<PAGE> 1
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________ to __________
Commission file number 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: (323) 210-5000
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: None
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 August 18, 1999, there were outstanding 31,016,964 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
($1.4375 per share) of the Registrant's Common Stock on the New York Stock
Exchange was $41,869,205.75. 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 1999 Annual
Meeting of Stockholders or an amendment to this Form 10-K are incorporated by
reference in Items 10, 11, 12 and 13 of Part III of this Annual Report.
<PAGE> 2
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. Upon its formation in 1991, the Company
acquired Aames Home Loan, a home equity lender founded in 1954. In August 1996,
the Company acquired One Stop Mortgage, Inc. ("One Stop") which originates
mortgage loans primarily through a broker network. In August 1999, One Stop
began operating under the name "Aames Home Loan."
On December 23, 1998 as amended February 10, 1999, June 9, 1999 and July
16, 1999, the Company entered into a Preferred Stock Purchase Agreement (the
"Preferred Stock Purchase Agreement") with Capital Z Financial Services Fund,
II, L.P., a Bermuda limited partnership ("Capital Z"), pursuant to which Capital
Z has agreed to make an equity investment of up to $126.5 million in the Company
(the "Investment"). The Investment is to be made as follows: (i) on February 10,
1999 (the "Initial Closing"), Capital Z (through a partnership majority-owned by
Capital Z) and certain other investors designated by Capital Z purchased 26,704
shares of the Series B Convertible Preferred Stock of the Company and 49,796
shares of the Series C Convertible Preferred Stock of the Company for $1,000 per
share, or an aggregate purchase price of $76.5 million; (ii) on August 3, 1999,
Capital Z (through a partnership majority-owned by Capital Z) purchased an
additional 25,000 shares of Series C Convertible Preferred Stock of the Company
for $1,000 per share, or an aggregate purchase price of $25 million (the
"Additional Investment'); (iii) subject to receiving stockholder approval of
amendments to the Company's Certificate of Incorporation to increase the
authorized common and preferred stock and effect a 1,000-for-1 forward stock
split of the outstanding preferred stock (the "Recapitalization") at a meeting
of stockholders scheduled for September 13, 1999, the Company will offer in a
public offering to the holders of the common stock of the Company
non-transferable subscription rights (the "Rights Offering") to purchase up to
approximately 31 million shares of Series C Convertible Preferred Stock for
$1.00 per share, and (iv) if less than 25 million shares of Series C Convertible
Preferred Stock is purchased by the stockholders, Capital Z has agreed to
purchase the difference (up to 25 million additional shares of Series C
Convertible Preferred Stock) for $1.00 per share (the "Standby Commitment").
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
residential 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.
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The Company originates and purchases loans nationally through three
production channels retail, broker and correspondent. For the year ended June
30, 1999, the Company originated and purchased $2.19 billion of mortgage loans.
The Company underwrites and appraises every loan it originates and generally
reviews appraisals and re-underwrites all loans it purchases.
As a fundamental part of its business and financing strategy, the
Company sells its loans to third party investors in the secondary market as
market conditions allow. The Company maximizes opportunities in its loan
disposition transactions by disposing of its loan production through a
combination of securitizations and whole loan sales, depending on market
conditions, profitability and cash flows. The Company sold $1.89 billion, $2.45
billion and $2.27 billion of loans in the fiscal years ended June 30, 1999, 1998
and 1997, respectively. Of the total amount of loans sold during the fiscal
years ended June 30, 1999, 1998 and 1997, $650 million, $2.03 billion and $2.26
billion were sold in securitizations, respectively. During those same fiscal
years, the Company sold $1.24 billion, $416 million and $7.5 million,
respectively, in whole loan sales for cash. The Company did not complete a
securitization during the quarters ended December 31, 1998, March 31, 1999 and
June 30, 1999 due to adverse market conditions for asset-backed securitizations.
In August 1999, the Company completed a mortgage loans securitization of $400
million. See "- Loan Disposition."
The Company retains the servicing on the loans it originates or
purchases and securitizes. In April 1999, the Company entered into a
sub-servicing arrangement with a loan servicing company with respect to $388
million of loans primarily to reduce the burden on its cash resources caused by
its obligation to advance interest on delinquent loans in its servicing
portfolio.
BUSINESS STRATEGY
Fiscal 1999's results reflect the impact on the Company of the global
economic crises that existed early in the year and the continuing effects of
those crises on the credit, capital and asset-backed markets. From October
through the Initial Closing, the Company was dependent on one $300 million
warehouse line to fund its loan production. In conjunction with the Initial
Closing, the Company obtained an additional $400 million in committed warehouse
and repurchase facilities and an additional $100 million in an uncommitted
facility. The limited warehouse capacity during the second and part of the third
fiscal quarters severely constrained the Company's loan production capability.
Further, the public equity and debt markets on which the Company had
historically relied to satisfy its cash flow needs were not available during the
whole of the fiscal year. Additionally, the asset-backed markets on which the
Company had historically and primarily relied for its loan disposition strategy
remained weak, and inaccessible to, or impracticable for, the Company,
throughout the last three fiscal quarters. The Company, therefore, relied solely
on whole loan sales for cash during that period. The gains recorded for whole
loan sales are generally lower than the gains recorded for securitizations.
However, this difference in gain was exacerbated during the year by the
over-supply of whole loan product as other home equity lenders who had
traditionally securitized their production also sold loans in the whole loan
market. The gain on sale from the securitization completed during the first
fiscal quarter was significantly reduced due to a loss on the Company's hedge
position which was not offset by enhanced securitization execution. These
negative market conditions adversely affected the prepayment, loss and discount
rate assumptions applied by the Company in estimating the value of its
interest-only strips.
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The application of these revised assumptions resulted in the Company recording a
$194 million net loss in valuation of its interest-only strips during the second
fiscal quarter of 1999 (the "Write-Down").
For the three years prior to fiscal 1998, the Company's significant
year-over-year growth was driven primarily by the increases in the volume of
loans purchased in the bulk correspondent business facilitated by the sale of
the Company's loan production in securitization transactions. These business
strategies significantly contributed to the Company's operating on a negative
cash flow basis which was funded by the Company regularly accessing the public
equity and debt markets. In the fourth quarter of fiscal 1997, primarily as a
reaction to the uncertainties in those capital markets, the Company decided to
reduce its bulk loan purchases and focus on the less cash intensive core retail
and broker loan production units and its servicing divisions. Fiscal 1998's
results reflect these strategic decisions in the record levels of retail and
broker loan production, increased expenses for retail and broker loan office
expansion and increased expenses to accommodate the significant increase in the
Company's in-house servicing portfolio.
The Company believes that the Investment by Capital Z and its current
warehouse capacity permits the Company to resume its growth strategy. This
growth strategy consists of: (i) continuing to focus on its core loan production
units; (ii) increasing its servicing portfolio and servicing capabilities; and
(iii) diversifying its funding sources to become self-financing (i.e., the
ability to obtain sufficient lines of credit to provide financing for assets
created by the Company and the reduction of reliance on the public equity and
debt markets). In particular, the Company intends to employ the following
strategies:
Focus on Core Loan Production. The Company intends to evaluate expansion
opportunities in its retail and broker operations and to expand its loan
purchasing capabilities by building new relationships with independent mortgage
brokers, with the goal of increasing market share in these areas. The Company
regularly reviews its loan offerings and introduces new loan products to further
meet the needs of its customers and increase its core loan production volume.
However, no assurance as to the Company's ability to accomplish these goals can
be given.
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 significant source of recurring revenue. At
June 30, 1999, the Company's servicing portfolio was $3.84 billion. 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. However, no assurance as to the
Company's ability to accomplish these goals can be given.
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 or repurchase facilities, disposing of a portion of
its loan production for cash in the whole loan market, and developing new
sources for working capital. However, no assurance as to the Company's ability
to accomplish these goals can be given.
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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.
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 residence with either a fixed or
adjustable interest 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 generally 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 1999, the Company obtained its residential
loans through three primary channels: retail, broker and correspondent.
The following table illustrates the sources of the Company's loan
production during the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS)
Retail loans:
<S> <C> <C> <C>
Total dollar amount.............................. $770,000 636,100 436,900
Number of loans................................. 12,214 11,531 8,565
Average loan amount............................ 63 55 51
Average initial combined loan to value........... 72% 70 67
Weighted average interest rate(1)................ 9.5% 10.3 10.5
Broker loans(2):
Total dollar amount.............................. $1,182,100 1,101,200 741,000
Number of loans.................................. 14,006 12,763 8,985
Average loan amount.............................. 84 86 83
Average initial combined loan to value........ 76% 75 71
Weighted average interest rate(1)................ 9.9% 9.8 10.0
Correspondent program:
Total dollar amount.............................. $ 241,500 646,300 1,170,000
Number of loans.................................. 2,219 6,252 12,500
Average loan amount.............................. 109 103 94
Average initial combined loan to value........... 80% 79 71
Weighted average interest rate(1)................ 10.0% 10.2 11.0
Total loans:
Total dollar amount.............................. $2,193,600 2,383,600 2,347,900
Number of loans.................................. 28,439 30,546 30,050
Average loan amount.............................. 77 78 78
Average initial combined loan to value........... 75% 75 70
Weighted average interest rate(1)................ 9.8% 10.1 10.6
- ----------------
</TABLE>
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(1) Calculated with respect to the interest rate at the time the loan is
originated or purchased by the Company.
(2) Includes commercial loans. In late fiscal 1997, the Company began
originating small commercial loans on a limited basis. In January 1999,
the Company discontinued its commercial loan operation.
Retail Loan Office Network. The Company originates home equity mortgage
loans through its network of retail loan offices. At June 30, 1999, the Company
had 101 offices serving borrowers in 37 states. Prior to fiscal year 1994, the
Company's retail offices were located only in California. Commencing fiscal
1996, the Company aggressively pursued a strategy of expanding its retail loan
office network nationwide. The Company's retail office network increased by 16
offices and 53 offices in fiscal 1997 and 1998, respectively. However, primarily
due to market conditions, during fiscal 1999, the Company closed 20 retail
offices. The Company's network of retail loan offices includes two different
retail operations - a centralized network which operates under the name "Aames
Home Loan" and uses a centralized marketing approach, and a decentralized
network which now operates under the name "Aames Funding Corporation" and uses a
decentralized marketing approach at the branch level. During the current fiscal
year, the Company intends to evaluate opportunities for further retail office
expansion.
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.
The Company's expansion of its retail loan office network during fiscal
1997 and 1998 resulted in significant increases in retail loan production over
those fiscal years. The Company originated $636 million and $437 million of
mortgage loans through this network in fiscal 1998 and 1997, respectively.
Despite the adverse market conditions that existed during most of the year,
retail production increased to $770 million during fiscal 1999. Most of the
increase resulted from the Company's decentralized retail network which
commenced operations in March 1998.
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, yellow-page
listings and telemarketing. In the past, the Company has also used television
and radio advertising. 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 the
Company to apply for a loan. On the basis of an initial screening conducted at
the time of the call, the Company 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.
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 underwritten for loan approval. If the
loan package is
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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.
Centralized Retail Network. The Company's direct mail advertising for
the centralized retail network is produced by the Company and distributed to
prospective borrowers based upon Company derived models and commercially
developed customer lists. The direct mail invites prospective borrowers to call
its headquarters office through the Company's toll-free telephone numbers, where
the customer is prequalified and scheduled for 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 customer is referred to a loan
officer who takes the loan application by telephone. The loan package is then
forwarded to the Company's headquarters office for review by underwriters and
for loan approval. At June 30, 1999, the Company had 80 centralized retail
offices serving borrowers in 32 states. During the years ended June 30, 1999,
1998, and 1997, $639 million, $635 million and $437 million in loans were
originated through this network, respectively.
Decentralized Retail Direct Network. In March 1998, the Company
established a separate decentralized retail production unit to enable the
Company to further penetrate the non-conforming home equity loan market. The
Company's advertising for the decentralized retail network is generated by the
local branch by the loan officers who are familiar with the local area. Direct
mail is often followed up by telephone calls to potential customers. All contact
with the customer is handled through the local branch. At June 30, 1999, the
Company had 21 decentralized retail offices serving borrowers in 13 states.
During the years ended June 30, 1999 and 1998, $131 million and $1.5 million in
loans were originated through this network, respectively.
Independent Mortgage Broker Network. Through its independent mortgage
broker network, the Company funded $1.18 billion, $1.10 billion and $741 million
in residential loans during the fiscal years ended June 30, 1999, 1998 and 1997,
respectively. At June 30, 1999, the Company operated 35 broker offices in 28
states and had approximately 7,100 approved mortgage brokers. During fiscal
1999, the Company originated loans through approximately 4,200 brokers, no one
of which accounted for more than 3% of total broker originations. All broker
loans originated by the Company are underwritten in accordance with the
Company's underwriting guidelines. Once approved, the loan is funded by the
Company 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
the Company's liaison with the borrower through the lending process. The Company
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
the Company, 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 the Company
to increase its loan volume without incurring the higher marketing costs
associated with increased retail originations.
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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, the Company 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 the Company's broker offices to answer questions, assist in the
loan application process and facilitate ultimate funding of the loan.
Correspondent Channel. The Company purchases closed loans from mortgage
bankers and other financial institutions on a continuous or "flow" basis, and
through mini-bulk purchases. During the fiscal years ended June 30, 1999, 1998
and 1997, $241 million, $646 million and $1.17 billion in loans were purchased
through the correspondent channel. The Company believes that its flow and
mini-bulk correspondent program represents a cost effective means of increasing
loan production. In the fourth quarter of fiscal 1997, primarily as a reaction
to the uncertainties in the public equity and debt markets, the Company decided
to emphasize its mini-bulk and flow purchases, rather than its bulk loan
purchases. This strategic decision eliminated bulk purchases in fiscal 1999 and
decreased the amount of bulk loans purchased in fiscal 1998 compared to fiscal
1997. Additionally, the Company's limited warehouse capacity during the second
and part of the third fiscal quarters constrained its ability to purchase loans
and contributed to the decline in fiscal 1999.
Underwriting. The Company underwrites every residential 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 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. The Company regularly reviews its underwriting guidelines and makes
changes when appropriate to
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respond to market conditions, the performance of loans representing a particular
loan product or changes in laws or regulations.
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 (or similar) form of title insurance on all residential
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 networks, 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 assigns a credit grade (A, A-, B, C, C- and
D) to each loan it originates or purchases depending on the risk profile of the
loan, with the higher credit grades exhibiting a lower risk profile and the
lower credit grades exhibiting increasingly higher risk profiles. Generally, the
higher credit grade loans have higher loan-to-value ratios and carry a lower
interest rate. The following chart generally outlines certain parameters of the
credit grades of the Company's underwriting guidelines for its residential loans
at August 12, 1999:
<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 credit Generally good Marginal credit Marginal credit Designed to
REPAYMENT credit. but might have mortgage pay history which is history not offset provide a borrower
some minor history but may offset by other by other positive with poor credit
delinquency. have marginal positive attributes. history an
consumer credit attributes. opportunity to
history. correct past credit
problems.
</TABLE>
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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>
EXISTING No lates in No more than 59 No more than 89 Can have No more than Greater than
MORTGAGE past 12 months. days late at days late at multiple 30-day 149 days 150 days
LOANS closing and a closing and a lates and two delinquent in delinquent in
maximum of maximum of 60-day lates the past 12 the past 12
two 30-day lates four 30-day lates or one 90-day months. Can months.
in the past 12 in the past 12 late in the past have multiple
months. months or one 12 months; 90-day lates
60-day late currently not or one 120 day
and two 30-day more than 119 late in the past
lates. days late at 12 months.
closing.
CONSUMER Consumer credit Consumer credit Consumer credit Consumer credit Consumer credit Consumer credit
CREDIT is good in the is good in the must be is fair in the last is poor in the is poor in the
last 12 months. last 12 months. satisfactory in 12 months. The last 12 months last 12 months.
Less than 25% Less than 35% the last 12 majority of the with currently The majority of
of credit report of credit report months. Less credit is not delinquent the credit is
items derogatory items derogatory than 40% of currently accounts. Less derogatory (more
with no 60-day with no 90-day credit report delinquent. Less than 60% of than 60%).
or more lates. or more lates. items derogatory. than 50% of credit report Percentage of
credit report items derogatory. derogatory items
items derogatory not a factor.
BANKRUPTCY 2 years since 2 years since 1 year since Bankruptcy Bankruptcy Current
discharge or discharge or discharge with filing 12 months filed within bankruptcy
dismissal with dismissal with reestablished old, discharged last 12 months must be paid
reestablished reestablished "B" credit or 18 or dismissed and discharged through loan.
"A" credit. "A-" credit. months since prior to or dismissed
discharge application. prior
without to
reestablished application.
credit.
DEBT SERVICE- Generally not to Generally not to Generally not to Generally not to Generally not Generally not to
TO-INCOME exceed 45%. exceed 45%. exceed 50%. exceed 55%. to exceed 60%. exceed 60%.
RATIO
MAXIMUM
LOAN-TO-VALUE
RATIO:
OWNER
OCCUPIED Generally 90% Generally 90% Generally 80% Generally 75% Generally 70% Generally 65%
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 dwelling. family dwelling. family dwelling. family dwelling. family dwelling. family dwelling.
NON-OWNER Generally 80% Generally 70% Generally 65% Generally 65% Generally 65% Generally 60%
OCCUPIED for a 1 to 4 for a 1 to 4 for a 1 to 2 for a 1 to 4 for a 1 to 4 for a 1 to 4
family dwelling. family dwelling. family dwelling. family dwelling. family dwelling. family dwelling.
</TABLE>
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The following tables present certain information about the Company's
loan production through its retail loan office networks, independent mortgage
broker network and correspondent program during fiscal 1999, 1998 and 1997:
LOAN ORIGINATIONS AND PURCHASES IN FISCAL 1999
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED AVERAGE
DOLLAR AMOUNT % OF COMBINED INTEREST
CREDIT GRADE OF LOAN TOTAL LOAN-TO-VALUE RATE(1)
<S> <C> <C> <C> <C>
A $ 707,644,000 32% 79% 9.1%
A- 729,237,000 33 77 9.4
B 475,370,000 22 75 10.1
C 119,730,000 5 68 11.1
C- 37,990,000 2 65 12.3
D 123,665,000 6 62 12.9
-------------- ------- ----- -------
Total $2,193,636,000 100% 75% 9.8%
============== ------- ===== =======
</TABLE>
LOAN ORIGINATIONS AND PURCHASES IN FISCAL 1998
<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 $ 651,303,000 27% 77% 9.3%
A- 835,834,000 35 78 9.7
B 560,710,000 24 74 10.2
C 159,652,000 7 67 11.2
C- 45,378,000 2 65 12.2
D 130,761,000 5 61 13.2
-------------- ------- ----- -------
Total $2,383,638,000 100% 75% 10.1%
============== ------- ===== =======
</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% 70% 10.6%
============== ------- ===== =======
</TABLE>
--------------
(1)Calculated with respect to the interest rate at the time the loan is
originated or purchased by the Company, as applicable.
11
<PAGE> 12
LOAN DISPOSITION
The Company sells loans to third party investors in the secondary market
as market conditions allow. The Company maximizes opportunities in its loan
disposition transactions by selling its loan production through a combination
of securitizations and whole loan sales, depending on market conditions,
profitability and cash flows. As discussed in "- Business Strategy," during the
1999 fiscal year, the Company relied primarily on whole loan sales to dispose
of its loans. The Company generally seeks to dispose of substantially all of
its production within 90 days. The Company applies the net proceeds of the loan
dispositions, whether through securitizations or whole loan sales, to pay down
its warehouse and repurchase facilities in order to make these facilities
available for future funding of mortgage loans.
The Company sold $1.89 billion, $2.45 billion and $2.27 billion of loans
in the fiscal years ended June 30, 1999, 1998 and 1997, respectively. Of the
total amount of loans sold during the fiscal years ended June 30, 1999, 1998
and 1997, $650 million, $2.03 billion and $2.26 billion were sold in
securitizations, respectively. During those same fiscal years, the Company sold
$1.24 billion, $416 million and $7.5 million, respectively, in whole loan sales
for cash. The Company did not complete a securitization during the quarters
ended December 31, 1998, March 31, 1999 and June 30, 1999. In August 1999, the
Company completed a securitization of $400 million of mortgage loans. See "-
Loan Disposition."
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. If losses exceed the amount of the
overcollateralization 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. 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. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Capital Resources -- Loan Sales" and "- Risk Factors -- Our Right to Service
Loans May be Terminated Because of the High Delinquencies and Losses on the
Loans in Our Servicing Portfolio."
In a whole loan sale for cash, the Company generally enters into an
agreement to sell the loans for cash on a servicing released basis. After the
sale, the Company retains no interest in the underlying loans.
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 the residential loans it originates or
12
<PAGE> 13
purchases and securitizes. In its whole loan sale strategy, the Company
evaluates the feasibility of selling loans on a servicing retained or servicing
released basis. To date, all of the Company's whole loan sales have been done
on a servicing released basis. The following table sets forth certain
information regarding the Company's servicing portfolio for the periods
indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
1999 1998 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Servicing portfolio (period end) ................... $3,841,000(1) 4,147,000(2) 3,174,000
Serviced in-house .................................. 3,428,000(1) 3,941,000(2) 1,506,000
Loan service revenue .............................. 49,900 51,642 31,131
- --------------------
</TABLE>
(1) Includes $84 million in loans subserviced for others on an interim basis
and approximately $413 million subserviced by others.
(2) Includes $82 million in loans subserviced for others on an interim
basis.
The Company believes that continued technology and processing
enhancements will provide it with improved margins on its servicing. The
Company anticipates that during fiscal 2000 it will begin subservicing for
third parties which will provide a new source of servicing revenue. However, no
assurance can be given that the Company will be successful in its attempts to
generate subservicing business.
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 reserves established by the
Company at the time of securitization 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, 1999, ten trusts representing approximately 20% (by
dollar volume) of the Company's servicing portfolio exceeded the specified
delinquency rate. Four of the ten trusts representing approximately 16% (by
dollar volume) of the Company's servicing portfolio exceeded specified loss
limits at June 30, 1999. None of the servicing rights of the Company have been
terminated. Additionally, during July 1999, one additional trust exceeded the
specified delinquency
13
<PAGE> 14
level and one of the four trusts that exceeded its loss limit was cured. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors -- Our Right to Service Loans May be
Terminated Because of the High Delinquencies and Losses on the Loans in Our
Servicing Portfolio." In the case of the Company's senior/subordinated
securitization transactions, holders of 51% of the certificates may terminate
the servicer upon certain events of default generally relating to certain
levels of loss experience, but not delinquency rates. No such events of default
have occurred to date in the Company's senior/subordinated securitizations.
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 fees 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. Under an
arrangement entered into in June 1999, the Company's right to receive the fees
and charges collected on loans in pre-1999 securitization trusts has been
subordinated to the right to such fees and charges as payment to the investment
bank which has agreed to make a significant portion of future advances on loans
included in those trusts. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital Resources."
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 core servicing portfolio.
In general, revenue from the Company's loan servicing portfolio may be
adversely affected by competitive market conditions that result in lower
mortgage interest rates or accelerated prepayment activity, subject to the
receipt by the Company of prepayment fee income. In some states in which the
Company currently operates, prepayment fees may be limited or prohibited by
applicable law.
The following table illustrates the mix of credit grades in the
Company's servicing portfolio as of June 30, 1999:
14
<PAGE> 15
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
COMBINED ORIGINAL
DOLLAR AMOUNT INITIAL INTEREST
CREDIT GRADE OF LOAN % OF TOTAL LOAN-TO-VALUE RATE
<S> <C> <C> <C> <C>
A $ 680,204,000 18% 78% 9.3%
A- 1,515,062,000 40 76 9.9
B 885,208,000 23 74 10.6
C 303,425,000 8 67 11.6
C- 118,865,000 3 64 12.5
D 324,909,000 8 62 13.4
Other 13,618,000 - 58 10.8
--------------- -------- ----------- --------
Total $3,841,291,000 100% 73% 10.5%
=============== ======== =========== =======
</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 "B," "C," "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 arranging for extended
prepayment terms, accepting a deed-in-lieu of foreclosure, entering into a
short sale (a sale for less than the outstanding principal amount) 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, other credit
considerations or borrower bankruptcy status.
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.
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
15
<PAGE> 16
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, servicing advances 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.
The Company has historically experienced delinquency rates that are
higher than those prevailing in its industry due to its origination of lower
credit grade loans. At the end of calendar year 1996, the Company started to
focus more on higher credit grade loans which should cause delinquencies in the
Company's servicing portfolio to decrease in the future. If the Company were to
sell 100% of its loans in the whole loan market on a servicing released basis,
the Company would not be adding new loans to the servicing portfolio. The
seasoning of the old portfolio without the addition of new loans could cause
delinquency rates to rise. The delinquency rate at June 30, 1999 was 15.7%
compared to 15.6% at June 30, 1998.
During the fiscal year ended June 30, 1999, losses increased to $52
million from $26 million in the prior year primarily due to the seasoning of
the lower credit grade loans purchased in bulk and included in the Company's
earlier trusts. The Company has eliminated its bulk purchase program. The
seasoning of the lower credit grade bulk portfolio may continue to contribute
to an increase in losses over time. Further, the adverse market conditions that
existed during the fall of 1998 resulted in the tightening in underwriting
guidelines by purchasers of whole loans and the insolvency of several large
subprime home equity lenders. These factors have had the effect of decreasing
the availability of credit to delinquent lower credit grade borrowers who in
the past had avoided default by refinancing. Management believes that this will
increase the Company's level of losses in future periods.
16
<PAGE> 17
The following table sets forth delinquency, foreclosure and loss
information relating to the Company's servicing portfolio as of or for the
periods indicated:
<TABLE>
<CAPTION>
AS OF OR FOR THE FISCAL YEARS ENDED JUNE 30,
1999 1998 1997
------------- ------------- -------------
(Dollars in thousands)
Percentage of dollar amount of delinquent
loans to loans serviced (period end)(1)(2)(3)(4)
<S> <C> <C> <C>
One Month ................................... 2.4% 3.8 4.3
Two Months .................................. 1.0 1.3 1.9
Three or More Months
Not foreclosed (5) ........................ 10.3 9.0 8.1
Foreclosed (6) ............................ 2.0 1.5 1.0
------------- ------------- -------------
Total ..................................... 15.7% 15.6 15.3
============= ============= =============
Percentage of dollar amount of loans foreclosed
during the period to loans serviced (2)(4) .... 3.0% 2.0 1.5
Number of loans foreclosed
during the period(7) ........................ 1,613 1,125 560
Principal amount of foreclosed loans
during the period(7) ........................ $ 117,015 84,613 48,029
Net losses on liquidations
during the period(8) ........................ $ 51,730 26,488 5,470
Percentage of losses to average servicing
portfolio (4) ............................... 1.31% .72 .24
Servicing portfolio at period end ............. $ 3,841,300 4,147,000 3,174,000
</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.
(3) At June 30, 1999, the dollar volume of loans delinquent more than 90
days in the Company's 10 REMIC trusts formed in December 1992 and during
the period from March 1995 to March 1997 exceeded the permitted limit in
the related pooling and servicing agreements. Four of those trusts
exceeded certain loss limits. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Capital
Resources;" and "- Risk Factors -- Our Right to Service Loans May Be
Terminated Because of the High Delinquencies and Losses on the Loans in
Our Servicing Portfolio".
(4) The servicing portfolio used in percentage calculations includes $84
million and $82 million of loans subserviced by the Company on an
interim basis at June 30, 1999 and 1998.
(5) Represents loans which are in foreclosure but as to which foreclosure
proceedings have not concluded.
(6) Represents properties acquired following a foreclosure sale and still
serviced by the Company at period end.
(7) The increase in the number of loans foreclosed and principal amount of
loans foreclosed in the periods presented is due to the larger and more
seasoned servicing portfolio.
(8) Represents losses net of gains on foreclosed properties sold during the
period indicated.
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.
17
<PAGE> 18
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,
investment banks, 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 or purchased home equity lenders offering loan products
directed at the target market of the Company. 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
non-conforming 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 lower rates to
potential borrowers 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) emphasizing
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; (iv)
providing convenient locations for its retail and broker offices and national
geographic coverage in origination channels; and (v) emphasizing customer
service in its loan servicing division.
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,
18
<PAGE> 19
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. A significant portion of the Company's mortgage loans are
so-called "high cost mortgage loans" where the borrower is charged points and
fees or interest rates above certain levels. Such high cost mortgage loans are
subject to special disclosure requirements and certain substantive prohibitions
under the Home Ownership and Equity Protection Act of 1994 and regulations
thereunder, and certain state laws. The federal regulations governing high cost
mortgage loans establish guidelines for determination of whether an individual
loan is a high cost mortgage loan. Such guidelines may be interpreted
differently by different lenders. Federal regulations on high cost mortgage
loans make assignees of such mortgage loans liable for violations of the
regulations. As a result of the increased regulation and scrutiny of high cost
mortgage loans, certain lenders, including certain purchasers of the Company's
loans, will not purchase high cost mortgage loans. In addition, there has been
recent class action litigation and regulatory actions by certain state agencies
against lenders for violations of high cost mortgage regulations. The Company
has not to date been subject to any such class action litigation or regulatory
action.
Failure to comply with these requirements can lead to loss of approved
status, certain rights of rescission for mortgage loans, individual and class
action lawsuits and administrative enforcement action. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Risk Factors -- If We are Unable to Comply with Mortgage Banking
Rules and Regulations, Our Ability to Make Mortgage Loans May be Restricted."
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, 1999, the Company employed 1,305 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 Company is attempting to sublet a significant amount
of these premises. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Expenses." The lease on these
premises extends through February 2012. The Company also continues to lease
space at its former
19
<PAGE> 20
headquarters location at 3731 Wilshire Boulevard, Los Angeles, California,
which it will use for its telemarketing operations and future expansion of
production related operations. This lease expires in December 2008. The
executive and administrative offices of the Company's Irvine office are located
at 3347 Michaelson Drive, Irvine, California, and consist of approximately
46,911 square feet. The lease on these premises extends through July 31, 2003.
The Company also leases space for its branch offices. These facilities
aggregate approximately 319,462 square feet and are leased under terms which
vary as to duration. In general, the leases expire between 1999 and 2004, 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
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 1999 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.
<TABLE>
<CAPTION>
CASH
HIGH LOW DIVIDEND
FISCAL 1999*
<S> <C> <C> <C>
First Quarter .............................. 13.375 6.063 .033
Second Quarter ............................. 4.813 1.250 --
Third Quarter .............................. 3.438 1.375 --
Fourth Quarter ............................. 2.000 1.313 --
FISCAL 1998*
First Quarter .............................. 23.250 15.875 .033
Second Quarter ............................. 17.125 10.625 .033
Third Quarter .............................. 15.250 11.438 .033
First Quarter ............................. 15.562 13.625 .033
</TABLE>
* As reported by Bloomberg
20
<PAGE> 21
As of August 18, 1999, the Company had 338 stockholders of record. From
its initial public offering on December 3, 1991 and through the first fiscal
quarter of 1999, the Company consistently paid quarterly cash dividends on its
common stock. The Company accrued and subsequently paid an aggregate of $0.033
per common share in dividends for the fiscal year ended June 30, 1999. The
Company declared and subsequently paid an aggregate of $0.13 per share in
dividends for the fiscal year ended June 30, 1998, representing approximately
13.7% 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. In November 1998, the Board of Directors
decided to suspend cash dividends on the common stock until the Company's
earnings and cash flows improved. Credit agreements generally limit the
Company's ability to pay dividends if such payment would result in an event of
default under the agreements or would otherwise cause a breach of a net worth
or liquidity covenants. The Company's Indenture relating to its 9.125% Senior
Notes due 2003 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 (minus 100% of any deficit); (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 (minus 100% of
net losses for any fiscal year), plus (iii) 100% of the net proceeds received
by the Company on offerings of its equity securities after December 31, 1994.
Under the most restrictive of these limitations, the Company will be prohibited
from paying cash dividends on its capital stock for the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
the Company for the five years ended June 30, 1999 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. The selected
consolidated financial data gives effect to the acquisition of One Stop in
August 1996.
21
<PAGE> 22
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
1999 1998 1997 1996 1995
--------- ------- ------- ------- ------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenue:
<S> <C> <C> <C> <C> <C>
Gain on sale of loans ........................... $ 44,855 120,828 135,421 71,255 15,870
Valuation (write-down) of interest-only strips .. (186,451) 19,495 (18,950) -- --
Commissions ..................................... 33,034 27,664 29,250 21,564 15,799
Loan service .................................... 49,900 51,642 31,131 20,394 8,791
Interest income and fees ........................ 42,509 46,860 37,679 15,215 7,940
----------- --------- --------- --------- -------
Total revenue including write-down ......... (16,153) 266,489 214,531 128,428 48,400
Total expenses .................................. 261,996 213,683 205,071 89,541 37,788
--------- --------- --------- --------- -------
Income (loss) before income taxes ............... (278,149) 52,806 9,460 38,887 10,612
Provision (benefit) for income taxes ............ (30,182) 25,243 7,982 17,814 4,828
--------- --------- --------- --------- -------
Net income (loss) .............................. $(247,967) 27,563 1,478 21,073 5,784
--------- --------- --------- --------- -------
Net income (loss) per share (diluted) ........... $ (8.00) 0.87 0.05 0.82 0.43
=========== ========= ========= ========= =======
Weighted average number of shares outstanding
(in thousands) (diluted) ........................ 31,000 35,749 28,371 27,248 13,532
=========== ========= ========= ========= =======
Cash dividends declared per common share ........ $ 0.03 .13 .13 .13 .13
=========== ========= ========= ========= =======
CASH FLOW DATA:
Used in operating activities ...................... $ (466,966) (49,661) (280,073) (241,073) (43,375)
Used in investing activities ...................... (5,229) (5,163) (8,864) (5,885) (988)
Provided by financing activities .................. 480,637 40,244 291,898 250,540 48,209
Net increase (decrease) in
cash and cash equivalents ........................ 8,442 (14,580) 2,961 3,582 3,846
RATIOS AND OTHER DATA:
Return on average common equity(1) ................. (149.3)% 10.1 18.6 21.5 10.8
Return on average managed receivables(2) ........... (5.9)% 0.8 0.1 2.1 1.2
Loans originated or purchased:
Broker network ................................ $ 1,182,100 1,101,200 741,000 319,800 --
Retail loans .................................. 770,000 636,100 436,900 220,900 148,200
Correspondent loans ........................... 241,500 646,300 1,170,000 628,200 206,800
----------- --------- --------- --------- -------
Total ...................................... 2,193,600 2,383,600 2,347,900 1,168,900 355,000
=========== ========= ========= ========= =======
Whole loans sold .................................... $ 1,236,050 416,390 7,500 202,200 --
Loans pooled and sold in securitizations ........... 649,999 2,034,300 2,262,700 791,300 316,600
Loans serviced at period end ....................... 3,841,300 4,147,100 3,174,000 1,370,000 608,700
Weighted average commission rate on
retail loan originations(3)........................ 4.1% 4.3 4.9 7.7 9.4
Weighted average interest rate(3) .................. 9.8 10.1 10.6 11.3 11.6
Weighted average initial combined
loan-to-value ratio(3)(4):
Retail loans .................................... 72 70 67 60 55
Broker network .................................. 76 75 71 68 --
Correspondent loans ............................. 80 79 71 66 65
At period end:
Number of retail loan offices ...................... 101 103 56 48 32
Number of One Stop branch offices .................. 35 52 37 25 --
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- ------- ------- ------- -------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents .......................... $ 20,764 12,322 26,902 23,941 20,359
Interest-only strips and mortgage servicing rights.. 353,255 522,632 360,892 167,740 50,421
Total assets ....................................... 1,021,097 815,187 717,595 401,524 108,084
--------- ------- ------- ------- -------
10.5% Senior Notes due 2002 ........................ 17,250 23,000 23,000 23,000 23,000
9.125% Senior Notes due 2003 ....................... 150,000 150,000 150,000 -- --
5.5% Convertible Subordinated Debentures due 2006... 113,970 113,990 113,990 115,000 --
Other long-term debt ............................... -- -- -- 45 144
--------- ------- ------- ------- -------
Total long-term debt ........................ 281,220 286,990 286,990 138,045 23,144
Stockholders' equity ............................... 145,556 304,051 239,755 120,461 75,797
</TABLE>
(1) Excludes nonrecurring charges in the pre-tax amount of $32 million during
the year ended June 30, 1997.
(2) Represents net income divided by the average servicing portfolio during
the fiscal year presented.
(3) Computed on loans originated or purchased during the fiscal year
presented.
(4) 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.
22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The following discussion should be read in conjunction with Item 6. Selected
Financial Data and Item 8. Financial Statements and Supplementary Data.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Report contains statements that constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934 and Section 27A of the Securities Act of 1933. The words "expect,"
"estimate," "anticipate," "predict," "believe," and similar expressions and
variations thereof are intended to identify forward-looking statements. Such
statements appear in a number of places in this filing and include statements
regarding the intent, belief or current expectations of the Company, its
directors or officers with respect to, among other things (a) market conditions
in the securitization, capital, credit and whole loan markets and their future
impact on the Company's operations, (b) trends affecting the Company's liquidity
position, including, but not limited to, its access to warehouse and other
credit facilities and its ability to effect whole loan sales, (c) the impact of
the various cash savings plans and other restructuring strategies being
considered by the Company, (d) the Company's on-going efforts in improving its
equity position, (e) trends affecting the Company's financial condition and
results of operations, (f) the Company's plans to address the Year 2000 problem
and (g) the Company's business and liquidity strategies. The stockholders of the
Company are cautioned not to put undue reliance on such forward-looking
statements. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual results may differ
materially from those projected in this Report, for the reasons, among others,
discussed under the captions "Item 1. Business - Business Strategy" and "- Risk
Factors." The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the factors referred to above
and the other documents the Company files from time to time with the Securities
and Exchange Commission, including the quarterly reports on Form 10-Q filed by
the Company during fiscal 2000 and any current reports on Form 8-K filed by the
Company.
OVERVIEW
Fiscal 1999's results reflect the impact on the Company of the global
economic crises that existed early in the year and the continuing effects of
those crises on the credit, capital and asset-backed markets. From October
through the Initial Closing, the Company was dependent on one $300 million
warehouse line to fund its loan production. In conjunction with the Initial
Closing, the Company obtained an additional $400 million in committed warehouse
and repurchase facilities and an additional $100 million in an uncommitted
facility. The limited warehouse capacity during the second and part of the third
fiscal quarters severely constrained the Company's loan production capability.
Further, the public equity and debt markets on which the Company had
historically relied
23
<PAGE> 24
to satisfy its cash flow needs were not available during the whole of the fiscal
year. Additionally, the asset-backed markets on which the Company had
historically and primarily relied for its loan disposition strategy remained
weak, and inaccessible to, or impracticable for, the Company, throughout the
last three fiscal quarters. The Company, therefore, relied solely on whole loan
sales for cash during that period. The gains recorded for whole loan sales are
generally lower than the gains recorded for securitizations. However, this
difference in gain was exacerbated during the year by the over-supply of whole
loan product as other home equity lenders who had traditionally securitized
their production also sold loans in the whole loan market. The gain on sale from
the securitization completed during the first fiscal quarter was significantly
reduced due to a loss on the Company's hedge position which was not offset by
enhanced securitization execution. These negative market conditions adversely
affected the prepayment, loss and discount rate assumptions applied by the
Company in estimating the value of its interest-only strips. The application of
these revised assumptions resulted in the Company recording a $194 million net
loss in valuation of its interest-only strips during the second fiscal quarter
of 1999.
For the three years prior to fiscal 1998, the Company's significant year
over year growth was driven primarily by the increases in the volume of loans
purchased in the bulk correspondent business facilitated by the sale of the
Company's loan production in securitization transactions. The combination of
these business strategies significantly contributed to the Company's operating
on a negative cash flow basis which was funded by the Company regularly
accessing the public equity and debt markets. In the fourth quarter of fiscal
1997, primarily as a reaction to the uncertainties in those capital markets, the
Company decided to reduce its bulk loan purchases and focus on the less cash
intensive core retail and broker loan production units and its servicing
division. Fiscal 1998's results reflect these strategic decisions in the record
levels of retail and broker loan production, increased expenses due to expedited
retail and broker loan office expansion and increased expenses to accommodate
the significant increase in the Company's in-house servicing portfolio.
CERTAIN ACCOUNTING CONSIDERATIONS
In December 1998, the FASB staff issued, in question and answer format,
"A Guide to Implementation of Statement 125 on Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, Questions and
Answers, Second Edition" (the "Special Report"). The Special Report indicates
that two methods have arisen in practice for accounting for credit enhancements
relating to securitization. These methods are the cash-in method and the
cash-out method. The cash-in method treats credit enhancements (pledged loans or
cash) as belonging to the Company. As such, these assets are recorded at their
face value as of the time they are received by the trust. The cash-out method
treats credit enhancements as assets owned by the related securitization trust.
As such, these assets are treated as part of the interest-only strips and are
recorded at a discounted value for the period between when collected by the
trust and released to the Company. The Special Report indicates that if no true
market exists for credit enhancement assets, the cash-out method should be used
to measure the fair value of credit enhancements.
Restatement of Prior Period Results. The Company had historically used
the cash-in method to account for its interest-only strips. However, during the
three months ended December 31, 1998,
24
<PAGE> 25
the Company retroactively changed its practice of measuring and accounting for
its interest-only strips to the cash-out method in response to the FASB's
Special Report and to public comments from the staff of the Securities and
Exchange Commission released on December 8, 1998.
Under the cash-in method previously used by the Company, the assumed
discount period for measuring the present value of the interest-only strips
ended when the cash flows were received by the securitization trust; and, the
initial deposits to overcollateralization accounts were recorded at face value.
Under the cash-out method now required by the FASB and Securities and Exchange
Commission, the assumed discount period for measuring the present value of the
interest-only strips ends when cash, including the return of any initial
deposits, is distributed to the Company on an unrestricted basis.
The change to the cash-out method results only in a difference in the
timing of revenue recognition from a securitization and has no effect on the
total cash flows of securitization transactions. While the total amount of
revenue recognized over the term of a securitization is the same under either
method, the cash-out method results in lower initial gains on the sale of loans
due to the longer discount period, and higher subsequent loan service revenue
resulting from the impact of discounting cash flows. See "- Revenue."
As a result, the Company's consolidated results of operations for all
prior periods have been restated.
The restatement resulted in the following changes to prior financial
information (Dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1998 1997 1996 1995
-------- ------- ------- ------
Revenue:
<S> <C> <C> <C> <C>
Previous $286,110 238,578 141,840 54,939
As restated 266,489 214,531 128,428 48,400
Net income:
Previous 40,317 17,109 29,791 10,034
As restated 27,563 1,478 21,073 5,784
Earnings per share:
Basic:
Previous 1.41 0.65 1.37 0.74
As restated 0.97 0.06 0.97 0.43
Diluted:
Previous 1.23 0.60 1.14 0.74
As restated 0.87 0.05 0.82 0.43
Interest-only strips:
(end of period)
Previous 554,161 383,249 173,789 56,960
As restated 490,542 339,251 153,838 50,421
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
1998 1997 1996 1995
------- ------- ------- -------
Stockholders' equity:
(end of period)
<S> <C> <C> <C> <C>
Previous 345,403 268,354 133,429 80,047
As restated 304,051 239,755 120,461 75,797
</TABLE>
Accounting for Securitizations. Although the Company's loan disposition
strategy relies on a combination of securitization transactions and whole loan
sales, the Company relied solely on whole loan sales during the quarters ended
December 31, 1998, March 31, 1999 and June 30, 1999. The following discusses
certain accounting considerations which arise only in the context of
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
non-cash 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 non-cash gain on sale of loans
represents the difference between the proceeds (including premiums) from the
sale, net of related transaction costs, and the allocated carrying amount of the
loans sold. The allocated carrying amount is determined by allocating the
original amount of loans (including premiums paid on loans purchased) between
the portion sold and any retained interests (interest-only strip), based on
their relative fair values at the date of transfer. The interest-only strip
represents, over the estimated life of the loans, the present value of the
estimated cash flows. These cash flows are determined by 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 .50%), a
monoline insurance fee, if any, a back-up servicer fee, if any, and an estimate
for loan losses. In quarters where the Company engaged in a securitization
transaction, net gains or losses in valuation of interest-only strips and
mortgage servicing rights include the recognition of a gain or loss which
represents the initial difference between the allocated carrying amount and the
fair market value of the interest-only strip at the date of sale. Additionally,
increases or decreases in valuation of the interest-only strips are also
recognized as net gains or losses. 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 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: (i) future
rate of prepayment; (ii) discount rate used to calculate present value; and
(iii) credit losses on loans sold. The future cash flows represent management's
best estimate. Management monitors the performance of the loans, and any changes
in the estimates are reflected in earnings. 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), the production channel which produced the loan,
prevailing interest rates, the presence of prepayment penalties, the
loan-to-
26
<PAGE> 27
value ratios and the credit grades of the loans included in the
securitization and other industry data. The rate of prepayment may be
affected by a variety of economic and other factors.
Discount Rate. In order to determine the fair value of the cash flow
from the interest-only strips, the Company discounts the cash flows
based upon rates prevalent in the market.
Credit Losses. In determining the estimate for credit losses on loans
securitized, the Company uses assumptions that it believes are
reasonable based on information from its prior securitizations, the
loan-to-value ratios, credit grades of the loans included in the
current securitizations and other industry data.
The interest-only strips are recorded at estimated fair value and are
marked to market through a charge (or credit) to earnings. On a quarterly basis,
the Company reviews the fair value of the interest-only strips by analyzing its
prepayment, discount rate and loss assumptions in relation to its actual
experience and current rates of prepayment and loss prevalent in the industry
and may adjust or take a charge to earnings through an adjustment to net gain or
loss on valuation of interest-only strips.
In the quarterly review of its interest-only strip for the quarter ended
December 31, 1998, the Company determined that it should adjust each of its
assumptions (rate of prepayment, discount rate and credit loss) to reflect
current market conditions. This change in estimates resulted in the Write-Down
in the quarter ended December 31, 1998. The components of this adjustment were
as follows:
Rate of Prepayment. In its valuation analysis of prepayment speeds, the
Company considered the relationship between the rate paid on the certificates or
bonds issued in the securitization and the weighted average coupons on the
mortgages outstanding in each securitization pool from time to time.
Additionally, for the quarters up to and including September 30, 1998,
prepayment rates used by the Company were held constant, e.g. flat, over the
life of the pool. The estimates used by the Company for the quarters up to and
including September 30, 1998 were flat prepayment rates ranging from 26% for
fixed to 30.5% for adjustable and hybrid loan products. These rates represented
a weighted average loan life of approximately 2.6 to 3.8 years. During the
quarter ended December 31, 1998, the Company finalized the development of an
enhanced analytical model which more precisely reflected the performance of the
securitized loans. This analytical model enabled the Company to refine its
estimate of the prepayment rates associated with the performance of its
securitized loans. Additionally, data and information received from market
participants (credit and capital providers) assisted the Company in its
assessment of current market conditions which resulted in the Company applying a
more precise valuation estimate to its prepayment assumptions. The Company
incorporated this new information in developing its improved judgment as to
prepayment speeds and changed its estimate of prepayment rates from a flat
constant prepayment rate to a vectored rate, which more closely approximates the
performance of the securitized loans. These revised prepayment rates resulted in
a weighted average life of 2.86 years. The impact of the change in prepayment
speeds amounted to approximately $62 million, which was included in the
Write-Down recorded for the quarter ended December 31, 1998.
Discount Rate. For the quarters up to and including September 30, 1998,
the Company used the weighted average interest rates of the loans included in
the pool as the best estimate available as an appropriate discount rate to
determine fair value. As the market deteriorated in the quarter ended December
31, 1998, it became apparent that a change in discount rate would be required in
order for the estimate of fair value to be consistent with market conditions. To
determine the appropriate discount rate, the Company reviewed general market
conditions as reflected by market sales of senior tranche asset-backed
securities. Management believed that the pass-through rate on senior tranche
27
<PAGE> 28
securities should be lower than the discount rate applied to the subordinate,
and higher risk, interest-only strips. However, the adversity of the market
during the quarter ended December 31, 1998 was so severe that, in some
instances, transactions of senior tranche asset-backed securities could not even
be completed. Accordingly, the Company incorporated this current market
information in developing its judgment as to the appropriate risk adjusted rate
of return in establishing its change in estimate of the discount rate to be used
in estimating the fair value of the interest-only strips. For the quarter ended
December 31, 1998, the Company increased its discount rate to 15% to reflect
current market conditions. The impact of this change in discount rate amounted
to approximately $65 million, which was included in the Write-Down recorded for
the quarter ended December 31, 1998.
Credit Losses. For the quarter up to and including September 30, 1998,
the Company used a prospective cumulative loan loss estimate of 1.4% of the
balance of the loans in the securitization pools as an appropriate estimate to
determine fair value. This estimate was developed through a review of the credit
performance of securitized loans in the aggregate. In conjunction with its
previous quarterly review of loss estimates, the Company considered the level of
delinquency of securitized loans and the percentage of annualized losses to
securitized loans in the aggregate. As market conditions deteriorated in the
quarter ended December 31, 1998, the Company refined its estimate of credit
losses by expanding the factors it considered in developing its credit loss
estimates to include loss and delinquency information by channel, credit grade
and product, and information available from other market participants such as
investment bankers, credit providers and credit agencies. For the quarter ended
December 31, 1998, the percentage of losses to average servicing portfolio
amounted to 1.08%, a significant increase from the previous quarter's level of
.80%. The Company had seen levels spike to .96% in the quarter ended June 30,
1998 but then subside to the .80% previously noted. This trend was in line with
the Company's assumption that losses were being realized as the servicing
portfolio was transferred in-house from sub-servicers. Management believes the
increase in losses in the December 1998 quarter reflected general market
conditions rather than the continuing effects of the transfer of servicing
in-house. Publicly available information from investment banking firms and
credit agencies began to indicate a market expectation that credit losses within
the sub-prime home equity sector would rise. Those indications, in part, arise
from the impact of the adverse market conditions on severely delinquent
borrowers who, in a more favorable market, would avoid default by refinancing
with other lenders. In the current market, with competition lessening and
underwriting guidelines tightening, these borrowers are much more likely to
default. Accordingly, the Company increased its prospective cumulative loan loss
estimate to 2.7% (discounted back at 15%) of the balance of the loans in the
securitization pools at December 31, 1998. This change in credit loss estimate
resulted in a valuation adjustment of $67 million, which was included in the
Write-Down recorded for the quarter ended December 31, 1998.
Additionally, upon sale or securitization of servicing retained
mortgages, the Company capitalizes the fair value of mortgage servicing rights
("MSRs") assets 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 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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In July 1999, the FASB issued SFAS 137
which deferred the effective date of SFAS 133 to fiscal years beginning after
June 15, 2000. SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets and liabilities, measured at fair value. Gains and
losses resulting from changes in the values of those derivatives would be
accounted for in earnings. Depending on the use of the derivative and the
satisfaction of other requirements, special hedge accounting may apply.
28
<PAGE> 29
The Company has not determined the impact that adoption of their
standard will have on its future consolidated financial statements.
RESULTS OF OPERATIONS -- FISCAL YEARS 1999, 1998 AND 1997
The following table sets forth information regarding the components of
the Company's revenue and expenses in fiscal 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- ------------------ --------------------
(Dollars in thousands)
Dollars Percentage Dollars Percentage Dollars Percentage
------- ---------- ------- ---------- ------- ----------
Percentage
Revenue:
<S> <C> <C> <C> <C> <C> <C>
Gain on sale of loan ........ $ 44,855 (277.7)% $ 120,828 45.3% $ 135,421 63.1%
Valuation (write-down) of
interest-only strips ...... (186,451) 1,154.3 19,495 7.3 (18,950) (8.8)
Commissions ................. 33,034 (204.5) 27,664 10.4 29,250 13.6
Loan Service:
Servicing spread .......... 27,798 (172.1) 32,392 12.2 21,592 10.1
Prepayment fees ........... 13,772 (85.3) 11,761 4.4 5,815 2.7
Late charges and
other servicing fees ..... 8,330 (51.6) 7,489 2.8 3,724 1.7
Interest income and fees:
Interest income ........... 35,853 (221.9) 40,110 15.1 31,160 14.5
Closing ................... 1,325 (8.2) 2,668 1.0 2,723 1.3
Appraisal ................. 2,822 (17.5) 2,617 1.0 1,854 0.9
Underwriting .............. 1,839 (11.4) 1,085 0.4 1,382 0.6
Other ..................... 670 (4.1) 380 0.1 560 0.3
--------- ------- --------- ----- --------- -----
Total revenue including
write-down .......... $ (16,153) 100.0% $ 266,489 100.0% $ 214,531 100.0%
========= ======= ========= ===== ========= =====
Expenses:
Compensation .............. $ 80,167 (496.3)% $ 94,820 35.6% $ 81,021 37.8%
Production ................ 40,061 (248.0) 34,195 12.8 27,229 12.7
General and
administrative .......... 60,635 (375.4) 40,686 15.3 31,716 14.8
Interest .................. 44,089 (272.9) 43,982 16.5 33,105 15.4
Nonrecurring charges ...... 37,044 (229.3) -- -- 32,000 14.9
--------- -------- --------- ----- --------- -----
Total expenses ........ $ 261,996 (1,622.0)% $ 213,683 80.2% $ 205,071 95.6%
========= ======== ========= ===== ========= =====
Income (loss) before
income taxes ................. (278,149) 1,722.0 52,806 19.8 9,460 4.4
Provision (benefit) for
income taxes ................. (30,182) 186.8 25,243 9.5 7,982 3.7
--------- -------- --------- ----- --------- -----
Net income (loss) ..... $(247,967) 1,535.2% $ 27,563 10.3% $ 1,478 0.7%
========= ======== ========= ===== ========= =====
</TABLE>
REVENUE
Total revenue, including the effects of the Write-Down for fiscal 1999,
was $(16 million), as compared to $266 million in fiscal 1998. Fiscal 1998's
total revenue increased $52 million, or 24.2%, from total revenue of $214
million for fiscal 1997. Total revenues include the Write-Down, net of a
positive valuation adjustment of $5.2 million recorded in the quarter ended
September 30, 1998 in connection with the Company's securitization, a $19
million net unrealized gain and a $19 million net unrealized loss (see below) on
valuation of the Company's interest-only strips for the fiscal years ended June
30, 1999, 1998 and 1997, respectively. The Write-Down reflected the impact of
negative market conditions that existed in the quarter ended December 31,
29
<PAGE> 30
1998 on the prepayment, loss and discount rate assumptions applied by the
Company in estimating the fair value of its interest-only strips. See "- Certain
Accounting Considerations -- Accounting for Securitizations."
Revenues for the fiscal year ended June 30, 1999 (excluding the
Write-Down) were $170 million, a 36% decrease from 1998. The decrease in total
revenue during fiscal year 1999 from the amount reported in fiscal year 1998
primarily reflects the Company's reliance on whole loan sales for cash during
the last three fiscal quarters of 1999. Gains associated with whole loans for
cash are generally lower than those recognized when such loans are securitized.
This disparity was exacerbated during the second fiscal quarter as a consequence
of the over-supply of product for sale in the marketplace due to weaknesses in
the asset-backed market during the same period, as well as the Company's limited
warehouse capacity during the quarter which necessitated the expedited sale of
loans. This continued during the March 31, 1999 quarter and part of the June 30,
1999 quarter as substantially all of the whole loan sales were closed under a
forward commitment entered into in the prior quarter when whole loan prices were
at their lowest level. During the quarter ended December 31, 1998, the Company
entered into the mandatory forward commitment to sell $500 million, subsequently
amended to $750 million, of loans. The commitment, which expired in May 1999,
reflected the lower whole loan prices that existed during the quarter. During
the fourth fiscal quarter of 1999, the Company entered into a new mandatory
forward commitment to sell loans. The pricing formula in the new commitment
reflects the improved market conditions in the fourth fiscal quarter. Terms of
the new forward commitment, which expires on May 16, 2000, include provisions
for the Company to sell a minimum of $500 million and a maximum of $1.50 billion
of loans to the purchaser on a servicing released basis. At June 30, 1999, the
Company had fulfilled approximately $80 million of loans held for sale under
this commitment.
Further contributing to the results for the fiscal year ended June 30,
1999 was the decrease in total loan production, from $2.38 billion during 1998
to $2.19 billion during 1999. The decrease in total revenue during the 1999
fiscal year also reflects the lower gains on sale resulting from hedge losses
and lower than historical spreads on the Company's $650 million securitization
closed in the quarter ended September 30, 1998. In addition, the Company did not
complete a securitization in the last three quarters of fiscal year 1999, and it
did not dispose of all loans produced in the whole loan market in anticipation
of the August 1999 securitization. This increase in loans held for sale further
reduced gain on sale revenue.
During the first fiscal quarter, the Company, as it had historically,
hedged its fixed rate pipeline by purchasing hedges against U.S. Treasuries. In
the past, changes in Treasury rates were generally reflected in the pass-through
rates of the fixed rate portion of the Company's securitization. During fiscal
1999's first quarter, unsettled market conditions resulted in a $15 million loss
on the Company's hedge position without an equivalent benefit from reductions in
the pass-through rate paid on certificates sold in the fixed rate portion of the
Company's securitization.
The increase in total revenue from the year ended June 30, 1997 to the
year ended June 30, 1998 was primarily due to an increase in net gain (loss) on
valuation of interest-only strips and the increase in loan service revenue,
offset by a decline in gain on sale of loans. The net loss on valuation of
interest-only strips during the year ended June 30, 1997 was due primarily to
the $28 million net unrealized loss on its interest-only strips recorded by the
Company in the fourth quarter of fiscal 1997. This unrealized loss was due
primarily to an increase in prepayment rates in certain of the Company's
adjustable rate loans in some of its earlier pools. Increased loan service
revenues during the year ended June 30, 1998 were a result of the continued
growth in the
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Company's servicing portfolio and the successful transfer in-house of $1.47
billion of mortgage loans previously subserviced by others.
Gain on sale, net of gain or loss on valuation of interest-only strips
for the fiscal year ended 1999 was $(142 million), as compared to $140 million
for the fiscal year ended 1998. Net gain (loss) on valuation of interest-only
strips and mortgage servicing rights for the fiscal year ended June 30, 1999
primarily reflects the impact of the Write-Down recorded in the quarter ended
December 31, 1998. The Company determines the fair value of the interest-only
strips by applying certain assumptions as to prepayments, losses and discount
rate to the future cash flows from prior securitizations. The negative market
conditions that existed during the quarter, as well as the performance of the
Company's pools of securitized loans, caused management to adjust these
assumptions which resulted in the Write-Down. See "- Certain Accounting
Considerations - Accounting for Securitizations." Gain on sale for the fiscal
year ended 1999 also reflects the Company's reliance primarily on the whole loan
market for its loan disposition strategy. During the fiscal year ended 1998, the
Company relied almost completely on the securitization market for its loan
disposition strategy. The gains associated with the whole loan sales were
substantially less than the gains associated with the earlier year's
securitizations. Gain on sale in fiscal year 1999 was also adversely affected by
the $14 million hedge loss recorded in the period. (See above.) Although market
conditions have recently improved, asset-backed market participants, whole loan
purchasers and the Company's warehouse lenders continue to impose more
restrictions on the Company's loan production than was the case prior to the
onset of the adverse market conditions in October 1998. These restrictions may
adversely affect the gain on sale recorded by the Company in the securitization
and whole loan market, and may require the Company to fund certain loans with
equity. The Company did complete a securitization in August 1999. The gain on
sale recognized was lower than historical gains due to market conditions at the
time of the securitization, higher margins paid by the Company on the
certificates issued by the securitization trust and the Company's adoption of
the revised assumptions during the quarter ended December 31, 1998.
Gain on sale, net of gain or loss on valuation of interest-only strips,
increased by $24 million, or 20.5% in fiscal 1998 compared to fiscal 1997. The
increase in fiscal 1998 over fiscal 1997 was primarily due to the net loss on
valuation on interest-only strips recorded in fiscal 1997. Fiscal 1998's gain on
sale, net of gain or loss on valuation of interest-only strips, as compared to
fiscal 1997's, reflects gains recorded on substantially the same total volumes
of loan production but with a larger percentage of the volume comprised of more
profitable retail and broker loan production as opposed to less profitable bulk
correspondent loan production. Premiums paid on the purchase of correspondent
loans are recorded as an offset to gain on sale. Total loan production for
fiscal 1998 was $2.38 billion. See "Item 1. Business - Mortgage Loan
Production." However, the 1998 gains reflect the lower gain on sale recorded on
whole loan sales closed during the 1998 fiscal year. Generally, the gain
recorded in a whole loan sale is less than that recorded in a securitization.
During fiscal 1998, the Company sold a total of $2.45 billion of loans, $2.03
billion of which was sold in securitization transactions and $416 million of
which was sold in whole loan sales for cash. During fiscal 1997, the Company
sold a total of $2.27 billion of loans, substantially all of which were sold in
securitization transactions. Further, gains recorded on loans securitized in
fiscal 1998 were negatively affected by reduced spreads and increased prepayment
rate assumptions established in the fourth fiscal quarter of 1997. 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% and 4.16% for fiscal 1998 and 1997, respectively. The
decreased weighted average servicing spread reflects a decrease in weighted
average interest rates on pooled loans due primarily to the higher percentage of
higher credit
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grade loans included in the loans securitized during the year and the then
current interest rate environment. The larger percentage of higher credit grade
loans included in the loans securitized during fiscal 1998 and 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.
Commissions earned on loan originations continue to be an important
component of total revenue comprising 19.4%, 10.4% and 13.6% of total revenue in
fiscal 1999 (excluding the Write-Down), 1998 and 1997, respectively. Commissions
increased $5.4 million, or 19.4%, in fiscal year 1999 compared to fiscal year
1998 and decreased $1.6 million, or 5.4%, in fiscal year 1998 compared to fiscal
1997. Commission revenue is primarily a function of the volume of mortgage loans
originated by the Company through its retail loan office network, the credit
grade of the loans originated and the weighted average commission rate charged
on such loans. The increase in fiscal 1999 reflects higher retail loan
origination volume primarily in the Company's decentralized retail loan
origination channel. The decrease in fiscal 1998 reflects the lower weighted
average commission rate charged. The weighted average commission rate was 4.1%,
4.3% and 4.9% during fiscal 1999, 1998 and 1997, respectively. The lower
weighted average commission rate in fiscal 1998 and fiscal 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 and commission rates do not include $3.2
million, $2.7 million and $1.2 million of commissions on loans which were held
for sale as of June 30, 1999, 1998 and 1997, respectively and deferred in
accordance with generally accepted accounting principles.
Loan servicing revenue for the fiscal year ended June 30, 1999 amounted
to $50 million as compared to $52 million in fiscal 1998 and $31 million in
fiscal 1997. Loan servicing 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, increased by the accretion of the
interest-only strips and reduced by the amortization of the MSRs. See "- Certain
Accounting Considerations." Future loan servicing revenue will be negatively
impacted by the costs associated with the arrangement the Company entered into
to reduce servicing advances on pre-1999 securitization trusts. See "Item 1.
Business - Loan Servicing."
The Company's loan servicing portfolio at June 30, 1999 declined 7.4%,
or approximately $306 million, from the $4.15 billion reported at June 30, 1998
reflecting the Company's recent reliance on whole loan sales with servicing
released. In April 1999, the Company entered into a subservicing arrangement
with a loan servicing company with respect to two pools containing an aggregate
of $388 million in principal amount of loans. The loan servicing company agreed
to make future servicing advances on the loans included in the two pools. The
Company entered into the subservicing arrangement primarily to reduce the burden
of making servicing advances on the loans in the two pools. The growth of the
Company's servicing portfolio will be negatively impacted by the Company's
reliance on sales of whole loans on a servicing released basis and subservicing
arrangements. Nevertheless, 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. See "- Risk Factors -- Our
Right to Service Loans May be Terminated Because of the High Delinquencies and
Losses on the Loans in Our Servicing Portfolio."
Loan service revenue increased $21 million, or 65.9% in fiscal 1998
compared to fiscal 1997. The increase in loan service revenue in fiscal 1998
primarily reflects the successful transfer of $1.47 billion of loans previously
subserviced by third parties and, to a lesser extent, interest-only strip
accretion offset by amortization of the Company's MSRs. As of June
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30, 1998, of the Company's $4.15 billion servicing portfolio, 95% was serviced
in-house. At June 30, 1997, 47% of the Company's $3.17 billion servicing
portfolio was serviced in-house.
Interest income and fees, which consist of interest earned on loans held
for sale and fees received by the Company through its retail loan office network
in the form of closing, appraisal, underwriting and other fees, for 1999
decreased 9.3% to $43 million from $47 million during 1998. The dollar amount of
interest income and fees decreased during 1999 from 1998 primarily due to
interest earned on lower amounts of loans held by the Company during the period
from origination or purchase of the loans until the date sold by the Company,
offset by increasing weighted average interest rates on loans held. Interest
income should continue to decline so long as the Company uses whole loan sales
which decreases the average number of days loans are held by the Company prior
to sale.
Interest income and fees increased by $9.2 million, or 24.4%, in fiscal
1998 compared to fiscal 1997. The dollar amount of the fees increased due to the
larger number of mortgage loans originated through the Company's retail loan
office network during the respective periods. Interest income increased during
the period 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, offset by declining weighted average interest rates on loans
held.
EXPENSES
Compensation expense for the fiscal year ended June 30, 1999 decreased
15.5% from $95 million for 1998 to $80 million for 1999. This decrease was
primarily due to the Company's reduction in force in February 1999, a decrease
in compensation incentives as a consequence of the decline in loan origination
during 1999 and a significant reduction in incentive compensation due to the
Company's results of operations. During 1999, compensation as a percentage of
loan originations and purchases declined to 3.6% from the 4.0% reported for
1998. The decline is due to the decrease in compensation expense during 1999
from 1998 offset by a decrease in total origination volume in 1999 from levels
reported during 1998. In mid-February, 1999 and subsequent to the Initial
Closing, management commenced a cost savings program designed to reduce the
Company's operating expenses. The implementation of this recent cost savings
plan included personnel reductions on a Company-wide basis. The effects of these
reductions are expected to reduce compensation costs on an annualized basis in a
pre-tax amount of approximately $6.7 million. Severance costs of approximately
$500 thousand were recognized in the fiscal year ended June 30, 1999.
Compensation and related expenses increased $14 million, or 17%, in fiscal 1998
compared to fiscal 1997. The increases were primarily due to the continued
effort to accommodate increased origination volumes, core origination channel
expansion and increased in-house servicing. Compensation and related expenses as
a percentage of total loan originations and purchases was 3.5% for fiscal 1997.
Additionally, in fiscal 1999, the Company deferred $5.6 million for the direct
expenses of loans originated but not yet sold primarily due to the higher amount
of loans held for sale at June 30, 1999. The higher amount reflects the
Company's decision to delay its securitization until August 1999.
Production expense, primarily advertising, outside appraisal costs,
travel and entertainment, and credit reporting fees, increased 17.2% to $40
million during 1999, from $34 million last year. The increase in total
production expense primarily reflects a rise in advertising and the additional
cost of outsourcing appraisal services offset by a decline in travel and
entertainment costs. Production expenses increased $7.0 million, or 25.6%, in
fiscal 1998 compared to fiscal 1997. This increase was primarily due to
increased origination volume and continued expansion into new geographical areas
requiring concentrated marketing efforts. Production costs as a percentage of
total origination volume were 1.8%, 1.4% and 1.2% for fiscal 1999, 1998 and
1997, respectively. The increase in the
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percentage of production costs to total loan originations and purchases for 1999
is due to the decline in the level of loan originations and purchases.
General and administrative expenses increased $20 million, or 49.0% in
fiscal 1999 over fiscal 1998. General and administrative expenses in fiscal 1998
increased $9.0 million or 28.3%, over fiscal 1997. These increases were
primarily the result of increased occupancy and communication costs related to
the Company's core origination channel expansion, and increases in legal and
other professional costs related primarily to the negotiation and closing of the
Preferred Stock Purchase Agreement. As part of the costs savings program
implemented in the quarter ended March 31, 1999, the Company ceased activities
in certain retail and broker branches that were deemed unprofitable by
management. The office space for such branches remains subject to operating
leases that management is attempting to sublease or terminate. The Company is
also attempting to sublet significant space at its headquarter office located at
350 South Grand Avenue in downtown Los Angeles. If such office space is
subleased at lease rates less than existing base lease terms or if the lease
commitments are bought out as a consequence of a negotiated lease termination,
the Company could incur a significant one-time charge.
Interest expense during 1999 remained constant over fiscal 1998.
Interest expense increased in fiscal 1998 to $43.9 million from $33.1 million in
fiscal 1997. This 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 or 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 external financing to fund operations.
During the fiscal year ended June 30, 1999, the Company recorded a $37
million nonrecurring charge related to the Company's servicing advances which
are recorded as accounts receivable on the Company's balance sheet. The
nonrecurring charge relates to payments made by the Company to the
securitization trusts for which it acts as servicer. As servicer of the loans it
securitizes, the Company is obligated to advance, or "loan," to the trusts
delinquent interest. In addition, as servicer, the Company advances to the
trusts foreclosure-related expenses and certain tax and insurance remittances
relating to loans in securitized pools. The Company, as servicer, is then
entitled to recover these advances from regular monthly cash flows into the
trusts, including monthly payments, pay-offs and liquidation proceeds on the
related loan. Until recovered, the Company records the cumulative advances as
accounts receivable on the balance sheet. In addition, the Company, as servicer,
is obligated to make additional payments into the trusts which are not
recoverable from monthly cash flows. These payments, for example, relate to
compensating interest payments for loans that pay-off other than at a month's
end. As servicer, the Company is required to pay into the trust that portion of
a monthly interest payment that is not included in the pay-off amount. However,
payments into a trust that are not recovered from monthly cash flows may be
recoverable from the trust's distributions to the Company, as residual
certificate holder.
In early 1999, the Company began to explore ways to reduce the cash
burden of its servicing advance obligations through various financing
techniques. At the same time, the Company determined that certain amounts
recorded as accounts receivable associated with the Company's securitization
trusts were not recoverable from the trusts' monthly cash flows. As a result,
accounts receivable were written-down by $37 million. This write-down represents
the nonrecurring charge. See "- Liquidity."
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In fiscal 1997, the Company incurred $32 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 relocating corporate headquarters recorded in the first
quarter and to severance and other strategic decisions made in the fourth
quarter.
INCOME TAXES
During the fiscal year ended June 30, 1999, the Company recorded an
estimated tax benefit of $30.2 million due to its net operating losses during
the year. The income tax benefit for the 1999 fiscal year reflects an effective
rate of (10.9%) and is net of tax valuation adjustments recorded to account for
estimated nonrealizable deferred tax assets. The investment in the Company by
Capital Z results in a change in control for income tax purposes thereby
limiting the Company's ability to use future net operating loss carryforwards
and certain other future deductions. The Company's provision for income taxes
increased to $25 million in fiscal 1998 from $8.0 million in fiscal 1997,
primarily as a result of the fluctuation in pre-tax income after consideration
of tax impact of nonrecurring charges. The effective tax rate declined to 47.8%
in fiscal 1998 from 84.4% in fiscal 1997 as a result of an adjustment in the
Company's tax reserve to more accurately reflect the risk of assessments on
previously filed tax returns.
FINANCIAL CONDITION
Loans Held for Sale. The Company's portfolio of loans held for sale
increased to $559.9 million at June 30, 1999, from $198 million at June 30,
1998. This substantial increase was due to the Company's decision to postpone
its securitization until August 1999.
Accounts Receivable. Accounts receivable, representing servicing fees,
advances, other receivables and accrued capital proceeds receivable, increased
to $57 million at June 30, 1999, from $51 million at June 30, 1998. The increase
reflects the accrual of capital proceeds received in the Additional Investment
which were recorded by the Company at June 30, 1999 and subsequently received in
August 1999, net of the sale of accounts receivable in June 1999. See "-
Liquidity" and "- Capital Resources." Otherwise, the level of servicing related
advances, in any given period, is dependent on portfolio delinquencies, the
levels of REO and loans in the process of foreclosure and the timing of cash
collections.
Interest-Only Strips. Interest-only strips were $332 million at June 30,
1999 compared to $491 million at June 30, 1998 reflecting the Write-Down in the
December quarter, offset by the non-cash gain recognized on the Company's
securitization in the quarter ended September 30, 1998, net of accretion and
amortization.
Mortgage Servicing Rights, net. Mortgage servicing rights, net were $21
million at June 30, 1999 compared to $32 million at June 30, 1998 reflecting the
charge-off of mortgage servicing rights resulting from the Company outsourcing
certain loan servicing to subservicers, the capitalization of mortgage servicing
rights on the securitization in the quarter ended September 30, 1998, net of
amortization.
Equipment and Improvements, net. Equipment and improvements, net,
decreased slightly to $13 million at June 30, 1999 from $14 million at June 30,
1998.
Prepaid and Other Assets. Prepaid and other assets decreased to $15
million at June 30, 1999 from $17 million at June 30, 1998.
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Income Tax Refund Receivable. At June 30, 1999, the Company had a state
income tax refund receivable in the amount of $1.7 million which was received
subsequent to year-end.
Borrowings. Borrowings at June 30, 1999 decreased to $281.2 million from
$287.0 million at June 30, 1998 and reflects the scheduled $5.8 million
principal reduction to the Company's 10.5% Senior Notes.
Revolving Warehouse and Repurchase Facilities. Amounts outstanding under
warehouse and repurchase facilities increased to $536 million at June 30, 1999
from $141 million at June 30, 1998, primarily as a result of the increase in
mortgage loans held for sale and from the negative cash flow from operations
during the 1999 fiscal year, and the resulting decrease in equity capital. At
June 30, 1999, the Company was holding mortgages for sale in anticipation of
closing a securitization during the summer. The Company completed a
securitization of approximately $400 million of mortgage loans in August 1999.
Proceeds from the Company's whole loan sales and securitizations are used to pay
down the Company's warehouse and repurchase facilities.
LIQUIDITY
The Company's operations require continued access to short-term and
long-term sources of cash. The Company's primary operating cash requirements
include the funding of: (i) mortgage loan originations and purchases prior to
their securitization or sale, (ii) fees, expenses and hedging costs, if any,
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 non-cash gain on sale other than in a debt-for-tax securitization structure,
(v) ongoing administrative and other operating expenses, (vi) interest and
principal payments under the Company's warehouse credit facilities and other
existing indebtedness, (vii) advances in connection with the Company's servicing
portfolio, and (viii) costs associated with expanding the Company's core
production units.
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
deterioration of the credit and capital markets severely restricted the
Company's access to these markets during the second and third fiscal quarters
until the Initial Closing on February 10, 1999. The $76.5 million ($67.4 million
net of issuance expenses) in equity capital from the Initial Investment
augmented the Company's negative operating cash until additional working capital
facilities were established. On February 10, 1999, the Company entered into a
$300 million committed repurchase facility and a $100 million (subsequently
reduced to $90 million) committed warehouse line provided from two separate
counterparties. The committed warehouse line also includes a $100 million
uncommitted warehouse facility. The repurchase facility and the warehouse
facility expire on March 31, 2000 and February 9, 2000, respectively. On April
8, 1999, the Company obtained an additional $175 million committed repurchase
facility, which was subsequently increased to $200 million when a $25 million
working capital facility with the same lender was paid off. (See below.) On
April 8, 1999, the Company's pre-existing $300 million syndicated warehouse
facility which had included a working capital sublimit expired.
The Company has historically relied on working capital lines to help it
fund its servicing advance obligations. See "- Expenses." Certain of the
warehouse and repurchase facilities require the Company to obtain an additional
working capital facility. In September 1998, the Company entered into a
revolving line of credit with a maximum borrowing capacity of $50 million
secured by certain of the Company's interest-only strips. Access to this line
originally depended upon the
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Company completing a new securitization and pledging the related interest-only
strips. However, during each of the months of December 1998 and January and
February 1999, the lender allowed the Company to borrow $20 million on a
short-term basis to satisfy the Company's obligation as servicer of the loans it
securitizes to advance interest on delinquent loans. On April 9, 1999, this line
was amended to provide for a maximum borrowing capacity of $25 million secured
by certain of the Company's interest-only strips and certain of its servicing
receivables. This satisfied the working capital requirements of the warehouse
and repurchase facilities. This line was paid off and terminated in June 1999
with the proceeds from the Company's sale of servicing advances. The facility
established in June 1999 also satisfied the working capital requirements of the
warehouse and repurchase facilities. See "- Capital Resources."
In April 1999, the Company reduced its servicing advance obligations by
engaging a loan servicing company to subservice two of the Company's
securitization trusts. Further, the loan service company assumed the obligations
to make all future advances on those two trusts. The Company also sold to the
loan servicing company the outstanding servicing advances on those two trusts
for approximately $13 million. In June 1999, the Company entered into an
arrangement with an investment bank pursuant to which the bank purchased certain
cumulative advances and undertook the obligation to make a substantial portion
of the Company's advance obligations on its pre-1999 securitization trusts. As a
result of this arrangement, the Company received approximately $50 million for
certain servicing advances carried on its books. Part of these proceeds were
used to pay off the Company's existing working capital line.
Under the terms of the Company's Indenture, dated October 21, 1996 with
respect to its 9.125% Senior Notes due 2003, the Company's ability to incur
certain additional indebtedness, including residual financing, is limited to two
times adjusted stockholders' equity. Warehouse indebtedness is not included in
the indebtedness limitations. The Company's new repurchase and warehouse
facilities contain similar limits on the Company's ability to incur additional
indebtedness. Further, until the Company receives investment grade ratings for
the notes issued under the Indenture, the amount of residual and servicing
advance financing the Company may incur on such assets allocable to
post-September 1996 securitizations is limited to 75% of the difference between
such post-September 1996 residuals and servicing advances and $225 million.
Although the Company's loan disposition strategy consists of a
combination of securitizations and whole loan sales, whole loan sales were the
sole disposition method during the last three fiscal quarters of 1999. The
Company did complete a securitization in August 1999. The gain on sale
recognized was lower than historical gains due to market conditions at the time
of the securitization, higher margins paid by the Company on the certificates
issued by the securitization trust and the Company's adoption of the revised
assumptions during the quarter ended December 31, 1998. See "- Certain
Accounting Considerations -- Accounting for Securitizations." During fiscal
1999, 1998 and 1997, the Company securitized $650 million, $2.03 billion and
$2.26 billion of loans, 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. Overcollaterization requirements increase up to
approximately twice the level otherwise required when the delinquency rates
exceed the specified limit. As of June 30, 1999, the Company was required to
maintain an additional $89 million in overcollateralization amounts as a result
of the level of its delinquency rates
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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, 1999, $48 million remains to be added to the overcollateralization amounts
from future spread income on the loans held by these trusts.
In the Company's securitizations structured as a REMIC, the recognition
of non-cash gain on sale has 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.
The Company's primary sources of liquidity are expected to be cash from
the Rights Offering, fundings under warehouse and repurchase facilities, whole
loan sales and the monetization of the Company's servicing advances.
The Company had originally anticipated that the Rights Offering would be
completed in the quarter ending June 30, 1999. However, the Company was delayed
in making the required filings with the Securities and Exchange Commission
pending completion of the restatement of its financial statements. See "-
Certain Accounting Considerations." Further, the closing of the Rights Offering
is subject to receiving stockholder approval of the Recapitalization at a
stockholders' meeting scheduled for September 13, 1999. Subject to receiving the
requisite stockholder approval, the Company currently expects the Rights
Offering to be completed in September 1999.
Under one of the Company's repurchase lines, the Company is required to
have cash and cash equivalents on and after October 1, 1999 of $15 million. It
is possible that if the Rights Offering does not close prior to that date, the
Company will not be able to maintain compliance with that covenant and would be
in default under the repurchase line. The Company believes that the Rights
Offering will be closed by that date, subject to receiving stockholder approval
of the Recapitalization at the stockholders' meeting scheduled for September 13,
1999. However, the Company has requested the necessary waiver from the lender
and expects that the waiver will be forthcoming.
The Company's primary and potential sources of liquidity as described
above (assuming continued access to working capital financing, completion of the
Rights Offering, access to the securitization and whole loan markets, and
implementation of the cash savings plans which by no means can be assured) 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. If the Company's access to
working capital or the securitization or whole loan markets is restricted, or
the cash savings are not realized, the Company may have to seek additional
equity. Further, if available at all, the type, timing and terms of 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. See "- Capital Resources --
Warehouse, Repurchase and Working Capital Facilities." There can be no assurance
that any such sources will be available to the Company at any given time or that
favorable terms will be available. As a result of the limitations described
above, the Company may be restricted in the amount of loans that it will be able
to produce and dispose of.
CAPITAL RESOURCES
The Company has historically financed its operating cash requirements
primarily through (i) warehouse and repurchase facilities and working capital
lines of credit, (ii) the securitization and sale of mortgage loans, and (iii)
the issuance of debt and equity securities.
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Warehouse, Repurchase and Working Capital Facilities. Through February
10, 1999, the Company retained access to warehouse and other credit facilities
with borrowing limits aggregating in excess of $1.0 billion. Changes in advance
rates imposed by lenders effectively limited the Company to a single $300
million committed warehouse line. The warehouse line included a working capital
line of credit with a syndicate of ten commercial banks. This facility was
secured by loans originated and purchased by the Company, as well as certain
servicing receivables. This line expired on April 8, 1999.
On February 10, 1999, and conditioned upon the Initial Closing
occurring, the Company entered into a $100 million (subsequently reduced to $90
million) committed warehouse facility and a $300 million committed repurchase
facility and one uncommitted warehouse facility in the amount of $100 million.
These facilities are each secured by the Company's home equity mortgage loans.
One of the committed facilities, in the amount of $300 million, bears interest
at rates of from 1.50% to 2.00% over one month LIBOR depending upon selected
sublimits under the facility and expires on March 31, 2000. The other committed
facility in the amount of $90 million bears interest at a rate of 1.50% over one
month LIBOR and expires on February 9, 2000. The $100 million uncommitted
facility bears interest at 1.50% over one month LIBOR and expires on February 9,
2000. On April 8, 1999, the Company entered into a second committed repurchase
facility in the amount of $175 million, which was subsequently increased to $200
million. This facility is secured by the Company's home equity mortgage loans,
bears interest at a rate of from 1.25% to 1.50% over one month LIBOR depending
on selected submits, and expires on April 7, 2000. If the Company is unable to
maintain existing warehouse or repurchase lines, it would have to cease loan
production operations which would negatively impact profitability and jeopardize
the Company's ability to continue to operate as a going concern.
In September 1998, the Company entered into a revolving line of credit
with a maximum borrowing capacity of $50 million secured by certain of the
Company's interest-only strips. Access to this line originally depended upon the
Company completing a new securitization and pledging the related interest-only
strips. However, during each of the months of December 1998 and January and
February 1999, the lender allowed the Company to borrow $20 million on a
short-term basis to satisfy the Company's obligation as servicer of the loans it
securitizes to advance interest on delinquent loans. On April 9, 1999, this line
was amended to provide for a maximum borrowing capacity of $25 million secured
by certain of the Company's interest-only strips and certain of its servicing
receivables. This line was paid off and terminated in June 1999 with the
proceeds from the Company's sale of servicing advances. See "- Liquidity."
Loan Sales. The Company's ability to sell loans originated and purchased
by it in the secondary market is necessary to generate cash proceeds to pay down
its warehouse and repurchase facilities and fund new originations and purchases.
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. See"- Risk Factors -- A Prolonged Interruption or Reduction
in the Secondary Market Would Hurt Our Financial Performance."
Other Capital Resources. The Company has historically funded negative
cash flow primarily from the sale of its equity and debt securities. However,
current market conditions have restricted the Company's ability to access its
traditional public equity and debt sources. In December 1991, July 1993, June
1995, October 1996 and April 1998, the Company effected public offerings of its
common stock with net proceeds to the Company aggregating $217 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%
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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. At June 30, 1999, under the most restrictive of such covenants, the
Company had no money available for the payment of such distributions and does
not expect to have the ability to pay dividends for the foreseeable future.
On April 27, 1998, the Company issued 2.78 million shares of its common
stock, or 9.9% of the Company's outstanding shares, to private entities
controlled by Ronald Perelman and Gerald Ford, at an aggregate purchase price of
approximately $38 million. The Company also issued warrants to these entities to
purchase an aggregate additional 6.3 million shares (as adjusted) of the
Company's common stock at an exercise price of $7.67 (as adjusted), subject to
customary anti-dilution provisions. The warrants are exercisable only upon a
change in control of the Company and expire in three years from issuance.
During the fiscal year ended June 30, 1999, the Company raised an
additional $76.8 million ($67.4 million net of issuance expenses) in the Initial
Investment by Capital Z. In August 1999, Capital Z (through a partnership
majority-owned by it) invested an additional $25 million in the Company. Net of
costs of issuance, the additional proceeds to the Company were $24.8 million and
were accrued at June 30, 1999. Subject to receiving stockholder approval of the
Recapitalization, the Company will close the Rights Offering. If less than 25
million shares of Series C Convertible Preferred Stock are purchased in the
Rights Offering, Capital Z has agreed to purchase the difference (up to 25
million shares of the Series C Preferred Stock) for $1.00 per share.
If the Company's stockholders do not adopt the amendments before the
earlier of September 30, 1999 or September 13, 1999, the date of the scheduled
stockholders' meeting (if, in the latter case, any of the proposed amendments to
the Certificate of Incorporation is defeated at the meeting), the dividend rate
on the Series B and Series C Convertible Preferred Stock held by Capital Z will
increase from 6.5% to 15% per annum and Capital Z will be able to exercise a
warrant to purchase up to 3,000,000 additional shares of common stock at an
exercise price of $1.00 per share.
The Company had cash and cash equivalents of approximately $21 million
at June 30, 1999. See "- Risk Factors -- If Outside Sources of Cash are Not
Sufficient, Our Ability to Make and Service Loans will be Impaired and Our
Revenues will Suffer."
YEAR 2000 COMPLIANCE AND TECHNOLOGICAL ENHANCEMENT
Readers are cautioned that forward-looking statements contained in this
Year 2000 disclosure should be read in conjunction with the Company's
disclosures under the heading, "Special Note on Forward-looking Statements,"
beginning on page 23 above. Readers should understand that the dates on which
the Company believes the Year 2000 project will be completed are based upon
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, or that there will not be a delay in, or
increased costs associated with, the implementation of the Company's Year 2000
Compliance Project. A delay in specific factors that might cause differences
between the estimates and actual results include, but are not limited to, the
availability and cost of personnel trained in these areas, the ability of
locating and correcting all relevant computer codes, timely responses to and
corrections by third parties and suppliers, the ability to implement interfaces
between the new systems
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<PAGE> 41
and the systems not being replaced, and similar uncertainties. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third parties and the
inter-connection of national and international businesses, the Company cannot
ensure its ability to timely and cost effectively resolve problems associated
with the Year 2000 issue that may effect its operations and business, or expose
it to third party liability.
The Company's Year 2000 compliance program consists of four
phases--inventory, risk assessment process, corrective action and testing. The
Company has completed the inventory phase which included the identification of
all computer hardware and software, electronic data exchanges, operating
systems, communications systems and non-information items. As a corollary to the
inventory phase, the Company has made inquiries of its significant vendors as to
their Year 2000 readiness.
The Company has also completed the risk assessment process of assigning
risk factors to each system used by the Company to determine the priority and
resource allocation of its Year 2000 efforts. The Company expects to complete
the corrective action and testing phases with respect to mission critical
systems by September 30, 1999. The Company will complete any remaining testing
and compliance by the end of 1999.
Costs to Address the Company's Year 2000 Issues. The Company anticipates
that costs relating to Year 2000 issues are not expected to be material since
the Company primarily relies on third party software for its primary information
technology systems and does not require significant internal reprogramming
resources to change program codes. The Company has partially converted and is
scheduled to complete the conversion of its major computer systems, including
the loan origination system and the financial system from in-house to
vendor-supported systems. These conversions were planned to upgrade and improve
functionality rather than as a result of Year 2000 issues.
Risks of the Company's Year 2000 Issues. The most significant risk
associated with the Company's Year 2000 compliance would result from the loss of
the Company's vendor supported servicing system and the inability to maintain
the ongoing loan service operations, including payment processing, collections
and investor remittance processing. The Company's servicing platform uses
software supplied by a subsidiary of Fiserv, Inc. To reduce the risk of
non-compliance, the Company intends to rely on the vendor's representations
regarding Year 2000 compliance, the Company's testing efforts, as well as the
testing results of other companies that use the same software. The testing and
other costs relating to the Company's Year 2000 compliance program are not
expected to be material.
Another Year 2000 risk relates to the Company's vendor supported loan
origination system. In the event of Year 2000 issues with respect to the
software used with such system (also supplied by a subsidiary of Fiserv, Inc.),
the Company's ability to originate loans would be diminished and may result in
reduced loan production until the problem is resolved. The Company intends to
rely on the vendor's assurances and Company testing to minimize the risk of
non-compliance of this system.
Contingency Plans. The Company has no reason to believe that its most
significant systems will not be Year 2000 compliant. If testing indicates any of
the systems are not compliant, the Company will develop appropriate contingency
plans.
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RISK MANAGEMENT
The Company is currently re-evaluating its current hedging policy, and
at June 30, 1999 had no hedge transactions in place. While the Company monitors
the interest rate environment and has employed 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.
FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES
Sale of Loans - Securitizations and Whole Loan Sales - Interest Rate
Risk. The most significant variable in the determination of gain on sale in a
securitization is the spread between the weighted average coupon on the
securitized loans and the pass-through interest rate. In the interim period
between loan origination or purchase and securitization of such loans, the
Company is exposed to interest rate risk. The majority of loans are securitized
within 90 days of origination or purchase. However, a portion of the loans are
held for sale or securitization for as long as 12 months (or longer, in very
limited circumstances) prior to securitization or sale. If interest rates rise
during the period that the mortgage loans are held, the spread between the
weighted average interest rate on the loans to be securitized and the
pass-through interest rates on the securities to be sold (the latter having
increased as a result of market rate movements) would narrow. Upon
securitization, this would result in a reduction of the Company's related gain
on sale. The Company is also exposed to rising interest rates for loans
originated or purchased which are held pending sale in the whole loan market. In
the past, the Company mitigated exposure to rising interest rates through swap
agreements with third parties that sell United States Treasury securities not
yet purchased and the purchase of Treasury Put Options. Hedge gains or losses
are initially deferred and subsequently included in gain on sale upon completion
of the securitization or whole loan sale. With respect to the Company's
securitizations, gain on sale included hedge losses of $13.5 million and $1.30
million in fiscal 1999 and 1998, respectively. These hedging activities help
mitigate the risk of absolute movements in interest rates but they do not
mitigate the risk of a widening in the spreads between pass-through certificates
and U.S. Treasury securities with comparable maturities.
At June 30, 1999, the Company did not have any hedge transactions in
place. At June 30, 1998, the Company had outstanding notional balances of
Treasury swap agreements in the amount of $250 million. This position expired on
September 30, 1998 and had a market value at June 30, 1998 of $248 million. The
Company had a similar position at June 30, 1997 in the notional amount of $135
million. This position expired on September 30, 1997 and had a market value at
June 30, 1997 of $135 million. These transactions were subject to Treasury
interest rate fluctuation and required cash settlement at expiration or
voluntary termination.
The Company also had LIBOR cap contracts outstanding at June 30, 1998
and 1997 in the notional amount of $17.5 million and $106 million, respectively.
These positions were valued at par at both fiscal year ends as their contractual
cap (strike price) exceeded the LIBOR market rate at June 30, 1998 and 1997. The
June 30, 1998 position expired December 23, 1998 and the June 30, 1997 position
had expiration dates from March 30, 1998 to December 23, 1998. These instruments
had no negative risk above the original premiums paid in cash.
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<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total Fair Value
------ ------ ------ ------ ------ ------ ------- -------
(Dollars in thousands)
RATE SENSITIVE ASSETS:
Loans held for sale:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate mortgage loan $ 48,902 77,550 61,407 43,657 30,892 73,513 335,921 $345,707
Weighted average rate 10.48% 10.48 10.48 10.48 10.48 10.48 10.48
Variable rate mortgage loan $ 41,922 54,747 57,559 17,170 12,972 39,578 223,948 $230,471
Weighted average rate 10.35% 10.35 11.83 11.83 11.83 11.83 10.35
RATE SENSITIVE LIABILITIES
Borrowings:
Fixed rate $ 5,750 5,750 5,750 -- 150,000 113,970 281,220 $171,888
Weighted average rate 7.68% 7.62 7.56 7.56 5.50 5.50 7.74
Variable rate $535,997 -- -- -- -- -- 535,997 $535,997
Weighted average rate 6.39% -- -- -- -- 6.39
</TABLE>
RATE SENSITIVE
DERIVATIVE FINANCIAL
INSTRUMENTS
None
Interest-Only Strips and MSRs. The Company had interest-only strips of
$332.3 million and $490.5 million outstanding at June 30, 1999 and 1998,
respectively. The Company also had MSRs outstanding at June 30, 1999 and 1998 in
the amount of $20.9 million and $32.1 million, respectively. Both of these
instruments are valued at market at June 30, 1999 and 1998. The Company values
these assets based on the present value of future revenue streams net of
expenses using various assumptions. The discount rate used to calculate the
present value of the interest-only strips and MSRs was 15.0% and 10.8% at June
30, 1999 and 1998, respectively. The weighted average life used for valuation at
June 30, 1999 was 2.86 years and at June 30, 1998 was 2.6 to 3.8 years.
These assets are subject to risk in accelerated mortgage prepayment or
losses in excess of assumptions used in valuation. Ultimate cash flows realized
from these assets would be reduced should prepayments or losses exceed
assumptions used in the valuation. Conversely, cash flows realized would be
greater should prepayments or losses be below expectations.
Fair Value of Financial Instruments. The Company's financial instruments
recorded at contractual amounts that approximate market or fair value primarily
consist of trade receivables, accounts payable and trade receivables sold under
agreements to repurchase. As these amounts are short term in nature and/or
generally bear market rates of interest, the carrying amounts of these
instruments are reasonable estimates of their fair values. The carrying amount
of the Company's long-term debt approximates fair value when valued using
available quoted market prices.
Credit Risk. The Company is exposed to on-balance sheet credit risk
related to its loans held for sale and interest-only strips. The Company is
exposed to off-balance sheet credit risk related to loans which the Company has
committed to originate or purchase.
The Company is a party to financial instruments with off-balance sheet
credit risk in the normal course of business. These financial instruments
include commitments to extend credit to
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borrowers and commitments to purchase loans from correspondents. The Company has
a first or second lien position on all of its loans, and the combined
loan-to-value ratio ("CLTV") permitted by the Company's mortgage underwriting
guidelines generally may not exceed 90%. In some cases, the Company originates
loans up to 95% CLTV that are insured down to approximately 65% with mortgage
insurance. The CLTV represents the combined first and second mortgage balances
as a percentage of the appraised value of the mortgaged property, with the
appraised value determined by an appraiser with appropriate professional
designations. A title insurance policy is required for all loans.
Warehousing Exposure. The Company utilizes warehouse and repurchase
financing facilities to facilitate the holding of mortgage loans prior to
securitization. As of June 30, 1999 and 1998, the Company had total warehouse
and repurchase facilities available in the amount of $590 million and $950
million, respectively; the total outstanding related to these facilities was
$536 million and $141 million at June 30, 1999 and 1998, respectively. Warehouse
and repurchase facilities are typically for a term of one year or less and are
designated to fund mortgages originated within specified underwriting
guidelines. The majority of the assets remain in the facilities for a period of
up to 90 days at which point they are securitized and sold to institutional
investors. As these amounts are short term in nature and/or generally bear
market rates of interest, the contractual amounts of these instruments are
reasonable estimates of their fair values.
RISK FACTORS
IF OUTSIDE SOURCES OF CASH ARE NOT SUFFICIENT, OUR ABILITY TO MAKE AND
SERVICE LOANS WILL BE IMPAIRED AND OUR REVENUES WILL SUFFER.
We operate on a negative cash flow basis, which means our cash
expenditures exceed our cash earnings. Therefore, we need continued access to
short- and long-term external sources of cash to fund our operations.
Our primary uses of cash include:
o mortgage loan originations and purchases before their
securitization and sale;
o fees, expenses and hedging costs, if any, incurred for the
securitization of loans;
o cash reserve accounts or overcollateralization required in the
securitization and sale of loans;
o tax payments generally due on recognition of non-cash gain on
sale recorded in the securitizations;
o ongoing administrative and other operating expenses;
o interest and principal payments under our credit facilities and
other existing indebtedness;
o cash advances made on delinquent loans included in our loan
servicing portfolio; and
o costs of expanding our loan production units.
Our primary sources of cash are expected to be cash from the Rights
Offering, warehouse and repurchase facilities, transactions by which we monetize
our servicing advance receivables,
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securitizations and whole loan sales.
Our primary and potential sources of cash as described in the paragraph
above should be sufficient to fund our cash requirements through at least the
next 12 months, but only if our future operations are consistent with our
current growth expectations. Further, the closing of the Rights Offering is
subject to receiving stockholder approval of the Recapitalization at the
stockholders' meeting scheduled for September 13, 1999. If available at all, the
type, timing and terms of financing selected by us will be dependent upon our
cash needs, the availability of other financing sources, limitations under debt
covenants and the prevailing conditions in the financial markets. However, we
are not sure that these sources of cash will be available when needed. Even if
the sources of cash are available, the providers of cash may impose terms that
are not favorable to us. As a result of the limitations described above, we may
be restricted in the amount of loans that we will be able to produce and dispose
of.
OUR RIGHT TO SERVICE LOANS MAY BE TERMINATED BECAUSE OF THE HIGH
DELINQUENCIES AND LOSSES ON THE LOANS IN OUR SERVICING PORTFOLIO.
If, at any measuring date, the delinquencies or losses with respect to
any of our securitization trusts credit-enhanced by monoline insurance were to
exceed the delinquency or loss limits applicable to that trust, our rights to
service the loans in the affected trust may be terminated.
A substantial majority of our servicing portfolio consists of loans
securitized by us and sold to real estate mortgage investment conduits or owner
trusts in securitization transactions. Generally, the agreement entered into in
connection with these securitizations contains specified limits on
delinquencies, which means loans past due 90, or in some cases past due 60, days
or more, and losses that may be incurred in each trust. Losses occur when the
cash we receive from the sale of foreclosed properties, less sales expenses, is
less than the principal balances of the loans previously secured by those
properties and related interest and servicing advances. See below.
A majority of our securitization transactions were credit-enhanced by an
insurance policy issued by a monoline insurance company. That insurance policy
protects the securitization investor against certain losses. The monoline
insurance company can terminate us as servicer if delinquencies or losses are
over a specified limit.
At June 30, 1999, the dollar volume of loans delinquent more than 90
days in our 10 securitization trusts formed in December 1992 and during the
period from March 1995 to March 1997 exceeded the permitted limit in the related
securitization agreements.
We have implemented various plans to lower the delinquency rates in our
future trusts, including diversifying the loans we originate and purchase to
include higher credit grade loans. The delinquency rate at June 30, 1999 was
15.7% and at June 30, 1998 was 15.6%.
Four of the ten trusts referred to above, which represent in the
aggregate 16% of the dollar volume of our servicing portfolio, exceeded loss
limits at June 30, 1999. The limit that has been exceeded provides that losses
may not exceed a certain threshold, which ranges from .50% to .77% of the
original pool balances in the relevant securitization trusts, on a rolling 12
month basis. Additionally, during July 1999, one additional trust exceeded the
specified delinquency level and one of the four trusts that exceeded its loss
limit was cured.
Although the monoline insurance company has the right to terminate
servicing with respect to the trusts that exceed the delinquency and loss
limits, no servicing rights have been terminated and we believe that it is
unlikely that we will be terminated as servicer. We cannot be sure, however,
that our servicing rights with respect to the mortgage loans in such trusts, or
any other trusts which exceed
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the specified delinquency or loss limits in future periods, will not be
terminated.
HIGH DELINQUENCIES ON THE LOANS IN OUR SERVICING PORTFOLIO MAY HURT OUR
CASH FLOWS.
High delinquency rates hurt our cash flows. When delinquency rates
exceed the limit specified in the securitization agreement, our right to receive
cash from the trust is delayed. When delinquency rates exceed the specified
amount, we are required to use the cash flows from the trust to make accelerated
payments of principal on the certificates or bonds issued by the trust. These
accelerated payments increase the overcollateralization levels. The
overcollateralization level represents the amount that the principal balance of
the loans in the trust exceeds the principal balance of the certificates or
bonds issued by the trust. We do not receive distributions from the trust until
after the required overcollateralization levels are met. Generally, provisions
in the securitization agreements have the effect of requiring the
overcollateralization amount to be increased up to approximately twice the level
otherwise required when the delinquency rates do not exceed the specified limit.
As of June 30, 1999, we were required to maintain an additional $89 million in
overcollateralization amounts as a result of the level of the 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, 1999, $48 million remains to be added to the overcollateralization amounts
from future spread income on the loans held by these trusts.
High delinquency rates also negatively affect our cash flows because we
act as servicer of the loans in the trust. As the servicer, we are required to
use our cash to advance to the trust past due interest.
HIGH DELINQUENCIES AND LOSSES MAY HURT OUR EARNINGS.
Higher delinquency and loss levels may also affect our reported
earnings. We apply certain assumptions with respect to expected losses on loans
in a securitization trust to determine the amount of non-cash gain on sale that
we record at the closing of a securitization transaction. If actual losses
exceed those assumptions, we may be required to take a charge to earnings. The
charge to earnings would result in an adjustment to the carrying value of the
interest-only strips recorded on our balance sheet.
OUR LOANS ARE SUBJECT TO HIGHER RISKS OF DELINQUENCY AND LOSS THAN THOSE
MADE BY CONVENTIONAL MORTGAGE SOURCES.
Loans made to borrowers in the lower credit grades have historically
resulted in a higher risk of delinquency and loss than loans made to borrowers
who use conventional mortgage sources. We believe that the underwriting criteria
and collection methods we use permit us to mitigate the higher risks inherent in
loans made to these borrowers. However, we cannot be sure that those criteria or
methods will protect us against those risks.
All of our loans are collateralized by residential property. The value
of the property collateralizing our loans may not be sufficient to cover the
principal amount of the loans in the event of liquidation. Losses not covered by
the underlying properties could have a material adverse effect on our results of
operations and financial condition. In addition, historical loss rates affect
the assumptions used by us in computing our non-cash gain on sale. If actual
losses exceed those assumptions, we may be required to take a charge to
earnings.
Adjustable rate loans account for a substantial portion of the mortgage
loans that we originate
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or purchase. Substantially all of the 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.
IF WE ARE UNABLE TO MAINTAIN ADEQUATE FINANCING SOURCES, OUR ABILITY TO
MAKE MORTGAGE LOANS WILL BE IMPAIRED AND OUR REVENUES WILL SUFFER.
We use cash draws under credit facilities, referred to as warehouse and
repurchase facilities, to fund new originations and purchases of mortgage loans
before securitization or sale. We currently have three committed lines with
aggregate borrowing capacity of $590 million and one $100 million uncommitted
warehouse line. We recently entered into a transaction pursuant to which we sold
certain accounts receivable representing servicing advances we had previously
made and engaged an investment bank to make a substantial portion of future
servicing advances on substantially all of the loans in our servicing portfolio.
As servicer of the loans we securitize, we are required to advance, or loan, to
the trusts delinquent interest. In addition, as servicer , we advance to the
trusts foreclosure related expenses, and certain tax and insurance remittances
relating to loans serviced. To the extent that we are unable to maintain
existing credit facilities, arrange new warehouse, repurchase or other credit
facilities or obtain additional commitments to sell whole loans for cash, we may
have to curtail making loans. This would have a material adverse effect on our
financial position and results of operations and jeopardize our ability to
continue to operate as a going concern.
OUR BUSINESS OPERATIONS MAY BE INTERRUPTED IF WE EXPERIENCE UNEXPECTED
YEAR 2000 PROBLEMS.
Many existing computer systems and software products do not properly
recognize dates after December 31, 1999. This Year 2000 problem could result in
data corruption, system failures or disruptions of operations. We are subject to
potential Year 2000 problems affecting our products and services, our internal
systems and the systems of third parties on whom we rely. As part of our overall
systems enhancement program, we are using both internal and external resources
to identify, correct, reprogram or replace, and test our systems for Year 2000
compliance. One of our financing facilities requires us to be Year 2000
compliant by September 30, 1999. It is anticipated that all of our Year 2000
compliance efforts will be completed on time. We use third-party equipment,
software and content that may not be Year 2000 compliant. Although we have
received assurances from third parties that they are Year 2000 compliant, we
generally do not independently verify their Year 2000 compliance. If third
parties on whom we rely are not Year 2000 compliant, our business could be
adversely affected later this year.
Certain state regulatory authorities have imposed early deadlines for
Year 2000 compliance. We are unable to meet those deadlines. If we are unable to
satisfy those regulators that our Year 2000 compliance effort is adequate, our
license to conduct business in a state could be revoked or not renewed.
We have recently installed and are testing a Year 2000 compliant loan
origination system that is expected to add approximately $2 million per year to
our technology costs over the next three years. Other technology enhancements
are being reviewed but, to date, the costs for those enhancements have not been
determined.
FASTER THAN EXPECTED PREPAYMENT RATES ON OUR LOANS WILL HURT EARNINGS.
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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. The rate of
prepayment of loans may be affected by a variety of economic and other factors.
We estimate prepayment rates based on our expectations of future prepayment
rates, which are based, in part, on the historic performance of our loans and
other considerations.
OUR OPERATIONS MAY BE HURT BY A SUBSTANTIAL AND SUSTAINED INCREASE OR
DECREASE IN INTEREST RATES.
A substantial and sustained increase in long-term interest rates could,
among other things:
o decrease the demand for consumer credit;
o adversely affect our ability to make loans; and
o reduce the average size of loans we underwrite.
A significant decline in long-term interest rates could increase the
level of loan prepayments. An increase in prepayments would decrease the size
of, and servicing income from, our servicing portfolio. Our expectations as to
prepayment are used to determine the amount of non-cash gain on sale recorded at
the closing of a securitization transaction. An increase in prepayment rates
could result in a charge to earnings if the rate is faster than originally
expected.
A substantial and sustained increase in short-term interest rates could,
among other things,
o increase our borrowing costs, most of which are tied to those
rates; and
o reduce the gains recorded by us upon the securitization and sale
of loans.
IN AN INCREASING INTEREST RATE ENVIRONMENT, OUR EARNINGS COULD SUFFER
BECAUSE OF ADJUSTABLE RATE LOANS THAT WE SECURITIZED.
The value of our interest-only strips created as a result of the
securitization of adjustable rate mortgage loans is subject to so-called basis
risk. Basis risk arises when the adjustable rate mortgage, including fixed
initial rate mortgage, loans in a securitization trust bear interest based on an
index or adjustment period that is different from the certificates or bonds
issued by the trust. In the absence of effective hedging, or loss mitigation,
strategies, in a period of increasing interest rates, the value of the
interest-only strips would be adversely affected because the interest rates on
the certificates or bonds issued by a securitization trust could adjust faster
than the interest rates on our adjustable rate mortgage loans in the trust.
Adjustable rate mortgage loans are typically subject to periodic and lifetime
interest rate caps, which limit the amount an adjustable rate mortgage loan's
interest rate can change during any given period. In a period of rapidly
increasing interest rates, the value of the interest-only strips could be
adversely affected in the absence of effective hedging strategies because the
interest rates on the certificates or bonds issued by a securitization trust
could increase without limitation by caps, while the interest rates on our
adjustable rate mortgage loans would be so limited.
A PROLONGED INTERRUPTION OR REDUCTION IN THE SECONDARY MARKET WOULD HURT
OUR FINANCIAL PERFORMANCE.
We must be able to sell loans we make in the securitization and whole
loan market to generate cash proceeds to pay down our warehouse and repurchase
facilities and fund new loans. Our ability to sell loans in the securitization
and whole loan markets on acceptable terms is essential for the
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continuation of our loan origination and purchase operations. The value of and
market for our loans are dependent upon a number of factors, including general
economic conditions, interest rates and governmental regulations. Adverse
changes in these factors may affect our ability to securitize or sell whole
loans for acceptable prices within a reasonable period of time.
To facilitate the sale of certificates or bonds issued by the
securitization trust, we must obtain investment grade ratings for the
certificates or bonds. To obtain those credit ratings, we credit-enhance the
securitization trust. The overcollateralization amount is one form of credit
enhancement. Additionally, we either obtain an insurance policy to protect
holders of the certificates or bonds against certain losses, or sell
subordinated interests in the securitization trusts.
Our financial position and results of operations would be materially
affected if investors were unwilling to purchase interests in our securitization
trusts or monoline insurance companies were unwilling to provide financial
guarantee insurance for the certificates or bonds sold. Other accounting, tax or
regulatory changes could also adversely affect our securitization program.
We rely on institutional purchasers, such as investment banks, financial
institutions and other mortgage lenders, to purchase our loans in the whole loan
market. We cannot be sure that the purchasers will be willing to purchase loans
on satisfactory terms or that the market for such loans will continue. Our
results of operations and financial condition could be materially adversely
affected if we could not successfully identify whole loan purchasers or
negotiate favorable terms for loan purchases.
IF WE ARE UNABLE TO SELL A SIGNIFICANT PORTION OF OUR LOANS ON AT LEAST
A QUARTERLY BASIS, OUR EARNINGS WOULD BE SIGNIFICANTLY AFFECTED.
Any delay in the sale of a significant portion of our loan production
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 the quarter.
Our loan disposition strategy calls for substantially all of our production to
be sold in the secondary market within 90 days of origination. However, market
and other considerations, including the conformity of loan pools to monoline
insurance company and rating agency requirements, could affect the timing of the
sale transactions.
CHANGES IN THE VOLUME AND COST OF OUR BROKER LOANS MAY DECREASE OUR LOAN
PRODUCTION.
We depend on independent mortgage brokers for the origination and
purchase of our broker loans, which constitute a significant portion of our loan
production. Our future results of operations and financial condition may be
vulnerable to changes in the volume and cost of our broker loans resulting from,
among other things, competition from other lenders and purchasers of such loans.
These independent mortgage brokers negotiate with multiple lenders for each
prospective borrower. We compete with these lenders for the independent brokers'
business on pricing, service, loan fees, costs and other factors. Our
competitors also seek to establish relationships with such brokers, who are not
obligated by contract or otherwise to do business with us.
OUR COMPETITORS IN THE MORTGAGE BANKING MARKET ARE OFTEN LARGER AND
HAVE GREATER FINANCIAL RESOURCES THAN WE DO, WHICH WILL MAKE IT DIFFICULT FOR
US TO SUCCESSFULLY COMPETE.
We face intense competition in the business of originating, purchasing
and selling mortgage loans. Competition among industry participants can take
many forms, including convenience in
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<PAGE> 50
obtaining a loan, customer service, marketing and distribution channels, amount
and term of the loan, loan origination fees and interest rates. Many of our
competitors are substantially larger and have considerably greater financial,
technical and marketing resources than we do. Our competitors in the industry
include other consumer finance companies, mortgage banking companies, commercial
banks, investment banks, credit unions, thrift institutions, credit card issuers
and insurance companies. In the future, we 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 our highest credit grades, who constitute a significant
portion of our customer base.
The historical level of gains realized 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, or have purchased companies that originate and purchase,
subprime mortgage loans, and some of these large mortgage companies, thrifts and
commercial banks have begun offering subprime loan products to customers similar
to our targeted borrowers. 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 our
broker lending business.
Additional competition may lower the rates we can charge borrowers and
increase the cost to purchase loans, which could potentially lower the gain on
future loan sales or securitizations. Increased competition may also reduce the
volume of our loan origination and loan sales and increase the demand for our
experienced personnel and the potential that such personnel will leave for
competitors.
Competitors with lower costs of capital have a competitive advantage
over us. During periods of declining rates, competitors may solicit our
customers to refinance their loans. In addition, during periods of economic
slowdown or recession, our borrowers may face financial difficulties and be more
receptive to the offers of our competitors to refinance their loans.
Our correspondent and broker programs depend largely on independent
mortgage bankers and brokers and other financial institutions for the purchases
of new loans. Our competitors also seek to establish relationships with the same
sources.
BECAUSE A SIGNIFICANT AMOUNT OF THE LOANS WE SERVICE ARE IN CALIFORNIA,
OUR OPERATIONS COULD BE HURT BY ECONOMIC DOWNTURNS OR NATURAL DISASTERS IN
THE STATE.
At June 30, 1999, 21.4% of the loans we serviced were collateralized by
residential properties located in California. Because of this concentration in
California, our 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 collateralizing
loans. If the principal balances of our loans, together with any primary
financing on the mortgaged properties, equal or exceed the value of the
mortgaged properties, we could incur higher losses on sales of properties
collateralizing foreclosed loans. 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 our ability to recover losses on properties affected by such disasters
and adversely impact our results of operations.
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<PAGE> 51
THE RISKS ASSOCIATED WITH OUR 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. Material declines in real estate values also
weakens collateral coverage and increases the possibility of a loss in the event
of liquidation. Further, delinquencies, foreclosures and losses generally
increase during economic slowdowns or recessions. Because of our 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,
our servicing costs may increase. Any sustained period of increased
delinquencies, foreclosure, losses or increased costs could adversely affect our
ability to securitize or sell loans in the secondary market and could increase
the cost of these transactions.
EVEN AFTER WE SELL OUR LOANS, WE REMAIN SUBJECT TO RISKS FROM
DELINQUENCIES AND LOSSES ON THE LOANS WE SERVICE.
Although we sell substantially all the mortgage loans which we originate
or purchase, we retain some degree of credit risk on substantially all loans
sold where we continue to service those loans. During the period of time that
loans are held before sale, we are 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. Cash flows
from the securitization trust are represented by the interest rate earned on the
loans in the trust over the amount of interest paid by the trust to the holders
of the certificates or bonds issued by the trust, plus certain monoline and
servicing fees. The agreements governing our securitization program require us
to credit-enhance the securitization trust by either establishing deposit
accounts or building overcollateralization levels. Deposit accounts are
established by maintaining a portion of the excess cash flows in a trust deposit
account. Overcollateralization levels are built up by applying these excess cash
flows to reduce the principal balances of the certificates or bonds issued by
the trust. Those amounts are available to fund losses realized on loans held by
such trust. We continue to be subject to the risks of default and foreclosure
following securitization and the sale of loans to the extent excess cash flows
are required to be maintained in the deposit account or applied to build up
overcollateralization, as opposed to being distributed to us.
When borrowers are delinquent in making monthly payments on loans
included in a securitization trust, as servicer of the loans in the trust, we
are required to advance interest payments with respect to such delinquent loans.
These advances require funding from our capital resources, but have priority of
repayment from collections or recoveries on the loans in the related pool in the
succeeding month.
WE MAY BE REQUIRED TO REPURCHASE LOANS OR INDEMNIFY INVESTORS IF WE
BREACH REPRESENTATIONS AND WARRANTIES.
In the ordinary course of our business, we are subject to claims made
against us 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 our employees
and officers, incomplete documentation and failures to comply with various laws
and regulations applicable to our business. In addition, agreements governing
our securitization program and whole loan sales require us to commit to
repurchase or replace loans which do not conform to
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our representations and warranties at the time of sale. We believe that
liability with respect to any currently asserted claims or legal actions is not
likely to be material to our 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 our financial position
and results of operations.
IF WE ARE UNABLE TO COMPLY WITH MORTGAGE BANKING RULES AND REGULATIONS,
OUR ABILITY TO MAKE MORTGAGE LOANS MAY BE RESTRICTED.
Our operations are subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and are subject
to various laws, regulations and judicial and administrative decisions imposing
requirements and restrictions on part or all of our operations. 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. Our consumer lending activities are subject
to various federal laws and regulations. We are 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 us, 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. Because our
business is highly regulated, the laws, rules and regulations applicable to us
are subject to regular modification and change. There are currently proposed
various laws, rules and regulations which, if adopted, could impact us.
CHANGES IN THE MORTGAGE INTEREST DEDUCTION COULD HURT OUR FINANCIAL
PERFORMANCE.
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 borrower income, type of loan
or principal amount. Because many of our 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 us.
WE WILL BE UNABLE TO PAY DIVIDENDS ON OUR CAPITAL STOCK FOR THE
FORESEEABLE FUTURE.
The indentures governing certain of our outstanding indebtedness as well
as our other credit agreements limit our ability to pay cash dividends on our
capital stock. Under the most restrictive of these limitations, we will be
prevented from paying cash dividends on our capital stock for the foreseeable
future.
THE CONCENTRATED OWNERSHIP OF OUR VOTING STOCK BY OUR CONTROLLING
STOCKHOLDER MAY HAVE AN ADVERSE EFFECT ON YOUR ABILITY TO INFLUENCE THE
DIRECTION WE WILL TAKE.
Following completion of the Rights Offering, Capital Z will beneficially
own senior preferred stock representing 61.1% of our combined voting power if
all the Series C Convertible Preferred Stock offered in the Rights Offering is
purchased by our common stockholders and 78.2% of our
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<PAGE> 53
combined voting power if none of the Series C Convertible Preferred Stock
offered in the Rights Offering is purchased by our common stockholders and 25
million shares of the Series C Convertible Preferred Stock are purchased by
Capital Z pursuant to the Standby Commitment. The Series C Convertible Preferred
Stock does not vote in the election of directors. Representatives or nominees of
Capital Z have five seats on our nine person Board of Directors. As a result of
its beneficial ownership and Board representation, Capital Z has, and will
continue to have, sufficient power to determine our direction and policies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are attached to this report:
Reports of Independent Auditors (Ernst & Young LLP,
PricewaterhouseCoopers LLP)
Consolidated Balance Sheet at June 30, 1999 and 1998
Consolidated Statement of Operations for the Years Ended
June 30, 1999, 1998 and 1997
Consolidated Statement of Stockholders' Equity for the Years Ended
June 30, 1999, 1998 and 1997
Consolidated Statement of Cash Flows for the Years Ended June 30, 1999,
1998 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 1999 Annual Meeting of Stockholders
or an amendment to this Form 10-K, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear in the proxy
statement for the 1999 Annual Meeting of Stockholders or an amendment to this
Form 10-K, 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 1999 Annual Meeting of
Stockholders or an amendment to this Form 10-K, and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
will appear in the proxy statement for the 1999 Annual Meeting of Stockholders
or an amendment to this Form 10-K, and is incorporated by this reference.
