-----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, UlwupxH0GkwBSNrtvSXU0q+Sx2fbTAkI3styKnPgLeVJUbMMEhLL1StsfCUY7xhN 6UHq9GFOXscnrtbnxHSAmQ== 0000909518-96-000255.txt : 19960812 0000909518-96-000255.hdr.sgml : 19960812 ACCESSION NUMBER: 0000909518-96-000255 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960809 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTCITY FINANCIAL CORP CENTRAL INDEX KEY: 0000828678 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 760243729 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26500 FILM NUMBER: 96607283 BUSINESS ADDRESS: STREET 1: 6400 IMPERIAL DRIVE CITY: WACO STATE: TX ZIP: 76712 BUSINESS PHONE: 8177511750 FORMER COMPANY: FORMER CONFORMED NAME: FIRST CITY BANCORPORATION OF TEXAS INC/ DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FIRST CITY ACQUISITION CORP DATE OF NAME CHANGE: 19880523 10-Q 1 SECOND QTR 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-7614 FIRSTCITY FINANCIAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 76-0243729 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 6400 Imperial Drive, Waco, TX 76712 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (817) 751-1750 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of July 31, 1996, 4,922,135 shares of Common Stock, par value $.01 per share, were outstanding. FIRSTCITY FINANCIAL CORPORATION TABLE OF CONTENTS TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements FirstCity Financial Corporation and Subsidiaries Consolidated Balance Sheets............................... 3 FirstCity Financial Corporation and Subsidiaries Consolidated Statements of Income......................... 4 FirstCity Financial Corporation and Subsidiaries Consolidated Statements of Shareholders' Equity........... 5 FirstCity Financial Corporation and Subsidiaries Consolidated Statements of Cash Flows..................... 6 FirstCity Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 12 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders....... 20 Item 6. Exhibits and Reports on Form 8-K.......................... 21 SIGNATURES.................................................................. 24 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, December 31, (Dollars in thousands, except per share data) 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Assets Cash and equivalents.............................................. $ 6,336 $ 8,370 Purchased asset pools, net........................................ 107,160 95,939 Equity investments in and advances to acquisition partnerships.... 36,582 26,187 Class "A" Certificate of FirstCity Liquidating Trust.............. 111,776 162,245 Deferred tax benefit.............................................. 14,600 - Other assets...................................................... 14,584 16,148 --------------------- -------------------- Total Assets.................................................... $ 291,038 $ 308,889 ===================== ==================== Liabilities, Special Preferred Stock and Shareholders' Equity Liabilities: Notes payable, secured......................................... $ 105,907 $ 85,518 Senior subordinated notes payable.............................. 52,345 106,690 Notes payable to others........................................ 4,829 8,988 Other liabilities.............................................. 3,839 5,887 --------------------- -------------------- Total Liabilities............................................ 166,920 207,083 --------------------- -------------------- Commitments and contingencies..................................... - - Special preferred stock, including dividends of $7,752 and $3,876, respectively (nominal stated value of $21.00 per share; 2,500,000 shares authorized; 2,460,911 issued and outstanding)................................................... 59,431 55,555 Shareholders' equity: Optional preferred stock (par value $.01 per share; 100,000,000 shares authorized; no shares issued or outstanding)................................................. - - Common stock (par value $.01 per share; 100,000,000 shares authorized; issued and outstanding: 4,922,135 and 4,921,422 shares, respectively).............................. 49 49 Paid in capital................................................ 22,933 22,916 Retained earnings.............................................. 41,705 23,286 --------------------- -------------------- Total Shareholders' Equity................................... 64,687 46,251 --------------------- -------------------- Total Liabilities, Special Preferred Stock and Shareholders' Equity..................................... $ 291,038 $ 308,889 ===================== ====================
See accompanying Notes to Consolidated Financial Statements. 3
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Three Months Ended Six Months Ended June 30, June 30, ----------------------------------- ----------------------------------- (Amounts in thousands, except per share data) 1996 1995 1996 1995 - -------------------------------------------------------------------------------------------- ----------------------------------- Proceeds from disposition and payments received on purchased asset pools............... $ 13,683 $ 19,477 $ 27,678 $ 23,586 Cost of purchased asset pools...................... 9,731 15,195 19,062 17,887 --------------- --------------- --------------- --------------- Net gain on purchased asset pools............... 3,952 4,282 8,616 5,699 Other income: Servicing fees.................................. 2,855 2,052 5,373 3,708 Interest income on Class "A" Certificate........ 3,116 - 7,428 - Other interest income........................... 2,196 44 3,286 52 Rental income on purchased real estate pools.... 1,448 - 1,935 - Other........................................... 339 403 597 662 --------------- --------------- --------------- --------------- 13,906 6,781 27,235 10,121 --------------- --------------- --------------- --------------- Expenses: Interest on senior subordinated notes payable... 1,178 - 3,552 - Interest on other notes payable................. 2,448 541 4,579 1,283 Salaries and benefits........................... 2,547 1,538 5,116 2,912 Amortization.................................... 836 - 1,661 - Other general and administrative................ 3,278 1,330 5,892 1,743 --------------- --------------- --------------- --------------- 10,287 3,409 20,800 5,938 --------------- --------------- --------------- --------------- Equity in earnings of acquisition partnerships..... 916 731 1,630 1,359 --------------- --------------- --------------- --------------- Earnings from operations before income taxes... 4,535 4,103 8,065 5,542 Provision (benefit) for income taxes.............. (14,370) 446 (14,230) 936 --------------- --------------- --------------- --------------- Net earnings.................................. $ 18,905 $ 3,657 $ 22,295 $ 4,606 =============== =============== =============== =============== Special preferred dividends........................ 1,938 - 3,876 - --------------- --------------- --------------- --------------- Net earnings to common shareholders................ $ 16,967 $ 3,657 $ 18,419 $ 4,606 =============== =============== =============== =============== Net earnings per share............................. $ 3.45 $ 1.54 $ 3.74 $ 1.94 =============== =============== =============== =============== Weighted average shares outstanding................ 4,921 2,367 4,921 2,370 =============== =============== =============== ===============
See accompanying Notes to Consolidated Financial Statements. 4
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Total Common Paid in Retained Shareholders' (Dollars in thousands) Stock Capital Earnings Equity - ----------------------------------------------------------------------------------------------------------------------------------- Balances, January 1, 1995................ $ 1,574 $ 1,812 $ 17,781 $ 21,167 Common stock issued (5,935 shares)....... 59 720 - 779 Common stock retired (11,080 shares)............................... (111) (1,089) - (1,200) Net assets spun off to Combined Financial Corporation................. - - (5,352) (5,352) Merger with First City Bancorporation of Texas, Inc.......... (1,473) 21,473 - 20,000 Net earnings for 1995.................... - - 14,733 14,733 Preferred stock dividends................ - - (3,876) (3,876) ----------------- ----------------- ---------------- ----------------- Balances, December 31, 1995 ............. 49 22,916 23,286 46,251 ----------------- ----------------- ---------------- ----------------- Exercise of warrants and employee stock purchase plan (713 shares)...... - 17 - 17 Net earnings for the six months ended June 30, 1996................... - - 22,295 22,295 Preferred stock dividends................ - - (3,876) (3,876) ----------------- ----------------- ---------------- ----------------- Balances, June 30, 1996.................. $ 49 $ 22,933 $ 41,705 $ 64,687 ================= ================= ================ =================
See accompanying Notes to Consolidated Financial Statements. 5
FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, ------------------------------------- (Dollars in thousands) 1996 1995 - ----------------------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings...................................... $ 22,295 $ 4,606 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Cost of collections.............................. 19,062 17,887 Purchase of asset pools.......................... (32,778) - Equity in earnings of acquisition partnerships... (1,630) (1,359) Collections on performing asset pools............ 3,510 - Deferred income tax benefit...................... (14,600) (64) Depreciation and amortization.................... 2,320 158 Increase in other assets......................... (4,949) (5,108) Decrease in other liabilities.................... (2,048) (301) ----------------- ---------------- Net cash provided by (used in) operating activities.................................. (8,818) 15,819 ----------------- ---------------- Cash flows from investing activities: Advances to acquisition partnerships and affiliates (235) - Payments on advances to acquisition partnerships and affiliates................................... 551 - Principal payment on Class "A" Certificate........ 53,345 - Property and equipment, net....................... (397) (92) Acquisition of National Auto Funding Corporation.. (302) - Contributions to acquisition partnerships ........ (13,376) (1,375) Distributions from acquisition partnerships....... 4,296 3,189 ----------------- ---------------- Net cash provided by investing activities........ 43,882 1,722 ----------------- ---------------- Cash flows from financing activities: Borrowings under notes payable ................... 71,424 3,800 Payments of notes payable ........................ (55,194) (21,130) Payment of senior subordinated notes payable...... ( 53,345) - Additions to notes payable to stockholders and officers......................................... - 1,930 Reduction of notes payable to stockholders and officers......................................... - (1,843) Issuance of common stock.......................... 17 779 Retirement of common stock........................ - (1,200) ----------------- ---------------- Net cash used in financing activities............ (37,098) (17,664) ----------------- ---------------- Net decrease in cash................................. $ (2,034) $ (123) Cash, beginning of period............................ 8,370 4,150 ----------------- ---------------- Cash, end of period.................................. $ 6,336 $ 4,027 ================= ================ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest......................................... $ 7,844 $ 1,126 ================= ================ Income taxes..................................... $ 116 $ 1,000 ================= ================
See accompanying Notes to Consolidated Financial Statements. 6 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1996 (1) Basis of Presentation --------------------- On July 3, 1995, FirstCity Financial Corporation ("FirstCity" or the "Company") was formed by the merger ("Merger") of J-Hawk Corporation and First City Bancorporation of Texas, Inc. Historical financial statements prior to the merger date reflect the financial position and results of operations of J-Hawk Corporation ("JHawk") and are not necessarily indicative of results expected to be achieved in the future. For further information, see the 1995 Annual Report on Form 10-K. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the estimation of future collections on purchased asset pools used in the calculation of net gain on purchased asset pools. Actual results could differ materially from those estimates. The unaudited consolidated financial statements of FirstCity Financial Corporation reflect, in the opinion of management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly FirstCity Financial Corporation's financial position at June 30, 1996, and the results of operations and cash flows for the three month and six month periods ended June 30, 1996 and 1995. (2) Purchased Asset Pools --------------------- The purchased asset pools are summarized as follows (dollars in thousands):
June 30, December 31, 1995 1996 ---------------------- ----------------------- Non-performing asset pools: Loans: Borrowers' obligation on outstanding balance of: Performing loans $ 36,613 $ 55,337 Non-performing loans 330,182 339,465 ---------------------- ----------------------- 366,795 394,802 Real estate assets 8,819 10,052 ---------------------- ----------------------- 375,614 404,854 Performing asset pools: Loans: Borrowers' obligation on outstanding balance of:
7 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Performing loans 46,736 16,714 Non-performing loans 560 - ---------------------- ----------------------- 47,296 16,714 Purchased real estate pool (at amortized cost) 25,969 35,179 ---------------------- ----------------------- Total purchased asset pools 448,879 456,747 Discount required to reflect purchased asset pools at amortized cost (341,719) (360,808) ---------------------- ----------------------- Purchased asset pools, net $ 107,160 $ 95,939 ====================== =======================
The purchased asset pools are pledged to secure non-recourse notes payable. (3) Acquisition Partnerships ------------------------ The Company has investments in partnerships and related general partners that are accounted for on the equity method. The combined financial position and results of operations of the acquisition partnerships and general partners are summarized below (dollars in thousands) : 8 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) Condensed Combined Balance Sheets June 30, December 31, 1996 1995 ----------------------- --------------------- Assets $275,291 $235,820 ======================= ===================== Liabilities 199,087 180,659 Net equity 76,204 55,161 ----------------------- --------------------- $275,291 $235,820 ======================= ===================== Company's equity in acquisition partnerships $27,312 $16,601 ======================= ===================== Advances to acquisition partnerships $9,270 $9,586 ======================= =====================
Condensed Combined Statements of Income Three months ended Six months ended June 30, June 30, ------------------------------------------------------ 1996 1995 1996 1995 ------------- ----------- ----------- ---------- Collections $35,902 $54,437 $61,224 $94,443 Gross margin 10,418 13,581 18,604 24,883 Interest income on performing asset pools 2,065 - 3,833 - Net income 1,842 1,824 3,281 3,305 ============ =========== =========== ========== Company's equity in net income of acquisition partnerships $916 $731 $1,630 $1,359 ============= ============ =========== ==========
(4) Class "A" Certificate of FirstCity Liquidating Trust ("Trust") -------------------------------------------------------------- FirstCity is the sole holder of the Class "A" Certificate of the Trust. Redemption by the Trust of the balance due on the Class "A" Certificate will be used to retire the senior subordinated notes payable, which are general obligations of FirstCity, and to redeem the special preferred stock. On March 29, 1996, $53.3 million of the senior subordinated notes were redeemed, reducing the "A" Certificate by a like amount. During the three months ended June 30, 1996, $1 million of senior subordinated notes (purchased by the Trust) were redeemed. On July 26, 1996, the remaining senior subordinated notes were redeemed with a corresponding reduction in the "A" Certificate. Under the terms of the special preferred stock, FirstCity is only required to redeem such stock and to declare dividends thereon to the extent it receives sufficient funds from the Trust to make such payments. Interest income on the Class "A" Certificate consists of reimbursement to FirstCity (by the Trust) of interest expense on senior subordinated notes and of accrued (but not declared) dividends on special preferred stock. At June 30, 1996, dividends accrued but not declared totaled $7.8 million, or 9 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) $3.15 a share. In the opinion of management, sufficient funds will be available from the Trust to redeem the special preferred stock at its stated redemption price and accrued dividends on the redemption date of September 30, 1998. The net assets in liquidation of the FirstCity Liquidating Trust are summarized below (dollars in thousands): Condensed Consolidated Statements of Net Assets in Liquidation June 30, December 31, 1996 1995 ----------------------- --------------------- Assets $164,130 $206,464 Liabilities (902) (4,683) ----------------------- --------------------- Net Asset Value $163,228 $201,781 ======================= ===================== Class "A" Certificate $111,776 $162,245 Class "B" Certificate 51,452 39,536 (5) Federal Income Taxes -------------------- Federal income taxes subsequent to the Merger are provided at a 35% rate. Net operating loss carryforwards are available to FirstCity and are recognized as an offset to the provision in the period during which the benefit is realized. During the second quarter of 1996, FirstCity recognized a deferred tax benefit of $14.6 million. Realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income prior to expiration of the net operating loss carryfowards. Although realization is not assured, management believes it is more likely than not that all of the recorded deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted in the future if estimates of future taxable income during the carryfoward period change. (6) Other Related Party Transactions -------------------------------- In January, 1995, the Company entered into an agreement with a shareholder to repurchase 11,080 shares of J-Hawk common stock for $1.2 million. The Company paid the former shareholder $.4 million in cash and issued a $.8 million note, which was assumed by Combined Financial Corporation in June 1995. During the three months ended June 30, 1995, the Company sold approximately $12 million (allocated cost) of loans to a partnership owned by certain executive officers of J-Hawk. The Company recognized approximately $3 million in gain from the transaction. Additionally, the Company entered into a servicing arrangement with the partnership to service the sold assets for a fee based on collections. This transaction 10 FIRSTCITY FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (continued) was part of the overall spin out transaction completed prior to the Merger on July 3, 1995. The Company has contracted with the Trust, the acquisition partnerships and related parties as third party loan servicer. Substantially all servicing fees and due diligence fees (included in other income) reflected in the Consolidated Statements of Income were derived from such affiliates. (7) Commitments and Contingencies ----------------------------- FirstCity has pledged a portion of its interest in the future distributions of certain acquisition partnerships, after FirstCity's initial investment has been returned, to the subordinated debt lender under a Residual Share Agreement (the "Agreement"). Under the Agreement, this pledge is limited to twice FirstCity's original investment in the respective partnership. In the opinion of management, this pledge does not currently represent a material contingent claim on the future distributions from the acquisition partnerships to FirstCity. The Company is involved in various legal proceedings in the ordinary course of business. In the opinion of management, the resolution of such matters should not have a material adverse impact on the financial condition, results of operations or liquidity of the Company. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FirstCity Financial Corporation ("FirstCity" or the "Company") reported net earnings for the second quarter of 1996 of $18.9 million. After dividends accrued but not declared on the Company's special preferred stock, earnings attributable to common equity were $17.0 million, or $3.45 per share. The results were positively impacted by the recognition of $14.6 million of deferred tax benefits. Excluding the tax benefit recognition, earnings attributable to common equity were $2.4 million, or $.48 per share, for the quarter. Earnings for the second quarter of 1995 were $3.7 million, or $1.54 per share. 1996 year-to-date earnings attributable to common equity were $18.4 million, or $3.74 per share, compared to $4.6 million, or $1.94 per share, for the 1995 year-to-date period. Excluding the effect of the tax benefits, 1996 year-to-date earnings attributable to common equity were $3.8 million, or $ .78 per share. Earnings for the current quarter were significantly increased by the recognition of certain tax benefits resulting from the Company's reassessment of its valuation allowance (reserve) related to its net operating loss carryforward ("NOL") asset. Prior to the second quarter, the deferred tax asset resulting from the Company's NOL was entirely offset by this valuation reserve. Realization of the asset is dependent upon generating sufficient taxable earnings to utilize the NOL. Although realization is not assured, management believes it is more likely than not that FirstCity will generate sufficient taxable income in future periods to utilize the tax benefit recognized this quarter. The amount of tax benefits recognized will be adjusted in future quarters should the estimates of future taxable income change. To the extent that there are changes, net earnings will be impacted accordingly. In May 1996, FirstCity initiated its sub-prime auto finance lending activity through the acquisition of National Auto Funding Corporation and NAF Auto Loan Trust (collectively, "NAF"), Irving, Texas. At quarter-end the Company owned $31.6 million in sub-prime auto loans, including NAF's $28 million portfolio, which an acquisition partnership had acquired in the first quarter of 1996. Asset acquisitions for the second quarter were modest with FirstCity acquiring approximately $10 million of face value of assets, including the loans originated by NAF. The acquisitions included a commercial/industrial portfolio purchased from a large banking organization and a consumer portfolio. The Company is in the process of finalizing the securitization of approximately $75 million of performing assets. The transaction, which is anticipated to close in August, will result in decreased funding costs for FirstCity's acquisition partnerships. On July 26, 1996, FirstCity redeemed the remainder of its senior subordinated notes with proceeds from a distribution from the FirstCity Liquidating Trust. BACKGROUND - ---------- On July 3, 1995, FirstCity was formed by the merger (the "Merger") of J-Hawk and First City Bancorporation of Texas, Inc. ("FCBOT"). For accounting purposes, the Merger was treated as an acquisition of FCBOT by J-Hawk. Accordingly, financial information prior to the Merger reflects the historical financial position and results of operations of J-Hawk. FirstCity is a specialized financial services company which evaluates, acquires, manages, services, and disposes of portfolios of performing loans, non-performing loans, other real estate and other financial assets (collectively, "purchased asset pools"). Purchased asset pools are acquired by FirstCity or its wholly-owned subsidiaries and through partnerships 12 ("acquisition partnerships") in which an affiliate of FirstCity is the general partner and FirstCity and other investors are limited partners. In connection with the Merger, the shareholders of J-Hawk received approximately 49.9% of FirstCity's common stock and the former security holders of FCBOT received approximately 50.1% of FirstCity's common stock. FirstCity also issued $106.7 million in senior subordinated notes (all of which have been redeemed by the Company), $51.7 million in special preferred stock and warrants to purchase 500,000 shares of its common stock at an initial exercise price of $25 per share. Also in connection with the Merger, substantially all of the assets of FCBOT, other than $20 million in cash, were transferred to the newly-formed FirstCity Liquidating Trust (the "Trust"). The liquidation of the assets transferred to the Trust is managed by the Company for a prescribed servicing fee. The following table summarizes FirstCity's performance for the second quarter and first six months of 1996 and 1995.
CONSOLIDATED SUMMARY OF OPERATIONS - -------------------------------------------------------------------------------------------------------------------- Three months ended Six months ended (Amounts in thousands, except per share data) June 30, June 30, ------------------------------ ----------------------------- 1996 1995 1996 1995 -------------- ------------- ------------- ------------- Income: Net gain on purchased asset pools $ 3,952 $ 4,282 $ 8,616 $ 5,699 Servicing fees 2,855 2,052 5,373 3,708 Interest income on Class A Certificate 3,116 - 7,428 - Other interest income 2,196 44 3,286 52 Rental income on purchased real estate pools 1,448 - 1,935 - Other income 339 403 597 662 -------------- ------------- ------------- ------------- Subtotal 13,906 6,781 27,235 10,121 -------------- ------------- ------------- ------------- Expenses: Interest on senior subordinated notes payable 1,178 - 3,552 - Interest on other notes payable 2,448 541 4,579 1,283 Salaries and benefits 2,547 1,538 5,116 2,912 Amortization 836 - 1,661 - Other general and administrative expense 3,278 1,330 5,892 1,743 -------------- ------------- ------------- ------------- Subtotal 10,287 3,409 20,800 5,938 -------------- ------------- ------------- ------------- Equity earnings of acquisition partnerships 916 731 1,630 1,359 -------------- ------------- ------------- ------------- Earnings before income taxes 4,535 4,103 8,065 5,542 -------------- ------------- ------------- ------------- Provision (benefit) for income taxes (14,370) 446 (14,230) 936 -------------- ------------- ------------- ------------- Net earnings $ 18,905 $ 3,657 $ 22,295 $ 4,606 ============== ============= ============= ============= Special preferred dividends 1,938 - 3,876 - -------------- ------------- ------------- ------------- Net earnings to common $ 16,967 $ 3,657 $ 18,419 $ 4,606 ============== ============= ============= ============= Net earnings per share $ 3.45 $ 1.54 $ 3.74 $ 1.94 Average shares outstanding 4,921 2,367 4,921 2,370 Return on average equity (annualized) 120.8 % 71.5% 69.7 % 44.6 %
13 The following table analyzes the composition of FirstCity's major revenue resources:
ANALYSIS OF REVENUE SOURCES - ------------------------------------------------------------------------------------------------ Three months ended Six months ended June 30, June 30, ------------------------- ------------------------ (Dollars in thousands) 1996 1995 1996 1995 ------------------------- ----------- ------------ GAINS ON PURCHASED ASSET POOLS ------------------------------ Asset portfolios purchased $ 31,037 $ - $ 32,778 $ - $ collected 13,683 19,477 27,678 23,586 Net gain on collections 3,952 4,282 8,616 5,699 Profit margin on purchased asset pools 28.88% 21.98% 31.13% 24.16% SERVICE FEE REVENUES -------------------- ACQUISITION PARTNERSHIPS $ collected $ 35,902 $ 54,437 $ 61,224 $ 94,443 Service fee revenue 1,354 1,965 2,295 3,612 Average service fee % 3.77% 3.61% 3.75% 3.82% TRUST $ collected FDIC receivable $ - - $ 17,698 - Other trust assets 38,443 - 62,318 - Service fee revenue 1,124 - 2,260 - Average service fee % 2.92% - 2.82% - OTHER AFFILIATED ENTITIES $ collected $ 4,898 $ 3,249 $ 9,968 $ 4,337 Service fee revenue 377 87 818 96 Average service fee % 7.70% 2.68% 8.21% 2.21% TOTAL SERVICE FEES $ collected $ 79,243 $ 57,686 $ 151,208 $ 98,780 Service fee revenue 2,855 2,052 5,373 3,708 Average service fee % 3.60% 3.56% 3.55% 3.75% EQUITY EARNINGS IN ACQUISITION PARTNERSHIPS ------------------------ Asset portfolios purchased $ 1,490 $ 6,533 $ 99,926 $ 53,167 Average FirstCity investment 28,584 14,186 23,381 14,309 Equity earnings in investments 916 731 1,630 1,359 - ------------------------------------------------------------------------------------------------
14 The following table analyzes the operations of the acquisition partnerships:
ANALYSIS OF ACQUISITION PARTNERSHIPS - ------------------------------------------------------------------------------------------------------- Three months ended Six months ended June 30, June 30, -------------------------- -------------------------- (Dollars in thousands) 1996 1995 1996 1995 ------------ ------------- ------------ ------------- GAINS ON DISPOSITION OF ASSET POOLS - ----------------------------------- Gross collections $ 35,902 $ 54,437 $ 61,224 $ 94,443 Cost of collections 25,484 40,856 42,620 69,560 ------------ ------------- ------------ ------------- Total gain on disposition of asset pools $ 10,418 $ 13,581 $ 18,604 $ 24,883 Variance from previous year due to: Collection levels (4,624) (2,625) (8,772) (4,148) Gross profit margins 2,217 (766) 3,848 2,004 Mix (756) 120 (1,355) (284) ------------ ------------- ------------ ------------- Total variance from previous year (3,163) (3,271) (6,279) (2,428) INTEREST INCOME ON PERFORMING ASSET POOLS $ 2,065 $ - $ 3,833 $ - - ----------------------------------------- COST OF BORROWINGS - ------------------ Interest expense $ 7,172 $ 7,192 $ 12,914 $ 14,419 Average borrowings 209,300 237,169 193,445 234,684 Weighted average rate 13.71% 12.13% 13.35% 12.29% OTHER EXPENSES - -------------- Service fee expense $ 1,455 $ 1,965 $ 2,421 $ 3,612 Legal 571 550 1,117 1,069 Property protection 1,107 1,461 1,996 1,409 Other 336 589 708 1,069 ------------ ------------- ------------ ------------- Total other expenses 3,469 4,565 6,242 7,159 - -------------------------------------------------------------------------------------------------------
SECOND QUARTER 1996 COMPARED TO SECOND QUARTER 1995 Net earnings in the second quarter of 1996 were $18.9 million, including $14.6 million of deferred tax benefits, compared to $3.7 million in the second quarter of 1995. Net earnings to common in the 1996 period were $17.0 million ($2.4 million excluding the deferred tax benefit) compared to $3.7 million in the 1995 period. On a per share basis, earnings attributable to common equity were $3.45 ($.48 excluding the deferred tax benefit) for 1996 compared to $1.54 per share for 1995. Results for periods prior to July 3, 1995 reflect the historical net earnings of J-Hawk. The related earnings per share are restated to reflect the equivalent number of FirstCity common shares issued to the J-Hawk shareholders in connection with the Merger. 15 NET GAIN ON PURCHASED ASSET POOLS The net gain on purchased asset pools decreased to $4.0 million in the second quarter of 1996 from $4.3 million in 1995 primarily because, in the second quarter of 1995, gains of approximately $3 million resulted from a sale of approximately $12 million in loans to a partnership owned by certain executive officers of J-Hawk, as a part of the spin off transaction completed in conjunction with the Merger. The profit margin on collections in 1996 was 29% as compared to 22% in 1995. The average investment in purchased asset pools in 1996 of $97.0 million exceeded the average investment levels for 1995 of $20.2 million, with the resulting gain on disposition of purchased asset pools higher in the 1996 period due to increased levels of collections (excluding the sale that was part of the 1995 spin off) on larger asset pools. Many of the assumptions upon which the future collections from purchased asset pools are based, and therefore the gross profits recognized upon collections, are subject to significant uncertainties such as timing and levels of collections and the cost of maintaining and protecting such assets within the pools. Additionally, unanticipated events and circumstances may occur. Consequently, there may be differences between current recognized gross profit rates and actual results achieved over the life of a portfolio. SERVICING FEES Servicing fees grew to $2.9 million in the second quarter of 1996 from $2.1 million for such period in 1995, an increase of 39%. Excluding $1.1 million in fees from collection of Trust assets, servicing fees declined $.3 million from 1995 because of lower collection levels achieved in acquisition partnerships. INTEREST INCOME AND EXPENSE As a result of the Merger, interest income on the Trust Class A Certificate was recorded in the second quarter of 1996, representing reimbursement to FirstCity (by the Trust) of interest expense of $1.2 million on the senior subordinated notes and accrual of dividends of $1.9 million on special preferred stock. The Company realized other interest income primarily from performing loans. Interest expense on other notes payable rose in proportion to higher volumes of debt associated with purchase of asset pools. OTHER INCOME Rental income on purchased real estate pools resulted from a third quarter 1995 acquisition of a pool consisting entirely of real estate assets. On this and other real estate purchases, the net operating income derived from such assets is recognized as other income, while gains on sales are recognized upon disposition of the asset. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expenses increased $3.8 million, reflecting higher costs since the Company's acquisition of Diversified Financial Systems, Inc. ("Diversified"), increased property expenses and amortization of goodwill and servicing rights in the second quarter of 1996 (none in the second quarter of 1995). 16 EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS Equity in earnings of acquisition partnerships in the second quarter of 1996 increased 25% from such period in 1995. Collections in the acquisition partnerships decreased $18.5 million, or 34%, and caused a decrease in gross profit of $4.6 million. However, this reduction was more than offset by a higher gross profit margin ($2.2 million), interest income on newly-acquired performing asset pools ($2.1 million) and an increased ownership percentage by FirstCity in the new partnerships. Most of the indebtedness incurred by FirstCity and its acquisition partnerships is floating rate debt, the rates of which change when certain short term benchmark rates increase. If these benchmark rates increase beyond what FirstCity had originally projected, the profitability of FirstCity and the acquisition partnerships will be adversely affected. FEDERAL INCOME TAXES Federal income taxes are provided at 35% of taxable income. The Company believes certain NOLs are available to it after July 3, 1995, and are recognized as an offset to the provision in the period during which the benefit is realized. During the second quarter of 1996, FirstCity recognized a deferred tax benefit of $14.6 million. Realization of the resulting net deferred tax asset is dependent upon generating sufficient taxable income prior to expiration of the NOLs. Although realization is not assured, management believes it is more likely than not that all of the recorded deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted in the future if estimates of future taxable income during the carryfoward period change. The Company believes that the NOLs that were accrued prior to the Merger survived the Merger and are available to offset future taxable income of the Company. However, there is no authority governing many of the tax aspects of the Merger because some determinations primarily may be questions of fact. Additionally, no private letter ruling from the Internal Revenue Service ("IRS") or opinion of counsel regarding the availability of such NOLs was sought or obtained; therefore, there can be no assurance that the availability of such NOLs will not be successfully challenged by the IRS. SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 Net earnings for the six months ended June 30, 1996 were $22.3 million, including the deferred tax benefit, compared to $4.6 million for the six months ended June 30, 1995. Net earnings to common in the 1996 period were $18.4 million ($3.8 million excluding the tax benefit) compared to $4.6 million in the 1995 period. On a per share basis, earnings attributable to common equity were $3.74 ($.78 excluding the tax benefit) for the 1996 period compared to $1.94 per share for the 1995 period. NET GAIN ON PURCHASED ASSET POOLS The net gain on purchased asset pools increased to $8.6 million in the first six months of 1996 from $5.7 million in 1995. The average investment in purchased asset pools in 1996 of $95.2 million exceeded the average investment levels for such period in 1995 of $24.2 million, with the resulting gain on disposition of purchased asset pools higher in the 1996 period due to increased levels of collections on larger asset pools. The previously-mentioned $3 million gain 17 was included in 1995 results. The profit margin on collections in 1996 was 31% as compared to 24% in 1995. SERVICING FEES Servicing fees grew to $5.4 million in the first six months of 1996 from $3.7 million for such period in 1995, an increase of 45%. Excluding $2.3 million in fees from collection of Trust assets, servicing fees declined $.6 million from 1995 because of lower collection levels achieved in acquisition partnerships. INTEREST INCOME AND EXPENSE Interest income on the Trust Class A Certificate was recorded in the six months ended June 30, 1996, representing reimbursement to FirstCity (by the Trust) of interest expense of $3.6 million on the senior subordinated notes and accrual of dividends of $3.9 million on the special preferred stock. The Company realized other interest income primarily from a portfolio of performing loans acquired in the Diversified transaction. Interest expense on other notes payable rose in proportion to higher volumes of debt associated with the purchase of asset pools. OTHER INCOME Rental income on purchased real estate pools resulted from a third quarter 1995 acquisition of a pool consisting entirely of real estate assets. There was no such investment or related income in the year earlier period. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expenses increased $8.0 million, reflecting higher costs since acquiring Diversified, increased property expenses and amortization of goodwill and servicing rights in the first six months of 1996 (none in the corresponding period of 1995). Also, general and administrative expenses in 1995 include a recovery of $.7 million of prior year expenses related to the Merger (which expenses were reimbursed by FCBOT). EQUITY IN EARNINGS OF ACQUISITION PARTNERSHIPS Equity in earnings of acquisition partnerships in the first six months of 1996 increased 20% from such period in 1995. Collections in the acquisition partnerships decreased $33.2 million, or 35%, and caused a decrease in gross profit of $8.8 million. However, this reduction was more than offset by a higher gross profit margin ($3.8 million), interest income on newly-acquired performing asset pools ($3.8 million) and an increased ownership percentage by FirstCity in new partnerships. FEDERAL INCOME TAXES Federal income taxes are provided at 35% of taxable income. The Company believes NOLs are available to it after July 3, 1995, and are recognized as an offset to the provision in the period during which the benefit is realized. As discussed earlier, a deferred tax benefit was recorded in 1996. 18 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Generally, the liquidity needs of FirstCity are for operations, payment of debt, acquisitions of purchased asset pools, investments in and advances to acquisition partnerships and other investments by the Company. The sources of liquidity are funds generated from operations, distributions from the Trust to the Company as the sole holder of the Trust Class "A" Certificate, equity distributions from acquisition partnerships and short term borrowings from lines of credit and other specific purpose short term borrowings. FirstCity contributed equity to acquisition partnerships totaling $13.4 million to facilitate the purchase of $99.9 million in portfolios of assets during the first six months of 1996 and also acquired $32.8 million in purchased asset pools. During the first six months of 1996, FirstCity borrowed $18.8 million under a credit facility provided by Cargill Financial Services ("Cargill"), increasing the balance under that facility to $24.0 million at quarter end. Such facility matures on December 29, 1996, and is secured by substantially all of the unencumbered assets of the Company. The Company and Cargill are currently negotiating an increase in the amount available under such facility from $25 million to $35 million, although there can be no assurances such an increase will be consummated. During the quarter ended June 30, 1996, NAF borrowed $23.8 million under a $50.0 million Warehouse Credit Agreement with ContiTrade Services L.L.C. to purchase and originate auto loans through NAF. As the origination of auto loans increases, NAF can borrow under this facility. Increases in loan originations may require additional equity injections into NAF to comply with the borrowing base terms of the Warehouse Credit Agreement. On March 29, 1996, FirstCity redeemed early $53.3 million of its senior subordinated notes by means of a distribution from the Trust. During the second quarter of 1996, $1 million of notes held by the Trust were redeemed. On July 26, 1996, the remaining $52.3 million of notes were redeemed via another distribution from the Trust. Each of these transactions resulted in a corresponding reduction in the Trust Class "A" Certificate. In the future, FirstCity anticipates being able to raise capital through public debt or equity offerings, thus enhancing the investment and growth opportunities of the Company. The Company believes that these and other sources of liquidity, including the Cargill credit facility, securitizations, and funding from senior lenders providing funding for acquisition partnership formation and direct portfolio acquisitions, should prove adequate to continue to fund the Company's other contemplated investment activities. At June 30, 1996, total common equity was $64.7 million and is considered by management adequate to support the current capital requirements and planned growth of the Company. 19 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company held its annual meeting of shareholders (the "Annual Meeting") on April 24, 1996. The following items of business were considered at the Annual Meeting: (a) Election of Directors All standing directors were elected as directors to serve as members of the Company's Board of Directors until the Company's 1997 annual meeting of shareholders. The number of votes cast for each nominee was as follows: Votes Votes Nominee Cast Against For ---------------------- --------------- ------------- James R. Hawkins 4,289,690 36,970 C. Ivan Wilson 4,289,703 36,957 James T. Sartain 4,289,742 36,918 Rick R. Hagelstein 4,289,742 36,918 Matt A. Landry, Jr. 4,289,742 36,918 Richard E. Bean 4,289,742 36,918 Bart A. Brown, Jr. 4,289,570 37,090 Donald J. Douglass 4,289,742 36,918 David W. MacLennan 4,289,666 36,994 David Palmer 4,289,742 36,918 There were no abstentions or broker non-votes. (b) Approval of Employee Benefit Plans The following three employee benefit plans were approved by the shareholders as follows:
Plan Votes Votes Cast Against Unvoted Abstentions For - ----------------------------------------------------- ------------------ ----------------- ------------------ 1995 Stock Option and Award Plan 3,000,324 173,121 1,129,224 23,991 1995 Employee Stock Purchase Plan 3,124,492 49,773 1,129,224 23,171 1996 Stock Option and Award Plan 2,876,483 229,504 1,195,676 24,997
20 (c) Ratification of Appointment of Auditors A proposal to ratify the Board of Directors' appointment of KPMG Peat Marwick LLP as the Company's independent Auditors for 1996 was approved by the shareholders. The number of votes for the proposal: 4,270,481; votes withheld: 32,187; abstentions: 10,433; unvoted: 13,559. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 2.1 Joint Plan of Reorganization by First City Bancorporation of Texas, Inc., Official Committee of Equity Security Holders and J-Hawk Corporation, with the Participation of Cargill Financial Services Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated by reference herein to Exhibit 2.1 of the Registrant's Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995) 2.2 Agreement and Plan of Merger, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk Corporation (incorporated herein by reference to Exhibit 2.2 of the Registrant's Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995) 3.1 Amended and Restated Certificate of Incorporation of the Registrant (incorporated herein by reference to Exhibit 3.1 of the Registrant's Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995) 3.2 Bylaws of the Registrant (incorporated herein by reference to Exhibit 3.2 of the Registrant's Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995) 21 10.9 Revolving Credit Agreement, dated December 29, 1995, by and between Cargill Financial Services Corporation and the Registrant * 10.10 Amended and Restated Right of First Refusal Agreement, dated June 9, 1994, by and among the Registrant, James R. Hawkins, James T. Sartain, Rick R. Hagelstein, Cargill Financial Services Corporation and CFSC Capital Corp. II, and Letter Agreement Amendment to Amended and Restated Right of First Refusal Agreement, dated March 11, 1996 * 10.11 FirstCity Financial Corporation 1995 Stock Option and Award Plan (incorporated herein by reference to Exhibit A of the Registrant's Proxy Statement for the Registrant's 1996 Annual Meeting of Stockholders) 10.12 FirstCity Financial Corporation 1996 Stock Option and Award Plan (incorporated herein by reference to Exhibit C of the Registrant's Proxy Statement for the Registrant's 1996 Annual Meeting of Stockholders) 10.13 FirstCity Financial Corporation 1995 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit B of the Registrant's Proxy Statement for the Registrant's 1996 Annual Meeting of Stockholders) 10.14 Warehouse Credit Agreement, dated May 17, 1996, by and among ContiTrade Services L.L.C. as Lender, N.A.F. Auto Loan Trust as Borrower and National Auto Funding Corporation * 10.15 Security and Collateral Agent Agreement, dated May 17, 1996, by and among N.A.F. Auto Loan Trust as Borrower, ContiTrade Services L.L.C. as Lender and Texas Commerce Bank National Association as Collateral Agent * 10.16 Funding Commitment, dated May 17, 1996, by and between ContiTrade Services L.L.C. as Lender and the Registrant * 10.17 Paying Agent Agreement, dated May 17, 1996, by and among N.A.F. Auto Loan Trust as Borrower, ContiTrade Services L.L.C. as Lender and Texas Commerce Bank National Association as Paying Agent * 10.18 Servicing Agreement Relating to N.A.F. Auto Loan Trust, dated May 17, 1996, by and among N.A.F. Auto Loan Trust as Borrower, J-Hawk Servicing Corporation as Servicer, National Auto Funding Corporation and ContiTrade Services L.L.C. as Lender * 10.19 Investment Banking Services Agreement, dated May 17, 1996, by and between ContiFinancial Services Corporation and National Auto Funding Corporation * 22 10.20 Amendment to Funding Commitment, dated May 17, 1996, by and between ContiTrade Services L.L.C. as Lender and the Registrant * 10.21 Loan and Security Agreement, dated April 18, 1996, by and among American National Bank and Trust Company of Chicago and Bank of Scotland as Lenders and Diversified Financial Systems, Inc., as Borrower * 10.22 Guarantee Agreement, dated April 18, 1996, by and among American National Bank and Trust Company of Chicago and Bank of Scotland as Lenders and FirstCity Financial Corporation as Guarantor * 27.1 Financial Data Schedule. (Exhibit 27.1 is being submitted as an exhibit only in the electronic format of this Quarterly Report on Form 10-Q being submitted to the Securities and Exchange Commission. Exhibit 27.1 shall not be deemed filed for purposes of Section 11 of the Securities Act of 1933, as amended, Section 18 of the Securities Exchange Act of 1934, as amended, or Section 323 of the Trust Indenture Act of 1939, as amended, or otherwise be subject to the liabilities of such sections, nor shall it be deemed a part of any registration statement to which it relates.) * - Filed herewith (b) Reports on Form 8-K. No report on Form 8-K was filed by the Registrant with the Securities and Exchange Commission during the quarterly period ended June 30, 1996. 23 HOFS02...:\92\54892\0004\2236\FRM8056R.55C SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRSTCITY FINANCIAL CORPORATION /s/ Gary H. Miller ------------------------------------ Name: Gary H. Miller Title: Senior Vice President and Controller (Duly authorized officer and chief accounting officer of the Registrant) Dated: August 9, 1996 24 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 2.1 Joint Plan of Reorganization by First City Bancorporation of Texas, Inc., Official Committee of Equity Security Holders and J-Hawk Corporation, with the Participation of Cargill Financial Services Corporation, Under Chapter 11 of the United States Bankruptcy Code, Case No. 392-39474-HCA-11 (incorporated by reference herein to Exhibit 2.1 of the Registrant's Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995) 2.2 Agreement and Plan of Merger, dated as of July 3, 1995, by and between First City Bancorporation of Texas, Inc. and J-Hawk Corporation (incorporated herein by reference to Exhibit 2.2 of the Registrant's Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995) 3.1 Amended and Restated Certificate of Incorporation of the Registrant (incorporated herein by reference to Exhibit 3.1 of the Registrant's Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995) 3.2 Bylaws of the Registrant (incorporated herein by reference to Exhibit 3.2 of the Registrant's Form 8-K dated July 3, 1995 filed with the Commission on July 18, 1995) 10.9 Revolving Credit Agreement, dated December 29, 1995, by and between Cargill Financial Services Corporation and the Registrant* 10.10 Amended and Restated Right of First Refusal Agreement, dated June 9, 1994, by and among the Registrant, James R. Hawkins, James T. Sartain, Rick R. Hagelstein, Cargill Financial Services Corporation and CFSC Capital Corp. II, and Letter Agreement Amendment to Amended and Restated Right of First Refusal Agreement, dated March 11, 1996 * 10.11 FirstCity Financial Corporation 1995 Stock Option and Award Plan (incorporated herein by reference to Exhibit A of the Registrant's Proxy Statement for the Registrant's 1996 Annual Meeting of Stockholders) 10.12 FirstCity Financial Corporation 1996 Stock Option and Award Plan (incorporated herein by reference to Exhibit C of the Registrant's Proxy Statement for the Registrant's 1996 Annual Meeting of Stockholders) 10.13 FirstCity Financial Corporation 1995 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit B of the Registrant's Proxy Statement for the Registrant's 1996 Annual Meeting of Stockholders) 10.14 Warehouse Credit Agreement, dated May 17, 1996, by and among ContiTrade Services L.L.C. as Lender, N.A.F. Auto Loan Trust as Borrower and National Auto Funding Corporation * 10.15 Security and Collateral Agent Agreement, dated May 17, 1996, by and among N.A.F. Auto Loan Trust as Borrower, ContiTrade Services L.L.C. as Lender and Texas Commerce Bank National Association as Collateral Agent * 10.16 Funding Commitment, dated May 17, 1996, by and between ContiTrade Services L.L.C. as Lender and the Registrant * 10.17 Paying Agent Agreement, dated May 17, 1996, by and among N.A.F. Auto Loan Trust as Borrower, ContiTrade Services L.L.C. as Lender and Texas Commerce Bank National Association as Paying Agent * 10.18 Servicing Agreement Relating to N.A.F. Auto Loan Trust, dated May 17, 1996, by and among N.A.F. Auto Loan Trust as Borrower, J-Hawk Servicing Corporation as Servicer, National Auto Funding Corporation and ContiTrade Services L.L.C. as Lender * 10.19 Investment Banking Services Agreement, dated May 17, 1996, by and between ContiFinancial Services Corporation and National Auto Funding Corporation * 10.20 Amendment to Funding Commitment, dated May 17, 1996, by and between ContiTrade Services L.L.C. as Lender and the Registrant * 10.21 Loan and Security Agreement, dated April 18, 1996, by and among American National Bank and Trust Company of Chicago and Bank of Scotland as Lenders and Diversified Financial Systems, Inc., as Borrower * 10.22 Guarantee Agreement, dated April 18, 1996, by and among American National Bank and Trust Company of Chicago and Bank of Scotland as Lenders and FirstCity Financial Corporation as Guarantor * 27.1 Financial Data Schedule. (Exhibit 27.1 is being submitted as an exhibit only in the electronic format of this Quarterly Report on Form 10-Q being submitted to the Securities and Exchange Commission. Exhibit 27.1 shall not be deemed filed for purposes of Section 11 of the Securities Act of 1933, as amended, Section 18 of the Securities Exchange Act of 1934, as amended, or Section 323 of the Trust Indenture Act of 1939, as amended, or otherwise be subject to the liabilities of such sections, nor shall it be deemed a part of any registration statement to which it relates.) _____________ * - Filed herewith EX-10.9 2 REVOLVING CREDIT AGREEMENT EXHIBIT 10.9 REVOLVING CREDIT AGREEMENT THIS REVOLVING CREDIT AGREEMENT dated as of December 29, 1995 (this "Agreement") is between FIRSTCITY FINANCIAL CORPORATION, a Delaware corporation (the "Company") and CARGILL FINANCIAL SERVICES CORPORATION, a Delaware corporation (the "Lender"). The Company has requested that the Lender provide the Company with a revolving credit facility, pursuant to which the Lender will commit to make revolving credit loans of up to $25,000,000.00 to the Company to finance working capital expenditures and certain capital investments of the Company made in the ordinary course of its business. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants set forth herein, the Company and the Lender agree as follows: ARTICLE I. DEFINITIONS; ACCOUNTING TERMS; INTERPRETATION SECTION 1.01 Definitions. As used in this Agreement, the following terms shall have the following meanings: "Acquisition Entity" means a limited partnership, limited liability company or corporation formed by the Company, a Subsidiary of the Company or an Affiliate of the Company (and possibly certain other investors), for the purpose of acquiring one or more portfolios of distressed assets in its ordinary course of business; provided, the Company, Subsidiary or Affiliate of the Company, as the case may be, does not own more than fifty percent (50%) of such entity. The Acquisition Entities on the Effective Date are listed on Schedule 1.01 hereof. "Advance" means an advance pursuant to a Notice of Advance comprised of a single Type of Loan from the Lender (or resulting from a conversion or conversions on the same date having, in the case of Eurodollar Rate Advances, the same Interest Period (except as otherwise provided in this Agreement)). "Advance Date" means, with respect to each Advance, the Business Day upon which the proceeds of such Advance are to be made available to the Company. "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling (including all directors and officers of such Person), controlled by, or under direct or indirect common control with such Person, and any other Person in which such Person's direct or indirect equity interest is 10% or more of the total outstanding equity interests of such Person. "Agreement" has the meaning specified in the introduction to this Agreement. 1 HOFS02...:\92\54892\0004\2236\FRM8056R.55C "Alternate Base Rate" means, for any date, the lesser of (a) the highest "Prime Rate" quoted in the Southwest Edition of The Wall Street Journal plus a margin (determined by the Lender in its sole discretion) which most closely approximates the most recent Eurodollar Rate plus the applicable Margin and (b) the Highest Lawful Rate. "Alternate Base Rate Advance" means any Advance bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "Assignment and Acceptance" has the meaning specified in Section 9.10 (c). "Bankruptcy Code" has the meaning specified in Section 8.01(f). "Board" means the Board of Governors of the Federal Reserve System of the United States (or any successor). "Business Day" means any day (other than a day which is a Saturday, Sunday or legal holiday in the State of Minnesota) on which banks are open for business in Minnetonka, Minnesota. "Capitalized Lease Obligations" means all lease or rental obligations which, pursuant to GAAP, are capitalized for balance sheet purposes. "Change of Control" means any of (i) the failure of the former shareholders of J-Hawk Corporation (predecessor in interest to the Company) to hold at least thirty percent (30%) of the outstanding voting capital stock of the Company, (ii) the failure of any one of James R. Hawkins, James T. Sartain, Rick Hagelstein, Matt Landry or David W. MacLennan (or anyone approved by the Lender in writing in lieu of any of the above Persons) to be a member of the Board of Directors of the Company at any time, (iii) all or substantially all of the assets of the Company are sold in a single transaction or series of related transactions to any Persons or (iv) the Company merges or consolidates with or into any other Person. "Class A Certificate" means that certain "Class A Certificate" issued by the FC Liquidating Trust to the Company which requires payments to the Company in order to provide the Company with the funds required to pay (a) the Senior Subordinated Notes (i.e., the Senior Subordinated Certificate Payments), (b) Special Preferred Stock Payments and (c) certain other payments. "Code" means Internal Revenue Code of 1986 and the regulations promulgated thereunder. "Commitment" means $25,000,000.00. "Commitment Fee" has the meaning specified in Section 3.01(a). "Company" has the meaning specified in the introduction to this Agreement. "Credit Event" means the making of any Advance or the continuation of any Advance as a Eurodollar Rate Advance. 2 "Default" means the occurrence of any event which with the giving of notice or the passage of time or both could become an Event of Default. "Default Rate" means the lesser of (i) the Highest Lawful Rate and (ii) the Eurodollar Rate plus ten percent (10%) per annum. "Effective Date" means the date on which all conditions to make an Advance set forth in Article IV are first met or waived in accordance with Section 9.01 hereof. "Eligible Assignee" means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $1,000,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or any successor organization, or a political subdivision of any such country, and having total assets in excess of $1,000,000,000; provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the Organization for Economic Cooperation and Development or any successor organization; (c) the central bank of any country which is a member of the Organization for Economic Cooperation and Development or any successor organization; and (d) any other bank or similar financial institution approved by the Lender. "Environmental Laws" means federal, state or local laws, rules or regulations, and any judicial, arbitral or administrative interpretations thereof, including any judicial, arbitral or administrative order, judgment, permit, approval, decision or determination pertaining to conservation or protection of the environment in effect at the time in question, including the Clean Air Act, the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), the Federal Water Pollution Control Act, the Occupational Safety and Health Act, the Resource Conservation and Recovery Act, the Safe Drinking Water Act, the Toxic Substances Control Act, the Superfund Amendment and Reauthorization Act of 1986, the Hazardous Materials Transportation Act, and comparable state and local laws, and other environmental conservation and protection laws. "ERISA" means the Employee Retirement Income Security Act of 1974 and the regulations promulgated thereunder. "ERISA Affiliate" means (a) any trade or business (whether or not incorporated) which is either a member of the same "controlled group" or under "common control," within the meaning of Section 414 of the Code and the regulations thereunder, with the Company and (b) any Subsidiary of the Company. "Eurodollar Rate" means the London interbank offered rate per annum for a period equal to the Interest Period which appears on the Tele Rate Screen "LIBO" page (3750) as of 11:00 a.m., (London time), two (2) Business Days prior to the first day of the Interest Period. "Eurodollar Rate Advance" means any Advance bearing interest at a rate determined by reference to the Eurodollar Rate in accordance with the provisions of Article II. "Events of Default" has the meaning specified in Section 8.01. "Execution Date" means December 29, 1995. 3 "FCBOT" means First City Bancorporation of Texas, Inc., a bank holding company incorporated in the State of Delaware, as it existed prior to its merger with J-Hawk Corporation, a Texas corporation, on July 3, 1995. "FC Intangible Assets" means all "Fidelity Bond" policies and claims and "D & O" policies and claims of FCBOT and all capital stock in First City Life Insurance Company, a life insurance company owned by FCBOT, and all capital stock in Central Texas Insurance Company, Inc.; all of which FC Intangible Assets are being held in the name of the Company for the benefit of FCLT Loans, L.P., a Texas limited partnership, and/or FC Liquidating Trust, as provided in the FCLT Asset Agency Agreement. "FC Liquidating Trust" means FirstCity Liquidating Trust, a Texas business trust. "FC Trust Agreement" means that certain Liquidating Trust Agreement dated as of July 3, 1995 under which Shawmut Bank Connecticut, National Association, appears as Trustee (the "Trustee") and pursuant to which FC Liquidating Trust was created, and any amendments thereto. "FCLT Asset Agency Agreement" means (i) that certain Assignment of Proceeds of Causes of Action dated June 21, 1995, pursuant to which FCBOT assigned to FCLT Loans, L.P., a Texas limited partnership, all of its right, title and interest in and to any and all proceeds recovered by FCBOT as the result of the assertion by it of any claims related to that portion of the FC Intangible Assets consisting of "Fidelity Bond" policies and claims, and agreed that FCLT Loans, L.P., a Texas limited partnership, would have the right to direct the prosecution by FCBOT of any such claims, subject to certain terms and conditions as set forth therein, (ii) that certain Assignment of Proceeds of Causes of Action dated July 3, 1995, pursuant to which FCBOT assigned to FCLT Loans, L.P., a Texas limited partnership, all of its right, title and interest in and to any and all proceeds recovered by FCBOT as the result of the assertion by it of any claims related to that portion of the FC Intangible Assets consisting of "D & O" policies and claims, and agreed that FCLT Loans, L.P., a Texas limited partnership, would have the right to direct the prosecution by FCBOT of any such claims, subject to certain terms and conditions as set forth therein, and (iii) that certain Undertaking for Future Assignment dated July 3, 1995, pursuant to which the Company agreed to hold, for the benefit of FC Liquidating Trust, that portion of the FC Intangible Assets consisting of capital stock in First City Life Insurance Company and Central Texas Insurance Company, Inc., and agreed to transfer to FC Liquidating Trust all proceeds in respect of such capital stock for the account of FCLT Loans, L.P., a Texas limited partnership, and to transfer, upon receipt of certain regulatory approvals and other conditions, such capital stock to FCLT Loans, L.P., a Texas limited partnership, or other designee of FC Liquidating Trust, subject to certain terms and conditions as set forth therein. "Fees" means all amounts payable pursuant to Section 3.01. "Financials" has the meaning specified in Section 5.07. "Funding Fee" shall have the meaning specified in Section 3.01(b). "GAAP" means generally accepted accounting principles as in effect from time to time as set forth in the opinions, statements and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, the Financial Accounting Standards 4 Board and such other Persons who shall be approved by a significant segment of the accounting profession and concurred in by the independent certified public accountants certifying any audited financial statements of the Company. "Hazardous Materials" means (a) hazardous waste as defined in the Resource Conservation and Recovery Act of 1976, or in any applicable federal, state or local law or regulation, (b) hazardous substances, as defined in CERCLA, or in any applicable state or local law or regulation, (c) gasoline, or any other petroleum product or by-product, (d) toxic substances, as defined in the Toxic Substances Control Act of 1976, or in any applicable federal, state or local law or regulation or (e) insecticides, fungicides, or rodenticides, as defined in the Federal Insecticide, Fungicide, and Rodenticide Act of 1975, or in any applicable federal, state or local law or regulation, as each such Act, statute or regulation may be amended from time to time. "Highest Lawful Rate" means the maximum nonusurious rate of interest that, under applicable law, may be contracted for, taken, reserved, charged or received by the Lender on the Loans or under the Loan Documents at any time or from time to time. If the maximum rate of interest which, under applicable law, the Lender is permitted to charge the Company on the Loans shall change after the date hereof, to the extent permitted by applicable law, the Highest Lawful Rate shall be automatically increased or decreased, as the case may be, as of the effective time of such change without notice to the Company or any other Person. "Indebtedness" means (a) all indebtedness for borrowed money (whether by loan or the issuance and sale of debt securities) or for the deferred purchase price of property or services, (b) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property, (c) all Capitalized Lease Obligations, (d) all guaranties or other contingent liabilities of any kind (including letter of credit reimbursement obligations) and (e) all indebtedness, to the extent it would constitute a liability on a balance sheet prepared in accordance with GAAP or would be disclosed as a contingent liability in a footnote to financial statements of such Person prepared in accordance with GAAP. "Interest Period" means, with respect to any Eurodollar Rate Advance, (a) initially, the period commencing on the Advance Date and ending on the last day of the current calendar month and (b) thereafter, each succeeding monthly period commencing on the first (1st) day of the following calendar month; provided that any Interest Period that would otherwise extend beyond the Maturity Date shall end on the Maturity Date. "Investment" means, as applied to any Person, any direct or indirect purchase or other acquisition by such Person of the assets, stock or other securities of any other Person, or any direct or indirect loan, advance or capital contribution by such Person to any other Person, and any other item which would be classified as an "investment" on a balance sheet of such Person, including any direct or indirect contribution by such Person of property or assets to a joint venture, partnership or other business entity in which such Person retains an interest. "Joint Plan" means that certain Joint Plan of reorganization dated December 23, 1994, as amended, filed with the Bankruptcy Court in the Bankruptcy Case by FCBOT, the Official Committee of Equity Security Holders and J-Hawk Corporation with the participation of Cargill Financial Services Corporation. 5 "Lien" means, when used with respect to any Person, any mortgage, lien, charge, pledge, security interest or encumbrance of any kind (whether voluntary or involuntary and whether imposed or created by operation of law or otherwise) upon, or pledge of, any of its property or assets, whether now owned or hereafter acquired, or any lease intended as security, any capital lease in the nature of the foregoing, any conditional sale agreement or other title retention agreement, in each case, for the purpose, or having the effect, of protecting a creditor against loss or securing the payment or performance of an obligation. "Loan" and "Loans" have the meaning specified in Section 2.01. "Loan Documents" means this Agreement and the other documents described in Article IV hereof. "Margin" means, with respect to any Eurodollar Rate Advance, five percent (5%) per annum. "Material Adverse Effect" means, relative to any occurrence of whatever nature (including any adverse determination in any litigation, arbitration or governmental investigation or proceeding) a material adverse effect equal to or greater than the lesser of (a) the value of five percent (5%) of the outstanding common stock of the Company and (b) $2,000,000.00. "Maturity Date" means one year from the date hereof, unless accelerated pursuant to Section 8.02. "Multiemployer Plan" means any plan which is a "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA). "Note" has the meaning specified in Section 2.02. "Notice of Advance" has the meaning provided in Section 2.03(a). "Notice of Default" has the meaning specified in Section 8.02. "Obligations" means all the obligations of the Company now or hereafter existing under the Loan Documents, whether for principal, interest, Fees, expenses, indemnification or otherwise. "Payment Office" means the office of the Lender located at 6000 Clearwater Drive, Minnetonka, Minnesota, 55343, or such other office as the Lender may hereafter designate in writing as such to the other parties hereto. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA. "Permitted Investments" means, as to any Person: (a) securities issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition thereof, 6 (b) time deposits and certificates of deposit with maturities of not more than twelve months from the date of acquisition by such Person which deposits or certificates are either: (a) fully insured by the Federal Deposit Insurance Corporation or (b) in any Bank or other commercial bank incorporated in the United States or any U.S. branch of any other commercial bank, in each case having capital, surplus and undivided profits aggregating $100,000,000 or more with a long-term unsecured debt rating of at least A- from Standard & Poor's Ratings Group or A3 from Moody's Investors Service, (c) commercial paper issued by any Person incorporated in the United States rated at least A2 or the equivalent thereof by Standard & Poor's Ratings Group or at least P2 or the equivalent thereof by Moody's Investors Service and, in each case, maturing not more than 270 days after the date of issuance, (d) investments in money market mutual funds having assets in excess of $2,000,000,000 substantially all of whose assets are comprised of securities of the types described in clauses (a) through (c) above, (e) repurchase or reverse purchase agreements respecting obligations with a term of not more than seven days for underlying securities of the types described in clause (a) above entered into with any bank listed in or meeting the qualifications specified in clause (b) above, (f) acquisitions of promissory notes evidencing loans (or real property previously foreclosed upon) by the Company, any Subsidiary or any Acquisition Entity in the ordinary course of its business, and (g) equity investments in Subsidiaries and/or Acquisition Entities for the purposes of acquiring promissory notes evidencing loans (or real property previously foreclosed upon). "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a foreign or domestic state or political subdivision thereof or any agency of such state or subdivision. "Plan" means any employee pension benefit plan (as defined in Section 3(2) of ERISA), subject to Title IV of ERISA or Section 412 of the Code, other than a Multiemployer Plan, with respect to which the Company or an ERISA Affiliate contributes or has an obligation or liability to contribute, including any such plan that may have been terminated. "Regulation U" means Regulation U of the Board (respecting margin credit extended by banks), as the same is from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Release" means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the environment (including the abandonment or discarding of barrels, containers and other closed receptacles). "Reportable Event" means an event described in Section 4043(b) of ERISA with respect to a Plan as to which the 30-day notice requirement has not been waived by the PBGC. 7 "Requirements of Environmental Laws" means, as to any Person, the requirements of any applicable Environmental Law relating to or affecting such Person or the condition or operation of such Person's business or its properties, both real and personal. "Responsible Officer" means, with respect to the Company, the chairman of the board of directors, president or any executive or senior vice president. "Security Documents" means (a) that certain Security Agreement dated as of even date herewith and executed by the Company granting the Lender a first priority security interest in substantially all of the assets of the Company, (b) that certain Pledge Agreement dated as of even date herewith and executed by the Company granting the Lender a first priority security interest in all of the outstanding capital stock of each Subsidiary of the Company, (c) those certain Collateral Assignment of Partnership Interests dated as of even date herewith, each executed by the Company and granting the Lender a first priority security interest in all of the Company's interest in each Acquisition Entity, (d) that certain Power of Attorney dated as of even date herewith executed by the Company in favor of the Lender and (e) any and all other security agreements, pledge agreements, mortgages, assignments, UCC financing statements, registrations of pledge and other similar documents executed by the Company and securing the obligations. "Senior Subordinated Certificate Payments" means payments required to be paid to the Company under the Class A Certificate in order to provide the Company with funds sufficient to make the scheduled payments required to be paid under the Senior Subordinated Notes. "Senior Subordinated Notes" means those certain "Senior Subordinated Notes" dated July 3, 1995 issued by the Company to the Class A preferred shareholders of FCBOT pursuant to the Joint Plan; which Senior Subordinated Notes (a) are in the combined principal amount of $106,690,029, (b) bear interest at the rate of nine percent (9%) per annum payable quarterly and (c) require one (1) principal payment in the amount of $53,345,014.50 on September 30, 1996 and an additional principal payment in the amount of $53,345,014.50 on September 30, 1997. "Special Preferred Stock Payments" means all dividends, redemption amounts and other amounts at anytime payable to holders of the "Special Preferred Stock" issued by the Company. "Subsidiary" means and includes, with respect to any Person, (a) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person, directly or indirectly and (b) any partnership, association, joint venture or other entity in which such Person, directly or indirectly, has greater than 50% of (i) the directors (or Persons performing similar functions) thereof or (ii) the equity interest; provided, that the definition of Subsidiary shall not include any Acquisition Entity. "Tangible Net Worth" means: (a) total assets minus (b) the sum of (i) all liabilities and (ii) all intangible assets, including, without limitation, goodwill, patents, trademarks and similar items. 8 "Unfunded Current Liability" means, with respect to any Plan, the amount, if any, by which the present value of the accrued benefits under the Plan as of the close of its most recent Plan year exceeds the fair market value of the assets allocable thereto, determined in accordance with Section 412 of the Code. "Unutilized Commitment" means, at any time, the Commitment less the outstanding Advances. SECTION 1.02 Types of Advances. Advances hereunder are distinguished by "Type". The Type of an Advance refers to the determination whether such Advance is a Eurodollar Rate Advance or an Alternate Base Rate Advance. SECTION 1.03 Accounting Terms. All accounting terms not defined herein shall be construed in accordance with GAAP, as applicable, and all calculations required to be made hereunder and all financial information required to be provided hereunder shall be done or prepared in accordance with GAAP. ARTICLE II. THE LOANS SECTION 2.01 The Loans. (a) Subject to the terms and conditions hereof, the Lender agrees at any time and from time to time on and after the Execution Date and prior to the Maturity Date, to make and maintain a revolving credit loan or loans (each a "Loan" and collectively, the "Loans") to the Company, which Loans (i) shall be made and maintained pursuant to one or more Advances comprised of Eurodollar Rate Advances (unless Eurodollar Rate Advances are unavailable pursuant to Sections 2.10 or 2.11, and then Alternate Base Rate Advances); provided, except as otherwise specifically provided herein, all Loans comprising all or a portion of the same Advance shall at all times be of the same Type, (ii) shall be made in the minimum amount of $500,000.00 and integral multiples thereof, (iii) so long as no Default or Event of Default exists hereunder, may be repaid and reborrowed, at the option of the Company in accordance with the provisions hereof, (iv) may be borrowed by the Company (to cover operating expenses only) without the express written approval of the Lender in an amount not to exceed $3,000,000.00 at any time, (v) with respect to Advances other than the unrestricted $3,000,000.00 operating expense draw, shall be subject to the Lender's express written approval and shall be made for a specific purpose with a specifically identified repayment source and (vi) shall, in the aggregate, not exceed the Commitment. There shall be no further Advances after the Maturity Date. (b) The Loans shall be used to provide working capital and to finance certain capital investments of the Company made in the ordinary course of its business. SECTION 2.02 The Note. The Loans shall be evidenced by the Note in favor of the Lender (the "Note"), substantially in the form of Exhibit 2.02 hereto. SECTION 2.03 Notice of Advance. Whenever the Company requires an Advance, it shall give written notice thereof (a "Notice of Advance") (or telephonic notice promptly confirmed in writing) to the Lender not later than 11:00 a.m. (Minnetonka, Minnesota time) two (2) Business Days prior to the date of such Advance. Each Notice of Advance shall be irrevocable and 9 shall be in the form of Exhibit 2.03 hereto, specifying (i) the aggregate principal amount of the Advance to be made and (ii) the date of such Advance (which shall be a Business Day). SECTION 2.04 Disbursement of Funds. No later than 1:00 p.m. (Minnetonka, Minnesota time) on each Advance Date, the Lender shall make available the amount of the Advance in U.S. dollars and in immediately available funds at the Payment Office. SECTION 2.05 Continuances. Subject to Sections 2.10 and 2.11, each Advance shall automatically continue as a Eurodollar Rate Advance during the term of this Agreement. SECTION 2.06 Voluntary Prepayments. The Company shall have the right to voluntarily prepay Advances in whole or in part at any time on the following terms and conditions: (a) no Eurodollar Rate Advance may be prepaid prior to the last day of its Interest Period unless, simultaneously therewith, the Company pays to the Lender all sums necessary to compensate the Lender for all costs and expenses resulting from such prepayment, as reasonably determined by the Lender, including, but not limited to, those costs described in Sections 2.12, and 2.13 hereof; (b) each partial prepayment shall be in an initial aggregate principal amount of $500,000.00 and integral multiples thereof; and (c) each prepayment pursuant to this Section shall be applied first, to the payment of accrued and unpaid interest, and then, to the outstanding principal of such Advances in the inverse order of maturity thereof. SECTION 2.07 Mandatory Repayments. (a) The aggregate amount of all Advances under the Note (and all accrued, unpaid interest) shall be due and payable on the Maturity Date. (b) The Company shall repay Advances on any day on which the aggregate outstanding principal amount of the Loans exceeds the Commitment in the amount of such excess. SECTION 2.08 Method and Place of Payment. Except as otherwise specifically provided herein, all payments under this Agreement due from the Company shall be made to the Lender not later than 11:00 a.m. (Minnetonka, Minnesota time) on the date when due and shall be made in lawful money of the United States in immediately available funds at the Payment Office. SECTION 2.09 Interest. (a) Subject to Section 9.08, the Company agrees to pay interest on the total outstanding principal balance of all Eurodollar Rate Advances from the date of each respective Advance to maturity (whether by acceleration or otherwise) at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) which shall, during each Interest Period applicable thereto, be equal to the lesser of (i) the Highest Lawful Rate and (ii) the applicable Eurodollar Rate for such Interest Period plus the Margin. (b) Subject to Section 9.08, the Company agrees to pay interest on the total outstanding principal balance of all Alternate Base Rate Advances from the date of each respective Advance to maturity (whether by acceleration or otherwise) at a rate per annum which shall at all times be equal to the lesser of (i) the Highest Lawful Rate and (ii) the Alternate Base Rate in effect from time to time. If the Alternate Base Rate is used, interest shall be computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be. (c) Subject to Section 9.08, overdue principal and, to the extent permitted by law, overdue interest in respect of any Advance and all other overdue amounts owing hereunder shall bear interest for each day that such amounts are overdue at a rate per annum equal to the Default Rate. 10 (d) Interest on each Advance shall accrue from and including the date of such Advance to but excluding the date of any repayment thereof and shall be payable (i) in respect of Eurodollar Rate Advances (A) on the first day of each month and (B) on the date of any voluntary or mandatory repayment or any conversion or continuance, (ii) in respect of Alternate Base Rate Advances, (A) on the first day of each month and (B) on the date of any voluntary or mandatory repayment and (iii) in respect of each Advance, at maturity (whether by acceleration or otherwise) and, after maturity, on demand. (e) The Lender, upon determining the Eurodollar Rate for any Interest Period, shall notify the Company thereof. Each such determination shall, absent manifest error, be final and conclusive and binding on all parties hereto. In addition, prior to the due date for the payment of interest on any Advances set forth in the immediately preceding paragraph, the Lender shall notify the Company of the amount of interest due by the Company on all outstanding Advances on the applicable due date, but any failure of the Lender to so notify the Company shall not reduce the Company's liability for the amount owed. SECTION 2.10 Interest Rate Not Ascertainable. In the event that the Lender shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) that on any date for determining the Eurodollar Rate for any Interest Period, by reason of any changes arising after the date of this Agreement affecting the Eurodollar interbank market or the Lender's position in such market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Eurodollar Rate, then, and in any such event, the Lender shall forthwith give notice to the Company of such determination. Until the Lender notifies the Company that the circumstances giving rise to the suspension described herein no longer exist, the obligations of the Lender to make Eurodollar Rate Advances shall be suspended and Alternate Base Rate Advances shall be available in lieu thereof. SECTION 2.11 Change in Legality. (a) Notwithstanding anything to the contrary herein contained, if any change in any law or regulation or in the interpretation thereof by any governmental authority charged with the administration or interpretation thereof shall make it unlawful for the Lender to make or maintain any Eurodollar Rate Advance or to give effect to its obligations as contemplated hereby, then, by prompt written notice to the Company, the Lender may: (i) declare that Eurodollar Rate Advances will not thereafter be made hereunder, whereupon the Company shall be prohibited from requesting Eurodollar Rate Advances hereunder unless such declaration is subsequently withdrawn; and (ii) require that all outstanding Eurodollar Rate Advances be converted to Alternate Base Rate Advances, in which event (A) all such Eurodollar Rate Advances shall be automatically converted to Alternate Base Rate Advances as of the effective date of such notice as provided in paragraph (b) below and (B) all payments and prepayments of principal which would otherwise have been applied to repay the converted Eurodollar Rate Advances shall instead be applied to repay the Alternate Base Rate Advances resulting from the conversion of such Eurodollar Rate Advances. (b) For purposes of this Section, a notice to the Company by the Lender pursuant to paragraph (a) above shall be effective on the date of receipt thereof by the Company. SECTION 2.12 Increased Costs or Taxes. If the application or effectiveness of any applicable law or regulation (i) shall change the basis of taxation of payments to the Lender of the 11 principal of or interest on any Eurodollar Rate Advance made by the Lender or any other fees or amounts payable hereunder (other than taxes imposed on the overall net income of the Lender or franchise taxes imposed upon it by the jurisdiction in which the Lender has an office), (ii) shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, the Lender or (iii) shall impose on the Lender any other condition affecting this Agreement or any Eurodollar Rate Advance made by the Lender, and the result of any of the foregoing shall be to increase the cost to the Lender of maintaining the Loans or its Commitment or of making or maintaining any Eurodollar Rate Advance or to reduce the amount of any sum received or receivable by the Lender hereunder (whether of principal, interest or otherwise) in respect thereof by an amount deemed in good faith by the Lender to be material, then the Company shall pay to the Lender such additional amount as will compensate it for such increase or reduction upon demand. The Lender shall not be entitled to make a demand for and the Borrower shall not be liable for payment of any amount under the terms of this Section 2.12 following the termination of the Obligations hereunder. SECTION 2.13 Eurodollar Advance Prepayment and Default Penalties. Subject to Section 9.08, the Company shall indemnify the Lender against any loss or expense which it may sustain or incur as a consequence of (a) an Advance of, or a conversion from, Eurodollar Rate Advances that does not occur on the date specified therefor in a Notice of Advance, (b) any payment, prepayment or conversion of a Eurodollar Rate Advance required by any other provision of this Agreement or otherwise made on a date other than the last day of the applicable Interest Period or (c) any default in the payment or prepayment of the principal amount of any Eurodollar Advance or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, by notice of prepayment or otherwise). Such loss or expense shall include an amount equal to the excess determined by the Lender of (i) its cost of obtaining the funds for the Advance being paid, prepaid or converted or not borrowed (based on the Eurodollar Rate) for the period from the date of such payment, prepayment or conversion or failure to borrow to the last day of the Interest Period for such Advance (or, in the case of a failure to borrow, the Interest Period for the Advance which would have commenced on the date of such failure to borrow) over (ii) the amount of interest (as determined by the Lender in good faith) that would be realized in reemploying the funds so paid, prepaid or converted or not borrowed for such period or Interest Period, as the case may be. The Lender will notify the Company of any loss or expense which will entitle it to compensation pursuant to this Section, as promptly as possible after it becomes aware thereof, but failure to so notify shall not affect the Company's liability therefor. A certificate of the Lender setting forth any amount which it is entitled to receive pursuant to this Section shall be delivered to the Company and shall be conclusive absent manifest error. The Company shall pay to the Lender the amount shown as due on any certificate within ten (10) days after its receipt of the same. Without prejudice to the survival of any other obligations of the Company hereunder, the obligations of the Company under this Section shall survive the termination of this Agreement and the assignment of the Note. ARTICLE III. FEES SECTION 3.01 Fees. (a) The Company agrees to pay to the Lender a commitment fee (the "Commitment Fee") of $250,000.00. The Commitment Fee shall be due and payable as follows: (i) $125,000.00 shall be due and payable on the Execution Date and (ii) $125,000.00 shall be due and payable on or before May 31, 1996. 12 (b) The Company agrees to pay to the Lender on each Advance Date a fee (each a "Funding Fee") in respect of each Advance hereunder equal to .5% of the amount of such Advance. Notwithstanding the above, the Funding Fees shall not exceed $175,000.00 in the aggregate during the term hereof. ARTICLE IV. CONDITIONS PRECEDENT SECTION 4.01 Conditions Precedent to the Initial Advance. The obligation of the Lender to make its initial Advance to the Company is subject to the condition that the Lender shall have received the following: (a) this Agreement executed by the Company; (b) the Note executed by the Company and payable to the order of the Lender in the amount of the Commitment; (c) the Security Documents executed by the Company; (d) a Notice of Advance with respect to the initial Advance meeting the requirements of Section 2.03; (e) a certificate of an officer and of the secretary or an assistant secretary of the Company certifying, inter alia, (i) true and complete copies of each of the articles or certificate of incorporation, as amended and in effect of the Company and each of its Subsidiaries, the bylaws, as amended and in effect, of the Company and each of its Subsidiaries and the resolutions adopted by the Board of Directors of the Company (A) authorizing the execution, delivery and performance by the Company of this Agreement and the other Loan Documents to which it is or will be a party and the Advances to be made hereunder, (B) approving the forms of the Loan Documents to which it is or will be a party and which will be delivered at or prior to the date of the initial Advance and (C) authorizing officers of the Company to execute and deliver the Loan Documents to which it is or will be a party and any related documents, including, any agreement contemplated by this Agreement, (ii) the incumbency and specimen signatures of the officers of the Company executing any documents on its behalf and (iii) that there has been no change in the businesses or financial condition of the Company which could have a Material Adverse Effect; (f) favorable, signed opinions addressed to the Lender from Vander Woude, Malone & Istre, P.C., counsel to the Company, in form and substance satisfactory to the Lender and their counsel; (g) the payment to the Lender of all reasonable fees and expenses (including the reasonable fees and disbursements of Andrews & Kurth L.L.P.) agreed upon by such parties to be paid on the Execution Date; and (h) certificates of appropriate public officials as to the existence, good standing and qualification to do business as a foreign corporation, as applicable, of the Company and each of its Subsidiaries in each jurisdiction in which the ownership of its properties or the conduct of its business requires such qualifications and where the failure to so qualify would have a Material Adverse Effect. 