-----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, EnWpYLrTHx9LXWy3I1qki4lbvoP0tQGVGqS5aqTO9MF0UMntLnNRMQtP6WuxqRgr lllJEErRSlovfIZwABcSGA== 0000950109-02-004125.txt : 20020813 0000950109-02-004125.hdr.sgml : 20020813 20020813170800 ACCESSION NUMBER: 0000950109-02-004125 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUSQUEHANNA BANCSHARES INC CENTRAL INDEX KEY: 0000700863 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 232201716 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10674 FILM NUMBER: 02730568 BUSINESS ADDRESS: STREET 1: 26 N CEDAR ST CITY: LITITZ STATE: PA ZIP: 17543 BUSINESS PHONE: 7176264721 MAIL ADDRESS: STREET 2: 26 NORTH CEDAR ST CITY: LITITZ STATE: PA ZIP: 17543 10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ----------------- FORM 10-Q (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, 2002 ------------------------------------------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _________________ to ____________________________ Commission file number 0-10674 --------- Susquehanna Bancshares, Inc. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Pennsylvania 23-2201716 - ------------------------------------------------ --------------------------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 26 North Cedar St., Lititz, Pennsylvania 17543 - ------------------------------------------------ --------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (717) 626-4721 ----------------------------- 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 [_] As of July 31, 2002, the Registrant had 39,608,918 shares of common stock outstanding. SUSQUEHANNA BANCSHARES, INC. INDEX
SEQUENTIAL PAGE REFERENCE PART I. FINANCIAL INFORMATION 3 Item 1. FINANCIAL STATEMENTS 3 Consolidated Balance Sheets - as of June 30, 2002 and 2001 3 Consolidated Statements of Income - for the three and six months ended June 31, 2002 and 2001 4 Consolidated Statements of Cash Flow - for the three and six month periods ended June 30, 2002 and 2001 5 Notes to Consolidated Financial Statements 6 - 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION 11-18 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19 - 21 PART II. OTHER INFORMATION 22 Item 2. CHANGES OF SECURITIES AND USE OF PROCEEDS 22 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22 Item 6. EXHIBITS AND REPORTS ON FORM 8-K 23 SIGNATURES 24 EXHIBIT INDEX 25
PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Susquehanna Bancshares, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------------------- June 30 December 31 June 30 (Dollars in thousands) 2002 2001 2001 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 113,414 $ 149,233 $ 119,013 Short-term investments: Restricted 31,149 41,584 35,823 Unrestricted 19,720 46,981 39,282 - ---------------------------------------------------------------------------------------------------------------------------------- Total short-term investments 50,869 88,565 75,105 - ---------------------------------------------------------------------------------------------------------------------------------- Investment securities available for sale, at fair value 1,038,522 1,019,313 954,562 Investment securities held to maturity, at amortized cost 1,689 1,778 1,865 (Fair values of $1,689, $1,778 and $1,865) Loans and leases, net of unearned income 3,737,178 3,519,498 3,481,729 Less: Allowance for loan and lease losses 39,148 37,698 38,407 - ---------------------------------------------------------------------------------------------------------------------------------- Net loans and leases 3,698,030 3,481,800 3,443,322 - ---------------------------------------------------------------------------------------------------------------------------------- Premises and equipment (net) 59,361 60,063 57,459 Accrued income receivable 21,521 21,268 22,688 Bank-owned life insurance 123,269 120,174 116,946 Goodwill 54,396 43,496 41,052 Intangible assets with finite lives 5,294 5,622 2,397 Other assets 110,892 97,642 101,298 - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $5,277,257 $5,088,954 $4,935,707 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Deposits: Demand $ 545,375 $ 529,162 $ 482,101 Interest-bearing demand 976,486 915,080 807,497 Savings 468,774 435,959 422,863 Time 1,317,126 1,322,494 1,304,432 Time of $100 or more 323,204 281,636 248,559 - ---------------------------------------------------------------------------------------------------------------------------------- Total deposits 3,698,030 3,484,331 3,265,452 - ---------------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 219,003 169,803 210,968 FHLB borrowings 565,121 570,580 508,074 Vehicle financing 106,403 171,462 284,723 Long-term debt 105,000 105,000 100,000 Accrued interest, taxes, and expenses payable 51,474 36,652 48,327 Other liabilities 82,160 57,590 44,499 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 4,760,126 4,595,418 4,462,043 - ---------------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock Authorized: 100,000,000 ($2.00 par value) Issued: 39,433,663, 39,398,190, and 39,398,190, respectively 78,867 78,796 78,796 Surplus 58,434 57,986 57,766 Retained earnings 360,204 345,508 331,820 Accumulated other comprehensive income, net of taxes of $10,568, $6,928 and $4,216, respectively 19,626 12,009 7,462 Less: Treasury stock, (0, 54,115 and 133,112 common shares at cost, respectively) 0 763 2,180 - ---------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 517,131 493,536 473,664 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $5,277,257 $5,088,954 $4,935,707 - ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 3 Susquehanna Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------------- ------------------------ Three Months Ended Six Months Ended June 30 June 30 - -------------------------------------------------------------------------------------------------- ------------------------ (Dollars in thousands, except per share) 2002 2001 2002 2001 - -------------------------------------------------------------------------------------------------- ------------------------ INTEREST INCOME Interest and fees on loans and leases $65,736 $71,526 $130,024 $143,687 Interest on investment securities: Taxable 13,833 11,403 27,116 23,596 Tax-exempt 618 848 1,322 1,749 Interest on short-term investments 263 1,056 700 2,194 - -------------------------------------------------------------------------------------------------- ------------------------ Total interest income 80,450 84,833 159,162 171,226 - -------------------------------------------------------------------------------------------------- ------------------------ INTEREST EXPENSE Interest on deposits: Interest-bearing demand 3,002 4,830 5,908 10,647 Savings 1,103 1,703 2,180 3,593 Time 16,386 21,537 34,152 43,753 Interest on short-term borrowings 797 2,175 1,472 5,062 Interest on FHLB borrowings 7,418 4,692 14,679 9,357 Interest on vehicle financing 1,988 5,425 4,594 11,482 Interest on long-term debt 2,000 1,934 3,993 3,884 - -------------------------------------------------------------------------------------------------- ------------------------ Total interest expense 32,694 42,296 66,978 87,778 - -------------------------------------------------------------------------------------------------- ------------------------ Net interest income 47,756 42,537 92,184 83,448 Provision for loan and lease losses 2,434 1,833 4,707 3,679 - -------------------------------------------------------------------------------------------------- ------------------------ Net interest income after provision for loan and lease losses 45,322 40,704 87,477 79,769 - -------------------------------------------------------------------------------------------------- ------------------------ OTHER INCOME Service charges on deposit accounts 4,207 3,269 8,050 6,271 Vehicle origination and servicing fees 6,864 6,277 13,896 12,052 Merchant credit card fees 2,740 2,353 6,467 6,119 Asset management fees 2,521 1,503 4,973 3,602 Income from fiduciary-related activities 1,247 1,313 2,498 2,531 Gain on sale of loans and leases 727 2,374 2,139 2,957 Income from bank-owned life insurance 1,630 1,574 3,348 3,080 Other operating income 2,474 2,528 5,309 5,098 Investment security gains/(losses) 4 0 145 0 - -------------------------------------------------------------------------------------------------- ------------------------ Total other income 22,414 21,191 46,825 41,710 - -------------------------------------------------------------------------------------------------- ------------------------ OTHER EXPENSES Salaries and employee benefits 19,772 18,551 39,411 36,188 Net occupancy expense 3,077 2,734 6,175 5,760 Furniture and equipment expense 2,144 1,925 4,219 4,014 Amortization of intangible assets 158 861 326 1,759 Vehicle residual value expense 1,605 1,243 3,270 2,544 Vehicle delivery and preparation expense 2,046 1,394 3,608 2,328 Merchant credit card servicing expense 2,603 2,275 6,250 5,824 Other operating expenses 13,695 12,304 26,928 24,077 - -------------------------------------------------------------------------------------------------- ------------------------ Total other expenses 45,100 41,287 90,187 82,494 - -------------------------------------------------------------------------------------------------- ------------------------ Income before income taxes 22,636 20,608 44,115 38,985 Provision for income taxes 7,017 6,400 13,676 12,281 - -------------------------------------------------------------------------------------------------- ------------------------ NET INCOME $15,619 $14,208 $ 30,439 $ 26,704 ================================================================================================== ======================== Per share information: Basic earnings $ 0.40 $ 0.36 $ 0.77 $ 0.68 Diluted earnings $ 0.39 $ 0.36 $ 0.76 $ 0.68 Cash dividends $ 0.20 $ 0.19 $ 0.40 $ 0.38 Average shares outstanding: Basic 39,398 39,224 39,373 39,223 Diluted 39,891 39,494 39,854 39,475 - -------------------------------------------------------------------------------------------------- ------------------------
The accompanying notes are an integral part of these financial statements. 4 Susquehanna Bancshares, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Six months ended June 30, 2002 2001 - ----------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 30,439 $ 26,704 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion 4,642 6,629 Provision for loan and lease losses 4,707 2,909 (Gain)/loss on securities transactions (145) (18) Gain on sale of loans (1,899) (2,957) (Gain)/loss on sale of other real estate owned (63) (43) Mortgage loans originated for resale (52,294) (52,416) Sale of mortgage loans originated for resale 58,189 56,308 Leases acquired/originated for resale (79,415) (116,643) Sale of leases acquired/originated for resale 80,215 118,392 (Increase)/decrease in accrued interest receivable (253) 4,087 Increase in accrued interest payable (1,824) (1,893) (Increase)/decrease in accrued expenses and taxes payable 16,646 7,838 Other, net (7,537) (16,376) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 51,408 32,521 - ----------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Net increase in restricted short-term investments 10,435 (3,092) Proceeds from the sale of available-for-sale securities 6,003 0 Proceeds from the maturity of investment securities 132,637 354,259 Purchase of available-for-sale securities (147,868) (399,834) Net (increase)/decrease in loans and leases (226,260) (53,996) Capital expenditures (290) (1,664) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by/(used for) investing activities (225,343) (104,327) - ----------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net increase/(decrease) in deposits 146,634 16,439 Net increase/(decrease) in short-term borrowings 49,200 5,632 Net increase/(decrease) in FHLB borrowings (5,459) 140,120 Net increase/(decrease) in vehicle financing (65,059) (72,799) Proceeds from issuance of common stock 1,282 208 Dividends paid (15,743) (14,904) - ----------------------------------------------------------------------------------------------------------------------- Net cash provided by/(used for) financing activities 110,855 74,696 - ----------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (63,080) 2,890 Cash and cash equivalents at January 1 196,214 155,405 - ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at June 30 $ 133,134 $ 158,295 - ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents: Cash and due from banks $ 113,414 $ 119,013 Unrestricted short-term investments 19,720 39,282 - ----------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at June 30 $ 133,134 $ 158,295 - -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. Interest paid on deposits, short-term borrowings, and long-term debt was $68,703 and $89,670 in 2002 and 2001, respectively. An income tax refund of $9,200 was received in 2002 and income taxes of $636 were paid in 2001. Amounts transferred to other real estate owned were $1,327 in 2002 and $2,498 in 2001. 5 Susquehanna Bancshares, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - ----------------------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMMON RETAINED COMPREHENSIVE Six months ended June 30 STOCK SURPLUS EARNINGS INCOME - ----------------------------------------------------------------------------------------------------------------------------- Balance - January 1, 2001 $78,796 $57,872 $320,020 ($757) Comprehensive income: Net income 26,704 Change in unrealized gain/(loss) on securities, net of taxes of $4,216 and reclassification adjustment of $0 8,219 - ----------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 26,704 8,219 Common stock issued under employee benefit plans (106) Cash dividends paid: Per common share of $0.38 (14,904) - ----------------------------------------------------------------------------------------------------------------------------- Balance - June 30, 2001 $78,796 $57,766 $331,820 $ 7,462 - ----------------------------------------------------------------------------------------------------------------------------- Balance - January 1, 2002 $78,796 $57,986 $345,508 $12,009 Comprehensive income: Net income 30,439 Change in unrealized gain/(loss) on securities, net of taxes of $3,844 and reclassification adjustment of $145 7,254 Unrealized gain on recorded interest in securitized assets, net of taxes of $237 363 - ----------------------------------------------------------------------------------------------------------------------------- Total comprehensive income 30,439 7,617 Common stock issued under employee benefit plans 71 448 Cash dividends paid: Per common share of $0.40 (15,743) - ----------------------------------------------------------------------------------------------------------------------------- Balance - June 30, 2002 $78,867 $58,434 $360,204 $19,626 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- TREASURY TOTAL Six months ended June 30 STOCK EQUITY - ----------------------------------------------------------------------------------------------------- Balance - January 1, 2001 ($2,494) $453,437 Comprehensive income: Net income 26,704 Change in unrealized gain/(loss) on securities, net of taxes of $4,216 and reclassification adjustment of $0 8,219 - ----------------------------------------------------------------------------------------------------- Total comprehensive income 34,923 Common stock issued under employee benefit plans 314 208 Cash dividends paid: Per common share of $0.38 (14,904) - ----------------------------------------------------------------------------------------------------- Balance - June 30, 2001 ($2,180) $473,664 - ----------------------------------------------------------------------------------------------------- Balance - January 1, 2002 $ (763) $493,536 Comprehensive income: Net income 30,439 Change in unrealized gain/(loss) on securities, net of taxes of $3,844 and reclassification adjustment of $145 7,254 Unrealized gain on recorded interest in securitized assets, net of taxes of $237 363 - ----------------------------------------------------------------------------------------------------- Total comprehensive income 38,056 Common stock issued under employee benefit plans 763 1,282 Cash dividends paid: Per common share of $0.40 (15,743) - ----------------------------------------------------------------------------------------------------- Balance - June 30, 2002 $ - $517,131 - -----------------------------------------------------------------------------------------------------
ACCOUNTING POLICIES The information contained in this report is unaudited and is subject to year-end adjustments. Certain prior year amounts have been reclassified to conform with current period classifications. The adjustments had no effect on gross revenues, gross expenses or net income. In the opinion of management, the information reflects all adjustments necessary for a fair statement of results for the periods ended June 30, 2002 and 2001. During the second quarter, managenment revised it's policy for evaluating loans for impairment. Previously all commercial loans greater than $100 were evaluated for impairment. Currently, only commercial loans greater than $250 will be evaluated for impairment. Except as noted above, the accounting policies of Susquehanna Bancshares, Inc. & Subsidiaries, as applied in the consolidated interim financial statements presented herein, are substantially the same as those followed on an annual basis as presented on pages 38 through 40 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2001. 6 Susquehanna Bancshares, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENT SECURITIES - ---------------------------------------------------------------------------------------------------------------------------------- The amortized costs and fair values of securities are as follows: - ---------------------------------------------------------------------------------------------------------------------------------- June 30, 2002 December 31, 2001 --------------------------------- ------------------------------------------ Amortized cost Fair value Amortized cost Fair value - ---------------------------------------------------------------------------------------------------------------------------------- Available-for-sale: U.S. Treasury $ 11,199 $ 11,294 $ 1,201 $ 1,302 U.S. Government agencies 78,577 79,780 86,329 88,289 State & municipal 51,003 52,531 63,334 64,712 Mortgage-backed 823,845 844,996 799,266 808,981 Corporates 12,302 12,948 20,073 20,844 Equities 34,764 36,973 33,373 35,185 - ---------------------------------------------------------------------------------------------------------------------------------- 1,011,690 1,038,522 1,003,576 1,019,313 - ---------------------------------------------------------------------------------------------------------------------------------- Held-to-maturity: State & municipal 1,689 1,689 1,778 1,778 - ---------------------------------------------------------------------------------------------------------------------------------- 1,689 1,689 1,778 1,778 - ---------------------------------------------------------------------------------------------------------------------------------- Total investment securities $1,013,379 $1,040,211 $1,005,354 $1,021,091 - ----------------------------------------------------------------------------------------------------------------------------------
LOANS AND LEASES - ---------------------------------------------------------------------------------------------------------------------------------- Loans and leases, net of unearned income at June 30, 2002 and December 31, 2001, were as follows: - ---------------------------------------------------------------------------------------------------------------------------------- June 30, December 31, 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- Commercial, financial, and agricultural $ 451,385 $ 434,780 Real estate - construction 408,191 359,445 Real estate - mortgage 2,119,381 1,963,094 Consumer 339,317 325,170 Leases 418,904 437,009 - ---------------------------------------------------------------------------------------------------------------------------------- Total loans and leases $3,737,178 $3,519,498 - ---------------------------------------------------------------------------------------------------------------------------------- Net investment in direct financing leases is as follows: - ---------------------------------------------------------------------------------------------------------------------------------- Minimum lease payments receivable $ 205,292 $ 175,893 Estimated residual value of leases 247,875 299,433 Unearned income under lease contracts (34,263) (38,317) - ---------------------------------------------------------------------------------------------------------------------------------- Total leases $ 418,904 $ 437,009 - ----------------------------------------------------------------------------------------------------------------------------------
An analysis of impaired loans as of June 30, 2002 and December 31, 2001, is presented as follows: - ---------------------------------------------------------------------------------------------------------------------------------- June 30, December 31, 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- Impaired loans without a related reserve $ 5,475 $ 7,252 Impaired loans with a reserve 3,143 2,111 - ---------------------------------------------------------------------------------------------------------------------------------- Total impaired loans $ 8,618 $ 9,363 - ---------------------------------------------------------------------------------------------------------------------------------- Reserve for impaired loans $ 1,300 $ 560 - ----------------------------------------------------------------------------------------------------------------------------------
An analysis of impaired loans for the three and six month periods ended June 30, 2002 and 2001 is presented as follows: - ---------------------------------------------------------------------------------------------------------------------------------- Three Months ended June 30, Six Months ended June 30, - ---------------------------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- Average balance of impaired loans $ 9,085 $ 10,047 $ 8,062 $ 10,773 Interest income on impaired loans (cash-basis) 18 98 58 118
7 Susquehanna Bancshares, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BORROWINGS - ------------------------------------------------------------------------------------------------------------------------------------ June 30, December 31, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Short-term borrowings at June 30, 2002 and December 31, 2001, were as follows: - ------------------------------------------------------------------------------------------------------------------------------------ Securities sold under repurchase agreements $210,575 $158,140 Treasury tax and loan notes 8,428 11,663 - ------------------------------------------------------------------------------------------------------------------------------------ Total short-term borrowings $219,003 $169,803 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Long-term debt at June 30, 2002 and December 31, 2001, was as follows: - ------------------------------------------------------------------------------------------------------------------------------------ Subsidiaries: Term notes due July, 2003 $ 10,000 $ 10,000 Term notes due July, 2003 5,000 5,000 Term notes due July, 2004 5,000 5,000 Parent: Senior notes due February, 2003 35,000 35,000 Subordinated notes due February, 2005 50,000 50,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total long-term debt $105,000 $105,000 - ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS-PER-SHARE - ------------------------------------------------------------------------------------------------------------------------------------ The following tables sets forth the calculation of basic and diluted earnings per share for the three months ended and six months ended June 30, 2002 and 2001: - ------------------------------------------------------------------------------------------------------------------------------------ For the three months ended June 30, ------------------------------------------------------------------------------------------ 2002 2001 ------------------------------------------ ----------------------------------------------- Per Share Per Share Income Shares Amount Income Shares Amount - ------------------------------------------------------------------------------------------------------------------------------------ Basic Earnings per Share: Income available to common stockholders $15,619 39,398 $0.40 $14,208 39,224 $0.36 Effect of Diluted Securities: Stock options outstanding 493 270 -------- -------- Diluted Earnings per Share: Income available to common stockholders and assuming conversion $15,619 39,891 $0.39 $14,208 39,494 $0.36 - ------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ For the six months ended June 30, ------------------------------------------------------------------------------------------ 2002 2001 ------------------------------------------ ----------------------------------------------- Per Share Per Share Income Shares Amount Income Shares Amount - ------------------------------------------------------------------------------------------------------------------------------------ Basic Earnings per Share: Income available to common stockholders $30,439 39,373 $0.77 $26,704 39,223 $0.68 Effect of Diluted Securities: Stock options outstanding 481 252 -------- -------- Diluted Earnings per Share: Income available to common stockholders and assuming conversion $30,439 39,854 $0.76 $26,704 39,475 $0.68 - ------------------------------------------------------------------------------------------------------------------------------------
8 Susquehanna Bancshares, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GOODWILL AND OTHER INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires companies to use the purchase method of accounting for all business combinations initiated after June 30, 2001 and addresses the initial recognition and measurement of goodwill and other intangibles acquired in a business combination. SFAS No. 142, which Susquehanna adopted on January 1, 2002, addresses the initial recognition and measurement of intangible assets acquired outside a business combination and the recognition and measurement of goodwill and other intangible assets subsequent to acquisition. Under the new standard, goodwill is no longer amortized. Instead, it is tested for impairment at least annually. As of June 30, 2002, there was no impairment of goodwill. Other intangible assets continue to be amortized over their useful lives. The gross carrying amount and accumulated amortization of identifiable intangible assets as of June 30, 2002 are as follows:
Gross Carrying Accumulated Amount Amortization -------------- ------------------ Amortized intangible assets: Core deposit intangibles $ 5,874 ($747) Favorable lease adjustments 393 (226) - --------------------------------------------------------------------------------------------------------------------- Total $ 6,267 ($973) - --------------------------------------------------------------------------------------------------------------------- Unamortized intangible assets: Goodwill $54,396 N/A - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- The following is the activity of the goodwill account since December 31, 2001: - --------------------------------------------------------------------------------------------------------------------- Goodwill, December 31, 2001 $43,496 Purchase of The Addis Group 10,900 - --------------------------------------------------------------------------------------------------------------------- Goodwill, June 30, 2002 $54,396 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- The following table sets forth the actual and estimated pre-tax amortization expense of amortized intangible assets: - --------------------------------------------------------------------------------------------------------------------- Aggregate Amortization Expense: For the quarter ended June 30, 2002 $ 158 Estimated Amortization Expense: For the year ended December 31, 2002 $ 632 For the year ended December 31, 2003 632 For the year ended December 31, 2004 632 For the year ended December 31, 2005 632 For the year ended December 31, 2006 632 - ---------------------------------------------------------------------------------------------------------------------
9
- --------------------------------------------------------------------------------------------------------- The following table sets forth the net income, basic EPS and fully diluted EPS as adjusted to exclude goodwill amortization expense for the three months and six months ended June 30, 2002 and 2001: - --------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended 2002 2001 2002 2001 - --------------------------------------------------------------------------------------------------------- Reported net income $ 15,619 $ 14,208 $ 30,439 $ 26,704 Add back: Goodwill amortization - 777 - 1,564 - --------------------------------------------------------------------------------------------------------- Adjusted net income $ 15,619 $ 14,985 $ 30,439 $ 28,268 ========================================================================================================= Basic earnings per share: Reported net income $ 0.40 $ 0.36 $ 0.77 $ 0.68 Goodwill amortization - $ 0.02 - 0.04 - --------------------------------------------------------------------------------------------------------- Adjusted net income $ 0.40 $ 0.38 $ 0.77 $ 0.72 ========================================================================================================= Diluted earnings per share: Reported net income $ 0.39 $ 0.36 $ 0.76 $ 0.68 Goodwill amortization - $ 0.02 - 0.04 - --------------------------------------------------------------------------------------------------------- Adjusted net income $ 0.39 $ 0.38 $ 0.76 $ 0.72 =========================================================================================================
10 Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION Management's discussion and analysis of the significant changes in the consolidated results of operations, financial condition, and cash flows of Susquehanna Bancshares, Inc. ("Susquehanna") is set forth below for the periods indicated. Certain statements in this document may be considered to be "forward-looking statements" as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words "expect," "estimate," "project," "anticipate," "should," "intend," "probability," "risk," "target," "objective" and similar expressions or variations on such expressions. In particular, this document includes forward-looking statements relating, but not limited, to Susquehanna's potential exposures to various types of market risks, such as interest rate risk and credit risk. Such statements are subject to certain risks and uncertainties. For example, certain of the market risk disclosures are dependent on choices about essential model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. As a result, actual income gains and losses could materially differ from those that have been estimated. Other factors that could cause actual results to differ materially from those estimated by the forward-looking statements contained in this document include, but are not limited to: general economic conditions in market areas in which Susquehanna has significant business activities or investments; the monetary and interest rate policies of the Board of Governors of the Federal Reserve System; inflation; deflation; unanticipated turbulence in interest rates; changes in laws, regulations and taxes; changes in competition and pricing environments; natural disasters; the inability to hedge certain risks economically; the adequacy of loss reserves; acquisitions or restructuring; technological changes; changes in consumer spending and saving habits and the success of Susquehanna in managing the risks involved in the foregoing. The management of Susquehanna encourages readers of this report to understand forward-looking statements to be strategic objectives rather than absolute targets of future performance. Forward-looking statements speak only "as of" the date made. Susquehanna does not update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events. The following discussion and analysis, the purpose of which is to provide investors and others with information that Susquehanna's management believes to be necessary for an understanding of its financial condition, changes in financial condition, and results of operations, should be read in conjunction with the financial statements, notes, and other information contained in this document. 11 Results of Operations Summary of 2002 Compared to 2001 Susquehanna's net income for the second quarter of 2002 was $15.6 million, a 9.9% increase from net income of $14.2 million in the second quarter of 2001. For the first six months of 2002, net income increased 14.0% to $30.4 million from $26.7 million for the same period during 2001. During the second quarter of 2002, Susquehanna's margin and fee income continued to improve as they increased by 12.3% and 5.8%, respectively, from the second quarter of 2001 and fee income represented 31.9% of total revenues for the second quarter of 2002. The improvement in margin and fee income was offset by a 9.2% increase in operating expenses from second quarter 2001 to second quarter 2002. During the first six months of 2002, Susquehanna's margin and fee income increased by 10.5% and 9.9%, respectively, from the comparable period of 2001 and fee income represented 33.7% of total revenues for the first six months of 2002. This improvement in margin and fee income was offset by a 9.3% increase in operating expenses from the comparable period of 2001. Diluted earnings per share ("EPS") increased 8.3% from $0.36 per share for the second quarter of 2001 to $0.39 per share for the second quarter of 2002. Diluted EPS increased 11.8% for the six months ended June 30, 2002 to $0.76 from $0.68 for the same period in 2001. Return on average assets ("ROA") and return on average equity ("ROE") were 1.20% and 12.37%, respectively, in the second quarter of 2002 compared with 1.20% and 12.15%, respectively, in the second quarter of 2001. ROA and ROE were 1.19% and 12.24%, respectively, for the six months ended June 30, 2002 as compared to 1.14% and 11.67%, respectively, for the same period ended June 30, 2001. In June 2001, the Financial Accounting Standards Board adopted SFAS 142, Goodwill and Other Intangible Assets. Because of the adoption of SFAS 142, goodwill amortization ceased in 2002. Had the new rules been in effect last year, fully diluted earnings per share would have been $ 0.72 and net income would have been $28.3 million for the six months ended June 30, 2001, resulting in a 5.6% increase in diluted earnings per share and a 7.7% increase in net income for the first six months of 2002. Under the new rules, second quarter 2001 fully diluted earnings per share and net income would have been $0.38 and $15.0 million, respectively, resulting in increases of 2.6% and 4.2%, respectively, for the second quarter of 2002. Total assets at June 30, 2002 were $5.3 billion, compared with $4.9 billion at June 30, 2001. Loans of $3.7 billion at June 30, 2002 increased from $3.5 billion at June 30, 2001, while deposits increased from $3.3 billion at June 30, 2001 to $3.6 billion at June 30, 2002. Equity capital was $517 million at June 30, 2002, or $13.11 per share, compared to $474 million, or $12.06 per share, at June 30, 2001. The following discussion details the factors that contributed to these results. 12 Net Interest Income - Taxable Equivalent Basis Our major source of operating revenues is net interest income, which rose to a level of $47.8 million in the second quarter of 2002, compared to $42.5 million for the same period in 2001. For the six months ended June 30, 2002, net interest income was $92.2 million compared with $83.4 million for the same period of 2001. Net interest income is the income that remains after deducting, from total income generated by earning assets, the interest expense attributable to the acquisition of the funds required to support earning assets. Income from earning assets includes income from loans and leases, income from investment securities and income from short-term investments. The amount of interest income is dependent upon many factors, including the volume of earning assets, the general level of interest rates, the dynamics of the change in interest rates, and levels of non-performing assets. The cost of funds varies with the amount of funds necessary to support earning assets, the rates paid to attract and hold deposits, rates paid on borrowed funds, and the levels of non-interest bearing demand deposits and equity capital. Table 1 presents average balances, taxable equivalent interest income and expenses, and yields earned or paid on the assets and liabilities of Susquehanna. For purposes of calculating taxable equivalent interest income, tax-exempt interest has been adjusted using a marginal tax rate of 35% in order to equate the yield to that of taxable interest rates. Net interest income as a percentage of net interest income and other income was 68.1% for the quarter ended June 30, 2002, and was 66.7% for the quarter ended June 30, 2001, respectively. For the six month period ended June 30, 2002 and 2001, net interest income as a percentage of net interest income and other income was 66.3% and 66.7%, respectively. Net interest income for the second quarter 2002 increased $5.2 million compared to the second quarter of 2001. Average earning assets in the second quarter of 2002 increased $389 million over the same period in 2001, with average loans increasing $219 million, average investment securities increasing $214million, and lower yield short-term investments decreasing $44 million. Average interest-bearing liabilities increased $297 million with average interest-bearing deposits increasing $237 million. Non-interest bearing demand deposits increased $77 million in the second quarter of 2002 over the second quarter of 2001. These factors, coupled with the overall decline in interest rates, caused the net interest margin to improve to 4.08% in the second quarter of 2002 from 3.97% in the second quarter of 2001. The margin improvement is partially attributable to a 128 basis point decrease in the cost of funds, coupled with a decrease of only 102 basis points in the yield on earning assets. Net interest income for the six months ended June 30, 2002 increased $8.7 million compared to the same period in 2001. Average earning assets for the first six months of 2002 increased $345 million over the same period in 2001, with average loans increasing $169 million and average investment securities increasing $194 million. Average interest-bearing liabilities increased $264 million with average interest-bearing deposits increasing $216 million. Average non-interest bearing demand deposits increased $80 million for the first six months of 2002 compared with the first six months of 2001. This increased volume helped the net interest margin improve to 4.01% in the first six months of 2002 from 3.94% during the same period of 2001. 13 Actions by the Board of Governors of the Federal Reserve System to decrease interest rates primarily caused these basis point decreases. Variances do occur in the net interest margin, as an exact repricing of assets and liabilities is not possible. A further explanation of the impact of asset and liability repricing is found in the section titled "Market Risks" below. Provision and Allowance for Loan and Lease Losses The provision for loan and lease losses is the expense necessary to maintain the allowance for loan and lease losses at a level adequate to absorb management's estimate of inherent losses in the loan and lease portfolio. Susquehanna's provision for loan and lease losses is based upon management's quarterly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets its affiliates serve. As illustrated in Table 3, the provision was $2.4 million in the second quarter of 2002, an increase of $0.6 million from the same period in 2001. Net charge-offs were $1.8 million for the three-month period ended June 30, 2002 versus $1.3 million in the corresponding three month period ended 2001. For the six months ended June 30, 2002, the provision was $4.7 million, an increase of $1.0 million from the $3.7 million provision for the first six months of 2001, while net charge-offs increased from $2.5 million in 2001 to $3.3 million in 2002. Determining the level of the allowance for possible loan and lease losses at any given period is difficult, particularly during deteriorating or uncertain economic periods. Management must make estimates using assumptions and information which is often subjective and changing rapidly. The review of the loan and lease portfolios is a continuing event in light of a changing economy and the dynamics of the banking and regulatory environment. Despite the fact that interest rates have been lowered, a slowdown of economic growth could occur. Borrowers may experience difficulty and the level of non-performing loans and assets, charge-offs and delinquencies could rise and require further increases to the provision. Other Income Non-interest income increased $1.2 million, or 5.8%, from $21.2 million in the second quarter of 2001, to $22.4 million in the second quarter of 2002. This quarter's increase resulted primarily from an increase in asset management fees at Valley Forge Asset Management Corp. (VFAM) and service charges on deposit accounts at our banking subsidiaries. Non-interest income increased $5.1 million, or 12.3%, from $41.7 million to $46.8 million for the six months ended June 30, 2002 and 2001, respectively. The six month improvement was primarily attributed to an increase in deposit service charges of $1.8 million, an increase in vehicle fees of $1.8 million at Boston Service Company, Inc., t/a Hann Financial Service Corp. (Hann), and an increase in asset management fees of $1.4 million at VFAM. 14 Other income as a percentage of net interest income and other income, was 31.9% for the quarter ended June 30, 2002 compared with 33.3% for the comparable period of 2001. For the six months ended June 30, 2002 and 2001, other income as a percentage of net interest income and other income was 33.7% and 33.3%, respectively. Other Expenses Total non-interest expenses increased $3.8 million from $41.2 million in the second quarter of 2001 to $45.1 million in the second quarter of 2002. For the six months ended June 30, 2002, total non-interest expenses increased $7.7 million to $90.2 million from $82.5 million during the same period in 2001. The quarter to quarter increase was primarily due to increases in salaries and benefits of 6.6%, or $1.2 million, and other expenses of 11.3%, or $1.4 million, with the increases consisting of professional fees, insurance, advertising, communications and software expenses. The increase in salaries and benefits was primarily due to normal annual salary increases, increased sales force and the addition of seven banking branches. Four of these branches were acquired from another institution, while three were newly developed branches. These additional branches also contributed to the increase in other expense. The six month increase was due to the same factors as noted above plus a $1.3 million increase in vehicle delivery and preparation expense due to increased volumes at Hann. Income Taxes Susquehanna's effective tax rate decreased slightly to 31.0% for the second quarter and first six months of 2002 due to the adoption of SFAS 142 and the cessation of goodwill amortization. Financial Condition Risk Assets Table 2 shows a decrease in non-accrual loans and leases from $18.7 million at June 30, 2001 to $16.8 million at June 30, 2002. Loans past due 90 days or more and still accruing increased from $8.5 million at June 30, 2001 to $10.0 million at June 30, 2002. The percentage of non-performing assets to period-end loans and other real estate owned (OREO) decreased from .67% at June 30, 2001 to .53% at June 30, 2002. The percentage of loan loss reserve to non-performing loans at June 30, 2002 was 233% compared with 205% at June 30, 2001. Capital Resources Capital elements for Susquehanna are segmented into two tiers. Tier 1 capital represents shareholders' equity reduced by most intangible assets. Tier 2 capital represents certain allowable long-term debt, the portion of the allowance for loan and lease losses limited to 1.25% of risk-adjusted assets, and 45% of the unrealized gain on equity securities. The sum of Tier 1 capital and Tier 2 capital is "total risk-based capital." 15 The minimum Tier I capital ratio is 4%; Susquehanna's ratio at June 30, 2002 was 10.3%. The minimum total capital (Tier I and II) ratio is 8%; Susquehanna's ratio at June 30, 2002 was 11.6%. The minimum leverage ratio is 4%; Susquehanna's leverage ratio at June 30, 2002 was 8.5%. Susquehanna and each of its banking subsidiaries have leverage and risk-weighted ratios well in excess of regulatory minimums, and each entity is considered "well-capitalized" under regulatory guidelines. 16 Susquehanna Bancshares, Inc. and Subsidiaries TABLE 1 - DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest rates and interest differential - taxable equivalent basis - ----------------------------------------------------------------------------------------------------------------------------------- For the Three Month Period Ended For the Three Month Period Ended June 30, 2002 June 30, 2001 - ------------------------------------------------------------------------------------ ------------------------------------------ Average Average (Dollars in thousands) Balance Interest Rate (%) Balance Interest Rate (%) - ----------------------------------------------------------------------------------------------------------------------------------- Assets Short - term investments $ 52,843 $ 263 2.00 $ 97,525 $ 1,056 4.34 Investment securities: Taxable 958,583 13,833 5.79 724,971 11,403 6.31 Tax - advantaged 54,023 952 7.07 73,511 1,305 7.12 - -------------------------------------------------------------------------------------------------------------------------------- Total investment securities 1,012,606 14,785 5.86 798,482 12,708 6.38 - -------------------------------------------------------------------------------------------------------------------------------- Loans and leases, (net): Taxable 3,645,093 65,110 7.16 3,430,843 70,953 8.30 Tax - advantaged 48,015 965 8.06 42,677 882 8.29 - -------------------------------------------------------------------------------------------------------------------------------- Total loans and leases 3,693,108 66,075 7.18 3,473,520 71,835 8.30 - -------------------------------------------------------------------------------------------------------------------------------- Total interest - earning assets 4,758,557 $ 81,122 6.84 4,369,527 $ 85,599 7.86 ------------------------- --------------------- Allowance for loan and lease losses (39,155) (38,501) Other non - earning assets 490,699 422,523 - ------------------------------------------------------ ------------- Total assets $5,210,101 $4,753,549 - ------------------------------------------------------ ------------- Liabilities Deposits: Interest - bearing demand $ 938,783 $ 3,003 1.28 $ 811,649 $ 4,830 2.39 Savings 467,067 1,103 0.95 421,301 1,703 1.62 Time 1,619,017 16,386 4.06 1,554,427 21,537 5.56 Short - term borrowings 195,226 796 1.64 213,688 2,175 4.08 FHLB borrowings 600,568 7,419 4.95 348,472 4,692 5.40 Vehicle financing 126,500 1,987 6.30 305,629 5,425 7.12 Long - term debt 105,000 2,000 7.64 100,000 1,934 7.76 ------------- ------------ ---------- ------------- ---------- -------- Total interest - bearing liabilities 4,052,161 $ 32,694 3.24 3,755,166 $ 42,296 4.52 ------------------------- --------------------- Demand deposits 541,669 464,800 Other liabilities 109,916 64,716 - ------------------------------------------------------ ------------- Total liabilities 4,703,746 4,284,682 - ------------------------------------------------------ ------------- Equity 506,355 468,865 - ------------------------------------------------------ ------------- Total liabilities & stockholders' equity $5,210,101 $4,753,547 - ------------------------------------------------------ ------------- Net interest income / yield on average earning assets $ 48,428 4.08 $ 43,303 3.97 ------------------------- ----------------------- - ---------------------------------------------------------------------------------------------------------------------------------- For the Six Month Period Ended For the Six Month Period Ended June 30, 2002 June 30, 2001 - ------------------------------------------------------------------------------------ ----------------------------------------- Average Average (Dollars in thousands) Balance Interest Rate (%) Balance Interest Rate (%) - ----------------------------------------------------------------------------------------------------------------------------------- Assets Short - term investments $ 73,659 $ 700 1.92 $ 91,504 $ 2,194 4.84 Investment securities: Taxable 954,078 27,116 5.73 742,047 23,596 6.41 Tax - advantaged 57,734 2,034 7.10 75,721 2,691 7.17 - -------------------------------------------------------------------------------------------------------------------------------- Total investment securities 1,011,812 29,150 5.81 817,768 26,287 6.48 - -------------------------------------------------------------------------------------------------------------------------------- Loans and leases, (net): Taxable 3,570,648 128,819 7.28 3,400,978 142,374 8.44 Tax - advantaged 45,985 1,854 8.13 46,969 2,020 8.67 - -------------------------------------------------------------------------------------------------------------------------------- Total loans and leases 3,616,633 130,673 7.29 3,447,947 144,394 8.45 - -------------------------------------------------------------------------------------------------------------------------------- Total interest - earning assets 4,702,104 $160,523 6.88 4,357,219 $172,875 8.00 --------------------- ------------------- Allowance for loan and lease losses (38,701) (38,046) Other non - earning assets 495,563 411,794 - ------------------------------------------------------ -------------- Total assets $5,158,966 $4,730,967 - ------------------------------------------------------ -------------- Liabilities Deposits: Interest - bearing demand $ 928,939 $ 5,909 1.28 $ 813,050 $ 10,647 2.64 Savings 456,198 2,180 0.96 417,306 3,593 1.74 Time 1,618,022 34,152 4.26 1,556,755 43,753 5.67 Short - term borrowings 185,283 1,471 1.60 214,823 5,062 4.75 FHLB borrowings 588,971 14,680 5.03 338,495 9,357 5.57 Vehicle financing 142,156 4,593 6.52 320,464 11,482 7.23 Long - term debt 105,000 3,993 7.67 100,000 3,884 7.83 ------------ -------- -------- -------------- -------- ---- Total interest - bearing liabilities 4,024,569 $ 66,978 3.36 3,760,893 $ 87,778 4.71 --------------------- ------------------- Demand deposits 529,135 449,111 Other liabilities 103,827 59,363 - ------------------------------------------------------ --------------- Total liabilities 4,657,531 4,269,367 - ------------------------------------------------------ --------------- Equity 501,435 461,602 - ------------------------------------------------------ --------------- Total liabilities & stockholders' equity $5,158,966 $4,730,969 - ------------------------------------------------------ --------------- Net interest income / yield on average earning assets $ 93,545 4.01 $ 85,097 3.94 --------------------- -------------------
For purposes of calculating loan yields, the average loan volume includes non-accrual loans. For purposes of calculating yields on non-taxable interest income, the taxable equivalent adjustment is made to equate non-taxable interest on the same baisis as taxable interest. The marginal tax rate is 35%. 17 Susquehanna Bancshares, Inc. and Subsidiaries
TABLE 2 - RISK ASSETS - ------------------------------------------------------------------------------------------------------------------------------- June 30 December 31, June 30, (Dollars in thousands) 2002 2001 2001 - ------------------------------------------------------------------------------------------------------------------------------- Nonperforming assets: Nonaccrual loans and leases $ 16,828 $ 15,516 $ 18,696 Restructured accrual loans 0 0 0 Other real estate owned 3,174 3,761 4,824 - ------------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 20,002 $ 19,277 $ 23,520 =============================================================================================================================== As a percent of period-end loans and leases and other real estate owned 0.53% 0.55% 0.67% Coverage ratio 232.64% 242.96% 205.43% Loans and leases contractually past due 90 days and still accruing $ 9,995 $ 11,498 $ 8,494 - -------------------------------------------------------------------------------------------------------------------------------
TABLE 3 - ALLOWANCE FOR LOAN AND LEASE LOSSES - ------------------------------------------------------------------------------------------------------------------------------- Three Months Ended June 30, Six Months Ended June 30, (Dollars in thousands) 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------- Balance - Beginning of period $ 38,532 $ 37,848 $ 37,698 $ 37,187 Additions charged to operating expenses 2,434 1,833 4,707 3,679 - ------------------------------------------------------------------------------------------------------------------------------- 40,966 39,681 42,405 40,866 - ------------------------------------------------------------------------------------------------------------------------------- Charge-offs (2,425) (1,960) (4,427) (3,545) Recoveries 607 686 1,170 1,086 - ------------------------------------------------------------------------------------------------------------------------------- Net charge-offs (1,818) (1,274) (3,257) (2,459) - ------------------------------------------------------------------------------------------------------------------------------- Balance - Period end $ 39,148 $ 38,407 $ 39,148 $ 38,407 =============================================================================================================================== Net charge-offs as a percent of average loans and leases(annualized) 0.20% 0.15% 0.18% 0.14% Allowance as a percent of period-end loans and leases 1.05% 1.10% 1.05% 1.10% Average loans and leases $3,693,108 $3,473,520 $3,616,633 $3,447,947 Period-end loans and leases 3,737,178 3,481,729 3,737,178 3,481,729
18 Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The types of market risk exposures generally faced by banking entities include interest rate risk, liquidity risk, equity market price risk, foreign currency risk, and commodity price risk. Only interest rate and liquidity risks are significant to Susquehanna. Liquidity Risk Liquidity and interest rate risk are related but distinctly different from one another. The maintenance of adequate liquidity -- the ability to meet the cash requirements of its customers and other financial commitments -- is a fundamental aspect of Susquehanna's asset/liability management strategy. Susquehanna's policy of diversifying its funding sources -- purchased funds, repurchase agreements, and deposit accounts -- allows it to avoid undue concentration in any single financial market and also to avoid heavy funding requirements within short periods of time. At June 30, 2002, Susquehanna's subsidiary banks had unused lines of credit available to them from the Federal Home Loan Bank system totaling approximately $521 million. However, liquidity is not entirely dependent on increasing Susquehanna's liability balances. Liquidity can also be generated from maturing or readily marketable assets. The carrying value of investment securities maturing within one year amounted to $51 million at June 30, 2002. These maturing investments represented 5% of total investment securities. Unrestricted short-term investments amounted to $19.7 million and represent additional sources of liquidity. Consequently, Susquehanna's exposure to liquidity risk is not considered significant. Interest Rate Risk Closely related to the management of liquidity is the management of interest rate risk, which focuses on maintaining stability in the net interest margin, an important factor in earnings growth. Interest rate sensitivity is the matching or mismatching of the maturity and rate structure of the interest-bearing assets and liabilities. Management's objective is to control the difference in the timing of the rate changes for these assets and liabilities to preserve a satisfactory net interest margin. In doing so, Susquehanna endeavors to maximize earnings in an environment of changing interest rates. However, there is a lag in maintaining the desired matching because the repricing of products occurs at varying time intervals. Susquehanna employs a variety of methods to monitor interest rate risk. By dividing the assets and liabilities into three groups -- fixed rate, floating rate and those which reprice only at management's discretion -- strategies are developed which are designed to minimize exposure to interest rate fluctuations. Management also uses gap and interest rate shock analyses to evaluate interest rate sensitivity at a given point in time. 19 Periodic gap reports compare the sensitivity of interest-earning assets and interest-bearing liabilities to changes in interest rates. Management also utilizes an in-house simulation model that measures Susquehanna's exposure to interest rate risk. This model calculates the income effect and the economic value of assets, liabilities and equity at current and forecasted interest rates, and at hypothetical higher and lower interest rates using one percent intervals. Susquehanna's policy, as approved by its Board of Directors, is for Susquehanna to experience no more than a 15% decline in net interest income and no more than a 30% decline in economic equity for a 300 basis point shock (immediate change) in interest rates. The assumptions used for the interest rate shock analysis are reviewed and updated at least quarterly. Based upon the most recent interest rate shock analysis, Susquehanna was within the Board's policy limits. At June 30, 2002, Susquehanna continues to be an asset sensitive institution and should benefit from a rise in interest rates in the future, if that should occur. Securitizations and Off-Balance Sheet Financings Background. Asset securitizations and other off-balance sheet financings can further affect liquidity and interest rate risk. Automobile leases originated by Susquehanna's wholly-owned subsidiary, Boston Service Company, Inc. doing business as Hann Financial Service Corporation ("Hann") are financed primarily in four ways: securitization transactions; sale-leaseback transactions; agency arrangements with other financial institutions; and other sources of funds, including internally generated sources. Assets financed in the first three of these manners generally are not reflected on Susquehanna's consolidated balance sheet. As of June 30, 2002, Hann's off-balance sheet, managed portfolio was funded in the following manners: asset securitization transactions, $179 million; sale-leaseback transaction, $158 million; and agency arrangements, $641 million. In connection with the securitization transactions, Hann sells the beneficial interests in automobile leases and related vehicles at par to a wholly-owned, special purpose entity, or SPE. These transactions have been accounted for as sales under the guidelines of SFAS 140. The SPE retains the right to receive excess cash flows from the sold portfolio. Under SFAS 140, Hann is required to recognize a receivable representing the present value of these excess cash flows. As of June 30, 2002, the aggregate amount of all such recorded receivables was $6.3 million. Second Quarter 2002 Transaction. During the second quarter of 2002, Hann completed a new agency arrangement. In connection with that arrangement, Susquehanna entered into a Residual Interest Agreement which guarantees the performance of Auto Lenders Liquidation Center, Inc. (Auto Lenders) in its obligation to an agency client of Hann. Michael J. Wimmer, who was a member of Susquehanna's Board of Directors on June 30, 2002, along with his immediate family owns 100% of the outstanding equity interest of Auto Lenders. Auto Lenders, which was formed in 1990, is a used vehicle remarketer with three retail locations in New Jersey. 20 In the event the agency client incurs any losses, cost and expenses as a result of any failure of Auto Lenders to perform in its obligation to remit to the agency client an amount equal to the full residual value of any leased vehicle within the agency client's portfolio, Susquehanna agrees to compensate the agency client for any final liquidation loss with respect to such leased vehicle. However, Susquehanna's liability is not to exceed 12% of the maximum aggregate residual value of all leases purchased by the agency client. At June 30, 2002, the total residual value amount related to this transaction was $13.6 million and the maximum obligation under the residual interest agreement at June 30, 2002, was $1.6 million. Summary of Susquehanna's Potential Exposure under All Off-Balance Sheet Transactions. Under the asset securitization transactions, Susquehanna has reimbursement obligations to lenders under letter of credit facilities if Auto Lenders breaches its obligations to the lenders. At June 30, 2002, Susquehanna would be obligated for up to $40.5 million under these facilities. Under the sale-leaseback transaction, Susquehanna must continue to maintain its investment grade senior unsecured long-term debt ratings. This rating provision can be cured by Susquehanna by obtaining a $33.9 million letter of credit from an eligible financial institution for the benefit of the equity participants in the transaction. Under the agency arrangements, Susquehanna's maximum obligation at June 30, 2002 was $1.6 million. 21 PART II. OTHER INFORMATION Item 2. CHANGES OF SECURITIES AND USE OF PROCEEDS On June 28, 2002, Susquehanna acquired all of the outstanding stock of The Addis Group, Inc., a property and casualty insurance brokerage located in King of Prussia, Pennsylvania. In connection with the acquisition, Susquehanna agreed to issue and sell $4,000,000 worth of its common stock to the shareholders of Addis, based on a per share price equal to the average closing price of the ten trading days prior to the date immediately preceeding the closing date, or $22.824 per share. Accordingly, on July 1, 2002, Susquehanna issued a total of 175,254 shares of its common stock to F. Scott Addis, William D. Rhodes, III and Peter Unger (the shareholders of Addis). The shares are exempt from registration pursuant to Section 506 of the Securities Act of 1933, as amended. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Susquehanna's Annual Meeting of Shareholders was held on May 29, 2002. The following directors were elected to Susquehanna's board of directors Class of 2005 by the holders of Susquehanna common stock (the following details the voting results with respect to each director nominee, including the number of shares not voted at all (Not Present) and the proxies that brokers did not vote in full (Broker Non-Voted)): Nominee Common Stock ------- ------------ C. William Hetzer, Jr. For 33,005,433 Withhold/Abstain 399,128 Not Present 5,965,095 Broker Non-Voted 297,248 Owen O. Freeman, Jr. For 32,984,322 Withhold/Abstain 420,239 Not Present 5,965,095 Broker Non-Voted 297,248 Guy W. Miller, Jr. For 32,997,788 Withhold/Abstain 406,773 Not Present 5,965,095 Broker Non-Voted 297,248 William J. Reuter For 30,689,314 Withhold/Abstain 2,715,247 Not Present 5,965,095 Broker Non-Voted 297,248 No other matters were submitted for shareholder action. 22 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The Exhibits filed as part of this report are as follows: 2.1 Stock Purchase Agreement by and among Susquehanna Bancshares, Inc., Susquehanna Acquisition, LLC, The Addis Group, Inc., F. Scott Addis, William D. Rhodes, III and Peter R. Unger, dated April 30, 2002, including the First Amendment to Stock Purchase Agreement, between the same parties, dated June 28, 2002. Schedules to this agreement and amendment are omitted. Pursuant to paragraph (2) of Item 601(b) of Regulation S-K, Susquehanna agrees to furnish a copy of such schedules to the Commission upon request. 10.1 Residual Interest Agreement dated May 17, 2002 by and between Sovereign Bank and Susquehanna Bancshares, Inc. 10.2 Purchase Agreement, dated as of June 29, 2001, between Boston Service Company, Inc. d/b/a Hann Financial Service Corp. and Auto Lenders Liquidation Center, Inc. 10.3 Irrevocable Standby Letter of Credit No. 1, dated June 29, 2001, of Susquehanna Bancshares, Inc. for the account of HAL Warehouse Funding 2001 LLC, including Amendment No. 1 thereto. 10.4 Purchase Agreement, dated as of March 11, 2002, between Boston Service Company, Inc. d/b/a/ Hann Financial Service Corp. and Auto Lenders Liquidation Center, Inc. 10.5 Irrevocable Standby Letter of Credit No. 2, dated March 11, 2002, of Susquehanna Bancshares, Inc. in favor of Galleon Capital Corporation for the account of HAL Warehouse Funding 2002-LLC. 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Report on Form 8-K. Susquehanna filed a Current Report on Form 8-K on May 3, 2002 regarding the execution of a definitive agreement by Susquehanna to purchase all of the outstanding stock of The Addis Group, Inc., a property and casualty insurance brokerage located in King of Prussia, Pennsylvania. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUSQUEHANNA BANCSHARES, INC. August 13, 2002 /s/ William J. Reuter ---------------------------------------- William J. Reuter President and Chief Executive Officer August 13, 2002 /s/ Drew K. Hostetter ---------------------------------------- Drew K. Hostetter Executive Vice President, Treasurer and Chief Financial Officer 24 EXHIBIT INDEX Exhibit Numbers Description and Method of Filing - --------------- -------------------------------- (2) Plan of acquisition, reorganization, arrangement, liquidation or succession. 2.1 Stock Purchase Agreement by and among Susquehanna Bancshares, Inc., Susquehanna Acquisition, LLC, The Addis Group, Inc. and F. Scott Addis, William D. Rhodes, III and Peter R. Unger, dated April 30, 2002, including the First Amendment to Stock Purchase Agreement, between the same parties, dated June 28, 2002. Schedules to this agreement and amendment are omitted. Pursuant to paragraph (2) of Item 601(b) of Regulation S-K, Susquehanna agrees to furnish a copy of such schedules to the Commission upon request. (10) Material Contracts. 10.1 Residual Interest Agreement dated May 17, 2002 by and between Sovereign Bank and Susquehanna Bancshares, Inc. 10.2 Purchase Agreement, dated as of June 29, 2001, between Boston Service Company, Inc. d/b/a Hann Financial Service Corp. and Auto Lenders Liquidation Center, Inc. 10.3 Irrevocable Standby Letter of Credit No. 1, dated June 29, 2001, of Susquehanna Bancshares, Inc. for the account of HAL Warehouse Funding 2001 LLC, including Amendment No. 1 thereto. 10.4 Purchase Agreement, dated as of March 11, 2002, between Boston Service Company, Inc. d/b/a/ Hann Financial Service Corp. and Auto Lenders Liquidation Center, Inc. 10.5 Irrevocable Standby Letter of Credit No. 2, dated March 11, 2002, of Susquehanna Bancshares, Inc. in favor of Galleon Capital Corporation for the account of HAL Warehouse Funding 2002-LLC. (99) Additional Exhibits 99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-2.1 3 dex21.txt STOCK PURCHASE AGREEMENT Exhibit 2.1 STOCK PURCHASE AGREEMENT by and among SUSQUEHANNA BANCSHARES, INC., SUSQUEHANNA ACQUISITION, LLC, THE ADDIS GROUP, INC. and THE SHAREHOLDERS OF THE ADDIS GROUP, INC. Dated as of April 30, 2002