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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:
None.
(c) Exhibits - Management Contracts and Compensatory Plans:
10.1 Form of Director and Officer Indemnification Agreement(14)
10.2(a) Second Amended and Restated Employment, dated as of May 8,
1997, between Registrant and Cary H. Thompson(14)
10.2(b) Stock Option Agreement between Registrant and Cary H.
Thompson(10)
10.2(c) Amendment No. 1, dated as of August 26, 1998, to Exhibit
10.2(a)(19)
10.3(a) Employment Agreement, dated as of August 28, 1996, between
Registrant and Neil Kornswiet(14)
10.3(b) Amendment No. 1, dated as of June 1, 1997, to Exhibit
10.3(a)(14)
10.3(c) Amended and Restated Employment Agreement, dated as of
August 26, 1998, between Registrant and Neil B.
Kornswiet(19)
10.4 Employment Agreement, dated as of May 12, 1997, between
the Registrant and David A. Sklar
10.5 Second Amended and Restated Employment Agreement, dated as
of June 1, 1997, between Registrant and Barbara Polsky(14)
10.6(a) Employment Agreement, dated as of June 1, 1997, between
Registrant and Mark Costello(14)
10.6(b) Performance Bonus Plan for Mark Costello(20)
10.7 1991 Stock Incentive Plan, as amended(2)
10.8 1995 Stock Incentive Plan(10)
10.9(a) 1996 Stock Incentive Plan(12)
10.9(b) Amendment No. 1 to Exhibit 10.9(a)(14)
10.10 1997 Stock Option Plan(15)
10.11 1997 Non-Qualified Stock Option Plan (amended and restated
effective May 22, 1998)(15)
10.20 Variable Deferred Compensation Plan(14)
10.21(a) Employment Agreement between Registrant and Cary H.
Thompson(21)
10.21(b) Amendment No. 1, dated as of December 23, 1998, to Exhibit
10.21(a)(21)
10.22 Management Investment Agreement, dated as of February 10,
1999, between Registrant and Cary H. Thompson(21)
10.23 Employment Agreement between Registrant and Neil B.
Kornswiet(21)
10.24 Management Investment Agreement, dated as of February 10,
1999, between Registrant and Neil B Kornswiet(21)
(d) Other Exhibits:
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<PAGE> 55
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(13)
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(14)
4.2(a) Rights Agreement, dated as of June 21, 1996 between
Registrant and Wells Fargo Bank, as rights agent(4)
4.2(b) Amendment to Rights Agreement, dated as of April 27,
1998(17)
4.2(c) Amendment to Rights Agreement, dated as of December 23,
1998(22)
4.3 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)
4.4(a) 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)
4.4(b) Second Supplemental Indenture, dated as of February 10,
1999, between Registrant, The Chase Manhattan Bank and
certain wholly owned subsidiaries of Registrant, relating
to Registrant's 9.125% Senior Notes due 2003(21)
10.12 Office Lease, dated as of September 15, 1998, between
Colonnade Wilshire Corp. and the Registrant, for the
premises located at 3731 Wilshire Boulevard, Los Angeles,
California.
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(14)
10.13(b) First Amendment, dated as of August 15, 1997, to Exhibit
10.13(a)(14)
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 Reserved
10.16 Reserved
10.17 Reserved
10.18(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)
10.18(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)
10.19 Management Voting Agreement between Registrant, Cary H.
Thompson and Neil B. Kornswiet, dated as of February 10,
1999(21)
10.25(a) Preferred Stock Purchase Agreement, dated as of December
23, 1998, between Registrant and Capital Z Financial
Services Fund II, L.P.(22)
10.25(b) Amendment No. 1 to Exhibit 10.25(a)(21)
10.25(c) Amendment No. 2 to Exhibit 10.25(a)
10.25(d) Amendment No. 3 to Exhibit 10.25(a)
10.25(e) Amendment No. 4 to Exhibit 10.25(a)
10.26(a) Amended and Restated Master Repurchase Agreement Governing
Purchase and Sales of Mortgage Loans, dated as of February
10, 1999, between Aames
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<PAGE> 56
Capital Corporation, Registrant's wholly owned subsidiary
("ACC") and Lehman Commercial Paper, Inc.(25)
10.26(b) Amendment, dated as of June 30, 1999, to Exhibit 10.26(a)
10.26(c) Second Amendment, dated as of June 30, 1999, to Exhibit
10.26(a)
10.26(d) Guaranty, dated as of March 8, 1996, between Registrant
and Lehman Commercial Paper, Inc., with respect to Exhibit
10.26(a)(25)
10.27(a) Master Loan and Security Agreement, dated as of February
10, 1999, between ACC and Greenwich Capital Financial
Products, Inc.(25)
10.27(b) Amendment No. 1, dated as of June 10, 1999, to Exhibit
10.27
10.27(c) Amendment No. 2, dated as of June 30, 1999, to Exhibit
10.28(a)
10.27(d) Guaranty, dated as of February 10, 1999, between
Registrant and Greenwich Capital Financial Products, Inc.,
with respect to Exhibit 10.28(a)(25)
10.27(e) Amendment No. 1, dated as of June 30, 1999, to Exhibit
10.28(d)
10.28(a) Master Repurchase Agreement, dated as of April 8, 1999,
between ACC and NationsBank, N.A.(25)
10.28(b) Guaranty, dated as of April 8, 1999, between Registrant
and NationsBank, N.A., with respect to Exhibit
10.28(a)(25)
10.28(c) First Amendment, dated as of June 30, 1999, to Exhibit
10.28(a) and Exhibit 10.28(b)
10.29 Agreement for Management Advisory Services, dated as of
February 10, 1999 between Registrant and Equifin Capital
Management, LLC(25)
10.30 Historical Advance Purchase Agreement, dated as of June
10, 1999, between ACC and Steamboat Financial Partnership
I, L.P.
10.31 Historical Advance Purchase Agreement, dated as of June
17, 1999, between ACC and Steamboat Financial Partnership
I, L.P.
10.32 Limited Partnership Agreement of Steamboat Financial
Partnership I, L.P., dated as of June 10, 1999, between
Random Properties Acquisition Corp. IV, ACC and Greenwich
Capital Derivatives, Inc.
10.33 Reserved
10.34 Delinquency Advance Purchase Agreement, dated as of May
13, 1999, between ACC and Fairbanks Capital Corp.
10.35 Sub-Servicing Agreement 1997-1, dated as of April 21,
1999, between ACC and Fairbanks Capital Corp.
10.36 Sub-Servicing Agreement 1996-D, dated as of April 21,
1999, between ACC and Fairbanks Capital Corp.
11 Computation of Per Share Earnings (Loss)
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
- -------------------
(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.
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<PAGE> 57
(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 Current Report on Form 8-K
dated September 11, 1996.
(14) Incorporated by reference from Registrant's Annual Report on Form 10-K
for the year ended June 30, 1997.
(15) Incorporated by reference from Registrant's Registration Statement on
Form S-8 dated July 24, 1998.
(16) Incorporated by reference from Registrant's Current Report on Form 8-K
dated April 27, 1998.
(17) Incorporated by reference from Registrant's Registration Statement on
Form 8-A/A dated April 27, 1998.
(18) Incorporated by reference from Registrant's Current Report on Form 8-K
dated March 25, 1998.
(19) Incorporated by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.
(20) Incorporated by reference from Registrant's Annual Report on Form 10-K
for the year ended June 30, 1998.
(21) Incorporated by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended December 31, 1998.
(22) Incorporated by reference from Registrant's Current Report on Form 8-K
dated December 31, 1998.
(23) Incorporated herein by reference to the Form of Warrant to Purchase
Common Stock of the Registrant, filed as Exhibit C to Exhibit 10.1 of
the Registrant's Current Report on Form 8-K, filed with the Commission
on December 31, 1998.
(24) Incorporated herein by reference to the Form of Contingent Warrant to
Purchase Common Stock of the Registrant, filed as Exhibit E to Exhibit
10.1 of the Registrant's Current Report on Form 8-K, filed with the
Commission on December 31, 1998.
(25) Incorporated by reference from Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999.
(e) Reports on Form 8-K:
During the last quarter of the fiscal year ended June 30, 1999,
the Company filed (i) a Current Report on Form 8-K filed on May 18, 1999
(earliest event reported May 14, 1999), reporting information under Item 5 with
respect to the appointment of Mani A. Sadeghi as interim Chief Executive Officer
and the appointment of Cary H. Thompson as Vice-Chairman; (ii) a Current Report
on Form 8-K filed on May 21, 1999 (earliest event reported May 17, 1999)
reporting earnings (losses) for the third fiscal quarter; and (iii) a Current
Report on Form 8-K (earliest event reported July 1, 1999) reporting the
structure to monetize servicing receivables and reduce future servicing advances
on loans in the Company's servicing portfolio and provide approximately $50
million to the Company.
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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 1, 1999 By: /s/ Mani Sadeghi
---------------------------
Mani Sadeghi
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/ Mani Sadeghi Chief Executive Officer, September 1, 1999
- ------------------------------- Director (Principal Executive Officer)
Mani Sadeghi
/s/ David A. Sklar Executive Vice President-- September 1, 1999
- ------------------------------- Finance and Chief Financial
David A. Sklar Officer (Principal Financial and
Accounting Officer)
/s/ George W. Coombe, Jr. Director September 1, 1999
- -------------------------------
George W. Coombe, Jr.
/s/ Steven M. Gluckstern Chairman of the Board and Director September 1, 1999
- -------------------------------
Steven M. Gluckstern
/s/ Neil B. Kornswiet President and Director September 1, 1999
- -------------------------------
Neil B. Kornswiet
/s/ Adam M. Mizel Director September 1, 1999
- -------------------------------
Adam M. Mizel
/s/ Eric Rahe Director September 1, 1999
- -------------------------------
Eric Rahe
/s/ Cary H. Thompson Director September 1, 1999
- -------------------------------
Cary H. Thompson
/s/ David A. Spuria Director September 1, 1999
- -------------------------------
David A. Spuria
/s/ George C. St. Laurent, Jr. Director September 1, 1999
- -------------------------------
George C. St. Laurent, Jr.
</TABLE>
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<PAGE> 59
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Aames Financial Corporation
We have audited the accompanying consolidated balance sheet of Aames
Financial Corporation and subsidiaries (the Company) as of June 30, 1999 and the
related consolidated statement of operations, changes in stockholders' equity
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based upon our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Aames Financial Corporation and subsidiaries at June 30, 1999, and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
August 26, 1999
F-1
<PAGE> 60
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Aames Financial Corporation
In our opinion, based upon our audits , the accompanying consolidated
balance sheet at June 30, 1998 and the related consolidated statement of
operations, changes in stockholders' equity and cash flows present fairly, in
all material respects, the financial position of Aames Financial Corporation and
its subsidiaries (the "Company") at June 30, 1998, and the results of their
operations and their cash flows for each of the two years in the period ended
June 30, 1998, 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 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 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 provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1, 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.
As discussed in Note 2, the consolidated financial statements have been
restated to reflect a change in the method of measuring and accounting for
credit enhancement assets.
/s/ PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
August 6, 1998, except as to the information presented in Note 2 for which the
date is August 5, 1999.
F-2
<PAGE> 61
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
--------------- ---------------
<S> <C> <C>
Cash and cash equivalents ................................................................ $ 20,764,000 12,322,000
Loans held for sale, at lower of cost or market .......................................... 559,869,000 198,202,000
Accounts receivable ...................................................................... 56,964,000 51,072,000
Interest-only strips, at estimated fair market value ..................................... 332,327,000 490,542,000
Mortgage servicing rights, net ........................................................... 20,928,000 32,090,000
Equipment and improvements, net .......................................................... 13,495,000 13,939,000
Prepaid and other ........................................................................ 15,013,000 17,020,000
Income tax refund receivable ............................................................. 1,737,000 --
--------------- ---------------
Total assets .................................................................... $ 1,021,097,000 815,187,000
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings ............................................................................... $ 281,220,000 286,990,000
Revolving warehouse and repurchase facilities ............................................ 535,997,000 141,012,000
Accounts payable and accrued expenses .................................................... 50,505,000 49,964,000
Income taxes payable ..................................................................... 7,819,000 33,170,000
--------------- ---------------
Total liabilities .............................................................. 875,541,000 511,136,000
--------------- ---------------
Commitments and contingencies
Stockholders' equity:
Series A Preferred Stock, par value .001 per share; 500,000 shares authorized
none outstanding ......................................................................... -- --
Series B Convertible Preferred Stock, par value $0.001 per share;
100,000 shares authorized; 26,704 and -0- shares outstanding ............................. 26,704,000 --
Series C Convertible Preferred Stock, par value $0.001 per share; 100,000 shares
authorized; 75,046 and -0- shares outstanding (includes 25,000
shares issued August 3, 1999) ............................................................ 65,475,000 --
Common Stock, par value $.001 per share; 50,000,000 shares
authorized; 31,016,964, and 30,962,578 shares outstanding ................................ 31,000 31,000
Additional paid-in capital ............................................................... 250,116,000 249,851,000
Retained earnings (deficit) .............................................................. (196,770,000) 54,169,000
--------------- ---------------
Total stockholders' equity ..................................................... 145,556,000 304,051,000
--------------- ---------------
Total liabilities and stockholders' equity ..................................... $ 1,021,097,000 815,187,000
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 62
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED JUNE 30,
---------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Revenue:
Gain on sale of loans ................................... $ 44,855,000 120,828,000 135,421,000
Valuation (write-down) of interest-only strips .......... (186,451,000) 19,495,000 (18,950,000)
Commissions ............................................. 33,034,000 27,664,000 29,250,000
Loan service ............................................ 49,900,000 51,642,000 31,131,000
Interest income and fees ................................ 42,509,000 46,860,000 37,679,000
-------------- -------------- --------------
Total revenue including write-down .............. (16,153,000) 266,489,000 214,531,000
-------------- -------------- --------------
Expenses:
Compensation ............................................ 80,167,000 94,820,000 81,021,000
Production .............................................. 40,061,000 34,195,000 27,229,000
General and administrative .............................. 60,635,000 40,686,000 31,716,000
Interest ................................................ 44,089,000 43,982,000 33,105,000
Nonrecurring charges .................................... 37,044,000 -- 32,000,000
-------------- -------------- --------------
Total expenses .................................... 261,996,000 213,683,000 205,071,000
-------------- -------------- --------------
Income (loss) before income taxes ......................... (278,149,000) 52,806,000 9,460,000
Provision (benefit) for income taxes ...................... (30,182,000) 25,243,000 7,982,000
-------------- ============== --------------
Net income (loss) ......................................... $ (247,967,000) 27,563,000 1,478,000
============== ============== ==============
Net income (loss) per share:
Basic ................................................... $ (8.00) 0.97 0.06
============== ============== ==============
Diluted ................................................. $ (8.00) 0.87 0.05
============== ============== ==============
Dividends per common share .............................. $ 0.03 0.13 0.13
============== ============== ==============
Weighted average number of shares outstanding:
Basic ................................................... 31,000,000 28,548,000 26,400,000
============== ============== ==============
Diluted ................................................. 31,000,000 35,749,000 28,371,000
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 63
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES B SERIES C
CONVERTIBLE CONVERTIBLE ADDITIONAL RETAINED
COMMON PREFERRED PREFERRED PAID-IN EARNINGS
STOCK STOCK STOCK CAPITAL (DEFICIT) TOTAL
------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1996 .................. $24,000 -- -- 88,134,000 32,303,000 120,461,000
Issuance of Common Stock ........... 4,000 -- -- 121,224,000 -- 121,228,000
Dividends .......................... -- -- -- -- (3,412,000) (3,412,000)
Net income ......................... -- -- -- -- 1,478,000 1,478,000
------- ---------- ---------- ----------- ------------ ------------
As of June 30, 1997 .................. 28,000 -- -- 209,358,000 30,369,000 239,755,000
Issuance of Common Stock ........... 3,000 -- -- 40,493,000 10,000 40,506,000
Dividends .......................... -- -- -- -- (3,773,000) (3,773,000)
Net income ......................... -- -- -- -- 27,563,000 27,563,000
------- ---------- ---------- ----------- ------------ ------------
As of June 30, 1998 .................. 31,000 -- -- 249,851,000 54,169,000 304,051,000
Issuance of Common Stock ........... -- -- -- 265,000 -- 265,000
Issuance of Series B Convertible
Preferred Stock ................. -- 26,704,000 -- -- -- 26,704,000
Issuance of Series C Convertible
Preferred Stock ................. -- -- 65,475,000 -- -- 65,475,000
Dividends paid ..................... -- -- -- -- (1,022,000) (1,022,000)
Dividends accrued .................. -- -- -- -- (1,950,000) (1,950,000)
Net loss ........................... -- -- -- -- (247,967,000) (247,967,000)
------- ---------- ---------- ----------- ------------ ------------
As of June 30, 1999 .................. $31,000 26,704,000 65,475,000 250,116,000 (196,770,000) 145,556,000
======= ========== ========== =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 64
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED JUNE 30,
-----------------------------------------------------
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) ............................................. $ (247,967,000) 27,563,000 1,478,000
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization .............................. 5,673,000 3,909,000 2,853,000
Gain on sale of loans ...................................... (35,716,000) (121,098,000) (194,026,000)
Valuation (write-down) of interest-only strips ............. 186,451,000 (19,495,000) 18,950,000
Accretion of interest-only strips .......................... (34,671,000) (41,008,000) (30,834,000)
Mortgage servicing rights originated ....................... (6,194,000) (19,513,000) (16,251,000)
Mortgage servicing rights amortized ........................ 11,431,000 9,064,000 5,512,000
Mortgage servicing rights charged-off ...................... 8,100,000 -- --
Accrual of 6.5% preferred stock dividend ................... (1,950,000) -- --
Changes in assets and liabilities:
Loans held for sale originated or purchased .............. (2,193,635,000) (2,383,638,000) (2,347,938,000)
Proceeds from sale of loans held for sale ................ 1,831,968,000 2,428,423,000 2,291,140,000
Decrease (increase) in:
Accounts receivable ................................... (5,892,000) 8,108,000 (49,495,000)
Interest-only strips .................................. 39,976,000 30,310,000 20,497,000
Prepaid and other ..................................... 2,007,000 (2,071,000) (4,654,000)
Income tax refund receivable .......................... (1,737,000) -- --
Increase (decrease) in:
Accounts payable and accrued expenses ................. 541,000 20,667,000 13,490,000
Deferred income taxes ................................. (25,351,000) 9,118,000 9,205,000
--------------- -------------- --------------
Net cash used in operating activities .......................... (466,966,000) (49,661,000) (280,073,000)
--------------- -------------- --------------
Investing activities:
Purchases of equipment and improvements ..................... (5,229,000) (5,163,000) (8,864,000)
Financing activities:
Net proceeds from issuance of convertible preferred stock ..... 92,179,000 -- --
Proceeds from sale of common stock or exercise of options ..... 265,000 40,505,000 121,228,000
Proceeds from (reductions in) borrowings ...................... (5,770,000) -- 148,945,000
Proceeds from revolving warehouse and
repurchase facilities ....................................... 394,985,000 3,512,000 25,137,000
Dividends paid ................................................ (1,022,000) (3,773,000) (3,412,000)
--------------- -------------- --------------
Net cash provided by financing activities ....................... 480,637,000 40,244,000 291,898,000
--------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents ............ 8,442,000 (14,580,000) 2,961,000
Cash and cash equivalents at beginning of period ................ 12,322,000 26,902,000 23,941,000
--------------- -------------- --------------
Cash and cash equivalents at end of period ...................... $ 20,764,000 12,322,000 26,902,000
=============== ============== ==============
Supplemental disclosures:
Interest paid ................................................. $ 41,769,000 44,501,000 30,207,000
Income taxes paid (refunded) .................................. $ (4,470,000) 16,125,000 (1,197,000)
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 65
AAMES FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Aames Financial Corporation (the "Company" or "Aames") operates in a single
industry segment as 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, 1999,
Aames operated 101 retail loan offices serving 37 states. At June 30, 1999, 18
of the 101 branches were located in California. Its wholly-owned subsidiary, One
Stop Mortgage, Inc. ("One Stop"), operated 35 additional offices located in 28
states. At June 30, 1999, 2 of the 35 branches were located in California. The
Company originates and purchases loans on a nationwide basis through three
production channels -- retail, broker and correspondent. During the years ended
June 30, 1999 and 1998, the Company originated and purchased $2.19 billion and
$2.38 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 extended on the basis of the equity in the
borrower's property and the creditworthiness of the borrower. The aggregate
outstanding balance of loans serviced by the Company was $3.84 billion and $4.15
billion at June 30, 1999 and June 30, 1998, respectively (which includes $413
million and $206 million of loans at June 30, 1999 and June 30, 1998,
respectively, serviced for the Company by unaffiliated subservicers under
subservicing agreements).
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 AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an original
maturity of no more than three months to be cash equivalents.
LOANS HELD FOR SALE
Loans held for sale are loans the Company plans to securitize or sell as
whole loans and 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 interest advances and other
servicing related advances to securitization trusts, and accrued interest
receivable on loans held for sale. At June 30, 1999, accounts receivable also
included a capital contribution receivable.
F-7
<PAGE> 66
EQUIPMENT AND IMPROVEMENTS, NET
Equipment and improvements, net, 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:
<TABLE>
<S> <C>
Data processing equipment......................... Five years
Furniture and fixtures............................ Five to seven years
Data processing software.......................... Three years
Leasehold improvements............................ Lower of life of lease or asset
</TABLE>
LOAN SALES
The Company depends on its ability to sell loans originated and purchased
by it in the secondary market, as market conditions allow, to generate cash
proceeds to pay down its warehouse and repurchase facilities and fund new
originations and purchases. 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.
REVENUE RECOGNITION
The Company adopted Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125")
effective January 1, 1997. As a result of the adoption of SFAS 125, the Company
records amounts previously categorized as excess servicing gains in the
consolidated statement of operations 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 asset called interest-only strips.
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
non-cash 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 represents the
difference between the proceeds (including premiums) from the sale, net of
related transaction costs, and the allocated carrying amount of the loans sold.
The allocated carrying amount is determined by allocating the original amount of
the loan (including premiums paid on loans purchased) between the portion sold
and any retained interests (interest-only strip), based on their relative fair
values at the date of transfer. The interest-only strip 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 .50%), a back-up
servicing fee, if any, and a monoline insurance fee, if any, and an estimate for
loan losses. Unrealized gains or losses include the recognition of an unrealized
gain or loss which represents the initial difference between the allocated
carrying amount and the fair market value of the interest-only strip at the date
of sale. 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 interest-only strips are recorded at estimated
fair value and are marked to market through a charge (or credit) to earnings.
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: (i) a future rate of
prepayment; (ii) a discount rate used to calculate present value; and (iii) a
prospective cumulative loan loss estimate on loans sold. The future cash flows
represent management's best estimate. Management monitors performance of the
loans and changes in the estimates are reflected in earnings. 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 Company used a discount rate of 15%.
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 rights 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, 1999 and 1998, there were no valuation allowances on mortgage
servicing rights.
F-8
<PAGE> 67
ADVERTISING EXPENSE
The Company's policy is to charge advertising costs to expense when
incurred. The Company charged to expense $29 million, $23 million and $18
million in fiscal years ended June 30, 1999, 1998 and 1997, respectively.
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.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share of common stock is computed using the
weighted average number of shares of common stock outstanding during each
period. Diluted earnings (loss) per share includes the effects of the conversion
of shares related to the Company's 5.5% Convertible Subordinated Debentures due
2006 as well as the average number of stock options outstanding, except when
their effect is antidilutive.
All references in the accompanying consolidated balance sheet, consolidated
statement of operations 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 split in the form of stock dividends effected on February
21, 1997, and the Company's presentation of basic earnings per share ("EPS")
under the adoption of SFAS 128 during the year ended June 30, 1998.
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 is currently re-evaluating its hedging policy and
no hedge transactions were in place at June 30, 1999.
In the past, the Company has hedged its fixed rate pipeline and some
LIBOR-based tranches in its fixed rate securitizations. The Company has utilized
fixed rate hedge products which were swap agreements with third parties that
sell United States Treasury securities not yet purchased and the purchase of
Treasury put options. The Company has utilized LIBOR rate caps as hedge
instruments on certain LIBOR-based tranches secured by fixed rate mortgages. The
use, amount and timing of hedging transactions are determined by members of the
Company's senior management.
RECLASSIFICATIONS
Certain amounts related to 1998 and 1997 have been reclassified to conform
to the 1999 presentation.
ADOPTION OF RECENT ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." In July 1999, the FASB issued SFAS 137
which deferred the effective date of SFAS 133 to fiscal years beginning after
June 15, 2000. SFAS 133 requires companies to record derivatives on the balance
sheet as assets and liabilities, measured at fair value. Gains and losses
resulting from changes in the values of those derivatives would be accounted for
in earnings. Depending on the use of the derivative and the satisfaction of
other requirements, special hedge accounting may apply. The Company has not
determined the impact that adoption of this standard will have on its future
consolidated financial statements.
NOTE 2. RESTATEMENT
Restatement of Prior Period Results. In December 1998, the FASB issued, in
question and answer format, "A Guide to Implementation of Statement 125 on
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, Questions and Answers, Second Edition" (the "Special Report").
The Special Report indicates that two methods have arisen in practice for
accounting for credit enhancements relating to securitization. These methods are
the cash-in method and the cash-out method. The cash-in method treats credit
enhancements (pledged loans or cash) as belonging to the Company. As such, these
assets are recorded at their face value as of the time they are received by the
trust. The cash-out method treats credit enhancements as assets owned by the
related securitization trust. As such, these assets are treated as part of the
interest-only strips and are recorded at a discounted value for the period
between when collected
F-9
<PAGE> 68
by the trust and the projected receipt to the Company. The Special Report
indicates that if no true market exists for credit enhancement assets, the
cash-out method should be used to measure the fair value of credit enhancements.
The Company had historically used the cash-in method to account for its
interest-only strips. However, during the three months ended December 31, 1998,
the Company retroactively changed its practice of measuring and accounting for
its interest-only strips to the cash-out method in response to the FASB's
Special Report and to public comments from the Securities and Exchange
Commission released on December 8, 1998.
Under the cash-in method previously used by the Company, the assumed
discount period for measuring the present value of the interest-only strips
ended when the cash flows were received by the securitization trust; and, the
initial deposits to overcollateralization accounts were recorded at face value.
Under the cash-out method as specified in the Special Report by the FASB and
comments made by the Securities and Exchange Commission, the assumed discount
period for measuring the present value of the interest-only strips ends when
cash, including the return of any initial deposits, is distributed to the
Company on an unrestricted basis.
The change to the cash-out method results only in a difference in the
timing of revenue recognition from a securitization and has no effect on the
total cash flows of securitization transactions. While the total amount of
revenue recognized over the term of a securitization is the same under either
method, the cash-out method results in lower initial gains on the sale of loans
due to the longer discount period, and higher subsequent loan service revenue
resulting from the impact of discounting cash flows.
As a result, the Company's consolidated results of operations for periods
subsequent to June 30, 1994 have been restated. The restatement resulted in the
following changes to the financial statements presented (dollars in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Revenue:
Previous ................................................. $286,110 238,578
As restated .............................................. 266,489 214,531
Net income:
Previous ................................................. 40,317 17,109
As restated .............................................. 27,563 1,478
Earnings per share:
Basic:
Previous .............................................. 1.41 0.65
As restated ........................................... 0.97 0.06
Diluted:
Previous .............................................. 1.23 0.60
As restated ........................................... 0.87 0.05
Interest-only strips:
(end of period)
Previous ................................................. 554,161 383,249
As restated .............................................. 490,542 339,251
Stockholders' equity:
(end of period)
Previous ................................................. 345,403 268,354
As restated .............................................. $304,051 239,755
</TABLE>
NOTE 3. NONRECURRING CHARGES
During the fiscal year ended June 30, 1999, the Company recorded a $37
million one-time charge related to advances which are recorded as accounts
receivable on the Company's balance sheet. The one-time charge relates to
payments made by the Company to the securitization trusts for which it acts as
servicer. As servicer of the loans it securitizes, the Company is obligated to
advance, or "loan," to the trusts delinquent interest. In addition, as servicer,
the Company advances to the trusts foreclosure-related expenses and certain tax
and insurance remittances relating to loans in securitized pools. The Company,
as servicer, is then entitled to recover these advances from regular monthly
cash flows into the trust, including monthly payments, pay-offs and liquidation
proceeds on the related loan. Until recovered, the Company records the
F-10
<PAGE> 69
cumulative advances in accounts receivable on the balance sheet. In addition,
the Company, as servicer, is obligated to make additional payments into the
trusts which are not recoverable from monthly cash flows. These payments, for
example, relate to compensating interest payments for loans that pay-off other
than at a month's end. As servicer, the Company is required to pay into the
trust that portion of a monthly interest payment that is not included in the
pay-off amount. However, payments into a trust that are not recovered from
monthly cash flows may be recoverable from the trust's distributions to the
Company, as residual certificate holder.
In early 1999, the Company began to explore ways to reduce the cash burden
of its servicing advance obligations through various financing techniques. At
the same time, the Company determined that certain amounts recorded as accounts
receivable associated with the Company's securitization trusts were not
recoverable from the trusts' monthly cash flows. As a result, accounts
receivable were written-down by $37 million.
In fiscal 1997, the Company incurred $32 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 relocating corporate headquarters recorded in the first fiscal
quarter and to severance and other strategic decisions made in the fourth fiscal
quarter.
NOTE 4. CASH AND CASH EQUIVALENTS AND CASH HELD IN TRUST
At June 30, 1999, the Company had corporate cash and cash equivalents
available of $21 million, none of which was restricted. Cash equivalents include
$15 million of overnight Eurodollar deposits at June 30, 1999.
The Company services loans on behalf of customers. In such capacity,
certain funds are collected and placed in segregated trust accounts which
totaled $93 million and $58 million at June 30, 1999 and June 30, 1998,
respectively. These accounts and corresponding liabilities are not included in
the accompanying consolidated balance sheet.
NOTE 5. LOANS HELD FOR SALE
The following is a summary of the composition of the Company's loans held
for sale by interest rate type at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1999 1998
------------ -----------
<S> <C> <C>
Fixed rate mortgages $335,921,000 140,525,000
Adjustable rate mortgages 223,948,000 57,677,000
------------ -----------
$559,869,000 198,202,000
============ ===========
</TABLE>
Subsequent to June 30, 1999, the Company sold approximately $400 million of
loans held for sale in the form of a securitization and recorded a gain on sale.
NOTE 6. ACCOUNTS RECEIVABLE
At June 30, 1999 and 1998, accounts receivable was comprised of the
following:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Interest advances $ 7,585,000 10,335,000
Servicing advances 14,240,000 16,088,000
Capital proceeds receivable 24,750,000 --
Other receivables 10,389,000 24,649,000
------------ -----------
$ 56,964,000 51,072,000
============ ===========
</TABLE>
F-11
<PAGE> 70
During the year ended June 30, 1999, the Company reduced its servicing
advance obligations by engaging a loan servicing company to subservice two of
the Company's securitization pools. The subservicer assumed the obligation to
make all future advances on those two pools. At the same time, the Company also
sold to the subservicer the outstanding servicing advances on the two pools for
approximately $13 million.
Also during the year ended June 30, 1999, the Company entered into an
arrangement with an investment bank pursuant to which the investment bank
purchased certain cumulative advances and undertook the obligation to make a
substantial portion of the Company's advance obligations on its pre-1999 pools.
As a result of this arrangement, the Company received approximately $50 million
in cash for certain servicing advances carried in accounts receivable.
At June 30, 1999, accounts receivable included $25 million of capital
proceeds receivable which were received in cash on August 3, 1999.
NOTE 7. INTEREST-ONLY STRIPS
The activity in the interest-only strips during the years ended June 30,
1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1999 1998
------------- ------------
<S> <C> <C>
Balance, beginning of year ......................... $ 490,542,000 339,251,000
Gain on sale of loans .............................. 35,716,000 121,098,000
Accretion .......................................... 34,671,000 41,008,000
Cash received from trusts .......................... (39,976,000) (30,310,000)
Valuation (write-down) of interest-only strips ..... (188,626,000) 19,495,000
------------- ------------
Balance, end of year ............................... $ 332,327,000 490,542,000
============= ============
</TABLE>
During the quarter ended June 30, 1999, the Company considered the
historical performance of its securitized pools, recent prepayment experience of
those pools, the credit performance of previously securitized loans and other
industry data in connection with the performance of its interest-only strips.
Key assumptions and estimates used by the Company in its June 30, 1999
review of the interest-only strips were the following:
<TABLE>
<S> <C>
Peak rates of prepayment:
Fixed rate loans 29.0%
Adjustable rate loans 42.0% to 57.0%
Weighted average life 2.9 years
Discount rate 15.0%
Prospective cumulative loss estimate 2.7%
</TABLE>
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. Included in interest-only strips at June 30, 1999 and 1998, were amounts
held in trust of approximately $259 million and $195 million, respectively,
which were available for 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.
During the quarter ended December 31, 1998, as part of its ongoing
monitoring process, management adjusted each of its assumptions (rate of
prepayment, discount rate and credit loss) to reflect current market conditions.
This change in estimate resulted in a valuation adjustment of the Company's
interest-only strips of approximately $194 million (the "Write-Down"), gross of
a positive valuation adjustment of $5.2 recorded in the quarter ended September
30, 1998, in connection with the Company's securitization. The components of the
valuation adjustment were as follows:
F-12
<PAGE> 71
Rate of Prepayment. In its valuation analysis of prepayment speeds, the
Company considered the relationship between the rate paid on the certificates or
bonds issued in the securitizations and the weighted average coupons on the
mortgages outstanding in each securitization pool from time to time.
Additionally, for the quarters up to and including September 30, 1998,
prepayment rates used by the Company were held constant, e.g. flat, over the
life of the pool. The estimates used by the Company for the quarters up to and
including September 30, 1998 were flat prepayment rates ranging from 26% for
fixed to 30.5% for adjustable and hybrid loan products. These rates represented
a weighted average loan life of approximately 2.6 to 3.8 years. During the
quarter ended December 31, 1998, the Company finalized the development of an
enhanced analytical model that more precisely reflected the performance of the
securitized loans. This analytical model enabled the Company to refine its
estimate of the prepayment rates associated with the performance of its
securitized loans. Additionally, data and information received from market
participants (credit and capital providers) assisted the Company in its
assessment of current market conditions resulting in the Company applying a more
precise valuation estimate to its prepayment assumptions. The Company
incorporated this new information in developing its improved judgment as to
prepayment speeds and changed its estimate of prepayment rates from a flat
constant prepayment rate to a vectored rate, which more closely approximates the
performance of the securitized loans. These revised prepayment rates resulted in
a weighted average life of 2.86 years. The impact of the change in prepayment
speeds amounted to approximately $62 million, which was included in the
Write-Down.
Discount Rate. For the quarters up to and including September 30, 1998,
the Company used the weighted average interest rates of the loans included in
the pool as the best estimate available as an appropriate discount rate to
determine fair value. As the market deteriorated in the quarter ended December
31, 1998, it became apparent that an increase in discount rate would be required
in order for the estimate of fair value to be consistent with market conditions.
To determine the appropriate discount rate, the Company reviewed general market
conditions as reflected by market sales of senior tranche asset-backed
securities. Management believed that the pass-through rate on senior tranche
securities should be lower than the discount rate applied to the subordinate,
and higher risk, interest-only strips. However, the adversity of the market
during the quarter ended December 31, 1998 was so severe that, in some
instances, transactions of senior tranche asset-backed securities could not even
be completed. Accordingly, the Company incorporated this current market
information in developing its judgment as to the appropriate risk adjusted rate
of return in establishing its change in estimate of the discount rate to be used
in estimating the fair value of the interest-only strips. For the quarter ended
December 31, 1998, the Company increased its discount rate to 15% to reflect
current market conditions. The impact of this change in discount rate amounted
to approximately $65 million, which was included in the Write-Down.
Credit Losses. For the quarter up to and including September 30, 1998, the
Company used a prospective cumulative loan loss estimate of 1.4% of the balance
of the loans in the securitization pools as an appropriate estimate to determine
fair value. This estimate was developed through a review of the credit
performance of securitized loans in the aggregate. In conjunction with its
previous quarterly review of loss estimates, the Company considered the level of
delinquency of securitized loans and the percentage of annualized losses to
securitized loans in the aggregate. As market conditions deteriorated in the
quarter ended December 31, 1998, the Company refined its estimate of credit
losses by expanding the factors it considered in developing its credit loss
estimates to include loss and delinquency information by channel, credit grade
and product, and information available from other market participants such as
investment bankers, credit providers and credit agencies. Management believes
the increase in losses in the December 1998 quarter reflected general market
conditions rather than the continuing effects of the transfer of servicing
in-house. Publicly available information from investment banking firms and
credit agencies began to indicate a market expectation that credit losses within
the sub-prime home equity sector would rise. Those indications, in part, arise
from the impact of the adverse market conditions on severely delinquent
borrowers who, in a more favorable market, would avoid default by refinancing
with other lenders. In the current market, with competition lessening and
underwriting guidelines tightening, these borrowers are much more likely to
default. Accordingly, the Company increased its prospective cumulative loan loss
estimate to 2.7% (discounted back at 15%) of the balance of the loans in the
securitization pools at December 31, 1998. This change in credit loss estimate
resulted in a valuation adjustment of $67 million, which was included in the
Write-Down.
NOTE 8. MORTGAGE SERVICING RIGHTS, NET
The activity in mortgage servicing rights during the years ended June 30,
1999 and 1998 is summarized as follows:
F-13
<PAGE> 72
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Balance, beginning of year ........................................................... $ 32,090,000 21,641,000
Mortgage servicing rights originated ................................................. 6,194,000 19,513,000
Mortgage servicing rights amortized .................................................. (11,431,000) (9,064,000)
Mortgage servicing rights charged-off ................................................ (5,925,000) --
------------ -----------
Balance, end of year ................................................................. $ 20,928,000 32,090,000
============ ===========
</TABLE>
The mortgage servicing rights are amortized over the estimated lives of
the loans to which they relate.
During the year ended June 30, 1999, in connection with the transfer of
servicing of two pools and a special servicing arrangement for two additional
pools with a subservicer, the Company charged off the carrying value of the
mortgage servicing rights associated with those pools.
NOTE 9. EQUIPMENT AND IMPROVEMENTS, NET
Equipment and improvements, net consisted of the following at June 30,
1999 and 1998:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Data processing equipment ............................................................. $ 11,496,000 10,421,000
Furniture and fixtures ................................................................ 8,623,000 8,353,000
Data processing software .............................................................. 6,340,000 3,213,000
Leasehold improvements ................................................................ 2,575,000 2,032,000
------------ ------------
Total ....................................................................... 29,034,000 24,019,000
Accumulated depreciation and amortization ............................................. (15,539,000) (10,080,000)
------------ ------------
Equipment and improvements, net ....................................................... $ 13,495,000 13,939,000
============ ============
</TABLE>
NOTE 10. BORROWINGS
Borrowings consisted of the following at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
9.125% Senior Notes due 2003, guaranteed by each
of the restricted subsidiaries (as defined in the indenture) of the Company ......... $150,000,000 150,000,000
5.5% Convertible Subordinated Debentures due 2006, convertible to 6.1 million
shares of common stock at $18.67 per share. The Convertible
Subordinated Debentures are subordinated to all existing and future senior
indebtedness of the Company (as defined in the Indenture) ........................... 113,970,000 113,990,000
10.5% Senior Notes due 2002,
Principal payments of $5,750,000 required in each of calendar
years 1999 through 2002 ............................................................. 17,250,000 23,000,000
------------ ------------
Borrowings .................................................................. $281,220,000 286,990,000
============ ============
</TABLE>
Maturities on borrowings are as follows:
Fiscal Years Ended June 30,
<TABLE>
<S> <C>
2000.................................................................................... $ 5,750,000
2001.................................................................................... 5,750,000
2002.................................................................................... 5,750,000
2003.................................................................................... --
2004.................................................................................... 150,000,000
Thereafter.............................................................................. 113,970,000
------------
Total borrowings.............................................................. $281,220,000
============
</TABLE>
F-14
<PAGE> 73
In October 1996, the Company completed an offering of its 9.125% Senior
Notes due 2003 which are guaranteed by all but one 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 income and net equity of such subsidiaries are substantially
equivalent to the total assets, net income and net equity of the Company on a
consolidated basis.
At June 30, 1999 and 1998, the Company had unamortized debt issuance costs
of $6 million and $7 million, respectively, related to the issuance of the $23
million of 10.5% Senior Notes due 2002, the issuance of the $115 million of 5.5%
Convertible Subordinated Debentures due 2006 and the issuance of the $150
million of 9.125% Senior Notes due 2003. This balance is included in prepaid and
other assets on the consolidated balance sheet and is amortized to expense over
the terms of the related debt issuances.
NOTE 11. REVOLVING WAREHOUSE AND REPURCHASE FACILITIES
The Company utilizes revolving warehouse and repurchase facilities to
finance the holding of mortgage loans prior to sale or securitization. As of
June 30, 1999 and 1998, the Company had total revolving warehouse and repurchase
facilities available in the amount of $590 million and $950 million,
respectively. Warehouse and repurchase facilities typically have a term of one
year or less and are designated to fund mortgage loans originated within
specified underwriting guidelines. The majority of the mortgage loans remain in
the facilities for a period generally of up to 90 days at which point they are
securitized or sold to institutional investors.
Amounts outstanding under revolving warehouse and repurchase facilities
consisted of the following at June 30, 1999 and 1998:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Warehouse facility of $90 million from an investment bank, collateralized by
loans held for sale; expires on February 9, 2000; bears interest at 1.5% over
one month LIBOR .......................................................................... $ 47,018,000 --
Repurchase facility of $300 million from an investment bank; collateralized by
loans held for sale; expires on March 31, 2000; bears interest from 1.50% to
2.00%, depending on document status, over one month LIBOR ................................ 293,037,000 --
Repurchase facility of $200 million from a commercial bank; collateralized by
loans held for sale; expires on April 7, 2000; bears interest from 1.25% to
1.50%, depending on document status, over one month LIBOR ................................ 195,942,000 --
Warehouse facility of $400 million from a syndicate of ten commercial banks;
collateralized by loans held for sale and certain servicing receivables; expired
April 9, 1999; bore interest at the Company's option of either 1.05% over the
Fed Funds Rate, or .80% over one month LIBOR ............................................. -- 135,500,000
Warehouse facility of $300 million from an investment bank; collateralized by
loans held for sale; expired on September 11, 1999; bore interest at .65% over
one month LIBOR .......................................................................... -- 5,512,000
------------ ------------
Amounts outstanding under warehouse and repurchase facilities .................. $535,997,000 141,012,000
============ ============
</TABLE>
At June 30, 1999, the one month LIBOR rate was 5.20%. The one month LIBOR
and Federal Funds rates were 5.7% and 7.1%, respectively, at June 30, 1998.
Commencing July 1, 1999 and to maturity, the Company's $300 million
repurchase facility bears interest from 1.50% to 2.00%, depending on document
status, over one month LIBOR, and the term of this facility was extended to
March 31, 2000. Also, effective July 1, 1999, the Company began using a $100
million uncommitted repurchase facility from an investment bank to fund loan
originations. In August, 1999, the Company closed a $400 million loan
securitization. Amounts outstanding under revolving warehouse and repurchase
facilities were reduced by approximately $392 million, including all borrowings
under the $100 million uncommitted repurchase facility.
F-15
<PAGE> 74
The weighted-average interest rate on borrowings outstanding under
revolving warehouse and repurchase facilities at June 30, 1999 and 1998 were
approximately 6.39% and 6.69%, respectively. During the year ended June 30,
1999, the average amount of borrowings under revolving warehouse and repurchase
facilities was $349 million and the maximum outstanding under such lines at any
one time during the year ended June 30, 1999, was $796 million.
At June 30, 1999, included in prepaid and other assets in the accompanying
consolidated balance sheet was approximately $1.8 million of deferred commitment
fees relating to the Company's revolving warehouse and repurchase facilities
remaining to be amortized to expense over their remaining terms.
NOTE 12. INCOME TAXES
The provision (benefit) for income taxes consisted of the following for
the years ended June 30, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Current:
Federal ......................... $ 1,200,000 10,060,000 203,000
State ........................... 400,000 3,249,000 262,000
------------ ---------- ----------
1,600,000 13,309,000 465,000
------------ ---------- ----------
Deferred:
Federal ......................... (24,155,000) 6,814,000 4,665,000
State ........................... (7,627,000) 5,120,000 2,852,000
------------ ---------- ----------
(31,782,000) 11,934,000 7,517,000
------------ ---------- ----------
Total ................... $(30,182,000) 25,243,000 7,982,000
============ ========== ==========
</TABLE>
Current and deferred taxes payable were comprised of the following at
June 30, 1999 and 1998:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Current taxes payable (receivable):
Federal .................................... $ -- 3,190,000
State ...................................... (1,737,000) (967,000)
------------ ------------
(1,737,000) 2,223,000
Deferred taxes payable:
Federal .................................... 7,819,000 26,442,000
State ...................................... -- 4,505,000
------------ ------------
7,819,000 30,947,000
------------ ------------
Total .............................. $ 6,082,000 33,170,000
============ ============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities consisted of the
following at June 30, 1999 and 1998:
F-16
<PAGE> 75
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Interest-only strips ......................... $ -- 27,754,000
Mark-to-market ............................... 5,960,000 5,960,000
Mortgage servicing rights .................... 8,416,000 13,317,000
Other, net ................................... -- 1,351,000
------------ ------------
Total gross deferred tax liabilities ..... 14,376,000 48,382,000
------------ ------------
Deferred tax assets:
Interest-only strips ......................... (53,367,000) --
State taxes .................................. (5,033,000) (5,033,000)
Allowance for doubtful accounts .............. (10,073,000) (3,195,000)
Net operating loss carry forward ............. (19,272,000) (4,969,000)
Other ........................................ (5,986,000) (4,238,000)
------------ ------------
Total gross deferred tax assets .......... (93,731,000) (17,435,000)
Tax valuation allowance ........................ 87,174,000 --
------------ ------------
Net deferred tax liabilities ................... $ 7,819,000 30,947,000
============ ============
</TABLE>
The estimated effective tax rates for the years ended June 30, 1999, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
1999
-------------------------------------------------
TAX AFFECTED EFFECTIVE
PERMANENT PERMANENT TAX RATE
DIFFERENCES DIFFERENCES CALCULATION
-------------- ------------- --------------
<S> <C> <C> <C>
Tax benefit ................ $ (30,182,000)
Loss before income taxes ... (278,149,000)
Effective tax rate ......... (10.9)%
=============
Federal statutory rate ..... (35.0)%
State pre-tax after
permanent difference...... $ -- (21,142,000) (7.6)
Disallowed compensation .... 3,000,000 1,050,000 .4
Tax valuation allowance .... -- 87,174,000 31.3
Other, net ................. 253,000 89,000 --
-------------
(10.9)%
=============
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------
TAX AFFECTED EFFECTIVE
PERMANENT PERMANENT TAX RATE
DIFFERENCES DIFFERENCES CALCULATION
----------- ------------ -----------
<S> <C> <C> <C>
Tax provision............... $25,243,000
Income before income taxes.. 52,806,000
Effective tax rate.......... 47.8%
===========
Federal statutory rate...... 35.0%
State pre-tax after
permanent difference...... $8,369,000 5,439,000 10.3
Disallowed compensation .... 3,398,000 1,189,300 2.3
Other, net ................. 253,940 132,250 0.2
-----------
47.8%
===========
</TABLE>
F-17
<PAGE> 76
<TABLE>
<CAPTION>
1997
--------------------------------------------------
TAX AFFECTED EFFECTIVE
PERMANENT PERMANENT TAX RATE
DIFFERENCES DIFFERENCES CALCULATION
----------- ------------ -----------
<S> <C> <C> <C>
Tax benefit ................................................ $7,982,000
Income before income taxes ................................. 9,460,000
Effective tax rate ......................................... 84.4%
==========
Federal statutory rate ..................................... 35.0%
State pre-tax after permanent difference ................... 36,558,000 2,654,000 28.1
Pooling of interests ....................................... 5,156,000 1,805,000 19.1
Stock options .............................................. (2,227,000) (779,000) (8.4)
Other, net ................................................. 2,872,000 1,005,000 10.6
----------
84.4%
==========
</TABLE>
The income tax refund receivable of $1.7 million was received subsequent
to June 30, 1999.
The investment in the Company by Capital Z Financial Services Fund, II,
L.P., a Bermuda limited partnership ("Capital Z"), results in a change of
control for income tax purposes thereby potentially limiting the Company's
ability to utilize net operating loss carryforwards and certain other future
deductions.
The Company's residual interest in real estate mortgage investment
conduits ("REMIC") creates excess inclusion income for tax purposes which may
give rise to a current income tax payable. Available loss carry-forwards and
operating losses may not reduce taxable income below excess inclusion income
earned from the REMIC.
NOTE 13. 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 $11 million, $9.1 million and
$5.3 million, for the years ended June 30, 1999, 1998 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).
At June 30, 1999, future minimum rental payments required under
non-cancelable operating leases that have initial or remaining terms in excess
of one year are as follows:
<TABLE>
<S> <C>
2000......................................... $ 9,445,000
2001......................................... 7,963,000
2002......................................... 6,724,000
2003......................................... 5,996,000
2004 4,489,000
Thereafter................................... 30,869,000
-----------
$65,486,000
===========
</TABLE>
During the fourth fiscal quarter of 1999, the Company entered into a new
mandatory forward commitment to sell loans. Terms of the new forward commitment,
which expires on May 16, 2000, include provisions for the Company to sell a
minimum of $500 million and a maximum of $1.50 billion of loans to the purchaser
on a servicing released basis. At June 30, 1999, the Company had fulfilled
approximately $80 million of loans held for sale under this commitment.
LITIGATION
In the ordinary course of its business, the Company is subject to various
claims made against it by borrowers, private investors and others arising from,
among other things, losses that are claimed to have been incurred as a result of
alleged
F-18
<PAGE> 77
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
consolidated financial position or results of operations; however, any claims
asserted in the future may result in expenses which could have a material
adverse effect on the Company's consolidated financial position and results of
operations.
EMPLOYMENT AND SEVERANCE AGREEMENTS
On May 13, 1999, the Company's chief executive officer resigned. At June
30, 1999, the Company had agreed in principle to the terms of a severance and
consulting arrangement pursuant to which the former officer will receive
$600,000, a corporate owned automobile and be granted 774,049 shares under the
Aames Financial Corporation 2000 Stock Option Plan, which remains subject to the
approval by the Company's stockholders.
At June 30, 1999, the president of the Company had an employment agreement
with the Company expiring in February, 2004, which provides for a $600,000
annual base salary and (i) a calendar 1999 guaranteed cash bonus to be paid in
the amount of $540,000 in the form of a recourse loan which shall be forgiven
and deemed paid in full so long as the president remains employed by the Company
through the first anniversary date of the agreement (ii) supplemental cash
bonuses subject to Board of Directors' determination of the Company's
satisfactory completion of a program of cost reductions (iii) cash bonuses after
the 1999 calendar year of up to $600,000; or in excess of 100% of annual base
salary for extraordinary performance subject to Board of Directors' approval and
the achievement of nonfinancial goals as established by the Board of Directors
(iv) a loan in the amount of $1.7 million to be used to purchase shares of
Series C Convertible Preferred Stock which shall be deemed nonrecourse provided
that the president remains employed by the Company through the first anniversary
date of the agreement. In addition to benefits provided to other employees, the
agreement provides the president with excess standard life insurance, medical
and dental benefits for himself and his family and long-term disability
benefits. Further under the agreement, the Company will grant an option to the
president to purchase 3,214,642 shares of the Company's common stock pursuant to
the Aames Financial Corporation Stock Option Plan, which remains subject to the
approval of the Company's stockholders. In the event of termination (as defined
in the agreement), the Company will be obligated to pay severance in a declining
amount over the anniversary dates of the agreement, subject to offset for
amounts owed to the Company by the president and for any salary earned by the
president from other employers. The agreement also limits the amount of Company
stock that the president may sell, assign or otherwise transfer while employed
by the Company.
During the year ended June 30, 1999 and as a means to induce the president
to enter into the agreement outlined in general terms above, the Company paid
the president a bonus of approximately $1.5 million, the receipt of which the
president had deferred since June, 1998.
Certain other members of management had employment or severance agreements
which provided for enhanced severance and other benefits upon a change in
control, as defined in the agreements.
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial
instruments as of June 30, 1999 and 1998 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.
F-19
<PAGE> 78
<TABLE>
<CAPTION>
JUNE 30, 1999 JUNE 30, 1998
----------------------------- --------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEET:
Cash and cash equivalents .................................. $ 20,764,000 20,764,000 12,322,000 12,322,000
Loans held for sale ........................................ 559,869,000 576,178,000 198,202,000 208,112,000
Accounts receivable ........................................ 56,964,000 56,964,000 51,072,000 51,072,000
Interest-only strips, at estimated fair market value ....... 332,327,000 332,327,000 490,542,000 490,542,000
Mortgage servicing rights, net ............................. 20,928,000 20,928,000 32,090,000 32,090,000
Borrowings ................................................. 281,220,000 171,888,000 286,990,000 246,938,000
Revolving warehouse and repurchase facilities .............. 535,997,000 535,997,000 141,012,000 141,012,000
OFF BALANCE SHEET:
Hedge position notional amount outstanding ................. -- -- 250,000,000 248,455,000
</TABLE>
The fair value estimates as of June 30, 1999 and 1998 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 consolidated 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.
- Loans held for sale are based on current investor yield
requirements.
- Accounts receivable are short term in nature, therefore the carrying
value approximates fair value.
- Interest-only strips and mortgage servicing rights are based on the
present value of expected future cash flows using assumptions based
on Company-specific and industry information as well as the
Company's historical experience.
- 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.
- Amounts outstanding under revolving warehouse and repurchase
facilities are short term in nature and generally bear market rates
of interest and therefore, are based on the carrying amount which is
a reasonable estimate of fair value.
- Hedge positions are based on quoted market prices.
NOTE 15. 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. There was no contribution to the Plan by the Company during the
year ended June 30, 1999. During the years ended June 30, 1998 and 1997, the
Company's contributions to the plan aggregated $549,000 and $432,000,
respectively.
DEFERRED COMPENSATION PLAN
During the year ended June 30, 1999, the Company terminated the Deferred
Compensation Plan which had been implemented in April 1997. During the year
ended June 30, 1998, the Company made $203,700 of discretionary contributions to
the plan.
F-20
<PAGE> 79
STOCK BASED COMPENSATION
The Company's Board of Directors adopted the Aames Financial Corporation
Stock Option Plan (the "1999 Plan") as of February 10, 1999, as amended. The
1999 Plan remains subject to the approval of the stockholders. If approved, the
1999 Plan will supercede the Company's 1991 Stock Incentive Plan, 1995 Stock
Incentive Plan, 1996 Stock Incentive Plan, 1997 Stock Option Plan and 1997
Non-Qualified Stock Option Plan. The 1999 Plan provides for the issuance of
options to purchase shares of the Company's common stock to officers, key
executives and consultants of the Company. Subject to adjustment for stock
splits, stock dividends and other similar events, shares reserved for issuance
under the 1999 Plan shall be 14,612,000 shares.
At June 30, 1999, the Company has reserved 5,450,000 shares of the common
stock for issuance under its 1991 Stock Incentive Plan, 1995 Stock Incentive
Plan, 1996 Stock Incentive Plan, 1997 Stock Option Plan and 1997 NonQualified
Stock Option 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 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, 1999, 1998 and 1997 and changes
during the years then ended are as follows:
<TABLE>
<CAPTION>
OPTION OPTION
SHARES PRICE RANGE
--------- ------------
<S> <C> <C>
1999
Outstanding at beginning of year..................... 4,570,669 $ 0.19-29.70
Granted.............................................. 911,680 13.38
Exercised............................................ (53,266) 3.89-7.94
Forfeited............................................ (403,585) 3.04-29.67
--------- ------------
Outstanding at end of year........................... 5,025,498 $ 0.19-29.60
========= ============
1998
Outstanding at beginning of year..................... 4,182,491 $ 0.19-29.70
Granted.............................................. 1,084,091 11.81-19.94
Exercised............................................ (419,414) 3.33-13.63
Forfeited............................................ (276,499) 0.20-28.92
--------- ------------
Outstanding at end of year........................... 4,570,669 $ 0.19-29.70
========= ============
1997
Outstanding at beginning of year .................... 2,940,722 $ 0.19-18.61
Granted ............................................. 1,647,733 12.00-29.70
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>
The number of options exercisable at June 30, 1999 and 1998, was 2,997,329
and 2,324,755, respectively. The weighted-average fair value of options granted
during 1999 and 1998 was $7.99 and $6.30, respectively.
F-21
<PAGE> 80
The Company applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for its stock-based compensation plans and
arrangements. No compensation cost has been recognized for its stock option
plan. If compensation cost for the stock option plan 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
(loss) and earnings (loss) per share would have been reflected to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss):
As reported .............................. $(247,967,000) 27,563,000 1,478,000
Pro forma ................................ (249,552,000) 26,511,000 (2,437,000)
Basic earnings (loss) per share:
As reported .............................. (8.00) 0.97 0.06
Pro forma ................................ (8.05) 0.93 (0.09)
Diluted earnings (loss) per share:
As reported .............................. (8.00) 0.87 0.05
Pro forma ................................ (8.05) 0.84 (0.09)
</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,
----------------------
1999 1998
--------- -------
<S> <C> <C>
Dividend yield............................... 0.00% 1.20%
Expected volatility.......................... 70.00 54.76
Risk-free interest rate...................... 5.47 5.78
Expected life of option...................... 4.5 years 5 years
</TABLE>
NOTE 16. STOCKHOLDERS' EQUITY
During the year ended June 30, 1999, the Company received $76.5 million in
new capital from Capital Z (through a partnership majority-owned by Capital Z),
certain designees of Capital Z and Cary H. Thompson pursuant to his Management
Investment Agreement with the Company. The investment was made on February 10,
1999 (the "Initial Closing") at which time the Company issued 26,704 shares of
Series B Convertible Preferred Stock and 50,046 shares of Series C Convertible
Preferred Stock for $1,000 per share. Net proceeds to the Company, after
issuance expenses, were $67.4 million.
On August 3, 1999, the Company received $25 million in additional capital
from Capital Z, through a partnership majority-owned by Capital Z, (the
"Additional Investment") at which time the Company issued 25,000 additional
shares of Series C Convertible Preferred Stock for $1,000 per share. Net
proceeds to the Company, after issuance expenses, were $24.8 million. The
Additional Investment is reflected in accounts receivable and stockholders'
equity in the accompanying consolidated balance sheet at June 30, 1999, pursuant
to the FASB's Emerging Issues Task Force ("EITF") Issue No. 85-1. EITF 85-1
provides guidance on recording capital proceeds as an asset if a binding
agreement exists at the balance sheet date requiring that the capital be
infused; and, if such capital is realized in cash prior to the issuance of the
financial statements.
The Company's Series B Convertible Preferred Stock and the Series C
Convertible Preferred Stock rank senior in right to dividends and liquidation to
all classes of the Company's common and preferred stock. The Series C
Convertible Preferred Stock does not have the right to vote for directors.
The Series B Convertible Preferred Stock and the Series C Convertible
Preferred Stock accrue and accumulate dividends at a rate of 6.5%. The Company
has the option to accrue but not pay the dividends for the first two years after
their issuance. If the Company's stockholders do not adopt certain amendments to
the Company's Certificate of Incorporation before the earlier of September 30,
1999 or September 13, 1999, the date of the scheduled stockholders' meeting (if,
in the latter case, any of the proposed amendments to the Certificate of
Incorporation is defeated at the meeting), the dividend rate on the Series B and
Series C Convertible Preferred Stock held by Capital Z will increase from 6.5%
to 15% per annum and Capital Z will be able to exercise a warrant to purchase up
to 3,000,000 additional shares of common stock at an exercise price of $1.00 per
share. Commencing on the earlier of (i) the 10th anniversary of the date on
which the Series B Convertible Preferred Stock and the Series C Convertible
Preferred Stock were first issued and (ii) the date on which fewer than 25% of
the Series B Convertible Preferred Stock and the Series C Convertible Preferred
Stock issued on the first date of issuance remain outstanding, the Company may,
at its option, redeem all outstanding shares of the Series B Convertible
Preferred Stock and the Series C Convertible Preferred Stock. Borrowing
agreements and revolving warehouse and repurchase agreements generally limit the
Company's ability
F-22
<PAGE> 81
to pay dividends if such payment would result in an event of default. In
addition, the Company's indentures relating to its 10.5% 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. Under the most
restrictive of these limitations, the Company will be prohibited from paying
cash dividends on its capital stock for the foreseeable future.
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 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.
On April 27, 1998, the Company issued 2.78 million shares of its common
stock, or 9.9% of the Company's outstanding shares, to private entities
controlled by Ronald Perelman and Gerald Ford, at a purchase price of $13.7625
per share, or approximately $38 million. As part of the agreement, the Company
also issued warrants to these entities to purchase an aggregate additional 9.9%
of the Company's stock at an exercise price of $7.67 (as adjusted), subject to
customary anti-dilution provisions. The warrants are exercisable only upon a
change in control of the Company and expire in April 2001.
The following table reconciles basic earnings (loss) per share to diluted
(loss) earnings per share for the years ended June 30, 1999, 1998 and 1997
(dollars and share data in thousands, except earnings per share):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Basic weighted average number of shares ............. 31,000 28,548 26,400
Add: options ........................................ -- 1,094 1,971
Add: convertible shares ............................. -- 6,107 --
---------- -------- --------
Diluted shares ...................................... 31,000 35,749 28,371
========== ======== ========
Basic net income (loss) ............................. $ (247,967) 27,563 1,478
Interest on convertible subordinated debentures ..... -- 3,645 --
---------- -------- --------
Diluted net income (loss) ........................... $ (247,967) $ 31,208 $ 1,478
========== ======== ========
Earnings (loss) per share:
Basic ............................................... $ (8.00) 0.97 0.06
Diluted ............................................. $ (8.00) 0.87 0.05
</TABLE>
NOTE 17. TRANSACTIONS INVOLVING DIRECTORS, OFFICERS AND AFFILIATES
On January 26, 1998, the Board of Directors approved the Executive and
Director Loan Program under which directors and executive officers of the
Company were entitled to obtain a mortgage loan from the Company at the
Company's cost
F-23
<PAGE> 82
of funds (plus 25 basis points) as determined by an approved, independent
investment banking firm. The Executive and Director Loan Program was terminated
in June 1999. All loans made under the Executive and Director Loan Program were
fixed rate, fully amortized, 15- or 30-year loans with no prepayment penalties
and were underwritten to the Company's underwriting guidelines in effect at the
time of the loan. Participants in this program were not charged any loan fees
except for those fees or costs charged by third parties. During the years ended
June 30, 1999 and 1998, the Company originated $7.5 million and $8.3 million of
loans to directors, officers and persons related to affiliates, respectively.
Included in loans held for sale at June 30, 1999 and 1998 in the accompanying
consolidated balance sheet are loans to directors, officers and affiliates of
$1.6 million and $7.8 million, respectively. All loans originated under the
Executive and Director Loan Program are intended for sale.
During the year ended June 30, 1999, the Company incurred management fees
and out-of-pocket expenses in the amount of $1.2 million relating to advisory
services rendered by Equifin Capital Partners, LLC ("Equifin"), an affiliate of
Capital Z.
In connection with the Initial Closing, the Company paid a transaction
fee and a commitment fee of $1.0 million and $2.0 million, respectively, to
Capital Z, and paid a $250,000 transaction fee to Equifin. The transaction fees
were deducted from capital proceeds received. The Company also reimbursed
Capital Z $262,000 for out-of-pocket expenses.
From time to time certain officers, directors and employees of the
Company, as well as members of their immediate families, acted as private
investors in loan transactions originated by the Company. All such loans were
originated on terms and conditions which were no more favorable than loans
originated by the Company for other nonaffiliated private investors except that
such persons received 75% of any prepayment fees collected by the Company on
such loans. The Company discontinued its private investor program in August
1997.
NOTE 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of unaudited quarterly operating results for the years ended
June 30, 1999 and 1998 follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
-----------------------------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1999
Revenue ................................... $ 57,761 (154,423) 36,814 43,695
Income (loss) before income taxes ......... (3,233) (208,076) (52,153) (14,687)
Net income (loss) ......................... (2,156) (195,745) (35,979) (14,087)
Earnings (loss) per share - diluted ....... (0.07) (6.31) (1.16) (0.46)
1998
Revenue ................................... $ 64,499 70,341 59,538 72,111
Income before income taxes ................ 18,760 17,840 3,937 12,269
Net income ................................ 9,933 9,170 2,018 6,442
Earnings per share -- diluted ............. 0.31 0.29 0.07 0.20
</TABLE>
NOTE 19. FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES
SECURITIZATIONS -- HEDGING INTEREST RATE RISK
The most significant variable in the determination of gain on sale in a
securitization is the spread between the weighted average coupon on the
securitized loans and the pass-through interest rate. In the interim period
between loan origination or purchase and securitization of such loans, the
Company is exposed to interest rate risk. The majority of loans are securitized
within 90 days of origination or purchase. However, a portion of the loans are
held for sale or securitization for as long as twelve months (or longer, in very
limited circumstances) prior to securitization. If interest rates rise during
the period that the mortgage loans are held, the spread between the weighted
average interest rate on the loans to be securitized
F-24
<PAGE> 83
and the pass-through interest rates on the securities to be sold (the latter
having increased as a result of market interest rate movements) would narrow.
Upon securitization, this would result in a reduction of the Company's related
gain on sale. Historically, the Company mitigated this exposure through swap
agreements with third parties that sell United States Treasury securities not
yet purchased and the purchase of Treasury Put Options. Hedge gains or losses
are initially deferred and subsequently included in gain on sale upon completion
of the securitization. With respect to the Company's securitizations, gain on
sale included hedge losses of $13.5 million, $1.3 million and $3.0 million in
fiscal 1999, 1998 and 1997, respectively. These hedging activities help mitigate
the risk of absolute movements in interest rates but they do not mitigate the
risk of a widening in the spreads between pass-through certificates and U.S.
Treasury securities with comparable maturities.
At June 30, 1999, the Company did not have any hedge transactions in place
and no gains or losses were deferred.
CREDIT RISK
The Company is exposed to on-balance sheet credit risk related to its
receivables and interest-only strips. The Company is exposed to off-balance
sheet credit risk related to loans which the Company has committed to originate
or purchase.
The Company is a party to financial instruments with off-balance sheet
credit risk in the normal course of business. These financial instruments
include commitments to extend credit to borrowers and commitments to purchase
loans from correspondents. The Company has a first or second lien position on
all of its loans, and the combined loan-to-value ratio ("CLTV") permitted by the
Company's mortgage underwriting guidelines generally may not exceed 90%. The
CLTV represents the combined first and second mortgage balances as a percentage
of the appraised value of the mortgaged property, with the appraised value
determined by an appraiser with appropriate professional designations. A title
insurance policy is required for all loans.
F-25
<PAGE> 84
EXHIBIT INDEX
<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(13)
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(14)
4.2(a) Rights Agreement, dated as of June 21, 1996 between
Registrant and Wells Fargo Bank, as rights agent(4)
4.2(b) Amendment to Rights Agreement, dated as of April 27, 1998(17)
4.2(c) Amendment to Rights Agreement, dated as of December 23,
1998(22)
4.3 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)
4.4(a) 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)
4.4(b) Second Supplemental Indenture, dated as of February 10, 1999,
between Registrant, The Chase Manhattan Bank and certain
wholly owned subsidiaries of Registrant, relating to
Registrant's 9.125% Senior Notes due 2003(21)
10.1 Form of Director and Officer Indemnification Agreement(14)
10.2(a) Second Amended and Restated Employment, dated as of May 8,
1997, between Registrant and Cary H. Thompson(14)
10.2(b) Stock Option Agreement between Registrant and Cary H.
Thompson(10)
10.2(c) Amendment No. 1, dated as of August 26, 1998, to Exhibit
10.2(a)(19)
10.3(a) Employment Agreement, dated as of August 28, 1996, between
Registrant and Neil Kornswiet(14)
10.3(b) Amendment No. 1, dated as of June 1, 1997, to Exhibit
10.3(a)(14)
10.3(c) Amended and Restated Employment Agreement, dated as of August
26, 1998, between Registrant and Neil B. Kornswiet(19)
10.4 Employment Agreement, dated as of May 12, 1997, between the
Registrant and David A. Sklar
10.5 Second Amended and Restated Employment Agreement, dated as of
June 1, 1997, between Registrant and Barbara Polsky(14)
10.6(a) Employment Agreement, dated as of June 1, 1997, between
Registrant and Mark Costello(14)
10.6(b) Performance Bonus Plan for Mark Costello(20)
10.7 1991 Stock Incentive Plan, as amended(2)
10.8 1995 Stock Incentive Plan(10)
10.9(a) 1996 Stock Incentive Plan(12)
10.9(b) Amendment No. 1 to Exhibit 10.9(a)(14)
10.10 1997 Stock Option Plan(15)
10.11 1997 Non-Qualified Stock Option Plan (amended and restated
effective May 22, 1998)(15)
10.12 Office Lease, dated as of September 15, 1998, between
Colonnade Wilshire Corp. and the Registrant, for the premises
located at 3731 Wilshire Boulevard, Los Angeles, California.
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(14)
10.13(b) First Amendment, dated as of August 15, 1997, to Exhibit
10.13(a)(14)
</TABLE>
<PAGE> 85
<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 Reserved
10.16 Reserved
10.17 Reserved
10.18(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)
10.18(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)
10.19 Management Voting Agreement between Registrant, Cary H.
Thompson and Neil B. Kornswiet, dated as of February 10,
1999(21)
10.20 Variable Deferred Compensation Plan(14)
10.21(a) Employment Agreement between Registrant and Cary H.
Thompson(21)
10.21(b) Amendment No. 1, dated as of December 23, 1998, to Exhibit
10.21(a)(21)
10.22 Management Investment Agreement, dated as of February 10,
1999, between Registrant and Cary H. Thompson(21)
10.23 Employment Agreement between Registrant and Neil B.
Kornswiet(21)
10.24 Management Investment Agreement, dated as of February 10,
1999, between Registrant and Neil B Kornswiet(21)
10.25(a) Preferred Stock Purchase Agreement, dated as of December 23,
1998, between Registrant and Capital Z Financial Services
Fund II, L.P.(22)
10.25(b) Amendment No. 1 to Exhibit 10.25(a)(21)
10.25(c) Amendment No. 2 to Exhibit 10.25(a)
10.25(d) Amendment No. 3 to Exhibit 10.25(a)
10.25(e) Amendment No. 4 to Exhibit 10.25(a)
10.26(a) Amended and Restated Master Repurchase Agreement Governing
Purchase and Sales of Mortgage Loans, dated as of February
10, 1999, between Aames Capital Corporation, Registrant's
wholly owned subsidiary ("ACC") and Lehman Commercial Paper,
Inc.(25)
10.26(b) Amendment, dated as of June 30, 1999, to Exhibit 10.26(a)
10.26(c) Second Amendment, dated as of June 30, 1999, to Exhibit
10.26(a)
10.26(d) Guaranty, dated as of March 8, 1996, between Registrant and
Lehman Commercial Paper, Inc., with respect to Exhibit
10.26(a)(25)
10.27(a) Master Loan and Security Agreement, dated as of February 10,
1999, between ACC and Greenwich Capital Financial Products,
Inc.(25)
10.27(b) Amendment No. 1, dated as of June 10, 1999, to Exhibit 10.27
10.27(c) Amendment No. 2, dated as of June 30, 1999, to Exhibit
10.28(a)
10.27(d) Guaranty, dated as of February 10, 1999, between Registrant
and Greenwich Capital Financial Products, Inc., with respect
to Exhibit 10.28(a)(25)
10.27(e) Amendment No. 1, dated as of June 30, 1999, to Exhibit
10.28(d)
10.28(a) Master Repurchase Agreement, dated as of April 8, 1999,
between ACC and NationsBank, N.A.(25)
10.28(b) Guaranty, dated as of April 8, 1999, between Registrant and
NationsBank, N.A., with respect to Exhibit 10.28(a)(25)
10.28(c) First Amendment, dated as of June 30, 1999, to Exhibit
10.28(a) and Exhibit 10.28(b)
10.29 Agreement for Management Advisory Services, dated as of
February 10, 1999 between Registrant and Equifin Capital
Management, LLC(25)
10.30 Historical Advance Purchase Agreement, dated as of June 10,
1999, between ACC and Steamboat Financial Partnership I, L.P.
</TABLE>
<PAGE> 86
<TABLE>
<S> <C>
10.31 Historical Advance Purchase Agreement, dated as of June 17,
1999, between ACC and Steamboat Financial Partnership I, L.P.
10.32 Limited Partnership Agreement of Steamboat Financial
Partnership I, L.P., dated as of June 10, 1999, between
Random Properties Acquisition Corp. IV, ACC and Greenwich
Capital Derivatives, Inc.
10.33 Reserved
10.34 Delinquency Advance Purchase Agreement, dated as of May 13,
1999, between ACC and Fairbanks Capital Corp.
10.35 Sub-Servicing Agreement 1997-1, dated as of April 21, 1999,
between ACC and Fairbanks Capital Corp.
10.36 Sub-Servicing Agreement 1996-D, dated as of April 21, 1999,
between ACC and Fairbanks Capital Corp.
11 Computation of Per Share Earnings (Loss)
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers 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 Current Report on Form 8-K
dated September 11, 1996.
(14) Incorporated by reference from Registrant's Annual Report on Form 10-K for
the year ended June 30, 1997.
(15) Incorporated by reference from Registrant's Registration Statement on Form
S-8 dated July 24, 1998.
(16) Incorporated by reference from Registrant's Current Report on Form 8-K
dated April 27, 1998.
(17) Incorporated by reference from Registrant's Registration Statement on Form
8-A/A dated April 27, 1998.
(18) Incorporated by reference from Registrant's Current Report on Form 8-K
dated March 25, 1998.
(19) Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998.
(20) Incorporated by reference from Registrant's Annual Report on Form 10-K for
the year ended June 30, 1998.
(21) Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1998.
(22) Incorporated by reference from Registrant's Current Report on Form 8-K
dated December 31, 1998.
(23) Incorporated herein by reference to the Form of Warrant to Purchase Common
Stock of the Registrant, filed as Exhibit C to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K, filed with the Commission on
December 31, 1998.
(24) Incorporated herein by reference to the Form of Contingent Warrant to
Purchase Common Stock of the Registrant, filed as Exhibit E to Exhibit
10.1 of the Registrant's Current Report on Form 8-K, filed with the
Commission on December 31, 1998.
<PAGE> 87
(25) Incorporated by reference from Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
<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.
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<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
<PAGE> 15
- --------------------------------------------------------------------------------
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
OR OTHER SPECIAL RIGHTS, AND QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS THEREOF, OF
SERIES B CONVERTIBLE PREFERRED STOCK OF
AAMES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
AAMES FINANCIAL CORPORATION, a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies that the following resolutions were adopted by the Board of Directors
of the Corporation (the "Board of Directors") pursuant to authority of the Board
of Directors as required by Section 151 of the Delaware General Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors in accordance with the provisions of the Certificate of
Incorporation of the Corporation, as amended (the "Certificate of
Incorporation"), the Board of Directors hereby creates a series of the
Corporation's previously authorized preferred stock, par value $0.001 per share
(the "Preferred Stock"), and hereby states the designation and number thereof,
and fixes the voting powers, preferences and relative, participating, optional
and other special rights, and the qualifications, limitations and restrictions
thereof, as follows:
SERIES B CONVERTIBLE PREFERRED STOCK:
I. DESIGNATION AND AMOUNT
The designation of this series of shares shall be "Series B Convertible
Preferred Stock" (the "Series B Preferred Stock") par value $0.001 per share;
the initial stated value per share shall be $1,000.00 (the "Initial Stated
Value"); and the number of shares constituting such series shall be 100,000. The
number of shares of the Series B Preferred Stock may be decreased from time to
time by a resolution or resolutions of the Board of Directors; provided,
however, that such number shall not be decreased below the aggregate number of
shares of the Series B Preferred Stock then outstanding.
II. RANK
A. With respect to dividends, the Series B Preferred Stock shall rank (i)
senior to each other class or series of Preferred Stock, except for the Series C
Convertible Preferred Stock, par value $0.001 per share, of the Corporation (the
"Series C Preferred Stock"); (ii) on a parity with the Series C Preferred Stock;
and (iii) senior to the Corporation's Common Stock, par value $.001 per share
(the "Common Stock"), and, except as specified above, all other classes and
series of capital stock of the Corporation hereafter issued by the Corporation.
With respect to dividends, all equity securities of the Corporation to which the
Series B Preferred Stock ranks senior, including the Common Stock, are
collectively referred to herein as the
<PAGE> 16
"Junior Dividend Securities"; all equity securities of the Corporation with
which the Series B Preferred Stock ranks on a parity, including the Series C
Preferred Stock, are collectively referred to herein as the "Parity Dividend
Securities"; and all equity securities of the Corporation (other than
convertible debt securities) to which the Series B Preferred Stock ranks junior,
with respect to dividends, are collectively referred to herein as the "Senior
Dividend Securities."
B. With respect to the distribution of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the Series B Preferred Stock shall rank (i) senior to each other class or series
of Preferred Stock of the Corporation, except for the Series C Preferred Stock;
(ii) on a parity with the Series C Preferred Stock; and (iii) senior to the
Common Stock, and, except as specified above, all other classes and series of
capital stock of the Corporation hereafter issued by the Corporation. With
respect to the distribution of assets upon liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, all equity securities
of the Corporation to which the Series B Preferred Stock ranks senior, including
the Common Stock, are collectively referred to herein as "Junior Liquidation
Securities"; all equity securities of the Corporation (other than convertible
debt securities) to which the Series B Preferred Stock ranks on parity,
including the Series C Preferred Stock, are collectively referred to herein as
"Parity Liquidation Securities"; and all equity securities of the Corporation to
which the Series B Preferred Stock ranks junior are collectively referred to
herein as "Senior Liquidation Securities."
C. The Series B Preferred Stock shall be subject to the creation of
Junior Dividend Securities and Junior Liquidation Securities (collectively,
"Junior Securities"), but no Parity Dividend Securities or Parity Liquidation
Securities (collectively, "Parity Securities") (other than the Series C
Preferred Stock) or Senior Dividend Securities or Senior Liquidation Securities
(collectively, "Senior Securities") shall be created except in accordance with
the terms hereof.
III. DIVIDENDS
A. DIVIDENDS. Subject to the terms of paragraph D below, shares of Series
B Preferred Stock shall accumulate dividends at a rate of 6.5% per annum (the
"Dividend Rate"), which dividends shall be paid quarterly in cash, in four equal
quarterly installments on the last day of March, June, September and December of
each year, or if any such date is not a Business Day, the Business Day next
preceding such day (each such date, regardless of whether any dividends have
been paid or declared and set aside for payment on such date, a "Dividend
Payment Date"), to holders of record (the "Registered Holders") as they appear
on the stock record books of the Corporation on the fifteenth day prior to the
relevant Dividend Payment Date; provided, however, that during the Accrual
Period (as defined in Article IX hereof) the Corporation shall have the option
to accrue such dividends, which dividends, to the extent so accrued, shall
compound quarterly. Prior to the consummation of the Recapitalization, dividends
shall accrue and accumulate on the Initial Stated Value of each share of Series
B Preferred Stock. Following the consummation of the Recapitalization, dividends
shall accrue and accumulate on the Post-Recapitalization Stated Value of each
share of Series B Preferred Stock. Dividends shall be paid only when, as and if
declared by the Board of Directors out of funds at the time
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<PAGE> 17
legally available for the payment of dividends. Dividends shall begin to
accumulate on outstanding shares of Series B Preferred Stock from the date of
issuance and shall be deemed to accumulate from day to day whether or not earned
or declared until paid. Dividends shall accumulate on the basis of a 360-day
year consisting of twelve 30-day months (four 90-day quarters) and the actual
number of days elapsed in the period for which payable.
B. ACCUMULATION. Dividends on the Series B Preferred Stock shall be
cumulative, and from and after (i) any Dividend Payment Date on which any
dividend that has accumulated or been deemed to have accumulated through such
date has not been paid in full (other than by reason of the election of the
Corporation to accrue dividends during the Accrual Period); or (ii) any payment
date set for a redemption on which such redemption payment has not been paid in
full, additional dividends shall accumulate in respect of the amount of such
unpaid dividends or unpaid redemption payment (the "Arrearage") at 125% of the
stated dividend rate (or such lesser rate as may be the maximum rate that is
then permitted by applicable law). Such additional dividends in respect of any
Arrearage shall be deemed to accumulate from day to day whether or not earned or
declared until the Arrearage is paid, shall be calculated as of such successive
Dividend Payment Date, and shall constitute an additional Arrearage from and
after any Dividend Payment Date to the extent not paid on such Dividend Payment
Date. References in any Article herein to dividends that have accumulated or
that have been deemed to have accumulated with respect to the Series B Preferred
Stock shall include the amount, if any, of any Arrearage together with any
dividends accumulated or deemed to have accumulated on such Arrearage pursuant
to the immediately preceding two sentences. Additional dividends in respect of
any Arrearage may be declared and paid at any time, in whole or in part, without
reference to any regular Dividend Payment Date, to Registered Holders as they
appear on the stock record books of the Corporation on such record date as may
be fixed by the Board of Directors (which record date shall be no less than 10
days prior to the corresponding payment date). Dividends in respect of any
Arrearage shall be paid in cash.
C. METHOD OF PAYMENT. Dividends paid on the shares of Series B Preferred
Stock in an amount less than the total amount of such dividends at the time
accumulated and payable on all outstanding shares of Series B Preferred Stock
shall be allocated pro rata on a share-by-share basis among all such shares then
outstanding. After the Second Anniversary Date, dividends that are declared and
paid in an amount less than the full amount of dividends accumulated on the
Series B Preferred Stock (and on any Arrearage) shall be applied first to the
earliest dividend which has not theretofore been paid. All cash payments of
dividends on the shares of Series B Preferred Stock shall be made in such coin
or currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts.
D. SPECIAL DIVIDEND RIGHTS.
1. In addition to the dividend rights set forth in paragraph A above,
prior to the consummation of the Recapitalization, the holders of shares of
Series B Preferred Stock shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for such purpose, cash
dividends in an amount per whole share (rounded to the nearest cent) equal to
the Formula Number then in effect times the aggregate per share amount of all
3
<PAGE> 18
cash dividends declared or paid on the Common Stock. If, prior to the
consummation of the Recapitalization, the Corporation shall pay any dividend or
make any distribution on the Common Stock payable in assets, securities or other
forms of non-cash consideration, then, in each such case, the Corporation shall
simultaneously pay or make on each whole outstanding share of the Series B
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 B Preferred Stock
pursuant to this paragraph are hereinafter referred to as "Participating
Dividends." 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 Participation
Dividend in respect of such dividend shall be have been paid. Nothing contained
in this paragraph D shall obligate the Company to declare or pay any dividend or
other distribution on the Common Stock or (except pursuant to paragraph A of
this Article III or in connection with a dividend or distribution on the Common
Stock as provided in this paragraph D) the Series B Preferred Stock.
2. If the Recapitalization is not consummated prior to June 30, 1999, the
Dividend Rate shall be deemed to be 15% per annum during the period commencing
on such date and ending on the date the Recapitalization is consummated.
IV. LIQUIDATION PREFERENCE
A. PRIOR TO THE RECAPITALIZATION. In the event of a liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
occurring prior to the consummation of the Recapitalization, the holders of
then-outstanding shares of Series B Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets are capital or surplus
of any nature, an amount per share equal to the sum of (i) the dividends, if
any, accumulated or deemed to have accumulated thereon, to the date of final
distribution to such holders, whether or not such dividends are declared; and
(ii) the Initial Stated Value thereof, before any payment shall be made or any
assets distributed to the holders of any Junior Liquidation Securities (the
"Initial Preferred Distribution"). After the Initial Preferred Distribution has
been made, the holders of Series B Preferred Stock shall be entitled to share
pro rata with the holders of Common Stock in the distribution of any remaining
assets of the Corporation on the basis of each whole outstanding share of the
Series B Preferred Stock receiving an amount equal to the Formula Number then in
effect times such distribution on each share of the Common Stock. The
distributions on the Series B Preferred Stock pursuant to the immediately
preceding sentence of this paragraph A are hereinafter referred to as
"Participating Liquidation Distributions." No distribution on the Common Stock
in respect of which a Participating Liquidation Distribution is required shall
be paid or set aside for payment on the Common Stock unless a Participating
Liquidation Distribution in respect of such distribution is concurrently paid.
4
<PAGE> 19
B. AFTER THE RECAPITALIZATION. Subsequent to the consummation of the
Recapitalization, the holders of the outstanding shares of Series B Preferred
Stock shall be entitled to receive out of the assets of the Corporation, whether
such assets are capital or surplus of any nature, an amount per share equal to
the sum of (i) the dividends, if any, accumulated or deemed to have accumulated
thereon to the date of final distribution to such holders, whether or not such
dividends are declared; and (ii) the Post-Recapitalization Stated Value thereof,
before any payment shall be made or any assets distributed to the holders of any
Junior Liquidation Securities. After any such payment in full after the
consummation of the Recapitalization, the holders of Series B Preferred Stock
shall not, as such, be entitled to any further participation in any distribution
of assets of the Corporation.
C. PARITY SECURITIES. All the assets of the Corporation available for
distribution to stockholders after the liquidation preferences of any Senior
Liquidation Securities shall be distributed ratably (in proportion to the full
distributable amounts to which holders of Series B Preferred Stock and Parity
Liquidation Securities, if any, are respectively entitled upon such dissolution,
liquidation or winding up) among the holders of the then-outstanding shares of
Series B Preferred Stock and Parity Liquidation Securities, if any, when such
assets are not sufficient to pay in full the aggregate amounts payable thereon.
D. MERGER NOT A LIQUIDATION. Neither a consolidation or merger of the
Corporation with or into any other Person or Persons, nor a sale, conveyance,
lease, exchange or transfer of all or part of the Corporation's assets for cash,
securities or other property to a Person or Persons shall be deemed to be a
liquidation, dissolution or winding up of the Corporation for purposes of this
Article IV, but the holders of shares of Series B Preferred Stock shall
nevertheless be entitled from and after any such consolidation, merger or sale,
conveyance, lease, exchange or transfer of all or part of the Corporation's
assets to the rights provided by this Article IV following any such transaction.
Notice of any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation, stating the payment date or dates when, and the place or places
where, the amounts distributable to each holder of shares of Series B Preferred
Stock in such circumstances shall be payable, shall be given by first-class
mail, postage prepaid, mailed not less than 30 days prior to any payment date
stated therein, to holders of record as they appear on the stock record books of
the Corporation as of the date such notices are first mailed.
V. REDEMPTION
A. INTENTIONALLY OMITTED
B. OPTIONAL REDEMPTION. Commencing on the earlier to occur of (x) the
tenth anniversary of the Issue Date and (y) the date on which fewer than 25% of
the shares of Series B Preferred Stock issued on the Issue Date remain
outstanding, and at all times thereafter, the Corporation may, at its option,
redeem all (but not less than all) outstanding shares of Series B Preferred
Stock on a date specified by the Corporation (the "Optional Redemption Date") by
paying the Redemption Price therefor in cash out of funds legally available for
such purpose.
C. NOTICE AND REDEMPTION PROCEDURES. Notice of the redemption of shares
of Series B Preferred Stock pursuant to paragraph B of this Article V (a "Notice
of Redemption")
5
<PAGE> 20
shall be sent to the holders of record of the shares of Series B Preferred Stock
to be redeemed by first class mail, postage prepaid, at each such holder's
address as it appears on the stock record books of the Corporation not more than
120 nor fewer than 90 days prior to the Optional Redemption Date, which date
shall be set forth in such notice (the "Redemption Date"); provided that failure
to give such Notice of Redemption to any holder, or any defect in such Notice of
Redemption to any holder shall not affect the validity of the proceedings for
the redemption of any shares of Series B Preferred Stock held by any other
holder. In order to facilitate the redemption of shares of Series B Preferred
Stock, the Board of Directors may fix a record date for the determination of the
holders of shares of Series B Preferred Stock to be redeemed not more than 30
days prior to the date the Notice of Redemption is mailed. On or after the
Optional Redemption Date, each holder of the shares called for redemption shall
surrender the certificate evidencing such shares to the Corporation at the place
designated in such notice and shall thereupon be entitled to receive payment of
the Redemption Price for such shares. From and after the Optional Redemption
Date, all dividends on shares of Series B Preferred Stock shall cease to
accumulate and all rights of the holders thereof as holders of Series B
Preferred Stock shall cease and terminate, except to the extent the Corporation
shall default in payment thereof on the Optional Redemption Date.
D. DEPOSIT OF FUNDS. The Corporation shall, on or prior to the Optional
Redemption Date, pursuant to paragraph C of this Article V, deposit with its
transfer agent or other redemption agent in the Borough of Manhattan, The City
of New York having a capital and surplus of at least $500,000,000 selected by
the Board of Directors, as a trust fund for the benefit of the holders of the
shares of Series B Preferred Stock to be redeemed, cash that is sufficient in
amount to redeem the shares to be redeemed in accordance with the Notice of
Redemption, with irrevocable instructions and authority to such transfer agent
or other redemption agent to pay to the respective holders of such shares, as
evidenced by a list of such holders certified by an officer of the Corporation,
the Redemption Price for such shares upon surrender of their respective share
certificates. Such deposit shall be deemed to constitute full payment of the
Redemption Price for such shares to the holders, and from and after the date of
such deposit, all rights of the holders of the shares of Series B Preferred
Stock that are to be redeemed as stockholders of the Corporation with respect to
such shares, except the right to receive the Redemption Price upon the surrender
of their respective certificates, shall cease and terminate. No dividends shall
accumulate on any shares of Series B Preferred Stock after the Optional
Redemption Date for such shares (unless the Corporation shall fail to deposit
cash sufficient to redeem all such shares). In case holders of any shares of
Series B Preferred Stock called for redemption shall not, within two years after
such deposit, claim the cash deposited for redemption thereof, such transfer
agent or other redemption agent shall, upon demand, pay over to the Corporation
the balance so deposited. Thereupon, such transfer agent or other redemption
agent shall be relieved of all responsibility to the holders thereof and the
sole right of such holders, with respect to shares to be redeemed, shall be to
receive the Redemption Price as general creditors of the Corporation. Any
interest accrued on any funds so deposited shall belong to the Corporation, and
shall be paid to it from time to time on demand.
6
<PAGE> 21
VI. RESTRICTIONS ON DIVIDENDS
So long as any shares of the Series B Preferred Stock are outstanding, the
Board of Directors shall not declare, and the Corporation shall not pay or set
apart for payment any dividend on any Junior Securities or make any payment on
account of, or set apart for payment money for a sinking or other similar fund
for, the repurchase, redemption or other retirement of, any Junior Securities or
Parity Securities or any warrants, rights or options exercisable for or
convertible into any Junior Securities or Parity Securities (other than the
repurchase, redemption or other retirement of debentures or other debt
securities that are convertible or exchangeable into any Junior Securities or
Parity Securities), or make any distribution in respect of the Junior
Securities, either directly or indirectly, and whether in cash, obligations or
shares of the Corporation or other property (other than distributions or
dividends in Junior Securities to the holders of Junior Securities), and shall
not permit any corporation or other entity directly or indirectly controlled by
the Corporation to purchase or redeem any Junior Securities or Parity Securities
or any warrants, rights, calls or options exercisable for or convertible into
any Junior Securities or Parity Securities (other than the repurchase,
redemption or other retirement of debentures or other debt securities that are
convertible or exchangeable into any Junior Securities or Parity Securities or
the repurchase, redemption or other retirement of Junior Securities or Parity
Securities in exchange for Junior Securities or Parity Securities) unless prior
to or concurrently with such declaration, payment, setting apart for payment,
repurchase, redemption or other retirement or distribution, as the case may be,
all accumulated and unpaid dividends on shares of the Series B Preferred Stock
not paid on the dates provided for in paragraph A of Article III hereof
(including Arrearages and accumulated dividends thereon) shall have been paid,
except that when dividends are not paid in full as aforesaid upon the shares of
Series B Preferred Stock, all dividends declared on the Series B Preferred Stock
and any series of Parity Dividend Securities shall be declared and paid pro rata
so that the amount of dividends so declared and paid on Series B Preferred Stock
and such series of Parity Dividend Securities shall in all cases bear to each
other the same ratio that accumulated dividends (including interest accrued on
or additional dividends accumulated in respect of such accumulated dividends) on
the shares of Series B Preferred Stock and such Parity Dividend Securities bear
to each other.
VII. VOTING RIGHTS
A. On or prior to the consummation of the Recapitalization, the holders of
Series B Preferred Stock shall be entitled to one thousand (1,000) votes per
share of Series B Preferred Stock at each meeting of stockholders of the
Corporation with respect to any and all matters presented to the stockholders of
the Corporation for their action and consideration. After the consummation of
the Recapitalization, the holders of Series B Preferred Stock shall be entitled
to the number of votes per share of Series B Preferred Stock equal to the number
of shares of Common Stock for which such share of Series B Preferred Stock is
then convertible pursuant to Article VIII at each meeting of stockholders of the
Corporation with respect to any and all matters presented to the stockholders of
the Corporation for their action and consideration.
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<PAGE> 22
B. So long as any shares of the Series B Preferred Stock are outstanding,
(i) each share of Series B Preferred Stock shall entitle the holder thereof to
vote on all matters voted on by holders of Common Stock; and (ii) the shares of
Series B Preferred Stock shall vote together with shares of Common Stock (and
any shares of Series C Preferred Stock entitled to vote) as a single class.
C. At each annual meeting of the stockholders of the Corporation, the
holders of Series B Preferred Stock, voting as a separate class, shall have the
right to elect, by the written consent (if action by written consent is
permitted) or affirmative vote of the holders of a majority of the outstanding
shares of Series B Preferred Stock, four members of a separate class of
directors, each of whom shall serve until the next annual meeting of the
stockholders of the Corporation or until his or her successor is elected and
qualified. Such vote or consent shall be taken in accordance with the procedures
specified in paragraph F below. The initial directors shall be Steven M.
Gluckstern, Adam M. Mizel, Mani Sadeghi and David Spuria.
D. Without the written consent (if action by written consent is
permitted) or affirmative vote of the holders of a majority of the outstanding
shares of Series B Preferred Stock and Series C Preferred Stock, voting together
as a single class, the Corporation shall not (i) authorize, create or issue, or
increase the authorized amount of, (x) any Senior Securities or Parity
Securities or (y) any class or series of capital stock or any security
convertible into or exercisable for any class or series of capital stock,
redeemable mandatorily or redeemable at the option of the holder thereof or (ii)
enter into any Transaction (as defined in paragraph H of Article VIII). Such
vote or consent shall be taken in accordance with the procedures specified in
paragraph F below.
E. Without the written consent (if action by written consent is
permitted) or affirmative vote of the holders of at least a majority of the
outstanding shares of Series B Preferred Stock and Series C Preferred Stock,
voting together as a single class, the Corporation shall not (i) amend, alter or
repeal any provision of the Certificate of Incorporation or the Bylaws, if the
amendment, alteration or repeal alters or changes the powers, preferences or
special rights of the Series B Preferred Stock so as to affect them materially
and adversely or (ii) authorize or take any other action if such action alters
or changes any of the rights of the Series B Preferred Stock in any respect or
otherwise would be inconsistent with the provisions of this Certificate of
Designations and the holders of any class or series of the capital stock of the
Corporation is entitled to vote thereon. Such vote or consent shall be taken in
accordance with the procedures specified in paragraph F below.
F. The foregoing rights of holders of shares of Series B Preferred Stock
to take any actions as provided in this Article VII may be exercised at any
annual meeting of stockholders or at a special meeting of stockholders held for
such purpose as hereinafter provided or at any adjournment thereof, or by the
written consent, delivered to the Secretary of the Corporation, of the holders
of the minimum number of shares required to take such action, if action by
written consent of stockholders of the Corporation is then permitted.
8
<PAGE> 23
The Chairman of the Board of the Corporation may call, and upon written
request of holders of record of 35% of the outstanding shares of Series B
Preferred Stock, if the holders of Series B Preferred Stock are to vote
separately as a single class, or the holders of record of 35% of the outstanding
shares of Series B Preferred Stock and Series C Preferred Stock, if the holders
of shares of Series B Preferred Stock are to vote as a class with the holders of
shares of any Series C Preferred Stock, addressed to the Secretary of the
Corporation at the principal office of the Corporation shall call, a special
meeting of the holders of shares entitled to vote as provided herein. Such
meeting shall be held within 30 days after delivery of such request to the
Secretary, at the place and upon the notice provided by law and in the By-laws
of the Corporation for the holding of meetings of stockholders.
At each meeting of stockholders at which the holders of shares of Series B
Preferred Stock shall have the right, voting separately as a single class or as
a class with the holders of shares of any Series C Preferred Stock, to elect
directors of the Corporation as provided in paragraph C above or to take any
action, the presence in person or by proxy of the holders of record of one-third
of the total number of shares of Series B Preferred Stock, if the holders of
shares of Series B Preferred Stock are to vote separately as a single class, or
the holders of record of one-third of the total number of shares of Series B
Preferred Stock and Series C Preferred Stock, if the holder of shares of Series
B Preferred Stock are to vote as a class with the holders of shares of Series C
Preferred Stock, then outstanding and entitled to vote on the matter shall be
necessary and sufficient to constitute a quorum. At any such meeting or at any
adjournment thereof:
(A) the absence of a quorum of the holders of shares of Series B
Preferred Stock, if the holders of Series B Preferred Stock are to vote
separately as a single class, shall not prevent the election of directors
other than those to be elected by the holders of shares of Series B
Preferred Stock, and the absence of a quorum of the holders of shares of
any other class or series of capital stock shall not prevent the election
of directors to be elected by the holders of shares of Series B Preferred
Stock or the taking of any action as provided in this Article VII; and
(B) in the absence of a quorum of the holders of shares of Series B
Preferred Stock, if the holders of Series B Preferred Stock are to vote
separately as a single class, or the holders of shares of Series B
Preferred Stock and Series C Preferred Stock, if the holders of Series B
Preferred Stock are to vote as a class with the holders of shares of Series
C Preferred Stock, a majority of the holders of such shares present in
person or by proxy shall have the power to adjourn the meeting as to the
actions to be taken by the holders of shares of Series B Preferred Stock or
the holders of Series B Preferred Stock and Series C Preferred Stock, as
the case may be, from time to time and place to place without notice other
than announcement at the meeting until a quorum shall be present.
For taking of any action as provided in this Article VII by the holders of
shares of Series B Preferred Stock voting separately as a single class or
together with the holders of shares of Series B Preferred Stock and Series C
Preferred Stock as a single class, as the case may be, each such holder shall
have one vote for each share of such stock standing in his name on the
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<PAGE> 24
transfer books of the Corporation as of any record dated fixed for such purpose
or, if no such date be fixed, at the close of business on the Business Day next
preceding the day on which notice is given, or if notice if waived, at the close
of business on the Business Day next preceding the day on which the meeting is
held.
In case any vacancy shall occur among the directors elected by the holders
of shares of Series B Preferred Stock, as provided in paragraph C above, such
vacancy may be filled for the unexpired portion of the term by vote of the
remaining directors theretofore elected by such holders (if there is a remaining
director), or the last remaining director's successor in office. If any such
vacancy is not so filled within 20 days after the creation thereof or if all
directors so elected by the holders of Series B Preferred Stock shall cease to
serve as directors before their terms shall expire, the holders of the Series B
Preferred Stock then outstanding and entitled to vote for such directors may, by
written consent as herein provided (if action by written consent is permitted),
or at a special meeting of such holders called as provided herein, elect
successors to hold office for the unexpired terms of the directors whose places
shall be vacant.
Any director elected by the holders of shares of Series B Preferred Stock
voting separately as a single class may be removed from office with or without
cause by the vote or written consent (if action by written consent is permitted)
of the holders of at least a majority of the outstanding shares of Series B
Preferred Stock. A special meeting of the holders of shares of Series B
Preferred Stock may be called in accordance with the procedures set forth in
this paragraph F.
G. The Corporation shall not enter into any agreement or issue any
security that prohibits, conflicts or is inconsistent with, or would be breached
by, the Corporation's performance of its obligations hereunder.
VIII. CONVERSION
The holders of the Series B Preferred Stock shall have conversion rights as
follows:
A. Each share of Series B Preferred Stock shall be convertible at the
direction of, and by notice to the Corporation from, the holders of a
majority of the outstanding shares of Series B Preferred Stock, at any
time, at the office of the Corporation or any transfer agent for such
Series, into one thousand (1,000) fully paid and nonassessable shares
of Common Stock subject (x) to adjustment from time to time as
provided below (as so adjusted, the "conversion ratio") and (y) (prior
to the consummation of the Recapitalization) to limitations resulting
from the available number of shares of Common Stock which may be
reserved for issuance upon such conversion, provided ,that any
conversion pursuant to this paragraph A of less than all of the
outstanding shares of Series B Preferred Stock shall be on a pro rata
basis amongst all holders of Series B Preferred Stock. After
consummation of the Recapitalization, the number "1,000" in this
paragraph shall be "1", subject to adjustment as provided in paragraph
VIII.G.
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<PAGE> 25
B. If the holders of a majority of the outstanding shares of Series B
Preferred Stock give notice of conversion under paragraph A above, the
Corporation shall notify all other record holders of Series B
Preferred Stock (a "Conversion Notice"). Following receipt of a
Conversion Notice, the holders of Series B Preferred Stock shall
surrender the certificate or certificates therefor duly endorsed, at
the office of the Corporation or of any transfer agent for such
Series, and shall state therein the name or names in which the
certificate or certificates for shares of Common Stock are to be
issued. The Corporation shall, as soon as practicable thereafter,
issue and deliver at such office to such holder, or to the nominee or
nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such
Conversion Notice and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall be treated
for all purposes as the recordholder or holders of such shares of
Common Stock as of such date. The issuance of certificates or shares
of Common Stock upon conversion of shares of Series B Preferred Stock
shall be made without charge for any issue, stamp or other similar tax
in respect of such issuance.
C. No fractional shares shall be issued upon conversion of any shares of
Series B Preferred Stock and the number of shares of Common Stock to
be issued shall be rounded down to the nearest whole share, and the
holder of Series B Preferred Stock shall be paid in cash for any
fractional share.
D. In case at any time or from time to time the Corporation shall pay any
dividend or make any other distribution to the holders of its Common
Stock or other class of securities, or shall offer for subscription
pro rata to the holders of its Common Stock or other class of
securities any additional shares of stock of any class or any other
right, or there shall be any capital reorganization or
reclassification of the Common Stock of the Corporation or
consolidation or merger of the Corporation with or into another
corporation, or any sale or conveyance to another corporation of the
property of the Corporation as an entirety or substantially as an
entirety, or there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation, then, in any one or more
of said cases the Corporation shall give at least 20 days' prior
written notice (the time of mailing of such notice shall be deemed to
be the time of giving thereof) to the registered holders of the Series
B Preferred Stock at the addresses of each as shown on the books of
the Corporation maintained by the Transfer Agent thereof of the date
on which (i) the books of the Corporation shall close or a record
shall be taken for such stock dividend,
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<PAGE> 26
distribution or subscription rights or (ii) such reorganization,
reclassification, consolidation, merger, sale or conveyance,
dissolution, liquidation or winding up shall take place, as the case
may be, provided that in the case of any Transaction to which
paragraph H applies the Corporation shall give at least 30 days' prior
written notice as aforesaid. Such notice shall also specify the date
as of which the holders of the Common Stock of record shall
participate in said dividend, distribution or subscription rights or
shall be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale or conveyance or participate in such
dissolution, liquidation or winding up, as the case may be. Failure to
give such notice shall not invalidate any action so taken.
E. From and after the Recapitalization, the Corporation shall at all
times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Series B Preferred Stock, such number of
its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of Series B Preferred
Stock, and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of
all then outstanding shares of Series B Preferred Stock, then in
addition to such other remedies as shall be available to the holder of
Series B Preferred Stock, the Corporation will take such corporate
action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes.
F. Any notice required by the provisions of paragraph D to be given the
holders of shares of Series B Preferred Stock shall be deemed given if
sent by facsimile transmission, by telex, or if deposited in the
United States mail, postage prepaid, and addressed to each holder of
record at his, her or its address appearing on the books of the
Corporation.
G. The conversion ratio shall be subject to adjustment from time to time
as follows:
(i) In case the Corporation shall at any time or from time to
time after the Issue Date (A) pay a dividend or make a distribution,
on the outstanding shares of Common Stock in shares of Common Stock,
(B) subdivide the outstanding shares of Common Stock into a larger
number of shares of Common Stock, (C) combine the outstanding shares
of Common Stock into a smaller number of shares or (D) issue by
reclassification of the shares of Common Stock any shares of capital
stock of the Corporation, then, and in each such case, the conversion
ratio in effect immediately prior to such event or the record date
therefor, whichever is earlier, shall be adjusted so that the holder
of any shares of Series B Preferred Stock thereafter surrendered for
conversion shall be entitled to receive the number of shares of Common
Stock or other securities of the Corporation which such holder would
have owned or have been entitled to receive after the happening of any
of the events described above, had such shares of Series B Preferred
Stock been surrendered for conversion immediately prior to the
happening of such event or the record date therefor, whichever is
earlier. An adjustment made pursuant to this clause (i) shall become
effective (x) in the case of any such dividend or distribution,
immediately after the close of business on the record date for the
determination of holders of shares of Common Stock
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<PAGE> 27
entitled to receive such dividend or distribution, or (y) in the case
of any such subdivision, reclassification or combination, at the close
of business on the day upon which such corporate action becomes
effective.
(ii) In the case the Corporation shall, after the Issue Date,
issue shares of Common Stock at a price per share, or securities
convertible into or exchangeable for shares of Common Stock
("Convertible Securities") having a "Conversion Price" (as defined
below) less than the Current Market Price (for a period of 15
consecutive trading days prior to such date), then, and in each such
case, the conversion ratio shall be adjusted so that the holder of
each share of Series B Preferred Stock shall be entitled to receive,
upon the conversion thereof, the number of shares of Common Stock
determined by multiplying (A) the applicable conversion ratio on the
day immediately prior to such date by (B) a fraction, the numerator of
which shall be the sum of (1) the number of shares of Common Stock
outstanding on the date on which such shares or Convertible Securities
are issued and (2) the number of additional shares of Common Stock
issued, or into which the Convertible Securities may convert, and the
denominator of which shall be the sum of (x) the number of shares of
Common Stock outstanding on such date and (y) the number of shares of
Common Stock which the aggregate consideration receivable by the
Corporation for the total number of shares of Common Stock so issued,
or the number of shares of Common Stock which the aggregate of the
Conversion Price of such Convertible Securities so issued, would
purchase at such Current Market price on such date. An adjustment made
pursuant to this clause (ii) shall be made on the next Business Day
following the date on which any such issuance is made and shall be
effective retroactively immediately after the close of business on
such date. For purposes of this clause (ii), the aggregate
consideration receivable by the Corporation in connection with the
issuance of any securities shall be deemed to be the sum of the
aggregate offering price to the public (before deduction of
underwriting discounts or commissions and expenses payable to third
parties), and the "Conversion Price" of any Convertible Securities is
the total amount received or receivable by the Corporation as
consideration for the issue or sale of such Convertible Securities
(before deduction of underwriting discounts or commissions and
expenses payable to third parties) plus the minimum aggregate amount
of additional consideration, if any, payable to the Corporation upon
the conversion, exchange or exercise of any such Convertible
Securities. Neither (A) the issuance of any shares of Common Stock
(whether treasury shares or newly issued shares) pursuant to a
dividend or distribution on, or subdivision, combination or
reclassification of, the outstanding shares of Common Stock requiring
an adjustment in the conversion ratio pursuant to clause (i) of this
paragraph G, or pursuant to any employee benefit plan or program of
the Corporation or pursuant to any option, warrant, right, or
Convertible Security outstanding as of the date hereof (including, but
not limited to, the Rights, the Series B Preferred Stock, the Series C
Preferred Stock and the Warrants) nor (B) the issuance of shares of
Common Stock pursuant thereto shall be deemed to
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<PAGE> 28
constitute an issuance of Common Stock or Convertible Securities by
the Corporation to which this clause (ii) applies. Upon expiration of
any Convertible Securities which shall not have been exercised or
converted and for which an adjustment shall have been made pursuant to
this clause (ii), the Conversion Price computed upon the original
issue thereof shall upon expiration be recomputed as if the only
additional shares of Common Stock issued were such shares of Common
Stock (if any) actually issued upon exercise or conversion of such
Convertible Securities and the consideration received therefor was the
consideration actually received by the Corporation for the issue of
such Convertible Securities (whether or not exercised or converted)
plus the consideration actually received by the Corporation upon such
exercise of conversion.
(iii) In case the Corporation shall at any time or from time to
time after the Issue Date declare, order, pay or make a dividend or
other distribution (including, without limitation, any distribution of
stock or other securities or property or rights or warrants to
subscribe for securities of the Corporation or any of its Subsidiaries
by way of dividend or spin-off), on its Common Stock, other than (A)
regular quarterly dividends payable in cash in an aggregate amount not
to exceed 15% of net income from continuing operations before
extraordinary items of the Corporation, determined in accordance with
generally accepted accounting principles, during the period (treated
as one accounting period) commencing on July 1, 1998, and ending on
the date such dividend is paid or (B) dividends or distributions of
shares of Common Stock which are referred to in clause (i) of this
paragraph G, then, and in each such case, the conversion ratio shall
be adjusted so that the holder of each share of Series B Preferred
Stock shall be entitled to receive, upon the conversion thereof, the
number of shares of Common Stock determined by multiplying (1) the
applicable conversion ratio on the day immediately prior to the record
date fixed for the determination of stockholders entitled to receive
such dividend or distribution by (2) a fraction, the numerator of
which shall be the then Current Market Price per share of Common Stock
for the period of 20 Trading Days preceding such record date, and the
denominator of which shall be such Current Market Price per share of
Common Stock for the period of 20 Trading Days preceding such record
date, less the Fair Market Value (as defined in Article IX) per share
of Common Stock (as determined in good faith by the Board of Directors
of the Corporation, a certified resolution with respect to which shall
be mailed to each holder of shares of Series B Preferred Stock) of
such dividend or distribution; provided, however, that in the event of
a distribution of shares of capital stock of a Subsidiary of the
Corporation (a "Spin-Off") made to holders of shares of Common Stock,
the numerator of such fraction shall be the sum of the Current Market
Price per share of Common Stock for the period of 20 Trading Days
preceding the 35th Trading Day after the effective date of such
Spin-Off and the Current Market Price of the number of shares (or the
fraction of a share) of capital stock of the Subsidiary which is
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<PAGE> 29
distributed in such Spin-Off in respect of one share of Common Stock
for the period of 20 Trading Days preceding such 35th Trading Day and
the denominator of which shall be the current market price per share
of the Common Stock for the period of 20 Trading Days proceeding such
35th Trading Day. An adjustment made pursuant to this clause (iii)
shall be made upon the opening of business on the next Business Day
following the date on which any such dividend or distribution is made
and shall be effective retroactively immediately after the close of
business on the record date fixed for the determination of
stockholders entitled to receive such dividend or distribution;
provided, however, if the proviso to the preceding sentence applies,
then such adjustment shall be made and be effective as of such 35th
Trading Day after the effective date of such Spin-Off.
(iv) For purposes of this paragraph G, the number of shares of
Common Stock at any time outstanding shall not include any shares of
Common Stock then owned or held by or for the account of the
Corporation.
(v) The term "dividend", as used in this paragraph G shall mean
a dividend or other distribution upon stock of the Corporation except
pursuant to the Rights Agreement (as defined in Article IX).
Notwithstanding anything in this Article VIII to the contrary, the
conversion ratio shall not be adjusted as a result of any dividend,
distribution or issuance of securities of the Corporation pursuant to
the Rights Agreement.
(vi) Anything in this paragraph G to the contrary
notwithstanding, the Corporation shall not be required to give effect
to any adjustment in the conversion ratio unless and until the net
effect of one or more adjustments (each of which shall be carried
forward), determined as above provided, shall have resulted in a
change of the conversion ratio by at least one-hundredth of one share
of Common Stock, and when the cumulative net effect of more than one
adjustment so determined shall be to change the conversion ratio by at
least one-hundredth of one share of Common Stock, such change in
conversion ratio shall thereupon be given effect.
(vii) The certificate of any firm of independent public
accountants of recognized standing selected by the Board of Directors
of the Corporation (which may be the firm of independent public
accountants regularly employed by the Corporation) shall be
presumptively correct for any computation made under this paragraph G.
(viii) If the Corporation shall take a record of the holders of
its Common Stock for the purpose of entitling them to receive a
dividend or other distribution, and shall thereafter and before the
distribution to stockholders thereof legally abandon its plan to pay
or deliver such dividend or distribution, then thereafter no
adjustment in the number of shares of Common Stock issuable upon
exercise of
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<PAGE> 30
the right of conversion granted by this paragraph G or in the
conversion ratio then in effect shall be required by reason of the
taking of such record.
(ix) There shall be no adjustment of the conversion ratio in case
of the issuance of any stock of the Corporation in a merger,
reorganization, acquisition or other similar transaction except as set
forth in paragraph G(i), G(ii) and H of this Article VIII.
H. In case of any reorganization or reclassification of outstanding
shares of Common Stock (other than a reclassification covered by
paragraph G(i) of this Article VIII, or in case of any consolidation
or merger of the Corporation with or into another corporation, or in
the case of any sale or conveyance to another corporation of the
property of the Corporation as an entirety or substantially as an
entirety (each of the foregoing being referred to as a "Transaction"),
each share of Series B Preferred Stock then outstanding shall
thereafter be convertible into, in lieu of the Common Stock issuable
upon such conversion prior to consummation of such Transaction, the
kind and amount of shares of stock and other securities and property
receivable (including cash) upon the consummation of such Transaction
by a holder of that number of shares of Common Stock into which one
share of Series B Preferred Stock was convertible immediately prior to
such Transaction (including, on a pro rata basis, the cash, securities
or property received by holders of Common Stock in any tender or
exchange offer that is a step in such Transaction). In case securities
or property other than Common Stock shall be issuable or deliverable
upon conversion as aforesaid, then all reference in this paragraph H
shall be deemed to apply, so far as appropriate and as nearly as may
be, to such other securities or property.
I. Upon any adjustment of the conversion ratio then in effect and any
increase or decrease in the number of shares of Common Stock issuable
upon the operation of the conversion set forth in Article VIII, then,
and in each such case, the Corporation shall promptly deliver to the
registered holders of the Series B Preferred and Common Stock, a
certificate signed by the President or a Vice President and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Corporation setting forth in reasonable detail the
event requiring the adjustment and the method by which such adjustment
was calculated and specifying the conversion ratio then in effect
following such adjustment and the increased or decreased number of
shares issuable upon the conversion set forth in this Article VIII.
IX. ADDITIONAL DEFINITIONS
For the purposes of this Certificate of Designations of Series B Preferred
Stock, the following terms shall have the meanings indicated:
"Accrual Period" means the end of the first quarterly period following the
Second Anniversary Date.
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"Beneficially Own" with respect to any securities means having "beneficial
ownership" of such securities (as determined pursuant to Rule 13d-3 under the
Exchange Act as in effect on the date hereof, except that a Person shall be
deemed to Beneficially Own all such securities that such Person has the right to
acquire whether such right is exercisable immediately or after the passage of
time). The terms "Beneficial Ownership" and "Beneficial Owner" have correlative
meanings.
"Business Day" means any day, other than a Saturday, Sunday or a day on
which banking institutions in the State of New York are authorized or obligated
by law or executive order to close.
"Bylaws" means the Bylaws of the Corporation, as amended.
"Current Market Price", when used with reference to shares of Common Stock
or other securities on any date, shall mean the closing price per share of
Common Stock or such other securities on such date and, when used with reference
to shares of Common Stock or other securities for any period shall mean the
average of the daily closing prices per share of Common Stock or such other
securities for such period. The closing price for each day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Stock or such other securities are not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Common Stock or such
other securities are listed or admitted to trading or, if the Common Stock is
not listed or admitted to trading on any national securities exchange, the last
quoted sale price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. National Market System or such other
securities are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Common Stock or such other securities selected by the Board of Directors
of the Corporation. If the Common Stock or such other securities are not
publicly held or so listed or publicly traded, "Current Market Price" shall mean
the Fair Market Value per share of Common Stock or of such other securities as
determined in good faith by the Board of Directors of the Corporation based on
an opinion of an independent investment banking firm with an established
national reputation as a valuer of securities, which opinion may be based on
such assumption as such firm shall deem to be necessary and appropriate.
"Equity Securities" of any Person means any and all common stock, preferred
stock and any other class of capital stock of, and any partnership or limited
liability company interests of such Person or any other similar interests of any
Person that is not a corporation, partnership or limited liability company.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder, from time to time.
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"Fair Market Value" shall mean the amount which a willing buyer would pay a
willing seller in an arm's-length transaction.
"Formula Number" shall mean one thousand (1,000) prior to consummation of
the Recapitalization, provided, however, that if at any time prior to the
consummation of the Recapitalization, 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 prior to the consummation of the Recapitalization 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 B
Preferred Stock continues to be the economic equivalent of a Formula Number of
shares of Common Stock immediately prior to such merger, reclassification, or
change.
"Group" has the meaning set forth in Rule 13d-5 under the Exchange Act.
"Issue Date" shall mean the first date on which shares of Series B
Preferred Stock are issued.
"Person" means any individual, corporation, company, association,
partnership, joint venture, trust or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Post-Recapitalization Stated Value" shall be equal to $1.00.
