-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, McaEKdZECXEtARKRQgBAVnl5s5uPFbLRH8TGUyQGSZjoo0vXhUiUViMJoxmzukTt YX8E1p+c6vuF/OPskpncEA== 0000898430-97-003718.txt : 19970912 0000898430-97-003718.hdr.sgml : 19970911 ACCESSION NUMBER: 0000898430-97-003718 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19970827 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANCHISE MORTGAGE ACCEPTANCE CO CENTRAL INDEX KEY: 0001045007 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-34481 FILM NUMBER: 97671116 BUSINESS ADDRESS: STREET 1: 2029 CENTURY PK E STREET 2: STE 1190 CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 8006613622 MAIL ADDRESS: STREET 1: 2029 CENTURY PARK EAST STREET 2: STE 1190 CITY: LOS ANGELES STATE: CA ZIP: 90067 S-1 1 REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 27, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- FRANCHISE MORTGAGE ACCEPTANCE COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 6162 95-4649104 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. JURISDICTION INDUSTRIAL CLASSIFICATION EMPLOYER IDENTIFICATION OFINCORPORATION OR CODE NUMBER) NUMBER) ORGANIZATION) 2049 CENTURY PARK EAST, SUITE 350 LOS ANGELES, CALIFORNIA 90067 (310) 229-2600 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) WAYNE L. KNYAL PRESIDENT AND CHIEF EXECUTIVE OFFICER FRANCHISE MORTGAGE ACCEPTANCE COMPANY 2049 CENTURY PARK EAST, SUITE 350 LOS ANGELES, CALIFORNIA 90067 (310) 229-2600 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ---------------- Copies to: THOMAS J. POLETTI, ESQ. TODD H. BAKER, ESQ. SUSAN B. KALMAN, ESQ. GIBSON, DUNN & CRUTCHER LLP DARREN O. BIGBY, ESQ. ONE MONTGOMERY STREET, SUITE 3100 FRESHMAN, MARANTZ, ORLANSKI, COOPER & SAN FRANCISCO, CALIFORNIA 94104- KLEIN 4505 9100 WILSHIRE BOULEVARD, 8TH FLOOR TELEPHONE (415) 393-8200 EAST FACSIMILE (415) 986-5309 BEVERLY HILLS, CALIFORNIA 90212 TELEPHONE (310) 273-1870 FACSIMILE (310) 274-8357 Approximate Date of Commencement of Proposed Sale to the Public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION SECURITIES REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE - ------------------------------------------------------------------------------- Common Stock, $.001 par value................. 10,062,500 $17.00 $171,062,500 $51,838
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Includes 1,312,500 shares which the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED AUGUST 27, 1997 8,750,000 SHARES [LOGO OF FRANCHISE MORTGAGE ACCEPTANCE COMPANY] COMMON STOCK Of the 8,750,000 shares of Common Stock offered hereby (the "Offering"), 5,312,500 are being sold by Franchise Mortgage Acceptance Company, a Delaware corporation (the "Company") and 3,437,500 are being sold by the Selling Stockholders. The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. Prior to the Offering, there has been no public market for the Common Stock. It is currently anticipated that the initial public offering price will be between $15.00 and $17.00 per share. See "Underwriting" for a discussion of factors to be considered in determining the initial public offering price. The Company intends to apply for quotation of the Common Stock on the Nasdaq National Market under the symbol "FMAX." SEE "RISK FACTORS" COMMENCING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF COMMON STOCK OFFERED HEREBY. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Price to Underwriting Proceeds to Proceeds to Selling Public Discount(1) Company(2) Stockholders - -------------------------------------------------------------------------------- Per Share................. $ $ $ $ Total (3)................. $ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) See "Underwriting" for information relating to indemnification of the Underwriters and other matters. (2) Before deducting expenses estimated to be $750,000, of which $455,000 are payable by the Company and $295,000 are payable by the Selling Stockholders. (3) The Company and the Selling Stockholders have granted the Underwriters a 30-day option to purchase up to 796,875 and 515,625 additional shares of Common Stock, respectively, on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public will be $ , Underwriting Discount will be $ , Proceeds to Company will be $ and Proceeds to Selling Stockholders will be $ . See "Underwriting." The shares of Common Stock are offered by the Underwriters named herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of the certificates representing such shares will be made against payment therefor at the offices of Montgomery Securities on or about , 1997. ----------- MONTGOMERY SECURITIES CREDIT SUISSE FIRST BOSTON PAINEWEBBER INCORPORATED The date of this Prospectus is , 1997 The Company intends to furnish its stockholders with annual reports containing financial statements audited by an independent accounting firm and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. ---------------- CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Except as otherwise specified, all information in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option (see "Underwriting"), (ii) regarding outstanding shares, excludes shares of Common Stock reserved for issuance under the Company's 1997 Stock Option, Deferred Stock and Restricted Stock Plan (the "Stock Option Plan") and (iii) assumes the reorganization of the Company as a Delaware corporation immediately prior to the closing of this Offering (see "The Reorganization"). Unless the context indicates otherwise, all references herein to the Company refer to Franchise Mortgage Acceptance Company and its predecessor entities, including Franchise Mortgage Acceptance Company LLC, a California limited liability company ("Franchise Mortgage LLC"). This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY The Company is a specialty commercial finance company engaged in the business of originating and servicing loans and equipment leases to small businesses, with a primary focus on established national and regional franchise concepts. Since commencing business in 1991, the Company believes it has become a leading lender to national and regional quick service restaurant ("QSR") franchisees, and the Company has developed a growing presence in the casual dining sector. More recently, the Company has expanded its focus to include retail energy licensees (service stations, convenience stores, truck stops, car washes and quick lube businesses) and golf operating businesses (golf courses and golf practice facilities). The Company originates long-term fixed and variable rate loan and lease products and sells such loans and leases either through securitizations or whole loan sales to institutional purchasers on a servicing retained basis. The Company believes that its loan and lease products are attractive investments to institutional investors because of the credit profile of its Borrowers (as defined herein), relatively long loan and lease terms, call protection through prepayment penalties and appropriate risk-adjusted yields. The Company also periodically makes equity investments or receives contingent equity compensation as part of its core lending and leasing business. The Company originated loans and leases through 11 marketing offices in nine states at June 30, 1997. Since the Company's inception, it has funded over $1.4 billion in loans and leases and at June 30, 1997, had a servicing portfolio of $1.1 billion. The Company's loan and lease originations grew to $458.5 million in 1996 from $218.7 million in 1995 and to $300.6 million for the six month period ended June 30, 1997 from $208.4 million for the comparable period in 1996. At June 30, 1997, the Company's average initial loan balance was $730,000 and the percentage of its loans and leases that were 90 days or more delinquent was 0.1%. The Company's focus is to provide funding to industries that have been historically underserved by banks and other traditional sources of financing. This focus requires the Company to develop specific industry expertise in the sectors which it serves in order to provide individualized financial solutions for its Borrowers. The Company believes that its industry expertise and proprietary databases, combined with its responsiveness to Borrowers, flexibility in structuring transactions and broad product offerings give it a competitive advantage over more traditional, highly regulated small business lenders. The Company's Borrowers are generally small business operators, most of whom are independent, multi-unit franchisees, with proven operating experience and a history of generating positive operating cash flows. The Company relies primarily upon its assessment of enterprise value, based in part on independent third party valuations, and historical operating cash flows to make credit determinations, as opposed to relying solely on the value of real estate and other collateral. 3 In 1991, the Company began making loans to franchisees of Taco Bell Corp. In 1992 and 1993, other national QSR concepts, such as Burger King, Wendy's, Pizza Hut, KFC and Hardee's, were approved. The Company's principal loan products at that time were fixed rate, 15-year, fully amortizing loans. In 1995, the Company began making loans to casual dining concepts such as TGI Friday's, Applebee's and Denny's and offering its Borrowers adjustable rate loans. Also in 1995, the Company began offering development and construction ("DEVCO") loans to its more experienced Borrowers to fund the development and construction or acquisition of new business units or the conversion of existing business units into a different franchise concept. In 1996, the Company expanded its approved concepts to include strong regional restaurants such as Carl's, Jr., Church's Chicken and Golden Corral and launched its Golf Finance Group to provide financing to owners and operators of golf courses and golf practice facilities. The Equipment Finance Group also commenced activities in 1996 to provide equipment loans and leases to the sectors which the Company serves. In February 1997, the Company created its Retail Energy Finance Group to make loans to businesses that distribute retail petroleum products. The Company's goal is to become a leading national small business lender in each of its target markets. The Company's growth and operating strategy is based on the following key elements: Growth in Existing Sectors. The Company plans to replicate its success in the restaurant sector in other business sectors that it has entered more recently, such as retail energy and golf, through focused product development, customer service and support. The Company forms specialized teams for each sector to assess customer needs, generate customer loyalty and enhance service and support. Management believes that its industry leadership position, relationships with major Borrowers, franchisors and vendors, and expertise within sectors will assist the Company in increasing its market share. Controlled Expansion into New Sectors. Management believes that substantial opportunities exist to extend the Company's expertise into other business sectors. The Company believes that its experience in lending to restaurant franchisees has allowed it to develop a template for efficiently originating and servicing loans and leases in other industry sectors. The Company's philosophy is to provide complete business solutions to identified industries by developing strategies and financial products which are based on industry characteristics and each Borrower's specific needs. The Company carefully reviews industry data, seeking business sectors with a combination of large funding requirements, proven cash flow generating capabilities, standardized operations, a scarcity of long-term funding sources and characteristics attractive to secondary market investors. Maintenance of Credit Quality. The Company's delinquency and loss experience has been extremely low, due in part to lending to experienced operators, its detailed industry knowledge, active oversight of its existing servicing portfolio, strict underwriting criteria and the Company's ability to locate qualified replacement Franchisees/Borrowers to assume delinquent loans. At June 30, 1997, the Company had only two loans 90 days or more delinquent and, from its inception in April 1991 through June 30, 1997 had experienced no credit losses. Efficient Secondary Market Execution. The Company is committed to maintaining effective secondary market execution on loans and leases that it originates and sells. The Company believes that the favorable execution it has experienced to date is primarily the result of the attractive terms and the credit quality of the loans and leases that it originates. Of the $37.5 million in gain on sale from securitizations recognized by the Company since January 1, 1996, $30.3 million was comprised of cash received by the Company at the time of securitization and not the present value of anticipated cash flows on retained interests. As a result, the Company has reduced its exposure to the risks associated with holding large amounts of such retained interests on its balance sheet. From the beginning of 1996 through June 30, 1997, the Company completed three securitizations and a whole loan sale totaling $553.0 million and $15.3 million, respectively. In all such transactions, the Company has retained the right to service the sold or securitized loans. 4 Diversification of Revenue Sources. Management is committed to developing a diversified revenue base to reduce revenue volatility and enhance profitability. The Company continually monitors and adjusts its loan and lease products and securitization structures to improve the stability of its cash flows. Revenue sources include loan and lease origination points and fees, interest income earned prior to the sale of the loans and leases, whole loan and lease sale profits, securitization profits, loan and lease servicing fees and equity investment returns. Prior to this Offering, the business of the Company has been conducted by Franchise Mortgage LLC. Immediately prior to this Offering, Franchise Mortgage LLC will merge into Franchise Mortgage Acceptance Company, a Delaware corporation, which was incorporated in August 1997 for the purpose of succeeding to the business of Franchise Mortgage LLC. Prior to this Offering, 66.7% of the membership interest in Franchise Mortgage LLC was owned by Imperial Credit Industries, Inc. ("ICII") and 33.3% was owned by FLRT, Inc., a California corporation controlled by Wayne L. Knyal, the Company's President and Chief Executive Officer. See "The Reorganization." The Company's administrative offices are located at 2049 Century Park East, Suite 350, Los Angeles, California 90067, and its telephone number is (310) 229-2600. THE OFFERING Common Stock offered hereby: By the Company....................... 5,312,500 shares By the Selling Stockholders.......... 3,437,500 shares Common Stock to be outstanding after the Offering(1)....................... 27,200,000 shares Use of Proceeds........................ The net proceeds will be used to repay certain indebtedness to ICII, to fund future loan and lease originations and equity investments and for general corporate purposes. Proposed Nasdaq National Market Symbol................................ "FMAX"
- -------- (1) Excludes shares of Common Stock reserved for issuance pursuant to the Company's Stock Option Plan. The Stock Option Plan authorizes the grant of options to purchase, and awards of, an aggregate of up to 10% of the shares of the Company's Common Stock to be outstanding after this Offering, including any shares issued pursuant to the Underwriters' over-allotment option, but not less than 2,700,000 shares. Options to acquire 1,120,000 shares are expected to be granted to certain employees, officers and directors of the Company on the effective date of the Offering at an exercise price equal to the initial public offering price. See "Management--Stock Options." RISK FACTORS See "Risk Factors" for a description of certain factors which should be carefully considered before making an investment in the Company. 5 SUMMARY FINANCIAL AND OTHER DATA (IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
PREDECESSOR ----------------------------------- SIX MONTHS ENDED SIX MONTHS SIX MONTHS YEAR ENDED JUNE 30, YEAR ENDED ENDED ENDED DECEMBER 31, -------------------- DECEMBER 31, DECEMBER 31, JUNE 30, ------------------------ 1997 1996 1996 1995 1995 1994 1993 1992 ----------- -------- ------------ ------------ ---------- -------- ------- ----- STATEMENT OF OPERATIONS DATA: Revenues: Gain on sale(1)......... $19,808 $ 12,520 $ 18,671 $ -- $ -- $ 4,052 $ 1,430 $ -- Net interest income..... 1,373 302 1,641 239 154 37 35 2 Loan servicing income... 1,376 649 1,191 349 326 306 345 147 Other income............ -- 63 63 -- -- 68 -- -- ------- -------- -------- ------- -------- -------- ------- ----- Total revenues.......... 22,557 13,534 21,566 588 480 4,463 1,810 149 Expenses: Personnel and commission............. 4,665 3,901 8,270 356 931 1,723 1,035 -- General and administrative......... 1,467 495 1,094 294 684 1,804 2,952 306 Other................... 2,462 1,375 2,878 597 776 1,664 1,718 -- ------- -------- -------- ------- -------- -------- ------- ----- Total expenses.......... 8,594 5,771 12,242 1,247 2,391 5,191 5,705 306 ------- -------- -------- ------- -------- -------- ------- ----- Net income (loss)....... $13,963 $ 7,763 $ 9,324 $ (659) $ (1,911) $ (728) $(3,895) $(157) ======= ======== ======== ======= ======== ======== ======= ===== Pro forma earnings data (2): Net income as reported.............. $13,963 $ 7,763 $ 9,324 Pro forma income taxes................. 5,935 3,110 3,873 ------- -------- -------- Pro forma net income... $ 8,028 $ 4,653 $ 5,451 ======= ======== ======== Pro forma net income per share(3).......... $ 0.37 $ 0.21 $ 0.25 ======= ======== ======== Supplemental pro forma earnings data(2): Net income as reported.............. $13,963 Establishment of deferred tax liability......... 7,018 ------- Supplemental pro forma net income............ $ 6,945 ======= Supplemental pro forma net income per share(3).............. $ 0.32 ======= AS OF DECEMBER 31, AS OF JUNE 30, 1997 ------------------------------------------------ --------------------------------- PREDECESSOR ------------------------ AS PRO ADJUSTED(4) FORMA(5) ACTUAL 1996 1995 1994 1993 1992 ----------- -------- ------------ ------------ ---------- -------- ------- ----- BALANCE SHEET DATA: Cash and cash equivalents............ $65,613 $ 15 $ 15 $ -- $ -- $ 102 $ 205 $ 1 Securities available for sale................... 2,581 2,581 2,581 39,349 -- 9,541 5,025 -- Loans and leases held for sale............... 208,014 208,014 208,014 98,915 181,254 -- -- -- Retained interest in loan securitizations(6)..... 7,002 7,002 7,002 6,908 -- -- -- -- Accrued interest receivable............. 1,137 1,137 1,137 560 1,108 138 39 -- Goodwill................ 4,571 4,571 4,571 4,332 4,226 -- -- -- Other assets............ 9,636 9,636 9,636 10,112 2,460 467 862 309 ------- -------- -------- ------- -------- -------- ------- ----- Total assets........... 298,554 232,956 232,956 160,176 189,048 10,248 6,131 310 Overdraft............... -- -- -- 171 445 -- -- -- Payable to ICII......... -- 12,997 9,997 17,728 -- -- -- -- Borrowings.............. 195,922 195,922 195,922 125,240 181,632 13,548 7,160 460 Deferred income taxes... 7,018 7,018 -- -- -- -- -- -- Other liabilities....... 4,939 4,939 4,939 2,580 3,198 1,543 3,086 70 ------- -------- -------- ------- -------- -------- ------- ----- Total liabilities...... 207,879 220,876 210,858 145,719 185,275 15,091 10,246 530 Members' equity......... -- -- $ 22,098 $14,457 $ 3,773 $(4,843) $(4,115) $(220) ======== ======= ======== ======== ======= ===== Common stock............ 27 22 Additional paid in capital................ 90,648 12,058 ------- -------- Total stockholders' equity................ $90,675 $ 12,080 ======= ========
6
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------- 1997 1996 1995 1994 1993 1992 ---------- -------- -------- -------- ------- ------- OPERATING STATISTICS: Loan originations: Total loan originations.......... $ 285,370 $456,981 $218,742 $109,166 $29,367 $26,101 Average initial principal balance per loan.................. $ 730 $ 837 $ 706 $ 635 $ 452 $ 458 Weighted average interest rate: Fixed rate loans....... 10.70% 10.29% 10.12% 10.21% 9.48% 10.94% Variable rate loans.... 9.60% 9.34% 8.40% 8.13% -- % -- % Equipment finance originations: Total equipment finance originations.......... $ 15,247 $ 1,486 $ -- $ -- $ -- $ -- Average initial principal balance per financing............. $ 186 $ 149 $ -- $ -- $ -- $ -- Weighted average interest rate......... 12.08% 12.14% -- % -- % -- % -- % Total loan and lease originations........... $ 300,617 $458,467 $218,742 $109,166 $29,367 $26,101 Loan sales: Whole loan sales....... $ 15,349 $ -- $ -- $ -- $ -- $ -- Loans sold through securitizations(1).... 158,554 325,088 147,972 105,686 28,973 -- ---------- -------- -------- -------- ------- ------- Total................. $ 173,903 $325,088 $147,972 $105,686 $28,973 $ -- Loans and leases held in servicing portfolio (at period end)(7)..... $1,051,165 $737,176 $358,579 $180,367 $81,030 $55,164 Net charge offs as a percentage of total servicing portfolio.... -- % -- % -- % -- % -- % -- %
- -------- (1) Gain on sale for the six months ended June 30, 1997 and 1996 and the year ended December 31, 1996 includes $18.4 million, $5.8 million and $11.9 million of cash gains, of which $2.4 million, $3.6 million and $7.8 million, respectively, represented loan fees. The gain on sale of loans for the December 1995 securitization was not recognized until the first quarter of 1996. (2) From July 1, 1995 through the closing date of the Offering, the Company qualified to be treated as a partnership for federal and state income tax purposes (the "LLC Qualification"). Pro forma earnings data reflect the Reorganization and the income tax expense that would have been recorded had the Company not been taxed as a partnership. As a result of terminating the Company's limited liability company ("LLC") status upon completion of this Offering, the Company will be required to record a one-time non-cash charge against historical earnings for deferred income taxes. This charge will occur in the quarter ending December 31, 1997 and the year ending December 31, 1997. If this charge were recorded at June 30, 1997, the amount would have been approximately $7.0 million. This amount is expected to increase through the closing date of this Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 3, 4 and 14 of Notes to Financial Statements. (3) 21,887,500 outstanding shares were used in computing pro forma and supplemental pro forma net income per share. See Note 3 of Notes to Financial Statements. (4) As adjusted to reflect the sale of the shares of Common Stock by the Company in this Offering at an assumed initial public offering price of $16.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." (5) Pro forma balance sheet data reflects the Reorganization, the distribution by Franchise Mortgage LLC to its members of the Final LLC Distribution of $3.0 million immediately prior to the completion of this Offering, such amount to be funded with a short term loan from ICII repayable with a portion of the net proceeds of this Offering (the "Final LLC Distribution"), the recording by the Company of deferred income taxes (see footnote (2) above), and the reclassification of members' equity to additional paid-in capital in connection therewith. See "LLC Distributions," "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (6) See Note 8 of Notes to Financial Statements. (7) Total delinquencies, which include all loans and leases 90 or more days past due as a percentage of all loans and leases held in the Company's servicing portfolio, was 0.11% as of June 30, 1997. 7 RISK FACTORS Before investing in the shares offered hereby, prospective investors should give special consideration to the following risk factors in addition to the information set forth elsewhere in this Prospectus. The following risk factors are interrelated, and consequently, investors should treat such risk factors as a whole. This Prospectus contains forward-looking statements that inherently involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. SUBSTANTIAL DEPENDENCE ON SECURITIZATIONS, WAREHOUSE LINES OF CREDIT AND REPURCHASE FACILITIES MAY ADVERSELY IMPACT THE COMPANY'S LIQUIDITY AND PROFITABILITY Liquidity. The Company has an ongoing need to finance its lending activities, which is expected to increase to the extent that the volume of loan and lease originations increases. The Company's primary operating cash requirements will include the funding of (i) loans and leases pending their sale, (ii) fees and expenses incurred in connection with its securitization program, (iii) overcollateralization or reserve account requirements in connection with loans pooled and securitized, (iv) interest, fees and expenses associated with the Company's warehouse lines of credit and repurchase facilities with certain financial institutions, (v) federal and state income tax payments and (vi) ongoing administrative and other operating expenses. The Company currently funds these cash requirements primarily through securitizations, whole loan and lease sales and borrowings from Banco Santander, Sanwa Bank and Credit Suisse First Boston. No assurance can be given that the Company will have access to the capital markets in the future for equity or debt issuances or for securitizations or that financing through borrowings will be available on acceptable terms to satisfy the Company's cash requirements. The Company's inability to access the capital markets or obtain acceptable financing could have a material adverse effect on the Company's business and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." Securitizations. The Company currently pools and sells through securitization substantially all of the loans which it originates. Under the Company's current securitization structure, the Company sells a pool of loans on a non-recourse basis to a single purpose trust. The trust issues securities in the form of certificates which are denominated in multiple tranches throughout the credit rating spectrum from the highest investment grade rating of "AAA" descending to a non-investment grade rating of "B." In addition, the Company structures an interest only security ("I/O") in its financings that is generally rated AAA. Several factors affect the Company's ability to complete securitizations of its loans, including conditions in the securities markets generally, conditions in the asset-backed securities markets specifically, the credit quality of the Company's loans, compliance of the Company's loans with the eligibility requirements established by the securitization documents, the Company's ability to adequately service its loans and the absence of any material downgrading or withdrawal of ratings given to certificates issued in the Company's previous securitizations. Adverse changes in any of these factors would impair the Company's ability to originate and sell loans on a favorable or timely basis which could have a material adverse effect upon the Company's business and results of operations. In addition, the securitization market for the Company's loans and leases is relatively undeveloped and may be more susceptible to market fluctuations or other adverse changes than more developed capital markets. To the extent the Company makes loans and leases in new industry sectors or to different types of entities in existing industry sectors, there is a risk that such loans and leases will not be securitizable or will be securitizable only on terms disadvantageous to the Company. The "gain on sale" associated with securitizations and loan and lease sales is the largest component of the Company's revenues. The gain on sale of loans in a securitization is computed as cash received from securitization plus the fair value of any retained interests held from a loan securitization less the book value of the loans sold (including par value of loans, plus or minus premiums, discounts and unearned loan fees) less any reserves required to be held by a securitization trust. The fair value of retained interests in loan securitizations is 8 computed as the present value of the estimated cash flows associated with the retained interest, using an appropriate discount factor and prepayment and credit loss assumptions. Of the $37.5 million gain on sale from securitizations recognized by the Company since January 1, 1996, $30.3 million was comprised of cash received by the Company at the time of securitization and not the present value of anticipated cash flow on retained interests. However, depending upon the securitization structure and execution of the transaction, in future transactions the Company may not receive some or all of the cash representing such gain until much later, as payments are received on the securitized assets, or may never receive some or all of such cash. In connection with securitizations, the Company also establishes retained interests in loan securitizations as a balance sheet asset, which are amortized over the estimated life of the loans securitized. While, to date, the Company's retained interest in loan securitization has been relatively small, it could become much larger in future periods. As a result, although an accounting gain may be recognized, future securitization transactions may not generate commensurate cash flows to the Company for an extended period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Accounting for Gain on Sale" and "--Liquidity and Capital Resources." The anticipated payments to the Company on its retained interest in loan securitizations are discounted at a specified rate and further reduced by the Company's estimate of future credit losses and prepayments over the lives of the loans securitized. Such amounts, if any, are held back and serve as additional collateral for the repayment of the related certificates. To date, the default rate used by the Company has been zero because the Company has incurred no credit losses. Generally, the Company has used a zero prepayment rate because prepayment penalties contained in loan documents have deterred Borrower prepayments significantly. If prevailing interest rates rise, the required discount rate might also rise, thereby causing the Company to record an expense reducing the Company's gain on sale and the carrying value of retained interests in loan securitizations. The actual rate of credit losses and prepayments are influenced by a variety of economic and other factors, including general economic conditions and business competition. Accordingly, there can be no assurance that the actual rate of credit losses on the loans sold in the Company's securitizations will not exceed the Company's estimates or historical experience. If actual credit losses and prepayments exceed the Company's estimates, this would cause the Company to record an expense in a future period or periods reducing the carrying value of retained interests in loan securitizations. There can be no assurance that future changes in the Company's securitization structures, interest rates or future credit loss and prepayment levels will not result in losses which could have a material adverse effect on the Company's business and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In order to gain access to the secondary market for its loans, in parallel with the accumulation of the collateral and the structuring of the securities sold in each securitization, independent rating agencies are retained to rate each series of securities issued. To date one or more classes of each of these series of securities has received investment grade ratings (BBB and above). The Company's inability to obtain such an investment grade rating could have a material adverse effect on the Company's operations and financial position. The Company has periodically relied on credit enhancements provided by monoline insurance carriers to guarantee the securities issued by the trust to enable it to improve the bond rating. Any substantial reduction in the size or availability of the securitization market for the Company's loans or the unwillingness of insurance companies to guarantee the certificates issued by the trust, could have a material adverse effect on the Company's business and results of operations and prospects. In addition, the documents governing the Company's securitizations also require the Company to build overcollateralization levels through retention of a specified amount of loan payments and the application thereof to reduce the principal balances of the notes issued or to create reserve funds. Such overcollateralization levels are pre-determined by the rating agencies or the insurance company issuing the guarantee of the certificates and are a condition to obtaining an investment grade rating thereon. The application of such amounts to collateral causes the aggregate principal amount of the loans to exceed the aggregate principal balance of certificates. Such excess amounts serve as a credit enhancement for the trust issuing the certificates or notes and fund losses realized on loans held by such trust. Accordingly, the Company continues to be subject to risks of delinquencies and charge-offs following the sale of loans through securitizations to the extent such amounts are required to be retained or applied by the trust. In addition, such retention slows, and in some circumstances, reduces over the 9 life of the related securitization, the flow of cash to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company is the originator and servicer of the loans that it securitizes. However, legal and beneficial ownership of securitized loans is held by the issuing trust and such loans serve as collateral for the certificates issued by the trust. The assets of the trust are not available to pay creditors of the Company. The Company's ongoing interest in such assets is limited to its participation in retained interests and servicing fees. The Company endeavors to execute material securitization transactions on not less than a quarterly basis. Market and other considerations, including the conformity of loan pools to the requirements of rating agencies, affect the timing of such transactions and may cause the Company's results of operations to fluctuate accordingly. Any delay in the sale of a loan pool beyond a quarter-end would postpone the recognition of gain related to such loans until their sale and may result in losses for such quarter being reported by the Company. In addition, the Company's securitization transactions currently permit it to defer paying taxes on a majority of the amount it records as gain on sale in securitization of loans. Taxes are deferred at the time the Company records gain on sale in securitization of loans, and are paid as cash is received from Borrowers. To the extent that the Company is unable to defer such taxes in future securitization transactions or is required by the Internal Revenue Service to accelerate the payment of taxes which previously had been deferred, the Company's liquidity, and thus its ability to pursue its growth strategy and to fund its future loan origination and securitization activities, may be adversely affected. Warehouse Lines of Credit and Repurchase Facilities. The Company is dependent upon its ability to access warehouse lines of credit and repurchase facilities to fund new originations. The Company had warehouse lines of credit and repurchase facilities of approximately $365.0 million at June 30, 1997, of which $15.0 million will expire in September 1997. The Company expects to be able to maintain existing warehouse lines of credit and repurchase facilities (or to obtain replacement or additional financing) as current arrangements expire or become fully utilized; however, there can be no assurance that such financing will be obtainable on favorable terms. To the extent that the Company is unable to arrange new warehouse lines of credit and repurchase facilities, the Company may have to curtail its loan and lease origination activities, which could have a material adverse effect on the Company's operations and financial position. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." CERTAIN UNDERWRITING REQUIREMENTS AND RISKS MAY ADVERSELY AFFECT CREDIT QUALITY Loans to franchisees ("Franchisees"), licensees of petroleum retailers and convenience store, truck stop, car wash and quick lube businesses ("Licensees") and owners and operators of golf courses and golf facilities ("Operators") (for purposes of this Prospectus, any Franchisee, Licensee, or Operator is referred to as a "Borrower") generally involve all of the risks associated with small business loans. While publicly available information permits the Company to perform certain risk analysis concerning the default, failure, and closure risks within industries and among Borrower groups, generally there is no assurance that the available information correctly reflects the risks associated with lending to Borrowers in each industry in general or to any particular Borrower within any particular industry. Moreover, there is no assurance that the underwriting formulas derived by the Company for Franchisees, Licensees and Operators generally or for particular business concepts will adequately assess the risk of making a loan to any particular Borrower. Business Valuation. The Company's loans are underwritten in accordance with the Company's underwriting guidelines which permit Borrowers to borrow up to a specified percentage of the value of the business unit and, in certain instances, the real estate pledged as collateral in connection with the loans. The value of the business unit is derived from a formula based upon the business concept and the revenues and cash flows generated by the business unit from its operations, as well as a valuation for each loan is performed by an independent third-party hired by the Company. However, there can be no assurance that the Company's valuations actually reflect an amount that could be realized upon a current sale of a Borrower's business unit and related personal and real property. Moreover, such a valuation is not indicative of the value of the enterprise at any time after the date of the valuation. Future values may depend upon a variety of factors, including the 10 economic success of the business unit, local and general competitive and economic conditions, as well as the strength of the relevant business concept, the franchisor or other licensor and the related Borrower. In addition, a Borrower's franchise or licensee agreement is not typically included in the collateral securing a loan, and as a result the Company may not foreclose on the franchise or licensee agreement in the event of a default by the Borrower. As a result, there is no assurance that the value of the collateral securing the loan will equal or exceed the amount of the loan and related Borrower obligations at any time. In addition, in the event of a default by a particular Borrower, there may be factors present that reduce the revenues or cash flow derived at the location and the value of the enterprise. Moreover, the liquidation value of the collateral securing the loan generally will be less than the value of the enterprise as determined above. Accordingly, in order to realize the full value of the collateral (which may or may not be sufficient to satisfy a Borrower's obligations to the Company), the Company generally will be required to obtain the cooperation of the franchisor or licensor. However, there is no assurance that such cooperation will be obtained, and that the interests of the Company and the franchisor or licensor will be comparable. Real Estate Valuation. The Company's loans are often secured by a mortgage or deed of trust on a Borrower's interest in the business unit-related real property upon which the unit operates. However, in many instances such interest is in a lease of limited value other than to one who also has the right to operate the business at such location, and as noted above, a Borrower's franchise or licensee agreement is not typically included in the collateral securing a loan. Accordingly, the Company's underwriting guidelines for leased properties do not require the Borrower to provide title insurance or reports and such policies or reports are typically not obtained in connection with the loans where the related property is a leasehold. In instances where the Company's underwriting guidelines permit a Borrower to borrow amounts based upon the value of the Borrower's interest in the business unit-related real estate, the Company determines the value of such real property interest based upon an independent, third-party appraisal. Such appraisals value the real property on an in-use, income approach which assumes that the property is in use as an income producing business property. Such value, even if realized in a sale or liquidation, generally would not provide such Borrower with sufficient proceeds to satisfy its obligations to the Company. Moreover, such an appraisal is not indicative of the value of the real property interest at any time after the date of the appraisal. Future values may depend upon a variety of factors, including changes in the surrounding area, including, but not limited to, changes which alter the visibility of the location and traffic patterns, duration of the lease, and absence of sufficient nondisturbance agreements, as well as changes in general or local economic conditions, increases in interest rates, real estate taxes and other operating expenses (including energy costs), changes in governmental rules and regulations (including environmental rules), acts of God and other factors. Accordingly, there is no assurance that the Company's valuations actually reflect the amount that could be realized upon a current sale of the real property interest. Credit Risks Associated with Loans Not Securitized or Sold. Certain of the Company's loans and leases may not be readily saleable or securitizable, or may be saleable or securitizable only after the individual loan or lease portfolio performance characteristics become apparent over time. To the extent that such loans and leases are not sold or securitized, the Company must fund such assets with borrowings or internally generated funds and bears the entire credit risk associated with such assets. The Company's inability ultimately to sell or securitize substantially all of the loans and leases it originates would have a material adverse effect on the Company's business and results of operations. See "--Substantial Dependence on Securitizations, Warehouse Lines of Credit and Repurchase Facilities May Adversely Impact the Company's Liquidity and Profitability" and "--Concentration on Restaurant, Retail Energy and Golf Sectors May Expose the Company to Concept Failures, Industry Cycles, Environmental Liabilities and Other Industry Specific Risks." Development and Construction Loans. The Company's DEVCO loans are a short- term product (up to 18 months) that have different risks than the permanent loans originated by the Company. DEVCO loans are offered to fund the development and construction or acquisition of new business units or the conversion of existing business units into a different franchise concept. In underwriting such loans, the Company relies more heavily on operator experience and the strength of the business concept rather than the historical profitability of the unit. The Company does not currently securitize any of its DEVCO loans and funds such loans primarily with warehouse borrowings. However, the Company may refinance such loans with permanent financing, subject to 11 its credit underwriting guidelines. In the event that the Company is unwilling or unable to refinance a DEVCO loan at maturity and no other lender refinances such loan, the Company may incur losses upon foreclosure or other collection action. In the event the Company's evaluation of value is less accurate for DEVCO loans than for permanent loans, the Company may be exposed to a greater risk of loss on such loans. See "Business--Loan Originations--Type of Loan Products." Bankruptcy. The bankruptcy of a Borrower could result in substantial delays in the enforcement of such Borrower's obligations to the Company and the enforcement and realization of the Company's interest in the collateral securing the obligations. In this regard, in the event of a bankruptcy of a Borrower, the Company would be stayed from foreclosing on its collateral and enforcing its rights against such Borrower. In addition, in the event that the value of the collateral securing a Borrower's obligations to the Company, as determined by the bankruptcy court, is less than the amount of the obligations owed to the Company, the Company's claim against such Borrower would be divided into secured and unsecured claims. Interest or attorneys' fees would not accrue in respect of either claim when such Borrower is in bankruptcy. As a result of, among other things, the issues relating to the value of the collateral securing the obligations owed by the borrower to the Company summarized above, there is no assurance that the Company's claim against the Borrower would not exceed the value of the collateral securing the obligations owed by the borrower to the secured party. The Company's Borrowers generally are corporations, limited liability companies and other limited liability entities, and the principals of the Borrowers generally are not required to personally guarantee the loans. As a result, in the event of a default by a Borrower under any particular loan, the stockholders or other principals of the defaulting Borrower generally will have no personal liability to repay the loan. Environmental Concerns. Contamination of real property by hazardous substances may give rise to a lien on that property to assure payment of the cost of clean-up or, in certain circumstances, subject the lender to liability. Such contamination may also reduce the value of the business and property. Under the laws of some states and under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), a lender may become liable for cleanup of a property and adjacent properties that are contaminated by releases from the property if the lender engages in certain activities. In 1996 CERCLA was amended to eliminate federal lender liability under CERCLA in certain circumstances, including foreclosure if the lender resells the property at the earliest practicable, commercially reasonable time on commercially reasonable terms. In addition, the amendments provided some guidance to lenders with respect to the nature of activities that would and would not give rise to liability under CERCLA. These amendments do not apply to state environmental laws. Also, foreclosure and other activities on contaminated property may subject a lender to state tort liability. In the course of its business, the Company may acquire real property securing loans that are in default. There is a risk that hazardous substances or waste, contaminants, pollutants or sources thereof could be discovered on such properties after acquisition by the Company. In such event, the Company might be required to remove such substances from the affected properties at its sole cost and expense. There can be no assurance that the cost of such removal would not substantially exceed the value of the affected properties or the loans secured by such properties or that the Company would have adequate remedies against the prior owners or other responsible parties, or that the Company would not find it difficult or impossible to sell the affected real properties either prior to or following any such removal. The Company's servicing guidelines require it to obtain an environmental site assessment of a business property prior to acquiring title thereto. Such requirement effectively precludes enforcement of the security for the related loan until a satisfactory environmental site assessment is obtained or until any required remedial action is thereafter taken but will decrease the likelihood that the Company will become liable for a material adverse environmental condition at the business property. However, there can be no assurance that the servicing guidelines will effectively insulate the Company from potential liability for a materially adverse environmental condition at any business property. See "Business--Regulation--Environmental Laws Affecting Borrowers in Specific Sectors." "Changes in Control" and Natural Person Franchisees. The franchise agreements of the Borrowers often prohibit "Changes in Control" whether by death, disability or otherwise. While in the event of the death or 12 disability of a natural person franchisee or of the principals of an entity franchisee, the executors and representatives of natural person franchisees are often permitted a period of months to locate a person acceptable to the franchisor to acquire the disabled or deceased person's interest in the business entity or to become a successor franchisee, there is no assurance that any such person would be found or, if found, would be acceptable to the franchisor and secured party. In the event that an acceptable person is not located, the Borrower would be in default under its franchise agreement and loan, and, among other things, the Borrower's right to operate the business unit could be terminated. License agreements of Borrowers on retail energy loans may contain similar provisions. Franchise Termination; Nonrenewal. A Borrower's franchise agreement may be subject to termination in the event of default after applicable cure periods. Default provisions under franchise agreements are generally drafted broadly, and include, among other things, failure to meet operating standards, actions which may threaten licensed intellectual property, and investments by principals in a competitive business. In addition, certain of the Borrower's franchise agreements may have remaining terms which are less than the full term of the respective Borrower's loans. In such cases, the respective Borrowers have the option, or are expected to be granted an option, to renew the franchise agreement for an additional term. Such option, however, often is contingent on the Borrower's execution of the then current form of franchise agreement (which may include increased royalties, advertising and other costs and which contained further restrictions on the franchisee's geographic and other rights) and satisfaction of certain conditions (including modernization of the business unit and related operations), the satisfaction of which may require the expenditure of substantial sums by the Borrower. The Company's standard loan documentation provides that the termination of a Borrower's franchise agreement is a default under the related loan which entitles the Company to declare the principal amount of such loan, immediately due and payable. A Borrower may mitigate the effects of a terminated franchise agreement by providing adequate substitute collateral to support the loan. There is no assurance that the Borrowers will not default under their respective franchise agreements, or that the Borrowers will be able to satisfy the requirements for renewal of the franchise agreement for an additional term. In the event a franchise agreement terminates, the related Borrower would not be able to continue to operate the business unit. In many instances, the sole business and source of revenue for the Borrowers is the operation of the business unit and the termination of the franchise agreement would mean that such Borrowers would cease business operations. Because the success of the business of the franchisee is largely dependent upon brand recognition and the strength of the business concept in which it operates, Borrowers whose rights to operate within the business concepts have been terminated will likely have substantially depleted revenues and/or higher operating costs, if they are able to operate at all. Accordingly, the termination or nonrenewal of the franchise agreement likely will result in a Borrower's inability to satisfy its obligations under the loan and a substantial decrease in the value of the collateral securing such obligations. License agreements by Borrowers on retail energy loans may contain similar provisions. See "Business-- Underwriting." Prepayment Restrictions on Loans May Be Insufficient to Deter Prepayments. Substantially all of the Company's loans contain provisions restricting prepayments of such loans. Such restrictions may prohibit prepayments in whole or in part during a specified period of time and/or require the payment of a prepayment fee in connection with the prepayment thereof. Such prepayment restrictions can, but do not necessarily, provide a deterrent to prepayments. As a result, if actual prepayments exceed Company estimates, the carrying value of the Company's retained interest in loan securitizations may become impaired, and the Company may be unable to effect future securitizations on terms similar to its recent securitization transactions, thereby having an adverse effect on the Company's financial condition and operating results. Prepayment charges may be in an amount which is less than the figure which would fully compensate for the difference in yield upon reinvestment of the prepayment proceeds against its expected yield to maturity of the loans. There can be no assurance that the Borrower on a loan which is being prepaid will have sufficient financial resources to pay all or a portion of any required prepayment charges, particularly where the prepayment results from acceleration of the loans following a payment default. No assurance can be given that, at the time any prepayment charges are required to be made in connection with a defaulted loan, foreclosure proceeds will be sufficient to make such payments. No representation or warranty is made as to the effect of such prepayment charges on the rate of prepayment of the related loan. 13 The enforceability, under the laws of a number of states, of provisions similar to the provisions in the loans providing for the payment of prepayment charges upon a voluntary or involuntary bankruptcy is unclear. In particular, no assurance can be given that, at any time that any prepayment charge is required to be made in connection with an involuntary prepayment, the obligation to pay such prepayment charge will be enforceable under applicable law or, if enforceable, that foreclosure proceeds will be sufficient to make such payment. Proceeds recovered in respect of any defaulted loan will, in general, be applied to cover outstanding property protection expenses and servicing expenses and unpaid principal and interest prior to being applied to cover any prepayment charge due in connection with the liquidation of such loan. Balloon Payment at Maturity and Extension Increases Lender Risks. The Company may from time to time originate loans with a balloon payment due at maturity. The ability of a Borrower to pay such amount will normally depend on its ability to fully refinance the loan or sell the business unit and related property at a price sufficient to permit the Borrower to make balloon payments. The ability of a Borrower to refinance will be affected by a number of factors, including, without limitation, the value of the related property, the financial condition and operating history of the Borrower and the related property limitations on transfer imposed by franchise or license agreements, the strength of the commercial real estate market, tax laws, and prevailing general economic conditions. Limited Covenant Restrictions. The Company's loan documents with each Borrower generally contain only a limited number of restrictive financial covenants, including covenants to maintain a specified fixed charge coverage ratio and covenants restricting encumbering or disposing of the collateral (other than dispositions in the ordinary course of business and encumbrances in connection with purchase money financings and certain other permitted encumbrances). The loan documents generally do not contain other financial covenants, such as covenants requiring maintenance of minimum levels of loan to value ratios, net worth or liquid assets, or covenants restricting or prohibiting distributions. The absence of such covenants (which are often included in traditional bank financings) may limit the secured party's ability to respond to declining collateral values and/or recover amounts in respect of any loans in the event of default. CONCENTRATION ON RESTAURANT, RETAIL ENERGY AND GOLF SECTORS MAY EXPOSE THE COMPANY TO CONCEPT FAILURES, INDUSTRY CYCLES, ENVIRONMENTAL LIABILITIES AND OTHER INDUSTRY SPECIFIC RISKS Risks Relating to Franchise Concepts The ability of a Borrower operating as a Franchisee to repay its loan is subject to general business risks typically associated with operating a business and particularly with operating a QSR/casual dining restaurant or other franchised business, including, without limitation, (i) an increase in the cost of labor (including, without limitation, mandatory increases in the minimum wage payable to employees) or food products, (ii) a decrease in the consumer demand for a particular product or class of products offered by a particular franchise concept and (iii) adverse changes in the economy in the geographic location in which a particular restaurant is located. Strength of Franchise Concept. A Franchisee's success is largely dependent upon brand recognition and the strength of the franchise system in which it operates. The continued success of a Borrower's business may be directly dependent upon the strength of the franchise concept, which in turn may be dependent upon the continued strength of the franchisor and the support which it provides to the franchise concept. While all of the Company's loans are made to Borrowers within approved franchise concepts and the approval of a franchise concept is based, among other things, on the historical results of the franchise concept, the strength of the franchisor and the support which it provides to the franchise concept, there is no assurance that the prior performance of the franchise concept will be indicative of future results, or that the franchisor will continue to have its present strength or continue to provide the support for the franchise concept. In addition, name brand recognition and franchise concept support that provides much of the basis for the successful operation of individual franchise businesses, can also mean that problems within the franchise concept or at other locations (e.g., food poisoning, crime, litigation and negative publicity) have substantial negative impact of the operations of otherwise successful individual restaurants. 14 The Company relies to a significant degree upon its established business relationships with franchisors in such franchise concepts as a source of new loan originations. The Company has a limited number of formal agreements with franchisors. No assurance can be given that such relationships will continue. The discontinuance of the relationship with one or more franchisors could reduce the volume of new loans that the Company is able to originate, which could have a material adverse effect on the Company's business and results of operations. See "Business--Loan Originations--Lending Groups." Competition Facing Franchisees. The QSR/casual dining restaurant sector in which many of the Company's Borrowers compete is highly competitive (e.g., with respect to price, service, location, food quality and presentation), and is affected by changes in taste and eating habits of the public, local economic and national economic conditions and population and traffic patterns. Borrowers compete with a variety of locally-owned restaurants, as well as competitive regional and national chains and franchises. In addition, Borrowers may be at risk of competition from restaurants within the same franchise concepts. Moreover, new companies may easily enter the Borrowers' respective market segments. All such competition may adversely affect a Borrower's revenues and profits and the value of its enterprise and its ability to satisfy its obligations in connection with its loan. Furthermore, Borrowers face stiff competition for competent employees and high levels of employee turn-over, which also can have an adverse effect on the operations and profitability of the Borrowers and on their ability to satisfy their loan obligations. See "Business--Competition." Concentration Risks. The Company may be exposed to certain substantial concentration risks including risks of (i) franchise concept concentration, (ii) Borrower concentration and (iii) geographic concentration. The Company makes loans to Borrowers who are franchisees in a limited number of franchise concepts, the majority of which operate solely in the QSR/casual dining restaurant market. Such concentration of systems will mean that in the event that any of the included franchise concepts suffers a material adverse change, the Borrowers in such franchise concept would be adversely affected, and there would be a concomitant adverse impact on the Borrowers' ability to repay its obligations to the Company. To date the substantial majority of the Company's loans have been made to Borrowers operating QSRs in a limited number of jurisdictions. Concentration in a limited number of jurisdictions will mean that in the event that any of the included jurisdictions suffers a material adverse change (whether as a result of deteriorating economic conditions, natural disasters or otherwise), the Borrowers in such jurisdiction would be adversely affected. In addition, to the extent that the Company makes loans to a Borrower or an affiliated group of Borrowers which constitutes a material portion of the Company's then outstanding loans, the Company could suffer material losses in the event such Borrower or affiliated group defaulted on its loans. At June 30, 1997, the Company had made loans to one Borrower whose loans comprised 13.9% of the Company's loans held for sale and the Company's top five Borrowers had loans comprising 35.4% of the Company's loans held for sale. See "Business--Loan Originations--Lending Groups" and "--Geographic Distribution." Franchise Site Location. One of the strengths of the franchise system is procedures employed in selecting site locations for franchises business units, and an important part of the value of a franchise business is the franchisee's ability to operate the franchise business at the specified location. In this regard, many franchisee agreements are "site" or "location" specific and permit only the Borrower to operate at the specified location. However, in the event of changes adversely affecting the location (e.g., changes in traffic patterns, changes in visibility, deterioration of the surrounding neighborhood), the Borrower may not be able to relocate its operations even if the Borrower has the financial resources to fund such a move. If a Borrower were unable to move, such changes could result in decreased revenue and substantially impair the Borrower's ability to satisfy its obligations under the loan, as well as the value of the business and collateral securing the loan. Risks Relating to Retail Energy Concepts Risks Related to Petroleum Supply Contracts. Many of the Company's Borrowers operating as Licensees in the retail energy sector operate under supply agreements (the "Supply Agreements") with national retail petroleum companies which may require such Borrowers to, among other things, purchase all or a portion of their requirements for petroleum products from such companies. The Supply Agreements may also contain terms which require such Borrowers to pay additional costs to such companies to cover marketing activities and additional other expenses for the percentage of branded products sold under such Company's brand in the event 15 the Borrower fails to achieve certain target earnings set forth in the Supply Agreement (the "Target Earnings"). In addition, the Supply Agreements may require such Borrowers to make additional "margin maintenance payments" on petroleum products not purchased if such Borrowers do not purchase a minimum amount of product per year. The minimum amounts required to be purchased may escalate each year. Accordingly, if Target Earnings are not met and/or such Borrowers do not meet the minimum purchase requirements, the cost for purchasing petroleum products could become excessive and adversely affect such Borrowers' profit margin with respect to those products and consequently their ability to repay their loans. Dependence on Sale of Motor Fuel. Gasoline sales are highly competitive. Most Borrowers in the retail energy sector compete with both independent and brand gasoline stations. Gasoline profit margins associated with the sale of motor fuel have a significant impact on such Borrowers and are affected by numerous factors outside of each Borrower's control, including the supply and demand for motor fuel in retail markets, volatility in the wholesale gasoline market and competitive pricing influences in each Borrower's local market area. Borrowers may obtain motor fuel from a number of independent suppliers in an attempt to lower their cost per gallon and establish a diverse supplier base in the event of shortages. As Borrowers generally may not inventory more than two weeks' volume requirements, any sustained shortage of motor fuel from a Borrower's suppliers could substantially reduce the volume of motor fuel sold by such Borrower. A material decrease in either the volume of motor fuel sold or the profit margin on such sales for an extended time period could have a material adverse effect on the income of Borrowers in the retail energy sector and their ability to service loans from the Company. In addition, the Company believes that the patronage of customers desiring to purchase motor fuel accounts for a significant portion of customer traffic at retail energy business units and has a favorable impact on the merchandise sales in the convenience stores, car washes and truck stops connected to service station operations. Accordingly, any reduction in motor fuel supplies and resulting reductions in motor fuel sales could adversely affect the sale of non-motor fuel items and result in decreased revenues for such Borrowers. Environmental Regulations. The operation and management of retail energy businesses (whether pursuant to direct ownership, leases or management contracts) involves the use and limited storage of certain hazardous materials. Specifically, the Company's Borrowers in the retail energy sector incur ongoing costs to comply with federal, state and local environmental laws and regulations governing underground storage tank systems ("USTs") used in their operations. The Company's loans may be secured by convenience store and gas station locations with USTs and other environmental risks. Borrowers may be required to obtain various environmental permits and licenses in connection with their operations and activities and comply with various health and safety regulations adopted by federal, state, local and foreign authorities governing the use and storage of such hazardous materials. Under various federal, state, local and foreign laws, ordinances and regulations, various categories of persons, including owners, operators or managers of real property may be liable for the costs of investigation, removal and remediation of hazardous substances that are or have been released on or in their property even if such releases were by former owners or occupants. In addition, any liability of Borrowers for assessment and remediation activities in connection with releases into the environment of gasoline or other regulated substances from USTs or otherwise at such Borrowers' gasoline facilities could adversely impact the Borrowers' ability to repay their loans from the Company or the value of any pledged collateral. Due to the nature of releases, the actual costs incurred may vary and the ongoing costs of assessment and remediation activities may vary from year to year and may adversely impact such Borrowers' ability to repay their loans. See "--Certain Underwriting Requirements and Risks May Adversely Affect Credit Quality." Most states have funds which provide reimbursement to qualified storage tank owners/operators for assessment and remediation costs associated with petroleum releases (after the operator pays a set deductible and co-payment amount). Most funds are supported by annual tank registration fees paid by the station owners and a gasoline fee, included in the price of the gas, which is paid by consumers. As a result of the recently enacted legislation regarding USTs, there has been an increasing number of UST replacements. Consequently, some state funds have been drained of reserves. The result is a delay in disbursement until the fund can be replenished with fee collections, the effect of which may have an adverse effect on the Borrower's financial condition and ability to repay its loan. See "Business--Regulation-- Environmental Regulations Affecting Retail Energy Businesses." 16 Competition Faced by Borrowers in the Retail Energy Sector. The retail energy sector is highly competitive. The number and type of competitors vary by location. The Company's Borrowers in the retail energy sector presently compete with other convenience stores, large integrated gasoline service station operators, supermarket chains, neighborhood grocery stores, independent gasoline service stations, fast food operations and other similar retail outlets, some of which are well recognized national or regional retail chains. The Company's Borrowers in the retail energy sector may compete against businesses which have greater financial and other resources than those of the Borrowers. Key competitive factors in the retail energy sector include, among others, location, ease of access, store management, product selection, pricing, hours of operation, store safety, cleanliness, product promotions and marketing. As a result of purchase economies or vertical integration, certain of the Company's Borrowers in the retail energy sector may not be able to compete effectively with larger competitors which may possess greater control over product costs and may have the ability to offer a broader range of products or services. To the extent these competitors adopt marketing policies, including advertising and pricing levels, that exploit their competitive advantages, such competitors could gain market share and have an adverse effect on the profitability of the Company's Borrowers in the retail energy sector and their ability to repay their loans. Risks Relating to Golf Loans Consumer Spending and Trends. The amount spent by consumers on discretionary activities, such as those offered by Borrowers in the golf sector, has historically been dependent upon levels of discretionary income which may be adversely affected by general economic conditions. A decrease in consumer spending on golf-associated activities could have a material adverse effect on the financial condition and results of operations of Borrowers in the golf sector and their ability to repay the Company's loans. Zoning and Environmental Regulations. The construction of golf courses for third parties and the development of golf practice and instruction facilities involve compliance with land use planning, zoning and environmental regulations, including regulations applicable to the treatment, storage and disposal of hazardous and solid wastes, run-off and wetland development. Regulations governing the use and development of real estate may prevent Borrowers in the golf sector from acquiring or developing prime locations for golf facilities, substantially delay or complicate the process of developing locations acquired by such Borrowers for golf facilities or constructing golf courses on locations owned by others, or materially increase the cost thereof. Further, the operation and management of golf courses and golf practice and instruction facilities (whether pursuant to direct ownership, lease or management contract) involve the use and limited storage of certain hazardous materials such as herbicides, pesticides, fertilizers, motor oil, gasoline and paint. Borrowers may be required to obtain various environmental permits and licenses in connection with their operations and activities and comply with various health and safety regulations adopted by federal, state, local and foreign authorities governing the use and storage of such hazardous materials. Under various federal, state, local and foreign laws, ordinances and regulations, various categories of persons, including owners, operators or managers of real property may be liable for the costs of investigation, removal and remediation of hazardous substances that are or have been released on or in their property even if such releases were by former owners or occupants. See "--Certain Underwriting Requirements and Risks May Adversely Affect Credit Quality." Seasonality. Golf facilities generally are the most active during the second and third quarters of the year. The inherent seasonality of participation in golf and golf-related activities and the effect of weather conditions generally result in greater revenues and income during the second and third quarters as compared to the first and fourth quarters of the year. Poor weather conditions and unforseen natural events may result in reduced utilization of Borrowers' golf facilities and have an adverse effect on revenues of Borrowers in the golf sector. Risks Relating to Equipment Loans and Leases Residual Value Risk. The Company retains a residual interest in the equipment covered by its leases. The estimated fair market value of the equipment at the end of the contract term of the lease, if any, is reflected as an asset on the Company's balance sheet for leases held to maturity and will be included as part of the gain on sale 17 in any lease securitization transaction. The Company's results of operations depend, to some degree, upon its ability to realize these residual values. Realization of residual values depends on many factors which are outside the Company's control, including general market conditions at the time of expiration of the lease, whether there has been unusual wear and tear on, or use of, the equipment, the cost of comparable new equipment, the extent, if any, to which the equipment has become technologically or economically obsolete during the contract term and the effects of any additional or amended government regulations. If, upon the expiration of a lease, the Company sells or refinances the underlying equipment and the amount realized is less than the recorded value of the residual interest in such equipment, a loss reflecting the difference will be recognized. Any failure by the Company to realize aggregate recorded residual values could have a material adverse effect on its business and results of operations. Risks Relating to Equity Investments Equity Risk. The Company periodically makes passive equity investments in companies operating in the sectors served by its lending and leasing business. Such investments may be made in conjunction with loans and leases or independent of any borrowing relationship. In certain cases, the Company is obligated to make additional equity investments in such companies at the option of the majority investor. Equity investments involve a higher degree of risk than loans or leases in that such companies generally have no contractual obligation to repay amounts invested by the Company, the investment is not secured and the Company bears the risk of loss of its entire investment. Generally, the Company is unable to control the activities of these companies due to its minority ownership interest and lacks representation in the management of such companies. See "Business--Equity Investments" and "Certain Transactions--Other Matters--Equity Investments." PROFITABILITY OF THE COMPANY MAY BE ADVERSELY AFFECTED BY INTEREST RATE FLUCTUATIONS Profitability may be directly affected by fluctuations in interest rates which affect the Company's ability to earn a spread between interest received on its loans held for sale and rates paid on warehouse lines of credit and repurchase facilities. The Company's profitability may be adversely affected during any period of unexpected or rapid changes in interest rates. A substantial and sustained increase in interest rates could adversely affect the Company's ability to originate loans. Fluctuating interest rates also may affect the net interest income earned by the Company resulting from the difference between the yield to the Company on loans held pending sale and the interest paid by the Company for funds borrowed under the Company's warehouse lines of credit and repurchase facilities. If interest rates rise, the required discount rate used in determining the Company's retained interest in loan securitizations might also rise, thereby causing the Company to record an expense reducing the Company's gain on sale and the carrying value of retained interests in loan securitizations. HEDGING STRATEGIES MAY NOT PROTECT THE COMPANY FROM INTEREST RATE RISKS The Company is required under its warehouse lines of credit and repurchase facilities to hedge all of its fixed-rate loan balances securing such facilities. The Company's hedging strategy normally includes selling U.S. Treasury futures in such amounts and maturities as to effectively hedge the interest rate volatility of its portfolio. The Company does not maintain naked or leveraged hedge positions. While the Company believes its hedging strategies are cost-effective and provide some protection against interest rate risks, no hedging strategy can completely protect the Company from such risks. Further, the Company does not believe that hedging against the interest rate risks associated with adjustable-rate loans is cost-effective, and the Company does not utilize the hedging strategies described above with respect to its adjustable-rate loans. THE COMPANY MAY BE REQUIRED TO REPURCHASE LOANS AND LEASES SOLD OR SECURITIZED IN THE EVENT OF BREACH OF REPRESENTATIONS AND WARRANTIES In connection with the issuance of securities in offerings in which loans originated by the Company have been securitized, such securities are issued to purchasers nonrecourse to the Company; provided, however, that the purchasers of such securities will have recourse to the Company with respect to the breach of a standard 18 representation or warranty made by the Company at the time such loans are securitized. To the extent that the Company is required to repurchase any loan it will incur those risks incurred by conventional lenders. In the ordinary course of its business, the Company is subject to claims made against it by Borrowers and certificate holders in the Company's securitizations arising from, among other things, losses that are claimed to have been incurred as a result of alleged breaches of fiduciary obligations, misrepresentations, errors and omissions of employees, officers and agents of the Company (including its appraisers), incomplete documentation and failures by the Company to comply with various laws and regulations applicable to its business. The Company believes that liability with respect to any currently asserted claims or legal actions is not likely to be material to the Company's results of operations or financial condition; however, any claims asserted in the future may result in legal expenses or liabilities which could have a material adverse effect on the Company's results of operations and financial condition. THE INABILITY OF THE COMPANY TO MANAGE GROWTH COULD ADVERSELY AFFECT COMPANY OPERATIONS The Company's total revenues and net income have grown significantly since inception, primarily due to increased loan origination activities. While the Company intends to continue to pursue a growth strategy, its future operating results will depend largely upon its ability to expand its loan and lease origination activities. The Company plans to continue its growth of loan and lease originations through increased penetration in the sectors where the Company currently operates as well as expansion into new sectors. However, these expansion plans will require additional personnel and assets and there can be no assurance that the Company will be able to successfully expand and operate such programs profitably or that the Company will anticipate all of the changing demands that its expanding operations will have on the Company's management, information and operating systems. Any failure by the Company to hire appropriate personnel or adapt its systems could have a material adverse effect on the Company's results of operations and financial condition. THE COMPANY'S OPERATIONS COULD BE ADVERSELY AFFECTED BY THE LOSS OF KEY PERSONNEL The Company's success depends to a large extent upon the expertise and continuing contributions of Wayne L. Knyal, President, Chief Executive Officer and a Director of the Company and Thomas J. Shaughnessy, Executive Vice President and Chief Credit Officer of the Company. The loss of the services of either of these individuals could have a material adverse effect on the Company's business and results of operations. The Company's future success also depends on its ability to identify, attract and retain additional qualified personnel. There can be no assurance that the Company will be successful in identifying, attracting and retaining such personnel. See "Management--Directors and Executive Officers." LIMITED HISTORY OF INDEPENDENT OPERATIONS AND NEW PRODUCTS LIMIT THE ABILITY OF THE COMPANY TO PREDICT FUTURE PERFORMANCE The Company has experienced substantial growth in loan and lease originations and total revenues since inception, and in particular since June 1995 when ICII acquired the operations of Franchise Mortgage LLC. The Company had been unprofitable until 1996 and there can be no assurance that the Company will be profitable in the future or that these rates of growth will be sustainable or indicative of future results. Prior to the Offering, the Company benefited from the financial, administrative and other resources of ICII and Greenwich Capital Financial Products, Inc., a prior owner of the operations of Franchise Mortgage LLC. Accordingly, the Company's prospects must be evaluated in light of the risks, expenses and difficulties it will encounter as an independent business. Although the Company will have a services agreement with ICII upon the effective date of this Offering, there can be no assurance that the Company will develop the financial, management or other resources necessary to operate successfully as an independent company. In light of the Company's aforementioned growth in loan and lease originations, the historical performance of the Company's earnings may be of limited relevance in predicting future performance. Also, the loans originated by the Company and included in the Company's securitizations have been outstanding for a relatively 19 short period of time. Consequently, the delinquency and loss experience of the Company's loans and leases to date may not be indicative of results to be experienced in the future. It is unlikely that the Company will be able to maintain delinquency and loss ratios at current levels as the portfolio becomes more seasoned. The Company has recently expanded its product offerings to include leases and has expanded its marketing efforts to include Borrowers in the retail energy and golf sectors. The Company has either limited or no experience with these new products and markets, and there can be no assurance that the Company will be able to compete in these markets successfully or that the return on the Company's investment in these new products and markets will be consistent with the Company's historical financial results. ANY FUTURE ACQUISITIONS OF OTHER SPECIALTY FINANCE COMPANIES OR ASSETS MAY HAVE ADVERSE EFFECTS ON THE COMPANY'S BUSINESS The Company may, from time to time, engage in the acquisition of other specialty finance companies or portfolios of loan and lease assets. Any acquisition made by the Company may result in potentially dilutive issuances of equity securities, the incurrence of additional debt and the amortization of expenses related to goodwill and other intangible assets, any of which could have a material adverse effect on the Company's business and results of operations. The Company also may experience difficulties in the assimilation of the operations, services, products and personnel related to acquired companies or asset portfolios, an inability to sustain or improve the historical revenue levels of acquired companies, the diversion of management's attention from ongoing business operations and the potential loss of key employees of such acquired companies. The Company currently has no agreements with regard to potential acquisition and there can be no assurance that future acquisitions, if any, will be consummated. ONE-TIME DEFERRED INCOME TAX CHARGE WILL REDUCE THE COMPANY'S EARNINGS In accordance with SFAS 109, as a result of terminating the Company's LLC status upon completion of this Offering, the Company will be required to record a one-time non-cash charge against earnings for deferred income taxes based upon the change from the Company's LLC status to C Corporation status. Management estimates that there will be a charge for the quarter ending December 31, 1997 and the year ending December 31, 1997; if such a charge were recorded at June 30, 1997, the amount would have been approximately $7.0 million. This amount is expected to increase through the closing date of this Offering. For a further discussion, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Impact of Change in Tax Status", "--Tax Considerations" and Notes 3, 4 and 14 of Notes to Financial Statements. SUBSTANTIAL COMPETITION IN THE COMMERCIAL FINANCE INDUSTRY MAY ADVERSELY AFFECT THE COMPANY'S ABILITY TO ORIGINATE OR MAINTAIN LOANS AND LEASES As a specialty commercial finance lender, the Company faces intense competition, primarily from commercial banks, thrift institutions, diversified finance companies, asset-based lenders, specialty franchise finance companies and real estate investment trusts, among others. Many of these competitors in the financial services business are substantially larger and have more capital and other resources than the Company. Competition can take many forms, including convenience in obtaining a loan or lease, customer service, marketing and distribution channels and loan and lease pricing. Furthermore, the current level of gains realized by the Company and its competitors on the sale of the type of loans and leases they originate is attracting and may continue to attract additional competitors into this market with the possible effect of lowering gains that may be realized on the Company's loan and lease sales. Competition may be affected by fluctuations in interest rates and general economic conditions. During periods of rising rates, competitors which have locked in low borrowing costs may have a competitive advantage. During periods of declining rates, competitors may solicit the Company's customers to refinance their loans and leases. During economic slowdowns or recessions, the Company's Borrowers may experience financial difficulties and may be receptive to offers by the Company's competitors. 20 CONTROL OF THE COMPANY BY SELLING STOCKHOLDERS AND POTENTIAL CONFLICTS OF INTEREST BETWEEN THE COMPANY AND CERTAIN AFFILIATES After the Offering, the Selling Stockholders will beneficially own 67.8% of the outstanding Common Stock of the Company (or approximately 64.1% of the outstanding Common Stock if the Underwriters' over-allotment option is exercised in full). Of such shares, 44.4% will be owned by ICII and 23.4% will be owned by FLRT, Inc., a company controlled by Wayne L. Knyal, the Company's President and Chief Executive Officer. As a result, the Selling Stockholders will be able to control substantially all matters requiring approval by the stockholders of the Company, including the election of directors and the approval of mergers or other business combination transactions. Under the Company's Bylaws, as long as ICII directly owns at least 25% of the Company's outstanding voting stock, the Unaffiliated Directors of the Company's Board of Directors (directors independent of both management and ICII) must independently approve all transactions between the Company and ICII. See "Principal and Selling Stockholders." ANTITAKEOVER PROVISIONS MAY DETER OR LIMIT CHANGES IN MANAGEMENT AND OWNERSHIP OF THE COMPANY Certain provisions of Delaware law and the Certificate of Incorporation (the "Certificate") and Bylaws (the "Bylaws") of the Company may make it more difficult or expensive for a third party to acquire, or discourage a third party from attempting to acquire control of the Company. Specifically, the Company's Certificate and Bylaws will prohibit stockholder action by written consent and limit the ability of stockholders to call special meetings. Also, the Board of Directors of the Company has the power to issue "blank check" preferred stock (the "Preferred Stock") with rights senior to the Common Stock without approval by the stockholders of the Company. The Preferred Stock may be issued from time to time with such designations, rights, preferences and privileges as the Board of Directors may determine and may adversely affect the rights of the Common Stock. See "Description of Capital Stock--Certain Provisions of Delaware General Corporation Law." NO ASSURANCE OF ACTIVE TRADING MARKET FOR COMMON STOCK Prior to this Offering, there has been no public market for the Common Stock of the Company. Although the Company intends to apply for quotation of the Common Stock on the Nasdaq National Market, there can be no assurance that an active public trading market for the Common Stock will develop after the Offering or that, if developed, it will be sustained. The public offering price of the Common Stock offered hereby has been determined by negotiations between the Company and the Representatives of the Underwriters and may not be indicative of the price at which the Common Stock will trade after the Offering. See "Underwriting." Consequently, there can be no assurance that the market price for the Common Stock will not fall below the initial public offering price. POSSIBLE VOLATILITY OF STOCK PRICE; EFFECT OF FUTURE OFFERINGS MAY ADVERSELY AFFECT MARKET PRICE OF COMMON STOCK The market price of the Common Stock may experience fluctuations that are unrelated to the Company's operating performance. In particular, the price of the Common Stock may be affected by general market price movements as well as developments specifically related to the commercial finance industry such as, among other things, interest rate movements. In addition, the Company's operating income on a quarterly basis is significantly dependent upon the successful completion of the Company's loan securitizations and whole loan sales in the market, and the Company's inability to complete significant loan sale transactions in a particular quarter may have a material adverse impact on the Company's results of operations for that quarter and could, therefore, negatively impact the price of the Common Stock. The Company may increase its capital by making additional private or public offerings of its Common Stock, securities convertible into its Common Stock or debt securities. The actual or perceived effect of such offerings, the timing of which cannot be predicted, may be the dilution of the book value or earnings per share of the Common Stock outstanding, which may result in the reduction of the market price of the Common Stock. 21 SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF THE COMPANY'S COMMON STOCK The sales of substantial amounts of the Company's Common Stock in the public market or the prospect of such sales could materially and adversely affect the market price of the Common Stock. Upon completion of this Offering, the Company will have outstanding 27,200,000 shares of Common Stock. The 8,750,000 shares of Common Stock offered hereby will be immediately eligible for sale in the public market without restriction beginning on the date of this Prospectus. The remaining 18,450,000 shares of Common Stock are restricted in nature and are saleable to the extent permitted for "affiliates" pursuant to Rule 144 under the Securities Act. The Company and the Selling Stockholders have agreed that they will not, without the prior written consent of Montgomery Securities (which consent may be withheld in its sole discretion) and subject to certain limited exceptions, sell, transfer, or otherwise dispose of any shares of Common Stock, options or warrants to acquire Common Stock, or securities exchangeable or exercisable for or convertible into Common Stock for a period commencing on the date of this Prospectus and continuing to a date 180 days after such date.See "Shares Eligible for Future Sale" and "Underwriting." Additionally, it is expected that stock options for 1,120,000 shares of Common Stock will be granted to certain employees, officers and directors of the Company on the date of this Offering at a per share exercise price equal to the initial public offering price, not more than 20% of which, except in the event of a change of control of the Company, will be exercisable on that date which is one year from the date of this Offering. The Stock Option Plan authorizes the grant of options to purchase, and awards of, an aggregate of up to 10% of the shares of the Company's Common Stock to be outstanding after this Offering, including any shares issued pursuant to the Underwriters' over-allotment option, but not less than 2,700,000 Shares. The Company intends to register under the Securities Act shares reserved for issuance pursuant to the Stock Option Plan. The Company has entered into a registration rights agreement (the "ICII Registration Rights Agreement") pursuant to which the Company has agreed to file one or more registration statements under the Securities Act in the future for shares of the Company held by ICII, subject to certain conditions set forth therein. Pursuant to the ICII Registration Rights Agreement, the Company will use its reasonable efforts to cause such registration statements to be kept continuously effective for the public sale from time to time of the shares of the Company held by ICII. Also, under the ICII Registration Rights Agreement, FLRT, Inc. may piggyback its shares onto any registration statement concerning shares of the Company's Common Stock held by ICII; provided however that for a period of three years following the date of this Prospectus, FLRT, Inc. is limited in the amount of shares of the Company's Common Stock it can sell to that amount authorized pursuant to Rule 144. Thereafter, FLRT, Inc. has registration rights similar to those granted to ICII under the ICII Registration Rights Agreement without any volume limitations. IMMEDIATE AND SUBSTANTIAL DILUTION The initial public offering price is substantially higher than the book value per outstanding shares of the Common Stock. Purchasers of the Common Stock will experience immediate and substantial dilution in net tangible book value per share of Common Stock from the initial public offering price per share of Common Stock. See "Dilution." ABSENCE OF DIVIDENDS Following the completion of the Offering, the Company intends to retain earnings to finance the growth and development of its business. Accordingly, the Company does not anticipate paying cash dividends on the Common Stock in the foreseeable future. 22 THE REORGANIZATION The Company's predecessor, FLRT, Inc. (formerly Franchise Mortgage Acceptance Corporation), was incorporated by Wayne L. Knyal as a California corporation in April 1991 and was wholly owned by him at that time. FLRT, Inc. and certain individuals formed a limited partnership for the purpose of originating and securitizing franchise loans. As the general partner of such limited partnership, FLRT, Inc. owned the sole rights to service such loans (the "FLRT Servicing Contracts"). In March 1993, Mr. Knyal entered into a joint venture with Greenwich Capital Financial Products, Inc. ("Greenwich") pursuant to which Mr. Knyal became the president of the Franchise Mortgage Acceptance Company division (the "FMAC Division") of Greenwich. Between March 1993 and June 1995, the Company originated and securitized franchise loans through the FMAC Division. However, FLRT, Inc. retained all rights to the FLRT Servicing Contracts. On June 30, 1995, ICII acquired from Greenwich certain assets of the FMAC Division, including all of Greenwich's rights under certain servicing contracts entered into by the FMAC Division (the "FMAC Servicing Contracts") and a $410,000 obligation owed by Mr. Knyal to Greenwich (see "Certain Transactions"). The FMAC Servicing Contracts pertain to the servicing of franchise loans that were previously securitized by Greenwich through the FMAC Division and other franchise loans owned by Greenwich and not yet securitized. Concurrent with the closing of the transactions described above, ICII entered into an operating agreement with Mr. Knyal for the formation of Franchise Mortgage LLC. In connection with the acquisition, Franchise Mortgage LLC or its affiliates assumed certain liabilities related to the FMAC Servicing Contracts and Greenwich agreed to act as Franchise Mortgage LLC's exclusive agent in connection with the securitization of franchise loans for a period of 24 months. Franchise Mortgage LLC was formed to originate, securitize and service franchise loans. Under the terms of the operating agreement, in exchange for a 66.7% ownership interest in Franchise Mortgage LLC, ICII was obligated to contribute to Franchise Mortgage LLC $1.3 million in cash and all of the assets purchased from Greenwich. In exchange for a 33.3% ownership interest in Franchise Mortgage LLC, Knyal caused FLRT, Inc., to contribute to Franchise Mortgage LLC all of its rights under the FLRT Servicing Contracts. Immediately prior to this Offering, Franchise Mortgage LLC will merge into Franchise Mortgage Acceptance Company, a Delaware corporation which was incorporated in August 1997 for the purpose of succeeding to the business of Franchise Mortgage LLC (the "Reorganization"). As a result of the Reorganization, immediately prior to this Offering ICII will own 66.7% and FLRT, Inc. will own 33.3%, respectively, of the outstanding shares of Common Stock of Franchise Mortgage Acceptance Company. Mr. Knyal currently beneficially owns 85% of the Common Stock of the Company held by FLRT, Inc. 23 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the 5,312,500 shares of Common Stock offered by the Company (after deducting the estimated underwriting discount and offering expenses payable by the Company), are estimated to be $78.6 million. The Company intends to apply the net proceeds from this Offering (i) to repay demand indebtedness owed to ICII ($10.0 million was owed to ICII as of June 30, 1997 at an interest rate of 12% per annum; amounts owed to ICII will increase by $3.0 million to fund the Final LLC Distribution), (ii) to fund future loan and lease originations and equity investments and (iii) for general corporate purposes. Prior to their eventual use, the net proceeds will be invested in high quality, short-term investment instruments such as short-term corporate investment grade or United States Government interest-bearing securities. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. LLC DISTRIBUTIONS Since July 1, 1995, the Company has been treated as a partnership for federal and state income tax purposes. As a result, the income of the Company has not been subject to federal and state income taxation. The members of Franchise Mortgage LLC (ICII and FLRT, Inc.) are liable for individual federal and state income taxes on their allocated portions of the Company's taxable income. The Company's status as an LLC will be automatically terminated as a result of this Offering. For the six months ended June 30, 1997 and the six months ended December 31, 1995, the Company distributed approximately $6.3 million and $3.8 million, respectively, to its members which distributions were funded with cash on hand and borrowings. This amount represents a portion of the Company's earnings through June 30, 1997. The Company will make the Final LLC Distribution of $3.0 million immediately prior to the completion of this Offering, such payment will be funded with a short term loan from ICII repayable with a portion of the net proceeds of this Offering (see "Use of Proceeds"). Purchasers of Common Stock in the Offering will not receive any portion of the Final LLC Distribution. Following termination of its status as an LLC, the Company will be subject to federal and state corporate income taxation. See "Capitalization" and Notes 3, 4 and 14 of Notes to Financial Statements. DIVIDEND POLICY Except as described herein under "LLC Distributions," the Company has never paid any cash dividends on its Common Stock. The Company intends to retain all of its future earnings to finance its operations and does not anticipate paying cash dividends in the foreseeable future. Any decision made by the Company's Board of Directors to declare dividends in the future will depend upon the Company's future earnings, capital requirements, financial condition and other factors deemed relevant by the Company's Directors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 24 DILUTION The pro forma net tangible book value of the Company's Common Stock at June 30, 1997 was approximately $7.5 million or $0.34 per share. Pro forma net tangible book value per share represents total tangible assets reduced by the amount of total liabilities, divided by the number of shares of Common Stock outstanding, after giving effect to (i) the Reorganization, (ii) the Final LLC Distribution and repayment thereof with a portion of the net proceeds of this Offering (see "LLC Distributions") and (iii) the recording by the Company of deferred income taxes as if the Company were treated as a C Corporation at June 30, 1997, and the reclassification of members' capital to additional paid-in capital in connection therewith. After giving effect to the sale by the Company of the shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $16.00 per share (after deducting the estimated underwriting discount and offering expenses), the pro forma as adjusted net tangible book value of the Company at June 30, 1997 would have been $86.1 million or $3.17 per share of Common Stock. This represents an immediate increase in pro forma net tangible book value of $2.83 per share to existing stockholders and an immediate dilution of $12.83 per share to new investors purchasing shares in this Offering. The following table illustrates this per share dilution: Assumed initial public offering price per share.................. $16.00 Pro forma net tangible book value per share as of June 30, 1997.......................................................... $0.34 Increase per share attributable to new investors............... 2.83 ----- Pro forma as adjusted net tangible book value per share after this Offering................................................... 3.17 ------ Dilution per share to new investors.............................. $12.83 ======
The following table summarizes, on a pro forma basis as of June 30, 1997, after giving effect to the adjustments set forth above, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share of Common Stock paid by the existing stockholders and by the new investors in this Offering:
SHARES OWNED AFTER THE OFFERING TOTAL CONSIDERATION ------------------ -------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- ------------- Existing stockholders..... 18,450,000 67.8% $ 12,080,000 7.9% $0.66 New investors............. 8,750,000 32.2 140,000,000 92.1 16.00 ---------- ----- ------------ ----- Total................... 27,200,000 100.0% $152,080,000 100.0% ========== ===== ============ =====
25 CAPITALIZATION The following table sets forth the capitalization of the Company (i) on an actual basis as of June 30, 1997 (when the Company was an LLC), (ii) on a pro forma basis to reflect (A) the Reorganization, (B) the Final LLC Distribution of $3.0 million immediately prior to the completion of this Offering, such amount to be funded with a short term loan from ICII (see "LLC Distributions") and (C) the recording by the Company of $7.0 million of deferred income taxes as if the Company were treated as a C Corporation at June 30, 1997 and the reclassification of members' capital to additional paid-in capital in connection therewith and (iii) on a pro forma as adjusted basis to give effect to the issuance and sale of the shares of Common Stock offered by the Company at an assumed initial public offering price of $16.00 per share (after deducting the estimated underwriting discount and offering expenses payable by the Company) and the anticipated applications of the net proceeds therefrom. This table should be read in conjunction with the Financial Statements and the Notes thereto included elsewhere in this Prospectus.
AT JUNE 30, 1997 -------------------------------- PRO PRO FORMA ACTUAL FORMA AS ADJUSTED(1) -------- -------- -------------- (DOLLARS IN THOUSANDS) Borrowings.................................... $195,922 $195,922 $195,922 Payable to ICII............................... 9,997 12,997 -- -------- -------- -------- Total Borrowings............................ 205,919 208,919 195,922 Members' equity(2)............................ 22,098 -- -- Stockholders' equity: Preferred Stock, $.001 par value; 10,000,000 shares authorized; none issued and outstanding actual, pro forma and pro forma as adjusted................................ -- -- -- Common Stock, $.001 par value; 100,000,000 shares authorized(3); no shares issued and outstanding actual; 21,887,500 shares issued and outstanding, pro forma; 27,200,000 shares issued and outstanding, pro forma as adjusted...................... -- 22 27 Additional paid-in capital.................. -- 12,058 90,648 -------- -------- -------- Total stockholders' equity................ -- 12,080 90,675 -------- -------- -------- Total capitalization...................... $228,017 $220,999 $286,597 ======== ======== ========
- -------- (1) After deducting the estimated underwriting discount and offering expenses payable by the Company, and assuming no exercise of the Underwriters' over-allotment option. (2) Members' equity consists of approximately $5.8 million of members' capital and $16.3 million of retained earnings. (3) Excludes shares reserved for issuance pursuant to the Company's Stock Option Plan. The Stock Option Plan authorizes the grant of options to purchase, and awards of, an aggregate of up to 10% of the shares of the Company's Common Stock to be outstanding after this Offering, including any shares issued pursuant to the Underwriters' over-allotment option, but not less than 2,700,000 shares. Options to acquire 1,120,000 shares are expected to be granted to employees, officers and directors of the Company at the effective date of this Offering at a per share exercise price equal to the initial public offering price. See "Management--Stock Options." 26 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) The selected statement of operations data for the six months ended June 30, 1997, the year ended December 31, 1996, the six months ended June 30, 1995 and December 31, 1995, and the year ended December 31, 1994, and the selected balance sheet data as of June 30, 1997, and December 31, 1996 and 1995, have been derived from audited financial statements of the Company which, together with the notes thereto and the related report of KPMG Peat Marwick LLP, independent certified public accountants, are included in this Prospectus. The selected statement of operations data for the six months ended June 30, 1996, and the years ended December 31, 1993 and 1992, and the selected balance sheet data as of December 31, 1994, 1993 and 1992, have been derived from the unaudited financial statements of the Company not included herein, and include all adjustments, consisting solely of normal recurring accruals, which management considers necessary for a fair presentation of such financial information for those periods. Results of operations for the six months ended June 30, 1997, are not necessarily indicative of results to be expected for the year ended December 31, 1997, or a full year. Financial information for periods ended and dates prior to July 1, 1995, represent that of the Company's predecessors.
PREDECESSOR ---------------------------------- SIX MONTHS ENDED SIX MONTHS SIX MONTHS YEARS ENDED JUNE 30, YEAR ENDED ENDED ENDED DECEMBER 31, ---------------------- DECEMBER 31, DECEMBER 31, JUNE 30, ----------------------- 1997 1996 1996 1995 1995 1994 1993 1992 ------------- -------- ------------ ------------- ---------- ------- ------- ----- STATEMENT OF OPERATIONS DATA: Revenues: Gain on sales(1)....... $ 19,808 $ 12,520 $ 18,671 $ -- $ -- $ 4,052 $ 1,430 $ -- Net interest income.... 1,373 302 1,641 239 154 37 35 2 Loan servicing income.. 1,376 649 1,191 349 326 306 345 147 Other income........... -- 63 63 -- -- 68 -- -- -------- -------- -------- -------- ------- ------- ------- ----- Total revenues......... 22,557 13,534 21,566 588 480 4,463 1,810 149 -------- -------- -------- -------- ------- ------- ------- ----- Expenses: Personnel and commission............ 4,665 3,901 8,270 356 931 1,723 1,035 -- General and administrative........ 1,467 495 1,094 294 684 1,804 2,952 306 Other.................. 2,462 1,375 2,878 597 776 1,664 1,718 -- -------- -------- -------- -------- ------- ------- ------- ----- Total expenses......... 8,594 5,771 12,242 1,247 2,391 5,191 5,705 306 -------- -------- -------- -------- ------- ------- ------- ----- Net income (loss)....... $ 13,963 $ 7,763 $ 9,324 $ (659) $(1,911) $ (728) $(3,895) $(157) ======== ======== ======== ======== ======= ======= ======= ===== Pro forma earnings data(2): Net income as reported.............. $ 13,963 $ 7,763 $ 9,324 Pro forma income taxes................. 5,935 3,110 3,873 -------- -------- -------- Pro forma net income... $ 8,028 $ 4,653 $ 5,451 ======== ======== ======== Pro forma net income per share(3).......... $ 0.37 $ 0.21 $ 0.25 ======== ======== ======== Supplemental pro forma earnings data(2): Net income as reported.............. $ 13,963 Establishment of deferred tax liability......... 7,018 -------- Supplemental pro forma net income............ $ 6,945 ======== Supplemental pro forma net income per share(3).............. $ 0.32 ======== AS OF JUNE 30, 1997 AS OF DECEMBER 31, ---------------------- ------------------------------------------------------ PREDECESSOR --------------------------- PRO FORMA (4) ACTUAL 1996 1995 1994 1993 1992 ------------- -------- ------------ ------------- ---------- ------- ------- BALANCE SHEET DATA: Cash and cash equivalents ........... $ 15 $ 15 $ -- $ -- $ 102 $ 205 $ 1 Securities available for sale................... 2,581 2,581 39,349 -- 9,541 5,025 -- Loans and leases held for sale............... 208,014 208,014 98,915 181,254 -- -- -- Retained interest in loan securitizations(5)..... 7,002 7,002 6,908 -- -- -- -- Accrued interest receivable............. 1,137 1,137 560 1,108 138 39 -- Goodwill................ 4,571 4,571 4,332 4,226 -- -- -- Other assets............ 9,636 9,636 10,112 2,460 467 862 309 -------- -------- -------- -------- ------- ------- ------- Total assets........... 232,956 232,956 160,176 189,048 10,248 6,131 310 Payable to Imperial Credit Industries, Inc.................... 12,997 9,997 17,728 -- -- -- -- Overdraft............... -- -- 171 445 -- -- -- Borrowings.............. 195,922 195,922 125,245 181,632 13,548 7,160 460 Deferred income taxes... 7,018 -- -- -- -- -- -- Other liabilities....... 4,939 4,939 2,580 3,198 1,543 3,086 70 -------- -------- -------- -------- ------- ------- ------- Total liabilities...... 220,876 210,858 145,719 185,275 15,091 10,246 530 Members' equity......... -- $ 22,098 $ 14,457 $ 3,773 $(4,843) $(4,115) $(220) ======== ======== ======== ======= ======= ======= Common stock............ 22 -- Additional paid-in capital................ 12,058 -------- Total stockholders equity................ $ 12,080 ========
27
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED ---------------------------------------------- JUNE 30, 1997 1996 1995 1994 1993 1992 ------------- -------- -------- -------- ------- ------- OPERATING STATISTICS: Loan originations: Total loan originations.......... $ 285,370 $456,981 $218,742 $109,166 $29,367 $26,101 Average initial principal balance per loan.................. $ 730 $ 837 $ 706 $ 635 $ 452 $ 458 Weighted average interest rate: Fixed rate loans....... 10.70% 10.29% 10.12% 10.21% 9.48% 10.94% Variable rate loans.... 9.60% 9.34% 8.40% 8.13% -- % -- % Equipment finance originations: Total equipment finance originations.......... $ 15,247 $ 1,486 $ -- $ -- $ -- $ -- Average principal balance per financing............. $ 186 $ 149 $ -- $ -- $ -- $ -- Weighted average interest rate......... 12.08% 12.14% -- % -- % -- % -- % Total loan and lease originations:.......... $ 300,617 $458,467 $218,742 $109,166 $29,367 $26,101 Loan sales: Whole loan sales....... $ 15,349 $ -- $ -- $ -- $ -- $ -- Loans sold through securitizations(1).... 158,554 325,088 147,972 105,686 28,973 -- ---------- -------- -------- -------- ------- ------- Total................. $ 173,903 $325,088 $147,972 $105,686 $28,973 $ -- Loans and leases held in servicing portfolio (at period end)(6)..... $1,051,165 $737,176 $358,579 $180,367 $81,030 $55,164 Net charge-offs as a percentage of total servicing portfolio.... -- % -- % -- % -- % -- % -- %
- ------- (1) Gain on sale for the six months ended June 30, 1997 and 1996 and the year ended December 31, 1996 includes $18.4 million, $5.8 million and $11.9 million of cash gains, of which $2.4 million, $3.6 million and $7.8 million, respectively, represented loan fees. The gain on sale of loans for the December 1995 securitization was not recognized until the first quarter of 1996. (2) From July 1, 1995 through the closing date of the Offering, the Company qualified to be treated as a partnership for federal and state income tax purposes. Pro forma earnings data reflect the Reorganization and the income tax expense that would have been recorded had the Company not been taxed as a partnership. As a result of terminating the Company's LLC status upon completion of this Offering, the Company will be required to record a one-time non-cash charge against historical earnings for deferred income taxes. This charge will occur in the quarter ending December 31, 1997 and the year ending December 31, 1997. If this charge were recorded at June 30, 1997, the amount would have been approximately $7.0 million. This amount is expected to increase through the closing date of this Offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 3, 4 and 14 of Notes to Financial Statements. (3) 21,887,500 outstanding shares were used in computing pro forma and supplemental pro forma earnings per share. See Note 3 of Notes to Financial Statements. (4) Pro forma balance sheet data reflects the Reorganization, the distribution by Franchise Mortgage LLC to its members of the Final LLC Distribution of $3.0 million immediately prior to the completion of this Offering, such amount to be funded with a short term loan from ICII repayable with a portion of the net proceeds of this Offering, the recording by the Company of deferred income taxes (see footnote (2) above), and the reclassification of members' equity to additional paid-in capital in connection therewith. See "LLC Distributions", "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (5) See Note 8 of Notes to Financial Statements. (6) Total delinquencies, which include all loans and leases 90 or more days past due as a percentage of all loans and leases held in the Company's servicing portfolio, was 0.11% as of June 30, 1997. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's financial statements and notes thereto appearing elsewhere herein. THE REORGANIZATION The Company's predecessor, FLRT, Inc. (formerly Franchise Mortgage Acceptance Corporation), was incorporated by Wayne L. Knyal as a California corporation in April 1991 and was wholly owned by him at that time. FLRT, Inc. and certain individuals formed a limited partnership for the purpose of originating and securitizing franchise loans. As the general partner of such limited partnership, FLRT, Inc. owned the sole rights to the FLRT Servicing Contracts. In March 1993, Mr. Knyal entered into a joint venture with Greenwich pursuant to which Mr. Knyal became the president of the FMAC Division. Between March 1993 and June 1995, the Company originated and securitized franchise loans through the FMAC Division. However, FLRT, Inc. retained all rights to the FLRT Servicing Contracts. On June 30, 1995, ICII acquired from Greenwich certain assets of the FMAC Division, including all of Greenwich's rights under the FMAC Servicing Contracts and a $410,000 obligation owed by Mr. Knyal to Greenwich (see "Certain Transactions"). The FMAC Servicing Contracts pertain to the servicing of franchise loans that were previously securitized by Greenwich through the FMAC Division and other franchise loans owned by Greenwich and not yet securitized. Concurrent with the closing of the transactions described above, ICII entered into an operating agreement with Mr. Knyal for the formation of Franchise Mortgage LLC. In connection with the acquisition, Franchise Mortgage LLC or its affiliates assumed certain liabilities related to the FMAC Servicing Contracts and Greenwich agreed to act as Franchise Mortgage LLC's exclusive agent in connection with the securitization of franchise loans for a period of 24 months. Franchise Mortgage LLC was formed to originate, securitize and service franchise loans. Under the terms of the operating agreement, in exchange for a 66.7% ownership interest in Franchise Mortgage LLC, ICII was obligated to contribute to Franchise Mortgage LLC $1.3 million in cash and all of the assets purchased from Greenwich. In exchange for a 33.3% ownership interest in Franchise Mortgage LLC, Knyal caused FLRT, Inc. to contribute to Franchise Mortgage LLC all of its rights under the FLRT Servicing Contracts. Immediately prior to this Offering, Franchise Mortgage LLC will effectuate the Reorganization whereby it will merge into Franchise Mortgage Acceptance Company, a Delaware corporation which was incorporated in August 1997 for the purpose of succeeding to the business of Franchise Mortgage LLC. As a result of the Reorganization, ICII will own 66.7% and FLRT, Inc. will own 33.3%, respectively, of the outstanding shares of Common Stock of Franchise Mortgage Acceptance Company. Mr. Knyal currently beneficially owns 85% of the Common Stock of the Company held by FLRT, Inc. In connection with the LLC Termination Date, the Company will make the Final LLC Distribution of $3.0 million to the members of Franchise Mortgage LLC. See "LLC Distributions" and Notes 3, 4 and 14 of Notes to Financial Statements. The accompanying statements of operations and cash flows for the six months ended June 30, 1995, and the year ended December 31, 1994, are those of the Company's predecessor when it was a division of Greenwich. Revenues and interest expense appearing on such statements of operations result from assets and debt of such division accounted for separately by Greenwich. Personnel and commission expense appearing on such statements of operations apply to the employees of such division, and such expense was also accounted for separately by Greenwich. All other expenses of such division were either directly assigned or allocated to the predecessor division by Greenwich based on either actual utilization or the number of such division's employees. 29 ACCOUNTING FOR GAIN ON SALE The gain on sale of loans in a securitization is computed as cash received from securitization plus the fair value of any retained interests held from a loan securitization less the book value of the loans sold (including par value of loans, plus or minus premiums, discounts and unearned loan fees) less any reserves required to be held by a securitization trust. The fair value of retained interests in loan securitizations is computed as the present value of the estimated cash flows associated with the retained interest, using an appropriate discount factor and prepayment and credit loss assumptions. LOAN AND LEASE ORIGINATIONS The following table summarizes the Company's loan and lease originations for the six months ended June 30, 1997 and 1996 and the years ended December 31, 1996, 1995, 1994, 1993 and 1992.
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ------------------ ---------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- ------- ------- (DOLLARS IN THOUSANDS) Loan originations: Principal balance...... $285,370 $208,221 $456,981 $218,742 $109,166 $29,367 $26,101 Number of loans........ 391 281 546 310 172 65 57 Average initial principal balance per loan.................. $ 730 $ 741 $ 837 $ 706 $ 635 $ 452 $ 458 Weighted average interest rate: Fixed rate loans....... 10.70% 10.17% 10.29% 10.12% 10.21% 9.48% 10.94% Variable rate loans.... 9.60% 9.13% 9.34% 8.40% 8.13% -- % -- % Equipment finance originations: Equipment finance balance............... $ 15,247 $ 140 $ 1,486 $ -- $ -- $ -- $ -- Number of financings... 82 1 10 -- -- -- -- Average initial balance per financing ........ $ 186 $ 140 $ 149 $ -- $ -- $ -- $ -- Weighted average interest rate......... 12.08% 11.99% 12.14% -- % -- % -- % -- % Total loan and lease originations........... $300,617 $208,361 $458,467 $218,742 $109,166 $29,367 $26,101
RESULTS OF OPERATIONS Impact of Change in Tax Status Prior to the completion of this Offering, the Company qualified to be taxed as a partnership. As such, the Company was not responsible for federal or state income taxes. As a result of the change in tax status effective with the completion of this Offering, the Company will, in future periods, provide for all income taxes at statutory rates. These factors are estimated to result in an effective tax rate for periods subsequent to the Offering of approximately 42%. However, for the three-month period in which the Offering closes, the Company will record a one-time non-cash charge for the quarter ending December 31, 1997 and for the year ending December 31, 1997 for deferred income taxes based upon the change in the Company's status to a C Corporation. If such a charge were recorded at June 30, 1997, the amount would have been approximately $7.0 million. This amount is expected to increase through the closing date for this Offering. For further information see Notes 3, 4 and 14 of Notes to Financial Statements. 30 Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1997 JUNE 30, 1996 ------------- ------------- (IN THOUSANDS) Revenues: Gain on sale of loans.............................. $19,808 $12,520 Interest income.................................... 10,767 1,257 Interest expense................................... (9,394) (955) ------- ------- Net interest income.............................. 1,373 302 Loan servicing income.............................. 1,376 649 Other income....................................... -- 63 ------- ------- Total revenues................................... 22,557 13,534 ------- ------- Expenses: Personnel and commission........................... 4,665 3,901 Professional services.............................. 1,176 602 Travel............................................. 524 202 Business promotion................................. 316 198 Occupancy.......................................... 277 122 Goodwill amortization.............................. 169 251 General and administrative......................... 1,467 495 ------- ------- Total expenses................................... 8,594 5,771 ------- ------- Net income....................................... $13,963 $ 7,763 ======= =======
Total revenues increased 66.7% to $22.6 million for the six months ended June 30, 1997 from $13.5 million for the comparable period in 1996. During the same periods, the Company's total expenses increased 48.9% to $8.6 million from $5.8 million. As a result, the Company's net income increased 79.9% to $14.0 million for the six months ended June 30, 1997 as compared to $7.8 million for the comparable period in 1996. The increase in revenues was primarily attributable to a $7.3 million increase in gain on sale of loans. For the six months ended June 30, 1997, the Company sold approximately $158.6 million of loans in a securitization for a gain on sale of $18.8 million (of which $18.4 million was cash) as compared to $272.6 million of loans sold in two securitizations for a gain on sale of $12.5 million (of which $5.8 million was cash) for the six months ended June 30, 1996. The Company also recognized a gain on sale of $1.0 million in the six months ended June 30, 1997 from a whole loan sale of approximately $15.3 million. The increased gain on sale of loans was due to several factors, including the composition of loans in the securitization, the structure of the securitization and market conditions at the time of the securitization transaction. Net interest income also contributed to the increase in revenues, increasing 354.6% to $1.4 million for the six months ended June 30, 1997 as compared to $0.3 million for the same period in 1996, primarily due to the significant increase in loans and leases held for sale which resulted from increased loan and lease originations. Additionally, loan servicing income increased 112.0% to $1.4 million for the six months ended June 30, 1997 as compared to $0.7 million for the same period in 1996. This was due to an increase in loans and leases serviced which resulted from the securitization of $325.1 million in loans from June 1996 through December 1996 with servicing rights retained by the Company. Total expenses increased 48.9% to $8.6 million for the six months ended June 30, 1997 as compared to $5.8 million for the same period of the prior year primarily due to infrastructure additions needed to fund increased loan and lease originations. Personnel expenses increased 19.6% to $4.7 million, professional services increased 95.3% to $1.2 million and general and administrative expenses increased 196.4% to $1.5 million for the six months ended June 30, 1997 as compared to the six months ended June 30, 1996. 31 Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
PRO FORMA YEAR ENDED YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1995(1) ----------------- -------------------- (IN THOUSANDS) Revenues: Gain on sale of loans................... $ 18,671 $ -- Interest income......................... 16,130 3,050 Interest expense........................ (14,489) (2,657) -------- ------- Net interest income................... 1,641 393 Loan servicing income................... 1,191 675 Other income............................ 63 -- -------- ------- Total revenues........................ 21,566 1,068 -------- ------- Expenses: Personnel and commission................ 8,270 1,287 Professional services................... 1,093 583 Travel.................................. 614 337 Business promotion...................... 450 158 Occupancy............................... 310 149 Goodwill amortization................... 411 146 General and administrative.............. 1,094 978 -------- ------- Total expenses........................ 12,242 3,638 -------- ------- Net income (loss)..................... $ 9,324 $(2,570) ======== =======
- -------- (1) The statement of operations for the six months ended December 31, 1995 and the predecessor statement of operations for the six months ended June 30, 1995 have been combined to show a 12 month period for the purpose of comparing to the year ended December 31, 1996. Total revenues increased 1,919.3% to $21.6 million for the year ended December 31, 1996 from $1.1 million for the year ended December 31, 1995. For the same years, the Company's total expenses increased 236.5% to $12.2 million from $3.6 million. As a result, the Company's net income increased to $9.3 million for the year ended December 31, 1996 as compared to a loss of $2.6 million for 1995. The $20.5 million increase in revenues for the year ended December 31, 1996 was primarily attributable to the sale of approximately $430.3 million of loans in securitizations, resulting in an $18.7 million gain on sale (of which $11.9 million was cash). The Company securitized $105.2 million of loans for the six months ended December 31, 1995; however, for accounting purposes, the transaction was precluded from sale treatment until the first quarter of 1996 at which time the retained interests were sold to an affiliate of ICII. Net interest income also contributed to the increase in revenues, increasing 317.6% to $1.6 million for the year ended December 31, 1996 as compared to $0.4 million for the year ended December 31, 1995, due to the significant increase in loans and leases held for sale which primarily resulted from a 108.9% increase in loan originations to $457.0 million in 1996 as compared to $218.7 million in 1995. Additionally, loan servicing income increased 76.4% to $1.2 million for the year ended December 31, 1996 from $0.7 million for the year ended December 31, 1995. This was due to the increase in loans serviced which resulted from the securitization of $167.4 million in loans in June 1996 and $105.2 million in loans in 1995, with servicing rights retained by the Company. The 236.5% increase in total expenses to $12.2 million for the year ended December 31, 1996 compared to $3.6 million for the year ended December 31, 1995 primarily resulted from the growth in operations of the Company due to the dramatic increase in loan originations. Personnel expenses increased $7.0 million or 542.6%, professional services increased $0.5 million or 87.5% and travel and business promotion expenses increased $0.6 million or 114.9% for the year ended December 31, 1996 as compared to the year ended December 31, 1995. 32 Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
PRO FORMA YEAR ENDED YEAR ENDED DECEMBER 31, 1995(1) DECEMBER 31, 1994 -------------------- ----------------- (IN THOUSANDS) Revenue: Gain on sale of loans................... $ -- $4,052 Interest income......................... 3,050 1,445 Interest expense........................ (2,657) (1,408) ------- ------ Net interest income................... 393 37 Loan servicing income................... 675 306 Other income............................ -- 68 ------- ------ Total revenue......................... 1,068 4,463 ------- ------ Expense: Personnel and commission................ 1,287 1,723 Professional services................... 583 1,057 Travel.................................. 337 340 Business promotion...................... 158 170 Occupancy............................... 149 97 Goodwill amortization................... 146 -- General and administrative.............. 978 1,804 ------- ------ Total expense......................... 3,638 5,191 ------- ------ Net loss.............................. $(2,570) $ (728) ======= ======
- -------- (1) The statement of operations for the six months ended December 31, 1995 and the predecessor statement of operations for the six months ended June 30, 1995 have been combined to show a 12 month period for the purpose of comparing to the year ended December 31, 1994. Total revenues decreased 76.1% to $1.1 million for the year ended December 31, 1995 from $4.5 million for the comparable period in 1994. Over this period, the Company's total expenses decreased 29.9% to $3.6 million from $5.2 million. As a result, the Company's net loss increased by $1.8 million to $2.6 million. Revenue decreased $3.4 million from 1994 to 1995 largely as a result of a $4.1 million decline in gain on sale of loans. In December 1995, the Company securitized and sold $105.2 million in loans. The related gain on this sale of $4.5 million was deferred for accounting purposes until the first quarter of 1996. Additionally, $44.6 million of loans originated by the Company during 1995 were retained by Greenwich at the time ICII acquired the FMAC Division assets from Greenwich. Greenwich securitized and sold such loans in October 1995. Accordingly, the gain on such sale recognized by Greenwich has not been included in the Company's 1995 revenues since such loans were not owned by the Company at the time of sale. Offsetting the decrease in gain on sale of loans was an increase in net interest income of 962.2% to $0.4 million for the year ended December 31, 1995 as compared to $37,000 for the year ended December 31, 1994, primarily due to the increase in loans held for sale which resulted from a 100.4% increase in loan originations to $218.7 million in 1995 as compared to $109.2 million in 1994. Also offsetting the decrease in gain on sale of loans was an increase in loan servicing income of 120.6% to $0.7 million for the year ended December 31, 1995 as compared to $0.3 million for 1994. The 29.9% decrease in total expenses to $3.6 million for the year ended December 31, 1995 compared to $5.2 million for the year ended December 31, 1994 primarily resulted from the reduction of parent company allocated expenses for Franchise Mortgage LLC as compared to its predecessor. 33 LIQUIDITY AND CAPITAL RESOURCES The Company requires access to short-term warehouse lines of credit and repurchase facilities in order to fund loan and lease originations pending sale or securitization of such loans and leases. At June 30, 1997, the Company had the following warehouse lines of credit and repurchase facilities, each of which was guaranteed by ICII:
INTEREST COMMITMENT PRINCIPAL LENDER EXPIRATION DATE INDEX RATE AMOUNT OUTSTANDING ------ --------------- ----- -------- ---------- ----------- (DOLLARS IN THOUSANDS) Credit Suisse First Boston December 31, 1998 Libor plus 160 basis points 7.29% $300,000 $167,447 Banco Santander June 1, 1998 Libor plus 160 basis points 7.29% 50,000 16,465 Sanwa Bank September 30, 1997 Eurodollar plus 200 basis points 7.50% 15,000 12,010 -------- -------- Total....................................................................... $365,000 $195,922 ======== ========
The Company expects to add new credit facilities, as well as renew and expand its existing credit facilities, in order to finance its growing levels of loan and lease origination activities. The Company also has a master purchase and sale agreement with Southern Pacific Thrift and Loan Association, a wholly owned subsidiary of ICII ("SPTL") to originate loans for SPTL under mutual agreement, and subject to SPTL underwriting each such loan prior to sale of such loans. Under this agreement, the Company also has the ability to repurchase loans, under mutual agreement with SPTL. There is no specified commitment by either party, and each individual sale is negotiated separately as to pricing. This agreement has no expiration date. At June 30, 1997, loans originated for SPTL (and not repurchased), totaled approximately $104.3 million. The Company does not expect to originate a significant volume of loans for SPTL under this arrangement in the future. The Company's sources of operating cash flow include: (i) loan origination income and fees; (ii) net interest income on loans held for sale; (iii) cash servicing income; (iv) premiums obtained in sales of whole loans and (v) cash proceeds from loan securitization. Cash from loan origination fees, net interest income on loans held for sale and loan servicing fees, as well as available borrowings generally provide adequate liquidity to fund current operating expenses, excluding the difference between the amount funded on loans originated and the amount advanced under the Company's current warehouse facilities (the "haircut"). Prior to the Reorganization, the Company's excess liquidity needs were funded by ICII. Excess liquidity needs of the Company have primarily included the haircut on loan originations and investments in certain equity ownership interests. The interest rate on borrowings from ICII was fixed at 12% annually. At June 30, 1997, the outstanding balance was $10.0 million. The Company expects to repay outstanding borrowings from ICII with a portion of the net proceeds of the Offering. The Company's whole loan sales and loan securitizations generally result in significant amounts of cash. Prior to the Reorganization, the excess cash flow from these transactions was used to repay borrowings from ICII. For a description of the Company's securitization activities, see "Business--Financing--Securitizations and Whole Loan Sales." For the six months ended June 30, 1997, net cash provided by operating activities was $17.1 million. This excludes cash used in net loan originations of $109.3 million, which was attributable to the Company's increased loan origination volume. For the year ended December 31, 1996, net cash provided by operating activities was $5.1 million, exclusive of cash provided by net loan origination activity of $82.3 million. For the six months ended June 30, 1997, net cash provided by investing activities was $35.8 million, which was primarily attributable to the sale of securities relating to the restructuring of the Company's 1991A securitization. For the year ended December 31, 1996, net cash used in investing activities was $49.9 million, 34 which was primarily attributable to the purchase of securities related to the restructuring of the Company's 1991A securitization. For the six months ended June 30, 1997, net cash provided by financing activities was $56.6 million, which was primarily attributable to increased amounts of warehouse line borrowings resulting from increased loan originations during the period, offset by a $6.3 million LLC distribution to its members. For the year ended December 31, 1996, net cash used in financing activities was $37.3 million, which was primarily attributable to the repayment of bonds relating to the restructuring of the Company's 1991A securitization, offset by $73.3 million in cash provided through borrowings from ICII and warehouse lines of credit and repurchase facilities. The Company anticipates that the net proceeds from the Offering, together with cash generated from operations and funds available under its credit facilities, will be sufficient to fund its operations for at least the next 12 months if the Company's future operations are consistent with management's expectations. TAX CONSIDERATIONS As a result of terminating its LLC status upon completion of this Offering, the Company will be required to record deferred income taxes, which relate primarily to timing differences between financial and income tax reporting of gain on sale of loans that were attributable to the periods in which it qualified to be taxed as a partnership. The recording of such deferred income taxes will result in a one-time non-cash charge against earnings as an additional income tax provision equal to the amount of the deferred income tax liability. The change by the Company from an LLC to a C Corporation is expected to have a significant adverse impact on the Company's reported net income for the quarter ending December 31, 1997 and the year ending December 31, 1997. As of June 30, 1997, the amount of the Company's deferred income taxes to be recorded would have been approximately $7.0 million although management believes that such amount will increase through the closing date of this Offering. See Notes 3, 4 and 14 of Notes to Financial Statements. ACCOUNTING CONSIDERATIONS The Company adopted a new accounting standard on January 1, 1997, and will adopt additional accounting and disclosure standards on either December 31, 1997, or January 1, 1998. For a description of these standards and the effect, if any, adoption has had or will have on the Company's financial statements, see Note 4 of Notes to Financial Statements. 35 BUSINESS The following Business section contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. GENERAL The Company is a specialty commercial finance company engaged in the business of originating and servicing loans and equipment leases to small businesses, with a primary focus on established national and regional franchise concepts. Since commencing business in 1991, the Company believes it has become a leading lender to national and regional quick service restaurant ("QSR") franchisees, and the Company has developed a growing presence in the casual dining sector. More recently, the Company has expanded its focus to include retail energy licensees (service stations, convenience stores, truck stops, car washes and quick lube businesses) and golf operating businesses (golf courses and golf practice facilities). The Company originates long-term fixed and variable rate loan and lease products and sells such loans and leases either through securitizations or whole loan sales to institutional purchasers on a servicing retained basis. The Company believes that its loan and lease products are attractive investments to institutional investors because of the credit profile of its Borrowers, relatively long loan and lease terms, call protection through prepayment penalties and appropriate risk- adjusted yields. The Company also periodically makes equity investments or receives contingent equity compensation as part of its core lending and leasing business. The Company originated loans and leases through 11 marketing offices in nine states at June 30, 1997. Since the Company's inception, it has funded over $1.4 billion in loans and leases and at June 30, 1997, had a servicing portfolio of $1.1 billion. The Company's loan and lease originations grew to $458.5 million in 1996 from $218.7 million in 1995 and to $300.6 million for the six month period ended June 30, 1997 from $208.4 million for the comparable period in 1996. At June 30, 1997, the Company's average initial loan balance was $730,000 and the percentage of its loans and leases that were 90 days or more delinquent was 0.1%. The Company's focus is to provide funding to industries that have been historically underserved by banks and other traditional sources of financing. This focus requires the Company to develop specific industry expertise in the sectors which it serves in order to provide individualized financial solutions for its Borrowers. The Company believes that its industry expertise and proprietary databases, combined with its responsiveness to Borrowers, flexibility in structuring transactions and broad product offerings give it a competitive advantage over more traditional, highly regulated small business lenders. The Company's Borrowers are generally small business operators, most of whom are independent, multi-unit franchisees, with proven operating experience and a history of generating positive operating cash flows. The Company relies primarily upon its assessment of enterprise value, based in part on independent third party valuations, and historical operating cash flows to make credit determinations, as opposed to relying solely on the value of real estate and other collateral. HISTORY In 1991, the Company began making loans to franchisees of Taco Bell Corp. In 1992 and 1993, other national QSR concepts, such as Burger King, Wendy's, Pizza Hut, KFC and Hardee's, were approved. The Company's principal loan products at that time were fixed rate, 15-year, fully amortizing loans. In 1995, the Company began making loans to casual dining concepts such as TGI Friday's, Applebee's and Denny's and offering its Borrowers adjustable rate loans. Also in 1995, the Company began offering development and construction ("DEVCO") loans to its more experienced Borrowers to fund the development and construction or acquisition of new business units or the conversion of existing business units into a different franchise concept. In 1996, the Company expanded its approved concepts to include strong regional restaurants such as Carl's, Jr., Church's Chicken and Golden Corral and launched its Golf Finance Group to provide financing to owners and operators of golf courses and golf practice facilities. The Equipment Finance Group also commenced activities in 1996 to provide equipment loans and leases to the sectors which the Company serves. In February 1997, the Company created its Retail Energy Finance Group to make loans to businesses that distribute retail petroleum products. 36 BUSINESS STRATEGY The Company's goal is to become a leading national small business lender in each of its target markets. The Company's growth and operating strategy is based on the following key elements: Growth in Existing Sectors. The Company plans to replicate its success in the restaurant sector in other business sectors that it has entered more recently, such as retail energy and golf, through focused product development, customer service and support. The Company forms specialized teams for each sector to assess customer needs, generate customer loyalty and enhance service and support. Management believes that its industry leadership position, relationships with major Borrowers, franchisors and vendors, and expertise within sectors will assist the Company in increasing its market share. Controlled Expansion into New Sectors. Management believes that substantial opportunities exist to extend the Company's expertise into other business sectors. The Company believes that its experience in lending to restaurant franchisees has allowed it to develop a template for efficiently originating and servicing loans and leases in other industry sectors. The Company's philosophy is to provide complete business solutions to identified industries by developing strategies and financial products which are based on industry characteristics and each Borrower's specific needs. The Company carefully reviews industry data, seeking business sectors with a combination of large funding requirements, proven cash flow generating capabilities, standardized operations, a scarcity of long-term, fixed rate funding sources and characteristics attractive to secondary market investors. Maintenance of Credit Quality. The Company's delinquency and loss experience has been extremely low, due in part to lending to experienced operators, its detailed industry knowledge, active oversight of its existing servicing portfolio, strict underwriting criteria and the Company's ability to locate qualified replacement Franchisees/Borrowers to assume delinquent loans. At June 30, 1997, the Company had only two loans 90 days or more delinquent and, from its inception in April 1991 through June 30, 1997 had experienced no credit losses. Efficient Secondary Market Execution. The Company is committed to maintaining effective secondary market execution on loans and leases that it originates and sells. The Company believes that the favorable execution it has experienced to date is primarily the result of the attractive terms and the credit quality of the loans and leases that it originates. Of the $37.5 million in gain on sale from securitizations recognized by the Company since January 1, 1996, $30.3 million was comprised of cash received by the Company at the time of securitization and not the present value of anticipated cash flows on retained interests. As a result, the Company has reduced its exposure to the risks associated with holding large amounts of such retained interests on its balance sheet. From the beginning of 1996 through June 30, 1997, the Company completed three securitizations and a whole loan sale totaling $553.0 million and $15.3 million, respectively. In all such transactions, the Company has retained the right to service the sold or securitized loans. Diversification of Revenue Sources. Management is committed to developing a diversified revenue base to reduce revenue volatility and enhance profitability. The Company continually monitors and adjusts its loan and lease products and securitization structures to improve the stability of its cash flows. Revenue sources include loan and lease origination points and fees, interest income earned prior to the sale of the loans and leases, whole loan and lease sale profits, securitization profits, loan and lease servicing fees and equity investment returns. INDUSTRY BACKGROUND Franchising A franchise is a business operating pursuant to a franchise agreement under which the franchisee undertakes to conduct a business or sell a product or service in accordance with methods and procedures prescribed by a franchisor and the franchisor undertakes to assist the franchisee through advertising, promotion and other advisory services. Although the term franchise is typically associated with fast food restaurants, a multitude of 37 franchise businesses exist, offering a variety of products and services such as hotels and motels, automotive parts, and cleaning services. Most franchise concepts offer franchisees training and diverse levels of ongoing support and oversight. Business format franchisees provide franchisees with a comprehensive operating system, whereas product distribution arrangements primarily license a trademark and/or logo. According to the International Franchise Association, franchises comprise one out of every 12 businesses in the United States. The Franchise Trade Association has estimated that by the year 2000 over 50% of retail sales, or approximately $1 trillion, will be generated by franchises. The Food Service Sector According to the Chain Store Guide (the "Guide"), using National Restaurant Association (the "NRA") data, in 1996 the food service industry employed more than nine million people and had estimated sales of $307.6 billion. According to the Guide, full service restaurants, QSRs, commercial cafeterias, social caterers and ice-cream and frozen yogurt stands ("Eating Places") represented an estimated $207.8 billion, or 67.6%, of such food service sales in 1996 and are expected to grow by 4.5% to $217.2 billion in 1997. The QSR segment of Eating Places are those restaurants that offer fast food or take-out, without table service. Most QSR establishments offer food products that lend themselves to quick service, such as pizza, chicken, hamburgers and similar food items. Full service restaurants typically represent casual and fine dining restaurants that accept major credit cards, offer table service and provide full liquor service. The QSR segment represented an estimated $98.4 billion, or 47.3%, of all Eating Places sales in 1996, and is expected to grow by 5.2% to $103.5 billion in 1997. The full service segment represented an estimated $100.3 billion, or 48.2%, of all Eating Places sales in 1996, and is expected to grow by 4.1% to $104.4 billion in 1997. Development and maturation of the QSR segment of the food service industry has led to a consolidation of restaurant operators. Increased competition has decreased profit margins which has contributed to the emergence of increasingly large and professionally managed restaurant operating companies. Large operators typically have greater economies of scale and better management systems which allow them to compete more effectively. As size and diversification become increasingly important, many franchise restaurant operators are becoming affiliated with multiple restaurant systems. The Company believes that the maturation of the fast food segment is likely to result in greater stability for this industry segment. Chain restaurant consolidation has also created lending opportunities for the Company arising from the demand by restaurant operators for acquisition financing. The Retail Energy Sector The United States retail petroleum sector is composed of service stations, convenience stores, and other related retail establishments which provide branded and independent fuel for motor vehicle consumption. According to the National Petroleum News ("NPN"), retail petroleum sector sales for the year ended December 31, 1995 approximated $300 billion or 4% of gross domestic product. According to NPN's latest count, the service station sector included approximately 188,000 units. The Company believes that these units are generally well located as a result of the early origins of these units relative to convenience stores and other retail merchants. According to NPN, at December 31, 1996, there were approximately 94,000 domestic convenience stores of which approximately 73% distributed fuel. According to the NPN, convenience store industry sales grew 5.4% in 1996 as gasoline volume, fast food sales and merchandise sales per customer increased due to retailers' focus on customer service needs. According to the NPN, gasoline demand grew 1.8% in 1996 to 123.2 billion gallons and is projected to increase 1.5% in 1997. The strength in demand reflects United States economic growth, the relaxation of speed limits, the increase in the total United States vehicle fuel consumption and the growing popularity of sport utility vehicles and minivans. The Company believes the retail energy sector is currently underserved by traditional lenders. Increasing sales and profit margins for gasoline retailers, the perceived diminished risk of lender liability for environmental clean-up costs and heightened profitability in multi-profit service stations/convenience store combinations should increase demand for financing. In addition, the Company believes that service station consolidation has also created lending opportunities arising out of the demand for acquisition financing. 38 The Golf Sector According to The National Golf Foundation ("NGF"), golf course development activity reached an eight year high in 1995. In 1995, 468 new golf courses opened representing the largest number of initial course openings in one year. Also, according to NGF, golf course construction set a record during 1995 with 850 courses under construction, 442 of which were completed in 1996. Additionally, the NGF believes that, there were 808 courses in the planning stages in 1996. Of the courses under construction in 1996, as many as 450 courses were scheduled to open in 1997. NGF defines a golf facility as a facility with at least one nine-hole course and that may include different types of courses, such as regulation-length courses, executive-length courses, and par-3 length courses. In 1996, there were a total of 30,044 golf facilities in the United States including 15,703 golf courses of which 70% were classified as public access. In the United States, golf courses handled approximately 477 million rounds in 1996. The number of rounds played has increased by 6.5% since 1975. Currently, 26% of golfers are over 50 years of age, with 48% between the ages of 18 and 39. NGF statistics show that golfers in their 50's play three times as much as golfers between the ages of 18 and 39. The number of rounds played should significantly increase as the baby-boomer segment of the population heads toward retirement age. In addition, for the past 10 years, the game has added approximately two million beginners a year, with the 18-29 age group producing the largest single sub-segment. The Company believes that the golf sector has the following similar characteristics to other sectors that the Company currently lends to: positive cash flow from operations, golf course and facility ownership is broad and diverse geographically, and the industry is underserved by traditional lenders. Increased golf usage has driven demand for loans for renovation and construction, while increased dollars spent at golf courses has driven demand for loans for golf course and facilities acquisitions. LOAN ORIGINATIONS Type of Loan Products The Company offers permanent loans, DEVCO loans (including acquisition loans) and equipment loans and leases to those sectors in which it operates. Permanent loans. Substantially all of the Company's permanent loans are self-amortizing long-term fixed or adjustable rate loans provided for purposes other than development and construction of business units. Permanent loans have a maximum term and amortization of up to 15 years. Fixed rate loans are tied to the U.S. Treasury rates plus a spread while adjustable rate loans are tied to the London interbank offered rate ("LIBOR") plus a spread and generally reprice on a monthly basis. As a cash flow lender, the Company maintains flexibility to tailor a loan program to fit the specific needs of its Borrowers. The terms of the loans vary in part based on the collateral pledged. The Company focuses on the cash flow of the subject business, the continuing ability of the Borrower to operate the business unit in a cash positive manner and the Borrower's ability to repay the loan since neither the real property mortgage nor the franchise or license agreement is generally assignable to secure the loan. In determining enterprise value, in addition to a Borrower's credit profile, the Company focuses on the following factors: . Business Profitability. The Company seeks to lend to Borrowers whose subject business operations provide adequate cash flow to support loan payments. . Strength of Business Concept. The Company emphasizes loans to Borrowers whose subject business has significant national or regional market penetration. . Operating Experience. The Company emphasizes loans to Borrowers having ownership of multiple business units with strong industry backgrounds. . Site Considerations. The Company focuses on a business' location, physical condition and environmental characteristics. 39 Location. The Company lends to Borrowers with business units located in high traffic areas that it believes exhibit strong retail property fundamentals. Physical Condition. The Company loans to Borrowers investing in well- maintained existing properties or in newly constructed properties. Each group uses third party appraisal professionals who conduct physical site inspections of each subject property. Environmental. The Company engages outside professionals to independently conduct Phase I environmental assessments for new financings. Phase II environmental assessment reports are also prepared, if recommended by the Phase I assessments. The Company will not finance a business if a Phase II report indicates significant environmental concerns. . Collateral. Loans are partially secured by taking a first lien on all available furniture, fixtures and equipment. Where the available collateral includes a building on a ground lease, the Company requires an assignment of the lease in addition to a security interest on the building and on the furniture, fixtures and equipment. If the collateral includes owned real estate, the Company also obtains a first mortgage on the property. Borrowers with additional collateral are generally afforded better credit terms. Depending on the collateral provided, loan to value ratios, up front fees and interest rates are adjusted to properly reflect credit risk. Development and Construction Loans. DEVCO loans are offered to fund the development and construction or acquisition of new business units or the conversion of existing business units into a different franchise concept. DEVCO loans are an interest-only short-term product. Fixed rate DEVCO loans are tied to U.S. Treasury rates, while adjustable rate DEVCO loans are tied to LIBOR. The loans generally include up front points and exit fees. DEVCO loans generally have an 18 month maturity which is comprised of two terms. The Borrower must receive a Certificate of Occupancy ("CO") within 12 months of the date of the loan. If a CO is received, the term of the loan is extended for six months to complete the construction or acquisition phase. If a CO is not received after 12 months, the loan is called. After 18 months the Borrower can apply for a permanent loan which will be re-underwritten. The Company believes that DEVCO loans create a pipeline for the Company's permanent loans. As a result of fee incentives built into the DEVCO products, Borrowers generally look to convert into permanent loans on the maturity date. DEVCO loans are secured by the real property mortgage or leasehold interest as well as all available furniture, fixtures and equipment. When used as a construction or development loan, a DEVCO loan provides a seasoning period to allow the Borrower to construct a business unit before converting to a permanent loan. When used as an acquisition or conversion loan, the interest only period of a DEVCO loan gives the Borrower the opportunity to improve business unit performance and achieve a higher cash flow before locking into long-term financing. Equipment Loans and Leases. The Company provides equipment financing to experienced owners and operators in those sectors in which the Company operates. Equipment loans are fixed rate products tied to U.S. Treasury rates. These loans have a maximum term of up to 10 years. In addition, the Company offers standard equipment leases. Substantially all of the leases originated by the Company are "direct financing" leases in that they transfer substantially all of the benefits and risks of equipment ownership to the lessee. Because the Company's leases are classified as direct financing leases, the Company records total estimated unguaranteed residual value and initial direct costs as the gross investment in the lease. The difference between the gross investment in the lease and the cost of the leased equipment is defined as "unearned income." Interest income is recognized over the term of the lease by amortizing the unearned income and deferred initial direct costs using the interest method. 40 Lending Groups The Company's focus at inception was to provide secured financing to franchisees of Taco Bell Corp. After establishing an infrastructure and credit expertise, the Company began expanding its QSR concepts, loaning to casual dining concepts and moving into other related lending sectors such as retail energy, golf and equipment finance. The Company carefully reviews industry data seeking sectors with a combination of large capital requirements, proven cash flow generating capabilities, standardized operations, a scarcity of long term funding sources and characteristics attractive to secondary market investors. This business formula provides the template to identify, test and determine the potential value of entering into new sectors. The Company's lending groups currently include Restaurant Finance, Retail Energy Finance, Golf Finance and Equipment Finance. Each of these groups includes a core group of professionals who are experts in the sector and can target selected Borrowers in such sector. See "Risk Factors--Concentration on Restaurant, Retail Energy and Golf Sectors May Expose the Company to Concept Failures, Industry Cycles, Environmental Liabilities and Other Industry Specific Risks." Restaurant Finance Group. The Restaurant Finance Group was organized in 1991 and originally focused on providing loans to national and regional franchise concepts such as Taco Bell, Burger King, Hardee's, KFC, Wendy's and Pizza Hut. In 1995, the Company began making loans to casual dining concepts such as TGIF, Applebee's, and Denny's and other successful casual dining concepts. In 1996, the Company expanded the approved concepts to include strong regional restaurants such as Carl's, Jr., Church's Chicken and Golden Corral. As of June 30, 1997, the Restaurant Finance Group originated loans through a network of eight offices in seven states. For the six month period ended June 30, 1997 this group originated $252.0 million of restaurant loans. The Restaurant Finance Group, which is headquartered in Denver, Colorado, includes marketing, processing, underwriting, credit, closing and administrative professionals with extensive experience in QSR and casual dining restaurant finance. The marketing professionals generate loans on a national basis which are processed and underwritten at the Company's headquarters or in one of the Company's five regional offices located in Greenwich, Atlanta, Dallas, Newport Beach and Los Angeles. Credit committee approval is obtained in these regional offices unless the transaction exceeds regional credit authority in which case approval must be obtained from the Company's Senior Credit Committee. See "--Underwriting." Franchisees utilize restaurant loans for a variety of purposes, including the acquisition, development and construction of new franchise units, to refinance existing franchise debt, to provide business expansion and remodeling proceeds and for working capital. Loans offered are fixed and adjustable loans typically ranging in size from $200,000 to $1.2 million with terms of up to 15 years. Generally, the Company's restaurant finance borrowers own three or more units, have three or more years of ownership in the concept, or have an equivalent ownership tenure in a different major fast food or casual dining concept. 41 The following table sets forth the Company's QSR and casual dining loan originations for the periods indicated by franchise concept.
SIX MONTHS ENDED JUNE 30, 1997 YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995 -------------------------------- -------------------------------- -------------------------------- NUMBER PRINCIPAL % OF NUMBER PRINCIPAL % OF NUMBER PRINCIPAL % OF OF LOANS AMOUNT TOTAL OF LOANS AMOUNT TOTAL OF LOANS AMOUNT TOTAL ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ORIGINATED ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) QSRs: Taco Bell........... 111 $102,314 40.6% 228 $163,011 37.7% 54 $ 44,614 20.4% Burger King......... 36 33,586 13.3 112 111,443 25.8 92 61,329 28.0 Church's Chicken.... 86 29,374 11.7 -- -- -- -- -- -- Wendy's............. 32 22,622 9.0 42 35,639 8.2 26 18,319 8.4 KFC................. 41 18,447 7.3 22 14,511 3.4 59 30,400 13.9 Hardee's............ -- -- -- 57 40,586 9.4 40 34,964 16.0 Other QSR........... 23 13,422 5.3 43 22,267 5.1 -- -- -- --- -------- ----- --- -------- ----- --- -------- ----- Total QSR........... 329 219,765 87.2 504 387,457 89.6 271 189,626 86.7 Casual Dining: Applebee's.......... 11 14,528 5.8 -- -- -- -- -- -- Golden Corral....... 4 6,232 2.5 5 14,450 3.3 -- -- -- TGI Friday's........ 6 5,110 2.0 3 7,870 1.8 1 2,550 1.2 Pizza Hut........... -- -- -- 16 8,093 1.9 38 26,566 12.1 Other Casual Dining............. 8 6,385 2.5 11 13,220 3.1 -- -- -- --- -------- ----- --- -------- ----- --- -------- ----- Total Casual Dining............. 29 32,255 12.8 35 43,633 10.1 39 29,116 13.3 Other Restaurant..... -- -- -- 2 1,440 0.3 -- -- -- --- -------- ----- --- -------- ----- --- -------- ----- Total............... 358 $252,020 100.0% 541 $432,530 100.0% 310 $218,742 100.0% === ======== ===== === ======== ===== === ======== =====
Retail Energy Finance Group. The Retail Energy Finance Group was organized in February 1997 to provide loans to national and regional businesses that distribute retail petroleum products such as service stations, convenience stores, truck stops, car washes and quick lube stores. Customers to date have included major national operators of retail petroleum businesses as well as major national chains such as Texaco, Chevron and Arco who seek to develop a sponsored loan program for their dealers and sellers. As of June 30, 1997, the Retail Energy Finance Group originated loans through a network of seven offices in five states. For the six months ended June 30, 1997, this group originated $23.5 million of energy loans. The Retail Energy Finance Group, which is headquartered in Morristown, New Jersey, includes personnel similar to the Restaurant Finance Group as well as industry professionals hired from major oil companies and energy related commercial lending roles who evaluate each customer's specific needs and suggest personalized financial solutions. Similar to the Restaurant Finance Group, energy loans are originated on a national basis and underwritten at the Company's headquarters or in one of five regional offices. Retail energy business operators use loans for existing station acquisitions, the purchase of real estate associated with currently leased facilities, funding for replacement or upgrading of underground storage tanks and development to transform a gasoline station/convenience store into a multi-profit center facility which may include a car wash, quick lube shop, co-branded fast food express unit or slot machines in states such as Nevada where gaming is permitted. Generally, the Company's Borrowers include business owners with five to 50 established locations. Loans typically range in size from $500,000 to $2.5 million. These loans are fixed and adjustable rate loans having a term of up to 20 years. The Company requires Borrowers to provide at least one additional revenue source aside from gasoline sales, such as a car wash or fast food, convenience items or quick lube center in order to diversify the revenue stream. Golf Finance Group. The Golf Finance Group is part of the Company's Diversified Products Group, which focuses on potential expansion into other sectors which are not related to the restaurant or retail energy sectors. The Golf Finance Group was organized in 1996 to provide loans to experienced owners and operators of golf courses and golf facilities, such as driving ranges and practice facilities. For the six months ended June 30, 1997, this group originated $9.9 million of golf loans. 42 The Golf Finance Group includes professionals with extensive commercial lending experience. The loan origination process is conducted by experienced golf facility lenders who solicit qualified owners nationwide. The group is supported by loan processing, underwriting and closing departments which work with Borrowers throughout the process. The Golf Finance Group operates out of four offices in four states. Loans are used for a variety of purposes, including debt refinance, golf course or facility acquisitions, expansions, renovations and improvements, purchase of new equipment, new golf course or facility development, purchase of underlying real estate and working capital. Loans typically range in size from $1.0 million to $5.0 million with a maximum term of up to 20 years. Since the Company generally lends against existing cash flow, all non-acquisition golf courses and facilities must have a minimum operating history of 12 months under ownership by the Borrower. Equipment Finance Group. The Equipment Finance Group was organized in 1996 to provide equipment financing to experienced owners and operators in those sectors in which the Company operates. For the six months ended June 30, 1997 the group originated $15.2 million of equipment loans and leases. Equipment loans and leases are originated either through the Company's direct sales or telemarketing groups, third party originators or in connection with loans offered in each sector in which the Company operates. The Company's equipment loans and leases typically range in size from $200,000 to $400,000. The Company believes the activities of this group complement those of groups in its other sectors and provides a more complete financing solution for its Borrowers. 43 The following table sets forth the Company's loan and lease origination activity by sector for the periods indicated:
SIX MONTH PERIOD ENDED JUNE 30, 1997 YEAR ENDED DECEMBER 31, 1996 ------------------------------------------- ------------------------------------------- WEIGHTED % OF WEIGHTED % OF AVERAGE PRINCIPAL PRINCIPAL AVERAGE PRINCIPAL PRINCIPAL LENDING SECTOR NUMBER OF INTEREST AMOUNT AMOUNT NUMBER OF INTEREST AMOUNT AMOUNT AD TYPE OF ORIGINATION ORIGINATIONS RATE ORIGINATED ORIGINATED ORIGINATIONS RATE ORIGINATED ORIGINATED - ----------------------- ------------ -------- ---------- ---------- ------------ -------- ---------- ---------- (DOLLARS IN THOUSANDS) Restaurant Loans: Fixed-rate loans........... 302 10.62% $198,365 64.6% 292 10.24% $218,765 47.7% Variable-rate loans............ 56 9.59 53,655 17.5 249 9.31 213,765 46.6 --- ----- -------- ----- --- ----- -------- ----- Total (2)........ 358 10.40 252,020 82.1 541 9.78 432,530 94.3 --- ----- -------- ----- --- ----- -------- ----- Retail Energy Loans: Fixed-rate loans............ 23 10.76 19,500 6.4 -- -- -- -- Variable-rate loans............ 6 9.69 4,000 1.3 -- -- -- -- --- ----- -------- ----- --- ----- -------- ----- Total (3)........ 29 10.58 23,500 7.7 -- -- -- -- --- ----- -------- ----- --- ----- -------- ----- Golf Loans: Fixed-rate loans............ 4 12.09 9,850 3.2 2 10.95 14,200 3.1 Variable-rate loans............ -- -- -- -- 3 9.74 10,251 2.3 --- ----- -------- ----- --- ----- -------- ----- Total (3)........ 4 12.09 9,850 3.2 5 10.44 24,451 5.4 --- ----- -------- ----- --- ----- -------- ----- Equipment Finance: Fixed-rate loans and leases....... 82 12.08 15,247 7.0 10 12.14 1,486 0.3 --- ----- -------- ----- --- ----- -------- ----- Total loan and lease originations..... 473 10.56% $300,617 100.0% 556 9.83% $458,467 100.0% === ===== ======== ===== === ===== ======== =====
YEAR ENDED DECEMBER 31, 1995(1) ------------------------------------------- WEIGHTED % OF AVERATE PRINCIPAL PRINCIPAL LENDING SECTOR NUMBER OF INTEREST AMOUNT AMOUNT AD TYPE OF ORIGINATION ORIGINATIONS RATE ORIGINATED ORIGINATED - ----------------------- ------------ -------- ---------- ---------- (DOLLARS IN THOUSANDS) Restaurant Loans: Fixed-rate loans........... 202 10.12% $143,515 65.6% Variable-rate loans............ 108 8.40 75,227 34.4 --- ----- -------- ----- Total (2)........ 310 9.53 218,742 100.0 --- ----- -------- ----- Retail Energy Loans: Fixed-rate loans............ -- -- -- -- Variable-rate loans............ -- -- -- -- --- ----- -------- ----- Total (3)........ -- -- -- -- --- ----- -------- ----- Golf Loans: Fixed-rate loans............ -- -- -- -- Variable-rate loans............ -- -- -- -- --- ----- -------- ----- Total (3)........ -- -- -- -- --- ----- -------- ----- Equipment Finance: Fixed-rate loans and leases....... -- -- -- -- --- ----- -------- ----- Total loan and lease originations..... 310 9.53% $218,742 100.0%
=== ===== ======== ===== - ----------- (1) Loan and lease origination activity for the six months ended December 31, 1995 and for the six months ended June 30, 1995 have been combined to show a 12 month period for the purpose of comparing to the year ended December 31, 1996. (2) For the six months ended June 30, 1997, 78.7% and 21.3% of the Company restaurant loans consisted of permanent and DEVCO loans, respectively; such percentages were 75.4% and 24.6% at December 31, 1996 and 97.3% and 2.7% at December 31, 1995. (3) For the six months ended June 30, 1997 and for the years ended December 31, 1996 and 1995, all of the Company's retail energy loans and golf loans were permanent loans. 44 Geographic Distribution--The following table sets forth by state the number of loans and leases originated by the Company for the periods presented.
SIX MONTHS ENDED JUNE 30, 1997 YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995 ---------------------------------- ---------------------------------- ---------------------------------- PRINCIPAL PRINCIPAL PRINCIPAL NUMBER OF AMOUNT % OF TOTAL NUMBER OF AMOUNT % OF TOTAL NUMBER OF AMOUNT % OF TOTAL ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ORIGINATIONS ORIGINATED ORIGINATED ------------ ---------- ---------- ------------ ---------- ---------- ------------ ---------- ---------- (DOLLARS IN THOUSANDS) California...... 103 $ 64,038 21.3% 42 $ 33,209 7.2% 23 $ 13,172 6.0% Michigan........ 33 24,370 8.1 7 4,848 1.1 9 7,414 3.4 Texas........... 26 23,829 7.9 41 29,189 6.4 15 13,471 6.2 Louisiana....... 15 15,784 5.3 5 4,243 0.9 -- -- -- North Carolina.. 19 14,641 4.9 21 23,106 5.0 22 13,444 6.1 Nevada.......... 11 11,895 4.0 18 11,284 2.5 -- -- -- New Jersey...... 16 12,205 4.1 29 30,746 6.7 14 10,906 5.0 Virginia........ 17 11,144 3.7 16 35,744 7.8 25 18,859 8.6 Ohio............ 21 9,960 3.3 10 6,501 1.4 9 8,192 3.7 South Carolina.. 9 8,867 2.9 20 16,927 3.7 8 5,460 2.5 Utah............ 8 9,038 3.0 5 7,482 1.6 -- -- -- Illinois........ 27 8,366 2.8 10 5,855 1.3 6 3,686 1.7 Colorado........ 8 7,268 2.4 6 3,155 0.7 10 6,066 2.8 Alabama......... 12 6,677 2.2 20 18,479 4.0 26 18,435 8.4 Pennsylvania.... 8 6,385 2.1 58 35,196 7.7 15 7,852 3.6 Florida......... 13 6,279 2.1 7 3,854 0.8 20 12,779 5.8 New York........ 4 3,640 1.2 21 13,499 2.9 12 9,588 4.4 Maryland........ 4 2,661 0.9 21 25,019 5.5 3 1,621 0.7 Connecticut..... 3 1,316 0.4 36 34,620 7.6 16 8,956 4.1 Other States.... 116 52,252 17.4 163 115,511 25.2 77 58,841 27.0 --- -------- ----- --- -------- ----- --- -------- ----- Totals: 473 $300,617 100.0% 556 $458,467 100.0% 310 $218,742 100.0% === ======== ===== === ======== ===== === ======== =====
EQUITY INVESTMENTS The Company periodically makes passive equity investments in companies operating in the sectors served by its lending and leasing businesses. Such investments may be made in conjunction with loans and leases or independent of any borrowing relationship. The Company's equity investments, which are generally made through subsidiary limited liability companies, have taken the form of common stock equivalents, contingent equity interests such as warrants, and combinations thereof. At June 30, 1997, the Company had investments in entities operating 267 units, including Taco Bell, Church's Chicken, KFC, Hardee's and Hot 'N Now franchisees. In certain cases, concurrent equity investments have been made directly by the Selling Stockholders and certain of the Company's officers and directors. The Company analyzes potential equity opportunities independently of credit analysis done in connection with its lending business, taking advantage of its industry expertise and extensive database of operating information. In general, the Company has structured its investments so that operating control is retained by experienced business operators while the Company maintains control over certain key corporate decisions that may affect its investments over time. To date, all of the Company's equity investments have involved actual or contingent minority (less than 50%) equity ownership. In certain cases, the Company is obligated to make additional equity investments at the option of the majority investor. Many of the Company's investments include "put" and "call" options at specified values to facilitate the Company's investment exit strategy. At June 30, 1997, the Company had made five common stock equivalent equity investments aggregating $4.4 million and was obligated to make up to an additional $5.6 million in equity investments under existing arrangements. Of these equity transactions, three were made in 1996 in connection with loans made by the Company in the initial aggregate amount of $83.8 million, and two were made in 1997, one in connection with loans made by the Company in the initial aggregate amount of $28.6 million. See "Certain Transactions--Other Matters--Equity Investments." 45 MARKETING The Company originates the majority of its loans through the efforts of its Marketing Vice Presidents ("MVPs"), comprised of experienced, credit trained professionals located in the Company's regional and district offices in Alabama, California, Colorado, Connecticut, Georgia, Nebraska, New Jersey, Texas and Washington. Each of the Restaurant, Retail Energy, Golf and Equipment Finance Groups has dedicated marketing departments, specifically targeting customers by sectors. In addition to its direct marketing activities, the Company maintains a telemarketing center in Columbus, Nebraska. The telemarketing center is used to perform basic telemarketing functions for each of the various lending groups, as well as to coordinate cross-marketing requests and opportunities. Applicants are identified through in-person solicitation, targeted mailings, phone solicitations, participation at conventions, institutional direct- response advertising and through existing Borrower relationships. MVPs meet with prospective Borrowers to determine the amount and appropriateness of the requested loan or lease proceeds as well as to make a preliminary determination of the Borrowers' creditworthiness. Qualifying prospects are presented with a proposal generated through the Company's proprietary underwriting software. Only after the prospective Borrower understands the loan or lease product is a loan or lease application(s) taken. The Company believes that this procedure accounts for the low denial rate the Company has experienced. Since this model was originally developed in 1994, the Company has funded over 90% of the applications submitted by its MVPs. Additionally, the Company estimates it funds approximately 45% of all potential Borrowers it interviews. The Company maintains multiple prospect and Borrower databases. The information varies from a simple name and address list to one that includes Borrower cash flow margins by sector, concept, geography, demographic information and other variables. The Company uses relational database software to store variables important to the credit process. Additionally, the Company has created an in-house research department which provides analysis on various franchise concepts and industry sectors. The Company has an extensive library of Borrower financial statements and uses the information for proprietary studies, which assist management in focusing on various industries. UNDERWRITING Each of the Company's lending groups operates under a set of underwriting guidelines that represents prudent credit standards designed to meet uniform standards for securitization purposes. Each lending group has a credit manager responsible for these guidelines who is a member of the Senior Credit Committee (the "SCC"). Loans above specified limits are submitted to the SCC. The Chief Credit Officer is the chairman of the SCC and has ultimate responsibility for the credit standards and guidelines for each of the Company's lending groups. Underwriting Guidelines are consistent across each of Company's lending groups. Below is a discussion of the methodology which has been used for the Restaurant Finance Group. Similar guidelines are being used by the Company's Retail Energy and Golf Finance Groups. See "Risk Factors--Certain Underwriting Requirements and Risks May Adversely Affect Credit Quality." Under the Company's current restaurant finance underwriting guidelines, each loan is originated after a review of the following criteria: (i) the applicant's ability to repay the loan, (ii) the adequacy of the cash flow of both the franchise unit and the Borrower and (iii) the real and tangible personal property that serves as collateral for such loan. The Company has created an underwriting model which incorporates historical operating results of the borrower and compares them to industry statistics for the applicable franchise concept. The model helps outline the loan proposal to fit the approval guidelines. Loan officers input data provided by potential borrowers into the underwriting model and determine as to whether or not a loan would qualify under the Company's underwriting guidelines before submission to the credit group. This pre-screening process allows for documentation once a loan is accepted for underwriting. The Company's loan originations typically range in size from $200,000 to $1.2 million for each franchise location. The majority of Borrowers are multiple unit operators. 46 For all loans, the Borrower completes an environmental questionnaire and the Company obtains a report from a third party service which identifies environmental risks in the vicinity. Certificates of occupancy are requested on all units. Additionally, Uniform Commercial Code searches are conducted for all Borrowers before and after origination of a loan. The Company prefers Borrowers to pay off all existing loans and equipment leases with the Company's loan proceeds. For cases in which encumbrances will survive the funding of the loan, the Company reviews all such notes, pledge and security agreements, and loan documents. Although the franchise agreement is not assigned to secure the loan, the continued ability of the Borrower to operate the franchise is essential to ensure the Borrower's ability to repay the franchisee loan. The Company reviews a copy of the executed franchise agreement to verify (i) that the Borrower is the franchisee or has been granted an assignment of franchisee rights from the franchisor, (ii) that the duration of the franchise term is as reported by the Borrower and (iii) that the renewal section of the agreement provides for renewals of the franchise term, particularly when the franchise term does not exceed the loan term. In the event a loan term exceeds the term of a Borrower's franchise agreement, the loan documentation provides that it is an event of default (entitling the Company to accelerate the loan at a premium) if the franchise agreement is not renewed. If a franchise agreement is not renewed, the Company can permit a Borrower to provide substitute collateral satisfying the Company's underwriting guidelines. Additionally, a certificate of good standing is required from the franchisor. The Company reviews the organizational documents of Borrowers which are business entities and reviews the personal net worth of Borrowers who are individuals. Business credit reports are obtained for all Borrowers. Personal credit reports are obtained for majority owners of all Borrowers. For Borrowers organized as sole proprietorships (other than multi-unit borrowers) and in certain other cases, personal guarantees are required from the principals. All former bankruptcies must be discharged and the time since discharge must be at least five years except in extraordinary circumstances. Three years of historical operating statements, if available, are required of all Borrowers. The Company analyzes the revenue and expense numbers to determine the ability of the unit to support the repayment of a prospective loan. The underwriting guidelines include three levels of analysis on each loan request, each of which must be satisfied to qualify for the Company's loan program. The first two are fixed charge coverage ratio tests at both the consolidated Borrower level (minimum of 1.25x) and at the individual unit level (minimum 1.15x). The fixed charge coverage ratio is the ratio of EBITDA (adjusted earnings before interest, tax, depreciation and amortization) plus rent over annual principal plus interest plus rent. This formula puts real estate mortgage loans and enterprise only loans on a comparable basis. The third analysis is the loan to value at the unit level. The "business value" of a franchise unit is derived from a formula based upon the franchise concept and the revenues and cash flow generated by the franchise unit through its operations, which in turn is dependent upon and derived from a Borrower's franchise agreement with the franchisor. In the case of enterprise loans, the maximum loan-to-business value is generally 65%. A loan secured by real property (fee or leasehold) is subject to a maximum loan to value of approximately 70%. Exceptions to these maximum loan-to-business values may be made in certain circumstances and with respect to single-unit Borrowers more stringent loan-to-business value standards are required. The Company hires independent third parties to perform a valuation of the subject franchise unit and as applicable, realty interests of the specific franchised restaurants and specialty retail locations. The appraisals are based on the premise that the value of a unit is related to revenues and EBITDA. Value-to-revenue ratios are used to estimate the market value of a unit site. An example of a factor in the selection of applicable value ratios is unit EBITDA margins, especially margins for the most recent 12 months. To determine realty interest valuation, appraisers utilize realty comparables, market based data in estimating market rentals and estimates of modeled cost and depreciation of any subject building. Retail energy lending involves certain additional underwriting issues. In the case of loans and leases to operators of service stations, convenience stores, truck stops, car washes and quick lube stores, the Company must also concern itself with: (i) risks associated with USTs and other environmental matters; (ii) protections 47 afforded borrowers via the Petroleum Marketers Practices Act and how these protections relate to senior lenders; (iii) profit margin volatility inherent in the petroleum marketing; and (iv) the relative value of location (side of street, relation to traffic lights), competition and the value of the trademark in the service area. In the case of golf lending, the Company also focuses on other issues such as: (i) the cost and availability of secondary water supplies; (ii) the length of the season of play; (iii) existing and planned competition; (iv) the number of active golfers in the serving area; (v) environmental risks with regards to chemical storage and the application of the chemicals and fertilizers; (vi) expense ratios for more complex (more expensive) courses, e.g. special mowing techniques, over-seeding during hot weather and (vii) tee and green insurance. FINANCING The Company has an ongoing need to finance its lending activities, which is expected to increase as the volume of loan and lease originations increases. The Company's primary operating cash requirements will include the funding of (i) loans and leases pending their sale, (ii) fees and expenses incurred in connection with its securitization program, (iii) overcollateralization or reserve account requirements in connection with loans pooled and sold, (iv) interest, fees and expenses associated with the Company's warehouse credit and repurchase facilities with certain financial institutions, (v) federal and state income tax payments and (vi) ongoing administrative and other operating expenses. The Company currently funds these cash requirements primarily through securitizations, whole loan and lease sales and borrowings from Banco Santander, Sanwa Bank and Credit Suisse First Boston. See "Risk Factors-- Substantial Dependence on Securitizations, Warehouse Lines of Credit and Repurchase Facilities May Adversely Impact the Company's Liquidity and Profitability." Securitizations and Whole Loan Sales The Company regularly offers its loans for sale through securitizations and whole loan sales to financial institutions and institutional investors. The Company plans to optimize its liquidity and profitability by continuously evaluating various combinations of whole loan sales and securitization structures. The Company plans to effect quarterly securitizations, and to structure such transactions to take advantage of prevailing interest rates and market conditions for senior subordinated and I/O securities. Securitizations. Under the Company's current securitization structure, the Company sells a pool of loans on a non-recourse basis to a single purpose trust. The trust issues securities in the form of notes which are denominated in multiple branches throughout the credit rating spectrum from the highest investment grade rating of "AAA" descending to a non-investment grade rating of "B." In addition, the Company structures an I/O in its financings that is generally rated AAA. In past securitizations, the Company has sold all rated interests while retaining a relatively small retained interest. With respect to certain of the aforementioned securitizations, the Company arranged for the related trusts to purchase credit enhancements for the senior certificates in the related trusts in the form of insurance policies provided by one AAA/AAA rated monoline insurance company and, as a result, the senior certificates in each trust received a rating of "AAA" from Standard & Poor's Ratings Services and "AAA" from Moody's Investors Service, Inc. The Company may continue to arrange for credit enhancements on future securitizations. 48 The following table lists securitization transactions involving loans originated by the Company and securitized by the Company or Greenwich, as indicated. Prior to July 1, 1995, the Company's securitizations were treated as financings for financial reporting purposes.
ORIGINAL OUTSTANDING ISSUANCE PRINCIPAL FRANCHISE LOANS PRINCIPAL AMOUNT AT CUMULATIVE LOAN RECEIVABLES TRUST DATE ISSUED AMOUNT JUNE 30, 1997 LOSSES SELLER ----------------- ----------------- --------- ------------- ---------- ------ (IN MILLIONS) 1991-A.. September 1, 1991 $61.8 $ 15.3 $-- Company 1993-B.. December 17, 1993 29.0 20.4 -- Greenwich 1994-A.. (1) 105.7 75.6 -- Greenwich 1995-A.. October 1, 1995 42.7 39.9 -- Greenwich 1995-B.. December 2, 1995(2) 105.2 97.6 -- Company(2) 1996-A.. June 28, 1996 167.4 161.1 -- Company 1996-B.. December 1, 1996 157.7(3) 154.5 -- Company 1997-A.. June 1, 1997 158.6 158.6 -- Company
- -------- (1) 1994A was issued in three series: May 31, 1994, August 17, 1994 and December 19, 1994. (2) The gain on sale of loans for this transaction was not recognized until the first quarter of 1996. (3) Original issuance principal amount was $227.7 million which included $70.0 million in loans sold by an affiliate of Credit Suisse First Boston. Whole Loan Sales. Depending on market conditions, the Company also executes whole loan sales in which the Company disposes of its entire economic interest in the loans on a non-recourse basis (excluding servicing rights) for cash. Whole loan sale gains/losses are recognized at the time of sale and there are generally no residuals. Prior to June 30, 1997, the Company engaged in one whole loan sale with aggregate principal balance of $15.3 million. The Company seeks to maximize its premium on whole loan sale revenues by closely monitoring institutional purchasers' requirements and focusing on originating or purchasing the types of loans that meet those requirements and for which institutional purchasers tend to pay higher premiums. Whole loan sales are made on a non-recourse basis pursuant to a purchase agreement containing customary representations and warranties by the Company regarding the underwriting criteria applied by the Company and the origination process. The Company, therefore, may be required to repurchase or substitute loans in the event of a breach of its representations and warranties. In addition, the Company may commit to repurchase or substitute a loan if a payment default occurs within the first month following the date the loan is funded, unless other arrangements are made between the Company and the purchaser. The Company may also be required in some cases to repurchase or substitute a loan if the loan documentation is alleged to contain fraudulent misrepresentations made by the borrower. The Company may be required either to repurchase or to replace loans which do not conform to the representations and warranties made by the Company in the pooling and servicing agreements entered into when the loans are pooled and sold through securitizations. Warehouse Lines of Credit and Repurchase Facilities The Company is dependent upon its ability to access warehouse lines of credit and repurchase facilities, in addition to its ability to continue to securitize or sell loans in the secondary market, in order to fund new originations. The Company has warehouse lines of credit and repurchase facilities under which it had available an aggregate of approximately $365 million in financing at June 30, 1997. 49 The following constitutes the Company's warehouse lines of credit and repurchase facilities available at June 30, 1997, all of which are guaranteed by ICII:
INTEREST COMMITMENT PRINCIPAL LENDER EXPIRATION DATE INDEX RATE AMOUNT OUTSTANDING ------ --------------- ----- -------- ---------- ----------- (DOLLARS IN THOUSANDS) Credit Suisse First Boston December 31, 1998 Libor plus 160 basis points 7.29% $300,000 $167,447 Banco Santander June 1, 1998 Libor plus 160 basis points 7.29% 50,000 16,465 Sanwa Bank September 30, 1997 Eurodollars plus 200 basis points 7.50% 15,000 12,010 -------- -------- Total........................................................................... $365,000 $195,922 ======== ========
LOAN AND LEASE SERVICING AND CREDIT QUALITY The Company's Servicing Department is responsible for loan and lease accounting, compliance monitoring and, as necessary, collections. As of June 30, 1997, the Company serviced approximately 1,565 loans and leases, representing approximately $1.1 billion in principal balances. Of this amount, $151.2 million were subserviced by the Company under a subservicing arrangement with SPTL, the owner of the servicing rights. See "Certain Transactions." The Company's servicing operations are located in Greenwich, Connecticut. The loan and lease servicing function includes monthly invoicing, payment collections, computing investor payments and processing investor remittances. The primary method for Borrower payments is through automatic clearing house ("ACH") direct debiting. Compliance monitoring procedures include a semi-annual review of each Borrower's compliance with stated covenants, including fixed charge coverage ratios. In the event a Borrower fails to comply with such covenants, the Borrower is placed on the Company's "Credit Watch List." Loans and leases on the Credit Watch List are subject to increased scrutiny and monitoring by the Company's servicing personnel. If a payment has not been received by the due date, the loan or lease is considered in default, and the Company aggressively pursues collections procedures, including collection calls and site visits. At June 30, 1997, the Company had only two loans more than 30 days delinquent and, from its inception in April 1991 through June 30, 1997, had experienced no credit losses. During the first month of a delinquency lasting ten days or more, the Company contacts the Borrower to determine the reason for the default and the likelihood and timing of any payment. The Company performs a credit investigation and obtains updated financial statements from the Borrower and current Dun & Bradstreet and personal credit reports. The Borrower's bank and major trade creditors are typically contacted to provide first-hand verification of the financial status of the Borrower. The Company may also retain counsel in the state in which the Borrower is located, if it is determined that the Borrower or a related entity is in bankruptcy or there is a reason to believe voluntary or involuntary bankruptcy will be declared. Within 15-45 days of the delinquency, an officer of the Company will meet in person with the delinquent borrower, the nature of the Borrower's financial difficulty will be re-examined and the likelihood of repayment will be re- evaluated. The Company will physically inspect the Borrower's business unit, and industry consultants or other Borrowers are contacted to evaluate the delinquent business unit. After 60 days of delinquency, the franchisor will be notified in writing of the default, and the delinquent Borrower will be informed of this action. The loan or lease will be accelerated at this time, and the Borrower sent a written notice demanding payment of the full amount due in respect of the loan or lease. The Borrower may also be reminded that any other loans that the Borrower may have from other sources are likely to be in default. If it appears unlikely that the Borrower will cure the default, the Company may decide to negotiate with the Borrower to induce the Borrower to offer the business unit for sale to other Borrowers of the franchisor or 50 licensee of the concept. In this way the loans and leases could be assumed. The Company was able to locate qualified replacement franchisee/Borrowers in the two case where it was necessary through its industry relationships, and believes that it may be able do so again in the future, if required. At a minimum, payments would resume, or, if possible, there could be recovery of past-due principal, interest and amounts advanced by the servicer. As a result of this policy, the Company has been able to avoid loan losses to date. As of June 30, 1997, two loans aggregating $1.2 million, or 0.11% of the Company's $1.1 billion servicing portfolio, were 90 or more days delinquent. However, some of the loans in the Company's servicing portfolio have been outstanding for a relatively short period of time. Consequently, the Company's experience to date may not be indicative of results to be experienced in the future. See "Risk Factors--Limited History of Independent Operations and New Products Limit the Ability of the Company to Predict Future Performance." INTEREST RATE RISK MANAGEMENT The Company's profits depend, in part, on the difference, or "spread," between the effective rate of interest received by the Company on the loans it originates or purchases and the interest rates payable by the Company under its warehouse financing facilities or for securities issued in its securitizations. The spread can be adversely affected because of interest rate increases during the period from the date the loans are originated or purchased until the closing of the sale or securitization of such loans. The Company is required by its warehouse lending facilities to hedge all of its fixed-rate principal loan balance securing such facilities. The Company's hedging strategy normally includes selling U.S. Treasury futures in such amounts and maturities as to effectively hedge the interest rate volatility of its portfolio. The Company does not maintain naked or leveraged hedge positions. In addition, the Company from time to time may use various other hedging strategies to provide a level of protection against interest rate risks on its fixed-rate loans. These strategies may include forward sales of loans or loan- backed securities, interest rate caps and floors and buying and selling of futures and options on futures. The Company's management determines the nature and quantity of hedging transactions based on various factors, including market conditions and the expected volume of loan originations and purchases. While the Company believes its hedging strategies are cost-effective and provide some protection against interest rate risks, no hedging strategy can completely protect the Company from such risks. Further, the Company does not believe that hedging against the interest rate risks associated with adjustable-rate loans is cost-effective, and does not utilize the hedging strategies described above with respect to its adjustable-rate loans. See "Risk Factors--Profitability of the Company May be Adversely Affected by Interest Rate Fluctuations" and "--Hedging Strategies May Not Protect the Company from Interest Rate Risks." COMPETITION The Company faces intense competition in the business of originating and selling loans and leases. Traditional competitors in the financial services business include commercial banks, thrift institutions, diversified finance companies, asset-based lenders, specialty franchise finance companies and real estate investment trusts. Many of these competitors in the commercial finance business are substantially larger and have considerably greater financial, technical and marketing resources than the Company. In addition, many financial service organizations have formed national networks for loan and lease originations substantially similar to the Company's loan and lease programs. Competition can take many forms including convenience in obtaining a loan or lease, customer service, marketing and distribution channels, amount and term of the loan, and interest or credit ratings. In addition, the current level of gains realized by the Company and its competitors on the sale of loans and leases could attract additional competitors into this market with the possible effect of lowering gains on future loan and lease sales due to increased loan and lease origination competition. The Company believes that its industry expertise and proprietary databases, combined with its responsiveness to Borrowers, flexibility in structuring transactions and broad product offerings give it a competitive advantage over more traditional, highly regulated small business lenders. 51 REGULATION Lending Laws Certain aspects of the Company's businesses are subject to regulation and supervision at both the federal and state level. Regulated matters include loan origination, credit activities, maximum interest rates and finance and other charges, disclosure to customers, the collection, foreclosure, repossession and claims handling procedures utilized by the Company, multiple qualification and licensing requirements for doing business in various jurisdictions and other trade practices. Future Laws The laws, rules and regulations applicable to the Company are subject to modifications and change. There can be no assurance that rules and regulations, or other such laws, rules or regulations will not be adopted in the future which could make compliance more difficult or expensive, restrict the Company's ability to originate or sell loans, the amount of interest and other charges earned on loans originated or sold by the Company, or otherwise adversely affect the business or prospects of the Company. Environmental Liability Generally Contamination of real property by hazardous substances may give rise to a lien on that property to assure payment of the cost of clean-up or, in certain circumstances subject the lender to liability. Such contamination may also reduce the value of the business property. Under the laws of some states and under CERCLA, a lender may become liable for cleanup of a property and adjacent properties that are contaminated by releases from the property if the lender engages in certain activities. See "Risk Factors--Certain Underwriting Risks May Adversely Affect the Credit Quality of the Company's Portfolio of Loans and Leases--Environmental Concerns." Environmental Laws Affecting Borrowers in Specific Sectors Environmental Regulations Affecting Franchises. The operation and management of franchise businesses (whether pursuant to direct ownership, lease or management contract) may involve the use and limited storage of certain hazardous materials. Borrowers may be required to obtain various environmental permits and licenses in connection with their operations and activities and comply with various health and safety regulations adopted by federal, state, local and foreign authorities governing the use and storage of such hazardous materials. Environmental Regulations Affecting Retail Energy Businesses. The operation and management of retail energy businesses (whether pursuant to direct ownership, lease or management contract) involves the use and limited storage of certain hazardous materials. Specifically, the Company's Borrowers in the retail energy sector incur ongoing costs to comply with federal, state and local environmental laws and regulations governing USTs used in their operations. The Company's loans may be secured by convenience store and gas station locations with USTs and other environmental risks. Borrowers may be required to obtain various environmental permits and licenses in connection with their operations and activities and comply with various health and safety regulations adopted by federal, state, local and foreign authorities governing the use and storage of such hazardous materials. Under various federal, state, local and foreign laws, ordinances and regulations, various categories of persons, including owners, operators or managers of real property may be liable for the costs of investigation, removal and remediation of hazardous substances that are or have been released on or in their property even if such releases were by former owners or occupants. In addition, any liability to Borrowers for assessment and remediation activities in connection with releases into the environment of gasoline or other regulated substances from USTs or otherwise at such Borrowers' gasoline facilities could adversely impact the Borrowers' ability to repay their loans from the Company or the value of any pledged collateral. Due to the nature of releases, the actual costs incurred may vary and the ongoing costs of assessment and remediation activities may vary from year to year and may adversely impact such Borrowers' ability to repay their loans. 52 Most states have funds which provide reimbursement to qualified storage tank owners/operators for assessment and remediation costs associated with petroleum releases (after the operator pays a set deductible and co-payment amount). Most funds are supported by annual tank registration fees paid by the station owners and a gasoline fee, included in the price of the gas, which is paid by consumers. There has been an increasing number of UST replacements in recent years. Consequently, some state funds have been drained of reserves. The result is a delay in disbursement until the fund can be replenished with fee collections, the effect of which may have an adverse effect on the borrowers' financial condition and ability to repay its loan. Environmental Regulations Affecting Golf Courses and Facilities. The operation and management of golf courses and golf practice and instruction facilities (whether pursuant to direct ownership, lease or management contract) involve the use and limited storage of certain hazardous materials such as herbicides, pesticides, fertilizers, motor oil, gasoline and paint. Borrowers may be required to obtain various environmental permits and licenses in connection with their operations and activities and comply with various health and safety regulations adopted by federal, state, local and foreign authorities governing the use and storage of such hazardous materials. EMPLOYEES At June 30, 1997, the Company employed 123 persons. None of the Company's employees is subject to a collective bargaining agreement. The Company believes that its relations with its employees are satisfactory. PROPERTIES The Company's executive and administrative offices are located at 2049 Century Park East, Suite 350, Los Angeles, California and 5 Greenwich Office Park, Greenwich, Connecticut and consist of an aggregate of approximately 17,700 square feet. The lease on the premises located in Los Angeles expires in March 1997 and the current annual rent is approximately $145,900. The lease on the premises located in Greenwich expires in September 2003 and the current annual rent is approximately $255,700. The Company also leases space for its other offices. These facilities aggregate approximately 17,300 square feet, with an annual aggregate base rental of approximately $321,400. The terms of these leases vary as to duration and rent escalation provisions. In general, the leases expire between 1997 and 2002 and provide for rent escalations tied to either increases in the lessor's operating expenses or fluctuations in the consumer price index in the relevant geographical area. LEGAL PROCEEDINGS The Company occasionally becomes involved in litigation arising from the normal course of business. Management believes that any liability with respect to pending legal actions, individually or in the aggregate, will not have a material adverse effect on the Company's financial position or results of operations. The predecessor entity to Franchise Mortgage LLC, and Mr. Knyal, among others, are named as defendants in De Wald, et al. vs. Knyal, et al. filed on November 15, 1996 in Los Angeles County Superior Court. The complaint seeks an accounting, monetary and punitive damages for alleged breach of contract, breach of fiduciary duty, breach of implied covenant of good faith and fair dealing and fraud arising from an alleged business relationship. Franchise Mortgage LLC has not been named as a defendant in this lawsuit. Counsel to the predecessor entity and Mr. Knyal believe that the claim is without merit and intend to defend it vigorously. ICII and FLRT, Inc. have agreed to indemnify the Company against any and all liability that the Company and its stockholders (other than ICII and FLRT, Inc.) may incur as a result of this lawsuit. 53 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the name, age and position with the Company of each person who is a director or executive officer of the Company.