13 The acceptance of the benefits of the initial Credit Event shall constitute a representation and warranty by the Company to the Lender that all of the conditions specified in this Section above shall have been satisfied or waived as of that time. SECTION 4.02 Conditions Precedent to All Credit Events. The obligation of the Lender to make any Advance is subject to the further conditions precedent that on the date of such Credit Event: (a) The conditions precedent set forth in Section 4.01 shall have theretofore been satisfied or waived. (b) The representations and warranties set forth in Article V shall be true and correct in all material respects as of, and as if such representations and warranties were made on, the date of the proposed Advance (unless such representation and warranty expressly relates to an earlier date or is no longer true and correct solely as a result of transactions permitted by the Loan Documents), and the Company shall be deemed to have certified to the Lender that such representations and warranties are true and correct in all material respects by submitting a Notice of Advance. (c) The Lender shall have satisfactorily completed a reasonable due diligence investigation with respect to each Advance other than an Advance under the unrestricted $3,000,000.00 operating expense draw. (d) The Company shall have complied with the provisions of Section 2.03 hereof. (e) No Default or Event of Default shall have occurred and be continuing or would result from such Credit Event. (f) No Material Adverse Effect shall have occurred since the delivery of the most recent financials. (g) The Lender shall have received such other approvals, opinions or documents as the Lender may reasonably request. The acceptance of the benefits of each such Credit Event shall constitute a representation and warranty by the Company to the Lender that all of the conditions specified in this Section above exist as of that time. SECTION 4.03 Delivery of Documents. The Note, certificates, legal opinions and other documents and papers referred to in this Article IV, unless otherwise specified, shall be delivered to the Lender and shall be reasonably satisfactory in form and substance to the Lender. ARTICLE V. REPRESENTATIONS AND WARRANTIES In order to induce the Lender to enter into this Agreement and to make the Advances provided for herein, the Company makes, on or as of the occurrence of each Credit Event (except to the extent such representations or warranties relate to an earlier date or are no longer true and correct 14 in all material respects solely as a result of transactions permitted by the Loan Documents), the following representations and warranties to the Lender: SECTION 5.01 Organization and Qualification. Each of Company and its Subsidiaries (a) is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation or organization, (b) has the corporate power to own its property and to carry on its business as now conducted and (c) is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the failure to be so qualified would have a Material Adverse Effect. SECTION 5.02 Authorization and Validity. The Company has the corporate power and authority to execute, deliver and perform its obligations hereunder and under the other Loan Documents and all such action has been duly authorized by all necessary corporate proceedings on its part. The Loan Documents have been duly and validly executed and delivered by the Company and constitute a valid and legally binding agreement the Company enforceable in accordance with the respective terms thereof, except, in each case, as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws relating to or affecting the enforcement of creditors' rights generally, and by general principles of equity regardless of whether such enforceability is a proceeding in equity or at law. SECTION 5.03 Governmental Consents. No authorization, consent, approval, license or exemption of or filing or registration with any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, is necessary for the valid execution, delivery or performance by the Company of any Loan Document. SECTION 5.04 Conflicting or Adverse Agreements or Restrictions. Neither the Company nor any Subsidiary is a party to any contract or agreement or subject to any restriction which would reasonably be expected to have a Material Adverse Effect. All agreements of the Company relating to the lending of money or the issuance of letters of credit by any party are described hereto on Schedule 5.04. Neither the execution nor delivery of the Loan Documents nor compliance with the terms and provisions hereof or thereof will be contrary to the provisions of, or constitute a default under (a) the charter or bylaws of the Company, (b) any applicable law or any applicable regulation, order, writ, injunction or decree of any court or governmental instrumentality or (c) any material agreement to which the Company is a party or by which it is bound or to which it is subject. SECTION 5.05 Title to Assets. Each of the Company and its Subsidiaries has good title to all material personalty and good and indefeasible title to all material realty as reflected on the Company's and the Subsidiaries' books and records as being owned by it, except for properties disposed of in the ordinary course of business, subject to no Liens, except those permitted hereunder or set forth on Schedule 7.04(a). All of such assets have been and are being maintained by the appropriate Person in good working condition in accordance with industry standards. SECTION 5.06 Litigation. No proceedings against or affecting the Company or any Subsidiary are pending or, to the knowledge of the Company, threatened before any court or governmental agency or department which involve a reasonable risk of having a Material Adverse Effect except those listed on Schedule 5.06 hereof. SECTION 5.07 Financial Statements. Prior to the Execution Date, the Company has furnished to the Lender the audited consolidated balance sheet, income statement and statement of cash flow for J-Hawk Corporation, predecessor in interest to the Company, as of December 31, 1994 15 and all quarterly reports of the Company as are currently available (such audited financials and quarterly reports, the "Financials"). The Financials have been prepared in conformity with GAAP consistently applied (except as otherwise disclosed in such financial statements) throughout the periods involved and present fairly, in all material respects, the consolidated financial condition of the Company and its consolidated Subsidiaries as of the dates thereof and the results of their operations for the periods then ended. As of the Execution Date, no Material Adverse Effect has occurred in the consolidated financial condition of the Company and its consolidated Subsidiaries since December 31, 1994. SECTION 5.08 Default. Neither the Company nor any Subsidiary is in default under any material provisions of any instrument evidencing any Indebtedness or of any agreement relating thereto, or in default in any respect under any order, writ, injunction or decree of any court, or in default in any respect under or in violation of any order, injunction or decree of any governmental instrumentality, in such manner as to cause a Material Adverse Effect. SECTION 5.09 Investment Company Act. Neither the Company nor any Subsidiary is, or is directly or indirectly controlled by or acting on behalf of any Person which is, an "investment company," as such term is defined in the Investment Company Act of 1940, as amended. SECTION 5.10 Public Utility Holding Company Act. Neither the Company nor any Subsidiary is a non-exempt "holding company," or is subject to regulation as such, nor is, to the knowledge of the Company's or Subsidiaries' officers, an "affiliate" of a "holding company" or a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. SECTION 5.11 ERISA. No accumulated funding deficiency (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived, exists or is expected to be incurred with respect to any Plan. No liability to the PBGC (other than required premium payments) has been or is expected by the Company to be incurred with respect to any Plan by the Company or any ERISA Affiliate. Neither the Company nor any ERISA Affiliate has incurred any withdrawal liability under Title IV of ERISA with respect to any Multi-Employer Plans. SECTION 5.12 Tax Returns and Payments. Each of the Company and its Subsidiaries has filed all federal income tax returns and other tax returns, statements and reports (or obtained extensions with respect thereto) which are required to be filed and has paid or deposited or made adequate provision in accordance with GAAP for the payment of all taxes (including estimated taxes shown on such returns, statements and reports) which are shown to be due pursuant to such returns, except for such taxes as are being contested in good faith and by proceedings. SECTION 5.13 Environmental Matters. Each of the Company and its Subsidiaries (a) possesses all environmental, health and safety licenses, permits, authorizations, registrations, approvals and similar rights necessary under law or otherwise for the Company or such Subsidiary to conduct its operations as now being conducted (other than those with respect to which the failure to possess or maintain would not, individually or in the aggregate for the Company and such Subsidiaries, have a Material Adverse Effect) and (b) each of such licenses, permits, authorizations, registrations, approvals and similar rights is valid and subsisting, in full force and effect and enforceable by the Company or such Subsidiary, and each of the Company and its Subsidiaries is in compliance with all terms, conditions or other provisions of such permits, authorizations, registrations, approvals and similar rights except for such failure or noncompliance that, individually or in the aggregate for the Company and such Subsidiaries, would not have a Material Adverse Effect. Except 16 as disclosed on Schedule 5.13, neither the Company nor any of its Subsidiaries has received any notices of any violation of, noncompliance with, or remedial obligation under, Requirements of Environmental Laws (which violation or non-compliance has not been cured) and there are no writs, injunctions, decrees, orders or judgments outstanding, or lawsuits, claims, proceedings, investigations or inquiries pending or, to the knowledge of the Company or any Subsidiary, threatened, relating to the ownership, use, condition, maintenance or operation of, or conduct of business related to, any property owned, leased or operated by the Company or any Subsidiary or other assets of the Company or such Subsidiary, other than those violations, instances of noncompliance, obligations, writs, injunctions, decrees, orders, judgments, lawsuits, claims, proceedings, investigations or inquiries that, individually or in the aggregate for the Company and such Subsidiaries, would not have a Material Adverse Effect. Except as disclosed on Schedule 5.13, there are no material obligations, undertakings or liabilities arising out of or relating to Environmental Laws to which the Company or any of its Subsidiaries has agreed, assumed or retained, or by which the Company or any of its Subsidiaries is adversely affected, by contract or otherwise. Except as disclosed on Schedule 5.13, neither the Company nor any of its Subsidiaries has received a written notice or claim to the effect that such Person is or may be liable to any other Person as the result of a Release or threatened Release of a Hazardous Material. SECTION 5.14 Purpose of Loans. (a) The proceeds of the Advances will be used solely to finance operating expenditures and for certain capital investments of the Company made in the ordinary course of its business. (b) None of the proceeds of any Advance will be used directly or indirectly for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation U (herein called "margin stock") or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry a margin stock. SECTION 5.15 Franchises and Other Rights. Each of the Company and its Subsidiaries has all franchises, permits, licenses and other authority as are necessary to enable it to carry on its businesses as now being conducted where the absence of such would have a Material Adverse Effect except those listed on Schedule 5.15 hereof. To the best of its knowledge, the Company is not in default in respect of any of such operating rights. SECTION 5.16 Subsidiaries. The Subsidiaries listed on Schedule 5.16 are all of the Subsidiaries of the Company as of the Execution Date. SECTION 5.17 Solvency. After giving effect to the initial Advance hereunder and all other Indebtedness of the Company, the Company and its Subsidiaries, viewed as a consolidated entity have (a) capital sufficient to carry on their businesses and transactions, (b) assets, the fair market value of which exceeds their consolidated liabilities (as reflected on the Financials or on the financial statements most recently delivered to the Lender), and (c) sufficient cash flow to pay their existing debts as they mature. SECTION 5.18 Material Facts. There is no fact which the Company has failed to disclose to the Lender in writing which will have a Material Adverse Effect on or, so far as the Company can now foresee, will have a Material Adverse Effect on the assets, business, prospects, profits or condition (financial or otherwise) of the Company or its Subsidiaries or the ability of the Company to perform its obligations under this Agreement. No information, exhibit or report furnished by the Company to the Lender in connection with the negotiation of this Agreement contained any material misstatement of fact or omitted a material fact or any fact necessary to make the statement contained therein not materially misleading. 17 SECTION 5.19 Solvency. The Company is, and after giving effect to the transactions contemplated under the Loan Documents will be, solvent. SECTION 5.20 Security Interests. The Security Documents create valid security interests in the collateral described therein in favor of the Lender securing the Obligations and constitute perfected first priority security interests in such collateral described therein subject to no Liens other than Liens permitted by Section 7.04. ARTICLE VI. AFFIRMATIVE COVENANTS The Company covenants and agrees that on and after the date hereof and for so long as this Agreement is in effect and until the Commitment has terminated: SECTION 6.01 Information Covenants. The Company will furnish to the Lender: (a) As soon as available, and in any event within 45 days after the close of each of the first three quarters in each fiscal year of the Company, the consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the end of such quarterly period and the related consolidated and consolidating statements of income and cash flows for such quarterly period and for the portion of the fiscal year ended at the end of such quarter, setting forth, in each case, comparative consolidated figures for the related periods in the prior fiscal year, all of which shall be certified by the chief financial officer or chief executive officer of the Company as fairly presenting in all material respects, the financial position of the Company and its Subsidiaries as of the end of such period and the results of their operations for the period then ended in accordance with GAAP, subject to changes resulting from normal year-end audit adjustments. (b) As soon as available, and in any event within 120 days after the close of each fiscal year of the Company, the audited consolidated and the unaudited consolidating balance sheets of the Company and its Subsidiaries as at the end of such fiscal year and the related consolidated and consolidating statements of income, stockholders equity and cash flows for such fiscal year, setting forth, in each case, comparative figures for the preceding fiscal year and certified by KPMG Peat Marwick, L.L.P. or other independent certified public accountants of recognized national standing, whose report shall be without limitation as to the scope of the audit and reasonably satisfactory in substance to the Lenders. (c) Immediately after any Responsible Officer of the Company obtains knowledge thereof, notice of: (i) any material violation of, noncompliance with, or remedial obligations under, Requirements of Environmental Laws, (ii) any material Release or threatened material Release of Hazardous Materials affecting any property owned, leased or operated by the Company or any of its Subsidiaries, (iii) any event or condition which constitutes a Default or an Event of Default, 18 (iv) any condition or event which, in the opinion of management of the Company, would reasonably be expected to have a Material Adverse Effect, (v) any Person having given any written notice to the Company or taken any other action with respect to a claimed material default or material adverse event under any material instrument or material agreement, and (vi) the institution of any litigation which might reasonably be expected in the good faith judgment of the Company either to have a Material Adverse Effect or result in a final, non-appealable judgment or award in excess of $1,000,000.00 with respect to any single cause of action, or the institution of any litigation of any kind by any party with whom the Company has entered into a franchise agreement; then, a notice of such event or condition will be delivered to the Lender specifying the nature and period of existence thereof and specifying the notice given or action taken by such Person and the nature of any such claimed default, event or condition and, in the case of an Event of Default or Default, what action has been taken, is being taken or is proposed to be taken with respect thereto. (d) At the time of the delivery of the financial statement provided for in Sections 6.01(a) and 6.01(b), a certificate of a Responsible Officer to the effect that no Default or Event of Default exists or, if any Default or Event of Default does exist, specifying the nature and extent thereof and the action that is being taken or that is proposed to be taken with respect thereto, which certificate shall set forth the calculations required to establish whether the Company was in compliance with the provisions of Sections 7.10 and 7.11 as at the end of such fiscal period or year, as the case may be. (e) Upon request by the Lender such audits of the Company's procedures and policies and operations in respect of Environmental Laws as the Lender may reasonably request. (f) Promptly upon receipt thereof, a copy of any report or letter submitted to the Company by its independent accountants in connection with any regular or special audit of the Company's records. (g) From time to time and with reasonable promptness, such other information or documents as the Lender may reasonably request. SECTION 6.02 Books, Records and Inspections. The Company and its Subsidiaries will maintain, and will permit, or cause to be permitted, any Person designated by the Lender to visit and inspect any of the properties of the Company and its Subsidiaries, to examine the corporate books and financial records of the Company and its Subsidiaries and make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of any such corporations with the officers, employees and agents of the Company and its Subsidiaries and with their independent public accountants, all at such reasonable times and as often as the Lender may request. Such inspections shall be made as often as the Lender reasonably requests, and shall be at the expense of the Company up to $5,000.00 annually. SECTION 6.03 Insurance and Maintenance of Properties. (a) The Company and its Subsidiaries will keep reasonably adequately insured by financially sound and reputable insurers all of its material property, which is of a character, and in amounts and against such risks, usually and reasonably insured by similar Persons engaged in the same or similar businesses, including, without limitation, insurance against fire, casualty and any other hazards normally insured against. The 19 Company and its Subsidiaries will at all times maintain insurance against its liability for injury to Persons or property, which insurance shall be by financially sound and reputable insurers and in such amounts and form as are customary for corporations of established reputation engaged in the same or a similar business and owning and operating similar properties, and shall annually provide the Lender a listing of all such insurance and such other certificates and other evidence thereof, as the Lender shall reasonably request. A listing of all presently existing policies of the Company and its Subsidiaries is attached hereto as Schedule 6.03. (b) The Company and its Subsidiaries will cause all of its material properties used or useful in the conduct of its business to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all reasonably necessary repairs, renewals and replacements thereof, all as in the reasonable judgment of such Person may be reasonably necessary so that the business carried on in connection therewith may be properly conducted at all times. (c) The Company will name the Lender as a loss payee on all of its insurance policies (other than public liability insurance policies). SECTION 6.04 Payment of Taxes. Except with respect to "distressed assets" acquired by any Subsidiary in a portfolio acquisition, the Company and its Subsidiaries will pay and discharge all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, except for such amounts that are being contested in good faith and by appropriate proceedings. SECTION 6.05 Corporate Existence. The Company and its Subsidiaries will do all things necessary to preserve and keep in full force and effect (a) its corporate existence and (b) unless the failure to do so would not have a Material Adverse Effect, the rights and franchises of each of the Company and its Subsidiaries. SECTION 6.06 Compliance with Statutes. The Company and its Subsidiaries will comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property, except to the extent the failure to do so would not reasonably be expected to have a Material Adverse Effect. SECTION 6.07 ERISA. Immediately after any Responsible Officer of the Company or any of its Subsidiaries knows or has reason to know any of the following items are true the Company will deliver or cause to be delivered to the Lender a certificate of the chief financial officer of the Company setting forth details as to such occurrence and such action, if any, the Company or its ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given to or filed with or by the Company or its ERISA Affiliate with respect thereto; that a Reportable Event has occurred or that an application may be or has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard; that a Multiemployer Plan has been or may be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA; that any required contribution to a Plan or Multiemployer Plan has not been or may not be timely made; that proceedings may be or have been instituted under Section 4069(a) of ERISA to impose liability on the Company or an ERISA Affiliate or under Section 4042 of ERISA to terminate a Plan or appoint a trustee to administer a Plan; that the Company or any ERISA Affiliate has incurred or may incur any liability (including any contingent or secondary liability) on account of the termination of or withdrawal from a Plan or a Multiemployer Plan; and that the Company or an ERISA Affiliate may be required to 20 provide security to a Plan under Section 401(a)(29) of the Code; or any other condition exists or may occur with respect to one or more Plans and/or Multiemployer Plans. SECTION 6.08 Fidelity Bond. The Company shall at all times during the term hereof maintain a fidelity bond in an amount not less than $2,000,000.00 per occurrence and $4,000,000.00 in the aggregate, net of any applicable deductible. ARTICLE VII. NEGATIVE COVENANTS The Company covenants and agrees that, unless the Lender shall have otherwise given its written consent, on and after the date hereof and for so long as this Agreement is in effect and until the Commitment has terminated: SECTION 7.01 Change in Business. The Company will not engage in any businesses not of the same general type as those conducted by the Company on the Execution Date. SECTION 7.02 Consolidation, Merger or Sale of Assets. The Company will not wind up, liquidate or dissolve their affairs, or enter into any transaction of merger or consolidation, or sell or otherwise dispose of all or any part of their property or assets (other than sales of inventory and surplus or obsolete assets in the ordinary course of business provided that any disposal does not prejudice the Lender in any way), including the capital stock of any Subsidiary, or purchase, lease or otherwise acquire (in one or a series of related transactions) all or any part of the property or assets of any Person or all of the capital stock of any Person. The Company will not permit any of its Subsidiaries to wind up, liquidate or dissolve their affairs, or enter into any transaction of merger or consolidation, or sell or otherwise dispose of any capital stock of any Subsidiary, or purchase, lease or otherwise acquire (in one or a series of related transactions) all or any part of the property or assets of any Person or all of the capital stock of any Person. SECTION 7.03 Indebtedness. The Company will not create, incur, assume or permit to exist any Indebtedness except: (a) Indebtedness existing hereunder; (b) long term Indebtedness or unsecured short term Indebtedness not to exceed in the aggregate $5,000,000.00; and (c) guarantees of any Indebtedness of any Person not to exceed in the aggregate $5,000,000.00. SECTION 7.04 Liens. Neither the Company nor any Subsidiary will create, incur, assume or suffer to exist any Lien upon or with respect to any of its property or assets of any kind whether now owned or hereafter acquired (nor will they covenant with any other Person not to grant such a Lien to the Lender), except (a) Liens existing on the Execution Date and listed on Schedule 7.04(a); 21 (b) Liens for taxes or assessments or other governmental charges or levies, either not yet due and payable or being contested in good faith and by appropriate proceedings for which adequate reserves have been established; (c) Liens securing long term Indebtedness permitted under Section 7.03(b) above; (d) any renewal, extension or replacement of any Lien referred to in subparagraph (a) above; provided, that no Lien arising or existing as a result of such extension, renewal or replacement shall be extended to cover any property not theretofore subject to the Lien being extended, renewed or replaced, and provided further, the principal amount of the Indebtedness secured thereby shall not exceed the principal amount of the Indebtedness so secured at the time of such extension, renewal or replacement; and (e) Liens granted in connection with the acquisition of promissory notes evidencing loans (or real property previously foreclosed upon). SECTION 7.05 Investments. Except as provided in Sections 7.02 and 7.09, neither the Company nor any Subsidiary will, directly or indirectly, make or own any Investment in any Person, except: (a) The Company and its Subsidiaries may make and own Permitted Investments; (b) The Company and its Subsidiaries may continue to own Investments owned by it on the Execution Date and listed on Schedule 7.05(b); and (c) The Company and its Subsidiaries may make and own Investments arising out of loans and advances for expenses, travel per diem and similar items in the ordinary course of business to officers, directors and employees. SECTION 7.06 Restricted Payments. (a) Other than payments in respect of the Senior Subordinated Notes and the Special Preferred Stock Payments, the Company will not pay any dividends or redeem, retire, purchase or make any other acquisition, direct or indirect, of any shares of any class of stock of the Company, or of any warrants, rights or options to acquire any such shares, now or hereafter outstanding; except to the extent that the consideration therefor consists solely of shares of stock (including warrants, rights or options relating thereto) of the Company. (b) Except in the ordinary course of business, the Subsidiaries will not declare any dividends, make any loans or advances to, or otherwise transfer any money or other assets to the Company during the term hereof; provided, such dividends, loans or transfers are simultaneously transferred to the Lender in repayment of the Obligations. SECTION 7.07 Change in Accounting. The Company will not, and will not permit any Subsidiary to, change its method of accounting except for (a) immaterial changes permitted by GAAP in which the Company's auditors concur or (b) changes required by GAAP. The Company shall advise the Lender in writing promptly upon making any material change to the extent same is not disclosed in the financial statements required under Section 6.01 hereof. SECTION 7.08 Change of Certain Indebtedness. Other than payments in respect of the Senior Subordinated Notes and the Special Preferred Stock Payments, the Company will not make any voluntary prepayments of principal or interest on any other of the Company's Indebtedness. 22 SECTION 7.09 Transactions with Affiliates. The Company will not, directly or indirectly, engage in any transaction with any Affiliate, including the purchase, sale or exchange of assets or the rendering of any service, except in the ordinary course of business or pursuant to the reasonable requirements of its business and, in each case, upon terms that are no less favorable than those which might be obtained in an arm's-length transaction at the time from non-Affiliates. SECTION 7.10 Minimum Tangible Net Worth. The Company will not permit its Tangible Net Worth during the term hereof to be less than $42,500,000.00. SECTION 7.11 Indebtedness to Equity Ratio. The Company will not permit the ratio of (a) its consolidated Indebtedness excluding Senior Subordinated Notes and "Special Preferred Stock" (as such term is used in the definition of Special Preferred Stock Payments) to (b) the amount of its equity represented by common stock, to be greater than 5.0 to 1.0 at any time during the term hereof. ARTICLE VIII. EVENTS OF DEFAULT AND REMEDIES SECTION 8.01 Events of Default. The following events shall constitute Events of Default ("Events of Default") hereunder: (a) any installment of principal or payment of interest on the Note or any payment of any Fee shall not be paid on the date on which such payment is due and such failure is not remedied within five (5) days; or (b) any representation or warranty made or, for purposes of Article V, deemed made by the Company or any Subsidiary herein or in any of the Loan Documents or other document, certificate or financial statement delivered in connection with this Agreement or any other Loan Document shall prove to have been incorrect in any material respect when made or deemed made or reaffirmed, as the case may be; or (c) the Company or any Subsidiary shall fail to perform or observe any duty or covenant contained in Article VII hereof; or (d) the Company or any Subsidiary shall fail to perform or observe any duty or covenant contained in this Agreement other than in Article VII, or in any of the Loan Documents, and such failure is not remedied within thirty (30) days; or (e) the Company or any Subsidiary shall (i) fail to make (whether as primary obligor or as guarantor or other surety) any principal payment of or interest or premium, if any, on any instrument of Indebtedness allowed hereunder (other than the Note) outstanding beyond any period of grace provided with respect thereto or (ii) shall fail to duly observe, perform or comply with any agreement with any Person or any term or condition of any instrument of Indebtedness in excess of $500,000.00, if such failure causes such obligations to become due prior to any stated maturity; or (f) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Company or any Subsidiary, or of a substantial part of the property or assets of the Company or any Subsidiary, under 23 Title 11 of the United States Code, as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"), or any other federal or state bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Subsidiary or for a substantial part of the property or assets of the Company or any Subsidiary or (iii) the winding-up or liquidation of the Company or any Subsidiary; and such proceeding or petition shall continue undismissed for sixty 60 days or an order or decree approving or ordering any of the foregoing shall be entered; or (g) the Company or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under the Bankruptcy Code or any other federal or state bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in clause (e) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Subsidiary or for a substantial part of the property or assets of the Company or any Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing; or (h) a judgment or order, which with other outstanding judgments and orders against the Company and its Subsidiaries equal or exceed $1,000,000.00 in the aggregate (to the extent not covered by insurance as to which the respective insurer has acknowledged coverage), shall be entered against the Company or any Subsidiary and (i) within thirty (30) days after entry thereof such judgment shall not have been paid or discharged or execution thereof stayed pending appeal or, within thirty (30) days after the expiration of any such stay, such judgment shall not have been paid or discharged or (ii) any enforcement proceeding shall have been commenced (and not stayed) by any creditor or upon such judgment; or (i) the occurrence of a change which has a Material Adverse Effect, in the opinion of the Lender, (A) in the financial condition, business or operations of the Company or (B) in the ability of the Company to make payment hereunder or under the Note or the right of the Lender to enforce any of its remedies to collect any amounts owing under the Loan Documents; or (j) a Change of Control shall occur. SECTION 8.02 Primary Remedies. In any such event, and at any time after the occurrence of any of the above described events, the Lender may, by written notice to the Company (a "Notice of Default") take any or all of the following actions to enforce any other rights it may have against the Company; provided, that if an Event of Default specified in Section 8.01(f) or Section 8.01(g) shall occur, the following shall occur automatically without the giving of any Notice of Default: (a) declare the Commitment terminated, whereupon the Commitment shall forthwith terminate immediately; (b) declare the principal of and any accrued and unpaid interest in respect of all Advances, and all obligations owing hereunder, to be, whereupon the same shall become, forthwith due and payable without presentment, demand, notice of demand or of dishonor and non-payment, protest, notice of protest, notice of intent to accelerate, declaration or notice of acceleration or any other notice of any kind, all of which are hereby waived by the Company; and (c) exercise any rights or remedies under any document securing any of the Loan Documents. In the event that no Default has occurred solely because of any grace period referred to herein, the Company shall, nonetheless, not be entitled to any Advances during said period. 24 SECTION 8.03 Other Remedies. Upon the occurrence and during the continuance of any Event of Default and after a Notice of Default, the Lender may proceed to protect and enforce its rights, either by suit in equity or by action at law or both, whether for the specific performance of any covenant or agreement contained in this Agreement or in any other Loan Document or in aid of the exercise of any power granted in this Agreement or in any other Loan Document; or may proceed to enforce the payment of all amounts owing to the Lender under the Loan Documents and any accrued and unpaid interest thereon in the manner set forth herein or therein; it being intended that no remedy conferred herein or in any of the other Loan Documents is to be exclusive of any other remedy, and each and every remedy contained herein or in any other Loan Document shall be cumulative and shall be in addition to every other remedy given hereunder and under the other Loan Documents or now or hereafter existing at law or in equity or by statute or otherwise. ARTICLE IX. MISCELLANEOUS SECTION 9.01 Amendments. No amendment or waiver of any provision of this Agreement, the Note or any other Loan Document, nor consent to any departure by the Company herefrom or therefrom, shall in any event be effective unless the same shall be in writing and signed by the Company, as to amendments, and by the Lender in all cases, and then, in any case, such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 9.02 Notices. Except with respect to telephone notifications specifically permitted pursuant to Article II, all notices, consents, requests, approvals, demands and other communications provided for herein shall be in writing (including telecopy communications) and mailed, telecopied, sent by overnight courier or delivered: (a) If to the Company: FirstCity Financial Corporation P.O. Box 8216 6400 Imperial Drive Waco, Texas 76714 Telecopy No: (817) 751-1208 Attention: Mr. James T. Sartain (b) If to the Lender: Cargill Financial Services Corporation 6000 Clearwater Drive Minnetonka, Minnesota 55343-9497 Telecopy No: (612) 984-3905 Attention: Mr. Jeffrey A. Parker 25 with copies to: Cargill Financial Services Corporation 6000 Clearwater Drive Minnetonka, Minnesota 55343-9497 Telecopy No: (612) 984-3898 Attention: Mr. James D. Dingel and to: Andrews & Kurth L.L.P. 4200 Texas Commerce Tower Houston, Texas 77002 Telecopy No. (713) 220-4295 Attention: Linda Dole or, in the case of any party hereto, such other address or telecopy number as such party may hereafter specify for such purpose by notice to the other parties. All communications shall, when mailed, telecopied or delivered, be effective when mailed by certified mail, return receipt requested to any party at its address specified above, or telecopied to any party to the telecopy number set forth above, or delivered personally to any party at its address specified above; provided, that communications to the Lender pursuant to Article II shall not be effective until actually received by the Lender. SECTION 9.03 No Waiver; Remedies. No failure on the part of the Lender to exercise, and no delay in exercising, any right hereunder, under the Note or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, or any abandonment or discontinuance of any steps to enforce such right, preclude any other or further exercise thereof or the exercise of any other right. No notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. The remedies herein are cumulative and not exclusive of any other remedies provided by law, at equity or in any other agreement. SECTION 9.04 Costs, Expenses and Taxes. The Company agrees to pay on demand: (a) all reasonable due diligence and travel expenses of the Lender in connection with any Advance not to exceed $10,000.00 per Advance, (b) all reasonable out-of-pocket costs and expenses of the Lender in connection with the preparation, execution and delivery of this Agreement, the Note, the other Loan Documents and the other documents to be delivered hereunder, including the reasonable fees and out-of-pocket expenses of counsel for the Lender with respect thereto and with respect to advising the Lender as to its rights and responsibilities under this Agreement, the Note and the other Loan Documents, and any modification, supplement or waiver of any of the terms of this Agreement or any other Loan Document, (c) all reasonable costs and expenses of the Lender and any other holder of an interest in the Note, and the Obligations of the Company hereunder and under the Loan Documents, including reasonable legal fees and expenses, in connection with a default or the enforcement of this Agreement, the Note and the other Loan Documents and (d) reasonable costs and expenses incurred in connection with third party professional services required by the Lender such as appraisers, 26 environmental consultants, accountants or similar Persons; provided, that prior to any Event of Default hereunder, the Lender will first obtain the consent of the Company to such expense, which consent shall not be unreasonably withheld. Without prejudice to the survival of any other obligations of the Company hereunder and under the Note, the obligations of the Company under this Section shall survive the termination of this Agreement or the replacement of the Lender and the assignment of the Note. SECTION 9.05 Indemnity. (a) The Company shall indemnify the Lender and each Affiliate thereof and their respective directors, officers, employees and agents from, and hold each of them harmless against, any and all losses, liabilities, claims or damages (including reasonable legal fees and expenses) to which any of them may become subject, insofar as such losses, liabilities, claims or damages arise out of or result from any actual or proposed use by the Company of the proceeds of any extension of credit hereunder or any investigation, litigation or other proceeding (including any threatened investigation or proceeding) relating to the foregoing or any of the other Loan Documents, and the Company shall reimburse the Lender and each Affiliate thereof and their respective directors, officers, employees and agents, upon demand for any expenses (including legal fees) reasonably incurred in connection with any such investigation or proceeding; but excluding any such losses, liabilities, claims, damages or expenses incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified. (B) WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED HEREUNDER OR THEREUNDER SHALL BE INDEMNIFIED AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS OR DAMAGES: (I) ARISING OUT OF OR RESULTING FROM THE ORDINARY SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH PERSON OR (II) IMPOSED UPON SAID PARTY UNDER ANY THEORY OR STRICT LIABILITY. Without prejudice to the survival of any other obligations of the Company hereunder and under the other Loan Documents, the obligations of the Company under this Section shall survive the termination of this Agreement and the other Loan Documents and the payment of the Obligations or the assignment of the Note. SECTION 9.06 Right of Setoff. If any Event of Default shall have occurred and be continuing, the Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits held and other indebtedness owing by the Lender, or any Subsidiary or Affiliate, to or for the credit or the account of the Company against any and all the Obligations of the Company now or hereafter existing under this Agreement and the other Loan Documents and other obligations of the Company held by the Lender, irrespective of whether or not the Lender shall have made any demand under this Agreement, its Note or the Obligations and although the Obligations may be unmatured. The rights of the Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which the Lender may have. SECTION 9.07 Governing Law. This Agreement, the Note, the other Loan Documents and all other documents executed in connection herewith shall be deemed to be contracts and agreements executed by the Company and the Lender under the laws of the State of Minnesota and of the United States of America and for all purposes shall be construed in accordance with, and governed by, the laws of said state and of the United States of America. Without limitation of the foregoing, nothing in this Agreement, or in the Note or in any other Loan Document shall be deemed to constitute a waiver of any rights which the Lender may have under applicable federal legislation 27 relating to the amount of interest which the Lender may contract for, take, receive or charge in respect of the Loan and the Loan Documents, including any right to take, receive, reserve and charge interest at the rate allowed by the law of the state where the Lender is located. SECTION 9.08 Interest. Each provision in this Agreement and each other Loan Document is expressly limited so that in no event whatsoever shall the amount paid, or otherwise agreed to be paid, to the Lender or charged, contracted for, reserved, taken or received by the Lender, for the use, forbearance or detention of the money to be loaned under this Agreement or any Loan Document or otherwise (including any sums paid as required by any covenant or obligation contained herein or in any other Loan Document which is for the use, forbearance or detention of such money), exceed that amount of money which would cause the effective rate of interest to exceed the Highest Lawful Rate, and all amounts owed under this Agreement and each other Loan Document shall be held to be subject to reduction to the effect that such amounts so paid or agreed to be paid, charged, contracted for, reserved, taken or received which are for the use, forbearance or detention of money under this Agreement or such Loan Document shall in no event exceed that amount of money which would cause the effective rate of interest to exceed the Highest Lawful Rate. Anything in the Note or any other Loan Document to the contrary notwithstanding, the Company shall not be required to pay unearned interest on the Note and the Company shall not be required to pay interest on the Obligations at a rate in excess of the Highest Lawful Rate, and if the effective rate of interest which would otherwise be payable under the Note and such Loan Documents would exceed the Highest Lawful Rate, or if the holder of the Note shall receive any unearned interest or shall receive monies that are deemed to constitute interest which would increase the effective rate of interest payable by the Company under the Note and the other Loan Documents to a rate in excess of the Highest Lawful Rate, then (a) the amount of interest which would otherwise be payable by the Company shall be reduced to the amount allowed under applicable law and (b) any unearned interest paid by the Company or any interest paid by the Company in excess of the Highest Lawful Rate shall in the first instance be credited on the principal of the obligations of the Company (or if all such obligations shall have been paid in full, refunded to the Company). It is further agreed that, without limitation of the foregoing, all calculations of the rate of interest contracted for, reserved, taken, charged or received by the Lender under the Note and the Obligations and under the other Loan Documents are made for the purpose of determining whether such rate exceeds the Highest Lawful Rate, and shall be made, to the extent permitted by usury laws applicable to the Lender, by amortizing, prorating and spreading in equal parts during the period of the full stated term of the Note and this Agreement and all interest at any time contracted for, charged or received by the Lender in connection therewith. SECTION 9.09 Survival of Representations and Warranties. All representations, warranties and covenants contained herein or made in writing by the Company in connection herewith and the other Loan Documents shall survive the execution and delivery of this Agreement, the Note and the other Loan Documents, the termination of the Commitment of the Lender and will bind and inure to the benefit of the respective successors and assigns of the parties hereto, whether so expressed or not; provided, that the Commitment of the Lender shall not inure to the benefit of any successor or assign of the Company. SECTION 9.10 Successors and Assigns; Participations. (a) All covenants, promises and agreements by or on behalf of the Company or the Lender that are contained in this 28 Agreement shall bind and inure to the benefit of their respective permitted successors and assigns. The Company may not assign or transfer any of its rights or obligations hereunder. (b) The Lender may assign to or sell participations to one or more banks of all or a portion of its rights and obligations under this Agreement and the other Loan Documents (including all or a portion of the Commitment, the Advances and the Obligations of the Company owing to it and the Note); provided, that the participating banks or other entities shall be entitled to the cost protection provisions contained in Article II and Section 9.04 and the Company shall continue to deal solely and directly with the Lender in connection with its rights and obligations under this Agreement and the other Loan Documents. Except with respect to cost protections provided to a participant pursuant to this paragraph and the items listed in Section 9.01 hereof, no participant shall be a third party beneficiary of this Agreement nor shall it be entitled to enforce any rights provided to the Lender against the Company under this Agreement. (c) With the prior written consent of the Company and the Lender (which consent shall not be unreasonably withheld), the Lender may assign to one or more other Eligible Assignees all or a portion of its interests, rights, and obligations under this Agreement and the other Loan Documents (including all or a portion of the Commitment and the same portion of the Loans and other Obligations of the Company at the time owing to it and the Note); provided, however, that (i) each such assignment shall be in a minimum principal amount of not less than $1,000,000.00 and shall be of a constant, and not a varying, percentage of all the Lender's Commitment, rights and obligations under this Agreement, (ii) the parties to each such assignment shall execute and deliver to the Lender, for its acceptance, an Assignment and Acceptance in form and substance satisfactory to the Lender (an "Assignment and Acceptance") and the Note subject to such assignment and (iii) no assignment shall be effective until receipt by the Lender of a reasonable service fee in respect of said assignment equal to $2,000.00. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five (5) Business Days after the execution thereof unless otherwise agreed to by the Lender and the Eligible Assignee thereunder (x) the Eligible Assignee thereunder shall be a party hereto and to the other Loan Documents and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of the Lender hereunder and under the other Loan Documents and (y) the Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement and the other Loan Documents (and, in the case of an Assignment and Acceptance covering all of the remaining portion of the Lender's rights and obligations under this Agreement and the other Loan Documents, the Lender shall cease to be a party hereto). (d) Notwithstanding any other provision herein, the Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section disclose to the assignee or participant or proposed assignee or participant, any information relating to the Company furnished to the Lender by or on behalf of the Company. SECTION 9.11 Confidentiality. The Lender agrees to exercise its best efforts to keep any information delivered or made available by the Company to it which is clearly indicated to be confidential information, confidential from anyone other than Persons employed or retained by the Lender who are or are expected to become engaged in evaluating, approving, structuring or administering the Loans; provided that nothing herein shall prevent any Lender from disclosing such 29 information (a) pursuant to subpoena or upon the order of any court or administrative agency, (b) upon the request or demand of any regulatory agency or authority having jurisdiction over the Lender, (c) which has been publicly disclosed, (d) to the extent reasonably required in connection with any litigation to which the Lender, the Company or its respective Affiliates may be a party, (e) to the extent reasonably required in connection with the exercise of any remedy hereunder, (f) to the Lender's legal counsel and independent auditors and (g) to any actual or proposed participant or assignee of all or part of its rights hereunder which has agreed in writing to be bound by the provisions of this Section. The Lender will promptly notify the Company of any information that it is required or requested to deliver pursuant to clause (b) or (c) of this Section and, if the Company is a party to any such litigation, clause (e) of this Section . SECTION 9.12 Separability. Should any clause, sentence, paragraph or Section of this Agreement be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Agreement, and the parties hereto agree that the part or parts of this Agreement so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom and the remainder will have the same force and effectiveness as if such part or parts had never been included herein. SECTION 9.13 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. SECTION 9.14 Interpretation. (a) In this Agreement, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any gender includes each other gender; (iii) 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; (iv) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually, provided that nothing in this clause is intended to authorize any assignment not otherwise permitted by this Agreement; (v) except as expressly provided to the contrary herein, reference to any agreement, document or instrument (including this Agreement) means such agreement, document or instrument as amended, supplemented or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof, and reference to the Note or other note includes the Note issued pursuant hereto in extension or renewal thereof and in substitution or replacement therefor; 30 (vi) unless the context indicates otherwise, reference to any Article, Section, Schedule or Exhibit means such Article or Section hereof or such Schedule or Exhibit hereto; (vii) the words "including" (and with correlative meaning "include") means including, without limiting the generality of any description preceding such term; (viii) with respect to the determination of any period of time, except as expressly provided to the contrary, the word "from" means "from and including" and the word "to" means "to but excluding"; and (ix) reference to any law, rule or regulation means such as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time. (b) The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. (c) No provision of this Agreement shall be interpreted or construed against any Person solely because that Person or its legal representative drafted such provision. SECTION 9.15 SUBMISSION TO JURISDICTION. (A) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF MINNESOTA, IN HENNEPIN COUNTY OR ELSEWHERE OR OF THE UNITED STATES FOR THE DISTRICT OF MINNESOTA AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE COMPANY HEREBY IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS WITH RESPECT TO ANY SUCH ACTION OR PROCEEDING. (B) THE COMPANY HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (A) ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. SECTION 9.16 WAIVER OF JURY TRIAL. THE COMPANY HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR ARISING FROM OR RELATING TO ANY LENDING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 31 SECTION 9.17 FINAL AGREEMENT OF THE PARTIES. THIS AGREEMENT (INCLUDING THE SCHEDULES AND EXHIBITS HERETO), THE NOTE AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF AND THEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. FIRSTCITY FINANCIAL CORPORATION /s/ James T. Sartain James T. Sartain President CARGILL FINANCIAL SERVICES CORPORATION /s/ Jeffrey A. Parker Jeffrey A. Parker Assistant Vice President 32 EX-10.10 3 AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AGMNT EXHIBIT 10.10 AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AGREEMENT THIS RIGHT OF FIRST REFUSAL AGREEMENT (the "Agreement") is made and entered into this 9th day of June, 1994, by and between J-Hawk Corporation, a Texas corporation ("J-Hawk"), James T. Sartain ("Sartain"), Rick R. Hagelstein ("Hagelstein"), and James R. Hawkins (collectively, the "J-Hawk Principals"), Cargill Financial Services Corporation, a Delaware corporation ("CFSC"), and CFSC Capital Corp. II, a Delaware corporation ("CCCII"). W I T N E S S E T H: WHEREAS, in December, 1991, J-Hawk, Sartain, and Hagelstein formed WAMCO Corporation, a Texas corporation ("WAMCO Corp.") and WAMCO Corp., J-Hawk, Sartain and Hagelstein formed WAMCO I, Ltd., a Texas limited partnership ("WAMCO I"), with WAMCO Corp. as its general partner and J-Hawk, Sartain and Hagelstein as its limited partners; WHEREAS, Sartain and Hagelstein have transferred to CFSC their respective interests in WAMCO Corp. and WAMCO I; WHEREAS, CFSC, or an entity owned and controlled by CFSC or Cargill, Incorporated ("CFSC Affiliate"), and J-Hawk have formed WAMCO II, Ltd., WAMCO III, Ltd., WAMCO IV, Ltd., WAMCO V, Ltd., WAMCO VI, Ltd. WAMCO VII, Ltd., WAMCO VIII, Ltd., WAMCO IX, Ltd., WAMCO X, Ltd., and WAMCO XI, Ltd., each a Texas limited partnership with a Texas corporation owned by J-Hawk and CCCII, or 1 other CFSC Affiliate, as the general partner, and CCCII, or other CFSC Affiliate, and J-Hawk as limited partners (all herein the "WAMCO Limited Partnerships"); WHEREAS, CFSC is a non-recourse lender to the WAMCO Limited Partnerships and upon the formation of additional business entities by J-Hawk and CCCII, or other CFSC Affiliate, anticipates that CFSC, or other CFSC Affiliate, may be a non-recourse lender to those entities. WHEREAS, WAMCO I and each of the WAMCO Limited Partnerships, CFSC, and/or a CFSC Affiliate, and J-Hawk have entered into separate Service Agreements, whereby J-Hawk has agreed to (i) provide loan collection servicing for assets owned by WAMCO I or another WAMCO Limited Partnership and which were financed by CFSC or a CFSC Affiliate, and (ii) conduct due diligence reviews of portfolios of distressed and/or performing loans and receivables that are being marketed and for which WAMCO I, the WAMCO Limited Partnerships, or other business entities formed by J-Hawk and CFSC, or other CFSC Affiliate, may be interested potential purchasers; WHEREAS, it is anticipated that if additional business entities are formed, such entities may enter into similar Service Agreements with J-Hawk and may also be potentially interested purchasers of such loans and receivables; 2 WHEREAS, J-Hawk or the J-Hawk Principals may from time to time receive invitations to bid on or otherwise obtain opportunities to acquire, directly or indirectly, interests in loans and receivables (and in some instances related collateral thereof or other real estate held by a Loan Seller) (collectively the "Loan Purchase Proposals") from finance companies, the Federal Deposit Insurance Corporation, the Resolution Trust Corporation and other sellers (each a "Loan Seller"); WHEREAS, the parties intend that J-Hawk and the J-Hawk Principals will offer CFSC, or other CFSC Affiliate, the exclusive right, with respect to all Loan Purchase Proposals received by J-Hawk or the J-Hawk principals, to participate in the proposed purchase or other acquisition in the manner provided herein; WHEREAS, J-Hawk, the J-Hawk Principals and CFSC entered into a Right of First Refusal Agreement dated March 31, 1992, pursuant to which J-Hawk and the J-Hawk Principals agreed to offer CFSC the exclusive right to participate in Loan Purchase Proposals (as defined therein), and the parties to that Right of First Refusal Agreement desire to enter into the following Agreement by and among such parties and CCCII, which Agreement will supersede the agreement of the parties as set forth in the Right of First Refusal Agreement dated March 31, 1992; 3 NOW, THEREFORE, in consideration of the promises and agreements herein contained, CFSC, CCCII, the J-Hawk Principals and J-Hawk hereby agree as follows: SECTION 1. CFSC RIGHT OF FIRST REFUSAL. 1.1 General Scope. During the term of this Agreement, neither J-Hawk nor any senior vice president, president or chairman of J-Hawk, nor the J-Hawk Principals shall, directly or indirectly by or through any person or any entity controlled by J-Hawk, the J-Hawk Principals or any senior vice president, president or chairman of J-Hawk, purchase, attempt to purchase or otherwise acquire a direct or indirect interest in, any loans or receivables (or related collateral therefor or other real estate held by a Loan Seller) ("Potential Purchased Loans") in connection with a Loan Purchase Proposal from any Loan Seller, except in accordance with the terms of this Section or with an express written waiver of CFSC, which waiver may be withheld in good faith for any commercial reason. 1.2 Notice Procedures. In the event that either J-Hawk, any senior vice president, president or chairman of J-Hawk, or any of the J-Hawk Principals (a "Prospective Bidder") shall obtain a Loan Purchase Proposal with respect to which such Prospective Bidder proposes to acquire any interest, such Prospective Bidder shall first give written notice to CFSC by 4 delivering a cover page substantially in the form of Exhibit A hereto (the "Initial Notice") to CFSC, which notice shall describe, in reasonable detail, the subject Loan Purchase Proposal. Thereafter, on or before the 3rd day after delivery of the Initial Notice to CFSC (the "Initial Response Date"), CFSC shall complete and return to the Prospective Bidder the cover page of the Initial Notice (the "Initial Response") indicating whether CFSC has a preliminary interest in the subject Loan Purchase Proposal. If CFSC returns an affirmative Initial Response to the Prospective Bidder, the Prospective Bidder shall then furnish CFSC with written notice (the "Option Notice"), which Option Notice shall contain substantive information regarding the subject Loan Purchase Proposal, including, without limitation, the estimated purchase price or bid range (if the Prospective Bidder is able to provide an estimate at such time) and other terms upon which such Prospective Bidder would propose to acquire an interest in such potential Purchased Loans. Thereafter, on or before the 15th day after delivery of the Option Notice to CFSC (the "Option Date"), CFSC shall have the option, exercisable by written notice to such Prospective Bidder (an "Exercise Notice"), to participate in the proposed purchase or other acquisition by requiring that the proposed purchase or other acquisition be affected through either a WAMCO Limited Partnership or through another business entity to be formed by J-Hawk and CFSC, or a CFSC Affiliate, which achieves 5 substantially the same economic relationship with respect to CFSC, or other CFSC Affiliate, as do the WAMCO Limited Partnerships. 1.3 Due Diligence/Withdrawal. Notwithstanding anything to the contrary in Section 1.2 above, if prior to delivering an Option Notice to CFSC, the Prospective Bidder determines through due diligence or otherwise that the Prospective Bidder has no further interest in pursuing the possible acquisition of the Potential Purchased Loans, the Prospective Bidder shall advise CFSC in writing that it has withdrawn its interest in acquiring the Potential Purchased Loans (a "Withdrawal Notice") and shall not thereafter acquire any interest in the Potential Purchased Loans, except with CFSC's prior written consent. Such Prospective Bidder, at CFSC's request, shall provide CFSC (if not prohibited or restricted from so providing by any agreement entered into by the Prospective Bidder for the purpose of evaluating the Potential Purchased Loans) with the product of its due diligence efforts to date for further evaluation by CFSC. Upon receiving a Withdrawal Notice from any Prospective Bidder, CFSC shall be free to proceed with the acquisition of the Potential Purchased Loans, directly or indirectly, either by itself or with any other Prospective Bidder or other entity. 1.4 Rejection/Deemed Rejection. If CFSC rejects the proposal contained in the Initial Notice or fails to deliver an Initial Response by the Initial Response Date, or if CFSC rejects 6 the proposal contained in the Option Notice or fails to deliver an Exercise Notice to the Prospective Bidder by the Option Date, the Prospective Bidder may acquire an interest in the Potential Purchased Loans. 1.5 Minimum Proposal. Notwithstanding anything in this Agreement to the contrary, the restrictions contained herein shall not apply to any offering which constitutes a Purchased Loan Proposal if the aggregate amount to be bid with respect to such offering does not exceed $3,000,000.00. 1.6 Non-exclusivity for J-Hawk. Notwithstanding anything in this Agreement to the contrary, the restrictions obtained herein shall not prohibit J-Hawk from holding discussions either prior to or after an Option Date with entities other than CFSC regarding Loan Purchase Proposals generally or the potential joint acquisition by that Prospective Bidder and such entity of the Potential Purchased Loans, provided, however, that any such discussions regarding Potential Purchased Loans shall always be subject to CFSC's rights hereunder unless CFSC either (i) rejected the proposal contained in an Initial Notice from J-Hawk or failed to deliver an Initial Response to J-Hawk by the Initial Response Date, or (ii) rejected a proposal contained in an Option Notice from J-Hawk or failed to deliver an Option Notice to J-Hawk by the Option Date. The rejection by CFSC of an Initial Notice or Option Notice from any one Prospective Bidder shall not be considered as 7 or deemed to be a rejection by CFSC of an Initial Notice or Option Notice from any other Prospective Bidder. Nor shall CFSC's failure to deliver an Initial Notice or Option Notice to any one Prospective Bidder be considered as or deemed to be a failure to deliver an Initial Notice or Option Notice as to any other Prospective Bidder. 1.7 Estoppel In the event that CFSC indicates an interest in the Potential Purchased Loans by returning an Initial Response or submitting an Exercise Notice to a Prospective Bidder, each Prospective Bidder may rely on such interest or notice as indicating that CFSC is not, either directly or indirectly, attempting to, and CFSC agrees that neither CFSC, nor any CFSC Affiliate will, acquire an interest in the subject Potential Purchased Loans other than through that Prospective Bidder; provided, that CFSC or a CFSC Affiliate may acquire an interest in the subject Potential Purchased Loans after it has been determined that the bid of the Prospective Bidder was unsuccessful. SECTION 2. MISCELLANEOUS. 2.1 Effective Date and Termination. This Agreement shall be effective as of the date hereof and shall continue in full force and effect until March 31, 1996; provided, however, that this Agreement shall terminate if and when CFSC or J-Hawk, or any of their Affiliates, shall fail to own at least 25% of the outstanding equity interests in at least one partnership, 8 corporation, limited partnership, joint venture or other business entity in which the other entity also owns an equity interest. 2.2 CFSC Remedies. J-Hawk and the J-Hawk Principals acknowledge that their breach of the provisions of Section 1 hereof will cause irrevocable harm to CFSC, for which there may be no adequate remedy at law and for which the ascertainment of damages would be difficult. Therefore, CFSC shall be entitled, in addition to, and without having to prove the inadequacy of, other remedies at law (including without limitation damages for prior breaches hereof), to specific performance of this Agreement, as well as injunctive relief (without being required to post bond or other security). 2.3 Amendments. This Agreement may not be amended or modified and the provisions hereof may not be waived without the prior written consent of all the parties hereto. 2.4 Transferability of Agreement. This Agreement shall be binding upon the parties and their respective successors and permitted assigns. No interest in this Agreement shall be transferable without the written consent of all the other parties hereto, except that CFSC may assign its interest in this Agreement to an affiliated entity without such written consent. 2.5 Governing Law. This Agreement will be governed by the internal laws of the State of Texas. 9 2.6 Enforceability of Agreement. Should any one or more of the Provisions of this Agreement be determined to be illegal or unenforceable, all other provisions, nevertheless, shall remain effective and binding on the parties hereto. 2.7 Nature of Obligations. The obligations of all the parties hereto shall be considered to be several and not joint obligations. 2.8 Affiliates. For purposes of this Agreement, an "affiliate" or "affiliated entity" shall include any entity which is beneficially owned, directly or indirectly, by the person in question. Additionally, for purposes of this Agreement, a "CFSC Affiliate" shall include any entity which is beneficially owned, directly or indirectly, by CFSC or its parent, Cargill, Incorporated or by CCCII. 2.9 Titles. Titles of the Sections of this Agreement are merely for convenience in reading and shall not be construed to alter, modify or interpret the meaning of the provisions under said titles. 2.10 Notice. Any notice, request or demand to or upon the parties hereto must be given in writing. Notices shall be sent by telecopy or other similar facsimile means or sent certified, postage prepaid, and shall be addressed to the party to receive the same as follows or to such other address as may be hereafter designated in writing by the respective parties hereto: 10 To J-Hawk: J-Hawk Corporation P. O. Box 8216 Waco, Texas 76714-8216 ATTN: James T. Sartain To the J-Hawk Principals: J-Hawk Corporation P. O. Box 8216 Waco, Texas 76714-8216 ATTN: James T. Sartain To CFSC and CCCII: Cargill Financial Services Corporation 6000 Clearwater Drive Minnetonka, MN 55343-9497 ATTN: David W. MacLennan Value Investment Group 2.11 Entire Agreement. This Agreement shall constitute the full and entire understanding and agreement of the parties hereto and there are no further or other agreements or undertakings written or oral, in effect between the parties relating to the subject matter hereof unless expressly referred to herein. All prior negotiations, agreements, representations, warranties, statements and undertakings concerning the subject matter hereof between the parties hereto are superseded by this Agreement. 2.12 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. 2.13 Replacement. The parties intend that this Agreement will replace in its entirety that certain Right of First 11 Refusal Agreement dated March 31, 1992, executed by and among J-Hawk, the J-Hawk Principals and CFSC. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. J-HAWK CORPORATION By:/s/ James T. Sartain Name: James T. Sartain Its: President /s/ James Hawkins James Hawkins /s/ James T. Sartain James T. Sartain /s/ Rick R. Hagelstein Rick R. Hagelstein CARGILL FINANCIAL SERVICES CORPORATION By:/s/ David W. MacLennan Name: David W. MacLennan Its: Vice President CFSC CAPITAL CORP. II By:/s/ David W. MacLennan Name: David W. MacLennan Its: Vice President 12 March 11,1996 FirstCity Financial Corporation Attn: James T. Sartain, President 6400 Imperial Drive Waco, Texas 76712 James R. Hawkins James T. Sartain Rick R. Hagelstein c/o FirstCity Financial Corporation 6400 Imperial Drive Waco, Texas 76712 Re: Amended And Restated Right of First Refusal Agreement dated June 9, 1994 (the "Agreement") Among J-Hawk Corporation ("J- Hawk"), James T. Sartain, Rick R. Hagelstein, James R. Hawkins (collectively Sartain, Hagelstein and Hawkins are referred to as the "J-Hawk Principals"), Cargill Financial Services Corporation ("CFSC") and CFSC Capital Corp. II ("CCC II" and collectively with CFSC, "Cargill") Gentlemen: The purpose of this letter is to amend the Agreement by extending the termination date of the Agreement. The parties to this letter agreement therefore represent, acknowledge and agree as follows: 1. FirstCity Financial Corporation ("FCFC") represents and Cargill acknowledges that the interests of J-Hawk in the Agreement became vested in FCFC on or about July 3, 1995 by operation of law pursuant to the merger of J-Hawk with and into First City Bancorporation of Texas, Inc. and the associated change in name of the surviving entity to FirstCity Financial Corporation; 2. Each party hereby agrees that, in accordance with Section 2.3 of the Agreement and effective from and as of the date of this letter agreement, the termination date of the Agreement (stated in Section 2.1 of the Agreement as March 31, 1996) shall be extended to March 31, 1997 by deleting the reference in Section 2.1 to "March 31, 1996" and substituting therefor for all purposes "March 31, 1997"; 3. Each party hereby agrees that this letter agreement may be executed in counterparts, all of which counterparts (when executed) shall constitute one and the same instrument; and 13 4. Each party hereby agrees that, except for the amendment of the Section 2.1 termination date embodied in this letter agreement, all other terms and conditions of the Agreement shall remain as originally written. Please acknowledge your agreement and acceptance of the terms of this letter agreement by countersigning the duplicate copies of this letter and returning one fully executed original to Cargill. Cargill Financial Services CFSC Capital Corp. II Corporation By:/s/ Jeffery D. Leu By:/s/ Jeffery D. Leu Name: Jeffery D. Leu Name: Jeffery D. Leu Title: Senior Vice President Title: Senior Vice President ACCEPTED AND AGREED TO: FirstCity Financial Corporation By:/s/ James T. Sartain Name: James T. Sartain Title: President /s/ James R. Hawkins James R. Hawkins /s/ Rick R. Hagelstein Rick R. Hagelstein /s/ James T. Sartain James T. Sartain 14 EX-10.14 4 WAREHOUSE CREDIT AGREEMENT EXHIBIT 10.14 CONTITRADE SERVICES L.L.C. -------------------- WAREHOUSE CREDIT AGREEMENT dated as of May 17, 1996 -------------------- NATIONAL AUTO FUNDING CORPORATION N.A.F. AUTO LOAN TRUST TABLE OF CONTENTS Page SECTION 1. DEFINITIONS.................................................... 1 1.1 Defined Terms................................................ 1 SECTION 2. AMOUNT AND TERMS OF LENDER FUNDING COMMITMENT........................................................... 2 2.1 Lender Funding Commitment.................................... 2 2.2 Promissory Note.............................................. 3 2.3 Availability of Borrowings................................... 3 2.4 Interest..................................................... 3 2.5 Principal Payments on the Loan............................... 4 2.6 Security and Collateral Agent Agreement...................... 4 2.7 Deposits to Collection Account............................... 4 2.8 Proceeds..................................................... 5 2.9 Taxes........................................................ 5 SECTION 3. REPRESENTATIONS AND WARRANTIES................................. 6 3.1 Representations and Warranties of Borrower................... 6 3.2 Representations and Warranties of NAF Corp................... 9 SECTION 4. CONDITIONS PRECEDENT........................................... 13 4.1 Conditions to Initial Advance................................ 13 4.2 Conditions to Each Advance................................... 15 SECTION 5. RELEASE OF LIENS............................................... 16 SECTION 6. AFFIRMATIVE COVENANTS.......................................... 17 6.1 Financial Statements......................................... 17 6.2 Certificates; Other Information.............................. 18 6.3 [Reserved]................................................... 19 6.4 Payment of Obligations....................................... 19 6.5 Conduct of Business and Maintenance of Existence............. 19 6.6 Maintenance of Property; Insurance........................... 19 6.7 Inspection of Property; Books and Records; Discussions; Audit Reports..................................................... 19 6.8 Notices...................................................... 20 6.9 Delivery of Other Reports.................................... 20 6.10 Approval of New FIs.......................................... 20 i 6.11 Further Assurances........................................... 21 6.12 Cooperation in Making Calculations........................... 21 6.13 Securitization............................................... 21 6.14 Additional Credit Support.................................... 21 6.15 Minimum Net Worth. ......................................... 22 6.16 Underwriting and Review...................................... 22 SECTION 7. NEGATIVE COVENANTS............................................. 22 7.1 Limitation on Debt........................................... 22 7.2 Limitation on Liens.......................................... 22 7.3 Limitation on Fundamental Changes............................ 22 7.4 Sale, Transfer or Encumbrance of Assets...................... 23 7.5 Contracts.................................................... 23 7.6 Limitation on Dividends...................................... 23 7.7 Limitation on Capital Expenditures........................... 23 7.8 Limitation on Investments, Loans and Advances................ 23 7.9 Transactions with Affiliates................................. 24 7.10 Sale and Leaseback........................................... 24 7.11 Trust Documents.............................................. 24 7.12 Fiscal Year.................................................. 24 7.13 Limitation on Negative Pledge Clauses........................ 24 7.14 Activities of Borrower....................................... 24 7.15 Agreements................................................... 24 7.16 Bank Accounts................................................ 24 7.17 Lock-Box Banks............................................... 25 7.18 Subordinated Debt............................................ 25 7.19 Margin Securities............................................ 25 7.20 No Commingling............................................... 25 7.21 Guarantees................................................... 25 7.22 Amendment of Facility Agreements............................. 25 7.23 Policies..................................................... 25 7.24 Miscellaneous................................................ 25 SECTION 8. REMEDIES UPON DEFAULT.......................................... 26 8.1 Acceleration................................................. 26 8.2 Files........................................................ 26 8.3 Collections.................................................. 26 8.4 Power of Attorney............................................ 27 SECTION 9. MISCELLANEOUS.................................................. 27 9.1 Amendments and Waivers....................................... 27 9.2 Notices...................................................... 28 9.3 No Waiver; Cumulative Remedies............................... 29 ii 9.4 Survival of Representations and Warranties................... 29 9.5 Payment of Expenses and Taxes................................ 29 9.6 Successors and Assigns; Participations....................... 30 9.7 Termination.................................................. 32 9.8 Counterparts................................................. 32 9.9 Severability................................................. 32 9.10 Integration; Construction.................................... 32 9.11 Limited Liability............................................ 32 9.12 GOVERNING LAW................................................ 32 9.13 SUBMISSION TO JURISDICTION; WAIVERS.......................... 33 9.14 Acknowledgements............................................. 33 9.15 WAIVER OF JURY TRIAL......................................... 34 SCHEDULES Schedule I - List of Documents EXHIBITS Exhibit A - Definition List Exhibit B - Form of Promissory Note Exhibit C - Notice of Borrowing iii WAREHOUSE CREDIT AGREEMENT WAREHOUSE CREDIT AGREEMENT, dated as of May 17, 1996 (the "Credit Agreement"), by and between CONTITRADE SERVICES L.L.C., a Delaware limited liability company ("Lender"), N.A.F. Auto Loan Trust, a Delaware business trust ("Borrower") and National Auto Funding Corporation, a Texas corporation ("NAF Corp." and together with the Borrower, the "NAF Entities"). W I T N E S S E T H: WHEREAS, Borrower desires to purchase certain Contracts from time to time; and WHEREAS, Borrower has requested that Lender make the Loans to Borrower, the proceeds of which shall be used to purchase Contracts; and WHEREAS, as security for its obligations under this Credit Agreement, Borrower shall pledge the Collateral; and WHEREAS, there is also being executed and delivered in connection with this Agreement a Funding Commitment dated as of May 17, 1996 (the "Funding Commitment") by and between FirstCity Financial Corporation ("FirstCity") and the Lender and an Investment Banking Services Agreement dated as of May 17, 1996 (the "IBSA") between NAF Corp. and ContiFinancial Services Corporation ("ContiFinancial"); and WHEREAS, subject to the terms and conditions set forth herein, Lender is willing to make the Loans to Borrower. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. (a) As used in this Credit Agreement, the Funding Commitment, the Promissory Note, the Servicing Agreement, the Security and Collateral Agent Agreement, the Paying Agent Agreement, the IBSA or any certificate or other document made or delivered pursuant hereto or thereto (collectively, the "Facility Agreements"), the capitalized terms used herein and therein shall, unless otherwise defined herein or therein, have the meanings assigned to them in the Definitions List dated as of the date hereof that refers to this Credit Agreement, which is incorporated herein by reference and attached as Exhibit A hereto (the "Definitions List"). (b) As used herein or in any other Facility Agreement, accounting terms not defined in the Definitions List and accounting terms partly defined in the Definitions List to the extent not defined shall have the respective meanings given to them under GAAP. 1 (c) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Credit Agreement shall refer to this Credit Agreement as a whole and not to any particular provision of this Credit Agreement, and Section, subsection, Schedule and Exhibit references are to this Credit Agreement unless otherwise specified. (d) Capitalized terms used herein or in any other Facility Agreement shall be equally applicable to both the singular and plural forms of such terms. SECTION 2. AMOUNT AND TERMS OF LENDER FUNDING COMMITMENT 2.1 Lender Funding Commitment. (a) Subject to the terms and conditions hereof, Lender agrees to make revolving credit loans (collectively, "Advances" or the "Loan", and, individually, an "Advance") to Borrower from time to time during the Funding Commitment Period, as requested; provided, however, that in no event shall Lender make any Advance, (x) if, after giving effect to such Advance the Outstanding Facility Balance would exceed either (i) the Maximum Loan Amount or (ii) the Borrowing Base or (y) an Event of Default or an Unmatured Event of Default shall have occurred and be continuing and not waived by Lender. Funds may be borrowed, repaid and reborrowed on a revolving basis subject to the terms and conditions set forth herein. The lending arrangement described herein is referred to herein as the "Facility". (b) The Facility will cancel automatically on the Funding Commitment Termination Date; provided, however, that the Borrower may request a renewal, in writing (a "Renewal Request"), not more than 120 days prior to the Funding Commitment Termination Date; and provided, further, that the Lender must notify the Borrower, in writing, by the later of (x) 30 days from receipt by the Lender of the Renewal Request or (y) at least 60 days prior to the Funding Commitment Termination Date that it has elected to renew the Facility. (c) If the Facility is not renewed pursuant to Section 2.1(b), Lender shall extend the Facility 60 days if no Event of Default or Unmatured Event of Default shall have occurred and be continuing and if the Borrower delivers to the Lender (i) a commitment letter, acceptable to the Lender, for a replacement warehouse loan facility from a financial institution acceptable to the Lender or (ii) a guarantee, from a party acceptable to the Lender, of all amounts payable under the Facility. 2.2 Promissory Note. The Borrower shall, in connection with the Facility, execute and deliver a promissory note, substantially in the form of Exhibit B hereto (the "Promissory Note"), payable to the order of Lender. Borrower is obligated to make payments to Lender as provided in this Agreement whether or not Borrower has executed the Promissory Note. The actual amount Borrower is obligated to pay the Lender shall be determined by this Agreement and the records of the Lender, regardless of the terms of the Promissory Note. Any Promissory Note executed in connection with the Facility need not be amended to reflect changes made to this Agreement. The records of the Lender shall, absent demonstrable error, be conclusive evidence at any time as to the amount of the Loan, the interest due thereon, and all other amounts owed in connection with this Agreement with respect to the Borrower. The Promissory Note shall (a) be dated the Closing Date, (b) be stated to mature on the Funding Commitment Termination Date and (c) provide for the payment of interest in accordance with Section 2.4. 2 2.3 Availability of Borrowings. Borrower may request an Advance on any Business Day during the Funding Commitment Period, subject to the provisions contained in Section 2.1, by giving Lender prior irrevocable notice of each borrowing in the form of Exhibit C hereto ("Notice of Borrowing") by 11:00 A.M. (New York City time) on the second Business Day prior to a Borrowing Date which shall specify (a) the Borrowing Date for such borrowing, (b) the Outstanding Facility Balance on such date (prior to the making of the requested Advance), (c) the Borrowing Base applicable to such Advance, and (d) the Available Facility Amount; provided, however, that Lender shall not be obligated to make more than one Loan in any single calendar week. Subject to satisfaction of the conditions precedent set forth in Section 4 hereof, the proceeds of such Advance will be made available to Borrower by Lender by wire transfer of immediately available funds to the Collection Account. The amount of such Advance shall be paid out from the Collection Account as set forth in Section 2.02(a)(i) of the Paying Agent Agreement. 2.4 Interest. Interest shall accrue on the Outstanding Facility Balance at a fluctuating rate per annum equal to LIBOR plus three percent (3.00%) percent. Interest accrued on the Loans shall be paid monthly in arrears on the third day of each calendar month, or if such day is not a Business Day the next succeeding Business Day, commencing in the first calendar month following the Closing Date (each such date, a "Payment Date"). Upon the occurrence, and during the continuance of, an Event of Default, the Outstanding Facility Balance shall bear interest at the rate per annum equal to LIBOR plus seven percent (7.00%); provided, however, that no provision of this Agreement shall require the payment or permit the collection of interest in excess of the maximum permitted by applicable law; and provided, further, that interest shall not be considered paid by any distribution if at any time such distribution is rescinded or must be returned for any reason. Interest shall accrue on the basis of a 360-day year and the actual number of days elapsed. 2.5 Principal Payments on the Loan. (a) Other than as set forth in Section 2.01(a)(iii) of the Paying Agent Agreement, the Borrower shall prepay the Loan with the proceeds of a Securitization to at least an extent such that the Outstanding Facility Balance (after such prepayment) does not exceed the Borrowing Base (after taking into account the Contracts transferred from the Facility to the Securitization); provided, however, after completion of Securitizations with Lender and ContiFinancial of $600,000,000, Borrower may thereafter prepay the Loan in whole or in part from any source of funds. Any such prepayment shall be accompanied by payment of all accrued and unpaid interest thereon and all fees and other amounts due to the Lender hereunder through the date of such prepayment. (b) Borrower shall pay the Outstanding Facility Balance, together with any accrued and unpaid interest thereon, and any other sums due pursuant to the terms hereof as set forth in Section 2.02(a)(ix) of the Paying Agent Agreement and otherwise on or before the Funding Commitment Termination Date. 2.6 Security and Collateral Agent Agreement. The Facility is secured pursuant to a Security and Collateral Agent Agreement, dated as of the date hereof (the "Security and Collateral Agent Agreement"), among the Borrower, the Lender and Texas Commerce Bank National Association, as Collateral Agent (together with any successors thereto, the "Collateral Agent"). 3 2.7 Deposits to Collection Account. (a) Borrower shall establish on or prior to the Closing Date, a bank account in the name of the Borrower (the "Collection Account"), bearing an additional designation clearly indicating that the funds deposited therein are for the benefit of the Lender. The Collection Account shall be initially established with the Paying Agent. The Collection Account shall at all times be an Eligible Deposit Account. All amounts held in such account shall, to the extent permitted by applicable laws, rules and regulations, be invested by the Collateral Agent at the written direction of the Borrower, in Permitted Investments which mature prior to the following Payment Date, or such earlier date as may be specified by the Borrower. Investments in Permitted Investments shall be made in the name of the Borrower, and such investments shall not be sold or otherwise disposed of prior to their maturity unless (x) a Securitization or an Event of Default shall have occurred and be continuing, (y) the Lender shall have instructed the Borrower to sell or otherwise dispose of such investments prior to their maturity or (z) as needed to fund the disbursements listed in Section 2.02(a) of the Paying Agent Agreement. Should the Collection Account no longer be an Eligible Deposit Account, then the Borrower shall within 10 Business Days (or such longer period, not to exceed 30 calendar days, as to which the Lender shall consent), with such bank's or trust company's assistance as necessary, cause the Collection Account to be moved to a bank or trust company such that the Collection Account will be an Eligible Deposit Account. Investment earnings on funds deposited in the Collection Account shall be deposited in the Collection Account. (b) Borrower shall cause each Lock-Box Bank to deposit, no later than the close of business on each Business Day, all available Collections received by each such Lock-Box Bank into the Collection Account. (c) All Collections received directly by the Borrower or the Servicer shall be held by the Borrower or the Servicer, as applicable, in trust for the benefit of the Lender. Borrower shall remit for deposit, and shall cause the Servicer to remit for deposit, no later than the close of business on the day received, such Collections in the Lock-Box Account. (d) Borrower may, from time to time, deposit cash and/or deliver to the Paying Agent Permitted Investments to be credited to the Collection Account. 2.8 Proceeds. The proceeds of the Loan shall be used by Borrower solely to finance the purchase or holding of Eligible Contracts, and to pay other amounts expressly permitted under the terms and conditions of the Facility Agreements. 