TABLE OF CONTENTS Page ---- ARTICLE I SALE AND TRANSFER OF THE SHARES............................................................1 Section 1.1 Purchase and Sale of the Shares.......................................................1 Section 1.2 Closing...............................................................................2 Section 1.3 Closing Deliveries....................................................................2 Section 1.4 No Fractional Shares..................................................................2 Section 1.5 Shareholder Representative............................................................3 ARTICLE II POST-CLOSING ADJUSTMENT; CONTINGENT CONSIDERATION..........................................3 Section 2.1 Post-Closing Adjustment...............................................................3 Section 2.2 Contingent Consideration..............................................................6 Section 2.3 Calculation of Contingent Consideration...............................................6 Section 2.4 Change of Control.....................................................................7 Section 2.5 Notice of Contingent Consideration....................................................8 ARTICLE III ESCROW....................................................................................10 Section 3.1 Creation of Escrow...................................................................10 Section 3.2 Duration and Terms...................................................................10 Section 3.3 Voting and Investment................................................................10 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF AGI AND THE SHAREHOLDERS................................10 Section 4.1 Organization.........................................................................10 Section 4.2 Capitalization.......................................................................12 Section 4.3 Authority............................................................................12 Section 4.4 Consents and Approvals; No Violations................................................12 Section 4.5 Subsidiaries; Predecessor Status; Spin-Offs..........................................13 Section 4.6 No Third Party Options...............................................................13 Section 4.7 Financial Statements.................................................................13 Section 4.8 Title to Assets, Properties, Interests in Properties, Rights and Related Matters..............................................................................13 Section 4.9 Absence of Certain Changes...........................................................14 Section 4.10 Absence of Undisclosed Liabilities...................................................14 Section 4.11 Legal Proceedings....................................................................14
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TABLE OF CONTENTS Page ---- Section 4.12 Contracts, Leases, Agreements and Other Commitments..................................14 Section 4.13 Insurance............................................................................16 Section 4.14 Benefit Plans........................................................................16 Section 4.15 Collective Bargaining Agreements and Employment Agreements...........................19 Section 4.16 Compliance with Applicable Law.......................................................19 Section 4.17 Actions since the Balance Sheet Date.................................................19 Section 4.18 Tax Matters..........................................................................21 Section 4.19 Environmental Matters................................................................23 Section 4.20 Books and Records....................................................................25 Section 4.21 Intellectual Property................................................................25 Section 4.22 Condition of Tangible Assets.........................................................25 Section 4.23 Conflict of Interest.................................................................25 Section 4.24 Customers............................................................................26 Section 4.25 Broker Services......................................................................26 Section 4.26 Disclosure...........................................................................26 ARTICLE V FURTHER REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS................................26 Section 5.1 Ownership of Capital Stock of AGI....................................................26 Section 5.2 Valid and Binding Agreement..........................................................27 Section 5.3 Marital Status.......................................................................27 Section 5.4 Shareholder Agreements...............................................................27 Section 5.5 Investment Intent....................................................................27 Section 5.6 Compliance with Law..................................................................27 Section 5.7 Economic Risk; Sophistication........................................................28 Section 5.8 Information Supplied.................................................................28 Section 5.9 Accredited Investor..................................................................28 Section 5.10 Securities Legends...................................................................28 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF SBI AND THE ACQUISITION SUB.............................29 Section 6.1 Organization.........................................................................29
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TABLE OF CONTENTS Page ---- Section 6.2 Authority............................................................................29 Section 6.3 Consents and Approvals; No Violation.................................................29 Section 6.4 SEC Reports and Financial Statements.................................................30 Section 6.5 Disclosure...........................................................................30 Section 6.6 SBI Stock............................................................................30 ARTICLE VII CERTAIN COVENANTS.........................................................................30 Section 7.1 Access and Information...............................................................30 Section 7.2 Conduct of the Business of AGI pending the Closing Date..............................31 Section 7.3 Conduct of SBI Pending the Closing Date..............................................32 Section 7.4 Notices..............................................................................32 Section 7.5 Advice of Changes....................................................................33 Section 7.6 Legal Conditions.....................................................................33 Section 7.7 No Shopping..........................................................................33 Section 7.8 Best Efforts.........................................................................33 Section 7.9 Conduct of AGI following the Closing Date............................................33 ARTICLE VIII INDEMNIFICATION...........................................................................34 Section 8.1 Basic Provision......................................................................34 Section 8.2 Definitions..........................................................................35 Section 8.3 Procedures for Establishment of Deficiencies.........................................35 Section 8.4 Payment of Deficiencies..............................................................37 Section 8.5 Survival of Representations, Warranties and Agreements...............................37 Section 8.6 Limitations on Indemnification.......................................................37 ARTICLE IX CONDITIONS TO CLOSING.....................................................................38 Section 9.1 Conditions to Each Party's Obligation To Effect the Transaction......................38 Section 9.2 Conditions of Obligations of SBI and the Acquisition Sub.............................38 Section 9.3 Conditions of Obligations of AGI and the Shareholders................................40 ARTICLE X DELIVERIES................................................................................41 Section 10.1 Shareholders' Deliveries.............................................................41 Section 10.2 SBI's and the Acquisition Sub's Deliveries at Closing................................42 Section 10.3 SBI's Deliveries on Payment Date.....................................................42
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TABLE OF CONTENTS Page ---- ARTICLE XI TAX MATTERS...............................................................................42 Section 11.1 Returns for Tax Periods Ending on or Before the Closing Date.........................42 Section 11.2 Returns for Tax Periods Beginning Before and Ending After the Closing Date...........43 Section 11.3 Cooperation on Tax Matters...........................................................43 Section 11.4 S Corporation Status.................................................................43 Section 11.5 Section 338(h)(10) Election..........................................................44 Section 11.6 Certain Taxes........................................................................44 ARTICLE XII TERMINATION AND AMENDMENT.................................................................45 Section 12.1 Termination..........................................................................45 Section 12.2 Effect of Termination................................................................45 Section 12.3 Amendment............................................................................46 Section 12.4 Extension; Waiver....................................................................46 ARTICLE XIII FORM D FILING; REGISTRATION OF THE NEW SHARES.............................................46 Section 13.1 Form D Filing; Registration of New Shares............................................46 Section 13.2 Transfer of Shares After Registration................................................48 Section 13.3 Furnish Information..................................................................48 Section 13.4 Indemnification......................................................................48 ARTICLE XIV MISCELLANEOUS.............................................................................50 Section 14.1 Costs and Expenses...................................................................50 Section 14.2 Brokers or Finders...................................................................50 Section 14.3 Notices..............................................................................50 Section 14.4 Publicity............................................................................52 Section 14.5 Binding Nature of Agreement; No Assignment...........................................52 Section 14.6 Controlling Law......................................................................52 Section 14.7 Exhibits and Schedules...............................................................52 Section 14.8 Execution in Counterparts............................................................52 Section 14.9 Provisions Separable.................................................................52 Section 14.10 Entire Agreement.....................................................................53 Section 14.11 Paragraph Headings...................................................................53
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TABLE OF CONTENTS Page ---- Section 14.12 Gender, Etc..........................................................................53 Section 14.13 Knowledge of AGI and the Shareholders................................................53
v STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made as of April 30, 2002 by and among Susquehanna Bancshares, Inc., a Pennsylvania business corporation registered as a financial holding company under the Bank Holding Company Act of 1956, as amended ("SBI"), Susquehanna Acquisition, LLC, a Pennsylvania limited liability company and wholly-owned subsidiary of SBI (the "Acquisition Sub"), The Addis Group, Inc., a Pennsylvania business corporation ("AGI"), and F. Scott Addis, William D. Rhodes, III and Peter R. Unger, who constitute all of the shareholders of AGI (each individually, a "Shareholder" and collectively, the "Shareholders"). WHEREAS, SBI is a multi-state financial holding company headquartered in Lititz, Pennsylvania; WHEREAS, AGI is an insurance brokerage firm specializing in risk management consulting and placement of property and casualty coverages to medium to large-sized companies throughout the United States, principally in the Middle Atlantic states; WHEREAS, the Shareholders own all of the issued and outstanding capital stock of AGI (the "Shares"), set forth opposite their respective names on Annex I to this Agreement; and WHEREAS, the Shareholders desire to sell to the Acquisition Sub, and the Acquisition Sub desires to purchase from the Shareholders, all of the Shares for the consideration and on the terms set forth in this Agreement; NOW, THEREFORE, in consideration of the premises and of the mutual agreements, representations, warranties, provisions and covenants herein contained, and intending to be legally bound, the parties hereto hereby agree as follows: ARTICLE I SALE AND TRANSFER OF THE SHARES Section 1.1 Purchase and Sale of the Shares. (a) Subject to the terms and conditions of this Agreement, at the Closing (as defined in Section 1.2 below), the Acquisition Sub agrees to purchase from the Shareholders, and the Shareholders agree to sell to the Acquisition Sub, the Shares. In consideration therefor, SBI agrees to pay or cause Acquisition Sub to pay (i) on the day immediately following the Closing Date as defined in Section 1.2 below (the "Payment Date"), an aggregate amount of $7,000,000 in cash, plus $4,000,000 in value of shares of common stock, par value $2.00 per share, of SBI (the "SBI Stock"), valued at the Average Closing Price (as defined below) (except that in no event shall SBI be required to issue a number of shares of the SBI Stock representing greater than 19.9% of the currently outstanding shares of the SBI Stock as of the Closing Date at a price less than the greater of book or market value of the SBI Stock), plus (ii) the Contingent Consideration (as defined in Section 2.2 below). In the event the 19.9% limitation set forth in the immediately preceding sentence results in the Shareholders receiving SBI Stock having an aggregate value of less than $4,000,000 valued at the Average Closing Price, then on the Payment Date the cash to be paid to the Shareholders shall be increased by an amount equal to the difference between $7,000,000 and the value of the SBI Stock issued to the Shareholders. The cash and the SBI Stock to be paid on the Payment Date in consideration for the sale of the Shares shall be referred to collectively as the "Base Consideration" and shall be subject to adjustment as provided in Section 2.1 below. For purposes of this Section 1.1, the "Average Closing Price" shall mean the amount per share of SBI Stock equal to the average of the closing sale price of the SBI Stock for the 10 trading days prior to the day immediately preceding the Closing Date reported by the Nasdaq National Market (or the facilities of any national securities exchange or over-the-counter market on which the SBI Stock is then traded). (b) On the Payment Date, each Shareholder shall, subject to Article III, be entitled to receive, in payment for the Shares owned by such Shareholder, (i) a percentage of the cash portion of the Base Consideration that is equal to the percentage ownership of such Shareholder in AGI as set forth in Annex I hereto, and (ii) a certificate or certificates registered in the name of such Shareholder representing that number of whole shares of SBI Stock equal to the stock portion of the Base Consideration that is equal to the percentage ownership of such Shareholder in AGI as set forth in Annex I hereto. Section 1.2 Closing. The closing of the transactions contemplated herein (the "Closing") will take place at the offices of Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, PA 19103 (or such other place as the parties hereto may agree) on the next business day (or such later date as the parties hereto may agree) following the first business day on which the last to be fulfilled or waived of the closing conditions set forth in Article IX shall be fulfilled or waived in accordance herewith. The date on which the Closing occurs is hereinafter referred to as the "Closing Date." Section 1.3 Closing Deliveries. (a) At the Closing, the Shareholders shall deliver to SBI, free and clear of all liens, claims, charges, restrictions, equities, or encumbrances thereon, the certificates representing all of the Shares, accompanied by blank stock powers duly executed with all necessary transfer tax and other revenue stamps affixed and canceled, and, in consideration therefor, on the Payment Date, SBI shall deliver to the Shareholders the Base Consideration. (b) In the event any certificates for the Shares shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such certificate to be lost, stolen or destroyed and, if requested by SBI, the posting by such person of a bond in such amount as SBI may direct as indemnity against any claim that may be made against it or AGI with respect to such certificate, SBI will pay or deliver the Base Consideration in exchange for such lost, stolen or destroyed certificate into which such certificate. Section 1.4 No Fractional Shares. Notwithstanding any other provision of this Article I, no fractional shares of SBI Stock will be issued and any holder of the Shares entitled hereunder to receive a fractional share of SBI Stock but for this Section 1.4 will be entitled hereunder to receive in lieu of such fractional share a cash payment equal to the value of such fractional share valued at the Average Closing Price. 2 Section 1.5 Shareholder Representative. Simultaneously with the execution of this Agreement, each of the Shareholders hereby appoints F. Scott Addis as his agent and as his true and lawful attorney in fact (the "Shareholder Representative"), for such Shareholder and in such Shareholder's name (i) to hold each of the Shares held by such Shareholder and deliver the same to SBI at Closing, and (ii) to act on behalf of such Shareholder at the Closing in connection with any and all issues that may arise at Closing in connection with the transactions contemplated by this Agreement and to execute and deliver all instruments and documents or every kind incident thereto. This power of attorney is coupled with an interest as provided by applicable law and shall survive bankruptcy or mental incapacity of each Shareholder to the extent that such Shareholder may legally contract for such survival. All parties to this Agreement and any person to whom any of the agreements, undertakings, consents and other documents referred to in this Agreement relate may conclusively presume and rely upon this power of attorney without further inquiry. This appointment of the Shareholder Representative may only be revoked in a writing which shall name a successor who agrees to be bound by the terms of this Agreement and shall be signed by a majority of the Shareholders. ARTICLE II POST-CLOSING ADJUSTMENT; CONTINGENT CONSIDERATION Section 2.1 Post-Closing Adjustment. (a) Within sixty (60) calendar days following the Closing Date, SBI at its own expense, shall cause PricewaterhouseCoopers ("SBI's Accountant") to audit (the "Post-Closing Audit") the books of AGI to determine the accuracy of the information set forth in the AGI Closing Financial Certificate (as defined in Section 9.2(j) herein). In the course of the Post-Closing Audit, SBI's Accountant shall apply generally accepted accounting principles consistently applied throughout the periods involved ("GAAP"), subject to the treatment of contingencies and direct bill receivables required by Section 7.9(d) of this Agreement. The Shareholders shall cooperate with SBI and SBI's Accountant in furnishing information, documents, evidence and other assistance to SBI's Accountant to facilitate the completion of the Post-Closing Audit. In the event that SBI's Accountant determines that (i) the actual Working Capital (as defined below) of AGI on the Closing Date was less than $1,000, (ii) AGI had long term liabilities on the Closing Date, or (iii) the actual Tangible Net Worth (as defined below) of AGI on the Closing Date was less than $100,000 (each of (i) - (iii) a "Financial Requirement Deficiency" and together "Financial Requirement Deficiencies") or that the actual Tangible Net Worth of AGI on the Closing Date was greater than $100,000 (such difference the "Excess Tangible Net Worth"), then SBI shall promptly deliver a written notice to that effect with supporting documentation to the Shareholder Representative setting forth such Financial Requirement Deficiency or Deficiencies of AGI and/or any Excess Tangible Net Worth, as the case may be, on the Closing Date ("Adjustment Notice"). As used in this agreement, "Working Capital" means current assets less current liabilities and "Tangible Net Worth" means total assets (excluding all intangible items) less total liabilities; also provided that, any receivables relating to loans to employees will be excluded from assets. (b) As soon as practicable, but in any event within thirty (30) calendar days of receipt of the Adjustment Notice from SBI, the Shareholders may cause their accountant(s), at such Shareholders' sole expense, to provide a report to SBI indicating their agreement or objections to the Adjustment Notice. Any such objections shall be set forth in reasonable detail 3 in a report (the "Shareholders' Report") that shall indicate the grounds upon which the Shareholders' accountant disputes the calculation of the Financial Requirement Deficiencies and/or the Excess Tangible Net Worth in the Adjustment Notice. (c) (i) Within fifteen (15) calendar days of the receipt by SBI of the Shareholders' Report, the Shareholder Representative and SBI shall endeavor to agree on any matters in dispute. (ii) If SBI and the Shareholder Representative are unable to agree on any matters in dispute within 15 calendar days after receipt of the Shareholders' Report, the matters in dispute will be submitted for resolution to an accounting firm of national reputation (excluding each of SBI's and the Shareholders' respective regular outside accounting firms) as may be mutually acceptable to the Shareholder Representative and SBI; provided, however, that in the event that SBI and the Shareholder Representative are unable to agree on such an accounting firm within ten (10) calendar days, then the accounting firm shall be selected by lot. Any accounting firm agreed to or chosen pursuant to this Section 2.1(c)(ii) is referred to, for purposes of this Section 2.1, as the "Accountants". Within thirty (30) calendar days of such submission, the Accountants shall determine and issue a written report to the Shareholder Representative and SBI upon such disputed items and such written decision shall be final and binding upon the parties. If a dispute is submitted to the Accountants for resolution, SBI and the Shareholder Representative: (i) will exchange and furnish or make available to the Accountants at reasonable times and upon reasonable notice, the Post-Closing Audit report and Financial Requirement Deficiency and/or Excess Tangible Net Worth calculations, and such financial statements, work papers and other documents and information relating to the disputed issues as the Accountants may request and are available to that party (or its independent public accountants), including supporting schedules, work papers and back up materials used in preparing the Financial Requirement Deficiency and/or Excess Tangible Net Worth calculations, the books, records, and financial staff of AGI, the parties' accountants, and summaries by SBI and the Shareholder Representative of their resolution of any objections thereto; and (ii) will be afforded the opportunity to present to the Accountants any material relating to the Accountants' determination, and to discuss with the Accountants in a hearing with all parties present, the Accountants' determination. The role of the Accountants will be to determine whether SBI properly performed the Post-Closing Audit and accounted for and calculated the Financial Requirement Deficiencies and/or Excess Tangible Net Worth in accordance with this Agreement. The fees and disbursements of the Accountants shall be shared equally by the Shareholders and SBI. (iii) The Financial Requirement Deficiencies of AGI and the Excess Tangible Net Worth of AGI, determined after resolution of matters in dispute (if any), are referred to as the "Actual Financial Requirement Deficiencies" and the "Actual Excess Tangible Net Worth," respectively. The Actual Financial Requirement Deficiencies and the Actual Excess Tangible Net Worth have the legal effect of an arbitral award and shall be final, binding and conclusive on the parties hereto. (iv) In acting under this Agreement, the Shareholders' accountants, SBI's accountant and the Accountants shall be entitled to the privileges and immunities of arbitrators. 4 (d) The Base Consideration pursuant to Section 1.1 shall be (x) reduced by an aggregate amount of deficiencies (the "Post-Closing Adjustment") equal to the sum of (A), (B) and (C) and (y) increased by the amount of (D) (collectively, the "Post Closing Adjustment"), where (A), (B), (C) and (D) shall be as follows: (A) any shortfall between the actual Working Capital of AGI on the Closing Date and $1,000; (B) any long term liabilities of AGI on the Closing Date; (C) any shortfall between the actual Tangible Net Worth of AGI on the Closing Date and $100,000; and (D) any Excess Tangible Net Worth. Notwithstanding the foregoing, no increase in the Base Consideration shall be payable pursuant to clause (D) to the extent the payment of any such increase would result in any deficiencies pursuant to clauses (A), (B) or (C), after taking into account any payments of increased amounts in Base Consideration that would otherwise occur. (e) In the event any Post-Closing Adjustment results in a reduction of the Base Consideration, within five (5) business days after notification of the amount of the Post-Closing Adjustment, each Shareholder shall pay to SBI his Proportionate Share (as defined below) of the Post-Closing Adjustment, which payment may be made, at the election of each respective Shareholder, in cash or in shares of SBI Stock issued as part of the Base Consideration valued at the Average Closing Price; and in the event any Post-Closing Adjustment results in an increase of the Base Consideration, within five (5) business days after notification of the amount of the Post-Closing Adjustment, SBI shall pay to each Shareholder his Proportionate Share of the Post-Closing Adjustment, which payment may be made, at the election of SBI, in cash or in additional shares of SBI Stock valued at the Average Closing Price which additional cash or shares shall be treated as part of the Base Consideration. Such "Proportionate Share" shall be such percentage of the Post-Closing Adjustment that is equal to the percentage ownership interest of such Shareholder in AGI as set forth on Annex I hereto. If any Shareholder fails to promptly make payment of an amount due SBI, SBI shall have the right to offset the amount of such payment by a claim against any payments of the Contingent Consideration to which such Shareholder may become entitled in accordance with Section 2.2. Any amount still not collected from such Shareholder shall remain the personal obligation of that Shareholder. Any amounts not paid by any Shareholder when due shall bear interest from the Closing Date until the date of payment at an annual rate equal to the prime rate, in effect from time to time, as reported in The Wall Street Journal. Section 2.2 Contingent Consideration. In addition to the Base Consideration as set forth in Section 1.1 above, the Shareholders shall be entitled to receive additional consideration for the Shares (allocated pro rata in accordance with each Shareholder's percentage ownership interest in AGI as set forth on Annex I hereto) in the form of cash payments in an aggregate maximum amount of $6,000,000 (the "Contingent Consideration"). Such Contingent Consideration shall be calculated in accordance with Section 2.3 below and paid or caused to be paid by SBI when and if earned each Fiscal Year (defined below) until the maximum amount of the Contingent Consideration has been paid pursuant to this Agreement whether or not the Shareholders continue to be employed by AGI; provided, however, that, except as otherwise 5 provided in this Agreement, a maximum of $4,000,000 of the Contingent Consideration may be earned during the first four Fiscal Years, and any Contingent Consideration not earned during the first four Fiscal Years may be earned in any Fiscal Year(s) thereafter. For the purposes of this Agreement, the term "Fiscal Year" shall mean a twelve-month period beginning on the first day of the month in which the Closing occurs. Section 2.3 Calculation of Contingent Consideration. (a) The Contingent Consideration for a Fiscal Year shall be determined by taking AGI's Adjusted Pre-tax Profit (hereinafter defined) in excess of $2,000,000 ("Excess Earnings") and multiplying such Excess Earnings by 5, then deducting from that result all amounts previously paid as Contingent Consideration for prior Fiscal Year(s). "Pre-tax Profit" means for a Fiscal Year, AGI's income before provision for income taxes, determined in accordance with GAAP, subject to the treatment of contingencies and direct bill receivables required by Section 7.9(e) of this Agreement, and "Adjusted Pre-tax Profit" means, for any Fiscal Year, the figure obtained after making additions and adjustments to Pre-tax Profit for any applicable items set forth in subsections (b) and (c). (b) In calculating Adjusted Pre-tax Profit, the following adjustments shall be made: (x) the following items shall be eliminated and not taken as expenses in this calculation: (i) management fees or similar charges or expenses imposed by SBI; provided, however, that charges by SBI for reasonable and necessary business products or services of the type customarily purchased by AGI that can be provided to AGI by SBI (for example, insurance or auditing) may be allowed as expenses for up to the amount paid to third parties by AGI for such products or services in the past, plus moderate vendor induced increases, with only the excess being eliminated; (ii) allocation of any overhead by SBI or affiliates thereof; (iii) amortization of goodwill or other intangible assets; (iv) income taxes; (v) any indemnification payments by AGI to the Escrow Agent pursuant to the provisions of the Escrow Agreement (as hereinafter defined); (vi) any costs and expenses, including, without limitation, for the payment of premiums, incurred in connection with obtaining and maintaining life insurance coverage on the lives of one or more of the Shareholders to the extent the benefits of such coverage are payable to SBI, AGI, or any affiliate of SBI or AGI; and (vii) any interest payable on intercompany subordinated debt issued to SBI or any affiliate of SBI in connection with the purchase of the Shares; (y) the following item shall be added and included as revenue in this calculation: an amount equal to the foregone opportunity cost of any interest that would have been earned by AGI on funds that shall have been paid or transferred, at any time from and after the Closing Date, by AGI to SBI in the form of dividends or in the form of management fees or other charges or expenses described in clauses (x)(i) (but only to the extent the amount is required to be eliminated from expenses), (ii) and (vi) above and any principal and interest payments associated with clause (x)(vii) above (together, the "Transfers"), shall be added to Pre-tax Profit; provided, however, that to the extent that AGI has received a tax benefit in the Fiscal Year for which Pre-tax Profit is being determined in connection with the Section 338(h)(10) Election (as defined in Section 11.5 hereof) due to amortization of purchase price, then only aggregate dividend payments in excess of such amount per Fiscal Year shall be deemed to be 6 Transfers (up to a maximum amount of $233,000). Such foregone opportunity costs shall be determined by multiplying (A) the average prime rate, as reported from time to time in The Wall Street Journal, eastern edition, for the Fiscal Year for which Pre-tax Profit is being determined (the "Prime Rate"), by (B) the aggregate amount of (1) any Transfers made during the Fiscal Year for which Pre-tax Profit is being determined, pro rated for the portion of the Fiscal Year between the date on which such Transfer is paid and last day of such Fiscal Year, plus (2) any Transfers made prior to the Fiscal Year for which Pre-tax Profit is being determined; and (z) an amount equal to the imputed cost of any capital funds supplied to AGI by SBI, whether in the form of equity or debt (the "Capital Funds"), shall be taken as an expense in the determination of Pre-tax Profit. Such imputed cost shall be determined by multiplying (A) the Prime Rate, by (B) the aggregate amount of (1) Capital Funds supplied during the Fiscal Year for which Pre-tax Profit is being determined, pro rated for the portion of the Fiscal Year between the date on which such Capital Funds are paid or issued and the last day of such Fiscal Year, plus (2) any Capital Funds paid or issued prior to the Fiscal Year for which Pre-tax Profit is being determined. (c) Pre-tax Profit also shall be adjusted for the net amount of all unusual and infrequently occurring items (including but not limited to items set forth below) as follows: (i) if the net amount of such items plus carryovers from prior Fiscal Years resulting from the application of this subsection is equal to or less than $100,000 (whether revenue or expense) in any Fiscal Year, then the full amount thereof shall be included in the determination of Pre-tax Profit for the Fiscal Year; or (ii) if the net amount of such items plus carryovers from prior Fiscal Years is greater than $100,000 (whether revenue or expense), then the amount above $100,000 (whether revenue or expense) shall be eliminated from the calculation of Pre-tax Profit for the current Fiscal Year and carried over into the next Fiscal Year. Unusual and infrequently occurring items subject to this subparagraph (c) shall include but not be limited to (i) extraordinary items as defined by GAAP, (ii) correction of errors, and (iii) changes in GAAP. (d) Upon the earlier of (i) the completion of the Fiscal Year end review of the books and records of AGI; or (ii) sixty days following the Fiscal Year end (the "Calculation Date"), SBI shall, in accordance with Section 2.5 below, notify the Shareholder Representative of the aggregate amount of the Contingent Consideration earned, if any. Section 2.4 Change of Control. In the event, prior to the fifth anniversary of this Agreement, of (a) a Change of Control (as hereinafter defined) of SBI, or (b) a sale of SBI's retail banking business or other material change in the nature of SBI's business that is reasonably likely to have a material adverse effect on the performance of AGI, or (c) a breach of any covenant of SBI contained in Section 7.9 hereof (each an "Acceleration Event"), $3,000,000 of the Contingent Consideration, less any amounts previously paid as Contingent Consideration payments and amounts properly retained by SBI to satisfy any Post-Closing Adjustment or Deficiency (as defined in Article VIII), shall become immediately payable to the Shareholders. In addition, if an Acceleration Event occurs prior to the fifth anniversary of this Agreement, and any prior Contingent Consideration pay-out was limited by the $4,000,000 maximum during the first four Fiscal Years as provided under Section 2.2 above, then the amount of Contingent Consideration that would have otherwise been paid if not for such limitation shall also become immediately payable to the Shareholders. For purposes of this Agreement, a "Change of 7 Control" shall mean (i) a merger, consolidation, or other corporate reorganization or combination in which 50% or more of the voting power of SBI is transferred or which results in SBI, directly or indirectly, owning less than 50% of the voting power of AGI; (ii) the acquisition of a majority of the outstanding equity interests of SBI by a single person or entity by means of any transaction or series of related transactions; or (iii) a sale of all or substantially all of the assets of SBI in one or more related transactions. Any Contingent Consideration that has not been earned prior to or as the result of an Acceleration Event shall continue to be available to be earned by the Shareholders pursuant to the terms of this Agreement; provided that, for purposes of determining whether any Contingent Consideration is earned for the Fiscal Year in which the Acceleration Event occurs, the Pre-tax Profit for such Fiscal Year shall include all income for such Fiscal Year whether earned prior to or following the Acceleration Event. Section 2.5 Notice of Contingent Consideration. Each year on the Calculation Date, SBI shall provide the Shareholder Representative, notice of its calculation, with supporting financial statements and appropriate explanations when reasonably requested, of the Contingent Consideration payment for the applicable Fiscal Year ("Calculation Notice"). (a) If the Shareholder Representative has not given SBI written notice of an objection to the Contingent Consideration calculation within thirty (30) calendar days following receipt of the Calculation Notice, then the amount set forth in the Calculation Notice will be deemed the Contingent Consideration payment for the applicable Fiscal Year and SBI shall pay such amount to the Shareholders within forty-five (45) calendar days of receipt of such notice. Any such payments due to the Shareholders with respect to the applicable Fiscal Year shall be allocated and distributed to the Shareholders on a pro rata basis based on each Shareholder's percentage ownership interest in AGI as set forth on Annex I hereto. (b) If the Shareholder Representative has any objections to the Calculation Notice, then he must provide SBI with written notice of the objections within thirty (30) days following his receipt of the Calculation Notice. The written notice must describe in reasonable detail the manner in which SBI allegedly failed to account for or calculate the Contingent Consideration in accordance with this Agreement. Except with respect to fraud, bad faith or willful misconduct by SBI, the Shareholder Representative and the Shareholders will be precluded from later raising any objection to the Contingent Consideration that is not raised within this thirty-day period. (c) SBI and the Shareholder Representative will use reasonable efforts to resolve any objections to the Contingent Consideration calculation. If SBI and the Shareholder Representative do not resolve the objections within thirty (30) calendar days after SBI's receipt of the Shareholder Representative's written notice of objections, then the matter in dispute will be submitted for resolution to an independent accounting firm of national reputation (excluding each of SBI's and the Shareholder's or AGI's respective regular outside accounting firms) as may be mutually acceptable to SBI and the Shareholder Representative; provided, however, that in the event SBI and the Shareholder Representative are unable to agree on such an accounting firm within ten (10) calendar days, then the accounting firm shall be selected by lot. Any accounting firm agreed to or chosen pursuant to this Section 2.5(c) is hereinafter referred to, for purposes of this Section 2.5, as the "Accountants." The Shareholder Representative shall be under no obligation to initiate a determination by the Accountants unless and until some or all of 8 the Shareholders agree in writing to pay any fees and expenses incurred in accordance with this Section 2.5(c), and deposit with the Shareholder Representative such amount of money as he or she shall consider sufficient in his or her reasonable judgment to cover the estimated amount of such fees and expenses. If a dispute is submitted to the Accountants for resolution, SBI and the Shareholder Representative: (i) will exchange and furnish or make available to the Accountants at reasonable times and upon reasonable notice, the Contingent Consideration calculations, and such financial statements, work papers and other documents and information relating to the disputed issues as the Accountants may request and are available to that party (or its independent public accountants), including supporting schedules, work papers and back up materials used in preparing the Contingent Consideration calculation, the books, records, and financial staff of AGI, the parties' accountants, and summaries by AGI and the Shareholder Representative of their resolution of any objections thereto; and (ii) will be afforded the opportunity to present to the Accountants any material relating to the Accountants' determination, and to discuss with the Accountants in a hearing with all parties present, the Accountants' determination. The role of the Accountants will be to determine whether SBI properly accounted for and calculated the Contingent Consideration in accordance with this Agreement. If the Accountants determine that any disputed items resulted in an incorrect determination of the Contingent Consideration, then the Accountants will recalculate the Contingent Consideration for the applicable Fiscal Year and so notify SBI and the Shareholder Representative. The Accountants' determination of the Contingent Consideration for the Fiscal Year in question, as set forth in a notice delivered to both parties by the Accountants, will be binding and conclusive on the parties, and the amount so determined shall be paid by SBI within thirty (30) days of delivery of such notice. (d) If the Shareholder Representative in good faith submits any dispute to the Accountants for resolution as provided in this Section 2.5 and the Accountants determine that SBI's calculation of Contingent Consideration was understated, then the fees and expenses of the Accountants, SBI and the Shareholder Representative shall be paid by SBI; otherwise, all such fees and expenses shall be paid by the Shareholder Representative from the deposit provided for above and, if the deposit is insufficient, the excess shall be paid by those Shareholders who agreed to pay such fees and expenses. ARTICLE III ESCROW Section 3.1 Creation of Escrow. (a) On the Payment Date, the Shareholders shall deliver to a bank escrow agent (the "Escrow Agent") the SBI Stock issued as part of the Base Consideration (the "Escrow Property"). The Escrow Agent shall be selected by SBI and the Shareholder Representative prior to the Closing. (b) In addition to the assets to be delivered to the Escrow Agent pursuant to Section 3.1(a), the Escrow Property shall include all cash and non-cash dividends and other property at any time received or otherwise distributed in respect of or in exchange for any or all of the Escrow Property, all securities hereafter issued in substitution for any of the foregoing, all certificates and instruments representing or evidencing such securities, all cash and non-cash 9 proceeds of all of the foregoing property and all rights, titles, interests, privileges and preferences appertaining or incident to the foregoing property. Section 3.2 Duration and Terms. The Escrow Property shall be held and disbursed by the Escrow Agent in accordance with the terms of an Escrow Agreement substantially in the form attached hereto as Exhibit A. The Escrow Agent shall hold the Escrow Property pursuant to the Escrow Agreement until the later of the (a) fifth anniversary of the date of the Escrow Agreement (the "Escrow Termination Date"); and (b) the resolution of any claim for indemnification or payment that is pending after the Escrow Termination Date, but only to the extent of the amount of such pending claim and only to the extent such claim may be satisfied out of the Escrow Property pursuant to the Escrow Agreement. Section 3.3 Voting and Investment. The Shareholders shall be entitled to exercise all voting powers incident to the shares of SBI Stock held by the Escrow Agent as their nominee, and shall be entitled to elect to convert or exchange such SBI Stock into such other investment property as permitted under the terms of the Escrow Agreement (the "Permitted Investments"). The Permitted Investments shall be held pursuant to the terms of the Escrow Agreement. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF AGI AND THE SHAREHOLDERS As of the date hereof and as of the Closing Date, AGI and each Shareholder, jointly and severally, represents and warrants to SBI and the Acquisition Sub as follows: Section 4.1 Organization. (a) AGI is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania and has all requisite corporate power and corporate authority and all necessary governmental approvals to own, lease and operate its properties, and to carry on its business in the places and in the manner as presently conducted, to enter into this Agreement and the other documents and instruments to be executed and delivered by it pursuant hereto and to carry out the transactions contemplated hereby and thereby. AGI is duly licensed or qualified to do business as a foreign corporation and is in good standing in all jurisdictions wherein the character of the properties owned or leased or the nature of its business make such qualification to do business necessary, except for those jurisdictions where the failure to be so qualified would not have a material adverse effect. Schedule 4.1(a) lists all of the jurisdictions in which AGI is qualified to do business. AGI has delivered to SBI true and correct copies of its Articles of Incorporation and Bylaws, each as in effect on the date hereof. (b) AGI has all federal, state, local and foreign governmental licenses, permits, or registrations required for its business as currently conducted, except where the absence would not have a material adverse effect. Schedule 4.1(b) lists all of such licenses, permits or registrations currently in effect, the applicable jurisdictions, and the date of expiration, if any. All of such licenses, permits or registrations are in full force and effect, no violations have occurred or been asserted with respect thereto, and no material change in the facts or circumstances reported or assumed in any documents submitted by AGI in connection with any 10 such license, permit or registration has occurred which would require an amendment of such document, license, permit or registration. (c) AGI is not, and has never been, registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and is not, and has never been, registered as a broker/dealer under the Securities Exchange Act of 1934, as amended (the "1934 Act"). (d) AGI is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"), which is required to be registered under the 1940 Act in order to engage in the transactions described in Section 6 of the 1940 Act. AGI does not act as an investment advisor or subadvisor to any "investment company," as defined in the 1940 Act, which is registered under the 1940 Act. (e) Schedule 4.1(e) contains a complete list of all of the directors and officers of AGI as of the date hereof. (f) There is no pending or, to the knowledge of AGI or the Shareholders, any threatened claim or litigation against AGI (nor to the knowledge of AGI or the Shareholders does there exist any basis therefor) contesting the validity of or right to use the "The Addis Group" name as currently used by AGI as its corporate name in connection with its business activities, nor has AGI received any notice that its use of its respective name conflicts, with the asserted rights of others. AGI does not use and has not used any fictitious name other than the name "Garno & Addis." (g) Except as set forth on Schedule 4.1(g), AGI does not own any capital stock or other equity interest of any corporation, has no direct or indirect equity or ownership interest in, by way of stock ownership or otherwise, any corporation, partnership, joint venture, association or business enterprise and is not contemplating acquiring any such interest. Section 4.2 Capitalization. (a) The authorized capital stock of AGI consists of 100,000 shares of common stock, par value $0.001 per share, of which 25,000 shares are issued and outstanding. No other shares of capital stock are authorized, issued or outstanding. All of the Shares are validly issued, fully paid and nonassessable and not subject to any preemptive rights. There are no existing options, warrants, calls, subscriptions or other rights or other agreements or commitments of any character relating to the issued or unissued capital stock of AGI, and, as of the date hereof, there are no outstanding contractual obligations of AGI to repurchase, redeem or otherwise acquire any shares of its capital stock. (b) AGI has not acquired any treasury stock. No option, warrant, call, conversion right or commitment of any kind exists which obligates AGI to issue any of its authorized but unissued capital stock. There are no agreements or commitments of any character (including voting agreements) relating to the issued or unissued capital stock of AGI, and AGI has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any of its equity securities or any interests therein or to pay any dividend or make any distribution in respect thereof. 11 Section 4.3 Authority. The execution, delivery and performance by AGI of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of AGI, and no other corporate proceedings on the part of AGI are necessary to authorize this Agreement or to consummate the transactions so contemplated. Section 4.4 Consents and Approvals; No Violations. This Agreement, the Escrow Agreement, the Employment Agreements and the Incentive Compensation Agreement (as defined in Section 9.2(i)) constitute, or when executed and delivered will constitute, valid and binding agreements of AGI and are enforceable in accordance with their terms, and the execution and delivery of this Agreement, the Escrow Agreement, the Employment Agreements and the Incentive Compensation Agreement, and the consummation of the transactions contemplated hereby do not or will not (i) conflict or result in a breach of any provision of the Articles of Incorporation or Bylaws of AGI, (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any of the AGI Agreements (as defined in Section 4.12), note, bond, mortgage, indenture, lease or license to which AGI is a party or by which any of its properties or assets may be bound or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to AGI or any of its properties or assets. No permit, authorization, consent or approval of, any court or other adjudicatory body, administrative agency or commission or other governmental or regulatory authority or agency is required in connection with the execution, delivery or performance by AGI of this Agreement, the Escrow Agreement the Employment Agreements, the Incentive Compensation Agreement or the consummation of the transactions contemplated hereby. Section 4.5 Subsidiaries; Predecessor Status; Spin-Offs. AGI has no subsidiaries or commonly controlled entities and is not a participant in any joint venture, partnership or other noncorporate entity. There are no predecessor companies of AGI and no entities from whom AGI previously acquired significant assets. AGI has never been a subsidiary or division of another corporation or been a part of an acquisition that was later rescinded. There has not been any sale or spin-off of significant assets of AGI other than (a) AGI's risk management advisory services business ("Risk Check") or (b) in the ordinary course of business. Section 4.6 No Third Party Options . Except as set forth on Schedule 4.6, there are no existing agreements, options, commitments or rights with, of or to any person for that person to acquire any properties, assets or rights of AGI or any interest therein. Section 4.7 Financial Statements. (a) AGI has delivered to SBI the reviewed financial statements, including notes thereto, of AGI for the years ended December 31, 2000 and 1999 accompanied by the report of Ernst & Young LLP with respect thereto (the "Financial Statements"). The Financial Statements have been prepared in accordance with GAAP consistently applied throughout the periods involved. All of the balance sheets included in the Financial Statements, including the related notes, fairly present, in all material respects, the assets, liabilities (whether accrued, absolute, contingent or otherwise) and financial condition of AGI on a consolidated basis at the dates indicated and the corresponding results of operations, retained earnings and cash flows for 12 the periods indicated were prepared in accordance with GAAP consistently applied throughout the periods involved. In addition, AGI has delivered unaudited financial statements for the twelve months ended December 31, 2001, which were prepared on a basis consistent with the reviewed financial statements of AGI, subject to normal, recurring year-end adjustments, including a balance sheet at December 31, 2001 (the "AGI Balance Sheet," and the date of such AGI Balance Sheet is referred to herein as the "AGI Balance Sheet Date"). (b) AGI has not received any management letters from its outside auditors relating to the Financial Statements. Section 4.8 Title to Assets, Properties, Interests in Properties, Rights and Related Matters. (a) AGI has good title to all of its properties, interest in properties, and assets, free and clear of any mortgages, pledges, liens, security interests, conditional and installment sale agreements, right of first refusal or similar claims or encumbrances or charges of any kind other than (i) any such claim or encumbrance as disclosed in the notes to the Financial Statements; (ii) the lien of current taxes not yet due and payable; (iii) properties, interests and assets that are leased or have been disposed of by AGI since the AGI Balance Sheet Date, in the ordinary course of business consistent with past practice; and (iv) such imperfections of title, easements and encumbrances, if any, as are not substantial in character, amount or extent and do not materially detract from the value, or interfere with the present or proposed use, of the properties subject thereto. (b) The assets and properties of AGI constitute the rights, properties and assets (tangible or intangible) necessary for the conduct of its business as currently conducted. (c) AGI owns no real property. Section 4.9 Absence of Certain Changes. Since the AGI Balance Sheet Date, AGI has not experienced, nor to the knowledge of AGI or the Shareholders, has there been threatened, any material adverse change in its condition (financial or otherwise), assets, liabilities (absolute, accrued, contingent or otherwise), business, or operations of AGI, nor has any customer material to the conduct of the business of AGI or its financial condition or prospects, to the knowledge of AGI or the Shareholders, threatened to terminate its relationship with AGI. Section 4.10 Absence of Undisclosed Liabilities. Except to the extent set forth in the AGI Balance Sheet, AGI has no material liabilities or obligations of any nature, whether or not accrued, contingent or otherwise, that would be required by GAAP to be reflected on its balance sheet (including the notes thereto), and it does not have any material claims by or debts, liabilities or obligations to or any alleged material claims by or debts, liabilities or obligations to any party, including but not limited to claims made by governmental authorities for taxes or otherwise, except for (x) liabilities expressly disclosed in this Agreement and in the Exhibits or Schedules hereto and (y) liabilities incurred between the date of this Agreement and the Closing Date, the occurrence of which is not in violation of the provisions of this Agreement. Section 4.11 Legal Proceedings. There are no claims, actions, suits, orders, proceedings or investigations pending or, to the knowledge of AGI or the Shareholders, 13 threatened by or against AGI at law or in equity or before or by any federal, state or municipal or other governmental department, commission, board, agency, instrumentality or authority. There is no valid basis known to AGI for any such claims, actions, suits, orders, proceedings or investigations, which if adversely determined could have a material adverse effect on AGI or the ability of AGI to consummate the transactions contemplated hereby. There are no judgments, decrees, injunctions or orders of any court or governmental department or agency outstanding against AGI. Section 4.12 Contracts, Leases, Agreements and Other Commitments. (a) Schedule 4.12(a) contains an accurate list of all commitments, contracts, leases and agreements to which AGI is a party or by which it is bound which involves a commitment or obligation in excess of $10,000 in the aggregate for each such commitment contract, lease or agreement or is otherwise material to the business of AGI (including, without limitation, joint venture or partnership agreements, employment agreements, contracts, tenant leases, equipment leases, equipment maintenance agreements, agreements with municipalities and labor organizations, loan agreements, bonds, mortgages, liens or other security agreements) (the "AGI Agreements"). AGI has delivered true, correct and complete copies of such agreements to SBI. Except as set forth in Schedule 4.12(a) attached hereto, as of the date of this Agreement, AGI is not a party to, or bound by, any oral or written: (i) contract, agreement or commitment with any consultant or independent contractor not terminable on thirty (30) days' or less notice involving the payment of more than $10,000 per annum, in the case of any such agreement; (ii) agreement with any officer or other key employee the benefits of which are contingent, or the terms of which are materially altered, upon the occurrence of a transaction of the nature contemplated by this Agreement; (iii) agreement with respect to any officer providing any term of employment or compensation guarantee extending for a period longer than one year or for a payment in excess of $50,000; (iv) agreement or plan, including any stock option plan, stock appreciation rights plan, employee stock ownership plan, restricted stock plan or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement; (v) agreement containing covenants that limit its ability to compete in any line of business or with any person, or that involve any restriction on the geographic area in which, or method by which, it may carry on its business (other than as may be required by law or any regulatory agency); (vi) agreement, contract or understanding, other than this Agreement, regarding its capital stock or committing to dispose of substantially all of its assets; 14 (vii) collective bargaining agreement, contract, or other agreement or understanding with a labor union or labor organization; (viii) employment contract or any other contract, agreement or commitment to or with individual employees or agents of AGI which involves a commitment or obligation in excess of $50,000 in the aggregate for each such contract, agreement or commitment; (ix) power of attorney given by AGI; (x) contract or commitment providing for payments based in any manner on the revenues or profits of AGI; (xi) contract under which AGI has agreed (i) to maintain the confidentiality of third party information, (ii) not to compete or solicit for hire employees of a third party or (iii) to otherwise limit or restrict its operations; (xii) instrument relating to indebtedness for borrowed money, including any note, bond, deed of trust, mortgage, indenture or agreement to borrow money or any agreement of guarantee or indemnification, whether written or oral, in favor of any person or entity; or (xiii) other contract or commitment, whether in the ordinary course of business or not, which involves future payments, performance of services or delivery of goods or materials, to or by AGI of any amount or value in excess of $50,000 in the aggregate for each such contract or commitment. (b) The AGI Agreements constitute valid and legally binding obligations of AGI and are enforceable in accordance with their terms, assuming due authorization, execution and delivery by parties other than AGI. (c) Each AGI Agreement constitutes the entire agreement by and between the respective parties thereto with respect to the subject matter thereof. (d) All obligations previously required to be performed under the terms of the AGI Agreements have been performed by AGI and, to AGI's and the Shareholders' knowledge, by the other parties thereto, and no act or omission has occurred or failed to occur which, with the giving of notice, the lapse of time or both would constitute a default by AGI under the AGI Agreements. (e) Except as expressly set forth on Schedule 4.12(e), none of the AGI Agreements contains any provision that requires the consent of the other parties thereto in order for it to be in full force and effect with respect to AGI upon consummation of the transactions contemplated under this Agreement or that would give rise to the other party's right to terminate any AGI Agreement as a result of the consummation of the transactions contemplated under this Agreement; and AGI will use its best efforts to obtain any required consents prior to the Closing. Except as expressly set forth on Schedule 4.12(e), AGI has no plans, programs, commitments or arrangements to which it is a party, or to which it is subject, pursuant to which payments may be 15 required or acceleration of benefits may be required upon change of control of AGI or the consummation of the transactions contemplated under this Agreement. Section 4.13 Insurance. Schedule 4.13 is a summary of all insurance policies maintained by AGI (specifying, among other things, the insurer, type of insurance, amount of coverage and policy number). Such policies are in full force and effect and all premiums with respect to such policies are currently paid. AGI has not been denied or had revoked or rescinded any policy of insurance or received any notice of intent to cancel or not renew during the past three years. Section 4.14 Benefit Plans. (a) Schedule 4.14 contains a complete list of all pension, retirement, stock option, stock purchase, savings, stock appreciation right, profit sharing, deferred compensation, consulting, bonus, group insurance, severance, health or welfare, vacation, and any other employee incentive or compensatory plan or contract that AGI maintains or sponsors, or to which it contributes or for which AGI otherwise has or may have any liability, contingent or otherwise, either directly or indirectly or as a result of an ERISA Affiliate (as defined in Section 4.14(c) below) for any of its present or former directors, employees, agents or independent contractors (hereinafter referred to collectively as the "Employee Plans"). Neither AGI nor any ERISA Affiliate has any liability with respect to any benefit plan or arrangement other than the Employee Plans listed on Schedule 4.14. (b) To the knowledge of AGI and the Shareholders, (i) all of the Employee Plans comply, conform and are maintained in accordance with its documents and in all material respects with all applicable requirements of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the Code and other applicable laws and all reporting, disclosure, and notice requirements of ERISA, the Code and other applicable laws have been fully and completely satisfied with respect to each Employee Plan; (ii) AGI has not engaged in a non-exempt "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) with respect to any Employee Plan which is likely to result in any material penalties, taxes or other events under Section 502(i) of ERISA or Section 4975 of the Code; and (iii) AGI has not breached any fiduciary duty described in Section 404 of ERISA that could result in any liability, direct or indirect, for AGI, the Shareholders or directors or employees of AGI. (c) Neither AGI nor any person that, together with AGI, is or was at any time treated as a single employer under Section 414 of the Code or Section 4001 of ERISA and any general partnership of which AGI is or has been a general partner (an "ERISA Affiliate") sponsor, maintain or contribute to, and has never sponsored, maintained or contributed to, or had any liability with respect to, any employee benefit plan subject to Section 302 of ERISA, Section 412 of the Code or Title IV of ERISA. (d) Neither AGI nor any ERISA Affiliate contributes to, and has ever contributed to, or had any liability with respect to, a "multi-employer plan," as defined in Section 3(37) of ERISA. 