-----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, FUQzhAjPYhOufNcdIDsdaTBym883m/UH7kWcYD9A35gl00Tb3b4fTXqv+Nu8sbk0 ViCKYXlU5nJNKq94vYGang== 0000950123-05-004244.txt : 20050408 0000950123-05-004244.hdr.sgml : 20050408 20050408145002 ACCESSION NUMBER: 0000950123-05-004244 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050408 DATE AS OF CHANGE: 20050408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN CREDIT MANAGEMENT CORP/DE/ CENTRAL INDEX KEY: 0000831246 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 752243266 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17771 FILM NUMBER: 05741273 BUSINESS ADDRESS: STREET 1: SIX HARRISON ST CITY: NEW YORK STATE: NY ZIP: 10013 BUSINESS PHONE: 2129258745 MAIL ADDRESS: STREET 1: SIX HARRISON ST CITY: NEW YORK STATE: NY ZIP: 10013 FORMER COMPANY: FORMER CONFORMED NAME: MIRAMAR RESOURCES INC DATE OF NAME CHANGE: 19920703 10-K 1 y07373e10vk.txt FRANKLIN CREDIT MANAGEMENT CORP. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 [ ] 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 0-17771 FRANKLIN CREDIT MANAGEMENT CORPORATION DELAWARE 75-2243266 (State of incorporation) (I.R.S. ID) SIX HARRISON STREET NEW YORK, NEW YORK 10013 (212) 925-8745 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.01 PAR VALUE PER SHARE. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X Number of shares of the registrant's common stock, par value $0.01 per share, outstanding as of March 23, 2005: 6,082,295 Based upon the closing sale price on the Over-The-Counter Bulletin Board on June 30, 2004, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of common stock held by non-affiliates of the registrant as of such date was approximately $6,023,380. Portions of the registrant's definitive proxy statement, which will be filed within 120 days of December 31, 2004, are incorporated by reference into Part III. ================================================================================ FRANKLIN CREDIT MANAGEMENT CORPORATION FORM 10-K DECEMBER 31, 2004 INDEX
PAGE PART I. Item 1. Business. 3 Item 2. Properties. 20 Item 3. Legal Proceedings. 21 Item 4. Submission of Matters to a Vote of Security Holders. 21 PART II. Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer 21 Purchases of Equity Securities. Item 6. Selected Financial Data. 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 23 Item 7A. Quantitative and Qualitative Disclosure About Market Risk. 33 Item 8. Financial Statements and Supplementary Data. 35 Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosures. 35 Item 9A. Controls and Procedures. 35 Item 9B. Other Information. 35 PART III. Item 10. Directors and Executive Officers of the Registrant. 35 Item 11. Executive Compensation. 35 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 35 Item 13. Certain Relationships and Related Transactions. 35 Item 14 Principal Accountant Fees and Services. 35 PART IV. Item 15. Exhibits, Financial Statements Schedules. 37
2 PART I ITEM 1. BUSINESS. OVERVIEW We are a specialty consumer finance company primarily engaged in the acquisition, origination, sale, servicing and resolution of performing, sub-performing and non-performing residential mortgage loans. We purchase and originate loans primarily on the basis of the borrower's ability and willingness to repay the mortgage loan, the borrower's historical pattern of debt repayment and the adequacy of the collateral securing the loan. We focus on acquiring and originating loans made to borrowers who generally do not meet conforming underwriting guidelines because of higher loan-to-value ratios, the nature or absence of income documentation, limited credit histories, high levels of consumer debt or past credit difficulties. We originate non-prime mortgage loans through our wholly-owned subsidiary, Tribeca Lending Corp. We hold for investment the loans we acquire and a significant portion of the loans we originate. From inception through December 31, 2004, we had purchased and originated in excess of $2.2 billion in mortgage loans, $940 million of which we held in our portfolio as of December 31, 2004. PORTFOLIO ACQUISITIONS Since commencing operations in 1989, we have become a nationally recognized buyer of non-conforming mortgage loans from a variety of financial institutions in the United States including mortgage banks, commercial banks and thrifts, other traditional financial institutions and other specialty finance companies. As these entities originate, sell and securitize mortgage loans on an ongoing basis, they inevitably discover a portion of assets that for a wide range of reasons do not meet the underwriting criteria established by most buyers in the secondary marketplace, or otherwise do not fit within their own criteria for holding and servicing through resolution, by which we mean repayment or foreclosure. In contrast, we have developed a specialized expertise at risk-based pricing, credit evaluation and loan servicing that allows us to effectively evaluate and manage the potentially higher risks associated with this segment of the residential mortgage industry, including the rehabilitation or resolution of non-performing or sub-performing loans. As a result, we have the ability to acquire what we call "scratch and dent loans" or "S&D loans" from a variety of sources that we believe provide us with the opportunity to achieve an attractive risk-adjusted rate of return. We refer to loans we acquire as "notes receivable." We typically acquire S&D loans at a discount relative to the face value of the mortgage. In 2004, we purchased loans with an aggregate face value of $652 million, including the acquisition of our largest portfolios to date, one of which was comprised of loans with an aggregate face value of approximately $310 million. From our inception through December 31, 2004, we purchased S&D loans with a face value in excess of $1.8 billion, $812 million of which we retained for investment as of December 31, 2004. 3 LOAN ORIGINATIONS We conduct our loan origination business through our wholly owned subsidiary, Tribeca Lending Corp., or Tribeca, which we formed in 1997 in order to leverage our experience in evaluating and managing residential mortgage loans and our loan servicing capabilities. We originate primarily non-prime residential mortgage loans to individuals whose documentation, credit histories, income and other factors cause them to be classified as non-prime borrowers and to whom, as a result, conventional mortgage lenders will often not make loans. Most lenders in the non-prime market generate a majority of their origination volume from "Alt-A" borrowers, meaning borrowers with a credit profile in the level immediately below prime. As a result of the extensive competition in this subcategory of the non-prime market, the ability for lenders to generate a risk premium is limited and profitability is more dependent upon an ability to originate and/or service a high volume of loans. In contrast, fewer lenders focus on originating loans to borrowers with credit profiles below "Alt-A." We focus our marketing efforts on this segment given our knowledge of these borrowers and our ability to service loans to them through the entire credit cycle. In 2004, we originated $200 million in non-prime mortgage loans. We originated approximately 65% of our mortgage loans on a retail basis and the rest through our wholesale channels. We hold the mortgages we originate for our portfolio or sell them for cash in the whole loan market, depending on market conditions and our own portfolio goals. From our inception through December 31, 2004, we originated loans with a face value of $447 million, $127 million of which we retained for sale or investment as of December 31, 2004. LOAN SERVICING In general, after we acquire or originate loans our servicing department begins the process of servicing each of the loans in our portfolio, seeking to ensure that it is repaid in accordance with its terms or according to amended repayment terms negotiated with the borrower. We have developed an extensive infrastructure that allows us to rehabilitate many loans which become delinquent or go into default. We also have the capability to follow loans through the default process into foreclosure and sale of the underlying collateral, when required. CORPORATE HISTORY We were formed in 1989 by, among others, Thomas J. Axon, our Chairman, and Frank B. Evans, Jr., one of our directors, for the purpose of acquiring consumer loan portfolios from the Resolution Trust Company, or RTC, and the Federal Deposit Insurance Corporation, or FDIC. We became a public company in December 1994, when we merged with Miramar Resources, Inc., a publicly traded oil and gas company that had emerged from bankruptcy proceedings in December 1993. The newly formed entity was renamed Franklin Credit Management Corporation. At the time of the merger, we divested substantially all of the remaining oil and gas assets directly owned by Miramar in order to focus primarily on the non-conforming sector of the residential mortgage industry. At that time, we decided to capitalize on our experience and expertise in acquiring and servicing loans from RTC and the FDIC and began purchasing subprime mortgage loans from additional financial institutions. In 1997, we formed Tribeca to originate non-conforming residential mortgage loans to borrowers in the subprime markets. 4 LOAN ACQUISITIONS - FRANKLIN Financial institutions generally sell or securitize the majority of the loans they originate in the secondary market. The vast majority of these loans are sold at a premium to face value of the note, creating a profit margin for the seller. For a variety of reasons, however, a portion of their loan production is typically sold at a discount to the face value of the note. Our acquisition business is focused on purchasing these S&D loans for which a highly liquid secondary market does not exist. We have a variety of opportunities to purchase S&D loans, both shortly following origination and throughout the remainder of their lifecycle. NEWLY ORIGINATED LOANS. When a financial institution cannot sell a newly-originated mortgage loan through normal secondary market channels, it may continue to look for ways to sell that mortgage at a discounted price in order to free up cash or financing capacity so that it may continue to originate and sell more liquid mortgages. Newly originated loans may be sold multiple times before they are purchased by a long-term investor. A typical scenario is that a loan is originated by a local mortgage banker, sold to an intermediary mortgage banker, and finally either sold to a long term investor or securitized. At any point in this process, we may have an opportunity to purchase the loan for various reasons, including: - Investor Fallout. Mortgages may not meet the requirements of the secondary market for a number of different reasons, including noncompliance with program requirements, documentation deficiencies and valuation variances. - Loan Repurchases. Once a mortgage is sold, it may be subject to repurchase by the seller for a number of different reasons, including a subsequent default by the borrower that occurs within a specified period of time after the sale. - Facilitation. Occasionally, financial institutions will originate loans (frequently second liens) even though a liquid secondary market does not exist for those loans in order to facilitate the origination of mortgages that do have a liquid secondary market. SEASONED LOANS. Seasoned loans may be sold in the secondary market for a number of reasons, including: - Mergers and Acquisitions. The acquiror in a merger or acquisition may find that it has acquired mortgages that do not fit within its credit parameters. - Credit or Performance Issues. A portfolio holder of mortgages may have accumulated mortgages that have credit or performance characteristics that do not meet its current needs and desires to sell these mortgages in order to free up capacity. - Securitization Terminations. When mortgage loans are securitized, the securitization trust normally sells bonds with maturities that are shorter than the life of some of the mortgage loans that act as collateral. Optional call provisions may also provide certain interested parties with the ability to collapse the trust by selling or refinancing the remaining mortgage loans in the trust prior to maturity. - Insolvency. When a financial institution becomes insolvent, a trustee may decide to liquidate a mortgage portfolio in order to satisfy the creditors of the insolvent institution. It is often more efficient and economical (and sometimes imperative) for lenders in the situations described above to sell S&D loans at a discount to a third-party than to expend the resources necessary to rehabilitate these loans internally, as these lenders generally do not possess the financial capability, desire or specialized skills and infrastructure necessary to 5 effectively value or service these types of assets. In contrast, we have developed specialized expertise that permits us to effectively value and bid on S&D loans, as well as to manage the loans in portfolios that we ultimately acquire, including, in some cases, up to and through the disposition of foreclosed real estate properties. Since commencing operations, we have purchased in excess of $1.8 billion in S&D loans, comprised of approximately 48,800 loans, primarily from financial institutions. During 2004, we took advantage of market opportunities to significantly increase our volume of loan acquisitions and purchased over $652 million in S&D loans, compared with approximately $244 million in S&D loans during 2003 and $212 million in S&D loans during 2002. A substantial portion of the S&D loans we acquired in 2004 resulted from the purchase of two large portfolios from Bank One N.A. and Master Financial Inc., which together represented over $400 million in face loan value at the time of acquisition and approximately 61% of the total face value of acquired notes receivable in 2004. Our acquisition department seeks out and identifies opportunities to purchase portfolios of S&D loans, performs due diligence on the loans included in a portfolio, prepares a bid for the portfolio in accordance with our price and yield guidelines based on the results of its due diligence investigation and assists in the integration of assets that we ultimately acquire into our existing portfolio. "BULK" AND "FLOW" ACQUISITIONS Some lenders sell their S&D loans in the secondary market in small amounts on a frequent basis, while other institutions tend to accumulate larger pools of mortgages before selling them. We have established an acquisition group to focus on each of these two segments of the selling market. Our bulk purchase unit is responsible for acquisitions of portfolios with a face value of notes receivable in excess of $1.5 million, while our flow unit is responsible for acquisitions of portfolios or individual notes with a face value below $1.5 million. We make the majority of our bulk pool purchases of S&D loans from large conventional lenders in connection with the various opportunities described above. In contrast, our flow purchases are generally made on a more regular basis from smaller, regional mortgage banks that have a need to quickly dispose of one or more S&D loans. Bulk purchases constituted 84% of our overall purchases in 2004, 71% in 2003 and 71% in 2002, respectively. DUE DILIGENCE We have established a proprietary due diligence review process that we use for all prospective purchases. In connection with our purchases of bulk portfolios, the due diligence process includes an analysis of a majority of the loans in a prospective portfolio, except in the case of very large portfolios where, due to time constraints, we analyze a representative sample of assets in the portfolio. Our team evaluates, among other things, lien position and the value of collateral, debt-to-income ratios and the borrower's creditworthiness, employment stability, number of years of home ownership, credit bureau reports and mortgage payment history. Where appropriate, our acquisition department performs an on-site evaluation of the seller's loan servicing department in addition to reviewing the loan files that comprise the portfolio. This process provides us with additional information as to the actual quality of the servicing of the loans in the portfolio, which we believe is critical to our ability to properly evaluate the portfolio. In the case of flow purchases, we typically perform due diligence on each loan we acquire, which 6 focuses on the same matters described above. In all cases, we tailor our review as appropriate based on the level of our prior experience with the seller and other factors relevant to the specific portfolio. PRICING For both our bulk and flow purchases, we compare the information derived from our due diligence review to our historical statistical database and, coupled with our cumulative knowledge of the non-conforming segment of the mortgage industry, our acquisition department projects a collection strategy and estimates the collectability, cost to service and timing of cash flows with respect to the loans in the portfolio. Based upon this information, the acquisition department prepares a bid which meets our established pricing and yield guidelines. We have accumulated a significant amount of intellectual property, including proprietary databases and statistical data, over our years of experience with borrowers of S&D loans, based on our understanding of the entire credit cycle and our ability to resolve loans. We believe our intellectual property provides us with a competitive advantage in analyzing, pricing and bidding on S&D loans. COMPETITION We face intense competition in the market for the acquisition of S&D loans. Many of our competitors have financial resources, acquisition departments and servicing capacity considerably larger than our own. Among our largest competitors are Residential Funding Corporation, Bayview Financial Trading Group, Countrywide Financial Corporation, The Goldman Sachs Group, and Bear Stearns & Co., Inc. Competition for acquisitions is generally based on price, reputation of the purchaser, funding capacity and ability to execute within timing parameters required by the seller. BORROWERS Our business model focuses for the most part on holding the mortgage assets that we acquire through resolution. Our borrowers are a diverse population and no single borrower represents a significant portion of our S&D loans. Likewise, our borrowers are located in all fifty states and no single state represents 10% or more of the aggregate principal balance of loans in our portfolio. SELLERS We acquire S&D loans through a variety of methods, including negotiated sales, ongoing purchase agreements, joint-bids with other institutions and private and public auctions. The supply of assets available for purchase by us is influenced by a number of factors, including knowledge by the seller of our interest in purchasing assets of the type it is seeking to sell, the general economic climate, financial industry regulation and new residential mortgage loan origination volume. During 2004, we purchased an aggregate of 341 portfolios from 153 sellers. Our sources of bulk loan acquisitions have historically varied from year to year and we expect that this will continue to be the case. In addition to acquiring loans directly from sellers, we also acquire loans indirectly through brokers from time to time. 7 MARKETING Members of the sales and marketing group of our acquisitions department continually seek to identify new opportunities for the purchase of bulk and flow mortgage assets. They focus on deepening relationships with sellers from whom we have made acquisitions in the past and on developing relationships with new sellers, as well as with brokers who have access to sellers of the types of portfolios that we are interested in purchasing. LOAN ORIGINATIONS - TRIBECA We formed Tribeca, our wholly owned subsidiary, in 1997 as an origination platform for non-prime residential mortgages. Tribeca's mortgage origination platform provides us with an additional vehicle for growth and reduces the risks associated with reliance entirely upon the purchase of loans from other financial institutions for growth. Since commencing operations in 1997, Tribeca has originated approximately $447 million in non-prime residential mortgage loans for individuals with credit histories, income and/or other factors that cause them to be classified as non-prime borrowers. Through Tribeca, we originate a range of first and second mortgage loans. While our current strategy is to hold a majority of originated loans in our portfolio for investment, our strategy has changed in the past and may do so in the future based on market conditions and our own portfolio needs. We focus on developing and offering an array of proprietary niche products, including innovative purchase loans for single family and multi-family residences. We offer both fixed-rate loans and adjustable rate mortgages. Our products are offered at various interest rates, depending on credit risk, mortgage history, collateral and underwriting guidelines. Borrowers may choose to increase or decrease their interest rate through the payment of different levels of origination fees. Our maximum loan amount is $2 million and our maximum loan-to-value ratio is 100%, depending on the specific product. WHOLESALE AND RETAIL ORIGINATIONS Tribeca originates loans through both wholesale and retail channels. In 2004, approximately 65% of loans were originated through our retail channels, with the remainder being originated through wholesale channels, meaning through mortgage brokers. Of retail loans originated in 2004, approximately 65% were Liberty loans, which we hold for our portfolio, while the balances were loans that we originated for sale to investors. All of the wholesale loans we originated in 2004 were Liberty loans. The focus of our retail operation is direct-to-consumer loans. Our marketing efforts consist primarily of Internet-generated leads and referral-based business from attorneys, accountants, real estate agents and financial planners. Our wholesale account executives focus on expanding our mortgage broker network. Our staff's main objective is to identify qualified mortgage brokers and generate a consistent flow of business. Tribeca maintains three offices, located in New York, New Jersey and Pennsylvania, but originates loans from 26 states. BORROWERS As with loans we acquire, borrowers of loans we originate are a diverse population and no single borrower represents a significant portion of our loans. Our borrowers are located in 26 8 states, with approximately 54% of the aggregate face value of loans originated in 2004 being secured by property in New York and New Jersey. SECONDARY MARKETING We sell loans for a cash gain on a whole-loan, servicing-released, basis. The percentage of originated loans sold varies from year to year, depending on market conditions and our portfolio needs. We have not historically hedged our origination pipeline by entering into mandatory delivery commitments; however, many mortgage originators do so in the ordinary course of business and we may choose to do so in the future as well, if management deems it to be advantageous. The purchasers of the whole loans we do sell are typically large financial institutions. We regularly sell loans meeting specified criteria to several large financial institutions with whom we have ongoing relationships. LICENSING Tribeca is currently licensed as a mortgage banker or exempt from licensing in 26 states. Tribeca is also a Department of Housing and Urban Development FHA Title I and Title II approved lender. PRODUCTS We vary our product offerings depending on market conditions. In 2004, our origination volume focused on Liberty loans, which we hold for investment in our own portfolio, and Gold and Platinum loans, which we originate for sale to investors as described above. Liberty Loans. During 2004, a majority of our loan originations were conducted through our Liberty loan program. The Liberty loan is oriented toward borrowers who are undergoing a transition in their credit profile due to unforeseen life events such as divorce, business failure, loss of employment, health reasons and similar events. We generally expect that Liberty loan customers will eventually refinance at a lower interest rate once they have re-established their credit record. Liberty loans are primarily ARMs with 30-year terms. Our loan application and approval process is simple, requiring little documentation. We believe our Liberty loan product is unique in that we do not use the borrower's FICO scores to determine eligibility and instead make our lending decision based solely on the borrower's equity in his or her home. The maximum loan amount for our Liberty loans is typically $2 million, with a loan-to-value ratio of up to 75%. Because we emphasize collateral value, we take extra precautions to confirm the value of the underlying collateral. Platinum and Gold Loans. The balance of our loan originations in 2004 were conducted through our Platinum and Gold programs. Borrowers of our Platinum and Gold loans typically have higher credit ratings than borrowers under loans that we hold for our portfolio. The maximum loan amount for these loans is generally $500,000, with a loan-to-value ratio of up to 100%. COMPETITION The market for non-prime loan originations is highly competitive. Tribeca competes with a variety of lenders, including commercial savings banks and mortgage bankers, for the 9 origination of non-prime mortgages. Among the largest and most well-established of these competitors are New Century Mortgage, Ameriquest Mortgage, Countrywide Financial Corporation, and Household Financial Services. Many of our competitors possess greater financial resources, longer operating histories and lower costs of capital than we do. Competition for mortgage originations is based upon marketing efforts, loan processing capabilities, funding capacity, loan product desirability, interest rates and fees and, to a lesser extent in our case, the ability to sell loans for a premium in the secondary market. SERVICING We hold and service a substantial majority of the loans in our portfolio, including both purchased and originated loans, until resolution. At December 31, 2004, our servicing department consisted of 68 employees who managed 22,865 loans. Our servicing operations are conducted in the following departments: LOAN BOARDING AND ADMINISTRATION. The primary objective of the loan boarding department is to ensure that newly acquired loans are properly transitioned from the prior servicer and that both newly acquired loans and originated loans are accurately boarded onto our servicing systems. In the bulk acquisition context, data is transmitted via a file from the seller which is loaded directly onto our system, while data for originated loans and flow acquisitions is boarded directly by us onto our system. Our loan boarding department audits loan information for accuracy to ensure, in the case of acquisitions, that the loans conform to the terms provided in the original note and mortgage. The information boarded onto our systems provides us with a file that we use to automatically generate introductory letters to borrowers summarizing the terms of their loan, among other standard industry procedures. The loan administration department performs typical duties related to the administration of loans, including incorporating modifications to terms of loans as well as, in the case of acquisitions, completing and recording the assignment of collateral documents from the seller into our name, which it does in conjunction with our acquisition department. The loan administration department also ensures the proper maintenance and disbursement of funds from escrow accounts and monitors non-escrow accounts for delinquent taxes and insurance lapses. For purchased and originated loans with adjustable interest rates, the loan administration group ensures that adjustments are properly made and timely identified to the affected borrowers. CUSTOMER SERVICE. The main objective of our customer service department is to handle inbound calls from borrowers. In addition, this group is responsible for processing payoff requests and reconveyances. COLLECTIONS. The main objective of our collections department is to ensure loan performance through maintaining customer contact. Our collections group continuously reviews and monitors the status of collections and individual loan payments in order to proactively identify and solve potential collection problems. When a loan becomes seven days past due, our collections group begins making collection calls and generating past-due letters. Our collections group attempts to determine whether a past due payment is an aberration or indicative of a more serious delinquency. If the past due payment appears to be an aberration, we emphasize a cooperative approach and attempt to assist the borrower in becoming current or arriving at an alternative repayment arrangement. Upon a delinquency of 55 days by a borrower, or the earlier determination by our collections group based on the evidence available that a serious delinquency is likely, the loan is typically transferred to our legal department where loss 10 mitigation begins. We focus on expediting the loan transfer process as soon as a borrower is identified as being impaired so that loss mitigation can begin as promptly as practicable. LEGAL. Our legal department manages and monitors the progress of seriously delinquent loans and loans which we believe will develop into serious delinquencies. In addition to maintaining contact with borrowers through telephone calls and collection letters, this department utilizes various strategies in an effort to reinstate an account or revive cash flow on an account. The legal department analyzes each loan to determine a collection strategy to maximize the amount and speed of recovery and minimize costs. The particular strategy is based upon each individual borrower's past payment history, current credit profile, current ability to pay, collateral lien position and current collateral value. We employ a range of strategies depending on the specific situation, including the following: - Short term repayment plans, or forbearance plans, when a delinquency can be cured within three months; - Loan modifications, when a delinquency cannot be cured within three months but the borrower has the financial ability to abide by the terms of the loan modification; - Short sales, when the borrower does not have the ability to repay and the equity in the property is not sufficient to satisfy the total amount due under the loan, but we accept the sale price of the property in full satisfaction of the debt in order to expedite the process for all parties involved; - Deed-in-lieu, when the borrower does not have the ability to repay and the equity in the property is not sufficient to satisfy the total amount due, but we accept the deed in full satisfaction of the debt in order to expedite the process for all parties involved; - Assumption, when the borrower wishes to relinquish responsibility to a third party and the prospective borrower demonstrates the ability to repay the loan; - Subordination, when we have the second lien on a property and the first lien-holder wishes to refinance its loan, to which we will agree if the terms of the refinanced loan permit the borrower to repay our loan; and - Deferment agreements, when we forgo collection efforts for a period of time, typically as a result of a hardship incurred by the borrower, such as a natural disaster or a death or illness in the family, as a result of which the borrower is temporarily unable to repay. Seriously delinquent accounts not resolved through the loss mitigation activities described above are foreclosed in accordance with state and local laws, with the objective of maximizing asset recovery in the most expeditious manner possible. Foreclosure timelines are managed through a timeline report built into the loan servicing system. The report schedules milestones applicable for each state throughout the foreclosure process, which enhances our ability to monitor and manage the process. Properties acquired through foreclosure are transferred to our real estate department to manage eviction and marketing of the properties. However, until foreclosure is completed, efforts at loss mitigation are continued. In addition, our legal department manages loans the borrower of which has declared bankruptcy. The primary objective of the bankruptcy group within our legal department is to proactively monitor bankruptcy assets to ensure compliance with individual plans and to ensure recovery in the event of non-compliance. REAL ESTATE. Our real estate department manages all properties acquired by us upon foreclosure of a delinquent loan or through purchase as part of a loan portfolio in order to 11 preserve their value and ensure that maximum returns are realized upon sale. We own real estate, or OREO, in various states that we acquired through foreclosure, a deed in lieu or acquisition. These properties are 1-4 family residences, co-ops and condos. We acquire or foreclose on property primarily with the intent to sell it at a profit. From time to time OREO properties may be in need of repair or improvements, in order to either increase the value of the property or reduce the time that the property is on the market. In those cases, the OREO property is evaluated independently and we make a determination of whether the additional investment would generate an adequate return. FINANCING We require access to credit facilities in order to finance our purchase and origination of loans. We have historically financed both our acquisitions of mortgage loan portfolios and our originations, through arrangements with Sky Bank N. A., with whom we have had a strong relationship since our founding in 1989. In October 2004 we consolidated our arrangements with Sky Bank relating to the funding of loan acquisitions under a Master Credit and Security Agreement. Loans to us under the credit agreement are secured by a first priority lien on the mortgage loans financed by proceeds of loans made under that agreement. In connection with our continued growth in 2004, and in particular our two large acquisitions of the Bank One and Master Financial portfolios, respectively, Sky Bank arranged for two additional financial institutions to participate as lenders under our arrangements with Sky Bank. Our wholly owned originations subsidiary, Tribeca, has also entered into a warehousing credit and security agreement with Sky Bank, in which one of these lenders also participates, pursuant to which Tribeca finances loans that it originates. From time to time, amounts borrowed under the warehouse facility are transferred to term loans. (For a further description of our financing arrangements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Senior Debt.") 12 PORTFOLIO CHARACTERISTICS OVERALL PORTFOLIO At December 31, 2004, our portfolio (excluding REO) consisted of $812 million notes receivable, $110 million loans held for investment and $17 million loans held for sale. Our total loan portfolio grew 87% to $939 million at December 31, 2004, from $503 million at December 31, 2003. Not boarded loans represent loans serviced by the seller on a temporary basis. The following table sets forth information regarding the types of properties securing our loans.