NAME AGE POSITION ---- --- -------- President, Chief Executive Officer and Wayne L. "Buz" Knyal............. 51 Director Executive Vice President and Chief Credit Thomas J. Shaughnessy............ 39 Officer John W. Rinaldi.................. 49 Executive Vice President, Loan Portfolio Management and President, Equipment Finance Group Kevin T. Burke................... 39 Executive Vice President, Capital Markets Raedelle A. Walker............... 42 Executive Vice President and Chief Financial Officer H. Wayne Snavely................. 56 Chairman of the Board Ronald V. Davis(1)............... 50 Director G. Louis Graziadio, III(2)....... 47 Director Perry A. Lerner(1)............... 54 Director Richard J. Loughlin(2)........... 63 Director John E. Martin(2)................ 52 Director Michael L. Matkins(1)............ 51 Director
- -------- (1) Member of Audit Committee (2) Member of Compensation Committee WAYNE L. "BUZ" KNYAL has been the President, Chief Executive Officer and a Director of Franchise Mortgage Acceptance Company since its inception and has been the President, Chief Executive Officer and a Manager of Franchise Mortgage LLC since its inception in June 1995. Prior to founding the Company's predecessor in 1991, Mr. Knyal founded and owned CBI Insurance Services, Inc. and concurrently served as President of CBI Mortgage Company, a residential mortgage banker. From 1968 to 1980, Mr. Knyal was an Executive Vice President of Krupp/Taylor Advertising and served clients in the fast food industry. Mr. Knyal is a Director of New Riders, Inc., a restaurant company. THOMAS J. SHAUGHNESSY has been the Executive Vice President, Chief Credit Officer of Franchise Mortgage Acceptance Company since its inception. Mr. Shaughnessy has held the same title at Franchise Mortgage LLC since July 1997 and was Senior Vice President, Chief Credit Officer of Franchise Mortgage LLC from June 1995 through June 1997. From May 1994 through June 1995, Mr. Shaughnessy held executive positions with the Company's predecessor when it was a division of Greenwich. From 1992 to May 1994, Mr. Shaughnessy was the Credit Portfolio Manager for the Franchise Finance Group at AT&T Capital Corporation in Denver, Colorado. JOHN W. RINALDI has been the Executive Vice President, Loan Portfolio Management and President, Equipment Finance Group of Franchise Mortgage Acceptance Company since its inception. Mr. Rinaldi has held the same title at Franchise Mortgage LLC since July 1997 and was Senior Vice President, Operations of Franchise Mortgage LLC since July 1995 through June 1997. From 1993 to July 1995, Mr. Rinaldi was the Executive Vice President of Federated Financial Reserve Corporation, a national lessor. Mr. Rinaldi was the Senior Vice President and Chief Operating Officer of the Commercial Equipment Finance Group of Bell Atlantic Corporation's financial services subsidiary, Bell Atlantic TriCon from 1984 to 1993. From 1968 to 1983, Mr. Rinaldi held various credit, operations and marketing positions with TriContinental Leasing and its parent, Yegen Associates. 54 KEVIN T. BURKE has been the Executive Vice President, Capital Markets of Franchise Mortgage Acceptance Company since its inception. Mr. Burke has held the same title at Franchise Mortgage LLC since July 1997 and was Senior Vice President, Capital Markets of Franchise Mortgage LLC from March 1997 to June 1997. Mr. Burke was a Managing Director at McNeil Capital from July 1996 to November 1996 and the Director of Treasury Operations at ICN Pharmaceuticals, Inc. from July 1995 to June 1996. From September 1994 to June 1995, Mr. Burke was a Vice President at Merrill Lynch. From August 1993 to September 1994, Mr. Burke was a Senior Vice President at Chilton O'Connor, an investment banking firm. Mr. Burke was a member of the Franciscan Order ("OFM") in Bosnia, Herzegovina and Ireland from May 1991 to May 1993. RAEDELLE A. WALKER has been Executive Vice President and Chief Financial Officer of Franchise Mortgage Acceptance Company since its inception and has held the same title at Franchise Mortgage LLC since February 1997. From 1995 until joining Franchise Mortgage LLC, Ms. Walker served as the Chief Financial Officer of SPTL, a wholly owned subsidiary of ICII. From 1985 to 1995, Ms. Walker served as a Senior Manager with KPMG Peat Marwick LLP, providing accounting and consulting services to clients in the firm's financial services practice. Ms. Walker is a Certified Public Accountant. H. WAYNE SNAVELY has been the Chairman of the Board of Franchise Mortgage Acceptance Company since its inception and has been a Manager of Franchise Mortgage LLC since June 1995. He has been Chairman of the Board and Chief Executive Officer of ICII since December 1991 and President of ICII since February 1996. From 1986 to February 1992, Mr. Snavely served as Executive Vice President of Imperial Bancorp and Imperial Bank with direct management responsibility for the following bank subsidiaries and division: Imperial Bank Mortgage, SPTL, Imperial Trust Company, Wm. Mason & Company, Imperial Ventures, Inc. and The Lewis Horwitz Organization. From 1983 through 1986, Mr. Snavely was employed as Chief Financial Officer of Imperial Bancorp and Imperial Bank. Mr. Snavely served as a Director of Imperial Bank from 1975 to 1983 and currently serves as a Director. Mr. Snavely is Chairman of the Board of Southern Pacific Funding Corporation, Imperial Credit Mortgage Holdings, Inc. and Imperial Financial Group, Inc., a subsidiary of Imperial Bank. RONALD V. DAVIS has been a Director of Franchise Mortgage Acceptance Company since its inception and has been a Manager of Franchise Mortgage LLC since June 1995. Mr. Davis is the Chairman of the Board of Davis Capital LLC, a private equity investment company. From 1980 to 1994, Mr. Davis was the President and Chief Executive Officer of the Perrier Group of America, Inc. ("PGA"). Mr. Davis twice held the presidency of the International Bottled Water Association, serving 1,000 members worldwide and in 1994, the industry inducted him into the Beverage World Bottled Water Hall of Fame. Mr. Davis is also a Director of Celestial Seasonings and Staff Leasing, Inc. G. LOUIS GRAZIADIO has been a director of Franchise Mortgage Acceptance Company since its inception. Mr. Graziadio is the Chairman of the Board and Chief Executive Officer of Ginarra Holdings, Inc. (as well as its predecessor and affiliated companies) since 1979. Ginarra Holdings, Inc. is a privately held California corporation engaged in a wide range of investment activities. Mr. Graziadio has been actively involved, since 1972, in real estate development, construction and home building. Mr. Graziadio is Co-Chairman of Imperial Financial Group, Inc. and a Director of ICII, Imperial Bancorp, Imperial Trust Company, an indirect subsidiary of Imperial Bancorp, and Lynx Golf, Inc., a golf club manufacturer. PERRY A. LERNER has been a Director of Franchise Mortgage Acceptance Company since its inception and has been a Manager of Franchise Mortgage LLC since June 1995. He has been a principal in the investment firm of Crown Capital Group, Inc. since 1996. Mr. Lerner was with the law firm of O'Melveny & Myers from 1982 through 1996, having been a partner with the firm from 1984 through 1996. Mr. Lerner was an Attorney-Advisor of the International Tax Counsel of the United States Treasury Department from 1973 to 1976. Mr. Lerner is a Director of ICII, Imperial Financial Group, Inc. and Vista 2000, Inc. RICHARD J. LOUGHLIN has been a Director of Franchise Mortgage Acceptance Company since its inception. Mr. Loughlin co-founded Century 21 Real Estate of Northern California, Inc. in 1973 and served as President and Regional Director until 1981, when he was appointed President and Chief Executive Officer of Century 21 Real Estate Corporation. He held that position until November of 1995 when he retired and was appointed President Emeritus to serve as a consultant and spokesperson. Mr. Loughlin is a Director of Inspectech 55 Corporation and the National Association of Realtors. Loughlin's prior affiliations include Chairman of Western Relocation Management, Inc., Chairman of the Real Estate National Networks, Director of the National Easter Seal Society, Director of the Housing Roundtable, and member of the Policy Advisory Board of the Center for Real Estate and Urban Economics for the University of California at Berkeley. Mr. Loughlin is a co-owner of the National Football League's Carolina Panthers. JOHN E. MARTIN has been a Director of Franchise Mortgage Acceptance Company since its inception. Mr. Martin has been the Chairman and Chief Executive Officer of New Riders, Inc., since June 1997. Mr. Martin was the Chairman and Chief Executive Officer of PepsiCo Casual Dining from October 1996 to June 1997. From August 1983 through October 1996 he was the Chairman and Chief Executive Officer of Taco Bell Corp. In 1996, Mr. Martin was named the third most successful restaurant executive in the Spenser Stuart/Cornell Study. He received the first Innovator Award from the Multi-Unit Foodservice Operators association in 1994; the Silver Plate Award from the International Foodservice Manufacturers Association in 1993 for his innovative leadership in the quick- service industry; the National Association of Corporate Real Estate Executives named him as the 1992 CEO of the Year; and Restaurants and Institutions Magazine named him Executive of the Year in 1991. Mr. Martin is a member of the Educational Foundation of the National Restaurant Association's board of trustees, and is a founding member of the Chief Executive Round Table at the University of California, Irvine. Mr. Martin is a Director of The Good Guys, Inc. and Williams-Sonoma, Inc. MICHAEL L. MATKINS has been a Director of Franchise Mortgage Acceptance Company since its inception and has been a Manager of Franchise Mortgage LLC since June 1995. Mr. Matkins is a founding partner with the law firm of Allen, Matkins, Leck, Gamble & Mallory LLP. Mr. Matkins has advised institutional investors, lenders, property owners and developers in all aspects of purchase, sale, financing, leasing and construction of real estate properties ranging from office and retail to recreational and mixed-use projects for more than 20 years. He has also represented institutional investors in the restructuring of investments in real property as well as institutional developers in acquiring, entitling and developing master-planned communities. Mr. Matkins is a member of the Urban Land Institute and Chair of the Los Angeles District Urban Development Council. Directors are elected annually to serve until the next annual meeting of stockholders and until their successors are elected and qualified. Directors will not be able to stand for reelection unless they have attended at least 75% of Board meetings and committee meetings, as applicable. The Company plans to pay its non-employee directors an annual fee of $12,000, payable quarterly, $1,000 for each board meeting or committee meeting attended and to reimburse them for reasonable expenses incurred in attending meetings. Concurrently with this Offering, the Company will grant options to purchase 30,000 shares of Common Stock under its Stock Option Plan to each of its non-employee directors. See "--Stock Options." No family relationships exist between any of the executive officers or directors of the Company. The Company's Board of Directors has an Audit Committee and a Compensation Committee. The Audit Committee is comprised of Messrs. Lerner, Matkins and Davis and is responsible for making recommendations concerning the engagement of independent certified public accountants, approving professional services provided by the independent certified public accountants and reviewing the adequacy of the Company's internal accounting controls. The Compensation Committee is comprised of Messrs. Graziadio, Martin and Loughlin and is responsible for recommending to the Board of Directors all officer salaries, management incentive programs and bonus payments. 56 OTHER KEY EMPLOYEES Clinton V. Barrow Marketing Vice President, Restaurant Finance Group Edward A. Boyle Senior Vice President, Managing Director, Diversified Products Group Melissa G. Dant, Esq. Vice President, General Counsel, Retail Energy Group Kent "Carty" M. Davis Marketing Vice President, Restaurant Finance Group Michael A. DeMita, III Senior Vice President, Managing Director, Diversified Products Group Brian V. Farren Senior Vice President, National Sales Manager, Restaurant Finance Group Bonita Glover Marketing Vice President, Restaurant Finance Group Donald W. Hakes President, Retail Energy Group Larry Howard Marketing Vice President, Restaurant Finance Group Christopher Kelleher Senior Vice President, Operations Manager, Retail Energy Group Pierrette A. Newman, Esq. Senior Vice President, Operations, Corporate Counsel, Restaurant Finance Group Thomas J. Schuldt President, Restaurant Finance Group David Schwartzman Senior Vice President, Credit Manager, Restaurant Finance Group Courtney S. Stephens Marketing Vice President, Restaurant Finance Group Mary Ann Zic Vice President, Research Analyst, Corporate
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to this Offering, the Company did not have a compensation committee. Messrs. Snavely and Knyal participated in deliberations concerning compensation of executive officers during 1996. Messrs. Graziadio and Lerner served on the Compensation Committee of ICII in 1996, and currently serve on such committee. During 1996, Mr. Snavely served on the Compensation Committee of ICII; beginning January 1, 1997 Mr. Snavely resigned from ICII's Compensation Committee. None of the other executive officers of the Company has served on the board of directors or on the compensation committee of any other entity which had officers who served on the Company's Board of Directors or on the Company's Compensation Committee. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth information concerning the annual and long- term compensation earned by the Company's Chief Executive Officer and each of the other executive officers whose annual salary and bonus during 1996 exceeded $100,000 (the "Named Executive Officers").
ANNUAL COMPENSATION ------------------------------ NAME AND ALL OTHER PRINCIPAL POSITION(1) SALARY BONUS COMPENSATION --------------------- -------- -------- ------------ Wayne L. Knyal(2)............................... $100,000 $150,000 $47,709(3) President, Chief Executive Officer and Director Thomas J. Shaughnessy(4)........................ 100,000 35,000 -- Executive Vice President and Chief Credit Officer John W. Rinaldi(4).............................. 125,000 100,000 11,709(5) Vice President, Loan Portfolio Management and President, Equipment Finance Group
- -------- (1) Raedelle A. Walker joined the Company in February 1997 and serves as Executive Vice President and Chief Financial Officer at an annual salary of $160,000. Kevin T. Burke joined the Company in March 1997 and serves as Executive Vice President, Capital Markets at an annual salary of $170,000. (2) Does not include distributions received by FLRT, Inc. as a member of Franchise Mortgage LLC. (3) Represents a car allowance of $6,000, reimbursement of living expenses of $36,000 and a $5,709 contribution by the Company under ICII's 401(k) Plan. (4) Messrs. Shaughnessy's and Rinaldi's base salaries for 1997 are $135,000 and $150,000, respectively, and their 1996 bonuses paid in 1997 are $111,000 and $76,000, respectively. (5) Represents a car allowance of $6,000 and a $5,709 contribution by the Company under ICII's 401(k) Plan. 57 Employment Agreement The Company and Mr. Knyal are parties to an employment agreement dated June 30, 1995 pursuant to which Mr. Knyal agreed to act as the President and Chief Executive Officer of the Company for an annual base salary of $100,000, an annual bonus of not less than $82,000, an automobile allowance, reimbursement of certain living expenses through December 1996 and customary benefits. The agreement had an initial term of two years and automatically renews for additional one year terms unless terminated prior to any renewal date. The Company and Mr. Knyal are currently negotiating the terms of a new employment agreement pursuant to which Mr. Knyal would be paid an annual base salary of $400,000, an annual bonus of not less than $82,000 and not to exceed $682,000, and customary benefits. Commencing January 1998, an amount of $82,000 per year would be deducted from the bonus payable to Mr. Knyal in order to repay certain amounts owed by Mr. Knyal to the Company, pursuant to the terms of a promissory note. See "Certain Transactions--Loans to Executive Officers and Directors." The terms of the new employment agreement remain subject to completion of a written agreement. The existing employment agreement will be terminated upon the execution of such new employment agreement. STOCK OPTIONS 1997 Stock Option Plan The Company has adopted the 1997 Stock Option, Deferred Stock and Restricted Stock Plan (the "Stock Option Plan"), which provides for the grant of qualified incentive stock options ("ISOs") that meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), stock options not so qualified ("NQSOs"), deferred stock, restricted stock, stock appreciation rights and limited stock appreciation rights awards ("Awards"). The Stock Option Plan is administered by a committee of directors appointed by the Board of Directors (the "Committee"). ISOs may be granted to the officers and key employees of the Company or any of its subsidiaries. The exercise price for any option granted under the Stock Option Plan may not be less than 100% (or 110% in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the outstanding Common Stock) of the fair market value of the shares of Common Stock at the time the option is granted. The purpose of the Stock Option Plan is to provide a means of performance- based compensation in order to attract and retain qualified personnel and to provide an incentive to those whose job performance affects the Company. The effective date of the Stock Option Plan will be the effective date of the Offering. The Stock Option Plan authorizes the grant of options to purchase, and awards of, an aggregate of up to 10% of the shares of the Company's Common Stock to be outstanding after this Offering, including any shares issued pursuant to the Underwriters' over-allotment option, but not less than 2,700,000 shares. The number of shares reserved for issuance under the Stock Option Plan is subject to anti-dilution provisions for stock splits, stock dividends and similar events. If an option granted under the Stock Option Plan expires or terminates, or an Award is forfeited, the shares subject to any unexercised portion of such option or Award will again become available for the issuance of further options or Awards under the Stock Option Plan. Under the Stock Option Plan, the Company may make loans available to stock option holders, subject to the Committee's approval, in connection with the exercise of stock options granted under the Stock Option Plan. If shares of Common Stock are pledged as collateral for such indebtedness, such shares may be returned to the Company in satisfaction of such indebtedness. If so returned, such shares shall again be available for issuance in connection with future stock options and Awards under the Stock Option Plan. Unless previously terminated by the Board of Directors, no options or Awards may be granted under the Stock Option Plan ten years after the effective date of the Offering. Options granted under the Stock Option Plan will become exercisable according to the terms of the grant made by the Committee. Awards will be subject to the terms and restrictions of the award made by the Committee. The Committee has discretionary authority to select participants from among eligible persons and to determine at the time an option or Award is granted and in the case of options, whether it is intended to be an ISO or a NQSO, and when and in what increments shares covered by the option may be purchased. Under current law, ISOs may not be granted to any individual who is not also an officer or employee of the Company or any subsidiary. 58 The exercise price of any option granted under the Stock Option Plan is payable in full (1) in cash, (2) by surrender of shares of the Company's Common Stock already owned by the option holder having a market value equal to the aggregate exercise price of all shares to be purchased including, in the case of the exercise of NQSOS, restricted stock subject to an Award under the Stock Option Plan, (3) by cancellation of indebtedness owed by the Company to the optionholder, (4) by a full recourse promissory note executed by the optionholder or (5) by any combination of the foregoing. The terms of any promissory note may be changed from time to time by the Board of Directors to comply with applicable Service or Commission regulations or other relevant pronouncements. The Board of Directors may from time to time revise or amend the Stock Option Plan, and may suspend or discontinue it at any time. However, no such revision or amendment may impair the rights of any participant under any outstanding Award without such participant's consent or may, without shareholder approval, increase the number of shares subject to the Stock Option Plan or decrease the exercise price of a stock option to less than 100% of fair market value on the date of grant (with the exception of adjustments resulting from changes in capitalization), materially modify the class of participants eligible to receive options or Awards under the Stock Option Plan, materially increase the benefits accruing to participants under the Stock Option Plan or extend the maximum option term under the Stock Option Plan. The following table sets forth the stock options to be granted to executive officers under the Stock Option Plan:
INDIVIDUAL GRANTS -------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL NUMBER OF PERCENTAGE RATES OF STOCK SHARES OF OPTIONS PRICE APPRECIATION UNDERLYING TO BE EXERCISE FOR OPTION TERM(1) OPTIONS GRANTED TO PRICE EXPIRATION ------------------- NAME GRANTED(2) EMPLOYEES(3) ($/SH)(4) DATE(5) 5%($) 10%($) ---- ---------- ------------ --------- ---------- -------- ---------- Thomas J. Shaughnessy... 80,000 7.1% $16.00 2007 $804,985 $2,039,990 John W. Rinaldi......... 50,000 4.5 16.00 2007 503,116 1,274,994 Kevin T. Burke.......... 50,000 4.5 16.00 2007 503,116 1,274,994 Raedelle A. Walker...... 50,000 4.5 16.00 2007 503,116 1,274,994
- -------- (1) Amounts reflect assumed risks of appreciation set forth in the Commission's executive compensation disclosure requirements. (2) Such stock options vest 20% on each anniversary date from the date of grant. (3) Based on options to acquire 1,120,000 shares expected to be granted under the Stock Option Plan on the effective date of this Offering. (4) The exercise price for all options will equal the initial public offering price. (5) Such stock options expire 10 years from the date of grant or earlier upon termination of employment. On the effective date of this Offering, it is expected that the Company will grant to certain other employees and directors options to acquire 890,000 shares of Common Stock at a per share exercise price equal to the initial public offering price, vesting 20% on each anniversary from the date of grant. ICII Options Granted to Executive Officers and Key Employees In April 1996, ICII granted incentive stock options to purchase 25,000 shares of ICII common stock to each of Messrs. Shaughnessy and Rinaldi and incentive stock options to purchase 10,000 shares of ICII common stock to Mr. Farren. In December 1995 and July 1996, ICII granted Raedelle A. Walker incentive stock options to purchase an aggregate of 15,000 shares of ICII common stock. The exercise price of all such options was the fair market value of ICII common stock at the time of the grants. 401(k) PLAN On the effective date of this Offering, the Company will commence participation in the ICII contributory retirement plan ("401(k) Plan") for all full time employees with at least six months of service, which is designed to be tax deferred in accordance with the provisions of Section 401(k) of the Code. The 401(k) Plan provides that each participant may contribute from 2% to 14% of his or her salary, and the Company will contribute to the participant's plan account at the end of each plan year 50% of the first 4% of salary contributed by a participant. Under the 401(k) Plan, employees may elect to enroll on the first day of any month, provided that they have been employed for at least six months. 59 Subject to the rules for maintaining the tax status of the 401(k) Plan, an additional Company contribution may be made at the Company's discretion. Should a discretionary contribution be made, the contribution would first be allocated to those employees deferring salaries in excess of 4%. The matching contribution would be 50% of any deferral in excess of 4% up to maximum deferral of 8%. Should discretionary contribution funds remain following the allocation outlined above, any remaining Company matching funds would be allocated as a 50% match of employee contributions, on the first 4% of the employee's deferrals. Company matching contributions will be made as of December 31st each year. LIMITATION ON DIRECTORS' LIABILITIES AND INDEMNIFICATION The Company's Certificate of Incorporation provides that, except to the extent prohibited by the Delaware General Corporation Law (the "DGCL"), its directors shall not be personally liable to the Company or its stockholders for monetary damages for any breach of fiduciary duty as directors of the Company. Under Delaware law, the directors have fiduciary duties to the Company that are not eliminated by this provision of the Certificate of Incorporation and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available. In addition, each director will continue to be subject to liability under Delaware law for breach of the director's duty of loyalty to the Company for acts or omissions that are found by a court of competent jurisdiction to be not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by Delaware law. This provision also does not affect the director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. In addition, the Company intends to maintain liability insurance for its officers and directors. Section 145 of the DGCL permits the Company to, and the Certificate of Incorporation provides that the Company may, indemnify each 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, by reason of the fact that he or she is or was, or has agreed to become, a director or officer of the Company, or is or was serving, or has agreed to serve, at the request of the Company, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom. Such right of indemnification shall inure to such individuals whether or not the claim asserted is based on matters that antedate the adoption of the Certificate of Incorporation. Such right of indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs and personal representatives of such a person. The indemnification provided by the Certificate of Incorporation shall not be deemed exclusive of any other rights that may be provided now or in the future under any provision currently in effect or hereafter adopted by the Certificate of Incorporation, by any agreement, by vote of stockholders, by resolution of directors, by provision of law or otherwise. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors of the Company pursuant to the foregoing provision, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Section 102(b)(7) of the DGCL permits a corporation to eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director (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) under Section 174 of the DGCL relating to unlawful dividends, stock purchases or redemptions or (iv) for any transaction from which the director derived an improper personal benefit. Section 102(b)(7) of the DGCL is designed, among other things, to encourage qualified individuals to serve as directors of Delaware corporations. The Company believes this provision will assist it in securing the services of qualified directors who are not employees of the Company. This provision has no effect on the availability of equitable remedies, such as injunction or rescission. If equitable remedies are found not to be available to stockholders in any particular case, stockholders may not have any effective remedy against actions taken by directors that constitute negligence or gross negligence. 60 CERTAIN TRANSACTIONS THE REORGANIZATION Immediately prior to the closing of this Offering, Franchise Mortgage LLC will merge into Franchise Mortgage Acceptance Company, a Delaware corporation. Upon the closing of this Offering, ICII and FLRT, Inc. will own 12,091,667 and 6,358,333, or 44.4% and 23.4%, respectively, of the total outstanding shares of the Company's Common Stock, respectively. See "The Reorganization." ARRANGEMENTS WITH ICII AND ITS AFFILIATES The Company and ICII have entered into agreements for the purpose of defining their ongoing relationships. The agreements have been developed in the context of a parent/subsidiary relationship and therefore are not the result of arm's-length negotiations between independent parties. It is the intention of the Company and ICII that such agreements and the transactions provided for therein, taken as a whole, are fair to both parties, while continuing certain mutually beneficial arrangements. However, there can be no assurance that each of such agreements, or the transactions provided for therein, have been effected on terms at least as favorable to the Company as could have been obtained from unaffiliated parties. Additional or modified arrangements and transactions may be entered into by the Company, ICII, and their respective subsidiaries, after completion of this Offering. Any such future arrangements and transactions will be determined through negotiation between the Company and ICII, and it is possible that conflicts of interest will be involved. All transactions by and between the Company and ICII must be approved by a majority of the disinterested directors of the Company. The following is a summary of certain arrangements and transactions between the Company and ICII. Services Agreement The Company and ICII will enter into a services agreement effective as of the effective date of this Offering (the "Services Agreement") under which ICII will continue to provide human resource administration and certain accounting functions to the Company. ICII will charge fees for each of the services which it will provide under the Services Agreement based upon usage. The Services Agreement will have an initial term that ends one year from the date of this Offering and is renewable annually thereafter. The Company may terminate the Services Agreement, in whole or in part, upon one month's written notice. As part of the services to be provided under the Services Agreement, ICII will provide the Company with insurance coverage and self insurance programs, including health insurance. The charge to the Company for coverage will be based upon a pro rata portion of the costs to ICII to the various policies. Management believes that the terms of the Services Agreement are as favorable to the Company as could be obtained from independent third parties. ICII Registration Rights Agreement The Company has entered into the ICII Registration Rights Agreement pursuant to which the Company has agreed to file one or more registration statements under the Securities Act in the future for shares of the Company held by ICII, subject to certain conditions set forth therein. Pursuant to the ICII Registration Rights Agreement, the Company will use its reasonable efforts to cause such registration statements to be kept continuously effective for the public sale from time to time of the shares of the Company held by ICII. Also, under the ICII Registration Rights Agreement, FLRT, Inc. may piggyback its shares onto any registration statement concerning shares of the Company's Common Stock held by ICII; provided however than for a period of three years following the date of this Prospectus, FLRT, Inc. is limited in the amount of shares of the Company's Common Stock it can sell to that amount authorized pursuant to Rule 144. Thereafter, FLRT, Inc. has registration rights similar to those granted to ICII under the ICII Registration Rights Agreement without any volume limitations. Transactions Involving SPTL At December 31, 1995, the Company had a net receivable of principal and interest on loans from SPTL, ICII's wholly owned subsidiary, of $579,000. In July 1995, the Company sold approximately $3.8 million of servicing rights to SPTL, resulting in a gain of $31,000. The Company also had a receivable from ICII of $924,000 bearing interest at 10.4% as of December 31, 1995 and a payable of $526,000 relating to ICII's residual interest in the Franchise Loan Receivables Trust 1995-B. 61 The Company provides subservicing on a contractual basis for servicing rights on certain loans originated by the Company's predecessor and sold to SPTL. At June 30, 1997, December 31, 1996 and 1995, there was approximately $151 million, $183 million and $262 million, respectively, of loans outstanding underlying this subservicing arrangement. The Company receives approximately 13 basis points for providing such services. The Company purchased $55.3 million in loans at a $6.0 million premium from SPTL on December 29, 1995. These loans had originally been purchased by SPTL from Greenwich on November 30, 1995. The Company purchased $15.5 million in loans at par value from SPTL on June 26, 1997. These loans were purchased by SPTL from the Company in 1996 and 1997. The Company also has a master purchase and sale agreement with SPTL to originate loans for SPTL under mutual agreement, and subject to SPTL underwriting each such loan prior to sale of such loans. Under this agreement, the Company also has the ability to repurchase loans, under mutual agreement with SPTL. There is no specified commitment by either party, and each individual sale is negotiated separately as to pricing. This agreement has no expiration date. At June 30, 1997, loans originated for SPTL (and not repurchased), totaled approximately $104.3 million. The Company does not expect to originate a significant volume of loans for SPTL under this arrangement in the future. Borrowings and Guarantees At June 30, 1997 and December 31, 1996, the Company had borrowings from ICII outstanding of $10.0 million and $17.7 million, respectively. The Company paid interest at 12% on the outstanding balances. The Company, among other subsidiaries of ICII, has jointly and severally and fully and unconditionally guaranteed ICII's $200 million 9.875% senior notes due January 15, 2007 and $70 million liquidation amount of remarketed par securities. Such guarantees will terminate upon the deconsolidation of the Company in the financial statements of ICII, which will be effective upon the closing of this Offering. In consideration of ICII's guarantee of the Company's warehouse lines of credit and repurchase facilities, the Company pays to ICII monthly a fee equal to 15 basis points on the Company's outstanding borrowings covered by such guarantee. See "Business--Financing--Warehouse Lines of Credit and Repurchase Facilities." ICII will not guarantee any of the Company's future warehouse lines of credit and repurchase facilities. ICII guaranteed the Company's lease obligations for its executive and administrative offices located in Los Angeles, California and Greenwich, Connecticut. The parties to the leases are currently negotiating a release of such guarantees. ICII will not guarantee any of the Company's future leases. ICII Options Granted to Executive Officers and Key Employees In April 1996, ICII granted incentive stock options to purchase 25,000 shares of ICII common stock to each of Messrs. Shaughnessy and Rinaldi and incentive stock options to purchase 10,000 shares of ICII common stock to Mr. Farren. In December 1995 and July 1996, ICII granted Raedelle A. Walker incentive stock options to purchase an aggregate of 15,000 shares of ICII common stock. The exercise price of all such options was the fair market value of ICII common stock at the time of the grants. OTHER MATTERS In the ordinary course of business, the Company has conducted transactions with certain of its officers and directors and with affiliated companies and entities. All such transactions are conducted at "arm's length" in accordance with the Company's policies. Equity Investments Franchise Equity Fund L.L.C. Franchise Mortgage LLC, ICII and Mr. Knyal are parties to an Operating Agreement, dated April 1, 1996, pursuant to which such parties organized Franchise Equity Fund L.L.C., a 62 Delaware limited liability company ("FEF LLC"), for the purpose of making equity investments in franchisees of PepsiCo related businesses. Franchise Mortgage LLC owns a 99% membership interest in, and is the manager of FEF LLC. ICII and Mr. Knyal own 0.67% and 0.33% membership interests, respectively, in FEF LLC. In June 1996, FEF LLC, Mr. Knyal and certain other investors entered into an agreement to organize five limited partnerships in New Jersey and Pennsylvania (the "Summerwood Partnerships") for the purpose of acquiring and operating 68 Taco Bell and KFC units. FEF LLC made a loan of $2.0 million to the Summerwood Partnerships in exchange for warrants to purchase a 40% limited partner interest in each of the Summerwood Partnerships. In December 1996, FEF LLC exercised the warrants in full, the $2.0 million loan was converted into capital contributions and FEF LLC acquired a 40% limited partner interest in each of the Summerwood Partnerships. Under certain circumstances, the general partner of the Summerwood Partnerships may require FEF LLC to make additional loans or capital contributions to the Summerwood Partnerships in the aggregate amount of $2.0 million until the third anniversary of the acquisition. The other investors have certain rights to purchase FEF LLC's limited partner interest after the fifth anniversary of the acquisition, and FEF LLC has certain rights to sell its limited partner interest to the other investors after the seventh anniversary of the acquisition. In addition, pursuant to the terms of the agreement, Mr. Knyal is required to personally guarantee any obligations of the Summerwood Partnerships that the limited partners of such partnerships are required to personally guarantee. In connection with the acquisition, Franchise Mortgage made 58 loans to the Summerwood Partnerships in the initial aggregate amount of $40.6 million. The loans bear interest at annual rates ranging from 9.19% to 10.8% and are due on dates ranging from July 2003 to July 2011. At June 30, 1997, the outstanding balance of such loans was $39.3 million. In November 1996, FEF LLC and certain other investors organized Restaurant Management of Carolina, L.P., a Delaware limited partnership ("Restaurant Management LP"), for the purpose of acquiring and operating 37 Taco Bell units. FEF LLC made an initial capital contribution of $3.0 million ($2.0 million of which has been repaid to FEF LLC) to, and owns a 32.5% limited partner interest in, Restaurant Management LP. Under certain circumstances, the general partner may require FEF LLC to make additional capital contributions to Restaurant Management LP in the aggregate amount of $2.0 million until the third anniversary of the acquisition. The purchase price for the units was funded in part through 27 loans from Franchise Mortgage LLC in the initial aggregate amount of $23.2 million. The loans bear interest at annual rates ranging from 9.19%% to 10.0% and are due on dates ranging from June 1998 to December 2011. At June 30, 1997, the outstanding balance of such loans was $22.9 million. The other investors have certain rights to purchase FEF LLC's limited partner interest after the fifth anniversary of the acquisition, and FEF LLC has certain rights to sell its limited partner interest to the other investors after the seventh anniversary of the acquisition. In addition, in March and August 1996, prior to the acquisition, Franchise Mortgage LLC made 15 loans to certain affiliates of Restaurant Management LP in the initial aggregate amount of $9.9 million. The loans bear interest at annual rates ranging from 10.25% to 10.45%. At June 30, 1997, the outstanding balance of such loans was $9.7 million. In December 1996, FEF LLC and certain other investors organized Family Eats Limited Partnership, a Delaware limited partnership ("Family Eats LP"), for the purpose of acquiring and operating 19 Taco Bell units. FEF LLC made a capital contribution of $1.45 million to, and owns a 49% limited partner interest in, Family Eats LP. Under certain circumstances, the general partner may require FEF LLC to make additional capital contributions to Family Eats LP in the aggregate amount of $1.55 million until the third anniversary of the acquisition. The purchase price for the units was funded in part through 18 loans from Franchise Mortgage LLC in the initial aggregate amount of $10.1 million. The loans bear interest at annual rates ranging from 9.69% to 10.25% and are due on dates ranging from July 1998 to October 2012. At June 30, 1997, the outstanding balance of such loans was $10.0 million. The other investors have certain rights to purchase FEF LLC's limited partner interest after the fifth anniversary of the acquisition, and FEF LLC has certain rights to sell its limited partner interest to the other investors after the seventh anniversary of the acquisition. CVB, L.L.C. Franchise Mortgage LLC, ICII and Mr. Knyal are parties to an Operating Agreement, dated February 6, 1997, pursuant to which such parties organized CVB, L.L.C., a Delaware limited liability company ("CVB LLC"), for the purpose of making equity investments in franchisees of Church's Chicken units. Franchise Mortgage LLC owns a 99% membership interest in, and is the manager of, CVB LLC. ICII and Knyal own 0.67% and 0.33% membership interests, respectively, in CVB LLC. 63 In April 1997, CVB LLC and another investor organized Atlanta Franchise Development Company, LLC, a Delaware limited liability company ("Atlanta Franchise LLC"), for the purpose of acquiring and operating 100 Church's Chicken units. CVB LLC made a nominal capital contribution to, and owns a 40% membership interest in, Atlanta Franchise LLC. The purchase price for the units was funded in part through 72 loans from Franchise Mortgage LLC in the initial aggregate amount of $25.1 million. The loans bear interest at an annual rate of 11.72% and are due in April 2012. At June 30, 1997, the outstanding balance of such loans was $24.7 million. The other investor has certain rights to purchase CVB LLC's membership interest after the fifth anniversary of the acquisition, and CVB LLC has certain rights to sell its membership interest to Atlanta Franchise LLC after the seventh anniversary of the acquisition. HNN Equity, L.L.C. Franchise Mortgage LLC and ICII are parties to an Operating Agreement, dated March 27, 1997, pursuant to which such parties organized HNN Equity, L.L.C., a Delaware limited liability company ("HNN Equity LLC"), for the purpose of making an equity investment in Hot N Now, L.L.C., a Delaware limited liability company ("Hot 'N Now LLC"). Franchise Mortgage LLC and ICII each own a 50% membership interest in, and share joint management of, HNN Equity LLC. In April 1997, HNN Equity LLC and Davis/HNN, L.L.C. ("Davis/HNN LLC"), a limited liability company principally owned by Ronald V. Davis, a director of the Company, organized Hot 'N Now LLC under the laws of the state of Delaware for the purpose of acquiring all franchisor and tradename rights to a QSR concept named "Hot 'N Now" as well as acquiring and operating 36 Not 'N Now units. HNN Equity LLC owns a 40% membership interest in Hot 'N Now LLC. Davis/HNN LLC owns a 60% membership interest in, and is the manager of, Hot 'N Now LLC. The purchase price for the Units was $2.0 million and was funded through a capital contribution of $1.5 million by Davis/HNN LLC and a loan of $600,000 from Davis/HNN LLC. The loan bears interest at an annual rate of 8% and is payable out of distributable cash from the operations of Hot 'N Now LLC. Mr. Davis is the Chief Executive Officer of Hot 'N Now LLC and Davis/HNN LLC is entitled to an annual base fee of $60,000 per year in its capacity as manager of Hot 'N Now LLC. The manager may require the members to make additional capital contributions to Hot 'N Now LLC to satisfy the obligations of Hot 'N Now LLC to make rent payments under real estate leases for 19 units. Such obligations are also guaranteed by ICII. PRG Equity, L.L.C. On April 14, 1997 Franchise Mortgage LLC organized PRG Equity, L.L.C., a Delaware limited liability company ("PRG Equity LLC"), for the purpose of making an equity investment in Pate Restaurant Enterprises, Ltd., a Florida limited partnership which owns and operates seven Hardee's units ("Pate Restaurant LP"). Franchise Mortgage owns all of the membership interests in and manages PRG Equity LLC. In April 1997, Franchise Mortgage LLC made seven loans to Pate Restaurant LP in the initial aggregate amount of $3.5 million. In connection with such loans, PRG Equity LLC acquired a 40% limited partner interest in Pate Restaurant LP. The loans bear interest at annual rates ranging from 9.94% to 10.79% and are due on dates ranging from November 1998 to May 2012. At June 30, 1997, the outstanding balance of such loans was $3.4 million. The other investors in Pate Restaurant LP have certain rights to purchase PRG Equity LLC's limited partner interest after the seventh anniversary of the acquisition, and PRG Equity LLC has certain rights to sell its limited partner interest to the other investors after the seventh anniversary of the acquisition. See "Risk Factors--Concentration on Restaurant, Retail Energy and Golf Sectors May Expose the Company to Concept Failures, Industry Cycles, Environmental Liabilities and Other Industry Specific Risks." Loans to Executive Officers and Directors On July 15, 1997 the Company loaned Kevin T. Burke, the Executive Vice President, Capital Markets of the Company, $170,000 for the purposes of assisting Mr. Burke to buy a home. The loan is evidenced by a promissory note executed by Mr. Burke in favor of the Company that bears interest at an annual rate of 8% and is payable in one installment on April 15, 1998. See "Management -- Directors and Executive Officers." In connection with the purchase by Franchise Mortgage LLC of certain of the assets and liabilities of the Division from Greenwich in June 1995, Franchise Mortgage LLC assumed as a receivable a $410,000 unsecured non-interest bearing note made by Mr. Knyal in favor of Greenwich. The note was restructured in August 1997 to be payable in five annual installments of $82,000 commencing January 1, 1998 out of that bonus due to Mr. Knyal under his new employment agreement. See "Management--Executive Compensation--Employment Agreements." 64 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of August 1, 1997, giving pro forma effect to the Reorganization, and pro forma as adjusted to reflect the sale of 5,312,500 shares by the Company and 3,437,500 shares by the Selling Stockholders, by (i) each director of the Company, (ii) each of the Named Executive Officers, (iii) each person known to the Company to be beneficial owner of more than 5% of the Common Stock and (iv) all directors and executive officers of the Company as a group.
COMMON STOCK OWNED PRIOR TO COMMON STOCK TO BE OFFERING(1) OWNED AFTER THE OFFERING ------------------ --------------------------- NUMBER OF NUMBER OF SHARES NUMBER OF SHARES PERCENT BEING OFFERED SHARES PERCENT ---------- ------- ---------------- --------------- ----------- Imperial Credit Industries, Inc.(2).... 14,591,667 66.7% 2,500,000 12,091,667 44.4% FLRT, Inc.(3)(4)........ 7,295,833 33.3 937,500 6,358,333 23.4 Wayne L. Knyal(4)....... 6,201,458 28.3 796,875 5,404,583 19.9 Thomas J. Shaughnessy(3)......... -- -- -- -- John W. Rinaldi(3)...... -- -- -- -- Kevin T. Burke(3)....... -- -- -- -- Raedelle Walker(3)...... -- -- -- -- H. Wayne Snavely(2)..... -- -- -- -- G. Louis Graziadio, III(2)................. -- -- -- -- Perry A. Lerner(2)...... -- -- -- -- Michael L. Matkins(3)... -- -- -- -- Ronald V. Davis(3)...... -- -- -- -- John E. Martin(3)....... -- -- -- -- Richard J. Loughlin(3).. -- -- -- -- All Directors and Officers as a Group (12 persons)(4)........ 6,201,458 28.3% 796,875 5,404,583 19.9%
- -------- (1) The persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned. (2) Imperial Credit Industries, Inc. and each of such persons may be reached at 23550 Hawthorne Boulevard, Building One, Suite 110, Torrance, California 90505. (3) FLRT, Inc. and each of such persons may be reached through the Company at 2049 Century Park East, Suite 350, Los Angeles, California 90067. (4) Wayne L. Knyal is deemed to beneficially own 85% of the shares of the Company's Common Stock held by FLRT, Inc. 65 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 100,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock. After giving effect to this Offering, there will be 27,200,000 shares of Common Stock outstanding and no shares of Preferred Stock outstanding. COMMON STOCK Holders of Common Stock are entitled to one vote per share on matters to be voted upon by the stockholders. There are no cumulative voting rights. Holders of Common Stock are entitled to receive ratable dividends when, as and if declared by the Board of Directors out of funds legally available therefor. Upon the liquidation, dissolution or winding up of the Company, holders of Common Stock share ratably in the assets of the Company available for distribution to its stockholders, subject to the preferential rights of any then-outstanding shares of Preferred Stock. No shares of Preferred Stock will be outstanding immediately following the consummation of this Offering. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights. All shares of Common Stock outstanding upon the effective date of this Prospectus, and the shares offered hereby will, upon issuance and sale, be fully paid and nonassessable. PREFERRED STOCK The Board of Directors has the authority, without further action by the stockholders of the Company, to issue up to 10,000,000 shares of Preferred Stock in one or more series, and to fix the designations, rights, preferences, privileges, qualifications and restrictions thereof including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation preferences and sinking fund terms, any or all of which may be greater than the rights of the Common Stock. The Board of Directors, without stockholder approval, can issue Preferred Stock with voting, conversion and other rights which could adversely affect the voting power and other rights of the holders of Common Stock. Preferred Stock could thus be issued quickly with terms calculated to delay or prevent a change in control of the Company or to make removal of management more difficult. In certain circumstances, such issuance could have the effect of decreasing the market price of the Common Stock. The issuance of Preferred Stock may have the effect of delaying, deterring or preventing a change in control of the Company without any further action by the stockholders including, but not limited to, a tender offer to purchase Common Stock at a premium over then current market prices. The Company has no present plan to issue any shares of Preferred Stock. CERTAIN PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW Generally, Section 203 of the DGCL prohibits a publicly held Delaware corporation from engaging in a broad range of "business combinations" with an "interested stockholder" (defined generally as a person owning 15% of more of a corporation's outstanding voting stock) for three years following the date such person became an interested stockholder unless (i) before the person becomes an interested stockholder, the transaction resulting in such person becoming an interested stockholder or the business combination is approved by the board of directors of the corporation, (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the outstanding voting stock of the corporation (excluding shares owned by directors who are also officers of the corporation or shares held by employee stock plans that do not provide employees with the right to determine confidentially whether shares held subject to the plan will be tendered in a tender offer or exchange offer), or (iii) on or after such date on which such person became an interested stockholder the business combination is approved by the board of directors and authorized at an annual or special meeting, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock excluding shares owned by the interested stockholders. The restrictions of Section 203 do not apply, among other reasons, if a corporation, by action of its stockholders, adopts an amendment to its certificate of incorporation or bylaws expressly electing not to be governed by Section 203, provided that, in addition to any other vote required by law, such amendment to the certificate of incorporation or bylaws must be approved by the affirmative vote of a majority of the shares entitled to vote. 66 Moreover, an amendment so adopted is not effective until twelve months after its adoption and does not apply to any business combination between the corporation and any person who became an interested stockholder of such corporation on or prior to such adoption. The Certificate of Incorporation and Bylaws do not currently contain any provisions electing not to be governed by Section 203 of the DGCL. Section 203 of the DGCL may discourage persons from making a tender offer for or acquisitions of substantial amounts of the Common Stock. This could have the effect of inhibiting changes in management and may also prevent temporary fluctuations in the Common Stock that often result from takeover attempts. Section 211 of the DGCL allows a corporation to designate in its certificate of incorporation or bylaws who may call a special meeting of the stockholders. The Certificate of Incorporation will designate that only members of the Company's Board of Directors may call a special meeting of the stockholders. Section 228 of the DGCL allows any action that is required to be or may be taken at a special or annual meeting of the stockholders of a corporation to be taken without a meeting with the written consent of holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, provided that the certificate of incorporation of such corporation does not contain a provision to the contrary. The Certificate of Incorporation will contain such a provision, and therefore stockholders holding a majority of the voting power of the Common Stock will not be able to approve corporate actions requiring stockholder approval without holding a meeting of stockholders. REGISTRATION RIGHTS The Company has entered into the ICII Registration Rights Agreement pursuant to which the Company has agreed to file one or more registration statements under the Securities Act in the future for shares of the Company held by ICII, subject to certain conditions set forth therein. Pursuant to the ICII Registration Rights Agreement, the Company will use its reasonable efforts to cause such registration statements to be kept continuously effective for the public sale from time to time of the shares of the Company held by ICII. Also, under the ICII Registration Rights Agreement, FLRT, Inc. may piggyback its shares onto any registration statement concerning shares of the Company's Common Stock held by ICII; provided however that for a period of three years following the date of this Prospectus, FLRT, Inc. is limited in the amount of shares of the Company's Common Stock it can sell to that amount authorized pursuant to Rule 144. Thereafter, FLRT, Inc. has registration rights similar to those granted to ICII under the ICII Registration Rights Agreement without any volume limitations. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer, Glendale, California. 67 SHARES ELIGIBLE FOR FUTURE SALE After this Offering, the Company will have outstanding 27,200,000 shares of Common Stock. Of the outstanding shares, the 8,750,000 shares to be sold in this Offering will be freely tradeable without restriction or further registration under the Securities Act unless purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act. The remaining 18,450,000 shares of Common Stock outstanding upon completion of this Offering (assuming no exercise of the Underwriters' over-allotment option) are "restricted securities" as that term is defined in Rule 144, all of which will be eligible for sale under Rule 144 upon completion of this Offering, subject to the lock-up described below. As described below, Rule 144 permits resales of restricted securities subject to certain restrictions. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who beneficially owned shares for at least one year, including any person who may be deemed an "affiliate" of the Company (as the term "affiliate" is defined under the Securities Act), would be entitled to sell within any three month period a number of such shares that does not exceed the greater of 1% of the shares of the Company's Common Stock then outstanding (272,000 shares immediately after this Offering) or the average weekly trading volume in the Company's Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. A person who is not deemed to have been an "affiliate" of the Company any time during the three months immediately preceding a sale and who has beneficially owned shares for at least two years would be entitled to sell such shares under Rule 144 without regard to the volume limitation described above. The Company and the Selling Stockholders have agreed that they will not, without the prior written consent of Montgomery Securities (which consent may be withheld in its sole discretion) and subject to certain limited exceptions, directly or indirectly, sell offer, contract or grant any option to sell, make any short sale, pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any shares of Common Stock, options or warrants to acquire Common Stock, or securities exchangeable or exercisable for or convertible into Common Stock currently owned either of record or beneficially by them or announce the intention to do any of the foregoing, for a period commencing on the date of this Prospectus and continuing to a date 180 days after such date. Montgomery Securities may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to these lock up agreements. In addition, the Company has agreed that, for a period of 180 days after the date of this Prospectus, it will not, without the consent of Montgomery Securities, issue, offer, sell or grant options to purchase or otherwise dispose of any equity securities or securities convertible into or exchangeable for equity securities except for (i) the issuance of shares of Common stock offered hereby and (ii) the grant of options to purchase shares of Common Stock pursuant to the Stock Option Plan and shares of Common Stock issued pursuant to the exercise of such options, provided that such options shall not vest, or the Company shall obtain the written consent of the grantee not to transfer such shares, until the end of such 180-day period. See "Underwriting." The Stock Option Plan authorizes the grant of options to purchase, and awards of, an aggregate of up to 10% of the shares of the Company's Common Stock to be outstanding after this Offering, including any shares issued pursuant to the Underwriters' over-allotment option, but not less than 2,700,000 shares. Options to purchase 1,120,000 shares are expected to be granted to employees, officers and directors of the Company on the effective date of this Offering. The Company intends to file a Registration Statement on Form S-8 covering the shares that have been reserved for issuance under the Stock Option Plan, thus permitting the resale of such shares in the public market. The Company has entered into the ICII Registration Rights Agreement pursuant to which the Company has agreed to file one or more registration statements under the Securities Act in the future for shares of the Company held by ICII, subject to certain conditions set forth therein. Pursuant to the ICII Registration Rights Agreement, the Company will use its reasonable efforts to cause such registration statements to be kept continuously effective for the public sale from time to time of the shares of the Company held by ICII. Also, under the ICII Registration Rights Agreement, FLRT, Inc. may piggyback its shares onto any registration statement concerning shares of the Company's Common Stock held by ICII; provided however that for a period of three years following the date of this Prospectus, FLRT, Inc. is limited in the amount of shares of the Company's Common Stock it can sell to that amount authorized pursuant to Rule 144. Thereafter, FLRT, Inc. has registration rights similar to those granted to ICII under the ICII Registration Rights Agreement without any volume limitations. 68 UNDERWRITING The Underwriters named below represented by Montgomery Securities, Credit Suisse First Boston and PaineWebber Incorporated (the "Representatives") have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement, to purchase from the Company and the Selling Stockholders the number of shares of Common Stock indicated below opposite their respective names at the initial public offering price less the underwriting discounts set forth on the cover page of this Prospectus:
UNDERWRITER NUMBER OF SHARES ----------- ---------------- Montgomery Securities.......................................... Credit Suisse First Boston..................................... PaineWebber Incorporated....................................... --------- Total........................................................ 8,750,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of such shares if any are purchased. The Representatives have advised the Company and the Selling Stockholders that the Underwriters propose initially to offer the shares of Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers a concession of not more than $ per share, and the Underwriters may allow, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After this Offering, the offering price and other selling terms may be changed by the Representatives. The shares of Common Stock are offered subject to receipt and acceptance by the Underwriters and to certain other conditions, including the right to reject orders in whole or in part. The Company and the Selling Stockholders have granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 1,312,500 additional shares of Common Stock to cover over-allotments, if any, at the offering price less the underwriting discount set forth on the cover page of this Prospectus. To the extent the Underwriters exercise this option, each of the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with the Offering. The Underwriting Agreement provides that the Company and the Selling Stockholders will indemnify the Underwriters against certain liabilities, including liabilities under the Act, or will contribute to payments that the Underwriters may be required to make in respect thereof. The Company and the Selling Stockholders have agreed that they will not, without the prior written consent of Montgomery Securities (which consent may be withheld in its sole discretion) and subject to certain limited exceptions, directly or indirectly, sell offer, contract or grant any option to sell, make any short sale, pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any shares of Common Stock, options or warrants to acquire Common Stock, or securities exchangeable or exercisable for or convertible into Common Stock currently owned either of record or beneficially by them or announce the intention to do any of the foregoing, for a period commencing on the date of this Prospectus and continuing to a date 180 days after such date. Montgomery Securities may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to these lock up agreements. In addition, the Company has agreed that, for a period of 180 days after the date of this Prospectus, it will not, without the consent of Montgomery Securities, issue, offer, sell or grant options to purchase or otherwise dispose of any equity securities or securities convertible into or exchangeable for equity securities except for (i) the issuance of shares of Common stock offered hereby and (ii) the grant of options to purchase shares of Common Stock pursuant to the Stock Option Plan and shares of Common Stock issued pursuant to the exercise of such options, provided that such options shall not vest, or the Company shall obtain the written consent of the grantee not to transfer such shares, until the end of such 180-day period. See "Management--Stock Options" and "Shares Eligible for Future Sale." 69 Prior to this Offering, there has been no public market for the Common Stock. Consequently, the initial public offering price will be determined by negotiations among the Company, the Selling Stockholders and the Representatives. Among the factors to be considered in such negotiations are the history of, and prospects for, the Company and the industry in which it competes, an assessment of the Company management, its past and present operations and financial performance, the prospects for further earnings of the Company, the present state of the Company's development, the general condition of the securities markets at the time of the Offering, the market prices of and demand for publicly traded common stocks of comparable companies in recent periods and other factors deemed relevant. The Representatives have advised the Company that, pursuant to Regulation M under the Securities Act, certain persons participating in this Offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with this Offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with this Offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Representative in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. Montgomery Securities and PaineWebber Incorporated have in the past performed investment banking and advisory services for ICII and certain of its other affiliates. Credit Suisse First Boston acted as private placement agent for the Company's most recent securitization transaction in June 1997. In addition, Credit Suisse First Boston makes available a $300 million repurchase facility to the Company. See "Business--Financing--Warehouse Lines of Credit and Repurchase Facilities." The Representatives have informed the Company that the Underwriters do not expect to make sales to accounts over which they exercise discretionary authority in excess of 5% of the number of shares of Common Stock offered hereby. 70 LEGAL MATTERS Certain matters relating to this offering are being passed upon for the Company and the Selling Stockholders by Freshman, Marantz, Orlanski, Cooper & Klein, a law corporation, Beverly Hills, California. Certain legal matters will be passed upon for the Underwriters by Gibson, Dunn & Crutcher LLP, San Francisco, California. EXPERTS The financial statements of Franchise Mortgage Acceptance Company LLC as of June 30, 1997 and December 31, 1996, and 1995, and for the six-months ended June 30, 1997, June 30, 1995 and December 31, 1995, and the years ended December 31, 1996 and 1994, have been included herein in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, files reports and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at the offices of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, New York, New York 10048. Copies of such materials can also be obtained by written request to the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Company has filed a Registration Statement under the Securities Act with the Commission with respect to the Common Stock offered hereby. This Prospectus, which constitutes part of the Registration Statement, omits certain of the information contained in the Registration Statement and the exhibits thereto on file with the Commission pursuant to the Securities Act and the rules and regulations of the Commission. Statements contained in this Prospectus such as the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement, including the exhibits thereto, may be inspected without charge at the Commission's principal office at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and copies of all or any part thereof may be obtained from the Commission upon the payment of certain fees prescribed by the Commission. The Commission also maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding restraints, such as the Company, that file electronically with the Commission. The address of the site is http:/ / www.sec.gov. 71 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report................................................ F-2 Balance Sheets.............................................................. F-3 Statements of Operations.................................................... F-4 Statements of Changes in Members' Equity.................................... F-5 Statements of Cash Flows.................................................... F-6 Notes to Financial Statements............................................... F-7
Schedules are omitted because they are either inapplicable or the required information is included in the financial statements or notes thereto. F-1 INDEPENDENT AUDITORS' REPORT The Managers Franchise Mortgage Acceptance Company LLC: We have audited the accompanying balance sheets of Franchise Mortgage Acceptance Company LLC as of June 30, 1997, and December 31, 1996 and 1995, and the related statements of operations, changes in members' equity and cash flows for the six months ended June 30, 1997 and December 31, 1995, and the year ended December 31, 1996, and the six months ended June 30, 1995, and the year ended December 31, 1994 (Predecessor periods). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Franchise Mortgage Acceptance Company LLC as of June 30, 1997, and December 31, 1996 and 1995, and the results of its operations and its cash flows for the six-months ended June 30, 1997 and December 31, 1995, and the year ended December 31, 1996, and the six months ended June 30, 1995, and the year ended December 31, 1994 (Predecessor periods), in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Los Angeles, California August 25, 1997 F-2 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC BALANCE SHEETS (IN THOUSANDS)
PRO FORMA DECEMBER 31, JUNE 30, 1997 JUNE 30, ----------------- (NOTE 3) 1997 1996 1995 ------------- -------- -------- -------- (UNAUDITED) ASSETS Cash................................ $ 15 $ 15 $ -- $ -- Restricted cash..................... -- -- -- 526 Interest bearing deposits........... 2,667 2,667 2,594 -- Securities available for sale....... 2,581 2,581 39,349 -- Loans and leases held for sale...... 208,014 208,014 98,915 181,254 Retained interest in loan securitizations.................... 7,002 7,002 6,908 -- Premises and equipment, net......... 1,433 1,433 1,162 235 Goodwill............................ 4,571 4,571 4,332 4,226 Receivable from Southern Pacific Thrift & Loan...................... -- -- -- 579 Receivable from Imperial Credit Industries, Inc.................... -- -- -- 924 Accrued interest receivable......... 1,137 1,137 560 1,108 Other assets........................ 5,536 5,536 6,356 196 -------- -------- -------- -------- Total assets.................... $232,956 $232,956 $160,176 $189,048 ======== ======== ======== ======== LIABILITIES AND MEMBERS' EQUITY Book overdraft...................... $ -- $ -- $ 171 $ 445 Payable to Imperial Credit Industries, Inc.................... 12,997 9,997 17,728 -- Borrowings.......................... 195,922 195,922 125,240 69,637 Bonds............................... -- -- -- 111,995 Deferred income taxes............... 7,018 -- -- -- Accrued interest payable............ 878 878 148 1,062 Other liabilities................... 4,061 4,061 2,432 2,136 -------- -------- -------- -------- Total liabilities............... 220,876 210,858 145,719 185,275 -------- -------- -------- -------- Commitments and contingencies (Note 19) Members' equity: Members' capital.................. -- 5,792 5,792 4,432 Additional paid in capital........ 12,080 -- -- -- Retained earnings (accumulated deficit)......................... -- 16,306 8,665 (659) -------- -------- -------- -------- Total members' equity............. 12,080 22,098 14,457 3,773 -------- -------- -------- -------- Total liabilities and members' equity........................... $232,956 $232,956 $160,176 $189,048 ======== ======== ======== ========
See accompanying notes to financial statements. F-3 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC STATEMENTS OF OPERATIONS (IN THOUSANDS)
PREDECESSOR ----------------------- SIX MONTHS SIX MONTHS SIX MONTHS ENDED YEAR ENDED ENDED ENDED YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31, 1997 1996 1995 1995 1994 ---------- ------------ ------------ ---------- ------------ Revenue: Gain on sale of loans................ $19,808 $18,671 $ -- $ -- $4,052 ------- ------- ------ ------- ------ Interest income....... 10,767 16,130 1,929 1,121 1,445 Interest expense...... 9,394 14,489 1,690 967 1,408 ------- ------- ------ ------- ------ Net interest income............. 1,373 1,641 239 154 37 ------- ------- ------ ------- ------ Loan servicing income............... 1,376 1,191 349 326 306 Other income.......... -- 63 -- -- 68 ------- ------- ------ ------- ------ Total other income.. 1,376 1,254 349 326 374 ------- ------- ------ ------- ------ Total revenues...... 22,557 21,566 588 480 4,463 ------- ------- ------ ------- ------ Expense: Personnel and commission........... 4,665 8,270 356 931 1,723 Professional services............. 1,176 1,093 106 477 1,057 Travel................ 524 614 155 182 340 Business promotion.... 316 450 96 62 170 Occupancy............. 277 310 94 55 97 Goodwill amortization......... 169 411 146 -- -- General and administrative....... 1,467 1,094 294 684 1,804 ------- ------- ------ ------- ------ Total expense....... 8,594 12,242 1,247 2,391 5,191 ------- ------- ------ ------- ------ Net income (loss)... $13,963 $ 9,324 $ (659) $(1,911) $ (728) ======= ======= ====== ======= ====== Pro forma earnings data (unaudited): Net income as reported............. $13,963 $ 9,324 Pro forma income taxes................ 5,935 3,873 ------- ------- Pro forma net income.. $ 8,028 $ 5,451 ======= ======= Pro forma net income per share............ $ 0.37 $ 0.25 ======= ======= Supplemental pro forma earnings data (unaudited): Net income as reported............. $13,963 Establishment of deferred tax liability............ 7,018 ------- Supplemental pro forma net income........... $ 6,945 ======= Supplemental pro forma net income per share................ $ 0.32 =======
See accompanying notes to financial statements. F-4 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC STATEMENTS OF CHANGES IN MEMBERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1997, DECEMBER 31, 1995 AND JUNE 30, 1995, AND THE YEARS ENDED DECEMBER 31, 1996 AND 1994 (IN THOUSANDS)
ACCUMULATED TOTAL MEMBERS' (DEFICIT) RETAINED MEMBERS' PREDECESSOR CAPITAL EARNINGS EQUITY - ----------- -------- ------------------ -------- Balance, January 1, 1994................. $ -- $(2,069) $(2,069) Net Loss................................. -- (728) (728) ------- ------- ------- Balance, December 31, 1994............... $ -- (2,797) (2,797) Net Loss................................. -- (1,911) (1,911) ------- ------- ------- Balance, June 30, 1995................... $ -- $(4,708) $(4,708) ======= ======= ======= THE COMPANY - ----------- Members' contribution--ICII.............. $ 7,592 $ -- $ 7,592 Members' contribution--Knyal............. 645 -- 645 Return of capital--ICII.................. (3,805) -- (3,805) Net loss................................. -- (659) (659) ------- ------- ------- Balance, December 31, 1995............... $ 4,432 $ (659) $ 3,773 Net income............................... -- 9,324 9,324 Members' Contribution--ICII.............. 1,360 -- 1,360 ------- ------- ------- Balance, December 31, 1996............... $ 5,792 $ 8,665 $14,457 Tax Distribution--ICII................... -- (4,215) (4,215) Tax Distribution--Knyal.................. -- (2,107) (2,107) Net income............................... -- 13,963 13,963 ------- ------- ------- Balance, June 30, 1997................... $ 5,792 $16,306 $22,098 ======= ======= =======
See accompanying notes to financial statements. F-5 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PREDECESSOR ---------------------- SIX SIX MONTHS SIX MONTHS MONTHS ENDED YEAR ENDED ENDED ENDED YEAR ENDED JUNE 30, DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31, 1997 1996 1995 1995 1994 ---------- ------------ ------------ -------- ------------ Cash flows from operating activities: Net income (loss)...... $ 13,963 $ 9,324 $ (659) $ (1,911) $ (728) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization......... 388 2,883 153 16 -- Net (increase) decrease in loans and leases held for sale................. (109,304) 82,339 (181,254) -- -- Decrease (increase) in accrued interest receivable........... (577) 548 (1,108) (524) (99) Increase in securities owned................ -- -- -- (45,778) (5,107) Gain on sale of servicing rights..... -- -- (31) -- Net change in other liabilities.......... 2,359 (618) 3,198 828 (197) Net change in other assets............... 931 (7,027) (2,214) 1,044 341 --------- --------- --------- -------- ------- Net cash provided (used) by operating activities.......... (92,240) 87,449 (181,915) (46,325) (5,790) --------- --------- --------- -------- ------- Cash flows from investing activities: Purchases of premises and equipment......... (490) (1,190) (162) 52 -- Increase in interest bearing deposits...... (73) (2,594) -- -- -- Purchase of securities available for sale.... -- (41,704) -- -- (15) Sale of securities available for sale.... 36,768 -- -- -- -- Purchase of other investments........... (408) (4,383) -- -- -- Sale of servicing rights................ -- -- 3,805 -- -- --------- --------- --------- -------- ------- Net cash provided (used) by investing activities.......... 35,797 (49,871) 3,643 52 (15) --------- --------- --------- -------- ------- Cash flows from financing activities: Issuance of bonds...... -- -- 111,995 -- -- Repayment of bonds..... -- (111,995) -- -- -- Net change in borrowings from ICII.. (7,731) 17,728 -- -- 3,500 Increase in borrowings............ 70,682 55,603 69,637 46,391 2,275 Member (distributions) contributions......... (6,322) 1,360 (3,805) -- -- --------- --------- --------- -------- ------- Net cash provided (used) by financing activities.......... 56,629 (37,304) 177,827 46,391 5,775 --------- --------- --------- -------- ------- Net change in cash... 186 274 (445) 118 (30) Cash (book overdraft) at beginning of period.... (171) (445) -- 102 132 --------- --------- --------- -------- ------- Cash (book overdraft) at end of period.......... $ 15 $ (171) $ (445) $ 220 $ 102 ========= ========= ========= ======== =======
See accompanying notes to financial statements. F-6 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997, DECEMBER 31, 1996 AND 1995 (1) ORGANIZATION On June 30, 1995, Imperial Credit Industries, Inc. ("ICII") acquired from Greenwich Capital Financial Products, Inc. (Greenwich) certain assets of Greenwich's Franchise Mortgage Acceptance Company division (the FMAC Division), including all of Greenwich's rights under certain servicing contracts entered into by the FMAC Division (the Servicing Contracts) and a $410,000 obligation owed by Wayne L. Knyal (Knyal) to Greenwich. The Servicing Contracts pertain to the servicing of franchise loans that were previously securitized by Greenwich through the FMAC Division and other franchise loans owned by Greenwich and not yet securitized. Concurrent with the closing of the transactions described above, ICII entered into an operating agreement with Knyal, the former president of the FMAC Division, for the formation of a California limited liability company named Franchise Mortgage Acceptance Company LLC (the Company). In connection with the acquisition, the Company or its affiliates assumed certain liabilities related to the Servicing Contracts and Greenwich agreed to act as the Company's exclusive agent in connection with the securitization of franchise loans for a period of 24 months. The Company was formed to originate, securitize and service franchise loans. Under the terms of the operating agreement, in exchange for a 66 2/3% ownership interest in the Company, ICII was obligated to contribute to the Company $1.3 million in cash and all of the assets purchased from Greenwich. In exchange for a 33 1/3% ownership interest in the Company, Knyal caused his wholly owned company, FLRT, Inc., to contribute to the Company all of its rights under a servicing contract pertaining to franchise loans that were previously securitized by FLRT, Inc. On August 30, 1995, ICII completed the acquisition of certain net assets of the FMAC Division for a net purchase price of $7.6 million which included $3.8 million in contingent consideration based on loan originations after the date of acquisition up to a maximum principal amount of such loans equal to $250.0 million. The acquisition was recorded using the purchase method of accounting. Under this method of accounting, the purchase price was allocated to the respective assets acquired (primarily purchased servicing rights) with a fair value of $3.2 million at the date of the purchase transaction. The excess of the purchase price over the fair value of the net assets acquired was recorded as goodwill of $4.4 million. The Company has filed a registration statement relating to its initial public offering of common stock. At the completion of such offering the Company will no longer be treated as a partnership for income tax purposes and its income will become fully taxable. See Notes 3, 4 and 14. (2) BASIS OF PRESENTATION The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the balance sheet and revenues and expenses for the periods presented. Significant balance sheet accounts which could be materially affected by such estimates include securities available for sale and retained interest in loan securitizations. Actual results could differ significantly from those estimates. The accompanying statements of operations and cash flows for the six months ended June 30, 1995, and the year ended December 31, 1994, are those of the Company's predecessor, the FMAC Division. Revenues and interest expense appearing on such statements of operations result from assets and debt of the FMAC Division which were accounted for separately by Greenwich. Personnel and commission expense appearing on such statements of operations apply to the employees of the FMAC Division, and such expense was also accounted for separately by Greenwich. All other expenses of the FMAC Division were either directly assigned or allocated to the FMAC Division by Greenwich based on either actual utilization or the number of FMAC Division employees. F-7 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (3) PRO FORMA INFORMATION (a) Pro Forma Income Taxes (unaudited) As discussed in Note 14, the Company has been treated as a partnership for federal and state income tax purposes. Upon completion of the initial public offering discussed in Note 1, the Company will no longer be treated as a partnership for income tax purposes and its income will be subject to federal and state income taxes. The accompanying statements of operations for the six months ended June 30, 1997, and the year ended December 31, 1996, present unaudited pro forma income taxes and net income reflecting the estimated income tax expense of the Company as if it had been subject to normal federal and state income taxes for such periods. Unaudited pro forma income tax expense for the six months ended June 30, 1997, and the year ended December 31, 1996, included the following components:
1997 1996 ------ ------ (IN THOUSANDS) Federal................... $4,310 $2,812 State..................... 1,625 1,061 ------ ------ Total pro forma income tax expense............ $5,935 $3,873 ====== ======
The differences between unaudited pro forma income tax expense at the statutory federal income tax rate of 34% and the unaudited pro forma income tax expense shown in the accompanying statements of operations for the six months ended June 30, 1997, and the year ended December 31, 1996, are as follows:
1997 1996 ------ ------ (IN THOUSANDS) Pro forma income tax expense at statutory rate............ $4,747 $3,170 State tax net of federal benefit.......................... 1,073 700 Elimination of valuation allowance on net operating loss carry forward............................................ -- (215) Other..................................................... 115 218 ------ ------ Total................................................... $5,935 $3,873 ====== ======
If the Company had not been treated as a partnership for tax purposes on June 30, 1997, a deferred income tax liability of approximately $7,018,000 would have been recorded as a charge to earnings and a corresponding decrease in retained earnings. The accompanying unaudited pro forma balance sheet as of June 30, 1997, and the unaudited supplemental pro forma earnings data for the six months ended June 30, 1997, reflect the effect on retained earnings and net income of establishing on June 30, 1997, the deferred tax liability. At June 30, 1997, the components of the unaudited pro forma deferred income tax liability were as follows:
JUNE 30, 1997 ------------- (IN THOUSANDS) Gain on sale of loans deferred for income tax purpose...... $7,134 Basis difference in retained interest in loan securitizations........................................... (783) Deferred loan fees......................................... 667 ------ Total unaudited pro forma deferred income tax liability.. $7,018 ======
F-8 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (b) Pro Forma Balance Sheet Information (unaudited) The pro forma information presented in the accompanying balance sheet as of June 30, 1997 reflects (i) the distribution of $3.0 million by the Company to members of its previously taxed and undistributed retained earnings determined, which amount is expected to be distributed at the closing date of the proposed initial public offering, subject to certain limitations (for purposes of the pro forma presentation, the distribution funds were obtained through short-term borrowings from ICII), (ii) an increase in the Company's deferred income tax liability of $7,018,000 as if the Company was not treated as a partnership for tax purposes on June 30, 1997 (Note 14) and (iii) the reclassification of Members' capital and retained earnings as paid-in capital. (c) Pro Forma Earnings Per Share data (unaudited) The pro forma and supplemental pro forma earnings per share data is based upon 21,887,500 shares outstanding, such shares being those outstanding immediately after termination of the Company's partnership status for income tax purposes and prior to the initial public offering referred to in Note 1. Stock options which are expected to be issued upon the completion of the initial public offering referred to in Note 1 do not add incrementally to shares outstanding because the option price per share is equal to the initial public offering price. (4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly liquid investments with maturities of three months or less at date of acquisition to be cash equivalents. Restricted cash includes cash pledged as a reserve account for the FLRT 1995-B securitization. INVESTMENT SECURITIES The Company classifies investments as held-to-maturity, trading, and/or available for sale. Held-to-maturity investments are reported at amortized cost, trading securities are reported at fair value, with unrealized gains and losses included in operations, and available for sale securities are reported at fair value with unrealized gains and losses included as a separate component of Members' equity. Discount and premium on such securities are amortized to income using the interest method over the life of the securities. Realized gains and losses on securities available for sale are included in earnings at the time of sale using the specific identification method for determining the cost of securities sold. LOANS AND LEASES HELD FOR SALE Loans and leases held for sale are carried at the lower of aggregate cost or market. RETAINED INTEREST IN LOAN SECURITIZATIONS The Company may create retained interest in loan securitizations as a result of the sale of loans into securitization trusts. Retained interest in loan securitizations is carried at estimated fair value. Each loan securitization has specific credit enhancement requirements in the form of overcollateralization which must be met before the Company receives cash flows due. As the securitized assets generate excess cash flows, they are initially used to pay down the balance of the pass-through certificates until such time as the ratio of securitized assets to pass-through certificates reaches the overcollateralization requirement specified in each securitization. This overcollateralization amount is carried on the balance sheet as retained interest in loan securitizations. After the overcollateralization requirement and the other requirements specified in the pooling F-9 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) and servicing agreement have been met, the Company begins to receive the excess cash flows and a portion of the retained interest on a monthly basis. Retained interest in loan securitizations are amortized using the interest method. To the extent that actual future performance results are less than the Company's original performance estimates, the Company's retained interest in loan securitizations will be written down through a charge to operations in that period. LOAN SALES AND RELATED GAIN OR LOSS Loans are sold through either securitizations or whole loan sales with servicing retained by the Company. Securitizations typically require credit enhancements in the form of cash reserves or overcollateralization that are reflected as retained interest in loan securitizations on the balance sheet. Sales are recognized when the transaction settles and the risks and rewards of ownership are determined to have been passed to the purchaser. Gain is recognized to the extent that the selling prices exceed the carrying value of the loans sold based on the estimated relative fair values of the assets transferred, assets obtained and liabilities incurred. The assets obtained in a sale include, generally, retained interest in loan securitizations, loan servicing assets, and call options. Liabilities incurred in a sale include, generally, recourse obligations, put options, and servicing liabilities. In the securitizations completed to date, the Company retained call options giving it the right to repurchase loans sold when the outstanding amount of such loans is 1% to 10% or less of the original amount sold, depending on the terms of the related securitization. As these call options are equivalent to a cleanup call, the Company has ascribed no value to them. The Company has not established servicing assets or liabilities, although the Company retained the servicing rights on the loans sold, because management has determined that revenues from contractually specified servicing fees (30 basis points) and other ancillary sources are just adequate to compensate the Company for its servicing responsibilities. Recourse obligations are included in the retained interests through discounting. The securitizations completed to date had no put option features. In determining the estimated fair values of the retained interest in loan securitizations, the Company estimates the cash flows therefrom and discounts such cash flows at interest rates determined by management (ranging from 11% to 19%) to be rates market participants would use in similar circumstances. Quoted market prices are not available as no active market exists for retained interest in loan securitizations. In estimating the cash flows, the Company considers default and prepayment rates. To date, the default rate used by the Company has been zero because the Company has incurred no credit losses. Generally, the Company has used zero prepayment rates because a prepayment penalty contained in lending documents has deterred borrower prepayments significantly. LOAN ORIGINATION FEES Origination fees received on franchise loans held for sale, net of direct costs related to the origination of the loans, are deferred as an adjustment to the carrying value of loans held for sale. At the time of sale of the related loans, such deferred fees are taken into income and included with the gain or loss on sale of loans. SERVICING FEES Servicing fees are earned on the cash flow streams from various pools of securitized loans serviced for others. Servicing fees are recognized as income when received. At June 30, 1997, December 31, 1996 and 1995, the Company serviced loans of $834.1 million, $593.7 million and $207.7 million, respectively, for affiliates and others. PREMISES AND EQUIPMENT, NET Premises and equipment are stated at cost, less accumulated depreciation or amortization. Depreciation on premises and equipment is recorded using the straight-line method over the estimated useful lives of individual F-10 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) assets (three to seven years). Leasehold improvements are amortized over the terms of their related leases or the estimated useful lives of improvements, whichever is shorter. INCOME TAXES Under current Federal and applicable state limited liability company laws and regulations, limited liability companies are treated as partnerships for tax reporting purposes and, accordingly, are not subject to income taxes. Therefore, no provision for income taxes has been made in the Company's financial statements. For tax purposes, income or losses are included in the tax returns of the members. Upon completion of the proposed initial public offering, the Company's LLC status will terminate and the Company's income will be fully taxable. See Note 3. GOODWILL Goodwill is amortized on a straight-line basis over its estimated useful life of 15 years. Goodwill is reviewed for possible impairment when events or changed circumstances may affect the underlying basis of the asset. HEDGING PROGRAM The Company regularly securitizes and sells fixed-and variable-rate mortgage loans. To offset the effects of interest rate fluctuations on the value of its fixed-rate loans held for sale, the Company in certain cases will hedge its interest rate risk related to loans held for sale by selling United States Treasury future contracts. Unrealized and realized gains and losses on such positions are deferred as an adjustment to the carrying value of loans and leases held for sale and included in income as gain or loss on sale of loans when the related loans are sold. RECENT ACCOUNTING PRONOUNCEMENTS The Company adopted on January 1, 1997, Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"), which establishes accounting for transfers and servicing of financial assets and extinguishment of liabilities. This statement specifies when financial assets and liabilities are to be removed from an entity's financial statements, the accounting for servicing assets and liabilities and the accounting for assets that can be contractually prepaid in such a way that the holder would not recover substantially all of its recorded investment. Under SFAS 125, an entity recognizes only assets it controls and liabilities it has incurred, discontinues recognition of assets only when control has been surrendered, and discontinues recognition of liabilities only when they have been extinguished. SFAS 125 requires that the selling entity continue to carry retained interests, including servicing assets, relating to assets it no longer recognizes. Such retained interests are based on the relative fair values of the retained interests of the subject assets at the date of transfer. Transfers not meeting the criteria for sale recognition are accounted for as a secured borrowing with a pledge of collateral. SFAS 125 requires an entity to recognize its obligation to service financial assets that are retained in a transfer of assets in the form of a servicing asset or liability. The servicing asset or liability is amortized in proportion to, and over the period of, net servicing income or loss. Servicing assets and liabilities are assessed for impairment based on their fair value. The implementation of SFAS 125 did not have a material impact on the Company's financial condition or results of operations. Under the provisions of SFAS 125, securitization interests retained by the Company as a result of securitization transactions will be held as either available for sale or trading. In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 simplifies the standards for computing and presenting earnings per share ("EPS") as previously prescribed by Accounting Principles Board Opinion No. 15, "Earnings per Share." SFAS 128 replaces primary EPS with basic EPS and fully diluted EPS with diluted EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from issuance of common stock that then shared in F-11 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) earnings. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, and earlier application is not permitted. Management has determined that the implementation of SFAS 128 will not have a material impact on the Company's financial condition or results of operations. Also in February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"). SFAS 129 consolidates existing reporting standards for disclosing information about an entity's capital structure. SFAS 129 also supersedes specific requirements found in previously issued accounting statements. SFAS 129 must be adopted for financial statements for periods ending after December 15, 1997. The impact on the Company of adopting SFAS 129 is not expected to be material. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. Management is in the process of determining what effect, if any, adoption will have on the Company's financial condition and results of operations. The FASB issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," ("SFAS 131") in June 1997. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. Management has not yet determined what effect, if any, adoption will have on the Company's financial condition and results of operations. (5) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Noncash transactions for the six months ended December 31, 1995, included the contribution of all of the assets acquired by ICII from Greenwich including $80,000 of premises and equipment, $11,000 of prepaid expenses and approximately $3.1 million of servicing rights. In addition, servicing rights totaling $645,000 were contributed by Knyal for his interest in the Company. Cash paid for the six months ended December 31, 1995, for interest totaled $1.4 million, including approximately $1.0 million paid to Southern Pacific Thrift and Loan ("SPTL"), an affiliate of the Company. During 1996, ICII contributed $1.4 million to the Company by decreasing the balances of the outstanding payable to ICII by the amount of the contribution. Cash paid for interest for the six months ended June 30, 1997 and the year ended December 31, 1996 was $6.2 million and $15.6 million, respectively, including approximately $0 million and $10.0 million, respectively, paid to SPTL. (6) SECURITIES AVAILABLE FOR SALE On June 20, 1996, the Company purchased two interest-only strips related to franchise loan securitizations completed by Greenwich Capital for a total price of $2,947,292 to yield approximately 15%. The carrying values of these securities was $2,581,183 and $2,778,110 at June 30, 1997 and December 31, 1996, respectively. For the year ended December 31, 1996, and the six months ended June 30, 1997, discount accretion and cash received was $217,415 and $386,597, respectively, and $204,389 and $401,316, respectively. As there is no active market for these securities, management estimated their fair values by discounting estimated cash flows from these securities at an interest rate determined by management to be the rate market participants would use in similar circumstances. F-12 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) On August 18, 1996, the Company purchased securitization certificates that had been issued by Greenwich Capital through the FMAC Division in 1991 for a total price of $38,756,339, which included a premium of $1,479,929. The certificates paid principal and interest and have final maturities in 2002 and 2003. Premium amortized and cash received during the year ended December 31, 1996, totaled $181,990 and $2,003,769, respectively. The carrying value of the certificates was $36,570,580 at December 31, 1996, and they were sold during 1997. (7) LOANS AND LEASES HELD FOR SALE At June 30, 1997, December 31, 1996 and 1995, loans and leases held for sale consisted of the following:
1997 1996 1995 -------- ------- -------- (IN THOUSANDS) Loans......................................... $188,825 $94,490 $174,879 Equipment loans and leases.................... 21,184 4,385 -- Premium on franchise loans.................... -- -- 5,946 Net deferred loan fees........................ (1,324) (750) (203) Unearned lease income......................... (3,270) (497) -- Margin and deferred net losses on futures contracts used to hedge loans held for sale.. 2,599 1,287 632 -------- ------- -------- Loans and leases held for sale.............. $208,014 $98,915 $181,254 ======== ======= ========
The Company's loans and leases are primarily comprised of loans to experienced franchisees of nationally recognized restaurant concepts. A substantial portion of its debtors' ability to honor their contracts is dependent upon the cash flows generated by the franchise restaurant units themselves. The loans and leases generally are collateralized by the business property, and the real estate on which the franchises are located. Loans and leases held for sale were pledged as collateral for the borrowings and bonds of the Company. As of June 30, 1997, there were two loans on nonaccrual totaling $1.2 million included in loans and leases held for sale. There were no restructured or impaired loans. As of December 31, 1996, 1995 and 1994 there were no nonaccrual, restructured or impaired loans. (8) RETAINED INTEREST IN LOAN SECURITIZATIONS Activity in retained interest in loan securitizations was as follows for the six-months ended June 30, 1997, and the year ended December 31, 1996:
1997 1996 ------ ------ (IN THOUSANDS) Balance, beginning of period............................... $6,908 $ -- Additions.................................................. 326 6,744 Accretion.................................................. 501 503 Cash received.............................................. (733) (339) ------ ------ Balance, end of period..................................... $7,002 $6,908 ====== ======
F-13 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The components of retained interest in loan securitizations were as follows at the dates indicated:
JUNE 30, DECEMBER 31, 1997 1996 -------- ------------ (IN THOUSANDS) Overcollateralization amounts........................ $5,283 $5,208 Cash reserve deposit--restricted..................... 1,259 1,566 Residual interests................................... 460 134 ------ ------ $7,002 $6,908 ====== ======
(9) ACQUISITION During April 1997, the Company acquired certain net assets of the Enterprise Financial Group for a purchase price of $408,000. The acquisition was recorded using the purchase method of accounting. Under this method of accounting the purchase price was allocated to the respective assets acquired. The excess of the purchase price over the fair value of the net assets acquired has been recorded as goodwill of approximately $408,000. (10) PREMISES AND EQUIPMENT, NET Premises and equipment consisted of the following at June 30, 1997, December 31, 1996 and 1995:
1997 1996 1995 ------ ------ ---- (IN THOUSANDS) Furniture, fixtures and equipment.................... $1,374 $ 968 $242 Leasehold improvements............................... 59 78 -- Construction in progress............................. 270 240 -- Less accumulated depreciation and amortization..... (270) (124) (7) ------ ------ ---- Ending balance....................................... $1,433 $1,162 $235 ====== ====== ====
(11) HEDGING As of June 30, 1997 and December 31, 1996, the Company had open positions of $149.2 million and $94.1 million, respectively, related to United States Treasury futures contracts used to hedge loans and leases held for sale. At June 30, 1997 and December 31, 1996, the Company's unrealized and realized net losses on future contracts was $0.9 million and $1.3 million, respectively. See Note 7. F-14 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (12) BORROWINGS Borrowings consisted of the following at June 30, 1997, December 31, 1996, and 1995 (dollars in thousands):
JUNE 30, 1997 DECEMBER 31, 1996 ---------------------- ---------------------- INTEREST COMMITMENT PRINCIPAL INTEREST COMMITMENT PRINCIPAL EXPIRATION DATE INDEX RATE AMOUNT OUTSTANDING RATE AMOUNT OUTSTANDING --------------- ----- -------- ---------- ----------- -------- ---------- ----------- CS First Boston..................... December 31, 1998 Libor plus 7.29% $ 300,000 $167,447 7.31% $ 300,000 $ 48,673 160 basis Banco points Santander.................. June 1, 1998 Libor plus 7.29% 50,000 16,465 7.63% 50,000 16,181 160 basis points Greenwich Capital 30 days on demand Libor plus -- -- -- 7.36% Not 35,158 Financial Products, Inc. .. 125 basis specified points Southern Pacific Thrift & Loan.............. Not specified Coupon less -- -- -- 9.17% 25,228 25,228 approximately 50 basis points Sanwa Bank................. September 30, 1997 Eurodollars 7.50% 15,000 12,010 -- -- -- plus 200 basis points Imperial Credit Industries, Inc. .......... Not Specified Fixed 12.00% Not 9,997 12.00% Not 17,728 specified specified --------- -------- --------- -------- $ 365,000 $205,919 $ 375,228 $142,968 ========= ======== ========= ======== DECEMBER 31, 1995 ---------------------- INTEREST COMMITMENT PRINCIPAL RATE AMOUNT OUTSTANDING -------- ---------- ----------- CS First Boston.......... -- $ -- $ -- Banco Santander....... 8.00% 25,000 12,615 Greenwich Capital Financial Products, Inc. .. 7.25% Not 10,054 specified Southern Pacific Thrift & Loan... 9.17% 46,968 46,968 Sanwa Bank...... -- -- -- Imperial Credit Industries, Inc. .. 12.00% -- -- ---------- ----------- $ 71,968 $69,637 ========== ===========
The proceeds of the loan from Greenwich Capital Financial Products, Inc. at December 31, 1996, were used to purchase asset backed securities totaling $39.3 million which are included in securities available for sale in the accompanying balance sheets. The above borrowings are collateralized by franchise loans held for sale and interest bearing deposits. F-15 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (13) BONDS In December 1995, the Company, through a special purpose entity ("SPE"), issued pass-through certificates (the "Bonds") secured by $105.2 million of franchise loans. The Bonds consisted of three separate classes, Class A, Class B and Class C, with principal balances at December 31, 1995 of approximately $92.6 million, $4.2 million and $4.2 million, respectively. The Class C bonds were subordinate to Class B, and both Class B and C are subordinate to Class A. The Bonds had a weighted average loan rate of 9.63%, a pass-through rate of 8.59%, and a stated maturity of 13 years. The premium associated with the Bonds of $11.0 million was amortized as an adjustment to interest expense over the anticipated life of the Bonds. Due to the Company's retained interest in the SPE and the disproportionate payments on the pass-through certificates, the Company accounted for this transaction as a financing. On March 28, 1996, the Company sold its interest in the SPE to Imperial Credit Mortgage Holdings, Inc. an affiliate, receiving proceeds from the sale of $2.8 million. As a result of the sale, the Company removed from its balance sheet the loans and related bonds of $111.2 million and $112.0 million, respectively, resulting in a net gain of $3.6 million. (14) INCOME TAXES The Company has qualified to be treated as a partnership for both federal and state income tax purposes, and, as a result, is not subject to Federal and state income taxes. Therefore, no asset or liability for income taxes has been included in the historical financial statements. The Members are liable for individual Federal and state income taxes on their allocated portions of the Company's taxable income. Upon completion of the public offering discussed in Note 1, the Company will not be treated as a partnership for federal and state income tax purposes, and its income will become fully taxable. This will result in the establishment of a deferred income tax liability using normal federal and state income tax rates, causing a one-time non-cash charge against earnings for additional income tax expense equal to the amount of the deferred tax liability. As of June 30, 1997, the deferred income tax liability which would have been recorded had the Company not been treated as a partnership for tax purposes on that date was approximately $7,018,000. For further information on this deferred income tax liability and income taxes, see Note 3. (15) PROFIT SHARING AND 401(K) PLANS The Company's employees participate in a 401(k) plan sponsored by ICII. Under the plan, employees may elect to enroll at the beginning of any month in which the employee has been employed for at least six months. Employees may contribute up to 14% of their salaries. The Company will match 50% of the employee's contribution up to 4% of the employee's compensation. The Company may also make a discretionary contribution on an annual basis to be allocated to participants who have contributed in excess of 4% of their compensation. The allocation is based upon a formula set by the plan and requires a five- year vesting period. All forfeitures are allocated to the remaining participants in the plan. Distribution of vested benefits to a terminated participant in the 401(k) is made in accordance with the contribution allocation form signed by the employee. Distributions are made, by election of the participant, in either certificates of deposit, ICII common stock and stock or bond mutual funds or a combination thereof. The Company contributed $105,000, $88,000 and $13,000 to the 401(k) plan in for the six months ending June 30, 1997, the year ended December 31, 1996 and the six months ended December 31, 1995, respectively. F-16 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (16) TRANSACTIONS WITH AFFILIATES In the ordinary course of business, the Company has conducted transactions with affiliated companies. In the opinion of management all such transactions are conducted at "arm's length" in accordance with the Company's policies. At December 31, 1995, the Company had a net receivable of principal and interest on franchise loans from SPTL of $579,000. In July 1995, the Company sold approximately $3.8 million of franchise loan servicing rights to SPTL, resulting in a gain of $31,000. The Company also had a receivable from ICII, a member, of $924,000 bearing interest at 10.4% as of December 31, 1995 and a payable of $526,000 relating to ICII's residual interest in the Franchise Loan Receivable Trust 1995-B (FLRT 1995-B). The Company provides subservicing on a contractual basis for servicing rights owned by SPTL. At June 30, 1997, and December 31, 1996 and 1995, there were approximately $151 million, $183 million and $262 million of loans outstanding underlying this subservicing arrangement. The Company receives approximately 13 basis points for providing such services. The Company purchased $55.3 million in franchise loans at a $6.0 million premium from SPTL on December 29, 1995. These franchise loans were purchased by SPTL from Greenwich on November 30, 1995. The Company purchased $15.5 million in franchise loans at par value from SPTL on June 26, 1997. These franchise loans were purchased by SPTL from the Company in 1996 and 1997. SPTL has provided warehouse facilities for the Company under which the loans are closed under SPTL's name with the intent to resell the franchise loans to the Company for inclusion into securitizations. The rate charged is equivalent to the rate earned on the franchise loans less approximately 50 basis points, or 9.17%. As of June 30, 1997, December 31, 1996 and December 31, 1995, the Company had an outstanding balance of $0, $25.2 million and $47.0 million, respectively, with respect to this facility. During the six months ended June 30, 1997, the year ended December 31, 1996 and the six months ended December 31, 1995, the Company paid SPTL $0 million, $10.3 million and $1.2 million in interest expense associated with this facility. At June 30, 1997, loans originated by the Company for SPTL totaled approximately $104.3 million. At June 30, 1997 and December 31, 1996, the Company had borrowings from ICII outstanding of $10.0 million and $17.7 million, respectively. The Company pays interest at 12% on the outstanding balance. The Company pays to ICII monthly 15 basis points on the Company's non-affiliate borrowing commitments in consideration for ICII's guaranty of such borrowings. (17) OTHER INVESTMENTS At June 30, 1997, and December 31, 1996, the Company had approximately $4.4 million of equity investments included in other assets. These investments represent interests in limited liability companies ("LLCs") or limited partnerships (collectively, the "investees") which were formed to own and operate restaurant franchise concepts, and are owned through investor LLCs, the members of which consist of the Company, the Company's chief executive officer, and ICII. Member ownership percentages in the investor LLCs range from 50% to 100% for the Company, from 0% to 0.33% for the chief executive officer, and from 0.67% to 50% for ICII. The investor LLC's ownership interests in the investees range from 32.5% to 49.0%. A director of the Company owns 60% of one investee and the investor LLC owns 40%; such investor LLC is owned 50% by the Company and 50% by ICII. Accordingly, the Company's ownership interests in the investees (through the investor LLCs) range from 20% to 48.5%. These investments are accounted for by the Company under the equity method. Management has determined that the Company's equity in the net income or loss of the investees is not material at this time. F-17 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The June 30, 1997, unpaid balances of loans to the investees made by the Company total approximately $100.4 million of which $80.3 million has been securitized and sold and $20.1 million is included in loans held for sale. At June 30, 1997, none of these loans was past due. Under the terms of the partnership and investment agreements, the investor LLCs are committed under certain circumstances to make additional loans and capital contributions of approximately $5.6 million. (18) FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments include interest bearing deposits, securities available for sale, loans and leases held for sale, futures contracts used to hedge loans held for sale, retained interest in loan securitizations, receivables from and payables to affiliates, borrowings and bonds. Fair value estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair value estimates presented do not include the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The carrying values of interest-bearing deposits and receivables from and payables to affiliates and members approximate fair value due to their short- term nature. The fair value of securities available for sale was based on discounted cash flow. The fair value of loans and leases held for sale is estimated by discounting expected future cash flows at an estimated market rate of interest. A market rate of interest is estimated based on the AAA Corporate Bond Rate, adjusted for credit risk and the Company's cost to administer such loans. The fair value of retained interest in loan securitizations was estimated by discounting future cash flows using rates that an unaffiliated third-party purchaser would require on instruments with similar terms and remaining maturities. The fair values of borrowings and bonds was estimated by discounting cash flows at interest rates for debt having similar credit ratings and maturities. The estimated fair values of the Company's financial instruments are as follows (in thousands):
1997 1996 1995 ------------------- ------------------- ------------------- CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- -------- ---------- Assets: Interest-bearing deposits............. $ 2,667 $ 2,667 $ 2,594 $ 2,594 $ -- $ -- Loans and leases held for sale............. 208,014 208,014 98,915 102,872 181,254 185,165 Retained interest in loan securitizations...... 7,002 7,002 6,908 6,908 -- -- Securities available for sale............. 2,581 2,581 39,349 39,349 -- -- Receivable due from affiliate............ -- -- -- -- 579 579 Receivable due from member............... -- -- -- -- 924 924 Liabilities: Payable due to Imperial Credit Industries, Inc...... $ 9,997 $ 9,997 $ 17,728 $ 17,728 $ -- $ -- Borrowings............ 195,922 195,922 125,240 125,240 69,637 69,637 Bonds................. -- -- -- -- 111,995 111,995
F-18 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (19) COMMITMENTS AND CONTINGENCIES Leases Minimum rental commitments under noncancelable operating leases at June 30, 1997, were as follows (in thousands): Six months ended December 31, 1997................................. $ 406 Year ended December 31,: 1998............................................................. 713 1999............................................................. 724 2000............................................................. 706 2001............................................................. 639 ------ Thereafter....................................................... 196 ------ Total............................................................ $3,384 ======
Rent expense for the six months ending June 30, 1997, the year ended December 31, 1996 and the six months ending December 31, 1995 was $241,000, $292,000 and $94,000, respectively. Litigation The Company is involved in litigation arising from the normal course of business. The Company is currently involved in a dispute with a vendor regarding the value of services rendered. Management does not believe that an adverse settlement, if any, would have a material impact on the Company's financial condition or results of operations. The predecessor entity to the Company, and an officer of such entity and of the Company, among others, are named as defendants in De Wald et al. vs. Knyal et al. filed on November 15, 1996 in the Los Angeles Superior Court. The complaint seeks an accounting, monetary and punitive damages for alleged breach of contract, breach of fiduciary duty, breach of implied covenant of good faith and fair dealing and fraud arising from an alleged business relationship. The Company has not been named as a defendant in this lawsuit. Financial Guarantees The Company, among other subsidiaries of ICII, has jointly and severally and fully and unconditionally guaranteed ICII's $200 million 9.875% senior notes due January 15, 2007 and ICII's $70 liquidation amount of remarketed par securities. Such guarantees will terminate upon the deconsolidation of the Company in the financial statements of ICII, effective upon the closing of the Company's initial public offering. Loan Servicing Related fiduciary funds held in trust for investors in non-interest bearing accounts at unaffiliated financial institutions totalled $24,000 as of June 30, 1997. These funds are segregated in special bank accounts and are held as deposits in such financial institutions. Loan Commitments As of June 30, 1997, the Company had open short-term lending commitments amounting to approximately $76.2 million in process subject to credit approval. There is no exposure to credit loss in this type of commitment until the loans are funded. Interest rate risk is mitigated by the use of hedging strategies applied to each loan at the time of funding. Equity Investments As of June 30, 1997 the Company was obligated to make up to an additional $5.6 million in loans and equity investments under existing arrangements. See Note 17. F-19 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- No dealer, salesman or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offer made in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company, any of the Underwriters or the Selling Stockholders. This Prospectus does not constitute an offer to sell or a solicitation of, any offer to buy any shares of Common Stock other than the Shares of Common Stock to which it relates or an offer to, or a solicitation of, any person in any jurisdiction where such an offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any time subsequent to the date hereof. ------------------- TABLE OF CONTENTS -------------------
Page ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 8 The Reorganization....................................................... 23 Use of Proceeds.......................................................... 24 LLC Distributions........................................................ 24 Dividend Policy.......................................................... 24 Dilution................................................................. 25 Capitalization........................................................... 26 Selected Financial Data.................................................. 27 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 29 Business................................................................. 36 Management............................................................... 54 Certain Transactions..................................................... 61 Principal and Selling Stockholders....................................... 65 Description of Capital Stock............................................. 66 Shares Eligible for Future Sale.......................................... 68 Underwriting............................................................. 69 Legal Matters............................................................ 71 Experts.................................................................. 71 Available Information.................................................... 71 Index to Financial Statements............................................ F-1
Until , 1997 (25 days after the date of this Prospectus) all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 8,750,000 SHARES [LOGO OF FRANCHISE MORTGAGE ACCEPTANCE COMPANY] COMMON STOCK ---------------- PROSPECTUS ---------------- MONTGOMERY SECURITIES CREDIT SUISSE FIRST BOSTON PAINEWEBBER INCORPORATED , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The Registrant estimates that expenses in connection with the offering described in this registration statement will be as follows:
AMOUNT TO BE PAID --------- Securities and Exchange Commission registration fee.............. $ 51,838 NASD filing fee.................................................. 17,606 Nasdaq National Market Listing fee............................... 50,000 Printing expenses................................................ 150,000 Accounting fees and expenses..................................... 150,000 Legal fees and expenses.......................................... 200,000 Fees and expenses (including legal fees) for qualifications under state securities laws........................................... 50,000 Transfer agent's fees and expenses............................... 10,000 Miscellaneous.................................................... 70,556 -------- Total........................................................ $750,000* ========
- ------- * Of this amount, $295,000 is payable by the Selling Stockholders. All amounts except the Securities and Exchange Commission registration fee and the NASD filing fee are estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law permits the Registrant to, and Article 8 of the Certificate of Incorporation provides that the Registrant may, indemnify each 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, by reason of the fact that he is or was, or has agreed to become, a director or officer of the Registrant, or is or was servicing, or has agreed to serve, at the request of the Registrant, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES On June 30, 1995, Imperial Credit Industries, Inc. ("ICII") acquired from Greenwich Capital Financial Products Inc. ("Greenwich") certain assets of the Franchise Mortgage Acceptance Company division of Greenwich (the "Division") including all of Greenwich's rights under certain servicing contracts (the "FMAC Servicing Contracts") entered into by the Division and a $410,000 obligation owed by Wayne L. Knyal, the President and Chief Executive Officer of the Registrant, to Greenwich. Concurrent with the closing of the transactions described above, ICII entered into an operating agreement with Mr. Knyal for the formation of Franchise Mortgage LLC. In connection with the acquisition, Franchise Mortgage LLC or its affiliates assumed certain liabilities related to the FMAC Servicing Contracts. Franchise Mortgage LLC was formed to originate, securitize and service franchise loans. Under the terms of the operating agreement, in exchange for a 66.7% ownership interest in Franchise Mortgage LLC, ICII was obligated to contribute to Franchise Mortgage LLC $1.3 million in cash and all of the assets purchased from Greenwich. In exchange for a 33.3% ownership interest in Franchise Mortgage LLC, Knyal caused his wholly owned company, FLRT, Inc., to contribute to Franchise Mortgage LLC all of its rights under the FLRT Servicing Contracts. Immediately prior to this Offering, Franchise Mortgage LLC will merge into the Registrant (the "Reorganization"). As a result of the Reorganization, immediately prior to this Offering ICII will own 66.7% and FLRT, Inc. will own 33.3%, respectively, of the outstanding shares of capital stock of the Registrant representing 14,591,667 and 7,295,833 shares, respectively. II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS 1.1 Form of Underwriting Agreement 3.1 Articles of Organization of Franchise Mortgage Acceptance Company LLC 3.2 Operating Agreement of Franchise Mortgage Acceptance Company LLC 3.3 Articles of Incorporation of Franchise Mortgage Acceptance Company, a Delaware corporation 3.4* Bylaws of Franchise Mortgage Acceptance Company, a Delaware corporation 4.1* Specimen Stock Certificate 5.1* Opinion of Freshman, Marantz, Orlanski, Cooper & Klein 10.1 Form of 1997 Stock Option Plan and Form of Option Agreement 10.2* Form of Employment Agreement by and between the Registrant and Wayne L. Knyal 10.3 Form of Services Agreement by and between the Registrant and Imperial Credit Industries, Inc. 10.4(a) First Amendment to Office Lease dated November 26, 1996 by and between the Registrant and Delta Towers Joint Venture (b) Office Lease dated August 24, 1995 by and between the Registrant and Delta Towers Joint Venture 10.5(a) Letter dated July 15, 1996 from Imperial Credit Industries, Inc. to Fawn Associates Limited Liability Company consenting to First Amendment to Lease dated as of March 22, 1996 by and between the Registrant and Fawn Associates Limited Liability Company (b) First Amendment to Lease dated as of March 22, 1996 by and between the Franchise Mortgage Acceptance Company LLC and Fawn Associates Limited Liability Company (c) Guaranty Agreement dated as of March 22, 1996 by and between Imperial Credit Industries, Inc. and Fawn Associates Limited Partnership (d) Lease dated as of March 22, 1996 by and between Franchise Mortgage Acceptance Company LLC and Fawn Associates Limited Liability Company 10.6(a) Letter of Intent dated August 19, 1996 by and between Franchise Mortgage Acceptance Company LLC and CS First Boston Mortgage Capital Corp. (b) Master Repurchase Agreement dated as of October 10, 1996 by and between Franchise Mortgage Acceptance Company LLC and CS First Boston Mortgage Capital Corp. (c) Tri-party Custodial Agreement for Contracts dated October 10, 1996 by and among the Franchise Mortgage Acceptance Company LLC, CS First Boston Mortgage Capital Corp. and First Bank National Association (d) First Amendment to Repurchase Agreement and Custodial Agreement dated May 1, 1997 by and among the Franchise Mortgage Acceptance Company LLC, Credit Suisse First Boston Mortgage Capital LLC and First Bank National Association 10.7 Master Loan Sale Agreement, dated August 23, 1995 by and between the Franchise Mortgage Acceptance Company LLC and Southern Pacific Thrift & Loan Association 10.8 Master Participation Agreement dated November 22, 1995 by and among the Franchise Mortgage Acceptance Company LLC, Imperial Credit Industries, Inc., Certain Financial Institutions and Banco Santander, New York Branch 10.9 Credit Agreement dated as of February 28, 1997 by and among Franchise Mortgage Acceptance Company LLC and Sanwa Bank California 10.10* Form of Registration Rights Agreement by and among the Registrant, Imperial Credit Industries, Inc. and Wayne L. Knyal 23.1 Consent of KPMG Peat Marwick LLP 23.2* Consent of Freshman, Marantz, Orlanski, Cooper & Klein (contained in Exhibit 5.1) 24.1 Power of Attorney (included on signature page of Registration Statement)
-------- * To be filed by amendment II-2 ITEM 17. UNDERTAKINGS (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10 (a) (3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; and (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned registrant hereby undertakes to provide to the Underwriter at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. (c) insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (d) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it is declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE OF CALIFORNIA ON AUGUST 27, 1997. Franchise Mortgage Acceptance Company /s/ Wayne L. Knyal By: _________________________________ WAYNE L. KNYAL, PRESIDENT, CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) POWER OF ATTORNEY We, the undersigned managers and officers of Franchise Mortgage Acceptance Company LLC, do hereby constitute and appoint Wayne L. Knyal and Raedelle Walker, or either of them, our true and lawful attorneys and agents, to do any and all acts and things in our names in the capacities indicated below, which said attorneys and agents, or either of them, may deem necessary or advisable to enable said corporation to comply with the Securities Act of 1933, and as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but without limitation, power and authority to sign for us or any of us in our names and in the capacities indicated below, any and all amendments (including post-effective amendment) to this Registration Statement, or any related registration statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended; and we do hereby ratify and confirm all that the said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITY INDICATED ON AUGUST 27, 1997. SIGNATURE TITLE /s/ Wayne L. Knyal President, Chief Executive Officer - ------------------------------------- and Director (Principal Executive WAYNE L. KNYAL Officer) /s/ Raedelle Walker Chief Financial Officer Executive - ------------------------------------- Vice President (Principal RAEDELLE WALKER Accounting Officer) /s/ H. Wayne Snavely Director - ------------------------------------- H. WAYNE SNAVELY /s/ G. Louis Graziadio, III Director - ------------------------------------- G. LOUIS GRAZIADIO, III /s/ Perry A. Lerner Director - ------------------------------------- PERRY A. LERNER /s/ Michael A. Matkins Director - ------------------------------------- MICHAEL A. MATKINS /s/ Ronald V. Davis Director - ------------------------------------- RONALD V. DAVIS /s/ John E. Martin Director - ------------------------------------- JOHN E. MARTIN /s/ Richard J. Loughlin Director - ------------------------------------- RICHARD J. LOUGHLIN II-4 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 1.1 Form of Underwriting Agreement 3.1 Articles of Organization of Franchise Mortgage Acceptance Company LLC 3.2 Operating Agreement of Franchise Mortgage Acceptance Company LLC 3.3 Articles of Incorporation of Franchise Mortgage Acceptance Company, a Delaware corporation 3.4* Bylaws of Franchise Mortgage Acceptance Company, a Delaware corporation 4.1* Specimen Stock Certificate 5.1* Opinion of Freshman, Marantz, Orlanski, Cooper & Klein 10.1 Form of 1997 Stock Option Plan and Form of Option Agreement 10.2* Form of Employment Agreement by and between the Registrant and Wayne L. Knyal 10.3 Form of Services Agreement by and between the Registrant and Imperial Credit Industries, Inc. 10.4(a) First Amendment to Office Lease dated November 26, 1996 by and between the Registrant and Delta Towers Joint Venture (b) Office Lease dated August 24, 1995 by and between the Registrant and Delta Towers Joint Venture 10.5(a) Letter dated July 15, 1996 from Imperial Credit Industries, Inc. to Fawn Associates Limited Liability Company consenting to First Amendment to Lease dated as of March 22, 1996 by and between the Registrant and Fawn Associates Limited Liability Company (b) First Amendment to Lease dated as of March 22, 1996 by and between the Franchise Mortgage Acceptance Company LLC and Fawn Associates Limited Liability Company (c) Guaranty Agreement dated as of March 22, 1996 by and between Imperial Credit Industries, Inc. and Fawn Associates Limited Partnership (d) Lease dated as of March 22, 1996 by and between Franchise Mortgage Acceptance Company LLC and Fawn Associates Limited Liability Company 10.6(a) Letter of Intent dated August 19, 1996 by and between Franchise Mortgage Acceptance Company LLC and CS First Boston Mortgage Capital Corp. (b) Master Repurchase Agreement dated as of October 10, 1996 by and between Franchise Mortgage Acceptance Company LLC and CS First Boston Mortgage Capital Corp. (c) Tri-party Custodial Agreement for Contracts dated October 10, 1996 by and among the Franchise Mortgage Acceptance Company LLC, CS First Boston Mortgage Capital Corp. and First Bank National Association (d) First Amendment to Repurchase Agreement and Custodial Agreement dated May 1, 1997 by and among the Franchise Mortgage Acceptance Company LLC, Credit Suisse First Boston Mortgage Capital LLC and First Bank National Association 10.7 Master Loan Sale Agreement, dated August 23, 1995 by and between the Franchise Mortgage Acceptance Company LLC and Southern Pacific Thrift & Loan Association 10.8 Master Participation Agreement dated November 22, 1995 by and among the Franchise Mortgage Acceptance Company LLC, Imperial Credit Industries, Inc., Certain Financial Institutions and Banco Santander, New York Branch 10.9 Credit Agreement dated as of February 28, 1997 by and among Franchise Mortgage Acceptance Company LLC and Sanwa Bank California 10.10* Form of Registration Rights Agreement by and among the Registrant, Imperial Credit Industries, Inc. and Wayne L. Knyal 23.1 Consent of KPMG Peat Marwick LLP 23.2* Consent of Freshman, Marantz, Orlanski, Cooper & Klein (contained in Exhibit 5.1) 24.1 Power of Attorney (included on signature page of Registration Statement)
-------- * To be filed by amendment EX-1.1 2 FORM OF UNDERWRITING AGREEMENT MONTGOMERY SECURITIES FORM UNDERWRITING AGREEMENT [Draft of August 15, 1997] [Execution Copy] [Conformed Copy] 10,062,500 SHARES FRANCHISE MORTGAGE ACCEPTANCE COMPANY COMMON STOCK UNDERWRITING AGREEMENT DATED OCTOBER ___, 1997 TABLE OF CONTENTS SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SELLING STOCKHOLDERS...................................... 2 A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND ICII...................................................... 2 Compliance with Registration Requirements................................................................ 2 Offering Materials Furnished to Underwriters............................................................. 3 Distribution of Offering Material By the Company......................................................... 3 The Underwriting Agreement............................................................................... 3 Authorization of the Common Shares....................................................................... 3 No Applicable Registration or Other Similar Rights....................................................... 4 No Material Adverse Change............................................................................... 4 Independent Accountants.................................................................................. 4 Preparation of the Financial Statements.................................................................. 4 Incorporation and Good Standing of the Company and its Subsidiaries...................................... 4 Capitalization and Other Capital Stock Matters........................................................... 5 Stock Exchange Listing................................................................................... 5 Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required............... 5 No Material Actions or Proceedings....................................................................... 6 Intellectual Property Rights............................................................................. 6 All Necessary Permits, etc............................................................................... 7 Title to Properties...................................................................................... 7 Tax Law Compliance....................................................................................... 7 Company Not an "Investment Company"...................................................................... 7 Insurance................................................................................................ 7 No Price Stabilization or Manipulation................................................................... 8 Related Party Transactions............................................................................... 8 No Unlawful Contributions or Other Payments.............................................................. 8 Company's Accounting System.............................................................................. 8 Compliance with Environmental Laws....................................................................... 8 ERISA Compliance......................................................................................... 9 B. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS.................................................. 10 The Underwriting Agreement............................................................................... 10 The Custody Agreement and Power of Attorney.............................................................. 10 Title to Common Shares to be Sold; All Authorizations Obtained........................................... 10 Delivery of the Common Shares to be Sold................................................................. 10 Non-Contravention; No Further Authorizations or Approvals Required....................................... 10 No Registration or Other Similar Rights.................................................................. 11 No Further Consents, etc................................................................................. 11 Disclosure Made by Such Selling Stockholder in the Prospectus............................................ 11 No Price Stabilization or Manipulation................................................................... 11 Confirmation of Company Representations and Warranties................................................... 11 SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES............................................................ 12 THE FIRM COMMON SHARES.......................................................................................... 12
i THE FIRST CLOSING DATE.......................................................................................... 12 The Optional Common Shares; the Second Closing Date...................................................... 12 Public Offering of the Common Shares..................................................................... 13 PAYMENT FOR THE COMMON SHARES................................................................................... 13 DELIVERY OF THE COMMON SHARES................................................................................... 14 DELIVERY OF PROSPECTUS TO THE UNDERWRITERS...................................................................... 14 SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY......................................................................... 14 A. COVENANTS OF THE COMPANY.................................................................................... 14 Representatives's Review of Proposed Amendments and Supplements.......................................... 14 Securities Act Compliance................................................................................ 15 Amendments and Supplements to the Prospectus and Other Securities Act Matters............................ 15 Copies of any Amendments and Supplements to the Prospectus............................................... 15 Blue Sky Compliance...................................................................................... 15 Use of Proceeds.......................................................................................... 16 Transfer Agent........................................................................................... 16 Earnings Statement....................................................................................... 16 Periodic Reporting Obligations........................................................................... 16 Agreement Not To Offer or Sell Additional Securities..................................................... 16 Future Reports to the Representatives.................................................................... 16 B. COVENANTS OF THE SELLING STOCKHOLDERS....................................................................... 17 Agreement Not to Offer or Sell Additional Securities..................................................... 17 Delivery of Forms W-8 and W-9............................................................................ 17 SECTION 4. PAYMENT OF EXPENSES......................................................................................... 17 SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS........................................................... 18 Accountants' Comfort Letter.............................................................................. 18 Compliance with Registration Requirements; No Stop Order; No Objection from NASD......................... 19 No Material Adverse Change or Ratings Agency Change...................................................... 19 Opinion of Counsel for the Company....................................................................... 19 Opinion of Counsel for the Underwriters.................................................................. 19 Company Officers' Certificate............................................................................ 20 Bring-down Comfort Letter................................................................................ 20 Opinion of Counsel for the Selling Stockholders.......................................................... 20 Selling Stockholders' Certificate........................................................................ 20 Selling Stockholders' Documents.......................................................................... 21 Additional Documents..................................................................................... 21 SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES..................................................................... 21 SECTION 7. EFFECTIVENESS OF THIS AGREEMENT............................................................................. 22 SECTION 8. INDEMNIFICATION............................................................................................. 22
ii Indemnification of the Underwriters...................................................................... 22 Indemnification of the Company, its Directors and Officers............................................... 23 Notifications and Other Indemnification Procedures....................................................... 24 Settlements.............................................................................................. 25 SECTION 9. CONTRIBUTION................................................................................................ 25 SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITER........................................................... 26 SECTION 11. TERMINATION OF THIS AGREEMENT............................................................................... 27 SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY......................................................... 28 SECTION 13. NOTICES..................................................................................................... 28 SECTION 14. SUCCESSORS.................................................................................................. 29 SECTION 15. PARTIAL UNENFORCEABILITY.................................................................................... 29 SECTION 16. GOVERNING LAW PROVISIONS.................................................................................... 29 SECTION 17. FAILURE OF ONE OR MORE OF THE SELLING STOCKHOLDERS TO SELL AND DELIVER COMMON SHARES........................ 30 SECTION 18. GENERAL PROVISIONS.......................................................................................... 30 SCHEDULE A ............................................................................................................ 1 SCHEDULE B ............................................................................................................ 1
iii UNDERWRITING AGREEMENT October __, 1997 MONTGOMERY SECURITIES CREDIT SUISSE FIRST BOSTON PAINEWEBBER INCORPORATED As Representatives of the several Underwriters c/o MONTGOMERY SECURITIES 600 Montgomery Street San Francisco, California 94111 Ladies and Gentlemen: INTRODUCTORY. Franchise Mortgage Acceptance Company, a Delaware corporation (the "Company"), proposes to issue and sell to the several underwriters named in Schedule A (the "Underwriters") an aggregate of 5,312,500 shares of its Common Stock, par value $ .001 per share (the "Common Stock"); and the stockholders of the Company named in Schedule B (collectively, the "Selling Stockholders") severally propose to sell to the Underwriters an aggregate of 3,437,500 shares of Common Stock. The 5,312,500 shares of Common Stock to be sold by the Company and the 3,437,500 shares of Common Stock to be sold by the Selling Stockholders are collectively called the "Firm Common Shares". In addition, the Company has granted to the Underwriters an option to purchase up to an additional 796,875 shares of Common Stock and the Selling Stockholders have severally granted to the Underwriters an option to purchase up to an additional 515,625 shares of Common Stock, each Selling Stockholder selling up to the amount set forth opposite such Selling Stockholder's name in Schedule B, all as provided in Section 2. The additional 796,875 shares to be sold by the Company and the additional 515,625 shares to be sold by the Selling Stockholders pursuant to such option are collectively called the "Optional Common Shares". The Firm Common Shares and, if and to the extent such option is exercised, the Optional Common Shares are collectively called the "Common Shares." Montgomery Securities, Credit Suisse First Boston and PaineWebber Incorporated have agreed to act as representatives of the several Underwriters (in such capacity, the "Representatives") in connection with the offering and sale of the Common Shares. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (File No. 333-______), which contains a form of prospectus to be used in connection with the public offering and sale of the Common Shares. Such registration statement, as amended, including the financial statements, exhibits and schedules thereto, in the form in which it was declared effective by the Commission under the Securities Act of 1933 and the rules and regulations promulgated thereunder (collectively, the "Securities Act"), including any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is called the "Registration Statement." Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration Statement," and from and after the date and time of filing of the Rule 462(b) Registration Statement the term "Registration Statement" shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first used by the Underwriters to confirm sales of the Common Shares, is called the "Prospectus;" provided, however, if the Company has, with the consent of Montgomery Securities, elected to rely upon Rule 434 under the Securities Act, the term "Prospectus" shall mean the Company's prospectus subject to completion (each, a "preliminary prospectus") dated October __, 1997 (such preliminary prospectus is called the "Rule 434 preliminary prospectus"), together with the applicable term sheet (the "Term Sheet") prepared and filed by the Company with the Commission under Rules 434 and 424(b) under the Securities Act and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). The Company is a newly formed Delaware corporation that has been incorporated and organized for the purpose of succeeding to the business of Franchise Mortgage Acceptance Company, LLC, a California limited liability company (the "LLC"). Immediately prior to the sale of the Firm Common Shares, the LLC shall merge with and into the Company with the Company continuing its existence as the surviving entity of the merger, and all of the assets and liabilities of the LLC shall be assigned to and assumed by the the Company. Except as set forth in Sections 6, 7, 8, 9, 12 and 13 below, all references herein to the Company shall mean the Company and its predecessors, including, without limitation, the LLC. The Company and each of the Selling Stockholders hereby confirm their respective agreements with the Underwriters as follows: SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND SELLING STOCKHOLDERS. A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND ICII. Each of the Company and Imperial Credit Industries, Inc., a California corporation ("ICII"), hereby, jointly and severally, represents, warrants and covenants to each Underwriter as follows: (a) Compliance with Registration Requirements The Registration Statement has been declared effective by the Commission under the Securities Act, and any Rule 462(b) Registration Statement will become effective under the Securities Act upon the filing thereof with the Commission on October __, 1997. The Company has complied to the Commission's satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company or ICII, are contemplated or threatened by the Commission. Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except 2 as may be permitted by Regulation S-T under the Securities Act), was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Common Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, at the time it became effective and at all subsequent times, complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, as amended or supplemented, as of its date and at all subsequent times, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, or any post- effective amendment thereto, or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by the Representatives expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed as required. (b) Offering Materials Furnished to Underwriters. The Company has delivered to the Representatives three complete manually signed copies of the Registration Statement and of each consent and certificate of experts filed as a part thereof, and conformed copies of the Registration Statement (without exhibits) and preliminary prospectuses and the Prospectus, as amended or supplemented, in such quantities and at such places as the Representatives have reasonably requested for each of the Underwriters. (c) Distribution of Offering Material By the Company. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined below) and the completion of the Underwriters' distribution of the Common Shares, any offering material in connection with the offering and sale of the Common Shares other than a preliminary prospectus, the Prospectus or the Registration Statement. (d) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (e) Authorization of the Common Shares. The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully paid and nonassessable. 3 (f) No Applicable Registration or Other Similar Rights. There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement. (g) No Material Adverse Change. Except as otherwise disclosed in the Prospectus, subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity (any such change is called a "Material Adverse Change"); (ii) the Company and its subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company or, except for dividends paid to the Company or other subsidiaries, any of its subsidiaries on any class of capital stock or repurchase or redemption by the Company or any of its subsidiaries of any class of capital stock. (h) Independent Accountants. KPMG Peat Marwick LLP, who have expressed their opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent public or certified public accountants as required by the Securities Act and the Exchange Act. (i) Preparation of the Financial Statements. The financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus present fairly the consolidated financial position of the Company and its subsidiaries as of and at the dates indicated and the results of their operations and cash flows for the periods specified. Such financial statements have been prepared in conformity with generally accepted accounting principles as applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements or supporting schedules are required to be included in the Registration Statement. The financial data set forth in the Prospectus under the captions "Prospectus Summary--Summary Financial and Other Data," "Selected Financial Data" and "Capitalization" fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained in the Registration Statement. The pro forma financial data set forth in the Prospectus under such captions and elsewhere in the Prospectus and Registration Statement fairly present the information set forth therein on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. (j) Incorporation and Good Standing of the Company and its Subsidiaries. Each of the Company and its subsidiaries has been duly incorporated or formed, as the case may be, and is validly existing as a corporation or limited liability company, as the case may be, in good standing under the laws of the jurisdiction of its incorporation or formation and has power and authority to own, lease and operate its properties and to conduct its business as described in the 4 Prospectus and, in the case of the Company, to enter into and perform its obligations under this Agreement. Each of the Company and each subsidiary is duly qualified as a foreign corporation or limited liability company, as the case may be, to transact business and is in good standing in the State of California and each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions (other than the State of California) where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. All of the issued and outstanding capital stock or membership interests of each subsidiary has been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance or claim. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 21 to the Registration Statement. (k) Capitalization and Other Capital Stock Matters. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Prospectus or upon exercise of outstanding options described in the Prospectus). The Common Stock (including the Common Shares) conforms in all material respects to the description thereof contained in the Prospectus. All of the issued and outstanding shares of Common Stock (including the shares of Common Stock owned by Selling Stockholders) have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with federal and state securities laws. None of the outstanding shares of Common Stock were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of its subsidiaries other than those accurately described in the Prospectus. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (l) Stock Exchange Listing. The Common Shares have been approved for inclusion on the Nasdaq National Market, subject only to official notice of issuance. (m) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required. Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or is in default (or, with the giving of notice or lapse of time, would be in default) ("Default") under any indenture, mortgage, loan or credit agreement, note, contract, franchise, lease or other instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound (including, without limitation, the Company's [list of ICII indentures that Company guarantees and Company credit facilities to come]), or to which any of the property or assets of the Company or any of its subsidiaries is subject (each, an "Existing Instrument"), except for such Defaults as would not, individually or in the aggregate, result in a Material Adverse 5 Change. The Company's execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Prospectus (i) have been duly authorized by all necessary action and will not result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary of the Company, (ii) will not conflict with or constitute a breach of, or Default or a Debt Repayment Triggering Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Company's subsidiaries pursuant to, or require the consent of any other part to, any Existing Instrument, except for such conflicts, breaches, Defaults, liens, charges or encumbrances as would not, individually or in the aggregate, result in a Material Adverse Change and (iii) will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company or any subsidiary of the Company. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental or regulatory authority or agency, is required for the Company's execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Prospectus, except such as have been obtained or made and are in full force and effect under the Securities Act, applicable state securities or blue sky laws and from the National Association of Securities Dealers, Inc. (the "NASD"). As used herein, a "Debt Repayment Triggering Event" means any event or condition which gives, or with the giving of notice or lapse of time would give, the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of the Company's subsidiaries. (n) No Material Actions or Proceedings. Except as otherwise disclosed in the Prospectus, there are no legal or governmental actions, suits or proceedings pending or, to the best of each of the Company's or ICII's knowledge, threatened (i) against or affecting the Company or any of its subsidiaries, (ii) which has as the subject thereof any officer or director of, or property owned or leased by, the Company or any of its subsidiaries or (iii) relating to environmental or discrimination matters, where in any such case (A) there is a reasonable possibility that such action, suit or proceeding might be determined adversely to the Company or such subsidiary and (B) any such action, suit or proceeding, if so determined adversely, would reasonably be expected to result in a Material Adverse Change or adversely affect the consummation of the transactions contemplated by this Agreement. No material labor dispute with the employees of the Company or any of its subsidiaries, exists or, to the best of each of the Company's or ICII's knowledge, is threatened or imminent. (o) Intellectual Property Rights. The Company and its subsidiaries own or possess sufficient trademarks, trade names, patent rights, copyrights, licenses, approvals, trade secrets and other similar rights (collectively, "Intellectual Property Rights") reasonably necessary to conduct their businesses as now conducted; and the expected expiration of any of such Intellectual Property Rights would not result in a Material Adverse Change. Neither the Company nor any of its subsidiaries has received any notice of infringement or conflict with asserted Intellectual Property Rights of others, which infringement or conflict, if the subject of an unfavorable decision, would result in a Material Adverse Change. 6 (p) All Necessary Permits, etc. The Company and each subsidiary possess such valid and current certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct their respective businesses, and neither the Company nor any subsidiary has received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could result in a Material Adverse Change. (q) Title to Properties. The Company and each of its subsidiaries has good and marketable title to all the properties and assets reflected as owned in the financial statements referred to in Section 1(A)(i) above (or elsewhere in the Prospectus), in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company or such subsidiary. The real property, improvements, equipment and personal property held under lease by the Company or any subsidiary are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company or such subsidiary. (r) Tax Law Compliance. The Company and its consolidated subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes, whether or not shown on such tax returns, required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1(A)(i) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its consolidated subsidiaries has not been finally determined. The LLC qualified as a partnership for federal and state tax purposes at the time of its formation and has maintained such qualification at all times since the time of its formation. (s) Company Not an "Investment Company The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and after receipt of payment for the Common Shares will not be, an "investment company" within the meaning of Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act. (t) Insurance. Each of the Company and its subsidiaries are insured by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for their businesses including, but not limited to, policies covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and earthquakes. The Company has no reason to believe that it or any subsidiary will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its 7 business as now conducted and at a cost that would not result in a Material Adverse Change. Neither of the Company nor any subsidiary has been denied any insurance coverage which it has sought or for which it has applied. (u) No Price Stabilization or Manipulation. The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Shares. (v) Related Party Transactions. There are no business relationships or related-party transactions involving the Company or any subsidiary or any other person required to be described in the Prospectus which have not been described as required. (y) No Unlawful Contributions or Other Payments. Neither the Company nor any of its subsidiaries nor, to the best of the Company's or ICII's knowledge, any employee or agent of the Company or any subsidiary, has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign office in violation of any law or of the character required to be disclosed in the Prospectus. (z) Company's Accounting System. The Company maintains a system of accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (aa) Compliance with Environmental Laws. Except as otherwise disclosed in the Prospectus or as would not, individually or in the aggregate, result in a Material Adverse Change (i) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign law or regulation relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum and petroleum products (collectively, "Materials of Environmental Concern"), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environment Concern (collectively, "Environmental Laws"), which violation includes, but is not limited to, noncompliance with any permits or other governmental authorizations required for the operation of the business of the Company or its subsidiaries under applicable Environmental Laws, or noncompliance with the terms and conditions thereof, nor has the Company or any of its subsidiaries received any written communication, whether from a governmental authority, citizens group, employee or otherwise, that alleges that the Company or any of its subsidiaries is in violation of any Environmental Law; (ii) there is no claim, action or cause of action filed with a 8 court or governmental authority, no investigation with respect to which the Company has received written notice, and no written notice by any person or entity alleging potential liability for investigatory costs, cleanup costs, governmental responses costs, natural resources damages, property damages, personal injuries, attorneys' fees or penalties arising out of, based on or resulting from the presence, or release into the environment, of any Material of Environmental Concern at any location owned, leased or operated by the Company or any of its subsidiaries, now or in the past (collectively, "Environmental Claims"), pending or, to the best of the Company's or ICII's knowledge, threatened against the Company or any of its subsidiaries or any person or entity whose liability for any Environmental Claim the Company or any of its subsidiaries has retained or assumed either contractually or by operation of law; and (iii) to the best of the Company's or ICII's knowledge, there are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge, presence or disposal of any Material of Environmental Concern, that reasonably could result in a violation of any Environmental Law or form the basis of a potential Environmental Claim against the Company or any of its subsidiaries or against any person or entity whose liability for any Environmental Claim the Company or any of its subsidiaries has retained or assumed either contractually or by operation of law. (bb) ERISA Compliance. The Company and its subsidiaries and any "employee benefit plan" (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, "ERISA")) established or maintained by the Company, its subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in all material respects with ERISA. "ERISA Affiliate" means, with respect to the Company or a subsidiary, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the "Code") of which the Company or such subsidiary is a member. No "reportable event" (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates. No "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates, if such "employee benefit plan" were terminated, would have any "amount of unfunded benefit liabilities" (as defined under ERISA). Neither the Company, its subsidiaries nor any of their ERISA Affiliates has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification. Any certificate signed by an officer of the Company or ICII and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company or ICII, as the case may be, to each Underwriter as to the matters set forth therein. 9 B. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS Each Selling Stockholder, severally and not jointly (except for the matters set forth in Sections 1(B)(c) and 1(B)(d) below with respect to the Common Shares to be sold by FLRT, Inc., as to which the representations and warranties of each Selling Stockholder are joint and several), hereby represents, warrants and covenants to each Underwriter as follows: (a) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (b) The Custody Agreement and Power of Attorney. Each of the (i) Custody Agreement signed by such Selling Stockholder and [ ], as custodian (the "Custodian"), relating to the deposit of the Common Shares to be sold by such Selling Stockholder (the "Custody Agreement") and (ii) Power of Attorney appointing certain individuals named therein as such Selling Stockholder's attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set forth therein relating to the transactions contemplated hereby and by the Prospectus (the "Power of Attorney"), of such Selling Stockholder has been duly authorized, executed and delivered by such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (c) Title to Common Shares to be Sold; All Authorizations Obtained. Such Selling Stockholder has, and on the First Closing Date and the Second Closing Date (as defined below) will have, good and valid title to all of the Common Shares which may be sold by such Selling Stockholder pursuant to this Agreement on such date and the legal right and power, and all authorizations and approvals required by law and under its charter or by-laws or other organizational documents to enter into this Agreement and its Custody Agreement and Power of Attorney, to sell, transfer and deliver all of the Common Shares which may be sold by such Selling Stockholder pursuant to this Agreement and to comply with its other obligations hereunder and thereunder. (d) Delivery of the Common Shares to be Sold. Delivery of the Common Shares which are sold by such Selling Stockholder pursuant to this Agreement will pass good and valid title to such Common Shares, free and clear of any security interest, mortgage, pledge, lien, encumbrance or other claim. (e) Non-Contravention; No Further Authorizations or Approvals Required. The execution and delivery by such Selling Stockholder of, and the performance by such Selling Stockholder of its obligations under, this Agreement, the Custody Agreement and the Power of Attorney will not contravene or conflict with, result in a breach of, or constitute a Default under, or 10 require the consent of any other party to, the charter or by-laws or other organizational documents of such Selling Stockholder or any other agreement or instrument to which such Selling Stockholder is a party or by which it is bound or under which it is entitled to any right or benefit, any provision of applicable law or any judgment, order, decree or regulation applicable to such Selling Stockholder of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over such Selling Stockholder. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental authority or agency, is required for the consummation by such Selling Stockholder of the transactions contemplated in this Agreement, except such as have been obtained or made and are in full force and effect under the Securities Act, applicable state securities or blue sky laws and from the NASD. (f) No Registration or Other Similar Rights. Such Selling Stockholder does not have any registration or other similar rights to have any equity or debt securities registered for sale by the Company under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as are described in the Prospectus under "Shares Eligible for Future Sale". (g) No Further Consents, etc. No consent, approval or waiver is required under any instrument or agreement to which such Selling Stockholder is a party or by which it is bound or under which it is entitled to any right or benefit, in connection with the offering, sale or purchase by the Underwriters of any of the Common Shares which may be sold by such Selling Stockholder under this Agreement or the consummation by such Selling Stockholder of any of the other transactions contemplated hereby. (h) Disclosure Made by Such Selling Stockholder in the Prospectus. All information furnished by or on behalf of such Selling Stockholder in writing expressly for use in the Registration Statement and Prospectus is, and on the First Closing Date and the Second Closing Date will be, true, correct, and complete in all material respects, and does not, and on the First Closing Date and the Second Closing Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such information not misleading. Such Selling Stockholder confirms as accurate the number of shares of Common Stock set forth opposite such Selling Stockholder's name in the Prospectus under the caption "Principal and Selling Stockholders" (both prior to and after giving effect to the sale of the Common Shares). (i) No Price Stabilization or Manipulation. Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Shares. (j) Confirmation of Company Representations and Warranties. Such Selling Stockholder has no reason to believe that the representations and warranties of the Company contained in Section 1(A) hereof are not true and correct, is familiar with the Registration Statement and the Prospectus and has no knowledge of any material fact, condition or information not disclosed in the Registration Statement or the Prospectus which has had or may have a Material 11 Adverse Effect and is not prompted to sell shares of Common Stock by any information concerning the Company which is not set forth in the Registration Statement and the Prospectus. Any certificate signed by or on behalf of any Selling Stockholder and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by such Selling Stockholder to each Underwriter as to the matters covered thereby. SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES. The Firm Common Shares. Upon the terms herein set forth, (i) the Company agrees to issue and sell to the several Underwriters an aggregate of 5,312,500 Firm Common Shares and (ii) the Selling Stockholders, severally and not jointly, agree to sell to the several Underwriters an aggregate of 3,437,500 Firm Common Shares, with each Selling Stockholder selling the number of Firm Common Shares set forth opposite such Selling Stockholder's name on Schedule B. On the basis ---------- of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase from the Company and the Selling Stockholders the respective number of Firm Common Shares set forth opposite their names on Schedule A. The purchase price per Firm Common Share to be paid ---------- by the several Underwriters to the Company and the Selling Stockholders shall be $ ____ per share. The First Closing Date. Delivery of certificates for the Firm Common Shares to be purchased by the Underwriters and payment therefor shall be made at the offices of Montgomery Securities, 600 Montgomery Street, San Francisco, California (or such other place as may be agreed to by the Company and the Representatives) at 6:00 a.m. San Francisco time, on the fourth full business day (unless the pricing occurs at a time earlier that 4:30 p.m. San Francisco time, in which case delivery of such certificates and payment therefor shall be made on the third full business day) after the date of this Agreement, or such other time and date not later than 10:30 a.m. San Francisco time, on October ____, 1997 as the Representatives shall designate by notice to the Company (the time and date of such closing are called the "First Closing Date"). The Company and the Selling Stockholders hereby acknowledge that circumstances under which the Representatives may provide notice to postpone the First Closing Date as originally scheduled include, but are in no way limited to, any determination by the Company, the Selling Stockholders or the Representatives to recirculate to the public copies of an amended or supplemented Prospectus or a delay as contemplated by the provisions of Section 10. The Optional Common Shares; the Second Closing Date. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Company and the Selling Stockholders hereby grant an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of 1,312,500 Optional Common Shares from the Company and the Selling Stockholders at the purchase price per share to be paid by the Underwriters for the Firm Common Shares. The option granted hereunder is for use by the Underwriters solely in covering any over-allotments in connection with the sale and distribution of the Firm Common Shares. The option granted hereunder may be exercised at any time (but not more than once) upon notice by the Representatives to the Company and the 12 Selling Stockholders, which notice may be given at any time within 30 days from the date of this Agreement. Such notice shall set forth (i) the aggregate number of Optional Common Shares as to which the Underwriters are exercising the option, (ii) the names and denominations in which the certificates for the Optional Common Shares are to be registered and (iii) the time, date and place at which such certificates will be delivered (which time and date may be simultaneous with, but not earlier than, the First Closing Date; and in such case the term "First Closing Date" shall refer to the time and date of delivery of certificates for the Firm Common Shares and the Optional Common Shares). Such time and date of delivery, if subsequent to the First Closing Date, is called the "Second Closing Date" and shall be determined by the Representatives and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Optional Common Shares are to be purchased, (a) each Underwriter agrees, severally and not jointly, to purchase the number of Optional Common Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Optional Common Shares to be purchased as the number of Firm Common Shares set forth on Schedule A opposite the name of such ---------- Underwriter bears to the total number of Firm Common Shares and (b) the Company and each Selling Stockholder agrees, severally and not jointly, to sell the number of Optional Common Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Optional Common Shares to be sold as the number of Optional Common Shares set forth in Schedule B opposite the name of ---------- such Selling Stockholder (or, in the case of the Company, as the number of Optional Common Shares to be sold by the Company as set forth in the paragraph "Introductory" of this Agreement) bears to the total number of Optional Common Shares. The Representatives may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company and the Selling Stockholders. Public Offering of the Common Shares. The Representatives hereby advise the Company and the Selling Stockholders that the Underwriters intend to offer for sale to the public, as described in the Prospectus, their respective portions of the Common Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Representatives, in its sole judgment, has determined is advisable and practicable. Payment for the Common Shares. Payment for the Common Shares to be sold by the Company shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer of immediately available funds to the order of the Company. Payment for the Common Shares to be sold by the Selling Stockholders shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer of immediately available funds to the order of the Custodian. It is understood that the Representatives have been authorized, for their own accounts and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Common Shares and any Optional Common Shares the Underwriters have agreed to purchase. Montgomery Securities, individually and not as the Representative of the Underwriters, may (but shall not be obligated to) make payment for any Common Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for 13 the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. Each Selling Stockholder hereby agrees that (i) it will pay all stock transfer taxes, stamp duties and other similar taxes, if any, payable upon the sale or delivery of the Common Shares to be sold by such Selling Stockholder to the several Underwriters, or otherwise in connection with the performance of such Selling Stockholder's obligations hereunder and (ii) the Custodian is authorized to deduct for such payment any such amounts from the proceeds to such Selling Stockholder hereunder and to hold such amounts for the account of such Selling Stockholder with the Custodian under the Custody Agreement. Delivery of the Common Shares. The Company and the Selling Stockholders shall deliver, or cause to be delivered, to the Representatives for the accounts of the several Underwriters certificates for the Firm Common Shares to be sold by them at the First Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The Company and the Selling Stockholders shall also deliver, or cause to be delivered, to the Representatives for the accounts of the several Underwriters, certificates for the Optional Common Shares the Underwriters have agreed to purchase from them at the First Closing Date or the Second Closing Date, as the case may be, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The certificates for the Common Shares shall be in definitive form and registered in such names and denominations as the Representatives shall have requested at least two full business days prior to the First Closing Date (or the Second Closing Date, as the case may be) and shall be made available for inspection on the business day preceding the First Closing Date (or the Second Closing Date, as the case may be) at a location in New York City as the Representatives may designate. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m. on the second business day following the date the Common Shares are released by the Underwriters for sale to the public, the Company shall delivery or cause to be delivered copies of the Prospectus in such quantities and at such places as the Representatives shall request. SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY. A. COVENANTS OF THE COMPANY. The Company further covenants and agrees with each Underwriter as follows: (a) Representatives' Review of Proposed Amendments and Supplements. During such period beginning on the date hereof and ending on the later of the First Closing Date or such date, as in the opinion of counsel for the Underwriters, the Prospectus is no longer required by law to be delivered in connection with sales by an Underwriter or dealer (the "Prospectus Delivery Period"), prior to amending or supplementing the Registration Statement (including any registration statement filed under Rule 462(b) under the Securities Act) or the Prospectus (including any amendment or supplement through incorporation by reference to reports filed under the Exchange Act), the Company shall furnish to the Representatives for review a copy of each such proposed 14 amendment or supplement, and the Company shall not file any such proposed amendment or supplement to which the Representatives reasonably objects. (b) Securities Act Compliance. After the date of this Agreement, the Company shall promptly advise the Representatives in writing (i) of the receipt of any comments of, or requests for additional or supplemental information from, the Commission, (ii) of the time and date of any filing of any post-effective amendment to the Registration Statement or any amendment or supplement to any preliminary prospectus or the Prospectus, (iii) of the time and date that any post-effective amendment to the Registration Statement becomes effective and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of any proceedings to remove, suspend or terminate from listing or quotation the Common Stock from any securities exchange upon which the it is listed for trading or included or designated for quotation, or of the threatening or initiation of any proceedings for any of such purposes. If the Commission shall enter any such stop order at any time, the Company will use its best efforts to obtain the lifting of such order at the earliest possible moment. Additionally, the Company agrees that it shall comply with the provisions of Rules 424(b), 430A and 434, as applicable, under the Securities Act and will use its reasonable efforts to confirm that any filings made by the Company under such Rule 424(b) were received in a timely manner by the Commission. (c) Amendments and Supplements to the Prospectus and Other Securities Act Matters. If, during the Prospectus Delivery Period, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if in the opinion of the Representatives or counsel for the Underwriters it is otherwise necessary to amend or supplement the Prospectus to comply with law, the Company agrees to promptly prepare (subject to Section 3(A)(a) hereof), file with the Commission and furnish at its own expense to the Underwriters and to dealers, amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) Copies of any Amendments and Supplements to the Prospectus. The Company agrees to furnish the Representatives, without charge, during the Prospectus Delivery Period, as many copies of the Prospectus and any amendments and supplements thereto as the Representatives may request. (e) Blue Sky Compliance. The Company shall cooperate with the Representatives and counsel for the Underwriters to qualify or register the Common Shares for sale under (or obtain exemptions from the application of) state securities or blue sky laws or Canadian provincial Securities laws of those jurisdictions designated by the Representatives, shall comply with such laws and shall continue such qualifications, registrations and exemptions in effect so long as required for the distribution of the Common Shares. The Company shall not be required to qualify as a foreign corporation or to take any action that would subject it to general service of 15 process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. The Company will advise the Representatives promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Common Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company shall use its best efforts to obtain the withdrawal thereof at the earliest possible moment. (f) Use of Proceeds. The Company shall apply the net proceeds from the sale of the Common Shares sold by it in the manner described under the caption "Use of Proceeds" in the Prospectus. (g) Transfer Agent. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Common Stock. (h) Earnings Statement. As soon as practicable, the Company will make generally available to its security holders and to the Representatives an earnings statement (which need not be audited) covering the twelve-month period ending December 31, 1998 that satisfies the provisions of Section 11(a) of the Securities Act. (i) Periodic Reporting Obligations. During the Prospectus Delivery Period the Company shall file, on a timely basis, with the Commission and the Nasdaq National Market all reports and documents required to be filed under the Exchange Act. Additionally, the Company shall file with the Commission all reports on Form SR as may be required under Rule 463 under the Securities Act. (j) Agreement Not To Offer or Sell Additional Securities. During the period of 180 days following the date of the Prospectus, the Company will not, without the prior written consent of Montgomery Securities (which consent may be withheld at the sole discretion of Montgomery Securities), directly or indirectly, sell, offer, contract or grant any option to sell, pledge, transfer or establish an open "put equivalent position" within the meaning of Rule 16a- 1(h) under the Exchange Act, or otherwise dispose of or transfer, or announce the offering of, or file any registration statement under the Securities Act in respect of, any shares of Common Stock, options or warrants to acquire shares of the Common Stock or securities exchangeable or exercisable for or convertible into shares of Common Stock (other than as contemplated by this Agreement with respect to the Common Shares); provided, however, that the Company may issue shares of its Common Stock or options to purchase its Common Stock, or Common Stock upon exercise of options, pursuant to any stock option, stock bonus or other stock plan or arrangement described in the Prospectus, but only if the holders of such shares, options, or shares issued upon exercise of such options, agree in writing not to sell, offer, dispose of or otherwise transfer any such shares or options during such 180 day period without the prior written consent of Montgomery Securities (which consent may be withheld at the sole discretion of the Montgomery Securities). (k) Future Reports to the Representatives. During the period of five years hereafter the Company will furnish to the Representatives at 600 Montgomery Street, San Francisco, CA 94111 Attention: Kathy Smythe: (i) as soon as practicable after the end of each 16 fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock. B. COVENANTS OF THE SELLING STOCKHOLDERS. Each Selling Stockholder, severally and not jointly, further covenants and agrees with each Underwriter: (a) Agreement Not to Offer or Sell Additional Securities. Such Selling Stockholder will not, without the prior written consent of Montgomery Securities (which consent may be withheld in its sole discretion), directly or indirectly, sell, offer, contract or grant any option to sell (including without limitation any short sale), pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock, or securities exchangeable or exercisable for or convertible into shares of Common Stock currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the undersigned, or publicly announce the undersigned's intention to do any of the foregoing, for a period commencing on the date hereof and continuing through the close of trading on the date 180 days after the date of the Prospectus. (b) Delivery of Forms W-8 and W-9. To deliver to the Representatives prior to the First Closing Date a properly completed and executed United States Treasury Department Form W-8 (if the Selling Stockholder is a non-United States person) or Form W-9 (if the Selling Stockholder is a United States Person). Montgomery Securities, on behalf of the several Underwriters, may, in its sole discretion, waive in writing the performance by the Company or any Selling Stockholder of any one or more of the foregoing covenants or extend the time for their performance. SECTION 4. PAYMENT OF EXPENSES The Company and the Selling Stockholders, jointly and severally, agree to pay in such proportions as they may agree upon among themselves all costs, fees and expenses incurred in connection with the performance of their obligations hereunder and in connection with the transactions contemplated hereby, including without limitation (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel, independent public or certified public accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), each preliminary prospectus and the Prospectus, and all amendments and supplements 17 thereto, and this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Common Shares for offer and sale under the state securities or blue sky laws or the provincial securities laws of Canada, and, if requested by the Representatives, preparing and printing a "Blue Sky Survey" or memorandum, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (vii) the filing fees incident to, and the reasonable fees and expenses of counsel for the Underwriters in connection with, the NASD's review and approval of the Underwriters' participation in the offering and distribution of the Common Shares, (viii) the fees and expenses associated with listing the Common Stock on the Nasdaq National Market, and (ix) all other fees, costs and expenses referred to in Item 13 of Part II of the Registration Statement. Except as provided in this Section 4, Section 6, Section 8 and Section 9 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel. The Selling Stockholders further agree with each Underwriter to pay (directly or by reimbursement) all fees and expenses incident to the performance of their obligations under this Agreement which are not otherwise specifically provided for herein, including but not limited to (i) fees and expenses of counsel and other advisors for such Selling Stockholders, (ii) fees and expenses of the Custodian and (iii) expenses and taxes incident to the sale and delivery of the Common Shares to be sold by such Selling Stockholders to the Underwriters hereunder (which taxes, if any, may be deducted by the Custodian under the provisions of Section 2 of this Agreement). This Section 4 shall not affect or modify any separate, valid agreement relating to the allocation of payment of expenses between the Company, on the one hand, and the Selling Stockholders, on the other hand. SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of the several Underwriters to purchase and pay for the Common Shares as provided herein on the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Stockholders set forth in Sections 1(A) and 1(B) hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Optional Common Shares, as of the Second Closing Date as though then made, to the timely performance by the Company and the Selling Stockholders of their respective covenants and other obligations hereunder, and to each of the following additional conditions: (a) Accountants' Comfort Letter. On the date hereof, the Representatives shall have received from KPMG Peat Marwick LLP, independent public or certified public accountants for the Company, a letter dated the date hereof addressed to the Underwriters, in form and substance satisfactory to the Representatives, containing statements and information of the type ordinarily included in accountant's "comfort letters" to underwriters, delivered according to Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information contained in the Registration 18 Statement and the Prospectus (and the Representatives shall have received additional conformed copies of such accountants' letter for each of the several Underwriters). (b) Compliance with Registration Requirements; No Stop Order; No Objection from NASD. For the period from and after effectiveness of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date: (i) the Company shall have filed the Prospectus with the Commission (including the information required by Rule 430A under the Securities Act) in the manner and within the time period required by Rule 424(b) under the Securities Act; or the Company shall have filed a post-effective amendment to the Registration Statement containing the information required by such Rule 430A, and such post-effective amendment shall have become effective; or, if the Company elected to rely upon Rule 434 under the Securities Act and obtained the Representatives' consent thereto, the Company shall have filed a Term Sheet with the Commission in the manner and within the time period required by such Rule 424(b); (ii) no stop order suspending the effectiveness of the Registration Statement, any Rule 462(b) Registration Statement, or any post- effective amendment to the Registration Statement, shall be in effect and no proceedings for such purpose shall have been instituted or threatened by the Commission; and (iii) the NASD shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements. (c) No Material Adverse Change or Ratings Agency Change. For the period from and after the date of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date: (i) in the judgment of the Representatives there shall not have occurred any Material Adverse Change; and (ii) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any securities of the Company or any of its subsidiaries by any "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Securities Act. (d) Opinion of Counsel for the Company. On each of the First Closing Date and the Second Closing Date the Representatives shall have received the favorable opinion of Freshman, Marantz, Orlanski, Cooper & Klein, counsel for the Company, dated as of such Closing Date, the form of which is attached as Exhibit A (and the Representatives shall have received additional conformed - --------- copies of such counsel's legal opinion for each of the several Underwriters). (e) Opinion of Counsel for the Underwriters. On each of the First Closing Date and the Second Closing Date the Representatives shall have received the favorable opinion of Gibson, Dunn & Crutcher LLP, counsel for the Underwriters, dated as of such Closing Date, with 19 respect to the incorporation and good standing of the Company, the sufficiency of all corporate proceedings and other legal matters relating to this Agreement, the validity of the issuance of the Common Shares, the Registration Statement and the Prospectus and other related matters as the Underwriters may reasonably require (and the Representatives shall have received additional conformed copies of such counsel's legal opinion for each of the several Underwriters). (f) Company Officers' Certificate. On each of the First Closing Date and the Second Closing Date the Representatives shall have received a written certificate executed by the Chairman of the Board, Chief Executive Officer or President of the Company and the Chief Financial Officer or Chief Accounting Officer of the Company, dated as of such Closing Date, to the effect set forth in subsections (b)(ii) and (c)(ii) of this Section 5, and further to the effect that: (i) for the period from and after the date of this Agreement and prior to such Closing Date, there has not occurred any Material Adverse Change; (ii) the representations, warranties and covenants of the Company set forth in Section 1(A) of this Agreement are true and correct with the same force and effect as though expressly made on and as of such Closing Date; and (iii) the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date. (g) Bring-down Comfort Letter. On each of the First Closing Date and the Second Closing Date the Representatives shall have received from KPMG Peat Marwick LLP, independent public or certified public accountants for the Company, a letter dated such date, in form and substance satisfactory to the Representatives, to the effect that they reaffirm the statements made in the letter furnished by them pursuant to subsection (a) of this Section 5, except that the specified date referred to therein for the carrying out of procedures shall be no more than three business days prior to the First Closing Date or Second Closing Date, as the case may be (and the Representatives shall have received additional conformed copies of such accountants' letter for each of the several Underwriters). (h) Opinion of Counsel for the Selling Stockholders. On each of the First Closing Date and the Second Closing Date the Representatives shall have received the favorable opinion of Freshman, Marantz, Orlanski, Cooper & Klein, counsel for the Selling Stockholders, dated as of such Closing Date, the form of which is attached as Exhibit B (and the Representatives shall have received --------- additional conformed copies of such counsel's legal opinion for each of the several Underwriters). (i) Selling Stockholders' Certificate. On each of the First Closing Date and the Second Closing Date the Representatives shall received a written certificate executed by each Selling Stockholder, dated as of such Closing Date, to the effect that: (i) the representations, warranties and covenants of such Selling Stockholder set forth in Section 1(B) (and, in the case of ICII, of the Company set forth in Section 20 1(A)) of this Agreement are true and correct with the same force and effect as though expressly made by such Selling Stockholder on and as of such Closing Date; and (ii) such Selling Stockholder has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date. (j) Selling Stockholders' Documents. On the date hereof, the Company and the Selling Stockholders shall have furnished for review by the Representatives copies of the Powers of Attorney and Custody Agreements executed by each of the Selling Stockholders and such further information, certificates and documents as the Representatives may reasonably request. (k) Additional Documents. On or before each of the First Closing Date and the Second Closing Date, the Representatives and counsel for the Underwriters shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Common Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained. If any condition specified in this Section 5 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company and the Selling Stockholders at any time on or prior to the First Closing Date and, with respect to the Optional Common Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 4, Section 6, Section 8 and Section 9 shall at all times be effective and shall survive such termination. SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is terminated by the Representatives pursuant to Section 5, Section 7, Section 10, Section 11 or Section 17, or if the sale to the Underwriters of the Common Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company or any Selling Stockholder to perform any agreement herein or to comply with any provision hereof, each of the Company, the LLC and ICII agrees to reimburse the Representatives and the other Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), severally, upon demand for all out-of-pocket expenses that shall have been reasonably incurred by the Representatives and the Underwriters in connection with the proposed purchase and the offering and sale of the Common Shares, including but not limited to fees and disbursements of counsel, printing expenses, travel expenses, postage, facsimile and telephone charges. 21 SECTION 7. EFFECTIVENESS OF THIS AGREEMENT. This Agreement shall not become effective until the later of (i) the execution of this Agreement by the parties hereto and (ii) notification by the Commission to the Company and the Representatives of the effectiveness of the Registration Statement under the Securities Act. Prior to such effectiveness, this Agreement may be terminated by any party by notice to each of the other parties hereto, and any such termination shall be without liability on the part of (a) the Company, the LLC or the Selling Stockholders to any Underwriter, except that the Company, the LLC and the Selling Stockholders shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of any Underwriter to the Company, the LLC or the Selling Stockholders, or (c) of any party hereto to any other party, except that the provisions of Section 8 and Section 9 shall at all times be effective and shall survive such termination. SECTION 8. INDEMNIFICATION. (a) Indemnification of the Underwriters. The Company, the LLC and each of the Selling Stockholders, jointly and severally, agrees to indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company or the LLC), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (iii) in whole or in part upon any inaccuracy in the representations and warranties of the Company, the LLC or the Selling Stockholders contained herein; or (iv) in whole or in part upon any failure of the Company, the LLC or the Selling Stockholders to perform their respective obligations hereunder or under law; or (v) upon the matters referred to in DeWald, et al. v Knyal, an individual, et al. (Los Angeles Superior Court Case no. SC044949); or (vi) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Common Stock or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any matter covered by clause (i) or (ii) above, provided that the Company, the LLC and the Selling Stockholders shall not be liable under this clause (vi) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through 22 its bad faith or willful misconduct; and to reimburse each Underwriter and each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by Montgomery Securities) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company, the LLC and the Selling Stockholders by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Common Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Common Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense; and provided, further, that the Company, the LLC and the Selling Stockholders may agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible. The indemnity agreement set forth in this Section 8(a) shall be in addition to any liabilities that the Company, the LLC and the Selling Stockholders may otherwise have. (b) Indemnification of the Company, its Directors and Officers. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, the LLC, each of its members, the Selling Stockholders and each person, if any, who controls the Company, the LLC or any Selling Stockholder within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer, the LLC, or any such member, Selling Stockholder or controlling person may become subject, under the Securities Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company and the Selling Stockholders 23 by the Representatives expressly for use therein; and to reimburse the Company, or any such director, officer, the LLC, or any such member, the Selling Stockholder or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer, the LLC, or any such member, the Selling Stockholder or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. The Company, the LLC and each of the Selling Stockholders, hereby acknowledges that the only information that the Underwriters have furnished to the Company and the Selling Stockholders expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) are the statements set forth (A) as the last paragraph on the inside front cover page of the Prospectus concerning stabilization by the Underwriters and (B) in the table in the first paragraph, and the third and tenth paragraphs under the caption "Underwriting" in the Prospectus; and the Underwriters confirm that such statements are correct. The indemnity agreement set forth in this Section 8(b) shall be in addition to any liabilities that each Underwriter may otherwise have. (c) Notifications and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section 8 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party (Montgomery Securities in the case of Section 8(b) and Section 9), representing the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified 24 party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. (d) Settlements. The indemnifying party under this Section 8 shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 8(c) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. SECTION 9. CONTRIBUTION. If the indemnification provided for in Section 8 is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party, as incurred, as a result of any losses, claims, damages, liabilities or expenses referred to therein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, the LLC and the Selling Stockholders, on the one hand, and the Underwriters, on the other hand, from the offering of the Common Shares pursuant to this Agreement or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, the LLC and the Selling Stockholders, on the one hand, and the Underwriters, on the other hand, in connection with the statements or omissions or inaccuracies in the representations and warranties herein which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, the LLC and the Selling Stockholders, on the one hand, and the Underwriters, on the other hand, in connection with the offering of the Common Shares pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Common Shares pursuant to this Agreement (before deducting expenses) received by the Company, the LLC and the Selling Stockholders, and the total underwriting discount received by the Underwriters, in each case as set forth on the front cover page of the Prospectus (or, if Rule 434 under the Securities Act is used, the corresponding location on the Term Sheet) bear to the aggregate initial public offering price of the Common Shares as set forth on such cover. The relative fault of the Company, the LLC and the 25 Selling Stockholders, on the one hand, and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact or any such inaccurate or alleged inaccurate representation or warranty relates to information supplied by the Company, the LLC or the Selling Stockholders, on the one hand, or the Underwriters, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 8(c), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in Section 8(c) with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this Section 9; provided, however, that no additional notice shall be required with respect to any action for which notice has been given under Section 8(c) for purposes of indemnification. The Company, the LLC, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 9. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the underwriting commissions received by such Underwriter in connection with the Common Shares underwritten by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several, and not joint, in proportion to their respective underwriting commitments as set forth opposite their names in Schedule A. For purposes of this Section 9, each officer and employee of an - ---------- Underwriter and each person, if any, who controls an Underwriter within the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company with the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as the Company. SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITER. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Underwriters shall fail or refuse to purchase Common Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Common Shares to be purchased on such date, the other Underwriters shall be obligated, severally, in the proportions that the number of Firm 26 Common Shares set forth opposite their respective names on Schedule A bears to ---------- the aggregate number of Firm Common Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as may be specified by the Representatives with the consent of the non-defaulting Underwriters, to purchase the Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Common Shares and the aggregate number of Common Shares with respect to which such default occurs exceeds 10% of the aggregate number of Common Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Common Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 4, Section 8 and Section 9 shall at all times be effective and shall survive such termination. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. As used in this Agreement, the term "Underwriter" shall be deemed to include any person substituted for a defaulting Underwriter under this Section 10. Any action taken under this Section 10 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date this Agreement maybe terminated by the Representatives by notice given to the Company and the Selling Stockholders if at any time (i) trading or quotation in any of the Company's securities shall have been suspended or limited by the Commission or by the Nasdaq Stock Market, or trading in securities generally on either the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges by the Commission or the NASD; (ii) a general banking moratorium shall have been declared by any of federal, New York, Delaware or California authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective substantial change in United States' or international political, financial or economic conditions, as in the judgment of the Representatives is material and adverse and makes it impracticable to market the Common Shares in the manner and on the terms described in the Prospectus or to enforce contracts for the sale of securities; (iv) in the judgment of the Representatives there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Representatives may interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured. Any termination pursuant to this Section 11 shall be without liability on the part of (a) the Company or the Selling Stockholders to any Underwriter, except that the Company and the Selling Stockholders shall be 27 obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the Company or the Selling Stockholders, or (c) of any party hereto to any other party except that the provisions of Section 8 and Section 9 shall at all times be effective and shall survive such termination. SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties and other statements of the Company, or its officers, of the LLC, or its members, of the Selling Stockholders, or their officers, and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or the LLC, or any of its or their members, partners, officers or directors or any controlling person, or the Selling Stockholders, as the case may be, and will survive delivery of and payment for the Common Shares sold hereunder and any termination of this Agreement. SECTION 13. NOTICES. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows: If to the Representatives: Montgomery Securities 600 Montgomery Street San Francisco, California 94111 Facsimile: 415-249-5558 Attention: Richard A. Smith with a copy to: Montgomery Securities 600 Montgomery Street San Francisco, California 94111 Facsimile: (415) 249-5553 Attention: David A. Baylor, Esq. If to the Company or the LLC: Franchise Mortgage Acceptance Company 2049 Century Park East, Suite 350 Los Angeles, California 90067 Facsimile: (310) 843-0976 Attention: Wayne L. Knyal If to the Selling Stockholders: 28 c/o [Custodian] [Address] Facsimile: [___] Attention: [___] Any party hereto may change the address for receipt of communications by giving written notice to the others. SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 10 hereof, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 8 and Section 9, and in each case their respective successors, and personal representatives, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Common Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. SECTION 16. GOVERNING LAW PROVISIONS. (a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE. (b) Consent to Jurisdiction. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby ("Related Proceedings") may be instituted in the federal courts of the United States of America located in the City and County of San Francisco or the courts of the State of California in each case located in the City and County of San Francisco (collectively, the "Specified Courts"), and each party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a "Related Judgment"), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party's address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum. 29 SECTION 17. FAILURE OF ONE OR MORE OF THE SELLING STOCKHOLDERS TO SELL AND DELIVER COMMON SHARES. If one or more of the Selling Stockholders shall fail to sell and deliver to the Underwriters the Common Shares to be sold and delivered by such Selling Stockholders at the First Closing Date pursuant to this Agreement, then the Underwriters may at their option, by written notice from the Representatives to the Company and the Selling Stockholders, either (i) terminate this Agreement without any liability on the part of any Underwriter or, except as provided in Sections 4, 6, 8 and 9 hereof, the Company or the Selling Stockholders, or (ii) purchase the shares which the Company and other Selling Stockholders have agreed to sell and deliver in accordance with the terms hereof. If one or more of the Selling Stockholders shall fail to sell and deliver to the Underwriters the Common Shares to be sold and delivered by such Selling Stockholders pursuant to this Agreement at the First Closing Date or the Second Closing Date, then the Underwriters shall have the right, by written notice from the Representatives to the Company and the Selling Stockholders, to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. SECTION 18. GENERAL PROVISIONS. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The Table of Contents and the Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. Each of the parties hereto acknowledges that it is a sophisticated business person who was adequately represented by counsel during negotiations regarding the provisions hereof, including, without limitation, the indemnification provisions of Section 8 and the contribution provisions of Section 9, and is fully informed regarding said provisions. Each of the parties hereto further acknowledges that the provisions of Sections 8 and 9 hereto fairly allocate the risks in light of the ability of the parties to investigate the Company, its affairs and its business in order to assure that adequate disclosure has been made in the Registration Statement, any preliminary prospectus and the Prospectus (and any amendments and supplements thereto), as required by the Securities Act and the Exchange Act. 30 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to the Company and the Custodian the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms. Very truly yours, FRANCHISE MORTGAGE ACCEPTANCE COMPANY, LLC, A CALIFORNIA LIMITED LIABILITY COMPANY By: IMPERIAL CREDIT INDUSTRIES, INC., Member By: __________________________ H. Wayne Snavely By:________________________________ Wayne L. Knyal, Member FRANCHISE MORTGAGE ACCEPTANCE COMPANY, A DELAWARE CORPORATION By:________________________________ Wayne L. Knyal, Chief Executive Officer IMPERIAL CREDIT INDUSTRIES, INC. FLRT, INC. By: ______________________________ (Attorney-in-fact) The foregoing Underwriting Agreement is hereby confirmed and accepted by the Representatives in San Francisco, California as of the date first above written. MONTGOMERY SECURITIES CREDIT SUISSE FIRST BOSTON PAINEWEBBER INCORPORATED Acting as Representatives of the several Underwriters named in the attached Schedule A. BY: MONTGOMERY SECURITIES 31 By:___________________________ Richard A. Smith, Authorized Signatory 32 SCHEDULE A