"Recapitalization" means the amendment of the Corporation's Certificate of
Incorporation to increase the authorized shares of Common Stock from 50,000,000
to 400,000,000, and the authorized shares of Preferred Stock from 1,000,000 to
200,000,000, and the subsequent one thousand-for-one split of Series B Preferred
Stock and Series C Preferred Stock.
"Redemption Price" of a share of Class B Preferred Stock shall mean the sum
of (a) the dividends, if any, accumulated or deemed to have accumulated thereon
to the Optional Redemption Date, whether or not such dividends are declared plus
(b) either (i) the Initial Stated Value thereof (if the Recapitalization has not
been consummated prior to June 30, 1999) or (ii) the Post-Recapitalization
Stated Value thereof (if the Recapitalization has been consummated prior to June
30, 1999), in each case subject to adjustment for splits, reclassifications,
recombinations or other similar events.
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<PAGE> 33
"Rights" shall mean any rights to purchase securities of the Corporation
issued pursuant to any Rights Agreement.
"Rights Agreement" shall mean the Rights Agreement, dated as of June 21,
1996, between the Company and Wells Fargo Bank as rights agent, and all
amendments, supplements and replacements thereof.
"Second Anniversary Date" means the second anniversary of the Issue Date.
"Subsidiary" means, as to any Person, any other Person of which more than
50% of the shares of the Voting Securities or other voting interests are owned
or controlled, or the ability to select or elect 50% or more of the directors or
similar managers is held, directly or indirectly, by such first Person and one
or more of its Subsidiaries.
"Trading Day" means a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open for
the transaction of business or, if the Common Stock is not listed or admitted to
trading on any national securities exchange a Business Day.
"Voting Securities" means, (i) with respect to the Company, the Equity
Securities of the Company entitled to vote generally for the election of
directors of the Company, and (ii) with respect to any other Person, any
securities of or interests in such Person entitled to vote generally for the
election of directors or any similar managing person of such Person.
X. MISCELLANEOUS
A. NOTICES. Any notice referred to herein shall be in writing and, unless
first-class mail shall be specifically permitted for such notices under the
terms hereof, shall be deemed to have been given upon personal delivery thereof,
upon transmittal of such notice by telecopy (with confirmation of receipt by
telecopy or telex) or five days after transmittal by registered or certified
mail, postage prepaid, addressed as follows:
(i) if to the Corporation, to its office at 2 California Plaza, 350
South Grand Avenue, Los Angeles, California 90071 (Attention:
General Counsel) or to the transfer agent for the Series B
Preferred Stock;
(ii) if to a holder of the Series B Preferred Stock, to such holder at
the address of such holder as listed in the stock record books of
the Corporation (which may include the records of any transfer
agent for the Series B Preferred Stock); or
(iii) to such other address as the Corporation or such holder, as the
case may be, shall have designated by notice similarly given.
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B. REACQUIRED SHARES. Any shares of Series B Preferred Stock redeemed,
purchased or otherwise acquired by the Corporation, directly or indirectly, in
any manner whatsoever shall be retired and canceled promptly after the
acquisition thereof (and shall not be deemed to be outstanding for any purpose)
and, if necessary to provide for the lawful redemption or purchase of such
shares, the capital represented by such shares shall be reduced in accordance
with the Delaware General Corporation Law. All such shares of Series B Preferred
Stock shall upon their cancellation and upon the filing of an appropriate
certificate with the Secretary of State of the State of Delaware, become
authorized but unissued shares of Preferred Stock, par value $0.001 per share,
of the Corporation and may be reissued as part of another series of Preferred
Stock, par value $0.001 per share, of the Corporation subject to the conditions
or restrictions on issuance set forth herein.
C. ENFORCEMENT. Any registered holder of shares of Series B Preferred
Stock may proceed to protect and enforce its rights and the rights of such
holders by any available remedy by proceeding at law or in equity to protect and
enforce any such rights, whether for the specific enforcement of any provision
in this Certificate of Designations or in aid of the exercise of any power
granted herein, or to enforce any other proper remedy.
D. TRANSFER TAXES. Except as otherwise agreed upon pursuant to the terms
of this Certificate of Designations, the Corporation shall pay any and all
documentary, stamp or similar issue or transfer taxes and other governmental
charges that may be imposed under the laws of the United States of America or
any political subdivision or taxing authority thereof or therein in respect of
any issue or delivery of Common Stock on conversion of, or other securities or
property issued on account of, shares of Series B Preferred Stock pursuant
hereto or certificates representing such shares or securities. The Corporation
shall not, however, be required to pay any such tax or other charge that may be
imposed in connection with any transfer involved in the issue or transfer and
delivery of any certificate for Common Stock or other securities or property in
a name other than that in which the shares of Series B Preferred Stock so
exchanged, or on account of which such securities were issued, were registered
and no such issue or delivery shall be made unless and until the Person
requesting such issue has paid to the Corporation the amount of any such tax or
has established to the satisfaction of the Corporation that such tax has been
paid or is not payable.
E. TRANSFER AGENT. The Corporation may appoint, and from time to time
discharge and change, a transfer agent for the Series B Preferred Stock. Upon
any such appointment or discharge of a transfer agent, the Corporation shall
send notice thereof by first-class mail, postage prepaid, to each holder of
record of shares of Series B Preferred Stock.
F. RECORD DATES. In the event that the Series B Preferred Stock shall be
registered under either the Securities Act of 1933, as amended, or the Exchange
Act, the Corporation shall establish appropriate record dates with respect to
payments and other actions to be made with respect to the Series B Preferred
Stock.
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IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf
of the Corporation by its Executive vice President, General Counsel and
Secretary and attested by its Assistant Secretary, this 10th day of February,
1999.
AAMES FINANCIAL CORPORATION
By: /s/ Barbara S. Polsky
-------------------------------------
Name: Barbara S. Polsky
Title: Executive Vice President, General
Counsel and Secretary
[Corporate Seal]
ATTEST:
/s/ John F. Madden, Jr.
- -------------------------------------
John F. Madden Jr.
Assistant Secretary
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- --------------------------------------------------------------------------------
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
OR OTHER SPECIAL RIGHTS, AND QUALIFICATIONS,
LIMITATIONS OR RESTRICTIONS THEREOF, OF
SERIES C CONVERTIBLE PREFERRED STOCK OF
AAMES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
AAMES FINANCIAL CORPORATION, a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), hereby
certifies that the following resolutions were adopted by the Board of Directors
of the Corporation (the "Board of Directors") pursuant to authority of the Board
of Directors as required by Section 151 of the Delaware General Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors in accordance with the provisions of the Certificate of
Incorporation of the Corporation, as amended (the "Certificate of
Incorporation"), the Board of Directors hereby creates a series of the
Corporation's previously authorized preferred stock, par value $0.001 per share
(the "Preferred Stock"), and hereby states the designation and number thereof,
and fixes the voting powers, preferences and relative, participating, optional
and other special rights, and the qualifications, limitations and restrictions
thereof, as follows:
SERIES C CONVERTIBLE PREFERRED STOCK:
I. DESIGNATION AND AMOUNT
The designation of this series of shares shall be "Series C Convertible
Preferred Stock" (the "Series C Preferred Stock") par value $0.001 per share;
the initial stated value per share shall be $1,000.00 (the "Initial Stated
Value"); and the number of shares constituting such series shall be 100,000. The
number of shares of the Series C Preferred Stock may be decreased from time to
time by a resolution or resolutions of the Board of Directors; provided,
however, that such number shall not be decreased below the aggregate number of
shares of the Series C Preferred Stock then outstanding.
II. RANK
A. With respect to dividends, the Series C Preferred Stock shall rank (i)
senior to each other class or series of Preferred Stock, except for the Series B
Convertible Preferred Stock, par value $0.001 per share, of the Corporation (the
"Series B Preferred Stock"); (ii) on a parity with the Series B Preferred Stock;
and (iii) senior to the Corporation's Common Stock, par value $.001 per share
(the "Common Stock"), and, except as specified above, all other classes and
series of capital stock of the Corporation hereafter issued by the Corporation.
With respect to dividends, all equity securities of the Corporation to which the
Series C Preferred Stock ranks senior, including the Common Stock, are
collectively referred to herein as the
<PAGE> 37
"Junior Dividend Securities"; all equity securities of the Corporation with
which the Series C Preferred Stock ranks on a parity, including the Series B
Preferred Stock, are collectively referred to herein as the "Parity Dividend
Securities"; and all equity securities of the Corporation (other than
convertible debt securities) to which the Series C Preferred Stock ranks junior,
with respect to dividends, are collectively referred to herein as the "Senior
Dividend Securities."
B. With respect to the distribution of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the Series C Preferred Stock shall rank (i) senior to each other class or series
of Preferred Stock, except for the Series B Preferred Stock; (ii) on a parity
with the Series B Preferred Stock; and (iii) senior to the Common Stock, and,
except as specified above, all other classes and series of capital stock of the
Corporation hereafter issued by the Corporation. With respect to the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, all equity securities of the
Corporation to which the Series C Preferred Stock ranks senior, including the
Common Stock, are collectively referred to herein as "Junior Liquidation
Securities"; all equity securities of the Corporation (other than convertible
debt securities) to which the Series C Preferred Stock ranks on parity,
including the Series B Preferred Stock, are collectively referred to herein as
"Parity Liquidation Securities"; and all equity securities of the Corporation to
which the Series C Preferred Stock ranks junior are collectively referred to
herein as "Senior Liquidation Securities."
C. The Series C Preferred Stock shall be subject to the creation of
Junior Dividend Securities and Junior Liquidation Securities (collectively,
"Junior Securities"), but no Parity Dividend Securities or Parity Liquidation
Securities (collectively, "Parity Securities") (other than the Series B
Preferred Stock) or Senior Dividend Securities or Senior Liquidation Securities
(collectively, "Senior Securities") shall be created except in accordance with
the terms hereof.
III. DIVIDENDS
A. DIVIDENDS. Subject to the terms of paragraph D below, shares of Series
C Preferred Stock shall accumulate dividends at a rate of 6.5% per annum (the
"Dividend Rate"), which dividends shall be paid quarterly in cash, in four equal
quarterly installments on the last day of March, June, September and December of
each year, or if any such date is not a Business Day, the Business Day next
preceding such day (each such date, regardless of whether any dividends have
been paid or declared and set aside for payment on such date, a "Dividend
Payment Date"), to holders of record (the "Registered Holders") as they appear
on the stock record books of the Corporation on the fifteenth day prior to the
relevant Dividend Payment Date; provided, however, that during the Accrual
Period (as defined in Article IX hereof) the Corporation shall have the option
to accrue such dividends, which dividends, to the extent so accrued, shall
compound quarterly. Prior to the consummation of the Recapitalization, dividends
shall accrue and accumulate on the Initial Stated Value of each share of Series
B Preferred Stock. Following the consummation of the Recapitalization, dividends
shall accrue and accumulate on the Post-Recapitalization Stated Value of each
share of Series B Preferred Stock. Dividends shall be paid only when, as and if
declared by the Board of Directors out of funds at the time
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<PAGE> 38
legally available for the payment of dividends. Dividends shall begin to
accumulate on outstanding shares of Series C Preferred Stock from the date of
issuance and shall be deemed to accumulate from day to day whether or not earned
or declared until paid. Dividends shall accumulate on the basis of a 360-day
year consisting of twelve 30-day months (four 90-day quarters) and the actual
number of days elapsed in the period for which payable.
B. ACCUMULATION. Dividends on the Series C Preferred Stock shall be
cumulative, and from and after (i) any Dividend Payment Date on which any
dividend that has accumulated or been deemed to have accumulated through such
date has not been paid in full (other than by reason of the election of the
Corporation to accrue dividends during the Accrual Period); or (ii) any payment
date set for a redemption on which such redemption payment has not been paid in
full, additional dividends shall accumulate in respect of the amount of such
unpaid dividends or unpaid redemption payment (the "Arrearage") at 125% of the
stated dividend rate (or such lesser rate as may be the maximum rate that is
then permitted by applicable law). Such additional dividends in respect of any
Arrearage shall be deemed to accumulate from day to day whether or not earned or
declared until the Arrearage is paid, shall be calculated as of such successive
Dividend Payment Date, and shall constitute an additional Arrearage from and
after any Dividend Payment Date to the extent not paid on such Dividend Payment
Date. References in any Article herein to dividends that have accumulated or
that have been deemed to have accumulated with respect to the Series C Preferred
Stock shall include the amount, if any, of any Arrearage together with any
dividends accumulated or deemed to have accumulated on such Arrearage pursuant
to the immediately preceding two sentences. Additional dividends in respect of
any Arrearage may be declared and paid at any time, in whole or in part, without
reference to any regular Dividend Payment Date, to Registered Holders as they
appear on the stock record books of the Corporation on such record date as may
be fixed by the Board of Directors (which record date shall be no less than 10
days prior to the corresponding payment date). Dividends in respect of any
Arrearage shall be paid in cash.
C. METHOD OF PAYMENT. Dividends paid on the shares of Series C Preferred
Stock in an amount less than the total amount of such dividends at the time
accumulated and payable on all outstanding shares of Series C Preferred Stock
shall be allocated pro rata on a share-by-share basis among all such shares then
outstanding. After the Second Anniversary Date, dividends that are declared and
paid in an amount less than the full amount of dividends accumulated on the
Series C Preferred Stock (and on any Arrearage) shall be applied first to the
earliest dividend which has not theretofore been paid. All cash payments of
dividends on the shares of Series C Preferred Stock shall be made in such coin
or currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts.
D. SPECIAL DIVIDEND RIGHTS.
1. In addition to the dividend rights set forth in paragraph A above,
prior to the consummation of the Recapitalization, the holders of shares of
Series C Preferred Stock shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for such purpose, cash
dividends in an amount per whole share (rounded to the nearest cent) equal to
the Formula Number then in effect times the aggregate per share amount of all
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<PAGE> 39
cash dividends declared or paid on the Common Stock. If, prior to the
consummation of the Recapitalization, the Corporation shall pay any dividend or
make any distribution on the Common Stock payable in assets, securities or other
forms of non-cash consideration, then, in each such case, the Corporation shall
simultaneously pay or make on each whole outstanding share of the Series C
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 C Preferred Stock
pursuant to this paragraph D are hereinafter referred to as "Participating
Dividends." 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 Participation
Dividend in respect of such dividend shall be have been paid. Nothing contained
in this paragraph D shall obligate the Company to declare or pay any dividend or
other distribution on the Common Stock or (except pursuant to paragraph A of
this Article III or in connection with a dividend or distribution on the Common
Stock as provided in this paragraph D) the Series B Preferred Stock.
2. If the Recapitalization is not consummated prior to June 30, 1999, the
Dividend Rate shall be deemed to be 15% per annum during the period commencing
on such date and ending on the date the Recapitalization is consummated.
IV. LIQUIDATION PREFERENCE
A. PRIOR TO THE RECAPITALIZATION. In the event of a liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
occurring prior to the consummation of the Recapitalization, the holders of
then-outstanding shares of Series C Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets are capital or surplus
of any nature, an amount per share equal to the sum of (i) the dividends, if
any, accumulated or deemed to have accumulated thereon, to the date of final
distribution to such holders, whether or not such dividends are declared; and
(ii) the Initial Stated Value thereof, before any payment shall be made or any
assets distributed to the holders of any Junior Liquidation Securities (the
"Initial Preferred Distribution"). After the Initial Preferred Distribution has
been made, the holders of Series C Preferred Stock shall be entitled to share
pro rata with the holders of Common Stock in the distribution of any remaining
assets of the Corporation on the basis of each whole outstanding share of the
Series C Preferred Stock receiving an amount equal to the Formula Number then in
effect times such distribution on each share of the Common Stock. The
distributions on the Series C Preferred Stock pursuant to the immediately
preceding sentence of this paragraph A are hereinafter referred to as
"Participating Liquidation Distributions." No distribution on the Common Stock
in respect of which a Participating Liquidation Distribution is required shall
be paid or set aside for payment on the Common Stock unless a Participating
Liquidation Distribution in respect of such distribution is concurrently paid.
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<PAGE> 40
B. AFTER THE RECAPITALIZATION. Subsequent to the consummation of the
Recapitalization, the holders of the outstanding shares of Series C Preferred
Stock shall be entitled to receive out of the assets of the Corporation, whether
such assets are capital or surplus of any nature, an amount per share equal to
the sum of (i) the dividends, if any, accumulated or deemed to have accumulated
thereon to the date of final distribution to such holders, whether or not such
dividends are declared; and (ii) the Post-Recapitalization Stated Value thereof,
before any payment shall be made or any assets distributed to the holders of any
Junior Liquidation Securities. After any such payment in full after the
consummation of the Recapitalization, the holders of Series C Preferred Stock
shall not, as such, be entitled to any further participation in any distribution
of assets of the Corporation.
C. PARITY SECURITIES. All the assets of the Corporation available for
distribution to stockholders after the liquidation preferences of any Senior
Liquidation Securities shall be distributed ratably (in proportion to the full
distributable amounts to which holders of Series C Preferred Stock and Parity
Liquidation Securities, if any, are respectively entitled upon such dissolution,
liquidation or winding up) among the holders of the then-outstanding shares of
Series C Preferred Stock and Parity Liquidation Securities, if any, when such
assets are not sufficient to pay in full the aggregate amounts payable thereon.
D. MERGER NOT A LIQUIDATION. Neither a consolidation or merger of the
Corporation with or into any other Person or Persons, nor a sale, conveyance,
lease, exchange or transfer of all or part of the Corporation's assets for cash,
securities or other property to a Person or Persons shall be deemed to be a
liquidation, dissolution or winding up of the Corporation for purposes of this
Article IV, but the holders of shares of Series C Preferred Stock shall
nevertheless be entitled from and after any such consolidation, merger or sale,
conveyance, lease, exchange or transfer of all or part of the Corporation's
assets to the rights provided by this Article IV following any such transaction.
Notice of any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation, stating the payment date or dates when, and the place or places
where, the amounts distributable to each holder of shares of Series C Preferred
Stock in such circumstances shall be payable, shall be given by first-class
mail, postage prepaid, mailed not less than 30 days prior to any payment date
stated therein, to holders of record as they appear on the stock record books of
the Corporation as of the date such notices are first mailed.
V. REDEMPTION
A. INTENTIONALLY OMITTED
B. OPTIONAL REDEMPTION. Commencing on the earlier to occur of (x) the
tenth anniversary of the Issue Date and (y) the date on which fewer than 25% of
the shares of Series C Preferred Stock issued on the Issue Date remain
outstanding, and at all times thereafter, the Corporation may, at its option,
redeem all (but not less than all) outstanding shares of Series C Preferred
Stock on a date specified by the Corporation (the "Optional Redemption Date") by
paying the Redemption Price therefor in cash out funds legally available for
such purpose.
C. NOTICE AND REDEMPTION PROCEDURES. Notice of the redemption of shares
of Series C Preferred Stock pursuant to paragraph B of this Article V (a "Notice
of Redemption")
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<PAGE> 41
shall be sent to the holders of record of the shares of Series C Preferred Stock
to be redeemed by first class mail, postage prepaid, at each such holder's
address as it appears on the stock record books of the Corporation not more than
120 nor fewer than 90 days prior to the Optional Redemption Date, which date
shall be set forth in such notice (the "Redemption Date"); provided that failure
to give such Notice of Redemption to any holder, or any defect in such Notice of
Redemption to any holder shall not affect the validity of the proceedings for
the redemption of any shares of Series C Preferred Stock held by any other
holder. In order to facilitate the redemption of shares of Series C Preferred
Stock, the Board of Directors may fix a record date for the determination of the
holders of shares of Series C Preferred Stock to be redeemed not more than 30
days prior to the date the Notice of Redemption is mailed. On or after the
Optional Redemption Date, each holder of the shares called for redemption shall
surrender the certificate evidencing such shares to the Corporation at the place
designated in such notice and shall thereupon be entitled to receive payment of
the Redemption Price for such shares. From and after the Optional Redemption
Date, all dividends on shares of Series C Preferred Stock shall cease to
accumulate and all rights of the holders thereof as holders of Series C
Preferred Stock shall cease and terminate, except to the extent the Corporation
shall default in payment thereof on the Optional Redemption Date.
D. DEPOSIT OF FUNDS. The Corporation shall, on or prior to the Optional
Redemption Date, pursuant to paragraph C of this Article V, deposit with its
transfer agent or other redemption agent in the Borough of Manhattan, The City
of New York having a capital and surplus of at least $500,000,000 selected by
the Board of Directors, as a trust fund for the benefit of the holders of the
shares of Series C Preferred Stock to be redeemed, cash that is sufficient in
amount to redeem the shares to be redeemed in accordance with the Notice of
Redemption, with irrevocable instructions and authority to such transfer agent
or other redemption agent to pay to the respective holders of such shares, as
evidenced by a list of such holders certified by an officer of the Corporation,
the Redemption Price upon surrender of their respective share certificates. Such
deposit shall be deemed to constitute full payment of the Redemption Price for
such shares to the holders, and from and after the date of such deposit, all
rights of the holders of the shares of Series C Preferred Stock that are to be
redeemed as stockholders of the Corporation with respect to such shares, except
the right to receive the Redemption Price upon the surrender of their respective
certificates, shall cease and terminate. No dividends shall accumulate on any
shares of Series C Preferred Stock after the Optional Redemption Date, for such
shares (unless the Corporation shall fail to deposit cash sufficient to redeem
all such shares). In case holders of any shares of Series C Preferred Stock
called for redemption shall not, within two years after such deposit, claim the
cash deposited for redemption thereof, such transfer agent or other redemption
agent shall, upon demand, pay over to the Corporation the balance so deposited.
Thereupon, such transfer agent or other redemption agent shall be relieved of
all responsibility to the holders thereof and the sole right of such holders,
with respect to shares to be redeemed, shall be to receive the Redemption Price
as general creditors of the Corporation. Any interest accrued on any funds so
deposited shall belong to the Corporation, and shall be paid to it from time to
time on demand.
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<PAGE> 42
VI. RESTRICTIONS ON DIVIDENDS
So long as any shares of the Series C Preferred Stock are outstanding, the
Board of Directors shall not declare, and the Corporation shall not pay or set
apart for payment any dividend on any Junior Securities or make any payment on
account of, or set apart for payment money for a sinking or other similar fund
for, the repurchase, redemption or other retirement of, any Junior Securities or
Parity Securities or any warrants, rights or options exercisable for or
convertible into any Junior Securities or Parity Securities (other than the
repurchase, redemption or other retirement of debentures or other debt
securities that are convertible or exchangeable into any Junior Securities or
Parity Securities), or make any distribution in respect of the Junior
Securities, either directly or indirectly, and whether in cash, obligations or
shares of the Corporation or other property (other than distributions or
dividends in Junior Securities to the holders of Junior Securities), and shall
not permit any corporation or other entity directly or indirectly controlled by
the Corporation to purchase or redeem any Junior Securities or Parity Securities
or any warrants, rights, calls or options exercisable for or convertible into
any Junior Securities or Parity Securities (other than the repurchase,
redemption or other retirement of debentures or other debt securities that are
convertible or exchangeable into any Junior Securities or Parity Securities or
the repurchase, redemption or other retirement of Junior Securities or Parity
Securities in exchange for Junior Securities or Parity Securities) unless prior
to or concurrently with such declaration, payment, setting apart for payment,
repurchase, redemption or other retirement or distribution, as the case may be,
all accumulated and unpaid dividends on shares of the Series C Preferred Stock
not paid on the dates provided for in paragraph A of Article III hereof
(including Arrearages and accumulated dividends thereon) shall have been paid,
except that when dividends are not paid in full as aforesaid upon the shares of
Series C Preferred Stock, all dividends declared on the Series C Preferred Stock
and any series of Parity Dividend Securities shall be declared and paid pro rata
so that the amount of dividends so declared and paid on Series C Preferred Stock
and such series of Parity Dividend Securities shall in all cases bear to each
other the same ratio that accumulated dividends (including interest accrued on
or additional dividends accumulated in respect of such accumulated dividends) on
the shares of Series C Preferred Stock and such Parity Dividend Securities bear
to each other.
VII. VOTING RIGHTS
A. On or prior to the consummation of the Recapitalization, the holders
of Series C Preferred Stock shall be entitled to one thousand (1,000) votes per
share of Series C Preferred Stock at each meeting of stockholders of the
Corporation with respect to any and all matters presented to the stockholders of
the Corporation for their action and consideration, other than the election of
directors. After the consummation of the Recapitalization, the holders of Series
C Preferred Stock shall be entitled to the number of votes per share of Series C
Preferred Stock equal to the number of shares of Common Stock for which such
share of Series C Preferred Stock is then convertible pursuant to Article VIII
at each meeting of stockholders of the Corporation with respect to any and all
matters presented to the stockholders of the Corporation for their action and
consideration, other than the election of directors.
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<PAGE> 43
B. So long as any shares of the Series C Preferred Stock are outstanding,
(i) each share of Series C Preferred Stock shall entitle the holder thereof to
vote on all matters voted on by holders of Common Stock, other than the election
of directors; and (ii) the shares of Series C Preferred Stock shall vote
together with shares of Common Stock and shares of Series B Preferred Stock as a
single class.
C. Without the written consent (if action by written consent is
permitted) or affirmative vote of the holders of a majority of the outstanding
shares of Series C Preferred Stock and Series B Preferred Stock, voting together
as a single class, the Corporation shall not (i) authorize, create or issue, or
increase the authorized amount of, (x) any Senior Securities or Parity
Securities or (y) any class or series of capital stock or any security
convertible into or exercisable for any class or series of capital stock,
redeemable mandatorily or redeemable at the option of the holder thereof or (ii)
enter into any Transaction (as defined in paragraph H of Article VIII). Such
vote or consent shall be taken in accordance with the procedures specified in
paragraph E below.
D. Without the written consent (if action by written consent is
permitted) or affirmative vote of the holders of at least a majority of the
outstanding shares of Series C Preferred Stock and Series B Preferred Stock,
voting together as a single class, the Corporation shall not (i) amend, alter or
repeal any provision of the Certificate of Incorporation or the Bylaws, if the
amendment, alteration or repeal alters or changes the powers, preferences or
special rights of the Series C Preferred Stock so as to affect them materially
and adversely or (ii) authorize or take any other action if such action alters
or changes any of the rights of the Series C Preferred Stock in any respect or
otherwise would be inconsistent with the provisions of this Certificate of
Designations and the holders of any class or series of the capital stock of the
Corporation is entitled to vote thereon. Such vote or consent shall be taken in
accordance with the procedures specified in paragraph E below.
E. The foregoing rights of holders of shares of Series C Preferred Stock
to take any actions as provided in this Article VII may be exercised at any
annual meeting of stockholders or at a special meeting of stockholders held for
such purpose as hereinafter provided or at any adjournment thereof, or by the
written consent, delivered to the Secretary of the Corporation, of the holders
of the minimum number of shares required to take such action, if action by
written consent of stockholders of the Corporation is then permitted.
The Chairman of the Board of the Corporation may call, and upon written
request of holders of record of 35% of the outstanding shares of Series C
Preferred Stock and Series B Preferred Stock, addressed to the Secretary of the
Corporation at the principal office of the Corporation shall call, a special
meeting of the holders of shares entitled to vote as provided herein. Such
meeting shall be held within 30 days after delivery of such request to the
Secretary, at the place and upon the notice provided by law and in the By-laws
of the Corporation for the holding of meetings of stockholders.
At each meeting of stockholders at which the holders of shares of Series C
Preferred Stock shall have the right to take any action, the presence in person
or by proxy of the
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<PAGE> 44
holders of record of one-third of the total number of shares of Series C
Preferred Stock and Series B Preferred Stock then outstanding and entitled to
vote on the matter shall be necessary and sufficient to constitute a quorum. At
any such meeting or at any adjournment thereof:
(A) the absence of a quorum of the holders of shares of Series C
Preferred Stock shall not prevent the election of directors to be elected
by the holders of shares of Series B Preferred Stock or the taking of any
action as provided in this Article VII; and
(B) in the absence of a quorum of the holders of shares of Series C
Preferred Stock and Series B Preferred Stock, a majority of the holders of
such shares present in person or by proxy shall have the power to adjourn
the meeting as to the actions to be taken by the holders of shares of
Series C Preferred Stock and Series B Preferred Stock, from time to time
and place to place without notice other than announcement at the meeting
until a quorum shall be present.
For taking of any action as provided in this Article VII by the holders of
shares of Series C Preferred Stock and Series B Preferred Stock, each such
holder shall have one vote for each share of such stock standing in his name on
the transfer books of the Corporation as of any record dated fixed for such
purpose or, if no such date be fixed, at the close of business on the Business
Day next preceding the day on which notice is given, or if notice if waived, at
the close of business on the Business Day next preceding the day on which the
meeting is held.
F. The Corporation shall not enter into any agreement or issue any
security that prohibits, conflicts or is inconsistent with, or would be breached
by, the Corporation's performance of its obligations hereunder.
VIII. CONVERSION
The holders of the Series C Preferred Stock shall have conversion rights as
follows:
A. Each share of Series C Preferred Stock shall be convertible at the
direction of, and by notice to the Corporation from, (i) the holder
thereof or (ii) the holders of a majority of the outstanding shares of
Series C Preferred Stock, at any time, at the office of the
Corporation or any transfer agent for such Series, into one thousand
(1,000) fully paid and nonassessable shares of Common Stock subject
(x) to adjustment from time to time as provided below (as so adjusted,
the "conversion ratio") and (y) (prior to the consummation of the
Recapitalization) to limitations resulting from the available number
of shares of Common Stock which may be reserved for issuance upon such
conversion, provided, that any conversion pursuant to clause (ii)
above of less than all of the outstanding shares of Series C Preferred
Stock shall be on a pro rata basis amongst all holders of Series C
Preferred Stock. After consummation of the Recapitalization, the
number "1,000" in this paragraph shall be "1", subject to adjustment
as provided in paragraph VIII.G.
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B. If a holder of Series C Preferred Stock gives notice (an "Optional
Conversion Notice") of conversion under paragraph A above, such holder
shall surrender with such Optional Conversion Notice the duly endorsed
certificate or certificates for the Series C Preferred Stock being
converted, at the office of the Corporation or of any transfer agent
for such Series, and shall state therein the name or names in which
the certificate or certificates for shares of Common Stock are to be
issued. If the holders of a majority of the outstanding shares of
Series C Preferred Stock give notice of conversion under paragraph A
above, the Corporation shall notify all other record holders of Series
C Preferred Stock (a "Mandatory Conversion Notice"). Following receipt
of a Mandatory Conversion Notice, the holders of Series C Preferred
Stock shall surrender the certificate or certificates therefor duly
endorsed, at the office of the Corporation or of any transfer agent
for such Series, and shall state therein the name or names in which
the certificate or certificates for shares of Common Stock are to be
issued. The Corporation shall, as soon as practicable after the
surrender of a Series C Preferred Stock certificate or certificates
pursuant to an Optional Conversion Notice or Mandatory Conversion
Notice, issue and deliver at such office to such holder, or to the
nominee or nominees of such holder, a certificate or certificates for
the number of shares of Common Stock to which such holder shall be
entitled as aforesaid. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such
Optional Conversion Notice or Mandatory Conversion Notice, as
applicable, and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all
purposes as the recordholder or holders of such shares of Common Stock
as of such date. The issuance of certificates or shares of Common
Stock upon conversion of shares of Series C Preferred Stock shall be
made without charge for any issue, stamp or other similar tax in
respect of such issuance.
C. No fractional shares shall be issued upon conversion of any shares of
Series C Preferred Stock and the number of shares of Common Stock to
be issued shall be rounded down to the nearest whole share, and the
holder of Series C Preferred Stock shall be paid in cash for any
fractional share.
D. In case at any time or from time to time the Corporation shall pay any
dividend or make any other distribution to the holders of its Common
Stock or other class of securities, or shall offer for subscription
pro rata to the holders of its Common Stock or other class of
securities any additional shares of stock of any class or any other
right, or there shall be any capital reorganization or
reclassification of the Common Stock of the Corporation or
consolidation or merger of the Corporation with or into another
corporation, or any sale or conveyance to another corporation of the
property of the Corporation as an entirety or substantially as an
entirety, or there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation, then, in any one or more
of said cases the Corporation shall give at least 20 days' prior
written notice (the time of mailing of such notice shall be deemed to
be the time of giving thereof) to the registered holders of the Series
C
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Preferred Stock at the addresses of each as shown on the books of the
Corporation maintained by the Transfer Agent thereof of the date on
which (i) the books of the Corporation shall close or a record shall
be taken for such stock dividend, distribution or subscription rights
or (ii) such reorganization, reclassification, consolidation, merger,
sale or conveyance, dissolution, liquidation or winding up shall take
place, as the case may be, provided that in the case of any
Transaction to which paragraph H applies the Corporation shall give at
least 30 days' prior written notice as aforesaid. Such notice shall
also specify the date as of which the holders of the Common Stock of
record shall participate in said dividend, distribution or
subscription rights or shall be entitled to exchange their Common
Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, sale or
conveyance or participate in such dissolution, liquidation or winding
up, as the case may be. Failure to give such notice shall not
invalidate any action so taken.
E. From and after the Recapitalization, the Corporation shall at all
times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Series C Preferred Stock, such number of
its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of Series C Preferred
Stock, and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient to effect the conversion of
all then outstanding shares of Series C Preferred Stock, then in
addition to such other remedies as shall be available to the holder of
Series C Preferred Stock, the Corporation will take such corporate
action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes.
F. Any notice required by the provisions of paragraph D to be given the
holders of shares of Series C Preferred Stock shall be deemed given if
sent by facsimile transmission, by telex, or if deposited in the
United States mail, postage prepaid, and addressed to each holder of
record at his, her or its address appearing on the books of the
Corporation.
G. The conversion ratio shall be subject to adjustment from time to time
as follows:
(i) In case the Corporation shall at any time or from time to
time after the Issue Date (A) pay a dividend or make a distribution,
on the outstanding shares of Common Stock in shares of Common Stock,
(B) subdivide the outstanding shares of Common Stock into a larger
number of shares of Common Stock, (C) combine the outstanding shares
of Common Stock into a smaller number of shares or (D) issue by
reclassification of the shares of Common Stock any shares of capital
stock of the Corporation, then, and in each such case, the conversion
ratio in effect immediately prior to such event or the record date
therefor, whichever is earlier, shall be adjusted so that the holder
of any shares of
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<PAGE> 47
Series C Preferred Stock thereafter surrendered for conversion shall
be entitled to receive the number of shares of Common Stock or other
securities of the Corporation which such holder would have owned or
have been entitled to receive after the happening of any of the events
described above, had such shares of Series C Preferred Stock been
surrendered for conversion immediately prior to the happening of such
event or the record date therefor, whichever is earlier. An adjustment
made pursuant to this clause (i) shall become effective (x) in the
case of any such dividend or distribution, immediately after the close
of business on the record date for the determination of holders of
shares of Common Stock entitled to receive such dividend or
distribution, or (y) in the case of any such subdivision,
reclassification or combination, at the close of business on the day
upon which such corporate action becomes effective.
(ii) In the case the Corporation shall, after the Issue Date,
issue shares of Common Stock at a price per share, or securities
convertible into or exchangeable for shares of Common Stock
("Convertible Securities") having a "Conversion Price" (as defined
below) less than the Current Market Price (for a period of 15
consecutive trading days prior to such date), then, and in each such
case, the conversion ratio shall be adjusted so that the holder of
each share of Series C Preferred Stock shall be entitled to receive,
upon the conversion thereof, the number of shares of Common Stock
determined by multiplying (A) the applicable conversion ratio on the
day immediately prior to such date by (B) a fraction, the numerator of
which shall be the sum of (1) the number of shares of Common Stock
outstanding on the date on which such shares or Convertible Securities
are issued and (2) the number of additional shares of Common Stock
issued, or into which the Convertible Securities may convert, and the
denominator of which shall be the sum of (x) the number of shares of
Common Stock outstanding on such date and (y) the number of shares of
Common Stock which the aggregate consideration receivable by the
Corporation for the total number of shares of Common Stock so issued,
or the number of shares of Common Stock which the aggregate of the
Conversion Price of such Convertible Securities so issued, would
purchase at such Current Market price on such date. An adjustment made
pursuant to this clause (ii) shall be made on the next Business Day
following the date on which any such issuance is made and shall be
effective retroactively immediately after the close of business on
such date. For purposes of this clause (ii), the aggregate
consideration receivable by the Corporation in connection with the
issuance of any securities shall be deemed to be the sum of the
aggregate offering price to the public (before deduction of
underwriting discounts or commissions and expenses payable to third
parties), and the "Conversion Price" of any Convertible Securities is
the total amount received or receivable by the Corporation as
consideration for the issue or sale of such Convertible Securities
(before deduction of underwriting discounts or commissions and
expenses payable to third parties) plus the minimum aggregate amount
of additional consideration, if any, payable to the Corporation upon
the conversion, exchange or exercise of any such Convertible
Securities. Neither (A)
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<PAGE> 48
the issuance of any shares of Common Stock (whether treasury shares or
newly issued shares) pursuant to a dividend or distribution on, or
subdivision, combination or reclassification of, the outstanding
shares of Common Stock requiring an adjustment in the conversion ratio
pursuant to clause (i) of this paragraph G, or pursuant to any
employee benefit plan or program of the Corporation or pursuant to any
option, warrant, right, or Convertible Security outstanding as of the
date hereof (including, but not limited to, the Rights, the Series B
Preferred Stock, the Series C Preferred Stock and the Warrants) nor
(B) the issuance of shares of Common Stock pursuant thereto shall be
deemed to constitute an issuance of Common Stock or Convertible
Securities by the Corporation to which this clause (ii) applies. Upon
expiration of any Convertible Securities which shall not have been
exercised or converted and for which an adjustment shall have been
made pursuant to this clause (ii), the Conversion Price computed upon
the original issue thereof shall upon such expiration be recomputed as
if the only additional shares of Common Stock issued were such shares
of Common Stock (if any) actually issued upon exercise of such
Convertible Securities and the consideration received therefor was the
consideration actually received by the Corporation for the issue of
such Convertible Securities (whether or not exercised or converted)
plus the consideration actually received by the Corporation upon such
exercise of conversion.
(iii) In case the Corporation shall at any time or from time to
time after the Issue Date declare, order, pay or make a dividend or
other distribution (including, without limitation, any distribution of
stock or other securities or property or rights or warrants to
subscribe for securities of the Corporation or any of its Subsidiaries
by way of dividend or spin-off), on its Common Stock, other than (A)
regular quarterly dividends payable in cash in an aggregate amount not
to exceed 15% of net income from continuing operations before
extraordinary items of the Corporation, determined in accordance with
generally accepted accounting principles, during the period (treated
as one accounting period) commencing on July 1, 1998, and ending on
the date such dividend is paid or (B) dividends or distributions of
shares of Common Stock which are referred to in clause (i) of this
paragraph G, then, and in each such case, the conversion ratio shall
be adjusted so that the holder of each share of Series C Preferred
Stock shall be entitled to receive, upon the conversion thereof, the
number of shares of Common Stock determined by multiplying (1) the
applicable conversion ratio on the day immediately prior to the record
date fixed for the determination of stockholders entitled to receive
such dividend or distribution by (2) a fraction, the numerator of
which shall be the then Current Market Price per share of Common Stock
for the period of 20 Trading Days preceding such record date, and the
denominator of which shall be such Current Market Price per share of
Common Stock for the period of 20 Trading Days preceding such record
date less the Fair Market Value (as defined in Article IX) per share
of Common Stock (as determined in good faith by the Board of Directors
of the Corporation, a certified resolution with
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<PAGE> 49
respect to which shall be mailed to each holder of shares of Series C
Preferred Stock) of such dividend or distribution; provided, however,
that in the event of a distribution of shares of capital stock of a
Subsidiary of the Corporation (a "Spin-Off") made to holders of shares
of Common Stock, the numerator of such fraction shall be the sum of
the Current Market Price per share of Common Stock for the period of
20 Trading Days preceding the 35th Trading Day after the effective
date of such Spin-Off and the Current Market Price of the number of
shares (or the fraction of a share) of capital stock of the Subsidiary
which is distributed in such Spin-Off in respect of one share of
Common Stock for the period of 20 Trading Days preceding such 35th
Trading Day and the denominator of which shall be the current market
price per share of the Common Stock for the period of 20 Trading Days
proceeding such 35th Trading Day. An adjustment made pursuant to this
clause (iii) shall be made upon the opening of business on the next
Business Day following the date on which any such dividend or
distribution is made and shall be effective retroactively immediately
after the close of business on the record date fixed for the
determination of stockholders entitled to receive such dividend or
distribution; provided, however, if the proviso to the preceding
sentence applies, then such adjustment shall be made and be effective
as of such 35th Trading Day after the effective date of such Spin-Off.
(iv) For purposes of this paragraph G, the number of shares of
Common Stock at any time outstanding shall not include any shares of
Common Stock then owned or held by or for the account of the
Corporation.
(v) The term "dividend", as used in this paragraph G shall mean
a dividend or other distribution upon stock of the Corporation except
pursuant to the Rights Agreement (as defined in Article IX).
Notwithstanding anything in this Article VIII to the contrary, the
conversion ratio shall not be adjusted as a result of any dividend,
distribution or issuance of securities of the Corporation pursuant to
the Rights Agreement.
(vi) Anything in this paragraph G to the contrary
notwithstanding, the Corporation shall not be required to give effect
to any adjustment in the conversion ratio unless and until the net
effect of one or more adjustments (each of which shall be carried
forward), determined as above provided, shall have resulted in a
change of the conversion ratio by at least one-hundredth of one share
of Common Stock, and when the cumulative net effect of more than one
adjustment so determined shall be to change the conversion ratio by at
least one-hundredth of one share of Common Stock, such change in
conversion ratio shall thereupon be given effect.
(vii) The certificate of any firm of independent public
accountants of recognized standing selected by the Board of Directors
of the Corporation (which may be the firm of independent public
accountants regularly employed by the
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<PAGE> 50
Corporation) shall be presumptively correct for any computation made
under this paragraph G.
(viii) If the Corporation shall take a record of the holders of
its Common Stock for the purpose of entitling them to receive a
dividend or other distribution, and shall thereafter and before the
distribution to stockholders thereof legally abandon its plan to pay
or deliver such dividend or distribution, then thereafter no
adjustment in the number of shares of Common Stock issuable upon
exercise of the right of conversion granted by this paragraph G or in
the conversion ratio then in effect shall be required by reason of the
taking of such record.
(ix) There shall be no adjustment of the conversion ratio in case
of the issuance of any stock of the Corporation in a merger,
reorganization, acquisition or other similar transaction except as set
forth in paragraph G(i), G(ii) and H of this Article VIII.
H. In case of any reorganization or reclassification of outstanding
shares of Common Stock (other than a reclassification covered by
paragraph G(i) of this Article VIII), or in case of any consolidation
or merger of the Corporation with or into another corporation, or in
the case of any sale or conveyance to another corporation of the
property of the Corporation as an entirety or substantially as an
entirety (each of the foregoing being referred to as a "Transaction"),
each share of Series C Preferred Stock then outstanding shall
thereafter be convertible into, in lieu of the Common Stock issuable
upon such conversion prior to consummation of such Transaction, the
kind and amount of shares of stock and other securities and property
receivable (including cash) upon the consummation of such Transaction
by a holder of that number of shares of Common Stock into which one
share of Series C Preferred Stock was convertible immediately prior to
such Transaction (including, on a pro rata basis, the cash, securities
or property received by holders of Common Stock in any tender or
exchange offer that is a step in such Transaction). In case securities
or property other than Common Stock shall be issuable or deliverable
upon conversion as aforesaid, then all reference in this paragraph H
shall be deemed to apply, so far as appropriate and as nearly as may
be, to such other securities or property.
I. Upon any adjustment of the conversion ratio then in effect and any
increase or decrease in the number of shares of Common Stock issuable
upon the operation of the conversion set forth in Article VIII, then,
and in each such case, the Corporation shall promptly deliver to the
registered holders of the Series C Preferred and Common Stock, a
certificate signed by the President or a Vice President and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Corporation setting forth in reasonable detail the
event requiring the adjustment and the method by which such adjustment
was calculated and specifying the conversion ratio then in effect
following such adjustment and
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<PAGE> 51
the increased or decreased number of shares issuable upon the
conversion set forth in this Article VIII.
IX. ADDITIONAL DEFINITIONS
For the purposes of this Certificate of Designations of Series C Preferred
Stock, the following terms shall have the meanings indicated:
"Accrual Period" means the end of the first quarterly period following the
Second Anniversary Date.
"Beneficially Own" with respect to any securities means having "beneficial
ownership" of such securities (as determined pursuant to Rule 13d-3 under the
Exchange Act as in effect on the date hereof, except that a Person shall be
deemed to Beneficially Own all such securities that such Person has the right to
acquire whether such right is exercisable immediately or after the passage of
time). The terms "Beneficial Ownership" and "Beneficial Owner" have correlative
meanings.
"Business Day" means any day, other than a Saturday, Sunday or a day on
which banking institutions in the State of New York are authorized or obligated
by law or executive order to close.
"Bylaws" means the Bylaws of the Corporation, as amended.
"Current Market Price", when used with reference to shares of Common Stock
or other securities on any date, shall mean the closing price per share of
Common Stock or such other securities on such date and, when used with reference
to shares of Common Stock or other securities for any period shall mean the
average of the daily closing prices per share of Common Stock or such other
securities for such period. The closing price for each day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on the New York Stock Exchange or,
if the Common Stock or such other securities are not listed or admitted to
trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Common Stock or such
other securities are listed or admitted to trading or, if the Common Stock is
not listed or admitted to trading on any national securities exchange, the last
quoted sale price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. National Market System or such other
securities are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Common Stock or such other securities selected by the Board of Directors
of the Corporation. If the Common Stock or such other securities are not
publicly held or so listed or publicly traded, "Current Market Price" shall mean
the Fair Market Value per share of Common Stock or of such other securities as
determined in good faith by the Board of Directors of the
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<PAGE> 52
Corporation based on an opinion of an independent investment banking firm with
an established national reputation as a valuer of securities, which opinion may
be based on such assumption as such firm shall deem to be necessary and
appropriate.
"Equity Securities" of any Person means any and all common stock, preferred
stock and any other class of capital stock of, and any partnership or limited
liability company interests of such Person or any other similar interests of any
Person that is not a corporation, partnership or limited liability company.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder, from time to time.
"Fair Market Value" shall mean the amount which a willing buyer would pay a
willing seller in an arm's-length transaction.
"Formula Number" shall mean one thousand (1,000) prior to consummation of
the Recapitalization; provided, however, that if at any time prior to the
consummation of the Recapitalization, 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 prior to the consummation of the Recapitalization 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 C
Preferred Stock continues to be the economic equivalent of a Formula Number of
shares of Common Stock immediately prior to such merger, reclassification, or
change.
"Group" has the meaning set forth in Rule 13d-5 under the
Exchange Act.
"Issue Date" shall mean the first date on which shares of Series
C Preferred Stock are issued. "Person" means any individual, corporation,
company, association, partnership, joint venture, trust or unincorporated
organization, or a government or any agency or political subdivision thereof.
"Post-Recapitalization Stated Value" shall be equal to $1.00.
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<PAGE> 53
"Recapitalization" means the amendment of the Corporation's Certificate of
Incorporation to increase the authorized shares of Common Stock from 50,000,000
to 400,000,000, and the authorized shares of Preferred Stock from 1,000,000 to
200,000,000, and the subsequent one thousand-for-one split of Series C Preferred
Stock and Series B Preferred Stock.
"Redemption Price" of a share of Series C Preferred Stock shall mean the
sum of (a) the dividends, if any, accumulated or deemed to have accumulated
thereon to the Optional Redemption Date, whether or not such dividends are
declared plus (b) either (i) the Initial Stated Value thereof (if the
Recapitalization has not been consummated prior to June 30, 1999) or (ii) the
Post-Recapitalization Stated Value thereof (if the Recapitalization has been
consummated prior to June 30, 1999), in each case subject to adjustment for
splits, reclassifications, recombinations or similar events.
"Rights" shall mean any rights to purchase securities of the Corporation
issued pursuant to any Rights Agreement.
"Rights Agreement" shall mean the Rights Agreement, dated as of June 21,
1996, between the Company and Wells Fargo Bank as rights agent, and all
amendments, supplements and replacements thereof.
"Second Anniversary Date" means the second anniversary of the Issue Date.
"Subsidiary" means, as to any Person, any other Person of which more than
50% of the shares of the Voting Securities or other voting interests are owned
or controlled, or the ability to select or elect 50% or more of the directors or
similar managers is held, directly or indirectly, by such first Person and one
or more of its Subsidiaries.
"Trading Day" means a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open for
the transaction of business or, if the Common Stock is not listed or admitted to
trading on any national securities exchange a Business Day.
"Voting Securities" means, (i) with respect to the Company, the Equity
Securities of the Company entitled to vote generally for the election of
directors of the Company, and (ii) with respect to any other Person, any
securities of or interests in such Person entitled to vote generally for the
election of directors or any similar managing person of such Person.
X. MISCELLANEOUS
A. NOTICES. Any notice referred to herein shall be in writing and, unless
first-class mail shall be specifically permitted for such notices under the
terms hereof, shall be deemed to have been given upon personal delivery thereof,
upon transmittal of such notice by telecopy (with confirmation of receipt by
telecopy or telex) or five days after transmittal by registered or certified
mail, postage prepaid, addressed as follows:
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<PAGE> 54
(i) if to the Corporation, to its office at 2 California Plaza, 350
South Grand Avenue, Los Angeles, California 90071 (Attention:
General Counsel)
or to the transfer agent for the Series C Preferred Stock;
(ii) if to a holder of the Series C Preferred Stock, to such holder at
the address of such holder as listed in the stock record books of
the Corporation (which may include the records of any transfer
agent for the Series C Preferred Stock); or
(iii) to such other address as the Corporation or such holder, as the
case may be, shall have designated by notice similarly given.
B. REACQUIRED SHARES. Any shares of Series C Preferred Stock redeemed,
purchased or otherwise acquired by the Corporation, directly or indirectly, in
any manner whatsoever shall be retired and canceled promptly after the
acquisition thereof (and shall not be deemed to be outstanding for any purpose)
and, if necessary to provide for the lawful redemption or purchase of such
shares, the capital represented by such shares shall be reduced in accordance
with the Delaware General Corporation Law. All such shares of Series C Preferred
Stock shall upon their cancellation and upon the filing of an appropriate
certificate with the Secretary of State of the State of Delaware, become
authorized but unissued shares of Preferred Stock, par value $0.001 per share,
of the Corporation and may be reissued as part of another series of Preferred
Stock, par value $0.001 per share, of the Corporation subject to the conditions
or restrictions on issuance set forth herein.
C. ENFORCEMENT. Any registered holder of shares of Series C Preferred
Stock may proceed to protect and enforce its rights and the rights of such
holders by any available remedy by proceeding at law or in equity to protect and
enforce any such rights, whether for the specific enforcement of any provision
in this Certificate of Designations or in aid of the exercise of any power
granted herein, or to enforce any other proper remedy.
D. TRANSFER TAXES. Except as otherwise agreed upon pursuant to the terms
of this Certificate of Designations, the Corporation shall pay any and all
documentary, stamp or similar issue or transfer taxes and other governmental
charges that may be imposed under the laws of the United States of America or
any political subdivision or taxing authority thereof or therein in respect of
any issue or delivery of Common Stock on conversion of, or other securities or
property issued on account of, shares of Series C Preferred Stock pursuant
hereto or certificates representing such shares or securities. The Corporation
shall not, however, be required to pay any such tax or other charge that may be
imposed in connection with any transfer involved in the issue or transfer and
delivery of any certificate for Common Stock or other securities or property in
a name other than that in which the shares of Series C Preferred Stock so
exchanged, or on account of which such securities were issued, were registered
and no such issue or delivery shall be made unless and until the Person
requesting such issue has paid to the Corporation the amount of any such tax or
has established to the satisfaction of the Corporation that such tax has been
paid or is not payable.
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<PAGE> 55
E. TRANSFER AGENT. The Corporation may appoint, and from time to time
discharge and change, a transfer agent for the Series C Preferred Stock. Upon
any such appointment or discharge of a transfer agent, the Corporation shall
send notice thereof by first-class mail, postage prepaid, to each holder of
record of shares of Series C Preferred Stock.
F. RECORD DATES. In the event that the Series C Preferred Stock shall be
registered under either the Securities Act of 1933, as amended, or the Exchange
Act, the Corporation shall establish appropriate record dates with respect to
payments and other actions to be made with respect to the Series C Preferred
Stock.
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<PAGE> 56
IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf
of the Corporation by its Executive Vice President, General Counsel and
Secretary and attested by its Assistant Secretary, this 10th day of February ,
1999.
AAMES FINANCIAL CORPORATION
By: /s/ Barbara S. Polsky
------------------------------------
Name: Barbara S. Polsky
Title: Executive Vice President, General
Counsel and Secretary
[Corporate Seal]
ATTEST:
/s/ John F. Madden, Jr.
- -------------------------------------
John F. Madden Jr.
Assistant Secretary
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<PAGE> 1
EXHIBIT 3.2
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> 2
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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<PAGE> 3
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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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;
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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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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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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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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
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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
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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
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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
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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.
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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
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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
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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> 17
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> 18
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
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<PAGE> 19
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> 20
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.
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<PAGE> 21
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
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<PAGE> 22
AMENDMENT NO. 2 TO
BYLAWS
OF
AAMES FINANCIAL CORPORATION
This Amendment No. 2 to the Bylaws of Aames Financial Corporation, a
Delaware corporation (the "Corporation"), is dated November 19, 1997.
Article IV, Section 1 ("Officers") of the Bylaws is hereby amended to
read in its entirety as follows:
The officers of the Corporation shall be a Chairman (or
Co-Chairmen), a Chief Executive Officer and/or 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 of this
Article. Any number of offices may be held by the same person.
References to Chairman in these Bylaws refer to Co-Chairmen, if
applicable, and the act of either one of such Co-Chairmen shall be the
act of the Chairman.
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. 2 to the Bylaws of said Corporation
was duly adopted by the Board of Directors on November 19, 1997.
IN WITNESS WHEREOF, I have hereunto subscribed my name as of this 19th
day of November, 1997.
/s/ Barbara S. Polsky
----------------------------------------
Barbara S. Polsky
Secretary
<PAGE> 23
SECRETARY'S CERTIFICATE
I, the undersigned, do hereby certify:
1. That I am the duly acting Assistant Secretary of Aames Financial
Corporation, a California corporation (the "Company"); and
2. That the following is a true and correct copy of a resolution of
the Company adopted by Unanimous Written Consent of the Board of Directors of
the Company on October 6, 1998.
AMENDMENT TO BYLAWS
(NUMBER AND QUALIFICATION)
WHEREAS, the number of directors of the Company is currently
fixed at nine; with two vacancies as a result of the resignation of
Howard Gittis and Gerald Ford;
WHEREAS, ARTICLE III, Section 2 of the Bylaws of the Company
provides that the Board shall consist of between three and nine members,
the exact number to be fixed by the Board from time-to-time; and
WHEREAS, the Board desires to decrease the size of the Board to
seven members.
NOW, THEREFORE, BE IT HEREBY RESOLVED, that the number of
directors to comprise the full Board of Directors shall be fixed at
seven.
The foregoing resolution is presently in full force and effect and has
not been revoked or rescinded as of the date hereof.
IN WITNESS WHEREOF, I have hereupon set the seal of this Company this
9th day of November, 1998.
/s/ BARBARA S. POLSKY
----------------------------------------
Barbara S. Polsky, Secretary
[SEAL]
<PAGE> 24
SECRETARY'S CERTIFICATE
I, the undersigned, do hereby certify:
1. That I am the duly acting Secretary of Aames Financial
Corporation, a Delaware corporation (the "Company"); and
2. That the following is a true and correct copy of a resolution of
the Company adopted by Written Consent of the Board of Directors of the Company
on February 10, 1999.
BYLAW AMENDMENT (INCREASE IN SIZE OF BOARD)
WHEREAS, the number of directors constituting the entire Board
of Directors of the Company (the "Board") is currently fixed at seven
members;
WHEREAS, ARTICLE III, Section 2 of the Bylaws of the Company
(the "Bylaws") provides that the Board shall consist of between three
and nine members, the exact number to be fixed by the Board from
time-to-time; and
WHEREAS, the Board desires to increase the size of the Board to
nine members.
NOW, THEREFORE, BE IT HEREBY RESOLVED, that the number of
directors constituting the entire Board is hereby fixed at nine (9)
members.
I certify that the foregoing is true and correct to the best of my
knowledge.
WITNESS MY HAND AND SEAL of this Company this 10th day of February,
1999.
/s/ Barbara S. Polsky
----------------------------------------
Barbara S. Polsky
Secretary
[SEAL]
<PAGE> 25
ASSISTANT SECRETARY'S CERTIFICATE
I, the undersigned, do hereby certify:
1. That I am the duly acting Assistant Secretary of Aames Financial
Corporation, a Delaware corporation (the "Company"); and
2. That the following is a true and correct copy of resolutions of
the Company adopted by the Board of Directors of the Company on August 9, 1999.
AMEND BYLAWS
WHEREAS, Article IV, Section 1 of the Bylaws of the Company
currently include the positions of Chairman, Co-Chairman and Vice
Chairman as officers of the Company; and
WHEREAS, the Board of Directors has determined that the Bylaws
should be amended to exclude the positions of Chairman, Co-Chairman and
Vice Chairman from the list of officers of the Company.
NOW, THEREFORE, BE IT HEREBY RESOLVED, that Article IV, Section
1 of the Bylaws of the Company is amended and restated to read as
follows:
"Section 1. Officers. The officers of the Corporation shall be a
Chief Executive Officer and/or 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."
RECONSTITUTE AUDIT COMMITTEE
WHEREAS, it is deemed to be in the best interests of the Board
of Directors to reconstitute the membership on the Audit Committee;
WHEREAS, under the New York Stock Exchange rules the Audit
Committee must be comprised solely of directors independent of
management and free from any relationship that would interfere with the
exercise of independent judgment as a committee member; and
WHEREAS, directors who are affiliates of the Company or officers
or employees of the Company would not be qualified for Audit Committee
membership pursuant to the New York Stock Exchange rules; and
WHEREAS, the Board of Directors has determined George W. Coombe,
Jr. and Georges C. St. Laurent are independent of management, free from
any relationship that would interfere with the exercise of independent
judgment as a committee member and are qualified for Audit Committee
membership because they are not affiliates, officers or employees of the
Company.
NOW, THEREFORE, BE IT HEREBY RESOLVED, that the following Board
members who qualify for Audit Committee Membership be, and they hereby
are, appointed to the Audit Committee:
George W. Coombe, Jr.
Georges C. St. Laurent
<PAGE> 26
The foregoing resolution is presently in full force and effect and has
not been revoked or rescinded as of the date hereof.
IN WITNESS WHEREOF, I have hereupon set the seal of this Company this
20th day of August, 1999.
/s/ John F. Madden, Jr.
----------------------------------------
John F. Madden, Jr.
Assistant Secretary
[SEAL]
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made and entered into as
of May 12, 1997 by and between AAMES FINANCIAL CORPORATION, a Delaware
corporation (the "Parent"), and DAVID SKLAR, an individual ("Executive").
W I T N E S S E T H:
WHEREAS, the parties wish to provide for the terms and conditions of
Executive's employment as an Executive Vice President of the Parent and Chief
Financial Officer of Aames Capital Corporation (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 parties agree as set forth
below.
1. EMPLOYMENT AND DUTIES. The Parent hereby employs Executive to
serve as an Executive Vice President--Finance of the Parent and the Chief
Financial Officer of the Company, with the powers and duties customarily
accorded to such positions, 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 Parent.
2. TERM. The initial term of this Agreement shall begin as of May
12, 1997. The initial term shall expire on May 12, 2000, 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
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. During the first year of the term of
this Agreement, Executive's Base Salary shall be $250,000. 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 $250,000 per
annum during the term of this Agreement.
<PAGE> 2
(b) Discretionary Bonus. Upon the completion of the fiscal
year ended June 30, 1998, Executive shall be eligible to receive a cash bonus
("Discretionary Bonus") in an amount, if any, as shall be determined by the
Board of Directors of the Parent (the "Parent Board"). Any such discretionary
bonus shall be paid as soon as practicable following the completion of the 1998
fiscal year.
(c) Performance Bonus. For fiscal years commencing after
June 30, 1998, Executive shall be entitled to participate in the Parent's
performance bonus plan for executive officers as then in existence, if any (the
"Performance Bonus). The computations and payment of the Performance Bonus shall
be as provided in the Parent's performance bonus plan.
(d) Stock Bonus. On the commencement of the Initial Term,
the Parent shall grant Executive options to purchase 125,000 shares of the
Parent Common Stock (the "Options"). Of such Options, 25,000 shall vest
immediately upon grant and an additional 25,000 shall vest on each anniversary
of the commencement of the Initial Term. To the extent permitted by Section 422
of the Internal Revenue Code of 1986, the Options shall be incentive stock
options, and all other Options shall be nonqualified stock options. The Options
will be exercisable at an exercise price of $12 (the closing price of the
Parent's Common Stock on the New York Stock Exchange on May 9, 1997). The
Options granted as incentive stock options shall be issued under the Parent'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 Parent or
similar reorganization. The Options granted as nonqualified stock options shall
be issued outside the Parent'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, recapitalizations, consolidations and mergers, as are provided in,
the Parents 1996 Stock Incentive Plan. The Parent shall use its best efforts to
register the shares of Common Stock issuable upon exercise of the nonqualified
stock options and shall use its best efforts to maintain a current registration
statement under the Securities Act, as amended, in respect of such shares.
4. Other Executive Benefits. During the term of this Agreement, the
Parent shall provide to the Executive benefits commensurate with his position,
including each of the following benefits:
(a) Group Medical and Life Insurance Benefits. The Parent
shall provide for Executive, at the Parent'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
Parent. Said coverage shall be in existence or shall take effect as of the
commencement of the Initial Term, subject to applicable waiting periods.
Provided the following supplemental life insurance may be obtained at a
reasonable cost, the Parent shall provide Executive with a $500,000 standard
term life insurance policy in addition to the normal customary life insurance
benefits provided to the Parent's executives.
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<PAGE> 3
(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 Parent or the Company.
(c) Business Expenses. The Parent 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 Parent's travel and expense
policies in effect generally from time to time for other officers of the Parent.
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.
(d) Benefit Plans. Executive shall be entitled to
participate in any pension, profit-sharing, stock option, stock purchase or
other benefit plan of the Parent 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 Parent 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, 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 Parent, Company, 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 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 Parent or 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 Parent or the Company, has been made available, or is made
available, on an unrestricted basis to a third party by the Parent or the
Company or 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
3
<PAGE> 4
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 Parent
or 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 Parent or 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 Parent or the Company; any action by Executive involving the
arrest of Executive, for violation of any criminal statute consisting of a
felony if the Parent 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 Parent or 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 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 Parent or 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 Parent's and
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 Discretionary Bonus or 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
4
<PAGE> 5
or other plan in which Executive is then a participant. All Options that have
become exercisable as of the date of death 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
Parent 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, if any, and
all benefits then in effect; provided, that the Parent may relieve Executive of
his 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 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 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. Up to and including November 12,
1997, this Agreement may be terminated at will at any time upon sixty (60) days'
written notice of termination by the Parent or the Company. In the event Parent
or Company elects to terminate this Agreement during the period commencing May
12, 1997 up to and including November 12, 1997, 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
Base Salary for six (6) months, less required withholding and payroll taxes. At
any time after November 12, 1997, if the Parent or the Company elects to
terminate Executive for any reason other than as provided in Section 6(a) or if
the Parent or 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) and, in the event termination occurs after June 30, 1998, an amount
equal to (i) in the event termination occurs prior to September 30, 1998, two
times the Discretionary Bonus, if any, paid or (ii) in the event termination
occurs after September 30, 1998, 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 participated in the Parent's
performance bonus plan for less than two years, the amount of Performance Bonus
paid to Executive for the entire period of participation multiplied by a
fraction, the numerator
5
<PAGE> 6
of which is the number eight and the denominator of which is the actual number
of fiscal quarters for which Executive participated in the Parent's performance
bonus plan). 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 of 12 months thereafter. In the event of a
Severance Termination, the Parent 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 Parent or 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 Parent shall fail to cause Executive to remain an Executive
Vice President of the Parent; (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 Parent shall
require Executive's primary services to be rendered in an area other than the
Parent'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 Severance Termination, all as
provided for in Sections 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 Parent in writing of
Executive's acceptance of full-time employment; within 15 days after receipt of
such notice,
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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 of 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 Parent
or 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 Securities Exchange
Act of 1934, as amended (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 Parent 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;
any acquisition by the Parent or any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Parent or any corporation
controlled by the Parent; 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 Parent 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 Parent, 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 Parent 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 Parent (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 Parent, any employee benefit plan (or related trust) of the
Parent, the Resulting Corporation and any person beneficially owning,
immediately prior to such reorganization, merger or consolidation, directly or
indirectly, 20% or more of the
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<PAGE> 8
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 Parent of (x) a
complete liquidation or dissolution of the Parent or (y) sale or other
disposition of all or substantially all of the assets of the Parent, 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 Parent and any employee benefit plan (or related trust) of
the Parent 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 Parent; or
(e) Cary H. Thompson shall cease to serve as Chief Executive
Officer of the Parent.
8. INSURANCE. During the term, the Parent 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
Parent.
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 (i) if personally delivered, when so delivered; (ii) 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; (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
provision of clause (ii) above; or (iv) if sent through an overnight delivery
service under circumstances by which service guarantees next day delivery, the
date following the date so sent:
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If to the Parent or to the Company to:
AAMES FINANCIAL CORPORATION
3731 Wilshire Boulevard
Los Angeles, California 90010
Attn: Executive Vice President -- Human Resources
If to Executive:
Mr. David Sklar
16921 Sunset Boulevard
Pacific Palisades, CA 90272
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 Parent and the Company and are not assignable or
transferable, nor may the services to be performed hereunder be assigned by the
Parent or the Company or to any person, firm or corporation; provided, however,
that this Agreement and the benefits hereunder may be assigned to any
corporation into which 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. 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
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 provision or of any breach of any other provision of this
Agreement. The failure of either
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<PAGE> 10
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.
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IN WITNESS WHEREOF, the Parent 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
-------------------------------------
EXECUTIVE
/s/ David A. Sklar
-------------------------------------
David Sklar
11
<PAGE> 1
EXHIBIT 10.12
WILSHIRE COLONNADE
OFFICE LEASE
This Office Lease, which includes the preceding Summary of Basic Lease
Information (the "Summary") attached hereto and incorporated herein by this
reference (the Office Lease and Summary to be known sometimes collectively
hereafter as the "Lease"), dated as of the date set forth in Section 1 of the
Summary, is made by and between COLONNADE WILSHIRE CORP., a California
corporation ("Landlord"), and AAMES FINANCIAL CORPORATION, a Delaware
corporation ("Tenant").
ARTICLE 1
REAL PROPERTY, BUILDING AND PREMISES
1.1 Real Property, Building and Premises. Upon and subject to the
terms, covenants and conditions hereinafter set forth in this Lease, Landlord
hereby leases to Tenant and Tenant hereby leases from Landlord the premises set
forth in Section 6.2 of the Summary (the "Premises"), which Premises are located
in the "Building," as that term is defined in this Section 1.1. The outline of
the floor plan of the Premises is set forth in Exhibit A attached hereto. The
Premises are a part of the building (the "Building") located at 3731 Wilshire
Boulevard, Los Angeles, California. The Building, the Building's parking
facility ("Building Parking Facility"), the other office building located
adjacent to the Building and the land upon which such adjacent office building
is located, any outside plaza areas, land and other improvements surrounding the
Building and adjacent building which are designated from time to time by
Landlord as common areas appurtenant to or servicing the Building, and the land
upon which any of the foregoing are situated, are herein sometimes collectively
referred to as the "Project" or "Real Property." Tenant is hereby granted the
right to the nonexclusive use of the common corridors and hallways, stairwells,
elevators, restrooms and other public or common areas located on the Real
Property; provided, however, that the manner in which such public and common
areas are maintained and operated shall be at the sole discretion of Landlord
and the use thereof shall be subject to such rules, regulations and restrictions
as Landlord may reasonably make from time to time. Landlord reserves the right
to make alterations or additions to or to change the location of elements of the
Real Property and the common areas thereof provided such alterations or
additions do not alter the fundamental character of the project.
1.2 Condition of the Premises. Tenant shall accept the Premises, and
the Building and Project (including the Building Structure and Building Systems
and Equipment) shall be, in good condition and operating order, with all ACM
removed, and in compliance with all laws applicable to new construction,
disregarding variances and grandfathered rights; provided, however, that the
parties acknowledge that Tenant is currently in possession of the second (2nd)
floor of the Building, and except as to Landlord's Work, Tenant accepts the
second (2nd) floor in its as-is condition. Except as specifically set forth in
this Lease and in the Tenant Work Letter attached hereto as Exhibit B, Landlord
shall not be obligated to provide or pay for any improvement work or services
related to the improvement of the Premises. Tenant also acknowledges that
Landlord has made no representation or warranty regarding the condition of the
Premises or the Building except as specifically set forth in this Lease.
Landlord acknowledges that ACM is present on the third (3rd) floor of the
Premises. As such, Landlord shall be responsible, at its sole cost and expense,
for the removal of the ACM on the third (3rd) floor of the Premises.
1.3 Remeasurement. Prior to the Lease Commencement Date, Landlord
and Tenant shall cause their architects to meet and mutually agree as to the
rentable square footage within the Premises pursuant to the standard set forth
in Section 4.2.7 below. The parties agree to be bound by the mutual decision of
Landlord's architect and Tenant's architect.
ARTICLE 2
LEASE TERM
2.1 Initial Lease Term. The terms and provisions of this Lease shall
be effective as of the date of this
<PAGE> 2
Lease except for the provisions of this Lease relating to the payment of Rent.
The term of this Lease (the "Lease Term") shall be as set forth in Section 7.1
of the Summary and shall commence on the date (the "Lease Commencement Date")
set forth in Section 7.2 of the Summary, and shall terminate on the date (the
"Lease Expiration Date") set forth in Section 7.3 of the Summary, unless this
Lease is sooner terminated or extended as hereinafter provided. The parties
acknowledge that Tenant is currently leasing from Landlord certain premises in
the Building and the Project, a portion of which constitutes a portion of the
Premises. Landlord and Tenant agree that on the Lease Commencement Date,
Tenant's existing lease(s) with Landlord for premises within the Building and
the Project shall immediately terminate and be of no further force or effect,
provided, that Tenant shall comply with the requirements of such lease(s) until
and including the Lease Commencement Date, including without limitation, those
requirements relating to the removal from such premises, to the extent not
constituting a portion of the Premises, of Tenant's furniture, fixture,
equipment and other personal property, if applicable, and provided further that
the provisions of such leases pursuant to which Tenant has agreed to indemnify
Landlord shall survive and remain in full force and effect after such
termination. For purposes of this Lease, the term "Lease Year" shall mean each
consecutive twelve (12) month period during the Lease Term; provided, however,
that the first Lease Year shall commence on the Lease 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 Lease
Expiration Date. At any time during the Lease Term, Landlord may deliver to
Tenant a notice of Lease Term dates in the form as set forth in Exhibit C,
attached hereto, which notice Tenant shall execute and return to Landlord within
ten (10) business days of receipt thereof, and thereafter the dates set forth on
such notice shall be conclusive and binding upon Tenant and Landlord. Failure of
Tenant to timely execute and deliver the Notice of Lease Term Dates shall
constitute an acknowledgment by Tenant that the statements included in such
notice are true and correct, without exception.
2.2 Option Term.
2.2.1 Option Right. Landlord hereby grants the Tenant named in
this Lease (the "Original Tenant") two (2) consecutive options to extend the
Lease Term for a period of five (5) years each (each, an "Option Term" and
collectively, the "Option Terms"), which options shall be exercisable only by
written notice delivered by Tenant to Landlord not less than six (6) months
prior to the expiration of the initial Lease Term or Option Term, as applicable,
provided that, as of the date of delivery of such notice, an Event of Default by
Tenant is not in existence under this Lease. Upon the proper exercise of each
option to extend, and provided that, as of the end of the initial Lease Term or
Option Term, as applicable, an Event of Default by Tenant is not in existence
under this Lease, the Lease Term, as it applies to the Premises, shall be
extended for a period of five (5) years. The rights contained in this Section
2.2 shall not be personal to the Original Tenant and may be exercised by any
assignee permitted under this Lease or by any sublessee approved by Landlord
under this Lease which sublessee is specifically granted such right in the
sublease; provided, however, (a) Tenant shall remain liable during any such
Option Term(s), and (b) the rights contained in this Section 2.2 are not
assignable separate and apart from this Lease.
2.2.2 Option Rent. The "Rent," as that term is defined in
Section 4.1 below, payable by Tenant during each Option Term (the "Option Rent")
will be adjusted to ninety-five percent (95%) of "Fair Market Rent" as of the
commencement of the applicable Option Term determined in the manner set forth
below. As used herein, "Fair Market Rent" shall mean the rental rate that
Landlord has accepted in current transactions over the preceding six (6) months
between non-affiliated parties from new, non-expansion, non-renewal, and
non-equity tenants, for comparable space, for a comparable use for a comparable
period of time ("Comparable Transactions") in the Building, or if there are not
a sufficient number of Comparable Transactions in the Building, what a
comparable landlord of other similar office buildings in the vicinity of the
Building ("Comparable Building") with comparable vacancy factors would accept in
comparable transactions. In any determination of Comparable Transactions
appropriate consideration shall be given 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, the type of
escalation clause (e.g., whether increases in additional rent are determined on
a net or gross basis, and if gross, whether such increases are determined
according to a base year or a base dollar amount expense stop), the extent of
Tenant's liability under the Lease, abatement provisions reflecting free rent
and/or no rent during the period of construction or subsequent to the
commencement date as to the space in question, brokerage commissions, if any,
which would be payable by Landlord in similar transactions, length of the lease
term, size and location of premises being leased, building standard work letter
and/or tenant improvement allowances, if any, and other generally applicable
conditions of tenancy for such Comparable Transactions. The intent is that
Tenant will obtain the same rent and other economic benefits that Landlord would
otherwise give in Comparable Transactions and that
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<PAGE> 3
Landlord will make, and receive the same economic payments and concessions that
Landlord would otherwise make, and receive in Comparable Transactions. If, for
example, after applying the criteria set forth above, Comparable Transactions
provide a new tenant with comparable space at Thirty-Two Dollars ($32) per
rentable square foot, with a Ten Dollar ($10) base amount expense stop, three
(3) months at no rent to construct improvements, four (4) months' free rent,
Fifty Dollars ($50) per usable square foot tenant improvement allowance, a
"lease takeover" obligation in the amount of One Hundred Thousand Dollars
($100,000), a brokerage commission of Fifty Thousand Dollars ($50,000), and
certain other generally applicable economic terms, the Fair Market Rental Rate
for Tenant shall not be Thirty-Two Dollars ($32) per rentable square foot only,
but shall be the equivalent of Thirty-Two Dollars ($32) per rentable square
foot, a Ten Dollar ($10) base amount expense stop, three (3) months at no rent
to construct improvements or three (3) months' additional free rent in lieu of
such construction, an additional four (4) months' free rent, Fifty Dollars ($50)
per usable square foot tenant improvement allowance or credit or payment in lieu
of such allowance, One Hundred Thousand Dollars ($100,000) credit or cash
payment in lieu of a lease takeover, a payment to Tenant's then broker or other
credit to Tenant of a Fifty Thousand Dollar ($50,000) brokerage commission (or
if Tenant is not then represented by a broker, Tenant shall receive credit in
the amount of the brokerage commission that Landlord would have otherwise been
required to pay) and such other generally applicable economic terms.
No later than thirty (30) days after Landlord's receipt of notice of
Tenant's exercise of its option to extend the Lease Term pursuant to Section
2.2.1 of this Lease, Landlord shall deliver to Tenant a statement ("Landlord's
Statement") setting forth the Fair Market Rent for the Premises as of the
commencement of the applicable Option Term, as determined by Landlord in
Landlord's good faith judgment. Within thirty (30) days after receipt of
Landlord's Statement ("Tenant's Review Period"), Tenant may elect to either: (i)
accept in writing the Fair Market Rent, as set forth in Landlord's Statement; or
(ii) give written notice ("Arbitration Notice") to Landlord that Tenant desires
to have the Fair Market Rent determined by arbitration (or appraisal, if
applicable) pursuant to the procedures set forth herein. If Tenant does not
deliver an Arbitration Notice to Landlord within thirty (30) days after
Landlord's delivery of Landlord's Statement to Tenant, Tenant shall be deemed to
have rejected Landlord's Statement of the Fair Market Rent and the Fair Market
Rent shall be determined by arbitration pursuant to the procedures set forth
below. Within five (5) business days after the end of Tenant's Review Period,
Landlord and Tenant shall meet and negotiate in good faith to determine the Fair
Market Rent. If Landlord and Tenant are unable to agree upon the Fair Market
Rent, then within fifteen (15) days after Landlord's receipt of the Arbitration
Notice in accordance with this Section, Landlord and Tenant shall jointly meet
to agree upon and appoint an independent, unaffiliated arbitrator who shall by
profession be a real estate lawyer who shall have been active over the five (5)
year period ending on the date of such appointment in the leasing of comparable
commercial properties in the vicinity of the Building to determine the Fair
Market Rent; provided, however, that Landlord may elect to have the Fair Market
Rent determined by a real estate appraiser mutually agreeable to Landlord and
Tenant. Landlord must make such election within ten (10) days after the end of
Tenant's Review Period. Such appraiser shall be a member of the American
Appraisal Institute or its successor organization and have at least five (5)
years' full-time experience appraising office properties in the area in which
the Building is located. Neither Landlord or Tenant shall consult with the
appointed arbitrator or appraiser, as applicable, as to his or her opinion as to
Fair Market Rent prior to the appointment. The arbitrator or appraiser, as
applicable, shall determine the Fair Market Rent with thirty (30) days of his or
her appointment. If an arbitrator (as opposed to an appraiser) is retained to
determine the Fair Market Rent, such arbitrator may hold hearings and require
such briefs as the arbitrator, in his or her sole discretion, determines
necessary. The parties shall each submit their determination of the Fair Market
Rent to the arbitrator or appraiser, as applicable. The Fair Market Rent shall
equal the Fair Market Rent submitted by Landlord or Tenant that is closest to
the Fair Market Rent determined by the arbitrator or appraiser, as applicable,
and the arbitrator or appraiser, as applicable, shall notify Landlord and Tenant
of his or her decision. If the parties fail to select a qualified arbitrator or
appraiser, as applicable, an arbitrator or appraiser, as applicable, shall be
selected by the then-Presiding Judge of the Superior Court of the State of
California of the County in which the Premises are located, acting in his
individual judicial capacity. Each Party shall pay one-half of the arbitrator's
or appraiser's, as applicable, fee and costs. The decision of the arbitrator or
appraiser, as applicable, shall be binding upon Landlord and Tenant.
During the period requiring the adjustment of Annual Base Rent to the
Option Rent, Tenant shall pay, as Annual Base Rent pending such determination,
the Annual Base Rent in effect for the Premises immediately prior to such
adjustment; provided, however, that upon the determination of the applicable
Fair Market Rent, Tenant shall pay Landlord the difference between the amount of
Annual Base Rent Tenant actually paid and the applicable Option Rent determined
in accordance herewith immediately upon the determination of Fair Market Rent.
Any
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amount of Annual Base Rent Tenant has actually paid to Landlord which exceeds
the applicable Option Rent determined in accordance herewith shall be credited
against Tenant's future Annual Base Rent obligations.
ARTICLE 3
BASE RENT
Tenant shall pay, without notice or demand, to Landlord or Landlord's
agent at the management office of the Building, or at such other place as
Landlord may from time to time designate in writing, in currency or a check for
currency which, at the time of payment, is legal tender for private or public
debts in the United States of America, base rent ("Base Rent") as set forth in
Section 8 of the Summary, payable in equal monthly installments as set forth in
Section 8 of the Summary in advance on or before the first day of each and every
month during the Lease Term, commencing on the Lease Commencement Date, without
any setoff or deduction whatsoever (except as otherwise specifically set forth
in this Lease). If any rental payment date (including the Lease Commencement
Date) falls on a day of the month other than the first day of such month or if
any rental payment is for a period which is shorter than one month, then the
rental for any such fractional month shall be a proportionate amount of a full
calendar month's rental based on the proportion that the number of days in such
fractional month bears to the number of days in the calendar month during which
such fractional month occurs. All other payments or adjustments required to be
made under the terms of this Lease that require proration on a time basis shall
be prorated on the same basis.
ARTICLE 4
ADDITIONAL RENT
4.1 Additional Rent. In addition to paying the Base Rent specified
in Article 3 of this Lease, Tenant shall pay as additional rent "Tenant's Share"
of the annual "Direct Expenses," as those terms are defined in Sections 4.2.7
and 4.2.3 of this Lease, respectively, which are in excess of the amount of
Direct Expenses applicable to the "Base Year," as that term is defined in
Section 4.2.1 of this Lease. Such additional rent, together with any and all
other amounts payable by Tenant to Landlord pursuant to the terms of this Lease,
shall be hereinafter collectively referred to as the "Additional Rent." The Base
Rent and Additional Rent are herein collectively referred to as the "Rent." All
amounts due under this Article 4 as Additional Rent shall be payable for the
same periods and in the same manner, time and place as the Base Rent. Without
limitation on other obligations of Tenant which shall survive the expiration of
the Lease Term, the obligations of Tenant to pay the Additional Rent provided
for in this Article 4 shall survive the expiration of the Lease Term.
4.2 Definitions. As used in this Article 4, the following terms
shall have the meanings hereinafter set forth:
4.2.1 "Base Year" shall mean the year set forth in Section 9.1
of the Summary.
4.2.2 "Expense Year" shall mean each calendar year in which
any portion of the Lease Term falls, through and including the calendar year in
which the Lease Term expires.
4.2.3 "Direct Expenses" shall mean "Operating Expenses" and
"Tax Expenses."
4.2.4 "Operating Expenses" shall mean all expenses, costs and
amounts of every kind and nature which Landlord shall pay during any Expense
Year because of or in connection with the ownership, management, maintenance,
repair, non-capital (except as expressly permitted below) replacement,
non-capital (except as expressly permitted below) restoration or operation of
the Real Property, including, without limitation, any amounts paid for (i) the
cost of supplying all utilities, the cost of operating, maintaining, repairing,
non-capital (except as expressly permitted below) renovating and managing the
utility systems, mechanical systems, sanitary and storm drainage systems, and
any escalator and/or elevator systems, and the cost of supplies and equipment
and maintenance and service contracts in connection therewith; (ii) the cost of
licenses, certificates, permits and inspections and 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 any mandatory
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transportation system management program or similar program; (iii) the cost of
insurance carried by Landlord, in such amounts as Landlord may reasonably
determine or as may be required by any mortgagees or the lessor of any
underlying or ground lease affecting the Real Property and/or the Building; (iv)
the cost of landscaping, relamping, and all supplies, tools, equipment and
materials used in the operation, repair and maintenance of the Building; (v) the
cost of parking area repair, restoration, and maintenance, including, but not
limited to, resurfacing, repainting, restriping, and cleaning; (vi) fees,
charges and other costs, including consulting fees, legal fees and accounting
fees, of all contractors engaged by Landlord or otherwise reasonably incurred by
Landlord in connection with the management, operation, maintenance and repair of
the Building and Real Property; (vii) any equipment rental agreements or
management agreements (including the cost of any reasonable management fee and
the fair rental value of any office space provided thereunder); (viii) wages,
salaries and other compensation and benefits of all persons engaged in the
operation, management, maintenance or security of the Building (not higher than
Building Manager), and employer's Social Security taxes, unemployment taxes or
insurance, and any other taxes which may be levied on such wages, salaries,
compensation and benefits; provided, that 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 Operating Expenses
based on the portion of their working time devoted to the Building; (ix)
payments under any easement, license, operating agreement, declaration,
restrictive covenant, underlying or ground lease (excluding rent), or instrument
pertaining to the sharing of costs by the Building; (x) operation, repair,
maintenance and replacement, to the extent permitted under (xiii) below, of all
"Building Systems and Equipment," as that term is defined in Section 4.2.5 of
this Lease, and components thereof; (xi) the cost of janitorial service, alarm
and security service, window cleaning, trash removal, replacement of wall and
floor coverings, ceiling tiles and fixtures in lobbies, corridors, restrooms and
other common or public areas or facilities, maintenance and replacement of curbs
and walkways, repair to roofs; (xii) amortization (including interest on the
unamortized cost) of the cost of acquiring or the rental expense of personal
property used in the maintenance, operation and repair of the Building and Real
Property subject to Section 4.7 below; and (xiii) the cost of any capital
improvements or other costs (I) which are intended as a labor-saving device or
to effect other economies in the operation or maintenance of the Building, or
(II) made to the Building after the Lease Commencement Date that are required
under any governmental law or regulation, except for capital improvements or
costs to remedy a condition existing as of the date of construction of the
Building which a federal, state or municipal governmental authority, if it had
knowledge of such condition as of the date of construction of the Building,
would have then required to be remedied pursuant to governmental laws or
regulations in their form existing as of the date of construction of the
Building; provided, however, that if any such cost described in (I) or (II)
above is a capital expenditure, such cost shall be amortized (including interest
on the unamortized cost) over its useful life (but in no event less than five
(5) years) as Landlord shall reasonably determine. 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. If the Building is not fully occupied during all or a
portion of any Expense Year with all tenants paying full rent, as contrasted
with free rent, half rent and the like, Landlord shall make an appropriate
adjustment to the variable components of Operating Expenses for such Expense
Year employing sound accounting and management principles, to determine the
amount of Operating Expenses that would have been paid had the Building been
ninety-five percent (95%) occupied with all tenants paying full rent, as
contrasted with free rent, half rent and the like; and the amount so determined
shall be deemed to have been the amount of Operating Expenses for such Expense
Year. Landlord shall have the right, from time to time, to equitably allocate
some or all of the Operating Expenses among different tenants of the Building
(the "Cost Pools"). Such Cost Pools may include, but shall not be limited to,
the office space tenants of the Building and the retail space tenants of the
Building. Notwithstanding anything to the contrary set forth in this Article 4,
when calculating Direct Expenses for the Base Year, Operating Expenses shall
exclude market-wide labor-rate increases due to extraordinary circumstances,
including, but not limited to, boycotts and strikes, and utility rate increases
due to extraordinary circumstances including, but not limited to, conservation
surcharges, boycotts, embargoes or other shortages.
4.2.5 "Building Systems and Equipment" shall mean any plant,
machinery, transformers, duct work, cable, wires, and other equipment,
facilities, and systems designed to supply heat, ventilation, air conditioning
and humidity or any other services or utilities, or comprising or serving as any
component or portion of the electrical, gas, steam, plumbing, sprinkler,
communications, alarm, security, or fire/life safety systems or equipment, or
any other mechanical, electrical, electronic, computer or other systems or
equipment which serve the Building in whole or in part. "Building Structure"
shall mean the structural portions of the Building, including the
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foundation, floor slabs, roof, curtain wall, exterior glass and mullions,
columns, beams, shafts (including elevator shafts), stairs (excluding any
interior stairs or stairwells), parking areas, stairwells (excluding any
interior stairs or stairwells), escalators, elevator cabs, plazas, pavement,
sidewalks, curbs, entrances, landscaping, art work, sculptures, washrooms,
mechanical and electrical closets, and all common areas and public areas.
4.2.6 "Tax Expenses" shall mean all federal, state, county, or
local governmental or municipal taxes, fees, charges or other impositions of
every kind and nature, whether general, special, ordinary or extraordinary,
(including, without limitation, real estate taxes, general and special
assessments, transit taxes, leasehold taxes 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, personal property taxes imposed upon the
fixtures, machinery, equipment, apparatus, systems and equipment, appurtenances,
furniture and other personal property used in connection with the Building),
which Landlord shall pay during any Expense Year because of or in connection
with the ownership, leasing and operation of the Real Property or Landlord's
interest therein. For purposes of this Lease, Tax Expenses shall be calculated
as if the tenant improvements in the Building were fully constructed and the
Real Property, the Building, and all tenant improvements in the Building were
fully assessed for real estate tax purposes, and accordingly, during the portion
of any Expense Year occurring during the Base Year, Tax Expenses shall be deemed
to be increased appropriately. As provided in Section 4.7(a)(29) below, for the
first four (4) calendar years following the Base Year ("Cutoff Date"), Tax
Expenses shall not include and Tenant shall not be responsible for any increase
of, or reassessment in, real property taxes and assessments in excess of two
percent (2%) of the taxes for the previous year, resulting from any sale,
transfer or other change in ownership of the Building or the Project or from
major alterations, improvements, modifications or renovations to the Building or
the Project during the first four (4) calendar years following the Base Year and
attributable to any period of time prior to the Cutoff Date; provided, however,
that Tenant shall be responsible for paying for Tenant's share of such increases
or reassessments after the Cutoff Date that are attributable to the period after
the Cutoff Date. Furthermore, any increase of, or reassessment in, real property
taxes and assessments in excess of two percent (2%) of the taxes for the
previous year resulting from any sale, transfer or other change in ownership of
the Building or the Project during the Base Year or from major alterations,
improvements, modifications or renovations to the Building or the Project during
the Base Year shall be included in Tax Expenses for the Base Year.
4.2.6.1 Tax Expenses shall include, without limitation:
(i) Any tax on Landlord's rent, right to
rent or other income from the Real Property or as against Landlord's
business of leasing any of the Real Property;
(ii) 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. 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 Tax Expenses for purposes of this Lease;
(iii) 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 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; and
(iv) Any assessment, tax, fee, levy or
charge, upon this transaction or any document to which Tenant is a
party, creating or transferring an interest or an estate in the
Premises.
4.2.6.2 If in any Expense Year subsequent to the Base
Year, including the Base Year, the Landlord obtains a Proposition 8 tax
decrease, the amount of Tax Expenses shall be determined as if a Proposition 8
decrease has not been obtained.
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4.2.6.3 Any expenses incurred by Landlord in attempting
to protest, reduce or minimize Tax Expenses shall be included in Tax Expenses in
the Expense Year such expenses are paid. Tax refunds shall be deducted from Tax
Expenses in the Expense Year they are received by Landlord. If Tax Expenses for
any period during the Lease Term or any extension thereof are increased after
payment thereof by Landlord for any reason, including, without limitation, error
or reassessment by applicable governmental or municipal authorities, Tenant
shall pay Landlord upon demand Tenant's Share of such increased Tax Expenses.
4.2.6.4 Notwithstanding anything to the contrary
contained in this Section 4.2.6 (except as set forth in Sections 4.2.6.1 and
4.2.6.2, above), there shall be excluded from Tax Expenses (i) all excess
profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and
succession taxes, estate taxes, federal and state income taxes, and other taxes
to the extent applicable to Landlord's general or net income (as opposed to
rents, receipts or income attributable to operations at the Building), (ii) any
items included as Operating Expenses, and (iii) any items paid by Tenant under
Section 4.4 of this Lease.
4.2.6.5 Notwithstanding anything to the contrary set
forth in this Article 4, when calculating Direct Expenses for the Base Year,
such Direct Expenses shall not include any increase in Tax Expenses attributable
to special assessments, charges, costs, or fees, or due to modifications or
changes in governmental laws or regulations, including, but not limited to, the
institution of a split tax roll.
4.2.7 "Tenant's Share" shall mean the percentage set forth in
Section 9.2 of the Summary. Tenant's Share was calculated by multiplying the
number of rentable square feet of the Premises by 100 and dividing the product
by the total rentable square feet in the Building. The rentable square feet in
the Premises and Building is measured pursuant to the Standard Method for
Measuring Floor Area in Office Buildings, ANSI Z65.1 - 1980 ("BOMA"), provided
that the rentable square footage of the Building shall include all of, and the
rentable square footage of the Premises therefore shall include a portion of,
the square footage of the ground floor common areas consisting of the lobby
within the Building. In the event either the rentable square feet of the
Premises and/or the total rentable square feet of the Building is changed,
Tenant's Share shall be appropriately adjusted, and, as to the Expense Year in
which such change occurs, Tenant's Share for such year shall be determined on
the basis of the number of days during such Expense Year that each such Tenant's
Share was in effect.
4.3 Calculation and Payment of Additional Rent.
4.3.1 Calculation of Excess. If for any Expense Year (after the
Base Year) ending or commencing within the Lease Term, Tenant's Share of Direct
Expenses for such Expense Year exceeds Tenant's Share of Direct Expenses for the
Base Year, then Tenant shall pay to Landlord, in the manner set forth in Section
4.3.2, below, and as Additional Rent, an amount equal to the excess (the
"Excess").
4.3.2 Statement of Actual Direct Expenses and Payment by
Tenant. Landlord shall endeavor to give to Tenant on or before the first day of
April following the end of each Expense Year, a statement (the "Statement")
which shall state the Direct Expenses incurred or accrued for such preceding
Expense Year, and which shall indicate the amount, if any, of any Excess. Upon
receipt of the Statement for each Expense Year ending during the Lease Term, if
an Excess is present, Tenant shall pay, with its next installment of Base Rent
due, the full amount of the Excess for such Expense Year, less the amounts, if
any, paid during such Expense Year as "Estimated Excess," as that term is
defined in Section 4.3.3 of this Lease. If no Excess is present and Tenant paid
more as Estimated Excess than the actual Excess in any given Expense Year, then
Tenant shall receive a credit against the Rents next due and owing under this
Lease. If the Lease Term shall have expired or terminated, then Landlord shall
pay Tenant such amount within thirty (30) days after Tenant's receipt of the
Statement. The failure of Landlord to timely furnish the Statement for any
Expense Year shall not prejudice Landlord from enforcing its rights under this
Article 4. Even though the Lease Term has expired and Tenant has vacated the
Premises, when the final determination is made of Tenant's Share of the Direct
Expenses for the Expense Year in which this Lease terminates, if an Excess is
present, Tenant shall immediately pay to Landlord an amount as calculated
pursuant to the provisions of Section 4.3.1 of this Lease. The provisions of
this Section 4.3.2 shall survive the expiration or earlier termination of the
Lease Term.
4.3.3 Statement of Estimated Direct Expenses. In addition,
Landlord shall endeavor to give Tenant a yearly expense estimate statement (the
"Estimate Statement") which shall set forth Landlord's reasonable
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estimate (the "Estimate") of what the total amount of Direct Expenses for the
then-current Expense Year shall be and the estimated Excess (the "Estimated
Excess") as calculated by comparing Tenant's Share of Direct Expenses, which
shall be based upon the Estimate, to Tenant's Share of Direct Expenses for the
Base Year. The failure of Landlord to timely furnish the Estimate Statement for
any Expense Year shall not preclude Landlord from enforcing its rights to
collect any Estimated Excess under this Article 4. If pursuant to the Estimate
Statement an Estimated Excess is calculated for the then-current Expense Year,
Tenant shall pay, with its next installment of Base Rent due, a fraction of the
Estimated Excess for the then-current Expense Year (reduced by any amounts paid
pursuant to the last sentence of this Section 4.3.3). Such fraction shall have
as its numerator the number of months which have elapsed in such current Expense
Year to the month of such payment, both months inclusive, and shall have twelve
(12) as its denominator. Until a new Estimate Statement is furnished, Tenant
shall pay monthly, with the monthly Base Rent installments, an amount equal to
one-twelfth (1/12) of the total Estimated Excess set forth in the previous
Estimate Statement delivered by Landlord to Tenant.
4.4 Taxes and Other Charges for Which Tenant Is Directly
Responsible. Tenant shall reimburse Landlord upon demand for any and all taxes
or assessments required to be paid by Landlord (except to the extent included in
Tax Expenses by Landlord), excluding state, local and federal personal or
corporate income taxes measured by the net income of Landlord from all sources
and estate and inheritance taxes, whether or not now customary or within the
contemplation of the parties hereto, when:
4.4.1 Said taxes are measured by or reasonably attributable to
the cost or value of Tenant's equipment, furniture, fixtures and other personal
property located in the Premises, or by the cost or value of any leasehold
improvements made in or to the Premises by or for Tenant, to the extent the cost
or value of such leasehold improvements exceeds 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;
4.4.2 Said taxes are assessed upon or with respect to the
possession, leasing, operation, management, maintenance, alteration, repair, use
or occupancy by Tenant of the Premises or any portion of the Real Property
(including the Building Parking Facility);
4.4.3 Said taxes are assessed upon this transaction or any
document to which Tenant is a party creating or transferring an interest or an
estate in the Premises; or
4.4.4 Said assessments are levied or assessed upon the Real
Property or any part thereof or upon Landlord and/or by any governmental
authority or entity, and relate to the construction, operation, management, use,
alteration or repair of mass transit improvements.
4.5 Method of Allocation. The parties acknowledge that the Building
is a part of a multi-building project and that the costs and expenses incurred
in connection with the Real Property (i.e., the Direct Expenses) should be
shared between the tenants of the Building and the tenants of the other
buildings of the Real Property. Accordingly, as set forth in Section 4.2 above,
Direct Expenses (which consists of Operating Expenses and Tax Expenses) are
determined annually for the Real Property as a whole, and a portion of the
Direct Expenses, which portion shall be determined by Landlord on an equitable
basis, shall be allocated to the tenants of the Building (as opposed to the
tenants of any other buildings of the Real Property) and such portion shall be
the Building Direct Expenses for purposes of this Lease. Such portion of Direct
Expenses allocated to the tenants of the Building shall include all Direct
Expenses attributable solely to the Building and an equitable portion of the
Direct Expenses which are not attributable solely to the Building or the
adjacent building on the Real Property, but rather are attributable to the Real
Property as a whole.
4.6 Review of Direct Expenses. Notwithstanding anything in the Lease
to the contrary, Tenant shall have the right, on sixty (60) days' notice (given
within two (2) years after receipt of any statement), to inspect and photocopy
Landlord's accounting records at Landlord's office. If, after such inspection
and photocopying, Tenant continues to dispute the amount of Tenant's Share of
Direct Expenses, an auditor from a nationally recognized accounting firm who is
approved by Landlord in its reasonable discretion shall be entitled to audit
and/or review Landlord's records to determine the proper amount of Tenant's
Share of Direct Expenses. If such audit or review reveals that Landlord has
overcharged Tenant, then within five (5) days after the results of such audit
are made available to Landlord, Landlord shall reimburse Tenant the amount of
such overcharge plus interest at the Interest Rate. If the audit reveals that
Tenant was undercharged, then within five (5) days after the results of the
audit are
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made available to Tenant, Tenant shall reimburse Landlord the amount of such
undercharge plus interest thereon at the Interest Rate. If Landlord desires to
contest such audit results, Landlord may do so by submitting the results of the
audit to arbitration pursuant to Section 30.34 within five (5) days of receipt
of the results of the audit, and the arbitration shall be final and binding upon
Landlord and Tenant. Tenant agrees to pay the cost of such audit, provided that,
if the audit reveals that Landlord's determination of Tenant's Share of Direct
Expenses as set forth in any Statement sent to Tenant was in error in Landlord's
favor by more than five percent (5%), Landlord shall pay the cost of such audit.
Landlord shall be required to maintain records of all Direct Expenses and other
rent adjustments for the entirety of the two-year period ("Review Period")
following Landlord's delivery to Tenant of each Statement setting forth Tenant's
Share of Direct Expenses. The payment by Tenant of any amounts pursuant to this
Article 4 shall not preclude Tenant from questioning the correctness of any
Statement provided by Landlord at any time during the Review Period, but the
failure of Tenant to object thereto prior to the expiration of the Review Period
shall be conclusively deemed Tenant's approval of the Statement.
4.7 Exclusions from Direct Expenses.
(a) Notwithstanding anything in the definition of Direct Expenses in
the Lease to the contrary, Direct Expenses shall not include the following,
except to the extent specifically permitted by a specific exception to the
following:
(1) Any ground lease rental;
(2) Costs of items considered capital repairs, replacements,
improvements and equipment under generally accepted accounting principles
consistently applied or otherwise ("Capital Items"); except for Capital Items
expressly permitted under Section 4.2.4(xiii) above;
(3) Rentals for items (except when needed in connection with
normal repairs and maintenance) which if purchased, rather than rented, would
constitute a Capital Item which is specifically excluded in (2) above
(excluding, however, equipment not affixed to the Building which is used in
providing janitorial or similar services);
(4) Costs incurred by Landlord for the repair of damage to
the Building, to the extent that Landlord is reimbursed by insurance proceeds,
and costs due to repairs resulting from an earthquake to the extent such costs
exceed $75,000;
(5) Costs, including permit, license and inspection costs,
incurred with respect to the installation of tenant or other occupants'
improvements in the Building or incurred in renovating or otherwise improving,
decorating, painting or redecorating vacant space for tenants or other occupants
of the Building;
(6) Depreciation, amortization and interest payments, except
as provided herein and except on materials, tools, supplies and vendor-type
equipment purchased by Landlord to enable Landlord to supply services Landlord
might otherwise contract for with a third party where such depreciation,
amortization and interest payments would otherwise have been included in the
charge for such third party's services, all as determined in accordance with
generally accepted accounting principles, consistently applied, and when
depreciation or amortization is permitted or required, the item shall be
amortized over its reasonably anticipated useful life;
(7) Marketing costs, including without limitation, leasing
commissions, attorneys' fees in connection with the negotiation and preparation
of letters, deal memos, letters of intent, leases, subleases and/or assignments,
space planning costs, and other costs and expenses incurred in connection with
lease, sublease and/or assignment negotiations and transactions with Tenant or
present or prospective tenants or other occupants of the Building;
(8) Expenses in connection with services or other benefits
which are not offered to Tenant or for which Tenant is charged directly but
which are provided to another tenant or occupant of the Building at no cost;
(9) Costs incurred by Landlord due to the violation by
Landlord or any tenant of the terms
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and conditions of any lease of space in the Building;
(10) Overhead and profit increment paid to Landlord or to
subsidiaries or affiliates of Landlord for goods and/or services in or to the
Building to the extent the same exceeds the costs of such goods and/or services
rendered by unaffiliated third parties on a competitive basis;
(11) Interest, principal, points and fees on debts or
amortization on any mortgage or mortgages or any other debt instrument
encumbering the Building or the Project (except as permitted in (2) above);
(12) Landlord's general corporate overhead and general and
administrative expenses (provided that the reasonable rental cost of the
Building office shall be included in Operating Expenses);
(13) Any compensation paid to clerks, attendants or other
persons in commercial concessions operated by Landlord or in the parking garage
of the Building or wherever Tenant is granted its parking privileges and/or all
fees paid to any parking facility operator (on or off Project) (provided,
however, that the incremental cost to Landlord of the operation of an additional
floor of the Building Parking Facility required to be operated to accommodate
Tenant's parking (including the attendant) shall be paid by Tenant, and to the
extent that Tenant's Share of all other parking expenses exceeds any amount paid
by Tenant for such parking, these expenses may be included as a part of Direct
Expenses);
(14) Intentionally Deleted;
(15) Advertising and promotional expenditures, and costs of
signs in or on the Building identifying the owner of the Building or other
tenants' signs;
(16) The cost of any electric power used by any tenant in the
Building in excess of the Building-standard amount, or electric power costs for
which any tenant directly contracts with the local public service company or of
which any tenant is separately metered or submetered and pays Landlord directly;
provided, however, that if any tenant in the Building contracts directly for
electric power service or is separately metered or submetered during any portion
of the relevant period, the total electric power costs for the Building shall be
"grossed up" to reflect what those costs would have been had each tenant in the
Building used the Building-standard amount of electric power;
(17) Services and utilities provided, taxes attributable to,
and costs incurred in connection with the operation of the retail and restaurant
operations in the Building, except to the extent the square footage of such
operations are included in the rentable square feet of the Building and do not
exceed the services, utility and tax costs that would have been incurred had the
retail and/or restaurant space been used for general office purposes;
(18) Costs incurred in connection with upgrading the Building
to comply with life, fire and safety codes, ordinances, statutes or other laws
in effect prior to the Commencement Date, including, without limitation, the
ADA, including penalties or damages incurred due to such non-compliance (For
this purpose, a change in the interpretation of or change in the procedures for
enforcing an existing law will be the equivalent of a new law; provided,
however, that costs incurred by Landlord in connection with the loss of a
variance or a disappearance of a grandfathered/grandmothered right shall not be
included as an Operating Expense.);
(19) Tax penalties incurred as a result of Landlord's failure
to make payments and/or to file any tax or informational returns when due;
(20) Any management fees in excess of those management fees
which are normally and customarily charged by landlords of Comparable Buildings;
(21) Costs arising from the negligence of Landlord or its
agents, or any vendors, contractors, or providers of materials or services
selected, hired or engaged by Landlord or its agents including, without
limitation, the selection of Building materials;
(22) Notwithstanding any contrary provision of this Lease,
including, without limitation, any provision relating to capital expenditures,
any and all costs arising from the presence of hazardous materials or
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substances (as defined by Applicable Laws in effect on the date this Lease is
executed) in or about the Premises, the Building or the Project including,
without limitation, hazardous substances in the ground water or soil, not placed
in the Premises, the Building or the Project by Tenant;
(23) Costs arising from Landlord's charitable or political
contributions;
(24) Costs arising from defects in the base, shell or core of
the Building or improvements installed by Landlord;
(25) Costs arising from any voluntary special assessment on
the Building or the Project by any transit district authority or any other
governmental entity having the authority to impose such assessment;
(26) Costs for the acquisition of (as contrasted with the
maintenance of) sculpture, paintings or other objects of art;
(27) Costs (including in connection therewith all attorneys'
fees and costs of settlement judgments and payments in lieu thereof) arising
from claims, disputes or potential disputes in connection with potential or
actual claims litigation or arbitrations pertaining to Landlord and/or the
Building and/or the Project unless directly related to the use or maintenance of
the Common Areas;
(28) Costs associated with the operation of the business of
the partnership or entity which constitutes Landlord as the same are
distinguished from the costs of operation of the Building, including partnership
accounting and legal matters, costs of defending any lawsuits with or claims by
any mortgagee (except as the actions of Tenant may be in issue), costs of
selling, syndicating, financing, mortgaging or hypothecating any of Landlord's
interest in the Building, costs of any disputes between Landlord and its
employees (if any) not engaged in Building operation, disputes of Landlord with
Building management, or outside fees paid in connection with disputes with other
tenants unless directly related to the use or maintenance of the Common Areas;
(29) During the period prior to the Cutoff Date, any increase
of, or reassessment in, real property taxes and assessments in excess of two
percent (2%) of the taxes for the previous year, resulting from either (1) any
sale, transfer, or other change in ownership of the Building or the Project or
from major alterations, improvements, modifications or renovations to the
Building or the Project (collectively, "Transfers"), or (2) any action,
including, without limitation, judicial action or action by initiative, which
serves to repeal, modify and/or limit the application of Article XIIIA of the
California Constitution (otherwise known as Proposition 13) to the extent such
repeal, modification or limitation causes Tenant to lose the benefit of the
foregoing limitation; provided, however, that Tenant shall be responsible for
paying for Tenant's share of such increases or reassessments after the Cutoff
Date that are attributable to the period after the Cutoff Date. Furthermore, any
increase of, or reassessment in, real property taxes and assessments in excess
of two percent (2%) of the taxes for the previous year resulting from any sale,
transfer or other change in ownership of the Building or the Project during the
Base Year or from major alterations, improvements, modifications or renovations
to the Building or the Project during the Base Year shall be included in Tax
Expenses for the Base Year;
(30) Costs of any "tap fees" or any sewer or water connection
fees for the benefit of any particular tenant in the Building;
(31) Intentionally Deleted;
(32) Any expenses incurred by Landlord for use of any
portions of the Building to accommodate events including, but not limited to
shows, promotions, kiosks, displays, filming, photography, private events or
parties, ceremonies, and advertising beyond the normal expenses otherwise
attributable to providing Building services, such as lighting and HVAC to such
public portions of the Building in normal Building operations during standard
Building hours of operation;
(33) Any entertainment, dining or travel expenses for any
purpose;
(34) Any flowers, gifts, balloons, etc. provided to any
entity whatsoever, to include, but not limited to, Tenant, other tenants,
employees, vendors, contractors, prospective tenants and agents;
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(35) Any "validated" parking for any entity unless directly
related to the operation or maintenance of the Building;
(36) Any "finders fees", brokerage commissions, job placement
costs or job advertising cost unless relating to a job search for Building
personnel within Los Angeles County;
(37) Any "above-standard" cleaning, including, but not
limited to construction cleanup or special cleanings associated with
parties/events and specific tenant requirements in excess of service provided to
Tenant, including related trash collection, removal, hauling and dumping;
(38) The cost of any magazine, newspaper, trade or other
subscriptions;
(39) The cost of any training or incentive programs, other
than for tenant life safety or information services;
(40) The cost of any "tenant relations" parties, events or
promotion not consented to by an authorized representative of Tenant in writing;
(41) "In-house" legal and/or accounting fees;
(42) Reserves for bad debts or for future improvements,
repairs, additions, etc.; and
(43) Rental (imputed or actual) of the space used as a
Conference Room as discussed in Section 6.5 of this Lease and all costs
associated with the operation of the Conference Room.
(b) It is understood that Direct Expenses shall be reduced
by all cash discounts, trade discounts, quantity discounts, rebates or other
amounts received by Landlord or Landlord's managing agent in the purchase of any
goods, utilities, or services in connection with the operation of the Building.
If Capital Items which are customarily purchased by landlords of Comparable
Buildings are leased by Landlord, rather than purchased, the decision by
Landlord to lease the item in question shall not serve to increase Tenant's
Share of Direct Expenses beyond that which would have applied had the item in
question been purchased.
4.8 Vacancy Credit. If at least ten (10) business days prior to the
commencement of a month of the Lease Term, Tenant has vacated ten thousand
(10,000) contiguous square feet on any floor of the Building and/or one or more
full floors of the Building (as so quantified, the "Vacated Space") for a period
of thirty (30) days and provided that Tenant sends a factually correct notice to
Landlord that Tenant vacated such Vacated Space, Landlord shall (i) determine in
the exercise of its reasonable judgment, the cost of the electricity, janitorial
service, water and HVAC (collectively, the "Variable Expenses") included in
Direct Expenses each month as a result of the gross-up provision that is
attributable to the Vacated Space and (ii) to the extent reasonably practicable,
cease causing to be provided to such Vacated Space electricity, janitorial
service, water and HVAC. Landlord shall provide to Tenant a credit against Base
Rent each such month such Vacated Space is not occupied by Tenant in an amount
equal to the Variable Expenses attributable to such Vacated Space as part of the
gross-up calculation and not in fact paid by Landlord to third party providers
of such Variable Expenses, all as reasonably determined by Landlord. To the
extent that Landlord incurs incremental extra costs in complying with this
provision that Landlord would not otherwise have incurred but for complying with
this provision, Tenant shall pay such costs to Landlord separate and apart from,
and in addition to, Direct Expenses.
4.9 Warranties/Service Contracts. If during the Base Year expenses
are not incurred by Landlord because they are covered by warranties and or
service contracts that are not continued in subsequent Expense Years, there
shall be imputed into the Base Year the amounts that would have been incurred
had the warranty and/or service contracts not been in effect.
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ARTICLE 5
USE OF PREMISES
Tenant shall use the Premises solely for general office purposes
consistent with the character of the Building as a first-class office building,
and in connection with any assignment or subletting, any other legally permitted
use consistent with the use of comparable space in the Building or Project as
long as such use does not conflict with an exclusive granted by Landlord to
another tenant of the Building. Tenant further covenants and agrees that it
shall not use, or suffer or permit any person or persons to use, the Premises or
any part thereof for any use or purpose contrary to the provisions of Exhibit D,
attached hereto, or in violation of the laws of the United States of America,
the State of California, or the ordinances, regulations or requirements of the
local municipal or county governing body or other lawful authorities having
jurisdiction over the Building. Tenant shall comply with all recorded covenants,
conditions, and restrictions, and the provisions of all ground or underlying
leases, now or hereafter affecting the Real Property. Tenant shall not use or
allow another person or entity to use any part of the Premises for the storage,
use, treatment, manufacture or sale of "Hazardous Material," as that term is
defined in Section 29.29 of this Lease. Landlord acknowledges, however, that
Tenant will maintain products in the Premises which are incidental to the
operation of its offices, such as photocopy supplies, secretarial supplies and
limited janitorial supplies, which products contain chemicals which are
categorized as Hazardous Material. Landlord agrees that the use of such products
in the Premises in compliance with all applicable laws and in the manner in
which such products are designed to be used shall not be a violation by Tenant
of this Article 5. Notwithstanding anything in this Lease to the contrary,
Tenant shall not be required to make any modification of, or addition to the
Building Structure and/or the Building Systems and Equipment and/or the Project
except and to the extent required because of Tenant's use, improvement or
alteration of all or a portion of the Premises for other than normal and
customary business office operations; provided, however, that costs incurred by
Landlord in connection with any such modifications or additions shall be
Operating Expenses to the extent permitted under Section 4.2.4.
ARTICLE 6
SERVICES AND UTILITIES
6.1 Standard Tenant Services. Landlord shall provide the following
services on all days during the Lease Term, unless otherwise stated below.
6.1.1 Subject to all governmental rules, regulations and
guidelines applicable thereto, Landlord shall provide heating and air
conditioning ("HVAC") when necessary for normal comfort for normal office use in
the Premises, from Monday through Friday, during the period from 8:00 a.m. to
6:00 p.m., and on Saturday during the period from 8:00 a.m. to 12:00 p.m.,
except for the date of observation of New Year's Day, Presidents' Day, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day and other New
York Stock Exchange holidays (collectively, the "Holidays"). Tenant shall be
permitted to install, at Tenant's sole cost and expense, a freestanding
supplemental HVAC unit in the Premises; provided, that Tenant shall pay the cost
of all electricity consumed in connection therewith in accordance with the
remaining provisions of this Article 6.
6.1.2 Landlord shall provide adequate electrical wiring and
facilities and seven (7) watts of electricity per rentable square foot of the
Premises for normal general office use. Such allocation of electricity shall be
used for fluorescent and incandescent lighting, standard office equipment,
computers, audio-visual equipment, vending machines, copy machines and kitchen
equipment. Such allocation of electricity shall not be used for any freestanding
supplemental HVAC unit installed by Tenant, at Tenant's sole cost and expense,
which shall be separately metered and all electricity costs associated therewith
paid for by Tenant. Tenant shall bear the cost of replacement of lamps, starters
and ballasts for lighting fixtures within the Premises.
6.1.3 Landlord shall provide city water from the regular
Building outlets for drinking, lavatory and toilet purposes.
6.1.4 Landlord shall provide janitorial services five (5) days
per week, except the date of observation of the Holidays, in and about the
Premises and window washing services in a manner consistent with Comparable
Buildings.
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6.1.5 Landlord shall provide nonexclusive automatic passenger
elevator service at all times.
6.1.6 Landlord shall provide nonexclusive freight elevator
service subject to scheduling by Landlord.
6.2 Overstandard Tenant Use; Separate Meter. Tenant shall not,
without Landlord's prior written consent, use heat-generating machines, machines
other than normal fractional horsepower office machines, or equipment or
lighting other than building standard lights in the Premises, which may affect
the temperature otherwise maintained by the air conditioning system or increase
the water normally furnished for the Premises by Landlord pursuant to the terms
of Section 6.1 of this Lease. At Landlord's election, Landlord may separately
meter the Premises for utilities, including without limitation, HVAC, water, gas
and electricity, and Tenant shall pay, at Landlord's election, either directly
to the provider thereof or to Landlord, within ten (10) days after billing, the
cost of Tenant's consumption at Landlord's "Actual Cost". The term "Actual Cost"
shall mean the actual out-of-pocket incremental extra costs to Landlord to
provide additional services or utilities without markup for profit, overhead,
depreciation or administrative costs. All such costs shall be prorated among all
tenants then requesting or needing additional services or utilities during such
time periods. The parties stipulate that the Actual Cost for after-hours HVAC is
currently $120 per hour, and such cost may be increased by Landlord to reflect
any increase in Actual Costs incurred by the Landlord; provided, however, that
Tenant shall be entitled to a ten percent (10%) discount off of the Actual Cost
for after-hours HVAC throughout the Lease Term and any Option Term(s). Landlord
and Tenant acknowledge and agree that Tenant shall only be charged $120 per hour
total for after-hours HVAC provided to all floors of the Premises. By way of
example, if Landlord provides after-hours HVAC to the both the second (2nd) and
third (3rd) floors of the Premises, Tenant shall be charged a combined fee of
$120 per hour total for all floors of the Premises, and not $240 per hour. To
the extent the Premises are not separately metered or if Landlord's cooperation
is necessary in connection therewith, if Tenant desires to use HVAC during hours
other than the Building Hours, (i) Tenant shall give Landlord such prior notice,
as Landlord shall from time to time establish as appropriate, of Tenant's
desired use, (ii) Landlord shall supply such after-hours HVAC (or cooperate to
cause such supply, as applicable) to Tenant at Landlord's Actual Cost as
provided above, and (iii) Tenant shall pay such cost within ten (10) days after
billing.
6.3 Interruption of Use. Tenant agrees that Landlord shall not be
liable for damages, by abatement of Rent or otherwise except as provided in
Section 19.9, for failure to furnish or delay in furnishing any service
(including telephone and telecommunication services), or for any diminution in
the quality or quantity thereof, when such failure or delay or diminution is
occasioned, in whole or in part, by repairs, replacements, or improvements, by
any strike, lockout or other labor trouble, by inability to secure electricity,
gas, water, or other fuel at the Building after reasonable effort to do so, by
any accident or casualty whatsoever, by act or default of Tenant or other
parties, or by any other cause beyond Landlord's reasonable control; and such
failures or delays or diminution shall never be deemed to constitute an eviction
or disturbance of Tenant's use and possession of the Premises or relieve Tenant
from paying Rent or performing any of its obligations under this Lease except as
provided in Section 19.9. Furthermore, Landlord shall not be liable under any
circumstances for a loss of, or injury to, property or for injury to, or
interference with, Tenant's business, including, without limitation, loss of
profits, however occurring, through or in connection with or incidental to a
failure to furnish any of the services or utilities as set forth in this Article
6. In the event of a failure to furnish or delay in furnishing any service,
Landlord shall use reasonable diligence to restore such service as soon as
reasonably possible under the circumstances.