PERCENTAGE OF TOTAL PROPERTY TYPES PRINCIPAL BALANCE PRINCIPAL BALANCE - -------------- ----------------- -------------------- Residential 1-4 family $ 755,307,799 80.44% Condos, Coops, Pud dwelling 50,622,894 5.39% Manufactured Homes 16,497,733 1.76% Multi-family 2,221,894 0.24% Commercial 2,847,944 0.30% Unsecured loans 11,754,680 1.25% Other 4,316,655 0.46% Not boarded 95,440,903 10.16% ----------------- ------ Total $ 939,010,501 100.00% ================= ======
Geographic Dispersion. The following table sets forth information regarding the geographic location of properties securing the loans in our portfolio at December 31, 2004:
PERCENTAGE OF TOTAL LOCATION PRINCIPAL BALANCE PRINCIPAL BALANCE - -------------- ----------------- -------------------- Ohio $ 85,252,809 9.08% New York 70,018,617 7.46% California 69,624,971 7.41% Florida 69,404,814 7.39% Georgia 49,040,644 5.22% New Jersey 48,469,855 5.16% Michigan 41,021,623 4.37% Pennsylvania 40,919,891 4.36% North Carolina 39,424,071 4.20% Texas 38,915,010 4.14% All Others 386,918,196 41.21% ----------------- ------ $ 939,010,501 100.00% ================= ======
13 NOTES RECEIVABLE PORTFOLIO As of December 31, 2004, our notes receivable portfolio, which consists of purchased loans, included approximately 22,100 loans with an aggregate face value of $812 million and a net value of $722 million (after allowance for loan losses of $89 million), compared with approximately 10,095 loans with an aggregate face value of $466 million and a net value of $420 million (after allowance for loan losses of $46 million) as of December 31, 2003. The following table provides a breakdown of the notes receivable portfolio by year:
2004 2003 2002 -------------- -------------- -------------- Performing loans $ 436,366,894 $ 322,345,537 $ 292,018,333 Allowance for loan losses 19,154,312 15,584,769 11,096,115 -------------- -------------- -------------- Total performing loans, net of allowance for loan losses $ 417,212,582 $ 306,760,768 $ 280,922,218 ============== ============== ============== Impaired loans $ 280,078,060 $ 126,341,722 $ 119,134,128 Allowance for loan losses 57,889,091 30,111,278 32,809,607 -------------- -------------- -------------- Total impaired loans, net of allowance for loan losses $ 222,188,969 $ 96,230,444 $ 86,324,521 ============== ============== ============== Not yet boarded onto servicing system $ 95,440,903 $ 16,866,611 $ 24,106,933 Allowance for loan losses 12,584,898 551,183 1,935,929 -------------- -------------- -------------- Not yet boarded onto servicing system, net of allowance for loan losses $ 82,856,005 $ 16,315,428 $ 22,171,004 ============== ============== ============== Total notes receivable, net of allowance for loan losses $ 722,257,556 $ 419,306,640 $ 389,417,743 ============== ============== ==============
The following table provides a breakdown of the balance of our portfolio of Notes Receivable by coupon type, net of allowance for loan losses and excluding loans purchased but not yet boarded onto our servicing operations and technology system as of December 31, 2004, December 31, 2003 and December 31, 2002 of $82,856,005, $16,315,428 and $22,171,004, respectively:
2004 2003 2002 -------------- -------------- -------------- Total Performing Loans: Total Fixed Rate Performing Loans $ 300,286,566 $ 199,691,299 $ 213,429,977 ============== ============== ============== Total Adjustable Performing Loans $ 116,926,017 $ 107,069,469 $ 67,492,241 ============== ============== ============== Total Impaired Loans: Total Fixed Rate Impaired Loans $ 184,312,204 $ 58,752,534 $ 58,873,564 ============== ============== ============== Total Adjustable Impaired Loans $ 37,876,765 $ 37,477,910 $ 27,450,957 ============== ============== ============== Total Notes Receivable, net of allowance for loan losses, boarded onto servicing systems $ 639,401,552 $ 402,991,212 $ 367,246,739 ============== ============== ==============
14 LOAN ACQUISITIONS We purchased over $652 million in assets in 2004, compared with approximately $244 million in assets during 2003 and approximately $212 million in assets during 2002. A substantial portion of the loans we acquired in 2004 resulted from the purchase of two large portfolios from BankOne N.A. and Master Financial Corp., which together represented over $400 million in face loan value at the time of acquisition. The following table sets forth the amounts and prices of our mortgage loan acquisitions during the previous three years:
YEAR ENDED DECEMBER 31, 2004 2003 2002 -------- -------- ------- ($ in millions) Number of loans 12,914 3,476 4,331 Aggregate unpaid principal balance at acquisition $ 626 $ 244 $ 212 Purchase price $ 545 $ 214 $ 184 Purchase price percentage 87% 88% 87%
In 2004, we also purchased a pool of $26 million of non-performing credit card assets in 2004 for an aggregate purchase price of approximately $2 million. LOAN DISPOSITIONS In the ordinary course of our loan servicing process, we encounter a small amount of purchased loans that, for various reasons, we determine to sell. We typically sell these loans on a whole loan basis, which means that we sell all right, title and interest in and to a pool of loans for cash. The following table sets forth our dispositions of both purchased loans during the previous three years:
2004 2003 2002 ----------- ----------- -------- SALE OF PERFORMING LOANS Aggregate Face Value $19,845,833 $15,146,598 $900,000 Number of Loans Sold 143 148 4 Gain (Loss) on Sale 2,178,296 2,203,490 114,019 SALE OF NON-PERFORMING LOANS Aggregate Face Value 1,154,506 4,220,120 215,000 Number of Loans Sold 65 248 1 Gain (Loss) on Sale (477,182) (1,085,252) 25,500
15 REAL ESTATE OWNED The following table sets forth our real estate owned, or OREO, portfolio:
2004 2003 2002 Other Real Estate Owned $ 20,626,156 $ 13,981,665 $ 9,353,884 Total Assets 891,510,754 476,733,346 424,419,034 OREO as a percentage of Total Assets 2.32% 2.93% 2.20%
TRIBECA'S LOAN ORIGINATIONS The following table sets forth Tribeca's origination amounts by year, as well as dispositions:
YEAR ENDED DECEMBER 31, 2004 2003 2002 ------------ ----------- ----------- Number of loans originated 1,159 562 501 Original principal balance $200,301,285 $97,431,553 $70,444,721 Average Loan Amount $ 172,563 $ 172,598 $ 139,721 Originated as Fixed $ 54,128,022 $72,098,058 - Originated as ARM $146,173,263 $25,045,495 - Number of loans sold 576 449 235 Aggregate face value $ 89,925,754 $79,105,920 $42,531,689 Gain on sale 3,689,616 3,236,616 2,259,979
Geographic Dispersion of Originated Loans. The following table sets forth information regarding the geographic location of properties securing the loans originated by Tribeca in 2004:
PERCENTAGE OF TOTAL LOCATION PRINCIPAL BALANCE PRINCIPAL BALANCE New York $ 66,136,591 33.02% New Jersey 42,943,063 21.44% California 19,115,350 9.54% Florida 13,758,554 6.87% Pennsylvania 11,137,249 5.56% Virginia 8,905,750 4.45% Connecticut 7,802,362 3.90% Maryland 6,765,945 3.38% North Carolina 6,258,225 3.12% Missouri 4,903,000 2.45% All Others 12,575,196 6.28% ------------- ------ $ 200,301,285 100.00% ============= ======
16 GOVERNMENT REGULATION The mortgage lending industry is highly regulated. Our business is regulated by federal, state and local government authorities and is subject to federal, state and local laws, rules and regulations, as well as judicial and administrative decisions that impose requirements and restrictions on our business. At the federal level, these laws, rules and regulations include: - the Equal Credit Opportunity Act and Regulation B; - the Federal Truth in Lending Act and Regulation Z; - Home Ownership and Equity Protection Act, or HOEPA; - the Real Estate Settlement Procedures Act, or RESPA, and Regulation X; - the Fair Credit Reporting Act; - the Fair Debt Collection Practices Act; - the Home Mortgage Disclosure Act and Regulation C; - the Fair Housing Act; - the Telephone Consumer Protection Act; - the Gramm-Leach-Bliley Act; - the Fair and Accurate Credit Transactions Act; - the CAN-SPAM Act; and - the USA Patriot Act. These laws, rules and regulations, among other things: - impose licensing obligations and financial requirements on us; - limit the interest rates, finance charges, and other fees that we may charge; - prohibit discrimination both in the extension of credit and in the terms and conditions on which credit is extended; - prohibit the payment of kickbacks for the referral of business incident to a real estate settlement service; - impose underwriting requirements; - mandate various disclosures and notices to consumers, as well as disclosures to governmental entities; - mandate the collection and reporting of statistical data regarding our customers; - require us to safeguard non-public information about our customers and prohibit or limit sharing of that information; - regulate our collection practices; 17 - require us to combat money-laundering and avoid doing business with suspected terrorists; - restrict the marketing practices we may use to find customers, including restrictions on outbound telemarketing; and - in some cases, impose assignee liability on us as purchaser of mortgage loans as well as the entities that purchase our mortgage loans. Our failure to comply with these laws can lead to: - civil and criminal liability, including potential monetary penalties; - loss of lending licenses or approved status required for continued lending and servicing operations; - demands for indemnification or loan repurchases from purchasers of our loans; - legal defenses causing delay and expense; - adverse effects on the servicer's ability to enforce loans; - the borrower having the right to rescind or cancel the loan transaction; - adverse publicity; - individual and class action lawsuits; - administrative enforcement actions; - damage to our reputation in the industry; - inability to sell or securitize our loans; - loss of the ability to obtain ratings on our securitizations by rating agencies; or - inability to obtain credit to fund our operations. These applicable laws and regulations are subject to administrative or judicial interpretation, but some of these laws and regulations have been enacted only recently or may be interpreted infrequently. As a result of infrequent or sparse interpretations, ambiguities in these laws and regulations may leave uncertainty with respect to permitted or restricted conduct under them. Any ambiguity under a law to which we are subject may lead to non-compliance with applicable regulatory laws and regulations. We actively analyze and monitor the laws, rules and regulations that apply to our business, as well as the changes to such laws, rules and regulations. In 2002, the Federal Reserve Board adopted changes to Regulation C promulgated under the Home Mortgage Disclosure Act. Among other things, the new regulations require lenders to report pricing data on loans with annual percentage rates that exceed the yield on treasury bills with comparable maturities by three percent. The expanded reporting takes effect in 2004 for reports filed in 2005. We anticipate that a majority of our loans will be subject to the expanded reporting requirements. The expanded reporting does not provide for additional loan information such as credit risk, debt-to-income ratio, LTV ratio, documentation level or other salient loan features. As a result, lenders like us are concerned that the reported information may lead to increased litigation as the information could be misinterpreted by third parties. Local, state and federal legislatures, state and federal banking regulatory agencies, state attorneys general offices, the FTC, the Department of Justice, the Department of Housing and Urban Development and state and local governmental authorities have increased their focus on lending practices by some companies, primarily in the 18 subprime lending industry, sometimes referred to as "predatory lending" practices. Sanctions have been imposed by various agencies for practices such as charging excessive fees, imposing higher interest rates than the credit risk of some borrowers warrant, failing to disclose adequately the material terms of loans to borrowers and abrasive servicing and collections practices. HOEPA identifies a category of mortgage loans and subjects such loans to restrictions not applicable to other mortgage loans. Loans subject to HOEPA consist of loans on which certain points and fees or the annual percentage rate, known as the APR, exceed specified levels. Liability for violations of applicable law with regard to loans subject to HOEPA would extend not only to us as the originator, but to the institutional loan purchasers of our loans or to our purchase of loans as well. It is our policy to seek not to originate or purchase loans that violate HOEPA or state and local laws discussed in the following paragraph. Non-compliance with HOEPA and other applicable laws may lead to demands for indemnification or loan repurchases from our warehouse lenders and institutional loan purchasers, class action lawsuits and administrative enforcement actions. Laws, rules and regulations have been adopted, or are under consideration, at the state and local levels that are similar to HOEPA in that they impose certain restrictions on loans on which certain points and fees or the APR exceeds specified thresholds, which generally are lower than under federal law. These restrictions include prohibitions on steering borrowers into loans with high interest rates and away from more affordable products, selling unnecessary insurance to borrowers, flipping or repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans. Compliance with some of these restrictions requires lenders to make subjective judgments, such as whether a loan will provide a "net tangible benefit" to the borrower. These restrictions expose a lender to risks of litigation and regulatory sanction no matter how carefully a loan is underwritten. The remedies for violations of these laws are not based on actual harm to the consumer and can result in damages that exceed the loan balance. In addition, an increasing number of these laws, rules and regulations seek to impose liability for violations on assignees, which may include our warehouse lenders and whole-loan buyers, regardless of whether such assignee knew of or participated in the violation. The continued enactment of these laws, rules and regulations may prevent us from originating certain loans and may cause us to reduce the interest rate or the points and fees on loans that we do originate. These thresholds below which we try to originate or purchase loans create artificial barriers to production and limit the price at which we can offer loans to borrowers and our ability to underwrite, originate, sell and finance mortgage loans. We may decide to originate or purchase a loan that is covered by one of these laws, rules or regulations only if, in our judgment, the loan is made in accordance with our strict legal compliance standards and without undue risk relative to litigation or to the enforcement of the loan according to its terms. If we decide to relax our self-imposed restrictions on originating loans subject to these laws, rules and regulations, we will be subject to greater risks for actual or perceived non-compliance with the laws, rules and regulations, including demands for indemnification or loan repurchases from the parties to whom we broker or sell loans, class action lawsuits, increased defenses to foreclosure of individual loans in default, individual claims for significant monetary damages, and administrative enforcement actions. In addition, the difficulty of managing the risks presented by these laws, rules and regulations may decrease the availability of warehouse financing and the overall demand for subprime loans, making it difficult to fund or sell any of our loans. If nothing else, the growing number of these laws, rules and regulations will increase our cost of doing business as we are required to develop systems and procedures to ensure that we do not violate any aspect of these new requirements. A portion of our mortgage loans are originated through independent mortgage brokers. Mortgage brokers provide valuable services in the loan origination process and are compensated for their services by receiving fees on loans. Brokers may be paid by the borrower, the lender or both. If a borrower cannot or does not want to pay the mortgage broker's fees directly, the loan can be structured so that the mortgage broker's fees are paid from the proceeds of the loan, or the loan can provide for a higher interest rate or higher fees to the lender. Regardless of manner in which the broker is compensated, the payment is intended to only compensate the broker for the services actually performed and the facilities actually provided. RESPA prohibits the payment of fees for the mere referral of real estate settlement service business. This law does permit the payment of reasonable value for services actually performed and facilities actually provided unrelated to the referral. Although we believe that our broker compensation programs comply with all applicable laws and are consistent with long-standing industry practice and regulatory interpretations, in the future new regulatory interpretations or judicial decisions may require us to change our broker compensation practices. Such a change may have a material adverse effect on us and the entire mortgage lending industry. 19 COMPLIANCE, QUALITY CONTROL AND QUALITY ASSURANCE We maintain a variety of quality control procedures designed to detect compliance errors prior to funding. We have a stated anti-predatory lending policy which is communicated to all employees at regular training sessions. In addition, we subject a statistical sampling of our loans to post-funding quality assurance reviews and analysis. We track the results of the quality assurance reviews and report them back to the responsible origination units. Our loans and practices are reviewed regularly in connection with the due diligence that our loan buyers and lenders perform. State regulators also review our practices and loan files and report the results back to us. ENVIRONMENTAL MATTERS In the ordinary course of our business we have from time to time acquired, and we may continue to acquire in the future, properties securing loans that are in default. In addition, loans that we purchase that are initially not in default may subsequently be defaulted on by the borrower. In either case, it is possible that hazardous substances or waste, contamination, pollutants or sources thereof could be discovered on those properties after we acquire them. To date, we have not incurred any environmental liabilities in connection with our OREO, although there can be no guarantee that we will not incur any such liabilities in the future. EMPLOYEES We recruit, hire, and retain individuals with the specific skills that complement our corporate growth and business strategies. As of December 31, 2004, we had 186 full time employees. Of these, 66 were employed by Tribeca, our origination subsidiary. None of our employees are represented by a union or covered by a collective bargaining agreement. We believe our relations with our employees are good. ITEM 2. PROPERTIES. We currently maintain our corporate headquarters on the sixth floor at 6 Harrison Street, New York, New York, where we own a 6,600 square foot condominium unit. In the same building, we have also entered into two subleases for additional space, one of approximately 2,500 square feet of space on the fifth floor, which we sublease from RMTS Associates, LLC, a company that is 80% owned by our Chairman, and one of approximately 2,200 square feet of space on the fourth floor, which we sublease from a third party. These subleases terminate in 2008 and 2005, respectively. We also have two other office locations in the same general vicinity. One is located at 99 Hudson Street, New York, New York where we lease approximately 6,400 square feet of office space under a lease agreement with a term expiring in December 2008. We have also leased approximately 7400 square feet of office space at 185 Franklin Street, New York, New York, which is owned by 185 Franklin Street Development Associates, a limited partnership of which 185 Franklin Street Development Corporation, which is wholly owned by our Chairman, is the general partner. These leases expire in November 2008 and March 2008, respectively. We have also leased two offices for Tribeca in Marlton, New Jersey (approximately 1,400 square feet) and Trivos, Pennsylvania (approximately 1,000 square feet). These leases expire in 2006. On March 4, 2005, we entered into a sublease agreement with Lehman Brothers Holdings Inc. to sublease approximately 33,866 square feet of space at 101 Hudson Street, Jersey City, New Jersey for use as executive and administrative offices. We currently expect the term of the sublease, which is subject to certain conditions, to commence by April 1, 2005. The term of the sublease is through December 30, 2010. 20 We are negotiating with certain of our landlords regarding the cost of terminating certain of our current leases in New York. In addition to the properties described above that we use for the conduct of our business, we own REO in various states that we acquired through acquisition, foreclosure or a deed in lieu. These properties are 1-4 family residences, co-ops, condos or commercial property. We acquire or foreclose on property primarily with the intent to sell it at a profit, or to rent the property until an economically beneficial sale can be made. ITEM 3. LEGAL PROCEEDINGS. We are involved in routine litigation matters incidental to our business related to the enforcement of our rights under mortgage loans we hold, none of which is individually material. In addition, because we originate and service mortgage loans throughout the country, we must comply with various state and federal lending laws and we are routinely subject to investigation and inquiry by regulatory agencies, some of which arise from complaints filed by borrowers, none of which is individually material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On December 29, 2004, the holders of 4,031,044 shares of common stock of the Company, or approximately 66% of the outstanding shares of common stock of the Company, acting by written consent in lieu of a special meeting, pursuant to Section 228 of the General Corporation Law of the State of Delaware, authorized, approved and adopted the Company's fifth amended and restated certificate of incorporation. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information. The Company's common stock is quoted on the Over-The-Counter Bulletin Board ("OTCBB") under the symbol "FCSC". The following table sets forth the bid prices for the common stock on the OTCBB, for the periods indicated. Trading during these periods was limited and sporadic; therefore, the following quotes may not accurately reflect the true market value of the securities. Such prices reflect inter-dealer prices without retail markup or markdown or commissions and may not represent actual transactions. Information for 2004 and 2003 was compiled from information representing the daily inter-dealer bid activity during the period.
2004 Bid 2003 Bid --------------- -------------- High Low High Low ------ ----- ----- ----- First Quarter $ 4.10 $2.97 $1.75 $1.07 Second Quarter $ 4.10 $3.35 $5.25 $1.15 Third Quarter $ 6.50 $3.33 $3.25 $2.75 Fourth Quarter $13.00 $6.41 $3.20 $2.96
As of December 31, 2004, there were approximately 468 record holders of the Company's common stock. Dividend Policy. The Company intends to retain all future earnings that may be generated from operations to help finance the operations and expansion of the Company and accordingly does not plan to pay cash dividends to holders of the common stock during the reasonably foreseeable future. Any 21 decisions as to the future payment of dividends will depend on the earnings and financial position of the company and such factors, as the Company's Management and Board of Directors deem relevant. See Item 12 for certain equity compensation information with respect to equity compensation plans of the Company. RECENT SALES OF UNREGISTERED SECURITIES In October 2004, our new CEO purchased 20,000 shares of common stock at a price of $5.52 per share. In addition, the new CEO received 100,000 restricted shares of our common stock as compensation. The above transaction was a private transaction not involving a public offering and was exempt from registration provisions of the Securities Act of 1933, as amended, or the "Act", pursuant to Section 4(2) thereof. The sale of the securities was without the use of an underwriter, and the certificates representing the shares of common stock bear a restrictive legend permitting transfer thereof only upon registration or under an exemption from registration under the Act. ITEM 6. SELECTED FINANCIAL DATA The selected financial data set forth below as of and for the years ended December 31, 2004, 2003, 2002, 2001 and 2000 have been derived from the Company's audited consolidated financial statements. This information should be read in conjunction with "Item 1. Business" and "Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations", as well as the audited financial statements and notes thereto included in "Item 8. Financial Statements."
2004 2003 2002 2001 2000 ------------- ------------- ------------- ------------- ------------- STATEMENT ON INCOME DATA Revenues $ 80,485,015 $ 57,566,559 $ 46,842,437 $ 37,963,358 $ 29,047,390 Expenses 63,078,705 45,186,102 34,664,987 34,637,210 28,476,727 ------------- ------------- ------------- ------------- ------------- Income before provision for income taxes 17,406,310 12,380,457 12,177,450 3,326,148 570,663 Provision for income taxes 7,900,000 5,695,000 5,514,000 444,000 - ------------- ------------- ------------- ------------- ------------- Net Income $ 9,506,310 $ 6,685,457 $ 6,663,450 $ 2,882,148 $ 570,663 ============= ============= ============= ============= ============= Earnings per share basic $ 1.60 $ 1.13 $ 1.13 $ 0.49 $ 0.10 Earnings per share diluted $ 1.43 $ 1.05 $ 1.07 $ 0.49 $ 0.10 BALANCE SHEET DATA Total Assets $ 891,510,754 $ 476,733,346 $ 424,419,034 $ 334,162,501 $ 243,235,288 Total Liabilities 861,954,872 457,054,040 411,425,185 327,832,102 239,787,037 ------------- ------------- ------------- ------------- ------------- Total Stockholders' Equity $ 29,555,882 $ 19,679,306 $ 12,993,849 $ 6,330,399 $ 3,448,251 ============= ============= ============= ============= ============= Principal $ 811,885,856 $ 465,553,870 $ 435,259,394 $ 331,643,076 $ 255,055,677 Purchase discount (32,293,669) (25,678,165) (22,974,310) (22,248,344) (23,392,400) Allowance for loan losses (89,628,299) (46,247,230) (45,841,651) (33,490,456) (24,086,322) ------------- ------------- ------------- ------------- ------------- Net Notes $ 689,963,888 $ 393,628,475 $ 366,443,433 $ 275,904,276 $ 207,576,955 ============= ============= ============= ============= ============= Allowance for loan losses as a percentage of principal 11.0% 9.9% 10.5% 10.1% 9.4% Purchase discount as a percentage of principal 4.0% 5.5% 5.3% 6.7% 9.2% Loans held for Investment $ 110,496,274 $ 9,536,669 $ - $ - $ - Loans held for sale 16,851,041 27,372,779 22,869,947 28,203,047 8,670,691 Other real estate owed 20,626,156 13,981,665 9,353,669 3,819,673 5,290,053
22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion of our operations and financial condition should be read in conjunction with our financial statements and notes thereto included elsewhere in this Form 10-K. In these discussions, most percentages and dollar amounts have been rounded to aid presentation. As a result, all such figures are approximations. OVERVIEW The following management's discussion and analysis of financial condition and results of operations is based on the amounts reported in the Company's consolidated financial statements. These financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. In preparing the financial statements, management is required to make various judgments, estimates and assumptions that affect the reported amounts. Changes in these estimates and assumptions could have a material effect on the Company's consolidated financial statements. EXECUTIVE LEVEL SUMMARY Net income totaled $9.5 million for 2004, $6.7 million for 2003 and $6.7 million for 2002. Earnings per common share for 2004 were $1.43 on a diluted basis and $1.60 on a basic basis, compared to $1.02 and $1.13 for 2003 and $1.07 and $1.13 for 2002. Our revenues for 2004 increased by 39.8% to $80.5 million, from 2003 revenues of $57.6 million. Net income increased 42.2% to $9.5 million in 2004, from net income of $6.7 million in 2003. During 2004, we closed acquisitions of S&D assets with an aggregate face amount of $652 million, comprised of approximately $548 million of bulk acquisitions, including acquisitions of $310 million from Bank One and $100 million from Master Financial, which were the two largest bulk acquisitions in our history, and $104 million of flow acquisitions. We originated over $200 million of sub prime loans through Tribeca. We grew the size of our total portfolio aggregate net notes receivable, loans held for sale, loans held for investment and REO at the end of 2004 to $838 million from $446 million at the end of 2003. Our total debt outstanding, including senior debt and financing agreements grew to $847 million at the end of 2004 from $450 million at the end of 2003. Our weighted average cost of funds during 2004 increased to 5.0% from 4.8% during 2003. APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES In December 2001, the Securities and Exchange Commission ("SEC") requested that all registrants discuss their most "critical accounting policies" in management's discussion and analysis of financial condition and results of operations. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of the company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While The Company's significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements, the following is a summary of the accounting policies believed by management to be most critical in their potential effect on the Company's financial position or results of operations: ALLOWANCE FOR LOAN LOSSES - The Company performs reviews of its loan portfolio upon purchase, at loan boarding, and on a frequent basis thereafter to segment impaired loans under Statement of Financial Accounting Standards ("SFAS") No. 114. A loan is considered impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the note agreement. An allowance for loan losses is estimated based on the Company's impairment analysis. Management's judgment in determining the adequacy of the allowance for loan losses is based on the evaluation of individual loans within the portfolios, the known and inherent risk 23 characteristics and size of the portfolio, the assessment of current economic and real estate market conditions, estimates of the current value of underlying collateral, past loan loss experience and other relevant factors. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for the underlying collateral when considered necessary. The allowance for loan losses is a material estimate which could change significantly in the near term. PURCHASE DISCOUNT - The Company frequently purchases S&D assets at discounts to unpaid principal balance. The Company accounts for its acquisitions of S&D assets using the guidance provided by the AICPA Practice Bulletin 6, "Amortization of Discounts on Certain Acquired Loans" and, effective January 2005 for acquisitions that are subject to it, the guidance provided by the AICPA Statement of Position 03-03 ("SOP 03-03"), "Accounting for Certain Debt Securities Acquired in a Transfer." The Company purchases portfolios of relatively homogenous S&D assets, pools them with similar, recently originated S&D assets, and records each pool ("Static Pool") at its acquisition cost. Each Static Pool is accounted for as a single unit for recognition of revenue, principal payments and impairment purposes. The difference between the initial allowance for loan losses and the initial discount of a Static Pool is accreted into income as purchase discount based on the level yield method. The amount of purchase discount to be accreted under the level yield method is based on the internal rate of return ("IRR") of the cashflow, or the rate of return that each Static Pool requires to amortize the outstanding purchase discount of such Static Pool to zero over its estimated life. Each Static Pool's IRR is determined by estimating future cash flows no less frequently than on a quarterly basis. The projection of cash flows for purposes of amortizing purchase loan discount is a material estimate, which could change significantly, in the near term. To the extent that the allowance for loan losses decreases, the change is added to purchase discount and accreted into income under the level yield method or taken directly into income to the extent there is no outstanding purchase discount balance. To the extent that the allowance for loan losses increases, the change was historically netted against the outstanding balance of purchase discount (or directly against income if no purchase discount existed). Beginning in January 2005, for acquisitions that are subject to SOP 03-3, if the allowance for loan losses on a Static Pool increases, the outstanding purchase discount of such Static Pool will remain unchanged and an immediate provision for loan losses will be taken against income. NOTES RECEIVABLE - The Company purchases mortgage loans, notes receivable, to be held as long-term investments. Loan purchase discounts are established at the acquisition date. Management must periodically evaluate each of the purchase discounts to determine whether the projection of cash flows for purposes of amortizing the purchase loan discount has changed significantly. Changes in the projected payments are accounted for as a change in estimate and the periodic amortization is prospectively adjusted over the remaining life of the loans. Should projected payments not exceed the carrying value of the loan, the periodic amortization is suspended and either the loan is written down or an allowance for uncollectibility is recognized. The allowance for loan losses is initially established by an allocation of the purchase loan discount based on management's assessment of the portion of purchase discount that represents uncollectable principal. Subsequently, increases to the allowance are made through a provision for loan losses charged to expense. Given the nature of the Company's loan portfolio and the underlying real estate collateral, significant judgment is required in determining periodic amortization of purchase discount, and allowance for loan losses. The allowance is maintained at a level that management considers adequate to absorb potential losses in the loan portfolio. LOANS HELD FOR SALE - The loans held for sale consist primarily of secured real estate first and second mortgages originated by the Company. Such loans held for sale are performing and are carried at lower of cost or market. 24 OTHER REAL ESTATE OWNED - Other real estate owned ("OREO") consists of properties acquired through, or in lieu of, foreclosure or other proceedings and are held for sale and carried at the lower of cost or fair value less estimated costs to sell. Any write-down to fair value, less cost to sell, at the time of acquisition is charged to purchase discount. Subsequent write-downs are charged to operations based upon management's judgment and continuing assessment of the fair value of the underlying collateral. Property is evaluated periodically to ensure that the recorded amount is supported by current fair values and valuation allowances are recorded as necessary to reduce the carrying amount to fair value less estimated cost to sell. Revenue and expenses from the operation of OREO and changes in the valuation allowance are included in operations. Direct costs relating to the development and improvement of the property are capitalized, subject to the limit of fair value of the collateral, while costs related to holding the property are expensed. Gains or losses are included in operations upon disposal. INCOME TAXES - Income taxes are accounted for under Financial Accounting Standards Board Statement No. 109 "Accounting for Income Taxes". This method provides for deferred income tax assets or liabilities based on the temporary difference between the income tax basis of assets and liabilities and their carrying amount in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if management determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003 Revenues increased by $22.9 million or 40%, to $80.5 million during 2004, from $57.6 million during 2003. Revenues includes interest income, purchase discount earned, gains on sale of notes receivable, gain on sale of loans held for sale, gain on sale of REO, gain on holding securities, rental income and other income. Revenue, as a percentage of average assets, was for the fiscal year 11.8% for 2004 as compared with 12.8% for 2003. The difference represented principally our closings towards the latter half of 2004 of the two largest bulk acquisitions in our history. Interest income increased by $16.8 million or 39%, to $59.5 million during 2004 from $42.7 million during 2003. The Company recognizes interest income on notes receivable and loans held for investment, including: (i) interest on performing notes, (ii) interest received with settlement payments on non-performing notes and (iii) the balance of settlements in excess of the carried principal amount. The increase in interest income reflected a 36% increase in the average of the balances of gross notes receivable and loans held for investment and sale at the end of 2004 compared to the end of 2003. Purchase discount earned increased by $4.0 million or 77%, to $9.2 million during 2004 from $5.2 million during 2003. This increase resulted primarily from a 74% increase in gross notes receivable, and the increased prepayments during 2004, which accelerate recognition of the associated purchase discount. The Company received $231 million of principal in 2004 compared with $157 million of principal in 2003. These two contributing factors outweighed the reduction over the past several years, of purchase discount available to be earned as a percentage of our portfolio of purchased notes receivable. Gains on sale of notes receivable increased by $0.6 million or 52%, to $1.7 million during 2004 from $1.1 million during 2003. The Company sold a total of $21.0 million in principal amount of notes receivable during 2004, of which $19.8 million was performing, as compared to $19.4 million during 2003, of which only $11.2 million was performing. 