2.9 Taxes. All payments made by Borrower under this Credit Agreement and the Promissory Note shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority having taxing authority, excluding income taxes and franchise taxes (imposed in lieu of income taxes) imposed on Lender, as a result of any present or former connection between the jurisdiction of the government or taxing authority imposing such tax or any political subdivision or taxing authority thereof or therein and Lender (excluding a connection arising solely from Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this 4 Credit Agreement or the Promissory Note) (all such non-excluded taxes, levies, imposts, duties, charges, fees, deductions and withholdings being hereinafter called "Taxes"). If any Taxes are required to be withheld from any amounts payable to or under the Promissory Note, the amounts so payable to Lender shall be increased to the extent necessary to yield to Lender (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Credit Agreement and the Promissory Note. Whenever any Taxes are payable by Borrower, as promptly as possible thereafter Borrower shall send to Lender a certified copy of an original official receipt received by Borrower showing payment thereof. If Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to Lender the required receipts or other required documentary evidence, Borrower shall indemnify Lender for any incremental Taxes, interest or penalties that Lender is legally required to pay as a result of any such failure. The agreements in this subsection shall survive the termination of this Credit Agreement and the payment of the Promissory Note. SECTION 3. REPRESENTATIONS AND WARRANTIES 3.1 Representations and Warranties of Borrower. To induce Lender to enter into this Credit Agreement and to make the Advances, Borrower hereby represents and warrants to Lender that: (a) Trust Existence; Compliance with Law. Borrower (i) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) has the power and authority, and the legal right, as a Delaware business trust, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (iii) is duly qualified as a foreign business trust or unincorporated association, is in good standing and has all licenses (in full force and effect) under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and/or licensing and (iv) is in compliance with all Requirements of Law. (b) Trust Power; Authorization; Enforceable Obligations. Borrower has the power and authority, and the legal right, as a Delaware business trust, to make, deliver and perform this Credit Agreement and the other Facility Agreements to which it is a party and to borrow hereunder and has taken all necessary action to authorize the borrowings on the terms and conditions of this Credit Agreement and the other Facility Agreements to which it is a party and to authorize the execution, delivery and performance of this Credit Agreement and the other Facility Agreements to which it is a party. All consents or authorizations of, filing with or other act by or in respect of, any Governmental Authority or any other Person required to be obtained, made or given by it in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Credit Agreement or the other Facility Agreements to which it is a party have been so obtained, made or received. This Credit Agreement and each other Facility Agreement to which it is a party has been duly executed and delivered on behalf of Borrower. This Credit Agreement and each other Facility Agreement to which it is a party constitutes a legal, valid and binding obligation of Borrower enforceable against Borrower in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 5 (c) No Legal Bar. The execution, delivery and performance of this Credit Agreement and the other Facility Agreements, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligation of Borrower and will not result in, or require, the creation or imposition of any Lien on any of its properties or revenues pursuant to any such Requirement of Law or Contractual Obligation other than the Lien set forth herein. (d) No Material Litigation. No litigation, investigation or proceeding of or before any arbitrator, court or Governmental Authority is pending or threatened, by or against Borrower or against any of its properties or revenues (i) with respect to this Credit Agreement or the other Facility Agreements or any of the transactions contemplated hereby or thereby, or (ii) which could have a material adverse effect on the business, prospects, properties, assets, operations or condition, financial or otherwise, of Borrower, or the ability of Borrower to perform its obligations hereunder or under the other Facility Agreements. (e) No Default; No Event of Default. Borrower is not in default under or with respect to any of its Contractual Obligations in any respect which could have a material adverse effect on the business, operations, properties, assets, condition or prospects, financial or otherwise, of Borrower, or on the ability of Borrower to perform its obligations hereunder or under the other Facility Agreements. No Event of Default or Unmatured Event of Default has occurred or is continuing. (f) No Burdensome Restrictions. Borrower is not a party to or subject to any Contractual Obligation (other than the Facility Agreements) which could have a material adverse effect on the business, properties, assets, operations, condition or prospects, financial or otherwise, of Borrower, or on the ability of Borrower to carry out its obligations hereunder or under the other Facility Agreements. (g) Taxes. Borrower has filed or caused to be filed all federal, state and other tax returns which are required to be filed by it, or has filed extensions with respect thereto (which extensions have not expired) and has paid all taxes shown to be due and payable on said returns or on any federal, state and other tax assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority having taxing power; no tax Lien has been filed against it, and no claim is being asserted by any Governmental Authority with respect to any such tax, fee or other charge. (h) ERISA. Neither Borrower nor any ERISA Affiliate of Borrower has participated in any Multiemployer Plan. Neither Borrower nor any ERISA Affiliate of Borrower has maintained any Single-Employer Plan. (i) Investment Company Act; Other Regulations. Borrower is not an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. Borrower is not subject to regulation under any federal or state statute or regulation which limits its ability to incur Debt. (j) Subsidiaries. Borrower has no Subsidiaries, other than Subsidiaries formed in connection with any Securitization. 6 (k) Purpose of Advances. The proceeds of the Advances shall be used by Borrower to purchase Eligible Contracts and for other purposes expressly permitted by the Facility Agreements. (l) No Deduction. Borrower is not required to make any deduction or withholding from payments to be made by it to Lender under this Credit Agreement, and the execution and performance of this Credit Agreement and any of the other Facility Agreements does not make Borrower liable for any registration tax, stamp duty or similar tax or duty imposed by any authority of or within its jurisdiction of creation, which tax or duty has not been, or will not be, paid when due. (m) No Other Debt. Borrower has no liability in respect of any Debt or in respect of any guarantee by Borrower of the obligations of another under which the lender, creditor or lessor or the Person in whose favor such guarantee is given has any right, by operation of law or otherwise, to have any claim in respect of such obligation or guarantee satisfied out of any assets of Borrower, other than Subordinated Debt consented to by Lender in writing. (n) Title; Liens. Except for the Liens granted to the Lender pursuant to the Facility Agreements and any Subordinate Liens consented to by the Lender in writing, Borrower owns each item of the Collateral free and clear of any and all Liens or claims of others. No security agreement, financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as may have been filed in favor of the Lender pursuant to the Facility Agreements. (o) Ownership of Contracts. Each purchase by Borrower of Contracts constitutes a valid sale of the Contracts to Borrower and creates in favor of Borrower a perfected ownership interest in and valid, legal and equitable title to such Contracts, which ownership interest is not subject to any Lien. (p) No Petition. There is no intent to file a voluntary petition under the federal bankruptcy laws with respect to Borrower and Borrower is not insolvent or generally unable to pay its debts as they become due. (q) Eligible Contracts. Each Contract is an Eligible Contract. With respect to each such Contract, (i) no effective financing statement, lien notation on any certificate of title or other instrument similar in effect covering all or any part of such Contract or the security therefor, which would give the Person filing, named on or entitled to the benefit of such statement or instrument priority senior to or pari passu with the Borrower, is on file in any recording office or is otherwise effective except such as may be filed in favor of the Dealer, the related FI or the Borrower and collaterally assigned to Lender in accordance with the Facility Agreements; and (ii) the Vehicle, including any equipment sold and financed in connection with such Contract, is the subject of an application for a certificate of title to be issued in the name of the Obligor which will indicate a security interest therein held by the Borrower or the Collateral Agent, in the appropriate form and in compliance with all appropriate procedures as may be necessary under applicable law to cause a perfected and first priority security interest to exist in favor of, or for the benefit of, the Borrower, to secure the obligations of such Obligor under such Contract; (iii) each of the Representations and Warranties are true and correct and (iv) it is in compliance with the Underwriting Criteria. 7 (r) Tangible Net Worth Requirement. The Tangible Net Worth Requirement is met. (s) Representations and Warranties in Facility Agreements. The representations and warranties of the Borrower contained in each of the Facility Agreements to which it is a party and in any document, certificate or instrument delivered pursuant to any such Facility Agreement are true and correct and the Lender may rely on such representations and warranties, if not made directly to the Lender, as if such representations and warranties were made directly to the Lender. To the best of the Borrower's knowledge, the representations and warranties of the FIs in each of the Loan Origination Agreements and in any document, certificate or instrument delivered pursuant to the Loan Origination Agreements are true and correct in all material respects and the Lender may rely on such representations and warranties as if such representations and warranties were made directly to the Lender, except that no such representation or warranty is made with respect to the Loan Origination Agreement with Farmers and Mechanics Bank. (t) Principal Place of Business. The Borrower's principal place of business is located at 4545 Fuller Drive, Suite 101, Irving, Texas. 3.2 Representations and Warranties of NAF Corp. To induce Lender to enter into this Credit Agreement and to make the Loans, NAF Corp. hereby represents and warrants to Lender that: (a) Financial Condition. (i) The pro forma consolidated balance sheet of NAF Corp. as of the Closing Date and reflecting all Closing Date transactions is complete and correct and presents fairly the financial condition of NAF Corp. as at such date. NAF Corp. does not have any Debt, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term commitments, including, without limitation, any interest rate or foreign currency swap or exchange transaction except to the extent reflected as a liability on the balance sheet referred to above. Such balance sheet has been prepared in accordance with GAAP. (b) Corporate Existence; Compliance with Law. NAF Corp. (i) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) has the power and authority, and the legal right, as a Texas corporation, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (iii) is duly qualified as a foreign corporation, is in good standing and has all licenses (in full force and effect) under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and/or licensing and (iv) is in compliance with all Requirements of Law. (c) Corporate Power; Authorization; Enforceable Obligations. NAF Corp. has the power and authority, and the legal right, as a Texas corporation, to make, deliver and perform this Credit Agreement and the other Facility Agreements to which it is a party and to borrow hereunder and has taken all necessary action to authorize the borrowings on the terms and conditions of this Credit Agreement and the other Facility Agreements to which it is a party and to authorize the execution, delivery and performance of this Credit Agreement and the other Facility Agreements to which it is a party. All consents or authorizations of, filing with or other act by or in respect of, any Governmental 8 Authority or any other Person required to be obtained, made or given by it in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Credit Agreement or the other Facility Agreements to which it is a party have been so obtained, made or received. This Credit Agreement and each other Facility Agreement to which it is a party has been duly executed and delivered on behalf of NAF Corp. This Credit Agreement and each other Facility Agreement to which it is a party constitutes a legal, valid and binding obligation of NAF Corp. enforceable against NAF Corp. in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). (d) No Legal Bar. The execution, delivery and performance of this Credit Agreement and the other Facility Agreements, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or Contractual Obligation of NAF Corp. and will not result in, or require, the creation or imposition of any Lien on any of its properties or revenues pursuant to any such Requirement of Law or Contractual Obligation other than the Lien set forth herein. (e) No Material Litigation. No litigation, investigation or proceeding of or before any arbitrator, court or Governmental Authority is pending or threatened, by or against NAF Corp. or against any of its properties or revenues. (f) No Default; No Event of Default. NAF Corp. is not in default under or with respect to any of its Contractual Obligations in any respect which could have a material adverse effect on the business, operations, properties, assets, condition or prospects, financial or otherwise, of NAF Corp., or on the ability of NAF Corp. to perform its obligations hereunder or under the other Facility Agreements. No Event of Default or Unmatured Event of Default has occurred or is continuing. (g) No Burdensome Restrictions. NAF Corp. is not a party to or subject to any Contractual Obligation (other than the Facility Agreements) which could have a material adverse effect on the business, properties, assets, operations, condition or prospects, financial or otherwise, of NAF Corp., or on the ability of NAF Corp. to carry out its obligations hereunder or under the other Facility Agreements. (h) Taxes. NAF Corp. has filed or caused to be filed all federal, state and other tax returns which are required to be filed by it, or has filed extensions with respect thereto (which extensions have not expired) and has paid all taxes shown to be due and payable on said returns or on any federal, state and other tax assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority having taxing power; no tax Lien has been filed against it, and no claim is being asserted by any Governmental Authority with respect to any such tax, fee or other charge. (i) ERISA. Prior to May 17, 1996, neither NAF Corp. nor any ERISA Affiliate of NAF Corp. has participated in any Multiemployer Plan. Prior to May 17, 1996, neither NAF Corp. nor any ERISA Affiliate of NAF Corp. has maintained any Single-Employer Plan. Beginning May 17, 1996, NAF Corp. and Borrower are participants in FirstCity's employee benefit plans. 9 (j) Investment Company Act; Other Regulations. NAF Corp. is not an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. NAF Corp. is not subject to regulation under any federal or state statute or regulation which limits its ability to incur Debt. (k) No Deduction. NAF Corp. is not required to make any deduction or withholding from payments to be made by it to Lender under this Credit Agreement, and the execution and performance of this Credit Agreement and any of the other Facility Agreements does not make NAF Corp. liable for any registration tax, stamp duty or similar tax or duty imposed by any authority of or within its jurisdiction of creation, which tax or duty has not been, or will not be, paid when due. (l) No Priority Claim Debt. NAF Corp. has no liability in respect of any Debt or in respect of any guarantee by NAF Corp. of the obligations of another under which the lender, creditor or lessor or the Person in whose favor such guarantee is given has any right, by operation of law or otherwise, to have any claim in respect of such obligation or guarantee first satisfied out of the general assets of NAF Corp. in priority to the claims of its general creditors, other than (i) a non-recourse promissory note to Cargill Financial Services Corporation and (ii) an indemnification agreement with High Industries, Inc. copies of which have been supplied to the Lender. (m) No Petition. There is no intent to file a voluntary petition under the federal bankruptcy laws with respect to NAF Corp. and NAF Corp. is not insolvent or generally unable to pay its debts as they become due. (n) Eligible Contracts. Each Contract is an Eligible Contract. With respect to each such Contract, (i) no effective financing statement, lien notation on any certificate of title or other instrument similar in effect covering all or any part of such Contract or the security therefor, which would give the Person filing, named on or entitled to the benefit of such statement or instrument priority senior to or pari passu with the Borrower, is on file in any recording office or is otherwise effective except such as may be filed in favor of the Dealer, the related FI or the Borrower and collaterally assigned to Lender in accordance with the Facility Agreements; and (ii) the Vehicle, including any equipment sold and financed in connection with such Contract is the subject of an application for a certificate of title to be issued in the name of the Obligor which will indicate a security interest therein held by the Borrower or the Collateral Agent, in the appropriate form and in compliance with all appropriate procedures as may be necessary under applicable law to cause a perfected and first priority security interest to exist in favor of, or for the benefit of, to secure the obligations of such Obligor under such Contract; (iii) each of the Representations and Warranties are true and correct and (iv) it is in compliance with the Underwriting Criteria. (o) Representations and Warranties in Facility Agreements. The representations and warranties of NAF Corp. contained in each of the Facility Agreements to which it is a party and in any document, certificate or instrument delivered pursuant to any such Facility Agreement are true and correct and the Lender may rely on such representations and warranties, if not made directly to the Lender, as if such representations and warranties were made directly to the Lender. To the best of NAF Corp.'s knowledge, the representations and warranties of the FIs in each of the Loan Origination Agreements and in any document, certificate or instrument delivered pursuant to the Loan Origination Agreements are true and correct in all material respects and the Lender may rely on such 10 representations and warranties as if such representations and warranties were made directly to the Lender, except that no such representation or warranty is made with respect to the Loan Origination Agreement with Farmers' and Mechanics' Bank. (p) Principal Place of Business. NAF Corp.'s principal place of business is located at 4545 Fuller Drive, Suite 101, Irving, Texas. SECTION 4. CONDITIONS PRECEDENT 4.1 Conditions to Initial Advance. The agreement of Lender to fund the initial Advance is subject to the satisfaction, immediately prior to or concurrently with the making of such Loan on the Closing Date, of the following conditions precedent: (a) Facility Agreements. Lender shall have received (i) this Credit Agreement executed and delivered by a duly authorized officer of Borrower, (ii) the Promissory Note executed and delivered by a duly authorized officer of Borrower, (iii) the Security and Collateral Agent Agreement, duly executed and delivered by the parties thereto, (iv) the Servicing Agreement, duly executed and delivered by the parties thereto; (v) the Paying Agent Agreement, (vi) the Funding Commitment, duly executed by the parties thereto, (vii) the IBSA, duly executed by the parties hereto, (viii) copies of all the other Facility Agreements, executed by all parties thereto and in form and substance satisfactory to Lender, and (ix) such other documents or instruments as may be reasonably requested by Lender. (b) Trust Documents; Incumbency. (i) Lender shall have received copies of the certificate of trust of Borrower certified by the Secretary of State or other appropriate official of the State of Delaware and the Governing Instrument of Borrower certified as of the Closing Date as complete and correct copies thereof by a Responsible Officer, (ii) good standing certificates for Borrower issued by the Secretary of State or other appropriate official of the State of Delaware and each jurisdiction where the conduct of Borrower's business activities or its ownership of properties makes qualification necessary and (iii) a certificate of a Responsible Officer of Borrower, certifying the names and true signatures of the officers of Borrower authorized to sign the Facility Agreements to which it is a party. (c) Credit Committee Approval. Lender shall have received the approval of its credit committee with respect to the transactions contemplated by the Facility Agreements. (d) No Violation. The consummation of the transactions contemplated hereby and by the other Facility Agreements shall not contravene, violate or conflict with, nor involve Borrower in any violation of, any Requirement of Law except to the extent that any such contravention, violation, conflict or involvement would not adversely affect the transactions contemplated hereby and by the other Facility Agreements. (e) Legal Opinions. Lender shall have received the executed legal opinion of counsel to Borrower, NAF Corp. and FirstCity. 11 (f) Collection Account and Paying Agent Agreement. Borrower shall have established the Collection Account, and the financial institution at which the Collection Account is established shall have executed and delivered the Paying Agent Agreement (the "Paying Agent Agreement"). (g) Lien Certificate. Lender shall have received a certificate of a Responsible Officer of Borrower to the effect that the Collateral is not subject to any Lien, except Liens created by the Facility Agreements. (h) UCC Searches. Lender shall have received lien searches and other evidence as to the absence of any Lien on or security interest in the Collateral in form and substance satisfactory to Lender. Any termination statements or releases requested by Lender to be filed with respect to the Contracts shall have been filed. (i) Filings. Lender shall have received acknowledgment copies of proper financing statements, duly filed under the UCC of all jurisdictions that Lender may deem necessary or desirable in order to perfect the security interests created by this Credit Agreement and the other Facility Agreements and all other filings, notifications, consents and recordings necessary to consummate the transactions contemplated hereunder and under the other Facility Agreements shall be accomplished and Lender shall have received evidence of such filings, notifications, consents and recordings satisfactory in form and substance to Lender. (j) Lock-Boxes. Borrower shall have established or caused to have been established Lock-Boxes in its name and the name of the Lender and shall have received an executed Lock-Box Agreement (a "Lock-Box Agreement") for each Lock-Box from each Lock-Box Bank. All Obligors shall have been instructed to remit Collections to a Lock-Box. (k) Consents. Lender shall have received copies of all consents, licenses and approvals, if any, required in connection with the execution, delivery and performance by Borrower and the validity and enforceability against it of the Facility Agreements to which it is a party and such consents, licenses and approvals shall be in full force and effect. (l) Insurance. Lender shall have received evidence that the Blanket Policy is in full force and effect. (m) Servicer's Certificates. Lender shall have received a certificate from EDS and the Servicer confirming the loss and delinquency status of the portfolio immediately prior to Closing. (n) No Default. Neither NAF Corp. nor the Borrower is in default under any agreement to which either is a party. (o) Due Diligence. Lender shall have had the opportunity to conduct legal, financial, operational and key man due diligence on the NAF Entities and FirstCity. 12 (p) FI Deferred Fees. Borrower shall have assigned its rights to any remaining FI deferred fees to the Lender. (q) Funding Commitment. FirstCity and Lender shall have executed and delivered the Funding Commitment. (r) Servicing Agreement. Borrower, the Servicer, the Lender and the Collateral Agent shall have entered into the Servicing Agreement. (s) Loan Origination Agreements. NAF Corp. and the FIs (other than Tammac Corporation and Mellon Bank) shall have entered into amended Loan Origination Agreements satisfactory to Lender (with executed waivers of defaults from the prior Loan Origination Agreements), or, in the case of Farmers and Mechanics Bank, a termination and release. (t) Exercise of First City's Options. FirstCity shall have exercised each of its options so as to gain control of the Borrower and NAF Corp.; provided that up to 20% of the equity in NAF Corp., and less than a majority of the board seats of NAF Corp., may be controlled by parties other than FirstCity (except that Cargill Financial Services Corporation may control not more than 15% of such equity and not more than one board seat). (u) IBSA. NAF Corp. and ContiFinancial shall have executed and delivered the IBSA. (v) Other Agreements. The Lender shall have received executed copies of all of the documents listed on Schedule I hereto. (w) Funding Commitment Fee. On the Closing Date, the Borrower shall pay $125,000 to the Lender as a commitment fee. 4.2 Conditions to Each Advance. The agreement of Lender to fund any Advance requested to be made by it on any date (including, without limitation, the initial Advance) is subject to the satisfaction of the following conditions precedent: (a) Representations and Warranties. Each of the representations and warranties made by Borrower and NAF Corp. in or pursuant to any of the Facility Agreements, and by FirstCity in the Funding Commitment, shall be true and correct on and as of such date as if made on and as of such date. (b) Notice of Borrowing. Borrower shall have delivered to Lender a Notice of Borrowing within the time period specified in Section 2.3. (c) Section 2.1 Requirements. After giving effect to the Advance to be made on such day, the Outstanding Facility Balance does not exceed either (x) the Maximum Loan Amount or (y) the Borrowing Base. 13 (d) Evidence of Pledge. Prior to the release of the proceeds of such Advance in consideration of the Borrower's acquisition of any Contracts, Lender shall have received an approving (i.e., indicating no material exceptions) Custodial Certification with respect to the related Contracts not later than 11 A.M., New York time, on the Business Day preceding the day on which such amounts are to be released. (e) Additional Documents. The Lender shall have received each additional document, instrument, legal opinion or item of information reasonably requested by Lender with respect of any aspect or consequence of the transactions contemplated hereby or by any other Facility Agreement. (f) Additional Matters. All proceedings, documents, instruments and legal matters specified in subsection 4.1 hereof, or required after the Closing Date, shall be satisfactory in form and substance to Lender. (g) Event of Default. No Event of Default or Unmatured Event of Default shall have occurred and be continuing to occur. Each borrowing by Borrower hereunder shall constitute a representation and warranty by Borrower as of the date of such Loan that the conditions contained in this subsection 4.2 have been satisfied. SECTION 5. RELEASE OF LIENS In connection with any payment of principal on the Facility, upon receipt of a written request from the Borrower to the Lender in the form attached as Exhibit B to the Collateral Agent Agreement, the Lender shall take such actions as are necessary to release or cause the lien of the Lender on the related Contract to be released and to cause the related Contract Files to be returned to the Borrower; as used in this Article 5, the "related Contracts" shall be those Contracts, specified by Borrower to be released from this Facility; provided that, following such release and the related payment of principal on the Facility, the Outstanding Facility Balance does not exceed the Borrowing Base. Upon payment in full of all Obligations, termination of all obligations of Lender to make Advances hereunder and expiration or termination of this Credit Agreement, the Lender shall take such actions as are necessary to release or cause the Lien of the Lender on the Collateral to be released and to cause the Contract Files then held by the Collateral Agent to be returned to the Borrower. To the extent the Borrower consummates a Securitization and so long as the proceeds thereof are applied to repay Loans hereunder, the Lender shall take such actions as are necessary to release the Lien of the Lender on the related Collateral and shall instruct the Collateral Agent to deliver possession of the related Contracts and Contract Files in the Collateral Agent's possession which will be used as collateral for such securities. SECTION 6. AFFIRMATIVE COVENANTS NAF Corp. and/or the Borrower hereby agree that, so long as this Credit Agreement remains in effect, NAF Corp. and/or the Borrower shall: 14 6.1 Financial Statements. (a) NAF Corp. shall furnish to Lender, commencing with the year ending December 31, 1996: (i) as soon as available, but in any event within 120 days after the end of each fiscal year of NAF Corp. a copy of the unaudited consolidated balance sheet as at the end of such year and the related unaudited consolidated statements of income and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year and including all footnotes thereto and management discussions and analysis contained therein, certified by a Responsible Officer of FirstCity as being fairly stated in all respects (subject to normal year-end audit adjustments); and (ii) as soon as available, but in any event not later than 60 days after the end of each fiscal quarter of NAF Corp., the unaudited balance sheet of NAF Corp. as at the end of such quarter and the related unaudited statements of income and cash flows of NAF Corp for such period and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures, for the previous year; (b) the Borrower shall furnish to Lender, commencing with the year ending December 31, 1996: (i) as soon as available, but in any event within 120 days after the end of each fiscal year of the Borrower, a copy of the balance sheet as at the end of such year and the related statements of income and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year and including all footnotes thereto and management discussions and analysis contained therein, audited by KPMG Peat Marwick or another nationally recognized accounting firm acceptable to Lender (the "Accountants"); and (ii) as soon as available, but in any event not later than 60 days after the end of each fiscal quarter of the Borrower, the unaudited balance sheet of the Borrower as at the end of such quarter and the related unaudited statements of income and cash flows of the Borrower for such period and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures, for the previous year, certified by a Responsible Officer of NAF Corp. as being fairly stated in all respects (subject to normal year-end audit adjustments); all such financial statements to be complete and correct in all respects and to be prepared in detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or Responsible Officer, as the case may be, and disclosed therein). 6.2 Certificates; Other Information. NAF Corp. shall furnish to Lender: (a) concurrently with the delivery of the financial statements referred to in subsection 6.1(a), a certificate of the Accountants reporting on such financial statements stating that (i) such audit was made in accordance with GAAP and (ii) no knowledge was obtained of any Event of Default or Unmatured Event of Default, except as specified in such certificate; 15 (b) concurrently with the delivery of the financial statements referred to in subsection 6.1, a certificate of a Responsible Officer stating that each of NAF Corp. and the Borrower during such period has observed or performed all of its covenants and other agreements, and satisfied every condition contained in this Credit Agreement and the other Facility Agreements to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Unmatured Event of Default or Event of Default, except as specified in such certificate; (c) copies of all financial statements, reports and other communications that NAF Corp. or the Borrower may make to, or file or have with, the SEC or any state securities commission contemporaneously with the filing thereof; (d) at the time of each securitization or whole-loan sale, a comfort letter from the Accountants covering the loss and delinquency statistics on the Servicer's servicing portfolio of the Borrower's contracts; (e) copies of any written communication received from an FI, outside of the ordinary course of business; and (f) promptly, such additional financial and other information as Lender may from time to time reasonably request. 6.3 [Reserved]. 6.4 Payment of Obligations. The NAF Entities shall pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, each of their obligations (with a balance of $50,000 or more) of whatever nature. 6.5 Conduct of Business and Maintenance of Existence. The NAF Entities shall continue to engage in business of the same type as now conducted by it and preserve, renew and keep in full force and effect its existence and take all action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business; and comply in all material respects with all Contractual Obligations and Requirements of Law. 6.6 Maintenance of Property; Insurance. The NAF Entities shall keep all property useful and necessary in its business in good working order and condition; maintain, or cause to be maintained on its behalf, with financially sound and reputable insurance companies, the Blanket Policy and insurance on all its property in at least such amounts and against at least such risks as are usually insured against in the same general area by companies engaged in the same or a similar business; and furnish to Lender, at least annually, and otherwise upon written request, full information as to the insurance carried. 6.7 Inspection of Property; Books and Records; Discussions; Audit Reports. NAF Corp. and the Borrower shall each 16 (a) keep proper books of records 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 its business and activities; and permit representatives of Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records on prior notice during normal business hours and to discuss the business, prospects, operations, properties and financial and other condition of NAF Corp. with officers and employees of NAF Corp. and the Borrower and with its independent certified public accountants. (b) permit all accountants and auditors employed by NAF Corp. and the Borrower at any time to exhibit and deliver to the Lender copies of any and all of NAF Corp.'s and the Borrower's financial statements, trial balances or other accounting records of any sort in the accountant's or auditor's possession and to disclose to the Lender any information they may have concerning the Borrower's financial status and business operations which the Lender may reasonably request. NAF Corp. and the Borrower shall authorize all federal, state and municipal authorities to furnish to the Lender copies of reports or examinations relating to NAF Corp. or the Borrower, whether made by NAF Corp., the Borrower or otherwise. (c) permit the Lender to conduct at any time and from time to time, and fully cooperate with, field examinations and audits of the business affairs of NAF Corp. and/or the Borrower. NAF Corp. shall reimburse the Lender for all reasonable costs and expenses in connection with such examinations. (d) permit the Lender to inspect the Collateral, during normal business hours and upon reasonable notice; the Borrower shall reimburse the Lender for the reasonable expenses of the Lender in conducting any such inspection. (e) deliver promptly upon receipt thereof, one copy of each other report submitted to the Borrower by its independent accountants, including management letters and "comment" letters, in connection with any annual, interim or special audit report made by them of the books of the Borrower. 6.8 Notices. NAF Corp. shall promptly give notice to Lender of: (a) the occurrence of any Event of Default or Unmatured Event of Default; (b) any (i) default or event of default by Borrower or NAF Corp. under any Contractual Obligation of Borrower or NAF Corp. or (ii) litigation, investigation or proceeding which may exist at any time affecting the Borrower or NAF Corp. and which is likely to result in a material adverse change in the financial condition or business prospects of the Borrower or of NAF Corp; (c) a material adverse change in the business, properties, assets, operations, prospects or condition (financial or otherwise) of the Borrower or NAF Corp.; and 17 (d) any change in its principal place of business or chief executive office from the address set forth in paragraph (v) of subsection 3.1. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the NAF Entities propose to take with respect thereto. 6.9 Delivery of Other Reports. The NAF Entities shall furnish any reports required to be delivered by the NAF Entities pursuant to any Facility Agreement to which any NAF Entity is a party or which any NAF Entity has signed. 6.10 Approval of New FIs. The NAF Entities shall not execute a Loan Origination Agreement with a new FI unless they have received approval of the new FI and the new Loan Origination Agreement from the Lender, which approval shall not be unreasonably withheld. This provision shall apply, without limitation, to Tammac Corporation and to Mellon Bank. 6.11 Further Assurances. The NAF Entities shall do such further acts and things and execute and deliver to Lender such assignments, agreements, financing statements, powers and instruments as are required by Lender to carry into effect the purposes of this Credit Agreement and the other Facility Agreements or to better assure and confirm unto Lender its rights, powers and remedies hereunder and under the other Facility Agreements, including, without limitation, to obtain such consents and give such notices, and to file and record all such documents, financing statements and instruments, and renew each such consent, notice, filing and recordation, at such time or times, in such manner and at such places, as may be necessary or desirable to preserve and protect the position of Lender hereunder and under the other Facility Agreements. This covenant shall survive the termination of this Credit Agreement. 6.12 Cooperation in Making Calculations. The NAF Entities shall cooperate with Lender at all times in the calculation of all formulas used in any Facility Agreement, including, without limitation, delivering in written or electronic form any and all data and other information as may be so required. The NAF Entities hereby agree to provide all such information or data on or before each date, without prior request by Lender, as required to make any such calculation, and to provide such information and data in such form as may be immediately used by Lender without further interpretation or purchase or license of any software. The NAF Entities do hereby further agree that if they fail to provide any such information or data as required in this subsection 6.12, Lender may use any estimate of any amount or calculation that it, in its sole discretion, determines. 6.13 Securitization. The Borrower shall use its best efforts to effect a refinancing of the Loans through the issuance by Borrower or an Affiliate of asset backed securities secured by Contracts (each such refinancing a "Securitization") on a semi-annual basis. Borrower further agrees to use its best efforts to consummate the first such Securitization on or prior to October 31, 1996 in an amount of not less than $40,000,000. 18 6.14 Additional Credit Support. (a) The NAF Entities will deliver or cause to be delivered to the Lender any and all subordinate securities (together with appropriate, fully-executed bond powers and assignments) received by them or by any Affiliate of the NAF Entities pursuant to any Securitization in order to create a first-priority, perfected security interest therein in favor of the Lender. (b) NAF Corp. shall cause the beneficial owner of Borrower to deliver to the Lender the "Certificates" issued under the Trust Agreement creating the Borrower, together with appropriate, fully-executed bond powers and assignments, not later than ten Business Days following the Closing Date. (c) The Borrower shall deposit any rebated FI deferred fees to the Collection Account. 6.15 Minimum Net Worth. For so long as there are any Obligations to Lender, the Borrower shall maintain at all times the Tangible Net Worth Requirement. 6.16 Underwriting and Review. (a) NAF shall review each Contract for compliance with the Underwriting Criteria. (b)(i) The Borrower shall cause to be furnished to the Lender, by August 31, 1996, a report stating the conclusions of a review to be conducted by an independent firm (such as Baker and Associates), of the Servicer, any Sub-Servicer and of the Contracts originated after the Closing Date. The costs of such report shall be paid as follows: the Lender shall pay the first $10,000; the Borrower shall pay the balance of such cost, which is not expected to exceed $18,000 in the aggregate. (ii) In addition to the costs of such initial review, the Borrower agrees to pay up to $20,000 per year in additional fees and expenses of a third-party contract reviewer (such as Baker and Associates); provided, that if any such review reveals material inconsistencies in the application of the Underwriting Criteria, the Lender may require additional reviews to be performed, all at the Borrower's expense. SECTION 7. NEGATIVE COVENANTS Each NAF Entity hereby agrees that, so long as this Credit Agreement remains in effect, it shall not directly or indirectly, without the prior written consent of the Lender, in its sole discretion: 7.1 Limitation on Debt. Create, incur, assume or suffer to exist any Debt, except (i) indebtedness in respect of the Loans, the Promissory Note, and other obligations of the NAF Entities under the Facility Agreements, (ii) Subordinated Debt which is subordinated to the Obligations on terms reasonably satisfactory to Lender, (iii) a non-recourse promissory note to Cargill Financial Services Corporation and (iv) in the case of NAF Corp., intercompany Debt approved by the Lender and trade Debt. 19 7.2 Limitation on Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, including, without limitation, the Collateral, whether now owned or hereafter acquired, except Subordinate Liens. 7.3 Limitation on Fundamental Changes. Except as expressly permitted by the Facility Agreements, enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets, or make any material change in its present method of conducting business. 7.4 Sale, Transfer or Encumbrance of Assets. Sell, lease, or otherwise dispose of, move, relocate, or transfer, whether by sale or otherwise, any of its property, business or assets, including, without limitation, the Collateral, (whether now owned or hereafter acquired) except for (i) the movement of assets in the ordinary course of business to locations disclosed in advance to Lender and where Borrower has executed and tendered to Lender appropriate UCC-1 financing statements for filing or taken other steps required to enable Lender to perfect its lien and (ii) Securitizations. 7.5 Contracts. (a) Sell, assign or otherwise encumber any Contract except as expressly permitted by the Facility Agreements; or (b) Cancel, terminate, amend, modify or waive any term or condition of any Contract (including the granting of rebates or adjustments with respect thereto), or the related certificates of title except in accordance with the Credit and Collection Policy. 7.6 Limitation on Dividends. The NAF Entities shall not declare or pay any dividend on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of the NAF Entities or any warrants or options to purchase any such Capital Stock, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of NAF Corp. 7.7 Limitation on Capital Expenditures. NAF Corp. shall not make or commit to make (by way of the acquisition of securities of a Person or otherwise) any expenditure in respect of the purchase or other acquisition of fixed or capital assets (including, without limitation, pursuant to an operating lease or a lease which is required to be capitalized for financial reporting purposes in accordance with GAAP) in excess of $250,000 in the aggregate in any year. 7.8 Limitation on Investments, Loans and Advances. The Borrower or NAF Corp. shall not make any advance, loan, extension of credit or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting a business unit of, or make any other investment in, any Person, except: (a) purchases of Contracts; 20 (b) investments in Permitted Investments of funds, if any, on deposit in the Collection Account; and (c) capitalization of any special purpose entity formed for the purpose of a Securitization. 7.9 Transactions with Affiliates. The Borrower shall not enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate, except for transactions expressly permitted by the Facility Agreements, and transactions in the ordinary course of Borrower's business and which are upon fair and reasonable terms not less favorable to Borrower than it would obtain in a comparable arm's length transaction with a person that is not an Affiliate. 7.10 Sale and Leaseback. NAF Corp. shall not enter into any arrangement with any Person providing for the leasing by NAF Corp. of real or personal property which has been or is to be sold or transferred by NAF Corp. to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of Borrower. 7.11 Trust Documents. The Borrower shall not amend its Governing Instrument. 7.12 Fiscal Year. The Borrower shall not permit the fiscal year of Borrower to end on a day other than December 31. 7.13 Limitation on Negative Pledge Clauses. The Borrower shall not enter into any agreement with any Person other than Lender which prohibits or limits the ability of Borrower to create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired. 7.14 Activities of Borrower. The Borrower shall not engage in any business or activity of any kind, or enter into any transaction or indenture, mortgage, instrument, agreement, contract, lease or other undertaking or expend any funds (other than incidental expenses incurred in the ordinary course of business), which are not directly related to the transactions contemplated and authorized hereby or by the other Facility Agreements other than an agreement or other arrangement approved in writing by Lender to share taxes of any affiliated, consolidated, unitary, combined or similar group including Borrower, such approval not to be unreasonably withheld. 7.15 Agreements. The Borrower shall not, except for the Facility Agreements, and as expressly permitted by the Facility Agreements, become a party to, or permit any of its properties to be bound by, any indenture, mortgage, instrument, contract, agreement, lease or other undertaking, or issue any power of attorney except to Lender except for instruments, contracts, agreements or leases entered into in the ordinary course of the Borrower's business which are necessary or desirable in furtherance of the transactions contemplated by the Facility Agreements. 21 7.16 Bank Accounts. The NAF Entities shall not, except as otherwise permitted by this Credit Agreement, move the Bank Accounts from the institution at which they are maintained on the Closing Date. 7.17 Lock-Box Banks. The NAF Entities shall not add or terminate any bank as a Lock-Box Bank from those delivering a Lock-Box Agreement pursuant to Section 4.1(o) hereof, or make any change in its instructions to Obligors regarding payments to be made to any Lock-Box Bank, unless the Lender shall have received notice of such addition of any Lock-Box Bank and a Lock-Box Agreement executed by Borrower, the Lender and such Lock-Box Bank shall have been delivered to the Lender; or deposit or otherwise credit, or cause or permit to be so deposited or credited, Collections to any lock-box account except the Lock-Boxes and the Collection Account. 7.18 Subordinated Debt. The Borrower shall not make or take any action to authorize or effect any payment of principal on or in respect of any part or all of any Debt that is by its terms subordinated to the Obligations or voluntarily prepay any such Debt or otherwise repurchase, redeem or retire any instrument evidencing any such Debt. 7.19 Margin Securities. The NAF Entities shall not own, purchase or acquire (or enter into any contract to purchase or acquire) any "margin security" as defined by any regulation of the Federal Reserve Board as now in effect or as the same may hereinafter be in effect. 7.20 No Commingling. The Borrower shall maintain separate bank accounts and no funds of the Borrower shall be commingled with funds of any other entity. The Borrower shall not maintain bank accounts other than those which have been identified in writing to the Lender. 7.21 Guarantees. Neither the Borrower nor NAF Corp. will guarantee (directly or indirectly), endorse or otherwise become contingently liable (directly or indirectly) for the obligations of, or own or purchase any stock, obligations or securities of or any other interest in, or make any capital contribution to, any other Person. 7.22 Amendment of Facility Agreements. The NAF Entities will not amend the Facility Agreements without the prior written approval of the Lender, such approval not to be unreasonably withheld. 7.23 Policies. The NAF Entities shall not amend the Credit and Collection Policy or the Underwriting Criteria without the prior written approval of Lender, such approval not to be unreasonably withheld. 7.24 Miscellaneous. (i) The Borrower will at all times hold itself out to the public under the Borrower's own name and as a separate and distinct entity from National Auto Funding Corporation, National Auto Funding I, LP or National Auto Funding II, LP. (ii) The Borrower will at all times be responsible for the payment of all its obligations and indebtedness, will at all times maintain a business office, records, books of account, and 22 funds separate from any other entity and will observe all customary formalities of independent existence. SECTION 8. REMEDIES UPON DEFAULT 8.1 Acceleration. Upon the occurrence of one or more Events of Default (other than pursuant to clause (e) of the definition of Event of Default), the Lender may cease making Advances, and may immediately declare all or any portion of the Obligations to be immediately due and payable. Upon such declaration, the Obligations shall become immediately due and payable without presentation, demand or further notice of any kind to the Borrower. Upon the occurrence of an Event of Default specified in clause (e) of the definition of Event of Default, the Lender shall immediately cease making Advances and the Obligations shall automatically accelerate and become due and payable, without any further action of the Lender. Upon acceleration of the Obligations for any reason, Borrower shall thereupon be obligated to pay to Lender the Obligations then outstanding, and Lender shall not be obligated to make any further Advance under this Credit Agreement. 8.2 Files. Upon the occurrence of one or more Events of Default, the Lender shall have the right to obtain physical possession of the Collateral, on a servicing-retained or servicingreleased basis, as Lender may elect, together with all files of Borrower relating to the Collateral and all documents relating to the Collateral which are then or may thereafter come into the possession of Borrower or any third party acting for Borrower, including the Collateral Agent and the Servicer. 8.3 Collections. Upon the occurrence of one or more Events of Default, Lender may exercise all rights and remedies under each Contract, lease, security agreement and other contract included among the Collateral as are afforded to the secured party thereunder or which are otherwise afforded to Borrower thereunder; Lender may, subject to the rights of Obligors, recover possession of any tangible personal property under any Contract, and require that the same be assembled and delivered to a specific location. Without limiting the foregoing, the Lender shall have the right to give direction to the Servicer, replace or remove the Servicer, collect and receive all further payments made on the Collateral, to instruct the Obligors to make payments to a lock-box or other location designated by the Lender, to control deposits to and disbursements from the Collection Account, to notify Lock-Box Banks to follow the instructions of the Lender, and if any payments are received by Borrower, the Borrower shall not commingle the amounts received with other funds of the Borrower and shall promptly pay them over to the Lender. In addition, the Lender shall have the right to dispose of all or any part of the Collateral as provided in the other documents executed in connection herewith, or in any commercially reasonable manner, or as provided by law. The Lender shall be entitled to place the Contracts which it recovers after any default in a pool for issuance of automobile loan receivable pass-through securities and to sell such securities at the then prevailing price for such securities in the open market as a commercially reasonable disposition of collateral subject to the applicable requirements of the UCC. The Lender shall also be entitled to sell (on a servicing-retained or servicing-released basis, as Lender may elect) any or all of such Contracts individually for the prevailing price as a commercially reasonable disposition of collateral subject to the applicable requirements of the UCC and to retitle in Lender's or Lender's nominee's name, the subordinate certificates referenced in Section 6.14 hereof. Any surplus which exists after payment and performance in full of the Loans and any other Obligations which arise hereunder shall be promptly paid over to 23 Borrower or otherwise disposed of in accordance with the UCC or other applicable law. The specification in this subsection 8.3 of manners of disposition of collateral as being commercially reasonable shall not preclude the use of other commercially reasonable methods (as contemplated by the UCC) at the option of the Lender. 8.4 Power of Attorney. Borrower hereby authorizes the Lender, at Borrower's expense, to file such financing statement or statements relating to the Collateral without Borrower's signature thereon as Lender at its option may deem appropriate, and appoints the Lender as the Borrower's attorney-in-fact (but without requiring the Lender to act) to execute any such financing statement or statements in Borrower's name and to perform all other acts which the Lender deems appropriate to perfect and continue the security interest granted hereby and to protect, preserve and realize upon the Collateral, including, but not limited to, the right to endorse notes and instruments, complete blanks in documents and sign assignments on behalf of Borrower as its attorney-in-fact and to prove and adjust any losses and to endorse any loss drafts under applicable insurance policies. This power of attorney is coupled with an interest and is irrevocable without the Lender's consent. Notwithstanding the foregoing, the power of attorney hereby granted shall only be effective during the occurrence and continuance of any Event of Default hereunder. SECTION 9. MISCELLANEOUS 9.1 Amendments and Waivers. None of this Credit Agreement, the Promissory Note, any other Facility Agreement to which Lender or Borrower is a party, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this subsection. Lender, the Collateral Agent and Borrower may, from time to time, enter into written amendments, supplements or modifications hereto and to the Promissory Note and the other Facility Agreements to which they are parties for the purpose of adding any provisions to this Credit Agreement or the Promissory Note or such other Facility Agreements or changing in any manner the rights of Lender, the Collateral Agent or Borrower hereunder or thereunder and, in addition, waiving, on such terms and conditions as Lender may specify in such instrument, any of the requirements of this Credit Agreement or the Promissory Note or such other Facility Agreements or any Unmatured Event of Default or Event of Default and its consequences. Any such waiver and any such amendment, supplement or modification shall be binding upon Lender and all future holders of the Promissory Note. In the case of any waiver, Lender and Borrower shall be restored to their former position and rights hereunder and under the Promissory Note and any other Facility Agreements to which they are parties, and any Unmatured Event of Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Unmatured Event of Default or Event of Default, or impair any right consequent thereon. 9.2 Notices. Except where telephonic instructions or notices are authorized herein to be given, all notices, demands, instructions and other communications required or permitted to be given to or made upon any party hereto shall be in writing and shall be personally delivered or sent by overnight courier service, or by registered, certified or express mail, postage prepaid, return receipt requested, or by facsimile copy (accompanied by a telephonic confirmation or receipt thereof), or telegram (with messenger delivery specified in the case of a telegram) and shall be deemed to be delivered for purposes of this Credit Agreement on: (a) the second Business Day following the day on 24 which such notice was placed in the custody of the U.S. Postal Service, (b) the next Business Day following the day on which such notice was placed in the custody of any overnight courier service, including express mail service or (c) the same Business Day on which such notice is sent by telegram, messenger or facsimile. Unless otherwise specified in a notice sent or delivered in accordance with the foregoing provisions of this subsection, notices, demands, instructions and other communications in writing shall be given to or made upon the respective parties hereto at their respective addresses (or to their respective facsimile numbers) indicated below, and, in the case of telephonic instructions or notices, by calling the telephone number or numbers indicated for such party below: If to Borrower: N.A.F. Auto Loan Trust 4545 Fuller Drive, Suite 101 Irving, TX 75038 Attention: Tel. No.: 214-791-1113 Telecopier No.: 214-791-0464 with a copy to: N.A.F. Auto Loan Trust c/o Delaware Trust Company 900 Market Street, 2-M Wilmington, Delaware 19801 Attention: Corporate Trust Administrator Facsimile Number: 302-421-7387 Telephone Number: 302-421-7748 If to NAF Corp.: National Auto Funding Corporation 4545 Fuller Drive, Suite 101 Irving, TX 75038 Attention: Jim W. Moore, President Tel. No.: 214-791-1113 Telecopier No.: 214-791-0464 If to Lender: ContiTrade Services L.L.C. 277 Park Avenue, 38th Floor New York, New York 10172 Attention: Chief Counsel Tel. No.: 212-207-2822 Telecopier No.: 212-207-2935 9.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of Lender; any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege 25 hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 9.4 Survival of Representations and Warranties. All representations and warranties made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Credit Agreement and the Promissory Note. 9.5 Payment of Expenses and Taxes. Borrower agrees, on demand, and except as otherwise specifically set forth herein, to (a) pay or reimburse Lender and the Collateral Agent for all out-of-pocket costs and expenses incurred in connection with the preparation and execution of this Credit Agreement, the Promissory Note and the other Facility Agreements and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, subject to the limitations in Section 5.2 hereof, any and all collateral audit fees and the reasonable fees and disbursements of counsel to Lender, (b) pay or reimburse Lender for all of its costs incurred in connection with its due diligence review of Borrower and all of its out-of-pocket expenses incurred in connection with the preparation, negotiation and execution of the Facility Agreements, (c) pay or reimburse Lender and the Collateral Agent for all out-of-pocket costs and expenses incurred in connection with the preparation and execution of any amendment, modification or supplement to this Credit Agreement, the Promissory Note and the other Facility Agreements and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including, without limitation, any and all collateral audit fees and the reasonable fees and disbursements of counsel to Lender, (d) pay or reimburse Lender for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Credit Agreement, the Promissory Note, the other Facility Agreements and any such other documents, including, without limitation, reasonable fees and disbursements of counsel to Lender, (e) pay, indemnify, and hold Lender, its directors, members, officers, employees, agents and Affiliates, harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, any registration tax, stamp, duty and other similar taxes or duties, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Credit Agreement, the Promissory Note, the other Facility Agreements and any such other documents (other than income taxes and franchise taxes), and (f) pay, indemnify, and hold Lender, its directors, members, officers, employees, agents and Affiliates, harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Credit Agreement, the Promissory Note and the other Facility Agreements (all the foregoing, collectively, the "indemnified liabilities"), provided that Borrower has no obligation hereunder to the Lender with respect to indemnified liabilities arising from the gross negligence or willful misconduct of the Lender. 9.6 Successors and Assigns; Participations. (a) This Credit Agreement shall be binding upon and inure to the benefit of Borrower and Lender, and all future holders of the Promissory Note and their respective successors and assigns, except that Borrower may not assign or transfer any 26 of its rights or obligations under this Credit Agreement and Lender, except as set forth in paragraph (b) below, may not assign or transfer any of its rights or obligations under this Credit Agreement without (except following the occurrence of, and during the continuance of, an Event of Default) the prior consent of Borrower, which consent shall not unreasonably be withheld; provided, however, that if Lender desires to assign, transfer, sell or otherwise dispose of all of its right, title and interest in the Collateral or the Obligations owed to it under the Facility Agreements to any institutional investor pursuant to any repurchase agreement or similar arrangement, or to a Subsidiary or Affiliate of Continental Grain Company, the consent of Borrower shall not be required. (b) Lender may, in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to it, the Promissory Note, the Facility or any other interest of Lender hereunder and under the other Facility Agreements. In the event of any such sale by Lender of participating interests to a Participant, Lender's obligations under this Credit Agreement to the other parties hereto shall remain unchanged, Lender shall remain solely responsible for the performance thereof, Lender shall remain the holder of the Promissory Note for all purposes under this Credit Agreement and the other Facility Agreements, and Borrower shall continue to deal solely and directly with Lender in connection with Lender rights and obligations under this Credit Agreement and the other Facility Agreements. Borrower agrees that if amounts outstanding under this Credit Agreement and the Promissory Note are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of the Funding Commitment Termination Date, each Participant shall be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Credit Agreement and the Promissory Note to the same extent as if the amount of its participating interest were owing directly to it under this Credit Agreement or the Promissory Note. Borrower also agrees that each Participant shall be entitled to the benefits of Subsections 2.9 and 9.5 with respect to its participation in the Facility and the Loans outstanding from time to time; provided, that no Participant shall be entitled to receive any greater amount pursuant to such subsections than Lender would have been entitled to receive in respect of the amount of the participation transferred by Lender to such Participant had no such transfer occurred. (c) Borrower authorizes Lender to disclose to any Participant and any prospective Participant any and all financial information in its possession concerning the Borrower and its Affiliates which has been delivered to it by or on behalf of such Person pursuant to this Credit Agreement or which has been delivered to it by or on behalf of such Person in connection with its credit evaluation of Borrower and its Affiliates prior to becoming a party to this Credit Agreement; provided such Participant agrees to keep such financial information confidential unless required to be disclosed by applicable Requirements of Law. (d) If, pursuant to this Subsection 9.6, any interest in this Credit Agreement or the Promissory Note is transferred or assigned to any Participant or assignee which is organized under the laws of any jurisdiction other than the United States or any state thereof, Lender shall cause such Participant or assignee, as a condition to the effectiveness of such transfer, (i) to represent to Lender and Borrower that under applicable law and treaties then in effect no taxes will be required to be withheld by Borrower or Lender with respect to any payments to be made to such Participant or assignee, in respect of the Loans, (ii) to furnish to Borrower either U.S. Internal Revenue Service Form 4224 (or any successor form) or U.S. Internal Revenue Service Form 1001 (or any successor form) (wherein such Participant or assignee claims entitlement to complete exemption from U.S. federal 27 withholding tax on all interest payments hereunder) and (iii) to agree (for the benefit of Lender and Borrower) timely to provide Lender and Borrower a new Form 4224 (or any successor form) or Form 1001 (or any successor form) upon the expiration or obsolescence of any previously delivered form and comparable statements in accordance with and if permitted under applicable U.S. laws and regulations and amendments then in effect duly executed and completed by such Participant or assignee, and to comply from time to time with all applicable U.S. laws and regulations with regard to such withholding tax exemption. (e) Lender shall not grant to any Participant the right to consent to any amendment or waiver entered into in accordance with subsection 9.1 except for any such amendment or waiver which would increase the Lender Funding Commitment, or reduce the amount or extend the due date of any principal of or interest on the Promissory Note. 9.7 Termination. This Credit Agreement (except for Sections 9.4 and 9.5) shall terminate following the Funding Commitment Termination Date upon payment in full of all outstanding principal, interest and other amounts due hereunder to Lender. 9.8 Counterparts. This Credit Agreement may be executed by one or more of the parties to this Credit Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 9.9 Severability. Any provision of this Credit Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9.10 Integration; Construction. This Credit Agreement represents the agreement of Borrower and Lender with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the other Facility Agreements. 9.11 Limited Liability. No recourse under any Facility Agreement shall be had against, and no personal liability shall attach to, any officer, employee, director, member, affiliate, beneficial owner, trustee or shareholder of any party hereto, as such, by the enforcement of any assessment or by any legal or equitable proceeding, by virtue of any statute or otherwise in respect of any of the Facility Agreements, it being expressly agreed and understood that each Facility Agreement is solely a corporate or trust obligation of each party hereto, and that any and all personal liability, either at common law or in equity, or by statute or constitution, of every such officer, employee, director, member, affiliate, beneficial owner, trustee or shareholder for breaches by any party hereto of any obligations under any Facility Agreement is hereby expressly waived as a condition of and in consideration for the execution and delivery of this Agreement. 9.12 GOVERNING LAW. THIS CREDIT AGREEMENT AND THE PROMISSORY NOTE AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS CREDIT AGREEMENT AND THE PROMISSORY NOTE SHALL BE GOVERNED BY, 28 AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. 9.13 SUBMISSION TO JURISDICTION; WAIVERS. EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY: (A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS CREDIT AGREEMENT AND THE OTHER FACILITY AGREEMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT OF THE COURTS OF THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN SUBSECTION 9.2 OR AT SUCH OTHER ADDRESS OF WHICH ALL OF THE OTHER PARTIES HERETO SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; (D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION; AND (E) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN THIS SUBSECTION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES. 9.14 Acknowledgements. Borrower and NAF Corp. each hereby acknowledge that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Credit Agreement, the Promissory Note and the other Facility Agreements; (b) the Lender has no fiduciary relationship to Borrower or NAF Corp., and the relationship between Lender and Borrower is solely that of debtor and creditor; and (c) no joint venture exists between Borrower, NAF Corp. and Lender. 29 9.15 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS CREDIT AGREEMENT OR THE PROMISSORY NOTE OR ANY OTHER FACILITY AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. 30 IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be duly executed and delivered in New York, New York by their proper and duly authorized officers, members or trustees as of the day and year first above written. N.A.F. AUTO LOAN TRUST By: DELAWARE TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee on behalf of N.A.F. AUTO LOAN TRUST By /s/ Richard N. Smith Name: Richard N. Smith Title: Vice President NATIONAL AUTO FUNDING CORPORATION By /s/ Jim W. Moore Name: Jim W. Moore Title: President CONTITRADE SERVICES L.L.C. By /s/ Jerome M. Perelson Name: Jerome M. Perelson Authorized Signatory By /s/ Susan E. O'Donovan Name: Susan E. O'Donovan Authorized Signatory 31 EXHIBIT A DEFINITIONS LIST Adjusted Eligible Contract Balance: On any day, the aggregate of the Outstanding Balances of all Contracts minus the sum of (a) the aggregate Outstanding Balance of all Defaulted Contracts on such day and (b), without duplication of the amount described in clause (a) of this definition, the aggregate Outstanding Balance of all Ineligible Contracts on such day; provided, that for this purpose only a Contract shall not be an Ineligible Contract by reason of clause (d) of the definition of the Eligible Contract. Administration Agreement: The Administration Agreement dated as of October 31, 1994 between the Borrower and NAF Corp. Advance Rate: Eighty-five percent (85%). Affiliate: As 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 and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" or "controlled" have meanings correlative to the foregoing. Notwithstanding the foregoing, no "acquisition vehicle" (such as WAMCO XXIII, Ltd.) shall be considered an "Affiliate" of FirstCity or any NAF Entity. Annual Percentage Rate: The annual rate of interest applicable to each Contract, as disclosed therein. Available Facility Amount: On any date, the excess, if any, of (a) the Borrowing Base, as of such date, minus (b) the Outstanding Facility Balance. Bank Accounts: Collectively, the Lock-Boxes and the Collection Account. Bankruptcy Event: With respect to a Person, (a) such Person or any of its Affiliates (if any) 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 such Person or any of its Affiliates shall make a general assignment for the benefit of its creditors; or (b) there shall be commenced against such Person or any of its Affiliates any case, proceeding or other action of a nature referred to in clause (a) 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 60 days; or (c) there shall be commenced against such Person or any of its Affiliates any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or 1 similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (d) such Person or any of its Affiliates shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (a), (b), or (c) above; or (e) such Person or any of its Affiliates shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due. Blanket Policy: An Insurance Policy maintained by the Borrower and its assignees for "vendor's single interest" coverage with respect to each Vehicle. Borrower: N.A.F. Auto Loan Trust, a Delaware business trust. Borrowing Base: On any day, an amount equal to (x) the sum of: (i) the product of the Advance Rate times the Adjusted Eligible Contract Balance as of the end of the prior Collection Period (or as of the Closing Date, with respect to the initial period), (ii) the product of the Advance Rate times the Outstanding Contract Balance of all Contracts acquired by the Borrower since the end of the immediately preceding Collection Period, (iii) the Eligible Amount on deposit in the Collection Account at the end of the immediately preceding Collection Period, (iv) the Deposit Amount on deposit in the Collection Account on such day, and (v) the product of the Advance Rate and 50% of the Outstanding Balance of each Contract which (a) is less than 60 days past due and (b) for which the related vehicle has been repossessed but not sold, minus (y) the sum of: (i) the Borrowing Base Adjustment Amount as of such date; and (ii) from the first day of the related Collection Period through the related Determination Date, zero; from the related Determination Date through the end of the related Collection Period, the principal amortization amount during the prior Collection Period, as reported on the Servicer's Certificate; and 2 (iii) the excess, if any, of: (x) the cumulative amount disbursed from the Collection Account pursuant to Section 2.03(a)(i) of the Paying Agent Agreement since the beginning of the related Collection Period; over (y) the sum of: (i) the cumulative amount deposited to the Collection Account pursuant to Section 2.02(a)(ii) of the Paying Agent Agreement since the beginning of the related Collection Period; and (ii) the Deposit Amount as of such day. Borrowing Base Adjustment Amount: means $2,000,000, until such time as the Lender notifies the Borrower, NAF Corp., the Paying Agent and FirstCity that the Lender has accepted FirstCity's delivery of its additional funding commitment pursuant to Section 3.1(b) of Commitment, the Borrowing Base Adjustment Amount shall thereafter be zero. Borrowing Date: Any Business Day specified in a notice pursuant to subsection 2.3 of the Credit Agreement as a date on which Borrower requests Lender to make Loans thereunder. Business Day: A day of the year on which banks are not required or authorized to close in New York City, New York, Wilmington, Delaware, Dallas, Texas and Los Angeles, California. Capital Stock: With respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing. Change of Control: (i) Except with respect to a securitization contemplated by the Facility Agreements, all or substantially all of either of the NAF Entities' assets are sold, leased, transferred or otherwise disposed of as an entirety or substantially as an entirety (in one transaction or in a series of transactions) to any Person or Persons which are not at least 80% owned, directly or indirectly, by FirstCity; or (ii) the beneficial owners or trustees of either of the NAF Entities consummate, or approve a definitive agreement or plan for: (A) any merger, consolidation, exchange of certificates, recapitalization, restructuring or other business combination with or into another business trust or any sale of beneficial 3 ownership of either of the NAF Entities (for purposes of this definition, a "Transaction") pursuant to which (x) either of the NAF Entities will not survive, or (y) FirstCity, directly or indirectly, will not hold at least 80% of the beneficial interest in either of the NAF Entities after such Transaction, or (z) FirstCity, directly or indirectly, is entitled to receive any cash, securities or other property, except any such Transaction as a result of which at least 80% of the beneficial ownership of the surviving Person is owned, directly or indirectly, by FirstCity, or (B) the liquidation or dissolution of either of the NAF Entities. Closing Date: the date on which all of the Facility Agreements have been executed by all the parties thereto. Code: The United States Internal Revenue Code of 1986, amended. Collateral: As defined in Section 2 of the Security and Collateral Agent Agreement. Collateral Agent: Texas Commerce Bank National Association, acting in its capacity as Collateral Agent under the Security and Collateral Agent Agreement and any successor Collateral Agent appointed pursuant to the Security and Collateral Agent Agreement. Collateral Agent Certification: As defined in Section 7.08(a)(i) of the Security and Collateral Agent Agreement. Collateral Agent's Certification As defined in Section 7.08(a)(i) of the Collateral Agent Agreement. Collection Account: The Collection Account maintained by the Collateral Agent pursuant to the Paying Agent Agreement. Collection Period: With respect to any Payment Date, the calendar month (or portion of such calendar month, in the case of the first Payment Date) immediately preceding such Payment Date. Collections: All amounts (including, without limitation, Recoveries) due and owing on, or otherwise received by Borrower in respect of the Contracts and the Vehicles. Commitment Period: The period from and including the date hereof to but not including the Commitment Termination Date. Commitment Termination Date: The date which is 360 days after the Closing Date; or such later date to which the Commitment Termination Date may be extended pursuant to Section 2.1(a) of the Credit Agreement. Computer Tape: A computer tape generated by the Borrower containing, without limitation, the information set forth on the Contract List. ContiFinancial: ContiFinancial Services Corporation, a Delaware Corporation. 4 Contract: Each retail installment sale contract for a Vehicle that was originated under a Loan Origination Agreement with an FI approved by the Lender, any amendment, supplement or modification thereto, and all rights and obligations thereunder. Contract List: Each schedule of Contracts delivered by Borrower to Lender and the Collateral Agent with respect to each Borrowing Date identifying, in such detail as such parties may require, each Contract being purchased by Borrower, delivered to the Lender and, for so long as the Security and Collateral Agent Agreement is in effect, the Collateral Agent, pledged by Borrower to the Lender, organized by the name of the Obligor and the state in which the Obligor's billing address is located and setting forth for each such Contract: (i) a number identifying the Contract, (ii) the original amount financed of such Contract, (iii) Annual Percentage Rate, (iv) the original maturity of the Contract, (v) the remaining maturity of the Contract, (vi) the amount of the Obligor's monthly payment, (vii) the purchase price of such Contract, (viii) the name and address of the Obligor on such Contract and (ix) the Outstanding Balance of such Contract. Contractual Obligation: As to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. Credit Agreement: The Warehouse Credit Agreement dated as of May 17, 1996 between Borrower, Lender and NAF Corp. Credit Enhancer: A monoline insurer, letter of credit bank or other third- party supplier of credit enhancement, if any. Dealer Assignment: Any agreement pursuant to which a Contract or security interest in a Vehicle has been transferred, sold or assigned by a Vehicle Dealer to Borrower (or to an FI and then assigned to Borrower). Debt: Of a Person on any day, the sum on such day of (a) indebtedness for borrowed money or for the deferred purchase price of property or services, or evidenced by bonds, notes or other similar instruments, (b) obligations as lessee under any operating leases and any leases which shall have been or should be, in accordance with GAAP, recorded as capital leases, and (c) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clause (a) or (b) above. Defaulted Contract: As of any Determination Date, any Contract that as of the end of the preceding Collection Period (a) is classified by the Borrower, on a contractual basis, as 60 or more days past due, or (b) with respect to which the related Vehicle has been repossessed by Borrower. Delinquency Ratio: With respect to the Determination Dates in June and July of 1996, the aggregate Outstanding Contract Balances of all Contracts which are 30 or more days past due as of the end of the preceding Collection Period divided by the aggregate Outstanding Contract Balances of all Contracts as of the end of such preceding Collection Period; with respect to any subsequent 5 Determination Date, the average, as of the last day of each of the three preceding Collection Periods, of the aggregate Outstanding Contract Balance of all Contracts. Delinquent Contract: Any Contract (a) that is classified by the Borrower, on a contractual basis, as 30 or more days past due and (b) that is not a Defaulted Contract. Deposit Amount: means all funds deposited in the Collection Account (i) by the Borrower, pursuant to Section 2.01(a)(iii) of the Paying Agent Agreement or (ii) by the Lender, pursuant to Section 2.01(a)(i) of the Paying Agent Agreement in each case (a) since the end of the immediately preceding Collection Period and (b) which remain on deposit in the Collection Account at the time of the Borrowing Base calculation is being made and, thus have not been applied to the acquisition of Contracts. Deposited Funds: On any day, all Principal Collections on deposit in or otherwise to the credit of the Collection Account at the close of business on the previous Business Day. Determination Date: With respect to a Collection Period, the tenth day following the end of such Collection Period. Dollars and $: Lawful money of the United States of America. EDS: Electronic Data Systems Corporation, a Texas corporation. Eligible Amount: means the amount on deposit in the Collection Account at the end of the immediately preceding Collection Period, less (i) the interest due to Lender on the Facility on the interest payment date which next follows the end of the such Collection Period, (ii) the Servicing Fees to be due to the Servicer on the 15th day of the month which next follows the end of such Collection Period and (iii) $250,000, representing miscellaneous amounts. Eligible Contract: On any day, a Contract (a) that arises from the completed delivery of a Vehicle and which has been fully performed by Borrower and the Dealer party thereto, (b) that arises from the normal course of the Dealer's business, (c) that is not a Defaulted Contract, (d) that is not a Delinquent Contract; provided, that this clause (d) shall not apply to WAMCO Contracts at the time the Advance is made against such WAMCO Contracts, (e) the Obligor of which is a natural person residing in any state of the United States or the District of Columbia, (f) the Obligor of which is not a government or governmental subdivision or agency, (g) the Obligor of which has full power and capacity to enter into such Contract and perform his or her obligations thereunder, (h) as to which the Obligor has executed and delivered an original note that is in full force and effect and constitutes the legal, valid and binding obligation of the Obligor in accordance with its terms, (i) that is denominated and payable in Dollars in the United States, (j) that is not subject to any dispute, litigation, counterclaim or defense, or any offset or right of offset at the time of purchase by Borrower, (k) that has an original term to maturity of not less than 24 nor more than 60 months, (l) that provides for equal monthly payments which will cause the Contract to fully amortize during its term, (m) that has an Annual Percentage Rate of not less than the lesser of (A) 700 basis points over the two-year Treasury rate in effect on the date of origination of such Contract and (B) the maximum interest rate permissible by law with respect to such Contract, (n) that, together with the note applicable thereto, does not contravene 6 any Requirements of Law applicable thereto, (o) with respect to which all required consents, approvals and authorizations have been obtained, (p) as to which the security interest in the Vehicle securing such Contract has been recorded in the name of Borrower or the Collateral Agent and which security interest is in full force and effect and subject to no prior or equal liens, claims or encumbrances, (q) which was originated using the Underwriting Criteria, (r) that requires the Borrower to be named as loss payee or beneficiary (as applicable) under an insurance policy with respect to the Vehicle financed by such Contract and entitles the Borrower to the benefits of such insurance policy and (s) as to which the Representations and Warranties are true and correct, (t) that, if such Contract is a Modified Contract, the Lender has not given the Borrower notice that such Contract is to be excluded as not being an Eligible Contract and (u) as to which the Collateral Agent has issued a Collateral Agent's Certification listing no exceptions. Eligible Deposit Account: Either (i) a segregated account with an Eligible Institution or (ii) a segregated trust account with the corporate trust department of a depository institution organized under the laws of the United States of America or any one of the States thereof or the District of Columbia (or any domestic branch of a foreign bank), having corporate trust powers and acting as trustee for funds deposited in such account, so long as any of the securities of such depository institution have a credit rating acceptable to the Lender. Eligible Institution: A depository institution organized under the laws of the United States of America or any one of the States thereof or the District of Columbia (or any domestic branch of a foreign bank), (A) which has either (1) a long-term unsecured debt rating of at least AA by S&P and Aa by Moody's or otherwise acceptable to the Lender or (2) a short-term unsecured debt rating or certificate of deposit rating of at least A-1 by S&P and P-1 by Moody's or otherwise acceptable to the Lender and (B) whose deposits are insured by the FDIC. ERISA: The Employee Retirement Income Security Act of 1974, as amended. ERISA Affiliate: With respect to any Person (a) any corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as such Person, (b) a partnership or other trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Code) with such Person or (c) a member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as such Person, any corporation described in clause (a) above or any partnership or other trade or business described in clause (b) above. Event of Default: The occurrence of any of the following events: (a) Borrower fails to pay when due any amount payable under the Credit Agreement. (b) Any representation or warranty made or deemed made by Borrower or NAF Corp., in any capacity which is contained in the Facility Agreements or in any agreement, written report or written information furnished at any time under or required by the Facility Agreements shall prove to have been false or incorrect on or as of the date made or deemed made, which remains uncured for five Business Days following NAF Corp.'s receipt of notice 7 thereof, and which is likely to have a material, adverse effect on the financial condition or business prospects of the Borrower or of NAF Corp. (c)(i) Borrower (x) defaults in any payment of principal of or interest on any Debt, beyond the period of grace, if any, provided in the instrument or agreement under which such Debt was created or (y) defaults in the observance or performance of any agreement or condition contained in any instrument or agreement to which it is a party or by which its property or assets are bound, which remains uncured for five Business Days following the Borrower's and NAF Corp.'s receipt of notice thereof. (ii) NAF Corp. (x) defaults in any payment of principal of or interest on any Debt, beyond the period of grace, if any, provided in the instrument or agreement under which such Debt was created and which has an outstanding principal balance of $50,000 or more or (y) defaults in the observance or performance of any agreement or condition contained in any instrument or agreement to which it is a party or by which its property or assets are bound, which remains uncured for five Business Days following NAF Corp.'s receipt of notice thereof, and which is likely to have a material adverse effect on the financial condition or business prospects of NAF Corp. (d) For any reason, Borrower shall cease to have a valid and perfected first priority ownership interest in the Contracts or Lender shall cease to have a valid and perfected first priority security interest in the Collateral or any other collateral pledged under the Facility Agreements or any other Operative Document shall cease to be in full force and effect or cease to be the legal, valid, binding and enforceable obligation of any party thereto. (e) A Bankruptcy Event shall occur with respect to Borrower, NAF Corp. or any Affiliate of NAF Corp. (f) One or more judgments or decrees (in the case of NAF Corp., in an aggregate amount in excess of $50,000) shall have been entered against any NAF Entity which is not paid, bonded, stayed or covered by insurance, provided, that this clause shall not apply to actions relating to individual Contracts, unless a material portion of the Contracts is affected. (g) Borrower or NAF Corp. becomes liable for environmental remediation or compliance expenses or fines, penalties or other charges related to environmental matters in excess of $50,000. (h) Borrower or NAF Corp. or any ERISA Affiliate of Borrower, (i) shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan, (iii) 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 commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Lender, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of 8 ERISA, (v) the Borrower or any ERISA Affiliate shall, or in the reasonable opinion of Lender is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist, with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could subject Borrower or any ERISA Affiliate to any tax, penalty or other liabilities which are materially adverse to the business, operations, prospects, property or financial or other condition of Borrower. (i) Any financial statement delivered pursuant to the Facility Agreements and reported on by any independent certified public accountants shall contain any qualification or exception, or qualification arising out of the scope of the audit. (j) A material adverse change from the date hereof in the business, properties, operations, prospects or financial or other condition of Borrower or NAF Corp., as determined by Lender in its reasonable, good faith business judgment. (k) A material adverse change from the date hereof in the collectibility of the Contracts taken as a whole. (l) Borrower or NAF Corp. becomes an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (m) Borrower shall fail to provide any information required to be provided by Section 6.3 of the Credit Agreement by the time required thereby. (n) Borrower or NAF Corp. shall default in the observance or performance of any other term, condition or covenant under the Facility Agreements and such failure to observe or perform continues for five Business Days. (o) As of any Determination Date, the Delinquency Ratio is greater than or equal to (i) for the Determination Dates in June and July 1996, 30%, or, (ii) for the Determination Dates in August and September 1996, 25% or (iii) thereafter, 15%. (p) As of the November, 1996, Determination Date, the Net Loss Ratio is greater than or equal to 13%; for each Determination Date thereafter, the Net Loss Ratio is greater than or equal to 10%, in each case, on an annualized basis. (q) As of any Determination Date, the average of the Recovery Percentages for the three preceding Collection Periods is less than (i) prior to the Determination Date in September, 1996, 35%, or (ii) thereafter, 45%. (r) As of any date, the Outstanding Facility Balance exceeds the Borrowing Base. (s) A Change of Control shall occur. 