6.4 Additional Services. Landlord shall also have the exclusive
right, but not the obligation, to provide any additional services which may be
required by Tenant, including, without limitation, locksmithing, lamp
replacement, additional janitorial service, and additional repairs and
maintenance, provided that Tenant shall pay to Landlord within thirty (30) days
billing, the sum of all costs to Landlord of such additional services at
Landlord's Actual Cost. Charges for any service for which Tenant is required to
pay from time to time hereunder, shall be deemed Additional Rent hereunder and
shall be billed on a monthly basis.
6.5 Conference Room Facility. The parties acknowledge that Landlord
currently has a conference room facility located on the eleventh (11th) floor of
the East Tower in the Wilshire Colonnade Building (the "Conference Room") which
is available for use by all tenants of the Project, at a usage fee established
by Landlord in Landlord's sole and absolute discretion. So long as Landlord
maintains the Conference Room for non-exclusive use by tenants of the Project,
Tenant shall have the right to use the Conference Room for general meeting and
other related purposes for up to thirty-six (36) hours per year. Such right to
use the Conference Room shall be subject to
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availability, as determined by Landlord, and to all such reasonable rules and
regulations regarding use of the Conference Room as Landlord may impose. Tenant
acknowledges that any usage of the Conference Room after Business Hours will be
without any HVAC service, unless specific arrangements are made by Tenant with
Landlord for HVAC usage. In the event HVAC services are provided to the
Conference Room after Business Hours, Tenant shall be charged Landlord's Actual
Cost for after Business Hours HVAC usage. Landlord makes no representation or
warranty to Tenant that Landlord will continue to provide the Conference Room
throughout the Lease Term or that the Conference Room will be available for use
by Tenant at any particular time or from time to time. Landlord agrees that the
costs incurred in connection with the Conference Room shall not be included in
Operating Expenses.
ARTICLE 7
REPAIRS
7.1 Tenant's Obligation to Repair. Tenant shall, at Tenant's own
expense, keep the Premises (except the Building Structure and the Building
Systems and Equipment), including all improvements, fixtures and furnishings
therein, in good order, repair and condition at all times during the Lease Term.
In addition, Tenant shall, at Tenant's own expense (subject to the prior
approval of Landlord), promptly and adequately repair all damage to the Premises
and replace or repair all damaged or broken fixtures and appurtenances; provided
however, that if Tenant fails to make such repairs (after notice from Landlord
to Tenant) within a reasonable amount of time, Landlord may, but need not, make
such repairs and replacements, and Tenant shall pay Landlord the reasonable and
actual cost thereof upon being billed for same and provided further that Tenant
shall be entitled to receive reimbursement for such expense to the extent the
cost of any such repair is covered by insurance obtained by Landlord as part of
Direct Expenses. Subject to Landlord's obligation to keep the Building, Building
Structure, Building Systems and Equipment and the common areas of the Building
in good condition, repair and operating order, Landlord may, but shall not be
required to, enter the Premises at all reasonable times to make such repairs,
alterations, improvements and additions to the Premises or to the Building or to
any equipment located in the Building as Landlord shall desire or deem necessary
or as Landlord may be required to do by governmental or quasi-governmental
authority or court order or decree or by the terms of this Lease. Tenant hereby
waives and releases its right to make repairs at Landlord's expense under
Sections 1941 and 1942 of the California Civil Code; or under any similar law,
statute, or ordinance now or hereafter in effect. 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 and Equipment and/or the Project except and to the extent required
because of Tenant's use, improvement or alteration of all or a portion of the
Premises for other than normal and customary business office operations;
provided, however, that costs incurred by Landlord in connection with any such
modifications or additions shall be Operating Expenses to the extent permitted
under Section 4.2.4.
7.2 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 that would be likely to cause material
disruption to Tenant's business) to Landlord of an event or circumstance which
requires the action of Landlord with respect to repair and/or maintenance, and
Landlord fails to provide such action within a reasonable period of time, given
the circumstances, after the receipt of such notice, but in any event Landlord
shall commence to repair not later than seven (7) days after receipt of such
notice, then Tenant may proceed to take the required action upon delivery of an
additional three (3) business days' notice to Landlord specifying that Tenant is
taking such required action (provided, however, that neither of the notices
shall be required in the event of an emergency which threatens life or where
there is imminent danger to property or a possibility that a failure to take
immediate action would be likely to cause a material disruption in Tenant's
normal and customary business activities), and if such action was required under
the terms of the Lease to be taken by Landlord and was not taken by Landlord
within such ten (10) day period or commenced to be taken as provided above
(unless such notice was not required as provided above), then Tenant shall be
entitled to prompt reimbursement by Landlord of Tenant's reasonable costs and
expenses in taking such action plus interest thereon at the Interest Rate below
plus rent abatement to the extent Tenant is entitled to rent abatement under
Section 19.9. Landlord agrees that Tenant will have access to the Building,
Building Systems and Equipment, Building Structure and Project to the extent
necessary to perform the work contemplated by this provision. In the event
Tenant takes such action, and such work will affect the Building Structure
and/or the Building Systems and Equipment, Tenant shall use only those
contractors used or approved by Landlord in the Building for work on such
Building Structure or Building Systems and Equipment unless such contractors are
unwilling or unable to perform (and are able to immediately 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
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performs similar work in Comparable Buildings. Furthermore, if Landlord does not
deliver a detailed written objection to Tenant within thirty (30) days after
receipt of an invoice by Tenant of its costs of taking action which Tenant
claims should have been taken by Landlord, and if such invoice from Tenant sets
forth a reasonably particularized breakdown of its costs and expenses in
connection with taking such action on behalf of Landlord, 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 the 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 the
selection of an arbitrator to resolve the dispute, which arbitrator shall be
selected and qualified pursuant to the procedures set forth in Section 30.34,
and whose costs shall be paid for by the losing party, unless it is not clear
that there is a "losing party", in which event the costs of arbitration shall be
shared equally. If Tenant prevails in the arbitration, 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) may be deducted by Tenant from the
rents next due and owing under the Lease.
7.3 Landlord's Obligations. Except as specifically provided in this
Lease to the contrary, subject to reimbursement in accordance with Article 4
above, Landlord shall keep the Building Structure and Building Systems and
Equipment in good condition and repair and shall operate the Building as a first
class office building.
ARTICLE 8
ADDITIONS AND ALTERATIONS
8.1 Landlord's Consent to Alterations. Tenant may not make any
improvements, alterations, additions or changes to the Premises (collectively,
the "Alterations") without first procuring the prior written consent of Landlord
to such Alterations, which consent shall be requested by Tenant not less than
twenty (20) days prior to the commencement thereof, and which consent shall not
be withheld unless a Design Problem, as that term is defined in Exhibit B,
exists. The Premises shall be initially improved as provided in and subject to,
the Tenant Work Letter attached hereto as Exhibit B and made a part hereof.
8.2 Manner of Construction. Landlord may impose, as a condition of
its consent to all Alterations or repairs of the Premises or about the Premises,
such requirements as Landlord in its reasonable discretion may deem necessary to
prevent a Design Problem (as that term is defined in Exhibit B) from occurring
and to prevent any unreasonable interference with other tenants normal and
customary business activities, including, but not limited to, the requirement
that upon Landlord's request (which election must be made by Landlord at the
time Tenant requests Landlord's consent to such Alterations), Tenant shall, at
Tenant's expense, remove such Alterations upon the expiration or any early
termination of the Lease Term (provided that Tenant shall not be required to
remove any Alterations which are customary and typical for business office
operations subject to Section 8.4 below), and/or the requirement that Tenant
utilize for such purposes only contractors, materials, mechanics and materialmen
reasonably approved by Landlord. In any event, a contractor approved by Landlord
shall perform all mechanical, electrical, plumbing, structural, and heating,
ventilation and air conditioning work, and such work shall be performed at
Tenant's cost. Tenant shall construct such Alterations and perform such repairs
in conformance with any and all applicable rules and regulations of any federal,
state, county or municipal code or ordinance and pursuant to a valid building
permit, issued by the city in which the Building is located, in conformance with
Landlord's construction rules and regulations identified on Exhibit F and any
modifications thereto that do not materially increase Tenant's obligations or
materially decrease Tenant's rights. Landlord's approval of the plans,
specifications and working drawings for Tenant's Alterations shall create no
responsibility or liability on the part of Landlord for their completeness,
design sufficiency, or compliance with all laws, rules and regulations of
governmental agencies or authorities. All work with respect to any Alterations
must be done in a good and workmanlike manner and diligently prosecuted to
completion to the end that the Premises shall at all times be a complete unit
except during the period of work. In performing the work of any such
Alterations, Tenant shall have the work performed in such manner as not to
obstruct access to the Building or the common areas for any other tenant of the
Building, and as not to obstruct the business of Landlord or other tenants in
the Building, or interfere with the labor force working in the Building. In the
event that Tenant makes any Alterations, Tenant agrees to carry
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"Builder's All Risk" insurance in an amount approved by Landlord covering the
construction of such Alterations, and such other insurance as Landlord may
reasonably require, it being understood and agreed that all of such Alterations
shall be insured by Tenant pursuant to Article 10 of this Lease immediately upon
completion thereof. 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
in which the Building is located in accordance with Section 3093 of the Civil
Code of the State of California or any successor statute, and Tenant shall
deliver to the Building management office a reproducible copy of the "as built"
drawings of the Alterations.
8.3 Payment for Alterations. The charges for Alterations under this
Lease shall be paid for by Tenant. Upon completion of such work, Tenant shall
deliver to Landlord, if payment is made directly to contractors, evidence of
payment, contractors' affidavits and full and final waivers of all liens for
labor, services or materials. Landlord shall receive no fee for supervision,
profit, overhead or general conditions in connection with construction of the
Alterations.
8.4 Landlord's Property. All Alterations, improvements, fixtures
and/or equipment which may be permanently installed or placed in or about the
Premises from time to time, shall be at the sole cost of Tenant and shall be and
become the property of Landlord on the termination or expiration of this Lease,
except that Tenant may remove any Alterations, improvements, fixtures and/or
equipment provided Tenant repairs any damage to the Premises and Building caused
by such removal. Furthermore, if Landlord, as a condition to Landlord's consent
to any Alteration, requires that Tenant remove any Alteration upon the
expiration or early termination of the Lease Term, Landlord may, by written
notice to Tenant prior to the end of the Lease Term, or given upon any earlier
termination of this Lease, require Tenant at Tenant's expense to remove such
Alterations and to repair any damage to the Premises and Building caused by such
removal; provided, however, that Tenant shall have no obligation to remove any
Alterations to the extent such Alterations are customary and typical for
business office purposes, and provided further that Tenant shall have an
obligation to remove any heavy machinery or equipment and any interconnecting
stairwells. Notwithstanding anything in this Article 8 to the contrary, Tenant
shall have no obligation to remove any of the initial Tenant Improvements in the
Premises. If Tenant fails to complete such removal and/or to repair any damage
caused by the removal of any Alterations, Landlord may do so and may charge the
reasonable and actual cost thereof to Tenant. Tenant hereby indemnifies and
holds Landlord harmless from any liability, cost, obligation, expense or claim
of lien in any manner relating to the installation, placement, removal or
financing of any such Alterations, improvements, fixtures and/or equipment in,
on or about the Premises. Notwithstanding anything in this Lease to the
contrary, all of Tenant's personal property, including movable furniture, trade
fixtures and equipment not attached to the Premises or the Building, may be
removed by Tenant prior to the expiration of the Lease Term.
ARTICLE 9
COVENANT AGAINST LIENS
Tenant has no authority or power to cause or permit any lien or
encumbrance of any kind whatsoever, whether created by act of Tenant, operation
of law or otherwise, to attach to or be placed upon the Real Property, Building
or Premises, and any and all liens and encumbrances created by Tenant shall
attach to Tenant's interest only. Landlord shall have the right at all times to
post and keep posted on the Premises any notice which it deems necessary for
protection from such liens. Tenant covenants and agrees not to suffer or permit
any lien of mechanics or materialmen or others to be placed against the Real
Property, the Building or the Premises with respect to work or services claimed
to have been performed for or materials claimed to have been furnished to Tenant
or the Premises, and, in case of any such lien attaching or notice of any lien,
Tenant covenants and agrees to cause it to be immediately released and removed
of record. Notwithstanding anything to the contrary set forth in this Lease, in
the event that such lien is not released and removed on or before the date
occurring ten (10) days after notice of such lien is delivered by Landlord to
Tenant, Landlord, at its sole option, may immediately take all action necessary
to release and remove such lien, without any duty to investigate the validity
thereof, and all sums, costs and expenses, including reasonable attorneys' fees
and costs, incurred by Landlord in connection with such lien shall be deemed
Additional Rent under this Lease and shall immediately be due and payable by
Tenant.
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ARTICLE 10
INSURANCE
10.1 Indemnification and Waiver. Landlord, its partners and their
respective officers, agents, servants, employees, and independent contractors
(collectively, "Landlord Parties") shall not be liable to Tenant for any damage
either to person or property or resulting from the loss of use thereof, which
damage is sustained by Tenant or by other persons claiming through Tenant,
except to the extent caused by the negligence or willful misconduct of the
Landlord Parties. Tenant shall indemnify, defend, protect, and hold harmless
Landlord Parties from any and all loss, cost, damage, expense and liability
(including without limitation court costs and reasonable attorneys' fees)
(collectively, "Claims") incurred in connection with or arising from any
negligence or willful misconduct of Tenant or any cause in, on or about the
Premises during the Lease Term, or any other period of Tenant's use or occupancy
thereof, provided that the terms of the foregoing indemnity shall not apply to
the gross negligence or willful misconduct of Landlord or Landlord Parties.
Landlord shall indemnify, defend, protect, and hold harmless Tenant, its
partners, and their respective officers, agents, servants, employees, and
independent contractors (collectively, "Tenant Parties") from any and all Claims
arising from the negligence or willful misconduct of Landlord in, on or about
the Project, except to the extent caused by the negligence or willful misconduct
of the Tenant Parties, but such indemnification shall not apply to damage to
property or the Building to the extent such damage was insured or required to be
insured by Landlord. Landlord further agrees to indemnify and hold harmless
Tenant and Tenant Parties from Claims arising from the presence in the Premises,
the Building and/or the Project of Hazardous Materials, except to the extent
such Hazardous Materials were placed or released or caused to be placed or
released in or on the Premises, the Building and/or the Project by Tenant or
Tenant Parties. Notwithstanding anything to the contrary set forth in this
Lease, either party's agreement to indemnify the other party as set forth in
this Section 10.1 shall be ineffective to the extent the matters for which such
party agreed to indemnify the other party are covered or required to be covered
by insurance required to be carried by the non-indemnifying party pursuant to
this Lease. Provided, further, to the extent any damage or repair obligation is
covered or required to be covered by insurance obtained by Landlord as part of
Direct Expenses, but is not covered or required to be covered by insurance
obtained by Tenant, then Tenant shall be relieved of its indemnity obligation up
to the amount of the insurance proceeds which Landlord receives. Further,
Tenant's agreement to indemnify Landlord and Landlord's agreement to indemnify
Tenant pursuant to this Section 10.1 are not intended to and shall not relieve
any insurance carrier of its obligations under policies required to be carried
pursuant to the provisions of this Lease, to the extent such policies cover, or
if carried, would have covered the matters, subject to the parties' respective
indemnification obligations; nor shall they supersede any inconsistent agreement
of the parties set forth in any other provision of this Lease. The provisions of
this Section 10.1 shall survive the expiration or sooner termination of this
Lease with respect to any claims or liability occurring prior to such expiration
or termination. Notwithstanding anything above to the contrary, because of
Tenant's and Landlord's agreement to allocate risks with respect to deductibles
and rely on insurance and the waiver of subrogation for property damage,
Landlord will not be liable to Tenant, and Tenant will not be liable to
Landlord, regardless of negligence or misconduct, for damages or destruction to
the property of the other.
10.2 Tenant's Compliance with Landlord's Fire and Casualty Insurance.
Tenant shall, at Tenant's expense, comply as to the Premises with all insurance
company requirements (that are customary with respect to Comparable Buildings)
pertaining to the use of the Premises. If Tenant's conduct or use of the
Premises causes any increase in the premium for such insurance policies, then
Tenant shall reimburse Landlord for any such increase. Tenant, at Tenant's
expense, shall comply with all rules, orders, regulations or requirements of the
American Insurance Association (formerly the National Board of Fire
Underwriters) and with any similar body.
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10.3 Tenant's Insurance. Tenant shall maintain the following
coverages in the following amounts.
10.3.1 Commercial General Liability Insurance covering the
insured against claims of bodily injury, personal injury and property damage
arising out of Tenant's operations, assumed liabilities or use of the Premises,
including a Broad Form Commercial General Liability endorsement covering the
insuring provisions of this Lease and the performance by Tenant of the indemnity
agreements set forth in Section 10.1 of this Lease, for limits of liability not
less than:
<TABLE>
<S> <C>
Bodily Injury and $3,000,000 each occurrence
Property Damage Liability $3,000,000 each occurrence
Personal Injury Liability $3,000,000 each occurrence
$3,000,000 annual aggregate
0% Insured's participation
</TABLE>
10.3.2 Physical Damage Insurance covering (i) all office
furniture, trade fixtures, office equipment, merchandise and all other items of
Tenant's property on the Premises installed by, for, or at the expense of
Tenant, (ii) the improvements which exist in the Premises as of the Lease
Commencement Date (the "Original Improvements"), and (iii) all other
improvements, alterations and additions to the Premises, including any
improvements, alterations or additions installed at Tenant's request above the
ceiling of the Premises or below the floor of the Premises. Such insurance shall
be written on an "all risks" of physical loss or damage basis, for the full
replacement cost value new without deduction for depreciation of the covered
items and in amounts that meet any co-insurance clauses of the policies of
insurance and shall include a vandalism and malicious mischief endorsement,
sprinkler leakage coverage and earthquake sprinkler leakage coverage. With
respect to the construction of the Tenant Improvements and to the extent Tenant
is constructing the Alterations, Tenant shall carry, or shall cause its
contractors to carry, (i) customary Builder's Risk Insurance and insurance
naming Tenant as the insured and Landlord as an additional insured to the extent
of Landlord's interest in the Alterations, (ii) the Standard E&O Policy and
(iii) Auto Insurance.
10.3.3 Landlord's Insurance. Landlord shall maintain in effect
at all times fire and hazard "all risk" insurance covering one hundred percent
(100%) of the full replacement cost valuation of the Building (or such other
amount as is customary for Comparable Buildings) and Landlord's personal
property including its business papers, furniture, fixtures and equipment,
subject to commercially reasonable deductibles, in the event of fire, lightning,
windstorm, vandalism, malicious mischief and all other risks normally covered by
"all risk" policies carried by landlords of comparable buildings in the vicinity
of the Building. Landlord shall also obtain and keep in full force (a) a policy
of commercial general liability and property damage insurance, (b) loss of rent
insurance and (c) workers' compensation insurance, all such insurance being in
amounts and with deductibles comparable to the insurance being carried by
landlords of Comparable Buildings. To the extent Landlord is constructing the
Alterations, Landlord shall (i) carry Insurance naming Landlord's agents as the
insured and Tenant as an additional insured to the extent of Tenant's interest
in the Alterations, (ii) cause the contractors and subcontractors to carry the
Standard E&O Policy and (iii) cause its contractors and subcontractors to carry
Auto Insurance.
10.3.4 Form of Policies. The minimum limits of policies of
insurance required of Tenant under this Lease shall in no event limit the
liability of Tenant under this Lease. Such insurance shall (i) name Landlord,
and any other party it so specifies in a written notice to Tenant, as an
additional insured; (ii) specifically cover the liability assumed by Tenant
under Section 10 of this Lease, including, but not limited to, Tenant's
obligations under Section 10.1 of this Lease; (iii) be issued by an insurance
company having a rating of not less than A-VII in Best's Insurance Guide or
which is otherwise acceptable to Landlord and permitted to do business in the
state in which the Building is located; (iv) be primary insurance as to all
claims thereunder and provide that any insurance carried by Landlord is excess
and is non-contributing with any insurance requirement of Tenant; (v) provide
that said insurance shall not be canceled or coverage changed unless fifteen
(15) days' prior written notice shall have been given to Landlord and any
mortgagee or ground or underlying lessor of Landlord to the extent such names
are furnished to Tenant; and (vi) contain a cross-liability endorsement or
severability of interest clause acceptable to Landlord. Tenant shall deliver
said policy or policies or certificates thereof to Landlord on or before the
Lease Commencement Date and at least one (1) day before the expiration dates
thereof. In the event Tenant shall fail to procure such insurance, or to deliver
such policies or certificate, Landlord may, at its option, on five (5) days
notice
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to Tenant procure such policies for the account of Tenant, and the cost thereof
shall be paid to Landlord as Additional Rent within five (5) days after delivery
to Tenant of bills therefor.
10.4 Subrogation. Landlord and Tenant agree to have their respective
insurance companies issuing property damage insurance waive any rights of
subrogation that such companies may have against Landlord or Tenant, as the case
may be, so long as the insurance carried by Landlord and Tenant, respectively,
is not invalidated thereby. As long as such waivers of subrogation are contained
in their respective insurance policies, Landlord and Tenant hereby waive any
right that either may have against the other on account of any loss or damage to
their respective property to the extent such loss or damage is insurable under
policies of insurance for fire and all risk coverage, theft, public liability,
or other similar insurance.
10.5 Additional Insurance Obligations. Tenant shall carry and
maintain during the entire Lease Term, at Tenant's sole cost and expense,
increased amounts of the insurance required to be carried by Tenant pursuant to
this Article 10, and such other reasonable types of insurance coverage and in
such reasonable amounts covering the Premises and Tenant's operations therein,
as may be reasonably requested by Landlord. Tenant shall require its Contractor
to carry such insurance as is normally required by other landlords of Comparable
Buildings with respect to contractors working in such buildings.
ARTICLE 11
DAMAGE AND DESTRUCTION
11.1 Repair of Damage to Premises by Landlord. Tenant shall promptly
notify Landlord of any damage to the Premises resulting from fire or any other
casualty. If the Premises or any common areas of the Building serving or
providing access to the Premises shall be damaged by fire or other casualty,
within sixty (60) days of notice to Landlord of the damage or destruction,
Landlord shall give notice to Tenant that Landlord elects, promptly and
diligently, subject to reasonable delays for insurance adjustment or other
matters beyond Landlord's reasonable control, and subject to all other terms of
this Article 11, to restore the Base, Shell, and Core of the Premises and
improvements to the Building not built by or for a tenant (collectively, the
"Base, Shell and Core") and such common areas and the Tenant Improvements and
Alterations made to the Premises by Tenant. Such restoration shall be to
substantially the same condition of the Base, Shell, and Core and common areas
prior to the casualty, except for modifications required by zoning and building
codes and other laws or by the holder of a mortgage on the Building, or the
lessor of a ground or underlying lease with respect to the Real Property and/or
the Building, or any other modifications to the common areas deemed desirable by
Landlord, provided access to the Premises and any common restrooms serving the
Premises shall not be materially impaired. Notwithstanding any other provision
of this Lease, upon the occurrence of any damage to the Premises, if this Lease
is not terminated as a result thereof, 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 10.3 of this Lease which pertains to
work to be performed by Landlord, and Landlord shall repair any injury or damage
to the Original Improvements installed in the Premises and shall return such
Original 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 in accordance with a reasonable
progress payment schedule. Upon Landlord's request, such insurance proceeds will
be placed in an escrow account or other account reasonably acceptable to Tenant,
subject to a progress payment disbursement procedure reasonably acceptable to
Landlord. 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. 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; 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 an abatement of Rent to the extent
permitted by Section 19.9 below.
11.2 Landlord's Option to Repair. Notwithstanding the terms of
Section 11.1 of this Lease, Landlord may elect not to rebuild and/or restore the
Premises and/or Building and instead terminate this Lease by notifying
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Tenant in writing of such termination within sixty (60) days after the date of
damage, such notice to include a termination date giving Tenant ninety (90) days
to vacate the Premises, but Landlord may so elect only if the Building shall be
damaged by fire or other casualty or cause, whether or not the Premises are
affected, and one or more of the following conditions is present: (i) repairs
cannot reasonably be completed within six (6) months of the date of damage (when
such repairs are made without the payment of overtime or other premiums); or
(ii) the uninsured damage exceeds one million dollars ($1,000,00.00) and
Landlord terminates the leases of all other tenants similarly affected by such
damage and destruction and elects either to demolish the Building or not to
commence and complete the repairs within one (1) year of the occurrence of such
damage and destruction. In addition, in the event that the Premises or the
Building is destroyed or damaged to any substantial extent during the last
twenty-four (24) months of the Lease Term, or the last twenty-four (24) months
of any renewal term, if Tenant exercises its renewal rights, then
notwithstanding anything contained in this Article 11, Landlord and Tenant shall
have the option to terminate this Lease by giving written notice to the other of
the exercise of such option within thirty (30) days after such damage or
destruction, in which event this Lease shall cease and terminate as of the date
of such notice. Upon any such termination of this Lease pursuant to this Section
11.2, Tenant shall pay the Base Rent and Additional Rent, subject to Section
19.9 below, properly apportioned up to such date of termination, and both
parties hereto shall thereafter be freed and discharged of all further
obligations hereunder, except as provided for in provisions of this Lease which
by their terms survive the expiration or earlier termination of the Lease Term;
provided, however, and notwithstanding anything to the contrary in this Lease,
that if Landlord does not elect to terminate this Lease pursuant to Landlord's
termination right as provided under this Section 11.2 and the repairs cannot, in
the reasonable opinion of an architect or contractor selected by Landlord and
Tenant, or if they cannot agree, then selected by a judge of a court of
competent jurisdiction (as specified by written notice to Tenant and Landlord
given within sixty (60) days after the damage), be completed within two hundred
seventy (270) days, then Tenant may elect no later than thirty (30) days after
the date of such notice, to terminate this Lease by written notice to Landlord
effective as of the date specified in the notice from Tenant, which date shall
not be less than thirty (30) days nor more than sixty (60) days after the date
such notice is given by Tenant. If, three hundred sixty-five (365) days after
the damage, subject to extension for any force majeure event or delay caused by
Tenant or any of the Tenant Parties, the Premises are not substantially
completed, Tenant shall have the right to terminate this Lease by written notice
to Landlord given within fifteen (15) days after expiration of such three
hundred sixty-five (365) day period.
11.3 Right to Terminate.
(a) Notwithstanding anything in either Articles 11 [Damage or
Destruction] and 13 [Condemnation] to the contrary, and except as expressly set
forth in Subsection (b) below, in the event that as a result of:
(i) damage or destruction of the Premises, the Building
Parking Facility (unless Tenant is provided with reasonable replacement parking)
and/or the Building or any part thereof so as to interfere substantially with
Tenant's use of all or a portion of the Premises, the Building Parking Facility,
(unless Tenant is provided with reasonable replacement parking) and/or the
Building;
(ii) a taking by eminent domain or exercise of other
governmental authority of the Premises, the Building Parking Facility (unless
Tenant is provided with reasonable replacement parking) and/or the Building or
any part thereof so as to interfere substantially with Tenant's use of all or a
portion of the Premises, the Building Parking Facility (unless Tenant is
provided with reasonable replacement parking) and/or the Building;
(iii) the inability of Landlord to provide services to the
Premises, the Building Parking Facility (unless Tenant is provided with
reasonable replacement parking) and/or the Building so as to interfere
substantially with Tenant's use of all or a portion of the Premises, the
Building Parking Facility (unless Tenant is provided with reasonable replacement
parking) and/or the Building; or
(iv) any discovery of Hazardous Materials in, on or around
the Premises, the Building and/or the Project not placed or caused to be
released in, on or around the Premises, the Building and/or the Project by
Tenant, that, considering the nature and amount of the substances involved,
materially interferes with Tenant's use of all or a portion of the Premises or
which presents a health risk to occupants of the Premises); or
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<PAGE> 22
(v) the discovery of any other hazardous condition with
respect to the Premises, the Building Parking Facility and/or the Building which
would make it dangerous or unsafe for Tenant and its employees to conduct their
normal and customary business operations from the Premises (each of the items
set forth in provision (a)(i), (ii), (iii), (iv) and (v) being referred to
herein as a "Trigger Event"),
Tenant cannot, within twelve (12) months ("Non-Use Period") of the occurrence of
the Trigger Event, be given reasonable use of, and access to, a fully repaired,
restored, and safe Premises, Building Parking Facility (unless Tenant is
provided with reasonable replacement parking) and Building (except for minor
"punch-list" items which will be repaired promptly thereafter), and the
utilities and services pertaining to the Premises, the Building Parking Facility
and the Building, all suitable for the efficient conduct of Tenant's business
therefrom, then Tenant may thereafter elect, within thirty (30) days after the
expiration of such Non-Use Period, to exercise a one-time right to terminate the
Lease upon thirty (30) days' written notice sent to Landlord.
(b) In the event of any Trigger Event occurring during the last year
of the Lease Term or, if an applicable renewal option has been exercised, during
the last year of any Option Term (provided Tenant has not, at the time of the
occurrence of the Trigger Event, exercised an option for an additional Option
Term), should the Non-Use Period continue for one hundred twenty (120) days,
Tenant may elect to exercise an on-going right to terminate the Lease upon
thirty (30) days' written notice sent to Landlord at any time following the
expiration of the Non-Use Period.
Waiver of Statutory Provisions. The provisions of this Lease,
including this Article 11, constitute an express agreement between Landlord and
Tenant with respect to any and all damage to, or destruction of, all or any part
of the Premises, the Building or any other portion of the Real Property, and any
statute or regulation of the State of California, including, without limitation,
Sections 1932(2) and 1933(4) of the California Civil Code, with respect to any
rights or obligations concerning damage or destruction in the absence of an
express agreement between the parties, and any other statute or regulation, now
or hereafter in effect, shall have no application to this Lease or any damage or
destruction to all or any part of the Premises, the Building or any other
portion of the Real Property.
ARTICLE 12
NONWAIVER
No waiver of any provision or breach of this Lease shall be implied by
any failure of Landlord or Tenant to enforce any remedy on account of the
violation of such provision, even if such violation shall continue or be
repeated subsequently, any waiver by Landlord or Tenant of any provision of this
Lease may only be in writing, and no express waiver shall affect any provision
other than the one specified in such waiver and that one only for the time and
in the manner specifically stated. Forbearance by Landlord or Tenant in
enforcement of one or more of the remedies herein provided upon an Event of
Default by Tenant or a default by Landlord shall not be deemed or construed to
constitute a waiver of such default. The acceptance of any Rent hereunder by
Landlord following the occurrence of any default, whether or not known to
Landlord, shall not be deemed a waiver of any such default, except only a
default in the payment of the Rent so accepted. Tenant's payment of any Rent
hereunder shall not constitute a waiver by Tenant of any breach or default by
Landlord under this Lease.
ARTICLE 13
CONDEMNATION
13.1 Permanent Taking. If the whole or any part of the Premises or
Building shall be taken by power of eminent domain or condemned by any competent
authority for any public or quasi-public use or purpose, or if any adjacent
property or street shall be so taken or condemned, or reconfigured or vacated by
such authority in such manner as to require the use, reconstruction or
remodeling of any part of the Premises or Building, or if Landlord shall grant a
deed or other instrument in lieu of such taking by eminent domain or
condemnation, Landlord shall have the option to terminate this Lease effective
as of the date possession is required to be surrendered to the authority to the
extent that Landlord terminates the leases of all other tenants in the Building
similarly affected by the taking pursuant to this Article 13; provided however,
that to the extent that the Premises are not adversely
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affected by such taking, and if Landlord continues to operate the Building as an
office building, Landlord may not terminate this Lease. If more than twenty-five
percent (25%) of the rentable square feet of the Premises is taken, or if access
to and/or use of the Premises is substantially impaired (in each case for a
period in excess of one (1) year), Tenant shall have the option to terminate
this Lease, provided such notice is given no later than one hundred eighty (180)
days after the date of such taking effective as of the date possession is
required to be surrendered to the authority. Landlord shall be entitled to
receive the entire award or payment in connection therewith, except that Tenant
shall have the right to file any separate claim available to Tenant for any
taking of Tenant's personal property and fixtures belonging to Tenant and
removable by Tenant upon expiration of the Lease Term pursuant to the terms of
this Lease and for the portion of the Tenant Improvements to the extent paid for
by Tenant, if any, and for moving expenses. All Rent shall be apportioned as of
the date of such termination, or the date of such taking, whichever shall first
occur. If any part of the Premises shall be taken, and this Lease shall not be
so terminated, the Rent shall be proportionately abated. Tenant hereby waives
any and all rights it might otherwise have pursuant to Section 1265.130 of the
California Code of Civil Procedure.
13.2 Temporary Taking. Notwithstanding anything to the contrary
contained in this Article 13, in the event of a temporary taking of all or any
portion of the Premises for a period of one (1) year or less, then this Lease
shall not terminate but the Base Rent and the Additional Rent shall be abated
for the period of such taking in proportion to the ratio that the amount of
rentable square feet of the Premises taken bears to the total rentable square
feet of the Premises. Landlord shall be entitled to receive the entire award
made in connection with any such temporary taking.
ARTICLE 14
ASSIGNMENT AND SUBLETTING
14.1 Transfers. Tenant shall not mortgage, pledge, hypothecate,
encumber or permit any lien to attach to, or otherwise transfer, this Lease or
any interest hereunder, permit any other such forgoing transfer of this Lease or
any interest hereunder by operation of law or permit the use of the Premises by
any persons other than Tenant and its employees (subject to the provisions
below) without the prior written consent of Landlord, which consent shall not be
unreasonably withheld. Tenant shall not, without the prior written consent of
Landlord, which consent shall not be withheld or conditioned, except as provided
under Section 14.2 below, or delayed beyond ten (10) business days, assign this
Lease or any interest hereunder, permit any assignment of this Lease or any
interest hereunder by operation of law, or sublet the Premises or any part
thereof (all of the foregoing are hereinafter sometimes referred to collectively
as "Transfers" and any person to whom any Transfer is made or sought to be made
is hereinafter sometimes referred to as a "Transferee"). If Tenant shall desire
Landlord's consent to any Transfer, Tenant shall notify Landlord in writing,
which notice (the "Transfer Notice") shall include (i) the proposed effective
date of the Transfer, which shall not be less than forty-five (45) days nor more
than one hundred eighty (180) days after the date of delivery of the Transfer
Notice, (ii) a description of the portion of the Premises to be transferred (the
"Subject Space"), (iii) all of the terms of the proposed Transfer and the
consideration therefor, including a calculation of the "Profits," as that term
is defined in Section 14.3 below, in connection with such Transfer, the name and
address of the proposed Transferee, and a copy of all existing and/or proposed
documentation pertaining to the proposed Transfer, including all existing
operative documents to be executed to evidence such Transfer or the agreements
incidental or related to such Transfer, and (iv) current financial statements of
the proposed Transferee certified by an officer, partner or owner thereof, and
any other information required by Landlord, which will enable Landlord to
determine the financial responsibility, character, and reputation of the
proposed Transferee, nature of such Transferee's business and proposed use of
the Subject Space, and such other reasonable information as Landlord may
reasonably require. Any Transfer made without Landlord's prior written consent
shall, at Landlord's option, be null, void and of no effect. Whether or not
Landlord shall grant consent, Tenant shall pay Landlord's review and processing
fees, as well as any reasonable legal fees incurred by Landlord (not to exceed
$1,500), within thirty (30) days after written request by Landlord.
14.2 Landlord's Consent. Landlord shall not withhold its consent to
any proposed assignment or subletting of the Subject Space to the Transferee on
the terms specified in the Transfer Notice except for the reasons enumerated in
this Section 14.2. The parties hereby agree that it shall be reasonable under
this Lease and under any applicable law for Landlord to withhold consent to any
proposed assignment or subletting where one or more of the following apply
(which are exclusive):
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14.2.1 The Transferee is of a character or reputation or
engaged in a business which is not consistent with the then existing tenants of
the Building or Project;
14.2.2 The Transferee intends to use the Subject Space for
purposes which are not permitted under this Lease or the use permitted by
Landlord of comparable space in the Building except with respect to retail space
on the ground floor;
14.2.3 The Transferee is either a governmental agency or
instrumentality thereof; provided, however, that Tenant shall be entitled to
assign, sublet or otherwise transfer to a governmental agency or instrumentality
thereof to the extent Landlord has leased or has permitted the lease of space to
a comparable governmental agency or instrumentality thereof of comparable
stature);
14.2.4 The assignment or subletting will result in
substantially more occupants than the number of people utilizing comparable
space in the Building;
14.2.5 The Transferee is not a party of reasonable financial
worth and/or financial stability in light of the responsibilities involved under
the Lease on the date consent is requested in Landlord's reasonable judgment;
14.2.6 The proposed assignment or subletting would cause
Landlord to be in violation of another lease or agreement to which Landlord is a
party, or would give an occupant of the Building a right to cancel its lease;
14.2.7 Intentionally Deleted; or
14.2.8 Either (a) the proposed Transferee, or any person or
entity which directly or indirectly, controls, is controlled by, or is under
common control with, the proposed Transferee occupies space in the Building at
the time of the request for consent (provided, however, that Tenant may assign
or sublease space to an occupant of the Building to the extent Landlord cannot
meet such occupant's space needs or to the extent such occupant occupies space
on the same floor as to which the Premises are located or on a floor contiguous
to a floor leased by Tenant), or (b) Landlord is in exclusive negotiations with
such proposed Transferee to lease a particular space in the Building at such
time.
If Landlord consents to any Transfer pursuant to the terms of this
Section 14.2 (for an assignment or subletting) or based on Landlord's reasonable
judgment (for any other Transfer as provided in Section 14.1 above), Tenant may
within six (6) months after Landlord's consent, but not later than the
expiration of said six-month period, enter into such Transfer of the Premises or
portion thereof, upon substantially the same terms and conditions as are set
forth in the Transfer Notice furnished by Tenant to Landlord pursuant to Section
14.1 of this Lease, provided that if there are any material changes in the terms
and conditions from those specified in the Transfer Notice (i) such that
Landlord would initially have been entitled to refuse its consent to such
Transfer under this Section 14.2 (for an assignment or subletting) or on
reasonable grounds (for all other Transfers), or (ii) which would cause the
proposed Transfer to be more favorable to the Transferee than the terms set
forth in Tenant's original Transfer Notice, Tenant shall again submit the
Transfer to Landlord for its approval and other action under this Article 14.
14.3 Profits. If Landlord consents to a Transfer, as a condition
thereto which the parties hereby agree is reasonable, Tenant shall pay to
Landlord fifty percent (50%) of any "Profits," as that term is defined in this
Section 14.3, received by Tenant from the Transferee. "Profits" shall mean all
rent, additional rent or other consideration payable by the Transferee less
Transfer Expenses (as hereinafter defined). "Profits" shall also include, but
not be limited to, key money and bonus money paid by the Transferee to Tenant in
connection with such Transfer, and any payment in excess of fair market value
for services rendered by Tenant to the Transferee or for assets, fixtures,
inventory, equipment, or furniture transferred by Tenant to the Transferee in
connection with such Transfer. As used herein, "Transfer Expenses" shall mean
(a) the gross revenue payable to Landlord by Tenant during the period of the
sublease term or during the assignment with respect to the space that is the
subject of the Transfer (the "Transferred Space"); (b) the gross revenue as to
the Transferred Space paid to Landlord by Tenant for all days the Transferred
Space was vacated from the date Tenant has actually vacated the Transferred
Space; (c) any improvement allowance or other economic concession (planning
allowance, moving expenses, etc.), paid by Tenant
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to the Transferee; (d) customary brokers' commissions; (e) reasonable attorneys'
fees; (f) lease takeover payments; (g) costs of advertising the space for
sublease or assignment; and (h) any other reasonable, customary costs actually
paid in assigning or subletting the Transferred Space or in negotiating or
effectuating the assignment or sublease; provided, however, under no
circumstance shall Landlord be paid any Profits until Tenant has recovered all
the items set forth in subparts (a) through (h) for such Transferred Space, it
being understood that if in any year the gross revenues, less the deductions set
forth in subparts (a) through (h) above (the "Net Revenues"), are less than any
and all costs actually paid in assigning or subletting the affected space
(collectively "Transaction Costs"), the amount of the excess Transaction Costs
shall be carried over to the next year and then deducted from Net Revenues with
the procedure repeated until a Profit is achieved. In the event of an assignment
in connection with which there are Profits, then as long as Landlord shall be
entitled to receive a portion of the Profits, the payment of Rents shall be paid
to Tenant; provided, however, that Tenant shall upon request by Landlord,
provide Landlord with an assignment of all Rents in excess of the amount of
Profits Tenant is entitled to retain and shall execute any documents reasonably
requested by Landlord to effectuate such assignment.
14.4 Landlord's Option as to Subject Space. Notwithstanding anything
to the contrary contained in this Article 14, Landlord shall have no right to
recapture the Subject Space, or to take an assignment or sublease of the Subject
Space from Tenant.
14.5 Effect of Transfer. If Landlord consents to a Transfer, (i) the
terms and conditions of this Lease shall in no way be deemed to have been waived
or modified, (ii) such consent shall not be deemed consent to any further
Transfer by either Tenant or a Transferee, (iii) Tenant shall deliver to
Landlord, promptly after execution, an original executed copy of all
documentation pertaining to the Transfer in form reasonably acceptable to
Landlord, (iv) Tenant shall furnish upon Landlord's request a complete
statement, certified by an independent certified public accountant, or Tenant's
chief financial officer, setting forth in detail the computation of any Profits
Tenant has derived and shall derive from such Transfer, and (v) no Transfer
relating to this Lease or agreement entered into with respect thereto, whether
with or without Landlord's consent, shall relieve Tenant from liability under
this Lease. Landlord or its authorized representatives shall have the right at
all reasonable times to audit the books, records and papers of Tenant relating
to any Transfer, and shall have the right to make copies thereof. If the Profits
respecting any Transfer shall be found understated, Tenant shall, within thirty
(30) days after demand, pay the deficiency with interest at the Interest Rate
and Landlord's costs of such audit.
14.6 Additional Transfers. A transfer of the capital stock of Tenant
or the sale of substantially all of the assets of Tenant shall not constitute a
"Transfer" hereunder provided that (a) as of the date of the transfer, the
transferee (or Tenant, if Tenant survives the transaction) has the financial
worth and/or financial stability reasonably sufficient to perform the
responsibilities involved under this Lease and (b) the transferee executes and
delivers to Landlord a writing reasonably acceptable to Landlord assuming the
obligations of Tenant hereunder.
14.7 Non-Transfers. Notwithstanding anything to the contrary
contained in this Article 14, an assignment or subletting of all or a portion of
the Premises to an affiliate of Tenant (an entity which is controlled by,
controls, or is under common control with, Tenant) (an "Affiliate"), shall not
be deemed a Transfer under this Article 14, provided that Tenant notifies
Landlord of any such assignment or sublease and promptly supplies Landlord with
any documents or information requested by Landlord regarding such assignment or
sublease or such affiliate, and further provided that such assignment or
sublease is not a subterfuge by Tenant to avoid its obligations under this
Lease. "Control," as used in this Section 14.7, shall mean the ownership,
directly or indirectly, of at least fifty-one percent (51%) of the voting
securities of, or possession of the right to vote, in the ordinary direction of
its affairs, of at least fifty-one percent (51%) of the voting interest in, any
person or entity.
14.8 Recognition Agreement. To the extent that Tenant enters into an
assignment of the Lease or enters into a sublease for all or any portion of the
Premises to a sublessee who is comparable in quality to the tenants who are
leasing comparable space from Landlord, Landlord, if it grants its consent to
such assignment or sublease, which consent shall not be unreasonably withheld,
conditioned or delayed, shall also simultaneously execute and deliver a
recognition agreement pursuant to which Landlord shall agree that in the event
Tenant defaults under the Lease and the Lease is terminated, provided the
assignee or subtenant is not then in default beyond the applicable cure periods
hereunder (or under the assignment or sublease documents), the assignment or the
sublease shall be recognized as a direct lease between Landlord and the assignee
or the subtenant on the terms and conditions of the assignment or sublease to
the extent same are not inconsistent with, or contrary to, the provisions of
this Lease and at a rental rate which is the higher of the rental rate under the
Lease or the rental rate
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under the assignment or sublease.
14.9 Occupancy By Others. Tenant may allow any person or company
which is a client or customer of Tenant or which is providing service to Tenant
or one of Tenant's clients to occupy certain portions of the Premises not to
exceed twenty percent (20%) thereof without such occupancy being deemed an
assignment or subleasing as long as (a) no new demising walls are constructed to
accomplish such occupancy, (b) such occupant agrees to observe all covenants of
Tenant hereunder (excluding the payment of Rent) and (c) such relationship was
not created as a subterfuge to avoid the obligations set forth in this Article
14.
ARTICLE 15
SURRENDER OF PREMISES; OWNERSHIP
AND REMOVAL OF TRADE FIXTURES
15.1 Surrender of Premises. No act or thing done by Landlord or any
agent or employee of Landlord during the Lease Term shall be deemed to
constitute an acceptance by Landlord of a surrender of the Premises unless such
intent is specifically acknowledged in a writing signed by Landlord. 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 properly terminated. The voluntary or other surrender of this Lease by
Tenant, whether accepted by Landlord or not, or a mutual termination hereof,
shall not work a merger, and at the option of Landlord shall operate as an
assignment to Landlord of all subleases or subtenancies affecting the Premises.
15.2 Removal of Tenant Property by Tenant. Subject to the terms of
Article 8, upon the expiration of the Lease Term, or upon any earlier
termination of this Lease, Tenant shall, subject to the provisions of this
Article 15, quit and surrender possession of the Premises to Landlord in good
order and condition, reasonable wear and tear, damage by casualty and repairs
which are specifically made the responsibility of Landlord hereunder excepted.
Upon such expiration or termination, Tenant shall, without expense to Landlord,
remove or cause to be removed from the Premises all debris and rubbish, and such
items of furniture, equipment, free-standing cabinet work, and other articles of
personal property owned by Tenant or installed or placed by Tenant at its
expense in the Premises, and such similar articles of any other persons claiming
under Tenant, as Landlord may, in its sole discretion, require to be removed,
subject to the terms of Article 8, and Tenant shall repair at its own expense
all damage to the Premises and Building resulting from such removal.
ARTICLE 16
HOLDING OVER
If Tenant holds over after the expiration of the Lease Term hereof, as
it may be extended in accordance herewith, with or without the express or
implied consent of Landlord, such tenancy shall be from month-to-month only, and
shall not constitute a renewal hereof or an extension for any further term, and
in such case Rent shall be payable at a monthly rate equal to one hundred
twenty-five percent (125%) of the Rent applicable during the last rental period
of the Lease Term under this Lease. Such month-to-month tenancy shall be subject
to every other term, covenant and agreement contained herein. Nothing contained
in this Article 16 shall be construed as consent by Landlord 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
Article 16 shall not be deemed to limit or constitute a waiver of any other
rights or remedies of Landlord provided herein or at law. If Tenant fails to
surrender the Premises upon the termination or expiration of this Lease, in
addition to any other liabilities to Landlord accruing therefrom, Tenant shall
protect, defend, indemnify and hold Landlord harmless from all loss, costs
(including reasonable attorneys' fees) and liability resulting from such
failure, including, without limiting the generality of the foregoing, any claims
made by any succeeding tenant founded upon such failure to surrender, and any
lost profits to Landlord resulting therefrom.
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ARTICLE 17
ESTOPPEL CERTIFICATES
Within fifteen (15) days following a request in writing by Landlord,
Tenant shall execute and deliver to Landlord an estoppel certificate, which, as
submitted by Landlord, shall be substantially in the form of Exhibit E, attached
hereto, (or such other commercially reasonable form as may be required by any
prospective mortgagee or purchaser of the Project, or any portion thereof),
indicating therein any exceptions thereto that may exist at that time, and shall
also contain any other information reasonably requested by Landlord or
Landlord's mortgagee or prospective mortgagee. Tenant shall execute and deliver
whatever other instruments may be reasonably required for such purposes. Upon
request by Tenant, Landlord shall execute and deliver a commercially reasonable
estoppel certificate to Tenant in the time period specified above. Failure of
Tenant or Landlord to timely execute and deliver such estoppel certificate or
other instruments shall constitute an acceptance of the Premises (by Tenant) and
an acknowledgment by Tenant or Landlord, as applicable, that statements included
in the estoppel certificate are true and correct, without exception.
ARTICLE 18
SUBORDINATION
This Lease is subject and subordinate to all present and future ground
or underlying leases of the Real Property and to the lien of any mortgages or
trust deeds, now or hereafter in force against the Real Property and the
Building, if any, and to all renewals, extensions, modifications, consolidations
and replacements thereof, and to all advances made or hereafter to be made upon
the security of such mortgages or trust deeds, unless the holders of such
mortgages or trust deeds, or the lessors under such ground lease or underlying
leases, require in writing that this Lease be superior thereto. Tenant covenants
and agrees in the event any proceedings are brought for the foreclosure of any
such mortgage, or if any ground or underlying lease is terminated, to attorn to
the purchaser upon any such foreclosure sale, or to the lessor of such ground or
underlying lease, as the case may be, if so requested to do so by such purchaser
or lessor, and to recognize such purchaser or lessor as the lessor under this
Lease. Tenant shall, within fifteen (15) days of request by Landlord, execute
such further instruments or assurances as Landlord may reasonably deem necessary
to evidence or confirm the subordination or superiority of this Lease to any
such mortgages, trust deeds, ground leases or underlying leases.
Landlord agrees that thirty (30) days after the date of full execution
of the Lease, it will provide, without cost to or charge of, Tenant with
non-disturbance, subordination and attornment agreements ("non-disturbance
agreement") in favor of Tenant from any ground lessors, mortgage holders or lien
holders (each, a "Superior Mortgagee") then in existence, on the form provided
by such Superior Mortgagee(s), with such changes as are approved by Tenant and
such parties. Said non-disturbance agreements shall be in recordable form and
may be recorded at Tenant's election and expense. In the event Landlord fails to
provide commercially reasonable non-disturbance agreements within the time frame
set forth in this Article 18, Tenant shall have the right, exercisable at any
time thereafter, to give ten (10) business days written notice to Landlord
terminating the Lease, which notice must be given, if at all, no later than ten
(10) days after Tenant's receipt of Landlord's notice to Tenant that Landlord
was unable to obtain such non-disturbance agreements. In addition, Tenant may
give such notice of termination after the expiration of the thirty (30) day
period and prior to receipt of Landlord's notice.
Landlord agrees to provide Tenant with commercially reasonable
non-disturbance agreement(s) in favor of Tenant from any Superior Mortgagee(s)
of Landlord who later come(s) into existence at any time prior to the expiration
of the Lease Term, as it may be extended, in consideration of, and as a
condition precedent to, Tenant's agreement to subordinate this Lease in
accordance with this Article 18. Said non-disturbance agreements shall be in
recordable form and may be recorded at Tenant's election and expense.
Notwithstanding anything to the contrary set forth in this Lease, the
non-disturbance agreement shall provide that in the event that Landlord fails to
reimburse Tenant, in accordance with this Lease, for the Tenant Improvement
Allowance, the Superior Mortgagee, if such Superior Mortgagee succeeds to
Landlord's interest hereunder, or such other successor to the interests of
Landlord hereunder, shall pay to Tenant, such unpaid amounts and shall recognize
and honor any remaining credit of Base Rent and/or Direct Expenses.
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All non-disturbance agreements shall acknowledge that, and Landlord
hereby independently agrees that, to the extent Landlord has failed to fulfill
its obligations with respect to the reimbursement of Tenant, in accordance
herewith, of any Tenant Improvement Allowance or remaining credit of Base Rent
and/or Direct Expenses ("Key Obligations"), and to the extent Superior Mortgagee
has failed to fulfill its obligations with regard to the payment of such Key
Obligations as provided in the preceding paragraph, Tenant may deduct the amount
of the Key Obligation which Landlord has not paid from the Rent next coming due
and payable, from time to time, under the Lease.
In addition to the foregoing, Landlord agrees that in the event Landlord
has failed to pay its Key Obligations, Tenant may deduct the amount of the Key
Obligations which Landlord has not paid, together with interest at the Interest
Rate, from the Rent next coming due and payable, from time to time, under the
Lease.
ARTICLE 19
DEFAULTS; REMEDIES
19.1 Events of Default. The occurrence of any of the following shall
constitute an Event of Default under this Lease by Tenant:
19.1.1 Any failure by Tenant to pay any Rent or any other
charge required to be paid under this Lease, or any part thereof, when due
unless such failure is cured within seven (7) business days after receipt of
written notice by Tenant from Landlord that same was not paid when due; provided
that such notice shall be in addition to, and not in lieu of, any notice
required under California Code of Civil Procedure Section 1161; or
19.1.2 Any failure by Tenant to observe or perform any other
provision, covenant or condition of this Lease (including any exhibit hereto or
other document executed in connection herewith) to be observed or performed by
Tenant where such failure continues for thirty (30) days after written notice
thereof from Landlord to Tenant; provided that any such notice shall be in
addition to, and not in lieu of, any notice required under California Code of
Civil Procedure Section 1161 or any similar or successor law; and provided
further that if the nature of such default is such that the same cannot
reasonably be cured within a thirty (30)-day period, Tenant shall not be deemed
to be in default if it diligently commences such cure within such period and
thereafter diligently proceeds to rectify and cure said default as soon as
possible.
19.2 Remedies Upon Default. Upon the occurrence of any Event of
Default by Tenant, Landlord shall have, in addition to any other remedies
available to Landlord at law or in equity, the option to pursue any one or more
of the following remedies, each and all of which shall be cumulative and
nonexclusive and except as required under Section 19.1, without any notice or
demand whatsoever.
19.2.1 Terminate this Lease by providing Tenant with written
notice, 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; and Landlord may
recover from Tenant the following:
(i) The worth at the time of award of any unpaid
rent which has been earned at the time of such termination; plus
(ii) The worth at the time of award of the amount by
which the 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
(iii) The worth at the time of award of the amount by
which the unpaid rent for the balance of the Lease Term after the time of award
exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus
(iv) Any other amount necessary to compensate
Landlord for all the detriment
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proximately caused by Tenant's failure to perform its 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; and
(v) At Landlord's election, such other amounts in
addition to or in lieu of the foregoing as may be permitted from time to time by
applicable law to the extent not duplicative.
The term "rent" as used in this Section 19.2 shall be deemed to be and
to mean all sums of every nature required to be paid by Tenant pursuant to the
terms of this Lease, whether to Landlord or to others. As used in Paragraphs
19.2.1(i) and (ii), above, the "worth at the time of award" shall be computed by
allowing interest at the Interest Rate set forth in Article 25 of this Lease. As
used in Paragraph 19.2.1(iii) above, the "worth at the time of award" 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%).
19.2.2 Landlord shall have the remedy described in California
Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's
breach and abandonment and recover rent as it becomes due, if lessee has the
right to sublet or assign, subject only to reasonable limitations). Accordingly,
if Landlord does not elect to terminate this Lease on account of any Event of
Default by Tenant, Landlord may, from time to time, without terminating this
Lease, enforce all of its rights and remedies under this Lease, including the
right to recover all rent as it becomes due.
19.3 Sublessees of Tenant. Whether or not Landlord elects to
terminate this Lease on account of any Event of Default by Tenant, as set forth
in this Article 19, Landlord shall have the right to terminate any and all
subleases, licenses, concessions or other consensual arrangements for possession
entered into by Tenant and affecting the Premises or may, in Landlord's sole
discretion, succeed to Tenant's interest in such subleases, licenses,
concessions or arrangements subject to Section 14.8. In the event of Landlord's
election to succeed to Tenant's interest in any such subleases, licenses,
concessions or arrangements, Tenant shall, as of the date of notice by Landlord
of such election, have no further right to or interest in the rent or other
consideration receivable thereunder.
19.4 Form of Payment After Default. Following the occurrence of an
Event of Default by Tenant, Landlord shall have the right to require that any or
all subsequent amounts paid by Tenant to Landlord hereunder, whether in the cure
of the default in question or otherwise, be paid in the form of cash, money
order, cashier's or certified check drawn on an institution acceptable to
Landlord, or by other means approved by Landlord, notwithstanding any prior
practice of accepting payments in any different form.
19.5 Waiver of Default. No waiver by Landlord or Tenant of any
violation or breach of any of the terms, provisions and covenants herein
contained shall be deemed or construed to constitute a waiver of any other or
later violation or breach of the same or any other of the terms, provisions, and
covenants herein contained. Forbearance by Landlord in enforcement of one or
more of the remedies herein provided upon an Event of Default shall not be
deemed or construed to constitute a waiver of such default. The acceptance of
any Rent hereunder by Landlord following the occurrence of any default, whether
or not known to Landlord, shall not be deemed a waiver of any such default,
except only a default in the payment of the Rent so accepted. Payment of Rent by
Tenant shall not constitute a waiver of any rights of Tenant.
19.6 Efforts to Relet. For the purposes of this Article 19, Tenant's
right to possession shall not be deemed to have been terminated by efforts of
Landlord to relet the Premises, by its acts of maintenance or preservation with
respect to the Premises, or by appointment of a receiver to protect Landlord's
interests hereunder. The foregoing enumeration is not exhaustive, but merely
illustrative of acts which may be performed by Landlord without terminating
Tenant's right to possession.
19.7 No Waiver of Redemption by Tenant. Nothing herein shall be
deemed to constitute a waiver of Tenant's right to redeem, by order or judgment
of any court or by any legal process or writ, Tenant's right of occupancy of the
Premises after any termination of this Lease; provided, however, that prior to
redeeming Tenant's right of occupancy of the Premises after termination of this
Lease, Tenant shall pay off any judgment or order and
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will pay to Landlord Landlord's attorneys' fees and all other reasonable costs
associated with Tenant's redemption, and provided further that Tenant shall
provide Landlord with reasonable assurances that the Lease will not be
terminated again due to an Event of Default and shall deposit with Landlord an
additional Security Deposit equal to four (4) months Base Rent.
19.8 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, then notwithstanding any provision of this Lease
to the contrary, and in addition to any and all other remedies permitted by this
Lease and/or by Applicable Laws Tenant shall have all offset rights available
under Section 365 of the United States Bankruptcy Code in connection with such
proceeding.
19.9 Abatement of Rent When Tenant Is Prevented From Using Premises.
In the event that Tenant is prevented from using, and does not use, the Premises
or any portion thereof, for five (5) consecutive business days or ten (10)
business days in any twelve (12) month period (the "Eligibility Period") as a
result of (1) any damage or destruction to the Premises, the Building Parking
Facility (without the provision of reasonable substitute parking) and/or the
Building, (2) any repair, maintenance or alteration performed by Landlord after
the Lease Commencement Date, which substantially interferes with Tenant's use of
the Premises, the Building Parking Facility (without the provision of reasonable
substitute parking) and/or the Building, (3) any failure by Landlord to provide
Tenant with services or access to the Premises, the Building Parking Facility
(without the provision of reasonable substitute parking) and/or the Building,
(4) because of an eminent domain proceeding or (5) because of the presence of
Hazardous Materials in, on or around the Premises, the Building or the Project
which poses a health risk to occupants of the Premises, not introduced or caused
to be released by Tenant, then Tenant's Rent shall be equitably 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. However, in the event that
Tenant is prevented from conducting, and does not conduct, its business in any
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 Rent for the entire Premises
shall be abated; provided, however, if Tenant reoccupies and conducts its
business from any portion of the Premises during such period, 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 such business operations
commence. If Tenant's right to abatement occurs because of an eminent domain
taking and/or because of damage or destruction to the Premises, the Building
Parking Facility (without the provision of reasonable substitute parking), the
Building and/or Tenant's property, Tenant's abatement period shall continue
until Tenant has been given reasonably sufficient time, and sufficient access to
the Premises, the Building Parking Facility and/or the Building, to rebuild such
portion it is required to rebuild, to install its property, furniture, fixtures,
and equipment to the extent the same shall have been removed and/or damaged as a
result of such damage or destruction and/or eminent domain taking and to move in
over a weekend. To the extent Tenant is entitled to abatement without regard to
the Eligibility Period, because of an event covered by Articles 11 [Damage or
Destruction] and 13 [Condemnation] of the Lease, then the Eligibility Period
shall not be applicable. To the extent Tenant has prepaid rent (as it does each
month since Rent is due on the first day of each month) and Tenant is
subsequently entitled to an abatement, such prepaid, and subsequently abated,
Rent should be refunded to, and paid by Landlord to, Tenant within thirty (30)
days after the end of the appropriate month.
ARTICLE 20
COVENANT OF QUIET ENJOYMENT
Landlord covenants that as long as an Event of Default by Tenant is not
in existence, Tenant shall, during the Lease 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 express or implied.
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ARTICLE 21
SECURITY DEPOSIT
Landlord and Tenant acknowledge that Landlord is currently holding
Tenant's security deposit in the amount of $63,208.90 under the prior existing
lease(s) by and between Landlord and Tenant. The parties agree that Landlord
shall retain the deposit described in the foregoing sentence as the "Security
Deposit" under this Lease notwithstanding anything to the contrary contained in
the prior lease(s) regarding return of the security deposit upon lease
termination. Tenant shall not be required to deposit any sum in addition to the
Security Deposit with Landlord upon execution of this Lease. The Security
Deposit shall be held by Landlord as security for the faithful performance by
Tenant of all the terms, covenants, and conditions of this Lease to be kept and
performed by Tenant during the Lease Term. The Security Deposit shall not be
mortgaged, assigned or encumbered in any manner whatsoever by Tenant without the
prior written consent of Landlord. If an Event of Default by Tenant occurs with
respect to any provisions of this Lease, including, but not limited to, the
provisions relating to the payment of Rent, Landlord may, but shall not be
required to, use, apply or retain all or any part of the Security Deposit for
the payment of any Rent or any other sum in default, or for the payment of any
amount that Landlord may spend or become obligated to spend by reason of
Tenant's default, or to compensate Landlord for any other loss or damage that
Landlord may suffer by reason of Tenant's default. If any portion of the
Security Deposit is so used or applied, Tenant shall, within fifteen (15) days
after written demand therefor, deposit cash with Landlord in an amount
sufficient to restore the Security Deposit to its original amount. The use,
application or retention of the Security Deposit, or any portion thereof, by
Landlord shall not (a) prevent Landlord from exercising any other right or
remedy provided by this Lease or by law, it being intended that Landlord shall
not first be required to proceed against the Security Deposit, nor (b) operate
as a limitation on any recovery to which Landlord may otherwise be entitled.
Tenant acknowledges that Landlord has the right to transfer or mortgage its
interest in the Real Property and the Building and in this Lease and Tenant and
Landlord agree that in the event of any such transfer or mortgage, Landlord
shall transfer the Security Deposit to the transferee or mortgagee. Upon such
transfer or assignment of the Security Deposit, Landlord shall thereby be
released by Tenant from all liability or obligation for the return of such
Security Deposit and Tenant shall look solely to such transferee or mortgagee
for the return of the Security Deposit. If Tenant shall fully and faithfully
perform every provision of this Lease to be performed by it, the Security
Deposit, or any balance thereof, shall be returned to Tenant, or, at Landlord's
option, to the last assignee of Tenant's interest hereunder, within sixty (60)
days following the expiration of the Lease Term. Tenant shall not be entitled to
any interest on the Security Deposit. Tenant hereby waives the provisions of
Section 1950.7 of the California Civil Code, and all other provisions of law,
now or hereafter in force, which provide that Landlord may claim from a security
deposit only those sums reasonably necessary to remedy defaults in the payment
of rent, to repair damage caused by Tenant or to clean the Premises, it being
agreed that Landlord may, in addition, claim those sums reasonably necessary to
compensate Landlord for any other loss or damage, foreseeable or unforeseeable,
caused by the act or omission of Tenant or any officer, employee, agent or
invitee of Tenant.
ARTICLE 22
SUBSTITUTION OF OTHER PREMISES
Intentionally Deleted.
ARTICLE 23
DIRECTORY BOARD
23.1 Building Directory. Tenant shall be entitled to two (2) lines
per 1,000 rentable square feet of the Premises on the Building directory, to
display Tenant's name and location in the Building.
23.2 Prohibited Signage and Other Items. Any signs, notices, logos,
pictures, names or advertisements which are installed and that have not been
individually approved by Landlord (which approval shall not be unreasonably
withheld) may be removed on five (5) days notice to Tenant at the sole expense
of Tenant. Tenant may not install any signs on the exterior or roof of the
Building or the common areas of the Building or the Real Property, except that
Tenant may retain its existing signage and any replacement thereof reasonably
approved by Landlord as to aesthetics. If Tenant elects to replace such signage,
Tenant shall pay for such costs (and such
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replacement sign shall be the same size as the existing sign). Any signs, window
coverings, or blinds (even if the same are located behind the Landlord approved
window coverings for the Building), or other items visible from the exterior of
the Premises or Building are subject to the prior approval of Landlord, which
approval shall not be unreasonably withheld.
ARTICLE 24
COMPLIANCE WITH LAW
Tenant shall not do anything or suffer anything to be done in or about
the Premises which will in any way conflict with any law, statute, ordinance or
other governmental rule, regulation or requirement now in force or which may
hereafter be enacted or promulgated (collectively, "Applicable Laws"). At its
sole cost and expense, Tenant shall promptly comply with any Applicable Laws
which relate to (i) Tenant's use of the Premises, (ii) the tenant improvements,
(iii) any Alterations made by Tenant to the Premises, or (iv) the Base, Shell
and Core, but as to the Base, Shell and Core, Building Structure and Building
Systems and Equipment, only to the extent such obligations are triggered by
Tenant's use of the Premises for other than normal and customary business office
purposes or because of Tenant's installation of Alterations or Tenant
Improvements which do not constitute normal and customary business office
improvements; provided, however, that costs incurred by Landlord in connection
with any such modifications or additions shall be Operating Expenses to the
extent permitted under Section 4.2.4. Should any standard or regulation now or
hereafter be imposed on Landlord or Tenant by a state, federal or local
governmental body charged with the establishment, regulation and enforcement of
occupational, health or safety standards for employers, employees, landlords or
tenants, then Tenant agrees, at its sole cost and expense, to comply promptly
with such standards or regulations, but Landlord shall, subject to reimbursement
in accordance with Article 4 above, pay for any changes to the Base, Shell, and
Core, Building Structure and/or Building Systems and Equipment required thereby
unless related to Tenant's specific use or improvement for other than normal and
customary business office operations, in which event Tenant shall be solely
responsible for payment therefore. A "call center" is deemed to be a normal and
customary business office operation; provided, however, that to the extent any
Applicable Law imposes a requirement that applies to call center operations and
not to other normal and customary business office operations, then to that
extent, Tenant shall be responsible for changes to the Building Structure and
Building Systems and Equipment. The judgment of any court of competent
jurisdiction or the admission of Tenant in any judicial action, regardless of
whether Landlord is a party thereto, that Tenant has violated any of said
governmental measures, shall be conclusive of that fact as between Landlord and
Tenant.
ARTICLE 25
LATE CHARGES
If any installment of Rent or any other sum due from Tenant shall not be
received by Landlord or Landlord's designee or if any sum due from Landlord to
Tenant shall not be received within five (5) days after notice that said amount
is due, then Tenant or Landlord, as applicable shall pay to the other a late
charge equal to three percent (3%) of the amount due plus any attorneys' fees
incurred by Landlord or Tenant, as applicable by reason of the other's failure
to pay Rent and/or other charges when due hereunder. As it relates to Tenant,
the late charge shall be deemed Additional Rent. The right to require it shall
be in addition to all of Landlord's and Tenant's other rights and remedies
hereunder or at law and shall not be construed as liquidated damages or as
limiting Landlord's or Tenant's remedies in any manner. In addition to the late
charge described above, any Rent or other amounts owing hereunder which are not
paid when due shall thereafter bear interest until paid at a rate equal to the
lessor of (i) the rate publicly announced from time to time by the largest (as
measured by deposits) state chartered bank operating in California as its Prime
Rate or Reference Rate or other similar benchmark plus two percent (2%) or (ii)
the highest rate permitted by applicable law ("Interest Rate").
ARTICLE 26
LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT
26.1 Landlord's Cure. All covenants and agreements to be kept or
performed by Tenant under this Lease shall be performed by Tenant at Tenant's
sole cost and expense and without any reduction of Rent except as expressly
provided in this Lease. If Tenant shall fail to perform any of its obligations
under this Lease, then upon
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three (3) additional days notice from Landlord, Landlord may, but shall not be
obligated to, after reasonable prior notice to Tenant, make any such payment or
perform any such act on Tenant's part without waiving its right based upon any
default of Tenant and without releasing Tenant from any obligations hereunder.
26.2 Tenant's Reimbursement. Except as may be specifically provided
to the contrary in this Lease, Tenant shall pay to Landlord, within fifteen (15)
days after delivery by Landlord to Tenant of statements therefor: (i) sums equal
to expenditures reasonably made and obligations incurred by Landlord in
connection with the remedying by Landlord of Tenant's defaults pursuant to the
provisions of Section 26.1; (ii) sums equal to all losses, costs, liabilities,
damages and expenses referred to in Article 10 of this Lease; and (iii) sums
equal to all expenditures made and obligations incurred by Landlord in
collecting or attempting to collect the Rent or in enforcing or attempting to
enforce any rights of Landlord under this Lease or pursuant to law, including,
without limitation, all legal fees and other amounts so expended. Tenant's
obligations under this Section 26.2 shall survive the expiration or sooner
termination of the Lease Term.
ARTICLE 27
ENTRY BY LANDLORD
Landlord reserves the right at all reasonable times and upon reasonable
notice to the Tenant to enter the Premises to (i) inspect them; (ii) show the
Premises to prospective purchasers, mortgagees or ground or underlying lessors,
or, during the last twelve (12) months of the Lease Term, to prospective
Tenants; (iii) post notices of nonresponsibility; or (iv) alter, improve or
repair the Premises or the Building if necessary to comply with current building
codes or other applicable laws, or for structural alterations, repairs or
improvements to the Building. Notwithstanding anything to the contrary contained
in this Article 27, Landlord may enter the Premises at any time to (A) perform
services required of Landlord; (B) take possession due to any breach of this
Lease in the manner provided herein; and (C) perform any covenants of Tenant
which Tenant fails to perform. Any such entries shall be without the abatement
of Rent, except as provided in Section 19.9, and shall include the right to take
such reasonable steps as required to accomplish the stated purposes; provided,
however, except for (i) emergencies, (ii) repairs, alterations, improvements or
additions required by governmental or quasi-governmental authorities or court
order or decree, or (iii) repairs which are the obligation of Tenant hereunder,
any such entry shall be performed in a manner so as not to unreasonably
interfere with Tenant's use of the Premises and shall be performed after normal
business hours if reasonably practical. Except as otherwise set forth in
Sections 19.4 and 19.9, Tenant hereby waives any claims for damages or for any
injuries or inconvenience to or interference with Tenant's business, lost
profits, any loss of occupancy or quiet enjoyment of the Premises, and any other
loss occasioned thereby. For each of the above purposes, Landlord shall at all
times have a key with which to unlock all the doors in the Premises, excluding
Tenant's vaults, safes and special security areas designated in advance by
Tenant. In an emergency, Landlord shall have the right to use any means that
Landlord may deem proper to open the doors in and to the Premises. Any entry
into the Premises in the manner hereinbefore described shall not be deemed to be
a forcible or unlawful entry into, or a detainer of, the Premises, or an actual
or constructive eviction of Tenant from any portion of the Premises.
Notwithstanding anything to the contrary set forth above, Tenant may
designate certain areas (reasonable in size) 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 or in the event of a Landlord inspection, in
which case Landlord shall provide Tenant with ten (10) days' prior written
notice of the specific date and time of such Landlord inspection with respect to
such areas.
ARTICLE 28
TENANT PARKING
Tenant shall have the right to rent (a) up to two hundred (200)
unreserved parking spaces in the Building Parking Facility (at a discount rate,
during the initial ten (10) year Lease Term only, of twenty percent (20%) off
the rate reasonably established by Landlord for the Building Parking Facility
from time to time), and (b) to the extent such parking spaces are available, as
determined by Landlord, up to one hundred (100) additional unreserved parking
spaces in the Building Parking Facility (at such rate as is established by
Landlord for the Building Parking Facility from time to time); provided,
however, that to the extent available, Tenant shall also be permitted to rent
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such additional one hundred (100) spaces, to the extent unavailable in the
Building Parking Facility, in the parking structure located on Serrano Avenue.
At any time and from time to time during the Lease Term, Tenant may, upon
forty-five (45) days notice to Landlord, increase or decrease the number of
parking spaces up to the maximum permitted by this Article 28. Tenant shall pay
to Landlord all parking charges along with Tenant's monthly rent payment.
Tenant's continued right to use the parking spaces and rent the parking passes
is conditioned upon Tenant abiding by all reasonable rules and regulations which
are prescribed from time to time for the orderly operation and use of the
Building Parking Facility and upon Tenant's cooperation in seeing that Tenant's
employees and visitors also comply with such rules and regulations. Landlord
specifically reserves the right to change the size, configuration, design,
layout, location and all other aspects of the Building Parking Facility
(provided Tenant's parking rights are not decreased as a result) and Tenant
acknowledges and agrees that Landlord may, without incurring any liability to
Tenant and without any abatement of Rent under this Lease except as provided in
Section 19.9, from time to time, close-off or restrict access to the Building
Parking Facility, or temporarily relocate Tenant's parking spaces to other
parking facilities and/or surface parking areas within a reasonable distance of
the Premises, for purposes of permitting or facilitating any such construction,
alteration or improvements with respect to the Building Parking Facility or to
accommodate or facilitate renovation, alteration, construction or other
modification of other improvements or structures located on the Real Property.
Landlord may delegate its responsibilities hereunder to a parking operator in
which case such parking operator shall have all the rights of control attributed
hereby to the Landlord and such owner.
ARTICLE 29
FIRST OFFER RIGHT
29.1 First Offer Space. Subject to any rights granted to tenants
occupying the Project prior to Tenant and provided such right existed in such
tenants' leases prior to August 1, 1998, and provided that an Event of Default
by Tenant is not in existence under the terms of this Lease, Tenant shall have
the right (the "First Offer Right") to lease any space that may become available
on the fourth (4th) floor of the Building (the "First Right Space"), if all or
any portion of the First Right Space comes available for lease during the Lease
Term, as the same may be extended. Upon all or any portion of the First Right
Space coming available, Landlord shall give Tenant written notice ("Offer
Notice") of the availability of all or such portion of the First Right Space,
which Offer Notice shall include Landlord's good faith determination of the Fair
Market Rent (as that term is defined in Section 2.2.2) for the First Right
Space. The parties acknowledge and agree that except with respect to the Fair
Market Rent, all of the terms and provisions of this Lease shall apply to any
lease by Tenant of any portion of the First Right Space.
29.2 Exercise Terms. Tenant shall have ten (10) business days from
receipt by Tenant of the Offer Notice to exercise the First Offer Right by
delivering to Landlord written notice of Tenant's election to exercise the First
Offer Right ("Exercise Notice"). If Tenant desires to lease the First Right
Space, Tenant shall notify Landlord as to whether it accepts Landlord's
determination of the Fair Market Rent for the First Right Space. If Tenant
objects to Landlord's determination of the Fair Market Rent, Landlord and Tenant
shall negotiate in good faith in an attempt to reach an agreement with respect
to the Fair Market Rent for the First Right Space within fifteen (15) days after
Landlord's receipt of Tenant's Exercise Notice. If the Landlord and Tenant
cannot agree as to the Fair Market Rent within such fifteen (15) days period, it
shall be determined in accordance with Section 2.2.2 above. To the extent Tenant
is granted other concessions in accordance with the determination of Fair Market
Rent such as any allowance, etc., such concessions shall be provided to Tenant
with Landlord incorporating the appropriate provisions of this Lease in the
Amendment to reflect any allowance or other concessions.
If Tenant so notifies Landlord of its intent to lease the First Right
Space, Landlord shall deliver the First Right Space to Tenant upon the date such
First Right Space is available and shall prepare an amendment to this Lease
adding the First Right Space to the Premises on the date of delivery on the
terms set forth in this Article 29, which amendment shall be delivered to
Tenant promptly after exercise and executed by Tenant within thirty (30) days
after Tenant's receipt of same from Landlord. The privileges for parking which
Tenant receives in connection with the First Right Space shall be in the
Building Parking Facility and shall be the number of spaces determined in
accordance with the definition of Fair Market Rent.
Rent for the First Offer Space shall commence upon the earliest of (i)
the date Tenant commences business operations from the First Right Space, (ii)
substantial completion of the tenant improvements therefor, if any, or (iii)
such other date as is agreed to by the parties or determined to be the
commencement date in connection with the
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determination of the Fair Market Rent.
ARTICLE 30
MISCELLANEOUS PROVISIONS
30.1 Terms. The necessary grammatical changes required to make the
provisions hereof apply either to corporations or partnerships or individuals,
men or women, as the case may require, shall in all cases be assumed as though
in each case fully expressed.
30.2 Binding Effect. Each of the provisions of this Lease shall
extend to and shall, as the case may require, bind or inure to the benefit not
only of Landlord and of Tenant, but also of their respective successors or
assigns, provided this clause shall not permit any assignment by Tenant contrary
to the provisions of Article 14 of this Lease.
30.3 No Air Rights. No rights to any view or to light or air over any
property, whether belonging to Landlord or any other person, are granted to
Tenant by this Lease. If at any time any windows of the Premises are temporarily
darkened or the light or view therefrom is obstructed by reason of any repairs,
improvements, maintenance or cleaning in or about the Building, the same shall
be without liability to Landlord and without any reduction or diminution of
Tenant's obligations under this Lease.
30.4 Modification of Lease. Should any current or prospective
mortgagee or ground lessor for the Building require a modification or
modifications of this Lease, which modification or modifications will not cause
an increased cost or expense to Tenant or in any other way materially and
adversely change the rights and obligations of Tenant hereunder, then and in
such event, Tenant agrees that this Lease may be so modified and agrees to
execute whatever documents are required therefor and deliver the same to
Landlord within ten (10) days following the request therefor. Should Landlord or
any such current or prospective mortgagee or ground lessor require execution of
a short form of Lease for recording, containing, among other customary
provisions, the names of the parties, a description of the Premises and the
Lease Term, Tenant agrees to execute such short form of Lease and to deliver the
same to Landlord within twenty (20) days following the request therefor the
recordation of which shall be at the sole cost and expense of Landlord, and not
included as an Operating Expense.
30.5 Transfer of Landlord's Interest. Tenant acknowledges that
Landlord has the right to transfer all or any portion of its interest in the
Real Property and Building and in this Lease, and Tenant agrees that in the
event of any such transfer, Landlord shall automatically be released from all
liability under this Lease not accrued as of the date of the transfer and Tenant
agrees to look solely to such transferee for the performance of Landlord's
obligations hereunder after the date of transfer upon agreement by such
transferee to fully assume and be liable for all obligations of this Lease to be
performed by Landlord which first accrue or arise after the date of the
conveyance, and Tenant shall attorn to such transferee.
30.6 Prohibition Against Recording. Except as provided in Section
30.4 of this Lease, neither this Lease, nor any memorandum, affidavit or other
writing with respect thereto, shall be recorded by Tenant with the Los Angeles
County Recorder's Office or by anyone acting through, under or on behalf of
Tenant.
30.7 Landlord's Title. Landlord's title is and always shall be
paramount to the title of Tenant. Nothing herein contained shall empower Tenant
to do any act which can, shall or may encumber the title of Landlord.
30.8 Captions. The captions of Articles and Sections are for
convenience only and shall not be deemed to limit, construe, affect or alter the
meaning of such Articles and Sections.
30.9 Relationship of Parties. Nothing contained in this Lease shall
be deemed or construed by the parties hereto or by any third party to create the
relationship of principal and agent, partnership, joint venturer or any
association between Landlord and Tenant, it being expressly understood and
agreed that neither the method of computation of Rent nor any act of the parties
hereto shall be deemed to create any relationship between Landlord and Tenant
other than the relationship of landlord and tenant.
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30.10 Application of Payments. Landlord shall have the right to apply
payments received from Tenant pursuant to this Lease, regardless of Tenant's
designation of such payments, to satisfy any obligations of Tenant hereunder, in
such order and amounts as Landlord, in its sole discretion, may elect.
30.11 Time of Essence. Time is of the essence of this Lease and each
of its provisions.
30.12 Partial Invalidity. If any term, provision or condition
contained in this Lease shall, to any extent, be invalid or unenforceable, the
remainder of this Lease, or the application of such term, provision or condition
to persons or circumstances other than those with respect to which it is invalid
or unenforceable, shall not be affected thereby, and each and every other term,
provision and condition of this Lease shall be valid and enforceable to the
fullest extent possible permitted by law.
30.13 No Warranty. In executing and delivering this Lease, Tenant has
not relied on any representation, including, but not limited to, any
representation whatsoever 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 any warranty or any statement of Landlord which is not set
forth herein or in one or more of the exhibits attached hereto.
30.14 Landlord Exculpation. It is expressly understood and agreed that
notwithstanding anything in this Lease to the contrary, and notwithstanding any
applicable law to the contrary, the liability of Landlord and the Landlord
Parties hereunder (including any successor landlord) and any recourse by Tenant
against Landlord or the Landlord Parties shall be limited solely and exclusively
to an amount which is equal to the interest of Landlord in the Building and any
available insurance proceeds, and neither Landlord, nor any of the Landlord
Parties shall have any personal liability therefor, and Tenant hereby expressly
waives and releases such personal liability on behalf of itself and all persons
claiming by, through or under Tenant.
30.15 Entire Agreement. It is understood and acknowledged that there
are no oral agreements between the parties hereto affecting this Lease and this
Lease supersedes and cancels any and all previous negotiations, arrangements,
brochures, agreements and understandings, if any, between the parties hereto or
displayed by Landlord to Tenant with respect to the subject matter thereof, and
none thereof shall be used to interpret or construe this Lease. This Lease and
any side letter or separate agreement executed by Landlord and Tenant in
connection with this Lease and dated of even date herewith contain all of the
terms, covenants, conditions, warranties and agreements of the parties relating
in any manner to the rental, use and occupancy of the Premises, shall be
considered to be the only agreement between the parties hereto and their
representatives and agents, and none of the terms, covenants, conditions or
provisions of this Lease can be modified, deleted or added to except in writing
signed by the parties hereto. All negotiations and oral agreements acceptable to
both parties have been merged into and are included herein. There are no other
representations or warranties between the parties, and all reliance with respect
to representations is based totally upon the representations and agreements
contained in this Lease.
30.16 Right to Lease. Landlord reserves the absolute right to effect
such other tenancies in the Building as Landlord in the exercise of its sole
business judgment shall determine to best promote the interests of the Building.
Tenant does not rely on the fact, nor does Landlord represent, that any specific
tenant or type or number of tenants shall, during the Lease Term, occupy any
space in the Building.
30.17 Force Majeure. Any prevention, delay or stoppage due to strikes,
lockouts, labor disputes, acts of God, inability to obtain services, labor, or
materials or reasonable substitutes therefor, governmental actions, civil
commotions, fire or other casualty, and other causes beyond the reasonable
control of the party obligated to perform, except with respect to the
obligations imposed with regard to Rent and other charges to be paid by Tenant
or Landlord pursuant to this Lease (collectively, the "Force Majeure"),
notwithstanding anything to the contrary contained in this Lease, shall excuse
the performance of such party for a period equal to any such prevention, delay
or stoppage and, therefore, if this Lease specifies a time period for
performance of an obligation of either party, that time period shall be extended
by the period of any delay in such party's performance caused by a Force
Majeure.
30.18 Waiver of Redemption by Tenant. Intentionally Deleted.
30.19 Notices. All notices, demands, statements or communications
(collectively, "Notices") given or required to be given by either party to the
other hereunder shall be in writing, shall be sent by United States certified
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or registered mail, postage prepaid, return receipt requested, or delivered
personally (i) to Tenant at the appropriate addresses set forth in Section 5 of
the Summary, or to such other place as Tenant may from time to time designate in
a Notice to Landlord; or (ii) to Landlord at the addresses set forth in Section
3 of the Summary, or to such other firm or to such other place as Landlord may
from time to time designate in a Notice to Tenant. Any Notice will be deemed
given on the date it is mailed as provided in this Section 29.19 or upon the
date personal delivery is made. If Tenant is notified of the identity and
address of Landlord's mortgagee or ground or underlying lessor, Tenant shall
give to such mortgagee or ground or underlying lessor written notice of any
default by Landlord under the terms of this Lease by registered or certified
mail, and such mortgagee or ground or underlying lessor shall be given a
reasonable opportunity to cure such default prior to Tenant's exercising any
remedy available to Tenant.
30.20 Joint and Several. If there is more than one Tenant or Landlord,
the obligations imposed upon Tenant or Landlord, as applicable under this Lease
shall be joint and several.
30.21 Authority. If Tenant or Landlord is a corporation or
partnership, each individual executing this Lease on behalf of Tenant or
Landlord, as appropriate, hereby represents and warrants that Tenant or
Landlord, as appropriate, is a duly formed and existing entity qualified to do
business in the state in which the Building is located and that Tenant or
Landlord, as appropriate, has full right and authority to execute and deliver
this Lease and that each person signing on behalf of Tenant and Landlord is
authorized to do so.
30.22 Attorneys' Fees. If either party commences litigation against
the other for the specific performance of this Lease, for damages for the breach
hereof or otherwise for enforcement of any remedy hereunder, the parties hereto
agree to and hereby do waive any right to a trial by jury and, in the event of
any such commencement of litigation, the prevailing party shall be entitled to
recover from the other party such costs and reasonable attorneys' fees as may
have been incurred, including any and all costs incurred in enforcing,
perfecting and executing such judgment.
30.23 Governing Law. This Lease shall be construed and enforced in
accordance with the laws of the state of California.
30.24 Submission of Lease. Submission of this instrument for
examination or signature by Tenant does not constitute a reservation of or an
option for lease, and it is not effective as a lease or otherwise until
execution and delivery by both Landlord and Tenant.
30.25 Brokers. 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 Lease, excepting only the real estate brokers or
agents specified in Section 12 of the Summary (the "Brokers"), and that they
know of no other real estate broker or agent who is entitled to a commission in
connection with this Lease. 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, and 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
the indemnifying party's dealings with any real estate broker or agent other
than the Brokers. Landlord agrees that it will pay the Broker a brokerage
commission pursuant to the terms of a separate agreement between Landlord and
the Broker.
30.26 Independent Covenants. This Lease shall be construed as though
the covenants herein between Landlord and Tenant are independent and not
dependent and Tenant hereby expressly waives the benefit of any statute to the
contrary and agrees that if Landlord fails to perform its obligations set forth
herein, Tenant shall not be entitled to make any repairs or perform any acts
hereunder at Landlord's expense or to any setoff of the Rent or other amounts
owing hereunder against Landlord except as expressly provided in this Lease;
provided, however, that 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 so long as notice is first given to Landlord and any
holder of a mortgage or deed of trust covering the Building, Real Property or
any portion thereof, of whose address Tenant has theretofore been notified, and
an opportunity is granted to Landlord and such holder to correct such violations
as provided above.
30.27 Building Name and Signage. Landlord shall have the right at any
time to change the name of the Building and to install, affix and maintain any
and all signs on the exterior and on the interior of the Building as Landlord
may, in Landlord's sole discretion, desire. Tenant shall not use the name of the
Building or use pictures or
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illustrations of the Building in advertising or other publicity, without the
prior written consent of Landlord.
30.28 Transportation Management. Tenant shall fully comply with all
present or future programs intended to manage parking, transportation or traffic
in and around the Building, and in connection therewith, Tenant shall take
responsible action for the transportation planning and management of all
employees located at the Premises by working directly with Landlord, any
governmental transportation management organization or any other
transportation-related committees or entities. Such programs may include,
without limitation: (i) restrictions on the number of peak-hour vehicle trips
generated by Tenant; (ii) increased vehicle occupancy; (iii) implementation of
an in-house ridesharing program and an employee transportation coordinator; (iv)
working with employees and any Building or area-wide ridesharing program
manager; (v) instituting employer-sponsored incentives (financial or in-kind) to
encourage employees to rideshare; and (vi) utilizing flexible work shifts for
employees.
30.29 Hazardous Material; Asbestos Disclosure. As used herein, the
term "Hazardous Material" means any hazardous or toxic substance, material or
waste which is or becomes regulated by any local governmental authority, the
state in which the Building is located or the United States Government. Tenant
acknowledges that Landlord may incur costs (A) for complying with laws, codes,
regulations or ordinances relating to Hazardous Material, or (B) otherwise in
connection with Hazardous Material, including, without limitation, the
following: (i) Hazardous Material present in soil or ground water; (ii)
Hazardous Material that migrates, flows, percolates, diffuses or in any way
moves onto or under the Real Property; (iii) Hazardous Material present on or
under the Real Property as a result of any discharge, dumping or spilling
(whether accidental or otherwise) on the Real Property by other tenants of the
Real Property or their agents, employees, contractors or invitees, or by others;
and (iv) material which becomes Hazardous Material due to a change in laws,
codes, regulations or ordinances which relate to hazardous or toxic material,
substances or waste. Tenant agrees that the costs incurred by Landlord for
commercially reasonable Hazardous Material inspections may be included in
Operating Expenses. To the extent Landlord is reimbursed through insurance or
recovers such expense for the inspection from a third party or through some
other action, Tenant shall be entitled to a proportionate share of such
Operating Expense to which such recovery or reimbursement relates to the extent
paid by Tenant.
Landlord has advised Tenant that the Building contains asbestos, which
was commonly used as a fireproofing and insulation agent in buildings
constructed before 1979. The Building was constructed before 1979 and there is
asbestos-containing material ("ACM") in the Premises as well as in other areas
of the Building. Landlord agrees to abate all ACM on the floors of the Building
in which the Premises is located. According to the United States Environmental
Protection Agency ("EPA"); "intact and undisturbed asbestos materials do not
pose a health risk. The mere presence of asbestos in a building does not mean
that the health of the building occupants is endangered . . . However, asbestos
materials can become hazardous when, due to damage, disturbance, or
deterioration over time, they release fibers into building air." Managing
Asbestos In Place, Washington, D.C., EPA 20T-2003, July 1990, at page 3.
Landlord has provided or will provide Tenant with a separate notification
containing such matters as the location of ACM in the Building. Tenant agrees in
turn to notify its contractors and employees who work in the Building as
required by California's Asbestos Notification Law (Health & Safety Code
Sections 25915 et seq.). Tenant shall comply, and cause its employees, agents,
contractors and invitees to comply, with all laws and regulations applicable to
ACM, including without limitation work practice and notification regulations in
the event of any work or activities which might disturb the ACM. Tenant shall
not cause, suffer or permit any such activities to commence or continue without
first notifying and obtaining the consent of Landlord, in addition to any
notices or consents required by law. Tenant shall comply, and cause its
employees, agents, contractors and invitees to comply, with any and all rules,
regulations and asbestos management programs which may be reasonably adopted by
Landlord for the Building or any other instructions, directions or prohibitions
which Landlord may deliver with respect to the ACM. If any asbestos-related work
is performed by or at the instance of Tenant, Tenant shall promptly provide
Landlord with documentation establishing, as to each and every performance of
such work, that the same was performed strictly in accordance with applicable
government standards and with the requirements of this Lease.
Tenant agrees that there shall be no abatement or other diminution of
Rent during any asbestos related work performed by Landlord or others, nor shall
Landlord be liable for any annoyance, inconvenience or injury to business,
persons or property resulting from any of the foregoing. Tenant accepts the
Premises with knowledge that there is ACM in the Building, but subject to
Landlord's agreement to abate all ACM in the floors of the Building in which the
Premises is located, and waives and releases any claim against Landlord which
Tenant may now or
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hereafter have or acquire arising in connection with the presence of ACM in the
Building; provided, however, that in the event ACM that was not introduced by
Tenant is discovered in the Premises and is either (a) required to be abated
under applicable law, or (b) constitutes a material threat to the health and
safety of occupants of the Premises, then it shall be the sole responsibility of
Landlord to abate such ACM in accordance with applicable law at no cost to
Tenant. Any delay caused by any such required abatement during the initial
construction of improvements to the Premises shall extend the Lease Commencement
Date.
30.30 Confidentiality. Tenant acknowledges that the content of this
Lease and any related documents are confidential information. Tenant shall keep
such confidential information strictly confidential and shall not disclose such
confidential information to any person or entity other than Tenant's financial,
legal, and space planning consultants.
30.31 Landlord Renovations. It is specifically understood and agreed
that, except as provided in Exhibit B, Landlord has no obligation and has made
no promises to alter, remodel, improve, renovate, repair or decorate the
Premises, Building, or any part thereof and that no representations respecting
the condition of the Premises or the Building have been made by Landlord to
Tenant except as specifically set forth herein. However, Tenant acknowledges
that Landlord is currently renovating or may during the Lease Term renovate,
improve, alter, or modify (collectively, the "Renovations") the Building,
Premises, and/or Real Property, including without limitation the Building
Parking Facility, common areas, Building Systems and Equipment, Building
Structure, which Renovations may include, without limitation, (i) modifying the
common areas and tenant spaces to comply with applicable laws and regulations,
including regulations relating to the physically disabled, seismic conditions,
and building safety and security, and (ii) installing new carpeting, lighting,
and wall coverings in the Building common areas, and in connection with such
Renovations, Landlord may, among other things, erect scaffolding or other
necessary structures in the Building, limit or eliminate access to portions of
the Real Property, including portions of the common areas, or perform work in
the Building, which work may create noise, dust or leave debris in the Building.
Tenant hereby agrees that such Renovations and Landlord's actions in connection
with such Renovations shall in no way constitute a constructive eviction of
Tenant nor entitle Tenant to any abatement of Rent except as expressly provided
in Section 19.9. Landlord shall have no responsibility or for any reason be
liable to Tenant for any direct or indirect injury to or interference with
Tenant's business arising from the Renovations, 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 Renovations or Landlord's actions in connection with such
Renovations, or for any inconvenience or annoyance occasioned by such
Renovations or Landlord's actions in connection with such Renovations.
30.32 Security. Landlord shall provide on-site security equipment and
personnel for the Building twenty-four (24) hours per day, seven (7) days per
week, three hundred sixty-five (365) days per year; provided, that, Landlord
shall have no liability with respect to any failure of any security to protect
the Building, the Premises or any users thereof. Upon request, Landlord's
security guards shall, after normal business hours, accompany any employee or
visitor of Tenant from the Building to the Building Parking Facility and to
parking areas located within one (1) block of the Building.
30.33 Access. Tenant shall have access to the Building, the Premises
and Building Parking Facility twenty-four (24) hours per day, seven (7) days per
week, three hundred sixty-five days (365) days per year.
30.34 Arbitration. With the exception of the arbitration provisions
which shall specifically apply to the determination of the Fair Market Rent, as
set forth in Section 2.2, or the failure of Tenant to pay Base Rent and/or
Direct Expenses, the provisions of this Section 30.34 contain the sole and
exclusive method, means and procedure to resolve any and all disputes or
disagreements, including whether any particular matter constitutes, or with the
passage of time would constitute, an Event of Default. The parties hereby
irrevocably waive any and all rights to the contrary and shall at all times
conduct themselves in strict, full, complete and timely accordance with the
provisions of this Section 30.34. Any and all attempts to circumvent the
provisions of this Section 30.34 shall be absolutely null and void and of no
force or effect whatsoever. As to any matter submitted to arbitration to
determine whether it would, with the passage of time, constitute an Event of
Default, such passage of time shall not commence to run until any such
affirmative determination, so long as it is simultaneously determined that the
challenge of such matter as a potential Event of Default was made in good faith,
except with respect to the payment of money. With respect to the payment of
money, such passage of time shall not commence to run only if the party which is
obligated to make the payment does in fact make the payment to the other party.
Such payment can be
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made "under protest," which shall occur when such payment is accompanied by a
good-faith notice stating why the party has elected to make a payment under
protest. Such protest will be deemed waived unless the subject matter identified
in the protest is submitted to arbitration as set forth in the following:
(a) Arbitration Panel. Within ninety (90) days after delivery of
written notice ("Notice of Dispute") of the existence and nature of any dispute
given by any party to the other party, and unless otherwise provided herein in
any specific instance, the parties shall each: (1) appoint one (1) lawyer
actively engaged in the licensed and full-time practice of law, specializing in
real estate, in the County of Los Angeles for a continuous period immediately
preceding the date of delivery ("Dispute Date") of the Notice of Dispute of not
less than ten (10) years, but who has at no time ever represented or acted on
behalf of any of the parties, and (2) deliver written notice of the identity of
such lawyer and a copy of his or her written acceptance of such appointment and
acknowledgment of and agreement to be bound by the time constraints and other
provisions of this Section 30.34 ("Acceptance") to the other parties hereto. The
party who selects the lawyer may not consult with such lawyer, directly or
indirectly, to determine the lawyer's position on the issue which is the subject
of the dispute. In the event that any party fails to so act, such arbitrator
shall be appointed pursuant to the same procedure that is followed when
agreement cannot be reached as to the third arbitrator. Within ten (10) days
after such appointment and notice, such lawyers shall appoint a third lawyer
(together with the first two (2) lawyers, "Arbitration Panel") of the same
qualification and background and shall deliver written notice of the identity of
such lawyer and a copy of his or her written Acceptance of such appointment to
each of the parties. In the event that agreement cannot be reached on the
appointment of a third lawyer within such period, such appointment and
notification shall be made as quickly as possible by any court of competent
jurisdiction, by any licensing authority, agency or organization having
jurisdiction over such lawyers, by any professional association of lawyers in
existence for not less than ten (10) years at the time of such dispute or
disagreement and the geographical membership boundaries of which extend to the
County of Los Angeles or by any arbitration association or organization in
existence for not less than ten (10) years at the time of such dispute or
disagreement and the geographical boundaries of which extend to the County of
Los Angeles, as determined by the party giving such Notice of Dispute and
simultaneously confirmed in writing delivered by such party to the other party.
Any such court, authority, agency, association or organization shall be entitled
either to directly select such third lawyer or to designate in writing,
delivered to each of the parties, an individual who shall do so. In the event of
any subsequent vacancies or inabilities to perform among the Arbitration Panel,
the lawyer or lawyers involved shall be replaced in accordance with the
provisions of this Section 30.34 as if such replacement was an initial
appointment to be made under this Section 30.34 within the time constraints set
forth in this Section 30.34, measured from the date of notice of such vacancy or
inability, to the person or persons required to make such appointment, with all
the attendant consequences of failure to act timely if such appointed person is
a party hereto.
(b) Duty. Consistent with the provisions of this Section 30.34, the
members of the Arbitration Panel shall utilize their utmost skill and shall
apply themselves diligently so as to hear and decide, by majority vote, the
outcome and resolution of any dispute or disagreement submitted to the
Arbitration Panel as promptly as possible, but in any event on or before the
expiration of thirty (30) days after the appointment of the members of the
Arbitration Panel. None of the members of the Arbitration Panel shall have any
liability whatsoever for any acts or omissions performed or omitted in good
faith pursuant to the provisions of this Section 30.34.
(c) Authority. The Arbitration Panel shall (1) enforce and interpret
the rights and obligations set forth in the Lease to the extent not prohibited
by law, (2) fix and establish any and all rules as it shall consider appropriate
in its sole and absolute discretion to govern the proceedings before it,
including any and all rules of discovery, procedure and/or evidence, and (3)
make and issue any and all orders, final or otherwise, and any and all awards,
as a court of competent jurisdiction sitting at law or in equity could make and
issue, and as it shall consider appropriate in its sole and absolute discretion,
including the awarding of monetary damages (but shall not award consequential
damages to either party and shall not award punitive damages except in
situations involving knowing fraud or egregious conduct condoned by, or
performed by, the person who, in essence, occupies the position which is the
equivalent of the chief executive officer of the party against whom damages are
to be awarded), the awarding of reasonable attorneys' fees and costs to the
prevailing party as determined by the Arbitration Panel and the issuance of
injunctive relief. If the party against whom the award is issued complies with
the award, within the time period established by the Arbitration Panel, then no
Event of Default will be deemed to have occurred, unless the Event of Default
pertained to the non-payment of money by Tenant or Landlord, and Tenant or
Landlord failed to make such payment under protest.
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(d) Appeal. The decision of the Arbitration Panel shall be final and
binding, may be confirmed and entered by any court of competent jurisdiction at
the request of any party and may not be appealed to any court of competent
jurisdiction or otherwise except upon a claim of fraud on the part of the
Arbitration Panel, or on the basis of a mistake as to the applicable law. The
Arbitration Panel shall retain jurisdiction over any dispute until its award has
been implemented, and judgment on any such award may be entered in any court
having appropriate jurisdiction.
(e) Compensation. Each member of the Arbitration Panel shall be
compensated for any and all services rendered under this Section 30.34 at a rate
of compensation equal to the sum of (1) Two Hundred Fifty Dollars ($250.00) per
hour and (2) the sum of Ten Dollars ($10.00) per hour multiplied by the number
of full years of the expired Term under the Lease, plus reimbursement for any
and all expenses incurred in connection with the rendering of such services,
payable in full promptly upon conclusion of the proceedings before the
Arbitration Panel. Such compensation and reimbursement shall be borne by the
nonprevailing party as determined by the Arbitration Panel in its sole and
absolute discretion.
30.35 When Payment Is Due. 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 thirty (30) days after the party which is entitled to such payment
sends written notice to the other party demanding payment.
30.36 Consent/Duty to Act Reasonably. Except for any references to the
terms "sole" or "absolute" (and except for matters which (1) could have an
adverse effect on the structural integrity of the Building Structure, (2) could
have an adverse effect on the Building Systems and Equipment, or (3) could have
an effect on the exterior appearance of the Building, whereupon in each such
case Landlord's duty is to act in good faith and in compliance with the Lease),
any time the consent of Landlord or Tenant is required, such consent shall not
be unreasonably withheld, conditioned or delayed. Subject to the foregoing,
whenever this Lease grants Landlord or Tenant the right to take action, exercise
discretion, establish rules and regulations or make allocations or other
determinations (other than decisions to exercise expansion, contraction,
cancellation, termination or renewal options), Landlord and Tenant shall act
reasonably and in good faith.
30.37 Consequential Damages. Notwithstanding anything to the contrary
contained in this Lease, Landlord shall not be liable to Tenant and Tenant shall
not be liable to Landlord for consequential damages.
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IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be
executed the day and date first above written.
"Landlord":
WILSHIRE COLONNADE CORP.,
a California corporation
By: Insignia/ESG, Inc.,
Agent
By:
--------------------------------
Its:
---------------------------
By:
--------------------------------
Its:
---------------------------
"Tenant":
AAMES FINANCIAL CORPORATION,
a Delaware corporation
By: /s/ David A. Sklar
------------------------------------
Its:
--------------------------------
By: /s/ Audry A. Patterson
------------------------------------
Its: CAO
-------------------------------
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<PAGE> 43
EXHIBIT A
WILSHIRE COLONNADE
OUTLINE OF FLOOR PLAN OF PREMISES
EXHIBIT A -- Page 1
<PAGE> 44
EXHIBIT B
WILSHIRE COLONNADE
TENANT WORK LETTER
This Tenant Work Letter shall set forth the terms and conditions
relating to the construction of the tenant improvements in 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 portion of Articles 1 through 30 of the Office Lease to which this
Tenant Work Letter is attached as Exhibit B and of which this Tenant Work Letter
forms a part, and all references in this Tenant Work Letter to Sections of "this
Tenant Work Letter" shall mean the relevant portion of Sections 1 through 6 of
this Tenant Work Letter.
SECTION 1
LANDLORD'S INITIAL CONSTRUCTION IN THE PREMISES
1.1 BASE, SHELL AND CORE OF THE PREMISES AS CONSTRUCTED BY LANDLORD.
Landlord has or will construct, at its sole cost and expense, the following work
("Landlord's Work") consisting of the base, shell, and core (i) of the Premises
and (ii) of the floors of the Building on which the Premises is located
inclusive of the Building Structure, Building Systems and Equipment and building
standard elevator lobbies and corridors (collectively, the "Base, Shell, and
Core"). The Base, Shell and Core shall also consist of those portions of the
Premises which were in existence prior to the construction of the tenant
improvements in the Premises for the prior tenant of the Premises. The Base,
Shell, and Core shall be completed and shall be delivered to Tenant on or before
October 1, 1998 in good condition and operating order, with all ACM removed, or
if not removed, encapsulated, and in compliance with all laws applicable to new
construction, disregarding variances and grandfathered rights (the "Required
Condition"); provided, that Landlord and Tenant agree that the Landlord may
encapsulate portions of the Premises which consist of the core and perimeter
walls with Landlord removing ACM from the remainder of the Premises, where same
was not encapsulated. In this connection, Landlord specifically agrees that its
obligation regarding the Required Condition applies to restrooms and elevator
lobbies (inclusive of fire doors). The spot abatement for the areas between the
first (1st) and second (2nd) floors will be done prior to the Lease Commencement
Date and in accordance with a schedule reasonably established by Tenant to
facilitate Tenant's construction of its Tenant Improvements, taking into account
the normal time required by a contractor to perform such work. Such delivery of
the Premises is anticipated to occur on October 1, 1998; provided, however, that
if Landlord fails to deliver the Premises to Tenant in the Required Condition by
January 1, 1999 (as such date may be extended for Force Majeure Delays and
Tenant-caused delays), Tenant may, on written notice to Landlord, terminate the
Lease.
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 Fifteen and No/100 Dollars ($15.00) per rentable square foot of
the Premises for the costs relating to the initial design and construction of
Tenant's improvements which are affixed to the Premises (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, except as specifically provided herein to the contrary.
In the event the actual cost of the Tenant Improvements is less than the Tenant
Improvement Allowance, Tenant shall receive a "dollar-for-dollar" credit against
Base Rent due under the Lease in the amount of such excess. All Tenant
Improvements for which the Tenant Improvement Allowance has been made available
shall be deemed Landlord's property at expiration or earlier termination of the
Lease term if so provided under the terms of the Lease.
2.2 DISBURSEMENT OF THE TENANT IMPROVEMENT ALLOWANCE. Except as
otherwise set forth in this Tenant Work Letter, the Tenant Improvement Allowance
shall be disbursed by Landlord (each of which
Exhibit B -- Page 1
<PAGE> 45
disbursements shall be made pursuant to Landlord's disbursement process) for
costs related to the construction of the Tenant Improvements and for the
following items and costs (collectively, the "Tenant Improvement Allowance
Items"): (i) 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 payment
of the fees incurred by, and the cost of documents and materials supplied by,
Tenant and Tenant's consultants in connection with the preparation and review of
the "Construction Drawings," as that term is defined in Section 3.1 of this
Tenant Work Letter; (ii) the cost of any changes in the Base, Shell and Core
when such changes are required by the Construction Drawings; (iii) the cost of
any changes to the Construction Drawings or Tenant Improvements required by all
applicable building codes (the "Code"); and (iv) the cost of wiring and conduits
for Tenant's equipment to be utilized in the Premises. Landlord agrees to
provide monthly progress payments of the Tenant Improvement Allowance provided
Tenant furnishes to Landlord such invoices, affidavits, releases, and other
documentation as Landlord may reasonably request, to be assured, to Landlord's
reasonable satisfaction, that the Tenant Improvements have been completed in
accordance with the plans and specifications approved by Landlord. Provided
Tenant complies with the foregoing requirements, Landlord shall pay all invoices
presented to Landlord up to an amount not to exceed the amount of the Tenant
Improvement Allowance for costs incurred in connection with completion of the
Tenant Improvements. Tenant will be responsible for paying all costs of the
Tenant Improvements in excess of the Tenant Improvement Allowance. Tenant agrees
to diligently prosecute the construction of the Tenant Improvements in
compliance with all applicable codes, regulations and ordinances, without any
claims for unpaid bills for material, labor or supplies. While Landlord will not
receive a fee for construction services, Tenant will pay Landlord an amount
equal to Two Thousand Dollars ($2,000.00) for services actually performed by
Landlord during Tenant's construction of its Tenant Improvements.
2.3 STANDARD TENANT IMPROVEMENT PACKAGE. Landlord has established
specifications (the "Specifications") for the Building standard components to be
used in the construction of the Tenant Improvements in the Premises
(collectively, the "Standard Improvement Package"), which Specifications shall
be supplied to Tenant by Landlord. To the extent the Specifications are supplied
to Tenant one (1) week prior to the execution of this Lease, the quality of
Tenant Improvements shall be equal to or of greater quality than the quality of
the Specifications. Landlord may make changes to the Specifications for the
Standard Improvement Package from time to time.
SECTION 3
CONSTRUCTION DRAWINGS
3.1 SELECTION OF ARCHITECT/CONSTRUCTION DRAWINGS. Tenant shall
retain Cole Martinez & Associates (the "Architect") to prepare the "Construction
Drawings," as that term is defined in this Section 3.1. Tenant shall retain the
engineering consultants designated by Tenant, and consented to by Landlord,
which consent shall not be unreasonably withheld or delayed (the "Engineers") to
prepare all plans and engineering working drawings relating to the structural,
mechanical, electrical, plumbing, HVAC, lifesafety, and sprinkler work of the
Tenant Improvements. 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 and
specifications reasonably determined by Landlord in accordance with industry
custom and practice, and shall be subject to Landlord's approval. Tenant and
Architect shall verify, in the field, the dimensions and conditions as shown on
the relevant portions of the Base Building Plans, to the extent such dimensions
and conditions are readily observable without penetration of walls, columns,
ceilings and floors and Tenant and Architect shall be solely responsible for the
same, and to the extent same are readily observable without such penetration,
Landlord shall have no responsibility in connection therewith. 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 in connection therewith and shall
not be responsible for any omissions or errors contained in the Construction
Drawings, and Tenant's waiver and indemnity set forth in this Lease shall
specifically apply to the Construction Drawings.
3.2 FINAL SPACE PLAN. Tenant and the Architect shall prepare the
final space plan for Tenant
Exhibit B -- Page 2
<PAGE> 46
Improvements in the Premises (collectively, the "Final Space Plan"), which Final
Space Plan shall include a layout and designation of all offices, rooms and
other partitioning, their intended use, and equipment to be contained therein,
and shall deliver the Final Space Plan to Landlord for Landlord's approval.
Within five (5) days after Landlord receives the Final Space Plan, Landlord
shall either reasonably approve or disapprove the Final Space Plan for
reasonable and material reasons (which shall be limited to the following: (i)
adverse effect on the Building Structure; (ii) possible damage to or adverse
effect on the Building Systems and Equipment; (iii) non-compliance with
applicable codes; (iv) effect on the exterior appearance of the Building or (v)
material interference with the normal and customary business operations of other
tenants in the Building (each, a "Design Problem")) and return the Final Space
Plan to Tenant. In such event, Landlord shall require, and Tenant shall make the
minimum changes necessary in order to correct the Design Problems and shall
return the Final Space Plan to Landlord, which Landlord shall approve or
disapprove within one (1) day after Landlord receives the revised Final Space
Plan. This procedure shall be repeated until the Final Space Plan is finally
approved by Landlord and written approval has been delivered to and received by
Tenant. The Final Space Plan may be submitted by Tenant in one or more stages
and at one or more times, and the time periods for Landlord's approval shall
apply with respect to each such portion submitted.
3.3 FINAL WORKING DRAWINGS. Tenant, the Architect and the Engineers
shall complete the architectural and engineering drawings for the Premises, and
the final architectural 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. Landlord shall approve the Final Working
Drawings, or such portion as has from time to time been submitted, within five
(5) days after receipt of same or designate by notice given within such time
period to Tenant the specific changes reasonably required to be made to the
Final Working Drawings in order to correct any Design Problem and shall return
the Final Working Drawings to Tenant. Tenant shall make the minimum changes
necessary in order to correct any such Design Problem and shall return the Final
Working Drawings to Landlord, which Landlord shall approve or disapprove within
five (5) days after Landlord receives the revised Final Working Drawings. This
procedure shall be repeated until all of the Final Working Drawings are finally
approved by Landlord and written approval has been delivered to and received by
Tenant.
3.4 PERMITS. Tenant shall immediately submit the Final Working
Drawings to the appropriate municipal authorities for all applicable building
permits necessary to allow "Contractor," as that term is defined in Section 4.1,
below, to commence and fully complete the construction of the Tenant
Improvements (the "Permits"), and, in connection therewith, Tenant shall
coordinate with Landlord in order to allow Landlord, at its option, to take part
in all phases of the permitting process and shall supply Landlord, as soon as
possible, with all plan check numbers and dates of submittal. Notwithstanding
anything to the contrary set forth in this Section 3.4, 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 the obtaining of the same shall be Tenant's responsibility; provided
however that Landlord shall, in any event, 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 minor changes, no changes, modifications or alterations in the Final Working
Drawings may be made without the prior written consent of Landlord which will be
granted or denied in accordance with the procedure set forth in Section 3.3
above.
3.5 TIME DEADLINES. Tenant shall use its best, good faith, efforts
and all due diligence to cooperate with the Architect, the Engineers, and
Landlord to complete all phases of the Construction Drawings and the permitting
process and to receive the permits, and with Contractor to obtain the "Contract
Cost," as that term is defined in Section 4.2 of this Tenant Work Letter, and,
in that regard, shall meet with Landlord on a scheduled basis, to discuss
Tenant's progress in connection with the same.
SECTION 4
CONSTRUCTION OF THE TENANT IMPROVEMENTS
4.1 CONTRACTOR. Dinwiddie Construction is the contractor selected by
Tenant and approved by Landlord ("Contractor") and such Contractor shall
construct the Tenant Improvements.
4.2 CONTRACT COST. The cost of all Tenant Improvement Allowance
Items to be incurred by Tenant in
Exhibit B -- Page 3
<PAGE> 47
connection with the construction of the Tenant Improvements may be referred to
herein as the "Contract Cost."
4.3 CONSTRUCTION OF TENANT IMPROVEMENTS BY CONTRACTOR UNDER THE
SUPERVISION OF LANDLORD.
4.3.1 OVER-ALLOWANCE AMOUNT. Intentionally Deleted.
4.3.2 TENANT'S RETENTION OF CONTRACTOR. Tenant shall
independently retain Contractor, on behalf of Tenant, to construct the Tenant
Improvements in accordance with the Final Working Drawings.
4.3.3 CONTRACTOR'S WARRANTIES AND GUARANTIES. Intentionally
Deleted.
4.3.4 TENANT'S COVENANTS. Within ten (10) days after
completion of construction of the Tenant Improvements, Tenant shall cause
Contractor and Architect to cause a Notice of Completion to be recorded in the
office of the County Recorder of the county in which the Building is located in
accordance with Section 3093 of the Civil Code of the State of California or any
successor statute and furnish a copy thereof to Landlord upon recordation,
failing which, Landlord may itself execute and file the same on behalf of Tenant
as Tenant's agent for such purpose. In addition, immediately after the
substantial completion of the Premises, Tenant shall have prepared and delivered
to the Building a copy of the "as built" plans and specifications (including all
working drawings) for the Tenant Improvements.
4.3.5 BASE BUILDING PLANS. Landlord and Tenant acknowledge
that Landlord has already delivered "as built" plans for the Base, Shell, and
Core of the Building (other than the third (3rd) floor) to the Tenant ("Base
Building Plans"). Landlord shall, at least one (1) week prior to the execution
of the Lease, deliver the Base Building Plans for the third (3rd) floor of the
Building.
SECTION 5
COMPLETION OF THE TENANT IMPROVEMENTS;
LEASE COMMENCEMENT DATE
5.1 DELAY OF COMMENCEMENT DATE. The January 15, 1999 anticipated
Lease Commencement Date shall be delayed by one (1) day for each day of delay in
the design and/or construction of or Tenant's move-in into the Premises that is
caused by any Force Majeure Delay or Landlord Delay. No Landlord Delay or Force
Majeure Delay shall be deemed to have occurred unless and until the party
claiming such delay has provided written notice to the other party specifying
the action or inaction that such notifying party contends constitutes a Landlord
Delay or Force Majeure Delay, as applicable. If such actions or inaction is not
cured or terminated within one (1) day after receipt of such notice, then a
Landlord Delay or Force Majeure Delay, as set forth in such notice, shall be
deemed to have occurred commencing as of the date such notice is received and
continuing for the number of days the design and/or construction of the Tenant
Improvements and/or Tenant's move-in into the Premises was in fact delayed as a
direct result of such action, inaction or occurrence.
5.2 CERTAIN DEFINITIONS.
(a) FORCE MAJEURE DELAY. The term "Force Majeure Delay" as
used in the Lease or this Tenant Work Letter shall mean any delay incurred by
Tenant in the design and/or construction of its Tenant Improvements or its
move-in into the Premises attributable to any: (1) actual delay or failure to
perform attributable to any strike, lockout or other labor or industrial
disturbance, civil disturbance, act of public enemy, war, riot, sabotage,
blockade, embargo; (2) delay due to changes in the ADA subsequent to September
1, 1998 or Base Building Plans; or (3) delay attributable to lightning,
earthquake, fire, storm, hurricane, tornado, flood, washout, explosion, or any
other similar industry-wide or Building-wide cause beyond the reasonable control
of the party from whom performance is required, or any of its contractors or
other representatives. Any prevention, delay or stoppage due to any Force
Majeure Delay shall excuse the performance of the party affected for a period of
time equal to any such prevention, delay or stoppage (except the obligations of
either party to pay money, including rental and other charges, pursuant to the
Lease).