NUMBER OF FIRM COMMON SHARES UNDERWRITERS TO BE PURCHASED Montgomery Securities................. [________] Credit Suisse First Boston............ [________] PaineWebber Incorporated.............. [________] [____]................................ [________] [____]................................ [________] Total............................ [________]
SCHEDULE B
NUMBER OF FIRM MAXIMUM NUMBER COMMON SHARES OF OPTIONAL SELLING STOCKHOLDER TO BE SOLD COMMON SHARES TO BE SOLD Imperial Credit Industries, Inc. 23550 Hawthorne Boulevard Building 1, Suite 110 [2,500,000] [375,000] Torrance, California 90505 Attention: H. Wayne Snavely FLRT, INC. c/o Frachise Mortgage Acceptance Company 2049 Century Park East, Suite 350 [937,500] [140,625] Los Angeles, California 90067 Total: [3,437,500] [515,625]
EXHIBIT A Opinion of counsel for the Company to be delivered pursuant to Section 5(e) of the Underwriting Agreement. References to the Prospectus in this Exhibit A include any supplements --------- thereto at the Closing Date. Capitalized terms used herein without definition have the meanings given to such terms in the Underwriting Agreement. (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Underwriting Agreement. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in the State of California and in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions (other than the State of California) where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. (iv) Each significant subsidiary (as defined in Rule 405 under the Securities Act) has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and, to the best knowledge of such counsel, is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. (v) All of the issued and outstanding capital stock of each such significant subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance or, to the best knowledge of such counsel, any pending or threatened claim. (vi) The authorized, issued and outstanding capital stock of the Company (including the Common Stock) conform to the descriptions thereof set forth or incorporated by reference in the Prospectus. All of the outstanding shares of Common Stock (including the shares of Common Stock owned by Selling Stockholders) have been duly authorized and validly issued, are fully paid and nonassessable and, to the best of such counsel's knowledge, have been issued in compliance with the registration and qualification requirements of federal and state securities laws. A-1 The form of certificate used to evidence the Common Stock is in due and proper form and complies with all applicable requirements of the charter and by-laws of the Company and the General Corporation Law of the State of Delaware. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (vii) No stockholder of the Company or any other person has any preemptive right, right of first refusal or other similar right to subscribe for or purchase securities of the Company arising (i) by operation of the charter or by-laws of the Company or the General Corporation Law of the State of Delaware or (ii) to the best knowledge of such counsel, otherwise. (viii) The Underwriting Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (ix) The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to the Underwriting Agreement and, when issued and delivered by the Company pursuant to the Underwriting Agreement against payment of the consideration set forth therein, will be validly issued, fully paid and nonassessable. (x) Each of the Registration Statement and the Rule 462(b) Registration Statement, if any, has been declared effective by the Commission under the Securities Act. To the best knowledge of such counsel, no stop order suspending the effectiveness of either of the Registration Statement or the Rule 462(b) Registration Statement, if any, has been issued under the Securities Act and no proceedings for such purpose have been instituted or are pending or are contemplated or threatened by the Commission. Any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) under the Securities Act has been made in the manner and within the time period required by such Rule 424(b). (xi) The Registration Statement, including any Rule 462(b) Registration Statement, the Prospectus, including any document incorporated by reference therein, and each amendment or supplement to the Registration Statement and the Prospectus, including any document incorporated by reference therein, as of their respective effective or issue dates (other than the financial statements and supporting schedules included or incorporated by reference therein or in exhibits to or excluded from the Registration Statement, as to which no opinion need be rendered) comply as to form in all material respects with the applicable requirements of the Securities Act and the Exchange Act. (xii) The Common Shares have been approved for listing on the Nasdaq National Market. A-2 (xiii) The statements (i) in the Prospectus under the captions "Risk Factors--Antitakeover Provisions", "Description of Capital Stock", "Management's Discussion and Analysis and Results of Operations--Liquidity", "Business-- Litigation", "Business--Regulation", "Certain Relationships and Related Transactions", "Shares Eligible for Future Sale", and "Underwriting" and (ii) in Item 14 and Item 15 of the Registration Statement, insofar as such statements constitute matters of law, summaries of legal matters, the Company's charter or by-law provisions, documents or legal proceedings, or legal conclusions, has been reviewed by such counsel and fairly present and summarize, in all material respects, the matters referred to therein. (xiv) To the best knowledge of such counsel, there are no legal or governmental actions, suits or proceedings pending or threatened which are required to be disclosed in the Registration Statement, other than those disclosed therein. (xv) To the best knowledge of such counsel, there are no Existing Instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed or incorporated by reference as exhibits thereto; and the descriptions thereof and references thereto are correct in all material respects. (xvi) No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental authority or agency, is required for the Company's execution, delivery and performance of the Underwriting Agreement and consummation of the transactions contemplated thereby and by the Prospectus, except as required under the Securities Act, applicable state securities or blue sky laws and from the NASD. (xvii) The execution and delivery of the Underwriting Agreement by the Company and the performance by the Company of its obligations thereunder (other than performance by the Company of its obligations under the indemnification section of the Underwriting Agreement, as to which we express no opinion) (i) have been duly authorized by all necessary corporate action on the part of the Company; (ii) will not result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary; (iii) will not constitute a breach of, or Default or a Debt Repayment Triggering Event under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, (A) [list of ICII indentures that Company guarantees and Company credit facilities to come], or (B) to the best knowledge of such counsel, any other material Existing Instrument; or (iv) to the best knowledge of such counsel, will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company or any subsidiary. (xviii) The Company is not, and after receipt of payment for the Common Shares will not be, an "investment company" within the meaning of Investment Company Act. (xix) Except as disclosed in the Prospectus under the caption "Shares Eligible for Future Sale", to the best knowledge of such counsel, there are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by the Underwriting Agreement. A-3 (xx) To the best knowledge of such counsel, neither the Company nor any subsidiary is in violation of its charter or by-laws or any law, administrative regulation or administrative or court decree applicable to the Company or any subsidiary or is in Default in the performance or observance of any obligation, agreement, covenant or condition contained in any material Existing Instrument, except in each such case for such violations or Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. In addition, we have participated in conferences with officers and other representatives of the Company, representatives of the independent public or certified public accountants for the Company and with representatives of the Underwriters at which the contents of the Registration Statement and the Prospectus, and any supplements or amendments thereto, and related matters were discussed and, although we are not passing upon and do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus (other than as specified above), and any supplements or amendments thereto, on the basis of the foregoing, nothing has come to our attention which would lead us to believe that either the Registration Statement or any amendments thereto, at the time the Registration Statement or such amendments became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of its date or at the First Closing Date or the Second Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that we express no belief as to the financial statements or schedules or other financial or statistical data derived therefrom, included or incorporated by reference in the Registration Statement or the Prospectus or any amendments or supplements thereto). In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the General Corporation Law of the State of Delaware, the General Corporation Law of the State of California or the federal laws of the United States, to the extent they deem proper and specified in such opinion, upon the opinion (which shall be dated the First Closing Date or the Second Closing Date, as the case may be, shall be satisfactory in form and substance to the Underwriters, shall expressly state that the Underwriters may rely on such opinion as if it were addressed to them and shall be furnished to the Representative) of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the Underwriters; provided, however, that such counsel shall further state that they believe that they and the Underwriters are justified in relying upon such opinion of other counsel, and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and public officials. A-4 EXHIBIT B The opinion of such counsel pursuant to Section 5(h) shall be rendered to the Representative at the request of the Company and shall so state therein. References to the Prospectus in this Exhibit C include any supplements thereto --------- at the Closing Date. Capitalized terms used herein without definition have the meanings given to such terms in the Underwriting Agreement. (i) The Underwriting Agreement has been duly authorized, executed and delivered by or on behalf of, and is a valid and binding agreement of, such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (ii) The execution and delivery by such Selling Stockholder of, and the performance by such Selling Stockholder of its obligations under, the Underwriting Agreement and its Custody Agreement and its Power of Attorney will not contravene or conflict with, result in a breach of, or constitute a default under, the charter or by-laws, partnership agreement, trust agreement or other organizational documents, as the case may be, of such Selling Stockholder, or, to the best of such counsel's knowledge, violate or contravene any provision of applicable law or regulation, or violate, result in a breach of or constitute a default under the terms of any other agreement or instrument to which such Selling Stockholder is a party or by which it is bound, or any judgment, order or decree applicable to such Selling Stockholder of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over such Selling Stockholder. (iii) Such Selling Stockholder has good and valid title to all of the Common Shares which may be sold by such Selling Stockholder under the Underwriting Agreement and has the legal right and power, and all authorizations and approvals required under its charter and bylaws or other organizational documents, as the case may be, to enter into the Underwriting Agreement and its Custody Agreement and its Power of Attorney, to sell, transfer and deliver all of the Common Shares which may sold by such Selling Stockholder under the Underwriting Agreement and to comply with its other obligations under the Underwriting Agreement, its Custody Agreement and its Power of Attorney. (iv) Each of the Custody Agreement and Power of Attorney of such Selling Stockholder has been duly authorized, executed and delivered by such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. B-1 (v) Assuming that the Underwriters purchase the Common Shares which are sold by such Selling Stockholder pursuant to the Underwriting Agreement for value, in good faith and without notice of any adverse claim, the delivery of such Common Shares pursuant to the Underwriting Agreement will pass good and valid title to such Common Shares, free and clear of any security interest, mortgage, pledge, lieu encumbrance or other claim. (vi) To the best of such counsel's knowledge, no consent, approval, authorization or other order of, or registration or filing with, any court or governmental authority or agency, is required for the consummation by such Selling Stockholder of the transactions contemplated in the Underwriting Agreement, except as required under the Securities Act, applicable state securities or blue sky laws, and from the NASD. In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the General Corporation Law of the State of Delaware, the General Corporation Law of the State of California or the federal law of the United States, to the extent they deem proper and specified in such opinion, upon the opinion (which shall be dated the First Closing Date or the Second Closing Date, as the case may be, shall be satisfactory in form and substance to the Underwriters, shall expressly state that the Underwriters may rely on such opinion as if it were addressed to them and shall be furnished to the Representative) of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the Underwriters; provided, however, that such counsel shall further state that they believe that they and the Underwriters are justified in relying upon such opinion of other counsel, and (B) as to matters of fact, to the extent they deem proper, on certificates of the Selling Stockholders and public officials. B-2 EX-3.1 3 ARTICLES OF ORGANIZATION OF FMAC, LLC EXHIBIT 3.1 State of California Bill Jones Secretary of State SACRAMENTO I, BILL JONES, Secretary of State of California, hereby certify: That the annexed transcript of 1 page(s) was prepared by and in this --- office from the record on file, of which it purports to be a copy, and that it is full, true and correct. [THE GREAT SEAL OF THE IN WITNESS WHEREOF, I execute this STATE OF CALIFORNIA] certificate and affix the Great Seal of the State of California JUL 20 1995 ------------------------------- /s/ BILL JONES Secretary of State [THE GREAT SEAL OF BILL JONES THE STATE OF SECRETARY OF STATE CALIFORNIA] LLC-2 LIMITED LIABILITY COMPANY CERTIFICATE OF AMENDMENT IMPORTANT - Read the instructions before completing the form. --------- This document is presented for filing pursuant to Section 17054 of the California Corporations Code. - ------------------------------------------------------------------------------- 1. Limited liability company name: Imperial Credit Franchise Mortgage LLC - ------------------------------------------------------------------------------- 2. File number: 101995181022 - ------------------------------------------------------------------------------- 3. Enter only the information in the Articles of Organization (LLC-1) amended by filing this Certificate of Amendment (LLC-2). a. Limited liability company name: Franchise Mortgage Acceptance Company LLC ----------------------------------------- b. Latest date on which the limited liability company is to dissolve: (month/day/year) --------------------------------------------------------- c. The limited liability company will be managed by: (check one). [ ] one manager [ ] more than one manager [ ] limited liability company members d. Other matters which were included by attachment as indicated in Item 7 of the Articles of Organization (LLC-1). Provide the text of each amendment adopted, using the space provided and/or attaching one or more separate pages. - ------------------------------------------------------------------------------- 4. Number of pages attached, if any: - -------------------------------------------- 5. It is hereby declared that I am the person who executed this instrument, which execution is my act and deed. /s/ WAYNE L. KNYAL ------------------------------------------ Signature of authorized person [BAR CODE] Wayne L. Knyal manager ------------------------------------------ [BAR CODE] Type or print name and title 101995181022 Date: July 6 , 1995 ------------- -- FILED: AMENDMENT AT SACRAMENTO, CA ON JUL. 18, 1995 - -------------------------------------------- SECRETARY OF STATE OF CALIFORNIA LLC-2 Approved by the Secretary of State Filing Fee $30 1/95 State of California Bill Jones Secretary of State SACRAMENTO I, BILL JONES, Secretary of State of California, hereby certify: That the annexed transcript of 1 page(s) was prepared by and in this --- office from the record on file, of which it purports to be a copy, and that it is full, true and correct. [THE GREAT SEAL OF THE IN WITNESS WHEREOF, I execute this STATE OF CALIFORNIA] certificate and affix the Great Seal of the State of California JUL 3 1995 ------------------------------- /s/ BILL JONES Secretary of State [THE GREAT SEAL OF BILL JONES THE STATE OF SECRETARY OF STATE CALIFORNIA] LLC-1 LIMITED LIABILITY COMPANY ARTICLES OF ORGANIZATION IMPORTANT - Read the instructions before completing the form. --------- This document is presented for filing pursuant to Section 17050 of the California Corporations Code. - ------------------------------------------------------------------------------- 1. Limited liability company name: Imperial Credit Franchise Mortgage LLC (End the name with "LLC" or "Limited Liability Company". No periods between the letters in "LLC". "Limited" and "Company" may be abbreviated to "Ltd." and "Co.") - ------------------------------------------------------------------------------- 2. Latest date (month/day/year) on which the limited liability company is to dissolve: June 30, 2045 - ------------------------------------------------------------------------------- 3. The purpose of the limited liability company is to engage in any lawful act or activity for which a limited liability company may be organized under the Beverly-Killea Limited Liability Company Act. - ------------------------------------------------------------------------------- 4. Enter the name of initial agent for service of process and check the appropriate provision below: H. Wayne Snavely --------------------------------------------------- , which is [x] an individual residing in California. Proceed to Item 5. [ ] a corporation which has filed a certificate pursuant to Section 1505 of the California Corporations Code. Skip Item 5 and proceed to Item 6. - ------------------------------------------------------------------------------- 5. If the initial agent for service of process is an individual, enter a ---------- business or residential street address in California: Street address: 20371 Irvine Avenue City: Santa Ana Heights State: CALIFORNIA Zip Code: 92707 - ------------------------------------------------------------------------------- 6. The limited liability company will be managed by: (check one) [ ] one manager [x] more than one manager [ ] limited liability company members - ------------------------------------------------------------------------------- 7. If other matters are to be included in the Articles of Organization attach one or more separate pages. Number of pages attached, if any: - ------------------------------------------------------------------------------- 8. It is hereby declared that I am the person who executed this instrument, which execution is my act and deed. /s/ KASEY HANNAH ------------------------------------------ Signature of organizer [BAR CODE] Kasey Hannah ------------------------------------------ [BAR CODE] Type or print name of organizer 101995181022 Date: June 29 , 1995 -------------- -- FILED: REGISTRN/ARTICLES OF ORG. AT SACRAMENTO, CA ON JUN.30, 1995 - -------------------------------------------- SECRETARY OF STATE OF CALIFORNIA LLC-1 Approved by the Secretary of State Filing Fee $80 1/95 EX-3.2 4 OPERATING AGREEMENT OF FMAC, LLC EXHIBIT 3.2 OPERATING AGREEMENT FOR IMPERIAL CREDIT FRANCHISE MORTGAGE LLC A CALIFORNIA LIMITED LIABILITY COMPANY This Operating Agreement, is made as of June 30, 1995, by and between the parties listed on the signature pages hereof, with reference to the following facts: A. On June 30, 1995, Articles of Organization for IMPERIAL CREDIT FRANCHISE MORTGAGE LLC (the "Company"), a limited liability company organized under the laws of the State of California, were filed with the California Secretary of State. B. The parties desire to adopt and approve an operating agreement for the Company. NOW, THEREFORE, the parties by this Agreement set forth the operating agreement for the Company under the laws of the State of California upon the terms and subject to the conditions of this Agreement. ARTICLE I DEFINITIONS When used in this Agreement, the following terms shall have the meanings set forth below (all terms used in this Agreement that are not defined in this Article I shall have the meanings set forth elsewhere in this Agreement): 1.1 "Act" shall mean the Beverly-Killea Limited Liability Company Act, --- codified in the California Corporations Code, Section 17000 et seq., as the same -- --- may be amended from time to time. 1.2 "Affiliate" of a Member or Manager shall mean any Person, directly or --------- indirectly, through one or more intermediaries, controlling, controlled by, or under common control with a Member or Manager, as applicable. The term "control," as used in the immediately preceding sentence, shall mean with respect to a corporation or limited liability company the right to exercise, directly or indirectly, more than fifty percent (50%) of the voting rights attributable to the controlled corporation or limited liability company, and, with respect to any individual, partnership, trust, other entity or association, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled entity. 1 1.3 "Agreement" shall mean this Operating Agreement, as originally --------- executed and as amended from time to time. 1.4 "Assignment and Assumption" shall mean that Assignment and Assumption ------------------------- of Asset Rights by and between the Company and FMAC dated as of June 30, 1995 relating to the Transferred Interests. 1.5 "Articles" shall mean the Articles of Organization for the Company -------- originally filed with the California Secretary of State and as amended from time to time. 1.6 "Assignee" shall mean the owner of an Economic Interest who has not -------- been admitted as a substitute Member in accordance with Article VII. 1.7 "Bankruptcy" shall mean: (a)the filing of an application by a Member ---------- for, or his or her consent to, the appointment of a trustee, receiver, or custodian of his or her other assets; (b) the entry of an order for relief with respect to a Member in proceedings under the United States Bankruptcy Code, as amended or superseded from time to time; (c) the making by a Member of a general assignment for the benefit of creditors; (d) the entry of an order, judgment, or decree by any court of competent jurisdiction appointing a trustee, receiver, or custodian of the assets of a Member unless the proceedings and the person appointed are dismissed within ninety (90) days; or (e) the failure by a Member generally to pay his or her debts as the debts become due within the meaning of Section 303(h)(1) of the United States Bankruptcy Code, as determined by the Bankruptcy Court, or the admission in writing of his or her inability to pay his or her debts as they become due. 1.8 "Capital Account" shall mean with respect to any Member the capital --------------- account which the Company establishes and maintains for such Member pursuant to Section 3.3. 1.9 "Capital Contribution" shall mean the total amount of cash and fair -------------------- market value of property contributed to the Company by Members. 1.10 "Closing Date" shall have the meaning ascribed to it in Section ------------ 8.9.2. 1.11 "Code" shall mean the Internal Revenue Code of 1986, as amended from ---- time to time, the provisions of succeeding law, and to the extent applicable, the Regulations. 1.12 "Company" shall mean Imperial Credit Franchise Mortgage LLC, a ------- California limited liability company. 2 1.13 "Company Minimum Gain" shall have the meaning ascribed to the term -------------------- "Partnership Minimum Gain" in the Regulations Section 1.704-2(d). 1.14 "Corporations Code" shall mean the California Corporations Code, as ----------------- amended from time to time, and the provisions of succeeding law. 1.15 "Dissolution Event" shall mean with respect to any Member one or more ----------------- of the following: the death, insanity, withdrawal, resignation, retirement, expulsion, Bankruptcy or dissolution of any Member. 1.16 "Distributable Cash" shall mean the amount of cash to be distributed ------------------ to the Members as provided in this Agreement. 1.17 "Economic Interest" shall mean the right to receive distributions of ----------------- the Company's assets and allocations of income, gain, loss, deduction, credit and similar items from the Company pursuant to this Agreement and the Act, but shall not include any other rights of a Member, including, without limitation, the right to vote or participate in the management of the Company, or except as provided in Section 17106 of the Corporations Code, any right to information concerning the business and affairs of the Company. 1.18 "Enforceability Exceptions" means bankruptcy, insolvency, ------------------------- reorganization, moratorium or other similar laws now or hereafter in effect affecting generally the enforcement of creditors' rights. 1.19 "Employment Agreement" shall mean that Employment Agreement dated as -------------------- of June 30, 1995 by and between Knyal and the Company. 1.20 "Fiscal Year" shall mean the Company's fiscal year, which shall be ----------- the calendar year. 1.21 "FMAC" means Franchise Mortgage Acceptance Corporation, a California ---- corporation. 1.22 "Former Member" shall have the meaning ascribed to it in Section 8.1. ------------- 1.23 "Former Member's Interest" shall have the meaning ascribed to it in ------------------------ Section 8.1. 1.24 "GAAP Income" shall mean the income of the Company determined in ----------- accordance with generally accepted accounting principles; provided, however, that, in any event and whether or not recognized in accordance with such principles, the present value of any equity, debt, or other interests retained by the Company in any loans, leases or 3 other financial accommodations which are securitized, sold or otherwise disposed of by the Company shall be included in the income of the Company in the year in which any such securitization, sale or disposition occurs. 1.25 "ICII" shall mean Imperial Credit Industries, Inc., a California ---- corporation. 1.26 "Knyal" shall mean Wayne Knyal, an individual. ----- 1.27 "Law" means any federal, state, local or foreign law (including --- common law), statute, code, ordinance, rule, or regulation, including but not limited to the Truth-in-Lending Act. 1.28 "Legal Proceeding" means any judicial, administrative or arbitral ---------------- action, suit, proceeding (public or private), claim, investigation or governmental proceeding. 1.29 "Lien" means any lien, pledge, mortgage, deed of trust, security ---- interest, claim, lease, charge, option, right of first refusal, easement or other real estate declaration, covenant, condition, restriction or servitude, transfer restriction under any shareholder or similar agreement or encumbrance. 1.30 "Majority Interest" shall mean those Members who hold a majority of ----------------- the Percentage Interests which all Members hold. 1.31 "Manager" shall mean each of the persons listed on Exhibit A to this ------- Agreement or any other persons that succeed any of them as a Manager of the Company. 1.32 "Member" shall mean each Person who (a) is an initial signatory to ------ this Agreement, has been admitted to the Company as a Member in accordance with the Articles or this Agreement or is an Assignee who has become a Member in accordance with Article VII, and (b) has not become the subject of a Dissolution Event or ceased to be a Member in accordance with Article VIII or for any other reasons. 1.33 "Member Nonrecourse Debt" shall have the meaning ascribed to the term ----------------------- "Partner Nonrecourse Debt" in Regulations Section 1.704-2(b)(4). 1.34 "Member Nonrecourse Deductions" shall mean items of Company loss, ----------------------------- deduction, or Code Section 705(a)(2)(B) expenditures which are attributable to Member Nonrecourse Debt. 1.35 "Membership Interest" shall mean a Member's entire interest in the ------------------- Company including the Member's Economic Interest, the right to vote on or participate in the management, and the right to receive information concerning the business and affairs, of the Company. 4 1.36 "Net Profits" and "Net Losses" shall mean the income, gain, loss and ---------------------------- deductions of the Company in the aggregate or separately stated, as appropriate, determined in accordance with the method of accounting at the close of each Fiscal Year on the Company's information tax return filed for federal income tax purposes. 1.37 "Nonrecourse Liability" shall have the meaning set forth in --------------------- Regulations Section 1.752-1(a)(2). 1.38 "Order" means any order, injunction, judgment, decree, ruling, writ, ----- assessment or arbitration award. 1.39 "Percentage Interest" shall mean the percentage of a Member set forth ------------------- opposite the name of such Member under the column "Member's Percentage Interest" in Exhibit A hereto, as such percentage may be adjusted from time to time pursuant to the terms of this Agreement. 1.40 "Permit" means any written approval, authorization, consent ------ franchise, license, permit or certificate by any Governmental Body. 1.41 "Person" shall mean an individual, partnership, limited partnership, ------ limited liability company, corporation, trust, estate, association or any other entity. 1.42 "Regulations" shall, unless the context clearly indicates otherwise, ----------- mean the regulations in force as final or temporary that have been issued by the U.S. Department of Treasury pursuant to its authority under the Code, and any successor regulations. 1.43 "Remaining Members" shall have the meaning ascribed to it in Section ----------------- 8.1. 1.44 "Sale Option" shall have the meaning ascribed to it in Section 8.9.2. ----------- 1.45 "Transferred Interests" shall mean all of FMAC's rights, duties and --------------------- obligations in, to and under (i) that certain Servicing Agreement dated as of September 1, 1991, by and among FMAC, as Servicer, Franchisee Loan Receivables Trust 1991-A, as Association, as Bond Trustee, and all other agreements, instruments and arrangements entered into by FMAC in connection therewith (the "Servicing Contract"), (ii) all transferable rights in any software, including any licenses or warranties, necessary to the performance of the servicing obligations under the Servicing Contract that FMAC owns and or has any rights with respect to, and (iii) the name "Franchise Mortgage Acceptance Corporation" and all goodwill attributable thereto and associated therewith. 5 ARTICLE II ORGANIZATIONAL MATTERS 2.1 Formation. The Members have formed a California limited liability --------- company under the laws of the State of California by filing the Articles with the California Secretary of State and entering into this Agreement. The rights and liabilities of the Members shall be determined pursuant to the Act and this Agreement. To the extent that the rights or obligations of any Member are different by reason of any provision of this Agreement than they would be in the absence of such provision, this Agreement shall, to the extent permitted by the Act, control. 2.2 Name. The name of the Company shall be "Imperial Credit Franchise ---- Mortgage LLC", which name shall be changed to Franchise Mortgage Acceptance Company LLC as, if and when such name is available for use by the Company. The business of the Company may be conducted under that name or any other name that the Managers deem appropriate or advisable. 2.3 Term. The term of this Agreement commenced on the filing of the ---- Articles and shall continue until June 30, 2045, unless extended or sooner terminated as hereinafter provided. 2.4 Office and Agent. The Company shall continuously maintain an office ---------------- and registered agent in the State of California. The principal office of the Company shall be 600 Steamboat Road, Greenwich, Connecticut 06830 or at such location as the Managers may determine. The registered agent shall be as stated in the Articles or as otherwise determined by the Managers. 2.5 Purpose and Business of the Company. The purpose of the Company is to ----------------------------------- engage in any lawful activity for which a limited liability company may be organized under the Act. Notwithstanding the foregoing, without the consent of all of the Members, the Company shall not engage in any business other than, the following: 2.5.1 The business of originating loans, leases and other financial accommodations and providing equity and making investments, directly or indirectly, and selling insurance to or in franchisees or other groups of businesses having a common trade name, sponsoring organization or other common theme similar to a franchise; 2.5.2 The servicing and monitoring of any such loans, leases, other financial accommodations, equity arrangements and investments; and 6 2.5.3 Such other activities directly related to and in furtherance of the foregoing business as may be necessary, advisable, or appropriate, in the reasonable opinion of the Managers. ARTICLE III CAPITAL CONTRIBUTIONS 3.1 Initial Capital Contributions. Each Member shall contribute such ----------------------------- amount as is set forth in Exhibit A as his or her initial Capital Contribution, which Exhibit A shall be revised to reflect any additional contributions made in accordance with Section 3.2. 3.2 Additional Capital Contributions. No Member shall be required to make -------------------------------- any additional Capital Contributions. 3.3 Capital Accounts. The Company shall establish and maintain an ---------------- individual Capital Account for each Member in accordance with Regulations Section 1.704-1(b)(2)(iv). If a Member transfers all or a part of his or her Membership Interest in accordance with this Agreement, such Member's Capital Account attributable to the transferred Membership Interest shall carry over to the new owner of such Membership Interest pursuant to Regulations Section 1.704- 1(b)(2)(iv)(1). 3.4 No Interest. No Member shall be entitled to receive any interest on ----------- his or her Capital Contributions. 3.5 Issuance of Additional Membership Interests. ------------------------------------------- 3.5.1 The Company shall not issue additional Membership Interests without the consent of all of the Members, except that a Majority Interest may approve the issuance of additional Membership Interests in: (i) any public offering of Membership Interests pursuant to a Registration Statement filed under the Securities Act of 1933, as amended; or (ii) any other offering of Membership Interests provided that no Member nor its Affiliates shall directly or indirectly purchase any Membership Interests in any such offering and there shall be no understanding or agreement in effect as a result of which a Member or any of its Affiliates shall be entitled to purchase any such additional Membership Interests which are purchased by other Persons. 3.5.2 Any additional Members shall obtain Membership Interests and will participate in the Net Profits, Net Losses and distributions of the Company on such terms as are determined by the Managers and approved by all of the Members or a Majority Interest in those cases where a Majority Interest is entitled to approve the issuance of additional Membership Interests as provided in Section 3.5.1. Any additional Members 7 shall be required to agree to be bound by the terms of this Agreement, and the issuance of Membership Interests to such Members shall not be effective unless and until the purchaser agrees in writing to be so bound. ARTICLE IV MEMBERS 4.1 Admission of Additional Members. Except as otherwise set forth ------------------------------- herein, the Managers may not admit to the Company additional Members. Assignees may only be admitted as substitute Members in accordance with Article VII. 4.2 Withdrawals or Resignations. --------------------------- 4.2.1 Any Member may withdraw or resign as a Member at any time upon one hundred twenty (120) days prior written notice to the Company, without prejudice to the rights, if any, of the Company or the other Members under any contract to which the withdrawing Member is a party. In the event of such withdrawal, such Member's Membership Interest shall terminate pursuant to Section 4.3 other than as set forth herein. 4.2.2 Notwithstanding the foregoing, if Knyal's employment with the Company is terminated pursuant to Sections 2.2(b), (e), (f) or (g) of the Employment Agreement or as a result of the Company giving a notice pursuant to Section 2.1 of the Employment Agreement not to renew the Employment Agreement, then Knyal (or his legal representatives) shall, for a period of twenty-four (24) months from the last day of Knyal's employment, have the right to require the Company to purchase Knyal's Membership Interest which shall be purchased by the Company as provided in Article VIII. Such right shall be exercised by written notice given within such 24 month period by Knyal (or his legal representatives) to the Company of his intention to exercise the "put" set forth in this Section 4.2.2. 4.2.3 Notwithstanding the foregoing, if Knyal's employment with the Company is terminated pursuant to Sections 2.2(a), (b), (d), (e) or (f) of the Employment Agreement or as a result of Knyal's giving a notice pursuant to Section 2.1 of the Employment Agreement not to renew the Employment Agreement, then the Company (and/or its designee) shall, for a period of twenty-four (24) months from the last day of Knyal's employment, have the right to require Knyal (or his legal representatives) to sell the Company (and/or its designee) Knyal's Membership Interest which shall be sold by Knyal (or his legal representatives) as provided in Article VIII. Such right shall be exercised by written notice given within such 24 month period by the Company (and/or its designee) to Knyal (or his legal representatives) of its intention to exercise the "call" set forth in this Section 4.2.3. 8 4.3 Termination of Membership Interest. Upon (a) the transfer of a ---------------------------------- Member's Membership Interest in violation of Article VII, (b) the occurrence of a Dissolution Event as to such Member which does not result in the dissolution of the Company under Article X, or (c) the withdrawal or resignation of a Member in accordance with Section 4.3, the Membership Interest of a Member shall be terminated by the Managers and thereafter that Member shall be an Assignee only unless such Membership Interest shall be purchased by the Company and/or remaining Members as provided in Article VIII. Each Member acknowledges and agrees that such termination or purchase of a Membership Interest upon the occurrence of any of the foregoing events is not unreasonable under the circumstances existing as of the date hereof. Notwithstanding the foregoing, upon termination of Knyal's employment with the Company under the Employment Agreement, then Knyal shall be deemed to have withdrawn as of the date that his Membership Interest is purchased or sold, as the case may be, in accordance with Article VIII. 4.4 Transactions With The Company. Subject to any limitations set forth ----------------------------- in this Agreement and with the prior approval of the Managers, a Member may lend money to and transact other business with the Company, so long as such transaction is not expressly prohibited by this Agreement and so long as the terms and conditions of such transaction, on an overall basis, are fair and reasonable to the Company and are at least as favorable to the Company as those that are generally available from Persons capable of similarly performing them and in similar transactions between parties operating at arm's length. Subject to other applicable law, such Member has the same rights and obligations with respect thereto as a Person who is not a Member. 4.5 Remuneration To Members. Except as otherwise specifically provided in ----------------------- this Agreement and the Employment Agreement, no Member is entitled to remuneration for acting in the Company business. 4.6 Voting Rights. Except as expressly provided in this Agreement or the ------------- Articles, Members shall have no voting, approval or consent rights. Members shall have the right to approve or disapprove matters as specifically stated in this Agreement, including the following: 4.6.1 Unanimous Approval. The following matters (in addition to ------------------ those otherwise expressly set forth herein) shall require the unanimous vote, approval or consent of all Members who are not the subject of a Dissolution Event or an assignor of a Membership Interest: (i) Except as otherwise set forth herein, the transfer of a Membership Interest and admission of the Assignee as a Member of the Company in accordance with Article VII; (ii) Any amendment of the Articles; and 9 (iii) A decision to compromise the obligation of a Member to return money or property paid or distributed in violation of the Act. 4.6.2 Approval by Members Holding a Majority Interest. Except as set ----------------------------------------------- forth in Section 5.3.2 or in any other provision of this Agreement, in all other matters in which a vote, approval or consent of the Members is required, a vote, consent or approval of a Majority Interest (or, in instances in which there are defaulting or remaining members, non-defaulting or remaining Members who hold a majority of the Percentage Interests held by all non-defaulting or remaining Members) shall be sufficient to authorize or approve such act. 4.6.3 Other Voting Rights. Besides the rights granted in Section ------------------- 4.6.1, Members may vote, consent or approve to the extent and on the terms provided in this Agreement in the following Sections: (i) Section 3.2 on additional Capital Contributions; (ii) Section 3.5 on admission of new Members; (iii) Section 5.2 on election and removal of a Manager; (iv) Section 5.3.2 on a change in the purpose or business of the Company; (v) Section 5.3.2 on reorganization of the Company; (vi) Section 5.3.2 on other limitations on the Managers' authority; (vii) Section 5.6 on transactions with the Managers and Affiliates of the Managers; (viii) Section 10.1 on dissolving the Company; and (ix) Section 11.1 on indemnification by the Company. ARTICLE V MANAGEMENT AND CONTROL OF THE COMPANY 5.1 Management of the Company by Managers. ------------------------------------- 5.1.1 Exclusive Management by Managers. Subject to the provisions of -------------------------------- this Agreement relating to actions required to be approved by the Members, the business, 10 property and affairs of the Company shall be managed and all powers of the Company shall be exercised by or under the direction of the Managers. 5.1.2 Meetings of Managers. Meetings of the Managers may be called -------------------- by any Manager. All meetings shall be held upon four (4) days notice by mail or forty-eight (48) hours notice (or upon such shorter notice period if necessary under the circumstances) delivered personally or by telephone, telegraph or facsimile. A notice need not specify the purpose of any meeting. Notice of a meeting need not be given to any Manager who signs a waiver of notice or a consent to holding the meeting (which waiver or consent need not specify the purpose of the meeting) or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior to its commencement, the lack of notice to such Manager. All such waivers, consents and approvals shall be filed with the Company records or made a part of the minutes of the meeting. A majority of the Managers present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment shall be given prior to the time of the adjourned meeting to the Managers who are not present at the time of the adjournment. Meetings of the Managers may be held at any place within or without the State of California which has been designated in the notice of the meeting or at such place as may be approved by the Managers. Managers may participate in a meeting through use of conference telephone or similar communications equipment, so long as all Managers participating in such meeting can hear one another. Participation in a meeting in such manner constitutes a presence in person at such meeting. A majority of the authorized number of Managers constitutes a quorum of the Managers for the transaction of business. Except to the extent that this Agreement expressly requires the approval of all Managers, every act or decision done or made by a majority of the Managers present at a meeting duly held at which a quorum is present is the act of the Managers. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of Managers, if any action taken is approved by at least a majority of the required quorum for such meeting. Any action required or permitted to be taken by the Managers may be taken by the Managers without a meeting, if all of the Managers individually or collectively consent in writing to such action. Such action by written consent shall have the same force and effect as a unanimous vote of such Managers. The provisions of this Section 5.1.2 govern meetings of the Managers if the Managers elect, in their discretion, to hold meetings. However, nothing in this Section 5.1.2 or in this Agreement is intended to require that meetings of Managers be held, it being the intent of the Members that meetings of Managers are not required. 11 5.2 Election of Managers. -------------------- 5.2.1 Number, Term, and Qualifications. During the term of this -------------------------------- Agreement, the authorized number of Managers shall consist of not less than seven (7) nor more than nine (9); three (3) of the Managers shall be selected by Knyal and the remaining Managers shall be selected by ICII; provided, however, that in the event that either of Knyal or ICII ceases to be a Member, his/its rights to the election of Managers under this Section 5.2.1 shall terminate. The number of Managers of the Company shall be fixed from time to time by the affirmative vote or written consent of a Majority Interest; the number of Managers will initially be seven (7). In no instance shall there be less than one Manager and provided further that if the number of Managers is reduced from more than one to one the Articles shall be amended to so state, and if the number of Managers is increased to more than one, the articles shall be amended to delete the statement that the Company has only one Manager. Unless he or she resigns or is removed, each Manager shall hold office for a term of five years. A Manager need not be a Member, an individual, a resident of the State of California, or a citizen of the United States. 5.2.2 Resignation. Any Manager may resign at any time by giving ----------- written notice to the Members and remaining Managers without prejudice to the rights, if any, of the Company under any contract to which the Manager is a party. The resignation of any Manager shall take effect upon receipt of that notice or at such later time as shall be specified in the notice. Unless otherwise specified in the notice, the acceptance of the resignation shall not be necessary to make it effective. The resignation of a Manager who is also a Member shall not affect the Manager's rights as a Member and shall not constitute a withdrawal of a Member. 5.2.3 Removal. Any Manager may be removed at any time, with cause, ------- by the affirmative vote of a Majority Interest at a meeting called expressly for that purpose. Any removal shall be without prejudice to the rights, if any, of the Manager under any employment contract and, if the Manager is also a Member, shall not affect the Manager's rights as a Member or constitute a withdrawal of a Member. For purpose of this Section, "cause" shall mean fraud, embezzlement by the Manager concerning the Company or a breach of such Manager's obligations, willful misconduct or gross negligence, which breach, willful misconduct or gross negligence relates to the Manager's activities concerning the Company and have not been cured within 30 days after written notice given by a majority of the Managers specifying such breach, willful misconduct or gross negligence. 5.2.4 Vacancies. Any vacancy occurring for any reason in the number --------- of Managers may be filled by the affirmative vote or written consent of the Member entitled to select such Manager in accordance with Section 5.2.1, or if a Member is not accorded the right to fill such vacancy in accordance with Section 5.2.1, then by a Majority Interest. 12 5.3 Powers of Managers. ------------------ 5.3.1 Powers of Managers. Without limiting the generality of Section ------------------ 5.1, but subject to Section 5.3.2 and to the express limitations set forth elsewhere in this Agreement, the Managers shall have all necessary powers to manage and carry out the purposes, business, property, and affairs of the Company, including, without limitation, the power to exercise on behalf and in the name of the Company all of the powers described in Corporations Code Section 17003. 5.3.2 Limitations on Power of Managers. Notwithstanding any other -------------------------------- provisions of this Agreement, no debt or liability of more than $10,000 may be contracted on behalf of the Company except by the written consent of all Managers. Additionally, the Managers shall not have authority hereunder to cause the Company to engage in the following transactions without first obtaining the affirmative vote or written consent of all of the Members: (i) The sale, exchange or other disposition of all, or substantially all, of the Company's assets occurring as part of a single transaction or plan, or in multiple transactions over a twelve (12) month period, except in the orderly liquidation and winding up of the business of the Company upon its duly authorized dissolution; (ii) The merger of the Company with another limited liability company or limited partnership; (iii) The merger of the Company with a corporation or a general partnership or other Person; (iv) The establishment of different classes of Members; (v) An alteration of the primary purpose or business of the Company as set forth in Section 2.5; (vi) The lending of money by the Company to any Manager, Member, Affiliate or officer; (vii) Any act which would make it impossible to carry on the ordinary business of the Company; (viii) The confession of a judgment against the Company; (ix) To file a bankruptcy petition on behalf of the Company; and 13 (x) Any other transaction described in this agreement as requiring the vote, consent, or approval of the Members in which case the vote required will be as specified in the provision of this Agreement requiring such vote, approval or consent. 5.4 Performance of Duties; Liability of Managers. Except as may otherwise -------------------------------------------- be provided in the Employment Agreement, a Manager shall not be liable to the Company or to any Member for any loss or damage sustained by the Company or any Member, unless the loss or damage shall have been the result of fraud, deceit, gross negligence, reckless or intentional misconduct, or a knowing violation of law by the Manager. 5.5 Devotion of Time. Except as may otherwise be provided in the ---------------- Employment Agreement, the Managers are not obligated to devote all of their time or business efforts to the affairs of the Company. The Managers shall devote whatever time, effort, and skill as they deem appropriate for the operation of the Company. 5.6 Transactions between the Company and the Managers. Notwithstanding ------------------------------------------------- that it may constitute a conflict of interest, the Managers may, and may cause their Affiliates to, engage in any transaction (including, without limitation, the purchase, sale, lease, or exchange of any property or the rendering of any service, or the establishment of any salary, other compensation, or other terms of employment) with the Company so long as such transaction is not expressly prohibited by this Agreement and so long as the terms and conditions of such transaction, on an overall basis, are fair and reasonable to the Company and are at least as favorable to the Company as those that are generally available from Persons capable of similarly performing them and in similar transactions between parties operating at arm's length. 5.7 Liability of Manager Limited to Manager's Assets. Under no ------------------------------------------------ circumstances will any director, officer, shareholder, member, manager, partner, employee, agent or Affiliate of any Manager have any personal responsibility for any liability or obligation of the Manager (whether on a theory of alter ego, piercing the corporate veil, or otherwise), and any recourse permitted under this Agreement or otherwise of the Members, any former Member or the Company against a Manager will be limited to the assets of the Manager as they may exist from time to time. 5.8 Payments to Managers. Except as specified in this Agreement, no -------------------- Manager or Affiliate of a Manager is entitled to remuneration for services rendered or goods provided to the Company. 5.9 Officers. The Managers may appoint officers at any time. The -------- officers shall serve at the pleasure of the Managers, subject to all rights, if any, of an officer under any contract of employment. Any individual may hold any number of offices. The officers shall exercise such powers and perform such duties as specified in this Agreement and as shall be determined from time to time by the Managers. 14 5.10 Limited Liability. No person who is a Manager or officer or both a ----------------- Manager and officer of the Company shall be personally liable under any judgment of a court, or in any other manner, for any debt, obligation, or liability of the Company, whether that liability or obligation arises in contract, tort, or otherwise, solely by reason of being a Manager or officer or both a Manager and officer of the Company. 5.11 Membership Interests of Managers. Except as otherwise provided in -------------------------------- this Agreement, Membership Interests held by the Managers as Members shall entitle each Manager to all the rights of a Member, including without limitation the economic, voting, information and inspection rights of a Member. ARTICLE VI ALLOCATIONS OF NET PROFITS AND NET LOSSES AND DISTRIBUTIONS 6.1 Allocations of Net Profit and Net Loss. -------------------------------------- 6.1.1 Net Loss. Net Loss shall be allocated to the Members in -------- proportion to their Percentage Interests. Notwithstanding the previous sentence, loss allocations to a Member shall be made only to the extent that such loss allocations will not create a deficit Capital Account balance for that Member in excess of an amount, if any, equal to such Member's share of Company Minimum Gain. Any loss not allocated to a Member because of the foregoing provision shall be allocated to the other Members (to the extent the other Members are not limited in respect of the allocation of losses under this Section 6.l.1). Any loss reallocated under this Section 6.1.1 shall be taken into account in computing subsequent allocations of income and losses pursuant to this Article VI, so that the net amount of any item so allocated and the income and losses allocated to each Member pursuant to this Article VI, to the extent possible, shall be equal to the net amount that would have been allocated to each such Member pursuant to this Article VI if no reallocation of losses had occurred under this Section 6.1.1. 6.1.2 Net Profit. Net Profit shall be allocated to the Members in ---------- proportion to their Percentage Interests. 6.2 Special Allocations. Notwithstanding Section 6.1: ------------------- 6.2.1 Minimum Gain Chargeback. If there is a net decrease in Company ----------------------- Minimum Gain during any Fiscal Year, each Member shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, in subsequent fiscal years) in an amount equal to the portion of such Member's share of the net decrease in 15 Company Minimum Gain that is allocable to the disposition of Company property subject to a Nonrecourse Liability, which share of such net decrease shall be determined in accordance with Regulations Section 1.704-2(g)(2). Allocations pursuant to this Section 6.2.1 shall be made in proportion to the amounts required to be allocated to each Member under this Section 6.2.1. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(f). This Section 6.2.1 is intended to comply with the minimum gain chargeback requirement contained in Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. 6.2.2 Chargeback of Minimum Gain Attributable to Member Nonrecourse ------------------------------------------------------------- Debt. If there is a net decrease in Company Minimum Gain attributable to a - ---- Member Nonrecourse Debt, during any Fiscal Year, each member who has a share of the Company Minimum Gain attributable to such Member Nonrecourse Debt (which share shall be determined in accordance with Regulations Section 1.704-2(i)(5)) shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, in subsequent Fiscal Years) in an amount equal to that portion of such Member's share of the net decrease in Company Minimum Gain attributable to such Member Nonrecourse Debt that is allocable to the disposition of Company property subject to such Member Nonrecourse Debt (which share of such net decrease shall be determined in accordance with Regulations Section 1.704-2(i)(5)). Allocations pursuant to this Section 6.2.2 shall be made in proportion to the amounts required to be allocated to each Member under this Section 6.2.2. The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(i)(4). This Section 6.2.2 is intended to comply with the minimum gain chargeback requirement contained in Regulations Section 1.704-2(i)(4) and shall be interpreted consistently therewith. 6.2.3 Nonrecourse Deductions. Any nonrecourse deductions (as defined ---------------------- in Regulations Section 1.704-2(b)(1)) for any Fiscal Year or other period shall be specially allocated to the Members in proportion to their Percentage Interests. 6.2.4 Member Nonrecourse Deductions. Those items of Company loss, ----------------------------- deduction, or Code Section 705(a)(2)(B) expenditures which are attributable to Member Nonrecourse Debt for any Fiscal Year or other period shall be specially allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such items are attributable in accordance with Regulations Section 1.704-2(i). 6.2.5 Qualified Income Offset. If a Member unexpectedly receives any ----------------------- adjustments, allocations, or distributions described in Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), or any other event creates a deficit balance in such Member's Capital Account in excess of such Member's share of Company Minimum Gain, items of Company income and gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate such excess deficit balance as quickly as possible. Any 16 special allocations of items of income and gain pursuant to this Section 6.2.5 shall be taken into account in computing subsequent allocations of income and gain pursuant to this Article VI so that the net amount of any item so allocated and the income, gain, and losses allocated to each Member pursuant to this Article VI to the extent possible, shall be equal to the net amount that would have been allocated to each such Member pursuant to the provisions of this Section 6.2.5 if such unexpected adjustments, allocations, or distributions had not occurred. 6.3 Code Section 704(c) Allocations. Notwithstanding any other provision ------------------------------- in this Article VI, in accordance with Code Section 704(c) and the Regulations promulgated thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its fair market value on the date of contribution. Allocations pursuant to this Section 6.3 are solely for purposes of federal, state and local taxes. As such, they shall not affect or in any way be taken into account in computing a Member's Capital Account or share of profits, losses, or other items of distributions pursuant to any provision of this Agreement. 6.4 Allocation of Net Profits and Losses and Distributions in Respect of a ---------------------------------------------------------------------- Transferred Interest. If any Economic Interest is transferred, or is increased - -------------------- or decreased by reason of the admission of a new Member or otherwise, during any Fiscal Year of the Company, Net Profit or Net Loss for such Fiscal Year shall be assigned pro rata to each day in the particular period of such Fiscal Year to which such item is attributable (i.e., the day on or during which it is accrued or otherwise incurred) and the amount of each such item so assigned to any such day shall be allocated to the Member or Assignee based upon his or her respective Economic Interest at the close of such day. However, for the purpose of accounting convenience and simplicity, the Company shall treat a transfer of, or an increase or decrease in, an Economic Interest which occurs at any time during a semi-monthly period (commencing with the semi-monthly period including the date hereof as having been consummated on the last day of such semi-monthly period, regardless of when during such semi- monthly period such transfer, increase, of decrease actually occurs (i.e., sales and dispositions made during the first fifteen (15) days of any month will be deemed to have been made on the 15th day of the month). Notwithstanding any provision above to the contrary, gain or loss of the Company realized in connection with a sale or other disposition of any of the assets of the Company shall be allocated solely to the parties owning Economic Interests as of the date such sale or other disposition occurs. 17 6.5 Distributions of Distributable Cash by the Company. Subject to -------------------------------------------------- applicable law and any limitations contained elsewhere in this Agreement, the Managers may elect from time to time to distribute Distributable Cash to the Members, which distributions shall be in the following order of priority: 6.5.1 To the Members in proportion to their unreturned Capital Contributions until each Member has recovered his or her Capital Contributions; and 6.5.2 To the Members in proportion to their Percentage Interests. Notwithstanding the foregoing, the Company shall make the following mandatory distributions on or before 90 days after the end of each fiscal year: Each Member shall be distributed on an annual basis additional Distributable Cash equal to such Members' tax liability on allocated Net Profits and the Members as a whole, shall be distributed with respect to each fiscal year an amount equal to the GAAP Net Income for such fiscal year up to a maximum of One Million Two Hundred Thousand Dollars ($1,200,000). For the first year of this Agreement (subject to the limitations of Section 6.7 herein) the minimum aggregate distribution shall be no less than Four Hundred Fifty Thousand Dollars ($450,000) and such distributions during said first year shall be made at least bi-weekly. All such distributions shall be made only to the Persons who, according to the books and records of the Company, are the holders of record of the Economic Interests in respect of which such distributions are made on the actual date of distribution. Subject to Section 6.7, neither the Company nor any Manager shall incur any liability for making distributions in accordance with this Section 6.5. 6.6 Form of Distribution. A Member, regardless of the nature of the -------------------- Member's Capital Contribution, has no right to demand and receive any distribution from the Company in any form other than money. Except as provided in Section 10.4, no Member may be compelled to accept from the Company a distribution of any asset in kind in lieu of a proportionate distribution of money being made to other Members and no Member may be compelled to accept a distribution of any asset in kind. 6.7 Restriction on Distributions. No distribution shall be made if, after ---------------------------- giving effect to the distribution: (i) Such distribution would be in violation of any applicable law; (ii) the amount of such distribution would be in excess of the maximum amount of annual distribution authorized pursuant to Section 6.5 herein; (iii) the Company would not be able to pay its debts as they become due in the usual course of business; or (iv) the Company's total assets would be less than the sum of its total liabilities plus, unless this Agreement provides otherwise, the amount that would be needed, if the Company were to be dissolved at the time of the distribution, to satisfy the preferential rights of other Members, if any, upon dissolution that are superior to the rights of the Member receiving the distribution. 18 ARTICLE VII TRANSFER AND ASSIGNMENT OF INTERESTS 7.1 Transfer and Assignment of Interests. Except as otherwise expressly ------------------------------------ set forth in this Agreement, no Member shall be entitled to transfer, assign, convey, or sell all or any part of his/her/its Membership Interest (collectively, "transfer") except with the prior written consent of all Members. After the consummation of any transfer of any part of a Membership Interest, the Membership Interest so transferred shall continue to be subject to the terms and provisions of this Agreement and any further transfers shall be required to comply with all the terms and provisions of this Agreement. 7.2 Further Restrictions on Transfer of Interests. In addition to other --------------------------------------------- restrictions found in this Agreement, no Member shall transfer, assign, convey, sell, encumber or in any way alienate all or any part of his or her Membership Interest: (i) without compliance with all federal and state securities law, and (ii) if the Membership Interest to be transferred, when added to the total of all other Membership Interests transferred in the preceding twelve (12) consecutive months prior thereto, would cause the tax termination of the Company under Code Section 708(b)(1)(B). 7.3 Substitution of Members. An Assignee of a Membership Interest shall ----------------------- have the right to become a substitute Member only if (i) the requirements of Sections 7.1 and 7.2 relating to unanimous consent of Members, securities and tax requirements hereof are met, (ii) the Assignee executes an instrument satisfactory to the Managers accepting and adopting the terms and provisions of this Agreement, and (iii) the Assignee pays any reasonable expenses in connection with his or her admission as a new Member. The admission of an Assignee as a substitute Member shall not result in the release of the Member who assigned the Membership Interest from any liability that such Member may have to the Company. 7.4 No Effect to Transfers in Violation of Agreement. Upon any transfer ------------------------------------------------ of a Membership Interest in violation of this Article VII, the transferee shall have no right to vote or participate in the management of the business, property and affairs of the Company or to exercise any rights of a Member. Such transferee shall only be entitled to become an Assignee and thereafter shall only receive the share of one or more of the Company's Net Profits, Net Losses and distributions of the Company's assets to which. the transferor of such Economic Interest would otherwise be entitled. Notwithstanding the immediately preceding sentences, if, in the determination of the Managers, a transfer in violation of this Article VII would cause the tax termination of the Company under Code Section 708(b)(1)(B), the transfer shall be null and void. 7.5 Right of First Negotiation. If any Member desires to transfer all or -------------------------- any part of his/her/its Membership Interest, such Member shall notify the Company and the other 19 Members in writing of such desire and, for a period of thirty (30) days thereafter, the Members and the Company shall negotiate with respect to the purchase of such Member's Membership Interest. During such period, the Member desiring to transfer such Membership Interest may not solicit a transferee for such Membership Interest. 7.6 Right of First Refusal. If the period described in Section 7.6 expires ---------------------- without an agreement being reached as to the purchase of the Membership Interest referred to therein, the Member desiring to transfer his/her/its Membership Interest may solicit transferees. In such event, each time a Member proposes to transfer all or any part of his or her Membership Interest (or as required by operation of law or other involuntary transfer to do so), such Member shall first offer such Membership Interest to the Company and the non-transferring Members in accordance with the following provisions: 7.6.1 Such Member shall deliver a written notice ("Option Notice") to the Company and the other Members stating (i) such Member's bona fide intention to transfer such Membership Interest, (ii) the Membership Interest to be transferred, and (iii) the purchase price and terms of payment for which the Member proposes to transfer such Membership Interest. 7.6.2 Within thirty (30) days after receipt of the Option Notice, the Company shall have the right, but not the obligation, to elect to purchase all or any part of the Membership Interest upon the price and terms of Payment designated in the Option Notice. If the Option Notice provides for the payment of non-cash consideration, the Company may elect to pay the consideration in cash equal to the good faith estimate of the present fair market value of the non-cash consideration offered as determined by the Managers. If the Company exercises such right within such thirty (30) day period, the Managers shall give written notice of that fact to the transferring and non-transferring Members. 7.6.3 If the Company fails to elect to purchase the entire Membership Interest proposed to be transferred within the thirty (30) day period described in Section 7.6.2, the non-transferring Members shall have the right, but not the obligation, to elect to Purchase any remaining share of such Membership Interest upon the price and terms of payment designated in the Option Notice. If the Option Notice provides for the payment of non-cash consideration, such purchasing Members each may elect to pay the consideration in cash equal to the good faith estimate of the present fair market value of the non-cash consideration offered as determined by the Managers. Within sixty (60) days after receipt of the Option Notice, each non-transferring Member shall notify the Managers in writing of his or her desire to purchase a portion of the Membership Interest proposed to be so transferred. The failure of any Member to submit a notice within the applicable period shall constitute an election on the part of that Member not to purchase any of the Membership Interest which may be so transferred. Each Member so electing to purchase shall be entitled to purchase a portion of such Membership Interest in the 20 same proportion that the Percentage Interest Of such Member bears to the aggregate of the Percentage Interests of all of the Members electing to so purchase the Membership Interest being transferred. In the event any Member elects to purchase none or less than all of his or her pro rata share of such Membership Interest, then the other Members can elect to purchase more than their pro rata share. 7.6.4 If the Company and the other Members elect to purchase or obtain any or all of the Membership Interest designated in the Option Notice, then the closing of such purchase shall occur within ninety (90) days after receipt of such notice and the transferring Member, the Company and/or the other Members shall execute such documents and instruments and make such deliveries as may be reasonably required to consummate such purchase. 7.6.5 If the Company and the other Members elect not to purchase or obtain, or default in their obligation to purchase or obtain, all of the Membership Interest designated in the Option Notice, then the transferring Member may transfer the portion of the Membership Interest described in the Option Notice not so purchased, providing such transfer (i) is completed within thirty (30) days after the expiration of the Company's and the other Members' right to purchase such Membership Interest, (ii) is made on terms no less favorable to the transferring Member than as designated in the Option Notice, and (iii) complies with Sections 7.1, 7.2 and 7.3 relating to consent of Members, securities and tax requirements; it being acknowledged by the Members that compliance with Sections 7.5 and 7.6.1-.4 does not modify any of the transfer restrictions in Article VII or otherwise entitle a Member to transfer his or her Membership Interest other than in the manner prescribed by Article VII. If such Membership Interest is not so transferred, the transferring Member must give notice in accordance with this Section prior to any other or subsequent transfer of such Membership Interest. 7.7 Right of Co-Sale. ---------------- 7.7.1 In the event that any Member proposes to sell, pledge or assign, transfer, or otherwise dispose of all or any portion of his/her/its Membership Interest and the provisions of Section 7.6 hereof have been complied with each Member will have a right of co-sale (the "Right of Co-sale") to sell such Member's "Pro Rata Share" of such Membership Interest that such Member proposes to transfer on the same terms as such as described in this Agreement. 7.7.2 A Member's Pro Rata Share shall be that proportion which the Percentage Interest (the "Co-sale Interest") held by such Member bears to the aggregate of the Percentage Interests of all Members. 7.7.3 At least 30 days before the proposed date of a sale or transfer of Membership Interest, each Member desiring to transfer such Membership Interest will 21 give a written notice (the "Co-sale Notice") simultaneously to the Company and to each of the Members. The Co-sale Notice shall describe in detail the proposed transfer, including the number of Membership Interest(s) proposed to be transferred, the proposed transfer price or consideration to be paid (which, for consideration the value of which is not readily ascertainable, shall be the fair market value of the Membership Interest to be transferred as most recently determined in good faith by the Managers), the address of the Members proposing to such transfer Membership Interest, and the name and address of the proposed transferee. Each Member shall have the right to sell to the proposed transferee (or, upon the unwillingness of any prospective transferee to purchase directly from such Member, to the selling Member) its Pro Rata Share of the Co-sale Interests (determined as of the date the Notice is delivered to the Company) subject to the Co-sale Notice on the terms set forth in the Co-sale Notice. 7.7.4 A Member shall exercise his Right of Co-sale by delivering a notice of exercise to the Member proposing to transfer such Membership Interest (with a copy to the Company) within 20 days after the date such notice has been delivered from the Member to the Company and each of the Members. The selling Member shall inform each Member of the decision of each other Member promptly upon learning it. 7.7.5 The selling Member shall assign to each Member who exercises its Right of Co-sale as much of his interest in the agreement of sale with the prospective transferee or transferees as such Member shall be entitled to and shall accept. To the extent that any prospective transferee or transferees prohibits such assignment or otherwise refuses to purchase a Membership Interest from a Member, the selling Member shall not sell to such prospective transferee or transferees any Membership Interests unless and until, simultaneously with such sale, the selling Member shall purchase such Membership Interests from such Member for the same consideration and on the same terms and conditions as the proposed transfer described in the Co-sale Notice. 7.7.6 If none of the Members elect to exercise the Right of Co-sale with respect to the Membership Interest subject to the Co-sale Notice, each Member may, not later than 30 days following delivery of the Members of the Co- sale Notice, conclude a transfer of not less than all of the Membership Interest covered by the Co-sale Notice on terms and conditions not more favorable to the Member than those described in the Co-sale Notice. Any proposed transfer of an additional Membership Interest or on terms and conditions more favorable to the Member than those described in the Co-sale Notice, as well as any subsequent proposed transfer of any of the Membership Interest by such Member shall again be subject to the Right of Co-Sale and shall require compliance by the Member with the procedures described in this Section 7.7. 7.8 Other Permitted Transfer. The Economic Interest of any Member may be ------------------------ transferred subject to compliance with Section 7.2, and without the prior written consent of the Members as required by Section 7.1, upon consent of the Managers, which shall 22 not be unreasonably withheld, by the Member (i) by inter vivos gift or by testamentary transfer to any spouse, parent, sibling, in-law, child or grandchild of the Member, or to a trust for the benefit of the Member or such spouse, parent, sibling, in-law, child or grandchild of the Member, or (ii) to any Affiliate of the Member; it being agreed that, in executing this Agreement, each Member has consented to such transfers. ARTICLE VIII CONSEQUENCES OF DISSOLUTION EVENTS AND TERMINATION OF MEMBERSHIP INTEREST 8.1 Dissolution Event. Upon the occurrence of a Dissolution Event, the ----------------- Company shall dissolve unless the remaining Members ("Remaining Members") holding a majority of the Percentage Interests which all Remaining Members hold, consent within ninety (90) days of the Dissolution Event to the continuation of the business of the Company. If the Remaining Members consent to the continuation of the business of the Company, the Company and/or the Remaining Members shall have the right to purchase, and if such right is exercised the Member whose actions or conduct resulted in the Dissolution Event ("Former Member") or such Former Member's legal representative shall sell, the Former Member's Membership Interest ("Former Member's Interest") as provided in this Article VIII. Notwithstanding the foregoing, upon termination of Knyal's employment with the Company under the Employment Agreement, the provisions of Section 4.2.2 and/or 4.2.3 shall be applicable, depending on the nature of such termination. 8.2 Withdrawal. Notwithstanding Section 8.1, upon the withdrawal by a ---------- Member in accordance with Section 4.4, such Member shall be treated as a Former Member, and, unless the Company is to dissolve, the Company and/or the Remaining Members shall have the right to purchase, and if such right is exercised, the Former Member shall sell, the Former Member's Interest as provided in this Article VIII. Notwithstanding the foregoing, in the event of the termination of Knyal's employment with the Company under the Employment Agreement, the provisions of Section 4.2.2 and/or 4.2.3 shall be applicable, depending on the nature of such termination, and Knyal (or his legal representatives) shall continue as a Member until his Membership Interest is purchased pursuant to this Article VIII. 8.3 Purchase Price. The purchase price for the Former Member's interest -------------- shall be the Capital Account balance of the Former Member; provided, however, that if the Former Member, such Former Member's legal representative or the Company, deems the Capital Account balance to vary from the fair market value of the Former Member's Interest by more than ten percent (10%), such party shall be entitled to require an appraisal by providing notice of the request for appraisal within thirty (30) days after the 23 determination of the Remaining Members to continue the business of the Company. In such event, the value of the Former Member's Interest shall be determined by three (3) independent appraisers, one (1) selected by the Former Member or such Former Member's legal representative, one selected by the Company, and one (1) selected by the two (2) appraisers so named. The fair market value of the Former Member's Interest shall be the average of the two (2) appraisals closest in amount to each other. In the event the fair market value is determined to vary from the Capital Account balance by less than ten percent (10%), the party requesting such appraisal shall pay all expenses of all the appraisals incurred by the party offering to enter into the transaction at the Capital Account valuation. In all other events, the party requesting the appraisal shall pay one-half of such expense and the other party shall pay one-half of such expense. Notwithstanding the foregoing, if the Dissolution Event results from a breach of this Agreement by the Former Member, the purchase price shall be reduced by an amount equal to the damages suffered by the Company or the Remaining Members as a result of such breach. Notwithstanding the foregoing, if the purchase of Knyal's Membership Interest is pursuant to Sections 4.2.2 or 4.2.3 herein; the value of Knyal's Membership Interest shall be determined by three (3) independent appraisers (at the Company's cost and expense), one (1) selected by Knyal or by Knyal's legal representative, one (1) selected by the Company, and one (1) selected by the two (2) appraisers so named, and the value of Knyal's Former Member's Interest shall be the average of the two (2) appraisals closest in amount to each other. Each of the appraisers selected pursuant to this Section 8.3 shall be skilled in valuing businesses such as the Company and shall be independent with respect to the Company, the Members and their Affiliates. Any appraisal procedure required pursuant to this Section 8.3 shall be conducted as follows: each of the Persons entitled to select an appraiser pursuant to this Section 8.3 shall select his or its appraiser within fifteen (15) days after the occurrence of the event or notice (such as a notice given pursuant to Section 4.2.2 or 4.2.3) that gives rise to the appraisal requirement; the two (2) appraisers so selected shall select a third appraiser within 15 days after their selection; and the three (3) appraisers shall render their appraisals in writing to the Persons interested in such determination within thirty (30) days after the third appraiser is selected. 8.4 Notice of Intent to Purchase. Within thirty (30) days after the ---------------------------- Managers have notified the Remaining Members as to the purchase price of the Former Member's Interest determined in accordance with Section 8.3, each Remaining Member shall notify the Managers in writing of his/her/its desire to purchase a portion of the Former Member's Interest. The failure of any Remaining Member to submit a notice within the applicable period shall constitute an election on the part of the Member not to purchase any of the Former Member's Interest. Each Remaining Member so electing to purchase shall be entitled to purchase a portion of the Former Member's Interest in the same proportion that the Percentage Interest of the Remaining Member bears to the aggregate of the Percentage Interests of all of the Remaining Members electing to purchase the Former Member's Interest. Notwithstanding the foregoing, in the event of a purchase by 24 Knyal's Membership interest pursuant to Section 4.2 or 4.3, the Company shall be obligated to purchase Knyal's Membership Interest. 8.5 Election to Purchase Less Than All of the Former Member's Interest. ------------------------------------------------------------------ If any Remaining Member elects to purchase none or less than all of his or her pro rata share of the Former Member's Interest, then the Remaining Members may elect to purchase more than their pro rata share. If the Remaining Members fail to purchase the entire Interest of the Former Member, the Company may purchase any remaining share of the Former Member's Interest. Notwithstanding the foregoing, in the event of a purchase of Knyal's Membership Interest pursuant to Section 4.2 or 4.3, the Company shall be obligated to purchase Knyal's Membership Interest. 8.6 Payment of Purchase Price. The Company or the Remaining Members shall ------------------------- at the closing pay in cash the total purchase price for the Former Member's Interest. 8.7 Closing of Purchase of Former Member's Interest. The closing for the ----------------------------------------------- sale of a Former Member's Interest pursuant to this Article VIII shall be held at 10:00 a.m. at the principal office of Company no later than sixty (60) days after the determination of the purchase price, except that if the closing date falls on a Saturday, Sunday, or California legal holiday, then the closing shall be held on the next succeeding business day. At the closing, the Former Member or such Former Member's legal representative shall deliver to the Company or the Remaining Members an instrument of transfer (containing warranties of title and no encumbrances) conveying the Former Member's Interest. The Former Member or such Former Member's legal representative, the Company and the Remaining Members shall do all things and execute and deliver all papers as may be necessary fully to consummate such sale and purchase in accordance with the terms and provisions of this Agreement. 8.8 Purchase Terms Varied by Agreement. Nothing contained herein is ---------------------------------- intended to prohibit Members from agreeing upon other terms and conditions for the purchase by the Company or any Member of the Membership Interest of any Member in the Company desiring to retire, withdraw or resign, in whole or in part, as a Member. 8.9 Restrictions on Mandatory Repurchase. With respect to any repurchase ------------------------------------ of Knyal's Former Member's Interest under this Article VIII, the following shall also apply: 8.9.1 No mandatory repurchase of Knyal's Former Member's Interest pursuant to Article VIII may be made by the Company if, after giving effect to the repurchase: (i) such repurchase would be in violation of any applicable law; 25 (ii) the Company would not be able to pay its debts as they become due in the ordinary course of business; or (iii) the Company's total assets would be less that the sum of its total liabilities plus, the amount that would be needed, if the Company were to be dissolved at the time of the repurchase, to satisfy the preferential rights of other Members, if any, upon dissolution that and superior to the rights of Knyal. 8.9.2 The obligation of the Company to ultimately repurchase Knyal's Former Member's Interest under Article VIII when not otherwise prohibited by this Section 8.9 shall not be affected by any prohibition on repurchase under this Section 8.9. 8.9.3 If the Company does not purchase Knyal's Former Member's Interest for the reasons set forth in Section 8.9.1 or if the Company defaults in effecting such purchase (or if the Company fails to make any mandatory distribution set forth in Section 6.5 herein within ten (10) business days of the date such distribution is to be paid (the "Final Due Date"), then notwithstanding any provisions to the contrary contained in this Agreement, Knyal or his legal representatives) shall continue as a Member with all the rights provided for in this Agreement and, in addition, Knyal (or his legal representatives) shall have the option (the "Sale Option") to cause the assets and business of the Company to be sold at any time within the period of eighteen (18) months immediately succeeding the date (the "Closing Date") on which the closing of the purchase of Knyal's Former Member's Interest was required to be held or the Final Due Date, as the case may be. The Sale Option may be exercised by written notice to the Company given at any time within such 18 month period. If the Sale Option is exercised, then Knyal (or his legal representatives) shall be entitled to offer the Company for sale on such terms and conditions as he shall select. If Knyal (or his legal representatives) elects to accept any such offer for the sale of the Company, then the Company will accept such offer and the Company will be sold in accordance with the terms of such offer and on the terms and conditions acceptable to Knyal (or his legal representatives). The Company, all of the other Members and the Managers shall cooperate in good faith and shall take such actions and execute such documents as may be reasonably required to effect such sale. If such sale is effected, then Knyal (or his legal representatives) shall receive for his Membership Interest an amount equal to the greater of (x) the purchase price which was to be paid on the Closing Date together with interest thereon at a fluctuating rate equal to 2% above the prime or rate of Citibank N.A. in effect from time to time from the Closing Date until such price is paid or (y) the amount which would have been paid to Knyal (or his legal representatives) with respect to such Membership Interest in accordance with Section 10.4 of this Agreement upon the sale of substantially all of the assets of the Company and the dissolution and winding-up of the Company. Any such amounts to be paid to Knyal (or his legal representatives) shall have priority over and shall be paid before any amounts to be paid to any other Members. Notwithstanding 26 anything contained herein, the obligations of the Company to purchase Knyal's Membership Interest shall continue and shall be effected as soon as the Company is able to purchase such Membership Interest without violating the provisions of Section 8.9.1. ARTICLE IX ACCOUNTING, RECORDS, REPORTING BY MEMBERS 9.1 Books and Records. The books and records of the Company shall be ----------------- kept, and the financial position and the results of its operations recorded, in accordance with the accounting methods followed for federal income tax purposes. The books and records of the Company shall reflect all the Company transactions and shall be appropriate and adequate for the Company's business. Any Member shall have the right to inspect the Company's books and records at any time. The Company shall maintain at its principal office in California all of the following: 9.1.1 A current list of the full name and last known business or residence address of each Member and Assignee set forth in alphabetical order, together with the Capital Contributions, Capital Account and Percentage Interest of each Member and Assignee; 9.1.2 A current list of the full name and business or residence address of each Manager; 9.1.3 A copy of the Articles and any and all amendments thereto together with executed copies of any powers of attorney pursuant to which the Articles or any amendments thereto have been executed; 9.1.4 Copies of the Company's federal, state, and local income tax or information returns and reports, if any, for the six (6) most recent taxable years; 9.1.5 A copy of this Agreement and any and all amendments thereto together with executed copies of any powers of attorney pursuant to which this Agreement or any amendments thereto have been executed; 9.1.6 Copies of the financial statements of the Company, if any, for the six (6) most recent Fiscal Years; and 9.1.7 The Company's books and records as they relate to the internal affairs of the Company for at least the current and past four (4) Fiscal Years. 27 9.2 Annual Statements. ----------------- 9.2.1 The Managers shall cause to be prepared at least annually, at Company expense, information necessary for the preparation of the Members' and Assignees' federal and state income tax returns. The Managers shall send or cause to be sent to each Member or Assignee within ninety (90) days after the end of each taxable year such information as is necessary to complete federal and state income tax or information returns, and, if the Company has thirty-five (35) or fewer Members, a copy of the Company's federal, state, and local income tax or information returns for that year. 9.2.2 The Managers shall cause to be filed at least annually with the California Secretary of State the statement required under California Corporations Code (S) 17060. ARTICLE X DISSOLUTION AND WINDING UP 10.1 Dissolution. The Company shall be dissolved, its assets shall be ----------- disposed of, and its affairs wound up on the first to occur of the following: 10.1.1 The happening of any event of dissolution specified in the Articles; 10.1.2 The entry of a decree of judicial dissolution pursuant to Corporations Code Section 17351; 10.1.3 The vote of all of the Members; 10.1.4 The occurrence of a Dissolution Event and the failure of the Remaining Members to consent in accordance with Section 8.1 to continue the business of the Company within ninety (90) days after the occurrence of such event or the failure of the Company or the Remaining Members to purchase the Former Member's Interest as provided in Section 8.2; or 10.1.5 The sale of all or substantially all of the assets of Company. 10.2 Certificate of Dissolution. As soon as possible following the -------------------------- occurrence of any of the events specified in Section 10.1, the Managers who have not wrongfully dissolved the Company or, if none, the Members, shall execute a Certificate of Dissolution in such form as shall be prescribed by the California Secretary of State and file the Certificate as required by the Act. 28 10.3 Winding Up. Upon the occurrence of any event specified in Section ---------- 10.1, the Company shall continue solely for the purpose of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors. The Persons winding up the affairs of the Company shall give written notice of the commencement of winding up by mail to all known creditors and claimants whose addresses appear on the records of the Company. 10.4 Order of Payment Upon Dissolution. After determining that all the --------------------------------- known debts and liabilities of the Company, including, without limitation, debts and liabilities to Members who are creditors of the Company, have been paid or adequately provided for, the remaining assets shall be distributed to the Members in the following order of priority: (i) first, to the Members in satisfaction for distributions under Sections 17201, 17202 or 17255 of the Corporations Code; (ii) second, to the members for the return of their Capital Contributions in proportion to the unreturned balances thereof; and (iii) thereafter, to the Members in the proportions in which they share in distributions. 10.5 Limitations on Payments Made in Dissolution. Except as otherwise ------------------------------------------- specifically provided in this Agreement, each Member shall only be entitled to look solely at the assets of the Company for the return of his or her positive Capital Account balance and shall have no recourse for his or her Capital Contribution and/or share of Net Profits (upon dissolution or otherwise) against the Managers or any other Member. 10.6 Certificate of Cancellation. The Managers or Members who filed the --------------------------- Certificate of Dissolution shall cause to be filed in the office of, and on a form prescribed by, the California Secretary of State, a Certificate of Cancellation of the Articles upon the completion of the winding up of the affairs of the Company. ARTICLE XI CONVERSION TO C CORPORATION 11.1 Notwithstanding anything to the foregoing set forth herein, parties listed on the signature pages hereof hereby agree that the Company shall automatically convert to a "C" Corporation on the effective date of the Company's initial public offering of shares of its capital stock pursuant to a Registration Statement filed pursuant to the Securities Act of 1933, as amended, and that no further consent of the Members or Managers shall be required for such conversion. The Members' Membership Interests shall automatically convert into shares of Common Stock at the same pro rata proportion that the Percentage Interest of each member bears to the aggregate of the Percentage Interests of all of the Members. Each of the Members and Managers agree to take all actions necessary to effectuate such conversion. 29 ARTICLE XII INDEMNIFICATION 12.1 Indemnification of Agents. The Company shall defend and indemnify any ------------------------- Member or Manager and may indemnify any other 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 by reason of the fact that he or she is or was a Member, Manager, officer, employee or other agent of the Company or that, being or having been such a Member, Manager, officer, employee or agent, he or she is or was serving at the request of the Company as a manager, director, officer, employee or other agent of another limited liability company, corporation, partnership, joint venture, trust or other enterprise, to the fullest extent permitted by applicable law in effect on the date hereof and to such greater extent as applicable law may hereafter from time to time permit. The Managers shall be authorized, on behalf of the Company, to enter into indemnity agreements from time to time with any Person entitled to be indemnified by the Company hereunder, upon such terms and conditions as the Managers deem appropriate in their business judgment. ARTICLE XIII INVESTMENT REPRESENTATIONS 13.1 Member Representations. Each Member hereby represents and warrants ---------------------- to, and agrees with, the Managers, the other Members, and the Company as follows: 13.1.1 Preexisting Relationship or Experience. (i) He/she/it has a -------------------------------------- preexisting personal or business relationship with the Company or one or more of its officers or control persons or (ii) by reason of his/her/its business or financial experience, or by reason of the business or financial experience of his/her/its financial advisor who is unaffiliated with and who is not compensated, directly or indirectly, by the Company or any affiliate or selling agent of the Company, he/she/it is capable of evaluating the risks and merits of an investment in the Membership Interest and of protecting his/her/its own interests in connection with this investment. 13.1.2 No Advertising. He/she/it has not seen, received, been -------------- presented with, or been solicited by any leaflet, public promotional meeting, newspaper or magazine article or advertisement, radio or television advertisement or any other form of advertising or general solicitation with respect to the sale of the Membership Interest. 13.1.3 Investment Intent. He/she/it is acquiring the Membership ----------------- Interest for investment purposes for his/her/its own account only and not with a view to or for sale in connection with any distribution of all or any part of the Membership Interest. No 30 other person will have any direct or indirect beneficial interest in or right to the Membership Interest. 13.2 Knyal Representations. Knyal hereby represents and warrants to ICII --------------------- and the Company as follows: 13.2.1 Authority Relative to This Agreement. Knyal's owns 100% of ------------------------------------ the outstanding capital stock of FMAC. FMAC has the full right, power and authority to execute and deliver the Assignment and Assumption and to perform the transactions contemplated thereunder. The Assignment and Assumption has been duly executed and delivered by FMAC and are the legal, valid and binding obligation of FMAC, enforceable in accordance with its terms, subject to the Enforceability Exceptions. Neither FMAC or Knyal is subject to or obligated under any contract provision or any license, agreement, indenture, instrument, franchise or Permit, or subject to any judgment, Law, order or decree, which would be breached or violated by or in conflict with the execution and carrying out of the Assignment and Assumption and the transactions contemplated thereunder. The execution, delivery and performance of the Assignment and Assumption and the consummation of the transactions contemplated thereunder will not result in the creation of any Lien upon the Transferred Interests. 13.2.2 Consents. No consent of any Person, nor consent of any -------- Governmental Body, is required to be obtained on the part of either FMAC or Knyal to permit the transactions contemplated pursuant to the Assignment and Assumption. 13.2.3 Tax Matters. FMAC has fully and timely, properly and ----------- accurately paid any and all such taxes due with respect to the Transferred Interests and there are no pending assessments, asserted deficiencies or claims for additional taxes with respect thereto that have not been paid. 13.2.4 Title to Transferred Interests. ------------------------------ (a) FMAC owns and has good and valid title to the Transferred Interests, free and clear of all Liens; (b) Upon consummation of the transactions contemplated under the Assignment and Assumption, the Company will have acquired good and valid title in and to, the Transferred Interests, free and clear of all Liens, provided, however, that no representation is made as to the ownership, title or rights to any software; and (c) The Company shall be entitled to all of the benefits of the Transferred Interests without the necessity of any consent, authorization or agreement from or with any Person. 31 13.2.5 Litigation. ---------- (a) There is no Legal Proceeding pending or, to the knowledge of the Knyal, threatened: (i) against either FMAC or Knyal in connection with the Transferred Interests; (ii) that seeks to enjoin or obtain damages in respect of the consummation of the transactions contemplated by the Assignment and Assumption; or (iii) that questions the validity of the Assignment and Assumption or any action taken or to be taken by either FMAC or Knyal in connection with the consummation of the transactions contemplated thereby; and (b) Neither FMAC or Knyal is in default under or in breach or violation of, nor, to Knyal's knowledge, is there any valid basis for any claim of default by either FMAC or Knyal under, or breach or violation by either FMAC or Knyal of, any contract, commitment or restriction to which FMAC or Knyal is a party or to which it or any of its properties including, but not limited to, the Transferred Interests, is subject or bound, where such defaults, breaches, or violations would, in the aggregate, have an adverse effect on the Transferred Interests. To Knyal's knowledge, no other party is in default under or in breach or violation of, nor is there any valid basis for any claim of default by any other party under or any breach or violation by any other party of, any material contract, commitment, or restriction to which either FMAC or Knyal is bound or by which any of its properties, including but not limited to the Transferred Interests, is subject or bound, where such defaults, breaches, or violations would, in the aggregate, have an adverse effect on the Transferred Interests. 13.2.6 Compliance with Law. ------------------- (a) The Transferred Interests are in compliance with all applicable material Laws and Orders of Governmental Bodies. Neither FMAC or Knyal has received, nor knows of the issuance of, any notice of any violation or alleged violation of any applicable Laws and Orders of Governmental Bodies, with respect to the Transferred Interests; and (b) To Knyal's knowledge, neither FMAC or Knyal is under investigation with respect to any violation of any Law, order or judgment entered by any court, arbitrator or Governmental Body, applicable to the Transferred Interests. 13.2.7 Disclosure. No statements by Knyal or FMAC contained in the ---------- Assignment and Assumption and the Schedules and Exhibits attached hereto, or any 32 written statement or certificate furnished or to be furnished pursuant hereto or in connection with the transactions contemplated hereby and thereby (when read together) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances under which they were made. ARTICLE XIV MISCELLANEOUS 14.1 Operations; Senior Loan Committee. ICII and Knyal agree to use their --------------------------------- best efforts to cause the business of the Company to be conducted in accordance with sound business practice, and in a lawful manner, and to endeavor to preserve for the Company the goodwill of its customers, employees and others having business relations with it. The Managers shall establish a Senior Loan Committee, to which all loan financings shall be submitted for approval. The Committee shall have three (3) members, two of which shall be selected by ICII and the remaining member selected by Knyal. All loan financings must receive the unanimous approval of the Committee. ICII and Knyal also contemplate that a separate loan committee, whose members consist solely of Managers and/or Officers of the Company, will be established; the duty of such committee will be to preapprove certain loans for consideration by the Senior Loan Committee. The composition of any such separate loan committee will be agreed to by ICII and Knyal. The parties acknowledge that Knyal has previously been involved in businesses substantially similar to the business of the Company. 14.2 Complete Agreement. This Agreement and the Articles constitute the ------------------ complete and exclusive statement of agreement among the Members and Managers with respect to the subject matter herein and therein and replace and supersede all prior written and oral agreements or statements by and among the Members and Managers or any of them. To the extent that any provision of the Articles conflict with any provision of this Agreement, the Articles shall control. 14.3 Binding Effect. Subject to the provisions of this Agreement relating -------------- to transferability, this Agreement will be binding upon and inure to the benefit of the Members, and their respective successors and assigns. 14.4 Interpretation. In the event any claim is made by any Member relating -------------- to any conflict, omission or ambiguity in this Agreement, no presumption or burden of proof 33 or persuasion shall be implied by virtue of the fact that this Agreement was prepared by or at the request of a particular Member or his or her counsel. 14.5 Jurisdiction. Each Member hereby consents to the exclusive ------------ jurisdiction of the state and federal courts sitting in California in any,action on a claim arising out of, under or in. connection with this Agreement or the transactions contemplated by this Agreement, provided such claim is not required to be arbitrated pursuant to Section 14.6. Each Member further agrees that personal jurisdiction over him or her may be effected by service of process by registered or certified mail addressed as provided in Section 14.8 of this Agreement, and that when so made shall be as if served upon him or her personally within the State of California. 14.6 Arbitration. Except as otherwise provided in this Agreement, any ----------- controversy between the parties arising out of this Agreement shall be submitted to the American Arbitration Association for arbitration in Los Angeles, California. The costs of the arbitration, including any American Arbitration Association administration fee, the arbitrator's fee, and costs for the use of facilities during the hearings, shall be borne equally by the parties to the arbitration. Attorneys' fees may be awarded to the prevailing party at the discretion of the arbitrator. The provisions of Sections 1282.6, 1283, and 1283.05 of the California Code of Civil Procedure apply to the arbitration. The arbitrator shall not have any power to alter, amend, modify or change any of the terms of this Agreement nor to grant any remedy which is either prohibited by the terms of this Agreement, or not available in a court of law. 14.7 Severability. If any provision of this Agreement or the application ------------ of such provision to any person or circumstance shall be held invalid, the remainder of this Agreement or the application of such provision to persons or circumstances other than those to which it is held invalid shall not be affected thereby. 14.8 Notices. Any notice to be given or to be served upon the Company or ------- any party hereto in connection with this Agreement must be in writing (which may include facsimile) and will be deemed to have been given and received when delivered to the address specified by the party to receive the notice. Such notices will be given to a Member or Manager at the address specified in Exhibit A hereto. Any party may, at any time by giving five (5) days' prior written notice to the other parties, designate any other address in substitution of the foregoing address to which such notice will be given. 14.9 Amendments. All amendments to this Agreement will be in writing and ---------- signed by all of the Members. 14.10 Multiple Counterparts. This Agreement may be executed in two or --------------------- more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 34 14.11 Attorney Fees. In the event that any dispute between the Company ------------- and the Members or among the Members should result in litigation or arbitration, the prevailing party in such dispute shall be entitled to recover from the other party all reasonable fees, costs and expenses of enforcing any right of the prevailing party, including without limitation, reasonable attorneys' fees and expenses, all of which shall be deemed to have accrued upon the commencement of such action and shall be paid whether or not such action is prosecuted to judgment. Any judgment or order entered in such action shall contain a specific provision providing for the recovery of attorney fees and costs incurred in enforcing such judgment and an award of prejudgment interest from the date of the breach at the maximum rate of interest allowed by law. For the purposes of this Section: (a) attorney fees shall include, without limitation, fees incurred in the following: (1) postjudgment motions; (2) contempt proceedings; (3) garnishment, levy, and debtor and third party examinations; (4) discovery; and (5) bankruptcy litigation and (b) prevailing party shall mean the party who is determined in the proceeding to have prevailed or who prevails by,dismissal, default or otherwise. 14.12 Captions. The Section and Article captions contained in this -------- Agreement are inserted only as a matter of convenience and reference and in no way define, limit or describe the scope of this Agreement or the intent of any provisions hereof. All of the Members of Imperial Credit Franchise Mortgage LLC, a California limited liability company, have executed this Agreement, effective as of the date written above. MEMBERS: /s/ Wayne L. Knyal --------------------------------- Wayne L. Knyal Imperial Credit Industries, Inc., a California corporation By: /s/ H. Wayne Snavely ------------------------------ H. Wayne Snavely, Its Chairman of the Board 35 EXHIBIT A --------- CAPITAL CONTRIBUTION OF MEMBERS AND ADDRESSES OF MEMBERS AND MANAGERS AS OF JUNE 30, 1995
Member's Capital Member's Member's Name Member's Address Contribution Percentage Interest - ------------------- ------------------- ---------------------------- -------------------- Wayne Knyal 11560 Bellagio Rd. Transferred Interests 33.33% Los Angeles, CA. (defined under Section 1.45 90049 herein and valued at $ 645,000) Imperial Credit 20371 Irvine Avenue $1,290,000 66.66% Industries, Inc. Suite 104 ---------- ------ Santa Ana Heights, CA 92707 ---------- ------- Total $1,935,000 100.00% ========== =======
Manager's Name Manager's Address - ---------------- ------------------ Ronald V. Davis Davis Capital L.L.C. 72 Commings Point Stamford, CT 06902 Michael Matkins Allen, Matkins, Lack Gamble & Mallocy 515 S. Figueroa, 8th Floor Los Angeles, CA 90071 Wayne Knyal 11560 Bellagio Road Los Angeles, CA 90049 H. Wayne Snavely c/o Imperial Credit Industries, Inc. 20371 Irvine Avenue Santa Ana Heights, CA 92707 Stephen Shugerman c/o Southern Pacific Thrift and Loan Association 12300 Wilshire Boulevard Los Angeles, CA 90025 Joseph Tomkinson c/o Imperial Credit Industries, Inc. 20371 Irvine Avenue Santa Ana Heights, CA 92707 Perry Lerner c/o Imperial Credit Industries, Inc. 20371 Irvine Avenue Santa Ana Heights, CA 92707 ACKNOWLEDGMENT AND AGREEMENT The undersigned is a member of Imperial Credit Franchise Mortgage LLC, a California limited liability company (the "Company"). Unless otherwise defined herein, all terms used herein shall have the meanings ascribed to them in the Operating Agreement of the Company dated as of June 30, 1995. The undersigned acknowledges, confirms and agrees that he holds his Membership Interest in the Company as a nominee for Franchise Mortgage Acceptance Corporation, a California Corporation ("FMAC"), and that FMAC is the beneficial owner of the entire Membership Interest in the Company held in the name of Knyal as of the date hereof. Dated: June 30, 1995 /s/ Wayne L. Knyal ----------------------- Wayne L. Knyal ACKNOWLEDGMENT STATE OF NEW YORK : : SS: COUNTY OF NEW YORK : I CERTIFY that on June 30, 1995, WAYNE L. KNYAL personally came before me and stated to my satisfaction that he signed the above Acknowledgment and Agreement as his own act. /s/ Linda Sperling ------------------------ Linda Sperling Notary Public, State of New York No. 41-4746621 Qualified in Queens County Commission Expires May 31, 1997 EX-3.3 5 ARTICLES OF INCORPORATION OF REGISTRANT EXHIBIT 3.3 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 08/21/1997 971281213 - 2788016 CERTIFICATE OF INCORPORATION OF FRANCHISE MORTGAGE ACCEPTANCE COMPANY FIRST. The name of the corporation is FRANCHISE MORTGAGE ACCEPTANCE COMPANY. SECOND. The address of the corporations' registered office in the State of Delaware is 15 East North Street, Dover, Delaware 19901. The name of the registered agent at such address is Paracorp Incorporated. THIRD. The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH. A. The total number of shares of stock which the corporation shall have the authority to issue is One Hundred Ten Million (110,000,000), divided into One Hundred (100,000,000) shares of Common Stock of the par value of $0.001 per share and Ten Million (10,000,000) shares of Preferred Stock of the par value of $0.001 per share. B. The shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors is expressly authorized to fix by resolution(s) the designation of each series of Preferred Stock and the powers, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, including, without limitation, such provisions as may be desired concerning the dividend rights, the dividend rate, conversion rate, conversion rights, voting rights, rights in terms of redemption (including sinking fund provisions), the redemption price or prices, the liquidation preferences and such other subjects or matters as may be fixed by resolution(s) of the Board of Directors under the General Corporation Law of Delaware; and to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any such series (but not below the number of shares of any such series then outstanding). In the event that the number of shares of any such series shall be so decreased, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution(s) originally fixing the number of shares of such series. All Preferred Stock of the same series shall be identical in all respects, except for the dates from which dividends, if any, shall be cumulative. FIFTH. The name and mailing address of the incorporator is Kasey Hannah, 9100 Wilshire Blvd., 8E, Beverly Hills, California 91021. SIXTH. The Board of Directors of the corporation is expressly authorized to make, alter or repeal by-laws of the corporation, but the stockholders may make additional by-laws and may alter or repeal any by-law whether adopted by them or otherwise. SEVENTH. Elections of directors need not be by written ballot except and to the extent provided in the by-laws of the corporation. EIGHTH. No director of the corporation shall be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (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) under Section 174 of the General Corporation law, or (iv) for any transaction from which the director derived an improper personal benefit. The undersigned incorporator hereby acknowledges that the foregoing certificate of incorporation is her act and deed and that the facts stated therein are true. /s/ Kasey Hannah, Incorporator -------------------------------------- Kasey Hannah, Incorporator EX-10.1 6 FORM OF 1997 STOCK OPTION PLAN EXHIBIT 10.1 FRANCHISE MORTGAGE ACCEPTANCE COMPANY 1997 STOCK OPTION, DEFERRED STOCK AND RESTRICTED STOCK PLAN SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS. ------------------------------------ (a) This plan is intended to implement and govern the Stock Option, Deferred Stock and Restricted Stock Plan (the "Plan") of Franchise Mortgage Acceptance Company, a Delaware corporation (the "Company"). The Plan was adopted by the Board on August , 1997, subject to the approval of the Company's stockholders. The purpose of the Plan is to enable the Company and its Subsidiaries, to obtain and retain competent personnel who will contribute to the Company's success by their ability, ingenuity and industry, and to provide incentives to such personnel and members that are linked directly to increases in stockholder value, and will therefore, inure to the benefit of all stockholders of the Company. (b) For purposes of the Plan, the following terms shall be defined as set forth below: (1) "Award" means any award of Deferred Stock, Restricted Stock, ----- Stock Appreciation Right, Limited Stock Appreciation Right or Stock Option. (2) "Board" means the Board of Directors of the Company. ----- (3) "Code" means the Internal Revenue Code of 1986, as amended from ---- time to time, or any successor thereto. (4) "Committee" means the Compensation Committee of the Board plus --------- such additional directors of the Company as the Board shall designate. (5) "Company" means Franchise Mortgage Acceptance Company, a ------- Delaware corporation, organized under the laws of the State of Delaware (or any successor corporation). (6) "Deferred Stock" means an award made pursuant to Section 7 -------------- below of the right to receive Stock at the end of a specified deferral period. (7) "Disability" means permanent and total disability as determined ---------- under the Company's disability program or policy. (8) "Effective Date" shall mean the date provided pursuant to -------------- Section 16. (9) "Eligible Employee" means an employee of the Company or any ----------------- Subsidiary eligible to participate in the Plan pursuant to Section 4. 1 (10) "Fair Market Value" means, as of any given date, with respect to any ----------------- any Awards granted hereunder, at the discretion of the Committee and subject to such limitations as the Committee may impose, (A) the closing sale price of the Stock on such date as reported in the Western Edition of the Wall Street Journal Composite Tape or (B) the average on such date of the closing price of the Stock on each day on which the Stock is traded over a period of up to twenty trading days immediately prior to such date or (C) if on the date for which current fair market value is to be determined the Stock is not listed on any securities exchange or quoted in the NASDAQ System or over-the-counter market, the current fair market value of the Stock shall be the highest price per share which the Company could then obtain from a willing buyer (not a current employee or director) for shares of the Stock sold by the Company, from authorized but unissued shares, as determined in good faith by the Board. (11) "Incentive Stock Option" means any Stock option intended to be ---------------------- designated as an "incentive stock option" within the meaning of Section 422 of the Code. (12) "IPO" means the Company's initial public offering of its Stock on --- Registration Statement Form S-1. (13) "Limited Stock Appreciation Right" means a Stock Appreciation Right -------------------------------- that can be exercised only in the event of a Change of Control as defined in Section 10. (14) "Non-Qualified Stock Option" means any Stock Option that is not an -------------------------- Incentive Stock Option, including any Stock Option that provides (as of the time such option is granted) that it will not be treated as an Incentive Stock Option. (15) "Parent Corporation" means any corporation (other than the Company) in ------------------ an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing 50% or more of the combined voting power of all classes of stock in one of the other corporations in the chain. (16) "Participant" means any Eligible Employee selected by the Committee, ----------- pursuant to the Committee's authority in Section 2 below, to receive grants of Stock Options or Awards or any combination of the foregoing. (17) "Restricted Period" means the period set by the Committee as it ----------------- pertains to Deferred Stock or Restricted Stock awards pursuant to Section 7. (18) "Restricted Stock" means an award of shares of Stock that is subject ---------------- to restrictions under Section 7 that will lapse with the passage of time or upon the attainment of performance objectives. (19) "Stock" means the Common Stock, no par value per share, of the ----- Company. (20) "Stock Appreciation Right" means the right pursuant to an award ------------------------ granted under Section 6 below to receive an amount equal to the difference between (i) the Fair Market Value, as of the date such Stock Appreciation Right or portion thereof is surrendered, of the shares of Stock covered by such right or such portion thereof and (ii) the aggregate exercise price of such right or such portion thereof. 2 (21) "Stock Option" means any option to purchase shares of Stock granted ------------ pursuant to Section 5. (22) "Subsidiary" means any corporation (other than the Company) in an ---------- unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 2. ADMINISTRATION. (a) The Plan shall be administered by the Committee which shall be appointed by the Board and which shall serve at the pleasure of the Board. (b) The Committee shall have the power and authority to grant to Eligible Employees, pursuant to the terms of the Plan: (A) Stock Options, (B) Stock Appreciation Rights, (C) Deferred Stock, (D) Restricted Stock, or (E) any combination of the foregoing. In particular, the Committee shall have the authority; (1) to select those employees of the Company or its Subsidiaries who are Eligible Employees; (2) to determine whether and to what extent Stock Options, Stock Appreciation Rights, Deferred Stock, Restricted Stock or a combination of the foregoing, are to be granted to Eligible Employees hereunder; (3) to determine the number of shares of Stock to be covered by each such Award; (4) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any such Award including, but not limited to, (x) the restricted period applicable to Deferred Stock or Restricted Stock awards, (y) the date or dates on which restrictions applicable to such Deferred Stock or Restricted Stock shall lapse during such period, and (z) when and in what increments shares covered by Stock Options may be purchased; and (5) to determine the terms and conditions, not inconsistent with the terms of the Plan, which shall govern all written instruments evidencing the Stock Options, Stock Appreciation Rights, Deferred Stock, Restricted Stock or any combination of the foregoing. (c) The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall from time to time deem advisable; to interpret the terms and provisions of the Plan and any Award issued under the Plan; and to otherwise supervise the administration of the Plan. (d) All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and its Subsidiaries and the Participants. SECTION 3. STOCK SUBJECT TO PLAN. 3 (a) The total number of shares of Stock reserved and available for issuance under the Plan shall be ( ) shares of Stock. Such shares shall consist of authorized but unissued shares. (b) To the extent that (i) a Stock Option expires or is otherwise terminated without being exercised or (ii) any shares of Stock subject to any Deferred Stock or Restricted Stock award granted hereunder are forfeited, such shares shall again be available for issuance in connection with future Awards under the Plan. If any shares of Stock have been pledged as collateral for indebtedness incurred by a Participant in connection with the exercise of a Stock Option and certificates representing such shares are surrendered to the Company in satisfaction of such indebtedness, such shares shall again be available for issuance in connection with future Awards under the Plan. (c) In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, or other change in corporate structure affecting the Stock, a substitution or adjustment shall be made in (i) the aggregate number of shares reserved for issuance under the Plan, and (ii) the kind, number and option price of shares subject to outstanding Stock Options granted under the Plan as may be determined by the Committee, in its sole discretion, provided that the number of shares subject to any Award shall always be a whole number. Such other substitutions or adjustments shall be made as may be determined by the Committee, in its sole discretion. An adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right. SECTION 4. ELIGIBILITY. Officers and other key employees of the Company or its Subsidiaries who are responsible for or contribute to the management, growth and/or profitability of the business of the Company or its Subsidiaries, and the directors of the Company and its Subsidiaries, shall be eligible to be granted Non-Qualified Stock Options, Stock Appreciation Rights, and Deferred Stock or Restricted Stock awards hereunder. Officers and other key employees of the Company or its Subsidiaries shall also be eligible to be granted Incentive Stock Options hereunder. The Participants under the Plan shall be selected from time to time by the Committee, in its sole discretion, from among Eligible Employees recommended by the senior management of the Company, and the Committee shall determine, in its sole discretion, the number of shares covered by each Award. SECTION 5. STOCK OPTION FOR ELIGIBLE EMPLOYEES (a) Stock Options may be granted to Eligible Employees alone or in addition to other Awards granted under the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve, and the provisions of Stock Options need not be the same with respect to each optionee. Recipients of Stock Options shall enter into a Stock Option Agreement with the Company, in such form as the Committee shall determine, which agreement shall set forth, among other things, the exercise price of the option, the term of the option and provisions regarding exercisability of the option granted thereunder. i) The Stock Options granted under the Plan to Eligible Employees may be of two types: (x) Incentive Stock Options and (y) Non-Qualified Stock Options. 4 ii) The Committee shall have the authority to grant any Eligible Employee (x) Incentive Stock Options (provided such Eligible Employee is also an employee of the Company or its Subsidiaries), (y) Non-Qualified Stock Options, or (z) both types of Stock Options (in each case with or without Stock Appreciation Rights or Limited Stock Appreciation Rights). To the extent that any Stock Option does not qualify as an Incentive Stock Option, it shall constitute a separate Non- Qualified Stock Option. (b) Stock Options granted under this Section 5 shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: i) Option Price. The option price per share of Stock purchasable ------------ under a Stock Option shall be determined by the Committee at the time of grant but shall be not less than 100% of the Fair Market Value of the Stock on such date. If an employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the option price of such Incentive Stock Option (to the extent required by the Code at the time of grant) shall be no less than 110% of the Fair Market Value of the Stock on the date such Incentive Stock Option is granted. ii) Option Term. The term of each Stock Option shall be fixed ----------- by the Committee, but no Stock Option shall be exercisable more than ten years after the date such Stock Option is granted; provided, however, that if an employee owns or is deemed to own -------- ------- (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the term of such Incentive Stock Option (to the extent required by the Code at the time of grant) shall be no more than five years from the date of grant. (c) Exercisability. Stock Options shall be exercisable at such time -------------- or times and subject to such terms and conditions as shall be determined by the Committee at or after grant; provided, however, that, except as provided herein -------- ------- or unless otherwise determined by the Committee at or after grant, Stock Options shall be exercisable one year following the date of grant of the option. If the Committee provides, in its discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time in whole or in part based on such factors as the Committee may determine in its sole discretion. (d) Method of Exercise. Subject to Section 5(c) above, Stock Options ------------------ may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the purchase price in cash or its equivalent, as determined by the Committee. As determined by the Committee, in its sole discretion, payment in whole or in part may also be made 5 (i) in the form of unrestricted Stock already owned by the optionee, or, in the case of the exercise of a Non-Qualified Stock Option, Restricted Stock subject to an Award hereunder (based, in each case, on the Fair Market Value of the Stock on the date the option is exercised), (ii) by cancellation of any indebtedness owed by the Company to the optionee, (iii) by a full recourse promissory note executed by the optionee, or (iv) by any combination of the foregoing; provided, however, that in the case of an Incentive Stock Option -------- ------- the right to make payment in the form of already owned shares may be authorized only at the time of grant. An optionee shall generally have the rights to dividends and other rights of a stockholder with respect to shares subject to the option only after the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in paragraph (a) of Section 11. (e) The Committee may require the voluntary surrender of all or a portion of any Stock Option granted under the Plan as a condition precedent to a grant of a new Stock Option. Subject to the provisions of the Plan, such new Stock Option shall be exercisable at the price, during such period and on such other terms and conditions as are specified by the Committee at the time the new Stock Option is granted; provided, however, should the Committee so require, the -------- ------- number of shares subject to such new Stock Option shall not be greater than the number of shares subject to the surrendered Stock Option. Upon their surrender, the Stock Options shall be canceled and the shares previously subject to such canceled Stock Options shall again be available for the grants of Stock Options and other Awards hereunder. (f) Loans. The Company may make loans available to Stock Option ----- holders as the Committee, in its discretion, may determine in connection with the exercise of outstanding options granted under the Plan. Such loans shall (i) be evidenced by promissory notes entered into by the holders in favor of the Company, (ii) be subject to the terms and conditions set forth in this Section 5(f) and such other terms and conditions, not inconsistent with the Plan, as the Committee shall determine, (iii) bear interest, if any, at such rate as the Committee shall determine and (iv) be subject to Board approval. In no event may the principal amount of any such loan exceed the sum of (x) the exercise price less the par value of the shares of Stock covered by the option, or portion thereof, exercised by the holder and (y) any Federal, state, local income tax attributable to such exercise. The initial term of the loan, the schedule of payments of principal and interest under the loan, the extent to which the loan is to be with or without recourse against the holder with respect to principal or interest and the conditions upon which the loan will become payable in the event of the holder's termination of employment shall be determined by the Committee; provided, however, that the term of the loan, -------- ------- including extensions, shall not exceed seven years. Unless the Committee determines otherwise, when a loan shall have been made, shares of Common Stock having a Fair Market Value at least equal to the principal amount of the loan shall be pledged by the holder to the Company as security for payment of the unpaid balance of the loan, and such pledge shall be evidenced by a pledge agreement, the terms of which shall be determined by the Committee, in its discretion; provided, however, that each loan shall comply with all applicable -------- ------- laws, regulations and rules of the Board of Governors of the Federal Reserve System and any other governmental agency having jurisdiction. (g) Non-transferability of Options. No Stock Options shall be ------------------------------ transferable by the optionee otherwise than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. To the extent such Options and intended to qualify as Incentive Stock Options no disposition of an Optioned Share may be made 6 by optionee within two (2) years from the date of the granting of the Option(s) nor within one (1) year after the transfer of such Optioned Share to him. (h) Termination by Death. If an optionee's employment with the -------------------- Company and any Subsidiary terminates by reason of death, the Stock Option may thereafter be immediately exercised, to the extent then exercisable (or on such accelerated basis as the Committee shall determine at or after grant), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of twelve months (or such shorter period as the Committee shall specify at grant) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is shorter. (i) Termination by Reason or Disability. If an optionee's employment ----------------------------------- with the Company or any Subsidiary terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised, to the extent it was exercisable at the time of such termination (or on such accelerated basis as the Committee shall determine at the time of grant), for a period of twelve months (or such shorter period as the Committee shall specify at grant) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is shorter; provided, however, that, if the -------- ------- optionee dies within such twelve-month period (or such shorter period as the Committee shall specify at grant) and prior to the expiration of the stated term of such Stock Option, any unexercised Stock Option held by such optionee shall thereafter be exercisable to the extent to which it was exercisable at the time of death for a period of twelve months (or such shorter period as the Committee shall specify at grant) from the time of death or until the expiration of the stated term of such Stock Option, whichever period is shorter. In the event of a termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (j) Other Termination. Except as otherwise provided in this paragraph ----------------- or otherwise determined by the Committee, if an optionee's employment with the Company or any Subsidiary terminates for any reason other than death or Disability, the Stock Option may be exercised until the earlier to occur of (A) three months from the date of such termination or (B) the expiration of such Stock Option's term. (k) Annual Limit on Incentive Stock Options. To the extent that the --------------------------------------- aggregate Fair Market Value (determined as of the date the Incentive Stock Option is granted) of the shares of Stock with respect to which Incentive Stock Options granted under this Plan and all other option plans of the Company, its Parent Corporation and any Subsidiary become exercisable for the first time by an optionee during any calendar year exceed $100,000, such options shall be treated as Non-Qualified Stock Options. (l) Annual Limit on Stock Options. More than one Stock Option may be ----------------------------- granted to an Eligible Employee during any fiscal year of the Company, but the aggregate number of shares of Stock underlying Stock Options granted to any Eligible Employee during any such fiscal year shall not exceed fifty percent (50%) of the shares of Stock reserved for issuance under the Plan pursuant to Section 3 of the Plan. 7 SECTION 6. STOCK APPRECIATION RIGHTS. (a) Grant and Exercise. Stock Appreciation Rights may be granted to ------------------ Eligible Employees either alone ("Free Standing Rights") or in conjunction with all or part of any Stock Option granted under the Plan ("Related Rights"). In the case of a Non-Qualified Stock Option, Related Rights may be granted either at or after the time of the grant of such Stock Option. In the case of an Incentive Stock Option, Related Rights may be granted only at the time of the grant of the Incentive Stock Option. A Related Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option, except that, unless otherwise provided by the Committee at the time of grant, a Related Right granted with respect to less than the full number of shares covered by a related Stock Option shall only be reduced if and to the extent that the number of shares covered by the exercise or termination of the related Stock Option exceeds the number of shares not covered by the Stock Appreciation Right. A Related Right may be exercised by an optionee, in accordance with paragraph (b) of this Section 6, by surrendering the applicable portion of the related Stock Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in paragraph (b) of this Section 6. Stock Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the Related Rights have been exercised. (b) Terms and Conditions. Stock Appreciation Rights shall be subject -------------------- to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following; i) Stock Appreciation Rights that are Related Rights ("Related Stock Appreciation Rights") shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 6 of the Plan; provided, however, that -------- ------- any Related Stock Appreciation Right shall not be exercisable during the first six months of the term of the Related Stock Appreciation Right, except that this additional limitation shall not apply in the event of death or Disability of the optionee prior to the expiration of the six-month period. ii) Upon the exercise of a Related Stock Appreciation Right, an optionee shall be entitled to receive up to, but not more than, an amount in cash or that number of shares of Stock (or in some combination of cash and shares of Stock) equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Related Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. 8 (c) Related Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under paragraph (g) of Section 5 of the Plan. (d) Upon the exercise of a Related Stock Appreciation Right, the Stock Option or part thereof to which such Related Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Stock to be issued under the Plan, but only to the extent of the number of shares issued under the Related Stock Appreciation Right. (e) A Related Stock Appreciation Right granted in connection with an Incentive Stock Option may be exercised only if and when the market price of the stock subject to an Incentive Stock Option exceeds the exercise price of such Stock Option. (f) Stock Appreciation Rights that are Free Standing Rights ("Free Standing Stock Appreciation Rights") shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at or after grant; provided, however, that Free Standing Stock Appreciation -------- ------- Rights shall not be exercisable during the first six months of the term of the Free Standing Stock Appreciation Right, except that this limitation shall not apply in the event of death or Disability of the recipient of the Free Standing Stock Appreciation Right prior to the expiration of the six-month period. (g) The term of each Free Standing Stock Appreciation Right shall be fixed by the Committee, but no Free Standing Stock Appreciation Right shall be exercisable more than ten years after the date such right is granted. (h) Upon the exercise of a Free Standing Stock Appreciation Right, a recipient shall be entitled to receive up to, but not more than, an amount in cash or that number of shares of Stock (or any combination of cash or shares of Stock) equal in value to the excess of the Fair Market Value of one share of Stock over the price per share specified in the Free Standing Stock Appreciation Right (which shall be no less than 100% of the Fair Market Value of the Stock on the date of grant) multiplied by the number of shares in respect to which the right is being exercised, with the Committee having the right to determine the form of payment. (i) No Free Standing Stock Appreciation Right shall be transferable by the recipient otherwise than by will or by the laws of descent and distribution, and all such rights shall be exercisable, during the recipient's lifetime, only by the recipient. (j) In the event of the termination of an employee who has received Free Standing Stock Appreciation Rights, such rights shall be exercisable to the same extent that a Stock Option would have been exercisable in the event of the termination of the optionee. SECTION 7. DEFERRED STOCK AND RESTRICTED STOCK. (a) General. Deferred Stock and Restricted Stock awards may be issued ------- to Eligible Employees either alone or in addition to other Awards granted under the Plan. The Committee shall determine to whom, and the time or times at which, grants of Deferred Stock or Restricted Stock awards will be made; the number of shares to be awarded; the price, if any, to be 9 paid by the recipient of Deferred Stock or Restricted Stock awards; the Restricted Period (as defined in paragraph (c) hereof) applicable to Deferred Stock or Restricted Stock awards; the performance objective applicable to Deferred Stock or Restricted Stock awards; the date or dates on which restrictions applicable to such Deferred Stock or Restricted Stock awards shall lapse during such Restricted Period; and all other conditions of the Deferred Stock or Restricted Stock awards. The Committee may also condition the grant of Deferred Stock or Restricted Stock awards upon the exercise of Stock Options, or upon such other criteria as the Committee may determine, in its sole discretion. The provisions of Deferred Stock or Restricted Stock awards need not be the same with respect to each recipient. (b) Awards and Certificates. The prospective recipient of a Deferred ----------------------- Stock or Restricted Stock award shall not have any rights with respect to such Award, unless and until such recipient has executed an agreement evidencing the Award (an "Award Agreement") and has delivered a fully executed copy thereof to the Company, within a period of sixty days (or such other period as the Committee may specify after the Award date). Each Participant who is awarded Restricted Stock shall be issued a stock certificate in respect of such shares of Restricted Stock; and such certificate shall be registered in the name of the Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award, substantially in the following form: The shares of stock represented by this certificate are subject to restrictions and limitations on transferability contained in the Franchise Mortgage Acceptance Company 1997 Stock Option, Deferred Stock and Restricted Stock Plan (the "Plan") and a Restricted Stock Award Agreement (the "Agreement") entered into between the registered owner of the shares of stock represented by this certificate and Franchise Mortgage Acceptance Company, a Delaware corporation (the "Company"). Copies of the Plan and the Agreement will be furnished by the Company to any holder of this certificate upon request and without charge. The Company shall require that the stock certificates evidencing such shares be held in the custody of the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the Participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such Award. With respect to Deferred Stock awards, at the expiration of the Restricted Period, stock certificates in respect of such shares of Deferred Stock shall be delivered to the Participant, or his legal representative, in a number equal to the shares of Stock covered by the Deferred Stock award. (c) Restriction and Conditions. The Deferred Stock or Restricted -------------------------- Stock awards granted pursuant to this Section 7 shall be subject to the following restrictions and conditions: (i) Subject to the provisions of the Plan and the Deferred Stock or Restricted Stock Award Agreements, during such period as may be set by the Committee commencing on the grant date (the "Restricted Period"), the Participant shall not be permitted to sell, transfer, pledge or assign shares of Deferred Stock awarded under the Plan. Within these limits, the Committee may, in its sole discretion, provide for the lapse of such restrictions in installments and 10 may accelerate or waive such restrictions in whole or in part based on such factors and such circumstances as the Committee may determine, in its sole discretion, including, but not limited to, the attainment of certain performance related goals, the Participant's termination, death or Disability or the occurrence of a "Change of Control" as defined in Section 10 below. (ii) With respect to Deferred Stock awards, the Participant shall generally not have the rights of a stockholder of the Company, including the right to vote the shares during the Restricted Period; provided, however, that -------- ------- dividends declared during the Restricted Period with respect to the number of shares covered by a Deferred Stock award shall be paid to the Participant. Certificates for shares of unrestricted Stock shall be delivered to the Participant promptly after, and only after, the Restricted Period shall expire without forfeiture in respect of such shares of Deferred Stock, except as the Committee shall otherwise determine. With respect to the shares of Restricted Stock, except as provided in paragraph (b) of this Section 7, the Participant shall have all of the rights of a stockholder of the Company, including the right to vote the shares, and the right to receive any dividends thereon during the Restricted Period. (iii) Subject to the provisions of the Deferred Stock or Restricted Stock Award Agreement and this Section 7, upon termination of employment for any reason during the Restricted Period, all shares still subject to restriction shall be forfeited by the Participant, and the Participant shall only receive the amount, if any, paid by the Participant for such Deferred Stock or Restricted Stock, plus simple interest at 8% per year. SECTION 8. AMENDMENT AND TERMINATION. (a) The Board may amend, alter or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made that would impair the rights of the Participant under any Award theretofore granted without such Participant's consent, or that without the approval of the stockholders (as described below) would: (i) except as provided in Section 3, increase the total number of shares of Stock reserved for the purpose of the Plan; (ii) except as provided in this Plan, decrease the option price of any Stock Option to less than 100% of the Fair Market Value on the date of the grant of the option; (iii) materially change the employees or class of employees eligible to participate in the Plan; (iv) materially increase the benefits accruing to Participants under the Plan; or (v) extend the maximum option period under paragraph (b) of Section 5 of the Plan. (b) The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but, subject to Section 3 above, no such amendment shall impair the rights of any holder without his or her consent. 11 SECTION 9. UNFUNDED STATUS OF PLAN. The Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payments not yet made to a Participant or optionee by the Company, nothing contained herein shall give any such Participant or optionee any rights that are greater than those of a general creditor of the Company. SECTION 10. CHANGE OF CONTROL. The following acceleration and valuation provisions shall apply in the event of a "Change of Control", as defined in paragraph (b) of this Section 10: (a) in the event of a "Change of Control," unless otherwise determined by the Committee or the Board in writing at or after grant (including under any individual agreement), but prior to the occurrence of such Change of Control; (i) any Stock Appreciation Rights outstanding for at least six months and any Stock Options awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested; (ii) the restrictions applicable to any Restricted Stock or Deferred Stock awards under the Plan shall lapse, and such shares and Awards shall be deemed fully vested; (iii) any indebtedness incurred pursuant to Section 5(f) above shall be forgiven and the collateral pledged in connection with any such loan shall be released; and (iv) the value of all outstanding Stock Options, Stock Appreciation Rights, Limited Stock Appreciation Rights, Restricted Stock and Deferred Stock awards shall, to the extent determined by the Committee at or after grant, be cashed out on the basis of the "Change of Control Price" (as defined in paragraph (c) of this Section 10) as of the date the Change of Control occurs or such other date as the Committee may determine prior to the Change of Control. (b) For purposes of paragraph (a) of this Section 10, a "Change of Control" shall be deemed to have occurred if; (i) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than the Company; any trustee or other fiduciary holding securities under an employee benefit plan of the Company; or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of the Stock of the Company) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates) representing 30% or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of two consecutive years (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement 12 with the Company to effect a transaction described in clause (i), (iii) or (iv) of this Section 10(b)) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company, at least 75% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person acquires more than 50% of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (c) For purposes of this Section 10, "Change of Control Price" means the higher of (i) the highest price per share paid or offered in any transaction related to a Change of Control of the Company or (ii) the highest price per share paid in any transaction reported on the exchange or national market system on which the Stock is listed, at any time during the preceding sixty day period as determined by the Committee, except that, in the case of Incentive Stock Options and Stock Appreciation Rights or Limited Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the Committee decides to cash out such options. SECTION 11. GENERAL PROVISIONS. (a) The Committee may require each person purchasing shares pursuant to a Stock Option to represent to and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commissions, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. (b) Nothing contained in the Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The 13 adoption of the Plan shall not confer upon any employee of the Company or any Subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. (c) Each Participant shall, no later than the date as of which the value of an Award first becomes includable in the gross income of the Participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to the Award. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company (and, where applicable, its Subsidiaries) shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Participant. (d) No member of the Board or the Committee, nor any officer or employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation. SECTION 12. SPECIFIC PERFORMANCE. The Stock Options granted under this Plan and the Shares issued pursuant to the exercise of such Stock Options cannot be readily purchased or sold in the open market, and, for that reason among others, the Company and its stockholders will be irreparably damaged in the event that this Plan is not specifically enforced. In the event of any controversy concerning the right or obligation to purchase or sell any such Option or Optioned Stock, such right or obligation shall be enforceable in a court of equity by a decree of a specific performance. Such remedy shall, however, be cumulative and not exclusive, and shall be in addition to any other remedy which the parties may have. SECTION 13. INVALID PROVISION. In the event that any provision of this Plan is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid unenforceable provision was not contained herein. SECTION 14. APPLICABLE LAW. This Plan shall be governed by and construed in accordance with the laws of the State of California. 14 SECTION 15. SUCCESSORS AND ASSIGNS. This Plan shall be binding on and inure to the benefit of the Company and the employees to whom an Option is granted hereunder, and such employees' heirs, executors, administrators, legatees, personal representatives, assignees and transferees. SECTION 16. EFFECTIVE DATE OF PLAN. The Plan became effective (the "Effective Date") on [ , 1997]. SECTION 17. TERM OF PLAN. No Stock Option, Stock Appreciation Right, Deferred Stock or Restricted Stock award shall be granted pursuant to the Plan on or after the tenth anniversary of the Effective Date, but Awards theretofore granted may extend beyond that date. 15 IN WITNESS WHEREOF, pursuant to the due authorization and adoption of this plan by the Board on the day and year first above written, the Company has caused this Plan to be duly executed by its duly authorized officers. FRANCHISE MORTGAGE ACCEPTANCE COMPANY By:__________________________________ Wayne L. Knyal, President 16 FRANCHISE MORTGAGE ACCEPTANCE COMPANY STOCK OPTION AGREEMENT This AGREEMENT is made effective as of the ______ day of _______________, (the "Option Grant Date"), by and between Franchise Mortgage Acceptance Company, a Delaware corporation (the "Company") and _________________ (the "Optionee"). RECITALS WHEREAS, the Board of Directors of the Company has established the 1997 Stock Option and Awards Plan (the "Plan") effective as of _________, 1997, and WHEREAS, pursuant to the provisions of said Plan, the Board of Directors of the Company, by action duly taken effective as of ____________, 1997, granted to the Optionee an option or options (the "Option(s)") to purchase shares of the Common Stock of the Company on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants set forth herein and other good and valuable consideration, the parties hereto agree as follows: 1. The Option(s). The Optionee may, at his/her option, purchase ------------- all or any part of an aggregate of ______ shares of Common Stock (the "Optioned Shares"), at the price of $_____ per share (the "Option Price"), on the terms and conditions set forth herein. 2. Option Type; Exercise Dates and Exercise. Options intended to ---------------------------------------- qualify as Incentive Stock Options are designated by an "ISO" under the category "Type." Options intended as separate Non-Qualified Stock Options are designated by a "NQSO" under the category "Type." The Option(s) shall be exercisable as to the specified number of Optioned Shares on and after the "First" dates and on or before the "Last" dates set forth below:
Exercise Dates ------------------------ Type Number of Shares First Last - ------- ---------------- ---------- --------- - ------- ---------------- ---------- --------- - ------- ---------------- ---------- --------- - ------- ---------------- ---------- ---------
1 - ------- ---------------- ---------- --------- - ------- ---------------- ---------- --------- - ------- ---------------- ---------- --------- Optionee acknowledges that he/she understands he/she has no right whatsoever to exercise the Option(s) granted hereunder with respect to any Optioned Shares covered by any installment until such installment accrues as provided above. Optionee further understands that the Option(s) granted hereunder shall expire and become unexercisable as provided in Section 3(c) below. This Option shall be deemed exercised as to the shares to be purchased when written notice of such exercise has been given to the Company at its principal business office by the Optionee with respect to the Common Stock to be purchased. Such notice shall be accompanied by full payment in cash or cash equivalents as determined by the Administrator. As determined by the Administrator, in its sole discretion, payment in whole or part may also be made (i) by cancellation of any indebtedness owed by the Company to the Optionee,(ii) by a full recourse promissory note executed by the Optionee, (iii) in the form of unrestricted Stock owned by the Optionee, or, in the case of the exercise of a Non-Qualified Stock Option, Restricted Stock or Performance Shares subject to an award under the Plan (based, in each case, on the Fair Market Value of the Stock on the date the option is exercised); provided, however, that in the case of an Incentive Stock Option, the right to make payment in the form of already owned shares may be authorized only at the time of grant, or (iv) by any combination of the foregoing. 3. Governing Plan. This Agreement hereby incorporates by reference the -------------- Plan and all of the terms and conditions of the Plan as heretofore amended and as the same may be amended from time to time hereafter in accordance with the terms thereof, but no such subsequent amendment shall adversely affect the Optionee's rights under this Agreement and the Plan except as may be required by applicable law. The Optionee expressly acknowledges and agrees that the provisions of this Agreement are subject to the Plan; the terms of this Agreement shall in no manner limit or modify the controlling provisions of the Plan, and in case of any conflict between the provisions of the Plan and this Agreement, the provisions of the Plan shall be controlling and binding upon the parties hereto. The Optionee also hereby expressly acknowledges, represents and agrees as follows: (a) Acknowledges receipt of a copy of the Plan, a copy of which is attached hereto and by reference incorporated herein, and represents that he/she is familiar with the terms and provisions of said Plan, and hereby accepts this Agreement subject to all the terms and provisions of said Plan. (b) Agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions arising under the Plan. (c) Acknowledges that he/she is familiar with Sections of the Plan regarding the exercise of the Option(s) and represents that he/she understands that said Option(s) must be 2 exercised on or before the earliest of the following dates, whichever is applicable: (i) the "Last" exercise date noted above in Section 2; (ii) the day prior to the fifth anniversary, in certain circumstances, of the Option(s) Grant Date with respect to Options granted as Incentive Stock Options pursuant to Subsection (5)(a)(ii) and the day prior to the tenth anniversary of the Option(s) Grant Date with respect to Options granted as Non-Qualified Stock Options; (iii) the effective date of a sale or other disposition of all or substantially all of the stock or assets of the Company, as provided in Section 10 of the Plan; (iv) the date which is the earlier of (A) three months from the date of termination or (B) the expiration of such Stock Option's term following the Optionee's termination of directorship or consulting or other arrangement (unless extended) for any reason other than death or disability as provided under Subsection 5(i) of the Plan; or (v) the date that is one year following the Optionee's termination of employment, directorship or consulting or other arrangement by reason of his/her death, or the date that is one year following his/her termination of employment, directorship or consulting or other arrangement by reason of disability, whichever is applicable, as provided in Subsections 5(g) and 5(h) of the Plan. (d) Acknowledges, understands and agrees that the existence of the Plan and the execution of this Agreement are not sufficient by themselves to cause any exercise of any Option(s) granted as an Incentive Stock Option to qualify for favorable tax treatment through the application of Section 422(A) of the Internal Revenue Code; that Optionee must, in order to so qualify, individually meet by his own action all applicable requirements of Section 422A, including without limitation the following holding period and employment requirements: (1) holding period requirement: no disposition of an Optioned -------------------------- Share may be made by Optionee within two (2) years from the date of the granting of the Option(s) nor within one (1) year after the transfer of such Optioned Share to him/her, and (2) employment requirement: at all times during the period ---------------------- beginning on the date of the granting of the Option(s) and ending on the day three (3) months before the date of exercise, the Optionee must have been an employee of the Company, its Parent, or a Subsidiary of the Company, of Affiliated Companies, or a corporation or a parent or subsidiary of such corporation issuing or assuming the Option(s) in a transaction to which Section 425(a) of the Internal Revenue Code applies, except where the termination of employment is by means of the employee's disability, in which case said three (3) month period may be extended to one (1) year, as provided under Internal Revenue Code Section 422A. 4. Representations and Warranties. As a condition to the exercise of ------------------------------ any portion of an Option, the Company may require the person exercising such Option to make any representation and/or warranty to the Company as may, in the judgment of counsel to the Company, be required under any applicable law or regulation, including but not limited to a representation and warranty that the shares are being acquired only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required under the Securities Act of 1933 or any other applicable law, regulation or rule of any governmental 3 agency. Optionee hereby represents to the Company that each of the Option evidenced hereby and the shares purchasable upon exercise thereof is being acquired only for investment and without any present intention to sell or distribute such securities. 5. Options Not Transferable. No Stock Option shall be transferable ------------------------ by the optionee otherwise than by will or by the laws of descent and distribution or, with respect to Non-Qualified Stock Options, pursuant to a "qualified domestic relations order," as such term is defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Incentive Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee or, with respect to Non-Qualified Stock Options, in accordance with the terms of a qualified domestic relations order. 6. No Enlargement of Employee Rights. Nothing in this Agreement --------------------------------- shall be construed to confer upon the Optionee (if an employee) any right to continued employment with the Company, any Parent or Subsidiary, or any Affiliated Company, or to restrict in any way the right of the Company, a Subsidiary or Parent, or Affiliated Company to terminate his/her employment. Optionee acknowledges that in the absence of an express written employment agreement to the contrary, Optionee's employment with the Company may be terminated by the Company at any time, with or without cause. 7. Withholding of Taxes. Optionee authorizes the Company to -------------------- withhold, in accordance with any applicable law, from any compensation payable to him any taxes required to be withheld by federal, state or local law as a result of the grant of the Option(s) or the issuance of stock pursuant to the exercise of such Option(s). 8. Laws Applicable to Construction. This Agreement shall be ------------------------------- construed and enforced in accordance with the laws of the State of Delaware. 9. Agreement Binding on Successors. The terms of this Agreement ------------------------------- shall be binding upon the executors, administrators, heirs, successors, transferees and assignees of the Optionee. 10. Costs of Litigation. In any action at law or in equity to enforce ------------------- any of the provisions or rights under this Agreement or the Plan, the unsuccessful party to such litigation, as determined by the court in a final judgment or decree, shall pay the successful party or parties all costs, expenses and reasonable attorneys' fees incurred by the successful party or parties (including without limitation costs, expenses end fees on any appeals), and if the successful party recovers judgment in any such action or proceeding such costs, expenses and attorneys' fees shall be included as part of the judgment. 11. Necessary Acts. The Optionee agrees to perform all acts and -------------- execute and deliver any documents that may be reasonably necessary to carry out the provisions of this Agreement, including but not limited to all acts and documents related to compliance with federal and/or state securities laws. 4 12. Counterparts. For convenience this Agreement may be executed in ------------ any number of identical counterparts, each of which shall be deemed a complete original in itself and may be introduced in evidence or used for any other purpose without the production of any other counterparts. 13. Invalid Provisions. In the event that any provision of this ------------------ Agreement is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein invalid or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid and unenforceable provision was not contained herein. 14. Limitation on Value of Optioned Shares. Optionee acknowledged -------------------------------------- that the Plan provides that the aggregate fair market value (determined as of the date hereof) of the shares of Common Stock to which Options granted as Incentive Stock Options are exercisable for the first time by Optionee during any calendar year under all incentive stock option plans of the Company and any Subsidiary shall not exceed $100,000. It is understood and agreed that should it be determined that an Option if granted as an Incentive Stock Option hereunder would exceed such maximum, such Option shall be considered granted as a Non-Qualified Stock Option to the extent, but only to the extent of such excess. This limitation shall not apply to any option granted as a Non- Qualified Stock Option. 5 IN WITNESS WHEREOF, the Company and the Optionee have executed this Agreement effective as of the date first written hereinabove. FRANCHISE MORTGAGE ACCEPTANCE OPTIONEE COMPANY By: ------------------------------ ------------------------------------- Name: Title: ------------------------------------- Street Address ------------------------------------- City and State ------------------------------------- Social Security No. By his or her signature below, the spouse of the Optionee, of such Optionee be legally married as of the date of his execution of this Agreement, acknowledges that he or she has read this Agreement and the Plan and is familiar with the terms and provisions thereof, and agrees to be bound by all the terms and conditions of said Agreement and said Plan document. ------------------------------------------------ Spouse Dated: ------------------------------ By his or her signature below the Optionee represents that he or she is not legally married as of the date of execution of this Agreement. ------------------------------------------------ Optionee Dated: ------------------------------ 6 EX-10.3 7 FORM OF SERVICES AGREEMENT EXHIBIT 10.3 SERVICES AGREEMENT This SERVICES AGREEMENT (this "Agreement") entered into on , , 1997, is made effective as of the effective date of the initial public offering of Common Stock on Registration Statement Form S-1 (the "Effective Date") of Franchise Mortgage Acceptance Company, a Delaware corporation ("FMAC"), by and between IMPERIAL CREDIT INDUSTRIES, INC., a California corporation ("ICII") and FMAC. For good and valuable consideration, the adequacy of which is hereby acknowledged, the parties agree as follows: 1. Services. From the Effective Date, up to and including ___________, -------- 1997, (the "Initial Term"), ICII will perform those services (the "Services") requested by FMAC including general administrative services, data processing, accounts payable, all as enumerated on Exhibit "A" attached hereto. This Agreement is renewable annually, at the option of the parties, after the completion of the Initial Term. Either FMAC or ICII may terminate audit, tax planning or insurance services if ICII should cease to own at least any of the outstanding voting stock of FMAC. ICII will continue to perform the Services until the last day of the month (the "Termination Date") following the month in which FMAC provides ICII with a written notice of its election to terminate any aspect of the Services. ICII will have no further duty to perform the Services after the Termination Date. As part of the services to be provided under this Agreement, ICII will continue to provide FMAC with insurance coverages and self insurance programs (collectively "Insurance Coverage Programs") including health insurance, public liability, workers' compensation, property damage, business interruption, fiduciary liability and surety bonds. The charge to FMAC for coverage will be based upon a pro rata portion of the costs to ICII for such coverage under the various policies. The charge for the insurance will be renegotiated annually based upon ICII's costs for the insurance and FMAC's loss experience. 2. Compensation. FMAC will pay ICII's fees for enumerated Services ------------ pursuant to the schedule of charges set forth on Exhibit "B" attached hereto, and for any other Services, FMAC will pay ICII fees which will be determined by the parties and will vary depending on the Services utilized. ICII will provide FMAC with an invoice for the Services not later than thirty (30) days following the close of any fiscal period in which such Services are rendered. ICII and FMAC will renegotiate the fees annually in order to have the fees reflect the direct and allocated costs of providing the Services. 3. Documentation and Disputes. In the event that any of ICII's charges -------------------------- are based upon hourly rates or upon allocation of a combined cost, FMAC will be provided upon request with documentation supporting the amount charged and will be entitled to contest any charge, provided that FMAC timely pays all contested amounts. 4. Confidential Information. (a) The parties agree: (i) to hold in ------------------------ trust and maintain confidential, (ii) not to disclose to others without prior written approval from the disclosing party, (iii) not to sue for any purpose, other than such purpose as may be authorized in writing by the disclosing party, and (iv) to prevent duplication of and disclosure to any other party, any Information received from the disclosing party or developed, presently held or continued to be held, or otherwise obtained, by the receiving party under this Agreement. (b) "Information" shall mean all results of the Services, Information disclosed by either party orally, visually, in writing, or in other tangible form, and includes, but is not limited to, technical, economic plans, computer Information data bases, and the like in connection with this Agreement. (c) The foregoing obligations of confidentiality, non-disclosure and non-use shall not apply to any Information to the extent that the obligated party can show that: (i) such Information is or becomes knowledge generally available to the public other than through the acts or omissions of the obligated party; (ii) such Information is subsequently received by the obligated party on a non-confidential basis from a third party who did not receive it directly or indirectly from the disclosing party; (iii) such Information is developed independently by the obligated party without reference to the Information; or (iv) disclosure of such Information is required under applicable law or regulations. Specific elements of Information shall not be deemed to come under the above exceptions merely because they are embraced by more general Information which is or becomes public knowledge. 5. Standard of Care. ICII shall perform the Services for FMAC with the ---------------- same degree of care, skill and prudence customarily exercised by it for its own operations. 6. Indemnification. ICII shall indemnify, defend and hold FMAC, its --------------- directors, officers and employees harmless from and against all direct damages, losses and out-of-pocket expenses (including reasonable legal fees) caused by or arising out of any failure in the performance of any obligation or agreement of ICII hereunder. 7. Assignment or Transfer. Neither party shall assign or transfer any of ---------------------- its rights under this Agreement without the prior written approval of the other party, except no such approval shall be required for an assignment to an affiliate or a successor to all or a substantial portion of the assets or the business of either party, provided that such affiliate or successor assumes such party's obligations hereunder with respect to the rights assigned or transferred. 8. Notices. All notices, requests, demands and other communications ------- provided for hereunder shall be in writing (including telegraphic or facsimile communications) and shall be mailed (return receipt requested), telegraphed, sent by facsimile or delivered to each party at the address set forth as follows, or at such other address as either party may designate by notice to the other, and any such notice, request, demand or other communication shall be effective upon receipt. All payments required in this Agreement shall be paid to and delivered to the party as provided herein for notice. If to FMAC: Franchise Mortgage Acceptance Company 2049 Century Park East, Suite 350 Los Angeles, California 90067 Telephone: (310) 229-2600 Facsimile: (310) 277-1674 Attention: Wayne L. Knyal Chief Executive Officer and President If to ICII: Imperial Credit Industries, Inc. 23550 Hawthorne Boulevard Building 1, Suite 210 Torrance, California 90505 Telephone: (310) 791-8040 Facsimile: (310) 791-8230 Attention: Irwin L. Gubman General Counsel 9. Severability. In the event any provision of this Agreement is held ------------ invalid or unenforceable, such holding shall not invalidate nor render unenforceable any other provision hereof. 10. Governing Law. This Agreement shall be construed in accordance with ------------- the laws of the State of California. 11. Reference Provision. ------------------- (a) Each controversy, dispute or claim between the parties arising out of or relating to this Agreement, which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to the Agreement gives written notice to all other parties that a controversy, dispute or claim exists) , will be settled by a reference proceeding in Orange County, California, in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor section ("CCP") , which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court of Orange County (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Orange County Superior Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers for a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one preemptory challenge pursuant to CCP 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the Claim Date and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP 644 in any court in the State of California having jurisdiction. Any party may apply for a reference at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and, request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. (b) Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. (c) The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. (d) In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Orange County Superior Court, in accordance with the California Arbitration Act, Sections 1280 through 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. 12. Counterparts. This Agreement 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 taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, this Services Agreement is made as of the day and year first above written. FRANCHISE MORTGAGE ACCEPTANCE COMPANY By:_______________________________ Name: Wayne L. Knyal Title: Chief Executive Officer and President IMPERIAL CREDIT INDUSTRIES, INC. By:_______________________________ Name: H. Wayne Snavely Title: Chairman EXHIBIT A SCHEDULE OF SERVICES EXHIBIT B SCHEDULE OF FEES Human Resources - --------------- All human resources services, including payroll, 401K profit sharing, ESOP, employment services, industrial relation services, compensation consulting, grievance resolution, and organization, development and training $100 per month per employee employed at the end of each month Operations and Accounting - ------------------------- General ledger accounts - $0.50 per general ledger account per month Check processing - $0.50 per item Accounts payable - $1.00 per invoice Data processing - Salary and overhead for personnel providing services Accounting - Salary and overhead for personnel providing services EX-10.4(A) 8 FIRST AMENDMENT TO OFFICE LEASE Exhibit 10.4(a) FIRST AMENDMENT TO OFFICE LEASE ------------------------------- This FIRST AMENDMENT TO OFFICE LEASE ("First Amendment") is made and entered into as of November 26, 1996, by and between DELTA TOWERS JOINT VENTURE, a California general partnership ("Landlord"), and FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a California limited liability company ("Tenant"). R E C I T A L S: - - - - - - - - A. Landlord and Tenant entered into that certain Office Lease (the "Lease") dated August 24, 1995, whereby Landlord Leased to Tenant and Tenant leased from Landlord approximately 1,884 rentable square feet of space commonly known as Suite 1190 (the "Existing Premises") located on the eleventh (11th) floor of the building known as One Century Plaza, situated at 2029 Century Park East, Los Angeles, California. B. Landlord and Tenant desire to amend the Lease on the Terms and conditions set forth in this First Amendment. A G R E E M E N T: - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. TERMS. All undefined terms when used herein shall have the same ----- respective meanings as are given such terms in the Lease unless expressly provided otherwise in this First Amendment. 2. MODIFICATION OF PREMISES. Landlord hereby leases to Tenant, and Tenant ------------------------ hereby leases from Landlord, those certain premises (the "New Premises") outlined on the floor plan attached hereto and marked Exhibit A-1, said New Premises being commonly known as Suite 350 and being agreed, for the purpose of this First Amendment, to have an area of approximately 5,932 rentable (5,126 usable) square feet and to be situated on the third (3rd) floor of the building known as Two Century Plaza, located at 2049 Century Park east, Los Angeles, California (the "Building"). As of the "New Premises Commencement Date" as that term is defined in Section 3.1, below, all references in the Lease, as amended hereby, to the "Premises" shall be deemed to refer to the New premises instead of the Existing Premises. 3. TERM OF LEASE. ------------- 3.1 NEW PREMISES. The term ("New Term") of Tenant's lease of the New ------------ Premises shall commence (the "New Premises Commencement Date") upon the earlier to occur of (i) the date upon which Tenant first commences to conduct business in the New Premises, and (ii) the date upon which the New Premises are "Ready for Occupancy," as that term is defined in Section 5.1 of the Tenant Work Letter attached hereto as Exhibit B-1 (the "Tenant Work Letter"). The anticipated date upon which the New Premises shall be Ready for Occupancy is February 1,1997. The New Term shall expire on the date immediately preceding the fifth (5th) anniversary of the New Premises Commencement Date. 3.2 EXISTING PREMISES. Upon the New Premises Commencement Date, ----------------- Tenant's lease of the Existing Premises shall automatically terminate and be of no further force and effect, and Landlord and Tenant shall be relieved of their respective obligations under the Lease, as amended hereby, in connection with the Existing Premises, except those obligations of Tenant set forth in the Lease, as amended hereby, which specifically survive the expiration or earlier termination of Tenant's lease of the Existing Premises, including, without limitation, the payment by Tenant of all amounts owed by Tenant under the Lease, as amended hereby, with respect to Tenant's period of occupancy of the Existing Premises Tenant shall vacate the Existing Premises, and surrender and deliver exclusive possession thereof to Landlord on or -1- before the New Premises Commencement Date in accordance with the provisions of the Lease, as amended hereby. In the event that Tenant retains possession of the Existing Premises or any part thereof after the New Premises Commencement Date, then the provisions of Article 16 of the Lease shall apply and any amounts payable by Tenant thereunder shall be computed using the Rent payable for the last month that the Lease is in effect with respect to the Existing Premises. 4. RENT. ---- 4.1 BASE RENT. Effective as of the New Premises Commencement Date --------- Section 4 of the Summary is hereby deleted and in its place is inserted the following: "4. BASE RENT (ARTICLE 3): Lease Year With Annual Rental Rate Respect to New Monthly Installment of Per Rentable Square Premises Annual Base Rent Base Rent Foot -------- ---------------- --------- ---- 1-5 $145,927.20 $12,160.60 $24.60 4.2 ADDITIONAL RENT. --------------- 4.2.1 OPERATING EXPENSES. Section 4.2.7 of the Lease, on ------------------ pages 5-8 thereof, is hereby deleted and replaced with the following: "4.2.7 "OPERATING EXPENSES" shall mean all expenses, costs and amounts of every kind and nature which Landlord pays or accrues during any Expense Year because of or in connection with the ownership, management, maintenance, security, repair, replacement, restoration or operation of the Project, or any portion thereof. Without limiting the generality of the foregoing, Operating Expenses shall specifically include any and all of the following: (i) the cost of supplying all utilities, the cost of operating, repairing, maintaining, and renovating the utility, telephone, mechanical, sanitary, storm drainage, and elevator systems, and the cost of maintenance and service contracts in connection therewith; (ii) the cost of licenses, certificates, permits and inspections and the cost of contesting any governmental enactments which may affect Operating Expenses, and the costs incurred in connection with a governmentally mandated transportation system management program or similar program; (iii) the cost of all insurance carried by Landlord in connection with the Project as reasonably determined by Landlord; (iv) the cost of landscaping, relamping, and all supplies, tools, equipment and materials used in the operation, repair and maintenance of the Project, or any portion thereof; (v) the cost of parking area repair, restoration, and maintenance; (vi) fees and other costs, including reasonable management fees, consulting fees, legal fees and accounting fees, of all contractors and consultants in connection with the management, operation, maintenance and repair of the Project; (vii) payments under any equipment rental agreements and the fair rental value of any management office space; (viii) subject to item (f), below, wages, salaries and other compensation and benefits, including taxes levied thereon, of all persons engaged in the operation, maintenance and security of the Project; (ix) costs under any instrument pertaining to the sharing of costs by the Project; (x) operation, repair, maintenance and replacement of all systems and equipment and components thereof of the Project; (xi) the cost of janitorial, alarm, security and other services, replacement of wall and floor coverings, ceiling tiles and fixtures in common areas, maintenance and replacement of curbs and walkways, repair to roofs and re-roofing; (xii) amortization (including interest on the unamortized cost) over the useful life as Landlord shall reasonably determine of the cost of acquiring or the rental expense of personal property used in the maintenance, -2- operation and repair of the Project, or any portion thereof; (xiii) the cost of capital improvements or other costs incurred in connection with the Project (A) which are intended to effect economies in the operation or maintenance of the Project, or any portion thereof, (B) that are required to comply with present or anticipated conservation programs, (C) which are replacements or modifications of nonstructural items located in the Common Areas required to keep the Common Areas in good order or condition, or (D) that are required under any governmental law or regulation by a federal, state or local governmental agency, except for capital repairs, replacements or other improvements to remedy a condition existing prior to the Lease Commencement Date which an applicable governmental authority, if it had knowledge of such condition prior to the Lease Commencement Date, would have then required to be remedied pursuant to the then-current governmental laws or regulations in their form existing as of the Lease Commencement Date and pursuant to the then-current interpretation of such governmental laws or regulations by the applicable governmental authority as of the Lease Commencement Date; provided, however, that any capital expenditure shall be amortized (including interest on the amortized cost) over its useful life as Landlord shall reasonably determine; and (xiv) costs, fees, charges or assessments imposed by, or resulting from any mandate imposed on Landlord by, any federal, state or local government for fire and police protection, trash removal, community services, or other services which do not constitute "Tax Expenses" as that term is defined in Section 4.2.8, below. Notwithstanding the foregoing, for purposes of this Lease, Operating Expenses shall not, however, include: (a) costs, including marketing costs, legal fees, space planners' fees, advertising and promotional expenses, and brokerage fees incurred in connection with the original construction or development, or original or future leasing of the Project, and costs, including permit, license and inspection costs, incurred with respect to the installation of tenant improvements made for new tenants in the Project or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants of the Project (excluding, however, such costs relating to any common areas of the Project or parking facilities); (b) except as set forth in items (xii), (xiii), and (xiv) above, depreciation, interest and principal payments on mortgages and other debt costs, if any, penalties and interest, costs of capital repairs and alterations, and costs of capital improvements and equipment; (c) costs for which the Landlord is reimbursed by any tenant or occupant of the Project or by insurance by its carrier or any tenant's carrier or by anyone else, and electric power costs for which any tenant directly contracts with the local public service company; (d) any bad debt loss, rent loss, or reserves for bad debts or rent loss; (e) costs associated with the operation of the business of the partnership or entity which constitutes the Landlord, as the same are distinguished from the costs of operation of the Project (which shall specifically include, but not be limited to, accounting costs associated with the operation of the Project). Costs associated with the operation of the business of the partnership or entity which constitutes the Landlord include costs of partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee (except as the actions of the Tenant may be in issue), costs of selling, syndicating, financing, mortgaging or hypothecating any of the Landlord's interest in the Project and costs incurred in connection with any disputes between Landlord and its employees, -3- between Landlord and Project management, or between Landlord and other tenants or occupants, and Landlord's general corporate overhead and general and administrative expenses; (f) the wages and benefits of any employee who does not devote substantially all of his or her employed time to the Project unless such wages and benefits are prorated to reflect time spent on operating and managing the Project vis-a-vis time spent on matters unrelated to operating and managing the Project; provided, that in no event shall Operating Expenses for purposes of this Lease include wages and/or benefits attributable to personnel above the level of Project manager or Project engineer; (g) amount paid as ground rental for the Project by the Landlord; (h) except for a Project management fee to the extent allowed pursuant to item (m), below, overhead and profit increment paid to the Landlord or to subsidiaries or affiliates of the Landlord for services in the Project to the extent the same exceeds the costs of such services rendered by qualified, first-class unaffiliated third parties on a competitive basis; (i) any compensation paid to clerks, attendants or other persons in commercial concessions operated by the Landlord, provided that any compensation paid to any concierge at the Project shall includable as an Operating Expense; (j) rentals and other related expenses incurred in leasing air conditioning systems, elevators or other equipment which if purchased the cost of which would be excluded from Operating Expenses as a capital cost, except equipment not affixed to the Project which is used in providing janitorial or similar services and, further excepting from this exclusion such equipment rented or leased to remedy or ameliorate an emergency condition in the Project; (k) all items and services for which Tenant or any other tenant in the Project reimburses Landlord or which Landlord provides selectively to one or more tenants (other than Tenant) without reimbursement; (l) costs, other than those incurred in ordinary maintenance and repair, for sculpture, paintings, fountains or other objects of art; (m) fees payable by Landlord for management of the Project in excess of three and one-half percent (3.5%) (the "Management Fee Cap") of Landlord's gross rental revenues, adjusted and grossed up to reflect a one hundred percent (100%) occupancy of the Building with all tenants paying rent, including base rent, pass-throughs, and parking fees (but excluding the cost of after hours services or utilities) from the Project for any calendar year or portion thereof; (n) any costs expressly excluded from Operating Expenses elsewhere in this Lease; (o) rent for any office space occupied by Project management personnel to the extent the size or rental rate of such office space exceeds the size or fair market rental value of office space occupied by management personnel of the Comparable Buildings in the vicinity of the Building, with adjustment where appropriate for the size of the applicable project; (p) costs arising from the gross negligence or wilful misconduct of Landlord or its agents, employees, vendors, contractors, or providers of materials or services; -4- (q) costs incurred to comply with laws relating to the removal of hazardous material (as defined under applicable law) which was in existence in the Building or on the Project prior to the Lease Commencement Date, and was of such a nature that a federal, State or municipal governmental authority, if it had then had knowledge of the presence of such hazardous material, in the state, and under the conditions that it then existed in the Building or on the Project, would have then required the removal of such hazardous material or other remedial or containment action with respect thereto; and costs incurred to remove, remedy, contain, or treat hazardous material, which hazardous material is brought into the Building or onto the Project after the date hereof by Landlord or any other tenant of the Project and is of such a nature, at that time, that a federal, State or municipal governmental authority, if it had then had knowledge of the presence of such hazardous material, in the state, and under the conditions, that it then exists in the Building or on the Project, would have then required the removal of such hazardous material or other remedial or containment action with respect thereto; (r) costs arising from Landlord's charitable or political contributions; (s) any gifts provided to any entity whatsoever, including, but not limited to, Tenant, other tenants, employees, vendors, contractors, prospective tenants and agents; and (t) the cost of any magazine, newspaper, trade or other subscriptions. 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 Project is not at least ninety-five percent (95%) occupied during all or a portion of the Base Year or any Expense Year, Landlord shall make an appropriate adjustment to the components of Operating Expenses for such year to determine the amount of Operating Expenses that would have been incurred had the Project been ninety-five percent (95%) occupied; and the amount so determined shall be deemed to have been the amount of Operating Expenses for such year. Operating Expenses for the Base Year shall not include 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, or amortized costs relating to capital improvements." 4.2.2 BASE YEAR. Notwithstanding anything contained in the Lease to --------- the contrary, effective as of the New Premises Commencement Date, with respect to the calculation of Tenant's Share of annual Building Direct Expenses under Article 4 of the Lease allocable to the period beginning on the New Premises Commencement Date and thereafter with respect to the New Premises, the "Base Year" shall be calender year 1996, and Section 5 of the Summary is hereby revised accordingly. 4.2.3 TAXES. ----- 4.2.3.1 On the eighth (8th) line of Section 4.2.8.1 of the Lease, on page 8 thereof, after the words "which shall be paid" are hereby added to the words "or accrued". -5- 4.2.3.2 After the last sentence of Section 4.2.8.4 of the Lease, on page 9 thereof, is hereby added: "Notwithstanding the foregoing, in the event that the Project is reassessed (the "Reassessment") for real estate tax purposes by the appropriate governmental authority pursuant to the terms of Proposition 13, the component of Tax Expenses for the Base Year which is attributable to the assessed value of the Project under Proposition 13 prior to the Reassessment (without taking into account any Proposition 8 reductions) shall be reduced, if at all, for the purposes of comparison to all subsequent Expense Years (commencing with the Expense Year in which the Reassessment takes place) to an amount equal to the real estate taxes based upon such Reassessment." 4.2.4 TENANT'S SHARE. With respect to the New Premises, -------------- Tenant's Share as set forth in Section 6 of the Summary shall be 0.5274%. 5. SECURITY DEPOSIT. Landlord and Tenant acknowledge that, in accordance ---------------- with Article 21 of the Lease, Tenant has previously delivered the sum of Three Thousand Three Hundred Nintey-One and 20/100 Dollars ($3,391.20) (the "Existing Security Deposit") to Landlord as security for the faithful performance by Tenant of the terms, covenants and conditions of the Lease with respect to the Existing Premises. Landlord shall retain the Existing Security Deposit with respect to Tenant's lease of the New Premises to the extent not used, applied or retained by Landlord with respect to the Existing Premises. Concurrently with Tenant's execution of this First Amendment, Tenant shall deposit with landlord an amount equal to Eight Thousand Seven Hundred Sixty-Nine and 40/100 Dollars ($8,769.40) to be held by Landlord as a part of the Security Deposit. Notwithstanding anything in the Lease to the contrary, the Security Deposit held by Landlord pursuant to the Lease, as amended hereby, shall equal Twelve Thousand One Hundred-Sixty and 60/100 Dollars ($12,160.60), and to the extent that the total amount held by Landlord at any time as security for the Lease, as amended hereby, is less than such amount, Tenant shall pay the difference to Landlord within ten(10) days following Tenant's recept of notice thereof from Landlord. 6. CONDITION OF PREMISES. Notwithstanding anything in the Lease to the --------------------- contrary, except as specifically set forth in this First Amendment and the Tenant Work Letter attached hereto as Exhibit B-1, Tenant shall accept the New Premises in its presently existing, "as is" condition. 7. INSURANCE As of the New Premises Commencement Date, Item (ii) of --------- Section 10.3.2 of the Lease, on page 17 thereof, is hereby deleted and replaced with the following: "(ii) the "Tenant Improvements," as that term is defined in Section 1 of the Tenant Work Letter (the "Tenant Work Letter") attached to that certain First Amendment to Office Lease, dated November 26, 1996, as Exhibit B-1, and any other improvements which exist in the Premises as of the New Premises Commencement Date (excluding the Base Building) (the "Original Improvements"), and...". 8. DAMAGE AND DESTRUCTION. As of the New Premises Commencement Date, ---------------------- the fourth sentence of Section 11.1 of the Lease, on Page 18 thereof, is hereby deleted and replaced with the following: "Upon the occurrence of any damage to the Premises, 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, and Landlord shall repair any injury or damage to the Tenant Improvements and the Original Improvements installed in the Premises and shall return such Tenant Improvements and 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 -6- cost of such repairs shall be paid by Tenant to Landlord prior to Landlord's commencement of repair of the damage." 9. BROKER. Landlord and Tenant hereby represent and warrant to each ------ other that they have not dealt with any broker or agent in connection with the negotiation and consummation of this First Amendment other than Premisys Real Estate Services, Inc. (the "Broker") and they each know of no other real estate broker, agent of finder who is, or might be, entitled to a commission or compensation in connection with this First Amendment. Each party agrees to indemnify and defend the other party against, and hold the other party harmless from, any and all claims, demands, losses, liabilities, lawsuits, judgments, 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 Broker. 10. NOTICES. Effective as of the New Premises Commencement Date, the ------- address set forth for Tenant in Section 10 of the Summary as being Tenant's address for notice after the Lease Commencement Date is hereby deleted and is replaced with the following: "2049 Century Park East, Suite 350, Los Angeles, California 90067, Attention: Mr. Wayne L. Knyal, President." 11. NO FURTHER MODIFICATION. Except as specifically set forth in this ----------------------- First Amendment, all of the terms and provisions of the Lease shall remain unmodified and in full force and effect. IN WITNESS WHEREOF, this First Amendment has been executed as of the day and year first above written. "LANDLORD" "TENANT" DELTA TOWERS JOINT VENTURE, FRANCHISE MORTGAGE ACCEPTANCE a California general partnership COMPANY, L.L.C., a California limited liability company By: Premisys Real Estate Services, Inc., Agent By: /s/ Wayne L. Knyal --------------------------- By: [SIGNATURE ILLEGIBLE] ------------------------ Its:_______________________ Its: VP/GM -------------------- By:___________________________ Its:_______________________ -7- ACKNOWLEDGEMENT AND CONSENT OF GUARANTOR ---------------------------------------- The undersigned Guarantor under that certain Guaranty of Lease dated August 24, 1995 ("Guaranty"), hereby (i) acknowledges and consents to the First Amendment provided above, and (ii) agrees that the terms and conditions of the Guaranty, including Guarantor's promises, covenants and guarantees thereunder, shall apply to this First Amendment. Dated November 26, 1996 IMPERIAL CREDIT INDUSTRIES, INC., a California corporation By: [SIGNATURE ILLEGIBLE] ------------------------ Its: General Counsel ------------------- By:________________________ Its:____________________ -8- EXHIBIT A-1 ----------- OUTLINE OF NEW PREMISES ----------------------- [FLOOR PLAN APPEARS HERE] Premisys -------- Real Estate Services [LOGO OF CENTURY PLAZA TOWERS APPEARS HERE] CONTROL PLAN 2049 CENTURY PARK EAST LOS ANGELES, CALIFORNIA FLOOR 3RD --------- DATE 10/18/94 --------- CENTURY PARK EAST 2029 2049 P. PATRICK MURRAY INC. INTERIOR SPACE PLANNING TEL. (310) 553-3752 FAX. (310) 553-9149 EXHIBIT A-1 - Page 1 EXHIBIT B-1 ----------- CENTURY PLAZA TOWERS -------------------- TENANT WORK LETTER ------------------ This Tenant Work Letter shall set forth the terms and conditions relating to the construction of the tenant improvements in the New Premises. This Tenant Work Letter is essentially organized chronologically and addresses the issues of the construction of the New Premises, in sequence, as such issues will arise during the actual construction of the New Premises. All references in this Tenant Work Letter to Articles or Sections of "this First Amendment" shall mean the relevant portion of Sections 1 through 11 of the First Amendment to Office Lease to which this Tenant Work Letter is attached as Exhibit B-1 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 --------- CONSTRUCTION DRAWINGS FOR THE NEW PREMISES ------------------------------------------ Landlord shall construct the improvements in the New Premises (the "Tenant Improvements") pursuant to those certain construction drawings entitled "Scheme B", dated October 20, 1996, prepared by P. Patrick Murray (collectively, the "Approved Working Drawings"). Tenant shall make no changes or modifications to the Approved Working Drawings without the prior written consent of Landlord, which consent may be withheld in Landlord's sole discretion if such change or modification would directly or indirectly delay the "Substantial Completion," as that term is defined in Section 5.1 of this Tenant Work Letter, of the New Premises or increase the cost of designing or constructing the Tenant Improvements. SECTION 2 --------- OVER-ALLOWANCE AMOUNT --------------------- In the event that after Tenant's execution of this Lease, any revisions, changes, or substitutions shall be made to the Approved Working Drawings or the Tenant Improvements, any additional costs which arise in connection with such revisions, changes or substitutions shall be paid by Tenant to Landlord immediately upon Landlord's request as an over-allowance amount (the "Over- Allowance Amount"). The Over-Allowance Amount shall be disbursed by Landlord prior to the disbursement of any portion of Landlord's contribution to the construction of the Tenant Improvement. SECTION 3 --------- CONTRACTOR'S WARRANTIES AND GUARANTIES -------------------------------------- Landlord hereby assigns to Tenant all Warranties and guaranties by the contractor who constructs the Tenant Improvements (the "Contractor") relating to the Tenant Improvements, and Tenant hereby waives all claims against Landlord relating to, or arising out of the construction of, the Tenant Improvements. SECTION 4 --------- TENANTS COVENANTS ----------------- Tenant hereby protects, defends, indemnifies and holds Landlord harmless for any loss, claims, damages or delays arising from the actions of Tenant's space planner/architect on the New Premises or in the Building. In addition, immediately after the Substantial Completion of the New Premises, Tenant shall have prepared and delivered to the Building a copy of the record set of plans and specifications (including all working drawings for the Tenant Improvements. EXHIBIT B-1 - Page 1 SECTION 5 --------- COMPLETION OF THE TENANT IMPROVEMENTS: ------------------------------------- NEW PREMISES COMMENCEMENT DATE ------------------------------ 5.1 Ready for Occupancy. The New Premises shall be deemed "Ready for ------------------- Occupancy" upon the Substantial Completion of the New Premises. For purposes of this First Amendment, "Substantial Completion" of the New Premises shall occur upon the completion of construction of the Tenant Improvements in the New Premises pursuant to the Approved Working Drawings, with the exception of any punch list items and any tenant fixtures, work-stations, built-in furniture, or equipment to be installed by Tenant or under the supervision of Contractor. 5.2 Delay of the Substantial Completion of the New Premises. Except as ------------------------------------------------------- provided in this Section 5.2, the New Premises Commencement Date shall occur as set forth in Section 3.1 of the First Amendment and Section 5.1, above. If there shall be a delay or there are delays in the Substantial Completion of the New Premises or in the occurrence of any of the other conditions precedent to the New Premises Commencement Date, as set forth in Section 3.1 of the First Amendment, as direct, indirect, partial, or total result of: 5.2.1 Tenant's failure to timely approve any matter requiring Tenant's approval; 5.2.2 A breach by Tenant of the terms of this Tenant Work Letter, the Lease or this First Amendment; 5.2.3 Tenant's request for changes in the Approved Working Drawings; 5.2.4 Changes in any of the Approved Working Drawings because the same do not comply with applicable laws; 5.2.5 Tenant's requirement for materials, components, finishes or improvements which are not available in a commercially reasonable time given the anticipated date of Substantial Completion of the New Premises, as set forth in this First Amendment, or which are different from, or not included in, Landlord's standard improvement package items for the Building; 5.2.6 Changes to the base, shell and core work of the Building required by the Approved Working Drawings; or 5.2.7 Any other acts or omissions of Tenant, or its agents, or employees; then, notwithstanding anything to the contrary set forth in this First Amendment or this Tenant Work Letter and regardless of the actual date of the Substantial Completion of the New Premises, the date of the Substantial Completion of the New Premises shall be deemed to be the date the Substantial Completion of the New Premises would have occurred if no Tenant delay or delays, as set forth above, had occurred. SECTION 6 --------- MISCELLANEOUS ------------- 6.1 Tenant's Entry Into the New Premises Prior to Substantial Completion. -------------------------------------------------------------------- Provided that Tenant and its agents do not interfere with Contractor's work in the Building and the New Premises, Contractor shall allow Tenant access to the New Premises prior to the Substantial Completion of the New Premises for the purpose of Tenant installing overstandard equipment or fixtures (including Tenant's data and telephone equipment) in the New Premises. Prior to Tenant's entry into the New Premises as permitted by the terms of this Section 6.1, Tenant shall submit a schedule to Landlord and Contractor, for their approval, which schedule shall detail the timing and purpose of Tenant's entry. Tenant shall hold Landlord harmless from and indemnify, protect and defend Landlord against any loss or damage to the Building or New Premises and against injury to any persons caused by Tenant's actions pursuant to this Section 6.1. 6.2 Tenant's Representative. Tenant has designated Mr. Wayne L. Knyal as ----------------------- its sole representative with respect to the matters set forth in this Tenant Work Letter, who, until further EXHIBIT B-1 - Page 2 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 Ms. Mary Ledford ------------------------- 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. All subcontractors, laborers, materialmen, and --------------- suppliers retained directly by Tenant shall all be union labor in compliance with the master labor agreements existing between trade unions and the Southern California Chapter of the Associated General Contractors of America. 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 the Lease, as amended, if an event of default as described in Section 19.1 of the Lease, as amended, or a default by Tenant under this Tenant Work Letter, has occurred at any time on or before the Substantial Completion of the New Premises, then (i) in addition to all other rights and remedies granted to Landlord pursuant to the Lease, as amended, Landlord shall have the right to cause Contractor to cease the construction of the New Premises (in which case, Tenant shall be responsible for any delay in the Substantial Completion of the New Premises caused by such work stoppage as set forth in Section 5 of this Tenant Work Letter), 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, as amended. EXHIBIT B - 1 - Page 3 EX-10.4(B) 9 OFFICE LEASE DATED AUGUST 24, 1995 EXHIBIT 10.4(b) OFFICE LEASE ------------ CENTURY PLAZA TOWERS -------------------- DELTA TOWERS JOINT VENTURE, a California General Partnership, as Landlord, and FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a California limited liability company, as Tenant. CENTURY PLAZA TOWERS -------------------- INDEX OF MAJOR DEFINED TERMS ----------------------------