9 (t) The aggregate principal amount of Contracts originated is less than $20,000,000 for the first six months following the Closing Date or $25,000,000 for any six month period thereafter. (u) FirstCity shall default in the observance or performance of any term, condition or covenant in the Funding Commitment and such failure to observe or perform continues for five Business Days. (v) Borrower fails to observe any financial covenant set forth in Section 6.15 of the Credit Agreement. (w) Any two FI's cancel their Loan Origination Agreements in any consecutive two-month period, or any FI which accounts for 10% or more of Contract originations (by principal balance, on a rolling six-month basis) cancels its Loan Origination Agreement. (x) An Event of Servicing Termination occurs under the Servicing Agreement. (y) Any NAF Entity shall default in the observance or performance of any term, condition or covenant in any other Facility Agreement and such failure to observe or perform continues for five Business Days. Facility Agreements: The collective reference to the Credit Agreement, the Promissory Note, the Commitment, the Security and Collateral Agent Agreement, the Servicing Agreement, the IBSA, the Loan Origination Agreements and any other agreement or instrument related or delivered to any party to any of the foregoing pursuant to or in connection with any of the foregoing. FDIC: The Federal Deposit Insurance Corporation or any successor thereof. File: With respect to each Contract to be purchased by Borrower: (a) the original Dealer Assignment; (b) the fully executed original of the Contract; (c) documents evidencing or related to any Insurance Policy with respect to a Vehicle; (d) the original or a copy of the credit application of the Obligor, fully executed by such Obligor, such application to be in a form substantially similar to that included in the Credit and Collection Policy; (e) where permitted by law, the original certificate of title and otherwise such documents, if any, that the Servicer keeps on file in accordance with its customary procedures and the Credit and Collection Policy indicating that the Vehicle is owned by the Obligor and subject to the interest of Borrower as first lienholder or secured party; and 10 (f) any and all other documents that Borrower, Collateral Agent or Servicer keeps on file in accordance with its procedures relating to the Contract, Obligor or Vehicle. Finance Charges: Interest charges, late charges, and other fees, charges and similar items with respect to Contracts. FirstCity: FirstCity Financial Corporation, a Delaware corporation. FIs: The financial institutions or agencies (except for Farmers' and Mechanics' Bank, Tammac Corporation and Mellon Bank) which have entered into respective Loan Origination Agreements with the Borrower. Funding Commitment: The Funding Commitment dated as of May 17, 1996 by and between FirstCity and Lender GAAP: Generally accepted accounting principles in effect from time to time in the United States of America. Governing Instrument: The trust instrument which created the Borrower and provides for the governance of its affairs and the conduct of its business. Governmental Authority: Any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. IBSA: The Investment Banking Services Agreement dated as of May 17, 1996 between NAF Corp. and ContiFinancial. Ineligible Contracts: Any Contract that, subsequent to the date of the Borrower's acquisition of such Contract, (A) is determined not to have conformed to the definition of "Eligible Contracts" on such date of purchase or (B) which has become (x) a Defaulted Contract or (y) a Modified Contract which the Lender has rejected from the Borrowing Base or (C) as to which the Servicer has not received the related Lien Certificate by the 136th day following the date on which the Contract was originated. Insolvency: With respect to any Multiemployer Plan, the condition that such plan is insolvent within the meaning of Section 4245 of ERISA. Interest Period: With respect to any Payment Date, the prior calendar month. Lender: ContiTrade Services L.L.C. Lender Commitment: $50,000,000, or such other amount agreed upon in writing by Borrower and Lender. 11 LIBOR: With respect to any Advance, (x) through the end of the Interest Period in which such Advance is made, one-month LIBOR on the related Borrowing Date, and (y) for subsequent Interest Periods, one-month LIBOR on the first day of such Interest Period, in either case as published on such date in the Wall Street Journal. Lien: Any lien, mortgage, security interest, pledge, hypothecation, charge, equity, encumbrance or right of any kind whatsoever (except any lien, mortgage, security interest, pledge, hypothecation, charge, equity, encumbrance or right of any kind granted under the Credit Agreement with respect to the Contracts). Liquidated Contract: A Contract which is a Defaulted Contract and with respect to which the Borrower has concluded that all Recoveries to be received in respect of such Contract have been deposited in the Lockbox Account. Loan: As defined in subsection 2.1 of the Credit Agreement. Loan Origination Agreement: The Non-Standard Auto Loan Origination Agreements, each in substantially the form attached as Exhibit K to the Credit Agreement (or with such changes from such form as are approved by the Lender), entered into between the Borrower and an FI pursuant to which the Borrower agrees to acquire Eligible Contracts, each as form time to time amended, supplemented or modified. Lock-Box: Any lock-box or account to which Obligors remit Collections. Lock-Box Agreement: As defined in Section 4.1(m) of the Credit Agreement. Lock Box Bank: Any institution at which a Lock-Box is kept. Maximum Loan Amount: At any time, the lesser of (a) $50,000,000 and (b) the Borrowing Base. Milco: Milco Loan Servicing Corporation. Modified Contract: As defined in Section 2.2(b) of the Servicing Agreement. Moody's: Moody's Investors Service, Inc. Multiemployer Plan: A "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which Borrower or any of its ERISA Affiliates is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. NAF Corp.: National Auto Funding Corporation, a Texas corporation. NAF Entities: The Borrower, NAF Corp. and all subsidiaries (including trusts) of NAF Corp. 12 Net Loss Ratio: As of any Determination Date, the average, over the three most recent Collection Periods, of the product of (a)(i) the principal balance of all Contracts where (A) the Vehicle has been repossessed and sold, (B) the Vehicle has been repossessed, and more than 30 days has passed since the end of the related redemption period, or (C) the Contract is more than 120 days delinquent or has been written off, less all Recoveries received on each related Contract (net of associated expenses), in each case during the preceding Collection Period, divided by (ii) the principal balance of all Contracts outstanding at the end of such Collection Period and (b) 12. Notice of Borrowing: As defined in Section 2.3 of the Credit Agreement. Obligations: All the unpaid principal amount of, and interest on (including interest accruing on or after any Bankruptcy Event, whether or not a claim for post-filing or post-petition interest is allowed in a proceeding relating thereto, and interest on overdue interest), the Promissory Note and all other obligations and liabilities of Borrower or any Affiliate of the NAF Entities to Lender or any Affiliate of Lender, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Credit Agreement, the Promissory Note, the Facility Agreement and any other document executed and delivered in connection therewith whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all fees and disbursements of counsel to Lender) or otherwise. Obligor: Each Person who is indebted on a Contract. Outstanding Contract Balance: On any day, with respect to any Contract, the principal amount due and owing on such Contract on such day. Outstanding Facility Balance: On any day, with respect to the Loan, the outstanding principal amount of the Loan on such day. Owner Trustee: Delaware Trust Company. Paying Agent: The Collateral Agent, acting in its capacity as paying agent under the Paying Agent Agreement. Paying Agent Agreement: The Paying Agent Agreement dated as of May 17, 1996 among Borrower, Lender and the Paying Agent. Payment Date: As defined in Section 2.4 of the Credit Agreement. PBGC: The Pension Benefit Guaranty Corporation established under ERISA. Permitted Investments: Book-entry securities, negotiable instruments or securities represented by instruments in bearer or registered form which evidence: (i) direct obligations of, and obligations fully guaranteed as to timely payment by, the United States of America; 13 (ii) demand deposits, time deposits or certificates of deposit of any depository institution or trust company incorporated under the laws of the United States of America or any state thereof (or any domestic branch of a foreign bank) and subject to supervision and examination by Federal or State banking or depository institution authorities; provided, however, that at the time of the investment or contractual commitment to invest therein, the commercial paper or other short-term unsecured debt obligations (other than such obligations the rating of which is based on the credit of a person other than such depository institution or trust company) thereof shall have a credit rating from each of S&P and Moody's in the highest investment category granted thereby; (iii) commercial paper having, at the time of the investment or contractual commitment to invest therein, a rating from each of S&P and Moody's in the highest investment category granted thereby; (iv) investments in money market or common trust funds having a rating from each of S&P and Moody's in the highest investment category granted thereby; (v) demand deposits, time deposits and certificates of deposit which are fully insured by the FDIC; (vi) bankers' acceptances issued by any depository institution or trust company referred to in clause (ii) above; and (vii) repurchase obligations with respect to any security that is a direct obligation of, or fully guaranteed by, the United States of America or any agency or instrumentality thereof, the obligations of which are backed by the full faith and credit of the United States of America, in either case entered into with a depository institution or trust company (acting as principal) the deposits of which are insured by the FDIC. Person: An individual, a partnership, a corporation, a limited liability company, a limited liability partnership, a business trust, a joint stock company, a trust, an unincorporated association, a joint venture, a Governmental Authority or other entity of whatever nature. Pipeline Contract: Any Contract funded directly by an FI prior to May 17, 1996, and acquired by the Borrower from such FI. Plan: Any employee benefit plan defined in Section 3(3) of ERISA in respect of which Borrower or any ERISA Affiliate thereof is or at any time within the immediately preceding five years was an "employer" as defined in Section 3(5) of ERISA or may have liability, including liability as a substantial employer, within the meaning of Section 4063 of ERISA and as a contributing sponsor under Section 4069 of ERISA. Principal Collections: Collections other than Finance Charges. Promissory Note: The note issued pursuant to Section 2.2 of the Credit Agreement. 14 Rating Agencies: Moody's Investors Service, Standard & Poor's Corporation, Duff & Phelps Credit Rating Service and Fitch Investors Service. Recoveries: With respect to any Collection Period, the aggregate amount of all cash received by Borrower during such Collection Period in respect of any Contract which is a Defaulted Contract including, through the sale or other disposition of the related Vehicle, proceeds of Insurance Policies with respect to the related Vehicle, or payments made by or on behalf of the Obligor, net of amounts that are legally required to be refunded to the Obligor and net of the Servicer's expenses in connection with such liquidation. Recovery Percentage: With respect to any Collection Period, the percentage equivalent of a fraction, the numerator of which is the aggregate amount of Recoveries deposited in the Collection Account during such Collection Period in respect of Contracts which became Liquidated Contracts during such Collection Period and the denominator of which is the aggregate Outstanding Balance of such Liquidated Contracts. Reorganization: With respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. Reportable Event: Any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder other than those events as to which the thirty day notice period is waived under Sections .13, .14, .18, .19 or .20 of PBGC regulation Section 2615. Representations and Warranties: With respect to any Contract, the representations and warranties made by an FI (including, for this purpose, Tammac Corporation, Mellon Bank and Farmers' and Mechanics' Bank) in the related Loan Origination Agreement. Requirements of Law: As to any Person, the Certificate of Incorporation and By-laws or other organizational or governing documents of such Person and any law, treaty, rule or regulation or determination of any arbitrator or 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 Officer: As to any Person, the chief executive officer, president, vice president-operations, chief financial officer, controller, secretary or treasurer of a corporation, provided, that (a) with respect to any certificate to be delivered by a Responsible Officer, such Responsible Officer shall have personal knowledge of the subject matter of such certificate, and (b) with respect to any other matter to be undertaken by a Responsible Officer, such Responsible Officer shall be duly authorized by all necessary corporate or other action with respect to such matter. S&P: Standard & Poor's Ratings Services, a Division of The McGraw Hill Companies, Inc. SEC: The Securities and Exchange Commission. Securitization: As defined in Section 6.14 of the Credit Agreement. 15 Security and Collateral Agent Agreement: The Security and Collateral Agent Agreement dated as of May 17, 1996 among Borrower, Lender and the Collateral Agent. Servicer: J-Hawk Servicing Corporation, a Texas corporation. Servicing Agreement: The servicing agreement dated as of May 17, 1996 among Borrower, the Servicer and the Collateral Agent. Servicing Report: The report to be delivered by Borrower pursuant to Section 6.2 of the Credit Agreement, substantially in the form of Exhibit I thereto. Single-Employer Plan: A single employer plan, as defined in Section 4001(a)(15) of ERISA, which (a) is maintained for employees of Borrower or an ERISA Affiliate thereof and no Person other than the Borrower and their ERISA Affiliates or (b) was so maintained and in respect of which the Borrower or any ERISA Affiliate thereof could have liability under Title IV of ERISA in the event such plan has been or were to be terminated. Subordinated Debt: Any Debt which (x) is by its terms subordinated to the Obligations, and (y) provides for a non-petition covenant against Borrower. Subordinated Lien: A Lien approved in writing by the Lender, and which secures any Subordinated Debt. Subsidiary: As to any Person, any Person of which a Person owns, directly or indirectly through one or more intermediaries, more than 50% of the Capital Stock or beneficial interest thereof. Tangible Assets: All assets of Borrower except: (i) deferred assets, other than prepaid insurance and prepaid taxes, (ii) patents, copyrights, trademarks, trade names, non-compete agreements, franchises and similar intangibles, (iii) good will, including any amounts, however designated on the balance sheet of Borrower, representing the excess of the purchase price paid for assets or stock over the value assigned thereto on the books of Borrower, (iv) unamortized debt discount and expense, and (v) accounts, notes and other receivables due from Affiliates or employees. Tangible Net Worth: At any date means a sum equal to (i) the net book value (after deducting related depreciation, amortization and other proper reserves) at which the Tangible Assets of Borrower would be shown on a balance sheet at such date in accordance with GAAP applied on a consistent basis, minus (ii) the amount at which the liabilities of Borrower (excluding Subordinated Debt) would be shown on such balance sheet in accordance with GAAP, and including as liabilities all reserves, required in accordance with GAAP, for contingencies and other potential liabilities. Tangible Net Worth Requirement: The total Tangible Net Worth of Borrower is equal to at least $4 million. Taxes: As defined in Section 2.10 of the Credit Agreement. 16 UCC: The Uniform Commercial Code as in effect in the specified jurisdiction or, if no jurisdiction is specified, as in effect in the state whose law, by agreement of the parties, governs the document or agreement in which the term "UCC" appears. Underwriting Criteria: The criteria agreed upon for underwriting Contracts between Borrower and Lender and attached to the Credit Agreement as Exhibit K. Unmatured Event of Default: Any of the events specified in the definition of Event of Default, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. Vehicle: Any new or used automobile or light truck that secures a Contract. Vehicle Dealer: Any seller of automobile or light trucks that originated one or more of the Contracts and transferred, sold or assigned the respective Contract, directly or indirectly, to Borrower under a Dealer Assignment. WAMCO Contract: Any Contract acquired by the Borrower from WAMCO XXIII, Ltd. 17 EXHIBIT B PROMISSORY NOTE New York, New York May 17, 1996 FOR VALUE RECEIVED, the undersigned, N.A.F. Auto Loan Trust, a Delaware business trust (the "Borrower"), promises to pay to the order of ContiTrade Services L.L.C. ("Lender"), on the date specified in Section 2.5 of the Credit Agreement hereinafter referred to, at the office of Lender at 277 Park Avenue, New York, New York, in lawful money of the United States of America and in immediately available funds, the principal amount of FIFTY MILLION DOLLARS AND NO CENTS DOLLARS ($50,000,000), or if less, the aggregate unpaid principal amount of all Advances made by Lender to Borrower pursuant to the Credit Agreement, and to pay interest at such office, in like money, from the date hereof on the unpaid principal amount of such Loans from time to time outstanding at the rate and on the dates specified in Section 2.4 of the Credit Agreement. Lender is authorized to record, on the schedule annexed thereto and made a part hereof or on other appropriate records of Lender, the date and amount of each Loan made by Lender, each continuation thereof, the interest rate from time to time on each Loan and the date and amount of each payment or repayment of principal thereof. Any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded, provided that the failure of Lender to make any such recordation (or any error in such recordation) shall not affect the obligations of Borrower hereunder or under the Credit Agreement in respect of the Loan. This Promissory Note is the Promissory Note referred to in the Warehouse Credit Agreement dated as of May 17, 1996 (as amended, supplemented or otherwise modified and in effect from time to time, the "Credit Agreement") between Borrower, Lender and NAF Corp., and is entitled to the benefits thereof. Capitalized terms used herein without definition have the meanings assigned to them in the Credit Agreement. This Promissory Note is subject to original and mandatory prepayment as provided in the Credit Agreement. Upon the occurrence of an Event of Default, the Lender shall have all of the remedies specified in the Credit Agreement, and Borrower hereby waives presentment, demand, protest and all notices of any kind. 1 THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. N.A.F. AUTO LOAN TRUST By: DELAWARE TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee on behalf of N.A.F. AUTO LOAN TRUST By: Name: Richard N. Smith Title: Vice President 2 Schedule 1 to PROMISSORY NOTE Interest Prepayment Notation Date Principal on Loans of Loans By - ---- --------- -------- -------- -- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3 EXHIBIT C NOTICE OF BORROWING N.A.F. Auto Loan Trust hereby requests that ContiTrade Services L.L.C. make a Loan to it on [insert Borrowing Date] in the amount of [amount of Loan requested] by crediting Texas Commerce Bank Account No. _______ by 4:00 p.m. (New York City time) on [insert Borrowing Date] (capitalized terms used herein have the meaning assigned to them in the Warehouse Credit Agreement dated as of May __, 1996 as amended, modified or supplemented from time to time). N.A.F. Auto Loan Trust hereby certifies as of the date hereof that the representations and warranties made in Section 3 of the Credit Agreement are true and correct on and as of the Borrowing Date for such Loan, both before and after giving effect to such Loan. N.A.F. AUTO LOAN TRUST By: DELAWARE TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee on behalf of N.A.F. AUTO LOAN TRUST By: Name: Richard N. Smith Title: Vice President 1 Attachment A to Notice of Borrowing TRUSTEE'S CERTIFICATE The undersigned, [TRUSTEE'S NAME], Trustee of N.A.F. AUTO LOAN TRUST, a Delaware business trust ("Borrower"), hereby gives this Certificate to induce CONTITRADE SERVICES, L.L.C. ("Lender") to consummate certain financial accommodations with Borrower pursuant to the terms of the Warehouse Credit Agreement (as amended, modified or supplemented from time to time and together with the schedules and exhibits thereto, the "Credit Agreement") dated as of May __, 1996. The undersigned, as Trustee, hereby certifies to Lender that: 1. The representations and warranties of Borrower contained in the Credit Agreement are true and correct in all materials respects on and as of this day. 2. Borrower is in compliance with all of the terms and provisions set forth in the Credit Agreement required to be complied with or performed by Borrower on or before the date hereof. 3. No Event of Default or Default (as defined in the Credit Agreement) has occurred and is continuing as of today's date. 4. The Collateral is not subject to any Lien, except Liens created by the Operative Documents. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings assigned to them in the Credit Agreement. IN WITNESS WHEREOF, the undersigned has executed and delivered this Certificate this ______ day of _____________, ____. N.A.F. AUTO LOAN TRUST By: DELAWARE TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee on behalf of N.A.F. AUTO LOAN TRUST By: Name: Richard N. Smith Title: Vice President 2 Schedule I LIST OF DOCUMENTS 3 EX-10.15 5 SECURITY AND COLLATERAL AGENT AGREEMENT EXHIBIT 10.15 SECURITY AND COLLATERAL AGENT AGREEMENT among N.A.F. AUTO LOAN TRUST (as Borrower) CONTITRADE SERVICES L.L.C. (as Lender) and TEXAS COMMERCE BANK NATIONAL ASSOCIATION (as Collateral Agent) ---------------------- Dated as of May 17, 1996 ---------------------- SECURITY AND COLLATERAL AGENT AGREEMENT TABLE OF CONTENTS Page SECTION 1. DEFINED TERMS................................................. 1 SECTION 2. SECURITY INTERESTS............................................ 2 SECTION 3. CERTAIN RIGHTS OF LENDER WITH RESPECT TO COLLATERAL........... 3 SECTION 4. REMEDIES UPON THE OCCURRENCE OF AN EVENT OF DEFAULT........... 4 SECTION 5. REPRESENTATIONS, WARRANTIES AND COVENANTS..................... 5 SECTION 6. [Reserved].................................................... 6 SECTION 7. THE COLLATERAL AGENT.......................................... 6 7.01. Appointment................................................... 6 7.02. Exculpatory Provisions........................................ 6 7.03. Reliance by Collateral Agent.................................. 7 7.04. Notice of Default............................................. 7 7.05. Non-Reliance on Collateral Agent.............................. 7 7.06. Successor Collateral Agent.................................... 8 7.07. Delivery of Collateral and Permitted Investments.............. 8 7.08. Duties and Covenants of Collateral Agent...................... 8 SECTION 8. AMENDMENTS AND WAIVERS........................................ 9 SECTION 9. NOTICES....................................................... 10 SECTION 10. LIMITATION ON COLLATERAL AGENT'S DUTY IN RESPECT OF COLLATERAL.................................................... 11 SECTION 11. SEVERABILITY.................................................. 11 SECTION 12. NO WAIVER; CUMULATIVE REMEDIES................................ 11 SECTION 13. PAYMENT OF EXPENSES AND TAXES................................. 12 SECTION 14. SUCCESSORS AND ASSIGNS; GOVERNING LAW......................... 13 SECTION 15. ENFORCEMENT RIGHTS OF LENDER.................................. 14 SECTION 16. BANKRUPTCY PETITION AGAINST THE BORROWER...................... 14 i SECURITY AND COLLATERAL AGENT AGREEMENT SECTION 17. MISAPPLICATION OF FUNDS....................................... 14 SECTION 18. COUNTERPART SIGNATURES........................................ 15 SECTION 19. THIRD PARTY BENEFICIARY....................................... 15 SECTION 20. STATUS OF COLLATERAL AGENT.................................... 15 SECTION 21. ACTS OF LENDER................................................ 15 ii SECURITY AND COLLATERAL AGENT AGREEMENT SECURITY AND COLLATERAL AGENT AGREEMENT, dated as of May 17, 1996, made by and among N.A.F. AUTO LOAN TRUST, a Delaware business trust (the "Borrower"), CONTITRADE SERVICES, L.L.C., a Delaware Limited Liability Company (the "Lender") and TEXAS COMMERCE BANK NATIONAL ASSOCIATION ("TCB"), as collateral agent (in such capacity, the "Collateral Agent"). W I T N E S S E T H WHEREAS, the Borrower has entered into a Credit Agreement dated as of May 17, 1996 (as may from time to time, be amended, supplemented, or modified, the "Credit Agreement" with the Lender, the Borrower and National Auto Funding Corporation ("NAF Corp."), pursuant to which the Borrower will take out loans (the "Loans") from time to time; WHEREAS, the Borrower intends to enter into from time to time Non-Standard Contract Origination Agreements (each, as from time to time amended, supplemented or modified, a "Loan Origination Agreement" and, collectively, the "Loan Origination Agreements") with certain financial institutions and agencies (the "FIs"), pursuant to which the Borrower will agree to purchase Eligible Contracts; and WHEREAS, it is a condition to the obligations of the Lender to make the Facility available to the Borrower that this Security and Collateral Agent Agreement be executed and delivered. NOW, THEREFORE, to induce the Lender to make the Facility available to the Borrower the parties hereto hereby agree as follows: SECTION 1. DEFINED TERMS. (a) The terms "inventory", "goods", "accounts", "contract rights", "chattel paper", "general intangibles", and "documents" have the respective meanings ascribed in the UCC. (b) Capitalized terms used herein undefined shall, unless otherwise defined herein, have the respective meanings ascribed in the Credit Agreement, including the "Definitions List" attached as Exhibit A thereto; and the following terms shall have the following meanings: "Collateral" shall have the meaning assigned to such term in Section 2 hereof. 1 SECURITY AND COLLATERAL AGENT AGREEMENT "Collateral Agent Fee" shall have the meaning set forth in a separate letter agreement between Borrower and the Collateral Agent. "Proceeds" shall have the meaning assigned such term under the UCC of the State of New York, and of each other jurisdiction whose law governs the grant or perfection of the Collateral Agent's interest in the particular proceeds of the Collateral and shall also include (to the extent not already included): (i) any and all proceeds of any insurance, indemnity, warranty, guaranty or letter of credit payable to the Borrower from time to time with respect to any of the Collateral, (ii) any and all payments (in any form whatsoever) made or rights to amounts payable to the Borrower from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental body, authority, bureau or agency (or any person acting under color of governmental authority), (iii) any and all other amounts, products, rents or profits from time to time paid or payable under or in connection with the Collateral and (iv) all additions to or substitutions or replacements for any of the Collateral. "Responsible Officer" shall mean, when used with respect to the Collateral Agent, any officer within the corporate trust department in Dallas, Texas (or any successor thereof) including any vice president, assistant vice president, or any officer or assistant officer of the Collateral Agent customarily performing functions similar to those performed by any of the above-designated officers. SECTION 2. SECURITY INTERESTS. (a) As security for the prompt, complete and unconditional payment and performance of all Obligations of the Borrower, the Borrower hereby pledges, assigns, transfers and delivers to the Collateral Agent for the benefit of the Lender, and grants to the Collateral Agent for the benefit of the Lender, a continuing first lien on, and first and prior security interest in, all of the Borrower's assets and properties, real, personal and mixed, tangible and intangible, of any kind or description, whether now owned or at any time hereafter acquired, whether now existing or hereafter acquired, and wherever located (collectively, the "Collateral") including, without limitation all estate, right, title and interest in, to and under: (i) all inventory, goods, accounts, contract rights, chattel paper, instruments, general intangibles and documents; (ii) each Contract, including without limitation, all rights to payments thereunder, purchased by or otherwise conveyed to or established by the Borrower pursuant to the related Loan Origination Agreement(s); (iii) each Financed Vehicle and all other property, now or hereafter acquired, securing or evidenced by, each Contract including, without limitation, the certificate of title relating to each Financed Vehicle, any insurance proceeds with respect to any Financed Vehicle or Contract, the proceeds of any repossession and liquidation of an Financed Vehicle, rights under judgments with respect to defaulted obligors, right to deficiency judgments with 2 SECURITY AND COLLATERAL AGENT AGREEMENT respect to defaulted obligors and rights under any service contracts with respect to any Financed Vehicle; (iv) all bank and trust accounts (including, without limitation, the Lockbox Account and the Collection Account and all moneys, checks, instruments, documents, securities, Investments, deposits and other credits (whether or not permitted by the Facility Agreements) credited to the Collection Account, or otherwise held by the Collateral Agent; (v) the certificates of title relating to the Contracts, credit applications, payment history records, and other origination and servicing records relating to the Contracts; (vi) all securities and other Investments held at any time by the Borrower including any and all subordinate certificates (including any "interest only" certificates and the rights to any other distributions from any securitization) received by the Borrower or any Affiliate of the Borrower from any securitization, together with appropriate bond powers, duly executed (the "Subordinate Certificates"); (vii) each Facility Agreement; and (viii) all Proceeds of any of the foregoing. (b) All rights of the Collateral Agent and the Lender and all liens and security interests granted hereunder, shall be absolute, unconditional and irrevocable unless and until released pursuant to the Facility Agreements, irrespective of any condition or circumstance whatsoever. (c) The grant of the security interest to the Collateral Agent pursuant to this Section 2 shall not: (i) relieve the Borrower from the performance of any term, covenant, condition or agreement on the Borrower's part to be performed or observed under or in connection with the Collateral, (ii) impose any obligation on the Collateral Agent or the Lender to perform or observe any such term, covenant, condition or agreement on the Borrower's part to be so performed or observed, or (iii) impose any liability on the Collateral Agent or the Lender for any act or omission on the part of the Borrower, or any Person acting as agent for or on behalf of the Borrower, relative to or for any breach of any representation or warranty on the part of the Borrower in connection with the Collateral. SECTION 3. CERTAIN RIGHTS OF LENDER WITH RESPECT TO COLLATERAL. Upon the occurrence and during the continuance of an Event of Default, the Borrower hereby irrevocably authorizes the Collateral Agent to execute and deliver, as the attorney-in-fact of the Borrower, any consent, waiver or amendment which, under the terms of any Facility Agreement, is or may be executed and delivered by the Borrower with respect to the Collateral, subject to the provisions of the Facility Agreements; provided, however, that the Collateral Agent shall have no duty or obligation to execute and deliver any such consent, waiver or amendment unless directed in writing to take the actions specified therein by the Lender; and provided, further, that the Collateral Agent shall 3 SECURITY AND COLLATERAL AGENT AGREEMENT not be required to take any action which the Collateral Agent reasonably believes may be contrary to applicable law or which would expose the Collateral Agent to financial liability if the Collateral Agent has reasonable grounds to believe that repayment of such financial liability is not reasonably assured to it. The Borrower hereby agrees to remit to the Collateral Agent for deposit in accordance with this Agreement any and all Proceeds of any Collateral received by the Borrower (other than money paid to the Borrower by the Collateral Agent in accordance with the Facility Agreements). SECTION 4. REMEDIES UPON THE OCCURRENCE OF AN EVENT OF DEFAULT. (a) (i) If at any time an Event of Default shall have occurred and be continuing, the Collateral Agent shall, if directed by the Lender, without demand of performance or other demand, advertisement or notice of any kind (except for any notice of the time and place of public or private sale required by law) to or upon the Borrower or any other Person (all of which demands, advertisements and/or notices are hereby expressly waived), and in its own name or in the name of the Lender, forthwith demand, collect, receive, sue for, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, grant an option or options to purchase, contract to sell or otherwise dispose of and deliver said Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at any location or locations at the option of the Collateral Agent acting upon any instructions received from the Lender, all upon such terms and conditions and at such prices as the Lender may deem advisable, for cash or on credit or for future delivery without assumption of any credit risk, with the right of the Collateral Agent or the Lender upon any such public sale or sales to purchase the whole or any part of said Collateral so sold, free of any right of redemption in the Borrower, which right is hereby expressly waived and released. At the instruction of the Lender, the Collateral Agent may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. (ii) If at any time an Event of Default shall have occurred and be continuing and the Lender has given written notice to the Collateral Agent as to the disposition of the Collateral or as to the exercise of remedies against the Collateral, the Collateral Agent hereby agrees to follow such direction; provided, however, no provision of this Agreement shall require the Collateral Agent to take any action which it or its counsel deems to be unlawful nor shall the Collateral Agent be obligated to expend or risk its own funds or otherwise incur any financial liability in the performance of any rights, powers or duties hereunder, if the Collateral Agent shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Until all Obligations have been repaid and satisfied in full, the Collateral Agent shall be obligated, subject to the foregoing proviso, to take direction only from the Lender as to, upon the occurrence and during the continuance of an Event of Default, the disposition of the Collateral, or the exercise of remedies against the Collateral. 4 SECURITY AND COLLATERAL AGENT AGREEMENT (iii) If an Event of Default shall have occurred and be continuing, then the Collateral Agent shall, if directed by the Lender, at any time thereafter, without demand of performance or other demand, succeed to the Borrower's rights and privileges with respect to each Facility Agreement. (iv) If an Event of Default shall have occurred and be continuing, the Collateral Agent shall, if directed by the Lender, re-register the Subordinate Certificates in the name of the Lender (which Subordinate Certificates will in turn be re-registered to the appropriate NAF Entity when and if all Obligations have been repaid and satisfied in full). (b) If any notification of a proposed disposition of the Collateral is required by law, such notification shall be deemed reasonably and properly given if made in any manner provided in Section 9 hereof at least ten days before such disposition. (c) In addition to the rights, powers and remedies granted to it in this Security and Collateral Agent Agreement and in any other instrument or agreement securing, evidencing or relating to the Loans, the Collateral Agent shall have all of the rights, powers and remedies now or hereafter permitted in law or equity, including, without limitation, those of a secured party under the UCC of the State of New York and any other applicable jurisdiction. SECTION 5. REPRESENTATIONS, WARRANTIES AND COVENANTS. The Borrower represents, warrants and agrees that: (a) No security agreement, financing statement, equivalent security or lien instrument or continuation statement listing the Borrower as debtor covering all or any part of the Collateral is on file or of record in any jurisdiction, except such as may have been filed, for the benefit of the Lender recorded or made by the Borrower in favor of the Collateral Agent pursuant to this Security and Collateral Agent Agreement or the Credit Agreement. (b) This Security and Collateral Agent Agreement is effective to create a valid and continuing Lien on the Collateral in favor of the Collateral Agent for the benefit of the Lender, which Lien is prior to all other Liens, and is enforceable as such as against creditors of and purchasers from the Borrower. All action necessary or desirable to protect and perfect such security interest has been duly taken. (c) The Borrower's chief executive office is at 4545 Fuller Drive, Suite 101, Irving, Texas 75038. The Borrower will not change its name and will not change its principal place of business or chief executive office unless the Borrower shall have given the Collateral Agent at least thirty (30) days prior written notice thereof and shall have taken all action necessary to assure continuous perfection of the security interest held by the Collateral Agent in the Collateral as evidenced by an opinion of counsel addressed to the Collateral Agent and the Lender to the effect that the lien and security interest created by this Security and Collateral Agent Agreement with respect to such 5 SECURITY AND COLLATERAL AGENT AGREEMENT Collateral will continue to be maintained, and that the priority thereof will not be affected, after giving effect to such action or actions. (d) At any time and from time to time, and at the sole expense of the Borrower, the Borrower will promptly and duly execute and deliver any and all such further instruments and documents and take such further action as the Lender may reasonably deem desirable in obtaining the full benefits of this Security and Collateral Agent Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the liens and security interests granted hereby. The Borrower also hereby authorizes the Collateral Agent to file any such financing or continuation statement the signature of the Borrower to the extent permitted by applicable law; provided, however, that such authorization shall not be deemed to create a duty in the Collateral Agent to monitor the compliance of the Borrower with the foregoing covenants and provided further that the duty of the Collateral Agent to execute any instrument pursuant to the authorizations of Section 5(d) or (f) shall arise only if a Responsible Officer of the Collateral Agent has actual knowledge, or has received written notice, of the failure of the Borrower to comply with the foregoing covenants. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note or other instrument, or any chattel paper, the Borrower shall, upon request of the Lender, duly endorse such note, instrument or chattel paper to the order of the Collateral Agent and deliver such note, instrument or chattel paper to the Collateral Agent promptly, and shall take such other actions and execute such other documents as shall be requested by the Lender to perfect the Collateral Agent's interest in such note, instrument or chattel paper. (e) The Borrower will warrant and defend the Collateral Agent's right, title and interest in and to the Collateral, for the benefit of the Lender against the claims and demands of all Persons whomsoever. (f) All authorizations in this Security and Collateral Agent Agreement for the Collateral Agent to endorse checks, instruments and securities and to execute, deliver and file financing statements, continuation statements, security agreements and other instruments with respect to the Collateral are powers coupled with an interest and are irrevocable so long as any Loans are outstanding. SECTION 6. [Reserved] SECTION 7. THE COLLATERAL AGENT. 7.01 Appointment. By accepting the benefits of the security interest granted herein, the Lender hereby designates and appoints Texas Commerce Bank National Association as the Collateral Agent of the Lender under this Security and Collateral Agent Agreement, and the Lender authorizes Texas Commerce Bank National Association as the Collateral Agent for the Lender, to take such action on its behalf under the provisions of this Security and Collateral Agent Agreement and to exercise such powers and perform such duties as are expressly delegated to the Collateral Agent by the terms of this Security and Collateral Agent Agreement together with such other powers as are reasonably incidental 6 SECURITY AND COLLATERAL AGENT AGREEMENT thereto but in each instance solely at the written instruction of the Lender. Notwithstanding any provision to the contrary elsewhere in this Security and Collateral Agent Agreement , the Collateral Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with the Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Security and Collateral Agent Agreement or otherwise exist against the Collateral Agent. Texas Commerce Bank National Association hereby accepts its appointment as Collateral Agent, subject to, and in reliance upon, the provision of this Section 7.01. 7.02 Exculpatory Provisions. Neither the Collateral Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Security and Collateral Agent Agreement (except for its or such Person's own gross negligence or wilful misconduct), or (ii) responsible in any manner to any of the Lender for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained herein or in any Loan Origination Agreement, the Administration Agreement, the Servicing Agreement, the Credit Agreement or in any certificate, report, statement or other document referred to or provided for in, or received by the Collateral Agent under or in connection with, this Agreement, any other Facility Agreement, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency (except with respect to the Collateral Agent) of this Agreement, any other Facility Agreement, or the Collateral or for any failure of the Borrower to perform its obligations hereunder or under any other Facility. The Collateral Agent shall not be under any obligation to the Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, any of the Facility Agreements, or to inspect the properties, books or records of the Borrower. 7.03 Reliance by Collateral Agent. The Collateral Agent shall be entitled to rely, and shall be fully protected in relying, upon any Loan, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation 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 Borrower), independent accountants and other experts selected by the Collateral Agent. The Collateral Agent shall be fully justified in failing or refusing to take any action under this Security and Collateral Agent Agreement unless it shall first receive such written advice or concurrence as it deems appropriate or it shall first be indemnified to its satisfaction against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Collateral Agent may from time to time consult with legal counsel, independent accountants or other experts of its own selection in the event of any disagreement, controversy, question or doubt as to the construction of any provision of this Agreement or any of its duties hereunder, and the Collateral Agent shall be fully protected in acting in good faith in reliance upon the advice or opinion of any such counsel or other expert. 7.04 Notice of Default. The Collateral Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default under the Credit Agreement unless a Responsible Officer has received written notice from the Lender or the Borrower referring to this Security and 7 SECURITY AND COLLATERAL AGENT AGREEMENT Collateral Agent Agreement and describing such Event of Default or unless a Responsible Officer otherwise has actual knowledge of such Event of Default. 7.05 Non-Reliance on Collateral Agent. Neither the Collateral Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to the Lender, and no act by the Collateral Agent hereafter taken, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by the Collateral Agent to the Lender. The Lender represents (or will be deemed to have represented at such time as such party becomes a Lender hereunder) to the Collateral Agent that it has, independently and without reliance upon the Collateral Agent, 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 Borrower and made its own decision to extend credit to the Borrower. The Lender will, independently and without reliance upon the Collateral Agent, 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 Security and Collateral Agent 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 Borrower. Except for notices, reports and other documents expressly required to be furnished by the Collateral Agent hereunder, the Collateral Agent shall have no duty or responsibility to provide the Lender with any credit or other information concerning the business, operations, property, financial and other condition or creditworthiness of the Borrower which may come into the possession of the Collateral Agent or any of its officers, directors, employees, agencies, attorneys-in-fact or affiliates. 7.06 Successor Collateral Agent. The Collateral Agent may resign as collateral agent upon 60 days' notice to the Borrower, NAF Corp. and the Lender. The Collateral Agent may be removed at any time by the Lender. No such resignation or removal shall be effective unless and until a successor collateral agent named by the Borrower and approved by the Lender has accepted appointment as such pursuant to this Agreement and in the case of a removal, any and all amounts then due to the Collateral Agent hereunder have been paid in full. Such successor collateral agent shall succeed to the rights, powers and duties of the Collateral Agent, and the term "Collateral Agent" shall mean such successor collateral agent effective upon its appointment, and the former Collateral Agent's rights, powers and duties as Collateral Agent shall be terminated, without any other or further act or deed on the part of such former Collateral Agent. Such successor collateral agent shall be entitled to amend any UCC financing statements and any other filings, recordation and declarations it deems advisable or necessary in connection with such termination and cancellation. After any retiring Collateral Agent's resignation or removal hereunder as Collateral Agent, the provisions of this Section 7.06 and Section 13 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Collateral Agent under this Security and Collateral Agent Agreement . Notwithstanding the foregoing, if no successor collateral agent shall be appointed as aforesaid, or if appointed, such successor shall not have accepted its appointment within thirty (30) days after resignation of the Collateral Agent, the Collateral Agent may petition a court of competent jurisdiction to make such appointment. 8 SECURITY AND COLLATERAL AGENT AGREEMENT 7.07 Delivery of Collateral and Permitted Investments. All certificates representing or evidencing the Collateral and Permitted Investments from time to time which are delivered to and held by or on behalf of the Collateral Agent pursuant hereto shall, in the case of the Collateral, be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank. The Lender hereby appoints TCB as its agent for the purpose of holding the Collateral and Permitted Investments which are delivered to it. The Collateral Agent shall be the agent solely of the Lender and shall not be the agent of the Borrower. The Collateral Agent shall not release possession of any Contract, any Permitted Investments or the security interest in any Financed Vehicle or Permitted Investment except as permitted in the next sentence, or upon the written instruction of the Lender. The Collateral Agent shall not release possession of any Contracts to the Servicer or any documents related thereto except (i) upon receipt of a trust receipt substantially in the form attached hereto as Exhibit A obligating the Servicer to hold same in trust for the benefit of the Lender and obligating the Servicer to return same when the need therefor no longer exists unless such Trust Receipt indicates that the related Contract has been paid in full. 7.08 Duties and Covenants of Collateral Agent. (a) The Collateral Agent undertakes to perform the duties as are set forth in this Agreement, including, without limitation: (i) reviewing each Contract delivered to it by the Borrower against the Contract List attached to the related Contract Acquisition Funding Request, ascertaining whether the information listed in items (ii), (iii) and (viii) of the Contract List is accurate with respect to such Contract; within three Business Days of the Collateral Agent's receipt of any Contract, provide a certification to the Borrower and the Lender (the "Collateral Agent's Certification") listing (x) the Contracts so reviewed by the Collateral Agent and in its possession and (y) whether there were any exceptions to the Collateral Agent's review of such items (ii), (iii) and (viii) on the Contract List; (ii) maintaining possession of such Contracts on behalf of the Lender, and releasing such Contracts from the Collateral Agent's possession only upon the Lender's written instruction or pursuant to Section 7.07 hereof; (iii) upon request, providing information reasonably within its possession and within reasonable time constraints regarding the Collateral and to the NAF Corp., the Servicer, the Lender and the FIs; (iv) acting as Collateral Agent of all documents related to the Collateral which are delivered to it; (v) providing confirmation to the Paying Agent of the Borrowing Base, and whether a Borrowing Base Deficiency exists on any day; 9 SECURITY AND COLLATERAL AGENT AGREEMENT (vi) cooperating with the Servicer, as requested by the Servicer at the expense of the Borrower, in enforcing any Contracts or Insurance Policies; (vii) furnishing the Servicer with any limited powers of attorney and other documents which the Servicer may reasonably request in writing and which the Servicer deems necessary or appropriate and take any other steps which the Servicer may deem necessary or appropriate to enable the Servicer to carry out its servicing and administrative duties under the Servicing Agreement; (viii) providing to the Lender and the Borrower a manifest of Contracts then held by the Collateral Agent, on the first Business Day of each week, at the end of each month, and otherwise upon request of the Lender; and (ix) upon a Responsible Officer obtaining actual knowledge of the occurrence of an Event of Servicing Termination or an Event of Default, promptly give notice to the Lender and the Borrower of such occurrence. (b) The Collateral Agent covenants and agrees that it will not release any Lien created hereby on any of the Collateral, release possession of any of the Collateral held by it, or affirmatively create any Lien on the Collateral adverse to the Lien created hereby, except, in all cases, as expressly permitted hereby or as directed by the Lender. The Collateral Agent shall give the Lender prompt written notice of any Liens on any of the Collateral adverse to the Lien created hereby, of which a Responsible Officer obtains actual knowledge. SECTION 8. AMENDMENTS AND WAIVERS. The parties hereto may, from time to time, enter into written amendments, supplements or modifications hereto for the purpose of adding any provision to this Security and Collateral Agent Agreement or changing in any manner the rights of the Collateral Agent or the Borrower hereunder. The Collateral Agent may, but shall not be obligated to, enter into any such supplement, amendment or modification that affects the Collateral Agent's own rights, duties or immunities under this Security and Collateral Agent Agreement or otherwise. The parties hereto agree not to execute any supplement, amendment or modification to any Facility Agreement to which the Collateral Agent is not a party, without the prior written consent of the Collateral Agent, if the effect of such supplement. amendment or modification would be to affect the Collateral Agent's rights, duties, or immunities thereunder or under this Security and Collateral Agent Agreement . 10 SECURITY AND COLLATERAL AGENT AGREEMENT SECTION 9. NOTICES. Unless otherwise expressly provided herein, all notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or when deposited in the mail, postage prepaid, or in the case of telegraphic notice, when delivered to the telegraph company, or, in the case of facsimile notice, when sent, confirmation received, addressed as follows, or to such other addresses as may be hereafter notified by the respective parties hereto: The Borrower and the Owner Trustee: N.A.F. Auto Loan Trust 4545 Fuller Drive Suite 101 Irving, Texas 75038 Telecopy: (214) 791-0464 Delaware Trust Company 900 Market Street, 2-M Wilmington, DE 19801 Attention: Corporate Trust Administration Telecopy: (302) 421-7387 with a copy to: National Auto Funding Corporation 4545 Fuller Drive Suite 101 Irving, Texas 75038 Telecopy: (214) 791-0464 The Collateral Agent: Texas Commerce Bank National Association 2200 Ross Avenue Fifth Floor Dallas, Texas 75201 Attention: Corporate Trust Administration NAF Auto Loan Trust Telecopy: (214) 965-3577 11 SECURITY AND COLLATERAL AGENT AGREEMENT The Lender: ContiTrade Services L.L.C. 277 Park Avenue New York, New York 10172 Attention: Chief Counsel Telecopy: (212) 207-2935 provided, that any notice to or upon the Borrower shall be deemed to have been duly given or made as aforesaid when so given or made to the Borrower whether or not any other party indicated above as the recipient of a copy thereof shall have received a copy of each notice. SECTION 10. LIMITATION ON COLLATERAL AGENT'S DUTY IN RESPECT OF COLLATERAL. Except as set forth herein and beyond the safe custody thereof, the Collateral Agent shall not have any duty as to any Collateral in its possession or control or the possession or control of any agent or nominee of it or any income thereof or as to the preservation of rights against prior parties or any other rights pertaining thereto. SECTION 11. SEVERABILITY. Any provision of this Security and Collateral Agent Agreement which is prohibited or unenforceable in any jurisdiction shall as to such jurisdiction be ineffective to the extent of such prohibition or unenforceability without invalidation of the remaining provisions hereof and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 12. NO WAIVER; CUMULATIVE REMEDIES. Neither the Collateral Agent nor the Lender shall by any act, delay, omission or otherwise be deemed to have waived any of its or their rights or remedies hereunder and no waiver shall be valid unless in writing, signed by the Collateral Agent on behalf of the Lender, and then only to the extent therein set forth. A waiver by the Collateral Agent of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Collateral Agent or the Lender would otherwise have had on any future occasion. No failure to exercise nor any delay in exercising on the part of the Collateral Agent or the Lender any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or future exercise thereof or the exercise of any other right, power or privilege. The rights and remedies hereunder provided are cumulative and may be exercised singly or concurrently and are not exclusive of any rights and remedies provided by law. 12 SECURITY AND COLLATERAL AGENT AGREEMENT SECTION 13. PAYMENT OF EXPENSES AND TAXES. (a) The Borrower hereby agrees to pay to the Collateral Agent a fee for its services hereunder equal to the Collateral Agent Fee. The Borrower and NAF Corp., jointly and severally, each agrees to pay, indemnify, and to hold the Collateral Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp and other similar taxes, if any, which may be payable or determined to be payable in connection the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Security and Collateral Agent Agreement , and any such other documents, and to pay, indemnify, and hold the Collateral Agent and its officers, directors, shareholders, employees, agents and representatives harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Security and Collateral Agent Agreement and any such other documents (including but not limited to those incurred by any negligent act or negligent omission to act of the Collateral Agent) (all the foregoing, collectively, the "indemnified liabilities"); provided, that the Borrower and NAF Corp. shall not be liable to the Collateral Agent for any losses incurred by the Collateral Agent as a result of the fraudulent actions, misrepresentations, gross negligence or willful misconduct of the Collateral Agent. The obligations of the Borrower under this Section 13 shall survive the termination of this Security and Collateral Agent Agreement and the discharge of the other obligations of the Borrower hereunder and also shall survive the resignation or removal of the Collateral Agent hereunder. (b) Promptly after receipt by the Collateral Agent of notice of the commencement of any action, such Collateral Agent shall, if a claim in respect thereof is to be made against the Borrower under this Section 13, notify the Borrower in writing of the commencement thereof; but the omission so to notify the Borrower will not relieve it from any liability which it may have to the Collateral Agent except to the extent the Borrower is prejudiced thereby. In case any action is brought against the Collateral Agent, and it notifies the Borrower of the commencement thereof, the Borrower will be entitled to appoint counsel satisfactory to the Collateral Agent and the Borrower (who shall not, except with the consent of the Collateral Agent, be counsel to the Borrower or the NAF Corp.) to represent the Collateral Agent in such action; provided, however, that, if the defendants in any action include both the Collateral Agent and the Borrower and the Collateral Agent shall have reasonably concluded that there may be legal defenses available to it which are different from or additional to those available to the Borrower, the Collateral Agent shall have the right to select separate counsel to defend such action on behalf of it. Upon receipt of notice from the Borrower to the Collateral Agent of its election so to appoint counsel to defend such action and approval by the Collateral Agent of such counsel, the Borrower will not be liable to the Collateral Agent under this Section 13 for any legal or other expenses subsequently incurred by the Collateral Agent in connection with the defense thereof unless (i) the Collateral Agent shall have employed separate counsel in accordance with the proviso to the next preceding sentence, (ii) the Borrower shall not have employed counsel satisfactory to the Collateral Agent to represent the Collateral Agent within a reasonable time after notice of commencement of the action or (iii) the Borrower has authorized the employment of counsel for the 13 SECURITY AND COLLATERAL AGENT AGREEMENT Collateral Agent at the expense of the Borrower; and except that, if clause (i) or (iii) is applicable, such liability shall be only in respect of the counsel referred to in such clause (i) or (iii). (c) The obligations of the Borrower and the Collateral Agent under this Section 13 shall be in addition to any liability which each of them may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls the Collateral Agent within the meaning of the Securities Act; and, with respect to the obligation of the Borrower to the Collateral Agent as indemnified party, shall extend, upon the same terms and conditions, to each director of the Collateral Agent. (d) The agreement, indemnities and other statements of the parties hereto in or made pursuant to this Section 13 will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any other parties hereto or any of the officers, directors or controlling persons referred to in this Section 13. The provisions of this Section 13 shall survive the termination or cancellation of this Agreement. SECTION 14. SUCCESSORS AND ASSIGNS; GOVERNING LAW; WAIVERS (a) This Security and Collateral Agent Agreement and all obligations of the Borrower hereunder shall be binding upon the successors and assigns of the Borrower, and shall, together with the rights and remedies of the Collateral Agent hereunder, inure to the benefit of the Collateral Agent, the Lender and their respective successors and assigns. THIS SECURITY AND COLLATERAL AGENT AGREEMENT SHALL BE GOVERNED BY, AND BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. (B) EACH PARTY HERETO IRREVOCABLY AND UNCONDITIONALLY: (I) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND THE OTHER FACILITY AGREEMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT OF THE COURTS OF THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (II) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; 14 SECURITY AND COLLATERAL AGENT AGREEMENT (III) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN SECTION 9 OR AT SUCH OTHER ADDRESS OF WHICH ALL OF THE OTHER PARTIES HERETO SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; (IV) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION; AND (V) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN THIS SUBSECTION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES. (VI) EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER FACILITY AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. SECTION 15. ENFORCEMENT RIGHTS OF LENDER. Unless the Collateral Agent shall fail to take action required to be taken by it in the immediately succeeding sentence, no Lender shall have any right directly to enforce the security interests granted by this Security and Collateral Agent Agreement . No Lender shall have any right to require the Collateral Agent to take or fail to take any action under this Security and Collateral Agent Agreement , except as otherwise provided in the Credit Agreement or in this Security and Collateral Agent Agreement . SECTION 16. BANKRUPTCY PETITION AGAINST THE BORROWER. The Collateral Agent hereby covenants and agrees that, prior to the date which is one year and one day after the payment in full of all outstanding Loans, it will not institute against, or join any other Person in instituting against, the Borrower any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding or other similar proceeding under the laws of the United States or any state of the United States. SECTION 17. MISAPPLICATION OF FUNDS. The Collateral Agent agrees that any funds incorrectly paid to it by the Borrower shall be promptly returned to the Borrower upon receipt of written notice from the Borrower that such funds were incorrectly paid to the Collateral Agent prior to the Collateral Agent's transfer of such funds in 15 SECURITY AND COLLATERAL AGENT AGREEMENT accordance with this Agreement. The Collateral Agent shall be completely protected against any liability for returning such funds in reliance on such written notice that funds were incorrectly paid. SECTION 18. COUNTERPART SIGNATURES. This Agreement may be executed and delivered to you simultaneously in two (2) or more counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute but one and the same instrument. SECTION 19. THIRD PARTY BENEFICIARY. For all purposes of this Agreement, the NAF Corp. shall be a third party beneficiary of the agreements and covenants herein contained and the Servicer shall be a third party beneficiary of the provisions of this Agreement which specify the amount and priority of payment of their respective fees. SECTION 20. STATUS OF COLLATERAL AGENT. The parties hereto acknowledge and agree that upon payment in full of all amounts owing under the Credit Agreement and the release of the Lender's security interest in the Collateral, the rights and obligations of the Collateral Agent under this Agreement shall continue but shall be performed solely at the direction of the Borrower. SECTION 21. ACTS OF LENDER. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement to be given or taken by the Lender may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by the Lender in person or by agents duly appointed in writing; and except as herein otherwise expressly provided such action shall become effective when such instrument or instruments is or are delivered to the Collateral Agent. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Agreement if made in the manner provided in this Section 21. (b) The fact and date of the execution by any person of any such instrument or writing may be proved in any manner that the Collateral Agent deems sufficient. (c) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Lender shall bind the Lender in respect of anything done, omitted or suffered to be done by the Collateral Agent in reliance thereon, whether or not notation of such action is made upon the Promissory Note. 16 SECURITY AND COLLATERAL AGENT AGREEMENT IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be executed by their duly authorized officers as of the date first set forth above. N.A.F. AUTO LOAN TRUST By: DELAWARE TRUST COMPANY, not in its individual capacity but solely as Owner Trustee on behalf of N.A.F AUTO LOAN TRUST By: /s/ Richard N. Smith Name: Richard N. Smith Title: Vice President TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Collateral Agent By: /s/ Linda J. Henderson Name: Linda J. Henderson Title: Assistant Vice President CONTITRADE SERVICES L.L.C. By /s/ Jerome M. Perelson Name: Jerome M. Perelson Authorized Signatory By /s/ Susan E. O'Donovan Name: Susan E. O'Donovan Authorized Signatory JOINDER WITH RESPECT TO SECTION 13 ONLY 17 SECURITY AND COLLATERAL AGENT AGREEMENT NATIONAL AUTO FUNDING CORPORATION By: /s/ Jim W. Moore Name: Jim W. Moore Title: President 18 SECURITY AND COLLATERAL AGENT AGREEMENT EXHIBIT A TRUST RECEIPT DATE N.A.F. Trust Auto Loan Trust c/o Delaware Trust Company 900 Market Street Wilmington, Delaware 19801 Re: Security and Collateral Agent Agreement, dated as of May 17, 1996 (the "Security Agreement") among N.A.F. Auto Loan Trust, ContiTrade Services L.L.C. and Texas Commerce Bank National Association Ladies and Gentlemen: In accordance with Section 7.07 of the Security Agreement, the undersigned hereby certifies that it has taken possession of the items set forth on Annex I hereto with respect to the Contracts on the attached schedule. The undersigned (i) confirms that it holds such items in trust for the benefit of the Lender and (ii) agrees to promptly return such items to the Collateral Agent after its need for possession of them ceases, except with respect to any Contract paid in full or liquidated, in which case the Servicer shall forward all proceeds and/or recoveries to the Lockbox Account. J-HAWK SERVICING CORPORATION By:_____________________________ Name: Title: APPROVED CONTITRADE SERVICES L.L.C. By:_____________________________ Name: Title: 1 EX-10.16 6 FUNDING COMMITMENT EXHIBIT 10.16 CONTITRADE SERVICES L.L.C. -------------------- FUNDING COMMITMENT dated as of May 17, 1996 -------------------- FIRSTCITY FINANCIAL CORPORATION TABLE OF CONTENTS Page SECTION 1. DEFINITIONS.................................................... 1 1.1 Defined Terms................................................ 1 SECTION 2. REPRESENTATIONS AND WARRANTIES OF FIRST CITY................... 2 2.1 Representations and Warranties of FirstCity.................. 2 SECTION 3. FUNDING COMMITMENT OF FIRSTCITY................................ 5 3.1 Commitments Re Credit Agreement.............................. 5 3.2 FirstCity to Provide Subordinate Financing................... 6 3.3 Indemnification.............................................. 6 SECTION 4. ADDITIONAL AFFIRMATIVE COVENANTS............................... 6 4.1 Certain Information.......................................... 6 4.2 Conduct of Business and Maintenance of Existence............. 6 4.3 Notices...................................................... 7 4.4 Maintenance of Control....................................... 7 4.5 Further Assurances........................................... 7 SECTION 5. MISCELLANEOUS.................................................. 8 5.1 Miscellaneous Provisions Related to the Financial Commitments 8 5.2 Amendments and Waivers....................................... 9 5.3 Notices...................................................... 10 5.4 No Waiver; Cumulative Remedies............................... 10 5.5 Survival of Representations, Warranties and Indemnities...... 11 5.6 Payment of Expenses and Taxes................................ 11 5.7 Successors and Assigns; Participations....................... 11 5.8 Termination.................................................. 12 5.9 Counterparts................................................. 12 5.10 Severability................................................. 13 5.11 Integration; Construction.................................... 13 5.12 Limited Liability............................................ 13 5.13 GOVERNING LAW................................................ 13 5.14 SUBMISSION TO JURISDICTION; WAIVERS.......................... 13 5.15 Acknowledgements............................................. 14 5.16 WAIVER OF JURY TRIAL......................................... 14 i FUNDING COMMITMENT FUNDING COMMITMENT, dated as of May 17, 1996 (the "Commitment"), by and among CONTITRADE SERVICES L.L.C., a Delaware limited liability company ("Lender") and FirstCity Financial Corporation, a Delaware corporation ("FirstCity"). W I T N E S S E T H: WHEREAS, the NAF Auto Loan Trust (the "Borrower") has entered into a Credit Agreement dated as of May 17, 1996 (as may from time to time, be amended, supplemented, or modified, the "Credit Agreement") with the Lender and National Auto Funding Corporation ("NAF Corp."), pursuant to which the Borrower will receive the proceeds of Advances from time to time thereunder; WHEREAS, the Borrower intends to enter into from time to time Non-Standard Auto Loan Origination Agreements (each, as from time to time amended, supplemented or modified, a "Loan Origination Agreement" and, collectively, the "Loan Origination Agreements") with certain financial institutions and agencies (the "FIs"), pursuant to which the Borrower will agree to purchase Eligible Auto Loans; WHEREAS, the Borrower and NAF Corp. have, in connection with the transactions contemplated hereby, also entered into an Investment Banking Services Agreement dated as of May 17, 1996 (the "IBSA") with the Lender and the Lender's Affiliate, ContiFinancial Services Corporation; WHEREAS, FirstCity is the parent corporation of NAF Corp.; and WHEREAS, it is a condition to the obligations of the Lender to make the Advances under the Credit Agreement that FirstCity shall have executed and delivered to the Lender this Commitment. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. (a) As used in this Commitment, the capitalized terms used herein and therein shall, unless otherwise defined herein or therein, have the meanings assigned to them in the Definitions List dated as of the date hereof that refers to this Commitment, which is incorporated herein by reference and attached as Exhibit A to the Credit Agreement (the "Definitions List"). 1 (b) As used herein or in any other Facility Agreement, accounting terms not defined in the Definitions List and accounting terms partly defined in the Definitions List to the extent not defined shall have the respective meanings given to them under GAAP. (c) The words "hereof," "herein" and "hereunder" and words of similar import when used in this Commitment shall refer to this Commitment as a whole and not to any particular provision of this Commitment and Section, subsection, Schedule and Exhibit references are to this Commitment unless otherwise specified. (d) Capitalized terms used herein or in any other Facility Agreement shall be equally applicable to both the singular and plural forms of such terms. SECTION 2. REPRESENTATIONS AND WARRANTIES OF FIRST CITY 2.1 Representations and Warranties of FirstCity. To induce Lender to enter into the Credit Agreement and to make the Advances, FirstCity hereby represents and warrants to Lender that: (a) Corporate Existence Compliance with Law. FirstCity (i) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (ii) has the power and authority, and the legal right, as a Delaware corporation, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (iii) is duly qualified as a foreign corporation and is in good standing and has all licenses (in full force and effect) under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification and/or licensing and (iv) is in compliance with all Requirements of Law. (b) Corporate Power; Authorization; Enforceable Obligations. FirstCity has the power and authority, and the legal right, as a Delaware corporation, to make, deliver and perform this Commitment and the other Facility Agreements to which it is a party and has taken all necessary action to authorize its obligations hereunder on the terms and conditions hereof and the other Facility Agreements to which it is a party and to authorize the execution, delivery and performance of this Commitment and the other Facility Agreements to which it is a party. All consents or authorizations of, filing with or other act by or in respect of, any Governmental Authority or any other Person required to be obtained, made or given by it in connection with its obligations hereunder or with the execution, delivery, performance, validity or enforceability of this Commitment or the other Facility Agreements to which it is a party have been so obtained, made or received. This Commitment and each other Facility Agreement to which it is a party has been duly executed and delivered on behalf of FirstCity. This Commitment and each other Facility Agreement to which it is a party constitutes a legal, valid and binding obligation of FirstCity enforceable against FirstCity in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 2 (c) No Legal Bar. The execution, delivery and performance by FirstCity of this Commitment and the other Facility Agreements and its obligations hereunder will not violate any Requirement of Law or Contractual Obligation of FirstCity and will not result in, or require, the creation or imposition of any Lien on any of its properties or revenues pursuant to any such Requirement of Law or Contractual Obligation. (d) No Material Litigation. No litigation, investigation or proceeding of or before any arbitrator, court or Governmental Authority is pending or threatened, by or against FirstCity or against any of its properties or revenues (i) with respect to this Commitment or the other Facility Agreements or any of the transactions contemplated hereby or thereby, or (ii) which could have a material adverse effect on the business, prospects, properties, assets, operations or condition, financial or otherwise, of FirstCity or the ability of FirstCity to perform its obligations hereunder or under the other Facility Agreements. (e) No Default; No Event of Default. FirstCity is not in default under or with respect to any of its Contractual Obligations in any respect which could have a material adverse effect on the business, operations, properties, assets, condition or prospects, financial or otherwise, of FirstCity or on the ability of FirstCity to perform its obligations hereunder or under the other Facility Agreements. (f) No Burdensome Restrictions. FirstCity is not a party to or subject to any Contractual Obligation which could have a material adverse effect on the business, properties, assets, operations, condition or prospects, financial or otherwise, of FirstCity, or on the ability of FirstCity to carry out its obligations hereunder or under the other Facility Agreements. (g) Taxes. FirstCity has filed or caused to be filed all federal, state and other tax returns which are required to be filed by it, or has filed extensions with respect thereto (which extensions have not expired) and has paid all taxes shown to be due and payable on said returns or on any federal, state and other tax assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority having taxing power; no tax Lien has been filed against it, and no claim is being asserted by any Governmental Authority with respect to any such tax, fee or other charge except, in each case, for filings which, if not made, taxes which, if not paid, and tax Liens which, if imposed, would not, in the aggregate, have a material adverse effect on the business, properties, assets, operations, condition or prospects, financial or otherwise, of FirstCity, or on the ability of FirstCity to carry out its obligations hereunder or under the other Facility Agreements. (h) Investment Company Act; Other Regulations. FirstCity is not an "investment company," or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. Borrower is not subject to regulation under any federal or state statute or regulation which limits its ability to incur Debt. (i) No Deduction. FirstCity is not required to make any deduction or withholding from payments to be made by it to Lender under this Commitment and the execution and 3 performance of this Commitment and any of the other Facility Agreements does not make FirstCity liable for any registration tax, stamp duty or similar tax or duty imposed by any authority of or within its jurisdiction of creation, which tax or duty has not been, or will not be, paid when due. (j) No Petition. There is no intent to file a voluntary petition under the federal bankruptcy laws with respect to FirstCity and FirstCity is not insolvent or generally unable to pay its debts as they become due. (k) Principal Place of Business. FirstCity's principal place of business is located at 6400 Imperial Drive, Waco, Texas 76712. (l) Financial Condition. (i) The audited, consolidated balance sheet of FirstCity as of December 31, 1995 and the related, consolidated statements of income and of cash flows for the periods ended on such date, are complete and correct and present fairly the financial condition of FirstCity as at such date, and the results of its operations and its consolidated cash flows for the period then ended. The financial statements referred to in clause (i) above have been audited by KPMG Peat Marwick, FirstCity's independent certified public accountants. FirstCity does not have, and at the date of the December 31, 1995 balance sheet referred to above, did not have any material Debt, material contingent liability or material liability for taxes, or any long-term lease or unusual forward or long-term commitments, including, without limitation, any interest rate or foreign currency swap or exchange transaction except (i) to the extent reflected as a liability on the balance sheet referred to above or (ii) liabilities incurred in the ordinary course of business since the date of such balance sheet and fully reflected on FirstCity's books of account. Since the date of the December 31, 1995 balance sheet referred to above, there has been no material change in the condition or prospects, financial or otherwise, of FirstCity except changes in the ordinary course of business, none of which individually or in the aggregate has been materially adverse. All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the period covered thereby. SECTION 3. FUNDING COMMITMENT OF FIRSTCITY 3.1 Commitments Re Credit Agreement. (a)(i) FirstCity hereby agrees to indemnify and hold the Lender harmless with respect to any loss suffered by the Lender as of a default and resulting credit loss on any WAMCO Contract listed on Exhibit A hereto, provided that such default and resulting credit loss occurs prior to the date on which the servicing arrangements for the Contracts are acceptable to the Lender. As used in this Section 3, the phrase "the servicing arrangements for the Contracts are acceptable to the Lender" means the satisfaction of each of the following conditions: (x) the Backup Servicer Effective Date (as defined in the Credit Agreement) shall have occurred; 4 (y) the Lender shall be reasonably satisfied with the results of Baker & Associates' review of Milco Loan Servicing Corporation's servicing abilities and procedures; and (z) the three-month, rolling average Delinquency Ratio calculated with respect to the WAMCO Contracts listed on Exhibit A hereto does not exceed 15% as of the end of the most recent Collection Period. At such time, if any, as the servicing arrangements for the Contracts are acceptable to the Lender, the Lender shall give written notice thereof to FirstCity and NAF Corp. (ii) FirstCity shall purchase from the Borrower, at a purchase price not less than 85% of the Outstanding Contract Balance thereof, each Pipeline Contract to the extent that the Lender shall not have received the Collateral Agent's approving Certification by the close of business on the third Business Day following the Lender's Advance against such Pipeline Contract, such purchase price shall be deposited to the Collection Account at the opening of business on the fourth Business Day following such Advance. (b) FirstCity may, at any time after the execution and delivery of this Commitment, deliver to the Lender FirstCity's additional funding commitment in the form of Exhibit B hereto, and, upon such delivery, the Lender shall inform TCB, NAF Corp. and the Borrower that the "Borrowing Base Adjustment amount", as defined in the Credit Agreement, shall thereafter be zero. Notwithstanding the foregoing, if FirstCity proposes to deliver such additional funding commitment after the date on which this commitment is originally executed and delivered, such delivery shall only be effective if the Lender determines in its reasonable business judgment that no material adverse change has occurred in financial condition or prospects of FirstCity, or in the ability of FirstCity to carry out its financial obligations hereunder, in each case since the date of initial execution of this Commitment. 3.2 FirstCity to Provide Subordinate Financing. FirstCity hereby agrees and covenants with Lender that FirstCity shall provide sufficient Subordinate Financing in connection with each securitization transaction with respect to the Contracts as may be required by independent third parties (such as the Rating Agencies and/or Credit Enhancer(s)), it being acknowledged that such level of Subordinate Financing so determined by such independent third parties shall constitute a "market" level. As used in this Section 3.2, "Subordinate Financing" means any combination of the following: cash, purchase of a "B piece" or "residual" certificate, funding of an initial reserve account deposit, issuance of a guaranty, serving as account party on a letter of credit, or other form of subordinate financing in the related securitization. Such subordinate financing shall be acceptable to the Rating Agencies and the Credit Enhancer. 3.3 Indemnification. FirstCity will indemnify the Lender and its Affiliates (collectively, "Conti") against any losses, claims, damages or liabilities to which Conti may become subject in connection with any matter related to or arising out of a default by FirstCity under this Commitment; provided, however, there shall be excluded from such indemnification any such loss, claim, damage or liability which results from the gross negligence or willful misconduct of Conti in 5 performing the services which it is to render pursuant to this Commitment or the other Facility Agreements. SECTION 4. ADDITIONAL AFFIRMATIVE COVENANTS 4.1 Certain Information. FirstCity shall furnish to Lender copies of all financial statements, reports and other communications that FirstCity may make to, or file or have with, the SEC (contemporaneously with the filing thereof with the SEC) pursuant to the Securities Exchange Act of 1934, as amended, together with, promptly, such additional financial and other information as Lender may from time to time reasonably request. 4.2 Conduct of Business and Maintenance of Existence. FirstCity shall continue to engage in business of the same type as now conducted by it and preserve, renew and keep in full force and effect its existence and take all action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business; and comply in all material respects with all Contractual Obligations and Requirements of Law. 4.3 Notices. FirstCity shall promptly give notice to Lender of: (a) the occurrence of (i) any Event of Default or Unmatured Event of Default, in either case, under the Credit Agreement or (ii) a default by FirstCity hereunder; (b) any (i) default or event of default by FirstCity under any Contractual Obligation of FirstCity or (ii) litigation, investigation or proceeding which may exist at any time affecting FirstCity, which, in either case, is likely to have a material adverse effect on the financial condition or prospects of FirstCity or the ability of FirstCity to perform its obligations hereunder; (c) a material adverse change in the business, properties, assets, operations, prospects or condition (financial or otherwise) of FirstCity. (d) any change in its principal place of business or chief executive office from the address set forth in paragraph (v) of subsection 3.1. Each notice pursuant to this subsection shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action FirstCity proposes to take with respect thereto. 4.4 Maintenance of Control. FirstCity hereby covenants and agrees to maintain direct or indirect ownership of (i) at least 80% of the issued and outstanding shares of capital stock of NAF Corp. and (ii) 100% of the issued and outstanding shares of capital stock of J-Hawk Servicing Corporation. Not more than 15% of the issued and outstanding shares of capital stock of NAF Corp., and not more than one board seat of NAF Corp., may be controlled by Cargill Financial Services Corporation or any Affiliate thereof. 6 4.5 Further Assurances. FirstCity shall do such further acts and things and execute and deliver to Lender such assignments, agreements, financing statements, powers and instruments as are required by Conti to carry into effect the purposes of this Commitment or to better assure and confirm unto Conti its rights, powers and remedies hereunder, including, without limitation, to obtain such consents and give such notices, and to file and record all such documents, financing statements and instruments, and renew each such consent, notice, filing and recordation, at such time or times, in such manner and at such places, as may be necessary or desirable to preserve and protect the position of Conti hereunder. This covenant shall survive the termination of this Commitment. SECTION 5. MISCELLANEOUS 5.1 Miscellaneous Provisions Related to the Financial Commitments. (a) The liabilities and obligations of FirstCity under Section 3.1 hereof (including any additional commitment delivered by FirstCity pursuant to Section 3.1(b) hereof) shall be absolute and unconditional under all circumstances and shall be performed by FirstCity regardless of (i) the validity, legality or enforceability of the Obligations or the Credit Agreement or the avoidance, subordination, discharge or disaffirmance of any of the foregoing by any Person (including a trustee in bankruptcy), (ii) any law, regulation, order or decree now or hereafter in effect which might in any manner affect any of the terms or provisions of the Credit Agreement, (iii) the merger or consolidation of any of the Lender or FirstCity into or with any corporation or any sale or transfer by the Lender or FirstCity of all or any part of its property, (iv) the waiver, amendment, consent, extension, forbearance or granting of any indulgence with respect to the Credit Agreement; IT BEING UNDERSTOOD, HOWEVER, that any such waiver, amendment, consent, extension, forbearance or indulgence with respect to the Credit Agreement shall be equally applicable to FirstCity's obligations and liabilities hereunder with respect to the subject matter thereof, (v) the failure by TCB to take any steps to perfect and maintain perfected its interests in the Collateral or in any other security or collateral related to the Credit Agreement, or (vi) any other circumstances whatsoever (with or without notice to or knowledge of FirstCity) which may in any manner or to any extent vary the risk of FirstCity, or might otherwise constitute a legal or equitable discharge of a surety or guarantor; it being the purpose and intent of FirstCity that the liabilities and obligations of FirstCity under Section 3.1 hereof (including any additional commitment delivered by FirstCity pursuant to Section 3.1(b) hereof) shall be absolute and unconditional under any and all circumstances, and shall not be discharged except by performance of the Credit Agreement and Section 3.1 hereof (including any additional commitment delivered by FirstCity pursuant to Section 3.1(b) hereof). (b) The provisions of Section 3.1 hereof (including any additional commitment delivered by FirstCity pursuant to Section 3.1(b) hereof) shall continue to be effective or be reinstated, as the case may be, if at any time payment of any of the Obligations payable to the Lender under the Credit Agreement or by FirstCity hereunder is rescinded, declared to be fraudulent or preferential, subsequently invalidated or set aside. FirstCity hereby waives (i) notice of the occurrence of any default under any of the Facility Agreements, (ii) any 7 requirement of diligence or promptness on the part of the Lender in making demand, commencing suit or exercising any other right or remedy under the Credit Agreement. (c) FirstCity hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of receivership or bankruptcy of the Lender, protest or notice with respect to the Credit Agreement and all demands whatsoever, and covenants that Section 3.1 hereof (including any additional commitment delivered by FirstCity pursuant to Section 3.1(b) hereof) will not be discharged, except by complete performance of the obligations contained herein. FirstCity hereby waives all set-offs and counterclaims and all presentments, demands for performance, notices of nonperformance, protests, notices of protest, notices of dishonor and notices of acceptance of Section 3.1 hereof (including any additional commitment delivered by FirstCity pursuant to Section 3.1(b) hereof). FirstCity's obligations under Section 3.1 hereof (including any additional commitment delivered by FirstCity pursuant to Section 3.1(b) hereof) shall not be limited if the Lender is precluded for any reason (including, without limitation, the application of the automatic stay under Section 362 of the Federal Bankruptcy Code (11 U.S.C. Section 101 et seq., the "BANKRUPTCY CODE") from enforcing or exercising any right or remedy with respect to the Credit Agreement. (d) FirstCity hereby agrees that its obligations hereunder shall continue in full force and effect and may not be terminated or otherwise revoked until the amounts due to Lender under the Credit Agreement shall have been fully discharged and the Facility Agreements have been terminated. In the event that FirstCity shall have any right under applicable law to otherwise terminate or revoke its obligations hereunder, which right cannot be waived, FirstCity agrees that such termination or revocation shall not be effective until a written notice of such revocation or termination, specifically referring hereto, signed by FirstCity, is actually received by the Lender. Such notice shall not affect the right and power of the Lender to enforce rights arising prior to the Lender's receipt thereof. If, in reliance on FirstCity's obligations, the Lender makes any financial accommodation, incurs any cost or expense or takes any action after the termination or revocation by FirstCity of its obligations hereunder but prior to the receipt by the Lender of said written notice from FirstCity, the rights of the Lender, with respect to such financial accommodation, cost, expense or action shall be the same as if such termination or revocation had not occurred. (e) FirstCity hereby assumes responsibility for keeping itself informed of the financial condition of the Borrower, and of all other circumstances bearing upon the risk of nonpayment of the amounts due to Lender under the Credit Agreement, and FirstCity hereby agrees that the Lender shall not have any duty to advise FirstCity of any information known to it regarding such condition or any such circumstances. 5.2 Amendments and Waivers. This Commitment may be amended, supplemented or modified by the parties hereto, in writing. Any waiver of any of the provisions hereof by the Lender and any such amendment, supplement or modification shall be binding upon Lender and all future holders of the Promissory Note. In the case of any waiver, the parties hereto shall be restored to their former position and rights hereunder; but no such waiver shall extend to any subsequent event, or impair any right consequent thereon. 