16 (e) Each Employee Plan of AGI which is an "employee pension benefit plan" (as defined in Section 3(2) of ERISA) and which is intended to be qualified under Section 401(a) of the Code (a "Qualified Plan") has been determined by the IRS (as defined in Section 4.18(b)) to be qualified under Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code, and each such determination remains in effect and has not been revoked. To the knowledge of AGI and the Shareholders, nothing has occurred with respect to the design or operation of any Qualified Plan that could cause the loss of such qualification or exemption or the imposition of any liability, lien, penalty or tax under ERISA or the Code, and the Qualified Plans have been timely amended to comply with current law. (f) To the knowledge of AGI and the Shareholders, neither AGI, nor any ERISA Affiliate, has committed any act or omission or engaged in any transaction that has caused it to incur, or created a material risk that it may incur, liability for any material excise tax under Sections 4971 through 4980B, 4980D or 4980E of the Code, other than excise taxes which heretofore have been paid and fully reflected in its financial statements. (g) There is no pending, or to the knowledge of AGI and the Shareholders any threatened, litigation, administrative action or proceeding relating to any Employee Plan other than routine claims for benefits. No Employee Plan is presently under audit or examination (nor has notice been received of a potential audit or examination) by the IRS, the Department of Labor, or any other governmental entity, and no matters are pending with respect to any Employee Plan under any IRS program. (h) Except as disclosed in Schedule 4.14(h), there has been no announcement or legally binding commitment by AGI to create an additional Employee Plan, or to amend an Employee Plan except for amendments required by applicable law which do not materially increase the cost of such Employee Plan. All Employee Plans may be amended or terminated without penalty by AGI at any time on or after the Closing. (i) With respect to any Employee Plan that is an employee welfare benefit plan (within the meaning of Section 3(1) of ERISA), (i) each welfare plan for which contributions are claimed as deductions under any provision of the Code is in compliance with all applicable requirements pertaining to such deduction, (ii) with respect to any welfare benefit fund (within the meaning of Section 419 of the Code) related to a welfare plan, there is no disqualified benefit (within the meaning of Section 4976(b) of the Code) that would result in the imposition of a material tax under Section 4976(a) of the Code, (iii) any Employee Plan that is a group health plan (within the meaning of Section 4980B(g)(2) of the Code) complies, and in each and every case has complied, in all material respects with all of the requirements of Section 4980B of the Code, ERISA, Title XXII of the Public Health Service Act, the applicable provisions of the Social Security Act, the Health Insurance Portability and Accountability Act of 1996, and other applicable laws, and (iv) no welfare plan provides health or other benefits after an employee's or former employee's retirement or other termination of employment except as required by Section 4980B of the Code. (j) Except as disclosed in Schedule 4.14(j), the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not result in any payment or series of payments by AGI, to any person which is an "excess parachute payment" 17 (as defined in Section 280G of the Code) under any Employee Plan or under any agreement executed in connection with this Agreement, increase any benefits payable under any Employee Plan, or accelerate the time of payment or vesting of any such benefit. (k) Except as disclosed in Schedule 4.14(k), all required annual reports have been filed timely with respect to each Employee Plan, and AGI has made available to SBI a true and correct copy of (A) the three most recent reports on the applicable form of the Form 5500 series filed with the IRS and any financial statements attached thereto, (B) such Employee Plan, including amendments thereto, (C) each trust agreement and insurance contract relating to such Employee Plan, including amendments thereto, (D) the most recent summary plan description for such Employee Plan, including amendments thereto, if the Employee Plan is subject to Title I of ERISA, (E) the most recent determination letter issued by the IRS if such Employee Plan is a Qualified Plan, (F) all notices that were issued within the preceding three years by the IRS, Department of Labor, or any other governmental entity with respect to any Employee Plan, and (G) all employee manuals or handbooks containing personnel or employee relations policies. (l) AGI and each ERISA Affiliate has paid all amounts that AGI and the ERISA Affiliate is required to pay as contributions to the Employee Plans as of the last day of the most recent fiscal year of each of the Employee Plans; all benefits accrued under any funded or unfunded Employee Plan have been paid, accrued, or otherwise adequately reserved in accordance with GAAP as of the AGI Balance Sheet Date; and all monies withheld from employee paychecks with respect to Employee Plans have been transferred to the appropriate Employee Plan in a timely manner as required by applicable law. (m) To the knowledge of AGI and the Shareholders, all persons classified by AGI and each ERISA Affiliate as independent contractors satisfy and have at all times satisfied the requirements of applicable law to be so classified; AGI and each ERISA Affiliate have fully and accurately reported their compensation on IRS Forms 1099 when required to do so; and AGI and each ERISA Affiliate have no obligations to provide benefits with respect to such persons under the Employee Plans or otherwise. No individuals are currently providing, or have ever provided, services to AGI or an ERISA Affiliate pursuant to a leasing agreement or similar type of arrangement, nor has AGI or any ERISA Affiliate entered into any arrangement whereby services will be provided by such individuals. Section 4.15 Collective Bargaining Agreements and Employment Agreements. (a) AGI has not entered into any collective bargaining agreements; (ii) there is no labor strike, slowdown or work stoppage or lockout actually pending or, to the knowledge of AGI or the Shareholders, threatened against or affecting, AGI, and during the past five years there has not been any such action; (iii) no union organizational campaign is in progress with respect to the employees of AGI; (iv) there is no unfair labor practice charge or complaint pending or to the knowledge of AGI threatened before the National Labor Relations Board; and (v) no charges with respect to or relating to AGI is pending before the Equal Employment Opportunity Commission. AGI does not have any plans, programs, commitments or arrangements to which either such entity is a party, or to which either such entity may be subject, pursuant to which payments may be required or acceleration of benefits may be required upon change of control of AGI. 18 (b) Except as set forth on Schedule 4.15, AGI is not a party to any employment agreement with any of its employees, nor any consulting, retainer or service agreement or arrangement with any individual or entity. Section 4.16 Compliance with Applicable Law. AGI has in the past complied and is presently complying, in respect of the assets and operation of its respective business in all material respects, with all applicable laws (whether statutory or otherwise), rules, regulations, orders, ordinances, judgments or decrees of all governmental authorities (federal, state, local or otherwise), including but not limited to the Securities Act of 1933 Act, as amended (the "Securities Act") and the 1934 Act, and in each case, the rules promulgated thereunder, and AGI has not received notification of any asserted present or past failure to so comply. AGI has delivered to SBI all inspection reports or similar documents received during the past three years from the SEC or state regulatory authorities, and their responses thereto. Section 4.17 Actions since the Balance Sheet Date. Except as set forth on Schedule 4.17, AGI has not, since the AGI Balance Sheet Date, and to date hereof: (a) taken any action outside of the ordinary course of business; (b) borrowed any money or become contingently liable for any obligation or liability of others outside of the ordinary course of business; (c) failed to pay all of its debts and obligations as they became due or otherwise in the ordinary course of business; (d) incurred any material debt, liability or obligation of any nature to any party except for obligations arising from the purchase of goods or the rendition of services in the ordinary course of business; (e) knowingly waived any right of substantial value; (f) failed to use its reasonable best efforts to preserve its business organization intact, keep available the services of its employees, and preserve relationships with customers, suppliers and others with whom it deals; (g) purchased or redeemed any shares of its capital stock, or transferred, distributed or paid, directly or indirectly, any money or other property or assets to its shareholders, other than employee compensation and dividends in amounts consistent with past practices and other distributions in amounts that would not result in a Financial Requirement Deficiency; (h) made a change in the number of shares of capital stock of AGI issued and outstanding; (i) declared, set aside, paid or distributed any dividend or other distribution with respect to its capital stock, or with respect to any split, combination or reclassification of its capital stock, other than dividends or other distributions of assets, including, without limitation, Risk Check, that in the aggregate would not result in a Financial Requirement Deficiency; 19 (j) increased the compensation or severance pay payable or to become payable by AGI to any employee or with respect to any employee welfare, pension, retirement, profit-sharing or similar payment plan or arrangement applicable to any present or former employee; (k) incurred any capital expenditure or authorization for a capital expenditure, acquisition of assets or execution of any lease, or incurred liability therefor, requiring any payment or payments in excess of $10,000 in the aggregate with respect to each individual transaction; (l) borrowed or lent money, issued debt securities or pledged the credit of AGI or guaranteed any indebtedness of others; (m) lost the services of any employee that is, either individually or in the aggregate, material to the conduct of the business of AGI; (n) incurred the loss or termination of relationship with any supplier, client or customer that is, either individually or in the aggregate, material to the conduct of the business of AGI or its financial condition or prospects; or (o) entered into any agreement, arrangement or understanding to do any of the foregoing. Section 4.18 Tax Matters. (a) For purposes of this Agreement, the term "Taxes" shall mean all taxes, charges, fees, levies or other assessments, including, without limitation, income, gross receipts, premium taxes, employment, excise, withholding, property, sales, use, transfer, license, payroll, and franchise taxes, together with any interest and any penalties, additions to tax or additional amounts with respect thereto, imposed by the United States, or any state, local, or foreign government or subdivision or agency thereof. For purposes of this Agreement, the term "Tax Return" shall mean any report, return, or other information required to be supplied to a taxing authority in connection with Taxes. All citations to provisions of the Code, or to the Treasury Regulations promulgated thereunder, shall include any amendments thereto and any substitute or successor provisions thereto. (b) AGI has duly filed all Tax Returns required to be filed on or before the date hereof (and will file all Tax Returns required to be filed on or before the Closing Date). All such Tax Returns are (and, as to Tax Returns not filed as of the date hereof but filed on or before the Closing Date, will be) true, correct and complete in all material respects and were (and, as to Tax Returns not filed as of the date hereof but filed on or before the Closing Date, will be) filed on a timely basis. All taxes shown on such Tax Returns or otherwise due or payable (whether or not shown on any Tax Return) have been timely paid. Except as disclosed in Schedule 4.18(b), AGI has not requested any extension of time within which to file any Tax Return, which Tax Return has not since been filed. True and complete copies of the federal, state and local income Tax Returns filed by AGI since December 31, 1998 and related examination reports, if any, have been provided to SBI prior to the date hereof. The reserves for Taxes reflected in (i) the Financial Statements are sufficient for the payment of all unpaid Taxes (whether or not currently 20 disputed) which are incurred or may be incurred with respect to the period (or portion thereof) ended on the date of such Financial Statements and for all years and periods ended prior thereto, (ii) the AGI Balance Sheet are sufficient for the payment of all unpaid Taxes (whether or not currently disputed) which are incurred or may be incurred with respect to the period (or portion thereof) ended on the AGI Balance Sheet Date, and for all years and periods ended prior thereto, and (iii) the proforma balance sheet referenced in Section 9.2(k)(ii) hereof are sufficient for the payment of all unpaid Taxes (whether or not currently disputed) which are incurred or may be incurred with respect to the period (or portion thereof) ended on the proforma balance sheet date and for all years and periods ended prior thereto. Schedule 4.18(b) sets forth a description of the specific Taxes for which such reserves are accrued, and the amounts of the reserves accrued with respect to each specific Tax. AGI has not incurred any liability for Taxes other than in the ordinary course of business, which Taxes would result in a material decrease in the net worth of AGI. No waiver or extension of any statute of limitations relating to Taxes has been given to, or requested by, the Internal Revenue Service (the "IRS"), or any state or local taxing authority. No claim is currently being made by any authority in a jurisdiction where neither AGI nor any subsidiary thereof files Tax Returns that they are or may be subject to Taxes in that jurisdiction. (c) Except as set forth on Schedule 4.18(c), AGI has complied (and until the Closing Date will comply) in all material respects with the provisions of the Code relating to the withholding and payment of Taxes, including, without limitation, the withholding and reporting requirements under Code sections 1441 through 1464, 3401 through 3406, and 6041 through 6049, as well as similar provisions under any other laws, and has, within the time and in the manner prescribed by law, withheld from employee wages and paid over to the proper governmental authorities all amounts required. AGI has undertaken in good faith to appropriately classify all service providers as either employees or independent contractors for all Tax purposes. (d) Neither the federal income Tax Returns nor the state or local income Tax Returns of AGI have been examined by the IRS or relevant state taxing authorities, except as set forth on Schedule 4.18(d). All deficiencies asserted as a result of the examinations referred to on Schedule 4.18(d) have been paid, and no issue has been raised by any federal, state, local or foreign income tax authority in any such examination which, by application of the same or similar principles to similar transactions, could reasonably be expected to result in a proposed deficiency for any subsequent period. Further, to the Shareholders' knowledge, no state of facts exists or has existed which would constitute grounds for the assessment of any material liability for Taxes with respect to the periods which have not been audited by the IRS or other taxing authority. Except as described on Schedule 4.18(d), there are no examinations or other administrative or court proceedings relating to Taxes in progress or pending nor has AGI received a revenue agent's report asserting a tax deficiency. To the knowledge of the Shareholders, there are no threatened actions, suits, proceedings, investigations or claims relating to or asserted for Taxes of AGI and there is no basis for any such claim. (e) Since its date of incorporation, AGI has not (A) filed any consent or agreement under Section 341(f) of the Code, (B) applied for any tax ruling, (C) entered into a closing agreement with any taxing authority, (D) filed an election under Section 338(g) or Section 338(h)(10) of the Code (nor has a deemed election under Section 338(e) of the Code occurred), (E) made any payments, or been a party to an agreement (including this Agreement), 21 or any transactions related thereto that under any circumstances could obligate it to make payments that will not be deductible because of Section 280G or Section 162(m) of the Code, (F) been a party to any tax allocation or tax sharing agreement, (G) been a U.S. real property holding corporation within the meaning of Section 897 of the Code, or (H) taken any position on a Tax Return that could give rise to a penalty under Section 6662 of the Code. (f) AGI (and any predecessor of AGI) is currently, and has been at all times during its existence, an S corporation within the meaning of Code (S)(S)1361 and 1362, and will be an S corporation at all times up to and including the Closing Date. At all such times, AGI has been an S corporation for Pennsylvania tax purposes. During its existence, AGI (and any predecessor of AGI) has complied with all applicable federal, state and local tax laws relating to election as an S corporation, including, but not limited to, provisions applicable to Pennsylvania law. (g) AGI has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency. (h) AGI has filed all abandoned and unclaimed property reports and escheat reports required by law to be filed by it and has paid all amounts and surrendered all property as required by law to be paid or surrendered in connection therewith. (i) AGI would not be liable for any Tax under Code (S)1374 (or under any equivalent state tax provision) if its assets were sold (or deemed sold pursuant to an election under Code (S)338(h)(10)) for their fair market value on the Closing Date. AGI has not, in the past 10 years, (A) acquired assets from another corporation in a transaction in which AGI's Tax basis for the acquired assets was determined, in whole or in part, by reference to the Tax basis of the acquired assets (or any other property) in the hands of the transferor or (B) acquired the stock of any corporation which is a qualified subchapter S subsidiary. Section 4.19 Environmental Matters. (a) Except as disclosed in Schedule 4.19(a): (i) AGI has been and is in full compliance with all Environmental Laws (as defined below) applicable to the operations of, and the property owned, operated, occupied or otherwise used by, AGI. To the knowledge of AGI and the Shareholders, there are no circumstances that may prevent or interfere with such full compliance in the future. (ii) AGI has obtained all Permits (as defined below) necessary for the operation of its business and the ownership, operation, occupation or other use of its properties, all such Permits are in good standing and AGI are in compliance with all terms and conditions of such Permits. There has been no material change in the facts or circumstances reported or assumed in the applications for or the granting of such Permits. (iii) There is no lawsuit, claim, action, cause of action, judicial or administrative proceeding, investigation, summons, or written notice by any person pending, or to AGI's or the Shareholder's knowledge threatened, against AGI alleging potential liability (including, without limitation, potential liability for investigatory costs, cleanup costs, 22 governmental response costs, natural resource damages, property damages, personal injuries or penalties) arising out of or resulting from (i) the violation of any Environmental Law or (ii) the presence or Release of any Hazardous Substance (as defined below) at any location, whether or not owned, operated, occupied or otherwise used by AGI. (iv) AGI is not subject to any writ, injunction, order, decree or settlement addressing (i) any alleged violation of any Environmental Law or (ii) the alleged presence, or Release into the environment of any Hazardous Substance at any location, whether or not owned, operated, occupied or otherwise used by AGI. (v) No Environmental Lien (as defined below) has attached to any of the property owned, operated, occupied or otherwise used by AGI. (vi) There has been no Release of any Hazardous Substance at, to or from any of the properties owned, operated, occupied or otherwise used by AGI. (vii) AGI has not transported or arranged for the transport of any Hazardous Substance to any facility or site for the purpose of treatment, storage, disposal or recycling which (i) is included on the National Priorities List or the Comprehensive Environmental Response, Compensation and Liability Information System under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (S)(S) 9601 et. seq. ("CERCLA"), or any similar state list which is required by any state Environmental Law to be kept, or (ii) is presently subject to a governmental enforcement action under CERCLA or the Solid Waste Disposal Act, 42 U.S.C. (S)(S) 6901 et. seq., or any similar state Environmental Law. (viii) All of the third parties with which AGI presently has arrangements, engagements or contracts to accept, treat, transport, store, dispose, remove or recycle any Hazardous Substances generated or present at any of the properties owned, operated, occupied or otherwise used by AGI are properly permitted under Environmental Laws to perform the foregoing activities or conduct. (ix) AGI does not have any liability for the violation of any Environmental Law or the Release of any Hazardous Substance in connection with any business or property previously owned, operated, occupied or otherwise used by AGI or any of the predecessors of AGI. (x) There are no past or present actions, activities, circumstances, conditions, event or incidents, including, without limitation, the generation, handling, transportation, treatment, storage, Release, presence, disposal or arranging for disposal of any Hazardous Substance, that could form the basis of any claim against AGI under any Environmental Law. (xi) The following terms shall have the following meanings: a. "Environmental Laws" means all federal, state, local and foreign laws, statutes, codes, ordinances, rules, regulations, orders, directives, binding policies, common law, or Permits as amended and in effect on the date hereof and on the Closing 23 Date relating to or addressing the environment, health or safety, including, but not limited to, any law, statute, code, ordinance, rule, regulation, order, directive, binding policy, common law or Permit relating to the generation, use, handling, treatment removal, storage, production, manufacture, transportation, remediation, disposal, arranging for disposal, or Release of Hazardous Substances. b. "Environmental Lien" means a lien in favor of any governmental authority for any (a) liability under any Environmental Law or (b) damages arising from, or costs incurred by, such governmental authority in response to a release or threatened release of a Hazardous Substance into the environment. c. "Hazardous Substances" means any toxic or hazardous substances (including, without limitation, wastes), pollutants, explosives, radioactive materials or substances (including, without limitation, wastes), including, without limitation, asbestos, PCBs, petroleum products and byproducts, and substances (including, without limitation, wastes) defined in or regulated under Environmental Law. d. "Permit" means any permit, license, consent or other approval or authorization required under any Environmental Law. e. "Release" means the release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migrating of any Hazardous Substance through or in the air, soil, surface water, or groundwater. Section 4.20 Books and Records. The books and records of AGI have been, and are being, maintained in accordance with applicable legal and accounting requirements and reflect in all material respects the substance of events and transactions that should be included therein. Section 4.21 Intellectual Property. AGI, directly or indirectly, possesses or has adequate rights to all licenses, permits and all other franchises, trademarks, trade names, service marks, inventions, patents, copyrights, and any applications therefor, trade secrets, research and development, know-how, technical data, computer software programs or applications and technology systems necessary to operate its business and required by applicable law (the "Intellectual Property"). Except as set forth on Schedule 4.21, all right, title and interest in and to each item of Intellectual Property is owned by AGI, is not subject to any license, royalty arrangement or pending or threatened claim or dispute and is valid and in full force and effect. To AGI's and the Shareholders' knowledge, none of the Intellectual Property owned or used by AGI, infringes any Intellectual Property right of any other entity and no Intellectual Property owned by AGI is infringed upon by any other entity. Section 4.22 Condition of Tangible Assets. In all material respects: (i) all buildings, structures and improvements on the real property leased by AGI are in good condition, ordinary wear and tear excepted, and are free from structural defects; and (ii) the equipment, including heating, air conditioning and ventilation equipment owned by AGI, is in good operating condition, ordinary wear and tear excepted. The operation and use of the property in the business conform in all material respects to all applicable laws, ordinances, regulations, permits, licenses and certificates. 24 Section 4.23 Conflict of Interest. No present or former officer or director, or managerial employee, of AGI and no Shareholder has (i) any interest in the property, tangible or intangible, including, without limitation, licenses, inventions, processes, know how or formula of a proprietary nature used in or pertaining to the business of AGI, or (ii) any contract, commitment, claim, arrangement or understanding, including, without limitation, any loan arrangement, with AGI. To the knowledge of AGI and the Shareholders, no present officer, director or managerial employee of AGI, and no Shareholder, has any ownership or stock interest in any other enterprise, firm, corporation, trust or any other entity, other than Risk Check, which is engaged in any contractual arrangement or understanding with AGI or is engaged in any line or lines of business which are the same as, or similar to, or competitive with, the line or lines of business of AGI. For the purpose of this representation, ownership of not more than 3% of the voting stock of any publicly-held company whose stock is listed on a recognized securities exchange or traded over-the-counter shall be disregarded. Section 4.24 Customers. Schedule 4.24 sets forth a list of the ten largest customers of AGI, in terms of dollar value of services sold by AGI, for each of the two years ended December 31, 2000 and 2001. No customer listed on Schedule 4.24 has notified AGI that it does not expect to continue to do business with AGI, and AGI has no basis to believe that any of such customers intend to cease doing business with AGI. No customers have represented, or are expected to represent, greater than 5% of the total annual revenues of AGI for each of the three years ended December 31, 1999 and 2000, and 2001, other than G.F. Management. More than 5% of the total annual revenues of AGI for each of such years was derived from AGI' s relationship with Captive Resources, Inc. and Churchill Casualty Ltd, and AGI expects to derive more than 5% of its total annual revenues in 2002 from such relationship. Section 4.25 Broker Services. AGI has at all times since its inception acted solely in the capacity of an insurance broker, and has not incurred any risks or liabilities associated with the underwriting of insurance policies issued in connection with such broker services. Section 4.26 Disclosure. No representation or warranty by the Shareholders contained in this Agreement, and no statement contained in any annex, exhibit or schedule hereto or any lists, certificates or writing delivered by AGI in connection herewith or pursuant hereto, to the knowledge of the Shareholders, contains any untrue statement of a material fact, or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading or necessary in order to fully and fairly provide the information required to be provided in such document. ARTICLE V FURTHER REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS As of the date hereof and as of the Closing Date, each Shareholder, individually and not jointly and severally, represents and warrants as follows: Section 5.1 Ownership of Capital Stock of AGI. Such Shareholder resides at the address indicated opposite his name on Annex I and owns the number of the Shares set forth 25 opposite his name on Annex I hereto. Such Shareholder has good, marketable and unencumbered title to his Shares, free and clear of all liens, security interests, pledges, claims, options and rights of others. Section 5.2 Valid and Binding Agreement. This Agreement constitutes and will constitute the valid and binding obligation of such Shareholder. Section 5.3 Marital Status. Such Shareholder has not commenced an action for divorce or annulment of his current marriage in any court. The Shares held by such Shareholder are not subject to any lien as security for the payment of alimony, child support or other award granted in any prior divorce or annulment proceeding. Section 5.4 Shareholder Agreements. There are no agreements between AGI and such Shareholder and no agreements between such Shareholder and any of the other Shareholders pertaining to AGI or the Shares, other than the First Amended and Restated Shareholders' Agreement, dated December 31, 2000 (the "Shareholders' Agreement"), which shall be terminated prior to Closing. Such Shareholder does not have (i) any interests in the property, tangible or intangible, including without limitation, licenses, inventions, processes, know how or formula of a proprietary nature used in or pertaining to the business of AGI, or (ii) any contract, commitment, claim, arrangement or understanding, including, without limitation, any loan arrangement, with AGI. Such Shareholder does not have any ownership or stock interest in any other enterprise, firm, corporation, trust or any other entity, other than Risk Check, which is engaged in any contractual arrangement or understanding with AGI or is engaged in any line or lines of business which are the same as, or similar to, or competitive with, the line or lines of business of AGI. For the purpose of this representation, ownership of not more than 3% of the voting stock of any publicly-held company whose stock is listed on a recognized securities exchange or traded over-the-counter shall be disregarded. Section 5.5 Investment Intent. Such Shareholder acknowledges and agrees that the SBI Stock to be delivered to the Shareholder pursuant to this Agreement has not been and will not be registered under the Securities Act and therefore may not be resold without compliance with the Securities Act. Such Shareholder represents and warrants that the shares of SBI Stock to be acquired by the Shareholder pursuant to this Agreement are being acquired solely for his own account, for investment purposes only, and with no present intention of distributing, selling or otherwise disposing of it in connection with a distribution. Section 5.6 Compliance with Law. Such Shareholder covenants, warrants and represents that none of the shares of SBI Stock issued to such Shareholder will be offered, sold, assigned, pledged, hypothecated, transferred or otherwise disposed of except after full compliance with all of the applicable provisions of the Securities Act and the rules and regulations of the Securities and Exchange Commission (the "SEC") thereunder, and except after full compliance with any applicable state securities laws. Section 5.7 Economic Risk; Sophistication. Such Shareholder represents and warrants that he is able to bear the economic risk of an investment in the SBI Stock acquired by him pursuant to this Agreement and can afford to sustain a total loss of such investment. Such Shareholder further represents and warrants that he (a) fully understands the nature, scope and 26 duration of the limitations on transfer contained in this Agreement and (b) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the proposed investment and therefore has the capacity to protect his own interests in connection with the acquisition of the SBI Stock. Section 5.8 Information Supplied. Such Shareholder represents and warrants that he has had an adequate opportunity to ask questions and receive answers from the officers of SBI concerning its business, operations, plans and strategy, and the background and experience of its officers and directors. Such Shareholder represents and warrants that he has asked any and all questions that he may have in the nature described in the preceding sentence and that all such questions have been answered to their satisfaction. Section 5.9 Accredited Investor. Such Shareholder represents and warrants that he is an "accredited investor" as that term is defined in Rule 501 of Regulation D. Section 5.10 Securities Legends. Such Shareholder hereby acknowledges that the certificates evidencing the SBI Stock to be received by him at Closing will bear a legend substantially in the form set forth below and containing such other information as SBI may deem appropriate: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES OR BLUE SKY LAWS. SUCH SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT AND ANY STATE SECURITIES OR BLUE SKY LAWS, UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION, SUCH REGISTRATION IS NOT REQUIRED. In addition, such certificates shall also bear such other legends as counsel for SBI reasonably determines are required under the applicable laws of any state. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF SBI and THE ACQUISITION SUB As of the date hereof and as of the Closing Date, SBI and the Acquisition Sub, jointly and severally, hereby represent and warrant as follows: Section 6.1 Organization. SBI and the Acquisition Sub are entities duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania, and have all requisite corporate power or limited liability company power, as the case may be, and authority and all necessary governmental approvals to own, lease and operate each of its properties, and to carry on each of its respective businesses in the places and in the manner as 27 presently conducted, to enter into this Agreement, and the other documents and instruments to be executed and delivered by each of them pursuant hereto and to carry out the transactions contemplated hereby and thereby. Section 6.2 Authority. The execution, delivery and performance of this Agreement and the other documents and instruments to be executed and delivered by SBI and the Acquisition Sub pursuant hereto and the consummation by SBI and the Acquisition Sub of the transactions contemplated hereby have been duly authorized by all necessary corporate or operating action, as the case may be, on the part of SBI and the Acquisition Sub. No other corporate act or limited liability company act, as the case may be, or proceeding on the part of SBI or its respective shareholders, or on the part of the Acquisition Sub or its sole member, is necessary to authorize this Agreement, the transactions contemplated by this Agreement or the other documents and instruments to be executed and delivered by SBI and the Acquisition Sub. Section 6.3 Consents and Approvals; No Violation. This Agreement, the Escrow Agreement, the Employment Agreements and the Incentive Compensation Agreement each constitute, or when executed and delivered will each constitute, the valid and binding agreements of SBI and the Acquisition Sub, as the case may be, and of the Acquisition Sub with respect to the Employment Agreements, enforceable in accordance with its terms, and neither the execution and delivery of this Agreement, the Escrow Agreement, and the Incentive Compensation Agreement nor the consummation of the transactions contemplated hereby and thereby do or will (i) conflict or result in a breach of any provision of the Articles of Incorporation or Bylaws of SBI, or the operating agreement of the Acquisition Sub (ii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which SBI or the Acquisition Sub is a party, as the case may be, or by which any of their respective properties or assets may be bound or (iii) violate any order, writ, injunction, decree, statute, rule or regulation applicable to SBI or the Acquisition Sub, or any of their respective properties or assets. Except as set forth in Schedule 6.3, no permit, authorization, consent or approval of, any court or other adjudicatory body, administrative agency or commission or other governmental or regulatory authority or agency ("Governmental Entity") is required in connection with the execution, delivery or performance by SBI of this Agreement, the Escrow Agreement, or the Incentive Compensation Agreement or in connection with the execution, delivery or performance by the Acquisition Sub of the Employment Agreements, or the consummation of the transactions contemplated hereby or thereby. Section 6.4 SEC Reports and Financial Statements. SBI has delivered to AGI complete (except in certain cases for listed exhibits which are available upon request) and correct copies of SBI's (a) Proxy Statement and Annual Report on Form 10-K for the fiscal year ended December 31, 2000; (b) Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, June 30 and September 30, 2001, in each case as filed by SBI with the SEC pursuant to the 1934 Act (such reports and other filings collectively referred to herein as the "1934 Act Filings"). As of their respective dates, the 1934 Act Filings complied in all material respects with the requirements of the 1934 Act and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The consolidated 28 financial statements of SBI included in the 1934 Act Filings, including any amendments thereto, present fairly, in all material respects, the consolidated financial position of SBI and its subsidiaries at the dates thereof and the results of operations and cash flows for the periods then ended in accordance with GAAP. Since the date of the last 1934 Act Filing, SBI has not experienced, nor to the knowledge of SBI has there been threatened or anticipated, any material adverse change in the condition (financial or otherwise), assets, liabilities (absolute, accrued, contingent or otherwise), business, or operations of SBI taken as a whole. Section 6.5 Disclosure. No representation or warranty by SBI contained in this Agreement, and no statement contained in any annex, exhibit or schedule hereto or any lists, certificate or writing delivered by SBI in connection herewith or pursuant hereto, to the knowledge of SBI, contains any untrue statement of a material fact, or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading or necessary in order to fully and fairly provide the information required to be provided in any such document. Section 6.6 SBI Stock. Upon issuance in accordance with this Agreement, the SBI stock will be duly authorized, validly issued, fully paid and non-assessable, free and clear of any and all liens, encumbrances and other restrictions on transfer, other than restrictions on transfer pursuant to applicable securities laws. ARTICLE VII CERTAIN COVENANTS Section 7.1 Access and Information. Between the date hereof and the Closing Date, AGI will give SBI and its authorized representatives full and free access during normal business hours and upon reasonable advance notice, in such manner as not to unduly disrupt normal business activities, to any and all premises, properties, contracts, commitments, books and records of AGI, and AGI will cause its officers to furnish any and all financial, technical and operating data and other information as SBI and its authorized representatives from time to time reasonably may request. Section 7.2 Conduct of the Business of AGI pending the Closing Date. Between the date hereof and the Closing Date, unless SBI otherwise consents in writing, AGI shall: (a) not take any action that would render untrue any of the representations or warranties herein contained; not omit to take any action, the omission of which would render untrue any such representation or warranty; provided, however, that AGI shall not be obligated to take any action not in the ordinary course of business that would result in the expenditure of funds by it exceeding $5,000 in the aggregate; and not take any action or commit any omission that would have as a result any of the conditions set forth in Article IX not being satisfied; (b) conduct its business in a good and diligent manner in the ordinary and usual course; 29 (c) use its best efforts to preserve its business organization intact, to keep available the services of its employees, and to preserve its relationships with customers, vendors, suppliers and others with whom it deals; (d) not reveal, orally or in writing, to any party, other than consultants and vendors of services with a need to know and other than SBI and its authorized agents, any of the confidential business procedures and practices followed by it in the conduct of its business; (e) not enter into any contract, agreement, commitment or arrangement with any party, other than contracts in the ordinary and usual course of business; (f) not redeem or otherwise acquire any shares of its capital stock or issue any capital stock or any stock or any stock option, warrant, preference, call or right relating thereto; (g) use its best efforts to maintain in full force and effect all of the insurance policies presently maintained by AGI, make no change in any insurance coverage and notify SBI at least ten days prior to any pending cancellation or lapse of any insurance policy; (h) keep the premises occupied and owned or leased by it and all of its equipment and other tangible personal property in good order and repair and perform all necessary repairs and maintenance; (i) continue to maintain all of its usual business books and records in accordance with its past practices; (j) not amend or propose to amend its Articles of Incorporation or Bylaws; (k) not waive any of its material rights, or cancel any of its material claims, without the receipt of adequate consideration; (l) maintain its respective corporate existence and not merge or consolidate it with any other entity; (m) comply with all applicable laws, rules and regulations; (n) not make any capital expenditure other than in the ordinary course of its business and in an amount not exceeding $10,000 in the aggregate; (o) not place any additional encumbrances on any of its inventory or assets not in the ordinary course of business, except that existing encumbrances may attach to its inventory or assets acquired after the date hereof; (p) not pay any severance, deferred compensation or other payments to any shareholder, whether or not accrued; (q) not declare or pay any increases in compensation to any of its employees, other than such increases as may be consistent with past practices and in any one case is not greater than five percent (5%) of such employee's base salary on an annual basis; and 30 (r) not engage in any transaction of the type listed in Section 4.17. Section 7.3 Conduct of SBI Pending the Closing Date. Between the date hereof and the Closing Date, unless AGI otherwise consents in writing, SBI shall not take any action which would render untrue any of the representations or warranties of SBI herein contained; not omit to take any action, the omission of which would render untrue any such representation or warranty; provided, however, SBI shall not be obligated to take any action not in the ordinary course of business that would result in the expenditure of funds in excess of $5,000 in the aggregate; and not take any action or commit any omission that would have as a result any of the conditions set forth in Article IX not be satisfied. Section 7.4 Notices. (a) Between the date hereof and the Closing Date, AGI shall give prompt notice to SBI of (i) any notice of, or other communication relating to, a default under AGI's Articles of Incorporation or Bylaws or any of the AGI Agreements which would have a material adverse effect on AGI or event which, with notice or lapse of time or both, would become a default under AGI's Articles of Incorporation or Bylaws or any of the AGI Agreements which would have a material adverse effect on AGI, received by it subsequent to the date of this Agreement and prior to the Closing, (ii) any claim, action, suit, proceeding or investigation by any Governmental Entity involving or relating to AGI's assets, properties or business or the AGI Agreements (or any communication indicating that the same may be contemplated), (iii) any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated hereby and (iv) any matter which would cause any material change with respect to any representations made hereunder by AGI or the Shareholders. (b) Between the date hereof and the Closing Date, SBI shall give prompt notice to AGI of (i) any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated hereby and (ii) any matter which would cause any material change with respect to any representations made hereunder by SBI or the Acquisition Sub. Section 7.5 Advice of Changes. SBI and AGI shall confer on a regular and frequent basis with the other, report on operational matters and promptly advise the other orally and in writing of any change or event having, or which, insofar as can reasonably be foreseen, could have, a material adverse effect on such party. Section 7.6 Legal Conditions. SBI, the Acqusition Sub and AGI will each take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on itself with respect to the transactions contemplated hereby (which actions shall include, without limitation, approvals or filings with any Governmental Entity) and will promptly cooperate with and furnish information to each other with any such requirements imposed upon any of them in connection with the same. SBI, the Acquisition Sub and AGI will each take all reasonable actions necessary to obtain (and will cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity or other public or private third party, required to be obtained by SBI, the 31 Acquisition Sub or AGI in connection with the taking of any action contemplated by this Agreement. SBI, the Acquisition Sub and AGI will each use its best efforts to effectuate the transactions and agreements contemplated by this Agreement, and, in furtherance thereof, shall make and execute, under the corporate seal of SBI and AGI, if required, whatever certificates and documents are required by the appropriate federal and state regulatory authorities to effect the transactions contemplated hereby, and to cause the same to be filed, in the manner provided by law, and to do all things whatsoever, whether within or without the Commonwealth of Pennsylvania, which would be necessary and proper to effect the transactions and agreements contemplated herein. Section 7.7 No Shopping. The Shareholders and AGI agree that none of them shall solicit, enter into or continue any discussions, negotiations or contracts (including any disclosure of business information concerning AGI) with any person or entity other than SBI concerning the disposition of AGI's capital stock or of its assets and business operations, whether by sale, merger or other transaction. Section 7.8 Best Efforts. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use reasonable best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. Section 7.9 Conduct of AGI following the Closing Date. From and after the Closing Date and until the earlier of (i) the eighth anniversary of the date of this Agreement, or (ii) the later of (x) such date as the Shareholders have received all Contingent Consideration of which they are eligible to earn in accordance with Article II of this Agreement or (y) such date as all Escrow Property (as defined in the Escrow Agreement) has been released by the Escrow Agent pursuant to the terms of the Escrow Agreement, unless otherwise agreed in writing by the Shareholder Representative, AGI, SBI and the Acquisition Sub shall: (a) not acquire or hold an entity interest in any insurance broker with customers in the Commonwealth of Pennsylvania or the States of New Jersey, Delaware or Maryland, unless the Cumulative Escrow Penalty (as defined in the Escrow Agreement) exceeds $2,000,000; (b) not require any Shareholder who is employed by AGI to divert his full time, attention, skill and efforts from the management of AGI, from the production of business for AGI or from maximizing the profitability of AGI; (c) take all actions necessary to cause F. Scott Addis, William D. Rhodes, III and Peter R. Unger to be elected to the Board of Directors, or such equivalent governing body, of AGI, but only to the extent that such individual remains an employee of AGI, and to cause F. Scott Addis to be elected the Chief Executive Officer, or such equivalent officer, of AGI for so long as F. Scott Addis is an employee of AGI and delegate to F. Scott Addis in his capacity as such officer the authority to recruit, hire, terminate and establish reasonable compensation packages for the employees of AGI; 32 (d) maintain a Tangible Net Worth plus subordinated debt of AGI equal to at least $100,000; (e) with respect to the calculation of Pre-tax Profit, cause the financial statements of AGI to be prepared in such a manner that (i) all contingent income expected in the next succeeding fiscal year is accrued in the current year based upon such current year's underwriting, provided that AGI has fulfilled all of the criteria (e.g., volume and loss ratios, etc.) for such current year set forth in the respective contingency agreement with the insurance carriers with whom AGI deals; (ii) all direct bill income is recorded on an accrual basis on the effective date of the insurance (as opposed to when payment is received from the insurance companies); and (iii) an offset to income and each direct bill receivable is recorded for a reserve in an amount equivalent to AGI's historical experience with rebates for cancelled policies. These accounting practices will be followed for purposes of determining Pre-tax Profit for purposes of the Contingent Consideration, the Escrow Agreement and the Incentive Compensation Agreement; and (f) subject to the corresponding reduction in salary and other payments provided for under the Employment Agreements, permit F. Scott Addis, as the Chief Executive Officer of AGI, to grant bonuses to employees of AGI in such amounts and at such times as he shall determine in his sole discretion. ARTICLE VIII INDEMNIFICATION Section 8.1 Basic Provision. The Shareholders severally (as provided in Section 8.6(b)) and not jointly, and AGI (only if the Closing does not occur) jointly and severally with the Shareholders, hereby indemnify and agree to hold harmless SBI, the Acquisition Sub, and each of its respective Affiliates (as defined herein), successors and assigns, and SBI and the Acquisition Sub, jointly and severally, hereby indemnify and agree to hold harmless the Shareholders and AGI and their respective Affiliates, successors and assigns from, against and in respect of the amount of any and all Deficiencies (as hereinafter defined); provided, however, that no Shareholder shall be liable for breaches or misrepresentations by the other Shareholders of their representations or warranties contained in Article V of this Agreement. Section 8.2 Definitions. As used in this Article VIII, the following terms have the meanings: (a) "Affiliate" as to any person or entity, means any other person that directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such person or entity. (b) "Deficiency" means any and all loss or damage, resulting from (i) any breach of representation or warranty, or any non-fulfillment of any warranty, representation, covenant or agreement by an Indemnitor contained herein; (ii) any misrepresentation contained in any statement, report, certificate or other document or instrument delivered by an Indemnitor pursuant to this Agreement or contained in any exhibit or schedule delivered pursuant hereto or 33 in connection herewith; (iii) claims by the Shareholders that the materials delivered by or on behalf of SBI to such Shareholder in connection with obtaining approval of the transactions contemplated by this Agreement contain any untrue statement of material fact or omit to state a material fact or are otherwise defective (a "Shareholder Disclosure Deficiency"); and (iv) any and all acts, suits, proceedings, demands, assessments, judgments, reasonable attorneys' fees, costs and expenses incident to any of the foregoing. Notwithstanding any term of this Agreement to the contrary, "Deficiency" shall not include any liability (including without limitation, any liability for Taxes of AGI) to the extent that any such liability resulted in an amount of Actual Financial Requirement Deficiency and is otherwise accounted for pursuant to a Post-Closing Adjustment in accordance with Section 2.1 hereof. (c) "Indemnified Party" means the individuals or entities entitled to indemnification under this Article VIII consisting of (i) SBI, the Acquisition Sub and each of its respective Affiliates, successors and assigns, and each of their respective officers and directors or (ii) AGI, the Shareholders, their respective Affiliates, successors and assigns and their respective officers and directors, as the case may be. (d) "Indemnitor" means the individuals or entities obligated to provide indemnification under this Article VIII consisting of SBI, the Acquisition Sub, AGI or the Shareholders, as the case may be. Section 8.3 Procedures for Establishment of Deficiencies. (a) In the event that any claim shall be asserted by any third party against an Indemnified Party which, if sustained, would result in a Deficiency, such Indemnified Party, within a reasonable time after learning of such claim, shall notify Indemnitor of such claim, and shall extend to Indemnitor a reasonable opportunity to defend against such claim at Indemnitor's sole expense and through legal counsel acceptable to the Indemnified Party, provided that Indemnitor proceed in good faith, expeditiously and diligently. No determination shall be made pursuant to subparagraph (b) below while such defense is still being made until the earlier of (i) the resolution of said claim by Indemnitor with the claimant, or (ii) the termination of the defense by Indemnitor against such claim or the failure of Indemnitor to prosecute such defense in good faith in an expeditious and diligent manner. The Indemnified Party shall be entitled to rely upon the opinion of its counsel as to the occurrence of either of said events. The Indemnified Party shall, at its option, have the right to participate in any defense undertaken by Indemnitor with legal counsel of its own selection, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (I) the employment of such counsel shall have been authorized in writing by Indemnitor in connection with the defense of such action, suit, or proceeding, or (II) Indemnitor shall fail actively and diligently to defend such claim, in either of which events the defense of such claim on behalf of the Indemnified Party shall be controlled by the Indemnified Party and that portion of any fees and expenses of counsel related to matters covered by the indemnity agreement contained in Section 8.1 shall be borne by Indemnitor. The Indemnified Party shall be kept fully informed of such claim at all stages thereof whether or not they are so represented. Each party shall make reasonably available to the other party and its attorneys and accountants all books and records of such party relating to such claim and the parties hereto shall render to each other such assistance as they may reasonably require of each other in order to ensure a proper and adequate defense. No settlement or 34 compromise of any claim which may result in a Deficiency may be made by Indemnitor without the prior written consent of the Indemnified Party unless (i) prior to such settlement or compromise Indemnitor acknowledges in writing its obligation to pay in full the amount of the settlement or compromise and all associated expenses and (ii) the Indemnified Party is furnished with security reasonably satisfactory to the Indemnified Party that Indemnitor will in fact pay such amount and expenses. (b) In the event that the Indemnified Party asserts the existence of any Deficiency, the Indemnified Party shall give written notice to Indemnitor of the nature and amount of the Deficiency asserted. If Indemnitor, within a period of twenty (20) business days after the giving of the Indemnified Party's notice, shall not give written notice to the Indemnified Party announcing its intent to contest such assertion of the Indemnified Party (such notice by Indemnitor being hereinafter called the "contest notice"), such assertion of the Indemnified Party shall be deemed accepted and the amount of the Deficiency shall be deemed established. In the event, however, that a contest notice is given to the Indemnified Party within said twenty-day period, then the contested assertion of a Deficiency shall be settled by arbitration to be held in Philadelphia, Pennsylvania in accordance with the rules of the American Arbitration Association then obtaining. The arbitrator shall be a firm or person mutually selected by the Shareholders and SBI (or by the rules of the American Arbitration Association absent such agreement within ten (10) business days after a request for such selection by the Indemnified Party or Indemnitor) which has not been engaged by SBI, the Shareholders or AGI or their respective subsidiaries or Affiliates during the prior five years. The determination of the arbitrator(s) and the reasons therefor shall be delivered in writing to Indemnitor and the Indemnified Party and shall be final, binding and conclusive upon all of the parties hereto, and the amount of the Deficiency, if any, determined to exist, shall be deemed established. (c) Indemnitor and the Indemnifying Party may agree in writing, at any time, as to the existence and amount of a Deficiency, and, upon the execution of such agreement such Deficiency shall be deemed established. Section 8.4 Payment of Deficiencies. Each Indemnitor hereby agrees to pay the amount of established Deficiencies to the applicable Indemnified Party within twenty (20) days after the establishment thereof in cash. Any amounts not paid by an Indemnitor when due under this subparagraph shall bear interest from the due date thereof until the date paid at a rate equal to the prime rate, as reported from time to time in The Wall Street Journal, eastern edition. In the event one or more Deficiencies are established against the Shareholders, each Indemnitor Shareholder shall pay to the Indemnified Party his Proportionate Share of the Deficiencies, which payment may be made, at the election of the respective Indemnitor Shareholder, out of the Escrow Property in accordance with the terms and conditions of the Escrow Agreement (such "Proportionate Share" shall equal the percentage of the Deficiency equal to such Shareholder's percentage ownership interest in AGI as set forth on Annex I hereto, except in the case of a Deficiency arising from a breach by a Shareholder of a representation made as to such Shareholder in Article V hereof, in which event such Shareholder's Proportionate Share shall be 100% and the Proportionate Share of the other Shareholders shall be 0%). If an Indemnitor Shareholder does not elect to make payment out of the Escrow Property, SBI shall nonetheless have the right to offset the amount of such payment by a claim against the Escrow Property in accordance with the terms and conditions of the Escrow Agreement. SBI shall also have the 35 right to offset any such Deficiencies not so paid against any payments to which such Indemnitor Shareholder may become entitled as Contingent Consideration. Any amount not collected from such Shareholder through the application of Escrow Property, offset or otherwise shall remain the personal obligation of that Shareholder. If such Indemnitor Shareholder would not have been entitled to receive funds in escrow which have been paid to SBI pursuant to this Section 8.4 (the "Deficiency Disqualified Amount") because the conditions to distribution of such funds would not have been satisfied, then such Indemnitor Shareholder shall remain liable to the Indemnified Party for an amount equal to the Deficiency Disqualified Amount. Section 8.5 Survival of Representations, Warranties and Agreements. (a) All representations and warranties contained in Articles IV, V and VI of this Agreement and any certificates pertaining thereto to be delivered at the Closing and the rights of the parties to seek indemnification under this Article VIII with respect to such representations and warranties and certificates delivered at Closing pertaining thereto, shall survive the Closing Date but, except as set forth below in respect of any claims as to which notice shall have been duly given prior to the relevant expiration date set forth below, shall expire on the second anniversary of the Closing Date. (b) All agreements and covenants contained in this Agreement and the rights of the parties to seek indemnification under this Article VIII with respect to such agreements and covenants shall survive Closing. (c) Except as provided in the last sentence of Section 8.2(b), nothing contained herein shall limit or restrict the Shareholders continuing liability for any breach of representations and warranties contained in Section 4.18 which in each case shall continue until the expiration of the applicable statute of limitations. (d) Nothing contained in this Section 8.5 shall limit or restrict the Shareholders continuing liability for Deficiencies pursuant to Section 8.4. (e) Except for claims involving fraud and provisions for remedial actions set forth in Article II, the indemnification provided in this Article VIII shall be the exclusive remedies the parties have under the terms of this Agreement with respect to Deficiencies. Section 8.6 Limitations on Indemnification. The indemnification provided for in this Article VIII shall be subject to the following limitations: (a) No Indemnitor shall have liability to an Indemnified Party for indemnification under this Article VIII unless the aggregate amount of Deficiency claims against the Shareholders as a group, or SBI and its Affiliates as a group, as the case may be, exceeds $250,000 (the "Threshold Amount"), in which case all Deficiencies incurred shall be subject to indemnification hereunder; provided, however, that the Threshold Amount shall not apply to Deficiencies arising out of breaches of representations and warranties set forth in Section 4.18, a Shareholder Disclosure Deficiency or a Deficiency relating to Section 2.1. (b) The Shareholders' total liability for indemnity to an Indemnified Party in respect of all claims for indemnification under this Article VIII shall not exceed $11,000,000. 