LOCATION OF DEFINITION IN DEFINED TERMS OFFICE LEASE - ------------- ------------- ACM............................................................ 35 Additional Notice.............................................. 13 Additional Rent................................................ 5 Adjustment Year................................................ 9 Alterations.................................................... 14 Base Building.................................................. 14 Base Rent...................................................... 4 Base Year...................................................... 5 BOMA........................................................... 9 Brokers........................................................ 34 Building....................................................... 3 Building Common Areas.......................................... 3 Building Direct Expenses....................................... 5 Building Hours................................................. 11 Building Operating Expenses.................................... 5 Building Tax Expenses.......................................... 5 Business Affiliates............................................ 23 Century Plaza Towers........................................... 3 Common Areas................................................... 3 Comparable Buildings........................................... 3 Contemplated Effective Date.................................... 22 Contemplated Transfer Space.................................... 22 Control........................................................ 23 Cost Pools..................................................... 10 Damage Termination Date........................................ 18 Damage Termination Notice...................................... 18 Direct Expenses................................................ 5 Eligibility Period............................................. 13 Estimate....................................................... 10 Estimate Statement............................................. 10 Estimated Excess............................................... 10 Excess......................................................... 10 Expense Year................................................... 5 Force Majeure.................................................. 32 Holidays....................................................... 11 HVAC........................................................... 11 Initial Notice................................................. 13 Intention of Transfer Notice................................... 22 Landlord....................................................... 1 Landlord Default............................................... 13 Landlord Parties............................................... 16 Lease.......................................................... 1 Lease Commencement Date........................................ 4 Lease Expiration Date.......................................... 4 Lease Term..................................................... 4 Lease Year..................................................... 4 Lines.......................................................... 35 Mail........................................................... 32 Nine Month Period.............................................. 22 Notices........................................................ 32 Operating Expenses............................................ 5 Original Improvements.......................................... 17 Other Improvements............................................. 34
(iii) Premises....................................................... 3 Project........................................................ 3 Project Common Areas........................................... 3 Proposition 13................................................. 8 Readjustment Year.............................................. 9 Renovations.................................................... 35 Rent........................................................... 5 rentable square feet........................................... 4 Reserved Space................................................. 30 Security Deposit............................................... 27 Statement...................................................... 10 Subject Space.................................................. 20 Summary........................................................ 1 Tax Expenses................................................... 8 Tenant......................................................... 1 Tenant Parties................................................. 16 Tenant's Share................................................. 9 Tenant's Subleasing Costs...................................... 21 Transfer Notice................................................ 20 Transfer Premium............................................... 21 Transferee..................................................... 20 Transfers...................................................... 20 usable square feet............................................. 4
(iv) CENTURY PLAZA TOWERS -------------------- OFFICE LEASE ------------ This Office Lease (the "LEASE"), dated as of the date set forth in Section 1 of the Summary of Basic Lease Information (the "SUMMARY"), below, is made by and between DELTA TOWERS JOINT VENTURE, a California general partnership ("LANDLORD"), and FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.P., a California limited liability company ("TENANT"). SUMMARY OF BASIC LEASE INFORMATION --------------------------------- TERMS OF LEASE DESCRIPTION - -------------- ----------- 1. Date: August 24, 1995 2. Premises (Article 1). 2.1 Building: 2029 Century Park East 2.2. Premises: Approximately 1,884 rentable (1,628 usable) square feet of space located on the eleventh (11th) floor of the Building, as further set forth in EXHIBIT A to the Office Lease. --------- 3. Lease Term (Article 2). 3.1 Length of Term: Three (3) years. 3.2 Lease Commencement The earlier to occur of (i) the date Date: upon which Tenant first commences to conduct business in the Premises and (ii) September 1, 1995. 3.3 Lease Expiration Date: The date immediately preceding the 3rd anniversary of the Lease Commencement Date. 4. Base Rent (Article 3): Annual Monthly Rental Rate Annual Installment per Rentable Lease Year Base Rent of Base Rent Square Foot ---------- --------- ------------ ------------ 1-3 $40,694.40 $3,391.20 $21.60 5. Base Year (Article 4): Calendar year 1995. 6. Tenant's Share (Article 4): Approximately .1675%. 7. Permitted Use (Article 5): General office use consistent with a first-class office building. -1- 8. Security Deposit (Article 21): $3,391.20. 9. Parking Passes (article 28): Three (3) unreserved parking passes for every 1,000 rentable square feet of the Premises and one (1) reserved parking pass. 10. Address of Tenant (Section 29.18): Franchise Mortgage Acceptance Company 600 Steamboat Road Greenwich, Connecticut 06830 Attention: Mr. Wayne L. Knyal, President (Prior to Lease Commencement Date) and Franchise Mortgage Acceptance Company 2029 Century Park East Suite 1190 Los Angeles, California 90067 Attention: Mr. Wayne L. Knyal, President (After Lease Commencement Date) 11. Address of Landlord (Section 29.18): See Section 29.18 of the Lease. 12. Broker(s) (Section 29.24): Premisys Real Estate Services, Inc. 2049 Century Park East, Suite 2650 Los Angeles, California 90067-3283 and Colliers Damner Pike 353 Sacramento Street Suite 500 San Francisco, California 94111 13. Guarantor: (Section 29.34) Imperial Credit Industries, Inc. a California corporation -2- ARTICLE 1 --------- PREMISES, BUILDING, PROJECT, AND COMMON AREAS --------------------------------------------- 1.1 Premises, Building, Project and Common Areas. -------------------------------------------- 1.1.1 THE PREMISES. Landlord hereby leases to Tenant and Tenant ------------ hereby leases from Landlord the premises set forth in Section 2.2 of the Summary (the "PREMISES"). The outline of the Premises is set forth in EXHIBIT A attached --------- hereto and each floor or floors of the Premises has the number of rentable square feet as set forth in Section 2.2 of the Summary. The parties hereto agree that the lease of the Premises is upon and subject to the terms, covenants and conditions herein set forth, and Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of such terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of such performance. The parties hereto hereby acknowledge that the purpose of EXHIBIT A is to show the approximate location of --------- the Premises in the "Building," as that term is defined in Section 1.1.2, below, only, and such Exhibit is not meant to constitute an agreement, representation or warranty as to the construction of the Premises, the precise area thereof or the specific location of the "Common Areas," as that term is defined in Section 1.1.3, below, or the elements thereof or of the accessways to the Premises or the "Project," as that term is defined in Section 1.1.2, below. Except as specifically set forth in this Lease, Tenant shall accept the Premises in its presently existing, "as is" condition. Landlord shall not be obligated to provide or pay for any improvement work or services related to the improvement of the Premises; provided that, prior to the Lease Commencement Date, Landlord shall change the interior wall adjacent to the reception area in the Premises to a half-height wall at a height of between thirty-six inches (36") and forty-two inches (42"), capped with a wood finish. Tenant also acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty regarding the condition of the Premises, the Building or the Project or with respect to the suitability of any of the foregoing for the conduct of Tenant's business, except as specifically set forth in this Lease. The taking of possession of the Premises by Tenant shall conclusively establish that the Premises and the Building were at such time in good and sanitary order, condition and repair. 1.1.2 THE BUILDING AND THE PROJECT. The Premises are a part of the ---------------------------- building set forth in Section 2.1 of the Summary (the "BUILDING"). The Building is part of an office project known as "CENTURY PLAZA TOWERS." The term "PROJECT" as used in this Lease, shall mean (i) the Building and the Common Areas, (ii) the land (which is improved with landscaping, subterranean parking facilities and other improvements) upon which the Building and the Common Areas are located, (iii) the other office building located adjacent to the Building and the land upon which such adjacent office building is located, and (iv) at Landlord's discretion, any additional real property, areas, land, buildings or other improvements added thereto outside of the Project. 1.1.3 COMMON AREAS. Tenant shall have the non-exclusive right to use ------------ in common with other tenants in the Project, and subject to the rules and regulations referred to in Article 5 of this Lease, those portions of the Project which are provided, from time to time, for use in common by Landlord, Tenant and any other tenants of the Project (such areas, together with such other portions of the Project designated by Landlord, in its discretion, including certain areas designated for the exclusive use of certain tenants, or to be shared by Landlord and certain tenants, are collectively referred to herein as the "COMMON AREAS"). The Common Areas shall consist of the "Project Common Areas" and the "Building Common Areas." The term "PROJECT COMMON AREAS," as used in this Lease, shall mean the portion of the Project designated as such by Landlord. The term "BUILDING COMMON AREAS," as used in this Lease, shall mean the portions of the Common Areas located within the Building designated as such by Landlord. The manner in which the Common Areas are maintained and operated shall be at the sole discretion of Landlord, provided that Landlord shall maintain and operate same in a manner consistent with that of other first-class, high-rise office buildings in the Century City, California area (the "COMPARABLE BUILDINGS") and the use thereof shall be subject to such rules, regulations and restrictions as Landlord may make from time to time. Landlord reserves the right to close temporarily, make alterations or additions to, or change the location of elements of the Project and the Common Areas. -3- 1.2 VERIFICATION OF RENTABLE SQUARE FEET AND USABLE SQUARE FEET OF --------------------------------------------------------------- PREMISES, BUILDING, AND PROJECT. For purposes of this Lease, "RENTABLE SQUARE - ------------------------------- FEET" and "USABLE SQUARE FEET" shall be calculated pursuant to "BOMA," as that term is defined in Section 4.2.9, below, provided that the rentable square footage of the Building and Project shall include all of (and the rentable square footage of the Premises therefore shall include a portion of) the Building Common Areas, and provided further that notwithstanding anything to the contrary set forth in this Section 1.2, the rentable square footage of the Premises as measured pursuant to the above provisions of this Section 1:2 shall be equal to the product of (A) the usable square footage of the Premises measured strictly pursuant to BOMA and (B) 1,1573. In the event that the rentable area of the Premises, the Building and/or the Project shall hereafter change due to subsequent alterations and/or other modifications to the Premises, the Building and/or the Project, the rentable area of the Premises, the Building and/or the Project, as the case may be, shall be appropriately adjusted as of the date of such alteration and/or other modification, based upon the written verification by Landlord's space planner of such revised rentable area. In the event of any such adjustment to the rentable area of the Premises, the Building and/or the Project, all amounts, percentages and figures appearing or referred to in this Lease based upon such rentable area (including, without limitation, the amount of the "Rent" and any "Security Deposit," as those terms are defined in Article 4 and Article 21 of this Lease, respectively) shall be modified in accordance with such determination. ARTICLE 2 --------- LEASE TERM ---------- The terms provisions of this Lease shall be effective as of the date of this Lease. The term of this Lease (the "LEASE TERM") shall be as set forth in Section 3.1 of the Summary, shall commence on the date set forth in Section 3.2 of the Summary (the "LEASE COMMENCEMENT DATE"), and shall terminate on the date set forth in Section 3.3 of the Summary (the "LEASE EXPIRATION DATE") unless this Lease is sooner terminated as hereinafter provided. For purposes of this Lease, the term "LEASE YEAR" shall mean each consecutive twelve (12) month period during the Lease Term. At any time during the Lease Term, Landlord may deliver to Tenant a notice in the form as set forth in EXHIBIT C attached --------- hereto, as a confirmation only of the information set forth therein, which Tenant shall execute and return to Landlord within five (5) days of receipt thereof. ARTICLE 3 --------- BASE RENT --------- Tenant shall pay, without prior notice or demand, to Landlord or Landlord's agent at the management office of the Project, or, at Landlords option, at such other place as Landlord may from time to time designate in writing, by 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 4 of the Summary, payable in equal monthly installments as set forth in Section 4 of the Summary in advance on or before the first day of each and every calendar month during the Lease Term, without any setoff or deduction whatsoever. The Base Rent for the first full month of the Lease Term which occurs after the expiration of any free rent period shall be paid at the time of Tenant's execution of this Lease. If any Rent 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 payment of Rent is for a period which is shorter than one month, the Rent for any fractional month shall accrue on a daily basis for the period from the date such payment is due to the end of such calendar month or to the end of the Lease Term at a rate per day which is equal to 1/365 of the applicable annual Rent. 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 basis. ARTICLE 4 --------- ADDITIONAL RENT --------------- 4.1 GENERAL TERMS. In addition to paying the Base Rent specified in ------------- Article 3 of this Lease, Tenant shall pay "Tenant's Share" of the annual "Building Direct Expenses," as those terms -4- are defined in Sections 4.2.9 and 4.2.2 of this Lease, respectively, which are in excess of the amount of Building Direct Expenses applicable to the "BASE YEAR," as that term is defined in Section 4.2.1, below, provided, however, that in no event shall any decrease in Building Direct Expenses for any "EXPENSE YEAR," as that term is defined in Section 4.2.6 below, below Building Direct Expenses for the Base Year entitle Tenant to any decrease in Base Rent or any Credit against sums due under this Lease. Such payments by Tenant, together with any and all other amounts payable by Tenant to Landlord pursuant to the terms of this Lease, are hereinafter collectively referred to as the "ADDITIONAL RENT", and the Base Rent and the Additional Rent are herein collectively referred to as "RENT." All amounts due under this Article 4 as Additional Rent shall be payable for the same periods and in the same manner as the Base Rent. Without limitation on other obligations of Tenant which 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 OF KEY TERMS RELATING TO ADDITIONAL RENT. As used in this ---------------------------------------------------- Article 4, the following terms shall have the meanings hereinafter set forth: 4.2.1 "BASE YEAR" shall mean the period set forth in Section 5 of the Summary. 4.2.2 "BUILDING DIRECT EXPENSES" shall mean "Building Operating Expenses" and "Building Tax Expenses", as those terms are defined in Sections 4.2.3 and 4.2.4, below, respectively. 4.2.3 "BUILDING OPERATING EXPENSES" shall mean the portion of "Operating Expenses," as that term is defined in Section 4.2.7 below, allocated to the tenants of the Building pursuant to the terms of Section 4.3.1 below. 4.2.4 "BUILDING TAX EXPENSES" shall mean that portion of "Tax Expenses", as that term is defined in Section 4.2.8 below, allocated to the tenants of the Building pursuant to the terms of Section 4.3.1 below. 4.2.5 "DIRECT EXPENSES" shall mean "Operating Expenses" and "Tax Expenses." 4.2.6 "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, provided that Landlord, upon notice to Tenant, may change the Expense Year from time to time to any other twelve (12) consecutive month period, and, in the event of any such change, Tenant's Share of Building Direct Expenses shall be equitably adjusted for any Expense Year involved in any such change. 4.2.7 "OPERATING EXPENSES" shall mean all expenses, costs and amounts of every kind and nature which Landlord pays during any Expense Year because of or in connection with the ownership, management, maintenance, repair, replacement, restoration or operation of the Project, or any portion thereof. Without limiting the generality of the foregoing, Operating Expenses shall specifically include any and all of the following: (i) the cost of supplying all utilities, the cost of operating, repairing and renovating the utility, telephone, mechanical, sanitary, storm drainage, and elevator systems, and the cost of maintenance and service contracts in connection therewith; (ii) the cost of licenses, certificates, permits and inspections and the cost of contesting any governmental enactments which may affect Operating Expenses, and the costs incurred in connection with a governmentally mandated transportation system management program or similar program; (iii) the cost of all insurance carried by Landlord in connection with the Project as reasonably determined by Landlord; (iv) the cost of landscaping, relamping, and all supplies, tools, equipment and materials used in the operation, repair and maintenance of the Project, or any portion thereof; (v) the cost of parking area repair, restoration, and maintenance; (vi) fees and other costs, including reasonable management fees, consulting fees, legal fees and accounting fees, of all contractors and consultants in connection with the management, operation, maintenance and repair of the Project; (vii)payments under any equipment rental agreements and the fair rental value of any management office space; (viii) subject to item (T), below, wages, salaries and other compensation and benefits, including taxes levied thereon, of all persons engaged in the operation, maintenance and security of the Project; (ix) costs under any instrument pertaining to the sharing of costs by the Project; (x) operation, repair, maintenance and -5- replacement of all systems and equipment and components thereof of the Project; (xi) the cost of janitorial, alarm, security and other services, replacement of wall and floor coverings, ceiling tiles and fixtures in common areas, maintenance and replacement of curbs and walkways, repair to roofs and re- roofing, (xii) amortization (including interest on the unamortized cost) over the useful life as Landlord shall reasonably determine, of the cost of acquiring or the rental expense of personal property used in the maintenance, operation and repair of the Project, or any portion thereof, (xiii) the cost of capital improvements or other costs incurred in connection with the Project (A) which are intended to effect economies in the operation or maintenance of the Project, or any portion thereof, (B) that are required to comply with present or anticipated conservation programs, (C) which are replacements or modifications of nonstructural items located in the Common Areas required to keep the Common Areas in good order or condition, or (D) that are required under any governmental law or regulation by a federal, state or local governmental agency, except for capital repairs, replacements or other improvements to remedy a condition existing as of the Lease Commencement Date which an applicable governmental authority, if it had knowledge of such condition as of the Lease Commencement Date, would have then required to be remedied pursuant to the then- current governmental laws or regulations in their form existing as of the Lease Commencement Date; provided, however, that any capital expenditure shall be amortized (including interest on the amortized cost) over its useful life as Landlord shall reasonably determine; and (xiv) costs, fees, charges or assessments imposed by, or resulting from any mandate imposed on Landlord by, any federal, state or local government for fire and police protection, trash removal, community services, or other services which do not constitute "Tax Expenses" as that term is defined in Section 4.2.8, below. Notwithstanding the foregoing, for purposes of this Lease, Operating Expenses shall not, however include: (A) costs of repairs or other work occasioned by fire, windstorm or other casualty (other than those amounts within the deductible limits of insurance policies actually carried by Landlord); (B) except as otherwise specifically provided in this Section 4.2.7, costs incurred by Landlord in the repairs, capital additions, alterations or replacements made or incurred to rectify or correct defects in design, materials or workmanship in connection with any portion of the Project; (C) costs (including permit, license and inspection costs) incurred in renovating or otherwise improving, decorating or redecorating rentable space for other tenants or vacant rentable space; (D) cost of utilities or services sold to Tenant or others for which Landlord is entitled to and actually receives reimbursement (other than through any operating cost reimbursement provision identical or substantially similar to the provisions set forth in this Lease); (E) except as otherwise specifically provided in this Section 4.2.7, costs incurred by Landlord for alterations to the Project which are considered capital improvements and replacements under generally accepted accounting principles, consistently applied; (F) costs of depreciation and amortization, except on materials, small tools and supplies purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party, where such depreciation and amortization would otherwise have been included in the charge for such third party services, all as determined in accordance with generally accepted accounting principles, consistently applied; (G) costs of services or other benefits which are not available to Tenant but which are provided to other tenants of the Project. (H) costs incurred due to the violation by Landlord or any other tenant of the terms and conditions of any lease of space in the Project; (I) costs of overhead or profit increment paid to Landlord or to subsidiaries or affiliates of Landlord for services in or in connection with the Project to the extent the same exceeds the cost of such services which could be obtained from third parties on a competitive basis; -6- (J) except as otherwise specifically provided in this Section 4.2.7, costs of interest on debt or amortization on any mortgages, and rent and other charges, costs and expenses payable under any mortgage, if any; (K) costs of general overhead and general administrative expenses, not including management fees and building office expenses which are included in operating expenses by landlords of other Comparable Buildings; (L) costs of any compensation and employee benefits paid to clerks, attendants or other persons in a commercial concession operated by Landlord, except the Project parking facility; (M) costs of rentals and other related expenses incurred in leasing heat, ventilation, and air-conditioning, elevators or other equipment ordinarily considered to be of a capital nature, except equipment which is used in providing janitorial or similar services and which is not affixed to the Project; (N) costs of advertising and promotion; (O) costs of electrical power for which Tenant directly contracts with and pays a local public service company; (P) costs incurred to comply with laws relating to the removal of any hazardous material (as defined under applicable law) which was in existence in the Building or on the Project prior to the Lease Commencement Date, and was of such a nature that a federal, state or municipal governmental authority, if it had then had knowledge of the presence of such hazardous material, in the state, and under the conditions that it then existed in the Building or on the Project, would have then required the removal of such hazardous material or other remedial or containment action with respect thereto; and costs incurred to remove, remedy, contain, or treat any hazardous material, which hazardous material is brought into the Building or onto the Project after the date hereof by Landlord or any other tenant of the Project and is of such a nature, at that time, that a federal, state or municipal governmental authority, if it had then had knowledge of the presence of such hazardous material, in the state, and under the conditions, that it then exists in the Building or on the Project, would have then required the removal of such hazardous material or other remedial or containment action with respect thereto; (Q) costs incurred in connection with the abatement or encapsulation of asbestos in the Project; (R) marketing costs, including 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 present or prospective tenants or other occupants of the Project, including attorneys' fees and other costs and expenditures incurred in connection with disputes with present or prospective tenants or other occupants of the Project; (S) the cost or providing any service directly to and paid directly by any tenant; and (T) the wages and benefits of any employee who does not devote substantially all of his or her employed time to the Project unless such wages and benefits are prorated to reflect time spent on operating and managing the Project vis-a-vis time spent on matters unrelated to operating and managing the Project. 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 Project is not at lease ninety-five percent (95%) occupied during all or a portion of the Base Year or any Expense -7- Year, Landlord shall make an appropriate adjustment to the components of Operating Expenses for such year to determine the amount of Operating Expenses that would have been paid had the Project been ninety-five percent (95%) occupied, and the amount so determined shall be deemed to have been the amount of Operating Expenses for such year. Operating Expenses for the Base Year shall not include 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, or amortized costs relating to capital improvements. 4.2.8 TAXES. ----- 4.2.8.1 "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 Project, or any portion thereof), which shall be paid during any Expense Year (without regard to any different fiscal year used by such governmental or municipal authority) because of or in connection with the ownership, leasing and operation of the Project, or any portion thereof. 4.2.8.2 Tax Expenses shall include, without limitation: (i) Any tax on the rent, right to rent or other income from the Project, or any portion thereof, or as against the business of leasing the Project, or any portion thereof; (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, and, in further recognition of the decrease in the level and quality of governmental services and amenities as a result of Proposition 13, Tax Expenses shall also include any governmental or private assessments or the Project's contribution towards a governmental or private cost-sharing agreement for the purpose of augmenting or improving the quality of services and amenities normally provided by governmental agencies; (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 business or gross income tax or excise 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, (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; and (v) All of the real estate taxes and assessments imposed upon or with respect to the Building and all of the real estate taxes and assessments imposed on the land and improvements of Lots 8 and 14, Tract 26196 as recorded in Book 684, page 84; and the tunnel and ramp providing egress from such Lot 8 to Century Park East and which is situated partly under Olympic Boulevard and partly on Lot 9 of such Tract 26196, except that there shall be deducted from all of such taxes and assessments any taxes and assessments attributable to the portion of such Lot 8 initially leased to American Broadcasting Companies, Inc. 4.2.8.3 Any costs and expenses (including, without, limitation, reasonable attorneys' fees) incurred 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 credited against Tax Expenses and refunded to Tenant regardless of when received, based on the Expense Year to which the refund is applicable, provided that in no event shall the amount to be refunded to Tenant for any such Expense Year exceed the total amount paid by Tenant as Additional Rent under this Article 4 for such Expense Year. If Tax --------- Expenses for any period during the Lease Term or any extension thereof are increased after payment thereof 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 any such -8- increased Tax Expenses included by Landlord as Building Tax Expenses pursuant to the terms of this Lease. Notwithstanding anything to the contrary contained in this Section 4.2.8 (except as set forth in Section 4.2.8.1, 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 Project), (ii) any items included as Operating Expenses, and (iii) any items paid by Tenant under Section 4.5 of this Lease. 4.2.8.4 If in any Expense Year subsequent to the Base Year (the "ADJUSTMENT YEAR"), the amount of Tax Expenses decreases below the amount of Tax Expenses for the Base Year as a result of a Proposition 8 reduction, then for purposes of all subsequent Expense Years, including the Expense Year in which such decrease in Tax Expenses occurs, the Building Direct Expenses for the Base Year shall be decreased by an amount equal to such decrease in Tax Expenses in the Adjustment Year. Conversely, if the Tax Expenses thereafter are decreased by a lesser amount during any comparison year subsequent to the Adjustment Year (the "READJUSTMENT YEAR") as a result of Landlord's failure to secure a Proposition 8 reduction which is greater than or equal to the Proposition 8 reduction secured during the Adjustment Year, then for purposes of all subsequent comparison years, including the comparison year in which such lesser decrease in Tax Expenses occurs, the Building Direct Expenses for the Base Year shall only be decreased by an amount equal to the decrease in Tax Expenses during such Readjustment Year which resulted from Landlord's failure to secure a Proposition 8 reduction greater than or equal to the Proposition 8 reduction secured during the Adjustment Year; provided that any costs and expenses incurred by Landlord in securing any Proposition 8 reduction shall not be included in Building Direct Expenses for purposes of this Lease. Landlord and Tenant acknowledge that this Section 4.2.8.4 is not intended to in any way affect (A) the inclusion in Tax Expenses of the statutory two percent (2.0%) annual increase in Tax Expenses (as such statutory increase may be modified by subsequent legislation), or (B) the inclusion or exclusion of Tax Expenses pursuant to the terms of Proposition 13, which shall be governed pursuant to the terms of Sections 4.2.8.1 through 4.2.8.3, above. 4.2.9 "TENANT'S SHARE" shall mean the percentage set forth in Section 6 of the Summary. Tenant's Share was calculated by multiplying the number of usable square feet of the Premises, as set forth in Section 2.2 of the Summary, by 100, and dividing the product by the 971,847 usable square feet in the Building. The usable 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 thereof shall include a portion of, the square footage of the ground floor common areas located within the Building and the common area and occupied space of the portion of the Building or Project, dedicated to the service of the Building. In the event either the usable square feet of the Premises and/or the total usable square feet of the Building is remeasured, Tenant's Share shall be appropriately adjusted, and, as to the Expense Year in which such change occurs, Tenant's Share for such Expense 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. Landlord shall have the option to modify the method of calculation of Tenant's Share to a calculation based on the rentable square feet of the Premises and Building, so long as the Tenant's Share hereunder is not increased thereby. 4.3 ALLOCATION OF DIRECT EXPENSES. ----------------------------- 4.3.1 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 Project (i.e, the Direct Expenses) should be --- shared between the tenants of the Building and the tenants of the other buildings in the Project. Accordingly, as set forth in Section 4.2 above, Direct Expenses (which consists of Operating Expenses and Tax Expenses) are determined annually for the Project 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 in the Project) 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 attributable to the Project as a whole. -9- 4.3.2 COST POOLS. Landlord shall have the right, from time to ---------- time, to equitably allocate some or all of the Direct Expenses for the Project among different portions or occupants of the Project (the "COST POOLS"), in Landlord's reasonable discretion. Such Cost Pools may include, but shall not be limited to, the office space tenants of a building of the Project or of the Project, and the retail space tenants of a building of the Project or of the Project. The Direct Expenses within each such Cost Pool shall be allocated and charged to the tenants within such Cost Pool in an equitable manner. 4.4 CALCULATION AND PAYMENT OF ADDITIONAL RENT. If for any Expense ------------------------------------------ Year ending or commencing within the Lease Term, Tenant's Share of Building Direct Expenses for such Expense Year exceeds Tenant's Share of Building Direct Expenses applicable to the Base Year, then Tenant shall pay to Landlord, in the manner set forth in Section 4.4.1, below, and as Additional Rent, an amount equal to the excess (the "EXCESS"). 4.4.1 STATEMENT OF ACTUAL BUILDING DIRECT EXPENSES AND ----------------------------------------------- PAYMENT BY TENANT. Landlord shall endeavor to give to Tenant following the end - ----------------- of each Expense Year, a statement (the "STATEMENT") which shall state the Building Direct Expenses incurred or accrued for such preceding Expense Year, and which shall indicate the amount of the Excess. Upon receipt of the Statement for each Expense Year commencing or ending during the Lease Term, if any 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 4.4.2, below, and if Tenant paid more as Estimated Excess than the actual Excess, Tenant shall receive a credit in the amount of Tenant's overpayment against Rent next due under this Lease. The failure of Landlord to timely furnish the Statement for any Expense Year shall not prejudice Landlord or Tenant 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 Building Direct Expenses for the Expense Year in which this Lease terminates, if an Excess if present, Tenant shall immediately pay to landlord such amount, and if Tenant paid more as Estimated Excess than the actual Excess, Landlord shall, within thirty (30) days, deliver a check payable to Tenant in the amount of the overpayment. The provisions of this Section 4.4.1 shall survive the expiration or earlier termination of the Lease Term. 4.4.2 STATEMENT OF ESTIMATED BUILDING 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 estimate (the "ESTIMATE") of what the total amount of Building Direct Expenses for the then-current Expense Year shall be and the estimated excess (the "ESTIMATED EXCESS") as calculated by comparing the Building Direct Expenses for such Expense Year, which shall be based upon the Estimate, to the amount of Building 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, nor shall Landlord be prohibited from revising any Estimate Statement or Estimated Excess theretofore delivered to the extent necessary. Thereafter, 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 next to last sentence of this Section 4.4.2). Such fraction shall have as its numerator the number of months which have elapsed in such current Expense Year, including the month of such payment, and twelve (12) as its denominator. Until a new Estimate Statement is furnished (which Landlord shall have the right to deliver to Tenant at any time), 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. Landlord shall maintain books and records with respect to Building Direct Expenses in accordance with generally accepted accounting and management practices, consistently applied. 4.5 TAXES AND OTHER CHARGES FOR WHICH TENANT IS DIRECTLY RESPONSIBLE. ---------------------------------------------------------------- 4.5.1 Tenant shall be liable for and shall pay ten (10) days before delinquency, taxes levied against Tenant's equipment, furniture, fixtures and any other personal property located in or about the Premises. If any such taxes on Tenant's equipment, furniture, fixtures and any other personal property are levied against Landlord or Landlord's property or if the assessed value of Landlord's property is increased by the inclusion therein of a value placed upon such -10- equipment, furniture, fixtures or any other personal property and if landlord pays the taxes based upon such increased assessment, which Landlord shall have the right to do regardless of the validity thereof but only under proper protest if requested by Tenant, Tenant shall upon demand repay to Landlord the taxes so levied against Landlord or the proportion of such taxes resulting from such increase in the assessment, as the case may be. 4.5.2 If the tenant improvements in the Premises, whether installed and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which tenant improvements conforming to Landlord's "building standard" in other space in the Building are assessed, then the Tax Expenses levied against Landlord or the property by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of Section 4.5.1, above. 4.5.3 Notwithstanding any contrary provision herein, Tenant shall pay prior to delinquency any (i) rent tax or sales tax, transfer tax or value added tax, or any other applicable tax on the rent or services herein or otherwise respecting this Lease, (ii) taxes 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 Project, including the Project parking facility; or (iii) taxes assessed upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. ARTICLE 5 --------- USE OF PREMISES --------------- 5.1 PERMITTED USE. Tenant shall use the Premises solely for the ------------- Permitted Use set forth in Section 7 of the Summary and Tenant shall not use or permit the Premises or the Project to be used for any other purpose or purposes whatsoever without the prior written consent of Landlord, which may be withheld in Landlord's sole discretion. 5.2 PROHIBITED USES. Tenant further covenants and agrees that Tenant --------------- 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 the Rules and Regulations set forth in 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 Project) including, without limitation, any such laws, ordinances, regulations or requirements relating to hazardous materials or substances, as those terms are defined by applicable laws now or hereafter in effect. Tenant shall not do or permit anything to be done in or about the Premises which will in any way damage the reputation of the Project or obstruct or interfere with the rights of other tenants or occupants of the Building, or injure or annoy them or use or allow the Premises to be used for any improper, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall comply with all recorded covenants, conditions, and restrictions now or hereafter affecting the Project. ARTICLE 6 --------- SERVICES AND UTILITIES ---------------------- 6.1 STANDARD TENANT SERVICES. Landlord shall provide the following ------------------------ services on all days (unless otherwise stated below) during the Lease Term. 6.1.1 Subject to limitations imposed by all governmental rules, regulations and guidelines applicable thereto, Landlord shall provide heating and air conditioning ("HVAC") P.M. Monday through Friday, and on Saturdays from 8:00 A.M. to 1:00 P.M. (collectively, the "BUILDING HOURS"), except for the date of observation of New Year's Day, Independence Day, Labor Day, Memorial Day, Thanksgiving Day, Christmas Day and, at Landlord's discretion, other locally or nationally recognized holidays which are observed by other Comparable Buildings (collectively, the "HOLIDAYS"). -11- 6.1.2 Landlord shall provide adequate electrical wiring and facilities for connection to Tenant's lighting fixtures and incidental use equipment, provided that (i) the connected electrical load of the incidental use equipment does not exceed an average of three (3) watts per usable square foot of the Premises during the Building Hours on a monthly basis, and the electricity so furnished for incidental use equipment will be at a nominal one hundred twenty (120) volts and no electrical circuit for the supply of such incidental use equipment will require a current capacity exceeding twenty (20) amperes, and (ii) the connected electrical load of Tenant's lighting fixtures does not exceed an average of one (1) watt per usable foot of the Premises during the Building Hours on a monthly basis, and the electricity so furnished for Tenant's lighting will be at a nominal one hundred twenty (120) volts, which electrical usage shall be subject to applicable laws and regulations, including Title 24. Tenant shall bear the cost of replacement of lamps, starters and ballasts for non-Building standard lighting fixtures within the Premises. 6.1.3 Landlord shall provide city water from the regular Building outlets for drinking, lavatory and toilet purposes in the Building Common Areas. 6.1.4 Landlord shall provide janitorial services to the Premises, except the date of observation of the Holidays, in and about the Premises and window washing services in a manner consistent with other comparable buildings in the vicinity of the Building, 6.1.5 Landlord shall provide nonexclusive, non-attended automatic passenger elevator service during the Building Hours, shall have one elevator available at all other times, including on the Holidays, and shall provide nonexclusive, non-attended automatic passenger escalator service during Building Hours only. 6.1.6 Landlord shall provide nonexclusive freight elevator service subject to scheduling by Landlord. Tenant shall cooperate fully with the Landlord at all times and abide by all regulations and requirements that Landlord may reasonably prescribe for the proper functioning and protection of the HVAC, electrical, mechanical and plumbing systems. 6.2 OVERSTANDARD TENANT USE. 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. If Tenant uses water, electricity, heat or air conditioning in excess of that supplied by Landlord pursuant to Section 6.1 of this Lease, Tenant shall pay to Landlord, upon billing, the actual cost of such excess consumption, the cost of the installation, operation, and maintenance of equipment which is installed in order to supply such excess consumption, and the cost of the increased wear and tear on existing equipment caused by such excess consumption; and Landlord may install devices to separately meter any increased use in such event Tenant shall pay the increased cost directly to Landlord, on demand, at the rates charged by the public utility company furnishing the same, including the actual cost of such additional metering devices. Tenant's use of electricity shall never exceed the capacity of the feeders to the Project or the risers or wiring installation, and subject to the terms of Section 29.32, below, Tenant shall not install or use or permit the installation or use of any computer or electronic data processing equipment in the Premises, without the prior written consent of Landlord. If Tenant desires to use heat, ventilation or air conditioning during hours other than those for which Landlord is obligated to supply such utilities pursuant to the terms of Section 6.1 of this Lease, Tenant shall give Landlord such prior notice, if any, as Landlord shall from time to time establish as appropriate, of Tenant's desired use in order to supply such utilities, and Landlord shall supply such utilities to Tenant at such hourly cost to Tenant (which shall be treated as Additional Rent) as Landlord shall from time to time establish. 6.3 INTERRUPTION OF USE. Tenant agrees that Landlord shall not be liable ------------------- for damages, by abatement of Rent or otherwise, 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 -12- breakage 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 or Project after reasonable effort to do so, by any riot or other dangerous conditions, emergency, 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. 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 finish any of the services or utilities as set forth in this Article 6. 6.4 RENT ABATEMENT. If Landlord fails to perform the obligations required --------------- of Landlord under the terms of this Lease and such failure causes all or a portion of the Premises to be untenantable and unusable by Tenant and such failure relates to the nonfunctioning of the heat, ventilation, and air conditioning system in the Premises, the electricity in the Premises, the nonfunctioning of the elevator service to the Premises, or a failure to provide access to the Premises, Tenant shall give Landlord notice (the "INITIAL NOTICE"), specifying such failure to perform by Landlord (the "LANDLORD DEFAULT"). If Landlord has not cured such Landlord Default within five (5) business days after the receipt of the Initial Notice (the "ELIGIBILITY PERIOD"), Tenant may deliver an additional notice to Landlord (the "ADDITIONAL NOTICE"), specifying such Landlord Default and Tenant's intention to abate the payment of Rent under this Lease. If Landlord does not cure such Landlord Default within five (5) business days of receipt of the Additional Notice, Tenant may, upon written notice to Landlord, immediately abate Rent payable under this Lease for that portion of the Premises rendered untenantable and not used by Tenant, for the period beginning on the date five (5) business days after the Initial Notice to the earlier of the date Landlord cures such Landlord Default or the date Tenant recommences the use of such portion of the Premises. Such right to abate Rent shall be Tenant's sole and exclusive remedy at law or in equity for a Landlord Default. Except as provided in this Section 6.4, nothing contained herein shall be interpreted to mean that Tenant is excused from paying Rent due hereunder. ARTICLE 7 --------- REPAIRS ------- Tenant shall, at Tenant's own expense, keep the Premises, including all improvements, fixtures and furnishings therein, and the floor or floors of the Building on which the Premises are located, in good order, repair and condition at all times during the Lease Term. In addition, Tenant shall, at Tenant's own expense, but under the supervision and subject to the prior approval of Landlord, and within any reasonable period of time specified by Landlord, promptly and adequately repair all damage to the Premises and replace or repair all damaged, broken, or worn fixtures and appurtenances, except for damage caused by ordinary wear and tear or beyond the reasonable control of Tenant; provided however, that, at Landlord's option, or if Tenant fails to make such repairs, Landlord may, but need not, make such repairs and replacements, and Tenant shall pay Landlord the cost thereof, including a percentage of the cost thereof (to be uniformly established for the Building and/or the Project) sufficient to reimburse Landlord for all overhead, general conditions, fees and other costs or expenses arising from Landlord's involvement with such repairs and replacements forthwith upon being billed for same. Notwithstanding the foregoing, Landlord shall be responsible for repairs to the exterior walls, foundation and roof of the Building, the structural portions of the floors of the Building, and the systems and equipment of the Building, except to the extent that such repairs are required due to the negligence or wilful misconduct of Tenant; provided, however, that if such repairs are due the negligence or wilful misconduct of Tenant, Landlord shall nevertheless make such repairs at Tenant's expense, or, if covered by Landlord's insurance, Tenant shall only be obligated to pay any deductible in connection therewith. Landlord may, but shall not be required to, enter the Premises at all reasonable times to make such repairs, alterations, improvements or additions to the Premises or to the Project or to any equipment located in the Project 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. Tenant hereby waives any and all rights under and benefits of -13- subsection 1 of Section 1932 and Section 1941 and 1942 of the California Civil Code or under any similar law, statute, or ordinance now or hereafter in effect. 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 or any mechanical, plumbing or HVAC facilities or systems pertaining 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 thirty (30) days prior to the commencement thereof, and which consent shall not be unreasonably withheld by Landlord, provided it shall be deemed reasonable for Landlord to withhold its consent to any Alteration which adversely affects the structural portions or the systems or equipment of the Building or is visible from the exterior of the Building. Notwithstanding the foregoing, Tenant shall be permitted to make Alterations following ten (10) business days notice to Landlord, but without Landlord's prior consent, to the extent that such Alterations are decorative only (i.e., installation of carpeting or painting of the Premises). The construction of the initial improvements to the Premises shall be governed by the terms of this Article 8. 8.2 MANNER OF CONSTRUCTION. Landlord may impose, as a condition of its ---------------------- consent to any and all Alterations or repairs of the Premises or about the Premises, such requirements as Landlord in its reasonable discretion may deem desirable, including, but not limited to, the requirement that Tenant utilize for such purposes only contractors, subcontractors, materials, mechanics and materialmen selected by Tenant from a list provided and approved by Landlord, the requirement that upon Landlord's request, Tenant shall, at Tenant's expense, remove such Alterations upon the expiration or any early termination of the Lease Term. Tenant shall construct such Alterations and perform such repairs in a good and workmanlike manner, in conformance with any and all applicable federal, state, county or municipal laws, rules and regulations and pursuant to a valid building permit, issued by the City of Los Angeles, all in conformance with Landlord's construction rules and regulations. In the event Tenant performs any Alterations in the Premises which require or give rise to governmentally required changes to the "Base Building," as that term is defined below, then Landlord shall, at Tenant's expense, make such changes to the Base Building. The "BASE BUILDING" shall include the structural portions of the Building, and the public restrooms and the systems and equipment located in the internal core of the Building on the floor or floors on which the Premises are located. In performing the work of any such Alterations, Tenant shall have the work performed in such manner so as not to obstruct the business of Landlord or other tenants in the Project. Tenant shall not use (and upon notice from Landlord shall cease using) contractors, services, workmen, labor, materials or equipment that, in Landlord's reasonable judgement, would disturb labor harmony with the workforce or trades engaged in performing other work, labor or services in or about the Building or the Common Areas. In addition to Tenant's obligations under Article 9 of this Lease, upon completion of any Alterations, Tenant agrees to cause a Notice of Completion to be recorded in the office of the Recorder of the County of Los Angeles in accordance with Section 3093 of the Civil Code of the State of California or any successor statute, and Tenant shall deliver to the Project management office a reproducible copy of the "as built" drawings of the Alterations as well as all permits, approvals and other documents issued by any governmental agency in connection with the Alterations. 8.3 PAYMENT FOR IMPROVEMENTS. If payment is made directly to contractors, ------------------------ Tenant shall comply with Landlord's requirements for final lien releases and waivers in connection with Tenant's payment for work to contractors. If Tenant orders any work directly from Landlord, Tenant shall pay to Landlord a percentage of the cost of such work sufficient to compensate Landlord for all overhead, general conditions, fees and other costs and expenses arising from Landlord's involvement with such work. If Tenant does not order any work directly from Landlord, Tenant shall reimburse Landlord for Landlord's reasonable, actual, out-of-pocket costs and expenses actually incurred in connection with Landlord's review of such work. -14- 8.4 CONSTRUCTION INSURANCE. In addition to the requirements of Article 10 ---------------------- of this Lease, in the event that Tenant makes any Alterations, prior to the commencement of such Alterations, Tenant shall provide Landlord with evidence that Tenant carries "Builder's All Risk" insurance in an amount approved by Landlord covering the construction of such Alterations, and such other insurance as Landlord may 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. In addition, Landlord may, in its discretion, require Tenant to obtain a lien and completion bond or some alternate form of security satisfactory to Landlord in an amount sufficient to ensure the lien-free completion of such Alterations and naming Landlord as a co-obligee. 8.5 LANDLORD'S PROPERTY. All Alterations, improvements, fixtures, ------------------- equipment and/or appurtenances which may be 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, except that Tenant may remove any Alterations, improvements, fixtures and/or equipment which Tenant can substantiate to Landlord have not been paid for with any Tenant improvement allowance funds provided to Tenant by Landlord, provided Tenant repairs any damage to the Premises and Building caused by such removal and returns the affected portion of the Premises to a building standard tenant improved condition as determined by Landlord. 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 following 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 and returns the affected portion of the Premises to a building standard tenant improved condition as determined by Landlord. If Tenant fails to complete such removal and/or to repair any damage caused by the removal of any Alterations and returns the affected portion of the Premises to a building standard tenant improved condition as reasonably determined by Landlord, Landlord may do so and may charge the cost thereof to Tenant. Tenant hereby protects, defends, 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, which obligations of Tenant shall survive the expiration or earlier termination of this Lease. ARTICLE 9 --------- COVENANT AGAINST LIENS ---------------------- Tenant shall keep the Project and Premises free from any liens or encumbrances arising out of the work performed, materials furnished or obligations incurred by or on behalf of Tenant, and shall protect, defend, indemnify and hold Landlord harmless from and against any claims, liabilities, judgments or costs (including, without limitation, reasonable attorneys' fees and costs) arising out of same or in connection therewith. Tenant shall give Landlord notice at least twenty (20) days prior to the commencement of any such work on the Premises (or such additional time as may be necessary under applicable laws) to afford Landlord the opportunity of posting and recording appropriate notices of non-responsibility. Tenant shall remove any such lien or encumbrance by bond or otherwise within ten (10) business days after notice by Landlord, and if Tenant shall fail to do so, Landlord may pay the amount necessary to remove such lien or encumbrance, without being responsible for investigating the validity thereof. The amount so paid shall be deemed Additional Rent under this Lease payable upon demand, without limitation as to other remedies available to Landlord under this Lease. Nothing contained in this Lease shall authorize Tenant to do any act which shall subject Landlord's title to the Building or Premises to any liens or encumbrances whether claimed by operation of law or express or implied contract. Any claim to a lien or encumbrance upon the Building or Premises arising in connection with any such work or respecting the Premises not performed by or at the request of Landlord shall be null and void, or at Landlord's option shall attach only against Tenant's interest in the Premises and shall in all respects be subordinate to Landlord's title to the Project, Building and Premises. -15- ARTICLE 10 ---------- INSURANCE --------- 10.1 INDEMNIFICATION AND WAIVER. Tenant hereby assumes all risk of damage -------------------------- to property or injury to persons in, upon or about the Premises from any cause whatsoever and agrees that Landlord, its partners, subpartners and their respective officers, agents, servants, employees, and independent contractors (collectively, "LANDLORD PARTIES") shall not be liable for, and are hereby released from any responsibility 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. Tenant shall indemnify, defend, protect, and hold harmless the Landlord Parties from any and all loss, cost, damage, expense and liability (including without limitation court costs and reasonable attorneys' fees) incurred in connection with or arising from any cause in, on or about the Premises, any acts, omissions or negligence of Tenant or of any person claiming by, through or under Tenant, or of the contractors, agents, servants, employees, invitees, guests or licensees of Tenant or any such person, in, on or about the Project or any breach of the terms of this Lease, either prior to, during, or after the expiration of the Lease Term, provided that the terms of the foregoing indemnity shall not apply to the negligence or willful misconduct of Landlord. Should Landlord be named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy of the Premises, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including without limitation, its actual professional fees such as reasonable appraisers', accountants' and attorneys' fees. 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 loss, cost, damage, expense and liability (including without limitation reasonable attorneys' fees) arising from the negligence or wilful misconduct of Landlord in, on or about the Project, except to the extent caused by the negligence or wilful misconduct of the 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 by insurance required to be carried by the non-indemnifying party pursuant to this Lease. 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 arising in connection with any event occurring prior to such expiration or termination. Notwithstanding anything to the contrary contained in this Lease, nothing in this Lease shall impose any obligations on Tenant or Landlord to be responsible or liable for, and each hereby releases the other from all liability for, consequential damages other than those consequential damages incurred by Landlord in connection with holdover of the Premises by Tenant after the expiration or earlier termination of this Lease or incurred by Landlord in connection with any repair, physical construction or improvement work performed by or on behalf of Tenant in the Project. 10.2 TENANT'S COMPLIANCE WITH LANDLORD'S FIRE AND CASUALTY INSURANCE. --------------------------------------------------------------- Tenant shall, at Tenant's expense, comply with all insurance company requirements 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. 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 (including loss of use thereof) arising out of Tenant's operations, and contractual liabilities (covering the performance by Tenant of its indemnity agreements) including a Board Form endorsement covering the insuring provisions of -16- 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: Bodily Injury and $3,000,000 each occurrence Property Damage Liability $3,000,000 annual aggregate Personal Injury Liability $3,000,000 each occurrence $3,000,000 annual aggregate 0% Insured's participation 10.3.2 Physical Damage Insurance covering (i) all office furniture, business and trade fixtures, office equipment, free-standing cabinet work, movable partitions, merchandise and all other items of Tenant's property on the Premises installed by, for, or at the expense of Tenant, (ii) any improvements which exist in the Premises as of the Lease Commencement Date (excluding the Base Building) (the "ORIGINAL IMPROVEMENTS"), and (iii) all other improvements, alterations and additions to the Premises. Such insurance shall be written on an "all risks" of physical loss or damage basis, for the full replacement cost value (subject to reasonable deductible amounts) 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 coverage for damage or other loss caused by fire or other peril including, but not limited to, vandalism and malicious mischief, theft, water damage of any type, including sprinkler leakage, bursting or stoppage of pipes, and explosion, and providing business interruption coverage for a period of one year. 10.3.3 Worker's Compensation and Employer's Liability or other similar insurance pursuant to all applicable state and local statutes and regulations. 10.4 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 the Landlord so specifies, as an additional insured, including Landlord's managing agent, if any; (ii) specifically cover the liability assumed by Tenant under 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-X in Best's Insurance Guide or which is otherwise acceptable to Landlord and licensed to do business in the State of California; (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) be in form and content reasonably acceptable to Landlord; and (vi) provide that said insurance shall not be canceled or coverage changed unless thirty (30) days' prior written notice shall have been given to Landlord and any mortgagee of Landlord. Tenant shall deliver said policy or policies or certificates thereof to Landlord on or before the Lease Commencement Date and at least thirty (30) days 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, procure such policies for the account of Tenant, and the cost thereof shall be paid to Landlord within five (5) days after delivery to Tenant of bills therefor. 10.5 SUBROGATION. Landlord and Tenant intend that their respective property ----------- loss risks shall be borne by reasonable insurance carriers to the extent above provided, and Landlord and Tenant hereby agree to look solely to, and seek recovery only from, their respective insurance carriers in the event of a property loss to the extent that such coverage is agreed to be provided, hereunder. The parties each hereby waive all rights and claims against each other for such losses, and waive all rights of subrogation of their respective insurers, provided such waiver of subrogation shall not affect the right to the insured to recover thereunder. The parties agree that their respective insurance policies are now, or shall be, endorsed such that the waiver of subrogation shall not affect the right of the insured to recover thereunder, so long as no material additional premium is charged therefor. 10.6 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, but in no event in excess of the amounts and types of insurance then being required by landlords of other Comparable Buildings. -17- 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 serving or providing access to the Premises shall be damaged by fire or other casualty, Landlord shall 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, restore the Base Building and such Common Areas. Such restoration shall be to substantially the same condition of the Base Building and the 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 Project or any other modifications to the Common Areas deemed desirable by Landlord, which are consistent with the character of the Project, provided that access to the Premises and any common restrooms serving the Premises shall not be materially impaired. Upon the Occurrence of any damage to the Premises, 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, 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 prior to Landlord's commencement of repair of the damage. 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 damage the Premises or Common Areas necessary to Tenant's occupancy, and the Premises are not occupied by Tenant as a result thereof, then during the time and to the extent the Premises are unfit for occupancy, the Rent shall be abated in proportion to the ratio that the amount of rentable square feet of the Premises which is unfit for occupancy for the purposes permitted under this Lease bears to the total rentable square feet of the Premises. 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, Building and/or Project, and instead terminate this Lease, by notifying Tenant in writing of such termination within sixty (60) days after the date of damage, such notice to include a termination date giving Tenant sixty (60) days to vacate the Premises, but Landlord may so elect only if the Building or Project 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) in Landlord's reasonable judgment, repairs cannot reasonably be completed within one hundred eighty (180) days after the date of damage (when such repairs are made without the payment of overtime or other premiums); (ii) the holder of any mortgage on the Building or Project or ground lessor with respect to the Building or Project shall require that the insurance proceeds or any portion thereof be used to retire the mortgage debt, or shall terminate the ground lease, as the case may be; (iii) the damage is not fully covered, except for deductible amounts, by Landlord's insurance policies; (iv) Landlord decides to rebuild the Building or Common Areas so that they will be substantially different structurally or architecturally; (v) the damage occurs during the last twelve (12) months of the Lease Term; or (vi) any owner of any other portion of the Project, other than Landlord, does not intend to repair the damage to such portion of the Project; provided, however, that if Landlord does not elect to terminate this Lease pursuant to Landlord's termination right as provided above, and the repairs cannot, in the reasonable opinion of Landlord, be completed within one hundred eighty (180) days after being commenced, Tenant may elect, no earlier than sixty (60) days after the date of the damage and not later than ninety (90) days after the date of such damage, to terminate this Lease by written notice to Landlord effective as of the date specified in the notice, 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. Furthermore, if neither Landlord nor Tenant has terminated this Lease, and the repairs are not actually completed within such 180-day period, Tenant shall have right to terminate this Lease during the first five (5) business days of each calendar month following the end of such period until such time as the repairs are complete, by notice to Landlord (the "DAMAGE TERMINATION NOTICE"), effective as of a date set forth in the Damage Termination Notice (the "DAMAGE TERMINATION DATE"), which Damage Termination Date shall not be less than ten (10) -18- business days following the end of each such month. Notwithstanding the foregoing, if Tenant delivers a Damage Termination Notice to Landlord, then Landlord shall have the right to suspend the occurrence of the Damage Termination Date for a period ending thirty (30) days after the Damage Termination date set forth in the Damage Termination Notice by delivering to Tenant, within five (5) business days of Landlord's receipt of the Damage Termination Notice, a certificate of Landlord's contractor responsible for the repair of the damage certifying that it is such contractor's good faith judgment that the repairs shall be substantially completed within thirty (30) days after the Damage Termination Date. If repairs shall be substantially completed prior to the expiration of such thirty-day period, then the Damage Termination Notice shall be of no force or effect, but if the repairs shall not be substantially completed within such thirty-day period, then this Lease shall terminate upon the expiration of such thirty-day period. At any time, from time to time, after the date occurring sixty (60) days after the date of the damage, Tenant may request that Landlord inform Tenant of Landlord's reasonable opinion of the date of completion of the repairs and Landlord shall respond to such request within five (5) business days. 11.3 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 the Project, 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 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 the Project. ARTICLE 12 ---------- NONWAIVER --------- No provision of this Lease shall be deemed waived by either party hereto unless expressly waived in a writing signed thereby. The waiver by either party hereto of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of same or any other term, covenant or condition herein contained. The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular Rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. No acceptance of a lesser amount than the Rent herein stipulated shall be deemed a waiver of Landlord's right to receive the full amount due, nor shall any endorsement or statement on any check or payment or any letter accompanying such check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the full amount due. No receipt of monies by Landlord from Tenant after the termination of this Lease shall in any way alter the length of the Lease Term or of Tenant's right of possession hereunder, or after the giving of any notice shall reinstate, continue or extend the Lease Term or affect any notice given Tenant prior to the receipt of such monies, it being agreed that after the service of notice or the commencement of a suit, or after final judgment for possession of the Premises, Landlord may receive and collect any Rent due, and the payment of said Rent shall not waive or affect said notice, suit or judgment. ARTICLE 13 ---------- CONDEMNATION ------------ If the whole or any part of the Premises, Building or Project 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, Building or Project, 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. If more than twenty-five percent (25%) of the rentable square feet of the Premises is taken, or if access to the Premises is substantially impaired, in each case for a period in excess of -19- one hundred eighty (180) days, Tenant shall have the option to terminate this Lease effective as of the date possession is required to be surrendered to the authority. Tenant shall not because of such taking assert any claim against Landlord or the authority for any compensation because of such taking and Landlord shall be entitled to 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 moving expenses, so long as such claims do not diminish the award available to Landlord, its ground lessor with respect to the Building or Project or its mortgagee, and such claim is payable separately to Tenant. All Rent shall be apportioned as of the date of such termination. 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. 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 hundred and eighty (180) days 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, without the prior written consent of --------- Landlord, assign, mortgage, pledge, hypothecate, encumber, or permit any lien to attach to, or otherwise transfer, this Lease or any interest hereunder, permit any assignment, or other transfer of this Lease or any interest hereunder by operation of law, sublet the Premises or any part thereof, or enter into any license or concession agreements or otherwise permit the occupancy or use of the Premises or any part thereof by any persons other than Tenant and its employees and contractors (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 desires 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 thirty (30) 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 calculation of the "Transfer Premium", as that term is defined in Section 14.3 below, in connection with such Transfer Premium", 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 executed 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, provided that Landlord shall have the right to require Tenant to utilize Landlord's standard Transfer documents in connection with the documentation of such Transfer (iv) current financial statements of the proposed Transferee certified by an officer, partner or owner thereof, business credit and personal references and history of the proposed Transferee and any other information reasonably 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. Any Transfer made without Landlord's prior written consent shall, at Landlord's option, be null, void and of no effect, and shall, at Landlord's option, constitute a default by Tenant under this Lease. Whether or not Landlord consents to any proposed Transfer, Tenant shall pay Landlord's reasonable review and processing fees, as well as any reasonable professional fees (including, without limitation, attorneys', accountants', architects', engineers' and consultants' fees) incurred by Landlord, within thirty (30) days after written request by Landlord, in an amount not to exceed $1,500 in the aggregate, for a Transfer in the ordinary course of business. 14.2 LANDLORD'S CONSENT. Landlord shall not unreasonably withhold or delay ------------------ its consent to any proposed Transfer of the Subject Space to the Transferee on the terms specified in the Transfer Notice. Without limitation as to other reasonable grounds for withholding consent, -20- 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 Transfer where one or more of the following apply: 14.2.1 The Transferee is of a character or reputation or engaged in a business which is not consistent with the quality of the Building or the Project; 14.2.2 The Transferee intends to use the Subject Space for purposes which are not permitted under this Lease; 14.2.3 The Transferee is either a governmental agency or instrumentality thereof; 14.2.4 The Transferee is not a party of reasonable financial worth and/or financial stability in light of the responsibilities to be undertaken in connection with the Transfer on the date consent is requested; 14.2.5 The proposed Transfer would cause a violation of another lease for space in the Project, or would give an occupant of the Project a right to cancel its lease; or 14.2.6 Either 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, (i) occupies space in the Project at the time of the request for consent, or (ii) is negotiating with Landlord or has negotiated with Landlord during the six (6) month period immediately preceding the date Landlord receives the Transfer Notice, to lease space in the Project. If Landlord consents to any Transfer pursuant to the terms of this Section 14.2 (and does not exercise any recapture rights Landlord may have under Section 14.4 of this Lease), 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 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, 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 (including Landlord's right of recapture, if any, under Section 14.4 of this Lease). Notwithstanding anything to the contrary in this Lease, if Tenant or any proposed Transferee claims that Landlord has unreasonably withheld or delayed its consent under Section 14.2 or otherwise has breached or acted unreasonably under this Article 14, their sole remedies shall be a suit for contract damages (other than damages for injury to, or interference with, Tenant's business including, without limitation, loss of profits, however occurring) or declaratory judgment and an injunction for the relief sought, and Tenant hereby waives all other remedies, including, without limitation, any right at law or equity to terminate this Lease, on its own behalf and, to the extent permitted under all applicable laws, on behalf of the proposed Transferee. 14.3 TRANSFER PREMIUM. If Landlord consents to a Transfer, as a condition ---------------- thereto which the parties hereby agree is reasonable, Tenant shall pay to Landlord fifty (50%) of any "Transfer Premium," as that term is defined in this Section 14.3, received by Tenant from such Transferee. "TRANSFER PREMIUM" shall mean all rent, additional rent or other consideration payable by such Transferee in connection with the Transfer in excess of the Rent and Additional Rent payable by Tenant under this Lease during the term of the Transfer on a per rentable square foot basis if less than all of the Premises is transferred, after deducting the reasonable expenses incurred by Tenant for (i) any changes, alterations and improvements to the Premises in connection with the Transfer, (ii) any other monetary concessions provided to the Transferee, and (iii) any brokerage commissions in connection with the Transfer (collectively, "TENANT'S SUBLEASING COSTS"). "Transfer Premium" shall also include, but not be limited to, key money, bonus money or other cash consideration paid by Transferee to Tenant in connection with such Transfer, and any payment in excess of fair market value for services rendered by Tenant to Transferee or for assets, fixtures, inventory, equipment, or furniture transferred by Tenant to Transferee in connection with such Transfer. The determination of the amount of Landlord's -21- applicable share of the Transfer Premium shall be made on a monthly basis as rent or other consideration is received by Tenant under the Transfer. For purposes of calculating the Transfer Premium on a monthly basis, (i) Tenant's Subleasing Costs shall be deemed to be expended by Tenant in equal monthly amounts over the entire term of the Transfer and (ii) the Rent paid for the Subject Space by Tenant shall be computed after adjusting such rent to the actual effective rent to be paid, taking into consideration any and all leasehold concessions granted in connection therewith, including, but not limited to, any rent credit and tenant improvement allowance. For purposes of calculating any such effective rent all such concessions shall be amortized on a straight-line basis over the relevant term. 14.4 LANDLORD'S OPTION AS TO SUBJECT SPACE. Notwithstanding anything to ------------------------------------- the contrary contained in this Article 14, in the event Tenant contemplates a Transfer of all or a portion of the Premises (or in the event of any other Transfer or Transfers entered into by Tenant as a subterfuge in order to avoid the terms of this Section 14.4), Tenant shall give Landlord notice (the "INTENTION TO TRANSFER NOTICE") of such contemplated Transfer (whether or not the contemplated Transferee or the terms of such contemplated Transfer have been determined). The Intention to Transfer Notice shall specify the portion of and amount of rentable square feet of the Premises which Tenant intends to Transfer (the "CONTEMPLATED TRANSFER SPACE"), the contemplated date of commencement of the Contemplated Transfer (the CONTEMPLATED EFFECTIVE DATE"), and the contemplated length of the term of such contemplated Transfer, and shall specify that such Intention to Transfer Notice is delivered to Landlord pursuant to this Section 14.4 in order to allow Landlord to elect to recapture the Contemplated Transfer Space for the term set forth in the Intention to Transfer Notice. Thereafter, Landlord shall have the option, by giving written notice to Tenant within thirty (30) days after receipt of any Intention to Transfer Notice, to recapture the Contemplated Transfer Space. Such recapture shall cancel and terminate this Lease with respect to such Contemplated Transfer Space as of the Contemplated Effective Date until the last day of the term of the contemplated Transfer as set forth in the Intention to Transfer Notice. In the event of a recapture by Landlord, if this Lease shall be canceled with respect to less than the entire Premises, the Rent reserved herein shall be prorated on the basis of the number of rentable square feet retained by Tenant in proportion to the number of rentable square feet contained in the Premises, and this Lease as so amended shall continue thereafter in full force and effect, and upon request of either party, the parties shall execute written confirmation of the same. If Landlord declines, or fails to elect in a timely manner, to recapture such Contemplated Transfer Space under this Section 14.4, then, subject to the other terms of this Article 14, for a period of nine (9) months (the "NINE MONTH PERIOD") commencing on the last day of such thirty (30) day period, Landlord shall not have any right to recapture the Contemplated Transfer Space with respect to any Transfer made during the Nine Month Period, provided that any such Transfer is substantially on the terms set forth in the Intention to Transfer Notice, and provided further that any such Transfer shall be subject to the remaining terms of this Article 14. If such a Transfer is not so consummated within the Nine Month Period (or if a Transfer is so consummated, then upon the expiration of the term of any Transfer of such Contemplated Transfer Space consummated within such Nine Month Period), Tenant shall again be required to submit a new Intention to Transfer Notice to Landlord with respect any contemplated Transfer, as provided above in this Section 14.4. 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 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 Transfer Premium 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 or any guarantor of the Lease from any liability under this Lease, including, without limitation, in connection with the Subject Space. 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 Transfer Premium respecting any Transfer shall be found understated, Tenant shall, within -22- thirty (30) days after demand, pay the deficiency, and if understated by more than two percent (2%), Tenant shall pay Landlord's costs of such audit. 14.6 OCCURRENCE OF DEFAULT. Any Transfer hereunder shall be subordinate --------------------- and subject to the provisions of this Lease, and if this Lease shall be terminated during the term of any Transfer, Landlord shall have the right to: (i) treat such Transfer as cancelled and repossess the Subject Space by any lawful means, or (ii) require that such Transferee attorn to and recognize Landlord as its landlord under any such Transfer. If Tenant shall be in default under this Lease, Landlord is hereby irrevocably authorized, as Tenant's agent and attorney-in-fact, to direct any Transferee to make all payments under or in connection with the Transfer directly to Landlord (which Landlord shall apply towards Tenant's obligations under this Lease) until such default is cured. Such Transferee shall rely on any representation by Landlord that Tenant is in default hereunder, without any need for confirmation thereof by Tenant. Upon any assignment, the assignee shall assume in writing all obligations and covenants of Tenant thereafter to be performed or observed under this Lease. No collection or acceptance of rent by Landlord from any Transferee shall be deemed a waiver of any provision of this Article 14 or the approval of any Transferee or a release of Tenant from any obligation under this Lease, whether theretofore or thereafter accruing. In no event shall Landlord's enforcement of any provision of this Lease against any Transferee be deemed a waiver of Landlord's right to enforce any term of this Lease against Tenant or any other person. If Tenant's obligations hereunder have been guaranteed, Landlord's consent to any Transfer shall not be effective unless the guarantor also consents to such Transfer. 14.7 NON-TRANSFER. Notwithstanding anything to the contrary contained in ------------ this Article 14, as 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), 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 PERMITTED SUBLEASES. Notwithstanding any contrary provision of this ------------------- Article 14, Tenant shall have the right without the payment of a Transfer Premium and without the receipt of Landlord's consent, but on prior written notice to Landlord, to sublease up to twenty-five percent (25%) of the rentable square feet of the Premises in the aggregate, to individuals or entities (the "BUSINESS AFFILIATES") on and subject to the following conditions: (i) Tenant shall have a business relationship with such Business Affiliate while such Business Affiliate occupies the Premises; (ii) such Business Affiliates shall not occupy a separately demised portion of the Premises which contains an entrance to such portion of the Premises other than the primary entrance to the Premises; (ii) all such Business Affiliates shall be of a character and reputation consistent with the quality of the Building and the Project; and (iii) such sublease shall not be a subterfuge by Tenant to avoid its obligations under this Lease or the restrictions on Transfers pursuant to this Article 14. Tenant shall promptly supply Landlord with any document or information requested by Landlord regarding any such sublease. Any sublease permitted under this Section 14.8 shall not be deemed a Transfer under this Article 14. Notwithstanding the foregoing, no such sublease shall relieve Tenant from any liability under this Lease. 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 writing 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, -23- 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 or terminate any or all such sublessees or subtenancies. 15.2 REMOVAL OF TENANT PROPERTY BY TENANT. 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 as good order and condition as when Tenant took possession and as thereafter improved by Landlord and/or Tenant, reasonable wear and tear 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, business and trade fixtures, free-standing cabinet work, movable partitions 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, 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 or earlier termination thereof, 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 the product of (i) the Rent applicable during the last rental period of the Lease Term under this Lease, and (ii) a percentage equal to 150% during the first two (2) months immediately following the expiration or earlier termination of the Lease Term, and 200% thereafter. Such month-to-month tenancy shall be subject to every other applicable 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 . ARTICLE 17 ---------- ESTOPPEL CERTIFICATES --------------------- Within ten (10) business days following a request in writing by Landlord, Tenant shall execute, acknowledge 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 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 motrgagee. Any such certificate may be relied upon by any prospective mortgagee or purchaser of all or any portion of the Project. Tenant shall execute and deliver whatever other instruments may be reasonably required for such porposes. At any time during the Lease Term, Landlord may require Tenant to provide Landlord with a current financial statement and financial statements of the two (2) years prior to the current financial statement year. Such statements shall be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant. Failure of Tenant to timely execute, acknowledge and deliver such estoppel certificate or other -24- instruments shall constitute an acceptance of the Premises and an acknowledgement by Tenant that statements included in the estoppel certificate are true and correct, without exception. ARTICLE 18 ---------- SUBORDINATION ------------- This Lease shall be subject and subordinate to all present and future ground or underlying leases of the Building or Project and to the lien of any mortgage, trust deed or other encumbrances now or hereafter in force against the Building or Project or any part thereof, 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, trust deeds or other encumbrances, 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 deed in lieu thereof (or if any ground lease is terminated), to attorn, without any deductions or set-offs whatsoever, to the lienholder or purchaser or any successors thereto upon any such foreclosure sale or deed in lieu thereof (or to the ground lessor), if so requested to do so by such purchaser or lienholder or ground lessor, and to recognize such purchaser or lienholder or ground lessor as the lessor under this Lease, provided such lienholder or purchaser or ground lessor shall agree to accept this Lease and not disturb Tenant's occupancy, so long as Tenant timely pays the rent and observes and performs the terms, covenants and conditions of this Lease to be observed and performed by Tenant. Landlord's interest herein may be assigned as security at any time to any lienholder. Tenant shall, within ten (10) 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. Tenant waives the provisions of any current or future statue, rule or law which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease and the obligations of the Tenant hereunder in the event of any foreclosure proceeding or sale. ARTICLE 19 ---------- DEFAULTS:REMEDIES ----------------- 19.1 EVENTS OF DEFAULT. The occurance of any of the following shall ----------------- constitute a default of 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 five (5) business days after notice; or 19.1.2 Except where a specific time period is otherwise set forth for Tenant's performance in this Lease, in which event the failure to perform by Tenant within such time period shall be a default by Tenant under this Section 19.1.2, any failure by Tenant to be observe or perform any other provision, covenant or condition of this Lease 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 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 such default; or 19.1.3 Abandonment or vacation of all or a substantial portion of the Premises by Tenant; or 19.1.4 The failure by Tenant to observe or perform according to the provisions of Article 5, 14, 17 or 18 of this Lease where such failure continues for than two (2) business days after notice from Landlord; or 19.1.5 Tenant's failure to occupy the Premises within ten (10) business days after the Lease Commencement Date. -25- The notice periods provided herein are in lieu of, and not in addition to, any notice periods provided by law. 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 (all of which remedies shall be distinct, separate and cumulative,) the option to pursue any one or more of the following remedies, each and all of which shall be cumulative and nonexclusive, without any notice or demand whatsoever. 19.2.1 Terminate this lease, 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 Tenent and any other person who may be occuping the Premises or any part thereof, without being liable for prosecution or any claim or damages thereof; and Landlord may recover from Tenant following: (i) The worth at the time 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 reasonable avoided; plus (iv) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligation under this Lease or which in the ordinary course of things would be likely to result therefrom, specifically including but not limited to, brokerage commission 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 concession 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. 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 rate set forth in Article 25 of this Lease, but in no case grate than the maximum amount of such interest permitted by law. 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%). If Landlord terminates this Lease or Tenant's right to possession, Landlord shall use reasonable efforts to mitigate Landlord's damages, and Tenant shall be entitled to submit proof of such failure to mitigate as a defense to Landlord's claims hereunder, if mitigation of damages by Landlord is required by applicable law. 19.22 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 become due, if lessee has the right to sublet or assign, subject only to reasonable limitations). Accordingly, if 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. 19.2.3 Landlord shall at all time have the rights and remedies (which shall be cumulative with each other and cumulative and in addition to those rights and remedies available under Sections 19.2.1, above, or any law or other provision of this Lease), without prior demand or notice except as required by applicable law, to seek any declaratory, injunctive or -26- other equitable relief, and specifically enforce this Lease, or restrain or enjoin a violation or breach of any provision hereof. 19.3 EFFORTS TO RELET. No re-entry or repossession, repairs ---------------- maintenance, changes, alterations and additions, reletting, appointment of a receiver to protect Landlord's interests hereunder, or any other action or omission by Landlord shall be construed as an election by Landlord to terminate this Lease or Tenant's right to possession, or to accept a surrender of the Premises, nor shall same operate to release Tenant in whole or in part from any of Tenant's obligations hereunder, unless express written notice of such intention is sent by Landlord to Tenant. Tenant hereby irrevocably waives any right otherwise available under any law to redeem or reinstate this Lease. ARTICLE 20 ---------- COVENANT OF QUIET ENJOYMENT --------------------------- Landlord covenants that Tenant, on paying the Rent, charges for services and other payments herein reserved and on keeping, observing and performing all the other terms, covenants, conditions, provisions and agreements herein contained on the part of Tenant to be kept, observed and performed, shall, during the 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. ARTICLE 21 ---------- SECURITY DEPOSIT ---------------- Concurrent with Tenant's execution of this Lease, Tenant shall deposit with Landlord a security deposit ("the SECURITY DEPOSIT") in the amount set forth in Section 8 of the Summary, as security for the faithful performance by Tenant of all of its obligations under this Lease. If Tenant defaults with respect to any provisions of this Lease, including, but not limited to, the provisions relating to the payment of Rent, the removal of property and the repair of resultant damage, Landlord may, without notice to Tenant, but shall not be required to apply all or any part of the Security Deposit for the payment of any Rent or any other sum in default and Tenant shall, upon demand therefor, restore the Security Deposit to its original amount. Any unapplied portion of the Security Deposit 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, or any successor statute. ARTICLE 22 ---------- SUBSTITUTION OF OTHER PREMISES ------------------------------ Landlord shall have the right to move Tenant to other space in the Project comparable to the Premises, and all terms hereof shall apply to the new space with equal force; provided that Tenant's then existing monetary obligations under this Lease shall not be increased as a result of such relocation of the Premises. In such event, Landlord shall give Tenant prior notice, shall provide Tenant, at Landlord's sole cost and expense, with tenant improvements at least equal in quality to those in the Premises and shall move Tenant's effects to the new space at Landlord's sole cost and expense at such time and in such manner as to inconvenience Tenant as little as reasonably practicable. In addition, Landlord shall reimburse Tenant for the reasonable costs and expenses incurred by Tenant in connection with such relocation (including, but not limited to, the cost of reasonable supplies of replacement stationery and telephone installations), within thirty (30) days of Landlord's receipt of an invoice therefor. Simultaneously with such relocation of the Premises, the parties shall immediately execute an amendment to this Lease stating the relocation of the Premises. -27- ARTICLE 23 ---------- SIGNS ----- 23.1 FULL FLOORS. Subject to Landlord's prior written approval, in its sole ----------- discretion, and provided all signs are in keeping with the quality, design and style of the Building and Project, Tenant, if the Premises comprise an entire floor of the Building, at its sole cost and expense, may install identification signage anywhere in the Premises including in the elevator lobby of the Premises, provided that such signs must not be visible from the exterior of the Building. 23.2 MULTI-TENANT FLOORS. If other tenants occupy space on the floor on ------------------- which the Premises is located, Tenant's identifying signage shall be provided by Landlord, at Tenant's cost, and such signage shall be comparable to that used by Landlord for other similar floors in the Building and shall comply with Landlord's Building standard signage program. 23.3 PROHIBITED SIGNAGE AND OTHER ITEMS. Any signs, notices, logos, ---------------------------------- pictures, names or advertisements which are installed and that have not been separately approved by Landlord may be removed without notice by Landlord at the sole expense of Tenant. Tenant may not install any signs on the exterior or roof of the Project or the Common Areas. 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, shall be subject to the prior approval of Landlord, in its sole discretion. 23.4 BUILDING DIRECTORY. A building directory will be located in the lobby ------------------ of the Building. Tenant shall have the right, at Tenant's sole cost and expense, to designate name strips to be displayed under Tenant's entry in such directory at the rate of one (1) strip per each 1,000 rentable square feet of the Premises. ARTICLE 24 ---------- COMPLIANCE WITH THE LAW ----------------------- Tenant shall not do anything or suffer anything to be done in or about the Premises or the Project 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. At its sole cost and expense, Tenant shall promptly comply with all such governmental measures, other than the making of changes to the Base Building. 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. 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 within five (5) business days after Tenant's receipt of written notice from Landlord that said amount is due, then Tenant shall pay to Landlord a late charge equal to five percent (5%) of the overdue amount plus any reasonable attorneys' fees incurred by Landlord by reason of Tenant's failure to pay Rent and/or other charges when due hereunder. The late charge shall be deemed Additional Rent and the right to require it shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord's remedies in any manner. In addition to the late charge described above, any Rent or other amounts owing hereunder which are not paid within ten (10) days after the date they are due shall bear interest from the date when due until paid at a rate per annum equal to the lesser of (i) the annual "Bank Prime Loan" rate cited in the Federal Reserve Statistical Release Publication G.13(415), published on the first Tuesday of each calendar -28- month (or such other comparable index as Landlord and Tenant shall reasonably agree upon if such rate ceases to be published) plus two (2) percentage points, and (ii) the highest rate permitted by applicable law. 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 to the extent, if any, otherwise expressly provided herein. If Tenant shall fail to perform any obligation under this Lease, and such failure shall continue in excess of the time allowed under Section 19.1.2, above, unless a specific time period is otherwise stated in this Lease, Landlord may, but shall not be obligated to, make any such payment or perform any such act on Tenant's part without waiving its rights 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 upon 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 reasonable 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 Tenant (except in the case of an emergency) to enter the Premises to (i) inspect them; (ii) show the Premises to prospective purchasers, or to current or prospective mortgagees, ground or underlying lessors or insurers, 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, or for structural alterations, repairs or improvements to the Building or the Building's systems and equipment. 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, including janitorial service; (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. Landlord may make any such entries without the abatement of Rent, except as otherwise provided in this Lease and may take such reasonable steps as required to accomplish the stated purposes. 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 by Landlord 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. No provision of the Lease shall be construed as obligating Landlord to perform any repairs, alterations or deductions except as otherwise expressly agreed to be performed by Landlord herein. -29- ARTICLE 28 ---------- TENANT PARKING -------------- Tenant shall have the right to rent from Landlord, commencing on the Lease Commencement Date, up to the amount of parking passes set forth in Section 9 of the Summary, on a monthly basis throughout the Lease Term, which parking passes shall pertain to the Project parking facility. The location of Tenant's reserved parking space (the "RESERVED SPACE") shall be mutually agreed upon between Landlord and Tenant, subject to availability. Tenant may change the number of unreserved parking passes rented pursuant to this Article 28 upon at least thirty (30) days prior written notice to Landlord, provided that in no event shall Tenant be entitled to rent more than the amount of parking passes set forth in Section 9 of the Summary, and provided further that, if Tenant decides to no longer lease the Reserved Space, Tenant shall not have the right to thereafter lease the Reserved Space during the remainder of the Lease Term. Tenant shall pay to Landlord for automobile parking passes on a monthly basis the prevailing rate charged from time to time at the location of such parking passes. In addition, Tenant shall be responsible for the full amount of any taxes imposed by any governmental authority in connection with the renting of such parking passes by Tenant or the use of the parking facility by Tenant. Notwithstanding anything to the contrary set forth in this Article 28, during the first (1st) Lease Year, Tenant shall not be required to pay any charges in connection with its leasing of the Reserved Space. Tenant's continued right to use the parking passes is conditioned upon Tenant abiding by all rules and regulations, which are prescribed from time to time for the orderly operation and use of the parking facility where the parking passes are located, including any sticker or other identification system established by Landlord, Tenant's cooperation in seeing that Tenant's employees and visitors also comply with such rules and regulations and Tenant not being in default under this Lease. Landlord specifically reserves the right to change the size, configuration, design, layout and all other aspects of the Project parking facility at any time and Tenant acknowledges and agrees that Landlord may, without incurring any liability to Tenant and without any abatement of Rent under this Lease, from time to time, close-off or restrict access to the Project parking facility for purposes of permitting or facilitating any such construction, alteration or improvements. 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. The parking passes rented by Tenant pursuant to this Article 28 are provided to Tenant solely for use by Tenant's own personnel and such passes may not be transferred, assigned, subleased or otherwise alienated by Tenant without Landlord's prior approval. Tenant may validate visitor parking by such method or methods as the Landlord may establish, at the validation rate from time to time generally applicable to visitor parking. ARTICLE 29 ---------- MISCELLANEOUS PROVISIONS ------------------------ 29.1 TERMS: CAPTIONS. The words "Landlord" and "Tenant" as used herein --------------- shall include the plural as well as the singular. The necessary grammical 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. 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. 29.2 BINDING EFFECT. Subject to all other provisions of this Lease, each of -------------- the covenants, conditions and 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 heirs, personal representatives, successors or assigns, provided this clause shall not permit any assignment by Tenant contrary to the provisions of Article 14 of this Lease. 29.3 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 Project, the same shall be without liability to Landlord and without any reduction or diminution of Tenant's obligations under this Lease. -30- 29.4 MODIFICATION OF LEASE. Should any current or prospective mortgagee or --------------------- ground lessor for the Building or Project require a modification of this Lease, which modification 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 reasonably required therefor and to deliver the same to Landlord within ten (10) business days following a request therefor. At the request of Landlord or any mortgagee or ground lessor, Tenant agrees to execute a short form of Lease and deliver the same to Landlord within ten (10) business days following the request therefor. 29.5 TRANSFER OF LANDLORD'S INTEREST. Tenant acknowledges that Landlord has ------------------------------- the right to transfer all or any portion of its interest in the Project or 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 and Tenant agrees to look solely to such transferee for the performance of Landlord's obligations hereunder after the date of transfer and such transferee shall be deemed to have fully assumed and be liable for all obligations of this Lease to be performed by Landlord, including the return of any Security Deposit, and Tenant shall attorn to such transferee. 29.6 PROHIBITION AGAINST RECORDING. Except as provided in Section 29.4 of ----------------------------- this Lease, neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall be recorded by Tenant or by anyone acting through, under or on behalf of Tenant. 29.7 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. 29.8 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. 29.9 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. 29.10 TIME OF ESSENCE. Time is of the essence with respect to the --------------- performance of every provision of this Lease in which time of performance is a factor. 29.11 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. 29.12 NO WARRANTY. In executing and delivering this Lease, Tenant has not ----------- relied on any representations, including, but not limited to, any representation as to the amount of any item comprising Additional Rent or the amount of the Addition 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. 29.13 LANDLORD EXCULPATION. The liability of Landlord or the Landlord -------------------- Parties to Tenant for any default by Landlord under this Lease or arising in connection herewith or with Landlord's operation, management, leasing, repair, renovation, alteration or any other matter relating to the Project or the Premises shall be limited solely and exclusively to an amount which is equal to the lesser of (a) the interest of Landlord in the Building or (b) the equity interest Landlord would have in the Building if the Building were encumbered by third-party debt in an amount equal to eighty percent (80%) of the value of the Building (as such value is determined by Landlord), provided that in no event shall such liability extend to any sales or insurance proceeds -31- received by Landlord or the Landlord Parties in connection with the Project, Building or Premises. 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. The limitations of liability contained in this Section 29.13 shall inure to the benefit of Landlord's and the Landlord Parties' present and future partners, beneficiaries, officers, directors, trustees, shareholders, agents and employees, and their respective partners, heirs, successors and assigns. Under no circumstances shall any present or future partner of Landlord (if Landlord is a partnership), or trustee or beneficiary (if Landlord or any partner of Landlord is a trust), have any liability for the performance of Landlord's obligations under this Lease. Notwithstanding any contrary provision herein, neither Landlord nor the Landlord Parties shall be liable under any circumstances for injury or damage to, or interference with, Tenant's business, including but not limited to, loss of profits, loss of rents or other revenues, loss of business opportunity, loss of goodwill or loss of use, in each case, however occurring. 29.14 ENTIRE AGREEMENT. It is understood and acknowledged that there are ---------------- no oral agreements between parties hereto affecting this Lease and this Lease constitutes the parties' entire agreement with respect to the leasing of the Premises and 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. 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. 29.15 RIGHT TO LEASE. Landlord reserves the absolute right to effect such -------------- other tenancies in the Project as Landlord in the exercise of its sole business judgment shall determine to best promote the interest of the Building or Project. Tenant does not rely on the fact, nor does Landlord represent, that any specific tenant or type or number of tenants shall, during the Lease Term, occupy any space in the Building or Project. 29.16 FORCE MAJEURE. Any prevention, delay or stoppage due to strikes, ------------- lockouts, labor disputes, act 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 pursuant to this Lease (collectively, a "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. 29.17 WAIVER OF REDEMPTION BY TENANT. Tenant hereby waives, for Tenant ------------------------------ and for all those claiming under Tenant, any and all rights now or hereafter existing 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. 29.18 NOTICES. All notices, demands, statements, designations, approvals ------- or other communications (collectively, "NOTICES") given or required to be given by either party to the other hereunder or by law shall be in writing, shall be (A) sent by United States certified or registered mail, postage prepaid, return receipt requested ("MAIL"), (B) transmitted by telecopy, if such telecopy is promptly followed by a Notice sent by Mail, (C) delivered by a nationally recognized overnight courier, or (D) delivered personally. Any Notice shall be sent, transmitted, or delivered, as the case may be, to Tenant at the appropriate address set forth in Section 10 of the Summary, or to such other place as Tenant may from time to time designate in a Notice to Landlord, or to Landlord at the addresses set forth below, or to such other places as Landlord may from time to time designate in a Notice to Tenant. Any Notice will be deemed given (i) three (3) days after the date it is posted if sent by Mail, (ii) the date the telecopy is transmitted, (iii) the date the overnight courier delivery is made, or (iv) the date personal delivery is made. As of the date of this Lease, any Notices to Landlord must be sent, transmitted, or delivered, as the case may be, to the following addresses: -32- Delta Towers Joint Venture c/o Premisys Real Estate Services, Inc. 2049 Century Park East, Suite 2650 Los Angeles, California 90067-3283 Attention: Property Manager and DT Towers Limited Partnership c/o Citicorp Real Estate, Inc. 725 South Figueroa Street Los Angeles, California 90017 Attention: Asset Management Division and (only as to notices of default and other legal notices) Citicorp Real Estate, Inc. 599 Lexington Avenue New York, New York 10043 Attention: General Counsel and Allen, Matkins, Leck, Gamble & Mallory 1999 Avenue of the Stars Suite 1800 Los Angeles, California 90067 Attention: Anton N. Natsis, Esq. 29.19 JOINT AND SEVERAL. If there is more than one Tenant, the ----------------- obligations imposed upon Tenant under this Lease shall be joint and several. 29.20 AUTHORITY. If Tenant is a corporation, trust or partnership, each --------- individual executing this Lease on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in California and that Tenant has full right and authority to execute and deliver this Lease and that each person signing on behalf of Tenant is authorized to do so. In such event, Tenant shall, within ten (10) days after execution of this Lease, deliver to Landlord satisfactory evidence of such authority and, if a corporation, upon demand by Landlord, also deliver to Landlord satisfactory evidence of (i) good standing in Tenant's state of incorporation and (ii) qualification to do business in California. 29.21. ATTORNEY'S FEES. In the event that either Landlord or Tenant should --------------- bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease or for any other relief against the other, then all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment. 29.22 GOVERNING LAW; WAIVER OF TRAIL BY JURY. This Lease shall be -------------------------------------- construed and enforced in accordance with the laws of the State of California. IN ANY ACTION OR PROCEEDING ARISING HEREFROM, LANDLORD AND TENANT HEREBY CONSENT TO (I) THE JURISDICTION OF ANY COMPETENT COURT WITHIN THE STATE OF CALIFORNIA, (II) SERVICE OF PROCESS BY ANY MEANS AUTHORIZED BY CALIFORNIA LAW, AND (III) IN THE INTEREST OF SAVING TIME AND EXPENSE, TRIAL WITHOUT A JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR THEIR SUCCESSORS IN RESPECT OF ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANTS USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM FOR INJURY OR -33- DAMAGE, OR ANY EMERGENCY OR STATUTORY REMEDY. IN THE EVENT LANDLORD COMMENCES ANY SUMMARY PROCEEDINGS OR ACTION FOR NONPAYMENT OF BASE RENT OR ADDITIONAL RENT, TENANT SHALL NOT INTERPOSE ANY COUNTERCLAIM OR ANY NATURE OR DESCRIPTION (UNLESS SUCH COUNTERCLAIM SHALL BE MANDATORY) IN ANY SUCH PROCEEDING OR ACTION, BUT SHALL BE RELEGATED TO ANY INDEPENDENT ACTION AT LAW. 29.23 SUBMISSION OF LEASE. Submission of this instrument for examination ------------------- or signature by Tenant does not constitute a reservation of, option for or option to lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. 29.24 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, costs and expenses (including without limitation reasonable attorneys' fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of any dealings with any real estate broker or agent, other than the Brokers, occurring by, through, or under the indemnifying party. 29.25 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. 29.26 PROJECT OR BUILDING NAME AND SIGNAGE. Landlord shall have the right ------------------------------------ at any time to change the name of the Project or Building and to install, affix and maintain any and all signs on the exterior and on the interior of the Project or Building as Landlord may, in Landlord's sole discretion, desire. Tenant shall not use the words "Century Plaza" or the name of the Project or Building or use pictures or illustrations of the Project or Building in advertising or other publicity or for any purpose other than as the address of the business to be conducted by Tenant in the Premises, without the prior written consent of Landlord. 29.27 COUNTERPARTS. This Lease may be executed in counterparts with the ------------ same effect as if both parties hereto had executed the same document. Both counterparts shall be construed together and shall constitute a single lease. 29.28 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. 29.29 DEVELOPMENT OF THE PROJECT. -------------------------- 29.29.1 SUBDIVISION. Landlord reserves the right to further ----------- subdivide all or a portion of the Project. Tenant agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord, any additional documents needed to conform this Lease to the circumstances resulting from such subdivision. 29.29.2 THE OTHER IMPROVEMENTS. If portions of the Project or ---------------------- property adjacent to the Project (collectively, the "OTHER IMPROVEMENTS") are owned by an entity other than Landlord, Landlord at its option, may enter into an agreement with the owner or owners of any or all of the Other Improvements to provide (i) for reciprocal rights of access and/or use of the Project and the Other Improvements, (ii) for the common management, operation, maintenance, improvement and/or repair of all or any portion of the Project and the Other Improvements, provided that Tenant's rights under this Lease are not materially impaired, (iii) for the allocation of a portion of the Direct Expenses to the Other Improvements and the operating -34- expenses and taxes for the Other Improvements to the Project, and (iv) for the use or improvement of the Other Improvements and/or the Project in connection with the improvement, construction, and/or excavation of the Other Improvements and/or the Project. Nothing contained herein shall be deemed or construed to limit or otherwise affect Landlord's right to convey all or any portion of the Project or any other of Landlord's rights described in this Lease. 29.29.3 CONSTRUCTION OF PROJECT AND OTHER IMPROVEMENTS. Tenant ---------------------------------------------- acknowledges that portions of the Project and/or the Other Improvements may be under construction following Tenant's occupancy of the Premises, and that such construction may result in levels of noise, dust, obstruction of access, etc. which are in excess of that present in a fully constructed project. Tenant hereby waives any and all rent offsets or claims of constructive eviction which may arise in connection with such construction. 29.30 BUILDING RENOVATIONS. It is specifically understood and agreed that -------------------- 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 hereby acknowledges that Landlord is currently renovating or may during the Lease Term renovate, improve, alter, or modify (collectively, the "RENOVATIONS") the Project, the Building and/or the Premises. Tenant hereby agrees that such Renovations shall in no way constitute a constructive eviction of Tenant nor entitle Tenant to any abatement of Rent. Landlord shall have no responsibility and shall not be liable to Tenant for any 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 for any inconvenience or annoyance occasioned by such Renovations. 29.31 NO VIOLATION. Tenant hereby warrants and represents that neither its ------------ execution of nor performance under this Lease shall cause Tenant to be in violation of any agreement, instrument, contract, law, rule or regulation by which Tenant is bound, and Tenant shall protect, defend, indemnify and hold Landlord harmless against any claims, demands, losses, damages, liabilities, costs and expenses, including, without limitation, reasonable attorneys' fees and costs, arising from Tenant's breach of this warranty and representation. 29.32 COMMUNICATIONS AND COMPUTER LINES. Tenant may install, maintain, --------------------------------- replace, remove or use any communications or computer wires and cables (collectively, the "LINES") at the Project in or serving the Premises, provided that (i) Tenant shall obtain Landlord's prior written consent, use an experienced and qualified contractor approved in writing by Landlord, and comply with all of the other provisions of Articles 7 and 8 of this Lease, (ii) an acceptable number of spare Lines and space for additional Lines shall be maintained for existing and future occupants of the Project, as determined in Landlord's reasonable opinion, (iii) the Lines therefor (including riser cables) shall be appropriately insulated to prevent excessive electromagnetic fields or radiation, and shall be surrounded by a protective conduit reasonably acceptable to Landlord, (iv) any new or existing Lines servicing the Premises shall comply with all applicable governmental laws and regulations, (v) as a condition to permitting the installation of new Lines, Landlord may require that Tenant remove existing lines located in or serving the Premises and repair any damage in connection with such removal, and (vi) Tenant shall pay all costs in connection therewith. Landlord reserves the right to require that Tenant remove any Lines located in or serving the Premises which are installed in violation of these provisions, or which are at any time in violation of any laws or represent a dangerous or potentially dangerous condition. 29.33 ASBESTOS DISCLOSURES. Landlord has advised Tenant that there is -------------------- asbestos-containing material ("ACM") in the Building. Attached hereto as EXHIBIT ------- F is a disclosure statement regarding asbestos in the Building. Tenant - - acknowledges that such notice complies with the requirements of Section 25915 of the California Health and Safety Code. -35- 29.34 GUARANTY. This Lease is subject to and conditioned upon Tenant -------- delivering to Landlord, concurrently with Tenant's execution and delivery of this Lease, a guaranty in the form attached hereto as EXHIBIT G, which guaranty --------- shall be fully executed by and binding upon Imperial Credit Industries, Inc., a California corporation, as guarantor. IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed the day and date first above written. "LANDLORD": DELTA TOWERS JOINT VENTURE, a California General partnership By: Premisys Real Estate Services, Inc., Agent By: [SIGNATURE ILLEGIBLE] ------------------------------ Its: VP/GM -------------------------- "TENANT": FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a California limited liability company By: [SIGNATURE ILLEGIBLE] ----------------------------------- Its: President ------------------------------- By: /s/ John Rinaldi ----------------------------------- Its: S V P ------------------------------- -36- EXHIBIT A --------- CENTURY PLAZA TOWERS -------------------- OUTLINE OF PREMISES ------------------- [FLOOR PLAN APPEARS HERE] Premisys -------- Real Estate Services [LOGO OF CENTURY PLAZA TOWERS APPEARS HERE] CONTROL PLAN 2029 CENTURY PARK EAST LOS ANGELES, CALIFORNIA FLOOR 11TH --------- DATE 10/14/94 ----------- CENTURY PARK EAST 2029 2049 P. PATRICK MURRAY INC. INTERIOR SPACE PLANNING TEL. (310) 553-3752 FAX. (310) 553-9149 EXHIBIT A - Page 1 EXHIBIT B --------- INTENTIONALLY OMITTED --------------------- EXHIBIT C --------- CENTURY PLAZA TOWERS -------------------- NOTICE OF LEASE TERM DATES -------------------------- To: ____________________ ____________________ ____________________ ____________________ Re: Office Lease dated ________, 19__ between ____________, a ___________ ("Landlord"), and ______________, a ______________ ("Tenant") concerning Suite ______ on floor(s) ________ of office building located at ____________________, Los Angeles, California. Gentlemen: In accordance with the Office Lease (the "Lease"), we wish to advise you and/or confirm as follows: 1. The Lease Term shall commence on or has commenced on ______ for the term of ______ ending on ______. 2. Rent commenced to accrue on ________, in the amount of _________. 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. You rent checks should be made payable to ______ at ________. 5. The exact number of rentable/usable square feet within the Premises is ______ square feet. 6. Tenant's Share as adjusted based upon the exact number of usable square feet within the Premises is ____% "Landlord": ______________________________ a_____________________________ By: __________________________ Its: _____________________ Agreed to and Accepted as of ______, 19__. "Tenant" ______________________________ a_____________________________ By: __________________________ Its: _____________________ EXHIBIT C - Page 1 EXHIBIT D --------- CENTURY PLAZA TOWERS -------------------- 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 Project. In the event of any conflict between the Rules and Regulations and the other provisions of this Lease, the latter 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. 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. Upon the termination of this Lease, Tenant shall restore to Landlord all keys of stores, offices, and toilet rooms, either furnished to, or otherwise procured by, Tenant and in the event of the loss of keys so furnished, Tenant shall pay to Landlord the cost of replacing same or of changing the lock or locks opened by such lost key if Landlord shall deem it necessary to make such changes. 2. All doors opening to public corridors shall be kept closed at all times except for normal ingress and egress to the Premises. 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 in the Century City, California area. 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. 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. Landlord will furnish passes to persons for whom Tenant requests same in writing. Tenant shall be responsible for all persons for whom Tenant requests passes and shall be liable to Landlord for all acts of such persons. The Landlord 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 or the Project during the continuance thereof by any means it deems appropriate for the safety and protection of life and property. 4. No furniture, freight or equipment of any kind shall be brought into the Building without prior notice to Landlord. All moving activity into or out of the Building shall be scheduled with Landlord and done only at such time and in such manner as Landlord designates. Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy property brought into the Building and also the times and manner of moving the same in and out of 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. Any damage to any part of the Building, its contents, occupants or visitors by moving or maintaining any such safe or other property shall be the sole responsibility and expense of Tenant. 5. No furniture, packages, supplies, equipment or merchandise will be received in the Building or carried up or down in the elevators, except between such hours, in such specific elevator and by such personnel as shall be designated by Landlord. 6. The requirements of Tenant will be attended to only upon application at the management office for the Project or 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. EXHIBIT D - Page 1 7. No sign, advertisement, notice or handbill shall be exhibited, distributed, painted or affixed by Tenant on any part of the Premises or the Building without the prior written consent of the Landlord. Tenant shall not disturb, solicit, peddle, or canvass any occupant of the Project and shall cooperate with Landlord and its agents of Landlord to prevent same. 8. 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. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose servants, employees, agents, visitors or licensees shall have caused same. 9. Tenant shall not overload the floor of the Premises, nor mark, drive nails or screws, or drill into the partitions, woodwork or drywall or in any way deface the Premises or any part thereof without Landlord's prior written consent. Tenant shall not purchase spring water, ice, towel, linen, maintenance or other like services from any person or persons not approved by Landlord. 10. Except for vending machines intended for the sole use of Tenant's employees and invitees, no vending machine or machines other than fractional horsepower office machines shall be installed, maintained or operated upon the Premises without the written consent of Landlord. 11. Tenant shall not use or keep in or on the Premises, the Building, or the Project any kerosene, gasoline or other inflammable or combustible fluid, chemical, substance or material. 12. Tenant shall not without the prior written consent of Landlord use any method of heating or air conditioning other than that supplied by Landlord. 13. 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 Project by reason of noise, odors, or vibrations, or interfere with other tenants or those having business therein, whether by the use of any musical instrument, radio, phonograph, or in any other way. Tenant shall not throw anything out of doors, windows or skylights or down passageways. 14. Tenant shall not bring into or keep within the Project, the Building or the Premises any animals, birds, aquariums, or, except in areas designated by Landlord, bicycles or other vehicles. 15. No cooking shall be done or permitted on the Premises, nor shall the Premises be used for 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 for employees and visitors, provided that such use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. 16. The Premises shall not be used for manufacturing or for the storage of merchandise except as such storage may be incidental to the use of the Premises provided for in the Summary. Tenant shall not occupy or permit any portion of the Premises to be occupied as an office for a messenger-type operation or dispatch office, public stenographer or typist, or for the manufacture or sale of liquor, narcotics, or tobacco in any form, or as a medical office, or as a barber or manicure shop, or as an employment bureau without the express prior written consent of Landlord. Tenant shall not engage or pay any employees on the Premises except those actually working for such tenant on the Premises nor advertise for laborers giving an address at the Premises. 17. Landlord reserves the right to exclude or expel from the Project 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. 18. Tenant, its employees and agents shall not loiter in or on the entrances, corridors, sidewalks, lobbies, courts, halls, stairways, elevators, vestibules or any Common Areas for the EXHIBIT D - Page 2 purpose of smoking tobacco products or for any other purpose, nor in any way obstruct such areas, and shall use them only as a means of ingress and egress for the Premises. 19. 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. 20. 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 Century City, California 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. 21. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 22. Any persons employed by Tenant to do janitorial work shall be subject to the prior written approval of Landlord, and while in the Building and outside of the Premises, shall be subject to and under the control and direction of the Building manager (but not as an agent or servant of such manager or of Landlord), and Tenant shall be responsible for all acts of such persons. 23. No awnings or other projection shall be attached to the outside walls of the Building without the prior written consent of Landlord, and 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 other than Landlord standard drapes. All electrical ceiling fixtures hung in the Premises or spaces along the perimeter of the Building must be fluorescent and/or of a quality, type, design and a warm white bulb color approved in advance in writing by Landlord. Neither the interior nor exterior of any windows shall be coated or otherwise sunscreened without the prior written consent of Landlord. Tenant shall abide by Landlord's regulations concerning the opening and closing of window coverings which are attached to the windows in the Premises, if any, which have a view of any interior portion of the Building or Building Common Areas. 24. 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. 25. Tenant must comply with requests by the Landlord concerning the informing of their employees of items of importance to the Landlord. 26. Tenant must comply with the State of California "No Smoking" law set forth in California Labor Code Section 6404.5, and any local "No Smoking" ordinance which may be in effect from time to time and which is not superseded by such State law. 27. Tenant hereby acknowledges that Landlord shall have no obligation to provide guard service or other security measures for the benefit of the Premises, the Building or the Project. Tenant hereby assumes all responsibility for the protection of Tenant and its agents, employees, contractors, invitees and guests, and the property thereof, from acts of third parties, including keeping doors locked and other means of entry to the Premises closed, whether or not Landlord, at its option, elects to provide security protection for the Project or any portion thereof. Tenant further assumes the risk that any safety and security devices, services and programs which Landlord elects, in its sole discretion, to provide may not be effective, or may malfunction or be circumvented by an unauthorized third party, and Tenant shall, in addition to its other insurance obligations under this Lease, obtain its own insurance coverage to the extent Tenant desires protection against losses related to such occurrences. Tenant shall cooperate in any reasonable safety or security program developed by Landlord or required by law. 28. All office equipment of any electrical or mechanical nature shall be placed by Tenant in the Premises in settings approved by Landlord, to absorb or prevent any vibration, noise and annoyance. EXHIBIT D - Page 3 29. Tenant shall not use in any space or in the public halls of the Building, any hand trucks except those equipped with rubber tires and rubber side guards. 30. No auction, liquidation, fire sale, going-out-of-business or bankruptcy sale shall be conducted in the Premises without the prior written consent of the Landlord. 31. No tenant shall use or permit the use of any portion of the Premises for living quarters, sleeping apartments or lodging rooms. 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 judgment may from time to time be necessary for the management, safety, care and cleanliness of the Premises, Building, the Common Areas and the Project, and for the preservation of good order therein, as well as for the convenience of other occupants and tenants therein. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant, nor prevent Landlord from thereafter enforcing any such Rules or Regulations against any or all tenants of the Project. Tenant shall be deemed to have read these Rules and Regulations and to have agreed to abide by them as a condition of its occupancy of the Premises. EXHIBIT D - Page 4 EXHIBIT E --------- CENTURY PLAZA TOWERS -------------------- FORM OF TENANT'S ESTOPPEL CERTIFICATE ------------------------------------- The undersigned as Tenant under that certain Office Lease (the "Lease") made and entered into as of ________, 199__ by and between _________ as Landlord, and the undersigned as Tenant, for Premises on the _______ floor(s) of the office building located at ____________, 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 currently occupies the Premises described in the Lease, the Lease Term commenced on _______, and the Lease Term expires on _______. 3. Base Rent became payable on ______________. 4. The Lease is in full force and effect and has not been modified, supplemented or amended in any way except as provided in Exhibit A. 5. Tenant has transferred, assigned, or sublet any portion of the Premises nor entered into any license or concession agreements with respect thereto except as follows: 6. Tenant shall not modify the documents contained in Exhibit A without the prior written consent of Landlord's mortgagee. 7. 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 $____________. 8. 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 more than thirty (30) days in advance and no security has been deposited with Landlord except as provided in the Lease. 10. As of the date hereof, there are no existing defenses or offsets that the undersigned has against Landlord. 11. 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 California 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. The undersigned acknowledges that this Estoppel Certificate may be delivered to Landlord or to a prospective mortgagee or prospective purchaser, and acknowledges that said 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 that receipt by it of this certificate is a condition of making such loan or acquiring such property. EXHIBIT E - Page 1 Executed at _________ on the ___ day of _____, 19_. "Tenant": _____________________________ a____________________________ By:__________________________ Its:______________________ By:__________________________ Its:______________________ EXHIBIT E - Page 2 EXHIBIT F --------- CALIFORNIA ASBESTOS NOTICE -------------------------- In 1988, California enacted Legislation (specifically, Chapter 10.4 of the Health and Safety Code, Section 25915 et seq.) requiring landlords and tenants of commercial buildings constructed prior to 1979 to notify certain people, including each other and their respective employees working within such building, of any knowledge they may have regarding any asbestos-containing construction materials ("ACM") in the Building. This notification is being given to provide the information required under this Legislation in order to help you avoid any unintentional contact with the ACM, to assure that appropriate precautionary measures are taken before disturbing any ACM, and to assist you in making appropriate disclosures to your employees and others, if any. We have engaged qualified asbestos consultants to survey the property for asbestos and to assist in implementing an asbestos management plan that includes, among other things, periodic reinspection and surveillance, air monitoring, information and training programs for building engineering and maintenance staff, cleaning procedures, emergency fiber release procedures, work procedures and other measures to minimize potential fiber releases. A description of the current Operations and Management Plans prepared for the Building (the "O&M Plans") is set forth on Schedule A attached hereto. Our asbestos consultant has certified to us that the O&M Plans fully comply with the disclosure requirements of Health and Safety Code Section 25915.1. We have no reason to believe, based upon the O&M Plans, that the ACM in the Building is currently in a condition to release asbestos fibers which would pose a significant health hazard to the Building's occupants; this should remain so if such ACM is properly handled and remains undisturbed. You should take into consideration that our knowledge as to the absence of health risks is based solely upon general information and the information contained in the O&M Plans, and that we have no special knowledge concerning potential health risks resulting from exposure to asbestos in the Building. We are therefore required by the above-mentioned legislation to encourage you to contact local or state public agencies if you wish to obtain a better understanding of the potential impact resulting from exposure to asbestos. Because any tenant alterations or other work at the property could disturb ACM and possibly release asbestos fibers into the air, we must require that you obtain our written approval prior to beginning such projects. This includes major alterations, but might also include such activities as drilling or boring holes, installing electrical, telecommunications or computer lines, sanding floors, removing ceiling tiles or other work which disturbs ACM. In many cases, such activities will not affect ACM, but you must check with the property manager in advance, just in case. You should check with the property manager at the address set forth on Schedule A. The property manager will make available such instruction as may be required. Any such work should not be attempted by an individual or contractor who is not qualified to handle ACM. In the areas specified in Schedule A, you should avoid touching or disturbing the ACM in any way. If you observe any activity which has the potential to disturb the ACM, please report the same to the property manager immediately. Further information concerning asbestos handling procedures in general can be found in the building's Asbestos Surveys, located in the building office. At this time, we are unaware of specific handling restrictions or procedures which might be necessary in any particular situation to avoid exposure to the asbestos in the Building. We are therefore required by the above-mentioned legislation to encourage you to contact local, state or federal public health agencies if you which to obtain further information regarding handling procedures and restrictions. In connection with the foregoing, we have adopted the following policies (which shall be considered rules under tenant leases): (1) the owner; and representatives of the owner, including, without limitation, the owner's ACM consultant, are entitled to enter into the premises of any tenant to inspect for ACM, perform air tests and abatement; (2) any tenant, contractor, or other party must obtain our prior written approval before performing any alterations on any tenant space, or performing any other work at the property that might disturb ACM or involve exposure to asbestos fibers as described above. We trust that the implementation of the aforesaid requirements will not unduly inconvenience you. Thank you for your cooperation in this mutual endeavor. EXHIBIT F - Page 2 SCHEDULE A TO NOTICE CONCERNING ASBESTOS BUILDING: Century Plaza Towers GENERAL MANAGER: Mr. Steve Sumell ADDRESS OF BUILDING OFFICE: 2049 Century Park East Suite 2650 Los Angeles, CA 90067 Telephone: (310) 552-8100 I. EXISTING OPERATIONS AND MANAGEMENT PLAN ("O&M PLAN") AND ASBESTOS SURVEYS WHICH DESCRIBE THE EXISTENCE, LOCATION AND CONDITION OF ACM The O&M Plan which has been prepared for the Building since October of 1987 is generally described as follows: DATE DESCRIPTION ---- ----------- A. O&M PLAN -------- 1. 1/17/89 (Revised 8/1/89) K&D West: Operations & Maintenance Program. 2. 10/2/90 K&D West: O&M Task Simulation for Personnel Exposure Report, South Tower, 2nd floor, Suite 280. 3. 8/20/93 K&D West: Semi Annual Inspection O&M Program 2nd Quarter 1993 B. SURVEYS ------- 1. 10/18/87; 2/3/88 Galson Survey Report (Tower Garage Area) 2. 6/88 - 10/88 1/31/89 K&D Survey (North & South Towers) (Revised) 3. 11/89 - 2/90 9/6/91 K&D West Survey (Elevator Shafts) 4. 1/4/90 3/90 K&D West (Elevator Lobbies and Shafts) 5. 3/23/90 K&D West (3rd Floor) 6. 4/18/90 K&D West ("A" Level Garage Entry) 7. 1/11/91 Pre-Design Survey (Plaza Level) 8. 10/30/92 - 11/30/92 Survey (3rd & 4th Floors) 12/92; 2/93 9. 10/31/92 - 11/30/92 Summary of Surveys (Plaza Levels) II CONTENTS OF O&M PLAN The Table of Contents of the O&M Plan contains the following sections: EXHIBIT F - PAGE 3 1. Purpose 2. Operations and Maintenance Program Overview 3. Definitions 4. Asbestos-Containing Materials at Century Plaza Towers 5. Asbestos Awareness and Operations & Maintenance Training Program 6. Respiratory Protection Program 7. Medical Surveillance Program 8. Building Survey; Remedial Action 9. Asbestos Control For Maintenance/Engineering Personnel and Outside Contractors 10. Spot Removal of Asbestos-Containing Materials 11. Cleaning 12. Episodic Contamination Control 13. Non-Asbestos Outside Contractor Work 14. Control Equipment For Asbestos Work 15. The Use of HEPA Equipment 16. Disposal of Asbestos Materials 17. On-Going Building Surveillance 18. Air Monitoring 19. Program Review 20. Recordkeeping 21. Description of Services 22. Appendices III SPECIFIC LOCATIONS WHERE ACM IS PRESENT IN ANY QUANTITY 1. Sprayed-on fireproofing exists on structural steel with minor overspray on decking in the following areas: - Garage Levels A & B - North Tower - Plaza Level (inaccessible core areas and above portions of high ceilings) - South Tower - Plaza Level (inaccessible core areas and above portions of high ceilings) - South Tower - 3rd and 4th floors (inaccessible core areas and above portions of high ceilings) - South Tower - 2nd floor (inaccessible core areas) - North & South Tower - Various inaccessible elevator and mechanical shafts. In conjunction with the Building's O&M Plan, the ACM fireproofing in all public corridors on Levels A & B, in all stairwells down to the Plaza Level was removed and replaced with non- asbestos containing fireproofing. In addition, EXHIBIT F - Page 4 during the past year, the following areas have undergone removal of ACM fireproofing during renovation work; a. South Tower and North Tower main elevator lobbies b. 2nd floor, South Tower c. Removal on Plaza Levels THE O&M PLAN AND THE RESULTS OF MONITORING DESCRIBED ABOVE, INCLUDING MONITORING DATA AND SAMPLING PROCEDURES AND THE ASBESTOS SURVEYS, ARE AVAILABLE FOR REVIEW DURING NORMAL BUSINESS HOURS IN THE BUILDING OFFICE, AT THE ABOVE ADDRESS, MONDAY THROUGH FRIDAY EXCEPT LEGAL HOLIDAYS. NO REPRESENTATIONS OR WARRANTIES WHATSOEVER ARE MADE REGARDING THE O&M PLAN, THE REPORTS CONCERNING SUCH O&M PLAN OR THE SURVEYS (INCLUDING WITHOUT LIMITATION, THE CONTENTS OR ACCURACY THEREOF), OR THE PRESENCE OR ABSENCE OF TOXIC OR HAZARDOUS MATERIALS IN, AT, OR UNDER ANY PREMISES OR THE BUILDING. EXHIBIT F - Page 5 EXHIBIT G --------- FORM OF GUARANTY OF LEASE ------------------------- THIS GUARANTY OF LEASE (this "Guaranty") is made as of August 24, 1995, by IMPERIAL CREDIT INDUSTRIES, INC., a California corporation (the "Guarantor"), whose address is as set forth in Paragraph 10 hereof, in favor of Delta Towers Joint Venture, a California General Partnership ("Landlord"), having an office c/o Premisys Real Estate Services, Inc., 2049 Century Park East, Suite 2650, Los Angeles, California 90067. WHEREAS, Landlord and FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a California limited liability company ("Tenant") desire to enter into that certain Office Lease dated August 24, 1995 (the "Lease") concerning the premises on the eleventh (11th) floor, Suite 1190, of the office building located at 2029 Century Park East, in the City of Los Angeles, County of Los Angeles, State of California; WHEREAS, Guarantor has a financial interest in the Tenant; and WHEREAS, Landlord would not execute the Lease if Guarantor did not execute and deliver to Landlord this Guaranty. NOW, THEREFORE, for and in consideration of the execution of the foregoing Lease by Landlord and as a material inducement to Landlord to execute said Lease, Guarantor hereby absolutely, presently, continually, unconditionally and irrevocably guarantees the prompt payment by Tenant of all rentals and other sums payable by Tenant under said Lease and the faithful and prompt performance by Tenant of each and every one of the terms, conditions and covenants of said Lease to be kept and performed by Tenant, and further agrees as follows: 1. It is specifically agreed and understood that the terms, covenants and conditions of the Lease may be altered, affected, modified, amended, compromised, released or otherwise changed by agreement between Landlord and Tenant, or by course of conduct and Guarantor does guaranty and promise to perform all of the obligations of Tenant under the Lease as so altered, affected, modified, amended, compromised, released or changed and the Lease may be assigned by or with the consent of Landlord or any assignee of Landlord without consent or notice to Guarantor and that this Guaranty shall thereupon and thereafter guaranty the performance of said Lease as so changed, modified, amended, compromised, released, altered or assigned. 2. This Guaranty shall not be released, modified or affected by failure or delay on the part of Landlord to enforce any of the rights or remedies of Landlord under the Lease, whether pursuant to the terms thereof or at law or in equity, or by any release of any person liable under the terms of the Lease (including, without limitation, Tenant) or any other guarantor, including without limitation, any other Guarantor named herein, from any liability with respect to Guarantor's obligations hereunder. 3. Guarantor's liability under this Guaranty shall continue until all rents due under the Lease have been paid in full in cash and until all other obligations to Landlord have been satisfied, and shall not be reduced by virtue of any payment by Tenant of any amount due under the Lease. If all or any portion of Tenant's obligations under the Lease is paid or performed by Tenant, the obligations of Guarantor hereunder shall continue and remain in full force and effect in the event that all or any part of such payment(s) or performance(s) is avoided or recovered directly or indirectly from Landlord as a preference, fraudulent transfer or otherwise. 4. Guarantor warrants and represents to Landlord that Guarantor now has and will continue to have full and complete access to any and all information concerning the Lease, the value of the assets owned or to be acquired by Tenant, Tenant's financial status and its ability to pay and perform the obligations owed to Landlord under the Lease. Guarantor further warrants and represents that Guarantor has reviewed and approved copies of the Lease and is fully informed of the remedies Landlord may pursue, with or without notice to Tenant, in the event of default under the Lease. So long as any of the Guarantor's obligations hereunder remains EXHIBIT G - Page 1 unsatisfied or owing to Landlord, Guarantor shall keep fully informed as to all aspects of Tenant's financial condition and the performance of said obligations. 5. Guarantor hereby covenants and agrees with Landlord that if a default shall at any time occur in the payment of any sums due under the Lease by Tenant or in the performance of any other obligation of Tenant under the Lease, Guarantor shall and will forthwith upon demand pay such sums and any arrears thereof, to Landlord in legal currency of the United States of America for payment of public and private debts, and take all other actions necessary to cure such default and perform such obligations of Tenant. 6. The liability of Guarantor under this Guaranty is a guaranty of payment and performance and not of collectibility, and is not conditioned or contingent upon the genuineness, validity, regularity or enforceability of the Lease or the pursuit by Landlord of any remedies which it now has or may hereafter have with respect thereto, at law, in equity or otherwise. 7. Guarantor hereby waives and agrees not to assert or take advantage of to the extent permitted by law: (i) all notices to Guarantor, to Tenant, or to any other person, including, but not limited to, notices of the acceptance of this Guaranty or the creation, renewal, extension, assignment, modification or accrual of any of the obligations owed to Landlord under the Lease and, except to the extent set forth in Paragraph 9 hereof, enforcement of any right or remedy with respect thereto, and notice of any other matters relating thereto; (ii) notice of acceptance of this Guaranty; (iii) demand of payment, presentation and protest; (iv) any right to require Landlord to apply to any default any security deposit or other security it may hold under the Lease; (v) any statute of limitations affecting Guarantor's liability hereunder or the enforcement thereof; (vi) any right or defense that may arise by reason of the incapability, lack of authority, death or disability of Tenant or any other person; and (vii) all principles or provisions of law which conflict with the terms of this Guaranty. Guarantor further agrees that Landlord may enforce this Guaranty upon the occurrence of a default under the Lease, notwithstanding any dispute between Landlord and Tenant with respect to the existence of said default or performance of the obligations under the Lease or any counterclaim, set-off or other claim which Tenant may allege against Landlord with respect thereto. Moreover, Guarantor agrees that Guarantor's obligations shall not be affected by any circumstances which constitute a legal or equitable discharge of a guarantor or surety. 8. Guarantor agrees that Landlord may enforce this Guaranty without the necessity of proceeding against Tenant or any other guarantor. Guarantor hereby waives the right to require Landlord to proceed against Tenant, to proceed against any other guarantor, to exercise any right or remedy under the Lease or to pursue any other remedy or to enforce any other right. 9. (a) Guarantor agrees that nothing contained herein shall prevent Landlord from suing on the Lease or from exercising any rights available to it thereunder and that the exercise of any of the aforesaid rights shall not constitute a legal or equitable discharge of Guarantor. Without limiting the generality of the foregoing, Guarantor hereby expressly waives any and all benefits under California Civil Code (S) (S) 2809, 2810, 2819, 2845, 2847, 2848, 2849 and 2850. (b) Guarantor agrees that Guarantor shall have no right of subrogation against Tenant or any right of contribution against any other guarantor unless and until all amounts due under the Lease have been paid in full and all other obligations under the Lease have been satisfied. Guarantor further agrees that, to the extent the waiver of Guarantor's rights of subrogation and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation Guarantor may have against Tenant shall be junior and subordinate to any rights Landlord may have against Tenant, and any rights of contribution Guarantor may have against any other guarantor shall be junior and subordinate to any rights Landlord may have against such other guarantor. (c) The obligations of Guarantor under this Guaranty shall not be altered, limited or affected by any case, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of Tenant or any defense which Tenant may have by reason of order, decree or decision of any court or administrative body resulting from any such case. Landlord shall have the sole right to EXHIBIT G - Page 2 accept or reject any plan on behalf of Guarantor proposed in such case and to take any other action which Guarantor would be entitled to take, including, without limitation, the decision to file or not file a claim. Guarantor acknowledges and agrees that any payment which accures with respect to Tenant's obligations under the Lease (including, without limitation, the payment of rent) after the commencement of any such proceeding (or, if any such payment ceases to accrue by operation of law by reason of the commencement of such proceeding, such payment as would have accrued if said proceedings had not been commenced) shall be included in Guarantor's obligations hereunder because it is the intention of the parties that said obligations should be determined without regard to any rule or law or order which may relieve Tenant of any of its obligations under the Lease. Guarantor hereby permits any trustee in bankruptcy, receiver, debtor-in-possession, assignee for the benefit of creditors or similar person to pay Landlord, or allow the claim of Landlord in respect of, any such payment accruing after the date on which such proceeding is commenced. Guarantor hereby assigns to Landlord Guarantor's right to receive payments from any trustee in bankruptcy, receiver, debtor-in- possession, assignee for the benefit of creditors or similar person by way of dividend, adequate protection payment or otherwise. 10. Any notice, statement, demand, consent, approval or other communication required or permitted to be given, rendered or made by either party to the other, pursuant to this Guaranty or pursuant to any applicable law or requirement of public authority, shall be in writing (whether or not so stated elsewhere in this Guaranty) and shall be deemed to have been properly given, rendered or made only if hand-delivered or sent by first-class mail, postage pre-paid, addressed to the other party at its respective address set forth below, and shall be deemed to have been given, rendered or made on the day it is hand-delivered or one day after it is mailed, unless it is mailed outside of Los Angeles County, California, in which case it shall be deemed to have been given, rendered or made on the third business day after the day it is mailed. By giving notice as provided above, either party may designate a different address for notices, statements, demands, consents, approvals or other communications intended for it. To Guarantor: Imperial Credit industries, Inc. 20371 Irvine Avenue Suite 104 Santa Ana Heights, California 92707 To Landlord: Delta Towers Joint Venture c/o Premisys Real Estate Services. Inc. 2049 Century Park East, Suite 2650 Los Angeles, California 90067 Attention: Property Manager 11. Guarantor represents and warrants to Landlord as follows: (a) No consent of any other person, including without limitation, any creditors of Guarantor, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by Guarantor in connection with this Guaranty or the execution, delivery, performance, validity or enforceability of this Guaranty and all obligations required hereunder. This Guaranty has been duly executed and delivered by Guarantor, and constitutes the legally valid binding obligation of Guarantor enforceable against such Guarantor in accordance with its terms. (b) The execution, delivery and performance of this Guaranty will not violate any provision of any existing law or regulation binding on Guarantor, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on Guarantor, or of any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which Guarantor is a party or by which Guarantor or any of Guarantor's assets may be bound, and will not result in, or require, the creation or imposition of any lien on any of Guarantor's property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract, or other agreement, instrument or undertaking. EXHIBIT G - Page 3 12. The obligations of Tenant under the Lease to execute and deliver estoppel statements, as therein provided, shall be deemed to also require the Guarantor hereunder to do and provide the same relative to Guarantor. 13. This Guaranty shall be binding upon Guarantor, Guarantor's heirs, representatives, administrators, executors, successors, and assigns and shall inure to the benefit of and shall be enforceable by Landlord, its successors, endorsees and assigns. Any married person executing this Guaranty agrees that recourse may be had against community assets and against his separate property for the satisfaction of all obligations herein guaranteed. As used herein, the singular shall include the plural, and the masculine shall include the feminine and neuter and vice versa, if the context so requires. 14. The term "Landlord" whenever used herein refers to and means the Landlord specifically named in the Lease and also any assignee of said Landlord, whether by outright assignment or by assignment for security, and also any successor to the interest of said Landlord or of any assignee in the Lease or any part thereof, whether by assignment or otherwise. So long as the Landlord's interest in or to the Premises (as that term is used in the Lease) or the rents, issues and profits therefrom, or in, to or under the Lease, are subject to any mortgage or deed of trust or assignment for security, no acquisition by Guarantor of the Landlord's interest in the Premises or under the Lease shall affect the continuing obligations of Guarantor under this Guaranty, which obligations shall continue in full force and effect for the benefit of the mortgagee, beneficiary, trustee or assignee under such mortgage, deed of trust or assignment, or any purchaser at sale by judicial foreclosure or under private power of sale, and of the successors and assigns of any such mortgagee, beneficiary, trustee, assignee or purchaser. 15. The term "Tenant" whenever used herein refers to and means the Tenant in the Lease specifically named and also any assignee or sublessee of said Lease and also any successor to the interests of said Tenant, assignee or sublessee of such Lease or any part thereof, whether by assignment, sublease or otherwise. 16. In the event of any dispute or litigation regarding the enforcement or validity of this Guaranty, Guarantor shall be obligated to pay all charges, costs and expenses (including, without limitation, reasonable attorneys' fees) incurred by Landlord, whether or not any action or proceeding is commenced regarding such dispute and whether or not such litigation is prosecuted to judgment. 17. This Guaranty shall be governed by and construed in accordance with the laws of the State of California, and in a case involving diversity of citizenship, shall be litigated in and subject to the jurisdiction of the courts of California. 18. Every provision of this Guaranty is intended to be severable. In the event any term or provision hereof is declared to be illegal or invalid for any reason whatsoever by a court of competent jurisdiction, such illegality or invalidity shall not affect the balance of the terms and provisions hereof, which terms and provisions shall remain binding and enforceable. 19. This Guaranty may be executed in any number of counterparts each of which shall be deemed an original and all of which shall constitute one and the same Guaranty with the same effect as if all parties had signed the same signature page. Any signature page of this Guaranty may be detached from any counterpart of this Guaranty and re-attached to any other counterpart of this Guaranty identical in form hereto but having attached to it one or more additional signature pages. 20. No failure or delay on the part of Landlord to exercise any power, right or privilege under this Guaranty shall impair and such power, right or privilege, or be construed to be a waiver of any default or any acquiescence therein, nor shall any single or partial exercise of such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. 21. This Guaranty shall constitute the entire agreement between Guarantor and the Landlord with respect to the subject matter hereof. No provision of this Guaranty or right of EXHIBIT G - Page 4 Landlord hereunder may be waived nor may Guarantor be released from any obligation hereunder except by a writing duly executed by an authorized officer, director or trustee of Landlord. 22. The liability of Guarantor and all rights, powers and remedies of Landlord hereunder and under any other agreement now or at any time hereafter in force between Landlord and Guarantor relating to the Lease shall be cumulative and not alternative and such rights, powers and remedies shall be in addition to all rights, powers and remedies given to Landlord by law. IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the day and year first above written IMPERIAL CREDIT INDUSTRIES, INC., a California corporation By:________________________________ Its:____________________________ By:________________________________ Its:____________________________ EXHIBIT G - Page 5 EX-10.5(A) 10 CONSENT LETTER DATED JULY 15, 1996 Exhibit 10.5(a) IMPERIAL CREDIT INDUSTRIES INC. 3701 Skypark Drive Torrance, California 90505 July 15, 1996 Fawn Associates Limited Liability Company 100 Putnam Green Greenwich, CT 06830 Attention: Chief Executive Officer RE: FIRST AMENDMENT TO LEASE OF PORTION OF THE FOURTH FLOOR OF BUILDING 5, GREENWICH OFFICE PARK BY FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC Gentlemen: Pursuant to a Guaranty dated March 22nd, 1996 executed by Imperial Credit Industries Inc. ("Imperial") in favor of Fawn Associates Limited Partnership, now known as Fawn Associates Limited Liability Company (Landlord"), Imperial guaranteed the obligations of Franchise Mortgage Acceptance Company, LLC ("Tenant") under the Lease dated March 22nd, 1996 between Landlord and Tenant for space in the Building known as Building 5, Greenwich Office Park, Greenwich, Connecticut (the "Lease"). Tenant has advised Imperial of its desire to amend the Lease to provide for, among other things, the addition of 3,212 rentable square feet to the Premises leased by Tenant, with a related increase in rental obligations payable by Tenant under the Lease. A copy of the proposed First Amendment to Lease is attached hereto. Notwithstanding anything to the contrary contained in paragraph 5 of the Guaranty, Imperial's consent has been requested in connection with the proposed Amendment. With the understanding that Landlord will rely on this letter in executing the requested First Amendment to Lease, Imperial hereby consents to the First Amendment to the Lease and agrees that the Guaranty remains in full and effect with respect to the Lease as modified by the attached First Amendment to Lease. All references in the Guaranty to the Lease shall hereafter be deemed to refer to the Lease as amended by the attached First Amendment to Lease. Very truly yours, IMPERIAL CREDIT INDUSTRIES INC. By: /s/ Kevin Villani ---------------------------- Kevin Villani Chief Financial Officer Attachment EX-10.5(B) 11 FIRST AMENDMENT TO LEASE DATED MARCH 22, 1996 Exhibit 10.5(b) FIRST AMENDMENT TO LEASE between FAWN ASSOCIATES LIMITED LIABILITY COMPANY, LANDLORD and FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, TENANT WHEREAS, Fawn Associates Limited Partnership, now known as Fawn Associates Limited Liability Company, as Landlord, and Franchise Mortgage Acceptance Company LLC, as Tenant, entered into a Lease as of March 22, 1996 (the "Lease") for approximately 8,570 rentable square feet of office space on the fourth floor of Building #5 of Greenwich Office Park, Greenwich, Connecticut; WHEREAS, Landlord has offered Tenant the right to lease an additional portion of the rentable portion of the fourth floor of Building #5 of Greenwich Office Park, consisting of 3,212 rentable square feet of office space as shown in Exhibit X to this Amendment to Lease (herein defined as "Additional Space"; the Additional Space and the Premises collectively referred to as the "Premises"); and WHEREAS, Tenant has accepted Landlord's offer to lease the Additional Space; NOW THEREFORE, to effect the intentions of the parties and for good and valuable consideration paid by each to the other, Landlord and Tenant agree as follows: 1. Item 2 of the Data Sheet attached to the Lease shall be amended by adding the following paragraphs to the end of such Item: "Additionally, Landlord shall perform the following work in the Premises at the Landlord's cost and expense: (i) install two (2) additional empty data outlets with drag lines in Rooms 410 and 411; (ii) furnish and install one (i) dedicated quad outlet in Room 410; (iii) furnish and install one (1) trane split system airconditioner to provide year round operation, including electrical connections and roofing curb; (iv) furnish and install all wiring connectors and face plates for voice/data work including 50 wall outlet and 22 furniture outlets, but excluding punchdown work; --------- (v) furnish and install six (6) fifty (50) pair telephone punchdown blocks, excluding any cross connect wiring; --------- (vi) furnish and install three (3) amp 48-port patch panels; (vii) furnish and install one (1) amp 24-port patch panel and mount racking; (viii) remove existing glass door in Room 418 and reinstall window unit; (ix) furnish and install the following: (a) two (2) isolated ground circuits for Area 409A, (b) two (2) isolated ground circuits for Area 409B, (c) one (1) isolated ground circuit for Area 426, (d) one (1) power circuit for Area 409B, (e) one (1) power circuit for Area 426, (f) one (1) duplex receptacle on dedicated circuit in server room, and (g) one (1) quad receptacle on dedicated receptacle in server room; (x) furnish and install dishwasher and microwave; (xi) furnish and install one (1) upgraded lockset at server room door; (xii) furnish and install glass in office 419; (xiii) furnish and install wallcovering in office 415; and (xiv) revisions to meeting room 411 pursuant to sketches 7 and 8 dated May 17, 1996 by R.S. Granoff. Landlord shall also perform, at Landlord's cost and expense except as specified below, additional Landlord's Construction in the Additional Premises in accordance with the schematic plan attached hereto as Exhibit Y to this Amendment of Lease, including (i) building standard (a) carpet/floor tile, (b) vinyl base, (c) paint, (d) lighting, (e) ceiling and (f) electrical work; and (ii) two (2) glass side lites as indicated on said plan. All items indicated on such plan as not included as "Building Standard" shall be performed by Landlord at Tenant's sole cost and expense and shall otherwise be subject to the terms and provisions of ARTICLE 9 of --------- the Lease." 2. In Item 3 of the Data Sheet, the number "8.71%" shall be deleted and the number "11.98%" submitted in its place. 3. Item 4 of the Data Sheet shall be amended to read in its entirety as follows: "A portion of the forth floor of the Building, consisting of 11,782 rentable square feet. Tenant shall also have, at no additional charge, the exclusive use of the Terrace on the western side of the Premises and the non-exclusive use in common with the tenant of the adjacent space of the Terrace on the eastern side of the Premises." 4. In Item 5 of the Data Sheet, the term "six(6) years," shall be deleted. 5. Item 5(a) of the Data Sheet shall be amended to read in its entirety as follows: "COMMENCEMENT DATE: JUNE 7, 1996." 2 6. Item 5(b) of the Data Sheet shall be amended to read in its entirety as follows: "EXPIRATION DATE: September 30, 2003." 7. In Item 6 of the Data Sheet, the number "twenty-eight (28)" shall be deleted and the number "thirty-eight (38)" shall be substituted in its place, and the number "sixteen (16)" shall be deleted and the number "twenty-one (21)" shall be substituted in its place. 8. The following provision shall be added to the end of Item 7 of the Data Sheet attached to the Lease: "The projected completion date for Landlord's Construction in the Additional Space is October 1, 1996, provided that by July 15, 1996, working drawings which are (i) reasonably acceptable to landlord; (ii) adequate for submission to the Town of Greenwich; and (iii) sufficiently detailed for bidding purposes are delivered to Landlord. Standard architectural, permitting and related fees and charges for Landlord's Construction in the Additional Space shall be included as part of Landlord's Construction at no cost to Tenant." 9. Item 8 of the Data Sheet attached to the Lease shall be amended to read in its entirety as follows: "Fixed Rent shall be determined by multiplying 11,782 rentable square feet by an annual rate per rentable square foot, as follows: Lease Months 1-24: $21.70/r.s.f. Lease Months 25-48: $23.70/r.s.f. Lease Months 49-87: $25.70/r.s.f. For the purpose of calculating Lease Months, Lease Month 1 shall be the calendar month following the month in which the Commencement Date occurs (unless the Commencement Date is on the first of the month, in which case Lease Month 1 shall be the month in which the Commencement Date occurs), Lease Month 2 shall be the next full calendar month and so forth. The per diem rent for the period, if any, from the Commencement Date until Lease Month 1 shall be $564.19. Notwithstanding anything to the contrary contained herein, for the period commencing on Lease Month 1 until the Additional Space is available for Tenant's occupancy in accordance with Sections 3.02 and ----------------- 3.03 of this Lease, Tenant shall receive a credit towards the amount of ---- Fixed Rent payable in the amount of $5,808.37 per month, pro-rated if necessary." 10. In Section 9.01 of the Lease, the following phrase shall be added to the ------------ end of the fourth (4th) sentence of such section: ";provided, however, Tenant shall have no obligation to remove any of Landlord's Construction. 11. Exhibit C of the Lease shall be deleted and Exhibit Z to this Amendment shall be substituted in its place. 12. All initial-capitalized terms herein are intended to have the same meanings as set forth in the Lease. 3 13. In the respects not amended hereby, all terms and provisions of the Lease, including the Data Sheet and the Exhibits thereto, are hereby ratified and confirmed. IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment to Lease as of the 11th day of July, 1996. Signed, Sealed and Delivered in the Presence of: FAWN ASSOCIATES LIMITED LIABILITY COMPANY [SIGNATURE ILLEGIBLE] By: /s/ Steven J. Schacter - --------------------- -------------------------------- Steven J. Schacter Its Authorized Representative [SIGNATURE ILLEGIBLE] - --------------------- FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC [SIGNATURE ILLEGIBLE] By: /s/ John Rinaldi - --------------------- -------------------------------- John Rinaldi Senior Vice President [SIGNATURE ILLEGIBLE] - --------------------- 4 STATE OF CONNECTICUT ) ) ss.: Greenwich July 11, 1996 COUNTY OF FAIRFIELD ) Personally appeared STEVEN J. SCHACTER, Authorized Representative of FAWN ASSOCIATES LIMITED LIABILITY COMPANY, signer and sealer of the foregoing instrument, and acknowledged the same to be his free act and deed and the free act and deed of Fawn Associates Limited Liability Company, before me. /s/ Elaine E. Seeds ------------------------ Notary Public My Commission Expires: [STAMP APPEARS HERE] STATE OF CONNECTICUT ) ) ss.: Greenwich July 11, 1996 COUNTY OF FAIRFIELD ) Personally appeared JOHN RINALDI, Senior Vice President of FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, signer and sealer of the foregoing instrument, and acknowledged the same to be his free act and deed and the free act and deed of said limited liability company, before me. [SIGNATURE ILLEGIBLE] ------------------------ Notary Public My Commission Expires: 4/30/97 EXHIBIT X --------- [PLAN OF GREENWICH OFFICE PARK - FIVE APPEARS HERE] GREENWICH OFFICE PARK - FIVE FOURTH FLOOR PLAN .NTS. JUNE 20, 1996 EXHIBIT V --------- [PLAN OF GREENWICH OFFICE PARK FIVE APPEARS HERE] E.M.A.C EXPANSION ----------------- Proposed Floor Plan Greenwich Office Park Five Fourth Floor 3,212 Additional R.S.F. Scale: 1/8"=1'-0" June 27, 1996 (REVISED 7/9/96) - ---------------------------------------------------------------- NOTE: - ---- 1. The following items are not included as "Building standard" .Built-in counters, cabinate & shelving .Kitchen appliances and plumbing 2. Open workstation partitons to be by tenant 3. All filing and furniture to be by Tenant 4. All dimensions are approximate and may vary according to actual building conditions. - ---------------------------------------------------------------- EXHIBIT Z --------- [GREENWICH OFFICE PARK-FIVE FOURTH FLOOR PLAN APPEARS HERE] GREENWICH OFFICE PARK-FIVE FOURTH FLOOR PLAN "NTS" JUNE 20, 1996 EX-10.5(C) 12 GUARANTY AGREEMENT DATED MARCH 22, 1996 Exhibit 10.5(c) GUARANTY AGREEMENT ------------------ THIS GUARANTY AGREEMENT is dated as of March 22, 1996 by and between IMPERIAL CREDIT INDUSTRIES, INC., a California corporation, (the "GUARANTOR"), and FAWN ASSOCIATES LIMITED PARTNERSHIP, a Connecticut limited partnership ("LESSOR"). WHEREAS, the Guarantor is affiliated with FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, a California limited liability company (the "LESSEE"); and WHEREAS, Guarantor wishes Lessee to enter into that certain Lease between Lessor and Lessee dated as of March 22, 1996 (the "LEASE"), providing for the Lease by Lessor to Lessee of certain premises in 5 Greenwich Office Park, Greenwich, Connecticut, which premises are more particularly described in the Lease; and WHEREAS, Lessor is unwilling to enter into the Lease with Lessee unless Guarantor enters into this Guaranty Agreement; and WHEREAS, Guarantor is willing to enter into this Guaranty Agreement; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Guarantor unconditionally guarantees the due and punctual payment of all Fixed Rent, Additional Rent, interest charges or other amounts provided for in the Lease and all other sums at any time becoming due and payable by Lessee (including damages provided for in the Lease, or damages allowed by law upon any Lessee default) and the performance of all of Lessee's obligations under the Lease. 2. The above guaranty is an absolute, unconditional, continuing guaranty of payment and performance and not of collectibility, and is in no way conditioned or contingent upon any attempt to collect from Lessee or upon any other condition or contingency. If Lessee fails to pay any Fixed Rent, Additional Rent, damages or any other sums at any time becoming due and payable by Lessee under the Lease beyond any applicable notice and grace periods, or if Lessee fails to perform any obligation on Lessee's part to be performed under the Lease beyond any applicable notice and grace periods, then, upon written notice, Guarantor shall promptly pay or perform the same. 3. If Lessor pursues Guarantor to enforce the obligations of Guarantor under this Guaranty Agreement or the obligations of Lessee under the Lease and prevails therein, Guarantor shall pay all costs and expenses incurred by or on behalf of Lessor, including reasonable attorney's fees. Lessor shall be under no obligation to proceed against Lessee before proceeding against the Guarantor. Guarantor hereby agrees (i) that Guarantor shall be at all times subject to the jurisdiction of the courts of the State of Connecticut in connection with the Lease and this Guaranty Agreement and, (ii) that all disputes relating to this Guaranty Agreement shall be subject to the jurisdiction of the courts of the State of Connecticut. 4. This Guaranty Agreement and all guaranties and covenants and agreements of Guarantor contained herein shall continue in full force and effect throughout the Lease Term and thereafter so long as any obligation or liability of Lessee under the Lease shall remain unperformed or unsatisfied. 5. Except as provided in Paragraph 8, the obligations of Guarantor under this Agreement shall not be terminated or in any way released or impaired by, and shall survive and remain in full force and effect notwithstanding, any occurrence whatsoever, including, without limitation, (a) any amendment or modification of, addition or supplement to the Lease or of any covenants, agreements, terms or conditions contained therein; (b) any exercise or non-exercise by Lessor of any right, power, or remedy under, or in respect of the Lease, or any waiver of such right, power, or remedy; (c) any waiver, consent, extension, indulgence or other action, inaction or omission under or in respect of the Lease; (d) any assignment, sale, sublease, surrender, forfeiture, re-entry, re-letting or other transfer in respect of the Lease or any or all of the Premises (as defined in the Lease) or any interest therein by Lessor or Lessee; or (e) any insolvency, bankruptcy, receivership, liquidation, merger, reorganization, readjustment, composition, dissolution, winding up or similar proceeding involving or affecting Lessor or Lessee, whether or not Guarantor shall have notice or knowledge of any of the foregoing items. 6. Lessor may at any time, and from time to time, assign, by way of pledge or otherwise, any of Lessor's rights under the Lease or any or all of the rights (in whole or part) of Lessor under this Guaranty Agreement. From and after any such assignment, the assignee may enforce any and all of the terms of this Guaranty Agreement, to the extent so assigned, as though such Assignee had been a party hereto. 7. All notices and other communications hereunder shall be in writing and shall be delivered or mailed by registered or certified mail, postage prepaid, addressed: If to Guarantor: 3701 Skypark Drive Torrance, CA 90505 If to Lessor: Fawn Associates Limited Partnership 100 Putnam Green Greenwich, Connecticut 06830 Attention: Chief Executive Officer or at such address as either party shall have furnished to the other in writing. 8. If any term of this Guaranty Agreement, or any application thereof, shall be invalid or unenforceable, the remainder of this Guaranty Agreement, and any other application of such term shall not be affected thereby. Neither this Guaranty Agreement nor any term hereof may be changed, waived, discharged, or terminated orally, but only by an instrument in writing signed by the party against which the enforcement of the charge, waiver, discharge or termination is sought. The terms of this Guaranty Agreement shall be binding upon Guarantor and its successors and assigns, and shall insure to the benefit of Lessor and its successors and assigns. 9. This Guaranty Agreement may be executed in counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the Guarantor has caused this Guaranty Agreement to be duly executed and attested on the date set forth above. Signed and Delivered in the presence of: IMPERIAL CREDIT INDUSTRIES, INC. _______________________________ By: [SIGNATURE ILLEGIBLE] -------------------------------- Its: Chairman Duly Authorized _______________________________ TENANT ESTOPPEL CERTIFICATE --------------------------- Re: 5 Greenwich Office Park The undersigned, as Lessee under that certain Lease dated March 22, 1996, as amended by First Amendment to Lease, dated as of July 12, 1996, made with Fawn Associations Limited Partnership, now known as Fawn Associates Limited Liability Company, as Lessor, does hereby certify to New York Life Insurance Company, 51 Madison Avenue, New York, New York 10010: 1. That its leased premises at the above location have been completed in accordance with the terms of the Lease, subject to punchlist items, that it has accepted possession of said premises and that it now occupies the same, and is open for business; 2. That the Lease term began on June 7, 1996, that it began paying rent on 8,570 rentable square feet on June 7, 1996, and 3,212 additional rentable square feet on October 1, 1996, that it pays rent on a current basis, that, save only as may be required by the terms of the Lease, no rent has been or will be paid by the Lessee during the term of this lease for more than one month in advance, that the rent payable under the Lease is the amount of fixed rent provided thereunder, which is net annual rent payable to Lessor of $255,669.40 and that there is no claim or basis for an adjustment thereto; 3. That to Lessee's knowledge there exist no defenses or offsets to enforcement of the Lease by the Lessor and that there are, as of the date hereof, no defaults or breaches on the part of the Lessor under the Lease known to the undersigned and the undersigned has made no claim against the Lessor; 4. That the Lease is now in full force and effect and has not been amended, modified or assigned and the Lease is the only agreement between Lessor and the undersigned regarding the leased premises; 5. That all required parking spaces have been furnished and/or all parking ratios have been met. 6. That the Lessee shall not look to New York Life, it successors or assigns for the return of the security deposit, if any, under the Lease unless the same is actually delivered to New York Life as security for our performance under the Lease. 7. That Lessee is in full compliance (to the extent such compliance is Lessee's responsibility under the Lease) with all Federal, State and Local laws, ordinances, rules and regulations affecting its use of the premises, including, but not limited to the handling, storage and disposal of hazardous and/or toxic materials used or generated as a result of its business conducted on or about the leased premises. It is understood that New York Life requires this statement from the undersigned as a condition to the making of a loan to the owners of the property comprising the leased premises, secured by a first mortgage thereon and also by an assignment of the Lease as collateral security. Dated: October 23, 1996 Lessee: FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC By: [SIGNATURE ILLEGIBLE] ------------------------------------- Name: SVP ----------------------------------- Title:__________________________________ EX-10.5(D) 13 LEASE DATED MARCH 22, 1996 Exhibit 10.5(d) LEASE FAWN ASSOCIATES LIMITED PARTNERSHIP, Landlord and FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, Tenant Dated: March 22, 1996 Table of Contents -----------------