(b) LANDLORD DELAY. The term "Landlord Delay" as used in the
Lease or this Tenant Work
Exhibit B -- Page 4
<PAGE> 48
Letter shall mean any delay in the design and/or construction of the Tenant
Improvements or Tenant's move-in into the Premises which is due to any act
(wrongful, negligent or otherwise) or negligent omission of Landlord, its agents
or contractors. The term Landlord Delay shall include, but shall not be limited
to any: (1) delay in the giving of authorizations or approvals by Landlord; (2)
Intentionally Deleted; (3) delay attributable to the interference of Landlord,
its agents or contractors with the design of the Tenant Improvements or the
failure or refusal of any such party to permit Tenant, its agents or
contractors, reasonable access to the Building or any Building facilities or
services, including freight elevators, passenger elevators, and loading docks,
which access and use are required for the orderly and continuous performance of
the work necessary for Tenant to complete its move-in into the Premises; (4)
delay attributable to Landlord giving Tenant incorrect or incomplete Base
Building Plans, or revisions made to such Base Building Plans subsequent to the
delivery of such items to Tenant (collectively, "Incomplete Plans"); provided,
however, that if a condition exists which causes the Base Building Plans to be
incomplete or in error and such error or omission could have been discovered had
Tenant (or its Contractor, Architect or project manager) conducted a visual
inspection which did not require the penetration of a wall, column, floor or
ceiling, then such error or omission shall not be deemed a Landlord Delay; (5)
failure by Landlord in delivery of the Building in the Required Condition on or
before October 1, 1998; (6) delay attributable to Landlord's failure to allow
Tenant sufficient access to the Building and/or the Premises during the
construction of the Tenant Improvements and/or to allow Tenant to move into the
Premises over one (1) weekend; (7) delay by Landlord in administering and paying
when due the Tenant Improvement Allowance (in which case, in addition to such
delay being deemed a Landlord Delay, Tenant shall have the right to stop the
design of the Tenant Improvements); (8) delay caused by the failure of the Base
Building to comply with the ADA and all other laws applicable to new
construction, disregarding variances and grandfathered rights (in which case, in
addition to such delay being deemed a Landlord Delay, Landlord shall perform
such work upon receipt of notice from Tenant); and (9) delays caused by the
construction or completion of Landlord's Work subsequent to October 1, 1998.
Notwithstanding anything to the contrary above, Tenant shall be entitled to
priority use of the freight elevator to assist Tenant in the construction of the
Tenant Improvements or installation of Tenant's furniture, fixtures and
equipment. In the event that Landlord does not provide Tenant with such priority
access or reasonable alternative elevator access, such failure shall be deemed a
Landlord Delay.
SECTION 6
MISCELLANEOUS
6.1 FREIGHT ELEVATORS. Landlord shall, consistent with its
obligations to other tenants of the Building, make the freight elevator
reasonably available to Tenant in connection with initial decorating, furnishing
and moving into the Premises; provided, however, Tenant shall be provided
priority access to the freight elevator as provided in Section 5.2(b) above.
6.2 TENANT'S REPRESENTATIVE. Tenant has designated PMLA's Julie
Buchalter and Tenant's Audry Patterson as its sole representatives 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.
6.3 LANDLORD'S REPRESENTATIVE. Landlord has designated Jennifer Choy
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.
6.4 TENANT'S AGENTS. Intentionally Deleted.
6.5 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. In all instances where Tenant is required to approve or deliver
an item, if no written notice of approval is given or the item is not delivered
within the stated time period, at Landlord's sole option, at the end of such
period the item shall automatically be deemed approved or delivered by Tenant
and the next succeeding time period shall commence.
6.6 TENANT'S LEASE DEFAULT. Notwithstanding any provision to the
contrary contained in this Lease, if an Event of Default as described in the
Lease has occurred at any time on or before the substantial completion of the
Premises and while such Event of Default is continuing, (i) in addition to all
other rights and remedies granted to
Exhibit B -- Page 5
<PAGE> 49
Landlord pursuant to the 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 pursuant to the terms of the
Lease.
6.7 NO MISCELLANEOUS CHARGES. Neither Tenant nor the Contractor
shall be charged for, and Landlord shall provide, elevator service, parking (to
the extent parking is available) and hoisting services for Tenant's architects,
designers, contractors and subcontractors (including those people working on the
Tenant Improvements), and during normal business hours, electricity, water,
toilet facilities, HVAC, and security during the design and construction of the
Tenant Improvements or during the move into the Premises. All such equipment,
areas, elevators and utilities shall be made reasonably available to Tenant
during the move into the Premises. The HVAC systems for the Premises shall be
run continuously twenty-four (24) hours per day for seven (7) days during the
week prior to the move into the Premises to flush out and purge new finish
odors.
6.8 BONDING. Notwithstanding anything to the contrary set forth in
the Lease, Tenant shall not be required to obtain or provide any completion or
performance bond in connection with any construction, alteration, or improvement
work performed by or on behalf of Tenant.
6.9 LANDLORD CHARGE-BACKS. There shall be no Landlord charge-backs
for pre-installed improvements provided by Landlord.
6.10 BUILDING'S EMERGENCY GENERATING SYSTEM. Tenant shall not be
permitted to connect to the Building's emergency generating system.
6.11 PRESENCE OF HAZARDOUS MATERIALS. In the event that at any point
in time the Premises and/or the Common Areas of the Building are determined to
contain Hazardous Materials not introduced or caused to be released by Tenant
that constitute a material interference with Tenant's ability to operate in the
Premises or a material threat to the health and safety of occupants in the
Premises, Tenant shall give notice to Landlord, to require Landlord to remove,
at Landlord's sole cost and expense, all such Hazardous Materials within a
reasonable time not to exceed one hundred twenty (120) days, following receipt
of such notice. Any delay incurred by Tenant in the design of its Tenant
Improvements or its move-in into the Premises because of the presence of
Hazardous Materials not introduced or caused to be released by Tenant shall
constitute a Landlord Delay.
6.12 NO FEE TO LANDLORD. Landlord shall receive no fee for
supervision, profit, overhead or general conditions in connection with the
Tenant Improvements except as provided in Section 2.2 of this Tenant Work
Letter.
6.13 LIFE-FIRE SAFETY CODES/DISABLED ACCESS CODES/EARTHQUAKE SAFETY
CODES. In the event that, because the Premises and/or the Building do not comply
with current Applicable Laws which pertain to new construction, including but
not limited to life-fire safety codes, disabled access codes (including, without
limitation, the ADA), and/or earthquake safety codes, Tenant incurs increased
design or construction costs that it would not have incurred had the Premises
and/or the Building already been in compliance with the then Applicable Laws
which are applicable to new construction, then such costs shall be reimbursed by
Landlord to Tenant within ten (10) days after receipt by Landlord from Tenant of
an invoice documenting and evidencing such increased costs. The amount of such
reimbursement shall be separate and apart from, and in addition to, the Tenant
Improvement Allowance and shall not be deducted from the Tenant Improvement
Allowance. Any delay in the design or construction of the Tenant Improvements or
the move into the Premises because of the non-compliance of the Building and/or
the Premises with the then Applicable Laws which are applicable to new
construction shall constitute a Landlord Delay.
6.14 HISTORICAL DESIGNATION. Intentionally Deleted.
6.15 STAGING AREA. During the period prior to the Lease Commencement
Date, Tenant shall have the right, without the obligation to pay Rent, to use
empty space that Landlord determines is available in the Building as designated
by Landlord 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 fencing or other protective
Exhibit B -- Page 6
<PAGE> 50
facilities as reasonably required by Landlord. Tenant shall hold Landlord
harmless and shall indemnify and defend Landlord from and against any and all
loss, liability or cost arising out of or in connection with use of such storage
space by Tenant. At Landlord's sole option, Tenant shall be obligated to remove
all of the stored materials and its fencing and other facilities within thirty
(30) days after Tenant's receipt of written notice from Landlord that such
staging area is needed by Landlord for construction of another tenant's
premises, in which event comparable space, to the extent available, shall be
made available to Tenant as a substitute staging area.
Exhibit B -- Page 7
<PAGE> 51
SCHEDULE 1 TO EXHIBIT B
TIME DEADLINES
Intentionally Deleted.
Exhibit B -- Page 8
<PAGE> 52
EXHIBIT C
WILSHIRE COLONNADE
NOTICE OF LEASE TERM DATES
To: Aames Financial Corporation
Re: Office Lease dated September 15, 1998, by and between COLONNADE
WILSHIRE CORP., a California corporation ("Landlord"), and AAMES
FINANCIAL CORPORATION ("Tenant"), concerning Suite 200 on the
second (2nd) floor, Suite 300 on the third (3rd) floor and Suite
630 on the sixth (6th) floor of the Office Building located at
3731 Wilshire Boulevard, Los Angeles, California.
Gentlemen:
In accordance with the Office Lease (the "Lease"), we wish to advise you
and/or confirm as follows:
1. That the Premises are Ready for Occupancy, and that the Lease
Term shall commence as of ________________ for a term of
_______________ ending on _______________.
2. That in accordance with the Lease, Rent commenced to accrue on
___________________________
3. If the Lease Commencement Date is other than the first day of
the month, the first billing will contain a pro rata adjustment.
Each billing thereafter, with the exception of the final
billing, shall be for the full amount of the monthly installment
as provided for in the Lease.
4. Rent is due and payable in advance on the first day of each and
every month during the Lease Term. Your rent checks should be
made payable to ______________________________________ at
____________________________________________.
5. The exact number of rentable square feet within the Premises is
_______ square feet.
Exhibit C -- Page 1
<PAGE> 53
6. Tenant's Share as adjusted based upon the exact number of
rentable square feet within the Premises is _______%.
"Landlord":
COLONNADE WILSHIRE CORP.
By:
------------------------------------
Its:
-------------------------------
Agreed to and Accepted as of _____________________, 19__.
"Tenant":
AAMES FINANCIAL CORPORATION,
a Delaware corporation
By:
------------------------------------
Its:
--------------------------------
By:
------------------------------------
Its:
--------------------------------
Exhibit C -- Page 2
<PAGE> 54
EXHIBIT D
WILSHIRE COLONNADE
RULES AND REGULATIONS
Tenant shall faithfully observe and comply with the following Rules and
Regulations. Landlord shall not be responsible to Tenant for the nonperformance
of any of said Rules and Regulations by or otherwise with respect to the acts or
omissions of any other tenants or occupants of the Building. Landlord may not
modify, change, amend or enforce these Rules and Regulations to the extent same
unreasonably interfere with Tenant's conduct of its normal and customary
business office operations. To the extent any provision of the Lease is contrary
to the Rule and Regulations, the provisions of the Lease shall control.
1. Tenant shall not alter any lock or install any new or additional locks
or bolts on any doors or windows of the Premises without obtaining Landlord's
prior written consent which consent shall not be unreasonably withheld or
delayed. Tenant shall bear the cost of any lock changes or repairs required by
Tenant. Two keys will be furnished by Landlord for the Premises, and any
additional keys required by Tenant must be obtained from Landlord at a
reasonable cost to be established by Landlord.
2. All doors opening to public corridors shall be kept closed at all
times except for normal ingress and egress to the Premises, unless electrical
hold backs have been installed.
3. Landlord reserves the right to close and keep locked all entrance and
exit doors of the Building during such hours as are customary for Comparable
Buildings. Tenant, its employees and agents must be sure that the doors to the
Building are securely closed and locked when leaving the Premises if it is after
the normal hours of business for the Building. Any tenant, its employees, agents
or any other persons entering or leaving the Building at any time when it is so
locked, or any time when it is considered to be after normal business hours for
the Building, may be required to sign the Building register when so doing.
Access to the Building may be refused unless the person seeking access has
proper identification or has a previously arranged pass for access to the
Building. The Landlord and his agents shall in no case be liable for damages for
any error with regard to the admission to or exclusion from the Building of any
person. In case of invasion, mob, riot, public excitement, or other commotion,
Landlord reserves the right to prevent access to the Building during the
continuance of same by any means it deems appropriate for the safety and
protection of life and property.
4. Landlord shall have the right to reasonably prescribe the weight, size
and position of all safes and other heavy property brought into the Building.
Safes and other heavy objects shall, if considered necessary by Landlord, stand
on supports of such thickness as is necessary to properly distribute the weight.
Landlord will not be responsible for loss of or damage to any such safe or
property in any case.
5. No furniture, freight, packages, supplies, equipment or merchandise
will be brought into or removed from the Building or carried up or down in the
elevators, except upon prior notice to Landlord, and in such manner, in such
specific elevator, and between such hours as shall be designated by Landlord.
Tenant shall provide Landlord with prior notice of the need to utilize an
elevator for any such purpose, so as to provide Landlord with a reasonable
period to schedule such use and to install such padding or take such other
actions or prescribe such procedures as are appropriate to protect against
damage to the elevators or other parts of the Building. In no event shall
Tenant's use of the elevators for any such purpose be permitted during the hours
of 7:00 a.m. - 9:00 a.m., 11:30 a.m. - 1:30 p.m. and 4:30 p.m. - 6:30 p.m.
6. Landlord shall have the right to control and operate the public
portions of the Building, the public facilities, the heating and air
conditioning, and any other facilities furnished for the common use of tenants,
in such manner as is customary for Comparable Buildings.
7. The requirements of Tenant will be attended to only upon application
at the Office of the Building or
Exhibit D -- Page 1
<PAGE> 55
at such office location designated by Landlord. Employees of Landlord shall not
perform any work or do anything outside their regular duties unless under
special instructions from Landlord.
8. Tenant shall not disturb, solicit, or canvass any occupant of the
Building and shall cooperate with Landlord or Landlord's agents to prevent same.
9. The toilet rooms, urinals, wash bowls and other apparatus shall not be
used for any purpose other than that for which they were constructed, and no
foreign substance of any kind whatsoever shall be thrown therein.
10. Tenant shall not overload the floor of the Premises or in any way
deface the Premises or any part thereof without Landlord's consent first had and
obtained which consent shall not be withheld unless a Design Problem exists or
delayed. Notwithstanding the foregoing, Tenant may hang pictures within the
Premises without Landlord's consent.
11. Except for vending machines intended for the sole use of Tenant's
employees and invitees, no vending machine or machines of any description other
than fractional horsepower office machines shall be installed, maintained or
operated upon the Premises without the written consent of Landlord which consent
shall not be unreasonably withheld or delayed.
12. Tenant shall not use or keep in or on the Premises or the Building any
kerosene, gasoline or other inflammable or combustible fluid or material.
13. Tenant shall not use any method of heating or air conditioning other
than that which may be supplied by Landlord, without the prior written consent
of Landlord which shall not be unreasonably withheld or delayed and except as
specifically provided in the Lease.
14. Tenant shall not use, keep or permit to be used or kept, any foul or
noxious gas or substance in or on the Premises, or permit or allow the Premises
to be occupied or used in a manner offensive or objectionable to Landlord or
other occupants of the Building by reason of noise, odors, or vibrations, or
interfere in any way with other tenants or those having business therein.
15. Tenant shall not bring into or keep within the Building or the
Premises any animals, birds, bicycles or other vehicles.
16. No cooking shall be done or permitted by any tenant on the Premises,
nor shall the Premises be used for the storage of merchandise, for lodging or
for any improper, objectionable or immoral purposes. Notwithstanding the
foregoing, Underwriters' laboratory-approved equipment and microwave ovens may
be used in the Premises for heating food and brewing coffee, tea, hot chocolate
and similar beverages, provided that such use is in accordance with all
applicable federal, state and city laws, codes, ordinances, rules and
regulations, and does not cause odors which are objectionable to Landlord and
other Tenants.
17. Landlord will reasonably approve where and how telephone and telegraph
wires are to be introduced to the Premises. No boring or cutting for wires shall
be allowed without the consent of Landlord which consent shall not be
unreasonably withheld or delayed. The location of telephone, call boxes and
other office equipment affixed to the Premises shall be subject to the
reasonable approval of Landlord.
18. Landlord reserves the right to exclude or expel from the Building any
person who, in the judgment of Landlord, is intoxicated or under the influence
of liquor or drugs, or who shall in any manner do any act in violation of any of
these Rules and Regulations.
19. Tenant, its employees and agents shall not loiter in the entrances or
corridors, nor in any way obstruct the sidewalks, lobby, halls, stairways or
elevators, and shall use the same only as a means of ingress and egress for the
Premises.
Exhibit D -- Page 2
<PAGE> 56
20. Tenant shall not waste electricity, water or air conditioning and
agrees to cooperate fully with Landlord to ensure the most effective operation
of the Building's heating and air conditioning system and shall refrain from
attempting to adjust any controls; provided, that if Tenant has its own HVAC
system, Tenant shall be permitted to adjust the same.
21. Tenant shall store all its trash and garbage within the interior of
the Premises. No material shall be placed in the trash boxes or receptacles if
such material is of such nature that it may not be disposed of in the ordinary
and customary manner of removing and disposing of trash and garbage in the city
in which the Building is located without violation of any law or ordinance
governing such disposal. All trash, garbage and refuse disposal shall be made
only through entry-ways and elevators provided for such purposes at such times
as Landlord shall designate.
22. Intentionally omitted.
23. Tenant shall assume any and all responsibility for protecting the
Premises from theft, robbery and pilferage, which includes keeping doors locked
and other means of entry to the Premises closed, when the Premises are not
occupied.
24. Landlord may waive any one or more of these Rules and Regulations for
the benefit of any particular tenant or tenants, but no such waiver by Landlord
shall be construed as a waiver of such Rules and Regulations in favor of any
other tenant or tenants, nor prevent Landlord from thereafter enforcing any such
Rules or Regulations against any or all tenants of the Building.
25. No awnings or other projection shall be attached to the outside walls
of the Building without the prior written consent of Landlord. No curtains,
blinds, shades or screens shall be attached to or hung in, or used in connection
with, any window or door of the Premises without the prior written consent of
Landlord which consent shall not be unreasonably withheld or delayed. All
electrical ceiling fixtures hung in offices or spaces along the perimeter of the
Building must be fluorescent and/or of a quality, type, design and bulb color
approved by Landlord which approval shall not be withheld unless a Design
Problem exists.
26. The sashes, sash doors, skylights, windows, and doors that reflect or
admit light and air into the halls, passageways or other public places in the
Building shall not be covered or obstructed by Tenant, nor shall any bottles,
parcels or other articles be placed on the windowsills.
27. The washing and/or detailing of or, the installation of windshields,
radios, telephones in or general work on, automobiles shall not be allowed on
the Real Property.
28. Food vendors shall be allowed in the Building upon receipt of a
written request from the Tenant. The food vendor shall service only the tenants
that have a written request on file in the Building Management Office. Under no
circumstance shall the food vendor display their products in a public or common
area including corridors and elevator lobbies. Any failure to comply with this
rule shall result in immediate permanent withdrawal of the vendor from the
Building.
29. Tenant must comply with requests by the Landlord concerning the
informing of their employees of items of importance to the Landlord.
30. Tenant shall comply with any non-smoking ordinance adopted by any
applicable governmental authority.
31. Landlord reserves the right at any time to change or rescind any one
or more of these Rules and Regulations, or to make such other and further
reasonable Rules and Regulations as in Landlord's reasonable judgment may from
time to time be necessary for the management, safety, care and cleanliness of
the Premises and Building, and for the preservation of good order therein, as
well as for the convenience of other occupants and tenants therein. Landlord
shall not be responsible to Tenant or to any other person for the nonobservance
of the Rules and Regulations by another tenant or other person. Tenant shall be
deemed to have read these Rules and Regulations and to have agreed
Exhibit D -- Page 3
<PAGE> 57
to abide by them as a condition of its occupancy of the Premises.
Exhibit D -- Page 4
<PAGE> 58
EXHIBIT E
WILSHIRE COLONNADE
FORM OF TENANT'S ESTOPPEL CERTIFICATE
The undersigned as Tenant under that certain Office Lease (the "Lease")
made and entered into as of September 15, 1998 and between WILSHIRE COLONNADE
CORP., a California corporation, as Landlord, and the undersigned as Tenant, for
Premises on the 2nd, 3rd and 6th floors of the Office Building located at 3731
Wilshire Boulevard, Los Angeles, California certifies as follows:
1. Attached hereto as Exhibit A is a true and correct copy of the Lease
and all amendments and modifications thereto. The documents contained in Exhibit
A represent the entire agreement between the parties as to the Premises.
2. The undersigned has commenced occupancy of the Premises described in
the Lease, currently occupies the Premises, and the Lease Term commenced on
____________________________________.
3. The Lease is in effect and has not been modified, supplemented or
amended in any way except as provided in Exhibit A.
4. Tenant has not transferred, assigned, or sublet any portion of the
Premises nor entered into any license or concession agreements with respect
thereto except as follows:
5. No modification of the documents contained in Exhibit A or prepayment
of any amounts owing under the Lease to Landlord in excess of thirty (30) days
shall be binding on Landlord's mortgagee without the prior written consent of
Landlord's mortgagee.
6. Base Rent became payable on _________________________________________.
7. The Lease Term expires on ___________________________________________.
8. To the best of Tenant's knowledge, without a duty to investigate, all
conditions of the Lease to be performed by Landlord necessary to the
enforceability of the Lease have been satisfied and Landlord is not in default
thereunder.
9. No rental has been paid in advance and no security has been deposited
with Landlord except as provided in the Lease.
10. To the best of Tenant's knowledge, without a duty to investigate, as
of the date hereof, there are no existing defenses or offsets except as
specifically provided in the Lease that the undersigned has, which preclude
enforcement of the Lease by Landlord.
11. All monthly installments of Base Rent, all Additional Rent and all
monthly installments of estimated Additional Rent have been paid when due
through _____________________________. The current monthly installment of Base
Rent is $___________________.
12. The undersigned acknowledges that this Estoppel certificate may be
delivered to Landlord's prospective mortgagee, or a prospective purchaser, and
acknowledges that it recognizes that if same is done, said mortgagee,
prospective mortgagee, or prospective purchaser will be relying upon the
statements contained herein in making the loan or acquiring the property of
which the Premises are a part, and in accepting an assignment of the Lease as
collateral security, and that receipt by it of this certificate is a condition
of making of the loan or acquisition of such property.
Exhibit E -- Page 1
<PAGE> 59
13. If Tenant is a corporation or partnership, each individual executing
this Estoppel Certificate on behalf of Tenant hereby represents and warrants
that Tenant is a duly formed and existing entity qualified to do business in the
state in which the Building is located and that Tenant has full right and
authority to execute and deliver this Estoppel Certificate and that each person
signing on behalf of Tenant is authorized to do so.
Executed at __________________ on the _____ day of ______________________,
19__.
"Tenant":
AAMES FINANCIAL CORPORATION,
a Delaware corporation
By:
------------------------------------
Its:
-------------------------------
By:
------------------------------------
Its:
-------------------------------
Exhibit E -- Page 2
<PAGE> 60
EXHIBIT F
WILSHIRE COLONNADE
CONSTRUCTION RULES AND REGULATIONS
Exhibit F -- Page 1
<PAGE> 61
OFFICE LEASE
WILSHIRE COLONNADE
COLONNADE WILSHIRE CORP.,
a California corporation,
as Landlord,
and
AAMES FINANCIAL CORPORATION,
a Delaware corporation,
as Tenant.
<PAGE> 62
WILSHIRE COLONNADE
SUMMARY OF BASIC LEASE INFORMATION
The undersigned hereby agree to the following terms of this Summary of
Basic Lease Information (the "Summary"). This Summary is hereby incorporated
into and made a part of the attached Office Lease (this Summary and the Office
Lease to be known collectively as the "Lease") which pertains to the office
building described in Section 6.1 of this Summary (the "Building"). Each
reference in the Office Lease to any term of this Summary shall have the meaning
as set forth in this Summary for such term. In the event of a conflict between
the terms of this Summary and the Office Lease, the terms of the Office Lease
shall prevail. Any capitalized terms used herein and not otherwise defined
herein shall have the meaning as set forth in the Office Lease.
TERMS OF LEASE
(References are to
the Office Lease) DESCRIPTION
1. Date: September 15, 1998.
2. Landlord: COLONNADE WILSHIRE CORP., a California corporation
3. Address of Landlord (Section 29.19):
c/o Insignia/ESG, Inc.
3701 Wilshire
Boulevard, Suite 407
Los Angeles, California 90010
Attention: Property Manager
4. Tenant: AAMES FINANCIAL CORPORATION, a Delaware corporation
5. Address of Tenant:
350 South Grand Avenue, Suite 5100
Los Angeles, California 90071
Attention: General Counsel
(Prior to Lease Commencement Date)
and:
3731 Wilshire Boulevard, Suite 300
Los Angeles, California 90010
Attention: General Counsel
(After Lease Commencement Date)
with a copy to:
Pillsbury Madison & Sutro LLP
725 S. 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
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<TABLE>
<CAPTION>
6. Building and Premises (Article 1):
<S> <C> <C>
6.1 Building The office building located at 3731 Wilshire Boulevard, Los Angeles, California.
6.2 Premises A total of approximately 39,001 rentable square feet of space comprised of
approximately 18,392 rentable square feet of space located on the second (2nd)
floor of the Building, commonly known as Suite 200, approximately 18,528
rentable square feet of space located on the third (3rd) floor of the Building,
commonly known as Suite 300, and approximately 2,081 rentable square feet of
space located on the sixth (6th) floor of the Building, commonly known as Suite
630, as shown on the floor plan attached hereto as Exhibit A.
7. Term (Article 2):
7.1 Lease Term: Ten (10) years, with two (2), five (5) year options to extend.
7.2 Lease Commencement Date: The earlier of (i) the date Tenant commences business in the Premises, and (ii)
ninety (90) days after Landlord delivers the Premises to Tenant for construction
of the Tenant Improvements, as such date may be extended for Force Majeure
Delays and Landlord Delays (as defined in the Work Letter attached to this Lease
as Exhibit B.)
7.3 Lease Expiration Date: The last day of the month in which the 10th anniversary of the Lease
Commencement Date occurs.
</TABLE>
8. *Base Rent (Article 3):
<TABLE>
<CAPTION>
Monthly
Monthly Rental Rate
Annual Installment per Rentable
Lease Months Base Rent of Base Rent Square Foot
- ------------ --------- ------------ -----------
<S> <C> <C> <C>
1 through 24 $936,024.00 $78,002.00 $2.00
25 through 84 $655,216,80 $54,601.40 $1.40
85 through 120 $748,819.20 $62.401.60 $1.60
</TABLE>
9. Additional Rent
(Article 4).
9.1 Base Year: Calendar year 1999.
9.2 *Tenant's Share of
Direct Expenses for
the Project: Approximately 10.66%.
* Such numbers are subject to remeasurement pursuant to Section 1.3.
<TABLE>
<CAPTION>
10. Security Deposit
<S> <C>
(Article 21): Landlord is currently holding Tenant's security deposit in the amount of
$63,208.90 under certain prior existing lease(s) by and between Landlord and
Tenant and shall continue to hold
</TABLE>
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<PAGE> 64
<TABLE>
such amount as the Security Deposit hereunder.
<S> <C>
11. Parking Spaces
(Article 28): Tenant shall have the right to rent (a) up to two hundred (200) unreserved
parking spaces in the Building Parking Facility (at a discount rate, during the
initial Lease Term only, of twenty percent (20%) off the rate established by
Landlord for the Building Parking Facility from time to time, and (b) to the
extent such parking spaces are available, as determined by Landlord, up to one
hundred (100) additional unreserved parking spaces in the Building Parking
Facility (at such rate as is established by Landlord for the Building Parking
Facility from time to time; provided, however, that to the extent available,
Tenant shall be permitted to rent all or any portion of such additional one
hundred (100) spaces that are not available in the Building Parking Facility in
the parking structure located on Serrano Avenue.
12. Brokers (Section 29.25): Insignia/ESG, Inc.
3701 Wilshire Boulevard, Suite 407
Los Angeles, California 90010
Cushman Realty Corporation
2121 Avenue of the Stars
Los Angeles, California 90067-5010
</TABLE>
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<PAGE> 65
The foregoing terms of this Summary are hereby agreed to by Landlord and Tenant.
"Landlord":
COLONNADE WILSHIRE CORP.,
a California corporation
By: Insignia/ESG, Inc.,
Agent
By:
--------------------------------
Its:
---------------------------
By:
--------------------------------
Its:
---------------------------
"Tenant":
AAMES FINANCIAL CORPORATION,
a Delaware corporation
By:
--------------------------------
Its:
---------------------------
By:
--------------------------------
Its:
---------------------------
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<PAGE> 66
WILSHIRE COLONNADE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE SUBJECT MATTER PAGE
- ------- -------------- ----
<S> <C>
ARTICLE 1 - REAL PROPERTY, BUILDING AND PREMISES......................... 1
ARTICLE 2 - LEASE TERM................................................... 2
ARTICLE 3 - BASE RENT.................................................... 4
ARTICLE 4 - ADDITIONAL RENT.............................................. 4
ARTICLE 5 - USE OF PREMISES.............................................. 14
ARTICLE 6 - SERVICES AND UTILITIES....................................... 14
ARTICLE 7 - REPAIRS...................................................... 16
ARTICLE 8 - ADDITIONS AND ALTERATIONS.................................... 17
ARTICLE 9 - COVENANT AGAINST LIENS....................................... 19
ARTICLE 10 - INSURANCE................................................... 19
ARTICLE 11 - DAMAGE AND DESTRUCTION...................................... 21
ARTICLE 12 - NONWAIVER................................................... 24
ARTICLE 13 - CONDEMNATION................................................ 24
ARTICLE 14 - ASSIGNMENT AND SUBLETTING................................... 25
ARTICLE 15 - SURRENDER OF PREMISES; OWNERSHIP
AND REMOVAL OF TRADE FIXTURES.......................... 28
ARTICLE 16 - HOLDING OVER................................................ 28
</TABLE>
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<PAGE> 67
<TABLE>
<S> <C>
ARTICLE 17 - ESTOPPEL CERTIFICATES....................................... 28
ARTICLE 18 - SUBORDINATION............................................... 29
ARTICLE 19 - DEFAULTS; REMEDIES.......................................... 30
ARTICLE 20 - COVENANT OF QUIET ENJOYMENT................................. 33
ARTICLE 21 - SECURITY DEPOSIT............................................ 33
ARTICLE 22 - SUBSTITUTION OF OTHER PREMISES.............................. 33
ARTICLE 23 - DIRECTORY BOARD............................................. 34
ARTICLE 24 - COMPLIANCE WITH LAW......................................... 34
ARTICLE 25 - LATE CHARGES................................................ 34
ARTICLE 26 - LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT........ 35
ARTICLE 27 - ENTRY BY LANDLORD........................................... 35
ARTICLE 28 - TENANT PARKING.............................................. 36
ARTICLE 29 - FIRST OFFER RIGHT........................................... 36
ARTICLE 30 - MISCELLANEOUS PROVISIONS.................................... 37
</TABLE>
EXHIBITS
A - OUTLINE OF PREMISES
B - TENANT WORK LETTER
C - FORM OF NOTICE OF LEASE TERM DATES
D - RULES AND REGULATIONS
E - FORM OF TENANT'S ESTOPPEL CERTIFICATE
F - CONSTRUCTION RULES AND REGULATIONS
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<PAGE> 1
EXHIBIT 10.25(c)
AMENDMENT NO. 2
TO
PREFERRED STOCK PURCHASE AGREEMENT
This AMENDMENT NO. 2, dated as of June 7, 1999 (this
"Amendment"), to that certain Preferred Stock Purchase Agreement dated as of
December 23, 1998, is made and entered into between Aames Financial Corporation,
a Delaware corporation (the "Company"), and Capital Z Financial Services Fund
II, L.P., a Bermuda limited partnership ("Capital Z").
RECITALS
WHEREAS, the parties hereto have entered into a Preferred
Stock Purchase Agreement dated as of December 23, 1998 and Amendment No. 1 to
Preferred Stock Purchase Agreement (as amended, the "Stock Purchase Agreement");
and
WHEREAS, such parties desire to amend the Stock Purchase
Agreement as set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.1. Definitions. Capitalized terms used herein that
are defined in the Stock Purchase Agreement are used herein as so defined.
ARTICLE II.
AMENDMENTS
The Stock Purchase Agreement is hereby amended as follows:
(a) Section 4.12 is amended by replacing "June 30, 1999" with
"September 30, 1999" in each place that it appears in the section.
(b) Section 5.1 is amended in its entirety by replacing such
section with the following:
"Section 5.1. Conditions to Obligation of Purchaser. The
obligation of the Purchaser to purchase the Senior Preferred Stock at
the Initial Closing Date and at the Supplemental Closing Date shall be
subject to the satisfaction or waiver of the following conditions
(provided, that, with respect to the Supplemental Closing,
<PAGE> 2
such obligation shall only be subject to the consummation of the
Initial Closing and the consummation of the Recapitalization prior to
September 30, 1999) on or before the applicable Closing Date:"
ARTICLE III.
MISCELLANEOUS PROVISIONS
Section 3.1. Counterparts. For the convenience of the parties,
any number of counterparts of this Amendment may be executed by any one or more
of the parties hereto, and each such executed counterpart shall be, and shall be
deemed to be, an original, but all of which together shall constitute one and
the same instrument.
Section 3.2. Ratification. The Stock Purchase Agreement, as
amended hereby, is hereby ratified and confirmed.
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<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed to be effective as of the 7th day of June, 1999.
AAMES FINANCIAL CORPORATION
By: /s/ David A. Sklar
--------------------------------------
Name:
Title:
SPECIALTY FINANCE PARTNERS
By its General Partner
CAPITAL Z FINANCIAL SERVICES FUND II, L.P.,
By its General Partner
CAPITAL Z PARTNERS, L.P.,
By its General Partner
CAPITAL Z PARTNERS, LTD.
By: /s/ Steven M. Gluckstern
--------------------------------------
Name: Steven M. Gluckstern
Title: Chairman of the Board
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<PAGE> 4
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<PAGE> 1
EXHIBIT 10.25(d)
AMENDMENT NO. 3
TO
PREFERRED STOCK PURCHASE AGREEMENT
This AMENDMENT NO. 3, effective as of July 16, 1999 (this
"Amendment"), to that certain Preferred Stock Purchase Agreement dated as of
December 23, 1998, as amended on February 10, 1999 and on June 9, 1999 (the
"Stock Purchase Agreement"), is made and entered into between Aames Financial
Corporation, a Delaware corporation (the "Company") and Specialty Finance
Partners, as successor to Capital Z Financial Services Fund II, L.P., a Bermuda
limited partnership ("Purchaser").
RECITALS
WHEREAS, the parties hereto have entered into the Stock Purchase
Agreement pursuant to which the Purchaser purchased from the Company, and the
Company sold to the Purchaser, on the Initial Closing Date, (i) 26,704 shares of
the Company's Series B Convertible Preferred Stock, par value $0.001 per share
(the "Series B Preferred Stock"), having the rights, preferences, privileges and
restrictions set forth in the Certificate of Designations as filed with the
Secretary of State of the State of Delaware (the "Series B Certificate of
Designations"), and (ii) 48,296 shares of the Company's Series C Convertible
Preferred Stock, par value $0.001 per share (the "Series C Preferred Stock," and
together with the Series B Preferred Stock, the "Senior Preferred Stock"),
having the rights, preferences, privileges and restrictions set forth in the
Certificate of Designations as filed with the Secretary of State of the State of
Delaware (the "Series C Certificate of Designations," and together with the
Series B Certificate of Designations, the "Certificates of Designations"); and
WHEREAS, pursuant to the Stock Purchase Agreement, the Company agreed
to, as promptly as practicable after the date thereof call a meeting of its
stockholders, at which the Company will submit to its stockholders proposals to
(among other things) , (i) amend the certificate of incorporation of the Company
to increase the authorized number of shares of the Company's common stock, par
value $0.001 per share ("Common Stock"), and the Company's preferred stock, par
value $0.001 per share (the "Preferred Stock") as contemplated by the
Certificate of Designations; and (ii) cause the outstanding shares of Senior
Preferred Stock to be split on the basis of one thousand-for-one (the foregoing
increase in authorized shares and split of Senior
<PAGE> 2
Preferred Stock are referred to collectively herein as the "Recapitalization");
and
WHEREAS, pursuant to the Stock Purchase Agreement, the Company agreed
to offer, subject to the completion of the Recapitalization, to the existing
holders of Common Stock non-transferable rights to purchase an aggregate of $25
million in stated value of Series C Preferred Stock and the Purchaser agreed to
purchase on the Supplemental Closing Date an amount equal to the entire
unsubscribed portion of the Rights Offering (the "Standby Commitment"); and
WHEREAS, the parties desire to amend the Stock Purchase Agreement to
provide for the purchase by the Purchaser from the Company, and the sale by the
Company to the Purchaser, on the Additional Closing Date, 25,000 shares of
Series C Preferred Stock (the "Additional Investment"); and
WHEREAS, the parties desire to amend the Stock Purchase Agreement to
provide for an increase in the aggregate number of shares of Series C Preferred
Stock offered to existing holders of Common Stock pursuant to the Rights
Offering from $25 million in stated value to a number of shares equal to the
total number of shares of Common Stock outstanding as of the applicable record
date relating to the Rights Offering; and
WHEREAS, on the Additional Closing Date, the Company will issue to the
Purchaser (or its designee), as a fee for the Additional Investment, a warrant
(the "Additional Warrant") to purchase 1,250,000 shares of Common Stock, subject
to the availability of authorized Common Stock, at an exercise price of $1.00
per share, such Warrant to be in the form attached hereto as Exhibit A; and
WHEREAS, the Continuing Directors of the Board of Directors have
approved this Amendment; and
WHEREAS, the Company has obtained an opinion from Donaldson Lufkin &
Jenrette as to the fairness, from a financial point of view, of the Additional
Purchase Price to be paid for the Additional Preferred Stock pursuant to this
Agreement. A copy of such fairness opinion has been provided to Purchaser prior
to the execution of this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
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<PAGE> 3
ARTICLE I.
DEFINITIONS
Section 1.1. Definitions. Capitalized terms used herein that
are defined in the Stock Purchase Agreement are used herein as so defined.
Section 1.1 of the Stock Purchase Agreement is hereby amended to include the
following definitions:
"Additional Closing" means the closing of the sale and
purchase of the Additional Preferred Stock pursuant to Section 2.3.1 hereof.
"Additional Closing Date" shall have the meaning set forth in
Section 2.3.2.
"Additional Investment" shall have the meaning set forth in
the Recitals of Amendment No. 3 to Stock Purchase Agreement.
"Additional Preferred Stock" has the meaning set forth in
Section 2.3.1.
"Additional Purchase Price" has the meaning set forth in
Section 2.3.1.
"Additional Warrant" shall have the meaning set forth in the
Recitals of Amendment No. 3 to the Stock Purchase Agreement.
"Amendment No. 3 to Stock Purchase Agreement" shall mean that
certain Amendment No. 3 to Stock Purchase Agreement by and between the Company
and the Purchaser.
ARTICLE II.
AMENDMENTS
The Stock Purchase Agreement is hereby amended as follows:
(a) Article II is amended by adding the following Sections:
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<PAGE> 4
"Section 2.3.1. Issuance, Sale and Purchase of the Additional
Preferred Stock. Upon the terms and subject to the conditions set forth
in this Agreement, on the Additional Closing Date, the Company will
issue, sell and deliver to the Purchaser (including such Affiliates of
Purchaser as Purchaser may designate in writing to the Company prior to
the Additional Closing Date), and the Purchaser will purchase from the
Company on the Additional Closing Date, twenty-five thousand (25,000)
shares of Series C Preferred Stock (the "Additional Preferred Stock").
The purchase price of the Additional Preferred Stock shall be one
thousand dollars ($1,000.00) per share (the "Additional Purchase
Price").
Section 2.3.2. Additional Closing. (a) The Additional Closing
shall take place at the offices of the Company, 350 South Grand Avenue,
52nd Floor, Los Angeles, California 90071 at 10:00 a.m., Los Angeles
time, as soon as practicable, or at such other time and place as the
parties may agree but not later than on the tenth Business Day,
following the execution of Amendment No. 3 to Stock Purchase Agreement,
or (the date on which the Additional Closing occurs, the "Additional
Closing Date").
(b) At the Additional Closing, (i) the Company will deliver to
the Purchaser certificates representing the Additional Preferred Stock
to be purchased by, and sold to, the Purchaser pursuant to Section
2.3.1 hereof (registered in the name or names and in the denominations
designated by Purchaser at least two Business Days prior to the
Additional Closing Date), (ii) the Purchaser, in full payment for the
Additional Preferred Stock to be purchased by, and sold to, the
Purchaser pursuant to Section 2.3.1 hereof, will deliver to the Company
an amount per share equal to the Additional Purchase Price, in
immediately available funds by wire transfer to the account specified
by the Company to Purchaser, at least two Business Days prior to the
Additional Closing Date, or by such other means as may be agreed upon
by the parties hereto, and (iii) the Company will issue the Additional
Warrant to a designee of the Purchaser."
(b) Section 2.4 is deleted in its entirety and replaced by the
following:
"Section 2.4. Issuance, Sale and Purchase of Series C
Preferred Stock Pursuant to the Standby Commitment. Upon the terms and
subject to the conditions set forth in this Agreement, including,
without limitation, the consummation of the Recapitalization, and in
reliance upon the representations and warranties hereinafter set forth,
at the
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<PAGE> 5
Supplemental Closing, the Company will issue, sell and deliver to the
Purchaser (including such Affiliates of Capital Z as Capital Z may
designate in writing to the Company prior to the Supplemental Closing
Date and any Designated Purchasers), and the Purchaser will purchase
from the Company on the Supplemental Closing Date, any shares of Series
C Preferred Stock which were offered in, and which remain unsubscribed
after consummation of, the Rights Offering up to a maximum of $25
million in stated value of Series C Preferred Stock. The purchase price
per share for the Series C Preferred Stock purchased pursuant to the
Standby Commitment shall be the amount obtained by dividing (x)
Purchase Price by (y) 1,000 (the "Standby Purchase Price"). In the
event that the Initial Closing occurs, and the Supplemental Closing
does not occur as result of a material breach by the Purchaser of its
obligation to consummate the purchase of the Series C Preferred Stock
to be purchased by the Purchaser at the Supplemental Closing (and not
any other breach or alleged breach by the Purchaser hereunder), then
Capital Z shall cause its designee which received the Warrant to return
the Warrant to the Company for cancellation. The provisions of the
immediately preceding sentence shall be of no force or effect if this
Agreement terminates for any reason prior to the Initial Closing Date.
(c) Section 4.9 is deleted in its entirety and replaced by the
following:
"Section 4.9. As promptly as possible after obtaining the Shareholder
Approval, the Company shall take all necessary action to effectuate and
complete the Recapitalization, including, but not limited to, (i)
making all necessary filings with the NYSE (including having the NYSE
approve for listing on the NYSE the shares of Common Stock into which
the Senior Preferred Stock may be converted) and (ii) filing an amended
Certificate of Incorporation with the Secretary of State of the State
of Delaware. Following the completion of the Recapitalization, the
Company will offer to its existing holders of Common Stock
non-transferrable rights ("Purchase Rights") to purchase one share of
Series C Preferred Stock for each share of Common Stock held by
stockholders as of the applicable record date for the Standby Purchase
Price (the "Rights Offering"), which Purchase Rights shall expire
thirty (30) days after issuance. The Rights Offering shall be subject
to the conditions set forth on Exhibit K attached hereto. The Purchaser
shall be provided with copies of all documents relating to the
Recapitalization and the Rights Offering, and all such documents shall
be subject to the comments and
-5-
<PAGE> 6
prior approval of the Purchaser. Without limiting any rights of the
Purchaser hereunder or under the Certificate of Designations, if the
Shareholder Approval is not obtained, the Company shall take all
actions reasonably requested by the Purchaser and consistent with the
DGCL to effect the increase in the authorized shares of capital stock
of the Company contemplated by the Recapitalization."
(d) Article III is hereby amended by adding the following Sections:
"Section 3.3. Representations and Warranties of the Company
with Respect to the Additional Investment. As of the date of Amendment
No. 3 to Stock Purchase Agreement, the Company represents and warrants
to the Purchaser as follows:
Section 3.3.1. Organization. Each of the Company and its
Subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of organization, and
has all requisite corporate or other organizational power and authority
under such laws to own or lease and operate its properties and to carry
on its business as now conducted. Each of the Company and its
Subsidiaries is duly qualified or licensed to do business as a foreign
corporation, in good standing in each jurisdiction in which the nature
of the business transacted by it or the character of the properties
owned or leased by it requires it to so qualify or be licensed, except
where the failure to be so licensed or qualified would not, singly or
in the aggregate, be reasonably likely to have a Material Adverse
Effect.
Section 3.3.2. Authorization; Enforceability. (a) (i) the
Company has all requisite corporate power and authority to perform,
execute and deliver its obligations necessary to consummate the
Additional Investment and issue the Additional Warrant; and (ii) all
corporate action on the part of the Company, its officers, directors
and stockholders necessary for the authorization, execution and
delivery of Amendment No. 3 to Stock Purchase Agreement and the
Additional Warrant, and the performance of all obligations of the
Company hereunder and thereunder, and the authorization, issuance, sale
and delivery of the Additional Preferred Stock, has been taken.
(b) Amendment No. 3 to Stock Purchase Agreement and the
Additional Warrant have been duly authorized, executed and delivered by
the Company and constitute the valid and legally binding obligations of
the Company, enforceable against the Company in accordance with their
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<PAGE> 7
respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity (whether enforcement is sought by proceedings in
equity or at law).
Section 3.3.3. Consents; No Conflict. (a) Except (i) required
blue sky filings, if any, which will be effected in accordance with
applicable blue sky laws; (ii) filings required under the Securities
Act in connection with the Registration Rights Agreement, and (iii) as
would not be reasonably likely, individually or in the aggregate, to
have a Material Adverse Effect, no consent, approval, order or
authorization of, or registration, qualification, designation,
declaration or filing with, any Governmental Authority or any other
Person on the part of the Company is required in connection with the
consummation of the Additional Investment and the issuance of the
Additional Warrant.
(b) The execution and delivery by the Company of Amendment No.
3 to Stock Purchase Agreement and the Additional Warrant, and the
performance by the Company of its obligations thereunder, will not (i)
violate any provision of the Certificate of Incorporation or Bylaws;
(ii) violate any provision of any law or any order of any court or
Governmental Authority; (iii) conflict with, result in a breach of or
constitute (with notice or lapse of time or both) a default under, or
allow any other party thereto a right to terminate or seek a payment
from the Company or any Subsidiary under the terms of, any indenture,
agreement or other instrument by which the Company or any of its
subsidiaries or any of their properties or assets is bound; or (iv)
result in the creation or imposition of any Lien upon any of the
properties or assets of the Company or any of its Subsidiaries, other
than, in the case of clauses (ii), (iii) and (iv), as would not be
reasonably likely to have a Material Adverse Effect.
-7-
<PAGE> 8
Section 3.3.4. Valid Issuance of Securities. (a) The
Additional Preferred Stock, the Additional Warrant and the Common Stock
underlying the Additional Preferred Stock and the Additional Warrant,
when issued, sold and delivered in accordance with the terms hereof for
the consideration expressed herein, will be duly authorized, validly
issued, fully paid and nonassessable.
(b) The outstanding shares of Common Stock are duly
authorized, validly issued, fully paid and nonassessable.
(c) The issuance, sale and delivery of the Additional
Preferred Stock, the Additional Warrant and the Common Stock underlying
the Additional Preferred Stock and the Additional Warrant are not
subject to any preemptive right of stockholders of the Company arising
under law or the Certificate of Incorporation or Bylaws or to any
contractual right of first refusal or other contractual right in favor
of any Person.
Section 3.4. Representations and Warranties of the Purchaser
with Respect to the Additional Investment. As of the date of Amendment
No. 3 to Stock Purchase Agreement, the Purchaser represents and
warrants to the Company as follows:
Section 3.4.1. Organization. The Purchaser is a limited
partnership duly organized and validly existing under the laws of
Bermuda.
Section 3.4.2. Authorization. The Purchaser has full power and
authority to enter into Amendment No. 3 to Stock Purchase Agreement.
Amendment No. 3 to Stock Purchase Agreement to which the Purchaser is a
party has been duly authorized, executed and delivered by the Purchaser
and constitutes the valid and legally binding obligation of the
Purchaser, enforceable against the Purchaser in accordance with its
terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and by general
principles of equity (whether enforcement is sought by proceedings in
equity or at law).
Section 3.4.3. Purchase for Investment. The Purchaser is an
accredited investor as defined under Rule 501(a) of the Securities Act.
The Additional Preferred Stock and the Additional Warrant will be
acquired for investment for the Purchaser's (or its Affiliates' or a
-8-
<PAGE> 9
Designated Purchaser's) own account and not with a view to the resale
or distribution of any part thereof, except in compliance with the
provisions of the Securities Act or an exemption therefrom.
Section 3.4.4. Restricted Securities. The Purchaser
understands that the Additional Preferred Stock and the Additional
Warrant are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in
a transaction not involving a public offering and that under such laws
and applicable regulations such Additional Preferred Stock and
Additional Warrant may be resold without registration under the
Securities Act only in certain limited circumstances.
The Purchaser further agrees that each certificate representing
the Additional Preferred Stock or the Additional Warrant shall be
stamped or otherwise imprinted with a legend substantially in the
following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS SUCH SECURITIES HAVE
BEEN REGISTERED UNDER THAT ACT OR AN EXEMPTION FROM REGISTRATION
IS AVAILABLE."
A certificate shall not bear such legend if the Purchaser shall have
delivered to the Company an opinion of counsel reasonably satisfactory
to the Company to the effect that the securities being sold may be
publicly sold without registration under the Securities Act. The
foregoing shall not be deemed to affect the obligations of the Company
under the Registration Rights Agreement.
Section 3.4.5. Consents; No Conflict. (a) No consent,
approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any governmental authority,
agency or body or any other person on the part of the Purchaser is
required in connection with the consummation of the Additional
Investment, except for (i) filings required under the Securities Act or
the Exchange Act; or (ii) such consents, approvals, orders,
authorizations, registrations, qualifications, designations,
declarations or filings, which if not obtained or made, as the case may
be, are not reasonably likely to impair in any material respect the
ability of the Purchaser to perform any of its obligations or
agreements or consummate the Additional Investment.
-9-
<PAGE> 10
(b) Neither the execution and delivery of Amendment No. 3 to
Stock Purchase Agreement by Purchaser, nor the consummation of the
transactions contemplated hereby, nor the fulfillment of the terms and
compliance with the provisions hereof will conflict with or result in a
material breach of or a material default (or in an occurrence which
with the lapse of time or action by a third party, or both, could
result in a material default) with respect to any of the terms,
conditions or provisions of any applicable order, writ or decree of any
court or of any Governmental Authority, applicable to Purchaser, or of
the governing documents of Purchaser, or of any indenture, contract,
agreement, lease, or other instrument to which Purchaser is a party or
subject or by which Purchaser or any of its properties or assets are
bound, or of any applicable statute, rule, or regulation to which
Purchaser or its businesses is subject.
Section 3.4.6. Financing. The Purchaser has or will have at
the Additional Closing sufficient funds available to it to consummate
the purchase of the Additional Preferred Stock at the Additional
Closing as contemplated hereby."
(e) Article V is hereby amended by adding the following sections:
"Section 5.3. Conditions to Obligations of Purchaser with
Respect to the Additional Investment. The obligation of the Purchaser
to purchase the Additional Preferred Stock at the Additional Closing
shall be subject to the satisfaction or waiver of the following
conditions on or before the Additional Closing Date:
Section 5.3.1. Compliance with this Agreement. The Company
shall have executed and delivered the Additional Preferred Stock, the
Additional Warrant, documents and instruments required to be executed
and delivered on the Additional Closing Date and shall have performed
and complied in all material respects with all agreements and covenants
contained herein which are required to be performed or complied with by
it on or before the Additional Closing Date.
Section 5.3.2. Representations and Warranties Complete and
Correct. The representations and warranties of the Company contained in
Section 3.3 hereof which are qualified as to materiality or a Material
Adverse Effect
-10-
<PAGE> 11
shall have been true and correct when made and shall be true and
correct at and as of the Additional Closing Date, as if made on and as
of such date (except for representations and warranties which speak as
of a specific time or date, which shall be true and correct as of such
time and date). The representations and warranties of the Company
contained in Section 3.3 hereof which are not qualified as to
materiality or a Material Adverse Effect shall have been true and
correct in all material respects when made and shall be true and
correct in all material respects at and as of the Additional Closing
Date, as if made on and as of such date (except for representations and
warranties which speak as of a specific time or date, which shall be
true and correct in all material respects as of such time and date).
Section 5.3.3. Illegality, Etc. No statute, rule or
regulation, or order, decree or injunction enacted, entered,
promulgated or enforced by any Governmental Authority shall be in
effect which prohibits or restricts the consummation of the Additional
Investment.
Section 5.4. Conditions to Obligations of the Company with
Respect to the Additional Investment. The Company's obligation to sell
the Additional Preferred Stock on the Additional Closing Date shall be
subject to the satisfaction or waiver by it of the following conditions
on or before the Additional Closing Date:Section 5.4.1. Compliance with
this Agreement. The Purchaser shall have executed and delivered all
documents required to be executed and delivered on the Additional
Closing Date and shall have performed and complied in all material
respects with all agreements and covenants contained herein which are
required to be performed or complied with by it on or before the
Additional Closing Date.
Section 5.4.2. Purchaser's Representations and Warranties
Complete and Correct. The Purchaser's representations and warranties
contained in Section 3.4 of this Agreement shall be true and correct in
all material respects when made and shall be true and correct in all
material respects at and as of the Additional Closing Date, as if made
on and as of such date.
Section 5.4.3. Illegality, Etc. No statute, rule or
regulation, or order, decree or injunction enacted, entered,
promulgated or enforced by any Governmental Authority shall be in
effect which prohibits or restricts the consummation of the
transactions contemplated hereby."
-11-
<PAGE> 12
(f) Section 7.2 is deleted in its entirety and replaced by the
following:
Section 7.2. Survival of Representations and Warranties. The
representations and warranties (i) of the Company set forth in Sections
3.1.1 through 3.1.7, inclusive, Sections 3.1.19, 3.1.21, 3.1.22 and
Section 3.3.1 through 3.3.4, inclusive, hereof and (ii) of the
Purchaser set forth in Sections 3.2.1 through 3.2.7, inclusive, and
Sections 3.4.1 through 3.4.5, inclusive, shall survive the Closing,
indefinitely. None of the other representations or warranties made in
Article III of this Agreement shall survive the Initial Closing Date.
ARTICLE III.
MISCELLANEOUS PROVISIONS
Section 3.1. Counterparts. For the convenience of the parties,
any number of counterparts of this Amendment may be executed by any one or more
of the parties hereto, and each such executed counterpart shall be, and shall be
deemed to be, an original, but all of which together shall constitute one and
the same instrument.
Section 3.2. Ratification. The Stock Purchase Agreement, as
amended hereby, is hereby ratified and confirmed.
Section 3.3. Governing Law. This Amendment shall be governed
by and construed in accordance with the laws of the State of Delaware, without
giving effect to conflicts of law principles thereof.
-12-
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be effective as of July 16, 1999 and executed on the 3rd day of
August, 1999.
AAMES FINANCIAL CORPORATION
By: /s/ Barbara S. Polsky
-----------------------------------------
Name: Barbara S. Polsky
Title: EVP & General Counsel
SPECIALTY FINANCE PARTNERS
By its General Partner
CAPITAL Z FINANCIAL SERVICES FUND II, L.P.,
By its General Partner
CAPITAL Z PARTNERS, L.P.,
By its General Partner
CAPITAL Z PARTNERS, LTD.
By: /s/ Adam M. Mizel
--------------------------------------
Name: Adam M. Mizel
Title: Partner
-13-
<PAGE> 1
EXHIBIT 10.25(e)
AMENDMENT NO. 4
TO
PREFERRED STOCK PURCHASE AGREEMENT
This AMENDMENT NO. 4, effective as of August 23, 1999 (this
"Amendment"), to that certain Preferred Stock Purchase Agreement dated as of
December 23, 1998, as amended on February 10, 1999, June 9, 1999 and July 16,
1999 (the "Stock Purchase Agreement"), is made and entered into between Aames
Financial Corporation, a Delaware corporation (the "Company") and Specialty
Finance Partners, as successor to Capital Z Financial Services Fund II, L.P., a
Bermuda limited partnership ("Purchaser").
RECITALS
WHEREAS, the parties hereto have entered into the Stock Purchase
Agreement pursuant to which the Purchaser purchased from the Company, and the
Company sold to the Purchaser shares of the Company's Series C Convertible
Preferred Stock, par value $0.001 per share (the "Series C Preferred Stock"; and
WHEREAS, pursuant to the Stock Purchase Agreement, the Company agreed
to offer, subject to the completion of the Recapitalization, to the existing
holders of the Company's Common Stock, par value $0.001 per share,
non-transferable rights to purchase an aggregate of approximately $31 million in
stated value of Series C Preferred Stock; and
WHEREAS, the parties desire to amend the Stock Purchase Agreement to
provide for the expiration of the Purchase Rights on a date that is fewer than
thirty (30) days following issuance; and
WHEREAS, the Continuing Directors of the Board of Directors have
approved this Amendment; and
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
<PAGE> 2
ARTICLE I.
DEFINITIONS
Section 1.1. Definitions. Capitalized terms used herein that
are defined in the Stock Purchase Agreement are used herein as so defined.
ARTICLE II.
AMENDMENTS
Section 4.9 of the Stock Purchase Agreement is hereby amended
to remove any requirement that the Purchase Rights expire thirty (30) days after
issuance and provide instead for the expiration of the Purchase Rights on date
as agreed to by the Company and Capital Z, or the successors and assigns of
Capital Z.
ARTICLE III.
MISCELLANEOUS PROVISIONS
Section 3.1. Counterparts. For the convenience of the parties,
any number of counterparts of this Amendment may be executed by any one or more
of the parties hereto, and each such executed counterpart shall be, and shall be
deemed to be, an original, but all of which together shall constitute one and
the same instrument.
Section 3.2. Ratification. The Stock Purchase Agreement, as
amended hereby, is hereby ratified and confirmed.
Section 3.3. Governing Law. This Amendment shall be governed
by and construed in accordance with the laws of the State of Delaware, without
giving effect to conflicts of law principles thereof.
-2-
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be effective as of the 23rd day of August, 1999.
AAMES FINANCIAL CORPORATION
By: /s/ DAVID A. SKLAR
------------------------------------
Name: David A. Sklar
Title: EVP & CFO
SPECIALTY FINANCE PARTNERS
By its General Partner
CAPITAL Z FINANCIAL SERVICES FUND II, L.P.,
By its General Partner
CAPITAL Z PARTNERS, L.P.,
By its General Partner
CAPITAL Z PARTNERS, LTD.
By: /s/ ADAM M. MIZEL
------------------------------------
Name: Adam M. Mizel
Title: Partner
-3-
<PAGE> 1
EXHIBIT 10.26(b)
AMENDMENT TO AMENDED AND RESTATED MASTER
REPURCHASE AGREEMENT GOVERNING
PURCHASES AND SALES OF MORTGAGE LOANS
This Amendment to Amended and Restated Master Repurchase Agreement
Governing Purchases and Sales of Mortgage Loans, effective as of May 1, 1999
(this "Amendment"), dated as of June 30, 1999, is made by and between LEHMAN
COMMERCIAL PAPER, INC. ("Buyer") and AAMES CAPITAL CORPORATION ("Seller";
collectively with Buyer, "Parties").
R E C I T A L S:
The Seller and the Buyer are parties to an Amended and Restated Master
Repurchase Agreement Governing Purchases and Sales of Mortgage Loans, dated as
of February 10, 1999 (the "Agreement"), pursuant to which Buyer has agreed,
subject to the terms and conditions set forth in the Agreement, to purchase
certain mortgage loans owned by the Seller, including, without limitation, all
rights of Seller to service and administer such mortgage loans and residential
properties. Terms used but not defined herein shall have the respective meanings
ascribed to such terms in the Agreement, as amended hereby.
The Parties wish to amend the Agreement to modify certain of the terms
and conditions governing the purchase and sale of the mortgage loans.
NOW, THEREFORE, in consideration of good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the Parties hereto
agree as follows, effective as of the date hereof:
SECTION 1. AMENDMENTS
1.1 The definition of "Collateral Amount" in Section 2 is deleted in
its entirety and replaced with the following language:
"Collateral Amount" means (i) with respect to any Transaction up to
and including an aggregate Purchase Price for all Purchased Mortgage
Loans at any one time subject to then outstanding Transactions equal to
$300,000,000, the amount obtained by application of the applicable
Collateral Amount Percentage to the Repurchase Price for such
Transaction and (ii) during the period beginning on July 1, 1999 and
extending through and including July 31, 1999, with respect to any
Transaction with a Purchase Price that, together with the aggregate
Purchase Price for all Purchased Mortgage Loans at any one time subject
to then outstanding Transactions, exceeds $300,000,000, the lesser of
(x) the amount obtained by application of the applicable Collateral
Amount Percentage to the Repurchase Price for such Transaction and (y)
97% of the aggregate outstanding principal balance of Purchased
Mortgage Loans subject to such Transactions in excess of $300,000,000;
provided, that the aggregate Purchase Price for all Purchased Mortgage
Loans at any one time subject to then outstanding Transactions shall
not
<PAGE> 2
excess (1) $400,000,000 during the period beginning July 1, 1999 and
extending through and including July 31, 1999, or (2) $300,000,000
prior to or after the period described in (1)."
1.2 The following language is inserted immediately after the definition
of "Purchased Mortgage Loans" and immediately preceding the definition of
"Replacement Loans" in Section 2:
"Q-1 Loan" means a Mortgage Loan that (i) is available only to
borrowers of A, A- and B credit grades and Iii) provides for a hold
back of proceeds or future advances to be applied to minor property
repairs restricted to roofing, plumbing, electrical or carpentry
repairs in an amount that does not exceed the lesser of $10,000 or 10%
of the aggregate Purchase Price for such Q-1 Loan."
1.3 Paragraph (a)(ii) of the definition of "Trigger Event" in Section 2
is deleted in its entirety and replaced with the following language:
"(ii) $124,000,000 from June 30, 1999 to (but excluding) September
30, 1999 or"
1.4 Paragraph (b)(ii) of the definition of "Trigger Event" in Section 2
is deleted in its entirety and replaced with the following language:
"(ii) $124,000,000 for June 30, 1999 to (but excluding) September
30, 199 or"
1.5 Paragraph (c) of the definition of "Trigger Event" in Section 2 is
deleted in its entirety and replaced with the following language:
"(c) the Leverage Ratio shall exceed (i) 6.5 to 1.0
from the date of this Agreement to (but excluding) September 30, 1999
or (ii) 4.5 to 1.0 thereafter."
1.6 The third sentence in Section 5(b) is deleted in its entirety and
replaced with the following language:
"The Depository Acknowledgement shall provide that upon notice to
the Collection Account Bank (which notice Buyer may deliver at its
reasonable discretion but in any event after the occurrence of a
Trigger Event, an Event of Default or a Market Value Collateral Deficit
or Securitization Value Collateral Deficit which is not cured in
accordance with Section 4), only Buyer shall be permitted to withdraw
funds from the Collection Account, such funds to be applied by Buyer to
reduce the outstanding Purchase Price."
1.7 The reference to "30 days" in Section 12(j)(vi) is deleted and
replaced with "45 days".
1.8 The reference to "June 30, 1999" in Section 13(xii) is deleted and
replaced with "September 30, 1999".
<PAGE> 3
1.9 Clause (ii) of Section 13(xiii) is deleted in its entirety and
replaced with the following language:
"(ii) $120,000,000 from June 30, 1999 to (but excluding) September
30, 1999 or"
1.10 Clause (ii) of Section 13(xiv) is deleted in its entirety and
replaced with the following language:
"(ii) $120,000,000 from June 30, 1999 to (but excluding) September
30, 1999 or"
1.11 Section 13(xv) is deleted in its entirety and replaced with the
following language:
"(xvi) the Leverage Ratio shall exceed (a) from the date of this
Agreement to (but excluding) Setember 30, 1999, 6.5 to 1.0, and (b) 5.0
to 1.0 thereafter;"
1.12 Section 13 (xvi) is deleted in its entirety and replaced with the
following language:
"(xvi) the Adjusted Leverage Ration shall exceed (a) on the last
Business Day of (i) any calendar month from the date of this Agreement
to (but excluding) September 30, 1999, 2.50 to 1.0, or (ii) any
calendar month thereafter, 2.25 to 1.0 or (b) 3.5 to 1.0 on any other
day;"
1.13 Section 13(xvii) is deleted in its entirety and replaced with the
following language:
"(xvii) as of the end of any quarter occurring on and after
September 30, 1999, the Interest Coverage Ratio shall be less than 1.0
to 1.0;"
1.14 Section 13(xviii) is deleted in its entirety and replaced with the
following language:
"(xviii) for any two consecutive fiscal quarters of Guarantor,
beginning with the fiscal quarter ending December 31, 1999, Guarantor
and its subsidiaries shall incur a loss on a consolidated basis in
accordance with GAAP; or"
1.15 Paragraph (1) of Exhibit V to the Agreement is deleted in its
entirety and replaced with the following language:
"(1) Full Disbursement of Proceeds. The proceeds of the Mortgage
Loan have been fully disbursed and there in no requirement for future
advance thereunder, and any and all requirements as to completion of
on-site or off-site improvement and as to disbursements of any escrow
funds therefor have been compiled with, except with respect to the
proceeds of Q-1 Loan; provided, that the Purchase Price of such Q-1
Loan, together with the aggregate Purchase Price for all such Q-1 Loans
subject to then outstanding Transactions does not exceed 3% of the
aggregate Purchase Price for all
<PAGE> 4
Purchased Mortgage Loans subject to then outstanding Transactions
(after giving effect to the purchase of such Q-1 Loan). All costs, fees
and expenses incurred in making or closing the Mortgage Loan and the
recording of the Mortgage were paid, and the Mortgage is not entitled
to any refund of any amounts paid or due under the Mortgage Note or
Mortgage."
1.16 Paragraph (o) of Exhibit V to the Agreement is deleted in its
entirety and replaced with the following:
"(o) Loan-to-Value Ratio. The Mortgage Loans subject to
Transactions do not have a weighted average cumulative Loan-to-Value
Ratio in excess of 85%. If a Mortgage Loan has a Loan-to-Value Ratio
greater than 90% and less than 95% or equal to or greater than 95% and
less than 100%, the Purchase Price of such Mortgage Loan together with
the Purchase Price of Purchased Mortgage Loans secured by a first or a
second lien on the related Mortgage Properties subject to then
outstanding Transaction having a Loan-to-Value Ratio greater than 90%
and less than 95% or equal to or greater than 95% and loan than 100%
does not, in either case, exceed the greater of (x) 3% of the aggregate
Purchase Price for all Mortgage Loans which are subject to then
outstanding Transactions and (y) $1,000,000."
1.17 Clause (v) of Paragraph (pp) of Exhibit V to the Agreement is
deleted in its entirety and Clause (vi) of Paragraph (pp) of Exhibit V of the
Agreement is renumbered Clause (v).
1.18 Paragraph (zz) of Exhibit V to the Agreement is deleted in its
entirety and replaced with the following language:
"(zz) Wet Ink Mortgage Loans. The Purchase Price of a Wet Ink
Mortgage Loan together with the Purchase Price of Purchased Mortgage
Loans which are Wet Ink Mortgage Loans does not exceed, (i) during the
first and last week of each month, the greater of (x) $35,000,000 and
(y) 25% of the aggregate Purchase Price for all Mortgage Loans which
are subject to then outstanding Transactions and (ii) at all other
times, 15% of the aggregate Purchase Price for all Purchased Mortgage
Loans subject to then outstanding Transactions."
SECTION 2. COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE PARTIES.
2.1 Except as expressly amended by Section 1 hereof, the Agreement
remains unaltered and in full force and effect. Each Party hereby reaffirms all
terms and covenants made in the Agreement as amended hereby.
2.2 Each of the Parties hereby represents and warrants to the other
parties that (a) this Amendment constitutes the legal, valid and binding
obligation of such Party, enforceable against such Party in accordance with its
terms, and (b) the execution and delivery by such Party of this
<PAGE> 5
Amendment has been duly authorized by all requisite limited liability company or
corporate action, as applicable, on the part of such Party and will not violate
any provision of the organizational documents of such Party.
2.3 Seller shall within thirty (3) days following the receipt of a
notice from Buyer requesting same, enter into a master servicing agreement in
form and substance acceptable to Buyer with respect to the Mortgage Loans, with
a master servicer approved by Buyer.
SECTION 3. PAYMENT OF FEE; EXPENSES
3.1 In consideration of Buyer increasing the maximum aggregate Purchase
Price for all Purchased Mortgage Loans at any one time subject to then
outstanding Transactions on a temporary basis as set forth in the Agreement,
Seller agrees to pay to Buyer on the date hereof a fee in the amount of $50,000.
3.2 Seller shall pay all out-of-pocket costs and expenses (including
legal fees and disbursements) reasonably incurred by Buyer in connection with
the preparation and execution of this Amendment.
SECTION 4. EFFECT UPON THE AGREEMENT.
4.1 Except as specifically set forth herein, the Agreement shall remain
in full force and effect and is hereby ratified and confirmed. All references to
the "Agreement" in the Amended and Restated Master Repurchase Agreement
Governing Purchases and Sales of Mortgage Loans shall mean and refer to the
Amended and Restated Master Repurchase Agreement Governing Purchases and Sales
of Mortgage Loans as modified and mended hereby.
4.2 The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of any Party under the
Agreement, or any other document, instrument or agreement executed and/or
delivered in connection therewith.
SECTION 5. GOVERNING LAW.
THIS AMENDMENT SHALL BE CONSTRUED, INTERPRETED AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS
PRINCIPLES THEREOF.
SECTION 6. COUNTERPARTS.
This Amendment may be executed in any number of counterparts, and all
such counterparts shall together constitute the same agreement.
<PAGE> 6
IN WITNESS WHEREOF, the Parties hereto have caused this Amendment to be
executed as of the day and year first above written.
SELLER:
AAMES CAPITAL CORPORATION, as Seller
By: /s/David A. Sklar
---------------------------------------------------------
Name: David A. Sklar
-------------------------------------------------------
Title: Executive Vice President & Chief Executive Officer
------------------------------------------------------
BUYER:
LEHMAN COMMERCIAL PAPER, INC., as Buyer
By: /s/ Francis X. Gilhool
------------------------------------------
Name: Francis X. Gilhool
----------------------------------------
Title: S.V.P.
---------------------------------------
<PAGE> 1
EXHIBIT 10.26(c)
SECOND AMENDMENT TO AMENDED AND RESTATED MASTER
REPURCHASE AGREEMENT GOVERNING
PURCHASES AND SALES OF MORTGAGE LOANS
This Second Amendment to Amended and Restated Master Repurchase
Agreement Governing Purchases and Sales of Mortgage Loans, effective as of July
1, 1999 (this "Second Amendment"), dated as of June 30, 1999, is made by and
between LEHMAN COMMERCIAL PAPER INC. ("Buyer") and AAMES CAPITAL CORPORATION (
"Seller"; collectively with Buyer, "Parties").
R E C I T A L S :
The Seller and the Buyer are parties to an Amended and Restated Master
Repurchase Agreement Governing Purchases and Sales of Mortgage Loans, dated as
of February 10, 1999 as modified and amended by the Amendment to Amended and
Restated Master Repurchase Agreement Governing Purchases and Sales of Mortgage
Loans dated as of June 30, 1999 (collectively, the "Agreement"), pursuant to
which Buyer has agreed, subject to the terms and conditions set forth in the
Agreement, to purchase certain mortgage loans owned by the Seller, including,
without limitation, all rights of Seller to service and administer such mortgage
loans and residential properties. Terms used but not defined herein shall have
the respective meanings ascribed to such terms in the Agreement, as amended
hereby.
The Parties wish to amend the Agreement to modify certain of the terms
and conditions governing the purchase and sale of the mortgage loans.
NOW, THEREFORE, in consideration of good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Parties hereto agree as
follows, effective as of the date hereof:
Section 1. Amendments.
1.1 The reference to "February 10, 2000" in Section 1 is deleted and replaced
with "March 31, 2000".
1.2 The definition of "Pricing Spread" in Section 2 is deleted in its entirety
and replaced with the following language:
"`Pricing Spread' means the rate specified in the Confirmation, which shall
be equal to (i) on each date prior to the delivery to the Custodian of the
complete Mortgage Files with respect to the related Purchased Mortgage
Loans, 2.00% and (ii) on each date on and after the delivery to the
Custodian of such Mortgage Files, 1.50%."
<PAGE> 2
1.3 Paragraph (a) of the definition of "Trigger Event" in Section 2 is deleted
in its entirety and replaced with the following language:
"Net Worth shall be less than (i) $120,000,000 at any time from June
30, 1999 to but excluding September 30, 1999 or (ii) thereafter $150,000,000
plus 90% of all additional shareholders' equity raised, determined in accordance
with GAAP, since the date of this Second Amendment (excluding any additional
equity contribution by Capital Z Partners in an amount up to $25,000,000 and the
public rights offering scheduled for September 1999 after the date of this
Second Amendment) plus 75% of cumulative reported net income, determined in
accordance with GAAP; or"
1.4 Paragraph (b) of the definition of "Trigger Event" in Section 2 is deleted
in its entirety and replaced with the following language:
"Tangible Net Worth shall be less than (i) $120,000,000 at any time
from June 30, 1999 to but excluding September 30, 1999 or (ii) thereafter
$150,000,000 plus 90% of all additional shareholders' equity raised, determined
in accordance with GAAP, since the date of this Second Amendment (excluding any
additional equity contribution by Capital Z Partners in an amount up to
$25,000,000 and the public rights offering scheduled for September 1999 after
the date of this Second Amendment) plus 75% of cumulative reported net income,
determined in accordance with GAAP; or"
1.5 Paragraph (c) of the definition of "Trigger Event" in Section 2 is deleted
in its entirety and replaced with the following language:
(c) the Leverage Ratio shall exceed (i) 6.5 to 1.0 from June 30, 1999 to but
excluding September 30, 1999 or (ii) 5.0 to 1.0 thereafter; except,
however, the application of this test shall not apply until such time as
the securitization more commonly known as Aames 1999-1 has closed.
1.6 Section 13(xiii) is deleted in its entirety and replaced with the following
language:
"Net Worth shall be less than (i) $120,000,000 at any time from June 30,
1999 to but excluding September 30, 1999 or (ii) thereafter $140,000,000 plus
90% of all additional shareholders' equity raised, determined in accordance with
GAAP, since the date of this Second Amendment (excluding any additional equity
contribution by Capital Z Partners in an amount up to $25,000,000 and the public
rights offering scheduled for September 1999 after the date of this Second
Amendment) plus 75% of cumulative reported net income, determined in accordance
with GAAP; or"
1.7 Section 13(xiv) is deleted in its entirety and replaced with the following
language:
2
<PAGE> 3
"Tangible Net Worth shall be less than (i) $120,000,000 at any time
from June 30, 1999 to but excluding September 30, 1999 or (ii) thereafter
$140,000,000 plus 90% of all additional shareholders' equity raised, determined
in accordance with GAAP, since the date of this Second Amendment (excluding any
additional equity contribution by Capital Z Partners in an amount up to
$25,000,000 and the public rights offering scheduled for September 1999 after
the date of this Second Amendment) plus 75% of cumulative reported net income,
determined in accordance with GAAP; or"
1.8 Section 13(xv) is deleted in its entirety and replaced with the following
language:
"(c) the Leverage Ratio shall exceed (i) 6.5 to 1.0 from June 30, 1999 to
but excluding September 30, 1999 or (ii) 5.0 to 1.0 thereafter; except, however,
the application of this test shall not apply until such time as the
securitization more commonly known as Aames 1999-1 has closed."
1.9 Section 20(a) shall be deleted in its entirety and replaced with the
following language:
"(a) This Agreement shall terminate upon the earlier of (i) March 31, 2000
or (ii) written notice from Seller to Buyer to such effect, except that this
Agreement shall notwithstanding the above clauses, remain applicable to any
Transaction then outstanding.
1.10 Paragraph (l) of Exhibit V to the Agreement is deleted in its entirety and
replaced with the following language:
"(l) Full Disbursement of Proceeds. The proceeds of the Mortgage Loan have
been fully disbursed and there is no requirement for future advances thereunder,
and any and all requirements as to completion of any on-site or off-site
improvement and as to disbursements of any escrow funds therefor have been
complied with, except with respect to the proceeds of a Q-1 Loan; provided, that
the Purchase Price of such Q-1 Loan, together with the aggregate Purchase Price
for all such Q-1 Loans subject to then outstanding Transactions does not exceed
5% of the aggregate Purchase Price for all Purchased Mortgage Loans subject to
then outstanding Transactions (after giving effect to the purchase of such Q-1
Loan). All costs, fees and expenses incurred in making or closing the Mortgage
Loan and the recording of the Mortgage were paid, and the Mortgagor is not
entitled to any refund of any amounts paid or due under the Mortgage Note or
Mortgage."
1.11 Paragraph (o) of Exhibit V to the Agreement is deleted in its entirety
and replaced with the following language:
"Loan-to-Value Ratio: The Mortgage Loans subject to Transactions do
not have a weighted average cumulative Loan-To-Value Ratio in excess of 85%. If
a Mortgage Loan has a Loan-To-Value greater than 90% and less than 95% or equal
to or greater than 95% and less than 100%, the Purchase Price of Purchased
Mortgage Loans secured by a first or second lien on
3
<PAGE> 4
the related Mortgaged Properties subject to then outstanding Transactions having
a Loan-To-Value Ratio greater than 90% and less than 95% or equal to or greater
than 95% and less than 100% does not, in either case, exceed the greater of (x)
5% of the aggregate Purchase Price for all Mortgage Loans which are subject to
then outstanding Transactions and (y) $ 15,000,000.
SECTION 2. COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE PARTIES.
2.1 Except as expressly amended by Section 1 hereof, the Agreement remains
unaltered and in full force and effect. Each Party hereby reaffirms all terms
and covenants made in the Agreement as modified and amended hereby.
2.2 Each of the Parties hereby represents and warrants to the other parties that
(a) this Second Amendment constitutes the legal, valid and binding obligation of
such Party, enforceable against such Party in accordance with its terms, and (b)
the execution and delivery by such Party of this Amendment has been duly
authorized by all requisite limited liability company or corporate action, as
applicable, on the part of such Party and will not violate any provision of the
organizational documents of such Party.
SECTION 3. PAYMENT OF FEES; EXPENSES.
3.1 (Reserved)
SECTION 4. EFFECT UPON THE AGREEMENT.
4.1 Except as specifically set forth herein, the Agreement shall remain in full
force and effect and is hereby ratified and confirmed. All references to the
"Agreement" in the Amended and Restated Master Repurchase Agreement Governing
Purchases and Sales of Mortgage Loans shall mean and refer to the Amended and
Restated Master Repurchase Agreement Governing Purchases and Sales of Mortgage
Loans as modified and amended hereby.
4.2 The execution, delivery and effectiveness of this Second Amendment shall not
operate as a waiver of any right, power or remedy of any Party under the
Agreement, or any other document, instrument or agreement executed and/or
delivered in connection therewith.
SECTION 5. GOVERNING LAW.
THIS SECOND AMENDMENT SHALL BE CONSTRUED, INTERPRETED AND GOVERNED BY THE LAW OF
THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES
THEREOF.
4
<PAGE> 5
SECTION 6. COUNTERPARTS.
This Second Amendment may be executed in any number of counterparts, and all
such counterparts shall together constitute the same agreement.
IN WITNESS WHEREOF, the Parties hereto have caused this Second Amendment to be
executed as of the day and year first above written.
SELLER:
AAMES CAPITAL CORPORATION, as Seller
By: /s/ David A. Sklar
--------------------------------------
Name: David A. Sklar
------------------------------------
Title: EVP & CFO
-----------------------------------
BUYER:
LEHMAN COMMERCIAL PAPER INC., as Buyer
By: /s/ Kurt A. Locher
--------------------------------------
Name: Kurt Locher
------------------------------------
Title: Authorized Signatory
-----------------------------------
5
<PAGE> 1
EXHIBIT 10.27(b)
AMENDMENT NO. 1 TO MASTER LOAN AND SECURITY AGREEMENT
This AMENDMENT NO. 1 TO MASTER LOAN AND SECURITY AGREEMENT ("Amendment
No. 1"), is entered into as of June 10, 1999, between AAMES CAPITAL CORPORATION,
a California corporation (the "Borrower") and GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC., a Delaware corporation (the "Lender") in order to amend certain
provisions of that certain MASTER LOAN AND SECURITY AGREEMENT, dated as of
February 10, 1999, between Borrower and Lender (the "Loan Agreement") to
permanently reduce the Maximum Credit and the Maximum Uncommitted Amount.
Capitalized terms used and not otherwise defined herein have the meanings
ascribed thereto in the Loan Agreement.
WHEREAS, Borrower is repaying a Committed Advance in the aggregate
amount of $10,000,000 on June 10, 1999 (the "June 10 Repayment") of which
$8,683,727.72 represents proceeds from the sale by Borrower of Historical
Advances pursuant to an Historical Advance Purchase Agreement dated as of June
10, 1999 between Borrower and Steamboat Financial Partnership I, L.P.;
WHEREAS, Lender and Borrower desire that the Maximum Credit and the
Maximum Committed Amount will be permanently reduced at the time of the June 10
Repayment by $10,000,000;
WHEREAS, Section 2.01(b) of the Loan Agreement provides in relevant
part: "Unless otherwise agreed by the parties, in determining whether Advances
secured by Eligible Mortgage Loans are Committed Advances or Uncommitted
Advances, such Advances shall first be deemed Committed Advances up to the
Maximum Committed Amount, and then the remained shall be deemed Uncommitted
Advances;"
WHEREAS, Borrower does not as of this date have Committed Advances
under the Loan Agreement up to the Maximum Committed Amount;
WHEREAS, Borrower has requested an Uncommitted Advance in the amount of
$10,000,000, secured by Mortgage Loans identified on Schedule A hereto (the
"June 10 Advance");
NOW, THEREFORE, it is hereby agreed by Borrower and Lender as follows:
1. The following definitions in Section 1.01 of the Loan Agreement are hereby
amended and restated as set forth below:
"Maximum Committed Amount" shall mean $90 million.
"Maximum Credit" shall mean the sum of the Maximum Committed Amount and
the Maximum Uncommitted Amount, which shall equal $190 million.
2. In accordance with Section 2.01 of the Loan Agreement, the parties agree that
the June 10 Advance shall be an Uncommitted Advance even though the Maximum
Committed Amount has not been satisfied.
3. Lender hereby acknowledges that the June 10 Advance meets the requirements of
Section 2.10 of the Loan Agreement concerning the purpose of Advances and
Section 7.12 of the Loan Agreement concerning use of proceeds or
alternatively waives the requirements of those Sections.
-1-
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1, as of
the date hereof.
BORROWER
AAMES CAPITAL CORPORATION
By: /s/ Barbara S. Polsky
------------------------------
Name: Barbara S. Polsky
----------------------------
Title: EVP & General Counsel
---------------------------
LENDER
GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC.
By: /s/ John C. Anderson
------------------------------
Name: John C. Anderson
----------------------------
Title: SVP
---------------------------
-2-
<PAGE> 1
EXHIBIT 10.27(c)
AMENDMENT NO. 2 TO MASTER LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 2 TO MASTER LOAN AND SECURITY AGREEMENT (this "Amendment")
dated June 30, 1999 amends the Master Loan and Security Agreement dated as of
February 10, 1999 (the "Loan Agreement"), between Aames Capital Corporation (the
"Borrower") and Greenwich Capital Financial Products, Inc. (the "Lender").
Capitalized terms used herein and not otherwise defined herein shall have the
meanings set forth in the Loan Agreement. The Borrower and the Lender, for good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, enter into this Amendment and agree as follows:
1. AMENDMENT
Effective as of June 30, 1999, Section 7.26(b) of the Loan Agreement is hereby
amended and restated in its entirety as follows:
"By September 30, 1999, the Borrower shall be required to provide
written assurance to the Lender that it is year 2000 compliant; provided
that during the period from September 1, 1999 until the date in
September, 1999 on which such written assurance is received by the
Lender, outstanding Advances under this Loan Agreement may not be
greater than the lesser of (a) the Maximum Committed Amount and (b) the
sum of the outstanding Advances as of August 31, 1999 and $25 million.
The failure of the Borrower to provide satisfactory assurance of year
2000 compliance by September 30, 1999 shall constitute an Event of
Default."
2. REPRESENTATIONS
In order to induce the Lender to execute and deliver this Amendment, the
Borrower hereby represents to the Lender that as of the date hereof, after
giving effect to this Amendment, the Borrower is in full compliance with all of
the terms and conditions of the Loan Agreement and no default or Event of
Default has occurred and is continuing under the Loan Agreement.
3. CONFIRMATION OF COMPLIANCE
The Lender hereby confirms that as of the date hereof the Borrower is in
compliance with the covenant contained in Section 7.18 of the Loan Agreement.
4. MISCELLANEOUS
Except as specifically amended herein, the Loan Agreement shall continue in full
force and effect in accordance with its original terms. Reference to this
specific Amendment need not be made in the Loan Agreement or any other
instrument or document executed in connection therewith, or in any certificate,
letter or communication issued or made pursuant to or with respect to the Loan
1
<PAGE> 2
Agreement any reference in any of such items to the Loan Agreement being
sufficient to refer to the Loan Agreement as amended hereby.
IN WITNESS WHEREOF, the Borrower and the Lender have caused this Amendment to be
duly executed and delivered as of the date first above written.
AAMES CAPITAL CORPORATION
By: /s/ Barbara S. Polsky
-------------------------------------
Name: Barbara S. Polsky
-----------------------------------
Title: EVP & General Counsel
----------------------------------
GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC.
By: /s/ John C. Anderson
-------------------------------------
Name: John C. Anderson
-----------------------------------
Title: SVP
----------------------------------
2
<PAGE> 1
EXHIBIT 10.27(e)
AMENDMENT NO. 1
TO
GUARANTY
This Amendment No. 1 (the "Amendment") dated June 30, 1999 amends the Guaranty
dated as of February 10, 1999 (the "Guaranty"), made by Aames Financial
Corporation (the "Guarantor") in favor of Greenwich Capital Financial Products,
Inc. (the "Lender"). Capitalized terms used herein and not otherwise defined
herein shall have the meanings set forth in the Guaranty or, if not so defined
therein, the Loan Agreement (as defined in the Guaranty). The Guarantor and the
Lender, for good and valuable consideration, the receipt of and sufficiency of
which are hereby acknowledged, enter into this Amendment and agree as follows:
1. AMENDMENT
Effective as of June 30, 1999 Section 3(b)(i), (iii), (iv), (v) and (vi) of the
Guaranty are hereby amended and restated in their entirety as follows:
(i) Maintenance of Tangible Net Worth. The Tangible Net Worth of the
Guarantor, on a consolidated basis and on any given day, shall
be (a) prior to October 1, 1999, $110,000,000; and (b) on and
after October 1, 1999, not less than the greater of (x)
$140,000,000 and (y) 80% of the Tangible Net Worth of the
Guarantor, on a consolidated basis, as at the end of each fiscal
quarter;
(iii) Liquidity. The aggregate amount of the Guarantor's cash, Cash
Equivalents and available borrowing capacity on unencumbered
assets that could be drawn against (taking into account required
haircuts) under committed warehouse or working capital
facilities, on a consolidated basis and on any given day, shall
be (a) prior to October 1, 1999, $5,000,000, and (b) on and
after October 1, 1999, $15,000,000.
(iv) Maintenance of Ratio of Earnings to Total Interest Expense.
Effective as of December 31, 1999, the Guarantor shall not
permit the ratio of earnings before interest and taxes to total
expense, on a consolidated basis, to be less than 1.05:1
measured on a rolling basis from the immediately preceding two
calendar quarters commencing with the two quarters ending
September 30, 1999 and December 31, 1999. Thereafter, such ratio
measured on a rolling basis shall not be less than 1.10:1.
(v) Profitability. The Guarantor shall have a GAAP after tax net
income of at least $1.00 as measured at the end of September 30,
1999 and December 31, 1999;
1
<PAGE> 2
(vi) Capitalization of Guarantor. The Guarantor has been capitalized
by a contribution of each to the equity of the Guarantor in an
aggregate amount equal to not less than $67,000,000 (after
taking into account related expenses, if any, payable on the
date of contribution) and, as of September 30, 1999, the
Guarantor shall have received an additional contribution to
capital in an amount not less than $23,000,000 (after taking
into account related expenses, if any, payable on the date of
such contribution).
2. REPRESENTATIONS
In order to induce the Lender to execute and deliver this Amendment, the
Guarantor hereby represents to the Lender that as of the date hereof, after
giving effect to this Amendment, (a) the representations and warranties set
forth in Section 3 of the Guaranty are and shall be and remain true and correct
and (b) the Guarantor is in full compliance with all of the terms and conditions
of the Guaranty.
3. MISCELLANEOUS
Except as specifically amended herein, the Guaranty shall continue in full force
and effect in accordance with its original terms. Reference to this specific
Amendment need not be made in the Guaranty or any other instrument or document
executed in connection therewith, or in any certificate, letter or communication
issued or made pursuant to or with respect to the Guaranty, any reference in any
of such items to the Guaranty being sufficient to refer to the Guaranty as
amended thereby.
2
<PAGE> 3
IN WITNESS WHEREOF, the Guarantor and the Lender have cause this Amendment to be
duly executed and delivered as of the date first above written.
AAMES FINANCIAL CORPORATION
By: /s/ Barbara S. Polsky
-------------------------------------
Name: Barbara S. Polsky
-----------------------------------
Title: EVP & General Counsel
----------------------------------
GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC.
By: /s/ John C. Anderson
-------------------------------------
Name: John C. Anderson
-----------------------------------
Title: SVP
----------------------------------
3
<PAGE> 1
EXHIBIT 10.28(c)
FIRST AMENDMENT
TO MASTER REPURCHASE AGREEMENT AND GUARANTY
THIS FIRST AMENDMENT TO MASTER REPURCHASE AGREEMENT AND GUARANTY (this
"First Amendment") is made and dated as of the 30th day of June, 1999, by and
among AAMES CAPITAL CORPORATION, a California corporation (the "Seller"), AAMES
FINANCIAL CORPORATION, a Delaware corporation (the "Guarantor"), and
NATIONSBANK, N.A., a national banking association (the "Buyer").
RECITALS
A. Pursuant to that certain Master Repurchase Agreement dated as of
April 8, 1999 by and between the Buyer and the Seller (as amended from time to
time, the "Repo Agreement"), the Buyer and the Seller agreed to enter into
Transactions on the terms and subject to the conditions set forth therein. All
capitalized terms not otherwise defined herein shall have the meanings given to
such terms in the Repo Agreement.
B. Pursuant to that certain Guaranty dated as of April 8, 1999 by
the Guarantor in favor of the Buyer (as amended from time to time, the
"Guaranty"), the Guarantor agreed to guarantee the Seller's obligations under
the Repo Agreement on the terms and subject to the conditions set forth therein.
C. The parties hereto wish to amend certain provisions in the Repo
Agreement and in the Guaranty, all as set forth more particularly below.
NOW, THEREFORE, in consideration of the foregoing Recitals and for other
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. Supplemental Closing. To reflect the agreement of Buyer to
permit Guarantor to consummate the "Supplemental Closing" under (and as defined
in) the Cap Z Agreement by September 30, 1999 instead of by June 30, 1999,
effective as of the First Amendment Effective Date (as defined in Paragraph 6
below), subparagraph 13(q) of the Repo Agreement is hereby amended to replace
the date "June 30, 1999" referenced therein with the date "September 30, 1999"
and to add after such date the following phrase: "or the Guarantor shall not
have otherwise issued at least $25,000,000.00 in additional equity capital on or
before September 30, 1999 to an investor or investors acceptable to the Buyer".
2. Minimum Tangible Net Worth. To reflect the agreement of the
parties hereto to amend the negative covenant regarding the Guarantor's minimum
Tangible Net Worth, effective as of the First Amendment Effective Date:
<PAGE> 2
(a) Subparagraph 12(j)(1) of the Repo Agreement is hereby
amended to replace the dollar amount "$135,000,000" referenced therein with the
dollar amount "$120,000,000."
(b) Subparagraph 4(j)(1) of the Guaranty is hereby amended
to replace the dollar amount "$135,000,000" referenced therein with the dollar
amount "$120,000,000."
3. Minimum Profitability. To reflect the agreement of the parties
hereto to delay the commencement of the covenant regarding minimum profitability
from the calendar quarter ending September 30, 1999 to the calendar quarter
ending December 31, 1999, effective as of the First Amendment Effective Date:
(a) Paragraph 12(k) of the Repo Agreement is hereby amended
to replace the date "September 30, 1999" referenced therein with the date
"December 31, 1999."
(b) Paragraph 4(k) of the Guaranty is hereby amended to
replace the date "September 30, 1999" referenced therein with the date "December
31, 1999."
4. Non-Warehouse Debt Ratio. To reflect the agreement of the
parties hereto to amend the negative covenant regarding Non-Warehouse Debt
Ratio, effective as of the First Amendment Effective Date:
(a) Paragraph 12(l) of the Repo Agreement is hereby amended
to read in its entirety as follows:
"(l) Non-Warehouse Debt. Permit the Non-Warehouse
Debt Ratio of Guarantor and its consolidated Subsidiaries to exceed
2.25:1.00 for the calendar quarter ending June 30, 1999, and 2.10:1.00
for any other calendar quarter thereafter."
(b) Paragraph 4(l) of the Guaranty is hereby amended to read
in its entirety as follows:
"(l) Non-Warehouse Debt. Permit the Non-Warehouse
Debt Ratio of Guarantor and its consolidated Subsidiaries to exceed
2.25:1.00 for the calendar quarter ending June 30, 1999, and 2.10:1.00
for any other calendar quarter thereafter."
(c) The definition of the term "Non-Warehouse Debt Ratio"
set forth in Paragraph 2 of the Repo Agreement is hereby amended to read in its
entirety as follows:
"'Non-Warehouse Debt Ratio' shall mean, with respect to
Guarantor and its Subsidiaries on a consolidated basis, on any date the
ratio of (a) consolidated funded Indebtedness (including Subordinated
Debt), minus the sum of (i) unrestricted cash or cash equivalents
exceeding $5,000,000.00, plus (ii) one hundred percent (100%) of the
value, according to Guarantor's balance sheet at such date, of all
Mortgage Loans held for sale, to (b) Tangible Net Worth."
<PAGE> 3
5. Maintenance of Liquidity. To reflect the agreement of the
parties hereto to amend the negative covenant regarding the maintenance of
liquidity, effective as of the First Amendment Effective Date:
(a) Subparagraph 12(m)(1) of the Repo Agreement is hereby
amended to replace the date "July 1, 1999" each time it is referenced therein
with the date "October 1, 1999."
(b) Subparagraph 4(m)(1) of the Guaranty is hereby amended
to replace the date "July 1, 1999" each time it is referenced therein with the
date "October 1, 1999."
6. First Amendment Effective Date. This First Amendment shall
become effective retrospectively as of May 30, 1999 (the "First Amendment
Effective Date") on the date upon which the Buyer has received a copy of this
First Amendment, duly executed by all parties hereto.
7. Reaffirmation of Obligations. Each of Seller and Guarantor
hereby reaffirms all of its obligations under the Repo Agreement and Guaranty
respectively and under all other documents, instruments and agreements executed
in connection therewith and acknowledges and agrees that such obligations are
not altered, modified or affected in any manner or to any extent except as
expressly provided herein.
8. Counterparts. This First Amendment may be executed in any number
of 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
agreement.
9. Representations and Warranties. Each of Seller and Guarantor
hereby represents and warrants to Buyer as follows:
(a) Each of Seller and Guarantor has the corporate power and
authority and the legal right to execute, deliver and perform this First
Amendment and has taken all necessary corporate action to authorize the
execution, delivery and performance of this First Amendment. This First
Amendment has been duly executed and delivered on behalf of Seller and Guarantor
and constitutes the legal, valid and binding obligations of each, enforceable
against each in accordance with its terms.
(b) At and as of the date of execution hereof and at and as
of the First Amendment Effective Date and both prior to and after giving effect
hereto: (i) the representations and warranties of Seller and Guarantor contained
in the Repo Agreement and the Guaranty are accurate and complete in all
respects, and (ii) there has not occurred an Event of Default or Potential
Default.
10. No Other Amendment. Except as expressly amended hereby, the Repo
Agreement and the Guaranty shall remain in full force and effect as written and
amended to date.
- --------------------------------------------------------------------------------
[signature page to follow]
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be executed as of the day and year first above written.
AAMES CAPITAL CORPORATION
By /s/ Barbara S. Polsky
--------------------------------------
Name Barbara S. Polsky
------------------------------------
Title EVP
-----------------------------------
AAMES FINANCIAL CORPORATION
By /s/ Barbara S. Polsky
--------------------------------------
Name Barbara S. Polsky
------------------------------------
Title General Counsel & EVP
-----------------------------------
NATIONSBANK, N.A.
By /s/ Carolyn M. Warren
--------------------------------------
Name Carrolyn M. Warren
------------------------------------
Title Senior Vice President
-----------------------------------
<PAGE> 1
EXHIBIT 10.30
EXECUTION COPY
================================================================================
HISTORICAL ADVANCE PURCHASE AGREEMENT
BETWEEN
AAMES CAPITAL CORPORATION
AS SELLER,
AND
STEAMBOAT FINANCIAL PARTNERSHIP I, L.P.
AS BUYER
DATED AS OF JUNE 10, 1999
================================================================================
<PAGE> 2
HISTORICAL ADVANCE PURCHASE AGREEMENT
This HISTORICAL ADVANCE PURCHASE AGREEMENT, dated as of June 10,
1999 (as amended, supplemented or otherwise modified and in effect from time to
time, this "Agreement"), made by and between STEAMBOAT FINANCIAL PARTNERSHIP I,
L.P., a Delaware limited partnership, as buyer (the "BUYER"), and AAMES CAPITAL
CORPORATION, a California corporation, as seller (the "SELLER").
R E C I T A L S:
WHEREAS, in the ordinary course of the Seller's business, the
Seller enters into servicing agreements, which include the Scheduled Pooling and
Servicing Agreements (as defined below), pursuant to which the Seller acts as
servicer of portfolios of mortgage loans;
WHEREAS, pursuant to the Scheduled Pooling and Servicing
Agreements, the Seller has made Historical Advances (as defined below) which,
subject to the terms and conditions of this Agreement, the Seller now wishes to
sell to the Buyer, and the Buyer wishes to purchase from the Seller, on the
Closing Date; and
WHEREAS, concurrently with the sale contemplated herein, each of
the Scheduled Pooling and Servicing Agreements are being supplemented to add the
Buyer as an additional limited servicer with respect to Historical Advances and
to provide for the direct payment by the trustee under each Scheduled Pooling
and Servicing Agreement to the Buyer with respect to such Historical Advances;
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein, and for good and sufficient consideration, the
parties hereto, intending to be legally bound, do hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Certain Defined Terms. All capitalized terms used
herein and not otherwise defined herein shall have the meaning ascribed to them
in the Scheduled Pooling and Servicing Agreements, and, to the extent not
inconsistent therewith, in the Limited Partnership Agreement, and the following
capitalized terms shall have the following meanings:
"AFFILIATE" shall mean, with respect to a Person, any other
Person which directly or indirectly controls, is controlled by or is under
common control with, such Person. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
2
<PAGE> 3
"BUSINESS DAY" shall mean any day other than (i) a Saturday or
Sunday or (ii) any other day on which banking institutions are authorized or
required by law, executive order or governmental decree to be closed in the
States of Delaware, New York or California.
"BUYER" shall have the meaning set forth in the recitals hereto.
"CERTIFICATE INSURER" shall mean the "Financial Guaranty
Insurer" or the "Certificate Insurer" as the case may be, in each case as
defined in each Scheduled Pooling and Servicing Agreement.
"CHIEF EXECUTIVE OFFICE" shall mean, with respect to the Seller
or the Buyer, the place where the Seller or the Buyer, as the case may be, is
located, within the meaning of Section 9-103(3)(d), or any analogous provision,
of the UCC, in effect in the jurisdiction whose Law governs the perfection of
the Buyer's ownership of any of the Historical Advances.
"CLOSING DATE" shall mean June 10, 1999.
"COLLECTION POLICY" shall mean the Seller's policies regarding
the collection and remittance of monies due under Historical Advances as
promptly as is reasonably practical and in accordance with the provisions of the
Scheduled Pooling and Servicing Agreements.
"CUT-OFF DATE" shall mean May 31, 1999.
"GAAP" shall mean generally accepted accounting principles in
the United States of America, applied on a consistent basis and applied to both
classification of items and amounts, and shall include, without limitation, the
official interpretations thereof by the Financial Accounting Standards Board,
its predecessors and successors.
"HISTORICAL ADVANCEs" shall mean, with respect to the Scheduled
Pooling and Servicing Agreements, all Monthly Advances and Servicing Advances
made by the Servicer, including all rights to repayment and reimbursement with
respect thereto, which remain unreimbursed as of the Cut-off Date, having an
aggregate balance of $40,800,786.72 as of the Cut-off Date, and the proceeds
thereof, as defined in the Relevant UCC, as listed on Schedule 1 hereto.
Historical Advances shall not include unreimbursed Monthly Advances and
Servicing Advances made under Scheduled Pooling and Servicing Agreements prior
to the Cut-off Date which are set forth on Annex A to Schedule 1 hereto.
"INDEMNIFIED PARTIES" shall have the meaning specified in
Section 7.1 hereof.
"LAW" shall mean any law (including common law), constitution,
statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or
award of any Official Body.
"LIEN", in respect of the property of any Person, shall mean any
ownership interest of any other Person, any mortgage, deed of trust,
hypothecation, pledge, lien, security interest, financing statement, or charge
or other encumbrance or security arrangement of any nature whatsoever,
including, without limitation, any conditional sale or title retention
3
<PAGE> 4
arrangement, and any assignment, deposit arrangement, consignment or lease
intended as, or having the effect of, security.
"LIMITED PARTNERSHIP AGREEMENT" shall mean the Limited
Partnership Agreement of Steamboat Financial Partnership I, L.P., dated as of
the date hereof.
"LIMITED PARTNERSHIP INTEREST" shall mean the limited
partnership interest in the Buyer, conveyed to the Seller by the Buyer on the
Closing Date, as set forth in the Limited Partnership Agreement.
"OFFICIAL BODY" shall mean any government or political
subdivision or any agency, authority, bureau, central bank, commission,
department or instrumentality of either, or any court, tribunal, grand jury or
arbitrator, in each case whether foreign or domestic.
"OUTSTANDING BALANCE" of any Historical Advance shall mean, at
any time, the then outstanding amount thereof.
"PERSON" shall mean an individual, corporation, limited
liability company, partnership (general or limited), trust, business trust,
unincorporated association, joint venture, joint-stock company, Official Body or
any other entity of whatever nature.
"PURCHASE" shall mean the purchase by the Buyer from the Seller
of an undivided ownership interest in the Historical Advances pursuant to
Sections 2.1 and 2.2 hereof.
"PURCHASE PRICE" shall have the meaning specified in Section
2.2(c) hereof.
"RECORDS" shall mean correspondence, memoranda, computer
programs, tapes, discs, papers, books or other documents or transcribed
information of any type whether expressed in ordinary or machine readable
language.
"RELEVANT UCC" shall mean the UCC as in effect in the State of
California and in the jurisdiction whose Law governs the perfection of the
Buyer's ownership interests in the Historical Advances.
"REPURCHASE EVENT" shall mean, with respect to any Historical
Advance sold by the Seller to the Buyer pursuant to this Agreement, either (i)
any representation or warranty made by the Seller in Section 3.2 of this
Agreement with respect to such Historical Advance proves to have been false or
misleading; or (ii) the failure of the Buyer to have a perfected ownership
interest in such Historical Advance, free and clear of any Lien imposed by or in
respect of Seller.
"RESPONSIBLE OFFICER" shall mean, with respect to the Seller or
the Buyer, the chief executive officer, chief financial officer, or treasurer of
such Person and any other Person designated as a Responsible Officer by any such
officers, identified on the List of Responsible Officers attached as Exhibit D
hereto (as such list may be amended or supplemented from time to time) and
agreed to by the Seller and Buyer.
4
<PAGE> 5
"SCHEDULED POOLING AND SERVICING AGREEMENTS" shall mean,
collectively, those pooling and servicing agreements described on Schedule 2
attached hereto to which the Seller is a party, pursuant to which the Seller
acts as the servicer of portfolios of mortgage loans, or by which Seller's
servicing obligations are governed. For all purposes of this Agreement, the term
"Scheduled Pooling and Servicing Agreements" shall include the Scheduled
Supplement thereto, and any and all instruments, agreements, invoices or other
writings, which gives rise to or otherwise evidence any of the Historical
Advances.
"SCHEDULED SUPPLEMENTS" shall mean, collectively, those
supplements, dated as of the date hereof, to each Scheduled Pooling and
Servicing Agreement.
"SCHEDULED TRUSTEE" shall mean each "Trustee" under each
Scheduled Pooling and Servicing Agreement.
"SELLER" shall have the meaning set forth in the recitals
hereto.
"UCC" shall mean, with respect to any jurisdiction, the Uniform
Commercial Code, or any successor statute, or any comparable law, as the same
may from time to time be amended, supplemented or otherwise modified and in
effect in such jurisdiction.
SECTION 1.2 Interpretation and Construction. Unless the context
of this Agreement otherwise clearly requires, references to the plural include
the singular, the singular the plural and the part the whole. References in this
Agreement to "determination", "determine" and "determined" by the Buyer shall be
conclusive absent manifest error and include good faith estimates by the Buyer
(in the case of quantitative determinations), and the good faith belief of the
Buyer (in the case of qualitative determinations). The words "hereof", "herein",
"hereunder" and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. Unless otherwise
stated in this Agreement, in the computation of a period of time from a
specified date to a later specified date, the word "from" means "from and
including" and the words "to" and "until" each means "to but excluding." The
section and other headings contained in this Agreement are for reference
purposes only and shall not control or affect the construction of this Agreement
or the interpretation hereof in any respect. Section, subsection and exhibit
references are to this Agreement unless otherwise specified. As used in this
Agreement, the masculine, feminine or neuter gender shall each be deemed to
include the others whenever the context so indicates. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP. Terms
not otherwise defined herein which are defined in the UCC as in effect in the
State of California on the date hereof shall have the respective meanings
ascribed to such terms therein unless the context otherwise clearly requires.
ARTICLE II
SALES AND TRANSFERS; SETTLEMENTS
SECTION 2.1 General Terms. On the terms and conditions
hereinafter set forth, on the Closing Date, the Seller shall sell to the Buyer,
and the Buyer shall purchase from the
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Seller, without recourse, except as specifically set forth herein, all right,
title and interest of the Seller in, to and under the Historical Advances.
SECTION 2.2 Purchase and Sale.
(a) The Seller hereby irrevocably sells, sets over, assigns,
transfers and conveys to the Buyer and its successors and assigns, without
recourse, except as specifically set forth herein, and the Buyer hereby accepts,
purchases and receives from the Seller, all of the Seller's right, title, and
interest in and to the Historical Advances, together with all monies due or to
become due in respect thereof.
(b) The purchase price (the "PURCHASE PRICE") for the
Historical Advances shall be $35,496,684.45, plus the Limited Partnership
Interest. The Buyer shall pay and transfer to the Seller on the Closing Date the
cash portion of the Purchase Price, by wire transfer of immediately available
funds and shall create the Limited Partnership Interest in favor of Seller.
(c) The Purchase shall be made, and the Purchase Price paid,
on the Closing Date; provided that all conditions precedent to the Purchase
specified in Section 4.1 shall have been satisfied.
SECTION 2.3 Intended as Sale.
(a) It is the intention of the parties hereto that the
Purchase shall constitute a sale and assignment, which sale and assignment shall
be absolute, irrevocable and without recourse except as specifically provided
herein and shall provide the Buyer with the full benefits of ownership of the
Historical Advances. In the event that the Purchase is deemed by a court
contrary to the express intent of the parties to constitute a pledge rather than
a sale and assignment of the Historical Advances, the Buyer shall be treated as
having a first-priority, perfected security interest in and to, and lien on, the
Historical Advances. The possession by the Buyer or its agent of notes and such
other goods, money or documents related thereto, and the filing of Form UCC-1,
shall be deemed to be "possession by the secured party" and "perfection by
filing", respectively, for purposes of perfecting such security interest
pursuant to the Relevant UCC. The sale and conveyance hereunder of the
Historical Advances does not constitute an assumption by the Buyer or its
successors and assigns of any obligations of the Seller to any Person in
connection with the Historical Advances or under any Scheduled Pooling and
Servicing Agreement or any other agreement or instrument relating to the
Historical Advances.
(b) In connection with the Purchase, and to reflect the sale
of the Historical Advances by the Seller, the Seller agrees to record and file
on or prior to the Closing Date, at its own expense, financing statements with
respect to the Historical Advances, suitable to reflect the transfer of accounts
and general intangibles (each as defined in Article 9 of the Relevant UCC) and
meeting the requirements of applicable state Law in such manner and in such
jurisdictions as are necessary to perfect the sale, transfer and assignment of
the Historical Advances from the Seller to the Buyer, and to deliver
file-stamped copies of such financing statements or other evidence of such
filing satisfactory to the Buyer on the Closing Date or the day thereafter. In
addition to, and without limiting the foregoing, the Seller shall, upon the
request of the Buyer, in
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order to accurately reflect this transaction, execute and file such financing or
continuation statements or amendments thereto or assignments thereof (as
permitted pursuant to Section 8.9 hereof) as may be reasonably requested by the
Buyer.
(c) The Seller shall maintain its books and records,
including but not limited to any computer files and master data processing
records, so that such records that refer to Historical Advances sold hereunder
shall indicate clearly that the Seller's right, title and interest in such
Historical Advances has been sold to the Buyer. Indication of the Buyer's
interest in Historical Advances shall be deleted from or modified on the
Seller's records when, and only when, the Historical Advances shall have been
paid in full or the Buyer's interest in such Historical Advances shall have been
repurchased or repaid by the Seller hereunder.
SECTION 2.4 Protection of Ownership of the Buyer.
(a) The Seller agrees that from time to time, at its
expense, it shall promptly execute and deliver all additional instruments and
documents and take all additional action that the Buyer may reasonably request
in order to perfect the interests of the Buyer in, to and under, or to protect,
the Historical Advances, or to enable the Buyer to exercise or enforce any of
its rights or remedies hereunder. To the fullest extent permitted by applicable
Law, the Buyer and its successor and assigns shall be permitted to sign and file
continuation statements and amendments thereto without the Seller's signature if
the Seller shall have failed to sign such continuation statements, amendments or
assignments within five (5) Business Days after receipt of a request for such
execution from the Buyer. The Seller hereby irrevocably consents to Buyer's
execution in Seller's name of continuation statements, amendments or
assignments.
(b) At any reasonable time and from time to time at the
Buyer's reasonable request and upon seven days' prior notice to the Seller, for
so long as Seller is the Servicer under the Scheduled Pooling and Servicing
Agreements, the Seller shall permit such Person as the Buyer may designate to
conduct audits or visit and inspect the Chief Executive Office of the Seller to
examine the Records, internal controls and procedures maintained by the Seller
with respect to the Historical Advances and take copies and extracts therefrom,
and to discuss the Seller's affairs with its officers, employees and, upon
notice to the Seller, independent accountants. The Seller hereby authorizes such
officers, employees and independent accountants to discuss with the Buyer or its
designee the affairs of the Seller. Any audit provided for herein shall be
conducted in accordance with Seller's rules respecting safety and security on
its premises and without materially disrupting operations.
(c) If the Seller shall receive any payments with respect to
Historical Advances, the Seller shall hold such payments in trust and shall pay
such amounts to the applicable Scheduled Trustee in accordance with the terms of
the applicable Scheduled Pooling and Servicing Agreements.
(d) The Buyer shall have the right to do all such acts and
things as it may deem reasonably necessary to protect its interests hereunder,
including, without limitation, confirmation and verification of the existence,
amount and status of the Historical Advances.
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SECTION 2.5 Mandatory Repurchase Under Certain Circumstances.
(a) The Seller shall promptly repurchase from the Buyer all
of the Historical Advances for a repurchase price equal to the aggregate
Outstanding Balance of all of the Historical Advances, if, at any time, the
Buyer shall cease to have a perfected ownership interest in all of the
Historical Advances purchased hereunder, free and clear of any Lien imposed by
or in respect of Seller, or if any of the representations or warranties made by
the Seller in Sections 3.1(b), (c), (f) and (i) prove to have been false or
misleading in any material respect as of the date on which they were made,
except that, with respect to the representations and warranties in Section
3.1(f), Seller shall be obligated to repurchase the Historical Advances as
provided herein only if the failure of such representation and warranty results
in any Form UCC-1 filed with respect to the Historical Advances not having been
filed in a location effective to perfect a security interest (with respect to
general intangibles) against the Seller under the Relevant UCC.
(b) If a Repurchase Event occurs with respect to any
particular Historical Advance, the Seller shall promptly repurchase such
Historical Advance from the Buyer for a purchase price equal to the then
Outstanding Balance of such Historical Advance.
(c) Each of the Seller and the Buyer shall promptly notify
the other if it becomes aware of or receives notice of any fact or circumstance
that could or would cause the Seller to be obligated to repurchase any
Historical Advance pursuant to this Section 2.5 or any Historical Advance is not
otherwise recoverable. The repurchase price of any Historical Advances purchased
hereunder shall be deposited by Seller into an account designated by Buyer
within two (2) Business Days of Buyer notifying Seller that a Repurchase Event
has occurred, or of Seller becoming aware that such Repurchase Event has
occurred.
(d) Upon receipt by the Buyer of the Outstanding Balance of
any Historical Advance required to be repurchased by the Seller pursuant to this
Section 2.5, the Buyer shall automatically and without further action, be deemed
to sell, transfer, assign, set-over and otherwise convey to the Seller, without
recourse, representation or warranty, all the right, title and interest of the
Buyer in and to such Historical Advance and all monies due or to become due with
respect thereto; and such repurchased Historical Advance shall be treated by the
Buyer as collected in full as of the date on which it was transferred. The Buyer
shall execute such documents and instruments of transfer or assignment and take
such other actions as shall reasonably be requested by the Seller to effect the
conveyance of such Historical Advance and all monies due or to become due with
respect thereto, pursuant to this Section 2.5. Promptly following any such
repurchase, the Seller shall update Schedule 1 to remove therefrom such
repurchased Historical Advance, and deliver the same to the Buyer as so updated.
SECTION 2.6 Transfers by Buyer. The Seller acknowledges and
agrees that the Buyer may sell, assign, encumber or otherwise dispose of the
Historical Advances.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
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SECTION 3.1 Representations and Warranties of Seller. The Seller
hereby represents and warrants to the Buyer on and as of the Closing Date that:
(a) Organization and Qualification. The Seller is a
corporation duly organized, validly existing and in good standing under the Laws
of its jurisdiction of incorporation. The Seller is duly qualified to do
business as a foreign corporation in good standing in each jurisdiction in which
the ownership of its properties or the nature of its activities (including
transactions giving rise to Historical Advances), or both, requires it to be so
qualified or, if not so qualified, the failure to so qualify would not have a
material adverse effect on its financial condition or results of operations.
(b) Authority. The Seller has the corporate power and
authority to execute and deliver this Agreement, to make the sales provided for
herein and to perform its obligations under this Agreement.
(c) Execution and Binding Effect. This Agreement has been
duly executed and delivered by the Seller and, assuming the due and valid
execution and delivery hereof by the Buyer, constitutes the legal, valid and
binding obligation of the Seller, enforceable against the Seller in accordance
with its terms, except as the enforceability hereof may be limited by
bankruptcy, insolvency, reorganization or other similar Laws of general
application relating to or affecting the enforcement of creditors' rights
generally or by general principles of equity and will vest absolutely and
unconditionally in the Buyer a valid undivided ownership interest in the
Historical Advances purported to be assigned hereby, subject to no Liens
whatsoever. Upon the filing of the necessary financing statements under the UCC
or under applicable Law as in effect in the jurisdiction whose Law governs the
perfection of the Buyer's ownership interests in the Historical Advances, the
Buyer's ownership interests therein will be perfected under Article 9 of such
UCC or under applicable Law, prior to and enforceable against all creditors of
and purchasers from the Seller and all other Persons whatsoever (other than the
Buyer and its successors and assigns).
(d) Authorizations and Filings. No authorization, consent,
approval, license, exemption or other action by, and no registration,
qualification, designation, declaration or filing with, any Official Body is or
will be necessary or, in the opinion of the Seller, advisable in connection with
the execution and delivery by the Seller of this Agreement, the consummation by
the Seller of the transactions herein contemplated or the performance by the
Seller of or the compliance by the Seller with the terms and conditions hereof,
to ensure the legality, validity or enforceability hereof, or to ensure that the
Buyer will have a valid undivided ownership interest in and to the Historical
Advances which is perfected and prior to all other Liens (including competing
ownership interests), other than the filing of financing statements under the
UCC in the jurisdiction of the Seller's Chief Executive Office.
(e) Absence of Conflicts. Neither the execution and delivery
by the Seller of this Agreement, nor the consummation by the Seller of the
transactions herein contemplated, nor the performance by the Seller of or the
compliance by the Seller with the terms and conditions hereof, will (i) violate
any Law or (ii) conflict with or result in a breach of or a (with due notice
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or lapse of time or both) default under (A) the Certificate of Incorporation or
By-laws of the Seller or (B) any agreement or instrument, including, without
limitation, any and all indentures, debentures, loans, credit agreements or
other agreements to which the Seller is a party or by which it or any of its
properties (now owned or hereafter acquired) may be subject or bound (including,
without limitation, the Scheduled Pooling and Servicing Agreements). The Seller
has not entered into any agreement with any Person prohibiting, restricting or
conditioning the assignment of any portion of the Historical Advances.
(f) Location of Chief Executive Office, etc. As of the date
hereof: (i) the Seller's Chief Executive Office is located at 350 South Grand
Avenue, Los Angeles, California, 90071; (ii) the offices where the Seller keeps
all of its material Records are listed on Exhibit B hereto; and (iii) the Seller
has, within the last 5 years, operated only under the trade names identified in
Exhibit C hereto, and, within the last 5 years, has not changed its name, merged
or consolidated with any other corporation with assets over $1,000,000 or been
the subject of any proceeding under Title 11, United States Code (Bankruptcy),
except as disclosed in Exhibit C hereto.
(g) Accurate and Complete Disclosure. No information
furnished in writing by the Seller to the Buyer pursuant to or in connection
with this Agreement is false or misleading in any material respect as of the
date of which such information was furnished (including by omission of material
information necessary to make such information not misleading).