36 Notwithstanding any other provision in this Agreement, the Shareholders' obligations for indemnification under this Article IX shall be allocated among the Shareholders in accordance with each Shareholders' Proportionate Share, and in no event shall any Shareholder be required to pay more than his Proportionate Share of any indemnity obligation arising under this Article VIII. ARTICLE IX CONDITIONS TO CLOSING Section 9.1 Conditions to Each Party's Obligation To Effect the Transaction. No party shall be obligated to effect the Closing if any temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the transactions contemplated hereby shall be in effect. Section 9.2 Conditions of Obligations of SBI and the Acquisition Sub. The obligations of SBI and the Acquisition Sub to effect the Closing are subject to the satisfaction of the following conditions, unless waived by SBI: (a) Representations and Warranties. The representations and warranties of AGI and the Shareholders set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date. (b) Performance of Obligations of the Shareholders. The Shareholders shall have performed in all material respects all of the obligations required to be performed by them under this Agreement at or prior to the Closing Date. (c) Consents, Approvals, etc. Any and all material consents, waivers, permits and approvals from any Governmental Entity required by AGI in connection with the execution, delivery and performance of this Agreement shall have been duly obtained and shall be in full force and effect on the Closing Date. (d) No Litigation. No litigation, governmental action or other proceedings involving or potentially involving a liability, obligation or loss on the part of AGI, or which by reason of the nature of the relief sought might have a materially adverse effect on AGI's business, shall be threatened or commenced against AGI with respect to any matter and no litigation, governmental action or other proceedings shall be threatened or commenced against any person with respect to the consummation of the transactions provided for herein. (e) Other Approvals. All authorizations, consents, orders or approvals, including, without limitation, all licenses or assignments of licenses, of, or declarations or filings with any Governmental Entity by AGI, of which the failure to obtain would have a material adverse effect on AGI, shall have been filed, occurred or been obtained. In addition, (i) AGI shall have received and delivered to SBI and the Acquisition Sub an executed waiver from the members of Capital Planning Group of Pennsylvania, LLC ("CPG") waiving the rights of such members, other than AGI, to notice to and exercise of the "blind option" referred to in Section 7.05 under the Operating Agreement of CPG, and (ii) AGI shall use its best efforts to cause 37 Edmund F. Garno, Inc. to file a withdrawal or cancellation of any and all Applications for Registration of Fictitious Name filings held in the name of Edmund F. Garno, Inc relating to its use of the fictitious name "Garno & Addis". (f) Closing Documents. All documents required to be delivered by AGI and the Shareholders at or prior to the Closing Date shall have been delivered. (g) Termination of Shareholders' Agreement and Restrictions on the Shares. The Shareholders' Agreement and any and all share transfer restrictions on the Shares, including, without limitation, voting, preemptive rights or co-sale agreements, shall have been terminated in accordance with the terms and provisions of each such agreement. (h) Payment of AGI's Expenses. AGI shall have paid or accrued all fees and expenses of its advisors, accountants and counsel, whether incident to the negotiations, preparation, execution, delivery and performance of this Agreement or otherwise for the period through the Closing Date, such that AGI shall have no liability or obligation with respect to such fees and expenses except as shown on AGI's balance sheet as of the Closing Date. (i) Employment Agreements; Incentive Compensation Agreement. Each of the Shareholders shall have entered into an employment agreement in the form attached hereto as Exhibit B (the "Employment Agreement"), and the incentive compensation agreement in the form attached hereto as Exhibit C (the "Incentive Compensation Agreement"). (j) Working Capital, Etc. SBI shall have received a certificate (the "AGI Closing Financial Certificate") dated as of the Closing Date, signed on behalf of AGI certifying that (x) as of the month ended prior to the Closing Date and, (y) immediately after the Closing, after making all payments required or permitted to be made by AGI under this Agreement: (i) the Working Capital of AGI as of such date is at least $1,000; (ii) AGI has no long term liabilities as of such date; (iii) the Tangible Net Worth of AGI as of such date is at least $100,000; and (iv) AGI has no receivables relating to loans to employees as of such date. An example of the calculation of such certificate is set forth on Schedule 9.2(j). (k) Financial Statements. At least ten (10) calendar days prior to the Closing Date, AGI shall have delivered to SBI (i) reviewed financial statements for the year ended December 31, 2001, and (ii) a pro forma balance sheet and income statement for the period from January 1, 2002 through the month ended prior to the Closing Date, which shall confirm, to the satisfaction of SBI in its sole discretion, (A) the accuracy of the AGI Closing Financial Certificate, and (B) a Pre-tax Profit for the year ended December 31, 2001 of at least $1,400,000, after adjustment for the items listed on Annex II hereto. 38 (l) Consents. SBI shall have received evidence in a form reasonably satisfactory to SBI of AGI's receipt of all required consents as referenced in Section 4.12(e), including, but not limited to, any consents required in connection with the leasing of AGI's office space and/or equipment and licensing of business systems. Section 9.3 Conditions of Obligations of AGI and the Shareholders. The obligation of the Shareholders to effect the transactions contemplated herein is subject to the satisfaction of the following conditions unless waived by the Shareholders: (a) Representations and Warranties. The representations and warranties of SBI and the Acquisition Sub set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date. (b) Performance of Obligations of SBI and the Acquisition Sub. SBI and the Acquisition Sub shall have performed in all material respects all of its obligations required to be performed by it under this Agreement at or prior to the Closing Date. (c) Consents, Approvals, etc. Any and all material consents, waivers, permits and approvals from any Governmental Entity required by SBI or the Acquisition Sub in connection with the execution, delivery and performance of this Agreement as listed in Schedule 6.3 shall have been duly obtained and shall be in full force and effect on the Closing Date. (d) No Litigation. No litigation, governmental action or other proceedings involving a liability, obligation or loss on the part of SBI or the Acquisition Sub, or which by reason of the nature of the relief sought might have a materially adverse effect on SBI's or the Acquisition Sub's respective business shall be threatened or commenced against SBI or the Acquisition Sub with respect to any matter, and no litigation, governmental action or other proceedings shall be threatened or commenced against any person with respect to the consummation of the transactions provided for herein. (e) Other Approvals. All authorizations, consents, orders or approvals shall have been filed, occurred or been obtained. (f) Closing Documents. All documents required to be delivered by SBI at or prior to the Closing Date shall have been delivered. ARTICLE X DELIVERIES Section 10.1 Shareholders' Deliveries. At the Closing, the Shareholder Representative shall deliver or cause to be delivered to SBI, the following: (a) Certificates for all of the Shares outstanding on the Closing Date, duly endorsed by the respective Shareholders in blank, or with stock transfer powers duly executed by the respective Shareholders in blank attached, and with all required transfer tax stamps, if any, affixed. 39 (b) Executed Escrow Agreement. (c) The legal opinion of Pepper Hamilton LLP substantially in the form of Exhibit D hereto and otherwise reasonably acceptable to SBI and its counsel; (d) The AGI Closing Financial Certificate described in Section 9.2(j); (e) A "Good Standing Certificate" and/or a certificate of valid registration of AGI issued by the Secretary of State of each jurisdiction in which it does business or is registered to do business, dated as of recent date of the Closing; (f) A certified copy of AGI's Articles of Incorporation and all amendments thereto issued by the Commonwealth of Pennsylvania, dated as of a recent date of the Closing; (g) A certificate of each Shareholder certifying that, as of the Closing Date, (i) each of the representations and warranties of AGI and such Shareholder under this Agreement is true and correct in all material respects, (ii) AGI and such Shareholder have performed all of its or his, as the case may be, obligations required to be performed by it or him under this Agreement; and (iii) such Shareholder has not revoked his appointment of the Shareholder Representative as his agent and attorney in fact in connection with the transactions contemplated by this Agreement; (h) Secretary's Certificate of the Secretary of AGI certifying and setting forth (i) the names of the directors and officers of AGI; (ii) a true and complete copy of the Articles of Incorporation and the Bylaws of AGI, in each case as in effect on the date thereof, and (iii) a true and complete copy of all resolutions, if any, adopted by the Board of Directors and Shareholders of AGI relating to the transactions contemplated by this Agreement; (i) The stock books and records, corporate minute books (containing, to the best knowledge of the Shareholders, the originals of all minutes and resolutions ever adopted or consented to or agreed by the shareholders of AGI, directors or any committee of directors of AGI) and corporate seal of AGI; and (j) Copies of all consents or assignments from governmental agencies or third parties necessary for the consummation of the transactions contemplated by this Agreement. (k) A list of all Tax Returns that will be due with respect to fiscal year 2001 and which have not been filed as of the Closing Date. Section 10.2 SBI's and the Acquisition Sub's Deliveries at Closing. At the Closing, SBI and the Acquisition Sub shall deliver or cause to be delivered to the Shareholder Representative, the following: (a) Executed Escrow Agreement; (b) Executed Employment Agreements; (c) Executed Incentive Compensation Agreement; and 40 (d) The legal opinion of Morgan, Lewis & Bockius LLP, substantially in the form of Exhibit E hereto and otherwise reasonably acceptable to AGI and its counsel; (e) A "Good Standing Certificate" of each of SBI and the Acquisition Sub and a certified copy of the Articles of Incorporation of SBI and Certificate of Organization of Acquisition Sub and all amendments thereto issued by the Commonwealth of Pennsylvania dated as of a recent date of the Closing; (f) Officer's Certificates of each of SBI and the Acquisition Sub certifying that, as of the Closing Date, (i) each of the representations and warranties of SBI and the Acquisition Sub, as the case may be, is true and correct in all material respects, and (ii) each of SBI and the Acquisition Sub, as the case may be, has performed all of its obligations under this Agreement; and (g) Secretary's Certificate of (i) SBI certifying that (A) attached thereto is a true and complete copy of the Articles of Incorporation and the Bylaws of SBI, in each case as in effect on the date thereof, and (B) that attached thereto is a true and complete copy of all resolutions adopted by the Board of Directors of SBI relating to the transactions contemplated by this Agreement, and (ii) the Acquisition Sub certifying that attached thereto is a true and complete copy of the Certificate of Organization and Operating Agreement of the Acquisition Sub. Section 10.3 SBI's Deliveries on Payment Date. On the Payment Date, SBI shall deliver or cause to be delivered to the Shareholders the Base Consideration. ARTICLE XI TAX MATTERS Section 11.1 Returns for Tax Periods Ending on or Before the Closing Date. SBI shall prepare or cause to be prepared and file or cause to be filed all Tax Returns of AGI for all periods ending on or prior to the Closing Date that are filed after the Closing Date and shall pay or cause to paid all Taxes due in connection with such Tax Returns. SBI shall permit the Shareholders to review and comment on each such Tax Return prior to filing and shall make such revisions to such Tax Returns as are reasonably requested by the Shareholders. The Shareholders, jointly and severally, shall reimburse SBI for the Taxes of AGI with respect to such periods, within fifteen (15) days after payment by SBI of such Taxes, to the extent the Shareholders would be obligated to indemnify SBI for such Taxes under Article VIII. Section 11.2 Returns for Tax Periods Beginning Before and Ending After the Closing Date. SBI shall prepare or cause to be prepared and file or cause to be filed all Tax Returns of AGI for Tax periods which begin before the Closing Date and end after the Closing Date and shall pay or cause to be paid all Taxes due in connection with such Tax Returns. SBI shall permit the Shareholders to review and comment on each such Tax Return prior to filing and shall make such revisions to such Tax Returns as Shareholders may reasonably request. The 41 Shareholders, jointly and severally, shall pay to SBI, within fifteen (15) days after the date on which Taxes are paid, with respect to such periods an amount equal to the portion of such Taxes which relates to the portion of such taxable period ending on the Closing Date, to the extent the Shareholders would be obligated to indemnify SBI for such taxes under Article VIII. For purposes of this Agreement, in the case of any Taxes that are imposed on a periodic basis and are payable for a Tax period that includes (but does not end on) the Closing Date, the portion of such Tax period ending on the Closing Date shall (x) in the case of any Taxes other than Taxes based upon or related to income or receipts, be deemed to be the amount of such Tax for the entire Tax period multiplied by a fraction of numerator of which is the number of days in the portion of the Tax period ending on the Closing Date and the denominator of which is the number of days in the entire Tax period; and (y) in the case of any Tax based upon or related to income or receipts, be deemed equal to the amount of Tax which would be payable if the Tax period ended on the Closing Date. Any credits related to a Tax period that begins before and ends after the Closing Date shall be taken into account as though the Tax period ended on the Closing Date. All determinations necessary to give effect to the foregoing allocations shall be made in a manner consistent with the past practices of AGI, provided that such practices are consistent with applicable Tax laws, rules and regulations. Section 11.3 Cooperation on Tax Matters. SBI, AGI and the Shareholders shall, and shall each cause its affiliates to, provide to each of the other parties hereto such cooperation and information, as and to the extent reasonably requested by the other party, in connection with the filing of any Tax Return, amended Tax Return or claim for refund, determining liability for Taxes or a right to refund of Taxes, or in conducting any audit or other proceeding with respect to Taxes. Such cooperation and information shall include providing copies of all relevant portions of relevant Tax Returns, together with relevant accompanying schedules and relevant work papers, relevant documents relating to rulings and other determinations by taxing authorities, and relevant records concerning the ownership and Tax basis of property, which any such party may possess. Each party will retain all Tax Returns, schedules, work papers, and all material records and other documents relating to Tax matters, of AGI for the Tax period first ending after the Closing Date and for all prior Tax periods until the expiration of the applicable statute of limitations for the Tax periods to which the Tax Returns and other documents relate. Thereafter, the party holding such Tax Returns or other documents may dispose of them; provided that such party shall notify the other in writing prior to doing so. Section 11.4 S Corporation Status. With respect to any period ended prior to the Closing Date, AGI and the Shareholders shall not revoke AGI's election to be taxed as an S corporation within the meaning of Code (S)(S)1361 and 1362 and any corresponding provisions of state law. AGI and the Shareholders shall not take or allow any action, other than the transactions contemplated by this Agreement, that would result in the termination of AGI's status as a validly electing S corporation within the meaning of Code (S)(S) 1361 and 1362 and any corresponding provisions of state law. Section 11.5 Section 338(h)(10) Election. (a) At SBI's request, AGI and each Shareholder shall join with SBI in making an election under Section 338(h)(10) of the Code (and any corresponding elections under state, local, or foreign law) (collectively a "Section 338(h)(10) Election") with respect to the purchase and sale of the stock of AGI. Subject to SBI's compliance with each of its obligations under Sections 11.1 and 11.2, the Shareholders, jointly 42 and severally, shall pay any Taxes resulting from the making of the Section 338(h)(10) Election, including (i) any tax imposed under Code (S) 1374, (ii) any tax imposed under Reg. (S) 1.338(h)(10)-1(d)(5), or (iii) any state, local, or foreign Tax imposed on AGI's gain, and, jointly and severally, shall indemnify SBI against any Deficiency arising out of the failure to pay such Taxes. The Shareholders, jointly and severally, shall indemnify and hold harmless SBI against any Deficiency arising out of the failure of any Shareholder to join SBI in making the Section 338(h)(10) Election (and any corresponding elections under state, local, or foreign law). (b) If SBI decides to make the Section 338(h)(10) Election, SBI, AGI and the Shareholders shall cooperate as provided herein to determine the aggregate deemed sales price ("ADSP") and the allocation of the ADSP among AGI's assets in accordance with applicable Treasury Regulations. SBI shall initially determine and send notice to the Shareholders of (i) the calculation of the ADSP and (ii) the allocation of the ADSP among AGI's assets. The Shareholders will be deemed to have accepted such calculation and allocation unless they provide written notice of disagreement to SBI within ten (10) days of receipt of SBI's notice of calculation and allocation. If the Shareholders provide such notice of disagreement to SBI, the parties shall proceed in good faith to determine the ADSP and allocation in dispute. If within ten (10) days after SBI receives the Shareholders' notice of disagreement the Shareholders and SBI have not reached agreement, the Accountants referred to in Section 2.1(c)(ii) shall be engaged to determine the ADSP (if in dispute) and the allocation (if in dispute) of the ADSP. The Shareholders and SBI shall share equally the fees of such Accountants. (c) Promptly following the final determination of the ADSP and the allocation of the ADSP pursuant to Section 11.5(b), SBI shall deliver to the Shareholders for execution a Form 8023 and any similar form under state or local law, and any schedules or attachments thereto (collectively, "Section 338 Forms"). Within ten (10) days of receipt of the Section 338 Forms, AGI and each Shareholder shall duly and promptly execute such Section 338 Forms and shall deliver them to SBI. SBI shall timely file such executed Section 338 Forms and shall provide copies of them to the Shareholders. The Shareholders, AGI and SBI shall file all Tax Returns (including amended returns and claims for refund) in a manner consistent with such Section 338 Forms. Section 11.6 Certain Taxes. All transfer, documentary, sales, use, stamp, registration and other such taxes and fees (including, without limitation, any penalties and interest) incurred in connection with this Agreement for periods on or before the Closing Date shall be paid by the Shareholders when due, and the Shareholders will, at their own expense, file all necessary Tax Returns and other documentation with respect to all such transfer, documentary, sales, use, stamp, registration, and other such taxes and fees, and, if required by applicable law, SBI will, and will cause its affiliates to, join in the execution of any such Tax Returns and other documentation. ARTICLE XII TERMINATION AND AMENDMENT 43 Section 12.1 Termination. This Agreement may be terminated at any time prior to the Closing Date, whether before or after approval of the matters presented in connection with the transactions contemplated herein: (a) by SBI, if the Average Closing Price of the SBI Stock is below $17.00 per share; (b) by AGI, if the Average Closing Price of the SBI Stock is below $17.00 per share; (c) by mutual consent of SBI and the Shareholders (through the Shareholder Representative); (d) (i) by SBI on the one hand or by the Shareholders (through the Shareholder Representative) on the other hand if there shall have been a material breach of any representation, warranty, covenant or agreement on the part of the Shareholders on the one hand, or SBI or the Acquisition Sub on the other hand, set forth in this Agreement which breach shall not have been cured, in the case of a representation or warranty, within five business days following notice of such breach given to the breaching party by the applicable party or, in the case of a covenant or agreement, within five business days following receipt by the breaching party of notice of such breach, or (ii) by SBI or the Shareholders if any permanent injunction or other order of a court or other competent authority preventing the consummation of the transactions hereby shall have become final and non-appealable; or (e) by either SBI or the Shareholders if the transactions contemplated herein shall not have been consummated before June 30, 2002. Section 12.2 Effect of Termination. In the event of a termination of this Agreement as provided in Section 12.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of the Shareholders , SBI or its respective officers or directors, or the Acquisition Sub or its respective members or officers, except (i) with respect to Sections 13.1 and 13.2, and (ii) to the extent that such termination results from the willful breach by a party hereto of any of its representations, warranties, covenants or agreements set forth in this Agreement. Section 12.3 Amendment. This Agreement may be amended by the parties hereto at any time; provided however, this Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Section 12.4 Extension; Waiver. At any time prior to the Closing Date, the parties hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. 44 ARTICLE XIII FORM D FILING; REGISTRATION OF THE NEW SHARES Section 13.1 Form D Filing; Registration of New Shares. SBI shall: (a) file in a timely manner a Form D relating to the sale of the SBI Stock issued pursuant to Section 1.1 herein (the "New Shares"), pursuant to Regulation D of the Securities Act. (b) as soon as practicable after the Closing Date, but in no event later than ninety (90) days following the Closing Date, prepare and file with the SEC a Registration Statement on Form S-3 (or, if SBI is ineligible to use Form S-3, then on Form S-1) relating to the sale of the New Shares by the Shareholders from time to time on the Nasdaq National Market (or the facilities of any national securities exchange or over-the-counter market on which the SBI Stock is then traded) or in privately negotiated transactions (the "Registration Statement"); (c) provide the Shareholders with any information required to permit the sale of the New Shares under rule 144A of the Securities Act; (d) subject to receipt of necessary information from the Shareholders, use its best efforts to cause the SEC to notify SBI of the SEC's willingness to declare the Registration Statement effective on or before 90 days after the Closing Date; (e) notify the Shareholders promptly upon the Registration Statement being declared effective by the SEC; (f) prepare and file with the SEC such amendments and supplements to the Registration Statement and the prospectus in the form first filed with the SEC pursuant to Rule 424(b) of the regulations of the Securities Act, or filed as part of the Registration Statement at the time of effectiveness if no Rule 424(b) filing is required (the "Prospectus") and take such other action, if any, as may be necessary to keep the Registration Statement effective until the earlier of (i) two years after the effective date of the Registration Statement, (ii) the date on which the New Shares may be resold by the Shareholders without registration or without regard to any volume limitations by reason of Rule 144(k) under the Securities Act or any other rule of similar effect or (iii) all of the New Shares have been sold pursuant to the Registration Statement or Rule 144(k) under the Securities Act or any other rule of similar effect; (g) promptly furnish to the Shareholders with respect to the New Shares registered under the Registration Statement such reasonable number of copies of the Registration Statement and the Prospectus, including any supplements to or amendments of the Registration Statement and the Prospectus, in order to facilitate the public sale or other disposition of all or any of the New Shares by the Shareholders; (h) during the period when copies of the Prospectus are required to be delivered under the Securities Act or the 1934 Act, will file all documents required to be filed with the SEC pursuant to Section 13, 14 or 15 of the 1934 Act within the time periods required by the 1934 Act and the rules and regulations promulgated thereunder; 45 (i) file documents required of SBI for customary blue sky clearance in all applicable states, if required; provided, however, that SBI shall not be required to qualify to do business or consent to service of process in any jurisdiction in which it is not now so qualified or has not so consented; (j) promptly inform each Shareholder when any stop order has been issued by the SEC with respect to the Registration Statement and use its commercially practical best efforts to promptly cause such stop order to be withdrawn; (k) notify the Shareholders at any time when the Shareholders must suspend offers or sales of the New Shares under the Registration Statement, either (i) because the Prospectus included in such Registration Statement is required to be amended for any reason, such as an amendment under the Securities Act to provide current information, or (ii) because the Prospectus includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, or (iii) because underwriters of the New Shares have insisted on suspension of such offerings and sales in connection with a public offering by SBI of its shares of common stock; provided that with respect to any such suspension pursuant to clause (iii), the duration for such suspension shall not exceed ninety (90) days and not more than one such suspension may occur during any six (6) month period. SBI shall not be required to inform any Shareholder of the reason for the suspension but shall use its best efforts to enable the Shareholders to recommence offers and sales under the registration statement at the earliest possible date. Notwithstanding the foregoing and anything to the contrary set forth in this Article XIII, there may occasionally be times when SBI must suspend the use of the Prospectus included in such Registration Statement until such time as an amendment to the Registration Statement has been filed by SBI and declared effective by the SEC, or until such time as SBI has filed an appropriate report with the SEC pursuant to the 1934 Act, or until the suspension period may be terminated under the provisions of an underwriting agreement. Shareholders may not offer or sell any New Shares pursuant to such Prospectus during the period commencing when SBI notifies the Shareholders of the suspension of the use of such prospectus and ending when SBI notifies the Shareholders that the Shareholders may thereafter effect offers and sales pursuant to such Prospectus; (l) prior to filing the Registration Statement, cause all of the SBI Stock covered by the Registration Statement to be listed on the Nasdaq National Market (or the facilities of any national securities exchange or over-the-counter market on which the SBI Stock is then traded); and (m) SBI shall bear all expenses in connection with the procedures in clauses (a) through (l) in this Section 13.1 and the registration of the New Shares pursuant to the Registration Statement, other than fees and expenses, if any, of counsel or other advisers to the Shareholders or and any expenses relating to the sale of the New Shares by the Shareholders (including without limitation, broker's commissions, discounts or fees of any nature and transfer taxes or charges of any nature). Section 13.2 Transfer of Shares After Registration. Each Shareholder agrees that it will not effect any disposition of the New Shares or its right to purchase the SBI Stock that 46 would constitute a sale within the meaning of the Securities Act, except as contemplated in the Registration Statement or as otherwise permitted by law, and that it will promptly notify SBI of any changes in the information set forth in the Registration Statement regarding such Shareholder or its plan of distribution. Section 13.3 Furnish Information. It is a condition precedent to the obligations of SBI to take any action pursuant to Section 13.1 hereof that the Shareholders shall furnish to SBI such information regarding the Shareholders, including such Shareholder's ownership of SBI Stock and the intended method of disposition of the New Shares as shall be required to effect the registration of the New Shares and as may be required from time to time to keep such registration current. Section 13.4 Indemnification. (a) To the fullest extent permitted by law, SBI shall indemnify, defend and hold harmless each Shareholder against any losses, claims, damages, or liabilities (joint and/or several) to which they may become subject under the Securities Act, the 1934 Act or other federal or state law, insofar a such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or other violations (collectively a "Violation") by SBI: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, the Prospectus or any amendment or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by SBI of the Securities Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Securities Act, the 1934 Act or any state securities law in connection with the offering covered by such registration statement, and SBI will pay as incurred to each such Shareholder for any legal or other expenses reasonably incurred by him in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 13.4(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of SBI, which consent shall not be unreasonably withheld, nor shall SBI be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Shareholder. (b) To the fullest extent permitted by law, each Shareholder shall indemnify, defend and hold harmless SBI, its Affiliates, successors and assigns, and each of their respective directors and officers, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons or entities may become subject under the Securities Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon information contained in the Registration Statement in conformity with written information furnished by such Shareholder expressly for use in connection with the Registration Statement; and each such Shareholder will pay, as incurred, any legal or other expenses reasonably incurred by any person or entity intended to be indemnified pursuant to this Section 13.4(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 13.4(b) shall not apply to amounts paid in 47 settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Shareholder, which consent shall not be unreasonably withheld. (c) Promptly after receipt by an indemnified party under this Section 13.4 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 13.4, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 13.4, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 13.4. (d) If the indemnification provided for in this Section 13.4 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. In no event shall a person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) be entitled to contribution from any person or entity who was not guilty of fraudulent misrepresentation. (e) The obligations of SBI and the Shareholders under this Section 13.4 shall survive the completion of the offering of New Shares under the Registration Statement. ARTICLE XIV MISCELLANEOUS 48 Section 14.1 Costs and Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be (i) paid by the Shareholders to the extent incurred by them and out of such accrued funds on the books of AGI specifically designated for the payment of such costs and expenses, and (ii) paid by SBI and the Acquisition Sub to the extent incurred by them. To the extent that AGI has over-accrued for the payment of such costs and expenses of the Shareholders on its books, SBI shall release to the Shareholders the excess of such accrued amounts over the actual costs and expenses incurred by the Shareholders. To the extent that AGI has under-accrued for the payment of such costs and expenses of the Shareholders on its books, then the Shareholders shall be jointly and severally liable for the amount of such deficiencies between the accrued funds and the actual costs and expenses incurred by the Shareholders. Section 14.2 Brokers or Finders. Except with respect to any amounts that might be due to the Shareholders' advisors (any of which amounts shall be paid by AGI and the Shareholders), each of SBI, the Acquisition Sub and the Shareholders hereby represents and warrants that there is no corporation, firm or person entitled to receive from it any brokerage commission or finder's fee in connection with this Agreement or the transactions and agreements provided for herein, and each such party hereby indemnifies and agrees to save the other parties hereto harmless from and against any claim for brokerage commission or finder's fee based on any retention or alleged retention of a broker or finder by it. Section 14.3 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed), sent by nationally recognized overnight express courier service, or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if SBI or the Acquisition Sub, to: Susquehanna Bancshares, Inc. 26 North Cedar Street Lititz, PA 17543 Attention: William J. Reuter, President and Chief Executive Officer Telecopy No.: 717.626.1874 with a copy to: Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103-2921 Attention: Lawrence H. Berger, Esquire Telecopy No.: 215.963.5299 (b) if AGI prior to the Closing, to: The Addis Group, Inc. 2300 Renaissance Blvd. 49 King of Prussia, PA 19406-2345 Attention: F. Scott Addis Telecopy No.: 610.279.8543 with a copy to: Pepper Hamilton LLP 400 Berwyn Park 899 Cassatt Road Berwyn, PA 19312-1183 Attention: Jeffrey P. Libson, Esquire Telecopy No.: 610-640-7835 (c) if to the Shareholders, to the address as set forth opposite his name on Annex I hereto, or such other address as the Shareholders shall have notified SBI of in writing. with a copy to: Pepper Hamilton LLP 400 Berwyn Park 899 Cassatt Road Berwyn, PA 19312-1183 Attention: Jeffrey P. Libson, Esquire Telecopy No.: 610-640-7835 Any communication given in conformity with this Section 14.3, shall be effective upon the earlier of actual receipt or deemed delivery. Delivery shall be deemed to have occurred as follows: if delivered personally on the day so delivered; if telecopied, upon written confirmation by the sending machine of effective transmission; if sent by overnight express courier service, the next business day; and if mailed, three business days after deposits in the United States Mail. Section 14.4 Publicity. Except as otherwise required by law, and for so long as this Agreement is in effect, AGI, the Shareholders, SBI and the Acquisition Sub shall not issue or cause the publication of any press release or other public announcement with respect to the transactions contemplated by this Agreement without the consent of the other parties, which consent shall not be unreasonably withheld. Until a press release of the execution of this Agreement has been made in accordance herewith, all of the parties hereto shall treat this Agreement and the terms thereof in the strictest confidence. Section 14.5 Binding Nature of Agreement; No Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns, except that no party may assign or transfer its Section 14.6 rights or obligations under this Agreement (other than as provided herein) without the prior written consent of the other parties hereto. 50 Section 14.7 Controlling Law. This Agreement and all questions relating to its validity, interpretation, performance and enforcement (including without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, regardless of the conflicts of law provisions thereof, and without the aid of any canon, custom, or rule of law requiring construction against the drafting party. Section 14.8 Exhibits and Schedules. All exhibits and schedules attached hereto are hereby incorporated by reference into, and made a part of, this Agreement. Section 14.9 Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signature of all of the parties reflected hereon as the signatories. Section 14.10 Provisions Separable. The provisions of this Agreement are independent of and separable from each other, and no provisions shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. Section 14.11 Entire Agreement. This Agreement contains the entire understanding among the parties hereto and with respect to the subject matter hereof, and together supersede all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. This Agreement may not be modified or amended other than by an agreement in writing signed by the parties hereto. Section 14.12 Paragraph Headings. The headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation. Section 14.13 Gender, Etc. Words used herein, regardless of the number and gender specifically used, shall be deemed and construed to include any other number, singular or plural, and any other gender, masculine, feminine or neuter, as the context requires. Section 14.14 Knowledge of AGI and the Shareholders. For purposes of this Agreement, "knowledge of AGI" or similar words and phrases shall be conclusively deemed to include: (i) actual knowledge of the Shareholders or the officers and directors of AGI, and (ii) that knowledge which any officer or director of AGI should have obtained after exercising due diligence which a prudent officer or director should have undertaken with respect thereto. In connection therewith, the knowledge (both actual and constructive) of the officers and directors of AGI shall be imputed to be the knowledge of the Shareholders and, except as to Article V, the knowledge of one Shareholder shall be imputed to the other Shareholders. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK 51 IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase Agreement as of the day and year first above written. SUSQUEHANNA BANCSHARES, INC. By: /s/ William J. Reuter --------------------------------- Name: William J. Reuter Title: President and CEO SUSQUEHANNA ACQUISITION, LLC THE SHAREHOLDERS By: /s/ William J. Reuter /s/ F. Scott Addiss --------------------- ------------------------------------- Name: William J. Reuter F. Scott Addis Title: President /s/ William D. Rhodes, III ------------------------------------- William D. Rhodes, III /s/ Peter R. Unger ------------------------------------- Peter R. Unger THE ADDIS GROUP, INC. By: /s/ F. Scott Addis --------------------------------- Name: F. Scott Addis Title: President FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT This First Amendment to Stock Purchase Agreement (this "Amendment") is entered into as of June 28, 2002, by and among Susquehanna Bancshares, Inc., a Pennsylvania business corporation registered as a financial holding company under the Bank Holding Company Act of 1956, as amended ("SBI"), Susquehanna Acquisition, LLC, a Pennsylvania limited liability company and wholly-owned subsidiary of SBI (the "Acquisition Sub"), The Addis Group, Inc., a Pennsylvania business corporation ( "AGI"), and F. Scott Addis, William D. Rhodes, III and Peter R. Unger (collectively, the "Shareholders"). Capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Stock Purchase Agreement, dated April 30, 2002, by and among the parties hereto (the "Agreement"). WHEREAS, the parties hereto entered into the Agreement, pursuant to which the Shareholders have agreed to sell to the Acquisition Sub, and the Acquisition Sub has agreed to purchase from the Shareholders, the shares of AGI owned by the Shareholders, which constitute all of the issued and outstanding shares of AGI, under the terms and conditions set forth in the Agreement; and WHEREAS, the parties hereto now desire to amend certain provisions of the Agreement as set forth in this Amendment. NOW, THEREFORE, in consideration of the mutual covenants contained herein and in the Agreement, and intending to be legally bound hereby, the parties agree as follows: 1. In accordance with Section 14.11 of the Agreement, the last sentence of Section 2.2 of the Agreement is hereby amended and restated to read in its entirety as follows: "For the purposes of this Agreement, the term "Fiscal Year" shall mean a twelve-month period beginning on the first day of the month following the month in which the Closing occurs." 2. In accordance with Section 14.11 of the Agreement, Section 12.1(e) of the Agreement is hereby amended and restated in its entirety as follows: "(e) by either SBI or the Shareholders if the transactions contemplated herein shall not have been consummated before July 1, 2002." 3. In accordance with Section 14.11 of the Agreement, Section 13.1 (a) of the Agreement is hereby amended and restated in its entirely as follows: "(a) to the extent determined by SBI to be necessary, file in a timely manner a Form D relating to the sale of the SBI Stock issued pursuant to Section 1.1 herein (the "New Shares"), pursuant to Regulation D of the Securities Act." 4. Schedule 6.3 of the Agreement shall be amended and restated in its entirety in the form attached hereto as Exhibit A. 5. Schedule 4.1(a) shall be amended and restated in its entirety in the form attached hereto as Exhibit B. 6. Schedule 4.1(b) shall be amended and restated in its entirety in the form attached hereto as Exhibit C. 7. This Amendment and all questions relating to its validity, interpretation, performance and enforcement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, regardless of the conflicts of law provisions thereof, without the aid of canon, custom, or rule of law requiring construction against the drafting party. 8. Except as specifically modified by this Amendment, all of the provisions of the Agreement are hereby ratified and confirmed to be in full force and effect, and shall remain in full force and effect. 9. This Amendment and the Agreement constitute the entire agreement between the parties hereto with respect to subject matter hereof and thereof. Said documents supersede all other agreements and understandings between the parties with respect to the subject matter hereof and thereof, whether written or oral. This Amendment shall be binding upon and shall inure to the benefit of the parties and their respective heirs, administrators, executors, affiliates, successors and permitted assigns. 10. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signature of all of the parties reflected hereon as the signatories. This Amendment may also be delivered by facsimile transmission with the same force and effect as if originally executed copies of this Agreement were delivered to all parties. [Signatures appear on following pages] IN WITNESS WHEREOF, the undersigned have caused this First Amendment to Stock Purchase Agreement be signed by their respective officers thereunder duly authorized, all as of the date first written above. SUSQUEHANNA BANCSHARES, INC. THE ADDIS GROUP, INC. By: /s/ William J. Reuter By: /s/ F. Scott Addis --------------------- --------------------------------- Name: William J. Reuter Name: F. Scott Addis Title: President and CEO Title: President SUSQUEHANNA ACQUISITION, LLC THE SHAREHOLDERS By: /s/ William J. Reuter /s/ F. Scott Addis --------------------- ------------------------------------- Name: William J. Reuter F. Scott Addis Title: President /s/ William D. Rhodes, III ------------------------------------- William D. Rhodes, III /s/ Peter R. Unger ------------------------------------- Peter R. Unger EX-10.1 4 dex101.txt RESIDUAL INTEREST AGREEMENT Exhibit 10.1 RESIDUAL INTEREST AGREEMENT This RESIDUAL INTEREST AGREEMENT (this"Residual Agreement"), is made and entered into this 17th day of May, 2002, by and between Sovereign Bank, a federal savings bank organized under the laws of the United States of America (the "Bank"), and Susquehanna Bancshares, Inc., a Pennsylvania corporation (the "Corporation"), in consideration of and as an inducement for the granting, execution and delivery by Bank of (i) that certain SUBI Supplement and Amended Servicing Agreement dated as of May 17th, 2002 by Bank, Hann Auto Trust (the "Trust"), Boston Service Company, Inc., doing business as Hann Financial Service Corporation ("Hann"), Auto Lenders Liquidation Center, Inc.("Auto Lenders"), and Wilmington Trust Company, as trustee (the "Supplement") a copy of which is attached hereto as Exhibit A, (ii) that certain Representations and Warranties Agreement dated as of May 17th, 2002 by and between Hann and Bank (the "Representations and Warranties Agreement") a copy of which is attached hereto as Exhibit B, and (iii) that certain Residual Purchase Agreement dated May 17th, 2002, by and among Hann, Bank and Auto Lenders a copy of which is attached hereto as Exhibit C (the "Residual Purchase Agreement"; and collectively with the Supplement and the Representations and Warranties Agreement, the "Agreements"), copies of which are attached hereto and made a part hereof) and in further consideration of the sum of One Dollar ($1.00) and other good and valuable consideration paid by Bank to Corporation, the receipt and sufficiency of which are hereby acknowledged, Corporation and Bank hereby agree as follows: In the event that Bank incurs any losses, costs and expenses (i) as a result of any failure of Auto Lenders in its obligation to remit to Bank an amount equal to the full Residual Value of any Leased Vehicle (plus penalties and interest thereon) in accordance with the Residual Purchase Agreement; or (ii) as a result of any amounts on deposit in the Residual Reserve Account being insufficient (or otherwise unavailable to Bank, including as a result of or in connection with a bankruptcy, insolvency, reorganization, or similar proceeding involving Auto Lenders or Hann) to fully compensate Bank for any Final Liquidation Loss with respect to such Leased Vehicle (each a "Loss"), Corporation hereby agrees to pay Bank, in accordance with the following paragraph, the amount of each such Loss, provided that in no event shall the liability of the Corporation hereunder in respect of all such Losses exceed in the aggregate an amount equal to twelve percent (12%) of the maximum aggregate Residual Value of all Units purchased by the Bank pursuant to the Agreements (the "Beneficial Amount"). The Bank shall provide the Corporation written notice of each Loss promptly after it learns of such Loss, such notice to identify the amount of the Loss and the Unit with respect to which the Loss has been incurred. Within five (5) Business Days after its receipt of such notice, the Corporation shall pay Bank an amount equal to the lesser of (a) the amount of the Loss on such Unit, or (b) the remaining Beneficial Amount after deduction of the aggregate amount of all Losses previously paid by Corporation from such Beneficial Amount. Corporation shall cause Hann, in its capacity as Servicer of the Units, to provide monthly reports to Bank itemizing the amounts paid by Corporation to Bank during the preceding month in respect of the Beneficial Amount, and the remaining available Beneficial Amount. At all times while Bank is the holder of the Bank SUBI Certificate, Corporation will maintain and pay when due all premiums with respect to an umbrella excess liability protection insurance policy (the "Policy") covering itself, Hann and the Trust (a) with an responsible insurance carrier which has been rated at least A:V by the A.M. Best Company, (b) which provides for minimum coverage of twenty-five million dollars ($25,000,000.00) per occurrence, (c) upon which the Bank has been named an additional insured, (d) which obligates the insurer to provide notice to the Bank of any change in coverage and 30 days prior written notice of any cancellation, and (e) with respect to which the contingent and excess liability insurance policy Hann is obligated to maintain pursuant to the SUBI Supplement meets the requirements of a policy of "Basic Insurance" as defined in Policy numbered FS06801318 with St. Paul Fire and Marine Insurance Co./St. Paul Mercury Insurance Co. in effect on the date hereof, or similar requirements of the insurer with respect to any replacement policy. The Corporation agrees that so long as Bank is the holder of the Bank SUBI Certificate, it may not terminate such policy or cause the termination thereof unless and until a replacement policy meeting the minimum criteria set forth above shall have been obtained. The Corporation shall not change insurance carriers or other aspects of coverage without prior written notice to Bank. This Residual Agreement is an absolute and unconditional contract for payment and of performance and is a surety agreement. Corporation's liability hereunder is direct and may be enforced without Bank being required to resort to any other right, remedy or security and this Residual Agreement shall be jointly and severally enforceable against Corporation, its successors and assigns, without the necessity for any suit or proceedings on Bank's part of any kind or nature whatsoever against Hann or Auto Lenders or Corporation, or their respective successors and assigns, and without the necessity of any notice of non-payment, non-performance or non-observance or the continuance of any such default or of any notice of acceptance of this Residual Agreement or of Bank's intention to act in reliance hereon or of any other notice or demand to which Corporation might otherwise be entitled, all of which Corporation hereby expressly waive; and Corporation hereby expressly agrees that the validity of this Residual Agreement and the obligations of Corporation hereunder shall in no way be terminated, affected or impaired by reason of the assertion or the failure to assert by Bank against Hann or Auto Lenders, or Hann's or Auto Lenders' successors and assigns, of any of the rights or remedies reserved to Bank pursuant to the provisions and covenants contained in the Agreements. Additionally, Corporation hereby approves and consents to the terms and conditions of all of the Agreements and liabilities to Bank. This Residual Agreement shall be a continuing guaranty, and (whether or not Corporation shall have notice or knowledge of any of the following) the liability and obligation of Corporation hereunder shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, discharged or in any way impaired by (a) any amendment or modification of, or supplement to, or extension or renewal of, the Agreements or any assignment or transfer thereof; (b) any exercise or non-exercise of any right, power, remedy privilege or action of any nature whatsoever with respect to Hann's or Auto Lenders' obligations or liabilities to Bank and with respect to any rights against any person or persons (including Hann, Auto Lenders and the Corporation) under or in respect of the Agreements or this Residual Agreement, or in the Units, Residual Units, or any other property, including but not being limited to, any renewals, extensions, modifications, postponements, compromises, indulgences, waivers, surrenders, exchanges and releases, and the Corporation will remain fully liable hereon notwithstanding any of the foregoing, or any waiver, consent or approval by Bank with respect to any of the covenants, terms, conditions or agreements contained in the Agreements or this Residual Agreement or any indulgences, forbearances or extensions of time for performance or observance allowed to either of Hann or Auto Lenders from time to time and for any length of time; (c) any bankruptcy, insolvency, reorganization, arrangement, readjustment, composition, liquidation or similar proceeding relating to either of Hann or Auto Lenders, their successors and assigns or their properties or creditors; (d) any limitation on the liability or obligation of Hann or Auto Lenders under the Agreements or their respective estates in bankruptcy or of any remedy for the enforcement thereof, resulting from the operation of any present or future provision of the Bankruptcy Reform Act of 1978, as amended, or any other statute or from the decision of any court; or (e) any transfer by either or both of Hann and Auto Lenders or assignment of any of their respective interest under the Agreements. Any notice required hereunder shall be given by certified mail, return receipt requested, to the parties hereto at the following addresses: (a) if to the Bank, to Sovereign Bank, One Huntington Quadrangle, Melville, NY 11747 Attention: Peter LaMariana, Senior Vice President; with a copy to: 1130 Berkshire Boulevard, Wyomissing, PA 19610, Attention David A. Silverman, Chief General Counsel; (b) if to Corporation, to Susquehanna Bancshares, Inc., 26 North Cedar Street, Lititz, PA 17653, Attention: Secretary. All of Bank's rights and remedies under the Agreements and under this Residual Agreement are intended to be distinct, separate and cumulative and no such right and remedy therein or herein mentioned is intended to be in exclusion of or a waiver of any of the others. No termination of any of the Agreements shall deprive Bank of any of its rights and remedies against Corporation under this Residual Agreement. This Residual Agreement shall apply to Bank's obligations pursuant to any extension, renewal, amendment, modification and supplement of or to the Agreements as well as to Hann and Auto Lenders' obligations thereunder. As a material inducement for the Bank to enter into the Agreements with Hann and Auto Lenders, Corporation does hereby represent and warrant to the Bank as follows: (i) Corporation is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and is duly qualified and in good standing under the laws of each jurisdiction in which the conduct of its business or the ownership of its assets requires such qualification. (ii) Corporation has the power, capacity and authority to execute, deliver and perform under this Residual Agreement, and has taken all necessary corporate action to authorize the execution, delivery and performance of this Residual Agreement. (iii) This Residual Agreement, when executed and delivered, will constitute a valid obligation of Corporation and shall be legally binding upon Corporation and enforceable against Corporation in accordance with its terms. (iv) The execution and delivery of this Residual Agreement will not violate or contravene any provision of any existing law, rule or regulation or decree of any court, governmental authority, bureau or agency or any mortgage, indenture, security agreement, undertaking or other agreement to which Corporation is a party or by which it or any of its properties is bound or subject and will not result in the creation or imposition of any lien, security interest or other encumbrance on any of its properties pursuant to the provisions of any such mortgage, indenture, security agreement, undertaking or other agreement. (v) Corporation has reviewed and is familiar with all of the provisions of the Agreements. (vi) Corporation is not in default under any material existing agreement to which it is a party. (v) Corporation acknowledges that Corporation will derive a direct benefit from the Agreements. As a further inducement to Bank to make and enter into the Agreements and accept the Bank SUBI Certificate, and the interests represented thereby, and in consideration thereof, Corporation hereby waives: (i) notice of the creation of any Affiliates' liabilities, (ii) presentment, (iii) demand for payment, (iv) protest, (v) notice of dishonor, (vi) notice of nonpayment of any Affiliates' liabilities, (vii) notice of suit or any other action by the Bank against an Affiliate, (viii) any other notice to an Affiliate. Corporation hereby waives the benefit of all laws now or hereafter in effect in any way limiting or restricting the liability of the Corporation hereunder, including without limitation (a) all defenses whatsoever to the Corporation's liability hereunder except the defense of payments made on account of Hann and Auto Lenders' liabilities to Bank and Corporation's liability hereunder, and (b) all right to stay of execution and exemption of property in any action to enforce the liability of Corporation hereunder. In addition, Corporation covenants and agrees that in any action or proceeding brought on, under or by virtue of this Residual Agreement, Corporation shall and does hereby waive trial by jury. This Residual Agreement shall be legally binding upon Corporation and its successors and assigns and shall inure to the benefit of Bank and its successors and assigns, including any assignee of all or any portion of the Bank SUBI Portfolio or the Bank SUBI Certificate, or any interest therein or represented thereby. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED UNDER THE INTERNAL LAWS OF THE STATE OF PENNSYLVANIA WITHOUT REGARD TO ANY OTHERWISE APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS. This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. Capitalized terms used herein and not defined herein shall have the meanings assigned to them in the Supplement. IN WITNESS WHEREOF, Corporation, intending to be legally bound hereby, has caused this Residual Agreement to be executed as of the 17th day of May 2002. Witness:/s/ Lisa M. Cavage SUSQUEHANNA BANCSHARES, INC. ---------------------------- Witness:/s/ Catherine M. Bush By: /s/ Drew K. Hostetter ---------------------------- -------------------------------- Name: Drew K. Hostetter Title: CFO Witness:/s/ Anthony Maresco SOVEREIGN BANK ---------------------------- Witness:/s/ Gordon Handshaw By: /s/ Peter LaMariana ---------------------------- -------------------------------- Name: Peter LaMariana Title: SVP STATE OF PENNSYLVANIA : :ss. : COUNTY OF LANCASTER On this 17th day of May 2002, before me, a notary public, the undersigned officer, personally appeared Drew K. Hostetter, known to me (or satisfactorily proven) to be the duly authorized CFO of Susquehanna Bancshares, Inc. , and the person whose name is subscribed to the within instrument and acknowledged that he executed the same on behalf of Susquehanna Bancshares, Inc. for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. /s/ Stefanie J. Martin ------------------------------------ Notary Public Notarial Seal Stefanie J. Martin, Notary Public Lancaster, Lancaster County My Commission Expires Jan. 5, 2004 STATE OF NEW YORK : :ss. : COUNTY OF SUFFOLK On this 17th day of May 2002, before me, a notary public, the undersigned officer, personally appeared Peter LaMariana, known to me (or satisfactorily proven) to be the duly authorized Sr. Vice President of Sovereign Bank, and the person whose name is subscribed to the within instrument and acknowledged that he executed the same on behalf of Sovereign Bank for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand and official seal. /s/ Jacqueline Badra ------------------------------------ Notary Public Jacqueline Badra Notary Public, State of New York No. 01BA6024589 Qualified in Nassau County Commission Expires May 10, 2003 Exhibit A - -------------------------------------------------------------------------------- SOVEREIGN BANK SUBI SUPPLEMENT AND SUPPLEMENT TO SERVICING AGREEMENT by and among BOSTON SERVICE COMPANY, INC., d.b.a. HANN FINANCIAL SERVICE CORPORATION, SOVEREIGN BANK, HANN AUTO TRUST, AUTO LENDERS LIQUIDATION CENTER, INC. and WILMINGTON TRUST COMPANY - -------------------------------------------------------------------------------- Dated as of May 17, 2002 1 Table of Contents Page ---- ARTICLE I DEFINITIONS; THIRD-PARTY BENEFICIARY; CONDITIONS TO SETTLEMENT 1.1. Definitions...........................................................2 1.2. Third Party Beneficiary...............................................2 1.3. Conditions to Settlement..............................................2 1.4. Opinions of Counsel...................................................3 ARTICLE II CREATION OF THE BANK SUBI 2.1. Initial Creation of the Bank SUBI.....................................3 2.2. SUBI Certificate......................................................3 2.3. Bank SUBI Trustee.....................................................3 2.4. Additions to and Removals From the Bank SUBI Portfolio................4 2.5. The Bank SUBI.........................................................5 2.6. General Servicing Obligations, Bank SUBI to be Treated Separately.....5 2.7. Compliance with Law...................................................5 ARTICLE III OPERATION OF THE PROGRAM; SERVICING OF BANK SUBI PORTFOLIO 3.1. Payments by Bank......................................................6 3.2. Additional Covenants regarding the Servicing of Leases................6 3.3. Compensation and Fees.................................................9 3.4. Establishment and Purpose of Residual Reserve Account.................9 3.5. Payoff................................................................9 3.6. Representations and Warranties.......................................10 3.7. Remedies for Breach of Representations and Warranties................11 3.8. Events of Termination................................................12 3.9. Cooperation upon Termination of Servicing............................13 3.10. Waiver of Past Events of Servicing Termination.......................13 ARTICLE IV MISCELLANEOUS 4.1. Amendment............................................................14 4.2. UCC Filings..........................................................14 4.3. Change in Name, Identity or Corporate Structure......................14 4.4. Location of Principal Executive Office...............................14 4.5. Delivery/Indication of Ownership in Physical Files...................15 4.6. Indication of Ownership in Computer Records..........................15 4.7. Preservation of Rights and Remedies..................................15 i Table of Contents (continued) Page ---- 4.8. Future Obligations...................................................15 4.9. Regulatory Requirements..............................................16 4.10. Nonpetition..........................................................16 4.11. Waiver...............................................................16 4.12. Governing Law........................................................16 4.13. Effect of Agreement on Trust Agreement and Servicing Agreement.......16 4.14. Indemnification by Hann..............................................17 4.15. Independent Contractor Relationship..................................17 4.16. No Use of Bank Name or Logo..........................................17 4.17. Refinancing..........................................................17 4.18. Term of Agreement....................................................17 4.19. Notice...............................................................18 4.20. No Assignment........................................................18 4.21. Article and Section Headings.........................................18 4.22 Counterparts.........................................................18 4.23 Limitation of Liability..............................................18 ii SOVEREIGN BANK SUBI SUPPLEMENT AND SUPPLEMENT TO SERVICING AGREEMENT THIS SUBI SUPPLEMENT AND SUPPLEMENT TO SERVICING AGREEMENT (as it may be modified, supplemented or amended from time to time in accordance with its terms, this "Agreement") is made and entered into as of May 17, 2002 among BOSTON SERVICE COMPANY, INC., a New Jersey corporation doing business as Hann Financial Service Corporation ("Hann", or in its capacity as Initial Beneficiary, the "Initial Beneficiary," or in its capacity as Servicer, the "Servicer"), SOVEREIGN BANK, a federal savings bank organized under the laws of the United States of America (the "Bank"), HANN AUTO TRUST, a Delaware business trust (the "Trust"), AUTO LENDERS LIQUIDATION CENTER, INC., a New Jersey Corporation ("Auto Lenders"), and WILMINGTON TRUST COMPANY, as UTI Trustee, Delaware Trustee and SUBI Trustee of the Bank SUBI (in such capacities, the "UTI Trustee," the "Delaware Trustee" and the "Bank SUBI Trustee"). RECITALS WHEREAS, the Trust is a Delaware business trust formed and operated pursuant to a Second Amended and Restated Trust Agreement dated February 12, 1999 (as it may be modified, supplemented or amended from time to time, the "Trust Agreement") for the purpose, among other things, of facilitating the origination and transfer of Leases and related Leased Vehicles without retitling; WHEREAS, the Trust and Hann have entered into that certain Servicing Agreement dated as of October 23, 1997 (as it has been amended, and as it may be further modified, supplemented or amended from time to time, the "Servicing Agreement"), which provides, among other things, for the servicing of the Trust Assets by Hann, as Servicer; WHEREAS, the Trust Agreement contemplates that, from time to time, the UTI Trustee, on behalf of the Trust and at the direction of the Initial Beneficiary, (i) will identify and allocate on the Trust's books and records certain Trust Assets from the Undivided Trust Interest to separate SUBI Portfolios; and (ii) will create and issue Certificates representing separate special units of beneficial interest in the Trust ("SUBIs"), the beneficiary or beneficiaries of which generally will hold undivided beneficial interests in the related SUBI Portfolios, all as set forth in the Trust Agreement; WHEREAS, Hann has established a retail automobile leasing program (the "Program") for which Hann, on behalf of the Trust, solicits Dealers to enter into Leases which, together with the related Leased Vehicle, are sold by such Dealers to the Trust; WHEREAS, the Bank desires to purchase from time to time the beneficial interest in certain Units which have been or will be acquired by the Trust as part of the UTI Portfolio in accordance with the Trust Agreement as modified and supplemented by this Agreement, and which such Units are to be serviced by Hann pursuant to this Agreement and the Servicing Agreement; WHEREAS, the parties hereto desire to hereby modify and supplement the terms of the Trust Agreement (i) to cause the UTI Trustee and the Bank SUBI Trustee to identify and allocate Trust Assets to a SUBI Portfolio (the "Bank SUBI Portfolio"), which shall consist of 1 certain Units and (ii) to create and issue to the Bank a SUBI Certificate to be designated the "Hann Auto Trust Sovereign Bank Special Unit of Beneficial Interest Certificate" (such SUBI Certificate, together with any replacements thereof, the "Bank SUBI Certificate"), that will evidence the entire and exclusive beneficial interest in the related SUBI (the "Bank SUBI"); WHEREAS, Auto Lenders is in the business of reselling and remarketing vehicles, inter alia, after the scheduled termination of Leases; WHEREAS, Auto Lenders is the beneficial owner of an SUBI Interest in the Trust (the "Auto Lender's SUBI"), and Wilmington Trust Company has been appointed by Auto Lenders as the Auto Lenders SUBI Trustee in accordance with Section 3.1 of the Trust Agreement; WHEREAS, the Bank desires to sell to Auto Lenders, and Auto Lenders desires to purchase from the Bank, the beneficial interest of the Bank in the Units allocated to the Bank SUBI upon the termination or expiration of the related Leases (each such Unit a Residual Unit, and each such related vehicle a "Residual Vehicle"); and WHEREAS, upon Auto Lender's purchase of each Residual Unit, the parties hereto desire to cause the Bank SUBI Trustee and the Auto Lenders SUBI Trustee to transfer the beneficial interest in the Residual Units to the Auto Lenders SUBI from the Bank SUBI; WHEREAS, the parties hereto desire to modify and supplement the terms of the Servicing Agreement to provide for specific servicing obligations that will benefit the Bank as the holder of the Bank SUBI Certificate and related matters; NOW THEREFORE, in consideration of the mutual agreements herein contained, and of other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: ARTICLE I DEFINITIONS; THIRD-PARTY BENEFICIARY; CONDITIONS TO SETTLEMENT 1.1. Definitions. Capitalized terms shall have the meanings in Exhibit A attached hereto. Capitalized terms not defined in this Agreement (a) have the same meanings as in the Trust Agreement, if defined therein, and (b) if not defined in the Trust Agreement but defined in the Servicing Agreement, have the same meanings as in the Servicing Agreement. 1.2. Third Party Beneficiary. The Bank, its successors and/or assigns, as a holder of a SUBI Certificate, is a third-party beneficiary of the Trust Agreement and the Servicing Agreement, insofar as they apply to the Bank SUBI, the Bank SUBI Portfolio, the Bank SUBI Certificate, or any of the rights created thereby or incident thereto. 1.3. Conditions to Settlement. The obligations of the parties hereto are subject to the following terms and conditions: (a) Satisfactory negotiation and execution by the respective parties of the Residual Purchase Agreement, the Residual Interest Agreement, the Representations and Warranties Agreement; 2 (b) Receipt by the Trustee and the Bank of satisfactory tax opinions of counsel. (c) Execution by the Bank and Hann of a Confidentiality, Privacy and Data Security Agreement in the form of Exhibit F hereto; (d) Execution by the Bank and Auto Lenders of a Confidentiality Privacy and Data Security Agreement in the Form of Exhibit B to the Residual Purchase Agreement. 1.4. Opinions of Counsel. Opinions of counsel acceptable to Bank and substantially in the form attached hereto as Exhibit H, shall be delivered to the Bank for receipt on or before June 17, 2002 by each of Hann, the Trustee, Susquehanna Bancshares, Inc., and Auto Lenders. In the event any such opinions are not received by the Bank by such date, Bank may, at its sole option, require Hann, as Initial Beneficiary and Certificateholder of the UTI Interest, to repurchase the Bank's interest in any Units in the Bank SUBI Portfolio, and notwithstanding anything to the contrary herein, the Bank may thereafter, at is option, decline to purchase any additional Units. ARTICLE II CREATION OF THE BANK SUBI 2.1. Initial Creation of the Bank SUBI. Pursuant to Section 4.2 of the Trust Agreement, the Initial Beneficiary hereby directs the UTI Trustee to create, and the UTI Trustee does hereby create, a SUBI for the exclusive benefit of the Bank (the "Bank SUBI"). The Bank SUBI will represent a specific beneficial interest solely in the Trust Assets allocated to the Bank SUBI Portfolio. 2.2. SUBI Certificate. On the date hereof, the Initial Beneficiary will cause the Delaware Trustee, on behalf of the Trust, to execute and deliver a SUBI Certificate to the Bank which will represent a 100% beneficial interest in the Bank SUBI and the Bank SUBI Portfolio (the "Bank SUBI Certificate"). The Bank SUBI Certificate will be substantially in the form attached hereto as Exhibit B. 2.3. Bank SUBI Trustee. In accordance with Section 3.1(b) of the Trust Agreement, the Bank has appointed Wilmington Trust Company as the SUBI Trustee for the Bank SUBI and the Bank SUBI Portfolio. Wilmington Trust Company hereby accepts its appointment as Bank SUBI Trustee with respect to the Bank SUBI and the Bank SUBI Portfolio. 3 2.4. Additions to and Removals From the Bank SUBI Portfolio. The Initial Beneficiary shall identify Units originated pursuant to the Program to the UTI Trustee and the UTI Trustee shall cause the Trust to acquire such Units from the related Dealers in accordance with the Trust Agreement, as modified herewith, provided however, Hann may remit the acquisition cost of any such Unit directly to the related Dealer for and on behalf of the Trust. Any payment by Hann to a Dealer in respect of the acquisition cost of a Unit will be deemed to be a contribution of the applicable Purchase Price of such Unit to the Trust followed by the purchase of the Unit by the Trust. (a) With respect to Units for which Hann has remitted the applicable acquisition cost to the related Dealer for and on behalf of the Trust, Hann, as Initial Beneficiary, may offer to the Bank, from time to time, the right to purchase the beneficial interest in such Units at the Purchase Price. Any Unit for which the acquisition cost was initially funded by Hann will be allocated to the Undivided Trust Interest and such Unit, upon the subsequent payment of the Purchase Price by the Bank to Hann to acquire the beneficial interest in such Unit, the Trustee will, upon receipt by the Trustee of the Worksheet and electronic data file described in (d) below, allocate such Unit to the Bank SUBI Portfolio. (b) The Bank shall be entitled to deduct an acquisition fee equal to fifty dollars ($50.00) from the applicable Purchase Price with respect to each Unit purchased by Bank. (c) Hann, in its capacity as Servicer will, and in its capacity as Initial Beneficiary will cause the UTI Trustee and Bank SUBI Trustee to, take any and all actions necessary or appropriate to assure that such Units are identified on the books and records of the Trust as allocated to the Bank SUBI Portfolio, it being understood that such direction regarding the identification of Bank SUBI Portfolio Units on the books and records of the Trust shall be considered an activity necessary in the creation of the Bank SUBI Portfolio for purposes of Section 4.2 (a) of the Trust Agreement. (d) Each of the UTI Trustee and Bank SUBI Trustee agrees, upon receipt of a copy of any Worksheet delivered pursuant to Section 3.1 hereof, to allocate the Units identified therein to the Bank SUBI Portfolio. It is understood that the each certificate of title with respect to any Leased Vehicle shall be held in the name of the Trust, and that the interest of the Bank will not be indicated on any certificate of title for any Leased Vehicle, unless and until requested by Bank in accordance with Section 4.5 of the Trust Agreement, which notation shall be performed at the Initial Beneficiary's expense upon the occurrence of an Event of Termination described in Section 3.8 herein, and otherwise at the Bank's expense. (e) Upon the scheduled expiration of any Lease or other termination of any Lease related to a Unit included in the Bank SUBI Portfolio, Auto Lenders shall purchase the beneficial interest in the related Residual Unit in accordance with Section 4 of the Residual Purchase Agreement. Upon the Bank's receipt of the related Residual Payment, Hann, as servicer of the Trust Assets, shall notify the Bank SUBI Trustee and the Auto Lenders SUBI Trustee to allocate the beneficial interest in such Residual Unit, the related Residual Vehicle and all other SUBI Assets related to such Residual Unit from the Bank SUBI to the Auto Lenders SUBI. Upon the occurrence of any such reallocation, the Bank SUBI Trustee and the Auto 4 Lenders SUBI Trustee shall make a notation in its respective records reflecting the reallocation of such Trust Assets. 2.5. The Bank SUBI. With respect to the Bank SUBI Certificate and each Unit identified to the Bank SUBI Portfolio, each of the Trust, the UTI Trustee and the Initial Beneficiary, as applicable and to the extent of their interest therein, on the date hereof, and with respect each such Unit, on the related Funding Date, does absolutely sell, assign and otherwise convey to the Bank, without recourse except as provided herein, and the Bank does hereby purchase and acquire, as of such date: (i) all right, title and interest in and to the Bank SUBI evidenced by the Bank SUBI Certificate and all monies due thereon and paid thereon or in respect thereof; (ii) the right to realize upon any property that underlies or may be deemed to secure the Bank SUBI to the extent of amounts payable under the Bank SUBI Certificate, whether now owned or hereafter acquired; and (iii) all proceeds of the foregoing. 2.6. General Servicing Obligations, Bank SUBI to be Treated Separately. Hann, as Servicer, will manage, service, administer and effect collections on the Trust Assets allocated to the Bank SUBI Portfolio on behalf of, for the sole benefit of, and in the best interests of, the Bank in accordance with Accepted Servicing Practices, the terms and provisions of the Servicing Agreement, this Agreement and the Confidentiality, Privacy and Security Addendum, attached hereto as Exhibit F ("GLB Addendum"), giving due consideration to the Bank's reliance on the Servicer, and shall employ a standard of diligence and care not less than that used by Hann in servicing leases and leased vehicles for its own behalf or for others. The Servicer will account to the Bank SUBI Trustee and the Bank with respect to the Bank SUBI Portfolio separately from any other Portfolio. The Servicer will not be required to take any action as Servicer with respect to the Bank SUBI Portfolio that is not required to be taken pursuant to this Agreement or the Servicing Agreement, except as shall otherwise be agreed between the parties. 2.7. Compliance with Law. Hann shall administer the Units and Lessee information and records in accordance with the terms of the Lease documents and the requirements of applicable federal, state and local laws, regulations and executive orders. Hann agrees to promptly notify appropriate government and regulatory agencies as required by applicable law in the event that any Lessee is identified by the Office of Foreign Assets Control, or other similar agency, as a Specially Designated National. Hann, at all times during the term of this Agreement shall service and administer the Lessee information and records in a commercially reasonable manner in accordance with Title V of the Gramm-Leach-Bliley Act (together with regulations and guidelines promulgated thereunder), as amended from time to time, and shall maintain and implement procedures which (a) ensure the security and confidentiality of Lessee customer information and records; (b) protect against any anticipated threats of hazards to the security or integrity of such Lessee information and records; and (c) protect against unauthorized access to or use of such Lessee information or records and (d) are otherwise in accordance with the GLB Addendum. 5 ARTICLE III OPERATION OF THE PROGRAM; SERVICING OF BANK SUBI PORTFOLIO 3.1. Payments by Bank. During the term of this Agreement, Bank may purchase from the UTI Portfolio the beneficial interest in any and all such Units identified by Hann as Bank elects for the Purchase Price contained in any Lease worksheet submitted to the Bank by Hann (as supplemented by the individual Leases subject thereto and such related lease-level data as is agreed by Hann and the Bank from time to time, a "Worksheet"). Bank is not required to purchase the beneficial interest in any Unit and shall not be liable to Hann, the Trust or any other party for its failure or refusal to purchase the beneficial interest in any Unit. On each Funding Date, Hann will provide a copy of the related Worksheet and a schedule containing the minimum information identified on Exhibit G hereto (which may be in electronic form) with respect to each Unit funded by the Bank on such Funding Date, to the UTI Trustee and the SUBI Trustee. Each of the UTI Trustee and SUBI Trustee agrees, upon receipt of a copy of any Worksheet to allocate the Units identified on such schedule and Worksheet to the Bank SUBI Portfolio. If Bank elects to purchase the beneficial interest in any Unit in accordance with Section 2.4, the Bank shall pay the Purchase Price (less the amount of the acquisition fee described in Section 2.4(b)) with respect to such Unit to Hann, as Initial Beneficiary and holder of the UTI Interest, as follows: (a) $100.00 (the "Per Unit Residual Reserve Deposit") shall be deposited into the Residual Reserve Account established pursuant to Section 3.4; and (b) the remainder of the Purchase Price (after deduction of the Per Unit Residual Reserve Deposit and the amount of the acquisition fee due to the Bank described in Section 2.4(b)) shall be deposited into such other account as may be designated in writing by Hann as holder of the UTI Interest. 3.2. Additional Covenants regarding the Servicing of Leases. (a) Servicer will provide to Bank daily, monthly, quarterly and annual reports with regard to the Units included in the Bank SUBI Portfolio in the form agreed to between Bank and Servicer, which shall be substantially in the form of Exhibit E hereto. (i) Daily reports shall be provided by Servicer on the Business Day next following the date of the reported activity. Monthly reports shall be provided by Servicer on or before the 5th Business Day of each month. Bank will verify and notify Servicer of any discrepancies on such reports within a reasonable period of time. Servicer agrees to provide such other reports and data with respect to the Bank SUBI 6 Portfolio as shall be requested from time to time by the Bank or its regulators, including but not limited to reports of Servicer's compliance with requirements of Title V of the Gramm Leach Bliley Act. Bank shall reimburse Servicer for its reasonable out-of pocket expenses related to the initial creation of any such other reports or data. (ii) Servicer shall deliver to Bank on or before April 30th of each year, beginning in the year following the first Funding Date, an Officers' Certificate stating, as to each signatory thereof, that (i) a review of the activities of Servicer during the preceding calendar year and of performance under this Agreement, the Trust Agreement and the Servicing Agreement has been made under such officers' supervision, (ii) that the Servicer has performed its duties as Servicer at all times in compliance with Title V of the Gramm Leach Bliley Act, as it may be amended from time to time, and (iii) to the best of such officers' knowledge, based on such review, Servicer has fulfilled all of its obligations under such agreements throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officers and the nature and status thereof and the action being taken by Servicer to cure such default. Servicer shall provide Bank with copies of such statements upon request. (iii) The Servicer shall deliver to the Purchaser on or before April 30th of each year beginning in the year following the Funding Date with respect to the prior calendar year, a copy of the Servicer's internally prepared financial statements together with a report made in accordance with Statement of Accounting Standard No. 70 (SAS 70) addressed to the board of directors of the Servicer and to the Bank, prepared by a firm of independent certified public accountants which is a member of the American Institute of Certified Public Accountants. The report will 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. (b) Servicer agrees to allow Bank, its authorized representatives and any governmental officials having regulatory responsibility with respect to the Bank full access to all of the properties, personnel, books and records of, and computer accounting systems of the Servicer for inspection and audit purposes at any reasonable time during normal business hours upon at least twenty-four (24) hours notice. (c) Servicer agrees to employ servicing personnel, at no cost to Bank, in a number and caliber sufficient to service and effect collections on the assets 7 included in the Bank SUBI Portfolio in accordance with Accepted Servicing Practices and the terms of this Agreement and the Servicing Agreement. Such personnel shall function under the sole guidance and direction of Servicer and at all times remain solely the employees of Servicer. Servicer shall solely be responsible for the salaries, employment taxes, and any and all employee benefits of such personnel, (d) Auto Lenders agrees to indemnify the Bank for credit losses, as described below, in an amount equal to 0.25% of the aggregate unpaid principal balance all Units purchased by the Bank hereunder (as such unpaid principal balance is determined on the date each such Unit was added to the Bank SUBI Portfolio). In furtherance of its obligation hereunder, Auto Lenders agrees to establish, at the Bank and in the name of the Bank, the Loss Reserve Account, which shall be an interest-bearing account, and to deposit therein on the date hereof, an initial amount equal to two-hundred-fifty-thousand dollars ($250,000.00) by wire transfer of immediately available funds. The amount on deposit in the Loss Reserve Account shall be supplemented from time to time, in such amounts as shall be agreed to in writing by the parties, if the amount of Auto Lender's indemnification pursuant to the first sentence hereof exceeds Auto Lender's initial deposit of $250,000.00. Notwithstanding anything to the contrary herein, the Bank shall have no obligation to purchase additional Units unless and until the parties agree on the additional amount Auto Lenders shall deposit to the Loss Reserve Account, if on the Funding Date with respect to such additional Units, the total of all amounts previously deposited by Auto Lenders to the Loss Reserve Account would be less than the amount of Auto Lenders' aggregate indemnity obligation pursuant to the first sentence of this paragraph if such additional Units were purchased by the Bank. The Bank may withdraw funds from the sum on deposit in the Loss Reserve Account to offset any Final Liquidation Loss suffered by the Bank with respect to a Unit for which the Lessee has defaulted in his/her obligation to make monthly payments, or which is otherwise terminated prior to the scheduled maturity date of such Lease. The Bank shall be entitled to offset credit losses against the amounts in the Loss Reserve Account notwithstanding the Bank's termination of purchases of additional Units hereunder, or of Hann as the Servicer of the Units. To the extent the Servicer receives recoveries with respect to any such Unit after the date upon which Bank was reimbursed from the Loss Reserve Account, the Servicer shall deposit such recoveries into the Loss Reserve Account to offset future losses. Auto Lenders agrees to maintain the Loss Reserve Account so long as the Bank, its successors or assigns own the beneficial interest in the Bank SUBI Portfolio. Auto Lenders hereby grants to the Bank a lien and security interest in the Loss Reserve Account and the proceeds thereof to secure payment and performance of all of Auto Lenders' and Hann's obligations to the Bank of any nature whatsoever arising under this Agreement, including but not limited to any damages arising as a result of either Auto Lenders' or Hann's rejection of this Agreement in connection with an insolvency or bankruptcy proceeding commenced by or against Auto Lenders or Hann. (e) All Lease payments will be made directly payable to the Bank. The Bank, at its cost, shall employ personnel to promptly process all Lease payments received on a daily basis through Servicer's systems. Servicer shall monitor, maintain, and upgrade such systems as necessary, provide training, consultants and systems support to the Bank, and make such systems available to the Bank during normal business hours so long as any Unit is outstanding in the Bank SUBI Portfolio, at no additional cost to Bank. 8 Bank will keep accurate, current and complete records of all payments posted in accordance with normal banking procedures. 3.3. Compensation and Fees. (a) In consideration for the services performed by Servicer under this Agreement, Bank shall pay to Servicer: (i) With respect to each Unit included in the Bank SUBI Portfolio as of the end of the calendar month immediately preceding the related remittance date described in 3.3(b) below, the monthly fee per Unit as shall be agreed to by Servicer and the Bank and which monthly fee amount shall be indicated in a letter agreement between the parties which is incorporated herein by reference; and (ii) All late charges and early termination fees collected by Bank on Leases included in the Bank SUBI Portfolio. (b) On or before the 10th day of each month while Servicer is obligated to service and is servicing the Units pursuant to this Agreement, Bank shall make payment to accounts designated by Servicer of the fees collected by Bank during the preceding month and which are due Servicer as provided in Section 3.3(a). This payment obligation of Bank shall terminate upon the termination of servicing under this Agreement as provided in Section 3.9 hereof. 3.4. Establishment and Purpose of Residual Reserve Account. (a) Auto Lenders agrees to establish, pursuant to the Residual Purchase Agreement, a Residual Reserve Account at the Bank in the name of the Bank, which shall bear interest at any time at a rate not less than Bank then pays on money market accounts at such time. Hann shall deposit therein, from the Purchase Price of each Unit, the Per Unit Residual Reserve Deposit for each Unit included in the Bank SUBI Portfolio. The sum on deposit in the Residual Reserve Account shall be applied to defray losses in excess of the Residual Value suffered by Auto Lenders on Units initially allocated to the Bank SUBI Portfolio which will be purchased by Auto Lenders in accordance with the Residual Purchase Agreement, or to defray losses by the Bank in the event Auto Lenders defaults upon its obligations under the Residual Purchase Agreement. Auto Lenders agrees to maintain the Residual Reserve Account so long as the Bank owns the beneficial interest in the Bank SUBI Portfolio. If Auto Lenders fails to purchase the beneficial interest in any Residual Vehicle (the "Residual Payment") in accordance with the Residual Purchase Agreement, the Bank may apply funds on deposit in the Residual Reserve Account to defray Final Liquidation Losses (if any) suffered by the Bank in connection with the sale by the Bank of such Residual Vehicle. Notwithstanding the termination of Bank's purchases of additional Units hereunder, or Bank's termination of Hann as the Servicer of the Units, the Bank shall be entitled to offset such Final Liquidation Losses against the Residual Reserve Account. 3.5. Payoff. In the event that the Bank becomes subject to a formal enforcement action by the OTS or the FDIC having a material adverse effect on the subject matter of this Agreement, the Initial Beneficiary shall have the right to repurchase the Bank 9 SUBI Certificate from Bank and to terminate this Agreement upon the payment to Bank of 100% of the then aggregate outstanding Book Value of all Units allocated to the Bank SUBI. Any Units allocated to the Bank SUBI at the time of such repurchase shall be allocated by Bank SUBI Trustee and the UTI Trustee from the Bank SUBI to the UTI Portfolio. The obligations of Auto Lenders under the Residual Purchase Agreement shall survive such a repurchase by the Initial Beneficiary and shall continue for the benefit of the Initial Beneficiary. 3.6. Representations and Warranties. Each of the parties hereto (other than the Trust, and as to representation (f) below, other than as to the UTI Trustee, Delaware Trustee and Bank SUBI Trustee) for itself in each of its respective capacities hereunder and Hann, on behalf of the Trust, represents and warrants to the others as of the date hereof, and as of the respective Funding Date with respect to each Unit acquired by the Bank as follows: (a) Duly Licensed. Such entity is duly organized and validly existing, duly licensed and/or qualified in all jurisdictions where such licensing and/or qualification is necessary. (b) Power and Authority, Due Authorization, Enforceability. Such entity has full power and authority to own its properties and to conduct its business as such properties shall be currently owned and such business is presently conducted and to perform all of its obligations hereunder. It has full power and authority to execute and deliver this Agreement and to carry out its terms and this Agreement has been duly authorized, executed and delivered by such entity and shall constitute the legal, valid and binding obligation of such entity, enforceable against such entity in accordance with its terms, except as such enforceability may be limited by insolvency, bankruptcy, reorganization, conservatorship, receivership, liquidation or other similar laws and to general equitable principles. (c) No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, nor constitute a default under (in each case material to the entity and its subsidiaries considered as a whole), or result in the creation or imposition of any lien, charge or encumbrance (in each case material to such entity and its subsidiaries considered as a whole) upon any of the property or assets of such entity pursuant to the terms of, any indenture, mortgage, deed of trust, loan agreement, guarantee, lease financing agreement or other agreement or instrument under which the entity is a party (other than this Agreement); nor will such action result in any violation of the provisions of its federal charter, bylaws or other organic documents or any law, order, rule, or regulation applicable to such entity or of any federal or State regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over such entity or its properties which would materially and adversely affect the performance by such entity of its obligations under, or the validity and enforceability of, this Agreement. (d) No Proceedings. No legal or governmental proceedings are pending to which such entity is a party or of which any property of such entity is the subject, and no such proceedings are threatened or contemplated by governmental authorities or threatened by others, other than such proceedings which will not have a material adverse effect upon the general affairs, financial position, net worth or results of operations (on an annual basis) of such entity and its subsidiaries considered as a whole and will not materially and adversely affect the 10 performance by such entity of its obligations under, or the validity and enforceability of, this Agreement. (e) No Consent Required. Such entity is not required to obtain the consent of any other Person, or any consent, license, approval or authorization or registration or declaration with, any governmental authority, bureau or agency in connection with the execution, delivery or performance of this Agreement, except for such as have been obtained, effected or made. (f) No Untrue Information. Neither this Agreement nor any statement, report or other document prepared by such entity pursuant to this Agreement or in connection with the transactions contemplated hereby contains any untrue statement of material fact or omits to state a fact necessary to make the statements contained herein or therein not misleading. (g) Ability to Perform. Such entity can perform each and every one of its covenants contained in this Agreement. (h) Material Adverse Change. There has been no change in the business, operations, financial condition, properties or assets of such entity since December 31, 2001 which would have a material adverse effect on its ability to perform its obligations under this Agreement. The representations and warranties in this Section shall survive the execution and assignment of this Agreement and the Bank SUBI Certificate, and any subsequent transfers of each Unit. 3.7. Remedies for Breach of Representations and Warranties. It is understood and agreed that the representations and warranties set forth in Sections 3.6 shall survive the funding or purchase of the Unit by the Bank, or any subsequent transfer of the SUBI Certificate and shall inure to the benefit of each of the parties hereto, notwithstanding any restrictive or qualified endorsement on any Lease, or other evidence of indebtedness or assignment or the examination or failure to examine documentation related to any Unit funded or purchased by the Bank hereunder by or any recital set forth in any Assignment which provides that such assignment is without recourse or representations. Upon discovery by Hann, Auto Lenders, or the Bank of a breach of any of the foregoing representations and warranties which materially and adversely affects the value of the Bank SUBI Portfolio or the interest of Bank in the Units (or which materially and adversely affects the interest of Bank in, or the value of, the related Unit in the case of a representation and warranty with respect to a particular Unit), the party discovering such breach shall give prompt written notice to the others. Within thirty (30) days of the earlier of either discovery by or notice to Hann or the Trust of any breach of a representation or warranty of Section 3.6 herein which materially and adversely affects the value of a Unit (or the interest of the Bank therein), Hann and the Trust, as applicable, shall use its best efforts promptly to cure such breach in all material respects and, if such breach cannot be cured within such thirty (30) days, Hann shall, at the Bank's option, purchase such Unit from the Bank SUBI at the Book Value within five (5) days of the Bank's demand. In the event that a breach materially and adversely affects the value of the Bank SUBI Portfolio or the Bank SUBI Certificate and shall involve any representation or warranty set forth 11 in Section 3.6 and cannot be cured within thirty (30) days of the earlier of either discovery by or notice to Hann or the Trust of such breach, all of the Units in the Bank SUBI Portfolio shall, at the Bank's option, be purchased by Hann at the Book Value. Any repurchase of a Unit or Units pursuant to the foregoing provisions of this Section 3.7 shall be accomplished by wire transfer of immediately available funds in the amount of the Book Value to such account as the Bank may direct. 3.8. Events of Termination. Upon the occurrence of the following events, by written notice to the other parties hereto, the Bank may at no cost to the Bank, (i) terminate any additional funding or purchases of Units, and (ii) terminate the servicing of the Bank SUBI Portfolio: (i) Any failure by Hann or the Auto Lenders to deliver to the Bank any proceeds or payment required to be so delivered under the terms of this Agreement or the Residual Purchase Agreement that shall continue unremedied for a period of five (5) Business Days after written notice of such failure is received by Hann or Auto Lenders, as the case may be, from the Bank or after discovery of such failure by an officer of the Hann or Auto Lenders, as the case may be; (ii) Failure on the part of Hann or Auto Lenders duly to observe or to perform in any material respect any of Hann's or Auto Lenders' representations or warranties or any other covenants or agreements of Hann or Auto Lenders, as the case may be, set forth in this Agreement, the Residual Purchase Agreement, the Trust Agreement, or the Servicing Agreement, which failure shall (a) materially and adversely affect the rights of the Bank and (b) continue unremedied for a period of thirty (30) days after the date on which written notice of such failure, requiring the same to be remedied, shall have been given to Hann or Auto Lenders by the Bank; (iii) The entry of a decree or order by a court or agency or supervisory authority having jurisdiction in the premises for the appointment of a conservator, receiver, or liquidator for Hann or Auto Lenders in any insolvency, readjustment of debt, marshaling of assets and liabilities, or similar proceedings, or for the winding up or liquidation of its respective affairs, and the continuance of any such decree or order unstayed and in effect for a period of thirty (30) consecutive days; (iv) The consent by Hann or Auto Lenders to the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshaling of assets and liabilities, or similar proceedings of or relating to such party or relating 12 to substantially all of its property or if such party shall admit in writing its inability to pay its debts generally as they become due, file a petition to take advantage of any applicable insolvency or reorganization statute, make an assignment for the benefit of its creditors, or voluntarily suspend payment of its obligations or become insolvent; (v) The failure by Hann for three consecutive months to provide a monthly detailed report of all accounts sixty (60) days or more delinquent, with a timeline for action to be taken on each account, and indicating that the appropriate action has been approved by the Collection Department Manager; (vi) The failure of Hann to remedy, within thirty (30) days of written notice by the Bank thereof, any event, condition, policy, practice, or circumstance which, in the Bank's sole reasonable determination, has caused, or is likely to cause, a material adverse effect upon any Unit, the Bank's investment in any Unit, or a regulatory violation on the part of the Bank. Notwithstanding anything to the contrary herein, upon the termination of Hann as Servicer due to the occurrence of an Event of Termination, Hann shall comply in all respects with Section 3.9 hereunder, and no fee or compensation shall be payable to Hann with respect to the servicing of the Receivables after the Termination Date or with respect to any servicing rights relating to the Units. 3.9. Cooperation upon Termination of Servicing. Upon termination under Section 3.8 hereof, or otherwise, the Servicer shall cooperate with the Bank or Bank's designee in effecting the termination of the responsibilities and rights of the Servicer under this Agreement by the applicable Termination Date, including the transfer to the Bank or the Bank's designee for administration of all cash amounts that shall at the time be held by the Servicer for deposit or shall thereafter be received with respect to a Unit and the delivery of the document files and the related accounts and records maintained by the Servicer. In the event this Agreement is terminated pursuant to Section 3.8, all reasonable costs and expenses (including attorneys' fees) incurred in connection with transferring the servicing and document files to the Bank or Bank's designee pursuant to this Section 3.9 shall be paid by the Servicer upon presentation of reasonable documentation of such costs and expenses. Upon any termination of the Servicer other than as a result of an Event of Termination pursuant to Section 3.8, costs and expenses incurred in connection with transferring the servicing and document files to the Bank or Bank's designee shall be allocated in a manner agreed upon by the parties. 3.10. Waiver of Past Events of Servicing Termination. The Bank may waive in writing any Event of Servicing Termination hereunder and its consequences. Upon any such written waiver of a past Event of Servicing Termination, such Event of Servicing Termination shall cease to exist, and shall be deemed to have been remedied for every purpose of this 13 Agreement. No such waiver shall extend to any subsequent or other event or impair any right consequent thereon. ARTICLE IV MISCELLANEOUS 4.1. Amendment. Notwithstanding any statement to contrary contained in this Agreement, the Trust Agreement or the Servicing Agreement, each of the Trust Agreement, the Servicing Agreement (each as supplemented by this Supplement) or this Agreement may be amended, supplemented or modified without the consent of the Bank in any respect which does not materially adversely affect the interest of the Bank under this Agreement. 4.2. UCC Filings. Hann does hereby authorize the Bank to file such financing statements and such continuation statements, all in such a manner and in such places as may be required by law fully to preserve, maintain, and protect the interest of the Bank, as owner of the Bank SUBI, the Bank SUBI Certificate, the beneficial interest in the Units allocated to the Bank SUBI Portfolio and the Leases and Leased Vehicles and other assets comprising such Units, and the proceeds of any of them (collectively, the "Bank SUBI Assets"), and, in the event that the conveyance by Hann to the Bank of its right title and interest in the Bank SUBI Assets hereunder is characterized by a court or other governmental authority or regulatory body of competent jurisdiction as a financing, the assignment, transfer and conveyance by Hann hereunder shall constitute, and Hann does hereby grant to the Bank, a security interest in the Bank SUBI, the Bank SUBI Certificate, the Units allocated to the Bank SUBI Portfolio, and each of Leases and Leased Vehicles comprising the Units allocated to the Bank SUBI Portfolio. In the event that the Bank determines that the interest conveyed to the Bank was other than an ownership interest or a first-priority security interest in the Bank SUBI, the Bank SUBI Certificate, and each of Leases and Leased Vehicles comprising the Units allocated to the Bank SUBI Portfolio, Hann, as Initial Beneficiary, immediately shall, or shall cause the UTI Trustee to, repurchase the affected Units, or all of them, at the Book Value within 5 days of the Bank's demand, and notify the Bank SUBI Trustee and the UTI Trustee. Immediately upon receipt of such notice, the Bank SUBI Trustee and the UTI Trustee shall allocate any Units so repurchased from the Bank SUBI to the UTI Portfolio. 4.3. Change in Name, Identity or Corporate Structure. Hann shall not change its name, identity, or corporate structure in any manner that would, could, or might make any financing statement or continuation statement filed in accordance with paragraph 4.2 above seriously misleading within the meaning of (S)9-506 of the Uniform Commercial Code ("UCC") as adopted in the State of New Jersey, unless it shall have given the Bank at least five (5) days' prior written notice thereof and shall have promptly filed appropriate amendments or supplements to all previously filed financing statements or continuation statements. 4.4. Location of Principal Executive Office. Hann shall give the Bank at least five (5) days' prior written notice of any relocation of its principal place of business, if, as a result of such relocation, the applicable provisions of the UCC would require the filing of any amendment of any previously filed financing or continuation statement or of any new financing statement, and Hann does hereby authorize the Bank to file any such amendment or new financing statement. Hann shall at all times maintain its principal executive office within the 14 United States of America, and Hann shall maintain each office from which it shall service the Units within the United States of America. 4.5. Delivery/Indication of Ownership in Physical Files. Hann shall deliver the entire contents of the Lease Files to the Bank on or before the related Funding Date. In addition to Hann's authorization to the Bank to file UCC-1 financing statements evidencing the Bank's ownership interest or security interest in and to the Bank SUBI Certificate, the Units in the Bank SUBI Portfolio and in the proceeds thereof under Section 4.2, the Servicer shall maintain the original certificate of title to each of the Leased Vehicles in a custodial capacity for the benefit of the Bank, and shall segregate all such titles retained by it with respect to each Unit in the Bank SUBI Portfolio from other documents held by it on its own behalf or for the benefit of others and shall clearly identify Bank as the beneficial owner of all such certificates of title. 4.6. Indication of Ownership in Computer Records. The Hann shall maintain its computer systems, in accordance with its customary standards, policies and procedures, so that, from and after the time of conveyance hereunder of the Units to the Bank, the Hann's master computer records (including any back-up archives) that refer to a Unit shall indicate clearly the interest of the Bank in such Unit and that such Unit is owned by the Bank. Indication of the Bank's ownership of a Unit shall be deleted from or modified on Hann's computer systems when, and only when, the Unit shall have been paid in full, repurchased, or transferred by the Bank. 4.7. Preservation of Rights and Remedies. Hann has caused to be performed or shall cause to be performed within fifteen (15) Business Days of the applicable Funding Date any and all acts required to preserve the rights and remedies of the Bank in any insurance policies (including any blanket insurance policies held by Hann as Servicer) applicable to each Unit including, without limitation, any necessary notifications of insurers, assignments of policies or interests therein, and establishment of coinsured, joint loss payee and rights in favor of Bank. At all times while Bank is the holder of the Bank SUBI Certificate, Hann will maintain and pay when due all premiums with respect to, a contingent and excess liability insurance policy (a) with a responsible insurance carrier which has been rated at least A:V by the A.M. Best Company, per occurrence , and (b) which provides for minimum coverage of two million dollars ($2,000,000.00) (c) upon which the Bank and the Trust have each been named an additional insured, and (d) which shall provide a minimum of 30 days prior notice to Bank of any policy lapse, cancellation or change in coverage. On the date hereof, such contingent and excess liability insurance policy is numbered SF0100408 with Empire Fire and Marine Insurance Company. Hann agrees that so long as Bank is the holder of the Bank SUBI Certificate, it may not terminate such policy or cause the termination thereof unless and until replacement insurance policy meeting the criteria set forth above has been obtained. Hann shall not change insurance carriers or other aspects of coverage without prior written notice to Bank. 4.8. Future Obligations. In order to enforce Bank's rights under this Agreement, Hann and the Trust shall, upon the request of Bank or its assigns, use its best efforts to do and perform or cause to be done and performed, every reasonable act and thing necessary or advisable to put Bank and its assigns in position to enforce the payment of the Units and to carry out the intent of this Agreement, including the execution of and, if necessary, the recordation of additional documents including separate endorsements and assignments upon 15 request of Bank. Notwithstanding any termination of Hann as the Servicer of the Units, or of Bank's purchases of additional Units hereunder, the Bank shall continue to offset losses against the Residual Reserve Account. 4.9. Regulatory Requirements. Hann and the Trust agree to take such further actions and obtain and/or execute, acknowledge, deliver and/or record such further documents and instruments relating to the subject matter hereof, as the Bank may reasonably request to fulfill any obligations Bank may have under applicable banking regulations or as requested by Bank's regulatory examiners. 4.10. Nonpetition. The Bank and Auto Lenders hereby agree to the covenants and agreements set forth in Section 6.8 of the Trust Agreement. 4.11. Waiver. The Bank agrees that it has no rights with respect to any assets of the Trust other than those allocated to the Bank SUBI Portfolio. Nothing contained in this agreement will limit any rights the Bank may have against Hann, including any rights the Bank may have as a creditor of Hann to reach Hann's assets, including (without limitation) any interest in the Trust held by Hann. Except as provided in this paragraph, the Bank hereby releases and waives all claims against or with respect to the UTI Assets and the SUBI Assets allocated to each other SUBI and, in the event that such release is not given effect, the Bank hereby fully subordinates all claims it may be deemed to have against all UTI Assets and all SUBI Assets allocated to each other SUBI. 4.12. Governing Law. THE PROVISIONS OF ARTICLE II, SECTION 3.1, and SECTION 4.11 OF THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED UNDER THE INTERNAL LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO ANY OTHERWISE APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS, AND THE REMAINING PROVISIONS OF THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED UNDER THE INTERNAL LAWS OF THE STATE OF NEW JERSEY, WITHOUT REGARD TO ANY OTHERWISE APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS. 4.13. Effect of Agreement on Trust Agreement and Servicing Agreement. (a) Except as otherwise specifically provided herein: (i) the parties will continue to be bound by all provisions of the Trust Agreement and the Servicing Agreement; and (ii) the provisions set forth herein will operate either as additions to or modifications of the obligations of the parties under the Trust Agreement and the Servicing Agreement, as the context may require. In the event of any conflict between the provisions of this Agreement and the Trust Agreement or the Servicing Agreement with respect to the Bank SUBI, the provisions of this Agreement will prevail. (b) For purposes of determining the parties' obligations under this Agreement with respect to the Bank SUBI, general references in the Trust Agreement or the Servicing Agreement to: (i) a SUBI Portfolio will be deemed to refer more specifically to the Bank SUBI Portfolio; (ii) a SUBI Supplement or a SUBI Servicing Agreement Supplement will be deemed to refer more specifically to this Agreement. 16 4.14. Indemnification by Hann. Hann agrees to reimburse, indemnify and save Bank, its affiliates, and their respective directors, officers, employees and agents, and the respective heirs, personal representatives, successors and assigns of the foregoing (each, and Indemnified Person) harmless from and against any and all losses, liabilities, damages, expenses, obligations, penalties, actions, judgments, suits, claims, costs or disbursements of any kind or nature whatever (including court costs and attorney's fees in connection with investigative, administrative or judicial proceedings commenced or threatened, whether or not such Indemnified Person is a party thereto) that may at any time be imposed on, asserted against, or incurred by such Indemnified Person as a result of or arising out of (a) the breach of any of the representations, warranties, covenants, agreement or duties of Hann or Auto Lenders herein, in the Trust Agreement or in the Servicing Agreement, or any other document or agreement executed in connection with or relating to the Units, (b) the conduct of Hann or its officers, agents, servants and employees, in soliciting Dealers, originating or causing the Trust to originate, and servicing Units in the Bank SUBI Portfolio for Bank, (c) the use, ownership, or operation of a Leased Vehicle. This indemnification shall survive termination of this Agreement. 4.15. Independent Contractor Relationship. It is the intention of Bank, the Trust, Auto Lenders and Hann that this Agreement shall not be construed to create in any manner whatsoever an employer-employee relationship, it being within the contemplation of the parties that all acts performed by Hann or Auto Lenders in carrying out the provisions of this Agreement shall be those of independent contractors. 4.16. No Use of Bank Name or Logo. No party to this Agreement, or any of the individuals or entities with whom such parties shall do business, shall refer to Bank or use Bank's name or logo in any advertisement or publication without the prior written consent of the Bank. 4.17. Refinancing. Bank and Hann agree not to take any action targeting Lessees to solicit them individually for any automobile loan or automobile lease products; it being understood that (i) promotions directed to the general public, including mass mailings and newspaper, radio and television advertisements; (ii) general mailings to customers all products; (iii) consenting to refinance a Lease with respect to which the related Lessee has contacted such party to inquire about refinancing or has indicated to such party its intent to prepay or refinance with another lender; and (iv) solicitations directly to a Lessee in connection with the remarketing of the Lessee's related Leased Vehicle; are not prohibited. In addition, the parties hereto agree that Bank in its sole discretion, may solicit the Lessees, individually or in any other manner, for all products and services (other than automobile loan and automobile lease products during the term of any such Lessee's related Lease). 4.18. Term of Agreement. This Agreement shall apply to all Units funded by the Bank. The Bank may fund or purchase Units hereunder for an initial term of one year. Bank may cease purchasing Units, at any time during such initial term or during any subsequent term, at its sole discretion, as follows: (i) immediately upon notice to Hann in connection with the occurrence of an Event of Termination, and (ii) in the absence of the occurrence of an Event of Termination, upon 90 days prior written notice to Hann. During such 90 day period, Bank shall purchase only additional Units (a) which conform to the Credit Qualifications, without regard to any exception policies; (b) the aggregate monthly Purchase Price of which does not exceed a monthly amount equal to the three month rolling average of the Bank's monthly purchases of 17 Units for the three months immediately preceding the Bank's notice of termination; and (c) with respect to which the monthly payments due from the related Lessee as set forth in the related Lease shall be determined using an interest rate component which is not less than the interest rate of the two-year Treasury Bill (as published in the Wall Street Journal) in effect on the date of origination of such Lease plus two and one-quarter percent. If this Agreement is not terminated by such notice, Bank's right to fund or purchase additional Units shall automatically be renewed for an additional term or terms of one (1) year each, until terminated as provided in this Section 4.18. Notwithstanding the termination by the Bank of its option to fund or purchase additional Units, the servicing and other obligations of Hann and the rights of Hann to servicing compensation from Bank under this Agreement with respect to Units included in the Bank SUBI Portfolio shall continue until the earlier of (i) the final payment, liquidation, or sale of all the Units in the Bank SUBI Portfolio and the final distribution to the Bank, or (ii) the Termination Date specified in a written notice of termination to Hann by the Bank whether or not pursuant to the occurrence of an Event of Termination described in Section 3.8. The representations and warranties of each of the parties hereto shall survive the termination of this Agreement. 4.19. Notice. Any notice required hereunder shall be given by certified mail, return receipt requested, to the parties hereto at the following addresses: (a) if to the Bank, at One Huntington Quadrangle, Melville, NY 11747 Attention: Peter LaMariana, Senior Vice President; with a copy to: Sovereign Bank, 1130 Berkshire Boulevard, Wyomissing, PA 19610, Attention David A. Silverman, Chief General Counsel; (b) if to Auto Lenders, at 1051 North Black Horse Pike, Williamstown, NJ 08094 and to Hann at One Centre Drive, Jamesburg, New Jersey 08831; (c) if to the Trust, the UTI Trustee, the Delaware Trustee, or the Bank SUBI Trustee, at Wilmington Trust Company, 1100 North Market Street, Wilmington, Delaware, 19890-0001, Attention Corporate Trust Administration; or, in each case, to such other address of a party as shall be designated by such party in a written notice to the other parties hereto. 4.20. No Assignment. No party to this Agreement, other than Bank, may assign all or any portion of its rights under this Agreement without the written consent of the other parties. 4.21. Article and Section Headings. The article and section headings herein are for convenience or reference only, and shall not limit or otherwise affect the meaning hereof. 4.22. Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. 