Page ---- PREFACE........................................................................i DATA SHEET....................................................................ii ARTICLE 1......................................................................1 Definitions ARTICLE 2......................................................................2 Demise; Premises; Term ARTICLE 3......................................................................2 Completion and Occupancy of the Premises ARTICLE 4......................................................................3 Rent ARTICLE 5......................................................................4 Use ARTICLE 6......................................................................5 Escalations ARTICLE 7......................................................................8 Assignment, Mortgaging and Subletting ARTICLE 8.....................................................................10 Compliance with Laws; Hazardous Substances ARTICLE 9.....................................................................11 Alterations; Improvements ARTICLE 10....................................................................13 Repairs ARTICLE 11....................................................................13 Utilities and Services ARTICLE 12....................................................................15 Damage to or Destruction of the Premises ARTICLE 13....................................................................16 Eminent Domain ARTICLE 14....................................................................17 Conditions of Limitation ARTICLE 15....................................................................18 Re-entry by Landlord; Remedies ARTICLE 16....................................................................19 Curing Tenant's Defaults; Fees and Expenses ARTICLE 17....................................................................20 Non-Liability and Indemnification
ARTICLE 18..................................................................21 Surrender ARTICLE 19..................................................................21 Insurance ARTICLE 20..................................................................23 Subordination and Attornment ARTICLE 21..................................................................24 Access; Change in Facilities ARTICLE 22..................................................................24 Inability to Perform and Waivers ARTICLE 23..................................................................25 Quiet Enjoyment ARTICLE 24..................................................................25 Rules and Regulations ARTICLE 25..................................................................26 Brokerage ARTICLE 26..................................................................26 Notices and Estoppel Certificate ARTICLE 27..................................................................27 Security Deposit ARTICLE 28..................................................................27 Parties Bound ARTICLE 29..................................................................28 Entire Agreement; No Other Representations; Governing Law; Separability ARTICLE 30..................................................................28 Miscellaneous Provisions
Exhibit A: Land Description Exhibit B: Landlord's Construction Exhibit C: Floor Plan Exhibit D: Cleaning Schedule Exhibit E: Rules and Regulations Exhibit F: Form of Estoppel Certificate Exhibit G: Form of Guaranty PREFACE ------- With respect to any consent or approval required to be given under this Lease, such consent or approval shall not be unreasonably withheld or delayed. All costs and fees to be charged against Landlord or Tenant on behalf of the other party, including but in no way limited to items included in operating and maintenance costs and fees, shall be required to be reasonable in amount and in nature. DATA SHEET ---------- LEASE AGREEMENT BETWEEN FAWN ASSOCIATES LIMITED PARTNERSHIP, LANDLORD and FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, TENANT (S) 1.01(a) 1. BUILDING: Building #5 Greenwich Office Park (S) 1.01(f) 2. LANDLORD'S CONSTRUCTION: Landlord shall perform Landlord's Construction in accordance with the plans set forth as EXHIBIT B of this Lease, at Landlord's cost and expense except as specified in such plans or on EXHIBIT B, including (i) building standard (a) carpeting, (b) finishes, (c) lighting, (d) ceiling, and (e) electrical work, including floor power feeds for free- standing workstations; (ii) builtin cabinets, sink and refrigerator in kitchen; (iii) wall covering in reception area and hallways, front office area and large conference room; (iv) built-in counter top and cabinets in copy room; (v) full height glass in five (5) executive offices; (vi) renovation of existing restrooms to current building standard; (vii) coat hooks on every office door; (viii) electrical roughing for a microwave; (ix) $5,000 allowance for reception desk; and (x) cold water connector to a coffee maker. (S) 1.01(i) 3. TENANT'S PROPORTIONATE SHARE: 8.71%, based upon an aggregate of 98,361 rentable square feet in the Building (S) 2.02 4. PREMISES: A portion of the fourth floor of the Building, consisting of 8,570 rentable square feet. Tenant shall also have exclusive use, at no additional charge, of the terrace accessed via the Premises. 5. TERM: Six (6) years. (S) 2.03(c) (a) COMMENCEMENT DATE: On or about May 1, 1996 subject to the provisions of Articles 2 and 3 herein. ---------------- (S) 2.04 (b) EXPIRATION DATE: The last day of seventy-second (72nd) full calendar month of the Term. (S) 2.06 6. PARKING SPACES: Landlord will provide twenty-eight (28) unreserved parking spaces, of which sixteen (16) shall be located in the Building's garage. (S) 3.01 7. PROJECTED COMPLETION DATE FOR LANDLORD'S CONSTRUCTION: May 1, 1996, provided that by March 5, 1996 working drawings which are (i) reasonably acceptable to Landlord, and (ii) adequate for submission to ii the Town of Greenwich for permitting purposes are delivered to Landlord. Architectural, permitting and related fees and charges for Landlord's Construction shall be included as part of Landlord's Construction at no cost to Tenant. (S) 4.01(a) 8. FIXED RENT SCHEDULE: Fixed Rent shall be determined by multiplying 8,570 rentable square feet by an annual rate per rentable square foot, as follows: Lease Months 1-24: $21.00/r.s.f Lease Months 25-48: $23.00/r.s.f Lease Months 49-72: $25.00/r.s.f For the purpose of calculating Lease Months, Lease Month 1 shall be the calendar month following the month in which the Commencement Date occurs (unless the Commencement Date is on the first of the month, in which case Lease Month 1 shall be the month in which the Commencement Date occurs), Lease Month 2 shall be the next full calendar month as so forth. The per diem rent for the period, if any, from the Commencement Date until Lease Month 1 shall be $547,53. (S) 6.01(c) 9. BASE TAX YEAR: July 1, 1996 - June 30, 1997. (S) 6.01(h) 10. BASE EXPENSE YEAR: Calendar year 1996. (S) 25.01 11. BROKER: The Galbreath Company (S) 27.01 12. SECURITY DEPOSIT: Tenant has furnished Landlord with its balance sheet as of December 31, 1995, and its income statement for the period ended December 31, 1995. Additionally, Tenant has furnished Landlord with the balance sheet of its parent company, Imperial Credit Industries, Inc., as December 31, 1994, and the income statement of Imperial Credit Industries, Inc, for the period ended December 31, 1994. All such financial statements shall be maintained by Landlord in confidence and shall not be released or divulged to anyone else. In reliance on these financial statements (which Tenant hereby represents to be true and correct in all material respects), Landlord has agreed to the following security arrangement; iii The obligations of Tenant shall be guaranteed by Imperial Credit Industries, Inc. in accordance with the terms and provisions of a separate Guaranty Agreement in the form attached hereto as EXHIBIT H. This Data Sheet will become an integral portion of the Lease. Any discrepancy between the terms of the Data Sheet and the remaining portions of the Lease (including all Exhibits thereto) shall be resolved in favor of the Data Sheet. Landlord FAWN ASSOCIATES LIMITED PARTNERSHIP Date: March 25, 1996 By: /s/ Steven J. Schacter -------------------------------- Steven J. Schacter Its Authorized Representative Tenant FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC Date: March 22, 1996 By: /s/ John Rinaldi -------------------------------- Its iv AGREEMENT OF LEASE dated the 22 day of March, 1996, between FAWN ASSOCIATES LIMITED PARTNERSHIP, a Connecticut limited partnership, with its principal office at 100 Putnam Green, Greenwich, Connecticut 06830 ("LANDLORD") and FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, a California limited liability company, with an office at 600 Steamboat Road, Greenwich, Connecticut 06830 ("TENANT"). WITNESSETH: Landlord and Tenant hereby covenant and agree as follows: ARTICLE 1 DEFINITIONS ----------- SECTION 1.01. For purposes of this Lease, unless the context otherwise requires: (a) "BUILDING" shall mean the Building specified in ITEM 1 of the Data Sheet. (b) "BUSINESS DAYS" means Monday through Friday other than days that are federal or state holidays. (b) "COMMON AREAS" shall mean portions of the Building not intended as leasable area, the Land and other improvements thereon. (c) "GOVERNMENTAL AUTHORITY" shall mean any Federal, state county, municipal or local government and all departments, commissions, boards, bureaus and offices thereof having or claiming jurisdiction over the "PREMISES" (as defined below). (d) "INTEREST RATE" shall mean the lesser of (i) the prevailing prime or base lending rate published from time to time in the Eastern Edition of the Wall Street Journal plus 400 basis points, or (ii) the maximum rate of interest permitted by law from time to time. In the event said prevailing prime lending rate is published as a range, the prime or base lending rate for purposes hereof shall be deemed to be an average of the high and low . (e) "LAND" shall mean the parcel of land within Greenwich Office Park situated in the Town of Greenwich, the Country of Fairfield and State of Connecticut, more particulary described on EXHIBIT A attached hereto, on which --------- is situated the Building. (f) "LANDLORD'S CONSTRUCTION" shall mean the work specified on EXHIBIT B hereto. - --------- (g) "LEASE YEAR" shall mean every period of twelve (12) consecutive months during the term of this Lease, commencing on the "COMMENCEMENT DATE" (as hereinafter defined) or each anniversary thereof, or if the Commencement Date is not the first day of ta calendar month, then on the first day of the first calendar month after the Commencement Date or each anniversary thereof. (h) "TENANT'S PROPERTY" shall mean all trade fixtures installed at the sole expense of Tenant, and which are not replacements of any property of Landlord, whether any such replacement is made at Tenant's expense or otherwise. Subject to SECTIONS 9.01. and 18.01. Tenant's Property shall also include all ------------- ----- items of property installed as part of Landlord's Construction and all other property of Tenant which does not become affixed to the Premises. (i) "TENANT'S PROPORTIONATE SHARE" is that percentage which is set forth as ITEM 3 of the Date Sheet. For the purposes of this Lease, the rentable square footage area of the Building is the square footage specified in ITEM 3 of the data sheet. (j) "UNAVOIDABLE DELAYS" shall mean any and all delays beyond Landlord's or Tenant's reasonable control, except for delays in Tenant's payment of Fixed Rent and Additional Rent hereunder, including without limitation, delays caused by Tenant or Landlord, as the case may be; governmental restrictions, regulations, controls or preemption; order of civil, military or naval authority; strikes, labor disputes, lock-outs; shortage of labor or materials, inability to obtain materials or reasonable substitutes therefor, default of any building or construction contractor or subcontractor, enemy action, civil commotion, riot or insurrection; Acts of God, earthquake, floods, explosions, actions of the elements, extreme weather conditions, fire or other unavoidable casualty; or, any other cause beyond Landlord's or Tenant's reasonable control, provided that Landlord and Tenant shall at all times make commercially reasonable efforts to mitigate the effects of any Unavoidable Delays, including the restoration of service interrupted by Unavoidable Delays. ARTICLE 2 DEMISE: PREMISES: TERM ---------------------- SECTION 2.01. Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord, the premises hereinafter described ("PREMISES"), in the Building, for the term hereinafter stated, under the terms and conditions hereinafter provided, along with access to and from the Premises and the right, in common with other tenants, to use the Common Areas. SECTION 2.02. The Premises consist of that property described in ITEM 4 of the Data Sheet and shown on EXHIBIT C hereto, together with all fixtures, --------- equipment, improvements, and appurtenances which, at the commencement of this Lease or at any time during the Term, are attached thereto or installed therein, other than Tenant's Property. For the purposes of this Lease, the rentable square footage area of the Premises is the square footage as set forth in ITEM 4 of the data sheet. SECTION 2.03. The Premises are leased for a term ("TERM") which shall commence on a date ("COMMENCEMENT DATE") which shall be the earliest of: (a) the date on which the Premises are available for occupancy, as determined pursuant to Sections 3.02 and 3.03; and ------------- ---- (b) the date Tenant shall occupy the Premises or any part thereof for the purpose of conducting its business; and SECTION 2.04. The Term shall end on the date set forth in ITEM 5 (B) of the Data Sheet ("EXPIRATION DATE"), unless the Term shall sooner terminate pursuant to any of the terms, covenants or conditions of this Lease or pursuant to law. SECTION 2.05. Tenant shall have the right to use that number of parking spaces in the parking areas of Greenwich Office Park allocated to the Building as specified in ITEM 6 of the Data Sheet. Landlord shall not be responsible for policing the use of the spaces; however, Landlord shall have the right (but not the obligation) to control access to the parking areas, by the use of a card system or otherwise. If Landlord adopts such a system, Tenant shall comply and shall use diligent efforts to cause its employees, agents and invitees to comply therewith. Tenant shall have the nonexclusive right to use the parking areas, in common with other tenants of the Building, up to its maximum permissible number of spaces. ARTICLE 3 COMPLETION AND OCCUPANCY OF THE PREMISES ---------------------------------------- SECTION 3.01. Landlord shall perform Landlord's Construction, and shall make diligent efforts to complete same on or before the date specified as ITEM 7 in the Data Sheet. Landlord's Construction shall be performed in a first-class manner as to workmanship, installation and materials, and in accordance with Tenant's approved plans. Landlord's Construction shall be warranted by Landlord for twelve (12) months following substantial completion. Tenant shall have the right to make change orders to said approved plans, upon Landlord's prior written consent. Landlord shall provide Tenant with any and all resulting cost increases and/or time delays associated with said change orders upon approving same. All such cost increases and/or time delays shall be at Tenant's expense. Landlord shall perform Landlord's Construction in compliance with all applicable federal, state and local laws, codes, statutes, ordinances, guidelines, rules and regulations. During the course of construction, Landlord shall keep Tenant duly apprised of the progress of Landlord's Construction and any claimed delays. Notwithstanding any Unavoidable Delays or anything to the contrary elsewhere in this Lease, in the event that the Premises are not available for Tenant's occupancy in accordance with Section 3.02 by December 31, 1996 for any reason other than delays caused by Tenant, then Tenant shall have the right to terminate this Lease without penalty, and receive a refund of any amounts previously paid to Landlord, on ten (10) days' written notice, unless within such ten-day period Landlord delivers possession in compliance with the requirements of Section 3.02. If Tenant requests Landlord to perform any additional fit-up work outside the scope of Landlord's Construction, then prior to commencing such additional work, Landlord, in good faith, shall competitively bid same, on a "fixed price" and "sealed bid" basis, to at least three (3) outside subcontractors for each major trade involved. The subcontractor selected need not be the one submitting the lowest bid. If the bid(s) received are satisfactory to Tenant, Landlord shall perform 2 the additional work at cost, plus fifteen percent (15%) to cover general conditions (other than on-site supervision), management, overhead and profit. SECTION 3.02. Subject to Unavoidable Delays, the Premises shall be conclusively deemed available for Tenant's occupancy on the date that the following conditions have been met: (a) a certificate or certificates of occupancy (conditional or otherwise) or other certificate permitting occupancy of the Premises for the permitted use specified in Article 5 has or have been issued by the applicable Governmental --------- Authority; (b) Landlord's Construction with respect to the Premises has been substantially completed (excluding (i) any minor details of construction, decoration or mechanical adjustment which do not materially interfere with Tenant's use of the Premises and are typically characterized as "punch list" items, all of which shall be addressed by Landlord at its expense as promptly as possible following the Commencement Date, and (ii) TENANT's WORK, which includes any other work (including installation of Tenant's telephone system and workstations) to be done before the commencement of the Lease Term that is not to be performed by Landlord, provided, however, that Landlord and Tenant shall sequence and coordinate the performance of Landlord's Construction and Tenant's Work in accordance with good construction practice); and (c) ten (10) days' notice of the occurrence or expected occurrence of the events described in subsections 3.02(a) and (b) has been given to Tenant. ------------------- --- Landlord shall endeavor, but shall not be obligated, to give longer notice of such events. SECTION 3.03. Notwithstanding the provisions of Section 3.02., if there is ------------- a delay in the availability of the Premises for occupancy due to the availability and/or responsiveness of Tenant's architect or other construction representative, the sequencing of Landlord's Construction and Tenant's Work, or due to any default, delay, change order or omission by Tenant, including, but not limited to, Tenant's failure to deliver to Landlord on or before the Plans Due Date specified in Item 7 of the Data Sheet working drawings in compliance therewith, then the Premises shall be deemed available for occupancy on the date when the Premises would have been available but for such default, delay, change order or omission. SECTION 3.04. Tenant has inspected the Premises and accepts same in an "as is" condition, subject to (i) the performance of Landlord's Construction and Tenant's Work (if any), (ii) the assumption that the roof and building systems are leak free and properly functioning, respectively (both of which shall be Landlord's responsibility under this Lease), and (iii) Landlord's express undertakings in this Lease. Landlord and Landlord's agents have made no representations to Tenant concerning the Premises except those specified herein. By entering into occupancy of any part of the Premises, Tenant shall be deemed, unless Tenant shall have notified Landlord otherwise in writing, and excluding latent defects, to have agreed that Landlord, up to the time of such occupancy, had performed all of its obligations hereunder with respect to Landlord's Construction in such part and that Landlord's Construction in such part, except for minor details of construction, decoration and mechanical adjustment referred to above, was in satisfactory condition as of the date of such occupancy, unless within sixty (60) days after such date Tenant shall have given notice to Landlord specifying the respects in which the same was not in such condition. ARTICLE 4 RENT ---- SECTION 4.01 Tenant shall pay to Landlord, without notice or demand, in lawful money of the United States of America, at the office of Landlord or at such other place as Landlord may designate, the following: (a) Annual fixed rent ("FIXED RENT") in the amounts specified as ITEM 8 in the Data Sheet for each Lease Year during the Term, payable in equal monthly installments in advance on the first day of each and every calendar month during the Term, for the period commencing on the Commencement Date and until the Expiration Date. (b) Additional rent ("ADDITIONAL RENT") consisting of all other sums of money as shall become due and payable by Tenant hereunder (for default in the payment of which Landlord shall have the same remedies as for a default in the payment of Fixed Rent). (c) If Tenant shall fail to pay within ten (10) days after the date when due any installment of Fixed Rent or any Additional Rent, Tenant shall pay interest thereon at the Interest Rate from the date when such installment or payment shall have become due to the date of payment thereof, 3 together with a late charge equal to five percent (5%) of the unpaid installment, which interest and late charge shall be deemed Additional Rent. (d) There shall be no abatement of, deduction from, counterclaim or setoff against Fixed Rent or Additional Rent except as otherwise specifically provided in this Lease. SECTION 4.02. On execution hereof, Tenant has paid Landlord the first two (2) monthly installments of Fixed Rent payable under this Lease. If the Commencement Date shall be any day other than the first day of a calendar month, Fixed Rent for such partial calendar month shall be pro-rated on the basis provided in the Data Sheet, and Landlord shall credit any excess amount paid pursuant to this Section 4.02 toward the payment of the Fixed Rent for the next ------------ succeeding calendar month, and Tenant shall pay Landlord any deficiency in the amount paid. ARTICLE 5 USE --- SECTION 5.01. Tenant shall use and occupy the Premises only for executive and administrative offices for the Tenant's business and for no other purpose. Tenant shall not use or occupy or suffer or permit the use or occupancy of the Premises or any part thereof in any manner which in Landlord's reasonable judgment shall adversely affect or interfere with (i) any services required to be furnished by Landlord to Tenant or to any other tenant or occupant of any part of the Building; (ii) the proper and economical delivery of any such service; or, (iii) the use or enjoyment of any part of the Building by any other tenant or occupant. Without limiting the foregoing, Tenant shall not use the Premises for the storage, preparation or consumption of food or beverages beyond that necessary to provide a kitchen/lunchroom facility for its employees. SECTION 5.02. Tenant shall not use or occupy, suffer or permit the Premises or any part thereof to be used in any manner, or anything to be done therein or suffer or permit anything to be brought into or kept therein, which would: (a) cause substantial or objectionable noise, (b) violate any laws or requirements of a Governmental Authority, (c) make void or voidable any insurance policy then in force with respect to the Building and Common Areas, (d) make unobtainable from reputable insurance companies authorized to do business in the State of Connecticut at standard rates any fire insurance with extended coverage, or liability, elevator, boiler or other insurance required to be furnished by Landlord under the terms of a Superior Mortgage, (e) cause, or be likely to cause, physical damage to the Building, Common Areas or any part thereof, (f) constitute a public or private nuisance, (g) impair the appearance, character or reputation of the Building, (h) discharge objectionable fumes, vapors or odors into the Building's air conditioning system or into the Building's flues or vents or otherwise in such manner as may unreasonably offend other occupants, or (i) impair or interfere with any of the Building's services, including the furnishing of electrical energy, or the proper and economic cleaning, air conditioning or other servicing of the Building or the Premises, or impair or interfere with the use of any of the other areas of the Building, or occasion discomfort, annoyance or inconvenience to Landlord or any of the other tenants or occupants of the Building. The provisions of this Section, and the application thereof, shall not be deemed to be limited in any way to or by the provisions of any other Section of this Article or any of the Rules and Regulations referred to in Article 24. ---------- SECTION 5.03. If any governmental license or permit, other than a certificate of occupancy (which Landlord shall obtain), shall be required for the proper and lawful conduct of Tenant's specific business in the Premises or any part thereof (as opposed to use for administrative/executive offices generally), then Tenant, at its expense, shall duly and timely procure and thereafter maintain such license or permit and submit the same to inspection by Landlord. Tenant shall at all times comply with the terms and conditions of each such license or permit, but in no event shall failure to procure and maintain same by Tenant affect Tenant's obligations hereunder. SECTION 5.04. Tenant will not at any time use or occupy, or suffer or permit the Premises to be used in violation of any certificate of occupancy issued for the Building or the applicable zoning ordinances, provided that the certificate of occupancy shall permit the Premises to be used for administrative/executive offices. SECTION 5.05. Tenant shall not place a load upon any floor of the Premises that exceeds the floor load per square foot that such floor was designed to carry and which is allowed by certificate, rule, regulation, permit or law. Subject to the terms of the next preceding sentence, if Tenant wishes to place any safes in the Premises, it may do so at its own expense, but Landlord reserves the right to limit their weight and position. Business machines and mechanical equipment in the Premises 4 shall be placed and maintained by Tenant, at Tenant's expense, in such manner as shall be sufficient to absorb vibration and noise and prevent annoyance or inconvenience to Landlord or any of the other tenants or occupants of the Building. SECTION 5.06. In the event Tenant prohibits its employees from smoking on the Premises or designates any areas within the Premises as "non-smoking" areas, the Tenant shall provide a suitably sized and designated smoking area for its employees wholly within the Premises, including the appurtenant terrace area; provided Tenant provides sufficient receptacles for purposes of disposing of all "smoking remnants" and Tenant empties such receptacles and maintains the terrace area in a neat and tidy condition acceptable to Landlord. ARTICLE 6 ESCALATIONS ----------- SECTION 6.01. As used herein: (a) The term "TAXES" shall mean the aggregate of all real estate taxes, assessments, special or otherwise, sewer rents, rates and charges, water rents, rates and charges, or any other charge of a Governmental Authority of a similar or dissimilar nature, of any kind, which may be levied or assessed upon or with respect to the Building and the Common Areas, and all taxes or charges levied on the Fixed Rent and/or Additional Rent or the gross receipts from the Building, or charges levied on Landlord's receipts from the Building which are in lieu of or a substitute for, any other tax or assessment or charge upon or with respect to the Building, the Land, or Greenwich Office Park. If any assessment can be paid in installments, Landlord shall exercise the election to pay the assessment in installments over the longest period allowed by law, and only those installments actually due and payable in a particular Tax Year shall be included as part of "Taxes" for such Tax Year. Taxes shall not be deemed to include: (i) franchise or similar taxes of Landlord, or (ii) income, excess profits or other taxes, if any, of Landlord, except to the extent such taxes are in lieu of or a substitute for any other tax, assessment or charge upon the Land and Building, which, if such other tax, assessment or charge were in effect, would be payable by Tenant as provided above, in which event such taxes shall be computed as if the Land and Building were the only property of Landlord, and the rent hereunder the only income of Landlord. If due to a future change in the method of taxation any franchise, income (other than an income tax which is applicable to other parties in addition to owners of real property), profit or other tax shall be levied against Landlord in substitution in whole or in part for or in lieu of any tax which would otherwise constitute Taxes, or a tax or excise shall be imposed upon or measured by rents, such franchise, income, profit or other tax, or excise imposed upon or measured by rents, shall be deemed to be Taxes for the purpose hereof. (b) The term "TAX YEAR" shall mean the period of twelve (12) months commencing on July 1st of each year or such other twelve (12) month period as may hereafter be duly adopted as the fiscal year for real estate tax purposes for the Town of Greenwich or other applicable Governmental Authority. (c) The term "BASE TAX YEAR" shall be the period specified as Item 9 in the Data Sheet. (d) The term "LANDLORD'S STATEMENT" shall mean an instrument containing a computation in reasonable detail of any Additional Rent due pursuant to the provisions of this Article. (e) The term "BASE TAXES" shall mean the amount of Taxes payable by Landlord during the Base Tax Year. (f) The term "COST OF OPERATION AND MAINTENANCE" shall mean the aggregate of all costs incurred by Landlord, excluding costs of work done for tenants at their own expense, with respect to the operation, maintenance and repair of the Building and the Common Areas, including, without limitation, the cost incurred for air conditioning; mechanical ventilation; heating; cleaning; rubbish removal; window washing; elevators; porter and matron service; metered or unmetered (if or to the extent not separately metered) cost of electric current used throughout the Common Areas, if and to the extent it is not billed directly to Tenant or a tenant; steam; protection and security services, if any; shuttle service, if any; repairs; maintenance; all insurance; supplies, wages, salaries, disability benefits, pensions, hospitalization, retirement plans and group insurance and other benefits or similar expenses with respect to service and maintenance employees; uniforms and working clothes for such employees and the cleaning thereof; expenses imposed pursuant to any collective bargaining 5 agreement with respect to such employees; the current amortized portion of capital expenses incurred with respect to the Building and Common Areas, based on the reasonably commercial useful life of the component for which the expense was incurred (but in no event to exceed $0.25 per rentable square foot in the aggregate per year); together with interest at Landlord's cost on the unamortized balance; payroll, social security, unemployment and other similar taxes with respect to such employees; sales, use and other similar taxes; water rates and sewer rents; management fees whether actually paid to independent contractors or imputed in accordance with the provisions of Section 6.07; cost ------------ of landscaping; legal and accounting fees; permit and license fees; the cost of changes to comply with governmental requirements enacted after the date of this Lease; repairs to Common Areas; and utility and other consultants' fees; and the costs (including but not limited to, the fees of lawyers, appraisers and other professionals) of any application or proceeding brought by or on behalf of the Landlord to lower the assessment on which the taxes are based, whether or not such application or proceeding in successful in reducing such assessment. The "Cost of Operation and Maintenance" shall not include: wages, salaries, fees and fringe benefits paid to administrative or executive personnel above the level of property manager, the cost of any repair or replacement made by Landlord because of casualty damage covered by insurance; the cost of repair or replacement because of a taking by eminent domain or by deed in lieu of eminent domain proceeding, to the full extent of the condemnation award of proceeds; any charge for depreciation or amortization, including debt service and mortgage interest; all costs incurred by Landlord with respect to the leasing of space or the sale of the Building, including but not limited to brokerage commissions and advertising, promotional and legal fees; legal fees incurred in connection with disputes with any tenants in their capacity as such; the costs of any fit-up, decorating or other construction performed for any tenant in connection with entering into or renewing or extending any lease or relocating within the Building; the costs of correcting any building code or other violations of law, including violations of environmental laws, antedating the Commencement Date; the cost of overtime or other added expense incurred by Landlord to perform work which this Lease expressly requires to be performed at Landlord's expense; any management fee or other amount paid to any affiliate of Landlord in excess of the amount which would be paid absent such a relationship; expenses incurred in connection with any financing or refinancing of the Building; except as provided above, the cost of any repairs, alterations, additions, changes, replacements and other items which under generally accepted accounting principles are properly classified as capital expenditures, to the extent that they upgrade or improve the Building as opposed to replacing existing items which have worn out; the cost of expanding the Building; and the costs of separately metered utilities or other special services provided to specific tenants, which are required to be reimbursed or paid directly by any tenant. (g) "OPERATIONAL YEAR" shall mean each calendar year falling wholly or partially during the Term. (h) "BASE EXPENSE YEAR" shall be the period specified as ITEM 10 in the Data Sheet. (i) The term "BASE EXPENSES" shall mean the Cost of Operation and Maintenance for the Base Expense Year with variable cost items appropriately adjusted upward to assume ninety-five percent (95%) occupancy of the Building, including an operating fitness center and restaurant facility, during the entire Base Expense Year. (j) "TENANT's PROJECTED SHARE" shall mean Tenant's Proportionate Share multiplied by Landlord's written good faith estimate in reasonable detail of increase of Cost of Operation and Maintenance for the ensuing Operational Year over the Base Expenses, said written estimate to be delivered by Landlord to Tenant during December of each year. Tenant's Projected Share shall be divided by twelve (12) and each such one-twelfth (1/12) shall be payable on the first of each month, starting January 1 of the ensuing year, by Tenant to Landlord as Additional Rent. SECTION 6.02. (a) If Taxes payable in any Tax Year falling wholly or partially within the Term shall be greater than the Base Taxes, Tenant shall pay as Additional Rent for such Tax Year a sum equal to Tenant's Proportionate Share of the amount by which the Taxes for such Tax Year exceed the Base Taxes. Tenant's obligation to make such payment shall commence on the first day of July following the Base Tax Year. Subsequent to the issuance by Greenwich or any other applicable Governmental Authority of the bill for Taxes, Landlord shall submit to Tenant a copy of such bill together with Landlord's Statement and Tenant shall pay the Additional Rent set forth on such statement within thirty (30) days after the mailing of such statement by Landlord. (b) If, as a result of any application or proceeding brought by or on behalf of Landlord, the Base Taxes shall be decreased, Landlord's Statement next following such decrease shall include a pro rata adjustment for prior tax years reflecting such decrease in the Base Taxes (less all costs and 6 expenses, including but not limited to counsel fees, incurred by Landlord in connection with such application or proceeding). If, as a result of any application or proceeding brought by or on behalf of Landlord for review of the assessed valuation of the Building or Common Areas for any fiscal year subsequent to the Base Tax Year, there shall be a decrease in the Taxes for any Tax Year with respect to which Landlord shall have previously rendered a Landlord's Statement and Tenant shall have paid Additional Rent hereunder, Landlord's Statement next following such decrease shall include an adjustment for such Tax Year reflecting such decrease in Taxes, or, if the Lease Term is already over, promptly refunded to Tenant. (c) Any payments of Additional Rent or refunds due to Tenant hereunder for any period of less than a full Lease Year, or any adjustment required due to the change in the area of the Premises, shall be equitably prorated to reflect any such event. Any expenses, including but not limited to the cost of operation and maintenance and tax escalations, not attributable solely to the Building or solely to the Premises, shall be equitably allocated among other buildings or other tenants, as applicable. SECTION 6.03. (a) After the expiration of the Base Expense Year and each Operational Year, Landlord shall furnish Tenant a written detailed statement prepared by Landlord of the Cost of Operation and Maintenance incurred for such Year. During the period of sixty (60) days after receipt of Landlord's Statement, Tenant may inspect the records of the material reflected in said Landlord's Statement at a reasonable time mutually agreeable to Landlord and Tenant. Within thirty (30) days after receipt of such Landlord's Statement for any Operational Year setting forth Tenant's Proportionate Share of any increase of Cost of Operation and Maintenance during such Operational Year over the Cost of Operation and Maintenance in the Base Expense Year (said increase being referred to herein as the "COST INCREASE"), Tenant shall pay same (less the amount of Tenant's Projected Share paid by Tenant on account thereof) to Landlord as Additional Rent. (b) Commencing with the first Operational Year after the Base Expense Year, Tenant shall pay to Landlord, as Additional Rent, Tenant's Projected Share. If Landlord's Statement at the end of the then Operational Year shall indicate that Tenant's Projected Share exceeded Tenant's Proportionate Share of Cost Increase, Landlord shall credit the amount of such excess against the next subsequent payment of Additional Rent due hereunder or, if the Lease Term is already over, promptly refund the overpayment to Tenant. In the event that Tenant's Projected Share paid by Tenant was more than one hundred twenty-five percent (125%) of Tenant's actual Proportionate Share of Cost Increase, Landlord shall credit Tenant with interest at the Interest Rate on the excess, calculated from the date of payment by Tenant until the date when the excess is refunded to Tenant or credited to Additional Rent as provided above. If Landlord's Statement shall indicate that Tenant's Proportionate Share of Cost Increased exceeded Tenant's Projected Share for the then Operational Year, Tenant shall, within thirty (30) days of receipt of Landlord's Statement, pay the amount of such excess to Landlord. SECTION 6.04. If the Term shall expire on a date other than December 31st, any Additional Rent for the Lease Year in which the date of expiration of the Term shall occur shall be apportioned in that percentage which the number of days in the period from January 1st of such Lease Year to such date of expiration, both inclusive, shall bear to the total number of days in the calendar year in which such expiration occurs. SECTION 6.05. (a) Landlord shall use all commercially reasonable efforts to render Landlord's statements no later than one hundred twenty (120) days after the end of each Operational Year or Tax Year. Landlord's failure to render Landlord's Statement with respect to any Operational Year or Tax Year, or Landlord's delay in rendering said Statement beyond a date specified herein, shall not prejudice Landlord's right to render a Landlord's Statement with respect to that or any subsequent Operational Year or Tax Year. The obligations of Landlord and Tenant under the provisions of this Article with respect to any Additional Rent shall survive the expiration or any sooner termination of the Term. (b) Each Landlord's Statement shall be conclusive and binding upon Tenant, unless within sixty (60) days after receipt of such Landlord's Statement, Tenant shall notify Landlord that it disputes the correctness of Landlord's Statement, specifying the respects in which Landlord's Statement is claimed to be incorrect. Pending the determination of such dispute, Tenant shall pay Additional Rent in accordance with the applicable Landlord's Statement, and such payment shall be without prejudice to Tenant's position in any legal proceeding commenced by Tenant. SECTION 6.06. Any Additional Rent payable pursuant to Article 6 shall be --------- collectible by Landlord in the same manner as Fixed Rent, and Landlord shall have the same remedies for nonpayment thereof as Landlord has hereunder for non-payment of Fixed Rent. 7 SECTION 6.07. During the period that Landlord or an affiliate of Landlord shall manage the Building with its own employees rather than independent contractors, the aggregate management costs and fees shall not exceed a rate which is competitive for such services rendered on an arm's-length basis in a first class office building in the Greenwich area. ARTICLE 7 ASSIGNMENT, MORTGAGING AND SUBLETTING ------------------------------------- SECTION 7.01. (a) Except as otherwise expressly provided in this Article, neither this Lease, nor the term and estate hereby granted, nor any part hereof or thereof, nor the interest of Tenant in any sublease or the rentals thereunder, shall be assigned, mortgaged, pledged, encumbered or otherwise transferred by Tenant, Tenant's legal representatives, subtenants, or successors in interest by operation of law or otherwise, and neither the Premises, nor any part thereof, shall be encumbered in any manner by reason of any act or omission on the part of Tenant or anyone claiming under or through Tenant, or shall be sublet or be used or occupied or permitted to be used or occupied, or utilized for desk space or for mailing privileges by anyone other than Tenant (excluding desk space/mailing privileges for institutional lenders/investors with which Tenant maintains a customer or servicer relationship) or for any purpose other than as permitted by this Lease, without the prior written consent of Landlord in each case. The transfer (or transfers in the aggregate) of a controlling interest in Tenant, by transfers of stock or general partnership or membership interest (other than transfers upon death or disability), shall be deemed an assignment of this Lease. In the event that Tenant shall desire to assign this Lease or to sublease any portion of the Premises, then Tenant shall submit in writing to Landlord the name of the proposed assignee or subtenant, the nature and character of its business, the terms and conditions of the proposed assignment or subletting, information as to the financial responsibility of the proposed assignee or subtenant, and such other information as Landlord may require. In the event that Tenant desires to assign this Lease, then any proposed assignment must require Tenant's assignee to assume Tenant's obligations from and after the effective date of an assignment. (b) Anything in subsection 7.01.(a) to the contrary notwithstanding, the ------------------- prior written consent of Landlord shall not be required with respect to an assignment of this Lease or a sublease of part or all of the Premises to an entity controlled by, controlling or under common control with Tenant. For this purpose "CONTROL" shall mean (i) in the case of a corporation, ownership of more than fifty percent (50%) of the outstanding capital stock of that corporation, (ii) in the case of a general partnership, shall mean more than fifty percent (50%) of the general partnership interest of the partnership, (iii) in the case of a limited partnership, shall mean more than fifty percent (50%) of the general partnership interests of such limited partnership, and (iv) in the case of a limited liability company, shall mean more than fifty percent (50%) of the membership interests. In connection with any such assignment of sublease, Tenant shall give notice to Landlord at least ten (10) days prior to the transaction and shall deliver a copy of the documentation to Landlord within ten (10) days after the execution of the assignment or sublease. (c) Any assignment of this Lease, or of the interest of Tenant hereunder, or sublease as aforesaid, without full compliance with any and all requirements set forth in this Lease shall be a breach of this Lease and a default hereunder and shall be of no effect. SECTION 7.02. (a) In the event that at any time or from time to time prior to or during the term of this Lease Tenant desires to sublet any part of the Premises or assign this Lease in whole or in part, other than a sublease or assignment pursuant to Section 7.10 (b) or desk space/mailing privileges ---------------- permitted by Section 7.01 (a), Landlord shall have the option to recapture the ---------------- space so proposed to be sublet or assigned and Tenant shall not sublet or assign such space until thirty (30) days have elapsed after the receipt of such notice by Landlord. Such option on the part of Landlord to recapture such space so proposed to be sublet or assigned shall be exercisable by Landlord in writing during said period of thirty (30) days. If Landlord elects to recapture the space proposed to be sublet or assigned, such recapture will take effect on the date specified in Landlord's written exercise of its recapture right (which shall not be prior to the proposed effective date of the sublet or assignment requested by Tenant, nor more than sixty (60) days after such proposed effective date). Upon any such recapture, this Lease shall terminate with respect to the space so recaptured, and Landlord shall be responsible for partitioning off the recaptured space, at Landlord's expense. If Landlord fails to exercise such option within said thirty (30) day period and Tenant fails to complete a sublease or assignment with a third party (as hereinafter provided) within ninety (90) days 8 thereafter, Tenant shall again comply with all the conditions of this section as if the notice and option herein above referred to had not been given and received. (b) In addition to the rights of Landlord specified above, if Tenant proposes to sublet all or substantially all of the Premises or to assign this Lease other than to a successor by merger, consolidation or acquisition of substantially all of Tenant's assets and business, Landlord shall have the right to cancel and terminate this Lease, by notice to Tenant within thirty (30) days after receipt of Tenant's proposal. SECTION 7.03. In the event Landlord does not exercise its option to recapture or cancel, Landlord covenants within the same 30-day period not unreasonably to withhold its consent, which must be in writing, to a subletting or assignment, provided, however, that Landlord shall not, in any event, be obligated to consent to any such proposed subletting or assignment unless: (a) At the time of the request for Landlord's consent and at the date of the sublease or assignment, this Lease shall be in full force and effect, without any uncured breach or default thereunder on the part of Tenant of which Tenant shall have been given notice if required pursuant to the terms of this Lease. (b) The proposed subtenant or assignee shall possess a business reputation and financial credit such as are then in keeping with the reasonable standards of Landlord for the Building and Greenwich Office Park generally. (c) The Premises, except with Landlord's prior written consent, shall not have been publicly advertised for subletting at a rental rate lower than the then prevailing rental rate for other space in the Building or comparable space if Building is full. (d) The subtenant or assignee assumes, by an instrument in form and content reasonably satisfactory to Landlord, the due performance of all Tenant's obligations under this Lease (to the extent not performed by Tenant) with respect to the subleased or assigned space. (e) A copy of the sublease or the original assumption agreement, fully executed and acknowledged, is submitted to Landlord within ten (10) days of execution of the sublease or assignment agreement. (f) Any such sublease or assignment provides that, in the event of any further subleasing or assignment of any portion of the Premises by the subtenant or assignee or anyone claiming under or through it, the prior written consent of Landlord must be obtained as provided in Section 7.01 and any profit on such ------------ further subletting shall be paid over entirely to Tenant, to be shared with Landlord as provided in Section 7.05. ------------ (g) By way of illustration and not limitation, Landlord shall not be obligated to consent to any proposed assignment or sublease to any of the following entities: (i) a bank, trust company, safe deposit business, savings and loan association or loan company, other than subleases for non-retail purposes to institutional lenders/investors with which Tenant maintains a customer or servicer relationship; (ii) a tenant or subtenant whose projected or reasonably likely use of the Premises involves the use, storage, generation, or disposal of Hazardous Substances as defined in Section 8.02 of this Lease; ------------ (iii) a school, college, university or educational institution, whether or not non-profit; (iv) a government, governmental or quasi-governmental organization, or any agency or subdivision thereof; (v) a tenant or subtenant of a tenant of Landlord or its affiliates, an occupant of the Building or any other building in Greenwich owned by the Landlord or its affiliates, or any party or entity with whom Landlord, or its affiliates or their agents or representatives have engaged in active negotiations for a lease during the ninety (90)- day period immediately preceding the date of Tenant's request for consent; or (vi) a tenant or subtenant whose projected or reasonably likely use of the Premises would classify the Premises as a "place of public accommodation" under the American with Disabilities Act of 1990, as may be amended from time to time, or furthermore whose projected or reasonably likely use of the Premises would create obligations in excess of Landlord's obligations under this Lease but for the sublease or assignment. SECTION 7.04. If this Lease is assigned, whether or not in violation of the provisions of this Lease, Landlord may collect rent from the assignee. If the Premises or any part thereof are sublet or used or occupied by anybody other than Tenant, whether or not in violation of this Lease, Landlord may, after default by Tenant and expiration of Tenant's time to cure such default, collect rent from the subtenant or occupant. In either event, Landlord may apply the net amount collected to the rents herein reserved, but no such assignment, subletting, occupancy or collection shall be 9 deemed a waiver of any of the provisions of this Article, or the acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of Tenant's obligations under this Lease. The consent by Landlord to an assignment, mortgaging or subletting pursuant to any provision of this Lease shall not in any way be considered to relieve Tenant or any party claiming under or through Tenant from obtaining the express consent of Landlord to any other or further assignment, mortgaging or subletting which consent shall be required for all further sublettings or assignments whether or not required pursuant to the terms and provisions of this Article 7. --------- SECTION 7.05. With respect to any sublease or assignment by Tenant of all or any portion of the Premises, the following provisions shall apply. Any profit on such sublease or assignment shall be shared fifty percent (50%) by Tenant and fifty percent (50%) by Landlord. For purposes of this Section, "PROFIT" shall refer to the difference between: (1) all payments made by a subtenant or assignee to Tenant as rent or otherwise under or in connection with said sublease or assignment after deducting brokers' commissions and other costs reasonably incurred by Tenant to secure the sublease or assignment, and excluding reimbursement for fit-up or other work in connection with occupancy, and any amounts paid in satisfaction of indemnity obligations, including brokerage fee indemnities; and (2) the annual Fixed Rent and Additional Rent payable hereunder with respect to the space affected by such sublease or assignment. Payments of Landlord's share of the profit in connection therewith shall be made monthly as Additional Rent hereunder, on the first day of each month, as, if and when collected by Tenant. SECTION 7.06. (a) In case of subletting, a duly executed and acknowledged original of the sublease shall be delivered to Landlord, the same to provide that (i) such sublease is and shall be subject and subordinate to this Lease and any then present or future modifications thereof; and (ii) in the event of termination, reentry or dispossession by Landlord under this Lease, Landlord may, at its option, take over all of the right, title and interest of Tenant, as sublessor, under such sublease, and such subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that Landlord shall not (A) be liable for any previous acts or omissions of Tenant, as sublessor under such sublease; (B) be subject to any offsets, not expressly provided for in such sublease, against Landlord or (C) be bound by any previous modification of such sublease to which Landlord shall not have consented in writing, or by any previous prepayments of more than one (1) month's rent. (b) In the case of such assignment or subletting, Tenant, as assignor or sublessor, as the case may be, shall remain liable for the performance or observance of all of the terms and provisions on Tenant's part to be performed or observed under this Lease. (c) Any consent of Landlord to any such assignment or subletting shall not be construed as a waiver of any requirement for obtaining: (i) the consent of Landlord to any subsequent assignment of this Lease or subletting of the entire Premises or (ii) the consent of Landlord to any assignment of any sublease, the undersubletting of the whole or any portion of the Premises or the subletting of any portion of the Premises. Tenant shall pay Landlord's costs incurred in connection with consideration of such consent, including but not limited to counsel fees and payments to any mortgagee. If the holder of a Superior Mortgage must approve a requested sublease or assignment and declines to do so, it shall be reasonable for Landlord to withhold its consent. SECTION 7.07. Nothwithstanding any other provisions of this Article 7 if --------- the Premises consist of less than five thousand (5,000) square feet of rentable space, not less than all of the Premises may be sublet or assigned. Denial of consent to the subletting or assignment of less than four thousand (4,000) square feet of rentable space shall not be construed as unreasonableness on the part of Landlord. ARTICLE 8 COMPLIANCE WITH LAWS: HAZARDOUS SUBSTANCES ------------------------------------------ SECTION 8.01. Tenant, at its cost and expense, shall comply with all laws, statutes, rules, ordinances, orders, regulations and notices of Governmental Authorities (present, future, ordinary, extraordinary, foreseen or unforeseen), and of all insurance policies, at any time duly issued or in force, applicable to the Premises or to the use or occupation thereof, provided however, that Tenant shall not be responsible for making any structural alteration of the Premises unless same shall be required as a result of the fault or negligence of Tenant, its contractors or agents in the particular operation of Tenant's business. Nothing contained in this Article 8 or elsewhere in this Lease shall --------- 10 be deemed to make Tenant liable or responsible for correcting any pre-existing conditions, including environmental conditions, antedating Tenant's occupancy, or for conditions caused by or attributable to Landlord, other tenants or (except for "Tenant's Responsible Parties" as defined below) third parties. SECTION 8.02. Except for routine cleaning compounds and office supplies in normal quantities for Tenant's own use in the ordinary course of business, Tenant shall not cause or permit any Hazardous Substance to be used, stored, generated, or disposed of on or in the Premises by Tenant, Tenant's agents, employees, contractors, guests, licensees, servants or invitees (collectively, "Tenant's Responsible Parties"), without first obtaining Landlord's written consent, which may be withheld at the Landlord's sole and absolute discretion. Additionally, Tenant shall not use, store, generate or dispose of any substance in any manner or undertake any act which would cause the Premises or the Greenwich Office Park to be classified as an "establishment" under the laws of the State of Connecticut. If Hazardous Substances are used, stored, generated, or disposed of on or in the Premises, or if the Premises become contaminated in any manner for which Tenant is legally liable or if Tenant's use of the Premises causes the Premises and/or the Greenwich Office Park to be classified as an "establishment" under applicable Connecticut law, Tenant shall indemnify, defend, and hold harmless the Landlord from any and all claims, damages, fines, judgments, penalties, costs, liabilities, or losses (including, without limitation, a decrease in the value of the Premises or the Building of which they are part, damages because of adverse impact on marketing of the space, and any and all sums paid for settlement of claims, attorneys', consultant, and expert fees) arising during or after the Lease Term and arising as a result of such contamination or use by Tenant. This indemnification includes, by way of illustration and not limitation, any and all costs incurred because of any investigation of the site or any cleanup, removal, or restoration mandated by a federal, state, or local agency or political subdivision. In addition, if Tenant causes or permits the presence of any Hazardous Substance on the Premises and this results in contamination, Tenant shall promptly, at its sole expense, take any and all necessary actions to return the Premises to the condition existing before the presence of any such Hazardous Substance on the Premises, provided, however, that Tenant shall first obtain Landlord's written approval for any such remedial action. Tenant's obligations pursuant to this Section 8.02 shall survive the expiration or early termination of this Lease. Landlord represents and warrants that to its best knowledge, there are no Hazardous Substances in or about the Premises, the Building or the Land, nor any outstanding violations of applicable environmental laws or requirements with respect to the Premises, the Building, or the Land of Greenwich Office Park. As used herein, "HAZARDOUS SUBSTANCE" means any substance which is toxic, ignitable, reactive, or corrosive and which is regulated by the Town of Greenwich, the State of Connecticut, or the United States government. Hazardous Substance includes any and all material or substances which are defined as "hazardous waste," "extremely hazardous waste," or a Hazardous Substance pursuant to state, federal, or local governmental law. Hazardous Substance includes but is not restricted to asbestos, polychlorinated biphenyls ("PCBs") and petroleum. SECTION 8.03. Tenant shall, at Tenant's sole cost and expense, comply with any and all requirements of any statute, rule, ordinance, order, regulation or notice of any Governmental Authority relating to the recycling of waste generated by tenants of the Building (collectively, the "RECYCLING LAWS"), including, without limitation, Connecticut Public Act 87-544 and the regulations promulgated pursuant thereto. Without limiting the generality of the foregoing, Tenant shall, at Tenant's sole cost and expense, separate all solid waste in accordance with, and otherwise comply with, the requirements of such Recycling Laws and any recycling plan in effect from time to time in the Building; and, in the event Landlord is required to separate any solid waste generated by Tenant or Landlord otherwise incurs any costs or expenses in connection with the recycling of Tenant's solid waste, Tenant shall reimburse Landlord for all such costs and expenses within ten (10) days after Tenant's receipt of a bill therefor from Landlord. ARTICLE 9 ALTERATIONS; IMPROVEMENTS ------------------------- SECTION 9.01. Tenant shall make no changes or alterations in or to the Premises of any nature without Landlord's prior written consent except for cosmetic and decorative changes of which Tenant shall give Landlord advance notice. Landlord shall not be deemed to be unreasonably withholding 11 its consent if Tenant's proposed changes or alterations are not within the guidelines of Connecticut Light and Power Company's energy conscious construction program, a program in which Landlord participates or may participate to increase electrical efficiency. If Landlord consents to any proposed changes or alterations, such consent shall not (i) constitute certification of compliance of the proposed changes or alterations with the American with Disabilities Act of 1990, as may be amended from time to time ("ADA") or (ii) give rise to any ADA compliance or responsibility on the part of the Landlord with respect to the proposed changes or alterations. All fixtures and partitions, railings and like installations (excluding movable partitions and Tenant's trade furniture, fixtures and equipment and other Tenant's Property), installed in the Premises at any time, either by Tenant or by Landlord on Tenant's behalf, shall at the Expiration Date or prior termination of this Lease, become the property of Landlord and shall remain upon and be surrendered with the Premises, unless Landlord, by notice to Tenant no later than twenty (20) days prior to the Expiration Date or prior termination date of this Lease, elects to have them removed by Tenant, in which event the same shall be removed from the Premises by Tenant forthwith, at Tenant's expense. Nothing in this Section shall be construed to prevent Tenant's removal of Tenant's Property including Landlord's Construction, unless in connection with Landlord's Construction, Landlord, by notice to Tenant no later than twenty (20) days prior to the Expiration Date or prior termination date of this Lease, elects to have Tenant leave any part or all of Landlord's Construction in the Premises. However, upon removal of any Tenant's Property from the Premises or upon removal of other installations as may be required or permitted by Landlord, Tenant shall immediately, and at its expense, repair and restore the Premises to the condition existing prior to installation and repair any damage to the Premises or the Building due to such removal. If Tenant uses any paint color or other wall covering in the Premises that is not Building standard, at the end of the Term Tenant, at Tenant's expense, must (i) repaint the Premises or remove the non-standard wall covering and (ii) paint the Premises in a Building standard color. Prior to using any such non-standard paint or wallcovering, Tenant may request Landlord's determination in advance whether such print or wallcovering must be repainted or removed at the end of the Term. All property permitted or required by Landlord to be removed from the Premises at the end of the Term remaining in the Premises after Tenant's removal shall be deemed abandoned and may, at the election of Landlord, either be retained as Landlord's property or may be removed from the Premises by Landlord at Tenant's expense. Tenant's obligations pursuant to this Section 9.01 shall survive the expiration or early termination of this Lease. SECTION 9.02. Tenant shall, before making any alterations, additions, installations or improvements, at its expense, obtain all permits, approvals and certificates required by any governmental or quasi-governmental bodies and (upon completion) certificates of final approval thereof and shall deliver promptly duplicates of all such permits, approvals and certificates to Landlord. Tenant agrees to carry and will cause Tenant's contractors and subcontractors to carry such workmen's compensation, general liability, personal and property damage insurance as Landlord may reasonably require. As permitted by law, Tenant agrees to obtain and deliver to Landlord, written and unconditional waivers of mechanic's liens upon the Land and Building for all work, labor and service to be performed and all materials to be furnished in connection with such work, signed by all contractors, sub-contractors, materialmen and laborers to become involved in such work. Notwithstanding the foregoing, if any mechanic's lien is filed against the Premises, Land or Building, for work claimed to have been done for, or materials furnished to, Tenant, whether or not done pursuant to this Article, the same shall be discharged or bonded against by Tenant within thirty (30) days thereafter, at Tenant's expense. SECTION 9.03. Landlord shall have the right to perform any proposed alterations to the Premises at cost, plus fifteen percent (15%) to cover general conditions (exclusive of on-site management), management, overhead and profit. Before commencing any alterations, Landlord, in good faith, shall, if requested by Tenant, competitively bid same, on a "fixed price" and "sealed bid" basis, to at least three (3) outside subcontractors, selected in consultation with Tenant, for each major trade involved. The subcontractor selected need not be the one submitting the lowest bid, if Landlord reasonably believes that the relative reliability and skill of the various subcontractors warrant a selection based on considerations not limited solely to price. 12 ARTICLE 10 REPAIRS ------- SECTION 10.01. Tenant shall take good care of the Premises and, at Tenant's sole cost and expense, shall make all repairs and replacements, as and when needed to preserve the Premises in good working order and condition, except that Tenant shall not be required to make any structural repairs or structural replacements to the Building and the Building systems serving the Premises unless necessitated or occasioned by the acts, omissions or negligence of Tenant, or any of Tenant's Responsible Parties, or by the specific use or occupancy or manner of use or occupancy of the Premises by Tenant or any such person beyond ordinary wear and tear, in such cases, Landlord may make or cause such structural repairs or structural replacements to be made, but shall not be obligated to do so, and Tenant agrees to pay to Landlord promptly upon Landlord's demand as Additional Rent, the cost of such repairs or replacements. In the event Landlord elects not to make such repairs or replacements caused by Tenant's negligence, Landlord may require Tenant to make such repairs or replacements at Tenant's sole cost and expense. Furthermore, Tenant shall, at Tenant's sole cost and expense, maintain and make all repairs and replacements to the water fountain in the Premises. On the Commencement date, Landlord shall Fountain in the Premises in good working order. SECTION 10.02. Landlord, at its expense, shall keep and maintain the Building (including the roof by excluding those portions of the Premises or other tenant's premises, to the extent that Tenant or other tenants are required to keep and maintain them under leases with Landlord), the Common Areas and the fixtures, appurtenances, systems and facilities serving the Premises, in good working order, condition and repair and shall make all necessary repairs other than those specifically required by this Lease to be made by the Tenant, and shall generally maintain and provide services to the Building consistent with the standards of comparable first-class commercial officer buildings in the Greenwich, Connecticut area. ARTICLE II UTILITIES AND SERVICES ---------------------- SECTION 11.01. Landlord shall provide the cleaning services described in EXHIBIT D attached hereto. Tenant shall pay to Landlord, on demand, Landlord's - --------- charges for any special or unusual cleaning work in the Premises, including without limitation, the cleaning of private baths (other than one (1) men's and one (1) women's restrooms in the Premises, which shall be included under EXHIBIT D), interior glass, pantries, kitchen, lounge areas, panelled and fabric walls, and wood floors; provided, however, that Tenant understands that nothing herein shall require Landlord to provide any special or unusual cleaning work. Tenant acknowledges that the cleaning services required to be furnished by Landlord pursuant to Section 11.01 may be furnished by a contractor or contractors ------------- employed by Landlord and agrees that Landlord shall not be deemed in default of any of its obligations under this Section unless such default shall continue for an unreasonable period of time after written notice from Tenant to Landlord setting forth the special nature of such default. SECTION 11.02. Landlord shall provide year round air conditioning to the Premises capable of providing and maintaining criteria as follows: Design Condition Inside Condition Outside Condition ---------------- ---------------- ----------------- Cooling Cycle 78 degrees D.B.F 95 degrees D.B.F ------------- ---------------- ---------------- 50% R.H. 75 degrees W.B.F -------- ---------------- Heating Cycle 68 degrees F 0 degrees F ------------- ------------ ----------- on Business Days from 8:00 a.m. to 6:00 p.m. and Saturdays from 8:00 a.m. to 1:00 p.m. (These design standards are based on an occupancy of not more than eight persons per 1000 sq. ft. and a total connected load not to exceed 5 watts per square foot for lighting and standard electrical office power, subject to the recommendations of any Governmental Authority for the purpose of conserving energy.) If Tenant requests core unit air-conditioning/cooling or ventilation for more extended hours, or on Sundays or on holidays, Landlord will furnish the same at an extra cost to Tenant of Fifty Dollars ($50) per hour increased by the percentage by which the Consumer Price 13 Index at the time Landlord furnished such overtime services has increased over the Base Year Consumer Price Index. As used in this Article 11, the "Base Year Consumer Price Index" shall be ---------- the Consumer Price Index for the June next preceding the Commencement Date. The Consumer Price Index as used in this Article 11 shall mean the Revised ---------- Consumer Price Index For All Urban Consumers, NY - Northern NJ - Long Island, NY, NJ, CT (1982-84=100) as reported in Labor Law Reports, published by Commercial Clearing House, Inc. In the event that the Consumer Price Index is not available, the successor or substitute index shall be used for the computations herein set forth. In the event that the Consumer Price Index, or such successor or such substitute index is not published, a reliable government or other nonpartisan publication evaluating the information used in determining the Consumer Price Index shall be used for the computations set forth herein. If the parties are unable to agree on the selection of a successor or substitute index, or a publication which would most nearly carry out the intent hereof, then such dispute shall be submitted to three (3) real estate brokers licensed in the State of Connecticut, each having at least ten (10) years of experience leasing office space similar to the Premises in Fairfield County. Such brokers shall be selected as follows: Landlord and Tenant shall each choose one (1) broker, which brokers shall jointly select the third broker. The determination by any two of any such three (3) brokers shall be binding on Landlord and Tenant. All costs incurred in connection with such arbitration proceedings shall be borne equally by Landlord and Tenant except that each party shall pay its own counsel fees. SECTION 11.03. (a) Landlord, at Tenant's expense, shall furnish electrical energy to or for the use of Tenant in the Premises for the operation of the lighting fixtures and the electrical receptacles. Subject to adjustment as provided in subsection (c) below, Tenant shall pay to Landlord, as Additional Rent, within ten (10) days of being billed therefor, a sum equal to Tenant's Proportionate Share times one hundred percent (100%) of the actual electricity charges for the Building (including, without limitation, charges on a pass-through basis, without mark-up, of Landlord's out-of-pocket cost per kilowatt-hour of demand and cost per kilowatt-hour of consumption, as the same are computed under such rate applicable to Landlord) and all applicable utility company surcharges, fuel adjustments, rate adjustments, and taxes. If either the quantity or character of electrical service is changed by the public utility corporation supplying electrical service to the Building or if electrical service is no longer available or suitable for Tenant's requirements, no such change, unavailability or unsuitability shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, unless by reason thereof any Governmental Authority deems the Premises unsafe or uninhabitable for the permitted use specified in this Lease, or impose any liability upon Landlord or Landlord's agents. (b) Tenant covenants that at no time shall the use of electrical energy in the Premises exceed the capacity of the existing feeders or wiring installations then serving the Premises. Tenant shall not, without prior consent of Landlord in each instance, make or perform, or permit the making or performing of, any alteration to wiring installations or other electrical facilities in or serving the Premises, nor make any material additions to the business machines, office equipment, or other appliances in the Premises which utilize electrical energy. (c) If Tenant, at any time, shall reasonably question the cost for its consumption of electricity charged by Landlord as Additional Rent, the validity of such costs shall be determined by an independent electrical engineer selected by Landlord, who shall certify such determination in writing to Landlord and Tenant. Landlord's selection of an independent electrical engineer shall be subject to Tenant's approval, which shall not be unreasonably withheld or delayed. If Tenant does not disapprove or consent to Landlord's selection of an engineer within ten (10) days, such selection shall be deemed approved. The cost of such consultant shall be paid by Tenant. Tenant may, at its own full cost and expense, have an electrical meter installed to measure separately the amount of electricity used in the Premises, and Tenant shall pay directly to the utility supplier the metered service charges, without any additional fees to Landlord. (d) Tenant, at Tenant's expense, shall purchase and Landlord shall, at Tenant's request, install all replacement lamps (including incandescent and fluorescent), starters and ballasts used in the Premises. All such purchases shall be from Landlord, unless Landlord elects otherwise. Prices for such items charged to Tenant shall be at rates competitive with those charged by other first class office buildings in the Greenwich area. SECTION 11.04. Landlord shall supply reasonably adequate quantities of hot and cold water to a point or points on the floor or floors in which the Premises are located for ordinary lavatory, 14 kitchen and drinking purposes. If Tenant requires, uses or consumes water for any purpose in addition to the ordinary lavatory use, Landlord may install a water meter and thereby measure Tenant's consumption of water for all purposes. Tenant shall pay to Landlord the cost of any such meter and its installation, and Tenant, at Tenant's sole cost and expense, shall keep any such meter and any such installation equipment in good working order and repair. Tenant shall pay for water consumed as shown on said meter and sewer charges thereon, as and when bills are rendered. SECTION 11.05. Landlord reserves the right to stop the service of the air conditioning, elevator, plumbing, electrical, sanitary, mechanical or other service or utility systems of the Building when necessary by reason of accident or emergency, mechanical breakdown, requirement of law. Unavoidable Delay or for repairs, alterations, replacements or improvements, which in the reasonable judgment of Landlord, are desirable or necessary, until the reason for such stoppage shall have been eliminated; provided that Landlord shall restore service as soon as reasonably possible under the circumstances. Except in emergencies, Landlord shall give Tenant prior notice of any anticipated stoppage. SECTION 11.06. Tenant shall have access to the Premises twenty-four (24) hours a day, seven (7) days a week. SECTION 11.07. Electricity supplied to the fitness center and restaurant facility in the Building shall be separately metered, and electricity, water and other utilities supplied to the fitness center and restaurant facility in the Building shall not be included in any computation of Tenant's Proportionate Share of electric charges or of any Cost Increase over the Base Expense Year. ARTICLE 12 DAMAGE TO OR DESTRUCTION OF THE PREMISES ---------------------------------------- SECTION 12.01. If the Premises or any part thereof shall be partially damaged by fire or other casualty and Tenant gives prompt notice thereof to Landlord, subject to its rights under Section 12.02, Landlord shall proceed with ------------- reasonable diligence to repair or cause such damage to be repaired to restore the Premises to the condition the Premises were in before the tenant installation was installed. Landlord shall, at Tenant's request and expense, also restore Landlord's Construction (utilizing therefor the proceeds, if available, of the insurance required to be maintained by Tenant pursuant to Section 19(a)(ii)). The Fixed Rent and Additional Rent shall be abated to the - ----------------- extent that the Premises shall have been rendered untenantable, such abatement to be from the date of such damage or destruction to the date the Premises shall be substantially repaired, restored or rebuilt. If Tenant shall reoccupy portions of the Premises as the restoration continues, the abatement shall cease as to such portions. SECTION 12.02. If the Premises shall be totally damaged or rendered wholly untenantable by fire or other casualty, or if the Building shall be so damaged by fire or other casualty that substantial alteration or reconstruction of the Building shall, in Landlord's reasonable opinion, be required (whether or not the Premises shall have been damaged by such fire or other casualty), then in any of such events Landlord may, at its option, terminate this Lease by giving Tenant thirty (30) days notice of such termination, which notice shall be given within ninety (90) days after the date of such damage. In the event that such notice of termination shall be given, this Lease shall terminate as of the date provided in such notice of termination (whether or not the Term shall have commenced) with the same effect as if that were the Expiration Date, and the Fixed Rent and Additional Rent shall be apportioned as of such date of damage or destruction, and any prepaid portion of Fixed and Additional Rent shall be apportioned as of such date of damage or destruction and shall be refunded by Landlord to Tenant. If the damage or destruction occurs during the final Lease Year, or is so extensive that the Premises cannot reasonably be anticipated to be restored within one (1) year, then Tenant shall likewise have the right to terminate this Lease, effective as of the date of the damage or destruction, by written notice given to Landlord within sixty (60) days after such date. If, at any time prior to Landlord giving Tenant the aforesaid notice of termination, the holder of a Superior Mortgage takes possession of the Building through foreclosure or otherwise, such holder or person shall have a further period of sixty (60) days from the date of so taking possession to terminate this Lease by written notice of termination. SECTION 12.03. Landlord shall not be liable for any inconvenience or annoyance to Tenant or injury to the business of Tenant resulting in any way from such damage by fire or other casualty or the repair thereof. Landlord will not carry insurance of any kind on Tenant's Property, and Landlord shall not be obligated to repair any damage thereto or replace the same. 15 SECTION 12.04. This Lease shall be considered an express agreement governing any case of damage to or destruction of the Building or any part thereof by fire or other casualty, and any law providing for such a contingency in the absence of such express agreement, now or hereafter enacted, shall have no application in such case. ARTICLE 13 EMINENT DOMAIN -------------- SECTION 13.01. If the whole of the Premises or the Building, or such part thereof (including parking areas) as will render the remainder untenantable or commercially unfeasible for Tenant's Permitted use, shall be acquired or condemned for any public or quasi-public use or purpose, this Lease shall end as of the date of the vesting of title in the condemning authority (either through court order or by voluntary conveyance by Landlord in lieu of condemnation) with the same effect as if said date were the Expiration Date. If only a part of the Premises shall be so acquired or condemned, then, except as otherwise provided in this Article, this Lease and the Term shall continue in force and effect, but, from and after the date of the vesting of title, the Fixed Rent shall be an amount which bears the same ratio to the Fixed Rent payable immediately prior to such condemnation pursuant to this Lease, as the value of the untaken portion of the Premises (appraised after the taking and repair of any damage to the Building pursuant to this Section) bears to the value of the entire Premises immediately before the taking; and any Additional Rent payable or credits receivable pursuant to Article 6 shall be adjusted to reflect the diminution of --------- Premises. The value of the Premises before and after the taking shall be determined for the purposes of this Section by an independent appraiser selected by Landlord. If only a part of the Building but a material part of the Land shall be so acquired or condemned, then (a) whether or not the Premises shall be affected thereby, Landlord, at Landlord's sole option, may give to Tenant, within sixty (60) days next following the date upon which Landlord shall have received notice of vesting of title, thirty (30) days notice of termination of this Lease, and (b) if the part of the Building so acquired or condemned shall contain more than twenty-five percent (25%) of the total of the Premises immediately prior to such acquisition or condemnation, or if, by reason of such acquisition or condemnation, Tenant no longer has reasonable means of access to the Premises, Tenant, at Tenant's sole option, may give to Landlord, within sixty (60) days following the date upon which Tenant shall have received notice of vesting of title, thirty (30) days notice of termination of this Lease. If a part of the Premises shall be so acquired or condemned, and the Lease shall not be terminated pursuant to the provisions of this Section, Landlord, at Landlord's expense, shall restore that part of the Premises not so acquired or condemned to a self-contained rental unit; provided that the Premises as so restored shall consist of no less than 4,000 rentable square feet. In the event of any termination of this Lease pursuant to the provisions of this Section, the Fixed Rent and Additional Rent shall be apportioned as of the date of such termination and any prepaid portion of Fixed Rent and Additional Rent for any period after such date shall be refunded by Landlord to Tenant. SECTION 13.02. In the event of any such acquisition or condemnation of all or any part of the Building and/or Common Areas, Landlord shall be entitled to receive the entire award for any such acquisition or condemnation. Tenant shall have no claim against Landlord or the condemning authority for the value of any unexpired portion of the Term, and Tenant hereby expressly assigns to Landlord all of its right, title and interest in and to any award, and also agrees to execute any and all further documents that may be required in order to facilitate the collection thereof by Landlord. Nothing contained in this Section shall be deemed to prevent Tenant from making a separate claim in any condemnation proceedings for any moving expenses and for the value of any Tenant's Property which would be removable at the end of the Term, pursuant to the provisions of Article 9. ---------- SECTION 13.03. If the grade of any street upon which the Land is situated or abuts shall be changed by any competent authority, this Lease shall nevertheless continue in full force and effect, and Landlord shall be entitled to collect from such authority the entire award that may be made in such proceedings. Tenant hereby expressly assigns to Landlord all of its right, title and interest in or to every such award and also agrees to execute any and all further documents that may be required in order to facilitate the collection thereof by Landlord. 16 ARTICLE 14 CONDITIONS OF LIMITATION ------------------------ SECTION 14.01. This Lease and the Term and estate hereby granted are subject to the limitations that, if, (a) Tenant shall file a voluntary petition in bankruptcy or insolvency, or shall be adjudicated a bankrupt or insolvent or shall file any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy act or any other present or future applicable federal, state or other statute or law, or shall make an assignment for the benefit of creditors or shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator or Tenant or of all or any part of Tenant's Property; or (b) Within sixty (60) days after the commencement of any such proceeding against Tenant, such proceeding shall not have been dismissed, or within sixty (60) days after the appointment of any trustee, receiver or liquidator of Tenant or of all or any part of Tenant's Property, without the consent or acquiescence of Tenant, such appointment shall not have been vacated or otherwise discharged, or any execution or attachment shall be issued against Tenant or any of Tenant's Property pursuant to which the Premises shall be taken or occupied or attempted to be taken or occupied; or (c) Tenant shall default in the payment when due of any installment of Fixed Rent or Additional Rent and such default shall continue for a period of ten (10) days after written notice; or (d) Tenant shall default in the observance or performance of any term, covenant or condition of this Lease on Tenant's part to be observed or performed (other than the covenants for the payment of Fixed Rent or Additional Rent), and Tenant shall fail to remedy such default within twenty (20) days after notice by Landlord to Tenant of such default, or if such default is of such a nature that it cannot be completely remedied within said period of twenty (20) days, if Tenant (i) shall not promptly, upon the giving of such notice, advise Landlord in writing of Tenant's intention duly to institute all steps necessary to remedy such situation, (ii) shall not promptly institute and thereafter diligently prosecute to completion all steps necessary to remedy the same, and (iii) subject only to Unavoidable Delays, shall not remedy the same within sixty (60) days after the date of the giving of said notice by Landlord; or (e) any event shall occur or any contingency shall arise whereby this Lease or the estate hereby granted or the unexpired balance of the Term would, by operation of law or otherwise, devolve upon or pass to any person, firm or corporation other than Tenant, except as is expressly permitted under Article 7; --------- or (f) Tenant shall default in the observance or performance of any term, convenant or condition on Tenant's part to be observed or performed under any other lease with Landlord or any affiliate of Landlord of space in the Building, the Greenwich Office Park or any other property owned by Landlord or any affiliate of Landlord, and such default shall continue beyond any grace period set forth in such other lease for the remedying of such default; then, in any of said events, Landlord may give to Tenant notice of intention to end the Term at the expiration of ten (10) days from the date of the giving of such notice, and, in the event such notice is given, this Lease (whether or not the Term shall have commenced) shall terminate upon the expiration of said ten (10) days with the same effect as if that day were the Expiration Date, but Tenant shall remain liable to Landlord, as provided in Article 15. ---------- SECTION 14.02. In the event Tenant becomes the subject debtor in a case pending under the Bankruptcy Code (11 U.S.C. Section 101 et. seq.), Landlord's right to terminate this Lease shall be subject to the rights of the Trustee in bankruptcy to assume or assign this Lease. To the extent permitted or allowed by law, the Trustee shall not have the right to assume or assign this Lease, until the Trustee (i) promptly cures all defaults under the Lease, (ii) promptly compensates Landlord for monetary damages incurred as a result of such default, and (iii) provides "ADEQUATE ASSURANCE OF FUTURE PERFORMANCE", which shall mean, in addition to any other requirements of 11 U.S.C. Section 365(b)(3), that all of the following have been satisfied: (a) in addition to rent payable under the Lease, the Trustee has established with Landlord a security deposit equal to three (3) months Fixed Rent; (b) Trustee has agreed that the security deposit will be reestablished in said amount, whenever it is drawn upon by Landlord; (c) Trustee has agreed that Tenant's business will continue to be conducted in a first class manner, and (d) Trustee has agreed that the use of the Premises will not change from the use permitted under this Lease. If all the foregoing are not satisfied, Tenant shall 17 be deemed not to have provided Landlord with adequate assurance of future performance of this Lease. SECTION 14.03. Any monies received by Landlord from or on behalf of Tenant during the pendency of any proceeding or appointment of the types referred to in subsections 14.01 (a) and (b) shall be deemed paid as compensation for the use - --------------------- --- and occupation of the Premises, and the acceptance of any such compensation by Landlord shall not be deemed an acceptance of rent or a waiver on the part of Landlord of any rights under Section 14.01. ------------- ARTICLE 15 RE-ENTRY BY LANDLORD; REMEDIES ------------------------------ SECTION 15.01. If this Lease and the Term shall terminate for any reason as provided in Article 14: ---------- (a) Landlord and Landlord's agents may immediately, or at any time after such uncured default or after the date upon which this Lease shall terminate, re-enter the Premises or any part thereof, without notice, either by summary proceeding or by any other applicable lawful action or proceeding, and may repossess the Premises and remove any and all of its or their property and effects from the Premises, and in no event shall re-entry be deemed an acceptance of surrender of this Lease; and (b) Landlord, at Landlord's option, may relet the whole or any part or parts of the Premises from time to time, either in the name of Landlord or otherwise, to such tenant or tenants, for such term or terms ending before, on or after the Expiration Date, at such rental or rentals and upon such other conditions, which may include concessions and free rent periods, as Landlord, in its sole discretion, may determine. Landlord shall have no obligation to relet the Premises or any part thereof and shall in no event be liable for failure to relet the Premises or any part thereof, or, in the event of any such reletting, for failure to collect any rent due upon any such reletting, and no failure shall operate to relieve Tenant of any liability under this Lease or otherwise to affect any such liability. Landlord, at Landlord's option, may make such commercially usual repairs, replacements, alterations, additions, improvements, decorations and other physical changes in and to the Premises as Landlord, in its sole discretion, considers advisable or necessary in connection with any such reletting or proposed reletting, without relieving Tenant of any liability under this Lease or otherwise affecting any such liability. Tenant shall be liable for the amount of all expenses incurred by Landlord in connection with such repairs, replacements, alterations, additions, improvements, decorations and other physical changes made by Landlord and the costs of such reletting, including without limitation, brokerage allocable to the unexpired balance of the Term and reasonable legal expenses. SECTION 15.02. In the event of any breach or threatened breach by Tenant or any persons claiming through or under Tenant of any of the agreements, terms, covenants or conditions contained in this Lease, Landlord shall be entitled to enjoin such breach or threatened breach and shall have the right to invoke any right and remedy allowed at law or in equity or by statute or otherwise as if re-entry, summary proceedings or other specific remedies were not provided for in this Lease. SECTION 15.03. If this Lease and the Term shall terminate as provided in Article 14, or by or under any summary proceeding or any other lawful action or - ---------- proceeding, or if Landlord shall re-enter the Premises as provided in this Article or by or under any summary proceeding or any other lawful action or proceeding, then, in any of said events: (a) Tenant shall pay to Landlord all Fixed Rent and Additional Rent to the date upon which this Lease and the Term shall have terminated or to the date of re-entry upon the Premises by Landlord, as the case may be; (b) Landlord shall be entitled to retain all monies, if any, paid by Tenant to Landlord, whether as advance rent, security or otherwise, but such monies shall be credited by Landlord against any Fixed Rent or Additional Rent due at the time of such termination or re-entry, or at Landlord's option, against any damages payable by Tenant; (c) Tenant shall be liable for and shall pay to Landlord, as damages, any deficiency between (i) the Fixed Rent and Additional Rent payable hereunder for the period which otherwise would have constituted the unexpired portion of the Term (conclusively presuming the Operating Expenses and Taxes to be the same as was payable for the year immediately preceding such termination or re-entry) and (ii) the net amount, if any, of rents ("NET RENT") collected under any reletting effected pursuant to the provisions of subsection 15.01(b), for any part of such ------------------- period (first deducting from 18 the rents collected under any such reletting all of Landlord's expenses in connection with the termination of this Lease or Landlord's re-entry upon the Premises and in connection with such reletting including but not limited to all repossession costs, the allocable portion of brokerage commissions for the unexpired balance of the Term, legal expenses, attorneys' fees, alteration costs and other expenses of preparing the Premises for such reletting); (d) Any such deficiency shall be paid in monthly installments by Tenant on the days specified in this Lease for the payment of installments of Fixed Rent. Landlord shall be entitled to recover from Tenant each monthly deficiency as the same shall arise, and no suit to collect the amount of the deficiency for any month shall prejudice Landlord's right to collect the deficiency for any subsequent month by a similar proceeding. Alternatively, suit or suits for the recovery of such deficiencies may be brought by Landlord from time to time, at its election; (e) Whether or not Landlord shall have collected any monthly deficiencies as aforesaid, Landlord shall, at its sole option, be entitled to recover from Tenant, and Tenant shall pay Landlord, on demand, as and for liquidated and agreed final damages, a sum equal to the amount by which the Fixed Rent and Additional Rent, payable hereunder for the period which otherwise would have constituted the unexpired portion of the Term (conclusively presuming the Operating Expenses and Taxes to increase five percent (5%) per annum from the year immediately preceding such termination or re-entry), exceeds the then fair and reasonable rental value of the Premises for the same period, both discounted to present worth at the rate of eight percent (8%) per annum. If, before presentation of proof of such liquidated damages to any court, commission or tribunal, the Premises, or any part thereof, shall have been relet by Landlord for the period which otherwise would have constituted the unexpired portion of the Term, or any part thereof, the amount of rent upon such reletting shall be deemed, prima facie, to be the fair and reasonable rental value for the part or the whole of the Premises so relet during the term of the reletting; (f) In no event (i) shall Tenant be entitled to receive any excess of such Net Rent over the sums payable by Tenant to Landlord hereunder, or (ii) shall Tenant be entitled in any suit by Landlord for the collection of damages pursuant to this Section to a credit in respect of any Net Rent from a reletting, except to the extent that such Net Rent is actually received by Landlord prior to the commencement of such suit. If the Premises or any part thereof are relet in combination with other space, then proper apportionment on a square foot area basis shall be made of the rent received from such reletting and of the expenses of reletting. SECTION 15.04. Any damages owed by Tenant to Landlord under this Article, if not paid when due, shall be paid with interest at the Interest Rate from the due date to the date of payment. SECTION 15.05. Nothing herein contained shall be construed as limiting or precluding the recovery by Landlord against Tenant of any sums or damages to which, in addition to the damages particularly provided above, Landlord may lawfully be entitled by reason of any uncured default hereunder on the part of Tenant. SECTION 15.06. Each right and remedy of Landlord provided for in this Lease shall be cumulative and shall be in addition to every other right and remedy provided for in this Lease, or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by Landlord of any one or more of the rights or remedies provided for in this Lease, or now or hereafter existing at law or in equity or by statute or otherwise, shall not preclude the simultaneous or later exercise by Landlord of any or all other rights or remedies provided for in this Lease or now or hereafter existing at law or in equity by statute or otherwise. ARTICLE 16 CURING TENANT'S DEFAULTS; FEES AND EXPENSES ------------------------------------------- SECTION 16.01. If Tenant shall default in the observance or performance of any term, covenant, or condition of this Lease on Tenant's part to be observed or performed, Landlord, without thereby waiving such default, may perform the same for the account and at the expense of Tenant, without notice in a case of emergency and in any other case if such default continues, subject to Unavoidable Delays, after twenty (20) days from the date of the giving by Landlord to Tenant of notice of intention so to do or such lesser period of notice in the event that a condition might constitute a default under a Superior Mortgage, Landlord may enter the Premises at any time to cure any such default. Bills for any expense incurred by Landlord in connection with any such performance by it for the account of Tenant, and bills for all costs, expenses and disbursements of every kind and nature whatsoever, including reasonable counsel fees, involved in collecting or 19 endeavoring to collect Fixed Rent or Additional Rent or other charge or any part thereof or enforcing or endeavoring to enforce any rights against Tenant, under or in connection with this Lease, or pursuant to law, including any such cost, expense and disbursement involved in instituting and prosecuting summary proceedings, as well as bills for any property, material, labor or services provided, furnished or rendered by Landlord to Tenant and any charges for services provided under this Lease, may be sent by Landlord to Tenant monthly or immediately, and shall be due and payable in accordance with the terms of said bills, and, if not paid when due, the amounts thereof shall immediately become due and payable as Additional Rent. Any such bill shall be payable with interest at the Interest Rate from the date Landlord incurs the charge or expense to the date of payment by Tenant to Landlord. Tenant's obligations under this Section shall survive the Expiration Date or sooner termination of the Term. ARTICLE 17 NON-LIABILITY AND INDEMNIFICATION --------------------------------- SECTION 17.01. (a) Except as provided in Section 17.02., neither Landlord -------------- nor Landlord's agents shall be liable to Tenant, its employees, agents, contractors, invitees and licensees, and Tenant shall save Landlord and Landlord's agents harmless of and from all loss, cost, liability, claim, damage and expense, including, but not limited to reasonable counsel fees, penalties and fines incurred in connection with or arising from any injury to Tenant its servants, employees, contractors, agents, visitors, invitees or licensees, or for any damage to, or loss (by theft or otherwise) of, any of Tenant's Property, irrespective of the cause of such injury, damage or loss (excluding Landlord's or its agents', employees', contractors', invitees' or licensees' negligence or willful misconduct). Any Building employees to whom any property shall be entrusted by or on behalf of Tenant shall be deemed to be acting as Tenant's agents with respect to such property, and neither Landlord nor Landlord's agents shall be liable for any loss of or damage to any such property by theft or otherwise. (b) In any action brought to enforce the obligations of Landlord under this Lease, any judgment or decree shall be enforceable against Landlord only to the extent of Landlord's interest in the Building and Common Areas, including rents, insurance proceeds and condemnation awards, and no such judgment shall be the basis of execution on, or be a lien on, assets of Landlord or any partner of Landlord other than Landlord's interest in the Building and Common Areas. SECTION 17.02. Neither (a) the performance by Landlord, Tenant or others of any construction, repairs, alterations, additions, installation of decorations or improvements in, to or on the Building, Common Areas, or the Premises, nor (b) the failure of Landlord or others to make any such repairs, alterations, additions, installation of decorations or improvements, nor (c) any damage to the Premises or to Tenant's Property, nor any injury to any persons, caused by other tenants or persons in the Building, or by operations in the construction of any private, public or quasi-public work, or by any other cause, nor (d) any latent defect in the Building, Common Areas, or in the Premises, nor (e) any temporary covering of any windows of the Premises for any reason whatsoever, including Landlord's own acts, nor any permanent covering of any such windows if required by law, order or regulation of Federal, county, state or municipal authorities or by any direction pursuant to law or any public officer, nor (f) any inconvenience or annoyance to Tenant or injury to or interruption of Tenant's business by reason of any of the events or occurrences referred to in the foregoing subdivisions (a) through (e) shall constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant of any of its obligations under this Lease. Landlord shall make all commercially reasonable efforts to correct or alleviate any such condition described in this Section 17.02. SECTION 17.03. Tenant agrees to indemnify and save Landlord and Landlord's agents harmless of and from all losses, costs, liabilities, claims, damages and expenses including, but not limited to reasonable counsel fees, penalties and fines, incurred in connection with or arising from (a) any default by Tenant in the observance or performance of any of the terms, covenants or conditions of this Lease on Tenant's part to be observed or performed, or (b) the use or occupancy or manner of use or occupancy of the Premises by Tenant or any person claiming through or under Tenant, or (c) any acts, omissions or negligence of Tenant or any such person, or the contractors, agents, servants, employees, visitors or licensees of Tenant, or any such person, in or about the Premises or the Building, or the Common Areas, either prior to, during, or after the expiration of the Term, including any acts, omissions or negligence in the making or performing or any improvements, or (d) failure, arising after the Commencement Date, to comply with the American 20 with Disabilities Act of 1990, as may be amended from time to time, with respect to the Premises in accordance with the terms and provisions of this Lease. If any action or proceeding shall be brought against Landlord or Landlord's agents, based upon any such claim, and if Tenant, upon notice from Landlord, shall cause such action or proceeding to be defended at Tenant's expense by counsel reasonably satisfactory to Landlord, without any disclaimer of liability by Tenant in connection with such claim, Tenant shall not be required to indemnify Landlord and Landlord's agents for counsel fees in connection with such action or proceeding. SECTION 17.04. Tenant shall pay to Landlord, within ten (10) days next following delivery by Landlord to Tenant of bills or statements therefor, sums equal to all losses, costs, liabilities, claims, damages and expenses referred to in Section 17.03. Tenant's obligations under this Article shall survive the ------------- Expiration Date or sooner termination of the Term. ARTICLE 18 SURRENDER --------- SECTION 18.01. On the last day of the Term or upon any earlier termination of this Lease, or upon any re-entry by Landlord upon the Premises pursuant to Section 15.01 (a), Tenant shall, at its own expense, quit and surrender the Premises to Landlord broom clean, in good order, condition and repair except for ordinary wear, tear and damage by fire or other insured casualty, together with all improvements which have been made upon the Premises (except as otherwise provided for in this Lease, including, but not limited to Article 9 above). --------- Tenant shall remove from the Premises and the Building all of Tenant's Property and all personal property and personal effects of all persons claiming through or under Tenant, and shall pay the cost of repairing all damage to the Premises and the Building occasioned by such removal. Notwithstanding anything to the contrary contained herein, in connection with Landlord's Construction, Landlord, by notice to Tenant no later than twenty (20) days prior to the Expiration Date or prior termination of this Lease, may require Tenant to leave any part or all of such Landlord's Construction in the Premises. SECTION 18.02. To the extent allowed by law, Tenant expressly waives, for itself and for any person claiming through or under Tenant, any rights which Tenant or any such person may have under any applicable law in connection with any holdover summary proceedings which Landlord may institute to enforce the provisions of this Article. SECTION 18.03. If the Premises are not surrendered at the expiration of the Term, such holding over without the written consent of the Landlord shall be construed to be a tenancy from month to month at one-twelfth (1/12th) of an amount equal to one and one-half times the Fixed Rent required to be paid by Tenant for the last full lease year of the Lease Term, together with an amount estimated by Landlord as equal to one-twelfth (1/12th) of the Additional Rent payable pursuant to this Lease, and shall otherwise be on the same terms and conditions as herein specified so far as applicable. Tenant shall indemnify Landlord against loss or liability resulting from delay by Tenant in so surrendering the Premises, including, but not limited to, reasonable attorneys fees and any claims made by any succeeding tenant found on such delay. Nothing contained in this Section 18.03 shall (a) imply or be deemed to grant Tenant any right to remain in the Premises after the termination of this Lease without the execution of a new lease, (b) imply any obligation on the part of Landlord to grant a new lease or (c) be construed to limit in any way any remedy that Landlord may have against Tenant as a holdover tenant, including but not limited to, resort to the summary process laws or enforcement of the foregoing indemnity obligation of Tenant. SECTION 18.04. Tenant's obligations under this Article shall survive the Expiration Date or sooner termination of this Lease. ARTICLE 19 INSURANCE --------- SECTION 19.01. Tenant shall not do anything, or suffer or permit anything to be done in or about the Building or Common Areas which shall (a) subject Landlord to any liability or responsibility for injury to any person or property by reason of any activity being conducted in the Premises, (b) cause any increase in the fire insurance rates applicable to the Building or equipment or other property located therein, or (c) be prohibited by any license or other permit required or 21 obtained pursuant to Section 5.03. Tenant, at Tenant's expense, shall comply ------------ with all requirements of the Connecticut Fire Safety Code. On the Commencement Date, the Premises shall comply with such Code (at Landlord's expense). SECTION 19.02. If by reason of any act or omission on the part Tenant, the rate of fire insurance with extended coverage on the Building, Common Areas, equipment or other property of Landlord or any other tenant or occupant of the Building shall be higher than it otherwise would be, Tenant shall reimburse Landlord and all such other tenants or occupants, on demand, for that part of the premiums for fire insurance and extended coverage paid by Landlord and such other tenants or occupants because of such act or omission on the part of Tenant. SECTION 19.03. (a) Tenant shall obtain and keep in full force and effect during the Term for the benefit of Landlord, and any mortgagees of which Landlord gives Tenant written notice and Tenant, at Tenant's own cost and expense and in the following amounts or such greater amounts as Landlord or the holder of the Superior Mortgages may reasonably request, (i) Public Liability Insurance, such insurance to afford protection in an amount not less than $5,000,000 for personal injury or death, and $1,000,000 for damage to property, protecting Landlord and Tenant as insureds against any and all claims for personal injury, death or property damage occurring in, upon, adjacent to or connected with the Premises or any part thereof; and (ii) insurance against loss or damage by fire, and such other risks and hazards as are insurable under present and future standard forms of fire and "all-risk" form insurance policies, for Tenant's Property and for all improvements performed on behalf of Tenant by Landlord for the full insurable value thereof, protecting Landlord, the holder of the Superior Mortgages, and Tenant as insureds as their respective interests may appear; (iii) contractual liability insurance in the amounts specified above insuring Tenant's liability pursuant to Article 17 hereof; (iv) ---------- worker's compensation coverage as required by law; and (v) with respect to alterations or improvements permitted to be made by Tenant under this Lease, contingent liability and builder's insurance, in an amount reasonably satisfactory to Landlord. (b) Tenant shall obtain such other insurance in such amounts as may from time to time be reasonably required by the Landlord against other insurable hazards which at the time are commonly insured against resulting from a change in local practice in the case of construction or alteration of buildings and/or in the case of premises similarly situated, due regard being given to the type of building, its location, construction, use and occupancy. (c) Said insurance is to be written in form and substance reasonably satisfactory to Landlord, by an insurance company with a rating of A or better from a recognized rating company such as Bests and which company shall be licensed to write such insurance in the State of Connecticut. Tenant shall procure, maintain and place such insurance and pay all premiums and charges therefor and, upon failure to do so, Landlord may, but shall not be obligated to, after written notice to Tenant in accordance with this Lease, procure, maintain and place such insurance or make such payments, and in such event Tenant agrees to pay the amount thereof, plus interest at the Interest Rate, to Landlord on demand, and said sums shall be in each instance collectible as Additional Rent on the first day of the month following the date of payment by Landlord. Tenant shall cause to be included in all such insurance policies a provision to the effect that (i) the same will not be cancelled or renewed except upon twenty (20) days' prior written notice to Landlord, and (ii) Landlord will receive at least twenty (20) days' prior written notice of any material changes in the terms or conditions of all such insurance policies. On the Commencement Date, the original insurance policies or appropriate certificates thereof shall be deposited with Landlord. Any renewals, replacements or endorsements thereto shall also be deposited with Landlord to make certain that said insurance shall be in full force and during the Term. SECTION 19.04. Each party shall include in each of its fire and extended coverage insurance policies (insuring the Building, Common Areas and Landlord's property therein, in the case of Landlord, and insuring Tenant's Property and business interest in the Premises, in the case of Tenant, against loss, damage or destruction by fire or other casualty) a waiver of the insurer's right of subrogation against the other party, to the extent available and in the case of Tenant, an additional waiver of insurer's right of subrogation against Mill Management Inc. and Greenwich Associates, Inc. The policy of insurance or certificate thereof delivered to Landlord shall include reference to the waiver of subrogation referred to above. SECTION 19.05. Each party hereby waives any right of recovery against the other for any loss occasioned by fire or other casualty which is an insured risk under such policies, and each shall look solely to the proceeds of such policies for any loss occasioned by fire or other casualty which is an insured risk under such policies. 22 SECTION 19.06. Throughout the Term Landlord shall maintain (i) public liability insurance affording coverage in amounts typically carried by other similarly situated landlords in the Greenwich, Connecticut area, (ii) "all risk" property insurance covering the Building and other improvements on the Land for their full replacement value, and (iii) such other insurance as is required under any Superior Mortgage or as shall then be being carried by similarly situated landlords generally in the Greenwich, Connecticut area. ARTICLE 20 SUBORDINATION AND ATTORNMENT ---------------------------- SECTION 20.01. This Lease, and all rights of Tenant hereunder are and shall be subject and subordinate, in all respects, to (a) all future ground leases, overriding leases and underlying leases and/or grants of term of the Land and/or the Building or the portion thereof in which the Premises are located in whole or in part; (b) all mortgages and building loan agreements, including leasehold mortgages and building loan agreements, which may now or hereafter affect the Land and/or the Building (collectively, the "SUPERIOR MORTGAGES"), whether or not the Superior Mortgages shall also cover other lands and/or buildings; and (c) each and every advance made or hereafter to be made under the Superior Mortgages and to all renewals, modification, replacements, substitutions and extentions of the Superior Mortgage, and spreaders and consolidations of the Superior Mortgages. The provisions of this Section shall be self-operative, and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall promptly execute and deliver, at its own cost and expense, any instrument, in recordable form if required, that Landlord or the holder of a Superior Mortgage or any of their respective successors in interest may reasonably request to evidence such subordination, and Tenant hereby constitutes and appoints Landlord attorney-in-fact for Tenant to execute any such instrument for and on behalf of Tenant. SECTION 20.02. If, at any time prior to the expiration of the Term, the holder of a Superior Mortgage shall become the owner of the Building as a result of foreclosure of its mortgage or conveyance of the Building, or become a mortgagee in possession of the Land or the Building, Tenant agrees, at the election and upon demand of any owner of the Land or the Building, or of the holder of any Superior Mortgage (including a leasehold mortgagee) in possession of the Land or the Building, to attorn, from time to time, to any such owner, holder or lessee, upon the then executory terms and conditions of this Lease, provided that such owner, holder or lessee, as the case may be, shall then be entitled to possession of the Premises. Such successor in interest to Landlord shall not be bound by (a) any payment of Fixed Rent or Additional Rent for more than one month in advance, except prepayment in the nature of security for the performance by Tenant of its obligations under the Lease, (b) any amendment, modification or termination of this Lease made without the consent of the holder of the Superior Mortgage or such successor in interest whose name is disclosed to Tenant, (c) any offsets which may be asserted by the lessee hereunder against payments of rent as a result of any default by or claims against Landlord hereunder arising prior to the date such sccessor takes possession of the Premises, or (d) any obligation by Landlord as lessor hereunder to perform any work or grant any concession without the mortgagees' express assumption of such obligation to perform work or grant such concession. The foregoing provisions of this Section shall inure to the benefit of any such owner, holder or lessee and shall be self-operative upon any such demand, and no further instrument shall be required to give effect to said provisions, although Tenant shall execute such an instrument upon request of the holder of a Superior Mortgage. SECTION 20.03. Tenant shall execute and deliver to Landlord within a reasonable period of time any reasonable modifications of this Lease required or requested by the holder or potential holder of a Superior Mortgage, provided that no such modification shall adversely affect Tenant's rights or obligations hereunder. SECTION 20.04. Landlord represents that as of the date of this Lease the only holder of a Superior Mortgage is New York Life Insurance Company and, to the best of Landlord's knowledge, there are no defaults under such Superior Mortgage. 23 ARTICLE 21 ACCESS; CHANGE IN FACILITIES ---------------------------- SECTION 21.01. Landlord reserves the right, at any time and at Landlord's sole cost and expense, without incurring any liability to Tenant therefor, to make such changes in or to the Building and the fixtures and equipment of the Building, as well as in the entrances, passageways, halls, doors, doorways, corridors, elevators, escalators, stairs, toilets and other Common Areas, as it may deem necessary or desirable, provided any such change does not deprive Tenant of access to the Premises, unreasonably interfere with the use of the Premises, reduce either disproportionately or by more than one (1) the number of parking spaces allocated to Tenant, or reduce the rentable square footage of the Premises in excess of one percent (1%) (without an appropriate adjustment in Fixed Rent due to such reduction in square footage of the Premises). SECTION 21.02. Tenant shall permit Landlord to install, use and maintain pipes, ducts and conduits within or through the Premises, or through the walls, columns and ceilings therein, provided that the installation work is performed at such times and by such methods as will not reduce the useable office space in the Premises or unreasonably interfere with Tenant's use and occupancy of the Premises or damage the appearance thereof. SECTION 21.03. Landlord or Landlord's agents shall have the right to enter the Premises at all times for any of the purposes specified in this Article: (a) to examine the Premises, to perform any obligation of Landlord or to exercise any right or remedy reserved to Landlord in this Lease; (b) to exhibit the Premises to a prospective purchaser, mortgagee or ground lessor of the Building, or others and, during the last twelve (12) months of the Lease Term, to exhibit the Premises to prospective tenants; (c) to make such repairs, alterations, improvements or additions or to perform such maintenance, including the maintenance of all air conditioning, elevator, plumbing, electrical, sanitary, mechanical and other service or utility systems, as Landlord may deem necessary or desirable; (d) to take all materials into and upon the Premises that may be required in connection with any such repair, alterations, improvements, additions or maintenance; and (e) to alter, renovate and decorate the Premises if Tenant shall have removed all or substantially all of Tenant's Property from the Premises. Notwithstanding the foregoing, except in emergencies or Tenant's uncured default hereunder, all entries by Landlord under this Section shall be at reasonable times, upon prior notice, and shall be conducted so as not to interfere unduly with Tenant's use and occupancy of the Premises. SECTION 21.04. The exercise of any right reserved to Landlord in this Article shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent (except as specifically provided herein), or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Landlord or Landlord's agents, or upon the holder of a Superior Mortgage. ARTICLE 22 INABILITY TO PERFORM AND WAIVERS -------------------------------- SECTION 22.01. This Lease and the obligations of Tenant to pay rent and perform all of the terms, covenants and conditions on the part of Tenant to be performed shall in no way be affected, impaired or excused because Landlord, due to Unavoidable Delay, is (a) unable to fulfill any of its obligations under this Lease, or (b) unable to supply or delayed in supplying any service expressly or impliedly to be supplied, or (c) unable to make or delayed in making any repairs, replacements, additions, alterations or decorations, or (d) unable to supply or delayed in supplying any equipment or fixtures. Landlord shall in each instance exercise reasonable diligence to effect performance when and as soon as possible. However, Landlord shall be under no obligation to pay overtime labor rates. SECTION 22.02. In the event Landlord commences any summary proceeding or other action for non-payment of rent, to the extent permitted by applicable law, Tenant covenants and agrees that it will not interpose any counterclaim in any such proceeding, unless by non-assertion such claim would be precluded or deemed waived. SECTION 22.03. To the extent permitted by applicable law, Landlord and Tenant hereby waive trial by jury in any action, proceeding or permitted counterclaim brought by either against the other on any matter arising out of or in any way connected with this Lease, the relationship of Landlord 24 and Tenant, Tenant's use or occupancy of the Premises, any claim of injury or damage, or any emergency or other statutory remedy with respect thereto. SECTION 22.04. The failure of Landlord to insist in any one or more instances upon the strict performance of any one or more of the agreements, terms, covenants, conditions or obligations of this Lease, or to exercise any right, remedy or election herein contained, shall not be construed as a waiver or relinquishment for the future of the performance of such one or more obligations of this Lease or of the right to exercise such election, but the same shall continue and remain in full force and effect with respect to any subsequent breach, act or omission, whether of a similar nature or otherwise. The manner of enforcement or the failure of Landlord to enforce any of the Rules and Regulations against Tenant and/or any other tenant in the Building shall not be deemed a waiver of any such Rules and Regulations, but Landlord shall enforce or not enforce any future Rules and Regulations against all tenants of the Building uniformly. SECTION 22.05. The following specific provisions of this Section shall not be deemed to limit the generality of the foregoing provisions of this Article: (a) No agreement to accept a surrender of all or any part of the Premises shall be valid unless in writing and signed by Landlord. No delivery of keys shall operate as a termination of this Lease or a surrender of the Premises. (b) The receipt or acceptance by Landlord of rents with knowledge of breach by Tenant of any term, covenant or condition of this Lease shall not be deemed a waiver of such breach. (c) No payment by Tenant or receipt by Landlord of a lesser amount than the correct Fixed Rent or Additional Rent shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed to effect or evidence an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance the balance or to pursue any other remedy in this Lease or provided by law. SECTION 22.06. The provisions of this Article shall survive the Expiration Date or sooner termination of this Lease. ARTICLE 23 QUIET ENJOYMENT --------------- SECTION 23.01. If, and so long as, Tenant pays the Fixed Rent and Additional Rent and keeps and performs each and every term, covenant and condition herein contained on the part and on behalf of Tenant to be kept and performed, Tenant shall quietly enjoy the Premises without hindrance or molestation by Landlord or anyone claiming by, through or under Landlord, subject to the terms, covenants and conditions of this Lease. ARTICLE 24 RULES AND REGULATIONS --------------------- SECTION 24.01. Tenant, its servants, employees, agents, visitors, invitees and licensees shall faithfully observe and strictly comply with, and shall not permit violation of, the Rules and Regulations annexed as EXHIBIT E, and such --------- reasonable changes therein (whether by modification, elimination or addition) as Landlord hereafter may make and communicate in writing to Tenant ("RULES AND REGULATIONS"). Any future Rules and Regulations shall be enforced or not enforced against all tenants of the Building uniformly, and any subsequent changes made by Landlord shall be consistent with the standards of first-class commercial office buildings in the Greenwich, Connecticut area generally. SECTION 24.02. The Building may be designated and known by any name Landlord may choose, and such name or designation may be changed from time to time in Landlord's sole discretion. SECTION 24.03. If an excavation or other substructure shall be undertaken or authorized upon land adjacent to the Building or beneath the Building, Tenant, without liability on the part of the Landlord therefor, shall afford to the person causing or authorized to cause such excavation or other substructure work license to enter upon the Premises for the purpose of doing such work as such person shall deem necessary to protect or preserve any of the walls or structures of the Building or surrounding land from injury or damage and to support the same by proper foundations, pinning 25 and/or underpinning, and, except in case of emergency, Landlord shall endeavor to have such entry accomplished during reasonable hours in the presence of a representative of Tenant, who shall be designated by Tenant promptly upon Landlord's request. The said license to enter shall not constitute an actual or constructive eviction, in whole or in part, or entitle Tenant to any abatement or diminution of rent, or relieve Tenant from any of its obligations under this Lease, or impose any liability upon Landlord or Landlord's agents, provided that the work is concluded with reasonable diligence and performed in a commercially reasonable manner. SECTION 24.04. Tenant shall give notice to Landlord, promptly after Tenant learns thereof, of (a) any accident in or about the Premises, (b) all fires in the Premises, (c) all damages to or defects in the Premises including the fixtures, equipment and appurtenances thereof, for the repair of which the Landlord might be responsible or which constitutes Landlord's property; and (d) all damages to or defects in any parts or appurtenances to the Building's air conditioning, elevator, plumbing, electrical, sanitary, mechanical or other service or utility system located in or passing through the Premises. SECTION 24.05. Tenant will not require, permit, suffer or allow the cleaning of any window in the Premises from the outside without Landlord's prior written consent and unless the equipment and safety devices required by law, ordinance, rules and regulations are provided and used. Tenant hereby agrees to indemnify Landlord and Landlord's agents for all losses, damages or fines suffered by them as a result of the Tenant's requiring, permitting, suffering or allowing any window in the Premises to be cleaned from the outside in violation of the requirements of the aforesaid laws, ordinances, regulations and rules. ARTICLE 25 BROKERAGE --------- SECTION 25.01. Tenant and Landlord each represent to the other that in the negotiation of this Lease it dealt with no real estate broker or salesperson except as set forth in ITEM 11 of the Data Sheet. Landlord shall compensate such broker pursuant to a separate agreement. Tenant hereby agrees to indemnify Landlord and hold it harmless from any and all losses, damages and expenses arising out of any inaccuracy or alleged inaccuracy of the above representation on the part of Tenant, including court costs and attorneys' fees. Landlord shall have no liability for brokerage commissions arising out of a sublease by Tenant, and Tenant shall and does hereby indemnify and hold Landlord harmless from any and all liability for brokerage commissions arising out of any such sublease. ARTICLE 26 NOTICES AND ESTOPPEL CERTIFICATE -------------------------------- SECTION 26.01. All notices, demands or communications given under this Lease shall be sent to the addresses set forth above, or to such other addresses as the parties may designate by written notice, and shall be sent by prepaid registered or certified mail, return receipt requested, and shall any lessor or prospective lessor thereof, by any lessee or prospective lessee thereof, or by any prospective assignee of any mortgage thereof. Failure to deliver the certificate within the ten (10) day period described above shall be conclusive on Tenant that this Lease is in full force and effect and has not been modified except as may be represented by Landlord and that, except as Landlord may have been previously notified in writing, Landlord is not in default of any term, covenant or condition contained in this Lease. (b) At the request of Landlord, Tenant shall enter into an agreement, not inconsistent with the terms of this Lease, to pay the Fixed Rent and Additional Rent to a mortgagee of Landlord upon receipt of a notice from such mortgagee that Landlord is in default under the note held by such mortgagee. (c) Prior to taking occupancy of the Premises, Tenant will deliver to Landlord to fully executed Estoppel Certificate in substantially the form attached hereto as EXHIBIT F. --------- ARTICLE 27 SECURITY DEPOSIT ---------------- [Intentionally Deleted] ARTICLE 28 PARTIES BOUND ------------- SECTION 28.01. The terms, covenants and conditions contained in this Lease shall bind and benefit the successors and assigns of the parties with the same effect as if mentioned in each instance where a party is named or referred to, except that no violation of the provisions of Article 7 shall operate to vest --------- any rights in any successor or assignee or Tenant and that the provisions of this Article shall not be construed as modifying the conditions of limitation contained in Article 14. ---------- SECTION 28.02. The obligations of Landlord arising under this Lease shall no longer be binding upon Landlord named herein after the sale, assignment or transfer by Landlord named herein (or upon any subsequent landlord after the sale, assignment or transfer by such subsequent landlord) of its interest in the Building as owner or lessee, and, in the event of such sale, assignment or transfer, such obligations shall thereafter be binding upon the grantee, assignee or other transferee of such interest, and any such grantee, assignee or transferee, by accepting such interest, shall be deemed to have assumed such obligations. A lease of Landlord's entire interest in the Building shall be deemed a transfer for the purposes of this Section. SECTION 28.03. In connection with the provisions of this Lease and the obligations and covenants of Landlord herein set forth, if Landlord or any successor in interest be an individual, joint venture, tenancy-in-common, co-partnership, unincorporated association, or other unincorporated aggregate of individuals (all of which are referred to below, individually and collectively, as an "UNINCORPORATED LANDLORD"), or a limited liability company, a limited liability partnership or any other entity which possesses the characteristics of limited liability (all of which are referred to below, individually and collectively, as a "LIMITED LIABILITY LANDLORD"), then anything elsewhere to the contrary notwithstanding, Tenant shall look solely to the estate and property of such unincorporated landlord or limited liability landlord in the Building and Common Areas, including rents, insurance proceeds and condemnation awards, for the satisfaction of Tenant's remedies, for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms, covenants and conditions of this Lease to be observed and/or performed by Landlord. No other property or assets of such unincorporated landlord, or any general or limited partner thereof, or of such limited liability landlord, shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies. SECTION 28.04. Any provision of this Lease which requires Landlord not to unreasonably withhold its consent shall never be the basis for an award of damages or give rise to a right of setoff to the other party, but may be the basis for a declaratory judgment or specific injunction with respect to the matter in question. Notwithstanding the foregoing, if it is determined by a court action that Landlord unreasonably withheld its consent to Tenant subletting the Premises or assigning this Lease and Tenant was damaged thereby, Tenant shall be entitled to damages therefor. SECTION 28.05. Nothing contained in this Lease shall be deemed to confer upon any other tenant, or anyone claiming under or through any other tenant, any right to insist upon, or to enforce 27 against Landlord or Tenant, the performance or observance by Tenant of its obligations hereunder or under the Rules and Regulations. ARTICLE 29 ENTIRE AGREEMENT; NO OTHER REPRESENTATIONS; ------------------------------------------- GOVERNING LAW; SEPARABILITY --------------------------- SECTION 29.01. This Lease contains the entire agreement between the parties, and all prior negotiations and agreements are merged in this Lease. This Lease may not be changed, modified or discharged, in whole or in part, except by a written instrument executed by the party against whom enforcement of the change, modification or discharge is sought. SECTION 29.02. Tenant expressly acknowledges that neither Landlord nor Landlord's agents has made or is making, and Tenant, in executing and delivering this Lease, is not relying upon any warranties, representations, promises or statements, except to the extent that the same are expressly set forth in this Lease. No rights, easements or licenses are or shall be acquired by Tenant, by implication or otherwise, unless expressly set forth in this Lease. SECTION 29.03. This Lease shall be governed in all respects by the laws of the State of Connecticut. SECTION 29.04. Each covenant and agreement in this Lease shall be construed to be a separate and independent covenant and agreement, and the breach of any such covenant or agreement by Landlord shall not discharge or relieve Tenant from Tenant's obligations to perform every covenant and agreement of this Lease to be performed by Tenant. If any term or provision of this Lease or any application thereof shall be invalid or unenforceable, the remainder of this Lease and any other application of such term shall not be affected thereby. SECTION 29.05. This Lease may be executed in two or more counterparts, each of which shall be considered an original, and all of which shall constitute one and the same instrument. ARTICLE 30 MISCELLANEOUS PROVISIONS ------------------------ SECTION 30.01. Terms negotiated by Landlord and Tenant that add to or vary from the provisions of this Lease, if any, are set forth at ITEM 13 OF THE DATA SHEET. SECTION 30.02. All indemnifications contained in this Lease shall survive the expiration or early termination of this Lease. IN WITNESS WHEREOF Landlord and Tenant have duly executed this Lease as of the day and year first above written. Signed, Sealed and Delivered in the Presence of: FAWN ASSOCIATED LIMITED PARTNERSHIP, Landlord /s/ Amy B. Levantin By: /s/ Steven J. Schacter - -------------------------- ------------------------------- Steven J. Schacter [SIGNATURE ILLEGIBLE] Its Authorized Representative - -------------------------- FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, Tenant [SIGNATURE ILLEGIBLE] By: [SIGNATURE ILLEGIBLE] - -------------------------- ------------------------------- /s/ Mary Jo D'Andrea Its: Senior Vice President - -------------------------- 28 STATE OF CONNECTICUT ) ) ss. Greenwich March 25, 1996 COUNTY OF FAIRFIELD ) Personally appeared Steven J. Schacter, the authorized representative of FAWN ASSOCIATES LIMITED PARTNERSHIP, signer and sealer of the foregoing instrument, and acknowledged the same to be his free act and deed and the free act and deed of said Limited Partnership, before me. /s/ Elaine E. Seeds ------------------------------------- Notary Public My Commission Expires: [STAMP APPEAR HERE] STATE OF CONNECTICUT ) ) ss. Greenwich March 22, 1996 COUNTY OF FAIRFIELD ) Personally appeared John Rinaldi Sr. Vice President of FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, signer and sealer of the foregoing instrument, and acknowledged the same to be his free act and deed and the free act and deed of said Corporation, before me. [SIGNATURE ILLEGIBLE] ------------------------------------- Notary Public My Commission Expires: 4/30/97 EXHIBIT A --------- LAND DESCRIPTION ---------------- BEGINNING at a point formed by the intersection of the division line between land now or formerly of Epstein and the premises herein described with the easterly line of Weaver Street and proceeding thence along land of Epstein South 77 degrees 03' East 519.79 feet to land now or formerly of Peter Mitchell, et al, thence along land of Peter Mitchell et al to and along land of Duclay Realty Corp. and Space Realty Co. North 63 degrees 26' East 111.41 feet, North 59 degrees 02' East 27.84 feet, North 57 degrees 02' East 81.37 feet, North 49 degrees 53' East 154.4 feet and North 63 degrees 52' East 225.5 feet to land now or formerly of Gospodinoff; thence along land of Gospodinoff North 2 degrees 29' West 61.4 feet, North 7 degrees 05' West 25.1 feet, North 14 degrees 20' East 16.9 feet, North 55 degrees 00' East 58.9 feet, North 55 degrees 18' East 190.1 feet, North 59 degrees 22' East 10.0 feet, North 38 degrees 19' East 32.1 feet, North 47 degrees 25' East 11.1 feet, North 57 degrees 39' East 53.1 feet, North 61 degrees 22' East 29.1 feet, North 49 degrees 25' East 22.9 feet and North 71 degrees 24' East 44.8 feet to the westerly line of Valley Drive, thence along the westerly line of Valley 12.1 feet on the arc of a circle curving to the left on a radius of 151.3 feet; thence still along the westerly line of Valley Drive North 9 degrees 38' West 281.23 feet and South 80 degrees 22' West 1.75 feet to land now or formerly of Willers; thence along land of Willers North 9 degrees 52' West 100.56 feet and North 10 degrees 28' West 76.1 feet to land now or formerly of Mellick; thence along land of Mellick South 64 degrees 37' West 19.3 feet, South 85 degrees 07' West 38.6 feet, South 62 degrees 53' West 38.5 feet and South 46 degrees 54' West 84.5 feet to land now or formerly of Berry; thence along land now or formerly of Berry South 24 degrees 51' West 17.5 feet South 14 degrees 22' West 108.6 feet, South 9 degrees 52' West 58.3 feet; South 51 degrees 02' West 25.6 feet, South 47 degrees 54' West 99.3 feet, South 38 degrees 38' West 19.0 feet, North 83 degrees 12' West 17.1 feet, South 22 degrees 44' West 93.6 feet, North 66 degrees 00' West 64.8 feet, North 30 degrees 20' West 30.6 feet, North 5 degrees 32' West 24.6 feet, North 33 degrees 41' West 27.2 feet and North 62 degrees 32' West 86.9 feet, thence through other land of Fawn Associates South 11 degrees 35' 30" East 324.12 feet, South 38 degrees 08' 40" West 97.0 feet, North 51 degrees 51' 20" West 241.03 feet, South 38 degrees 08' 40" West 265.0 feet, South 44 degrees 51' 20" West 149.72 feet and North 77 degrees 03' West 148.0 feet to the easterly line of Weaver Street; thence along the easterly line of Weaver Street South 27 degrees 56' East 294.8 feet and South 9 degrees 18' West 14.6 feet to the point or place of beginning. EXHIBIT B --------- LANDLORD'S CONSTRUCTION ----------------------- Landlord's Construction will be performed in accordance with plans drawn for F.M.A.C., entitled Greenwich Office Park Five, 4th Floor, Greenwich, CT, by R.S. Granoff Architects, P.C. dated February 26, 1996, including drawings A1 through A5, as amended by an Addendum to Contract Documents, dated February 26, 1996 (collectively "Plans") except the water fountain referred to in such Addendum shall not be removed, which Plans are incorporated in this Lease by this reference; provided, however, Tenant shall pay for one (1) 7'-4" h., 3/8" th. tempered glass side-lite. Notwithstanding anything to the contrary contained in the Plans, Landlord shall construct an access panel from the Premises to the bridge to 2 Greenwich Office Park. Furthermore, if any of the terms and provisions of this Lease conflict with the Plans, the terms and provisions of this Lease shall govern. EXHIBIT C --------- [FLOOR PLAN APPEARS HERE] EXHIBIT D --------- CLEANING, JANITOR AND ROUTINE MAINTENANCE SERVICE ------------------------------------------------- Cleaning, Janitor, and Routine Maintenance Service will be provided as follows: NIGHTLY Empty and clean wastepaper baskets, ashtrays and other receptacles. Sweep all flooring, vacuum clean or carpet sweep (as required) all carpets and rugs. Sweep or dust stone, ceramic tile, marble, terrazzo and other unwaxed flooring, excluding kitchen area (cleaning of kitchen is tenant's responsibility). Dust and wipe clean all office furniture and window sills. Wipe clean all water fountains and coolers. Dust all leather and leather-type furniture. Sweep and dust all private stairways. Dust all chair rails, baseboards and trim. Replace plastic bags in wastebaskets when necessary - cost per bag charged to Tenant. Remove normal wastepaper and refuse; cost of unusual waste removal to be charged to Tenant. Clean and wash one men's and one women's washroom per floor. Paper towels, toilet tissue and soap provided by Landlord and, unless bathrooms are common bathrooms, billed to Tenant directly. After cleaning, all lights shall be turned off, windows closed, doors locked and offices left in an orderly condition. MONTHLY Dust all pictures, frames, charts, graphs, and similar wall hangings not reached in nightly cleaning. QUARTERLY Dust all venetian blinds. ANNUALLY Dust ceiling surfaces other than acoustical ceiling material and vacuum clean only acoustical materials and other similar surfaces, if necessary. WINDOW CLEANING Wash all interior and exterior windows quarterly. SIDEWALKS, ENTRANCES, ROADWAYS AND PARKING AREAS: To be kept free and clear of refuse, snow and ice. AS REQUIRED BY TENANT Clean inside of all lighting fixtures and globes at cost to Tenant. EXHIBIT E --------- RULES AND REGULATIONS ATTACHED TO AND MADE A PART OF THIS LEASE IN ACCORDANCE WITH ARTICLE 24 ---------------------------------------- 1. The sidewalks, entrances, driveways, passages, courts, elevators, vestibules, stairways, corridors or halls shall not be obstructed or encumbered by any tenant or used for any purpose other than for ingress to and egress from the Premises and for delivery of such merchandise and equipment in a prompt and efficient manner using elevators and passageways designated for such delivery by Landlord. There shall not be used in any space, or in the public hall of the Building, either by any tenant or any jobbers or others in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and sideguards. 2. The water and wash closets and plumbing fixtures shall not be used for any purpose other than those for which they were designed or constructed and no sweepings, rubbish, rags, acids or other substances shall be deposited therein, and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the tenant who, or whose clerks, agents, employees or visitors, shall have caused it. 3. No carpet, rug or other article shall be hung or shaken out of any window of the Building; and no tenant shall sweep or throw or permit to be swept or thrown from the Premises any dirt or other substances into any of the corridors or halls, elevators, or out of the doors or windows or stairways of the Building, and Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Premises, or permit or suffer 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 and/or vibrations, or interfere in any way with other tenants or those having business therein, nor shall any animals or birds be kept in or about the Building. Smoking or carrying lighted cigars or cigarettes is prohibited in the Common Areas of the Building, including, but not limited to, the elevators, lobby, stairwells and hallways. 4. No awnings or other projections shall be attached to the outside walls of the Building without the prior written consent of Landlord. 5. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by any tenant on any part of the outside of the Premises or the Building or on the inside of the Premises if the same is visible from the outside of the Premises without the prior written consent of Landlord, except that the name of Tenant may appear on the entrance door of the Premises after approval by Landlord. Tenant shall be entitled to a listing on the lobby and Greenwich Office Park directories. In the event of the violation of the foregoing by any tenant, Landlord may remove same without any liability, and may charge the expense incurred by such removal to the tenant without violating this rule. Interior signs on doors shall be inscribed, painted or affixed by Tenant, at the expense of Tenant, and shall be of a size, color and style acceptable to Landlord. 6. Except for changes and alterations which the Lease permits Tenant to make, no tenant shall mark, paint, drill into, or in any way deface any part of the Premises or the Building of which they form a part. No cutting or stringing of wires shall be permitted, except with the prior written consent of Landlord, and as Landlord may direct. No tenant shall lay linoleum, or other similar floor covering, so that the same shall come in direct contact with the floor of the Premises, and, if linoleum or other similar floor cover is desired to be used, an interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water, the use of cement or other adhesive material being expressly prohibited. 7. No tenant shall obtain for use upon the Premises ice, drinking water, towel and other similar services, or accept barbering or bootblacking services in the Premises, except from persons authorized by Landlord, which authorization shall not be unreasonably withheld or delayed. and at hours and under regulations fixed by Landlord. Canvassing, soliciting and peddling in the Building is prohibited and each tenant shall cooperate to prevent the same. 8. Landlord reserves the right to exclude from the Building between the hours of 6 p.m. and 8 a.m. and all hours on Sundays, and legal holidays all persons who do not present a pass to the Building signed by Landlord. Landlord will furnish passes to persons for whom any tenant requires same in writing. Each tenant shall be responsible for all persons for whom he requests such pass and shall be liable to Landlord for all acts of such persons. 9. Landlord shall have the right to prohibit any advertising by any tenant which, in Landlord's reasonable opinion, tends to impair the reputation of the Building or its desirability as a building for offices, and upon written notice from Landlord, Tenant shall refrain from or discontinue such advertising. 10. Tenant shall not bring or permit to be brought or kept in or on the Premises, any inflammable, combustible or explosive fluid, material, chemical or substance, or cause or permit any odors of cooking or other processes, or any unusual or other objectional odors to emanate from the Premises. 11. If the Building contains central air conditioning and ventilation, Tenant agrees to keep all windows closed at all times and to abide by any rules and regulations issued by the Landlord with respect to such services. If Tenant requires air conditioning or ventilation after the usual hours, Tenant shall, unless alternative arrangements are made, give notice in writing to the Building superintendent prior to 3 p.m. in the case of services required on week days, and prior to 3 p.m. on the day prior in the case of service required on weekends or on holidays. 12. No smoking of cigars or pipes shall be permitted in the Premises or the Building. EXHIBIT F --------- TENANT ESTOPPEL CERTIFICATE --------------------------- Re: _____________________________________ The undersigned, as Lessee under that certain Lease dated _______________, 19__, made with _________________________________, as Lessor, does hereby certify to New York Life Insurance Company, 51 Madison Avenue, New York, New York 10010: 1. That its leased premises at the above location have been completed in accordance with the terms of the Lease, subject to punchlist items, that it has accepted possession of said premises and that it now occupies the same, and is open for business: 2. That the Lease term began on ___________________________, 19__, that it began paying rent on ________________________, 19__, that it pays rent on a current basis, that, save only as may be required by the terms of the Lease, no rent has been or will be paid by the Lessee during the term of this lease for more than one month in advance, that the rent payable under the Lease is the amount of fixed rent provided thereunder, which is net annual rent payable to Lessor of $______________, and that there is no claim or basis for an adjustment thereto; 3. That to Lessee's knowledge there exist no defenses or offsets to enforcement of the Lease by the Lessor and that there are, as of the date hereof, no defaults or breaches on the part of the Lessor under the Lease known to the undersigned and the undersigned has made no claim against the Lessor; 4. That the Lease is now in full force and effect and has not been amended, modified or assigned and the Lease is the only agreement between Lessor and the undersigned regarding the leased premises; 5. That all required parking spaces have been furnished and/or all parking ratios have been met. 6. That the Lessee shall not look to New York Life, it successors or assigns for the return of the security deposit, if any, under the Lease unless the same is actually delivered to New York Life as security for our performance under the Lease. 7. That Lessee is in full compliance (to the extent such compliance is Lessee's responsibility under the Lease) with all Federal, State and Local laws, ordinances, rules and regulations affecting its use of the premises, including, but not limited to the handling, storage and disposal of hazardous and/or toxic materials used or generated as a result of its business conducted on or about the leased premises. It is understood that New York Life requires this statement from the undersigned as a condition to the making of a loan to the owners of the property comprising the leased premises, secured by a first mortgage thereon and also by an assignment of the Lease as collateral security. Dated:_______________________________ Lessee: FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC By:__________________________________ Name:________________________________ Title:_______________________________ EXHIBIT G --------- GUARANTY AGREEMENT ------------------ THIS GUARANTY AGREEMENT is dated as of March______, 1996 by and between IMPERIAL CREDIT INDUSTRIES, INC., a California corporation, (the "GUARANTOR"), and FAWN ASSOCIATES LIMITED PARTNERSHIP, a Connecticut limited partnership ("LESSOR"). WHEREAS, the Guarantor is affiliated with FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, a California limited liability company (the "LESSEE"); and WHEREAS, Guarantor wishes Lessee to enter into that certain Lease between Lessor and Lessee dated as of March________, 1996 (the "LEASE"), providing for the Lease by Lessor to Lessee of certain premises in 5 Greenwich Office Park, Greenwich, Connecticut, which premises are more particularly described in the Lease; and WHEREAS, Lessor is unwilling to enter into the Lease with Lessee unless Guarantor enters into this Guaranty Agreement; and WHEREAS, Guarantor is willing to enter into this Guaranty Agreement; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Guarantor unconditionally guarantees the due and punctual payment of all Fixed Rent, Additional Rent, interest charges or other amounts provided for in the Lease and all other sums at any time becoming due and payable by Lessee (including damages provided for in the Lease, or damages allowed by law upon any Lessee default) and the performance of all of Lessee's obligations under the Lease. 2. The above guaranty is an absolute, unconditional, continuing guaranty of payment and performance and not of collectibility, and is in no way conditioned or contingent upon any attempt to collect from Lessee or upon any other condition or contingency. If Lessee fails to pay any Fixed Rent, Additional Rent, damages or any other sums at any time becoming due and payable by Lessee under the Lease beyond any applicable notice and grace periods, or if Lessee fails to perform any obligation on Lessee's part to be performed under the Lease beyond any applicable notice and grace periods, then, upon written notice, Guarantor shall promptly pay or perform the same. 3. If Lessor pursues Guarantor to enforce the obligations of Guarantor under this Guaranty Agreement or the obligations of Lessee under the Lease and prevails therein, Guarantor shall pay all costs and expenses incurred by or on behalf of Lessor, including reasonable attorney's fees. Lessor shall be under no obligation to proceed against Lessee before proceeding against the Guarantor. Guarantor hereby agrees (i) that Guarantor shall be at all times subject to the jurisdiction of the courts of the State of Connecticut in connection with the Lease and this Guaranty Agreement and, (ii) that all disputes relating to this Guaranty Agreement shall be subject to the jurisdiction of the courts of the State of Connecticut. 4. This Guaranty Agreement and all guaranties and covenants and agreements of Guarantor contained herein shall continue in full force and effect throughout the Lease Term and thereafter so long as any obligation or liability of Lessee under the Lease shall remain unperformed or unsatisfied. 5. Except as provided in Paragraph 8, the obligations of Guarantor under this Agreement shall not be terminated or in any way released or impaired by, and shall survive and remain in full force and effect notwithstanding, any occurence whatsoever, including, without limitation, (a) any amendment or modification of, addition or supplement to the Lease or of any covenants, agreements, terms or conditions contained therein; (b) any exercise or non-exercise by Lessor of any right, power, or remedy under, or in respect of the Lease, or any waiver of such right, power, or remedy; (c) any waiver, consent, extension, indulgence or other action, inaction or omission under or in respect of the Lease; (d) any assignment, sale, sublease, surrender, forefeiture, re-entry, re-letting or other transfer in respect of the Lease or any or all of the Premises (as defined in the Lease) or any interest therein by Lessor or Lessee; or (e) any insolvency, bankruptcy, receivership, liquidation, merger, reorganization, readjustment, composition, dissolution, winding up or similar proceeding involving or affecting Lessor or Lessee, whether or not Guarantor shall have notice or knowledge of any of the foregoing items. 6. Lessor may at any time, and from time to time, assign, by way of pledge or otherwise, any of Lessor's rights under the Lease or any or all of the rights (in whole or part) of Lessor under this Guaranty Agreement. From and after any such assignment, the assignee may enforce any and all of the terms of this Guaranty Agreement, to the extent so assigned, as though such Assignee had been a party hereto. 7. All notices and other communications hereunder shall be in writing and shall be delivered or mailed by registered or certified mail, postage prepaid, addressed: If to Guarantor: 3701 Skypark Drive Torrence, CA 90505 If to Lessor: Fawn Associates Limited Partnership 100 Putnam Green Greenwich, Connecticut 06830 Attention: Chief Executive Officer or at such address as either party shall have furnished to the other in writing. 8. If any term of this Guaranty Agreement, or any application thereof, shall be invalid or unenforceable, the remainder of this Guaranty Agreement, and any other application of such term shall not be affected thereby. Neither this Guaranty Agreement nor any term hereof may be changed, waived, discharged, or terminated orally, but only by an instrument in writing signed by the party against which the enforcement of the charge, waiver, discharge or termination is sought. The terms of this Guaranty Agreement shall be binding upon Guarantor and its successors and assigns, and shall insure to the benefit of Lessor and its successors and assigns. 9. This Guaranty Agreement may be executed in counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the Guarantor has caused this Guaranty Agreement to be duly executed and attested on the date set forth above. Signed and Delivered in the presence of: IMPERIAL CREDIT INDUSTRIES, INC. _______________________________ By:__________________________________ Its: Duly Authorized _______________________________ STATE OF _____________ ) ) ss March ______,1996 COUNTY OF ____________ ) Personally appeared _____________________, ____________ of IMPERIAL CREDIT INDUSTRIES, INC., a California corporation, signer and sealer of the foregoing instrument, and acknowledged the same to be his/her free act and deed and the free act and deed of said Corporation, before me. ________________________________________ Commissioner of the Superior Court Notary Public My Commission Expires: _________________ EX-10.6(A) 14 LETTER OF INTENT DATED AUGUST 19, 1996 Exhibit 10.6(a) [LETTERHEAD OF CS FIRST BOSTON APPEARS HERE] August 19, 1996 Mr. Wayne L. Knyal Franchise Mortgage Acceptance Company LLC Five Greenwich Office Park Greenwich, CT 06830 RE: $200 Million Repurchase Facility Ladies and Gentlemen: This letter of intent ("Letter") will confirm our agreement to enter into good faith negotiations for a repurchase facility (the "Repurchase Facility") for Franchise Mortgage Acceptance Company LLC ("FMAC") to be provided by CS First Boston Mortgage Capital Corp. ("MCC") upon the terms and conditions described herein. Prior to the documentation of the Repurchase Facility, MCC and/or its agents will review the financial and operational characteristics of FMAC's business and will give notice to FMAC in the event that such review causes MCC to cease to work toward definitive documentation pursuant to this Letter. FMAC will exclusively work with MCC on the subject matter hereof, and will not commence discussions with any other broker or other entity prior to the closing of the Repurchase Facility. Originator and Seller: Franchise Mortgage Acceptance Company LLC ("FMAC"). The obligations of FMAC under the Repurchase Agreement shall be at the discretion of CS First Boston's Credit Department and shall include standard representations and warrants relating to Eligible Assets which would appear in a rated franchise securitization. Purchaser: CS First Boston Mortgage Capital Corp. ("MCC"), a wholly-owned subsidiary of CS First Boston. Repurchase Facility: The reverse repurchase facility ("Repurchase Facility") by and between FMAC and MCC that shall be used by FMAC to finance FMAC'S purchase of Eligible Assets. Page 2 Franchise Mortgage Acceptance Company LLC August 19, 1996 Eligible Assets: Franchise loans (the "Loans") to owners or lessees of restaurant properties who are authorized franchisees. Eligibility criteria may include, but are not limited to the following: 1) The Loan was originated or purchased by FMAC in the normal course of its business; 2) The Loans will be underwritten in accordance with FMAC's documented and stated underwriting standards. FMAC will furnish a copy of its underwriting standards to MCC (i) prior to the initial Repurchase Transaction and (ii) prior to any changes made to such underwriting standards; 3) The Loan was not delinquent on the date that FMAC sold the Loan to MCC. 4) The Loan was secured by either by a mortgage of the fee interests or leasehold interests in the real property, as well as a security interest in the borrower's equipment and other restaurant related personal property. FMAC shall be required to repurchase any Loans that cease to meet the eligibility criteria for Eligible Asset or, that violate a representation and/or warranty made by FMAC to MCC in respect of said Loan. In addition, MCC may in its reasonable discretion exclude any Loan from any Repurchase Transaction if in MCC's sole and reasonable opinion the Loan does not meet FMAC's underwriting guidelines. Term of Transactions: The term of this arrangement shall extend to December 31, 1996 and commence on the date of the initial Repurchase Transaction. Notwithstanding the previous sentence, the Agreements shall provide that the commitment of MCC evidenced thereby will be subject to termination by MCC if, in its sole discretion, it is reasonable to do so under the circumstances, taking into consideration, among other things, the volatility or illiquidity of the market for the Loans or securities backed thereby, the extent and nature of any event which is, or with notice or passage of time would become, a Termination Event (as define below), or the availability of financing to MCC. In the event of a change in FMAC's ownership, MCC has the right to immediately terminate the line, if in its sole judgement it deems the change to be detrimental to FMAC's Page 3 Franchise Mortgage Acceptance Company LLC August 19, 1996 ongoing business. The Repurchase Facility can be extended on December 31, 1996 for an additional 12 months if mutually acceptable to MCC and FMAC and will be subject to a new spread. Maximum Amounts It is anticipated that no more than $200,000,000 in of Loans: aggregate unpaid principal balance will be outstanding under the Repurchase Agreement at any time. Parent Guarantee: FMAC's parent Imperial Credit Industries, Inc. shall guarantee the obligations of FMAC. Structuring Advisory The Structuring Fee shall be paid by FMAC and shall be Fee: 0.625% of the Maximum Amount of the Facility. The Structuring Advisory Fee shall be earned on the date the Repurchase Facility documents are completed. A fee of $812,500 relating to the initial $130,000,000 financed under the Repurchase Facility shall be paid upon completion of the Repurchase Facility documentation. The remaining fee shall be paid in conjunction with further transactions under the Repurchase Facility. As FMAC makes additional draws on the Repurchase Facility, FMAC shall pay MCC 0.625% on the amount of the additional transactions. In any event, FMAC shall pay MCC a total Structuring Advisory Fee of 0.625% on the Maximum Amount of Contracts before the termination of this Repurchase Facility. The Structuring Advisory Fee shall be non-refundable. Minimum Amount of It is anticipated that each purchase or resale Loans: transaction by MCC under the Repurchase Agreement will be at least $1,000,000 in aggregate unpaid balance. Base Rate: U.S. one-month LIBOR reset monthly (the "Base Rate"); Interest Rate: The Interest Rate shall be computed as the sum of (i) the Base Rate and (ii) a fixed spread for each year during the term of the Repurchase Facility, the spread is 1.25%. Page 4 Franchise Mortgage Acceptance Company LLC August 19, 1996 Paid-Off, Delinquent At the end of each calendar month any Loan that and Ineligible Loans: has missed two payments and is still owned by MCC under the Repurchase Agreement, FMAC immediately shall repurchase such loan plus any accrued interest due to MCC. Those Loans that have been paid in full shall be deducted from the unpaid principal balance of the Loans. In addition, any Loan which is ineligible for securitization shall be repurchased by FMAC. If a Loan is excluded from securitization due to concentration of the collateral, MCC will retain the Loan in the Repurchase Facility until termination, and upon termination, if the Repurchase Facility is extended per the Term of the Transaction paragraph above, the Loan would be placed in the new facility. Securitization FMAC will combine its collateral with franchise Matters: loans originated or purchased by MCC to complete a securitization. CS First Boston will be the underwriter for the securitization. FMAC will pay CS First Boston 0.50% on the principal balance of the FMAC Loans in the securitization as an underwriting fee. FMAC will retain all of the economics associated with the Loans originated by FMAC including the first loss piece of the securitization. If for any reason FMAC does not use CS First Boston in a securitization or other disposition of the Loans financed under this Repurchase Facility, FMAC will pay a 1% exit fee (the "Exit Fee") on the outstanding principal balance of the Loans. The Exit Fee discussed herein only applies to the transaction terminating December 31, 1996 and will be renegotiated for a new facility. Back-Up Servicer: Imperial Credit Industries, Inc. Margin Maintenance: Subject to final determination by CS First Boston's Credit Department, it is anticipated that FMAC will at all times cause the Custodian to hold Eligible Assets having a market value determined by MCC in good faith sufficient to create an advance rate of funds advanced to FMAC equal to the acquisition price FMAC has paid. However each weekly funding will have an advance not greater than 95%. The difference between par and the advance rate will be comprised of the discount which FMAC reserve against the Loans held by the Custodian. If on any business day the Margin Requirement is not met (e.g., due to a decline in the value of the Loans or otherwise) FMAC will prior to 4:00 p.m. New York time on such business day, post cash or addition Loan collateral as needed to satisfy the Margin Requirement. The criteria for setting the Page 5 Franchise Mortgage Acceptance Company LLC August 19, 1996 Margin requirements will include the following (without limitation): 1. the term of the Repurchase Transaction 2. prevailing market conditions 3. the financial condition of FMAC The market value of the Loans will be determined on a monthly basis by MCC (unless at MCC's sole discretion, a daily mark-to-market is required) based on collateral performance, the interest rate environment and the alternative exit strategies for the collateral. Custodian: First Trust, (the "Custodian") will serve as custodian of the Loans under the Repurchase Facility and cash collateral on behalf of FMAC, MCC, and other parties (including MCC's repurchase counterparties) pursuant to the Custody Agreement described below. Custodial fees will be responsibility of FMAC. Custodian and Back-Up servicer could be the same party. Master Repurchase A PSA Master Repurchase Agreement with supplemental terms Agreement: attached, as modified in accordance herewith, including an expansion of the definition of assets to include the Loans described above under Eligible Assets. Custody Agreement: The Custodian, FMAC and MCC shall execute a custody agreement (the "Custody Agreement") which shall specify the timing and nature of original loan legal documents to be delivered by nature of original loan legal documents to be delivered by FMAC to the Custodian. Pursuant to the Custody Agreement, the Custodian shall deliver a form of certification and trust receipt (to be defined in the Custody Agreement) to MCC evidencing that loan legal documents have been received and reviewed by the Custodian. The Custodian shall prepare and deliver the original certification and trust receipt to MCC on the date of purchase of the Eligible Assets under a Reverse Repurchase Transaction. Page 6 Franchise Mortgage Acceptance Company LLC August 19, 1996 Security Interest: FMAC will execute all filings giving MCC a first priority perfected security interest in the Loans purchase. Policies and As a condition to executing the Repurchase Facility, Procedures FMAC shall develop, implement, and actively monitor the following policies and procedures (i) Loan Underwriting Guidelines, (ii) Servicing and Collections, (iii) Quality Control, (iv) Accounting and Financial Reporting, (v) Risk Management and Insurance, (vi) Licensing, (vii) Employee, (viii) Management Information Systems, (ix) Disaster Recovery, and (x) such other policies and procedures as may be reasonably requested by MCC from time to time (the "Policies and Procedures"). Reporting FMAC shall be subject to the following reporting Requirements: requirements including, but not limited to, the following (i) annual consolidated financial statements audited by a big-six firm, (ii) quarterly consolidated financial statements prepared and certified by management, (iii) monthly consolidated financial statements and operations reporting package prepared by management, (iv) Eligible Asset performance data, (v) Eligible Assets stratification reports, (vi) litigation summary, (vii) annual budgets and monthly actual vs. budget comparisons, (viii) three-years projections and strategic business plan, (ix) licensing summary, and (x) monthly servicing diskettes of all Eligible Assets, and (xi) such other reports as may be reasonably requested by MCC from time to time (the "Reporting Requirements"). Repurchase Facility Such events will include, but are not limited to, the Termination Events: following (the "Repurchase Facility Termination Events"): 1) FMAC shall fail to observe in any material respect any covenant, representation, term or condition contained in the Repurchase Facility and related transaction documents; 2) An FMAC payment default remains uncured following a mutually agreed upon cure period; 3) A Breach of FMAC of any of their covenants or agreements with CFBMCC; 4) A Default by FMAC on any of its material debt instruments; Page 7 Franchise Mortgage Acceptance Company LLC August 19, 1996 5) A Bankruptcy of FMAC or a material adverse change in FMAC's financial condition or operations; 6) A Representation or warrant of FMAC shall prove to be materially incorrect; 7) FMAC's report of independent accountants' include a "going concern" reference; 8) Either (i) a change in control and/or ownership of FMAC other than as result of an initial public offering or private placement of common stock or (ii) any member of FMAC's executive management team terminates their employment with FMAC and a suitable replacement is not found; 9) FMAC amends its underwriting guidelines or buying practices without obtaining the prior written consent and approval of MCC, such approval not be unreasonably withheld; and 10) Other items as provided for in the Repurchase Facility, any related transaction documents, or "market" securitization transactions of franchise loans. Certain Termination Events shall be subject to a thirty-day cure period during which time such event may be remedied in order to avoid the occurrence of such Termination Event. Upon a Termination Event, the Repurchase Facility will terminate and no further purchases will be made by MCC and MCC shall be entitled to all remedies set forth in the Repurchase Facility and related transaction documents. Covenants: Usual and customary non-financial covenants similar to those contained in "market" securitization transaction of franchise loans, including periodic financial reporting, preservation of corporate existence, etc. Certain financial covenants may be required with respect to the Servicer and FMAC, including minimum net worth requirements (the "Covenants"). Representations Usual and customary representations and warranties similar and Warranties: to those contained in "market" securitization transactions of franchise loans, including organization in good standing, validity of agreements, valid ownership of Eligible Assets, tax status, Page 8 Franchise Mortgage Acceptance Company LLC August 19, 1996 compliance with laws, litigation and underwriting guidelines, and representations and warranties with respect to Eligible Assets will result in the repurchase of the Eligible Assets (the "Representations and Warranties"). Delivery Notice: Twenty-four (24) hours (or before 11:00 AM New York City time in the event that MCC has received confirmation of receipt by the Custodian of the delivered documents) prior to the purchase of Eligible Assets by MCC, FMAC shall deliver (1) the appropriate Eligible Assets document to the Custodian as specified in the Custody Agreement and (2) a notice of borrowing to MCC containing the following information with respect to each Loan (the "Delivery Notice"): a) Loan Number b) Borrower name c) Borrower address d) Franchise Concept e) Valuation, Loan-to-Value f) Loan APR g) Remaining term of Loan h) Current principal amount i) Due date Servicing of the FMAC and its agents shall service and administer the Loans Eligible Assets: in a manner that is necessary and consistent with the terms of the Repurchase Agreement and shall exercise the same care customarily employed by FMAC and its agents in servicing Loans for FMAC's own account in accordance with accepted Loan servicing practices of prudent lending institutions and giving due consideration to MCC's reliance of FMAC and its agents. FMAC or its agents shall collect all principal and interest payments including partial prepayments, and prepayment in full less servicing fees and shall hold such amounts in trust for the benefit of MCC unless otherwise directed by MCC. FMAC or its agents shall remit such amounts to MCC upon the request of MCC. Either (i) FMAC shall represent and warrant that the Loans are Page 9 Franchise Mortgage Acceptance Company LLC August 19, 1996 assigned to MCC on the Purchase Date free and clear of servicing rights or agreements with third parties or (ii) FMAC shall assign all such agreements in a manner satisfactory to MCC. If Clause (i) of the proceeding sentence applies, FMAC shall service the Loans for MCC as provided in the Master Repurchase Agreement such servicing to be terminable by MCC, without the payment of any termination fee to FMAC, at any time subject to MCC's obligation to re-deliver the Loans and such servicing to FMAC on the Repurchase Date against the transfer of funds. Power of Attorney: FMAC or its agents shall grant MCC an irrevocable power of attorney, with full power of substitution with respect to the Loans to (i) endorse any checks or instruments representing payment of the Loans; (ii) prepare, complete, execute, deliver and record any assignment of auto; (iii) endorse and deliver any auto note; (iv) take all necessary and appropriate action to direct the receipt of payment on the Loans from the servicer and master servicer thereof to MCC or its designee; (v) handle any claim relating to the Loan; and (vi) take any action and execute any instruments that MCC may deem necessary. Due Diligence: MCC and its advisors shall have the right to perform financial and operations due diligence with regard to FMAC, and an agreed-upon sample of loans Non-Binding This Letter does not represent a legally binding commitment Commitment: for MCC to proceed with any portion of the transaction contemplated herein, and is subject to the internal approval of both MCC and FMAC and to the execution of definitive documentation containing mutually satisfactory terms and conditions consistent with the terms hereof. Fees and Expenses: Upon the execution of this letter, FMAC shall be responsible up to $75,000 for any and all legal fees, due diligence and other out of pocket costs incurred by MCC in setting up and administering the Reverse Repurchase Facility. Page 10 Franchise Mortgage Acceptance Company LLC August 19, 1996 Kindly acknowledge below your agreement to the foregoing by signing and returning to the undersigned the enclosed extra copy of this Letter. Sincerely, CS First Boston Mortgage Capital CORP. By:___________________________ Name:_________________________ Agreed: Franchise Mortgage Acceptance Company LLC By:___________________________ Name:_________________________ Title:________________________ Date:_________________________ EX-10.6(B) 15 MASTER REPURCHASE AGREEMENT DATED OCTOBER 10, 1996 Exhibit 10.6(b) 40 Broad Street, New York, NY 10004-2373 Telephone (212)809-7000 MASTER REPURCHASE AGREEMENT DATED AS OF OCTOBER 10, 1996 BETWEEN: CS FIRST BOSTON MORTGAGE CAPITAL CORP. ("Buyer") AND FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC ("Seller") 1. APPLICABILITY From time to time the parties hereto may enter into transactions in which one party ("Seller") agrees to transfer to the other ("Buyer") securities or financial instruments ("Securities") against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Securities at a date certain or on demand, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a "Transaction" and shall be governed by this Agreement, including any supplemental terms or conditions contained in Annex I hereto, unless otherwise agreed in writing. 2. DEFINITIONS (a) "Act of Insolvency", with respect to any party, (i) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law, or such party seeking the appointment of a receiver, trustee, custodian or similar official for such party or any substantial part of its property, or (ii) the commencement of any such case or proceeding against such party, or another seeking such an appointment, or the filing against a party of an application for a protective decree under the provisions of the Securities Investor Protection Act of 1970, which (A) is consented to or not timely contested by such party, (B) results in the entry of an order for relief, such an appointment, the issuance of such a protective decree or the entry of an order having a similar effect, or (C) is not dismissed within 15 days, (iii) the making by a party of a general assignment for the benefit of creditors, or (iv) the admission in writing by a party of such party's inability to pay such party's debts as they become due; (b) "Additional Purchased Securities", Securities provided by Seller to Buyer pursuant to Paragraph 4(a) hereof; (c) "Buyer's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of a percentage (which may be equal to the percentage that is agreed to as the Seller's Margin Amount under subparagraph (q) of this Paragraph), agreed to by Buyer and Seller prior to entering into the Transaction, to the Repurchase Price for such Transaction as of such date; (d) "Confirmation", the meaning specified in Paragraph 3(b) hereof; (e) "Income", with respect to any Security at any time, any principal thereof then payable and all interest, dividends or other distributions thereon; (f) "Margin Deficit", the meaning specified in Paragraph 4(a) hereof; (g) "Margin Excess", the meaning specified in Paragraph 4(b) hereof; (h) "Market Value", with respect to any Securities as of any date, the price for such Securities on such date obtained from a generally recognized source agreed to by the parties or the most recent closing bid quotation from such a source, plus accrued income to the extent not included therein (other than any income credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to market practice for such Securities); (i) "Price Differential", with respect to any Transaction hereunder as of any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction on a 360 day per year basis for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the date of determination (reduced by any amount of such Price Differential previously paid by Seller to Buyer with respect to such Transaction); (j) "Pricing Rate", the per annum percentage rate for determination of the Price Differential; (k) "Prime Rate", the prime rate of U.S. money center commercial banks as published in The Wall Street Journal; (l) "Purchase Date", the date on which Purchased Securities are transferred by Seller to Buyer; (m) "Purchase Price", (i) on the Purchase Date, the price at which Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter, such price increased by the amount of any cash transferred by Buyer to Seller pursuant to Paragraph 4(b) hereof and decreased by the amount of any cash transferred by Seller to Buyer pursuant to Paragraph 4(a) hereof or applied to reduce Seller's obligations under clause (ii) of Paragraph 5 hereof; (n) "Purchased Securities", the Securities transferred by Seller to Buyer in a Transaction hereunder, and any Securities substituted therefor in accordance with Paragraph 9 hereof. The term "Purchased Securities" with respect to any Transaction at any time also shall include Additional Purchased Securities delivered pursuant to Paragraph 4(a) and shall exclude Securities returned pursuant to Paragraph 4(b); (o) "Repurchase Date", the date on which Seller is to repurchase the Purchased Securities from Buyer, including any date determined by application of the provisions of Paragraphs 3(c) or 11 hereof; (p) "Repurchase Price", the price at which Purchased Securities are to be transferred from Buyer to Seller upon termination of a Transaction, which will be determined in each case (including Transactions terminable upon demand) as the sum of the Purchase Price and the Price Differential as of the date of such determination, increased by any amount determined by the application of the provisions of Paragraph 11 hereof; (q) "Seller's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of a percentage (which may be equal to the percentage that is agreed to as the Buyer's Margin Amount under subparagraph (c) of this Paragraph), agreed to by Buyer and Seller prior to entering into the Transaction, to the Repurchase Price for such Transaction as of such date. 3. INITIATION; CONFIRMATION; TERMINATION (a) An agreement to enter into a Transaction may be made orally or in writing at the initiation of either Buyer or Seller. On the Purchase Date for the Transaction, the Purchased Securities shall be transferred to Buyer or its agent against the transfer of the Purchase Price to an account of Seller. (b) Upon agreeing to enter into a Transaction hereunder, Buyer or Seller (or both), as shall be agreed, shall promptly deliver to the other party a written confirmation of each Transaction (a "Confirmation"). The Confirmation shall describe the Purchased Securities (including CUSIP number, if any), identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction, and (v) any additional terms or conditions of the Transaction not inconsistent with this Agreement. The Confirmation, together with this Agreement, shall constitute conclusive evidence of the terms agreed between Buyer and Seller with respect to the Transaction to which the Confirmation relates, unless with respect to the Confirmation specific objection is made promptly after receipt thereof. In the event of any conflict between the terms of such Confirmation and this Agreement, this Agreement shall prevail. (c) In the case of Transactions terminable upon demand, such demand shall be made by Buyer or Seller, no later than such time as is customary in accordance with market practice, by telephone or otherwise on or prior to the business day on which such termination will be effective. On the date specified in such demand, or on the date fixed for termination in the case of Transactions having a fixed term, termination of the Transaction will be effected by transfer to Seller or its agent of the Purchased Securities and any income in respect thereof received by Buyer (and not previously credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against the transfer of the Repurchase Price to an account of Buyer. 4. MARGIN MAINTENANCE (a) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Buyer is less than the aggregate Buyer's Margin Amount for all such Transactions (a "Margin Deficit"), then Buyer may by notice to Seller require Seller in such Transactions, at Seller's option, to transfer to Buyer cash or additional Securities reasonably acceptable to Buyer ("Additional Purchased Securities"), so that the cash and aggregate Market Value of the Purchased Securities, including any such Additional Purchased Securities, will thereupon equal or exceed such aggregate Buyer's Margin Amount (decreased by the amount of any Margin Deficit as of such date arising from any Transactions in which such Buyer is acting as Seller). (b) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Seller exceeds the aggregate Seller's Margin Amount for all such Transactions at such time (a "Margin Excess"), then Seller may by notice to Buyer require Buyer in such Transactions, at Buyer's option, to transfer cash or Purchased Securities to Seller, so that the aggregate Market Value of the Purchased Securities, after deduction of any such cash or any Purchased Securities so transferred, will thereupon not exceed such aggregate Seller's Margin Amount (increased by the amount of any Margin Excess as of such date arising from any Transactions in which such Seller is acting as Buyer). (c) Any cash transferred pursuant to this Paragraph shall be attributed to such Transactions as shall be agreed upon by Buyer and Seller. 2 (d) Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer or Seller (or both) under subparagraphs (a) and (b) of this Paragraph may be exercised only where a Margin Deficit or Margin Excess exceeds a specified dollar amount or a specified percentage of the Repurchase Prices for such Transactions (which amount or percentage shall be agree to by Buyer and Seller prior to entering into any such Transactions). (e) Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer and Seller under subparagraphs (a) and (b) of this Paragraph to require the elimination of a Margin Deficit or a Margin Excess, as the case may be, may be exercised whenever such a Margin Deficit or Margin Excess exists with respect to any single Transaction hereunder (calculated without regard to any other Transaction outstanding under this Agreement). 5. INCOME PAYMENTS Where a particular Transaction's term extends over an Income payment date on the Securities subject to that Transaction, Buyer shall, as the parties may agree with respect to such Transaction (or, in the absence of any agreement, as Buyer shall reasonably determine in its discretion), on the date such Income is payable either (i) transfer to or credit to the account of Seller an amount equal to such Income payment or payments with respect to any Purchased Securities subject to such Transaction or (ii) apply the Income payment or payments to reduce the amount to be transferred to Buyer by Seller upon termination of the Transaction. Buyer shall not be obligated to take any action pursuant to the preceding sentence to the extent that such action would result in the creation of a Margin Deficit, unless prior thereto or simultaneously therewith Seller transfers to Buyer cash or Additional Purchased Securities sufficient to eliminate such Margin Deficit. 6. SECURITY INTEREST Although the parties intend that all Transactions hereunder be sales and purchases and not loans, in the event any such Transactions are deemed to be loans, Seller shall be deemed to have pledged to Buyer as security for the performance by Seller of its obligations under each such Transaction, and shall be deemed to have granted to Buyer a security interest in, all of the Purchased Securities with respect to all Transactions hereunder and all proceeds thereof. 7. PAYMENT AND TRANSFER Unless otherwise mutually agreed, all transfers of funds hereunder shall be in immediately available funds. All Securities transferred by one party hereto to the other party (i) shall be in suitable form for transfer or shall be accompanied by duly executed instruments of transfer or assignment in blank and such other documentation as the party receiving possession may reasonably request, (ii) shall be transferred on the book-entry system of a Federal Reserve Bank, or (iii) shall be transferred by any other method mutually acceptable to Seller and Buyer. As used herein with respect to Securities, "transfer" is intended to have the same meaning as when used in Section 8-313 of the New York Uniform Commercial Code or, where applicable, in any federal regulation governing transfers of the Securities. 8. SEGREGATION OF PURCHASED SECURITIES To the extent required by applicable law, all Purchased Securities in the possession of Seller shall be segregated from other securities in its possession and shall be identified as subject to this Agreement. Segregation may be accomplished by appropriate identification on the books and records of the holder, including a financial intermediary or a clearing corporation. Title to all Purchased Securities shall pass to Buyer and, unless otherwise agreed by Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased Securities or otherwise pledging or hypothecating the Purchased Securities, but no such transaction shall relieve Buyer of its obligations to transfer Purchased Securities to Seller pursuant to Paragraphs 3, 4 or 11 hereof, or of Buyer's obligation to credit or pay income to, or apply Income to the obligations of, Seller pursuant to Paragraph 5 hereof. - -------------------------------------------------------------------------------- REQUIRED DISCLOSURE FOR TRANSACTIONS IN WHICH THE SELLER RETAINS CUSTODY OF THE PURCHASED SECURITIES Seller is not permitted to substitute other securities for those subject to this Agreement and therefore must keep Buyer's securities segregated at all times, unless in this Agreement Buyer grants Seller the right to substitute other securities. If Buyer grants the right to substitute, this means that Buyer's securities will likely be commingled with Seller's own securities during the trading day. Buyer is advised that, during any trading day that Buyer's securities are commingled with Seller's securities, they [will]* [may]** be subject to liens granted by Seller to [its clearing bank]* [third parties]** and may be used by Seller for deliveries on other securities transactions. Whenever the securities are commingled, Seller's ability to resegregate substitute securities for Buyer will be subject to Seller's ability to satisfy [the clearing]* [any]** lien or to obtain substitute securities. - -------------------------------------------------------------------------------- *Language to be used under 17 C.F.R. (S)403.4(e) if Seller is a government securities broker or dealer other than a financial institution. **Language to be used under 17 C.F.R. (S)403.5(d) if Seller is a financial institution. 3 (a) Seller may, subject to agreement with and acceptance by Buyer, substitute other Securities for any Purchased Securities. Such substitution shall be made by transfer to Buyer of such other Securities and transfer to Seller of such Purchased Securities. After substitution, the substituted Securities shall be deemed to be Purchased Securities. (b) In Transactions in which the Seller retains custody of Purchased Securities, the parties expressly agree that Buyer shall be deemed, for purposes of subparagraph (a) of this Paragraph, to have agreed to and accepted in this Agreement substitution by Seller of other Securities for Purchased Securities; provided, however, that such other Securities shall have a Market Value at least equal to the Market Value of the Purchased Securities for which they are substituted. 10. REPRESENTATIONS Each of Buyer and Seller represents and warrants to the other that (i) it is duly-authorized to execute and deliver this Agreement, to enter into the Transactions contemplated hereunder and to perform its obligations hereunder and has taken all necessary action to authorize such execution, delivery and performance, (ii) it will engage in such Transactions as principal (or, if agreed in writing in advance of any Transaction by the other party hereto, as agent for a disclosed principal), (iii) the person signing this Agreement on its behalf is duly authorized to do so on its behalf (or on behalf of any such disclosed principal), (iv) if has obtained all authorizations of any governmental body required in connection with this Agreement and the Transactions hereunder and such authorizations are in full force and effect and (v) the execution, delivery and performance of this Agreement and the Transactions hereunder will not violate any law, ordinance, charter, by-law or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected. On the Purchase Date for any Transaction Buyer and Seller shall each be deemed to repeat all the foregoing representations made by it. 11. EVENTS OF DEFAULT In the event that (i) Seller fails to repurchase or Buyer fails to transfer Purchased Securities upon the applicable Repurchase Date, (ii) Seller or Buyer fails, after one business day's notice, to comply with Paragraph 4 hereof, (iii) Buyer fails to comply with Paragraph 5 hereof, (iv) an Act of Insolvency occurs with respect to Seller or Buyer, (v) any representation made by Seller or Buyer shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated, or (vi) Seller or Buyer shall admit to the other its inability to, or its intention not to, perform any of its obligations hereunder (each an "Event of Default"): (a) At the option of the nondefaulting party, exercised by written notice to the defaulting party (which option shall be deemed to have been exercised, even if no notice is given, immediately upon the occurrence of an Act of Insolvency), the Repurchase Date for each Transaction hereunder shall be deemed immediately to occur. (b) In all Transactions in which the defaulting party is acting as Seller, if the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, (i) the defaulting party's obligations hereunder to repurchase all Purchased Securities in such Transactions shall thereupon become immediately due and payable, (ii) to the extent permitted by applicable law, the Repurchase Price with respect to each such Transaction shall be increased by the aggregate amount obtained by daily application of (x) the greater of the Pricing Rate for such Transaction or the Prime Rate to (y) the Repurchase Price for such Transaction as of the Repurchase Date as determined pursuant to subparagraph (a) of this Paragraph (decreased as of any day by (A) any amounts retained by the nondefaulting party with respect to such Repurchase Price pursuant to clause (iii) of this subparagraph, (B) any proceeds from the sale of Purchased Securities pursuant to subparagraph (d)(i) of this Paragraph, and (C) any amounts credited to the account of the defaulting party pursuant to subparagraph (e) of this Paragraph) on a 360 day per year basis for the actual number of days during the period from and including the date of the Event of Default giving rise to such option to but excluding the date of payment of the Repurchase Price as so increased, (iii) all income paid after such exercise or deemed exercise shall be retained by the nondefaulting party and applied to the aggregate unpaid Repurchase Prices owed by the defaulting party, and (iv) the defaulting party shall immediately deliver to the nondefaulting party any Purchased Securities subject to such Transactions then in the defaulting party's possession. (c) In all Transactions in which the defaulting party is acting as Buyer, upon tender by the nondefaulting party of payment of the aggregate Repurchase Prices for all such Transactions, the defaulting party's right, title and interest in all Purchased Securities subject to such Transactions shall be deemed transferred to the nondefaulting party, and the defaulting party shall deliver all such Purchased Securities to the nondefaulting party. (d) After one business day's notice to the defaulting party (which notice need not be given if an Act of Insolvency shall have occurred, and which may be the notice given under subparagraph (a) of this Paragraph or the notice referred to in clause (ii) of the first sentence of this Paragraph), the nondefaulting party may: (1) as to Transactions in which the defaulting party is acting as Seller, (A) immediately sell, in a recognized market at such price or prices as the nondefaulting party may reasonably deem satisfactory, any or all Purchased Securities subject to such Transactions and apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder 4 (2)(i) [illegible] Selling all or a portion of such Purchased Securities to give the defaulting party credit for such Purchased Securities in an amount equal to the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source, against the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder; and (ii) as to Transactions in which the defaulting party is acting as Buyer, (A) purchase securities ("Replacement Securities") of the same class and amount as any Purchased Securities that are not delivered by the defaulting party to the nondefaulting party as required hereunder or (B) in its sole discretion elect, in lieu of purchasing Replacement Securities, to be deemed to have purchased Replacement Securities at the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source. (e) As to Transactions in which the defaulting party is acting as Buyer, the defaulting party shall be liable to the nondefaulting party (i) with respect to Purchased Securities (other than Additional Purchased Securities), for any excess of the price paid (or deemed paid) by the nondefaulting party for Replacement Securities therefor over the Repurchase Price for such Purchased Securities and (ii) with respect to Additional Purchased Securities, for the price paid (or deemed paid) by the nondefaulting party for the Replacement Securities therefor. In addition, the defaulting party shall be liable to the nondefaulting party for interest on such remaining liabilty with respect to each such purchase (or deemed purchase) of Replacement Securities from the date of such purchase (or deemed purchase) until paid in full by Buyer. Such interest shall be at a rate equal to the greater of the Pricing Rate for such Transaction or the Prime Rate. (f) For purposes of this Paragraph 11, the Repurchase Price for each Transaction hereunder in respect of which the defaulting party is acting as Buyer shall not increase above the amount of such Repurchase Price for such Transaction determined as of the date of the exercise or deemed exercise by the nondefaulting party of its option under subparagraph (a) of this Paragraph. (g) The defaulting party shall be liable to the nondefaulting party for the amount of all reasonable legal or other expenses incurred by the nondefaulting party in connection with or as a consequence of an Event of Default, together with interest thereon at a rate equal to the greater of the Pricing Rate for the relevant Transaction or the Prime Rate. (h) The nondefaulting party shall have, in addition to its rights hereunder, any rights otherwise available to it under any other agreement or applicable law. 12. SINGLE AGREEMENT Buyer and Seller acknowledge that, and have entered hereinto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and have been made in consideration of each other. Accordingly, each of Buyer and Seller agrees (i) to perform all of its obligations in respect of each. Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder and (iii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted. 13. NOTICES AND OTHER COMMUNICATIONS Unless another address is specified in writing by the respective party to whom any notice or other communications is to be given hereunder, all such notices or communications shall be in writing or confirmed in writing and delivered at the respective addresses set forth in Annex II attached hereto. 14. ENTIRE AGREEMENTS; SEVERABILITY This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for repurchase transactions. Each provision and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceablity of any such other provision or agreement. 15. NON-ASSIGNABILITY; TERMINATION The rights and obligations of the parties under this Agreement and under any Transactions shall not be assigned by either party without the prior written consent of the other party. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. This Agreement may be cancelled by either party upon giving written notice to the other, except that this Agreement shall, notwithstanding such notice, remain applicable to any Transactions then outstanding. 5 16. GOVERNING LAW This Agreement shall be governed by the laws of the State of New York without giving effect to the conflict of law principles thereof. 17. NO WAIVERS, ETC. No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. Without limitation on any of the foregoing, the failure to give a notice pursuant to subparagraphs 4(a) or 4(b) hereof will not constitute a waiver of any right to do so at a later date. 18. USE OF EMPLOYEE PLAN ASSETS (a) If assets of any employee benefit plan subject to any provision of the Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be used by either party hereto (the "Plan Party") in a Transaction, the Plan Party shall so notify the other party prior to the Transaction. The Plan Party shall represent in writing to the other party that the Transaction does not constitute a prohibited transaction under ERISA or is otherwise exempt therefrom, and the other party may proceed in reliance thereon but shall not be required so to proceed. (b) Subject to the last sentence of subparagraph (a) of this Paragraph, any such Transaction shall proceed only if Seller furnishes or has furnished to Buyer its most recent available audited statement of its financial condition and its most recent subsequent unaudited statement of its financial condition. (c) By entering into a Transaction pursuant to this Paragraph, Seller shall be deemed (i) to represent to Buyer that since the date of Seller's latest such financial statements, there has been no material adverse change in Seller's financial condition which Seller has not disclosed to Buyer, and (ii) to agree to provide Buyer with future audited and unaudited statements of its financial condition as they are issued, so long as it is a Seller in any outstanding Transaction involving a Plan Party. 