8 5.3 Notices. Except where telephonic instructions or notices are authorized herein to be given, all notices, demands, instructions and other communications required or permitted to be given to or made upon any party hereto shall be in writing and shall be personally delivered or sent by overnight courier service, or by registered, certified or express mail, postage prepaid, return receipt requested, or by facsimile copy (accompanied by a telephonic confirmation or receipt thereof), or telegram (with messenger delivery specified in the case of a telegram) and shall be deemed to be delivered for purposes of this Commitment on: (a) the second Business Day following the day on which such notice was placed in the custody of the U.S. Postal Service, (b) the next Business Day following the day on which such notice was placed in the custody of any overnight courier service, including express mail service or (c) the same Business Day on which such notice is sent by telegram, messenger or facsimile. Unless otherwise specified in a notice sent or delivered in accordance with the foregoing provisions of this subsection, notices, demands, instructions and other communications in writing shall be given to or made upon the respective parties hereto at their respective addresses (or to their respective facsimile numbers) indicated below, and, in the case of telephonic instructions or notices, by calling the telephone number or numbers indicated for such party below: If to FirstCity: FirstCity Financial Corporation 6400 Imperial Drive Waco, Texas 76718 Attention: James T. Sartain, President Tel. No.: 817-751-1750 Telecopier No.: 817-751-1208 If to Lender: ContiTrade Services L.L.C. 277 Park Avenue, 38th Floor New York, New York 10172 Attention: Chief Counsel Tel. No.: 212-207-2822 Telecopier No.: 212-207-2935 5.4 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of Lender; any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 5.5 Survival of Representations, Warranties and Indemnities. All representations, warranties and indemnities made hereunder and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Commitment and the other Facility Agreements. 9 5.6 Payment of Expenses and Taxes. FirstCity agrees, on demand, to (a) pay or reimburse Conti for all out-of-pocket costs and expenses incurred in connection with the preparation, execution and enforcement of this Commitment, as well as the preparation of any amendments hereto, and (b) pay, indemnify, and hold Conti, its directors, members, officers, employees and agents, harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Commitment (all the foregoing, collectively, the "indemnified liabilities"); provided that FirstCity has no obligation hereunder to Conti with respect to indemnified liabilities arising from the gross negligence or willful misconduct of Conti. 5.7 Successors and Assigns; Participations. (a) This Commitment shall be binding upon and inure to the benefit of FirstCity, Lender, ContiFinancial Services Corporation and all future holders of the Promissory Note and their respective successors and assigns, except that FirstCity may not assign or transfer any of its obligations under this Commitment, and, except as set forth in paragraph (b) below, Lender may not assign or transfer any of its obligations under this Commitment without the prior consent of the other party, which consent shall not unreasonably be withheld. (b) Any hypothecation or participation granted by Lender pursuant to Section 9.6 of the Credit Agreement shall constitute a grant of a hypothecation or participation in FirstCity's obligations under Section 3.1 hereof (including any additional commitment delivered by FirstCity pursuant to Section 3.1(b) hereof); FirstCity hereby acknowledges and consents to any such grant of a hypothecation or participation. In the event of any such grant by Lender of a hypothecating or participating interest, Lender's obligations under this Commitment to FirstCity shall remain unchanged, Lender shall remain solely responsible for the performance thereof, Lender shall remain the holder of the Promissory Note for all purposes under this Commitment and the other Facility Agreements, and FirstCity shall continue to deal solely and directly with Lender in connection with Lender's rights and obligations under this and the other Facility Agreements. FirstCity agrees that if amounts outstanding under this Commitment are due and unpaid, or shall have been declared or shall have become due and payable, each person acquiring such a hypothecation or participation interest (a "Participant") shall be deemed to have the right of setoff in respect of its hypothecating or participating interest in amounts owing under this Commitment to the same extent as if the amount of its hypothecating or participating interest were owing directly to it under this Commitment. (c) FirstCity authorizes Lender to disclose to any Participant and any prospective Participant any and all financial information in its possession concerning FirstCity and its Affiliates which has been delivered to it by or on behalf of such Person pursuant to this Commitment or which has been delivered to it by or on behalf of such Person in connection with its credit evaluation of FirstCity and its Affiliates prior to becoming a party to this Commitment; provided such Participant agrees to keep such financial information confidential unless required to be disclosed by applicable Requirements of Law. (d) If, pursuant to this subsection 5.6, any interest in this Commitment is transferred or assigned to any Participant or assignee which is organized under the laws of any jurisdiction other than the United States or any state thereof, Lender shall cause such Participant or assignee, as a condition to the effectiveness of such transfer, (i) to represent to Lender and FirstCity that under 10 applicable law and treaties then in effect no taxes will be required to be withheld by FirstCity or Lender with respect to any payments to be made to such Participant or assignee, in respect of terms of this Commitment, (ii) to furnish to FirstCity either U.S. Internal Revenue Service Form 4224 (or any successor form) or U.S. Internal Revenue Service Form 1001 (or any successor form) (wherein such Participant or assignee claims entitlement to complete exemption from U.S. federal withholding tax on all interest payments hereunder) and (iii) to agree (for the benefit of Lender and FirstCity) timely to provide Lender and FirstCity a new Form 4224 (or any successor form) or Form 1001 (or any successor form) upon the expiration or obsolescence of any previously delivered form and comparable statements in accordance with and if permitted under applicable U.S. laws and regulations and amendments then in effect duly executed and completed by such Participant or assignee, and to comply from time to time with all applicable U.S. laws and regulations with regard to such withholding tax exemption. (e) Lender shall not grant to any Participant the right to consent to any amendment or waiver entered into in accordance with subsection 5.1 except for any such amendment or waiver which would increase the Lender Commitment under the Credit Agreement, or reduce the amount or extend the due date of any principal of or interest on the Promissory Note. 5.8 Termination. The obligations of FirstCity under Section 3.1(a) hereof shall terminate upon the receipt by Lender of all amounts owed to it under the Credit Agreement and the termination of the Credit Agreement; the obligations of FirstCity under Section 3.1(b) hereof shall terminate upon the termination of the Investment Banking Services Agreement; all other obligations of FirstCity hereunder shall terminate on the later of the dates described in the two foregoing clauses. 5.9 Counterparts. This Commitment may be executed by one or more of the parties to this Commitment on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 5.10 Severability. Any provision of this Commitment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 5.11 Integration; Construction. This Commitment represents the agreement of the parties hereto with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the parties hereto relative to the subject matter hereof not expressly set forth or referred to herein or in the other Facility Agreements. 5.12 Limited Liability. No recourse hereunder or under any other Facility Agreement shall be had against, and no personal liability shall attach to, any officer, employee, director, member, affiliate, beneficial owner, trustee or shareholder of any party hereto, as such, by the enforcement of any assessment or by any legal or equitable proceeding, by virtue of any statute or otherwise in respect of any of the Facility Agreements, it being expressly agreed and understood that each Facility Agreement is solely a corporate or trust obligation of each party hereto, and that any and all personal liability, either at common law or in equity, or by statute or constitution, of every such officer, employee, director, 11 member, affiliate, beneficial owner, trustee or shareholder for breaches by any party hereto of any obligations under any Facility Agreement is hereby expressly waived as a condition of and in consideration for the execution and delivery of this Commitment. 5.13 GOVERNING LAW. THIS COMMITMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS COMMITMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. 5.14 SUBMISSION TO JURISDICTION; WAIVERS. EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY: (A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS FUNDING COMMITMENT AND THE OTHER FACILITY AGREEMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT OF THE COURTS OF THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN SUBSECTION 5.5 OR AT SUCH OTHER ADDRESS OF WHICH ALL OF THE OTHER PARTIES HERETO SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; (D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION; AND (E) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN THIS SUBSECTION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES. 5.15 Acknowledgements. FirstCity hereby acknowledges that: 12 (a) it has been advised by counsel in the negotiation, execution and delivery of this Commitment and the other Facility Agreements; (b) the Lender has no fiduciary relationship to FirstCity; and (c) no joint venture exists between FirstCity and Lender. 5.16 WAIVER OF JURY TRIAL. EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS COMMITMENT OR ANY OTHER FACILITY AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. IN WITNESS WHEREOF, the parties hereto have caused this Commitment to be duly executed and delivered in New York, New York by their proper and duly authorized officers, members or trustees as of the day and year first above written. FIRSTCITY FINANCIAL CORPORATION By /s/ Matt A. Landry, Jr. Name: Matt A. Landry, Jr. Title: Executive Vice President CONTITRADE SERVICES L.L.C. By /s/ Jerome M. Perelson Name: Jerome M. Perelson Authorized Signatory /s/ Susan E. O'Donovan Name: Susan E. O'Donovan Authorized Signatory 13 EX-10.17 7 PAYING AGENT AGREEMENT EXHIBIT 10.17 PAYING AGENT AGREEMENT among N.A.F. AUTO LOAN TRUST (as Borrower), CONTITRADE SERVICES L.L.C. (as Lender) and TEXAS COMMERCE BANK NATIONAL ASSOCIATION (as Paying Agent) ---------------------- Dated as of May 17, 1996 ---------------------- TABLE OF CONTENTS Page SECTION 1. DEFINED TERMS................................................ 1 SECTION 2. COLLECTION ACCOUNT........................................... 2 2.01. Establishment of Collection Account.......................... 2 2.02. Deposits to the Collection Account........................... 3 2.03. Withdrawals from the Collection Account...................... 3 2.04. Investment of Funds Deposited in the Collection Account...... 4 SECTION 3. THE PAYING AGENT............................................. 5 3.01. Appointment.................................................. 5 3.02. Exculpatory Provisions....................................... 5 3.03. Reliance by Paying Agent..................................... 5 3.04. Notice of Default............................................ 6 3.05. Non-Reliance on Paying Agent................................. 6 3.06. Successor Paying Agent....................................... 6 3.07. Duties and Covenants of Paying Agent......................... 7 SECTION 4. AMENDMENTS AND WAIVERS....................................... 7 SECTION 5. NOTICES...................................................... 7 SECTION 6. SEVERABILITY................................................. 9 SECTION 7. NO WAIVER; CUMULATIVE REMEDIES............................... 9 SECTION 8. PAYMENT OF EXPENSES AND TAXES................................ 9 SECTION 9. SUCCESSORS AND ASSIGNS; GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVERS..................................... 10 SECTION 10. ENFORCEMENT RIGHTS OF LENDER................................. 11 SECTION 11. BANKRUPTCY PETITION AGAINST THE BORROWER..................... 12 SECTION 12. MISAPPLICATION OF FUNDS...................................... 12 SECTION 13. COUNTERPART SIGNATURES....................................... 12 SECTION 14. THIRD PARTY BENEFICIARIES.................................... 12 SECTION 15. STATUS OF PAYING AGENT....................................... 12 SECTION 16. ACTS OF LENDER............................................... 12 i PAYING AGENT AGREEMENT PAYING AGENT AGREEMENT, dated as of May 17, 1996, made by and between N.A.F. AUTO LOAN TRUST, a Delaware business trust (the "Borrower"), CONTITRADE SERVICES L.L.C., a Delaware limited liability company (the "Lender") and TEXAS COMMERCE BANK NATIONAL ASSOCIATION ("TCB"), as paying agent (in such capacity, the "Paying Agent"). W I T N E S S E T H WHEREAS, the Borrower has entered into a Credit Agreement dated as of May 17, 1996 (as may from time to time, be amended, supplemented, or modified, the "Credit Agreement") among the Lender, the Borrower and National Auto Funding Corporation ("NAF Corp."), pursuant to which the Borrower will take out loans (the "Loans") from time to time; WHEREAS, the Borrower intends to enter into from time to time Non-Standard Auto Loan Origination Agreements (each, as from time to time amended, supplemented or modified, a "Loan Origination Agreement" and, collectively, the "Loan Origination Agreements") with certain financial institutions and agencies (the "FIs"), pursuant to which the Borrower will agree to purchase contracts; and WHEREAS, the Borrower has entered into a Security and Collateral Agent Agreement dated as of May 17, 1996 (the "Collateral Agent Agreement") with TCB as Collateral Agent (the "Collateral Agent") and the Lender; and WHEREAS, it is a condition to the obligations of the Lender to make the Facility available to the Borrower under the Credit Agreement that the Borrower, the Lender and TCB shall have executed and delivered this Paying Agent Agreement. NOW, THEREFORE, to induce the Lender to make the Facility available to the Borrower, the Borrower and the Lender hereby agree with the Paying Agent, for the benefit of the Lender, as follows: SECTION 1. DEFINED TERMS. (a) The terms "inventory", "goods", "accounts", "contract rights", "chattel paper", "general intangibles", and "documents" have the respective meanings ascribed in the UCC. (b) Capitalized terms used herein undefined shall, unless otherwise defined herein, have the respective meanings ascribed in the "Definitions List" attached to the Credit Agreement; and the following terms shall have the following meanings: 1 "Borrowing Base Deficiency" shall mean the situation in which the Outstanding Facility Balance exceeds the Borrowing Base. "Collateral" shall have the meaning assigned to such term in Section 2 of the Security and Collateral Agent Agreement. "Contract Acquisition Disbursement Request" shall mean a form in substantially the form of Exhibit A hereto. "Disbursement Date" shall mean the 15th day of each calendar month (or next succeeding Business Day) commencing June, 1996. "Disbursement Request" shall mean any of a Contract Acquisition Disbursement Request, a Miscellaneous Disbursement Request, a Servicer Disbursement Request or a Weekly Fee Disbursement Request. "Miscellaneous Disbursement Request" shall mean a form in substantially the form of Exhibit B hereto. "NAF Procurement Fee" shall mean with respect to any Auto Loan purchased by the Borrower an amount equal to the product of 0.02 and the principal amount of such Auto Loan, which amount shall be payable to NAF Corp. upon the purchase by the Borrower of such Auto Loan. "Paying Agent Fee" shall have the meaning set forth in a separate letter agreement between NAF Corp. and the Paying Agent. "Responsible Officer" shall mean, when used with respect to the Paying Agent, any officer within the corporate trust department in Dallas, Texas (or any successor thereof) including any vice president, assistant vice president, or any officer or assistant officer of the Paying Agent customarily performing functions similar to those performed by any of the above-designated officers. "Servicer Disbursement Request" shall mean a form in substantially the form of Exhibit C hereto. "VSI Provider" shall mean any provider of "vendor's single interest" coverage identified by NAF Corp. "Weekly Fee Disbursement Request" shall mean a form in substantially the form of Exhibit D hereto. 2 SECTION 2. COLLECTION ACCOUNT. 2.1 Establishment of Collection Account. Concurrently with the execution and delivery hereof, the Collateral Agent shall establish at the office of TCB located in Dallas, Texas, a segregated account entitled the "N.A.F. Auto Loan Trust Collection Account, TCB, as Collateral Agent on behalf of ContiTrade Services L.L.C." (the "Collection Account"). The Collection Account shall be maintained in the State of Texas in either (i) segregated trust accounts with the corporate trust department of TCB or any replacement collateral agent approved by the Lender or (ii) segregated deposit account with banks or trust companies approved by the Lender (which may include the Collateral Agent or a replacement collateral agent) the short-term debt obligations of which are rated "A-1+" by S&P (or its equivalent from another Rating Agency). 2.2 Deposits to the Collection Account. (a) The following amounts received by the Paying Agent shall be deposited in the Collection Account: (i) the proceeds of all Advances made by the Lender pursuant to Section 2.1 of the Credit Agreement; (ii) all amounts remitted by the Lock-Box Bank pursuant to Section 2.2 of the Servicing Agreement; and (iii) all amounts remitted by the Borrower pursuant to Section 2.7(d) of the Credit Agreement; (b) The Paying Agent is hereby irrevocably authorized and empowered, as the Borrower's attorney-in-fact, to endorse any check or any other instrument or security presented for deposit in the Collection Account requiring the endorsement of the Borrower. (c) Notwithstanding the foregoing provisions of this Section 2.01, if at any time the Borrower, or any Person on behalf of the Borrower (including any FI, the Servicer under the related Loan Origination Agreement or the Servicing Agreement), receives any proceeds or payments required to be deposited in the Collection Account, all such amounts shall be held by the Borrower or such other person as the agent of, and in trust for, the Paying Agent and shall, forthwith upon receipt by the Borrower, or such other Person, be turned over to the Paying Agent for deposit to the Collection Account in the same form as received by the Borrower or such other Person (and, if received in the form of a check, instrument or security requiring endorsement, duly endorsed on behalf of the Borrower or such other Person to the order of the Paying Agent). 2.3 Withdrawals from the Collection Account. (a) Prior to the occurrence of an Event of Default, the Paying Agent shall apply funds in the Collection Account as follows: 3 (i) from time to time, to the N.A.F. Trust Account, at the appropriate FI, for the related Dealers, the amounts set forth on the related Contract Acquisition Disbursement Request provided by NAF Corp. to the Payment Agent, provided that before releasing any such amount the Paying Agent shall receive confirmation from the Collateral Agent, based upon information supplied by the Servicer, that, immediately following the release of any such amount, no Borrowing Base Deficiency would result and provided further, that if more than $750,000 is requested to be disbursed pursuant to any single Contract Acquisition Disbursement Request, then the Lender shall countersign such Contract Acquisition Disbursement Request; and (ii) on the first Business Day of each week, to the FIs certain fees due to them (including pass-through document fees deducted from amounts due to the Dealers), and to NAF Corp. the NAF Procurement Fees due to it, in each case as set forth in the related Weekly Fee Disbursement Request prepared by NAF Corp. and countersigned by the Lender; provided, that before releasing any such amount (whether or not the Lender's signature appears on the related Weekly Fee Disbursement Request) the Paying Agent shall confirm that the Paying Agent has in its possession, from the Collateral Agent, a Collateral Agent's Certification, without exceptions, with respect to the related Contracts; (iii) on each Disbursement Date: (a) to the Servicer, the Servicing Fee then due, together with other amounts owing to the Servicer; (b) to the Paying Agent and to the Collateral Agent, the fees then due to each; (c) on the Disbursement Date occurring in the month following each anniversary date of this Agreement, to the Owner Trustee, the fees and expenses then due to it; and (d) to each VSI Provider, the amounts then due to it, in each case, as set forth on a Monthly Disbursement Request prepared by NAF Corp. and countersigned by the Lender; (iv) from time to time, to certain Obligors, certain rebates due to them, as set forth in a Miscellaneous Disbursement Request prepared by the Servicer and, if such rebates exceed $1,000 per Disbursement Request, countersigned by the Lender; (v) on the third Business Day of each month, commencing in June, 1996, to the Lender, the monthly interest then due with respect to the Facility, as set forth in a Miscellaneous Disbursement Request prepared by NAF Corp.; 4 (vi) from time to time, to the Lender, such additional amounts with respect to the Facility, as set forth in a Miscellaneous Disbursement Request prepared by NAF Corp. Each Disbursement Request shall be furnished to the Paying Agent by NAF Corp. (with the Lender's countersignature, if required pursuant to the foregoing) not later than the close of business on the Business Day which precedes the requested date for disbursement of funds. (b) If the Paying Agent receives a written notice from the Lender that an Event of Default has occurred the Paying Agent shall thereafter disburse funds from the Collection Account only as directed by the Lender in writing; provided, that the Lender shall direct that the disbursements described in clauses (a)(ii) to the FIs, (a)(iii) to the Servicer, the Paying Agent, the Collateral Agent, the Owner Trustee and the VSI Providers and (a)(iv) to the Obligors shall in any event be paid. 2.4 Investment of Funds Deposited in the Collection Account. The Paying Agent shall, in accordance with the provisions of this Section 2.04, invest and reinvest, at the written direction of NAF Corp., in the Paying Agent's own name or in the name of the Paying Agent's nominee, funds in the Collection Account in Permitted Investments which shall mature, or be redeemed at the option of the holder, prior to the respective dates when the money invested in such Permitted Investments is required for application in accordance with this Section 2. If no such instructions have been received, such amounts shall be invested in a Permitted Investment described in clause (iv) of the definition of Permitted Investments, as designated by NAF Corp. SECTION 3. THE PAYING AGENT. 3.1 Appointment. The Lender hereby designates and appoints Texas Commerce Bank National Association as the Paying Agent under this Paying Agent Agreement, and the Lender authorizes Texas Commerce Bank National Association as the Paying Agent to take such action on its behalf under the provisions of this Paying Agent Agreement and to exercise such powers and perform such duties as are expressly delegated to the Paying Agent by the terms of this Paying Agent Agreement together with such other powers as are reasonably incidental thereto but in each instance solely at the written instruction of the Lender. Notwithstanding any provision to the contrary elsewhere in this Paying Agent Agreement, the Paying Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with the Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Paying Agent Agreement or otherwise exist against the Paying Agent. Texas Commerce Bank National Association hereby accepts its appointment as Paying Agent, subject to, and in reliance upon, the provision of this Section 3.01. 3.2 Exculpatory Provisions. Neither the Paying Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with 5 this Paying Agent Agreement (except for its or such Person's own gross negligence or wilful misconduct), or (ii) responsible in any manner to the Lender for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained herein or in any other Facility Agreement or in any certificate, report, statement or other document referred to or provided for in, or received by the Paying Agent under or in connection with, this Agreement, or any other Facility Agreement, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency (except with respect to the Paying Agent) of this Agreement or any other Facility, or the Collateral or for any failure of the Borrower to perform its obligations hereunder or under any other Facility Agreement. The Paying Agent shall not be under any obligation to the Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, any of the Facility Agreements, or to inspect the properties, books or records of the Borrower. 3.3 Reliance by Paying Agent. The Paying Agent shall be entitled to rely, and shall be fully protected in relying, upon any Loan, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation 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 Borrower), independent accountants and other experts selected by the Paying Agent. The Paying Agent shall be fully justified in failing or refusing to take any action under this Paying Agent Agreement unless it shall first receive such written advice or concurrence as it deems appropriate or it shall first be indemnified to its satisfaction against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Paying Agent may from time to time consult with legal counsel, independent accountants or other experts of its own selection in the event of any disagreement, controversy, question or doubt as to the construction of any provision of this Agreement or any of its duties hereunder, and the Paying Agent shall be fully protected in acting in good faith in reliance upon the advice or opinion of any such counsel or other expert. 3.4 Notice of Default. The Paying Agent shall not be deemed to have knowledge or notice of the occurrence of any Event of Default under the Credit Agreement unless a Responsible Officer has received written notice from the Lender or the Borrower referring to this Paying Agent Agreement and describing such Event of Default or unless a Responsible Officer otherwise has actual knowledge of such Event of Default. 3.5 Non-Reliance on Paying Agent. Neither the Paying Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to the Lender, and no act by the Paying Agent hereafter taken, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by the Paying Agent to the Lender. The Lender represents to the Paying Agent that it has, independently and without reliance upon the Paying Agent, 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 Borrower and made its own decision to extend credit to the Borrower. 6 The Lender will, independently and without reliance upon the Paying Agent, 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 Paying Agent 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 Borrower. Except for notices, reports and other documents expressly required to be furnished by the Paying Agent hereunder, the Paying Agent shall have no duty or responsibility to provide the Lender with any credit or other information concerning the business, operations, property, financial and other condition or creditworthiness of the Borrower which may come into the possession of the Paying Agent or any of its officers, directors, employees, agencies, attorneys-in-fact or affiliates. 3.6 Successor Paying Agent. The Paying Agent may resign as paying agent upon 60 days' notice to the Borrower, the Owner Trustee, NAF Corp. and the Lender. The Paying Agent may be removed at any time by the Lender. No such resignation or removal shall be effective unless and until a successor paying agent has accepted appointment as such pursuant to this Agreement and in the case of a removal, any and all amounts then due to the Paying Agent hereunder have been paid in full. If the Paying Agent shall resign or be removed as paying agent, then the Borrower with the approval of the Lender shall appoint a successor. Such successor collateral agent shall succeed to the rights, powers and duties of the Paying Agent, and the term "Paying Agent" shall mean such successor effective upon its appointment, and the former Paying Agent's rights, powers and duties as Paying Agent shall be terminated, without any other or further act or deed on the part of such former Paying Agent. Such successor shall be entitled to amend any UCC financing statements and any other filings, recordation and declarations it deems advisable or necessary in connection with such termination and cancellation. After any retiring Paying Agent's resignation or removal hereunder as Paying Agent, the provisions of this Section 3 and Section 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Paying Agent under this Paying Agent Agreement. Notwithstanding the foregoing, if no successor paying agent shall be appointed as aforesaid, or if appointed, such successor shall not have accepted its appointment within thirty (30) days after resignation of the Paying Agent, the Paying Agent may petition a court of competent jurisdiction to make such appointment. 3.7 Duties and Covenants of Paying Agent. (a) The Paying Agent undertakes to perform the duties as are set forth in this Agreement, including, without limitation: (i) providing information reasonably within its possession and within reasonable time constraints regarding disbursements and receipt of funds; (ii) depositing and investing funds as provided herein; 7 (iii) making payments as provided herein, based solely upon timely receipt of the related Disbursement Request or, following an Event of Default, direction from the Lender; and (iv) providing a monthly accounting statement with respect to the Collection Account on or before each Disbursement Date. (b) The Paying Agent covenants and agrees that it will, upon a Responsible Officer obtaining actual knowledge of the occurrence of an Event of Default or an Unmatured Event or Default, promptly give notice of the occurrence of such event to the Lender and the Borrower. SECTION 4. AMENDMENTS AND WAIVERS. With the written consent of NAF Corp. (such consent not to be unreasonably withheld) the parties hereto may, from time to time, enter into written amendments, supplements or modifications hereto for the purpose of adding any provision to this Paying Agent Agreement or changing in any manner the rights of the parties hereunder. The Paying Agent may, but shall not be obligated to, enter into any such supplement, amendment or modification that affects the Paying Agent's own rights, duties or immunities under this Paying Agent Agreement or otherwise. The Borrower and the Lender agree not to execute any supplement, amendment or modification to any Facility Agreement to which the Paying Agent is not a party, without the prior written consent of the Paying Agent, if the effect of such supplement. amendment or modification would be to affect the Paying Agent's rights, duties, or immunities thereunder or under this Paying Agent Agreement. SECTION 5. NOTICES. Unless otherwise expressly provided herein, all notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or when deposited in the mail, postage prepaid, or in the case of telegraphic notice, when delivered to the telegraph company, or, in the case of facsimile notice, when sent, confirmation received, addressed as follows, or to such other addresses as may be hereafter notified by the respective parties hereto: 8 The Borrower and the Owner Trustee: N.A.F. Auto Loan Trust 4545 Fuller Drive Suite 101 Irving, Texas 75038 Attention: Jim W. Moore Telecopy: (214) 791-0464 Delaware Trust Company 900 Market Street, 2-M Wilmington, DE 19801 Attention: Corporate Trust Administration Telecopy: (302) 421-7387 with a copy to: National Auto Funding Corporation 4545 Fuller Drive Suite 101 Irving, Texas 75038 Attention: Jim W. Moore Telecopy: (214) 791-0464 The Paying Agent: Texas Commerce Bank National Association 2200 Ross Avenue Fifth Floor Dallas, Texas 75201 Attention: Gary Jones Telecopy: (214) 965-3577 The Lender: ContiTrade Services L.L.C. 277 Park Avenue New York, New York 10172 Attention: Chief Counsel Telecopy: (212) 207-2935 provided, that any notice to or upon the Borrower shall be deemed to have been duly given or made as aforesaid when so given or made to the Borrower whether or not any other party indicated above as the recipient of a copy thereof shall have received a copy of each notice. 9 SECTION 6. SEVERABILITY. Any provision of this Paying Agent Agreement which is prohibited or unenforceable in any jurisdiction shall as to such jurisdiction be ineffective to the extent of such prohibition or unenforceability without invalidation of the remaining provisions hereof and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 7. NO WAIVER; CUMULATIVE REMEDIES. Neither the Paying Agent nor the Lender party shall by any act, delay, omission or otherwise be deemed to have waived any of its or their rights or remedies hereunder and no waiver shall be valid unless in writing, signed by the Paying Agent on behalf of the Lender, and then only to the extent therein set forth. A waiver by the Paying Agent of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Paying Agent or the Lender would otherwise have had on any future occasion. No failure to exercise nor any delay in exercising on the part of the Paying Agent or the Lender any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or future exercise thereof or the exercise of any other right, power or privilege. The rights and remedies hereunder provided are cumulative and may be exercised singly or concurrently and are not exclusive of any rights and remedies provided by law. SECTION 8. PAYMENT OF EXPENSES AND TAXES. (a) The Borrower hereby agrees to pay to the Paying Agent a fee for its services hereunder equal to the Paying Agent Fee. The Borrower agrees to pay, indemnify, and to hold the Paying Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp and other similar taxes, if any, which may be payable or determined to be payable in connection the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Paying Agent Agreement, and any such other documents, and to pay, indemnify, and hold the Paying Agent and its officers, directors, shareholders, employees, agents and representatives harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Paying Agent Agreement and any such other documents (including, but not limited to, those incurred by any negligent act or negligent omission to act of the Paying Agent) (all the foregoing, collectively, the "indemnified liabilities"); provided, that the Borrower shall not be liable to the Paying Agent for any losses incurred by the Paying Agent as a result of the fraudulent actions, misrepresentations, gross negligence or willful misconduct of the Paying Agent. The obligations of the Borrower under this Section 8 shall survive the termination of this Paying Agent Agreement and the discharge of the other obligations of the 10 Borrower hereunder and also shall survive the resignation or removal of the Paying Agent hereunder. (b) Promptly after receipt by the Paying Agent of notice of the commencement of any action, such Paying Agent shall, if a claim in respect thereof is to be made against the Borrower under this Section 8, notify the Borrower in writing of the commencement thereof; but the omission so to notify the Borrower will not relieve it from any liability which it may have to the Paying Agent except to the extent the Borrower is prejudiced thereby. In case any action is brought against the Paying Agent, and it notifies the Borrower of the commencement thereof, the Borrower will be entitled to appoint counsel satisfactory to the Borrower and to the Paying Agent (who shall not, except with the consent of the Paying Agent, be counsel to the Borrower or NAF Corp.) to represent the Paying Agent in such action; provided, however, that, if the defendants in any action include both the Paying Agent and the Borrower and the Paying Agent shall have reasonably concluded that there may be legal defenses available to it which are different from or additional to those available to the Borrower, the Paying Agent shall have the right to select separate counsel to defend such action on behalf of it. Upon receipt of notice from the Borrower to the Paying Agent of its election so to appoint counsel to defend such action and approval by the Paying Agent of such counsel, the Borrower will not be liable to the Paying Agent under this Section 8 for any legal expenses subsequently incurred by the Paying Agent in connection with the defense thereof unless (i) the Paying Agent shall have employed separate counsel in accordance with the proviso to the next preceding sentence, (ii) the Borrower shall not have employed counsel satisfactory to the Paying Agent to represent the Paying Agent within a reasonable time after notice of commencement of the action or (iii) the Borrower has authorized the employment of counsel for the Paying Agent at the expense of the Borrower; and except that, if clause (i) or (iii) is applicable, such liability shall be only in respect of the counsel referred to in such clause (i) or (iii). (c) The obligations of the Borrower and the Paying Agent under this Section 8 shall be in addition to any liability which each of them may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls the Paying Agent within the meaning of the Securities Act; and, with respect to the obligation of the Borrower to the Paying Agent as indemnified party, shall extend, upon the same terms and conditions, to each director of the Paying Agent. (d) The agreement, indemnities and other statements of the parties hereto in or made pursuant to this Section 8 will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any other parties hereto or any of the officers, directors or controlling persons referred to in this Section 8. The provisions of this Section 8 shall survive the termination or cancellation of this Agreement. 11 SECTION 9. SUCCESSORS AND ASSIGNS; GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVERS. (a) This Paying Agent Agreement and all obligations of the Borrower hereunder shall be binding upon the successors and assigns of the Borrower, and shall, together with the rights and remedies of the Paying Agent hereunder, inure to the benefit of the Paying Agent, the Secured party and their respective successors and assigns. (b) THIS PAYING AGENT AGREEMENT SHALL BE GOVERNED BY, AND BE CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. (c) EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY: (I) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND THE OTHER FACILITY AGREEMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT OF THE COURTS OF THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (II) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (III) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN SECTION 5 OR AT SUCH OTHER ADDRESS OF WHICH ALL OF THE OTHER PARTIES HERETO SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; (IV) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION; (V) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL 12 ACTION OR PROCEEDING REFERRED TO IN THIS SUBSECTION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES; AND (VI) EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS COMMITMENT OR ANY OTHER FACILITY AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. SECTION 10. ENFORCEMENT RIGHTS OF LENDER. Unless the Paying Agent shall fail to take action required to be taken by it in the immediately succeeding sentence, no Lender shall have any right directly to enforce the security interests granted by this Paying Agent Agreement. The Lender shall not have any right to require the Paying Agent to take or fail to take any action under this Paying Agent Agreement, except as otherwise provided in this Paying Agent Agreement. SECTION 11. BANKRUPTCY PETITION AGAINST THE BORROWER. The Paying Agent hereby covenants and agrees that, prior to the date which is one year and one day after the payment in full of all outstanding Loans, it will not institute against, or join any other Person in instituting against, the Borrower any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding or other similar proceeding under the laws of the United States or any state of the United States. SECTION 12. MISAPPLICATION OF FUNDS. The Paying Agent agrees that any funds incorrectly paid to it by the Borrower shall be promptly returned to the Borrower upon receipt of written notice from the Borrower that such funds were incorrectly paid to the Paying Agent prior to the Paying Agent's transfer of such funds in accordance with this Agreement. The Paying Agent shall be completely protected against any liability for returning such funds in reliance on such written notice that funds were incorrectly paid. SECTION 13. COUNTERPART SIGNATURES. This Agreement may be executed and delivered to you simultaneously in two (2) or more counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute but one and the same instrument. 13 SECTION 14. THIRD PARTY BENEFICIARIES. For all purposes of this Agreement, NAF Corp., the Servicer and the FIs shall each be a third party beneficiary of the provisions of this Agreement which specify the amount and priority of payment of amounts due to them. SECTION 15. STATUS OF PAYING AGENT. The parties hereto acknowledge and agree that upon payment in full of all amounts owing under the Credit Agreement and the release of the Lender's security interest in the Collateral (as certified to the Paying Agent by the Lender in writing), the rights and obligations of the Paying Agent under this Agreement shall continue but shall be performed solely at the direction of the Borrower. SECTION 16. ACTS OF LENDER. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement to be given or taken by the Lender may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by the Lender in person or by agents duly appointed in writing; and except as herein otherwise expressly provided such action shall become effective when such instrument or instruments is or are delivered to the Paying Agent. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Agreement if made in the manner provided in this Section 16. (b) The fact and date of the execution by any person of any such instrument or writing may be proved in any manner that the Paying Agent deems sufficient. (c) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Lender shall bind the Lender in respect of anything done, omitted or suffered to be done by the Paying Agent in reliance thereon, whether or not notation of such action is made upon the Promissory Note. 14 IN WITNESS WHEREOF, the parties hereto have caused this Paying Agent Agreement to be executed by their duly authorized officers as of the date first set forth above. N.A.F. AUTO LOAN TRUST By: Delaware Trust Company, not in its individual capacity but solely as Owner Trustee on behalf of N.A.F. AUTO LOAN TRUST By: /s/ Richard N. Smith Name: Richard N. Smith Title: Vice President TEXAS COMMERCE BANK NATIONAL ASSOCIATION, as Paying Agent By: /s/ Linda J. Henderson Name: Linda J. Henderson Title: Assistant Vice President CONTITRADE SERVICES L.L.C. By /s/ Jerome M. Perelson Name: Jerome M. Perelson Authorized Signatory By /s/ Susan E. O'Donovan Name: Susan E. O'Donovan Authorized Signatory 15 EX-10.18 8 SERVICING AGREEMENT EXHIBIT 10.18 SERVICING AGREEMENT RELATING TO N.A.F. AUTO LOAN TRUST among N.A.F. AUTO LOAN TRUST as Borrower J-HAWK SERVICING CORPORATION as Servicer NATIONAL AUTO FUNDING CORPORATION and CONTITRADE SERVICES L.L.C. as Lender ---------------------- Dated as of May 17, 1996 ---------------------- TABLE OF CONTENTS Page ARTICLE I DEFINITIONS............................................... 1 Section 1.1. Definitions........................................ 1 Section 1.2. Usage of Terms..................................... 4 Section 1.3. Calculations....................................... 5 Section 1.4. Section References................................. 5 Section 1.5. No Recourse........................................ 5 ARTICLE II ADMINISTRATION AND SERVICING OF CONTRACTS................. 5 Section 2.1. Duties of the Servicer............................. 5 Section 2.2. Collection of Contract Payments; Modification and Amendment of Contracts; Lockbox Agreements......... 6 Section 2.3. Realization Upon Contracts......................... 8 Section 2.4. Insurance.......................................... 9 Section 2.5. Maintenance of Security Interests in Vehicles...... 10 Section 2.6. Covenants, Representations and Warranties of Servicer........................................... 10 Section 2.7. Indemnification.................................... 13 Section 2.8. Servicing Fee; Payment of Certain Expenses by Servicer........................................... 13 Section 2.9. Servicer's Certificate............................. 13 Section 2.10. Quarterly Statement as to Compliance; Notice of Servicer Termination Event......................... 13 Section 2.11. Annual Independent Accountants' Report............. 14 Section 2.12. Access to Certain Documentation and Information Regarding Contracts................................ 15 Section 2.13. Provision of Information........................... 15 Section 2.14. Fidelity Bond...................................... 16 Section 2.15. Sub-Servicing Agreements Between Servicer and Sub-Servicers...................................... 16 Section 2.16. Successor Sub-Servicers............................ 16 Section 2.17. Liability of Servicer.............................. 17 Section 2.18. No Contractual Relationship Between Sub-Servicer and Trust, the Backup Servicer, the Lender, or the Collateral Agent................................... 17 Section 2.19. Assumption or Termination of Sub-Servicing Agreement by Backup Servicer................................. 17 ARTICLE III LIABILITY AND INDEMNITIES................................. 18 Section 3.1. Liability of Servicer; Indemnities................. 18 Section 3.2. Merger or Consolidation of, or Assumption of the Obligations of, the Servicer or Backup Servicer.... 18 i Section 3.3. Limitation on Liability of Servicer, Backup Servicer and Others......................................... 20 Section 3.4. Delegation of Duties............................... 20 Section 3.5. Servicer and Backup Servicer Not to Resign......... 20 ARTICLE IV SERVICER TERMINATION EVENTS............................... 21 Section 4.1. Servicer Termination Event......................... 21 Section 4.2. Consequences of a Servicer Termination Event....... 22 Section 4.3. Appointment of Successor........................... 23 Section 4.4. Waiver of Past Defaults............................ 24 ARTICLE V MISCELLANEOUS PROVISIONS.................................. 24 Section 5.1. Amendment.......................................... 24 Section 5.2. Governing Law...................................... 24 Section 5.3. Severability of Provisions......................... 24 Section 5.4. Assignment......................................... 25 Section 5.5. Governing Law; Waiver.............................. 25 Section 5.6. Counterparts....................................... 26 Section 5.7. Notices............................................ 26 Section 5.8. Successors and Assigns............................. 26 ii THIS SERVICING AGREEMENT ("this Agreement"), dated as of May 17, 1996, among N.A.F. AUTO LOAN TRUST, (the "Trust"), a Delaware business trust formed pursuant to the Amended and Restated Trust Agreement dated as of November 10, 1994 (the "Trust Agreement") among National Auto Funding I, L.P., a Texas limited partnership, National Auto Funding II, L.P., a Texas limited partnership and Delaware Trust Company, not in its individual capacity unless expressly stated therein but solely as owner trustee, (the "Owner Trustee"), J-HAWK SERVICING CORPORATION, a Texas corporation ("J-Hawk") (in its capacity as Servicer, the "Servicer"), NATIONAL AUTO FUNDING CORPORATION, a Delaware corporation ("NAF Corp."), CONTITRADE SERVICES L.L.C., a Delaware limited liability company, as Lender (the "Lender") and, on and after the Backup Servicer Effective Date, the Backup Servicer. WHEREAS, the Borrower is entering into a Warehouse Credit Agreement dated as of May 10, 1996 (the "Credit Agreement") with the Lender. WHEREAS, the Servicer has agreed to service the Contracts, NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the Borrower, the Servicer, and the Backup Servicer hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1. Definitions. As used in this Agreement, defined terms have their respective meanings as set forth in the Definitions List attached to the Credit Agreement, or as set forth below: Accountants' Report: The report of a firm of nationally recognized independent accountants described in Section 2.11. Backup Servicer: On and after the Backup Servicer Effective Date, the Person identified in writing by the Servicer with the approval of the Lender. Backup Servicer Effective Date: The date on which the Back-up Servicer assumes its duties and obligations hereunder. The Backup Servicer will join as a party pursuant to a joinder agreement among the Backup Servicer and the parties hereto, the terms of which shall be consented to by the Lender. Basic Servicing Fee: With respect to any Collection Period, the fee payable to the Servicer for services rendered during such Collection Period, which shall be equal to one-twelfth of the Basic Servicing Fee Rate multiplied by the sum of the Principal Balances for all 1 Contracts (other than any Contract which was 120 or more days delinquent as of the first day of such Collection Period) as of the first day of the Collection Period. Basic Servicing Fee Rate: 2.10% per annum, payable monthly at one-twelfth of the annual rate. Blanket Policy: Shall have the meaning set forth in Section 2.4(c). Collected Funds: With respect to any Determination Date, the amount of funds in the Collection Account representing collections on the Contracts during the related Collection Period, including all Recoveries collected during the related Collection Period. Collection Account: The account designated as the Collection Account in, and which is established and maintained pursuant to, the Paying Agent Agreement. Collection Records: Computer generated records relating to collection efforts, payment histories and account activity with respect to the Contracts. Cram Down Loss: With respect to a Contract, if a court of appropriate jurisdiction in an insolvency proceeding shall have issued an order reducing the amount owed on a Contract or otherwise modifying or restructuring the scheduled payments to be made on a Contract, an amount equal to the excess of the principal balance of such Contract immediately prior to such order over the principal balance of such Contract as so reduced. A "Cram Down Loss" shall be deemed to have occurred on the date of issuance of such order. Dealer: A seller of new or used automobiles or light trucks that originated one or more of the Contracts and sold the respective Contract, directly or indirectly, to NAF Corp. Electronic Ledger: The electronic master record of the retail installment sales contracts or installment loans of the Servicer. Eligible Servicer: J-Hawk, the Backup Servicer or another Person which at the time of its appointment as Servicer, (i) is servicing a portfolio of motor vehicle retail installment sales contracts and/or motor vehicle installment loans, (ii) is legally qualified and has the capacity to service the Contracts, (iii) has demonstrated the ability professionally and competently to service a portfolio of motor vehicle retail installment sales contracts and/or motor vehicle installment loans similar to the Contracts with reasonable skill and care, and (iv) is qualified and entitled to use, pursuant to a license or other written agreement, and agrees to maintain the confidentiality of, the software which the Servicer uses in connection with performing its duties and responsibilities under this Agreement or otherwise has available software which is adequate to perform its duties and responsibilities under this Agreement. Independent Accountants: Shall have the meaning set forth in Section 2.11(a). Insurance Policies: All insurance policies covering physical damage, theft, mechanical breakdown or similar event with respect to a Vehicle or loss of such Vehicle or 2 credit life or credit disability insurance with respect to payments due on a Contract or otherwise benefiting the holder of the Contracts. J-Hawk: J-Hawk Servicing Corporation, a Texas corporation. Lien Certificate: With respect to a Vehicle, an original certificate of title, certificate of lien or other notification issued by the Registrar of Titles of the applicable state to a secured party which indicates that the lien of the secured party on the Vehicle is recorded on the original certificate of title. In any jurisdiction in which the original certificate of title is required to be given to the Obligor, the term "Lien Certificate" shall mean only a certificate or notification issued to a secured party. Lockbox Bank: Marine National Bank or any other depository institution named by the Servicer and acceptable to the Lender and NAF Corp.. N.A.F. Program Administration Manual: The N.A.F. Program Administration Manual in effect as of the date hereof, as modified from time to time. Opinion of Counsel: A written opinion of counsel reasonably acceptable to the Lender, which opinion is acceptable in form and substance to the Lender. Paying Agent: TCB, acting in its capacity as paying agent under the Paying Agent Agreement. Paying Agent Agreement: The Paying Agent Agreement dated as of May 17, 1996 among Borrower, Lender and the Paying Agent. Recoveries: With respect to a Liquidated Contract, all amounts realized with respect to such Contract net of amounts that are legally required to be refunded to the Obligor on such Contract and net of the Servicer's expenses in connection with such liquidation; provided, however, that the Recoveries with respect to any Contract shall in no event be less than zero. Registrar of Titles: With respect to any state, the governmental agency or body responsible for the registration of, and the issuance of certificates of title relating to, motor vehicles and liens thereon. Servicer: J-Hawk Servicing Corporation, a Texas corporation. Servicing Procedures Manual: The servicing manual previously delivered to the Lender, as amended from time to time. Servicing Records: All records and data maintained in electronic form by the Servicer with respect to the Contracts, including the following with respect to each Contract: the account number; the originating Dealer; Obligor name; Obligor address; Obligor home phone number; Obligor business phone number; original Principal Balance; original term; Annual Percentage Rate; current Principal Balance; current remaining term; origination date; 3 first payment date; final scheduled payment date; next payment due date; date of most recent payment; new/used classification; Collateral description; days currently delinquent; number of contract extensions (months) to date; amount of Scheduled Payment; current Insurance Policy expiration date; and past due late charges. Servicer's Certificate: With respect to each Determination Date, a certificate, completed by and executed on behalf of the Servicer, in accordance with Section 2.9, substantially in the form attached hereto as Exhibit A. Simple Interest Method: The method of allocating a fixed level payment on an obligation between principal and interest, pursuant to which the portion of such payment that is allocated to interest is equal to (a) the product of the fixed rate of interest on such obligation multiplied by the period of time (expressed as a fraction of a year, based on the actual number of days in the calendar month and 365 days in the calendar year) elapsed since the preceding payment under the obligation was made plus (b) accrued and unpaid interest. Sub-Servicer: Any Sub-Servicer appointed by the Servicer pursuant to Section 2.15. Sub-Servicing Agreement: Any Sub-Servicing Agreement entered into pursuant to Section 2.15. The terms of such Sub-Servicing Agreement shall be approved by the Lender. Supplemental Servicing Fee: With respect to any Collection Period all administrative fees, expenses and charges paid by or on behalf of Obligors, including late fees, prepayment fees and liquidation fees collected on the Contracts during such Collection Period which have been approved by NAF Corp. for payment to the Servicer. Section 1.2. Usage of Terms. With respect to all terms used in this Agreement, the singular includes the plural and the plural the singular; words importing any gender include the other gender; references to "writing" include printing, typing, lithography, and other means of reproducing words in a visible form; references to agreements and other contractual instruments include all subsequent amendments thereto or changes therein entered into in accordance with their respective terms and not prohibited by this Agreement; references to Persons include their permitted successors and assigns; and the terms "include" or "including" mean "include without limitation" or "including without limitation." Vehicle: A new or used automobile or light truck, van or mini-van together with all accessories thereto, securing or purporting to secure an Obligor's indebtedness under a Contract. Section 1.3. Calculations. All calculations of the amount of the Basic Servicing Fee shall be made on the basis of a 360-day year consisting of twelve 30-day months. 4 Section 1.4. Section References. All references to Articles, Sections, paragraphs, subsections, exhibits and schedules shall be to such portions of this Agreement unless otherwise specified. Section 1.5. No Recourse. No recourse may be taken, directly or indirectly, under this Agreement or any certificate or other writing delivered in connection herewith or therewith, against any stockholder, officer, or director, as such, of the Borrower, NAF Corp., the Servicer or the Lender or of any such stockholder, officer or director of any predecessor or successor of any of them. ARTICLE II ADMINISTRATION AND SERVICING OF CONTRACTS Section 2.1. Duties of the Servicer. (a) The Servicer, either directly or through one or more Sub-Servicers, is hereby authorized to act as agent for the Borrower and in such capacity shall manage, service, administer and make collections on the Contracts, and perform the other actions required by the Servicer under this Agreement. The Servicer agrees that its servicing of the Contracts shall be carried out in accordance with customary and usual procedures of institutions which service motor vehicle retail installment sales contracts and, to the extent more exacting, the degree of skill and attention that the Servicer exercises from time to time with respect to all comparable motor vehicle receivables that it services for itself or others in accordance with N.A.F.'s Program Administration Manual as in effect at the current time for servicing all its other comparable motor vehicle receivables or, if not addressed therein, then in the Servicing Procedures Manual. The Servicer's duties shall include, without limitation, collection and posting of all payments, responding to inquiries of Obligors on the Contracts, investigating delinquencies, sending payment statements to Obligors, reporting any required tax information to Obligors, policing the Collateral, complying with the terms of the Lockbox Agreement, accounting for collections and furnishing monthly and annual statements to the Collateral Agent and the Lender with respect to distributions, monitoring the status of Insurance Policies with respect to the Vehicles, providing information as required hereby, cooperating with the reasonable requests of the Lender and performing the other duties specified herein. The Servicer shall also administer and enforce all rights and responsibilities of the holder of the Contracts provided for in the Loan Origination Agreements, the Dealer Assignments and the Insurance Policies, to the extent that such Loan Origination Agreements, Dealer Assignments and Insurance Policies relate to the Contracts, the Vehicles or the Obligors. The Servicer may, and is hereby authorized to, perform any of its servicing responsibilities with respect to all or certain of the Contracts through a Sub-Servicer as it may from time to time designate with the approval of the Lender, but no such designation of a Sub-Servicer shall serve to release the Servicer from any of its obligations under this Agreement. Such Sub-Servicer shall have all the rights and powers of the Servicer with respect to such Contracts under this Agreement. To the extent consistent with the standards, policies and procedures otherwise required hereby, the Servicer shall follow its customary standards, policies, and procedures 5 and shall have full power and authority, acting alone, to do any and all things in connection with such managing, servicing, administration and collection that it may deem necessary or desirable. Without limiting the generality of the foregoing, the Servicer is hereby authorized and empowered by the Borrower to execute and deliver, on behalf of the Borrower, any and all instruments of satisfaction or cancellation, or of partial or full release or discharge, and all other comparable instruments, with respect to the Contracts and with respect to the Vehicles; provided, however, that notwithstanding the foregoing, the Servicer shall not, except pursuant to an order from a court of competent jurisdiction, release an Obligor from payment of any unpaid amount under any Contract or waive the right to collect the unpaid balance of any Contract from the Obligor, except that the Servicer may forego collection efforts if the amount reasonably expected to be recovered by the Servicer (net of the Servicer's expenses) is de minimis and if it would forego collection in accordance with its customary procedures. The Servicer is hereby authorized to commence, in its own name or in the name of the Borrower, a legal proceeding to enforce a Contract pursuant to Section 2.3 or to commence or participate in any other legal proceeding (including, without limitation, a bankruptcy proceeding) relating to or involving a Contract, an Obligor or a Vehicle. If the Servicer commences or participates in such a legal proceeding in its own name, the Collateral Agent shall thereupon be deemed to have automatically assigned such Contract to the Servicer solely for purposes of commencing or participating in any such proceeding as a party or claimant, and the Servicer is authorized and empowered by the Borrower to execute and deliver in the Servicer's name any notices, demands, claims, complaints, responses, affidavits or other documents or instruments in connection with any such proceeding. Section 2.2. Collection of Contract Payments; Modification and Amendment of Contracts; Lockbox Agreements. (a) Consistent with the standards, policies and procedures required by this Agreement, the Servicer shall make reasonable efforts to collect all payments called for under the terms and provisions of the Contracts as and when the same shall become due, and shall follow such collection procedures as it follows with respect to all comparable automobile receivables that it services for itself or others and otherwise act with respect to the Contracts, the Loan Origination Agreements, the Dealer Assignments, the Insurance Policies and the other Collateral in such manner as will, in the reasonable judgment of the Servicer, maximize the amount to be received by the Borrower with respect thereto. The Servicer is authorized in its discretion to waive any prepayment charge, late payment charge or any other similar fees that may be collected in the ordinary course of servicing any Contract. (b) (i) The Servicer may at any time agree to a modification or amendment of a Contract in order to (x) change the Obligor's regular due date to a date within 30 days in which such due date occurs or (y) re-amortize the scheduled payments on the Contract following a partial prepayment of principal. (ii) The Servicer may grant payment extensions on, or other modifications or amendments to, a Contract (including those modifications permitted by Section 2.2(b)) in accordance with its customary procedures if the Servicer believes in good faith that such extension, modification or amendment is necessary to avoid a default on such Contract, will maximize the amount to be received by the Borrower with respect to such Contract, and is otherwise in the best interests of the Borrower. 6 Notwithstanding the foregoing, no Contract which has previously been modified may be modified pursuant to this Section without the Lender's prior written consent. Any Contract which is modified pursuant to this Section is referred to as a "Modified Contract." (c) The Servicer shall use its best efforts to cause Obligors to make all payments on the Contracts, whether by check or through the Automated Clearing House (ACH) system, to be made directly to one or more Lockbox Banks, acting as agent for the Lender pursuant to a Lockbox Agreement. The Servicer shall use its best efforts to cause any Lockbox Bank to deposit all payments on the Contracts in the Lockbox Account on the Business Day of receipt, and to cause all amounts credited to the Lockbox Account on account of such payments to be transferred to the Collection Account, no later than the second Business Day after receipt of such payments. The Lockbox Account shall be a demand deposit account held by the Lockbox Bank, or at the request of the Lender an Eligible Deposit Account satisfying clause (i) of the definition thereof. The Servicer has notified each Obligor with respect to the Contracts Serviced by the Servicer on the Closing Date to make such payments thereafter directly to the Lockbox Bank. Notwithstanding any Lockbox Agreement, or any of the provisions of this Agreement relating to the Lockbox Agreement, the Servicer shall remain obligated and liable to the Borrower and the Lender for servicing and administering the Contracts and the other Collateral in accordance with the provisions of this Agreement without diminution of such obligation or liability by virtue thereof. In the event the Servicer shall for any reason no longer be acting as such, the Backup Servicer or successor Servicer shall thereupon assume all of the rights and, from the date of assumption, all of the obligations of the outgoing Servicer under the Lockbox Agreement. The Backup Servicer or any other successor Servicer shall not be liable for any acts, omissions or obligations of the Servicer prior to such succession. In such event, the successor Servicer shall be deemed to have assumed all of the outgoing Servicer's interest therein and to have replaced the outgoing Servicer as a party to each such Lockbox Agreement to the same extent as if such Lockbox Agreement had been assigned to the successor Servicer, except that the outgoing Servicer shall not thereby be relieved of any liability or obligations on the part of the outgoing Servicer to the Lockbox Bank under such Lockbox Agreement. The outgoing Servicer shall, upon request of the Borrower, but at the expense of the outgoing Servicer, deliver to the successor Servicer all documents and records relating to each such Agreement and an accounting of amounts collected and held by the Lockbox Bank and otherwise use its best efforts to effect the orderly and efficient transfer of any Lockbox Agreement to the successor Servicer. In the event that the Lender elects to change the identity of the Lockbox Bank, the Servicer, at its expense, shall cause the Lockbox Bank to deliver, at the direction of the Lender, to the Collateral Agent or a successor Lockbox Bank, all documents and records relating to the Contracts and all amounts held (or thereafter received) by the Lockbox Bank (together with an accounting of such amounts) and shall otherwise use its best efforts to effect the orderly and efficient transfer of the lockbox arrangements and the 7 Servicer shall notify the Obligors to make payments to the Lockbox Account established by the successor. (d) The Servicer shall remit all payments by or on behalf of the Obligors received directly by the Servicer to the Lockbox Account, without deposit into any intervening account as soon as practicable, but in no event later than the Business Day after receipt thereof. Section 2.3. Realization Upon Contracts. (a) Consistent with the standards, policies and procedures required by this Agreement, the N.A.F. Program Administration Manual and the Servicing Procedures Manual, the Servicer shall use its best efforts to repossess (or otherwise comparably convert the ownership of) and liquidate any Vehicle securing a Contract with respect to which the Servicer has determined that payments thereunder are not likely to be resumed, as soon as is practicable after default on such Contract. The Servicer is authorized to follow such customary practices and procedures as it shall deem necessary or advisable, consistent with the standard of care required by Section 2.1, which practices and procedures may include reasonable efforts to realize upon any recourse to Dealers, selling the related Vehicle at public or private sale, the submission of claims under an Insurance Policy and other actions by the Servicer in order to realize upon such a Contract. The foregoing is subject to the provision that, in any case in which the Vehicle shall have suffered damage, the Servicer shall not expend funds in connection with any repair or towards the repossession of such Vehicle unless it shall determine in its discretion that such repair and/or repossession shall increase the proceeds of liquidation of the related Contract by an amount greater than the amount of such expenses. All amounts received upon liquidation of a Vehicle shall be remitted directly by the Servicer to the Lockbox Account without deposit into any intervening account as soon as practicable, but in no event later than the Business Day after receipt thereof. The Servicer shall be entitled to recover all reasonable expenses incurred by it in the course of repossessing and liquidating a Vehicle, which expenses shall be properly documented by the Servicer and reviewed by NAF Corp., but only out of the cash proceeds of such Vehicle, any deficiency obtained from the Obligor or any amounts received from the related Dealer, as set forth in Section 2.03(a)(iii) of the Paying Agent Agreement to the extent of such expenses. The Servicer shall recover such reasonable expenses based on the information contained in the Servicer's Certificate delivered on the related Determination Date. The Servicer shall pay on behalf of the Borrower any personal property taxes assessed on repossessed Vehicles; the Servicer shall be entitled to reimbursement of any such tax from Recoveries with respect to such Contract, as set forth in Section 2.03(a)(iii) of the Paying Agent Agreement. (b) If the Servicer elects to commence a legal proceeding to enforce a Loan Origination Agreement or Dealer Assignment, the act of commencement shall be deemed to be an automatic assignment from the Collateral Agent to the Servicer of the rights under such Loan Origination Agreement and Dealer Assignment for purposes of collection only. If, however, in any enforcement suit or legal proceeding, it is held that the Servicer may not enforce a Loan Origination Agreement or Dealer Assignment on the grounds that it is not a real party in interest or a Person entitled to enforce the Loan Origination Agreement or Dealer 8 Assignment, the Collateral Agent, at the Borrower's expense, shall take such steps as the Servicer deems necessary to enforce the Loan Origination Agreement or Dealer Assignment, including bringing suit in its name. All amounts recovered shall be remitted directly by the Servicer to the Lockbox Account without deposit into any intervening account as soon as practicable, but in no event later than the Business Day after receipt thereof. Section 2.4. Insurance. (a) The Servicer shall monitor the status of the Insurance Policies in accordance with its customary servicing procedures. If the Servicer shall determine that an Obligor has failed to obtain or maintain a physical loss and damage insurance policy covering the related Vehicle (including during the repossession of such Vehicle) the Servicer shall be diligent in carrying on its customary servicing procedures to enforce the rights of the holder of the Contract thereunder to ensure that the Obligor obtains such physical loss and damage insurance. (b) The Servicer may sue to enforce or collect upon the Insurance Policies, in its own name, if possible, or as agent of the Borrower. If the Servicer elects to commence a legal proceeding to enforce an Insurance Policy, the act of commencement shall be deemed to be an automatic assignment of the rights of the Borrower under such Insurance Policy to the Servicer for purposes of collection only. (c) NAF Corp. shall cause to be maintained a vendor's single interest or other Collateral protection insurance policy with respect to all Vehicles ("Blanket Policy") which policy by its terms insures against physical damage in the event any Obligor fails to maintain physical damage insurance with respect to the related Vehicle. The Borrower will be the named insured and loss payee under all policies of Blanket Policy. Each Vehicle shall be covered by Blanket Policy providing coverage upon repossession of such Vehicle. (d) The Premiums incurred by the Borrower in maintaining such Blanket Policy shall be paid by the Borrower as set forth in Section 2.03(a)(vi) of the Paying Agent Agreement. Section 2.5. Maintenance of Security Interests in Vehicles. Consistent with the policies and procedures required by this Agreement, the Servicer shall take such steps as are necessary to maintain perfection of the security interest created by each Contract in the related Vehicle on behalf of the Borrower, including but not limited to obtaining the execution by the Obligors and the recording, registering, filing, re-recording, re-filing, and re-registering of all security agreements, financing statements and continuation statements as are necessary to maintain the security interest granted by the Obligors under the respective Contracts. The Lender hereby authorizes the Servicer, and the Servicer agrees, to take any and all steps necessary to re-perfect such security interest on behalf of the Borrower as necessary because of the relocation of a Vehicle or for any other reason. Section 2.6. Covenants, Representations and Warranties of Servicer. The Servicer hereby makes the following representations, warranties and covenants to the other parties hereto and the Lender on which the Collateral Agent shall rely in accepting the Contracts. 9 (a) The Servicer covenants as follows: (i) Liens in Force. The Vehicle securing each Contract shall not be released in whole or in part from the security interest granted by the Contract, except upon payment in full of the Contract or as otherwise contemplated herein; (ii) No Impairment. The Servicer shall do nothing to impair the rights of the Borrower in the Contracts, the Loan Origination Agreements, the Dealer Assignments, the Insurance Policies or the other Collateral; (iii) No Amendments. The Servicer shall not extend or otherwise amend the terms of any Contract, except in accordance with Section 2.2; (iv) Servicing of Contracts. The Servicer shall service the Contracts as required by the terms of this Agreement and in material compliance with the current Servicing Procedures Manual for servicing all its other comparable motor vehicle receivables; (v) Credit Bureaus. The Servicer shall supply such customary payment history information to credit reporting bureaus on a monthly basis as is permissible under applicable law; (vi) The Servicer shall obtain and maintain all necessary licenses and approvals in all jurisdictions in which the ownership or lease of property or the conduct of its business (involving the servicing of the Contracts as required by this Agreement) requires; (vii) The Servicer shall hold all Collateral items in its possession as custodian on behalf of the Lender; (viii) The Servicer, as requested by the Lender, shall deliver to the Lender any Lien Certificate, credit application, Contract, or other Collateral item which is in possession of the Servicer, within three Business Days of the Lender's request. To the extent that the Servicer does not so deliver any requested item with respect to any Contract by the opening of business on the fourth Business Day following such request, the Servicer shall deposit on the Lockbox Account an amount not less than 85% of such Contract's Outstanding Contract Balance; (ix) The Servicer shall track receipt of all Lien Certificates received by it, and shall report to NAF Corp. and the Lender on each Determination Date all Lien Certificates received by it during the prior Collection Period, together with all Lien Certificates not yet received as of the end of the prior Collection Period, as well as the origination dates of the related Contracts; and (x) The Servicer shall send to the Collateral Agent a copy of each Lien Certificate received by the Servicer. 10 (b) The Servicer represents and warrants to the Borrower and the Collateral Agent as of the Closing Date as to itself: (i) Organization and Good Standing. The Servicer has been duly organized and is validly existing and in good standing under the laws of the State of Texas, with power, authority and legal right to own its properties and to conduct its business as such properties are currently owned and such business is currently conducted, and had at all relevant times, and now has, power, authority and legal right to enter into and perform its obligations under this Agreement; (ii) Due Qualification. The Servicer is duly qualified to do business as a foreign corporation in good standing, and has obtained all necessary licenses and approvals, in all jurisdictions as shall require such qualification; in which the ownership or lease of property or the conduct of its business (involving the servicing of the Contracts as required by this Agreement) requires; (iii) Power and Authority. The Servicer has the power and authority to execute and deliver this Agreement and any Sub-Servicing Agreement and to carry out its terms and their terms, respectively, and the execution, delivery and performance of this Agreement and any Sub-Servicing Agreement have been duly authorized by the Servicer by all necessary corporate action; (iv) Binding Obligation. This Agreement and the Servicer's Facility Agreements shall constitute legal, valid and binding obligations of the Servicer enforceable in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors' rights generally and by equitable limitations on the availability of specific remedies, regardless of whether such enforceability is considered in a proceeding in equity or at law; (v) No Violation. The consummation of the transactions contemplated by this Agreement and any Sub-Servicing Agreement, and the fulfillment of the terms of this Agreement and any Sub-Servicing Agreement, shall not conflict with, result in any breach of any of the terms and provisions of, or constitute (with or without notice or lapse of time) a default under, the certificate of incorporation or bylaws of the Servicer, or any indenture, agreement, mortgage, deed of trust or other instrument to which the Servicer is a party or by which it is bound or any of its properties are subject, or result in the creation or imposition of any Lien upon any of its properties pursuant to the terms of any such indenture, agreement, mortgage, deed of trust or other instrument, other than this Agreement, or violate any law, order, rule or regulation applicable to the Servicer of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Servicer or any of its properties, or in any way materially adversely affect the interest of the Borrower in any Contract, or affect the Servicer's ability to perform its obligations under this Agreement; 11 (vi) No Proceedings. There are no 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 having jurisdiction over the Servicer or its properties (A) asserting the invalidity of this Agreement or any Sub-Servicing Agreement, (B) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or any Sub-Servicing Agreement, (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 Sub-Servicing Agreement, or (D) that could have a material adverse effect on the Contracts. (vii) Approvals. All approvals, authorizations, consents, orders or other actions of any person, corporation or other organization, or of any court, governmental agency or body or official, required in connection with the execution and delivery by the Servicer of this Agreement and the consummation of the transactions contemplated hereby have been or will be taken or obtained on or prior to the Closing Date. (viii) No Consents. The Servicer is not required to obtain the consent of any other party or any consent, license, approval or authorization, or registration or declaration with, any governmental authority, bureau or agency in connection with the execution, delivery, performance, validity or enforceability of this Agreement; (ix) Chief Executive Office. The chief executive office of the Servicer is located at 6400 Imperial Drive, Waco, Texas 76712. Section 2.7. Indemnification. The Servicer shall indemnify the Lender, the Backup Servicer, the Collateral Agent, NAF Corp. and the Borrower against all costs, expenses, losses, damages, claims and liabilities, including reasonable fees and expenses of counsel, which may be asserted against or incurred by any of them as a result of third party claims arising out of the events or facts giving rise to a breach of the covenants or representations and warranties set forth in Section 2.5(a) or 2.6. Section 2.8. Servicing Fee; Payment of Certain Expenses by Servicer. (a) On each Distribution Date, the Servicer shall be entitled to receive out of the Collection Account the Basic Servicing Fee for the related Collection Period pursuant to the Paying Agent Agreement. The Servicer may retain any Supplemental Servicing Fee, or may receive such amounts from the Collection Account payable pursuant to the Paying Agent Agreement. (b) The Servicer shall be required to pay all expenses incurred by it in connection with its activities under this Agreement. The Servicer shall be liable for the fees and expenses of each Sub-Servicer, the Lockbox Bank (and any fees under the Lockbox Agreement) and the Independent Accountants. Section 2.9. Servicer's Certificate. No later than 10:00 a.m. Eastern time on each Determination Date, the Servicer shall deliver to the Collateral Agent, the Backup Servicer, NAF Corp. and the Lender a Servicer's Certificate executed by a Responsible Officer of the Servicer substantially in the form of Exhibit A hereto. 12 Section 2.10. Quarterly Statement as to Compliance; Notice of Servicer Termination Event. (a) The Servicer shall deliver to the Borrower, the Backup Servicer, NAF Corp., the Lender and the Collateral Agent, on or before the last day of that quarter beginning on the date that is three months after the Closing Date, an Officer's Certificate, stating that (i) a review of the activities of the Servicer during the preceding 3-month period (or such other period as shall have elapsed from the Closing Date to the date of the first such certificate) and of its performance under this Agreement has been made under such officer's supervision, and (ii) to such officer's knowledge, based on such review, the Servicer has fulfilled all its obligations under this Agreement throughout such period, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officer and the nature and status thereof. (b) The Servicer shall deliver to the Borrower, the Backup Servicer, the Collateral Agent and the Lender, promptly after having obtained knowledge thereof, but in no event later than two Business Days thereafter, written notice in an Officer's Certificate of any event which with the giving of notice or lapse of time, or both, would become a Servicer Termination Event under Section 4.1. Section 2.11. Annual Independent Accountants' Report. (a) The Servicer shall, at its expense, cause a firm of nationally recognized independent certified public accountants (the "Independent Accountants"), who may also render other services to the Servicer, to deliver to the Borrower, the Backup Servicer, NAF Corp. and the Lender, on or before April 30 (or 120 days after the end of the Servicer's fiscal year, if other than December 31) of each year, beginning on April 30, 1997, a statement (the "Accountant's Report") addressed to the Board of Directors of the Servicer, to the Borrower, the Backup Servicer, the Lender and to the Collateral Agent, to the effect that such firm has audited the financial statements of the Servicer and issued its report thereon and that such audit (1) was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as such firm considered necessary in the circumstances; (2) included an examination of documents and records relating to the servicing of automobile installment sales contracts under servicing agreements substantially similar one to another (such statement to have attached thereto a schedule setting forth the servicing agreements covered thereby, including this Agreement); (3) included an examination of the delinquency and loss statistics relating to the Servicer's portfolio of automobile installment sales contracts; and (4) except as described in the statement, disclosed no exceptions or errors in the records relating to automobile and light truck loans serviced for others that, in the firm's opinion, generally accepted auditing standards requires such firm to report. The Accountants' Report shall further state that (1) a review in accordance with agreed upon procedures was made of three randomly selected Servicer's Certificates for the Borrower; (2) except as disclosed in the Report, no exceptions or errors in the Servicer's Certificates so examined were found; and (3) the delinquency and loss information relating to the Contracts contained in the Servicer Certificates were found to be accurate. (b) The Accountants' Report shall also indicate that the firm is independent of the Servicer within the meaning of the Code of Professional Ethics of the American Institute of Certified Public Accountants. 