4.23. Limitation of Liability. It is expressly understood and agreed by the parties hereto that (a) this Agreement is executed and delivered by Wilmington Trust Company, 18 not individually or personally, but solely as UTI Trustee, Bank SUBI Trustee and Delaware Trustee of the Trust, in the exercise of the powers and authority conferred and vested in it, (b) each of the representations, undertakings and agreements herein made on the part of the Trust or the UTI Trustee, Bank SUBI Trustee and Delaware Trustee is made and intended not as personal representations, undertakings and agreements by Wilmington Trust Company but is made and intended for the purpose for binding only the Trust, (c) nothing herein contained shall be construed as creating any liability on Wilmington Trust Company, individually or personally, to perform any covenant either expressed or implied contained herein, all such liability, if any, being expressly waived by the parties hereto and by any Person claiming by, through or under the parties hereto and (d) under no circumstances shall Wilmington Trust Company be personally liable for the payment of any indebtedness or expenses of the Trust or the UTI Trustee, Bank SUBI Trustee and Delaware Trustee or be liable for the breach or failure of any obligation, representation, warranty or covenant made or undertaken by the Trustee or the UTI Trustee, Bank SUBI Trustee and Delaware Trustee under this Agreement or any other related documents. [Signature Page Follows] 19 IN WITNESS WHEREOF, each of the undersigned have caused this Agreement to be duly executed by their respective officers as of the day and year first above written. BOSTON SERVICE COMPANY, doing HANN AUTO TRUST business as Hann Financial Service Corp., as Initial Beneficiary and Servicer By: WILMINGTON TRUST COMPANY, not in its individual capacity, but as UTI Trustee, Delaware Trustee By: By: -------------------------------------- --------------------------- Name: Name: Title: Title: WILMINGTON TRUST COMPANY, not AUTO LENDERS LIQUIDATION in its individual capacity, but as UTI CENTER, INC. Trustee, Delaware Trustee and Bank SUBI Trustee By: By: -------------------------------------- --------------------------------- Name: Name: Title: Title: SOVEREIGN BANK By: -------------------------------------- Name: Title: 20 EXHIBIT A DEFINITIONS "Accepted Servicing Practices" shall mean, with respect to each Unit, those servicing practices customary in the industry for leases and leased vehicles of the same type as the Unit in the jurisdiction where the related Leased Vehicle is located. "Auto Lenders" means Auto Lenders Liquidation Center, Inc., a New Jersey corporation. "Auto Lenders SUBI" means the special unit of beneficial interest of the Trust created by the Auto Lenders Operating Agreement and SUBI Supplement dated as of January 1, 2000 among the Initial Beneficiary, the Trust, the Servicer, the UTI Trustee, the Delaware Trustee, Auto Lenders and Wilmington Trust Company, as Auto Lenders SUBI Trustee. "Bank" means Sovereign Bank, a federal savings bank organized under the laws of the United States. "Bank SUBI" shall have the meaning set forth in the Recitals. "Bank SUBI Certificate" shall have the meaning set forth in the Recitals. "Bank SUBI Portfolio" shall have the meaning set forth in the Recitals. "Bank SUBI Trustee" means Wilmington Trust Company, as SUBI trustee of the Bank SUBI. "Book Value" shall mean on any date of determination, with respect to any Lease related to a Unit, the sum of the remaining unpaid payments due on such Lease less the amount of any unaccrued interest component thereof calculated on an actuarial basis, plus the Residual Value related thereto. "Credit Qualifications" shall mean the credit qualification standards used by Hann on the date hereof, a copy of which are attached hereto as Exhibit C. "Dealer" means a dealer participating in the Program who enters into Leases of motor vehicles which the dealer sells to the Trust. "Delaware Trustee" means Wilmington Trust Company, as Delaware trustee of the Trust. "Early Termination" shall mean the voluntary or involuntary termination of a Lease prior to the scheduled Expiration Date stated therein. "End of Term Charges" means, with respect to any Unit, excess wear and tear charges and excess mileage charges. "Expiration Date" shall mean the date of the scheduled termination or expiration in accordance with its terms of the Lease related to any Unit. 21 "Final Liquidation Loss" shall mean, (A) with respect to any Leased Vehicle which becomes subject to disposition as a result of Early Termination, the amount, if any by which (i) the Book Value of the Bank's beneficial interest in such Leased Vehicle (including accrued interest thereon) on the date of such Early Termination exceeds (ii) the Net Liquidation Proceeds remitted to Bank thereon, and (B) with respect to any Leased Vehicle with respect to which Auto Lenders defaults in its obligation to pay the full amount of the related Residual Value following the related Expiration Date pursuant to the Residual Purchase Agreement, the amount, if any, by which (i) the Residual Value of such Leased Vehicle (plus any Penalty amounts) exceeds (ii) Net Liquidation Proceeds thereon. "Funding Date" shall mean the date on which the Bank pays the Purchase Price with respect to any Unit. "Hann" means Boston Service Company, Inc., a New Jersey corporation doing business as Hann Financial Service Corp. "Initial Beneficiary" means Hann, as initial beneficiary of the Trust. "Lease" means a closed-end motor vehicle retail lease agreement between a Dealer and a Lessee entered into pursuant to the Program. "Lease File" All documents, records, and items (other than the original Certificate of Title to the Leased Vehicle which shall be pertaining to a particular Unit, including, but not limited to those specified on Exhibit D hereto. Leased Vehicle" means an automobile, sport utility vehicle, light duty truck or other vehicle, together with all accessories, additions and parts constituting a part thereof and all accessions thereto, which is the subject of a Lease. "Lessee" means the lessee under a Lease. "Loss Reserve Account" shall mean the account established in accordance with Section 3.2(d). "Net Liquidation Proceeds" shall mean, (i) with respect to any Unit which becomes subject to disposition as a result of Early Termination, an amount equal to any cash amounts received from the liquidation of the related Leased Vehicle, sale or lease of such Unit, or otherwise (including any other cash amounts received in connection with the management of the Leased Vehicle collateralizing a defaulted Lease) net of reasonable out-of-pocket expenses in connection with the liquidation or disposition of such Unit or the related Leased Vehicle, or (ii) with respect to any Unit for which Auto Lenders fails to pay the full Residual Value of such Unit and any applicable Penalty amounts, any cash amounts received by the Bank from Auto Lenders or from the liquidation of the related Leased Vehicle, sale of the Unit, or otherwise (including any other cash amounts received in connection with the management of the Leased Vehicle collateralizing a defaulted Lease) net of expenses incurred by the Bank or its designee in the event the Bank must liquidate or dispose of the Unit or the related Leased Vehicle. "Penalty" shall mean, with respect to any Unit for which Auto Lenders fails to timely pay the full Residual Payment to the Bank in accordance with the terms of the Residual 22 Purchase Agreement, the amount required to be remitted to the Bank in accordance with Section 7(d)(ii) thereof. "Per Unit Residual Reserve Deposit" shall have the meaning set forth in Section 3.1(a). "Purchase Price" shall mean, with respect to any Unit identified by Hann for purchase by the Bank, an amount equal to the "adjusted capitalized cost" used in calculating the related Lessee's base monthly payment as set forth in the related Lease, and which is set forth in the Worksheet submitted to the Bank by Hann. "Program" means the retail automobile leasing program established by Hann pursuant to which it solicits Dealers to enter into retail motor vehicle Leases which conform to the Credit Qualifications. "Representations and Warranties Agreement" means that certain Representations and Warranties Agreement dated May 17, 2002 by and among Sovereign Bank and Boston Service Company, Inc., doing business as Hann Financial Service Corporation, Hann Auto Trust, and Wilmington Trust Company, as Trustee, as the same may be amended from time to time. "Residual Interest Agreement" means that certain Residual Interest Agreement dated May 17, 2002, by and between Sovereign Bank and Susquehanna Bancshares, Inc., as the same may be amended from time to time. "Residual Purchase Agreement" means that certain Residual Purchase Agreement dated May 17, 2002, by and among Sovereign Bank, Auto Lenders Liquidation Center, Inc. and Boston Service Company, Inc., doing business as Hann Financial Service Corporation, as the same may be amended from time to time. "Residual Reserve Account" means the account established pursuant to Section 3.4. "Residual Unit" means, with respect to any Lease which has reached its stated maturity date, the related Residual Vehicle and the associated related rights therein or in the related Lease, if any. "Residual Value" means, for any Residual Vehicle, the estimated wholesale value of a motor-vehicle subject to a Lease on the maturity thereof, as set by Hann in its Credit Qualifications and as stated in each Lease. "Residual Vehicle" shall have the meaning given thereto in the Recitals. "Servicer" means Hann, as Servicer of the Trust Assets. "Servicing Agreement" means the Servicing Agreement dated as of October 23, 1997 between the Trust and Hann, as it may be modified, supplemented or amended from time to time. 23 "Specially Designated National" means a person or entity identified by the Office of Foreign Assets Control ("OFAC") or any successor organization, as (a) a "Specially Designated National", or (b) any other person or entity identified by OFAC on the list published at www.treas.gov/ofac, or any successor web address as shall contain such information. "SUBI" means a separate special unit of beneficial interest in the Trust. "SUBI Assets" shall have the meaning given thereto in the Trust Agreement. "SUBI Certificate" shall have the meaning given thereto in the Trust Agreement. "SUBI Portfolio" means, as to each SUBI, that collection of Leases, Leased Vehicles and other associated Trust Assets allocated by the Trust to such SUBI from time to time from among all those Leases, Leased Vehicles and other associated Trust Assets owned by the Trust. "Termination Date" shall mean the date of servicing termination specified by the Bank in the notice provided to the Servicer pursuant to Section 4.18 hereof. "Trust" means Hann Auto Trust, a Delaware business trust. "Trust Agreement" means the Second Amended and Restated Trust Agreement dated as of February 12, 1999 between Hann and Wilmington Trust Company, as UTI Trustee and Delaware Trustee, as it may be modified, supplemented or amended from time to time. "Trust Assets" shall have the meaning given thereto in the Trust Agreement. 9- "Unit" means a Lease, the related Leased Vehicle and the associated related rights. "Undivided Trust Interest" or "UTI" shall have the meaning given thereto in the Trust Agreement. "UTI Trustee" means Wilmington Trust Company, as UTI trustee of the Trust. "Worksheet" shall have the meaning set forth in Section 3. 1. 24 EXHIBIT B FORM OF BANK SUBI CERTIFICATE HANN AUTO TRUST SOVEREIGN BANK SPECIAL UNIT OF BENEFICIAL INTEREST CERTIFICATE evidencing an undivided 100% interest in all SUBI Assets allocated to the Bank SUBI Portfolio. (This Certificate does not represent an obligation of, or an interest in, BOSTON SERVICE COMPANY, INC., WILMINGTON TRUST COMPANY or any of their respective affiliates (other than the Trust (as defined below)).) SOVEREIGN BANK SUBI Number THIS CERTIFIES THAT SOVEREIGN BANK (the "Bank") is the registered owner of a 100% nonassessable, fully-paid, undivided interest in the Bank SUBI Portfolio (such interest, a "Bank SUBI Interest"), of HANN AUTO TRUST, a Delaware business trust (the "Trust") formed by Boston Service Company, Inc., a New Jersey corporation doing business as Hann Financial Service Corp., as settlor ("Hann" or, in its capacity as settlor thereunder, and, together with any successor or assign, the "Settlor"), and Wilmington Trust Company, a Delaware banking corporation, as UTI trustee (the "UTI Trustee") and as Delaware trustee (the "Delaware Trustee"). The Trust was created pursuant to a Trust Agreement dated as of February 12, 1999 (as modified, supplemented, or amended from time to time, the "Agreement"), among Hann as the Settlor and as the sole initial beneficiary (in such capacity, and, together with any successor or permitted assign, the "Initial Beneficiary"), the UTI Trustee and the Delaware Trustee, as supplemented for purposes hereof by that certain Sovereign Bank SUBI Supplement and Supplement to Servicing Agreement dated as of May 17, 2002, among the Initial Beneficiary, the Trust, Auto Lenders Liquidation Center, Inc., the Bank and Wilmington Trust Company as the UTI Trustee, the Delaware Trustee and the Bank SUBI Trustee (the "SUBI Supplement"). To the extent not otherwise defined herein, the capitalized terms herein have the meanings set forth in the Agreement. This Certificate is the duly authorized certificate issued under the Agreement and the SUBI Supplement, and designated as "Hann Auto Trust Sovereign Bank Special Unit of Beneficial Interest Certificate" (the "Bank SUBI Certificate"). This Bank SUBI Certificate is issued under and is subject to the terms, provisions and conditions of the Agreement, to which Agreement the holder of this Bank SUBI Certificate by virtue of the acceptance hereof assents and by which such holder is bound. By accepting this Certificate, the holder hereof waives any claim in respect of this Certificate to any proceeds or assets of any Trustee and to all of the assets of the Trust other than those from time to time included within the Bank SUBI Portfolio. 25 The holder of this SUBI Certificate covenants and agrees that prior to the date which is one year and one day after the date upon which all obligations under each Financing have been paid in full, it will not institute against, or join any other Person in instituting against, the Trust, any Special Purpose Entity, or any general partner of any Special Purpose Entity that is a partnership, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding or other proceedings under any federal or state bankruptcy or similar law. No bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding or other proceedings under any federal or state bankruptcy, insolvency or similar law shall be instituted by the Trust without the unanimous consent of all Trustees and Certificateholders hereunder. A SUBI Trustee shall not so consent unless directed to do so by the holder of the applicable SUBI, and the Delaware Trustee shall not so consent unless directed to do so by all of the Certificateholders. Unless this Certificate shall have been executed by an authorized officer of the Trustee, by manual signature, this Certificate shall not entitle the holder hereof to any benefit under the Agreement or be valid for any purpose. IN WITNESS WHEREOF, the Delaware Trustee on behalf of the Trust and not in its individual capacity has caused this Bank SUBI Certificate to be duly executed. Dated: HANN AUTO TRUST By: WILMINGTON TRUST COMPANY, not in its individual capacity as Delaware Trustee By: --------------------------- Authorized Officer 26 EXHIBIT C CREDIT QUALIFICATIONS 27 EXHIBIT C UNDERWRITING CRITERIA The company's underwriting criteria starts with the employment of seasoned automobile underwriters. Our company's philosophy is to provide a degree of flexibility to each of our underwriters by eliminating mandatory credit scoring systems as the basis of decision making. Strong emphasis is made to existing and previous auto credit, as well as satisfactory repayment of all structured debt. The following list of credit guidelines provides the key points in the underwriting of lease credit. CREDIT GUIDELINES . Applicant must show stability of residence in same geographic areas, and residence must be verifiable. . Applicant's employment history must show stability, and employment. . Applicant's debt to income should indicate an ability to repay our debt. . Applicant's credit history should demonstrate a willingness to repay our debt. . Applicant's credit history should not contain any meaningful derogatory credit. . Business applicants should have established and satisfactory bank references. . Closely held corporations will generally require a principal's personal guarantee. The qualifications of that personal guarantor will be evaluated in the same manner as a consumer applicant. EXHIBIT D LEASE FILE MINIMUM DOCUMENTS 1. The original Lease and any other document constituting the Lease fully executed by the Lessee(s). 2. The original credit application fully executed by the Lessee(s) or a photocopy thereof or a record thereof on a computer file or diskette or on microfiche. 3. A copy of the executed application submitted to the applicable state department of motor vehicles, or agency with similar authority, directing issuance of the certificate of title in the name of the Trust. 4. The original evidence of insurability with respect to the Lessee(s) in connection with the Lessee's obligation to obtain and maintain physical damage insurance naming the Trust as an additional insured. 28 EXHIBIT E MONTHLY REPORTS (Exhibit begins on next page) 29 EXHIBIT E LISTING OF PROVIDED REPORTS Daily G/L Batch Report- Daily batch details Daily Trial Balance Recap Daily Summary- Daily Transaction Summary End of Term Report- Leases Maturing in the next month (Monthly only) Earned Income- Earned Income Report (Monthly only) New Lease Report- Report of all new leases (Monthly only) Lease Projections Summary (Monthly only) Posting Journal- Detail Daily Posting Journal Schedule J (Monthly only) Missing Titles- Report of titles not yet received (Monthly only) Trial Balance- Full detail trial balance (Monthly only) Termination Report- Report of Terminations (Monthly only) Delinquency Report- (Monthly) Static Pool Analysis- (Request only) Trust Asset Listing- (Monthly) Any other System Generated Reports- (Request only) EXHIBIT F FORM OF GLB ADDENDUM CONFIDENTIALITY, PRIVACY AND SECURITY AGREEMENT This agreement ("Agreement") is made as of the 17th day of May, 2002, by and between Sovereign Bank, having an office at 1130 Berkshire Boulevard, Wyomissing, Pennsylvania 19610, on its own behalf and on behalf of its affiliates ("Sovereign"), and Boston Service Company, Inc., d.b.a. Hann Financial Service Corporation, a New Jersey corporation with its principal office located at One Centre Drive, Jamesburg, NJ 08831 ("Vendor"). This Agreement amends, modifies and supplements any and all contractual arrangements between Sovereign and Vendor and shall supersede any provision in such arrangements to the extent that any provision in this Agreement conflicts with, amends, or modifies any term or condition in such contractual arrangements. BACKGROUND As a result of Title V of the Gramm-Leach-Bliley Act ("GLBA") together with the regulations and guidelines promulgated by the Federal banking regulators having jurisdiction over Sovereign, Sovereign is required to include in new and existing contractual arrangements certain terms and conditions to (1) ensure the security and confidentiality of customer information, (2) protect against any anticipated threats or hazards to the security or integrity of such information, and (3) protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. NOW THEREFORE, in consideration of the foregoing, the parties intending to be legally bound, hereby agree to the following: 1. DEFINITIONS. The following terms shall have the meaning set forth below for purposes of this Agreement: 1.1 "Customer information systems" means any methods used to access, collect, store, use, transmit, protect, or dispose of customer, including employee, information. 1.2 "Guidelines" refers to abstract and partial summary of the GLBA Interagency Guidelines Establishing Standards for Safeguarding Customer Information attached as Exhibit 1 and incorporated into this Agreement by reference, as may be amended from time to time by law or regulation. The term "you" and "your" in the Guidelines refers to Sovereign and also to Vendor to the extent Vendor has access to Non-Public Personal Information. 1.3 "Individual Data" means information or any data which could reasonably be used to identify a named individual. 1.4 "Non-Public Personal Information" means any and all employee and/or customer information collected and obtained from Sovereign or its other third party vendors, including, but not limited to name, e-mail, mailing or other address; account number, postal code; telephone number; gender other demographic characteristics; year or date of birth; social security or other tax identification number; educational background; occupation or other socio-economic or financial information; credit situation; pattern of use; nature, subject matter, date or amount paid in any commercial transaction(s); number or identification of viewed/downloaded web site(s); preferences, profile, personal interests or habits; and any other identifying information, regardless of its accuracy or completeness, whether in paper, electronic, or other form, that is maintained by or on behalf of Sovereign. Non-Public Personal Information also includes Individual Data. 1.5 "Representatives" refers to an entity's officers, employees, affiliates, agents, subcontractors and consultants and other parties associated with that entity, including but not limited to the third parties referenced in Section 3.2 of this Agreement. 1.6 "Sovereign Information" refers to all knowledge and information which Vendor may acquire or have access to concerning Sovereign, Sovereign's customers and prospective customers and employees and includes but is not limited to Non-Public Personal Information and any data or materials relating to the business, trade secrets and/or technology of Sovereign and its other vendors, whether transmitted in writing, orally, visually, electronically or by any other means, whether received prior to, on or after the date of this Agreement. 30 2. Confidentiality. 2.1 All Sovereign Information will at all times and for all purposes be and remain Sovereign's confidential and proprietary information. Vendor shall, at all times, maintain and keep all Sovereign Information confidential and in a secure manner. 2.2 Vendor agrees to (i) restrict disclosure of Sovereign Information solely to its Representatives with a need to know Sovereign Information for purposes of the business dealings between the parties, (ii) not disclose to any other person the Sovereign Information without the written approval of Sovereign, (iii) use the Sovereign Information solely for purposes of the services provided by Vendor, (iv) not use or disclose the Sovereign Information in any manner that is detrimental to Sovereign, and (v) inform the Representatives of Vendor of the confidential nature of the Sovereign Information and obtain their agreement to the obligations set forth in this Agreement. Vendor is responsible for its Representatives compliance with this Agreement. 2.3 The obligations imposed under Sections 2.1 and 2.2 shall not apply to information (i) which is made public by Sovereign, (ii) which rightfully becomes generally available to the public, or (iii) which is rightfully received by Vendor from a third party without restriction and without breach of this Agreement or other obligation of confidentiality. 2.4 Upon termination of this Agreement, Vendor and its Representatives will promptly return to Sovereign (or destroy at Sovereign's request) all Sovereign Information in its possession or control, together with all copies, notes, abstracts, memoranda, or other documents or media which contain Sovereign Information or any discussion or copies of the Sovereign Information. 2.5 If the Vendor, or any of its Representatives, become legally compelled (by deposition, interrogatory, request for documents, subpoena, civil investigative demand, warrant or other legal process) to disclose any Sovereign Information, Vendor shall provide Sovereign with prompt prior written notice of such requirement and agrees to cooperate with Sovereign so that Sovereign may seek a protective order or other appropriate remedy. 2.6 The termination of agreement or business relationship between, or involving both the Vendor and Sovereign, shall not relieve the Vendor of its obligations under this Agreement. 3. SOVEREIGN'S CUSTOMER PRIVACY AND DATA SECURITY. 3.1 Vendor agrees to (i) comply with GLBA and the Guidelines and cooperate fully with Sovereign in its compliance with GLBA and the Guidelines, (ii) adopt and maintain reasonable policies and procedures, as well as train its employees, to protect the privacy and security of Sovereign's customers' Non-Public Personal Information in compliance with GLBA and other laws and regulations applicable to the privacy and security of Non-Public Personal Information, and (iii) not sell, transfer, rent or disclose to any third parties or use, except for the limited purposes expressly set forth in the Agreement or otherwise agreed by Sovereign, any of the Non-Public Personal Information. 3.2 If the release of Individual Data to third parties by Vendor is required in connection with the business dealings between the parties or otherwise, prior to such release Vendor will (i) Notify Sovereign of the third party that needs to receive such information, and (ii) cooperate with Sovereign in obtaining the written agreement that such third party will provide the option, in any communications generated concerning the Individual Data, for the customer of Sovereign to elect not to receive any further communications from such third party. 3.3 Vendor agrees to promptly notify Sovereign if it (i) receives any type of complaint or notice concerning a violation of privacy rights, including but not limited to information sharing involving an opt out of sharing any Individual Data between the parties, or (ii) becomes aware of a breach of customer data security involving Individual Data. 31 4. AUDIT AND MONITORING REQUIREMENTS. 4.1 Vendor shall keep and maintain accurate books and records with respect to its compliance with the requirements of this Agreement. 4.2 Sovereign and its designated agents, and all of Sovereign's regulatory authorities shall have unimpeded access (during normal business hours upon reasonable notice), at all times to all books and records maintained in connection with this Agreement to review and verify that Vendor and its Representatives are in compliance with this Agreement. 5. VENDOR'S REPRESENTATIVES. 5.1 Vendor understands that Sovereign operates under various laws and federal regulatory agencies that are unique to the security sensitive banking industry. As such, persons engaged by Vendor to provide products and services to Sovereign are held to a higher standard of conduct and scrutiny than in other industries or business enterprises. Vendor understands and acknowledges that Vendor's Representatives shall possess appropriate character, disposition and honesty conducive to the environment where products and services are provided. Vendor shall to the extent permitted by law, exercise reasonable and prudent efforts to comply with the provisions of this Agreement and all other contractual arrangements with Sovereign. 5.2 Vendor shall not knowingly permit any Vendor Representative(s) to have access to or engage in any of the banking affairs or business activities of Sovereign, including but not limited to accessing the Sovereign Information, when such Representative(s): (a) has been convicted of a crime or has agreed to or entered into a pretrial diversion or similar program in connection with (i) a dishonest act or a breach of trust, as stipulated under Section 19 of the Federal Deposit Insurance Act, 12 U.S.C. 1829(a); and/or (ii) a felony; or (b) uses illegal drugs. 6. SOVEREIGN'S REMEDIES. Vendor understands and agrees that Sovereign will suffer irreparable harm in the event that of a breach of any obligations in this Agreement and that monetary damages will be inadequate to compensate Sovereign for such breach. Accordingly, Vendor agrees that, in the event of a breach or threatened breach of any of the provisions of this Agreement, in addition to and not in limitation of any other rights, remedies or damages available at law or in equity, Sovereign will be entitled to equitable relief, including but not limited to a temporary restraining order, preliminary injunction and permanent injunction in order to prevent or restrain any such breach. IN WITNESS WHEREOF, and intending to be legally bound the parties have executed this Agreement as of the date first above written. SOVEREIGN BANK HANN FINANCIAL SERVICE CORPORATION By: By: ------------------------------ ---------------------------- Print Name: Print Name: --------------------- ------------------- Title: Title: -------------------------- ------------------------ 32 EXHIBIT 1 to The Interagency Guidelines Establishing Standards for Safeguarding Customer Information Published 2/1/01 - -------------------------------------------------------------------------------- I. Introduction The Interagency Guidelines Establishing Standards for Safeguarding Customer Information (Guidelines) set forth standards pursuant to section 39 of the Federal Deposit Insurance Act (section 39, codified at 12 U.S.C. 1831p-1), and sections 501 and 505(b), codified at 15 U.S.C. 6801 and 6805(b), of the Gramm-Leach-Bliley Act. These Guidelines address standards for developing and implementing administrative, technical, and physical safeguards to protect the security, confidentiality, and integrity of customer information. - -------------------------------------------------------------------------------- II. Standards for Safeguarding Customer Information - -------------------------------------------------------------------------------- A. Information Security You shall implement a comprehensive written Program information security program that includes administrative, technical, and physical safeguards appropriate to your size and complexity and the nature and scope of your activities. While all parts of your organization are not required to implement a uniform set of policies, all elements of your information security program must be coordinated. - -------------------------------------------------------------------------------- B. Objectives Your information security program shall be designed to: 1. Ensure the security and confidentiality of customer information; 2. Protect against any anticipated threats or hazards to the security or integrity of such information; and 3. Protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. - -------------------------------------------------------------------------------- III. Development and Implementation of Customer Information Security Program - -------------------------------------------------------------------------------- A. Involve the Board of Your board of directors or an appropriate committee Directors of the board shall: 1. Approve your written information security program; and 2. Oversee the development, implementation, and maintenance of your information security program, including assigning specific responsibility for its implementation and reviewing reports from management. - -------------------------------------------------------------------------------- B. Assess Risk You shall: 1. Identify reasonably foreseeable internal and external threats that could result in unauthorized disclosure, misuse, alteration, or destruction of customer information or customer information systems. 2. Assess the likelihood and potential damage of these threats, taking into consideration the sensitivity of customer information. 3. Assess the sufficiency of policies, procedures, customer information systems, and other arrangements in place to control risks. - -------------------------------------------------------------------------------- C. Manage and Control You shall: Risk 1. Design your information security program to control the identified risks, commensurate with the sensitivity of the information as well as the complexity and scope of your activities. You must consider whether the following security measures are appropriate for you and, if so, adopt those measures you conclude are appropriate: a. Access controls on customer information systems, including controls to authenticate and permit access only to authorized individuals and controls to prevent employees from providing customer information to unauthorized individuals who may seek to obtain this information through fraudulent means. b. Access restrictions at physical locations containing customer information, such as buildings, computer facilities, and records storage facilities to permit access only to authorized individuals; c. Encryption of electronic customer information, including while in transit or in storage on networks or - -------------------------------------------------------------------------------- 33 - -------------------------------------------------------------------------------- systems to which unauthorized individuals may have access; d. Procedures designed to ensure that customer information system modifications are consistent with your information security program; e. Dual control procedures, segregation of duties, and employee background checks for employees with responsibilities for or access to customer information; f. Monitoring systems and procedures to detect actual and attempted attacks on or intrusions into customer information systems; g. Response programs that specify actions for you to take when you suspect or detect that unauthorized individuals have gained access to customer information systems, including appropriate reports to regulatory and law enforcement agencies; and h. Measures to protect against destruction, loss, or damage of customer information due to potential environmental hazards, such as fire and water damage or technological failures. 2. Train staff to implement your information security program. 3. Regularly test the key controls, systems and procedures of the information security program. The frequency and nature of such tests should be determined by your risk assessment. Tests should be conducted or reviewed by independent third parties or staff independent of those that develop or maintain the security programs. - -------------------------------------------------------------------------------- 34 EXHIBIT G Form of Worksheet with List of Data Fields to be Provided on Each Funding Date (Exhibit begins on next page) 35 EXHIBIT G LEASE DISBURSEMENT SUMMARY SOVEREIGN BANK Date ------------ Number of Leases Attached ------------- CASH DISBURSEMENT Total Dollars Disbursed to Dealers $ -------------- (Acct. #_________________) Reserve Deposit to Auto Lenders $ -------------- (Acct. #_________________) Fee Deposit to Hann Financial $ -------------- (Acct. #_________________) Fee Due Sovereign Bank $ -------------- (G/L Acct. #____________________) Exhibit G Information Provided on the Monthly Report of Trust Assets 1. Lease Number 2. Lessee Name 3. Acquisition Date 4. Year, Make and Model of Vehicle 5. Full Vehicle Identification Number EXHIBIT H FORM OF OPINIONS OF COUNSEL (Exhibit begins on next page) 36 FORM OF OPINION OF COUNSEL TO HANN BOSTON SERVICE COMPANY, INC d.b.a HANN FINANCIAL SERVICE CORPORATION [Date] Sovereign Bank One Huntington Quadrangle Melville, NY 11747 Dear Sirs: You have requested our opinion, as counsel to Boston Service Company, Inc. doing business as Hann Financial Service Corporation, with respect to certain matters in connection with the sale to Sovereign Bank, ("Bank") by Boston Service Company, Inc., d.b.a., Hann Financial Service Corporation ("Hann") of the entire beneficial interest in certain Units consisting of motor vehicle leases ("Leases") and the underlying leased vehicles ("Leased Vehicles") originated by automobile dealers in their ordinary course of business and acquired by , as Initial Beneficiary and Certificateholder of the UTI Interest in the Hann Auto Trust ("Trust") created pursuant to that certain Trust Agreement, as amended, dated as of February 12, 1999, (the "Trust Agreement"), between the Trust, Hann, and Wilmington Trust Company, ("Trustee") as the Delaware Trustee and the UTI Trustee, and serviced by Hann pursuant to that certain Servicing Agreement, as amended, dated October 23, 1997, between the Trust and Hann. Auto Lenders Liquidation Center, Inc. ("Auto Lenders") has agreed to purchase the residual value of the Leased Vehicles upon the expiration of the Lease pursuant to a Residual Purchase Agreement dated by and ------------ between Hann, Auto Lenders and the Bank (the "Residual Purchase Agreement"). Susquehanna has agreed to be surety for any Final Liquidation Loss incurred by the Bank to the extent Auto Lenders defaults in its obligations under the Residual Purchase Agreement. We have reviewed the Trust Agreement, the Servicing Agreement, the SUBI Supplement and Supplement to Servicing Agreement (the "SUBI Supplement") dated by and among Hann, the Bank, Auto Lenders, the Trust and the Trustee, - --------- the Residual Interest Agreement dated by and between the Bank and --------- Susquehanna Bancshares, Inc., the Residual Purchase Agreement dated ----------- by and among Hann, Auto Lenders, and the Bank, and the Representations and Warranties Agreement dated by and between Hann, the Bank, the Trust ----------- and the Trustee, and such other documents, records and papers as we have deemed necessary and relevant for purposes of the opinions set forth below (collectively, the "Transaction Documents"). Based upon the foregoing, it is our opinion that: 1. Hann is a corporation duly organized, validly existing and ------------ in good standing under the laws of the state of New Jersey, and is a wholly owned subsidiary of Susquehanna Bancshares, Inc.. 2. Hann has the requisite corporate power, authority and legal right to engage in the transactions contemplated by the Transaction Documents to which it is a party, to execute and deliver such Transaction Documents, and to perform and observe the terms and conditions of such Transaction Documents. 3. The Transaction Documents to which Hann is a party have been duly authorized, executed and delivered by Hann and are legal, valid and binding agreements enforceable against Hann in accordance with their terms, subject to bankruptcy laws and other similar laws of general application affecting rights of creditors. 37 4. Hann has been duly authorized to allow any of its officers to execute the required documents by original signature in order to complete the transactions contemplated in the Transaction Documents. 5. Either no consent or approval is required for the execution, delivery and performance by Hann of the Transaction Documents to which it is a party, or any required consent or approval has been obtained by Hann. 6. The consummation of the transactions contemplated by the Transaction Documents will (i) neither conflict with, result in a breach of, nor constitute a default under the charter or by-laws of Hann, the terms of any indenture or other agreement to which Hann is a party or by which it is bound, and (ii) not violate any statute or order, rule, regulation, or to the best of our knowledge, any writ, injunction or decree of any court, governmental authority or regulatory body to which Hann is subject or by which it is bound. Capitalized terms used but not otherwise defined herein shall have the meanings set forth in the SUBI Supplement. Very truly yours, 38 FORM OF OPINION OF COUNSEL TO TRUSTEE [Date] Sovereign Bank One Huntington Quadrangle Melville, NY 11747 Dear Sirs: You have requested our opinion, as counsel to Wilmington Trust Company, as Delaware Trustee UTI Trustee and Bank SUBI Trustee with respect to the Hann Auto Trust ("Trust") with respect to certain matters in connection with the sale to Sovereign Bank, ("Bank") by Boston Service Company, Inc., d.b.a., Hann Financial Service Corporation ("Hann"), a wholly owned subsidiary of Susquehanna Bancshares, Inc. ("Susquehanna"), of the entire beneficial interest in certain Units consisting of motor vehicle leases and the underlying leased vehicles ("Units") originated by automobile dealers in their ordinary course of business and acquired by Hann, as Initial Beneficiary and Certificateholder of the UTI Interest in the Trust created pursuant to that certain Trust Agreement, as amended, dated as of February 12, 1999, (the "Trust Agreement"), between the Trust, Hann, and Wilmington Trust Company, ("Trustee") as the Delaware Trustee and the UTI Trustee, which are to be serviced by Hann pursuant to that certain Servicing Agreement, as amended, dated October 23, 1997, between the Trust and Hann. Auto Lenders has agreed to purchase the residual value of the Leased Vehicles upon the expiration of the Lease pursuant to a Residual Purchase Agreement dated by and between Hann, Auto Lenders and the Bank (the ------------ "Residual Purchase Agreement"). Susquehanna has agreed to be surety for any Final Liquidation Loss incurred by the Bank to the extent Auto Lenders defaults in its obligations under the Residual Purchase Agreement. We have reviewed the Trust Agreement, the Servicing Agreement, the Residual Purchase Agreement, the SUBI Supplement and Supplement to Servicing Agreement (the "SUBI Supplement") dated by and among Auto Lenders, Hann, the ---------- Bank, the Trust and the Trustee, the Residual Interest Agreement dated -------- by and between the Bank and Susquehanna, and the Representations and Warranties Agreement dated by and between Hann, the Bank, the Trust and the ----------- Trustee, and such other documents, records and papers as we have deemed necessary and relevant for purposes of the opinions set forth below (collectively, the "Transaction Documents"). Based upon the foregoing, it is our opinion that: 1. Each of the Transaction Documents is authorized and permitted pursuant to the Trust Agreement and the Servicing Agreement, as amended, and all conditions precedent to the execution and delivery of the Transaction Documents have been satisfied. 2. The creation of the Bank SUBI and the Bank SUBI Certificate have been duly authorized, duly executed and authenticated by the Trustee in accordance with the Transaction Documents and, when delivered to the Bank as contemplated in the Transaction Documents, the Bank SUBI and the Bank SUBI Certificate will be validly issued, fully paid and non-assessable and will, together with each of the Transaction Documents to which the Trust or the Trustee is a party, constitute legally valid and binding obligations of the Trust and the Trustee, enforceable against each such party, as applicable, in accordance with its terms. Capitalized terms used but not otherwise defined herein shall have the meanings set forth in the SUBI Supplement. Very truly yours, 39 FORM OF OPINION OF COUNSEL TO AUTO LENDERS LIQUIDATION CENTER, INC. [Date] Sovereign Bank One Huntington Quadrangle Melville, NY 11747 Dear Sirs: You have requested our opinion, as counsel to Auto Lenders Liquidation Center, Inc. ("Auto Lenders"), with respect to certain matters in connection with the sale to Sovereign Bank, ("Bank") by Boston Service Company, Inc., d.b.a., Hann Financial Service Corporation ("Hann"), a wholly owned subsidiary of Susquehanna Bancshares, Inc. ("Susquehanna"), of the entire beneficial interest in certain Units consisting of motor vehicle leases ("Leases") and the underlying leased vehicles ("Leased Vehicles") originated by automobile dealers in their ordinary course of business and acquired by Hann, as Initial Beneficiary and Certificateholder of the UTI Interest in the Hann Auto Trust ("Trust") created pursuant to that certain Trust Agreement, as amended, dated as of February 12, 1999, (the "Trust Agreement"), between the Trust, Hann, and Wilmington Trust Company, ("Trustee") as the Delaware Trustee and the UTI Trustee, which serviced by Hann pursuant to that certain Servicing Agreement, as amended, dated October 23, 1997, between the Trust and Hann. Auto Lenders has agreed to purchase the residual value of the Leased Vehicles upon the expiration of the Lease pursuant to a Residual Purchase Agreement dated by and ------------ among Hann, Auto Lenders and the Bank (the "Residual Purchase Agreement"). Susquehanna has agreed to be surety for any Final Liquidation Loss incurred by the Bank to the extent Auto Lenders defaults in its obligations under the Residual Purchase Agreement. We have reviewed the Trust Agreement, the Servicing Agreement, the Residual Purchase Agreement, the SUBI Supplement and Supplement to Servicing Agreement (the "SUBI Supplement") dated by and among Auto Lenders, Hann, the ---------- Bank, the Trust and the Trustee, the Residual Interest Agreement dated -------- by and between the Bank and Susquehanna Bancshares, Inc., and the Representations and Warranties Agreement dated by and between Hann, ----------- the Bank, the Trust and the Trustee, and such other documents, records and papers as we have deemed necessary and relevant for purposes of the opinions set forth below (collectively, the "Transaction Documents"). Based upon the foregoing, it is our opinion that: 1. Auto Lenders is a corporation duly organized, validly -------------- existing and in good standing under the laws of the state of New Jersey, and is a wholly owned subsidiary of Susquehanna Bancshares, Inc.. 2. Auto Lenders has the requisite corporate power, authority and legal right to engage in the transactions contemplated by the Transaction Documents to which it is a party, to execute and deliver such Transaction Documents, and to perform and observe the terms and conditions of such Transaction Documents. 3. The Transaction Documents to which Auto Lenders is a party have been duly authorized, executed and delivered by Auto Lenders and are legal, valid and binding agreements enforceable against Auto Lenders in accordance with their terms, subject to bankruptcy laws and other similar laws of general application affecting rights of creditors. 40 4. Auto Lenders has been duly authorized to allow any of its officers to execute the required documents by original signature in order to complete the transactions contemplated in the Transaction Documents. 5. Either no consent or approval is required for the execution, delivery and performance by Auto Lenders of the Transaction Documents, or any required consent or approval has been obtained by Auto Lenders. 6. The consummation of the transactions contemplated by the Transaction Documents will (a) neither conflict with, result in a breach of, nor constitute a default under the charter or by-laws of Auto Lenders, the terms of any indenture or other agreement to which Auto Lenders is a party or by which it is bound, and (b) not violate any statute or order, rule, regulation, or to the best of our knowledge, any writ, injunction or decree of any court, governmental authority or regulatory body to which Auto Lenders is subject or by which it is bound. Capitalized terms used but not otherwise defined herein shall have the meanings set forth in the Trust Agreement. Very truly yours, 41 FORM OF OPINION OF COUNSEL TO SUSQUEHANNA BANCSHARES, INC. [Date] Sovereign Bank One Huntington Quadrangle Melville, NY 11747 Dear Sirs: You have requested our opinion, as counsel to Susquehanna Bancshares, Inc. ("Susquehanna") with respect to certain matters in connection with the sale to Sovereign Bank, ("Bank") by Boston Service Company, Inc., d.b.a., Hann Financial Service Corporation ("Hann"), a wholly owned subsidiary of Susquehanna, of the entire beneficial interest in certain Units consisting of motor vehicle leases ("Leases") and the underlying leased vehicles ("Leased Vehicles") originated by automobile dealers in their ordinary course of business and acquired by Hann, as Initial Beneficiary and Certificateholder of the UTI Interest in the Hann Auto Trust ("Trust") created pursuant to that certain Trust Agreement, as amended, dated as of February 12, 1999, (the "Trust Agreement"), between the Trust, Hann, and Wilmington Trust Company, ("Trustee") as the Delaware Trustee and the UTI Trustee, which serviced by Hann pursuant to that certain Servicing Agreement, as amended, dated October 23, 1997, between the Trust and Hann. Auto Lenders has agreed to purchase the residual value of the Leased Vehicles upon the expiration of the Lease pursuant to a Residual Purchase Agreement dated by and ------------ among Hann, Auto Lenders and the Bank (the "Residual Purchase Agreement"). Susquehanna has agreed to be surety for any Final Liquidation Loss incurred by the Bank to the extent Auto Lenders defaults in its obligations under the Residual Purchase Agreement. We have reviewed the Trust Agreement, the Servicing Agreement, the Residual Purchase Agreement, the SUBI Supplement and Supplement to Servicing Agreement (the "SUBI Supplement") dated by and among Auto Lenders, Hann, the ---------- Bank, the Trust and the Trustee, the Residual Interest Agreement dated -------- by and between the Bank and Susquehanna, and the Representations and Warranties Agreement dated by and between Hann, the Bank, the Trust and the ----------- Trustee, and such other documents, records and papers as we have deemed necessary and relevant for purposes of the opinions set forth below (collectively, the "Transaction Documents"). Based upon the foregoing, it is our opinion that: 1. Susquehanna is a bank holding company and corporation duly ------------ organized, validly existing and in good standing under the laws of the state of , and Hann is a wholly owned subsidiary of Susquehanna. - ---------- 2. Susquehanna has the requisite corporate power, authority and legal right to engage in the transactions contemplated by the Transaction Documents to which it is a party, to execute and deliver such Transaction Documents, and to perform and observe the terms and conditions of such Transaction Documents. 3. The Transaction Documents to which Susquehanna is a party have been duly authorized, executed and delivered by Susquehanna and are legal, valid and binding agreements enforceable against Susquehanna in accordance with their terms, subject to bankruptcy laws and other similar laws of general application affecting rights of creditors. 42 4. Susquehanna has been duly authorized to allow any of its officers to execute the required documents by original signature in order to complete the transactions contemplated in the Transaction Documents. 5. Either no consent or approval is required for the execution, delivery and performance by Susquehanna of the Transaction Documents, or any required consent or approval has been obtained by Susquehanna. 6. The consummation of the transactions contemplated by the Transaction Documents will (i) neither conflict with, result in a breach of, nor constitute a default under the charter or by-laws of Susquehanna, the terms of any indenture or other agreement to which Susquehanna is a party or by which it is bound, and (ii) not violate any statute or order, rule, regulation, or to the best of our knowledge, any writ, injunction or decree of any court, governmental authority or regulatory body to which Susquehanna is subject or by which it is bound. Capitalized terms used but not otherwise defined herein shall have the meanings set forth in the Trust Agreement. Very truly yours, 43 Exhibit B REPRESENTATIONS AND WARRANTIES AGREEMENT THIS REPRESENTATIONS AND WARRANTIES AGREEMENT (as it may be modified, supplemented or amended from time to time in accordance with its terms, this "Warranties Agreement") is made and entered into as of May 17, 2002 among BOSTON SERVICE COMPANY, INC., a New Jersey corporation doing business as Hann Financial Service Corporation ("Hann"), SOVEREIGN BANK, a federal savings bank organized under the laws of the United States of America (the "Bank"). RECITALS WHEREAS, the Trust is a Delaware business trust formed and operated pursuant to a Second Amended and Restated Trust Agreement dated February 12, 1999 (as it may be modified, supplemented or amended from time to time, the "Trust Agreement") for the purpose, among other things, of facilitating the origination and transfer of Leases and related Leased Vehicles without retitling; WHEREAS, the Trust and Hann have entered into that certain Servicing Agreement dated as of October 23, 1997 (as it has been amended, and as it may be further modified, supplemented or amended from time to time, the "Servicing Agreement"), which provides, among other things, for the servicing of the Trust Assets by Hann, as Servicer; WHEREAS, the Trust Agreement contemplates that, from time to time, Wilmington Trust, as UTI Trustee, on behalf of the Trust and at the direction of the Initial Beneficiary, (i) will identify and allocate on the Trust's books and records certain Trust Assets from the Undivided Trust Interest to separate SUBI Portfolios and (ii) will create and issue Certificates representing separate special units of beneficial interest in the Trust ("SUBIs"), the beneficiary or beneficiaries of which generally will hold undivided beneficial interests in the related SUBI Portfolios, all as set forth in the Trust Agreement; WHEREAS, Hann has established a retail automobile leasing program (the "Program") for which Hann, on behalf of the Trust, solicits Dealers to enter into Leases which, together with the related Leased Vehicle, are sold by such Dealers to the Trust; WHEREAS, the Bank desires to purchase from time to time the beneficial interest in certain Units which have been or will be acquired by the Trust in accordance with the Trust Agreement as amended, and which such Units are to be serviced by Hann pursuant to the Servicing Agreement, as amended by that certain SUBI Supplement and Supplement to Servicing Agreement dated as of May 17, 2002 by and among the Bank, Hann, as Servicer and Initial Beneficiary, and Wilmington Trust Company ("Trustee"), as Delaware Trustee, Bank SUBI Trustee and UTI Trustee on behalf of the Trust (in such capacities, "Delaware Trustee", "Bank SUBI Trustee" and "UTI Trustee") (the "Supplement", and together with the Trust Agreement and the Servicing Agreement, as the same may be amended from time to time, the "Agreements"). WHEREAS, concurrently herewith, as contemplated by the Trust Agreement, the Bank, the Trustee, as Delaware Trustee, Bank SUBI Trustee and UTI Trustee on behalf of the Trust, Auto Lenders Liquidation Center, Inc., and Hann, as Initial Beneficiary, are entering into 1 the Supplement, pursuant to which (i) the UTI Trustee and the Bank SUBI Trustee, at the direction of the Initial Beneficiary, will identify and allocate certain Trust Assets, consisting of Units, to a SUBI Portfolio, the "Bank SUBI Portfolio"), and (ii) the Delaware Trustee will create and issue to the Bank, its successors and assigns, a SUBI Certificate to be designated the "Hann Auto Trust Sovereign Bank Special Unit of Beneficial Interest Certificate" (such SUBI Certificate, together with any replacements thereof, the "Bank SUBI Certificate"), that will evidence the entire and exclusive beneficial interest in the related SUBI (the "Bank SUBI"); NOW THEREFORE, in consideration for the Bank's agreement to purchase the beneficial interest in the Bank SUBI, the Bank SUBI Portfolio, the Bank SUBI Certificate, and for the mutual agreements herein contained, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: ARTICLE I DEFINITIONS; THIRD-PARTY BENEFICIARY 1.1. Definitions. Capitalized terms used herein and not defined in the text hereof or on Exhibit A attached hereto (a) shall have the same meanings as in the Trust Agreement, if defined therein, and (b) if not defined in the Trust Agreement but defined in the Servicing Agreement, shall have the same meanings as in the Servicing Agreement. 1.2. Third Party Beneficiary. This Warranties Agreement will inure to the benefit of and be binding upon the Bank and each subsequent holder of any legal or beneficial interest in the Bank SUBI Certificate. The Bank, and any such subsequent holder of a SUBI Certificate, is an intended third-party beneficiary of the Trust Agreement and the Servicing Agreement, insofar as they apply to the Bank SUBI, the Bank SUBI Portfolio, the Bank SUBI Certificate, or any of the rights created thereby or incident thereto. ARTICLE II REPRESENTATIONS AND WARRANTIES 2.1. Representations and Warranties of Hann. Hann warrants to Bank as of the date hereof, and as of the respective Funding Date with respect to each Unit subject to this Warranties Agreement as follows: (a) Duly Licensed. Hann is a corporation, duly organized and validly existing under the laws of the State of New Jersey, and is duly licensed and/or qualified in all jurisdictions where such licensing and/or qualification is necessary. The Trust is a Delaware Business Trust and is duly licensed, validly existing and qualified in all jurisdictions where such licensing and/or qualification is required. (b) Power and Authority, Due Authorization, Enforceability. In each jurisdiction where a Lessee of a Leased Vehicle is located, Hann and the Trust have full power and authority to own its properties and to conduct its business as such properties shall be currently owned and such business is presently conducted and to convey and assign the beneficial interests conveyed and assigned to Bank and the Trust hereunder. Hann and the Trust have full power and authority to execute and deliver the Agreements and to carry out their respective terms and the Agreements and the Bank SUBI Certificate have been duly authorized, executed and delivered by Hann and the Trust, as applicable, there has been no breach of any party to either the Agreements or any SUBI Certificate, and all of them shall constitute the legal, 2 valid and binding obligation of Hann the Trust, and every other party thereto, as applicable, enforceable against such parties in accordance with their terms, except as such enforceability may be limited by insolvency, bankruptcy, reorganization, conservatorship, receivership, liquidation or other similar laws and general equitable principles. (c) No Violation. The consummation of the transactions contemplated by the Agreements and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, nor constitute a default under (in each case material to the Trust or to Hann and its subsidiaries considered as a whole), or result in the creation or imposition of any lien, charge or encumbrance (in each case material to the Trust or to Hann and its subsidiaries considered as a whole) upon any of the property or assets of Hann or the Trust pursuant to the terms of, any indenture, mortgage, deed of trust, loan agreement, guarantee, lease financing agreement or other agreement or instrument under which Hann or the Trust is a party (other than this Warranties Agreement); nor will such action result in any violation of the provisions of Hann's charter or bylaws or any law, order, rule, or regulation applicable to Hann or the Trust or of any federal or State regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over Hann, the Trust or their respective properties which would materially and adversely affect the performance by Hann or the Trust of its obligations under, or the validity and enforceability of, the Agreements. (d) No Proceedings. No legal or governmental proceedings are pending to which Hann or the Trust is a party or of which any property of either is the subject, and no such proceedings are threatened or contemplated by governmental authorities or threatened by others, other than such proceedings which will not have a material adverse effect upon the general affairs, financial position, net worth or results of operations (on an annual basis) of the Trust or of Hann and its subsidiaries considered as a whole and will not materially and adversely affect the performance by Hann or the Trust of its obligations under, or the validity and enforceability of, the Agreements. (e) Ordinary Course of Business. The consummation of the transactions contemplated by the Agreements are in the ordinary course of business of Hann and the Trust, and the transfer, assignment and conveyance of the Units by Hann, the Trust or any Dealer pursuant to the Agreements are not subject to the bulk transfer or any similar statutory provisions in effect in any applicable jurisdiction. (f) Due Qualification. Hann and the Trust have obtained or are exempt from obtaining all the licenses and approvals necessary for the conduct of their respective business where the failure to do so would materially and adversely affect the Units, or any individual Unit, or render any Unit unenforceable. (g) No Consent Required. Hann and the Trust are not required to obtain the consent of any other Person, or any consent, license, approval or authorization or registration or declaration with, any governmental authority, bureau or agency in connection with the execution, delivery or performance of the Agreements, except for such as have been obtained, effected or made. (h) No Litigation Pending. There is no action, suit, proceeding or investigation pending or threatened against Hann or the Trust which would draw into question 3 the validity of the Agreements or the Units or of any action taken or to be taken in connection with the obligations of Hann or the Trust contemplated herein or therein, or which would be likely to impair materially the ability of Hann or the Trust to perform under the terms of the Agreements. (i) No Untrue Information. Neither the Agreements nor any statement, report or other document prepared by or on behalf of Hann or the Trust pursuant to the Agreements or in connection with the transactions contemplated herein or therein contains any untrue statement of material fact or omits to state a fact necessary to make the statements contained herein or therein not misleading. (j) Y2K Compliant. Hann represents, warrants and covenants that its information systems, data processing and other hardware, software and other systems, facilities, programs and procedures that will be used by Servicer in servicing the Units are, and shall remain Y2K Compliant. (k) No Broker. Neither Hann nor the Trust has, in connection with any Unit purchased by the Bank, incurred any obligation, made any commitment or taken any action which might result in a claim against the Bank or an obligation by the Bank to pay a sales brokerage commission, finder's fee or similar fee in respect to the transactions described in the Agreements. (l) Ability to Perform. Hann, in each of its respective capacities described in the recitals hereto, and the Trust, can perform each and every one of its covenants contained in the Agreements. (m) No Default. Neither Hann, any of its affiliates, nor the Trust is in material default under any agreement, contract, instrument or indenture of any nature whatsoever to which Hann, any of its affiliates, or the Trust is a party or by which it is bound nor has any event occurred which with notice or lapse of time or both would constitute a material default under any such agreement, contract, instrument or indenture and which default would have a material adverse effect on its ability to perform its obligations under the Agreements. (n) Selection Procedures. Neither Hann, the Trust nor any Dealer has used selection procedures that identified the Units as being less desirable or valuable than other comparable leases and leased vehicles as to which the representations and warranties described in Section 2.2 could be made. (o) Financial Statements. Hann has delivered to the Bank financial statements as to its last two complete fiscal years and any later quarter ended more than 60 days prior to the Closing Date. All such financial statements fairly present the pertinent results of operations for each of such periods and the financial condition at the end of each such period of Hann and its subsidiaries. All such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as set forth in the notes thereto. (p) Material Adverse Change. There has been no change in the business, operations, financial condition, properties or assets of Hann since the date of Hann's 4 financial statements which would have a material adverse effect on its ability to perform its obligations under the Agreements. (q) Errors and Omissions Policies. Hann, its officers, employees, agents and representatives are covered by one or more errors and omissions insurance policies and fidelity bonds held by its parent company, Susquehanna Bancshares, Inc., with a responsible insurance carrier which has been rated at least A:V by the A.M. Best Company, each of which policies and bonds is in full force and effect. Such policies and bonds, or replacement policies and bonds with substantially identical coverage shall remain in full force and effect for the duration of this Agreement. (r) Waiver of Interest in other SUBI Assets. Each of the holders of a beneficial interest in the Trust, or any SUBI Certificate or SUBI Portfolio has agreed in writing that it has no rights with respect to any assets of the Trust other than those allocated to its respective SUBI Portfolio and has released and waived all claims against or with respect to the UTI Assets and the SUBI Assets allocated to each other SUBI and, in the event that such release is not given effect, each such holder has agreed to fully subordinate all claims it may be deemed to have against all UTI Assets and all SUBI Assets allocated to each other SUBI, including but not limited to the Bank SUBI. The representations and warranties in this Section shall survive the execution and assignment of the Agreements by the Bank, the Bank SUBI Certificate, and any subsequent transfers of each Unit. 2.2. Representations and Warranties of Hann with respect to the Leases. Hann warrants to Bank as of the respective Funding Date with respect to each Unit subject to the Agreements as follows: (a) Each Lease was originated by a Dealer (i) in the ordinary course of its business, (ii) on a form of Lease attached as Exhibit C, (iii) pursuant to a form of Dealer Agreement which provides for recourse to the Dealer in the event of certain defects in the Lease but not for default by the Lessee, and (iv) in compliance with the Credit Qualifications; (b) Each Lease and the related Leased Vehicle are owned by the Trustee, on behalf of the Trust, free of all Liens (including tax liens, mechanics' liens and liens that arise by operation of law, but other than any lien on the title of such Leased Vehicle noted solely to provide for delivery of title documentation to the Trustee or its designee); (c) The Residual Value with respect to each Leased Vehicle was determined in accordance with commercially reasonable expectations of the remaining value of such Leased Vehicle upon the expiration of the Lease term and was calculated in accordance with generally accepted industry practices of prudent lessors of motor vehicles similar to the Leased Vehicle in the jurisdiction where the Lease was originated; (d) Each Lease was originated in compliance with, and complies with, all applicable federal, state and local laws and regulations, including, but not limited to the Federal Consumer Credit Protection Act, as amended, Regulations M and Z of the Board of Governors of the Federal Reserve System, as each has been amended, all state leasing and 5 consumer protection laws, including Title V of the Gramm Leach Bliley Act, and all state and federal usury laws; (e) (i) No Lease or related Lessee was or is (or would be if such Lease was originated on the Funding Date) subject to or in violation of the stated prohibitions of Executive Order 13224; and (ii) no Lease involves a person (as such term is defined in such Executive Order) identified as a Specially Designated National ("SDN") or any other similar designation by the Office of Foreign Asset Control or any other federal agency with similar charge or jurisdiction; (f) There has been no fraud by any Person in connection with the origination, servicing or transfer of any Lease or any Leased Vehicle; (g) With respect to each Lease, all material consents, licenses, approvals or authorizations of, or registrations or declarations with, any governmental authority required to be obtained, effected or given by the originator of such Lease in connection with (i) the origination of such Lease, (ii) the execution, delivery and performance by such originator of such Lease, and (iii) the acquisition by the Trustee, on behalf of the Trust, of such Lease and the related Leased Vehicle, have been duly obtained, effected or given and are in full force and effect as of such date of creation or acquisition; (h) Each Lease is the legal, valid and binding full-recourse payment obligation of the Lessee thereunder, enforceable against such Lessee in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws, now or hereafter in effect, affecting the enforcement of creditors' rights in general and except as such enforceability may be limited by general principles of equity (whether considered in a suit at law or in equity); (i) No Lease is subject to any right of rescission, setoff, counterclaim or any other defense (including defenses arising out of violations of usury laws) of the Lessee thereof to payment of the amounts due thereunder, and no such right of rescission, setoff, counterclaim or other defense has been asserted or threatened; (j) With respect to each Lease, each of the originator of such Lease, the Servicer and the Trustee, on behalf of the Trust, have each satisfied all obligations required to be fulfilled on its part with respect to such Lease and the related Leased Vehicle; (k) Each Lease is payable solely in United States dollars in the United States; (l) The Lessee of each Lease is a Person located in one or more of the 50 states of the United States, the District of Columbia or a territory of the United States and is not (i) Hann or an Affiliate thereof or (ii) the United States of America or any state or local government or any agency or political subdivision thereof; (m) All information and statements provided by Hann or any other Person with respect to the Agreements, the SUBI Certificate, the Bank SUBI Portfolio, or any document relating thereto (including any Worksheet prepared with respect to any Unit) is true, correct and complete and does not omit to state any material fact necessary to make such 6 information or statements contained therein, in the context in which they are made, not misleading; (n) Each Lease requires the Lessee thereunder to maintain insurance against loss or damage to the related Leased Vehicle under an enforceable insurance policy that names the Trust as loss payee; (o) With respect to each Lease, the related Leased Vehicle is titled in the name of the Trustee on behalf of the Trust (or properly completed applications for such title have been submitted to the appropriate titling authority) and all transfer and similar taxes imposed in connection therewith have been paid; (p) Each Lease is a closed-end Lease that (i) requires equal monthly payments to be made within a fixed time period from the date of origination of such Lease, such time period to be at least 12 months and no more than 60 months, and (ii) requires such payments to he made by the Lessee thereof within 30 days after the billing date for such payment; (q) Each Lease is fully assignable and does not require the consent of the Lessee thereunder as a condition to any transfer, sale or assignment of the rights of the originator under such Lease; (r) Each Lease had been serviced in accordance with applicable federal, state and local laws, regulations and executive orders, and Accepted Servicing Practices; (s) The Residual Value of the related Leased Vehicle as stated on each Lease was reasonably established by Hann to approximate the actual residual value of such Leased Vehicle at the end of the Lease term in a manner consistent with generally accepted policies and practices of prudent lessors regarding the setting of residual values in the jurisdiction where the Unit was originated as applied with respect to closed-end retail automobile and light duty truck leases; (t) With respect to each Lease, the Lessee thereof has not made a claim under the Soldiers' and Sailors' Relief Act of 1940; (u) All documentation and information provided to the Bank with respect to each Unit, including the Lease File, is true, correct and complete in all material respects, and no information was omitted which would be necessary to make the statements or information contained therein not misleading; (v) The Lease is not allocated to any SUBI Portfolio other than the Bank SUBI Portfolio; (w) As of the related Funding Date, the Lease is not more than 29 days delinquent, and the related Lessee has not filed for Bankruptcy; (x) Each Lease is a finance lease for purposes of generally accepted accounting principles, consistently applied; 7 (y) Each Lease is a "true lease", as opposed to a lease intended as security, under the laws of the State in which it was originated; (z) With respect to each Lease, the Servicer has not exercised any right of set off against the originating Dealer; (aa) With respect to each Lease, the related Leased Vehicle was produced by the original manufacturer to U.S. specifications and standards, as evidenced by the vehicle identification number which is within the approved series for the make and model at the time of origination of the Lease; (bb) With respect to each Lease, the related Leased Vehicle has not been used commercially as a taxi cab, public omnibus, livery, or sightseeing conveyance or for any carrying of goods or passengers for hire; and (cc) Each Lease, as of the related Funding Date, (i) was originated in the United States; and (ii) fully amortizes to an amount equal to the Residual Value of the related Leased Vehicle based on a fixed Lease Rate calculated on a constant yield basis and provides for level payments over its term (except for payment of such Residual Value). The representations and warranties in this Section shall survive the execution and assignment of the Agreements, the Bank SUBI Certificate, and any subsequent transfers of each Unit. 2.3. Remedies for Breach of Representations and Warranties. It is understood and agreed that the representations and warranties set forth in Sections 2.1, and 2.2 shall survive the funding or purchase of the Unit by Buyer, or any subsequent transfer of the SUBI Certificate and shall inure to the benefit of Buyer, notwithstanding any restrictive or qualified endorsement on any Lease, or other evidence of indebtedness or assignment or the examination or failure to examine documentation related to any Unit funded or purchased by the Bank hereunder by or any recital set forth in any Assignment which provides that such assignment is without recourse or representations. Upon discovery by Hann or the Bank of a breach of any of the foregoing representations and warranties which materially and adversely affects the value of the Bank SUBI Portfolio or the interest of Buyer in the Units (or which materially and adversely affects the interest of Buyer in, or the value of, the related Unit in the case of a representation and warranty with respect to a particular Unit), the party discovering such breach shall give prompt written notice to the others. 