19. INTENT (a) The parties recognize that each Transaction is a "repurchase agreement" as that term is defined in Section 101 of Title 11 of the United States Code, as amended (except insofar as the type of Securities subject to such Transaction or the term of such Transaction would render such definition inapplicable), and a "securities contract" as that term is defined in Section 741 of Title 11 of the United States Code, as amended. (b) It is understood that either party's right to liquidate Securities delivered to it in connection with Transactions hereunder or to exercise any other remedies pursuant to Paragraph 11 hereof, is a contractual right to liquidate such Transaction as described in Sections 555 and 559 of Title 11 of the United States Code, as amended. 20. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS The parties acknowledge that they have been advised that: (a) in the case of Transactions in which one of the parties is a broker or dealer registered with the Securities and Exchange Commission ("SEC") under Section 15 of the Securities Exchange Act of 1934 ("1934 Act"), the Securities Investor Protection Corporation has taken the position that the provisions of the Securities Investor Protection Act of 1970 ("SIPA") do not protect the other party with respect to any Transaction hereunder; (b) in the case of Transactions in which one of the parties is a government securities broker or a government securities dealer registered with the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to the other party with respect to any Transaction hereunder; and (c) in the case of Transactions in which one of the parties is a financial institution, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation or the National Credit Union Share Insurance Fund, as applicable. FRANCHISE MORTGAGE ACCEPTANCE CS FIRST BOSTON MORTGAGE CAPITAL CORP. COMPANY LLC. By /s/ John Shrewsbury By _____________________________ -------------------------------- Title SVP Title __________________________ ----------------------------- Date 10/18/96 Date ___________________________ ------------------------------ 6 This Agreement shall be governed by the laws of the State of New York without giving effect to the conflict of law principles thereof. 17. NO WAIVERS, ETC. No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure hereform shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. Without limitation on any of the foregoing, the failure to give a notice pursuant to subparagraphs 4(a) or 4(b) hereof will not constitute a waiver of any right to do so at a later date. 18. USE OF EMPLOYEE PLAN ASSETS (a) If assets of an employee benefit plan subject to any provision of the Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be used by either party hereto (the "Plan Party") in a Transaction, the Plan Party shall so notify the other party prior to the Transaction. The Plan Party shall represent in writing to the other party that the Transaction does not constitute a prohibited transaction under ERISA or is otherwise exempt therefrom, and the other party may proceed in reliance thereon but shall not be required so to proceed. (b) Subject to the last sentence of subparagraph (a) of this Paragraph, any such Transaction shall proceed only if Seller furnishes or has furnished to Buyer its most recent available audited statement of its financial condition and its most recent subsequent unaudited statement of its financial condition. (c) By entering into a Transaction pursuant to this Paragraph, Seller shall be deemed (i) to represent to Buyer that since the date of Seller's latest such financial statements, there has been no material adverse change in Seller's financial condition which Seller has not disclosed to Buyer, and (ii) to agree to provide Buyer with future audited and unaudited statements of its financial condition as they are issued, so long as it is a Seller in any outstanding Transaction involving a Plan Party. 19. INTENT (a) The parties recognize that each Transaction is a "repurchase agreement" as that term is defined in Section 101 of Title 11 of the United States Code, as amended (except insofar as the type of Securities subject to such Transaction or the term of such Transaction would render such definition inapplicable), and a "securites contract" as that term is defined in Section 741 of Title 11 of the United States Code, as amended. (b) it is understood that either party's right to liquidate Securities delivered to it in connection with Transactions hereunder or to exercise any other remedies pursuant to Paragraph 11 hereof, is a contractual right to liquidate such Transaction as described in Sections 555 sand 559 of Title 11 of the United States Code, as amended. 20. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS The parties acknowledge that they have been advised that: (a) in the case of Transactions in which one of the parties is a broker or dealer registered with the Securities and Exchange Commission ("SEC") under Section 15 of the Securities Exchange Act of 1934 ("1934 Act"), the Securities Investor Protection Corporation has taken the position that the provisions of the Securities Investor Protection Act of 1970 ("SIPA") do not protect the other party with respect to any Transaction hereunder; (b) in the case of Transactions in which one of the parties is a government securities broker or a government securities dealer registered with the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to the other party with respect to any Transaction hereunder, and (c) In the case of Transactions in which one of the parties is a financial institution, funds held by the financial Institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation or the National Credit Union Share Insurance Fund, as applicable. FRANCHISE MORTGAGE ACCEPTANCE CS FIRST BOSTON MORTGAGE CAPITAL CORP. COMPANY BY_____________________________ By /s/ Emily Youssouf -------------------------------- Title__________________________ Title VP ----------------------------- Date___________________________ Date 10/12/96 ----------------------------- 6 ANNEX I ADDITIONAL SUPPLEMENTAL TERMS TO MASTER REPURCHASE AGREEMENT, DATED AS OF OCTOBER 10, 1996, BETWEEN CS FIRST BOSTON MORTGAGE CAPITAL CORP. ("CSFB" or "Buyer") AND FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC ("FMAC" or "Seller") 1. APPLICABILITY. These Additional Supplemental Terms (the "Additional ------------- ---------- Supplemental Terms") to Master Repurchase Agreement (the "Repurchase ------------------ ---------- Agreement") modify the terms and conditions of the Repurchase --------- Agreement and the terms under which the parties hereto may, from time to time, enter into Transactions (the Repurchase Agreement, together with the Annexes thereto, the "Agreement"). The provisions of these Additional Supplemental Terms shall supersede the terms in the Repurchase Agreement to the extent they are in conflict. The Agreement shall be read, taken and construed as one and the same instrument. Capitalized terms used in these Additional Supplemental Terms and not otherwise defined herein shall have the meanings set forth in the Repurchase Agreement. 2. ADDITIONAL DEFINITIONS. ---------------------- (a) Notwithstanding the definition set forth in Paragraph 2(h) of the -------------- Repurchase Agreement, with respect to Contracts, the "Market ------ Value" of Contracts shall be the price of Contracts as determined ----- from time to time (but in no event less frequently than monthly) by CSFB in its good faith assessment of the value of the Contracts. (b) Notwithstanding the definition set forth in Paragraph 2(o) of the -------------- Repurchase Agreement, the "Repurchase Date" with respect to each --------------- Transaction shall be the earliest of (i) the twentieth (20th) day of the calendar month following the month in which the Purchase Date for such Transaction occurs, or if such day is not a Business Day, the immediately following Business Day, (ii) the Termination Date, and (iii) the date determined by application of Paragraph 11 of the Repurchase Agreement or Section 10 hereof. --------- ---------- (c) Notwithstanding the definition set forth in Paragraph 2(c) of the -------------- Repurchase Agreement, the "Buyer's Margin Amount" with respect to --------------------- each Transaction as of any date shall be the amount obtained by application to the Repurchase Price of each such Transaction of the percentage equivalent of a fraction the numerator of which is one (1) and the denominator of which is the lesser of (x) the Advance Rate and (y) 0.95. (d) "Advance Rate" shall have the meaning assigned thereto in Section ------------ 16(b) hereof. (e) "Affiliate" shall mean, with respect to any specified Person, ---------- any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management the policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise and the terms "controlling" and controlled" have meanings correlative to the foregoing. (f) "Amount Financed" shall have the meaning assigned thereto in --------------- Section 16(b) hereof. (g) "Appraised Value" shall mean with respect to any related --------------- Collateral, generally, the lesser of (a) the appraised value of such Collateral based on an appraisal made at the time of the origination or modification of the related Contract and (b) the sales price of the related Collateral at such time of origination; except in the case of a Collateral securing a refinanced or modified Contract as to which it is either the appraised value determined above or the appraised value determined in an appraisal at the time of refinancing or modification, as the case may be. (h) "Assignment of Leases" shall mean any assignment of leases, rents -------------------- and profits or similar document or instrument executed by the Obligor in connection with the origination or subsequent modification or amendment of the related Contract. (i) "Back-Up-Servicer" shall mean Imperial Credit Industries, Inc., ---------------- or any successor thereto, subject, however, to approval by Buyer. (j) "Balloon Contracts" shall mean any Contract whose final Monthly ----------------- Payment is substantially greater than the preceding Monthly Payments. (k) "Business Day" shall mean any day other than (i) a Saturday or a ------------ Sunday or (ii) another day on which banking institutions in the State of New York are authorized or obligated by law, executive order, or governmental decree to be closed. -2- (l) "Closing Documents" shall mean all the documents required for the ----------------- closing of a franchise loan to an Obligor, including, without limitation, the documents in the Custodian's Contract File. (m) "Collateral" shall mean the Mortgaged Property, Equipment, ---------- Personalty and any other related property securing a Contract, including, without limitation, furniture, fixtures and accounts. (n) "Computer Tape" shall have the meaning assigned thereto in the ------------- Custodial Agreement. (o) "Contract" shall mean each Note and the other related Loan -------- Documents evidencing a franchise loan for operating restaurants which are to be sold and assigned by the Seller to the Buyer and which are the subject of the Agreement. The Contracts include, without limitation, all Records relating to such Contract and all related security interests, the Related Assets, and any and all rights to receive payments thereunder and all other proceeds thereof (including, without limitation, any recourse rights against third persons) from and after the related Purchase Date. (p) "Contract Purchase Price" shall have the meaning assigned thereto ----------------------- in Section 16(b) hereof. (q) "Contract Schedule" shall have the meaning assigned thereto in ----------------- the Custodial Agreement. (r) "Custodial Agreement" shall refer to one or more Custodial -------------------- Agreements, by and among Seller, CSFB and Custodian providing for the custody of ownership records relating to Contracts and the Servicing of the Contracts. (s) "Custodian" shall refer to First Bank National Association, in --------- its capacity as custodian under the Custodial Agreement or any successor thereto. (t) "Custodian's Contract File" shall have the meaning assigned ------------------------- thereto in the Custodial Agreement. (u) "Defaulted Contract" shall have the meaning assigned thereto in ------------------ the Custodial Agreement. (v) "Distribution Letter" shall have the meaning assigned thereto in ------------------- the Custodial Agreement. (w) "Eligible Contact" means, as of any date of determination, a ---------------- Contract that complies in all respects with the representations and warranties set -3- forth in Exhibit B hereto and that has not been repurchased, and is not required to be repurchased, pursuant to Section 9 hereof. (x) "Equipment" shall mean equipment and other related personal --------- property subject to the lien of the Security Agreement used in the operation of a restaurant or restaurants. (y) "ERISA" shall mean the Employee Retirement Income Security ----- Act of 1974, as amended. (z) "Escrow Agent" shall be a nationally recognized title insurance ------------ company acceptable to Seller and Buyer. (aa) "Escrow Agreement" shall mean the agreement entered into ---------------- between the Seller, Buyer and the Escrow Agent providing for the facilitation of a Table Funding, a form of which is attached to the Custodial Agreement. (ab) "Franchise Agreement" shall mean the agreement entered into ------------------- between the Obligor and the franchisor to operate a restaurant. (ac) "GAAP" shall have the meaning assigned thereto in the Custodial ---- Agreement. (ad) "Guaranty Agreement" shall mean the guaranty, dated October 10, ------------------ 1996, issued by Imperial Credit Industries, Inc. for the benefit of Buyer. (ae) "Hazard Insurance Policy" shall have the meaning assigned ----------------------- thereto in Paragraph 21 in Exhibit B thereto. (af) "Insurance Policy" shall mean any Hazard Insurance Policy, ---------------- Flood Insurance Policy, title insurance policy, business interruption or rental loss insurance policy, comprehensive general liability insurance policy and any other insurance policy that is maintained from time to time in respect of a Contract or the related Collateral. (ag) "LIBOR" shall have the meaning assigned thereto in Section ----- 16(a) hereof. (ah) "List of Contracts" shall have the meaning assigned thereto ----------------- in Section 4 hereof. (ai) "Loan Documents" shall mean the Note, Mortgage, Assignment of -------------- Leases, Security Agreement, and any other documents and agreements made for the benefit of the related originator and executed in connection with a Contract. -4- (aj) "Management Team" shall mean the group of managers of the --------------- Seller which shall include Wayne L. Knyal, President and Chief Executive Officer, and Thomas Shaughnessy, Chief Credit Officer. (ak) "Monthly Payment" shall mean the scheduled monthly payments of --------------- principal and interest on a Contract which is payable by an Obligor under such Contract. (al) "Mortgage" shall mean the mortgage or mortgages, deed of trust -------- or deeds of trust, that secures the Note and creates a lien on the fee simple or leasehold interest of the related Obligor in the related Mortgaged Property or Mortgaged Properties and on the related Personalty or Personalties. (am) "Mortgaged Property" shall mean the real property or real ------------------ properties, including any and all buildings, improvements and leasehold improvements thereon, subject to the lien of the related Mortgage, used in connection with the operation of a restaurant or restaurants. (an) "Multiemployer Plan" shall mean a multiemployer plan (within ------------------ the meaning of Section 4001(a)(3) of ERISA) in respect of which Seller makes contributions or has liability. (ao) "Note" shall mean the original executed promissory note ---- evidencing the indebtedness of an Obligor under a Contract, together with any rider, addendum or amendment thereto, or any renewal, substitution or replacement of such note. (ap) "Obligor" shall mean the Obligor or Obligors on a Note, ------- including, without limitation, any Person that has acquired the related Collateral and assumed the obligations of the original obligor under the Note. (aq) "PBGC" shall mean the Pension Benefit Guaranty Corporation ---- established pursuant to Section 4002 of ERISA, or any successor thereto. (ar) "Pay-Off Letter" shall have the meaning assigned thereto in -------------- the Custodial Agreement. (as) "Person" shall mean any individual, corporation, partnership, ------ joint venture, association, joint-stock company, trust, limited liability company, unincorporated organization or government or any agency or political subdivision thereof. (at) "Personalty" shall mean the personal property or properties of ---------- the Obligor specified in the related Mortgage. -5- (au) "Plan" shall mean any pension plan (other than a Multiemployer ---- Plan) covered by Title IV of ERISA, which is maintained by Seller or in respect of which Seller has liability. (av) "Prime Rate" shall mean, with respect to any date of ---------- determination, the daily prime loan rate as reported in The --- Wall Street Journal as most recently available as of the date ------------------- of determination or, if such rate is not published for any reason, a daily prime loan rate from a comparable financial publication. (aw) "Records" shall mean, with respect to any Contract, all ------- documents, books, records and other information (including, without limitation, computer programs, tapes, discs, punch cards and related property and rights) relating to such Contract. (ax) "Related Assets" shall mean, in respect of a Contract, (i) -------------- Seller's security interest in the Collateral, (ii) Seller's rights, remedies, powers and privileges under the Contracts, including any personal guaranty thereof, (iii) Seller's rights, remedies, powers and privileges under the Transaction Documents, (iv) Seller's rights, remedies, powers and privileges under any Insurance Policies, and (v) all proceeds of the foregoing. (ay) "Reportable Event" shall mean any of the events set forth in ---------------- Section 4043(c) of ERISA or the regulations thereunder. (az) Notwithstanding the definition set forth in Paragraph 1 of ----------- the Repurchase Agreement, "Securities" shall mean Contracts ---------- purchased pursuant to this Agreement. (ba) "Outstanding Principal Amount" shall have the meaning assigned ---------------------------- thereto in the Custodial Agreement. (bb) "Security Agreement" shall mean the pledge, security agreement ------------------ or similar instrument that secures the Note and creates a lien on the related Equipment. (bc) "Table Funding" shall mean the arrangement by which a franchise ------------- loan to the Obligor is financed by Seller through the Purchase Price provided by Buyer directly to the Escrow Agent. (bd) "Table Funding Closing Date" shall mean, with respect to a -------------------------- Table Funding, the date on which all the Closing Documents are received by the Escrow Agent. -6- (be) "Table Funding Period" shall mean, with respect to a -------------------- Transaction subject to a Table Funding, the period of time from the date Buyer transfers, by wire, to the Escrow Agent the Purchase Price to and including the date the Custodian receives the related Custodian's Contract File from the Escrow Agent. (bf) "Termination Date" shall have the meaning assigned thereto ---------------- in Section 13 hereof. (bg) "Transaction" shall, in addition to the definition set forth in ----------- the Repurchase Agreement, refer to substitutions pursuant to Paragraph 9 of the Repurchase Agreement. ----------- (bh) "Transaction Documents" shall mean this Agreement, the --------------------- Custodial Agreement and any related agreements. (bi) "Transaction Notice" shall have the meaning assigned thereto ------------------ in the Custodial Agreement. (bj) "Underwriting Standards" shall mean the standards of the Seller ---------------------- in accordance with which a Contract was originated, a copy of which is attached hereto as Exhibit D. (bk) "Wire Instruction Letter" shall have the meaning assigned ----------------------- thereto in the Custodial Agreement. 3. COMMITMENT. On the terms and subject to the conditions set forth in ---------- this Agreement and the Custodial Agreement, Buyer agrees to purchase from the Seller Eligible Contracts and Seller agrees to repurchase such Eligible Contracts from Buyer. 4. CONFIRMATIONS. ------------- (a) An agreement to enter into a Transaction may not be entered into orally unless otherwise agreed to between Seller and Buyer. (b) With respect to Transactions not subject to Table Funding: --------------------------------------------------------- Seller shall deliver to Buyer and Custodian (i) a Transaction Notice in the form of Exhibit C attached to the Custodial Agreement and (ii) on Computer Tape and in such computer readable form as requested by the Buyer, the List of Contracts relating to the Contracts subject to such Transaction not later than 12:00 p.m. New York City time, on the Business Day preceding the proposed Purchase Date with respect to such Transaction; provided however, that if the Delivery Date with ---------------- respect to each of the Contracts -7- identified in the Transaction Notice is a date preceding the date of such Transaction Notice, such Transaction Notice may be delivered not later than 11.00 a.m. on the proposed Purchase Date. Seller shall, either prior to the delivery of or with the Transaction Notice, deliver to the Custodian the items listed in Section 3.1 of the Custodial Agreement for each Contract identified in the Transaction Notice. Furthermore, Seller shall, upon reasonable notice, make available or, at Buyer's request, deliver to the Buyer or the Custodian any other documents in its possession relating to the Contracts for inspection by Buyer. The List of Contracts ("List of Contracts") shall include fields of information requested by Buyer, including, without limitation, the information set forth in Exhibit D to the Custodial Agreement. (c) With respect to Transactions subject to Table Funding: ---------------------------------------------------- Seller shall deliver to Buyer and Custodian a Transaction Notice, in the form attached hereto as Exhibit C, not --------- later than 12.00 p.m., New York City time, at least two (2) Business Days prior to the proposed Table Funding Closing Date related to a Transaction. Seller shall, at the time of delivery of the Transaction Notice, also deliver to Buyer a Wire Instruction Letter, Pay-Off Letter and a Disbursement Letter. Seller shall deliver or cause to be delivered to the Escrow Agent all of the Closing Documents, including all the items listed in Section 3.1 of the Custodial Agreement for such Contract identified in such Transaction Notice. Buyer shall, upon receipt of (x) an Initial Trust Receipt and Certification from the Custodian and (y) Wire Instruction Letter, Disbursement Letter and Pay-Off Letter from Seller, wire to the Escrow Agent, as directed by Seller in such Wire Instruction Letter, the Purchase Price for such Contract. Upon receipt of the Purchase Price by the Escrow Agent, Seller shall then (x) cause the Escrow Agent to deliver to the Custodian all the items listed in Section 3.1 of the Custodial Agreement for such Contract in accordance with the terms of the Escrow Agreement and (y) deliver to Custodian and Buyer a Computer Tape and Contract Schedule in respect of such Contract, in each case such delivery must be made for receipt thereof by Custodian within five (5) Business days after the date which the Escrow Agent receives from Buyer, by wire transfer, the Purchase Price for such Contract. (d) When Buyer determines that any Contracts identified in a Transaction Notice are Eligible Contracts and will be purchased pursuant to a Transaction, Buyer will confirm the terms of each Transaction by delivering a written confirmation to Seller (i) on or before the related Purchase Date in respect of a Transaction not subject to a Table Funding or (ii) on or before the date Buyer wires the Purchase Price to the Escrow -8- Agent in respect of a Transaction subject to a Table Funding, in each case in the form of Schedule 1 attached hereto (a "Confirmation "). Seller's acceptance of the Purchase Price paid by Buyer on the Purchase Date shall be deemed Seller's acknowledgement of and agreement with such Confirmation, and upon acceptance of such Purchase Price or, in the case of Table Funding, and upon receipt of the Purchase Price by Escrow Agent, Seller shall execute such Confirmation where provided therein and deliver the original executed copy of such Confirmation to the Buyer within 48 hours of the funding of such Transaction. (e) Any Confirmation by Buyer shall be deemed to have been received by Seller: (i) on the date sent if given by telecopy, telex or other telecommunication device capable of transmitting or creating a written record directly to the office of Seller, and (ii) on the Business Day following the day sent if sent by a nationally recognized overnight courier service. (f) No person or group of affiliated persons shall be the obligor or obligors in respect of any franchise loan or franchise loans acquired or originated by FMAC with an aggregate outstanding principal balance of greater than $35,000,000 unless such franchise loan or franchise loans shall have been offered by Seller to Buyer for purchase or financing, whereupon Buyer may, in its sole discretion, purchase such franchise loans or otherwise finance such franchise loans an such terms as may be negotiated by Seller and Buyer, which terms may be different than those generally applicable to Transaction hereunder. If Buyer declines to purchase such franchise loans hereunder or otherwise finance such franchise loans, Seller may finance such franchise loans with such financing sources as it deems appropriate. 5. BUYER MARGIN MAINTENANCE. Paragraph 4(a) of the Repurchase ------------------------ -------------- Agreement is hereby modified to provide that if the notice to be given by Buyer to Seller under such Paragraph is given at or prior to 1,00 p.m. New York City time, Seller shall transfer the Additional Purchased Securities to Buyer prior to 4.00 p.m. New York City time in New York City on the date of such notice, and if such notice is given after 1:00 p.m. New York City time, Seller shall transfer the Additional Purchased Securities prior to 4.00 p.m. New York City time in New York City on the Business Day following the date of such notice. Each Custodial Agreement shall set forth further terms and provisions relating to Buyer's and Seller's rights and obligations under Paragraph 4 of the ----------- Repurchase Agreement. 6. SELLER MARGIN MAINTENANCE. Paragraph 4(b) of the Repurchase ------------------------- Agreement is hereby deleted in its entirety. -9- 7. SECURITY INTEREST. ------------------ (a) In the event, for any reason, any Transaction is construed by any court as a secured loan rather than a purchase and sale, the parties intend that Seller shall have granted to Buyer a perfected first priority security interest in all of the Purchased Securities. (b) Seller shall pay all fees and expenses associated with perfecting and maintaining such security interest including, without limitation, the cost of filing financing statements and continuation statements under the Uniform Commercial Code and the recording of any assignment of Mortgage or lease in the appropriate jurisdiction as and when required thereunder or, if so specified by Buyer, upon the occurrence of an Event of Default or Event of Termination hereunder. Buyer shall not record any Assignment of Mortgage, Assignment of Assignment of Leases or assignments of UCC-1 financing statements listing the Seller as secured party until there shall have occurred an Event of Default or Event of Termination hereunder. (c) In the event that Buyer elects to engage in repurchase transactions with the Purchased Securities or otherwise elects to pledge or hypothecate the Purchased Securities, Seller shall, at the request of Buyer (i) do and perform such acts and things necessary to enable the Custodian to do and perform such further acts and things and to execute and deliver to Buyer and its counterparty such additional documents, acknowledgements, powers and instruments as are required by Buyer in connection with such transaction and such counterparty, and (ii) provide Buyer's counterparty in such repurchase transaction with an opinion of counsel to the effect that such counterparty has a perfected first priority security interest in such Purchased Securities. Buyer shall promptly reimburse Seller for Seller's out-of- pocket expenses incurred in connection with performance under this subsection 7(c). 8. REPRESENTATIONS: COVENANTS. -------------------------- (a) Each party represents and warrants, and shall on and as of the Purchase Date of any Transaction and on and as of each date thereafter through the related Repurchase Date be deemed to represent and warrant, as follows: i) The execution, delivery and performance of the Agreement and the performance of each Transaction do not and will not result in or require the creation of any lien, security interest or other charge or encumbrance (other than pursuant hereto) upon or with respect to any of its properties; and -10- ii) The Agreement is, and each Transaction when entered into under the Agreement will be, a legal, valid and binding obligation of it enforceable against it in accordance with the terms of the Agreement. (b) Seller hereby makes, and on and as of the Purchase Date of any Transaction and on and as of each date thereafter through the related Repurchase Date shall be deemed to have made, the representations and warranties to Buyer set forth in Exhibit A and Exhibit B hereto. The representations and warranties set forth herein shall survive transfer of the Purchased Securities to the Buyer and shall continue until the Agreement has terminated. In the event Buyer engages in a repurchase transaction with any of the Purchased Securities or otherwise pledges or hypothecates any of the Purchased Securities, Buyer shall have the right to assign to Buyer's counterparty any or all of the representations and warranties in Exhibit B as they relate to the Purchased Securities that are subject to such repurchase transaction; provided, however, that any such repurchase transaction, -------- ------- pledge or hypothecation shall not diminish or impair the obligation of the Buyer to reconvey the Securities to the Seller in accordance herewith. 9. REPURCHASE OF CONTRACTS. ----------------------- (a) Upon discovery by the Seller of a breach of any of the representations set forth in Exhibit B except for the representation and warranty set forth in Paragraph 4 of Exhibit B, the Seller shall immediately give written notice thereof to the other party. If the Seller does not correct or cure such breach on or before the 30th day following the earlier of discovery of such breach by Seller or receipt of notice of such breach, then the Seller shall repurchase such Contract on the Repurchase Date next succeeding such 30th day following receipt of such notice (or, if such 30th day following receipt of such notice occurs on a Repurchase Date, on such Repurchase Date). (b) Seller shall repurchase from Buyer on each Repurchase Date (without regard to whether the full amount of the Repurchase Price for any Transaction is payable on such Repurchase Date) each Contract with respect to which all or any part of the scheduled monthly payment due in the second calender month immediately preceding the calendar month in which such Repurchase Date occurs has not been received as of the end of the preceding calendar month. (c) The repurchase price required to be paid by Seller to Buyer for any Contract repurchased pursuant to subsection (a) or (b) of this Section 9 -11- shall be an amount equal to the sum of the Contract Purchase Price for such Contract and the accrued and unpaid Price Differential with respect to such Contract. (d) In addition to the foregoing, Seller hereby indemnifies and holds harmless Buyer for any loss, liability, expense (including attorney fees) or damage suffered or incurred by Buyer arising from or in any way related to a breach by Seller of any representation or warranty of Seller in this Agreement. (e) With respect to a Contract subject to a Table Funding, in the event the Custodian does not receive the Custodian's Contract File within the period of time specified in Section 4(c) hereof, Seller shall immediately repurchase the related Contract at the Repurchase Price (calculated based on the Pricing Rate applied during the Table Funding Period) for such Contract, unless otherwise agreed to by Buyer. 10. EVENTS OF DEFAULT. ----------------- (a) The term "Event of Default" shall, in addition to the ---------------- definition set forth in the Repurchase Agreement, include the following events: i) Buyer shall have reasonably determined that Seller is or will be unable to meet its commitments under the Transaction Documents or that the Guarantor is or will be unable to meet its commitments under the Guaranty Agreement and shall have notified Seller or Guarantor, as applicable, of such determination and Seller or Guarantor, as applicable, shall not have responded with appropriate information to the contrary to the reasonable satisfaction of Buyer within one Business Day. ii) The Agreement shall for any reason cease to create a valid, first priority security interest in any of the Purchased Securities purported to be covered thereby. iii) A final judgement by any competent court in the United States of America for the payment of money in an amount of at least $100,000 is rendered against Seller and the same remains undischarged for a period of 30 days during which execution of such judgement is not effectively stayed. iv) FMAC shall fail to observe or perform any of the covenants or agreements under any Transaction Document, which failure, in the good faith judgment of CSFB, materially and adversely affects the -12- rights of the Buyer and which failure shall not have been cured by FMAC within 30 days of the earlier of discovery of such failure by FMAC or notification by Buyer to Seller of same. v) Any event of default shall occur and be continuing and shall not have been waived by under any repurchase or other financing agreement for borrowed funds or indenture for borrowed funds by which FMAC is bound or affected. vi) In the good faith judgment of CSFB a material adverse change shall have occurred in the business, operations or financial condition of FMAC or the Guarantor. vii) CSFB shall not have received (a) a certificate, substantially in the form set forth in Paragraph --------- II.(c)(2) of Exhibit A hereto, on the 5th Business Day --------- of each month with respect to the prior month's activity, and (b) a certificate, substantially in the form set forth in paragraph II.(c)(1) of Exhibit A hereto, within ten (10) Business Days following the date the related annual or quarterly financial statement is required to be delivered, or (c) written assurances as to the financial well-being of FMAC or the Guarantor within one Business Day of a request by CSFB therefor. viii) FMAC shall be in default with respect to any provision under any debt contract or agreement, any servicing agreement or any lease to which it is a party, which default, in the good faith judgment of CSFB, could materially and adversely affect the financial condition of FMAC (which defaults include, but are not limited to, an Act of Insolvency of FMAC or the failure of FMAC to make required payments under such contract or agreement as they become due). ix) Any representation or warranty made by FMAC in Exhibit A hereto or in Paragraphs 1, 44, 45 or 46 of Exhibit B ---------- hereto or in the Custodial Agreement shall have been incorrect or untrue when made or repeated or when deemed to have been made or repeated, or any representation or warranty made by the Guarantor in the Guaranty Agreement shall be incorrect or untrue at any time during the term of the Guaranty Agreement. x) FMAC shall fail to promptly notify CSFB of (i) the acceleration of any material debt obligation or the termination of any credit facility of FMAC, respectively, which failure to so notify has prejudiced Buyer rights hereunder; (ii) the amount and maturity of any such debt assumed or any funding facility entered into after -13- the date hereof; (iii) any material adverse developments with respect to pending or future material litigation involving FMAC, respectively; and (iv) any other developments which might, in the good faith judgment of CSFB, materially and adversely affect the financial condition of FMAC. xi) Either FMAC's or the Guarantor's audited annual financial statements or the notes thereto or other opinions or conclusions stated therein shall be qualified or limited by reference to the status of FMAC or the Guarantor, as applicable, as a "going concern" or a reference of similar import. xii) Seller shall have terminated or consented to the termination of the Back-Up Servicer without the prior written consent of the Buyer. xiii) Any material amendment to the Underwriting Standards or buying practices pursuant to which any of the Contracts were originated or acquired that was not previously approved in writing by the Buyer. xiv) Either (i) a change in control or ownership of FMAC shall have occurred other than in connection with and as a result of (a) the issuance and sale by FMAC of common stock in an initial public offering or (b) the transfer of ownership interests in FMAC to any party that was an Affiliate of FMAC prior to such transfer (including the Guarantor) or its chief executive officer as of the date hereof; or (ii) both the chief executive officer and chief credit officer of FMAC cease to be employed by FMAC and functioning in their respective capacities and successors acceptable to CSFB shall not have been employed by FMAC and commenced functioning in such capacities. (b) In addition to the rights of the Buyer pursuant to Paragraph --------- 11 of the Repurchase Agreement, upon the occurrence of an -- Event of Default by Seller: i) Buyer's commitment to purchase Eligible Contracts under Section 3 hereof shall immediately terminate; ii) All rights of Seller to receive payments which it would otherwise be authorized to receive pursuant to the Custodial Agreement shall cease, and all such rights shall thereupon become vested in Buyer, which shall thereupon have the sole right to receive such payments -14- and apply them to the aggregate unpaid Repurchase Prices owed by Seller; iii) All payments which are received by Seller contrary to the provisions of the preceding clause (ii) above shall be received in trust for the benefit of Buyer and shall be segregated from other funds of Seller; and iv) The Pricing Rate for each day from and after the date of such Event of Default shall be a per annum rate equal to the sum of (i) the Prime Rate and (ii) three percent (3.0%). (c) Each event specified in Section 10(a) of these Supplemental Terms may, at the option of CSFB, cause an acceleration of the Repurchase Date for a Transaction and shall be in addition to any other rights of CSFB to cause such an acceleration under the Agreement. (d) The method, manner, time, place and terms of any disposition of Collateral by Buyer following an Event of Default hereunder shall, in accordance with Section 9-504 of the Uniform Commercial Code as in effect in the State of New York, be commercially reasonable. 11. EVENTS OF TERMINATION. At the option of CSFB, exercised by --------------------- written notice to FMAC, Buyer's commitment to purchase Eligible Contracts that are not the subject of a Transaction as of the occurrence of any of the following events (each, an "Event of Termination") shall immediately terminate: (a) In the good faith judgment of CSFB a material adverse change shall have occurred in the business, operations, properties, prospects or condition (financial or otherwise) of FMAC; or (b) CSFB shall request written assurances as to the financial well-being of FMAC and such assurances shall not have been provided within one Business Day of such request. 12. SERVICER TERMINATION. In addition to, or in lieu of, any rights ------------------- of Buyer under Section 10 or Section 11 hereof, Buyer may terminate Seller as servicer of the Contracts upon any failure by Seller to (i) deposit funds to the Contract Account as required pursuant to the Custodial Agreement, which failure is not remedied within one (1) Business Day, or (ii) observe or perform any of the other covenants or agreements set forth in the Custodial Agreement or Exhibit A hereto, which failure, in the reasonable judgment of CSFB, materially and adversely affects the rights of the Buyer. -15- 13. TERM OF AGREEMENT. The last sentence of Paragraph 15 of the ----------------- ------------ Repurchase Agreement is hereby deleted. Subject to earlier termination as set forth below, the Agreement shall terminate on the Repurchase Date occurring in December 1996 (such termination date, as if may be extended pursuant to the following proviso, the "Termination Date") and all Transactions outstanding hereunder shall terminate automatically without any requirement for notice on such date; provided however, that the Agreement and -------- ------- any Transaction outstanding hereunder shall be extended for an additional twelve (12) month term if there shall have been consummated by December 31, 1996 a securitization rated by one or more nationally recognized statistical rating organizations of a pool comprised jointly of Contracts or other franchise loans acquired by Seller and franchise loans acquired by Buyer from sources other than the Seller (such extension, a "Mandatory Extension"). In addition, this Agreement and any Transaction outstanding hereunder may be extended by a mutual agreement of CSFB and FMAC, subject, however, to changes in terms and conditions, including, without limitation, changes in the Pricing Rate; provided, however, that neither party shall be obligated to -------- ------- agree to such an extension. It is further understood and agreed that if, notwithstanding the foregoing, any Transaction shall remain outstanding subsequent to the termination of this Agreement, this Agreement shall nevertheless survive to govern the termination of such outstanding Transaction. 14. FINANCIAL STATEMENTS. As of the date hereof, the parties hereto -------------------- have each provided the other with such party's audited year-end financial statements and such party's most recent publicly available interim financial statement. Each delivery of Purchased Securities to Buyer hereunder will constitute a representation by Seller that there has been no material adverse change in Seller's of FMAC'S financial condition not disclosed to Buyer since the date of Seller's most recent financial statement. 15. MINIMUM AND MAXIMUM TRANSACTION AMOUNTS. With respect to a --------------------------------------- transaction in which FMAC acts as Seller: (a) The minimum amount of any Transaction under this Agreement shall have an aggregate Repurchase Price of $500,000 unless CSFB shall have consented to a lesser amount with respect to any individual Transaction. (b) The aggregate outstanding Repurchase Price for the Purchased Securities subject to the Agreement at any one time shall not exceed $200,000,000. 16. PRICING RATE; PURCHASE PRICE. ---------------------------- (a) The Pricing Rate with respect to each Transaction hereunder shall be as follows: -16- (i) During any Table Funding Period: The Pricing Rate shall ------------------------------- be a per annum rate equal to LIBOR plus (x) 1.75% through and including December 31, 1996 or (y) 2.10% for the twelve (12) month term commencing January 1, 1997 upon the occurrence of a Mandatory Extension. (ii) After any Table Funding Period or For Transactions not ------------------------------------------------------ subject to Table Funding: The Pricing Rate shall be a ------------------------ per annum rate equal to LIBOR plus (x) 1.25% through and including December 31, 1996 or (y) 1.60% for the 12 month term commencing January 1, 1997 upon the occurrence of a Mandatory Extension. "LIBOR" shall be the offered rate for United States dollars with a maturity of one month which appears on Telerate as of 9.00 A.M., New York City time, on the day that is the first LIBOR Business Day of the calendar month in which the Purchase Date for such Transaction occurs,; provided, however, that if such rate does not appear on -------- ------- the Dow Jones Telerate Service page 3750 (or such other page as may replace that page on that service) or if such service is no longer offered, the rate for United States dollars with a maturity of one month quoted by such other service as may be selected by the Buyer. "LIBOR Business Day" means any day other than a Saturday, Sunday or any other day on which banking institutions in the City of London, England are required or authorized by law to be closed. (b) The Purchase Price with respect to each Transaction shall be the lesser of (i) the aggregate of the Contract Purchase Price for each Contract purchased by Buyer pursuant to such Transaction and (ii) 95% of the aggregate Outstanding Principal Amount of the Contracts. The "Contract Purchase Price" with respect to each Contract shall be equal to the product of (x) Outstanding Principal Amount of such Contract less any amounts not disbursed to the related Obligor and (y) a fraction, the numerator of which is the purchase price paid by FMAC for such Contract, and the denominator of which is the Amount Financed under such Contract (such fraction, the "Advance Rate"). The "Amount Financed" with respect to any Contract shall equal the amount advanced thereunder plus all related costs for which the Obligor is liable under such Contract. 17. REPURCHASE DATE AND REPURCHASE PRICE. ------------------------------------ (a) On each Repurchase Date, unless (i) Buyer shall have notified Seller of an Event of Default pursuant to Paragraph --------- 11 of the Repurchase Agreement or Section 10 hereof, or (ii) -- such Repurchase Date shall be the Termination Date, Seller and Buyer shall rollover all Transactions -17- maturing on such date into a single Transaction with respect to all Purchased Securities (other than Purchased Securities rejected by Buyer pursuant hereto or subject to repurchase by Seller on such Repurchase Date pursuant hereto) which were the subject of the matured Transactions. Seller shall pay to Buyer on each Repurchase Date the greater of (x) aggregate Price Differential with respect to all Transactions terminating on such Repurchase Date and (y) the excess, if any, of (A) the Repurchase Price for all Transactions terminating on such Repurchase Date over (B) the Market Value of the Purchased Securities purchased by Buyer on such Repurchase Date pursuant to the preceding sentence. Payment of amounts payable to Buyer shall be made by wire transfer in immediately available funds. (b) Seller agrees to indemnify Buyer and to hold Buyer harmless from any loss or reasonable expense which Buyer may sustain or incur as a consequence of the repurchase of Securities by Seller on a day that is not a Repurchase Date. Such indemnification shall be in an amount including, but not limited to, the excess, if any, of (i) the amount of Price Differential that would have been payable with respect to the related Transaction on the next succeeding Repurchase Date but for such repurchase over (ii) the sum of (x) the amount of Price Differential paid by Seller to Buyer in connection with such repurchase, if any, and (y) the amount of interest (as determined by Buyer) that would have accrued on the amount paid by Seller to Buyer in connection with such repurchase had such amount been deposited by Buyer with leading banks in the interbank eurodollar market until the next succeeding Repurchase Date. This covenant shall survive the termination of this Agreement and the payment of all other amounts payable hereunder. Notwithstanding the foregoing, Seller shall not be liable for indemnifying Buyer pursuant to this subsection 17(b) if such repurchase is effected to facilitate a securitization of such Securities and Seller has engaged Buyer to act as placement agent or underwriter in connection with such securitization. Nothing contained in this subsection 17(b) shall be construed to relieve Seller of its obligation to pay to Buyer the Repurchase Price in connection with any repurchase of Securities hereunder. 18. ADDITIONAL INFORMATION. ---------------------- (a) At any reasonable time, Seller shall permit Buyer, its agents or attorneys, to inspect and copy any and all documents and data in their possession pertaining to each Security that is the subject of such Transaction. Such inspection shall occur upon the request of Buyer at a mutually agreeable location during regular business hours and on a date not more than two (2) Business Days after the date of such request. -18- (b) Seller agrees to provide Buyer from time to time with such information concerning Seller and FMAC of a financial or operational nature as Buyer may request. (c) Seller shall provide Buyer with copies of all filings made by or on behalf of Seller with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, promptly upon making such filings. 19. REJECTION OF SECURITIES. Buyer may reject any Security from ----------------------- inclusion in a Transaction hereunder if Buyer determines, in its sole discretion, that such Contract was not originated in conformity with the Underwriting Standards. 20. RIGHT OF SET-OFF. In addition to its rights hereunder, upon the ---------------- occurrence and continuation of an Event of Default or an event that with notice, the passage of time or both shall constitute an Event of Default, Buyer shall have the right to proceed against any assets of Seller which may be in possession of Buyer, including the right to liquidate such assets and to set-off the proceeds against monies owed by Seller to Buyer pursuant to this Agreement. Buyer may set-off cash, the proceeds of the liquidation of the Purchased Securities and Additional Purchased Securities, any collateral or its proceeds, and all other sums or obligations owed by Buyer to Seller against all of Seller's obligations to Buyer, whether under this Agreement, under a Transaction, or under any other agreement between the parties, or otherwise, whether or not such obligations are then due, without prejudice to Buyer's right to recover any deficiency. Any cash proceeds, or property in excess of any amounts due, or which Buyer reasonably believes may become due, to it from Seller shall be returned to Seller after satisfaction of all obligations of Seller to Buyer. 21. OPINIONS OF COUNSEL. Seller shall, on the date of the first ------------------- Transaction hereunder and, upon the request of Buyer, on the date on any subsequent Transaction, cause to be delivered to Buyer, with reliance thereon permitted as to any person or entity that purchases the Securities from Buyer in a repurchase transaction, a favorable opinion or opinions of counsel with respect to the matters set forth in Exhibit C hereto, in form and substance --------- acceptable to CSFB. 22. ADDITIONAL CONDITIONS. Prior to entering into the initial --------------------- Transaction under this Agreement, Seller shall cause each of the following conditions to occur: (a) A Custodial Agreement to cover the Contracts, in a form satisfactory to CSFB, shall have been executed and delivered by the parties thereto. -19- (b) FMAC shall have disclosed information satisfactory to CSFB with respect to the scheduled maturities and termination provisions of all outstanding credit facilities and debt of FMAC. (c) A guaranty agreement in form and substance satisfactory to CSFB shall have been executed and delivered by FMAC's parent, Imperial Credit Industries, Inc. (d) FMAC shall have executed and delivered to CSFB a letter agreement dated the date hereof in form and substance satisfactory to CSFB and shall pay to CSFB the Advisory Fee as required therein. (e) Seller shall have arranged with one or more nationally recognized title insurance companies acceptable to Seller and Buyer to act as an Escrow Agent with respect to any Table Funding. Notwithstanding anything contained herein to the contrary, prior to each Table Funding, Seller, Buyer and the Escrow Agent shall execute and Escrow Agreement in form satisfactory to Buyer. 23. REPURCHASE TRANSACTIONS. CSFB may in its sole election engage in ----------------------- repurchase transactions with the Purchased Securities or otherwise pledge, hypothecate, assign, transfer or otherwise convey the Purchased Securities with a counterparty of CSFB's choice; provided, however, that no such transaction by CSFB shall -------- ------- relieve CSFB of its obligations to FMAC in connection with the repurchase by FMAC of any Purchased Securities in accordance with the terms of this Agreement. 24. NEW YORK JURISDICTION; WAIVER OF JURY TRIAL. FMAC agrees to ------------------------------------------- submit to personal jurisdiction in the State of New York in any action or proceeding arising out of this Agreement. CSFB and FMAC each hereby waive the right of trial by jury in any litigation arising hereunder. 25. FURTHER ASSURANCES. Seller agrees to do such further acts and ------------------ things and to execute and deliver to Buyer such additional assignments, acknowledgements, agreements, powers and instruments as are reasonably required by Buyer to carry into effect the purposes of the Agreement, to perfect the interests of the Custodian in the Contracts and the Related Assets or to better assure and confirm unto Buyer its rights, powers and remedies hereunder. 26. BINDING TERMS. All of the representations, warranties, covenants, ------------- stipulations, promises and agreements in the Agreement shall bind and inure to the benefit of the successors of the parties hereto, whether expressed or not. -20- 27. NOTICES AND OTHER COMMUNICATIONS. Any provision of Paragraph 13 -------------------------------- ------------ of the Repurchase Agreement to the contrary notwithstanding, any notice required or permitted by the Agreement shall be in writing (including telegraphic, facsimile or telex communications) and shall be effective and deemed delivered only when received by the party to which it is sent; provided, however, that a facsimile transmission shall be deemed to be received when transmitted so long as the transmitting machine has provided an electronic confirmation of such transmission. Any such notice shall be sent to a party at the address or facsimile transmission number set forth in Annex II attached hereto. 28. FEES AND DISBURSEMENTS. Seller shall promptly pay all fees and ---------------------- expenses (including without limitation those of counsel, accountants and escrow agent) incurred by Buyer and Custodian in entering into the Transaction Documents to which it is a party and the Transactions. In the event that either party commences a lawsuit or proceeding against the other in connection with the Agreement, any and all reasonable attorneys' fees and costs incurred by the Buyer in connection with such lawsuit or proceeding shall be paid by the Seller unless Seller shall have prevailed in such proceeding. -21- IN WITNESS WHEREOF, Buyer and Seller have caused their names to be signed hereto by their respective officers thereunto duly authorized, all as of the day and year first above written. CS FIRST BOSTON MORTGAGE CAPITAL CORP., as Buyer By /s/ Emily Youssouf ---------------------------------- Name: Emily Youssouf Title: V.P FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, as Seller By__________________________________ Name: Title: IN WITNESS WHEREOF, Buyer and Seller have caused their names to be signed hereto by their respective officers thereunto duly authorized, all as of the day and year first above written. CS FIRST BOSTON MORTGAGE CAPITAL CORP., as Buyer By__________________________________ Name: Title: FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, as Seller By /s/ John Rinaldi ---------------------------------- Name: John Rinaldi Title: S.V.P EXHIBIT A --------- REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER I. FMAC represents, warrants and covenants, as of the date hereof and as of each day during the term of the Agreement, as follows: (a) Due Organization and Qualification. FMAC is a limited liability ---------------------------------- company duly organized, validly existing and in good standing under the laws of the state of California. FMAC is duly qualified to do business, is in good standing and has obtained all necessary licenses, permits, charters, registrations and approvals (together, "approvals) necessary for the conduct of --------- its business as currently conducted and the performance of its obligations under the Transaction Documents, in each jurisdiction in which the failure to be so qualified or to obtain such approvals would render any Contract unenforceable in any respect or would otherwise have a material adverse effect upon any Transaction. (b) Power and Authority. FMAC has all necessary power and authority to ------------------- conduct its business as currently conducted, to execute, deliver and perform its obligations under the Transaction Documents and to consummate the Transactions. (c) Due Authorization. The execution, delivery and performance of the ----------------- Transaction Documents by FMAC have been duly authorized by all necessary action under its operating agreement or similar organizational documents and do not require any additional approvals or consents or other action by or any notice to or filing with any Person. (d) Noncontravention. None of the execution and delivery of the ---------------- Transaction Documents by FMAC, the consummation of the transactions contemplated thereby or the satisfaction of the terms and conditions of the Transaction Documents: (i) conflicts with or results in any breach or violation of any provision of the operating agreement or similar organizational documents of FMAC or any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award currently in effect having applicability to FMAC, or any of its properties, including regulations issued by an administrative agency or other governmental authority having supervisory powers over FMAC; (ii) constitutes a default by FMAC under or a breach of any provisions of any loan agreement, mortgage, indenture or other agreement or instrument to which FMAC or any of its affiliates is a party or by which it or any of its properties is or may be bound or affected; or (iii) results in or requires the creation of any lien upon or in respect of any of the assets of FMAC or any of its affiliates except as otherwise expressly contemplated by the Transaction Documents. A-1 (e) Legal Proceedings. There is no action, proceeding or investigation by ----------------- or before any court, governmental or administrative agency or arbitrator against or affecting all or any of the Contracts, FMAC or any of its affiliates, or any properties or rights of FMAC or any of its affiliates, pending or threatened, which, in any case, if decided adversely, would have a material adverse effect with respect to FMAC or any Contract. (f) Valid and Binding Obligations. Each of the Transaction Documents to ----------------------------- which FMAC is a party when executed and delivered by FMAC will constitute the legal, valid and binding obligations of FMAC, enforceable in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and general equitable principles. (g) Financial Statements. The Financial Statements of FMAC, copies of -------------------- which have been furnished to Buyer, (i) are, as of the dates and for the periods referred to therein, complete and correct in all material respects, (ii) present fairly the financial condition and results of operations of each of FMAC as of the dates and for the periods indicated and (iii) have been prepared in accordance with generally accepted accounting principles consistently applied, except as noted therein (subject as to interim statements to normal year-end adjustments). Since the date of the most recent Financial Statements, there has been no material adverse change in such financial condition or results of operations. Except as disclosed in the Financial Statements, FMAC is not subject to any contingent liabilities or commitments that, individually or in the aggregate, would have a material adverse change in the business or operations of FMAC if such contingency were to occur. (h) ERISA. FMAC is in compliance with ERISA and has not incurred and does ----- not reasonably expect to incur any liabilities to the PBGC under ERISA in connection with any Plan or Multiemployer Plan or to contribute now or in the future in respect of any Plan or Multiemployer Plan. (i) Accuracy of Information. None of the documents or information provided ----------------------- by Seller to Buyer in connection with the Agreement or the Transactions thereunder contain any statement of fact with respect to FMAC or the Transactions that was untrue or misleading in any respect when made. Since the furnishing of such documents or information, there has been no change, nor any development or event involving a prospective change known to FMAC that would render any of such documents or information untrue or misleading in any respect. There is no fact known to FMAC which has a possibility of causing a material adverse change with respect to FMAC or the Contracts. (j) [Reserved]. ---------- (k) No Consents. No consent, license, approval or authorization from, or ----------- registration, filing or declaration with, any regulatory body, administrative agency, or other governmental instrumentality, nor any consent, approval, waiver or notification of any creditor, A-2 lessor or other nongovernmental person, is required in connection with the execution, delivery and performance by FMAC of this Agreement or of any other Transaction Document. (l) Compliance With Law, Etc. No practice, procedure or policy employed ------------------------ or proposed to be employed by FMAC in the conduct of its businesses violates any law, regulation, judgment, agreement, order or decree applicable to it which, if enforced, would result in a material adverse effect upon FMAC. (m) Solvency; Fraudulent Conveyance. FMAC is solvent and will not be ------------------------------- rendered insolvent by the Transaction and, after giving effect to such Transaction, FMAC will not be left with an unreasonably small amount of capital with which to engage in its business. FMAC does not intend to incur, or believe that it has incurred, debts beyond its ability to pay such debts as they mature. FMAC is not contemplating the commencement of insolvency, bankruptcy, liquidation or consolidation proceedings or the appointment of a receiver, liquidator, conservator, trustee or similar official in respect of FMAC or any of its assets. The amount of consideration being received by the Seller upon the sale of the Contracts to Buyer and thereafter upon the sale of any Contracts by the Seller to the Buyer constitutes reasonably equivalent value and fair consideration for such Contracts. FMAC is not transferring any Contracts with any intent to hinder, delay or defraud any of its creditors. (n) Investment Company Act Compliance. FMAC is neither required to be --------------------------------- registered as an "investment company" as defined under the Investment Company Act nor under the control of an "investment company" as defined under the Investment Company Act. (o) Taxes. FMAC has and each of its affiliates have filed all federal and ----- state tax returns which are required to be filed and paid all taxes, including any assessments received by it, to the extent that such taxes have become due. Any taxes, fees and other governmental charges payable by FMAC in connection with the Transaction and the execution and delivery of the Transaction Documents have been paid. (p) Licenses. Other than as set forth in Schedule 2 hereto, Buyer will -------- not be required as a result of purchasing Contracts to be licensed, registered or approved or to obtain permits or otherwise qualify (i) to do business in any state in which it currently so required or (ii) under any state consumer lending, fair debt collection or other applicable state statute or regulation. (q) Chief Executive Office: The chief executive office of the Seller is ---------------------- located at Five Greenwich Office Park, 4th Floor, Greenwich, Connecticut 06831. (r) Good Title; Valid Transfer; Absence of Liens; Security Interest. --------------------------------------------------------------- Immediately prior to the sale of the Contracts to the Buyer pursuant to the Agreement on the Purchase Date FMAC was the owner of, and had good, marketable and indefeasible title to, such Contracts free and clear of any and all liens, security interests, charges, pledges, preferences, encumbrances or rights of others, and restrictions on transferability, and had full right, power and lawful A-3 authority to assign, transfer and pledge such Contracts. The Agreement constitutes a valid sale, transfer and assignment of the Contracts to the Buyer enforceable against creditors of FMAC. (s) Perfection of Liens and Security Interest. The lien and security ----------------------------------------- interest in favor of the Buyer with respect to the Contracts will be perfected by (i) the delivery of the Contracts to the Custodian, which Contracts the Custodian will hold on behalf of the Buyer, (ii) the filing of financing statements on Form UCC-1 and recording of any assignment of mortgage and lease in the appropriate jurisdiction or jurisdiction where such recording or filing is necessary for the perfection of the security interest in favor of the Buyer, and no other filings in any jurisdiction or any other actions (except as expressly provided herein) are necessary to perfect the Buyer's first priority lien on and security interest in the Contracts as against any third parties. II. FMAC hereby agrees that during the term of the Agreement, unless Buyer shall otherwise expressly consent in writing: (a) Compliance With Agreements and Applicable Laws. FMAC shall perform ---------------------------------------------- each of its obligations under the Transaction Documents and shall comply with all requirements of any law, rule or regulation applicable to it or thereto, or that are required in connection with its performance under any of the Transaction Documents. (b) Financial Statements: Accountants' Reports; Other Information. FMAC ------------------------------------------------------------- shall keep or cause to be kept in reasonable detail books and records of account of its assets and business and shall clearly reflect therein the transfer of Additional Contracts to the Buyer. FMAC shall furnish or cause to be furnished to Buyer: (i) Annual Financial Statements. As soon as available, and in any --------------------------- event within 120 days after the close of each fiscal year FMAC, the audited balance sheets of FMAC as of the end of such fiscal year and the audited statements of income and changes in equity of FMAC for such fiscal year, all in reasonable detail and stating in comparative form the respective figures for the corresponding date and period in the preceding fiscal year, prepared in accordance with generally accepted accounting principles, consistently applied, and accompanied by the certificate of FMAC's independent accountants (who shall be, in each case, a nationally recognized firm or otherwise acceptable to Buyer). (ii) Quarterly Financial Statement. As soon as available, and in any ----------------------------- event within 60 days after the close of each of the first three quarters of each fiscal year of FMAC, the unaudited balance sheets of FMAC as of the end of such quarter and the unaudited statements of income and changes in equity of FMAC for the portion of the fiscal year then ended, all in reasonable detail and stating in comparative form the respective figures for the corresponding date and period in the preceding fiscal year, prepared in accordance with generally accepted accounting principles, consistently applied (subject to normal year-end adjustments). A-4 (iii) Monthly Financial Statements. As soon as available, and in ---------------------------- any event within 30 days after the last day of each calender month, the unaudited balance sheets of FMAC as of the end of such calender month and the unaudited statements of income and changes in equity of FMAC for the portion of the fiscal year then ended, all in reasonable detail and prepared in accordance with generally accepted accounting principles, consistently applied (subject to normal year-end adjustments), to the extent such monthly balance sheets and/or statements are prepared or reviewed by the Management Team. (iv) Contract Performance Data. Monthly reports in form and scope ------------------------- satisfactory to CSFB, setting forth data regarding the performance of the Contracts, including, without limitation, information with respect to delinquencies, repossessions, charge-offs, Obligor bankruptcies, extensions and modifications and such other information as CSFB may request. (v) Monthly Servicing Diskettes. A computer tape and a diskette --------------------------- (or any other electronic transmission acceptable to Buyer and the Back-Up Servicer) in a format acceptable to the Buyer and the Back-Up Servicer containing such information with respect to the Contracts and the servicing of the Contracts as CSFB or the Back-up Servicer may request. (vi) Annual Budgets; Business Plans. Such annual budgets, monthly ------------------------------ and annual comparisons of conformity of operations with annual budgets, three-year projections of financial and operations results, strategic business plans and other internal reports, to the extent prepared or reviewed by the Management Team, as CFSB may request. (vii) Other Information. Promptly upon receipt thereof, copies of ----------------- all reports, statements, certifications, schedules, or other similar items delivered to or by FMAC pursuant to the terms of the Transaction Documents and, promptly upon request, such other data as Buyer may reasonably request. Upon the request of Buyer, FMAC shall permit Buyer or its authorized agents (A) to inspect the books and records of FMAC as they may relate to the Contracts, the obligations of FMAC under under the Transaction Documents, the Transactions and FMAC's business; (B) to discuss the affairs, finances and accounts of FMAC with its respective chief operating officer and chief financial officer, in each case no more frequently than annually, unless an Event of Default has occurred; and (C) to discuss the affairs, finances and accounts of FMAC with its independent accountants, provided that an officer of FMAC shall have the right to be -------- present during such discussions. Such inspections and discussions shall be conducted during normal business hours and shall not unreasonably disrupt the business of FMAC. In addition, FMAC shall promptly (but in no case more than 30 days following issuance or receipt) provide to Buyer a copy of all correspondence between FMAC and the PBGC, Internal Revenue Service, Department of Labor or the administrators of a Multiemployer Plan relating to any Reportable Event or the underfunded status, A-5 termination or possible termination of a Plan or a Multiemployer Plan. The books and records of FMAC will be maintained at the respective addresses designated herein for receipt of notices, unless FMAC shall otherwise advise Buyer in writing. (viii) Government Information. Promptly after the filing or sending ---------------------- thereof, copies of all proxy statements, financial statements, reports and registration statements which FMAC files, or delivers to, the Internal Revenue Service, the Securities and Exchange Commission, or any other federal, state or foreign government agency, authority or body which supervises the issuance of securities by FMAC or any national securities exchange. (c) Compliance Certificate. (1) FMAC shall deliver to Buyer concurrently ---------------------- with the delivery of the annual and quarterly financial statements required by paragraphs II.(b)(i) and II.(b)(ii) of this Exhibit A a certificate signed by the chief financial officer of FMAC stating that: (i) a review of FMAC's performance under the Transaction Documents during such period has been made under such officer's supervision; and (ii) the attached financial reports are complete and correct in all material respects and present fairly the financial condition and results of operations of FMAC as of the dates and for the periods indicated, in accordance with generally accepted accounting principles consistently applied (subject as to interim statements to normal year-end adjustments). (2) FMAC shall deliver to Buyer monthly a certificate signed by the chief financial officer of FMAC stating that: (i) no Default or Event of Default has occurred, or if a Default or Event of Default has occurred, specifying the nature thereof and, if FMAC has a right to cure any such Default or Event of Default, stating in reasonable detail the steps, if any, being taken by FMAC to cure such Default or Event of Default or to otherwise comply with the terms of the agreement to which such Default or Event of Default relates. (d) Notice of Material Events. FMAC shall promptly inform (unless, in the ------------------------- case of clause (i) only, prohibited by applicable law) Buyer in writing of the occurence of any of the following: (i) the submission of any claim or the initiation of any legal process, litigation or administrative or judicial investigation (A) against FMAC pertaining to the Contracts in general, (B) with respect to a portion of the Contracts or (C) in which a request has been made for certification as a class action (or equivalent relief) that would involve a portion of the Contracts; A-6 (ii) any change in the location of FMAC's principal office or any change in the location of FMAC's books and records; (iii) the occurrence of any Default or Event of Default; or (iv) any other event, circumstance or condition that has resulted, or has a possibility of resulting, in a material adverse effect upon FMAC. (e) Further Assurances. FMAC will file or cause to be filed all necessary ------------------ financing statements, assignments or other instruments, and any amendments or continuation statements relating thereto, necessary to be kept and filed in such manner and in such places as may be required by law to preserve and protect fully the lien on and first priority security interest in the Contracts. (f) Independent Entity. FMAC is a separate and independent entity from the ------------------ custodian named in the Custodial Agreement, FMAC does not own a controlling interest in such custodian either directly or through affiliates, and no director or officer of FMAC is also a director or officer of such custodian. (g) Existence. FMAC shall preserve and maintain its existence, rights, --------- franchises and privileges and shall at all times continue to be duly organized under the laws of the jurisdiction of its organization, and qualify and remain qualified in good standing in each jurisdiction where the failure to preserve and maintain such existence, rights, franchises, privileges and qualifications would have a reasonable likelihood of having a material adverse effect on the business or properties of the Seller. (h) Maintenance of Licenses. FMAC shall maintain all licenses, permits, ----------------------- charters and registrations as are material to the performance by FMAC of its business or its obligations under the Transaction Documents. (i) Regulation T. None of the Purchase Price for any Purchased Securities ------------ will be used either directly or indirectly to acquire any security, as that term is defined in Regulation T of the Regulations of the Board of Governors of the Federal Reserve System, and the Seller has not taken any action that might cause any Transaction to violate any regulation of the Federal Reserve Board. (j) Keeping of Records and Book of Account. Seller shall maintain and -------------------------------------- implement administrative and operating procedures (including, an ability to recreate records evidencing the Contracts in the event of the destruction of the originals thereof), and shall keep and maintain, or cause to be kept or maintained, all documents, books, records and other information which, in the determination of Buyer, are necessary or advisable in accordance with prudent industry practice and custom for transactions of this type for the collection of all Contracts. Seller shall maintain or cause to be maintained at all times accurate and complete books, records and A-7 accounts relating to the Contracts, which books and records shall be marked to indicate the transfer of the Contracts under the Agreement. A-8 EXHIBIT B --------- REPRESENTATIONS AND WARRANTIES OF SELLER REGARDING CONTRACTS ------------------------------------------------------------ FMAC makes the following representations and warranties with respect to each Contract, as of each Purchase Date with respect to such Contract, which representations and warranties shall survive transfer of each such Contract to Buyer pursuant to the Agreement: 1. The information set forth in the List of Contracts and any other information in respect to a Contract given by Seller to Buyer is true and correct; 2. Each Contract is being serviced by the Seller in accordance with applicable law and the terms of the related Loan Documents, and is not subject to any subservicing arrangement; 3. Each Contract is principally secured by a valid and subsisting first lien on the related Collateral; 4. As of the Purchase Date, none of the Contracts are Defaulted Contracts and no Obligor had been identified on the records of the Seller as being subject to a current bankruptcy proceeding; 5. Except with respect to liens released immediately prior to the transfer herein contemplated, immediately prior to the sale, transfer and assignment herein contemplated, the Seller held good, marketable and indefeasible title to, and was the sole owner and holder of, each Contract free and clear of any and all liens, charges, restrictions on transferability, mortgages, pledges, preferences, security interests, encumbrances or rights of others; and immediately upon the sale, transfer and assignment herein contemplated, the Buyer will hold good, marketable and indefeasible title, to, and be the sole owner and holder of, each Contract free and clear of any and all liens, charges, restrictions on transferability, mortgages, pledges, preferences, security interests, encumbrances or rights of others. As of the Purchase Date, the lien or security interest in favor of the Buyer with respect to each Contract will be perfected by (i) the delivery of the Contract to the Custodian, which Contract the Custodian will hold on behalf of the Buyer, (ii) the filing of financing statements on form UCC-1 and (iii) if required by Buyer, the recording of any assignment of Mortgage or Assignment of Leases in each jurisdiction where such recording or filing is necessary for the perfection of the security interest in favor of the Buyer, and no other filings or recordings in any jurisdiction or any other actions (except as expressly provided herein) are necessary to perfect the Buyer's first priority lien on and security interest in each Contract as against any third parties; 6. Any assignment of the related Mortgage or any Assignment of Leases is in recordable form and any such assignment, together with the endorsement of the related Note and all assignments of any other related Loan Documents, constitute legal, valid and binding B-1 assignments of all such Loan Documents from the Seller and legally and validly conveys the Seller's rights, titles and interests in and to such Contract conveyed to the Buyer hereunder; 7. The related Mortgage was properly recorded (or, if not recorded, has been submitted for recording, is in from and substance acceptable for recording and, when properly recorded, will be sufficient under the laws of the jurisdiction wherein the Mortgaged Property is located to reflect of record the lien of such Mortgage) and such Mortgage creates a valid, continuing and enforceable first priority lien on the fee simple or leasehold interest of the related Obligor in the related Mortgaged Property, and a valid, continuing and enforceable first or junior lien on the Personalty specified in such Mortgage, subject to the matters described in Paragraph 17 below with respect to such Mortgaged Property and in Paragraph 9 below with respect to such Personalty; 8. The related Assignment of Leases was properly recorded (or, if not recorded, has been submitted for recording, is in form and substance acceptable for recording and, when properly recorded, will be sufficient under the laws of the jurisdiction wherein the Mortgaged Property is located to reflect of record the lien of such Assignment of Leases) and such Assignment of Leases creates a valid first priority assignment of, or a valid first priority security interest in, the related Obligor's rights under the related leases, subject only to a license granted to such Obligor to exercise certain rights and to perform certain obligations of the lessor under such leases, including the right to operate the related Mortgaged Property and the related Personalty. No person other than such Obligor owns any interest in any payments due under such lease that is superior to, or of equal priority with, the related Seller's interest therein; 9. The related Security Agreement creates a valid, existing and enforceable security interest in the related Equipment, and except to the extent such Collateral consists of patents, trademarks or copyrights, or property as to which perfection of a security interest is effected through possession, notation on a document of title or recording or filing under any law other than the Uniform Commercial Code, such security interest is perfected as a first priority security interest under the Uniform Commercial Code. The related Mortgage creates a valid, existing and enforceable security interest in any related Personality, and except to the extent such Collateral consists of patents, trademarks or copyrights, or property as to which perfection of a security interest is effected through possession, notation on a document of title or recording or filing under any law other than the Uniform Commercial Code, such security interest is perfected as a security under the Uniform Commercial Code, subject only to (i) the lien of any purchase money security interest in such Personalty and (ii) any other lien on such Personalty permitted to have or required to be given priority over the security interest in such Personalty under the terms of such Mortgage; 10. Each Note and other related Loan Documents is the legal, valid and binding obligation of the related Obligor thereof and is enforceable in accordance with its terms, except only as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity (whether considered in a proceeding or action in equity or at law), B-2 and all parties to each Contract had full legal capacity to execute all the related Loan Documents and convey the estate therein purported to be conveyed; 11. All parties to the Note and the other related Loan Documents had legal capacity to execute the Note and such Loan Documents and each Note and such Loan Documents have been duly and properly executed by such parties; 12. None of the Contracts shall be due from the United States of America or any State or from any agency, department, or instrumentality of the United States of America or any State; 13. No Contract shall have been originated in, or shall be subject to the laws of, any jurisdiction under which the sale, transfer and assignment of such Contract under the Agreement shall be unlawful, void, or voidable. Seller has not entered into any agreement with any account debtor that prohibits, restricts or conditions the assignment of any portion of the Contracts; 14. Each Contract was, in all respects, underwritten according to the Underwriting Standards, unless otherwise disclosed to CSFB and consented to by CSFB prior to the purchase of such Contract by CSFB hereunder; 15. No error, omission, misrepresentation, negligence, fraud or similar action occurred on the part of any Person in connection with the origination of any Contract; 16. Each Contract at the time it was made complied in all respects with applicable state and federal laws, regulations and other requirements pertaining to the origination and sale of such Contract, including, without limitation, usury laws; 17. The lien of the related Mortgage is either (i) insured by an American Land Title Association form of lender's title insurance policy or a binding commitment therefor (or a policy on an equivalent form), insuring the related originator, its successors and assigns as to the first priority lien of such Mortgage on the related Mortgaged Property in the original principal amount of the Contract after all advances of principal, subject only to (a) the lien of current real property taxes, ground rents, water charges, sewer rents and assessments, in each case not yet due and payable, (b) covenants, conditions and restrictions, rights of way, easements and other matters of public record as of the date of recording which are acceptable to mortgage lending institutions generally which are specifically referred to in the lender's title insurance policy delivered to such originator and which do not adversely affect the use of such Mortgaged Property, and (c) other matters to which like properties are commonly subject which do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability of such Mortgaged Property, or (ii) not subject to liens, covenants, conditions, restrictions or other matters described in clauses (a), (b) or (c) of the preceding sentence that materially interfere with the benefits of the security intended to be provided by the Mortgage or the value or marketability of the related Mortgage Loan. B-3 Each policy described in clause (i) of this paragraph 17 is assignable without the consent of or any notification to the insurer and is in full force and effect. No claims have been made by related Seller under such policy and nothing has been done, by act or omission, and such Seller does not have any knowledge of any matter which would impair or diminish the coverage of such policy; 18. There is no mechanics' lien or claim for work, labor or material affecting any Mortgaged Property or Personalty which is or may be a lien prior to, or equal with, the lien of such Mortgage except (i) those which are insured against by the title insurance policy, (ii) those liens for which funds sufficient to discharge such liens are held in escrow by the Seller or an escrow agent and (iii) such as in the aggregate do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the value or marketability of the related Mortgage Loan; 19. All taxes, ad valorem property taxes or other property assessments, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents which previously became due and owing have been paid, or an escrow of funds has been established in an amount sufficient to pay for every such item which remains unpaid and which has been assessed but is not yet due and payable, except for such assessments, premiums, charges, payments or rents failure of which to have been paid escrowed do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the value or marketability of the related Mortgage Loan. Except for payments in the nature of escrow payments, including, without limitation, taxes and insurance payments, the Seller has not advanced funds, or induced, solicited or knowingly received any advance of funds by a party other than the Obligor, directly or indirectly, for the payment of any amount required by the Note or the related Loan Documents, except for interest accruing from the date of the Note or date of disbursement of the proceeds thereof, whichever is greater, to the day which precedes by one month the due date of the first installment of principal and interest; 20. The Collateral is covered by a (i) valid and existing hazard insurance policy ("Hazard Insurance Policy") with a carrier licensed in the state in which the Collateral is located that provides coverage against loss or damage sustained by reason of, without limitation, fire, lightning, windstorm, hail, explosion, riot, civil commotion, aircraft, vehicles and smoke, and, to the extent required under such Loan Documents, against earthquake and other risks insured against by Persons operating like properties in the locality of such Collateral, in an amount not less than the least of (A) the Outstanding Principal Amount of the related Contract, (B) the minimum amount required to compensate for loss or damage on a replacement cost basis, or (C) the full insurable value of the Collateral, (ii) if the Collateral is located in a special flood hazard area, a flood insurance policy with the same minimum amount, (iii) business interruption and rental loss insurance, and (iv) comprehensive general liability insurance. All individual insurance policies are the valid and binding obligation of the related insurer and contain a standard mortgage clause naming the Seller, its successors and assigns, as mortgagee. All premiums then due thereon have been paid or are subject to a blanket policy. The Loan Documents obligate the Obligor thereunder to maintain all such insurance at the Obligor's cost B-4 and expense. Seller has caused to be performed any and all acts required to preserve the rights and remedies of Buyer in any such insurance policies applicable to the Contracts, including, without limitation, any necessary notifications of insurers, assignments of policies or interests therein, and establishments of co-insured, joint loss payee and mortgagee rights in favor of the Buyer; 21. All of the improvements that were considered in determining the Appraised Value of the Mortgage Property lie wholly within the boundaries and building restriction lines of such Mortgage Property, except to the extent that any encroachment upon such boundaries or building restriction lines would not have an adverse effect upon the conduct of the business at such Mortgaged Property and would not reduced the value of the Mortgaged Property. No such improvements encroach upon easements running thereto or to adjoining properties, and no improvements on adjoining properties encroach upon such Mortgaged Property or easements running thereto, except, in each case, to the extent that such encroachment would not have an adverse effect on the use of such Mortgaged Property; 22. No improvement located on or being part of the Mortgaged Property is in violation of any applicable zoning law or regulation and all inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Mortgaged Property and, with respect to the use and occupancy of the same, including, but not limited to certificates of occupancy and fire underwriting certificates, have been made or obtained from the appropriate authorities, except as such violations or failure to have so obtained such inspections, licenses and certificates do not materially interfere with the security intended to be provided by the Mortgaged or the value or marketability of the related Mortgaged Loan; 23. To the best Seller's knowledge, all licenses, permits and other approvals necessary for the conduct of business at the Mortgaged Property are in the possession of the appropriate parties except for such licenses, permits and other approvals the failure of which to have would not have an adverse affect on the conduct of such business. Such Seller has not received written notice from any governmental authority that the Collateral for any such Contract is in non-compliance with applicable law, is being used, operated or occupied unlawfully or does not have any licenses, permits or other approvals the failure of which to obtain would have an adverse affect on the use of such Collateral in the conduct of business at the Mortgaged Property related to such Contract; 24. Each Mortgaged Property is free from any and all Hazardous Substances and there exists no violation of Environmental Laws with respect to such Property. For this purpose, the term "Hazardous Substance" shall have the meaning specified in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601 et seq., as amended ("CERCLA"), provided, however, that to the extent that the laws of any state where the - -------- ------- Mortgaged Property is located establish a meaning for comparably regulated "hazardous substances" which is broader than that specified in CERCLA, such broader meaning shall apply with respect to the related Mortgaged Property; and provided, further, however, that - -------- ------- B-5 the term " Hazardous Substance" shall also include those listed in the U.S Department of Transportation Table (49 C.F.R. 172.101), as amended; 25. The terms of the Note and the other related Loan Documents have not been impaired, altered or modified in any respect, except by a written instrument which has been recorded or is in the process of being recorded, if necessary, to protect the security interests or lien of the Buyer and which has been or will be delivered to the Custodian. The substance of any such alteration or modification is reflected on the Contract Schedule. No instrument of release or waiver has been executed in connection with any Contract, and no Obligor has been released, in whole or in part. No Contract is assumable by another Person in a manner which would release the Obligor thereof from such Obligor's obligations to the Seller with respect to such Contract. No Contract shall have been satisfied, cancelled, subordinated or rescinded, nor shall any Collateral have been released from the lien granted by the related Mortgage or Security Agreement in whole or in part; 26. No Contract shall have been charged-off in whole or in part as of the Purchase Date; 27. Each Contract is not subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, nor will the operation of any of the terms of the Note or any of the other related Loan Documents, or the exercise of any right thereunder, render either the Note or any of the other related Loan Documents, unenforceable in whole or in part, or subject to any right of rescission, set-off, counterclaim or defense, including the defense of usury, and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto; 28. There is no default, breach, violation or event of acceleration existing under the Note or the other related Loan Documents and no event has occurred that, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration, except the passage of time for a payment to be made under a Contract that does not exceed the number of days established for a Contract to be deemed a Defaulted Contract, and Seller has not waived and default, breach, violation or event of acceleration; 29 No action has been taken by a Seller with respect to any of the Contracts that would cause the representations and warranties made by the related Obligor in the related Loan Documents not to be true in any respect. Such Seller does not have any knowledge that the representations and warranties made by such Obligor in such Loan Documents were not true and correct in any respect as of the dates such representations and warranties were made; 30. Other than as disclosed to CSFB and consented to by CSFB in writing prior to the purchase of such Contract, the proceeds of the Contract have been fully disbursed to the Obligor or into an escrow account (subject to a maximum $500 holdback per Contract) (i) for completion of improvements to the Mortgaged Property or (ii) for the payment of taxes, B-6 insurance, or other liens on the Mortgaged Property, and there is no obligation or requirement on the part of the mortgagee to make future advances thereunder. Other than as previously disclosed to and consented to by Buyer in writing, any and all requirements as to completion of any on-site or off-site improvements and as to disbursements of any escrow funds therefor that were to have been complied with. All costs, fees and expenses incurred in making or closing or recording the Contract have been paid. All advances made prior to (and excluding) the Purchase Date have been consolidated with the outstanding principal amount of the Contract, and such principal amount, as consolidated, bears a single interest rate and single repayment term reflected on the Contract Schedule. The consolidated principal amount does not exceed the original principal amount of the Contract; 31. The related Note is not and has not been secured by any collateral, pledged account or other security except the lien of the corresponding Mortgage and Security Agreement and other related Loan Documents; 32. There is no obligation on the part of the Seller or any other Person to make payments in addition to those made by the Obligor; 33. To the best of Seller's knowledge, the Collateral for each of the related Contracts is in good repair and free of any material damage, waste or defective condition that would adversely affect the value of such Collateral as security for such Contract. To the best of Seller's knowledge, there is no proceeding pending or threatened for the total or partial condemnation of the Mortgaged Property, nor is such a proceeding currently occurring, and such Collateral is undamaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other casualty, so as to adversely affect the value of the Collateral as security for the Contract or the use for which the Collateral were intended; 34. If such Mortgage is a deed of trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in such Mortgage, and no fees or expenses are or will become payable by the Buyer or the Custodian to the trustee under such deed of trust, except in connection with a trustee's sale after default by the Obligor, except as otherwise required by applicable law. There is no exemption under existing law available to the Obligor which would interfere with the mortgagee's or secured party's right to foreclose any such Loan Documents other than which may be available under applicable bankruptcy law, debt relief or homestead; statutes; 35. No Collateral has been foreclosed or is in foreclosure status; 36. An appraisal, completed by independent appraisers, was performed with respect to each Contract and is contained in the Servicer's files, and no appraisal was based solely on a cost approach analysis; 37. With respect to each Contract for which the Obligor has a leasehold interest in the land at the related Mortgaged Property: B-7 (i) The related ground lease, or a memorandum thereof, has been recorded, and either any provisions of such ground lease that prohibit the leasehold estate to be mortgaged have been waived or the ground lessor has consented to the leasehold mortgage. Such ground lease does not materially and adversely restrict the use of the related Mortgaged Property by the Obligor, its successors or assigns, and no such restriction adversely affects the security provided by such Mortgaged Property; (ii) Such ground lease has an original term that, together with any term or terms for which such ground lease may be renewed or extended by the related Obligor, extends to not earlier than the stated maturity date of the related Contract; (iii) Either (a) the mortgagee is permitted an opportunity (including, where necessary, sufficient time to gain possession of the interest of the lessee under such ground lease through legal proceedings or to take other action so long as the mortgagee is proceeding diligently) to cure any default under such ground lease which is curable after the receipt of notice of any such default before the lessor thereunder may terminate such ground lease (and, in the case of any such default which is not curable by the mortgagee, or in the event of the bankruptcy or insolvency of the lessee under such ground lease, such default is deemed waived as to the mortgagee and its successors and assigns) or (b) if such opportunity is not so provided, the lack of such opportunity does not adversely affect the security provided by the related Collateral; and (iv) all ground lease rents, other payments or assessments that have become due have been paid and the Obligor is not in default under any other provisions of such lease and such lease is valid, binding and in full force and effect and enforceable in accordance with its terms. 38. Each Contract has a remaining term of no longer than the term of the related Franchise Agreement. The Obligor is (i) current on all franchise payments and (ii) current on all lease payments (if applicable). The Obligor is in full compliance with the terms of the Franchise Agreement and (ii) the Obligor is in good standing with the franchisor, except where the failure to so comply or remain in good standing does not subject the Obligor to penalties, restrictions or defaults under the Franchise Agreement as would materially impair or inhibit the operation of the related franchise. The related Franchise Agreement is valid, binding and in full force and effect and enforceable in accordance with its terms. Each Obligor has at least two years of experience in the franchise business; 39. With respect to each Contract that has a Contract Rate that is fixed and not a Balloon Contract, such Contract provides for a schedule of substantially level and equal monthly scheduled payments which are sufficient to amortize fully the principal balance of such Note on or before its maturity date, which maturity date is not more than thirty (30) years from B-8 the date of origination of such COntract. Each Balloon Contract has an original term to stated maturity of at least five (5) years and an amortization schedule not greater than thirty (30) years; 40. With respect to each Contract that has a Contract Rate that is adjustable, all of the terms of the Note pertaining to interest rate adjustments, payments adjustments and adjustments of the outstanding principal balance are enforceable, such adjustments will not affect the priority of the lien of the Mortgage and Security Agreement, and all of the interest rate calculations have been properly calculated, recorded, reported and applied in accordance with the Note; 41. All allocations of payments with respect to each Contract to principal and interest, and determinations of periodic charges and the like, shall be made using the actuarial method or the simple interest method, based on a 360-day year consisting of twelve 30-day months. Each payment on a Contract shall be applied first to the amount of interest accrued on such Contract and then to reduce the principal amount outstanding on such Contract: 42. No Contract shall have a maximum amount financed that exceeds $3,500,000. 43. By the Purchase Date, the Seller will have caused the portions of the electronic ledger relating to Contracts to be clearly and unambiguously marked to show that the Contracts have been transferred to Buyer; 44. The Computer Tape made available by the Seller to the Buyer and the Custodian on the Purchase Date was complete and accurate and includes a description of the same Contracts that are described in the List of Contracts; 45. No selection procedures adverse to the Buyer were utilized in selecting the Contracts from those Contracts owned by Seller eligible for transfer to the Buyer pursuant to the Agreement; 46. There is only one original executed copy of each Note and such originated executed copy shall be in the possession of the Custodian as provided in the Custodial Agreement; and 47. All parties which have had any interest in the Contract, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (i) in compliance in all material respects with any and all applicable licensing requirements of the laws of the state wherein the Collateral is located, and (ii)(A) organized under the laws of such state, or (B) qualified to do business in such state, or (C) federal savings and loan associations or national banks having principal offices in such state, or (D) not doing business in such state so as to require qualifications or licensing. B-9 EXHIBIT C OPINION OF COUNSEL TO SELLER ---------------------------- PROVIDED SEPARATELY C-1 EXHIBIT D UNDERWRITING STANDARDS ---------------------- D-1 ANNEX II NAMES AND ADDRESSES FOR COMMUNICATIONS BETWEEN PARTIES ------------------------------------------------------ CS FIRST BOSTON MORTGAGE CAPITAL CORP. Park Avenue Plaza 55 East 52nd Street New York, New York 10055-0186 Attention: Patrick McGrath --------- Telephone: (212) 909-3556 Facsimile: (212) 318-1427 Any and all legal notices and the Certificate of Compliance required to be delivered pursuant to Paragraph II.(c) of Exhibit A must be sent to: Walter Fekula, Director of Credit First Boston Mortgage Capital Corp. 11 Madison Avenue, 7th Floor New York, New York 10010 Telephone Number: (212) 325-3063 Facsimile Number: (212) 325-8219 FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC Five Greenwich Office Park 4th Floor Greenwich, Connecticut 06831 Attention: John W. Rinaldi, Senior Vice President --------- Telephone: (203) 863-7106 Facsimile: (203) 622-1834 AII-1 SCHEDULE 1 ---------- FORM OF CONFIRMATION [Sellers Address] Confirmation No.:__________________ Gentlemen: We have received your Transaction Notice attached hereto with respect to the Contracts listed in Appendix I hereto. This letter confirms our agreement to purchase from you such Contracts pursuant to the Master Repurchase Agreement and Annex I, Additional Supplemental Terms between us, each dated as of October 10, 1996 (collectively, the "Agreement"), as set forth below. Capitalized terms used but not defined herein shall have the meanings assigned to them in the Agreement. Confirmation Date: Purchased Securities: Number of Contracts: Outstanding Principal Amount of Contracts as of ____________: Purchase Date: Purchase Price: Pricing Rate: Repurchase Date: Percentage used to determine Buyer's Margin Amount: Market Value of Contracts (aggregate): Schedule 1-1 CS FIRST BOSTON MORTGAGE CAPITAL CORP., as Buyer By:________________________________ Name:______________________________ Title:_____________________________ Acknowledged and Agreed to by: [SELLER'S NAME] By:________________________________ Name:______________________________ Title:_____________________________ Schedule 1-2 SCHEDULE 2 ---------- REQUIRED LICENSES, REGISTRATION AND/OR QUALIFICATIONS (EXHIBIT A, Paragraph I.(p), Annex I, Additional Supplemental Terms) Schedule 2-1 EX-10.6(C) 16 TRI-PARTY CUSTODIAL AGREEMENT FOR CONTRACTS Exhibit 10.6(c) ================================================================= TRI-PARTY CUSTODIAL AGREEMENT FOR CONTRACTS by and among CS FIRST BOSTON MORTGAGE CAPITAL CORP., Buyer FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, Seller and Servicer and FIRST BANK NATIONAL ASSOCIATION, Custodian Dated as of October 10,1996 ================================================================= TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS............................. 1 Section 1.1. General..................................................... 1 ------- Section 1.2. Certain Defined Terms....................................... 1 --------------------- Section 1.3. Incorporation of Certain Definitions........................ 5 ------------------------------------ Section 1.4. Reference to Time........................................... 5 ----------------- ARTICLE II CONTRACT SCHEDULE.......................... 6 Section 2.1. Contract Schedule: Computer Tape............................ 6 -------------------------------- Section 2.2. Documents Maintained by Seller.............................. 6 ------------------------------ ARTICLE III CUSTODIAL ARRANGEMENT........................ 7 Section 3.1. Transfer of Contracts: Delivery of Documents................ 7 -------------------------------------------- Section 3.2. Transactions Not Subject to Table Funding................... 10 ----------------------------------------- Section 3.3. Transactions Subject to Table Funding....................... 11 ------------------------------------- Section 3.4. Trust Receipt and Certification............................. 12 ------------------------------- Section 3.5. Release of Custodian's Contract Files....................... 13 ------------------------------------- Section 3.6. Repurchase.................................................. 14 ---------- Section 3.7. Custodial Register.......................................... 14 ------------------ Section 3.8. Power of Attorney........................................... 14 ----------------- Section 3.9. No Service Charge for Sale or Transfer of Contracts......... 14 --------------------------------------------------- Section 3.10. Buyer May Reject Contracts.................................. 14 -------------------------- ARTICLE IV REPURCHASE DATE PAYMENTS; CONTRACT ACCOUNT.............. 15 Section 4.1. Repurchase Date Payments.................................... 15 ------------------------ Section 4.2. Contract Account............................................ 15 ---------------- Section 4.3. Simultaneous Transfers...................................... 16 ---------------------- Section 4.4. Transfer of Contracts....................................... 16 --------------------- ARTICLE V SERVICING.............................. 17 Section 5.1. Duties of Servicer; Standard of Care........................ 17 ------------------------------------ Section 5.2. Collection of Payments...................................... 17 ---------------------- Section 5.3. Additional Servicing Duties and Obligations with respect -------------------------------------------------------- to Contracts................................................ 18 ------------ Section 5.4. [Reserved].................................................. 20 ---------- Section 5.5. Notice of Default........................................... 20 ----------------- Section 5.6. Servicer Expenses........................................... 20 ----------------- Section 5.7. Collections................................................. 20 ----------- Section 5.8. Representations of Servicer................................. 20 --------------------------- Section 5.9. Merger or Consolidation of, or Assumption of the ------------------------------------------------ Obligations of Servicer..................................... 21 -----------------------
Section 5.10. Resignation .......................................... 22 ----------- Section 5.11. Fidelity Bond, Errors and Omissions Insurance ........ 22 --------------------------------------------- Section 5.12. [Intentionally Omitted] .............................. 22 Section 5.13. Monthly Servicing Report ............................. 22 ------------------------ Section 5.14. Servicer Termination Event ........................... 24 -------------------------- Section 5.15. Transfer and Successor Servicer ...................... 24 ------------------------------- Section 5.16. Custodian to Act: Appointment of Sucessor ............ 25 ----------------------------------------- ARTICLE VI CUSTODIAN .............................. 27 Section 6.1. Representations, Warranties and Covenants of Custodian 27 ------------------------------------------------------ Section 6.2. Custodian of Documents ................................ 28 ---------------------- Section 6.3. Charges and Expenses .................................. 28 -------------------- Section 6.4. No Adverse Interests .................................. 29 -------------------- Section 6.5. Inspections ........................................... 29 ----------- Section 6.6. Insurance ............................................. 29 --------- Section 6.7. Limitation of Liability ............................... 29 ----------------------- Section 6.8. Indemnification ....................................... 29 --------------- Section 6.9. Removal of Custodian .................................. 29 -------------------- Section 6.10. Termination of Custodian .............................. 30 ------------------------ Section 6.11. Reliance of Custodian ................................. 30 --------------------- Section 6.12. Transmission of Custodain's Contract Files ............ 30 ------------------------------------------ Section 6.13. Authorized Representatives ............................ 31 -------------------------- ARTICLE VIII MISCELLANEOUS PROVISIONS....................... 32 Section 7.1. Amendment ............................................. 32 --------- Section 7.2. Governing Law and Jurisdiction; Waiver of Jury Trial .. 32 ---------------------------------------------------- Section 7.3. Notices ............................................... 32 ------- Section 7.4. Severability of Provisions ............................ 33 -------------------------- Section 7.5. No Partnership ........................................ 33 -------------- Section 7.6. Counterparts .......................................... 33 ------------ Section 7.7. Assignment ............................................ 33 ---------- Section 7.8. Headings .............................................. 33 --------
EXHIBIT A Trust Receipt and Certification ............................. A-1 EXHIBIT A-1 Initial Trust Receipt and Certification ..................... A-1-1 EXHIBIT B Request for Release of Documents ............................ B-1 EXHIBIT C Form of Transaction Notice .................................. C-1 EXHIBIT D Form of Contract Schedule ................................... D-1 EXHIBIT E Authorized Officers of Buyer ................................ E-1 EXHIBIT F Authorized Officers of Seller ............................... F-1 EXHIBIT G Authorized Officers of Servicer ............................. G-1 EXHIBIT H Authorized Officers of Custodian ............................ H-1 EXHIBIT I Escrow Agreement ............................................ I-1 ii TRI-PARTY CUSTODIAL AGREEMENT FOR CONTRACTS ------------------------------------------- This Tri-Party Custodial Agreement for Contracts ("Agreement"), dated --------- as of October 10, 1996, is by and among CS First Boston Mortgage Capital Corp., a New York corporation ("Buyer"), Franchise Mortgage Acceptance Company LLC, a ----- California limited liability company ("Seller"), and First Bank National Association, a national banking association ("Custodian"). --------- Recitals -------- Pursuant to the Repurchase Agreement, Seller may from time to time enter into Transactions, evidenced by confirmations, to transfer and sell Contracts to Buyer against transfer of funds from Buyer to Seller. Seller and Buyer desire to provide for the servicing, custody and management of the Contracts which may become subject to a Transaction. In connection with the foregoing, Seller and Buyer desire to engage Custodian to act as custodian of the Contracts for the benefit of Seller, Buyer and subsequent purchasers of Contracts from Buyer, as their interests may appear. Custodian is willing and able to perform the duties and obligations of a custodian and bailee as set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth, Buyer, Seller and Custodian agree as follows: ARTICLE I DEFINITIONS Section 1.1. General. For the purpose of this Agreement, except as ------- otherwise expressly provided or unless the context otherwise requires, the terms defined in this Article include the plural as well as the singular, the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision, and Section references refer to Sections of this Agreement. Section 1.2. Certain Defined Terms. Whenever used in this --------------------- Agreement, unless the context otherwise requires, the following words shall have the meanings set forth below: "Accepted Servicing Standards": As defined in Section 5.1 hereof. ---------------------------- "Agreement": This Tri-Party Custodial Agreement for Contracts, --------- including all exhibits hereto, and all amendments hereof and supplements hereto. "Assignment": With respect to a Contract, collectively the original ---------- instrument of assignment of such Contract and all other documents securing such Contract made by the 1 Person originating such Contract to the Seller, which is in a form sufficient under the laws of the jurisdiction in which the related Collateral is located to permit the assignee to exercise all rights granted by the Obligor under such Contract and such other documents and all rights available under applicable law to the obligee under such Contract and which, in each case, may, to the extent permitted by the laws of the state in which the related Collateral is located, be a blanket instrument of assignment covering other Contracts as well. "Assignment of Leases": As defined in the Supplemental Terms. -------------------- "Authorized Representative": As defined in Section 6.13 hereof. ------------------------- "Available Funds": With respect to any Repurchase Date, all --------------- collections and other amounts received in respect of the Contracts and deposited to the Contract Account during the related Collection Period. "Buyer": CS First Boston Mortgage Capital Corp., or any successor ----- thereto. "Buyer's Account": The account designated in writing by Buyer to --------------- Custodian, as Buyer may so designate from time to time. "Closing Documents": As defined in the Escrow Agreement. ----------------- "Collateral": As defined in the Supplemental Terms. ---------- "Collateral Lease": As defined in the Supplemental Terms. ---------------- "Collateral Period": With respect to any Repurchase Date, the calendar ----------------- month preceding the month in which such Repurchase Date occurs. "Computer Tape": A computer tape generated by the Seller and delivered ------------- to Buyer pursuant Section 2.1 and Section 3.2 or Section 3.3 hereof, as applicable, which provides information relating to the Contracts in a format as may be requested by Buyer or Custodian, including, without limitation, the information set forth in Exhibit D to this Agreement. "Contract Account": An account established pursuant to Section 4.2 ---------------- hereof. "Contract Rate": The annual rate at which interest accrues and as ------------- indicated on a Contract. "Contract Schedule": The schedule of Contracts delivered by Seller to ----------------- Custodian, substantially in the form attached hereto as Exhibit D, setting forth categories of information contained in Exhibit D with respect to each Contract possession of which is maintained by Custodian on behalf of the Buyer. "Contracts": As defined in the Repurchase Agreement. --------- 2 "Custodian": First Bank National Association, acting in its custodial --------- capacity under this Agreement, or any successor thereto. "Custodian's Contract File": As defined in Section 3.1 hereof. ------------------------- "Defaulted Contract": With respect to any date of determination, any ------------------ Contract with respect to which all or any part of the scheduled monthly payment due in the second calendar month immediately preceding the calendar month in which such date of determination occurs has not been received. "Delivery Date": The date on which Contracts are delivered to -------------- Custodian by Seller which shall be (x) at least one (1) Business Day prior to the related Purchase Date in the case of Transactions not subject to Table Funding or (y) as set forth in Section 3.3 hereof in the case of a Transaction subject to Table Funding. "Disbursement Letter": As defined in each Escrow Agreement. ------------------- "Equipment": As defined in the Supplemental Terms. --------- "Escrow Agreement": The agreement entered into by among the Buyer, ---------------- Seller, Escrow Agent and Custodian with respect to a Table Funding, a form of which is attached hereto as Exhibit I. "Event of Termination": As defined in Section 11 of the Supplemental -------------------- Terms. "Flood Insurance Policy": An insurance policy insuring against flood ---------------------- damage to a Mortgaged Property, required by loan originators for Mortgaged Properties located in "flood hazard areas identified by the Secretary of the Housing and Urban Development or the Director of the Federal Emergency Management Agency. "Franchise Agreement": As defined in the Supplemental Terms. ------------------ "Leasehold Interest": As defined in the Supplemental Terms. ------------------ "Loan Documents": As defined in the Supplemental Terms. -------------- "Loan-to-Value Ratio": shall mean as of any date, the fraction, ------------------- expressed as a percentage, the numerator of which is the Outstanding Principal Amount of the related Contract at the date of determination and the denominator of which is the Appraised Value of the related Collateral. "Margin Call": As defined in Section 3.2 hereof. ----------- "Master Repurchase Agreement": The Master Repurchase Agreement (1987 --------------------------- Version) dated as of October 10, 1996 between Franchise Mortgage Acceptance Company LLC and CS First Boston Mortgage Capital Corp. 3 "Monthly Servicing Fee": As to any Repurchase Date, one-twelfth of the --------------------- product of .40% and the aggregate Outstanding Principal Amount of the Contracts as of the preceding Repurchase Date. "Monthly Servicing Report": The report required to be delivered by ------------------------ Seller pursuant to Section 5.13 hereof, in such format as is acceptable to Buyer ------------ and Custodian, together with a computer tape and a diskette (or any other electronic transmission acceptable to Buyer and the Custodian) in a format acceptable to the Buyer and the Custodian containing such information with respect to the Contracts and the preceding Collection Period as CSFB or the Custodian may reasonably request. "Mortgage": As defined in the Supplemental Terms. -------- "Mortgaged Property": As defined in the Supplemental Terms. ------------------ "Note": As defined in the Supplemental Terms. ---- "Outstanding Principal Amount": The outstanding principal amount ---------------------------- thereof, in each case as reflected on the most recent Computer Tape received by Custodian; provided, however, that any Defaulted Contract and any Rejected Contract shall be assigned an Outstanding Principal Amount of zero. "Pay-Off Letter": As defined in the Escrow Agreement. -------------- "Person": Any individual, corporation, partnership, joint venture, ------ association, joint-stock company, trust (including any beneficiary thereof), limited liability company, unincorporated organization or government or any agency or political subdivision thereof. "Price Differential": As defined in Paragraph 2(i) of the Master ------------------ -------------- Repurchase Agreement. "Purchase Date": As defined in Paragraph 2(l) of the Master Repurchase ------------- -------------- Agreement. "Purchase Price": With respect to any Transaction, the price to be -------------- paid or deemed to be paid by Buyer for the Contracts in accordance with the Repurchase Agreement. "Rejected Contract": Any Contract that Buyer has rejected pursuant to ----------------- the Repurchase Agreement and in accordance with Section 3.10 hereof. "Repurchase Agreement": The Master Repurchase Agreement and the -------------------- Supplemental Terms, including all amendments, annexes and supplements thereto. "Repurchase Agreement Default": An Event of Default (as defined in the ---------------------------- Repurchase Agreement) under the Repurchase Agreement. "Repurchase Date": As defined in Section 2(b) of the Supplemental --------------- Terms. 4 "Repurchase Price": As defined in Section 2(p) of the Master ---------------- Repurchase Agreement. "S&P": Standard & Poor's Ratings Service, or any successor thereto. --- "Seller": Franchise Mortgage Acceptance Company LLC, or any successor ------ thereto. "Servicer": Franchise Mortgage Acceptance Company LLC, or any -------- successor thereto. "Servicer Termination Event": As defined in Section 5.14 hereof. -------------------------- "Supplemental Terms": Annex I, Additional Supplemental Terms To Master ------------------ Repurchase Agreement dated as of October 10, 1996 between Seller and Buyer. "Transaction": As defined in the Repurchase Agreement. ----------- "Transaction Notice": With respect to each Transaction, the notice ------------------ delivered by Seller to Buyer and Custodian pursuant to Section 3.2(a) or Section 3.3(a) hereof, as applicable, which notice shall be in the form of Exhibit C attached hereto. "Wire Instruction Letter": With respect to a Table Funding, the letter ----------------------- to be delivered by Seller to Buyer pursuant to Section 3.3 hereof which specifies the wiring instructions for wiring the Purchase Price to the Escrow Agent. Section 1.3. Incorporation of Certain Definitions. All capitalized ------------------------------------ terms used herein and not otherwise defined shall have the meanings assigned in the Repurchase Agreement unless the context clearly indicates otherwise. Section 1.4. Reference to Time. All references to time herein shall be ----------------- deemed to refer to New York City time unless otherwise provided. 5 ARTICLE II CONTRACT SCHEDULE Section 2.1. Contract Schedule: Computer Tape. -------------------------------- (a) Custodian shall maintain, as an attachment to its executed copy of the this Agreement, the most recent version of the Contract Schedule, as such list may be amended from time to time. Custodian shall receive a printed copy of the amended Contract Schedule with each revised copy of the Computer Tape. If a Computer Tape received by Custodian is not accompanied by such amended Contract Schedule, Custodian shall immediately produce such a printed list from the related Computer Tape. The Contract Schedule in the custody of Custodian shall be the definitive Contract Schedule for all purposes under this Agreement. (b) On or before each (i) Delivery Date, (ii) each Repurchase Date and (iii) the date of each Margin Call, and in no event less than once in any seven day period, Seller will provide to Custodian and to Buyer a Computer Tape setting forth a list of all the Contracts and the Outstanding Principal Amount of each such Contract as of a date not earlier than the Business Day prior to such Delivery Date or Repurchase Date. Each Computer Tape shall clearly indicate Defaulted Contracts in a manner acceptable to Custodian and Buyer and, when delivered, shall be accompanied by a printed copy of the amended Contract Schedule. Section 2.2 Documents Maintained by Seller. Except as delivered to ------------------------------ Custodian hereunder, Seller shall retain possession of all documents and files relating to the Contracts. All documents held by Seller shall be held by it as agent of Custodian for the benefit of the Buyer. 6 ARTICLE III CUSTODIAL ARRANGEMENT Section 3.1. Transfer of Contracts: Delivery of Documents. Prior to a -------------------------------------------- Contract becoming subject to this Agreement, and thereby becoming eligible for inclusion in a Transaction, Seller shall deliver, or cause to be delivered, to Custodian on the related Delivery Date, the following documents: (i) the Contract Schedule, as amended; (ii) a copy of the credit application of the Obligor; (iii) the original Note, endorsed to the order of or assigned to the Seller by the holder/payee thereof, without recourse, and endorsed by Seller, without recourse, in blank, together with all intervening endorsements showing a complete chain of endorsements from the originator of the Contract to the Seller; (iv) the original Mortgage (fee or leasehold, as applicable) naming Seller as the "mortgagee" thereof, and bearing in the face thereof the address of Seller, or, if the Mortgage does not name Seller as the mortgagee, the Mortgage, together with an instrument of assignment assigning the Mortgage, individually or together with other Mortgages, to Seller and bearing on the face thereof the address of Seller, and, in either case, bearing evidence that such instruments have been recorded in the appropriate jurisdiction where the Mortgaged Property is located as determined by Seller (or, in lieu of the original of the Mortgage or the assignments thereof, a duplicate or conformed copy of the Mortgage or the instruments of assignment, if any, together with a certificate of receipt from the Seller or the settlement agent who handled the closing of the Contract, certifying that such copy or copies represent true and correct copy(ies) of the original(s) and that such original(s) have been or are currently submitted to be recorded in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located) or a certification or receipt of the recording authority evidencing the same; (v) the original Security Agreement naming Seller as the "secured party" thereof, and bearing on the face thereof the address of Seller, or, if the Security Agreement does not name Seller as the secured party, the Security Agreement, together with an instrument of assignment assigning the Security Agreement, individually or together with other Security Agreements, to Seller and bearing on the face thereof the address of Seller; and the copies of the UCC-1 financing statements related to such Security Agreement bearing evidence that such financing statements have been filed in the 7 appropriate filing office(s) under the Uniform Commercial Code where the Collateral is located and recorded in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located (or in lieu of such evidence, a certificate of receipt from the settlement agent who handled the closing of the Contract, certifying that such copy or copies represent true correct copy(ies) of the original(s) and that such original(s) have been or are currently submitted to be filed in the appropriate filing office(s), under the Uniform Commercial Code where the Collateral is located and recorded in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located) or a certification or receipt of the filing and recording authority evidencing the same; (vi) an original Assignment of Mortgage (fee or leasehold, as applicable), in blank, which assignment appears to be in form and substance acceptable for recording and, in the event that the Seller acquired the Contract in a merger, the assignment must be by "[Seller], successor by merger to [name of predecessor]", and in the event that the Contract was acquired or originated by Seller while doing business under another name, the assignment must be by "[Seller]", formerly known as [previous name]"; (vii) an original Assignment of Security Agreement, in blank, and in the event that the Seller acquired the Contract in a merger, the assignment must be by "[Seller], successor by merger to [name of predecessor]", and in the event that the Contract was acquired or originated by Seller while doing business under another name, the assignment must be by "[Seller]", formerly known as [previous name]"; (viii) the original of any intervening assignment of the Mortgage (fee or leasehold, as applicable) or Security Agreement or related UCC-1 Financing Statement not included in clauses (vi) and (vii) above, respectively, including any warehousing assignment, with evidence of recording thereon, if applicable, (or, in lieu of the original of any such intervening assignment together with a certificate of receipt from the Seller or the settlement agent who handled the closing of the Contract, certifying that such copy represents a true and correct copy of the original and that such original has been or is currently submitted to be filed or recorded in the appropriate filing office under the Uniform Commercial Code and/or recording office of the jurisdiction where the Collateral is located, as applicable,) or a certification or receipt if the filing or recording authority evidencing the same; 8 (ix) the originals of any assumption, modification, extension or guaranty agreement with evidence of recording thereon, if and as applicable, (or, in lieu of the original of any such agreement, a duplicate or conformed copy of such agreement together with a certificate of receipt from the Seller or the settlement agent who handled the closing of the Contract, certifying that such copy or copies represent true and correct copy(ies) of the original(s) and that such original(s) have been or are currently submitted to be filed or recorded in the appropriate filing office under the Uniform Commercial Code and/or recording office of the jurisdiction where the Collateral is located), or a certification or receipt of the filing or recording authority evidencing the same; (x) the original of any subordination of lessor's lien and subordination agreement and assignment with evidence of recording thereon, if applicable (or, in lieu of the original of any such agreements, a duplicate or conformed copy of such agreement together with a certificate of receipt from the Seller or the settlement agent who handled the closing of the Contract, certifying that such copy or copies represent true and correct copy(ies) of the original(s) and that such original(s) have been recorded in the recording office of the jurisdiction where the Mortgaged Property is located), or a certification or receipt of the recording authority evidencing the same. (xi) with respect to each Contract other than Contracts with respect to which the related Mortgage secures the Obligor's leasehold interest in the related Mortgaged Property, an original title insurance policy, or, if such policy has not been issued or local state law does not require it, a written commitment or interim binder issued by the title insurance company evidencing that the required title insurance coverage is in effect and unconditionally guaranteeing the holder of the Contract that the lender's title insurance policy will be issued; (xii) if the Note or other related Loan Documents or any other document or instrument relating to the Contract has been signed by a person on behalf of the Obligor, the original power of attorney or other instrument that authorized and empowered such person to sign bearing evidence that such instrument has been filed or recorded, if so required, in the appropriate filing office under the Uniform Commercial Code and/or recording office of the jurisdiction where the Collateral is located as determined by Seller (or, in lieu thereof, a duplicate or conformed copy of such instrument, together with a certificate of receipt from the Seller or the settlement agent who handled the closing of the Contract, certifying that such copy represents a true and complete copy of 9 the original and that such original has been or is currently submitted to be filed or recorded in the appropriate filing office under the Uniform Commercial Code and/or recording office of the jurisdiction where the Collateral is located) or a certification or receipt of the filing or recording authority evidencing the same; (xiii) evidence of filing with the appropriate office in the following jurisdictions of the following UCC-1 financing statements indicating the Contracts as collateral: (a) UCC-1 financing statement executed by Seller as debtor, naming Buyer as secured party and filed in the State of California and the State of Connecticut; and (b) such other filings under the UCC as may be required by Buyer; (xiv) if applicable, a copy of a ground lease and memorandum of ground lease with evidence that such memorandum has been recorded in the appropriate jurisdiction where the related Mortgaged Property is located; (xv) a copy of any Franchise Agreement certified by Seller that such copy is a true and correct copy thereof; and (xvi) other such documents as the Buyer may require after notice to the Seller and the Custodian which the Custodian has consented to review. All documents held by Custodian with respect to a Contract, including those delivered to Custodian pursuant to Section 3.1, are referred to herein as the "Custodian's Contract File." Section 3.2. Transactions Not Subject to Table Funding. ----------------------------------------- (a) Transaction Notice. ------------------ (i) Seller shall deliver to Buyer and Custodian a Transaction Notice, in the form attached hereto as Exhibit C, and a Computer Tape not later than 12:00 p.m., New York City time, on the Business Day preceding the proposed Purchase Date with respect to a Transaction; provided, -------- however, that if the Delivery Date with respect to each of the Contracts ------- identified in the Transaction Notice is a date preceding the date of such Transaction Notice, such Transaction Notice may be delivered not later than 11:00 a.m. on the proposed Purchase Date. Seller shall, either prior to the delivery of or with the Transaction Notice, deliver to the Custodian the items listed in Section 3.1 hereof for such Contracts identified in such Transaction Notice. (ii) Custodian shall, upon receiving such Transaction Notice, Computer Tape and items listed in Section 3.1 hereof for such Contracts from Seller relating to the purchase of Contracts pursuant to a Transaction, immediately advise Buyer and Seller by 10 telephone or by facsimile transmission if it determines that such Computer Tape and Contracts are not so deposited. (b) Certification. ------------- (i) Upon receipt by Custodian of a confirmation from Buyer and the Custodian's Contract Files from Seller with respect to a Transaction, Custodian shall, with respect to the Contracts referenced in such Confirmation, execute and deliver to Buyer (with a copy to Seller which shall be clearly marked as a copy and non-transferrable) one or more certifications (each, a "Trust Receipt and Certification"), in the form ------------------------------- attached hereto as Exhibit A and in accordance with Section 3.4 hereof, in --------- New York City on or before 1:00 p.m. New York City time on the date of receipt by Custodian of such Confirmation (but, in any event no later than one (1) Business Day following receipt thereof). (ii) In the event of delivery by Buyer to Seller and Custodian of a notice pursuant to Paragraph 4(a) of the Master Repurchase Agreement ("Margin Call") the Custodian shall, upon receipt of such notice of Margin Call, Contracts and the related Custodian's Contract Files, execute and deliver to Buyer (with a copy to Seller which shall be clearly marked as a copy and non-transferrable) one or more Trust Receipt(s) and Certification(s) in the form attached hereto as Exhibit A with respect to --------- such Contracts and in accordance-with Section 3.4 hereof. Section 3.3 Transactions Subject to Table Funding. ------------------------------------ (a) Transaction Notice and Delivery of Custodian's Contract Files to ---------------------------------------------------------------- Escrow Agent. ------------ Seller shall deliver to Buyer and Custodian a Transaction Notice, in the form attached hereto as Exhibit C, not later than 12:00 p.m., New --------- York City time, at least two (2) Business Days prior to the proposed Table Funding Closing Date related to a Transaction. Seller shall, at the time of delivery of the Transaction Notice, also deliver to Buyer a Wire Instruction Letter, a Disbursement Letter and a Pay-Off Letter. Seller shall also deliver or cause to be delivered to the Escrow Agent all of the Closing Documents, including all the items listed in Section 3.1 hereof for such Contract indentified in such Transaction Notice. (b) Certifications and Delivery of Custodian's Contract File to ----------------------------------------------------------- Custodian. --------- (i) Upon receipt by Custodian of (x) a Confirmation from Buyer with respect to such Transaction subject to such Table Funding Closing Date and (y) an Escrow Receipt, in the form attached to the Escrow Agreement, from the Escrow Agent with respect to the Contract subject to such Transaction, Custodian shall, with respect to such Escrow Receipt, executed and deliver to Buyer (with a copy to Seller which shall be clearly marked as a copy and non-transferable) one or more initial trust receipt and certifications (each an "Initial Trust Receipt and Certification") in the form attached hereto as Exhibit A-1. Each original Initial Trust Receipt ----------- and Certification shall be 11 delivered to Buyer in New York City on or before 11:00 a.m., New York City time, on the next Business Day immediately following the date on which the Custodian receives such Escrow Receipt. (ii) Buyer shall, upon receipt of (x) such Initial Trust Receipt and Certification from the Custodian and (y) Wire Instruction Letter, Disbursement Letter and Pay-Off Letter from Seller, wire to the Escrow Agent, as directed in such wire instruction letter, the Purchase Price for such Contract. (iii) Seller shall (x) cause the Escrow Agent to deliver to the Custodian all the items listed in Section 3.1 hereof for such Contract subject to such Table Funding Closing Date in accordance with the terms of the Escrow Agreement and (y) deliver to Custodian and Buyer a Computer Tape and Contract Schedule in respect of such Contract, in each case such delivery must be made for receipt thereof by Custodian within five (5) Business Days after the date on which the Escrow Agent receives from Buyer, by wire transfer, the Purchase Price for such Contract. (iv) Custodian shall, within one (1) Business Day after receipt of (x) the Contract and related Custodian Contract File subject to such Escrow Receipt and the related Initial Trust Receipt and Certification from the Escrow Agent and (y) the related Computer Tape and Contract Schedule from Seller, execute and deliver to Buyer an original, final Trust Receipt and Certification in the form attached hereto as Exhibit A-1 and in accordance with Section 3.4 ----------- hereof with respect to the Contract related to such Initial Trust Receipt and Certification. Buyer shall, upon receipt of such original Trust Receipt and Certification, promptly deliver to Custodian the related original Initial Trust Receipt and Certification, and such Initial Trust Receipt and Certification shall be deemed to be of no further force and effect at the time Buyer receives such Trust Receipt and Certification. Section 3.4. Trust Receipt and Certification ------------------------------- (a) The Custodian shall, in each Trust Receipt and Certification, certify and confirm as to each Contract listed on the Contract Schedule to the Transaction Notice or Computer Tape delivered with such Transaction Notice, as applicable, that except as noted on the schedule of exception report attached to the related Trust Receipt and Certification: (i) all documents required to be delivered to it pursuant to subparagraphs (iii) through (xi), inclusive, of Section 3.1 hereof are in the Custodian's possession, expect as otherwise noted in such exception report; (ii) all documents contained in the Custodian's Contract File have been reviewed by the Custodian and appear regular on their face and relate to such applicable Contracts and neither of the Loan Documents nor the Assignments contains any notations on their face which appear to evidence any claims, liens, security interests, encumbrances or other restrictions or transfers, except as otherwise noted, 12 (iii) each Note and other related Loan Documents in the Custodian's Contract File bears an original signature or signatures purporting to be the signature or signatures of the person or persons named as the maker or Obligor under the Contract; (iv) if the Note does not name "[Seller"] as the holder or payee, the Note bears the original endorsements that complete the chain of ownership from the original holder or payee to "[Seller]"; (v) the original of each Assignment of each Loan Document required under Section 3.1 hereof and any intervening assignment of such Loan Documents bear the original signature purporting to be the signature of the named obligee, mortgagee, secured party or beneficiary, as applicable, (and any other necessary party including subsequent assignors) and that such Assignment and any such intervening assignment complete the chain of title from the originator to the "[Seller]"; (vi) each Note has been endorsed as noted in Section 3.1 hereof and each Assignment has been completed as noted in Section 3.1 hereof; and (vii) based on its review of the Custodian's Contract Files with respect to each such Contract listed on the Contract Schedule to the Transaction Notice or the Computer Tape delivered with such Transaction Notice, as applicable, the information set forth on such Contract Schedule or Computer Tape accurately reflects the information contained in each Custodian's Contract File as to the information set forth in Exhibit D hereto. (b) On each Repurchase Date, Buyer shall cause the applicable Trust Receipt(s) and Certification(s) issued in connection with Transactions terminating on such Repurchase Date in accordance with the Repurchase Agreement to be delivered via overnight courier to Custodian for cancellation within one (1) Business Day after such Repurchase Date. In the event that any Contracts covered by such surrendered Trust Receipt(s) and Certification(s) are not the subject of the repurchase Transaction in question, Custodian shall issue and deliver to Buyer via overnight courier a replacement Trust Receipt and Certification covering such Contracts which are not the subject of such repurchase Transaction. Section 3.5 Release of Custodian's Contract Files. From time to time ------------------------------------- and as appropriate for the repossession of or foreclosure on the collateral securing any of the Contracts, pay off, full prepayment and repurchase, Custodian is hereby authorized, upon written request of Seller in the form annexed hereto as Exhibit B, to release to the Seller or the Seller's designee --------- the related Custodian's Contract File or the documents set forth in such request; provided, however, that such release of Custodian's Contract Files by -------- ------- Custodian upon request by the Seller shall be operative only upon written authorization of Buyer. All documents so released to the Seller or the Seller's designee shall be held by it in trust for the benefit of the Buyer. Seller shall return or cause to be returned to Custodian Custodian's Contract File, or such other documents which have been released to Seller or Seller's designee, when Seller's need therefor in connection with such foreclosure or repossession no longer exists, unless the Contract shall be liquidated, in which case, upon receipt of a certification to this effect from Seller to Custodian in the form annexed hereto as Exhibit B, the Seller's request shall be released by Custodian --------- to Seller and Custodian shall thereupon reflect any such liquidation on the Contract Schedule. The 13 limitation of this Section 3.5 shall not apply to release of files to Seller under Section 3.6 or Section 3.10 below. Section 3.6. Repurchase. Upon the repurchase of any Contract ---------- pursuant to this Agreement, the Repurchase Agreement or the payment in full of any Contract, which shall be evidenced by Custodian's receipt of the Seller's request for release in the form annexed hereto as Exhibit B, Custodian shall --------- promptly release the related Custodian's Contract File to the Seller. Section 3.7. Custodial Register. Custodian shall cause such books ------------------ and records at its corporate trust office or other registry maintained with respect to the Contracts to reflect the ownership by Buyer of the Contracts maintained by Custodian pursuant to this Agreement. Section 3.8. Power of Attorney. Seller and Buyer hereby grant to the ----------------- Custodian a power of attorney, with full power of substitution, to take in the name of Seller and Buyer all steps which are necessary or appropriate to endorse, negotiate, deposit or otherwise realize on any instrument or writing of any kind held or transmitted by Seller or Buyer or transmitted or received by Custodian in connection with any Contract. The power of attorney that Seller and Buyer have granted to the Custodian pursuant to this Section 3.8 may be revoked by the Buyer at any time. Section 3.9. No Service Charge for Sale or Transfer of Contracts. --------------------------------------------------- No service charge shall be made for any sale or transfer of Contracts, but Custodian may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any sale or transfer of Contracts. Notwithstanding the foregoing, Custodian may charge a reasonable fee in connection with the release of the Custodian's Contract Files or any document contained therein pursuant to Section 3.5, which fee shall be paid by Seller. Section 3.10 Buyer May Reject Contracts. -------------------------- (a) Buyer may refuse to purchase any Contract offered for sale by Seller under the Repurchase Agreement or may, by notice to Custodian, require an immediate repurchase of any such Contract, in each case under the circumstances provided in the Repurchase Agreement. (b) If a Contract is not purchased by the Buyer on a Purchase Date because of a defect in the related Contract File, or if the Buyer gives written notice to the Custodian that it will not be purchasing a specific Contract for any other reason, the Custodian with return the Custodian's Contract File relating to the Contract to the Seller (or such other person as the Seller shall indicate in writing), at the Seller's expense, within two (2) Business Days of such Purchase Date unless otherwise instructed in writing by the Buyer or, after such Purchase Date, the Seller. 14 ARTICLE IV REPURCHASE DATE PAYMENTS; CONTRACT ACCOUNT Section 4.1. Repurchase Date Payments. One (1) Business Day prior to ------------------------ each Repurchase Date, Buyer shall inform Custodian via facsimile of the amount payable by Seller to Buyer on such Repurchase Date pursuant to the Repurchase Agreement and Custodian shall, on such Repurchase Date, transfer such amount from the Contract Account to the Buyer's Account in accordance with Section 4.2 hereof. If Available Funds on deposit in the Contract Account are not sufficient on such date to pay amounts payable pursuant to the Repurchase Agreement in full, the Custodian shall notify Buyer and Seller of such circumstance by telephone or telecopy and Seller shall deposit to the Contract Account in immediately available funds the amount of such deficiency. Section 4.2. Contract Account. ---------------- (a) Seller shall establish and maintain the Contract Account with First Bank National Association. The Contract Account shall be entitled "First Bank National Association, as Custodian for CS First Boston Mortgage Capital Corp." Seller shall pay into the Contract Account not more often than once each day, as promptly as practicable following the receipt thereof by Seller (but in any event not later than the second Business Day following receipt) all amounts received in respect of the Contracts, including all loan payments from Obligors, liquidation proceeds (net of liquidation expenses) or other recoveries in respect of the Contracts. All amounts paid into the Contract Account under this Agreement shall be held in trust for the Buyer until payment of any such amounts is authorized hereunder. (b) Custodian shall on a monthly basis as directed in writing by Buyer make withdrawals from the Contract Account amounts deposited in such account pursuant to this Section 4.2 for the following purposes and in the following priority: (i) to make payments to Buyer's Account pursuant to Section 4.1 hereof; (ii) to pay the Monthly Servicing Fee to the Servicer; (iii) to release to Seller on each Repurchase Date (and such other date or dates as CSFB shall have consented to in writing) Available Funds remaining after payments to the Buyer pursuant to Section 4.1 hereof; (iv) to withdraw and return to Seller any amount deposited in the Contract Account that was not required to be deposited by Seller therein. (c) If Seller so directs, the Custodian shall, in the name of Custodian, as custodian, invest the amounts in the Contract Account in such investments as are then generally acceptable to S&P for reinvestment of funds in transactions rated "AAA" by S&P. Such investment shall mature not later than one (1) Business Day prior to the next succeeding Repurchase Date. All net income and gain from such investments shall be deposited in the 15 Contract Account and all such net gains and any losses on reinvestment of funds deposited in the Contract Account shall be reimbursed by the Seller and deposited into the Contract Account. Section 4.3. Simultaneous Transfers. The payment of cash for Contracts ---------------------- and the related transfer of Contracts pursuant to any provision of this Agreement shall be deemed to occur simultaneously. Section 4.4. Transfer of Contracts. --------------------- (a) Upon Custodian receiving written certification from Buyer of a Repurchase Agreement Default, Custodian shall (x) follow the instructions of the non-defaulting party including instructions regarding the release of the related Contracts from this Agreement and the transfer of such Contracts and shall do such other acts and execute such other documents as may be deemed reasonably necessary by such non-defaulting party to comply with such instructions and (y) follow the instructions of such nondefaulting party with respect to payment of related amounts from the Contract Account. (b) Upon receipt by Custodian of a written certification of Buyer of a breach of a representation or warranty by Custodian, or the failure of Custodian to perform a covenant, under this Agreement, and any applicable cure period has elapsed, Custodian shall (x) follow the instructions of the Buyer regarding the release from this Agreement and the transfer of such Contracts and shall do such other acts and execute such other documents as may be deemed reasonably necessary to comply with such instructions and (y) follow the instructions of Buyer with respect to payment of related amounts from the Contract Account. 16 ARTICLE V SERVICING Section 5.1. Duties of Servicer: Standard of Care. ------------------------------------ (a) The parties hereto agree and acknowledge that, notwithstanding the purchase and sale of the Contracts contemplated hereby, the Seller shall continue to service the Contracts (in such capacity, the "Servicer") for the benefit of Buyer and, if Buyer shall exercise its rights to sell the Contracts pursuant to this Agreement prior to the related Repurchase Date, Buyer's assigns; provided, however, that the obligation of Servicer to service Contracts -------- ------- for the benefit of Buyer as aforesaid shall cease upon the payment to Buyer of the Repurchase Price therefor. (b) The Servicer shall have full power and authority to manage, service, administer and make collections on the Contracts, subject, however, to the terms and conditions of this Agreement. The Servicer's duties shall include collection and posting of all payments, responding to inquiries of Obligors on the Contracts and accounting for collections. Without limiting the generality of the foregoing, the Servicer is authorized and empowered to execute and deliver, on behalf of itself and Buyer any and all instruments of satisfaction of cancellation, or partial or full release or discharge, and all other comparable instruments, with respect to the Contracts or to the Collateral securing such Contracts. In performing its duties and obligations hereunder, the Servicer shall comply with all applicable state and federal laws and shall exercise that degree of skill and care consistent with the highest degree of skill and care that the Servicer exercises with respect to franchise loans serviced by the Servicer for its own account or others and that is consistent with prudent industry standards ("Accepted Servicing Standards"). (c) If the Servicer shall commence a legal proceeding to enforce a Contract, which has been purchased by Buyer and not repurchased by Seller in a Transaction, Buyer shall thereupon be deemed to have automatically assigned, solely for the purpose of collection, such Contract to the Servicer. If in any enforcement suit or legal proceeding it shall be held that the Servicer may not enforce a Contract on the ground that it shall not be a real party in interest or a holder entitled to enforce such Contract, Buyer shall, at the Servicer's expense and direction, take steps to enforce such Contract, including bringing suit in its name. Buyer shall upon the written request of the Servicer furnish the Servicer with any powers of attorney and other documents reasonably necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties hereunder. Section 5.2. Collection of Payments. The Servicer shall make diligent ---------------------- efforts to collect all payments called for under the terms and provisions of the Contracts as and when the same shall become due and payable consistent with the terms of the related Contract, this Agreement and in accordance with Accepted Servicing Standards. The Servicer shall allocate collections between principal and interest in accordance with the terms of the Contracts and in accordance with the Accepted Servicing Standards. The Servicer may grant extensions, rebates or adjustments on a Contract consistent with its customary practices and ordinary course of business; provided, however, that except as required or -------- ------- permitted by law in connection with disaster, military and other credit relief policies and procedures implemented by the Servicer with respect to Contracts in connection with defaults thereon, the Servicer shall not modify the 17 original due dates of the scheduled payments on any Contract for more than one month for each full year of the original term of such Contract or change the dollar amount of the scheduled payments thereunder. The Servicer may in its discretion waive any late payment charge or any other fees that may be collected in the ordinary course of servicing a Contract. Section 5.3. Additional Servicing Duties and Obligations with respect -------------------------------------------------------- to Contracts. ------------- (a) Maintenance of Security Interests in Collateral. The Servicer ----------------------------------------------- shall take such steps as are necessary to maintain perfection of the security interest created by each Contract in the related Collateral and any related property in the name of Buyer. The Servicer is hereby authorized to take such steps as are necessary to reperfect such security interest on behalf of Buyer in the event of the relocation of the Collateral or for any other reason. The Servicer shall not release any Collateral securing a Contract from the security interest granted by such Contract in whole or in part except (i) as provided under such Contract or (ii) in the event of payment in full by the Obligor or other discounted settlement of the obligations of the Obligor thereunder in connection with a workout of such Contract. (b) Maintenance of Insurance. ------------------------ (i) The Servicer shall cause each Obligor to maintain for each Mortgaged Property and related Collateral all insurance coverage as is required under the related Loan Documents, provided that if and to the extent that any Loan Document permits the holder thereof any discretion (by way of consent, approval or otherwise) as to the insurance coverage that the related Obligor is required to maintain, the Servicer shall exercise such discretion in a manner consistent with the Accepted Servicing Standards, with a view towards requiring insurance comparable to that required under other Contracts with express provisions governing such matters. Each such insurance policy shall be issued by a generally accepted carrier which is licensed to issue such policies in the jurisdiction in which the Collateral is located. (c) Realization Upon Defaulted Contracts. ------------------------------------ (i) The Servicer, on behalf of the Buyer, and with Buyer's prior written consent, shall foreclose upon, repossess, sell at a private or public sale, or otherwise take title, in the name of Custodian on behalf of the Buyer, to the properties, including the Collateral, securing a Contract related to any Defaulted Contract and as to which no satisfactory arrangements, in the reasonable opinion of Servicer, can be made for collection of the delinquent payment. In connection with such foreclosure, repossession, private or public sale or other transfer of title, the Servicer shall follow such practices and procedures as it shall deem necessary or advisable that are customary and usual in its servicing of such Contracts and in accordance with the Accepted Servicing Standards in order to realize upon the Collateral and maximize the recovery of such Collateral. In any case in which the Equipment shall have suffered damage, the Servicer shall not expend funds in connection with any repair or towards the repossession of such Collateral unless it shall determine in its discretion that such repair and/or repossession will increase the liquidation proceeds by an amount greater than the amount of such expense. 18 (ii) Notwithstanding the foregoing, the Servicer shall not obtain title to a Mortgaged Property or other Collateral by deed-in-lieu of foreclosure or otherwise, or take any other action with respect to any Mortgaged Property or other Collateral, if, as a result of any such action, the Custodian could, in the reasonable judgment of Servicer, be considered to hold title to, to be a "mortgagee-in-possession" of, or to be an owner or operator of such Mortgaged Property or other Collateral within the meaning of CERCLA or any comparable law, unless Servicer has taken into account, in accordance with Accepted Servicing Standards, the existence of any known condition upon or impacting the Mortgaged Property or other Collateral in the nature of hazardous substances, hazardous wastes, infectious waste, toxic substance, solid wastes and so forth, as such terms now or in the future are defined or listed in, or otherwise classified pursuant to, or regulated by, any applicable environmental laws, including, but not limited to, all present and future federal, state or local laws, ordinances, rules, regulations, decisions and other requirements of governmental authorities relating to the environment or to any hazardous substance. (iii) The Servicer shall have the right to determine, in accordance with the Accepted Servicing Standards, the advisability of seeking to obtain a deficiency judgment if the state in which the Collateral is located and the terms of the Contract permit such a action and shall, in accordance with such Accepted Servicing Standards, retain Buyer's right to, and seek, a deficiency judgement against the Obligor on a foreclosed Contract, unless otherwise instructed by Buyer. (iv) On behalf of Buyer, the Servicer shall use diligent efforts to pursue any claims under the Insurance Policies. (v) All (x) liquidation proceeds (net of reasonable costs and expenses), (y) all proceeds received under any Insurance Policy, other than proceeds to be applied to the restoration or repair of the Mortgaged Property or other Collateral or released to Obligor in accordance with Accepted Servicing Standards, the Loan Documents and applicable law, and (z) all awards or settlements in respect of condemnation proceeds or eminent domain affecting any Mortgaged Property or other Collateral which are not released to the Obligor in accordance with Accepted Servicing Standards, the applicable Loan Documents and applicable law shall be deposited in the Contract Account. (d) Due-on-Sale Clause; Assumption and Substitution Agreements. When ---------------------------------------------------------- a Collateral has been or is about to be conveyed by the Obligor, the Servicer shall, to the extent it has knowledge of such conveyance or prospective conveyance, exercise its rights to accelerate the maturity of the related Contract under a "due on sale" clause contained in the related Loan Documents; provided, however, that the Servicer shall not exercise any such right if (x) - -------- ------- the "due on sale" clause, in the reasonable belief of the Servicer, is not enforceable under applicable law; or (y) Buyer approves a waiver of the due-on- sale clause; or (z) in the reasonable belief of the Servicer, the exercise of the "due-on-sale clause would likely result in foreclosure or repossession or a default by the Obligor giving rise to a loss on the Contract, and provided, -------- further, that the Servicer may refrain from exercising any such right with the - ------- Buyer's prior consent. In the event of any waiver of the enforcement of, or decision not to enforce, a due-on-sale clause on any Contract, the Servicer shall enter into an assumption and modification agreement with a new Obligor consistent with the Accepted Servicing Standards. 19 Section 5.4. [Reserved]. ---------- Section 5.5. Notice of Default. The Servicer shall deliver to Buyer ----------------- and the Custodian, promptly after having obtained knowledge thereof, but in no event later than five (5) Business Days thereafter, written notice of any event which with the giving of notice or lapse of time, or both, would become an Repurchase Agreement Default. Section 5.6. Servicer Expenses. The Servicer shall be required to pay ----------------- all expenses incurred by it in connection with its activities hereunder, including fees and disbursements of independent accountants, taxes imposed on the Servicer, expenses incurred in connection with distributions and reports to Buyer or Custodian, and fees and expenses of any subservicer, successor Servicer or any other subcontractor. Section 5.7. Collections. The Seller and Servicer covenant and agree ----------- to procure all checks and other payments with respect to the Contracts and insurance proceeds ("Collections") and to make such checks or other forms of payment immediately available to Buyer by causing their deposit into the Contract Account within one (1) Business Day of receipt or as otherwise directed by Buyer in writing. The Seller, Servicer and Custodian covenant and agree to notify Buyer if Collections have not been deposited to the Contract Account for a period of two (2) Business Days. Any amounts received or collected by the Seller or the Servicer shall be held in trust by them for the benefit of Buyer and immediately remitted to the Contract Account or otherwise as instructed by Buyer. Section 5.8. Representations of Servicer. The Servicer hereby --------------------------- represents and warrants to Buyer that at the date of execution of this Agreement and at each Purchase Date: (i) the Servicer is duly organized, validly existing and in good standing under the laws of the state of its organization and is qualified to transact business in and is in good standing under the laws of each state in which it is necessary for it to be so qualified in order to carry on its business as now being conducted and has all licenses necessary to carry on its business as now being conducted; the Servicer has the full power and authority to own its property, to carry on its business as presently conducted, and to execute, deliver and perform each of the Transaction Documents to which it is a party; the execution, delivery and performance of each of the Transaction Documents to which it is a party (including all instruments of transfer to be delivered pursuant to any such Transaction Documents to which it is a party) by the Servicer and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized; each of the Transaction Documents to which it is a party evidences the valid, binding and enforceable obligation of the Servicer (subject to applicable bankruptcy and insolvency laws and other similar laws affecting the enforcement of creditors' rights generally and to general principles of equity, regardless of whether enforcement is sought in a proceeding in equity or at law) and all requisite corporate action has been taken by the Servicer to make each of the Transaction Documents to which it is a party valid and binding upon the Servicer (subject as aforesaid in the preceding clause); (ii) the Servicer is not required to obtain the consent of any other party or obtain the consent, license, approval or authorization of, or make any registration or declaration 20 with any governmental authority, bereau or agency in connection with the execution, delivery, performance, validity or enforceability of each of the Transaction Documents to which it is a party; (iii) the consummation of the transactions comtemplated by the Transaction Documents to which it is a party will not result in the breach of any term or provision of the certificate of incorporation or by-laws of the Servicer or result in the breach of any term or provision of, or conflict with or constitute a default (with or without notice, lapse of time or both) under or result in the acceleration of any obligation under, any agreement, indenture or loan or credit agreement or other instrument to which the Servicer or its property is subject, or result in the creation or imposition of any lien upon any of the properties pursuant to the terms of any such agreement indenture or loan or credit agreement or other instrument (aside from the lien created pursuant to the Transaction Documents) or result in the violation of any law, rule, regulation, order, judgment or decree to which the Servicer or its property or the Contracts are subject; (iv) the Servicer is not a party to, bound by or in breach or violation of any indenture or other agreement or instrument, or subject to or in violation of any statue, order or regulation of any court, regulatory body, administrative agency or governmental body having jurisdiction over it, which adversely affects, or may in the future adversely affect, the ability of the Servicer to perform its obligations under this Agreement or the interest of the Buyer in any respect; (v) there are no actions, suits, proceedings or investigations pending or, to the Servicer's knowledge, threatened against the Servicer, before any court, regulatory body, administrative agency or other tribunal or governmental instrumentality (A) asserting the invalidity of this Agreement or any of the Transaction Documents to which it is a party, (B) seeking to prevent the consummation of any of the transactions contemplated by the Transaction Documents to which it is a party, (C) seeking any determination or ruling that might materially and adversely affect the performance by the Servicer of its obligations under, or the validity or enforceability of, this Agreement or any of the Transaction Documents to which it is a party, or (D) that could have a material and an adverse effect on the Contracts; and (vi) the chief executive office of the Servicer is located at Five Greenwich Office Park, Greenwich, CT 06830. Section 5.9. Merger or Consolidation of, or Assumption of the ------------------------------------------------ Obligations of Servicer. Any Person (a) into which the Servicer may be merged or - ----------------------- consolidated, (b) which may result from any merger or consolidation to which the Servicer shall be a party, or (c) which may succeed to the properties and assets of the Servicer substantially as a whole, which Person executed an agreement of assumption to perform every obligation of the Servicer hereunder, shall be the successor to the Servicer under this Agreement without further act on the part of any of the parties to this Agreement; provided, however, that (1) the -------- ------- Servicer shall have delivered to Buyer and the Custodian 45 days prior written notice of any such merger or consolidation; (2) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time, or both, would become an Event of Default shall have occurred and be continuing; (3) the Servicer shall have delivered to Buyer a certificate stating that such 21 consolidation, merger or succession and such agreement of assumption comply with this Section and that all conditions precedent provided for in this Agreement relating to such transaction have been complied with; and (4) the Servicer shall have delivered to Buyer an opinion of counsel stating that, in the opinion of such counsel, either (i) all financing statements and continuation statements and amendments thereto have been executed and filed that are necessary fully to preserve and protect the interest of Buyer in the Contracts and reciting the details of such filings, or (ii) no such action shall be necessary to preserve and protect such interests. Section 5.10. Resignation. Subject to the provisions of Section 5.9, ----------- the Servicer shall not resign from the obligations and duties hereby imposed on it as Servicer under this Agreement except upon a determination by the board of directors of the Servicer that the performance of its duties under this Agreement shall no longer be permissible under applicable law (any such determination permitting the resignation of the Servicer shall be evidenced by an opinion of counsel to such effect delivered to Buyer and the Custodian) and that the Servicer cannot reasonably comply therewith. No such resignation shall become effective until a successor interim servicer acceptable to Buyer shall have assumed the responsibilities and obligations of the Servicer in respect of the Contracts provided hereby. Section 5.11. Fidelity Bond, Errors and Omissions Insurance. The ---------------------------------------------- Servicer shall maintain, at its own expense, a blanket fidelity bond and an errors and omissions insurance policy, with broad coverage with responsible companies that would meet applicable requirements on all officers, employees or other persons acting in any capacity with regard to the Contracts to handle funds, money, documents and papers relating to the Contracts. Any such fidelity bond and errors and omissions insurance shall be in appropriate form in respect to the Contract and shall protect and insure the Servicer against losses, including forgery, theft, embezzlement, fraud, errors and omissions and negligent acts of such persons. No provision of this Section 5.11 requiring such fidelity bond and errors and omissions insurance shall diminish or relieve the Servicer from its duties and obligations as set forth in this Agreement. The minimum coverage under any such bond and insurance policy shall be in an amount which is customary and standard in the industry for servicers that service a similar portfolio of Contracts and that are in accordance with the Accepted Serving Standards. Upon request of the Buyer, the Servicer shall cause to be delivered to Buyer a certified true copy of the fidelity bond and errors and omissions insurance policy and a statement from the surety and the insurer that such fidelity bond and errors and omissions insurance policy shall in no event be terminated or materially modified without thirty (30) days' prior written notice to the Buyer. Section 5.12. [Intentionally Omitted]. Section 5.13. Monthly Servicing Report. On or before the fifteenth ------------------------ (15th) day of each calendar month (or, if such day is not a Business Day then the next succeeding Business Day) Seller shall deliver to Buyer and Custodian a Monthly Servicing Report with respect to the immediately preceding Collection Period setting forth the following information, and such other information as Buyer may from time to time request: (i) The aggregate number of Contracts subject to Transactions and the number of Contracts subject to each Transaction and the number of Contracts subject to each Transaction; 22 (ii) The aggregate of payments received on such Contracts during the preceding Collection Period allocable to principal and the total payments received on each such Contract during the preceding Collection Period allocable to principal; (iii) The aggregate of payments received on such Contracts during the preceding Collection Period allocable to interest and the total payments received on each such Contract during the preceding Collection Period allocable to interest; (iv) The aggregate Outstanding Principal Amount of such Contracts as of the close of business on the last day of the preceding Collection Period, after giving effect to payments allocated to principal on such day, and the Outstanding Principal Amount of each such Contract as of the close of business on the last day of the preceding Collection Period, after giving effect to payments allocated to principal on such day; (v) The weighted average annual percentage rate of such Contracts as of the beginning of the preceding Collection Period and the weighted average annual percentage rate of each such Contract as of the beginning of the preceding Collection Period; (vi) The number of Contracts, and the outstanding principal balance of such Contracts and of each such Contract, that were (x) 1 to 30 days past due, (y) 31 to 60 days past due, and (z) 61 or more days past due as of the end of the preceding Collection Period; (vii) Gross charge-offs, recoveries and net losses for the preceding Collection Period for each Contract; (viii) (A) The number and aggregate principal balance of all Contracts in respect of which the related Collateral has been repossessed or foreclosed upon during the preceding Collection Period and (B) the number and aggregate principal balance of all Contracts that were liquidated (otherwise than pursuant to voluntary prepayment) during such Collection Period; (ix) (A) The principal balance of each such Contract in respect of which the related Colleteral has been repossessed or foreclosed upon during the preceding Collection Period and (B) the principal balance of each such Contract that was liquidated (otherwise than pursuant to voluntary prepayment) during such Collection Period; (x) First payment defaults for the preceding Collection Period; (xi) Obligor bankruptcy filings for the preceding Collection Period; and 23 (xii) Repossession and liquidation expenses for the preceding Collection Period. Section 5.14. Servicer Termination Event. "Servicer -------------------------- Termination Event" means the occurrence of any of the following: (i) Any failure by Servicer to make any deposit into an account required to be made hereunder and the continuance of such failure for a period of one (1) Business Day after Servicer has become aware, or should have become aware, that such deposit was required; (ii) Failure on Servicer's part to observe or perform in any respect any covenant or agreement in this Agreement, which failure continues unremedied for fifteen (15) days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to Servicer by Custodian or Buyer or to Servicer and Custodian by Buyer; (iii) Any assignment by Servicer of its duties or rights hereunder except as specifically permitted hereunder, or any attempt to make such an assignment; (iv) A court or other governmental authority having jurisdiction in the premises shall have entered a decree or order for relief in respect of Servicer in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall have appointed a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of Servicer, as the case may be, for any substantial liquidation of its affairs, and such order remains undischarged and unstayed for at least thirty (30) days; or (v) Servicer shall have commenced a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall have consented to the entry of an order for relief in an involuntary case under any such law, or shall have consented to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian or sequestrator (or other similar official) of Servicer or for any substantial part of its property, or shall have made any general assignment for the benefit of its creditors, or shall have failed to, or admitted in writing its inability to, pay its debts as they become due, or shall have taken any corporate action in furtherance of the foregoing. Section 5.15. Transfer and Successor Servicer. If a Servicer ------------------------------ Termination Event has occurred and is continuing, Buyer may, by written notice to Servicer, terminate all 24 (but not less than all) of Servicer's management, administrative, servicing and collection functions (such termination being herein called a "Servicer Transfer"). On receipt of such notice (or, if later, on a date designated therein), all authority and power of Servicer under this Agreement, whether with respect to the Contracts, the Collateral, the Custodian's Contract Files or otherwise shall pass to and be vested in Custodian pursuant to and under this Sections 5.15 and 5.16 hereof; and, without limitation, Custodian is authorized and empowered to execute and deliver on behalf of Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments and to do any and all acts of things necessary or appropriate to effect the purposes of such notice of termination. Each of Buyer and Servicer agrees to cooperate with Custodian in effecting the transfer of the responsibilities and rights of Servicer hereunder, including, without limitation, execution of notices in accordance with applicable state and federal law and the transfer to Custodian for administration by it of all cash amounts which shall at the time be held by Servicer for deposit, or have been deposited by Servicer, in the Contract Account or for its own account in connection with its services hereafter or thereafter received with respect to the Contracts. Servicer shall be entitled to receive any other amounts which are payable to Servicer under this Agreement, at the time of the termination of its activities as Servicer. Servicer shall transfer to the new Servicer (i) Servicer's records relating to the Contracts in such electronic form as the new Servicer may reasonably request, (ii) any Contracts and the Custodian's Contract Files in Servicer's possession, (iii) Servicer's files relating to the Contracts, and (iv) all funds in an account related to the Contracts and the related documents and statements held by it hereunder and the Servicer shall account for all such funds. Section 5.16. Custodian to Act; Appointment of Successor. ------------------------------------------ On and after the time Servicer receives a notice of termination pursuant to Sections 5.14 and 5.15 hereof, Custodian shall be the successor in all respects to Servicer in its capacity as Servicer under this Agreement and the transactions set forth or provided for herein and shall be subject to all the responsibilities, duties and liabilities relating thereto placed on Servicer by the terms and provisions hereof, and Servicer shall be relieved of such responsibilities, duties and liabilities arising after such Service Transfer; provided, however, that Custodian shall not be liable for any act or omissions - -------- ------- of Servicer occurring prior to such Service Transfer or for any breach by such Servicer of any of its representations and warranties contained herein or in any related document or agreement. As compensation therefor, Custodian shall, except as provided in Section 5.15 and in this Section 5.16, be entitled to such compensation as Servicer would have been entitled to hereunder if no such notice of termination had been given. Notwithstanding the above, Custodian may, if it is legally unable so to act, appoint, with the prior written consent of Buyer, a successor to Servicer hereunder. Such successor Servicer shall succeed to the responsibilities, duties and liabilities of Servicer hereunder upon delivering to Custodian and Buyer a written assumption of such responsibilities, duties and liabilities in form and substance satisfactory to Buyer and the Custodian. Pending appointment of a successor to Servicer hereunder, unless Custodian is prohibited by law from so acting, Custodian shall act in such capacity as hereinabove provided. In connection with such appointment and assumption, Custodian may make such arrangements for the compensation of such successor out of payments on Contracts as it and such successor shall agree; provided, -------- however, that no such compensation shall be in excess of the Monthly Servicing - ------- Fee. Notwithstanding the above, the Custodian shall, if it shall be unwilling or unable so to act, appoint, or petition a court of competent jurisdiction to appoint, any established financial 25 institution, having a net worth of not less than $50,000,000 and whose regular business shall include the servicing of franchise loans, as the successor to the Servicer under this Agreement; provided that such successor Servicer shall be reasonably acceptable to Buyer. 26 ARTICLE VI CUSTODIAN Section 6.1. Representations, Warranties and Covenants of Custodian. ------------------------------------------------------- With respect to each Trust Receipt and Certification, Custodian hereby represents and warrants to, and covenants with Buyer that as of the date such Trust Receipt and Certification is provided: (a) Custodian is duly organized, validly existing and in good standing under the laws of the United States; (b) Custodian has the full power and authority to hold each Contract (whether acting alone or through an agent) and to execute, deliver and perform, and to enter into and consummate all transactions contemplated by this Agreement, has duly authorized the execution, delivery and performance of this Agreement, has duly executed and delivered this Agreement and this Agreement constitutes a legal, valid and binding obligation of Custodian, enforceable against it in accordance with its terms, except as enforcement of such terms may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and by the availability of equitable remedies; (c) Neither the execution and delivery of this Agreement, the filing of a financing statement indicating that Buyer is the secured party with respect to certain Contracts, the delivery of Contracts, the issuance of the Trust Receipt and Certification, the consummation of the transactions contemplated hereby or thereby, nor the fulfillment of or compliance with the terms and conditions of this Agreement will conflict with or result in a breach of any of the terms, conditions or provisions of Custodian's charter or by-laws or any legal restriction or any agreement or instrument to which Custodian is now a party or by which it is bound, or constitute a default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which Custodian or its property is subject; (d) Custodian does not believe, nor does it have any reason or cause to believe, that it cannot perform each and every covenant contained in this Agreement; (e) There is no litigation pending or threatened, which is determined adversely to Custodian, would adversely affect the execution, delivery or enforceability of this Agreement, or any of the duties or obligations of Custodian thereunder, or which would have an adverse effect on the financial condition of Custodian; (f) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance by Custodian of or compliance by Custodian with this Agreement or the consummation of the transactions contemplated hereby; (g) Custodian is a separate and independent entity from Seller, Custodian does not own a controlling interest in Seller either directly or through affiliates and no director or officer of Custodian is also a director or officer of Seller; 27 (h) Upon written request of Buyer, Custodian shall take such steps as requested by Buyer to protect or maintain any interest in the Collateral or other collateral securing the Contract owned by Buyer and any insurance applicable thereto. (i) Custodian is not a party to, bound by or in breach or violation of any indenture or other agreement or instrument, or subject to or in violation of any statute, order or regulation of any court, regulatory body, administrative agency or governmental body having jurisdiction over it, which materially and adversely affects, or may in the future adversely affect, the ability of the Custodian to perform its obligations under this Agreement or the interest of the Buyer in any respect; (j) There are no actions, suits, proceedings or investigations pending or threatened against the Custodian, before any court, regulatory body, administrative agency or other tribunal or governmental instrumentality (A) asserting the invalidity of this Agreement, (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement, and (C) seeking any determination or ruling that might adversely affect the performance by the Custodian of its obligations under, or the validity or enforceability of, this Agreement; and (k) Custodian shall monitor the financing statements filed with respect to the Contracts naming Buyer as the secured party and shall cause Seller to file or, if Seller shall fail to file in a timely manner, shall itself file such amendments and continuation statements with respect thereto necessary in order to maintain the perfected security interest of Buyer in the Contracts. Section 6.2. Custodian of Documents. Custodian, either directly or by ---------------------- acting through an agent, shall hold all documents relating to any Contract that comes into its possession for the exclusive use and benefit of Buyer on and after the Purchase Date of any Transaction and to the related Repurchase Date and shall make disposition thereof only in accordance with the instructions furnished by Buyer. Custodian shall segregate and maintain continuous custody of all such documents received by it in secure facilities in accordance with customary standards for such custody and shall not release such documents or transfer such documents to any other party, including any subcustodian, without the express written consent of the Buyer, except as provided in Section 3.5 hereof. Section 6.3. Charges and Expenses. Seller will pay all fees of -------------------- Custodian in connection with the performance of its duties hereunder in accordance with written agreements to be entered into from time to time between Custodian and Seller, including fees and expenses of counsel incurred by Custodian in the performance of its duties hereunder; provided, however, that --------- -------- (i) Custodian shall in no event acquired and hereby agrees not to assert (x) any lien upon any Contract deposited under this Agreement or (y) any claim against Buyer or Seller, by reason of the failure of Seller to pay any of such fees, charges or expenses, and (ii) in the event Seller fails to pay the fees and expenses of Custodian as set forth in such written agreements, Custodian shall have no obligation to take actions or incur costs in connection with this Agreement unless Buyer, Seller or another Person has made adequate provision for payment of Custodian's fees and expenses. 28 Section 6.4. No Adverse Interests. Custodian covenants and warrants to -------------------- Buyer and Seller that: (i) as of the related date on which Custodian receives evidence of the perfection of its interest in the related Contracts, it holds no adverse interest, by way of security or otherwise, in any Contract; and (ii) the execution of this Agreement and the creation of the custodial relationship hereunder does not create any interest, by way of security or otherwise of Custodian in or to any Contract, other than Custodian's rights as custodian hereunder. Section 6.5. Inspections. Upon no less than one (1) Business Day prior ----------- written notice to Custodian, Buyer and Buyer's agents, accountants, attorneys and auditors will be permitted during normal business hours to examine Custodian's documents, records and other papers in possession of or under the control of Custodian relating to the Contracts. Section 6.6. Insurance. Custodian shall, at its own expense, maintain --------- at all times during the existence of this Agreement and keep in full force and effect, (1) fidelity insurance, (2) theft of documents insurance, (3) forgery insurance subject to deductibles, all in amounts customary and standard in the industry and with insurance companies reasonably acceptable to Buyer. A certificate of the respective insurer as to each such policy or a blanket policy for such coverage shall be furnished to Buyer, upon request, containing the insurer's statement or endorsement that such insurance shall not terminate prior to receipt by such party, by registered mail, of ten (10) days advance notice thereof. Section 6.7. Limitation of Liability. Custodian assumes no obligation, ----------------------- and shall be subject to no liability, under this Agreement to Buyer, except that Custodian agrees to use its best judgement and good faith in the performance of such obligations and duties as are specifically set forth herein. Custodian shall not be liable for any action or non-action by it in reliance on advice of counsel believed by it in good faith to be competent to give such advice. Custodian may rely and shall be protected in acting upon any written notice, order, request, direction or other document believed by it to be genuine and to have been signed or presented by the proper party or parties. Section 6.8. Indemnification. Seller agrees to indemnify Custodian --------------- against, and to hold it and its employees, officers and directors harmless from, any liabilities, and any related out-of-pocket expenses, which it may incur in connection with this Agreement or the Trust Receipt and Certification, other than any liabilities and expenses arising out of Custodian's negligence or bad faith or misconduct. Custodian agrees to indemnify each of Buyer and Seller and their respective employees, officers and directors against out-of-pocket expenses which either Buyer or Seller or their respective employees, officers or directors may incur in connection with this Agreement and any Trust Receipt and Certification and which is caused by Custodian's negligence or bad faith or misconduct. Such indemnifications shall survive the removal or resignation of the Custodian hereunder and the termination of this Agreement. Section 6.9. Removal of Custodian. Buyer, with or without cause, may -------------------- upon at least thirty (30) days' notice remove and discharge Custodian from the performance of its duties under this Agreement by written notice from Buyer to Custodian, with a copy to Seller. Having given notice of such removal, Buyer promptly shall appoint a successor custodian to act on behalf of Buyer and Seller, as their respective rights appear herein, by written instrument, original counterparts of which instrument shall be delivered to Buyer and the successor 29 Custodian, with a copy to Seller. So long as no Repurchase Agreement Default shall have occurred and be continuing and there shall not have occurred a Servicer Termination Event or an Event of Termination pursuant to Section 11 of the Supplemental Terms, the Seller shall have the right to consent to the appointment of a successor custodian pursuant to this Section 6.9, which consent may not be unreasonably withheld. In the event of any such removal, Custodian shall promptly transfer to the successor Custodian, as directed, and at the expense of Seller, all Custodian's Contract Files and all funds in the Contract Account and any other accounts in connection with this Agreement and all related documents. In the event of any such removal, Seller shall promptly pay the Custodian its outstanding fees and expenses incurred in connection with this Agreement. In the event of any such appointment Seller shall be responsible for the fees and expenses of the existing and successor Custodian in accordance with Section 6.3 hereof. Section 6.10. Termination of Custodian. Custodian may terminate its ------------------------ obligations under this Agreement upon at least 120 days' prior notice to Servicer, Seller and Buyer. In the event of such termination, Buyer shall appoint a successor Custodian. Upon such appointment, Custodian shall promptly transfer to the successor Custodian, as directed, all Custodian's Contract Files and all funds in the Contract Account and any other accounts in connection with this Agreement and all related documents being administered under this Agreement. The termination of the Custodian pursuant to this Section 6.10 hereof shall not become effective until a successor custodian has been appointed pursuant to this Section 6.10. The payment of such successor Custodian's fees and expenses shall be solely the responsibility of Seller in accordance with Section 6.3 hereof. If the endorsements on the Contracts have been completed in the name of Custodian, Custodian shall execute such endorsements on the Contracts as Buyer shall request. Section 6.11. Reliance of Custodian. The Custodian may conclusively --------------------- rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any request, instructions, certificate, opinion or other document furnished to the Custodian, reasonably believe by the Custodian to be genuine and to have been signed or presented by the proper party or parties and conforming to the requirements of this Agreement; but in any case of any document or other request, instruction, document or certificate which by any provision hereof is specifically required to be furnished to the Custodian, the Custodian shall be under a duty to examine the same to determine whether or not it conforms to the requirements of this Agreement. Section 6.12. Transmission of Custodian's Contract Files. Written ------------------------------------------ instructions as to the method of shipment and shipper(s) the Custodian is directed to utilize in connection with transmission of Custodian's Contract Files in the performance of the Custodian's duties hereunder shall be delivered by the Seller to the Custodian prior to any shipment of any Custodian's Contract Files hereunder. In the event the Custodian does not receive written instructions as provided for in the preceding sentence, the Custodian is hereby authorized and shall be indemnified as provided herein to utilize a nationally recognized courier service. The Seller will arrange for the provision of such services at its sole cost and expense (or, at the Custodian's option, reimburse the Custodian for all costs and expenses incurred by the Custodian consistent with such instructions) and will maintain such insurance against loss or damage to Custodian's Contract Files as the Seller deems appropriate. Without limiting the generality of the provisions of Section 6.8 above, it is expressly agreed that in no event shall the Custodian 30 have any liability for any losses or damages to any person, including, without limitation, the Seller, arising out of actions of the Custodian consistent with instructions of the Seller. Section 6.13. Authorized Representatives. Each individual designated -------------------------- as an authorized representative of the Buyer, Seller, Servicer and Custodian, respectively (an "Authorized Representative"), is authorized to give and receive notices, requests and instructions and to deliver certificates and documents in connection with this Agreement on behalf of the Buyer or Seller or Servicer or Custodian, as the case may be, and the specimen signature for each such Authorized Representative of the Buyer, each such Authorized Representative of the Seller, each such Authorized Representative of the Seller, and each such Authorized Representative of the Custodian, initially authorized hereunder, is set forth on Exhibits E, F, G and H hereof, respectively. From time to time, the Buyer, the Seller, the Servicer and the Custodian may, by delivering to each other a revised exhibit, change the information previously given pursuant to this Section 6.13, but each of the parties hereto shall be entitled to rely conclusively on the then current exhibit until receipt of a superseding exhibit. 31 ARTICLE VII MISCELLANEOUS PROVISIONS Section 7.1. Amendment. This Agreement may be amended from time to --------- time by Custodian, Buyer and Seller by written agreement signed by such parties. Section 7.2. Governing Law and Jurisdiction; Waiver of Jury Trial. ---------------------------------------------------- This Agreement shall be construed in accordance with the laws of the State of New York governing agreements made and to be performed therein, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. The parties hereto agree to submit to personal jurisdiction in the State of New York in any action or proceeding arising out of this Agreement. The parties hereto each hereby waive the right to trial by jury in any litigation arising hereunder. Section 7.3. Notices. All demands, notices and communications ------- hereunder, except as otherwise provided herein, shall be in writing and shall be deemed to have been duly given if personally delivered at or mailed by registered mail, postage prepaid, or sent by facsimile transmission to: (a) in the case of Custodian: ------------------------ First Bank National Association c/o First Trust 180 East 5th Street St. Paul, Minnesota 55101 Attention: DCS-Judy Spahn Telephone: (612) 244-0416 Telecopy: (612) 244-0010 with a copy to: First Trust 180 East 5th Street St. Paul, Minnesota 55101 Attention: Structured Finance-Lynn Steiner Telephone: (612) 244-0743 Telecopy: (612) 244-0089 (b) in the case of Buyer: -------------------- CS First Boston Mortgage Capital Corp. 55 East 52nd Street New York, New York 10055-0186 Attention: Patrick McGrath Telephone: (212) 909-3556 Telecopy: (212) 318-1427 32 Any and all legal notices are to be sent to: CS First Boston Mortgage Capital Corp. 11 Madison Avenue, 7th Floor New York, New York 10010 Attention: Walter Fekula, Director of Credit Telephone: (212) 325-3063 Telecopy: (212) 325-8219 (c) in the case of Seller: --------------------- Franchise Mortgage Acceptance Company LLC Five Greenwich Office Park Greenwich, CT 06830 Attention: John W. Rinaldi, Senior Vice President Telephone: (203) 863-7106 Telecopy: (203) 622-1834 (d) in the case of Servicer: ----------------------- Franchise Mortgage Acceptance Company LLC Five Greenwich Office Park Greenwich, CT 06830 Attention: Karen M. Kowalski, Servicing Manager Telephone: (203) 863-7113 Telecopy: (203) 622-1834 Section 7.4. Severability of Provisions. If any one or more of the -------------------------- covenants, agreements, provisions or terms of this Agreement shall be for any reason whatsoever held invalid, then such covenants, agreements, provisions or terms shall be deemed severable from the remaining covenants, agreements, provisions or terms of this Agreement and shall in no way affect the validity or enforceability of the other provisions of this Agreement. Section 7.5. No Partnership. Nothing herein contained shall be deemed -------------- or construed to create a co-partnership or joint venture between the parties hereto and the services of Custodian shall be rendered as an independent contractor and not as agent for Buyer or Seller. Section 7.6. Counterparts. This Agreement may be executed ------------ simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument. Section 7.7. Assignment. No party hereto shall sell, pledge, assign or ---------- otherwise transfer this Agreement without the prior written consent of the other parties hereto. Section 7.8. Headings. Section headings are for reference purposes -------- only and shall not be construed as a part of this Agreement. 