25 Gain on sale of originated loans increased by $0.5 million or 16%, to $3.7 million during 2004 from $3.2 million during 2003. This increase reflected a 14% increase in the principal amount of such loans sold during 2004 to $89.9 million from $79.1 million during 2003. The weighted average margin on sold loans remained constant at 410 basis points during both 2004 and 2003. During 2003, Tribeca's policy was to realize the gains associated with its origination by selling all of its originated loans for margin. In July, 2004, the Company determined for the foreseeable future to retain most of the liberty loans originated by Tribeca, subject to sales from time to time for the same reasons we periodically sell notes receivable in our portfolio. Gain on sale of OREO decreased by $0.5 million or 47% to $0.5 million during 2004 from $1.0 million during 2003. The Company sold 290 OREO properties at a sales price of $23.5 million during 2004 as compared to 231 OREO properties at a sales price of $18.1 million during 2003. This decrease was due to increased costs associated with maintaining the properties and restoring them to appropriate condition for marketing and sales, and the increasing number of the properties that are carried at market value, which are generally lower than the cost at which we acquired the notes or claims resolution of which resulted in our ownership of the OREO. Prepayment penalties and other income increased by $1.6 million or 38%, to $5.8 million during 2004 from $4.2 million during 2003. The increase reflected increases in prepayments during 2004 resulting from the low interest rate environment and the growth in the size of the portfolio, increases in late charges resulting primarily from the growth in the size of the portfolio, and increases in loan application fees due to the growth in the volume of our non-prime loan originations. Operating expenses increased by $17.9 million or 40% to $63.1 million during 2004 from $45.2 million during 2003. Total operating expenses include interest expense, collection, general and administrative expenses, provisions for loan losses, amortization of loan commitment fees and depreciation expense. Interest expense increased by $11.1 million or 51%, to $32.8 million during 2004 from $21.7 million during 2003. This increase reflected an increase in the balance of total debt, including Senior Debt and financing agreements and increases in the costs of funds during 2004, resulting from increases in the index rates. Senior Debt and financing agreements increased by 88% or $397 million to $847 million as of the end of 2004 compared with $450 million as of the end of 2003. The weighted average cost of funds was 5.0% during 2004 and 4.9% during 2003. Collection, general and administrative expenses increased by $5.4 million or 30% to $23.3 million during 2004 from $17.9 million during 2003. The increased costs occurred primarily related to the growth in the level of acquisitions and the size of the portfolio. Increased costs also resulted from a restricted stock grant to our new Chief Executive Officer, a settlement entered into with our former Chief Executive Officer, a settlement in respect of options owing to members of our board of directors for services rendered in previous years that were not issued in such years, and professional fees relating to increased tax and audit fees. Provisions for loan losses, which relate to our purchased loans, increased by $0.5 million or 16%, to $3.7 million during 2004 from $3.2 million during 2003. This increase was primarily due to increased provision for loan losses with respect to certain portfolios, which did not have additional purchase discount that might be moved into provision for loan losses. Provisions for loan losses are incurred as soon as the valuation of the asset diminishes and there is no unamortized discount remaining associated with that asset. Provision for loan losses, expressed as a percentage of principal amounts of notes receivable held at the end of the year, were approximately 0.46% and 0.63% for 2004 and 2003, respectively. Amortization of deferred financing costs increased by $0.8 million or 40%, to $2.8 million during 2004 from $2.0 million during 2003. This increase resulted primarily from the growth in the portfolio and the 26 increased pace of prepayments during 2004, which caused a corresponding increase in the pay down of Senior Debt. Our operating income increased by $5.0 million or 40% to $17.4 million during 2004 from $12.4 million during 2003 for the reasons set forth above. During 2004, the Company had a provision for income taxes of $7.9 million as compared to a provision of $5.7 million in 2003. Our effective tax rates for 2004 and 2003 were 45% and 46%, respectively. YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 Revenues increased by $10.8 million or 23%, to $57.6 million during 2003, from $46.8 million during 2002. Revenue, as a percentage of average assets was 12.8% for 2003 as compared with 12.4% for 2002. Interest income increased by $6.0 million or 16%, to $42.7 million during 2003 from $36.7 million during 2002. The increase reflected a 17.5% increase in the average of the balances of the gross notes receivable and loans held for investment and sale, at the end of the four fiscal quarters of 2004. Purchase discount earned increased by $1.4 million or 37%, to $5.2 million during 2003 from $3.8 million during 2002. This increase reflected primarily the increase in prepayments received in 2003. The Company received $144 million of principal in 2003 compared with $106 million of principal in 2002. Gains on sale of notes receivable increased by $1.0 to $1.1 million during 2003 from $0.1 million during 2002. The Company sold a total of $19.4 million in principal amount of notes receivable during 2003, of which $11.2 million was performing, as compared to $1.1 million in performing notes during 2002. The increase in loan sales reflected our initiating during 2003 a policy of liquidating loans we suspect might be likely to refinance or decline in value often due to interest rate changes in anticipation of such changes. Gain on sale of originated loans increased by $0.9 million or 39%, to $3.2 million during 2003 from $2.3 million during 2002. This increase reflected an 86% increase in the principal amount of such loans sold during 2003 to $79.1 million from $42.5 million during 2002. Gain on sale of OREO increased by $0.2 million or 25% to $1.0 million during 2003 from $0.8 million during 2002. The Company sold 231 OREO properties at a sales price of $18.1 million during 2003 as compared to 105 OREO properties at a sales price of $4.9 million during 2002. The increase in the number of properties sold reflected growth in our OREO inventory due to both an increase in foreclosures and the purchase of a few pools during the year that already had loans in the foreclosure process. Prepayment penalties and other income increased by $1.3 million or 45%, to $4.2 million during 2003 from $2.9 million during 2002. The increase reflected increases in prepayment penalties associated with the increased volume of prepayments during 2003, increases in late charges resulting primarily from the growth in the size of the portfolio, and increase in loan application fees due to the growth in the volume of our non-prime loan originations. Operating expenses increased by $8.9 million or 24% to $45.2 million during 2003 from $36.3 million during 2002, excluding the effects of a special recovery during 2002. Interest expense increased by $2.6 million or 14%, to $21.7 million during 2003 from $19.1 million during 2002. This increase reflected an increase in the balance of total debt, including Senior Debt and financing agreements at the end of 2003. Senior debt and financing agreements increased by 11% or $44 27 million to $451 million at the end of 2003 as compared to $407 million at the end of 2002. The weighted average cost of funds during 2003 was 4.9% and 5.4% during 2002. Collection, general and administrative expenses increased by $5.0 million or 39% to $17.9 million during 2003 from $12.9 million during 2002. The increase in expenses resulted from a variety of different initiatives, including ramping up our Tribeca, our origination subsidiary, upgrading our servicing system, changing and upgrading our property insurance policies, as well as a result of the acquisition and servicing of a greater number of loans. Provisions for loan losses, which related to our purchased loans, increased by $0.5 or 18%, to $3.2 million during 2003 from $2.7 million during 2002. This increase was primarily due to increased provision for loan losses with respect to certain portfolios which did not have additional purchase discount that might be moved into provision for loan losses and the increase in the size of the nonperforming portfolio. Provision for loan losses, expressed as a percentage of principal amount of notes receivable held at the end of the year, were approximately 0.63% and 0.58% for 2003 and 2002, respectively. Amortization of deferred financing costs increased by $0.7 million or 54%, to $2.0 million during 2003 from $1.3 million during 2002. This increase resulted primarily from the increased pace of prepayments in 2003 and the growth in the portfolio which caused a corresponding increase in the pay down of Senior Debt. Our operating income increased by $0.2 million or 2% to $12.4 million during 2003 from $12.2 million during 2002 for the reasons set forth above. During 2003, we had a provision for income taxes of $5.7 million as compared to a provision of $5.5 million in 2002. The effective tax rate for 2003 and 2002 was 46% and 45% respectively. COST OF FUNDS. As of December 31, 2004, the Company owed an aggregate of $808 million ("Senior Debt") to a bank (the "Senior Debt Lender"), which was incurred in connection with the purchase of, and is secured by, the Company's loan portfolios and OREO portfolios. The Company's Senior Debt incurred after March 1, 2001, accrues interest at the Federal Home Loan Bank of Cincinnati ("FHLB") thirty-day advance rate (the "Index") plus a spread of 3.25% (the "Spread"). Senior Debt incurred before March 1, 2001 accrues interest at prime rate plus a margin of between 0% and 1.75%. At December 31, 2004, approximately $21 million of the Senior Debt incurred before March 1, 2001 remained outstanding and will continue to accrue interest at the prime rate plus a margin of between 0% and 1.75%. At December 31, 2004, the weighted average interest rate on Senior Debt was 5.73%. LIQUIDITY AND CAPITAL RESOURCES GENERAL During the year ended December 31, 2004 the Company purchased 12,914 loans, consisting primarily of first and second mortgages, with an aggregate face value of $626 million at an aggregate purchase price of $545 million, or 87% of the face value. These acquisitions were fully funded through Senior Debt in the amount equal to the purchase price plus a 1% loan origination fee. The Company's portfolio of purchased notes receivable at December 31, 2004, had a face amount of $812 million and included net notes receivable of approximately $690 million. Net notes receivable are stated at the amount of unpaid principal, reduced by purchase discount and allowance for loan losses. The Company has the ability and intent to hold its notes until maturity, payoff or liquidation of collateral or may sell certain notes, if it is economically advantageous to do so. 28 At December 31, 2004, the Company held OREO recorded in its consolidated financial statements at $21 million. OREO is recorded at the lower of cost or fair market value less estimated costs of disposal. The Company believes that the OREO inventory held at December 31, 2004 has a net realizable value of approximately $22 million based on market analyses of the individual properties less estimated closing costs. At December 31, 2004, the Company held originated loans for investment of $110 million, which are carried at the amortized cost of the loans, and held originated loans for sale of $17 million, which are carried at the lower of cost or fair market value. CASH FLOW FROM OPERATING, INVESTING AND FINANCING ACTIVITIES As of December 31, 2004, we had cash and cash equivalents of approximately $19 million compared to approximately $14 million at December 31, 2003. The increase was primarily due to an increase in collections on purchased notes receivable and originated loans held for investment, caused primarily by an increase in the portfolio balance in 2004 due to increased acquisitions and originations. Primary sources of cash from operations include payments on purchased notes receivable and originated loans. Substantially all of the assets of the Company are invested in its portfolios of notes receivable, loans held for investment, OREO and loans held for sale. Primary sources of the Company's cash flow for operating and investing activities are borrowings under its Senior Debt facilities, collections on notes receivable and gain on sale of notes and OREO properties. Primary uses of cash include purchases of notes receivable and origination of loans. We rely significantly upon our Senior Lender to provide the funds necessary for the purchase of notes receivable portfolios and the origination of loans. While we have historically been able to finance these purchases and originations, we have not had committed loan facilities in significant excess of the amount we currently have outstanding under our Senior Debt facilities, described below. Net cash used in operating activities was $7 million in 2004, compared to approximately$12 million in 2003. The decrease was primarily due to an increased sales volume of loans held for sale and increased net income, which provided more cash in the Company's operating activities. These increases were partially offset by the origination of mortgage loans held for sale, which were $108 million in 2004 as compared with $97 million in 2003, as well as payment of interest expense, overhead and litigation expense incidental to its collections, and for the foreclosure and improvement of OREO, partially offset by proceeds of $101 million from the sale of originated loans in 2004, as compared with proceeds of $80 million in 2003, and prepayment penalties and other income of approximately $6 million, compared with approximately $4 million in 2003. Net cash used in investing activities was approximately $384 million in 2004, compared to approximately $28 million in 2003. The increase was primarily due to increases in the purchase of notes receivable, which constituted approximately $546 million in 2004 as compared to $214 million in 2003, partially offset by principal collections of notes receivable of $209 million in 2004, as compared with $157 million in 2003, originations of loans held for investments of $92 million as compared to a transfer of $14 million in 2003 and proceeds from sales of notes receivable of $20 million in 2004 compared with $16 million in 2003 and sales of OREO of $20 million in 2004 compared with $16 million in 2003. Net cash provided by financing activities increased to approximately $397 million in 2004, from $44 million in 2003. The increase resulted primarily from a net increase in Senior Debt of $381 million and a net increase in borrowings under financing agreements of $16 million. 29 SENIOR DEBT As of December 31, 2004, the Company owed an aggregate of $808 million to its Senior Debt lender under several loans: Senior Debt Facility General. On October 13, 2004, the Company and all of its subsidiaries other than Tribeca entered into a Master Credit and Security Agreement with Sky Bank, an Ohio banking corporation (the "Bank"). Under the facility as amended, the Company and its subsidiaries that are or become parties to the credit agreement are entitled to request loans to finance the purchase of residential mortgage loans or refinance existing outstanding loans. The credit agreement amended and restated the borrowers' previous loan agreements with the Bank, under which an aggregate principal balance of approximately $747 million was outstanding immediately prior to the execution of the new facility. The facility does not include a commitment to additional lendings, which are therefore subject to the Bank's discretion as well as any regulatory limitations to which the Bank is subject. The facility terminates on October 13, 2006. Interest Rates and Fees. Interest on the loans is payable monthly at a floating rate equal to the highest Federal Home Loan Bank of Cincinnati 30 day advance rate as published daily by Bloomberg under the symbol FHL5LBRI or, "the 30 day advance rate", plus the applicable margin as follows: If the 30 day advance rate is the applicable margin is Less than 2.01% 350 basis points 2.01 to 4.75% 325 basis points Greater than 4.75% 300 basis points
In addition, upon each closing of a subsidiary loan, the Company is required to pay an origination fee equal to 1% of the amount of the subsidiary loan unless otherwise agreed to by the Bank and the subsidiary. Upon repayment of subsidiary loans, the Bank is generally entitled to receive a fee equal to the lesser of (i) one half of one percent (0.50%) or with respect to certain subsidiaries whose loans were originated before 1996, one percent 1% of the original principal balance of the subsidiary loan or (ii) 50% of the remaining cash flows of the pledged mortgage loans related to such subsidiary loan as and when received by the relevant subsidiary after the repayment of the subsidiary loan. In connection with certain subsidiary loans, the Company and the Bank have agreed to specified minimum fees and fee waivers. Principal; Prepayments; Termination of Commitments. The unpaid principal balance of each loan is amortized over a period of ten years, but matures three years after the date the loan was made. Historically the Bank and the Company have routinely agreed to extend the maturities of such loans for additional three-year terms upon their maturity. Each borrower is required to make monthly payments of the principal of its outstanding loans. In the event there is a material and adverse breach of the representations and warranties with respect to a pledged mortgage loan that is not cured within 30 days after notice by the Bank, the Company will be required to prepay the loan with respect to such pledged mortgage loan in an amount equal to the price (as determined by the Bank) at which such mortgage loan could readily be sold. Covenants; Events of Default. The facility contains affirmative, negative and financial covenants customary for financings of this type, including, among other things, a covenant that the Company and its subsidiaries together maintain a minimum net worth of at least $10 million. The agreement contains events of default customary for facilities of this type (with customary grace periods, as applicable). 30 Security. The borrowers' obligations under the credit agreement are secured by a first priority lien on the mortgage loans financed by proceeds of loans made under the credit agreement. The mortgage loans securing each borrower's obligations under the credit agreement also secure each other borrower's obligations under the credit agreement. In addition, pursuant to a lock-box arrangement, the Bank is entitled to receive all sums payable to a subsidiary borrower in respect of any of the collateral. Warehouse Facility General. On September 30, 2003, Tribeca entered into a warehousing credit and security agreement with the Bank. The facility was amended on April 7, 2004. The agreement, as amended, provides for a commitment of $40 million which expires on April 30, 2006. Tribeca is currently discussing with the Bank an increase in the amount of the commitment to $60 million. Interest Rates and Fees. Interest on advances is payable monthly at a rate per annum equal to the greater of (i) a floating rate equal to the Wall Street Journal Prime Rate or (ii) five percent (5%). In addition, Tribeca is required to pay transaction fees equal to $25 for each mortgage loan financed by an advance under the warehouse facility and an annual commitment fee equal to $15,000 multiplied by a fraction the numerator of which is the average monthly unborrowed commitment during the previous year and the denominator of which is $40 million. Principal Payment. Advances are required to be repaid upon the earlier of the termination or expiration of the commitment or within 120 days after the date of the advance or under certain other circumstances. From time to time, by agreement between the Bank and the Company, amounts borrowed under the warehouse facility are transferred to term loans. At the end of each month, 98% of any amounts paid to repay advances are required to be repaid from the Company's senior credit facility with the Bank. Amounts under the facility may be borrowed, repaid and reborrowed by Tribeca from time to time until the warehouse expiration of the commitment. Prepayments; Termination of Commitment. Voluntary prepayments and commitment reductions under the facility are permitted at any time without fee upon proper notice and subject to a minimum dollar requirement. The Bank can terminate the commitment at any time upon 60 days prior notice to Tribeca. The Bank can terminate the facility at any time in the event there is a material adverse change in Tribeca's financial condition. Covenants; Events of Default. The facility contains affirmative, negative and financial covenants customary for financings of this type, including, among other things, maintenance of consolidated net worth requirements, a ratio of total debt to total assets, maintenance of consolidated pretax net income. The credit agreement contains events of default customary for facilities of this type (with customary grace periods, as applicable). Security and Guarantees. The facility is secured by a lien on all of the mortgage loans delivered to the Bank or in respect of which an advance has been made as well as by all mortgage insurance and commitments issued by insurers to insure or guarantee pledged mortgage loans. Tribeca also assigns all of its rights under third-party purchase commitments covering pledged mortgages and the proceeds of such commitments and its rights with respect to investors in the pledged mortgages to the extent such rights are related to pledged mortgages. In addition, we have provided a guaranty of the facility which is secured by a lien on substantially all of our personal property. Availability. As of December 31, 2004, Tribeca had approximately $1.0 million available under the facility. From time to time, Tribeca's business needs require that it borrow amounts at times when there is no availability under the warehousing facility. At such times as the need for advances exceeds availability, Tribeca reduces its outstanding advances by assigning loans borrowed under the warehouse 31 facility to its subsidiaries. As of December 31, 2004 subsidiaries of Tribeca had acquired $78 million of indebtedness from Tribeca. See "Term Loans" below. Term Loans As of December 31, 2004, from time to time, subsidiaries of Tribeca had borrowed $78 million in term loans from the Bank. Interest on the loans is payable, monthly, at a floating rate equal to the highest Federal Home Loan Bank of Cincinnati 30 day advance rate published by Bloomberg under the symbol FHL5LBRI, plus 325 basis points. In addition, upon the closing of each term loan, the applicable borrower pays the Bank a merchant banking fee and the amount of such fee is added to the principal of the loan. The unpaid balance of each term loan is amortized over a period of 20 years, but matures three years after the loan was made. Each term loan is subject to mandatory payment under certain circumstances. Each borrower is required to make monthly payments of the principal of its outstanding loan. Each term loan is secured by a lien on certain promissory notes and hypothecation agreements, as well as all property, monies, securities and other property of the applicable borrower held by, received by or in transit to the Bank. The term loans contain affirmative and negative covenants and events of default customary for financings of this type. Financing Agreements The Company entered into a line of credit with the Bank, under which the Company is permitted to borrow up to approximately $2.5 million at a rate per annum equal to the Bank's prime rate plus two percent. Under this line of credit, interest is payable monthly, the principal amount of each advance is due 9 months after the date of the advance. As of December 31, 2004, and December 31, 2003, $420,000 and $570,000, respectively, were outstanding under this line of credit. Cash advances under this line of credit were used to satisfy senior lien positions and fund capital improvements in connection with foreclosures of certain real estate loans financed by the Company. Management believes the ultimate sale of these properties will satisfy the related outstanding amounts under the line of credit and accrued interest. When available, the Company uses OREO sales proceeds to pay down financing arrangements to help reduce interest expense. The Company has a financing agreement with Citibank, N.A. which entitles the Company to borrow a maximum of $150,000 at a rate per annum equal to Citibank's prime rate plus 1%. As of December 31, 2004 and December 31, 2003, $87,000 and $100,000, respectively, were outstanding pursuant to this agreement. Management believes that sufficient cash flow from the collection of notes receivable will be available to repay the Company's secured obligations and that sufficient additional cash flows will exist, through collections of notes receivable, the sale of loans, sales and rental of OREO or additional borrowing, to repay the current liabilities arising from operations and to repay the long term indebtedness of the Company. FINANCING ACTIVITIES AND CONTRACTUAL OBLIGATIONS Below is a schedule of the Company's contractual obligations and commitments at December 31, 2004: 32
WEIGHTED AVERAGE MINIMUM CONTRACTUAL OBLIGATIONS INTEREST RATE (EXCLUDING INTEREST) CONTRACTUAL OBLIGATION SCHEDULE AS OF 12/31/04 TOTAL LESS THAN 1 YR 1-3 YRS 3-5 YRS THEREAFTER Contractual Obligations Notes Payable 5.73% 807,718,038 143,684,898 639,189,226 23,924,672 919,242 Warehouse Line 7.25% 39,540,205 39,540,205 - - - Rent Obligations - 9,258,980 760,447 2,686,130 2,139,549 3,672,854 Capital Lease Obligations - 572,190 173,332 261,775 137,083 - Employment Agreements - 1,781,750 563,000 650,000 568,750 - ------------- -------------- ------------- ------------ ----------- Total Contractual Cash Obligations $ 858,871,163 $ 184,721,882 $ 642,787,131 $ 26,770,054 $ 4,592,096 ============= ============== ============= ============ ===========
The interest rates on the Notes Payable and the Warehouse Line are indexed to the monthly Federal Home Loan Bank of Cincinnati 30 day LIBOR advance rate and Prime as more fully described herein, and will increase or decrease over time. Minimum contractual obligations are based on minimum required principal payments including balloon maturities of the notes payable and warehouse line. Actual payments will vary depending on cash collections and loan sales as described herein. Historically, the Company and the Bank have extended the maturities and balloon payments. SAFE HARBOR STATEMENT Statements contained herein that are not historical fact may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those projected or suggested in forward-looking statements made by the Company. These factors include, but are not limited to: (i) unanticipated changes in the U.S. economy, including changes in business conditions such as interest rates, and changes in the level of growth in the finance and housing markets; (ii) the status of relations between the Company and its sole Senior Debt Lender and the Senior Debt Lender's willingness to extend additional credit to the Company; (iii) the availability for purchases of additional portfolios; (iv) the availability of non-prime borrowers for the origination of additional loans; and (v) other risks detailed from time to time in the Company's SEC reports. Additional factors that would cause actual results to differ materially from those projected or suggested or suggested in any forward-looking statements are contained in the Company's filings with the Securities and Exchange Commission, including, but not limited to, those factors discussed herein under the caption "Real Estate Risk", which the Company urges investors to consider. The Company undertakes no obligation to publicly release the revisions to such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events, except as other wise required by securities and other applicable laws. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to release publicly the results on any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes and changes in corporate tax rates. A material change in these rates could adversely affect our operating results and cash flows. INTEREST RATE RISK Interest rate fluctuations can adversely affect the Company's income and value of its common shares in many ways and present a variety of risks, including the risk of mismatch between asset yields and borrowing rates, variances in the yield curve and changing prepayment rates. 33 Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Conditions such as inflation, recession, unemployment, money supply and other factors beyond the Company's control may also affect interest rates. Fluctuations in market interest rates are neither predictable nor controllable and may have a material adverse effect on the Company's business, financial condition and results of operations. The Company's operating results will depend in large part on differences between the income from its assets (net of credit losses) and its borrowing costs. Most of the Company's assets, consisting primarily of mortgage notes receivable, generate fixed returns and will have terms in excess of five years. The Company funds the origination and acquisition of a significant portion of these assets with borrowings, which have interest rates that are based on the monthly Federal Home Loan Bank of Cincinnati 30-day advance rate ("FHLB"). In most cases, the income from assets will respond more slowly to interest rate fluctuations than the cost of borrowings, creating a mismatch between yields and borrowing rates. Consequently changes in interest rates, particularly short-term rates may influence the Company's net income. The Company's borrowing under agreements with its Senior Debt Lender bear interest at rates that fluctuate with the FHLB rate of Cincinnati and the prime rate. Based on approximately $787 and $21 million of borrowings outstanding under these facilities at December 31, 2004, a 1% change in FHLB and prime rate would impact the Company's annual net income and cash flows by approximately $4.4 million. Increases in these rates will decrease the net income and market value of the Company's net assets. Interest rate fluctuations that result in interest expense exceeding interest income would result in operating losses. The value of the Company's assets may be affected by prepayment rates on investments. Prepayments rates are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond the Company's control, and consequently, such prepayment rates cannot be predicted with certainty. When the Company originates and purchases mortgage loans, it expects that such mortgage loans will have a measure of protection from prepayment in the form of prepayments lockout periods or prepayment penalties. In periods of declining mortgage interest rates, prepayments on mortgages generally increase. If general interest rates decline as well, the proceeds of such prepayments received during such periods are likely to be reinvested by the Company in assets yielding less than the yields on the investments that were prepaid. In addition the market value of mortgage investments may, because the risk of prepayment, benefit less from declining interest rates than from other fixed-income securities. Conversely, in periods of rising interest rates, prepayments on mortgage generally decrease, in which case the Company would not have the prepayment proceeds available to invest in assets with higher yields. Under certain interest rate and prepayment scenarios the Company may fail to recoup fully its cost of acquisition of certain investments. REAL ESTATE RISK Multi-family and residential property values and net operating income derived from such properties are subject to volatility and may be affected adversely by number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as the over supply of housing). In the event net operating income decreases, a borrower may have difficultly paying the Company's mortgage loan, which could result in losses to the Company. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the Company's mortgage loans, which could also cause the Company to suffer losses. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements required by this Item are included herein, beginning on page F1 of this report. 34 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. (a) Evaluation of Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the period covered by this report. Based on such evaluation, the Company' Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's reports filed or submitted under the Exchange Act. (b) Changes in Internal Controls. There has been no change in the Company's internal control over financial reporting during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting. ITEM 9B. OTHER INFORMATION. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information required under this Item is contained in the Company's definitive proxy statement, which will be filed within 120 days of December 31, 2004, the registrant's most recent fiscal year, and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information required under this Item is contained in the Company's definitive proxy statement, which will be filed within 120 days of December 31, 2004, the registrant's most recent fiscal year, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. Information required under this Item is contained in the Company's definitive proxy statement, which will be filed within 120 days of December 31, 2004, the registrant's most recent fiscal year, and is incorporated herein by reference. 35 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information required under this Item is contained in the Company's definitive proxy statement, which will be filed within 120 days of December 31, 2004, the registrant's most recent fiscal year, and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Information required under this Item is contained in the Company's definitive proxy statement, which will be filed within 120 days of December 31, 2004, the registrant's most recent fiscal year, and is incorporated herein by reference. 36 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES. (a) Documents filed as part of Form 10-K: (1) Financial Statements. The financial statements required by Item 8 are included herein, beginning on page F1 of this report. (2) Financial Statement Schedules. All financial statement schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) Exhibits. Exhibit Number - ------- 3.1 Fifth Amended and Restated Certificate of Incorporation. Incorporated by reference to Appendix A to the Registrant's Definitive Information Statement on Schedule 14C, filed with the Securities and Exchange Commission (the "Commission") on January 20, 2005. 3.2 Amended and Restated By-laws. Incorporated by reference to Appendix B to the Registrant's Definitive Information Statement on Schedule 14C, filed with the Commission on January 20, 2005. 10.1 Master Credit and Security Agreement, dated as of October 13, 2004, between the Registrant and Sky Bank, N.A. Incorporated by reference to Exhibit 10(M) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004, filed with the Commission on November 15, 2004. *10.2 Amendment to the Master Credit and Security Agreement, dated as of December 30, 2004 between the Registrant and Sky Bank, N.A. *10.3 Warehousing Credit and Security Agreement, dated as of September 30, 2003, between Tribeca Lending Corporation and Sky Bank, N.A. *10.4 Letter, dated as of March 24, 2005, from Sky Bank, N.A. to Tribeca Lending Corporation. *10.5 Form of Term Loan and Security Agreement between subsidiaries of Tribeca Lending Corporation and Sky Bank, N.A. 10.6 1996 Stock Incentive Plan, as amended. Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 (File No. 333-122677), filed with the Commission on February 10, 2005. 10.7 Mortgage Loan Purchase and Sale Agreement, dated as of September 24, 2004, between the Registrant and Master Financial, Inc. Incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K, filed with the Commission on October 20, 2004. 10.8 Mortgage Loan Purchase and Sale Agreement, dated as of June 30, 2004, between the Registrant and Bank One, Inc. Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K/A, filed with the Commission on July 16, 2004. *10.9 Employment Agreement, effective as of October 1, 2004, between the Registrant and Jeffrey R. Johnson. 37 *10.10 Registration Rights Agreement, effective as of October 1, 2004, between the Registrant and Jeffrey R. Johnson. *10.11 Restricted Stock Grant Agreement, dated as of October 4, 2004, between the Registrant and Jeffrey R. Johnson. *10.12 Sublease Agreement, dated as of March 4, 2005, between the Registrant and Lehman Brothers Holdings Inc. *21.1 Subsidiaries of the Registrant. *23.1 Consent of Deloitte & Touche LLP. *31.1 Rule 13a-14(a) Certification of Chief Executive Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. *31.2 Rule 13a-14(a) Certification of Chief Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. *32.1 Certification of Chief Executive Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. *32.2 Certification of Chief Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith. 38 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. March 31, 2005 FRANKLIN CREDIT MANAGEMENT CORPORATION By: /s/ JEFFREY R. JOHNSON ------------------------------------- President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.