2.4. Repurchase. Within thirty (30) days of the earlier of either discovery by or notice to Hann of any breach of a representation or warranty of Section 2.1 or 2.2 herein which affects the value of a Unit (or the interest of the Buyer therein), Hann as applicable, shall use its best efforts promptly to cure such breach in all material respects and, if such breach cannot be cured within such thirty (30) days, Hann shall, at the Bank's option, repurchase such Unit from the Bank at the Repurchase Price within five (5) days of the Bank's demand. In the event that a breach affects the value of the Bank SUBI Portfolio or the Bank SUBI Certificate, (or the interest of Buyer in a Unit) and shall involve any representation or warranty set forth in Section 2.1 or 2.2, and cannot be cured within 30 days of the earlier of either discovery by or notice to Hann of such breach, all of the Units in the Bank SUBI Portfolio shall, at the Bank's 8 option, be repurchased by Hann at the Repurchase Price. Any repurchase of a Unit or Units pursuant to the foregoing provisions of this Section 2.4 shall be accomplished by wire transfer of immediately available funds in the amount of the Repurchase Price to such account as the Bank may direct. ARTICLE III MISCELLANEOUS 3.1. Amendment. This Warranties Agreement may be only be amended, supplemented or modified by a written document executed by all of the parties hereto. 3.2. Future Obligations. In order to enforce Bank's rights under this Warranties Agreement and the Agreements, Hann shall, upon the request of Bank or its assigns, do and perform or cause to be done and performed, every reasonable act and thing necessary or advisable to put Bank and its assigns in position to enforce the payment of the Units and to carry out the intent of this Warranties Agreement and the Agreements, including the execution of and, if necessary, the recordation of additional documents including separate endorsements and assignments upon request of Bank. 3.3. Regulatory Requirements. Hann agrees to take such further actions and obtain and/or execute, acknowledge, deliver and/or record such further documents and instruments, as the Bank may reasonably request to fulfill any obligations Bank may have with respect to the Units or the Bank SUBI Portfolio or under applicable banking regulations or as requested by Bank's regulatory examiners. 3.4. Governing Law. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED UNDER THE INTERNAL LAWS OF THE STATE OF PENNSYLVANIA WITHOUT REGARD TO ANY OTHERWISE APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS. 3.5. Indemnification by Hann. Hann agrees to indemnify and save Bank harmless from all losses, damages and claims (including court costs and attorney's fees) arising out of the breach of any of the representations, warranties and covenants of Hann (in any of its capacities) herein, in the Trust Agreement or in the Servicing Agreement or the Supplement, the conduct of Hann or its officers, agents, servants and employees, in soliciting Dealers or originating or causing the Trust to originate Units, and servicing Units in the Bank SUBI Portfolio. This indemnification shall survive termination of this Agreement. 3.6. Term of Agreement. This Warranties Agreement shall apply to all Units funded by the Bank. Notwithstanding any termination by the Bank of its option to fund or purchase additional Units, the obligations of Hann, and the rights of the Bank under this Warranties Agreement with respect to Units included in the Bank SUBI Portfolio shall continue until the earlier of (i) the final payment or liquidation of all the Units in the Bank SUBI Portfolio and the final distribution to the Bank, and the remittance of all amounts due to the Bank. The representations and warranties of Hann, and the rights and obligations of the parties with respect to any breach thereof shall survive the termination of this Warranties Agreement. 3.7. Notice. Any notice required hereunder shall be given in writing by certified mail, return receipt requested, to the respective party at the address provided below, or 9 to such other address as shall be otherwise provided in writing by one party to the other from time to time: (a) the Bank at: Sovereign Bank, One Huntingdon Quadrangle, Melville, NY 11747, Attention: Peter LaMariana; with a copy to: Sovereign Bank, 1130 Berkshire Boulevard, Wyomissing, PA 19610, Attention: David A. Silverman, Chief Counsel; and (b) to Hann at: Boston Service Company, Inc. d.b.a. Hann Financial Service Corporation, One Centre Drive, Jamesburg, New Jersey 08831, Attention: President. 3.8. No Assignment. This Warranties Agreement shall be binding upon Hann and its successors in interest. Hann may not assign its rights under this Warranties Agreement without the written consent of the Bank. 3.9. Article and Section Headings. The article and section headings herein are for convenience of reference only, and shall not limit or otherwise affect the meaning hereof. 3.10. Counterparts. This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument. [Signature Page Follows] 10 IN WITNESS WHEREOF, the undersigned have caused this Warranties Agreement to be duly executed by their respective officers as of the day and year first above written. BOSTON SERVICE COMPANY, doing business as Hann Financial Service Corp., as Hann, Initial Beneficiary and Servicer By: ---------------------------------------- Name: -------------------------------------- Title: -------------------------------------- SOVEREIGN BANK, as the Bank By: ---------------------------------------- Name: -------------------------------------- Title: -------------------------------------- EXHIBIT A DEFINITIONS "Accepted Servicing Practices" shall mean, with respect to each Unit, those servicing practices customary in the industry for leases and leased vehicles of the same type as the Unit in the jurisdiction where the related Leased Vehicle is located. "Auto Lenders" means Auto Lenders Liquidation Center, Inc., a New Jersey corporation. "Auto Lenders SUBI" means the special unit of beneficial interest of the Trust created by the Auto Lenders Operating Agreement and SUBI Supplement dated as of January 1, 2000 among the Initial Beneficiary, the Trust, the Servicer, the UTI Trustee, the Delaware Trustee, Auto Lenders and Wilmington Trust Company, as Auto Lenders SUBI Trustee. "Bank" means Sovereign Bank, a federal savings bank organized under the laws of the United States. "Bank SUBI" shall have the meaning set forth in the recitals to the Supplement. "Bank SUBI Certificate" shall have the meaning set forth in the recitals to the Supplement. "Bank SUBI Portfolio" shall have the meaning set forth the recitals to the Supplement. "Bank SUBI Trustee" means Wilmington Trust Company, as SUBI trustee of the Bank SUBI. "Credit Qualifications" shall mean the credit qualifications attached as Exhibit C to the Supplement. "Dealer" means a dealer participating in the Program who enters into Leases of motor vehicles which the dealer sells to the Trust. "Delaware Trustee" means Wilmington Trust Company, as Delaware trustee of the Trust. "End of Term Charges" means, with respect to any Unit, excess wear and tear charges and excess mileage charges. "Funding Date" shall mean the date on which the Bank pays the Purchase Price with respect to any Unit. "Hann" means Boston Service Company, Inc., a New Jersey corporation doing business as Hann Financial Service Corp. "Initial Beneficiary" means Hann, as initial beneficiary of the Trust. "Lease" means a closed-end motor vehicle retail lease agreement between a Dealer and a Lessee entered pursuant to the Program. "Lease File" All documents, records, and items (other than the original Certificate of Title to the Leased Vehicle) which shall be pertaining to a particular Unit, including, but not limited to those specified on Exhibit D to the Supplement. Leased Vehicle" means an automobile, sport utility vehicle, light duty truck or other vehicle, together with all accessories, additions and parts constituting a part thereof and all accessions thereto, which is the subject of a Lease. "Lessee" means the lessee under a Lease. "Purchase Price" shall mean, with respect to any Unit, the purchase price with respect to a Unit as determined in accordance with Hann's Credit Qualifications. "Program" means the retail automobile leasing program established by Hann pursuant to which it solicits Dealers to enter into retail motor vehicle Leases which conform to the Credit Qualifications. "Repurchase Price" shall mean, as of any date of determination, with respect to any Unit, the sum of the remaining unpaid payments due on the related Lease less the amount of any unaccrued interest component thereof calculated on an actuarial basis, plus the Residual Value related thereto. "Residual Value" means, for any Residual Vehicle, the estimated wholesale value of a motor-vehicle subject to a Lease on the maturity thereof, as set by Hann in its Credit Qualifications and as stated in each Lease. "Residual Vehicle" shall have the meaning given thereto in the recitals to the Supplement. "Servicer" means Hann, as Servicer of the Trust Assets. "Servicing Agreement" means the Servicing Agreement dated as of October 23, 1997 between the Trust and Hann, as it may be modified, supplemented or amended from time to time. "SUBI" means a separate special unit of beneficial interest in the Trust. "SUBI Assets" shall have the meaning given thereto in the Trust Agreement. "SUBI Certificate" shall have the meaning given thereto in the Trust Agreement. "SUBI Portfolio" means, as to each SUBI, that collection of Leases, Leased Vehicles and other associated Trust Assets allocated by the Trust to such SUBI from time to time from among all those Leases, Leased Vehicles and other associated Trust Assets owned by the Trust. "Trust" means Hann Auto Trust, a Delaware business trust. "Trust Agreement" means the Second Amended and Restated Trust Agreement dated as of February 12, 1999 between Hann and Wilmington Trust Company, as UTI Trustee and Delaware Trustee, as it may be modified, supplemented or amended from time to time. "Trust Assets" shall have the meaning given thereto in the Trust Agreement. "Unit" means a Lease, the related Leased Vehicle and the associated related rights. "Undivided Trust Interest" or "UTI" shall have the meaning given thereto in the Trust Agreement. "UTI Trustee" means Wilmington Trust Company, as UTI trustee of the Trust. "Worksheet" shall have the meaning set forth in Section 3.1 of the Supplement. Exhibit C RESIDUAL PURCHASE AGREEMENT THIS RESIDUAL PURCHASE AGREEMENT (as it may be amended from time to time, this "Agreement"), is made and entered into this 17th day of May, 2002, by and between AUTO LENDERS LIQUIDATION CENTER, INC. (hereinafter referred to as "Auto Lenders"), a New Jersey corporation having its principal office at 1051 North Black Horse Pike, Williamstown, New Jersey 08094, SOVEREIGN BANK, a federal savings bank organized and existing under the laws of the United States of America, having its principal office at 1130 Berkshire Boulevard, Wyomissing, PA 19610 (hereinafter referred to as the "Bank"), and BOSTON SERVICE COMPANY, INC., doing business as HANN FINANCIAL SERVICE CORPORATION (hereinafter referred to as "Hann"), a New Jersey corporation, having its principal office at One Centre Drive, Jamesburg, New Jersey 08831. BACKGROUND Auto Lenders is in the business of providing services to lenders who acquire motor vehicles upon termination of lease contracts or upon repossession under installment sales contracts. Auto Lenders reconditions motor vehicles and sells or leases them at retail to the general public or sells them at wholesale at public or private auctions (the "Service"). The Service enables lenders to maximize remarketing and resale gains, minimize remarketing and resale losses and do so while reducing the costs normally incurred by lenders in the disposition of such motor vehicles. Auto Lenders initially agreed to provide the Service to Hann on an exclusive basis pursuant to the terms and conditions of a Servicing Agreement between the parties dated February 1, 2000, the Amended Agreement dated September 1, 2000, and the 2002 Amended Servicing Agreement dated January 1, 2002 (the "Hann Agreements"). Hann has established and administers a retail automobile leasing program (the "Program") pursuant to which Hann either (a) purchases Leases and Leased Vehicles (collectively, "Units") from automobile dealers on behalf the Hann Auto Trust (the "Trust") and subsequently assigns its interest in the Units to participating lenders (the "Lenders"), or (b) arranges for the direct funding of Leases from automobile dealers on behalf of the Trust by Lenders, all in exchange for certificates representing the beneficial interest in a designated portfolio of such Leases and related Leased Vehicles (the "SUBI Portfolio" and "SUBI Certificates", respectively). Each Lender's SUBI Portfolio, and such Lender's 100% beneficial interest therein, shall include such additional Units as may be purchased or funded by such Lender from time to time. Hann currently services the Leases and, pursuant to that certain 2002 Amended Servicing Agreement dated as of January 1, 2002, Hann and Auto Lenders agreed that Auto Lenders would provide the Service and agree to purchase the residual value of the Leased Vehicles from each of the applicable Lenders upon the expiration, repossession or other termination of the Leases, (together with the Hann Agreements, the "Hann Servicing Agreements"). Pursuant to that certain SUBI Supplement and Supplement to Servicing Agreement dated concurrently herewith by and among the Bank, Hann, Auto Lenders, and 1 Wilmington Trust Company (the "SUBI Supplement"), the Bank may purchase beneficial interests in certain Units originated through dealers pursuant to the Program. The Bank desires that Auto Lenders purchase the residual values of all such Units pursuant to the terms and provisions of the above-referenced agreements as amended hereby. NOW THEREFORE, in consideration of the mutual agreements herein contained, and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree with respect to those Units that become part of the Bank SUBI Portfolio as follows: 1. Definitions; Third Party Beneficiary. (a) Definitions. Capitalized terms shall have the meanings in Exhibit A attached hereto. Capitalized terms not defined in this Agreement (a) have the same meanings as in the Trust Agreement, if defined therein, and (b) if not defined in the Trust Agreement but defined in the Servicing Agreement, have the same meanings as in the Servicing Agreement. (b) Third Party Beneficiary. The Bank, as a holder of a SUBI Certificate, is a third-party beneficiary of the Trust Agreement and the Servicing Agreement, insofar as they apply to the Bank SUBI, the Bank SUBI Portfolio, the Bank SUBI Certificate, or any of the rights created thereby or incident thereto. 2. Residual Values of Leased Motor Vehicles. Notwithstanding anything to the contrary in the Servicing Agreement or the Hann Servicing Agreements, with respect to each Unit in the Bank SUBI Portfolio, Auto Lenders does hereby agree to pay to the Bank during the term or any extended term of this Agreement: (a) with respect to any Lease which has terminated in accordance with the Expiration Date stated in the terms of such Lease, an amount equal to the Residual Value of the related Residual Vehicle. (b) with respect to any Lease which was subject to Early Termination, for which the related Lessee has defaulted in its obligation to satisfy the remaining Book Value of the related Lease, and for which Auto Lenders provides the Service, upon the sale or other disposition of such Leased Vehicle, an amount equal to the lesser of (i) the Book Value of the Bank's beneficial interest in such Unit, or (ii) the Net Liquidation Proceeds related to such Leased Vehicle received by Auto Lenders. 3. Delivery and Reconditioning of Vehicles. Hann, as Servicer, on behalf of the Bank, will deliver all Residual Vehicles which are subject to this Agreement (other than any Leased Vehicle with respect to which the related Lessee exercised its option to purchase such Leased Vehicle) to an Auto Lenders' designated place of business at Hann's sole cost and expense. In providing the Service, Auto Lenders will determine the reasonable costs necessary to recondition the Residual Vehicle for sale or lease and shall promptly advise Hann of such costs. Such costs, to the extent actually incurred, shall be reimbursed to Auto Lenders by Hann on a monthly basis within thirty (30) days of receipt of an invoice for such costs from Auto Lenders. The provisions of this Section 3 shall survive termination of this Agreement. 2 4. Remarketing of Vehicles. As an incident to the Service, Auto Lenders will use its best efforts to sell or lease those Leased Vehicles which are reconditioned by it, as well as those Leased Vehicles which did not require reconditioning, on such terms as are reasonably acceptable to Auto Lenders within 45 days of the date of Early Termination or the Expiration Date, as applicable, related to each Leased Vehicle. In the event that any Leased Vehicle for which Auto Lenders is providing the Service is not sold within such 45 day period, Auto Lenders shall continue to use its best efforts to sell or lease such Leased Vehicle thereafter. Auto Lenders shall remit the Residual Payment to the Bank upon the earlier of (a) the second business day following the sale or lease of such Residual Vehicle or (b) the 45th day following the scheduled Expiration Date of the related Lease (a "Residual Payment Date"). With respect to Residual Payments determined in accordance with Section 2(a) hereof, any deficiency between the sale proceeds received and the applicable Residual Payment relating to the Residual Vehicles sold or leased by Auto Lenders shall be reconciled and paid by Auto Lenders to the Bank concurrently with any remittance to the Bank pursuant to the immediately preceding sentence. For the purpose of such remittance to the Bank, Auto Lenders may withdraw the amount of any deficiency determined in accordance with the preceding sentence from the Residual Reserve Account to the extent of funds therein. Any surplus of the sale proceeds received over the applicable Residual Payment shall be reconciled at the end of each month and paid by the Bank to Auto Lenders within 30 days of receipt by the Bank of such reconciliation evidencing such surplus, and Auto Lenders' request for payment thereof. With respect to any Residual Payment received by the Bank after the applicable Residual Payment Date, Auto Lenders shall pay to the Bank interest on any such late Residual Payment (or portion thereof) at a rate equal to the Prime Rate of interest as is then most recently published by the Wall Street Journal, plus four percent (4%), but in no event greater than the maximum amount permitted by applicable law. Such interest shall be paid by Auto Lenders to the Bank on the date such late Residual Payment is made and shall be due for the period commencing with on the Residual Payment Date and ending on the Business Day on which such late Residual Payment is made, both inclusive. Such interest shall be remitted along with such late Residual Payment by wire transfer of immediately available funds to such account as Bank shall direct. The payment by Auto Lenders of any such interest shall not be deemed an extension of time for payment or a waiver by Bank of any default, if applicable. Upon any such sale or lease of a Residual Vehicle, and confirmation that the Bank has received from Auto Lenders the appropriate Residual Payment, Hann, as Servicer on behalf of the Bank, shall cause the transfer of the title to the Residual Vehicle to Auto Lenders, which shall then transfer title to the respective purchaser. Any recoveries obtained by Auto Lenders with respect to a Residual Unit for which any portion of the Residual Payment was made to the Bank from the Residual Reserve Account or from Auto Lenders' own funds (to the extent amounts in the Residual Reserve Account were insufficient) shall be allocated in the following priority to the extent of such recoveries: first, to Auto Lenders an amount equal to any previously unreimbursed amounts advanced by Auto Lenders in accordance with its obligations under this Section 4 (exclusive of any amounts withdrawn with respect to such Residual Vehicle from the Residual Reserve Account), and second, to replenish the Residual Reserve Account for any amounts withdrawn therefrom with respect to any such Unit, and third, to Auto Lenders, the remainder. 3 5. Commitment to Purchase Residual Vehicles. Upon the Bank's receipt of the Residual Payment Auto Lenders shall become the owner of the beneficial interest in the related Unit, and the Bank shall cause the Bank SUBI Trustee to transfer record ownership of the beneficial interest in such Unit to the Auto Lenders SUBI, and shall deliver to Auto Lenders, without recourse, the Lease Files related thereto. 6. Employees. Auto Lenders agrees to employ servicing personnel, at no cost to the Bank, in a number and quality sufficient to provide the Service to the Bank required by this Agreement in accordance with Accepted Servicing Practices. Such personnel shall function under the sole guidance and direction of Auto Lenders and at all times remain solely the employees of Auto Lenders. Auto Lenders shall solely be responsible for the salaries, employment taxes, and any and all employee benefits of such personnel. It is the intention of the parties hereto that this Agreement shall not be construed to create in any manner whatsoever an employer-employee relationship between Hann, the Bank and/or the employees of Auto Lenders, it being within the contemplation of the parties that all acts performed by Auto Lenders in carrying out the provisions of this Agreement shall be those of an independent contractor and all acts performed by employees of Auto Lenders shall be those strictly of employees of Auto Lenders. 7. Establishment and Purpose of Residual Reserve Account. (a) Auto Lenders agrees to establish a Residual Reserve Account at Bank in the name of the Bank, which shall bear interest at any time at a rate not less than Bank then pays on money market accounts at such time. In accordance with the SUBI Supplement, the Bank shall deposit into the Residual Reserve Account, from the Purchase Price with respect to each Unit included in the Bank SUBI Portfolio, an amount equal to the Per Unit Residual Reserve Deposit. Auto Lenders hereby grants to the Bank a lien and security interest in the Residual Reserve Account and in each Per Unit Residual Reserve Deposit, and the proceeds of each to secure payment and performance of all of Auto Lender's obligations to the Bank of any nature whatsoever arising under this Agreement, including but not limited to any damages arising as a result of Auto Lender's rejection of this Agreement in connection with any insolvency or bankruptcy proceeding commenced by or against Auto Lenders. (b) To the extent that the proceeds from the sale of any Residual Vehicle related to a Unit allocated to the Bank SUBI Portfolio are less than the Residual Payment due to the Bank thereon, Auto Lenders may withdraw from the sum on deposit in the Residual Reserve Account, exclusively for remittance to the Bank, an amount equal to the amount by which such Residual Payment exceeds the amount of such proceeds. (c) Auto Lenders agrees to maintain the Residual Reserve Account so long as Bank, its successors or assigns own the beneficial interest in the Bank SUBI Portfolio, and the Bank shall be entitled to offset each Final Liquidation Loss described in subsection 7(d) below with respect to a Unit allocated to the Bank SUBI Portfolio, plus the amount of any Penalty against the Residual Reserve Account notwithstanding the termination of this Agreement. 4 (d) If Auto Lenders fails to pay the full Residual Payment to the Bank in accordance with Section 4 hereof, upon the expiration of ten Business Days from and including the date such payment was due, the Bank shall withdraw from funds on deposit in the Residual Reserve Account an amount equal to (i) any Final Liquidation Loss suffered by the Bank in connection with such Residual Vehicle up to the unpaid amount of the related Residual Payment, plus (ii) a penalty fee equal to the greater of (A) one percent (1%) of the related Residual Payment, or (B) the amount of penalty interest accrued pursuant to Section 4 hereof ( the "Penalty"). In the event that Bank withdraws any funds from the Residual Reserve Account pursuant to this Section, Auto Lenders shall not be relieved of its obligation to pay the Residual Payment and shall deposit all amounts representing the Residual Payment plus the accrued Penalty amount to and including the date of such payment to the Residual Reserve Account to offset future losses. The parties hereto agree that, notwithstanding any agreement that Auto Lenders may enter into with Hann to advance the funds representing the Residual Payment Amount on any Leased Vehicle to Bank on Auto Lender's behalf, Auto Lenders shall remain primarily liable to Bank for any such payment together with all penalties thereon. 8. Insurance. Auto Lenders shall maintain one or more garage liability insurance policies and general liability insurance policies with a responsible insurance carrier which has been rated at least A:V by the A.M. Best Company, which (i) provide for minimum coverage not less than that declared upon the Certificate of Insurance issued 5/8/02 by Empire Fire and Marine Insurance Company/Empire Indemnity Insurance Company for Policy Numbers SB227447 and SU227447 (ii) with respect to which the Bank has been named an additional insured, and (iii) with respect to which the insurer will provide 30 days prior written notice to the Bank of any cancellation or change in coverage. Auto Lenders shall not terminate such policy or cause the termination thereof unless and until replacement insurance policy meeting the criteria set forth above has been obtained. Auto Lenders shall not change insurance carriers or other aspects of coverage without prior written notice to Bank. 9. Sales Tax. All sales, property, use, transfer or other similar taxes arising from the transactions contemplated by this Residual Purchase Agreement upon the purchase of the beneficial interest in the Residual Vehicles by Auto Lenders will be paid or provided for by Auto Lenders as of the date of such transfer unless such transactions will then be exempt from any such taxes. 10. Compliance with Law. Auto Lenders shall administer the Units and Lessee information and records in accordance with the terms of the Lease documents and the requirements of applicable federal, state and local laws, regulations and executive orders. Auto Lenders agrees to promptly notify appropriate government and regulatory agencies as required by applicable law in the event that any Lessee is identified by the Office of Foreign Assets Control, or other similar agency, as a Specially Designated National. Auto Lenders, at all times during the term of this Residual Agreement shall service and administer the Lessee information and records relating to the Units in the Bank SUBI Portfolio in a commercially reasonable manner in accordance with Title V of the Gramm-Leach-Bliley Act (together with regulations and guidelines promulgated thereunder), as amended from time to time, and shall maintain and implement procedures which will (a) ensure the security and confidentiality of Lessee customer information and records; (b) protect against any anticipated threats of hazards to the security or integrity of such Lessee information and records; and (c) protect against unauthorized access to 5 or use of such Lessee information or records and (d) are otherwise in accordance with the Confidentiality, Privacy and Security Agreement attached hereto as Exhibit A. 11. Reports. (a) Auto Lenders shall deliver to Bank on or before April 30th of each year, beginning in the year following the first Funding Date, an Officers' Certificate stating, as to each signatory thereof, that (i) a review of the activities of Auto Lenders during the preceding calendar year and of its performance under this Agreement has been made under such officers' supervision, (ii) that Auto Lenders has performed its duties at all times in compliance with Title V of the Gramm Leach Bliley Act, as it may be amended from time to time, and (iii) to the best of such officers' knowledge, based on such review, Auto Lenders has fulfilled all of its obligations under this Agreement and the Confidentiality, Privacy and Data Security Agreement throughout such year, or, if there has been a default in the fulfillment of any such obligation, specifying each such default known to such officers and the nature and status thereof and the action being taken by Auto Lenders to cure such default. Auto Lenders shall provide Bank with copies of such statements upon request. (b) Auto Lenders shall deliver to Bank on or before April 30th of each year, beginning in the year following the first Funding Date, the audited financial statements of Auto Lenders (c) Auto Lenders agrees to allow Bank, its authorized representatives and any governmental officials having regulatory responsibility with respect to the Bank full access to all of the properties, personnel, books and records of, and computer accounting systems of Auto Lenders for inspection and audit purposes at any reasonable time during normal business hours upon at least twenty-four (24) hours notice. 12. Collections: End of Term Charges. Auto Lenders shall be entitled to any End of Term Charges relating to any Residual Unit. 13. Representations and Warranties of Hann. Hann represents and warrants to the Bank that (i) all of the representations and warranties made by Hann to the Bank in the Representations and Warranties Agreement dated May 17, 2002 between Hann, Bank, the Trust, and Wilmington Trust Company, as Delaware Trustee, UTI Trustee and Bank SUBI Trustee, are true and correct and are restated and incorporated herein by reference, (ii) that it is duly licensed and/or qualified in all jurisdictions where such licensing and/or qualifications is required pursuant to this Agreement, and (iii) authorized to enter into and perform its obligations under this Agreement. (a) Representations and Warranties of Auto Lenders. Auto Lenders warrants to Bank as of the date hereof, and as of the respective date of Early Termination and Expiration Date, as applicable, with respect to each Unit subject to this Agreement as follows: (i) Duly Organized, Licensed and Qualified. Auto Lenders is a corporation, duly organized and validly existing under the laws of the State of New Jersey; is duly licensed and/or qualified in all jurisdictions where such licensing and/or qualification is necessary to enable Auto Lenders to fulfill its obligations under this Agreement; 6 (ii) Power and Authority, Due Authorization, Enforceability. Auto Lenders and has full power and authority to own its properties and to conduct its business as such properties shall be currently owned and such business is presently conducted. Auto Lenders has full power and authority to execute and deliver this Agreement and to carry out its terms and this Agreement has been duly authorized, executed and delivered by Auto Lenders and shall constitute the legal, valid and binding obligation of Auto Lenders, enforceable against Auto Lenders in accordance with its terms, except as such enforceability may be limited by insolvency, bankruptcy, reorganization, conservatorship, receivership, liquidation or other similar laws and to general equitable principles. (iii) No Violation. The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, nor constitute a default under (in each case material to Auto Lenders and its subsidiaries considered as a whole), or result in the creation or imposition of any lien, charge or encumbrance (in each case material to Auto Lenders and its subsidiaries considered as a whole) upon any of the property or assets of Auto Lenders pursuant to the terms of, any indenture, mortgage, deed of trust, loan agreement, guarantee, lease financing agreement or other agreement or instrument under which Auto Lenders is a party (other than this Agreement); nor will such action result in any violation of the provisions of the charter or bylaws of Auto Lenders or any law, order, rule, or regulation applicable to Auto Lenders or of any federal or State regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over Auto Lenders or its properties which would materially and adversely affect the performance by Auto Lenders of its obligations under, or the validity and enforceability of, this Agreement. (iv) No Proceedings. No legal or governmental proceedings are pending to which Auto Lenders is a party or of which any property of Auto Lenders is the subject, and no such proceedings are threatened or contemplated by governmental authorities or threatened by others, other than such proceedings which will not have a material adverse effect upon the general affairs, financial position, net worth or results of operations (on an annual basis) of Auto Lenders and its subsidiaries considered as a whole and will not materially and adversely affect the performance by Auto Lenders of its obligations under, or the validity and enforceability of, this Agreement. (v) Ordinary Course of Business. The consummation of the transactions contemplated by this Agreement are in the ordinary course of business of Auto Lenders, and the transfer, assignment and conveyance of the Units by Auto Lenders pursuant to this Agreement are not subject to the bulk transfer or any similar statutory provisions in effect in any applicable jurisdiction. (vi) Compliance with Law, No Fraud. Auto Lenders has at all times transacted, and shall continue to transact, its business in compliance with all applicable federal, state and local laws, regulations and executive orders, and there has been no fraud in connection with any transaction involving any Lease or Leased Vehicle relating to the preparation for sale, marketing, or transfer of any Lease or Leased Vehicle or to any other transaction contemplated hereby. 7 (vii) Due Qualification. Auto Lenders has obtained or is exempt from obtaining all the licenses and approvals necessary for the conduct of Auto Lenders business in the jurisdictions where the failure to do so would materially and adversely affect its ability to own an interest in an Eligible Unit or Residual Vehicle or perform its obligations hereunder or under the Servicing Agreement, or render any Eligible Unit unenforceable. (viii) No Consent Required. Auto Lenders is not required to obtain the consent of any other Person, or any consent, license, approval or authorization or registration or declaration with, any governmental authority, bureau or agency in connection with the execution, delivery or performance of this Agreement, except for such as have been obtained, effected or made. (ix) No Litigation Pending. There is no action, suit, proceeding or investigation pending or threatened against Auto Lenders which would draw into question the validity of this Agreement or the Units or of any action taken or to be taken in connection with the obligations of Auto Lenders contemplated herein, or which would be likely to impair materially the ability of Auto Lenders to perform under the terms of this Agreement. (x) No Untrue Information. Neither this Agreement nor any statement, report or other document prepared by Auto Lenders pursuant to this Agreement or in connection with the transactions contemplated hereby contains any untrue statement of material fact or omits to state a fact necessary to make the statements contained herein or therein not misleading. (xi) Ability to Perform. Auto Lenders can perform each and every covenant of Auto Lenders contained in this Agreement. (xii) No Default. Neither Auto Lenders nor any of its affiliates is in material default under any agreement, contract, instrument or indenture of any nature whatsoever to which Auto Lenders or any of its subsidiaries is a party or by which it is bound nor has any event occurred which with notice or lapse of time or both would constitute a material default under any such agreement, contract, instrument or indenture and which default would have a material adverse effect on its ability to perform its obligations under this Agreement. (xiii) Financial Statements. Auto Lenders has delivered to the Bank financial statements as to its last two complete fiscal years and any later quarter ended more than 60 days prior to the Funding Date. All such financial statements fairly present the pertinent results of operations and cash flow for each of such periods and the financial condition at the end of each such period of Auto Lenders and its subsidiaries. All such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as set forth in the notes thereto. (xiv) Material Adverse Change. There has been no change in the business, operations, financial condition, properties or assets of Auto Lenders since the date of Auto Lenders' financial statements which would have a material adverse effect on its ability to perform its obligations under this Agreement. 8 (xv) No Untrue Information. Neither this Residual Agreement nor any statement, report or other document prepared in connection with the transactions contemplated herein contains any untrue statement of material fact or omits to state a fact necessary to make the statements contained herein or therein not misleading. (xvi) Insurance Policies. Auto Lenders has one or more garage liability insurance policies and general liability insurance policies with a responsible insurance carrier which has been rated at least A:V by the A.M. Best Company, which (i) provide for minimum coverage not less than that declared upon the Certificate of Insurance issued 5/8/02 by Empire Fire and Marine Insurance Company/Empire Indemnity Insurance Company for Policy Numbers SB227447 and SU227447, (ii) with respect to which the Bank has been named an additional insured, and (iii) with respect to which the insurer will provide 30 days prior written notice to the Bank of any cancellation or change in coverage. Auto Lenders has provided copies of such policies to Bank, each of which policies is in full force and effect on the initial Funding Date, and which policies shall remain in full force and effect throughout the term of this Agreement. The representations and warranties in this Section shall survive the execution and assignment of this Agreement, the Bank SUBI Certificate and any subsequent transfers of each Unit. 14. Indemnification by Auto Lenders. Auto Lenders agrees to reimburse, indemnify and save Bank, its affiliates, and their respective directors, officers, employees and agents, and the respective heirs, personal representatives, successors and assigns of the foregoing (each, and Indemnified Person) harmless from and against any and all losses, liabilities, damages, expenses, obligations, penalties, actions, judgments, suits, claims, costs or disbursements of any kind or nature whatever (including court costs and attorney's fees in connection with investigative, administrative or judicial proceedings commenced or threatened, whether or not such Indemnified Person is a party thereto) that may at any time be imposed on, asserted against, or incurred by such Indemnified Person as a result of or arising out of (a) the breach of any of the representations, warranties, covenants, agreement or duties of Auto Lenders herein, in the Trust Agreement or in the Servicing Agreement, or any other document or agreement executed in connection with or relating to the Units, (b) the conduct of Auto Lenders or its officers, agents, servants and employees, the conduct of Auto Lenders or its officers, agents, servants and employees in reselling and remarketing Leased Vehicles, or any failure on the part of Auto Lenders to purchase a Residual Vehicle from the Bank in accordance with Section 4 hereof. This indemnification shall survive termination of this Agreement. 15. Change of Control. Notwithstanding any provision to the contrary in any other contract or agreement to which Auto Lenders is a party, Auto Lenders shall not terminate its obligations to the Bank under this Agreement, including but not limited to the occurrence of a Change in Control of Susquehanna Bancshares, Inc. ("SBI"), Hann, or Auto Lenders. 16. Assignment of Agreement. Neither Auto Lenders nor Hann may terminate, assign or delegate its rights or obligations under this Agreement without the written consent of the other parties. The Bank may assign its rights hereunder without consent of either Hann or Auto Lenders, provided however, the Bank shall provide notice of such assignment to 9 each such party. This Agreement, however, shall inure to the benefit of the parties hereto and their respective permitted successors and assigns. 17. Notices. All notices hereunder to a party shall be in writing and shall be deemed to have been duly received when delivered by hand or sent by confirmed facsimile, or two (2) days after being mailed by certified mail, return receipt requested, to such party at its address set forth above or such other address as such party may specify by notice to the other party hereto. If sent to Auto Lenders, such notice shall be forwarded to: AUTO LENDERS LIQUIDATION CENTER, INC. 1051 North Black Horse Pike Williamstown, NJ 08094 Attn: Chief Executive Officer with a copy to: CAPEHART & SCATCHARD, P.A. A Professional Corporation Laurel Corporate Center, Suite 300 8000 Midlantic Drive - C.S. 5016 Mt. Laurel, NJ 08054 Attn: Charles A. Rizzi, Jr., Esquire If sent to Hann, such notice shall be forwarded to: BOSTON SERVICE COMPANY INC. d.b.a. HANN FINANCIAL SERVICE CORP. One Centre Drive Jamesburg, NJ 08831 Attn: President with a copy to: Susquehanna Bancshares, Inc. 26 North Cedar Street Lititz, PA 176543 Attn: Chief Executive Officer If sent to the Bank, such notice shall be forwarded to: SOVEREIGN BANK One Huntington Quadrangle Melville, NY 11747 Attn: Peter LaMariana 10 with a copy to: SOVEREIGN BANK 1130 Berkshire Boulevard Wyomissing, PA 19610 Attn: David A Silverman, Chief Counsel 18. Amendments. This Agreement may not be modified unless such modification is in writing and signed by each party to this Agreement. 19. Governing Law. The terms of this Agreement shall be construed and governed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to principles of conflict of laws. 20. Severability. If any provision of this Agreement is held invalid or unenforceable in any jurisdiction, the remainder of this Agreement shall not be affected thereby. 21. Future Obligations. In order to enforce Bank's rights under this Agreement, Hann and Auto Lenders shall, upon the request of Bank or its assigns, use its best efforts to do and perform or cause to be done and performed, every reasonable act and thing necessary or advisable to put Bank and its assigns in position to enforce the payment of the Units and to carry out the intent of this Agreement, including the preparation of such additional reports as requested by Bank's regulators, execution of and, if necessary, the recordation of additional documents including separate endorsements and assignments upon request of Bank. 22. Enforcement of Agreement. Hann, the Bank and Auto Lenders agree that irreparable damage would occur in the event that any of the provisions of this Agreement was not performed in accordance with its specific terms or was otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement, this being in addition to any other remedy to which they are entitled at law or in equity. 23. Counterparts. This Agreement may be executed in counterparts each of which shall be deemed to constitute an original, but all of which together shall constitute one and the same Agreement. 24. Superseding Agreement. This Agreement supplements, amends and supersedes certain provisions of the Hann Agreements, and all other prior agreements between such parties relating to the subject matter hereof. However, the parties' rights and obligations under those agreements shall continue in full force and effect under the terms thereof except and to the extent that they have been amended by this Agreement. [SIGNATURE PAGE FOLLOWS] 11 IN WITNESS WHEREOF, Bank, Hann and Auto Lenders have caused this Agreement to be executed by their duly authorized corporate officers and their corporate seals to be affixed hereto the day and year written by their signatures below; each intending that this Agreement shall become effective on the date first written above. AUTO LENDERS LIQUIDATION CENTER, INC. Attest: By: ----------------------- ---------------------------------------- Title: ------------------------------------ Dated: ------------------------------------- SOVEREIGN BANK. Attest: By: ----------------------- ---------------------------------------- Title: ------------------------------------ Dated: ------------------------------------- BOSTON SERVICE COMPANY, INC. d.b.a. Hann Financial Service Corporation Attest: By: ----------------------- ---------------------------------------- Title: ------------------------------------ Dated: ------------------------------------- EXHIBIT A DEFINITIONS "Accepted Servicing Practices" shall mean, with respect to each Unit, those servicing practices customary in the industry for leases and leased vehicles of the same type as the Unit in the jurisdiction where the related Leased Vehicle is located. "Auto Lenders" means Auto Lenders Liquidation Center, Inc., a New Jersey corporation. "Auto Lenders SUBI" means the special unit of beneficial interest of the Trust created by the Auto Lenders Operating Agreement and SUBI Supplement dated as of January 1, 2000 among the Initial Beneficiary, the Trust, the Servicer, the UTI Trustee, the Delaware Trustee, Auto Lenders and Wilmington Trust Company, as Bank SUBI Trustee. "Bank" means Sovereign Bank, a federal savings bank organized under the laws of the United States. "Bank SUBI" shall have the meaning set forth in the Recitals to the SUBI Supplement which is incorporated herein by reference. "Bank SUBI Certificate" shall have the meaning set forth in the Recitals to the SUBI Supplement. "Bank SUBI Portfolio" shall have the meaning set forth in the Recitals to the SUBI Supplement. "Bank SUBI Trustee" means Wilmington Trust Company, as SUBI trustee of the Bank SUBI. "Book Value" shall mean on any date of determination, with respect to any Lease, the sum of the remaining unpaid payments due on such Lease less the amount of any unaccrued interest component thereof calculated on an actuarial basis, plus the Residual Value related thereto. "Change in Control" shall mean, with respect to any entity, (i) the occurrence of a sale of all or substantially all of the assets of the subject entity, (ii) a plan of liquidation or dissolution, other than pursuant to a bankruptcy or insolvency, is adopted, (iii) the acquisition by any person of twenty-five percent (25%) or more of the shares of the subject entity, whether directly or indirectly or acting through one or more other persons, including the power to vote twenty-five percent (25%) or more of any class of voting securities of such entity, (iv) any person, whether directly or indirectly or acting through one or more other persons, obtains control in any manner over the election of a majority of the directors of such entity, or (v) if the Bank determines that any person, whether directly or indirectly or acting through one or more other persons, possesses or exercises a controlling influence over the management or policies of such entity, which person does not possess or exercise such a controlling influence with regard to the ownership and/or management of the subject entity at the time the SUBI Supplement was executed. "Credit Qualifications" shall mean the credit qualification standards used by Hann on the date hereof, a copy of which are attached as Exhibit C to the SUBI Supplement. "Dealer" means a dealer participating in the Program who enters into Leases of motor vehicles which the dealer sells to the Trust. "Delaware Trustee" means Wilmington Trust Company, as Delaware trustee of the Trust. "Early Termination" shall mean the voluntary or involuntary termination of a Lease prior to the scheduled Expiration Date stated therein (including but not limited to termination resulting from the repossession and liquidation of the related Leased Vehicle). "End of Term Charges" means, with respect to any Unit, excess wear and tear charges and excess mileage charges. "Expiration Date" shall mean the date of the scheduled termination or expiration in accordance with its terms of the Lease related to any Unit. "Final Liquidation Loss" shall mean, (A) with respect to any Leased Vehicle which becomes subject to disposition as a result of Early Termination, the amount, if any by which (i) the Book Value of the Bank's beneficial interest in such Leased Vehicle (including accrued interest thereon) on the date of such Early Termination exceeds (ii) the Net Liquidation Proceeds remitted to Bank thereon, and (B) with respect to any Leased Vehicle with respect to which Auto Lenders defaults in its obligation to pay the full amount of the related Residual Value following the related Expiration Date, the amount, if any, by which (i) the Residual Value of such Leased Vehicle (plus any Penalty amounts) exceeds (ii) Net Liquidation Proceeds thereon. "Funding Date" shall mean the date on which the Bank pays the Purchase Price with respect to any Unit. "Hann" means Boston Service Company, Inc., a New Jersey corporation doing business as Hann Financial Service Corp. "Initial Beneficiary" means Hann, as initial beneficiary of the Trust. "Lease" means a closed-end motor vehicle retail lease agreement between a Dealer and a Lessee entered pursuant to the Program. "Lease File" All documents, records, and items (other than the original Certificate of Title to the Leased Vehicle which shall be pertaining to a particular Unit, including, but not limited to those specified on Exhibit D of the SUBI Supplement. Leased Vehicle" means an automobile, sport utility vehicle, light duty truck or other vehicle, together with all accessories, additions and parts constituting a part thereof and all accessions thereto, which is the subject of a Lease. "Lessee" means the lessee under a Lease. "Loss Reserve Account" shall mean the account established in accordance with Section 3.2(d) of the SUBI Supplement. "Net Liquidation Proceeds" shall mean, (i) with respect to any Unit which becomes subject to disposition as a result of Early Termination, an amount equal to any cash amounts received from the liquidation of the related Leased Vehicle, sale or lease of such Unit, or otherwise (including any other cash amounts received in connection with the management of the Leased Vehicle collateralizing a defaulted Lease) net of reasonable out-of-pocket expenses in connection with the liquidation or disposition of such Unit or the related Leased Vehicle, or (ii) with respect to any Unit for which Auto Lenders fails to pay the full Residual Value of such Unit and any applicable Penalty amounts, any cash amounts received by the Bank from Auto Lenders or from the liquidation of the related Leased Vehicle, sale of the Unit, or otherwise (including any other cash amounts received in connection with the management of the Leased Vehicle collateralizing a defaulted Lease) net of expenses incurred by the Bank or its designee in the event the Bank must liquidate or dispose of the Unit or the related Leased Vehicle. "Penalty" shall mean, with respect to any Unit for which Auto Lenders fails to timely pay the full Residual Payment to the Bank, the amount due to be remitted to the Bank in accordance with Section 7(d)(ii). "Per Unit Residual Reserve Deposit" shall have the meaning set forth in Section 3.1(a) of the SUBI Supplement. "Purchase Price" shall mean, with respect to any Unit, the purchase price with respect to a Unit as determined in accordance with Hann's Credit Qualifications. "Program" means the retail automobile leasing program established by Hann pursuant to which it solicits Dealers to enter into retail motor vehicle Leases which conform to the Credit Qualifications. "Residual Payment" means, with respect to any Unit included in the Bank SUBI, the amount described in Section 2(a) or 2(b) hereof, as applicable. "Residual Reserve Account" means the account established pursuant to Section 7(b). "Residual Unit" means, with respect to any Lease which has reached its stated maturity date, the related Residual Vehicle and the associated related rights therein or in the related Lease, if any. "Residual Value" means, for any Residual Vehicle, the estimated wholesale value of a motor-vehicle subject to a Lease on the maturity thereof, as set by Hann in its Credit Qualifications and as stated in each Lease at the inception thereof. "Residual Vehicle" shall mean with respect to each Unit allocated to the Bank SUBI, upon the expiration or other termination of the related Lease, the Vehicle related thereto. "Servicer" means Hann, as Servicer of the Trust Assets. "Servicing Agreement" means the Servicing Agreement dated as of October 23, 1997 between the Trust and Hann, as it may be modified, supplemented or amended from time to time. "Specially Designated National" means a person or entity identified by the Office of Foreign Assets Control ("OFAC") or any successor organization, as (a) a "Specially Designated National", or (b) any other person or entity identified by OFAC on the list published at www.treas.gov/ofac, or any successor web address as shall contain such information. "SUBI" means a separate special unit of beneficial interest in the Trust. "SUBI Assets" shall have the meaning, given thereto in the Trust Agreement. "SUBI Certificate" shall have the meaning given thereto in the Trust Agreement. "SUBI Portfolio" means, as to each SUBI, that collection of Leases, Leased Vehicles and other associated Trust Assets allocated by the Trust to such SUBI from time to time from among all those Leases, Leased Vehicles and other associated Trust Assets owned by the Trust. "Trust" means Hann Auto Trust, a Delaware business trust. "Trust Agreement" means the Second Amended and Restated Trust Agreement dated as of February 12, 1999 between Hann and Wilmington Trust Company, as UTI Trustee and Delaware Trustee, as it may be modified, supplemented or amended from time to time. "Trust Assets" shall have the meaning given thereto in the Trust Agreement. 9- "Unit" means a Lease, the related Leased Vehicle and the associated related rights. "Undivided Trust Interest" or "UTI" shall have the meaning given thereto in the Trust Agreement. "UTI Trustee" means Wilmington Trust Company, as UTI trustee of the Trust. "Worksheet" shall have the meaning set forth in Section 3. 1 of the SUBI Supplement. EXHIBIT B CONFIDENTIALITY, PRIVACY AND SECURITY AGREEMENT This agreement ("Agreement") is made as of the17th day of May, 2002, by and between Sovereign Bank, having an office at 1130 Berkshire Boulevard, Wyomissing, Pennsylvania 19610, on its own behalf and on behalf of its affiliates ("Sovereign"), and Auto Lenders Liquidation Center, Inc., a New Jersey corporation with its principal office located at 1051 North Black Horse Pike, Williamstown, NJ 08094 ("Vendor"). This Agreement amends, modifies and supplements any and all contractual arrangements between Sovereign and Vendor and shall supersede any provision in such arrangements to the extent that any provision in this Agreement conflicts with, amends, or modifies any term or condition in such contractual arrangements. BACKGROUND As a result of Title V of the Gramm-Leach-Bliley Act ("GLBA") together with the regulations and guidelines promulgated by the Federal banking regulators having jurisdiction over Sovereign, Sovereign is required to include in new and existing contractual arrangements certain terms and conditions to (1) ensure the security and confidentiality of customer information, (2) protect against any anticipated threats or hazards to the security or integrity of such information, and (3) protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. NOW THEREFORE, in consideration of the foregoing, the parties intending to be legally bound, hereby agree to the following: 1. Definitions. The following terms shall have the meaning set forth below for purposes of this Agreement: 1.1 "Customer information systems" means any methods used to access, collect, store, use, transmit, protect, or dispose of customer, including employee, information. 1.2 "Guidelines" refers to abstract and partial summary of the GLBA Interagency Guidelines Establishing Standards for Safeguarding Customer Information attached as Exhibit 1 and incorporated into this Agreement by reference, as may be amended from time to time by law or regulation. The term "you" and "your" in the Guidelines refers to Sovereign and also to Vendor to the extent Vendor has access to Non-Public Personal Information. 1.3 "Individual Data" means information or any data which could reasonably be used to identify a named individual. 1.4 "Non-Public Personal Information" means any and all employee and/or customer information collected and obtained from Sovereign or its other third party vendors, including, but not limited to name, e-mail, mailing or other address; account number, postal code; telephone number; gender other demographic characteristics; year or date of birth; social security or other tax identification number; educational background; occupation or other socio-economic or financial information; credit situation; pattern of use; nature, subject matter, date or amount paid in any commercial transaction(s); number or identification of viewed/downloaded web site(s); preferences, profile, personal interests or habits; and any other identifying information, regardless of its accuracy or completeness, whether in paper, electronic, or other form, that is maintained by or on behalf of Sovereign. Non-Public Personal Information also includes Individual Data. 1.5 "Representatives" refers to an entity's officers, employees, affiliates, agents, subcontractors and consultants and other parties associated with that entity, including but not limited to the third parties referenced in Section 3.2 of this Agreement. 