13 Section 2.12. Access to Certain Documentation and Information Regarding Contracts. The Servicer shall provide to representatives of the Borrower, the Backup Servicer, the Lender and the Collateral Agent reasonable access to the documentation regarding the Contracts. Each of the Servicer will permit any authorized representative or agent designated by the Lender to visit and inspect any of the properties of the Borrower or the Servicer, as the case may be, to examine the corporate books and financial records of the Borrower or Servicer, as the case may be, its records relating to the Contracts, and make copies thereof or extracts therefrom and to discuss the affairs, finances, and accounts of the Borrower or Servicer, as the case may be, with its principal officers, as applicable, and its independent accountants. Any expense incidental to the exercise by the Lender of any right under this Section 2.12 shall be borne by the Servicer. Such access shall be afforded without charge but only upon reasonable request and during normal business hours. Nothing in this Section 2.12 shall derogate from the obligation of the Servicer to observe any applicable law prohibiting disclosure of information regarding the Obligors, and the failure of the Servicer to provide access as provided in this Section 2.12 as a result of such obligation shall not constitute a breach of this Section 2.12. Section 2.13. Provision of Information. On or prior to the Backup Servicer Effective Date the Servicer shall supply the Backup Servicer with the Servicing Records as of a date at least as recent as the close of business on the second Business Day prior to the Backup Servicer Effective Date. On the first Business Day of each week, the Servicer will deliver to the Backup Servicer a computer tape or a diskette (or any other electronic transmission acceptable to the Backup Servicer) in a format reasonably acceptable to the Backup Servicer containing the Collection Records with respect to the Contracts as of the last Business Day of the prior week. The Backup Servicer shall use such tapes or diskettes (or other electronic transmission acceptable to the Backup Servicer) (x) to maintain an up-dated, parallel set of servicing records with respect to the Contracts and (y) to verify each monthly Servicer's Certificate delivered by the Servicer. The Backup Servicer shall certify to the Lender that it has verified each monthly Servicer's Certificate in accordance with this Section 2.13 and shall notify the Servicer and the Lender of any discrepancies, in each case, on or before the second Business Day following the Determination Date. In the event that the Backup Servicer reports any discrepancies, the Servicer and the Backup Servicer shall attempt to reconcile such discrepancies prior to the related Distribution Date, but in the absence of a reconciliation, the Servicer's Certificate shall control for the purpose of calculations and distributions with respect to the related Distribution Date. In the event that the Backup Servicer and the Servicer are unable to reconcile discrepancies with respect to a Servicer's Certificate by the related Distribution Date, the Servicer shall cause the Independent Accountants, at the Servicer's expense, to audit the Servicer's Certificate and, prior to the fourth Business Day, but in no event later than the fifth calendar day, of the following month, reconcile the discrepancies. The effect, if any, of such reconciliation shall be reflected in the Servicer's Certificate for such next succeeding Determination Date. 14 In addition, the Servicer shall, if so requested by the Lender, deliver to the Backup Servicer the Collection Records (as of the close of business on any Business Day) within one Business Day of demand therefor. Other than the duties specifically set forth in this Agreement, the Backup Servicer shall have no obligations hereunder, including, without limitation, to supervise, verify, monitor or administer the performance of the Servicer. The Backup Servicer shall have no liability for any actions taken or omitted by the Servicer. The duties and obligations of the Backup Servicer shall be determined solely by the express provisions of this Agreement and no implied covenants or obligations shall be read into this Agreement against the Backup Servicer. Section 2.14. Fidelity Bond. The Servicer shall maintain a fidelity bond in such form and amount as is customary in the industry for entities acting as servicers of consumer contracts on behalf of institutional investors, which amount shall provide coverage of not less than $4,000,000 in the aggregate and single-occurrence coverage of $2,000,000. Section 2.15. Sub-Servicing Agreements Between Servicer and Sub-Servicers. The Servicer may enter into Sub-Servicing Agreements for any servicing and administration of any Contracts with any institution which is in compliance with the laws of each state necessary to enable it to perform its obligations under such Sub-Servicing Agreement and as to which the Lender, NAF Corp. and the Borrower have each given their prior written consent. The Servicer shall give notice to the Borrower, the Backup Servicer and the Collateral Agent of the appointment of any Sub-Servicer. For purposes of this Agreement, the Servicer shall be deemed to have received payments on any Contracts when any Sub-Servicer has received such payments. Any such Sub-Servicing Agreement shall be consistent with and not violate the provisions of this Agreement. Section 2.16. Successor Sub-Servicers. Each Sub-Servicing Agreement shall expressly provide that the Servicer, the Lender or the Backup Servicer shall be entitled to terminate any Sub-Servicing Agreement in accordance with the terms and conditions of such Sub-Servicing Agreement and to either itself directly service the related Contracts or enter into a Sub-Servicing Agreement with a successor Sub-Servicer. None of the Lender, the Collateral Agent nor the Backup Servicer shall have any duty or obligation to monitor or supervise the performance of any Sub-Servicer. In the event of termination of any Sub-Servicer by the Servicer, all servicing obligations of such Sub-Servicer shall be assumed simultaneously by the Servicer without any act or deed on the part of such Sub-Servicer or the Servicer, and the Servicer either shall service directly the related Contracts or shall enter into a Sub-Servicing Agreement with a successor Sub-Servicer. The Servicer shall give written notice to the Lender and to the Backup Servicer of the termination of any Sub-Servicer. Any Sub-Servicing Agreement shall include (a) the provision that such agreement may be immediately terminated, without cause and without payment of any penalty or fee, by (x) the Backup Servicer or (y) the Lender, in either case in the event that the Servicer shall, for any reason, no longer be the Servicer (including termination due to an Event of Servicer Termination or an Event of Default), together with (b) a provision stating that none 15 of the Backup Servicer, the Lender, the Collateral Agent or the Borrower (i) shall be deemed a party thereto and (ii) shall have any claims, rights, obligations, duties or liabilities with respect to any Sub-Servicer, except as set forth herein. Section 2.17. Liability of Servicer. The Servicer shall not be relieved of its obligations under this Agreement notwithstanding any Sub-Servicing Agreement or any of the provisions of this Agreement relating to agreements or arrangements between the Servicer and a Sub-Servicer or otherwise, and the Servicer shall be obligated to the same extent and under the same terms and conditions as if it alone were servicing and administering the Contracts. The Servicer shall be entitled to enter into any agreement with a Sub-Servicer for indemnification of the Servicer by such Sub-Servicer and nothing contained in such SubServicing Agreement shall be deemed to limit or modify this Agreement. Section 2.18. No Contractual Relationship Between Sub-Servicer and Trust, the Backup Servicer, the Lender, or the Collateral Agent. Any Sub-Servicing Agreement and any other transactions or services relating to the Contracts involving a Sub-Servicer shall be deemed to be between the Sub-Servicer and the Servicer alone and the Borrower, the Backup Servicer, the Lender and the Collateral Agent shall not be deemed parties thereto and shall have no claims, rights, obligations, duties or liabilities with respect to any Sub-Servicer except as set forth in Section 2.19. Section 2.19. Assumption or Termination of Sub-Servicing Agreement by Backup Servicer. In connection with the assumption of the responsibilities, duties and liabilities and of the authority, power and rights of the Servicer hereunder pursuant to Section 4.2, it is understood and agreed that the Servicer's rights and obligations under any Sub-Servicing Agreement then in force between the Servicer and a Sub-Servicer may be assumed or terminated by the assuming party at its option. The Servicer shall, upon request of the Lender or of the Backup Servicer, but at the expense of the Servicer, deliver to the assuming party documents and records relating to each Sub-Servicing Agreement and an accounting of amounts collected and held thereunder and otherwise use its best reasonable efforts to effect the orderly and efficient transfer of the Sub-Servicing Agreements to the assuming party. ARTICLE III LIABILITY AND INDEMNITIES Section 3.1. Liability of Servicer; Indemnities. (a) The Servicer shall be liable hereunder only to the extent of the obligations in this Agreement specifically undertaken by the Servicer and the representations made by the Servicer. (b) The Servicer shall defend, indemnify and hold harmless the Borrower, the Backup Servicer, the Collateral Agent, NAF Corp., the Lender and their respective officers, directors, agents and employees from and against any and all costs, expenses, losses, damages, claims and liabilities, including reasonable fees and expenses of counsel and expenses of 16 litigation arising out of or resulting from the use, ownership or operation by the Servicer or any Affiliate thereof of any Vehicle; (c) The Servicer shall indemnify, defend and hold harmless the Borrower, the Backup Servicer, the Lender, NAF Corp., and the Collateral Agent, their respective officers, directors, agents and employees from and against any and all costs, expenses, losses, claims, damages, and liabilities to the extent that such cost, expense, loss, claim, damage, or liability arose out of, or was imposed upon the Borrower, the Backup Servicer, the Collateral Agent or the Lender through the breach of this Agreement, the negligence, willful misfeasance, or bad faith of the Servicer in the performance of its duties under this Agreement or by reason of reckless disregard of its obligations and duties under this Agreement; (d) For purposes of this Section 3.1, in the event of the termination of the rights and obligations of the Servicer (or any successor thereto pursuant to Section 3.2) as Servicer pursuant to Section 4.1, or a resignation by such Servicer pursuant to this Agreement, such Servicer shall be deemed to be the Servicer pending appointment of a successor Servicer pursuant to Section 4.3. The provisions of this Section 3.1(f) shall in no way affect the survival pursuant to Section 3.1(g) of the indemnification by the Servicer provided by Sections 3.1(b) through 3.1(e); and (e) Indemnification under this Article shall survive the termination of this Agreement and shall include reasonable fees and expenses of counsel and expenses of litigation. If the Servicer shall have made any indemnity payments pursuant to this Article and the recipient thereafter collects any of such amounts from others, the recipient shall promptly repay such amounts collected to the Servicer, without interest. Notwithstanding any other provision of this Agreement, the obligations of the Servicer described in this Section shall not terminate or be deemed released upon the resignation or termination of J-Hawk Servicing Corporation as the Servicer and shall survive any termination of this Agreement. Section 3.2. Merger or Consolidation of, or Assumption of the Obligations of, the Servicer or Backup Servicer. (a) The Servicer shall not merge or consolidate with any other Person, convey, transfer or lease substantially all its assets as an entirety to another Person, or permit any other Person to become the successor to the Servicer's business unless, after the merger, consolidation, conveyance, transfer, lease or succession, the successor or surviving entity shall be an Eligible Servicer and shall be capable of fulfilling the duties of the Servicer contained in this Agreement. Any Person (i) into which the Servicer may be merged or consolidated, (ii) resulting from any merger or consolidation to which the Servicer shall be a party, (iii) which acquires by conveyance, transfer, or lease substantially all of the assets of the Servicer, or (iv) succeeding to the business of the Servicer, in any of the foregoing cases shall execute an agreement of assumption to perform every obligation of the Servicer under this Agreement and, whether or not such assumption agreement is executed, shall be the successor to the Servicer under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties to this Agreement, anything in this Agreement to the contrary notwithstanding; provided, however, that nothing contained herein shall be deemed to release the Servicer from any obligation. The Servicer shall provide notice of any merger, consolidation or succession pursuant to this Section 3.2(a) to the Borrower, NAF Corp. and the Collateral Agent. Notwithstanding the foregoing, as a condition to the 17 consummation of the transactions referred to in clauses (i), (ii), (iii) and (iv) above, (x) immediately after giving effect to such transaction, no representation or warranty made pursuant to Section 2.6 shall have been breached (for purposes hereof, such representations and warranties shall speak as of the date of the consummation of such transaction), (y) the Servicer shall have delivered to the Borrower, the Collateral Agent and the Lender an Officer's Certificate and an Opinion of Counsel each stating that such consolidation, merger or succession and such agreement of assumption comply with this Section 3.2(a) and that all conditions precedent, if any, provided for in this Agreement relating to such transaction have been complied with, and (z) the Servicer shall have delivered to the Borrower, the Collateral Agent, NAF Corp., and the Lender, stating, in the opinion of such counsel, either (A) all financing statements and continuation statements and amendments thereto have been executed and filed that are necessary to preserve and protect the interest of the Collateral Agent in the Collateral and reciting the details of the filings or (B) no such action shall be necessary to preserve and protect such interest. (b) Any Person (i) into which the Backup Servicer may be merged or consolidated, (ii) resulting from any merger or consolidation to which the Backup Servicer shall be a party, (iii) which acquires by conveyance, transfer or lease substantially all of the assets of the Backup Servicer, or (iv) succeeding to the business of the Backup Servicer, in any of the foregoing cases shall execute an agreement of assumption to perform every obligation of the Backup Servicer under this Agreement and, whether or not such assumption agreement is executed, shall be the successor to the Backup Servicer under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties to this Agreement, anything in this Agreement to the contrary notwithstanding; provided, however, that nothing contained herein shall be deemed to release the Backup Servicer from any obligation. Section 3.3. Limitation on Liability of Servicer, Backup Servicer and Others. Neither the Servicer, the Backup Servicer nor any of the directors or officers or employees or agents of the Servicer or Backup Servicer shall be under any liability to the Borrower, the Lender or NAF Corp., except as provided in this Agreement, for any action taken or for refraining from the taking of any action pursuant to this Agreement; provided, however, that this provision shall not protect the Servicer, the Backup Servicer or any such person against any liability that would otherwise be imposed by reason of willful misfeasance, bad faith or negligence (excluding errors in judgment) in the performance of duties (including negligence with respect to the Servicer's indemnification obligations hereunder), by reason of reckless disregard of obligations and duties under this Agreement or any violation of law by the Servicer, Backup Servicer or such person, as the case may be; further provided, that this provision shall not affect any liability to indemnify the Collateral Agent for costs, taxes, expenses, claims, liabilities, losses or damages paid by the Collateral Agent in its individual capacity. The Servicer, the Backup Servicer and any director, officer, employee or agent of the Servicer or Backup Servicer may rely in good faith on the advice of counsel or on any document of any kind prima facie properly executed and submitted by any Person respecting any matters arising under this Agreement. The Backup Servicer shall not be required to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if the repayment of such 18 funds or adequate written indemnity against such risk or liability is not reasonably assured to it in writing prior to the expenditure or risk of such funds or incurrence of financial liability. Section 3.4. Delegation of Duties. So long as J-Hawk Servicing Corporation is the Servicer, the Servicer may delegate duties under this Agreement to an Affiliate of JHawk Servicing Corporation with the prior written consent of the NAF Corp., the Lender, the Borrower and the Backup Servicer. The Servicer also may at any time perform the specific duty of repossession of Vehicles through sub-contractors who are in the business of repossessing vehicles which secure automotive receivables, and may perform other specific duties through such sub-contractors with the prior written consent of the Lender, provided, however, that no such delegation or subcontracting duties by the Servicer shall relieve the Servicer of its responsibility with respect to such duties. Neither J-Hawk Servicing Corporation nor any other party acting as Servicer hereunder shall appoint any subservicer hereunder without the prior written consent of the Collateral Agent, the Borrower, the Lender and the Backup Servicer. Section 3.5. Servicer and Backup Servicer Not to Resign. (a) Subject to the provisions of Section 3.2, neither the Servicer nor the Backup Servicer shall resign from the obligations and duties imposed on it by this Agreement as Servicer or Backup Servicer except with the prior written consent of the Lender. No resignation of the Servicer shall become effective until, the Backup Servicer or an entity acceptable to the Lender shall have assumed the responsibilities and obligations of the Servicer. No resignation of the Backup Servicer shall become effective until, an entity acceptable to the Lender shall have assumed the responsibilities and obligations of the Backup Servicer; provided, however, that in the event a successor Backup Servicer is not appointed within 60 days after the Backup Servicer has given notice of its resignation as permitted by this Section 3.5, the Backup Servicer may petition a court for its removal. (b) The Borrower may, with the prior written consent of the Lender upon 45 days' notice to the Servicer, terminate the Servicer as Servicer hereunder without cause. ARTICLE IV SERVICER TERMINATION EVENTS Section 4.1. Servicer Termination Event. For purposes of this Agreement, each of the following shall constitute a "Servicer Termination Event": (a) Any failure by the Servicer to deliver to the Lockbox or to the Collateral Agent for distribution any proceeds or payment required to be so delivered under the terms hereof that continues unremedied for a period of two Business Days after written notice is received by the Servicer or after discovery of such failure by a Responsible Officer of the Servicer; (b) Failure by the Servicer (i) to deliver the Servicer's Certificate required by Section 2.9 within five (5) days after the date such certificate is required to be delivered 19 or (ii) to deliver to the Backup Servicer the Weekly Collection Records required by Section 2.9 within two (2) days after the date such records are required to be delivered; (c) Failure on the part of the Servicer to observe its covenants and agreements set forth in Section 3.2(a); (d) Failure on the part of the Servicer duly to observe or perform in any material respect any other covenants or agreements of the Servicer which failure continues unremedied for a period of 30 days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Servicer by the Collateral Agent or the Lender; (e) The entry of a decree or order for relief by a court or regulatory authority having jurisdiction in respect of the Servicer in an involuntary case under the federal bankruptcy laws, as now or hereafter in effect, or another present or future, federal or state, bankruptcy, insolvency or similar law, or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Servicer or of any substantial part of their respective properties or ordering the winding up or liquidation of the affairs of the Servicer and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days or the commencement of an involuntary case under the federal bankruptcy laws, as now or hereinafter in effect, or another present or future federal or state bankruptcy, insolvency or similar law and such case is not dismissed within 60 days; or (f) The commencement by the Servicer of a voluntary case under the federal bankruptcy laws, as now or hereafter in effect, or any other present or future, federal or state, bankruptcy, insolvency or similar law, or the consent by the Servicer to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of the Servicer or of any substantial part of its property or the making by the Servicer of an assignment for the benefit of creditors or the failure by the Servicer generally to pay its debts as such debts become due or the taking of corporate action by the Servicer in furtherance of any of the foregoing; (g) Any representation, warranty or statement of the Servicer made in this Agreement or any certificate, report or other writing delivered pursuant hereto shall prove to be incorrect in any material respect as of the time when the same shall have been made, and the incorrectness of such representation, warranty or statement has a material adverse effect on the Borrower or the Lender and, within 30 days after written notice thereof shall have been given to the Servicer by the Lender, the circumstances or condition in respect of which such representation, warranty or statement was incorrect shall not have been eliminated or otherwise cured; (h) A material adverse change from the date hereof in the business, properties, operations, prospects or financial or other condition of the Servicer, as determined by Lender in its reasonable, good faith business judgment; or 20 (i) The occurrence of an "Event of Default" under the Credit Agreement which is not waived by the Lender. Section 4.2. Consequences of a Servicer Termination Event. If a Servicer Termination Event shall occur and be continuing the Lender shall thereafter have the right to direct all activities of the Servicer with respect to the Collateral, including the right to direct the Servicer to deliver any portion of the Collateral then held by the Servicer to the location designated by the Lender; in addition, by notice given in writing to the Servicer may terminate all of the rights and obligations of the Servicer under this Agreement. On or after the receipt by the Servicer of such written notice, all authority, power, obligations and responsibilities of the Servicer under this Agreement automatically shall pass to, be vested in and become obligations and responsibilities of the Backup Servicer; provided, however, that the Backup Servicer (i) shall have no liability with respect to any obligation which was required to be performed by the prior Servicer prior to the date that the Backup Servicer becomes the Servicer or any claim of a third party based on any alleged action or inaction of the prior Servicer and (ii) shall have no duty or obligation with respect to the Servicer's obligations set forth in Sections 2.8(b). The Backup Servicer is authorized and empowered by this Agreement to execute and deliver, on behalf of the prior Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments and to do or accomplish all other acts or things necessary or appropriate to effect the purposes of such notice of termination, whether to complete the transfer and endorsement of the Contracts and the other Collateral and related documents to show the Collateral Agent as lienholder or secured party on the related Lien Certificates, or otherwise. The prior Servicer agrees to cooperate with the Backup Servicer in effecting the termination of the responsibilities and rights of the prior Servicer under this Agreement, including, without limitation, the transfer to the Backup Servicer for administration by it of all cash amounts that shall at the time be held by the prior Servicer for deposit, or have been deposited by the prior Servicer, in the Collection Account or thereafter received with respect to the Contracts and the delivery to the Backup Servicer of all Contract Files, Servicing Records and Collection Records and a computer tape in readable form containing all information necessary to enable the Backup Servicer or a successor Servicer to service the Contracts and the other Collateral. If requested by the Lender, the Backup Servicer or successor Servicer shall terminate the Lockbox Agreement and direct the Obligors to make all payments under the Contracts directly to the successor Servicer (in which event the successor Servicer shall process such payments in accordance with Section 2.2(e)), or to a lockbox established by the successor Servicer at the direction of the Lender, at the prior Servicer's expense. The Backup Servicer may set off and deduct any amounts owed by the terminated Servicer from any amounts payable to the terminated Servicer pursuant to the preceding sentence. The terminated Servicer shall grant the Collateral Agent, the Backup Servicer and the Lender reasonable access to the terminated Servicer's premises at the terminated Servicer's expense. Section 4.3. Appointment of Successor. (a) On and after (i) the time the Servicer receives a notice of termination pursuant to Section 4.2 or (ii) upon the resignation of the Servicer pursuant to Section 3.5, the Backup Servicer shall be the successor in all respects to the Servicer in its capacity as servicer under this Agreement and the transactions set forth or provided for in this Agreement, and shall be subject to all the responsibilities, restrictions, duties, liabilities and termination provisions relating thereto placed on the Servicer by the 21 terms and provisions of this Agreement; provided, however, that the Backup Servicer (i) shall not be liable for any acts, omissions or obligations of the Servicer prior to such succession or for any breach by the Servicer of any of its representations and warranties contained in this Agreement or in any related document or agreement and (ii) shall have no duty or obligation with respect to the Servicer's obligations set forth in Section 2.8(b). The Backup Servicer and such successor shall take such action, consistent with this Agreement, as shall be necessary to effectuate any such succession. If a successor Servicer is acting as Servicer hereunder, it shall be subject to termination under Section 4.2 upon the occurrence of any Servicer Termination Event applicable to it as Servicer. Notwithstanding the above, if the Backup Servicer shall be legally unable or unwilling to act as Servicer, the Backup Servicer may petition a court of competent jurisdiction to appoint any Eligible Servicer as the successor to the Servicer. Pending such appointment, the Backup Servicer shall act as successor Servicer unless it is legally unable to do so, in which event the outgoing Servicer shall continue to act as Servicer until a successor has been appointed and accepted such appointment. Subject to Section 3.5, no provision of this Agreement shall be construed as relieving the Backup Servicer of its obligation to succeed as successor Servicer upon the termination of the Servicer pursuant to Section 4.2 or the resignation of the Servicer pursuant to Section 3.5. If upon the termination of the Servicer pursuant to Section 4.2 or the resignation of the Servicer pursuant to Section 3.5, the Lender appoints a successor Servicer other than the Backup Servicer, the Backup Servicer shall not be relieved of its duties as Backup Servicer hereunder. (b) Any successor Servicer shall be entitled to such compensation (whether payable out of the Collection Account or otherwise) as the Servicer would have been entitled to under the Agreement if the Servicer had not resigned or been terminated hereunder. If any successor Servicer is appointed for any reason, the Lender and such successor Servicer may agree on additional compensation to be paid to such successor Servicer, which additional compensation shall be payable out of funds on deposit in the Collection Account. In addition, any successor Servicer shall be entitled, out of funds in the Collection Account, to reasonable transition expenses incurred in acting as successor Servicer. Section 4.4. Waiver of Past Defaults. The Lender may waive any default by the Servicer in the performance of its obligations hereunder and its consequences. Upon any such waiver of a past default, such default shall cease to exist, and any Servicer Termination Event arising therefrom shall be deemed to have been remedied for every purpose of this Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereon. ARTICLE V MISCELLANEOUS PROVISIONS Section 5.1. Amendment. This Agreement may be amended from time to time by the parties hereto only by a written instrument executed by all such parties and consented to by the Lender. Section 5.2. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to the 22 principles of conflicts of laws thereof and the obligations, rights and remedies of the parties under this Agreement shall be determined in accordance with such laws. Section 5.3. 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 5.4. Assignment. Notwithstanding anything to the contrary contained in this Agreement, except as provided in Section 3.2 and as provided in the provisions of the Agreement concerning the resignation of the Servicer and the Backup Servicer, this Agreement may not be assigned by any party hereto without the prior written consent of the other parties hereto. Section 5.5. Governing Law; Waiver. (a) This Servicing Agreement and the rights and obligations of the parties hereunder shall be governed by, and construed and interpreted in accordance with the law of the State of New York, without regard to the conflicts of law principles thereof. (b) EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY: (I) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND THE OTHER FACILITY AGREEMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT OF THE COURTS OF THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (II) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (III) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN SECTION 5.7 OR AT SUCH OTHER ADDRESS OF WHICH ALL OF THE OTHER PARTIES HERETO SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; (IV) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER 23 PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION; (V) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN THIS SUBSECTION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES; AND (VI) EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS SERVICING AGREEMENT OR ANY OTHER FACILITY AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. Section 5.6. Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and all of which counterparts shall constitute but one and the same instrument. Section 5.7. Notices. All demands, notices and communications under this Agreement shall be in writing, personally delivered or mailed by certified mail-return receipt requested, and shall be deemed to have been duly given upon receipt (a) in the case of the Servicer, the Servicer, at the following address: J-Hawk Servicing Corporation, 6400 Imperial Drive, Waco, Texas 76712, P.O. Box 8216, Waco, Texas 76712-8216, phone 817-751-1750, fax 817-751-1208, Attention: James T. Sartain, (b) in the case of the Borrower or NAF Corp., at the following address: N.A.F. Auto Loan Trust, 4545 Fuller Drive, Suite 101, Irving, Texas 75038, Attention: Jim W. Moore, (c) in the case of the Collateral Agent, at the following address: Texas Commerce Bank, 2200 Ross Avenue, Dallas, Texas 75201, Attention: Structured Capital, fax 214-965-3577, and (d) in the case of the Lender, at the following address: ContiTrade Services L.L.C., 277 Park Avenue, New York, New York 10172, phone 212-207-2822, fax 212-207-2935, Attention: Chief Counsel, or at such other address as shall be designated by any such party in a written notice to the other parties. Section 5.8. Successors and Assigns. This Agreement shall be binding upon the parties hereto and their respective successors and assigns, and shall inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns permitted hereunder. All covenants and agreements contained herein shall be binding upon, and inure to the benefit of, the Borrower, the Backup Servicer, NAF Corp., the Lender and the Collateral Agent and their respective permitted successors and assigns, if any. 24 IN WITNESS WHEREOF, the Borrower, the Servicer, NAF Corp. and the Lender have caused this Servicing Agreement to be duly executed by their respective officers, effective as of the day and year first above written. N.A.F. AUTO LOAN TRUST By: DELAWARE TRUST COMPANY, not in its individual capacity, but solely as Owner Trustee on behalf of N.A.F. AUTO LOAN TRUST By /s/ Richard N. Smith Name: Richard N. Smith Title: Vice President J-HAWK SERVICING CORPORATION By /s/ Matt A. Landry, Jr. Name: Matt A. Landry, Jr. Title: Executive Vice President NATIONAL AUTO FUNDING CORPORATION By /s/ Jim W. Moore Name: Jim W. Moore Title: President 25 CONTITRADE SERVICES L.L.C. By /s/ Susan E. O'Donovan Name: Susan E. O'Donovan Authorized Signatory By /s/ Jerome M. Perelson Name: Jerome M. Perelson Authorized Signatory 26 EXHIBIT A FORM OF SERVICER'S CERTIFICATE J-HAWK SERVICING CORPORATION Monthly Servicing Report: N.A.F. Auto Loan Trust Collection Period Ending: dd/mm/yy 1 EX-10.19 9 INVESTMENT BANKING SERVICES AGREEMENT EXHIBIT 10.19 CONTIFINANCIAL SERVICES CORPORATION -------------------- INVESTMENT BANKING SERVICES AGREEMENT dated as of May 17, 1996 -------------------- NATIONAL AUTO FUNDING CORPORATION TABLE OF CONTENTS Page SECTION 1. DEFINITIONS.................................................... 1 1.1 Defined Terms.................................................... 1 SECTION 2. INVESTMENT BANKING............................................. 2 2.1 Appointment of Lead Manager...................................... 2 2.2 Fees............................................................. 2 2.3 The Securities................................................... 3 2.4 Information to be Made Available................................. 4 2.5 Payment of Expenses.............................................. 4 2.6 Indemnification.................................................. 5 2.7 Further Assurances............................................... 5 SECTION 3. MISCELLANEOUS.................................................. 5 3.1 Amendments and Waivers........................................... 5 3.2 Notices.......................................................... 5 3.3 Successors and Assigns........................................... 6 3.4 Termination...................................................... 6 3.5 Counterparts..................................................... 6 3.6 Severability..................................................... 6 3.7 Integration; Construction........................................ 6 3.8 Limited Liability................................................ 7 3.9 GOVERNING LAW.................................................... 7 3.10 SUBMISSION TO JURISDICTION; WAIVERS.............................. 7 3.11 Acknowledgements................................................. 8 3.12 WAIVER OF JURY TRIAL............................................. 8 i INVESTMENT BANKING SERVICES AGREEMENT INVESTMENT BANKING SERVICES AGREEMENT, dated as of May 17, 1996 (this "IBSA"), by and among CONTIFINANCIAL SERVICES CORPORATION ("ContiFinancial") and NATIONAL AUTO FUNDING CORPORATION, a Delaware corporation ("NAF Corp."). W I T N E S S E T H: WHEREAS, the NAF Auto Loan Trust (the "Borrower") has entered into a Credit Agreement dated as of May 17, 1996 (as may from time to time, be amended, supplemented, or modified, the "Credit Agreement") with NAF Corp. and ContiTrade Services L.L.C. (the "Lender"), pursuant to which the Borrower will receive the proceeds of Advances from time to time made thereunder; WHEREAS, it is a condition to the obligations of the Lender to make the Advances under the Credit Agreement that NAF Corp. shall have executed and delivered this Agreement to ContiFinancial. NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. (a) As used in this IBSA, the capitalized terms used herein and therein shall, unless otherwise defined herein or therein, have the meanings assigned to them in the Definitions List which is attached as Exhibit A to the Credit Agreement (the "Definitions List"). (b) The words "hereof," "herein" and "hereunder" and words of similar import when used in this IBSA shall refer to this IBSA as a whole and not to any particular provision of this IBSA and Section, subsection, schedule and exhibit references are to this IBSA unless otherwise specified. (c) Capitalized terms used herein shall be equally applicable to both the singular and plural forms of such terms. 1 SECTION 2. INVESTMENT BANKING 2.1 Appointment of Lead Manager. (a) NAF Corp. hereby appoints ContiFinancial as the lead manager of the NAF Entities with respect to any issuance of Securities. For purposes of this IBSA, "Securities" shall mean the NAF Entities' first $600,000,000 of automobile receivables-backed notes or certificates issued to finance the NAF Entities' automobile loan origination and acquisition program (the "Program"), together with any such automobile-backed notes or certificates in excess of such $600,000,000, so long as the Lender financed the Contracts underlying such notes or certificates pursuant to the Credit Agreement. ContiFinancial in its capacities as lead manager for the Securities is referred to herein as the "Lead Manager". ContiFinancial's mandate as the Lead Manager shall not be conditioned upon ContiTrade Service L.L.C.'s continued provision of warehouse financing after the initial term to the Borrower pursuant to the Credit Agreement. (b) Upon accumulation of a pool of Contracts suitable for securitization in a structure acceptable to the Lead Manager and rating agencies and the related Credit Enhancer, the Lead Manager agrees to utilize its best efforts in its ordinary course of business to obtain one or more purchasers (the "Purchasers") of the Securities, in compliance with applicable law and any terms provided in the offering memorandum or other offering materials, if any, prepared by the NAF Entities for the issuance of Securities. (c) ContiFinancial's mandate as Lead Manager is expressly conditioned upon ContiFinancial's continued ability to effect the placement of the Securities in a commercially reasonable manner. Any disagreement as to whether a Securities execution was in a "commercially reasonable manner" shall be settled by binding arbitration, with each of ContiFinancial and NAF Corp. naming one arbitrator and the two arbitrators so named naming a third. 2.2 Fees. (a) The Lead Manager shall be the exclusive Lead Manager for any investment grade Securities, at the fees set forth below. The NAF Entities may retain the Lead Manager to act as placement agent for non-investment grade securities at fees to be determined at the time of the offering. (b) The NAF Entities shall pay to the Lead Manager, on the applicable closing date of each issuance of Securities a management fee equal to (i) 1.00% of the gross proceeds from the sale of the first $200,000,000 of Securities issued, (ii) .90% of the gross proceeds from the next $200,000,000 of Securities issued and (ii) .60% of the gross proceeds from the sale of any Securities issued thereafter (collectively, the "Management Fee"). (c) In addition to the provisions of paragraph (b) above, the Management Fee shall also be due and owing: 2 (i) immediately, upon the occurrence of an Event of Default under the Credit Agreement; provided that the Lender shall have accelerated the Obligations; in such circumstance the Management Fee shall be applied to the Adjusted Eligible Contract Balance as of the date of acceleration; (ii) (a) six months following the refinancing of the Loan under the Credit Agreement with another lender un-affiliated with the Lender, provided that a securitization of such Contracts through the Lead Manager does not take place prior to the end of such six- month period and (b) immediately upon the sale of the Contracts on a whole-loan basis; in either such circumstance the Management Fee shall be applied to the Adjusted Eligible Contract Balance as of the date of such refinancing or sale; provided, that if the NAF Entities thereafter effects a securitization with the Lead Manager relating to such Contracts, the Management Fee previously paid in connection with such refinancing or sale shall be offset against the Management Fees due to the Lead Manager in connection with the subsequent securitization; and (iii) six months following the termination of the Credit Agreement at its stated termination date (if not renewed or extended), if $600,000,000 in Securities have not previously been issued; in such circumstance the Management Fee shall be applied to the Aggregate Eligible Contract Balance as of the date of such termination; provided, that if the NAF Entities thereafter effects a securitization with the Lead Manager relating to such Contracts, the Management Fee previously paid in connection with such refinancing or sale shall be offset against the Management Fees due to the Lead Manager in connection with the subsequent securitization. In no event shall the above provisions result in the payment of duplicative Management Fees. 2.3 The Securities. (a) It is expected that the Securities will consist of either (i) senior notes ("Notes") of a special purpose corporation created for such purpose (ii) certificates evidencing undivided interests in a trust ("Grantor Trust Certificates") or (iii) certificates, which for tax purposes will be indebtedness ("Debt Certificates"). The holders of the Notes, the Grantor Trust Certificates or the Debt Certificates will have a first perfected security interest in the contracts and credit enhancement described below. (b) It is intended that the Securities will be issued in one or more series of Rule 144A private placements or public offerings, and the senior class 3 thereof will be rated at least "A" by at least one nationally recognized rating agency. The credit enhancement used to obtain this rating may consist of a cash reserve account funded by the NAF Entities or FirstCity, a subordinated class of securities retained by the NAF Entities, overcollateralization provided by the NAF Entities, a financial guaranty insurance policy provided by a nationally recognized monoline financial guaranty insurer acceptable to the rating agencies, other form of third-party credit enhancement reasonably acceptable to the Lead Manager, or a combination of the above. No issuance of the Securities shall be consummated unless NAF Corp. and the Lead Manager mutually agree on the tax and credit enhancement structure to be used to issue the Securities and the interest rate to be paid to investors in respect of the Securities; provided, however, that NAF Corp. may not unreasonably withhold consent to any proposed structure (including, without limitation, the interest rate to be paid to investors in respect of the Securities). 2.4 Information to be Made Available. (a) The NAF Entities will provide information about the Contracts to the Lead Manager on a magnetic medium. The Contracts will be selected by NAF Corp. from the Borrower's portfolio, subject to eligibility standards established by the Lead Manager, the Rating Agencies and the Credit Enhancer. If the Securities are Notes, on the closing date the Contracts will be contributed to the SPC in exchange for the ownership interests in the SPC and the proceeds received upon sale of the Notes. (b) The NAF Entities agree to make available to the Lead Manager, the Rating Agencies, the Credit Enhancer and any prospective Purchaser for their review all documents, records and other information relating to the Contracts and/or the servicing thereof. NAF Entities also will make available the appropriate personnel to meet with prospective Purchasers, the Rating Agencies and the Credit Enhancer, as identified by the Lead Manager. (c) The NAF Entities agree to co-operate with accountants' file review as may be reasonably necessary in connection with a securitization. 2.5 Payment of Expenses. The NAF Entities shall pay all customary, usual and reasonable costs and expenses in connection with this Agreement, and the rating, issuance and sale of the Securities, whether or not the Securities are issued or sold, such as, without limitation, the fees and disbursements of NAF Entities attorneys, including such fees incurred in preparing required legal opinions, and the fees and expenses of any data processing vendor. The NAF Entities shall pay all of the Lead Manager's reasonable out-of-pocket expenses related to this Agreement, including all fees and disbursements of the Lead Manager's and counsel and any outside auditors required by the rating agencies and the credit enhancer. In addition, the NAF Entities shall pay all fees and disbursements of counsel to any Purchaser, rating agencies and the credit enhancer. All such expenses, fees and disbursements shall be due and payable whether or not any Securities are sold. 2.6 Indemnification. NAF Corp. will indemnify the Lead Manager against any losses, claims, damages or liabilities to which the Lead Manager may become 4 subject in connection with any matter related to or arising out of this Agreement; provided, however, there shall be excluded from such indemnification any such loss, claim, damage or liability which results from the gross negligence or willful misconduct of the Lead Manager in performing the services which it is to render pursuant to this agreement. In addition, NAF Corp. shall indemnify the Lead Manager in the case of claims respecting (a) the accuracy or completeness of the materials or information provided by the NAF Entities to the Lead Manager or a Purchaser or (b) any action, or failure to act, by the Lead Manager undertaken at NAF Corp.'s request or with the consent of NAF Corp. 2.7 Further Assurances. NAF Corp. shall do such further acts and things and execute and deliver to the Lead Manager such assignments, agreements, financing statements, powers and instruments as are required by the Lead Manager to carry into effect the purposes of this Agreement. SECTION 3. MISCELLANEOUS 3.1 Amendments and Waivers. The provisions hereof may be amended, supplemented or modified by the parties hereto, in writing. 3.2 Notices. Except where telephonic instructions or notices are authorized herein to be given, all notices, demands, instructions and other communications required or permitted to be given to or made upon any party hereto shall be in writing and shall be personally delivered or sent by overnight courier service, or by registered, certified or express mail, postage prepaid, return receipt requested, or by facsimile copy (accompanied by a telephonic confirmation or receipt thereof), or telegram (with messenger delivery specified in the case of a telegram) and shall be deemed to be delivered for purposes of this Agreement on: (a) the second Business Day following the day on which such notice was placed in the custody of the U.S. Postal Service, (b) the next Business Day following the day on which such notice was placed in the custody of any overnight courier service, including express mail service or (c) the same Business Day on which such notice is sent by telegram, messenger or facsimile. Unless otherwise specified in a notice sent or delivered in accordance with the foregoing provisions of this subsection, notices, demands, instructions and other communications in writing shall be given to or made upon the respective parties hereto at their respective addresses (or to their respective facsimile numbers) indicated below, and, in the case of telephonic instructions or notices, by calling the telephone number or numbers indicated for such party below: If to NAF Corp.: National Auto Funding Corporation 4545 Fuller Drive, Suite 101 Irving, TX 75038 Attention: Jim W. Moore Tel. No.: 214-791-1113 Telecopier No.: 214-791-0464 5 If to ContiFinancial: ContiFinancial Services Corporation 277 Park Avenue, 38th Floor New York, New York 10172 Attention: Chief Counsel Tel. No.: 212-207-2822 Telecopier No.: 212-207-2935 3.3 Successors and Assigns. (a) This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that NAF Corp. may not assign or transfer any of its obligations under this Agreement and ContiFinancial may not assign or transfer any of its obligations under this Agreement without the prior consent of the other party, which consent shall not unreasonably be withheld. 3.4 Termination. This Agreement (except for Section 2.5 hereof) shall terminate following the issuance of $600,000,000 in Securities, and receipt by the Lead Manager of the related Management Fees. 3.5 Counterparts. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 3.6 Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 3.7 Integration; Construction. This Agreement represents the agreement of the parties hereto with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the parties hereto relative to the subject matter hereof not expressly set forth or referred to herein or in the other Facility Agreements. 3.8 Limited Liability. No recourse hereunder or under any other Facility Agreement shall be had against, and no personal liability shall attach to, any officer, employee, director, member, affiliate, beneficial owner, trustee or shareholder of any party hereto, as such, by the enforcement of any assessment or by any legal or equitable proceeding, by virtue of any statute or otherwise in respect of any of the Facility Agreements, it being expressly agreed and understood that each Facility Agreement is solely a corporate or trust obligation of each party hereto, and that any and all personal liability, either at common law or in equity, or by statute or constitution, of every such officer, employee, director, member, affiliate, beneficial owner, trustee or shareholder for breaches by any party hereto of any obligations under any Facility Agreement is hereby expressly waived as a condition of and in consideration for the execution and delivery of this Agreement. 6 3.9 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. 3.10 SUBMISSION TO JURISDICTION; WAIVERS. EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY: (A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND THE OTHER FACILITY AGREEMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT OF THE COURTS OF THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH IN SUBSECTION 3.2 OR AT SUCH OTHER ADDRESS OF WHICH ALL OF THE OTHER PARTIES HERETO SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; (D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION; AND (E) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN THIS SUBSECTION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES. 3.11 Acknowledgements. NAF Corp. hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement; (b) ContiFinancial has no fiduciary relationship to NAF Corp.; and 7 (c) no joint venture exists between NAF Corp. and ContiFinancial. 3.12 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER FACILITY AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered in New York, New York by their proper and duly authorized officers, members or trustees as of the day and year first above written. NATIONAL AUTO FUNDING CORPORATION By /s/ Jim W. Moore Name: Jim W. Moore Title: President CONTIFINANCIAL SERVICES CORPORATION By /s/ Jerome M. Perelson Name: Jerome M. Perelson Authorized Signatory By /s/ Susan E. O'Donovan Name: Susan E. O'Donovan Authorized Signatory 8 EX-10.20 10 AMENDMENT TO FUNDING COMMITMENT EXHIBIT 10.20 May 17, 1996 ContiTrade Services L.L.C. 277 Park Avenue New York, New York 10172 Re: Funding Commitment dated as of May 17, 1996 between ContiTrade Services L.L.C. and FirstCity Financial Corporation Gentlemen: Reference is made to the Funding Commitment captioned above; defined terms used herein have their respective meanings as set forth in the Funding Commitment. FirstCity hereby agrees with Lender that if, on any Payment Date, or any other date on which amounts are due to the Lender under the Credit Agreement (including, without limitation, in connection with an acceleration of the Loan), the full amount then due to the Lender is not received by the Lender on such date, FirstCity shall, within two Business Days of receipt by FirstCity of written demand from Lender, pay to Lender, in immediately available funds, the lesser of (i) the amount of such shortfall and (ii) the Available Amount as of such date. As used in the foregoing sentence, the "Available Amount" is the excess, if any, of (x) $2,000,000 minus (y) the aggregate cumulative amount previously paid by FirstCity pursuant to this letter agreement. This letter agreement is delivered by FirstCity pursuant to Section 3.1(b) of the Funding Commitment, and all representations, warranties, covenants and other obligations of FirstCity under the Funding Commitment shall be equally applicable hereto. FIRSTCITY FINANCIAL CORPORATION By: /s/ Matt A. Landry, Jr. Name: Matt A. Landry, Jr. Title: Executive Vice President 1 Acknowledged and Agreed: CONTITRADE SERVICES L.L.C. CONTIFINANCIAL SERVICES CORPORATION By/s/ James E. Moore Name: James E. Moore Authorized Signatory By/s/ Susan E. O'Donovan Name: Susan E. O'Donovan Authorized Signatory 2 EX-10.21 11 LOAN AND SECURITY AGREEMENT EXHIBIT 10.21 LOAN AND SECURITY AGREEMENT DIVERSIFIED FINANCIAL SYSTEMS, INC. BORROWER AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO AND BANK OF SCOTLAND LENDERS AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO AGENT APRIL 18, 1996 TABLE OF CONTENTS PAGE 1. DEFINITIONS AND TERMS....................................................2 2. LOANS: GENERAL TERMS....................................................13 2.1 Loan Facilities; Interest.........................................13 2.2 Revolving Loans...................................................14 2.3 Term Loans........................................................15 2.4 Maximum Outstanding Loans.........................................16 2.5 Limitation on Lender's Obligations................................18 2.6 General Payment Provisions........................................18 2.7 Place of Payments.................................................20 2.8 Single Liability..................................................20 2.9 Business Purpose..................................................20 2.10 Reaffirmation of Warranties.......................................21 2.11 Payment of Bank Charges...........................................21 2.12 Loan Fees.........................................................21 2.13 Authorized Advances...............................................22 2.14 Prepayment........................................................22 2.15 Lender's Commitment...............................................22 2.16 Change of Laws....................................................22 3. DISBURSEMENTS AND APPLICATION OF PAYMENTS...............................23 3.1 Disbursement of Portfolio Advances................................23 3.2 Protective Advances Upon Borrower's Request.......................24 3.3 Disbursement of Other Advances by Lender..........................25 3.4 Proceeds of DFSLP Collections.....................................25 3.5 Application of Payment............................................26 3.6 Direction of Application..........................................28 4. COLLATERAL: GENERAL TERMS...............................................29 4.1 Grant of Security Interest........................................29 4.2 Supplemental Documentation........................................30 4.3 Inspection of Collateral..........................................31 4.4 Perfection; Location..............................................31 4.5 Special Collateral................................................32 4.6 Control of Proceeds...............................................32 4.7 Acceptance of Collateral..........................................32 4.8 Special Collateral................................................33 4.9 Release of Proceeds to Borrower...................................33 4.10 Limitation of Waivers.............................................33 4.11 Right to Set-Off..................................................33 5. COLLATERAL: LOAN ACCOUNTS...............................................34 5.1 General Representations Relating to Loan Accounts.................34 i 5.2 Inspection of Loan Accounts.......................................35 5.3 Records...........................................................35 5.4 Cash Collateral Accounts..........................................35 5.5 Required Notices..................................................36 5.6 Rights of Lenders.................................................36 5.7 Appointment of Attorney-In-Fact...................................36 5.8 Release of Loan Account Documentation.............................37 6. OTHER COLLATERAL AND OTHER AGREEMENTS...................................38 6.1 Checklist Items...................................................38 6.2 Necessary Actions.................................................38 6.3 Conditions Precedent to Loans.....................................38 6.4 Conditions Precedent to Each Advance..............................40 7. INSURANCE AND TAXES:....................................................41 7.1 Insurance.........................................................41 7.2 Payment of Charges................................................42 8. WARRANTIES, REPRESENTATIONS AND COVENANTS ..............................43 8.1 General Representations...........................................43 8.2 Financial Covenants...............................................48 8.3 Affirmative Covenants.............................................49 8.4 Negative Covenants................................................52 9. DEFAULT.................................................................55 9.1 Events of Default.................................................55 9.2 Cumulate Remedies.................................................57 9.3 Acceleration......................................................57 9.4 Remedies..........................................................57 9.5 Assemble Collateral...............................................58 9.6 Notice of Sale....................................................58 9.7 Postpone Sale.....................................................58 9.8 WAIVER OF BOND....................................................58 9.9 Enforcement During Unmatured Default..............................58 10. AGENT...................................................................59 10.1 Appointment of Agent..............................................59 10.2 Delegation of Duties..............................................59 10.3 Nature of Duties..................................................59 10.4 Actions in Discretion of Agent; Instructions from the Lenders.....59 10.5 Reliance by Agent.................................................60 10.6 Holders of Notes..................................................60 10.7 Independent Credit Investigations.................................61 10.8 Exculpatory Provisions............................................61 10.9 Reimbursement and Indemnification.................................61 10.10 Agent in its Individual Capacity..................................62 10.11 Equalization of Lenders...........................................62 ii 10.12 Successor Agent...................................................62 11. GENERAL.................................................................63 11.1 Settlement........................................................63 11.2 Reaffirmation of Responsibilities.................................63 11.3 Service Fees......................................................63 11.4 Statement.........................................................63 11.5 Notices...........................................................64 11.6 Reaffirmation of Warranties and Representations...................65 11.7 Survival of Warranties and Representations........................66 11.8 Modification......................................................66 11.9 No Waiver.........................................................66 11.10 Severability......................................................67 11.11 Successors or Assigns.............................................67 11.12 Incorporation of Other Agreements.................................67 11.13 Waiver of Trial by Jury...........................................67 11.14 Designated Person.................................................68 11.15 Attorney-in-Fact..................................................68 11.16 Attorneys' Fees and Expenses; Agent's Expenses....................68 11.17 Acceptance........................................................69 11.18 Release of Collateral.............................................69 11.19 Knowledge.........................................................69 11.20 Waiver by Borrower................................................69 11.21 Governing Law.....................................................70 11.22 Service of Process................................................70 11.23 Representation by Counsel.........................................70 11.24 Release of Lender.................................................71 11.25 Invalidated Payments..............................................71 11.26 Superseded Prior Agreements.......................................71 iii Schedule of Exhibits Exhibit A - J-Hawk Servicing Agreement Exhibit B - Term Loan Portfolios Exhibit C - Permitted Disbursements Exhibit D - Location of Collateral Exhibit E - Cash Collateral Accounts Exhibit F - Documentation Checklist Exhibit G - Exceptions to General Representations Exhibit H - Fictitious Names Exhibit I - Affiliates Exhibit J - Leases, Options and Real Property Exhibit K - Agreements with Affiliates i LOAN AND SECURITY AGREEMENT DIVERSIFIED FINANCIAL SYSTEMS, INC. THIS LOAN AND SECURITY AGREEMENT (this "AGREEMENT"), made effective as of April 18, 1996 by and among AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO ("ANB"), Bank of Scotland, acting through its federal branch located in New York, New York, ("BOS"), Diversified Financial Systems, Inc., an Indiana corporation ("BORROWER"), and American National Bank and Trust Company of Chicago, as collateral agent and administrative agent for BOS and ANB (in such capacity the "AGENT"). RECITALS: A. Borrower and ANB have entered into that certain Loan and Security Agreement, as amended by that certain First Amendment to Loan and Security Agreement dated as of January 20, 1994, that certain Second Amendment to Loan and Security Agreement dated as of September 30, 1994, and modified by agreements dated as of September 19, 1995, November 19, 1995 and December 21, 1995 ("PRIOR LOAN AGREEMENT"). B. BOS and ANB (collectively referred to herein as "LENDERS") entered into that certain Participation Agreement dated September 30, 1994 pursuant to which BOS agreed to purchase a participation in the credit facility provided by ANB to Borrower pursuant to the terms of the Prior Loan Agreement. C. On September 19, 1995 one hundred percent (100%) of the capital stock of Borrower was sold by Randall R. Geist and J. Michael Hester ("SELLING SHAREHOLDERS") to DFC Asset Corp., a Texas corporation, with the consent of Lenders. D. In connection with such sale, DFC Asset Corp. delivered to the Selling Shareholders eight (8) promissory notes ("PURCHASE MONEY NOTES") in partial payment of the purchase price of the stock of Borrower. E. At the time of the sale of the shares, Lenders agreed (upon the terms and conditions set forth in that certain Consent Agreement dated as of September 19, 1995, to forebear exercising any rights or remedies arising from certain existing defaults pending resolution of various matters among the parties. F. Lenders subsequently extended such forbearance upon the terms and conditions set forth in those certain Forbearance Agreements dated as of October 13, 1995, November 17, 1995, December 21, 1995 and January 15, 1996, respectively. G. Lenders have agreed to terminate their participation in the credit facility evidenced by the Prior Loan Agreement and to become co-lenders to Borrower in credit facilities in an amount not to exceed $50,000,000, comprised of a term loan and a revolving loan, which credit facilities will be unconditionally guaranteed by Randall R. Geist and DFC Asset Corp. In addition: (i) the holder of each of the Purchase Money Notes will agree to 1 subordinate payment thereof to the payment of the credit facilities provided by Lenders pursuant to the terms hereof; (ii) Randall R. Geist will pledge those Purchase Money Notes payable to him, as collateral for his guaranty; and (iii) FirstCity Financial Corporation (the sole shareholder of DFC Asset Corp.) will provide certain additional guarantees. H. Borrower, ANB and BOS have agreed that it is in their mutual best interest to set forth their agreements with respect to the credit facilities herein. NOW THEREFORE, in consideration of any loan, advance, extension of credit and/or other financial accommodation at any time made by Lenders to or for the benefit of Borrower, and of the promises set forth herein, the parties hereto agree as follows: 1. DEFINITIONS AND TERMS 1.1 The following words, terms and/or phrases shall have the meanings set forth thereafter and such meanings shall be applicable to the singular and plural form thereof, giving effect to the numerical difference. Whenever the context so requires, the use of "IT" in reference to Borrower shall mean Borrower as identified at the beginning of this Agreement: (a) "ACCOUNTS": The definition ascribed to this term in Section 4.1 below. (b) "ADVANCE": Each disbursement of the Loans made pursuant to the terms of Section 3. (c) "AFFILIATE": Any Person (i) in which Borrower, one or more shareholders of Borrower, or other equity interest holders of Borrower, any Subsidiary, and/or any Parent individually, jointly and/or severally, now or at any time or times hereafter, has or have an equity or other ownership interest equal to or in excess of five percent (5%) of the total equity of or other ownership interest in such Person; and/or (ii) which directly or indirectly through one or more intermediaries controls or is controlled by, or is under common control with Borrower. For purposes of this definition "CONTROL" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of Stock or Partnership Interests, by contract or otherwise. For the purposes of this Agreement (and without limiting the generality of the foregoing), each Credit Party and DPAI shall be deemed to be an Affiliate of Borrower. (d) "AGENT": American National Bank and Trust Company of Chicago, and its successors or assigns designated by Lenders in accordance with Section 10.12. (e) "AGREEMENT": This Loan and Security Agreement, as amended, modified, supplemented, restated, and extended from time to time. (f) "AND/OR": One or the other or both, or any one or more or all, of the things or Persons in connection with which such conjunction is used. 2 (g) "ASSETS": Any and all real, personal and intangible property of Borrower, including, without limitation, accounts, chattel paper, contract rights, letters of credit, instruments and documents, Equipment, General Intangibles, inventory (including, without limitation, all raw materials, work in process, finished merchandise, supplies, goods, incidentals, office supplies and packaging materials), wherever located, whether in transit, held by others for Borrower's account, covered by warehouse receipts, purchase orders and contracts, or in the possession of any carriers, forwarding agents, truckers, warehousemen, vendors or other Persons, leases, licenses, and real estate, whether now existing or hereafter acquired or arising. (h) "BOOK VALUE": At any time, the then current principal balance outstanding of each Loan Account. (i) "BORROWER": Diversified Financial Services, Inc., an Indiana corporation. (j) "BORROWER'S COST": the difference between the Maximum Advance Amount and the Proposed Acquisition Price of a Proposed Loan Portfolio. (k) "BORROWER'S LIABILITIES": All monetary obligations and liabilities of Borrower to Lenders (including, without limitation, all debts, claims and indebtedness) whether primary, secondary, direct, contingent, fixed or otherwise, heretofore, now and/or from time to time hereafter owing, due or payable, however evidenced, created, incurred, acquired or owing and however arising, whether under this Agreement or the Other Agreements, or by oral agreement or operation of law or otherwise. (l) "BORROWER'S OBLIGATIONS": All terms, conditions, warranties, representations, agreements, undertakings, covenants and provisions (other than Borrower's Liabilities) to be performed, discharged, kept, observed or complied with by Borrower pursuant to this Agreement and/or any of the Other Agreements. (m) "BULK PACKAGED LOAN REPORT FORMAT 1": The printed report so designated by the FDIC setting forth in reasonable detail information identifying the debtors, original face amounts, maturity dates, interest rates, principal and interest balances, per diem, days late and recent payment record with respect to all Loan Accounts comprising a Loan Portfolio, or comparable report prepared by or on behalf of the FDIC and acceptable in form and substance to Lenders. (n) "BUSINESS DAY": Means any day, other than (x) a Saturday, Sunday, a day that is a legal holiday under the laws of one or both of the State of Illinois and the State of New York, or (y) any other day on which banking institutions located in one or both of Chicago, Illinois and New York, New York are authorized or required by law or other governmental action to close. (o) "CASH COLLATERAL ACCOUNTS": The definition ascribed to this term in Section 5.4. 3 (p) "CHARGES": All national, federal, state, county, city, municipal and/or other governmental (or any instrumentality, division, agency, body or department thereof, including without limitation the Pension Benefit Guaranty Corporation) taxes, levies, assessments, charges, liens, claims or encumbrances upon and/or relating to the Assets, Borrower's Liabilities, Borrower's Obligations, Borrower's business, Borrower's ownership and/or use of any of its Assets, Borrower's income and/or gross receipts and/or Borrower's ownership and/or use of any of its material assets. (q) "COLLATERAL": The definition ascribed to this term in Section 4.1 below. (r) "COLLATERAL COLLECTIONS": The definition ascribed to this term in Section 3.5. (s) "CORPORATE CREDIT PARTY": Each of the Borrower, DFC Asset Corp, DFSLP and FirstCity and, from and after the TLF Payment Date, as defined in that certain DFC Asset Corp. Pledge and Security Agreement of even date, DPAI shall be a Corporate Credit Party. (t) "CREDIT PARTY": Each Corporate Credit Party and Geist. (u) "DEDICATED ACCOUNT": The definition ascribed to this term in Section 3.5. (v) "DEFAULT RATE": A rate which is two percent (2%) plus the Interest Rate. (w) "DESIGNATED PERSON": Any Person identified as a "Designated Person" on Borrower's Secretary's Certificate heretofore or hereafter delivered to Agent, as amended or superseded from time to time. (x) "DFC ASSET CORP.": DFC Asset Corp., a Texas corporation. (y) "DFSLP": Diversified Financial Systems, L.P., an Indiana limited partnership, of which Borrower is the sole general partner and DPAI is the sole limited partner. (z) "DFSLP PROCEEDS": The definition ascribed to this term in Section 3.4. (aa) "DIVIDEND REQUEST": The definition ascribed to this term in Section 3.5. (ab) "DPAI": Diversified Performing Assets, Inc., an Indiana corporation which is a wholly owned subsidiary of DFC Asset Corp., and an Affiliate of Borrower. (ac) "ENVIRONMENTAL LAWS": Any Federal, state or local law, rule, regulation, ordinance, order, code or statute applicable to the Borrower or its property, in each case as amended (whether now existing or hereafter enacted or promulgated), controlling, governing or relating to the pollution or contamination of the air, water or land or concerning 4 hazardous, special or toxic materials, wastes or substances, or any judicial or administrative interpretation of such laws, rules or regulations, including, without limitation, the Water Pollution Control Act (33 U.S.C. Section 1251 et seq.), Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), Safe Drinking Water Act (42 U.S.C. Section 3000(f) et seq.), Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.), Clean Air Act (42 U.S.C. Section 7401 et seq.), Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.). (ad) "ESTIMATED REMAINING COLLECTIONS": With respect to any single Loan Account, any Loan Portfolio or one or more Loan Portfolios taken in the aggregate (whether such Loan Portfolio is, or is a part of, a Term Loan Portfolio, a Proposed Loan Portfolio, or a Loan Portfolio acquired after the date hereof pursuant to the terms in Section 3.1), an amount equal to Borrower's good faith estimate of the remaining collections of principal from such Loan Account or Loan Portfolio(s). With respect to any single Loan Account, any loan portfolio or one or more loan portfolios taken in the aggregate that are owned by DPAI or DFSLP, an amount equal to DPAI's or DFSLP's, as applicable, good forth estimate of the remaining collections of principal from such Loan Account, or loan portfolio(s). (ae) "EQUIPMENT": The definition ascribed to this term in Section 4.1. (af) "EVENT OF DEFAULT": The definition ascribed to this term in Section 9.1. (ag) "EXISTING OBLIGATIONS": The definition ascribed to this term in Section 2.3. (ah) Intentionally deleted. (ai) "FDIC": The Federal Deposit Insurance Corporation or such other qualified seller of Loan Portfolios as Lenders may determine with respect to each Loan Portfolio in Lenders' sole and absolute discretion. (aj) "FEDERAL FUNDS RATE": Means the rate of interest charged by banks with excess reserves at a Federal Reserve district bank to banks needing overnight loans to meet reserve requirements. (ak) "FLC": First Lake Corp., a Delaware corporation. (al) "FINANCIALS": Those financial statements of a Credit Party heretofore, concurrently herewith or from time to time hereafter delivered by or on behalf of Borrower and/or another Credit Party to Lenders. (am) "FIRSTCITY": FirstCity Financial Corporation, a Delaware corporation. (an) "FRAUDULENT RECEIVABLE": Any Loan Account: (i) As to which the putative Obligor (or any of them, if there be more than one) does not exist; or 5 (ii) As to which no goods or services were in fact delivered or rendered; or (iii) Which is duplicative, in whole or in part, of another obligation (whether or not the Borrower is the assignee or beneficiary thereof); or (iv) Which was originated or obtained, directly or indirectly, in a fraudulent manner or as a result of fraud; or (v) Which is otherwise, in the sole and absolute discretion of the Lenders made reasonably and in good faith, fraudulent (whether in its origin, with respect to the circumstances involved in any assignment or transfer thereof, or otherwise). (ao) "FUNDING FEE": The meaning set forth in Section 2.12(d). (ap) "GEIST": Randall R. Geist. (aq) "GENERAL INTANGIBLES": The definition ascribed to this term in Section 4.1. (ar) "GUARANTOR": Any Person which has guaranteed to Lenders the payment, collection or performance of all or any portion of the Secured Obligations, and/or has granted to Lenders and/or Agent a security interest in, or lien or encumbrance upon, some or all of such Person's real, personal property and/or intangible property to secure the payment and/or performance of all or any portion of the Secured Obligations, and/or has executed the Deficiency Undertaking. (as) "INDEBTEDNESS": With respect to any Person, at a particular time, (i) indebtedness for borrowed money or for the deferred purchase price of property or services in respect of which such Person is liable, contingently or otherwise, as obligor, guarantor or otherwise or any commitment by which such Person assures a creditor against loss, (ii) obligations under leases which shall have been or should be, in accordance with generally accepted accounting principals, recorded as capital leases in respect of which obligations such Person is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which obligations such Person assures a creditor against loss, and (iii) all obligations and liabilities with respect to unfunded vested benefits under any "EMPLOYEE BENEFIT PLAN" or with respect to withdrawal liabilities incurred under ERISA by the Borrower or any ERISA Affiliate to a "MULTIEMPLOYER PLAN," as such terms are defined under the Employee Retirement Income Security Act of 1974. (at) "INTEREST RATE": The variable rate of the sum of two percent (2%) per annum plus the Prime Rate, adjusted from time to time automatically and simultaneously with each announced change in the Prime Rate. (au) Intentionally Deleted. 6 (av) "INVENTORY": The definition ascribed to this term in Section 4.1. (aw) "J-HAWK": J-Hawk Servicing Corporation, a Texas corporation, which is an Affiliate of FirstCity. (ax) "LEASES": The meaning ascribed to this term in Section 4.1. (ay) "LENDERS": Individually or collectively, American National Bank and Trust Company of Chicago and Bank of Scotland and any other lender hereafter made a party to this Agreement pursuant to Section 11.8. (az) "LENDER'S COMMITMENT": The meaning ascribed to this term in Section 2.15. (ba) "LOANS": Any and all loans, advances, extensions of credit and/or other financial accommodations of any kind or nature made by Lenders, or any one or more of them, at any time to, for the benefit or at the request of Borrower pursuant to this Agreement and/or any of the Other Agreements. (bb) "LOAN ACCOUNT": A loan obligation set forth as a single entry with respect either to a Term Loan Portfolio or on a Bulk Packaged Loan Report Format 1 and purchased by Borrower from the FDIC. (bc) "LOAN ACCOUNT DOCUMENTATION": All notes, instruments, agreements and other documents, including chattel paper, effecting, evidencing or governing a Loan Account. (bd) "LOAN ADVANCE CERTIFICATE": Certificate(s) delivered by Borrower to Agent pursuant to Section 3.1 below, certified as true, accurate and complete by an executive officer of Borrower and setting forth with respect to a Proposed Loan Portfolio the following information: (i) the aggregate Book Value; (ii) the aggregate interest due; (iii) the number of Loan Accounts; (iv) the Book Value and aggregate interest outstanding of each Loan Account; (v) Proposed Acquisition Price of such Proposed Loan Portfolio and allocated by Loan Accounts comprising such Proposed Loan Portfolio ("Allocated Purchase Price"); (vi) calculation of the Maximum Advance Amount with respect to such Proposed Loan Portfolio; (vii) a statement of the Estimated Remaining Collections with respect to the Proposed Loan Portfolio in the aggregate and for each Loan Account comprising the Proposed Loan Portfolio; (viii) a statement that DFC Asset Corp. is providing the Borrower's Cost as a capital contribution to Borrower; (ix) the proposed date of acquisition; and (x) certification that no Loan Account in the Proposed Loan Portfolio that is secured by Real Estate has an Allocated Purchase Price in excess of Five Hundred Thousand Dollars ($500,000.00). No Loan Advance Certificate shall be deemed to be complete unless accompanied by both the Bulk Packaged Loan Report Format 1 with respect to the Proposed Loan Portfolio and any and all written analyses by or on behalf of Borrower, however formal or informal the same may be, of the Proposed Loan Portfolio, including, without limitation, all such analyses of individual Loan Accounts which are included in such Proposed Loan Portfolio. 7 (be) "LOAN DOCUMENTS": This Agreement, the Other Agreements and each guaranty, pledge agreement, security agreement, cash collateral agreement, subordination agreement, deficiency undertaking, indemnity agreement or similar agreement executed by a Credit Party or Lender in connection with this Agreement, and all other instruments and agreements executed in connection herewith and therewith, in each case as amended, modified, supplemented, restated and extended from time to time. Without limiting the generality of the foregoing, each amendment to (or constituting part of), this Agreement or any other Loan Document and each instrument and agreement (including, without limitation, waivers) executed in connection with any Loan Documents shall be deemed to be a Loan Document for all purposes of this Agreement and the other Loan Documents. (bf) "LOAN PORTFOLIO": Loan Accounts purchased by Borrower together on one date from the FDIC, all of which Loan Accounts are set forth on a single Bulk Packaged Loan Report Format 1. (bg) "MATURITY DATE": April 17, 1997 or such earlier date as all Borrower's Liabilities shall be due and payable by acceleration or otherwise. (bh) "MAXIMUM ADVANCE AMOUNT": With respect to each proposed Advance of the Revolving Loan to acquire a Proposed Loan Portfolio, an amount equal to the lesser of: (a) The lesser of: (i) 80% of the Proposed Acquisition Price of the Proposed Loan Portfolio, as set forth in the Loan Advance Certificate, and (ii) 55% of the Estimated Remaining Collections of such Proposed Loan Portfolio, as set forth in the Loan Advance Certificate; or (b) Such lesser amount as Lenders shall, in their sole and absolute discretion, determine. Unless the Lenders (or the Agent on their behalf) notify the Borrower that they believe a lesser number is correct,the amounts of the Proposed Acquisition Price and the Estimated Remaining Collections shall, for purposes of clause (a) above, be as set forth by the Borrower in the relevant Loan Advance Certificate. (bi) "MAXIMUM PORTFOLIO BALANCE": The maximum unpaid principal balance of a Portfolio Advance (expressed as a percentage of the sum of the original principal amount of said Portfolio Advance plus any amount added thereto as a result of the making of any Protective Advance with respect to said Loan Portfolio) on each Portfolio Advance Target Date, as set forth in Section 2.4(d). (bj) "MAXIMUM TERM LOANS": The maximum aggregate outstanding principal balance of the Term Loans, from time to time (expressed as a percentage of the original aggregate principal balance of the Term Loans plus any amount added thereto as a result of the making of any Protective Advance with respect to the Term Loan Portfolios) on each Term Loan Target Date, as set forth in Section 2.4(c). (bk) "NET COLLECTIONS": The meaning ascribed to this term in Section 3.5.(a). 8 (bl) "NOTES": The Term Notes and the Revolving Notes, or any one or more of them, as context requires. (bm) "OBLIGOR": Any Person who is and/or may become obligated to Borrower under or on account of Loan Accounts or other Accounts. (bn) "OPTIONS": The meaning ascribed to this term in Section 4.1. (bo) "OTHER AGREEMENTS": All agreements, instruments and documents, including, without limitation, bond agreements, loan agreements, security agreements, subordination agreements, guaranties, mortgages, deeds of trust, notes, letters of credit, advises of credit, bankers acceptances, pledges, powers of attorney, consents, assignments, contracts, notices, leases, financing statements and all other written matter heretofore, now and/or from time to time hereafter executed by and/or on behalf of Borrower and delivered or filed to or for the benefit of Lenders and/or Agent, or issued by Lenders and/or Agent upon the application and/or other request of, and on behalf of, Borrower, in each case as amended, modified, supplemented, restated and extended from time to time. (bp) "OTHER LENDERS": The Lenders party to this Agreement other than any Lender that is also the Agent. (bq) "PARENT": Any Person, now or at any time or times hereafter, owning or controlling (alone or with Borrower, any Subsidiary and/or any other Person) at least a majority of the issued and outstanding Stock, Partnership Interests or other ownership interest of Borrower or any Subsidiary. For purposes of this definition control shall have the same meaning ascribed to this term in Section 1.1(c) above. (br) "PARTNERSHIP INTERESTS": All units of ownership, interests, participations or other equivalents (however designated) of or in a limited or general partnership, including, without limitation, such interests of general and limited partners, and all agreements, instruments and documents convertible, in whole or in part, into any one or more or all of the foregoing, and further including, without limitation, the general partnership interest of Borrower in DFSLP. (bs) "PERSON": Means any individual, sole proprietorship, general or limited partnership, joint venture, trust, unincorporated organization, association, corporation, institution, entity, party or government (whether national, federal, state, county, city, municipal or otherwise, including without limitation any instrumentality, division, agency, body or department thereof). (bt) "PERMITTED LIENS": (i) The liens created in favor of Agent for the benefit of Lenders, whether pursuant to this Agreement or any of the Other Agreements or otherwise; (ii) liens for Charges which are not yet due and payable or which are expressly permitted pursuant to the terms hereof, or claims and unfunded liabilities under ERISA not yet due and payable or which are being contested in good faith by appropriate proceedings diligently pursued; (iii) liens arising in connection with worker's compensation, unemployment insurance, old age pensions and social security benefits which are not overdue or are being 9 contested in good faith by appropriate proceedings diligently pursued, provided that in the case of any such contest any proceedings commenced for the enforcement of such liens shall have been duly suspended and such reserve or provision for the payment of such liens has been made on the books of Borrower as may be required by generally accepted accounting principles; (iv) liens incurred in the ordinary course of business to secure the performance of statutory obligations arising in connection with progress payments or advance payments due under contracts with the United States Government, any state government, or any agency of any thereof entered into in the ordinary course of business; and (v) additional liens expressly permitted from time to time in writing by Lenders. (bu) "PORTFOLIO ADVANCE": Each Advance, if any, made pursuant to the terms of Section 3.1 for the purpose of acquiring a Loan Portfolio. (bv) "PORTFOLIO ADVANCE TARGET DATE": Each of the dates determined pursuant to Section 2.4(d). (bw) "PRIME RATE": Means, for any day, the higher of (x) the Federal Funds Rate in effect on such day plus 1/2%, or (y) the per annum rate of interest announced or published publicly from time to time by ANB at its principal place of business in Chicago, Illinois as its prime, base or equivalent rate of interest. Each of such prime rate, base rate and Prime Rate is a designated rate, and may not be the lowest or least rate charged by ANB to its commercial customers. Each change in the interest rate resulting from a change in the Prime Rate shall be effective as of the opening of business on the day on which such change becomes effective. (bx) "PROPOSED ACQUISITION PRICE": The cash price Borrower will pay the FDIC for the acquisition of a Loan Portfolio, as set forth in the applicable Loan Advance Certificate, both in the aggregate and allocated to each Loan Account comprising such Loan Portfolio. (by) "PROPOSED LOAN PORTFOLIO": A portfolio of Loan Accounts which Borrower proposes to acquire and which is described in a Loan Advance Certificate and Bulk Packaged Loan Report Format 1 submitted together by Borrower to Lenders. (bz) "PROTECTIVE ADVANCE": Any Advance made by Lenders to Borrower to be used by Borrower to protect any collateral pledged by an Obligor as security for a Loan Account or to preserve and protect the lien, security interest or other encumbrance granted to Borrower in said collateral. (ca) "RECORDS": The definition ascribed to this term in Section 4.1 below. (cb) "REVOLVING LOAN PORTFOLIOS": The Loan Portfolios acquired by Borrower after the date hereof, if any, from the proceeds of Revolving Loans in accordance with Section 3.1. (cc) "REVOLVING LOANS": Loans made or to be made by Lenders to Borrower pursuant to the terms of Section 2.2(a). 10 (cd) "REVOLVING NOTES": Those certain revolving promissory notes each in the original principal amount of $5,000,000, each dated even date herewith, delivered by Borrower to ANB and BOS, respectively, pursuant to Section 2.2(d), together with all amendments, modifications, extensions, supplements and restatements thereto or thereof. (ce) "SECURED OBLIGATIONS": All Borrower's Liabilities and Borrower's Obligations. (cf) "SERVICING FEE": that fee payable by Borrower to J-Hawk pursuant to the loan servicing agreement entered into by and between Borrower and J-Hawk, as such loan servicing agreement is set out in Exhibit A ("SERVICING AGREEMENT"). (cg) "SPECIAL COLLATERAL": The definition ascribed to this term in Section 4.8 below. (ch) "STOCK": All shares, interests, participations or other equivalents (however designated) of or in a corporation, whether or not voting, including, but not limited to, common stock, warrants, preferred stock, convertible debentures and all agreements, instruments and documents convertible, in whole or in part, into any one or more or all of the foregoing. (ci) "SUBSIDIARY": Any Person at least a majority of whose issued and outstanding Stock, Partnership Interests or other ownership interests now or at any time hereafter is owned by Borrower and/or one or more Subsidiaries. (cj) "SUPPLEMENTAL DOCUMENTATION": The definition ascribed to this term in Section 4.2 below. (ck) "TANGIBLE NET WORTH": As determined at any time, the total of shareholders' equity (including capital stock, additional paid-in capital and retained earnings after deducting treasury stock) of Borrower, less the sum of the total amount of any intangible assets, which, for purposes of this definition, shall include, without limitation, General Intangibles and, if applicable, all accounts receivable from shareholders or officers of Borrower, all prepaid expenses, any unamortized debt, discount and expense, unamortized deferred charges and good will, all as determined in accordance with generally accepted accounting principles, consistently applied. (cl) "TERM LOANS ": The term loan or loans made by Lenders to Borrower pursuant to Section 2.3. (cm) "TERM LOAN PORTFOLIOS": The Loan Portfolios set forth on Exhibit B. (cn) "TERM LOAN TARGET DATE": Each of the dates determined pursuant to Section 2.4(c). (co) "TERM NOTES": Those two certain promissory notes each in the original principal amount of $20,881,245.78 each, dated even date herewith, delivered by Borrower to 11 ANB and BOS, respectively, pursuant to Section 2.3(c), together with all amendments, modifications, extensions, supplements and restatements thereto or thereof. (cp) "TLF": Transamerica Lender Finance, a division of Transamerica Business Credit corporation. (cq) "TRANSAMERICA DEFAULT": The definition ascribed to this term in Section 3.4. (cr) "UCC": The Uniform Commercial Code, as enacted in Illinois. (cs) "UNMATURED DEFAULT": Any event or condition which, with the passage of time or the giving of notice or both, would constitute an Event of Default hereunder. (ct) "WEEKLY PAYMENT": The definition ascribed to this term in Section 3.5. 1.2 Except as otherwise defined in this Agreement or the Other Agreements, all words, terms and/or phrases used herein and therein shall be defined by the applicable definition therefor (if any) in the UCC. 2. LOANS: GENERAL TERMS 2.1 Loan Facilities; Interest. (a) The Loans. The Loans shall be comprised of two (2) facilities, the Revolving Loans and the Term Loans. (b) Interest Rate. From the date of disbursement of funds until the occurrence of an event set forth in Section 2.1(c), the principal balance of all Loans from time to time unpaid shall bear interest at the Interest Rate. If funds are disbursed into an account pursuant to Section 3.1(b) or into an escrow at the direction of Borrower or to the FDIC, interest shall be charged from the date of deposit or disbursement. Interest shall be computed on the basis of a 360 day year and charged for the actual number of days elapsed. (c) Default Interest. If any of the Secured Obligations is not paid when due and payable or declared due and payable, interest shall accrue thereon from the due date of the same until paid at the Default Rate. Such amounts shall be part of the Secured Obligations immediately due and payable by Borrower to Agent without notice to or demand of Borrower. 2.2 Revolving Loans. (a) Advances. Subject to the terms and conditions hereof, Lenders may, in their sole and absolute discretion, make available to Borrower revolving loans ("REVOLVING LOANS") from time to time in an aggregate principal amount not to exceed at any time outstanding the lesser of: (i) Fifty Million and No/100 Dollars ($50,000,000.00) minus the aggregate outstanding principal amount of the Term Loans and (ii) Ten Million and No/100 Dollars ($10,000,000.00). Subject to the provisions hereof, the principal amount of each 12 Advance may be borrowed, repaid (without any premium or penalty) and reborrowed again, from time to time, in whole or in part. (b) Use of Proceeds of Revolving Loans. The Revolving Loans shall be used by Borrower: (i) to acquire Loan Portfolios in accordance with the provisions of Section 3.1; (ii) to fund Protective Advances in an amount not to exceed, at any one time, $1,000,000; and (iii) in Lenders' sole and absolute discretion, to pay any Secured Obligation, including Advances made pursuant to Sections 2.11, 2.12, and 2.13. Portfolio Advances shall be made, if at all, in accordance with Section 3.1. Protective Advances shall be made, if at all, in accordance with Section 3.2. All other Advances of the Revolving Loan shall be made, if at all, in accordance with the provisions of Section 3.3. (c) Revolving Loan Commitments. All Revolving Loans shall be made ratably from the Lenders in proportion to their respective Lender's Commitment and shall be disbursed in accordance with the provisions of Sections 2.15, 3.1, 3.2 and 3.3. Notwithstanding anything to the contrary contained herein, Lenders shall have no obligation to make any Revolving Loans to Borrower during the term hereof. Revolving Loans may be made, if at all, only after compliance by Borrower with the requirements of Sections 3.1, 3.2 and 3.3, Section 6 and the other applicable provisions of this Agreement. (d) Revolving Notes. The Revolving Loans are further evidenced by two Revolving Notes delivered to ANB and BOS concurrently herewith. The Revolving Notes bear interest at the Interest Rate and shall be repayable as provided herein. 2.3 Term Loans. (a) Existing Obligations. As used herein the term "EXISTING OBLIGATIONS" shall mean and include: (1) Liabilities of Borrower to ANB under the terms of the Prior Loan Agreement in the aggregate amount of $26,648,597.14; (2) Liabilities of First Lake Corp. to LaSalle National Bank in the aggregate amount of 6,164,428.43; evidenced by a Payoff Letter from LaSalle National Bank dated April 19, 1996 ("LASALLE BANK FIRST LAKE LOAN"); (3) Liabilities of First Lake Corp. to LaSalle National Bank in the principal amount of approximately $492,455.70 relating to Protective Advances made prior to the date hereof. (4) The amount of $1,741,615.00 advanced by FirstCity to Borrower on January 26, 1996 as the purchase price of the Loan Portfolio commonly referred to as Atlanta II; (5) Liabilities of Borrower to DFC Asset Corp. in the amount of $1,138,514.66 which liability is evidenced by an unsecured promissory note dated September 19, 1995; 13 (6) Liabilities of Borrower to DFC Asset Corp. in the amount of $828,011.63, which liability is evidenced by an unsecured promissory note dated September 19, 1995; (7) The amount of $858,047.00 advanced on December 27, 1995 by FirstCity to Borrower and advanced by Borrower to LaSalle National Bank as principal payments with respect to the LaSalle Bank First Lake Loan for the Loan Portfolio commonly referred to as Manchester II; (8) The amount of $1,109,159.00 advanced on March 26, 1996 by FirstCity to Borrower and advanced by Borrower to LaSalle National Bank as principal payments with respect to the LaSalle Bank First Lake Loan for the Loan Portfolio commonly referred to as Connecticut I; and (9) Liabilities of Borrower to Transamerica in the principal amount of $2,781,663.00 under the terms of that certain Loan and Security Agreement dated February 28, 1994. (b) Use of Proceeds of the Term Loans. Subject to the conditions set forth in Section 6, Lenders will loan to Borrower an amount equal to the Existing Obligations as the Term Loans. The Term Loans shall be made ratably by the Lenders in accordance with their respective Lender's Commitments. The proceeds of the Term Loans shall be used solely by Borrower for the purpose of paying the Existing Obligations in full. (c) Term Notes. The Term Loans are further evidenced by two promissory notes delivered concurrently herewith in the original principal amount of $20,881,245.78 each, payable to the order of ANB and BOS, respectively. The Term Notes bear interest at the Interest Rate and shall be payable as provided herein. 