Signature Title Date /s/ JEFFREY R. JOHNSON President, Chief Executive Officer, Director March 31, 2005 - ---------------------- Jeffrey R. Johnson /s/ ALAN JOSEPH Executive Vice President and Chief Financial Officer March 31, 2005 - --------------- Alan Joseph /s/ KIMBERLY SHAW Vice President and Treasurer March 31, 2005 - ----------------- Kimberly Shaw /s/ THOMAS J. AXON - ------------------ Thomas J. Axon Chairman of the Board and Director March 31, 2005 /s/ MICHAEL BERTASH Director March 31, 2005 - ------------------- Michael Bertash /s/ FRANK EVANS Director March 31, 2005 - --------------- Frank Evans /s/ STEVEN LEFKOWITZ Director March 31, 2005 - -------------------- Steven Lefkowitz /s/ ALLAN R. LYONS Director March 31, 2005 - ------------------ Allan R. Lyons /s/ WILLIAM F. SULLIVAN Director March 31, 2005 - ----------------------- William F. Sullivan /s/ A. GORDON JARDIN Director March 31, 2005 - -------------------- A. Gordon Jardin
39 FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS
PAGE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets at December 31, 2004 and 2003 F-2 Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 F-3 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2004, 2003 and 2002 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 F-5 Notes to Consolidated Financial Statements for the years ended December 31, 2004, 2003 and 2002 F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Franklin Credit Management Corporation New York, New York We have audited the accompanying consolidated balance sheets of Franklin Credit Management Company and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company has determined it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Franklin Credit Management Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America Deloitte & Touche LLP New York, New York March 28, 2005 FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2004 AND 2003
2004 2003 ASSETS CASH AND CASH EQUIVALENTS $ 19,519,659 $ 14,418,876 RESTRICTED CASH 128,612 413,443 NOTES RECEIVABLE: Principal 811,885,856 465,553,870 Purchase discount (32,293,669) (25,678,165) Allowance for loan losses (89,628,299) (46,247,230) ------------- ------------- Net notes receivable 689,963,888 393,628,475 ORIGINATED LOANS HELD FOR SALE 16,851,041 27,372,779 ORIGINATED LOANS HELD FOR INVESTMENT, NET 110,496,274 9,536,669 ACCRUED INTEREST RECEIVABLE 8,506,252 4,332,419 OTHER REAL ESTATE OWNED 20,626,156 13,981,665 OTHER RECEIVABLES 5,366,500 2,893,735 DEFERRED TAX ASSET 583,644 681,398 OTHER ASSETS 10,577,344 3,922,234 BUILDING, FURNITURE AND EQUIPMENT - Net 1,290,442 1,252,711 DEFERRED FINANCING COSTS - Net 7,600,942 4,298,942 ------------- ------------- TOTAL ASSETS $ 891,510,754 $ 476,733,346 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Accounts payable and accrued expenses $ 11,572,764 $ 4,979,806 Financing agreements 39,540,205 23,315,301 Notes payable 807,718,038 427,447,844 Deferred tax liability 3,123,865 1,311,089 ------------- ------------- Total liabilities 861,954,872 457,054,040 ------------- ------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.01 par value; authorized 3,000,000 issued-none - - Common stock, $.01 par value, 22,000,000 authorized shares; issued and outstanding: 6,062,295 in 2004 and 5,916,527 in 2003 60,623 59,167 Additional paid-in capital 7,354,778 6,985,968 Retained earnings 22,140,481 12,634,171 ------------- ------------- Total stockholders' equity 29,555,882 19,679,306 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 891,510,754 $ 476,733,346 ============= =============
See notes to consolidated financial statements F-2 FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002 REVENUES: Interest income $59,481,422 $ 42,699,710 $36,728,735 Purchase discount earned 9,234,896 5,154,601 3,841,927 Gain on sale of notes receivable 1,701,113 1,118,239 139,519 Gain on sale of loans held for sale 3,689,616 3,236,616 2,259,979 Gain on sale of other real estate owned 542,202 1,027,130 796,562 Rental income 42,300 113,255 152,965 Prepayment penalties and other income 5,793,466 4,217,008 2,922,750 ----------- ------------ ----------- 80,485,015 57,566,559 46,842,437 ----------- ------------ ----------- OPERATING EXPENSES: Interest expense 32,795,347 21,672,993 19,127,713 Collection, general and administrative 23,321,659 17,864,786 12,882,135 Recovery of a special charge - (1,662,598) Provision for loan losses 3,705,333 3,164,103 2,713,864 Amortization of deferred financing costs 2,761,476 1,979,208 1,264,112 Depreciation 494,890 505,012 339,761 ----------- ------------ ----------- 63,078,705 45,186,102 34,664,987 ----------- ------------ ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 17,406,310 12,380,457 12,177,450 ----------- ------------ ----------- PROVISION FOR INCOME TAXES 7,900,000 5,695,000 5,514,000 ----------- ------------ ----------- NET INCOME $ 9,506,310 $ 6,685,457 $ 6,663,450 =========== ============ =========== NET INCOME PER COMMON SHARE: Basic $ 1.60 $ 1.13 $ 1.13 =========== ------------ ----------- Diluted $ 1.43 $ 1.02 $ 1.07 =========== ------------ ----------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, BASIC 5,941,462 5,916,527 5,916,527 =========== ============ =========== OUTSTANDING, DILUTED 6,648,381 6,536,639 6,216,337 =========== ============ ===========
See notes to consolidated financial statements. F-3 FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
ADDITIONAL COMMON STOCK PAID-IN RETAINED --------------------- SHARES AMOUNT CAPITAL EARNINGS TOTAL BALANCE, JANUARY 1, 2002 5,916,527 $ 59,167 $ 6,985,968 $ (714,736) $ 6,330,399 Net income - - - 6,663,450 6,663,450 --------- -------- ----------- ------------ ------------ BALANCE, DECEMBER 31, 2002 5,916,527 59,167 6,985,968 5,948,714 12,993,849 Net income - - - 6,685,457 6,685,457 --------- -------- ----------- ------------ ------------ BALANCE, DECEMBER 31, 2003 5,916,527 59,167 6,985,968 12,634,171 19,679,306 --------- -------- ----------- ------------ ------------ Issuance of common stock 145,768 1,206 128,800 130,006 Exercise of options 250 18,500 18,750 Issuance of in-the-money stock options 221,510 221,510 Net income - - - 9,506,310 9,506,310 --------- -------- ----------- ------------ ------------ BALANCE, DECEMBER 31, 2004 6,062,295 $ 60,623 $ 7,354,778 $ 22,140,481 $ 29,555,882 ========= ======== =========== ============ ============
See notes to consolidated financial statements. F-4 FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,506,310 $ 6,685,457 $ 6,663,450 Adjustments to reconcile income to net cash used in operating activities: Gain on sale of notes receivable (1,701,113) (1,118,239) (139,519) Gain on sale of other real estate owned (542,202) (1,027,130) (796,562) Depreciation 494,890 505,012 339,761 Amortization of deferred financing costs 2,761,476 1,979,208 1,264,112 Issuance of options and stock for services rendered 240,110 Proceeds from the sale of and principal collections on loans held for sale-net 100,887,103 80,810,221 53,355,507 Origination of loans held for sale (108,432,590) (97,143,554) (70,444,721) Deferred tax provision 1,910,530 234,343 (128,382) Purchase discount earned (9,234,896) (5,154,601) (3,841,927) Provision for loan losses 3,705,333 3,164,103 2,713,864 Changes in operating assets and liabilities: Accrued interest receivable (4,173,833) (174,804) 638,174 Other receivables (2,472,765) (634,192) (3,045,866) Other assets (6,655,110) (1,087,834) (739,030) Accounts payable and accrued expenses 6,592,959 1,161,249 (411,646) ------------- ------------- ------------- Net cash used in operating activities (7,113,798) (11,800,761) (14,572,785) ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) decrease in restricted cash 284,831 (219,440) (91,440) Purchase of notes receivable (546,269,608) (213,638,801) (184,090,904) Principal collections on notes receivable 209,206,383 156,924,859 110,541,717 Principal collections on loans held for investment 8,693,192 - - Origination of loans held for investment (92,818,695) - - Investment in marketable securities - (203,771) - Acquisition and loan fees (5,309,462) (2,564,246) (2,065,626) Proceeds from sale of other real estate owned 20,856,448 16,407,503 7,053,926 Proceeds from sale of loans held for investment 1,233,122 Proceeds from sale of notes receivable 20,241,957 15,648,149 1,000,083 Purchase of building, furniture and fixtures (527,585) (650,858) (295,455) ------------- ------------- ------------- Net cash used in investing activities (384,409,417) (28,296,605) (67,947,699) ------------- ------------- -------------
Continued on next page F-5 FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002 CONTINUED FROM PREVIOUS PAGE CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable 663,023,803 226,367,253 205,224,166 Principal payments of notes payable (282,753,609) (194,185,553) (123,901,830) Proceeds from financing agreements 206,219,638 101,322,968 74,886,326 Payments on financing agreements (189,994,734) (89,565,036) (70,871,468) Proceeds from exercise of options 18,500 Proceeds from common stock purchase 110,400 - - Principal payments of subordinated debentures - - (24,262) ------------ ------------ ------------ Net cash provided by financing activities 396,623,998 43,939,632 85,312,932 ------------ ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 5,100,783 3,842,266 2,792,448 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 14,418,876 10,576,610 7,784,162 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 19,519,659 $ 14,418,876 $ 10,576,610 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash payments for interest $ 30,296,647 $ 21,204,660 $ 19,404,197 ============ ============ ============ Cash payments for taxes $ 7,849,900 $ 5,713,700 $ 5,425,000 ============ ============ ============ Non-cash investing and financing activity: Transfer of loans from held for sale to loans held for investment $ 18,067,224 $ 13,721,717 - ============ ============ ============
F-6 FRANKLIN CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 1. ORGANIZATION AND BUSINESS As used herein references to the "Company", FCMC", "we", "our" and "us" refer to Franklin Credit Management Corporation, collectively with its subsidiaries. The Company is a specialty consumer finance company primarily engaged in the acquisition, origination, servicing and resolution of performing, sub-performing and non-performing residential mortgage loans. The Company purchases and originates loans primarily on the basis of the borrower's ability and willingness to repay the mortgage loan, the borrower's historical pattern of debt repayment and the adequacy of the collateral securing the loan. FCMC's loan investment strategy focuses on acquiring loans made to borrowers who generally do not meet conforming underwriting guidelines because of higher loan-to-value ratios, the nature or absence of income documentation, limited credit histories, high levels of consumer debt or past credit difficulties. Through our wholly-owned subsidiary, Tribeca Lending Corp., the Company also originates non-prime mortgage loans. In both cases, the Company holds and services a substantial majority of loans through resolution. As of December 31, 2004, the Company had purchased and originated in excess of $2.2 billion in mortgage loans, $939 million of which the Company held in our portfolio and serviced as of December 31, 2004. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates of the Company are allowance for loan losses. The Company's estimates and assumptions primarily arise from risks and uncertainties associated with interest rate volatility and credit exposure. Although management is not currently aware of any factors that would significantly change its estimates and assumptions in the near term, future changes in market trends and conditions may occur which could cause actual results to differ materially. RECLASSIFICATION- Certain prior year's amounts have been reclassed to conform to current year presentation. OPERATING SEGMENTS- Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments of an Enterprise and Related Information requires companies to report financial and descriptive information about their reportable operating segments, including segment profit or loss, certain specific revenue and expense items, and segment assets. The Company is currently operating in F-7 two business segments: (i) portfolio asset acquisition and resolution; and (ii) mortgage banking. (See note 9) EARNINGS PER SHARE- Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding, including the dilutive effect, if any, of stock options outstanding, calculated under the treasury stock method. CASH AND CASH EQUIVALENTS - Cash and cash equivalents includes cash and investments with original maturities of three months or less, with the exception of restricted cash. The Company maintains accounts at banks, which at times may exceed federally insured limits. The Company has not experienced any losses from such concentrations. NOTES RECEIVABLE AND INCOME RECOGNITION - The notes receivable portfolio consists primarily of secured real estate mortgage loans purchased from financial institutions, and mortgage and finance companies. Such notes receivable are performing, non-performing or sub-performing at the time of purchase and are usually purchased at a discount from the principal balance remaining. Notes receivable are stated at the amount of unpaid principal, reduced by purchase discount and allowance for loan losses. The Company has the ability and intent to hold these notes until maturity, payoff or liquidation of the collateral. Impaired notes receivable are measured based on the present value of expected future cash flows discounted at the note's effective interest rate or, as a practical expedient, at the observable market price of the note receivable or the fair value of the collateral if the note is collateral dependent. The Company periodically evaluates the collectability of both interest and principal of its notes receivable to determine whether they are impaired. A note receivable is considered impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the note agreement. In general, interest on the notes receivable is calculated based on contractual interest rates applied to daily balances of the principal amount outstanding using the accrual method. Accrual of interest on notes receivable, including impaired notes receivable, is discontinued when management believes, after considering economic and business conditions and collection efforts, that the borrowers' financial condition is such that collection of interest is doubtful. When interest accrual is discontinued, all unpaid accrued interest is reversed. Subsequent recognition of income occurs only to the extent payment is received, subject to management's assessment of the collectability of the remaining interest and principal. A non-accrual note is restored to an accrual status when it is no longer delinquent and collectability of interest and principal is no longer in doubt and past due interest is recognized at that time. Loan purchase discounts are amortized into income using the interest method over the period to maturity. The interest method recognizes income by applying the effective yield on the net investment in the loans to the projected cash flows of the loans. Discounts are amortized if the projected payments are probable of collection and the timing of such collections is reasonably estimable. The projection of cash flows for purposes of amortizing purchase loan discount is a material estimate, which could change significantly, in the near term. Changes in the projected payments are accounted for as a change in estimate and the periodic amortization is prospectively adjusted over the remaining life of the loans. In the event projected payments do not exceed the carrying value of the loan, the periodic amortization of purchase discount is suspended and either the loan is written down or an allowance for uncollectibility is recognized. F-8 ALLOWANCE FOR LOAN LOSSES - The Company performs reviews of its loan portfolio upon purchase, at loan boarding, and on a frequent basis thereafter to segment impaired loans under Statement of Financial Accounting Standards ("SFAS") No. 114. A loan is considered impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the note agreement. An allowance for loan losses is estimated based on the Company's impairment analysis. Management's judgment in determining the adequacy of the allowance for loan losses is based on the evaluation of individual loans within the portfolios, the known and inherent risk characteristics and size of the portfolio, the assessment of current economic and real estate market conditions, estimates of the current value of underlying collateral, past loan loss experience and other relevant factors. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for the underlying collateral when considered necessary. The allowance for loan losses is a material estimate, which could change significantly, in the near term. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on notes receivable, future additions to the allowance or write-downs may be necessary based on changes in economic conditions. An allowance of $89,628,299 and $46,247,230 is included in notes receivable at December 31, 2004 and 2003, respectively. ORIGINATED LOANS HELD FOR SALE- The loans held for sale consists primarily of secured real estate first and second mortgages originated by the Company. Such loans held for sale are performing and are carried at lower of cost or market. The gain/loss on sale is recorded as the difference between the carrying amount of the loan and the proceeds from sale on a loan-by-loan basis. The Company records a sale upon settlement and when the title transfers to the seller. ORIGINATED LOANS HELD FOR INVESTMENT - In the second quarter of 2003, the Company adopted a strategy to originate loans for its portfolio and for sale. As a result, certain loans were transferred from "Loans held for Sale" to "Loans held for Investment" at lower of cost or market value. At the date of transfer, the estimated market value of the loans transferred was greater than cost, and therefore, the loans were transferred at amortized cost. Originated loans held for investment consists primarily of secured real estate first and second mortgages originated by the Company. Such loans are performing and are carried at the amortized cost of the loan. OTHER REAL ESTATE OWNED - Other real estate owned ("OREO") consists of properties acquired through, or in lieu of, foreclosure or other proceedings and are held for sale and carried at the lower of cost or fair value less estimated costs to sell. Any write-down to fair value, less cost to sell, at the time of acquisition is charged to purchase discount. Subsequent write-downs are charged to operations based upon management's continuing assessment of the fair value of the underlying collateral. Property is evaluated periodically to ensure that the recorded amount is supported by current fair values and valuation allowances are recorded as necessary to reduce the carrying amount to fair value less estimated cost to sell. Revenue and expenses from the operation of OREO and changes in the valuation allowance are included in operations. Direct costs relating to the development and improvement of the property are capitalized, subject to the limit of fair value of the collateral, while costs related to holding the property are expensed. Gains or losses are included in operations upon disposal. BUILDING, FURNITURE AND EQUIPMENT - Building, furniture and equipment is recorded at cost net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 40 years. Maintenance and repairs are expensed as incurred. F-9 DEFERRED FINANCING COSTS - Costs which include origination fees and incurred in connection with obtaining financing are deferred and are amortized over the term of the related loan. RETIREMENT PLAN - The Company maintains a savings plan, which is intended to qualify under Section 401(k) of the Internal Revenue Code. All employees are eligible to be a participant in the plan. The plan provides for voluntary contributions by participating employees in amounts up to 20% of their annual compensation, subject to certain limitations. Currently, the Company matches 50% of the first 3% of the employee's contribution. INCOME TAXES - Income taxes are accounted for under SFAS No. 109 Accounting for Income Taxes which requires an asset and liability approach in accounting for income taxes. This method provides for deferred income tax assets or liabilities based on the temporary difference between the income tax basis of assets and liabilities and their carrying amount in the consolidated financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when management determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment of the changes. PREPAYMENTS AND OTHER INCOME - Prepayments and other income consists of prepayment penalties, application fees on originated loans, late charges, and other miscellaneous income. Such income is recognized on a cash basis. RENTAL INCOME - The Company rents out certain OREO properties. Rental income is recognized on a accrual basis where a lease exists and a cash basis if no lease exists. FAIR VALUE OF FINANCIAL INSTRUMENTS - SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of fair value information of financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Statement No. 107 excludes certain financial instruments and all non-financial assets and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: a. CASH, RESTRICTED CASH, ACCRUED INTEREST RECEIVABLES, OTHER RECEIVABLE AND ACCRUED INTEREST PAYABLE - The carrying values reported in the consolidated balance sheets are a reasonable estimate of fair value. b. NOTES RECEIVABLE - Fair value of the net note receivable portfolio is estimated by discounting the estimated future cash flows using the interest method. The fair value of notes receivable at December 31, 2004 and 2003 was equivalent to their carrying value of $689,963,888 and $393,628,475, respectively. F-10 c. SHORT-TERM BORROWINGS - The interest rates on financing agreements and other short-term borrowings reset on a monthly basis therefore, the carrying amounts of these liabilities approximate their fair value. The fair value at December 31, 2004 and 2003 was $39,540,205 and $23,315,301, respectively. d. LONG-TERM DEBT - The interest rate on the Company's long-term debt (notes payable) is a variable rate that resets monthly; therefore, the carrying value reported in the balance sheet approximates fair value at $807,718,038 and $427,447,844 at December 31, 2004 and 2003, respectively. COMPREHENSIVE INCOME - SFAS No. 130, Reporting Comprehensive Income defines comprehensive income as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from investments by and distributions to stockholders. The Company had no items of other comprehensive income in 2004, 2003 and 2002 therefore net income was the same as its comprehensive income. ACCOUNTING FOR STOCK OPTIONS- The incentive stock option plan is accounted for under the recognition and measurement principles of Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees and related interpretations. Generally, options are issued with exercise prices at least equal to the market price of the common stock at the grant date, and no compensation expense is recorded. However, during 2004, the Company issued 26,500 stock options to certain board members as compensation for service in prior years as required by the Company's agreement with such board members. These options were issued with exercise prices based on the stock prices in effect in such prior years, which resulted in stock-based compensation expense of approximately $221,510 in 2004, based on the excess of the market price of the common stock at the grant date over the exercise price of the options. Also during 2004, the Company issued 10,000 warrants to a consultant for services rendered. The warrants were issued with an exercise price equal to the market value of the underlying common stock on the date of grant. The fair value of the warrants was de minims at December 31, 2004. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all awards:
2004 2003 2002 Net income - as reported $ 9,506,310 $ 6,685,457 $ 6,663,450 Stock based compensation expense actual $ 99,680 Stock based compensation expense determined under fair value method, net of related tax effects $ (53,362) $ (65,333) $ (78,377) Net income - pro forma $ 9,552,628 $ 6,620,124 $ 6,585,073 =========== =========== ============== Earnings per share: Net income per common share - basic - as reported $ 1.60 $ 1.13 $ 1.13 Net income per common share - basic - pro forma $ 1.61 $ 1.12 $ 1.12 Net income per common share - dilutive - as reported $ 1.43 $ 1.02 $ 1.07 Net income per common share - dilutive - pro forma $ 1.44 $ 1.01 $ 1.06
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2004, 2003 and 2002: F-11
2004 2003 2002 Dividend yield 0% 0% 0% Volatility 83% 97% 139% Risk-free interest rate 5% 5% 5% Weighted average expected lives 5 years 5 years 5 years
During 2004 and 2003 there were 46,500 and 39,000 options granted respectively. RECENT ACCOUNTING PRONOUNCEMENTS We have adopted the disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation--Transition and Disclosure effective December 2002. SFAS 148 amends FASB Statement 123, Accounting for Stock-Based Compensation to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and also amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the methods of accounting for stock based employee compensation and the effect of the method used on reported results. As permitted by SFAS 148 and SFAS 123, we continue to apply the accounting provisions of Accounting Principles Board Opinion Number 25, "Accounting for stock Issued to Employees," and related interpretations, with regard to the measurement of compensation cost for options granted under our Stock Option Plans. In January of 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, Consolidation of Variable Interest Entities, which was amended by Interpretation No. 46(R) in December of 2003. This Interpretation clarifies the application of existing accounting pronouncements to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. As it applies to the Company, Interpretation No. 46(R) became effective for all variable interests in variable interest entities created after December 31, 2003, and to all variable interest entities on March 31, 2004. The adoption of Interpretation No. 46(R) did not have a material impact on the Company's consolidated financial statements. In December 2003, the AICPA issued Statement of Position 03-03 ("SOP 03-03"), "Accounting for Certain Debt Securities Acquired in a Transfer." SOP 03-03 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor's initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. This SOP limits the yield that may be accreted to the excess of the investor's estimate of undiscounted expected principal, interest, and other cash flows over the investor's initial investment in the loan. Subsequent increases in cash flows expected to be collected generally would be recognized prospectively through adjustment of the loan's yield over its remaining life. Decreases in cash flows expected to be collected would be recognized as an impairment on the statement of operations and a corresponding valuation allowance would be created against the investment in receivable portfolios on the statement of financial condition. SOP 03-03 applies to loans acquired in fiscal years beginning after December 15, 2004, and accordingly, we will adopt the provisions of this SOP in the first quarter of 2005. Adoption of SOP 03-03 may result in an increase in our provision for loan losses in future periods but may also result in an increase in purchase discount earned in future periods. F-12 3. NOTES RECEIVABLE, LOANS HELD FOR SALE, PURCHASE DISCOUNT AND ALLOWANCE FOR LOAN LOSSES Notes receivable consist principally of mortgages as of December 31, 2004 and 2003 secured as follows:
2004 2003 Real estate secured $ 777,719,050 $ 436,748,611 Consumer unsecured 10,218,900 8,382,427 Mobile homes 16,413,026 14,871,762 Other 7,534,880 5,551,070 ------------- ------------- 811,885,856 465,553,870 Less: Purchase discount (32,293,669) (25,678,165) Allowance for loan losses (89,628,299) (46,247,230) ------------- ------------- Balance $ 689,963,888 $ 393,628,475 ============= =============
Originated loans held for sale of $16,851,041 and $27,372,779 as of December 31, 2004 and 2003 respectively represent real estate secured mortgages. Originated loans held for investment represent real estate mortgages as of December 31, 2004 and 2003 secured as follows:
2004 2003 Real estate secured $ 110,684,391 $ 9,575,896 Consumer unsecured 58,050 $ 53,816 Mobile homes 84,707 85,240 ------------- ----------- 110,827,148 9,714,952 Less: Allowance for loan losses (330,874) (178,283) ------------- ----------- Balance $ 110,496,274 $ 9,536,669 ============= ===========
In the second quarter of 2003, the Company's holding strategy on certain loans originated changed and, as a result, such loans were transferred from the loans held for sale category into loans held for investment at their amortized cost. This new strategy continued and, as a result, the Company originated $92 million dollars in loans held for investment during 2004. As of December 31, 2004, contractual maturities of notes receivable, originated loans held for sale and originated loans held for investment net of the allowance for loan losses if any, were as follows: F-13
YEAR ENDING NOTES LOANS HELD LOANS HELD DECEMBER 31, RECEIVABLE FOR SALE FOR INVESTMENT 2005 $ 40,891,498 $ 191,384 $ 615,275 2006 36,968,178 206,246 604,867 2007 35,162,873 222,311 643,044 2008 33,310,104 239,681 710,569 2009 45,475,369 255,095 1,158,122 Thereafter 530,449,535 15,736,324 106,764,397 ------------- ------------ ------------- Balance, December 31, 2004 $ 722,257,557 $ 16,851,041 $ 110,496,274 ============= ============ =============
It is the Company's experience that a portion of the notes receivable portfolio may be refinanced or repaid before contractual maturity dates. The above tabulation, therefore, is not to be regarded as a forecast of future cash collections. During the years ended December 31, 2004, 2003 and 2002, cash collections of principal amounts totaled approximately $230,000,000, $157,000,000 and $ 120,000,000 respectively, and the ratios of these cash collections to average principal balances were approximately 32 %, 33% and 29%, respectively. Changes in the allowance of loan losses on notes receivable for the years ended December 31, 2004, 2003 and 2002 are as follows:
2004 2003 2002 Balance, beginning $ 46,247,230 $ 45,841,651 $ 33,490,456 Allowance allocated on purchased portfolio 53,836,759 11,413,944 15,551,056 Net change in allowance (14,161,023) (14,172,468) (5,913,725) Provision for loan losses 3,705,333 3,164,103 2,713,864 ------------ ------------ ------------ Balance, ending $ 89,628,299 $ 46,247,230 $ 45,841,651 ============ ============ ============
The net change in allowance presented above represents chargeoffs, recoveries, and subsequent increases in the allowance for notes receivable. The provision for loan losses represents additional allowance on notes receivable that had no remaining purchase discount. At December 31, 2004, 2003 and 2002, principal amounts of notes receivable included approximately $307,000,000, $126,000,000 and $119,000,000 respectively, of notes for which there was no accrual of interest income. The following information relates to impaired notes receivable, which include all such notes receivable as of and for the years ended December 31, 2004, 2003 and 2002: F-14
2004 2003 2002 Total impaired notes receivable $ 306,840,734 $ 126,341,722 $ 119,134,128 ============= ============= ============= Allowance for loan losses related to impaired notes receivable $ 68,858,866 $ 30,111,278 $ 32,809,607 ============ ============= ============= Average balance of impaired notes receivable during the year $ 216,591,228 $ 122,737,925 $ 96,848,593 ============= ============= ============= Interest income recognized $ 9,959,069 $ 2,196,003 $ 5,866,377 ============= ============= =============
In the normal course of business, the Company restructures or modifies terms of notes receivable to enhance the collectability of certain notes that were impaired at the date of acquisition and were included in certain portfolio purchases. 4. BUILDING, FURNITURE AND EQUIPMENT At December 31, 2004 and 2003, building, furniture and equipment consisted of the following:
2004 2003 Building and improvements $ 1,234,202 $ 1,094,336 Furniture and equipment 2,259,644 1,871,925 ------------ ----------- 3,493,846 2,966,261 Less accumulated depreciation (2,203,404) (1,713,550) ------------ ----------- $ 1,290,442 $ 1,252,711 ============ ===========
5. NOTES PAYABLE Notes payable consists primarily of loans ("Subsidiary Loans") made to the Company by Sky Bank, an Ohio banking corporation (the "Bank" or "Senior Debt Lender") to acquire portfolios of notes receivable ("Pledged Collateral") and term loans made by the Senior Debt Lender to Tribeca to principally finance originated loans held for investment (collectively with Subsidiary Loans, "Notes Payable"). On October 13, 2004, the Company and all of its subsidiaries other than Tribeca entered into a Master Credit and Security Agreement with the Senior Debt Lender ("Credit Agreement"). The Credit Agreement amended and restated the Company's previous loan agreements with the Senior Debt Lender, under which an aggregate principal balance of approximately $747 million was outstanding immediately prior to the execution of the Credit Agreement. Under the Credit Agreement, the Company and its subsidiaries that are or become parties to the Credit Agreement are entitled to request new Subsidiary Loans to finance the purchase of residential mortgage loans or to refinance existing outstanding Subsidiary Loans. The Credit Agreement requires that all cash collections received on the notes receivable be paid to the Senior Debt Lender, subject to the Company being provided with a F-15 monthly allowance to fund operations and pay taxes. The Credit Agreement expires on October 13, 2006. As part of the Credit Agreement, the Company is required to pay the Senior Debt Lender a fee on each Subsidiary Loan contingent on the successful payoff of the Subsidiary Loan ("Success Fee"). After payoff, the Success Fee is based on the lesser of (i) up to 1% of the Subsidiary Loan's original principal balance or (ii) 50% of the remaining cash flows from the Subsidiary Loan's Pledged Collateral. On December 30, 2004, the Company executed an amendment to the Credit Agreement ("Amendment"). As part of the Amendment, the Company agreed that, in addition to any Success Fees previously paid the Senior Debt Lender, and based on an analysis of the likelihood and timing of the payment of the Success Fees due, a minimum aggregate Success Fees of $2,952,830 would be payable in accordance with the terms of the Credit Agreement for certain Subsidiary Loans entered into with the Senior Debt Lender, prior to December 31, 2003. The Amendment did not change the contingent aspects of the Success Fee including the estimated timing of the payments. The Amendment also provides for a separate fee of approximately $198,000 from certain Tribeca originated loans which is to be paid over 23 months beginning in January 2005 and additionally states that no Success Fees would be due on certain other Subsidiary Loans representing approximately $2.2 million of potential Success Fees. At December 31, 2004, the Company estimated and recorded an asset and concurrent liability in the amount of $2,664,145, which represents the net present value of the minimum aggregate Success Fees based on projections of when the fees would likely become due. The amounts are included in other assets and accounts payable and accrued expenses on the accompanying consolidated balance sheet. The Company amortized $100,000 of Success Fees as additional interest expense in the fourth quarter of 2004. The amortization amount was derived using the straight-lined method based on the estimated weighted average life of the relevant Subsidiary Loans and the related Success Fee payments. The unamortized amount will be re-evaluated each reporting period for changes in assumptions. As of December 31, 2004 and 2003, the Company had Notes Payable with an aggregate principal balance of $807,718,038 and 427,447,844, respectively. All Notes Payable are secured by an interest in the notes receivable, payments to be received under the notes receivable and the underlying collateral securing the notes receivable. At December 31, 2004, approximately $21,068,027 of the Notes Payable accrues interest at a rate of prime plus a margin of 0% to 1.75%, $785,499,152 accrue interest at the FHLB 30 day LIBOR advance rate plus 3.50%, and $937,848 accrues interest at the FHLB 30 day LIBOR advance rate plus 3.875%. The remaining $213,012 accrues interest at 8.93%. At December 31, 2004 and 2003, the weighted average interest rate on the Notes Payable was 5.73% and 4.82%, respectively. The above loans also require additional monthly principal reductions based on cash collections received by the Company. Aggregate contractual maturities of all notes payable at December 31, 2004 are as follows: 2005 $ 143,684,898 2006 135,276,228 2007 503,912,998 2008 23,873,616 2009 51,056 Thereafter 919,242 ------------- $ 807,718,038 =============
F-16 6. FINANCING AGREEMENTS The Company and Tribeca have the following financing agreements: Tribeca and the Bank have entered into a warehouse financing agreement, which provides Tribeca with the ability to borrow a maximum of $40,000,000 at a rate equal to the Bank's prime rate or a floor of 5%, if prime is lower than 5%. This credit facility is to be utilized for the purpose of originating mortgage loans. As of December 31, 2004 and 2003, $39,033,806 and $22,646,114, respectively, were outstanding under the warehouse financing agreement and secured by originated loans held for sale. The prime rate at December 31, 2004 was 5.25%. The Company and the Bank have entered into a credit facility, which provides the Company with the ability to borrow a maximum of $2,500,000 at a rate equal to the Bank's prime rate plus two percent per annum. The credit facility may be utilized to pay real estate taxes or to purchase the underlying collateral of certain nonperforming real estate secured loans. Principal repayment of each respective advance is due six months from the date of such advance and interest is payable monthly. As of December 31, 2004 and 2003, $419,663 and $569,451, respectively, were outstanding on this credit facility. The credit facility is secured by a first priority security interest in the respective notes receivable, any purchased real estate, payments received under the notes receivable, and collateral securing the notes of certain loan portfolios. The Company has entered into a line of credit with another bank, which provides the Company with an unsecured line of credit to borrow a maximum of $150,000 at a rate equal to such bank's prime rate plus one percent per annum. As of December 31, 2004, and 2003, $86,736 and $99,736, respectively, were outstanding on this line of credit. The bank's prime rate at December 31, 2004 was 5.25%. F-17 7. INCOME TAX MATTERS The components of the income tax provision for the years ended December 31, 2004, 2003 and 2002 are as follows:
2004 2003 2002 Current provision: Federal $ 4,683,558 $ 4,131,000 $ 3,317,000 State and local 1,305,912 1,036,000 1,043,000 ------------- ------------- ------------- 5,989,470 5,167,000 4,360,000 ------------- ------------- ------------- Deferred provision : Federal 1,452,000 422,000 945,000 State and local 458,530 106,000 209,000 ------------- ------------- ------------- 1,910,530 528,000 1,154,000 ------------- ------------- ------------- Provision $ 7,900,000 $ 5,695,000 $ 5,514,000 ============= ============= =============
The current and deferred income tax provisions include adjustments as a result of the reclassification of certain current and deferred income tax amounts. A reconciliation of the anticipated income tax expense (computed by applying the Federal statutory income tax rate to income before income tax expense) to the provision for income taxes in the accompanying consolidated statements of income for the years ended December 31, 2004, 2003, and 2002 is as follows:
2004 2003 2002 Tax determined by applying U.S. statutory rate to income $ 6,092,208 $ 4,546,000 $ 4,262,000 Increase in taxes resulting from: State and local taxes, net of Federal benefit 1,764,442 1,142,000 1,252,000 Meals and entertainment 43,350 7,000 - ----------- ----------- ----------- $ 7,900,000 $ 5,695,000 $ 5,514,000 =========== =========== ===========
F-18 The tax effects of temporary differences that give rise to significant components of deferred tax assets and deferred tax liabilities at December 31, 2004, and 2003 are presented below: Deferred liabilities: Purchase discount $ 1,690,175 $ 926,596 Deferred cost 1,433,690 384,493 ------------- ------------ Deferred tax liabilities $ 3,123,865 $ 1,311,089 ============= ============ Deferred tax assets: Inventory, repossessed collateral $ 583,644 $ 681,398 ------------- ------------ Deferred tax assets $ 583,644 $ 681,398 ============= ============ Net deferred tax liability $ 2,540,221 $ 629,691 ============= ============
The Company has not recorded a valuation allowance, as the Company has determined that it is more likely than not that all of the deferred tax assets will be realized. 8. STOCK OPTION PLAN During 1996, the Company adopted an incentive stock option plan for certain of its officers and directors. Under the terms of the Plan, as amended, options to purchase an aggregate of up to 1,600,000 shares of the Company's common stock may be granted. Generally, each option has an exercise price at least equal to the market price of the common stock at the time the option is granted. Options become exercisable at various times after the date granted and unless otherwise provided in the applicable option agreements, expire ten years after the date granted. The Company granted 15,000 options to five members of the Board of Directors at market price in May 2004; these options are granted to each board member annually as compensation. In August 2004 5,000 options were also issued to a member of the Company's management team. On December 29, 2004 the Company also granted 26,500 options to certain members of the Board of Directors that represented vested options earned by the directors in prior years but through an oversight were never issued. The weighted average fair value per share of options granted during the year was $5.10. The fair value of the options granted was estimated using the Black-Scholes option-pricing model. The Company granted 39,000 options to five members of the Board of Directors during 2003. The weighted average fair value per share of options granted during the year was $2.41. The fair value of the options granted was estimated using the Black-Scholes option-pricing model. F-19 Transactions in stock options under the plan are summarized as follows:
2004 2003 2002 ---- ---- ---- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE --------- -------- --------- -------- -------- -------- OUTSTANDING OPTIONS AT THE BEGINNING OF YEAR 1,017,500 $ 0.95 978,500 $ 0.90 712,500 $ 1.00 OPTIONS GRANTED 46,500 $ 2.24 39,000 $ 2.25 396,000 $ 0.75 OPTIONS CANCELLED (228,000) $ 0.75 (130,000) $ 1.00 OPTIONS EXERCISED (25,000) $ 0.75 OUTSTANDING OPTIONS AT THE END OF THE YEAR 811,000 $ 1.04 1,017,500 $ 0.95 978,500 $ 0.90
Options outstanding at December 31,
NUMBER RANGE OF EXERCISE PRICE OF OPTIONS: OUTSTANDING $0.75 566,000 $0.85 20,000 $1.04 6,000 $1.15 25,000 $1.56 155,000 $2.25 19,000 $3.55 15,000 $5.50 5,000 ------- TOTAL OPTIONS 811,000 =======
The company has the following warrants outstanding at December 31, 2004:
NUMBER RANGE OF EXERCISE PRICE OF WARRANTS: OUTSTANDING $ 5.00 10,000 $ 1.56 87,000 ------ TOTAL WARRANTS OUTSTANDING 97,000 ======
F-20 9. OPERATING SEGMENTS The Company has two reportable operating segments: (i) portfolio asset acquisition and resolution; and (ii) mortgage banking. The portfolio asset acquisition and resolution segment acquires performing, nonperforming, nonconforming and sub performing notes receivable and promissory notes from financial institutions, mortgage and finance companies, and services and collects such notes receivable through enforcement of original note terms, modification of original note terms and, if necessary, liquidation of the underlying collateral. The mortgage-banking segment originates or purchases for sale and investment purposes residential mortgage loans to individuals whose credit histories, income and other factors cause them to be classified as sub-prime borrowers. The Company's management evaluates the performance of each segment based on profit or loss from operations before unusual and extraordinary items and income taxes. PORTFOLIO ASSET ACQUISITION AND RESOLUTION OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31:
2004 2003 2002 ------------ ------------ ------------ REVENUES: Interest income $ 52,889,964 $ 39,472,458 $ 33,435,447 Purchase discount earned 8,637,055 4,912,686 3,841,927 Gain on sale of notes receivable 1,701,113 1,118,239 139,519 Gain on sale of other real estate owned 448,805 995,899 796,562 Rental income 42,300 113,255 152,965 Other 4,512,999 3,567,165 2,402,977 ------------ ------------ ------------ 68,232,236 50,179,702 40,769,397 ------------ ------------ ------------ OPERATING EXPENSES: Interest expense 29,571,575 20,069,282 17,423,341 Collection, general and administrative 18,377,783 13,741,836 10,646,814 Recovery of a special charge - - (1,662,598) Provision for loan losses 3,369,803 3,100,524 2,612,361 Amortization of deferred financing costs 2,426,826 1,851,339 1,095,529 Depreciation 380,547 428,906 279,616 ------------ ------------ ------------ 54,126,534 39,191,887 30,395,063 ------------ ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES $ 14,105,702 $ 10,987,815 $ 10,374,334 ============ ============ ============
F-21 MORTGAGE BANKING OPERATING FOR THE YEARS ENDED DECEMBER 31,:
2004 2003 2002 ------------ ------------ ------------ REVENUES: Interest income $ 6,591,458 $ 3,227,252 $ 3,293,289 Purchase discount earned 597,841 241,915 - Gain on sale of loans held for sale 3,689,616 3,236,616 2,259,979 Gain on sale of other real estate owned 93,397 31,231 - Other 1,280,467 649,843 519,772 ------------ ------------ ------------ 12,252,779 7,386,857 6,073,040 ------------ ------------ ------------ OPERATING EXPENSES: Interest expense 3,223,772 1,603,711 1,704,372 Collection, general and administrative 4,941,300 4,122,950 2,235,321 Provision for loan loss 335,530 63,579 101,503 Amortization of deferred financing costs 334,651 127,869 168,583 Depreciation 114,342 76,106 60,145 ------------ ------------ ------------ 8,949,595 5,994,215 4,269,924 ------------ ------------ ------------ INCOME BEFORE PROVISION FOR INCOME TAXES $ 3,303,184 $ 1,392,642 $ 1,803,116 ============ ============ ============ OTHER SELECTED SEGMENT RESULTS CONSOLIDATED ASSETS: Portfolio asset acquisition and resolution $754,234,144 $428,436,923 $400,088,702 Mortgage banking 137,276,610 48,296,423 24,330,332 ------------ ------------ ------------ Consolidated assets $891,510,754 $476,733,346 $424,419,034 ============ ============ ============ TOTAL ADDITIONS TO BULIDING, FURNITURE AND FIXTURES: Portfolio asset acquisition and resolution $ 372,011 $ 503,221 $ 253,140 Mortgage banking 155,574 147,637 42,314 ------------ ------------ ------------ Consolidated additions to building, furniture and fixtures $ 527,585 $ 650,858 $ 295,455 ============ ============ ============ CONSOLIDATED REVENUE: Portfolio asset acquisition and resolution $ 68,232,236 $ 50,179,702 $ 40,769,397 Mortgage banking 12,252,779 7,386,857 6,073,040 ------------ ------------ ------------ Consolidated Revenue $ 80,485,015 $ 57,566,559 $ 46,842,437 ============ ============ ============ CONSOLIDATED NET INCOME : Portfolio asset acquisition and resolution $ 7,721,435 $ 5,933,419 $ 5,671,774 Mortgage banking 1,784,875 752,038 991,676 ------------ ------------ ------------ Consolidated Net Income $ 9,506,310 $ 6,685,457 $ 6,663,450 ============ ============ ============
F-22 10. CERTAIN CONCENTRATIONS The following table summarizes geographic locations of mortgage loans held as of December 31, 2004:
PERCENTAGE OF TOTAL LOCATION PRINCIPAL BALANCE - -------- ------------------- Ohio 9.08% New York 7.46% California 7.41% Florida 7.39% Georgia 5.22% New Jersey 5.16% Michigan 4.37% Pennsylvania 4.36% North Carolina 4.20 Texas 4.14% All Others 41.21% ----- 100.00% =====
Such real estate mortgage loans held are collateralized by real estate with a concentration in these regions. Accordingly, the collateral value of a substantial portion of the Company's real estate mortgage loans held and real estate acquired through foreclosure is susceptible to changes in market conditions in these regions. In the event of sustained adverse economic conditions, it is possible that the Company could experience a negative impact in its ability to collect on existing real estate mortgage loans held, or liquidate foreclosed assets in these regions, which could impact the Company's related loan loss estimates. Financing - Substantially all of the Company's existing debt and available credit facilities are with one financial institution. The Company's purchases of new portfolios and financing of its mortgage banking operations are contingent upon the continued availability of these credit facilities. 11. COMMITMENTS AND CONTINGENCIES Operating Leases - Certain secondary office and file space is leased under operating leases. The combined future minimum lease payments at December 31, 2004 are as follows: F-23
YEAR ENDED AMOUNT - ---------- ---------- 2005 $ 760,447 2006 1,332,493 2007 1,353,637 2008 1,203,783 2009 935,767 THEREAFTER 3,672,854 ---------- $9,258,981 ==========
YEAR ENDED AMOUNT - ---------- ---------- 2005 $ 173,332 2006 160,733 2007 101,042 2008 83,091 2009 53,992 --------- $ 572,190 =========
Legal Actions - The Company is involved in legal proceedings and litigation arising in the ordinary course of business. In the opinion of management, the outcome of such proceedings and litigation currently pending will not materially affect the Company's financial statements. During 2003, the Company sold $2,730,605 of loans to one investor and retained the servicing rights. SFAS 140 requires that entities that acquire servicing assets through either purchase or origination of loans and sell or securitize those loans with servicing assets retained must allocate the total costs of the loans to the servicing assets and the loans (without the servicing assets) based on their relative fair values. The amount attributable to the servicing assets was determined to be $20,480 and was capitalized as a servicing asset in other assets in the consolidated balance sheet. During 2004, a significant portion of the serviced portfolio paid off and the Company judged the servicing asset to be immaterial, and wrote off the remaining balance. As of December 31, 2004 the unpaid balances of mortgage loans being serviced by the Company for others were $1,128,460. Mortgage loans serviced for others are not included in the Company's consolidated balance sheet. 12. RELATED PARTY TRANSACTIONS In 1998, Mr. Axon, the Company's Chairman, purchased from the Company, a Florida condominium unit subject to considerable title defects, held by the Company in its OREO available for sale. The consideration included forgiveness of $ 184,335 of indebtedness of the Company to an affiliated F-24 Company and issuance by Mr. Axon of a note to the Company in the amount of $234,165. The note bore interest at a rate of 8% per annum, was secured by the condominium property, and was due June 1, 2001. During 2001, the parties agreed to extend the note until December 31, 2003 and it has since been repaid. During 2000, Mr. Axon purchased from the Company a New York condominium held by the Company in its OREO. The consideration included the issuance by Mr. Axon of a note to the Company in the amount of $165,000. The note bore interest at a rate of 8% per annum, was secured by the condominium property, and was due January 30, 2004. The note has since been repaid. On March 31, 1999, Mr. Steven W. Lefkowitz, a board member, purchased from the Company without recourse a delinquent non-performing note receivable held by the Company. The consideration given included a note for $270,000 payable to the Company. The note bore interest at a rate of 8% per annum, payable monthly, and was secured by a mortgage on real estate. The note has since been repaid. The Company currently leases approximately 2,500 square feet of office space on the fifth floor at Six Harrison Street in New York, New York, from RMTS Associates, LLC, of which Mr. Axon owns 80%. Pursuant to the lease, the Company paid RMTS rent of approximately $50,500 in 2003 and $51,500 in 2004. The Company currently subleases approximately 7,400 square feet of office space at 185 Franklin Street in New York, New York from 185 Franklin Street Development Associates, a limited partnership, of which 185 Franklin Street Development Corp., which is wholly-owned by Mr. Axon, is the general partner. Pursuant to the sublease, the Company paid 185 Franklin Street Development Associates rent of $11,575 per month in 2003 and $11,500 per month in 2004. 13. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) The table below sets forth selected unaudited financial information for each calendar quarter of each the years ended December 31, 2004 and 2003. F-25
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER 2004 Revenue $15,059,765 $15,787,166 $21,965,456 $27,672,629 Operating expenses 11,361,416 12,737,201 17,345,667 21,634,420 ----------- ----------- ----------- ----------- Income before income taxes $ 3,698,349 $ 3,049,965 $ 4,619,789 $ 6,038,209 ----------- ----------- ----------- ----------- Provision for Income taxes 1,665,000 1,409,000 2,102,004 2,723,996 ----------- ----------- ----------- ----------- Net Income $ 2,033,349 $ 1,640,965 $ 2,517,785 $ 3,314,213 =========== =========== =========== =========== Income per common share Basic $ 0.34 $ 0.28 $ 0.43 $ 0.53 =========== =========== =========== =========== Diluted $ 0.30 $ 0.25 $ 0.37 $ 0.48 =========== =========== =========== ===========
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER 2003 Revenue $13,939,228 $13,957,953 $14,057,724 $15,611,654 Operating expenses 10,517,883 11,246,377 11,386,400 12,035,442 ----------- ----------- ----------- ----------- Income before income taxes $ 3,421,345 $ 2,711,576 $ 2,671,324 $ 3,576,212 ----------- ----------- ----------- ----------- Provision for Income taxes 1,573,800 1,282,500 1,215,900 1,622,800 ----------- ----------- ----------- ----------- Net Income $ 1,847,545 $ 1,429,076 $ 1,455,424 $ 1,953,412 =========== =========== =========== =========== Income per common share Basic $ 0.31 $ 0.24 $ 0.25 $ 0.33 =========== =========== =========== =========== Diluted $ 0.30 $ 0.22 $ 0.22 $ 0.30 =========== =========== =========== ===========
14. SUBSEQUENT EVENTS On March 4, 2005, the Company entered into a sublease agreement with Lehman Brothers Holdings Inc. to sublease approximately 33,866 square feet of space at 101 Hudson Street, Jersey City, New Jersey for use as executive and administrative offices. We currently expect the term of the sublease, which is subject to certain conditions, to commence by April 1, 2005. The term of the sublease is through December 30, 2010. We are negotiating with certain of our landlords regarding the cost of terminating certain of our current leases in New York. F-26 EX-10.2 2 y07373exv10w2.txt AMENDMENT TO MASTER CREDIT & SECURITY AGREEMENT Exhibit 10.2 AGREEMENT THIS AGREEMENT (the "Agreement") is entered into as of December 30, 2004, between Franklin Credit Management Corporation, a New York corporation (the "Company" ), having its principal office at Six Harrison Street, New York, New York 10013, and Sky Bank, an Ohio banking corporation (the "Bank"), having an office at 110 East Main Street, Salineville, Ohio 43945. WHEREAS, the Company and the Bank are, inter alia, parties to the Master Credit and Security Agreement dated October 13, 2004 (the "Master Agreement"); and WHEREAS, the Company and the Bank desire to amend and clarify Section 2.10 of the Master Agreement; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Section 2.10 of the Master Agreement provides for the payment of a Success Fee to Sky, generally equal to the lesser of fifty basis points (0.50%) of the original amount of the Company Subsidiary Loan or fifty percent (50%) of the remaining cashflows of the Pledged Mortgage Loans after the payoff of the Company Subsidiary Loan. The Company represents that, in addition to any Success Fees paid to the Bank prior to the date hereof, a minimum aggregate of $2,952,830 in Success Fees will be payable in accordance with the Master Agreement on account of Company Subsidiary Loans originated prior to December 31, 2003. See Schedules A. 2. In addition, the Company represents that additional success fees equal to fifty basis points (0.50%) of the original amount of loans to subsidiaries of Tribeca Lending Corp. originated prior to December 31, 2003 ("Tribeca Success Fees") are to be paid to the Bank. See Schedule B. The Tribeca Success Fees shall be paid in equal monthly installments of $8,000 over a period of 23 months beginning in January of 2005, with a final payment of $13,773 due in December 2006 for a total amount of $197,773. 3. The Company and the Bank agree that no additional Success Fees shall be payable on loans specified in Schedule C and Schedule D after the date of this Agreement. 4. The Company and the Bank agree to amend the Master Agreement as soon as practicable under Section 11.6 thereof, to conform the Master Agreement with the provisions of this Agreement. 5. Capitalized terms not defined herein have the meaning prescribed by the Master Agreement. 6. Schedules A, B, C and D are specifically incorporated by reference into and made part of this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date first above written. COMPANY: FRANKLIN CREDIT MANAGEMENT CORPORATION By___________________________________ Printed Name: Title: BANK: SKY BANK By___________________________________ Jerry S. Sutherin Vice President 2 EX-10.3 3 y07373exv10w3.txt WAREHOUSING CREDIT AND SECURITY AGREEMENT Exhibit 10.3 WAREHOUSING CREDIT AND SECURITY AGREEMENT between TRIBECA LENDING CORPORATION Borrower and SKY BANK Lender TABLE CONTENTS
SECTION HEADING PAGE ARTICLE I DEFINITIONS.............................................. 1 Section Definitions........................................ 1 Section 1. Other Definitional Provisions...................... 1 ARTICLE II THE CREDIT............................................... 5 Section 2.1. The Commitment..................................... 5 Section 2.2. Procedures for Obtaining Advances.................. 5 Section 2.2. Note............................................... 6 Section 2.4. Interest and Transaction Fees...................... 6 Section 2.5. Principal Payments................................. 7 Section 2.6. Expiration and/or Termination of Commitment........ 7 Section 2.7. Method of Making Payment; Reduction in Commitment.. 8 Section 2.8. Late Payments Fees................................. 9 Section 2.9. Net Payments....................................... 9 Section 2.10. Commitments Fees................................... 9 Section 2.11. Premiums and Points................................ 9 ARTICLE III COLLATERAL............................................... 9 Section 3.1. Assignment and Grants of Security.................. 9 Section 3.2. Guaranties......................................... 10 Section 3.3. Delivery of Addition Collateral or Mandatory Prepayment......................................... 10 Section 3.4. Right of Redemption form Pledge.................... 10 Section 3.5. Collection and Servicing Rights.................... 10 Section 3.6. Return of Collateral at End of Commitment.......... 11 ARTICLE IV CONDITIONS PRECEDENT..................................... 11 Section 4.1. Initial Advance.................................... 11 Section 4.2. Each Advance....................................... 11 ARTICLE V REPRESENTATIONS AND WARRANTIES........................... 13
Section 5.1. Organization Good Standing; Subsidiaries........... 13 Section 5.2. Authorization and Enforceability................... 13 Section 5.3. Approvals.......................................... 14 Section 5.4. Financial Conditions............................... 14 Section 5.5. Litigation......................................... 14 Section 5.6. Compliance with Laws............................... 14 Section 5.7. Regulations U...................................... 14 Section 5.8. Investment Company Act............................. 14 Section 5.9. Payment Taxes...................................... 15 Section 5.10. Agreements......................................... 15 Section 5.11. Title Of Properties................................ 15 Section 5.12. ERISA.............................................. 15 Section 5.13. Eligibility........................................ 15 Section 5.14. Special Presentations Concerning Collateral........ 15 ARTICLE VI AFFIRMATIVE CONVENANTS................................... 18 Section 6.1. Payment of Note.................................... 18 Section 6.2. Financial Statements and Other Reports............. 18 Section 6.3. Maintenance of Existence; Conduct Business......... 19 Section 6.4. Compliance with Applicable Laws.................... 20 Section 6.5. Inspection of Property and Books................... 20 Section 6.6. Notice............................................. 20 Section 6.7. Payment of Debt, Taxes, etc........................ 20 Section 6.8 Insurance.......................................... 21 Section 6.9. Insured Closings................................... 21 Section 6.10. Purchased Loans.................................... 21 Section 6.11. Other Loan Obligations............................. 21 Section 6.12. Use of Proceeds of Advances........................ 21 Section 6.13. Special Affirmative Covenants Concerning Collateral......................................... 21 ARTICLE VII NEGATIVE CONVENANTS...................................... 23 Section 7.1. Contingent Liabilities............................. 23 Section 7.2. Merger; Sale of Assets; Acquisitions; Change in Control; Change of Senior Management............... 23 Section 7.3. Loss of Eligibility................................ 23 Section 7..4. Special Negative Covenant Concerning Collateral.... 23 ARTICLE VIII DEFAULTS REMEDIES........................................ 23 Section 8.1. Events of Default.................................. 23 Section 8.2 Remedies........................................... 25 Section 8.3. Application of Proceeds............................ 27 Section 8.4. Bank Appointed Attorney-in-Fact.................... 28
LIT Section 8.5 Right of Set-off................................... 28 Section 8.6. Reasonable Assurances.............................. 28 ARTICLE IX REIMBURSEMENT OF EXPENSES; INDEMNITY..................... 28 Section 9.1. Cost of Enforcement................................ 29 Section 9.2. Payments of Taxes.................................. 29 Section 9.3. Indemnification.................................... 29 ARTICLE X DELIVERIES OF COLLATERAL DOCUMENTS....................... 29 ARTICLE IX MISCELLANEOUS............................................ 30 Section 11.1. Relationship of Parties............................ 30 Section 11.2. Recourse........................................... 30 Section 11.3. Notices............................................ 30 Section 11.4. Terms Binding Upon Successors; Survival............ 31 Section 11.5. Assignment......................................... 31 Section 11.6. Amendments......................................... 31 Section 11.7. No Waiver; Remedies Cumulative..................... 31 Section 11.8. Invalidity......................................... 31 Section 11.9. Participants....................................... 31 Section 11.10. Integration........................................ 32 Section 11.11. Additional Instruments, etc........................ 32 Section 11.12. Governing Law...................................... 32 Section 11.13. Company Information................................ 32 Section 11.14. Counterparts....................................... 32 Exhibit A Promissory Note Exhibit B Guaranty of Franklin Credit Management Corporation Exhibit C Advance Request Form Exhibit D Procedures and Documentation for Warehouse Residential Mortgage Loans Exhibit E Bailee Letter Exhibit F Power of Attorney Exhibit G Underwriting Standards Exhibit H Officer's Certificate
LIT WAREHOUSING CREDIT AND SECURITY AGREEMENT THIS WAREHOUSING CREDIT AND SECURITY AGREEMENT (the "Agreement") is entered into as of September 30, 2003, between Tribeca Lending Corporation, a New York corporation (the "Company" or the "Borrower"), having its principal office at Six Harrison Street, New York, New York 10013, and Sky Bank, an Ohio banking corporation (the "Bank"), having an office at 110 East Main Street, Salineville, Ohio 43945. WHEREAS, the Company has requested the Bank, and the Bank is willing, to extend a revolving warehousing line of credit to the Company to finance the making and the purchasing of residential mortgage loans, and the parties desire to set forth herein the terms and conditions under which Advances under the revolving warehousing line of credit shall be made and security provided for the repayment thereof~ Now, THEREFORE, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1. Defined Terms. Capitalized terms defined below or elsewhere in THIS Agreement (including the Exhibits hereto) shall have the following meanings: "Advance" means a disbursement by the Bank under the Commitment, including readvances of funds previously advanced to the Company and repaid to the Bank. "Advance Request" has the meaning set forth in Section 2.2(a) hereof "Affiliate" has the meaning set forth in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "Agreement" means this Warehousing Credit and Security Agreement, either as originally executed or as it may from time to time be supplemented, modified or amended. "Bank" has the meaning set forth in the first paragraph of this Agreement. "Business Day" means any day excluding Saturday, Sunday and any day which is a legal holiday for banks under the laws of the State of Ohio. "Collateral" has the meaning set forth in Section 3.1 hereof "Collateral Documents" has the meaning set forth in Section 2.2(b) hereof "Commitment" has the meaning set forth in Section 2.1(a) hereof. "Company" has the meaning set forth in the first paragraph of this Agreement. 1 "Conventional Mortgage Loan" means a Mortgage Loan other than a FHA-insured or VA-guaranteed Mortgage Loan. "Custodian" means the organization which holds documents relating to pooled Mortgage Loans on the Company's behalf "Debt" means, with respect to any Person, at any date (a) all indebtedness or other obligations of such Person which, in accordance with GAAP, would be included in determining total liabilities as shown on the liabilities side of a balance sheet of such Person at such date; (b) all indebtedness or other obligations of such Person for borrowed money or for the deferred purchase price of property or services; (c) all indebtedness or other obligations of any other Person for borrowed money or for the deferred purchase price of property or services in respect of which such Person is liable, contingently or otherwise, to pay or advance money or property as guarantor, endorser, or otherwise (except as endorser of negotiable instruments for collection in the ordinary course of business), or which such Person has agreed to purchase or otherwise acquire; and (d) all indebtedness for borrowed money or for the deferred purchase price of property or services secured by a Lien on any property owned or being purchased by such Person (even though such Person has not assumed or otherwise become liable for the payment of such indebtedness). "Default" means the occurrence of any event or existence of any condition which, but for the giving of notice, the lapse of time, or both, would constitute an Event of Default. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time and any successor statute. "Event of Default" means any of the conditions or events set forth in Section 8.1 hereof "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute. "FHA" means The Federal Housing Administration of the United States Department of Housing and Urban Development and any successor thereto. "FHLMC" means The Federal Home Loan Mortgage Corporation and any successor thereto. "Floating Rate" has the meaning set forth in Section 2.4(a) hereof "FNMA" means The Federal National Mortgage Association and any successor thereto. "GAAF" means generally a accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination. "GNMA" means Government National Mortgage Association or any successor thereto. 2 "HUD" means the United States Department of Housing and Urban Development or any successor thereto. `Indemnified Liabilities "has the meaning set forth in Section 9.3 hereof "Index" has the meaning set forth in Section 2.4 (a) hereof "Insurer" means FHA, VA or a private mortgage insurer, as applicable. "Internal Revenue Code" means the Internal Revenue Code of 1986, or any subsequent federal income tax law or laws, as any of the foregoing have been or may from time to time be amended. "Investor" means a financially responsible institution (which is deemed acceptable by the Bank in its s ole discretion) purchasing Mortgage Loans from the Company pursuant to a Purchase Commitment. "Lien" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest). "Margin Stock" has the meaning assigned to that term in Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time. "Mortgage" means either (1) a first-lien mortgage, deed of trust, security deed or similar instrument on improved real property; or (2) a second-lien mortgage, deed of trust, security deed or similar instrument on improved real property insured under Title I of the National Housing Act, 12 U.S.C. 1701 et seq. "Mortgage Loan" means any loan evidenced by a Mortgage Note. A Mortgage Loan, unless otherwise expressly stated herein, means a Residential Mortgage Loan. "Mortgage Loan Documents" means the Mortgage, Mortgage Note, credit and closing packages, disclosures, and all other files, records and documents necessary to establish the eligibility of the Mortgage Loans for mortgage insurance or guarantee by an Insurer or for purchase by an Investor. "Mortgage Note" means a note secured by a Mortgage and evidencing a Mortgage Loan. "Mortgage Note Amount" means the outstanding unpaid principal amount of a Mortgage Note at the time such Mortgage Note is pledged to the Bank. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 400l(a)(3) of ERISA which is maintained for employees of the Company or a Subsidiary of the Company. "Note" has the meaning set forth in Section 2.3 hereof "Notices" has the meaning set forth in Section 11.3. "Officers' Certificate" means a certificate executed on behalf of the Company by its vice 3 president, cashier or other appropriate officer. "Person" means and includes natural persons, corporations, limited liability companies, partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust land trusts, business trusts or other organizations, whether or not legal entities, and companies, governmental agencies and political subdivisions thereof. "Plans" has the meaning set forth in Section 5.12 hereof "Pledged Mortgages" has the meaning set forth in Section 3.1(a) hereof "Purchase Commitment" means a written commitment, in form and substance reasonably satisfactory to the Bank, issued in favor of the Company by an Investor pursuant to which that Investor commits to purchase one or more Mortgage Loans, along with the related correspondent or whole loan purchase agreement by and between the Company and the Investor, in form and substance reasonably satisfactory to the Bank, governing the terms and conditions of any such purchases. "Redemption Amount" has the meaning set forth in Section 3.3 hereof `Residential Mortgage Loan "means a Mortgage Loan secured by a Mortgage covering improved real property containing one- to four-family residences. "Statement Date" has the meaning set forth in Section 4.1(a~(6) hereof "Subsidiary" means any corporation, association or other business entity in which more than fifty percent (50%) of the total voting power or shares of stock entitled to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more of the other Subsidiaries of that Person or a combination thereof "VA" means the Department of Veterans Affairs and any successor thereto. "Wet Settlement" means a closing or settlement of a Residential Mortgage Loan wherein the Bank is requested to make an advance to the Company based upon delivery of the Collateral Documents to a third person as agent for or on behalf of the Bank, but prior to examination of the Collateral Documents by the Bank. Section 1.2. Other Definitional Provisions. (a) Accounting terms not otherwise defined herein shall have the meanings given them under GAAP. (b) Defined terms may be used in the singular or the plural, as the context requires. 4 ARTICLE II THE CREDIT Section 2.1. The Commitment. (a) Subject to the terms and conditions of this Agreement and provided no Default has occurred and is continuing, the Bank agrees, from time to time during the period from the date hereof to the expiration date as provided in Section 2.6 hereof, to make Advances to, or on behalf of, the Company, provided the total aggregate principal amount which is outstanding at any one time of all such Advances shall not exceed Thirty Million Dollars ($30,000,000.00) without written request by the Company and subsequent approval by an officer of the Bank. The obligation of the Bank to make .Advances hereunder up to such limits or the amount to which such limit may be reduced pursuant to Section 2.7(b) hereof, is hereinafter referred to as the "Commitment" Within the Commitment, the Company may borrow, repay and reborrow. (b) Advances shall be used by the Company solely for the purpose of funding or financing the purchase or origination of Mortgage Loans and shall be made at the request of the Company, in the manner hereinafter provided in Section 2.2, against the pledge of such Mortgage Loans. (c) No Advance shall exceed one hundred percent (100%) of the lower of (i) the Mortgage Note Amount or (ii) the committed purchase price set forth in the Purchase Commitment for the related Pledged Mortgages. (d) No Advance shall be used by the Company for the purpose of repurchasing Mortgage Loans that were sold by the Company to an Investor. Section 2.2. Procedures for Obtaining Advances. (a) The Company may obtain an Advance hereunder, subject to the satisfaction of the conditions set forth in Sections 4.1 and 4.2 hereof, upon compliance with the procedures set forth in this Section 2.2. Requests for Advances shall be initiated by the Company by delivering to the Bank a completed and signed request for an Advance (an "Advance Request") on the then current form therefor approved by the Bank and provided to the Company. The current form in use by the Bank is set forth in Exhibit C hereto. The Bank shall have the right to revise or supplement approved forms of Advance Request by giving prior written-notice thereof to the Company. (b) The procedures to be followed by the Company in making an Advance Request for the origination of Mortgage Loans, and the documents relating to the Collateral described in the Advance Request (the "Collateral Documents") required to be delivered to the Bank, shall consist of those set forth in the following described Exhibit D attached hereto and hereby made part hereof entitled: Procedures and Documentation for Warehousing Residential Mortgage Loans, as set forth in Exhibit D hereto. Unless the related Advance is no longer outstanding, the Company shall require the remaining Collateral Documents, as set forth in the aforementioned Exhibit D, to be furnished to the Bank within three (3) Business Days after the date of the Wet Settlement. The Bank shall have the right, on not less than three (3) Business Days' prior notice to the Company, to modify said Exhibit(s) to conform to current legal requirements or Bank practices, and, as so modified, said Exhibit shall be deemed part hereof. (c) Before funding any Advance, the Bank shall have twenty four (24) hours to examine each Advance Request and the Collateral Documents to be delivered prior to the Advance, as set forth in Exhibit D hereto, and may reject such of them as do not meet the requirements of this Agreement. 