(h) No Proceedings. There are no proceedings or
investigations pending, or to the knowledge of the Seller threatened, before any
Official Body (A) asserting the invalidity of this Agreement, (B) seeking to
prevent the consummation of any of the transactions contemplated by this
Agreement, or (C) seeking any determination or ruling that might materially and
adversely affect (i) the performance by the Seller of its obligations under this
Agreement or (ii) the validity or enforceability of this Agreement, the
Scheduled Pooling and Servicing Agreements, or any of the Historical Advances.
(i) Litigation. No injunction, decree or other decision has
been issued or made by any Official Body that prevents, and to the knowledge of
the Seller, no threat by any Person has been made to attempt to obtain any such
decision that would have a material adverse impact on the value of the
Historical Advances or the performance of the Seller's obligations and the
exercise of its rights under the Scheduled Pooling and Servicing Agreements, or
that would materially adversely affect the collectibility of the Historical
Advances as a whole, except as set forth on Exhibit A hereto.
(j) Taxes. No Lien has been filed against the Seller on all
or any material portion of its property or assets in respect of any unpaid
federal, state or local taxes.
(k) Books and Records The Seller has clearly indicated on
its books and records (including any computer files) that the Historical
Advances have been sold to the Buyer. For accounting and tax purposes, the
Seller shall treat the sale of the Historical Advances hereunder as a sale. The
Seller maintains at one or more of the offices listed on Exhibit B hereto the
complete records for the Historical Advances.
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(l) Investment Company. The Seller is not an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
(m) No Fraudulent Conveyance. The transactions contemplated
by this Agreement are being consummated by the Seller in furtherance of the
Seller's ordinary business, with no contemplation of insolvency and with no
intent to hinder, delay or defraud any of its present or future creditors. By
its receipt of the Purchase Price hereunder, the Seller shall have received
reasonably equivalent value for the Historical Advances sold or otherwise
conveyed to the Buyer under this Agreement.
(n) Solvency. The Seller is solvent and will not be rendered
insolvent by the transactions contemplated herein.
SECTION 3.2 Representations and Warranties of the Seller With
Respect to the Sale of the Historical Advances. By selling Historical Advances
to the Buyer on the Closing Date, the Seller represents and warrants to the
Buyer as of the Closing Date (in addition to its other representations and
warranties contained herein or made pursuant hereto) that:
(a) Scheduled Pooling and Servicing Agreements. All of the
Scheduled Pooling and Servicing Agreements are in full force and effect and the
Seller as Servicer thereunder has not been terminated. Other than each
Certificate Insurer's right to terminate the applicable Scheduled Pooling and
Servicing Agreements based on Seller's failure to achieve certain delinquency
and/or loss targets, no event has occurred that would give any party to any
Scheduled Pooling and Servicing Agreement the right (including with notice or
lapse of time or both) to terminate the Seller for cause as the Servicer or
Sub-Servicer under any Scheduled Pooling and Servicing Agreement, and the Seller
does not have actual knowledge of any pending or threatened action to terminate
the Seller as Servicer or Sub-Servicer under any of the Scheduled Pooling and
Servicing Agreements.
(b) Assignment. This Agreement vests in the Buyer all of the
right, title and interest in and to the Historical Advances, and constitutes a
valid sale of the Historical Advances, enforceable against, and creating an
interest prior in right to, all creditors of and purchasers from the Seller.
(c) No Liens. Each Historical Advance is owned by the Seller
free and clear of any Lien (except any Lien of the Trust under the relevant
Scheduled Pooling and Servicing Agreement), except as provided herein, and is
not subject to any dispute or other adverse claim, except as provided herein.
When the Buyer purchases the Historical Advances, it shall acquire ownership of
the Historical Advances, free and clear of any Lien, except as provided herein.
(d) Filings. On or prior to the Closing Date, all financing
statements and other documents required to be recorded or filed in order to
perfect and protect the Historical Advances against all creditors of, and
purchasers from, the Seller and all other Persons whatsoever have been duly
filed in each filing office necessary for such purpose and all filing fees and
taxes, if any, payable in connection with such filings have been paid in full
and all
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documents required to be filed to release any Liens on the Historical Advances
shall have been filed.
(e) Collection Policy. The Seller has complied in all
material respects with the Collection Policy in regard to each Historical
Advance and the related Scheduled Pooling and Servicing Agreement. The Seller
has not extended or modified the terms of any Historical Advance or the related
Scheduled Pooling and Servicing Agreement except in accordance with the
Collection Policy.
(f) Bona Fide Historical Advance. Each Historical Advance is
an obligation arising out of the making of a Monthly Advance or Servicing
Advance by the Seller or a predecessor servicer, in its capacity as a servicer
of a portfolio of mortgage loans, pursuant to a Scheduled Pooling and Servicing
Agreement. Each Historical Advance relates to a Monthly Advance or Servicing
Advance that has been made in accordance with the terms of the related Scheduled
Pooling and Servicing Agreement. The Seller has no knowledge of any fact that
has led it to expect that such Historical Advance will not be fully recoverable
when the related mortgage loan is brought current or is liquidated and the
Seller had a good faith basis, at the time each Historical Advance was made, to
believe that such Historical Advance would be fully recoverable. As of the
Cut-off Date, the Seller has not received any payments in respect of the
Historical Advances which have not been attributed to the Historical Advances.
(g) Accuracy of Schedule. The information set forth in
Schedule 1 (including Annex A to Schedule 1) and in Schedule 2 hereto with
respect to the Historical Advances and the Scheduled Pooling and Servicing
Agreements is true and correct in all material respects as of the date hereof.
(h) Creditor Approval. The Seller has obtained from each
Person that may have an interest in the Historical Advances (i) all approvals
that are necessary to sell and assign the Historical Advances in the manner
contemplated by this Agreement and (ii) releases of any security interests in
the Historical Advances.
ARTICLE IV
CONDITIONS PRECEDENT
SECTION 4.1 Conditions to Closing. On the Closing Date, as a
condition precedent to the Buyer's obligations hereunder, all of the
representations and warranties of the Seller made herein shall be true and
correct, the Seller shall not be in breach of any of the agreements made herein,
and the Seller shall deliver to the Buyer the following documents and
instruments, all of which shall be in form and substance acceptable to the
Buyer:
(a) A copy of the resolutions of the Board of Directors of
the Seller, certified as of the date hereof by its secretary or assistance
secretary authorizing the execution, delivery and performance of this Agreement
by the Seller and approving the transactions contemplated hereby;
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(b) The Certificate of Incorporation of the Seller,
certified as of a date reasonably near the Closing Date by the Secretary of
State or other similar official of the Seller's jurisdiction of incorporation;
(c) A good standing certificate for the Seller issued by the
Secretary of State or other similar official of the Seller's jurisdiction of
incorporation, certificates of qualification as a foreign corporation issued by
the Secretaries of State or other similar officials of each jurisdiction where
such qualification is material to the transactions contemplated by this
Agreement and certificates of the appropriate state official in each
jurisdiction specified by the Buyer as to the absence of any tax Liens against
the Seller under the Laws of such jurisdiction, each such certificate to be
dated a date reasonably near the Closing Date;
(d) A certificate of the secretary or an assistant secretary
of the Seller dated as of the Closing Date, certifying (i) the names and
signatures of the officers authorized on the Seller's behalf to execute, and the
officers and other employees authorized to perform, this Agreement by the Seller
and (ii) a copy of the Seller's By-laws;
(e) Executed copies of proper financing statements (Form
UCC-l) naming the Seller as seller/debtor in respect of the Historical Advances,
and the Buyer, as the purchaser/secured party, together with evidence of filing
thereof in the appropriate jurisdictions; or other similar instruments or
documents as may be necessary or, in the opinion of the Buyer, desirable under
the UCC of all appropriate jurisdictions to evidence or perfect the Buyer's
ownership interests in all of the Historical Advances;
(f) Executed copies of proper financing statements (Form
UCC-3), if any, necessary under the Laws of all appropriate jurisdictions to
release all security interests and other Liens or rights of any person in
Historical Advances previously granted by the Seller (except the Lien of a Trust
under the relevant Scheduled Pooling and Servicing Agreement);
(g) Certified copies of lien search reports dated a date
reasonably near the Closing Date listing all effective financing statements that
name the Seller (under its present name and any previous name or any trade names
or "d.b.a." name) as debtor and which are filed in jurisdictions in which the
filings were made pursuant to paragraph (e) above, together with copies of such
financing statements (none of which shall cover any of the Historical Advances,
the Scheduled Pooling and Servicing Agreements or any related rights);
(h) A favorable opinion or opinions of the Seller, dated the
date hereof and addressed to the Buyer relating to corporate matters, legality
and validity of this Agreement, and a favorable opinion or opinions of O'Melveny
& Myers LLP, counsel to the Seller, dated the date hereof and addressed to Buyer
relating to the characterization of the transfer of the Historical Advances in a
bankruptcy case as an absolute transfer, enforceability of this Agreement and of
the Scheduled Supplements, the perfection of the Buyer's ownership interests in
the Historical Advances and such other matters as the Buyer may reasonably
request;
(i) An officer's certificate dated the date hereof in a form
reasonably acceptable to the Buyer executed by a Responsible Officer of the
Seller to the effect that (i) all
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representations and warranties are true and correct as of the Closing Date and
(ii) all terms, covenants agreements and conditions required to be complied with
or performed on or prior to the Closing Date have been complied with or
performed on or prior to the Closing Date;
(j) Executed copies of all of the Scheduled Pooling and
Servicing Agreements, certified as true, complete and correct by an incumbent
officer of the Seller, except as noted in a certificate of such officer;
(k) Copies of all Scheduled Supplements, executed by all
parties thereto; and
(l) A true, complete, and correct list (which shall be in
paper form and may also be in the form of a computer file or tape) of the
Historical Advances, each of which shall be identified by the related Scheduled
Pooling and Servicing Agreement, loan number and Outstanding Balance, in the
form of Schedule 1 to this Agreement.
ARTICLE V
COVENANTS
SECTION 5.1 Covenants of the Seller. At all times during the
term of this Agreement, unless the Buyer shall otherwise consent in writing:
(a) Enforceability of Obligations; Reimbursements. The
Seller shall take such actions as are reasonable and within its power to ensure
that, with respect to each Historical Advance, that Buyer will receive
reimbursements with respect to such Historical Advance as promptly as
practicable; provided however, that this subsection shall not constitute a
guarantee of payment or collection. The Seller shall enforce the right to
receive reimbursement for each Historical Advance against any and all parties to
a Scheduled Pooling and Servicing Agreement, if its usual and customary
procedures do not result in such reimbursement.
(b) Fulfillment of Obligations. The Seller shall duly
observe and perform, or cause to be observed or performed, all material
obligations and undertakings on its part to be observed and performed under or
in connection with this Agreement, the Collection Policies and the Scheduled
Pooling and Servicing Agreements; shall do nothing to impair the rights, title
and interest of the Buyer in and to the Historical Advances or the right or
ability of the Seller or the Buyer to realize thereon.
(c) Notice of Relocation. The Seller shall give the Buyer
thirty (30) days' prior written notice of any relocation of its Chief Executive
Office if, as a result of such relocation, the applicable provisions of the UCC
of any applicable jurisdiction or other applicable Laws would require the filing
of any amendment of any previously filed financing statement or continuation
statement or of any new financing statement. The Seller will at all times
maintain its Chief Executive Office within a jurisdiction in the United States
in which Article 9 of the UCC (1972 or later revision) is in effect as of the
date hereof or the date of any such relocation.
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(d) Further Information. The Seller shall furnish or cause
to be furnished to the Buyer such other information as promptly as practicable,
and in such form and detail, as the Buyer may reasonably request.
(e) Fees, Taxes and Expenses. The Seller shall pay all
filing fees, stamp taxes, other taxes and expenses that are incurred or assessed
on account of or arise out of this Agreement and the documents and transactions
entered into pursuant to this Agreement.
SECTION 5.2 Negative Covenants of the Seller. At all times
during the term of this Agreement, unless the Buyer shall otherwise consent in
writing:
(a) No Changes. The Seller shall not change its name,
identity or corporate structure in any manner which would make any financing
statement or continuation statement filed in connection with this Agreement or
the transactions contemplated hereby misleading within the meaning of Section
9-402(7) of the UCC of any applicable jurisdiction or other applicable Laws
unless it shall have given the Buyer at least thirty (30) days' prior written
notice thereof and unless prior thereto it shall have caused such financing
statement or continuation statement to be amended or a new financing statement
to be filed such that such financing statement or continuation statement would
not be misleading.
(b) Collection Policy. The Seller shall not make, allow or
consent to any material change in its Collection Policy without prior written
notification to the Buyer.
ARTICLE VI
TERMINATION
SECTION 6.1 Termination. The Seller's obligations under this
Agreement shall continue in full force and effect until all Historical Advances
have been paid or liquidated; provided, however, that the indemnification and
payment provisions set forth in Article VII hereof shall be continuing and shall
survive termination of this Agreement.
ARTICLE VII
INDEMNIFICATION
SECTION 7.1 Indemnity.
(a) The Seller agrees to indemnify, defend and save harmless
the Buyer and any of its successors or permitted assignees (each, an
"INDEMNIFIED PARTY" and collectively, the "INDEMNIFIED PARTIES"), other than for
the Indemnified Party's own gross negligence or willful misconduct, forthwith on
demand, from and against any and all losses, claims, damages, liabilities, costs
and expenses (including, without limitation, all reasonable attorneys' fees and
expenses, expenses incurred by an Indemnified Party (or any successors thereto)
and expenses of settlement, litigation or preparation therefor) which any
Indemnified Party may incur or which may be asserted against any Indemnified
Party by any Person (whether on its own behalf or derivatively on behalf of the
Seller) arising from or incurred in connection with (i) any breach of
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a representation, warranty or covenant by the Seller made or deemed made
hereunder or in connection herewith or the transactions contemplated hereby or
(ii) any action taken or, if the Seller is otherwise obligated to take action,
failed to be taken, by the Seller with respect to the Historical Advances or any
of its obligations hereunder including, without limitation, the Seller's failure
to comply with an applicable Law or regulation
(b) Promptly upon receipt by any Indemnified Party under
this Section 7.1 of notice of the commencement of any suit, action, claim,
proceeding or governmental investigation against such Indemnified Party, such
Indemnified Party shall, if a claim in respect thereof is to be made against the
Seller hereunder, notify the Seller in writing of the commencement thereof. The
Seller may participate in and assume the defense and settlement of any such
suit, action, claim, proceeding or investigation at its expense, and no
settlement thereof shall be made without the approval of the Seller and the
Indemnified Party. The approval of either party will not be unreasonably
withheld or delayed.
(c) Each Indemnified Party shall use its good faith efforts
to mitigate, reduce or eliminate any losses, expenses or claims for
indemnification.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 Survival. The indemnification and payment provisions
of Article VII shall be continuing and shall survive any termination of this
Agreement, subject to applicable statutes of limitation; provided, however, that
any such indemnification or payment claim must be presented to the Seller within
thirty (30) Business Days after the Person making such claim receives notice or
otherwise becomes aware of such claim, provided, further, however, that any
failure to give such notice shall not prejudice the rights of any Indemnified
Party except to the extent Seller is actually prejudiced by such failure to give
notice.
SECTION 8.2 Amendments. Any provision of this Agreement may be
waived or amended only in a writing signed by the parties hereto.
SECTION 8.3 Notices. Except as provided below, all
communications and notices provided for hereunder shall be in writing (including
bank wire, telecopy or electronic facsimile transmission or similar writing) and
shall be given to the other party at its address or telecopy number set forth
hereunder or at such other address or telecopy number as such party may
hereafter specify for the purposes of notice to such party. Each such notice or
other communication shall be effective if given by facsimile, when such
facsimile is transmitted to the facsimile number specified in this Section 8.3
and the appropriate written confirmation is received or, if given by any other
means, when received at the address specified in this Section 8.3. Each party
further agrees to deliver promptly to the other party a written confirmation of
each telephonic notice signed by an authorized officer of the Seller. However,
the absence of such confirmation shall not affect the validity of such notice.
If to the Buyer:
16
<PAGE> 17
Steamboat Financial Partnership I, L.P.
c/o Random Properties Acquisition Corp. IV
600 Steamboat Road
Greenwich, CT 06830
Attn: John Anderson
Telephone: (203) 625-7941
Facsimile: (203) 618-2135
with a copy to:
Sheldon Goldfarb, Esq.
General Counsel
c/o Steamboat Financial, Inc.
600 Steamboat Road
Greenwich, CT 06830
Telephone: (203) 625-6065
Facsimile: (203) 618-2132
If to the Seller:
Aames Capital Corporation
350 South Grand Avenue
Los Angeles, CA 90071
Attention: David Sklar, CFO
Telephone: (323) 210-5276
Facsimile: (323) 210-5551
with a copy to:
Barbara S. Polsky, Esq.
General Counsel
350 South Grand Avenue
Los Angeles, CA 90071
Telephone: (323) 210-4927
Facsimile: (323) 210-5026
SECTION 8.4 Governing Law; Submission to Jurisdiction; Waiver of
Jury Trial; Process Agent. (a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. The Seller and the Buyer
hereby submit to the nonexclusive jurisdiction of courts of the State of New
York located in the Borough of Manhattan and the United States District Court
for the Southern District of New York for purposes of adjudicating any claim or
controversy arising in connection with this Agreement or any of the transactions
contemplated hereby. The Seller and the Buyer hereby
17
<PAGE> 18
irrevocably waive, to the fullest extent they may lawfully do so, any objection
which they may now or hereafter have to the laying of the venue of any such
proceeding brought in such a court and any claim that any such proceeding
brought in such a court has been brought in an inconvenient forum. Nothing in
this Section 8.4 shall affect the right of any Person to bring any action or
proceeding against the Seller or the Buyer or their respective properties in the
courts of other jurisdictions. EACH PARTY HERETO HEREBY WAIVES ANY RIGHT TO HAVE
A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT,
OR OTHERWISE ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO ANY
RELATIONSHIP ESTABLISHED IN CONNECTION WITH THIS AGREEMENT. INSTEAD, ANY
DISPUTES RESOLVED IN COURT WILL BE RESOLVED IN A BENCH TRIAL WITHOUT A JURY.
(b) THE SELLER HEREBY IRREVOCABLY DESIGNATES CT CORPORATION
AS ITS DESIGNEE, APPOINTEE AND AGENT TO RECEIVE, FOR AND ON BEHALF OF IT,
SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
AGREEMENT. THE SELLER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF
ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING
OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO CT
CORPORATION, 1633 BROADWAY, NEW YORK, NEW YORK, OR TO ITS ADDRESS FOR NOTICES IN
SECTION 8.3, WHICH SERVICE SHALL BECOME EFFECTIVE THREE (3) BUSINESS DAYS AFTER
DEPOSIT IN THE MAIL AND SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE. NOTHING
HEREIN SHALL AFFECT THE RIGHT OF THE BUYER TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST
THE SELLER IN ANY OTHER JURISDICTION.
SECTION 8.5 No Implied Waiver; Cumulative Remedies. No course of
dealing and no delay or failure of the Buyer in exercising any right, power or
privilege under this Agreement shall affect any other or future exercise thereof
or the exercise of any other right, power or privilege; nor shall any single or
partial exercise of any such right, power or privilege or any abandonment or
discontinuance of steps to enforce such a right, power or privilege preclude any
further exercise thereof or of any other right, power or privilege. The rights
and remedies of the Buyer under this Agreement are cumulative and not exclusive
of any rights or remedies which the Buyer would otherwise have.
SECTION 8.6 No Discharge. The obligations of the Seller under
this Agreement shall be absolute and unconditional and shall remain in full
force and effect without regard to, and shall not be released, discharged or in
any way affected by (a) any exercise or nonexercise of any right, remedy, power
or privilege under or in respect of this Agreement or applicable Law, including,
without limitation, any failure to set-off or release in whole or in part by the
Buyer of any balance of any deposit account or credit on its books in favor of
the Buyer or any waiver, consent, extension, indulgence or other action or
inaction in respect of any thereof, or (b) any other act or thing or omission or
delay to do any other act or thing which would operate as a discharge of the
Buyer as a matter of law.
18
<PAGE> 19
SECTION 8.7 Prior Understandings. This Agreement sets forth the
entire understanding of the parties relating to the subject matter hereof and
thereof, and supersede all prior understandings and agreements, whether written
or oral with respect to the subject matter hereof and thereof.
SECTION 8.8 Successors and Assigns. This Agreement shall be
binding on the parties hereto and their respective successors and assigns;
provided, however, that the Seller may not assign any of its rights or delegate
any of its duties hereunder without the prior written consent of the Buyer. No
provision of this Agreement shall in any manner restrict the ability of the
Buyer to assign, participate, grant security interests in, or otherwise transfer
any portion of the Historical Advances owned by the Buyer. The Seller further
agrees that notwithstanding any claim, counterclaim, right of setoff or defense
which it may have against the Buyer due to a breach by the Buyer of this
Agreement or for any other reason, and notwithstanding the bankruptcy of the
Buyer or any other event whatsoever, the Seller's sole remedy shall be a claim
against the Buyer for money damages, and in no event shall the Seller assert any
claim on or any interest in the Historical Advances or take any action which
would reduce or delay receipt of collections with respect to the Historical
Advances.
SECTION 8.09 Severability; Counterparts. This Agreement may be
executed in any number of counterparts and by different 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
Agreement. Any provisions of this Agreement which are 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 any other provision in
such jurisdiction or such provision in any other jurisdiction.
SECTION 8.10 Expenses. Seller shall pay Buyer's costs and
expenses reasonably incurred in connection with Buyer's negotiation,
preparation, execution and delivery of this Agreement, including the fees and
out-of-pocket expenses of Buyer's counsel, and Buyer's costs and expenses
incurred in seeking enforcement of any of Seller's obligations hereunder.
[Signature Page Follows]
19
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered by their duly authorized officers as of
the date first above set forth.
AAMES CAPITAL CORPORATION,
as Seller
By: /s/ David A. Sklar
-------------------------------------
Name: David A. Sklar
Title: Executive Vice President and
Chief Financial Officer
STEAMBOAT FINANCIAL PARTNERSHIP I, L.P.
as Buyer
By: RANDOM PROPERTIES ACQUISITION
CORP. IV
its general partner
By: /s/ John C. Anderson
-------------------------------------
Name: John C. Anderson
Title: Senior Vice President
HISTORICAL ADVANCE PURCHASE AGREEMENT
20
<PAGE> 21
EXHIBIT A
SCHEDULE OF LITIGATION
None
A-1
<PAGE> 22
EXHIBIT B
SCHEDULE OF LOCATION OF RECORDS
Seller: 350 South Grand Avenue
Los Angeles, CA 90071
B-1
<PAGE> 23
EXHIBIT C
SCHEDULE OF CORPORATE NAMES,
TRADE NAMES OR ASSUMED NAMES AND SUBSIDIARIES
Corporate Name: Aames Capital Corp.
Trade Names: Aames Home Loan
Assumed Names: None
Subsidiaries: None
C-1
<PAGE> 24
EXHIBIT D
LIST OF RESPONSIBLE OFFICERS
Responsible Officers of Seller: Cary H. Thompson
David K. Sklar
Jon D. Van Deuren
Steven Naberhaus
Fred Mahintorabi
Barbara Polsky
Responsible Officers of Buyer: Robert J. McGinnis
Joseph Walsh III
Kevin Piccoli
Michael Florio
Peter Sanchez
D-1
<PAGE> 25
Schedule 1
SCHEDULE OF HISTORICAL ADVANCES
(As of the Cut-off Date)
[To come]
S1-2
<PAGE> 26
Annex A to Schedule 1
Monthly Advances and Servicing Advances
outstanding under Scheduled Pooling and Servicing Agreements
as of the Cut-Off Date, but Excluded from Historical Advances
S-1-2
<PAGE> 27
Schedule 2
SCHEDULED POOLING AND SERVICING AGREEMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Series Effective Date Parties
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Series 1992-2 12/10/92 Aames Home Loan as Seller & Servicer
Bankers Trust Company of
California, N.A. as Trustee
- ------------------------------------------------------------------------------------------------
Series 1993-A 12/1/93 Aames Capital Corporation as Seller
& Servicer
Bankers Trust Company of
California, N.A. as Trustee
- ------------------------------------------------------------------------------------------------
Series 1994-A 3/1/94 same as above
- ------------------------------------------------------------------------------------------------
Series 1994-B 6/1/94 same as above
- ------------------------------------------------------------------------------------------------
Series 1994-C 9/1/94 same as above
- ------------------------------------------------------------------------------------------------
Series 1994-D 12/1/94 same as above
- ------------------------------------------------------------------------------------------------
Series 1995-A 3/1/95 same as above
- ------------------------------------------------------------------------------------------------
Series 1995-B 5/12/95 same as above
- ------------------------------------------------------------------------------------------------
Series 1995-C 9/1/95 same as above
- ------------------------------------------------------------------------------------------------
Series 1995-D 12/1/95 same as above
- ------------------------------------------------------------------------------------------------
Series 1996-A 3/1/96 same as above
- ------------------------------------------------------------------------------------------------
Series 1997-A 3/1/97 same as above
- ------------------------------------------------------------------------------------------------
Series 1997-B 6/1/97 same as above
Amendment #1 11/1/98 same as above
- ------------------------------------------------------------------------------------------------
Series 1997-C 9/1/97 same as above
Amendment #1 11/1/98 same as above
- ------------------------------------------------------------------------------------------------
Series 1997-D 12/1/97 same as above
Amendment #1 12/1/97 same as above
- ------------------------------------------------------------------------------------------------
Series 1998-A 3/1/98 same as above
Amendment #1 11/1/98 same as above
- ------------------------------------------------------------------------------------------------
</TABLE>
S2-1
<PAGE> 28
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Series Effective Date Parties
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Series 1998-B 6/1/98 Aames Capital Acceptance Corp. as
Transferor
Aames Capital Corporation as Servicer
Bankers Trust Company of California,
N.A. as Trustee
Amendment #1 11/1/98 same as above
- ------------------------------------------------------------------------------------------------
Series 1998-C 9/1/98 Aames Capital Corporation as Seller
& Servicer
Bankers Trust Company of California,
N.A. as Trustee
- ------------------------------------------------------------------------------------------------
</TABLE>
S2-2
<PAGE> 1
EXHIBIT 10.31
================================================================================
HISTORICAL ADVANCE PURCHASE AGREEMENT
BETWEEN
AAMES CAPITAL CORPORATION
AS SELLER,
AND
STEAMBOAT FINANCIAL PARTNERSHIP I, L.P.
AS BUYER
DATED AS OF JUNE 17, 1999
================================================================================
<PAGE> 2
HISTORICAL ADVANCE PURCHASE AGREEMENT
This HISTORICAL ADVANCE PURCHASE AGREEMENT, dated as of June 17,
1999 (as amended, supplemented or otherwise modified and in effect from time to
time, this "Agreement"), made by and between STEAMBOAT FINANCIAL PARTNERSHIP I,
L.P., a Delaware limited partnership, as buyer (the "BUYER"), and AAMES CAPITAL
CORPORATION, a California corporation, as seller (the "SELLER").
R E C I T A L S:
WHEREAS, in the ordinary course of the Seller's business, the
Seller enters into servicing agreements, which include the Scheduled Pooling and
Servicing Agreements (as defined below), pursuant to which the Seller acts as
servicer of portfolios of mortgage loans;
WHEREAS, pursuant to the Scheduled Pooling and Servicing
Agreements, the Seller has made Historical Advances (as defined below) which,
subject to the terms and conditions of this Agreement, the Seller now wishes to
sell to the Buyer, and the Buyer wishes to purchase from the Seller, on the
Closing Date; and
WHEREAS, concurrently with the sale contemplated herein, each of
the Scheduled Pooling and Servicing Agreements are being supplemented to add the
Buyer as an additional limited servicer with respect to Historical Advances and
to provide for the direct payment by the trustee under each Scheduled Pooling
and Servicing Agreement to the Buyer with respect to such Historical Advances;
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein, and for good and sufficient consideration, the
parties hereto, intending to be legally bound, do hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Certain Defined Terms. All capitalized terms used
herein and not otherwise defined herein shall have the meaning ascribed to them
in the Scheduled Pooling and Servicing Agreements, and, to the extent not
inconsistent therewith, in the Limited Partnership Agreement, and the following
capitalized terms shall have the following meanings:
"AFFILIATE" shall mean, with respect to a Person, any other
Person which directly or indirectly controls, is controlled by or is under
common control with, such Person. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
2
<PAGE> 3
"BUSINESS DAY" shall mean any day other than (i) a Saturday or
Sunday or (ii) any other day on which banking institutions are authorized or
required by law, executive order or governmental decree to be closed in the
States of Delaware, New York or California.
"BUYER" shall have the meaning set forth in the recitals hereto.
"CERTIFICATE INSURER" shall mean the "Financial Guaranty
Insurer" or the "Certificate Insurer" as the case may be, in each case as
defined in each Scheduled Pooling and Servicing Agreement.
"CHIEF EXECUTIVE OFFICE" shall mean, with respect to the Seller
or the Buyer, the place where the Seller or the Buyer, as the case may be, is
located, within the meaning of Section 9-103(3)(d), or any analogous provision,
of the UCC, in effect in the jurisdiction whose Law governs the perfection of
the Buyer's ownership of any of the Historical Advances.
"CLOSING DATE" shall mean June 17, 1999.
"COLLECTION POLICY" shall mean the Seller's policies regarding
the collection and remittance of monies due under Historical Advances as
promptly as is reasonably practical and in accordance with the provisions of the
Scheduled Pooling and Servicing Agreements.
"CUT-OFF DATE" shall mean May 31, 1999.
"GAAP" shall mean generally accepted accounting principles in
the United States of America, applied on a consistent basis and applied to both
classification of items and amounts, and shall include, without limitation, the
official interpretations thereof by the Financial Accounting Standards Board,
its predecessors and successors.
"HISTORICAL ADVANCEs" shall mean, with respect to the Scheduled
Pooling and Servicing Agreements, all Monthly Advances and Servicing Advances
made by the Servicer, including all rights to repayment and reimbursement with
respect thereto, which remain unreimbursed as of the Cut-off Date, having an
aggregate balance of $14,961,401.26 as of the Cut-off Date, and the proceeds
thereof, as defined in the Relevant UCC, as listed on Schedule 1 hereto.
Historical Advances shall not include unreimbursed Monthly Advances and
Servicing Advances made under Scheduled Pooling and Servicing Agreements prior
to the Cut-off Date which are set forth on Annex A to Schedule 1 hereto.
"INDEMNIFIED PARTIES" shall have the meaning specified in
Section 7.1 hereof.
"LAW" shall mean any law (including common law), constitution,
statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or
award of any Official Body.
"LIEN", in respect of the property of any Person, shall mean any
ownership interest of any other Person, any mortgage, deed of trust,
hypothecation, pledge, lien, security interest, financing statement, or charge
or other encumbrance or security arrangement of any nature whatsoever,
including, without limitation, any conditional sale or title retention
3
<PAGE> 4
arrangement, and any assignment, deposit arrangement, consignment or lease
intended as, or having the effect of, security.
"LIMITED PARTNERSHIP AGREEMENT" shall mean the Limited
Partnership Agreement of Steamboat Financial Partnership I, L.P., dated as of
June 10, 1999.
"LIMITED PARTNERSHIP INTEREST" shall mean the limited
partnership interest in the Buyer, conveyed to the Seller by the Buyer on the
Closing Date, as set forth in Schedule A to the Limited Partnership Agreement.
"OFFICIAL BODY" shall mean any government or political
subdivision or any agency, authority, bureau, central bank, commission,
department or instrumentality of either, or any court, tribunal, grand jury or
arbitrator, in each case whether foreign or domestic.
"OUTSTANDING BALANCE" of any Historical Advance shall mean, at
any time, the then outstanding amount thereof.
"PERSON" shall mean an individual, corporation, limited
liability company, partnership (general or limited), trust, business trust,
unincorporated association, joint venture, joint-stock company, Official Body or
any other entity of whatever nature.
"PURCHASE" shall mean the purchase by the Buyer from the Seller
of an undivided ownership interest in the Historical Advances pursuant to
Sections 2.1 and 2.2 hereof.
"PURCHASE PRICE" shall have the meaning specified in Section
2.2(c) hereof.
"RECORDS" shall mean correspondence, memoranda, computer
programs, tapes, discs, papers, books or other documents or transcribed
information of any type whether expressed in ordinary or machine readable
language.
"RELEVANT UCC" shall mean the UCC as in effect in the State of
California and in the jurisdiction whose Law governs the perfection of the
Buyer's ownership interests in the Historical Advances.
"REPURCHASE EVENT" shall mean, with respect to any Historical
Advance sold by the Seller to the Buyer pursuant to this Agreement, either (i)
any representation or warranty made by the Seller in Section 3.2 of this
Agreement with respect to such Historical Advance proves to have been false or
misleading; or (ii) the failure of the Buyer to have a perfected ownership
interest in such Historical Advance, free and clear of any Lien imposed by or in
respect of Seller.
"RESPONSIBLE OFFICER" shall mean, with respect to the Seller or
the Buyer, the chief executive officer, chief financial officer, or treasurer of
such Person and any other Person designated as a Responsible Officer by any such
officers, identified on the List of Responsible Officers attached as Exhibit D
hereto (as such list may be amended or supplemented from time to time) and
agreed to by the Seller and Buyer.
4
<PAGE> 5
"SCHEDULED POOLING AND SERVICING AGREEMENTS" shall mean,
collectively, those pooling and servicing agreements described on Schedule 2
attached hereto to which the Seller is a party, pursuant to which the Seller
acts as the servicer of portfolios of mortgage loans, or by which Seller's
servicing obligations are governed. For all purposes of this Agreement, the term
"Scheduled Pooling and Servicing Agreements" shall include the Scheduled
Supplement thereto, and any and all instruments, agreements, invoices or other
writings, which gives rise to or otherwise evidence any of the Historical
Advances.
"SCHEDULED SUPPLEMENTS" shall mean, collectively, those
supplements, dated as of the date hereof, to each Scheduled Pooling and
Servicing Agreement.
"SCHEDULED TRUSTEE" shall mean each "Trustee" under each
Scheduled Pooling and Servicing Agreement.
"SELLER" shall have the meaning set forth in the recitals
hereto.
"UCC" shall mean, with respect to any jurisdiction, the Uniform
Commercial Code, or any successor statute, or any comparable law, as the same
may from time to time be amended, supplemented or otherwise modified and in
effect in such jurisdiction.
SECTION 1.2 Interpretation and Construction. Unless the context
of this Agreement otherwise clearly requires, references to the plural include
the singular, the singular the plural and the part the whole. References in this
Agreement to "determination", "determine" and "determined" by the Buyer shall be
conclusive absent manifest error and include good faith estimates by the Buyer
(in the case of quantitative determinations), and the good faith belief of the
Buyer (in the case of qualitative determinations). The words "hereof", "herein",
"hereunder" and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. Unless otherwise
stated in this Agreement, in the computation of a period of time from a
specified date to a later specified date, the word "from" means "from and
including" and the words "to" and "until" each means "to but excluding." The
section and other headings contained in this Agreement are for reference
purposes only and shall not control or affect the construction of this Agreement
or the interpretation hereof in any respect. Section, subsection and exhibit
references are to this Agreement unless otherwise specified. As used in this
Agreement, the masculine, feminine or neuter gender shall each be deemed to
include the others whenever the context so indicates. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP. Terms
not otherwise defined herein which are defined in the UCC as in effect in the
State of California on the date hereof shall have the respective meanings
ascribed to such terms therein unless the context otherwise clearly requires.
ARTICLE II
SALES AND TRANSFERS; SETTLEMENTS
SECTION 2.1 General Terms. On the terms and conditions
hereinafter set forth, on the Closing Date, the Seller shall sell to the Buyer,
and the Buyer shall purchase from the
5
<PAGE> 6
Seller, without recourse, except as specifically set forth herein, all right,
title and interest of the Seller in, to and under the Historical Advances.
SECTION 2.2 Purchase and Sale.
(a) The Seller hereby irrevocably sells, sets over, assigns,
transfers and conveys to the Buyer and its successors and assigns, without
recourse, except as specifically set forth herein, and the Buyer hereby accepts,
purchases and receives from the Seller, all of the Seller's right, title, and
interest in and to the Historical Advances, together with all monies due or to
become due in respect thereof.
(b) The purchase price (the "PURCHASE PRICE") for the
Historical Advances shall be $12,717,191.07, plus the Limited Partnership
Interest. The Buyer shall pay and transfer to the Seller on the Closing Date the
cash portion of the Purchase Price, by wire transfer of immediately available
funds and shall create the Limited Partnership Interest in favor of Seller.
(c) The Purchase shall be made, and the Purchase Price paid,
on the Closing Date; provided that all conditions precedent to the Purchase
specified in Section 4.1 shall have been satisfied.
SECTION 2.3 Intended as Sale.
(a) It is the intention of the parties hereto that the
Purchase shall constitute a sale and assignment, which sale and assignment shall
be absolute, irrevocable and without recourse except as specifically provided
herein and shall provide the Buyer with the full benefits of ownership of the
Historical Advances. In the event that the Purchase is deemed by a court
contrary to the express intent of the parties to constitute a pledge rather than
a sale and assignment of the Historical Advances, the Buyer shall be treated as
having a first-priority, perfected security interest in and to, and lien on, the
Historical Advances. The possession by the Buyer or its agent of notes and such
other goods, money or documents related thereto, and the filing of Form UCC-1,
shall be deemed to be "possession by the secured party" and "perfection by
filing", respectively, for purposes of perfecting such security interest
pursuant to the Relevant UCC. The sale and conveyance hereunder of the
Historical Advances does not constitute an assumption by the Buyer or its
successors and assigns of any obligations of the Seller to any Person in
connection with the Historical Advances or under any Scheduled Pooling and
Servicing Agreement or any other agreement or instrument relating to the
Historical Advances.
(b) In connection with the Purchase, and to reflect the sale
of the Historical Advances by the Seller, the Seller agrees to record and file
on or prior to the Closing Date, at its own expense, financing statements with
respect to the Historical Advances, suitable to reflect the transfer of accounts
and general intangibles (each as defined in Article 9 of the Relevant UCC) and
meeting the requirements of applicable state Law in such manner and in such
jurisdictions as are necessary to perfect the sale, transfer and assignment of
the Historical Advances from the Seller to the Buyer, and to deliver
file-stamped copies of such financing statements or other evidence of such
filing satisfactory to the Buyer on the Closing Date or the day thereafter. In
addition to, and without limiting the foregoing, the Seller shall, upon the
request of the Buyer, in
6
<PAGE> 7
order to accurately reflect this transaction, execute and file such financing or
continuation statements or amendments thereto or assignments thereof (as
permitted pursuant to Section 8.9 hereof) as may be reasonably requested by the
Buyer.
(c) The Seller shall maintain its books and records,
including but not limited to any computer files and master data processing
records, so that such records that refer to Historical Advances sold hereunder
shall indicate clearly that the Seller's right, title and interest in such
Historical Advances has been sold to the Buyer. Indication of the Buyer's
interest in Historical Advances shall be deleted from or modified on the
Seller's records when, and only when, the Historical Advances shall have been
paid in full or the Buyer's interest in such Historical Advances shall have been
repurchased or repaid by the Seller hereunder.
SECTION 2.4 Protection of Ownership of the Buyer.
(a) The Seller agrees that from time to time, at its
expense, it shall promptly execute and deliver all additional instruments and
documents and take all additional action that the Buyer may reasonably request
in order to perfect the interests of the Buyer in, to and under, or to protect,
the Historical Advances, or to enable the Buyer to exercise or enforce any of
its rights or remedies hereunder. To the fullest extent permitted by applicable
Law, the Buyer and its successor and assigns shall be permitted to sign and file
continuation statements and amendments thereto without the Seller's signature if
the Seller shall have failed to sign such continuation statements, amendments or
assignments within five (5) Business Days after receipt of a request for such
execution from the Buyer. The Seller hereby irrevocably consents to Buyer's
execution in Seller's name of continuation statements, amendments or
assignments.
(b) At any reasonable time and from time to time at the
Buyer's reasonable request and upon seven days' prior notice to the Seller, for
so long as Seller is the Servicer under the Scheduled Pooling and Servicing
Agreements, the Seller shall permit such Person as the Buyer may designate to
conduct audits or visit and inspect the Chief Executive Office of the Seller to
examine the Records, internal controls and procedures maintained by the Seller
with respect to the Historical Advances and take copies and extracts therefrom,
and to discuss the Seller's affairs with its officers, employees and, upon
notice to the Seller, independent accountants. The Seller hereby authorizes such
officers, employees and independent accountants to discuss with the Buyer or its
designee the affairs of the Seller. Any audit provided for herein shall be
conducted in accordance with Seller's rules respecting safety and security on
its premises and without materially disrupting operations.
(c) If the Seller shall receive any payments with respect to
Historical Advances, the Seller shall hold such payments in trust and shall pay
such amounts to the applicable Scheduled Trustee in accordance with the terms of
the applicable Scheduled Pooling and Servicing Agreements.
(d) The Buyer shall have the right to do all such acts and
things as it may deem reasonably necessary to protect its interests hereunder,
including, without limitation, confirmation and verification of the existence,
amount and status of the Historical Advances.
7
<PAGE> 8
SECTION 2.5 Mandatory Repurchase Under Certain Circumstances.
(a) The Seller shall promptly repurchase from the Buyer all
of the Historical Advances for a repurchase price equal to the aggregate
Outstanding Balance of all of the Historical Advances, if, at any time, the
Buyer shall cease to have a perfected ownership interest in all of the
Historical Advances purchased hereunder, free and clear of any Lien imposed by
or in respect of Seller, or if any of the representations or warranties made by
the Seller in Sections 3.1(b), (c), (f) and (i) prove to have been false or
misleading in any material respect as of the date on which they were made,
except that, with respect to the representations and warranties in Section
3.1(f), Seller shall be obligated to repurchase the Historical Advances as
provided herein only if the failure of such representation and warranty results
in any Form UCC-1 filed with respect to the Historical Advances not having been
filed in a location effective to perfect a security interest (with respect to
general intangibles) against the Seller under the Relevant UCC.
(b) If a Repurchase Event occurs with respect to any
particular Historical Advance, the Seller shall promptly repurchase such
Historical Advance from the Buyer for a purchase price equal to the then
Outstanding Balance of such Historical Advance.
(c) Each of the Seller and the Buyer shall promptly notify
the other if it becomes aware of or receives notice of any fact or circumstance
that could or would cause the Seller to be obligated to repurchase any
Historical Advance pursuant to this Section 2.5 or any Historical Advance is not
otherwise recoverable. The repurchase price of any Historical Advances purchased
hereunder shall be deposited by Seller into an account designated by Buyer
within two (2) Business Days of Buyer notifying Seller that a Repurchase Event
has occurred, or of Seller becoming aware that such Repurchase Event has
occurred.
(d) Upon receipt by the Buyer of the Outstanding Balance of
any Historical Advance required to be repurchased by the Seller pursuant to this
Section 2.5, the Buyer shall automatically and without further action, be deemed
to sell, transfer, assign, set-over and otherwise convey to the Seller, without
recourse, representation or warranty, all the right, title and interest of the
Buyer in and to such Historical Advance and all monies due or to become due with
respect thereto; and such repurchased Historical Advance shall be treated by the
Buyer as collected in full as of the date on which it was transferred. The Buyer
shall execute such documents and instruments of transfer or assignment and take
such other actions as shall reasonably be requested by the Seller to effect the
conveyance of such Historical Advance and all monies due or to become due with
respect thereto, pursuant to this Section 2.5. Promptly following any such
repurchase, the Seller shall update Schedule 1 to remove therefrom such
repurchased Historical Advance, and deliver the same to the Buyer as so updated.
SECTION 2.6 Transfers by Buyer. The Seller acknowledges and
agrees that the Buyer may sell, assign, encumber or otherwise dispose of the
Historical Advances.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
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SECTION 3.1 Representations and Warranties of Seller. The Seller
hereby represents and warrants to the Buyer on and as of the Closing Date that:
(a) Organization and Qualification. The Seller is a
corporation duly organized, validly existing and in good standing under the Laws
of its jurisdiction of incorporation. The Seller is duly qualified to do
business as a foreign corporation in good standing in each jurisdiction in which
the ownership of its properties or the nature of its activities (including
transactions giving rise to Historical Advances), or both, requires it to be so
qualified or, if not so qualified, the failure to so qualify would not have a
material adverse effect on its financial condition or results of operations.
(b) Authority. The Seller has the corporate power and
authority to execute and deliver this Agreement, to make the sales provided for
herein and to perform its obligations under this Agreement.
(c) Execution and Binding Effect. This Agreement has been
duly executed and delivered by the Seller and, assuming the due and valid
execution and delivery hereof by the Buyer, constitutes the legal, valid and
binding obligation of the Seller, enforceable against the Seller in accordance
with its terms, except as the enforceability hereof may be limited by
bankruptcy, insolvency, reorganization or other similar Laws of general
application relating to or affecting the enforcement of creditors' rights
generally or by general principles of equity and will vest absolutely and
unconditionally in the Buyer a valid undivided ownership interest in the
Historical Advances purported to be assigned hereby, subject to no Liens
whatsoever. Upon the filing of the necessary financing statements under the UCC
or under applicable Law as in effect in the jurisdiction whose Law governs the
perfection of the Buyer's ownership interests in the Historical Advances, the
Buyer's ownership interests therein will be perfected under Article 9 of such
UCC or under applicable Law, prior to and enforceable against all creditors of
and purchasers from the Seller and all other Persons whatsoever (other than the
Buyer and its successors and assigns).
(d) Authorizations and Filings. No authorization, consent,
approval, license, exemption or other action by, and no registration,
qualification, designation, declaration or filing with, any Official Body is or
will be necessary or, in the opinion of the Seller, advisable in connection with
the execution and delivery by the Seller of this Agreement, the consummation by
the Seller of the transactions herein contemplated or the performance by the
Seller of or the compliance by the Seller with the terms and conditions hereof,
to ensure the legality, validity or enforceability hereof, or to ensure that the
Buyer will have a valid undivided ownership interest in and to the Historical
Advances which is perfected and prior to all other Liens (including competing
ownership interests), other than the filing of financing statements under the
UCC in the jurisdiction of the Seller's Chief Executive Office.
(e) Absence of Conflicts. Neither the execution and delivery
by the Seller of this Agreement, nor the consummation by the Seller of the
transactions herein contemplated, nor the performance by the Seller of or the
compliance by the Seller with the terms and conditions hereof, will (i) violate
any Law or (ii) conflict with or result in a breach of or a (with due notice
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or lapse of time or both) default under (A) the Certificate of Incorporation or
By-laws of the Seller or (B) any agreement or instrument, including, without
limitation, any and all indentures, debentures, loans, credit agreements or
other agreements to which the Seller is a party or by which it or any of its
properties (now owned or hereafter acquired) may be subject or bound (including,
without limitation, the Scheduled Pooling and Servicing Agreements). The Seller
has not entered into any agreement with any Person prohibiting, restricting or
conditioning the assignment of any portion of the Historical Advances.
(f) Location of Chief Executive Office, etc. As of the date
hereof: (i) the Seller's Chief Executive Office is located at 350 South Grand
Avenue, Los Angeles, California, 90071; (ii) the offices where the Seller keeps
all of its material Records are listed on Exhibit B hereto; and (iii) the Seller
has, within the last 5 years, operated only under the trade names identified in
Exhibit C hereto, and, within the last 5 years, has not changed its name, merged
or consolidated with any other corporation with assets over $1,000,000 or been
the subject of any proceeding under Title 11, United States Code (Bankruptcy),
except as disclosed in Exhibit C hereto.
(g) Accurate and Complete Disclosure. No information
furnished in writing by the Seller to the Buyer pursuant to or in connection
with this Agreement is false or misleading in any material respect as of the
date of which such information was furnished (including by omission of material
information necessary to make such information not misleading).
(h) No Proceedings. There are no proceedings or
investigations pending, or to the knowledge of the Seller threatened, before any
Official Body (A) asserting the invalidity of this Agreement, (B) seeking to
prevent the consummation of any of the transactions contemplated by this
Agreement, or (C) seeking any determination or ruling that might materially and
adversely affect (i) the performance by the Seller of its obligations under this
Agreement or (ii) the validity or enforceability of this Agreement, the
Scheduled Pooling and Servicing Agreements, or any of the Historical Advances.
(i) Litigation. No injunction, decree or other decision has
been issued or made by any Official Body that prevents, and to the knowledge of
the Seller, no threat by any Person has been made to attempt to obtain any such
decision that would have a material adverse impact on the value of the
Historical Advances or the performance of the Seller's obligations and the
exercise of its rights under the Scheduled Pooling and Servicing Agreements, or
that would materially adversely affect the collectibility of the Historical
Advances as a whole, except as set forth on Exhibit A hereto.
(j) Taxes. No Lien has been filed against the Seller on all
or any material portion of its property or assets in respect of any unpaid
federal, state or local taxes.
(k) Books and Records The Seller has clearly indicated on
its books and records (including any computer files) that the Historical
Advances have been sold to the Buyer. For accounting and tax purposes, the
Seller shall treat the sale of the Historical Advances hereunder as a sale. The
Seller maintains at one or more of the offices listed on Exhibit B hereto the
complete records for the Historical Advances.
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(l) Investment Company. The Seller is not an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
(m) No Fraudulent Conveyance. The transactions contemplated
by this Agreement are being consummated by the Seller in furtherance of the
Seller's ordinary business, with no contemplation of insolvency and with no
intent to hinder, delay or defraud any of its present or future creditors. By
its receipt of the Purchase Price hereunder, the Seller shall have received
reasonably equivalent value for the Historical Advances sold or otherwise
conveyed to the Buyer under this Agreement.
(n) Solvency. The Seller is solvent and will not be rendered
insolvent by the transactions contemplated herein.
SECTION 3.2 Representations and Warranties of the Seller With
Respect to the Sale of the Historical Advances. By selling Historical Advances
to the Buyer on the Closing Date, the Seller represents and warrants to the
Buyer as of the Closing Date (in addition to its other representations and
warranties contained herein or made pursuant hereto) that:
(a) Scheduled Pooling and Servicing Agreements. All of the
Scheduled Pooling and Servicing Agreements are in full force and effect and the
Seller as Servicer thereunder has not been terminated. Other than each
Certificate Insurer's right to terminate the applicable Scheduled Pooling and
Servicing Agreements based on Seller's failure to achieve certain delinquency
and/or loss targets, no event has occurred that would give any party to any
Scheduled Pooling and Servicing Agreement the right (including with notice or
lapse of time or both) to terminate the Seller for cause as the Servicer or
Sub-Servicer under any Scheduled Pooling and Servicing Agreement, and the Seller
does not have actual knowledge of any pending or threatened action to terminate
the Seller as Servicer or Sub-Servicer under any of the Scheduled Pooling and
Servicing Agreements.
(b) Assignment. This Agreement vests in the Buyer all of the
right, title and interest in and to the Historical Advances, and constitutes a
valid sale of the Historical Advances, enforceable against, and creating an
interest prior in right to, all creditors of and purchasers from the Seller.
(c) No Liens. Each Historical Advance is owned by the Seller
free and clear of any Lien (except any Lien of the Trust under the relevant
Scheduled Pooling and Servicing Agreement), except as provided herein, and is
not subject to any dispute or other adverse claim, except as provided herein.
When the Buyer purchases the Historical Advances, it shall acquire ownership of
the Historical Advances, free and clear of any Lien, except as provided herein.
(d) Filings. On or prior to the Closing Date, all financing
statements and other documents required to be recorded or filed in order to
perfect and protect the Historical Advances against all creditors of, and
purchasers from, the Seller and all other Persons whatsoever have been duly
filed in each filing office necessary for such purpose and all filing fees and
taxes, if any, payable in connection with such filings have been paid in full
and all
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documents required to be filed to release any Liens on the Historical Advances
shall have been filed.
(e) Collection Policy. The Seller has complied in all
material respects with the Collection Policy in regard to each Historical
Advance and the related Scheduled Pooling and Servicing Agreement. The Seller
has not extended or modified the terms of any Historical Advance or the related
Scheduled Pooling and Servicing Agreement except in accordance with the
Collection Policy.
(f) Bona Fide Historical Advance. Each Historical Advance is
an obligation arising out of the making of a Monthly Advance or Servicing
Advance by the Seller or a predecessor servicer, in its capacity as a servicer
of a portfolio of mortgage loans, pursuant to a Scheduled Pooling and Servicing
Agreement. Each Historical Advance relates to a Monthly Advance or Servicing
Advance that has been made in accordance with the terms of the related Scheduled
Pooling and Servicing Agreement. The Seller has no knowledge of any fact that
has led it to expect that such Historical Advance will not be fully recoverable
when the related mortgage loan is brought current or is liquidated and the
Seller had a good faith basis, at the time each Historical Advance was made, to
believe that such Historical Advance would be fully recoverable. As of the
Cut-off Date, the Seller has not received any payments in respect of the
Historical Advances which have not been attributed to the Historical Advances.
(g) Accuracy of Schedule. The information set forth in
Schedule 1 (including Annex A to Schedule 1) and in Schedule 2 hereto with
respect to the Historical Advances and the Scheduled Pooling and Servicing
Agreements is true and correct in all material respects as of the date hereof.
(h) Creditor Approval. The Seller has obtained from each
Person that may have an interest in the Historical Advances (i) all approvals
that are necessary to sell and assign the Historical Advances in the manner
contemplated by this Agreement and (ii) releases of any security interests in
the Historical Advances.
ARTICLE IV
CONDITIONS PRECEDENT
SECTION 4.1 Conditions to Closing. On the Closing Date, as a
condition precedent to the Buyer's obligations hereunder, all of the
representations and warranties of the Seller made herein shall be true and
correct, the Seller shall not be in breach of any of the agreements made herein,
and the Seller shall deliver to the Buyer the following documents and
instruments, all of which shall be in form and substance acceptable to the
Buyer:
(a) A copy of the resolutions of the Board of Directors of
the Seller, certified as of June 10, 1999 by its secretary or assistant
secretary authorizing the execution, delivery and performance of this Agreement
by the Seller and approving the transactions contemplated hereby;
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(b) The Certificate of Incorporation of the Seller,
certified as of a date reasonably near the Closing Date by the Secretary of
State or other similar official of the Seller's jurisdiction of incorporation;
(c) A good standing certificate for the Seller issued by the
Secretary of State or other similar official of the Seller's jurisdiction of
incorporation, certificates of qualification as a foreign corporation issued by
the Secretaries of State or other similar officials of each jurisdiction where
such qualification is material to the transactions contemplated by this
Agreement and certificates of the appropriate state official in each
jurisdiction specified by the Buyer as to the absence of any tax Liens against
the Seller under the Laws of such jurisdiction, each such certificate to be
dated a date reasonably near the Closing Date;
(d) A certificate of the secretary or an assistant secretary
of the Seller dated as of June 10, 1999, certifying (i) the names and signatures
of the officers authorized on the Seller's behalf to execute, and the officers
and other employees authorized to perform, this Agreement by the Seller and (ii)
a copy of the Seller's By-laws;
(e) Executed copies of proper financing statements (Form
UCC-l) naming the Seller as seller/debtor in respect of the Historical Advances,
and the Buyer, as the purchaser/secured party, together with evidence of filing
thereof in the appropriate jurisdictions; or other similar instruments or
documents as may be necessary or, in the opinion of the Buyer, desirable under
the UCC of all appropriate jurisdictions to evidence or perfect the Buyer's
ownership interests in all of the Historical Advances;
(f) Executed copies of proper financing statements (Form
UCC-3), if any, necessary under the Laws of all appropriate jurisdictions to
release all security interests and other Liens or rights of any person in
Historical Advances previously granted by the Seller (except the Lien of a Trust
under the relevant Scheduled Pooling and Servicing Agreement);
(g) Certified copies of lien search reports dated a date
reasonably near the Closing Date listing all effective financing statements that
name the Seller (under its present name and any previous name or any trade names
or "d.b.a." name) as debtor and which are filed in jurisdictions in which the
filings were made pursuant to paragraph (e) above, together with copies of such
financing statements (none of which shall cover any of the Historical Advances,
the Scheduled Pooling and Servicing Agreements or any related rights);
(h) A favorable opinion or opinions of the Seller, dated the
date hereof and addressed to the Buyer relating to corporate matters, legality
and validity of this Agreement, and a favorable opinion or opinions of O'Melveny
& Myers LLP, counsel to the Seller, dated the date hereof and addressed to Buyer
relating to the characterization of the transfer of the Historical Advances in a
bankruptcy case as an absolute transfer, enforceability of this Agreement and of
the Scheduled Supplements, the perfection of the Buyer's ownership interests in
the Historical Advances and such other matters as the Buyer may reasonably
request;
(i) An officer's certificate dated the date hereof in a form
reasonably acceptable to the Buyer executed by a Responsible Officer of the
Seller to the effect that (i) all
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representations and warranties are true and correct as of the Closing Date and
(ii) all terms, covenants agreements and conditions required to be complied with
or performed on or prior to the Closing Date have been complied with or
performed on or prior to the Closing Date;
(j) Executed copies of all of the Scheduled Pooling and
Servicing Agreements, certified as true, complete and correct by an incumbent
officer of the Seller, except as noted in a certificate of such officer;
(k) Copies of all Scheduled Supplements, executed by all
parties thereto; and
(l) A true, complete, and correct list (which shall be in
paper form and may also be in the form of a computer file or tape) of the
Historical Advances, each of which shall be identified by the related Scheduled
Pooling and Servicing Agreement, loan number and Outstanding Balance, in the
form of Schedule 1 to this Agreement.
ARTICLE V
COVENANTS
SECTION 5.1 Covenants of the Seller. At all times during the
term of this Agreement, unless the Buyer shall otherwise consent in writing:
(a) Enforceability of Obligations; Reimbursements. The
Seller shall take such actions as are reasonable and within its power to ensure
that, with respect to each Historical Advance, that Buyer will receive
reimbursements with respect to such Historical Advance as promptly as
practicable; provided however, that this subsection shall not constitute a
guarantee of payment or collection. The Seller shall enforce the right to
receive reimbursement for each Historical Advance against any and all parties to
a Scheduled Pooling and Servicing Agreement, if its usual and customary
procedures do not result in such reimbursement.
(b) Fulfillment of Obligations. The Seller shall duly
observe and perform, or cause to be observed or performed, all material
obligations and undertakings on its part to be observed and performed under or
in connection with this Agreement, the Collection Policies and the Scheduled
Pooling and Servicing Agreements; shall do nothing to impair the rights, title
and interest of the Buyer in and to the Historical Advances or the right or
ability of the Seller or the Buyer to realize thereon.
(c) Notice of Relocation. The Seller shall give the Buyer
thirty (30) days' prior written notice of any relocation of its Chief Executive
Office if, as a result of such relocation, the applicable provisions of the UCC
of any applicable jurisdiction or other applicable Laws would require the filing
of any amendment of any previously filed financing statement or continuation
statement or of any new financing statement. The Seller will at all times
maintain its Chief Executive Office within a jurisdiction in the United States
in which Article 9 of the UCC (1972 or later revision) is in effect as of the
date hereof or the date of any such relocation.
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(d) Further Information. The Seller shall furnish or cause
to be furnished to the Buyer such other information as promptly as practicable,
and in such form and detail, as the Buyer may reasonably request.
(e) Fees, Taxes and Expenses. The Seller shall pay all
filing fees, stamp taxes, other taxes and expenses that are incurred or assessed
on account of or arise out of this Agreement and the documents and transactions
entered into pursuant to this Agreement.
SECTION 5.2 Negative Covenants of the Seller. At all times
during the term of this Agreement, unless the Buyer shall otherwise consent in
writing:
(a) No Changes. The Seller shall not change its name,
identity or corporate structure in any manner which would make any financing
statement or continuation statement filed in connection with this Agreement or
the transactions contemplated hereby misleading within the meaning of Section
9-402(7) of the UCC of any applicable jurisdiction or other applicable Laws
unless it shall have given the Buyer at least thirty (30) days' prior written
notice thereof and unless prior thereto it shall have caused such financing
statement or continuation statement to be amended or a new financing statement
to be filed such that such financing statement or continuation statement would
not be misleading.
(b) Collection Policy. The Seller shall not make, allow or
consent to any material change in its Collection Policy without prior written
notification to the Buyer.
ARTICLE VI
TERMINATION
SECTION 6.1 Termination. The Seller's obligations under this
Agreement shall continue in full force and effect until all Historical Advances
have been paid or liquidated; provided, however, that the indemnification and
payment provisions set forth in Article VII hereof shall be continuing and shall
survive termination of this Agreement.
ARTICLE VII
INDEMNIFICATION
SECTION 7.1 Indemnity.
(a) The Seller agrees to indemnify, defend and save harmless
the Buyer and any of its successors or permitted assignees (each, an
"INDEMNIFIED PARTY" and collectively, the "INDEMNIFIED PARTIES"), other than for
the Indemnified Party's own gross negligence or willful misconduct, forthwith on
demand, from and against any and all losses, claims, damages, liabilities, costs
and expenses (including, without limitation, all reasonable attorneys' fees and
expenses, expenses incurred by an Indemnified Party (or any successors thereto)
and expenses of settlement, litigation or preparation therefor) which any
Indemnified Party may incur or which may be asserted against any Indemnified
Party by any Person (whether on its own behalf or derivatively on behalf of the
Seller) arising from or incurred in connection with (i) any breach of
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a representation, warranty or covenant by the Seller made or deemed made
hereunder or in connection herewith or the transactions contemplated hereby or
(ii) any action taken or, if the Seller is otherwise obligated to take action,
failed to be taken, by the Seller with respect to the Historical Advances or any
of its obligations hereunder including, without limitation, the Seller's failure
to comply with an applicable Law or regulation
(b) Promptly upon receipt by any Indemnified Party under
this Section 7.1 of notice of the commencement of any suit, action, claim,
proceeding or governmental investigation against such Indemnified Party, such
Indemnified Party shall, if a claim in respect thereof is to be made against the
Seller hereunder, notify the Seller in writing of the commencement thereof. The
Seller may participate in and assume the defense and settlement of any such
suit, action, claim, proceeding or investigation at its expense, and no
settlement thereof shall be made without the approval of the Seller and the
Indemnified Party. The approval of either party will not be unreasonably
withheld or delayed.
(c) Each Indemnified Party shall use its good faith efforts
to mitigate, reduce or eliminate any losses, expenses or claims for
indemnification.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 Survival. The indemnification and payment provisions
of Article VII shall be continuing and shall survive any termination of this
Agreement, subject to applicable statutes of limitation; provided, however, that
any such indemnification or payment claim must be presented to the Seller within
thirty (30) Business Days after the Person making such claim receives notice or
otherwise becomes aware of such claim, provided, further, however, that any
failure to give such notice shall not prejudice the rights of any Indemnified
Party except to the extent Seller is actually prejudiced by such failure to give
notice.
SECTION 8.2 Amendments. Any provision of this Agreement may be
waived or amended only in a writing signed by the parties hereto.
SECTION 8.3 Notices. Except as provided below, all
communications and notices provided for hereunder shall be in writing (including
bank wire, telecopy or electronic facsimile transmission or similar writing) and
shall be given to the other party at its address or telecopy number set forth
hereunder or at such other address or telecopy number as such party may
hereafter specify for the purposes of notice to such party. Each such notice or
other communication shall be effective if given by facsimile, when such
facsimile is transmitted to the facsimile number specified in this Section 8.3
and the appropriate written confirmation is received or, if given by any other
means, when received at the address specified in this Section 8.3. Each party
further agrees to deliver promptly to the other party a written confirmation of
each telephonic notice signed by an authorized officer of the Seller. However,
the absence of such confirmation shall not affect the validity of such notice.
If to the Buyer:
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Steamboat Financial Partnership I, L.P.
c/o Random Properties Acquisition Corp. IV
600 Steamboat Road
Greenwich, CT 06830
Attn: John Anderson
Telephone: (203) 625-7941
Facsimile: (203) 618-2135
with a copy to:
Sheldon Goldfarb, Esq.
General Counsel
c/o Steamboat Financial, Inc.
600 Steamboat Road
Greenwich, CT 06830
Telephone: (203) 625-6065
Facsimile: (203) 618-2132
If to the Seller:
Aames Capital Corporation
350 South Grand Avenue
Los Angeles, CA 90071
Attention: David Sklar, CFO
Telephone: (323) 210-5276
Facsimile: (323) 210-5551
with a copy to:
Barbara S. Polsky, Esq.
General Counsel
350 South Grand Avenue
Los Angeles, CA 90071
Telephone: (323) 210-4927
Facsimile: (323) 210-5026
SECTION 8.4 Governing Law; Submission to Jurisdiction; Waiver of
Jury Trial; Process Agent. (a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. The Seller and the Buyer
hereby submit to the nonexclusive jurisdiction of courts of the State of New
York located in the Borough of Manhattan and the United States District Court
for the Southern District of New York for purposes of adjudicating any claim or
controversy arising in connection with this Agreement or any of the transactions
contemplated hereby. The Seller and the Buyer hereby irrevocably waive, to the
fullest extent they may lawfully do so, any objection which they may
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now or hereafter have to the laying of the venue of any such proceeding brought
in such a court and any claim that any such proceeding brought in such a court
has been brought in an inconvenient forum. Nothing in this Section 8.4 shall
affect the right of any Person to bring any action or proceeding against the
Seller or the Buyer or their respective properties in the courts of other
jurisdictions. EACH PARTY HERETO HEREBY WAIVES ANY RIGHT TO HAVE A JURY
PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR
OTHERWISE ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO ANY
RELATIONSHIP ESTABLISHED IN CONNECTION WITH THIS AGREEMENT. INSTEAD, ANY
DISPUTES RESOLVED IN COURT WILL BE RESOLVED IN A BENCH TRIAL WITHOUT A JURY.
(b) THE SELLER HEREBY IRREVOCABLY DESIGNATES CT CORPORATION
AS ITS DESIGNEE, APPOINTEE AND AGENT TO RECEIVE, FOR AND ON BEHALF OF IT,
SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
AGREEMENT. THE SELLER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF
ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING
OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO CT
CORPORATION, 1633 BROADWAY, NEW YORK, NEW YORK, OR TO ITS ADDRESS FOR NOTICES IN
SECTION 8.3, WHICH SERVICE SHALL BECOME EFFECTIVE THREE (3) BUSINESS DAYS AFTER
DEPOSIT IN THE MAIL AND SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE. NOTHING
HEREIN SHALL AFFECT THE RIGHT OF THE BUYER TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST
THE SELLER IN ANY OTHER JURISDICTION.
SECTION 8.5 No Implied Waiver; Cumulative Remedies. No course of
dealing and no delay or failure of the Buyer in exercising any right, power or
privilege under this Agreement shall affect any other or future exercise thereof
or the exercise of any other right, power or privilege; nor shall any single or
partial exercise of any such right, power or privilege or any abandonment or
discontinuance of steps to enforce such a right, power or privilege preclude any
further exercise thereof or of any other right, power or privilege. The rights
and remedies of the Buyer under this Agreement are cumulative and not exclusive
of any rights or remedies which the Buyer would otherwise have.
SECTION 8.6 No Discharge. The obligations of the Seller under
this Agreement shall be absolute and unconditional and shall remain in full
force and effect without regard to, and shall not be released, discharged or in
any way affected by (a) any exercise or nonexercise of any right, remedy, power
or privilege under or in respect of this Agreement or applicable Law, including,
without limitation, any failure to set-off or release in whole or in part by the
Buyer of any balance of any deposit account or credit on its books in favor of
the Buyer or any waiver, consent, extension, indulgence or other action or
inaction in respect of any thereof, or (b) any other act or thing or omission or
delay to do any other act or thing which would operate as a discharge of the
Buyer as a matter of law.
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SECTION 8.7 Prior Understandings. This Agreement sets forth the
entire understanding of the parties relating to the subject matter hereof and
thereof, and supersede all prior understandings and agreements, whether written
or oral with respect to the subject matter hereof and thereof.
SECTION 8.8 Successors and Assigns. This Agreement shall be
binding on the parties hereto and their respective successors and assigns;
provided, however, that the Seller may not assign any of its rights or delegate
any of its duties hereunder without the prior written consent of the Buyer. No
provision of this Agreement shall in any manner restrict the ability of the
Buyer to assign, participate, grant security interests in, or otherwise transfer
any portion of the Historical Advances owned by the Buyer. The Seller further
agrees that notwithstanding any claim, counterclaim, right of setoff or defense
which it may have against the Buyer due to a breach by the Buyer of this
Agreement or for any other reason, and notwithstanding the bankruptcy of the
Buyer or any other event whatsoever, the Seller's sole remedy shall be a claim
against the Buyer for money damages, and in no event shall the Seller assert any
claim on or any interest in the Historical Advances or take any action which
would reduce or delay receipt of collections with respect to the Historical
Advances.
SECTION 8.09 Severability; Counterparts. This Agreement may be
executed in any number of counterparts and by different 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
Agreement. Any provisions of this Agreement which are 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 any other provision in
such jurisdiction or such provision in any other jurisdiction.
SECTION 8.10 Expenses. Seller shall pay Buyer's costs and
expenses reasonably incurred in connection with Buyer's negotiation,
preparation, execution and delivery of this Agreement, including the fees and
out-of-pocket expenses of Buyer's counsel, and Buyer's costs and expenses
incurred in seeking enforcement of any of Seller's obligations hereunder.
[Signature Page Follows]
19
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered by their duly authorized officers as of
the date first above set forth.
AAMES CAPITAL CORPORATION,
as Seller
By: /s/ David A. Sklar
-------------------------------------
Name: David A. Sklar
Title: Executive Vice President and
Chief Financial Officer
STEAMBOAT FINANCIAL PARTNERSHIP I, L.P.
as Buyer
By: RANDOM PROPERTIES ACQUISITION
CORP. IV
its general partner
By: /s/ John C. Anderson
-------------------------------------
Name: John C. Anderson
Title: Senior Vice President
HISTORICAL ADVANCE PURCHASE AGREEMENT
20
<PAGE> 21
EXHIBIT A
SCHEDULE OF LITIGATION
None
A-1
<PAGE> 22
EXHIBIT B
SCHEDULE OF LOCATION OF RECORDS
Seller: 350 South Grand Avenue
Los Angeles, CA 90071
B-1
<PAGE> 23
EXHIBIT C
SCHEDULE OF CORPORATE NAMES,
TRADE NAMES OR ASSUMED NAMES AND SUBSIDIARIES
Corporate Name: Aames Capital Corp.
Trade Names: Aames Home Loan
Assumed Names: None
Subsidiaries: None
C-1
<PAGE> 24
EXHIBIT D
LIST OF RESPONSIBLE OFFICERS
Responsible Officers of Seller: Cary H. Thompson
David K. Sklar
Jon D. Van Deuren
Steven Naberhaus
Fred Mahintorabi
Barbara Polsky
Responsible Officers of Buyer: Robert J. McGinnis
Joseph Walsh III
Kevin Piccoli
Michael Florio
Peter Sanchez
D-1
<PAGE> 25
Schedule 1
SCHEDULE OF HISTORICAL ADVANCES
(As of the Cut-off Date)
S1-1
<PAGE> 26
Annex A to Schedule 1
Monthly Advances and Servicing Advances
Outstanding as of the Cut-Off Date
Excluded from Historical Advances
S1-2
<PAGE> 27
Schedule 2
SCHEDULED POOLING AND SERVICING AGREEMENTS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Series Effective Date Parties
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Series 1996-B 6/1/96 Aames Capital Corporation as Seller
& Servicer Bankers Trust Company of
California, N.A. as Trustee
- ----------------------------------------------------------------------------------------------
Series 1996-C 9/1/96 same as above
- ----------------------------------------------------------------------------------------------
</TABLE>
S2-1
<PAGE> 1
EXHIBIT 10.32
================================================================================
LIMITED PARTNERSHIP AGREEMENT
of
STEAMBOAT FINANCIAL PARTNERSHIP I, L.P.
(a Delaware limited partnership)
Dated as of June 10, 1999
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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----
<S> <C> <C>
ARTICLE I
DEFINITIONS
Section 1.01 Definitions.................................................................1
ARTICLE II
GENERAL PROVISIONS
Section 2.01 Partnership Name............................................................6
Section 2.02 Fiscal Year.................................................................6
Section 2.03 Principal Office............................................................6
Section 2.04 Liability of Partners.......................................................6
Section 2.05 Purposes of Partnership.....................................................7
Section 2.06 Assignability of Interest...................................................7
Section 2.07 Registered Office and Agent in Delaware.....................................7
ARTICLE III
MANAGEMENT OF PARTNERSHIP
Section 3.01 Management Generally........................................................8
Section 3.02 Authority of General Partner................................................8
Section 3.03 Limitations on Activities of Partnership...................................10
Section 3.04 Partnership Covenants......................................................10
Section 3.05 Activities of General Partner..............................................11
Section 3.06 Reliance by Third Parties..................................................11
Section 3.07 Indemnification............................................................11
Section 3.08 Exculpation................................................................12
Section 3.09 Payment of Costs and Expenses..............................................12
Section 3.10 Reimbursement of the Management Fee........................................12
ARTICLE IV
CAPITAL ACCOUNTS OF PARTNERS AND OPERATION THEREOF
Section 4.01 Capital Contributions......................................................13
Section 4.02 Capital Accounts...........................................................13
Section 4.03 Allocations of Net Income and Net Losses...................................14
Section 4.04 Determination by General Partner of Certain Matters........................16
Section 4.05 No Deficit Makeup..........................................................16
</TABLE>
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<PAGE> 3
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Section 4.06 Tax Allocations............................................................16
ARTICLE V
COLLECTIONS AND DISTRIBUTIONS
Section 5.01 Collections................................................................17
Section 5.02 Distributions..............................................................17
Section 5.03 Distributions to Holders of Special Limited Partnership Interests and
Limited Partner interests..................................................18
Section 5.04 Withholding................................................................19
Section 5.05 Limitations on Withdrawals and Distributions...............................19
Section 5.06 Distributions In Kind......................................................19
ARTICLE VI
ADMISSION OF NEW PARTNERS; CHANGES
IN THE GENERAL PARTNER; TRANSFERS
Section 6.01 Changes in the General Partner.............................................19
Section 6.02 Transfer of the Limited Partner's Interest.................................20
Section 6.03 Transfer of a Special Limited Partnership Interest.........................20
ARTICLE VII
WITHDRAWAL, DEATH, INCOMPETENCY
Section 7.01 Withdrawal, Death, Etc., of Partners.......................................21
Section 7.02 Limitations on Withdrawal of Capital Account...............................21
ARTICLE VIII
DURATION AND TERMINATION OF PARTNERSHIP
Section 8.01 Duration...................................................................21
Section 8.02 Termination................................................................21
ARTICLE IX
TAX RETURNS; REPORTS TO PARTNERS
Section 9.01 Independent Accountants....................................................22
Section 9.02 Filing of Tax Returns......................................................22
Section 9.03 Tax Matters Partner........................................................22
Section 9.04 Annual Reports to Current and Former Partners..............................22
Section 9.05 Tax Classification.........................................................23
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE X
MISCELLANEOUS
Section 10.01 General....................................................................23
Section 10.02 Power of Attorney..........................................................23
Section 10.03 Amendments to Partnership Agreement........................................24
Section 10.04 Choice of Law..............................................................25
Section 10.05 Adjustment of Basis of Partnership Property................................25
Section 10.06 Notices....................................................................25
Section 10.07 Goodwill...................................................................25
Section 10.08 Headings...................................................................25
Section 10.09 Construction and Interpretation............................................25
Section 10.10 Survival...................................................................26
</TABLE>
-iii-
<PAGE> 5
LIMITED PARTNERSHIP AGREEMENT
OF
STEAMBOAT FINANCIAL PARTNERSHIP I, L.P.
Dated as of June 10, 1999
ARTICLE I
DEFINITIONS
THIS LIMITED PARTNERSHIP AGREEMENT is made as of the tenth day
of June, 1999 by and among Random Properties Acquisition Corp. IV, a Delaware
corporation (the "General Partner"), Greenwich Capital Derivatives, Inc. (the
"Special Limited Partner") and Aames Capital Corporation (the "Limited
Partner"). The undersigned (the "Partners", which term shall include any persons
hereafter admitted to the limited partnership formed hereby and shall exclude
any persons who cease to be Partners of the limited partnership formed hereby
pursuant to the terms hereof) hereby agree to form and hereby form, a limited
partnership (the "Partnership"), pursuant to the provisions of the Delaware
Revised Uniform Limited Partnership Act (the "Act"), which shall be governed by,
and operated pursuant to, the terms and provisions of this Limited Partnership
Agreement (this "Agreement").
Section 1.01 Definitions. For the purposes of this Agreement,
unless the context otherwise requires:
"Aames" means Aames Capital Corporation.
"Act" has the meaning provided in the preamble.
"Additional Capital Contributions" means any additional amounts
contributed by a Partner to the Partnership pursuant to Section 4.01(b) hereof.
"Agreement" has the meaning provided in the preamble.
"Asset Value" means, with respect to any of the Partnership's
assets, such asset's adjusted basis for U.S. Federal income tax purposes, except
that: (A) the initial Asset Value of any asset contributed by a Partner to the
Partnership shall be the gross fair market value of such asset, as determined by
the agreement of the Partners at the time of its contribution (which shall be
set forth in Schedule A hereto); (B) the Asset Value of all the Partnership's
assets shall be adjusted to equal their respective gross fair market values, as
determined by the General Partner in good faith, upon the occurrence of any
event described in Section 4.02(c) hereof; (C) the Asset Value of any
Partnership property distributed to any Partner shall be adjusted to equal the
gross fair market value of such property on the date of distribution as
determined by the General Partner in good faith; and (D) to the extent that the
Asset Value is determined pursuant to clause
-1-
<PAGE> 6
(A) or (B) of this definition, the Asset Value of such property shall be
subsequently adjusted by the amount of Depreciation taken into account with
respect to such asset for purposes of computing Net Income or Net Losses.
"Capital Account" has the meaning specified in Section 4.02
hereof.
"Capital Contribution" means a contribution of capital by a
Partner to the Partnership, pursuant to Section 4.01 hereof.
"Code" means the Internal Revenue Code of 1986, as amended (or
any corresponding provision of succeeding law).
"Collection Period" means, as to any Distribution Date, the
period beginning on the first day of the calendar month immediately preceding
the month in which said Distribution Date occurs and ending on the last day of
such calendar month.
"Cut-Off Date" means May 31, 1999.
"Depreciation" shall mean, for each Fiscal Year, an amount equal
to the depreciation, amortization or other cost-recovery deduction allowable
with respect to an asset for such Fiscal Year, except that if the Asset Value of
such asset differs from its adjusted basis for federal income tax purposes at
the beginning of such Fiscal Year, Depreciation shall be an amount which bears
the same ratio to such beginning Asset Value as the federal income tax
depreciation, amortization or other cost-recovery deduction for such Fiscal Year
bears to such beginning adjusted basis for federal income tax purposes;
provided, however, that if the adjusted basis for federal income tax purposes of
an asset at the beginning of such Fiscal Year is zero, Depreciation shall be
determined with reference to such beginning Asset Value in a manner selected by
the General Partner.
"Disbursing Account" means one or more accounts established by
the General Partner at a depository institution in the name of the Partnership
for the purpose of receiving payments from Scheduled Trustees and payments from
Repurchases, and disbursing same in accordance with this Agreement. Disbursing
Accounts shall be Eligible Accounts.
"Distribution Date" means the 15th day of each calendar month
beginning July 1999, or, if such date is not a business day, the following
business day.
"Eligible Account" means an account described in the Series
1998-A Scheduled Pooling and Servicing Agreement, listed on Schedule B hereto,
that is designated as an Eligible Account by the Manager.
"Fiscal Year" has the meaning set forth in Section 2.02 hereof.
"General Partner" has the meaning provided in the preamble and
also includes a replacement General Partner substituted pursuant to Section 6.01
hereof.
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<PAGE> 7
"Historical Advances" means, collectively, all "Historical
Advances" listed on Schedule C hereto, conveyed to the Partnership under a
Purchase Agreement listed on Schedule D hereto, as such schedules may be amended
from time to time.
"Indemnified Persons" has the meaning set forth in Section
3.07(a) hereof.
"Initial Capital Contribution" means the initial Capital
Contribution made by each Partner pursuant to Section 4.01(a) hereof and set
forth in Schedule A hereto.
"Limited Partner" has the meaning provided in the preamble,
includes the plural if there is more than one Limited Partner, and also includes
a transferee Limited Partner substituted pursuant to Section 6.02 hereof.
"Limited Servicer" means the Partnership acting as "Limited
Servicer" under each of the Scheduled Pooling and Servicing Agreements.
"Limited Servicer Fees" means, with respect to any Distribution
Date while Historical Advances are outstanding, the "Limited Servicer Fees"
payable to the Partnership as Limited Servicer, under the relevant Scheduled
Supplement.
"Majority-in-Interest of the Limited Partners" means, with
respect to any date of determination, Limited Partners whose aggregate balances
in their Capital Accounts constitute more than 50% of the sum of all the Capital
Account balances of all Limited Partners as of such date.
"Majority-in-Interest of the Special Limited Partners" means,
with respect to any date of determination, Special Limited Partners whose
aggregate balances in their Capital Accounts constitute more than 50% of the sum
of all the Capital Account balances of all Special Limited Partners as of such
date.
"Management Fee" means $10,000.00 per annum, payable to the
Manager on the Distribution Date immediately following the date on which the
Manager is engaged and on each annual anniversary thereof.
"Manager" means any individual or entity designated from
time-to-time by the General Partner to be employed by the Partnership to provide
administrative and managerial services to the Partnership. The initial Manager
shall be Greenwich Capital Financial Products, Inc.
"Net Income" and "Net Losses" shall mean, with respect to a
Fiscal Year, the income or loss, as the case may be, of the Partnership for U.S.
federal income tax purposes determined in accordance with Section 703(a) of the
Code (for this purpose, all items of income, gain, loss or deduction required to
be stated separately pursuant to Section 703(a)(1) of the Code shall be included
in taxable income or loss) increased by the amount of any income that is exempt
from Federal income tax under the Code during such year and decreased by the
amount of any Section 705(a)(2)(B) expenditures (within the meaning of Treasury
Regulation Section 1.704-1(b)(2)(iv)(i)) of the Partnership during such year;
provided, however, that, in lieu of depreciation, amortization and other
cost-recovery deductions, there shall be taken into account
-3-
<PAGE> 8
Depreciation; provided further, however, that in calculating gain or loss
resulting from any disposition of Partnership property for U.S. Federal income
tax purposes, the basis of such property shall be its Asset Value, rather than
its adjusted tax basis for U.S. Federal income tax purposes, and that in the
event that the value of any Partnership asset is adjusted pursuant to Section
4.02(c) of this Agreement, the amount of such adjustment shall be taken into
account as gain or loss from the disposition of such asset for purposes of
computing Net Income or Net Loss; and provided further, however that Net Income
or Net Loss of the Partnership shall be computed without regard to the amount of
any items of gross income, gain, loss or deduction that are specifically
allocated pursuant to Sections 4.03(b) or (c) hereof,
"Nonrecourse Deductions" has the meaning set forth in Treasury
Regulations Section 1.704-2(b)(1).
"Partially Adjusted Capital Account" means, with respect to any
Partner for any Fiscal Year, the Capital Account balance of such Partner at the
beginning of such Fiscal Year, adjusted as set forth in Section 4.02 hereof for
all contributions and distributions during such Fiscal Year and all Regulatory
Allocations pursuant to Section 4.03(b) and (c) hereof with respect to such
Fiscal Year but prior to any allocations of Net Income or Net Losses for such
Fiscal Year pursuant to Section 4.03(a)(i) and (ii) hereof.
"Partner Nonrecourse Debt" shall have the meaning set forth in
Treasury Regulations Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" shall have the meaning
set forth in Treasury Regulations Section 1.704-2(i).
"Partner Nonrecourse Deductions" shall have the meaning set
forth in Treasury Regulations Section 1.7042(i).
"Partners" has the meaning provided in the preamble.
"Partnership" has the meaning provided in the preamble.
"Partnership Expenses" means (i) the Management Fee, (ii) direct
expenses relating to the operation of the Partnership, including legal,
accounting and auditing fees, bank service fees, insurance costs and any other
reasonable expenses related to the Partnership, as shall be determined by the
General Partner in its sole discretion, and (iii) indemnification obligations
incurred, as provided in Section 3.07 hereof.
"Partnership Minimum Gain" has the meaning set forth in Treasury
Regulations Section 1.704-2(b)(2) and (d).
"Purchase Agreement" means the Historical Advance Purchase
Agreement between Aames as Seller and the Partnership as Buyer, dated as of the
date hereof, and any other agreement listed on Schedule D hereto, under which
the Partnership purchases Historical Advances (as defined in such purchase
agreement) from Aames.
-4-
<PAGE> 9
"Repurchase" means a repurchase of Historical Advances by Aames,
pursuant to the relevant Purchase Agreement.
"Schedule A" means Schedule A annexed hereto, as such schedule
may be amended from time to time in accordance with the provisions of this
Agreement, setting forth the name and address of each Partner and the amount of
each Partner's Capital Contributions.
"Schedule B" means Schedule B annexed hereto, as such schedule
may be amended from time to time in accordance with this provisions of this
Agreement, containing a list of the Scheduled Pooling and Servicing Agreements
and the Scheduled Trustees thereunder.
"Schedule C" means Schedule C annexed hereto, as such schedule
may be amended from time to time in accordance with the provisions of this
Agreement, setting forth the unreimbursed balance with respect to each
Historical Advance, as of the Cut-off Date.
"Schedule D" means Schedule D annexed hereto, as such schedule
may be amended from time to time in accordance with the provisions of this
Agreement, listing the Purchase Agreements.
"Scheduled Pooling and Servicing Agreement" means each agreement
listed in Schedule B hereto, together with the Scheduled Supplement thereto.
"Scheduled Supplement" means each Supplement to a Scheduled
Pooling and Servicing Agreement.
"Scheduled Trustee" means each "Trustee" under each Scheduled
Pooling and Servicing Agreement.
"Servicer" means the "Servicer" under each of the Scheduled
Pooling and Servicing Agreements, and its permitted successors and assigns.
"SLP Preferred Return" means, with respect to any Collection
Period, an amount equal to .75% of the Undistributed Capital Contributions of
the Special Limited Partner on the last day of such Collection Period.
"SLP Redetermined Percentage" means, as to any Distribution Date
after giving effect to any distributions to be made on such date pursuant to
Sections 5.02 hereof, the decimal equivalent (expressed as a percentage) of a
fraction, the numerator of which is the amount of the Undistributed Capital
Contributions of the Special Limited Partner, and the denominator of which is
the aggregate unpaid balance of the Historical Advances as of the date of their
respective transfers to the Partnership, reduced as of each Distribution Date by
(i) the aggregate of the unpaid balances (including portions of balances) of
Historical Advances that the Manager determines in its sole discretion are not
collectible with reasonable efforts and (ii) any amounts paid to the Partnership
as a Repurchase.
"Special Limited Partner" has the meaning provided in the
preamble, includes the plural if there is more than one Special Limited Partner,
and also includes a transferee Special Limited Partner substituted pursuant to
Section 6.03 hereof.
-5-
<PAGE> 10
"Special Limited Partnership Interest" means the aggregate of
the interests in the Partnership held by all Special Limited Partners.
"Target Capital Account" means, with respect to any Partner for
any Fiscal Year or portion thereof, an amount (which may be either a positive
balance or deficit balance) equal to the hypothetical distribution (or
contribution) such Partner would receive (or contribute) if the Partnership were
to dissolve, all of the Partnership assets were sold for cash equal to their
Asset Value (taking into account any adjustments to Asset Value for such Fiscal
Year), all Partnership liabilities were satisfied by the respective terms
thereof (limited with respect to each Partnership Nonrecourse Liability or
Partner Nonrecourse Debt to the Asset Value of assets securing such liability)
and the net assets of the Partnership were distributed in full to the Partners
pursuant to Article V hereof all as of the last day of such Fiscal Year minus
such Partner's share of Partnership Minimum Gain and minus such Partner's share
of Partner Nonrecourse Debt Minimum Gain computed immediately prior to such
hypothetical sale.
"Transfer" means any sale, exchange, transfer, lease, gift,
encumbrance, assignment, pledge, mortgage or other hypothecation or other
disposition, whether voluntary or involuntary.
"Treasury Regulations" mean the Income Tax Regulations
promulgated under the Code, as such regulations may be amended from time to
time.
"Undistributed Capital Contributions" of any Partner shall mean,
with respect to any date of determination, the excess, if any, of (a) the sum of
Initial Capital Contributions and any Additional Capital Contributions made by
such Partner as of such date, over (b) the sum of the prior distributions to
such Partner through such date, pursuant to the priorities of Sections 5.02 (d),
(e), (f) and (g) hereof.
ARTICLE II
GENERAL PROVISIONS
Section 2.01 Partnership Name. The Partnership shall do business
under the name of Steamboat Financial Partnership I, L.P.
Section 2.02 Fiscal Year. The fiscal year of the Partnership
shall end on December 31 of each year.
Section 2.03 Principal Office. The principal office of the
Partnership shall be located at 600 Steamboat Road, Greenwich, Connecticut,
06830, or such other place as may from time to time be designated by the General
Partner. The General Partner shall give prompt notice of any change to each
Partner.
Section 2.04 Liability of Partners. The names of all of the
Partners and the amounts of their respective Initial Capital Contributions shall
be set forth in Schedule A, as may be amended from time to time by the addition
of new Partners and Additional Capital Contributions.
-6-
<PAGE> 11
(a) Subject to the obligations of the Limited Partners and
former Limited Partners, and the obligations of the Special Limited Partners and
former Special Limited Partners pursuant to Section 2.04(b), the General Partner
shall have unlimited liability for the repayment and discharge of all debts and
obligations of the Partnership incurred during any Fiscal Year during which such
Partner is the General Partner of the Partnership to the extent such debts and
obligations are not by their terms or otherwise either non-recourse as to the
General Partner or limited generally to assets or to specific assets of the
Partnership.
(b) Those Partners who are designated in Schedule A as
Limited Partners and Special Limited Partners, and former Limited Partners and
former Special Limited Partners, shall be liable for the repayment and discharge
of all debts and obligations of the Partnership incurred during any period
during which they are or were Limited Partners or Special Limited Partners of
the Partnership only to the extent of their respective interests in the
Partnership during such period and shall not otherwise have any liability in
respect of the debts and obligations of the Partnership. Notwithstanding the
previous sentence, in no event shall any Limited Partner (or former Limited
Partner), or any Special Limited Partner (or former Special Limited Partner) (i)
be obligated to make any additional contribution whatsoever to the Partnership,
or (ii) have any liability for the repayment and discharge of any of the debts
and obligations of the Partnership (apart from such Partner's interest in the
Partnership) except to the extent provided by Section 17-607(b) and (c) of the
Act.
(c) The interests in the Partnership do not constitute a
debt of or claim against the Partnership.
Section 2.05 Purposes of Partnership. The Partnership is
organized for the sole purpose of purchasing, holding, dealing with and selling
an interest in Historical Advances, receiving income from Limited Servicer Fees,
distributing payments received with respect to Historical Advances and income
from Limited Servicer Fees, and engaging in all activities and transactions as
the General Partner may deem reasonably necessary, advisable or incidental in
connection therewith and that may be permitted under Delaware Law.
Section 2.06 Assignability of Interest. Except with the express
written consent of the General Partner, which may be withheld in its sole and
absolute discretion, a Limited Partner may not assign, sell, transfer, pledge,
hypothecate, enter into a derivative or notional principal contract with respect
to, or otherwise dispose of any of the attributes of its interest in the
Partnership in whole or in part to any person; provided however, if Aames is no
longer the Servicer under any of the Scheduled Pooling and Servicing Agreements,
a Limited Partner may transfer all of its interests with the consent of the
General Partner (not to be unreasonably withheld). Any assignment, sale,
transfer, pledge, hypothecation or other disposition made in violation of this
Section 2.06 shall be void and of no effect. No transferee of an interest in the
Partnership shall become a Limited Partner except upon admission in accordance
with Section 6.02 hereof. A Special Limited Partner may transfer its Special
Limited Partnership Interest in accordance with Section 6.03 hereof.
Section 2.07 Registered Office and Agent in Delaware. The
address of the Partnership's registered office in the County of New Castle in
the State of Delaware, is 1013 Centre Road, Wilmington, Delaware 19805-1297. The
name of its registered agent at that
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<PAGE> 12
address is Corporation Service Company. The Partnership may from time to time
have such other place or places of business within or without the State of
Delaware as may be designated by the General Partner.
ARTICLE III
MANAGEMENT OF PARTNERSHIP
Section 3.01 Management Generally. The management of the
Partnership shall be vested exclusively in the Manager. The Limited Partners and
Special Limited Partners shall have no part in the management of the
Partnership, shall not be the Manager at any time and shall have no authority or
right to act on behalf of the Partnership in connection with any matter, or to
direct the General Partner or the Manager to take any action or to refrain from
taking any action. Employees of the Partnership, if any, and the Manager shall
have authority to act on behalf and in the name of the Partnership to the extent
authorized by the General Partner.
Section 3.02 Authority of General Partner. The General Partner
shall have the power by itself on behalf and in the name of the Partnership to
carry out any and all of the objects and purposes of the Partnership set forth
in Section 2.05, and to perform all acts and enter into and perform all
contracts and other undertakings, including with its affiliates, which it may
deem necessary, advisable or incidental thereto, including, without limitation,
the power:
(a) to act as Manager for the Partnership;
(b) to do any and all acts on behalf of the Partnership and
exercise all rights, powers, privileges and other incidents of ownership or
possession with respect to the Partnership's property and funds held or owned by
the Partnership, including without limitation, to receive, purchase, hold, sell,
exchange and otherwise deal in and with property of the Partnership;
(c) to open, maintain and close bank accounts and authorize
the drawing of checks or other orders for the payment of monies;
(d) to protect and preserve the title and interest of the
Partnership with respect to the assets at any time owned or acquired by the
Partnership;
(e) to engage one or more custodians, attorneys, independent
accountants, consultants and any other persons that the General Partner deems
necessary or advisable, including, without limitation, officers, directors or
employees of any affiliate of the General Partner;
(f) to collect all amounts due to the Partnership, and
otherwise to enforce all rights of the Partnership, and in that connection, to
retain counsel and institute such suits or proceedings, in the name and on
behalf of the Partnership, or in the name of the Partners;
(g) to participate in arrangements with creditors, institute
and settle or compromise suits and administrative proceedings and other similar
matters; bring or defend, pay,
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<PAGE> 13
collect, compromise, arbitrate, resort to legal action, or otherwise adjust
claims or demands of or against the Partnership;
(h) to charge to the Partnership, or be reimbursed by the
Partnership for, expenses reasonably incurred by the General Partner (or its
affiliates, or the Manager) on behalf of the Partnership, not to exceed $10,000
per annum;
(i) to take any and all action which is permitted under the
Act and which is customary or reasonably related to the affairs of the
Partnership;
(j) to make such elections under the Code, and other
relevant tax laws as to the treatment of items of Partnership income, gain,
loss, deduction and credit, and as to all other relevant matters, as the General
Partner deems necessary or appropriate, including, without limitation, elections
referred to in Section 754 of the Code, determination of which items of cash
outlay are to be capitalized or treated as current expenses, and selection of
the method of accounting and bookkeeping procedures to be used by the
Partnership;
(k) to deposit, withdraw, invest, pay, retain and distribute
the Partnership's funds in a manner consistent with the provisions of this
Agreement, including depositing monies received by the Partnership in Eligible
Accounts;
(l) to pay all expenses relating to the organization of the
Partnership and the offering of interests therein (including attorneys' fees),
in the amount of $5000.00;
(m) to pay all debts and obligations of the Partnership,
including expenses relating to the operation of the Partnership, such as legal,
accounting and auditing fees, investment expenses, interest expenses, custodial
fees, bank service fees, insurance costs and any other reasonable expenses
related to the Partnership, as shall be determined by the General Partner in its
sole discretion and to reserve such funds for expenses as the General Partner
determines to be appropriate, in an amount not to exceed $25,000.00, unless a
greater amount is otherwise agreed by 100% of the Partners;
(n) to cause the Partnership to carry such insurance or
bonds as the General Partner deems necessary to protect the Partnership, the
Partners and any individual or entity entitled to indemnification by the
Partnership pursuant to Section 3.07;
(o) to authorize any officer, director, employee or other
agent of the General Partner (including the Manager), employee or agent of the
Partnership (but not including a Limited Partner or Special Limited Partner) to
act for and on behalf of the Partnership in any or all of the foregoing matters
and all matters incidental thereto as fully as if such person were the General
Partner.
(p) to amend this Agreement as provided in Section 10.03 and
Section 10.09, and, if the Agreement cannot be amended as provided in Section
10.09, to make a determination to dissolve the Partnership in accordance with
Section 10.09.
(q) to dissolve the Partnership in accordance with Section
8.01.
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<PAGE> 14
Section 3.03 Limitations on Activities of Partnership.
The sole activities of the Partnership shall be as described in
Section 2.05.
Section 3.04 Partnership Covenants. The General Partner
covenants that the Partnership shall:
(a) maintain books and records that show its separate assets
and liabilities;
(b) maintain its bank accounts separate from any other
person or entity;
(c) not commingle its assets with those of any other person
or entity and hold all of its assets in its own name;
(d) conduct its own business in its own name;
(e) maintain separate financial statements, showing its
assets and liabilities separate and apart from those of any other person or
entity;
(f) file the Partnership tax returns;
(g) pay its own liabilities and expenses only out of its own
funds;
(h) observe all partnership and other organizational
formalities;
(i) enter into transactions with affiliates only on a
commercially reasonable basis;
(j) pay the salaries of its own employees from its own
funds;
(k) maintain or contract for a sufficient number of
employees in light of its contemplated business operations;
(l) not guarantee or become obligated for the debts of any
other entity or person;
(m) not hold out its credit as being available to satisfy
the obligations of any other person or entity;
(n) not acquire the obligations or securities of its
affiliates or owners, including partners, Partners or shareholders, as
appropriate;
(o) not make loans to any other person or entity or to buy
or hold evidence of indebtedness issued by any other person or entity (other
than Historical Advances, cash and investment-grade securities);
(p) allocate fairly and reasonably any overhead expenses
that are shared with an affiliate, including paying for office space and
services performed by any employee of an affiliate;
(q) use separate stationery, invoices, and checks bearing
its own name;
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<PAGE> 15
(r) not pledge its assets for the benefit of any other
person or entity;
(s) correct any known misunderstanding regarding its
separate identity; and
(t) not identify itself as a division of any other person or
entity.
Section 3.05 Activities of General Partner. The General Partner
and its Partners, managers, officers, employees or other agents and agents of
any of them and employees of the Partnership, if any, shall devote so much of
their time to the affairs of the Partnership as in their judgment the conduct of
the Partnership's business shall reasonably require and the General Partner and
its Partners, managers, officers, employees or agents and agents of any of them
and employees of the Partnership, if any, shall not be obligated to do or
perform any act or thing in connection with the business of the Partnership not
expressly set forth herein.
Section 3.06 Reliance by Third Parties. Persons dealing with the
Partnership are entitled to rely conclusively upon the certificate of the
General Partner to the effect that it is then acting as the General Partner and
upon the power and authority of the General Partner and any employee or agent of
the General Partner or the Partnership as herein set forth.
Section 3.07 Indemnification.
(a) The Partnership, out of its own assets and not out of
the assets of any Partner (except as provided in Section 3.07(b) below), shall
indemnify and hold harmless the General Partner and the Manager and any Partner,
manager, officer, employee or agent of the General Partner, the Manager and/or
the legal representatives or controlling persons of any of them and any employee
or agent of the Partnership or the Manager (herein collectively called the
"Indemnified Persons"), from and against any loss, expense, judgment, settlement
cost, fee and related expenses (including attorneys' fees and expenses), costs
or damages suffered or sustained by reason of being or having been the General
Partner, the Manager, a Partner, manager, officer, employee or agent (or a legal
representative or controlling person of any of them) of the General Partner or
the Manager or any employee or agent of the Partnership or the Manager, or
arising out of or in connection with the business of the Partnership or the
performance by the Indemnified Person of any of the responsibilities of the
General Partner or the Manager hereunder, provided that an Indemnified Person
shall be entitled to indemnification hereunder only if the Indemnified Person's
conduct did not constitute willful misconduct, gross negligence or criminal
wrongdoing. The Partnership shall, in the sole discretion of the General Partner
upon advice of counsel that such Indemnified Person is not likely not to be
entitled to such indemnification, advance to any Indemnified Person reasonable
attorneys' fees and other costs and expenses incurred in connection with the
defense of any action or proceeding which arises out of conduct which is the
subject of the indemnification provided hereunder. The General Partner hereby
agrees and each other Indemnified Person shall agree, that in the event such
Indemnified Person receives any such advance, such Indemnified Person shall
reimburse the Partnership for such advance to the extent that it shall be
finally judicially determined that such Indemnified Person was not entitled to
indemnification under this Section 3.07. Except as provided in Section 2.04, the
satisfaction of any indemnification and any saving harmless pursuant to this
Section 3.07(a) shall be from and limited to Partnership assets, and no Partner
shall have any personal liability on account thereof.
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<PAGE> 16
(b) Each Limited Partner and Special Limited Partner who is
at the time of any allocation or distribution of Net Income a "foreign partner"
within the meaning of Section 1446(e) of the Code shall provide indemnification
to the Partnership and each other Partner in accordance with Section 3.07(a)
with respect to any taxes, including any penalties, assessed by the U.S.
Internal Revenue Service with respect to such allocation or distribution by
reason of any failure by the General Partner to withhold a portion, or the
requisite portion, of such allocation or distribution.
(c) Notwithstanding any of the foregoing to the contrary,
the provisions of this Section 3.07 and Section 5.03 shall not be construed so
as to provide for the indemnification of any Indemnified Person for any
liability to the extent (but only to the extent) that such indemnification would
be in violation of applicable law or such liability may not be waived, modified
or limited under applicable law, but shall be construed so as to effectuate the
provisions of this Section 3.07 and Section 5.03 to the fullest extent permitted
by law.
Section 3.08 Exculpation. No Indemnified Person shall be liable
to any Partner or the Partnership for any act or failure to act on behalf of the
Partnership, unless such act or failure to act resulted from willful misconduct,
gross negligence or criminal wrongdoing. Each Indemnified Person may consult
with counsel and accountants in respect of the Partnership's affairs and shall
be fully protected and justified in any action or inaction which is taken or not
taken in good faith reliance and in accordance with the advice or opinion of
such counsel or accountants, so long as such counsel or accountants were
selected with reasonable care. Notwithstanding any of the foregoing to the
contrary, the provisions of this Section 3.08 shall not be construed so as to
relieve (or attempt to relieve) any Indemnified Person of any liability, to the
extent (but only to the extent) that such liability may not be waived, modified
or limited under applicable law, but shall be construed so as to effectuate the
provisions of this Section 3.08 to the fullest extent permitted by law.
Section 3.09 Payment of Costs and Expenses. The Partnership
shall bear (a) all operating expenses of the Partnership, including custodial
fees and expenses, administrative fees and expenses, reporting expenses, legal
and accounting fees and expenses, interest expenses, litigation expenses, taxes,
if any, and (b) the expenses incurred in connection with the organization of the
Partnership and the offering of interests in the Partnership. The General
Partner and the Manager shall pay all expenses of providing their respective
services to the Partnership, including, without limitation, overhead, office and
salary expenses.
Section 3.10 Reimbursement of the Management Fee. In the event
that a Management Fee has been paid, and the Manager does not act as Manager for
the subsequent twelve month period, the Manager shall reimburse the Partnership
(promptly after the Manager ceases to act as such) for the pro rata amount of
the Management Fee received but unearned.
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<PAGE> 17
ARTICLE IV
CAPITAL ACCOUNTS OF PARTNERS AND OPERATION THEREOF
Section 4.01 Capital Contributions.
(a) Upon execution of this Agreement, the General Partner
and Special Limited Partner will each make an Initial Capital Contribution to
the Partnership, in cash, as set forth in Schedule A hereto. On such date, the
Limited Partner will assign and transfer the initial Historical Advances to the
Partnership pursuant to the initial Purchase Agreement with an agreed Asset
Value as set forth in Schedule A hereto, for a cash consideration set forth in
the Purchase Agreement, with the difference between said cash consideration and
the agreed Asset Value being the Limited Partner's Initial Capital Contribution.
The value attributed to the Limited Partner's Initial Capital Contribution shall
also be set forth in Schedule A hereto. Except as provided for herein, no
further Capital Contributions to the Partnership shall be required. Following
the Initial Capital Contributions, Additional Capital Contributions may be made
by Partners only in accordance with the provisions of this Section 4.01.
Additional Capital Contributions shall be reflected on Schedule A, as amended as
of the date of such Additional Capital Contributions.
(b) Unless 100% of the Partners agree otherwise, no Partner
may make or be required to make any Additional Capital Contribution.
(c) Except as expressly set forth herein, no Partner shall
be entitled to any return of capital, interest or compensation by reason of its
Capital Contributions or by reason of being a Partner.
Section 4.02 Capital Accounts. The Partnership shall establish
and maintain a separate account (the "Capital Account") for each Partner. The
initial balance of the Capital Account for each Partner shall be such Partner's
Initial Capital Contribution as set forth on Schedule A dated as of the date
hereof.
(a) The Capital Account of each Partner shall be increased
at the end of each Fiscal Year by (i) the amount of any Additional Capital
Contributions in cash made by such Partner, (ii) the fair market value of any
property (other than cash) contributed to the Partnership by such Partner (net
of liabilities to which such property is subject), (iii) such Partner's share of
Net Income allocated to it pursuant to Section 4.03(a)(i) hereof and (iv) any
items of income or gain allocated to such Partner pursuant to Section 4.03(b)
and (c) hereof.
(b) The Capital Account of each Partner shall be decreased
at the end of each Fiscal Year by (i) the amount of any cash distributions made
to such Partner, (ii) the fair market value of any property distributed to such
Partner (net of any liabilities to which such property is subject), (iii) such
Partner's share of Net Losses allocated to it pursuant to Section 4.03(a)(ii)
hereof, and (iv) any items of deductions and losses allocated to such Partner
pursuant to Section 4.03(b) and (c) hereof.
(c) The General Partner may, in its sole discretion, adjust
the Capital Accounts of the Partners (i) upon the occurrence of any event
specified in Treasury Regulation Section 1.704-
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<PAGE> 18
1(b)(2)(iv)(f), and (ii) immediately prior to a liquidation of the Partnership,
in each case to reflect the Asset Value of the Partnership's property at such
time, as provided in such Regulation.
(d) In the event that any interest in the Partnership is
transferred in accordance with the provisions hereof, the transferee of such
interest shall succeed to the portion of the transferor's Capital Account
attributable to such interest.
(e) Any adjustments to the tax basis of Partnership property
under Sections 732, 734 or 743 of the Code will be reflected as adjustments to
the Capital Account of the Partners only in the manner and to the extent
provided in Treasury Regulation Section 1.704-1(b)(2)(iv)(m).
(f) The foregoing provisions and the other provisions of
this Agreement relating to the maintenance of Capital Accounts are intended to
comply with Treasury Regulations Sections 1.704-1(b) and 1.704-2, and shall be
interpreted and applied in a manner consistent with such Treasury Regulations.
Section 4.03 Allocations of Net Income and Net Losses
(a) General Allocations.
(i) Net Income. Subject to Section 4.03(b) hereof, for each
Fiscal Year or portion thereof, Net Income shall be allocated among the
Partners so as to reduce, proportionately, the differences between their
respective Target Capital Accounts and Partially Adjusted Capital
Accounts for such Fiscal Year. No portion of Net Income for any Fiscal
Year shall be allocated to a Partner whose Partially Adjusted Capital
Account is greater than or equal to its Target Capital Account for such
Fiscal Year. Allocations of Net Income hereunder shall consist of a
pro-rata portion of each item of Partnership income, gain, loss or
deduction that is included in computing Net Income for such Fiscal Year.
(ii) Net Losses. Subject to Section 4.03(b) hereof, for each
Fiscal Year or portion thereof Net Losses shall be allocated among the
Partners so as to reduce, proportionately, the differences between their
respective Partially Adjusted Capital Accounts and Target Capital
Accounts for such Fiscal Year. No portion of Net Losses for any Fiscal
Year shall be allocated to a Partner whose Target Capital Account is
greater than or equal to its Partially Adjusted Capital Account for such
Fiscal Year. Allocation of Net Losses hereunder shall consist of a
pro-rata portion of each item of Partnership income, gain, loss or
deduction that is included in computing Net Losses for such Fiscal Year.
(b) Regulatory and Related Allocations. Notwithstanding any
other provision in this Agreement to the contrary, the following special
allocations shall be made in the following order:
(i) Minimum Gain Chargeback. Notwithstanding any other
provision of this Article IV, if there is a net decrease in Partnership
Minimum Gain during any Fiscal Year, each Partner shall be specifically
allocated items of income and gain for such Fiscal
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<PAGE> 19
Year (and, if necessary, subsequent Fiscal Years) in an amount
determined in accordance with Treasury Regulations Section 1.704-2.
Likewise, if there is a net decrease in Partner Nonrecourse Debt Minimum
Gain with respect to Partner Nonrecourse Debt, then any Partner with a
share of the Partner Nonrecourse Debt Minimum Gain attributable to such
Partner Nonrecourse Debt at the beginning of the Fiscal Year shall be
allocated items of income and gain for such Fiscal Year (and, if
necessary for subsequent Fiscal Years) in the manner provided in
Treasury Regulations Section 1.704-2(i)(4). This Section 4.03(b)(i) is
intended to comply with the minimum gain chargeback requirements of
Treasury Regulations Section 1.704-2 and shall be interpreted
consistently therewith.
(ii) Qualified Income Offset. In the event any Partner
unexpectedly receives any adjustments, allocations, or distributions
described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5)
or (6) with respect to such Partner's Capital Account, items of income
and gain shall be specially allocated to each such Partner in an amount
and manner sufficient to eliminate, to the extent required by the
Treasury Regulations, the Capital Account deficit of such Partner as
quickly as possible; provided that an allocation pursuant to this
Section 4.03(b)(ii) shall be made only if and to the extent that such
Partner would have a Capital Account deficit after all other allocations
provided for in this Section 4.03 have been tentatively made as if this
Section 4.03(b)(ii) were not a part of this Agreement. This Section
4.03(b)(ii) is intended to constitute a "qualified income offset" within
the meaning of Treasury Regulations Section 1.704-1(b)(ii)(d) and shall
be interpreted consistently therewith.
(iii) Nonrecourse Deductions. Any Nonrecourse Deductions for
any Fiscal Year or other period shall be allocated to the Partners in
accordance with their respective Capital Account balances at the
beginning of such Fiscal Year. Partner Nonrecourse Deductions for any
Fiscal Year shall be allocated to the Partner who bears the economic
risk of loss with respect to the loan to which such Partner Nonrecourse
Deductions are attributable in accordance with Treasury Regulations
Section 1.704-2(i).
(iv) Adjustments. If the Partnership has Net Income for any
Fiscal Year (determined prior to giving effect to this subsection), each
Partner whose Partially Adjusted Capital Account is greater than its
Target Capital Account for such Year shall be specially allocated items
of Partnership deductions for such Fiscal Year equal to the difference
between its Target Capital Account and its Partially Adjusted Capital
Account. In the event that the Partnership has insufficient items of
deductions for such Fiscal Year to satisfy the previous sentence with
respect to all such Partners, the available items of deductions shall be
divided among such Partners in proportion to the respective differences
between each such Partner's Target Capital Account and its Partially
Adjusted Capital Account. If the Partnership has Net Losses for any
Fiscal Year (determined prior to giving effect to this subsection), each
Partner whose Target Capital Account is greater than its Partially
Adjusted Capital Account for such Fiscal Year shall be specially
allocated items of Partnership gross income for such Fiscal Year equal
to the difference between its Target Capital Account and its Partially
Adjusted Capital Account. In the event the Partnership has insufficient
items of gross income for such Fiscal Year to satisfy the previous
sentence with respect to all such Partners, the available items of gross
income shall be divided among the Partners in proportion to the
respective differences
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<PAGE> 20
between each such Partner's Target Capital Account and its Partially
Adjusted Capital Account. The availability of items of gross income and
deductions to be specially allocated pursuant to this subsection shall
be determined after giving full effect to Sections 4.03(b)(i), (ii) and
(iii) hereof.
(c) Curative Allocations. The allocations set forth in
Section 4.03(b) (the "Regulatory Allocations") are intended to comply with
certain requirements of Treasury Regulations under Section 704 of the Code.
Notwithstanding any other provision of this Article VI (other than the
Regulatory Allocations), the Regulatory Allocations shall be taken into account
in allocating other items of income, gain, loss, deduction and expense among the
Partners so that, to the extent possible, the net amount of such allocations of
other items and the Regulatory Allocations shall be equal to the net amount that
would have been allocated to the Partners pursuant to this Section 4.03 if the
Regulatory Allocations had not been made.
(d) Transfer of or Change in Interests. The General Partner
is authorized to adopt any convention or combination of conventions likely to be
upheld for federal income tax purposes regarding the allocation and/or special
allocation of items of income, gain, loss, deduction and expense with respect to
a newly issued Partnership interest, a transferred Partnership interest or a
redeemed Partnership interest.
Section 4.04 Determination by General Partner of Certain
Matters. All matters concerning the computation of Capital Accounts, the
allocation of Net Income (and items thereof) and Net Loss (and items thereof),
the allocation of items of Partnership income, gain, loss, deduction and expense
for tax purposes, the making of any elections and the adoption of any accounting
procedures not expressly provided for by the terms of this Agreement shall be
determined by the General Partner in its sole and absolute discretion. Such
determination shall be final and conclusive as to all Partners. Notwithstanding
anything expressed or implied to the contrary in this Agreement, in the event
the General Partner shall determine, in its sole and absolute discretion, that
it is prudent to modify the manner in which the Capital Accounts, or any debits
or credits thereto, are computed in order to effectuate the intended economic
sharing arrangement of the Partners as reflected in Article IV, the General
Partner may make such modification.
Section 4.05 No Deficit Makeup. Notwithstanding anything herein
to the contrary, upon liquidation of the Partnership, except as required by
Delaware law no Partner shall be required to make any Capital Contribution to
the Partnership in respect of any deficit in such Partner's Capital Account.
Section 4.06 Tax Allocations.
(a) Except as otherwise provided in subparagraph (b) of this
Section 4.06, taxable income, gain, loss or deduction of the Partnership as
determined for federal income tax purposes shall be allocated among the Partners
in the same manner as the corresponding income, gain, loss or deduction is
allocated among the Partners for purposes of adjusting Capital Accounts under
this Article IV.
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<PAGE> 21
(b) Any item of income, gain, loss and deduction (including
tax depreciation) for federal income tax purposes with respect to any
Partnership property that has been contributed by a Partner to the capital of
the Partnership and which is required to be allocated for federal income tax
purposes under Section 704(c) of the Code so as to take into account the
variation between the adjusted tax basis of such Property and its agreed upon
Asset Value at the time of its contribution shall be allocated to the Partners
solely for federal income tax purposes in the manner so required. The General
Partner may elect to use any method described in Section 1.704-3 of the
Regulations for purposes of making any determination under this Section 4.06(b).
ARTICLE V
COLLECTIONS AND DISTRIBUTIONS
Section 5.01 Collections. The Manager will cause all amounts
paid by Scheduled Trustees to the Partnership, and all monies paid by Aames
pursuant to a Repurchase, to be deposited into the Disbursing Account. Any
monies received by the Partnership on a day other than a Distribution Date shall
be deposited into Disbursing Accounts and distributed, with the earnings
thereon, on the next succeeding Distribution Date.
Section 5.02 Distributions. On each Distribution Date, or as
soon thereafter as is practicable, and upon liquidation of the Partnership, the
Manager shall distribute or cause to be distributed amounts in the Disbursing
Account (and any other Eligible Accounts) in the following amounts and order of
priority:
(a) to the Manager, any unreimbursed Partnership Expenses;
(b) to a Partnership account, such amounts as the Manager
reasonably determines should be held to pay anticipated Partnership Expenses;
(c) to the Special Limited Partner, an amount equal to the
excess, if any, of (i) the cumulative SLP Preferred Return from the inception of
the Partnership to the end of the related Collection Period, over (ii) the sum
of all prior distributions to the Special Limited Partner pursuant to this
Section 5.02(c);
(d) to the Special Limited Partner, an amount such that
after distribution thereof the SLP Redetermined Percentage has been reduced to
the following percentages, in each of the months listed below:
<TABLE>
<CAPTION>
---------------------------------------------------------
SLP REDETERMINED
DATE PERCENTAGE
---------------------------------------------------------
<S> <C>
July 65%
---------------------------------------------------------
August 65%
---------------------------------------------------------
September 65%
---------------------------------------------------------
October 65%
---------------------------------------------------------
November 65%
---------------------------------------------------------
December 65%
---------------------------------------------------------
January 2000 65%
---------------------------------------------------------
</TABLE>
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<PAGE> 22
<TABLE>
<CAPTION>
---------------------------------------------------------
SLP REDETERMINED
DATE PERCENTAGE
---------------------------------------------------------
<S> <C>
February 65%
---------------------------------------------------------
March 65%
---------------------------------------------------------
April 65%
---------------------------------------------------------
May 65%
---------------------------------------------------------
June 60%
---------------------------------------------------------
July 55%
---------------------------------------------------------
August 50%
---------------------------------------------------------
September 45%
---------------------------------------------------------
October 40%
---------------------------------------------------------
November 35%
---------------------------------------------------------
December 30%
---------------------------------------------------------
January 2001 25%
---------------------------------------------------------
February 20%
---------------------------------------------------------
March 15%
---------------------------------------------------------
April 10%
---------------------------------------------------------
May 5%
---------------------------------------------------------
June 0%
---------------------------------------------------------
</TABLE>
(e) until the Special Limited Partner's Undistributed
Capital Contribution is reduced to zero, to the Limited Partner, any amount then
remaining in the Disbursing Account; provided that so long as the Special
Limited Partner shall have Undistributed Capital Contributions in excess of
zero, the Undistributed Capital Contribution of the Limited Partner may not be
reduced below $1 million, and any amount that would otherwise be paid to the
Limited Partner on a Distribution Date, shall instead be paid to the Special
Limited Partner, until the Special Limited Partner's Undistributed Capital
Contribution is reduced to zero, or until the Partnership is terminated;
(f) to the Limited Partner, all amounts remaining in the
Disbursing Account and any other Eligible Account, until the Limited Partner's
Undistributed Capital Contribution is equal to zero;
(g) to the General Partner, all amounts remaining in the
Disbursing Account and any other Eligible Account, until the balance in the
General Partner's Undistributed Capital Contribution is equal to zero;
(h) to the Limited Partner, any remaining amounts.