2.4 Maximum Outstanding Loans. Notwithstanding anything contained in this Agreement or the Other Agreements to the contrary: (a) Maximum Borrower's Liabilities. The principal portion of Borrower's Liabilities outstanding at any one time shall not exceed the sum of Fifty Million and No/100 Dollars ($50,000,000). (b) Maximum Revolving Loans. The principal portion of Borrower's Liabilities under the Revolving Loans shall not exceed the lesser of: (i) Fifty Million and No/100 Dollars ($50,000,000.00) minus the aggregate outstanding principal amount of the Term Loans, and (ii) Ten Million Dollars and No/100 ($10,000,000.00). (c) Maximum Term Loans. The principal portion of Borrower's Liabilities under the Term Notes (including, without limitation, the unpaid principal amount of Protective Advances made with respect to Term Loan Portfolios) shall not exceed the following 14 percentages of the aggregate principal balance on the date hereof of the Term Loans on or before the following Term Loan Target Dates: TERM LOAN TARGET DATE MAXIMUM TERM LOANS June 30, 1996 87.5% of the original principal balance September 30, 1996 75% of the original principal balance December 31, 1996 62.5% of the original principal balance Maturity Date The unpaid principal balance plus all accrued but unpaid interest shall be due in full. Following Borrower's written request, Agent shall deliver to Borrower a schedule (subject to the Other Lender's concurrence) of the amount of the Maximum Term Loans that may be outstanding on each of the foregoing Term Loan Target Dates. (d) Maximum Portfolio Balance. The principal portion of each Portfolio Advance outstanding (which principal outstanding shall include for this purpose the unpaid principal amount of all Protective Advances made with respect to such Loan Portfolio) shall not exceed an amount equal to the following percentage of the original principal balance of such Portfolio Advance (i.e., excluding from the original principal balance of the Portfolio Advance the original principal amount of any such Protective Advances) on or before the following Portfolio Advance Target Dates: MAXIMUM PORTFOLIO PORTFOLIO ADVANCE TARGET DATE BALANCE 90% of the Portfolio Advance on or before the 6 month anniversary of the applicable Portfolio Advance 75% of the Portfolio Advance on or before the 9 month anniversary of the applicable Portfolio Advance Paid in Full on or before the Maturity Date Following Borrower's written request, Agent shall deliver to Borrower a schedule (subject to the Other Lender's concurrence) setting forth the Maximum Portfolio Balance on each of the Portfolio Advance Target Dates with respect to each Revolving Loan Portfolio. (e) Fraudulent Receivable. In the event any Loan Account is determined by Lenders, in their sole and absolute discretion made reasonably and in good faith, to be a Fraudulent Receivable, that portion of the Loans allocable thereto (in Lenders' reasonable discretion), shall be repaid to the Lenders by FirstCity on behalf of the Borrower pursuant to the Deficiency Undertaking. 15 (f) Ratio of Term Loans to Estimated Remaining Collections. At no time shall the unpaid principal balance of the Term Loans be greater than 65% of the Estimated Remaining Collections of the Term Loan Portfolios. (g) Ratio of Portfolio Advance to Estimated Remaining Collections. At no time shall the total unpaid principal balance of any Portfolio Advance exceed 55% of the Estimated Remaining Collections of the Loan Portfolio to which such Portfolio Advance relates. (h) Ratio of Borrower's Liabilities to Real Property. At no time shall the aggregate unpaid principal balance of Loans with respect to Loan Accounts which are secured by real property exceed 40% of the total aggregate unpaid principal balance of the Borrower's Liabilities. (i) Maximum Amounts Secured by Real Property. At no time shall the Allocated Purchase Price of any individual Loan Account which is secured by real property (or any one or more Loan Accounts secured in whole or in part by the same real property) which is a part of a Loan Portfolio exceed Five Hundred Thousand Dollars ($500,000.00). (j) Maximum DFC Indebtedness. At no time shall the aggregate Indebtedness of DFC Asset Corp., Borrower, DPAI and DFSLP and their Subsidiaries, if any, be greater than 60% of the sum of (x) the Estimated Remaining Collections of the Revolving Loan Portfolios and (y) the Estimated Remaining Collections of the Term Loan Portfolios, and (z) the Estimated Remaining Collections of all loan portfolios of either DPAI or DFSLP. 2.5 Limitation on Lender's Obligations. Notwithstanding anything to the contrary contained herein or in any other Loan Document: (a) Revolving Loans. Lenders shall have no duty or obligation to make any Revolving Loans under the terms hereof. All Revolving Loans shall be made, if at all, in Lenders' sole and absolute discretion. Borrower hereby acknowledges that Lenders shall not be bound by any course of prior dealings, the duty of good faith and fair dealing or reasonableness in exercising such discretion. (b) No Extension. Lenders shall have no duty to extend the Maturity Date and the unpaid principal balance of the Term Loans and the Revolving Loans shall be due and payable in full on the Maturity Date. (c) Failure to Make Loans. The failure of any Lender to make its ratable portion of an Advance which Lenders then have become obligated to make pursuant to the terms of this Agreement shall not relieve any other Lender of its obligation to make Advances under this Agreement. If any Lender fails to make its ratable portion of an Advance neither Agent nor any of the other Lenders will have any obligation to make that Lender's Advance or to find another lender to make that Advance on the same terms and conditions or upon any other terms and conditions. 16 2.6 General Payment Provisions. Except as otherwise specifically provided in this Agreement, that portion of Borrower's Liabilities consisting of: (a) Payment of Interest. Interest payable by Borrower to Lenders with respect to the Revolving Loans and the Term Loans shall be due and payable by Borrower weekly on the last Business Day of each week with respect to such week (to the extent able to be paid from Collateral Collections pursuant to Section 3.5) and, to the extent not then previously paid, on the final Business Day of each month. Weekly interest payments shall be paid from Collateral Collections in accordance with the provisions of Section 3.5; provided that in the event Collateral Collections are not so permitted or are insufficient to satisfy Borrower's obligations to pay interest in accordance with the provisions of this Section and of Section 3.5, Borrower shall pay to Agent the amount necessary to pay such deficiency on the last Business Day of each month, without notice or demand; (b) Payment on Maturity. The unpaid principal balance of all Loans and all accrued Interest with respect thereto shall be due and payable on the Maturity Date; (c) Payment of Principal of Term Loans. Subject to the provisions of Section 2.6(b), principal payable on account of the Term Loans shall be payable in accordance with the provisions of Sections 2.4(c) and 2.6(i). Principal payments shall be paid from Collateral Collections in accordance with Section 3.5(b) to the extent permitted thereby or the Lenders shall otherwise agree in their sole and absolute discretion; provided that in the event Collateral Collections are not so permitted or are insufficient to satisfy Borrower's obligations to reduce the principal amount of the Term Loans to an amount which is equal to or less than the Maximum Term Loans on each Term Loan Target Date, Borrower shall pay to Agent, without notice or demand on or before the applicable Term Loan Target Date, the amount necessary to pay such deficiency; (d) Payment of Principal of Portfolio Advance. Subject to the provisions of Section 2.6(b), principal payable on account of any Portfolio Advance shall be payable in accordance with the provisions of Sections 2.4(d) and 2.6(i). Principal payments shall be paid from Collateral Collections in accordance with Section 3.5(a) to the extent permitted thereby, or as the Lenders may otherwise agree in their sole and absolute discretion; provided that in the event that Section 3.5(a) does not permit or Collateral Collections are not sufficient to satisfy Borrower's obligations to reduce the principal amount of such Portfolio Advance to an amount which is equal to or less than the Maximum Portfolio Balance on each Portfolio Target Date, Borrower shall pay to Agent, without notice or demand on or before the applicable Portfolio Loan Target Date, the amount necessary to pay such deficiency; (e) Payment of Protective Advances. Protective Advances shall be made, if at all, in accordance with Section 3.2. Subject to the provisions of Section 2.6(b), the principal balance of any Advance made to fund a Protective Advance shall be due and payable on the earliest of (i) the date on which Borrower receives reimbursement or payment relating to such Protective Advance from the Obligor thereof, or (ii) the sale or disposition of the Loan Account (or the collateral therefor) for which such Protective Advance was made, or (iii) if not sooner paid, in accordance with Section 2.4(c) with respect to Protective Advances that are 17 made with respect to Term Loan Portfolios and Section 2.4(d) with respect to Protective Advances that are made with respect to Revolving Loan Portfolios; (f) Payment of Other Advances. Subject to the provisions of Section 2.6(b), principal payable on account of any Advance made in accordance with Section 3.3 shall be due and payable on demand and shall be paid from Collateral Collections in accordance with Sections 3.5 (a)(ii)(1) and 3.5(b)(ii)(1) to the extent permitted thereby; (g) Payment of Costs. Costs, fees and expenses payable by Borrower to Lenders and/or Agent shall be payable to Agent or to such other Person or Persons designated by Agent, on demand and, if not sooner paid, shall be paid from Collateral Collections in accordance with Sections 3.5 (a)(ii)(1) and 3.5(b)(ii)(1) to the extent permitted thereby; (h) Other Borrower's Liabilities. All other Borrower's Liabilities, if any, shall be payable by Borrower as and when provided in this Agreement or the Other Agreements but in any event, no later than the Maturity Date; and (i) Obligation to Eliminate Excess. In the event that at any time Borrower's Liabilities (or any portion thereof) exceeds the applicable maximum amount therefor as set forth in Section 2.4, or if at any time the principal portion of any Portfolio Advance exceeds the applicable amount therefor as set forth in said section, Borrower shall immediately, without demand therefor, pay to Agent an amount sufficient to eliminate such excess. 2.7 Place of Payments. All payments shall be payable to Agent, for the ratable benefit of Lenders, in lawful currency of the United States of America and without setoff or counterclaim, at 33 N. LaSalle Street, Chicago, Illinois or at such other place or places as Agent may hereafter designate in a written notice given to Borrower in accordance with Section 11.5. Promptly upon receipt thereof, Agent shall forward each Lender's ratable share of such amounts to such Lenders. 2.8 Single Liability. All of the Secured Obligations shall constitute one obligation secured by the security interest, lien or encumbrance in or upon the Collateral and by all other security interests, liens, claims and encumbrances heretofore, now and/or from time to time hereafter granted by Borrower and/or any Guarantor to Agent, for the ratable benefit of Lenders. 2.9 Business Purpose. Borrower warrants and represents to Lenders that Borrower shall use the proceeds of all Loans solely for business purposes and consistently with all applicable laws and statutes. Borrower further warrants and represents to Lenders and covenants with Lenders that Borrower is not in the business of extending credit for the purpose of purchasing or carrying margin Stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Loans will be used to purchase or carry any margin Stock or to extend credit to others for the purpose of purchasing or carrying any margin Stock. 2.10 Reaffirmation of Warranties. The disbursement of the Term Loans and each Advance thereafter shall constitute an automatic warranty and representation by Borrower to 18 Lenders that there does not then exist an Event of Default or an Unmatured Default at the time of making such Loan and that all representations and warranties contained herein and in each and every one of the other Loan Documents is true and correct as of the date of disbursement of said Loan. 2.11 Payment of Bank Charges. Borrower shall pay to Agent as part of Borrower's Liabilities, on demand, any and all charges asserted by a bank or similar institution against Lenders and/or Agent for or with respect to Agent's forwarding to Borrower or at the direction of Borrower of proceeds of any Loans or for or with respect to Agent's depositing for collection any check or item of payment received and/or delivered to Agent on account of Borrower's Liabilities, or in connection with any Cash Collateral Account. 2.12 Loan Fees. Borrower shall pay: (a) To Agent, to be retained by Agent, monthly as part of Borrower's Liabilities, a loan administration fee equal to $3,500 for each month (or part thereof) from the date hereof until the date on which Borrower's Liabilities are paid in full. Said fees shall be paid on the earlier of (i) quarterly in arrears on the last day of each May, August, November and February during the term hereof, commencing May 31, 1996 or (ii) that date when Borrower's Liabilities are paid in full; (b) To Agent, to be retained by Agent, at the time of each Portfolio Advance under the Revolving Loan, a fee equal to $7.00 for each Loan Account for which Loan Account Documentation is pledged to Lenders and/or Agent; (c) To Agent, for the ratable benefit of Lenders, a quarterly loan fee equal to $25,000 payable on the last day of each May, August, November and February during the term hereof, provided that, if Borrower pays Borrower's Liabilities in full before November 30, 1996 the unpaid balance of the unpaid aggregate quarterly loan fees shall be immediately due and payable; and (d) To Agent, for the ratable benefit of Lenders, a Funding Fee in the amount of $400,000 payable in installments of $100,000 concurrently herewith and on May 31, 1996, August 31, 1996 and November 30, 1996; provided that, if Borrower pays Borrower's Liabilities in full before November 30, 1996 the unpaid balance of the Funding Fee shall be immediately due and payable. 2.13 Authorized Advances. Lenders, in their sole and absolute discretion, upon notice thereof to Borrower, may disburse for the account of Borrower, as a disbursement of the Revolving Loans, any or all funds necessary to pay: (a) any costs, expenses or other amounts required to be paid by Borrower hereunder and not so paid (but not, unless Lenders agree in their sole and absolute discretion, any amounts payable under Section 2.12 hereof); (b) any Person as Lenders deem necessary or desirable to insure that the security interest, lien or other encumbrance granted to Agent, on behalf of Lenders in the Collateral shall at all times have the priority represented and covenanted in this Agreement and the Other Agreements; (c) to protect the Collateral or Agent's and/or Lenders' security interest therein; and (d) for any and all other costs or expenses incurred by Borrower or Lenders and/or Agent (including, 19 without limitation expenses and reasonable fees of Lenders' attorneys in connection with the Loans). 2.14 Prepayment. The Loans may be prepaid in part, but not in whole, at any time without premium or penalty; provided that any prepayment of the Loans in full shall be accompanied by the payment of all accrued but unpaid interest. The Loans may be prepaid in whole upon not less than five (5) days prior notice, without premium or penalty. Borrower shall not be subject to any penalty or other charge solely because no Revolving Loans are advanced hereunder or because any or all Loans are prepaid in full. 2.15 Lender's Commitment. Each Lender hereby agrees that its loan commitment (a "LENDER'S COMMITMENT") shall be 50% of all Loans made by Lenders to Borrower pursuant to the terms hereof. This provision may be modified from time to time, as to all Loans, or as to individual Portfolio Advances, by written agreement between the Lenders, without notice to or consent by Borrower. Each and every Loan made by Lenders pursuant to the terms hereof shall be made by Lenders depositing their ratable share of each Advance (based upon each Lender's Commitment) with Agent, in immediately available funds, no later than 10:00 A.M. Chicago time on the date of the funding of such Loan. 2.16 Change of Laws. If either Lender shall determine at any time after the date hereof that the adoption of any law, rule or regulation regarding capital adequacy, or any change therein or in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof or compliance by such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any such authority, central bank or comparable agency, has or would have the affect of reducing the rate of return on Lender's capital as a consequence of its obligations hereunder to a level below that which Lender could have achieved but for such adoption, change or compliance (taking into consideration Lender's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then, upon Lender's presentation to Borrower of a written calculation and explanation of such charge and its effect, Borrower shall pay to such Lender upon demand such amount or amounts, in addition to the amounts payable under any other provision of this Agreement or the Other Agreements, as will compensate Lender for such reduction. Determinations by a Lender for purposes of this paragraph of the additional amount or amounts required to compensate Lenders with respect to the foregoing shall be conclusive in the absence of manifest error. In determining such amount or amounts, Lenders may use any reasonable averaging or attribution methods. 3. DISBURSEMENTS AND APPLICATION OF PAYMENTS 3.1 Disbursement of Portfolio Advances. Subject to the limitations set forth in Sections 2.2 and 2.4 and other applicable provisions of this Agreement (including, without limitation, Section 6 hereof), and provided no Event of Default or Unmatured Default then exists hereunder or would then be created thereby, Lenders may, in their sole and absolute discretion, disburse Advances to Borrower and Borrower may use Advances from time to time to acquire Loan Portfolios under the following terms and conditions. 20 (a) Proposed Loan Portfolio. If Borrower proposes to acquire one or more Loan Portfolios with the proceeds of an Advance to be made hereunder, then (i) Borrower shall execute and deliver to Lenders a Loan Advance Certificate with respect to such Proposed Loan Portfolio, in form and detail acceptable to Lenders, in their sole and absolute discretion, no less than three (3) Business Days prior to the proposed date of Borrower's submission of a bid to the FDIC with respect to such Proposed Loan Portfolio; (ii) if Lenders determine, for any reason or no reason, that the Proposed Loan Portfolio is acceptable to become a Revolving Loan Portfolio and at the time of such determination the Proposed Loan Portfolio is available for acquisition by Borrower, then Lenders will make available to Borrower an Advance in an amount equal to the Maximum Advance Amount or such lesser amount as Borrower shall have requested (in each case subject to the limitation in Section 2.4(b)); (iii) if either Lender determines, for any reason or no reason, that the Proposed Loan Portfolio is not acceptable to become a Revolving Loan Portfolio, then no Revolving Loan shall be disbursed with respect to such Proposed Loan Portfolio and Borrower acknowledges that Lenders shall have no liability in connection with a Revolving Loan not being made hereunder with respect to such Proposed Loan Portfolio. (b) Funding Portfolio Advances. In the event Lenders determine to make a Revolving Loan with respect to a Proposed Loan Portfolio in accordance with Section 3.1(a), Agent shall notify Borrower (telephonic notice being sufficient for the purposes of this Section 3.1(b)), and not later than 10:00 a.m. Chicago time on the date of the proposed funding Lenders shall deliver to Agent an amount equal to each Lender's ratable share of said Revolving Loans, and Borrower shall deliver to Agent an amount equal to Borrower's Cost in immediately available funds, together with a certificate executed by DFC Asset Corp., that said funds have been contributed by DFC Asset Corp. to Borrower as an equity contribution. Funds so deposited by Agent shall be deemed deposited into escrow for purposes of Sections 2.1(b) and 3.1(e). It shall be a condition precedent to Lenders' obligation to make any Portfolio Advance that DFC Asset Corp. contribute as equity (and not as subordinated loans or in any other manner) an amount in cash equal to Borrower's Cost with respect to any Loan Portfolio acquired with the proceeds of an Advance. (c) Disbursement to FDIC. Funds deposited with Agent in accordance with Section 3.1(b) shall be disbursed by Agent upon delivery to Agent of notice from the FDIC that Borrower has acquired the Proposed Loan Portfolio and against delivery to Agent from the FDIC of all Loan Account Documentation relating to the applicable Loan Portfolio. Borrower hereby irrevocably authorizes and directs Agent to disburse to the FDIC, for and on behalf of Borrower and for Borrower's account the proceeds of each Portfolio Advance and Borrower's Cost, to the extent delivered to Agent in immediately available funds. (d) Failure to Acquire. Borrower covenants with Lenders and Agent (i) that if for any reason Borrower does not acquire a Proposed Loan Portfolio after Lenders have made a Revolving Loan pursuant hereto for such acquisition, then Borrower shall promptly repay such Revolving Loan in full together with interest thereon, and (ii) that if for any reason Borrower redelivers title to any Loan Accounts to the FDIC, then Borrower shall promptly repay the portion of the Revolving Loan made with respect to such redelivered Loan Accounts and (iii) that each time Borrower does acquire a Proposed Loan Portfolio Borrower will direct the FDIC to deliver Loan Account Documentation to Agent and that if the FDIC does not do 21 so, Borrower will promptly deliver or cause the delivery of such Loan Account Documentation to Agent or promptly repay such Revolving Loan in full. (e) Portfolio Advance. Each Advance of Revolving Loans for the acquisition of a Loan Portfolio acquired pursuant to the foregoing provisions, if any, shall be identified on the books and records of Agent as a "PORTFOLIO ADVANCE", funds received by Agent as proceeds of said Loan Portfolio shall be applied to the payment of the applicable Portfolio Advance in the manner set forth herein, and Borrower shall pay principal and interest on each Portfolio Advance in accordance with the provisions of Sections 2.2 and 2.6. 3.2 Protective Advances Upon Borrower's Request. In the event Borrower desires Lenders to make Revolving Loans for Protective Advances, Borrower shall give Lenders not less than five (5) business days prior notice, together with information, in form and detail acceptable to Lenders, in their sole and absolute discretion, relating to the purpose and use of the proposed Advance. Agent shall promptly deliver to Lenders copies of all materials, if any, delivered by Borrower to Agent pursuant to this Section 3.2. If Lenders elect, for any reason or no reason, in their sole and absolute discretion to make such Advance, and provided no Event of Default or Unmatured Default then exists or would be created thereby (including but not limited to a default under the provisions of Sections 2.2 and 2.4), Lenders shall deliver to Agent an amount equal to its ratable share of such Advance and Agent shall thereupon immediately transfer to Borrower's operating account maintained with Agent the amount of said Advance. If either Lender determines, for any reason or no reason, not to make such an Advance, then no Revolving Loan shall be disbursed with respect to such requested Protective Advance and Borrower acknowledges that Lenders shall have no liability in connection with a Revolving Loan not being made hereunder with respect to such requested Protective Advance. The principal amount of any Protective Advance made with respect to a Term Loan Portfolio shall be added to the principal balance of the Term Loans and shall be payable in accordance with the provisions of Section 2.6(e). The principal amount of any Protective Advance made with respect to a Revolving Loan Portfolio shall be added to the principal balance of the related Portfolio Advance and shall be payable in accordance with the provisions of Section 2.6(e). Any Advance made by Lenders pursuant to the terms of this Section 3.2 for any purpose other than a Protective Advance shall be payable by Borrower on demand (unless Lenders agree otherwise at the time of making such Advance) and shall be paid from Collateral Collections, in accordance with Sections 3.5(a)(ii) or 3.5(b)(ii), if permitted by the terms thereof, or in accordance with Section 2.6 and the other applicable provisions of this Agreement. 3.3 Disbursement of Other Advances by Lender. In addition to the Advances made pursuant to Borrower's request set forth in Sections 3.1 and 3.2, Lenders (if both agree) may make Advances for the payment of Borrower's obligations pursuant to the terms of Sections 2.11, 2.12 and 2.13. All monies shall be disbursed by Agent at the direction of Lenders, upon notice to Borrower; provided that Agent's failure to notify Borrower shall not affect the validity of Lenders' and/or Agent's actions hereunder. All monies so disbursed shall be a part of the Secured Obligations, payable by Borrower to Agent on demand, and shall be paid from Collateral Collections in accordance with Sections 3.5 (a)(ii) and 3.5(b)(ii), if permitted by the terms thereof, or in accordance with Section 2.6 and the other applicable provisions of this Agreement. 22 3.4 Proceeds of DFSLP Collections. DPAI, an Affiliate of Borrower, and TLF have entered into a Loan and Security Agreement dated as of February 28, 1994, pursuant to which TLF has made loans to DPAI. As additional collateral for the loans by TLF to DPAI, DFSLP has pledged to TLF all assets of DFSLP. Pursuant to the terms of a security agreement executed concurrently herewith ("TLF SECURITY AGREEMENT"), DFSLP has pledged to Agent, for the ratable benefit of Lenders, a springing security interest in all assets of DFSLP. Concurrently herewith, Lenders and TLF have entered into an agreement pursuant to which, until an "EVENT OF DEFAULT" (of which notice has been given, if applicable, and all cure or grace periods have expired) has occurred under the terms of the loan agreement with Transamerica (a "TRANSAMERICA DEFAULT"), TLF will deliver to Agent all proceeds of DFSLP's assets, less servicing fees of no more than 12.5% of such proceeds ("DFSLP PROCEEDS"), which shall be applied in accordance with Section 3.5(b). 3.5 Application of Payment. One hundred percent (100%) of the collected balance in each Cash Collateral Account shall be debited and delivered to Agent on behalf of the Lenders, at such intervals as Agent shall (in its sole and absolute discretion) determine, but in no event less often than once each week ("COLLATERAL COLLECTIONS"). Agent shall hold all Collateral Collections with respect to each Loan Portfolio in a non-interest-bearing account at Agent identified to such Loan Portfolio and/or the DFSLP Proceeds, as applicable (each, a "DEDICATED ACCOUNT"). Borrower hereby pledges, assigns and transfers to the Agent for the benefit of the Lenders, as collateral for the Secured Obligations, all of Borrower's right, title and interest in and to each Cash Collateral Account and each Dedicated Account, together with all monies due or to become due thereunder or otherwise deposited therein and all sums due or to become due on any such amounts, whether by way of interest, dividends, bonus, redemption, repayment or otherwise. Provided no Event of Default or Unmatured Default has occurred and is continuing, on the final Business Day of each week, Agent shall apply the sum of all Collateral Collections in each Dedicated Account (a "WEEKLY PAYMENT") as follows: (a) Revolving Loan Portfolio. Agent shall apply the sum of all Collateral Collections in each Dedicated Account applicable to a Portfolio Advance as follows: (i) if no Event of Default or Unmatured Default then exists, 12.5% shall be delivered to an account at Agent in the name of J-Hawk in full satisfaction of the Servicing Fee; (ii) The remaining 87.5% (100%, if an Event of Default or Unmatured Default then exists) of Collateral Collections ("NET COLLECTIONS") shall be applied as follows: (1) Any unpaid fees and expenses (including, when due, the quarterly installment of the Funding Fee and the quarterly loan fee) and any Advances made pursuant to Section 3.3; (2) Interest due and payable with respect to the Portfolio Advance to which the Dedicated Account is dedicated; (3) Interest due and payable with respect to the Revolving Loans; 23 (4) Principal outstanding with respect to the Portfolio Advance to which the Dedicated Account is dedicated; and (5) If no Borrower's Liabilities are then outstanding with respect to the Portfolio Advance to which the Dedicated Account is dedicated, then the balance, if any, to a Cash Collateral Account maintained with Agent, to be applied by Agent within thirty (30) days to any other of Borrower's Liabilities (other than Interest or fees which are not yet accrued, due and owing), applied in such order of priority as Borrower shall designate in writing to Agent or, in the absence of such written designation during the applicable thirty (30) day period, as Lenders may determine. (b) Term Loan Portfolios. Agent shall apply Collateral Collections applicable to a Term Loan Portfolio as follows: (i) If no Event of Default or Unmatured Default then exists, 12.5% of the Collateral Collections shall be delivered to an account at Agent in the name of J-Hawk in full satisfaction of the Servicing Fee; (ii) The Net Collections plus the DFSLP Proceeds shall then be applied as follows: (1) Any unpaid fees and expenses (including, when due, the quarterly installment of the Funding Fee and the quarterly loan fee) and any Advances made pursuant to Section 3.3; (2) Interest due and payable with respect to the Term Loans; (3) Principal outstanding with respect to the Term Loans (including any amount due pursuant to Section 2.4(a), relating to Fraudulent Receivables); and (4) If no Borrower's Liabilities are then outstanding with respect to the Term Loans, then the balance, if any, to a Cash Collateral Account maintained with Agent, to be applied by Agent within thirty (30) days to any other of Borrower's Liabilities (other than Interest or fees which are not yet accrued, due and owing), applied in such order of priority as Borrower shall designate in writing to agent or, in the absence of such written designation, during the applicable thirty (30) day period, as Agent may determine. 24 (c) Approved Disbursements. (i) Notwithstanding anything to the contrary contained in this Section 3.5, provided no Transamerica Default, Event of Default or Unmatured Default has occurred and is continuing or would be created thereby, following written request therefor from Borrower (which request shall certify that Borrower's Board of Directors has declared such a dividend and ordered it paid) in each instance (each, a "DIVIDEND REQUEST"), Agent shall deliver to an account maintained with Agent in the name of DFC Asset Corp. as a dividend, an amount of DFSLP Proceeds which are received by Agent after the date of such Dividend Request that is equal to the lesser of all DFSLP Proceeds received by Agent after the date of such Dividend Request or the amount of the next payment of principal and interest due to Geist under the terms of that certain promissory note dated as of September 19, 1995 in the original principal amount of $3,700,000 from Borrower, but only if Geist is entitled to receive same in accordance with the terms of the relevant note and his subordination agreement in favor of the Lenders with respect thereto. (ii) Notwithstanding anything to the contrary contained in this Agreement, Lenders consent to the disbursements by Borrower on the date hereof to the parties and in the amounts identified on Exhibit C ("PERMITTED DISBURSEMENTS"), hereto. (d) Payment to Lenders. All payments received by Agent pursuant to the foregoing provisions of this Section 3.5 (other than amounts payable to DFC Asset Corp. pursuant to clause (c) above, to the extent so paid) shall be deemed to be received by Agent, ratably on behalf of the Lenders, and shall be disbursed to Lenders ratably in accordance with Lender's Commitment, in payment of the Secured Obligations no later than the end of business on the last Business Day of each week. (e) Application After Default. Following an Event of Default or Unmatured Default and during the continuation thereof, one hundred percent (100%) of all Collateral Collections shall be applied in payment of the Secured Obligations in such order of priority as Lenders shall determine, in their sole and absolute discretion. To the extent any portion of Collateral Collections has been received by virtue of Borrower's sale of any of the Loan Accounts, no portion thereof shall be payable or paid to J-Hawk but 100% of such monies shall be distributed as set forth in Section 3.5(a)(ii), 3.5(b)(ii) or 3.5(e), as applicable. 3.6 Direction of Application. Subject to compliance by Agent with the provisions of Section 3.5, Borrower waives the right to direct the application of any and all payments at any time or times hereafter received by Agent on account of the Secured Obligations and Borrower agrees that Agent shall have the continuing exclusive right to apply and reapply any and all such payments in such manner as Agent or the Lenders may deem advisable, notwithstanding any other provision of this Agreement or any entry by Agent upon any of its books and records. 25 4. COLLATERAL: GENERAL TERMS 4.1 Grant of Security Interest. To secure the prompt payment to Lenders of Borrower's Liabilities and the prompt, full and faithful performance of Borrower's Obligations, Borrower hereby grants to Agent, for the ratable benefit of and as Collateral Agent for Lenders, a security interest in and to, and assigns and pledges to Agent on behalf of the Lenders, all of Borrower's now existing and/or owned and hereafter arising and/or acquired: (a) Loan Accounts and Loan Account Documentation relating thereto; (b) All right, title and interest of Borrower under any purchase contract pursuant to which Borrower acquires any Loan Portfolio or any Loan Account; (c) All right, title and interest of Borrower under any agreement pursuant to which a Person agrees to act as Borrower's agent in servicing the Loan Accounts, the Loan Portfolios and enforcing Borrower's rights thereunder, including without limitation, the service agreement heretofore entered into with J-Hawk. (d) Accounts, chattel paper, contract rights, leases and rental income thereunder, leasehold interests, letters of credit, instruments and documents, both related to and not related to Loan Portfolios ("ACCOUNTS"); (e) All patents, copyrights and trademarks, and all applications for and registrations of the foregoing, all franchise rights, tradenames, goodwill, Partnership Interests, beneficial interests, rights to tax refunds and all other general intangibles of any kind or nature whatsoever ("GENERAL INTANGIBLES"); (f) All inventory of Borrower, wherever located, whether in transit, held by others for Borrower's account, covered by warehouse receipts, purchase orders and contracts, or in the possession of any carriers, forwarding agents, truckers, warehousemen, vendors or other Persons, including without limitation all raw materials, work in process, finished merchandise, supplies, goods, incidentals, office supplies and packaging materials ("INVENTORY"); (g) Goods (other than Inventory), machinery, equipment, vehicles, appliances, furniture, furnishings and fixtures ("EQUIPMENT"); (h) Monies, reserves, deposits, certificates of deposit and deposit accounts and interest or dividends thereon, securities, cash, cash equivalents and other property now or at any time or times hereafter in the possession or under the control of Lenders and/or Agent or their respective bailee; (i) All books, records, computer records, ledger cards, programs and other computer materials, customer and supplier lists, invoices, orders and other property and general intangibles at any time evidencing or relating to the Collateral ("RECORDS"); 26 (j) All rights of Borrower under all leases, licenses, occupancy agreements, concessions or other agreements entered into by Borrower as tenant or lessee or licensee or concessionaire thereunder, whether written or oral, whether now existing or entered into at any time hereafter, whereby Borrower is granted the right, either exclusively or in common with others, to use, possess, or occupy real estate ("LEASES"); (k) All options, rights of first refusal, grants, contracts, agreements, or rights to purchase, lease, license, or otherwise acquire any interest in real property, whether now existing or hereafter acquired ("OPTIONS"); (l) All accessions to any of the Collateral and all substitutions, renewals, improvements and replacements of and additions thereto; (m) The collateral referenced in Article 6 ("OTHER COLLATERAL AND OTHER AGREEMENTS"); (n) All other property of Borrower, real and/or personal; and (o) All products and proceeds of the foregoing (whether such proceeds are in the form of cash, cash equivalents, proceeds of insurance policies, Accounts, General Intangibles, Inventory, Equipment, Records or otherwise). All of the foregoing is referred to herein individually and collectively as the "COLLATERAL". It is the intent of the parties hereto that "Collateral" include all Assets of Borrower, including real, personal and intangible property of Borrower, of every kind and nature, whether specifically enumerated herein or not, and shall be given the broadest possible meaning and interpretation. Borrower shall make appropriate entries upon its financial statements and Records disclosing Agent's security interest in and assignment and pledge of the Collateral. 4.2 Supplemental Documentation. Borrower shall execute and/or deliver to Agent, at any time and from time to time hereafter at the request of Agent, all agreements, instruments, documents and other written matter ("SUPPLEMENTAL DOCUMENTATION") that Agent reasonably may request, in form and substance acceptable to Agent, to perfect and maintain perfected Agent's security interest, lien and/or encumbrance in and/or assignment and pledge of the Collateral and to consummate the transactions contemplated in or by this Agreement and the Other Agreements. Borrower, irrevocably, hereby appoints Agent (and all Persons designated by Agent for that purpose) as Borrower's true and lawful agent and attorney-in-fact to sign the name of Borrower on the Supplemental Documentation and to deliver the Supplemental Documentation to such Persons as Agent, in its sole and absolute discretion, may elect; provided that notwithstanding the foregoing, Agent shall execute such Supplemental Documentation only upon Borrower's failure to execute and deliver the same to Agent within five (5) Business Days following Agent's request that Borrower execute such Supplemental Documentation. Borrower agrees that a carbon, photographic or photostatic copy, or other reproduction, of this Agreement or of any financing statement, shall be sufficient as a financing statement. 27 4.3 Inspection of Collateral. (a) Lenders and/or Agent (by any of its officers, employees and/or agents) shall have the right, at any time or times during Borrower's usual business hours, to inspect the Collateral (and the premises upon which it is located) and all related Records and to verify the amount and condition of or any other matter relating to the Collateral. All reasonable costs, fees and expenses incurred by Agent, or for which Agent becomes obligated, in connection with such inspection and/or verification shall constitute part of Borrower's Liabilities, payable by Borrower to Agent on demand. (b) Borrower will allow any representative, officer or accountant of any Lender or the Agent to discuss the Financial Statements, the other financial information from time to time delivered hereunder and the financial condition of the Borrower and its Affiliates with their respective outside auditors. Borrower hereby irrevocably authorizes such auditors to discuss the foregoing with all such Persons. 4.4 Perfection; Location. (a) Perfection. Borrower hereby warrants and represents to and covenants with Lenders that: (b) Agent's security interest in the Collateral, including, without limitation, Agent's security interest in the Loan Account Documentation with respect to each of the Loan Portfolios heretofore or hereafter to be purchased by Borrower with the proceeds of the Revolving Loans, when the same attaches, is now and at all times hereafter shall be perfected and have a first priority; (b) the principal place of business of Borrower and the location where Borrower keeps the Collateral and the Records, other than the Loan Account Documentation, is the location specified on Exhibit D ("LOCATION OF COLLATERAL"); Borrower has no other offices or locations and Borrower shall not remove such Records and/or the Collateral from its principal place of business and shall not keep any of such Records and/or the Collateral at any other office or location unless Borrower gives Agent written notice thereof at least thirty (30) days prior thereto and the same is within the continental United States of America. Borrower, by written notice delivered to Agent at least thirty (30) days prior thereto, shall advise Agent of Borrower's opening of any new office or place of business or its closing of any then existing office or place of business and any new office or place of business shall be within the continental United States of America. (c) Maintain Perfection, Location of Collateral. Borrower shall perform all the acts requested by Lenders and/or Agent which are reasonably necessary to maintain a valid security interest in the Collateral, including but not limited to, executing and/or delivering to Agent, at any time and from time to time hereafter, any and all Supplemental Documentation that Agent may request, in form and substance reasonably acceptable to Agent, to perfect and maintain perfected Agent's security interest, lien and/or encumbrance in and/or assignment and pledge of the Collateral and to consummate the transactions contemplated in or by this Agreement and/or the Other Agreements. Borrower agrees that Agent, to the extent permitted by applicable law, may execute, on behalf of and in the name of Borrower, any Supplemental Documentation covering all or any of the Collateral and file the same in each and every appropriate jurisdiction. 28 4.5 Special Collateral. Borrower shall receive, as the sole and absolute property of Agent and as trustee for Agent, all monies, checks, notes, drafts and all other payment for and/or proceeds of Collateral which come into the possession or under the control of Borrower (or any of its general or limited partners, agents, employees or the shareholders, directors, officers, employees, partners or agents of any of its general or limited partners, or those Persons acting for or in concert with Borrower,) and immediately upon receipt thereof, Borrower shall remit the same (or cause the same to be remitted by such persons set forth above), in kind, to Agent (at Agent's principal place of business designated herein); provided that if such payment or proceeds represent amounts collected with respect to a Loan Portfolio, then Agent hereby designates the proper place of delivery to be the Cash Collateral Account(s) established with respect to such Loan Portfolio. 4.6 Control of Proceeds. Agent, now or at any time hereafter, in its sole and absolute discretion, may take control of, in any manner, and may endorse Borrower's name to any of the items of payment or proceeds described in Section 4.5 above and, subject to Section 4.9 below, Agent shall apply the same to and on account of the Secured Obligations in accordance with the provisions of Section 3.5. Borrower, irrevocably, hereby makes, constitutes and appoints Agent (and all Persons designated by Agent for that purpose) as Borrower's true and lawful agent and attorney-in-fact, with power, upon notice to Borrower, to take any such actions. 4.7 Acceptance of Collateral. Agent, in its sole and absolute discretion, upon notice to Borrower, without waiving or releasing any Secured Obligations or any Event of Default or Unmatured Default, may at any time or times hereafter, but shall be under no obligation to, pay, acquire and/or accept an assignment of any security interest, lien, encumbrance or claim asserted by any Person against the Collateral. All sums paid by Agent in respect thereof and all costs, fees and expenses, including reasonable attorneys' fees, court costs, expenses and other charges relating thereto incurred by Agent or for which Agent becomes obligated on account thereof shall be part of the Secured Obligations payable by Borrower to Agent on demand. 4.8 Special Collateral. In the event that Borrower shall receive that portion of the Collateral consisting of chattel paper and/or evidenced by an instrument and/or document ("SPECIAL COLLATERAL"), including, without limitation, Loan Account Documentation, Borrower immediately shall mark the same to show that such Special Collateral is subject to a security interest in favor of Agent and shall deliver the original thereof to Agent, together with appropriate endorsement and/or other specific evidence of assignment thereof to Agent, in form and substance acceptable to Agent. 4.9 Release of Proceeds to Borrower. Agent may, in its sole and absolute discretion, retain as additional Collateral or (with the consent of the Other Lender) release to Borrower, from time to time, such portion of the monies, reserves and proceeds received by Agent with respect to the Collateral as Agent (with the consent of the Other Lender) may determine. All such monies, reserves and proceeds and other property of Borrower in the possession of Agent or its bailee at any time or times hereafter are hereby pledged by Borrower to Agent as additional Collateral hereunder, and, in Agent's sole and absolute discretion, may be held by Agent (with the consent of the Other Lender) until the Secured 29 Obligations are paid in full or, at any time, may be applied by Agent on account of Secured Obligations. 4.10 Limitation of Waivers. Except as set forth in Section 5.8, no authorization given by Agent or any Lender pursuant to this Agreement or the Other Agreements to sell any specified portion of Collateral or any items thereof, and no waiver by Agent or any Lender in connection therewith shall establish a custom or constitute a waiver of the prohibition contained in this Agreement against such sales, with respect to any portion of the Collateral or any item thereof not covered by said authorization. 4.11 Right to Set-Off. Regardless of the adequacy of any Collateral, any deposits or other sums at any time credited by or payable or due from Agent or any Lender to Borrower, or any monies, cash, cash equivalents, certificates of deposit, securities, instruments, documents or other assets of Borrower in the possession or control of Agent or its bailee or any Lender or its bailee for any purpose may at any time be reduced to cash and applied by Agent or such Lender to, or setoff by Agent or such Lender against, the Secured Obligations. 5. COLLATERAL: LOAN ACCOUNTS 5.1 General Representations Relating to Loan Accounts. With respect to Loan Accounts, except as otherwise disclosed by Borrower to Lenders in writing at the time of or prior to delivery to Lenders of the applicable Loan Advance Certificate or thereafter promptly upon Borrower becoming aware of each qualification to the representations and warranties set out below, Borrower warrants and represents to Lenders that: (a) Each Loan Account to the extent reflected by the greater of Allocated Purchase Price and Estimated Remaining Collections for the Loan Accounts represents an undisputed, bona fide transaction completed in accordance with the terms and provisions contained in the applicable Loan Account Documentation delivered to Agent with respect thereto; (b) To the extent of the greater of the Allocated Purchase Price and Estimated Remaining Collections for the Loan Accounts, the amounts thereof, as shown on the Loan Advance Certificate and all statements delivered to Agent with respect thereto, are actually and absolutely owing to Borrower and are not contingent for any reason; (c) Since acquisition of such Loan Accounts, including, without limitation, the Loan Accounts acquired from FLC, no payments have been or shall be made thereon except payments immediately delivered to Agent pursuant to this Agreement; (d) There are no setoffs, counterclaims or disputes existing or asserted against Borrower (or, to the knowledge of Borrower, against any Obligor) with respect thereto and Borrower has not made any agreement with any Obligor thereof for any deduction therefrom except a discount allowed by Borrower in the ordinary course of its business in exchange for prompt payment in settlement or for assignment of the entire applicable Loan Account; 30 (e) There are no facts, events or occurrences which in any way impair the validity or enforceability thereof or tend to reduce the amount payable thereunder from the greater of the Allocated Purchase Price and the Estimated Remaining Collections thereof; (f) To the best of Borrower's knowledge all Obligors had the capacity to contract and were solvent at the time the applicable Loan Account(s) arose; (g) Borrower has no knowledge of any fact or circumstance which would impair the validity or collectibility thereof; (h) To the best of Borrower's knowledge, there are no proceedings or actions which are threatened or pending against any Obligor which might result in any material adverse change in its financial condition; (i) To the best of Borrower's knowledge, none of the collateral for any of the Loan Accounts is subject to a security interest or lien in favor of any Person other than the Borrower; (j) To the best of Borrower's knowledge, no Obligor is a resident of, incorporated in or otherwise located in, any jurisdiction outside of the United States; (k) To the best of Borrower's knowledge, no Obligor is a government or governmental agency, department or instrumentality; and (l) No Loan Account is payable other than in U.S. dollars. 5.2 Inspection of Loan Accounts. Any of Agent's and/or Lenders' officers, employees or agents shall have the right, at any time or times hereafter, in Agent's and/or Lenders' name or in the name of a nominee of Agent, to verify the validity, amount or any other matter relating to any Loan Accounts by mail, telephone, telegraph or otherwise. All reasonable costs, fees and expenses relating thereto incurred by Agent (or for which Agent becomes obligated) shall be part of the Secured Obligations, payable by Borrower to Agent on demand. 5.3 Records. Borrower shall keep accurate and complete Records relating to its Loan Accounts, which Records shall be made available to Agent, and to any representative of Agent or one or both of Lenders, at all times hereafter (during Borrower's customary business hours) for Agent's inspection, copying, verification or otherwise. 5.4 Cash Collateral Accounts. All payments made with respect to Loan Accounts, whether by or on behalf of Obligor or assignees of such Loan Accounts, shall be made to lockbox or other depositary accounts established for such purposes, as to which one or more representatives of Agent shall be the only authorized signatory or signatories ("CASH COLLATERAL ACCOUNTS"). One or more Cash Collateral Accounts, as Agent may determine in its sole and absolute discretion, shall be established to receive payments with respect to each Loan Portfolio. The Cash Collateral Accounts shall be at Agent and/or such other banks or financial institutions as Lenders shall determine in their sole and absolute discretion. A separate account 31 agreement shall be established for each Cash Collateral Account, which shall authorize Agent in its sole and absolute discretion to debit balances in such account. All Cash Collateral Accounts currently in existence, together with all other deposit accounts of Borrower are identified on Exhibit E hereto. Unless an Event of Default or Unmatured Default has occurred and is continuing, funds in each Cash Collateral Account shall be paid to Agent no less often than weekly and applied to the Secured Obligations in accordance with the provisions of Section 3.5. All costs, fees and expenses paid or incurred by Agent with respect to Cash Collateral Accounts established at other banks or financial institutions, and all costs, fees and expenses customarily imposed upon such accounts by Agent with respect to Cash Collateral Accounts established at Agent, shall be part of the Secured Obligations, payable by Borrower to Agent on demand. Any other bank or financial institution at which a Cash Collateral Account is established shall be deemed to be Agent's bailee with respect to instruments and other forms of payment received in such Cash Collateral Accounts and shall waive all rights of set-off with respect to such Cash Collateral Accounts. Borrower covenants and agrees promptly following acquisition by Borrower of each Loan Portfolio to deliver written direction to each Obligor under the Loan Accounts in such Loan Portfolio that all payments with respect to such Loan Accounts shall be delivered to the applicable Cash Collateral Account(s). Copies of all such written directions shall be retained by Borrower during the term hereof as Records. 5.5 Required Notices. Unless Agent notifies Borrower in writing (with a copy to the Other Lenders) that Agent suspends any one or more of the following requirements, Borrower shall promptly upon Borrower's learning thereof, inform Agent, in writing, of (i) any material delay in Borrower's performance of any of its obligations to any Obligor, (ii) any assertion of any claims, offsets or counterclaims by any Obligor and of any allowances, credits and/or other monies granted by Borrower to any Obligor, (iii) any assertion by an Obligor that a Loan Account is a Fraudulent Receivable. 5.6 Rights of Lenders. Agent shall have the right, now and at any time or times hereafter, in its sole and absolute discretion, upon notice thereof to Borrower: (a) to notify any or all Obligors that the Loan Accounts and Special Collateral have been assigned to Agent and that Agent has a security interest therein; (b) to direct such Obligor to make all payments due from them to Borrower upon the Loan Accounts and Special Collateral directly to Agent; (c) to enforce payment of and collect, by legal proceedings or otherwise, the Loan Accounts and Special Collateral in the name of Agent and Borrower; and (d) to take control, in any manner, of any item of payment or proceeds referred to in Section 4.5 above. 5.7 Appointment of Attorney-In-Fact. Borrower, irrevocably, hereby designates, makes, constitutes and appoints Agent (and all Persons designated by Agent) as Borrower's true and lawful agent and attorney-in-fact, with power, without notice to Borrower and at such time or times hereafter as Agent, in its sole and absolute discretion, may determine, in Borrower's or Agent's name: (a) to demand payment of the Loan Accounts and Special 32 Collateral; (b) to enforce payment of the Loan Accounts and Special Collateral by legal proceedings or otherwise; (c) to exercise all of Borrower's rights and remedies with respect to the collection of the Loan Accounts and Special Collateral; (d) to settle, adjust, compromise, extend or renew the Loan Accounts and Special Collateral; (e) to settle, adjust or compromise any legal proceedings brought to collect the Loan Accounts and Special Collateral; (f) to sell or assign the Loan Accounts and Special Collateral upon such terms, for such amounts and at such time or times as Agent deems advisable; (g) to discharge and release the Loan Accounts and Special Collateral; (h) to take control, in any manner, of any item of payment or proceeds referred to in Section 4.5 above; (i) to prepare, file and sign Borrower's name on any notice of lien, assignment or satisfaction of lien or similar document in connection with the Loan Accounts and Special Collateral; (j) to prepare, file and sign Borrower's name on any proof of claim in bankruptcy or similar document against any Obligor; (k) to do all acts and things necessary, in Agent's sole and absolute discretion, to fulfill Borrower's Obligations under this Agreement; (l) to endorse the name of Borrower upon any of the items of payment or proceeds referred to in Section 4.8 and to deposit the same in the Dedicated Account; (m) to endorse the name of Borrower upon any chattel paper, document, instrument, invoice, freight bill, bill of lading or similar document or agreement relating to the Loan Accounts and Special Collateral; and (n) to sign the name of Borrower to verifications of the Loan Accounts and Special Collateral and notices thereof to Obligor. 5.8 Release of Loan Account Documentation. Once each week, Borrower may withdraw from Agent's possession Loan Account Documentation with respect to one or more Loan Accounts which at that time remain Collateral, solely for the purpose of and as necessary to enforce collection of such Loan Accounts or in connection with a bona fide proposed liquidation through assignment, sale or transfer of such Loan Accounts to a party which is not an Affiliate of Borrower. Borrower shall withdraw such Loan Account Documentation as Agent's trustee only pursuant to delivery, and redelivery on a weekly basis with respect to Loan Account Documentation which Borrower retains for more than one week, to Agent and acceptance by Agent of a Trust Receipt in form and substance satisfactory to Agent executed by the chief executive officer of Borrower or such other officer of Borrower as may be acceptable to Agent in its sole and absolute discretion. Borrower acknowledges and agrees that delivery of Loan Account Documentation to Borrower and Borrower's possession thereof pursuant to Trust Receipts shall not affect Agent's perfected first security interest in the related Loan Accounts. Notwithstanding the foregoing, Agent shall not release to Borrower Loan Account Documentation with respect to Loan Accounts representing more than 5% of the then Book Value of the Loan Portfolio to which such Loan Account Documentation relates. Once each week, Borrower may withdraw from Agent's possession Loan Account Documentation with respect to one or more Loan Accounts which at that time are eligible for release from Collateral because the underlying Loan Accounts have then been fully collected, settled or 33 liquidated through assignment, sale or transfer to a party which is not an Affiliate of Borrower. Borrower shall withdraw such Loan Account Documentation only pursuant to delivery to and acceptance by Agent of a Collateral Release Certificate in form and substance satisfactory to Agent and executed by the chief executive officer of Borrower or such other officer of Borrower as may be acceptable to Agent in its sole and absolute discretion. All Loan Account Documentation delivered to Borrower, whether pursuant to Trust Receipts or Collateral Release Certificates, shall be delivered at Borrower's expense, the amount of which shall be part of the Secured Obligations, payable by Borrower to Agent on demand. 6. OTHER COLLATERAL AND OTHER AGREEMENTS. 6.1 Checklist Items. The obligation of Lenders to make the Term Loans to Borrower is subject to the condition precedent that, in addition to satisfaction of the conditions set forth in Sections 6.2, 6.3, 6.4 and elsewhere in this Agreement, Lenders shall have received all documents, instruments, agreement, notes, mortgages, collateral assignments, evidences of Borrower's authority, and all other instruments as Lenders shall, in their sole and absolute discretion, request, including but not limited to all items on the documentation checklist, attached hereto as Exhibit F ("DOCUMENTATION CHECKLIST"). 6.2 Necessary Actions. The obligation of Lenders to make the Loans to Borrower is subject to the further condition precedent that all proceedings taken in connection with the transaction contemplated by this Agreement, and all instruments, authorizations and other documents applicable thereto, shall be satisfactory in form and substance to Lenders, in their sole and absolute discretion. 6.3 Conditions Precedent to Loans. It shall be a condition precedent to Lenders' obligation to make any Loan hereunder that the following documents, instruments or security agreements in form and substance satisfactory to Lenders, in Lenders' sole and absolute discretion, shall have been delivered to Lenders. (a) Guarantees. Each of the Guarantors, to wit, Geist and DFC Asset Corp., contemporaneously with the execution and delivery of this Agreement, will enter into and deliver to Agent, a joint and several guaranty of payment and performance of the Secured Obligations. Such guaranties are incorporated herein by reference and made a part hereof. (b) Pledge of Subordinate Notes. The Guaranty of Geist shall be secured by a pledge of the following promissory notes: (i) promissory note dated as of September 19, 1995 in the original principal amount of $3,700,000 payable to Geist made by DFC Asset Corp.; (ii) 34 cash flow note dated as of September 19, 1995 in the original principal amount of $2,700,000 payable to Geist made by DFC Asset Corp.; (iii) cash flow note dated as of September 19, 1995 in the original principal amount of $3,500,000 payable to Geist made by DFC Asset Corp.; (iv) cash flow note with respect to DFSI dated September 19, 1995 payable to Geist made by DFC Asset Corp.; and (v) receivables note with respect to DFSI receivables dated September 19, 1995 payable to Geist made by DFC Asset Corp., the original of which notes have been delivered to Agent. Such pledge shall be evidenced by a pledge and security agreement, in form and substance acceptable to Lenders, in their sole and absolute discretion, to be entered into concurrently herewith. (c) Pledge of Assets. The Guaranty of DFC Asset Corp. shall be secured by a pledge of 100% of the issued and outstanding stock of Borrower and a security interest in all other assets of DFC Asset Corp., except the stock of DPAI. DFC Asset Corp shall grant to Agent, for the ratable benefit of Lenders, a security interest in such stock and other assets, pursuant to the terms of one or more pledge and security agreements in form and substance acceptable to Lenders, in their sole and absolute discretion, entered into concurrently herewith. Said agreements shall require, inter alia, that DFC Asset Corp. maintain its primary banking relationship with ANB. (d) Pledge of Partnership Interests. Borrower shall grant to Agent a security interest in the general partnership interests of DFSLP, pursuant to the terms of a pledge agreement in form and substance acceptable to Lenders, in their sole and absolute discretion, executed concurrently herewith. (e) Guaranty by FirstCity. To secure payment and performance of the Secured Obligations, FirstCity shall, concurrently herewith, enter into a guaranty of payment and performance of Borrower's Liabilities, in form and substance acceptable to Lenders in their sole and absolute discretion. (f) Deficiency Undertaking. In addition to guaranty of FirstCity pursuant to Section 6.3(e), FirstCity shall, concurrently herewith, enter into a deficiency undertaking, in form and substance acceptable to Lenders in their sole and absolute discretion ("DEFICIENCY UNDERTAKING"). (g) Intentionally Deleted. (h) Termination of Sale and Repurchase Agreements. All obligations of Borrower to sell or otherwise transfer Loan Accounts to, or purchase or otherwise acquire Loan 35 Accounts from, one or more of DPAI or any other Affiliate of any Credit Party shall be terminated, and all amounts due thereunder, if any, shall have been paid in full. (i) Intentionally Deleted. (j) Prior Fees and Expenses. All amounts payable to the Lenders with respect to the Prior Loan Agreement shall have been paid in full. (k) Reports. The Lenders shall have received from the relevant Corporate Credit Parties and DPAI an analysis of all litigation (if any) to which any such Corporate Credit Party or DPAI or any of their respective properties is a party or subject, or by which Borrower of such Corporate Credit Party or DPAI is otherwise affected; provided, however, that no such report must be provided with respect to litigation in which the aggregate amount claimed is less than $250,000. (l) Insurance. There shall have been delivered to the Agent certificates of insurance from Borrower's various insurers (and from those of DFC Asset Corp.) naming the Agent and the Lenders as additional insured or Lenders loss payable, as their interests may appear, and otherwise complying with the requirements of Section 7 hereof and the comparable provisions of the guaranty agreement executed by DFC Asset Corp. (m) Legal Opinions. The Agent shall have received legal opinions, addressed to the Lenders and dated the Closing Date, of counsel to the Borrower and the other Corporate Credit Parties covering such matters as the Agent or any Lender may reasonably request. (n) Fees and Expenses. The fees referred to in Section 2.12(d) that are payable concurrently with execution and delivery of this Agreement and the legal fees and expenses of counsel for each of the Lenders in connection with the transactions contemplated by this Agreement and the Prior Loan Agreement shall (to the extent demand for payment thereof shall have been made) have been paid in full. (o) Financial Statements. Recent Financial Statements of each Credit Party shall have been delivered to the Lenders. (p) J-Hawk Servicing Agreement. The existing servicing agreement with J-Hawk shall have been amended to provide that at any time when an Event of Default or Unmatured Default exists no fee, costs or expenses shall be paid to J-Hawk with respect to such servicing agreement, that such non-payment shall not constitute a default or breach with respect to such servicing agreement, no penalties or interest or other amount shall accrue as a result of such 36 non-payment and that such servicing agreement shall terminate upon written notice from Lenders on or after the earlier of acceleration by Lenders of any of Borrower's Liabilities hereunder or the Maturity Date if all of Borrower's Liabilities are not then paid in full. (q) First Lake Acquisition. Borrower shall have delivered to Lenders evidence satisfactory to Lenders in their sole and absolute discretion that the acquisition of assets by Borrower pursuant to that certain Asset Sale Agreement between First Lake Corp. and Borrower, has closed. 6.4 Conditions Precedent to Each Advance. In addition to the foregoing, prior to Lenders making of any and all Loans hereunder, including each Portfolio Advance, if any, all of the following shall have been satisfied in a manner satisfactory to Lenders: (a) No change in the condition or operations, financial or otherwise, of Borrower or any Affiliate, shall have occurred which change, in the sole and absolute judgment of Lenders, may have a material adverse effect on Borrower or such Affiliate or on any of the Collateral; (b) No litigation shall be outstanding or have been instituted or threatened which Lenders determine to be material against Borrower or any Affiliate or any of the Collateral; (c) All of the representations and warranties of Borrower set forth in this Agreement and each of the Other Agreements to which Borrower as a party shall be true and correct on the date of the contemplated Loan to the same extent as originally made on such date; (d) No Event of Default or Unmatured Default has occurred and is continuing or would be created thereby; (e) All UCC-1 and UCC-2 financing statements (including those naming DFC Asset corp. as debtor) shall have been filed in the appropriate jurisdictions and Agent shall have received evidence, in form and substance satisfactory to Lenders thereof; (f) A report of Petersen Consulting, L.P., meeting the conditions of Section 8.3(d)(ix) shall have been delivered to the Lenders and been satisfactory to them; (g) All deficiencies, if any, with respect to conditions precedent to any prior Loan shall have been corrected; 37 (h) No issuer of any legal opinion in connection with any Loan Document or in connection with the making of any Loan shall have rescinded or qualified any such legal opinion; (i) No issuer thereof shall have rescinded or qualified any of the financial statements, certificates, letters, reports or other documents identified in this Section 6. 7. INSURANCE AND TAXES: 7.1 Insurance. Borrower, at its sole cost and expense, shall keep and maintain: (a) policies of insurance against all hazards and risks ordinarily insured against by other owners or users of properties in similar business or as reasonably requested in writing by Agent; and (b) public liability insurance relating to Borrower's ownership and use of its assets. All such policies of insurance shall be in form, with insurers and in such amounts as may be satisfactory to Agent. Borrower shall deliver to Agent the original (or certified) copy of each policy of insurance, and evidence of payment of all premiums for each such policy. Such policies of insurance (except those of public liability) shall contain an endorsement, in form and substance acceptable to Agent, showing loss payable to Agent. Such endorsement or an independent instrument furnished to Agent, shall provide that all insurance companies will give Agent at least thirty (30) days prior written notice before any such policy or policies of insurance shall be altered or cancelled and that no act or default of Borrower or any other Person shall affect the right of Agent to recover under such policy or policies of insurance in case of loss or damage. Borrower hereby directs all insurers under such policies of insurance (except those of public liability) to pay all proceeds payable thereunder directly to Agent. Borrower, irrevocably, appoints Agent (and all officers, employees or agents designated by Agent) as Borrower's true and lawful agent and attorney-in-fact for the purpose of making, settling and adjusting claims under such policies of insurance, endorsing the name of Borrower on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and for making all determinations and decisions with respect to such policies of insurance. In the event Borrower at any time or times hereafter shall fail to obtain or maintain any of the policies of insurance required above or to pay any premium in whole or in part relating thereto, then Agent, without waiving or releasing any of Borrower's Obligations or any Event of Default or Unmatured Default hereunder, may at any time or times thereafter (but shall be under no obligation to do so) obtain and maintain such policies of insurance and pay such premium and take any other action with respect thereto which Agent deems advisable. All sums so disbursed by Agent, including reasonable attorneys' fees, court costs, expenses and other charges relating thereto, shall be part of Borrower's Liabilities, payable by 38 Borrower to Agent on demand. The Agent and the Lenders shall also have been named as additional insureds with respect to Borrower's liability insurance. 7.2 Payment of Charges. Borrower shall pay promptly, when due, all Charges and Borrower shall not permit the Charges to arise or to remain unpaid, and will promptly discharge the same. In the event Borrower, at any time or times hereafter, shall fail to pay the Charges or to obtain such discharges as required herein, Borrower shall so advise Lenders thereof in writing. Agent may, without waiving or releasing any of Borrower's Obligations or any Event of Default or Unmatured Default hereunder, in its sole and absolute discretion (but with the other Lenders' consent), at any time or times thereafter, make such payment, or any part thereof, or obtain such discharge and take any other action with respect thereto which Lenders deem advisable. All sums so paid by Agent and any expenses, including reasonable attorneys' fees, court costs, expenses and other charges relating thereto, shall be part of Borrower's Liabilities, payable by Borrower to Agent on demand. Notwithstanding the foregoing, Borrower may permit or suffer the Charges to attach to Borrower's assets and may dispute, without prior payment thereof, the Charges, on the conditions that (a) Borrower, in good faith, shall be contesting the same in an appropriate proceeding diligently pursued, (b) enforcement thereof against any assets of Borrower shall be stayed and (c) appropriate reserves therefor shall have been established on the Records of Borrower in accordance with generally accepted accounting principles. In the event Borrower, at any time or times hereafter, shall fail to pay the Charges required herein, Borrower shall so advise Lenders thereof in writing; Lenders may, without waiving or releasing any of Borrower's Obligations or any Event of Default or Unmatured Default hereunder, in their sole and absolute discretion, at any time or times thereafter, make such payment, or any part thereof, and take any other action with respect thereto which Lenders deem, in their sole and absolute discretion, advisable. All sums so paid by Agent and/or Lenders and any expenses, including reasonable attorneys' fees, court costs, expenses and other charges relating thereto, shall be part of the Secured Obligations, payable by Borrower to Agent on demand. 8. WARRANTIES, REPRESENTATIONS AND COVENANTS 8.1 General Representations. Except as disclosed in writing to Lenders in Exhibit G attached hereto (with, as to each exception listed there, a reference to which section and subsection in this Section 8.1 such exception applies) ("EXCEPTIONS TO GENERAL REPRESENTATION"), Borrower warrants and represents to and covenants with Lenders that: (a) Organization. Borrower is and at all times hereafter shall be a corporation, duly organized and existing and in good standing under the laws of the State of 39 Indiana and qualified or licensed to do business and in good standing in all states in which the laws thereof require Borrower to be so qualified and/or licensed, including without limitation the State of Illinois and the State of Texas; (b) Corporate Power. Borrower, has the right, power and capacity and is duly authorized and empowered to enter into, execute, deliver and perform this Agreement and the Other Agreements, as applicable; (c) Violation of Organizational Documents. The execution, delivery and/or performance by Borrower, of this Agreement and the Other Agreements, as applicable, shall not, by the lapse of time, the giving of notice or otherwise, constitute a violation of any applicable law or a breach of any provision contained in the articles of incorporation or by-laws of Borrower, or contained in any agreement, instrument or document to which Borrower, is now or hereafter a party or by which it or any of its assets is or may become bound; (d) Enforceability. This Agreement and the Other Agreements are and will be the legal, valid and binding agreements of Borrower enforceable in accordance with their terms, except as enforcement thereof may be subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally, and to general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law); (e) Borrower is Subsidiary. Borrower is, and at all times during the term hereof shall be, a wholly-owned Subsidiary of DFC Asset Corp. There are, and at all times during the term hereof shall be, 150 shares of issued and outstanding common stock of Borrower. The shares of stock pledged by DFC Asset Corp. pursuant to the pledge agreement delivered in accordance with Section 6.3 hereof shall all times during the term hereof represent 100% of the issued and outstanding stock of Borrower; (f) Organization of DFC Asset Corp. DFC Asset Corp. is and at all times during the term hereof shall be a corporation, duly organized and existing and in good standing under the laws of the State of Texas and qualified or licensed to do business and in good standing in all states in which the laws thereof require DFC Asset Corp. to be so qualified and/or licensed. DFC Asset Corp is, and at all times during the term hereof shall be, a wholly-owned Subsidiary of First City. (g) Organization of DFSLP. DFSLP is, and at all times during the term hereof shall be, a limited partnership duly organized and in good standing under the laws of 40 the State of Indiana and is qualified or licensed to do business and is in good standing in all states in which the laws thereof require DFSLP to be so qualified and/or licensed. (h) Ownership of DFSLP. As of the date hereof and at all times during the term hereof, the sole general partner of DFSLP is and shall be Borrower and the sole limited partner of DFSLP is and shall be DPAI. Borrower and DPAI now and at all times during the term hereof shall own such Partnership Interests, free and clear of all liens and encumbrances other than the pledge of Borrower's general partnership interest in DFSLP to Agent hereunder and the pledge of DPAI's limited partnership interest in DFSLP to TLF. (i) Fictitious Names. Each of the fictitious names, if any, used by Borrower during the five (5) year period preceding the date of this Agreement is set forth on Exhibit H attached hereto ("FICTITIOUS NAMES") and none of such fictitious names are registered trademarks or tradenames with the U.S. Patent and Trademark Office; (j) Title. At all times following Borrower's acquisition thereof until release thereof by Agent, Borrower shall have good, indefeasible and merchantable title to and ownership of the Collateral, free and clear of all liens, claims, security interests and encumbrances, except the Permitted Liens. (k) Solvency. Borrower is now, and at all times hereafter shall be, solvent and generally paying its debts as they mature and Borrower now owns, and shall at all times hereafter own, property which, at a fair valuation, is greater than the sum of its debt. Borrower now has, and shall have at all times hereafter, capital sufficient to carry on its business and transactions and all businesses and transactions in which it is about to engage; (l) Proceedings. There are no actions or proceedings which are pending or threatened against Borrower or any Guarantor which might result in any material and adverse change in its financial condition or materially adversely affect its assets or the Collateral or its ability to fully pay and perform the Secured Obligations; (m) Government Contracts. Borrower is not subject to the renegotiation of any government contracts; (n) Adequate Licenses. Borrower possesses adequate assets, licenses, patents, copyrights, trademarks and tradenames to continue to conduct its business as previously conducted by it and as contemplated in the foreseeable future; 41 (o) Government Permits. Borrower has and is in good standing with respect to all governmental permits, certificates, consents and franchises necessary to continue to conduct its business as previously conducted prior to the date hereof and to own or lease and operate its properties as now owned or leased by it. None of said permits, certificates, consents or franchises contain any term, provision, condition or limitation more burdensome than such as are generally applicable to Persons engaged in the same or similar business as Borrower; (p) Charge Restrictions. Borrower is not a party to (nor are any of its assets otherwise subject to) any contract or agreement or subject to any charge, restriction, judgment, decree or order materially and adversely affecting its business, property, assets, operations or condition, financial or otherwise; (q) Compliance with Laws. Borrower is not, and will not be during the term hereof, in violation of any applicable statute, regulation, order or ordinance of the United States of America, of any state, city, town, municipality, county or of any other jurisdiction, or of any agency thereof, including the Federal Reserve Board, in any respect materially and adversely affecting its business, property, assets, operations or condition, financial or otherwise; (r) Compliance with Agreements. Borrower is not in default with respect to any indenture, loan agreement, mortgage, deed or other similar agreement relating to the borrowing of monies to which it is a party or by which it is bound; (s) Financials. The Financials (audited by independent auditors, in the case of Borrower and FirstCity) heretofore delivered by Borrower or any Affiliate to Lenders and/or Agent, fairly and accurately present the assets, liabilities and financial conditions and results of operations of Borrower and such other Persons described therein as, of and for the periods ending on such dates and have been prepared in accordance with generally accepted accounting principles and such principles have been applied on a basis consistently followed in all material respects throughout the periods involved; (t) Tax Returns. Borrower has filed or caused to be filed all tax returns which are required to be filed, and has paid all Charges shown to be due and payable on said returns or on any assessments made against it or any of its property, and all other Charges imposed on it or any of its properties by any governmental authority; (u) No Adverse Change. There has been no material and adverse change in the assets, liabilities or financial condition of Borrower since the date of the Financials. 42 (v) No Indebtedness. (i) Except as disclosed in the most recent Financials heretofore delivered by Borrower to Lenders and/or Agent, Borrower has no Indebtedness (except for Indebtedness arising in the ordinary course of its business since the dates reflected in the Financials that is not indebtedness for borrowed money), has not guaranteed (other than as a result of the endorsement of any instrument of items of payment for deposit or collection in the ordinary course of business or as otherwise expressly permitted pursuant to the terms hereof) the obligations of any Person, and there are no actions or proceedings which are pending or, to the best of Borrower's knowledge, threatened against Borrower which, in any of the foregoing cases, are reasonably likely to result in any material adverse change in its financial condition or materially adversely affect its assets or the Collateral or its ability to fully perform and satisfy Borrower's Liabilities hereunder; (ii) DFC Asset Corp. has no Subsidiaries other than DPAI and Borrower and is neither a general or limited partner, directly or indirectly, of any Person other than DFSLP. Neither DFC Asset Corp. nor DPAI nor DFSLP has outstanding any Indebtedness for borrowed money,or any guarantee of any Indebtedness for borrowed money, other than indebtedness to TLF under the agreement referred to in the first sentence of Section 3.4 hereof. The amount now outstanding to TLF under such agreement is $8,687,523; the maximum principal amount of Indebtedness that may at any time be outstanding thereunder is $25,000,000. (w) No Liability on Lenders. The execution, delivery and performance by Borrower of this Agreement and/or the Other Agreements will not, except to the extent caused by independent actions of Lenders and/or Agent, impose on or subject Lenders and/or Agent to any liability, whether fixed or contingent, in respect of any Environmental Law relating to the operation of Borrower's business. Lenders' and/or Agent's exercise of any of the rights or remedies described in this Agreement or in any of the Other Agreements shall not constitute a breach of any provision contained in any agreement, instrument or document concerning the assignment or license of, or the payment of royalties for, any patents, patent rights, tradenames, trademarks, trade secrets, know-how, copyrights or any other form of intellectual property now or at any time or times hereafter protected as such by any applicable law; (x) Margin Stock. Borrower's execution and delivery of this Agreement or any of the Other Agreements does not directly or indirectly violate or result in a violation of the Securities Exchange Act of 1934, as amended, and Regulations U, G, T and X of the Board of Governors of the Federal Reserve System (12 CFR 221, 207, 220 and 224, 43 respectively), and Borrower does not own or intend to purchase or carry any "MARGIN SECURITY," as defined in such Regulations; (y) Affiliates. Borrower has no wholly owned Subsidiaries. Exhibit I attached hereto ("AFFILIATES") is a true, accurate and complete schedule of Borrower's Affiliates, together with a description of Borrower's relationship to such Affiliate. (z) Environmental Issues. To the best of Borrower's knowledge, no real estate ("REAL PROPERTY") that is collateral for a Loan Account has ever had hazardous wastes or substances used on or in them in a manner which violates any Environmental Law and that all of the Real Property is free of any hazardous waste or substance. Borrower has not received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission resulting in the releasing, or otherwise disposing of hazardous waste or hazardous substances into the environment with respect to any of such Real Property collateral. Concurrently herewith Borrower will execute an Environmental Indemnity Agreement. (aa) Leases; Real Property. Attached hereto as Exhibit J ("LEASES, OPTIONS AND REAL PROPERTY") is a true, accurate and complete schedule of all Leases and Options to which Borrower is a party and all Real Property owned by Borrower. (ab) Investment Company Act and Public Utility Holding Company Act. Neither the Borrower nor any Affiliate nor the entering into of the Loan Documents nor the issuance of the Notes is subject to any of the provisions of the Investment Company Act of 1940, as amended. Neither the Borrower nor any Affiliate is a "holding company" as defined in the Public Utility Holding Company Act of 1935, as amended, or subject to any other federal or state statute or regulation limiting its ability to insure Indebtedness for money borrowed. (ac) Disclosure. Neither this Agreement or any Loan Document nor any statement, list, certificate or other document or information, or any schedules to this Agreement or any other Loan Document, delivered or to be delivered to the Agent or any Lender, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make statements contained herein or therein, in light of the circumstances in which they are made, not misleading. 44 (ad) Qualification. (i) Solely by reason of (and without regard to any other activities of the Agent or any Lender in any state in which Collateral is located) the entering into, performance and enforcement of this Agreement, the Notes and the other Loan Documents by the Agent or any Lender will not constitute doing business by the Agent or any Lender in any of such states or result in any liability of the Agent or such Lender for taxes or other governmental charges; and qualification by the Agent or any Lender to do business in such jurisdiction is not necessary in connection with, and the failure to so qualify will not affect, the enforcement of, or exercise of any rights or remedies under, any of such documents. (ii) No "business activity," "doing business" or similar report or notice is required to be filed by the Agent or any Lender in any such jurisdiction in connection with the Loans or the transactions contemplated by this Agreement, and the failure to file any such report or notice will not affect the enforcement of, or the exercise of any rights or remedies under, this Agreement or any of the other Loan Documents. 8.2 Financial Covenants. (a) At all times during the term hereof, Borrower shall maintain Tangible Net Worth equal to at least Four Million Dollars ($4,000,000). (b) At all times during the term hereof, DFC Asset Corp. shall maintain Tangible Net Worth determined on a consolidated basis equal to at least Three Hundred Thousand Dollars ($300,000). (c) Borrower warrants and represents to and covenants with Lenders that, now and at all times hereafter, (i) the aggregate Estimated Remaining Collections of each then existing Revolving Loan Portfolio owned by Borrower shall be at least 182% of the principal portion then outstanding of Borrower's Liabilities represented by the Revolving Loan made by Lenders to Borrower pursuant to Section 3.1 (including, for this purpose, any Protective Advances in respect thereof) with respect to such Revolving Loan Portfolio; (ii) the aggregate Estimated Remaining Collections of all then existing Term Loan Portfolios shall be at least 154% of the principal portion then outstanding of Borrower's Liabilities represented by the Term Loans; and (iii) the aggregate principal portion of Borrower's Liabilities outstanding shall be at least 250% of the principal portion of Borrower's Liabilities outstanding that represents Loans with respect to Loan Portfolios which are secured by Real Property. In the event of a breach of such warranty, representation and covenant, Borrower, immediately, shall pay to Lenders an amount of money sufficient to cure the same and/or if both Lenders agree, 45 in their sole and absolute discretion, deliver to Agent as additional Collateral Certificate(s) of Deposit of Agent in an amount at least equal the amount of money sufficient to cure the same and/or Agent, in its sole and absolute discretion, may pay to itself for the ratable benefit of Lenders, for the account of Borrower, from monies, reserves and proceeds received or collected by Agent pursuant to Section 4.9 above, an amount necessary to satisfy (in whole or in part) the foregoing requirement. Notwithstanding the provisions of Section 9.1, if Borrower does not timely make such payment or if the funds referred to in the preceding sentence above are not sufficient therefor, the same shall be deemed an Event of Default or Unmatured Default by Borrower under this Agreement. 8.3 Affirmative Covenants. In addition to and not in lieu of those covenants contained in other provisions of this Agreement, Borrower covenants and agrees with Lenders and Agent that Borrower shall, unless Lenders otherwise consent thereto in writing, do all of the following during the term hereof: (a) Representation and Warranties. To the extent any representation or warranty contained herein refers to an event or state of facts which exists on the date hereof and shall exist during the term hereof or at the time of each Advance hereunder, said representation or warranty shall be deemed to be an affirmative covenant by Borrower to take all actions, omit to take such actions or cause such actions to be taken which shall be necessary or desirable to cause such representation or warranty to be true and accurate at all times during the term hereof. (b) Operating Accounts. Borrower shall maintain and shall cause DFC Asset Corp. to maintain its primary banking relationship with ANB, including without limitation maintaining all operating accounts of Borrower and/or DFC Asset Corp. with ANB. (c) Corporate Existence. Borrower shall preserve and maintain its corporate existence, rights, privileges and franchises in the jurisdiction of its incorporation or organization, and qualify and remain qualified to do business in each other jurisdiction in which such qualification is necessary in view of its business or operations. (d) Records; Reports. Borrower covenants with Lenders that Borrower shall keep Records and prepare financial statements and shall cause to be furnished to Lenders the following (all of the foregoing and following which comprise financial statements are to be kept and prepared in accordance with generally accepted accounting principles applied on a basis consistent with the Financials unless Borrower's certified public accountants concur in any changes therein and such changes are consistent with then generally accepted accounting principles). 46 (i) As soon as available but not later than ninety (90) days after the close of each fiscal year of Borrower (including the fiscal year ended December 31, 1995), a balance sheet of Borrower as at the end of, and the related statement of operations, including income statement, for, such year and a reconciliation of capital for such year, all certified on an unqualified basis by a firm of independent certified public accountants selected by Borrower and acceptable to Lenders, in Lenders' sole and absolute discretion. (ii) Concurrently with the delivery of the financial statements described in Section (i) above for fiscal years ending after December 31, 1995: (A) a certificate of the aforesaid certified public accountants certifying to Lenders that based upon their examination of the affairs of Borrower, performed in connection with the preparation of said financial statements, they are not aware of the occurrence or existence of any condition or event which constitutes an Event of Default or Unmatured Default, or, if they are aware thereof, the nature thereof, and (B) a reliance letter executed by an authorized partner of the aforesaid certified public accountants, in form and substance reasonably acceptable to Lenders, and acknowledging that Lenders may rely on such financial statements in connection with this Agreement notwithstanding that Lenders are not in privity with such certified public accountants in connection with such financial statements. (iii) As soon as available, but not later than thirty (30) days after the end of each calendar year, financial statements, in form and substance reasonably acceptable to Lenders, including income statements and balance sheets, as at the end of such calendar year, of each of Geist and DFC Asset Corp., DPAI and DFSLP. (iv) As soon as available but not later than thirty (30) days after the end of each calendar month hereafter, a balance sheet of Borrower (and of DFC Asset Corp., DPAI and DFSLP) as at the end of, and the related statement of operations for, the portion of such Person's fiscal year then elapsed, all certified by the chief financial officer of such Person's to be prepared in accordance with generally accepted accounting principles and to present fairly the financial position and results of operations of such Person for such period. (v) Concurrently with delivery to its shareholders or any other equity owners or Affiliates of Borrower by any Corporate Credit Party, copies of all financial and other information delivered by such Corporate Credit Party to such Persons, including without limitation with respect to FirstCity, its proxy statements and annual reports to stockholders. Concurrently with delivery to the Securities Exchange Commission ("SEC") by FirstCity, copies of all reports filed by FirstCity with the SEC, including without limitation, all reports on Forms 10K, 10Q or 8K promulgated under the Securities Exchange Act of 1934, as amended. 