5 (d) To make an Advance, the Bank shall debit the Company's warehousing credit line account for the amount of the Advance and, unless otherwise agreed to by the Bank, the Bank shall deposit the proceeds of such Advance to the Company's operating account no. 402620085 with the Bank. (e) All Advances under this Agreement shall constitute a single indebtedness and all of the Collateral shall be security for the Note and for the performance of all obligations of the Company to the Bank. Section 2.3. Note. The Company's obligation to pay the principal of, and interest on, all Advances made by the Bank shall be evidenced by the promissory note (the "Note ") of the Company dated as of the date hereof substantially in the form of Exhibit A attached hereto. The term "Note" shall include all extensions, renewals and modifications of the Note and all substitutions therefor. All terms and provisions of the Note are incorporated herein. Section 2.4. Interest & Transaction Fees. (a) The unpaid amount of each Advance shall bear interest, payable monthly, from the date of such Advance until paid in full, at a floating rate of interest (the "Floating Rate ") from time to time (computed on the basis of a 360-day year and applied to the actual number of days elapsed in each interest calculation period) which is equal to Index; provided, however, that the Floating Rate shall not be less than five percent (5%) per annum. As used herein, the term "Index" shall mean the independent index which is The Wall Street Journal Prime Rate. The Index is not necessarily the lowest rate charged by the Bank on its loans. If the Index becomes unavailable during the term of this Agreement, the Bank may designate a substitute Index after written notice to the Company. The Floating Rate will be adjusted as of the effective date of each change in the Index. Interest will be billed monthly and will be due within ten (10) days of the issuance of the relevant monthly billing statement. (b) The Company shall pay the Bank a transaction fee equal to Twenty-Five Dollars ($25.00) for each Mortgage Loan financed by an Advance under the terms of this Agreement which fee shall be billed monthly and will be due within ten (10) days of the issuance of the relevant monthly billing statement. (c) The holder of the Note is hereby authorized to record the date and amount of each payment of principal and interest, and applicable interest rates and other information with respect thereto, on the schedules annexed to and constituting a part of the Note and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded; provided, however, that the failure to make a notation or the inaccuracy of any notation shall not limit or otherwise affect the obligations of the Company hereunder or thereunder. Section 2.5. Principal Payments. (a) The outstanding principal amount of each Advance shall be payable in frill upon the earliest to occur of (i) the occurrence of any event described in Section 2.5(c) hereof with respect to such Advance, or (ii) expiration or termination of the Commitment. (b) The Company shall have the right to prepay the outstanding Advances in whole or in part, from time to time, without premium or penalty or advance notice. (c) The Company shall be obligated to pay to the Bank, without the necessity of prior demand or notice from the Bank, and the Company authorizes the Bank to charge its account for, the amount of any 6 outstanding Advance against a specific Mortgage Loan that has been originated with the intent to sell to an Investor, upon the occurrence of any of the following events: (1) One hundred twenty (120) calendar days elapse from the date of the Advance; (2) Ten (10) Business Days elapse from the date the Collateral Documents relating to a Mortgage Loan against which an Advance was made, were required to be received by the Bank without the actual receipt thereof; (3) Thirty (30) calendar days elapse from the date a Collateral Document was delivered to the Company for correction or completion, without being returned to the Bank, or such Collateral Documents, upon examination by the Bank, are found not to be in compliance with the requirements of this Agreement or the related Purchase Commitment; (4) A nonmonetary default, as defined in the applicable Mortgage, occurs under the Mortgage Loan with respect to which such Advance was made and remains uncured for a period of thirty (30) calendar days; (5) Upon sale of the Mortgage Loan; and (6) Upon a determination that a Mortgage Loan is a fraudulent loan. Upon making such payment to the Bank, the Company shall be deemed to have redeemed such Mortgage Loan from pledge, and the Collateral Documents relating thereto shall be promptly released by the Bank to the Company or to the applicable Investor. The Bank agrees to take such other steps reasonably requested by the Company in connection with such release. At the end of each month, ninety-eight percent (98%) of the amount which the Company pays to the Bait under items (t) or (4) of this subsection (c) shall come from, or shall be repaid from, the Company's Affiliate senior credit facility with the Bank. Section 2.6. Expiration and/or Termination of Commitment. (a) Unless terminated earlier as permitted hereunder, the Commitment shall expire of its own term, and without the necessity of action by the Bank, three hundred sixty-four (364) days following the date of execution of this Agreement. Notwithstanding anything to the foregoing, for any Advance made by the Bank prior to the termination date, the Company shall still have one hundred twenty (120) days from the date of the Advance to pay the Bank the amount of any outstanding Advance. (b) The Bank shall have the right, without cause, at any time to terminate the Agreement on not less than sixty (60) days' prior written notice to the Company. (c) The Bank shall have the right to terminate this Agreement and any line of credit extended to the Company pursuant to the terms of this Agreement, upon any adverse material change in the Company's financial condition as defined by the Bank in its reasonable discretion during the term of this Agreement upon written notice to the Company. Such an adverse change of financial condition will include, but not be limited to the occurrence of any one or more of the events listed in Section 6.6 hereto. For purposes of this Section 2.6(c), the term "adverse material change" means Company's failure to comply with and maintain during the term of this Agreement any of the Financial Requirements set forth under Section 6.13 7 (d) The Bank shall have the right from time to time and in its sole discretion, to extend the term of this Agreement with prior written notice to the Company. The length of any such extension shall also be determined in the Bank's sole discretion. Such extension may be made subject to the renegotiation of the terms hereunder and to any other such conditions as the Bank may deem necessary. Under no circumstances shall such an extension by the Bank be interpreted or construed as the Bank's forfeiture of any of its rights, entitlements or interest created hereunder. The Company acknowledges and understands that the Bank is under no obligation whatsoever to extend the term of this Agreement beyond its expiration date as originally stated in this Agreement. Section 2.7. Method of Making Payments; Reductions in Commitment. (a) Except as otherwise specifically provided herein, all payments hereunder shall be received by the Bank on the date when due and shall be made in lawful money of the United States of America in immediately available funds at the office of the Bank, at East Liverpool, Ohio, P.O. Box 5399, zip code 43920, or at such other place as the Bank from lime to time shall designate. Whenever any payment to be made hereunder or under the Note shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day, and, with respect to payments of principal, the interest thereon shall be payable at the applicable rate during such extension. Funds received by the Bank after 4:00 p.m. (East Liverpool, Ohio, time) on a Business Day shall be deemed to have been paid by the Company on the next succeeding Business Day. (b) The Company shall have the right, at any time and from time to time, effective as of the first day of any calendar month, to terminate in whole or permanently reduce in part, without premium or penalty, the amount of the Commitment in excess of the then outstanding principal amount of all Advances hereunder. The Company shall give written notice to the Bank designating the date of such termination or reduction not less than five (5) Business Days' prior to the date such termination or reduction is to take effect, and the amount of any partial reduction of the Commitment shall be in an aggregate minimum amount of One Hundred Thousand Dollars ($100,000.00) or integral multiples of One Hundred Thousand Dollars ($100,000.00) in excess of that amount. Section 2.8. Late Payment Fees. In the event the Company fails to make any payment (whether of principal, interest or any other sum) on the date such payment is due and payable hereunder or under the Note, and such failure continues for more than fifteen (15) days after notice from the Bank, the Company shall pay to the Bank, upon demand therefor, a late payment fee equal to five percent (5%) of the amount of such payment or One Thousand Dollars ($1,000.00), whichever is greater. Section 2.9. Net Payments. All payments with respect to any Advance shall be made without offset or counterclaim and free from any present or future taxes, levies, imports, duties or other similar charges of whatsoever nature imposed by any government or any political subdivision or taxing authority hereof, other than any taxes on or measured by the net income of the Bank. Section 2.10. Commitment Fees. At the time of the first Advance, the Company shall pay the Bank a loan origination fee of Fifteen Thousand Dollars ($15,000.00). Annually thereafter the Company shall pay the Bank a commitment fee computed as follows: Fifteen Thousand Dollars ($15,000.00) multiplied by a fraction, the numerator of which is equal to the average monthly unborrowed amount of the Commitment during the previous year, and the denominator of which is equal to the Commitment. The commitment fee shall be payable by the Company to the Bank within thirty (30) days of the anniversary date of this Agreement. The Bank shall provide the Company with a statement, within fifteen (15) days of the anniversary date of this Agreement, showing its computation of the average 8 daily unborrowed amount of the Commitment for the previous year. Unless the Company contests the accuracy of the Bank's statement within ten (10) days of receipt, the Bank may debit the Company's warehousing credit line account for the amount of the commitment fee. Section 2.11. Premiums. Any and all premiums received by the Company on Mortgage Loans with respect to which Advances are made shall be applied by the Company to pay the Bank. ARTICLE III COLLATERAL Section 3.1. Assignments and Grant of Security Interest. As security for the payment of the Note and for the performance of all of the Company's obligations hereunder, the Company hereby grants to the Bank a security interest in all rights and interest of the Company in and to the following described property (collectively, the "Collateral"): (a) All Mortgage Loans, including all Mortgage Notes and Mortgages evidencing such Mortgage Loans and the related Mortgage Loan Documents, which from time to time are delivered, or caused to be delivered, to the Bank (including delivery to a third party on behalf of the Bank) pursuant hereto or in respect of which an Advance has been made by the Bank hereunder (the "Pledged Mortgages"); (b) All mortgage insurance and all commitments issued by Insurers to insure or guarantee any Mortgage Loans included in the Pledged Mortgages; all Purchase Commitments held by the Company covering the Pledged Mortgages and all proceeds resulting from the sale thereof to Investors pursuant thereto; and all personal property, contract rights, collection and servicing rights and servicing fees and income, accounts and general intangibles of whatsoever kind relating to the Pledged Mortgages, said Insurer commitments and the Purchase Commitments, and all other documents or instruments delivered to the Bank in respect of the Pledged Mortgages, including, without limitation, the right to receive all insurance proceeds and condemnation awards which may be payable in respect of the premises encumbered by any Pledged Mortgage; (c) All right, title and interest of the Company in and to all files, surveys, certificates, correspondence, appraisals, computer programs, tapes, discs, cards, accounting records, information and data of the Company relating to the foregoing; (d) All property of the Company, in any form or capacity now or at any time hereafter in the possession or direct or indirect control of the Bank relating to the Pledged Mortgages (including possession by a parent company, affiliate or subsidiary of the Bank); and (e) All products and proceeds of any and all of the foregoing. In addition to the foregoing grant of a security interest to the Bank in the Collateral, the Company hereby assigns and delivers to the Bank all of the following: (i) the Company's right (but not any liabilities of the Company) under all Purchase Commitments now held or hereafter acquired by the Company covering Pledged Mortgages and all proceeds resulting from the sale of Pledged Mortgages pursuant thereto; and (ii) all rights of the Company (but not any liabilities of the Company) with respect to Investors to the extent related to the Pledged Mortgages. Upon the request of the Bank, the Company shall execute any further document or instrument reasonably requested by the Bank to further evidence or effectuate the assignments set forth in this subparagraph. 9 Section 3.2. Guaranties. Contemporaneously with the signing of this Agreement, the Company shall cause to be delivered to the Bank the Guaranty of the parent company of the Company, namely Franklin Credit Management Corporation, in the form attached to this Agreement as Exhibit B. Section 3.3. Delivery of Additional Collateral or Mandatory Prepayment. In the event that the Bank shall in good faith determine at any time that the value of the Collateral then pledged hereunder (such value being determined at such time as if then being pledged under Section 3.1(a) hereof) is less than the aggregate amount of the Advances then outstanding hereunder, the Company shall within fifteen (15) Business Days after receipt of written notice from the Bank: (a) deliver to the Bank for pledge hereunder additional Mortgage Loans, Purchase Commitments and other related Collateral satisfactory to the Bank (each valued at that time in accordance with Section 2.1(c) hereof) and/or cash, in aggregate amounts sufficient to cover the difference between the value of the Collateral pledged and the aggregate amount of Advances outstanding hereunder; or (b) repay the Advances in an amount sufficient to reduce the aggregate balance thereof outstanding to or below the value of the Collateral pledged hereunder. Section 3.4. Right of Redemption from Pledge. Provided no Default or Event of Default has occurred and is continuing, the Company may redeem a Mortgage Loan from pledge, by either (i) paying, or causing an Investor to pay, to the Bank for application to prepayment of the principal balance of the Note, an amount (the "Redemption Amount") equal to the then collateral value (each valued at that time in accordance with Section 2.1(c) hereof) of the Mortgage Loan to be released, but not less than the amount of the Advance made with respect to such Mortgage Loan; or (ii) delivering substitute Collateral which, in addition to being acceptable to the Bank in its sole discretion, will when included with the Collateral, result in a collateral value (as determined in accordance with Section 2.1(c) hereof) of all Collateral held by the Bank which is at least equal to the aggregate outstanding Advances. Section 3.5. Collection and Servicing Rights. So long as no Event of Default shall have occurred, the Company shall be entitled to service, receive and collect directly all sums payable to the Company in respect of the Collateral, except amounts payable to the Company for the purchase by any Investor under a Purchase Commitment of any Mortgage Loans which are funded in whole or in part with the proceeds of any Advance, which amounts shall be paid directly to the Bank. The Company shall direct each Investor to pay the amounts payable for the purchase of such Mortgage Loans directly to the Bank. Following the occurrence of any Event of Default, the Bank shall thereafter, upon written notice to the Company, be entitled to service, receive and collect all stuns payable to the Company in respect of the Collateral, and in such case: (a) the Bank in its discretion may, in its own name or in the name of the Company or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on account of or in exchange for any of the Collateral, but shall be under no obligation to do so; (b) the Company shall, if the Bank requests, forthwith pay to the Bank at its principal office or such other place as the Bank may designate all amounts thereafter received by the Company upon or in respect or any of the Collateral, advising the Bank as to the source of such funds; and (c) all amounts so received and collected by the Bank shall be held by it as part of the Collateral. Section 3.6. Return of Collateral at End of Commitment. If (i) the Commitment shall have expired or been terminated, and (ii) no Advances, interest or other amounts evidenced by the Note or due under this Agreement shall be outstanding and unpaid, the Bank shall promptly deliver or release all Collateral in its possession to the Company. The Bank shall also execute and deliver such assignments and other instruments and documents reasonably requested by the Company to vest title in the Collateral into the Company. The receipt of the Company for any Collateral released or delivered to the Company pursuant 10 to any provision of this Agreement shall be a complete and full acquittance for the Collateral so returned, and the Bank shall hereafter be discharged from any liability or responsibility therefor. ARTICLE IV CONDITIONS PRECEDENT Section 4.1. Initial Advance. The obligation of the Bank to make the initial Advance is subject to the satisfaction, on or before the date thereof of the following conditions precedent: (a) The Bank shall have received the following, all of which must be satisfactory in form and content to the Bank, in its reasonable discretion: (t) The Note duly executed by the Company; (2) Certified copies of the Company's articles of organization and bylaws, and certificate of good standing dated no less recently than one (I) month prior to the date of the initial Advance; (3) An original resolution of the board of directors of the Company, certified as of the date of this Agreement by its secretary, authorizing the execution, delivery and performance of this Agreement and the Note, and all other instruments or documents to be delivered by the Company pursuant to this Agreement; (4) A certificate of the Company's secretary as to the incumbency and authenticity of the signatures of the officers of the Company executing this Agreement and the Note and each Advance Request and all other instruments or documents to be delivered pursuant hereto (the Bank being entitled to rely thereon until a new such certificate has been furnished to the Bank); (5) Original financial statements of the Company for the most recent fiscal year-end containing a balance sheet and related statements of income and retained earnings (the "Statement Date ") and changes in financial position for the period ended on the Statement Date, all prepared in accordance with GAAIP applied on a basis consistent with prior periods and reasonably acceptable to the Bank; (6) Copies of the certificates, documents or other written instruments which evidence the Company's eligibility described in Section 5.13 hereof, all in form and substance satisfactory to the Bank; (7) Copies of the Company's errors and omissions insurance policy or mortgage impairment insurance policy and blanket bond coverage policy, or certificates in lieu of policies, all in form and content satisfactory to the Bank, showing compliance by the Company as of the date of the initial Advance with the related provisions of Section 6.8 hereof~ and (8) A Power of Attorney to indorse negotiable instruments in the form of Exhibit F. 11 Section 4.2. Each Advance. The obligation of the Bank to make the initial and each subsequent Advance is subject to the satisfaction, as of the date of each such Advance, of the following additional conditions precedent: (a) The Company shall have delivered to the Bank the Advance Request, and Collateral Documents called for under, and shall have satisfied the procedures set forth in, Sections 2.2(a) through 2.2(b) hereof and the applicable Exhibits hereto described in those Sections. All items delivered to the Bank must be reasonably satisfactory to the Bank in form and content, and the Bank may reject such of them as do not meet the requirements of this Agreement or as provided in Section 2.2(c). (b) The Bank shall have received evidence satisfactory to it as to the due filing and recording in all appropriate offices of all financing statements and other instruments as may be necessary to perfect the security interest of the Bank in the Collateral under the Uniform Commercial Code of the State of New York or other applicable law. (c) The representations and warranties of the Company contained in Article V hereof shall be true and correct in all material respects as if made on and as of the date of each Advance unless the same relates to an earlier date. (d) The Company shall have performed all agreements to be performed by it hereunder, respectively, and after giving effect to the requested Advance, there shall exist no Default or Event of Default hereunder. (e) The Company shall not have (i) incurred any material liabilities, direct or contingent, other than in the ordinary course of its business that would render it to be noncompliant with the financial requirements set forth in section 6.2 herein, since the dates of the Company's most recent financial statements theretofore delivered to the Bank, or (ii) experienced any other material adverse change in its business or operations. Acceptance of the proceeds of the requested Advance by the Company shall be deemed a representation by the Company that all conditions set forth in this Section 4.2 shall have been satisfied as of the date of such Advance. ARTICLE V REPRESENTATIONS AND WARRANTIES In order to induce the Bank to enter into this Agreement and make each Advance, the Company hereby represents and warrants to the Bank, as of the date of this Agreement and as of the date of each Advance Request and of each Advance, that: Section 5.1. Organization; Good Standing; Subsidiaries. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of New York, has the full legal power and authority to own its property and to carry on its business as currently conducted and is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction in which the transaction of its business makes such qualification necessary, except in jurisdictions, if any, where a failure to be in good standing has no material adverse effect on the business, operations, assets or 12 financial condition of the Company. The Company has no Subsidiaries. Section 5.2. Authorization and Enforceability. The Company has the power and authority to execute, deliver and perform this Agreement, the Note and all other documents contemplated hereby or thereby. The execution, delivery and performance by the Company of this Agreement, the Note and all other documents contemplated hereby or thereby and the making of the borrowing hereunder and thereunder, have been duly and validly authorized by all necessary corporate action on the part of the Company (none of which actions have been modified or rescinded, and all of which actions are in full force and effect) and do not and will not conflict with or violate any provision of law or of the articles of organization or bylaws of the Company, conflict with or result in a breach of or constitute a default or require any consent under, or result in the creation of any Lien upon any property or assets of the Company (other than pursuant to this Agreement), or result in or require the acceleration of any indebtedness of the Company pursuant to any agreement, instrument or indenture to which the Company is a party or by which the Company or its property may be bound or affected. This Agreement, the Note and all other documents contemplated hereby or thereby constitute legal, valid, and binding obligations of the Company enforceable in accordance with their respective terms, except as limited by Bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights and by general principles of equity. Section 5.3. Approvals. The execution and delivery of this Agreement, the Note and all other documents contemplated hereby or thereby and the performance of the Company's obligations hereunder and thereunder do not require any license, consent, approval or other action of any state or federal agency or governmental or regulatory authority. Section 5.4. Financial Condition. The balance sheet of the Company as at the Statement Date, and the related statements of income and cash flows for the fiscal year ended on the Statement Date, heretofore furnished to the Bank, fairly present the financial condition of the Company as at the Statement Date and the results of its operations for the fiscal period ended on the Statement Date. The Company had, on the Statement Date, no known liabilities, direct or indirect, fixed or contingent, matured or unmatured, or liabilities for taxes, long-term leases or unusual forward or long-term commitments not disclosed by, or reserved against in, said balance sheet and related statements, except as heretofore disclosed to the Bank in writing or otherwise reflected on the Company's balance sheet, and except for the Bank's extension(s) of credit to the Company Except for financial statements prepared for interim periods between the fiscal year-end, all financial statements were prepared in accordance with GAAP applied on a consistent basis throughout the periods involved. Since the Statement D ate, there has been no material adverse change in the business, operations, assets or financial condition of the Company, nor is the Company aware of any state of facts which (with or without notice or lapse of time or both) would or could result in any such material adverse change. Section 5.5. Litigation. There are no actions, claims, suits or proceedings pending, or to the knowledge oft he Company, threatened against or affecting the Company in any court or before any arbitrator or before any government commission, board, bureau or other administrative agency which, if adversely determined, may reasonably be expected to result in any material and adverse change in the business, operations, assets, licenses, qualifications or financial condition of the Company. Section 5.6. Licenses; Compliance with Laws. The Company has all permits, licenses, authorizations and approvals with all governmental authorities or agencies that are required in order to permit it to conduct its business as presently conducted, and all such permits, licenses, authorizations and 13 approvals are in frill force and effect. The Company is not in violation of any provision of any law, or of any judgment, award, rule, regulation, order, decree, writ or injunction of any court or public regulatory body or authority which might have a material adverse effect on the business, operations, assets or financial condition, assets, licenses, qualifications or financial condition of the Company. Section 5. 7. Regulation U. No part of the proceeds of any Advances made hereunder will be used to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock. Section 5.8. Investment Company Act. The Company is not an "investment company," or a company controlled by an "investment company," within the m earning oft he Investment Company Act of 1940, as amended. Section 5.9. Payment of Taxes. The Company has filed or caused to be filed all federal, state, and local income, excise, property and other tax returns with respect to the operations of the Company, which are required to be filed, all such returns are true and correct in all material respects, and the Company has paid or caused to be paid all taxes as shown on such returns or on any assessment to the extent that such taxes have become due, except in cases where the Company has disputed in good faith the amount of said taxes. Section 5.10. Agreements. The Company is not a party to any agreement, instrument or indenture or subject to any restriction materially and adversely affecting its business, operations, assets or financial condition, except as disclosed in the financial statements described in Section 5.4 hereof The Company is not in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement, instrument, or indenture which default could have a material adverse effect on the business, operations, properties or financial condition of the Company. No holder of any indebtedness of the Company has given notice of any asserted default thereunder, and no liquidation or dissolution of the Company and no receivership, insolvency, bankruptcy, reorganization or other similar proceedings relative to the Company or any of its properties is pending, or to the knowledge of the Company, threatened. Section 5.11. Title to Properties. The Company has good, valid, insurable (in the case of real property) and marketable title to all material portions of its properties and assets (whether real or personal, tangible or intangible) reflected on the financial statements described in Section 5.4 hereof, except for such properties and assets as have been disposed of since the date of such financial statements as no longer used or useful in the conduct of its business or as have been disposed of in the ordinary course of business, and all such properties and assets are free and clear of all Liens except as disclosed in such financial statements. Section 5.12. ERISA. All plans ("Plans") of a type described in Section 3(3) of ERISA in respect of which the Company is an "Employer," as defined in Section 3(8) of ERISA, are in substantial compliance with ERISA, and none of such Plans is insolvent or in reorganization, has an accumulated or waived funding deficiency within the meaning of Section 412 of the Internal Revenue Code, and the Company has not incurred any material liability (including any material contingent liability) to or on account of any such Plan pursuant to Sections 4062, 4063, 4064, 4201 or 4204 of ERISA; and no proceedings have been instituted to terminate any such plan, and no condition exists which presents a material risk to the Company of incurring a material liability to or on account of any such Plan pursuant to any of the foregoing Sections of ERTSA. No Plan or trust forming a part thereof has been terminated since September 1, 1974. 14 Section 5.13. Eligibility. The Company has all state and local permits, licenses, approvals, registrations and qualifications which it is required to have, in order to make, purchase, sell or service the Mortgage Loans. Section 5.14. Special Representations Concerning Collateral. The Company hereby represents and warrants to the Bank, as of the date of this Agreement and as of the date of each Advance Request and of each Advance, that: (a) The Company owns the Collateral free and clear of any Lien, except for the security interest created by this Agreement, rights of Investors and Insurers of the Pledged Mortgages. No financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of Bank relating to this Agreement. The Company has no trade name. (b) This Agreement, together with the Bank's possession of the Mortgage Notes and a duly filed financing statement, creates a valid and perfected first priority security interest in the Mortgage Notes in favor of the Bank, securing the payment of the Note, and all filings and other actions necessary or desirable to perfect and protect such security interest have been duly taken or shall be taken at the time of the initial Advance hereunder. (c) No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required (and has not been obtained, delivered or filed, as applicable) either (i) for the grant by the Company of the security interest granted hereby or for the execution, delivery or performance of this Agreement by the Company, or (ii) for the perfection of or the exercise by the Bank of its rights and remedies hereunder, other than the filing of a financing statement which has been duly executed by the Company and delivered to the Bank for filing. (d) The principal office of the Company for purposes of Section 9-103 of the Uniform Commercial Code is located at the address set forth at the front of this Agreement. (e) Each Mortgage Loan conforms in all material respects to the requirements and the specifications set forth in the attached Exhibit G constituting the underwriting standards utilized by the Company. (f) The Mortgage Loan Documents have been duly executed by the mortgagor and create valid and legally binding obligations of the mortgagor, enforceable in accordance with their terms, except as may be limited by bankruptcy Or other similar laws affecting the enforcement of creditors' rights generally, and general principles of equity, and to the knowledge of the Company there are no rights of rescission, set-offs, counterclaims or other defenses with respect thereto. The full original principal amount of each Mortgage Loan (net of any discounts) has been fully advanced or disbursed to the mortgagor named therein. There is no requirement for future advances and except for Mortgage Loans insured under Section 203(k) of the National Housing Act, any and all requirements as to completion of any on-site or off-site improvements and as to disbursements of any escrow funds therefor have been satisfied. To Company's knowledge and except as disclosed to Bank, there is no material default, breach, violation or event of acceleration existing under the Mortgage or the related Mortgage Note, and no event has occurred which, with 15 the passage of time or with notice and the expiration of any grace or cure period, would constitute a material default, breach, violation or event of acceleration, other than waivers in the ordinary course of servicing the Mortgage Loan which do not have a material adverse effect of the Collateral; and the Company has not waived any material default, breach, violation or event of acceleration. The terms of the Mortgage Loan have in no way been waived, impaired, changed or modified. To Company's knowledge and except as disclosed to Bank, all tax identifications and property descriptions are legally sufficient; tax segregation, where required, has been completed. All taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents which previously became due and have been paid, or an escrow of funds has been established in an amount sufficient to pay for every such item which remains unpaid. (g) Each of the Mortgage Loans has been originated, made and serviced in material compliance with all industry standards, applicable Investor and Insurer requirements and all applicable federal, state and local statutes, regulations and rules, including, without limitation, the Federal Truth-in-Lending Act of t 968, as amended, and Regulation Z thereunder, the Federal Fair Credit Reporting Act, the Federal Equal Credit Opportunity Act, the Federal Real Estate Settlement Procedures Act of 1974, as amended, and Regulation X thereunder, and all applicable usury, licensing, real property, consumer protection and other laws. (h) Each of the Mortgage Loans presently is covered by a policy of hazard insurance (and flood insurance and insurance against other insurable risks and hazards as required by the applicable Investor and the agreements applicable to such Mortgage Loans), in amounts not less than outstanding principal balance of the Mortgage Loans or such maximum lesser a mount as permitted by applicable law, all in a form usual and customary in the industry and which is in full force and effect, and all amounts required to have been paid under any such policy have been paid; and all taxes, assessments, ground rents or other applicable charges or fees due and payable as to each Mortgage Loan have been paid. (i) A title opinion or a valid and enforceable title policy currently in full force and effect has been issued for each Mortgage Loan which is a first mortgage lien as identified in Exhibit 0, and in the case of title insurance, in an amount not less than the original principal amount of such Mortgage Loan, and which title opinion opines or which title policy insures that the Mortgage relating thereto is either (i) a valid first lien on the property therein described and that the mortgaged property is free and clear of all encumbrances and liens having priority over the first lien of the Mortgage except for taxes not yet due and payable and minor title irregularities that do not have a material adverse effect on the use or marketability of the mortgaged property, and otherwise in compliance with the requirements of the applicable Investor; or (ii) if the Mortgage Loan is insured under Title I of the National Housing Act, a valid second lien on the property therein described and that the mortgaged property is free and clear of all encumbrances and liens (other than the first lien) having priority over the second lien of the Mortgage except for taxes not yet due and payable and minor title irregularities that do not have a material adverse effect on the use or marketability of the mortgaged property, and otherwise in compliance with the requirements of the applicable Investor. If the Mortgage Loan is a second lien that is not insured under Title I of the National Housing Act, Company shall have a title search performed to verify that the mortgaged property is free and clear of all encumbrances and liens (other than the first lien) having priority over the second lien of the Mortgage except for taxes not yet due and payable. (j) All escrow/custodial accounts have been established in accordance with the requirements of FHA, VA and the applicable Investor and Insurer and all other applicable laws and by the terms of the related Mortgages. 