Section 5.03 Distributions to Holders of Special Limited
Partnership Interests and Limited Partner interests. If there is more than one
Special Limited Partner, distributions to the Special Limited Partners shall be
made pro rata in accordance with the percentage of the Special Limited
Partnership Interest held by each Special Limited Partner. If there is more than
one Limited Partner, distributions to the Limited Partners shall be made pro
rata in accordance with their respective percentage interests as Limited
Partners.
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<PAGE> 23
Section 5.04 Withholding.
(a) Notwithstanding anything expressed or implied to the
contrary in this Agreement, the General Partner is authorized to take any action
that it determines to be necessary or appropriate to cause the Partnership to
comply with any foreign or United States federal, state or local withholding
requirement with respect to any allocation, payment or distribution by the
Partnership to any Partner or other Person. All amounts so withheld, and, in the
manner determined by the General Partner in its sole and absolute discretion,
amounts withheld with respect to any allocation, payment or distribution by any
Person to the Partnership, shall be treated as distributions to the applicable
Partners under the applicable provision of this Agreement. If any such
withholding requirement with respect to any Partner exceeds the amount
distributable to such Partner under this Agreement, or if any such withholding
requirement was not satisfied with respect to any item previously allocated,
paid or distributed to such Partner, such Partner or any successor or assignee
with respect to such Partner's interest in the Partnership hereby indemnifies
and agrees to hold harmless the General Partner, the other Partners and the
Partnership for such excess amount or such amount required to be withheld, as
the case may be, together with any applicable interest, additions or penalties
thereon.
Section 5.05 Limitations on Withdrawals and Distributions. The
right of any Partner to receive any distribution in respect of capital from its
Capital Account pursuant to this Article V is subject to the provision by the
General Partner for all Partnership liabilities in accordance with Section
17-607 of the Act, and for reserves and contingencies.
Section 5.06 Distributions In Kind. For all purposes of this
Agreement, (i) any property (other than United States dollars) that is
distributed in kind to one or more Partners with respect to a Fiscal Year
(including any in-kind distributions upon the dissolution and winding up of the
Partnership) shall be deemed to have been sold for cash (in United States
dollars) equal to its fair market value (net of any relevant liabilities secured
by such property), (ii) the unrealized gain or loss inherent in such property
shall be treated as recognized gain or loss for purposes of determining the Net
Income and Net Loss, (iii) such gain or loss shall be allocated to the Partners'
respective Capital Accounts pursuant to Article IV for such Fiscal Year and (iv)
such in-kind distributions shall be made after giving effect to such allocation
pursuant to Article IV.
ARTICLE VI
ADMISSION OF NEW PARTNERS; CHANGES
IN THE GENERAL PARTNER; TRANSFERS
Section 6.01 Changes in the General Partner. Without the consent
of the Limited Partner or the Special Limited Partner, the General Partner may
designate an affiliate of the General Partner (the "Designee") to be added or
substituted as a general partner. Any such Designee to be added shall be deemed
to be admitted upon its execution of this Agreement. Any such Designee to be
substituted shall be deemed to be admitted immediately prior to the withdrawal
of the General Partner. Upon admission to the Partnership, the Designee shall
become, and have all of the rights, powers and duties of, the General Partner
for all purposes of this Agreement. Notwithstanding the foregoing, no Designee
shall be added or substituted as a general partner of the Partnership if such
addition or substitution would adversely affect the
-19-
<PAGE> 24
Limited Partner, the Special Limited Partner or the Partnership. Except as
required by applicable law, changes in the partners, directors or officers of
the General Partner shall not require the consent of the Limited Partners or the
Special Limited Partners and shall not dissolve the Partnership.
Section 6.02 Transfer of the Limited Partner's Interest.
(a) A Limited Partner may not make any Transfer of its
interest in the Partnership as a Limited Partner in whole or in part to any
person and is not entitled to substitute for itself as a Limited Partner any
other person, except as provided in Section 2.06.
(b) If there is an assignment of all or a portion of the
interest of a Limited Partner in compliance with this Section 6.02, such
assignment shall become effective on the first business day following the
delivery of the consent of the General Partner to the transferring Limited
Partner and all distributions on or before the date of such assignment shall be
made to the assignor, and all distributions thereafter shall be made to the
assignee.
(c) Upon the assignment of all or a portion of a Limit
Partner's interest becoming effective in accordance with this Section 6.02, such
assignee shall (x) be admitted automatically to the Partnership as a Limited
Partner, (y) succeed to the assignor's Capital Account interest, to the extent
of such assignment, and (z) have an interest in the Limited Partner interests
pro rata with all other Limited Partners.
(d) Any attempted assignment or substitution not made in
accordance with this Section 6.02 shall be null and void.
Section 6.03 Transfer of a Special Limited Partnership Interest.
(a) A Special Limited Partner may make a Transfer of all or
any portion of its interest in the Partnership to any person with the consent of
the General Partner, which consent may not be unreasonably withheld. Any request
for consent shall advise the General Partner of the percentage interest in the
Special Limited Partnership Interest proposed to be transferred.
(b) If there is an assignment of all or a portion of the
interest of a Special Limited Partner in compliance with this Section 6.03, such
assignment shall become effective on the first business day following the
delivery of the consent of the General Partner to the transferring Special
Limited Partner and all distributions on or before the date of such assignment
shall be made to the assignor, and all distributions thereafter shall be made to
the assignee.
(c) Upon the assignment of all or a portion of the Special
Limited Partnership Interest becoming effective in accordance with this Section
6.03, such assignee shall (x) be admitted automatically to the Partnership as a
Special Limited Partner, (y) succeed to the assignor's Capital Account interest,
to the extent of such assignment, and (z) have an interest in the Special
Limited Partnership Interest pro rata with all other Special Limited Partners.
-20-
<PAGE> 25
(d) All distributions to a Special Limited Partner shall be
made pro rata with all other Special Limited Partners, in accordance with each
Special Partner's interest in the Special Limited Partnership Interest.
ARTICLE VII
WITHDRAWAL, DEATH, INCOMPETENCY
Section 7.01 Withdrawal, Death, Etc., of Partners.
(a) The General Partner shall not have the right to withdraw
from the Partnership except as provided in Section 6.01.
(b) The withdrawal, death, disability, incapacity,
incompetency, termination, bankruptcy, insolvency or dissolution of a Partner
shall not in and of itself dissolve the Partnership. The legal representatives
of a Partner shall succeed as assignee to the Partner's interest in the
Partnership upon the death, disability, incapacity, incompetency, termination,
bankruptcy, insolvency or dissolution of a Partner, but shall not be admitted as
a substitute Partner without the consent of the General Partner, which consent
may be given or withheld in its sole and absolute discretion. In the event of
death, disability, incapacity, incompetency, termination, bankruptcy, insolvency
or dissolution of a Partner or the giving of notice of withdrawal by a Partner,
such Partner's interest in the Partnership shall continue at the risk of the
Partnership's business until the effective date of the Partner's withdrawal or
the earlier termination of the Partnership.
Section 7.02 Limitations on Withdrawal of Capital Account. The
right of any Partner or the legal representatives of such Partner to have
distributed such Partner's Capital Account pursuant to this Article VII is
subject to the provision by the General Partner for all Partnership liabilities
in accordance with Section 17-607 of the Act, and for reserves for contingencies
established by the General Partner in good faith.
ARTICLE VIII
DURATION AND TERMINATION OF PARTNERSHIP
Section 8.01 Duration. Subject to the provisions of the Act, the
Partnership shall continue in perpetuity and shall not terminate upon the
resignation, withdrawal, bankruptcy or insolvency of the General Partner;
provided, however, that the General Partner, in its sole discretion, may
dissolve the Partnership at any time after the earlier of the date on which (i)
95% of the original unpaid principal balance of all Historical Advances has been
paid to and distributed by the Partnership and (ii) the last mortgage loan for
which a Historical Advance is outstanding has been liquidated, all proceeds
related thereto have been distributed by the related Scheduled Trustee and the
General Partner has determined that in its good faith judgment no additional
amounts will be paid to the Partnership in respect of such mortgage loan.
Section 8.02 Termination. On termination of the business of the
Partnership, the General Partner shall, within no more than 30 days after
completion of a final reconciliation
-21-
<PAGE> 26
of the Partnership's books and records (which shall be performed within 90 days
of such termination), make distributions, out of Partnership net assets, if any,
in the following manner and order:
(a) to payment and discharge of the claims of all creditors
of the Partnership who are not Partners;
(b) to payment and discharge of the claims of all creditors
of the Partnership who are Partners;
(c) to the Partners or their legal representatives in
accordance with Section 5.02 hereof.
ARTICLE IX
TAX RETURNS; REPORTS TO PARTNERS
Section 9.01 Independent Accountants. The books and records of
the Partnership are not required to be audited by independent certified
accountants.
Section 9.02 Filing of Tax Returns. The General Partner shall
prepare and file, or cause the accountants of the Partnership to prepare and
file, a federal information tax return in compliance with Section 6031 of the
Code and any required state and local income tax and information returns for
each tax year of the Partnership. Not later than five business days prior to
filing any such return, or making an election permitted under Section 3.02(j) or
Section 10.05, the General Partner shall provide a copy of such return or notice
of such election, as the case may be, to the Limited Partner for review and
comment, however, the General Partner shall retain sole discretion with respect
thereto, as provided in Section 4.04 hereof, and shall not be obligated to
accept any comments given by the Limited Partner.
Section 9.03 Tax Matters Partner. The General Partner shall be
designated as the tax matters partner of the Partnership (the "Tax Matters
Partner") as provided in Section 6231(a)(7) of the Code. In the event the
Partnership shall be the subject of an income tax audit by any federal, state or
local authority, to the extent the Partnership is treated as an entity for
purposes of such audit, including administrative settlement and judicial review,
the Tax Matters Partner shall be authorized to act for, and its decision shall
be final and binding upon, the Partnership and each Partner. All expenses
incurred in connection with any such audit, investigation, settlement or review
shall be borne by the Partnership.
Section 9.04 Annual Reports to Current and Former Partners. As
soon as practicable after the end of each Fiscal Year, the Partnership shall
prepare and mail, or cause its accountants to prepare and mail, to each Partner
and, to the extent necessary, to each former Partner (or such Partner's legal
representatives), a report setting forth in sufficient detail such information
as shall enable such Partner or former Partner (or such Partner's legal
representatives) to prepare their respective federal, state and local income tax
returns in accordance with the laws, rules and regulations then prevailing.
-22-
<PAGE> 27
Section 9.05 Tax Classification. The General Partner agrees to
use reasonable efforts to ensure that the Partnership will not be classified as
a corporation or an association taxable as a corporation for Federal, State, or
local income tax purposes.
ARTICLE X
MISCELLANEOUS
Section 10.01 General. This Agreement: (i) shall be binding on
the executors, administrators, estates, heirs, and legal successors and
representatives of the Partners; and (ii) may be executed, through the use of
separate signature pages or in any number of counterparts with the same effect
as if the parties executing such counterparts had all executed one counterpart,
provided that the counterparts, in the aggregate, shall have been signed by all
of the Partners.
Section 10.02 Power of Attorney. Each Limited Partner and
Special Limited Partner hereby appoints the General Partner, or any of its
officers (and any substitute or successor general partner or any officer thereof
or of the Partnership) each acting individually, as the true and lawful
representative of such Limited Partner or Special Limited Partner, as the case
may be, and attorney-in-fact, in such Limited Partner's or Special Limited
Partner's name, place and stead:
(a) to receive and pay over to the Partnership on behalf of
such Limited Partner or Special Limited Partner, to the extent set forth in this
Agreement, all funds received from such Limited Partner or Special Limited
Partner, respectively, hereunder;
(b) to complete or correct, on behalf of such Limited
Partner or Special Limited Partner, all documents to be executed by such Limited
Partner or Special Limited Partner, as the case may be, in connection with such
Limited Partner's or Special Limited Partner's subscription for an interest in
the Partnership, including, without limitation, filling in or amending amounts,
dates, and other pertinent information on a basis consistent with information
provided by or on behalf of the Limited Partners or Special Limited Partners, as
the case may be, or their representatives; and
(c) to make, execute, sign, acknowledge, swear to and file:
(i) a Certificate of Limited Partnership of the Partnership and all amendments
thereto as may be required under the Act including, without limitation, any such
filing for the purpose of admitting the undersigned and others as Limited
Partners or Special Limited Partners, as the case may be, and describing their
Initial Capital Contributions or any Additional Capital Contributions; (ii) any
and all instruments, certificates, and other documents which may be deemed
necessary or desirable to effect the winding-up and termination of the
Partnership (including, but not limited to, a Certificate of Cancellation of the
Certificate of Limited Partnership); (iii) any business certificate, fictitious
name certificate, amendment thereto, or other instrument, agreement or document
of any kind necessary or desirable to accomplish the business, purpose and
objectives of the Partnership, or required by any applicable federal, state or
local law; (iv) any counterparts of the Partnership Agreement to be entered into
pursuant to this Agreement and any amendments to which such Partner is a
signatory, (v) any amendments to any such amendments (as provided
-23-
<PAGE> 28
in the Partnership Agreement); and (vi) all other filings with agencies of the
federal government, of any state or local government, or of any other
jurisdiction, which the General Partner considers necessary or desirable to
carry out the purposes of this Agreement, the Partnership Agreement and the
business of the Partnership.
The power of attorney hereby granted by each Limited Partner and
Special Limited Partner is coupled with an interest, is irrevocable, shall
survive the transfer of the Limited Partner's or Special Limited Partner's
interest in the Partnership and shall survive, and shall not be affected by, the
subsequent death, disability, incapacity, incompetency, termination, bankruptcy,
insolvency or dissolution of such Limited Partner or Special Limited Partner.
Such representative and attorney-in-fact shall not have any
right, power or authority to amend or modify this Agreement when acting in such
capacity.
Section 10.03 Amendments to Partnership Agreement.
(a) Except as otherwise provided herein, the terms and
provisions of this Agreement may be modified or amended at any time and from
time to time with the written consent of the General Partner and at least a
Majority-in-Interest of the Limited Partners and a Majority-in-Interest of the
Special Limited Partners.
(b) The unanimous written consent of all of the Partners
shall be required for any amendment which would (i) cause the Partnership to
cease to be a limited partnership under and pursuant to the laws of the State of
Delaware, (ii) amend Sections 3.03 hereof or (iii) amend the provisions of this
Section 10.03 for amending this Agreement.
(c) Without the consent of any Limited Partner, but with the
consent of a Majority-in-Interest of the Special Limited Partners, the General
Partner may amend this Agreement or Schedule A hereto to (i) reflect the
admission of new Partners or the full or partial withdrawal of existing Partners
in accordance with the provisions of this Agreement and changes validly made in
the Capital Contributions of the Partners; (ii) reflect a change in the name of
the Partnership; (iii) make a change that is necessary or, in the opinion of the
General Partner, advisable to qualify the Partnership as a limited partnership
or a partnership in which the Limited Partners have limited liability under the
laws of any state, or ensure that the Partnership will not be treated as an
association taxable as a corporation for federal income tax purposes; (iv) make
a change that does not adversely affect the Limited Partners in any material
respect, including, but not limited to, any such change that is necessary or
desirable to cure any ambiguity, to correct or supplement any provision in this
Agreement that would be inconsistent with any other provision in this Agreement,
to address any matter affecting solely the relative rights of holders of Special
Limited Partnership Interests, including the admission of Special Limited
Partners, the transfer of Special Limited Partnership Interests, and the
allocation of distributions among Special Limited Partners, or to make any other
provision with respect to matters or questions arising under this Agreement that
will not be inconsistent with the provisions of this Agreement; (v) make a
change that is necessary or desirable to satisfy any requirements, conditions or
guidelines contained in any opinion, directive, order, ruling or regulation of
any federal or state statute, so long as such change is made in a manner which
minimizes any adverse effect on the Limited Partners or make a change that is
required or contemplated by this Agreement; (vi) make a
-24-
<PAGE> 29
change in any provision of this Agreement that requires any action to be taken
by or on behalf of the General Partner or the Partnership pursuant to the
requirements of applicable Delaware law if the provisions of applicable Delaware
law are amended, modified or revoked so that the taking of such action is no
longer required; (vii) prevent the Partnership or the General Partner from in
any manner being deemed an "investment company" subject to the provisions of the
Investment Company Act of 1940, as amended; (viii) prevent the General Partner
from becoming a fiduciary (as such term is used in the Employee Retirement
Income Security Act of 1974, as amended, (ix) restate this Agreement together
with any amendments hereto which have been duly adopted in accordance herewith,
to incorporate such amendments in a single, integrated document or (x) make any
other amendments similar to the foregoing, provided, however, that prior to
admitting a new class of Partners, the General Partner shall obtain an opinion
of counsel that the action will not cause the Partnership to be treated as a
taxable mortgage pool (a transfer of a pro rata interest in an interest in the
Partnership and the admission of the holder of such an interest as a Partner
shall not constitute the admission of a new class of Partners).
Section 10.04 Choice of Law. Notwithstanding the place where
this Agreement may be executed by any of the parties hereto, the parties
expressly agree that all the terms and provisions hereof shall be construed
under the laws of the State of Delaware and, without limitation thereof, that
the Act as now adopted or as may be hereafter amended shall govern the
partnership aspects of the Agreement.
Section 10.05 Adjustment of Basis of Partnership Property. In
the event of a distribution of Partnership property to a Partner or an
assignment or other transfer (including by reason of death) of all or part of a
Partner's interest in the Partnership, at the request of a Partner, the General
Partner, in its sole discretion, may cause the Partnership to elect, pursuant to
Section 754 of the Code, or the corresponding provision of subsequent law, to
adjust the basis of the Partnership property as provided by Sections 734 and 743
of the Code.
Section 10.06 Notices. Each notice relating to this Agreement
shall be in writing and delivered in person, by facsimile, personal delivery or
overnight courier. Any notice transmitted by facsimile shall be effective upon
confirmation of receipt of transmission, provided, however, that such a
confirmation does not, in turn, have to be confirmed. Any notice sent by
personal delivery or overnight courier shall be effective upon receipt. All
notices to the Partnership shall be addressed to its principal office and place
of business. All notices addressed to a Partner shall be addressed to such
Partner at the address set forth in Schedule A. Any Partner may designate a new
address by notice to that effect given to the Partnership.
Section 10.07 Goodwill. No value shall be placed on the name or
goodwill of the Partnership, which shall belong exclusively to the General
Partner.
Section 10.08 Headings. The titles of the Articles and the
headings of the Sections of this Agreement are for convenience of reference
only, and are not to be considered in constructing the terms and provisions of
this Agreement.
Section 10.09 Construction and Interpretation. If any question
should arise with respect to the operation of the Partnership, which is not
otherwise specifically provided for in this Agreement, or with respect to the
interpretation of this Agreement, the General Partner is
-25-
<PAGE> 30
hereby authorized to make a final determination with respect to any such
question and to interpret this agreement in such a manner as it shall deem fair
and equitable, and its determination and interpretations so made shall be final
and binding on all parties. Whenever possible, the provisions of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law. If the General Partner determines that any provision hereof may
not be enforceable or valid under applicable law, the General Partner may amend
such provision and this Agreement in such manner as it deems reasonable and
appropriate to carry out the intent of the parties, or, if the General Partner
determines that it cannot amend such provision in a manner so as to reasonably
reflect the intent of the parties, the General Partner may liquidate the assets
of the Partnership, including by sale of such assets to itself at the fair
market value therefor, and shall thereupon distribute the proceeds in accordance
with Section 8.02 hereof and terminate the Partnership.
Section 10.10 Survival. All indemnities and reimbursement
obligations made pursuant to this Agreement shall survive dissolution and
liquidation of the Partnership until expiration of the longest applicable
statute of limitations (including extensions and waivers) with respect to the
matter for which a party would be entitled to be indemnified or reimbursed, as
the case may be.
-26-
<PAGE> 31
IN WITNESS WHEREOF, the undersigned have hereunto set their
hands as of the date first set forth above.
GENERAL PARTNER: LIMITED PARTNER:
Random Properties Acquisition Corp. IV Aames Capital Corporation
By: /s/ John C. Anderson By: /s/ David A. Sklar
----------------------------------- -------------------------------------
Name:
Title:
STEAMBOAT FINANCIAL PARTNERSHIP I, L.P. LIMITED PARTNERSHIP AGREEMENT
<PAGE> 32
SPECIAL LIMITED PARTNER:
Greenwich Capital Derivatives, Inc.
By: /s/ John C. Anderson
-------------------------------------
Name:
Title:
STEAMBOAT FINANCIAL PARTNERSHIP I, L.P. LIMITED PARTNERSHIP AGREEMENT
<PAGE> 33
SCHEDULE A
to Limited Partnership Agreement of
Steamboat Financial Partnership I, L.P.
CAPITAL CONTRIBUTIONS
Date: June 10, 1999
Asset Value of Historical Advances: $37,720,986.27
PART I
GENERAL PARTNER
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Asset Value of
Asset Value of Additional Asset Value of
Initial Capital Capital Total Capital
Name and Address Contribution Contributions Contributions Date
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Random Properties $ 1,000.00 $ 1,000.00 6/10/99
Acquisition Corp. IV
600 Steamboat Road
Greenwich, CT 06830
Attn: John Anderson
ph. (203) 625-7941
fax (203) 618-2135
- -------------------------------------------------------------------------------------------------
</TABLE>
A-1
<PAGE> 34
PART II
SPECIAL LIMITED PARTNERS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Asset Value of
Asset Value of Additional Asset Value of
Initial Capital Capital Total Capital
Name and Address Contribution Contributions Contributions Date
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Greenwich Capital $ 35,496,684.45 $ 35,496,684.45 6/10/99
Derivatives, Inc.
600 Steamboat Road
Greenwich, CT 06830
Attn: John Anderson
ph. (203) 625-7941
fax (203) 618-2135
- -------------------------------------------------------------------------------------------------
</TABLE>
PART III
LIMITED PARTNERS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Asset Value of
Asset Value of Additional Asset Value of
Initial Capital Capital Total Capital
Name and Address Contribution Contributions Contributions Date
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aames Capital Corporation $2,223,301.82 $2,223,301.82 6/10/99
350 South Grand Avenue
Los Angeles, CA 90071
Attn: David Sklar, CFO
ph. (323) 210-5276
fax (323) 210-5551
- -------------------------------------------------------------------------------------------------
</TABLE>
A-2
<PAGE> 35
SCHEDULE B
to Limited Partnership Agreement of
Steamboat Financial Partnership I, L.P.
Date: June 10, 1999
SCHEDULED POOLING AND SERVICING AGREEMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Series Effective Date Parties Date added
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series 1992-2 12/10/92 Aames Home Loan as Seller & Servicer June 10, 1999
Bankers Trust Company of California,
N.A. as Trustee
- ------------------------------------------------------------------------------------------------
Series 1993-A 12/1/93 Aames Capital Corporation as Seller & June 10, 1999
Servicer Bankers Trust Company of
California, N.A. as Trustee
- ------------------------------------------------------------------------------------------------
Series 1994-A 3/1/94 same as above June 10, 1999
- ------------------------------------------------------------------------------------------------
Series 1994-B 6/1/94 same as above June 10, 1999
- ------------------------------------------------------------------------------------------------
Series 1994-C 9/1/94 same as above June 10, 1999
- ------------------------------------------------------------------------------------------------
Series 1994-D 12/1/94 same as above June 10, 1999
- ------------------------------------------------------------------------------------------------
Series 1995-A 3/1/95 same as above June 10, 1999
- ------------------------------------------------------------------------------------------------
Series 1995-B 5/12/95 same as above June 10, 1999
- ------------------------------------------------------------------------------------------------
Series 1995-C 9/1/95 same as above June 10, 1999
- ------------------------------------------------------------------------------------------------
Series 1995-D 12/1/95 same as above June 10, 1999
- ------------------------------------------------------------------------------------------------
Series 1996-A 3/1/96 same as above June 10, 1999
- ------------------------------------------------------------------------------------------------
Series 1997-A 3/1/97 same as above June 10, 1999
- ------------------------------------------------------------------------------------------------
Series 1997-B 6/1/97 same as above June 10, 1999
Amendment #1 11/1/98 same as above
- ------------------------------------------------------------------------------------------------
Series 1997-C 9/1/97 same as above June 10, 1999
Amendment #1 11/1/98 same as above
- ------------------------------------------------------------------------------------------------
Series 1997-D 12/1/97 same as above June 10, 1999
Amendment #1 12/1/97 same as above
- ------------------------------------------------------------------------------------------------
Series 1998-A 3/1/98 same as above June 10, 1999
Amendment #1 11/1/98 same as above
- ------------------------------------------------------------------------------------------------
</TABLE>
B-1
<PAGE> 36
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Series Effective Date Parties Date added
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Series 1998-B 6/1/98 Aames Capital Acceptance Corp. as June 10, 1999
Transferor, Aames Capital Corporation
as Servicer, Bankers Trust Company of
California, N.A. as Trustee
Amendment #1 11/1/98 same as above
- ------------------------------------------------------------------------------------------------
Series 1998-C 9/1/98 Aames Capital Corporation as Seller & June 10, 1999
Servicer Bankers Trust Company of
California, N.A. as Trustee
- ------------------------------------------------------------------------------------------------
</TABLE>
B-2
<PAGE> 37
Date: June 10, 1999
SCHEDULE C
HISTORICAL ADVANCES
[Stored separately]
C-1
<PAGE> 38
SCHEDULE D
to Limited Partnership Agreement
of Steamboat Financial Partnership I, L.P.
PURCHASE AGREEMENTS
Date: June 10, 1999
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Name of Agreement Effective Date Parties Date Added
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Historical Advance June 10, 1999 Aames Capital June 10, 1999
Purchase Agreement Corporation and
Steamboat Financial
Partnership I, L.P.
- -------------------------------------------------------------------------------------------------
</TABLE>
D-1
<PAGE> 1
EXHIBIT 10.34
EXECUTION COPY
================================================================================
DELINQUENCY ADVANCE PURCHASE AGREEMENT
BETWEEN
AAMES CAPITAL CORPORATION
AS SELLER,
AND
FAIRBANKS CAPITAL CORP.
AS BUYER
DATED AS OF MAY 13, 1999
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I
DEFINITIONS................................................................................................1
SECTION 1.1 Certain Defined Terms. ..............................................................1
SECTION 1.2 Interpretation and Construction......................................................7
ARTICLE II
SALES AND TRANSFERS; SETTLEMENTS...........................................................................7
SECTION 2.1 General Terms. .....................................................................7
SECTION 2.2 Purchase and Sale. .................................................................8
SECTION 2.3 Intended as Sale.....................................................................8
SECTION 2.4 Protection of Ownership of the Buyer.................................................9
SECTION 2.5 Mandatory Repurchase Under Certain Circumstances....................................10
SECTION 2.6 Transfers by Buyer..................................................................11
ARTICLE III
REPRESENTATIONS AND WARRANTIES............................................................................11
SECTION 3.1 Representations and Warranties of Seller............................................11
(a) Organization and Qualification......................................................11
(b) Authority...........................................................................12
(c) Execution and Binding Effect. ......................................................12
(d) Authorizations and Filings..........................................................12
(e) Absence of Conflicts................................................................12
(f) Location of Chief Executive Office, etc.............................................12
(g) Accurate and Complete Disclosure....................................................13
(h) No Proceedings......................................................................13
(i) Litigation..........................................................................13
(j) Margin Regulations..................................................................13
(k) Taxes...............................................................................13
(l) Books and Records...................................................................13
(m) Creditor Approval...................................................................14
(n) Investment Company..................................................................14
(o) No Fraudulent Conveyance............................................................14
(p) Solvency............................................................................14
SECTION 3.2 Representations and Warranties of the Seller With Respect to the Sale of
the Receivables..................................................................................14
(a) Servicing Contracts. ..............................................................14
(b) Assignment..........................................................................14
(c) No Liens............................................................................14
(d) Filings.............................................................................15
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
(e) Collection Policy...................................................................15
(f) Bona Fide Receivables...............................................................15
(g) Accuracy of Schedule................................................................15
(h) Servicer Advances Reimbursable......................................................15
(i) Year 2000...........................................................................15
ARTICLE IV
CONDITIONS PRECEDENT......................................................................................15
SECTION 4.1 Conditions to Closing...............................................................16
ARTICLE V
COVENANTS.................................................................................................17
SECTION 5.1 Covenants of the Seller.............................................................17
(a) Notice of Material Adverse Change...................................................17
(b) Preservation of Corporate Existence.................................................17
(c) Compliance with Laws................................................................18
(d) Enforceability of Obligations; Reimbursements.......................................18
(e) Books and Records...................................................................18
(f) Fulfillment of Obligations..........................................................18
(g) Notice of Relocation................................................................18
(h) Further Information.................................................................18
(i) Treatment of Purchase...............................................................18
(j) Fees, Taxes and Expenses............................................................19
(k) Compliance with Collection Policy...................................................19
(l) Litigation..........................................................................19
(m) Notification........................................................................19
SECTION 5.2 Negative Covenants of the Seller....................................................19
(a) No Rescissions or Modifications.....................................................19
(b) No Liens............................................................................19
(c) No Changes..........................................................................19
(d) Modification, Termination or Resignation Under Servicing Contracts..................20
(e) Consolidations Mergers and Sales of Assets..........................................20
(f) Collection Policy...................................................................20
ARTICLE VI
TERMINATION...............................................................................................20
SECTION 6.1 Term................................................................................20
ARTICLE VII
INDEMNIFICATION...........................................................................................20
SECTION 7.1 Indemnity...........................................................................20
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE VIII
MISCELLANEOUS.............................................................................................21
SECTION 8.1 Survival............................................................................21
SECTION 8.2 Amendments..........................................................................22
SECTION 8.3 Notices.............................................................................22
SECTION 8.4 Governing Law; Submission to Jurisdiction; Waiver of Jury Trial;
Process Agent.......................................................................23
SECTION 8.5 Records.............................................................................24
SECTION 8.6 No Implied Waiver; Cumulative Remedies. ............................................24
SECTION 8.7 No Discharge........................................................................24
SECTION 8.8 Prior Understandings................................................................24
SECTION 8.9 Successors and Assigns..............................................................24
SECTION 8.10 No Petition.........................................................................25
SECTION 8.11 Severability; Counterparts..........................................................25
SECTION 8.12 Expenses............................................................................25
EXHIBIT A................................................................................................A-1
EXHIBIT B................................................................................................B-1
EXHIBIT C................................................................................................C-1
EXHIBIT D................................................................................................D-1
EXHIBIT E................................................................................................E-1
Schedule 1...............................................................................................1-1
Schedule 2...............................................................................................2-1
</TABLE>
iii
<PAGE> 5
DELINQUENCY ADVANCE PURCHASE AGREEMENT
This DELINQUENCY ADVANCE PURCHASE AGREEMENT, dated as of May 13,
1999 (as amended, supplemented or otherwise modified and in effect from time to
time, this "AGREEMENT"), made by and between FAIRBANKS CAPITAL CORP., a Utah
corporation, as buyer (the "BUYER"), and AAMES CAPITAL CORPORATION, a California
corporation, as seller (the "SELLER").
R E C I T A L S:
WHEREAS, in the ordinary course of the Seller's business, the
Seller enters into servicing agreements, which include the Servicing Contracts
(as defined below), pursuant to which the Seller acts as servicer of portfolios
of mortgage loans;
WHEREAS, pursuant to the Servicing Contracts, the Seller has
made Delinquency Advances (as defined below) that have given rise to the
Receivables (as defined below) which, subject to the terms and conditions of
this Agreement, the Seller now wishes to sell to the Buyer, and the Buyer wishes
to purchase from the Seller, on the Closing Date;
WHEREAS, Buyer intends to sell the Receivables to its
subsidiary, Fairbanks Funding Corp, a Delaware Corporation ("Fairbanks
Funding"); and
WHEREAS, Nomura Asset Capital Corporation, a Delaware
corporation, (together with its successors and assigns, "Lender") will finance
Fairbanks Funding's purchase of the Receivables and obtain a security interest
in the Receivables to secure that financing;
NOW, THEREFORE, in consideration of the premises and mutual
covenants contained herein, and for good and sufficient consideration, the
parties hereto, intending to be legally bound, do hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Certain Defined Terms. As used in this Agreement,
the following capitalized terms shall have the following meanings:
"AFFILIATE" shall mean, with respect to a Person, any other
Person which directly or indirectly controls, is controlled by or is under
common control with, such Person. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
1
<PAGE> 6
"BUSINESS DAY" shall mean any day other than (i) a Saturday or
Sunday or (ii) any other day on which banking institutions are authorized or
required by law, executive order or governmental decree to be closed in the
States of Delaware, New York, Utah or California.
"BUYER" shall have the meaning set forth in the recitals hereto.
"CHIEF EXECUTIVE OFFICE" shall mean, with respect to the Seller
or the Buyer, the place where the Seller or the Buyer, as the case may be, is
located, within the meaning of Section 9-103(3)(d), or any analogous provision,
of the UCC, in effect in the jurisdiction whose Law governs the perfection of
the Buyer's ownership of any of the Purchased Assets.
"CLOSING DATE" shall mean May 13, 1999.
"COLLECTION POLICY" shall mean the Seller's policies regarding
the collection and remittance of the Receivables as promptly as is reasonably
practical and in accordance with the provisions of the Servicing Contracts.
"COLLECTIONS" shall mean: (a) with respect to any Receivable as
of any date, (i) the sum of all amounts, whether in the form of wire transfer,
cash, checks, drafts, or other instruments, received by the Seller in payment
of, or applied to, any amount owed with respect to a Receivable on or before
such date, including, without limitation, all amounts received on account of
such Receivable, and (ii) cash Proceeds of a Related Security with respect to
such Receivable; and (b) at any time during the term of this Agreement, all
Termination Amounts paid to the Seller in an amount up to, but not exceeding,
the aggregate Outstanding Balance of the Receivables at such time.
"CUT-OFF DATE" shall mean April 30, 1999.
"DELINQUENCY ADVANCES" shall mean, with respect to the Servicing
Contracts, all Monthly Advances (as defined in Servicing Contracts) made by the
Seller or a predecessor servicer, as the servicer or the subservicer under the
Servicing Contracts.
"DOLLAR" and "$" shall mean the lawful currency of the United
States of America.
"ELIGIBLE RECEIVABLE" shall mean, at the time, any Receivable:
(a) which complies in all material respects with all
applicable Laws and other legal requirements, whether federal, state or local;
(b) which constitutes an "account" or a "general intangible"
as defined in the UCC as in effect in the State of New York and in the
jurisdiction whose Law governs the sale and the perfection of the Buyer's
ownership interests therein, and is not evidenced by an "instrument," as defined
in the UCC as so in effect;
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(c) which was originated in connection with making of a
Delinquency Advance by the Seller pursuant to a Servicing Contract that, on the
Closing Date, is in full force and effect;
(d) which, at the time of the Purchase, is genuine and
constitutes a legal, valid, binding and irrevocable payment obligation under the
Servicing Contract under which it has arisen, enforceable in accordance with the
terms of such Servicing Contract, subject to no offsets, counterclaims or
defenses;
(e) which provides for payment in Dollars;
(f) which was not originated in or subject to the Laws of a
jurisdiction whose Laws would make such Receivable, the related Servicing
Contract or the sale of the Purchased Assets relating thereto to the Buyer
hereunder unlawful, invalid or unenforceable and is not subject to any legal
limitation on transfer;
(g) which, immediately prior to the Purchase, was owned
solely by the Seller free and clear of all Liens;
(h) for which, at the time of the Purchase, there exists no
dispute regarding the transaction that gave rise to such Receivable that results
in making the Receivable invalid or otherwise not recoverable; and
(i) which is not an obligation of the United States of
America, any State, or any agency or instrumentality or political subdivision
thereof.
"EVENT OF BANKRUPTCY" shall mean for any Person:
(a) that such Person shall fail generally to, or admit in
writing its inability to, pay its debts as they become due; or
(b) a proceeding shall have been instituted in a court
having jurisdiction in the premises seeking a decree or order for relief in
respect of such Person in an involuntary case under any applicable bankruptcy,
insolvency, liquidation, reorganization or other similar law now or hereafter in
effect, or for the appointment of a receiver, liquidator, assignee, trustee,
custodian, sequestrator, conservator or other similar official of such Person or
for any substantial part of its property, or for the winding-up or liquidation
of its affairs; or
(c) the commencement by such Person of a voluntary case
under any applicable bankruptcy, insolvency or other similar Law now or
hereafter in effect, or such Person's consent to the entry of an order for
relief in an involuntary case under any such Law, or consent to the appointment
of or taking possession by a receiver, liquidator, assignee, trustee, custodian,
sequestrator, conservator or other similar official of such Person or for any
substantial part of its property, or any general assignment for the benefit of
creditors; or
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(d) if such Person is a corporation, such Person, or any
subsidiary of such Person, shall take any corporate action in furtherance of, or
the actions of which would result in any of the actions set forth in the
preceding clause (a), (b) or (c).
"FAIRBANKS FUNDING" shall have the meaning set forth in the
recitals hereto.
"FISCAL YEAR" shall mean each year which is the fiscal year of
the Seller for accounting purposes.
"GAAP" shall mean generally accepted accounting principles in
the United States of America, applied on a consistent basis and applied to both
classification of items and amounts, and shall include, without limitation, the
official interpretations thereof by the Financial Accounting Standards Board,
its predecessors and successors.
"INDEMNIFIED PARTIES" shall have the meaning specified in
Section 7.1 hereof.
"INTERNAL REVENUE CODE" shall mean the Internal Revenue Code of
1986, as amended from time to time, and any successor thereto, and the
regulations promulgated and rulings issued thereunder.
"LAW" shall mean any law (including common law), constitution,
statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or
award of any Official Body.
"LIEN", in respect of the property of any Person, shall mean any
ownership interest of any other Person, any mortgage, deed of trust,
hypothecation, pledge, lien, security interest, financing statement, or charge
or other encumbrance or security arrangement of any nature whatsoever,
including, without limitation, any conditional sale or title retention
arrangement, and any assignment, deposit arrangement, consignment or lease
intended as, or having the effect of, security.
"LENDER" shall have the meaning set forth in the recitals
hereto.
"LENDER LOAN AGREEMENT" shall mean the Loan Agreement dated as
of the date hereof between Lender and Fairbanks Funding pursuant to which Lender
has agreed to lend to Fairbanks Funding, pursuant to a revolving credit
facility, a maximum principal amount of $20,000,000 as the same may be amended,
supplemented, or otherwise modified from time to time.
"LENDER LOAN AND SECURITY DOCUMENTS" shall mean, collectively,
the Lender Loan Agreement, the "Note" and the "Security Agreement" (as such
terms are defined in the Lender Loan Agreement) together with any and all other
documents or agreements delivered by Buyer, Seller and Fairbanks Funding in
connection with the transactions contemplated by this Agreement and the Lender
Loan Agreement.
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"OFFICIAL BODY" shall mean any government or political
subdivision or any agency, authority, bureau, central bank, commission,
department or instrumentality of either, or any court, tribunal, grand jury or
arbitrator, in each case whether foreign or domestic.
"OUTSTANDING BALANCE" of any Receivable shall mean, at any time,
the then outstanding amount thereof.
"PERSON" shall mean an individual, corporation, limited
liability company, partnership (general or limited), trust, business trust,
unincorporated association, joint venture, joint-stock company, Official Body or
any other entity of whatever nature.
"PROCEEDS" shall mean "proceeds" as defined in Section 9-306(l)
of the UCC as in effect in the State of New York and the jurisdiction whose Law
governs the perfection of the Buyer's interests therein.
"PURCHASE" shall mean the purchase by the Buyer from the Seller
of an undivided ownership interest in the Purchased Assets pursuant to Sections
2.1 and 2.2 hereof.
"PURCHASE AND CONTRIBUTION AGREEMENT" shall mean the Purchase
and Contribution Agreement dated as of the date hereof between the Buyer and
Fairbanks Funding.
"PURCHASE PRICE" shall have the meaning specified in Section
2.2(c) hereof.
"PURCHASED ASSETS" shall mean, at any time, an undivided
ownership interest in (i) all of the Receivables outstanding on the Cut-off
Date, (ii) all Collections, (iii) all Related Security with respect to each such
Receivable, and (iv) all cash and non-cash Proceeds of the foregoing.
"RECEIVABLES" shall mean, collectively, each and every right of
the Seller to be reimbursed for the Delinquency Advances (without giving effect
to the Purchase hereunder) under a Servicing Contract as of the Cut-off Date,
whether or not constituting an "account" or a "general intangible" under the UCC
but not evidenced by "chattel paper" or an "instrument," as defined in the UCC.
Each such right with respect to a single Mortgage Loan shall be treated as a
single Receivable for purposes of this Agreement.
"RECEIVABLES REIMBURSEMENT ACCOUNT" shall mean the demand
deposit account identified on Exhibit D, which account has been established in
the name of, and under the exclusive control and dominion of, the Lender or its
designee and is maintained at Bankers Trust Company for the purpose of
depositing all Collections made with respect to the Receivables pursuant to
Section 2.7 of the Purchase and Contribution Agreement.
"RECEIVABLES SCHEDULE" shall mean the list of Receivables
described in Section 4.1(k), which identifies each Receivable by the related
Servicing Contract account number, account name, and Outstanding Balance.
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"RECORDS" shall mean correspondence, memoranda, computer
programs, tapes, discs, papers, books or other documents or transcribed
information of any type whether expressed in ordinary or machine readable
language.
"RELATED Security" shall mean with respect to any Receivable,
(a) all security interests or Liens and property subject thereto from time to
time, if any, purporting to secure payment of such Receivable, whether pursuant
to the Servicing Contract related to such Receivable or otherwise, together with
all financing statements covering any collateral securing such Receivable; (b)
all guarantees, indemnities, letters of credit, insurance or other agreements or
arrangements of any kind from time to time supporting or securing payment of
such Receivable whether pursuant to the Servicing Contract related to such
Receivable or otherwise; and (c) any and all Proceeds of the foregoing.
"RELEVANT UCC" shall mean the UCC as in effect in the State of
New York and in the jurisdiction whose Law governs the perfection of the Buyer's
ownership interests in the Purchased Assets.
"REPURCHASE EVENT" shall mean, with respect to any Receivable
sold by the Seller to the Buyer pursuant to this Agreement, any one of the
following events or circumstances:
(i) the failure of such Receivable, at the time of the
Purchase, to be an Eligible Receivable;
(ii) any representation or warranty made by the Seller in
Section 3.2 of this Agreement with respect to such
Receivable proves to have been false or misleading; or
(iii) the failure of the Buyer or Fairbanks Funding to have a
perfected ownership interest in such Receivable, free
and clear of any Lien imposed by or in respect of
Seller.
"RESPONSIBLE OFFICER" shall mean, with respect to the Seller or
the Buyer, the chief executive officer, chief financial officer, or treasurer of
such Person and any other Person designated as a Responsible Officer by any such
officers, identified on the List of Responsible Officers attached as Exhibit E
hereto (as such list may be amended or supplemented from time to time) and
agreed to by the Seller and Buyer.
"SELLER" shall have the meaning set forth in the recitals
hereto.
"SERVICING CONTRACTS" shall mean, collectively, those servicing
agreements described on Schedule 2 attached hereto to which the Seller is a
party, pursuant to which the Seller acts as the servicer of portfolios of
mortgage loans, or by which Seller's servicing obligations are governed. For all
purposes of this Agreement, the term "Servicing Contracts" shall include any and
all
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instruments, agreements, invoices or other writings, which gives rise to or
otherwise evidence any of the Receivables.
"SUBSERVICING CONTRACTS" shall mean, collectively, each of the
Sub-Servicing Agreements between the Seller and the Buyer with respect to each
of the Servicing Contracts.
"TERMINATION AMOUNTS" shall mean, with respect to any Servicing
Contract, any termination fee or similar payment that is paid to the Seller, and
any other amount that is paid or reimbursed to the Seller, in connection with
the termination of the Seller's obligations as servicer or subservicer under
such Servicing Contract.
"UCC" shall mean, with respect to any jurisdiction, the Uniform
Commercial Code, or any successor statute, or any comparable law, as the same
may from time to time be amended, supplemented or otherwise modified and in
effect in such jurisdiction.
"WEEKLY REPORT DATE" shall mean each Monday; provided that, if a
Monday is not a Business Day, the Weekly Report Date shall be the next
succeeding Business Day.
SECTION 1.2 Interpretation and Construction. Unless the context
of this Agreement otherwise clearly requires, references to the plural include
the singular, the singular the plural and the part the whole. References in this
Agreement to "determination", "determine" and "determined" by the Buyer shall be
conclusive absent manifest error and include good faith estimates by the Buyer
(in the case of quantitative determinations), and the good faith belief of the
Buyer (in the case of qualitative determinations). The words "hereof", "herein",
"hereunder" and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. Unless otherwise
stated in this Agreement, in the computation of a period of time from a
specified date to a later specified date, the word "from" means "from and
including" and the words "to" and "until" each means "to but excluding." The
section and other headings contained in this Agreement are for reference
purposes only and shall not control or affect the construction of this Agreement
or the interpretation hereof in any respect. Section, subsection and exhibit
references are to this Agreement unless otherwise specified. As used in this
Agreement, the masculine, feminine or neuter gender shall each be deemed to
include the others whenever the context so indicates. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP. Terms
not otherwise defined herein which are defined in the UCC as in effect in the
State of New York on the date hereof shall have the respective meanings ascribed
to such terms therein unless the context otherwise clearly requires.
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ARTICLE II
SALES AND TRANSFERS; SETTLEMENTS
SECTION 2.1 General Terms. On the terms and conditions
hereinafter set forth, on the Closing Date, the Seller shall sell to the Buyer,
and the Buyer shall purchase from the Seller, without recourse, except as
specifically set forth herein, all right, title and interest of the Seller in,
to and under the Receivables, along with Related Security with respect to such
Receivables and Collections with respect thereto, and the Buyer shall buy from
the Seller such Receivables, Related Security and Collections.
SECTION 2.2 Purchase and Sale. (a) The Seller hereby irrevocably
sells, sets over, assigns, transfers and conveys to the Buyer and its successors
and assigns, without recourse, except as specifically set forth herein, and the
Buyer hereby accepts, purchases and receives from the Seller, all of the
Seller's right, title, and interest in and to the Receivables, together with all
monies due or to become due in respect thereof, including the Related Security,
all Collections with respect to the Receivables, and all other Purchased Assets.
(b) The Purchase shall be made on the Closing Date; provided
that all conditions precedent to the Purchase specified in Section 4.1 shall
have been satisfied.
(c) The purchase price (the "PURCHASE PRICE") for the
Receivables (together with the related Purchased Assets) payable on the Closing
Date shall be $15,272,685.65. The Buyer shall pay to the Seller on the Closing
Date the Purchase Price less the amount of $2,000,000 (the "ESCROW AMOUNT"),
which Escrow Amount shall be deposited in a bank account (the "Escrow Account")
established for the benefit of Buyer in the name of, and under the exclusive
control and dominion of Lender. Prior to or on September 13, 1999, Buyer or its
assignee of the Receivables shall conduct a due diligence review of the
Receivables to determine whether such Receivables were, as of the Closing Date,
fully recoverable. Buyer shall cause to be withdrawn from the Escrow Account an
amount equal to the amount of Receivables which Buyer has determined in its
reasonable discretion did not as of the Closing Date represent an amount fully
recoverable in a liquidation of the related Mortgage Loan. Buyer shall cause
such amount to be applied as a prepayment of principal pursuant to the Lender
Loan Agreement, and shall remit the remaining balance, if any, of the Escrow
Account to Seller, less any amount due Buyer under this Agreement. Any amount
withdrawn from the Escrow Account because Buyer has determined that all or a
portion of a Receivable is not recoverable and applied as a prepayment of
principal pursuant to the Lender Loan Agreement shall be deemed a repurchase of
such Receivable pursuant to Section 2.5(b) hereof and shall reduce the
Outstanding Balance of such Receivable by the amount so withdrawn and applied
and Buyer shall reconvey such Receivable pursuant to Section 2.5(d).
SECTION 2.3 Intended as Sale. (a) It is the intention of the
parties hereto that the Purchase shall constitute a sale and assignment, which
sale and assignment shall be absolute, irrevocable and without recourse except
as specifically provided herein and shall provide the Buyer
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with the full benefits of ownership of the Receivables and the other related
Purchased Assets. In the event that the Purchase is deemed by a court contrary
to the express intent of the parties to constitute a pledge rather than a sale
and assignment of the Purchased Assets, the Seller does hereby grant to the
Buyer a first-priority, perfected security interest in and to, and lien on, the
Receivables and the other related Purchased Assets, together with all monies
from time to time on deposit in the Receivables Reimbursement Account relating
to the Purchased Assets. The possession by the Buyer or its transferee or agent
of notes and such other goods, money, documents, chattel paper or certificated
securities related thereto shall be deemed to be "possession by the secured
party" for purposes of perfecting such security interest pursuant to the
Relevant UCC (including, without limitation, Section 9-305 thereof).
Notifications to persons holding such property, and acknowledgments, receipts or
confirmations from persons holding such property, shall be deemed to be
notifications to, or acknowledgments, receipts or confirmations from, bailees or
agents (as applicable) of, the Buyer or its transferee for the purpose of
perfecting such security interest under the Relevant UCC and other applicable
Laws. The sale and conveyance hereunder of the Purchased Assets does not
constitute an assumption by the Buyer or its successors and assigns of any
obligations of the Seller to any Person in connection with Receivables or under
any Servicing Contract or any other agreement or instrument relating to the
Receivables.
(b) In connection with the Purchase, the Seller agrees to
record and file on or prior to the Closing Date, at its own expense, financing
statements with respect to the Purchased Assets, suitable to reflect the
transfer of accounts and general intangibles (each as defined in Article 9 of
the Relevant UCC) and meeting the requirements of applicable state Law in such
manner and in such jurisdictions as are necessary to perfect the sale, transfer
and assignment of the Purchased Assets from the Seller to the Buyer, and to
deliver file-stamped copies of such financing statements or other evidence of
such filing satisfactory to the Buyer on the Closing Date or the day thereafter.
In addition to, and without limiting the foregoing, the Seller shall, upon the
request of the Buyer, in order to accurately reflect this transaction, execute
and file such financing or continuation statements or amendments thereto or
assignments thereof (as permitted pursuant to Section 8.9 hereof) as may be
reasonably requested by the Buyer.
(c) The Seller shall maintain its books and records,
including but not limited to any computer files and master data processing
records, so that such records that refer to Receivables sold hereunder shall
indicate clearly that the Seller's right, title and interest in such Receivables
has been sold to the Buyer and that a security interest in such Receivables has
been granted by Fairbanks Funding to the Lender. Indication of the Buyer's
interest in Receivables shall be deleted from or modified on the Seller's
records when, and only when, the Receivables shall have been paid in full or the
Buyer's interest in such Receivables shall have been repurchased or repaid by
the Seller hereunder.
SECTION 2.4 Protection of Ownership of the Buyer.
(a) The Seller agrees that from time to time, at its
expense, it shall promptly execute and deliver all additional instruments and
documents and take all additional action that the Buyer
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may reasonably request in order to perfect the interests of the Buyer in, to and
under, or to protect, the Purchased Assets or to enable the Buyer to exercise or
enforce any of its rights or remedies hereunder. To the fullest extent permitted
by applicable Law, the Buyer and its successor and assigns shall be permitted to
sign and file continuation statements and amendments thereto and assignments
thereof without the Seller's signature in such cases where the Seller is
obligated hereunder or under the Relevant UCC to sign such statements,
amendments or assignments if, after written notice to the Seller, the Seller
shall have failed to sign such continuation statements, amendments or
assignments within five (5) Business Days after receipt of such notice from the
Buyer. The Seller hereby irrevocably constitutes and appoints the Buyer and any
officer, agent, successor or assignee thereof, with full power of substitution,
as its true and lawful attorney-in-fact with full irrevocable power and
authority in the place and stead of the Seller and in the name of the Seller or
in its own name, from time to time in the Buyer's discretion to sign such
continuation statements, amendments or assignments. Carbon, photographic or
other reproduction of this Agreement or any financing statement shall be
sufficient as a financing statement.
(b) At any reasonable time and from time to time at the
Buyer's reasonable request and upon seven days' prior notice to the Seller, the
Seller shall permit such Person as the Buyer may designate, which for so long as
any amounts may be owing by Fairbanks Funding to Lender under the Lender Loan
and Security Documents and shall include, without limitation, Lender or persons
designated by Lender, at such Person's expense and together with the Buyer, to
conduct audits or visit and inspect the principal place of business of the
Seller to examine the Records, internal controls and procedures maintained by
the Seller with respect to the Receivables and take copies and extracts
therefrom, and to discuss the Seller's affairs with its officers, employees and,
upon notice to the Seller, independent accountants. The Seller hereby authorizes
such officers, employees and independent accountants to discuss with the Buyer
or its designee the affairs of the Seller. Any audit provided for herein shall
be conducted in accordance with Seller's rules respecting safety and security on
its premises and without materially disrupting operations.
(c) If the Seller shall receive any Collections with respect
to Receivables which have been sold to the Buyer pursuant to this Agreement, the
Seller shall hold such Collections in trust for the Buyer and shall pay such
amounts to the Buyer as soon as practicable, but in no event more than two (2)
Business Days after receipt thereof.
(d) The Buyer shall have the right to do all such acts and
things as it may deem reasonably necessary to protect its interests hereunder,
including, without limitation, confirmation and verification of the existence,
amount and status of the Receivables.
SECTION 2.5 Mandatory Repurchase Under Certain Circumstances.
(a) The Seller shall promptly repurchase from the Buyer all of the Receivables
for a repurchase price equal to the aggregate Outstanding Balance of all of the
Receivables, if, at any time, the Buyer or Fairbanks Funding shall cease to have
a perfected ownership interest in all of the Receivables purchased hereunder,
free and clear of any Lien imposed by or in respect of Seller, or if any of the
representations or warranties made by the Seller in this Agreement (other than
the representations
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and warranties set forth in Section 3.2 of this Agreement, the breach of which
shall constitute a Repurchase Event) prove to have been false or misleading in
any material respect as of the date on which they were made.
(b) If a Repurchase Event occurs with respect to any
Receivable, the Seller shall promptly repurchase such Receivable from the Buyer
for a purchase price equal to the then Outstanding Balance of such Receivable.
(c) Each of the Seller and the Buyer shall promptly notify
the other if it becomes aware of or receives notice of any fact or circumstance
that could or would cause the Seller to be obligated to repurchase any
Receivable pursuant to this Section 2.5 or any Receivable is not otherwise
recoverable. The repurchase price of any Receivables purchased hereunder shall
be deposited by Seller into an account designated by Buyer within two (2)
Business Days of Buyer notifying Seller that a Repurchase Event has occurred, or
of Seller becoming aware that such Repurchase Event has occurred.
(d) Upon receipt by the Buyer of the Outstanding Balance of
any Receivable required to be repurchased by the Seller pursuant to this Section
2.5 or withdrawal from the Escrow Account pursuant to Section 2.2(c) hereof, the
Buyer shall automatically and without further action provided that Buyer is
required to repurchase such Receivables from Fairbanks Funding pursuant to the
Purchase and Contribution Agreement, be deemed to sell, transfer, assign,
set-over and otherwise convey to the Seller, without recourse, representation or
warranty, all the right, title and interest of the Buyer in and to such
Receivable, all monies due or to become due with respect thereto, including the
Related Security and all Collections related to such Receivable, and all
proceeds thereof; and such repurchased Receivable shall be treated by the Buyer
as collected in full as of the date on which it was transferred. The Buyer shall
execute such documents and instruments of transfer or assignment and take such
other actions as shall reasonably be requested by the Seller to effect the
conveyance of such Receivable, all monies due or to become due with respect
thereto, including the Related Security and all Collections related to such
Receivable, pursuant to this Section 2.5. Promptly following any such
repurchase, the Seller shall update the Receivables Schedule to remove therefrom
such repurchased Receivable, and deliver the same to the Buyer as so updated.
SECTION 2.6 Transfers by Buyer. The Seller acknowledges and
agrees that the Buyer will, pursuant to the Lender Loan and Security Documents
and the Purchase and Contribution Agreement (copies of which have been reviewed
by the Seller), sell to Fairbanks Funding the Receivables and the other related
Purchased Assets, and the Seller hereby acknowledges and consents to such sale
and the transactions contemplated by such agreement and documents.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Representations and Warranties of Seller. The Seller
hereby represents and warrants to the Buyer on and as of the Closing Date that:
(a) Organization and Qualification. The Seller is a
corporation duly organized, validly existing and in good standing under the Laws
of its jurisdiction of incorporation. The Seller is duly qualified to do
business as a foreign corporation in good standing in each jurisdiction in which
the ownership of its properties or the nature of its activities (including
transactions giving rise to Receivables), or both, requires it to be so
qualified or, if not so qualified, the failure to so qualify would not have a
material adverse effect on its financial condition or results of operations.
(b) Authority. The Seller has the corporate power and
authority to execute and deliver this Agreement, to make the sales provided for
herein and to perform its obligations under this Agreement.
(c) Execution and Binding Effect. This Agreement has been
duly executed and delivered by the Seller and, assuming the due and valid
execution and delivery hereof by the Buyer, constitutes the legal, valid and
binding obligation of the Seller, enforceable against the Seller in accordance
with its terms, except as the enforceability hereof may be limited by
bankruptcy, insolvency, reorganization or other similar Laws of general
application relating to or affecting the enforcement of creditors' rights
generally or by general principles of equity and will vest absolutely and
unconditionally in the Buyer a valid undivided ownership interest in the
Purchased Assets purported to be assigned hereby, subject to no Liens
whatsoever. Upon the filing of the necessary financing statements under the UCC
or under applicable Law as in effect in the jurisdiction whose Law governs the
perfection of the Buyer's ownership interests in the Purchased Assets, the
Buyer's ownership interests in the Purchased Assets will be perfected under
Article Nine of such UCC or under applicable Law, prior to and enforceable
against all creditors of and purchasers from the Seller and all other Persons
whatsoever (other than the Buyer and its successors and assigns).
(d) Authorizations and Filings. No authorization, consent,
approval, license, exemption or other action by, and no registration,
qualification, designation, declaration or filing with, any Official Body is or
will be necessary or, in the opinion of the Seller, advisable in connection with
the execution and delivery by the Seller of this Agreement, the consummation by
the Seller of the transactions herein contemplated or the performance by the
Seller of or the compliance by the Seller with the terms and conditions hereof,
to ensure the legality, validity or enforceability hereof, or to ensure that the
Buyer will have a valid undivided ownership interest in and to the Receivables
and the other related Purchased Assets which is perfected and prior to all other
Liens (including competing ownership interests), other than the filing of
financing statements under the UCC in the jurisdiction of the Seller's Chief
Executive Office.
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(e) Absence of Conflicts. Neither the execution and delivery
by the Seller of this Agreement, nor the consummation by the Seller of the
transactions herein contemplated, nor the performance by the Seller of or the
compliance by the Seller with the terms and conditions hereof, will (i) violate
any Law or (ii) conflict with or result in a breach of or a (with due notice or
lapse of time or both) default under (A) the Certificate of Incorporation or
By-laws of the Seller or (B) any agreement or instrument, including, without
limitation, any and all indentures, debentures, loans, credit agreements or
other agreements to which the Seller is a party or by which it or any of its
properties (now owned or hereafter acquired) may be subject or bound (including,
without limitation, the Servicing Contracts). The Seller has not entered into
any agreement with any Person prohibiting, restricting or conditioning the
assignment of any portion of the Receivables.
(f) Location of Chief Executive Office, etc. As of the date
hereof: (i) the Seller's Chief Executive Office is located at 350 South Grand
Avenue, Los Angeles, California, 90071, (ii) the Seller has only the
Subsidiaries and divisions listed on Exhibit C hereto; (iii) the offices where
the Seller keeps all of its material Records are listed on Exhibit B hereto; and
(iv) the Seller has, within the last 5 years, operated only under the trade
names identified in Exhibit C hereto, and, within the last 5 years, has not
changed its name, merged or consolidated with any other corporation with assets
over $1,000,000 or been the subject of any proceeding under Title 11, United
States Code (Bankruptcy), except as disclosed in Exhibit C hereto.
(g) Accurate and Complete Disclosure. No information
furnished in writing by the Seller to the Buyer pursuant to or in connection
with this Agreement or any transaction contemplated hereby is false or
misleading in any material respect as of the date of which such information was
furnished (including by omission of material information necessary to make such
information not misleading).
(h) No Proceedings. There are no proceedings or
investigations pending, or to the knowledge of the Seller threatened, before any
Official Body (A) asserting the invalidity of this Agreement, (B) seeking to
prevent the consummation of any of the transactions contemplated by this
Agreement, or (C) seeking any determination or ruling that might materially and
adversely affect (i) the performance by the Seller of its obligations under this
Agreement or (ii) the validity or enforceability of this Agreement, the
Servicing Contracts, or any of the Receivables.
(i) Litigation. No injunction, decree or other decision has
been issued or made by any Official Body that prevents, and to the knowledge of
the Seller, no threat by any Person has been made to attempt to obtain any such
decision that would have a material adverse impact on, the conduct by the Seller
of a significant portion of the Seller's business operations or any portion of
its business operations affecting the Receivables (including the performance of
its obligations and the exercise of its rights under the Servicing Contracts),
and no litigation, investigation or proceeding pending or threatened against the
Seller which could have a material adverse effect on the financial condition or
results of operations of the Seller, impair the ability of the Seller to perform
its obligations under this Agreement, or materially adversely affect the
collectibility of the Receivables as a whole exists, except as set forth on
Exhibit A hereto.
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(j) Margin Regulations. The use of all funds acquired by the
Seller under this Agreement will not conflict with or contravene any of
Regulations T, U or X promulgated by the Board of Governors of the Federal
Reserve System as the same may from time to time be amended, supplemented or
otherwise modified.
(k) Taxes. The Seller has timely filed all United States
federal income tax returns and all other material tax returns or extensions
which are required to be filed by it and has paid all taxes due pursuant to such
returns and paid or contested any assessment received by the Seller related to
such returns. No Lien has been filed against the Seller on all or any material
portion of its property or assets in respect of any unpaid federal, state or
local taxes.
(l) Books and Records. The Seller has indicated on its books
and records (including any computer files) that the Receivables and the other
related Purchased Assets are the property of the Buyer. The Seller maintains at
one or more of the offices listed on Exhibit B hereto the complete records for
the Receivables and the other related Purchased Assets.
(m) Creditor Approval. The Seller has obtained from its
creditors and all other Persons that may have an interest in the Receivables (i)
all approvals that are necessary to sell and assign the Receivables in the
manner contemplated by this Agreement and (ii) releases of any security
interests in the Receivables.
(n) Investment Company. The Seller is not an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
(o) No Fraudulent Conveyance. The transactions contemplated
by this Agreement are being consummated by the Seller in furtherance of the
Seller's ordinary business, with no contemplation of insolvency and with no
intent to hinder, delay or defraud any of its present or future creditors. By
its receipt of the Purchase Price hereunder, the Seller shall have received
reasonably equivalent value for the Purchased Assets sold or otherwise conveyed
to the Buyer under this Agreement.
(p) Solvency. The Seller is solvent and will not be rendered
insolvent by the transactions contemplated herein.
SECTION 3.2 Representations and Warranties of the Seller With
Respect to the Sale of the Receivables. By selling Receivables to the Buyer on
the Closing Date, the Seller represents and warrants to the Buyer as of the
Closing Date (in addition to its other representations and warranties contained
herein or made pursuant hereto) that:
(a) Servicing Contracts. All of the Servicing Contracts are
in full force and effect and the Seller has not been terminated. Other than
Certificate Insurer's right to terminate the Servicing Contracts based on
Seller's failure to achieve certain delinquency targets, no event has
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occurred that would give any party to any Servicing Contract the right
(including with notice or lapse of time or both) to terminate the Seller for
cause as the servicer or subservicer under any Servicing Contract, and the
Seller does not have actual knowledge of any pending or threatened action to
terminate the Seller as servicer or subservicer under any of the Servicing
Contracts.
(b) Assignment. This Agreement vests in the Buyer all the
right, title and interest of the Seller in and to the Receivables and the other
related Purchased Assets, and constitutes a valid sale of the Receivables and
the other related Purchased Assets, enforceable against, and creating an
interest prior in right to, all creditors of and purchasers from the Seller.
(c) No Liens. Each Receivable is owned by the Seller free
and clear of any Lien (except any Lien of the Trust under the relevant Servicing
Agreement), except as provided herein, and is not subject to any dispute or
other adverse claim, except as provided herein. When the Buyer purchases the
Receivables, it shall acquire an ownership interest in the Receivables, the
Related Security, and the Collections with respect thereto, free and clear of
any Lien, except as provided herein. The Seller has not and will not prior to
the time of the sale of any such interest to the Seller have sold, pledged,
assigned, transferred or subjected and will not thereafter sell, pledge, assign,
transfer or subject, to a Lien any of the Receivables, the Related Security or
the Collections other than in accordance with the terms of this Agreement.
(d) Filings. On or prior to the Closing Date, all financing
statements and other documents required to be recorded or filed in order to
perfect and protect the Receivables and the other related Purchased Assets
against all creditors of, and purchasers from, the Seller and all other Persons
whatsoever have been duly filed in each filing office necessary for such purpose
and all filing fees and taxes, if any, payable in connection with such filings
have been paid in full.
(e) Collection Policy. The Seller has complied in all
material respects with the Collection Policy in regard to each Receivable and
related Servicing Contract. The Seller has not extended or modified the terms of
any Receivable or the related Servicing Contract except in accordance with the
Collection Policy.
(f) Bona Fide Receivables. Each Receivable is an obligation
arising out of the making of a Delinquency Advance by the Seller or a
predecessor servicer, in its capacity as a servicer of a portfolio of mortgage
loans, pursuant to a Servicing Contract. Each Receivable relates to a
Delinquency Advance that has been made in accordance with the terms of the
related Servicing Contract. The Seller has no knowledge of any fact that has led
it to expect that such Receivable will not be fully recoverable when the related
Mortgage Loan is brought current or is liquidated. As of the Cut-off Date, the
Seller has not received any Collections or other payments in respect of the
Receivables which have not been applied to the Receivables, and each Receivable
is an Eligible Receivable.
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(g) Accuracy of Schedule. The information set forth in
Schedules 1 and 2 hereto with respect to the Receivables and the Servicing
Contracts is true and correct in all material respects as of the date hereof.
(h) Servicer Advances Reimbursable. The terms of the
Servicing Contracts provide that each Delinquency Advance is reimbursable to the
Seller from collections on the related mortgage loan, collections on other
mortgage loans serviced or subserviced by the Seller pursuant to the related
Servicing Contract, or from the owner of the related mortgage loan.
(i) Year 2000. The Seller has reviewed the areas within its
business and operations which could be adversely affected by, and has developed
or is developing a program to address on a timely basis, the risk that certain
computer applications used by the Seller may be unable to recognize and perform
properly date-sensitive functions involving dates prior to and after December
31, 1999 (the "Year 2000 Problem"). The Year 2000 Problem will not have a
material adverse effect on the Seller's ability to comply with its Collection
Policy at any time during the term of this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT
SECTION 4.1 Conditions to Closing. On the Closing Date, as a
condition precedent to the Buyer's obligations hereunder, all of the
representations and warranties of the Seller made herein shall be true and
correct, the Seller shall not be in breach of any of the agreements made herein,
and the Seller shall deliver to the Buyer the following documents and
instruments, all of which shall be in form and substance acceptable to the
Buyer:
(a) A copy of the resolutions of the Board of Directors of
the Seller, certified as of the date hereof by its secretary authorizing the
execution, delivery and performance of this Agreement by the Seller and
approving the transactions contemplated hereby;
(b) The Certificate of Incorporation of the Seller,
certified as of a date reasonably near the Closing Date by the Secretary of
State or other similar official of the Seller's jurisdiction of incorporation;
(c) A good standing certificate for the Seller issued by the
Secretary of State or other similar official of the Seller's jurisdiction of
incorporation, certificates of qualification as a foreign corporation issued by
the Secretaries of State or other similar officials of each jurisdiction where
such qualification is material to the transactions contemplated by this
Agreement and certificates of the appropriate state official in each
jurisdiction specified by the Buyer as to the absence of any tax Liens against
the Seller under the Laws of such jurisdiction, each such certificate to be
dated a date reasonably near the Closing Date;
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(d) A certificate of the secretary or an assistant secretary
of the Seller dated as of the Closing Date, certifying (i) the names and
signatures of the officers authorized on the Seller's behalf to execute, and the
officers and other employees authorized to perform, this Agreement by the Seller
and (ii) a copy of the Seller's By-laws;
(e) Executed copies of proper financing statements (Form
UCC-l) naming the Seller as seller/debtor in respect of the Receivables, the
Related Security and Collections and the Buyer, as the purchaser/secured party,
together with evidence of filing thereof in the appropriate jurisdictions; or
other similar instruments or documents as may be necessary or, in the opinion of
the Buyer, desirable under the UCC of all appropriate jurisdictions to evidence
or perfect the Buyer's ownership interests in all of the Receivables, the
Related Security and Collections;
(f) Executed copies of proper financing statements (Form
UCC-3), if any, necessary under the Laws of all appropriate jurisdictions to
release all security interests and other Liens or rights of any person in
Receivables and the other related Purchased Assets previously granted by the
Seller;
(g) Certified copies of requests for information or copies
(Form UCC-11) (or a similar search report certified by parties acceptable to the
Buyer) dated a date reasonably near the Closing Date listing all effective
financing statements that name the Seller (under its present name and any
previous name or any trade names or "d.b.a." name) as debtor and which are filed
in jurisdictions in which the filings were made pursuant to paragraph (e) above,
together with copies of such financing statements (none of which shall cover any
of the Receivables, the Servicing Contracts or any related rights);
(h) A favorable opinion or opinions of the Seller, dated the
date hereof and addressed to the Buyer, and the Lender, relating to corporate
matters, legality, validity and enforceability of this Agreement, and a
favorable opinion or opinions of Andrews and Kurth, counsel to the Seller, dated
the date hereof and addressed to Buyer relating to the characterization of the
transfer of the Receivables in a bankruptcy case as an absolute transfer, and
relating to the perfection of the Buyer's ownership interests in the Receivables
and the other related Purchased Assets and such other matters as the Buyer may
reasonably request;
(i) An officer's certificate dated the date hereof in a form
reasonably acceptable to the Buyer executed by a Responsible Officer of the
Seller to the effect that (i) all representations and warranties are true and
correct as of the Closing Date and (ii) all terms, covenants agreements and
conditions required to be complied with or performed on or prior to the Closing
Date have been complied with or performed on or prior to the Closing Date;
(j) Executed copies of all of the Servicing Contracts,
certified as true, complete and correct by an incumbent officer of the Seller,
except as noted in a certificate of such officer;
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(k) A true, complete, and correct list (which shall be in
paper form and may also be in the form of a computer file or tape) of the
Receivables, each of which shall be identified by the related Servicing
Contract, account number, account name, and Outstanding Balance. Such list shall
be marked as the "Receivables Schedule" and shall constitute Schedule 1 to this
Agreement.
ARTICLE V
COVENANTS
SECTION 5.1 Covenants of the Seller. At all times during the
term of this Agreement, unless the Buyer shall otherwise consent in writing:
(a) Notice of Material Adverse Change. Promptly upon
becoming aware thereof, the Seller shall give the Buyer notice of any material
adverse change in the business, operations, or financial condition of the Seller
which reasonably could affect adversely the collectibility of any of the
Receivables or the Seller's ability to perform its obligations under the
Servicing Contracts, including, without limitation, any defaults by the Seller
under any material agreements to which the Seller is a party and any defaults by
the Seller that would permit the acceleration of any indebtedness of the Seller.
(b) Preservation of Corporate Existence. The Seller shall
preserve and maintain its corporate existence, rights, franchises and privileges
in the jurisdiction of its incorporation, and qualify and remain qualified in
good standing as a foreign corporation in each jurisdiction where the failure to
preserve and maintain such existence, rights, franchises, privileges and
qualification would materially adversely affect (i) the interests of the Buyer
hereunder or (ii) the ability of the Seller to perform its obligations under
this Agreement and the Servicing Contracts.
(c) Compliance with Laws. The Seller shall comply in all
material respects with all Laws applicable to the Seller, its business and
properties, the Servicing Contracts, the Receivables, and the other Purchased
Assets.
(d) Enforceability of Obligations; Reimbursements. The
Seller shall take such actions as are reasonable and within its power to ensure
that, with respect to each Receivable, that Buyer will receive reimbursements
with respect to each Delinquency Advance as promptly as practicable. The Seller
shall enforce its right to receive reimbursement for each Delinquency Advance
against any and all parties to a Servicing Contract, if its usual and customary
procedures do not result in such reimbursement.
(e) Books and Records. The Seller shall, to the extent
practicable, maintain and implement administrative and operating procedures
(including, without limitation, an ability to recreate records evidencing
Receivables in the event of the destruction of the originals thereof), and keep
and maintain or obtain, as and when required, all documents, books, records and
other
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information reasonably necessary or advisable for the collection of all
Receivables (including, without limitation, records adequate to permit the daily
identification of all Collections).
(f) Fulfillment of Obligations. The Seller shall duly
observe and perform, or cause to be observed or performed, all material
obligations and undertakings on its part to be observed and performed under or
in connection with this Agreement and the Servicing Contracts; shall do nothing
to impair the rights, title and interest of the Buyer in and to the Purchased
Assets or the right or ability of the Seller or the Buyer to realize on the
Purchased Assets; and shall pay when due any taxes applicable to Seller and
payable in connection with the Receivables and their creation and satisfaction
or shall properly contest the payment of any such taxes in good faith and before
a court or administrative body of appropriate jurisdiction.
(g) Notice of Relocation. The Seller shall give the Buyer
thirty (30) days' prior written notice of any relocation of its Chief Executive
Office if, as a result of such relocation, the applicable provisions of the UCC
of any applicable jurisdiction or other applicable Laws would require the filing
of any amendment of any previously filed financing statement or continuation
statement or of any new financing statement. The Seller will at all times
maintain its Chief Executive Office within a jurisdiction in the United States
in which Article Nine of the UCC (1972 or later revision) is in effect as of the
date hereof or the date of any such relocation.
(h) Further Information. The Seller shall furnish or cause
to be furnished to the Buyer such other information as promptly as practicable,
and in such form and detail, as the Buyer may reasonably request.
(i) Treatment of Purchase. For accounting and tax purposes,
the Seller shall treat the sale of the Receivables hereunder as a sale of
Receivables. The Seller shall also maintain its records and books of account in
a manner which clearly reflects such sale of the Receivables to the Buyer.
(j) Fees, Taxes and Expenses. The Seller shall pay all
filing fees, stamp taxes, other taxes and expenses that are incurred or assessed
on account of or arise out of this Agreement and the documents and transactions
entered into pursuant to this Agreement.
(k) Compliance with Collection Policy. The Seller shall
comply in all material respects with the Collection Policy with respect to each
Receivable and the related Servicing Contract.
(l) Litigation. As soon as possible, and in any event within
ten Business Days of Seller's knowledge thereof, the Seller shall give the Buyer
notice of (i) any litigation, investigation or proceeding against the Seller
that may exist at any time that in Seller's reasonable judgement could have a
material adverse effect on the financial condition or results of operations of
the Seller, impair the ability of the Seller to perform its obligations under
this Agreement, or materially
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adversely affect the collectibility of all or any portion of the Receivables,
and (ii) any material adverse development in any such previously disclosed
litigation.
(m) Notification. Seller has advised the parties to the
Servicing Contracts that the Receivables are being sold. All necessary consents
required under the Servicing Contracts for the sale of the Receivables have been
obtained. As soon as practible after the Closing Date, Seller shall notify the
parties to the Servicing Contracts in writing that the Receivables have been
sold.
SECTION 5.2 Negative Covenants of the Seller. At all times
during the term of this Agreement, unless the Buyer shall otherwise consent in
writing:
(a) No Rescissions or Modifications. For as long as any
Receivable shall remain uncollected or not otherwise paid to the Buyer or
repurchased by the Seller pursuant to Section 2.5, the Seller shall not take any
action that would rescind or cancel all or any portion of such Receivable, or
amend, modify, consent to the modification of or waive any terms or provisions
thereof or of the related Servicing Contract or the Collection Policy except in
accordance with the terms thereof, without the prior written consent of the
Buyer.
(b) No Liens. The Seller shall not cause any of the
Receivables or related Servicing Contracts to be sold, pledged, assigned, or
transferred or to be subject to a Lien, other than the sale and assignment of
the Purchased Assets to the Buyer, the Liens created in connection with the
transactions contemplated by this Agreement, and the Subservicing Contracts.
(c) No Changes. The Seller shall not change its name,
identity or corporate structure in any manner which would make any financing
statement or continuation statement filed in connection with this Agreement or
the transactions contemplated hereby misleading within the meaning of Section
9-402(7) of the UCC of any applicable jurisdiction or other applicable Laws
unless it shall have given the Buyer at least thirty (30) days' prior written
notice thereof and unless prior thereto it shall have caused such financing
statement or continuation statement to be amended or a new financing statement
to be filed such that such financing statement or continuation statement would
not be misleading.
(d) Modification, Termination or Resignation Under Servicing
Contracts. Without the prior written consent of the Buyer, for as long as any
Receivables arising under any Servicing Contract shall not have been paid in
full, the Seller shall not (i) modify or terminate, or otherwise permit the
modification or the termination of, such Servicing Contract or (ii) resign from,
or assign, transfer, or otherwise delegate, any of its rights or obligations, as
the servicer or subservicer under such Servicing Contract, unless the Seller is
prohibited by law from continuing thereunder, as evidenced by an opinion of
counsel in form and substance satisfactory to the Buyer or is removed by the
Certificate Insurer or Trustee.
(e) Consolidations Mergers and Sales of Assets. The Seller
shall not (i) consolidate or merge with or into any other Person, or (ii) sell,
lease or otherwise transfer all or substantially all
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of its assets to any other Person; provided that the Seller may merge or
consolidate with another Person if the Seller is the corporation surviving such
merger, or is if the survivor assumes the obligations of Seller and has net
worth at least as high as Sellers.
(f) Collection Policy. The Seller shall not make, allow or
consent to any material change in its Collection Policy, or in its current
payment terms with respect to Receivables, without prior written notification to
and consent of the Buyer.
ARTICLE VI
TERMINATION
SECTION 6.1 Term. This Agreement shall commence as of the date
of execution and delivery hereof and shall continue in full force and effect
until the payment in full of all of the Receivables purchased hereunder;
provided, however, that the indemnification and payment provisions set forth in
Article VII hereof and the provisions and agreement set forth in Section 8.10
hereof shall be continuing and shall survive termination of this Agreement.
ARTICLE VII
INDEMNIFICATION
SECTION 7.1 Indemnity.
(a) The Seller agrees to indemnify, defend and save harmless
the Buyer and any of its successors or permitted assignees (each, an
"INDEMNIFIED PARTY" and collectively, the "INDEMNIFIED PARTIES"), other than for
the Indemnified Party's own gross negligence or willful misconduct, forthwith on
demand, from and against any and all losses, claims, damages, liabilities, costs
and expenses (including, without limitation, all reasonable attorneys' fees and
expenses, expenses incurred by an Indemnified Party (or any successors thereto)
and expenses of settlement, litigation or preparation therefor) which any
Indemnified Party may incur or which may be asserted against any Indemnified
Party by any Person (whether on its own behalf or derivatively on behalf of the
Seller) arising from or incurred in connection with (i) any breach of a
representation, warranty or covenant by the Seller made or deemed made hereunder
or in connection herewith or the transactions contemplated hereby or any
statements made by any Responsible Officer of the Seller in connection herewith
or the transactions contemplated hereby which shall have been incorrect in any
material respect when made, (ii) any action taken or, if the Seller is otherwise
obligated to take action, failed to be taken, by the Seller with respect to the
Purchased Assets or any of its obligations hereunder including, without
limitation, the Seller's failure to comply with an applicable Law or regulation,
(iii) any failure to vest and maintain vested in the Buyer the ownership of the
Purchased Assets, free and clear of any Lien or other adverse claim, (iv) any
failure to pay when due any taxes, including without limitation any sales tax,
excise tax or other similar tax or charge payable in connection with the
Receivables and their creation or satisfaction, or (v) any dispute, suit,
action,
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claim, proceeding or governmental investigation, pending or threatened, whether
based on statute, regulation or order, on tort, on contract or otherwise, before
any Official Body (an "Action") which arises out of or relates to this
Agreement, the Purchased Assets or the Receivables or the related Servicing
Contracts, or the use of the proceeds of the sale of the Purchased Assets or the
Receivables pursuant hereto other than any such Action arising from Buyer's
servicing of the Receivables pursuant to the Sub-Servicing Contracts.
(b) Promptly upon receipt by any Indemnified Party under
this Section 7.1 of notice of the commencement of any suit, action, claim,
proceeding or governmental investigation against such Indemnified Party, such
Indemnified Party shall, if a claim in respect thereof is to be made against the
Seller hereunder, notify the Seller in writing of the commencement thereof. The
Seller may participate in and assume the defense and settlement of any such
suit, action, claim, proceeding or investigation at its expense, and no
settlement thereof shall be made without the approval of the Seller and the
Indemnified Party. The approval of either party will not be unreasonably
withheld or delayed. After notice from the Seller to the indemnified party of
its intention to assume the defense thereof with counsel reasonably satisfactory
to the Buyer and so long as the Seller so assumes the defense thereof in a
manner reasonably satisfactory to the Buyer, the Seller shall not be liable for
any legal expenses of counsel unless there shall be a conflict between the
interests of the Seller and the Indemnified Party.
(c) Each Indemnified Party shall use its good faith efforts
to mitigate, reduce or eliminate any losses, expenses or claims for
indemnification.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1 Survival. The indemnification and payment provisions
of Article VII shall be continuing and shall survive any termination of this
Agreement, subject to applicable statutes of limitation; provided, however, that
any such indemnification or payment claim must be presented to the Seller within
thirty (30) Business Days after the Person making such claim receives notice or
otherwise becomes aware of such claim, provided, further, however, that any
failure to give such notice shall not prejudice the rights of any Indemnified
Party except to the extent Seller is actually prejudiced by such failure to give
notice.
SECTION 8.2 Amendments. Any provision of this Agreement may be
waived or amended in writing by the parties hereto.
SECTION 8.3 Notices. Except as provided below, all
communications and notices provided for hereunder shall be in writing (including
bank wire, telecopy or electronic facsimile transmission or similar writing) and
shall be given to the other party at its address or telecopy number set forth
hereunder or at such other address or telecopy number as such party may
hereafter specify for the purposes of notice to such party. Each such notice or
other communication shall be
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effective if given by facsimile, when such facsimile is transmitted to the
facsimile number specified in this Section 8.3 and the appropriate written
confirmation is received or, if given by any other means, when received at the
address specified in this Section 8.3. Each party further agrees to deliver
promptly to the other party a written confirmation of each telephonic notice
signed by an authorized officer of the Seller. However, the absence of such
confirmation shall not affect the validity of such notice.
If to the Buyer:
Fairbanks Capital Corp.
3815 South West Temple
Salt Lake City, Utah 84115-4412
Attention: Mark S. Finston
Telecopier: (801) 293-3986
with a copy to:
Terrell W. Smith, General Counsel
Telecopier: (801) 293-2555; and
with a copy to:
Wilmer, Cutler & Pickering
2445 M Street, NW
Washington, DC 20037
Attention: Russell J. Bruemmer
Telecopier: (202) 663-6363
If to the Seller:
Aames Capital Corporation
350 South Grand Avenue
Los Angeles, CA 90071
Attention: David Sklar, CFO
Telecopier: (323)-210-5551
with a copy to:
Barbara S. Polsky, General Counsel
Telecopier: (323)-210-5026
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SECTION 8.4 Governing Law; Submission to Jurisdiction; Waiver of
Jury Trial; Process Agent. (a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. The Seller and the Buyer
hereby submit to the nonexclusive jurisdiction of courts of the State of New
York located in the Borough of Manhattan and the United States District Court
for the Southern District of New York for purposes of adjudicating any claim or
controversy arising in connection with this Agreement or any of the transactions
contemplated hereby. The Seller and the Buyer hereby irrevocably waive, to the
fullest extent they may lawfully do so, any objection which they may now or
hereafter have to the laying of the venue of any such proceeding brought in such
a court and any claim that any such proceeding brought in such a court has been
brought in an inconvenient forum. Nothing in this Section 8.4 shall affect the
right of any Person to bring any action or proceeding against the Seller or the
Buyer or their respective properties in the courts of other jurisdictions. EACH
PARTY HERETO HEREBY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY
DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE ARISING OUT OF,
CONNECTED WITH, RELATED TO OR INCIDENTAL TO ANY RELATIONSHIP ESTABLISHED IN
CONNECTION WITH THIS AGREEMENT. INSTEAD, ANY DISPUTES RESOLVED IN COURT WILL BE
RESOLVED IN A BENCH TRIAL WITHOUT A JURY.
(b) THE SELLER HEREBY IRREVOCABLY DESIGNATES CT CORPORATION
AS ITS DESIGNEE, APPOINTEE AND AGENT TO RECEIVE, FOR AND ON BEHALF OF IT,
SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
AGREEMENT. THE SELLER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF
ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING
OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO CT
CORPORATION, 1633 BROADWAY, NEW YORK, NEW YORK, OR TO ITS ADDRESS FOR NOTICES IN
SECTION 8.3, WHICH SERVICE SHALL BECOME EFFECTIVE THREE (3) BUSINESS DAYS AFTER
DEPOSIT IN THE MAIL AND SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE. NOTHING
HEREIN SHALL AFFECT THE RIGHT OF THE BUYER TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST
THE SELLER IN ANY OTHER JURISDICTION.
SECTION 8.5 Records. All amounts calculated or due hereunder
shall be determined from the records of the Buyer, which determinations shall be
prima facie conclusive.
SECTION 8.6 No Implied Waiver; Cumulative Remedies. No course of
dealing and no delay or failure of the Buyer in exercising any right, power or
privilege under this Agreement shall affect any other or future exercise thereof
or the exercise of any other right, power or privilege; nor shall any single or
partial exercise of any such right, power or privilege or any abandonment or
discontinuance of steps to enforce such a right, power or privilege preclude any
further exercise thereof or of any other right, power or privilege. The rights
and remedies of the Buyer under this Agreement are cumulative and not exclusive
of any rights or remedies which the Buyer would otherwise have.
24
<PAGE> 29
SECTION 8.7 No Discharge. The obligations of the Seller under
this Agreement shall be absolute and unconditional and shall remain in full
force and effect without regard to, and shall not be released, discharged or in
any way affected by (a) any exercise or nonexercise of any right, remedy, power
or privilege under or in respect of this Agreement or applicable Law, including,
without limitation, any failure to set-off or release in whole or in part by the
Buyer of any balance of any deposit account or credit on its books in favor of
the Buyer or any waiver, consent, extension, indulgence or other action or
inaction in respect of any thereof, or (b) any other act or thing or omission or
delay to do any other act or thing which would operate as a discharge of the
Buyer as a matter of law.
SECTION 8.8 Prior Understandings. This Agreement and the
Sub-servicing Contracts set forth the entire understanding of the parties
relating to the subject matter hereof and thereof, and supersede all prior
understandings and agreements, whether written or oral with respect to the
subject matter hereof and thereof.
SECTION 8.9 Successors and Assigns. (a) This Agreement shall be
binding on the parties hereto and their respective successors and assigns;
provided, however, that the Seller may not assign any of its rights or delegate
any of its duties hereunder without the prior written consent of the Buyer. No
provision of this Agreement shall in any manner restrict the ability of the
Buyer to assign, participate, grant security interests in, or otherwise transfer
any portion of the Purchased Assets owned by the Buyer. The Seller hereby agrees
and consents to the sale by the Buyer of all the Receivables and the other
related Purchased Assets to Fairbanks Funding pursuant to the Purchase and
Contribution Agreement and the transactions contemplated by the Lender Loan and
Security Documents. The Seller further agrees that notwithstanding any claim,
counterclaim, right of setoff or defense which it may have against the Buyer due
to a breach by the Buyer of this Agreement or for any other reason, and
notwithstanding the bankruptcy of the Buyer or any other event whatsoever, the
Seller's sole remedy shall be a claim against the Buyer for money damages and
the Escrow Account, and in no event shall the Seller assert any claim on or any
interest in the Receivables or any proceeds thereof or take any action which
would reduce or delay receipt by Fairbanks Funding of collections with respect
to the Receivables. Additionally, the Buyer directs and the Seller agrees for
the benefit of Fairbanks Funding that any amounts payable by the Seller to the
Buyer hereunder or otherwise in connection herewith which are to be paid by the
Buyer to Fairbanks Funding shall be paid by the Seller, on behalf of the Buyer,
directly to Fairbanks Funding, and, in connection with the foregoing, the Seller
agrees (i) that all of the Seller's rights and remedies under this Agreement,
and in and to the Purchased Assets, are hereby expressly made subject and
subordinate in all respects to the rights of Fairbanks Funding under the
Purchase and Contribution Agreement and (ii) for at least ninety (90) days after
all of the obligations owing by the Buyer to Fairbanks Funding under the
Purchase and Contribution Agreement have been paid in full, the Seller will not
take any action to assert any claim against the Buyer.
(b) The Seller agrees that the Buyer may at any time assign
all of its assets to a newly-formed, special-purpose limited liability company
into which the Buyer shall merge, and which limited liability company shall,
inter alia, be assigned all of the Buyer's rights and shall
25
<PAGE> 30
assume all of the Buyer's obligations hereunder and under the Purchase and
Contribution Agreement.
SECTION 8.10 No Petition. The Seller agrees that, prior to the
date which is one year and one day after the date upon which the last Receivable
purchased hereunder has been paid in full, it will not institute against, or
join any other Person in instituting against, the Buyer any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceeding or other
similar proceeding under the Laws of the United States or any state of the
United States.
SECTION 8.11 Severability; Counterparts. This Agreement may be
executed in any number of counterparts and by different 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
Agreement. Any provisions of this Agreement which are 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 any other provision in
such jurisdiction or such provision in any other jurisdiction.
SECTION 8.12 Expenses
Seller shall pay Buyer's costs and expenses reasonably incurred
in connection with Buyer's due diligence for this Agreement, including the fees
and out-of-pocket expenses of Buyer's attorneys up to $200,000.
[Signature Page Follows]
26
<PAGE> 31
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered by their duly authorized officers as of
the date first above set forth.
AAMES CAPITAL CORPORATION,
as Seller
By: /s/ David A. Sklar
-------------------------------------
Name:
Title:
FAIRBANKS CAPITAL CORP.
as Buyer
By: /s/ Kim A. Stevenson
-------------------------------------
Name: Kim A. Stevenson
Title: Executive Vice President
[Delinquency Advance Purchase Agreement]
<PAGE> 32
EXHIBIT A
SCHEDULE OF LITIGATION
None
A-1
<PAGE> 33
EXHIBIT B
SCHEDULE OF LOCATION OF RECORDS
Seller: 350 South Grand Avenue
Los Angeles, CA 90071
Buyer: 3815 South West Temple
Salt Lake City, Utah 84115-4412
B-1
<PAGE> 34
EXHIBIT C
SCHEDULE OF CORPORATE NAMES,
TRADE NAMES OR ASSUMED NAMES AND SUBSIDIARIES
Corporate Name: Aames Capital Corp.
Trade Names: Aames Home Loan
Assumed Names: None
Subsidiaries: None
C-1
<PAGE> 35
EXHIBIT D
THE RECEIVABLES REIMBURSEMENT ACCOUNT
Bankers Trust Company, NY
ABA number 021-001-033
Account number 01419663
Account name: Nomura Asset Capital Corporation #27531
Attn: Karen Carnemolla
D-1
<PAGE> 36
EXHIBIT E
LIST OF RESPONSIBLE OFFICERS
Responsible Officers of Seller: Cary H. Thompson
David K. Sklar
Jon D. Van Deuren
Steven Naberhaus
Fred Mahintorabi
Barbara Polsky
Responsible Officers of Buyer: Thomas D. Basmajian
Mark S. Finston
Kim A. Stevenson
Terrell W. Smith
Richard A. Lee
Lee Ervin
Andrew de Jong
David E. Smoot
E-1
<PAGE> 37
Schedule 1
SCHEDULE OF RECEIVABLES
(As of the Cut-off Date)
[To come]
1-1
<PAGE> 38
Schedule 2
SCHEDULE OF SERVICING CONTRACTS
1. Pooling and Servicing Agreement between Aames Capital Corporation and
Bankers Trust Company of California, N.A dated as of December 1, 1996
with respect to Aames Mortgage Trust 1996-D.
2. Servicing Agreement between Aames Capital Corporation and Bankers Trust
Company of California, N.A dated as of March 1, 1997 with respect to
Aames Capital Owner Trust 1997-1.
2-1
<PAGE> 1
EXHIBIT 10.35
EXECUTION COPY
- --------------------------------------------------------------------------------
AAMES CAPITAL CORPORATION
Servicer
and
FAIRBANKS CAPITAL CORP.
Sub-Servicer
---------------
SUB-SERVICING AGREEMENT
Dated as of April 21, 1999
--------------
Adjustable Rate Home Equity Mortgage Loans
Pledged under an Indenture dated as of March 1, 1997
Bankers Trust Company of California, N.A., Indenture Trustee
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I
DEFINITIONS..............................................................................................1
Section 1.01 Defined Terms.................................................................1
ARTICLE II
SERVICER'S ENGAGEMENT OF SUB-SERVICER TO PERFORM SERVICING RESPONSIBILITIES..............................2
Section 2.01 Contract for Sub-Servicing....................................................2
Section 2.02 Possession of Mortgage Loan Documents.........................................3
ARTICLE III
SERVICING OF THE MORTGAGE LOANS..........................................................................3
Section 3.01 Sub-Servicer to Service.......................................................3
Section 3.02 Loan Information and Financial Statements.....................................6
Section 3.03 Merger or Consolidation of the Sub-Servicer...................................7
Section 3.04 Limitation on Liability of the Sub-Servicer and Others........................7
Section 3.05 Sub-Servicer Not to Resign....................................................8
Section 3.06 No Transfer or Assignment of Servicing........................................9
Section 3.07 Servicer's Cooperation........................................................9
Section 3.08 Receipt of Mortgage Loan Amounts..............................................9
Section 3.09 Subsequent Transfers..........................................................9
Section 3.10 [Intentionally Omitted]......................................................10
Section 3.11 Compensation to the Sub-Servicer.............................................10
Section 3.12 Appointment as Servicer......................................................11
Section 3.13. Reserve Sub-Account..........................................................12
Section 3.14 Security Interest............................................................12
Section 3.15 Tax Forms....................................................................12
Section 3.16 Additional Servicing Procedures..............................................12
ARTICLE IV
REPRESENTATIONS AND WARRANTIES..........................................................................13
Section 4.01 Representations, Warranties and Covenants of the Sub-Servicer................13
Section 4.02 Representations and Warranties of the Servicer...............................14
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
ARTICLE V
DEFAULT........................................................................................16
Section 5.01 Events of Default...................................................16
Section 5.02 Waiver of Defaults..................................................18
ARTICLE VI
TERMINATION....................................................................................18
Section 6.01 Termination.........................................................18
Section 6.02 Termination With Cause..............................................19
Section 6.03 Termination Without Cause...........................................19
Section 6.04 Effect of Termination...............................................19
ARTICLE VII
MISCELLANEOUS..................................................................................20
Section 7.01 Payment of Costs....................................................20
Section 7.02 Reports.............................................................20
Section 7.03 Notices.............................................................21
Section 7.04 Severability Clause.................................................22
Section 7.05 Counterparts........................................................22
Section 7.06 Governing Law.......................................................23
Section 7.07 Security for Expenses...............................................23
Section 7.08 Indemnification.....................................................23
Section 7.09 Protection of Confidential Information..............................25
Section 7.10 Intention of the Parties............................................25
Section 7.11 Third Party Beneficiary.............................................25
Section 7.12 Successors and Assigns; Assignment of Agreement.....................26
Section 7.13 Waivers.............................................................26
Section 7.14 Exhibits............................................................26
Section 7.15 General Interpretive Principles.....................................26
Section 7.16 Reproduction of Documents...........................................26
Section 7.17 Further Agreement; Power-of-Attorney................................27
Section 7.18 Amendments..........................................................27
Section 7.19 Entire Agreement....................................................27
Section 7.20 Expenses............................................................27
Section 7.21 Non-Disclosure......................................................27
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT A
SERVICING AGREEMENT..........................................................A-1
SCHEDULE 2.01
MORTGAGE LOAN SCHEDULE.......................................................B-1
SCHEDULE 3.01(a)
ADDITIONAL SERVICING PROCEDURES..............................................B-2
SCHEDULE 3.01(d)
LOANS FOR WHICH SUB-SERVICER HAS NO PAYMENT OBLIGATIONS ON MAY 12, 1999......B-3
SCHEDULE 4.01(i)
CERTAIN EXCLUDED MORTGAGE LOANS AND REO PROPERTIES...........................B-4
</TABLE>
iii
<PAGE> 5
SUB-SERVICING AGREEMENT
This is a Sub-Servicing Agreement (the "Agreement"), dated as of April 21,
1999, by and between FAIRBANKS CAPITAL CORP., a Utah corporation, having an
office at 3815 South West Temple, Salt Lake City, Utah 84165-4412, and its
successors and assigns (the "Sub-Servicer"), and Aames Capital Corporation, a
California corporation, having an office at 350 South Grand Avenue, Los Angeles,
California 90071, and its successors and assigns (the "Servicer").
W I T N E S S E T H:
WHEREAS, the Servicer Aames Capital Owner Trust 1997-I as the issuer (the
"Issuer") and Bankers Trust Company (the "Indenture Trustee") have entered into
that certain Servicing Agreement dated as of March 1, 1997 (as amended, the
"Servicing Agreement"), whereby the Servicer will service certain mortgage loans
on behalf of the Indenture Trustee;
WHEREAS, the Servicer desires to enter into a contract with the
Sub-Servicer whereby the Sub-Servicer shall service those mortgage loans listed
on Schedule 2.01 (the "Mortgage Loan Schedule") attached hereto (the "Mortgage
Loans") in the name of on behalf of the Servicer;
WHEREAS, as the parties contemplate that Sub-Servicer may purchase from
Servicer the right to be reimbursed for all delinquency advances made by
Servicer with respect to the Mortgage Loans pursuant a purchase agreement to be
entered into by the parties (the "Purchase Agreement"); and
WHEREAS, certain obligations hereunder will become effective upon the
closing, if any, of the Purchase Agreement (the "Closing Date")
NOW, THEREFORE, in consideration of the mutual agreements hereinafter set
forth, and for other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the Servicer and the Sub-Servicer hereby agree
as follows:
ARTICLE I
DEFINITIONS
Section 1.01 Defined Terms.
Unless otherwise specified in this Agreement, all capitalized terms not
otherwise defined herein shall have the meanings set forth in the Servicing
Agreement. As used herein, the following terms have the meanings assigned to
them in this Section 1.01:
"Advance" shall mean any Monthly Advance or Servicing Advance.
<PAGE> 6
"Event of Default" shall have the meaning set forth in Article V.
"Lender" shall mean any lender or lenders providing financing to
Sub-Servicer for the Purchase Agreement.
"Lockbox Advances" shall mean advances on funds received at the lockbox
account for which the lockbox bank does not make funds available for withdrawal
on the same day received.
"Non-Recoverable Advance" shall mean a Servicing Advance made by
Sub-Servicer that would be uncollectible through Monthly Mortgage Payments,
Insurance Proceeds, Liquidation Proceeds, proceeds from a Principal Payment or
other proceeds of the related Mortgage Loan.
"Prior Monthly Advances" shall mean Monthly Advances on the Mortgage Loans
made by Servicer prior to the Sub-Servicing Commencement Date.
"Reserve Sub-account" shall have the meaning set forth in Section 3.13.
"Sub-Servicing Agreements" shall mean this Agreement and each of the
Sub-Servicing Agreements between Servicer and Sub-Servicer with respect to Aames
Mortgage Trust 1996-D, Aames Mortgage Trust 1996-B, and Aames Mortgage Trust
1996-C.
"Sub-Servicing Commencement Date" shall mean May 1, 1999.
"Sub-Servicing Fees" shall mean, with respect to any Collection Period, the
applicable servicing fees and compensation as established pursuant to Section
3.11.
"Uncollectible Advance" shall mean a Monthly Advance made by Sub-Servicer
or a Prior Monthly Advance made by Servicer which is or would be uncollectible
through Monthly Mortgage Payments, Insurance Proceeds, Liquidation Proceeds,
proceeds from a Principal Payment or other proceeds of the related Mortgage
Loan.
ARTICLE II
SERVICER'S ENGAGEMENT OF SUB-SERVICER TO PERFORM
SERVICING RESPONSIBILITIES
Section 2.01 Contract for Sub-Servicing.
The Servicer, by execution and delivery of this Agreement, does hereby
contract with the Sub-Servicer for, and Sub-Servicer hereby agrees to perform
commencing on the Sub-Servicing Commencement Date, in each case subject to the
terms of this Agreement, the servicing of the Mortgage Loans listed on Schedule
2.01.
2
<PAGE> 7
Section 2.02 Possession of Mortgage Loan Documents.
(a) Within one (1) Business Day prior to the Sub-Servicing Commencement
Date, the Servicer, at Servicer's sole cost and expense, shall deliver to
Sub-Servicer a copy of each Mortgage File and other servicing, underwriting and
origination documents relating to the Mortgage Loans in Servicer's possession,
and on or before the Sub-Servicing Commencement Date, Servicer shall transfer to
Sub-Servicer all electronic data in Servicer's possession necessary to service
the Mortgage Loans and to provide current data with respect to the Mortgage
Loans and REO Property. Such copies of Mortgage Files shall include, without
limit, all documents relating to servicing, foreclosure, bankruptcy, and REO
Property with respect to any Mortgage Loan.
(b) The Sub-Servicer shall hold each Mortgage File and each document
contained therein in the possession of the Sub-Servicer in trust on behalf of
the Servicer for the benefit of the Indenture Trustee and the Financial Guaranty
Insurer. The Sub-Servicer's possession of any portion of the Mortgage File shall
be for the sole purpose of facilitating the servicing of the related Mortgage
Loan pursuant to this Agreement and the Servicing Agreement, and such retention
and possession by the Sub-Servicer shall be in a custodial capacity only. Any
portion of the Mortgage File retained by the Sub-Servicer shall be identified to
reflect clearly the ownership of the related Mortgage Loan by the Indenture
Trustee. The Sub-Servicer shall release from its custody any Mortgage File
retained by it only in accordance with this Agreement and the Servicing
Agreement. The Sub-Servicer shall provide to the Servicer as soon as practicable
after request therefor by the Servicer a copy of any documents held by it with
respect to any Mortgage Loan.
ARTICLE III
SERVICING OF THE MORTGAGE LOANS
Section 3.01 Sub-Servicer to Service.
(a) The Sub-Servicer, as an independent contractor, shall service and
administer the Mortgage Loans in accordance with the Servicing Agreement and
this Agreement, including the additional servicing procedures set forth on
Schedule 3.01(a) hereto as may be amended from time to time. This Agreement
shall govern in the event of any conflict between this Agreement and the
additional servicing procedures. The Sub-Servicer shall perform all obligations
of Servicer under the Servicing Agreement except as specifically provided herein
and shall prepare and deliver to Servicer all documents and reports required to
be delivered by the Servicer to the Indenture Trustee or the Financial Guaranty
Insurer at least two (2) Business Days prior to the date the Servicer must
deliver such reports, provided, however, that Sub-Servicer shall provide to
Servicer such information as to the Mortgage Loans being serviced by
Sub-Servicer as is required by Servicer to prepare the Servicer Remittance
Report not later than the second
3
<PAGE> 8
Business Day of each month. Sub-Servicer shall comply in all material respects
with applicable law in collecting the Mortgage Loans. The Sub-Servicer is hereby
authorized and empowered, subject to the terms of this Agreement, to execute and
deliver on behalf of itself and the Servicer all instruments of satisfaction or
cancellation, or of partial or full release, discharge and all other comparable
instruments, with respect to the Mortgage Loans and with respect to the
Mortgaged Properties. The Servicer shall furnish the Sub-Servicer with any
powers of attorney and other documents necessary or appropriate to enable the
Sub-Servicer to carry out its servicing and administrative duties under this
Agreement.
(b) The Sub-Servicer shall cause the portions of its electronic ledger
relating to the Mortgage Loans to be clearly and unambiguously marked, and shall
make appropriate entries in Sub-Servicer's general accounting records to
indicate that such Mortgage Loans constitute part of the Trust Estate in
accordance with the terms of the Trust Estate created under the Indenture.
(c) The Sub-Servicer shall, in cooperation with the Indenture Trustee,
establish on or prior to the Sub-Servicing Commencement Date and maintain
thereafter one or more trust accounts (the "Sub-Servicing Account") in a manner
consistent with Section 2.02(b) of the Servicing Agreement. The Sub-Servicing
Account shall be an Eligible Account established in the name of the Indenture
Trustee as trustee of Aames Trust 1997-I. The Sub-Servicer shall deposit into
the Sub-Servicing Account no later than the first Business Day after receipt all
proceeds of Mortgage Loans received by the Sub-Servicer (except for Additional
Servicing Compensation as set forth in Section 3.11 hereof) consistent with
Section 2.02 of the Servicing Agreement. The Sub-Servicer shall make Lockbox
Advances necessary to deposit such proceeds into the Sub-Servicing Account in
accordance with this Agreement and Section 2.02 of the Servicing Agreement. The
Sub-Servicer shall remit such proceeds to the Collection Account on or before
the Deposit Date. The Sub-Servicer shall be able to withdraw Sub-Servicer's
servicing compensation from the Sub-Servicing Account on such date in accordance
with Section 2.07 of the Servicing Agreement. The Sub-Servicer shall be
permitted to withdraw from time to time from the Sub-Servicing Account amounts
representing reimbursements for Advances made hereunder or purchased by the
Sub-Servicer from the Seller in accordance with the priorities set forth in
Section 3.01(h). The Sub-Servicer shall send to the Servicer a statement of
proceeds of Mortgage Loans collected by or on behalf of the Sub-Servicer within
two (2) Business Days after the end of every month, and the Servicer shall
compare the information provided in such reports with the deposits made by the
Sub-Servicer into the Collection Account for the same period. The Sub-Servicer
shall direct the investment of the Sub-Servicing Accounts in Permitted
Investments in accordance with the requirements of Section 2.02(b) of the
Servicing Agreement.
(d) The Sub-Servicer shall deposit into the Collection Account one (1)
Business Day prior to each Remittance Date, commencing with the first Remittance
Date after the Sub-Servicing Commencement Date, Monthly Advances due the
Collection Account on such Remittance Date in accordance with the terms of the
Servicing Agreement as if the Sub-Servicer were the Servicer thereunder,
provided, however, that Sub-Servicer shall not be responsible for funding
Servicing Advances or Monthly Advances or remitting any collections on the
4
<PAGE> 9
Remittance Date of May 12, 1999 with respect to the Mortgage Loans listed on
Schedule 3.01(d), or any other Mortgage Loan as to which Servicer has received
payments with respect to such Mortgage Loans during April 1999 and all such
advances, payments and collections shall be made directly by Servicer.
Notwithstanding any other provision of this Agreement, Sub-Servicer shall not be
responsible for funding Servicing Advances or Monthly Advances to the extent
that Sub-Servicer deems such Servicing Advances or Monthly Advances to be
Non-Recoverable Advances or Uncollectible Advances, respectively, and gives
Servicer notice that it has deemed such Servicing Advances or Monthly Advances
to be Non-Recoverable Advances or Uncollectible Advances, respectively, five (5)
Business Days prior to the Remittance Date on which such an Advance would have
been made were it not deemed a Non-Recoverable Advance or Uncollectible Advance.
Compensating Interest shall be an obligation of Servicer and Sub-Servicer shall
have no obligation to make any payment with respect to Compensating Interest. To
the extent not paid directly by the Servicer, Sub-Servicer shall have the right
to pay Compensating Interest and off-set it against monies collected by
Sub-Servicer which represent amounts due Servicer with respect to Lockbox
Advances and Servicing Advances previously made by Servicer or from amounts
payable to Servicer including prepayment fees under the Servicing Agreement
(collectively, the "Servicer Reimbursement Funds").
(e) This Agreement is intended to be consistent with and not to violate
the provisions of the Servicing Agreement, including without limit Sections 2.01
and 2.14 thereof. Accordingly, if it is discovered that any provision of this
Agreement is not consistent with or violates any provision of the Servicing
Agreement, the Servicing Agreement shall prevail, and the Sub-Servicer and the
Servicer shall execute such amendments, subject to the provisions of Section
7.18 hereof, as are reasonably necessary to make this Agreement consistent with
the Servicing Agreement while maintaining as nearly as possible the same
economic benefits intended to be conferred on the parties by this Agreement
without regard to such inconsistency or violation.
(f) [Intentionally omitted]
(g) [intentionally omitted]
(h) Except as set forth in this Section 3.01(h), Sub-Servicer shall not be
obligated to reimburse Servicer for any Advance made or Compensating Interest
paid by Servicer. As amounts are collected by Sub-Servicer which represent
reimbursements to Servicer or Sub-Servicer with respect to a particular mortgage
loan (a "Specific Mortgage Loan"), these amounts shall be paid or credited in
the following priority from time to time but in no event less frequently than
once a month:
(i) first, to Sub-Servicer to reimburse it for Monthly Advances
(including any such Advances made by the Servicer, the reimbursement
rights for which have been sold to the Sub-Servicer pursuant to the
Purchase
5
<PAGE> 10
Agreement), Servicing Advances, Lockbox Advances and Sub-Servicing
Fees (in that order) with respect to the Specific Mortgage Loan;
(ii) second, to Sub-Servicer to reimburse Sub-Servicer for any
Compensating Interest for any Mortgage Loan which Sub-Servicer has
elected to pay notwithstanding Servicer's obligation to pay
Compensating Interest;
(iii) third, to Sub-Servicer to pay any amount due and payable to
Sub-Servicer under this Agreement or the Purchase Agreement,
including, without limitation, to reimburse Sub-Servicer for any
Monthly Advances and Servicing Advances made by Sub-Servicer that have
not been reimbursed following liquidation of the related Mortgage
Loan, or where proceeds of any Mortgage Loan that would have otherwise
been available to reimburse Sub-Servicer for Advances made by Servicer
or Sub-Servicer under this Agreement have been applied by the
Indenture Trustee or the Financial Guaranty Insurer to set-off amounts
owed by the Servicer in respect of any default by Servicer under this
Agreement or the Servicing Agreement;
(iv) fourth, to Sub-Servicer to fund the Reserve Sub-account to the
extent required by Section 3.13; and
(v) fifth, any remaining amounts, to the Servicer.
(i) Sub-Servicer shall service the Mortgage Loans on a private label basis
under the name of Servicer as Servicer's servicing agent and, except as may be
required by law or is required or desirable in connection with the performance
of its obligations hereunder, Sub-Servicer shall not disclose that it is a
sub-servicer for the Mortgage Loans.
Section 3.02 Loan Information and Financial Statements.
(a) No later than three (3) Business Days following each Remittance Date,
and no later than two (2) Business Days following any request by the Financial
Guaranty Insurer, the Sub-Servicer shall deliver to the Financial Guaranty
Insurer or its designee, a computer tape or electronic transmission in such
format as shall be agreed by the Financial Guaranty Insurer and the Sub-Servicer
containing the "loan level" information with respect to the Mortgage Loans as of
the related Servicer Remittance Date, or such other date specified by the
Financial Guaranty Insurer if such information is being provided upon its
request. The form of such "loan level" information may be modified by mutual
agreement of the Sub-Servicer and the Financial Guaranty Insurer.
6
<PAGE> 11
(b) Sub-Servicer shall maintain appropriate records of information
relating to the servicing of the Mortgage Loans and the REO Property and related
books and records. Sub-Servicer will promptly provide Servicer or Financial
Guaranty Insurer with (i) information from and access to such records, upon the
reasonable request of Servicer or Financial Guaranty Insurer, and (ii) audit
rights to discuss the affairs, finances and accounts with the appropriate
officers or employees of the Sub-Servicer and with the Sub-Servicer's
independent accountants.
Section 3.03 Merger or Consolidation of the Sub-Servicer.
(a) The Sub-Servicer shall keep in full effect its existence, rights, and
franchises as a corporation under the laws of the state of its incorporation
except as permitted herein, and shall obtain and preserve its qualification to
do business as a foreign corporation in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and
enforceability of this Agreement and the Servicing Agreement or any of the
Mortgage Loans and to perform its duties under this Agreement and shall continue
to meet the requirements of Sections 2.01 and 2.14 of the Servicing Agreement as
shall be necessary to perform its duties under this Agreement and the Servicing
Agreement (including maintaining licenses and qualifications necessary to
perform its servicing obligations in states where the Mortgaged Properties are
located).
(b) Any Person into which the Sub-Servicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the Sub-Servicer shall be a party, or any Person succeeding to the
business of the Sub-Servicer, shall be the successor of the Sub-Servicer
hereunder, without the execution or filing of any paper or any further act on
the part of any of the parties hereto, anything herein to the contrary
notwithstanding, if the successor or surviving Person (i) meets the requirements
and complies with the terms of Section 2.01 of the Servicing Agreement, (ii) has
received the prior written consent of the Financial Guaranty Insurer, and (iii)
has received the prior written consent of the Servicer.
Section 3.04 Limitation on Liability of the Sub-Servicer and Others.
(a) Other than provided in Section 7.08(b) hereof, neither the
Sub-Servicer nor any of the directors or officers or employees or agents of the
Sub-Servicer shall be under any liability to the Servicer or the Financial
Guaranty Insurer for any action taken or for refraining from the taking of any
action in good faith pursuant to this Agreement, or for errors in judgment;
provided, however, that this provision shall not protect the Sub-Servicer or any
such Person against any liability that would otherwise be imposed by reason of
such Person's willful misfeasance, bad faith or gross negligence in the
performance of duties by the Sub-Servicer or by reason of such Person's reckless
disregard of its obligations and duties hereunder; and provided, further, that
this provision shall not be construed to entitle the Sub-Servicer to indemnity
in the event that amounts advanced by the Sub-Servicer to retire any senior lien
exceed Net Liquidation Proceeds realized with respect to the related Mortgage
Loan. The Sub-Servicer and any director, officer, employee or agent of the
Sub-Servicer may rely in good faith on any document of any
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kind prima facie properly executed and submitted by any Person respecting any
matters arising hereunder.
(b) Notwithstanding anything else contained in this Agreement, the
Sub-Servicer does not assume (i) any responsibility to indemnify nor make any of
the Seller's representations and warranties under the Servicing Agreement or the
Seller's or the Servicer's representations and warranties under (a) any document
relating to the sale of the Mortgage Loans and (b) the Insurance and Indemnity
Agreement dated as of March 1, 1997, by and between the Financial Guaranty
Insurer and the Servicer; (ii) any obligation to pay a termination fee to any
sub-servicer pursuant to the Servicing Agreement; (iii) any obligation to
purchase one or more of the Mortgage Loans pursuant to any agreement; (iv) any
obligation to record the Mortgage Loans; provided, however, that if the
Sub-Servicer cannot enforce any Mortgage Loan due to a lack of such recording,
the Sub-Servicer shall record such mortgage at the Servicer's expense; or (v),
except as specifically provided herein, any obligations of, or requirement to
pay from Sub-Servicer=s own funds, the Indenture Trustee under the Servicing
Agreement.
(c) The Sub-Servicer shall not be under any obligation to appear in,
prosecute or defend any legal action that is not incidental to its duties to
service the Mortgage Loans in accordance with this Agreement and that in its
opinion may involve it in any expenses or liability; provided, however, that the
Sub-Servicer may, with the prior written consent of the Servicer and the
Financial Guaranty Insurer, undertake any such action that it may deem necessary
or desirable in respect to this Agreement and the rights and duties of the
parties hereto. In such event, the reasonable legal expenses and costs of such
action and any liability resulting therefrom shall be expenses, costs and
liabilities for which the Servicer will be liable and the Sub-Servicer shall be
entitled to be reimbursed therefor from the Servicer upon written demand,
subject to the Financial Guaranty Insurer's consent, to the extent that the
Servicer receives reimbursement from the Trust in accordance with the Servicing
Agreement. To the extent that the Sub-Servicer's actions pursuant to this
Agreement and the results thereof would entitle the Servicer to indemnity from
the Trust Estate if such actions had been performed directly by the Servicer,
the Servicer shall seek indemnification from the Trust Estate for such expenses
and if the Trust Estate actually indemnifies the Servicer, the Servicer shall
indemnify the Sub-Servicer therefore, subject to Financial Guaranty Insurer=s
reasonable consent all in accordance with the Servicing Agreement.
Section 3.05 Sub-Servicer Not to Resign.
The Sub-Servicer shall not resign from the obligations and duties hereby
imposed on it except with the prior written consent of the Financial Guaranty
Insurer, or upon the determination, in Sub-Servicer's reasonable judgment that
the Sub-Servicer's material duties hereunder are no longer permissible under
applicable law, and provided such impermissibility is not caused by an act or
omission of the Sub-Servicer and cannot be cured in a commercially reasonable
manner by the Sub-Servicer. Any such determination permitting the resignation of
the Sub-Servicer shall be evidenced by an Opinion of Counsel to such effect
delivered to the
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Servicer and the Financial Guaranty Insurer, which Opinion of Counsel shall be
in form and substance acceptable to the Servicer and the Financial Guaranty
Insurer.