1.6 "Sovereign Information" refers to all knowledge and information which Vendor may acquire or have access to concerning Sovereign, Sovereign's customers and prospective customers and employees and includes but is not limited to Non-Public Personal Information and any data or materials relating to the business, trade secrets and/or technology of Sovereign and its other vendors, whether transmitted in writing, orally, visually, electronically or by any other means, whether received prior to, on or after the date of this Agreement. 2. Confidentiality. 2.1 All Sovereign Information will at all times and for all purposes be and remain Sovereign's confidential and proprietary information. Vendor shall, at all times, maintain and keep all Sovereign Information confidential and in a secure manner. 2.2 Vendor agrees to (i) restrict disclosure of Sovereign Information solely to its Representatives with a need to know Sovereign Information for purposes of the business dealings between the parties, (ii) not disclose to any other person the Sovereign Information without the written approval of Sovereign, (iii) use the Sovereign Information solely for purposes of the services provided by Vendor, (iv) not use or disclose the Sovereign Information in any manner that is detrimental to Sovereign, and (v) inform the Representatives of Vendor of the confidential nature of the Sovereign Information and obtain their agreement to the obligations set forth in this Agreement. Vendor is responsible for its Representatives compliance with this Agreement. 2.3 The obligations imposed under Sections 2.1 and 2.2 shall not apply to information (i) which is made public by Sovereign, (ii) which rightfully becomes generally available to the public, or (iii) which is rightfully received by Vendor from a third party without restriction and without breach of this Agreement or other obligation of confidentiality. 2.4 Upon termination of this Agreement, Vendor and its Representatives will promptly return to Sovereign (or destroy at Sovereign's request) all Sovereign Information in its possession or control, together with all copies, notes, abstracts, memoranda, or other documents or media which contain Sovereign Information or any discussion or copies of the Sovereign Information. 2.5 If the Vendor, or any of its Representatives, become legally compelled (by deposition, interrogatory, request for documents, subpoena, civil investigative demand, warrant or other legal process) to disclose any Sovereign Information, Vendor shall provide Sovereign with prompt prior written notice of such requirement and agrees to cooperate with Sovereign so that Sovereign may seek a protective order or other appropriate remedy. 2.6 The termination of agreement or business relationship between, or involving both the Vendor and Sovereign, shall not relieve the Vendor of its obligations under this Agreement. 3. SOVEREIGN'S CUSTOMER PRIVACY AND DATA SECURITY. 3.1 Vendor agrees to (i) comply with GLBA and the Guidelines and cooperate fully with Sovereign in its compliance with GLBA and the Guidelines, (ii) adopt and maintain reasonable policies and procedures, as well as train its employees, to protect the privacy and security of Sovereign's customers' Non-Public Personal Information in compliance with GLBA and other laws and regulations applicable to the privacy and security of Non-Public Personal Information, and (iii) not sell, transfer, rent or disclose to any third parties or use, except for the limited purposes expressly set forth in the Agreement or otherwise agreed by Sovereign, any of the Non-Public Personal Information. 3.2 If the release of Individual Data to third parties by Vendor is required in connection with the business dealings between the parties or otherwise, prior to such release Vendor will (i) Notify Sovereign of the third party that needs to receive such information, and (ii) cooperate with Sovereign in obtaining the written agreement that such third party will provide the option, in any communications generated concerning the Individual Data, for the customer of Sovereign to elect not to receive any further communications from such third party. 3.3 Vendor agrees to promptly notify Sovereign if it (i) receives any type of complaint or notice concerning a violation of privacy rights, including but not limited to information sharing involving an opt out of sharing any Individual Data between the parties, or (ii) becomes aware of a breach of customer data security involving Individual Data. 4. AUDIT AND MONITORING REQUIREMENTS. 4.1 Vendor shall keep and maintain accurate books and records with respect to its compliance with the requirements of this Agreement. 4.2 Sovereign and its designated agents, and all of Sovereign's regulatory authorities shall have unimpeded access (during normal business hours upon reasonable notice), at all times to all books and records maintained in connection with this Agreement to review and verify that Vendor and its Representatives are in compliance with this Agreement. 5. VENDOR'S REPRESENTATIVES. 5.1 Vendor understands that Sovereign operates under various laws and federal regulatory agencies that are unique to the security sensitive banking industry. As such, persons engaged by Vendor to provide products and services to Sovereign are held to a higher standard of conduct and scrutiny than in other industries or business enterprises. Vendor understands and acknowledges that Vendor's Representatives shall possess appropriate character, disposition and honesty conducive to the environment where products and services are provided. Vendor shall to the extent permitted by law, exercise reasonable and prudent efforts to comply with the provisions of this Agreement and all other contractual arrangements with Sovereign. 5.2 Vendor shall not knowingly permit any Vendor Representative(s) to have access to or engage in any of the banking affairs or business activities of Sovereign, including but not limited to accessing the Sovereign Information, when such Representative(s): (a) has been convicted of a crime or has agreed to or entered into a pretrial diversion or similar program in connection with (i) a dishonest act or a breach of trust, as stipulated under Section 19 of the Federal Deposit Insurance Act, 12 U.S.C. 1829(a); and/or (ii) a felony; or (b) uses illegal drugs. 6. SOVEREIGN'S REMEDIES. Vendor understands and agrees that Sovereign will suffer irreparable harm in the event that of a breach of any obligations in this Agreement and that monetary damages will be inadequate to compensate Sovereign for such breach. Accordingly, Vendor agrees that, in the event of a breach or threatened breach of any of the provisions of this Agreement, in addition to and not in limitation of any other rights, remedies or damages available at law or in equity, Sovereign will be entitled to equitable relief, including but not limited to a temporary restraining order, preliminary injunction and permanent injunction in order to prevent or restrain any such breach. IN WITNESS WHEREOF, and intending to be legally bound the parties have executed this Agreement as of the date first above written. SOVEREIGN BANK AUTO LENDERS LIQUIDATION CENTER, INC. By: By: ---------------------------------- ---------------------------------- Print Name: Print Name: -------------------------- -------------------------- Title: Title: ------------------------------- ------------------------------- EXHIBIT 1 to The Interagency Guidelines Establishing Standards for Safeguarding Customer Information Published 2/1/01 - -------------------------------------------------------------------------------- I. Introduction The Interagency Guidelines Establishing Standards for Safeguarding Customer Information (Guidelines) set forth standards pursuant to section 39 of the Federal Deposit Insurance Act (section 39, codified at 12 U.S.C. 1831p-1), and sections 501 and 505(b), codified at 15 U.S.C. 6801 and 6805(b), of the Gramm-Leach-Bliley Act. These Guidelines address standards for developing and implementing administrative, technical, and physical safeguards to protect the security, confidentiality, and integrity of customer information. - -------------------------------------------------------------------------------- II. Standards for Safeguarding Customer Information - -------------------------------------------------------------------------------- A. Information Security You shall implement a comprehensive written information security program that includes administrative, technical, and physical safeguard appropriate to your size and complexity and the nature and scope of your activities. While all parts of your organization are not required to implement a uniform set of policies, all elements of your information security program must be coordinated. - -------------------------------------------------------------------------------- B. Objectives Your information security program shall be designed to 1. Ensure the security and confidentiality of customer information; 2. Protect against any anticipated threats or hazards to the security or integrity of such information; and 3. Protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. - -------------------------------------------------------------------------------- III. Development and Implementation of Customer Information Security Program - -------------------------------------------------------------------------------- A. Involve the Board of Your board of directors or an appropriate committee of Directors the board shall: 1. Approve your written information security program; and 2. Oversee the development, implementation, and maintenance of your information security program, including assigning specific responsibility for its implementation and reviewing reports from management. - -------------------------------------------------------------------------------- B. Assess Risk You shall: 1. Identify reasonably foreseeable internal and external threats that could result in unauthorized disclosure, misuse, alteration, or destruction of customer information or customer information systems. 2. Assess the likelihood and potential damage of these threats, taking into consideration the sensitivity of customer information. 3. Assess the sufficiency of policies, procedures, customer information systems, and other arrangements in place to control risks. - -------------------------------------------------------------------------------- C. Manage and Control You shall: Risk 1. Design your information security program to control the identified risks, commensurate with the sensitivity of the information as well as the complexity and scope of your activities. You must consider whether the following security measures are appropriate for you and, if so, adopt those measures you conclude are appropriate: a. Access controls on customer information systems, including controls to authenticate and permit access only to authorized individuals and controls to prevent employees from providing customer information to unauthorized individuals who may seek to obtain this information through fraudulent means. b. Access restrictions at physical locations containing customer information, such as buildings, computer facilities, and records storage facilities to permit access only to authorized individuals; - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- c. Encryption of electronic customer information, including while in transit or in storage on networks or systems to which unauthorized individuals may have access; d. Procedures designed to ensure that customer information system modifications are consistent with your information security program; e. Dual control procedures, segregation of duties, and employee background checks for employees with responsibilities for or access to customer information; f. Monitoring systems and procedures to detect actual and attempted attacks on or intrusions into customer information systems; g. Response programs that specify actions for you to take when you suspect or detect that unauthorized individuals have gained access to customer information systems, including appropriate reports to regulatory and law enforcement agencies; and h. Measures to protect against destruction, loss, or damage of customer information due to potential environmental hazards, such as fire and water damage or technological failures. 2. Train staff to implement your information security program. 3. Regularly test the key controls, systems and procedures of the information security program. The frequency and nature of such tests should be determined by your risk assessment. Tests should be conducted or reviewed by independent third parties or staff independent of those that develop or maintain the security programs. - -------------------------------------------------------------------------------- EX-10.2 5 dex102.txt PURCHASE AGREEMENT Exhibit 10.2 [EXECUTION] PURCHASE AGREEMENT between BOSTON SERVICE COMPANY, INC., d/b/a Hann Financial Service Corp. and AUTO LENDERS LIQUIDATION CENTER, INC. Dated as of June 29, 2001
TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS.....................................................2 SECTION 1.1 Defined Terms..........................................2 ARTICLE II PURCHASE OF RESIDUAL VEHICLES...................................3 SECTION 2.1 Commitment to PurchaseResidual Vehicles................3 SECTION 2.2 Sales Tax..............................................3 SECTION 2.3 Collections; End of Term Charges.......................3 SECTION 2.4 Auto Lenders Servicing Agreement.......................3 ARTICLE III REPRESENTATIONS AND WARRANTIES..................................3 SECTION 3.1 Representations and Warranties of Hann.................4 SECTION 3.2 Representations and Warranties of Auto Lenders.........4 ARTICLE IV MISCELLANEOUS...................................................5 SECTION 4.1 Transfers Intended as Sale.............................5 SECTION 4.2 Specific Performance...................................6 SECTION 4.3 Notices, Etc...........................................6 SECTION 4.4 CHOICE OF LAW..........................................6 SECTION 4.5 Counterparts...........................................7 SECTION 4.6 Amendment..............................................7 SECTION 4.7 Severability of Provisions.............................7 SECTION 4.8 Binding Effect; Assignability..........................7 SECTION 4.9 Third Party Beneficiary................................7
-i- PURCHASE AGREEMENT THIS PURCHASE AGREEMENT is made and entered into as of June 29, 2001 (as amended, modified or supplemented from time to time, this "Agreement") by BOSTON SERVICE COMPANY, INC., a New Jersey corporation doing business as Hann Financial Service Corp. ("Hann") and AUTO LENDERS LIQUIDATION CENTER, INC., a New Jersey corporation ("Auto Lenders"). WITNESSETH: WHEREAS, Hann Auto Trust is a Delaware business trust (the "Origination Trust") formed and operated pursuant to a Second Amended and Restated Trust Agreement dated February 12, 1999 (the "Origination Trust Agreement") for the purpose, among other things, of acquiring title to automobiles and light duty trucks ("Vehicles") subject to closed-end consumer leases ("User Leases"); WHEREAS, on the date hereof, Hann (as owner of the entire undivided interest in the Origination Trust) will direct the trustees of the Origination Trust to establish a special unit of beneficial interest in the Origination Trust (the "Financial Asset SUBI"), which will represent the entire beneficial interest in a specified portfolio of Vehicles, the related User Leases and all assets of the Origination Trust to the extent related thereto (the "Related Rights"; together with a Vehicle and the related User Lease, a "Unit"); WHEREAS, Auto Lenders is in the business of reselling and remarketing vehicles, inter alia, after the scheduled termination of closed-end consumer leases; WHEREAS, Hann desires to sell and Auto Lenders desires to buy MSF Units (as defined below) upon the scheduled termination or expiration of the related User Leases (each such Unit, a "Residual Vehicle") pursuant to the terms and conditions of this Agreement; and WHEREAS, all Residual Vehicles purchased by Auto Lenders will be allocated to the Auto Lenders SUBI. NOW, THEREFORE, in consideration of the mutual agreements set forth herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 Defined Terms. Defined terms used in this Agreement but not otherwise defined herein shall have the meanings given to them in Appendix A to the Loan Agreement dated as of June 29, 2001 (the "Loan Agreement") among HAL Warehouse Funding 2001 LLC, as Borrower, Market Street Funding Corporation, as Lender, and PNC Bank, National Association, as Administrator. ARTICLE II PURCHASE OF RESIDUAL VEHICLES SECTION 2.1 Commitment to Purchase Residual Vehicles. For any Residual Vehicle, on the date of the scheduled termination or expiration in accordance with its terms of the User Lease related to such Residual Vehicle (such date, the "Purchase Date"), (i) the holder of the Financial Asset SUBI Certificate (the "Seller") will sell, transfer and assign the beneficial interest in such Residual Vehicle to Auto Lenders, (ii) Auto Lenders shall purchase the beneficial interest in, and accept allocation to the Auto Lenders SUBI of, such Residual Vehicles, such allocation to be evidenced by the execution and delivery by the Seller to Auto Lenders and to the SUBI Trustee of the Financial Asset SUBI and the Auto Lenders SUBI of an allocation notice in the form attached hereto as Exhibit A (a "Residual Vehicle Allocation Notice") and (iii) in consideration of each such sale and allocation, Auto Lenders shall deposit into the Distribution Account, in immediately available funds, an amount equal to the Stated Residual Value of each Residual Vehicle purchased by Auto Lenders on such date (the "Residual Vehicle Purchase Price"). SECTION 2.2 Sales Tax. All sales, property, use, transfer or other similar taxes arising from the transactions contemplated by this Agreement upon the purchase of the beneficial interest in the Residual Vehicles by Auto Lenders will be paid or provided for by Auto Lenders as of the date of such transfer unless such transactions will then be exempt from any such taxes. SECTION 2.3 Collections; End of Term Charges. Seller agrees that any End of Term Charges received by the Origination Trust (or the Servicer on behalf of the Origination Trust) relating to any Residual Vehicle the beneficial interest in which is purchased by Auto Lenders pursuant to Section 2.1 hereof shall be allocated to the Auto Lenders SUBI. Auto Lenders agrees that all other Collections with respect to Residual Vehicles (including, without limitation, all Collections not constituting End of Term Charges or sales proceeds and all Collections with respect to Residual Vehicles the beneficial interest in which is not purchased by Auto Lenders pursuant to Section 2.1 hereof) shall be allocated to the Financial Asset SUBI. SECTION 2.4 Auto Lenders Servicing Agreement. Reference is hereby made to the Amended Servicing Agreement, dated as of September 1, 2000 (the "Auto Lenders Servicing Agreement"), between Auto Lenders and Hann. For the avoidance of doubt, this Purchase Agreement shall supercede the terms of the Auto Lenders Servicing Agreement (including, without limitation, any provisions relating to the guaranty of residual values, the deposit of sales proceeds and service and guaranty fees) with respect to the matters covered in Sections 2.1, 2.2, and 2.3 of this Purchase Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES -2- SECTION 3.1 Representations and Warranties of Hann. Hann hereby represents and warrants to Auto Lenders that the following are true and correct on the date hereof: (a) Organization and Power. Hann is a corporation duly organized, validly existing and in good standing under the laws of the State of New Jersey, and has the corporate power and authority to conduct its business as now conducted, to sell its properties and to execute, deliver and perform its obligations under this Agreement. Hann is duly qualified to do business and is in good standing in (i) the State of New Jersey and (ii) each other jurisdiction in which its business is conducted, except in the case of clause (ii) above, where the failure to so qualify or to be in good standing would not have a material adverse effect on Hann or its business. (b) Authorization, Execution and Validity. This Agreement has been duly authorized by all necessary corporate action on the part of Hann and has been duly executed and delivered by Hann and (assuming the due authorization, execution and delivery by each other party thereto) constitutes the legal, valid and binding obligation of Hann, enforceable against Hann in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors', mortgagees' or lessors' rights in general and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (c) No Conflict. The execution, delivery and performance by Hann of this Agreement and compliance by Hann with its obligations hereunder and thereunder do not (i) require any approval of the shareholders of Hann or any approval or consent of any trustee or holder of any indebtedness or obligation of Hann, other than such consents and approvals as have been obtained, (ii) contravene any applicable law, (iii) breach or contravene Hann's organizational documents; or (iv) contravene or result in any breach of or creation of any lien upon any property of Hann under any indenture, mortgage, loan agreement, lease or other agreement or instrument to which Hann is a party or by which Hann or any of its properties is bound. (d) Applicable Law. Hann is in compliance with all Applicable Laws, and Governmental Actions, the failure to comply with which would have a Material Adverse Effect. (e) Consents. No consent, approval or authorization of, or filing, registration or qualification with, or giving of notice or taking of any other action with respect to, any State or local Governmental Authority or agency or any United States federal Governmental Authority or agency is required in connection with the execution, delivery and performance of Hann of this Agreement, other than any such consent, approval, authorization, filing, registration, qualification, notice or action as has been duly obtained, given or taken and is in full force and effect. SECTION 3.2 Representations and Warranties of Auto Lenders. Auto Lenders hereby represents and warrants to Hann that the following are true and correct on the date hereof: (a) Organization and Power. Auto Lenders is a corporation duly organized, validly existing and in good standing under the laws of the State of New Jersey, and has the corporate power and authority to conduct its business as now conducted, to sell its properties and to execute, -3- deliver and perform its obligations under this Agreement. Auto Lenders is duly qualified to do business and is in good standing in (i) the State of New Jersey and (ii) each other jurisdiction in which its business is conducted, except in the case of clause (ii) above, where the failure to so qualify or to be in good standing would not have a material adverse effect on Auto Lenders or its business. (b) Authorization, Execution and Validity. This Agreement has been duly authorized by all necessary corporate action on the part of Auto Lenders and has been duly executed and delivered by Auto Lenders and (assuming the due authorization, execution and delivery by each other party thereto) constitutes the legal, valid and binding obligation of Auto Lenders, enforceable against Auto Lenders in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors', mortgagees' or lessors' rights in general and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (c) No Conflict. The execution, delivery and performance by Auto Lenders of this Agreement and compliance by Auto Lenders with its obligations hereunder and thereunder do not (i) require any approval of the shareholders of Auto Lenders or any approval or consent of any trustee or holder of any indebtedness or obligation of Auto Lenders, other than such consents and approvals as have been obtained, (ii) contravene any applicable law, (iii) breach or contravene Auto Lenders's organizational documents; or (iv) contravene or result in any breach of or creation of any lien upon any property of Auto Lenders under any indenture, mortgage, loan agreement, lease or other agreement or instrument to which Auto Lenders is a party or by which Auto Lenders or any of its properties is bound. (d) Applicable Law. Auto Lenders is in compliance with all Applicable Laws, and Governmental Actions, the failure to comply with which would have a Material Adverse Effect. (e) Consents. No consent, approval or authorization of, or filing, registration or qualification with, or giving of notice or taking of any other action with respect to, any State or local Governmental Authority or agency or any United States federal Governmental Authority or agency is required in connection with the execution, delivery and performance of Auto Lenders of this Agreement, other than any such consent, approval, authorization, filing, registration, qualification, notice or action as has been duly obtained, given or taken and is in full force and effect. ARTICLE IV MISCELLANEOUS SECTION 4.1 Transfers Intended as Sale. It is the express intent of Hann and Auto Lenders that each transfer contemplated and effected under this Agreement shall constitute a sale of personal property which is absolute and irrevocable and which is without recourse to Hann or the Seller, and which provides Auto Lenders with the full benefits of exclusive beneficial ownership of the Residual Vehicles (subject to Section 2.3 hereof) purchased in accordance with Section 2.1 -4- hereof (collectively, the "Transferred Property"). However, in the event that, notwithstanding the intent of the parties, such Transferred Property is held by a court of law to continue to be property of the Seller, then (i) this Agreement also shall be deemed to be and hereby is a security agreement within the meaning of the Uniform Commercial Code in effect in the applicable jurisdiction; and (ii) the allocations by Seller provided for in this Agreement shall be deemed to be a security interest in and to all of Seller's right, title and interest in and to such Transferred Property. SECTION 4.2 Specific Performance. Each party agrees that damages at law would be an inadequate remedy for a breach by either party of its representations and warranties herein, and that either party may therefore seek and enforce specific performance of this Agreement. SECTION 4.3 Notices, Etc. Each communication to be made hereunder shall (except as expressly permitted otherwise) be made in writing but, unless otherwise stated, may be made by facsimile or letter. Any communication or document to be made or delivered by any one Person to another pursuant to this Agreement shall (unless that other Person has by fifteen days' written notice to the other specified another address) be made or delivered to that other Person at the address identified with its signature below and shall be deemed to have been made or delivered (in the case of any communication made by facsimile) when dispatched or (in the case of any communication made by letter) when left at that address. Any communication sent by facsimile shall be promptly confirmed by letter but the non-delivery or non-receipt of any such letter shall not affect the validity of the original facsimile communication. Each communication and document made or delivered hereunder shall be in the English language. SECTION 4.4 CHOICE OF LAW. (a) THIS AGREEMENT SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO OTHERWISE APPLICABLE PRINCIPLES OF CONFLICTS OF LAW, OTHER THAN SECTION 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, EXCEPT TO THE EXTENT THAT THE PERFECTION (OR THE EFFECT OF PERFECTION OR NON-PERFECTION) OF THE INTERESTS OF THE COLLATERAL AGENT IN THE COLLATERAL, IS GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. (b) EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT. -5- SECTION 4.5 Counterparts. This Agreement may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. SECTION 4.6 Amendment. (a) This Agreement may be amended by the parties hereto, without the consent of any other Person, to cure any ambiguity or defect, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the parties hereto; provided that such action shall not, as evidenced by an opinion of counsel delivered to the Seller and any assignee or pledgee of the Financial Asset SUBI, adversely affect the interests of Seller or such assignee or pledgee. (b) This Agreement may be amended in any respect from time to time by the parties hereto, with the consent of the Seller. SECTION 4.7 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 4.8 Binding Effect; Assignability. This Agreement shall be binding upon and inure to the benefit of Auto Lenders and Hann and their respective successors and permitted assigns. Auto Lenders may not assign any of its rights hereunder or any interest herein without the prior written consent of Hann or Seller, except as otherwise herein specifically provided. Auto Lenders hereby consents to the mortgage, pledge, assignment and grant of a security interest by the Seller of all of Seller's rights and obligations hereunder. In addition, Auto Lenders hereby acknowledges and agrees that any assignee or pledgee of this Agreement will have the right to exercise all rights, remedies, powers, privileges and claims of Seller under this Agreement. SECTION 4.9 Third Party Beneficiary. Seller and each assignee or pledgee of Seller's interest in this Agreement is an express third party beneficiary of the obligations of Auto Lenders hereunder and may directly enforce the performance by Auto Lenders of such obligations. [Remainder of Page Intentionally Left Blank] -6- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. BOSTON SERVICE COMPANY, INC. d/b/a Hann Financial Service Corp. By: /s/ Charles R. Dovico --------------------------------- Name: Charles R. Dovico Title: President One Centre Drive Jamesburg, NJ 08831 AUTO LENDERS LIQUIDATION CENTER, INC. By: /s/ Michael J. Wimmer --------------------------------- Name: Michael J. Wimmer Title: President 1051 North Black Horse Pike Williamstown, NJ 08094 -7- EXHIBIT A FORM OF RESIDUAL VEHICLE ALLOCATION NOTICE THIS RESIDUAL VEHICLE ALLOCATION NOTICE (this "Allocation Notice") is made and delivered by [SELLER] ("Seller"), a [___________________], to AUTO LENDERS LIQUIDATION CENTER, INC., a New Jersey corporation ("Auto Lenders"), pursuant to that certain Purchase Agreement dated as of June 29, 2001 (the "Purchase Agreement") between Boston Service Company, Inc., a New Jersey corporation doing business as Hann Financial Service Corp., and Auto Lenders. Terms initially capitalized but not otherwise defined in this Allocation Notice have the meanings given to them in the Purchase Agreement. In consideration of Auto Lender's payment of the related Residual Vehicle Purchase Price under the Purchase Agreement for all of the Residual Vehicles listed on the attached Schedule 1 as being allocated to the Auto Lenders SUBI Portfolio, all on the terms and subject to the conditions contained in the Purchase Agreement, the Seller does hereby direct the trustees of the Origination Trust to identify from the Origination Trust assets allocable to the Financial Asset SUBI Portfolio, all of the Residual Vehicles listed on the attached Schedule 1, together with all related Origination Trust assets with respect thereto. IN WITNESS WHEREOF, [SELLER] has executed this Allocation Notice as of the [______] day of [____________], 2001. [SELLER] By: ---------------------------------- SCHEDULE 1 Residual Vehicles [COMPLETE WITH CATEGORIES OF IDENTIFYING INFORMATION] EX-10.3 6 dex103.txt IRREVOCABLE STANDBY LETTER OF CREDIT NUMBER 1 Exhibit 10.3 Susquehanna Bancshares, Inc. 26 North Cedar Street, P.O. Box 1000 Lititz, PA 17543-7000 (717) 626-4721 Irrevocable Standby Letter of Credit Number #1 June 29, 2001 Applicant HAL WAREHOUSE FUNDING 2001 LLC C/O HANN FINANCIAL SERVICE CORP. ONE CENTRE DRIVE JAMESBURG, NJ 08831 Beneficiary HAL WAREHOUSE FUNDING 2001 LLC We hereby authorize the Beneficiary to draw on Susquehanna Bancshares, Inc. up to the aggregate amount of Twenty Million, Five Hundred Thousand and 00/100 U.S. Dollars (U.S. $20,500,000) ("Letter of Credit Amount"). Subject to the foregoing and the further provisions of this Irrevocable Standby Letter of Credit, you may make a demand for payment by presentation to the following address: Susquehanna Bancshares, Inc. Attention: Chief Financial Officer 26 North Cedar Street Lititz, PA 17543 of your drawing certificate in the form of Exhibit "A" hereto, appropriately completed and signed by your duly authorized officer (including any duly authorized officer of PNC Bank, National Association, as Collateral Agent, as your attorney-in-fact). If your drawing certificate is so presented to the address set forth previously at or before 11:00 a.m., Lititz, Pennsylvania time, on any business day, payment will be made to you of the amount demanded in same day funds before the close of business on the same business day. If your drawing certificate is presented to the address set forth previously after 11:00 a.m., Lititz, Pennsylvania time, on any business day, payment will be made to you of the amount of requested in same day funds before the close of business on the next business day. "Business day" means any day on which banks are not authorized to remain closed in Lititz, Pennsylvania. We hereby engage with drawer that drafts drawn in conformity with the terms of this Letter of Credit will be duly honored upon presentation. In the event of a draw under this Letter of Credit, the Beneficiary is required to present the original Letter of Credit, and any amendments which may be issued in the future, with any/all other documents required by this Letter of Credit for endorsement of drawing and return if balance remains for future possible draws. We hereby consent to the assignment of this Letter of Credit by the Beneficiary to PNC Bank, National Association, as Collateral Agent. This Letter of Credit shall expire on the close of business at the aforesaid address on January 31, 2006. You shall promptly surrender this Letter of Credit to us upon such expiration. THIS LETTER OF CREDIT SHALL BE GOVERNED BY THE INTERNATIONAL STANDBY PRACTICES 1998 (ISP 98) AND BY THE UNIFORM COMMERCIAL CODE OF THE COMMONWEALTH OF PENNSYLVANIA . SUSQUEHANNA BANCSHARES, INC. /s/ Drew K. Hostetter - --------------------------- ------------------------------------ AUTHORIZED SIGNATURE AUTHORIZED SIGNATURE EXHIBIT A TO IRREVOCABLE LETTER OF CREDIT DRAWING CERTIFICATE Susquehanna Bancshares, Inc. 26 North Cedar Street Lititz, Pennsylvania 17543 Attention: Chief Financial Officer Drawn under Susquehanna Bancshares, Inc. Credit No.: 1 Ladies and Gentlemen: We refer to your Irrevocable Letter of Credit No. 1 (the "Letter of Credit"). Capitalized terms used herein shall have the meanings set forth in the Letter of Credit or, if not defined therein, in the Loan Agreement dated as of June , 2001 (the "Loan Agreement") among HAL Warehouse Funding 2001 LLC (the -- "Borrower"), Market Street Funding Corporation and PNC Bank, National Association. 1. The Eligible Demand Amount, as calculated in accordance with the Loan Agreement, as of the date hereof equals $ . -------------- 2. Payment of $ , which is less than or equal to the ------------- Eligible Demand Amount, is hereby demanded. 3. As of the date hereof, $ (the "SBI Paid Amount") ---------------- has been drawn and paid under the Letter of Credit, and $ (the ---------------- "First Tennessee Paid Amount") has been drawn and paid under the Irrevocable Standby Credit No. S013164 issued by First Tennessee Bank National Association. The sum of the SBI Paid Amount, the First Tennessee Paid Amount and the amount demanded hereunder does not exceed the Letter of Credit Amount. 4. The undersigned is duly authorized to make this demand on behalf of the Borrower. 5. [Please wire the amount demanded hereunder to account no. ___________at____________in___________________.] 6. [The original of the Letter of Credit is returned to you herewith.] [The original of the Letter of Credit will be delivered to you by overnight courier for delivery on the next business day.] Dated: , 200 . --------- - HAL WAREHOUSE FUNDING 2001 LLC, by PNC Bank, National Association, as Collateral Agent, as its attorney-in-fact By: ----------------------------------------- Title: -------------------------------------- Susquehanna Bancshares, Inc. 26 North Cedar Street, P.O. Box 1000 Lititz, PA 17543-7000 (717) 626-4721 June 29, 2001 Applicant HAL WAREHOUSE FUNDING 2001 LLC C/O HANN FINANCIAL SERVICE CORP. ONE CENTRE DRIVE JAMESBURG, NJ 08831 Beneficiary HAL WAREHOUSE FUNDING 2001 LLC C/O HANN FINANCIAL SERVICE CORP. ONE CENTRE DRIVE JAMESBURG, NJ 08831 AMENDMENT NO. 01 We hereby amend our Irrevocable Standby Letter of Credit No. 1 as follows: Beneficiary's name and address now to read: HAL WAREHOUSE FUNDING 2001 LLC BY PNC BANK, NATIONAL ASSOCIATION, AS COLLATERAL AGENT, AS ITS ATTORNEY-IN-FACT C/O HANN FINANCIAL SERVICE CORP. ONE CENTRE DRIVE JAMESBURG, NJ 08831 The original credit and all amendments have to be presented with any draw under this letter of credit. All other terms and conditions remain unchanged. SUSQUEHANNA BANCSHARES, INC. /s/ Drew K. Hostetter - ----------------------------------- ------------------------------------ AUTHORIZED SIGNATURE AUTHORIZED SIGNATURE EX-10.4 7 dex104.txt PURCHASE AGREEMENT Exhibit 10.4 EXECUTION PURCHASE AGREEMENT between BOSTON SERVICE COMPANY, INC., d/b/a Hann Financial Service Corp. and AUTO LENDERS LIQUIDATION CENTER, INC. Dated as of March 11, 2002 TABLE OF CONTENTS Page ARTICLE I DEFINITIONS............................................2 SECTION 1.1 Defined Terms.......................................2 ARTICLE II PURCHASE OF RESIDUAL VEHICLES..........................3 SECTION 2.1 Commitment to PurchaseResidual Vehicles.............3 SECTION 2.2 Sales Tax...........................................3 SECTION 2.3 Collections; End of Term Charges....................3 SECTION 2.4 Auto Lenders Servicing Agreement....................3 ARTICLE III REPRESENTATIONS AND WARRANTIES.........................4 SECTION 3.1 Representations and Warranties of Hann..............4 SECTION 3.2 Representations and Warranties of Auto Lenders......5 ARTICLE IV MISCELLANEOUS..........................................6 SECTION 4.1 Transfers Intended as Sale..........................6 SECTION 4.2 Specific Performance................................6 SECTION 4.3 Notices, Etc........................................6 SECTION 4.4 CHOICE OF LAW; SUBMISSION TO JURISDICTION...........6 SECTION 4.5 Counterparts........................................7 SECTION 4.6 Amendment...........................................7 SECTION 4.7 Severability of Provisions..........................7 SECTION 4.8 Binding Effect; Assignability.......................7 SECTION 4.9 Third Party Beneficiary.............................7 -i- EXECUTION PURCHASE AGREEMENT THIS PURCHASE AGREEMENT is made and entered into as of March 11, 2002 (as amended, modified or supplemented from time to time, this "Agreement") by BOSTON SERVICE COMPANY, INC., a New Jersey corporation doing business as Hann Financial Service Corp. ("Hann") and AUTO LENDERS LIQUIDATION CENTER, INC., a New Jersey corporation ("Auto Lenders"). WITNESSETH: WHEREAS, Hann Auto Trust is a Delaware business trust (the "Origination Trust") formed and operated pursuant to a Second Amended and Restated Trust Agreement dated February 12, 1999 (the "Origination Trust Agreement") for the purpose, among other things, of acquiring title to automobiles and light duty trucks ("Vehicles") subject to closed-end consumer leases ("User Leases"); WHEREAS, on the date hereof, Hann (as owner of the entire undivided interest in the Origination Trust) will direct the trustees of the Origination Trust to establish a special unit of beneficial interest in the Origination Trust (the "Galleon SUBI"), which will represent the entire beneficial interest in a specified portfolio of Vehicles, the related User Leases and all assets of the Origination Trust to the extent related thereto (the "Related Rights"; together with a Vehicle and the related User Lease, a "Unit"); WHEREAS, Auto Lenders is in the business of reselling and remarketing vehicles, inter alia, after the scheduled termination of closed-end consumer leases; WHEREAS, Hann desires to sell and Auto Lenders desires to buy Galleon Units (as defined below) upon the scheduled termination or expiration of the related User Leases (each such Unit, a "Residual Vehicle") pursuant to the terms and conditions of this Agreement; and WHEREAS, all Residual Vehicles purchased by Auto Lenders will be allocated to the Auto Lenders SUBI (as defined below). NOW, THEREFORE, in consideration of the mutual agreements set forth herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 Defined Terms. Defined terms used in this Agreement but not otherwise defined herein shall have the meanings given to them in Appendix A to the Loan Agreement dated as of March 11, 2002 (the "Loan Agreement") among HAL Warehouse Funding 2002-1 LLC, as borrower (the "Borrower"), Galleon Capital Corporation, as Lender, and State Street Capital Markets, LLC, as Administrator. ARTICLE II PURCHASE OF RESIDUAL VEHICLES SECTION 2.1 Commitment to Purchase Residual Vehicles. For each Residual Vehicle, on the date of the scheduled termination or expiration in accordance with the terms of the User Lease related to such Residual Vehicle (such date, the "Purchase Date"), (i) Borrower in its capacity as seller hereunder (the "Seller") will (or will cause to) sell, transfer and assign the beneficial interest in such Residual Vehicle to Auto Lenders, (ii) Auto Lenders shall purchase the beneficial interest in, and accept allocation to the Auto Lenders SUBI of, such Residual Vehicles, such allocation to be evidenced by the execution and delivery by the Seller to Auto Lenders and to the SUBI Trustee of the Galleon SUBI and the Auto Lenders SUBI of an allocation notice in the form attached hereto as Exhibit A (a "Residual Vehicle Allocation Notice") and (iii) in consideration of each such sale and allocation, Auto Lenders shall deposit into the Collection Account, in immediately available funds, an amount equal to the Stated Residual Value of each Residual Vehicle purchased by Auto Lenders on such date (the "Residual Vehicle Purchase Price"). Nothing contained herein shall be deemed to require the Administrator or the Collateral Agent to identify any Residual Vehicles or to prepare or execute any Residual Vehicle Allocation Notice. SECTION 2.2 Sales Tax. All sales, property, use, transfer or other similar taxes arising from the transactions contemplated by this Agreement upon the purchase of the beneficial interest in the Residual Vehicles by Auto Lenders will be paid or provided for by Auto Lenders as of the date of such transfer unless such transactions will then be exempt from any such taxes. SECTION 2.3 Collections; End of Term Charges. Seller agrees that any End of Term Charges received by the Origination Trust (or the Servicer on behalf of the Origination Trust) relating to any Residual Vehicle the beneficial interest in which is purchased by Auto Lenders pursuant to Section 2.1 hereof shall be allocated to the Auto Lenders SUBI. Auto Lenders agrees that all other Collections with respect to Residual Vehicles (including, without limitation, all Collections not constituting End of Term Charges or Sales Proceeds and all Collections with respect to Residual Vehicles the beneficial interest in which is not purchased by Auto Lenders pursuant to Section 2.1 hereof) shall be allocated to the Galleon SUBI. SECTION 2.4 Auto Lenders Servicing Agreement. Reference is hereby made to the Amended Servicing Agreement, dated as of September 1, 2000 (the "Auto Lenders Servicing Agreement"), between Auto Lenders and Hann. For the avoidance of doubt, this Purchase Agreement shall supercede the terms of the Auto Lenders Servicing Agreement (including, without limitation, any provisions relating to the guaranty of residual values, the deposit of Sales Proceeds and service and guaranty fees) with respect to the matters covered in Sections 2.1, 2.2, and 2.3 of this Purchase Agreement. 2 ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1 Representations and Warranties of Hann. Hann hereby represents and warrants to Auto Lenders that the following are true and correct on the date hereof: (a) Organization and Power. Hann is a corporation duly organized, validly existing and in good standing under the laws of the State of New Jersey, and has the corporate power and authority to conduct its business as now conducted, to sell its properties and to execute, deliver and perform its obligations under this Agreement. Hann is duly qualified to do business and is in good standing in (i) the State of New Jersey and (ii) each other jurisdiction in which its business is conducted, except in the case of clause (ii) above, where the failure to so qualify or to be in good standing would not have a material adverse effect on Hann or its business. (b) Authorization, Execution and Validity. This Agreement has been duly authorized by all necessary corporate action on the part of Hann and has been duly executed and delivered by Hann and (assuming the due authorization, execution and delivery by each other party thereto) constitutes the legal, valid and binding obligation of Hann, enforceable against Hann in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors', mortgagees' or lessors' rights in general and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (c) No Conflict. The execution, delivery and performance by Hann of this Agreement and compliance by Hann with its obligations hereunder and thereunder do not (i) require any approval of the shareholders of Hann or any approval or consent of any trustee or holder of any indebtedness or obligation of Hann, other than such consents and approvals as have been obtained, (ii) contravene any applicable law, (iii) breach or contravene Hann's organizational documents; or (iv) contravene or result in any breach of or creation of any lien upon any property of Hann under any indenture, mortgage, loan agreement, lease or other agreement or instrument to which Hann is a party or by which Hann or any of its properties is bound. (d) Applicable Law. Hann is in compliance with all Applicable Laws and Governmental Actions, the failure to comply with which would have a Material Adverse Effect. (e) Consents. No consent, approval or authorization of, or filing, registration or qualification with, or giving of notice or taking of any other action with respect to, any State or local Governmental Authority or agency or any United States federal Governmental Authority or agency is required in connection with the execution, delivery and performance of Hann of this Agreement, other than any such consent, approval, authorization, filing, registration, qualification, notice or action as has been duly obtained, given or taken and is in full force and effect. 3 SECTION 3.2 Representations and Warranties of Auto Lenders. Auto Lenders hereby represents and warrants to Hann that the following are true and correct on the date hereof and on each Purchase Date: (a) Organization and Power. Auto Lenders is a corporation duly organized, validly existing and in good standing under the laws of the State of New Jersey, and has the corporate power and authority to conduct its business as now conducted, to sell its properties and to execute, deliver and perform its obligations under this Agreement. Auto Lenders is duly qualified to do business and is in good standing in (i) the State of New Jersey and (ii) each other jurisdiction in which its business is conducted, except in the case of clause (ii) above, where the failure to so qualify or to be in good standing would not have a material adverse effect on Auto Lenders or its business. (b) Authorization, Execution and Validity. This Agreement has been duly authorized by all necessary corporate action on the part of Auto Lenders and has been duly executed and delivered by Auto Lenders and (assuming the due authorization, execution and delivery by each other party thereto) constitutes the legal, valid and binding obligation of Auto Lenders, enforceable against Auto Lenders in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors', mortgagees' or lessors' rights in general and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). (c) No Conflict. The execution, delivery and performance by Auto Lenders of this Agreement and compliance by Auto Lenders with its obligations hereunder and thereunder do not (i) conflict with any other obligation or agreement of Auto Lenders or require any approval of the shareholders of Auto Lenders or any approval or consent of any trustee or holder of any indebtedness or obligation of Auto Lenders, other than such consents and approvals as have been obtained, (ii) contravene any applicable law, (iii) breach or contravene Auto Lenders's organizational documents; or (iv) contravene or result in any breach of or creation of any lien upon any property of Auto Lenders under any indenture, mortgage, loan agreement, lease or other agreement or instrument to which Auto Lenders is a party or by which Auto Lenders or any of its properties is bound. (d) Applicable Law. Auto Lenders is in compliance with all Applicable Laws, and Governmental Actions, the failure to comply with which would have a Material Adverse Effect. (e) Consents. No consent, approval or authorization of, or filing, registration or qualification with, or giving of notice or taking of any other action with respect to, any State or local Governmental Authority or agency or any United States federal Governmental Authority or agency is required in connection with the execution, delivery and performance of Auto Lenders of this Agreement, other than any such consent, approval, authorization, filing, registration, qualification, notice or action as has been duly obtained, given or taken and is in full force and effect. 4 ARTICLE IV MISCELLANEOUS SECTION 4.1 Transfers Intended as Sale. It is the express intent of Hann and Auto Lenders that each transfer contemplated and effected under this Agreement shall constitute a sale of personal property which is absolute and irrevocable and which is without recourse to Hann or the Seller, and which provides Auto Lenders with the full benefits of exclusive beneficial ownership of the Residual Vehicles (subject to Section 2.3 hereof) purchased in accordance with Section 2.1 hereof (collectively, the "Transferred Property"). However, in the event that, notwithstanding the intent of the parties, such Transferred Property is held by a court of law to continue to be property of the Seller or its assignee or pledgee, then (i) this Agreement also shall be deemed to be and hereby is a security agreement within the meaning of the UCC; and (ii) the allocations by Seller provided for in this Agreement shall be deemed to be a security interest in and to all of Seller's or its assignee's or pledgee's right, title and interest in and to such Transferred Property. SECTION 4.2 Specific Performance. Each party agrees that damages at law would be an inadequate remedy for a breach by either party of its representations and warranties herein, and that either party may therefore seek and enforce specific performance of this Agreement. SECTION 4.3 Notices, Etc. Each communication to be made hereunder shall (except as expressly permitted otherwise) be made in writing but, unless otherwise stated, may be made by facsimile or letter. Any communication or document to be made or delivered by any one Person to another pursuant to this Agreement shall (unless that other Person has by fifteen days' written notice to the other specified another address) be made or delivered to that other Person at the address identified with its signature below and shall be deemed to have been made or delivered (in the case of any communication made by facsimile) when dispatched or (in the case of any communication made by letter) when left at that address. Any communication sent by facsimile shall be promptly confirmed by letter but the non-delivery or non-receipt of any such letter shall not affect the validity of the original facsimile communication. Each communication and document made or delivered hereunder shall be in the English language. SECTION 4.4 CHOICE OF LAW; SUBMISSION TO JURISDICTION. (a) THIS AGREEMENT AND ALL MATTERS ARISING OUT OF OR RELATING IN ANY WAY THERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO OTHERWISE APPLICABLE PRINCIPLES OF CONFLICTS OF LAW, OTHER THAN SECTION 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, EXCEPT TO THE EXTENT THAT THE PERFECTION (OR THE EFFECT OF PERFECTION OR NON-PERFECTION) OF THE INTERESTS OF THE COLLATERAL AGENT IN THE COLLATERAL, IS GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. (b) EACH PARTY HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THE SUPREME COURT OF THE STATE OF NEW 5 YORK SITTING IN THE BOROUGH OF MANHATTAN AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT. SECTION 4.5 Counterparts. This Agreement may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. SECTION 4.6 Amendment. (a) This Agreement may be amended by the parties hereto, without the consent of any other Person, to cure any ambiguity or defect, to correct or supplement any provisions in this Agreement or for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions in this Agreement or of modifying in any manner the rights of the parties hereto; provided that such action shall not, as evidenced by an opinion of counsel delivered to the Seller and any assignee or pledgee of the Galleon SUBI, adversely affect the interests of Seller or such assignee or pledgee. (b) This Agreement may be amended in any respect from time to time by the parties hereto, with the consent of the Seller. SECTION 4.7 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 4.8 Binding Effect; Assignability. This Agreement shall be binding upon and inure to the benefit of Auto Lenders and Hann and their respective successors and permitted assigns. Auto Lenders may not assign any of its rights hereunder or any interest herein without the prior written consent of Hann or Seller, except as otherwise herein specifically provided. Auto Lenders hereby consents to the mortgage, pledge, assignment and grant of a security interest by the Seller of all of Seller's rights and obligations hereunder. In addition, Auto Lenders hereby acknowledges and agrees that any assignee or pledgee of this Agreement will have the right to exercise all rights, remedies, powers, privileges and claims of Seller under this Agreement, including with respect to any waiver or consent. SECTION 4.9 Third Party Beneficiary. Seller and each assignee or pledgee of Seller's interest in this Agreement is an express third party beneficiary of the obligations of Auto Lenders hereunder and may directly enforce the performance by Auto Lenders of such obligations. 6 [Remainder of Page Left Intentionally Blank] 7 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. BOSTON SERVICE COMPANY, INC. d/b/a Hann Financial Service Corp. By: /s/ Charles R. Dovico --------------------------------- Name: Charles R. Dovico Title: President One Centre Drive Jamesburg, NJ 08831 AUTO LENDERS LIQUIDATION CENTER, INC. By: /s/ Michael J. Wimmer --------------------------------- Name: Michael J. Wimmer Title: President 1051 North Black Horse Pike Williamstown, NJ 08094 8 EXHIBIT A FORM OF RESIDUAL VEHICLE ALLOCATION NOTICE THIS RESIDUAL VEHICLE ALLOCATION NOTICE (this "Allocation Notice") is made and delivered by HAL WAREHOUSE FUNDING 2002-1 LLC, a Delaware limited liability company ("Seller"), a [______________], to AUTO LENDERS LIQUIDATION CENTER, INC., a New Jersey corporation ("Auto Lenders"), pursuant to that certain Purchase Agreement dated as of March [_____________], 2002 (the "Purchase Agreement") between Boston Service Company, Inc., a New Jersey corporation doing business as Hann Financial Service Corp., and Auto Lenders. Terms initially capitalized but not otherwise defined in this Allocation Notice have the meanings given to them in the Purchase Agreement. In consideration of Auto Lender's payment of the related Residual Vehicle Purchase Price under the Purchase Agreement for all of the Residual Vehicles listed on the attached Schedule 1 as being allocated to the Auto Lenders SUBI Portfolio, all on the terms and subject to the conditions contained in the Purchase Agreement, the Seller does hereby direct the trustees of the Origination Trust to identify from the Origination Trust assets allocable to the Galleon SUBI Portfolio, all of the Residual Vehicles listed on the attached Schedule 1, together with all related Origination Trust assets with respect thereto. IN WITNESS WHEREOF, Seller has executed this Allocation Notice as of the [___________] day of [______________], 200 . - HAL WAREHOUSE FUNDING 2002-1 LLC By: ---------------------------------- Name: Title: SCHEDULE 1 Residual Vehicles [COMPLETE WITH CATEGORIES OF IDENTIFYING INFORMATION] EX-10.5 8 dex105.txt IRREVOCABLE STANDBY LETTER OF CREDIT NUMBER 2 EXHIBIT 10.5 Susquehanna Bancshares, Inc. 26 North Cedar Street, P.O. Box 1000 Lititz, PA 17543-7000 (717) 626-4721 Irrevocable Standby Letter of Credit Number 2 March 11, 2002 Applicant HAL WAREHOUSE FUNDING 2002-1 LLC C/O HANN FINANCIAL SERVICE CORP. ONE CENTRE DRIVE JAMESBURG, NJ 08831 Beneficiary GALLEON CAPITAL CORPORATION C/O STATE STREET GLOBAL MARKETS, LLC 225 FRANKLIN STREET 18TH FLOOR BOSTON, MA 02110 We hereby authorize the Beneficiary to draw on Susquehanna Bancshares, Inc. up to the aggregate amount of Twenty Million U.S. Dollars (U.S. $20,000,000) ("Letter of Credit Amount") or such lower amount to which the Letter of Credit Amount shall be reduced as described below, effective immediately and expiring as provided below. Partial and multiple drawings under this Letter of Credit are permitted. Subject to the foregoing and the further provisions of this Irrevocable Standby Letter of Credit, you may make a demand for payment by presentation to the following address: Susquehanna Bancshares, Inc. Attention: Chief Financial Officer 26 North Cedar Street Lititz, PA 17543 of your drawing certificate in the form of Exhibit "A" hereto, appropriately completed and signed by your duly authorized officer. If your drawing certificate is so presented to the address set forth previously at or before 11:00 a.m., Lititz, Pennsylvania time, on any business day, payment will be made to you of the amount demanded in same day funds before the close of business on the same business day. If your drawing certificate is presented to the address set forth previously after 11:00 a.m., Lititz, Pennsylvania time, on any business day, payment will be made to you of the amount of requested in same day funds before the close of business on the next business day. "Business day" means any day on which banks are not authorized to remain closed in Lititz, Pennsylvania. We hereby engage with drawer that drafts drawn in conformity with the terms of this Letter of Credit will be duly honored upon presentation. In the event of a draw under this Letter of Credit, the Beneficiary is required to present the original Letter of Credit, and any amendments which may be issued in the future, with any/all other documents required by this Letter of Credit for endorsement of drawing and return if balance remains for future possible draws. The aggregate amount available under this Letter of Credit shall be reduced following our honoring any draft drawn hereunder in an amount equal to the amount of such draft. All bank charges and commissions incurred by us in connection with the issuance or administration of this Letter of Credit (including any drawing hereunder) shall be for account of the Applicant. This Letter of Credit shall expire on the close of business at the aforesaid address on January 31, 2007. You shall promptly surrender this Letter of Credit to us upon such expiration. This Letter of Credit sets forth in full the terms of our undertaking, and such undertaking shall not in any way be amended, modified, amplified or limited by reference to any document, instrument or agreement referred to herein or in which this Letter of Credit is referred to or to which this Letter of Credit relates (other than the Exhibit attached hereto), and any such reference shall not be deemed to incorporate herein by reference any document, instrument or agreement. [The remainder of this page is intentionally left blank.] Susquehanna Bancshares, Inc. 26 North Cedar Street, P.O. Box 1000 Lititz, PA 17543-7000 (717) 626-4721 THIS LETTER OF CREDIT SHALL BE GOVERNED BY THE INTERNATIONAL STANDBY PRACTICES 1998 (ISP 98) AND BY THE UNIFORM COMMERCIAL CODE OF THE COMMONWEALTH OF PENNSYLVANIA. SUSQUEHANNA BANCSHARES, INC. /s/ Drew K. Hostetter - ---------------------------------- ---------------------------------- AUTHORIZED SIGNATURE AUTHORIZED SIGNATURE EXHIBIT A TO IRREVOCABLE LETTER OF CREDIT DRAWING CERTIFICATE Susquehanna Bancshares, Inc. 26 North Cedar Street Lititz, Pennsylvania 17543 Attention: Chief Financial Officer Drawn under Credit No. 2 Susquehanna Bancshares, Inc. ("SBI") Ladies and Gentlemen: We refer to your Irrevocable Letter of Credit No. 2 (the "SBI Letter of Credit"). Capitalized terms used herein shall have the meanings set forth in the SBI Letter of Credit or, if not defined therein, in the Loan Agreement dated as of March 11, 2002 (the "Loan Agreement") among HAL Warehouse Funding 2002-1 LLC (the "Borrower"), Galleon Capital Corporation and State Street Global Markets, LLC. 1. The undersigned hereby demands payment of $ under the ------------- SBI Letter of Credit (the "Demand Amount"). 2. The undersigned hereby certifies that a Primary LOC Draw Event has occurred. 3. On or prior to the date hereof, , (a) $ (the "SBI Paid ------------- Amount") has been drawn and paid under the SBI Letter of Credit, (b) $ (the "First Tennessee Paid Amount") has been drawn and paid ---------------- under the Irrevocable Standby Credit No. S023062 issued by First Tennessee Bank National Association and (c) $ (the "State Street Paid Amount") ---------------- has been drawn and paid under Irrevocable Standby Credit No. [_] issued by State Street Bank & Trust Company. The sum of the SBI Paid Amount and the Demand Amount does not exceed $20,000,000. 4. Payment of the Demand Amount, together with the SBI Paid Amount, the First Tennessee Paid Amount and the State Street Paid Amount is less than or equal to the Letter of Credit Limit. 5. Please wire the amount demanded hereunder to account no. [insert wire instructions for the Letter of Credit Draw Account]. 6. [The original of the SBI Letter of Credit is returned to you herewith.] [The original of the SBI Letter of Credit will be delivered to you by overnight courier for delivery on the next business day.] Dated: , 200 . ------------- - GALLEON CAPITAL CORPORATION By: -------------------------------- Title: ----------------------------- 2 EX-99.1 9 dex991.txt CERTIFICATION OF CEO Exhibit 99.1 CERTIFICIATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, William J. Reuter, Chief Executive Officer of Susquehanna Bancshares, Inc. (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002 (the "Report") filed with the Securities and Exchange Commission as of the date hereof: (1) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.(S)78m(a) or(S)78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. /s/ William J. Reuter ------------------------------------ William J. Reuter Chief Executive Officer August 13, 2002 EX-99.2 10 dex992.txt CERTIFICATION OF CFO Exhibit 99.2 CERTIFICIATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Drew K. Hostetter, Chief Financial Officer of Susquehanna Bancshares, Inc. (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2002 (the "Report") filed with the Securities and Exchange Commission as of the date hereof: (1) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.(S)78m(a) or(S)78o(d)); and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. /s/ Drew K. Hostetter ------------------------------------ Drew K. Hostetter Chief Financial Officer August 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----