33 IN WITNESS WHEREOF, Buyer, Seller and Custodian have caused their names to be signed hereto by their respective officers there unto duly authorized, all as of the day and year first above written. CS FIRST BOSTON MORTGAGE CAPITAL CORP., as Buyer By /s/ Emily Youssouf ----------------------------------------- Name: Emily Youssouf Title: VP. FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, as Seller and Servicer By /s/ John Rinaldi ----------------------------------------- Name: John Rinaldi Title: SVP FIRST BANK, NATIONAL ASSOCIATION, as Custodian By /s/ Lynn M. Steiner ----------------------------------------- Name: Lynn M. Steiner Title: Assistant Vice President EXHIBIT A --------- TRUST RECEIPT AND CERTIFICATION Trust Receipt No. Aggregate Outstanding Principal Amount: [Date] To: CS First Boston Mortgage Capital Corp. Five World Trade Center - 7th Floor New York, New York 10048 Attention: Mortgage Operations Re: Tri-Party Custodial Agreement, dated as of October 10, 1996 by and among CS First Boston Mortgage Capital Corp. ("Buyer"), Franchise Mortgage Acceptance Company LLC ("Seller") and First Bank National Association ("Custodian") --------------------------------------- Gentlemen: In accordance with the provisions of Section 3.4 of the ----------- above-referenced Custodial Agreement, the undersigned, as Custodial, hereby confirms and certifies:(1) that it has received all of the documents listed in subparagraphs (iii) through (ix), inclusive, of Section 3.1 of the Custodial ----------- Agreement with respect to each Contract [identified on the Contract Schedule attached to, or on the Computer Tape delivered with, the Transaction Notice dated] [delivered to Custodian in connection with the notice of Margin Call dated ______]; (2) that it has reviewed each Custodian's Contract File in accordance with Section 3.4(a) of the Custodial Agreement and the documents contained in each Custodian's Contract File appear regular on their face and on their face satisfy the requirements set forth in Section 3.4(a) of the Custodial Agreement, subject to the qualifications set forth herein; (3) that it has physical possession of the Contracts and the other documents in the related Custodian's Contract File and will continue to hold each Contract and the other documents in the related Custodian's Contract File for the benefit of Buyer and its successors and assigns from time to time pursuant to the Custodial Agreement so long as any Transaction involving such Contract is subject to the Repurchase Agreement; and (4) the Aggregate Outstanding Principal Amount set forth hereinabove corresponds to like information contained on such Contract Schedule or Computer Tape, as applicable. Any exceptions or deficiencies in a Custodial's Contract File are set forth in an exception report attached hereto and made a part hereof. It is herein acknowledged that, in making such certification, the Custodian was under no duty or obligation to inspect, review or examine any such documents, instruments, certificates or other papers to determine that they are genuine, enforceable or appropriate for the A-1 represented purpose or that they have actually been recorded or that they are other than what they purport to be on their face. Capitalized terms used herein without definition shall have the meanings ascribed to them in the Custodial Agreement. Custodian further certifies that as to each Contract, Custodian holds the Contract without notice (a) of any adverse claims, liens or encumbrances, (b) that any Contract was overdue or has been dishonored, (c) of evidence on the face of any Contract or other document in Custodian's Contract File of any security interest therein, or (d) of any defense against or claim to the Contract by any other party. Custodian makes no representations or warranties as to the validity, legality, sufficiency, enforceability, genuineness or prior recorded status of any of the documents contained in each Custodian's Contract File or the collectability, insurability, effectiveness or suitability of any Contract, or the accuracy of the Outstanding Principal Amount. Upon termination of the Transaction to which this Trust Receipt and Certification relates and payment of the applicable repurchase price by Seller thereunder, and Contracts to which this Trust Receipt and Certification relate shall be returned and released by Custodian to Seller, and this Trust Receipt and Certification shall be and be deemed to be canceled by Custodian and of no force and effect. [CUSTODIAN], Custodian By___________________________________ Name: Title: A-2 EXHIBIT A-1 ----------- INITIAL TRUST RECEIPT AND CERTIFICATION Initial Certification No. [Date] To: CS First Boston Mortgage Capital Corp. Five World Trade Center - 7th Floor New York, New York 10048 Attention: Mortgage Operations Re: Tri-Party Custodial Agreement, dated as of October 10, 1996 ("Custodial Agreement") by and among CS First Boston Mortgage Capital Corp. ("Buyer"), Franchise Mortgage Acceptance Company LLC ("Seller") and First Bank National Association ("Custodian") -------------------------------------------------- Ladies and Gentlemen: In accordance with the provisions of Section 3.3 of the above-referenced Custodial Agreement, the undersigned, as Custodian, hereby certifies that it has received the Escrow Agent Receipt dated _________, 1996 in respect to the Contract subject to the Confirmation dated _________, 1996. Custodian confirms that it holds the Escrow Receipt for the benefit of Buyer and its successors and assigns from time to time pursuant to the terms and conditions of the Custodial Agreement so long as any Transaction involving the Contract in respect of such Escrow Receipt is subject to the Repurchase Agreement. Capitalized terms used herein without definition shall have the meanings ascribed to them in the Custodial Agreement. Any holder of this Initial Trust Receipt and Certification, by its acceptance hereof, acknowledges that this Initial Trust Receipt and Certification is a temporary receipt which will be cancelled and replaced by a final Trust Receipt and Certification to be issued by the Custodian to CS First Boston Mortgage Capital Corp. (or any successor), as initial holder. Upon receipt by CS First Boston Mortgage Capital Corp. of the related final Trust and Receipt Certification, this Initial Trust Receipt and Certification shall automatically be deemed to be non-negotiable and of no further force and effect. Any holder of this Initial Trust Receipt and Certification (including any transferee or assignee of the initial holder) should contact the Custodian at (612)244-0416 to inquire of the status of this Initial Trust Receipt and Certification prior to acceptance thereof or in connection with retention thereof. A-1-1 FIRST BANK NATIONAL ASSOCIATION, Custodian By: _______________________________ Name: Title: A-1-2 EXHIBIT B --------- REQUEST FOR RELEASE OF DOCUMENTS To: [Custodian] RE: Tri-Party Custodial Agreement, dated as of October 10, 1996 by and among CS First Boston Mortgage Capital Corp. ("Buyer"), Franchise Mortgage Acceptance Company LLC ("Seller") and First Bank National Association ("Custodian") -------------------------------------------------- In connection with the administration of the Contracts held by you as Custodian under the above-referenced Custodial Agreement, we request the release, and acknowledge receipt, of the (Custodian's Contract File/[specify documents) for the Contract described below, for the reason indicated. Obligor's Name. Address & Zip Code: - ---------------------------------- Contract Loan Number: - -------------------- Reason for Requesting Documents (check one) - ------------------------------- _______ 1. Contract Paid in Full. _______ 2. Contract Repurchased Pursuant to the Repurchase Agreement. _______ 3. Contract Liquidated. _______ 4. Contract in Foreclosure or Repossession Proceedings. _______ 5. Other (explain) _____________________________________________ _____________________________________________ If box 1, 2 or 3 above is checked, and if all or part of Custodian's Contract File was previously released to us, please release to us our previous receipt on file with you, as well as any additional documents in your possession relating to the above specified Contract. B-1 If box 4 or 5 above is checked, upon or return of all of the above documents to you as Custodian, please acknowledge your receipt by signing in the space indicated below, and returning this form. [SELLER], Seller By_____________________________________ Name: Title: Date: Documents returned to Custodian: [CUSTODIAN] Custodian as Servicer By________________________________ Name: Title: Date: B-2 EXHIBIT C --------- FORM OF TRANSACTION NOTICE CS First Boston Mortgage Capital Corp. Transaction No.____________ 55 East 52nd Street New York, NY 10055 Attention: [Custodian's Name and Address] Ladies and Gentlemen: The undersigned executes and delivers this notice ("Notice") pursuant to the requirements of the Master Repurchase Agreement, dated as of October 10, 1996 and Annex I, Additional Supplemental Terms dated as of October 10, 1996, in each case between CS First Boston Mortgage Capital Corp. ("Buyer") and Franchise Mortgage Acceptance Company LLC ("Seller"), and the Tri-Party Custodial Agreement for Contracts, dated as of October 10, 1996 (the "Custodial Agreement"), among Seller, Buyer and First Bank National Association ("Custodian") in connection with the submission for sale thereunder on __________ 199_ (the "Purchase Date") of the Contracts indentified on the Computer Tape and the Contract Schedule each delivered herewith and the delivery of the related Custodian's Contract Files to Custodian pursuant to Section 3.1 of the Custodial Agreement. All capitalized terms used in this Notice without definition shall have the same meanings herein as they have in the Custodial Agreement. Seller hereby represents and certifies to Buyer as follows: 1. As of this date, Seller is in compliance with all of the terms and conditions of the Agreement. 2. Except as otherwise previously disclosed in writing to Buyer, Seller's representations and warranties set forth in the Transaction Documents and any other related document are true and accurate as of the date of this Notice. 3. The Contracts, which are indentified on such Computer Tape, satisfy the requirements of the eligibility set forth in the Transaction Documents and all related agreements between Buyer and Seller. 4. Upon payment to Seller by Buyer of the Purchase Price in respect of the Transaction involving the Contracts, all of Seller's right (including the power to convey title thereto), title and interest in and to each document constituting the Custodian's Contract Files delivered to Custodian or held by or on behalf of Seller with respect to each purchased Contract, shall be transferred, assigned, set over and otherwise conveyed to Buyer. 5. The general terms of the sale are: A. Number of Contracts: B. Outstanding Principal Amount of the Contracts as of the Purchaser Date:_______ C. Purchase Date:_____ D. Table Funding Date:_____ E. Repurchase Date:______ F. Characteristics of each Contract:______ [for each Contract attach a Contract Schedule in the form attached hereto as Exhibit D] [SELLER] By:______________________________ Name:____________________________ Title:___________________________ C-1 EXHIBIT D --------- FORM OF CONTRACT SCHEDULE [For Each Contract] (1) Name of Contract: (2) Loan Number: (3) Originated by: (4) Bought form (if applicable): (5) Obligor's name and address: (6) Contract Rate: (7) Original term: (8) Original principal balance: (9) Remaining balance on the Contract as of the proposed Purchase Date: (10) The monthly due date with respect to scheduled payments on the Contract: (11) Remaining term of the Contract to maturity and the stated maturity date: (12) Whether a prepayment penalty is provided for: (13) Type of interest in land (fee or leasehold): (14) Frequency of adjustment of the interest rate (for adjustable rate Contracts): (15) First interest rate change date (for adjustable rate Contracts): (16) Index (for adjustable rate Contracts): (17) Maximum interest rates and if applicable minimum interest rates (for adjustable rate Contracts): (18) Periodic rate cap (for adjustable rate Contracts): (19) Gross margin (for adjustable rate Contracts): (20) Loan-to-Value Ratio at origination: (21) Loan-to-Value Ratio as of the proposed Purchase Date: (22) Franchise Concept: (23) That the amount of the title insurance policy equals the original principal balance of the loan: D-1 EXHIBIT E --------- AUTHORIZED OFFICES OF THE BUYER Name Specimen Signature Emily Youssouf /s/ Emily Youssouf - ------------------------ -------------------------- Heidi Davis /s/ Heidi Davis - ------------------------ -------------------------- John Shrewsbury /s/ John Shrewsbury - ------------------------ -------------------------- E-1 EXHIBIT F --------- AUTHORIZED OFFICERS OF THE SELLER Name Specimen Signature John Rinaldi - Senior V.P. /s/ John Rinaldi ----------------------- -------------------------------- Thomas Shaughnessy - Senior V.P. /s/ Thomas Shaughnessy ----------------------- -------------------------------- Wayne Knyal - President /s/ Wayne Knyal ----------------------- -------------------------------- F-1 EXHIBIT G --------- AUTHORIZED OFFICERS OF THE SERVICER Name Specimen Signature John Rinaldi - Senior V.P. /s/ John Rinaldi ----------------------- -------------------------------- Thomas Shaughnessy - Senior V.P. /s/ Thomas Shaughnessy ----------------------- -------------------------------- Wayne Knyal - President /s/ Wayne Knyal ----------------------- -------------------------------- G-1 EXHIBIT H --------- AUTHORIZED OFFICERS OF THE CUSTODIAN Name Specimen Signature Judy M. Spahn Assistant Secretary /s/ Judy M. Spahn - ---------------------------- ---------------------------- Julaine A. Fuith Assistant Secretary /s/ Julaine A. Fuith - ---------------------------- ---------------------------- [SIGNATURE ILLEGIBLE] Vice President /s/ [SIGNATURE ILLEGIBLE] - ---------------------------- ---------------------------- Lynn M. Steiner Assistant Vice President /s/ Lynn M. Steiner H-1 EXHIBIT I --------- ESCROW AGREEMENT I-1 MASTER ESCROW AGREEMENT This Master Escrow Agreement ("Master Escrow Agreement") is dated as of _____, 199_, by and among Franchise Mortgage Acceptance Company LLC ("FMAC"), Credit Suisse First Boston Mortgage Capital LLC (formerly CS First Boston Mortgage Capital Corp.) ("CSFB"), First Bank National Association, as custodian (in such capacity, "Custodian") and as wire escrow agent (in such capacity, "Wire Agent") and ________________________, as document escrow agent ("Document Agent"). WHEREAS, pursuant to a Master Repurchase Agreement and Annex I, Additional Supplemental Terms To Master Repurchase Agreement, each dated as of October 10, 1996, and by and between CSFB and FMAC and each as amended from time to time (collectively, the "Repurchase Agreement"), FMAC intends to sell and CSFB intends to purchase certain Contracts (as defined in the Repurchase Agreement) in accordance with the terms of the Repurchase Agreement. WHEREAS, CSFB, FMAC and Custodian have entered into a Tri-Party Custodial Agreement dated as of October 10, 1996, as amended from time to time (the "Custodial Agreement") for the servicing, custody and management of the Contracts which become subject to the Repurchase Agreement. WHEREAS, FMAC intends to make from time to time certain franchise loans (each, a "Loan") to certain obligors secured by a mortgage on the fee simple or leasehold interest in the mortgaged property and/or other collateral securing such Loan with funds advanced from time to time by CSFB pursuant to the terms of the Repurchase Agreement and the Custodial Agreement. WHEREAS, FMAC and CSFB each desire to retain the Wire Agent for the purpose of facilitating the funding of each Loan and holding and disbursing the Escrow Funds in accordance with the terms and conditions of this Master Escrow Agreement; WHEREAS, FMAC desires to retain the Document Agent for the purpose of facilitating the funding of each Loan and issuing and delivering to Custodian an Escrow Receipt and holding and delivering to Custodian, the Custodian's Contract File with respect to each Loan in accordance with the terms of this Master Escrow Agreement. WHEREAS, the Wire Agent and the Document Agent each desires to act as an escrow agent in the capacity as set forth herein and pursuant hereto, subject to the terms and conditions set forth herein. NOW THEREFORE, in consideration of the foregoing and of the mutual covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and received, the parties hereto each agree as follows; -2- ARTICLE I DEFINITIONS; APPOINTMENT OF DOCUMENT AGENT AND WIRE AGENT; MASTER AGREEMENT Section 1.1 Definitions. For purposes of this following terms shall ----------- have the meanings set forth below. "Business Day" shall mean any day other than (i) a Saturday or a ------------ Sunday or (ii) another day on which banking institutions in the State of New York are authorized or obligated by law, executive order, or governmental decree to be closed. "Closing Documents" shall mean, with respect to each Loan, the ----------------- documents required by FMAC for the closing of such Loan, including, without limitation, the documents in the Custodian's Contract File and the documents listed on the closing index prepared by the attorney responsible for closing the Loan on behalf of FMAC, which index shall be attached to the related Escrow Receipt. "Closing Index" shall mean, with respect to a Loan, the closing ------------- index prepared by the closing attorney that lists all the documents necessary and required to close such Loan. "Custodian's Contract File" shall mean, with respect to each Loan, the ------------------------- documents specified in Section A of Schedule 1 attached hereto. "Escrow Funds" shall mean the funds deposited by CSFB with the Wire ------------ Agent for each Table Funding. "Escrow Receipt" shall have the meaning assigned thereto in Section -------------- 3.3(b). "Funding" shall mean the release of the Escrow Funds by the Wire ------- Agent to the Persons specified in the Wire Disbursement and Document Release Authorization Letter with respect to a Loan. "Pay-Off Letter" shall mean a letter from a lending institution or -------------- other creditor of the Obligor having an outstanding loan to the Obligor that will be paid off with the Escrow Funds, and which letter sets forth the amounts required to pay-off such loan and to obtain a release of such creditor's lien on the Obligor's property. "Table Funding" shall mean, with respect to each Loan, the arrangement ------------- by which a Loan is financed by FMAC through the Escrow Funds provided by CSFB directly to the Wire Agent. "Table Funding Closing Date" shall mean the date on which the Funding -------------------------- takes place. -3- "Table Funding Period" shall mean, with respect to each Table Funding, -------------------- the period of time from the date CSFB transfers, by wire, to the Wire Agent the Escrow Funds to and including the date Custodian receives the related Custodian's Contract File from the Document Agent. "Settlement Statement" shall mean, with respect to each Loan, the -------------------- settlement statement prepared by FMAC and executed by the Obligor that sets forth the allocation of the Loan funds. "Wire Disbursement and Document Release Authorization Letter" shall ----------------------------------------------------------- mean the letter, in the form attached hereto as Exhibit A, originated by FMAC and confirmed in writing by CSFB that (x) authorizes and directs the Wire Agent to transfer the Escrow Funds to the Person(s) specified therein and (y) authorizes and directs the Document Agent to release and deliver to Custodian the Custodian Contract File, in the form attached hereto as Exhibit A. Section 1.2. Incorporation of Certain Definitions; Times. All ------------------------------------------- capitalized terms used herein and not otherwise defined shall have the meanings assigned in the Repurchase Agreement or Custodial Agreement unless the context clearly indicates otherwise. All times specified herein shall be New York City time. Section 1.3. Appointment of the Wire Agent and the Document Agent. ---------------------------------------------------- The Wire Agent is hereby appointed by CSFB and FMAC to act as Wire Agent and the Document Agent is hereby appointed by FMAC to act as Document Agent, in each case to facilitate the Table Funding of each Loan under the Repurchase Agreement, and the Wire Agent and the Document Agent each hereby accepts such appointment. Section 1.4. Master Escrow Agreement. The parties hereto agree and ----------------------- acknowledge (i) that this Master Escrow Agreement (x) sets forth and controls each of the parties' respective rights, duties, responsibilities and obligations with respect to each Table Funding and (y) shall continue to be in full force and effect with respect to each Table Funding to be entered into from time to time, and (ii) that each shall be bound by the terms of this Master Escrow Agreement with respect to each Table Funding. ARTICLE II DELIVERY OF DOCUMENTS Section 2.1. Delivery of Wire Disbursement and Document Release -------------------------------------------------- Authorization Letter. With respect to each Table Funding, FMAC shall deliver to - -------------------- CSFB and Custodian the following, respectively, by facsimile transmission (unless otherwise indicated herein): (i) to CSFB the following: -4- (a) for receipt by CSFB at least two (2) Business Days preceding the proposed Table Funding Closing Date, the Transaction Notice (delivered pursuant to the Repurchase Agreement); (b) for receipt by CSFB on or before 12:00 p.m. New York City time on the Business Day preceding the proposed Table Funding Closing Date, the Pay-Off Letter(s); and (c) for receipt by CSFB on or before 12:00 p.m. New York City time on the proposed Table Funding Closing Date specified in such Transaction Notice (x) the Wire Disbursement and Document Release Authorization Letter executed by FMAC (original to be sent by overnight mail for receipt the next day) and (y) the Settlement Statement; and (ii) to the Custodian the following: (a) for receipt by Custodian at least two (2) Business Days preceding the proposed Table Funding Closing Date, the Transaction Notice (delivered pursuant to the Repurchase Agreement). FMAC hereby acknowledges and agrees that in the event CSFB or Custodian do not receive the foregoing documents, respectively, or the Escrow Receipt by the applicable times specified above or in Section 3.3(b) hereof, as the case may be, the proposed Table Funding Closing Date shall be the next Business Day succeeding the original proposed Table Funding Closing Date. Section 2.2 Delivery of Closing Documents. FMAC shall deliver or ----------------------------- cause to be delivered to the Document Agent the Closing Documents with respect to each Loan subject to a Table Funding. ARTICLE III CUSTODY OF CUSTODIAL CONTRACT FILES Section 3.1. Receipt of Closing Documents. The Document Agent shall ---------------------------- receive from FMAC or the Borrower, as the case may be, the Closing Documents with respect to each Loan subject of a Table Funding and shall hold and maintain such Closing Documents for the benefit of FMAC and CSFB in accordance with the terms hereof until such time as the Custodian's Contract File is delivered to the Custodian pursuant to Section 3.6 hereof. Section 3.2. Holding of the Custodian's Contract File. ---------------------------------------- (a) The Document Agent shall segregate and maintain continuous custody of all Closing Documents, including the documents in the Custodian's Contract File, received by it in accordance with its customary standards for such custody. -5- (b) Written instructions as to the method of shipment and shipper(s) the Document Agent is directed to utilize in connection with transmission of the Custodian's Contract File to Custodian shall be delivered by FMAC to the Document Agent prior to any shipment of any Custodian's Contract File hereunder by the Document Agent. In the event the Document Agent does not receive written instructions as provided for in the preceding sentence, the Document Agent is hereby authorized and shall be indemnified as provided herein to utilize a nationally recognized courier service. FMAC will arrange for the provision of such services at FMAC's sole expense and cost (or at the Document Agent's option, reimburse the Document Agent for all costs and expenses incurred by the Document Agent consistent with such instructions) and will maintain insurance against loss or damage to Custodian's Contract Files as FMAC deems appropriate and at FMAC's expense. Section 3.3 Review of Closing Documents and Delivery of Escrow -------------------------------------------------- Receipt. - ------- (a) The Document Agent shall, prior to issuing an Escrow Receipt pursuant to Section 3.3(b) below, review each of the Closing Documents with respect to each Loan and determine whether all such Closing Documents listed on Schedule 1 (originals or copies as specified therein) are in its possession, and if any of the Closing Documents are not in its possession, the Document Agent shall immediately advise CSFB and FMAC which Closing Documents are not in its possession by sending to CSFB and FMAC by facsimile transmission the Schedule 1 to the related Escrow Receipt with respect to the Loan subject of the Closing Documents indicating in such Schedule 1 which Closing Documents have and have not been received by such Document Agent. (b) After such review of all such Closing Documents, the Document Agent shall promptly deliver by facsimile transmission to Custodian, CSFB and FMAC a fully executed escrow receipt (the original of which is to be sent by overnight mail to Custodian on the same day such escrow receipt is sent by facsimile transmission) in the form of Exhibit B attached hereto ("Escrow Receipt") in which the Document Agent shall certify (i) that the required original or copy of each such Closing Document as specified in Schedule 1 attached to such Escrow Receipt has been received by it, (ii) that each Closing Document appears to be the applicable closing document for the related Loan and is signed, and (iii) that all such Closing Documents are in its possession. The facsimile copy of the Escrow Receipt must be received by the Custodian and CSFB from the Document Agent on or before 5:00 p.m. New York City time on the Business Day preceding the proposed Table Funding Closing Date. Section 3.4. Examination of the Custodian's Contract File. -------------------------------------------- Upon prior written notice to the Document Agent, FMAC and CSFB and their respective agents, accountants, attorneys and auditors will be permitted, during normal business hours, to examine the Custodian's Contract File with respect to each Loan and, subject to attorney-client privilege, any other related documents relating to the Loan in the possession of or under the control of the Document Agent. Section 3.5. Copies of Documents Contained in the Custodian's ------------------------------------------------ Contract File. Upon written request of FMAC or CSFB and at the sole cost and - ------------- expense of FMAC, the Document Agent shall provide FMAC or CSFB, as applicable, with copies of the documents that -6- are part of the Custodian's Contract File relating to each Loan. At no time shall be Document Agent release the original of any document in such Custodian's Contract File unless the Document Agent (i) reasonably determines that such document is needed for recording or filing by the title insurance company or FMAC's designated filing/recording entity, as applicable, in the appropriate filing office under the Uniform Commercial Code and/or recording office of the jurisdiction where the mortgaged property and other collateral securing the related Loan is located or (ii) determines that such document is to be delivered to Custodian in accordance to the terms of this Master Escrow Agreement, or as otherwise agreed to in writing by CSFB. Section 3.6. Delivery of Custodian's Contract File to Custodian. The -------------------------------------------------- Document Agent shall (i) deliver to Custodian all the documents in the Custodian's Contract File for receipt thereof by Custodian within five (5) Business Days (or within such longer period of time as mutually agreed to by FMAC and CSFB, and the Document Agent has received timely notice of such other period of time) after the date on which the Document Agent receives from CSFB the Wire Disbursement and Document Release Authorization Letter, and (ii) deliver the remaining Closing Documents, including, to the extent required by FMAC, copies of the documents in the Custodian's Contract File, to FMAC, or as otherwise instructed by FMAC. In the event the Custodian does not receive the Custodian's Contract File within the time period specified in clause (i) in this Section 3.6, the Custodian shall promptly send by facsimile transmission written notice to CSFB indicating that it has not yet received such Custodian's Contract File. ARTICLE IV ESCROW FUNDS Section 4.1. Establishment of Escrow Funds. ----------------------------- (a) The Wire Agent, as escrow agent for CSFB, shall hold in a segregated account, subject to the terms and conditions herein, the Escrow Funds it receives by wire from CSFB with respect to each Loan. The Account shall be entitled "First Bank National Association for CS First Boston Mortgage Capital Corp." The Wire Agent shall, upon receipt of the Escrow Funds, immediately send by facsimile transmission to CSFB, FMAC and Custodian written confirmation indicating its receipt of such Escrow Funds. (b) The Escrow Funds shall be invested and reinvested by the Wire Agent in such investments as directed in writing by FMAC, provided that such investments are then generally acceptable to Standard & Poor's Rating Service ("S&P") for reinvestment of funds in transactions rated "AAA" by S&P. No investment may be sold prior to its maturity. All net income and gain from such investments shall be released to FMAC as directed in writing by FMAC. Any losses on investment or reinvestment of the Escrow Funds shall be reimbursed by FMAC and immediately deposited into the Escrow Account prior to the release of the Escrow Funds in accordance with the terms of this Master Escrow Agreement. -7- (c) Any Escrow Funds to be wired to the Wire Agent by CSFB with respect to a Table Funding are to be transferred by federal funds wire in accordance with the following wire instructions: Bank: First Bank National Association ABA#: 091000022 Account Name: First Bank for CS First Boston Mortgage Capital Corp. - Master Escrow Account #: 180121167365 Reference #: 33-35288-0 Attention: Michael Speltz Telephone: (612) 244-5013 Section 4.2 Disbursement of Escrow Funds. ---------------------------- (a) The Wire Agent shall not disburse the Escrow Funds with respect to each Loan unless and until the Wire Agent has received the fully executed and confirmed telecopy of the Wire Disbursement and Document Release Authorization Letter from CSFB. The Wire Agent shall disburse the Escrow Funds in accordance with the instructions set forth in the Wire Disbursement and Document Release Authorization Letter. (b) In the event that the Wire Agent receives the Escrow Funds and the Wire Disbursement and Document Release Authorization Letter from CSFB prior to 3:00 p.m. New York City time on the proposed Table Funding Closing Date the Wire Agent shall transfer the Escrow Funds in accordance with the terms of the Wire Disbursement and Document Release Authorization Letter, subject, however to the terms set forth in Sections 4.2(c) and (d). Any Escrow Funds received by the Wire Agent after 3:00 p.m. New York City time shall be promptly returned to CSFB, subject, however, to the terms set forth in Sections 4.2(c) and (d). (c) (1) In the event there is an excess of Escrow Funds after disbursement of the Escrow Funds with respect to each Loan in accordance with the instructions set forth in the Wire Disbursement and Document Release Authorization Letter, the Wire Agent shall immediately return such excess via federal funds wire of immediately available funds to CSFB in accordance with the wire instructions set forth in Section 4.2(c)(2), subject, however, to the terms set forth in Section 4.2(d). (2) In the event (i) that the Funding with respect to each Loan does not take place prior to 3:00 p.m. New York City time on the same day the Escrow Agent receives the related Escrow Funds from CSFB, unless otherwise extended by CSFB by telephone or (ii) that the Wire Agent receives written instructions from either CSFB or FMAC that the Table Funding with respect to the related Loan has been cancelled or that one of them has elected not to proceed with the related Table Funding for any reason and that the related Escrow Funds are to be returned to CSFB, the Wire Agent shall promptly return such Escrow Funds via federal funds wire of immediately available funds to CSFB as follows: -8- Bank: Citibank NYC ABA#: 021000089 Account: CS First Boston Corp. Account#: 09253506 Attention: Chris Bolarte (d) FMAC agrees that upon receipt of the Escrow Funds by the Wire Agent, FMAC shall be deemed to have received such Escrow Funds and will be liable for such Escrow Funds in accordance with the terms of the Repurchase Agreement. If the Wire Agent returns to CSFB any Escrow Funds pursuant to Section 4.2(b) or Section 4.2(c), FMAC shall, at the time such Escrow Funds are returned to CSFB, immediately pay to CSFB the amount equal to the product of (i) the product of (x) the amount of such Escrow Funds and (y) the Pricing Rate applied during the Table Funding Period as provided in the Repurchase Agreement and (ii) a fraction, expressed as a percentage, the numerator of which is the number of days from the date on which CSFB wires the Escrow Funds to the Wire Agent to the date on which CSFB receives the Escrow Funds from the Wire Agent pursuant to this Master Escrow Agreement (calculated by including the date on which CSFB wires such Escrow Funds but excluding the date on which CSFB receives the Escrow Funds from the Wire Agent; provided, however, that for purposes of -------- ------- such calculation, in the event such Escrow Funds are returned to and received by CSFB on the same day the Escrow Funds are received by the Wire Agent from CSFB, the Escrow Funds shall be deemed to be received by CSFB on the next day), and the denominator of which is 360 days. Such payment by FMAC shall be made via federal funds wire of immediately available funds in accordance with the wire instructions set forth in Section 4.2(c)(2). ARTICLE V CONCERNING THE WIRE AGENT AND THE DOCUMENT AGENT Section 5.1. Duties of the Wire Agent and the Document Agent. The ----------------------------------------------- Wire Agent and the Document Agent each shall be obligated to perform only the applicable duties as are expressly set forth in this Master Escrow Agreement. No implied covenants or obligations shall be inferred from this Master Escrow Agreement and the Master Repurchase Agreement against the Wire Agent or the Document Agent, nor shall the Wire Agent and the Document Agent be bound by the provisions of any agreement between any parties hereto beyond the specific terms hereof. Section 5.2. Indemnification of Wire Agent. FMAC agrees: (i) to ----------------------------- indemnify the Wire Agent for, and hold the Wire Agent harmless from and against any loss, liability, claim, expense or damage (including court costs and attorney's fees) incurred in connection with the performance of the Wire Agent's duties hereunder, except for any loss, liability, claim, expense or damage caused by the Wire Agent's bad faith, misconduct or negligence; (ii) the Wire Agent may, at its own expense, consult with legal counsel in the event of any dispute or questions as to the construction of any of the provisions hereof or its duties hereunder, and it shall be fully protected in acting in accordance with the opinion and instruction of such counsel; and (iii) the Wire Agent shall not be responsible for any representation made -9- or obligations assumed by CSFB, FMAC, Custodian or the Document Agent, and nothing herein shall be deemed to obligate the Wire Agent to deliver any cash or wire any funds or release any documents unless the same have first been received by the Wire Agent pursuant to this Agreement. Section 5.3. Indemnification of Liability of Document Agent. FMAC ---------------------------------------------- agrees: (i) to indemnify the Document Agent for, and hold the Document Agent harmless from and against any loss, liability, claim, expense or damage (including court costs and attorney's fees) incurred in connection with the performance of the Document Agent's duties hereunder, except for any loss, liability, claim, expense or damage caused by the Document Agent's bad faith, misconduct or negligence; (ii) the Document Agent may, at its own expense, consult with legal counsel in the event of any dispute or questions as to the construction of any of the provisions hereof or its hereunder, and it shall be fully protected in acting in accordance with the opinion and instruction of such counsel; and (iii) the Document Agent shall not be responsible for any representation made or obligations assumed by CSFB, FMAC, Custodian or the Wire Agent, and nothing herein shall be deemed to obligate the Document Agent to release any documents unless the same shall have first been received by the Document Agent. Section 5.4. Reliance. The Wire Agent and the Document Agent each -------- shall be entitled to rely upon any order, judgment, certification, instruction, notice or other writing delivered to it in compliance with the provisions of this Master Escrow Agreement without being required to determine the correctness of any fact stated therein or the propriety or validity or service thereof. The Wire Agent and the Document Agent each may act in reliance upon any instrument comporting with the provisions of this Master Escrow Agreement or signature believed by it to be genuine and may assume that any person purporting to give notice or make any statement or execute any document in connection with the provisions hereof has been duly authorized to do so. Section 5.5. No Representations. The Wire Agent and the Document ------------------ Agent each makes no representation or warranty as to the validity, effectiveness, enforceability, sufficiency, value, genuineness or collectability of any security or other document or instrument held by or delivered to it. Section 5.6. Wire Agent and Document Agent Fees and Expenses. FMAC ----------------------------------------------- shall be liable for and pay all expenses and costs incurred by the Wire Agent and the Document Agent in connection with the Wire Agent's and the Document Agent's respective activities hereunder, including, but not limited to, fees, disbursements and reasonable attorney fees. Section 5.7. No Adverse Interest of the Wire Agent and the Document ------------------------------------------------------ Agent. By execution of this Master Escrow Agreement, the Wire Agent and the - ----- Document Agent each represents, warrants and covenants that it currently does not hold, and during the existence of this Master Escrow Agreement shall not hold, any adverse interest or claim, by way of security, lien or otherwise, in or to any document contained in the Custodian's Contract File or in or to the Escrow Funds. -10- Section 5.8. Replacement of the Wire Agent or the Document Agent. --------------------------------------------------- CSFB and FMAC shall have the right to designate a new wire agent or document agent upon delivery to the Wire Agent or the Document Agent, as the case may be, of written notice of such designation signed by CSFB and FMAC. In the event CSFB and FMAC agree to designate a new wire agent or document agent, upon such designation the Wire Agent shall immediately deliver any Escrow Funds and related documents to the new wire agent or the Document Agent shall immediately deliver any Closing Documents and related documents to the new document agent to be held in escrow by such new Wire Agent or Document Agent, as the case may be. Section 5.9. Resignation of Document Agent. The Document Agent may ----------------------------- resign and be discharged from its duties or obligations hereunder by giving notice in writing specifying a date when such resignation shall take effect, which date shall not be less than thirty (30) days after such notice is given; provided, that (i) the Document Agent shall continue to perform its duties until - -------- a successor document agent has been designated by CSFB and FMAC and (ii) Document Agent shall continue to comply with reasonable requests for documents and information in Document Agent's files with respect to any Loan for which Document Agent acted as document agent under this Master Escrow Agreement. ARTICLE VI TERMINATION OF AGREEMENT Section 6.1. Termination. At such time as when the Repurchase ----------- Agreement terminates pursuant to the terms therein, this Master Escrow Agreement shall terminate and the Wire Agent and the Document Agent shall be discharged from all obligations under this Master Escrow Agreement and shall have no further duties or responsibilities in connection herewith. -11- ARTICLE VII MISCELLANEOUS 7.1 Authorized Representatives. Each individual designated as an -------------------------- authorized representative of CSFB, FMAC, Custodian, Wire Agent and Document Agent, respectively (an "Authorized Representative"), is authorized to give and receive notices, requests and instructions and to deliver certificates and documents in connection with this Master Escrow Agreement on behalf of CSFB, FMAC, Custodian, Wire Agent and Document Agent, as the case may be, and the specimen signature for each such Authorized Representative of CSFB, each such Authorized Representative of FMAC, each such Authorized Representative of the Custodian, each such Authorized Representative of the Wire Agent, and each such Authorized Representative of the Document Agent, initially authorized hereunder, is set forth on Exhibits C, D, E, F and G hereof, respectively. From time to time, CSFB, FMAC, Custodian, Wire Agent and Document Agent may, by delivering to each other a revised exhibit, change the information previously given pursuant to this Section 7.1, but each of the parties hereto shall be entitled to rely conclusively on the then current exhibit until receipt of a superseding exhibit. 7.2. Notices. Any notice or other writing given by any party ------- hereto to any other party relating to the subject matter of these instructions shall at the same time be delivered to every other party hereto. All notices, requests and other communications hereunder shall be in writing and shall be delivered by facsimile or by reputable overnight courier addressed as follows: If to First Boston: Credit Suisse First Boston Mortgage Capital LLC 11 Madison Avenue, 4th Floor New York, New York 10010 Attention: Patrick McGrath Telephone: (212) 325-0551 Facsimile: (212) 325-8040 If to FMAC: Franchise Mortgage Acceptance Company LLC Five Greenwich Office Park, 4th Floor Greenwich, Connecticut 06830 Attention: John W. Rinaldi, Senior Vice President Telephone: (203) 863-7106 Telefacsimile: (203) 622-1834 If to Custodian: First Bank National Association c/o First Trust 180 E. 5th Street St. Paul, Minnesota 55101 Attention: DCS-Judy Spahn Telephone: (612) 244-0416 Telefacsimile: (612) 244-0010 -12- If to Wire Agent: First Bank National Association c/o First Trust 180 E. 5th Street St. Paul, Minnesota 55101 Attention: Lynn M. Steiner, A.V.P. Telephone: (612) 244-0743 Telefacsimile:(612) 244-0089 If to Document Agent: _________________________ Attention: Telephone: Telefacsimile: All such notices, requests or communications shall be deemed to have been duly given when received by the other party or parties, as the case may be. Either party may from time to time change the addresses to which notices to it are to be delivered or marked under this Master Escrow Agreement by notice in writing to the other party. Section 7.3. Governing Law. This Master Escrow Agreement shall be ------------- governed by and construed in accordance with the laws of the State of New York and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws without giving effect to the conflict of law rules thereof. Section 7.4. Counterparts. This Master Escrow Agreement may be ------------ executed in one or more counterparts, each of which counterparts shall be deemed to be an original, and all of such counterparts taken together shall constitute but one and the same instrument. Section 7.5. Amendment. This Master Escrow Agreement may not be --------- amended nor may any provision hereof be waived or modified without the written consent of all parties hereof. Section 7.6. Severability of Provisions. If any one or more of the -------------------------- covenants, agreements, provisions or terms of this Master Escrow Agreement shall be for any reason whatsoever held invalid, the invalidity of any such covenant, agreement, provision or term of this Master Escrow Agreement shall in no way affect the validity or enforceability of the other provisions of this Master Escrow Agreement. Section 7.7. Successors. This Master Escrow Agreement shall bind and ---------- inure to the benefit of and be enforceable by the parties hereto and their respective successors. IN WITNESS WHEREOF, the parties hereto have signed this Master Escrow Agreement on the date first above written. CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC By:_________________________________________ Name: Title: FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC By:_________________________________________ Name: Title: FIRST BANK NATIONAL ASSOCIATION, in its capacity as Custodian By:_________________________________________ Name: Title: FIRST BANK NATIONAL ASSOCIATION, in its capacity as Wire Agent By:_________________________________________ Name: Title: _____________________, as Document Agent By:_________________________________________ Name: Title: EXHIBIT A WIRE DISBURSEMENT AND DOCUMENT RELEASE AUTHORIZATION LETTER First Bank National Association, as Wire Agent Structured Finance 180 East Fifth Street, 2nd Floor St. Paul, Minnesota 55101 Attention: Lynn M. Steiner, Assistant Vice President [Law Firm], as Document Agent [Address] Re: The loan to ________________("Loan") and the Master Escrow Agreement dated as of ______, 199_ ("Escrow Agreement") by and between Franchise Mortgage Acceptance Company LLC ("FMAC"), Credit Suisse First Boston Mortgage Capital LLC (formerly CS First Boston Mortgage Capital Corp.) ("CSFB"), First Bank National Association, as custodian (in such capacity, "Custodian") and as wire escrow agent (in such capacity, "Wire Agent") and _______________________, as document escrow agent ("Document Agent"). Ladies and Gentlemen: This Wire Disbursement and Document Release Authorization Letter ("Authorization Letter") is delivered to you in connection with the above- referenced Loan and the Escrow Agreement. A. Wire Disbursement Authorization To Wire Agent --------------------------------------------- FMAC hereby authorizes and directs the Wire Agent to transfer the Escrow Funds in the amount of $___________________ held by it pursuant to the terms of the Escrow Agreement as follows: 1. Name of Creditor $______________ Address Account No. ABA No. File No. Bank Contact: 2. Name of Creditor $______________ Address Account No. ABA No. File No. Bank Contact: 3. Name of Creditor $______________ Address Account No. ABA No. File No. Bank Contact: 4. Name of Creditor $______________ Address Account No. ABA No. File No. Bank Contact: B. Release of Custodian's Contract File. ------------------------------------ FMAC hereby authorizes and directs the Document Agent to release and deliver the Custodian's Contract Files with respect to the Loan to Custodian in accordance with the term of the Escrow Agreement to the following address: [CUSTODIAN TO PROVIDE ADDRESS] C. Disbursements Information: [TO BE PROVIDED BY FMAC] The Wire Agent shall not transfer such Escrow Funds and the Document Agent shall not release the Custodian Contract Files unless and until the Wire Agent and the Document Agent each receives from CSFB, by facsimile transmission, a copy of this letter executed by FMAC and confirmed and acknowledged by CSFB in writing in the space provided below. In the event that either of you receive contrary written instructions from CSFB, you are to follow such instructions and disregard the instructions set forth in this Letter. Very truly yours, FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC By:__________________________________ Name: Title: Acknowledged and Confirmed By: CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC: By:____________________________ Name: Title: EXHIBIT B ESCROW RECEIPT First Bank National Association, as Custodian Structured Finance 180 East Fifth Street, 2nd Floor St. Paul, Minnesota 55101 Attention: Lynn M. Steiner, Assistant Vice President Re: Credit Suisse First Boston Mortgage Capital LLC and Franchise Mortgage Acceptance Company LLC --------------------------------------------------- Date_______________: Reference is made to the following: 1. Master Escrow Agreement dated as of _____, 199_ ("Escrow Agreement") by and among Franchise Mortgage Acceptance Company LLC ("FMAC"). Credit Suisse First Boston Mortgage Capital LLC (formerly CS First Boston Mortgage Capital Corp) ("CSFB"), First Bank National Association, as custodian (in such capacity, "Custodian") and as Wire Escrow Agent (in such capacity, "Wire Agent") and __________________, as document agent ("Document Agent"): 2. Master Repurchase Agreement dated as of October 10, 1996 and Annex I. Additional Supplemental Term To Master Repurchase Agreement dated as of October 10, 1996, each by and among FMAC and CSFB (collectively, the Repurchase Agreement"): and 3. The Tri-Party Custodial Agreement dated as of October 10, 1996 by and among CSFB, FMAC and Custodian, as amended, supplemented or otherwise modified from time to time ("Custodial Agreement"). The Master Escrow Agreement and the Repurchase Agreement and the Custodial Agreement are collectively referred to herein as the "Agreements". Capitalized terms not defined herein shall have the respective meanings assigned in the Agreements, as applicable. In connection with that certain loan ("Loan") made by FMAC to [Name of Obligor] ("Obligor"), the undersigned hereby states: (i) that it has received the required original or copy of each of the Closing Documents, including the Custodian Contract File, specified in Schedule 1 attached hereto in respect of such Loan; (ii) that each Closing Document, including each document in the Custodian Contract File, appears to be the applicable closing document for the related Loan and is signed; and (iii) that, except as otherwise expressly provided herein, it has physical possession of such Closing Documents, including the Custodian Contract File, and will continue to hold all such Closing Documents, including the Custodian Contract File, for the benefit of FMAC and CSFB and will deliver the Custodian's Contract File to Custodian in accordance with the terms of the Escrow Agreement. We acknowledge that FMAC has granted a security interest to CSFB in the Loan. Very truly yours, [DOCUMENT AGENT] By:______________________________ Name: Title: The foregoing is hereby accepted and agreed to by FMAC, and FMAC hereby represents and warrants to CSFB and the Custodian that: (1) the UCC-1 financing statement granting CSFB a first priority security interest in the Loan and required pursuant to the Repurchase Agreement and the Custodial Agreement has been filed by FMAC with the Secretary of State of California and the Secretary of State of Connecticut and remains in full force and effect. (2) The UCC-1 financing statements with respect to the related Obligor and any other documents to be recorded or filed with the appropriate filing or recording office (including any leasehold mortgage, in the case where title insurance is not being obtained), except for mortgages to be recorded by the title insurance company, will be submitted by FMAC to its designated recording/filing entity within twenty-four (24) hours following the disbursement of the Escrow Funds by the Wire Agent in accordance with the Wire Disbursement and Document Release Authorization Letter for filing in the appropriate office(s) under the Uniform Commercial Code and governmental recording office(s) of the jurisdiction(s) where the Collateral is located. (3) In the event title insurance is being obtained, the related original Mortgage on the fee interest or the leasehold interest in the related Mortgaged Property will be forwarded to the title company within twenty-four (24) hours after the disbursement of the Escrow Funds by the Wire Agent in accordance with the Wire Disbursement and Document Release Authorization Letter for recording in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located. (4) The original title policy shall be delivered to the Custodian by FMAC within sixty (60) days after delivery of all of the other documents in the Custodian's Contract File to the Custodian, or such other period of time as agreed to by CSFB. (5) If applicable, an original memorandum of ground lease and original power of attorney shall be submitted to the title insurance company or FMAC's designated recording/filing entity, as applicable, within twenty-four (24) hours after the disbursement and Document Release Authorization Letter for recording in the appropriate filing office under the Uniform Commercial Code or the appropriate recording office of the jurisdiction where the related Collateral is located. FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC By:______________________________ Name: Title: SCHEDULE 1 ---------- CLOSING DOCUMENTS FOR FMAC FRANCHISE LOANS Closing Checklist Section A. CUSTODIAN'S CONTRACT FILE. ------------------------- 1. a copy of the credit application of the Obligor; 2. the original promissory note endorsed by FMAC, without recourse, in blank; 3. a) in the event title insurance is being obtained, the original Mortgage (fee or leasehold, as applicable), naming FMAC as the "mortgagee" thereof, and bearing on the face thereof the address of FMAC and bearing evidence that such instrument will be submitted to the title company for recording in the appropriate recording office of the jurisdiction where the Mortgaged Property is located (or, in lieu of the original of the Mortgage, a duplicate or conformed copy of the Mortgage, together with a certificate from FMAC certifying that such copy or copies represent true and correct copy(ies) of the original(s) and that such original(s) will be submitted to the title company for recording in the appropriate recording office of the jurisdiction where the related Mortgaged Property is located) or a certification or receipt of the recording authority evidencing the same; or b) in the event title insurance is not being obtained, the original leasehold Mortgage naming FMAC as the "mortgagee" thereof, and bearing on the face thereof the address of FMAC and bearing evidence that such leasehold Mortgage will be submitted to FMAC for recording by FMAC's designated recording/filing entity in the appropriate recording office of the jurisdiction where the related Mortgaged Property is located (or, in lieu of such original, a duplicate or conformed copy of such leasehold Mortgage, together with a certificate from FMAC certifying that such copy or copies represent true and correct cop(ies) of the original(s) and that such original(s) will be submitted to FMAC for recording by FMAC's designated recording/filing entity in the appropriate recording office of the jurisdiction where the related Mortgaged Property is located; 4. the original Security Agreement naming FMAC as the "secured party" thereof, and bearing on the face thereof the address of FMAC, and the copies of the UCC-1 financing statements related to such Security Agreement bearing evidence that such financing statements will be submitted to FMAC for filing and/or recording by FMAC's designated recording/filing entity in the appropriate filing office under the Uniform Commercial Code and/or the appropriate recording office of the jurisdiction where the Collateral is located, (or, in lieu of such evidence, a certificate from FMAC certifying that such copy or copies represent true and correct copy(ies) of the original(s) and that such original(s) will be -2- submitted to FMAC for filing and/or recording by FMAC's designated recording/filing entity in the appropriate filing office under the Uniform Commercial Code and/or the appropriate recording office of the jurisdiction where the Collateral is located) or a certification or receipt of the filing and/or recording authority evidencing the same; 5. an original Assignment of Mortgage (fee or leasehold, as applicable), in blank, which assignment appears to be in form and substance acceptable for recording; 6. an original Assignment of Security Agreement, in blank; 7. the originals of any guaranty agreement, if applicable; 8. with respect to each Loan, other than Loans with respect to which the related Mortgage secures the Obligor's leasehold interest in the related Mortgaged Property and will not be insured by a title insurance company, the original or faxed written commitment or interim binder issued by the title insurance company evidencing that the required title insurance coverage will be in effect as of the Table Funding Closing Date and certifying to the holder of the Loan that the lender's title insurance policy will be issued with an effective date as of the date of recordation of the Mortgage or otherwise endorsed to insure against loss of priority to encumbrances or liens attaching prior to recordation of the Mortgage; 9. if the Note or other related Loan Documents or any other document or instrument relating to the Loan has been signed by a person on behalf of the Obligor, the original power of attorney (or such other similar instrument that is required by the applicable recording or filing office to be filed or recorded) that authorized and empowered such person to sign bearing evidence that such instrument will, if so required, be submitted to FMAC or the title insurance company, as applicable, for filing or recording by FMAC's designated recording/filing entity or the title insurance company, as applicable, in the appropriate filing office under the Uniform Commercial Code and/or the appropriate recording office of the jurisdiction where the related Collateral is located (or, in lieu thereof, a duplicate or conformed copy of such instrument, together with a certificate from FMAC certifying that such copy represents a true and complete copy of the original and that such original will be submitted to FMAC or the title insurance company, as applicable, for filing or recording by FMAC's designated recording/filing entity or the title insurance company, as applicable, in the appropriate filing office under the Uniform Commercial Code and/or the appropriate recording office of the jurisdiction where the Collateral is located), or a certification or receipt of the filing or recording authority evidencing the same; 10. to the extent that a Subordination of Lessor's lien agreement or similar subordination agreement is a required Closing Document, the original of such -3- Subordination of Lessor's lien agreement or similar subordination agreement with evidence that such agreement has been submitted to FMAC or the title insurance company, as applicable, for recording by FMAC's designated recording/filing entity or the title insurance company, as applicable, in the appropriate recording office of the jurisdiction where the related Mortgage Property is located (or, in lieu of the original of any such agreement, a duplicate or conformed copy of such agreement together with a certificate from FMAC certifying that such copy or copies represent the true and correct cop(ies) of the original(s) and that such original(s) have been or are currently submitted to FMAC or the title insurance company, as applicable, for recording by FMAC's designated recording/filing entity or the title insurance company, as applicable, in the appropriate recording office of the jurisdiction where the Mortgaged Property is located) or a certification or receipt of the recording authority evidencing the same; 11. if applicable, a copy of a ground lease and an original memorandum of such ground lease, with evidence that such memorandum will be submitted to the title insurance company or FMAC, as applicable, for recording by the title insurance company or FMAC's designated recording/filing entity, as applicable, in the appropriate recording office of the jurisdiction where the related Mortgaged Property is located (or, in lieu of such original, a duplicate conformed copy of such original, together with a certificate from FMAC certifying that such copy represents a true and accurate copy of the original and that such original will be submitted to the title company or FMAC, as applicable, for recording by the title insurance company or FMAC's designated recording/filing entity, as applicable, in the appropriate recording office of the jurisdiction where the related Mortgaged Property is located; 12. a copy of the related Franchise Agreement; and 13. other such documents as CSFB may require after written notice to FMAC and the Document Agent. Section B. OTHER CLOSING DOCUMENTS. ----------------------- To the extent indicated on the Closing Index, all other Closing Documents listed thereon with respect to the Loan subject of such Closing Documents and which Closing Index is attached hereto and made a part hereof. EXHIBIT C AUTHORIZED REPRESENTATIVES CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC With respect to wires only: CHRISTIAN BOLARTE ___________________________________ ARTHUR SCHLESINGER ___________________________________ GREGORY BURNES ___________________________________ PETER MURRAY ___________________________________ With Respect to any matters other than wires: Emily Youssouf ___________________________________ John Shrewsbury ___________________________________ Patrick McGrath ___________________________________ EXHIBIT D AUTHORIZED REPRESENTATIVES FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC NAMES SIGNATURES ________________________________ _______________________________ ________________________________ _______________________________ ________________________________ _______________________________ EXHIBIT E AUTHORIZED REPRESENTATIVES FIRST BANK NATIONAL ASSOCIATION, as Custodian NAMES SIGNATURES ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ EXHIBIT F AUTHORIZED REPRESENTATIVES FIRST BANK NATIONAL ASSOCIATION, as Wire Agent NAMES SIGNATURES ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ EXHIBIT G AUTHORIZED REPRESENTATIVES _______________________________, as Document Agent NAMES SIGNATURES ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ ______________________________ EX-10.6(D) 17 FIRST AMENDMENT TO REPURCHASE AGREEMENT Exhibit 10.6(d) FIRST AMENDMENT TO REPURCHASE AGREEMENT AND CUSTODIAL AGREEMENT This First Amendment to Repurchase Agreement and Custodial Agreement ("Amendment"), dated as of May 1, 1997, is entered into between Franchise Mortgage Acceptance Company LLC, as seller (in such capacity, "Seller") and as servicer (in such capacity, "Servicer"), Credit Suisse First Boston Mortgage Capital LLC (formerly, CS First Boston Mortgage Capital Corp.), as buyer ("Buyer"), and First Bank National Association, as custodian ("Custodian"). R E C I T A L S A. Seller and Buyer entered into that certain Master Repurchase Agreement dated as of October 10, 1996, (the "Master Repurchase Agreement") and Annex I, Additional Supplemental Terms to Master Repurchase Agreement dated as of October 10, 1996 ("Annex I") (collectively, the "Repurchase Agreement".) B. Seller, Servicer, Buyer and Custodian entered into that certain Tri-Party Custodial Agreement For Contracts dated as of October 10, 1996 (the "Custodial Agreement"). C. Seller and Buyer each desire to amend the Repurchase Agreement in order to make certain changes thereto as set forth below. D. Seller, Servicer, Buyer and Custodian each desire to amend the Custodial Agreement in order to make certain changes thereto as set forth below. E. Seller, Servicer, Buyer and Custodian each have agreed to execute and deliver this Amendment on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and of the mutual agreements hereinafter set forth, and in and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. Any capitalized term not otherwise defined herein shall ----------- have the meaning assigned to such term in the Repurchase Agreement or Custodial Agreement, as applicable. 2. AMENDMENTS TO REPURCHASE AGREEMENT: ---------------------------------- A. Paragraph 4(d) of the Master Repurchase Agreement is hereby amended by deleting the words "or Margin Excess exceeds a specified dollar amount or specified percentage of the Repurchase Prices" therein and replacing them with the words: "exceeds $10,000". -2- B. Paragraph 7 of the Master Repurchase Agreement is hereby amended by deleting the second sentence in its entirety. C. Paragraph 19 of the Master Repurchase Agreement is hereby amended by deleting Paragraph 19 in its entirety. D. The definition "Contract" in Section 2(o) of Annex I is hereby amended -------- by deleting such definition in its entirety and replacing it with the following: "Contract" shall mean the Note and the other related Loan Documents -------- evidencing a Restaurant Franchise Loan or a Retail Franchise Loan, which Note and Loan Documents are to be sold and assigned by Seller to Buyer and are the subject of the Agreement. Each Contract includes, without limitation, all records relating to such Contract and all related security interests, the Related Assets, and any and all rights to receive payments thereunder and all other proceeds thereof (including, without limitation, any recourse rights against third persons) from and after the related Purchase Date." E. The definition "Equipment" in Section 2(x) of Annex I is hereby --------- amended by deleting such definition in its entirety and replacing it with the following: "Equipment" shall mean any equipment and other related property --------- subject to the lien to the related Security Agreement and/or Mortgage used in connection with the operation of (i) a Restaurant or (ii) a gas station and/or convenience store, as the case may be." F. The definition "Franchise Agreement" in Section 2(ab) of Annex I is ------------------- hereby amended by deleting such definition in its entirety and replacing it with the following: "Franchise Agreement" shall mean the agreement entered into between ------------------- the Obligor or related Person and the franchisor to operate a (i) a Restaurant or (ii) a gas station and/or convenience store, as the case may be." G. The definition "Mortgaged Property" in Section 2(am) of Annex I is ------------------ hereby amended by deleting such definition in its entirety and replacing it with the following: "Mortgaged Property" shall mean the real property or properties, ------------------ including any and all buildings, improvements and leasehold improvements thereon, and any other Collateral subject to the lien of the related Mortgage used in connection with the operation of (i) a Restaurant(s) or (ii) a gas station(s) and/or convenience store(s), as the case may be." -3- H. The definition "Personalty" in Section 2(at) of Annex I is ---------- hereby amended by deleting such definition in its entirety and replacing it with the following: "Personalty" shall mean the personal property or properties of ---------- the specified in, and subject to the lien of, the related Mortgage and/or Security Agreement." I. The definition "Security Agreement" of Section 2(bb) of Annex I ------------------ is hereby amended by deleting such definition in its entirety and replacing it with the following: "Security Agreement" shall mean the pledge and/or security ------------------ agreement or similar instrument that secures the Note and creates a lien on the related Equipment, Personalty and any other related Collateral." J. The definition "Underwriting Standards" in Section 2(bj) of ---------------------- Annex I is hereby amended by deleting such definition in its entirety and replacing it with the following: "Underwriting Standards" shall mean the standards of Seller in ---------------------- accordance with which a Contract was originated. The Underwriting Standards for a Restaurant Franchise Loan and for a Retail Franchise Loan are attached hereto as Exhibit D." K. The definition "Escrow Agreement" in Section 2(aa) of Annex I is ---------------- hereby deleted in its entirety and replaced with the following definition: "Escrow Agreement" shall mean one or more master escrow ---------------- agreements entered into between the Seller, Buyer Custodian, the Wire Agent and a Document Agent providing for the facilitation of a Table Funding, a form of which agreement is attached to the Custodial Agreement as Exhibit I." L. The definition "Pay-Off Letter" in Section 2(ar) of Annex I is -------------- hereby deleted in its entirety and replaced with the following definition: "Pay-Off Letter" shall mean a letter from a lending institution -------------- or other creditor of the Obligor having an outstanding loan to the Obligor that will be paid off with the Escrow Funds, and which letter sets forth the amounts required to pay-off such loan and to obtain a release of such creditor's lien on the Obligor's property." M. The definition "Table Funding" in Section 2(bc) of Annex I is ------------- hereby deleted in its entirety and replaced with the following: -4- "Table Funding" shall mean, with respect to each franchise loan, ------------- the arrangement by which such franchise loan is financed by Seller through the Escrow Funds provided by Buyer directly to the Wire Agent." N. The definition "Table Funding Closing Date" in Section 2(bd) of Annex -------------------------- I is hereby deleted in its entirety and replaced with the following: "Table Funding Closing Date" shall mean the date on which the Funding -------------------------- takes place." O. The definition "Table Funding Period" in Section 2(be) of Annex I is -------------------- hereby deleted in its entirety and replaced with the following: "Table Funding Period" shall mean, with respect to a Transaction -------------------- subject to a Table Funding, the period of time from the date Buyer transfers, by wire, to the Wire Agent the Purchase Price to and including the date the Custodian receives the related Custodian's Contract File from the Document Agent." P. The definition."Wire Instruction Letter" in Section 2(bk) of Annex I ----------------------- is hereby deleted in its entirety and replaced with the following: "Wire Disbursement and Document Release Authorization Letter" shall ----------------------------------------------------------- mean the letter, in the form attached hereto as Exhibit A to the Escrow Agreement originated by Seller and confirmed in writing by Buyer that (x) authorizes and directs the Wire Agent to transfer the Escrow Funds to the Person(s) specified therein and (y) authorizes and directs the Document Agent to release and deliver to Custodian the Custodian Contract File." Q. The definition "Distribution Letter" in Section 2(v) of Annex I is ------------------- hereby deleted in its entirety. R. The definition "Escrow Agent" in Section 2(z) of Annex I is hereby ------------ deleted in its entirety. S. The definition "Transaction Documents" in Section 2(bh) of Annex I is --------------------- hereby amended by adding after the word "agreements" in the second line thereof the words: "(but not including the Contracts)." T. The following definitions are added to Section 2 of Annex I: "(bl) "Restaurant" shall mean a restaurant or a fast food ---------- restaurant." -5- "(bm) "Restaurant Franchise Loan" shall mean a franchise loan secured ------------------------- by Collateral used in connection with the operation of a Restaurant." "(bn) "Retail Franchise Loan" shall mean a franchise loan secured by --------------------- Collateral used in connection with the operation of a gas station and/or convenience store." "(bo) "Closing Documents" shall mean, with respect to each franchise ----------------- loan, the documents required by Seller for the closing of such franchise loan, including, without limitation, the documents in the Custodian's Contract File and the documents listed on the closing index prepared by the attorney responsible for closing such franchise loan on behalf of Seller, which closing index shall be attached to the related Escrow Receipt." "(bp) "Document Agent" shall be one or more nationally recognized law -------------- firms engaged by Seller to assist in the facilitation of Table Fundings and shall be a party to the applicable Escrow Agreement." "(bq) "Escrow Funds" shall mean the funds deposited by Buyer with the ------------ the Wire Agent for each Table Funding." "(br) "Escrow Receipt" shall have the meaning assigned thereto in the -------------- Escrow Agreement and in the form attached thereto." "(bs) "Funding" shall mean the release of the Escrow Funds by the Wire ------- Agent to the Persons specified in the Wire Disbursement and Document Release Authorization Letter with respect to a Loan." "(bt) "Settlement Statement" shall mean, with respect to each -------------------- franchise loan, the settlement statement prepared by Seller and executed by the Obligor that sets forth the allocation of such franchise loan funds." "(bu) "Wire Agent " shall mean First Bank National Association, and ---------- any successor thereto." U. Section 4(c) of Annex I is hereby deleted in its entirety and replaced with the following: "(c) "With respect to Transactions subject to Table Funding: ----------------------------------------------------- -6- The timing for delivery of documents, including, but not limited to, Escrow Receipts, Custodian's Contract Files and Transaction Notices, with respect to a Table Funding is set forth in Section 3.3 of the Custodial Agreement." V. Section 4(d) of Annex I is amended by deleting the word "Escrow" in the sixth and twelfth lines thereof and replacing it with the word "Wire". W. Section 4(f) of Annex I is hereby amended by deleting the paragraph in its entirety and replacing it with the following: "No obligor or group of affiliated persons shall be the obligor or obligors in respect of any Restaurant Franchise Loan(s) acquired or originated by FMAC with an aggregate outstanding principal balance of greater than $35,000,000 unless such Restaurant Franchise Loan(s) shall have been offered by Seller to Buyer for purchase or financing, whereupon Buyer may, in its sole discretion, purchase such Restaurant Franchise Loan(s) or otherwise finance such Restaurant Franchise Loan(s) on such terms as may be negotiated by Seller and Buyer, which terms may be different than those generally applicable to Transactions hereunder. If Buyer declines to purchase such Restaurant Franchise Loan(s) or otherwise finance such Restaurant Franchise Loan(s), Seller may finance such Restaurant Franchise Loan(s) with such other financing sources as it deems appropriate." X. Section 9(a) of Annex I is hereby amended by adding at the end of the paragraph therein the following: "Notwithstanding the foregoing in this Section 9(a), in the event of a breach of the representation and warranty set forth in Paragraph 24 of Exhibit B with respect to a Contract that is a Retail Franchise Loan, Seller shall immediately repurchase such Contract." Y. Section 13 of Annex I is hereby amended by deleting the second sentence thereof in its entirety and deleting the words "In addition," in the thirteenth line thereof and replacing it with the following: "Subject to earlier termination, the Agreement shall terminate on the Repurchase Date occurring in December 1998 (such termination date, as if may be extended pursuant to the following proviso, the " Termination Date") and all transactions outstanding hereunder shall terminate automatically without any requirement for notice on such date and the Seller shall repurchase all Contracts subject to any Transaction outstanding pursuant to the terms of the Agreement; provided, however, that" -------- ------- -7- Z. Section 15(b) of Annex I is hereby amended by deleting the sentence in its entirety and replacing it with the following: "(b) The aggregate outstanding Repurchase Price for the Purchased Securities subject to the Agreement at any one time shall not exceed (i) $300,000,000, in the aggregate, (ii) $200,000,000 in the aggregate with respect to Contracts that are Restaurant Franchise Loans, and (iii) $100,000,000 in the aggregate with respect to Contracts that are Retail Franchise Loans." AA. Section 16(a) (i) and (ii) of Annex I is hereby amended by deleting such Section 16(a) (i) and (ii) in its entirety and replacing it with the following: "(a) The Pricing Rate with respect to each Transaction hereunder shall be as follows: (i) During a Table Funding Period: ----------------------------- A. With respect to Contracts that are Restaurant Franchise Loans, the Pricing Rate shall be a per annum rate equal to LIBOR plus 2.10%; and B. With respect to Contracts that are Retail Franchise Loans, the Pricing Rate shall be a per annum rate equal to LIBOR plus 2.35%. (ii) After a Table Funding Period or for a Transaction Not ----------------------------------------------------- Subject to Table Funding: ------------------------ A. With respect to Contracts that are Restaurant Franchise Loans, the Pricing Rate shall be a per annum rate equal to LIBOR plus 1.60%; and B. With respect to Contracts that are Retail Franchise Loans, the Pricing Rate shall be a per annum rate equal to LIBOR plus 1.85%. (iii) "LIBOR" shall be the offered rate for United States dollars with a maturity of one month which appears on Telerate as of 9:00 A.M., New York City time, on the day that is the first LIBOR Business Day of the calendar month in which the Purchase Date for such Transaction occurs; provided, however, that if such -------- ------- rate does not appear on the Dow Jones Telerate Service page 3750 (or such other page as may replace that page on that service) or if such service is -8- no longer offered, the rate for United States dollars with a maturity of one month quoted by such other service as may be selected by the Buyer. "LIBOR Business Day" means any day other than a Saturday, Sunday or any other day on which banking institutions in the City of London, England are required or authorized by law to be closed." BB. Section 17(a) of Annex I is hereby amended by deleting the second sentence therein in its entirety and replacing it with the following sentence: "Seller shall pay to Buyer on each Repurchase Date the sum of (x) the aggregate Price Differential with respect to all Transactions terminating on such Repurchase Date and (y) the aggregate of all principal payments and all other recoveries of principal in respect of the Contracts deposited into the Contract Account during the preceding Collection Period." CC. Section 18 of Annex I is hereby amended by adding a new clause (d) as follows: "(d) Prior to the occurrence of an Event of Default, Buyer agrees to keep confidential (and to use its best efforts to cause its respective agents and representatives to keep confidential) the Information (as defined below) and all copies thereof, extracts therefrom and analyses or other materials based thereon, except that the Buyer shall be permitted to disclose the Information (a) to such of its respective officers, directors, employees, agents, affiliates, representatives and auditors, on a need to know basis, (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws and regulations or by any subpoena or similar legal process, upon prior notice thereof (unless prohibited by the terms of such subpoena or process) to the Seller, (d) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section 18(d) or (ii) becomes lawfully available to the Buyer on a nonconfidential basis from a source or third party other than the Seller or (iii) is material to a counterparty of Buyer in the normal course and Buyer gives notice to such counterparty that such Information is subject to confidentiality and such counterparty (which shall be disclosed to Seller) agrees to the maintenance of confidentiality substantially on the terms in this Section 18(d), or (e) to the extent disclosure of such Information is necessary as determined by Buyer in order for Buyer to enforce or defend its rights under the Agreement. For the purposes of this Section 18(d), "Information" shall mean all financial statements, ----------- certificates, reports, or material non-public information that are received from the Seller and clearly identified -9- and marked as Confidential at the time of delivery. The provisions of this Section 18(d), shall remain operative and in full force and effect regardless of the expiration and term of this Agreement. To the extent Buyer reasonably incurs any costs and expenses, including reasonable attorneys' fees, to enforce, defend or comply with the terms or provisions of this Section 18(d), Seller agrees to promptly reimburse Buyer such costs and expenses, including reasonable attorneys' fees; provided, however, that Seller -------- ------- shall have no obligation to make such reimbursement in the event such costs and expenses were incurred as a result of Buyer's negligence or misconduct in complying with the terms of Section 18(d) hereof." DD. Section 22(e) of Annex I is hereby amended as follows: (a) by deleting the first sentence thereof in its entirety and replacing it with the following: "Seller shall have arranged with one or more nationally recognized law firms acceptable to Seller and Buyer to act as Document Agent in connection with a Table Funding"; and (b) by deleting the word "Escrow" in the fifth line thereof and replacing it with the word "Document". EE. Paragraph II, clause (b)(vi) of Exhibit A to Annex I is hereby amended by as follows: (a) by deleting the word "Such annual" in the first line thereof and replacing them with the word: "Annual"; (b) by deleting the words, "strategic business plans" in the third line thereof in its entirety; (c) by deleting the words "as CSFB may request" in the fourth and fifth lines thereof and replacing them with words: "shall be delivered to CSFB no more frequently than quarterly unless reasonably requested otherwise by CSFB"; FF. Paragraph II, clause (b)(vii) of Exhibit A to Annex I is hereby amended as follows: -10- (a) by deleting the first sentence thereof in its entirety and replacing it with the following: "No more frequently than quarterly, unless otherwise required pursuant to the terms of the Transaction Documents or reasonably requested otherwise by CSFB, copies of all reports, statements, certifications, or other similar items required to be delivered to or by FMAC pursuant to the terms of the Transaction Documents, and promptly upon request, such other data as Buyer may reasonable request." (b) by adding after the words "business hours" in the thirteenth line thereof the words: "upon reasonable prior notice"; and (c) by deleting the words "promptly (but in no case more than 30 days following issuance or receipt) provide to Buyer" in the fourteenth and fifteenth lines thereof and replacing them with the following words: ", no more frequently than quaterly unless reasonably requested otherwise by CSFB, provide to Buyer". GG. Paragraph II, clause (b)(viii) of Exhibit A to Annex I is hereby amended as follows: (a) by deleting the words "Promptly after the filing or sending thereof copies" in the first and second lines thereof and replacing them with the following words: "No more frequently than quarterly unless reasonably requested otherwise by CSFB, FMAC shall deliver to CSFB copies". HH. Paragraph 23 of Exhibit B to Annex I is hereby amended by adding after the first sentence and before the second sentence thereof, the following: "Notwithstanding the foregoing sentence, with respect to Contracts that are Retail Franchise Loans, all licenses, permits and other approvals necessary to conduct and operate the business on and at the related Mortgaged Property, including the operation of a gas station and/or convenience store, have been obtained, and are current and in full force and effect, and are in the possession of the appropriate parties." II. Paragraph 24 of Exhibit B to Annex I is hereby amended by deleting such Paragraph 24 in its entirety and replacing it with the following: -11- "24. (a) There are no Hazardous Substances (defined below) or underground storage tanks in, on, or under the Mortgaged Property, except those that are both (i) in full compliance with Environmental Laws (defined below) and with permits issued pursuant thereto, which permits are current and in full force and effect, and (ii) fully disclosed to Seller in writing pursuant to the written reports resulting from the environmental assessments of the Mortgaged Property delivered to Seller (the "Environmental Report"); (b) there are no past, present or threatened Releases (defined below) of Hazardous Substances in, on, under or from the Mortgaged Property; (c) there is no threat of any Release of Hazardous Substances migrating to the Mortgaged Property; (d) there is no past or present non-compliance with Environmental Laws, or with permits issued pursuant thereto, in connection with the Mortgaged Property; and (e) Obligor has not received any written or oral notice or other communication from any person or entity (including, but not limited to, a governmental entity) relating to Hazardous Substances or Remediation (defined below) thereof, of possible liability of any Obligor, person or entity pursuant to any Environmental Law, other environmental conditions in connection with the Mortgaged Property, or any actual or potential administrative or judicial proceedings in connection with any of the foregoing. "Environmental Law" means any present and future federal, state and local laws, statutes, ordinances, rules, regulations, and the like, as well as common law, relating to protection of human health or the environment, relating to Hazardous Substances, relating to liability for or costs of Remediation or prevention of Releases of Hazardous Substances or relating to liability for or costs of other actual or threatened danger to human health or the environment. "Environmental Law" includes, but is not limited to, the following statutes, as amended, any successor thereto, and any regulations promulgated pursuant thereto, and any state or local statutes, ordinances, rules, regulations and the like addressing similar issues: the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"); the Emergency Planning and Community Right-to- Know Act; the Hazardous Substances Transportation Act; the Resource Conservation and Recovery Act (including, but not limited to, Subtitle I relating to underground storage tanks); the Solid Waste Disposal Act; the Clean Water Act; the Clean Air Act; the Toxic Substances Control Act; the Safe Drinking Water Act; the Occupational Safety and Health Act; the Federal Water Pollution Control Act; the Federal Insecticide, Fungicide and Rodenticide Act; the Endangered Species Act; the National Environmental Policy Act; and the River and Harbors Appropriation Act. "Environmental Law" also includes, but is not limited to, any present and future federal, state and local laws, statutes, ordinances, rules, regulations, and the like, as well as common law: conditioning transfer of property upon a negative declaration or other approval of a governmental authority of the environmental -12- condition of the property; requiring notification or disclosure of Releases of Hazardous Substances or other environmental condition of the Mortgaged property to any governmental authority or other person or entity, whether or not in connection with transfer of title to or interest in such Mortgage Property; imposing conditions or requirements in connection with permits or other authorization for lawful activity; relating to nuisance, trespass or other causes of action related to the Mortgaged property, and relating to wrongful death, personal injury, or property or other damage in connection with any physical condition or use of the Mortgaged Property. "Hazardous Substances" include, but are not limited to, any and all substances (whether solid, liquid or gas) defined, listed, or otherwise classified as pollutants, hazardous wastes, hazardous substances, hazardous materials, extremely hazardous wastes, or words of similar meaning or regulatory effect under any present or future Environmental Laws or that may have a negative impact on human health or the environment, including, but not limited to, petroleum and petroleum products, asbestos and asbestos- containing materials, polychlorinated biphenyls, lead, radon, radioactive materials, and flammables. "Release" of any Hazardous Substance includes, but is not limited to, any release, deposit, discharge, emission, leaking, spilling, seeping, migrating, injecting, pumping, pouring, emptying, escaping, dumping, disposing or other movement of Hazardous Substances. "Remediation" includes, but is not limited to, any response, remedial, removal, or corrective action, any activity to cleanup, detoxify, decontaminate, contain or otherwise remediate any Hazardous Substance, any actions to prevent, cure or mitigate any Release of any Hazardous Substance, any action, to comply with any Environmental Laws or with any permits issued pursuant thereto, any inspection, investigation, study, monitoring, assessment, audit, sampling and testing, laboratory or other analysis, or evaluation relating to any Hazardous Substances." JJ. Paragraph 47 of Exhibit B to Annex I is hereby amended by adding after the word "parties" in the first line thereof the words: "(except CSFB)" KK. Annex II is hereby amended by as follows: (a) by deleting the addresses and telephone number for Patrick McGrath and replacing it with the following: "CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC 11 Madison Avenue, 4th Floor New York, New York 10010 Attention: Patrick McGrath -13- Telephone: (212) 325-0551 Facsimile: (212) 325-8040 (b) by deleting the name "CS First Boston Mortgage Capital Corp" under the name "Walter Fekula" and replacing it with "Credit Suisse First Boston Mortgage Capital LLC". 3. AMENDMENTS TO THE CUSTODIAL AGREEMENT: ------------------------------------- A. The following definitions in Section 1.2 of the Custodial Agreement are hereby deleted in their entirety: "Disbursement Letter"; "Escrow Agreement"; "Pay-off Letter"; and "Wire Instruction Letter". B. Section 3.1 of the Custodial Agreement is hereby amended by adding after the word "documents" in the fourth line thereof, the following "With respect to Non-Table Funding Transactions:" ---------------------------------------------- C. Section 3.1 of the Custodial Agreement is hereby amended by deleting the word "and" at the end of clause (xv) thereof and the period after the word "review" in clause (xvi) and adding at the end of clause (xvi) and before the last paragraph of Section 3.1 the following: "and (xvi) any environmental indemnity agreement (with respect to Contracts that are Retail Franchise Loans). With respect to Table Funding Transactions: ------------------------------------------ (i) the Contract Schedule, as amended; (ii) all the documents listed in Section A of Schedule 1 to Escrow Agreement; (iii) with respect to Contracts that are Retail Franchise Loans, any environmental indemnity agreement (contained in the Loan and Security Agreement or as a separate document); and (iv) any documents referenced above that were delivered for recording or filing with the appropriate recording or filing offices and subsequently returned by such office(s)." D. Section 3.2(b) of the Custodial Agreement is hereby amended as follows: (a) by deleting the words "Confirmation from Buyer" in the first line thereof and replacing them with the words: "Transaction Notice from Seller"; and (b) by deleting the word "Confirmation" in the third and eighth lines thereof and replacing it with the words: "Transaction Notice". -14- E. Section 3.3(a) of the Custodial Agreement is hereby amended by deleting such Section 3.3(a) in its entirety and replacing such Section 3.3(a) with the following: "(a)(i) Seller shall deliver to Buyer and Custodian the following by facsimile transmission (unless otherwise indicated herein): (1) to CSFB the following: (A) for receipt by CSFB at least two (2) Business Days preceding the proposed Table Funding Closing Date, a Transaction Notice in the form attached hereto as Exhibit C; --------- (B) for receipt by CSFB on or before 12:00 p.m. New York City time on the Business preceding the proposed Table Funding Closing Date, the Pay-Off Letter(s); and (C) for receipt by CSFB on or before 12:00 p.m. New York City time on the proposed Table Funding Closing Date specified in such Transaction Notice (x) the Wire Disbursement and Document Release Authorization Letter executed by FMAC (original to be sent by overnight mail for receipt the next day) and (y) the Settlement Statement; and (2) to the Custodian the following: (A) for receipt by Custodian at least two (2) Business Days preceding the proposed Table Funding Closing Date, the Transaction Notice." "(ii) Seller shall cause the Document Agent to deliver to the Custodian and Buyer the related Escrow Receipt by no later than 5:00 p.m. on the day preceding the proposed Table Funding Closing Date." "(iii) FMAC acknowledges and agrees that in the event CSFB or Custodian do not receive the documents or the Escrow Receipt by the applicable times specified in Section 3.3(a)(i) and (ii), the proposed Table Funding Closing Date shall be the next Business Day succeeding the original proposed Table Funding Closing Date." "(iv) Seller shall deliver or cause to be delivered to the Document Agent all of the Closing Documents, including all the items listed in -15- Section 3.1 of the Custodial Agreement for such Contract identified in such Transaction Notice (including those items listed in Schedule A of Schedule I to the Escrow Agreement)." F. Section 3.3(b)(i), (ii) and (iii) of the Custodial Agreement are hereby amended by deleting such Section 3.3(b)(i), (ii) and (iii) in their entirety and replacing them with the following: "(b)(i) Upon receipt by Custodian of an Escrow Receipt, in the form attached to the Escrow Agreement, from the Document Agent with respect to the Contract subject to a Table Funding, Custodian shall, with respect to such Escrow Receipt, execute and deliver to Buyer (with a copy to Seller which shall be clearly marked as a copy and non-transferable) one or more initial trust receipt and certifications (each an "Initial Trust Receipt and Certification") in the form attached hereto as Exhibit ------- A-1. Each original Initial Trust Receipt and --- Certification shall be delivered to Buyer in New York City on or before 11:00 a.m., New York City Time, on the next Business Day immediately following the date on which the Custodian receives such Escrow Receipt." "(ii) Buyer shall, upon receipt of (x) an Initial Trust Receipt and Certification from the Custodian and (y) the Wire Disbursement and Document Release and Authorization Letter, Settlement Statement and Pay-Off Letter from Seller, (1) wire to the Wire Agent, as directed by Seller in such Wire Disbursement and Document Release and Authorization Letter, the Purchase Price for such Contract, and (2) deliver to the Wire Agent and the Document Agent by facsimile transmission a fully executed Wire Disbursement and Document Release and Authorization Letter." "(iii) Seller shall (x) cause the Document Agent to deliver to the Custodian all the items listed in Section 3.1 of the Custodial Agreement (including those documents listed in Section A of Schedule I to the Escrow Agreement) for such Contract in accordance with the terms of the applicable Escrow Agreement within the time period specified in such Escrow Agreement and (y) deliver to Custodian and Buyer a Computer Tape and Contract Schedule in respect of such Contract, in each case such delivery must be made for receipt thereof by Custodian within five (5) Business Days after the date on which the Wire Agent receives from Buyer, by wire transfer, the Purchase Price for such Contract, unless such time is otherwise extended by mutual agreement between Seller and Buyer." -16- G. Section 3.1(b)(iv) of the Custodial Agreement is hereby amended by deleting the words "Escrow Agent" in the third line thereof and replacing them with the words: "Document Agent". H. Section 3.1(b) of the Custodial Agreement is hereby amended by adding a new clause (v) as follows: "(v) Seller agrees that upon receipt of the Escrow Funds by the Wire Agent, Seller shall be deemed to have received such Escrow Funds and will be liable for such Escrow Funds in accordance with the terms of the Repurchase Agreement. If the Wire Agent returns to Buyer any Escrow Funds pursuant to Section 4.2(b) or Section 4.2(c) of the Escrow Agreement, Seller shall, at the time such Escrow Funds are returned to Buyer, immediately pay to Buyer the amount equal to the product of (i) the product (x) the amount of such Escrow Funds and (y) the Pricing Rate applied during the Table Funding Period as provided in the Repurchase Agreement and (ii) a fraction, expressed as a percentage, the numerator of which is the number of days from the date on which Seller wires the Escrow Funds to the Wire Agent to the date on which Buyer receives the Escrow Funds from the Wire Agent pursuant to the Escrow Agreement (calculated by including the date on which Buyer wires such Escrow Funds but excluding the date on which Buyer receives the Escrow Funds from the Wire Agent; provided, -------- however, that for purposes of such calculation, in the ------- event such Escrow Funds are returned to and received by Buyer on the same day the Escrow Funds are received by the Wire Agent from Buyer, the Escrow Funds shall be deemed to be received by Buyer on the next day), and the denominator of which is 360 days. Such payment by Seller shall be made via federal funds wire of immediately available funds in accordance with the wire instructions specified in the Escrow Agreement." I. Section 5.1(b) of the Custodial Agreement is hereby amended by adding after the word "loans" and before the word "serviced" in the eleventh line thereof the following: ", including restaurant and/or gas station and/or convenience store franchise loans". J. Section 7.3(b) of the Custodial Agreement is hereby amended as follows: (a) by deleting the first paragraph thereof and replacing it with the following: -17- "Credit Suisse First Boston Mortgage Capital LLC 11 Madison Avenue, 4th Floor New York, New York 10010 Attention: Patrick McGrath Telephone: (212) 325-0551 Facsimile: (212) 325-8040 (b) by changing the name "CS First Boston Mortgage Capital Corp." to "Credit Suisse First Boston Mortgage Capital LLC" in the address section for Walter Fekula. K. Wherever the name "CS First Boston Mortgage Capital Corp." appears in the Exhibits to the Custodial Agreement, such name is hereby changed to "Credit Suisse First Boston Mortgage Capital LLC". L. Exhibit A-1 to the Custodial Agreement is hereby amended by deleting the word "Confirmation" in the third line of the first paragraph thereof and replacing it with the word: "Transaction Notice". 4. FULL FORCE AND EFFECT. Except to the extent expressly amended and --------------------- modified by this Amendment, all of the terms, covenants, conditions, agreements and provisions of the Repurchase Agreement and the Custodial Agreement shall remain unmodified and unchanged and shall continue in full force and effect. 5. GOVERNING LAW. This Amendment shall be governed by, and construed in ------------- accordance with, the laws of the State of New York, without regard to the conflict of law principles thereof. 6. COUNTERPARTS. This Amendment may be executed in any number of ------------ counterparts and by each of the undersigned on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute this Amendment as of the date first above written. CREDIT SUISSE FIRST BOSTON MORTGAGE CAPITAL LLC, as Buyer By /s/ Emily Youssouf ----------------------------------------- Name: Emily Youssouf Title: V.P. FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, as Seller and Servicer By /s/ Kevin Burke ----------------------------------------- Name: Kevin Burke Title: Senior Vice President FIRST BANK, NATIONAL ASSOCIATION, as Custodian By /s/ Lynn M. Steiner ----------------------------------------- Name: Lynn M. Steiner Title: Assistant Vice President The undersigned Guarantor, Imperial Credit Industries, Inc., under that certain Guaranty dated as of October 10, 1996, hereby acknowledges and agrees to this Amendment and the foregoing amendments, modifications and supplements to the Repurchase Agreement and Custodial Agreement. IMPERIAL CREDIT INDUSTRIES, INC. By: /s/ H. Wayne Snavely ---------------------------------------- Name: H. Wayne Snavely Title: Chairman and Chief Executive Officer EX-10.7 18 MASTER LOAN SALE AGREEMENT DATED AUGUST 23, 1995 Exhibit 10.7 MASTER LOAN SALE AGREEMENT between FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC as Seller and SOUTHERN PACIFIC THRIFT & LOAN ASSOCIATION as Purchaser Dated as of August 23, 1995 MASTER LOAN SALE AGREEMENT THIS MASTER LOAN SALE AGREEMENT (this "Agreement") dated as of August 23, 1995, by and between SOUTHERN PACIFIC THRIFT & LOAN ASSOCIATION, a thrift and loan institution organized and existing under the laws of the State of California (herein, together with its successors and assigns, called "Purchaser") and FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC, a limited liability company organized and existing under the laws of the State of California (herein, together with its successors and assigns, called "Seller"). WHEREAS, Seller, originates and services long-term whole loans to successful franchisees of major restaurant concepts; and WHEREAS, Seller intends to offer Loans to Purchaser on a regular and ongoing basis, to the extent provided herein; and WHEREAS, Purchaser is willing to purchase Loans from time to time as provided herein and evidenced by a Notice of Loan Sale, a form of which is attached hereto as Exhibit A; NOW, THEREFORE, in consideration of the premises and mutual promises contained in this Agreement, the parties hereto hereby agree as follows: 1. Definitions. ----------- All capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Loan Documents (as hereafter defined) for each Loan. Purchaser acknowledges receipt of forms of the Loan Documents from Seller. Application Package shall mean the Borrower's loan application, ------------------- including documents described in Seller's Documentation Review Log, the Borrower's financial statements and such other information required by Purchaser. Available Funds shall have the meaning set forth in Section 3 hereof. --------------- Business Day shall mean any day other than (i) a Saturday or a Sunday, ------------ or (ii) a day on which banking institutions in the State of Connecticut or the State of California are authorized or obligated by law or executive order to remain closed. Custodial Agreement shall mean the Custodial Agreement, dated as of ------------------- the date hereof, entered into by and among Seller, Purchaser and the Custodian. Custodian shall mean Norwest Bank Minnesota, N.A., a national banking --------- institution, until a successor Person shall have become the Custodian pursuant to the 1 applicable provisions of the Custodial Agreement, and thereafter "Custodian" shall mean such successor Person. Custodian File shall mean all instruments and documents delivered to the -------------- Custodian in connection with a Loan. Gross Rate shall mean, for a particular Loan, the interest rate payable by ---------- the Borrower under the Loan Documents for such Loan. Guarantee shall mean the guarantee of a Borrower's obligations under the --------- Loan Documents. Leasehold Mortgage shall mean the leasehold mortgage (or collateral ------------------ assignment of lease) with respect to any lease, securing the obligations of the Borrower under its Note, as such leasehold mortgage (or assignment of lease) may be amended, modified or renewed from time to time. Lender Commitment shall mean a written commitment by Seller to make a Loan ----------------- to the Borrower on terms and conditions set forth in the Purchase Commitment. Loan shall mean long-term whole loans to franchisees acceptable to ---- Purchaser and Seller, and such other restaurant or other concepts as may be mutually acceptable to Seller and Purchaser, that are originated and serviced by Seller. Loan Closing Date shall mean the day on which a Loan is funded. ----------------- Loan Collateral shall mean with respect to a Loan, the related Security --------------- Agreement (including any Collateral secured thereby), the Leasehold Mortgage or the Mortgage, if any, the Guarantee, if any, assignment of franchise rights, where assignable, and any other Loan Documents. Loan Documents shall mean with respect to a Loan, those instruments, -------------- agreements, guaranty documents, certificates or other writings, now or hereafter executed and delivered by the Borrower in respect of such Loan, including, without limitation, those which are required to be included in the Custodian File therefor, as the same may be modified, amended, consolidated, continued or extended from time to time. Mortgage shall mean any mortgage or deed of trust or deed to secure a Loan -------- entered into by a Borrower, (but not including Leasehold Mortgages) or other similar encumbrance creating a lien on and security interest in the mortgaged property securing the obligations of the Borrower under the related Note, together with any other security instruments, any related Uniform Commercial Code financing and continuation statements delivered by the Borrower, including, in all events, the property and rights assigned 2 under all such instruments, together with all amendments, substitutions and replacements of any of the foregoing. Mortgaged Property shall mean, collectively, all fee simple (or ground ------------------ leasehold) interests of the mortgagor in any real property, including the improvements thereon, subject to the lien of a Mortgage which secures a Loan. Net Rate shall mean, for a particular Loan, the Gross Rate less the -------- Servicing Fee Rate. Person shall mean any legal person, including any individual, corporation, ------ partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. Principal Amount shall mean, with respect to any Loan, the amount of the ---------------- principal advanced to the Borrower thereunder. Purchase Commitment shall mean Purchaser's written commitment to Seller, in ------------------- the form previously provided by Seller to Purchaser and approved by Purchaser, to purchase a Loan from Seller on the terms and conditions set forth therein. Purchase Price shall mean an amount equal to the outstanding Principal -------------- Amount for such Loan, as listed on the Notice of Loan Sale in Exhibit A attached hereto to be provided to Purchaser in connection with each sale of a Loan, payable in United States dollars in same day funds. Rating Agency shall mean Duff & Phelps Credit Rating Co., or its successors ------------- in interest, or any other rating agency acceptable to Seller and Purchaser. Sale Date shall mean the date on which Seller sells and Purchaser purchases --------- a Loan, which shall be the Loan Closing Date. Servicer shall mean Seller, in its capacity as the Servicer under the -------- Servicing Agreement. Servicing Agreement shall mean the Servicing Agreement, dated as of the ------------------- date hereof between Servicer and Purchaser. Servicing Fee Rate shall mean, with respect to a particular Loan, the fee ------------------ payable to the Servicer under the Servicing Agreement, which shall equal the number of basis points agreed upon by Purchaser and Seller with respect thereto. 3 Underwriting Guidelines shall mean Purchaser's underwriting ----------------------- guidelines, as amended from time to time. The Underwriting Guidelines in effect as of the date hereof are attached hereto as Exhibit B. 2. Procedure for Offers, Acceptances and Purchases. ----------------------------------------------- (a) Seller may, from time to time, deliver a letter (a "Proposal Letter") to a potential Borrower, setting forth the terms and conditions on which Seller might be interested in making a Loan to such potential Borrower. Such Proposal Letter shall not constitute an obligation on the part of Seller to make a Loan or a commitment on the part of the potential Borrower to borrow from Seller. If the potential Borrower expresses an interest in proceeding as described in Seller's Proposal Letter, Seller shall deliver to Purchaser a copy of the Proposal Letter and Borrower's response thereto. (b) Seller shall be solely responsible for processing a potential Borrower's Loan application, including but not limited to review of the potential Borrower's application, as well as supporting credit information, property appraisals and any other materials relevant to Seller's lending decision. If Seller shall determine that the potential Borrower qualifies under the Underwriting Guidelines with respect to the Loan, Seller shall forward all relevant information (the "Application Package") to Purchaser, together with Seller's review analysis. (c) Purchaser shall, within three (3) Business Days following its receipt of the Application Package, notify Seller in writing of its approval or disapproval of the Loan, based solely on Purchaser's independent credit evaluation. If Purchaser approves the Loan, Purchaser shall issue to Seller a Purchase Commitment with respect thereto. (d) Upon receipt by Seller of the Purchase Commitment, Seller shall issue to the Borrower a Lender Commitment. Upon receipt of the Lender Commitment executed by the Borrower, Seller shall sign and return to Purchaser the Purchase Commitment. If Purchaser disapproves the Loan, Seller may, in its discretion make such Loan; provided, however, that in such event Purchaser shall -------- ------- have no obligation with to such Loan. If Seller makes a determination not to originate a Loan, Seller shall so inform the potential Borrower. (e) Subject to compliance by each Borrower with the terms and conditions of its applicable Lender Commitment, Seller shall close in its own name Loans as to which it has issued a Lender Commitment. Seller shall receive and review the Loan Documents executed by the Borrower, and, if applicable, each guarantor of the Loan, and shall execute the Loan Documents where execution by the lender is appropriate. Following Seller's determination that Borrower has fulfilled the terms and conditions of the Lender Commitment, Seller shall deliver to Purchaser, by facsimile transmission, a completed and duly executed Notice of Loan Sale. Purchaser shall, promptly after receipt of the Notice of Loan Sale, pay the Purchase Price stated therein in immediately available funds by federal wire transfer to an account of Seller designated by Seller; provided that if the Notice of Sale is not received by Purchaser prior to 1:00 p.m. eastern time on a Business Day, Purchaser shall not be required to pay the Purchase Price until 4 1:00 p.m. eastern time on the next succeeding Business Day. Upon receipt of the Purchase Price, Seller shall disburse the proceeds of the Loan as directed by Borrower in writing, provided that if at any time prior to such disbursement Seller shall determine that the Borrower is no longer in compliance with the terms and conditions of the Lender Commitment, Seller shall repay the Purchase Price to Purchaser by federal wire transfer. Simultaneously with the closing of each Loan, Seller shall endorse each Note to Purchaser, and execute assignments of each Mortgage and UCC-1 financing statement to Purchaser. Promptly following the closing of each Loan, Seller shall (i) deliver for recording or filing, as applicable, each Mortgage and UCC-1 financing statement executed in connection with such Loan (Seller may employ a title insurance company or an insured document filing service in order to effect such recordation and/or filing); and (ii) deliver an original or duplicate original of each Loan Document to the Custodian (endorsed and/or assigned as appropriate); and (iii) deliver a copy of each endorsement and assignment to Purchaser. (f) Nothing set forth herein shall be deemed to obligate Seller to offer any Loan for sale to Purchaser or Purchaser to purchase any Loan from Seller unless and until a Purchaser Commitment has been executed by both Purchaser and Seller; provided, however, that any offer by Purchaser to Seller, -------- ------- as evidenced by a Purchase Commitment, shall remain in effect for thirty (30) Business Days after receipt thereof by Seller. Nothing set forth herein shall be deemed to preclude or limit (i) Seller's right to offer loans of the same type as the Loans for sale to Persons other than Purchaser, or (ii) Purchaser's right to purchase loans of the same type as the Loans from Persons other than Seller. 3. Application of Payments. ----------------------- When Seller receives a scheduled payment or prepayment of principal or interest, or collects any Guaranty Amounts or any other payments or collections representing principal or scheduled interest on a Loan (not including Late Payment Charges, assumption fees or expenses, default interest, default fees or prepayment penalties, which shall belong to Servicer, but which shall not be paid out of such above-referenced amounts) ("Available Funds"), in respect of a Loan, Seller shall accept, in trust for Purchaser, the amounts of such payments or collections to which Purchaser is entitled pursuant to this Section 3. On the 15th day of each month (or if such date is not a Business Day, on the Business Day immediately following such date) Seller shall, out of Available Funds received but not paid out as of the 14th day of such month (or the next preceding Business Day) and after payment to Servicer of the servicing compensation described under Section 2.4 of the Servicing Agreement, remit to Purchaser (i) all payments received in respect of principal, (ii) out of scheduled payments received in respect of interest, interest accrued at the Net Rate on the related Loan and (iii) all other remaining Available Funds, if any; provided, however, that Purchaser's right to interest payments under (ii) above - -------- ------- shall be appropriately adjusted to reflect the period of time during which Purchaser owned the Loan during the calendar month prior to the month of each remittance. 5 4. Method of Payments. ------------------ All payments required to be made by the parties to this Agreement shall be made in accordance with such instructions as each party may from time to time deliver to the other party in writing, by telex or by facsimile transmission. All payments required to be paid hereunder shall be made by wire transfer of immediately available funds, unless otherwise directed by the party entitled thereto. 5. Adjustment of Payments. ---------------------- If, after Seller has paid to Purchaser any payment or collection in accordance with Section 3 herein and that payment or collection is rescinded or must otherwise be returned or paid over by Seller, whether pursuant to any bankruptcy or insolvency law, or otherwise, Purchaser shall, at Seller's request, promptly return that payment or collection to Seller, together with any interest or other amount required to be paid by Seller with respect to that payment or collection. 6. Representations and Warranties. ------------------------------ Each of Purchaser and Seller represents and warrants to the other, which representations and warranties shall be deemed repeated on each Sale Date, that (i) this Agreement has been duly authorized, and the execution, delivery and performance hereof has been duly executed and delivered and constitutes the valid and binding obligation of such party enforceable against such party in accordance with its terms; and (ii) each of Purchaser and Seller further represents that it is not insolvent and will not be rendered insolvent as a result of the purchase of the Loan by Purchaser, and Purchaser has not purchased, and Seller has not sold, the Loan with any intent to hinder, delay or defraud any of its creditors. Seller further represents and warrants that it is qualified to do business to the extent that is required to be so qualified in each state in which Seller makes a Loan. 7. Loan Representations. -------------------- Seller hereby represents and warrants that with respect to each Loan, as of the related Sale Date or such other date as provided herein, except as otherwise disclosed in writing by Seller to Purchaser prior to Purchaser's issuance of a Purchase Commitment with respect thereto: (a) The information pertaining to the Loan set forth in the Notice of Loan Sale is true and correct in all material respects as of the date or dates such information was furnished. (b) All federal, state and local laws, rules and regulations, including, without limitation, those relating to usury, truth-in-lending, real estate settlement procedure, land sales, 6 the offer and sale of securities, consumer credit protection and equal credit opportunity or disclosure, applicable to Seller with respect to the Loan have been complied with in all material respects. (c) With respect to any Loan secured by a Mortgage or a Leasehold Mortgage, the Loan file contains documentation which will enable such Mortgages, Leasehold Mortgages or assignments thereon to be duly filed and recorded with all appropriate governmental authorities in all jurisdictions in which such filing is required to be filed and recorded to create a valid, binding and enforceable first lien on the related Mortgage and Leasehold Mortgage. (d) Immediately prior to the sale of the Loan pursuant hereto, Seller owned full legal and equitable title to the Loan, free and clear of any lien or participation which represents any ownership interest in favor of any other party. (e) The Loan Documents are genuine, have not been impaired, altered or modified in any respect and are the legal, valid and binding obligation of the Borrower (and the guarantor, if applicable) thereunder, enforceable in accordance with their terms (except as such enforceability may be limited by Bankruptcy Law and by general principles of equity, regardless of whether such enforceability shall be considered in a proceeding in equity or at law), and are not subject to any dispute, right of setoff, counterclaim or defense of any kind. (f) All parties to the Loan Documents had the legal capacity to enter into the Loan (and the Guaranty, if applicable) and to execute and deliver the Loan Documents, and the Loan Documents have been duly and properly executed by such parties. (g) At the time the Loan was made, the related Borrower owned or had a leasehold interest in the related Loan Collateral, including good and marketable title to any property (subject to exceptions contained in the title insurance policy, if any, relating to such property), free and clear of all liens other then Permitted Encumbrances (as defined in the Security Agreement for such Loan) and other than liens otherwise contemplated by the related Loan Documents, and each related Loan is a legal and binding obligation of the Borrower and is enforceable in accordance with its terms. (h) The related Mortgage, Leasehold Mortgage and Security Agreement, if any, contain customary and enforceable provisions so as to render the rights and remedies of the holder thereof adequate for the practical realization against the related Loan Collateral of the benefits of the security interests intended to be provided thereby, including by judicial foreclosure. There is no exemption under existing law available to the related Borrower that would interfere with the Mortgagee's or secured party's right to foreclose such related Mortgage, Leasehold Mortgage or Loan Collateral, as applicable, other than those which may be available under applicable Bankruptcy Law, homestead statutes or other debtor relief statutes. 7 (i) Seller has not taken or omitted to take any action required hereunder, and has no notice that the related Borrower has taken or omitted to take any action that would impair or invalidate the coverage provided by any existing insurance policy relating to the Loan. (j) All applicable intangible taxes and documentary stamp taxes were paid as to the Note and the related Mortgage, Leasehold Mortgage and Security Agreement. (k) Except as otherwise set forth in the related Loan Documents and subject to Permitted Encumbrances with respect thereto, the related Mortgage or Leasehold Mortgage, if any, and Security Agreement give the Mortgagee or the secured party the right to receive and direct the application of insurance proceeds and condemnation proceeds received in respect of the Loan. (l) There are no delinquent taxes, ground rents, water charges, sewer rents or assessments outstanding with respect to the related Loan Collateral other than those which were Permitted Encumbrances or those which are immaterial and are being contested in good faith. (m) The Loan Collateral is free of material damage and waste for which no insurance is maintained and there is no proceeding pending or, to the best knowledge of Seller, threatened for the total or partial condemnation or taking of the related Loan Collateral by eminent domain. (n) Neither the Borrower nor any officer, director, employee, shareholder, partner or Affiliate thereof is an officer, director, employee, shareholder, partner or Affiliate of Seller. (o) No instrument of release or waiver has been executed in connection with the Loan, and the Borrower has not been released in whole or in part. (p) The Borrower is not in default in complying with the terms of the Note and related Security Agreement, Mortgage or Leasehold Mortgage if any, or Affiliate Guarantee, if any, and Seller has not waived any default, breach, violation or event of acceleration. Seller has not advanced funds, or induced, solicited or knowingly received any advance of funds by a party other than the Borrower, directly or indirectly, for the payment of any amount required by such Borrower's Loan. (q) The related Custodian File contains the related Loan Documents and instruments specified to be included therein in the form so specified. (r) The proceeds of the Loan have been fully disbursed, there is no requirement for future advances thereunder and all costs, fees and expenses incurred in making, closing or recording the Loan have been paid. 8 (s) The Loan was underwritten in accordance with the Underwriting Guidelines as in effect on the date of the related Purchaser Commitment. The Underwriting Guidelines in effect on the date hereof are attached hereto as Exhibit B. Any amendments thereto have been furnished to Seller. The Underwriting Guidelines, as of the date hereof, are substantially the same as those used by Greenwich Capital Financial Products, Inc. ("Greenwich") to originate the loans that were the subject of the most recent securitization by Greenwich of loans similar to the Loan which securities were rated by the Rating Agency at least investment grade. Seller in not aware of any changes in the requirements of the Rating Agency for granting an investment grade rating to a pool of such Loans since the date of such securitization by Greenwich except as reflected in its current Underwriting Guidelines. (t) There exist no deficiencies with respect to escrow deposits and payments, if such are required, for which customary arrangements for repayment thereof have not been made, and no escrow deposits or payments of other charges or payments due Seller have been capitalized under related Note. (u) The transfer, assignment and conveyance of the Loan by Seller pursuant to this Agreement are not subject to the bulk transfer laws or any similar statutory provisions in effect in any applicable jurisdiction. (v) Seller has caused to be performed any and all acts required to be performed to preserve the rights and remedies of the secured party in any insurance policies. (w) The Loan is not subject to a Bankruptcy plan. (x) The Loan is evidenced by a Secured Promissory Note, Pledge and Security Agreement, UCC Financing Statement, and, where appropriate, a Mortgage or Leasehold Mortgage, Guaranty, Agreement to Elect to Renew Franchise Agreement, and such other documents as Seller customarily employs in the closing of loans of the same type as the Loan, substantially in the forms previously provided to Purchaser by Seller. In the event that any of the representations and warranties of Seller set forth in Section 6 or Section 7 hereof shall prove to have been untrue in any material respect on and as of the Sale Date (a "Breached Representation") with respect to any Loan (an "Ineligible Loan"), the party discovering such Breached Representation shall give written notice to the other. Seller may, at its option, cure such Breached Representation. If such Breached Representation is not cured in all material respects within 90 days from the date on which Seller discovers or receives notice of the Breached Representation, Purchaser may, at its option, requires Seller to repurchase the Ineligible Loan at a price equal to the unpaid Principal Amount thereof, together with all accrued but unpaid amounts due to Purchaser pursuant to Section 3 hereof. Seller shall file, or cause to be filed by the escrow agent with respect to a Loan secured by a Mortgage or a Leasehold Mortgage, or otherwise by the closing agent, at Seller's sole cost and expense, (i) all financing statements on Form UCC-1 and all financing statement 9 assignments on Form UCC-3 and (ii) if applicable, all Mortgage assignments and assignments of Leasehold Mortgages as are customarily required to perfect a security interest in the Loans. Purchaser hereby acknowledges that Seller is selling, assigning, conveying, transferring, and delivering the Loans without recourse, and, except as expressly set forth above, without representation or warranty of any kind or description. Nothing in this paragraph shall limit in any way the Purchaser's rights and remedies set forth above in this Section 7. 8. Agreements of Seller. -------------------- As of the Sale Date with respect to any Loan, Purchaser shall be a legal and the beneficial owner of such Loan, free and clear of any adverse claim. Seller agrees to give Purchaser prompt notice of the occurrence of any default under the Loan Documents of which Seller shall have actual knowledge. Seller agrees to maintain such licenses and/or registrations in good standing the lapse of which would have a material, adverse impact on any Loan or Purchaser's interest therein or on Seller's ability to securitize the Loans. Seller agrees to continue to originate loans in accordance with the Underwriting Guidelines, as amended from time to time. Purchaser shall notify Seller in writing in the event that there are any material alterations to such Underwriting Guidelines. Seller agrees to indemnify and hold harmless Purchaser for any loss, damage, liability or expense (including reasonable attorneys' fees) incurred by Purchaser which arises as a direct result of any gross negligence or intentional misconduct by Seller in the application of its Underwriting Guidelines, in connection with the origination of any Loan. Seller shall not be liable to Purchaser for any loss, damage, liability or expense arising out of a Borrower's misrepresentations, bad faith or intentional malfeasance or as a result of defaults by Borrowers in making payments under the Loan Documents. Seller shall be entitled to rely in good faith upon any advice of counsel regarding legal matters and upon any written certifications or representations made by Borrowers. Nothing in this paragraph shall be construed to limit Purchaser's rights and remedies under Section 7 herein. 9. Agreements of Purchaser. ----------------------- Purchaser shall, independently and without reliance upon Seller, except as provided herein, and based on the Application Package and such financial statements and other documents and information as Purchaser deems appropriate, make Purchaser's own credit analysis and underwriting decisions to purchase any Loan hereunder, based upon its own lending policies and investment objectives. 10 Purchaser shall maintain the confidentiality of any confidential information contained in the Application Package. 10. Repurchase Prior to Securitization. ---------------------------------- Purchaser acknowledges that Seller has experience in the securitization of loans into investment grade securities and may, from time to time, wish to repurchase Loans therefor. In the event that Seller wishes to repurchase any Loan in order to resell such Loan in a securitized transaction, Purchaser agrees to negotiate the terms of such repurchase, subject to Purchaser's investment objectives and policies. 11. Custody of Loan Documents. ------------------------- The Loan Documents for each Loan sold to Purchaser will be held in custody by the Custodian pursuant to the Custodial Agreement. 12. Servicing of the Loans. ---------------------- The Loans will be serviced in the manner set forth in the Servicing Agreement. Without Purchaser's prior written consent, and subject to the Servicing Agreement, Seller shall not agree to the modification or waiver of any of the terms of the Loan Documents, consent to any action or failure to act by the Borrower, or exercise any rights which Seller may have in respect of the Loans or under the Loan Documents if the agreement, consent or exercise of rights would (i) reduce the principal amount of or rate of interest on the Loans to which Purchaser is entitled under this Agreement, (ii) postpone any date fixed for any payment of principal of or interest on the Loans, (iii) release any Collateral or security interest thereon except as otherwise contemplated in the Loan Documents or (iv) release the Borrower, any guarantor, or any other party primarily or secondarily liable under any Loan, or permit an assignment of the obligations of the Borrower. 13. Notices. ------- All demands, notices and communications hereunder shall be in writing and shall be deemed to have been duly given if mailed, by registered or certified mail, return receipt requested, or, if by other means, when received by the other party at the address as follows or such other address as may hereafter be furnished to the other party by like notice: (a) if to Seller: Franchise Mortgage Acceptance Company LLC 600 Steamboat Road Greenwich, Connecticut 06830 Attention: Mr. John Rinaldi 11 with a copy to: Thomas J. Infurna Thacher Proffitt & Wood 50 Main Street 5th Floor White Plains, N.Y. 10606 (b) if to Purchaser: Southern Pacific Trust & Loan Association 12300 Wilshire Boulevard Los Angeles, California 90025 Attention: Mr. Robert Blumberg Vice President Operating with a copy to: Nebenzahl and Kohn 10940 Wilshire Boulevard Suite 1500 Los Angeles, California 90025 Attention: Bernard Nebenzahl, Esq. 14. Governing Law. ------------- This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to conflicts of the loan principle. 15. Entire Agreement; Amendment. --------------------------- This Agreement (together with the Servicing Agreement and the Custodial Agreement) constitutes the entire agreement of the parties with respect to its subject matter and supersedes all prior oral or written agreements in regard thereto. No modification or amendment of this Agreement shall be binding unless in writing and executed by the parties. 16. Counterparts. ------------ This Agreement may be executed in any number of counterparts, each of which shall for all purposes be deemed to be an original and all of which shall together constitute but one and the same instrument. 12 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC [SIGNATURE APPEARS HERE] ----------------------------------- Name: Title: SVP Date: ------------------------------- SOUTHERN PACIFIC THRIFT & LOAN ASSOCIATION ------------------------------------ Name: Title: Date: ------------------------------- IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC --------------------------------- Name: Title: Date: ---------------------------- SOUTHERN PACIFIC THRIFT & LOAN ASSOCIATION /s/ Stephen Shugerman --------------------------------- Name: Stephen Shugerman Title: President Date: ---------------------------- EXHIBIT A EXHIBIT A FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC 600 Steamboat Road Greenwich, Connecticut 06830 To: Southern Pacific Thrift & Loan Association Certificate No.___ Notice of Loan Sale ------------------- Franchise Mortgage Acceptance Company LLC ("Seller") hereby sells, transfers and assigns to Southern Pacific Thrift & Loan Association ("Purchaser"), the Loan and Loan Collateral between Seller and the Borrower described below upon the terms and conditions set forth in the Master Loan Sale Agreement between Seller and Purchaser, dated as of August 23, 1995 (the "Agreement"). Details are as follows: Borrower: Date of Loan: Principal Amount: Gross Rate: Net Rate: Date of Purchase: Maturity Date: Additional Provisions: Loan Collateral: Capitalized terms not otherwise defined in this Notice of Loan Sale shall have the meanings given to them in the Agreement. In case of any conflicts between the terms of this Notice of Loan Sale and the Agreement, this Notice of Loan Sale shall govern. FRANCHISE MORTGAGE ACCEPTANCE COMPANY LLC ------------------------------ Name: Title: 2 EX-10.8 19 MASTER PARTICIPATION AGREEMENT Exhibit 10.8 MASTER PARTICIPATION AGREEMENT among FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., as Seller, IMPERIAL CREDIT INDUSTRIES, INC., as Guarantor, CERTAIN FINANCIAL INSTITUTIONS, as Participants and BANCO SANTANDER, NEW YORK BRANCH as Agent Dated as of November 22, 1995 TABLE OF CONTENTS
PAGE SECTION 1. Definitions .................................................. 1 SECTION 2. Conditions Precedent to Effectiveness of this Agreement ...... 8 SECTION 4. Payments of Principal, Interest and Fees ..................... 10 SECTION 5. Method of Payments ........................................... 11 SECTION 6. Representations and Warranties ............................... 11 SECTION 7. Loan Representations ......................................... 11 SECTION 8. Covenants .................................................... 12 SECTION 9. Agreements of the Participants ............................... 15 SECTION 10. ICI Guaranty ................................................. 16 SECTION 11. Optional and Mandatory Repurchase ............................ 16 SECTION 12. FMAC as Servicer ............................................. 16 SECTION 13. Custody of Loan Documents; Appointment of Company as Agent ... 17 SECTION 14. Servicing of the Loans ....................................... 17 SECTION 15. Termination; Termination Fee ................................. 17 SECTION 16. Security Interest ............................................ 17 SECTION 17. Notices and Payments ......................................... 17 SECTION 18. The Agent .................................................... 18 SECTION 19. Governing Law ................................................ 21 SECTION 21. Entire Agreement ............................................. 22
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PAGE ---- SECTION 22. Counterparts ................................................. 22 SECTION 23. Confidentially ............................................... 22 SECTION 24. Assignment by FMAC ........................................... 22 SECTION 25. Assignments by Participants .................................. 22 SECTION 26. Additional Participants ...................................... 23
iii THIS MASTER PARTCIPATION AGREEMENT, dated as of November 22, 1995, among FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a California limited liability company (together with its successors and assigns, "FMAC" or the "Seller") and ---- ------ IMPERIAL CREDIT INDUSTRIES, INC., a corporation organized and existing under the laws of the State of California (together with its successors and assigns, "ICI" or the "Guarantor"), certain financial institutions now or hereafter --- --------- parties hereto as participants (the "Participants") and BANCO SANTANDER, NEW ------------ YORK BRANCH, a bank organized and existing under the laws of Spain ("Banco ----- Santander"), as agent for the Participants (in such capacity, the "Agent"); - --------- W I T N E S S E T H - - - - - - - - - - WHEREAS, FMAC originates (and acquires) and services long-term whole loans to successful franchisees of major restaurant concepts; and WHEREAS, the Loans (as defined herein) are originated (or with the consent of the Agent acting at the direction of the Majority Participants, acquired) by FMAC for the primary purpose of their sale to a securitization vehicle for securitization of the Loans into investment grade securities as determined by at least one nationally recognized rating agency; and WHEREAS, FMAC desires the Participants to facilitate the origination (and acquisition) of such Loans prior to the securitization of such Loans, anticipated to occur within 270 days of the transfer of each Participation (as defined herein); and WHEREAS, FMAC intends to offer Participations (as defined herein) in such Loans to the Participants on a regular and ongoing basis, to the extent provided herein; and WHEREAS, the Participants are willing to purchase Participations in Loans from time to time on the terms provided herein and evidenced by a Notice of Loan Sale, to the extent of the applicable Participation Share (as defined herein); and WHEREAS, as an inducement to the Participants to enter into this agreement, the Seller and/or the Guarantor will provide (or cause to be provided) the Non-Performing Loan Bond (as defined herein); NOW, THEREFORE, in consideration of the premises and mutual promises contained in this Agreement, IT IS AGREED: SECTION 1. Definitions. All capitalized terms used herein and not ----------- otherwise defined herein shall have the meanings ascribed to them in the Loan Documents (as hereafter defined) for each Loan. "Additional Participants" means such financial institutions, if any, as may ----------------------- become parties hereto in accordance with Section 26(a). ------------- "Adjustment Date" is defined in Section 26(b)(iii). --------------- ------------------ "Adjustment Date Certificate" means a certificate duly executed pursuant to --------------------------- Section 26 by the Seller, the Agent and each Additional Participant, - ---------- substantially in the form of Exhibit G. --------- "Agent" is defined in the preamble. ----- -------- "Agreement" means this Master Participation Agreement, as amended or --------- otherwise modified from time to time. "Aggregate Loan Principal Amount" means, in connection with a particular ------------------------------- offer under Section 3(a), the sum of the Principal Amounts of the Loans being ------------ offered to the Participants, as set forth in the related Notice of Loan Sale. "Applicable Margin" means an interest rate margin as agreed between the ----------------- Agent and the Participant. "Applicant Participant" is defined in Section 26(a). --------------------- ------------- "Assignment Notice" means an assignment notice substantially in the form of ----------------- Exhibit G. - --------- "Available Funds" is defined in Section 4. --------------- --------- "Borrower" means any borrower or other obligor with respect to a Loan. -------- "Breached Representation" is defined in Section 7(a). ----------------------- ------------ "Business Day" means any day other than (i) a Saturday or a Sunday, or (ii) ------------ a holiday designated by the Federal Reserve Bank of New York, but which is a day on which transactions are carried on in the London eurodollar interbank market. "Call Period" means, with respect to any Participation, the period ending ----------- 270 days (or if such day is not a Business Day, the next following Business Day) after the date of the sale of such Participation. "Commitment Fee" means 0.25% per annum multiplied by the daily average of -------------- the unused portion of the Facility Amount on a 365 day basis. -2- "Custodial Agreement" means the Custodial Agreement entered into among ------------------- FMAC, Banco Santander and the Custodian, dated as of the date hereof, as from time to time supplemented or amended, a copy of which is attached as Exhibit D --------- hereto. "Custodian" is defined in the Custodial Agreement. --------- "Custodian File" means all instruments and documents delivered to the -------------- Custodian in connection with a Loan. "Duff & Phelps" means Duff & Phelps Credit Rating Co., or its successors in ------------- interest. "Eligible Franchise Concepts" means Taco-Bell, Kentucky Fried Chicken and --------------------------- Pizza Hut (as long as such concepts are part of the PepsiCo. system), Burger King Corporation and Wendy's International, Inc. or such other concepts as may be mutually acceptable to both FMAC and each of the Participants. "Event of Default" means ---------------- (a) the Seller shall default in the payment of any principal, interest or other amounts due to the Participants under Section 4(b); or ------------ (b) the Guarantor shall default in the performance of any of its obligations under Section 8(b)(ii) or Section 10; or ---------------- ---------- (c) the Seller shall default in any obligation under Section 11; or ---------- (d) the Seller shall fail to have delivered any Loan Collateral with respect to any Participated Loan in accordance with the terms of the Custodial Agreement; or (e) the Seller or the Guarantor shall fail to observe or perform any other covenant, obligation, condition or agreement contained in this Agreement or the other Related Documents and such failure shall continue unremedied for 10 Business Days after the earlier of a responsible officer of the Seller having become aware of such failure or written notice to the Seller of such failure; or (f) any representation, warranty, certificate, or other statement (financial or otherwise) (other than any representation or warranty set forth in Section 7(a)) made or furnished by or on behalf of the Seller or ------------ the Guarantor to any Participants in or in connection with this Agreement or any of the other Related Documents shall be false, incorrect, incomplete or misleading in any material respect when made or furnished; or (g) the Seller or the Guarantor shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a -3- substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated in full or in part, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commerce a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (vii) take any action for the purpose of affecting any of the foregoing; or (h) proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Seller or the Guarantor or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Seller or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within 30 days of commencement; or (i) the Seller shall in bad faith use any adverse selection procedures in selecting the Participated Loans from among the franchisee loans originated or pending origination (or acquired) by the Seller; or (j) the Seller shall grant any security interests in any Participated Loan which constitutes a fraudulent conveyance under applicable law; or (k) any material term of this Agreement or shall cease to be, or be asserted by the Seller or the Guarantor not to be, a legal, valid and binding obligation of the Seller enforceable in accordance with its terms; or (l) the Participants shall, for any reason (other than a reason solely attributable to the Participants or any of their agents), fail to have a first priority perfected security interest in the Loans or the Loan Documents pursuant to Section 16. ---------- "Expiration Date" is defined in Section 15. --------------- ---------- "Facility Amount" means $25,000,000, as such amount may be increased from --------------- time to time pursuant to Section 26. ---------- "Facility Suspension Event" means, with respect to this facility, ------------------------- (i) the representations contained in this Agreement with respect to FMAC or ICI contained in Section 6 are inaccurate in any material respect or there is a --------- material breach in any of FMAC's or ICI's covenants contained in this Agreement; or (ii) an Event of Default, or any event that with the -4- passage of time or the giving of notice would constitute an Event of Default, shall have occurred and be continuing. "Fee Letter" means the fee letter, dated as of November 22, 1995, between ---------- the Seller and Banco Santander, as arranger and Agent, as amended or otherwise modified from time to time. "FMAC" is defined in the preamble. ---- -------- "Guarantor" is defined in the preamble. --------- -------- "Hedge Calculation Date" is defined in Section 8(a)(x). ---------------------- --------------- "ICI" is defined in the preamble. --- -------- "Increased Facility Amount" means the amount by which the Facility Amount ------------------------- increases on an Adjustment Date. "Ineligible Loan" is defined in Section 7(a). --------------- ------------ "Leasehold Mortgage" is defined in the Custodial Agreement. ------------------ "Loan" means long-term fixed-rate and adjustable-rate whole loans to ---- successful franchisees of Eligible Franchise Concepts, that are originated (or with the consent of the Agent acting at the direction of the Majority Participants, acquired) and serviced by FMAC. "Loan Collateral" means with respect to a Loan, the related Security --------------- Agreement (including any Loan Collateral secured thereby), the Leasehold Mortgage or the Mortgage, if any, the Affiliate Guarantee, if any, and any other Loan Documents. "Loan Documents" means with respect to a Loan, those instruments, -------------- agreements, guaranty documents, certificates or other writings, now or hereafter executed and delivered by the Borrower in respect of such Loan, including, without limitation, those which are required to be included in the Custodian File therefor, as the same may be modified, amended, consolidated, continued or extended from time to time. "Loan Suspension Event" means, with respect to any Loan, (i) there exist, --------------------- at the time of an offer, three or more different Borrowers who are franchisees of the same Eligible Franchise Concept who are more than 29 days delinquent in making payments on any Loans in which any Participant owns a Participation; (ii) the representations contained in this Agreement with respect to such Loan contained in Section 7 are inaccurate in any material respect; (iii) there is a --------- material, adverse change in the market for securities backed by such Loans, as reasonably determined by the Majority Participants; (iv) the related franchisor or franchisor's parent for such Loan is rated lower than BBB by S&P or Baa2 by Moody's or a -5- comparable rating by Duff & Phelps; and (v) the related Borrower for such Loan is 45 days or more delinquent on any other Loan or Loans purchased and currently held by the Participants. "Majority Participants" means, at any time, Participants whose aggregate --------------------- Percentages total more than 50%. "Moody's" means Moody's Investors Service Inc., or its successors in ------- interest. "Mortgage" is defined in the Custodial Agreement. -------- "Mortgaged Property" means, collectively, all fee simple (or ground ------------------ leasehold) interests of the mortgagor in any real property, including the improvements thereon, subject to the lien of a Mortgage which secures a Loan. "Non-Performing Loan" means, as of any date, any Loan with payments that ------------------- are 45 days or more past due. "Non-Performing Loan Bond" means either, ------------------------ (a) an irrevocable standby letter of credit (issued by a bank acceptable to the Agent and having a rating of at least A+/A1 (or the equivalent)by at least one Rating Agency) under the terms described under Section 8(a)(viii) for the ratable benefit of the Participants (the "Bond ------------------ ---- L/C"), or --- (b) a cash bond deposited in an account held by the Agent (or a bank designated by the Agent) (the "Bond Account"). ------------ "Notice of Loan Sale" means, in connection with each sale of a ------------------- Participation to the Participants hereunder, the confirmation and evidence of such sale substantially in the form of Exhibit A. --------- "Participants" is defined in the preamble. ------------ -------- "Participation" means a beneficial ownership interest in Loans specified ------------- in a related Notice of Loan Sale in principal amount equal to the Participation Principal Amount specified in the related Notice of Loan Sale. "Participated" ------------ has a corresponding meaning. "Participation Principal Amount" means, in connection with the sale of a ------------------------------ Participation to the Participants hereunder, the principal amount of the Participation being sold to the Participants, as set forth in the related Notice of Loan Sale. "Participation Share" means, with respect to a particular Participated ------------------- Loan or group of Participated Loans, the percentage obtained by dividing the Participation Principal Amount -6- specified in the related Notice of Sale by the Aggregate Loan Principal Amount specified in such Notice of Loan Sale. "Percentage" means, relative to any Participant, the percentage set forth ---------- on Schedule I or set forth in an Assignment Notice or Adjustment Date ---------- Certificate, as such percentage may be adjusted from time to time pursuant to subsequent Assignment Notices or Adjustment Date Certificates. "Person" means any legal person, including any individual, corporation, ------ partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Purchase Price" means an amount equal to the Participation Share -------------- multiplied by the outstanding Principal Amount for such Loan, as listed on each ---------------- Notice of Loan Sale, payable in United States dollars in same day funds ratably and severally by each Participant based on its Percentage. "Rating Agency" means Duff & Phelps, Moody's, S&P or any other nationally ------------- recognized credit rating agency and any of their respective successors in interest. "Reference LIBO Rate" means, on any day, the higher of ------------------- (a) the rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) reported on the date two Business Days prior to such day as of 11:00 a.m., London time, on Telerate Access Service Page 3750 (British Bankers Associate Settlement Rate) as the London Interbank Offered Rate for Dollar deposits having a term of one month in an amount approximately equal to the amount of the Participated Loans (or if said Page shall cease to be publicly available, as reported by any publicly available source of similar market data selected by the Agent that in the Agent's reasonable judgment, accurately reflects such London Interbank Offered Rate), and (b) the Agent's actual cost of obtaining funds for lending, as determined in good faith by the Agent and notified by the Agent to FMAC and the Participants. "Reference Period" means the period beginning on the 15th day (or if such ---------------- day is not a Business Day, the next following Business Day) of each month, and ending on (but excluding) the 15th day (or if such day is not a Business Day, the next following Business Day) of the next following month. "Related Documents" means this Agreement, each of Loan Sale, the ----------------- Custodial Agreement, each Assignment Notice, each Adjustment Date Certificate, and each other agreement or instrument (other than a Loan Document) delivered by the Seller in connection with this Agreement. -7- "Remittance Date" is defined in Section 4. --------------- --------- "S&P" means Standard & Poor's Rating Corporation, a division of McGraw --- Hill, Inc., or its successors in interest. "Seller" is defined in the preamble. ------ -------- "Servicer" means FMAC, in its capacity as the Servicer under the Servicing -------- Agreement. "Servicing Agreement" means the Servicing Agreement, dated as of the date ------------------- hereof between the Servicer and the Agent, attached hereto as Exhibit B. --------- "Servicing Fee Rate" is defined in the Servicing Agreement. ------------------ "Termination Fee" means 0.25% multiplied by the Facility Amount immediately --------------- prior to the termination of this Agreement pursuant to Section 15. ---------- "Underwriting Guidelines" means the underwriting guidelines of the Sellers ----------------------- attached hereto as Exhibit C, together with such modifications thereto as may be --------- approved by the Agent. SECTION 2. Conditions Precedent to Effectiveness of this Agreement. The ------------------------------------------------------- effectiveness of this Agreement is subject to the satisfaction of each of the following conditions precedent: (a) The Seller shall have delivered to the Agent for each of the Participants (i) copies of a letter from FMAC substantially in the form of Exhibit E attached hereto and (ii) evidence of the creation of the Non- --------- Performing Loan Bond in favor of the Participants. (b) The Seller shall have executed and delivered the Custodial Agreement. (c) The Seller shall have delivered to the Participants an opinion of counsel as to such matters as the Agent may reasonably request. (d) The Seller shall have paid all fees then due pursuant to the Fee Letter. SECTION 3. Selling and Purchasing Participations. ------------------------------------- (a) Agreement to Purchase and Sell. On the terms and subject to the ------------------------------ conditions of this Agreement, from time to time on any Business Day occurring prior to the occurrence of a Termination Event, each Participant agrees to purchase Participations in Loans equal to such Participant's Percentage of the Aggregate Loan Principal Amount offered by the Seller on -8- such day. On the terms and subject to the conditions hereof, the Seller may from time to time sell and repurchase Participations. No repurchase of any Participation by the Seller shall cause a reduction in the Facility Amount. (b) Participants Not Permitted or Required To Purchase Participations. No ----------------------------------------------------------------- Participant shall be permitted or required to purchase any Participation in any Loan if, (i) after giving effect to all Participations to be purchased on such date, the aggregate outstanding principal amount of all Participated Loans would exceed the Facility Amount; (ii) a Loan Suspension Event with respect to such Loan shall have occurred and be continuing; or (iii) a Facility Suspension Event shall have occurred and be continuing. No Loan Suspension Event or Facility Suspension Event shall relieve FMAC of its obligations under Section 4 of this Agreement. --------- (c) Procedures for Sale and Purchase of Participations. FMAC may, in its -------------------------------------------------- sole discretion, by a notice in writing to the Agent not later than 3:00 p.m. (New York City time) two Business Days prior to the proposed date of sale, offer to sell to the Participants a Participation in a Loan or group of Loans. Each such offer in respect of Participations in any Loan shall specify (i) the name of the Borrower in respect of such Loan, (ii) the Aggregate Loan Principal Amount of the Loans being offered, (iii) the Maturity Date of each such Loan, (iv) the Participation Principal Amount, and (v) the applicable Participation Share. (d) Acceptance of Offer. The Agent shall promptly notify each Participant ------------------- of each such offer. Subject to the terms and conditions hereof, the Participants shall be deemed to have accepted such offer on the second Business Day after the Agent's receipt of such offer. Not later than 11:00 a.m. (New York City time) on such second Business Day, each Participant shall deposit with the Agent immediately available funds in an amount equal to such Participant's Percentage of the Purchase Price. Such deposit will be made to an account which the Agent shall specify from time to time by notice to the Participants. To the extent funds are received from the Participants, the Agent shall make such funds available to the Seller by wire transfer to the account the Seller shall specify from time to time to the Agent. -9- No Participant's obligation to purchase any Participation shall be affected by any other Participant's failure to purchase a Participation. (e) When FMAC receives from any Participant such Participant's Percentage of the Purchase Price for a Participation, FMAC shall have sold to such Participant, and such Participant shall have purchased from FMAC a Participation in each Loan described in such Notice of Loan Sale to the extent of such Participant's Percentage. FMAC will deliver to each such Participant a Notice of Loan Sale by telecopy transmission, containing the terms of the Participation and evidencing the Participation(s) sold to such Participant. SECTION 4. Payments of Principal, Interest and Fees. (a) When FMAC receives ---------------------------------------- a scheduled payment or prepayment of principal or interest (not including Late Payment Charges and assumption fees or expenses, which shall belong to the Servicer, but which shall not be paid out of such above-referenced amounts) ("Available Funds"), in respect of a Participated Loan, FMAC shall accept the --------------- amounts of such payments or collections to which the Participants are entitled pursuant to this Section 4 in trust for the Participants. --------- (b) On the 15th day of each month (or if such date is not a Business Day, on the Business Day immediately following such date) (the "Remittance Date"), --------------- FMAC shall pay to the Agent for the ratable account of each Participant an amount equal to the Participation the sum of: (i) with respect to all scheduled payments of principal of each Participated Loan, the Participation Share of such scheduled principal payments, whether or not the Seller has actually received such scheduled payments; (ii) with respect to all unscheduled and/or voluntary payments of ---------------------------- principal of each Participated Loan, the Participation Share of such ------------ scheduled principal payments, but only to the extent actually received by the Seller; (iii) interest accrued for each day of the Reference Period on the outstanding principal amount of the related Participated Loans, at the Reference LIBO Rate for such day plus the Applicable Margin, whether or not the Seller has actually received such interest payments with respect to any Participated Loan; and (iv) the Participation Share of all other remaining Available Funds (other than any Available Funds relating to principal of or interest on the Participated Loans), if any, but only to the extent actually received by the Seller. All remittances to the Participants in respect of principal shall be applied to reduce the outstanding principal amount of the Participants' related Participation. All funds held by or for the account of FMAC with respect to the Participated Loans which have been received as of any Remittance Date and which are in excess of the amounts required to be paid to the Participants pursuant to this clause (b) shall, immediately after such payment to the ---------- -10- Participants, be released to FMAC. Nothing shall contained in this Agreement shall limit the recourse of any Participant against the Seller and its assets for the payment of the amounts due under this Section. (c) FMAC shall pay to the Agent for the ratable account of each Participant the Commitment Fee, payable monthly in arrears on each Remittance Date. SECTION 5. Method of Payments. All payments required to be made by the ------------------ parties to this Agreement shall be made in accordance with such instructions as each party may from time to time deliver to the other party in writing, by telex or by telecopy transmission. SECTION 6. Representations and Warranties. Each of the Participants, ------------------------------ FMAC and ICI represents and warrants to the other, which representations shall be deemed repeated on each instance of sale of a Participation to the Participants, that this Agreement has been duly authorized, and the execution, delivery and performance hereof has been duly executed and delivered and constitutes the valid and binding obligation of such party enforceable against such party in accordance with its terms. Each of the Participants and FMAC further represents that it is not insolvent and will not be rendered insolvent as a result of the purchase of the Participations by such Participant, and such Participant has not purchased, and FMAC has not sold, the Participations with any intent to hinder, delay or defraud any of its creditors. ICI further represents and warrants that there has been no material adverse change in the financial condition of FMAC or ICI since the date of the financial statements most recently delivered to the Participants pursuant to Section 8(b). ------------ SECTION 7. Loan Representations. (a) FMAC hereby represents and warrants -------------------- that with respect to a particular Loan, at the time any Participant purchases a Participation in such Loan pursuant to Section 3: --------- (i) The information pertaining to the Loan set forth in the Notice of Loan Sale is true and correct in all material respects as of the date or dates such information was furnished. (ii) Immediately prior to the sale of the Participation in the Loan pursuant hereto, FMAC owned full legal and equitable title to the Loan, free and clear of any lien or participation which represents any ownership interest in favor of any other party, except with the consent of the Agent (acting at the direction of the Majority Participants). As of the date of purchase of a Participation in each Loan pursuant to Section 3, each Participant shall be a legal owner of that Loan and, to --------- the extent of the Participation sold and such Participant's Percentage, the beneficial owner of that Loan, free and clear of any adverse claim. (iii) The Loan was underwritten in accordance with the Underwriting Guidelines. Such underwriting guidelines are no less restrictive than the underwriting -11- guidelines relating to similar pools of loans which, when securitized, have previously received an investment grade rating from a Rating Agency. In the event that any of the foregoing representations and warranties of FMAC shall prove to have been untrue in any material respect on and as of the date on which any Participant purchases a Participation pursuant to Section 3 (a --------- "Breached Representation") with respect to any Loan (an "Ineligible Loan"), FMAC ----------------------- --------------- and each Participant agree to promptly notify each other thereof. FMAC has 90 days from discovery of such breach or from receipt of notice from any Participant of discovery of such breach to cure such Breached Representation before FMAC must purchase such Ineligible Loan; provided, however, that FMAC -------- ------- shall use its best efforts to cure such Breached Representation prior to the expiration of the related Call Period. Such 90 day cure period may extend beyond the expiration of the related Call Period if FMAC so requests and the Majority Participants grant their consent. (b) FMAC agrees that in the event it originates a Loan other than in accordance with its underwriting guidelines FMAC shall deliver a written notice and description of such deviation to the Participants prior to the delivery of a Notice of Loan Sale. If the Agent consents to such deviations, the Participants shall purchase a Participation in such a Loan; provided, however, if any -------- ------- Participant shall not have so consented within two Business Days from receipt of FMAC's notice, it shall be deemed to have rejected FMAC's offer to sell the related Participation in such Loan. (c) Each Participant further agrees that FMAC, in its capacity as Servicer, shall retain sole discretion with respect to the enforcement of any Performance Guarantees under the Loan Documents; provided, however, that the Agent, acting -------- ------- at the direction of the Majority Participant, shall have sole discretion with respect to the enforcement of any Performance Guarantees in accordance with the Loan Documents for any Loans with respect to which the Call Period has expired. SECTION 8. Covenants. --------- (a) Covenants of FMAC. ----------------- (i) FMAC hereby covenants and agrees to file, or cause to be filed, at FMAC's sole cost and expense (A) all financing statements on Form UCC-1, and (B) all Mortgage assignments and assignments of Leasehold Mortgages as are customarily required to perfect a security interest in the Participated Loans, except in those jurisdictions where such filings would subject FMAC to an unreasonably high fee or tax such that it would not be prudent to execute such filings, and to cause confirmation copies thereof to be delivered to the Participants. -12- (ii) FMAC hereby covenants and agrees to provide to the Custodian all financing statement assignments on Form UCC-3, in form suitable for filing. (iii) FMAC will furnish the Participants with copies of the Loan Documents as requested. Upon any Participant's request, FMAC will, from time to time, furnish such Participant with copies of financial statements and other documents that FMAC receives from the Borrowers in connection with the Loans. FMAC agrees to furnish to each Participant (i) on a monthly basis, copies of pool performance and aging analysis reports relating to the Participations in Participated Loans, (ii) on a weekly basis, a facility pipeline report and (iii) from time to time, such other reports as may be mutually agreed upon by FMAC and the Majority Participants. (iv) FMAC agrees to give each Participant prompt notice of the occurrence of any default under the Loan Documents of which FMAC shall have actual knowledge. (v) FMAC agrees to maintain such licenses and/or registrations in good standing the lapse of which would have a material adverse impact on the Participants' interest in any Participations or on FMAC's ability to securitize the Loans. (vi) FMAC agrees to provide the Participants with notice of any material adverse change in the criteria of the Rating Agencies with respect to securities backed by the Loans or with respect to securities or loans with substantially similar characteristics and of substantially similar quality. (vii) FMAC will continue to originate loans in accordance with the Underwriting Guidelines. FMAC shall notify the Participants in writing in the event that there are any material alterations to such underwriting guidelines. Notwithstanding any provision of this Agreement to the contrary, the Participant's shall not be obligated to purchase any Participations in Loans originated in accordance with such altered underwriting guidelines, unless the Agent shall have consented to such alterations (or acquired without the consent of the Agent). (viii) FMAC agrees to have the Non-Performing Loan Bond issued in favor of the Agent for the benefit Participants. The sum of the face amount of the Bond L/C plus any cash on deposit in the Bond Account shall be 5% of the Facility ---- Amount. The Seller hereby grants to the Participants for their ratable benefit a continuing security interest in all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter maintained with or otherwise held in the Bond Account. The ratable rights of each Participant in the Non-Performing Loan Bond shall be assignable by such Participant in connection with the transfer of Participations pursuant to the terms of this Agreement. The Agent, acting at the direction of the Majority Participants shall have the right (A) to draw upon the Bond L/C; or -13- (B) to appropriate and apply funds on deposit in the Bond Account upon default by the Seller in its payment obligations pursuant to Section 4(b) ------------ or upon default of the Seller's repurchase obligations under Section 11(b). ------------- Draws upon the Non-Performing Loan Bond will not be replenished. FMAC shall be entitled to any interest accrued on the Bond Account. Upon termination of this Agreement and payment in full of all obligations of the Seller with respect to the Participations, any part of the Bond Account that is not applied pursuant to the terms of this Agreement shall be returned and/or remitted to FMAC, and the Bond L/C shall be cancelled and returned to the Seller. (ix) FMAC agrees to indemnify and hold harmless the Agent and each Participant and their respective directors, officers, employees, agents and any affiliate thereof (the "Indemnitees") from and against any and all liabilities, ----------- losses, damages or expenses of any kind or nature and from any and all suits, claims or demands (including, without limitation, in respect of or for reasonable attorney's fees and other expenses) arising on account of or in connection with any matter or thing, arising out of or relating to the Loans or the Participations, including without limitation any use by FMAC of any proceeds of the sales of Participations or any use by any Borrower of the proceeds of the Loans, except to the extent such liability arises from the willful misconduct or gross negligence of the Indemnitees. (x) FMAC or an affiliate thereof shall provide the Participants with the benefits of an interest rate hedge with respect to each Participation purchased by the Participants. With respect to each Participation, such hedge shall be accomplished through the payment by FMAC or its affiliates ratably to the Participants, within one Business Day of the later of (i) the day on which the Call Period with respect to any such Participation expires and (ii) if applicable, the date on which FMAC's cure period, as described in Section 7(a), ------------ with respect to any Loan related to such Participation expires (the "Hedge ----- Calculation Date"), the "Hedge Amount." The Hedge Amount for a particular - ---------------- Participation shall be the amount in dollars calculated using the following formula: (Price (A) - Price (B)) x (outstanding Participation Principal Amount as of related Hedge Calculation Date) where A = the interpolated yield for U.S. Treasury securities with a maturity equal to the weighted average life of the Loan or Loans underlying such Participation, calculated as of the date of origination (or acquisition) of such Loan or Loans B = the interpolated yield for U.S. Treasury securities with a maturity equal to the remaining term to maturity of U.S. Treasury -14- securities having the initial maturity described in A above, calculated as of the related Hedge Calculation Date Price(A) = the price, expressed as a percentage of the notional face amount of U.S. Treasury securities, calculated based on the interpolated yield and the maturity described in A Price(B) = the price, expressed as a percentage of the notional face amount of U.S. Treasury securities, calculated based on the interpolated yield and the maturity described in B If the Hedge Amount is less than or equal to zero, then the Hedge Amount shall be deemed to equal zero dollars. This transfer payment from FMAC to Participant is intended solely to provide the Participants with the benefits of an interest rate hedge with respect to each Participation. This hedge shall not be construed or applied in any manner as a payment to cover any losses of any kind which may be suffered by the Participants in connection with their purchase and ownership of Participations other than losses due to adverse fluctuations in interest rates. (xi) FMAC agrees that, except for transfers to its affiliates, as long as any Participant owns a Participation in a particular Loan, it will not sell, assign, convey or otherwise dispose of, or create or permit to exist any participation, encumbrance, lien or security interest upon all or any part of, its beneficial ownership interest in such Loan without the prior written consent of the Agent acting at the direction of the Majority Participants. (b) Covenants of ICI. ---------------- (i) ICI agrees to furnish to the Participants copies of its consolidated audited annual financial statements within 90 days of its fiscal year end and its consolidated unaudited quarterly financial statements within 60 days of the end of the related fiscal quarter. (ii) ICI agrees at all times relevant to this Agreement to own, directly or indirectly, a majority of the outstanding membership interests having by the terms thereof ordinary voting power to elect all of the Managers of FMAC. SECTION 9. Agreements of the Participants. Each Participant acknowledges ------------------------------ that it will, independently and without reliance upon FMAC or ICI, except as provided herein, and based on such financial statements and other documents and information as such Participant deems appropriate, make its own credit analysis and decision to enter into this Agreement. Each Participant also acknowledges that it will, independently and without reliance upon FMAC or ICI and based on such documents and information as such Participant deems appropriate at the time, continue to make its own credit decisions with respect to this Agreement. -15- SECTION 10. ICI Guaranty. ICI, as Guarantor hereunder, hereby guarantees to ------------ the Agent and each Participant the performance of all of FMAC's obligations under this Agreement if FMAC does not perform any such obligations in a timely manner and the Agent, acting at the direction of the Majority Participants, provides Guarantor with a written demand specifying the nature of FMAC's failure and demanding ICI to perform in lieu thereof. The Guarantor's obligations under this Section 10 shall terminate when all of FMAC's obligations to the Agent and ---------- the Participants under this Agreement have been satisfied in full. SECTION 11. Optional and Mandatory Repurchase. --------------------------------- (a) Optional Repurchase. Each Participant hereby grants to FMAC an ------------------- irrevocable option to repurchase such Participant's Participation Share for any or all Participated Loans at any time upon 2 Business Days' prior written notice during the Call Period applicable to such Participated Loan. The exercise price of the option with respect to each repurchased Loan shall be the Participation Share multiplied by 100% of the then-outstanding Principal Amount for such Participated Loan plus all accrued but unpaid amounts due to the Participants pursuant to Section 4 for such portion of such month the Participation was --------- outstanding. (b) Mandatory Repurchase. FMAC shall immediately -------------------- (i) upon notice by the Agent, acting at the direction of the Majority Participants, repurchase each Participation in any Ineligible Loan, if FMAC has not cured such Breached Representation and such Loan remains an Ineligible Loan beyond the end of the applicable cure period described in Section 7(a), ------------ (ii) repurchase each Participation on the last day of the Call Period relating thereto, (iii) immediately and without further action, repurchase each Participation upon the occurrence of an Event of Default described in clause (f) or (g) of the definition of Event of Default, ---------- --- (iv) upon notice from the Agent acting at the direction of the Majority Participants, repurchase each Participation upon the occurrence of any other Event of Default, in each case, at a price equal to the Purchase Price for such Loan(s), together with all accrued but unpaid amounts thereon to the date of payment. SECTION 12. FMAC as Servicer. FMAC agrees and acknowledges that the Agent, ---------------- acting at the direction of the Majority Participants, may replace or cause to be replaced FMAC as Servicer of any Loan upon the occurrence of an Event of Default. -16- SECTION 13. Custody of Loan Documents; Appointment of Company as Agent. ---------------------------------------------------------- The Loan Documents for any Loan which has had a Participation Share sold to any Participant will be held in custody by the Custodian pursuant to the Custodial Agreement. FMAC shall notify the Custodian that each Participant is a Beneficial Owner (as defined thereunder). Each Participant shall have all the rights of a Beneficial Owner under the Custodial Agreement. SECTION 14. Servicing of the Loans. The Loans will be serviced in the ---------------------- manner set forth in the Servicing Agreement. FMAC shall not, without the Participant's prior written consent, agree to the modification or waiver of any of the terms of the Loan Documents, consent to any action or failure to act by the Borrower, or exercise any rights (other than the right to collect payments) which FMAC may have in respect of the Loans or under the Loan Documents, including but not limited to any agreement, consent or exercise of rights which would (i) reduce the principal amount of or rate of interest on the Loans of which any Participant is entitled to receive a Participation Share under this Agreement, (ii) postpone any date fixed for any payment of principal of or interest on the Loans, (iii) release any Loan Collateral or security interest thereon except as otherwise contemplated in the Loan Documents or (iv) release the Borrower, any guarantor, or any other party primarily or secondarily liable under any Loan, or permit an assignment of the obligations of the Borrower. SECTION 15. Termination; Termination Fee. This Agreement shall expire one ---------------------------- year less a day from the date hereof (the "Expiration Date"). This Agreement --------------- shall be renewable upon the mutual consent of the parties hereto for subsequent terms to be determined. FMAC may terminate this Agreement at any time upon 15 days' written notice to the Agent and the Participants. If such termination is effective prior the Expiration Date, the Seller shall pay to the Agent for the ratable benefit of the Participants the Termination fee on the date specified for the termination of this Agreement. SECTION 16. Security Interest. The parties intend that all transactions ----------------- hereunder be sales and purchases of Participations and not loans by the Participants. Solely as security for the performance by FMAC of its obligations under Section 4 in connection with Participations owned by the Participants and --------- solely to the extent of the Participant's Participation Share in the related Loan or Loans, FMAC shall be deemed to have pledged and to have granted to the Agent for the ratable benefit of the Participants a security interest in all of the Loan Documents related to all Participations purchased by the Participants hereunder and all proceeds thereof. Such security interest shall be deemed to be released to the extent of the repurchase of any Participation by the Seller pursuant to Section 11. ---------- SECTION 17. Notices and Payments. All notices and other communications -------------------- provided for under this Agreement shall be in writing (including telegraphic, telex, telecopy or cable communications), unless otherwise specified, and shall be deemed sent to the Agent and to FMAC if sent to the addresses or telecopy numbers set forth below (or such other address or telecopy number as the Agent or FMAC may designate in writing). -17- To the Agent (two notices): Banco Santander, New York Branch 45 East 53rd Street New York, New York 10022 Attn: Mark A. Voltmann, Vice President Telephone: (212) 350-3683 Telecopy: (212) 350-3690 And to: Attn: Ligia Castro, Loan Department Telephone: (212) 350-3677 Telecopy: (212) 350-3690 To FMAC: Franchise Mortgage Acceptance Company, L.L.C. 600 Steamboat Road Greenwich, CT 06830 Attn: Wayne Knyal, President Telephone: (203) 622-5688 Telecopy: (203) 622-1834 with a copy to: Imperial Credit Industries, Inc. 3701 Skypark Drive Building 6 Suite 130 Torrance, CA 90505 Attn: Wayne Snavely Telephone: (310) 791-8222 Telecopy: (310) 791-8226 SECTION 18. The Agent. --------- (a) Actions. Each Participant hereby appoints Banco Santander, New York ------- Branch, as its Agent under and for purposes of this Agreement and each other Related Document. Each Participant authorizes the Agent to act on behalf of such Participant under this Agreement and each other Related Document and, in the absence of other written instructions from the Majority Participants received from time to time by the Agent (with respect to which the Agent agrees that it will comply, except as otherwise provided in this Section or as otherwise advised by counsel), to exercise such powers hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. Each Participant hereby indemnifies (which indemnity shall survive any termination of this Agreement) the Agent, pro rata according to --- ---- -18- such Participant's Percentage, from and against any and all liabilities, obligations, losses, damages, claims, costs or expenses of any kind or nature whatsoever which may at any time be imposed on, incurred by, or asserted against, the Agent in any way relating to or arising out of this Agreement and any other Related Document, including reasonable attorney's fees, and as to which the Agent is not reimbursed by the Seller; provided, however, that no -------- ------- Participant shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, claims, costs or expenses which are determined by a court of competent jurisdiction in a final proceeding to have resulted solely from the Agent's gross negligence or wilful misconduct. The Agent shall not be required to take any action under this Agreement or under any other Related Document, or to prosecute or defend any suit in respect of this Agreement or any other Related Document, unless it is indemnified hereunder to its satisfaction. If any indemnity in favor of the Agent shall be or become, in the Agent's determination, inadequate, the Agent may call for additional indemnification from the Participants and cease to do the acts indemnified against hereunder until such additional indemnity is given. (b) Funding Reliance, etc. Unless the Agent shall have been notified by --------------------- telephone, confirmed in writing, by any Participant by 5:00 p.m. (New York City time) on the day prior to a sale of a Participation that such Participant will not make available the amount which would constitute its Percentage of the applicable Purchase Price on the date specified therefor, the Agent may assume that such Participant has made such amount available to the Agent and, in reliance upon such assumption, make available to the Seller a corresponding amount. If and to the extent that such Participant shall not have made such amount available to the Agent, such Participant and the Seller severally agree to repay the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date the Agent made such amount available to the Seller to the date such amount is repaid to the Agent, at the Reference LIBO Rate. (c) Exculpation. Neither the Agent nor any of its directors, officers, ----------- employees or agents shall be liable to any Participant for any action taken or omitted to be taken by it under this Agreement or any other Related Document, or in connection herewith or therewith, except for its own wilful misconduct or gross negligence, nor responsible for any recitals or warranties herein or therein, nor for the effectiveness, enforceability, validity or due execution of this Agreement or any other Related Document, nor for the creation, perfection or priority of any security interests purported to be created by any of the Related Documents, or the validity, genuineness, enforceability, existence, value or sufficiency of any collateral security, nor to make any inquiry respecting the performance by the Seller of its obligations hereunder or under any other Related Document. Any such inquiry which may be made by the Agent shall not obligate it to make any further inquiry or to take any action. The Agent shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which the Agent believes to be genuine and to have been presented by a proper Person. -19- (d) Successor. The Agent may resign as such at any time upon at least 30 --------- days' prior notice to the Seller and all Participants. If the Agent at any time shall resign, the Majority Participants may appoint another Participant as a successor Agent which shall thereupon become the Agent hereunder. If no successor Agent shall have been so appointed by the Majority Participants, and shall have accepted such appointment, within 30 days after the retiring Agent's giving notice of resignation, then the retiring Agent may, on behalf of the Participants, appoint a successor Agent, which shall be one of the Participants or a commercial banking institution organized under the laws of the United States (or any State thereof) or a United State branch or agency of a commercial banking institution, and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall be entitled to receive from the retiring Agent such documents of transfer and assignment as such successor Agent may reasonably request, and shall thereupon succeed to and become vested with all rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation hereunder as the Agent, the provisions of (i) this Section 18 shall inure to its benefit as to any actions ---------- taken or omitted to be taken by it while it was the Agent under this Agreement; and (ii) Section 18(c) and Section 18(d) shall continue to inure to its ------------- ------------- benefit. (e) Loans by Banco Santander. Banco Santander shall have the same rights ------------------------ and powers with respect to (x) the Loans made by it or any of its affiliates, and (y) the Notes held by it or any of its Affiliates as any other Participant and may exercise the same as if it were not the Agent. Banco Santander and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Seller or any Subsidiary or Affiliate of the Seller as if Banco Santander were not the Agent hereunder. (f) Credit Decisions. Each Participant acknowledges that it has, ---------------- independently of the Agent and each other Participant, and based on such Participant's review of the financial information of the Seller, this Agreement, the other Related Documents (the terms and provisions of which being satisfactory to such Participant) and such other documents, information and investigations as such Participant has deemed appropriate, made its own credit decision to enter into this Agreement. Each Participant also acknowledges that it will, independently of the Agent and each other Participant, and based on such other documents, information and investigations as it shall deem appropriate at any time, continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement or any other Related Document. (g) Copies, etc. The Agent shall give prompt notice to each Participant of ----------- each notice or request required or permitted to be given to the Agent by the Seller pursuant to the terms of this Agreement (unless concurrently delivered to Participants by the Seller). The Agent will distribute to each Participant each document or instrument received for its account and -20- copies of all other communications received by the Agent from the Seller for distribution to the Participants by the Agent in accordance with the terms of this Agreement. SECTION 19. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of New York. SECTION 20. Waivers, Amendments, etc. The provisions of this Agreement ------------------------ and of each other Related Document may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by the Borrower and the Majority Participants; provided, however, that no such -------- ------- amendment, modification or waiver which would (a) modify any requirement hereunder that any particular action be taken by all the Participants or by the Majority Participants shall be effective unless consented to by each Participant; (b) modify this Section 20, change the definition of "Majority ---------- Participants", increase the Facility Amount or the Percentage of any Participant (except pursuant to an Adjustment Date Certificate), reduce any fees described in Section 4(c), release any collateral security, ------------ except as otherwise specifically provided in any Loan Document or extend the Expiration Date shall be made without the consent of each affected Participant; (c) extend the due date for, or reduce the amount of, any scheduled repayment or prepayment of principal of or interest on any Loan (or reduce the principal amount of or rate of interest on any Loan) shall be made without the consent of the applicable Participant; or (d) affect adversely the interests, rights or obligations of the Agent as Agent shall be made without consent of the Agent. No failure or delay on the part of the Agent or any Participant in exercising any power or right under this Agreement or any other Related Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Borrower in any case shall entitle the Borrower to any notice or demand in similar or other circumstances. No waiver or approval by the Agent or any Participant under this Agreement or any other Related Document shall, except as may be otherwise stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. -21- SECTION 21. Entire Agreement. This Agreement and each other Related ---------------- Document constitute the entire understanding amount the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. SECTION 22. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall for all purposes be deemed to be an original and all of which shall together constitute but one and the same instrument. SECTION 23. Confidentially. Each of the Seller, the Agent and the -------------- Participants agree that they will not disclose without the prior consent of the Seller and the Agent (other than (a) to any current or prospective Assignee Participants, Participants and any directors, trustees, employees, auditors, agents, counsel, members of the finance or investment committees thereof, who are aware of the confidential nature thereof and agree to be bound by the terms of this Section, or (b) as otherwise agreed by the Seller and the Agent in writing) any information with respect to the Seller or any Subsidiary of the Seller which has been or will be furnished (i) in connection with the preparation of the Information Memorandum, (ii) in the Disclosure Schedule, (iii) pursuant to the terms of this Agreement, or (iv) otherwise provided by the Seller; provided, -------- however, that it may disclose any such information (A) as has become generally - ------- available to the public, (B) to the extent required in any report, statement or testimony submitted to any regulatory body having or reasonably claiming to have jurisdiction over it, (C) as part of a judicial proceeding, and (D) to the extent required in order to comply with any law, order, regulation or ruling applicable to it. SECTION 24. Assignment by FMAC. FMAC may assign its rights and obligations ------------------ under this Agreement only with the prior written consent of all of the Participants. SECTION 25. Assignments by Participants. Any Participant, upon 10 days --------------------------- notice to, and with the prior written consent of (such consent not to be unreasonably withheld), the Seller and the Agent, may assign and delegate to any financial institution (each such assignee financial institution, an "Assignee -------- Participant"), all or any fraction of such Participant's Percentage of the - ----------- Facility Amount in a minimum amount of $10,000,000 together with a ratable portion of such Participant's Percentage of the aggregate outstanding principal amount of the Participated Loans; provided, however, that, the Seller and the -------- ------- Agent shall be entitled to continue to deal solely and directly with such Participant in connection with the interests so assigned and delegated to an Assignee Participant until such assigning Participant and such Assignee Participant shall have executed and delivered to the Seller and the Agent an Assignment Notice. From and after the date that such Assignment Notice is delivered to the Seller and the Agent, (x) such Assignee Participant shall be deemed automatically to have become a party hereto and to the extent that rights and obligations hereunder have been -22- assigned and delegated to such Assignee Participant in connection with such Assignment Notice, shall have the rights and obligations of a Participant hereunder and under the other Related Documents, and (y) the assignor Participant, to the extent that rights and obligations hereunder have been assigned and delegated by it in connection with such Assignment Notice, shall be released from its obligations hereunder. SECTION 26. Additional Participants. ----------------------- (a) Applicant Participants. At any time and from time to time prior to ---------------------- the Expiration Date, any commercial lending institution (an "Applicant --------- Participant") may, by notice to the Agent, indicate its desire to become an - ----------- Additional Participant hereunder on the next succeeding Adjustment Date. At such time, such Applicant Participant shall notify the Agent of such Applicant Participant's proposed portion of the Increased Facility Amount (effective after the occurrence of such Adjustment Date). The Agent shall, in its sole discretion, allocate the Increased Facility Amounts among the Applicant Participants. The Agent shall inform the Seller of the identity of each Applicant Participant and its proposed portion of the Increased Facility Amount. The Agent may, in its sole discretion, increase the Facility Amount to $50,000,000, any further increases to the Facility Amount shall require the prior consent of the Seller. (b) Notification of Adjustment Date. The Agent shall give each Applicant ------------------------------- Participant and the Seller at least three Business Days' prior notice of (i) the Agent's selection of Applicant Participants which will become Additional Participants; (ii) its allocation of the Increased Facility Amount among such Applicant Participants; and (iii) the date (the "Adjustment Date") on which the Agent --------------- proposes that one or more selected Applicant Participants shall become parties hereto and Additional Participants hereunder. (c) Adjustment Procedures. On each Adjustment Date, each Applicant --------------------- Participant selected to become an Additional Participant on such date shall pay to the Agent an amount (which amount shall be deemed to be a substitution of Participation interests in the Participated Loans by such Applicant Participant) equal to such selected Applicant Participant's allocated Percentage of the then outstanding principal amount of all Participated Loans. Such payment shall be made to the Agent, on or before 11:00 a.m. in immediately available funds to such account as the Agent shall specify. Promptly upon receipt of such funds, the Agent shall remit to each existing Participant its share of such funds, and, upon receipt of such funds, each such existing Participant's Percentage shall be appropriately reduced. -23- (d) Status. Immediately upon each selected Applicant Participant ------ purchasing its Participation in accordance with Section 26(c), such institution ------------- shall become a party hereto and an Additional Participant hereunder and be entitled to all rights and subject to all obligations of an Additional Participant hereunder. To confirm the status of each Additional Participant as a party to this Agreement, the Seller, the Agent and each Additional Participant shall, on the Adjustment Date (which date shall be inserted by the Agent in the space below such Additional Participant's signature on the Adjustment Date Certificate opposite the caption "Adjustment Date"), execute and deliver an Adjustment Date Certificate, which certificate shall set forth, among other things, administrative information for such Additional Participant, each existing Participant's adjusted Percentage, the amount of such Additional Participant's Revolving Commitment Amount and such Additional Participant's Percentage. Promptly after the occurrence of any Adjustment Date, a copy of the Adjustment Date Certificate executed and delivered on such date shall be delivered by the Agent to the Seller, and to each Participant. -24- IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. BANCO SANTANDER, NEW YORK BRANCH, as Participant ----------------------- Name: Mark A. Voltmann Title: Vice President ----------------------- Name: Title: FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., as Seller ----------------------- Name: Title: IMPERIAL CREDIT INDUSTRIES, INC. ----------------------- Name: Title: -25- SCHEDULE I ---------- PERCENTAGES -----------
Participant Percentage - --------------------------------------- --------------------------------------- Banco Santander, New York Branch....... 100.000000% ---------- Total.................................. 100.000000% ==========
EXHIBIT A [Name of Participant] Copy to: Banco Santander, New York Branch, as Agent Notice of Loan Sale ------------------- Franchise Mortgage Acceptance Company, L.L.C. ("FMAC") confirms it has ---- sold, transferred and conveyed to [name of Participant] (the "Participant") and ----------- the Participant has purchased from FMAC an undivided Participation interest in the Loan(s) to the Borrower described below upon the terms and conditions set forth in the Master Participation Agreement, dated as of November 22, 1995, as amended or supplemented (the "Agreement") among FMAC, Imperial Credit --------- Industries, Inc., and the participants parties thereto, and Banco Santander, New York Branch, as Agent. Details are as follows: Loan No.: Borrower: Borrower principals: Borrower Address: Borrower phone: Borrower Tax ID No.: Borrower fax: Date of Loan(s): Aggregate Loan Principal Amount: Participation Principal Amount: Participation Share: Date of Purchase: Date 270 days after Participation is bought: Maturity Date: General Loan Collateral Description: Additional Provisions: Deviations from underwriting guidelines: The Participation will be governed by the provisions of the Agreement. Capitalized terms not otherwise defined in this Notice of Loan Sale shall have the meanings given to them in the Agreement. In case of any conflicts between the terms of this Notice of Loan Sale and the Agreement, this Notice of Loan Sale shall govern. FMAC's payments to the Participant will be made in accordance with the provisions of the Agreement. Once fully executed by the Participant and FMAC, this Notice of Loan Sale shall evidence Participant's beneficial ownership in the Loan(s) described herein in accordance with the terms of the Agreement. FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C. By: -------------------------- Name: Title: BANCO SANTANDER, NEW YORK BRANCH, as Participant By: -------------------------- Name: Title: By: -------------------------- Name: Title: -2- EXHIBIT B [FORM OF SERVICING AGREEMENT] EXHIBIT C [UNDERWRITING GUIDELINES] EXHIBIT D FORM OF ADJUSTMENT DATE CERTIFICATE ----------------------------------- THIS ADJUSTMENT DATE CERTIFICATE (this "Certificate") is delivered pursuant ----------- to Section 26 of the Master Participation Agreement, dated as of June 9, 1995 ---------- (together with all amendments, if any from time to time made thereto, the "Agreement"), among FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a California --------- corporation (the "Seller"), the Participants parties thereto, and BANCO ------ SANTANDER, NEW YORK BRANCH ("Banco Santander"), as Agent. Unless otherwise defined herein, terms used herein have the meanings defined in the Agreement. Each of the undersigned hereby agrees and certifies that: 1. [Each] [The] Applicant Lending Institution listed below under the caption "Additional Participant" has indicated its desire to become an Additional Participant under the Agreement. 2. The date on which such Applicant Lending Institution shall become an Additional Participant is , 19 (the "Adjustment ----------------------------- -- ---------- Date"). - ---- 3. On the Adjustment Date, [the] [each] Applicant Lending Institution's Revolving Commitment Amount shall be equal to the respective amounts set forth in Schedule I hereto. ---------- 4. On the Adjustment Date, the Total Commitment Amount shall be equal to the amount set forth in Schedule I hereto. ---------- 5. On the Adjustment Date, [the] [each] Applicant Lending Institution's Percentage and Revolving Commitment Amount shall be equal to the respective percentage set forth in Schedule I hereto. ---------- 6. On the Adjustment Date, the adjusted Percentage and Revolving Commitment Amount of each Participant shall be equal to the respective percentage set forth in Schedule I hereto. ---------- 7. The administrative information for each Applicant Lending Institution is set forth in Schedule II hereto. ----------- -1- IN WITNESS WHEREOF, the undersigned have executed this Certificate as of the Adjustment Date set forth in Item 2. BANCO SANTANDER, NEW YORK BRANCH, as Agent By: --------------------- Title: By: --------------------- Title: ADDITIONAL PARTICIPANTS ----------------------- [NAME OF ADDITIONAL PARTICIPANT] By: --------------------- Title: Receipt Acknowledged on _____ __, 19__ FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C. By: --------------------- Title: -2- SCHEDULE I ADJUSTED COMMITMENT AMOUNTS AND PERCENTAGES
On and After the Adjustment Prior to Adjustment Date Date -------------------------- ---------------------------- Revolving Revolving Commitment Commitment Amount Percentage Amount Percentage ------------ ----------- ------------ ----------- Existing Participants Banco Santander, $ % $ % New York Branch [Other existing $ % $ % Participants] Additional Participants [Name(s) of $0 % $ % Additional ------------ ----------- ------------ ----------- Participant(s)] Total $ 100.00% $ 100.00% ============ =========== ============ ===========
SCHEDULE II ADMINISTRATIVE INFORMATION FOR APPLICANT LENDING INSTITUTIONS [Name] [Address] [Address] Telephone: ( ) Facsimile: ( ) Wire Instructions: Attention: -4- EXHIBIT E --------- FORM OF ASSIGNMENT NOTICE To: Franchise Mortgage Acceptance Company, L.L.C. [Address] Telecopy: Attention: To: Banco Santander, New York Branch, as Agent 45 East 53rd Street New York, New York 10022 Telecopy: 212-350-3690 Attention: Mark A. Voltmann and Manager, Loan Department FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C. --------------------------------------------- Ladies and Gentlemen: We refer to Section 25 of the Master Participation Agreement, dated as of ---------- November 22, 1995 (together with all amendments and other modifications, if any, from time to time thereafter made thereto, the "Agreement"), among Franchise --------- Mortgage Acceptance Company, L.L.C. (the "Seller"), the Participants parties ------ thereto, and Banco Santander, New York Branch, as agent for the Participants (the "Agent"). Unless otherwise defined herein or the context otherwise ----- requires, terms used herein have the meanings provided in the Agreement. This agreement is delivered to you pursuant to Section 25 of the Agreement ---------- and also constitutes notice to each of you of the assignment and delegation to _________________ (the "Assignee Participant") of ____% of the Percentage and -------------------- the aggregate principal amount of Loans in which ___________________ (the "Assignor") holds a Participation. After giving effect to the foregoing -------- assignment and delegation, the Assignor's and the Assignee Participant's Percentage for the purposes of the Agreement are as follows: -1-
Before Giving Effect to the After Giving Effect to the Assignment Assignment -------------------------------- ------------------------------- Aggregate Principal Aggregate Amount of Principal Participated Amount of Loans Participated Commitment Percentage Loans Percentage ---------------- -------------- --------------- -------------- Assignor $ % $ % Assignee Participant $ % $ %