Section 3.06 No Transfer or Assignment of Servicing.
With respect to the responsibility of the Sub-Servicer to service the
Mortgage Loans hereunder, the Sub-Servicer, acknowledges that the Servicer (and
the Financial Guaranty Insurer, in granting its consent hereto) has acted in
reliance upon the Sub-Servicer's independent status, the adequacy of its
servicing facilities, plant, personnel, records and procedures, its integrity,
reputation and financial standing and the continuance thereof. Without in any
way limiting the generality of this Section 3.06, the Sub-Servicer shall not
either assign or transfer this Agreement or the servicing hereunder nor delegate
its rights or duties hereunder or any portion thereof, whether to any
sub-servicer or otherwise, or sell or otherwise dispose of all or substantially
all of its property or assets, without the prior written consent of the Servicer
and the Financial Guaranty Insurer. Notwithstanding any other provision of this
Agreement, Sub-Servicer shall have the right to assign, transfer and pledge any
right to receive payment under this Agreement without the consent of or notice
to Servicer, the Trust Estate or the Financial Guaranty Insurer.
Section 3.07 Servicer's Cooperation.
The Servicer shall cooperate with the Sub-Servicer, and shall provide to
the Sub-Servicer information in its systems, regarding the Mortgage Loans and
the servicing thereof as reasonably requested by the Sub-Servicer.
Section 3.08 Receipt of Mortgage Loan Amounts.
All amounts collected in connection with the Mortgage Loans before the
Sub-Servicing Commencement Date shall be accounted for and dealt with by the
Servicer in the manner set forth in the Servicing Agreement. Except for
Servicer's interest as Servicer under the Servicing Agreement not specifically
transferred to Sub-Servicer as provided herein, the Servicer specifically
disclaims any interest, legal or equitable, in payments received with respect to
the Mortgage Loans after the Sub-Servicing Commencement Date, and the Servicer
shall endorse any such payments received with respect to the Mortgage Loans
after the Sub-Servicing Commencement Date to the Sub-Servicer and shall forward
such payments to the Sub-Servicer within one Business Day following the receipt
of such payments by the Servicer.
Section 3.09 Subsequent Transfers.
In the event that any mortgage loan, as defined in the Servicing Agreement,
is currently being sub-serviced by another sub-servicer and such other
sub-servicer terminates its servicing of such mortgage loan, such mortgage loan
shall be added to Schedule 2.01, and such mortgage loan shall thereafter be
sub-serviced by the Sub-Servicer; provided, however, that the Sub-Servicer's
obligation to accept servicing with respect to any such mortgage loans shall be
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subject to terms and conditions (including without limit, compensation
provisions) to be mutually agreed upon by the Servicer, Sub-Servicer, and
Financial Guaranty Insurer.
Section 3.10 [Intentionally Omitted].
Section 3.11 Compensation to the Sub-Servicer.
(a) As compensation for Sub-Servicer's services under this Agreement,
Sub-Servicer shall be entitled to the following during its term as Sub-Servicer
(collectively, the "Sub-Servicing Fees"):
(i) payment on a monthly basis on the Remittance Date of an
amount with respect to each Mortgage Loan, that is the product of .000125 (1/12
of 15 basis points) times the aggregate outstanding balance of Mortgage Loans
being serviced by Sub-Servicer as of the first Business Day of each month
whether or not Servicer would be entitled to such Servicing Fee pursuant to the
Servicing Agreement (the "Enhanced Servicing Fees") plus .000416667 (1/12 of 50
basis points) times the aggregate outstanding balance of Mortgage Loans being
serviced by Sub-Servicer for which Servicer would be entitled to such Servicing
Fee pursuant to the Servicing Agreement (the "Regular Servicing Fees"). Payment
of the Enhanced Servicing Fee and Regular Servicing Fees may be made first, by
withdrawals from the Sub-Servicing Account on each Remittance Date to the extent
permitted by Sections 2.02 and 2.07 of the Servicing Agreement; second, from any
prepayment fees received by the Sub-Servicer and due the Servicer under this
Agreement; third, from any reimbursement of Servicing Advances received by the
Sub-Servicer and due the Servicer pursuant to the Servicing Agreement; fourth,
by Sub-Servicer's invoicing the Servicer for such Sub-Servicing Fees, which
invoice shall be paid within ten (10) days of receipt by the Servicer; and
fifth, by payment to the Sub-Servicer from the Reserve Sub-account.
Notwithstanding any other provision of this Agreement, the obligation to pay the
Enhanced Servicing Fee shall commence on the later of the Sub-Servicing
Commencement Date or the Closing Date and shall not be payable with respect to
any period prior to the Sub-Servicing Commencement Date or the Closing Date, as
applicable.
(ii) With the exception of prepayment fees, Sub-Servicer shall be
be entitled to all additional servicing compensation that Servicer would
otherwise be entitled to under Sections 2.02 and 2.07 of the Servicing Agreement
with respect to each Mortgage Loan, for any period in which such Mortgage Loan
was serviced by Sub-Servicer, including without limitation ancillary income,
assumption fees, late payment charges, charges for checks returned for
insufficient funds and extension and other administrative charges ("Additional
Servicing Compensation"). Additional Servicing Compensation will be paid to
Sub-Servicer by Sub-Servicer retaining such Additional Servicing Compensation
prior to depositing proceeds of Mortgage Loans into the Sub-Servicing Account
or, if deposited in the Sub-Servicing Account, by withdrawals from the
Sub-Servicing Account on each Remittance Date as permitted by Sections 2.02 and
2.07 of the Servicing Agreement.
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(iii) The Servicer shall pay to the Sub-Servicer a Set-Up Fee equal to
$5 for each Mortgage Loan for which servicing is transferred to the
Sub-Servicer. Payment of the Set-Up Fees shall be made at Sub-Servicer's
election by Sub-Servicer invoicing the Servicer for such Set-Up Fees, which
invoice shall be paid within ten (10) days of receipt by the Servicer or by
payment to Sub-Servicer from the Reserve Sub-account.
(iv) In the event the Sub-Servicer is terminated pursuant to Section
6.03 of this Agreement, or any Mortgage Loan is transferred to another servicer
or special servicer, the Sub-Servicer shall be entitled (from the Servicer and
not from the Trust Estate unless specifically provided by the Servicing
Agreement) to a Termination Fee of $20 (the "Termination Fee") for each Mortgage
Loan for which the Sub-Servicer transfers servicing in accordance with this
Agreement. In connection with a termination pursuant to Section 6.03 hereof, the
Sub-Servicer shall receive, prior to the transfer of servicing, the Termination
Fees, all outstanding Advances and all other amounts due Sub-Servicer hereunder.
(v) Sub-Servicer shall be entitled to all net income and net gain
realized, and shall be obligated to reimburse any loss from the investment of
funds deposited in the Sub-Servicing Account, as provided in Section 2.02(b) of
the Servicing Agreement. The amount described in this subsection (v) shall be
paid to Sub-Servicer in accordance with the Servicing Agreement, as if the
Sub-Servicer was the Servicer in the Servicing Agreement.
(vi) Sub-Servicer shall remit to Servicer on each Remittance Date all
prepayment fees and compensation payable to Servicer pursuant to 3.01(h)(v), if
any, less any amount due Sub-Servicer hereunder.
Section 3.12 Appointment as Servicer.
If the Servicer is terminated as the servicer under Section 6.01 of the
Servicing Agreement, or Servicer's term is not renewed, the Sub-Servicer, if
appointed by the Indenture Trustee or the Financial Guaranty Insurer, agrees to
accept such appointment as the successor Servicer under the Servicing Agreement
and shall perform all of the duties of the Servicer under the Servicing
Agreement and be bound by all the obligations of the Servicer thereunder, except
that the Sub-Servicer does not assume any obligation described in Sections
3.04(b)(i), (ii) (except as to sub-servicers engaged by the Sub-Servicer) (iii)
or (v) hereof. Upon such occurrence, all future obligations of the Sub-Servicer
under this Agreement shall be terminated, but without payment of any penalty or
Termination Fee, provided, however, that Sub-Servicer shall be entitled to all
unpaid compensation due under Section 3.11 of this Agreement, (provided that the
amount of any unpaid Enhanced Servicing Fees and any unpaid Set-Up Fees shall be
recoverable solely from the Servicer) and Servicer, Sub-Servicer and Financial
Guaranty Insurer shall continue to be entitled and obligated with respect to all
of their respective indemnification obligations pursuant to Section 7.08 of this
Agreement, in each case arising from activities prior to such termination date.
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Section 3.13. Reserve Sub-Account.
Sub-Servicer shall establish a single segregated trust account ("Reserve
Sub-account") to be funded with distributions from, and subject to withdrawals
in accordance with, each of the Sub-Servicing Agreements. The Reserve Sub-
account shall be established for the benefit of Sub-Servicer in the name of, and
under the exclusive dominion and control of Sub-Servicer or its designee.
Sub-Servicer shall deposit into the Reserve Sub-account all amounts designated
for distribution to the Reserve Sub-account at any time pursuant to each of the
Sub-Servicing Agreements until the Reserve Sub-account balance at such time is
$300,000 (the "Reserve Amount"). All net income from the Reserve Sub-account
shall be reinvested in the Reserve Sub-account. Sub-Servicer shall have the
right to withdraw funds from the Reserve Sub-account (i) to reimburse
Sub-Servicer for any Advance made by the Sub-Servicer that was not reimbursed
from proceeds of the related Mortgage Loan following the liquidation or
attempted liquidation of such Mortgage Loan; (ii) to pay any Sub-Servicing Fee
owed Sub-Servicer pursuant to Section 3.11 or any other amount due Sub-Servicer
under this Agreement; and (iii) in accordance with terms of each Sub-Servicing
Agreement other than this Agreement. Sub-Servicer shall determine in its sole
reasonable discretion at least annually whether the Reserve Amount exceeds the
amount required to provide an adequate reserve for amounts payable to
Sub-Servicer from the Reserve Sub-account and shall reduce the Reserve Amount by
the amount of any such excess, provided however, that the Reserve Amount shall
in no event be reduced below $150,000. Promptly after the date on which the last
Sub-Servicing Agreement that is in effect is terminated, Sub-Servicer shall
distribute the balance in the Reserve Sub-account, if any, to Servicer, less any
amounts due Sub-Servicer under the Sub-Servicing Agreements.
Section 3.14 Security Interest.
Servicer hereby grants Sub-Servicer a security interest in the Reserve
Sub-account and in all amounts payable to Servicer under the Servicing Agreement
to secure payment of all amounts due Sub-Servicer under or pursuant to this
Agreement, the Purchase Agreement, any sub-servicing agreement or any similar or
other agreement between Servicer and Sub-Servicer.
Section 3.15 Tax Forms.
The Sub-Servicer shall mail, on or before the date required by law, all
required Internal Revenue Service forms, including without limitation form
numbers 1099, 1099A or 1098, to all persons or entities entitled to receive such
forms for all applicable periods beginning January 1, 2000. Servicer shall
cooperate with Sub-Servicer in the preparation of all such forms and timely
provide to Sub-Servicer all information necessary for Sub-Servicer to prepare
such forms.
Section 3.16 Additional Servicing Procedures.
The parties agree to comply with the additional servicing procedures set
forth on Schedule 3.01(a) hereto as the same may be amended from time to time by
the mutual agreement
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of the parties, provided that this Agreement shall govern in the event of a
conflict between this Agreement and the additional servicing procedures.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.01 Representations, Warranties and Covenants of the Sub-Servicer.
The Sub-Servicer hereby represents and warrants to and covenants with the
Servicer and with the Financial Guaranty Insurer that as of the date of this
Agreement or as of such date as is specifically provided herein:
(a) The Sub-Servicer is a corporation duly organized, validly existing and
in good standing under the laws of the State of Utah and is in compliance with
the laws of each state in which any Mortgaged Property is located to the extent
necessary to perform the sub-servicing obligations hereunder;
(b) The execution and delivery of this Agreement by the Sub-Servicer and
its performance of and compliance with the terms of this Agreement will not
violate the Sub-Servicer's articles of incorporation or by-laws or constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, or result in the breach or acceleration of, any
material contract, agreement or other instrument to which the Sub-Servicer is a
party or which may be applicable to the Sub-Servicer or any of its assets;
(c) The Sub-Servicer has the full power and authority to enter into and
consummate all transactions contemplated by this Agreement, has duly authorized
the execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby, and has duly executed and delivered
this Agreement. This Agreement, assuming due authorization, execution and
delivery by the Servicer, constitutes a valid, legal and binding obligation of
the Sub-Servicer, enforceable against it in accordance with the terms hereof,
except as such enforcement may be limited by bankruptcy, insolvency,
reorganization, receivership, moratorium or other similar laws relating to or
affecting the rights of creditors generally, and by general equity principles
(regardless of whether such enforcement is considered in a proceeding in equity
or at law);
(d) The Sub-Servicer is not in violation of, and the execution and
delivery of this Agreement by the Sub-Servicer and its performance and
compliance with the terms of this Agreement will not constitute a violation with
respect to, any order or decree of any court or any order or regulation of any
federal, state, municipal or governmental agency having jurisdiction, which
violation would materially and adversely affect the condition (financial or
otherwise) or operations of the Sub-Servicer or materially and adversely affect
the performance of Sub-Servicer's duties hereunder;
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(e) There are no actions or proceedings against, or investigations of, the
Sub-Servicer pending, or, to the best knowledge of the Sub-Servicer, threatened,
before any court, administrative agency or other tribunal (A) that, if
determined adversely, would prohibit its entering into this Agreement, (B)
seeking to prevent the consummation of any of the transactions contemplated by
this Agreement, or (C) that, if determined adversely, would result in a material
adverse change with respect to Sub-Servicer or would be reasonably likely to
impair the ability of Sub-Servicer to perform, or to materially and adversely
affect the performance by the Sub-Servicer of its obligations under, or the
validity or enforceability of, this Agreement;
(f) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by the Sub-Servicer of, or compliance by the Sub-Servicer with, this
Agreement, or for the consummation of the transactions contemplated by this
Agreement, except for such consents, approvals, authorizations and orders, if
any, that have been obtained prior to the date of this Agreement;
(g) The Sub-Servicer is duly licensed where required as a "Licensee" or is
otherwise qualified in each state in which it transacts business and is not in
default of such state's applicable laws, rules and regulations, except where the
failure to so qualify or such default would not have a material adverse effect
on the ability of the Sub-Servicer to conduct its business or perform its
obligations hereunder, and the Sub-Servicer is an FHLMC-approved servicer; and
(h) The Sub-Servicer is not required to be registered as an "investment
company" under the Investment Company Act of 1940, as amended.
Section 4.02 Representations and Warranties of the Servicer.
The Servicer hereby represents and warrants to the Sub-Servicer and to the
Financial Guaranty Insurer that as of the date of this Agreement or as of such
date as is specifically provided herein:
(a) The Servicer is a corporation duly organized, validly existing and in
good standing under the laws of the State of California and has, and had at all
relevant times, full power to own its property, to carry on its business as
presently conducted, to enter into and perform its obligations under this
Agreement;
(b) The execution and delivery of this Agreement by the Servicer and its
performance of and compliance with the terms of this Agreement will not violate
the Servicer's articles of incorporation or by-laws or constitute a default (or
an event which, with notice or lapse of time, or both, would constitute a
default) under, or result in the breach or acceleration of, any material
contract, agreement or other instrument to which the Servicer is a party or
which may be applicable to the Servicer or any of its assets;
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(c) The Servicer has the full power and authority to enter into and
consummate the transactions contemplated by this Agreement, has duly authorized
the execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby, and has duly executed and delivered
this Agreement. This Agreement, assuming due authorization, execution and
delivery by the Sub-Servicer, constitutes a valid, legal and binding obligation
of the Servicer, enforceable against it in accordance with the terms hereof,
except as such enforcement may be limited by bankruptcy, insolvency,
reorganization, receivership, moratorium or other similar laws relating to or
affecting the rights of creditors generally, and by general equity principles
(regardless of whether such enforcement is considered in a proceeding in equity
or at law);
(d) The Servicer is not in violation of, and the execution and delivery of
this Agreement by the Servicer and its performance and compliance with the terms
of this Agreement and the Servicing Agreement will not constitute a violation
with respect to, any order or decree of any court or any order or regulation of
any federal, state, municipal or governmental agency having jurisdiction, which
violation would materially and adversely affect the condition (financial or
otherwise) or operations of the Servicer or materially and adversely affect the
performance of Servicer's duties hereunder and thereunder;
(e) There are no actions or proceedings against, or investigations of, the
Servicer pending, or, to the best knowledge of the Servicer, threatened, before
any court, administrative agency or other tribunal (A) that, if determined
adversely, would prohibit its entering into this Agreement, (B) seeking to
prevent the consummation of any of the transactions contemplated by this
Agreement, or (C) that, if determined adversely, would result in a material
adverse change with respect to Servicer or would be reasonably likely to impair
the ability of Servicer to perform, or to materially and adversely affect the
performance by the Servicer of its obligations under, or the validity or
enforceability of, this Agreement;
(f) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by the Servicer of, or compliance by the Servicer with, this
Agreement, or for the consummation of the transactions contemplated by this
Agreement, except for such consents, approvals, authorizations and orders, if
any, that have been obtained prior to the date of this Agreement;
(g) The Servicer is duly licensed where required as a "Licensee" or is
otherwise qualified in each state in which it transacts business and is not in
default of such state's applicable laws, rules and regulations, except where the
failure to so qualify or such default would not have a material adverse effect
on the ability of the Servicer to conduct its business or perform its
obligations hereunder or under the Servicing Agreement;
(h) The Servicer has serviced the Mortgage Loans in accordance with
applicable laws and the Servicing Agreement. As of the Sub-Servicing
Commencement Date, there will be no
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Advances, Compensating Interest or any other payment required to have been paid
or advanced by the Servicer under the Servicing Agreement that have not been
paid or advanced; and
(i) Schedule 2.01 contains all mortgage loans in the Trust Estate except
for the Mortgage Loans and REO Properties set forth on Schedule 4.01(i).
ARTICLE V
DEFAULT
Section 5.01 Events of Default.
(a) In case one or more of the following events (each, an "Event of
Default") by the Sub-Servicer shall occur and be continuing:
(1) except as set forth in clause (a)(3) below, any failure by the
Sub-Servicer to deposit into the designated account any amount required to be so
deposited or remitted under this Agreement or the Servicing Agreement on the
date required under such agreement, subject to any applicable grace period;
(2) the Sub-Servicer shall fail timely to provide to the Servicer,
the Indenture Trustee, or the Financial Guaranty Insurer any report required by
this Agreement to be provided to the Servicer, the Indenture Trustee, or the
Financial Guaranty Insurer, subject to any applicable grace period;
(3) any failure by the Sub-Servicer to make any Servicing Advance as
required under this Agreement, which failure continues unremedied for a period
of 30 days, or any failure on the part of the Sub-Servicer duly to observe or
perform in any material respect any other of the covenants or agreements on the
part of the Sub-Servicer contained in this Agreement which continues unremedied
for a period of 30 days after the earlier of (a) knowledge of the Sub-Servicer
of such failure and (b) the date on which written notice of such failure,
requiring the same to be remedied, shall have been given to the Sub-Servicer by
the Servicer, Financial Guaranty Insurer or Indenture Trustee;
(4) the entry against the Sub-Servicer of a decree or order of a
court or agency or supervisory authority having jurisdiction in the premises for
the appointment of a conservator, receiver, liquidator, trustee or similar
official in any bankruptcy, insolvency, conservatorship, receivership,
readjustment of debt, marshaling of assets and liabilities or similar
proceedings, or for the winding-up or liquidation of its affairs, shall have
been entered against the Sub-Servicer and such decree or order shall have
remained in force undischarged or unstayed for a period of 60 consecutive days;
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(5) the Sub-Servicer shall consent to the appointment of a
conservator, receiver, liquidator, trustee or similar official in any
bankruptcy, insolvency, conservatorship, receivership, readjustment of debt,
marshaling of assets and liabilities or similar proceedings of or relating to
the Sub-Servicer or of or relating to all or substantially all of its property;
(6) the Sub-Servicer shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take advantage of any
applicable bankruptcy, insolvency or reorganization statute, make an assignment
for the benefit of its creditors, voluntarily suspend payment of its
obligations, or take any corporate action in furtherance of the foregoing;
(7) the Sub-Servicer shall cease to be an approved servicer of
residential mortgage loans for FHLMC;
(8) the Sub-Servicer shall assign or transfer or attempt to assign or
transfer all or part of its rights and obligations hereunder except as permitted
by this Agreement;
(9) the Sub-Servicer shall cease to be a wholly-owned subsidiary of
Fairbanks Capital Holding Corp.;
(10) any breach by the Sub-Servicer of a representation or warranty
made in Section 4.01 hereof, which breach continues unremedied for a period of
30 days after the earlier of (a) knowledge of the Sub-Servicer of such breach
and (b) the date on which written notice of such breach requiring the same to be
remedied shall have been given to the Sub-Servicer; or
(11) the Sub-Servicer shall fail to qualify as Sub-Servicer under
Section 2.01 of the Servicing Agreement.
Servicer shall deliver written notice thereof to the Financial Guaranty Insurer,
and in each and every such case, so long as such Event of Default shall not have
been remedied within the applicable time period, if any, set forth above, the
Servicer shall, following ten day's prior written notice to the Financial
Guaranty Insurer which notice shall specify in detail the nature of such Event
of Default terminate, by notice in writing to the Sub-Servicer, all of the
rights and obligations of the Sub-Servicer as Sub-Servicer under this Agreement
unless the Financial Guaranty Insurer directs the Servicer by written notice to
take either no remedial action or a specified remedial measure, in which case
the Servicer shall follow such written notice of the Financial Guaranty Insurer.
From and after the receipt by the Sub-Servicer of such written notice, all
authority and power of the Sub-Servicer under this Agreement, whether with
respect to the Mortgage Loans or otherwise, shall pass to and be vested in the
Servicer pursuant to and under this section, and, without limitations, the
Servicer is hereby authorized and empowered, as attorney-in-fact or otherwise,
to execute and deliver on behalf of Sub-Servicer any and all documents and other
instruments, and to do or accomplish all other acts or things necessary or
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appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and enforcement or assignment of the Mortgage Loans and
related documents, or otherwise.
(b) The Sub-Servicer agrees that if it is terminated pursuant to this
Agreement, it shall promptly (and in any event no later than five Business Days
subsequent to its receipt of the notice of termination), at Servicer's cost and
expense, provide the Servicer with all documents and records (including, without
limitation, those in electronic form) requested by it to enable it to assume the
Sub-Servicer's functions hereunder, and shall cooperate with the Servicer in
effecting the termination of the Sub-Servicer's responsibilities and rights
hereunder and the assumption by a successor of the Sub-Servicer's obligations
hereunder, including, without limitation, the transfer within one Business Day
to the Servicer for administration by it of all cash amounts which shall at the
time be or should have been credited by the Sub-Servicer to the designated
account, or thereafter be received with respect to the Mortgage Loans or any REO
Property subject to Sub-Servicer's rights under Section 6.04.
Section 5.02 Waiver of Defaults.
The Servicer, with the prior written consent of the Financial Guaranty
Insurer, may waive any default by the Sub-Servicer in the performance of its
obligations hereunder and its consequences. Upon any such waiver of a past
default, such default shall cease to exist, and any Event of Default arising
therefrom shall be deemed to have been remedied for every purpose of this
Agreement. No such waiver shall extend to any subsequent or other default or
impair any right consequent thereon except to the extent expressly so waived.
ARTICLE VI
TERMINATION
Section 6.01 Termination.
Except as otherwise specifically set forth herein, the obligations and
responsibilities of the Sub-Servicer shall terminate: (i) upon the later of the
final payment or other liquidation (or any advance with respect thereto) of the
last Mortgage Loan and the disposition of all REO Property and the remittance of
all funds due hereunder; (ii) by mutual consent of the Sub-Servicer, the
Servicer, and the Financial Guaranty Insurer in writing, such consent of
Financial Guaranty Insurer not to be unreasonably withheld; (iii) pursuant to
Section 6.02 of this Agreement; (iv) at the option of any successor to the
Servicer in its sole discretion, subject, however, to the prior written consent
of the Financial Guaranty Insurer; (v) at the option of any purchaser of one or
more Mortgage Loans pursuant to the Servicing Agreement, upon such purchase and
only with respect to such purchased Mortgage Loan or Mortgage Loans (including,
without limitation, the purchase of any delinquent loan in accordance with the
Servicing Agreement); (vi) after sixty (60) days notice by the Sub-Servicer to
the Servicer and the
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<PAGE> 23
Financial Guaranty Insurer, that Servicer has not, within ninety (90) days
following the commencement of any bankruptcy proceeding in which the Servicer is
a "debtor", obtained from the bankruptcy court approval of the assumption of
this Agreement; provided, however, that the Sub-Servicer shall not terminate
this Agreement if within ten (10) days of providing such notice, the Financial
Guaranty Insurer or the Indenture Trustee provides reasonable assurance that the
Sub-Servicer will be paid all amounts due under this Agreement; and (vii) upon
termination of the Servicing Agreement pursuant to Section 7.01 thereof.
Section 6.02 Termination With Cause.
(a) The Servicer may, at its sole option, with the prior written consent
of the Financial Guaranty Insurer but without payment of any penalty or
Termination Fee, terminate any rights the Sub-Servicer may have hereunder with
respect to any or all of the Mortgage Loans as provided in Section 5.01 of this
Agreement upon the occurrence of an Event of Default.
(b) The Financial Guaranty Insurer, upon the occurrence of an Event of
Default under this Agreement, but without payment of any penalty or Termination
Fee, shall have the right to terminate this Agreement immediately upon delivery
of written notice to the Servicer and the Sub-Servicer.
Section 6.03 Termination Without Cause.
The Servicer, with the prior written consent of the Financial Guaranty
Insurer, may terminate this Agreement as of the last day of any Collection
Period as to any or all of the Mortgage Loans for reasons other than those set
forth in Sections 6.01(i), (ii), and (iii) by giving the Sub-Servicer at least
45 days notice of termination, provided that the Servicer in its sole
responsibility shall pay the Termination Fee for the Mortgage Loan or Loans
being terminated. Any notice of termination shall be in writing and delivered to
the Sub-Servicer as provided in Section 7.03 of this Agreement.
Section 6.04 Effect of Termination.
(a) With respect to termination of the Sub-Servicer pursuant to Section
6.02 or Section 6.03 of this Agreement, immediately upon the transfer of the
servicing of the Mortgage Loans, Sub-Servicer's obligations to make any Advance
or any other payment required hereunder shall cease. Upon termination of this
Agreement for any reason, with or without cause, the Sub-Servicer shall be
entitled to the Sub-Servicing Fees for each Mortgage Loan subject to termination
for the entire month in which the servicing transfer date occurs as well as all
other unpaid or unreimbursed Sub-Servicing Fees, reimbursement in full for all
Advances made by Sub-Servicer, and all Prior Monthly Advances remaining
unreimbursed and all other compensation, payments and reimbursable expenses due
the Sub-Servicer through the servicing transfer date (the "Sub-Servicer
Compensation").
19
<PAGE> 24
(b) In the event of termination pursuant to Section 6.03, Sub-Servicer
shall be paid Sub-Servicer Compensation by the Servicer, any successor servicer,
or otherwise on or prior to such servicing transfer date and if the Sub-Servicer
does not receive the Sub-Servicer Compensation by the servicing transfer date,
the Sub-Servicer will be entitled to net such amounts against funds held in the
Sub-Servicing Account and Sub-Servicer shall not be obligated to transfer
servicing of the Mortgage Loans until such time as Sub-Servicer is paid all the
Sub-Servicer Compensation.
(c) In the event of termination pursuant to Section 6.02, Sub-Servicer
shall not be obligated to transfer servicing until either (i) Sub-Servicer is
paid the Sub-Servicer Compensation by the Servicer, any successor servicer, or
otherwise on or prior to such servicing transfer date, or (ii) the successor
servicer is obligated to deposit into the Receivables Reimbursement Account (as
defined in the Purchase Agreement), all collections relating to unreimbursed
Advances within one (1) Business Day of receipt thereof and the successor
servicer provides an endorsement to Lender on its fidelity bond naming Lender as
a loss payee.
(d) This Section 6.04 shall survive any termination of this Agreement and
any termination of this Agreement shall not prejudice the rights of the
Sub-Servicer to recover any Sub-Servicer Compensation. The Sub-Servicer and its
directors, officers, employees and agents shall continue to be entitled to the
benefits of Section 3.04 of this Agreement notwithstanding any termination of
this Agreement.
ARTICLE VII
MISCELLANEOUS
Section 7.01 Payment of Costs
Except as specifically set forth herein, all costs of Servicer or
Sub-Servicer associated with this Agreement shall be paid by the party incurring
such costs.
Section 7.02 Reports.
As long as this Agreement is in effect, the Sub-Servicer shall deliver to
the Financial Guaranty Insurer and Servicer: (A) the audited consolidated
financial statements, balance sheet and statement of income of the Sub-Servicer
and each subsidiary thereof within 90 days of the close of each fiscal year and
(B) the unaudited consolidated quarterly financial statements, balance sheet and
statement of income of the Sub-Servicer thereof within 45 days of the end of
each fiscal quarter.
20
<PAGE> 25
Section 7.03 Notices.
All demands, notices, consents and communications hereunder shall be in
writing and shall be deemed to have been duly given when delivered to the
following addresses:
(1) if to the Servicer:
Aames Capital Corporation
350 South Grand Avenue, 47th Floor,
Los Angeles, California 90071-3406
Attention: National Loan Servicing Director
Fax No. (323) 210-5888
Phone No. (323) 210-4736
with a copy to:
Aames Capital Corporation
350 South Grand Avenue, Suite 52nd Floor,
Los Angeles, California 90071-3406
Attention: Barbara S. Polsky
Fax No. (323) 210-5026
Phone No. (323) 210-4927
(2) if to the Sub-Servicer:
If by U.S. Mail:
Fairbanks Capital Corp.
P.O. Box 65250
Salt Lake City, Utah 84165-0250
Attention: Terrell W. Smith
Fax No. (801) 293-1297
Phone No. (801) 293-1883
If by overnight delivery:
Fairbanks Capital Corp.
3815 South West Temple
Salt Lake City, Utah 84165-4412
Attention: Terrell W. Smith
21
<PAGE> 26
with a copy to:
Wilmer, Cutler & Pickering
2445 M Street, N.W.
Washington, D.C. 20037
Attention: R. J. Bruemmer
Fax No. (202) 663-6363
Phone No. (202) 663-6804
(3) if to the Financial Guaranty Insurer:
Financial Security Assurance Inc.
350 Park Avenue
New York, New York 10022
Attention: Senior Vice President - Surveillance
Fax No. (212) 339-3518
Phone No. (212) 826-0100
or such other address as may hereafter be furnished to the other party by like
notice. Any notice given pursuant hereto shall be effective upon receipt by the
party to whom sent.
Section 7.04 Severability Clause.
Any part, provision, representation or warranty of this Agreement that is
prohibited or that is held to be void or unenforceable shall 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 as to any Mortgage Loan shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the parties hereto waive any provision of law that prohibits
or renders void or unenforceable any provision hereof. If the invalidity of any
part, provision, representation or warranty of this Agreement shall deprive any
party of the economic benefit intended to be conferred by this Agreement, the
parties shall negotiate, in good faith, to develop a structure the economic
effect of which is nearly as possible the same as the economic effect of this
Agreement without regard to such invalidity.
Section 7.05 Counterparts.
This Agreement may be executed simultaneously in any number of
counterparts. Each counterpart shall be deemed to be an original, and all such
counterparts shall constitute one and the same instrument.
22
<PAGE> 27
Section 7.06 Governing Law.
The Agreement shall be construed in accordance with the laws of the State
of California without regard to conflicts rules and the obligations, rights and
remedies of the parties hereunder shall be determined in accordance with the
laws of the State of California except to the extent preempted by Federal Law.
With respect to any claim arising out of this Agreement, each party irrevocably
submits to the jurisdiction of the courts of the state of California, and each
party irrevocably waives any objection which it may have at any time to the
laying of venue of any suit, action or proceeding arising out of or relating
hereto brought in any such courts, irrevocably waives any claim that any such
suit, action or proceeding brought in any such court has been brought in any
inconvenient forum and further waives the right to object, with respect to such
claim, suit, action or proceeding brought in any such court, that such court
does not have jurisdiction over such party, provided that service of process has
been made by any lawful means.
Section 7.07 Security for Expenses.
Except as provided in Section 3.01(e), neither the Servicer nor the
Sub-Servicer shall have any obligation to consent to any amendment or
modification of this Agreement.
Section 7.08 Indemnification.
(a) Servicer Indemnification.
(1) The Servicer shall indemnify the Sub-Servicer and the Financial
Guaranty Insurer and hold harmless each of them against any and all claims,
losses, damages, penalties, fines, forfeitures, reasonable legal fees and
related costs, judgments, and other costs and expenses resulting from any claim,
demand, defense or assertion based on or grounded upon, or resulting from, a
breach of any of the Servicer's representations and warranties and covenants
contained in this Agreement, in any way relating to the failure of the Servicer
to perform its duties in compliance with the terms of this Agreement; provided,
however, that the Servicer shall not be required to indemnify the Sub-Servicer
or the Financial Guaranty Insurer against any liability due to the willful
malfeasance, bad faith, or negligence of the Sub-Servicer or the Financial
Guaranty Insurer hereunder. This indemnity shall survive the termination of this
Agreement and the payment of the Mortgage Loans. The Sub-Servicer or Financial
Guaranty Insurer, as the case may be, shall promptly notify the Servicer if a
claim is made by a third party with respect to a breach of any of the Servicer's
representations and warranties and covenants contained in this Agreement or in
any way relating to the failure of the Servicer to perform its duties in
compliance with the terms of this Agreement. The Servicer shall promptly notify
the Sub-Servicer and the Financial Guaranty Insurer of any claim of which it has
been notified pursuant to this Section 7.08 by a Person other than the party
claiming indemnification, as the case may be, and, in any event, shall promptly
notify the Sub-Servicer and the Financial Guaranty Insurer of its intended
course of action with respect to any claim.
23
<PAGE> 28
(2) The Servicer shall be entitled to participate in and, upon notice
to the Sub-Servicer and the Financial Guaranty Insurer, assume the defense of
any such action or claim in reasonable cooperation with, and with the reasonable
cooperation of the Sub-Servicer and the Financial Guaranty Insurer. The
Sub-Servicer and the Financial Guaranty Insurer shall have the right to employ
their own counsel in any such action in addition to the counsel of the Servicer,
but the fees and expenses of such counsel shall be at the expense of the
Sub-Servicer and the Financial Guaranty Insurer, unless (a) the employment of
counsel by the Sub-Servicer and the Financial Guaranty Insurer at its expense
has been authorized in writing by the Servicer, (b) the Servicer has not in fact
employed counsel to assume the defense of such action within a reasonable time
after receiving notice of the commencement of the action, or (c) the named
parties to any such action or proceeding (including any impleaded parties)
include the Servicer and either the Sub-Servicer or the Financial Guaranty
Insurer, or both, and the Sub-Servicer and the Financial Guaranty Insurer have
been advised by counsel that there may be one or more legal defenses available
to them which are different from or additional to those available to the
Servicer. The Servicer shall not be liable for any settlement of any such claim
or action unless the Servicer shall have consented thereto or be in default on
its obligations hereunder. Any failure by the Sub-Servicer or the Financial
Guaranty Insurer to comply with the provisions of this section shall relieve the
Servicer of liability only if such failure is materially prejudicial to the
position of the Servicer and then only to the extent of such prejudice.
(b) Sub-Servicer Indemnification.
(1) The Sub-Servicer shall indemnify the Servicer and the Financial
Guaranty Insurer and hold harmless each of them against any and all claims,
losses, damages, penalties, fines, forfeitures, reasonable legal fees and
related costs, judgments, and other costs and expenses resulting from any claim,
demand, defense or assertion based on or grounded upon, or resulting from, a
breach of any of the Sub-Servicer's representations and warranties and covenants
contained in this Agreement or in any way relating to the failure of the
Sub-Servicer to perform its duties in compliance with the terms of this
Agreement; provided, however, that the Sub-Servicer shall not be required to
indemnify the Servicer or the Financial Guaranty Insurer against any liability
due to the willful malfeasance, bad faith, or negligence of the Servicer or the
Financial Guaranty Insurer hereunder. This indemnity shall survive the
termination of this Agreement and the payment of the Mortgage Loans. The
Servicer and the Financial Guaranty Insurer, as the case may be, shall promptly
notify the Sub-Servicer if a claim is made by a third party with respect to a
breach of any of the Sub-Servicer's representations and warranties and covenants
contained in this Agreement or in any way relating to the failure of the
Sub-Servicer to perform its duties in compliance with the terms of this
Agreement. The Sub-Servicer shall promptly notify the Servicer and the Financial
Guaranty Insurer of any claim of which it has been notified pursuant to this
Section 7.08 by a Person other than the Servicer or the Financial Guaranty
Insurer, as the case may be, and, in any event, shall promptly notify the
Servicer and the Financial Guaranty Insurer of its intended course of action
with respect to any claim.
24
<PAGE> 29
(2) The Sub-Servicer shall be entitled to participate in and,
upon notice to the Servicer and the Financial Guaranty Insurer, assume the
defense of any such action or claim in reasonable cooperation with, and with the
reasonable cooperation of the Servicer and the Financial Guaranty Insurer. The
Servicer and the Financial Guaranty Insurer shall have the right to employ their
own counsel in any such action in addition to the counsel of the Sub-Servicer,
but the fees and expenses of such counsel shall be at the expense of the
Servicer and the Financial Guaranty Insurer, unless (a) the employment of
counsel by the Servicer and the Financial Guaranty Insurer at its expense has
been authorized in writing by the Sub-Servicer, (b) the Sub-Servicer has not in
fact employed counsel to assume the defense of such action within a reasonable
time after receiving notice of the commencement of the action, or (c) the named
parties to any such action or proceeding (including any impleaded parties)
include the Sub-Servicer and either the Servicer or the Financial Guaranty
Insurer, or both, and the Servicer and the Financial Guaranty Insurer have been
advised by counsel that there may be one or more legal defenses available to
them which are different from or additional to those available to the
Sub-Servicer. The Sub-Servicer shall not be liable for any settlement of any
such claim or action unless the Sub-Servicer shall have consented thereto or be
in default on its obligations hereunder. Any failure by the Servicer or the
Financial Guaranty Insurer to comply with the provisions of this section shall
relieve the Sub-Servicer of liability only if such failure is materially
prejudicial to the position of the Sub-Servicer and then only to the extent of
such prejudice.
Section 7.09 Protection of Confidential Information.
The Sub-Servicer shall keep confidential and shall not divulge to any party
other than the Servicer, the Indenture Trustee, or the Financial Guaranty
Insurer, without the Servicer's prior written consent, any information
pertaining to the Mortgage Loans or any borrower thereunder, except to the
extent that it is appropriate for the Sub-Servicer to do so in working with
legal counsel, auditors, taxing authorities or other governmental agencies or in
accordance with this Agreement.
Section 7.10 Intention of the Parties.
It is the intention of the parties that the Servicer is conveying, and the
Sub-Servicer is receiving, only a contract for sub-servicing the Mortgage Loans.
Accordingly, the parties hereby acknowledge that the Indenture Trustee remains
the sole and absolute beneficial owner of the Mortgage Loans and all rights
related thereto.
Section 7.11 Third Party Beneficiary.
The Indenture Trustee, for the benefit of the Certificateholders, and the
Financial Guaranty Insurer shall be third party beneficiaries under this
Agreement, provided that, except to the extent the Indenture Trustee or its
designee assumes the obligations of the Servicer hereunder as contemplated by
Section 6.04 of the Servicing Agreement, none of the Indenture Trustee, the
25
<PAGE> 30
Trust Estate, the Financial Guaranty Insurer, any successor Servicer, or any
Certificateholder shall have any duties under this Agreement or any liabilities
arising herefrom.
Section 7.12 Successors and Assigns; Assignment of Agreement.
This Agreement shall bind and inure to the benefit of and be enforceable by
the Sub-Servicer and the Servicer and the respective successors and assigns of
the Sub-Servicer and the Servicer. This Agreement shall not be assigned, pledged
or hypothecated by the Sub-Servicer to a third party except as otherwise
specifically provided for herein and shall be subject to the prior written
consent of the Financial Guaranty Insurer in each instance. If the Servicer
shall for any reason no longer act in such capacity under the Servicing
Agreement, the Indenture Trustee or its designee may thereupon assume all of the
rights and, except to the extent they arose prior to the date of assumption,
obligations of the Servicer under this Agreement or, alternatively, may
terminate this Agreement as provided in Section 6.01(iv) of this Agreement.
Notwithstanding any other provision of this Agreement, Sub-Servicer shall have
the right to assign, transfer and pledge any right to receive payment under this
Agreement without the consent of or notice to Servicer, the Trust Estate, the
Indenture Trustee or the Financial Guaranty Insurer.
Section 7.13 Waivers.
No term or provision of this Agreement may be waived or modified unless
such waiver or modification is in writing and signed by the party against whom
such waiver or modification is sought to be enforced and the Financial Guaranty
Insurer shall have consented to such waiver.
Section 7.14 Exhibits.
The exhibits to this Agreement are hereby incorporated and made a part
hereof and are an integral part of this Agreement.
Section 7.15 General Interpretive Principles.
The general interpretive principles set forth in the Servicing Agreement
are hereby incorporated herein by reference, provided that references therein to
the Servicing Agreement shall, for the purposes of this Agreement, be deemed to
be references to this Agreement.
Section 7.16 Reproduction of Documents.
The provisions with respect to reproduction of documents set forth in the
Servicing Agreement are hereby incorporated herein by reference, provided that
references therein to the Servicing Agreement shall, for purposes of this
Agreement, be deemed to be references to this Agreement.
26
<PAGE> 31
Section 7.17 Further Agreement; Power-of-Attorney.
The Sub-Servicer and the Servicer each agree to execute and deliver to the
other (with copies to the Financial Guaranty Insurer) such reasonable and
appropriate additional documents, instruments or agreements as may be necessary
or appropriate to effectuate the purposes of this Agreement. Servicer hereby
irrevocably grants to Sub-Servicer a limited power-of-attorney to execute
documents as may be necessary or appropriate so as to enable Sub-Servicer to
collect payments against, to liquidate and to otherwise manage and service the
Mortgage Loans and properties in accordance with this Agreement.
Section 7.18 Amendments.
This Agreement may only be modified, supplemented or amended by written
agreement by and between the Sub-Servicer and the Servicer, with the Financial
Guaranty Insurer's prior written consent in each instance. No amendment to the
Servicing Agreement that purports to change the rights or obligations of the
Sub-Servicer hereunder shall be effective against the Sub-Servicer without the
express prior written consent of the Sub-Servicer.
Section 7.19 Entire Agreement.
This Agreement contains the entire agreement and understanding between the
parties with respect to the subject matter hereof and supersedes all prior and
contemporaneous agreements and understandings, express or implied, oral or
written, of any nature whatsoever with respect to the subject matter hereof.
Section 7.20 Expenses.
Servicer shall pay Sub-Servicer's costs and expenses reasonably incurred in
connection with its due diligence and the preparation, negotiation, execution,
delivery and enforcement of this Agreement, including but not limited to the
fees and out-of-pocket expenses of its attorneys.
Section 7.21 Non-Disclosure.
The Servicer and Sub-Servicer agree not to disclose information concerning
this transaction without their mutual agreement and the consent of the Financial
Guaranty Insurer, except as may be required by law or regulation.
[Signature page follows]
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<PAGE> 32
IN WITNESS WHEREOF, the Sub-Servicer and the Servicer have caused their
names to be signed hereto by their respective officers thereunto duly authorized
as of the date first above written.
AAMES CAPITAL CORPORATION
By: /s/ Cary H. Thompson
------------------------------------
Cary H. Thompson
Its: Chief Executive Officer
-----------------------------------
FAIRBANKS CAPITAL CORP.
By: /s/ Kim A. Stevenson
------------------------------------
Its: Executive Vice President--
Administration
-----------------------------------
<PAGE> 33
EXHIBIT A
SERVICING AGREEMENT
A-1
<PAGE> 34
SCHEDULE 2.01
MORTGAGE LOAN SCHEDULE
B-1
<PAGE> 35
SCHEDULE 3.01(a)
ADDITIONAL SERVICING PROCEDURES
B-2
<PAGE> 36
SCHEDULE 3.01(d)
LOANS FOR WHICH SUB-SERVICER HAS NO
PAYMENT OBLIGATIONS ON MAY 12, 1999
All of the Mortgage Loans listed on Schedule 2.01.
B-3
<PAGE> 37
SCHEDULE 4.01(i)
CERTAIN EXCLUDED MORTGAGE LOANS AND REO PROPERTIES
B-4
<PAGE> 1
EXHIBIT 10.36
EXECUTION COPY
- --------------------------------------------------------------------------------
AAMES CAPITAL CORPORATION
Servicer
and
FAIRBANKS CAPITAL CORP.
Sub-Servicer
-------------------------
SUB-SERVICING AGREEMENT
Dated as of April 21, 1999
-------------------------
Aames Mortgage Trust 1996-D
Mortgage Pass-Through Certificates Series 1996-D
Financial Security Assurance Inc., Certificate Insurer
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
DEFINITIONS..........................................................................1
Section 1.01 Defined Terms..............................................1
ARTICLE II
SERVICER'S ENGAGEMENT OF SUB-SERVICER TO PERFORM SERVICING RESPONSIBILITIES..........2
Section 2.01 Contract for Sub-Servicing.................................2
Section 2.02 Possession of Mortgage Loan Documents......................3
ARTICLE III
SERVICING OF THE MORTGAGE LOANS......................................................3
Section 3.01 Sub-Servicer to Service...................................3
Section 3.02 Loan Information and Financial Statements.................7
Section 3.03 Merger or Consolidation of the Sub-Servicer...............7
Section 3.04 Limitation on Liability of the Sub-Servicer and Others....8
Section 3.05 Sub-Servicer Not to Resign................................9
Section 3.06 No Transfer or Assignment of Servicing....................9
Section 3.07 Servicer's Cooperation....................................9
Section 3.08 Receipt of Mortgage Loan Amounts.........................10
Section 3.09 Subsequent Transfers.....................................10
Section 3.10 [Intentionally Omitted]..................................10
Section 3.11 Compensation to the Sub-Servicer.........................10
Section 3.12 Appointment as Servicer..................................12
Section 3.13 Reserve Sub-Account......................................12
Section 3.14 Security Interest........................................13
Section 3.15 Tax Forms................................................13
Section 3.16 Additional Servicing Procedures..........................13
ARTICLE IV
REPRESENTATIONS AND WARRANTIES......................................................13
Section 4.01 Representations, Warranties and Covenants of the Sub-
Servicer.................................................................13
Section 4.02 Representations and Warranties of the Servicer...........15
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
ARTICLE V
DEFAULT..............................................................................16
Section 5.01 Events of Default. .......................................16
Section 5.02 Waiver of Defaults. ......................................18
ARTICLE VI
TERMINATION..........................................................................19
Section 6.01 Termination...............................................19
Section 6.02 Termination With Cause ...................................19
Section 6.03 Termination Without Cause. ...............................20
Section 6.04 Effect of Termination.....................................20
ARTICLE VII
MISCELLANEOUS........................................................................21
Section 7.01 Payment of Costs..........................................21
Section 7.02 Reports. ................................................ 21
Section 7.03 Notices. .................................................21
Section 7.04 Severability Clause. .....................................23
Section 7.05 Counterparts. ............................................23
Section 7.06 Governing Law. ...........................................23
Section 7.07 Security for Expenses. ...................................23
Section 7.08 Indemnification. .........................................24
Section 7.09 Protection of Confidential Information. ..................26
Section 7.10 Intention of the Parties. ................................26
Section 7.11 Third Party Beneficiary. .................................26
Section 7.12 Successors and Assigns; Assignment of Agreement. .........26
Section 7.13 Waivers. .................................................27
Section 7.14 Exhibits. ................................................27
Section 7.15 General Interpretive Principles. .........................27
Section 7.16 Reproduction of Documents. ...............................27
Section 7.17 Further Agreement; Power-of-Attorney. ....................27
Section 7.18 Amendments. ..............................................27
Section 7.19 Entire Agreement. ........................................28
Section 7.20 Expenses .................................................28
Section 7.21 Non-Disclosure. ..........................................28
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT A
POOLING AND SERVICING AGREEMENT.....................................................A-1
SCHEDULE 2.01
MORTGAGE LOAN SCHEDULE..............................................................B-1
SCHEDULE 3.01(a)
ADDITIONAL SERVICING PROCEDURES.....................................................B-2
SCHEDULE 3.01(d)
LOANS FOR WHICH SUB-SERVICER HAS NO
PAYMENT OBLIGATIONS ON MAY 12, 1999.................................................B-3
SCHEDULE 4.01(i)
CERTAIN EXCLUDED MORTGAGE LOANS AND REO PROPERTIES..................................B-4
</TABLE>
iii
<PAGE> 5
SUB-SERVICING AGREEMENT
This is a Sub-Servicing Agreement (the "Agreement"), dated as of April
21, 1999, by and between FAIRBANKS CAPITAL CORP., a Utah corporation, having an
office at 3815 South West Temple, Salt Lake City, Utah 84165-4412, and its
successors and assigns (the "Sub-Servicer"), and Aames Capital Corporation, a
California corporation, having an office at 350 South Grand Avenue, Los Angeles,
California 90071, and its successors and assigns (the "Servicer").
W I T N E S S E T H:
WHEREAS, the Servicer and Bankers Trust Company (the "Trustee") have
entered into that certain Pooling and Servicing Agreement dated as of December
1, 1996 (as amended, the "Pooling and Servicing Agreement"), whereby the
Servicer will service certain mortgage loans on behalf of the Trustee;
WHEREAS, the Servicer desires to enter into a contract with the
Sub-Servicer whereby the Sub-Servicer shall service those mortgage loans listed
on Schedule 2.01 (the "Mortgage Loan Schedule") attached hereto (the "Mortgage
Loans") in the name of on behalf of the Servicer;
WHEREAS, as the parties contemplate that Sub-Servicer may purchase from
Servicer the right to be reimbursed for all delinquency advances made by
Servicer with respect to the Mortgage Loans pursuant a purchase agreement to be
entered into by the parties (the "Purchase Agreement"); and
WHEREAS, certain obligations hereunder will become effective upon the
closing, if any, of the Purchase Agreement (the "Closing Date")
NOW, THEREFORE, in consideration of the mutual agreements hereinafter
set forth, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Servicer and the Sub-Servicer
hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01 Defined Terms.
Unless otherwise specified in this Agreement, all capitalized terms not
otherwise defined herein shall have the meanings set forth in the Pooling and
Servicing Agreement. As used herein, the following terms have the meanings
assigned to them in this SECTION 1.01:
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"Advance" shall mean any Monthly Advance or Servicing Advance.
"Event of Default" shall have the meaning set forth in Article V.
"Lender" shall mean any lender or lenders providing financing to
Sub-Servicer for the Purchase Agreement.
"Lockbox Advances" shall mean advances on funds received at the lockbox
account for which the lockbox bank does not make funds available for withdrawal
on the same day received.
"Non-Recoverable Advance" shall mean a Servicing Advance made by
Sub-Servicer that would be uncollectible through Monthly Mortgage Payments,
Insurance Proceeds, Liquidation Proceeds, proceeds from a Principal Payment or
other proceeds of the related Mortgage Loan.
"Prior Monthly Advances" shall mean Monthly Advances on the Mortgage
Loans made by Servicer prior to the Sub-Servicing Commencement Date.
"Reserve Sub-account" shall have the meaning set forth in Section 3.13.
"Sub-Servicing Agreements" shall mean this Agreement and each of the
Sub-Servicing Agreements between Servicer and Sub-Servicer with respect to Aames
Capital Owner Trust 1997-1, Aames Mortgage Trust 1996-B, and Aames Mortgage
Trust 1996-C.
"Sub-Servicing Commencement Date" shall mean May 1, 1999.
"Sub-Servicing Fees" shall mean, with respect to any Collection Period,
the applicable servicing fees and compensation as established pursuant to
Section 3.11.
"Uncollectible Advance" shall mean a Monthly Advance made by
Sub-Servicer or a Prior Monthly Advance made by Servicer which is or would be
uncollectible through Monthly Mortgage Payments, Insurance Proceeds, Liquidation
Proceeds, proceeds from a Principal Payment or other proceeds of the related
Mortgage Loan.
ARTICLE II
SERVICER'S ENGAGEMENT OF SUBSERVICER TO PERFORM
SERVICING RESPONSIBILITIES
Section 2.01 Contract for Sub-Servicing.
The Servicer, by execution and delivery of this Agreement, does hereby
contract with the Sub-Servicer for, and Sub-Servicer hereby agrees to perform
commencing on the Sub-Servicing
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Commencement Date, in each case subject to the terms of this Agreement, the
servicing of the Mortgage Loans listed on Schedule 2.01.
Section 2.02 Possession of Mortgage Loan Documents.
(a) Within one (1) Business Day prior to the Sub-Servicing Commencement
Date, the Servicer, at Servicer's sole cost and expense, shall deliver to
Sub-Servicer a copy of each Mortgage File and other servicing, underwriting and
origination documents relating to the Mortgage Loans in Servicer's possession,
and on or before the Sub-Servicing Commencement Date, Servicer shall transfer to
Sub-Servicer all electronic data in Servicer's possession necessary to service
the Mortgage Loans and to provide current data with respect to the Mortgage
Loans and REO Property. Such copies of Mortgage Files shall include, without
limit, all documents relating to servicing, foreclosure, bankruptcy, and REO
Property with respect to any Mortgage Loan.
(b) The Sub-Servicer shall hold each Mortgage File and each document
contained therein in the possession of the Sub-Servicer in trust on behalf of
the Servicer for the benefit of the Trustee and the Certificate Insurer. The
Sub-Servicer's possession of any portion of the Mortgage File shall be for the
sole purpose of facilitating the servicing of the related Mortgage Loan pursuant
to this Agreement and the Pooling and Servicing Agreement, and such retention
and possession by the Sub-Servicer shall be in a custodial capacity only. Any
portion of the Mortgage File retained by the Sub-Servicer shall be identified to
reflect clearly the ownership of the related Mortgage Loan by the Trustee. The
Sub-Servicer shall release from its custody any Mortgage File retained by it
only in accordance with this Agreement and the Pooling and Servicing Agreement.
The Sub-Servicer shall provide to the Servicer as soon as practicable after
request therefor by the Servicer a copy of any documents held by it with respect
to any Mortgage Loan.
ARTICLE III
SERVICING OF THE MORTGAGE LOANS
Section 3.01 Sub-Servicer to Service.
(a) The Sub-Servicer, as an independent contractor, shall service and
administer the Mortgage Loans in accordance with the Pooling and Servicing
Agreement and this Agreement, including the additional servicing procedures set
forth on Schedule 3.01(a) hereto as may be amended from time to time. This
Agreement shall govern in the event of any conflict between this Agreement and
the additional servicing procedures. The Sub-Servicer shall perform all
obligations of Servicer under the Pooling and Servicing Agreement except as
specifically provided herein and shall prepare and deliver to Servicer all
documents and reports required to be delivered by the Servicer to the Trustee or
the Certificate Insurer at least two (2) Business Days
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prior to the date the Servicer must deliver such reports, provided, however,
that Sub-Servicer shall provide to Servicer such information as to the Mortgage
Loans being serviced by Sub-Servicer as is required by Servicer to prepare the
Servicer Remittance Report not later than the second Business Day of each month.
Sub-Servicer shall comply in all material respects with applicable law in
collecting the Mortgage Loans. The Sub-Servicer is hereby authorized and
empowered, subject to the terms of this Agreement, to execute and deliver on
behalf of itself and the Servicer all instruments of satisfaction or
cancellation, or of partial or full release, discharge and all other comparable
instruments, with respect to the Mortgage Loans and with respect to the
Mortgaged Properties. The Servicer shall furnish the Sub-Servicer with any
powers of attorney and other documents necessary or appropriate to enable the
Sub-Servicer to carry out its servicing and administrative duties under this
Agreement.
(b) The Sub-Servicer shall cause the portions of its electronic ledger
relating to the Mortgage Loans to be clearly and unambiguously marked, and shall
make appropriate entries in Sub-Servicer's general accounting records to
indicate that such Mortgage Loans constitute part of the Trust in accordance
with the terms of the Trust created under the Pooling and Servicing Agreement.
(c) The Sub-Servicer shall, in cooperation with the Trustee, establish
on or prior to the Sub-Servicing Commencement Date and maintain thereafter one
or more trust accounts (the "Sub-Servicing Account") in a manner consistent with
Section 3.02(b) of the Pooling and Servicing Agreement. The Sub-Servicing
Account shall be an Eligible Account established in the name of the Trustee as
trustee of Aames Mortgage Trust 1996-D. The Sub-Servicer shall deposit into the
Sub-Servicing Account no later than the first Business Day after receipt all
proceeds of Mortgage Loans received by the Sub-Servicer (except for Additional
Servicing Compensation as set forth in Section 3.11 hereof) consistent with
Section 3.02 of the Pooling and Servicing Agreement. The Sub-Servicer shall make
Lockbox Advances necessary to deposit such proceeds into the Sub-Servicing
Account in accordance with this Agreement and Section 3.02 of the Pooling and
Servicing Agreement. The Sub-Servicer shall remit such proceeds to the
Certificate Account on or before the Deposit Date. The Sub-Servicer shall be
able to withdraw Sub-Servicer's servicing compensation from the Sub-Servicing
Account on such date in accordance with Section 3.08 of the Pooling and
Servicing Agreement. The Sub-Servicer shall be permitted to withdraw from time
to time from the Sub-Servicing Account amounts representing reimbursements for
Advances made hereunder or purchased by the Sub-Servicer from the Seller in
accordance with the priorities set forth in Section 3.01(h). The Sub-Servicer
shall send to the Servicer a statement of proceeds of Mortgage Loans collected
by or on behalf of the Sub-Servicer within two (2) Business Days after the end
of every month, and the Servicer shall compare the information provided in such
reports with the deposits made by the Sub-Servicer into the Certificate Account
for the same period. The Sub-Servicer shall direct the investment of the
Sub-Servicing Accounts in Permitted Investments in accordance with the
requirements of Section 3.02(b) of the Pooling and Servicing Agreement.
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(d) The Sub-Servicer shall deposit into the Certificate Account one (1)
Business Day prior to each Deposit Date, commencing with the first Deposit Date
after the Sub-Servicing Commencement Date, Monthly Advances due the Certificate
Account on such Deposit Date in accordance with the terms of the Pooling and
Servicing Agreement as if the Sub-Servicer were the Servicer thereunder,
provided, however, that Sub-Servicer shall not be responsible for funding
Servicing Advances or Monthly Advances or remitting any collections on the
Deposit Date of May 12, 1999 with respect to the Mortgage Loans listed on
Schedule 3.01(d) , or any other Mortgage Loan as to which Servicer has received
payments with respect to such Mortgage Loans during April 1999 and all such
advances, payments and collections shall be made directly by Servicer.
Notwithstanding any other provision of this Agreement, Sub-Servicer shall not be
responsible for funding Servicing Advances or Monthly Advances to the extent
that Sub-Servicer deems such Servicing Advances or Monthly Advances to be
Non-Recoverable Advances or Uncollectible Advances, respectively, and gives
Servicer notice that it has deemed such Servicing Advances or Monthly Advances
to be Non-Recoverable Advances or Uncollectible Advances, respectively, five (5)
Business Days prior to the Deposit Date on which such an Advance would have been
made were it not deemed a Non-Recoverable Advance or Uncollectible Advance.
Compensating Interest shall be an obligation of Servicer and Sub-Servicer shall
have no obligation to make any payment with respect to Compensating Interest. To
the extent not paid directly by the Servicer, Sub-Servicer shall have the right
to pay Compensating Interest and off-set it against monies collected by
Sub-Servicer which represent amounts due Servicer with respect to Lockbox
Advances and Servicing Advances previously made by Servicer or from amounts
payable to Servicer including prepayment fees under the Pooling and Servicing
Agreement (collectively, the "Servicer Reimbursement Funds").
(e) This Agreement is intended to be consistent with and not to violate
the provisions of the Pooling and Servicing Agreement, including without limit
Sections 3.01, 3.02, and 3.15 thereof. Accordingly, if it is discovered that any
provision of this Agreement is not consistent with or violates any provision of
the Pooling and Servicing Agreement, the Pooling and Servicing Agreement shall
prevail, and the Sub-Servicer and the Servicer shall execute such amendments,
subject to the provisions of Section 7.18 hereof, as are reasonably necessary to
make this Agreement consistent with the Pooling and Servicing Agreement while
maintaining as nearly as possible the same economic benefits intended to be
conferred on the parties by this Agreement without regard to such inconsistency
or violation.
(f) The Sub-Servicer agrees that it shall not knowingly or
intentionally take any action that would result in the termination of the REMIC
status for the Trust, and that it shall not knowingly or intentionally engage in
any "prohibited transaction", as such term is defined in Section 860F(a)(2) of
the Code. In the event that any tax is imposed on "prohibited transactions" as
defined in Section 860F(a)(2) of the Code on the "net income from foreclosure
property" as defined in Section 860G of the Code, on any contribution to the
Trust after the applicable Startup Date pursuant to 860G of the Code, or any
other tax is imposed, such tax shall be paid by the Sub-Servicer, if, but only
if such tax arises out of or results from the gross negligence, willful
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malfeasance or bad faith of the Sub-Servicer in the performance of its
obligations under this Agreement.
(g) [intentionally omitted]
(h) Except as set forth in this Section 3.01(h), Sub-Servicer shall not
be obligated to reimburse Servicer for any Advance made or Compensating Interest
paid by Servicer. As amounts are collected by Sub-Servicer which represent
reimbursements to Servicer or Sub-Servicer with respect to a particular mortgage
loan (a "Specific Mortgage Loan"), these amounts shall be paid or credited in
the following priority from time to time but in no event less frequently than
once a month:
(i) first, to Sub-Servicer to reimburse it for Monthly
Advances (including any such Advances made by the Servicer,
the reimbursement rights for which have been sold to the
Sub-Servicer pursuant to the Purchase Agreement), Servicing
Advances, Lockbox Advances and Sub-Servicing Fees (in that
order) with respect to the Specific Mortgage Loan;
(ii) second, to Sub-Servicer to reimburse Sub-Servicer for
any Compensating Interest for any Mortgage Loan which
Sub-Servicer has elected to pay notwithstanding Servicer's
obligation to pay Compensating Interest;
(iii) third, to Sub-Servicer to pay any amount due and
payable to Sub-Servicer under this Agreement or the Purchase
Agreement, including, without limitation, to reimburse
Sub-Servicer for any Monthly Advances and Servicing Advances
made by Sub-Servicer that have not been reimbursed following
liquidation of the related Mortgage Loan, or where proceeds
of any Mortgage Loan that would have otherwise been
available to reimburse Sub-Servicer for Advances made by
Servicer or Sub-Servicer under this Agreement have been
applied by the Trustee or the Certificate Insurer to set-off
amounts owed by the Servicer in respect of any default by
Servicer under this Agreement or the Pooling and Servicing
Agreement;
(iv) fourth, to Sub-Servicer to fund the Reserve Sub-account
to the extent required by Section 3.13; and
(v) fifth, any remaining amounts, to the Servicer.
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(i) Sub-Servicer shall service the Mortgage Loans on a private label
basis under the name of Servicer as Servicer's servicing agent and, except as
may be required by law or is required or desirable in connection with the
performance of its obligations hereunder, Sub-Servicer shall not disclose that
it is a sub-servicer for the Mortgage Loans.
Section 3.02 Loan Information and Financial Statements.
(a) No later than three (3) Business Days following each Deposit Date,
and no later than two (2) Business Days following any request by the Certificate
Insurer, the Sub-Servicer shall deliver to the Certificate Insurer or its
designee, a computer tape or electronic transmission in such format as shall be
agreed by the Certificate Insurer and the Sub-Servicer containing the "loan
level" information with respect to the Mortgage Loans as of the related Servicer
Remittance Date, or such other date specified by the Certificate Insurer if such
information is being provided upon its request. The form of such "loan level"
information may be modified by mutual agreement of the Sub-Servicer and the
Certificate Insurer.
(b) Sub-Servicer shall maintain appropriate records of information
relating to the servicing of the Mortgage Loans and the REO Property and related
books and records. Sub-Servicer will promptly provide Servicer or Certificate
Insurer with (i) information from and access to such records, upon the
reasonable request of Servicer or Certificate Insurer, and (ii) audit rights to
discuss the affairs, finances and accounts with the appropriate officers or
employees of the Sub-Servicer and with the Sub-Servicer's independent
accountants.
Section 3.03 Merger or Consolidation of the Sub-Servicer.
(a) The Sub-Servicer shall keep in full effect its existence, rights,
and franchises as a corporation under the laws of the state of its incorporation
except as permitted herein, and shall obtain and preserve its qualification to
do business as a foreign corporation in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and
enforceability of this Agreement and the Pooling and Servicing Agreement or any
of the Mortgage Loans and to perform its duties under this Agreement and shall
continue to meet the requirements of Sections 3.01 and 3.15 of the Pooling and
Servicing Agreement as shall be necessary to perform its duties under this
Agreement and the Pooling and Servicing Agreement (including maintaining
licenses and qualifications necessary to perform its servicing obligations in
states where the Mortgaged Properties are located).
(b) Any Person into which the Sub-Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Sub-Servicer shall be a party, or any Person
succeeding to the business of the Sub-Servicer, shall be the successor of the
Sub-Servicer hereunder, without the execution or filing of any paper or any
further act on the part of any of the parties hereto, anything herein to the
contrary notwithstanding, if the successor or surviving Person (i) meets the
requirements and complies with the terms of Section 3.01 of the Pooling and
Servicing Agreement, (ii) has received the prior
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written consent of the Certificate Insurer, and (iii) has received the prior
written consent of the Servicer.
Section 3.04 Limitation on Liability of the SubServicer and Others.
(a) Other than provided in Section 7.08(b) hereof, neither the
Sub-Servicer nor any of the directors or officers or employees or agents of the
Sub-Servicer shall be under any liability to the Servicer or the Certificate
Insurer for any action taken or for refraining from the taking of any action in
good faith pursuant to this Agreement, or for errors in judgment; provided,
however, that this provision shall not protect the Sub-Servicer or any such
Person against any liability that would otherwise be imposed by reason of such
Person's willful misfeasance, bad faith or gross negligence in the performance
of duties by the Sub-Servicer or by reason of such Person's reckless disregard
of its obligations and duties hereunder; and provided, further, that this
provision shall not be construed to entitle the Sub-Servicer to indemnity in the
event that amounts advanced by the Sub-Servicer to retire any senior lien exceed
Net Liquidation Proceeds realized with respect to the related Mortgage Loan. The
Sub-Servicer and any director, officer, employee or agent of the Sub-Servicer
may rely in good faith on any document of any kind prima facie properly executed
and submitted by any Person respecting any matters arising hereunder.
(b) Notwithstanding anything else contained in this Agreement, the
Sub-Servicer does not assume (i) any responsibility to indemnify nor make any of
the Seller's representations and warranties under the Pooling and Servicing
Agreement or the Seller's or the Servicer's representations and warranties under
(a) any document relating to the sale of the Mortgage Loans and (b) the
Insurance and Indemnity Agreement dated as of December 1, 1996, by and between
the Certificate Insurer and the Servicer; (ii) any obligation to pay a
termination fee to any sub-servicer pursuant to the Pooling and Servicing
Agreement; (iii) any obligation to purchase one or more of the Mortgage Loans
pursuant to any agreement; (iv) any obligation to record the Mortgage Loans;
provided, however, that if the Sub-Servicer cannot enforce any Mortgage Loan due
to a lack of such recording, the Sub-Servicer shall record such mortgage at the
Servicer's expense; or (v), except as specifically provided herein, any
obligations of, or requirement to pay from Sub-Servicer's own funds, the Trustee
under the Pooling and Servicing Agreement.
(c) The Sub-Servicer shall not be under any obligation to appear in,
prosecute or defend any legal action that is not incidental to its duties to
service the Mortgage Loans in accordance with this Agreement and that in its
opinion may involve it in any expenses or liability; provided, however, that the
Sub-Servicer may, with the prior written consent of the Servicer and the
Certificate Insurer, undertake any such action that it may deem necessary or
desirable in respect to this Agreement and the rights and duties of the parties
hereto. In such event, the reasonable legal expenses and costs of such action
and any liability resulting therefrom shall be expenses, costs and liabilities
for which the Servicer will be liable and the Sub-Servicer shall be entitled to
be reimbursed therefor from the Servicer upon written demand, subject to the
Certificate Insurer's consent, to the extent that the Servicer receives
reimbursement from the
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Trust in accordance with the Pooling and Servicing Agreement. To the extent that
the Sub-Servicer's actions pursuant to this Agreement and the results thereof
would entitle the Servicer to indemnity from the Trust if such actions had been
performed directly by the Servicer, the Servicer shall seek indemnification from
the Trust for such expenses and if the Trust actually indemnifies the Servicer,
the Servicer shall indemnify the Sub-Servicer therefore, subject to Certificate
Insurer's reasonable consent all in accordance with the Pooling and Servicing
Agreement.
Section 3.05 Sub-Servicer Not to Resign.
The Sub-Servicer shall not resign from the obligations and duties
hereby imposed on it except with the prior written consent of the Certificate
Insurer, or upon the determination, in Sub-Servicer's reasonable judgment that
the Sub-Servicer's material duties hereunder are no longer permissible under
applicable law, and provided such impermissibility is not caused by an act or
omission of the Sub-Servicer and cannot be cured in a commercially reasonable
manner by the Sub-Servicer. Any such determination permitting the resignation of
the Sub-Servicer shall be evidenced by an Opinion of Counsel to such effect
delivered to the Servicer and the Certificate Insurer, which Opinion of Counsel
shall be in form and substance acceptable to the Servicer and the Certificate
Insurer.
Section 3.06 No Transfer or Assignment of Servicing.
With respect to the responsibility of the Sub-Servicer to service the
Mortgage Loans hereunder, the Sub-Servicer, acknowledges that the Servicer (and
the Certificate Insurer, in granting its consent hereto) has acted in reliance
upon the Sub-Servicer's independent status, the adequacy of its servicing
facilities, plant, personnel, records and procedures, its integrity, reputation
and financial standing and the continuance thereof. Without in any way limiting
the generality of this Section 3.06, the Sub-Servicer shall not either assign or
transfer this Agreement or the servicing hereunder nor delegate its rights or
duties hereunder or any portion thereof, whether to any sub-servicer or
otherwise, or sell or otherwise dispose of all or substantially all of its
property or assets, without the prior written consent of the Servicer and the
Certificate Insurer. Notwithstanding any other provision of this Agreement,
Sub-Servicer shall have the right to assign, transfer and pledge any right to
receive payment under this Agreement without the consent of or notice to
Servicer, the Trust or the Certificate Insurer.
Section 3.07 Servicer's Cooperation.
The Servicer shall cooperate with the Sub-Servicer, and shall provide
to the Sub-Servicer information in its systems, regarding the Mortgage Loans and
the servicing thereof as reasonably requested by the Sub-Servicer.
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Section 3.08 Receipt of Mortgage Loan Amounts.
All amounts collected in connection with the Mortgage Loans before the
Sub-Servicing Commencement Date shall be accounted for and dealt with by the
Servicer in the manner set forth in the Pooling and Servicing Agreement. Except
for Servicer's interest as Seller or Master Servicer under the Pooling and
Servicing Agreement not specifically transferred to Sub-Servicer as provided
herein, the Servicer specifically disclaims any interest, legal or equitable, in
payments received with respect to the Mortgage Loans after the Sub-Servicing
Commencement Date, and the Servicer shall endorse any such payments received
with respect to the Mortgage Loans after the Sub-Servicing Commencement Date to
the Sub-Servicer and shall forward such payments to the Sub-Servicer within one
Business Day following the receipt of such payments by the Servicer.
Section 3.09 Subsequent Transfers.
In the event that any mortgage loan, as defined in the Pooling and
Servicing Agreement, is currently being sub-serviced by another sub-servicer and
such other sub-servicer terminates its servicing of such mortgage loan, such
mortgage loan shall be added to Schedule 2.01, and such mortgage loan shall
thereafter be sub-serviced by the Sub-Servicer; provided, however, that the
Sub-Servicer's obligation to accept servicing with respect to any such mortgage
loans shall be subject to terms and conditions (including without limit,
compensation provisions) to be mutually agreed upon by the Servicer,
Sub-Servicer, and Certificate Insurer.
Section 3.10 [Intentionally Omitted].
Section 3.11 Compensation to the SubServicer.
(a) As compensation for Sub-Servicer's services under this Agreement,
Sub-Servicer shall be entitled to the following during its term as Sub-Servicer
(collectively, the "Sub-Servicing Fees"):
(i) payment on a monthly basis on the Deposit Date of an amount
with respect to each Mortgage Loan, that is the product of .000125 (1/12 of 15
basis points) times the aggregate outstanding balance of Mortgage Loans being
serviced by Sub-Servicer as of the first Business Day of each month whether or
not Servicer would be entitled to such Servicing Fee pursuant to the Pooling and
Servicing Agreement (the "Enhanced Servicing Fees") plus .000416667 (1/12 of 50
basis points) times the aggregate outstanding balance of Mortgage Loans being
serviced by Sub-Servicer for which Servicer would be entitled to such Servicing
Fee pursuant to the Pooling and Servicing Agreement (the "Regular Servicing
Fees"). Payment of the Enhanced Servicing Fee and Regular Servicing Fees may be
made first, by withdrawals from the Sub-Servicing Account on each Deposit Date
to the extent permitted by Sections 3.02 and 3.08 of the Pooling and Servicing
Agreement; second, from any prepayment fees received by the Sub-Servicer and due
the Servicer under this Agreement; third, from any reimbursement of
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Servicing Advances received by the Sub-Servicer and due the Servicer pursuant to
the Pooling and Servicing Agreement; fourth, by Sub-Servicer's invoicing the
Servicer for such Sub-Servicing Fees, which invoice shall be paid within ten
(10) days of receipt by the Servicer; and fifth, by payment to the Sub-Servicer
from the Reserve Sub-account. Notwithstanding any other provision of this
Agreement, the obligation to pay the Enhanced Servicing Fee shall commence on
the later of the Sub-Servicing Commencement Date or the Closing Date and shall
not be payable with respect to any period prior to the Sub-Servicing
Commencement Date or the Closing Date, as applicable.
(ii) With the exception of prepayment fees, Sub-Servicer shall be
entitled to all additional servicing compensation that Servicer would otherwise
be entitled to under Section 3.08 of the Pooling and Servicing Agreement with
respect to each Mortgage Loan, for any period in which such Mortgage Loan was
serviced by Sub-Servicer, including without limitation ancillary income,
assumption fees, late payment charges, charges for checks returned for
insufficient funds and extension and other administrative charges ("Additional
Servicing Compensation"). Additional Servicing Compensation will be paid to
Sub-Servicer by Sub-Servicer retaining such Additional Servicing Compensation
prior to depositing proceeds of Mortgage Loans into the Sub-Servicing Account
or, if deposited in the Sub-Servicing Account, by withdrawals from the
Sub-Servicing Account on each Deposit Date as permitted by Sections 3.02 and
3.08 of the Pooling and Servicing Agreement.
(iii) The Servicer shall pay to the Sub-Servicer a Set-Up Fee equal
to $5 for each Mortgage Loan for which servicing is transferred to the
Sub-Servicer. Payment of the Set-Up Fees shall be made at Sub-Servicer's
election by Sub-Servicer invoicing the Servicer for such Set-Up Fees, which
invoice shall be paid within ten (10) days of receipt by the Servicer or by
payment to Sub-Servicer from the Reserve Sub-account.
(iv) In the event the Sub-Servicer is terminated pursuant to
Section 6.03 of this Agreement, or any Mortgage Loan is transferred to another
servicer or special servicer, the Sub-Servicer shall be entitled (from the
Servicer and not from the Trust unless specifically provided by the Pooling and
Servicing Agreement) to a Termination Fee of $20 (the "Termination Fee") for
each Mortgage Loan for which the Sub-Servicer transfers servicing in accordance
with this Agreement. In connection with a termination pursuant to Section 6.03
hereof, the Sub-Servicer shall receive, prior to the transfer of servicing, the
Termination Fees, all outstanding Advances and all other amounts due
Sub-Servicer hereunder.
(v) Sub-Servicer shall be entitled to all net income and net gain
realized, and shall be obligated to reimburse any loss from the investment of
funds deposited in the Sub-Servicing Account, as provided in Section 3.02(b) of
the Pooling and Servicing Agreement. The amount described in this subsection (v)
shall be paid to Sub-Servicer in accordance with the Pooling and Servicing
Agreement, as if the Sub-Servicer was the Servicer in the Pooling and Servicing
Agreement.
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(vi) Sub-Servicer shall remit to Servicer on each Deposit Date all
prepayment fees and compensation payable to Servicer pursuant to 3.01(h)(v), if
any, less any amount due Sub-Servicer hereunder.
Section 3.12 Appointment as Servicer.
If the Servicer is terminated as the servicer under Section 8.01 of the
Pooling and Servicing Agreement, or Servicer's term is not renewed, the
Sub-Servicer, if appointed by the Trustee or the Certificate Insurer, agrees to
accept such appointment as the successor Servicer under the Pooling and
Servicing Agreement and shall perform all of the duties of the Servicer under
the Pooling and Servicing Agreement and be bound by all the obligations of the
Servicer thereunder, except that the Sub-Servicer does not assume any obligation
described in Sections 3.04(b)(i), (ii) (except as to sub-servicers engaged by
the Sub-Servicer) (iii) or (v) hereof. Upon such occurrence, all future
obligations of the Sub-Servicer under this Agreement shall be terminated, but
without payment of any penalty or Termination Fee, provided, however, that
Sub-Servicer shall be entitled to all unpaid compensation due under Section 3.11
of this Agreement, (provided that the amount of any unpaid Enhanced Servicing
Fees and any unpaid Set-Up Fees shall be recoverable solely from the Servicer)
and Servicer, Sub-Servicer and Certificate Insurer shall continue to be entitled
and obligated with respect to all of their respective indemnification
obligations pursuant to Section 7.08 of this Agreement, in each case arising
from activities prior to such termination date.
Section 3.13 Reserve Sub-Account.
Sub-Servicer shall establish a single segregated trust account
("Reserve Sub-account") to be funded with distributions from, and subject to
withdrawals in accordance with, each of the Sub-Servicing Agreements. The
Reserve Sub- account shall be established for the benefit of Sub-Servicer in the
name of, and under the exclusive dominion and control of Sub-Servicer or its
designee. Sub-Servicer shall deposit into the Reserve Sub-account all amounts
designated for distribution to the Reserve Sub-account at any time pursuant to
each of the Sub-Servicing Agreements until the Reserve Sub-account balance at
such time is $300,000 (the "Reserve Amount"). All net income from the Reserve
Sub-account shall be reinvested in the Reserve Sub-account. Sub-Servicer shall
have the right to withdraw funds from the Reserve Sub-account (i) to reimburse
Sub-Servicer for any Advance made by the Sub-Servicer that was not reimbursed
from proceeds of the related Mortgage Loan following the liquidation or
attempted liquidation of such Mortgage Loan; (ii) to pay any Sub-Servicing Fee
owed Sub-Servicer pursuant to Section 3.11 or any other amount due Sub-Servicer
under this Agreement; and (iii) in accordance with terms of each Sub-Servicing
Agreement other than this Agreement. Sub-Servicer shall determine in its sole
reasonable discretion at least annually whether the Reserve Amount exceeds the
amount required to provide an adequate reserve for amounts payable to
Sub-Servicer from the Reserve Sub-account and shall reduce the Reserve Amount by
the amount of any such excess, provided however, that the Reserve Amount shall
in no event be reduced below $150,000. Promptly after the date on which the last
Sub-Servicing Agreement that is in effect is terminated,
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Sub-Servicer shall distribute the balance in the Reserve Sub-account, if any, to
Servicer, less any amounts due Sub-Servicer under the Sub-Servicing Agreements.
Section 3.14 Security Interest.
Servicer hereby grants Sub-Servicer a security interest in the Reserve
Sub-account and in all amounts payable to Servicer under the Pooling and
Servicing Agreement to secure payment of all amounts due Sub-Servicer under or
pursuant to this Agreement, the Purchase Agreement, any sub-servicing agreement
or any similar or other agreement between Servicer and Sub-Servicer.
Section 3.15 Tax Forms.
The Sub-Servicer shall mail, on or before the date required by law, all
required Internal Revenue Service forms, including without limitation form
numbers 1099, 1099A or 1098, to all persons or entities entitled to receive such
forms for all applicable periods beginning January 1, 2000. Servicer shall
cooperate with Sub-Servicer in the preparation of all such forms and timely
provide to Sub-Servicer all information necessary for Sub-Servicer to prepare
such forms.
Section 3.16 Additional Servicing Procedures.
The parties agree to comply with the additional servicing procedures
set forth on Schedule 3.01(a) hereto as the same may be amended from time to
time by the mutual agreement of the parties, provided that this Agreement shall
govern in the event of a conflict between this Agreement and the additional
servicing procedures.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.01 Representations, Warranties and Covenants of the
Sub-Servicer.
The Sub-Servicer hereby represents and warrants to and covenants with
the Servicer and with the Certificate Insurer that as of the date of this
Agreement or as of such date as is specifically provided herein:
(a) The Sub-Servicer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Utah and is in compliance
with the laws of each state in which any Mortgaged Property is located to the
extent necessary to perform the sub-servicing obligations hereunder;
(b) The execution and delivery of this Agreement by the Sub-Servicer
and its performance of and compliance with the terms of this Agreement will not
violate the Sub-Servicer's articles of incorporation or by-laws or constitute a
default (or an event which,
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with notice or lapse of time, or both, would constitute a default) under, or
result in the breach or acceleration of, any material contract, agreement or
other instrument to which the Sub-Servicer is a party or which may be applicable
to the Sub-Servicer or any of its assets;
(c) The Sub-Servicer has the full power and authority to enter into and
consummate all transactions contemplated by this Agreement, has duly authorized
the execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby, and has duly executed and delivered
this Agreement. This Agreement, assuming due authorization, execution and
delivery by the Servicer, constitutes a valid, legal and binding obligation of
the Sub-Servicer, enforceable against it in accordance with the terms hereof,
except as such enforcement may be limited by bankruptcy, insolvency,
reorganization, receivership, moratorium or other similar laws relating to or
affecting the rights of creditors generally, and by general equity principles
(regardless of whether such enforcement is considered in a proceeding in equity
or at law);
(d) The Sub-Servicer is not in violation of, and the execution and
delivery of this Agreement by the Sub-Servicer and its performance and
compliance with the terms of this Agreement will not constitute a violation with
respect to, any order or decree of any court or any order or regulation of any
federal, state, municipal or governmental agency having jurisdiction, which
violation would materially and adversely affect the condition (financial or
otherwise) or operations of the Sub-Servicer or materially and adversely affect
the performance of Sub-Servicer's duties hereunder;
(e) There are no actions or proceedings against, or investigations of,
the Sub-Servicer pending, or, to the best knowledge of the Sub-Servicer,
threatened, before any court, administrative agency or other tribunal (A) that,
if determined adversely, would prohibit its entering into this Agreement, (B)
seeking to prevent the consummation of any of the transactions contemplated by
this Agreement, or (C) that, if determined adversely, would result in a material
adverse change with respect to Sub-Servicer or would be reasonably likely to
impair the ability of Sub-Servicer to perform, or to materially and adversely
affect the performance by the Sub-Servicer of its obligations under, or the
validity or enforceability of, this Agreement;
(f) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by the Sub-Servicer of, or compliance by the Sub-Servicer with, this
Agreement, or for the consummation of the transactions contemplated by this
Agreement, except for such consents, approvals, authorizations and orders, if
any, that have been obtained prior to the date of this Agreement;
(g) The Sub-Servicer is duly licensed where required as a "Licensee" or
is otherwise qualified in each state in which it transacts business and is not
in default of such state's applicable laws, rules and regulations, except where
the failure to so qualify or such default would not have a material adverse
effect on the ability of the Sub-Servicer to conduct its business or perform its
obligations hereunder, and the Sub-Servicer is an FHLMC-approved servicer; and
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(h) The Sub-Servicer is not required to be registered as an "investment
company" under the Investment Company Act of 1940, as amended.
Section 4.02 Representations and Warranties of the Servicer.
The Servicer hereby represents and warrants to the Sub-Servicer and to
the Certificate Insurer that as of the date of this Agreement or as of such date
as is specifically provided herein:
(a) The Servicer is a corporation duly organized, validly existing and
in good standing under the laws of the State of California and has, and had at
all relevant times, full power to own its property, to carry on its business as
presently conducted, to enter into and perform its obligations under this
Agreement;
(b) The execution and delivery of this Agreement by the Servicer and
its performance of and compliance with the terms of this Agreement will not
violate the Servicer's articles of incorporation or by-laws or constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, or result in the breach or acceleration of, any
material contract, agreement or other instrument to which the Servicer is a
party or which may be applicable to the Servicer or any of its assets;
(c) The Servicer has the full power and authority to enter into and
consummate the transactions contemplated by this Agreement, has duly authorized
the execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby, and has duly executed and delivered
this Agreement. This Agreement, assuming due authorization, execution and
delivery by the Sub-Servicer, constitutes a valid, legal and binding obligation
of the Servicer, enforceable against it in accordance with the terms hereof,
except as such enforcement may be limited by bankruptcy, insolvency,
reorganization, receivership, moratorium or other similar laws relating to or
affecting the rights of creditors generally, and by general equity principles
(regardless of whether such enforcement is considered in a proceeding in equity
or at law);
(d) The Servicer is not in violation of, and the execution and delivery
of this Agreement by the Servicer and its performance and compliance with the
terms of this Agreement and the Pooling and Servicing Agreement will not
constitute a violation with respect to, any order or decree of any court or any
order or regulation of any federal, state, municipal or governmental agency
having jurisdiction, which violation would materially and adversely affect the
condition (financial or otherwise) or operations of the Servicer or materially
and adversely affect the performance of Servicer's duties hereunder and
thereunder;
(e) There are no actions or proceedings against, or investigations of,
the Servicer pending, or, to the best knowledge of the Servicer, threatened,
before any court, administrative agency or other tribunal (A) that, if
determined adversely, would prohibit its entering into this Agreement, (B)
seeking to prevent the consummation of any of the transactions contemplated by
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this Agreement, or (C) that, if determined adversely, would result in a material
adverse change with respect to Servicer or would be reasonably likely to impair
the ability of Servicer to perform, or to materially and adversely affect the
performance by the Servicer of its obligations under, or the validity or
enforceability of, this Agreement;
(f) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by the Servicer of, or compliance by the Servicer with, this
Agreement, or for the consummation of the transactions contemplated by this
Agreement, except for such consents, approvals, authorizations and orders, if
any, that have been obtained prior to the date of this Agreement;
(g) The Servicer is duly licensed where required as a "Licensee" or is
otherwise qualified in each state in which it transacts business and is not in
default of such state's applicable laws, rules and regulations, except where the
failure to so qualify or such default would not have a material adverse effect
on the ability of the Servicer to conduct its business or perform its
obligations hereunder or under the Pooling and Servicing Agreement;
(h) The Servicer has serviced the Mortgage Loans in accordance with
applicable laws and the Pooling and Servicing Agreement. As of the Sub-Servicing
Commencement Date, there will be no Advances, Compensating Interest or any other
payment required to have been paid or advanced by the Servicer under the Pooling
and Servicing Agreement that have not been paid or advanced; and
(i) Schedule 2.01 contains all mortgage loans in the Trust except for
the Mortgage Loans and REO Properties set forth on Schedule 4.01(i).
ARTICLE V
DEFAULT
Section 5.01 Events of Default.
(a) In case one or more of the following events (each, an "Event of
Default") by the Sub-Servicer shall occur and be continuing:
(1) except as set forth in clause (a)(3) below, any failure by the
Sub-Servicer to deposit into the designated account any amount required to be so
deposited or remitted under this Agreement or the Pooling or Servicing Agreement
on the date required under such agreement, subject to any applicable grace
period;
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(2) the Sub-Servicer shall fail timely to provide to the Servicer,
the Trustee, or the Certificate Insurer any report required by this Agreement to
be provided to the Servicer, the Trustee, or the Certificate Insurer, subject to
any applicable grace period;
(3) any failure by the Sub-Servicer to make any Servicing Advance
as required under this Agreement, which failure continues unremedied for a
period of 30 days, or any failure on the part of the Sub-Servicer duly to
observe or perform in any material respect any other of the covenants or
agreements on the part of the Sub-Servicer contained in this Agreement which
continues unremedied for a period of 30 days after the earlier of (a) knowledge
of the Sub-Servicer of such failure and (b) the date on which written notice of
such failure, requiring the same to be remedied, shall have been given to the
Sub-Servicer by the Servicer, Certificate Insurer or Trustee;
(4) the entry against the Sub-Servicer of a decree or order of a
court or agency or supervisory authority having jurisdiction in the premises for
the appointment of a conservator, receiver, liquidator, trustee or similar
official in any bankruptcy, insolvency, conservatorship, receivership,
readjustment of debt, marshaling of assets and liabilities or similar
proceedings, or for the winding-up or liquidation of its affairs, shall have
been entered against the Sub-Servicer and such decree or order shall have
remained in force undischarged or unstayed for a period of 60 consecutive days;
(5) the Sub-Servicer shall consent to the appointment of a
conservator, receiver, liquidator, trustee or similar official in any
bankruptcy, insolvency, conservatorship, receivership, readjustment of debt,
marshaling of assets and liabilities or similar proceedings of or relating to
the Sub-Servicer or of or relating to all or substantially all of its property;
(6) the Sub-Servicer shall admit in writing its inability to pay
its debts generally as they become due, file a petition to take advantage of any
applicable bankruptcy, insolvency or reorganization statute, make an assignment
for the benefit of its creditors, voluntarily suspend payment of its
obligations, or take any corporate action in furtherance of the foregoing;
(7) the Sub-Servicer shall cease to be an approved servicer of
residential mortgage loans for FHLMC;
(8) the Sub-Servicer shall assign or transfer or attempt to assign
or transfer all or part of its rights and obligations hereunder except as
permitted by this Agreement;
(9) the Sub-Servicer shall cease to be a wholly-owned subsidiary of
Fairbanks Capital Holding Corp.;
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(10) any breach by the Sub-Servicer of a representation or warranty
made in Section 4.01 hereof, which breach continues unremedied for a period of
30 days after the earlier of (a) knowledge of the Sub-Servicer of such breach
and (b) the date on which written notice of such breach requiring the same to be
remedied shall have been given to the Sub-Servicer; or
(11) the Sub-Servicer shall fail to qualify as Sub-Servicer under
Section 3.01 of the Pooling and Servicing Agreement.
Servicer shall deliver written notice thereof to the Certificate Insurer, and in
each and every such case, so long as such Event of Default shall not have been
remedied within the applicable time period, if any, set forth above, the
Servicer shall, following ten day's prior written notice to the Certificate
Insurer which notice shall specify in detail the nature of such Event of Default
terminate, by notice in writing to the Sub-Servicer, all of the rights and
obligations of the Sub-Servicer as Sub-Servicer under this Agreement unless the
Certificate Insurer directs the Servicer by written notice to take either no
remedial action or a specified remedial measure, in which case the Servicer
shall follow such written notice of the Certificate Insurer. From and after the
receipt by the Sub-Servicer of such written notice, all authority and power of
the Sub-Servicer under this Agreement, whether with respect to the Mortgage
Loans or otherwise, shall pass to and be vested in the Servicer pursuant to and
under this section, and, without limitations, the Servicer is hereby authorized
and empowered, as attorney-in-fact or otherwise, to execute and deliver on
behalf of Sub-Servicer any and all documents and other instruments, and to do or
accomplish all other acts or things necessary or appropriate to effect the
purposes of such notice of termination, whether to complete the transfer and
enforcement or assignment of the Mortgage Loans and related documents, or
otherwise.
(b) The Sub-Servicer agrees that if it is terminated pursuant to this
Agreement, it shall promptly (and in any event no later than five Business Days
subsequent to its receipt of the notice of termination), at Servicer's cost and
expense, provide the Servicer with all documents and records (including, without
limitation, those in electronic form) requested by it to enable it to assume the
Sub-Servicer's functions hereunder, and shall cooperate with the Servicer in
effecting the termination of the Sub-Servicer's responsibilities and rights
hereunder and the assumption by a successor of the Sub-Servicer's obligations
hereunder, including, without limitation, the transfer within one Business Day
to the Servicer for administration by it of all cash amounts which shall at the
time be or should have been credited by the Sub-Servicer to the designated
account, or thereafter be received with respect to the Mortgage Loans or any REO
Property subject to Sub-Servicer's rights under Section 6.04.
Section 5.02 Waiver of Defaults.
The Servicer, with the prior written consent of the Certificate
Insurer, may waive any default by the Sub-Servicer in the performance of its
obligations hereunder and its consequences. Upon any such waiver of a past
default, such default shall cease to exist, and any Event of Default arising
therefrom shall be deemed to have been remedied for every purpose of this
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Agreement. No such waiver shall extend to any subsequent or other default or
impair any right consequent thereon except to the extent expressly so waived.
ARTICLE VI
TERMINATION
Section 6.01 Termination.
Except as otherwise specifically set forth herein, the obligations and
responsibilities of the Sub-Servicer shall terminate: (i) upon the later of the
final payment or other liquidation (or any advance with respect thereto) of the
last Mortgage Loan and the disposition of all REO Property and the remittance of
all funds due hereunder; (ii) by mutual consent of the Sub-Servicer, the
Servicer, and the Certificate Insurer in writing, such consent of Certificate
Insurer not to be unreasonably withheld; (iii) pursuant to Section 6.02 of this
Agreement; (iv) at the option of any successor to the Servicer in its sole
discretion, subject, however, to the prior written consent of the Certificate
Insurer; (v) at the option of any purchaser of one or more Mortgage Loans
pursuant to the Pooling and Servicing Agreement, upon such purchase and only
with respect to such purchased Mortgage Loan or Mortgage Loans (including,
without limitation, the purchase of any delinquent loan in accordance with the
Pooling and Servicing Agreement); (vi) after sixty (60) days notice by the
Sub-Servicer to the Servicer and the Certificate Insurer, that Servicer has not,
within ninety (90) days following the commencement of any bankruptcy proceeding
in which the Servicer is a "debtor", obtained from the bankruptcy court approval
of the assumption of this Agreement; provided, however, that the Sub-Servicer
shall not terminate this Agreement if within ten (10) days of providing such
notice, the Certificate Insurer or the Trustee provides reasonable assurance
that the Sub-Servicer will be paid all amounts due under this Agreement; and
(vii) upon termination of the Pooling and Servicing Agreement pursuant to
Section 10.01 thereof.
Section 6.02 Termination With Cause.
(a) The Servicer may, at its sole option, with the prior written
consent of the Certificate Insurer but without payment of any penalty or
Termination Fee, terminate any rights the Sub-Servicer may have hereunder with
respect to any or all of the Mortgage Loans as provided in SECTION 5.01 of this
Agreement upon the occurrence of an Event of Default.
(b) The Certificate Insurer, upon the occurrence of an Event of Default
under this Agreement, but without payment of any penalty or Termination Fee,
shall have the right to terminate this Agreement immediately upon delivery of
written notice to the Servicer and the Sub-Servicer.
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Section 6.03 Termination Without Cause.
The Servicer, with the prior written consent of the Certificate
Insurer, may terminate this Agreement as of the last day of any Collection
Period as to any or all of the Mortgage Loans for reasons other than those set
forth in Sections 6.01(i), (ii), and (iii) by giving the Sub-Servicer at least
45 days notice of termination, provided that the Servicer in its sole
responsibility shall pay the Termination Fee for the Mortgage Loan or Loans
being terminated. Any notice of termination shall be in writing and delivered to
the Sub-Servicer as provided in Section 7.03 of this Agreement.
Section 6.04 Effect of Termination.
(a) With respect to termination of the Sub-Servicer pursuant to Section
6.02 or Section 6.03 of this Agreement, immediately upon the transfer of the
servicing of the Mortgage Loans, Sub-Servicer's obligations to make any Advance
or any other payment required hereunder shall cease. Upon termination of this
Agreement for any reason, with or without cause, the Sub-Servicer shall be
entitled to the Sub-Servicing Fees for each Mortgage Loan subject to termination
for the entire month in which the servicing transfer date occurs as well as all
other unpaid or unreimbursed Sub-Servicing Fees, reimbursement in full for all
Advances made by Sub-Servicer, and all Prior Monthly Advances remaining
unreimbursed and all other compensation, payments and reimbursable expenses due
the Sub-Servicer through the servicing transfer date (the "Sub-Servicer
Compensation").
(b) In the event of termination pursuant to Section 6.03, Sub-Servicer
shall be paid Sub-Servicer Compensation by the Servicer, any successor servicer,
or otherwise on or prior to such servicing transfer date and if the Sub-Servicer
does not receive the Sub-Servicer Compensation by the servicing transfer date,
the Sub-Servicer will be entitled to net such amounts against funds held in the
Sub-Servicing Account and Sub-Servicer shall not be obligated to transfer
servicing of the Mortgage Loans until such time as Sub-Servicer is paid all the
Sub-Servicer Compensation.
(c) In the event of termination pursuant to Section 6.02, Sub-Servicer
shall not be obligated to transfer servicing until either (i) Sub-Servicer is
paid the Sub-Servicer Compensation by the Servicer, any successor servicer, or
otherwise on or prior to such servicing transfer date, or (ii) the successor
servicer is obligated to deposit into the Receivables Reimbursement Account (as
defined in the Purchase Agreement), all collections relating to unreimbursed
Advances within one (1) Business Day of receipt thereof and the successor
servicer provides an endorsement to Lender on its fidelity bond naming Lender as
a loss payee.
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(d) This Section 6.04 shall survive any termination of this Agreement
and any termination of this Agreement shall not prejudice the rights of the
Sub-Servicer to recover any Sub-Servicer Compensation. The Sub-Servicer and its
directors, officers, employees and agents shall continue to be entitled to the
benefits of Section 3.04 of this Agreement notwithstanding any termination of
this Agreement.
ARTICLE VII
MISCELLANEOUS
Section 7.01 Payment of Costs.
Except as specifically set forth herein, all costs of Servicer or
Sub-Servicer associated with this Agreement shall be paid by the party incurring
such costs.
Section 7.02 Reports.
As long as this Agreement is in effect, the Sub-Servicer shall deliver
to the Certificate Insurer and Servicer: (A) the audited consolidated financial
statements, balance sheet and statement of income of the Sub-Servicer and each
subsidiary thereof within 90 days of the close of each fiscal year and (B) the
unaudited consolidated quarterly financial statements, balance sheet and
statement of income of the Sub-Servicer thereof within 45 days of the end of
each fiscal quarter.
Section 7.03 Notices.
All demands, notices, consents and communications hereunder shall be in
writing and shall be deemed to have been duly given when delivered to the
following addresses:
(1) if to the Servicer:
Aames Capital Corporation
350 South Grand Avenue, 47th Floor,
Los Angeles, California 90071-3406
Attention: National Loan Servicing Director
Fax No. (323) 210-5888
Phone No. (323) 210-4736
with a copy to:
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Aames Capital Corporation
350 South Grand Avenue, Suite 52nd Floor,
Los Angeles, California 90071-3406
Attention: Barbara S. Polsky
Fax No. (323) 210-5026
Phone No. (323) 210-4927
(2) if to the Sub-Servicer:
If by U.S. Mail:
Fairbanks Capital Corp.
P.O. Box 65250
Salt Lake City, Utah 84165-0250
Attention: Terrell W. Smith
Fax No. (801) 293-1297
Phone No. (801) 293-1883
If by overnight delivery:
Fairbanks Capital Corp.
3815 South West Temple
Salt Lake City, Utah 84165-4412
Attention: Terrell W. Smith
with a copy to:
Wilmer, Cutler & Pickering
2445 M Street, N.W.
Washington, D.C. 20037
Attention: R. J. Bruemmer
Fax No. (202) 663-6363
Phone No. (202) 663-6804
(3) if to the Certificate Insurer:
Financial Security Assurance Inc.
350 Park Avenue
New York, New York 10022
Attention: Senior Vice President - Surveillance
Fax No. (212) 339-3518
Phone No. (212) 826-0100
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or such other address as may hereafter be furnished to the other party by like
notice. Any notice given pursuant hereto shall be effective upon receipt by the
party to whom sent.
Section 7.04 Severability Clause.
Any part, provision, representation or warranty of this Agreement that
is prohibited or that is held to be void or unenforceable shall 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 as to any Mortgage Loan shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the parties hereto waive any provision of law that prohibits
or renders void or unenforceable any provision hereof. If the invalidity of any
part, provision, representation or warranty of this Agreement shall deprive any
party of the economic benefit intended to be conferred by this Agreement, the
parties shall negotiate, in good faith, to develop a structure the economic
effect of which is nearly as possible the same as the economic effect of this
Agreement without regard to such invalidity.
Section 7.05 Counterparts.
This Agreement may be executed simultaneously in any number of
counterparts. Each counterpart shall be deemed to be an original, and all such
counterparts shall constitute one and the same instrument.
Section 7.06 Governing Law.
The Agreement shall be construed in accordance with the laws of the
State of California without regard to conflicts rules and the obligations,
rights and remedies of the parties hereunder shall be determined in accordance
with the laws of the State of California except to the extent preempted by
Federal Law. With respect to any claim arising out of this Agreement, each party
irrevocably submits to the jurisdiction of the courts of the state of
California, and each party irrevocably waives any objection which it may have at
any time to the laying of venue of any suit, action or proceeding arising out of
or relating hereto brought in any such courts, irrevocably waives any claim that
any such suit, action or proceeding brought in any such court has been brought
in any inconvenient forum and further waives the right to object, with respect
to such claim, suit, action or proceeding brought in any such court, that such
court does not have jurisdiction over such party, provided that service of
process has been made by any lawful means.
Section 7.07 Security for Expenses.
Except as provided in Section 3.01(e), neither the Servicer nor the
Sub-Servicer shall have any obligation to consent to any amendment or
modification of this Agreement.
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Section 7.08 Indemnification.
(a) Servicer Indemnification.
(1) The Servicer shall indemnify the Sub-Servicer and the
Certificate Insurer and hold harmless each of them against any and all claims,
losses, damages, penalties, fines, forfeitures, reasonable legal fees and
related costs, judgments, and other costs and expenses resulting from any claim,
demand, defense or assertion based on or grounded upon, or resulting from, a
breach of any of the Servicer's representations and warranties and covenants
contained in this Agreement, in any way relating to the failure of the Servicer
to perform its duties in compliance with the terms of this Agreement; provided,
however, that the Servicer shall not be required to indemnify the Sub-Servicer
or the Certificate Insurer against any liability due to the willful malfeasance,
bad faith, or negligence of the Sub-Servicer or the Certificate Insurer
hereunder. This indemnity shall survive the termination of this Agreement and
the payment of the Mortgage Loans. The Sub-Servicer or Certificate Insurer, as
the case may be, shall promptly notify the Servicer if a claim is made by a
third party with respect to a breach of any of the Servicer's representations
and warranties and covenants contained in this Agreement or in any way relating
to the failure of the Servicer to perform its duties in compliance with the
terms of this Agreement. The Servicer shall promptly notify the Sub-Servicer and
the Certificate Insurer of any claim of which it has been notified pursuant to
this Section 7.08 by a Person other than the party claiming indemnification, as
the case may be, and, in any event, shall promptly notify the Sub-Servicer and
the Certificate Insurer of its intended course of action with respect to any
claim.
(2) The Servicer shall be entitled to participate in and, upon
notice to the Sub-Servicer and the Certificate Insurer, assume the defense of
any such action or claim in reasonable cooperation with, and with the reasonable
cooperation of the Sub-Servicer and the Certificate Insurer. The Sub-Servicer
and the Certificate Insurer shall have the right to employ their own counsel in
any such action in addition to the counsel of the Servicer, but the fees and
expenses of such counsel shall be at the expense of the Sub-Servicer and the
Certificate Insurer, unless (a) the employment of counsel by the Sub-Servicer
and the Certificate Insurer at its expense has been authorized in writing by the
Servicer, (b) the Servicer has not in fact employed counsel to assume the
defense of such action within a reasonable time after receiving notice of the
commencement of the action, or (c) the named parties to any such action or
proceeding (including any impleaded parties) include the Servicer and either the
Sub-Servicer or the Certificate Insurer, or both, and the Sub-Servicer and the
Certificate Insurer have been advised by counsel that there may be one or more
legal defenses available to them which are different from or additional to those
available to the Servicer. The Servicer shall not be liable for any settlement
of any such claim or action unless the Servicer shall have consented thereto or
be in default on its obligations hereunder. Any failure by the Sub-Servicer or
the Certificate Insurer to comply with the provisions of this section shall
relieve the Servicer of liability only if such failure is materially prejudicial
to the position of the Servicer and then only to the extent of such prejudice.
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(b) Sub-Servicer Indemnification.
(1) The Sub-Servicer shall indemnify the Servicer and the
Certificate Insurer and hold harmless each of them against any and all claims,
losses, damages, penalties, fines, forfeitures, reasonable legal fees and
related costs, judgments, and other costs and expenses resulting from any claim,
demand, defense or assertion based on or grounded upon, or resulting from, a
breach of any of the Sub-Servicer's representations and warranties and covenants
contained in this Agreement or in any way relating to the failure of the
Sub-Servicer to perform its duties in compliance with the terms of this
Agreement; provided, however, that the Sub-Servicer shall not be required to
indemnify the Servicer or the Certificate Insurer against any liability due to
the willful malfeasance, bad faith, or negligence of the Servicer or the
Certificate Insurer hereunder. This indemnity shall survive the termination of
this Agreement and the payment of the Mortgage Loans. The Servicer and the
Certificate Insurer, as the case may be, shall promptly notify the Sub-Servicer
if a claim is made by a third party with respect to a breach of any of the
Sub-Servicer's representations and warranties and covenants contained in this
Agreement or in any way relating to the failure of the Sub-Servicer to perform
its duties in compliance with the terms of this Agreement. The Sub-Servicer
shall promptly notify the Servicer and the Certificate Insurer of any claim of
which it has been notified pursuant to this Section 7.08 by a Person other than
the Servicer or the Certificate Insurer, as the case may be, and, in any event,
shall promptly notify the Servicer and the Certificate Insurer of its intended
course of action with respect to any claim.
(2) The Sub-Servicer shall be entitled to participate in and, upon
notice to the Servicer and the Certificate Insurer, assume the defense of any
such action or claim in reasonable cooperation with, and with the reasonable
cooperation of the Servicer and the Certificate Insurer. The Servicer and the
Certificate Insurer shall have the right to employ their own counsel in any such
action in addition to the counsel of the Sub-Servicer, but the fees and expenses
of such counsel shall be at the expense of the Servicer and the Certificate
Insurer, unless (a) the employment of counsel by the Servicer and the
Certificate Insurer at its expense has been authorized in writing by the
Sub-Servicer, (b) the Sub-Servicer has not in fact employed counsel to assume
the defense of such action within a reasonable time after receiving notice of
the commencement of the action, or (c) the named parties to any such action or
proceeding (including any impleaded parties) include the Sub-Servicer and either
the Servicer or the Certificate Insurer, or both, and the Servicer and the
Certificate Insurer have been advised by counsel that there may be one or more
legal defenses available to them which are different from or additional to those
available to the Sub-Servicer. The Sub-Servicer shall not be liable for any
settlement of any such claim or action unless the Sub-Servicer shall have
consented thereto or be in default on its obligations hereunder. Any failure by
the Servicer or the Certificate Insurer to comply with the provisions of this
section shall relieve the Sub-Servicer of liability only if such failure is
materially prejudicial to the position of the Sub-Servicer and then only to the
extent of such prejudice.
25
<PAGE> 30
Section 7.09 Protection of Confidential Information.
The Sub-Servicer shall keep confidential and shall not divulge to any
party other than the Servicer, the Trustee, or the Certificate Insurer, without
the Servicer's prior written consent, any information pertaining to the Mortgage
Loans or any borrower thereunder, except to the extent that it is appropriate
for the Sub-Servicer to do so in working with legal counsel, auditors, taxing
authorities or other governmental agencies or in accordance with this Agreement.
Section 7.10 Intention of the Parties.
It is the intention of the parties that the Servicer is conveying, and
the Sub-Servicer is receiving, only a contract for sub-servicing the Mortgage
Loans. Accordingly, the parties hereby acknowledge that the Trustee remains the
sole and absolute beneficial owner of the Mortgage Loans and all rights related
thereto.
Section 7.11 Third Party Beneficiary.
The Trustee, for the benefit of the Certificateholders, and the
Certificate Insurer shall be third party beneficiaries under this Agreement,
provided that, except to the extent the Trustee or its designee assumes the
obligations of the Servicer hereunder as contemplated by Section 8.04 of the
Pooling and Servicing Agreement, none of the Trustee, the Trust, the Certificate
Insurer, any successor Servicer, or any Certificateholder shall have any duties
under this Agreement or any liabilities arising herefrom.
Section 7.12 Successors and Assigns; Assignment of Agreement.
This Agreement shall bind and inure to the benefit of and be
enforceable by the Sub-Servicer and the Servicer and the respective successors
and assigns of the Sub-Servicer and the Servicer. This Agreement shall not be
assigned, pledged or hypothecated by the Sub-Servicer to a third party except as
otherwise specifically provided for herein and shall be subject to the prior
written consent of the Certificate Insurer in each instance. If the Servicer
shall for any reason no longer act in such capacity under the Pooling and
Servicing Agreement, the Trustee or its designee may thereupon assume all of the
rights and, except to the extent they arose prior to the date of assumption,
obligations of the Servicer under this Agreement or, alternatively, may
terminate this Agreement as provided in Section 6.01(iv) of this Agreement.
Notwithstanding any other provision of this Agreement, Sub-Servicer shall have
the right to assign, transfer and pledge any right to receive payment under this
Agreement without the consent of or notice to Servicer, the Trust, the Trustee
or the Certificate Insurer.
26
<PAGE> 31
Section 7.13 Waivers.
No term or provision of this Agreement may be waived or modified unless
such waiver or modification is in writing and signed by the party against whom
such waiver or modification is sought to be enforced and the Certificate Insurer
shall have consented to such waiver.
Section 7.14 Exhibits.
The exhibits to this Agreement are hereby incorporated and made a part
hereof and are an integral part of this Agreement.
Section 7.15 General Interpretive Principles.
The general interpretive principles set forth in the Pooling and
Servicing Agreement are hereby incorporated herein by reference, provided that
references therein to the Pooling and Servicing Agreement shall, for the
purposes of this Agreement, be deemed to be references to this Agreement.
Section 7.16 Reproduction of Documents.
The provisions with respect to reproduction of documents set forth in
the Pooling and Servicing Agreement are hereby incorporated herein by reference,
provided that references therein to the Pooling and Servicing Agreement shall,
for purposes of this Agreement, be deemed to be references to this Agreement.
Section 7.17 Further Agreement; Power of Attorney.
The Sub-Servicer and the Servicer each agree to execute and deliver to
the other (with copies to the Certificate Insurer) such reasonable and
appropriate additional documents, instruments or agreements as may be necessary
or appropriate to effectuate the purposes of this Agreement. Servicer hereby
irrevocably grants to Sub-Servicer a limited power-of-attorney to execute
documents as may be necessary or appropriate so as to enable Sub-Servicer to
collect payments against, to liquidate and to otherwise manage and service the
Mortgage Loans and properties in accordance with this Agreement.
Section 7.18 Amendments.
This Agreement may only be modified, supplemented or amended by written
agreement by and between the Sub-Servicer and the Servicer, with the Certificate
Insurer's prior written consent in each instance. No amendment to the Pooling
and Servicing Agreement that purports to change the rights or obligations of the
Sub-Servicer hereunder shall be effective against the Sub-Servicer without the
express prior written consent of the Sub-Servicer.
27
<PAGE> 32
Section 7.19 Entire Agreement.
This Agreement contains the entire agreement and understanding between
the parties with respect to the subject matter hereof and supersedes all prior
and contemporaneous agreements and understandings, express or implied, oral or
written, of any nature whatsoever with respect to the subject matter hereof.
Section 7.20 Expenses.
Servicer shall pay Sub-Servicer's costs and expenses reasonably
incurred in connection with its due diligence and the preparation, negotiation,
execution, delivery and enforcement of this Agreement, including but not limited
to the fees and out-of-pocket expenses of its attorneys.
Section 7.21 Non-Disclosure.
The Servicer and Sub-Servicer agree not to disclose information
concerning this transaction without their mutual agreement and the consent of
the Certificate Insurer, except as may be required by law or regulation.
[Signature page follows]
28
<PAGE> 33
IN WITNESS WHEREOF, the Sub-Servicer and the Servicer have caused their
names to be signed hereto by their respective officers thereunto duly authorized
as of the date first above written.
AAMES CAPITAL CORPORATION
By: /s/ Cary H. Thompson
--------------------------------------------
Cary H. Thompson
Its: Chief Executive Officer
-------------------------------------------
FAIRBANKS CAPITAL CORP.
By: /s/ Kim A. Stevenson
--------------------------------------------
Its: Executive Vice President-Administration
-------------------------------------------
<PAGE> 34
EXHIBIT A
POOLING AND SERVICING AGREEMENT
A-1
<PAGE> 35
SCHEDULE 2.01
MORTGAGE LOAN SCHEDULE
B-1
<PAGE> 36
SCHEDULE 3.01(a)
ADDITIONAL SERVICING PROCEDURES
B-2
<PAGE> 37
SCHEDULE 3.01(d)
LOANS FOR WHICH SUB-SERVICER HAS NO PAYMENT OBLIGATIONS ON MAY 12, 1999
All of the Mortgage Loans listed on Schedule 2.01.
B-3
<PAGE> 38
SCHEDULE 4.01(i)
CERTAIN EXCLUDED MORTGAGE LOANS AND REO PROPERTIES
B-4
<PAGE> 1
EXHIBIT 11
AAMES FINANCIAL CORPORATION
EARNINGS PER SHARE
For the years ended June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
For the years ended June 30,
-----------------------------------------------
1999 1998 1999
------------- ----------- ----------
<S> <C> <C> <C>
BASIC EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) for calculating basic
earnings per common share $(247,967,000) $27,563,000 1,478,000
Average common shares outstanding 31,000,000 28,548,000 26,400,000
------------- ----------- ----------
Basic earnings (loss) per common share $ (8.00) 0.97 0.06
============= =========== ==========
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
Net income (loss) for calculating diluted earnings
(loss) per common share $(247,967,000) 27,563,000 1,478,000
Adjust net income to add back the after-tax amount
of interest recognized in the period associated
with the convertible subordinated notes - 3,645,000 -
------------- ----------- ----------
Adjusted net income (loss) $(247,967,000) 31,208,000 1,478,000
------------- ----------- ----------
Average common shares outstanding 31,000,000 28,548,000 26,400,000
Add exercise of options and warrants - 1,094,000 1,971,000
Convertible subordinated notes - 6,107,000 -
------------- ----------- ----------
Diluted shares outstanding 31,000,000 35,749,000 28,371,000
------------- ----------- ----------
Diluted earnings (loss) per common share $ (8.00) 0.87 0.05
============= =========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY DOING BUSINESS NAMES JURISDICTION OF INCORPORATION
- ------------------ -------------------- -----------------------------
<S> <C> <C>
Aames Capital Acceptance Corp. Delaware
Aames Capital Corporation Aames Home Loan, California
The Center for Loan Servicing
Aames Funding Corporation Aames Home Loan, California
The Center for Loan Servicing,
Metro Acceptance Corporation
One Stop Mortgage, Inc. One Stop Funding Wyoming
Oxford Aviation Corporation, Inc. California
Rossmore Financial Insurance Services, Inc. California
Serrano Insurance Services Nevada
Windsor Management Co.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-3 (Nos. 33-95120, 33-93826, 333-15777, 333-27537 and 333-85241) and S-8
(Nos. 33-44606, 333-01512, 333-12063 and 333-19675) and related Prospectuses of
Aames Financial Corporation of our report dated August 26, 1999 with respect to
the consolidated financial statements of Aames Financial Corporation included in
this Annual Report (Form 10-K) for the year ended June 30, 1999.
/s/ Ernst & Young LLP
Ernst & Young LLP
Los Angeles, California
September 1, 1999
<PAGE> 1
EXHIBIT 23.2
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, 333-27537 and 333-85241) and S-8 (Nos. 33-44606, 333-01512,
333-12063 and 333-19675) of Aames Financial Corporation of our report dated
August 6, 1998, except as to the information presented in Note 2 for which the
date is August 5, 1999, appearing on page F-9 of this Form 10-K.
PricewaterhouseCoopers LLP
Los Angeles, California
September 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 20,764,000
<SECURITIES> 0
<RECEIVABLES> 427,633,000
<ALLOWANCES> 664,000
<INVENTORY> 559,869,000
<CURRENT-ASSETS> 1,007,602,000
<PP&E> 28,634,000
<DEPRECIATION> 15,139,000
<TOTAL-ASSETS> 1,021,097,000
<CURRENT-LIABILITIES> 594,321,000
<BONDS> 281,220,000
0
92,179,000
<COMMON> 31,000
<OTHER-SE> 53,346,000
<TOTAL-LIABILITY-AND-EQUITY> 1,021,097,000
<SALES> (16,153,000)
<TOTAL-REVENUES> (16,153,000)
<CGS> 40,061,000
<TOTAL-COSTS> 40,061,000
<OTHER-EXPENSES> 177,846,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,089,000
<INCOME-PRETAX> (278,149,000)
<INCOME-TAX> (30,182,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (247,967,000)
<EPS-BASIC> (8.00)
<EPS-DILUTED> (8.00)
</TABLE>