47 (vi) As soon as available, but not later than thirty (30) days after the end of each month, a reconciliation statement in form and substance acceptable to Lenders, certified as true, accurate and complete by the chief financial officer of Borrower, setting forth with respect to each Loan Portfolio the total amount of funds: (A) deposited into the applicable Cash Collateral Account; (B) collected by or on behalf of Borrower during such month; and (C) collected to date (both the amount and the percentage of such Loan Portfolio's Book Value, as set forth in the Loan Advance Certificate, that such amount represents). Each such reconciliation statement shall be prepared in accordance with the manner in which Book Value of the applicable Loan Accounts was determined for the purposes of preparing the Loan Advance Certificate in connection with acquisition of such Loan Accounts. (vii) With respect to each Loan Portfolio, a Monthly Performance Report in form and substance acceptable to Lenders, certified as true, accurate and complete by the chief financial officer of Borrower, setting forth in reasonable detail the payment, settlement and transfer activity with respect to each Loan Account in such Loan Portfolio and aggregate Estimated Remaining Collections with respect to each such Loan Portfolio and each Loan Account comprising such Loan Portfolio. Such performance reports shall be delivered to Lenders within thirty (30) days following the close of each calendar month during which any Loan Accounts comprising the applicable Loan Portfolio remain Collateral. Such performance reports shall be prepared in accordance with the manner in which Book Value and Estimated Remaining Collections of the applicable Loan Portfolio and Loan Accounts were determined for the purposes of preparing the Loan Advance Certificate in connection with acquisition of such Loan Portfolio. (viii) With respect to all loan portfolios owned by either DPAI or DFSLP, a report of the current Estimated Remaining Collections from each of such loan portfolios, certified as true and complete by the chief financial officer of DPAI or DFSLP, as applicable, identifying such loan portfolio and the aggregate Estimated Remaining Collections of DPAI and DFSLP, respectively, and otherwise in form and substance satisfactory to Lenders. Such reports shall be delivered to Lenders within thirty (30) days following the close of each calendar month and shall be prepared consistently from month to month. (ix) Such other data and information (financial and otherwise) as either Lender, from time to time, reasonably may request bearing upon or related to the Collateral, Borrower's financial condition and/or results of operations; including, without limitation, immediately prior to funding of the Term Loans and no more often than once every twelve (12) months thereafter (unless an Event of Default or Unmatured Default shall then exist, in which case there shall be no limit on the number of such audits and review that the Lenders can request), an audit and review of the Collateral which shall be conducted in such scope and 48 result in such report(s) as may be satisfactory to Lenders in their sole and absolute discretion, by Peterson Consulting L.P., or such other party as Lenders may designate in their sole and absolute discretion, which audits shall be performed at Borrower's sole cost and expense and with respect to which audits Borrower covenants and agrees to fully cooperate at its own expense. (e) Pay Debts. Borrower shall pay or discharge or otherwise satisfy all Indebtedness at or before maturity or before the same becomes delinquent, provided that Borrower shall not be required to pay any Indebtedness which is unsecured while the same is being contested by it in good faith and by appropriate proceedings so long as Borrower shall have set aside on its books reserves in accordance with generally accepted accounting principles with respect thereto and title to any property of Borrower is not jeopardized. (f) Compliance with Laws. Borrower shall comply with all laws, rules, regulations and governmental orders (federal, state and local), including all Environmental Laws, having applicability to it or to the business or businesses at any time conducted by it, where the failure to so comply would have a material adverse effect, either individually or in the aggregate, on the business, condition (financial or otherwise) and assets, operations or prospects of Borrower. (g) Perform Obligations. Borrower shall duly and punctually pay and perform each of its obligations under this Agreement and the Other Agreements in accordance with the terms thereof. 8.4 Negative Covenants. Borrower warrants and represents to and covenants with Lenders that Borrower shall not, without Lenders prior written consent, which Lenders may or may not give in their sole and absolute discretion, concurrently or hereafter: (a) Sell or Encumber Collateral. Grant a security interest in, assign, sell or transfer any of the Collateral to any Person or permit, grant, or suffer a lien, claim or encumbrance upon any of the Collateral, except: (i) the Permitted Liens; or (ii) a sale, assignment or transfer of Loan Accounts pursuant to Section 5.8; or (iii) from the date hereof through October 18, 1996, the lien, claim and security interest created pursuant to the terms of that certain Assignment of Deposit Account, dated April 18, 1996, by Borrower in favor of TLF, but only to the extent of $750,000 on deposit in such deposit account. (b) Transactions with Affiliates. Purchase, acquire, settle or liquidate one or more Loan Account(s) through assignment, sale or transfer to or from one or more Affiliates of any Credit Party. 49 (c) Attachment. Permit or suffer any levy, attachment or restraint to be made affecting any of its Assets or the Collateral; (d) Receiver. Permit or suffer any receiver, trustee or assignee for the benefit of creditors, or any other custodian to be appointed to take possession of all or any of its Assets or any of the Collateral; (e) Amend Organizational Documents. Make any material change: (i) in Borrower's articles of incorporation, by-laws or capital structure, or (ii) in any of its business objectives, purposes and operations, either by ceasing to collect, service, settle and transfer Loan Portfolios or by undertaking additional business activities; (f) Merge. Merge or consolidate with, acquire (or sell Borrower to) any Person, whether by sale of assets or sale or exchange of stock or purchase, lease, or otherwise acquire all or any substantial part of the property or assets of any Person,or permit any Subsidiary so to do, or purchase, lease or otherwise acquire property or net assets in excess of $50,000 in any Fiscal Year, or permit any Subsidiary so to do, other than Loan Portfolios purchased in accordance with Section 3.1 hereof. (g) Redeem Stock. Redeem, retire, purchase or otherwise acquire, directly or indirectly, any of Borrower's Stock or other evidence of ownership interest of Borrower or any other corporation or partnership or any subordinated debt of any Credit Party; (h) Advance Transactions. Enter into any transaction not in the ordinary course of business which materially and adversely affects Borrower's ability to repay Borrower's Liabilities or any other Indebtedness, or materially and adversely affects the Collateral; (i) Investments. Make any investment in the Stock or obligations of any Person. (j) Pay Dividends. Except as expressly permitted pursuant to Section 3.5, declare or pay dividends or other distributions upon any of Borrower's Stock or make any distributions of Borrower's property or assets or make any loans, advances and/or extensions of credit to any Persons; (k) Terminate ERISA Plans. Terminate or withdraw from any pension (or similar) plan so as to result in any material liability (in the sole and absolute discretion of Agent) of Borrower to the Pension Benefit Guaranty Corporation, or permit to exist any 50 occurrence of any Reportable Event (as defined in Title IV of the Employee's Retirement Income Security Act of 1974 as the same may be amended and in effect from time to time), or any other event or condition, which presents a material risk (in the sole and absolute discretion of Agent) of such a termination by the Pension Benefit Guaranty Corporation; (l) Agreements with Affiliates. Attached hereto as Exhibit K ("AGREEMENTS WITH AFFILIATES"), is a true, accurate and complete schedule of all service agreements, notes, or agreements between Borrower and its Affiliates. Lenders hereby expressly consent to the performance by Borrower of said agreements as in effect on the date hereof. Borrower shall not enter into any other transactions with any Affiliate, including, without limitation, agreements for the purchase, sale or exchange of property (including Loan Portfolios or Loan Accounts) or the rendering of any services to or by any Affiliate, or enter into, assume or suffer to exist any employment, management, administration, advisory or consulting contract with any Affiliate or, in each of the foregoing cases, with any officer, director or partner of any Affiliate (or a spouse or other relative of any of them). (m) Loan Servicing Agreement. Borrower has delivered to Lenders a true, accurate and complete copy of the Servicing Agreement with J-Hawk, together with all amendments thereto. Borrower shall not modify or amend (or waive any rights with respect to) such Servicing Agreement without Lenders' prior written consent. Borrower shall fully perform all of Borrower's obligations under the terms of such Servicing Agreement and shall keep such Servicing Agreement in full force and effect during the term hereof and shall not terminate such Servicing Agreement or employ any other service agent, without the prior written consent of Lenders; provided, however, that it shall not be a breach of this section if such Servicing Agreement is terminated at a time when an Event of Default or Unmatured Default exists and a successor servicing agent, satisfactory to the Lenders, is appointed in its place. (n) DFSLP Activities. Borrower will not cause or permit DFSLP to acquire any loan obligations or otherwise to engage in any business activity other than collection and settlement of loan obligations that DFSLP currently owns, without first obtaining the prior written consent of Lenders, which will not be unreasonably withheld. (o) Indebtedness. Borrower will not contract, create, incur, assume or suffer 51 to exist any Indebtedness or permit any of its Subsidiaries so to do; except for (x) the Loans, (y) Indebtedness existing on the date hereof and reflected on the Financials of the Borrower delivered on such date and (z) unsecured trade payables to parties other than Affiliates incurred in the ordinary course of business that do not exceed $375,000 in the aggregate at any time outstanding. (p) Engage in Same Type of Business. Borrower will not enter into, or permit any of its Subsidiaries to enter into, any business which is substantially different from the business in which the Borrower is engaged on the date hereof. (q) Agreement Modifications. Borrower will not amend, extend or otherwise modify, directly or indirectly, or waive any of its rights with respect to, any of the following: the notes payable to Geist referred to in Section 3.5(c); and the notes payable to J. Michael Hester referred to in Section 6.3(g). (r) DPAI Indebtedness. DPAI will not contract, create, incur assume or suffer to exist any Indebtedness except for (x) Indebtedness to TLF existing on the date hereof; (y) Indebtedness existing on the date hereof and reflected on financial statements of DPAI delivered on such date and (z) unsecured trade payables to parties other than Affiliates incurred in the ordinary course of business that do not exceed $50,000 in the aggregate at any time outstanding. 9. DEFAULT 9.1 Events of Default. The occurrence of any one of the following events shall constitute a default ("EVENT OF DEFAULT") by Borrower under this Agreement: (a) If Borrower fails or neglects to perform, keep or observe any of Borrower's Obligations; (b) If any representation, warranty or material statement, report or certificate made or delivered by any Credit Party, or any of its directors, officers, authorized employees or agents, to Lenders and/or Agent is not true and correct; provided, however, that with respect to such obligations of Geist, an Event of Default shall occur following five (5) days written notice thereof to Borrower; (c) If Borrower fails to pay any of Borrower's Liabilities, when due and payable or declared due and payable; 52 (d) If the Collateral or any other of Borrower's Assets or the assets of any Credit Party , or any portion thereof are attached, seized, subjected to a writ of distress warrant, or are levied upon, or come within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors and the same is not terminated or dismissed within sixty (60) days thereafter; (e) If a petition under any section or chapter of the United States Bankruptcy Code or any similar law or regulation shall be filed by any Credit Party or if any Credit Party shall make an assignment for the benefit of its creditors or if any case or proceeding is filed by any Credit Party for its dissolution or liquidation; (f) If any Credit Party is enjoined, restrained or in any way prevented by court order from conducting all or any material part of its business affairs or if a petition under any section or chapter of the United States Bankruptcy Code or any similar law or regulation is filed against any Credit Party or if any case or proceeding is filed against any Credit Party for its dissolution or liquidation and such injunction, restraint or petition is not dismissed or stayed within sixty (60) days after the entry or filing thereof; (g) If an application is made by any Credit Party for the appointment of a receiver, trustee or custodian for any of its assets; (h) If an application is made by any Person other than a Credit Party for the appointment of a receiver, trustee, or custodian for any of its Assets and the same is not dismissed within sixty (60) days after the application therefor; (i) If a notice of any Charge is filed of record with respect to all or any of any Credit Party's assets, or if (except as permitted in Section 7.2 above) any Charge becomes a lien or encumbrance upon any of its assets and the same is not released within sixty (60) days after the same becomes a lien or encumbrance; (j) If any Corporate Credit Party or DPAI is in default in the payment of any Indebtedness (other than Borrower's Liabilities) and such default is not cured within the time, if any, specified therefor in any agreement governing the same and such default permits any holder or holders of such Indebtedness (or a trustee, agent or other representative on behalf of such holder or holders) to cause any of such Indebtedness evidenced thereby to become due prior to its stated maturity or if any of such Indebtedness so becomes due prior to its stated maturity; 53 (k) The occurrence of a default or Event of Default or Unmatured Default under any agreement, instrument and/or document executed and delivered by any Guarantor to Agent or a Lender, which is not cured within the time, if any, specified therefor in such agreement, instrument or document or any of the Loan Documents shall fail to grant to the Agent on behalf of the Lenders the lien or other security interest (if any) intended to be created thereby or any Credit Party thereto shall assert that it is not liable with respect thereto; or any Guarantor shall assert that it is not liable as a guarantor or otherwise under its guarantee agreement (including, without limitation, the Deficiency Undertaking) executed in connection herewith; (l) The occurrence of an Event of Default under any of the Other Agreements, which is not cured within the time, if any, specified therefor in such Other Agreement; provided, however, that with respect to the obligations of Geist, an Event of Default shall occur following five (5) days written notice thereof to Borrower; (m) If Borrower or DFC Asset Corp. fails to maintain its primary banking relationship with ANB at any time during the term of this Agreement; (n) If Borrower issues to or transfers to any Person, any stock of Borrower, or any Person other than DFC Asset Corp. is a shareholder of the Borrower, or any Person other than FirstCity is a shareholder of DFC Asset Corp.; (o) If Borrower acquires any Loan Portfolio in which a Loan Account that is secured by Real Estate has an Allocated Purchase Price in excess of Five Hundred Thousand Dollars ($500,000.00); (p) If DFC Asset Corp. has not at any time provided to the Borrower, in cash and as a capital contribution, the Borrower's Cost for the acquisition of a Loan Portfolio; or (q) If any final non-appealable judgment for the payment of money in excess of $250,000 (after giving effect to any amount covered by insurance as to which the insurer shall not have defied or questioned its obligation to pay) shall be rendered against the Borrower or DFC Asset Corp.; or final judgment for the payment of money in excess of $250,000 shall be rendered against the Borrower or DFC Asset Corp. and the same shall remain undischarged for a period of thirty (30) days during which execution shall not be effectively stayed or diligently contested in good faith by appropriate proceedings. 54 9.2 Cumulate Remedies. All of Lenders' rights and remedies under this Agreement and the Other Agreements and the other Loan Documents are cumulative and non-exclusive. 9.3 Acceleration. Upon the occurrence of an Event of Default, and at any time thereafter, if any Event of Default shall then be continuing, the Lenders jointly may (and the Agent shall, if so instructed in writing by both Lenders) by written notice to the Borrower: declare the principal of and accrued interest on the Loans to be, whereupon the same shall forthwith become, due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that if any Event of Default described in any of clauses (d)-(h) (inclusive) of Section 9.1 shall occur with respect to the Borrower, the result which would otherwise occur only upon the giving of written notice by the Agent or Lenders to the Borrower as herein described shall occur automatically, without giving of any such notice. 9.4 Remedies. Upon the occurrence of an Event of Default Agent, for the ratable benefit of Lenders, may in its sole and absolute discretion (and shall, if so directed by both Lenders) exercise any one or more of the rights and remedies accruing to a secured party under the UCC of the relevant state or states and any other applicable law upon default by a debtor, including without limitation the following: (a) Enter, with or without process of law and without breach of the peace, any premises where the Collateral is or may be located, and without charge or liability to Lenders and/or Agent therefor seize and remove the Collateral from said premises and/or remain upon said premises and use the same for the purpose of collecting, preparing and disposing of the Collateral; (b) Sell or otherwise dispose of the Collateral at public or private sale for cash or credit, provided that Borrower shall be credited with the net proceeds of such sale only when such proceeds are actually received by Agent. 9.5 Assemble Collateral. Upon the occurrence of an Event of Default, Borrower, immediately upon demand by the Lenders jointly or Agent at the written instruction of both Lenders, shall assemble the Collateral and make it available to Agent at a place or places to be designated by Agent or Lenders which are reasonably convenient to Agent and Borrower. Borrower recognizes that in the event Borrower fails to perform, observe or discharge any of Borrower's Obligations, no remedy of law will provide adequate relief to Lenders, and agrees that Lenders shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of posting bond or proving actual damages. 55 9.6 Notice of Sale. Any notice required to be given to Borrower by Agent or one or both Lenders of a sale, lease, other disposition of the Collateral or any other intended action by Agent, deposited in the United States mail, postage prepaid and duly addressed to Borrower at its principal place of business specified in Section 11.5 of this Agreement not less than five (5) days prior to such proposed action, shall constitute commercially reasonable and fair notice to Borrower thereof. 9.7 Postpone Sale. Upon the occurrence of an Event of Default, Borrower agrees that Agent may, if Lenders deem it reasonable, postpone or adjourn any such sale of the Collateral from time to time by an announcement at the time and place of sale or by announcement at the time and place of such postponed or adjourned sale, without being required to give a new notice of sale. Borrower agrees that neither Agent nor any Lender has any obligation to preserve rights against prior parties to the Collateral. Further, Borrower waives and releases any cause of action and claim against Agent and Lenders as a result of Agent's possession, collection or sale of the Collateral, any liability or penalty for failure of Agent to comply with any requirement imposed on Agent relating to notice of sale, holding of sale or reporting of sale of the Collateral, and, to the extent permitted by law, any right of redemption from such sale. 9.8 WAIVER OF BOND. IN THE EVENT AGENT SEEKS POSSESSION OF THE COLLATERAL THROUGH REPLEVIN OR OTHER COURT PROCESS, BORROWER HEREBY IRREVOCABLY WAIVES (A) ANY BOND, SURETY OR SECURITY REQUIRED AS AN INCIDENT TO SUCH POSSESSION, AND (B) ANY DEMAND FOR POSSESSION OF THE COLLATERAL PRIOR TO COMMENCEMENT OF ANY SUIT OR ACTION TO RECOVER POSSESSION THEREOF. 9.9 Enforcement During Unmatured Default. Upon the occurrence and during the existence of any one of the events described in Section 9.1 above, notwithstanding that the Loans have not yet been accelerated, both Lenders jointly or the Agent at the written direction of Lenders, if they determine that the Collateral or the payment of Borrower's Liabilities is jeopardized, may enforce such of its rights and remedies under this Article as Agent or Lenders deems necessary or proper. 10. AGENT 10.1 Appointment of Agent. The Lenders hereby appoint Agent to act as administrative agent and collateral agent of and for Lenders as specified in this Agreement and the other Loan Documents. Each of the Lenders accepts and agrees to all the terms and 56 conditions of this Agreement and the other Loan Documents. Each of the Lenders hereby irrevocably authorizes, and each holder of any Note by the acceptance of a Note shall be deemed irrevocably to authorize, the Agent to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and any other instruments and agreements referred to in this Agreement, and to exercise such powers and to perform such duties under this Agreement and the other Loan Documents, as are specifically delegated to or required of the Agent by the terms of this Agreement and the other Loan Documents, together with such powers as are reasonably incidental to this Agreement and the other Loan Documents. The Agent agrees to act as the Agent on behalf of the Lenders to the extent provided in this Agreement and the other Loan Documents. 10.2 Delegation of Duties. The Agent may perform any of its duties under this Agreement and the other Loan Documents by or through agents or employees and shall be entitled to advice of counsel concerning all matters pertaining to its duties under this Agreement and the other Loan Documents. 10.3 Nature of Duties. The Agent shall have no duties or responsibilities except those expressly set forth in this Agreement and the other Loan Documents. The duties of the Agent shall be mechanical and administrative in nature. Nothing in this Agreement or any Loan Document, expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of this Agreement or any Loan Document, except as expressly set forth in this Loan Agreement or in any of the other Loan Documents. EACH OF THE LENDERS EXPRESSLY ACKNOWLEDGES AND AGREES THAT THE AGENT SHALL NOT HAVE BY REASON OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS A FIDUCIARY RELATIONSHIP IN RESPECT OF ANY LENDER. 10.4 Actions in Discretion of Agent; Instructions from the Lenders. (a) In addition to the powers and duties expressly delegated to the Agent under this Agreement, and the other Loan Documents, the Agent agrees, upon the written instructions of all the Lenders, to take any action of the type specified in any such written instructions as being within the Agent's rights, powers or discretion under this Agreement or any of the other Loan Documents. (b) In the absence of instructions by the Lenders, and in the case of actions to be taken, following three (3) Business Days prior written notice to the Other Lender, the Agent shall have authority, in its sole and absolute discretion, to take or not to take any of the following actions: (i) to accept additional security or instruments of further assurance; (ii) to limit any right, power or authority reserved to or conferred upon the Borrower under this 57 Agreement or any of the other Loan Documents; and (iii) to permit the Agent to comply with any obligations imposed upon it by law. (c) The Agent shall not, without the prior written consent of both Lenders, (i) modify, amend, waive or release any right with respect to, any covenant set forth in this Agreement or the occurrence or existence of an Event of Default described in Section 9.1 of this Agreement, or (ii) amend, waive or modify any other provisions of the Loan Documents, or (iii) release any Collateral or any collateral under any of the other Loan Documents or any Guarantor or other Credit Party from its obligations under the Loan Agreement, except as may be expressly permitted under this Agreement or the other Loan Documents, including without limitation, pursuant to Section 5.8. (d) Any action taken pursuant to written instructions or discretion in accordance with the terms of this Section shall be binding on Lenders. No Lender shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting under this Agreement or the other Loan Documents in accordance with the instructions of the Lenders (or in the case of ANB as agent, in accordance with its instructions) as provided in this Agreement, or in the absence of such instructions, in the sole and absolute discretion of the Agent (except to the extent such instructions are required by Section 10.4(c) or other applicable provisions of this Agreement). So long as the Agent shall obtain any consents expressly required under this Section 10.4 and other applicable provisions of this Agreement, the failure by the Agent to take any action recommended by any one Lender shall not create a cause of action against the Agent or create any claim or right on behalf of the Lenders, or any one or more of them. The provisions of this Section 10.4 are for the benefit of the Agent and the Lenders and are not intended to, and shall not, inure to the benefit of the Borrower or any third party. 10.5 Reliance by Agent. The Agent shall be entitled to rely upon any writing, telegram, telecopy, telex or teletype message, resolution, notice, consent, certificate, letter, cablegram, statement, or order or other document or phone conversation by telephone or otherwise believed by it to be genuine and correct and to have been signed, sent or made by an authorized person, and upon opinions of counsel and other professional advisers selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or under any of the other Loan Documents unless it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. 10.6 Holders of Notes. The Agent may deem and treat any payee of any Note as the owner thereof for all purposes under this Agreement and the other Loan Documents unless and 58 until written notice of the assignment or transfer thereof shall have been filed with the Agent. Any request, authority or consent of any legal entity who at the time of making such request or giving such authority or consent is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor. 10.7 Independent Credit Investigations. Each Lender expressly acknowledges (a) that the Agent has not made any representations or warranties to it and that no act by the Agent hereafter taken, including any review of the affairs of the Borrower or any of its Affiliates, shall be deemed to constitute any representation or warranty by the Agent to any Lender; (b) that it has made and will make its own independent investigation of the financial condition and affairs and its own appraisal of the credit-worthiness of the Borrower in connection with the making and continuance of the Loans under this Agreement; (c) that it has made its own independent investigation of the legal matters relating to this Agreement and the other Loan Documents; and (d) that except following the written request of a Lender the Agent shall have no duty or responsibility, either initially or on a continuing basis, to provide any Lender with any credit or other information with respect to the Borrower, whether coming into its possession before the making of a Loan or at any time or times thereafter. 10.8 Exculpatory Provisions. Neither the Agent nor any of its directors, officers, employees or agents shall be liable to any Lender for any action taken or omitted to be taken by it or them under this Agreement or any of the other Loan Documents, or in connection with this Agreement or any of the other Loan Documents, unless caused by its or their own gross negligence or willful misconduct. In performing its functions and duties under this Agreement on behalf of the Lenders, the Agent shall exercise the same care which it would exercise in dealing with loans for its own account, but it shall not (a) be responsible in any manner to any of the Lenders for the effectiveness, enforceability, genuineness, validity or the due execution of this Agreement, any other Loan Document or any of the Notes, or for any recital, representation, warranty, document, certificate, report or statement in this Agreement or made or furnished under or in connection with this Agreement or any other Loan Document, or (b) be under any obligation to any of the Lenders to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions hereof or thereof on the part of the Borrower, or the financial condition of the Borrower, or the existence or possible existence of an Event of Default or Unmatured Default. 10.9 Reimbursement and Indemnification. Each Lender agrees to reimburse and indemnify the Agent (to the extent not reimbursed by the Borrower) ratably, in proportion to its Lender's Commitment, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or 59 nature whatsoever which may be imposed on, incurred by or asserted against the Agent, in its capacity as such, in any way relating to or arising out of this Agreement or any of the other Loan Documents or any actions taken or omitted by the Agent under this Agreement or any of the other Loan Documents, provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements if the same results from the Agent's gross negligence or willful misconduct or if incurred as a result of the inclusion herein of Section 6.3(c) (last sentence), Section 8.3(b), Section 9.1(m) or the requirement contained therein. Without limitation of the foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including attorney's fees) incurred by the Agent in connection with the preparation, execution, administration or enforcement of, or the preservation of any rights under, this Agreement and the other Loan Documents to the extent that the Agent is not reimbursed for such expenses by the Borrower. 10.10 Agent in its Individual Capacity. With respect to its commitments, the Loans made by it and any Note held by it, American National Bank and Trust Company of Chicago shall have the same rights and powers under this Agreement and the other Loan Documents as any other Lender and may exercise the same as though it were not the Agent, and the terms "Lenders" or "holders" of a "Note" shall, unless the content otherwise indicates, include the Agent in its individual capacity. 10.11 Equalization of Lenders. The Lenders agree among themselves that, with respect to all amounts received by any Lender for application on any obligation hereunder or on the Notes, after the earlier of an exercise of any Lender's rights of set-off or the acceleration of maturity of any of the Notes, equitable adjustment will be made in the manner stated in the next succeeding sentence so that, in effect, all such amounts will be shared ratably among the Lenders, in proportion to the sum of the amounts then outstanding under the Notes, whether received by voluntary payment, by realization upon security, by the exercise of the right of set-off or banker's lien, by counterclaim or cross action or any other non-pro rata source. Any Lender receiving any such amount shall purchase for cash from the other Lenders an interest in their Notes, and all other obligations of the Borrower to the Lenders, if any, in such amount as shall result in a ratable participation by each of the Lenders in the aggregate unpaid amount of all outstanding Notes then held by all of the Lenders, and all other obligations of the Borrower to the Lenders under the terms hereof and the other Loan Documents; provided that if all or any portion of such excess amount is thereafter recovered from such Lender, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. 60 10.12 Successor Agent. The Agent may resign at any time by giving written notice thereof to the Lenders and to the Borrower. Upon any such resignation, the Lenders shall have the right to appoint a successor Agent (which shall be the Other Lender if the Other Lender wishes to assume such role). If no successor Agent shall have been so appointed, and shall have accepted such appointment within thirty (30) days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent which shall be a commercial bank organized under the laws of the United States of America or any State thereof and having a combined capital and surplus of at least $100,000,000. Upon the acceptance by a successor Agent of its appointment as Agent under this Agreement, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties under this Agreement. After any retiring Agent's resignation under this Agreement as Agent, the provisions of this Section 10 and Section 11.27 shall inure to its benefit as to any actions taken or omitted by it while it was Agent under this Agreement. 10.13 Direction to Agent to Close Initial Loans. The execution and delivery of this Agreement by BOS constitutes the irrevocable consent and direction of BOS to ANB executing and delivering as Agent on behalf of Lenders those Loan Documents to be executed by or on behalf of Lenders, accepting delivery of those Loan Documents to be delivered to Lenders, including, without limitation, the Loan Documents to be delivered pursuant to Section 6 of this Agreement, and to funding the Term Loans. 11. GENERAL 11.1 Settlement. Any check, draft or similar item of payment by or for the account of Borrower delivered to Agent on account of Borrower's Liabilities shall, provided the same is honored and final settlement thereof is reflected by irrevocable credit to Agent, be applied by Agent on account of Borrower's Liabilities on the second day after the date Agent actually receives the same. 11.2 Reaffirmation of Responsibilities. Borrower covenants, warrants and represents to Lenders that all representations and warranties of Borrower contained in this Agreement and the other Loan Documents shall be true at the time of Borrower's execution of this Agreement and the Other Agreements, shall survive the execution, delivery and acceptance thereof by the parties thereto and the closing of the transactions described therein or related thereto and shall be true from the time of Borrower's execution of this Agreement to the end of the term hereof. 11.3 Service Fees. Borrower acknowledges that, in addition to the fees set forth at Section 2.12 above, Agent will charge Borrower monthly service charges for various services 61 performed by Agent in connection with the Loans and/or any other aspects of the relationship between Borrower and Agent, and Borrower hereby agrees with Agent that if such service charges arising in any one month exceed the credit to Borrower in that month arising from earnings attributable to funds on deposit with Agent in demand deposit accounts, such service charge deficiency shall be charged by Agent against Borrower's operating account. 11.4 Statement. Each statement of account by Agent delivered to Borrower relating to Borrower's Liabilities shall be presumed correct and accurate and shall constitute an account stated between Borrower and Agent unless Agent subsequently corrects such statement of its own volition or, within thirty (30) days after Borrower's receipt of said statement, Borrower delivers to Agent, by registered or certified mail addressed to Agent at the address specified in Section 11.5, written objection thereto specifying the error or errors, if any, which Borrower asserts are contained in any such statement. 11.5 Notices. Any and all notices given in connection with this Agreement shall be deemed adequately given only if in writing (which term, for all purposes of this Agreement and the other Loan Documents, shall include telecopy) and addressed to the party for whom such notices are intended at the address set forth below. All notices shall be sent by personal delivery, Federal Express or other over-night messenger service, first class registered or certified mail, postage prepaid, return receipt requested or by other means at least as fast and reliable as first class mail. A written notice shall be deemed to have been given to the recipient party on the earlier of (a) the date it shall be delivered to the address required by this Agreement; (b) the date delivery shall have been refused at the address required by this Agreement; or (c) with respect to notices sent by mail, the date as of which the postal service shall have indicated such notice to be undeliverable at the address required by this Agreement. Any and all notices referred to in this Agreement, or which either party desires to give to the other, shall be addressed as follows: IF TO BORROWER: Diversified Financial Systems, Inc. 5015 Speedway Drive Fort Wayne, Indiana 46825 Attn: President Telecopy: 219-482-2439 62 WITH A COPY TO: Vander Woude Malone & Istre, P.C. 510 N. Valley Mills Drive Suite 308 Waco, Texas 76710 Attn: F. John Istre, III, Esq. Telecopy: 817-751-7725 IF TO LENDERS: Bank of Scotland 565 Fifth Avenue New York, New York 10017 Attn: Loans Administration Telecopy: 212-557-9460 and to American National Bank and Trust Company of Chicago 33 N. LaSalle Street Chicago, Illinois 60690 Attn: Paul Carlisle, Vice President Telecopy: 312-661-3566 WITH A COPY TO: Sachnoff & Weaver, Ltd. Suite 2900 30 South Wacker Drive Chicago, Illinois 60606 Attn: Frank Ballantine, Esq. Telecopy: 312-207-6400 and to 63 Sullivan & Worcester LLP 767 Third Avenue New York, New York 10017 Attn: Mark Levine, Esq. Telecopy: 212-758-2151 and to Bank of Scotland Chicago Representative Office 181 West Madison Street Suite 4710 Chicago, Illinois 60602 Attn: Colin Ferguson Telecopy: 312-263-1143 IF TO AGENT: American National Bank and Trust Company of Chicago 33 N. LaSalle Street Chicago, Illinois 60690 Attn: Paul Carlisle, Vice President Telecopy: 312-661-3566 The above addresses may be changed by notice of such change, mailed as provided herein, to the last address designated. 11.6 Reaffirmation of Warranties and Representations. Each request for an Advance made by Borrower pursuant to this Agreement or the Other Agreements shall constitute (i) an automatic warranty and representation by Borrower to Lenders that there does not then exist an Event of Default or an Unmatured Default, and (ii) a reaffirmation as of the date of said request for Advance that each and every warranty and representation of Borrower contained in this Agreement and in the Other Agreements is true and correct in all material respects, except where such representation or warranty specifically relates to an earlier date. 11.7 Survival of Warranties and Representations. Borrower covenants, warrants and represents to Lenders that all representations and warranties of Borrower contained in this Agreement and the Other Agreements shall be true at the date hereof, and shall survive the execution, delivery and acceptance hereof and thereof by the parties thereto and the closing of the transactions described herein and therein or related hereto or thereto. 64 11.8 Modification. This Agreement and the Other Agreements may not be modified, altered or amended except by an agreement in writing signed by Borrower and Lenders, or in accordance with the provisions of Section 10.4 by Agent. Borrower may not sell, assign or transfer this Agreement or the Other Agreements or any portion thereof, including, without limitation, Borrower's rights, titles, interests, remedies, powers and/or duties hereunder or thereunder. Borrower hereby consents to Lenders' sale, assignment, transfer or other disposition, at any time and from time to time hereafter, of this Agreement or the Other Agreements, or of any portion thereof or participation therein, including, without limitation, Lenders' rights, titles, interests, remedies, powers and/or duties. However, as between ANB and BOS, neither (without the prior written consent of the other) shall take any action referred to in the previous sentence if the effect thereof would be to cause any such purchaser, assignee or other transferee to become a "Lender" under this Agreement. 11.9 No Waiver. Agent's or any Lender's failure at any time or times hereafter to require strict performance by Borrower of any provision of this Agreement or any other Loan Document shall not waive, affect or diminish any right of Agent or such Lender thereafter to demand strict compliance and performance therewith. Any suspension or waiver by Lenders or Agent of an Event of Default or an Unmatured Default by Borrower under this Agreement or the Other Agreements shall not suspend, waive or affect any other Event of Default or Unmatured Default by Borrower under this Agreement or the Other Agreements, whether the same is prior or subsequent thereto and whether of the same or of a different type. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Agreement or the Other Agreements and no Event of Default or Unmatured Default by Borrower under this Agreement or the Other Agreements shall be deemed to have been suspended or waived by either Agent or Lenders unless such suspension or waiver is by an instrument in writing signed by an officer of each Lender and directed to Borrower specifying such suspension or waiver. 11.10 Severability. If any provision of this Agreement or the Other Agreements or the application thereof to any Person or circumstance is held invalid or unenforceable, the remainder of this Agreement and the Other Agreements and the application of such provision to other Persons or circumstances will not be affected thereby and the provisions of this Agreement and the Other Agreements shall be severable in any such instance. In no event shall interest be due under any of the Loans at a rate in excess of the highest lawful rate. It is not the intention of the parties hereto to make any agreement which shall violate the applicable laws of the State of Illinois, the United States of America or any other state thereof relating to usury. In no event shall Borrower pay or Lenders accept or charge any interest which, together with any other charges upon the principal or any portion thereof howsoever computed, shall exceed the maximum legal rate of interest allowable under the applicable laws of the State 65 of Illinois, the United States of America or any state thereof. Should any provisions of this Agreement or any of the Other Agreements be construed to require the payment of interest which, together with any other charges upon the principal, or any portion thereof, exceed such maximum legal rate of interest, then any such excess shall be and is hereby expressly waived as interest and shall be credited to the outstanding principal balance. 11.11 Successors or Assigns. This Agreement and the Other Agreements shall be binding upon and inure to the benefit of the successors and assigns of Borrower and Agent or Lenders. This provision, however, shall not be deemed to modify Section 11.8. 11.12 Incorporation of Other Agreements. The provisions of the Other Agreements are incorporated in this Agreement by this reference thereto. Except as otherwise provided in this Agreement and except as otherwise provided in the Other Agreements by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in conflict with, or inconsistent with, any provision in the Other Agreements or the other Loan Documents , Lenders shall have the right to elect, in their sole and absolute discretion, which provision shall govern and control. Except to the extent provided to the contrary in this Agreement and in the Other Agreements or the other Loan Documents, no termination or cancellation (regardless of cause or procedure) of this Agreement or the Other Agreements shall in any way affect or impair the powers, obligations, duties, rights and liabilities of Borrower or Lenders or Agent in any way or respect relating to (a) any transaction or event occurring prior to such termination or cancellation, (b) the Collateral and/or (c) any of the undertakings, agreements, covenants, warranties and representations of Borrower contained in this Agreement or the Other Agreements. All such undertakings, agreements, covenants, warranties and representations shall survive such termination or cancellation. 11.13 Waiver of Trial by Jury. TO THE EXTENT PERMITTED BY LAW, BORROWER, LENDERS AND AGENT EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE OTHER AGREEMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF EITHER PARTY IN CONNECTION HEREWITH. BORROWER HEREBY EXPRESSLY ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR LENDERS TO MAKE THE LOANS. 11.14 Designated Person. Until Lenders are notified by Borrower to the contrary in accordance with Section 11.5, the signature upon this Agreement or upon any of the Other 66 Agreements of any officer, partner, manager, employee or agent of Borrower, or of any other Person designated in writing to Agent by any of the foregoing, or of a "DESIGNATED PERSON" (as that term is defined in Borrower's Secretary's Certificate of even date herewith, constituting one of the Other Agreements) shall bind Borrower and be deemed to be the duly authorized act of Borrower. 11.15 Attorney-in-Fact. Borrower hereby appoints Agent as Borrower's agent and attorney-in-fact for the purpose of carrying out the provisions of this Agreement and the Other Agreements, and taking any action and executing any agreement, instrument or document which Agent or any Lender may deem necessary or advisable to accomplish the purposes hereof, which appointment is irrevocable and coupled with an interest. All monies paid for the purposes herein, and all costs, fees and expenses paid or incurred in connection therewith, shall be part of the Secured Obligations, payable by Borrower on demand. 11.16 Attorneys' Fees and Expenses; Agent's Expenses. Borrower hereby agrees that it shall reimburse Lenders, as part of the Secured Obligations, for any and all reasonable costs and expenses (including, without limitation, the reasonable fees and expenses of any counsel, accountants, appraisers or other professionals) incurred by Lenders or any of them at any time, in connection with: (a) the preparation, negotiation and execution of this Agreement, and all Other Agreements and the other Loan Documents; (b) the preparation, negotiation and execution of any amendment of or modification of this Agreement or the Other Agreements and the other Loan Documents; (c) any litigation, contest, dispute, suit, proceeding or action (whether instituted by Lenders, Borrower or any other Person) in any way relating to the Collateral, any Collateral under the other Loan Documents, this Agreement, the Other Agreements, and the other Loan Documents, the Secured Obligations, or any Corporate Credit Party's affairs; (d) any attempt to enforce any rights of Lenders against Borrower or any other Person which may be obligated to Lenders by virtue of this Agreement or the Other Agreements and the other Loan Documents, including, without limitation, the Obligor and Guarantors; (e) any inspection, verification or audit of any of the Collateral in accordance with this Agreement; (f) any action to protect, collect, sell, liquidate or otherwise dispose of the Collateral or any collateral under any of the other Loan Documents; and (g) performing any of the obligations relating to or payment of any Borrower's Liabilities or Borrower's Obligations hereunder in accordance with the terms hereof. 11.17 Acceptance. This Agreement and the Other Agreements are submitted by Borrower to Lenders (for Lenders' acceptance or rejection thereof) at Lenders' principal place of business as an offer by Borrower to borrow monies from Lenders now and from time to time hereafter and shall not be binding upon Lenders or become effective until and unless accepted by Lenders, in writing, at said place of business. If so accepted by Lenders, this 67 Agreement and the Other Agreements and the other Loan Documents shall be deemed to have been made at said place of business. This Agreement and the Other Agreements and the other Loan Documents shall be governed and controlled by the laws of the State of Illinois as to interpretation, enforcement, validity, construction, effect and in all other respects including, but not limited to, the legality of the interest rate and other charges, but excluding choice of law provisions and perfection of security interests which shall be governed and controlled by the laws of the relevant jurisdiction. 11.18 Release of Collateral. Agent is hereby authorized and directed to release the lien and security interest granted pursuant to the terms hereof and in the Other Agreements (a) as to all Collateral, upon payment and performance in full of all Secured Obligations, after notice to each of the Lenders, and (b) as to any individual Loan Account or Loan Portfolio, upon receipt of 87.5% (100% if an Event of Default or Unmatured Default then exists) of the proceeds from sale, settlement or other final disposition of a Loan Portfolio, a Loan Account and all collateral pledged therefor, without deduction therefrom of any servicing or other fees, costs or expenses, and (c) any individual Loan Account as to which the Book Value has been paid in full. 11.19 Knowledge. As used herein the phrase "TO THE BEST OF BORROWER'S KNOWLEDGE" or words of such import shall mean all knowledge, including, actual knowledge and knowledge of matters which any reasonable person in such position knew or should have known, of the respective officers, directors and managers of Borrower. 11.20 Waiver by Borrower. EXCEPT AS OTHERWISE PROVIDED FOR IN THIS AGREEMENT OR REQUIRED BY LAW, BORROWER WAIVES (A) PRESENTMENT, DEMAND AND PROTEST, NOTICE OF PROTEST, NOTICE OF PRESENTMENT, DEFAULT, NON-PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS, CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY LENDERS AND/OR AGENT ON WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS WHATEVER LENDERS AND/OR AGENT MAY DO IN THIS REGARD; (B) ALL RIGHTS TO NOTICE AND A HEARING PRIOR TO LENDERS' AND/OR AGENT'S TAKING POSSESSION OR CONTROL OF, OR TO LENDERS' AND/OR AGENT'S REPLEVY, ATTACHMENT OR LEVY UPON THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING LENDERS AND/OR AGENT TO EXERCISE ANY OF LENDERS AND/OR AGENT'S REMEDIES; AND (C) THE BENEFIT OF ALL VALUATION, APPRAISEMENT, EXTENSION AND EXEMPTION LAWS. 68 11.21 Governing Law. THIS AGREEMENT HAS BEEN DELIVERED FOR ACCEPTANCE BY LENDERS IN CHICAGO, ILLINOIS AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAW PROVISIONS) OF THE STATE OF ILLINOIS. BORROWER HEREBY (a) IRREVOCABLY SUBMITS, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN CHICAGO, ILLINOIS OVER ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS AGREEMENT; (b) IRREVOCABLY WAIVES, TO THE FULLEST EXTENT BORROWER MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT; (c) AGREES THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW; AND (d) TO THE EXTENT PERMITTED BY APPLICABLE LAW, AGREES NOT TO INSTITUTE ANY LEGAL ACTION OR PROCEEDING AGAINST ANY LENDER AND/OR AGENT OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR PROPERTY, CONCERNING ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT IN ANY COURT OTHER THAN ONE LOCATED IN COOK COUNTY, ILLINOIS. NOTHING IN THIS SECTION 11.21 SHALL AFFECT OR IMPAIR LENDERS' AND/OR AGENT'S RIGHT TO SERVE LEGAL PROCESS IN ANY MANNER PERMITTED BY LAW OR LENDERS' AND/OR AGENT'S RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST BORROWER OR BORROWER'S PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION. 11.22 Service of Process. Borrower hereby irrevocably appoints and designates CT Corporation System, Inc, 208 S. LaSalle Street, Chicago, Il 60604 as its true and lawful attorney-in-fact and duly authorized agent for service of legal process and agrees that service of such process upon such agent and attorney-in- fact shall constitute personal service of such process upon Borrower. 11.23 Representation by Counsel. Borrower hereby represents that it has been represented by competent counsel of its choice in the negotiation and execution of this Agreement and the Other Agreements; that it has read and fully understood the terms hereof; Borrower and its counsel have been afforded an opportunity to review, negotiate and modify the terms of this Agreement, and that it intends to be bound hereby. In accordance with the foregoing, the general rule of construction to the effect that any ambiguities in a contract are to 69 be resolved against the party drafting the contract shall not be employed in the construction and interpretation of this Agreement. 11.24 Release of Lender. Borrower releases Lenders and Agent from any and all causes of action or claims which Borrower may now or hereafter have for any asserted loss or damage to Borrower claimed to be caused by or arising from: (a) any failure of Agent and/or Lenders to protect, enforce or collect in whole or in part any of the Collateral, including, without limitation, Lenders' and/or Agent's failure to receive, review the contents of, to observe the absence of, or to maintain or safely deliver all or any portion of the Loan Account Documentation; (b) Lenders' and/or Agent's notification to any Obligor of Agent's security interests in the Accounts and Special Collateral; (c) Lenders' and/or Agent's directing any Obligor to pay any sums owing to Borrower directly to Lenders; and (d) any other act or omission to act on the part of Lenders and/or Agent, its officers, agents or employees, except for willful misconduct. 11.25 Invalidated Payments. To the extent that either Agent and/or Lenders receives any payment on account of Borrower's Liabilities, or any proceeds of Collateral are applied on account of Borrower's Liabilities, and any such payment(s) and/or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, subordinated and/or required to be repaid to a trustee, receiver or any other Person under any bankruptcy act, state or federal law, common law or equitable cause, then, to the extent of such payment(s) or proceeds received, Borrower's Liabilities or part thereof intended to be satisfied shall be revived and continue in full force and effect, as if such payment(s) and/or proceeds had not been received by Agent and/or Lenders and applied on account of Borrower's Liabilities. 11.26 Superseded Prior Agreements. Upon payment by the Borrower of all amounts owing to the Lenders in connection with the Prior Loan Agreement, this Agreement and the Other Agreements supersede in their entirety any other agreement or understanding between Lenders and Borrower with respect to loans and advances made or to be made by Lenders, or either one or more of them and all commitments of Lenders in connection therewith. 11.27 Reimbursement and Indemnification. Borrower agrees to reimburse and indemnify the Agent (on behalf of itself) and each Lender from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against one or more of the Agent, in its capacity as such, and any of Lenders in any way relating to or arising out of this Agreement or any of the other Loan Documents or any actions taken or omitted by the Agent or such Lenders under this Agreement or any of the 70 other Loan Documents, provided that Borrower shall not be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements if the same results from the gross negligence or willful misconduct of the indemnified party. Without limitation of the foregoing, Borrower agrees to reimburse the Agent (on behalf of Lenders) promptly upon demand for any out-of-pocket expenses (including attorney's fees) incurred by the Agent or one or more of Lenders in connection with the preparation, execution, administration or enforcement of, or the preservation of any rights under, this Agreement and the other Loan Documents. 11.28 Direction to Charge Borrower Accounts. The Borrower hereby authorizes and directs the Agent and each Lender to charge any account of the Borrower maintained at any office of the Agent or such Lender with the amount of any principal, interest or fee when the same becomes due and payable under the terms hereof or of the Notes; provided, however, that neither the Agent nor any Lender shall be under any obligation to charge any such account. 11.29 Headings. The descriptive headings of the various provisions of this Agreement and the other Loan Documents are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. 11.30 Computations of Interest. All computations of interest on the loans shall be computed on the basis of a thirty (30) day month and a three hundred sixty (360) day year. 11.31 Counterparts; Telecopies. This Agreement and the other Loan Documents may be executed in any number of counterparts, and by the different parties hereto and thereto on the same or separate counterparts, each of which when so executed and delivered shall be deemed to be an original; all the counterparts for each such Loan Document shall together constitute one and the same agreement. Telecopied signatures hereto and to the other Loan Documents shall be of the same force and effect as an original of a manually signed copy. 11.32 No Third Party Beneficiaries. This Agreement is solely for the benefit of the Agent, the Lenders, the Borrower and their respective successors and assigns (except as otherwise expressly provided herein) and nothing contained herein shall be deemed to confer upon any Person other than the Borrower and its successors and assigns any right to insist on or to enforce the performance or observance of any of the obligations contained herein. All conditions to the obligations of the Lenders to make Loans hereunder are imposed solely and exclusively for the benefit of the Lenders and their respective successors and assigns and no other Person shall have standing to require satisfaction of such conditions in accordance with 71 their terms and no other Persons shall under any circumstances be deemed to be a beneficiary of such conditions. 11.33 Domicile of Loans. Any Lender may make, maintain or transfer any of its Loans hereunder to, or for the account of, any branch office, subsidiary or affiliate of such Lender. IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and year specified at the beginning hereof. BORROWER: DIVERSIFIED FINANCIAL SYSTEMS, INC., AN INDIANA CORPORATION By: /s/ John T. Parish Name: John T. Parish Title: President LENDERS: AMERICAN NATIONAL BANK AND TRUST COMPANY OF CHICAGO By: /s/ Garrick L. Nielsen Name: Garrick L. Nielsen Title: Officer 72 BANK OF SCOTLAND By: /s/ Catherine M. Oniffrey Name: Catherine M. Oniffrey Title: Vice President AGENT: AMERICAN NATIONAL BANK TRUST COMPANY OF CHICAGO By: /s/ Garrick L. Nielsen Name: Garrick L. Nielsen Title: Officer 73 EXHIBIT A Attached to and Forming a Part of Loan and Security Agreement Dated as of April 18, 1996 ANB and BOS, as Lenders Diversified Financial Services, Inc., as Borrower J-HAWK SERVICING AGREEMENT EXHIBIT B Attached to and Forming a Part of Loan and Security Agreement Dated as of April 18, 1996 ANB and BOS, as Lenders Diversified Financial Services, Inc., as Borrower TERM LOAN PORTFOLIOS EXHIBIT C Attached to and Forming a Part of Loan and Security Agreement Dated as of April 18, 1996 ANB and BOS, as Lenders Diversified Financial Services, Inc., as Borrower PERMITTED DISBURSEMENTS EXHIBIT D Attached to and Forming a Part of Loan and Security Agreement Dated as of April 18, 1996 ANB and BOS, as Lenders Diversified Financial Services, Inc., as Borrower LOCATION OF ALL COLLATERAL Borrower's Principal Place of Business: 5015 Speedway Drive Fort Wayne, IN 46825 Other Locations where Collateral is kept, stored or located: 1. Diversified Financial Systems, Inc. 38 Pond Street, Suite 105 Franklin, MA 02038 2. Diversified Financial Systems, Inc. 1820 North Greenville Avenue, Suite 101 Richardson, TX 75081 3. American National Bank and Trust Company of Chicago 33 North LaSalle Street Chicago, IL 60690 4. Norwest Bank Indiana, N.A. 111 East Wayne Street Fort Wayne, IN 45502 EXHIBIT E Attached to and Forming a Part of Loan and Security Agreement Dated as of April 18, 1996 ANB and BOS, as Lenders Diversified Financial Services, Inc., as Borrower CASH COLLATERAL ACCOUNTS EXHIBIT F Attached to and Forming a Part of Loan and Security Agreement Dated as of April 18, 1996 ANB and BOS, as Lenders Diversified Financial Services, Inc., as Borrower DOCUMENTATION CHECKLIST EXHIBIT G Attached to and Forming a Part of Loan and Security Agreement Dated as of April 18, 1996 ANB and BOS, as Lenders Diversified Financial Services, Inc., as Borrower EXCEPTIONS TO GENERAL REPRESENTATIONS NONE EXHIBIT H Attached to and Forming a Part of Loan and Security Agreement Dated as of April 18, 1996 ANB and BOS, as Lenders Diversified Financial Services, Inc., as Borrower FICTITIOUS NAMES EXHIBIT I Attached to and Forming a Part of Loan and Security Agreement Dated as of April 18, 1996 ANB and BOS, as Lenders Diversified Financial Services, Inc., as Borrower AFFILIATES FirstCity Financial Corporation, a Delaware corporation ("FIRSTCITY"), qualified to do business in Texas as a foreign corporation under the name of First City Bancorporation of Texas, Inc. DFC Asset Corporation, a Texas corporation and a wholly-owned subsidiary of FirstCity ("DFC"). Diversified Financial Systems, Inc., an Indiana corporation and a wholly-owned subsidiary of DFC ("DFSI"). Diversified Performing Assets, Inc., an Indiana corporation and a wholly-owned subsidiary of DFC ("DPAI"). Diversified Financial Systems L.P., an Indiana limited partnership ("DFSLP"). The sole general partner of DFSLP is DFSI. The sole limited partner of DFSLP is DPAI. J-Hawk Servicing Corporation, a Texas corporation and a wholly-owned subsidiary of FirstCity ("J-HAWK"). J-Hawk Corporation, a Texas corporation and a wholly-owned subsidiary of FirstCity ("JHC"). All other subsidiaries of FirstCity. EXHIBIT J Attached to and Forming a Part of Loan and Security Agreement Dated as of April 18, 1996 ANB and BOS, as Lenders Diversified Financial Services, Inc., as Borrower LEASES, OPTIONS AND REAL PROPERTY EXHIBIT K Attached to and Forming a Part of Loan and Security Agreement Dated as of April 18, 1996 ANB and BOS, as Lenders Diversified Financial Services, Inc., as Borrower AGREEMENTS WITH AFFILIATES 1. J-Hawk Servicing Agreement. 2. Servicing Agreements attached hereto. EX-10.22 12 GUARANTEE AGREEMENT EXHIBIT 10.22 GUARANTEE AGREEMENT (FIRSTCITY) GUARANTEE AGREEMENT, dated as of April 18, 1996, made by FIRSTCITY FINANCIAL CORPORATION, a corporation incorporated under the laws of Delaware (the "Guarantor"), in favor of American National Bank and Trust Company of Chicago ("ANB"), as collateral agent and administrative agent (in such capacity, and including its successors and assigns in such capacity, the "Agent"), for itself, Bank of Scotland ("BOS") and the other financial institutions (such financial institutions, including ANB and BOS, the "Banks") from time to time party to the Loan and Security Agreement dated as of the date hereof (said agreement, the "Agreement") among Diversified Financial Systems, Inc., an Indiana corporation (the "Borrower"), the Banks and the Agent. W I T N E S S E T H WHEREAS, pursuant to the terms of the Agreement, the Banks have agreed to make loans to the Borrower to be evidenced by certain notes of the Borrower (said notes, the "Notes") and other financial accommodations (including letters of credit); WHEREAS, Guarantor owns all of the capital stock of DFC Asset Corp., a Texas corporation which owns all of the capital stock of the Borrower; WHEREAS, the obligation of the Banks to extend credit to the Borrower as aforesaid is conditioned upon, among other things, the execution and delivery by the Guarantor of this Guarantee; and WHEREAS, all terms defined in the Agreement and used herein without definition shall have the meanings provided therefor in the Agreement, except where the context otherwise requires, and as used herein the terms "Agreement" and "Notes" include such documents and instruments as the same may from time to time be amended, supplemented, restated, extended or otherwise modified; NOW, THEREFORE, in consideration of the mutual promises herein contained and to induce the Banks to make the Loans to the Borrower, and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, it is hereby agreed as follows: 1 1. Guarantee. (a) Subject to the provisions of Section 1(b) hereof, the Guarantor unconditionally and irrevocably guarantees to the Agent and the Banks the prompt and complete payment when due (whether at the stated maturity, by acceleration or otherwise) of any and all of the Borrower's present and future indebtedness and obligations, mature or contingent, in connection with the Loans, including (without limitation) all principal of the Loans and all interest which may be payable on the Loans prior to or during the pendency of any insolvency or similar proceeding with respect to the Borrower. All such indebtedness and obligations are referred to in this Guarantee Agreement as the "Indebtedness" and will be payable by the Guarantor to the Agent at its office at 33 N. LaSalle Street, Chicago, Illinois 60690, or at such other payment office as the Agent may notify the Guarantor of in writing, in United States dollars, immediately on demand in the event of any default of the Borrower with respect to the Indebtedness or any part thereof, without setoff or counterclaim. If the Agent or the Banks are prevented by law from accelerating any of the Indebtedness in accordance with the terms of any agreement or instrument governing same, the Agent and the Banks shall be entitled to receive hereunder from the Guarantor, upon demand therefor, the sum which would have otherwise been due had such acceleration occurred. (b) The liability of the Guarantor under Section 1(a) hereof shall be limited to the sum of all Loans up to but not exceeding $4,500,000 in the aggregate (the "Maximum Guaranteed Amount"), plus all unpaid interest payable on the Maximum Guaranteed Amount, but as to such unpaid interest only to the extent such interest accrues from and after two days following demand on the Guarantor by the Agent for the Guarantor to honor its obligations hereunder. 2. Rights of Agent. The Guarantor authorizes the Banks at any time in their discretion (subject only to the consent of the Borrower where the relevant Loan Document specifically provides for such consent) to alter any of the terms of the Indebtedness, to take and hold any security for the Indebtedness and to accept additional or substituted security, to subordinate, compromise or release any security, to release the Borrower or any other party of its liability for all or any part of the Indebtedness, to release, substitute or add any one or more guarantors or endorsers, and to assign this Guarantee Agreement in whole or in part. Any modifications, renewals and extensions of the Indebtedness may be made at any time by the Banks, before or after any termination of this Guarantee Agreement, and the Guarantor shall be fully liable subject, however, to the provisions of Section 1(b) hereof) for any such modifications, renewals or extensions. The Agent and the Banks may take any of the foregoing actions upon any terms and conditions as the Banks may elect, without giving notice 2 to the Guarantor or obtaining the consent of the Guarantor and without affecting the liability of the Guarantor to the Agent or the Banks. 3. Independent Obligations. (a) This Guarantee Agreement is a guarantee of payment rather than a guarantee of collection. The Guarantor's obligations under this Guarantee Agreement are independent of those of the Borrower and any security for or other guarantee (which term, for purposes of this Guarantee Agreement, shall include the Deficiency Undertaking) of the Indebtedness of the Borrower. The Agent (separately or with the Banks) may bring a separate action against the Guarantor without first proceeding against the Borrower or any other person or any security held by the Agent or the Banks and without pursuing any other remedy. The Agent's and the Banks' rights under this Guarantee Agreement will not be exhausted by any action or inaction by the Agent or the Banks until all of the Indebtedness has been indefeasibly paid in full. Any statute of limitations which is tolled as to the Borrower by reason of any payment by the Borrower or other circumstance shall operate to toll the statute of limitations as to the Guarantor. (b) The liability of the Guarantor hereunder is not affected or impaired by any direction or application of payment by the Borrower or by any other party, or by any other guarantee or undertaking of the Guarantor or any other party as to the Indebtedness of the Borrower, by any payment on, or in reduction of, any such other guarantee or undertaking, by the termination, revocation or release of any obligations hereunder or of any other guarantor, or by any payment made to the Agent or any Bank on the Indebtedness which the Agent or such Bank repays to the Borrower or any other guarantor or other person or entity pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, or any other fact or circumstance which would excuse the obligation of a guarantor or surety, and the Guarantor waives any right to the deferral or modification of the Guarantor's obligations hereunder by reason of any such proceeding, fact or circumstance. This Guarantee shall continue to be effective in accordance with its terms, or be reinstated, as the case may be, if at any time payment, or any part thereof, of or with respect to any of the Indebtedness (including without limitation any amounts payable under the Deficiency Undertaking) is rescinded or must otherwise be restored or returned by the Agent or the Banks upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Borrower or any other payor thereof, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Borrower or any other payor thereof or any substantial part of its property, or otherwise, all as though such payments had not been made. 3 4. Representations and Warranties. The Guarantor represents, warrants and agrees (which representations, warranties and agreements shall survive the Guarantor's execution of this Guarantee Agreement) that: (a) The Guarantor is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has the full power and authority to own its properties and assets and to carry on its business as now being conducted. (b) The Guarantor has full power, authority and legal right to execute, deliver and perform this Guarantee Agreement. (c) The execution, delivery and performance by the Guarantor of this Guarantee Agreement has been duly authorized by all necessary action. This Guarantee Agreement constitutes a legal, valid and binding obligation of the Guarantor enforceable against the Guarantor in accordance with its terms. (d) This Guarantee Agreement is in proper legal form under the laws of the Guarantor's jurisdiction of incorporation and principal location for enforcement thereof against the Guarantor in the courts of any such jurisdiction. In any legal action upon this Guarantee Agreement in any such jurisdiction, the choice of law set forth in Section 14 hereof would be given effect by the courts of such jurisdiction. (e) The most recent year-end financial statements of the Guarantor furnished to the Banks prior to the date hereof have been prepared in accordance with generally accepted accounting principles consistently applied and fairly present the financial condition and results of operations of the Guarantor as at the end of and for the reporting period covered thereby. There are no material liabilities or any material unrealized or anticipated losses from unfavorable commitments or investments which are not disclosed in such financial statements. (f) There has been no Material Adverse Change with respect to the Guarantor from that set forth in the financial statements referred to in clause (e) above. There are no legal proceedings pending or, to the knowledge of the Guarantor threatened, against or affecting the Guarantor or its obligations hereunder, and no default by the Guarantor with respect to any agreement or instrument to which it is a party or to which it or its assets are subject which might (individually or in the aggregate) result in such a Material Adverse Change. (g) The execution, delivery and performance of this Guarantee Agreement will not contravene any provision of law, rule or regulation to which the Guarantor is subject or any judgment, decree or order applicable to the Guarantor nor conflict or be inconsistent with or 4 result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any lien or other encumbrance upon any of the property or assets of the Guarantor pursuant to the terms of, any agreement or other instrument to which Guarantor is a party or by which it or its property is bound or to which it or its property may be subject nor violate any provision of the charter documents or by-laws of the Guarantor. (h) No order, permission, consent, approval, license, authorization, registration or validation of, or filing with, or exemption by, any Government Authority, or any stock exchange or other governmental or non-governmental regulatory authority or any other Person, domestic or foreign, is required to authorize, or is required in connection with the execution, delivery and performance of this Guarantee Agreement or any of the other Loan Documents executed by the Guarantor, or the taking of any action hereby or thereby contemplated. (i) The Guarantor owns, directly or indirectly, more than 50% of the outstanding common shares of the Borrower. 5. Covenants. So long as this Guarantee Agreement shall be in effect or any obligations shall remain outstanding hereunder, the Guarantor agrees to comply with each of the following covenants, unless the Banks should otherwise consent in writing: (a) The Guarantor will furnish to the Agent and the Banks promptly upon becoming available, copies of its annual audited and quarterly unaudited financial statements and such other information, reports, notices or statements as the Agent or any Bank may reasonably request from time to time, including all reports and other information sent by the Guarantor to its shareholders generally. (b) The Guarantor will not wind up, liquidate or dissolve its affairs. (c) The Guarantor will not take any action which would prevent or interfere with the performance by the Borrower of any of the covenants, agreements, or obligations of the Borrower contained in any agreements or instruments governing or securing the Indebtedness and shall take or cause to be taken all appropriate action to enable the Borrower to perform any such covenants, agreements and obligations. (d) The Guarantor will allow any representative, officer or accountant of any Bank or the Agent to discuss its Financials and financial condition with its outside auditors. Guarantor hereby irrevocably authorizes such auditors to discuss the foregoing with all such Persons. 5 6. Waivers of Defenses. The Guarantor waives, to the fullest extent permitted by law: (a) all statutes of limitation as to the Indebtedness, this Guarantee Agreement or otherwise as a defense to any action brought against the Guarantor by the Agent or the Banks; (b) any defense based upon any legal disability of the Borrower or any discharge or limitation of the liability of the Borrower to the Agent or the Banks, whether consensual or arising by operation of law or any bankruptcy, insolvency, or debtor-relief proceeding, or from any other cause; (c) presentment, demand, protest and notice of any kind; (d) any defense based upon or arising out of any defense which the Borrower may have to the payment or performance of any part of the Indebtedness; (e) any defense based upon any disbursements by the Agent or the Banks to the Borrower pursuant to any agreements or instruments governing or securing the Indebtedness whether same be deemed an additional advance or be deemed to be paid out of any special interest or other fund accounts, as constituting unauthorized payments hereunder or amounts not guaranteed by this Guarantee Agreement; (f) all rights to participate in any security held by the Agent or the Banks for the Indebtedness; (g) irregularity or unenforceability of any agreement or instrument representing or governing or securing the Indebtedness; (h) any request that the Agent or the Banks be diligent or prompt in making demands hereunder or under any agreement or instrument representing or governing or securing the Indebtedness; and (i) any other defense in law or equity (other than the defense that the indebtedness has been indefeasibly paid in full), until the Indebtedness has been indefeasibly paid in full (subject, however, to the provisions of Section 1(b) hereof). 7. Borrower's Authority and Financial Condition. It is not necessary for the Agent or the Banks to inquire into the capacity or powers of the Borrower or the officers, directors, partners or agents acting or purporting to act on the Borrower's behalf, and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. The Guarantor assumes full responsibility for keeping fully informed of the financial condition of the Borrower and all other circumstances affecting the Borrower's ability to perform its obligations to the Agent and the Banks, and agrees that neither the Agent nor any Bank will have any duty to report to the Guarantor any information which the either receives about the Borrower's financial condition or any circumstances bearing on its ability to perform, and expressly waives any right to receive such information and any defense based upon failure to receive such information. 8. Waiver of Subrogation. Irrespective of any payment by the Guarantor to the Agent or any Bank pursuant to this Guarantee Agreement, the Guarantor will not be subrogated in place of and to the claims and demands of the Agent or any Bank nor will the Guarantor have any right to participate in any security or lien now or hereafter held by or on behalf of the Agent or any Bank against the Borrower or any other guarantor or any collateral which the Agent or any Bank now has or hereafter acquires, whether or not such claim, 6 remedy or right arises in equity, or under contract, statute or common law (including, without limitation, the right to take or receive from the Borrower, directly or indirectly, in cash or other property or by setoff or in any other manner, payment or security on account of such claim or other rights), until (x) the Indebtedness has been indefeasibly paid in full and (y) final indefeasible payment and satisfaction of all claims and demands due to the Agent and the Banks hereunder. If any amount shall be paid to the Guarantor in violation of the preceding sentence and the Indebtedness shall not have been paid in full, such amount shall be deemed to have been paid to the Guarantor for the benefit of, and held in trust for the benefit of, the Agent and the Banks and shall forthwith be paid to the Agent to be credited and applied upon the Indebtedness, whether matured or unmatured, in accordance with the terms of the Indebtedness. The Guarantor acknowledges that it will receive direct and indirect benefits from the financial accommodations extended by the Banks to the Borrower and that the waiver set forth in this paragraph is knowingly made in contemplation of such benefits. 9. Right of Setoff. In addition to all rights of setoff or lien against any moneys, securities or other property of the Guarantor given to the Agent and the Banks by law, upon the occurrence of any default under any agreement or instrument governing any of the Indebtedness or under this Guarantee Agreement, the Agent and each Bank is authorized at any time and from time to time, without notice to the Guarantor or to any other person or entity, any such notice being hereby expressly waived, to setoff and apply any and all deposits (general or special) and any other indebtedness at any time held or owing by the Agent or any Bank to or for the credit or the account of the Guarantor against and on account of the obligations of the Guarantor under this Guarantee Agreement, irrespective of whether or not the Agent or such Bank shall have made any demand hereunder or any demand for payment of any Indebtedness and although said obligations, liabilities or claims, or any of them, shall be contingent or unmatured. 10. Default. The Agent may declare the Guarantor in default under this Guarantee Agreement, and may exercise all of its rights hereunder and demand payment of the aggregate outstanding principal amount of all Indebtedness, if the Guarantor fails to perform any of its obligations under this Guarantee Agreement or if the Guarantor becomes the subject of any bankruptcy, insolvency, arrangement, reorganization, moratorium, or other debtor-relief proceeding under any law, whether now existing or hereafter enacted, or upon 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 Guarantor. 11. Costs and Expenses. In addition to the amounts guaranteed hereunder, the Guarantor agrees to pay the Agent's and the Banks' reasonable out-of-pocket costs and expenses, including but not limited to legal fees and disbursements, incurred in any effort to 7 collect or enforce this Guarantee Agreement, whether or not any lawsuit is filed. Until paid to the Agent, such sums (and any other amounts payable under this Guarantee Agreement that are not paid when due) will bear interest at the highest rate of interest borne by any of the Indebtedness plus 2%; provided that if such interest exceeds the maximum amount permitted to be paid under applicable law, then such interest shall be reduced to such maximum permitted amount. Interest accrued hereunder pursuant to this paragraph shall be payable on demand and shall be calculated on the basis of the actual number of days elapsed and a 360-day year. 12. Delay; Cumulative Remedies. No delay or failure by the Agent or any Bank to exercise any right or remedy against, or to require performance by, the Borrower or the Guarantor or any other party shall be construed as a waiver of that right, remedy or requirement, and all such powers of the Agent and the Banks shall remain in full force and effect, until specifically waived or released by an instrument in writing executed by the Agent on behalf of the Banks. All remedies of the Agent and the Banks against the Borrower and the Guarantor are cumulative. 13. Subordination. The Guarantor agrees that any and all indebtedness or claims it may have against the Borrower, whether such claims are in connection with this Guarantee Agreement, the Indebtedness, or are completely independent of this Guarantee Agreement and the Indebtedness, will be subordinate to the claims of the Agent and the Banks under this Guarantee Agreement and all Indebtedness guaranteed hereby, and that the Guarantor will not assert any such claim against the Borrower until all Indebtedness to the Agent and the Banks has been indefeasibly paid in full. Notwithstanding such subordination, and without affecting or impairing in any manner the liability of the Guarantor under the other provisions of this Guarantee Agreement, any Indebtedness of the Borrower to the Guarantor, if the Agent so requests, shall be collected, enforced and received by the Guarantor as trustee for the Banks and paid over to the Agent on account of the Indebtedness of the Borrower to the Agent and the Banks. 14. Governing Law. THIS GUARANTEE AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS APPLICABLE TO CONTRACTS EXECUTED WHOLLY WITHIN THE STATE OF ILLINOIS (REGARDLESS OF THE PLACE WHERE THIS GUARANTEE AGREEMENT IS EXECUTED). 15. Jurisdiction. The Guarantor hereby agrees that ANY LEGAL ACTION OR PROCEEDING AGAINST THE GUARANTOR WITH RESPECT TO THIS GUARANTEE AGREEMENT OR ANY OTHER AGREEMENT OR DOCUMENT CONTEMPLATED HEREBY OR REFERRED TO HEREIN MAY BE BROUGHT IN ANY STATE OR 8 FEDERAL COURT LOCATED IN CHICAGO, ILLINOIS AS THE AGENT OR ANY BANK MAY ELECT, AND BY EXECUTION AND DELIVERY OF THIS GUARANTEE AGREEMENT THE GUARANTOR ACCEPTS AND CONSENTS FOR ITSELF AND IN RESPECT TO ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS AND AGREES THAT SUCH JURISDICTION SHALL BE EXCLUSIVE, unless waived by the Agent in writing, with respect to any action or proceeding brought by it against the Agent or any Bank and any questions relating to usury, and further consents (to the extent permitted by applicable law) to the service of process in any such action or proceeding being made upon the Guarantor by mail at the address stated alongside its name on the signature page hereof or at such other address as the Banks are notified of in accordance with Section 18 hereof. Nothing herein shall limit the right of the Agent or the Banks to bring proceedings against the Guarantor in the courts of any other jurisdiction. Guarantor covenants that it is and will remain subject to service of process in the State of Illinois so long as any of the Indebtedness is outstanding. If for any reason Guarantor should not be or remain so qualified, Guarantor hereby designates and appoints, without power of revocation, CT Corporation System, Inc., 208 S. LaSalle Street, Chicago, Illinois 60604 as the agent of Guarantor upon whom may be served all process, pleadings, notices or other papers which may be served upon Guarantor as a result of any of its obligations under this Guarantee Agreement. Nothing herein shall affect the right of the Agent or the Banks to serve process in any other manner permitted by law. 16. Severability. If any one or more of the provisions contained in this Guarantee Agreement or any document executed in connection herewith shall be invalid, illegal or unenforceable in any respect under any applicable law, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired. 17. Certain Definitions. (a) As used in this Guarantee Agreement, the following terms have the following meanings: "Government Authority" shall mean any nation or government, any state or political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Material Adverse Change" shall mean, with respect to a Person, a material adverse change in such Person's condition or operations, financial or otherwise. 9 (b) Relationship with Deficiency Undertaking. Guarantor's obligations hereunder are in addition to (and not in lieu of) its obligations under the Deficiency Undertaking. 18. Notices. Except as otherwise expressly provided herein, all notices, requests, demands or other communications to or upon the respective parties hereto shall be deemed to have been duly given or made when delivered if sent by Federal Express or other similar overnight delivery service; or three days after being deposited in the mails, when deposited in the mails (by registered or certified mail, return receipt requested), postage prepaid; or in the case of telex, telegraphic, telecopier or cable notice, when delivered to the telex, telegraph, telecopier or cable company; or in the case of telex or telecopier notice sent over a telex or telecopier owned or operated by a party hereto, when sent; in each case, addressed to the party entitled to receive same at the address stated alongside its name on the signature page hereto (or to such other address as any party hereto may hereafter specify to the other in writing); provided that communications with respect to a change of address shall be deemed to be effective when actually received. Copies of all notices, requests, demands and other communications hereunder shall also be sent to the Agent if the Agent is not the direct recipient thereof and to BOS if BOS if BOS is not the direct recipient thereof. Notices and other communications to BOS shall be sent to BOS in New York at 565 Fifth Avenue, New York, NY 10017 (fax: 212/557-9460) and to BOS in Chicago at 181 West Madison Street, Chicago, Illinois 60602, fax: 312/263-1143 (or, in each case, to such other address or fax number as BOS may hereafter specify to the others in writing). 19. Amendment. No provisions of this Guarantee Agreement shall be waived, amended or supplemented except by a written instrument executed by the Guarantor, the Agent and the Banks. 20. Miscellaneous. The provisions of this Guarantee Agreement will bind and benefit the successors and assigns of the Guarantor, the Agent and the Banks; without limiting the generality of the foregoing, it is understood and agreed that the obligations of the Guarantor hereunder shall continue even if it should transfer or otherwise dispose of any of its direct equity or other interests in the Borrower. The term "Borrower" will mean both the named Borrower and any other person or entity at any time assuming or otherwise becoming primarily liable on all or any part of the Indebtedness. The descriptive headings used in this Guarantee Agreement are for convenience only and shall not be deemed to affect the meaning or construction of any provision hereof. 21. Counterparts. This Guarantee Agreement may be executed in any number of counterparts, and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute one 10 and the same agreement. Telecopied signatures hereto shall be of the same force and effect as an original of a manually signed copy. 22. Texas Language. (a) THIS WRITTEN AGREEMENT (TOGETHER WITH THE OTHER LOAN DOCUMENTS) REPRESENTS THE FINAL AGREEMENT BETWEEN AND AMONG THE PARTIES HERETO WITH RESPECT TO THE MATTERS COVERED HEREBY AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. (b) THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN OR AMONG THE PARTIES HERETO. 23. Waiver of Jury Trial. EACH OF THE AGENT AND THE GUARANTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY AND ALL RIGHTS EITHER MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS GUARANTEE AGREEMENT OR ANY OTHER AGREEMENT OR DOCUMENT RELATED HERETO, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF THE AGENT, THE BANKS, THE BORROWER, THE GUARANTOR OR ANY OTHER LOAN PARTY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT ENTERING INTO THIS GUARANTEE AGREEMENT AND SUCH OTHER AGREEMENTS AND DOCUMENTS AND FOR THE BANKS ENTERING INTO THE LOAN AND SECURITY AGREEMENT REFERRED TO ON THE FIRST PAGE HEREOF. 24. Actions of Agent. All duties, obligations, undertakings, covenants, agreements, rights and responsibilities of Agent hereunder are the duties, obligations, undertakings, covenants, agreements, rights and responsibilities of Agent, as collateral agent and administrative agent of the Banks pursuant to the terms of the Loan Agreement. No action taken by Agent pursuant to the terms of this Agreement shall be deemed to be the act of Agent for its own account. The Agent shall be entitled to rely upon any writing, telegram, telecopy, telex or teletype message, resolution, notice, consent, certificate, letter, cablegram, statement, or order or other document or phone conversation by telephone or otherwise believed by it to be genuine and correct and to have been signed, sent or made by an authorized person, and upon opinions of counsel and other professional advisers selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or under any of the other Loan Documents unless it shall first be indemnified to its satisfaction by the 11 the Banks and/or Borrower against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Guarantee Agreement as of the date first above written. addresses and fax number FIRSTCITY FINANCIAL CORPORATION 6400 Imperial Drive P.O. Box 8216 Waco, Texas 76714-8216 By /s/ James T. Sartain fax: 817/751-1208 Name: James T. Sartain Title: President AMERICAN NATIONAL BANK AND TRUST 33 North LaSalle Street COMPANY OF CHICAGO, individually and as Chicago, Illinois 60690 agent fax: 312/661-3566 By /s/ Garrick L. Nielsen Name: Garrick L. Nielsen Title: Officer AGREED TO: DIVERSIFIED FINANCIAL SYSTEMS, INC. 5015 Speedway Drive Fort Wayne, Indiana 46825 fax: 219/482-2439 By /s/ John T. Parrish Name: John T. Parrish Title: President 12 EX-27.1 13 FINANCIAL DATA SCHEDULE
5 This Schedule contains summary financial information extracted from the financial statements contained in the body of the accompanying Form 10-Q and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1995 JUN-30-1996 6,336 111,776 0 0 107,160 0 0 0 291,038 0 163,081 59,431 0 49 64,638 291,038 27,678 47,927 19,062 19,062 12,669 0 8,131 8,065 (14,230) 22,295 0 0 0 18,419 3.74 3.74
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