[Add paragraph dealing with accrued interest and fees with respect to the Participated Loans assigned.] The Assignee Participant hereby acknowledges and confirms that it has received a copy of the Agreement and the exhibits related thereto, together with copies of the documents which were required to be delivered under the Agreement as a condition to the making of the Loans thereunder. The Assignee Participant further confirms and agrees that in becoming a Participant under the Agreement, such actions have and will be made without recourse to, or representation or warranty by the Agent. Except as otherwise provided in the Agreement, effective as of the date of acceptance hereof by the Agent (a) the Assignee Participant (i) shall be deemed automatically to have become a party to the Agreement, have all the rights and obligations of a "Participant" under the Agreement and the other Related Documents as if it were an original signatory thereto to the extent specified in the second paragraph hereof; (ii) agrees to be bound by the terms and conditions set forth in the Agreement and the other Related Documents as if it were an original signatory thereto; and (b) the Assignor shall be released from its obligations under the Agreement and the other Related Documents to the extent specified in the second paragraph hereof. -2- The Assignee Participant hereby advises each of you of the following administrative details with respect to the assigned Loans and Revolving Commitment and requests the Agent to acknowledge receipt of this document: (A) Institution Name: Address for Notices: Attention: Telephone: Telecopy: (B) Payment Instructions: This Agreement may be executed by the Assignor and Assignee Participant in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. [THE ASSIGNOR] By: ------------------------------ Title: [THE ASSIGNEE] By: ------------------------------ Title: Receipt Acknowledged on , 19 - -------------- --- -3- BANCO SANTANDER, NEW YORK BRANCH, as Agent By: --------------------- Title: By: --------------------- Title: Receipt Acknowledged on , 19 - --------- -- FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C. By: --------------------- Title: -4- EX-10.9 20 CREDIT AGREEMENT DATED FEBRUARY 28, 1997 Exhibit 10.9 CREDIT AGREEMENT THIS CREDIT AGREEMENT (the "Agreement") is made and dated as of the 28th day of February, 1997, by and among SANWA BANK CALIFORNIA ("Sanwa"), those other lenders from time to time party hereto (Sanwa and such other lenders being referred to herein individually as a "Lender" and, collectively, as the "Lenders"), SANWA, as agent for the Lenders (in such capacity, the "Agent"), and FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a limited liability company organized under the laws of the State of California (the "Company"). RECITALS A. The Company has requested that the Lenders extend credit to the Company in the form of a secured revolving credit facility and the Agent agree to act as credit agent and collateral agent for the benefit of the Lenders with respect thereto. B. The Company, the Agent and Lenders desire to enter into this Agreement to evidence the willingness of the Lenders to provide such credit facility and of the Agent to act on their behalf and to set forth the rights and obligations of the parties with respect to such credit facility. NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1. Revolving Loan Facility. ----------------------- 1(a) Lending Limit. On the terms and subject to the conditions set ------------- forth herein, the Lenders severally agree that they shall from time to time to but not including the Maturity Date (as that term and capitalized terms not otherwise defined herein are defined in Paragraph 11 below), make Loans (the ------------ "Loans" or a "Loan"), pro rate in accordance with their respective Percentage Shares, in an aggregate amount not to exceed at any one time outstanding the lesser of: (1) The Credit Limit; and (2) The Aggregate Collateral Value of the Borrowing Base; provided, however, that no Loan shall exceed at the funding date thereof the Collateral Value of the Related Program Contract. 1 1(b) Maintenance of Loans. Loans shall be maintained, at the election of -------------------- the Company made from time to time as permitted herein, as Reference Rate Loans and/or COF Rate Loans. 1(c) Calculation of Interest. The Company shall pay interest on Loans ----------------------- outstanding hereunder from the date disbursed to but not including the date of payment at a rate per annum equal to, at the option of and as selected by the Company from time to time (subject to the provisions of Paragraphs 1(e) and 1(f) --------------- ---- below): (1) with respect to each Loan which is a Reference Rate Loan, at a fluctuating rate per annum equal to the daily average Reference Rate during the applicable computation period, and (2) with respect to each Loan which is a COF Rate Loan, at the Applicable COF Rate for the applicable Interest Period. 1(d) Payment of Interest. Interest accruing on Reference Rate Loans shall ------------------- be payable monthly, in arrears, for each month no later than the fifth Business Day following delivery by the Agent to the Company of an interest billing for such Reference Rate Loans (which delivery may be telephonic and later confirmed in writing). Interest accruing on COF Rate Loans shall be payable, in arrears: (1) in the case of COF Loans with Interest Periods ending 30, 60, or 90 days from the date advanced, at the end of the applicable Interest Period therefor, and (2) in the case of COF Loans with the Interest Periods ending later than 90 days from the date advanced, at the end of each 90 day period from the date advanced and at the end of the applicable Interest Period therefor. Each such interest billing shall be deemed conclusively correct and accepted by the Company unless the Company otherwise notifies the Agent to the contrary within ten Business Days following the delivery of a written copy of such billing. 1(e) Election of Type of Loan: Conversion Options: Funding of Loans. -------------------------------------------------------------- (1) The Company may elect from time to time to have Loans funded by giving the Agent irrevocable notice of such election no later than 10:00 a.m. (Los Angeles time) on the requested funding date. The principal amount of each COF Rate Loan shall be in the minimum amount of $250,000.00 and whole multiples of $25,000.00 in excess thereof. The Company may elect from time to time to convert Loans outstanding as COF Rate Loans and Reference Rate Loans to the other type of Loan by giving the Agent irrevocable notice of such election no later than 10:00 a.m. (Los Angeles time) on the day of the requested conversion. Any conversion of COF Rate Loans may only be made on the last day of the applicable Interest Period. No Reference Rate Loan may be converted into a COF Rate Loan if an Event of Default or Potential Default has occurred and is continuing at the requested conversion date. All or any part of outstanding Loans may be converted as provided herein, provided that partial conversions shall be in a principal amount of $250,000.00 or whole multiples of $25,000.00 in excess thereof. (2) The Company may elect from time to time to have any COF Rate Loan continued as such upon the expiration of the Interest Period applicable thereto by giving the Agent irrevocable notice of such election no later than 10:00 a.m. (Los Angeles time) on the last day of such Interest Period; provided, however, that no 2 COF Rate Loan may be continued as such when any Event of Default or Potential Default has occurred and is continuing, but shall be automatically converted to a Reference Rate Loan on the last day of the Interest Period applicable thereto. The Agent shall notify the Company promptly that such automatic conversion will occur. If the Company shall fail to give notice of its election to continue a COF Rate Loan as such as provided above, the Company shall be deemed to have elected to convert the affected COF Rate Loan to a Reference Rate Loan on the last day of the applicable Interest Period. (3) Each request for the funding, continuation or conversion of a Loan shall be evidenced by the timely delivery by the Company to the Agent of a duly executed Loan Request (which delivery may be by facsimile transmission). (4) Upon receipt of a Loan Request for the funding of a new Loan, the Agent shall notify each Lender of such Lender's Percentage Share thereof no later than 10:30 a.m. (Los Angeles time) on the date such Loan Request is received by the Agent (said notice by the Agent to the Lenders to be given telephonically and confirmed by facsimile transmission). Each Lender shall make its Percentage Share of the proposed Loan available to the Agent, in same-day funds, on the funding date at the Contact Office of the Agent, ABA 122003516, for the Agent's Account #0493-24551, or such other account as the Agent shall designate no later than 12:00 noon (Los Angeles time). The failure of any Lender to advance its Percentage Share of a proposed Loan shall not relieve any other Lender of its obligation hereunder to advance its Percentage Share thereof, but no Lender shall be responsible for the failure of any other Lender to make any such advance. 1(f) Illegality. Notwithstanding any other provisions herein, if any ---------- law, regulation, treaty or directive or any change therein or in the interpretation or application thereof, shall make it unlawful for any Lender to make or maintain COF Rate Loans as contemplated by this Agreement: (1) the commitment of such Lender hereunder to make or to continue COF Rate Loans or to convert Reference Rate Loans to COF Rate Loans shall forthwith be canceled and (2) such Lender's Loans then outstanding as COF Rate Loans, if any, shall be converted automatically to Reference Rate Loans at the end of their respective Interest Periods or within such earlier period as may be required by law. In the event of a conversion of any such Loan prior to the end of its applicable Interest Period the Company hereby agrees promptly to pay any Lender affected thereby, upon demand, the amounts required pursuant to Paragraph 1(i) below, it -------------- being agreed and understood that such conversion shall constitute a prepayment for all purposes hereof. The provisions hereof shall survive the termination of this Agreement and payment of the outstanding Loans and all other amounts payable hereunder. 1(g) Requirements of Law; Increased Costs. In the event that any ------------------------------------ applicable law, order, regulation, treaty or directive issued by any central bank or other governmental authority, agency or instrumentality or in the governmental or judicial interpretation or application thereof, or compliance by any Lender with any request or directive (whether or not having the force of law) issued by any central bank or other governmental authority, agency or instrumentality: 3 (1) Does or shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement or any Loans made hereunder, or change the basis of taxation of payments to such Lender of principal, fee, interest or any other amount payable hereunder (except for change in the rate of tax on the overall net income of such Lender); (2) Does or shall impose, modify or hold applicable any reserve, capital requirement, special deposit, compulsory loan or similar requirements against assets held by, or deposits or other liabilities in or for the account of, advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Lender in the nature of the Loans made hereunder which are not otherwise included in the determination of interest payable on the Obligations; or (3) Does or shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the cost to such Lender of making, renewing or maintaining any Loan or to reduce any amount receivable in respect thereof or the rate of return on the capital of such Lender or any corporation controlling such Lender, then, in any such case, the Company shall promptly pay to such Lender, upon its written demand made through the Agent, any additional amounts necessary to compensate such Lender for such additional cost or reduced amounts receivable or rate of return as determined by such Lender with respect to this Agreement or Loans made hereunder. If a Lender becomes entitled to claim any additional amounts pursuant to this Paragraph 1(g), it shall promptly notify the Company of the event by reason of - -------------- which it has become so entitled. A certificate as to any additional amounts payable pursuant to the foregoing sentence containing the calculation thereof in reasonable detail submitted by a Lender to the Company shall be conclusive in the absence of manifest error. The provisions hereof shall survive the termination of this Agreement and payment of the outstanding Loans and all other amounts payable hereunder. 1(h) Funding. Each Lender shall be entitled to fund all or any ------- portion of its Loans in any manner it may determine in its sole discretion, including, without limitation, in the Grand Cayman inter-bank market, the London inter-bank market and within the United States. 1(i) Prepayment Premium. In addition to all other payment ------------------ obligations hereunder, in the event: (1) any Loan which is outstanding as a COF Rate Loan is prepaid prior to the last day of the applicable Interest Period, whether following a mandatory prepayment or otherwise, or (2) the Company shall fail to continue or to make a conversion to a COF Rate Loan after the Company has given notice thereof as provided in Paragraph 1(e) above, then the Company -------------- shall immediately pay to the Lenders holding the Loans prepaid or not converted, through the Agent, an additional premium sum compensating each Lender for losses, costs and expenses incurred by such Lender in connection with such prepayment. A certificate as to any additional amounts payable pursuant to the foregoing sentence containing the calculation thereof in reasonable detail submitted by a Lender to the Company shall be conclusive in the absence of 4 manifest error. The provisions hereof shall survive the termination of this Agreement and payment of the outstanding Loans and all other amounts payable hereunder. 1(j) Repayment of Principal. Subject to the prepayment requirements of ---------------------- Paragraph 2(g) below, the Company shall pay the principal amount of each COF - -------------- Rate Loan on the last day of the applicable Interest Period therefor and shall pay the principal amount of each other Loan on the Maturity Date. 2. Miscellaneous Provisions. ------------------------ 2(a) Use of Proceeds. The proceeds of all Loans shall be utilized by --------------- the Company for general corporate and working capital purposes. 2(b) Notes. The obligation of the Company to repay the Loans shall be ----- evidenced by a note payable to the order of each Lender in the form of that attached hereto as Exhibit A (a "Note" or the "Notes"). Upon any advance, --------- conversion or prepayment as provided in Paragraph 1(e) or 2(g) with respect to -------------- ---- any Loan, each Lender is hereby authorized to record the date and amount of each such advance and conversion made by such Lender, or the date and amount of each such payment or prepayment of principal of the Loan made by such Lender, the applicable Interest Period and interest rate with respect thereto, on the schedules annexed to and constituting a part of its respective Note (or by any analogous method any Lender may elect consistent with its customary practices) and any such recordation shall constitute prima facie evidence of the accuracy ----- ----- of the information so recorded absent manifest error. The failure of any Lender to make any such notation shall not affect in any manner or to any extent the Company's Obligations hereunder. 2(c) Borrowing Base Conformity. In support of its obligation to repay ------------------------- Loans hereunder, the Company shall cause the Aggregate Collateral Value of the Borrowing Base to be not less than, at any date, the aggregate principal amount of Loans outstanding on such date. The Company shall immediately prepay Loans to the Agent on behalf of the Lenders, upon telephonic demand by the Agent, on any day in the amount by which the aggregate principal amount of outstanding Loans exceeds the Aggregate Collateral Value of the Borrowing Base. 2(d) Nature and Place of Payments. All payments made on account of the ---------------------------- Obligations shall be made by the Company, without setoff or counterclaim, in lawful money of the United States of America in immediately available same day funds, free and clear of and without deduction for any taxes, fees or other charges of any nature whatsoever imposed by any taxing authority and must be received by the Agent by 12:00 noon (Los Angeles time) on the day of payment, it being expressly agreed and understood that if a payment is received after 12:00 noon (Los Angeles time) by the Agent, such payment will be considered to have been made by the Company on the next succeeding Business Day and interest thereon shall be payable by the Company at the Reference Rate during such extension. All payments on account of the Obligations shall be made to the Agent through its Contact Office. If any payment required to be made by the Company hereunder becomes due and payable on a day other than a Business Day, the due date thereof shall be extended to the next succeeding Business Day and interest 5 thereon shall be payable at the then applicable rate during such extension. The Agent is hereby irrevocably authorized by the Company, without prior notice to the Company, to debit the general operating account of the Company maintained with Sanwa for the full amount of monthly and periodic interest billings, fees and other Obligations payable hereunder; provided, however, that the failure of the Agent to so debit such account shall not in any manner or to any extent affect the obligation of the Company to pay such Obligations as provided herein and in the other Loan Documents. 2(e) Default Interest. Notwithstanding anything to the contrary ---------------- contained herein, on any date that there shall have occurred and be continuing an Event of Default, any and all Obligations outstanding shall bear interest, at the Agent's discretion, at a per annum rate equal to two percent (2%) in excess of the higher of the Applicable Reference Rate and the highest Applicable COF Rate then in effect under this Agreement. 2(f) Computations. All computations of interest and fees payable ------------ hereunder shall be based upon a year of 360 days for the actual number of days elapsed. 2(g) Prepayments. ----------- (1) The Company may prepay Reference Rate Loans in whole or in part at any time, without premium or penalty, it being acknowledged and agreed that COF Rate Loans may not be voluntary prepaid prior to the last day of their applicable Interest Periods. (2) Loans hereunder are subject to mandatory prepayment pursuant to Paragraph 2(c) above. -------------- (3) The Company shall pay in connection with any prepayment hereunder, whether voluntary or mandatory, all interest accrued but unpaid on Loans to which such prepayment is applied, and all prepayment premiums, if any, on COF Rate Loans to which such prepayment is applied, concurrently with payment to the Agent of any principal amounts. 2(h) Allocation of Payments Received. Prior to the occurrence of an ------------------------------- Event of Default and acceleration of the Obligations, all amounts received by the Agent on account of the Loans shall be disbursed by the Agent to the Lenders pro rata in accordance with their respective Percentage Shares by wire transfer on the date of receipt if received by the Agent before 12:00 noon (Los Angeles time) or if received later, by 12:00 noon (Los Angeles time) on the next succeeding Business Day, without further interest payable by the Agent. Following the occurrence of an Event of Default and acceleration of the Obligations, all amounts received by the Agent on account of the Obligations shall be disbursed by the Agent as follows: (1) First, to the payment of expenses incurred by the Agent in the performance of its duties and enforcement of its rights under the Loan Documents, including, without limitation, all costs and expenses of collection, attorneys' fees, court costs and foreclosure expenses; 6 (2) Then, to the Lenders, pro rata in accordance with their respective Percentage Shares, until all outstanding Loans and interest accrued thereon and all other Obligations have been paid in full; and (3) Then to such Persons as may be legally entitled thereto. 2(i) Fees. The Company shall pay to the Agent for the pro rata benefit ---- of the Lenders in accordance with their respective Percentage Shares: (1) On or before the date of funding of the first Loan hereunder, a commitment fee equal to one eighth of one percent (0.125%) of the Credit Limit on such date; and (2) On the first Business Day of the first month of each calendar quarter commencing July 1, 1997 (and on the Maturity Date) for the immediately preceding calendar quarter, a non-usage fee in the amount set forth in a fee billing delivered by the Agent to the Company, which non- usage fee shall be computed at the per annum rate of one-quarter of one percent (0.25%) against: (i) the average daily Credit Limit in effect during such calendar quarter (or portion thereof), minus (ii) the daily average amount of Loans outstanding during such calendar quarter (or portion thereof). 3. Security: Guaranty: Subordination: Additional Documents. ------------------------------------------------------- 3(a) Security Agreement. As collateral security for the Obligations ------------------ the Company shall execute and deliver to the Agent: (i) a security agreement in the form of that attached hereto as Exhibit B (the "Security Agreement"), --------- pursuant to which the Company shall pledge, assign and grant to the Agent for the pari passu benefit of the Lenders a first priority, perfected security ---- ----- interest in and lien upon the Collateral, and (2) such UCC-1 financing statements as the Agent may request. 3(b) Guaranty: Subordination Agreement. As additional credit support --------------------------------- for the Obligations, the Company shall cause the Guarantor to execute and deliver to the Agent: (1) a guaranty in the form of that attached hereto as Exhibit C (the "Guaranty"), and (2) a subordination agreement in the form of - --------- that attached hereto as Exhibit D (the "Subordination Agreement"). --------- 3(c) Additional Documents. The Company agrees to execute and deliver -------------------- or to cause to be executed and delivered to the Agent from time to time such confirmatory or supplementary security agreements, financing statements, notices to and consents of third parties and such other documents, instruments or agreements as the Agent may reasonably request, which are in the Agent's judgment necessary or desirable to obtain for the Agent on behalf of the Lenders, the benefit of the Loan Documents and the Collateral. 7 4. Conditions to Making Loans. -------------------------- 4(a) First Loan(s). As conditions precedent to the funding of the ------------- first Loan(s) hereunder: (1) The Company shall have delivered or shall have had delivered to the Agent, in form and substance satisfactory to the Agent and its counsel, each of the following (with sufficient copies for each of the Lenders): (i) A duly executed copy of this Agreement; (ii) A duly executed copy of the Security Agreement; (iii) Duly executed copies of each of the Notes; (iv) Duly executed copies of the Guaranty and the Subordination Agreement; (v) A duly executed Borrowing Base Certificate evidencing that the Aggregate Collateral Value of the Borrowing Base is sufficient to support such Loan(s); (vi) Duly executed copies of all financing statements and other documents, instruments and agreements, properly executed, deemed necessary or appropriate by the Agent to create in favor of the Lenders a first perfected security interest in and lien upon the Collateral; (vii) Such credit applications, financial statements, authorizations and such information concerning the Company and its business, operations and condition (financial and otherwise) as any Lender may reasonably request; (viii) Certified copies of resolutions of the Boards of Directors of the Company and the Guarantor approving the execution, delivery and performance of the Loan Documents to which such Person is a party; (ix) A certificate of the Secretary or an Assistant Secretary of each of the Company and the Guarantor certifying the names and true signatures of the officers of such Person authorized to sign the Loan Documents to which such Person is a party; (x) A copy of the Articles of Organization of the Company and the Certificate of Incorporation of the Guarantor, certified by the Secretary of State of the State or other official of the state or jurisdiction of formation of such Person as of a recent date; 8 (xi) A copy of each of the Articles of Organization of the Company and its Operating Agreement, if any, and a copy of the Certificate of Incorporation and Bylaws of the Guarantor, certified in each case by the Secretary or an Assistant Secretary of such Person as of the date of this Agreement as being accurate and complete; (xii) A certificate of good standing for each of the Company and the Guarantor from the Secretary of State of the State of California; (xiii) A certificate of a Responsible Financial Officer of: a. the Company in the form of that attached hereto as Exhibit E-1 dated as of - - ----------- the date of this Agreement confirming the accuracy and completeness of the representations and warranties of the Company set forth in the Loan Documents and the fact that there does not exist a Potential Default or an Event of Default and demonstrating compliance with the financial tests set forth under Paragraphs 7(g) through 7(j) at and as of September 30, 1996, and b. the - --------------- ---- - Guarantor in the form of that attached hereto as Exhibit E-2 dated as of the ----------- date of this Agreement confirming the accuracy and completeness of the representations and warranties of the Guarantor set forth in the Guaranty and demonstrating compliance with the financial tests set forth in Paragraph 10 of the Guaranty at and as of September 30, 1996; (xiv) An opinion of counsel to each of the Company and the Guarantor, in form and substance and rendered by counsel satisfactory to the Agent; and (xv) A copy, certified by a Responsible Financial Officer of the Company as accurate and complete, of the final form of the SPTL Asset Purchase Agreement, which SPTL Asset Purchase Agreement shall be reasonably acceptable to the Agent. (2) All acts and conditions (including, without limitation, the obtaining of any necessary regulatory approvals and the making of any required filings, recordings or registrations) required to be done and performed and to have happened precedent to the execution, delivery and performance of the Loan Documents and to constitute the same legal, valid and binding obligations, enforceable in accordance with their respective terms, shall have been done and performed and shall have happened in due and strict compliance with all applicable laws. (3) All documentation, including, without limitation, documentation for corporate and legal proceedings in connection with the transactions contemplated by the Loan Documents shall be reasonably satisfactory in form and substance to the Agent and its counsel. 9 4(b) All Loans. As conditions precedent to each Lender's obligation to --------- fund its Percentage Share of any Loan, including the first Loan and including the conversion of any Loan to another type of Loan or the continuation of any COF Rate Loan after the end of its applicable Interest Period, at and as of the date of the funding, conversion or continuation: (1) There shall have been delivered to the Agent a Loan Request therefor and the Required Documents for the Related Program Contract; (2) The representations and warranties of the Company and the Guarantor contained in the Loan Documents shall be accurate and complete in all respects as if made on and as of the date of such advance, conversion or continuance; (3) There shall not have occurred an Event of Default or Potential Default; and (4) Following the funding of such Loan, neither the amount of such Loan nor the aggregate principal amount of Loans outstanding will not exceed the limitations of Paragraph 1(a) above. -------------- By delivering a Loan Request to the Agent hereunder, the Company shall be deemed to have represented and warranted the accuracy and completeness of the statements set forth in subparagraphs (b)(2) through (b)(4) above. 5. Representations and Warranties of the Company. --------------------------------------------- As an inducement to the Agent and each Lender to enter into this Agreement and to make Loans as provided herein, the Company represents and warrants to the Agent and each Lender that: 5(a) Financial Condition. The financial statements, dated the ------------------- Statement Date and the Interim Date, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly in accordance with GAAP the financial condition of the Company and its consolidated Subsidiaries at such dates and the consolidated and consolidating results of their operations and changes in financial position for the fiscal periods then ended. 5(b) No Change. Since the Statement Date there has been no material ---------- adverse change in the business, operations, assets or financial or other condition of the Company or the Company and its consolidated Subsidiaries taken as a whole, nor has the Company entered into, incurred or assumed any long-term debt, mortgages, material leases or oral or written commitments, nor commenced any significant project, nor made any purchase or acquisition of any significant property. 5(c) Corporate Existence; Compliance with Law. The Company: (1) is ------------------- ------------------- duly organized, validly existing and in good standing as a limited liability company under the laws of the State of California and is qualified to do business in each jurisdiction where its ownership of property or conduct of business requires such qualification and where failure to 10 qualify would have a material adverse effect on the Company or its property and/or business or on the ability of the Company to pay or perform the Obligations, (2) has the corporate power and authority and the legal right to own and operate its property and to conduct business in the manner which it does and proposes so to do, and (3) is in compliance with all Requirements of Law and Contractual Obligations, the failure to comply with which could have a material adverse effect on the business, operations, assets or financial or other condition of the Company or the Company and its consolidated Subsidiaries taken as a whole or on the Collateral or the Aggregate Collateral Value of the Borrowing Base. 5(d) Corporate Power; Authorization; Enforceable Obligations. The ------------------------------------------------------- Company has the corporate power and authority and the legal right to execute, deliver and perform the Loan Documents to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance of such Loan Documents. The Loan Documents to which the Company is party have been duly executed and delivered on behalf of the Company and constitute legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally and the effect of equitable principles whether applied in an action at law or a suit in equity. 5(e) No Legal Bar. The execution, delivery and performance of the Loan ------------ Documents to which the Company is party, the borrowing hereunder and the use of the proceeds thereof, will not violate any Requirement of Law or any Contractual Obligation of the Company or create or result in the creation of any Lien (except the Lien created by the Security Agreement) on any assets of the Company. 5(f) No Material Litigation. Except as disclosed on Exhibit F hereto, ---------------------- --------- no litigation, investigation or proceeding of or before any arbitrator, court or Governmental Authority is pending or, to the knowledge of the Company, threatened by or against the Company or any of its Subsidiaries or against any of such parties' properties or revenues which is likely to be adversely determined and which, if adversely determined, is likely to have a material adverse effect on the business, operations, property or financial or other condition of the Company or any of its Subsidiaries or on the Collateral or the Aggregate Collateral Value of the Borrowing Base. 5(g) Taxes. The Company and each of its Subsidiaries have filed or ----- caused to be filed all tax returns that are required to be filed and have paid all taxes shown to be due and payable on said returns or on any assessments made against them or any of their property other than taxes which are being contested in good faith by appropriate proceedings and as to which the Company or applicable Subsidiary has established adequate reserves in conformity with GAAP. 5(h) Investment Company Act. Neither the Company or any Person ---------------------- controlling the Company or any Subsidiary is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 11 5(i) Subsidiaries. Attached hereto as Exhibit G is an accurate and ------------ --------- complete list of all presently existing Subsidiaries of the Company, their respective jurisdictions of incorporation and the percentage of their capital stock owned by the Company or other Subsidiaries. All of the issued and outstanding shares of capital stock of such Subsidiaries have been duly authorized and issued and are fully paid and non-assessable. 5(j) Federal Reserve Board Regulations. Neither the Company nor any of --------------------------------- its Subsidiaries is engaged or will engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" and "margin stock" within the respective meanings of such terms under Regulation U. No part of the proceeds of any Loan issued hereunder will be used for "purchasing" or "carrying" "margin stock" as so defined or for any purpose which violates, or which would be inconsistent with, the provisions of the Regulations of the Board of Governors of the Federal Reserve System. 5(k) ERISA. The Company and each of its Subsidiaries are in compliance ----- in all respects with the requirements of ERISA and no Reportable Event has occurred under any Plan maintained by the Company or any of its Subsidiaries which is likely to result in the termination of such Plan for purpose of Title IV or ERISA. 5(l) Assets. The Company and each of its Subsidiaries has good and ------ marketable title to all property and assets reflected in the financial statements referred to in Paragraph 5(a) above, except property and assets sold -------------- or otherwise disposed of in the ordinary course of business subsequent to the respective dates thereof. Neither the Company nor any of its Subsidiaries has outstanding Liens on any of its properties or assets nor are there any security agreements to which the Company or any of its Subsidiaries is a party, or title retention agreements, whether in the form of leases or otherwise, of any personal property except as reflected in the financial statements referred to in Paragraph 5(a) above or as permitted under Paragraph 7(a) below. -------------- -------------- 5(m) Securities Acts. The Company has not issued any unregistered --------------- securities in violation of the registration requirements of Section 5 of the Securities Act of 1933, as amended, or any other law, and is not violating any rule, regulation or requirement under the Securities Act of 1933, as amended, or the Securities and Exchange Act of 1934, as amended. The Company is not required to qualify an indenture under the Trust Indenture Act of 1939, as amended, in connection with its execution and delivery of the Notes. 5(n) Consents, Etc. No consent, approval, authorization of, or -------------- registration, declaration or filing with any Person is required on the part of the Company in connection with the execution and delivery of the Loan Documents (other than filings to perfect the Lien granted by it to the Agent on behalf of the Lenders under the Security Agreement) or the performance of or compliance with the terms, provisions and conditions hereof or thereof. 5(o) Copyrights, Patents, Trademarks and Licenses, etc. The Company -------------------------------------------------- owns or is licensed or otherwise has the right to use all of the patents, trademarks, service marks, trade names, copyrights, contractual franchises, authorizations and other rights that are reasonably necessary for the operation of its business, without conflict with the rights of any 12 other Person. To the best knowledge of the Company, no slogan or other advertising device, product, process, method, substance, part or other material now employed, or now contemplated to be employed, by the Company infringes upon any rights held by any other Person. Except as specifically disclosed in Exhibit F. hereto, no claim or litigation regarding any of the foregoing is - --------- pending or, to the knowledge of the Company, threatened, and, to the knowledge of the Company, no patent, invention, device, application, principle or any statute, law, rule, regulation, standard or code is pending or proposed, which, in either case, could, reasonably be expected to have a material adverse effect on the Company or any of its Subsidiaries or on the Collateral or the Borrowing Base. 5(p) Regulated Entities. The Company is not subject to ------------------ regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal or state statute or regulation limiting its ability to incur Indebtedness. 6. Affirmative Covenants. The Company hereby covenants and agrees --------------------- with the Agent and each Lender that, as long as any Obligations remain unpaid or any Lender has any obligation to make Loans hereunder, the Company shall: 6(a) Financial Statements. Furnish or cause to be furnished to -------------------- the Agent and each of the Lenders directly: (1) Within one hundred twenty (120) days after the last day of each fiscal year of the Company, consolidated and consolidating statements of income and statements of changes in financial position of the Company for such year and balance sheets as of the end of such year presented fairly in accordance with GAAP and accompanied in each case by an unqualified report of a firm of independent certified public accountants acceptable to the Agent and including therewith a copy of the management letter form such certified public accountants and a certificate of a Responsible Financial Officer of the Company setting forth calculations, certified to be true, complete and correct, showing compliance of the Company with the financial covenants set forth in Paragraphs ---------- 7(g) through 7(i) below; and - ---- ---- (2) Within one hundred twenty (120) days after the last day of each calendar quarter of the Company, unaudited consolidated and consolidating statements of income and changes in financial position for such calendar quarter and balance sheets as of the end of such calendar quarter, accompanied in each case by a certificate of a Responsible Financial Officer of the Company stating that such financial statements are presented fairly in accordance with GAAP, confirming the continuing accuracy and completeness of all representations and warranties of the Company set forth in the Loan Documents and the fact that there does not exist a Potential Default or an Event of Default hereunder and setting forth calculations, certified to be true, complete and correct, showing compliance of the Company with the financial covenants set forth in Paragraphs 7(i) through 7(l) below. --------------- ---- 13 6(b) Certificates; Reports; Other Information. Furnish or ---------------------------------------- cause to be furnished to the Agent and each of the Lenders directly: (1) No later than the tenth calendar day following the end of each calendar month, as of the close of business of the Company on the last Business Day of the immediately preceding calendar month, and at such other times as the Agent may reasonably request: (i) a Borrowing Base Certificate, and (ii) a monthly servicing and portfolio report, in form and detail satisfactory to the Agent; (2) Prior to the implementation thereof, written notice of any proposed changes to the Underwriting Guidelines; (3) Promptly upon the filing or sending thereof, copies of all proxy statements, financial statements, and reports which the Guarantor sends to its stockholders, and copies of all regular, periodic and special reports, and all registration statements under the Securities Act of 1933, as amended (the "Act"), which the Guarantor files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange; provided, however, that there shall not be required to be delivered hereunder to any Lender copies of prospectuses relating to future series of offerings under registration statements filed under Rule 415 of the Act or other items which such Lender has indicated in writing to the Guarantor or the Company from time to time need not be delivered to such Lender; and (4) Promptly, such additional financial and other information, including, without limitation, financial statements of the Company and the Guarantor, and information regarding the Collateral as the Agent or any Lender may from time to time reasonably request, including, without limitation, such information as is necessary for any Lender to participate out any of its interests in the Loans hereunder or to enable other financial institutions to become signatories hereto. 6(c) Payment of Indebtedness. And shall cause each of its ----------------------- Subsidiaries, to pay, discharge or otherwise satisfy at or before maturity or before it becomes delinquent, defaulted or accelerated, as the case may be, all its Indebtedness (including taxes), except Indebtedness being contested in good faith and for which provision is made to the satisfaction of the Agent for the payment thereof in the event the Company or such Subsidiary is found to be obligated to pay such Indebtedness and which Indebtedness is thereupon promptly paid by the Company. 6(d) Maintenance of Existence and Properties. And shall cause --------------------------------------- each of its Subsidiaries, to maintain its corporate existence and maintain all rights, privileges, licenses, approvals, franchises, properties and assets necessary or desirable in the normal conduct of its business, and comply with all Contractual Obligations and Requirements of Law. 6(e) Inspection of Property; Books and Records; Discussions. ------------------------------------------------------ Keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to 14 its business and activities, and permit representatives of the Agent or any Lender (at no cost or expense to the Company (other than costs and expenses associated with the semi-annual audit referred to in Paragraph 6(g)(2) below) ----------------- unless there shall have occurred and be continuing an Event of Default) to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired by the Agent or any Lender, to contact Obligors for verification purposes and to discuss the business, operations, properties and financial and other condition of the Company and any of its Subsidiaries with officers and employees of such parties, and with their independent certified public accountants. 6(f) Notices. Promptly give written notice to the Agent and each ------- Lender of: (1) The occurrence of any Potential Default or Event of Default; (2) Any litigation or proceeding affecting the Company or any of its Subsidiaries, the Guarantor or the Collateral which could have a material adverse effect on the Collateral or the business, operations, property, or financial or other condition of the Company or any of its Subsidiaries or the Guarantor; and (3) A material adverse change in the business, operations, property or financial or other condition of the Company or any of its Subsidiaries or the Guarantor. 6(g) Expenses. Pay all reasonable out-of-pocket expenses (including -------- fees and disbursements of counsel): (1) of the Agent incident to the preparation, negotiation and administration of the Loan Documents and the protection of the rights of the Lenders and the Agent under the Loan Documents, (2) of the Agent incident audits of the Company's servicing activities records conducted by the Agent (provided that prior to the occurrence of an Event of Default and acceleration of the Obligations, the Company shall not be obligated to pay costs and expenses for more than two audits conducted during any fiscal year of the Company), and (3) of the Agent and each of the Lenders incident to the enforcement of payment of the Obligations, whether by judicial proceedings or otherwise, including, without limitation, in connection with bankruptcy, insolvency, liquidation, reorganization, moratorium or other similar proceedings involving the Company or a "workout" of the Obligations. The obligations of the Company under this Paragraph 6(g) shall be effective and enforceable whether or -------------- not any Loan is funded hereunder and shall survive payment of all other Obligations. 6(h) Loan Documents. Comply with and observe all terms and conditions -------------- of the Loan Documents. 6(i) Insurance. Obtain and maintain insurance with responsible --------- companies in such amounts and against such risks as are usually carried by corporations engaged in similar businesses similarly situated, which shall name the Agent as loss payee and an 15 additional insured for the benefit of itself and the Lenders as their interests may appear, and furnish any of the Lenders on request full information as to all such insurance. 6(j) Hazardous Materials. And shall cause each of its Subsidiaries ------------------- to: (1) Keep and maintain all Property in compliance with, and shall not cause or permit any Property to be in violation of, any federal, state or local laws, ordinances or regulations relating to industrial hygiene or to the environmental conditions on, under or about any Property, including, but not limited to, soil and ground water conditions. (2) Immediately advise the Agent in writing if any Hazardous Materials Claims are hereafter asserted, and of any discharge, release or disposal of any Hazardous Materials in, on, under or about any Property. The Agent and the Lenders shall have the right to join and participate in, as parties if they so elect, any legal proceedings or actions initiated in connection with any Hazardous Materials Claims and to have their reasonable attorney's fees in connection therewith paid by the Company. (3) Without the prior written consent of the Agent and the Lenders, not take any remedial action in response to the presence of any Hazardous Materials in, on, under or about any Property, nor enter into any settlement agreement, consent decree or other compromise in respect to any Hazardous Material Claims, which remedial action, settlement, consent or compromise might, in the reasonable judgment of the Agent and the Lenders impair the value of any Property; provided, however, that the prior consent of the Agent and the Lenders shall not be necessary in the event that the presence of Hazardous Materials in, on, under or about the Property either poses an immediate threat to the health, safety or welfare of any individual or is of such a nature that an immediate remedial response is necessary and it is not possible to obtain the consent of the Agent and the Lenders before taking such action, provided that in such event the Company shall notify the Agent as soon as practicable of any action so taken. The Agent and the Lenders agree not to withhold their consent, where such consent is required hereunder, if either (i) a particular remedial action is ordered by a court of competent jurisdiction,or (ii) the Company establishes to the reasonable satisfaction of the Agent and the Lenders that there is no reasonable alternative to such remedial action which would result in less impairment of the value of any Property. 6(k) Compliance with Laws. And shall cause each of its Subsidiaries -------------------- to, comply in all material respects with all Requirements of Law and Contractual Obligations the failure to comply with which could have a material adverse effect on the business, operations, assets or financial or other condition of the Company or the Company and its consolidated Subsidiaries taken as a whole or on the Collateral or the Aggregate Collateral Value of the Borrowing Base. 6(l) Further Assurances. Promptly upon the reasonable request by the ------------------ Agent or any Lender, do, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register, any and all such further acts, deeds, conveyances, security agreements. 16 mortgages, assignments, estoppel certificates, financing statements and continuations thereof, termination statements, notices of assignment, transfers, certificates, assurances and other instruments the Agent or such Lender, as the case may be, may reasonably require from time to time in order (1) to carry out more effectively the purposes of this Agreement or any other Loan Document, (2) to perfect and maintain the validity, effectiveness and priority of the Lien intended to be created by the Security Agreement, and (3) to better assure, convey, grant, assign, transfer, preserve, protect and confirm to the Agent and Lenders the rights granted or now or hereafter intended to be granted to Agent and the Lenders under any Loan Document or under any other document executed in connection therewith. 7. Negative Covenants. The Company hereby agrees that, as long as any ------------------ Obligations remain unpaid or any Lender has any obligation to make Loans hereunder, the Company shall not, directly or indirectly: 7(a) Liens. Create, incur, assume or suffer to exist, any Lien upon ----- the Collateral except as contemplated by the Security Agreement or create, incur, assume or suffer to exist any Lien upon any of its other property and assets except: (1) Liens or charges for current taxes, assessments or other governmental charges which are not delinquent or which remain payable without penalty, or the validity of which are contested in good faith by appropriate proceedings upon stay of execution of the enforcement thereof, provided the Company shall have set aside on its books and shall maintain adequate reserves for the payment of same in conformity with GAAP; (2) Liens, deposits or pledges made to secure statutory obligations, surety or appeal bonds, or bonds for the release of attachments or for stay of execution, or to secure the performance of bids, tenders, contracts (other than for the payment of borrowed money), leases or for purposes of like general nature in the ordinary course of the Company's business; (3) Purchase money security interests for property hereafter acquired, conditional sale agreements, or other title retention agreements, with respect to property hereafter acquired; provided, however, that no such security interest or agreement shall extend to any property other than the property acquired; (4) Statutory Liens of carriers, warehousemen, mechanics, materialmen and other similar Liens imposed by law and created in the ordinary course of business for amounts not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves are being maintained in conformity with GAAP; (5) Attachment and judgment Liens not otherwise constituting an Event of Default each of which lien is in existence less than thirty (30) days after the entry thereof or with respect to which execution has been stayed, payment is covered in full by insurance, or the Company shall in good faith be prosecuting an appeal or 17 proceedings for review and shall have set aside on its books such reserves as may be required by GAAP with respect to such judgment or award; (6) Liens securing warehousing lines of credit entered into in the normal course of the Company's business; and (7) Permitted Other Liens. 7(b) Indebtedness. Create, incur, assume or suffer to exist, or ------------ otherwise become or be liable, or cause any Subsidiary to create, incur, assume or suffer to exist, or otherwise become or be liable, in respect of any Indebtedness except: (1) The Obligations; (2) Indebtedness reflected in the financial statements referred to in Paragraph 5(a) above; -------------- (3) Trade debt incurred in the ordinary course of business and outstanding less than sixty (60) days after the same has become due and payable or which is being contested in good faith, provided provision is made to the satisfaction of the Lenders for the eventual payment thereof in the event it is found that such contested trade debt is payable by the Company; (4) Indebtedness secured by Liens permitted under Paragraph 7(a) -------------- above; and (5) Permitted Other Debt. 7(c) Consolidation and Merger. Liquidate or dissolve or enter into any ------------------------ consolidation, merger, partnership, joint venture, syndicate or other combination. 7(d) Acquisitions. Purchase or acquire or incur liability for the ------------ purchase or acquisition of any or all of the assets or business of any person, firm or corporation, other than in the normal course of business as presently conducted. 7(e) Investments; Advances. Make or commit to make any advance, loan or --------------------- extension of credit other than in connection with the origination of Program Contracts in the ordinary course of business or make any capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of, or make any other investment in, any Person other than in the ordinary course of the Company's business. 7(f) Sale of Assets. Sell, lease, assign, transfer or otherwise -------------- dispose of any of its assets (other than obsolete or worn out property), whether now owned or hereafter acquired, other than in the ordinary course of business as presently conducted and at fair market value. 18 7(g) Minimum Tangible Net Worth. Permit the Company's Tangible Net -------------------------- Worth as of the last day of any calendar quarter to be less than $6,300,000. 7(h) Minimum Current Ratio. Permit the Company's ratio of Current --------------------- Assets to Current Liabilities (which Current Liabilities shall include for purposes hereof the aggregate principal amount of Loans outstanding hereunder on the applicable calculation date) as of the last day of any calendar quarter to be less than 1.03:1.00. 7(i) Minimum Interest Coverage Ratio. Permit as of the last day of any ------------------------------- calendar quarter the ratio of EBITDA of the Company during such quarter and the immediately preceding three calendar quarters to Interest Expense of the Company during such four calendar quarters to be less than 1.50:1.00. 7(j) Profitability. Permit its Net Profit after Taxes, as of the last ------------- day of any calendar quarter, for such quarter and the immediately preceding three calendar quarters, to be less than $1.00. 7(k) Limitation on Transactions with Affiliates. Purchase, acquire or ------------------------------------------ lease any property from, or sell, transfer or lease any property to, or lend or advance any money to, or borrow any money from, or guarantee any obligation of, or acquire any stock, obligations or securities of, or enter into any merger or consolidation agreement, or any management or similar fee, agreement with, any Affiliate, or enter into any other transaction or arrangement or make any payment to (including, without limitation, on account of any management fees, service fees, home office charges, consulting fees, technical services charges or tax sharing charges) or otherwise deal with, in the ordinary course of business or otherwise, any Affiliate other than on terms no less favorable to the Company as would be obtained in an arms-length transaction with a non- Affiliate. 8. Events of Default. Upon the occurrence of any of the following events ----------------- (an "Event of Default"): 8(a) The Company shall fail to pay any principal on the Loans on the date when due or fail to pay within five days of the date when due any other Obligation under the Loan Documents; or 8(b) Any representation or warranty made by the Company or the Guarantor in any Loan Document or in connection with any Loan Document shall be inaccurate or incomplete in any respect on or as of the date made; or 8(c) The Company shall fail to maintain its corporate existence or shall default in the observance or performance of any covenant or agreement contained in Paragraph 7 above or in the Security Agreement; or ----------- 8(d) The Company shall fail to observe or perform any other term or provision contained in the Loan Documents and such failure shall continue for thirty (30) days; or 19 8(e) The Company shall default in any payment of principal of or interest on any Indebtedness (other than the Obligations) or any other event shall occur, the effect of which is to permit such Indebtedness to be declared or otherwise to become due prior to its stated maturity; or 8(f) (1) The Company or any of its Subsidiaries or the Guarantor, shall commence any case, proceeding or other action (i) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (ii) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or the Company or any of its Subsidiaries or the Guarantor shall make a general assignment for the benefit of its creditors; or (2) there shall be commenced against the Company or any of its Subsidiaries or the Guarantor, any case, proceeding or other action of a nature referred to in clause (1) above which (i) results in the entry of an order for relief or any such adjudication or appointment, or (ii) remains undismissed, undischarged or unbonded for a period of sixty (60) days; or (3) there shall be commenced against the Company or any of its Subsidiaries or the Guarantor, any case, proceeding or other action seeking issuance or a warrant of attachment, execution, distraint or similar process against all or substantially all of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, stayed, satisfied or bonded pending appeal within sixty (60) days from the entry thereof; or (4) the Company or any of its Subsidiaries or the Guarantor, shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in (other than in connection with a final settlement), any of the acts set forth in clause (1), (2), or (3) above; or (5) the Company or any of its Subsidiaries or the Guarantor, shall generally not, or shall be unable to, or shall admit in writing its inability to pay its debts as they become due; or 8(g) (1) Any Person shall engage in any "prohibited transaction" (as defined in section 406 of ERISA or Section 4975 or the Code) involving any Plan, (2) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, (3) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or institution of proceedings is, in the reasonable opinion of the agent, likely to result in the termination of such Plan for purposes of Title IV of ERISA, and, in the case of a Reportable Event, the continuance of such Reportable Event unremedied for ten days after notice of such Reportable Event pursuant to section 4043(a), (c) or (d) of ERISA is given or the continuance of such proceedings for ten days after commencement thereof, as the case may be, (4) any single Employer Plan shall terminate for purposes of Title IV of ERISA, (5) any withdrawal liability to a Multiemployer Plan shall be incurred by the Company or (6) any other event or condition shall occur or exist; and in each case in clauses (1) through (6) above, such event or condition, together with all other such events or conditions, if any, is likely to subject the Company or any of its subsidiaries or the Guarantor to any tax, penalty or other liabilities in the aggregate material in relation to the 20 business, operation, property or financial or other condition of the Company or any of its Subsidiaries or the Guarantor; or 8(h) One or more judgments or decrees shall be entered against the Company or any of its Subsidiaries or the Guarantor and all such judgments or decrees shall not have been vacated, discharged, stayed, satisfied or bonded pending appeal within thirty (30) days from the entry thereof or in any event later than five days prior to the date of any proposed sale thereunder; or 8(i) The Company shall voluntarily suspend the transaction of business for more than five days in any calendar year commencing in fiscal year 1997; 8(j) The Guarantor shall attempt to rescind or revoke the Guaranty or the Subordination Agreement, with respect to future transactions or otherwise, or shall fail to observe or perform any term or provision of the Guaranty or the Subordination Agreement; or 8(k) The Lien of the Agent for the benefit of the Lenders on the Collateral shall for any reason cease to be a first priority, perfected Lien; or 8(l) SPTL shall become "Undercapitalized," "Significantly Undercapitalized," or "Critically Undercapitalized" within the context of 12 U.S.C. (S) 1831o as amended, restated or redesignated; or 8(m) SPTL shall submit to a "Capital Restoration Plan" or "Capital Management Agreement" under 12 U.S.C. (S) 1831o(b)(2)(C), as amended, restated or redesignated; or 8(n) SPTL's Net Profit after Taxes, during any calendar quarter shall be less than $1.00; or 8(o) The Guarantor shall cease to own or control, directly or indirectly, at least fifty one percent (51%) of the outstanding capital stock of the Company or Wayne L. Knyal shall cease to be actively involved in the operations of the Company; THEN: Automatically upon the occurrence of an Event of Default under Paragraph 8(f) -------------- above, at the option of any Lender upon the occurrence of an Event of Default under Paragraph 8(a) above and, in all other cases, at the option of the -------------- Majority Lenders, each Lender's obligation to make Loans shall terminate and the principal balance of outstanding Loans and interest accrued but unpaid thereon shall become immediately due and payable, without demand upon or presentment to the Company, which are expressly waived by the Company and the Agent and the Lenders may immediately exercise all rights, powers and remedies available to them at law, in equity or otherwise, including, without limitation, under the Security Agreement, the Guaranty and the other Loan Documents. 21 9. The Agent. --------- 9(a) Appointment. Each Lender hereby irrevocably designates and ----------- appoints the Agent as the agent of such Lender under the Loan Documents and each such Lender hereby irrevocably authorizes the Agent, as the agent for such Lender, to take such action on its behalf under the provisions of the Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of the Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in the Loan Documents, the Agent shall not have any duties or responsibilities, except those expressly set forth herein or therein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into the Loan Documents or otherwise exist against the Agent. The Company shall pay to the Agent an agency fee in such amount and at such times as the Agent and the Company may from time to time agree in writing. 9(b) Delegation of Duties. The Agent may execute any of its -------------------- duties under the Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence of misconduct of any agents or attorneys-in-fact selected by it with reasonable care. 9(c) Exculpatory Provisions. Neither the Agent nor any of its ---------------------- officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (1) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with the Loan Documents (except for its or such Person's own gross negligence or willful misconduct), or (2) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Company or any officer thereof contained in the Loan Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with the Loan Documents or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of the Loan Documents or for any failure of the Company to perform its obligations hereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements continued in, or conditions of, the Loan Documents or to inspect the properties, books or records of the Company. 9(d) Reliance by Agent. The Agent shall be entitled to rely, and ----------------- shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certification, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation reasonably believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Company), independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any note as the owner thereof for all purposes. As to the Lenders: (1) the Agent shall be fully justified in failing or refusing to take any action under the Loan Documents unless it shall first receive such advice or concurrence of the Majority Leaders or all of the Lenders, as appropriate, or it shall 22 first be indemnified to its satisfaction by the Lenders ratably in accordance with their respective Percentage Shares against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any action (except for liabilities and expenses resulting from the Agent's gross negligence or willful misconduct), and (2) the Agent shall in all cases be fully protected in acting, or in refraining from acting, under the Loan Documents in accordance with a request of the Majority Lenders or all of the Lenders, as appropriate, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders. 9(e) Notice of Default. The Agent shall not be deemed to ----------------- have knowledge or notice of the occurrence of any Potential Default or Event of Default hereunder unless the Agent has received notice from a Lender or the Company referring to the Loan Documents, describing such Potential Default or Event of Default and stating that such notice is a "notice of default." In the event that the Agent receives such a notice, the Agent shall give notice thereof to the Lenders. The Agent shall take such action with respect to such Potential Default or Event of Default as shall be reasonably directed by the Majority Lenders (or any Lender with respect to an Event of Default under Paragraph 8(a) -------------- above); provided that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Potential Default or Event of Default as it shall deem advisable in the best interest of the Lenders. 9(f) Non-Reliance on Agent and Other Lenders. Each Lender --------------------------------------- expressly acknowledges that neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Agent hereinafter taken, including any review of the affairs of the Company, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Company and made its own decision to make its loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Company. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, financial and other condition or creditworthiness of the Company which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 9(g) Indemnification. The Lenders agree to indemnify the --------------- Agent in its capacity as such (to the extent not reimbursed by the Company and without limiting the obligation of the Company to do so), ratably according to the respective amounts of their Percentage Shares, from and against any and all liabilities, obligations, losses, damages, 23 penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including without limitation at any time following the payment of the Obligations) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Loan Documents or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. The agreements in this subsection shall survive the payment of the Obligations. 9(h) Agent in Its Individual Capacity. The Agent and its -------------------------------- affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Company as though the Agent were not the Agent hereunder. With respect to such loans made or renewed by them and any Note issued to them, the Agent shall have the same rights and powers under the Loan Documents as any Lender and may exercise the same as though it were not the Agent, and the terms "Lender" and "Lenders" shall include the Agent in its individual capacity. 9(i) Successor Agent. The Agent may resign as Agent under the --------------- Loan Documents upon thirty (30) days' notice to the Lenders and agrees that it will so resign in the event it ceases to hold any Percentage Share of the Obligations. If the Agent shall resign, then the Majority Lenders shall appoint from among the Lenders a successor agent or, if the Majority Lenders are unable to agree on the appointment of a successor agent, the Agent shall appoint a successor agent for the Lenders (which successor agent shall, in either case and assuming that there does not exist a Potential Default or Event of Default, be reasonably acceptable to the Company), whereupon such successor agent shall succeed to the rights, powers and duties of the Agent, and the term "Agent" shall mean such successor agent effective upon its appointment, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any of the Loan Documents or successors thereto. After any retiring Agent's resignation hereunder as Agent, the provisions of this Paragraph 9 shall inure to its benefit as to any actions taken or omitted ----------- to be taken by it while it was Agent under the Loan Documents. 9(j) Collateral Matters. ------------------ (1) The Agent is authorized on behalf of the Lenders, without the necessity of any notice to or further consent from the Lenders, from time to time to take any action with respect to any Collateral or the Loan Documents which may be necessary to perfect and maintain perfected the security interest in and Liens upon Collateral granted pursuant to the Security Agreement. (2) The Lenders irrevocably authorize the Agent, at its option and in its discretion, to release any Lien granted to or held by the Agent upon any Collateral (i) upon termination of the Credit Limit and payment in full of all Loans and all other Obligations payable under this Agreement and under any other Loan 24 Documents; (ii) constituting property sold or to be sold or disposed of as part of or in connection with any disposition permitted hereunder; (iii) constituting property in which the Company owned no interest at the time the Lien was granted or at any time thereafter; (iv) constituting property leased to the Company under a lease which has expired or been terminated in a transaction permitted under this Agreement or is about to expire and which has not been, and is not intended by the Company to be, renewed or extended; (v) consisting of an instrument evidencing Indebtedness or other debt instrument, if the indebtedness evidenced thereby has been paid in full; or (vi) if approved, authorized or ratified in writing by all the Lenders. Upon request by the Agent at any time, the Lenders will confirm in writing the Agent's authority to release particular types or items of Collateral pursuant to this subsection. (3) Each Lender agrees with and in favor of each other (which agreement shall not be for the benefit of the Company or any of its Subsidiaries) that the Company's obligation to such Lender under this Agreement and the other Loan Documents is not and shall not be secured by any real property collateral now or hereafter acquired by such Lender. 10. Miscellaneous Provisions. ------------------------ 10(a) No Assignment. The Company may not assign its rights or ------------- obligations under this Agreement without the prior written consent of one hundred percent (100%) of the Agent and the Lenders. Subject to the foregoing, all provisions contained in this Agreement or any document or agreement referred to herein or relating hereto shall inure to the benefit of each Lender, its successors and assigns, and shall be binding upon the Company, its successors and assigns. 10(b) Amendment. This Agreement may not be amended or terms or --------- provisions hereof waived unless such amendment or waiver is in writing and signed by the Majority Lenders, the Agent and the Company; provided, however, that without the prior written consent of one hundred percent (100%) of the Agent and the Lenders and (other than with respect to subparagraph (3) below) the Company, no amendment or waiver shall: (1) reduce the principal of, or rate of interest or fees on, the Loans, (2) modify the Credit Limit, (3) modify any Lender's Percentage Share thereof, (4) modify the definition of "Majority Lenders," (5) extend the Maturity Date or (6) amend this Paragraph 10(b). It is --------------- expressly agreed and understood that the failure by the required Lenders to elect to accelerate amounts outstanding hereunder and/or to terminate the obligation of the Lenders to make Loans hereunder shall not constitute an amendment or waiver of any term or provision of this Agreement. 10(c) Cumulative Rights; No Waiver. The rights, powers and ---------------------------- remedies of the Lenders hereunder are cumulative and in addition to all rights, power and remedies provided under any and all agreements between the Company and the Lenders relating hereto, at law, in equity or otherwise. Any delay or failure by the Lenders to exercise any right, power or remedy shall not constitute a waiver thereof by the Lenders, and no single or partial exercise by 25 the Lenders of any right, power or remedy shall preclude other or further exercise thereof or any exercise of any other rights, powers or remedies. 10(d) Entire Agreement. This Agreement and the documents and ---------------- agreements referred to herein embody the entire agreement and understanding between the parties hereto and supersede all prior agreements and understandings relating to the subject matter hereof and thereof. 10(e) Survival. All representations, warranties, covenants and -------- agreements herein contained on the part of the Company shall survive the termination of this Agreement and shall be effective until the Obligations are paid and performed in full or longer as expressly provided herein. 10(f) Notices. All notices given by any party to the others shall ------- be in writing unless otherwise provided for herein, delivered by facsimile transmission, personally or by depositing the same in the United States mail, registered or certified, with postage prepaid, addressed to the party as set forth on Schedule 1 attached hereto, as such Schedule 1 may be amended from ---------- ---------- time to time. Any party may change the address to which notices are to be sent by notice of such change to each other party given as provided herein. Such notices shall be effective on the date received or, if mailed, on the third Business Day following the date mailed. 10(g) Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of California. 10(h) Assignments, Participations, Etc. -------------------------------- (1) Any Lender may at any time, with the consent of the Agent and, but only so long as there does not exist an Event of Default, the Company, assign and delegate to one or more financial institutions (each an "Assignee") all, or any ratable part of all, of the Loans and the other rights and obligations of such Lender hereunder in a minimum amount of $5,000,000.00; provided, however, that the Company and the Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment institutions, addresses and related information with respect to the Assignee, shall have been given to the Company and the Agent by such Lender and the Assignee; (ii) such Lender and its Assignee shall have delivered to the Company and the Agent an Assignment and Acceptance Agreement together with any Note or Notes subject to such assignment; and (iii) the Agent shall have been paid a fee on account of such assignment in the amount of $2,500.00. From and after the date that the Agent notifies the assignor Lender that it has received an executed Assignment and Acceptance Agreement, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned to it pursuant to such Assignment and Acceptance Agreement, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance Agreement, relinquish its rights and be 26 released from its obligations under the Loan Documents. Within five Business Days after its receipt of notice by the Agent that it has received an executed Assignment and Acceptance Agreement, which notice shall also be sent by the Agent to each Lender, the Company shall execute and deliver to the Agent, new Notes evidencing such Assignee's assigned Loans and Loan funding commitment. Upon the effective date of such assignment, this Agreement and the other Loan Documents shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Percentage Share arising therefrom. (2) Any Lender may at any time sell to one or more financial institutions or other Persons (each a "Participant") participating interests in any Loans, the funding commitment of that Lender and the other interests of that Lender (the "originating Lender") hereunder and under the other Loan Documents; provided, however, that (i) the originating Lender's obligations under this Agreement shall remain unchanged, (ii) the originating Lender shall remain solely responsible for the performance of such obligations, (iii) the Company and the Agent shall continue to deal solely and directly with the originating Lender in connection with the originating Lender's rights and obligations under this Agreement and the other Loan Documents, and (iv) following such sale that Lender shall continue to hold a Percentage Share of the Credit Limit of not less than $5,000,000.00. (3) Notwithstanding any other provision contained in this Agreement or any other Loan Document to the contrary, any Lender may assign all or any portion of the Loans or Notes held by it to any Federal Reserve Lender or the United States Treasury as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Lender. 10(i) Counterparts. This Agreement and the other Loan Documents may be ------------ executed in any number of counterparts, all of which together shall constitute one agreement. 11(j) Sharing of Payments. If any Lender shall receive and retain any ------------------- payment, whether by setoff, application of deposit balance or security, or otherwise, in respect of the Obligations in excess of such Lender's Percentage Share thereof, then such Lender shall purchase from the other Lenders for cash and at face value and without recourse, such participation in the Obligations held by them as shall be necessary to cause such excess payment to be shared ratably as aforesaid with each of them; provided, that if such excess payment or part thereof is thereafter recovered from such purchasing Lender, the related purchases from the other Lenders shall be rescinded ratably and the purchase price restored as to the portion of such excess payment so recovered, but without interest. Each Lender is hereby authorized by the Company to exercise any and all rights of setoff, counterclaim or bankers' lien against the full amount of the Obligations, whether or not held by such Lender. Each Lender hereby agrees to exercise any such rights first against the Obligations and only then to any other Indebtedness of the Company to such Lender. 27 10(k) Consent to Jurisdiction. SUBJECT TO PARAGRAPH 10(m) BELOW, ANY ----------------------- --------------- LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE LENDERS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENT AND THE LENDERS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER -------------------- HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE AGENT AND THE LENDERS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA LAW. 10(l) Waiver of Jury Trial. SUBJECT TO PARAGRAPH 10(m) BELOW, THE -------------------- --------------- COMPANY, THE LENDERS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE LENDERS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 10(m) Dispute Resolution. It is understood and agreed that upon the ------------------ request of any party hereto any dispute, claim, or controversy of any kind, whether in contract or in tort, statutory or common law, legal or equitable now existing or hereinafter arising out of, pertaining to or in connection with this Agreement or the other Loan Documents, or any related agreements, documents, or instruments, shall be resolved through final and binding arbitration administered by Judicial Arbitration & Mediation Services, Inc. ("J.A.M.S."). The hearing shall be conducted at a location determined by the arbitrator in Los Angeles, California and shall be administered by and in accordance with the then existing Rules of Practice and Procedure of 28 Judicial Arbitration & Mediation Services, Inc., and judgment upon any award rendered by the arbitrator may be entered by any State or Federal Court having jurisdiction thereof. The arbitrator shall determine which is the prevailing party or parties and shall include in the award that party's or parties' reasonable attorney's fees and costs. As soon as practicable after selection of the arbitrator, the arbitrator or his/her designated representative shall determine a reasonable estimate of anticipated fees and costs of the arbitrator, and render a statement to each party setting forth that party's pro-rata share of said fees and costs. Thereafter each party shall, within ten days of receipt of said statement, deposit said sum with the arbitrator. Failure of any party to make such a deposit shall result in a forfeiture by the non-depositing party of the right to prosecute or defend that claim which is the subject of the arbitration, but shall not otherwise serve to abate, stay under this paragraph, nor any other provision of this dispute resolution provision, shall limit the right of any party to obtain provisional or ancillary remedies such as injunctive relief from any court having jurisdiction before, during or after the pendency of any arbitration. The institution and maintenance of an action for the pursuit of provisional or ancillary remedies shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration. 10(n). Indemnity. --------- (1) Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify and hold the Agent and each Lender and each of their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including attorney's fees and expenses, including the allocated cost of internal counsel) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of the Agent or replacement of any Lender) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any insolvency proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, however, that the Company shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting solely from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Paragraph 10(n)(1) shall survive payment of all other Obligations. ------------------ (2) Any agreement of the Agent and the Lenders herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Company. The Agent and the Lenders shall be entitled to rely on the authority of any Person purporting to be an authorized Person and the Agent and the Lenders shall not have any liability to the Company or other Person on account of any 29 action taken or not taken by the Agent or the Lenders in reliance upon such telephonic or facsimile notice. The obligation of the Company to repay the Loans shall not be affected in any way or to any extent by any failure by the Agent and the Lenders to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Lenders of a confirmation which is at variance with the terms understood by the Agent and the Lenders to be contained in the telephonic or facsimile notice. 10(o) Marshalling: Payments Set Aside. Neither the Agent nor the ------------------------------- Lenders shall be under any obligation to marshall any assets in favor of the Company or any other Person or against or in payment of any or all of the Obligations. To the extent that the Company makes a payment or payments to the Agent or the Lenders, or the Agent or the Lenders enforce their Liens or exercise their rights of set-off, and such payment or payments or the proceeds of such enforcement or set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent in its discretion) to be repaid to a trustee, receiver or any other party in connection with any insolvency proceeding, or otherwise, then (1) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or set-off had not occurred, and (2) each Lender severally agrees to pay to the Agent upon demand its ratable share of the total amount so recovered from or repaid by the Agent. 10(p) Set-off. In addition to any rights and remedies of the Lenders ------- provided by law, if an Event of Default exists, each Lender is authorized at any time and from time to time, without prior notice to the Company, any such notice being waived by the Company to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing to, such Lender to or for the credit or the account of the Company against any and all Obligations owing to such Lender, now or hereafter existing, irrespective of whether or not the Agent or such Lender shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Each Lender agrees promptly to notify the Company and the Agent after any such set-off and application made by such Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. 10(q) Severability. The illegality or unenforceability of any ------------ provision of this Agreement or any other Loan Document or any instrument or agreement required hereunder or thereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions hereof or thereof. 10(r) No Third Parties Benefited. This Agreement and the other Loan -------------------------- Documents are made and entered into for the sole protection and legal benefit of the Company, the Lenders and the Agent, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. Neither the Agent nor 30 any Lender shall have any obligation to any Person not a party to this Agreement or other Loan Documents. 11. Definitions. For purposes of this Agreement, the terms set forth ----------- below shall have the following meanings: "Affiliate" shall mean, as to any Person, any other Person directly or --------- indirectly controlling, controlled by or under direct or indirect common control with, such Person. "Control" as used herein means with respect to any business entity the power to direct the management and policies of such business entity. "Agent" shall have the meaning given such term in the introductory ----- paragraph hereof and shall include any successor to Sanwa as the initial "Agent" hereunder. "Aggregate Collateral Value of the Borrowing Base" shall mean at any ------------------------------------------------ date the sum of the Collateral Values of all Eligible Program Contracts included in the Borrowing Base at such date. "Agreement" shall mean this Agreement, as the same may be amended, --------- extended or replaced from time to time. "Applicable COF Rate" shall mean with respect to any Interest Period, ------------------- the COF Rate for such Interest Period plus two percent (2.00%). "Assignee" shall have the meaning given such term in -------- Paragraph 10(h)(1) above. - ------------------ "Assignment and Acceptance Agreement" shall mean an agreement in the ----------------------------------- form of that attached hereto as Exhibit H. --------- "Borrowing Base" shall mean at any date all Eligible Program Contracts -------------- in which the Agent holds for the benefit of the Lenders a first priority, perfected security interest at such date. "Borrowing Base Certificate" shall mean a report in form acceptable to -------------------------- the Agent, duly certified by a responsible officer of the Company. "Business Day" shall mean any day other than a Saturday, a Sunday or a ------------ day on which banks in Los Angeles, California are authorized or obligated to close their regular banking business. "COF Rate" shall mean, with respect to any Interest Period for a COF -------- Loan, a percentage equivalent to the rate per annum quoted in London by banks in the interbank eurocurrency market for deposits in immediately available U.S. dollars in an amount equal to the amount of such COF Loan for a period of time equal to such Interest Period on the first day of such Interest Period which Sanwa determines in its sole and absolute discretion to be equal to Sanwa's cost of acquiring funds (adjusted for any and all assessments, surcharges and reserve requirements pertaining to the borrowing or purchase by Sanwa of such funds) in an amount 31 approximately equal the amount of the relevant COF Loan for a period of time approximately equal to the relevant Interest Period. "COF Rate Loans" shall mean Loans hereunder during such time as they -------------- are made and/or being maintained at a rate of interest based upon the COF Rate. "Collateral" shall mean, collectively and severally, the personal ---------- property collateral described as such in the Security Agreement. "Collateral Value" shall mean at any date with respect to any Eligible ---------------- Program Contract, ninety five percent (95%) of: (a) in the case of each Equipment Sale Contract, the outstanding principal balance of the promissory note evidencing the same at such date, and (b) in the case of each Equipment Lease, the net lease receivable thereunder, computed in accordance with GAAP. "Commonly Controlled Entity" of a Person shall mean a Person, whether -------------------------- or not incorporated, which is under common control with such Person within the meaning of Section 414(c) of the Internal Revenue Code. "Contact Office" shall mean the office of Sanwa located at 601 South -------------- Figueroa Street, W8-6, Los Angeles, California 90017 or such other office as Sanwa may notify the Company and the Lenders from time to time in writing. "Contractual Obligation" as to any Person shall mean any provision of ---------------------- any security issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound. "Credit Limit" shall mean $15,000,000.00, as such amount may be ------------ increased or decreased by written agreement of the Agent, the Company and one hundred percent (100%) of the Lenders. "Current Assets" shall mean for any Person, as of any date of -------------- determination, all amounts which would, in accordance with GAAP, be included under current assets on a balance sheet of such Person; provided, however, that such amounts shall not include (a) any amounts for any Indebtedness owing by an Affiliate of such Person unless such Indebtedness arose in connection with the sale of goods or other property in the ordinary course of business and would otherwise constitute current assets in conformity with GAAP, (b) the equity value of any shares of stock issued by an Affiliate of such Person, (c) the cash surrender value of any life insurance policy, or (d) any intangibles. "Current Liabilities" shall mean for any Person, as of any date of ------------------- determination, all amounts which would, in accordance with GAAP, be included under current liabilities on a balance sheet of such Person. "EBITDA" shall mean for any period the sum of (a) net income (or net ------ loss) plus (b) all amounts treated as expenses for interest, amortization, depreciation, taxes (to the extent 32 included in the determination of net income (or net loss)), and other non-cash charges for such period. "Eligible Program Contract" shall mean a Program Contract for which each ------------------------- of the following statements is accurate and complete (and the Company by including such Program Contract in any computation of the Aggregate Collateral Value of the Borrowing Base shall be deemed to represent and warrant to the Agent and the Lenders the accuracy and completeness of such statements): (a) Said Program Contract is a binding and valid obligation of the Obligor thereon, in full force and effect and enforceable in accordance with its terms; (b) Said Program Contract is genuine, in all respects as appearing on its face or as represented in the books and records of the Company, and all information set forth therein is true and correct; (c) Except to the extent permitted pursuant to subparagraph (d) below, said Program Contract is free of all default of any party thereto, including, without limitation, the Company, counterclaims, offsets and defenses and from any rescission, cancellation or avoidance, and all right thereof, whether by operation of law or otherwise; (d) No payment under said Program Contract is more than thirty (30) days past due; (e) Said Program Contract is free of waivers, concessions and understandings with the Obligor thereon of any kind other that such as have been disclosed to and approved by the Agent in writing; (f) Said Program Contract is, and at all times will be, free and clear of all liens, encumbrances, charges, rights and interests of any kind, except in favor of the Agent for the benefit of the Lenders; (g) Said Program Contract was originated in the ordinary course of the Company's business, consistent in all respects with Requirements of Law, including, without limitation, usury laws; (h) The Obligor on said Program Contract: (1) is located within the United States of America or the District of Columbia; (2) is not the subject of any bankruptcy or insolvency proceeding, nor has a trustee or receiver been appointed for all or a substantial part of its property, nor has said Obligor made an assignment for the benefit of creditors, admitted its inability to pay its debts as they mature or suspended its business; (3) is not affiliated, directly or indirectly, with the Company, as a Subsidiary or other Affiliate, employee or otherwise; (4) is not a state or federal governmental department, commission, board, bureau or agency; and (5) is not in default or delinquent under any other Program Contract held by the Company; 33 (i) The aggregate amount payable by the Obligor on said Program Contract at the date of origination was not less than $50,000.00 nor more than $500,000.00 unless otherwise approved by the Agent in writing; (j) The aggregate amount payable by the Obligor on said Program Contract when added to the aggregate amount payable by such Obligor on all other Program Contracts held by the Company from such Obligor does not exceed the greater of: (1) $1,500,000.00, and (2) ten percent (10%) of the Credit Limit; (k) The term of said Program Contract at origination and after giving effect to any renewals and extensions contemplated thereby did not exceed eighty four (84) months; (l) The Required Documents for such Program Contract have been delivered to the Agent; (m) If the Obligor on said Program Contract is a franchisee under a "Tier 2 Concept" or "Tier 3 Concept" (as set forth in the Underwriting Guidelines), the Collateral Value of said Program Contract when added to the Collateral Value of all other Program Contracts of similar Obligors included in the calculation of the Aggregate Collateral Value of the Borrowing Base does not exceed the greater of: (1) $1,500,000.00, and (2) thirty percent (30%) of the aggregate dollar amount of Loans outstanding; (n) Unless said Program Contract is an Equipment Lease which is a "true" or "operating" lease, said Program Contract is secured by a validly perfected, first priority security interest in favor of the Company as secured party in the equipment which is the subject of such Program Contract; (o) There is only one original executed copy of such Program Contract; (p) Said Program Contract constitutes "chattel paper" as defined in the Uniform Commercial Code of the jurisdiction under which the perfection of the Agent's security interest therein will be determined; (q) The Company has indicated in its books and records, including, without limitation, in its computer files, that said Program Contract has been pledged to the Agent for the benefit of the Lenders; and (r) Said Program Contract is otherwise satisfactory to the Agent, in its sole discretion. "Equipment Lease" shall mean a written lease or rental agreement entered --------------- into by the Company in the ordinary course of its business pursuant to which the Company leases equipment included in the Company's inventory to the Obligor thereon, which lease may be a "true" or "cooperating" lease or a "financing" lease. 34 "Equipment Sale Contract" shall mean a written agreement pursuant to ----------------------- which the Company in the ordinary course of its business sells equipment included in the Company's inventory to the Obligor thereunder, including, without limitation, the promissory note evidencing the obligor's agreement to pay for such equipment and a security agreement covering the subject equipment as collateral security for such note. "ERISA" shall mean the Employee Retirement Income Security Act of ----- 1974, as the same may from time to time be supplemented or amended. "Event of Default" shall have the meaning given such term in ---------------- Paragraph 8 above. - ----------- "GAAP" shall mean generally accepted accounting principles in the ---- United States of America in effect from time to time. "Governmental Authority" shall mean any nation or government, any ---------------------- state or other political subdivision thereof, or any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantor" shall mean Imperial Credit Industries, Inc., a California --------- corporation. "Guaranty" shall have the meaning given such term in Paragraph 3(b) -------- -------------- above. "Hazardous Materials" shall mean any flammable materials (excluding ------------------- wood products normally used in construction), explosives, radioactive materials, hazardous wastes, toxic substances or related materials, including, without limitation, any substances defined as or included in the definitions of "hazardous substances," "hazardous wastes," "hazardous materials," or "toxic substances" under any applicable federal, state, or local laws or regulations. "Hazardous Materials Claims" shall mean any enforcement, cleanup, -------------------------- removal or other governmental or regulatory action or order with respect to the Property, pursuant to any Hazardous Materials Laws, and/or any claim asserted in writing by any third party relating to damage, contribution, cost recovery compensation, loss or injury resulting from any Hazardous Materials. "Hazardous Materials Laws" shall mean any applicable federal, state or ------------------------ local laws, ordinances or regulations relating to Hazardous Materials. "Indebtedness" of any Person shall mean all items of indebtedness ------------ which, in accordance with GAAP and practices, would be included in determining liabilities as shown on the liability side of a statement of condition of such Person as of the date as of which indebtedness is to be determined, including, without limitation, all obligations for money borrowed and capitalized lease obligations, and shall also include all indebtedness and liabilities of others assumed or guaranteed by such Person or in respect of which such Person is secondarily or contingently liable (other than by endorsement of instruments in the course of collection) whether by reason of any agreement to acquire such indebtedness or to supply or advance sums or otherwise. 35 "Interest Expense" shall mean for any period all interest and similar ---------------- charges actually paid on account of Indebtedness of the Company and its Subsidiaries during such period. "Interest Period" shall mean with respect to any Loan which is a --------------- COF Loan, the period commencing on the date such Loan is advanced and ending 30, 60, 90 or 180 days thereafter, as designated in the related Loan Request; provided, however, that (a) any Interest Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day, and (b) no Interest Period shall end after date set forth in subparagraph (a) of the definition of the "Maturity Date". "Interim Date" shall mean September 30, 1996. ------------ "Lien" shall mean any security interest, mortgage, pledge, lien, claim ---- on property, charge or encumbrance (including any conditional sale or other title retention agreement), any lease in the nature thereof, and the filing of or agreement to give any financial statement under the Uniform Commercial Code of any jurisdiction. "Loan Documents" shall mean this Agreement, the Security Agreement, -------------- the Notes, the Guaranty, the Subordination Agreement and each other document, instrument or agreement executed by the Company and the Guarantor in connection herewith or therewith, as any of the same may be amended, extended or replaced from time to time. "Loan Request" shall mean a request for a Loan in form satisfactory to ------------ the Agent. "Loans" shall have the meaning given in Paragraph 1(a) above. ----- -------------- "Majority Lenders" shall mean the Lenders holding not less than fifty ---------------- one percent (51%) of the Percentage Shares; provided, however, that at any time during which the number of Lenders hereunder are less than three, the term "Majority Lenders" shall mean one hundred percent (100%) of the Lenders. "Maturity Date" shall mean the earlier of: (a) September 30, 1997, as ------------- such date may be extended from time to time in writing by one hundred percent (100%) of the Lenders, in their sole discretion, and (b) the date the Lenders terminate their obligation to make further Loans hereunder pursuant to Paragraph 8 above. - ----------- "Multiemployer Plan" as to any Person shall mean a Plan of such Person ------------------ which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Profit After Taxes" shall mean for any Person for any period, the ---------------------- pre-tax net income (or net loss) of such Person for such period, determined in accordance with GAAP, less all accrued taxes on or measured by income to the ---- extent included in the determination of such net income (or loss); provided, however, that net income (or net loss) shall be computed for these purposes without giving effect to extraordinary losses or extraordinary gains, as determined under GAAP. 36 "Notes" shall have the meaning given such term in Paragraph 2(b) ----- -------------- above. "Obligations" shall mean any and all debts, obligations and ----------- liabilities of the Company to the Lenders (whether now existing or hereafter arising, voluntary or involuntary, whether or not jointly owed with others, direct or indirect, absolute or contingent, liquidated or unliquidated, and whether or not from time to time decreased or extinguished and later increased, created or incurred), arising out of or related to the Loan Documents. "Obligor" shall mean the Person or Persons obligated to pay the ------- indebtedness which is the subject of a Program Contract. "Participant" shall have the meaning given such term in ----------- Paragraph 10(h)(2) above. - ------------------ "PBGC" shall mean the Pension Benefit Guaranty Corporation established ---- pursuant to Subtitle A of Title IV of ERISA and any successor thereto. "Percentage Share" shall mean, for any Lender at any date that ---------------- percentage which the dollar commitment of such Lender bears to the aggregate dollar commitment of all Lenders hereunder, as set forth on Schedule 2 attached ---------- hereto, as said Schedule 2 may be amended from time to time. ---------- "Permitted Other Debt" shall mean that Indebtedness described on -------------------- Exhibit I attached hereto. - --------- "Permitted Other Liens" shall mean Liens securing Indebtedness --------------------- described as "Permitted Other Secured Debt" on Exhibit I attached hereto. --------- "Person" shall mean any corporation, natural person, firm, joint ------ venture, partnership, trust, unincorporated organization, government or any department or agency of any government. "Plan" shall mean as to any Person, any pension plan that is covered ---- by Title IV of ERISA and in respect of which such Person or a Commonly Controlled Entity of such Person is an "employer" as defined in Section 3(5) of ERISA. "Potential Default" shall mean an event which but for the lapse of ----------------- time or the giving of notice, or both, would constitute an Event of Default. "Proceeds" shall mean whatever is receivable or received when -------- Collateral or proceeds are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including return premiums, with respect to any insurance relating thereto. "Program Contract" shall mean an Equipment Lease or an Equipment Sale ---------------- Contract originated by the Company in the ordinary course of the Company's business. 37 "Property" shall mean, collectively and severally, any and all real -------- property, including all improvements and fixtures thereon, owned or occupied by the Company. "Reference Rate" shall mean the fluctuating per annum rate announced from -------------- time to time by Sanwa in Los Angeles, California, as its "Reference Rate". The Reference Rate is a rate set by Sanwa based upon various factors including Sanwa's costs and desired return, general economic conditions, and other factors, and is used as a reference point for pricing some loans, which may be priced at, above or below the Reference Rate. "Reference Rate Loans" shall mean Loans hereunder during such time as they -------------------- are made and/or being maintained at a rate of interest based upon the Reference Rate. "Related Program Contract" shall mean with respect to any Loan, the ------------------------ Eligible Program Contract presented for inclusion in the Borrowing Base at the time of, and as a condition to, the funding of such Loan. "Reportable Event" shall mean a reportable event as defined in Title IV of ---------------- ERISA, except actions of general applicability by the Secretary of Labor under Section 110 of ERISA. "Required Documents" shall mean with respect to any Program Contract those ------------------ documents, instruments and agreements described on Exhibit J attached hereto. --------- "Requirements of Law" shall mean as to any Person the Certificate of ------------------- Incorporation and ByLaws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation, or a final and binding determination of an arbitrator or a determination of a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Financial Officer" of any Person shall mean the chief ----------------------------- financial officer or treasurer of such Person or any other officer of such Person who is actively involved in the day to day financial operations of such Person. "Security Agreement" shall have the meaning given such term in ------------------ Paragraph 3(a) above. - -------------- "Single Employer Plan" shall mean as to any Person any Plan of such Person -------------------- which is not a Multiemployer Plan. "SPTL" shall mean Southern Pacific Thrift and Loan, a California industrial ---- loan company. "SPTL Asset Purchase Agreement" shall mean that certain Master Loan Sale ----------------------------- Agreement dated as of August 23, 1995 by and between SPTL and the Company pursuant to which the Company agreed to purchase certain assets of SPTL as provided more particularly therein. "Statement Date" shall mean December 31, 1995. -------------- 38 "Subordination Agreement" shall have the meaning given such term in ----------------------- Paragraph 3(b) above. --- "Subsidiary" shall mean any corporation more than fifty percent (50%) of ---------- the stock of which having by the terms thereof ordinary voting power to elect the board of directors, managers or trustees of the corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) shall, at the time as of which any determination is being made, be owned, either directly or through Subsidiaries and any other partnership, joint venture or other business combination whose management and policies are controlled by or under common control with the Company or any of its Subsidiaries. "Tangible Net Worth" shall mean for any Person at any time of ------------------ determination, total assets (exclusive of equity investments in Subsidiaries and other Persons, notes receivable from Affiliates, goodwill, patents, trademarks, trade names, organization expense, treasury stock, unamortized debt discount and premium, deferred charges and other like intangibles) less Total Liabilities (including accrued and deferred income taxes but excluding subordinated debt), at such time. "Total Liabilities" shall mean for any Person at any time of determination, ----------------- all liabilities of such Person which in accordance with GAAP would be shown on the liability side of a balance sheet of such Person but excluding subordinated debt, as determined in accordance with GAAP. 39 "Underwriting Guidelines" shall mean the underwriting guidelines ----------------------- of the Company dated as of August 22, 1996, a copy of which are attached hereto as Exhibit K, as the same may be amended form time to time with prior written --------- notice to the Agent. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year above written. SANWA BANK CALIFORNIA, as Agent and a Lender By: --------------------------------- John C. Hyche, Vice President By: ---------------------------------- Robinson T. Kaspar, Vice President FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a California limited liability company By: /s/ John Rinaldi ---------------------------------- John Rinaldi, Senior Vice President 40 SCHEDULE OF EXHIBITS -------------------- EXHIBIT DOCUMENT - ------- -------- A Form of Note B Form of Security Agreement C Form of Guaranty D Form of Subordination Agreement E-1 Form of Officer's Certificate (Company) E-2 Form of Officer's Certificate (Guarantor) F Litigation Schedule G Schedule of Subsidiaries H Form of Assignment and Acceptance Agreement I Schedule of Permitted Other Debt J Schedule of Required Documents K Underwriting Guidelines Schedule 1: Schedule of Addresses for Notice Purposes Schedule 2: Schedule of Percentage Shares 41 EXHIBIT A --------- TO CREDIT AGREEMENT ------------------- FORM OF NOTE ---- February 28, 1997 FOR VALUE RECEIVED, the undersigned, FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a limited company organized under the laws of the State of California (the "Company"), hereby-unconditionally promises to pay to the order of _____________________(the "Lender"), at the office of SANWA BANK CALIFORNIA (the "Agent"), located at 601 South Figueroa Street, Los Angeles, California 90017, or such other place as the Agent may designate in writing, in lawful money of the United States, on the dates required under that certain Credit Agreement dated as of February 28, 1997 among the Company, the Agent, and the lenders signatory thereto, including the Lender (as the same may be amended, extended or replaced from time to time, the "Credit Agreement," and with capitalized terms not otherwise defined herein used with the meanings given such terms in the Credit Agreement), the principal amount of Lender's Percentage Share of each Loan outstanding under the Credit Agreement. The Company further agrees to pay interest in like money and funds to the Agent at the location indicated above, on the unpaid principal amount hereof from the date advanced on the dates and at the applicable rates set forth in the Credit Agreement. The holder of this Note is hereby authorized to record the date and amount of the Lender's Loans, the date and amount of each payment of principal and interest, and applicable interest rates and other information with respect thereto, on the schedules annexed to and constituting a part of this Note (or record such information by any analogous method the holder hereof may elect consistent with its customary practices) and any such recordation shall constitute prima facie evidence, absent manifest error, of the accuracy of the ----------- information so recorded; provided, however, that the failure to make a notation or the inaccuracy of any notation shall not limit or otherwise affect the obligations of the Company under the Loan Documents. This Note is one of the Notes referred to in, and entitled to all the benefits of, the Credit Agreement and the other Loan Documents. Reference is hereby made to the Loan Documents for rights and obligations of payment and prepayment, collateral security, Events of Default and the rights of acceleration of the maturity hereof upon the occurrence of an Event of Default. This Note shall be governed by and construed in accordance with the laws of the State of California. FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a California limited liability Company By: /s/ ------------------------------------- Name: ---------------------------------- Title: ---------------------------------- 2 EXHIBIT B --------- TO CREDIT AGREEMENT ------------------- FORM OF SECURITY AND COLLATERAL AGENCY AGREEMENT ---------------------------------------- THIS SECURITY AND COLLATERAL AGENCY AGREEMENT (the "Security Agreement") is made and dated this 28th day of February, 1997, by and between FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a limited liability company organized under the laws of the State of California (the "Company"), and SANWA BANK CALIFORNIA, acting in its capacity as Agent for the Lenders participating in (and as the terms "Agent," "Lenders" and capitalized terms not otherwise defined herein are defined in) that certain Credit Agreement dated as of February 28, 1997 by and among the Company, the Agent and the Lenders (as the same may be amended, extended and replaced from time to time, the "Credit Agreement"). RECITALS -------- A. Pursuant to the Credit Agreement the Lenders have agreed to extend credit to the Company on the terms and subject to the conditions set forth in therein and in the other Loan Documents. B. As a condition precedent to the agreement of the Lenders to enter into the Credit Agreement and to make Loans thereunder, the Company is required to execute and deliver to the Agent for the benefit of the Lenders this Security Agreement. NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: AGREEMENT --------- 1. Appointment. By executing a copy of or otherwise becoming a "Lender" ----------- under the Credit Agreement, each Lender shall automatically be deemed to appoint the Agent to act as secured party, agent, custodian and bailee for the exclusive benefit of Lenders with respect to the Collateral (as defined in Paragraph 2 ----------- below). The Agent hereby accepts such appointment and agrees to maintain and hold all Collateral as secured party, agent, custodian and bailee for the exclusive benefit of Lenders. The Agent agrees to act in accordance with this Security Agreement and acknowledges and agrees that the Agent is not, and shall not at any time in the future be, subject, with respect to the Collateral, in any manner or to any extent, to the direction or control of the Company except as expressly permitted hereunder and under the other Loan Documents. 2. Grant of Security Interest. The Company hereby pledges, mortgages, -------------------------- assigns and grants to the Agent for the equal, ratable benefit of the Lenders in accordance with their respective Percentage Shares, and to the Lenders, a first priority perfected security interest in the property described in Paragraph 3 ----------- below (collectively and severally, the "Collateral") to secure payment and performance of the Obligations. 3. Collateral. The Collateral shall consist of all now existing and ---------- hereafter arising right, title and interest of the Company in each of the following: (a) All Program Contracts, now existing and hereafter arising, the Required Documents for which have been delivered to the Agent or which are otherwise included in the calculation of the Aggregate Collateral Value of the Borrowing Base ("Subject Program Contracts"), including, without limitation, all Equipment Leases and Equipment Sales Contracts and the documents, instruments and agreements evidencing the same, as the same may be amended, extended or replaced from time to time; (b) All now existing and hereafter arising rights to payment under or with respect to the Subject Program Contracts, including, without limitation, all rental and lease payments, sales payments, early termination payments, casualty loss payments and indemnity payments, whether payable by the Obligors under such Subject Program Contracts or by third parties, including without limitation under policies of insurance and guaranties; (c) All now existing and hereafter acquired inventory of the Company which at any time is covered by a Subject Program Contract and all additions and accessions thereto and replacements therefor and all rights of the Company in the personal property which is at any time covered by a Subject Program Contract which property does not constitute inventory of the Company and all additions and accessions thereto; (d) All Liens, including, without limitation, consensual security interests, on personal property (tangible and intangible) now existing or hereafter arising held by the Company as collateral security for the obligations of the Obligors under the Subject Program Contracts and all property which is the subject of such Liens; (e) All now existing and hereafter arising rights of the Company against vendors of the properties which are covered by Subject Program Contracts; (f) Account No. 0493-24551 maintained at Sanwa Bank California and any and all funds at any time held therein; (g) All now existing and hereafter acquired books and records relating to the foregoing Collateral and all equipment containing such books and records (including, without limitation, computer data and storage media); and (h) All products and all Proceeds of any of the foregoing. 2 4. Representations and Warranties. In addition to all representations and ------------------------------ warranties of the Company set forth in the Loan Documents, which are incorporated herein by the reference, the Company hereby represents and warrants that: (a) The Company is the sole owner of and has good and marketable title to the Collateral (or, in the case of after-acquired Collateral, at the time the Company acquires rights in the Collateral, will be the sole owner thereof); (b) No person has (or, in the case of after-acquired Collateral, at the time the Company acquires rights therein, will have) any right, title, claim or interest (by way of security interest or other lien or charge) in, against or to the Collateral; (c) All information heretofore, herein or hereafter supplied to the Agent or any Lender by or on behalf of the Company with respect to the Collateral is or will be accurate and complete; and (d) The Company has delivered to the Agent all instruments, chattel paper and other items of Collateral in which a security interest is or may be perfected by possession, together with such additional writings, including, without limitation, assignments, with respect thereto as are deemed necessary by the Agent to perfect the security interest granted hereunder therein. (e) There exists only one executed original for each document, instrument or agreement in connection with the Subject Program Contracts delivered by the Company to the Agent. 5. Convenants and Agreements of the Company. In addition to all covenants ---------------------------------------- and agreements of the Company set forth in the Loan Documents, which are incorporated herein by this reference, the Company hereby agrees: (a) To do all acts that may be necessary to maintain, preserve and protect the Collateral; (b) Not to use or permit any Collateral to be used unlawfully or in violation of any provision of this Security Agreement, any other agreement with the Agent and/or the Lenders related hereto, or any Requirement of Law or Contractual Obligation affecting the Collateral; (c) To pay promptly when due all taxes, assessments, charges, encumbrances and Liens now or hereafter imposed upon or affecting any Collateral; (d) To appear in and defend any action or proceeding which may affect its title to or the Agent's interest on behalf of the Lenders in the Collateral; (e) Not to surrender or lose possession of (other than to the Agent), sell, encumber, lease, rent, or otherwise dispose of or transfer any Collateral or right or interest 3 therein except as expressly provided herein and in the other Loan Documents, and to keep the Collateral free of all levies and security interests or other Liens or charges except those approved in writing by the Agent and the Lenders; provided, however, that, unless an Event of Default shall have occurred and be continuing, the Company may, in the ordinary course of business, sell or lease any Collateral consisting of inventory and transfer funds from deposit accounts included in the Collateral; (f) To account fully for and promptly deliver to the Agent, in the form received, all documents, chattel paper, instruments and agreements constituting Collateral hereunder and all proceeds of the Collateral received, all endorsed or assigned to the Agent or in blank, as requested by the Agent, and until so delivered all such documents, instruments, agreements and proceeds shall be held by the Company in trust for the Lenders, separate from all other property of the Company. (g) To keep separate, accurate and complete records of the Collateral and to provide the Agent and each of the Lenders with such records and such other reports and information relating to the Collateral as the Agent or any Lender may reasonably require from time to time; (h) To give the Agent thirty (30) days prior written notice of any change in the Company's chief place of business or legal name or trade name(s) or style(s) referred to in Paragraph 9 below; ----------- (i) To keep the records concerning the Collateral at the location(s) referred to in Paragraph 9 below and not to remove such records from such ----------- location(s) without the prior written consent of the Agent; (j) To keep the Collateral consisting of inventory at the location(s) referred to in Paragraph 9 below prior to the sale thereof in the ordinary ----------- course of business; and (k) To keep the Collateral in good condition and repair and not to cause or permit any waste or unusual or unreasonable depreciation of the Collateral. 6. Authorized Action by Secured Party. The Company hereby agrees that ---------------------------------- from time to time, without presentment, notice or demand, and without affecting or impairing in any way the rights of the Agent with respect to the Collateral, the obligations of the Company hereunder or the Obligations, the Agent may, but shall not be obligated to and shall incur no liability to the Company, any Lender or any third party for failure to, take any action which the Company is obligated by this Security Agreement to do and to exercise such rights and powers as the Company might exercise with respect to the Collateral, and the Company hereby irrevocablY appoints the Agent as its attorney-in-fact to exercise such rights and powers, including, without limitation, to: (a) collect by legal proceedings or otherwise and endorse, receive and receipt for all dividends, interest, payments, proceeds and other sums and property now or hereafter payable on or on account of the Collateral; (b) enter into any extension, reorganization, deposit, merger, consolidation or other agreement pertaining to, or deposit, surrender, accept, hold or apply other property in exchange for the Collateral; (e) insure, process 4 and preserve the Collateral; (d) transfer the Collateral to its own or its nominee's name; (e) make any compromise or settlement, and take any action it deems advisable, with respect to the Collateral; and (f) subject to the provisions of Paragraph 7 below, notify any Obligor on any Collateral to make ----------- payment directly to the Agent. The Company hereby grants to the Agent for the benefit of the Lenders an exclusive, irrevocable power of attorney, with full power and authority in the place and stead of the Company to take all such action permitted under this Paragraph 6. ----------- 7. Collection of Collateral Payments. --------------------------------- (a) The Company shall, at its sole cost and expense, endeavor to obtain payment, when due and payable, of all sums due or to become due with respect to any Collateral ("Collateral Payments" or a "Collateral Payment"), including, without limitation, the taking of such action with respect thereto as the Agent or any Lender may reasonably request, or, in the absence of such request, as the Company may reasonably deem advisable; provided, however, that the Company shall not, without the prior written consent of the Lenders, grant or agree to any rebate, refund, compromise or extension with respect to any Collateral Payment or accept any prepayment on account thereof except in the ordinary course of business. Following the occurrence of an Event of Default, upon the request of the Agent, the Company will notify and direct any party who is or might become obligated to make any Collateral Payment, to make payment thereof directly to the Agent to such account or accounts as the Agent may designate in writing and to execute all instruments and take all action required by the Agent to ensure the rights of the Agent for the benefit of the Lenders in the Collateral. (b) Upon the request of the Agent at the direction of all the Lenders, the Company will, forthwith upon receipt, transmit and deliver to the Agent, in the form received, all cash, checks, drafts and other instruments for the payment of money (properly endorsed where required so that such items may be collected by the Agent) which may be received by the Company at any time as payment on account of any Collateral Payment and if such request shall be made, until delivery to the Agent, such items will be held in trust for the Agent and the Lenders and will not be commingled by the Company with any of its other funds or property. Thereafter, the Agent is hereby authorized and empowered to endorse the name of the Company on any check, draft or other instrument for the payment of money received by the Agent on account of any Collateral Payment if the Agent believes such endorsement is necessary or desirable for purpose of collection. (c) The Company will indemnify and save harmless the Agent from and against all reasonable liabilities and expenses on account of any adverse claim asserted against the Agent relating to any moneys received by the Agent on account of any Collateral Payment and such obligation of the Company shall continue in effect after and notwithstanding the discharge of the Obligations and the release of the security interest granted in Paragraph 2 above. ----------- 8. Remedies. Upon the occurrence of an Event of Default the Agent shall, -------- at the direction of all the Lenders, and without notice to or demand on the Company and in addition 5 to all rights and remedies available to the Lenders under the Loan Documents, at law, in equity or otherwise, do any one or more of the following: (a) Foreclose or otherwise enforce the Agent's security interest in any manner permitted by law, or provided for in this Security Agreement; (b) Sell, lease or otherwise dispose of any Collateral at one or more public or private sales at the Agent's place of business or any other place or places, including, without limitation, any broker's board or securities exchange, whether or not such Collateral is present at the place of sale, for cash or credit or future delivery, on such terms and in such manner as the Agent may determine; (c) Recover from the Company all costs and expenses, including, without limitation, reasonable attorneys' fees (including the allocated cost of internal counsel), incurred or paid by the Agent or any Lender in exercising any right, power or remedy provided by this Security Agreement; (d) Require the Company to assemble the Collateral and make it available to the Agent at a place to be designated by the Agent; (e) Enter onto property where any Collateral is located and take possession thereof with or without judicial process; and (f) Prior to the disposition of the Collateral, store, process, repair or recondition it or otherwise prepare it for disposition in any manner and to the extent the Agent deems appropriate and in connection with such preparation and disposition, without charge, use any trademark, tradename, copyright, patent or technical process used by the Company. The Company shall be given five (5) business days' prior notice of the time and place of any public sale or of the time after which any private sale or other intended disposition of Collateral is to be made, which notice the Company hereby agrees shall be deemed reasonable notice thereof. Upon any sale or other disposition pursuant to this Security Agreement, the Agent shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral or portion thereof so sold or disposed of. Each purchaser at any such sale or other disposition (including the Agent) shall hold the Collateral free from any claim or right of whatever kind, including any equity or right of redemption of the Company and the Company specifically waives (to the extent permitted by law) all rights of redemption, stay or appraisal which it has or may have under any rule of law or statute now existing or hereafter adopted. 9. Residence; Collateral Location; Records Location. The Company ------------------------------------------------ represents that its chief place of business is as set forth on Schedule 1 ---------- attached hereto; that the only trade name(s) or style(s) used by the Company are set forth on said Schedule 1; that, except as otherwise disclosed to the Agent ---------- in writing, the Company's records concerning the Collateral 6 are located at its chief place of business; and that Collateral consisting of inventory is located at the addresses set forth in said Schedule 1. ---------- EXECUTED as of the 28th day of February, 1997. FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a California limited liability company By: -------------------------------- Name: ------------------------------- Title: ------------------------------ SANWA BANK CALIFORNIA, a California banking corporation, as Agent for the benefit of the Lenders By: -------------------------------- Name: ------------------------------- Title: ------------------------------ 7 SCHEDULE 1 ---------- to Borrower Security Agreement CHIEF PLACE OF BUSINESS; TRADENAMES; LOCATION OF BOOKS AND RECORDS AND INVENTORY Chief Place of Business: Five Greenwich Office Park Greenwich, Connecticut 06831 Tradenames: FMAC Imperial Golf Location of Books and Records and Inventory: Five Greenwich Office Park Greenwich, Connecticut 06831 EXHIBIT C --------- TO CREDIT AGREEMENT ------------------- FORM OF ------- CONTINUING GUARANTY THIS CONTINUING GUARANTY (the "Guaranty") is made and dated as of the 28th day of February, 1997, by IMPERIAL CREDIT INDUSTRIES, INC., a California corporation ("Guarantor"). RECITALS A. Pursuant to that certain Credit Agreement dated as of February 28, 1997 (as the same may be amended, extended or replaced from time to time, the "Credit Agreement," and with capitalized terms not otherwise defined herein used with the meanings given such terms in the Credit Agreement) by and among Franchise Mortgage Acceptance Company, L.L.C. (the "Company"), the Lenders party thereto from time to time, and Sanwa Bank California, as agent for the Lenders (in such capacity, the "Agent"), the Lenders have agreed to make Loans to the Company on the terms and subject to the conditions set forth in the Credit Agreement. B. Pursuant to the Credit Agreement and as a condition precedent to the obligation of the Lenders to make Loans thereunder, Guarantor is required to execute and deliver this Guaranty to the Agent for the benefit of the Lenders. NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Guarantor hereby agrees as follows: AGREEMENT 1. Guarantor hereby irrevocably and unconditionally guarantees the payment when due, upon maturity, acceleration or otherwise, of the Obligations, whether heretofore, now, or hereafter made, incurred or created, whether voluntary or involuntary and however arising, absolute or contingent, liquidated or unliquidated, determined or undetermined, whether or not such Obligations are from time to time reduced, or extinguished and thereafter increased or incurred, whether the Company may be liable individually or jointly with others, whether or not recovery upon such Obligations may be or hereafter become barred by any statute of limitations, and whether or not such Obligations may be or hereafter become otherwise invalid or unenforceable. This is a continuing guaranty relating to any and all Obligations including those arising under successive transactions which shall either continue the Obligations or from time to time renew the same after such have been satisfied. 2. Guarantor irrevocably and unconditionally guarantees the payment of the Obligations whether or not due or payable by the Company upon: (a) the dissolution, insolvency or business failure of, or any assignment for benefit of creditors by, or commencement of any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceedings by or against, the Company or Guarantor, or (b) the appointment of a receiver for, or the attachment, restraint of or making or levying of any order of court or legal process affecting, the property of the Company or Guarantor, and unconditionally promises to pay such Obligations to Agent for the benefit of Lenders, or order, on demand, in lawful money of the United States. 3. The liability of Guarantor hereunder is exclusive and independent of any security for or other guaranty of the Obligations, whether executed by Guarantor or by any other party, and the liability of Guarantor hereunder is not affected or impaired by (a) any direction of application of payment by the Company or by any other party, or (b) any other guaranty, undertaking or maximum liability of Guarantor or of any other party as to the Obligations, or (c) any payment on or in reduction of any such other guaranty or undertaking, or (d) any revocation or release of any obligations of any other guarantor of the Obligations, or (e) any dissolution, termination or increase, decrease or change in personnel of Guarantor, or (f) any payment made to Lenders or Agent on the Obligations which any of such Persons repay to the Company pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, and Guarantor waives any right to the deferral or modification of Guarantor's obligations hereunder by reason of any such proceeding. 4. (a) The obligations of Guarantor hereunder are independent of the Obligations of the Company, and a separate action or actions may be brought and prosecuted against Guarantor whether or not action is brought against the Company and whether or not the Company be joined in any such action or actions. Guarantor waives, to the fullest extent permitted by law, the benefit of any statute of limitations affecting its liability hereunder or the enforcement thereof. Any payment by the Company or other circumstance which operates to toll any statute of limitations as to the Company shall operate to toll the statute of limitations as to Guarantor. (b) All payments made by Guarantor under this Guaranty shall be made without set-off or counterclaim and free and clear of and without deductions for any present or future taxes, fees, withholdings or conditions of any nature ("Taxes"). Guarantor shall pay any such Taxes, including Taxes on any amounts so paid, and will promptly furnish each Lender with copies of any tax receipts or such other evidence of payment as Lenders or Agent may require. Guarantor shall not be liable for such taxes (including income taxes or franchise taxes) as are imposed on or measured by each Lender's net income by the jurisdiction (or any political subdivision thereof) under the laws of which such Lender is organized or maintains a lending office. 5. Guarantor authorizes Lenders and Agent (whether or not after termination of this Guaranty), without notice or demand (except as shall be required by applicable statute and cannot be waived), and without affecting or impairing its liability hereunder, from time to time to 2 (a) renew, compromise, extend, increase, accelerate or otherwise change the time for payment of, or otherwise change the terms of, the Obligations or any part thereof, including increase or decrease of the rate of interest thereon; (b) take and hold security for the payment of this Guaranty or the Obligations and exchange, enforce, waive and release any such security; (c) apply such security and direct the order or manner of sale thereof as Lenders and Agent in their discretion may determine; and (d) release or substitute any one or more endorsers, guarantors, the Company or other obligors. Lenders and Agent may without notice to or the further consent of the Company or Guarantor assign this Guaranty in whole or in part to any person acquiring an interest in the Obligations. 6. It is not necessary for Lenders or Agent to inquire into the capacity or power of the Company or the officers acting or purporting to act on its behalf, and Obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. 7. Guarantor waives any right to require Lenders or Agent to: (a) proceed against the Company or any other party; (b) proceed against or exhaust any security held from the Company; or (c) pursue any other remedy in Lenders' power whatsoever. Guarantor waives any personal defense based on or arising out of any personal defense of the Company other than payment in full of the Obligations, including, without limitation, any defense based on or arising out of the disability of the Company, or the invalidity or unenforceability of the Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Company other than payment in full of the Obligations. Lenders and Agent may, at their election, foreclose on any security held for the Obligations by one or more judicial or nonjudicial sales, or exercise any other right or remedy Lenders and Agent may have against the Company, or any security, without affecting or impairing in any way the liability of Guarantor hereunder except to the extent the Obligations have been paid. Guarantor waives any defense arising out of any such election, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of Guarantor against the Company or any security. Guarantor hereby waives any claim or other rights which Guarantor may now have or may hereafter acquire against the Company or any other Guarantor of all or any of the Obligations that arise from the existence or performance of Guarantor's obligations under this Guaranty or any other of the Loan Documents (as such claims and rights being referred to as the "Guarantor's Conditional Rights"), including, without limitation, any right of subrogation, reimbursement, exoneration, contribution, or indemnification, or any right to participate in any claim or remedy which the Lenders or Agent have against the Company or any collateral which the Lenders and Agent now have or hereafter acquire for the Obligations, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, by any payment made hereunder or otherwise, including, without limitation, the right to take or receive from the Company, directly or indirectly, in cash or other property or setoff or in any other manner, payment or security on account of such claim or other rights. If, notwithsanding the foregoing provisions, any amount shall be paid to Guarantor on account of Guarantor's Conditional Rights and either (a) such amount is paid to Guarantor at any time when the Obligations shall not have been paid or performed in full, or (b) regardless of when such amount is paid to Guarantor any payment made by the Company to the Lenders or Agent is at any time determined to be a preferential payment, then such amount paid to Guarantor shall be deemed to be held in trust for the benefit 3 of the Lenders or Agent and shall forthwith be paid to the Lenders or Agent to be credited and applied upon the Obligations, whether matured or unmatured, in such order and manner as the Lenders or Agent shall determine. To the extent that any of the provisions of this Paragraph shall not be enforceable, Guarantor agrees that until such time as the Obligations have been paid and performed in full and the period of time has expired during which any payment made by the Company or Guarantor to the Lenders or Agent may be determined to be a preferential payment, Guarantor's Conditional Rights to the extent not validly waived shall be subordinate to the Lenders' or Agent's right to full payment and performance of the Obligations and Guarantor shall not seek to enforce Guarantor's Conditional Rights during such period. Guarantor waives all presentments, demands for performance, protests and notices, including, without limitation, notices of nonperformance, notices of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the existence, creation or incurring of new or additional Obligations. Guarantor assumes all responsibility for being and keeping itself informed of the Company's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Obligations and the nature, scope and extent of the risks which Guarantor assumes and incurs hereunder, and agrees that neither Lenders nor Agent shall have any duty to advise Guarantor of information known to any of them regarding such circumstances or risks. The Agent hereby agrees to use reasonable efforts to give a copy to Guarantor of any formal written notice to the Company of the occurrence of an Event of Default under the Credit Agreement; provided; however, that the failure of the Agent to provide any such notice shall not in any manner or to any extent affect the obligations of Guarantor hereunder. 8. In addition to the Obligations, Guarantor agrees to pay reasonable attorneys' fees (including the allocated costs of internal counsel) and all other costs and expenses incurred by Lenders and Agent in enforcing this Guaranty in any action or proceeding arising out of, or relating to, this Guaranty. This Guaranty and the liability and obligations of Guarantor hereunder are binding upon Guarantor and its successors and assigns, and this Guaranty inures to the benefit of and is enforceable by Lenders and Agent and their successors, transferees, and assigns. 9. Guarantor hereby represents and warrants to the Agent and the Lenders as follows: (a) Guarantor: (1) is duly organized, validly existing and in good standing as a corporation under the laws of the State of California and is qualified to do business in each jurisdiction where its ownership of property or conduct of business requires such qualification and where failure to qualify would have a material adverse effect on Guarantor or its property and/or business or on the ability of Guarantor to pay or perform the Obligations, (2) has the corporate power and authority and the legal right to own and operate its property and to conduct business in the manner in which it does and proposes so to do, and (3) is in compliance with all Requirements of Law and Contractual Obligations, the failure to comply with which could have a material adverse effect on the business, operations, assets or financial or other condition of Guarantor or Guarantor and its consolidated Subsidiaries taken as a whole. (b) Guarantor has the corporate power and authority and the legal right to execute, deliver and perform this Guaranty and has taken all necessary corporate action to 4 authorize the execution, delivery and performance of this Guaranty. This Guaranty has been duly executed and delivered on behalf of Guarantor and constitutes the legal, valid and binding obligation of Guarantor enforceable against Guarantor in accordance with its terms, subject to the effect of applicable bankruptcy and other similar laws affecting the rights of creditors generally and the effect of equitable principles whether applied in an action at law or a suit in equity. (c) The execution, delivery and performance of this Guaranty will not violate any Requirement of Law or any Contractual Obligation of Guarantor or create or result in the creation of any Lien on any assets of Guarantor. (d) No consent, approval, authorization of, or registration, declaration or filing with any Person is required on the part of Guarantor in connection with the execution and delivery of this Guaranty or the performance of or compliance with the terms, provisions and conditions hereof. 10. Guarantor hereby covenants and agrees with the Agent and the Lenders that as long as any Obligations remain unpaid or any Lender has any obligation to make Loans under the Credit Agreement, Guarantor shall not: (a) Permit Guarantor's consolidated Tangible Net Worth as of the last day of any calendar quarter to be less than the sum of: (1) $180,000,000.00, plus (2) on a cumulative basis (with no deduction for losses) for each calendar quarter after September 30, 1996, fifty percent (50%) of Net Profit After Taxes during such calendar quarter; or (b) Permit Guarantor's consolidated Net Profit After Taxes for any calendar quarter to be less than $1.00. 11. Guarantor shall furnish or cause to be furnished to the Agent and each of the Lenders directly: (a) Within ninety (90) days after the last day of each fiscal year of Guarantor, consolidated and consolidating statements of income and statements of changes in financial position of Guarantor for such year and balance sheets as of the end of such year presented fairly in accordance with GAAP and accompanied in each case by an unqualified report of a firm of independent certified public accountants acceptable to the Agent and including therewith a copy of the management letter from such certified public accountants and a certificate of the chief financial officer of Guarantor setting forth calculations certified to be true, complete and correct showing compliance of Guarantor with the financial covenants set forth in Paragraph 10 above; (b) Within sixty (60) days after the last day of each calendar quarter of Guarantor, unaudited consolidated and consolidating statements of income and changes in financial position for such calendar quarter and balance sheets as of the end of such calendar quarter, accompanied in each case by a certificate of the chief financial officer of Guarantor stating that such financial statements are presented fairly in accordance with GAAP and setting 5 forth calculations certified to be true, complete and correct showing compliance of Guarantor with the financial covenants set forth in Paragraph 10 above; and (c) Promptly upon the filing or sending thereof, copies of all proxy statements, financial statements and reports which Guarantor sends to its stockholders, and copies of all regular, periodic and special reports, and all registration statements under the Securities Act of 1933, as amended (the "Act"), which Guarantor files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange; provided, however, that there shall not be required to be delivered hereunder to any Lender copies of prospectuses relating to future series of offerings under registration statements filed under Rule 415 of the Act or other items which such Lender has indicated in writing to Guarantor from time to time need not be delivered to such Lender. 12. No right or power of Lenders or Agent hereunder shall be deemed to have been waived by any act or conduct on the part of such Persons, or by any neglect to exercise such right or power, or by any delay in so doing; and every right or power shall continue in full force and effect until specifically waived or released by an instrument in writing executed by Lenders and Agent. 13. Guarantor agrees to execute any and all further documents, instruments and agreements as Agent from time to time reasonably requests to evidence Guarantor's obligations hereunder. 14. This Guaranty shall be deemed to be made under and shall be governed by the laws of the State of California. 15. If any of the provisions of this Guaranty shall contravene or be held invalid under the laws of any jurisdiction, this Guaranty shall be construed as if not containing those provisions and the rights and obligations of the parties hereto shall be construed and enforced accordingly. 16. Neither this Guaranty nor any provision hereof may be amended, modified, waived, discharged, or terminated except by an instrument in writing duly signed by or on behalf of the Lenders. 17. The rights, powers and remedies of the Lenders or Agent hereunder are cumulative and not exclusive of any other right, power, or remedy which Lender or Agent would otherwise have. 18. All notices, requests, demands, directions, and other communications provided for hereunder must be in writing and must be personally delivered, sent by overnight courier or mailed to Guarantor at the address set forth on the signature page of this Guaranty or at any other address as may be designated by Guarantor in a written notice sent to Agent in accordance with the Credit Agreement. Any notice, request, demand, direction, or other communication given by mail will be deemed effective on the third calendar day after deposited in the United States mails 6 with first class postage prepaid, on the next business day after deposited with a reputable overnight courier, or when delivered if given by personal delivery. Executed as of the day and year first above written. IMPERIAL CREDIT INDUSTRIES, INC., a California corporation By: --------------------------------------- Name: ------------------------------------- Title: ------------------------------------ Address: 23550 Hawthorne Boulevard Building 1, Suite 210 Torrance, California 90505 7 EXHIBIT D --------- TO CREDIT AGREEMENT ------------------- SUBORDINATION AGREEMENT ----------------------- THIS SUBORDINATION AGREEMENT is made and dated as of the 28th day of February, 1997 by and among FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a limited liability company organized under the laws of the State of California (the "Company"), IMPERIAL CREDIT INDUSTRIES, INC., a California corporation (the "Creditor"), and SANWA BANK CALIFORNIA, as Agent for the LENDERS participating in (and as the term "Lenders" and capitalized terms not otherwise defined herein are defined in) that certain Credit Agreement dated as of February 28, 1997 (as the same may be amended, extended and replaced from time to time, the "Credit Agreement") (in such capacity, the "Agent"). RECITALS -------- Lenders have agreed to extend credit to the Company pursuant to the terms and subject to the conditions set forth in the Credit Agreement, including, without limitation, the condition that Creditor execute and deliver to Lenders a continuing guaranty of the Obligations of Company to Lenders under the Credit Agreement and this Subordination Agreement. NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT --------- 1. Creditor has extended and will in the future extend credit to Company from time to time. The principal of all now existing and hereafter arising indebtedness of Company to Creditor together with accrued but unpaid interest thereon is hereinafter referred to as "the Claim." 2. Creditor is the sole and absolute owner of the Claim and has not sold, assigned, transferred or otherwise disposed of any right it may have to repayment of the Claim or any security therefor. 3. The Claim and all rights and remedies of Creditor with respect thereto and any lien securing payment thereof are and shall continue to be subject, subordinate and rendered junior in the right of payment to the Obligations, as the same may be extended, amended or replaced from time to time; provided, however, that unless and until there shall occur an Event of Default or Potential Default Borrower may make and Creditor may receive payments on account of the Claim made in the normal course of Borrower's business. 4. Unless and until the Obligations shall have been fully paid and discharged and any agreement by Lenders to make further loans or advances to Company shall have terminated, except as expressly permitted pursuant to Paragraph 3 above: 1 (a) Company will not make or give, and Creditor will not receive, directly or indirectly, any payment, advance, credit or further security of any kind whatsoever on account of the Claim, or any new or further evidence thereof; (b) Creditor will not sell, assign, transfer or endorse the Claim or any part or evidence thereof; (c) Creditor will pay to Agent for the benefit of the Lenders promptly upon receipt, for application against the Obligations, any and all amounts which may be received by Creditor on account of the Claim; and (d) Creditor will not take, or permit any action to be taken, to assert, collect or enforce the Claim or any part thereof. 5. Each of Company and Creditor waives notice of acceptance of this Subordination Agreement by Lenders and Agent, and Creditor waives notice of and consent to the making, among and terms of any loan or loans which Lenders may from time to time make to Company and any renewal or extension thereof and any action which Lenders or Agent in their sole and absolute discretion may take or omit to take with respect thereto. 6. This Subordination Agreement shall constitute a continuing agreement of subordination and Lenders may, from time to time and without notice to Creditor, lend money to or make other financial arrangements with Company in reliance hereon until written notice of termination shall be delivered by Creditor to Agent and Lenders by certified mail, return receipt requested. The receipt by Agent and Lenders of such notice shall not affect this Subordination Agreement as it relates to any Obligations then existing, to any Obligations incurred thereafter pursuant to a previous commitment by Lenders or to any amendments to, or extensions or renewals of, any such Obligations. 7. In the event of a default in the performance or observance of any of the foregoing, the Obligations shall forthwith become due and payable at the election of Agent and Lenders, without presentment, demand or notice of any kind, all of which are hereby waived. 8. Creditor agrees as follows: (a) Upon any distribution of all of the assets of Company to creditors of Company upon the dissolution, winding up, liquidation, arrangement, or reorganization of Company, whether in any bankruptcy, insolvency, arrangement, reorganization or receivership proceeding or upon an assignment for the benefit of creditors or any other marshalling of the assets and liabilities of Company or otherwise, any payment or distribution of any kind (whether in cash, property or securities) which otherwise would be payable or deliverable upon or with respect to the Claim shall be paid or delivered directly to Agent for the benefit of Lenders for application (in the case of cash) to, or as collateral (in the case of non-cash property or securities) for, the payment or prepayment of the Obligations until the Obligations shall have been paid in full. 2 (b) If any proceeding referred to in subsection (a) above is commenced by or against Company: (1) Agent and Lenders is hereby irrevocably authorized and empowered (in their own name or in the name of Creditor or otherwise), but shall have no obligation, to demand, sue for, collect and receive every payment or distribution referred to in subsection (a) above and give acquittance therefor and to file claims and proofs of claim and take such other action (including, without limitation, voting the Claim or enforcing any security interest or other lien securing payment of the Claim) as it may deem necessary or advisable for the exercise or enforcement of any of the rights or interests of Lenders hereunder; and (2) Creditor shall duly and promptly take such action as Agent or Lenders may request (i) to collect the Claim for account of Lenders and to file appropriate claims or proofs of claim in respect of the Claim, (ii) to execute and deliver to Agent and Lenders such powers of attorney, assignments, or other instruments as it may request in order to enable it to enforce any and all claims with respect to, and any security interests and other liens securing payment of, the Claim, and (iii) to collect and receive any and all payments or distributions which may be payable or deliverable upon or with respect to the Claim. (c) All payments or distributions upon or with respect to the Claim which are received by Creditor contrary to the provisions of this Subordination Agreement shall be received in trust for the benefit of Lenders, shall be segregated from other funds and property held by Creditor and shall be forthwith paid over to Agent for the benefit of Lenders in the same form as so received (with any necessary endorsement) to be applied (in the case of cash) to, or held as collateral (in the case of non-cash property or securities) for, the payment or prepayment of the Obligations. (d) Agent and Lenders are hereby authorized to demand specific performance of this Subordination Agreement, whether or not the Company shall have complied with any or all of the provisions hereof applicable to it, at any time when the Creditor shall have failed to comply with any of the provisions of this Subordination Agreement applicable to it. 9. It is the intent of Creditor to create by this Subordination Agreement a security interest in favor of Agent for the benefit of Lenders in the Claim and in Creditor's other rights to receive money or other property from Company, whether such rights shall constitute accounts, contract rights, chattel paper, instruments, general intangibles or otherwise. Creditor hereby grants to Agent for the benefit of Lenders a security interest in the Claim in order to secure the payment and performance of the Creditor's obligations pursuant to this Subordination Agreement. 10. Creditor authorizes Agent and Lenders (whether or not after revocation of this Subordination Agreement), without notice or demand (except as shall be required by applicable statute and cannot be waived), and without affecting or impairing Creditor's obligations hereunder, from time to time to (a) renew, compromise, extend, increase, accelerate or otherwise change the time for payment of, or otherwise change the terms of the Obligations or any part thereof, including without limitation to increase or decrease the rate of interest thereon; 3 (b) take and hold security for the payment of the Obligations and exchange, enforce, waive and release any such security; (c) apply such security and direct the order or manner of sale thereof as Agent and Lenders in their sole discretion may determine; and (d) release and substitute any one or more endorsers, warrantors, Company or other obligor. Agent and Lenders may without notice assign this Subordination Agreement in whole or in part. 11. This Subordination Agreement shall extend to and be binding upon the successors and assigns of each of the parties hereto. 12. This Subordination Agreement may be executed in any number of counterparts all of which taken together shall constitute one agreement and any party hereto may execute this Subordination agreement by signing any such counterpart. FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a California limited liability company By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- SANWA BANK CALIFORNIA, a California banking corporation, as Agent By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- IMPERIAL CREDIT INDUSTRIES, INC., a California corporation, as Creditor By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- 4 EXHIBIT E-1 ----------- TO CREDIT AGREEMENT ------------------- FORM OF OFFICER'S CERTIFICATE --------------------- I,_________________, the duly appointed and acting Chief Financial Officer of FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a limited liability company organized under the laws of the State of California (the "Company"), DO HEREBY CERTIFY, to the best of my knowledge in the reasonable conduct of my duties, as follows: 1. The representations and warranties set forth in Paragraph 5 of that certain Credit Agreement, dated as of February 28, 1997, among the Company, SANWA BANK CALIFORNIA, as Agent, and the Lenders named therein (the "Agreement") and Paragraph 4 of the Security Agreement referred to therein, are accurate and complete on and as of the date hereof with the same effect as though such representations and warranties had been made on and as of the date hereof. 2. The Company is in compliance with all the terms and provisions set forth in the Agreement on its part to be observed and performed, and no Event of Default or Potential Default (as those terms are defined in the Agreement) has occurred and is continuing. 3. The calculations attached hereto showing the Company's compliance with the financial covenants set forth in Paragraphs 7(i) through 7(l) of the Agreement are true, accurate and complete in all respects and were prepared in accordance with GAAP. IN WITNESS WHEREOF, the undersigned has hereunto signed his name this ___ day of _______, 1997. ----------------------------------- Name: Illegible signature ------------------------------ Title: ----------------------------- 1 EXHIBIT E-2 ----------- TO CREDIT AGREEMENT ------------------- FORM OF OFFICER'S CERTIFICATE --------------------- I, _________________, the duly appointed and acting Chief Financial Officer of IMPERIAL CREDIT INDUSTRIES, INC., a California corporation (the "Guarantor"), DO HEREBY CERTIFY, to the best of my knowledge in the reasonable conduct of my duties, as follows: 1. The representations and warranties set forth in Paragraph 9 of that certain Continuing Guaranty, dated as of February 28, 1997, executed by the Guarantor in favor of SANWA BANK CALIFORNIA, as Agent, and the Lenders named therein (the "Guaranty") are accurate and complete on and as of the date hereof with the same effect as though such representations and warranties had been made on and as of the date hereof. 2. The Guarantor is in compliance with all the terms and provisions set forth in the Guaranty on its part to be observed and performed. 3. The calculations attached hereto showing the Guarantor's compliance with the financial covenants set forth in Paragraph 10 of the Guaranty are true, accurate and complete in all respects and were prepared in accordance with GAAP. IN WITNESS WHEREOF, the undersigned has hereunto signed his name this _____day of _____, 1997. ------------------------------------ Name: ------------------------------- Title: ------------------------------ 1 EXHIBIT F --------- TO CREDIT AGREEMENT ------------------- LITIGATION SCHEDULE Noblestar Systems Corp. v. FMAC and Imperial Credit Industries, Inc. - -------------------------------------------------------------------- Noblestar filed the case in September 1996 in the United States District Court for the District of Connecticut. The suit arises out of a contract between FMAC and Noblestar for a computerized information and servicing system for processing and servicing franchise loans. Noblestar alleges breach of contract and seeks $211,000 in compensatory damages and punitive damages under the Connecticut Uniform Trade Practices Act. FAMC has answered, denying any debt to Noblestar and counterclaimed for $122,000 for breach of contract. No discovery has taken place and any assessment at this point concerning the outcome of the case is premature. The parties have agreed to engage in a one-day mediation with a retired magistrate of the Connecticut District Court in an attempt to settle the matter. The mediation is tentatively scheduled for mid-March and, in the meantime, discovery is on hold. EXHIBIT G --------- TO CREDIT AGREEMENT ------------------- SCHEDULE OF SUBSIDIARIES 1. Franchise Equity Fund, L.L.C., a Delaware limited liability company having a registered office in the State of Delaware, as follows: Franchise Equity Fund, L.L.C. c/o National Corporate Research, Ltd. 9 East Loockerman Street Dover, Kent County, DE 19901 2. CVB, L.L.C., a Delaware limited liability company having a registered office in the State of Delaware, as follows: CVB, L.L.C. c/o National Corporate Research, Ltd. 9 East Loockerman Street Dover, Kent County, DE 19901 The members of each of the above entities are the same: 99% to FMAC, 0.67% to Imperial Credit Industries, Inc., and 0.33% to Buz Knyal. EXHIBIT H --------- TO CREDIT AGREEMENT ------------------- FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT ----------------------------------- THIS ASSIGNMENT AND ACCEPTANCE AGREEMENT (the "Assignment Agreement") is made and dated as of _____________, 19__, between ____________________________ (the "Assignor") and _____________________(the "Assignee"). The parties hereto agree as follows: 1. The Assignor is a Lender under that certain Credit Agreement dated as of February 28, 1997 (as amended, extended and restated from time to time, the "Credit Agreement," and with capitalized terms used herein and not otherwise defined herein used with the same meanings attributed to them in the Credit Agreement). 2. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, a portion of the Obligations held by the Assignor consistent with the commitment schedule attached hereto as Schedule I. - ---------- 3. By executing this Assignment Agreement in the space provided below, the Company and the Agent approve the inclusion of the Assignee as a Lender under the Credit Agreement and agree with the Assignor and the Assignee that the effective date therfor shall be _______________,199__ (the "Effective Date"). 4. On and after the Effective Date: (a) the Assignee shall have the rights and obligations of a Lender under the Credit Agreement and the other Loan Documents with respect to the rights and obligations assigned to the Assignee hereunder arising on and after such Effective Date, and (b) the Assignor shall relinquish its rights and be released from its corresponding obligations under the Credit Agreement and the other Loan Documents with respect to the rights and obligations assigned to Assignee hereunder arising prior to such Effective Date. 5. The Assignee shall be entitled to receive from the Agent all payments of principal, interest and fees with respect to the interest assigned hereby accruing on and after such Effective Date. In the event that either the Assignee or the Assignor receives any payment to which the other party hereto is entitled under this Assignment Agreement, then the party receiving such amount shall promptly remit it to the other party hereto. 6. The Assignor represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim. It is understood and agreed that the assignment and assumption hereunder are made without recourse to the Assignor and that the Assignor makes no other representation of warranty of any kind to the Assignee. Neither the Assignor nor any of its officers, directors, employees, agents or attorneys shall be responsible for: (a) the due execution, legality, validity, enforceability, genuineness, sufficiency or collectability of any Loan Documents, (b) any representation, warranty or statement made in or in connection with any of the Loan Documents, (c) the financial condition or creditworthiness of the Company, (d) the performance of or compliance with any of the terms or provisions of any of the Loan Documents, (e) inspecting any of the property, books or records of the Company, (f) the validity, enforceability, perfection, priority, condition, value or sufficiency of any collateral securing or purporting to secure the Obligations or (g) any mistake, error of judgment, or action taken or omitted to be taken in connection with the Loan Documents. 7. The Assignee: (a) confirms that it has received a copy of the Loan Documents, together with copies of any financial statements requested by the Assignee and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment Agreement, (b) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, (c) appoints and authorizes the Agent to take such actions as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to the Agent by the terms thereof on the terms set forth therein, including, without limitation, the terms set forth in Paragraph 9 of the Credit Agreement entitled "The Agent," (d) agrees that on and after the Effective Date it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender, and (c) agrees that its payment instructions and notice instructions are as set forth in Schedule II attached hereto. - ----------- 8. The Assignee agrees to indemnify and hold harmless the Assignor against any and all losses, costs and expenses (including, without limitation, reasonable attorneys' fees) and liabilities incurred by the Assignor in connection with or arising in any manner from the Assignee's non-performance of the obligations assumed under this Assignment Agreement. 9. This Assignment Agreement embodies the entire agreement and understanding between the parties hereto and supersedes all prior agreements and understandings between the parties hereto relating to the subject matter hereof. 10. This Assignment Agreement shall be deemed to be a contract made under the laws of the State of California and for all purposes shall be construed in accordance with the laws of said State, without regard to principles of conflicts of law. 11. Notices shall be given under this Assignment Agreement in the manner set forth in the Credit Agreement. For the purpose hereof and of the Loan Documents, the address of the Assignee (until notice of a change is delivered pursuant to the provisions of the Credit Agreement) shall be the address set forth beneath the Assignee's signature below. 2 IN WITNESS WHEREOF, the parties hereto have executed this Assignment Agreement by their duly authorized officers as of the date first above written. [NAME OF ASSIGNOR] By: ------------------------ Name: ------------------------ Title: ------------------------ [NAME OF ASSIGNEE] By: ------------------------ Name: ------------------------ Title: ------------------------ Address: ----------------------- ----------------------- ----------------------- Attn: ------------------ ACKNOWLEDGED AND AGREED TO this ___ day of _________, 199_: SANWA BANK CALIFORNIA, as Agent By: ----------------------- Name: ----------------------- Title: ----------------------- FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a ___________ limited liability company By: ----------------------- Name: ----------------------- Title: ----------------------- 3 SCHEDULE I ---------- COMMITMENT SCHEDULE 4 SCHEDULE II ----------- PAYMENT AND NOTICE INSTRUCTIONS 5 EXHIBIT 1 --------- TO CREDIT AGREEMENT ------------------- PERMITTED OTHER DEBT LENDER COMMITMENT AMOUNT EXPIRATION DATE ------ ----------------- --------------- C.S. First Boston $200,000,000 December 31, 1997 Banco Santander $ 50,000,000 December 31, 1997 Greenwich Financial $ 33,766,000 30 days on demand Capital Products, Inc. In addition to the above outstanding warehouse facilities, FMAC is nearing completion of a warehouse facility with KeyCorp in amount of $125,000,000, which would be an additional warehouse line for franchise loans and golf course loans made by FMAC. Finally, a $20,000,000 warehouse facility for franchise loans and leases is being negotiated with Bank of Boston. EXHIBIT J --------- TO CREDIT AGREEMENT ------------------- REQUIRED DOCUMENTS With respect to any Equipment Lease: 1. Copy of the written master lease agreement between the Company and the Obligor thereunder, and the original of any amendment, addendum or supplement thereto or extension thereof, and the original of any document (including, without limitation, any receipt) executed in connection with such amendment, addendum, supplement or extension; and 2. Filed and stamped acknowledgement copy of the financing statement(s) covering the property or properties subject to such Equipment Lease filed in each jurisdiction where such filing is required to perfect the relevant security interest, naming the Agent (for the benefit of the Lenders) as the secured party and the Obligor under such Equipment Lease as the debtor, and any amendments or supplements thereto or extensions thereof; or 3. In lieu of item 2 above, (a) filed and stamped acknowledgement copy of the financing statement(s) covering the property or properties subject to such Equipment Lease filed in each jurisdiction where such filing is required to perfect the relevant security interest, naming the Company as the secured party and the Obligor under such Employment Lease as the debtor, and any amendments or supplements thereto or extensions thereof, and (b) executed assignment of each such financing statement by the Company to the Agent for the benefit of the lenders for each applicable jurisdiction. With respect to any Equipment Sale Contract: 1. The original written agreement for the sale of equipment between the Company and the Obligor thereunder, and any amendments or supplements thereto or extensions thereof; and 2. The original promissory note evidencing such Obligor's agreement to pay for such equipment; and 3. The original security agreement covering the subject equipment as collateral security for such promissory note; and 4. Filed and stamped acknowledgment copy of the financing statement(s) covering the property or properties subject to such Equipment Sale Contract field in each jurisdiction where such filing is required to perfect the relevant security interest, naming the Agent (for the benefit of the Lenders) as the secured party and the Obligor under such Equipment Sale Contract as the debtor, and any amendments or supplements thereto or extensions thereof; or 5. In lieu of item 4 above, (a) filed and stamped acknowledgement copy of the financing statement(s) covering the property or properties subject to such Equipment Sale Contract filed in each jurisdiction where such filing is required to perfect the relevant security interest, naming the Company as the secured party and the Obligor under such Equipment Sale Contract as the debtor, and any amendments or supplements thereto or extensions thereof, and (b) executed assignment of each such financing statement by the Company to the Agent for the benefit of the Lenders for each applicable jurisdiction. EXHIBIT K --------- TO CREDIT AGREEMENT ------------------- UNDERWRITING GUIDELINES [To come from the Company] SCHEDULE 1 ---------- TO CREDIT AGREEMENT ------------------- SCHEDULE OF ADDRESSES FOR NOTICE PURPOSES (As at February 28, 1997) COMPANY: Franchise Mortgage Acceptance Company, L.L.C. Five Greenwich Office Park Greenwich, Connecticut 06831 Attn: John Rinaldi Tel: (203) 863-7106 Fax: (203) 863-1984 AGENT: Sanwa Bank California 601 South Figueroa Street, W8-12 Los Angeles, California 90017 Attn: John C. Hyche, Vice President Tel: (213) 896-7543 Fax: (213) 896-7282 LENDERS: Sanwa Bank California 601 South Figueroa Street, W8-12 Los Angeles, California 90017 Attn: John C Hyche, Vice President Tel: (213) 896-7543 Fax: (213) 896-7282 SCHEDULE 2 ---------- TO CREDIT AGREEMENT ------------------- SCHEDULE TO PERCENTAGE SHARES (As of February 28, 1997) LENDER PERCENTAGE SHARE ------ ---------------- Sanwa Bank California 100% SECURITY AND COLLATERAL AGENCY AGREEMENT ---------------------------------------- THIS SECURITY AND COLLATERAL AGENCY AGREEMENT (the "Security Agreement") is made and dated this 28th day of February, 1997 by and between FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a limited liability company organized under the laws of the State of California (the "Company"), and SANWA BANK CALIFORNIA, acting in its capacity as Agent for the Lenders participating in (and as the terms "Agent," "Lenders" and capitalized terms not otherwise defined herein are defined in) that certain Credit Agreement dated as of February 28, 1997 by and among the Company, the Agent and the Lenders (as the same may be amended, extended and replaced from time to time, the "Credit Agreement"). RECITALS -------- A. Pursuant to the Credit Agreement the Lenders have agreed to extend credit to the Company on the terms and subject to the conditions set forth in therein and in the other Loan Documents. B. As a condition precedent to the agreement of the Lenders to enter into the Credit Agreement and to make Loans thereunder, the Company is required to execute and deliver to the Agent for the benefit of the Lenders this Security Agreement. NOW THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT --------- 1. Appointment. By executing a copy of or otherwise becoming a "Lender" ----------- under the Credit Agreement, each Lender shall automatically be deemed to appoint the Agent to act as secured party, agent, custodian and bailee for the exclusive benefit of Lenders with respect to the Collateral (as defined in Paragraph 2 ----------- below). The Agent hereby accepts such appointment and agrees to maintain and hold all Collateral as secured party, agent, custodian and bailee for the exclusive benefit of Lenders. The Agent agrees to act in accordance with this Security Agreement and acknowledges and agrees that the Agent is not, and shall not at any time in the future be, subject, with respect to the Collateral, in any manner or to any extent, to the direction or control of the Company except as expressly permitted hereunder and under the other Loan Documents. 2. Grant of Security Interest. The Company hereby pledges, mortgages, -------------------------- assigns and grants to the Agent for the equal, ratable benefit of the Lenders in accordance with their respective Percentage Shares, and to the Lenders, a first priority perfected security interest in the property described in Paragraph 3 ----------- below (collectively and severally, the "Collateral") to secure payment and performance of the Obligations. 3. Collateral. The Collateral shall consist of all now existing and ---------- hereafter arising right, title and interest of the Company in each of the following: (a) All Program Contracts, now existing and hereafter arising, the Required Documents for which have been delivered to the Agent or which are otherwise included in the calculation of the Aggregate Collateral Value of the Borrowing Base ("Subject Program Contracts"), including, without limitation, all Equipment Leases and Equipment Sales Contracts and the documents, instruments and agreements evidencing the same, as the same may be amended, extended or replaced from time to time; (b) All now existing and hereafter arising rights to payment under or with respect to the Subject Program Contracts, including, without limitation, all rental and lease payments, sales payments, early termination payments, casualty loss payments and indemnity payments, whether payable by the Obligors under such Subject Program Contracts or by third parties, including, without limitation under policies of insurance and guaranties; (c) All now existing and hereafter acquired inventory of the Company which at any time is covered by a Subject Program Contract and all additions and accessions thereto and replacements therefor and all rights of the Company in the personal property which is at any time covered by a Subject Program Contract which property does not constitute inventory of the Company and all additions and accessions thereto; (d) All Liens, including, without limitation, consentual security interests, on personal property (tangible and intangible) now existing or hereafter arising held by the Company as collateral security for the obligations of the Obligors under the Subject Program Contracts and all property which is the subject of such Liens; (e) All now existing and hereafter arising rights of the Company against vendors of the properties which are covered by Subject Program Contracts; (f) Account No. 0493-24551 maintained at Sanwa Bank California and any and all funds at any time held therein; (g) All now existing and hereafter acquired books and records relating to the foregoing Collateral and all equipment containing such books and records (including, without limitation, computer data and storage media); and (h) All products and all Proceeds of any of the foregoing. 4. Representations and Warranties. In addition to all representations ------------------------------ and warranties of the Company set forth in the Loan Documents, which are incorporated herein by this reference, the Company hereby represents and warrants that: (a) The Company is the sole owner of and has good and marketable title to the Collateral (or, in the case of after-acquired Collateral, at the time the Company acquires rights in the Collateral, will be the sole owner thereof); (b) No person has (or, in the case of after-acquired Collateral, at the time the Company acquires rights therein, will have) any right, title, claim or interest (by way of security interest or other lien or charge) in, against or to the Collateral; (c) All information heretofore, herein or hereafter supplied to the Agent or any Lender by or on behalf of the Company with respect to the Collateral is or will be accurate and complete; and (d) The Company has delivered to the Agent all instruments, chattel paper and other items of Collateral in which a security interest is or may be perfected by possession, together with such additional writings, including, without limitation, assignments, with respect thereto as are deemed necessary by the Agent to perfect the security interest granted hereunder therein. (e) There exists only one executed original for each document, instrument or agreement in connection with the Subject Program Contracts delivered by the Company to the Agent. 5. Covenants and Agreements of the Company. In addition to all covenants --------------------------------------- and agreements of the Company set forth in the Loan Documents, which are incorporated herein by this reference, the Company hereby agrees: (a) To do all acts that may be necessary to maintain, preserve and protect the Collateral; (b) Not to use or permit any Collateral to be used unlawfully or in violation of any provision of this Security Agreement, any other agreement with the Agent and/or the Lenders related hereto, or any Requirement of Law or Contractual Obligation affecting the Collateral; (c) To pay promptly when due all taxes, assessments, charges, encumbrances and Liens now or hereafter imposed upon or affecting any Collateral; (d) To appear in and defend any action or proceeding which may affect its title to or the Agent's interest on behalf of the Lenders in the Collateral; (e) Not to surrender or lose possession of (other than to the Agent), sell, encumber, lease, rent, or otherwise dispose of or transfer any Collateral or right or interest therein except as expressly provided herein and in the other Loan Documents, and to keep the Collateral free of all levies and security interests or other Liens or charges except those approved in writing by the Agent and the Lenders; provided, however, that, unless an Event of Default shall have occurred and be continuing, the Company may, in the ordinary course of business, sell or lease any Collateral consisting of inventory and transfer funds from deposit accounts included in the Collateral; 3 (f) To account fully for and promptly deliver to the Agent, in the form received, all documents, chattel paper, instruments and agreements constituting Collateral hereunder and all proceeds of the Collateral received, all endorsed or assigned to the Agent or in blank, as requested by the Agent, and until so delivered all such documents, instruments, agreements and proceeds shall be held by the Company in trust for the Lenders, separate from all other property of the Company; (g) To keep separate, accurate and complete records of the Collateral and to provide the Agent and each of the Lenders with such records and such other reports and information relating to the Collateral as the Agent or any Lender may reasonably request from time to time; (h) To give the Agent thirty (30) days prior written notice of any change in the Company's chief place of business or legal name or trade name(s) or style(s) referred to in Paragraph 9 below; ----------- (i) To keep the records concerning the Collateral at the location(s) referred to in Paragraph 9 below and not to remove such records from such ----------- location(s) without the prior written consent of the Agent; (j) To keep the Collateral consisting of inventory at the location(s) referred to in Paragraph 9 below prior to the sale thereof in the ordinary ----------- course of business; and (k) To keep the Collateral in good condition and repair and not to cause or permit any waste or unusual or unreasonable depreciation of the Collateral. 6. Authorized Action by Secured Party. The Company hereby agrees that ---------------------------------- from time to time, without presentment, notice or demand, and without affecting or impairing in any way the rights of the Agent with respect to the collateral, the obligations of the Company hereunder or the Obligations, the Agent may, but shall not be obligated to and shall incur no liability to the Company, any Lender or any third party for failure to, take any action which the Company is obligated by this Security Agreement to do and to exercise such rights and powers as the Company might exercise with respect to the Collateral, and the Company hereby irrevocably appoints the Agent as its attorney-in-fact to exercise such rights and powers, including, without limitation, to: (a) collect by legal proceedings or otherwise and endorse, receive and receipt for all dividends, interest, payments, proceeds and other sums and property now or hereafter payable on or on account of the Collateral; (b) enter into any extension, reorganization, deposit, merger, consolidation or other agreement pertaining to, or deposit, surrender, accept, hold or apply other property in exchange for the Collateral; (c) insure, process and preserve the Collateral; (d) transfer the Collateral to its own or its nominee's name; (e) make any compromise or settlement, and take any action it deems advisable, with respect to the Collateral; and (f) subject to the provisions of Paragraph 7 below, ----------- notify any Obligor on any Collateral to make payment directly to the Agent. The Company hereby grants to the Agent for the benefit of the Lenders an exclusive, irrevocable power of attorney, with full power and authority in the place and stead of the Company to take all such action permitted under this Paragraph 6. ----------- 4 7. Collection of Collateral Payments. --------------------------------- (a) The Company shall, at its sole cost and expense, endeavor to obtain payment, when due and payable, of all sums due or to become due with respect to any Collateral ("Collateral Payments" or a "Collateral Payment"), including, without limitation, the taking of such action with respect thereto as the Agent or any Lender may reasonably request, or, in the absence of such request, as the Company may reasonably deem advisable; provided, however, that the Company shall not, without the prior written consent of the Lenders, grant or agree to any rebate, refund, compromise or extension with respect to any Collateral Payment or accept any prepayment on account thereof except in the ordinary course of business. Following the occurrence of an Event of Default, upon the request of the Agent, the Company will notify and direct any party who is or might become obligated to make any Collateral Payment, to make payment thereof directly to the Agent to such account or accounts as the Agent may designate in writing and to execute all instruments and take all action required by the Agent to ensure the rights of the Agent for the benefit of the Lenders in the Collateral. (b) Upon the request of the Agent at the direction of all the Lenders, the Company will, forthwith upon receipt, transmit and deliver to the Agent, in the form received, all cash, checks, drafts and other instruments for the payment of money (properly endorsed where required so that such items may be collected by the Agent) which may be received by the Company at any time as payment on account of any Collateral Payment and if such request shall be made, until delivery to the Agent, such items will be held in trust for the Agent and the Lenders and will not be commingled by the Company with any of its other funds or property. Thereafter, the Agent is hereby authorized and empowered to endorse the name of the Company on any check, draft or other instrument for the payment of money received by the Agent on account of any Collateral Payment if the Agent believes such endorsement is necessary or desirable for purposes of collection. (c) The Company will indemnify and save harmless the Agent from and against all reasonable liabilities and expenses on account of any adverse claim asserted against the Agent relating to any moneys received by the Agent on account of any Collateral Payment and such obligation of the Company shall continue in effect after and notwithstanding the discharge of the Obligations and the release of the security interest granted in Paragraph 2 above. ----------- 8. Remedies. Upon the occurrence of an Event of Default the Agent shall, -------- at the direction of all the Lenders, and without notice to or demand on the Company and in addition to all rights and remedies available to the Lenders under the Loan Documents, at law, in equity or otherwise, do any one or more of the following: (a) Foreclose or otherwise enforce the Agent's security interest in any manner permitted by law, or provided for in this Security Agreement; (b) Sell, lease or otherwise dispose of any Collateral at one or more public or private sales at the Agent's place of business or any other place or places, including, without limitation, any broker's board or securities exchange, whether or not such Collateral is 5 present at the place of sale, for cash or credit or future delivery, on such terms and in such manner as the Agent may determine; (c) Recover from the Company all costs and expenses, including, without limitation, reasonable attorneys' fees (including the allocated cost of internal counsel), incurred or paid by the Agent or any Lender in exercising any right, power or remedy provided by this Security Agreement; (d) Require the Company to assemble the Collateral and make it available to the Agent at a place to be designated by the Agent; (e) Enter onto property where any Collateral is located and take possession thereof with or without judicial process; and (f) Prior to the disposition of the Collateral, store, process, repair or recondition it or otherwise prepare it for disposition in any manner and to the extent the Agent deems appropriate and in connection with such preparation and disposition, without charge, use any trademark, tradename, copyright, patent or technical process used by the Company. The Company shall be given five (5) business days' prior notice of the time and place of any public sale or of the time after which any private sale or other intended disposition of Collateral is to be made, which notice the Company hereby agrees shall be deemed reasonable notice thereof. Upon any sale or other disposition pursuant to this Security Agreement, the Agent shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral or portion thereof so sold or disposed of. Each purchaser at any such sale or other disposition (including the Agent) shall hold the Collateral free from any claim or right of whatever kind, including any equity or right or redemption of the Company and the Company specifically waives (to the extent permitted by law) all rights of redemption, stay or appraisal which it has or may have under any rule of law or statute now existing or hereafter adopted. 9. Residence; Collateral Location; Records Location. The Company ------------------------------------------------ represents that its chief place of business is as set forth on Schedule 1 ---------- attached hereto; that the only trade name(s) or style(s) used by the Company are set forth on said Schedule 1; that, except as otherwise disclosed to the Agent ---------- in writing, the Company's records concerning the Collateral 6 are located at its chief place of business; and that Collateral consisting of inventory is located at the addresses set forth in said Schedule 1. ---------- EXECUTED as of the 28th day of February, 1997. FRANCISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a California limited liability company By: illegible signature ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- SANWA BANK CALIFORNIA, a California banking corporation, as Agent for the benefit of the Lenders By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- 7 SCHEDULE 1 ---------- to Borrower Security Agreement CHIEF PLACE OF BUSINESS; TRADENAMES; LOCATION OF BOOKS AND RECORDS AND INVENTORY Chief Place of Business: Five Greenwich Office Park Greenwich, Connecticut 06831 Tradenames: FMAC Imperial Golf Location of Books and Records and Inventory: Five Greenwich Office Park Greenwich, Connecticut 06831 8 SUBORDINATION AGREEMENT ----------------------- THIS SUBORDINATION AGREEMENT is made and dated as of the 28th day of February, 1997 by and among FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a limited liability company organized under the laws of the State of California (the "Company"), IMPERIAL CREDIT INDUSTRIES, INC., a California corporation (the "Creditor"), and SANWA BANK CALIFORNIA, as Agent for the LENDERS participating in (and as the term "Lenders" and capitalized terms not otherwise defined herein are defined in) that certain Credit Agreement dated as of February 28, 1997 (as the same may be amended, extended and replaced from time to time, the "Credit Agreement")(in such capacity, the "Agent"). RECITALS -------- Lenders have agreed to extend credit to the Company pursuant to the terms and subject to the conditions set forth in the Credit Agreement, including, without limitation, the condition that Creditor execute and deliver to Lenders a continuing guaranty of the Obligations of Company to Lenders under the Credit Agreement and this Subordination Agreement. NOW, THEREFORE, in consideration of the above Recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: AGREEMENT --------- 1. Creditor has extended and will in the future extend credit to Company from time to time. The principal of all now existing and hereafter arising indebtedness of Company to Creditor together with accrued but unpaid interest thereon is hereinafter referred to as "the Claim." 2. Creditor is the sole and absolute owner of the Claim and has not sold, assigned, transferred or otherwise disposed of any right it may have to repayment of the Claim or any security therefor. 3. The Claim and all rights and remedies of Creditor with respect thereto and any lien securing payment thereof are and shall continue to be subject, subordinate and rendered junior in the right of payment to the Obligations, as the same may be extended, amended or replaced from time to time; provided, however, that unless and until there shall occur an Event of Default or Potential Default Borrower may make and Creditor may receive payments on account of the Claim made in the normal course of Borrower's business. 4. Unless and until the Obligations shall have been fully paid and discharged and any agreement by Lenders to make further loans or advances to Company shall have terminated, except as expressly permitted pursuant to Paragraph 3 above: 1 (a) Company will not make or give, and Creditor will not receive, directly or indirectly, any payment, advance, credit or further security of any kind whatsoever on account of the Claim, or any new or further evidence thereof; (b) Creditor will not sell, assign, transfer or endorse the Claim or any part or evidence thereof; (c) Creditor will pay to Agent for the benefit of the Lenders promptly upon receipt, for application against the Obligations, any and all amounts which may be received by Creditor on account of the Claim; and (d) Creditor will not take, or permit any action to be taken, to assert, collect or enforce the Claim or any part thereof. 5. Each of Company and Creditor waives notice of acceptance of this Subordination Agreement by Lenders and Agent, and Creditor waives notice of and consent to the making, amount and terms of any loan or loans which Lenders may from time to time make to Company and any renewal or extension thereof and any action which Lenders or Agent in their sole and absolute discretion may take or omit to take with respect thereto. 6. This Subordination Agreement shall constitute a continuing agreement of subordination and Lenders may, from time to time and without notice to Creditor, lend money to or make other financial arrangements with Company in reliance hereon until written notice of termination shall be delivered by Creditor to Agent and Lenders by certified mail, return receipt requested. The receipt by Agent and Lenders of such notice shall not affect this Subordination Agreement as it relates to any Obligations then existing, to any Obligations incurred thereafter pursuant to a previous commitment by Lenders or to any amendments to, extensions or renewals of, any such Obligations. 7. In the event of a default in the performance or observance of any of the foregoing, the Obligations shall forthwith become due and payable at the election of Agent and Lenders, without presentment, demand or notice of any kind, all of which are hereby waived. 8. Creditor agrees as follows: (a) Upon any distribution of all of the assets of Company to creditors of Company upon the dissolution, winding up, liquidation, arrangement, or reorganization of Company, whether in any bankruptcy, insolvency, arrangement, reorganization or receivership proceeding or upon an assignment for the benefit of creditors or any other marshalling of the assets and liabilities of Company or otherwise, any payment or distribution of any kind (whether in cash, property or securities) which otherwise would be payable or deliverable upon or with respect to the Claim shall be paid or delivered directly to Agent for the benefit of Lenders for application (in the case of cash) to, or as collateral (in the case of non-cash property or securities) for, the payment or prepayment of the Obligations shall have been paid in full. 2 (b) If any proceeding referred to in subsection (a) above is commenced by or against Company: (1) Agent and Lenders is hereby irrevocably authorized and empowered (in their own name or in the name of Creditor or otherwise), but shall have no obligation, to demand, sue for, collect and receive every payment or distribution referred to in subsection (a) above and give acquittance therefor and to file claims and proofs of claim and take such other action (including, without limitation, voting the Claim or enforcing any security interest or other lien securing payment of the Claim) as it may deem necessary or advisable for the exercise or enforcement of any of the rights or interests of Lenders hereunder; and (2) Creditor shall duly and promptly take such action as Agent or Lenders may request (i) to collect the Claim for account of Lenders and to file appropriate claims or proofs of claim in respect of the Claim, (ii) to execute and deliver to Agent and Lenders such powers of attorney, assignments, or other instruments as it may request in order to enable it to enforce any and all claims with respect to, and any security interests and other liens securing payment of, the Claim, and (iii) to collect and receive any and all payments or distributions which may be payable or deliverable upon or with respect to the Claim. (c) All payments or distributions upon or with respect to the Claim which are received by Creditor contrary to the provisions of this Subordination Agreement shall be received in trust for the benefit of Lenders, shall be segregated from other funds and property held by Creditor and shall be forthwith paid over to Agent for the benefit of Lenders in the same form as so received (with any necessary endorsement) to be applied (in the case of cash) to, or held as collateral (in the case of non-cash property or securities) for, the payment or prepayment of the Obligations. (d) Agent and Lenders are hereby authorized to demand specific performance of this Subordination Agreement, whether or not the Company shall have complied with any or all of the provisions hereof applicable to it, at any time when the Creditor shall have failed to comply with any of the provisions of this Subordination Agreement applicable to it. 9. It is the intent of Creditor to create by this Subordination Agreement a security interest in favor of Agent for the benefit of Lenders in the Claim and in Creditor's other rights to receive money or other property from Company, whether such rights shall constitute accounts, contract rights, chattel paper, instruments, general intangibles or otherwise. Creditor hereby grants to Agent for the benefit of Lenders a security interest in the Claim in order to secure the payment and performance of the Creditor's obligations pursuant to this Subordination Agreement. 10. Creditor authorizes Agent and Lenders (whether or not after revocation of this Subordination Agreement), without notice or demand (except as shall be required by applicable statute and cannot be waived), and without affecting or impairing Creditor's obligations hereunder, from time to time to (a) renew, compromise, extend, increase, accelerate or otherwise change the time for payment of, or otherwise change the terms of the Obligations or any part thereof, including without limitation to increase or decrease the rate of interest thereon; 3 (b) take and hold security for the payment of the Obligations and exchange, enforce, waive and release any such security; (c) apply such security and direct the order or manner of sale thereof as Agent and Lenders in their sole discretion may determine; and (d) release and substitute any one or more endorsers, warrantors, Company or other obligor. Agent and Lenders may without notice assign this Subordination Agreement in whole or in part. 11. This Subordination Agreement shall extend to and be binding upon the successors and assigns of each of the parties hereto. 12. This Subordination Agreement may be executed in any number of counterparts all of which taken together shall constitute one agreement and any party hereto may execute this Subordination Agreement by signing any such counterpart. FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C., a California limited liability company By: /s/ [ILLEGIBLE SIGNATURE] ------------------------------------- Name: ------------------------------------ Title: ----------------------------------- SANWA BANK CALIFORNIA, a California banking corporation, as Agent By: ------------------------------------- Name: ------------------------------------ Title: ----------------------------------- IMPERIAL CREDIT INDUSTRIES, INC., a California corporation, as Creditor By: ------------------------------------- Name: ------------------------------------ Title: ----------------------------------- 4 EXHIBIT B TO UCC-1 ------------------ REVISED COLLATERAL DESCRIPTION DEBTOR: FRANCHISE MORTGAGE ACCEPTANCE COMPANY, L.L.C. SECURED PARTY: SANWA BANK CALIFORNIA, as agent Item 4 (Collateral Description): - ------------------------------- The Collateral shall consist of all now existing and hereafter arising right, title and interest of the Debtor in, under and to each of the following: (a) All written leases or rental agreements entered into by Debtor in the ordinary course of its business pursuant to which the Debtor leases equipment included in the Debtor's inventory to the obligor thereon (which leases may be a "true" or "operating" lease or a "financing" lease), and all written agreements pursuant to which the Debtor in the ordinary course of its business sells equipment included in the Debtor's inventory to the obligors thereunder (including, without limitation, the promissory note evidencing the obligor's agreement to pay for such equipment and a security agreement covering the subject equipment as collateral security for such note), in each case whether now existing or hereafter arising, the required documents for which have been delivered to the Agent or which are otherwise identified as "Collateral" under the Security Agreement ("Subject Program Contracts"), including, without limitation, all the documents, instruments and agreements evidencing the same, as the same may be amended, extended or replaced from time to time; (b) All now existing and hereafter arising rights to payment under or with respect to the Subject Program Contracts, including, without limitation, all rental and lease payments, sales payments, early termination payments, casualty loss payments and indemnity payments, whether payable by the obligors under such Subject Program Contracts or by third parties, including, without limitation, under policies of insurance and guaranties; (c) All now existing and hereafter acquired inventory of the Debtor which at any time is covered by a Subject Program Contract and all additions and accessions thereto and replacements therefor and all rights of the Debtor in the personal property which is at any time covered by a Subject Program Contract which property does not constitute inventory of the Debtor and all additions and accessions thereto; (d) All liens, including, without limitation, consentual security interests, on personal property (tangible or intangible) now existing or hereafter arising held by the Debtor as collateral security for the obligations of the obligors under the Subject Program Contract and all property which is the subject of such liens; (e) All now existing and hereafter arising rights of the Company against vendors of the properties which are covered by Subject Program Contracts; and (f) Account No. 0493-24551 maintained at Sanwa Bank California and any and all funds at any time held therein; (g) All now existing and hereafter acquired books and records relating to the foregoing Collateral and all equipment containing such books and records (including, without limitation, computer data and storage media); and (h) All products and proceeds of any of the foregoing. As used herein, the following capitalized terms shall have the following meanings: "Agent" shall mean Sanwa Bank California, as Agent under the Security ----- Agreement, and any successor thereto. "Security Agreement" shall mean that certain Security and Collateral Agency ------------------ Agreement dated as of February 28, 1997 by and among Debtor and Secured Party, as the same may be amended, extended or replaced from time to time. EX-23.1 21 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Managers Franchise Mortgage Acceptance Company LLC: We consent to the use of our report included herein and to the reference to our Firm under the heading "Selected Financial Data" and "Experts" in the Prospectus. KMPG Peat Marwick LLP Los Angeles, California August 26, 1997 -----END PRIVACY-ENHANCED MESSAGE-----