16 (k) There are no accrued liabilities of the Company with respect to the Mortgage Loans. (l) To the Company's knowledge, the Company, all prior servicers and, if different, the originating mortgagee, have performed all obligations required of them to be performed under or pursuant to each of the Servicing Contracts and related requirements of the applicable Investor and Insurer and each other document or agreement relating to the Mortgage Loans by which the Company is bound, and no event has occurred and is continuing which, under the provisions of any such Servicing Contracts and related requirements of the applicable Investor or other document or agreement, but for the passage of time or in, giving of notice, or both, would constitute an event of default thereunder. (m) The books, records, accounts and reports of the Company with respect to the Mortgage Loans and Servicing Contracts have been prepared and maintained in accordance with all applicable Investor and Insurer requirements. (n) At least ninety-eight percent (98%) of the Mortgage Loans will be underwritten to Investor guidelines however, upon approval by the Bank which shall not be unreasonably withheld, Company shall be allowed to retain certain Mortgage Loans in its own portfolio. ARTICLE VI AFFIRMATIVE COVENANTS The Company agrees that so long as the Commitment is outstanding or there remain any obligations of the Company to be paid or performed under this Agreement or under the Note, the Company shall: Section 6.1. Payment of Note. Punctually pay or cause to be paid the principal and interest on and all other amounts due and payable hereunder and under the Note in accordance with the terms hereof and thereof Section 6.2. Financial Statements and Other Reports. Deliver to the Bank: (a) Upon request by the Bank, as soon as available and in any event within thirty (30) days after each calendar quarter, statements of income and cash flows of the Company for the immediately preceding quarter, and related balance sheet as of the end of the immediately preceding quarter, all in reasonable detail and certified by the chief financial officer or other appropriate officer of the Company, subject, however, to year-end audit adjustments. (b) As soon as available and in any event within one hundred twenty (120) days after the close of each fiscal year: a statement of income and cash flows of the Company for such year, the related balance sheet as at the end of such year (setting forth in comparative form the corresponding figures for the preceding fiscal year), all in reasonable detail and accompanied by an opinion of an accounting firm reasonably satisfactory to the Bank, or other independent public accountants of recognized standing selected by the Company and acceptable to the Bank, as to said financial statements and a certificate signed by the chief financial officer or other appropriate officer of the Company stating that said financial statements 17 fairly present the financial condition and results of operations of the Company as at the end of, and for, such year. (c) Together with each delivery of financial statements pursuant to Sections 6.2(a) and (b) hereof, an Officer's Certificate substantially in the form of Exhibit H stating that the signatory or signatories thereto have reviewed the terms of this Agreement and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and conditions of the Company during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signatory or signatories thereto do not have knowledge of the existence as of the date of the Officer's Certificate, of any Default or if any Default existed or exists, specifying the nature and period oft he existence thereof and what action the Company has taken, is taking and proposes to take with respect thereto. (d) Such other reports in respect of the Mortgage Loans pledged as collateral, in such detail and at such limes as the Bank in its reasonable discretion may request at any time or from time to time. (e) Copies of all audits, examinations and reports concerning the operations of the Company from any Investor, Insurer or licensing authority to the extent not subject to restrictions on disclosure. (f) From time to time, with reasonable promptness, such further information regarding the business, operations, properties or financial condition of the Company as the Bank may reasonably request. Except for financial statements prepared for interim periods between the fiscal year end, all financial statements and reports furnished to the Bank hereunder shall be prepared in accordance with GAAP, applied on a basis consistent with that applied in preparing the financial statements as at, and for the period ended, the Statement Date (except to the extent otherwise required to conform to good accounting practice). Section 6.3. Maintenance of Existence; Conduct of Business. Preserve and maintain its corporate existence in good standing and all of its rights, privileges, licenses, qualifications and franchises necessary or desirable in the normal conduct of its business, including, without limitation, its eligibility as an approved lender and issuer as described under Section 5.13 hereof and make no material change in the nature or character of its business, if such material change would result in Company being unable to fulfill or complete its duties and obligations under this Agreement. Section 6.4. Compliance with Applicable Laws. Comply with the requirements of all applicable laws, rules, regulations (including laws, rules and regulations relating to predatory lending) and orders of any governmental authority and prudent industry standards, a breach of which could materially adversely affect its business, operations, assets, or financial condition or which could materially adversely impair the ability of Company to perform its obligation hereunder, except where contested in good faith and by appropriate proceedings. Section 6.5. Inspection of Properties and Books. Permit authorized representatives of the Bank, its parent company or affiliates, upon prior written notice of not less than ten (10) Business Days to the Company, to discuss the business, operations, assets and financial condition of the Company and its 18 Subsidiaries with their officers and employees and to examine their books of account and make copies or extracts thereof subject to applicable laws with respect to confidentiality of customer records, all at such reasonable times as the Bank may request. The Company will provide its accountants with a copy of this Agreement promptly after the execution hereof and will instruct its accountants to answer candidly and fully any and all questions that the officers of the Bank or any authorized representatives of the Bank may address to them in reference to the financial condition or affairs of the Company. Section 6.6. Notice. Give written notice to the Bank within fifteen (15) days of the Company's actual knowledge of (a) any action, suit or proceeding instituted against the Company in any federal or state court or before any commission or other regulatory body (federal, state or local, domestic or foreign) seeking damages of Fifty Thousand Dollars ($50,000.00) or more, or any such proceedings threatened against the Company in a writing containing the details thereof, (b) the filing, recording or assessment of any federal, state or local tax lien against it, or any of its assets, (c) the occurrence of any Default or Event of Default hereunder, (d) the actual or threatened suspension, revocation or termination of the Company's eligibility, in any respect, as an approved lender, and issuer as described under Section 5.13 hereof, (e) the suspension, revocation or termination of any existing credit or Investor relationship made to the Company to facilitate the sale and/or origination of residential mortgages, (0 the transfer or loss of any Servicing Contract to which the Company is a party, or which is held for the benefit of the Company, and the reason for such transfer or loss, if known to the Company, (g) any demand by any Investor or Insurer for either the repurchase of a Mortgage Loan or indemnification, and (h) any other action, event or condition of any nature which may lead to or result in a material adverse effect upon the business, operations, assets, or financial condition of the Company or which, with or without notice or lapse of time or both, would constitute a default under any other material agreement, instrument or indenture to which the Company is a party or to which the Company, its properties or assets may be subject. Section 6. 7. Payment of Debt, Taxes, etc. Pay and perform all obligations of the Company promptly and in accordance with the terms thereof and pay and discharge or cause to be paid and discharged promptly all taxes, assessments and governmental charges or levies imposed upon the Company or upon its income, receipts or properties before the same shall become past due, as well as all lawful claims for labor, materials and supplies or otherwise which, if unpaid, might become a Lien or charge upon such properties or any part thereof~ provided, however, that the Company shall not be required to pay taxes, assessments or governmental charges or levies or claims for labor, materials or supplies for which the Company shall have obtained an adequate bond or adequate insurance or which are being contested in good faith and by proper proceedings which are being reasonably and diligently pursued. Section 6.8. Insurance. Will maintain (a) errors and omissions insurance or mortgage impairment insurance and blanket bond coverage, with such companies and in such amounts as satisfy prevailing FNMA, GNMA or FHLMC requirements applicable to a qualified mortgage originating institution, and (b) liability insurance and fire and other hazard insurance on its properties, with responsible insurance companies, in such amounts and against such risks as is customarily carried by similar businesses operating in the same vicinity, and (c) within thirty (30) days after notice from the Bank, will obtain such additional insurance as the Bank shall reasonably require, all at the sole expense of the Company. Copies of all such policies shall be furnished to the Bank without charge upon request of the Bank. Section 6.9. Insured Closings. As applicable, will obtain and maintain in effect at all times an insured closing letter from each title insurance company from which mortgagee title insurance is procured, indemnifying and holding the Company harmless from and against the failure of the agents and 19 approved title attorneys of such title insurance companies to comply with the written closing instructions of the Company as to the Mortgage Loans pledged hereunder and will provide the Bank with evidence of the same from lime to time upon request. The Company agrees to indemnify and hold the Bank harmless from and against any loss, including reasonable attorneys' fees and costs, attributable to the failure of such title insurance company, agent or approved attorney to comply with the disbursement or instruction letter or letters of the Company or of the Bank relating to such Mortgage Loan. Section 6.10. Purchased Loans. The Company agrees to indemnify and hold the Bank harmless from and against any loss, including reasonable attorneys' fees and costs, attributable to the failure of any correspondent of the Company to comply with the disbursement or instruction letter or letters of the Company or of the Bank relating to Mortgage Loans purchased by the Company with Advances hereunder. Section 6.11. Other Loan Obligations. Will perform in all material respects all obligations under the terms of each loan agreement, note, mortgage, security agreement or debt instrument by which the Company is bound or to which any of its property is subject, and will promptly notify the Bank in writing of the cancellation or reduction of any of its other mortgage warehousing lines of credit or agreements with any other lender. Section 6.12. Use of Proceeds of Advances. Will use the proceeds of each Advance solely for the purpose of financing the purchase or origination of Mortgage Loans. Section 6.13. Financial Requirements. (a) Net Worth. Maintain at all times a minimum consolidated tangible net worth equal to at least $2,500,000.00. (b) Indebtedness to Net Worth. Not permit the Company's total Indebtedness at any time to exceed ninety-five percent (95%) of its total assets. (provided that nothing in this paragraph shall permit the Company to incur Indebtedness except as specifically permitted elsewhere in this Agreement). (c) Pretax Net Income. Maintain consolidated pretax net income to be at least $300,000.00, as calculated over the prior four (4) quarters with not more than one (1) quarter with a net loss during that time period. Section 6.14. Special Affirmative Covenants Concerning Collateral. (A) The Company warrants and will defend the right, title and interest of the Bank in and to the Pledged Mortgages against the claims and demands of all persons whomsoever. (b) The Company shall service or cause to be serviced in all material respects all Pledged Mortgages in accordance with the standard requirements of the issuers of the respective Purchase Commitments covering the same and all applicable governmental requirements, including without limitation taking all actions necessary to enforce the obligations of the obligors under such Pledged Mortgages. The Company shall hold all escrow funds collected in respect of Pledged Mortgages in trust, without commingling the same with non-custodial funds, and apply the same for the purposes for which such funds were collected. (e) The Company shall execute and deliver to the Bank such Uniform Commercial Code financing statements with respect to the Collateral as the Bank may reasonably request. The Company 20 shall also execute and deliver to the Bank such further instruments of sale, pledge or assignment or transfer, and such powers of attorney, as reasonably required by the Bank, and shall do and perform all matters and things necessary or desirable to be done or observed, for the purpose of effectively creating, maintaining and preserving the security and benefits intended to be afforded the Bank under this Agreement. The Bank shall have all the rights and remedies of a secured party under the Uniform Commercial Code of the State of Ohio, or any other applicable law, in addition to all rights provided for herein. (d) The Company shall notify the Bank within seven (7) Business Days of any default under, or of the termination of, or the rejection for purchase under, any Purchase Commitment relating to any Pledged Mortgage. (e) The Company will promptly comply in all material respects with the terms and conditions of all Purchase Commitments, and all extensions, renewals and modifications or substitutions thereof or thereto. The Company will cause to be delivered to the Investor the Pledged Mortgages to be sold under each Purchase Commitment not later than the earlier of three (3) Business Days prior to the expiration thereof or three (3) Business Days prior to the deadline for acquisition of the Pledged Mortgage by the Investor thereunder. (f) The Company shall maintain, at its principal office or in a regional office approved by the Bank, or in the office of a computer service bureau engaged by the Company and approved by the Bank, and, upon request, shall make available to the Bank the originals, or copies in any case where the original has been delivered to the Bank, or to an Investor, of its Mortgage Notes and Mortgages included in Mortgage Loans, Purchase Commitments, and all related Pledged Mortgage documents and instruments, and all files, surveys, certificates, correspondence, appraisals, computer programs, tapes, discs, cards, accounting records and other information and data relating to the Collateral. ARTICLE VII NEGATIVE COVENANTS The Company agrees that so long as the Commitment is outstanding or there remain any obligation of the Company to be paid or performed hereunder or under the Note, the Company shall not, either directly or indirectly, without the prior written consent of the Bank: Section 7.1. Contingent Liabilities. Assume, guarantee, endorse, or otherwise become liable for the obligation of any Person except by endorsement of negotiable instruments for deposit or collection in the ordinary course of business. Section 7.2. Merger; Sale of Assets; Acquisitions; Change in Control; Change of Senior Management. Except for the sale or purchase of loans in the ordinary course of the business, liquidate, dissolve, consolidate or merge or sell, transfer or otherwise dispose of, any substantial part of its assets, nor acquire substantially all of the assets of another, nor permit a change in ownership beneficially or of record of the voting stock of Company which results in Franklin Credit Management Corporation having less than a majority ownership interest in the voting stock of the Company. 21 Section 7.3. Loss of Eligibility. Take, or fail to take, any action that would cause the Company to lose all or any part of its status as an eligible lender, as described under Section 5.13 hereof Section 7.4. Special Negative Covenants Concerning Collateral. Except for actions taken in the ordinary course of servicing Mortgage Loans, the Company shall not do any of the following: (a) Amend or modify, or waive any of the terms and conditions of, or settle or compromise any claim in respect of, any Mortgage Loan pledged hereunder. (b) Sell, assign, transfer or otherwise dispose of, or grant any option with respect to, or pledge or otherwise encumber (except pursuant to this Agreement) any of the Collateral or any interest therein. (c) Make any compromise, adjustment or settlement in respect of any of the Collateral or accept other than cash in payment or liquidation of the Collateral. ARTICLE VIII DEFAULTS; REMEDIES Section 8.1. Events of Default. T he occurrence of any o ft he following conditions or events shall be in event of default ("Event of Default"): (a) Failure to pay the principal of any Advance within thirty (30) days from when due, whether at stated maturity, by acceleration, or otherwise; or failure to pay any installment of interest on any Advance or any other amount due under this Agreement when due; or (b) Failure of the Company to pay, or any default in the payment of any principal or interest on, any other indebtedness or in the payment of any contingent obligation which are in the aggregate amount of Ten Thousand Dollars ($10,000.00); or breach or default with respect to any other material term of any other indebtedness or of any loan agreement, note, mortgage, security agreement, indenture or other agreement relating thereto, if the effect of such failure, default or breach is to cause, or to permit the holder or holders thereof (or a trustee on behalf of such holder or holders) to cause, indebtedness of the Company or its Subsidiaries in the aggregate amount of Ten Thousand Dollars ($10,000.00) or more to become or be declared due prior to its stated maturity; or (c) Failure of the Company to perform or comply with any term or condition applicable to it contained in Sections 6.1 through 6.13 inclusive, or 7.1 through 7.5, inclusive, of this Agreement; or (d) Any of the Company's representations or warranties made herein or in any statement or certificate at any time given by the Company in writing pursuant hereto or in connection herewith shall be false in any material respect on the date as of which made; or (e) The Company shall default in the performance of or compliance with any term contained in this Agreement other than those referred to above in subsections 8.1(a), (c) or (d) and such default shall not have been remedied or waived within thirty (30) days after receipt of 22 notice from the Bank of such default; or (f~ (1) A court having jurisdiction shall enter a decree or order for relief in respect of the Company in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, which decree or order is not stayed; or (2) any other similar relief shall b e granted under any applicable federal or state law; or a decree or order o f a court having jurisdiction for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over the Company, or over all or a substantial part of its property, shall have been entered; or the involuntary appointment of an interim receiver, trustee or other custodian of the Company for all or a substantial part of its property; or the issuance of a warrant of attachment, execution or similar process against any substantial part of the property of the Company, and the continuance of any such events in this clause (2) for sixty (60) days unless dismissed, bonded off or discharged; or (g) The Company shall have an order for relief entered with respect to it or commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion to an involuntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; the making by the Company of any assignment for the benefit of creditors; or the inability or failure of the Company, or the admission by the Company in writing of its inability to pay its debts as such debts become due; or (h) Any money judgment, writ or warrant o f attachment, or similar process involving in any case an amount in excess of Ten Thousand Dollars ($10,000.00) shall be entered or filed against the Company or any of its assets and shall remain undischarged, unvacated, unbonded or unstayed for a period of thirty (30) days or in any event later than five (5) days prior to the date of any proposed sale thereunder; or (i) Any order, judgment or decree shall be entered against the Company decreeing the dissolution, liquidation or split up of the Comp any and such order shall remain undischarged or unstayed for a period in excess of twenty (20) days; or (j) Any Plan maintained by the Company shall be terminated within the meaning of Title IV of ERISA or a trustee shall be appointed by an appropriate United States district court to administer any Plan, or the Pension Benefit Guaranty Corporation (or any successor thereto) shall institute proceedings to terminate any Plan or to appoint a trustee to administer any Plan if as of the date thereof the Company's liability (after giving effect to the tax consequences thereof) to the Pension Benefit Guaranty Corporation (or any successor thereto) for unfunded guaranteed vested benefits under the Plan exceeds the then current value of assets accumulated in such Plan by more than Ten Thousand Dollars ($10,000.00) (or in the case of a termination involving the Company as a "substantial employer" (as defined in Section 4001(a)(2) of ERISA) the withdrawing employer's proportionate share of such excess shall exceed such amount); or (k) The Company as employer under a Multiemployer Plan shall have made a complete or partial withdrawal from such Multiemployer Plan and the plan sponsor of such Multiemployer Plan shall have notified such withdrawing employer that such employer has incurred a withdrawal liability in annual amount exceeding Ten Thousand Dollars ($10,000.00); 23 (1) The Company shall purport to disavow its obligations hereunder or shall contest the validity or enforceability hereof~ or the Bank's security interest in any portion of the Collateral shall become unenforceable or otherwise impaired; or (m) The Company or its parent company shall have been subject to an enforcement action by any federal regulatory agency which may reasonably be expected to result in any material and adverse change in the business, operations, assets, licenses, qualifications or financial condition of the Company. Section 8.2. Remedies. (a) Upon the occurrence of any Event of Default described in Section 8.1(1)) or (g) the unpaid principal amount of and accrued interest on the Note shall automatically become due and payable, without presentment, demand or other requirements of any kind, all of which are hereby expressly waived by the Company, and the obligation of the Bank to make Advances shall thereupon terminate. (b) Upon the occurrence of any Event of Default (other than those described in Section 8.1(f) or (g)), the Bank may, by written notice to the Company declare all or any portion of the Advances to be due and payable whereupon the same shall forthwith become due and payable, together with all accrued interest thereon, and the obligation of the Bank to make Advances shall thereupon terminate. (c) Upon the occurrence of any Event of Default, the Bank may also do anyone or more or all of the following: (1) Foreclose upon or otherwise enforce its security interest in and Lien on all of the Collateral or on any portion thereof to secure all payments and performance of obligations owed by the Company under this Agreement. (2) Notify all obligors of Collateral or on any portion thereof that the Collateral has been assigned to the Bank and that all payments thereon are to be made directly to the Bank or such other party as may be designated by the Bank; settle, compromise, or release, in whole or in part, any amounts owing on the Collateral, any such obligor or Investor or any portion of the Collateral, on terms acceptable to the Bank; enforce payment and prosecute any action or proceeding with respect to any and all Collateral; and where any such Collateral is in default, foreclose on and enforce security interests in, such Collateral by any available judicial procedure or, if permitted by applicable law, without judicial process and sell property acquired as a result of any such foreclosure. (3) Act, or contract with a third party to act, as servicer of all or any item of Collateral requiring servicing and perform all obligations required in connection with Purchase Commitments, such third party's fees to be paid by the Company. (4) Exercise all rights and remedies of a secured creditor under the Uniform Commercial C ode of the State of Ohio or the state in which the Collateral is located, including but not limited to selling the collateral at public or private sale. The Bank shall give the Company not less than thirty (30) days' written notice of any such public sale or of the date after which private sale may be held. The Company agrees that thirty (30) days' notice shall be reasonable notice. At any such sale the Collateral may be sold as an entirety or in separate parts, as the Bank may determine. The Bank may, Without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed 24 for the sale, and such sale may be made at any time or place to which the same may be so adjourned. In case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by the Bank until the selling price is paid by the purchaser thereof, but the Bank shall not incur any liability in case of the failure of such purchaser to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may again be sold upon like notice. The Bank may, however, instead of exercising the power of sale herein conferred upon it, proceed by a suit or suits at law or in equity to collect all amounts due upon all or any portion of the Collateral or to foreclose the pledge and sell all or any portion of the Collateral under a judgment or decree of a court or courts of competent jurisdiction, or both. (5) Proceed against the Company on the Note. (6) Pursue any rights and/or remedies available at law or in equity against the Company. (d) The Bank shall incur no liability as a result of the sale of the Collateral, or any part thereof, at any private sale conducted in a commercially reasonable manner. The Company hereby waives any claims it may have against the Bank arising by reason of the fact that the price at which the Collateral may have been sold at such private sale was less than the price which might have been obtained at a public sale or was less than the aggregate amount of the outstanding Advances and the unpaid interest accrued thereon, even if the Bank accepts the first offer received and does not offer the Collateral, or any part thereof, to more than one offeree. (e) The Company waives any right to require the Bank to (1) proceed against any Person, (2) proceed against or exhaust all or any of the Collateral or pursue its rights and remedies as against the Collateral in any particular order, or (3) pursue any other remedy in its power. The Bank shall not be required to take any steps necessary to preserve any rights of the Company against holders of mortgages prior in lien to the Lien of any Mortgage included in the Collateral or to preserve rights against prior parties. (f) The Bank may, but shall not be obligated to, advance any sums or do any act or thing necessary to uphold and enforce the Lien and priority of, or the security intended to be afforded by, any Mortgage included in the Collateral, including, without limitation, payment of delinquent taxes or assessments and insurance premiums. All advances, charges, costs and expenses, including reasonable attorneys' fees and disbursements, incurred or paid by the Bank in exercising any right, power or remedy conferred by this Agreement, or in the enforcement hereof, shall be paid by the Company, shall be secured by the Collateral, and until paid, shall bear interest from the date of expenditure at the rate of interest specified in the Note. (g) No failure on the part of the Bank to exercise, and no delay in exercising, any right, power or remedy provided hereunder, at law or in equity shall operate as a waiver thereof, nor shall any single or partial exercise by the Bank of any right, power or remedy provided hereunder, at law or in equity preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein provided are cumulative and are not exclusive of any remedies provided at law or in equity. Section 8.3. Application of Proceeds. The proceeds of any sale or other enforcement of the Bank's security interest in all or any part of the Collateral shall be applied by the Bank: 25 First, to the payment of the costs and expenses of such sale or enforcement, including reasonable compensation to the Bank's agents and counsel, and all expenses, liabilities and advances made or incurred by or on behalf of the Bank in connection therewith; Second, to the payment of any other amounts due under the Note or this Agreement (whether for principal or interest or otherwise) in such order and maimer as the Bank elects; and Finally, to the payment to the Company, or to its successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. If the Proceeds of any such sale are insufficient to cover the costs and expenses of such sale, as aforesaid, and the payment in full o f the Note and all other amounts due hereunder, the Company shall remain liable for any deficiency. Section 8.4. Bank Appointed Attorney-in-Fact. The Bank is hereby appointed the attorney-in-fact of the Company, with full power of substitution, upon the occurrence and during the continuation of an Event of Default, for the purpose of carrying out the provisions hereof and taking any action and executing any instruments which the Bank may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, the Bank shall have the right and power upon the occurrence and during the continuation of an Event of Default, to give notices of its security interest in the Collateral to any Person, either in the name of the Company or in its own name, to endorse all Mortgage Loans payable to the order of the Company, or to receive, endorse and collect all checks made payable to the order of the Company representing any payment on account of the principal of or interest on, or the proceeds of sale of, any of the Mortgage Loans or and to give full discharge for the same. Section 8.5. Right of Set-off If the Company shall default in the payment of the Note, any interest accrued thereon, or any other sums which may become payable hereunder when due, or in the performance of any of its other obligations or liabilities under this Agreement, the Bank, shall have the right, at any time and from time to time, without notice, to set-off and to appropriate or apply any and all deposits of money or property or any other indebtedness at any time held or owing by the Bank or a parent company, affiliate, or subsidiary to or for the credit of the account of the Company against and on account of the obligations and liabilities of the Company under the Note and this Agreement, irrespective of whether or not the Bank shall have made any demand hereunder and whether or not said obligations and liabilities shall have matured, provided, however, that the aforesaid right of set-off shall not apply to any deposits of escrow monies or other funds being held on behalf of the mortgagors under Mortgage Loans or other third parties. Section 8.6. Reasonable Assurances. If, at any time during the term of the Agreement, Bank has reason to believe that Company is not conducting its business in accordance with, or otherwise is not satisfying in all material respects: (i) all applicable statutes, regulations, rules, and notices of federal, state, or local governmental agencies or instrumentalities, all applicable requirements of Investors and Insurers and prudent industry standards or (ii) all applicable requirements of Bank, as set forth in this Agreement, then, B ark shall have the right to demand, pursuant to written notice from Bank to Company specifying with particularity, the alleged act, error or omission in question, reasonable assurances from Company that such a belief is in fact unfounded, and any failure of Company to provide to Bank such reasonable assurances in form and substance reasonably satisfactory to Bank, within the time frame specified in such written notice shall itself constitute an Event of Default hereunder. Company hereby authorizes Bank to take such actions as may be necessary or appropriate to confirm the continued 26 eligibility of Company for Advances hereunder, including without limitation (i) ordering credit reports and (ii) contacting mortgagors, licensing authorities and Investors or Insurers. ARTICLE IX REIMBURSEMENT OF EXPENSES; INDEMNITY The Company shall: Section 9.1. Cost of Enforcement. Pay all costs and expenses of the Bank, including reasonable attorney's fees, in connection with the enforcement of this Agreement, the Note, and other documents and instruments related hereto. Section 9.2. Payments of Taxes. P ay, and hold the Bank and any holder of the Note harmless from and against, any, and all, present and future stamp, documentary and other similar taxes with respect to the foregoing matters and save the Bank and the holder or holders of the Note harmless from and against any and all liabilities with respect to or resulting from any delay or omission to pay such taxes. Section 9.3. Indemnification. Indemnify, pay and hold harmless the Bank and any of its officers, directors, employees or agents and any subsequent holder of the Note from and against any and all liabilities, obligations, losses, damages, penalties, judgments, suits, costs, expenses and disbursements of any kind whatsoever (the "Indemnified Liabilities") (excluding any such Indemnified Liabilities resulting from failure by the Bank to perform any of its obligations under this Agreement, the Note, or any other document referred to herein as established in a suit between the Company and the Bank which may be the same suit in which indemnification is being sought hereunder by the Bank and any liabilities arising from the Bank's gross negligence or willful misconduct) which may be imposed upon, incurred by or asserted against the Bank or such holder in any way relating to or arising out of this Agreement, the Note, or any other document referred to herein or any oft he transactions contemplated hereby or thereby to the extent that any such Indemnified Liabilities result (directly or indirectly) from (i) the inaccuracy or incompleteness of any representation or warranty made by the Company in this Agreement or any schedule, statement, Exhibit or certificate furnished by the company pursuant to this Agreement or (ii) the failure by the Company to observe or perform any term or provision of this Agreement or of any agreement executed in connection herewith, including without limitation any claims made, or any actions, suits or proceedings commenced or threatened, by or on behalf of any creditor (excluding the Bank and the holder or holders of the Note), security holder, shareholder, mortgagor, customer (including, without limitation, any person or entity having any dealings of any kind with the Company), trustee, director, officer, employee and/or agent of the Company acting in such capacity, the Company or any governmental regulatory body or authority. ARTICLE X DELIVERIES OF COLLATERAL DOCUMENTS The Bank exclusively shall deliver Pledged Mortgages to the Investor under the Purchase Commitment with respect thereto for its examination and purchase, against a bailee letter substantially in the form attached hereto as Exhibit E. The Bank may deliver any document relating to the Collateral to the Company for correction or completion against a properly executed trust receipt in the form approved by the Bank with instructions to the Company to either return the corrected document to the B ark within ten (10) calendar days after such delivery or redeem the Mortgage Loan from pledge. In the case of 27 deliveries of Pledged Mortgages by the Bank, the Company shall deliver to the Bank a letter, to accompany the delivery, confirming the security interest of the Bank and designating the Bank as payee under any Purchase Commitment. ARTICLE XI MISCELLANEOUS Section 11.1. Relationship of Parties. The relationship between Bank and the Company is limited to that of creditor/secured party, on the one hand, and borrower, on the other hand. The provisions herein for compliance with financial covenants and delivery of financial statements, are intended solely for the benefit of Bank to protect its interests as lender in assuring performance of the obligations hereunder, and nothing contained in this Agreement shall be construed as permitting or obligating Bank to act as a financial or business advisor or consultant to the Company, as permitting or obligating the Bank to control the Company or to conduct the Company's operations, as creating any joint venture, agency, fiduciary, trustee, or other relationship between the parties other than as explicitly and specifically stated in this Agreement. The Company acknowledges that it has had the opportunity to obtain the advice of experienced counsel of its own choosing in connection with the negotiation and execution of this Agreement and to obtain the advice of such counsel with respect to all matters contained herein. The Company further acknowledges that it is experienced with respect to financial and credit matters and has made its own independent decision to execute and deliver this Agreement. Section 11.2. Recourse. The Company acknowledges and agrees that it is fully liable for repayment of all Advances and all sums due hereunder or under the Note and for performance of all obligations contained in this Agreement. Section 11.3. Notices. All notices, demands, consents, requests and other communications required or, permitted to be given or made hereunder (collectively, "Notices ") shall, except as otherwise expressly provided hereunder, be in writing and shall be delivered in person or telegraphed or mailed, first class, return receipt requested, postage prepaid, or by overnight delivery service or by facsimile or other telecommunications device addressed to the respective parties hereto at their respective addresses hereinafter set forth or, as to any such party, at such other address as may be designated by it in a Notice to the other. All Notices shall be conclusively deemed to have been properly given or made when duly delivered, in person or by overnight delivery service or by facsimile or other telecommunications device, or if mailed on the third Business Day after being deposited in the mails or when delivered to the telegraph company, addressed as follows: if to the Company: if to the Bank: with a copy to: with a copy to: Tribeca Lending Corporation Six Harrison Street New York, New York 10013 28 Attention: Mr. Joseph Caiazzo 110 East Main Street President Salineville, Ohio 43945 Facsimile No. 212.625.9830 Attention: Mr. Jerry S. Sutherin Vice President Facsimile No. 330.679.0028 Tribeca Lending Corporation Six Harrison Street Sky Financial Group, Inc. New York, New York 10013 221 South Church Street Attention: General Counsel Bowling Green, OH 43402 Facsimile No. 212.625.9830 Attention: General Counsel Facsimile No. 419.254.6345 Sky Bank Section 11.4. Terms Binding Upon Successors; Survival. The terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. All representations, warranties, covenants and agreements herein contained on the part of the Company shall survive the making of any Advance and the execution of the Note, and shall be effective so long as the Commitment is outstanding or there remains any obligation of the Company hereunder or under the Note to be paid or performed. Section 11.5. Assignment. This Agreement may not be assigned by the Company without the written consent of Bank. This Agreement and the Note, along with the Bank's security interest in any or all of the Collateral, may, at any time, be transferred or assigned, in whole or in part, by the Bank, and any such transferee or assignee thereof may enforce this Agreement, the Note and such security interest. Section 11.6. Amendments. This Agreement may not be modified or amended or waived unless such modification, waiver or amendment is in writing signed by the parties. Section 11.7. No Waiver; Remedies Cumulative. No failure or delay on the part of the Company or the Bank or any holder of the Note in exercising any right, power or privilege hereunder and no course of dealing between the Company and the Bank or the holder of the Note shall operate as a waiver thereof~ nor shall any single or partial exercise of any right, power or privilege hereunder or under the Note preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Company or the Bank or the holder of the Note would otherwise have. No notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Bank or the holder of the Note to any other or further action in any circumstances without notice or demand. Section 11.8. Invalidity. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions hereof, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had not been included. Section 11.9. Participations. The Bank may from time to time a ell or otherwise grant participations in the Note, and the holder of any such participation, if the participation agreement so provides, (i) shall, with respect to its participation, be entitled to all of the rights of the Bank and (ii) may exercise any and all rights of setoff or banker's lien with respect thereto, in each case as fully as though the Company were directly indebted to the holder of such participation in the amount of such participation; provided 29 however, that the Company shall not be required to send or deliver to any of the participants other than the Bank any of the materials or notices required to be sent or delivered by it under the terms of this Agreement, nor shall it have to act except in compliance with the instructions of the Bank. Section 11.10. Integration. This Agreement, together with the Note, and other documents executed pursuant to the terms hereof, constitute the entire agreement between the parties hereto, with respect to the subject matter hereof Section 11.11. Additional Instruments, etc. The Company shall execute and deliver such further instruments and shall do and perform all matters and things necessary or expedient to be done or observed for the purpose of effectively creating, maintaining and preserving the security and benefits intended to be afforded by this Agreement. Section 11.12. Governing Law. This Agreement and the rights and obligations of the parties hereunder and under the Note shall be construed in accordance with and governed by the laws of the State of Ohio. Section 11.13. Company Information. The Company hereby authorizes the Bank to provide any Affiliate of the Bank with information regarding the Company, including copies of documents, financial statements, corporate records and reports, obtained by the Bank from the Company or any other entity during the course of the negotiation or administration of this Agreement. Section 11.14. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterpart signature pages, each of which when so executed and delivered shall be an original, but all of which together constitute one and the same instrument. [This space has been left blank intentionally.] 30 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. COMPANY: TRIBECA LENDING CORPORATION By _________________________________________ Printed Name: Title: BANK: SKY BANK By _________________________________________ Printed Name: Title: 31 EXHIBIT A PROMISSORY NOTE $30,000,000.00 Date: September 30, 2003 FOR VALUE RECEIVED, the undersigned (herein called the "Company"), hereby promises to pay to the order of Sky Bank (the "Bank" or, together with its successors and assigns, the "Holder") at East Liverpool, Ohio address], or at such other place as the Holder may designate from time to time, the principal sum of Thirty Million Dollars ($30,000,000.00) or so much thereof as may be outstanding from time to time at such times and in such amounts as set forth in the Warehousing Credit and Security Agreement dated as of September 30, 2003, between the Company and the Bank (the "Agreement"). The unpaid amount of each Advance shall bear interest, from the date of such Advance until paid in full, at a rate per annum equal to the Index (as hereinafter defined) of the Bank (the "Floating Rate"); provided, however, that the Floating Rate shall not be less than five percent (5%) per annum. All interest and transaction fees will be deducted from the proceeds remitted from the Investor to the Bank on each individual loan. In the event the total sum of the advance plus such fees and interest exceeds the remittance amount received from the investor, the deficit amount shall be deemed in arrears and will be payable to the Bank on the [___] day of each month. All payments hereunder shall be made in lawful money of the United States and in immediately available finds. As used herein, the term "Index" shall mean the independent index which is The Wall Street Journal Prime Rate. The Index is not necessarily the lowest rate charged by the Bank on its loans. If the Index becomes unavailable during the term of this Note, the Bank may designate a substitute Index after notice to the Company. The rate of interest hereunder shall be adjusted as of the effective date of each change in the Index. Should any issue arise as to the Index in effect on any date or for any period, a certificate as to the Index in effect on such date or for such period, executed by the chief financial officer of the Bank, shall be deemed conclusively to establish such Index. Interest shall be computed on the basis of a 360-day year and applied to the actual number of days in each interest calculation period. If any payments required to be made by the Company hereunder becomes due and payable on a Saturday, Sunday or holiday, the due date thereof shall be extended to the next succeeding business day and interest hereon shall be payable at the then applicable rate during such extension. The holder of this Note is hereby authorized to record the date and amount of each payment of principal and interest, and applicable interest rates and other information with respect thereto, on the schedules annexed to and constituting a part of this Note and any such recordation shall constitute prima facie evidence of the accuracy of the information so recorded; provided, however, that the failure to make a notation or the inaccuracy of any notation shall not limit or otherwise affect the obligations of the Company hereunder. Payments shall be applied first to the interest due hereunder at the applicable rate set forth above and the balance thereof shall be applied on account of the principal of this Note. EXHIBIT A This Note is the note referred to in the Agreement and is entitled to the benefits thereof Capitalized terms used herein without definition shall have the meanings given them in said Agreement. Upon failure of the Company to pay any payment due hereunder in frill when due or upon the occurrence of an Event of Default, the entire unpaid principal balance hereof plus accrued and unpaid interest thereon shall, at the option of the Bank, mature and become immediately due and payable all in accordance with the terms of the Agreement. This Note may be prepaid in whole or in part at any time without premium or penalty. The Company hereby agrees to pay, in addition to all of the sums of money due hereunder, all costs of collection and attorneys' fees, whether suit be brought or not, and all other amounts due under the Agreement, if this Note is not paid in frill when due, whether at the stated maturity or by acceleration. No provision hereof may be waived or modified orally, but all such waivers, or modifications shall be in writing. The Company hereby waives presentment for payment, demand, protest, notice of protest and notice of dishonor. This Note shall be construed and enforced in accordance with the laws of the State of Ohio, without reference to its principles of conflicts of law. IN WITNESS WHEREOF the Company has executed this Note on the day and year first above written. TRIBECA LENDING CORPORATION By__________________________________________ Printed Name: Title: EXHIBIT A EXHIBIT B GUARANTY OF FRANKLIN CREDIT MANAGEMENT CORPORATION UNCONDITIONAL AND CONTINUING SECURED GUARANTY This Unconditional and Continuing Secured Guaranty ("Guaranty") is executed in this 30th day of September 30, 2003, by Franklin Credit Management Corporation, a corporation organized and existing under the laws of the state of Delaware, having an address of 6 Harrison Street, New York City. New York 10013 ("Guarantor") in favor and for the benefit of SkyBank, an Ohio state chartered bank, having an address of 110 East Main Street, Salineville, Ohio 43945 (hereinafter "Lender"). Guarantor unconditionally guarantees to Lender lie prompt payment and performance of each and every obligation or liability of Tribeca Lending Corporation ("Borrower") to Lender, now or at any time hereafter arising, including payment of all principal, interest and others L55ii5 due, whether by acceleration or otherwise, under that certain Warehouse Credit and Security Agreement dated September 30, 2003, between Borrower and Lender ("Agreement"), together with alt late charges, disbursements, expenses and deficiencies. 1, WARRANTIES. [a] Organization. Guarantor warrants that Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the state of its organization. [b] Power and Authority. Guarantor warrants that Guarantor has the power and authority to incur she obligations of this Guaranty, to execute, deliver and perform this Guaranty, and that Guarantor has taken all requisite action to authorize the execution, delivery and performance of Guarantor's obligations Larder this Guaranty. [c] Contracts. Guarantor warrants that there are no provisions of any existing indenture, contract, agreement to which Guarantor is a party, or of any law, administrative regulation, court order, nr consent decree that would be contravened by the execution, delivery, nr performance of this Guaranty. [d]Inducement to Lender: Waivers. Guarantor [1] acknowledges that Leader would not have extended die Indebtedness under the Agreement and will not continue to extend Indebtedness to Borrower but for tins Guaranty; [2] warrants that Guarantor has given due Guaranty to induce Lender to extend and to continue to extend Indebtedness to Borrower; [3] agrees that Lender may rely on this Guaranty in extending future Indebtedness to Borrower [4] warrants that Guarantor has received good and valuable consideration for this Guaranty; [5] waiver acceptance of this Guaranty; [6] warrants that Guarantor has not given this Guaranty in reliance upon the existence of any security; [7] acknowledges receipt of notice of all Indebtedness extended before this date; [8] waives notice of any Indebtedness extended after this date; and [9] waives protest and arty other notice of failure to pay the Indebtedness or to performs any agreement relating to any Indebtedness or Security. As used herein, the terra "Security" means and includes all guaranties of any Indebtedness, all interest in real or personal property securing the payment of any Indebtedness or any guaranties of any Indebtedness, and all of agreements. rights, or interests insuring or guaranteeing payment of any Indebtedness. [e] No Reliance on Information from Lender. Guarantor [1] warrants that Guarantor has not relied on any information about any Borrower, the Security, or any guarantor of die Indebtedness provided directly or indirectly by Lender; [2] warrants that Guarantor is familiar with each Borrower, each Borrower's affairs, and the Security; [3] warrants that Guarantor has had ample opportunity to investigate each Borrower, each Borrower's affairs, die Security, and the effect that the Indebtedness will have thereon; [4] warrants that Guarantor has been provided by Borrower all information concerning each Borrower, each Borrower's affairs, and the Security requested; [5] warrant that Guarantor has had adequate opportunity to seek and evaluate professional advice concerning each Borrower, die Security, and this Guaranty from advisors of Guarantor's choosing, including financial and legal advice; and [6] agrees that Guarantor shall not rely on any information provided by Lender about each Borrower or die Security, including any-other guarantor. Guarantor shall continue to investigate and evaluate each Borrower and Use Security independently throughout the term of this Guaranty, and Lender has no obligation to provide Guarantor any information about clay Borrower or die Security. 2. WAIVERS. With out notice to or consent of Guarantor, Lender may in or refrain from doing anything affecting any Indebtedness or any Security including the following: [a] granting or not granting any indulgences to anyone liable for payment of the Indebtedness or any Security; [b] failing to get or to perfect any Security; [c] failing to get an enforceable agreement to repay the Indebtedness;[d] releasing any Security or anyone or any property from liability for payment of the Indebtedness; [e] changing any agreement relating to the Indebtedness or any Security; [f] extending die time for payment of the Indebtedness; and [g] delaying the enforcement of nr failing to enforce any rights to payment of the Indebtedness or rights against any Security. GUARANTOR WAIVES ALL SURESHIP AND OTHER SIMILAR DEFENSES. 3. DEFECTS IN SECURITY. ETC. Guarantor's obligations under this Guaranty shall not be affected by [a] any default in any document concerning any Indebtedness or Security when accepted by Lender or arising any time thereafter [b] Use unenforceability of or defect in any Security or document relating to any Indebtedness; [c] any decline in the value of any Security; or [d] death, incompetence, insolvency, dissolution, liquidation, or winding up of affairs of any Borrower, Guarantor, or anyone liable for any Security or the start of insolvency proceedings by or against any such person or entity. 4. UNCONDITIONAL OBLIGATION. In the event of a default under the Agreement, or any other agreement between Borrower and Lender, Guarantor shall immediately pay to Lender the outstanding principal balance and all interest, charges, expenses and other amounts payable in connection with any Indebtedness, regardless of whether or not Lender first pursues a Borrower or exhausts any of its rights or remedies against any Borrower, any other guarantor, others, or the Security. Guarantor shall not have any right of subrogation to Lender unless and until the Indebtedness is paid in full. Guarantor shall make no claim against any Borrower or any Borrowers estate in any way arising out of this Guaranty is a any proceeding wader the U.S. Bankruptcy Code, waives any right to such a claim, and shall repay all repayments of any Indebtedness that are recovered from Lender or avoided in such a proceeding or under any other law. This Guaranty shall extend and be applicable to alt renewals, amendments, extensions, consolidations, modifications, increases and restriction of the Indebtedness and Guarantor's liability under dais Guaranty shall not be affected or in any way reduced or canceled by any such action, No subsequent guaranty to Lender by Guarantor shall supersede or terminate this Guaranty, but shall be an additional guaranty unless otherwise stated therein and, if Guarantor has given a previous guaranty to Lender, this Guaranty shall be in addition to the previous guaranty. 5. SECURITY INTEREST. As security for the payment and performance of die Indebtedness and die obligations of the Guarantor under this Guaranty, Guarantor grants to Lender a security interest in the Collateral of Guarantor. As used herein, the term Collateral means all personal property of Guarantor wherever located, and whether now owned or hereafter acquired, including without limitation: (i) Accounts, including health-care insurance receivables; (ii) Chattel Paper; (iii) Inventory; (iv) Equipment; (v) instrument; (vi) Investment Property; (vii) Documents, including patient lists, records and files; (viii) Deposit Account; (ix) General Intangibles, including patient lists, records and files; (x) Supporting Obligations; and (xii) to the extent net listed above as original Collateral, proceeds and products of the foregoing, including but not limited to, payments from insurance claims for the loss, damage or destruction of any of the Collateral. Any term used in the Uniform Commercial Code, as adopted in Ohio ("UCC") and not defined in this Agreement has the meaning given to die term in the UCC, as tie same may be amended from time to time. 6. SUBORDINATION. Guarantor subordinates to and postpones in favor oft the Indebtedness and Security [a] any present and future debts and obligations of any Borrower to Guarantor, and [],] airy liens or security interests securing payment of such debt and obligations. Guarantor nary receive payment from Borrower on any debts or obligations owed to Guarantor by Borrower, provided however, that, upon the occurrence of an event of difficult by Borrower tinder die Agreement, Guarantor shall not ask for or receive any payment for all or any part of any debts and obligations owed to Guarantor by any Borrower until die Indebtedness has been paid its full; and, if Guarantor receives such a payment Guarantor shall immediately deliver the payment to Lender for credit against die theta outstanding balance of the Indebtedness, whether natured or unmatured 7. FINANCIAL STATEMENTS. Guarantor shall promptly furnish to Lender such other information and statements concerning die business affairs and financial condition of Guarantor as Lender nary reasonably request. Guarantor shall give Leader access to all books, records, and financial data of Guarantor by or through any of Lender's officers, agents, attorneys or accountants, at all reasonable times and from time to time. Lender may examine, inspect and make extracts from Guarantor's books and other records at all reasonable rinses and from time to time. Guarantor represents and warrants dial all financial EXHIBIT B statements off Guarantor furnished Lender will present fairly tire financial position of Guarantor as of the dates of die statements and will be prepared in accordance with accounting principles applied on a basis consistently maintained thought the period involved. 8. TERMINATION; REVOCATION. This Guaranty shall automatically terminate on the date on which all of Use Indebtedness is repaid is a full. No revocation of this Guaranty or any substitute guaranty by Guarantor shall be effective until all of the Indebtedness has been repaid in full. 9. SUCCESSORS: GOVERNING LAW; ENFORCEABILITY This Guaranty shall be biding upon not only Guarantor but also Guarantor's heirs, administrators, and personal representatives and shall inure to the benefit of Lender and its successors and assigns. This Guaranty shall be construed and interpreted in accordance with the laws oft the State of Ohio. If any provision of this warranty or the application thereof to anyone or any circumstance shall be adjudge invalid or unenforceable to any extent, die application of the reminder of the provision to the party or circumstances, Use application of the provision to other parties or circumstances, and the application of the remainder of this Guaranty shall not be affected thereby. Each s provision of this Guaranty shall be valid and enforceable to the fullest extent permitted by law. 10. NO WAIVERS BY LENDER. No forbearance by Lender in exercising any right under this Guaranty, any Indebtedness, or any Security shall operate as a waiver thereof no forbearance in exercising any right under this Guaranty, any Indebtedness, or any Security oh any one or more occasions shall operate as a waiver of such right on other occasion; and no single or partial exercise of any right under this Guaranty, any Indebtedness, or any Security shaft preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. Lender's tights under this Guaranty are cumulative and not exclusive of any rights or remedies that Lender may otherwise have. 11.ATTORNEYS' FEES AND EXPENSES Guarantor shall pay to Lender all costs and expenses incurred by Lender in enforcing or protecting Lenders tights in connection with any Indebtedness, Security or thus Guaranty and in collecting payment on any Indebtedness or this Guaranty, whether or not any Borrower is in default under any document executed in connector with the Indebtedness, including, but not limited to, [a]attorneys' and paralegals' fees; [b} the fees and expenses of my litigation, administrative, bankruptcy, insolvency, receivership or any other similar proceeding; [c]court costs; [d] the expenses of Lender, its employees, agents, and witnesses in preparing for litigation arid for lodging, ravel, and attendance at pretrial hearings, depositions, and trials; and [e] consulting fees and expenses incurred by Lender in connection with any litigation. 12.NOTICES Any notices required or desired to be given under this Guaranty shall be in writing, and shall be delivered by nationally recognized overnight delivery services U.S. mail (postage prepaid) or hand delivery, if to Lender, to Sky Bank, 110 East Main Street, Salirueville, Ohio 43945, Attn: Jerry S. Sutherien, Vice President, and if to Guarantor to the address set forth in the opening paragraph of this Guaranty, with a copy to: Tribeca Lending Corporation, 5 Harrison Street, New York City, New York 10013, Attn: General Counsel, or to such other address as Lender or Guarantor my hereafter give written notice thereof. 13, WALVER OF JURY TRIAL. EACH PARTY TO TI-11S AGREEMENT VOLUNTARILY, IRREVOCABLY AND UNCONDITIONALLY WAIVES AJ1Y RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, BETWEEN THEM ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS GUARANTY, THE AGREEMENT, OR ANY OTHER AGREEMENT OR DOCUMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO. GUARANTOR ACKNOWLEDGES AND AGREES THAT THIS WAIVER OF JURY TRIAL IS A MATERIAL INDUCEMENT TO LENDER ENTERING INTO THIS AGREEMENT. IN WITNESS WHEREOF, GUARANTOR EXECUTES AND DELIVERS TO LENDER THIS UNCONDITIONAL AND CONTINUING GUARANTY AS OF SEPTEMBER 30, 2003. GUARANTOR: FRANKLIN CREDIT MANAGEMENT CORPORATION Witnesses: /s/ [ILLEGIBLE] /s/ Joseph Caiazzo ____________________________________ ______________________________________ [ILLEGIBLE] E.V.P. C.O.O ____________________________________ ______________________________________ EX-10.4 4 y07373exv10w4.txt LETTER EXHIBIT 10.4 [SKY BANK LOGO] Tribeca Lending Corporation Attn: Joseph Caiazzo 6 Harrison Street New York, NY 10013 March 24, 2005 Dear Joe, In regards to Tribeca Lending Corporation, please find attached the information for the Tribeca Lending Corporation's Warehouse Line of Credit. The line is currently approved for $40MM and will be approved to be increased to $60MM on May 1, 2005. This line is in good standing at Sky Bank and will be reviewed again on or before the maturity date of April 30, 2006. Amount of Commitment: $40,000,000.00 Amount currently in use: $16,216,775.00 as of 3/24/05 Please feel free to call with further questions. Sincerely, Jerry S. Sutherin Vice President, Specialty Lending Group Sky Bank EX-10.5 5 y07373exv10w5.txt FORM OF TERM LOAN AND SECURITY AGREEMENT EXHIBIT 10.5 TERM LOAN AND SECURITY AGREEMENT LOAN AGREEMENT, dated as of _____________, between ____________, a ____________, (the "Borrower") and Sky Bank (the "Bank"). The Borrower is the owner of certain Promissory Notes, (hereinafter collectively called the "Notes") and being further described and listed in the attached Exhibit "A". The Borrower has requested the Bank to make a loan evidenced by a Promissory Note in the principal amount of Five Million Four Hundred Eleven Thousand Eight Hundred Seven Dollars and Twenty-five Cents ($_________), (the "Note") together with an initial interest rate of ____%. The interest rate will be adjusted monthly on the first day of each month, based upon the following Index: Federal Home Loan Bank of Cincinnati 30 day advance rate, plus ___ basis points. Pursuant to the terms of this Loan Agreement, the Bank is willing to make the Loan to the Borrower, upon the pledge of collateral security of, among other things, (i) an assignment of Borrower's interest in those certain Promissory Notes previously assigned to Bank by Borrower on _______, such Notes being identified on the attached Exhibit "A"; (ii) Hypothecation Agreements entered into between Bank and various parties as set forth on Exhibit "B" attached hereto, all such referred to herein individually or collectively as the "Collateral" and all documents executed in connection with the Loan shall be herein referred to collectively as the "Documents". NOW, THEREFORE, the parties hereby agree as follows: 1. LOAN. Upon the terms and conditions set forth herein, the Bank agrees to make on or about March 29, 2005 the Loan to the Borrower, which shall be evidenced by and paid in accordance with the terms and provisions of the Note of the Borrower payable to Bank in the form of Exhibit B annexed hereto with the blanks appropriately completed. Nothing contained herein shall be deemed to alter or diminish the Borrower's absolute and unconditional obligation to make the payments to the Bank required under the terms of the Note. 2. PLACE OF PAYMENTS. Payment of principal, interest and other sums due or to become due with respect to the Loan and all the Obligations (hereinafter defined) are to be made at the office of the Bank referred to herein, or such other place as the Bank shall designate to the Borrower in writing, in lawful money of the United States of America and in immediately available funds. It is further understood that all payments to be received by the Borrower on the Notes shall be mailed directly to the following addresses: Each account will then be deposited directly to Checking Account No. ____________. The daily collected balance from this account will be applied as hereinafter set forth. 3. APPLICATION OF NOTE PAYMENTS. So long as no Event of Default (hereinafter defined) or event which, with notice, lapse of time or the happening of any further condition, event or act would constitute an Event of Default ("Default"), shall have occurred and be continuing, each payment of an installment due under the Loan, received by the Bank shall be applied as follows: a. Interest b. Principal c. Escrow d. All remaining funds from the collateral payments shall be placed into a cash deposit account and pooled with funds from additional accounts as identified in the attached Exhibit C e. Disbursement of funds, if available from such pooled account, up to $________ per month to Franklin Credit Management Corporation f. Remaining funds in the account to be applied as additional principal curtailments on a contributory basis per loan transaction for the funds remaining in said account Additionally, the Loan shall be reviewed on a quarterly basis and if, in the sole discretion of Sky, there has been a substantial reduction in the principal on said Loan, then said Loan shall be reamortized over the remainder of the twenty year amortization period to reduce the required monthly payment. If such reduction occurs, there shall be a loan modification prepared, executed by the parties, and attached to the applicable Documents. 4. ATTORNEY-IN-FACT. (a) The Borrower hereby authorizes the Bank to do every act and thing in the name of the Borrower or the Bank which the Bank may deem advisable to enforce the terms of the Notes or Collateral, and the Borrower hereby irrevocably appoints the Bank its true and lawful attorney, with full, irrevocable power and authority in the name of the Borrower and with full power of substitution and revocation, to demand, enforce, collect, receive, give a receipt for and give releases for any monies due or to become due under or arising out of the Notes, or Collateral, or any policy of insurance or indemnity relating to the Notes, to endorse all checks and other instruments, and to do and take all such other actions relating to the Notes, or to file any claims or institute any proceedings for the foregoing, which the Bank deems necessary. The Borrower hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (b) The powers conferred on the Bank hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. The Bank shall be accountable only for amounts that it actually receives as a result of the exercise of such powers and neither it nor any of its officers, directors, employees or agents shall be responsible to the Borrower for any act or failure to act, except for the Bank's gross negligence or willful misconduct. 5. CONDITIONS OF THE LOAN. The obligation of the Bank to make the Loan is subject to the satisfaction of the following conditions either precedent to or concurrently with the date on which the Bank makes the Loan (the "Closing Date"): (a) There shall have occurred no material adverse change in the business or the financial condition of the Borrower since the date of the most recent audited financial statements furnished to Bank. (b) All acts, conditions and things (including, without limitation, the obtaining of any necessary regulatory approvals and the making of any required filings, recordings or registrations) required to 2 be done or performed or to have happened prior to the execution, delivery and performance of this Loan Agreement, and the Note shall have been done and performed to the satisfaction of the Bank and its legal counsel. (c) The Bank shall have received certified copies satisfactory to it of all of the corporate documents and proceedings taken by the Borrower authorizing and approving the execution, delivery and performance of this Loan Agreement, the Loan and all other Documents. (d) The Bank shall have received an opinion of counsel to the Borrower, dated the Closing Date, satisfactory in form and substance to the Bank. (e) The Note shall have been duly executed and delivered to the Bank. (f) The Bank shall have received a copy of the assignment of the Purchase Agreement to Borrower. (g) There shall be executed and delivered to the Bank, an assignment under which the Borrower assigns to the Bank Borrower's interest in the Notes, the Purchase Agreement and Borrower's interest in any documents evidencing any interest the Borrower may have in the Notes, including the Collateral for the Notes. (h) The Bank shall have received the Notes endorsed to Bank. (i) The representations, warranties and agreements set forth in this Loan Agreement shall be true and correct as of the Closing Date and no Default or Event of Default shall exist on the Closing Date. (j) All legal matters incident to the transaction herein contemplated shall be satisfactory to designated counsel to the Bank. (k) All other documents reasonably required by the Bank, on/or, subsequent to the Closing Date, by the Bank shall have been received. (l) Borrower shall provide to Bank a Power of Attorney granting unto Bank the right to complete mortgage assignments or any other applicable assignments of the collateral which secures the Notes. (m) Hypothecation Agreements entered into between Bank and various parties as set forth on Exhibit "B" attached hereto. 6. ASSIGNMENTS, ENCUMBRANCES AND TRANSFERS. The Borrower shall not, without the prior written consent of the Bank, assign, convey, transfer, sell, exchange, lease or otherwise dispose of any of its right, title or interest in, to or under this Loan Agreement, the Notes or any of the Collateral, or create, incur or suffer to exist any lien, charge, mortgage, security interest or encumbrance upon any of the Collateral (except the security interests and the assignments created or effected by this Loan Agreement). Provided, however, the parties hereto agree that although the Borrower shall be the record holder 3 and owner of the Notes, it shall submit to the Bank the original of said Notes, and pursuant to the Power of Attorney granted herein by the Borrower in favor of Bank, the Bank may take steps as necessary to protect its interest. 7. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants that: (a) The Borrower (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of New York (ii) has the power and authority to purchase and hold or own the Notes and carry on its business as now being conducted, (iii) is qualified to do business in every jurisdiction where such qualification is necessary and (iv) has the power to execute, deliver and perform this Loan Agreement, and the Note and to borrow under this Loan Agreement, and to pledge the Collateral as hereunder described. (b) The execution, delivery and performance of this Loan Agreement, the Note and the borrowing under this Loan Agreement (i) have been duly authorized by all requisite action on the part of the Borrower, (ii) will not violate any provision of law, any order of any court or other agency of government or the charter or by-laws (or similar documents) of the Borrower or any indenture, agreement or other instrument to which the Borrower is a party, or by which it or any of its property is bound, or be in conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, any such indenture, agreement or other instrument, and (iii) do not require the consent or approval of any federal, state, municipal or other governmental department, board, bureau, agency or instrumentality, domestic or foreign. (c) This Loan Agreement, the Note and the other Documents have each been duly executed by the Borrower and constitute the legal, valid and binding obligations of the Borrower enforceable in accordance with their terms. (d) As of the date hereof, the Borrower is not insolvent within the meaning of applicable State or Federal law. (e) No litigation, arbitration, investigation or administrative proceedings of or before any court, tribunal or governmental body is presently pending or threatened against the Borrower, or against its property which, if adversely determined, would have a material adverse effect on its business, assets or financial condition. (f) The Borrower has good, valid and marketable title to the Notes, free and clear of all liens, claims and encumbrances to the Notes except for the liens, claims and encumbrances of the Bank pursuant to this Loan Agreement, and no financing statements or mortgages securing repayment of the Notes other than those naming the Bank as secured party are on file in any public office. (g) The Borrower has the power and authority to and does hereby convey to the Bank a valid and continuing first security interest and lien in and upon the Notes, as evidenced by the assignment of the Notes and Collateral. (h) The Borrower is not an Investment Company under the Investment Company Act of 1940. (i) The Borrower's chief executive office is located at 6 Harrison Street, New York, New 4 York 10013. (j) All other documents reasonably requested by the Bank, on/or, subsequent to the Closing Date, shall be submitted to Bank. (k) The Borrower has not entered into any understanding or agreement (oral or in writing) relating to the Notes, the transactions contemplated thereby, or any of the transactions contemplated or permitted by this Loan Agreement, with any person or entity, other than the Bank. (l) Borrower warrants that the Loan is made pursuant and subject to the terms of that certain Agreement dated March 20, 1997, and Modification Agreements dated December 1, 1998 and April 1, 2000, September 15, 2001, December 14, 2001, and March 19, 2003, respectfully, between Franklin Credit Management Corporation and Bank (the "Agreement") and that the Loan once made shall be included as an Exhibit C loan (as identified on the Agreement) and be subject to the terms and conditions of said Agreement, a copy of said Agreement and Modification are attached hereto as Exhibits ______ and ______ and made a part hereof. 8. BORROWER'S COVENANTS. The Borrower covenants and agrees as follows: (a) The Borrower will promptly give written notice to the Bank of (i) the occurrence of any Default or Event of Default of which it has knowledge, (ii) the occurrence of any loss respecting the Notes of which it has knowledge, (iii) the commencement, threat of which the Borrower has knowledge of, any material litigation or other proceedings affecting the Borrower or the Collateral or that might materially interfere with the normal business operations of the Borrower. (b) The Borrower will (i) duly observe and conform to all valid requirements of governmental authorities necessary to the performance of its obligations under this Loan Agreement, including the payment of all sales, use, property or other tax, license, toll, inspection or other fee, and obtaining any bond, permit or certificate, (ii) maintain its corporate existence and obtain and keep in full force and effect all rights, franchises, licenses and permits which are necessary to the proper conduct of its business and (iii) obtain or cause to be obtained as promptly as possible any governmental, administrative or agency approval and make any filing or registration therewith which shall be required with respect to the performance of its obligations under this Loan Agreement and all of the Documents. (c) The Borrower will duly observe and perform all covenants and obligations to be performed by it under the Documents. (d) The Borrower will promptly, at any time and from time to time, at its sole expense, execute and deliver to the Bank such further instruments and documents, and take such further action, as the Bank may from time to time reasonably request in order to carry out the intent and purpose of this Loan Agreement and all of the Documents, and to establish and protect the rights, interests and remedies created, or intended to be created, in favor of the Bank hereby and thereby, including, without limitation, the execution, delivery, recordation and filing of financing statements continuation statements or mortgage assignments with respect to the Collateral. With respect to the Collateral, the Borrower hereby authorizes the Bank, in such jurisdictions, where such action is authorized or permitted by law, to effect any such recordation or filing without the signature of the Borrower thereto and the Bank's expenses with respect 5 thereto shall be payable by the Borrower on demand and Bank shall provide copies of such filings to the Borrower. The Borrower will pay, or reimburse the Bank for, any and all fees, costs and expenses of whatever kind or nature incurred in connection with the creation, preservation and protection of the Bank's security interests in the Collateral, including, without limitation, all fees and taxes in connection with the recording or filing of instruments and documents in public offices, payment or discharge of any taxes or liens, charges or encumbrances of any nature upon or in respect of the Collateral, premiums for insurance with respect to the Collateral and all other fees, costs and expenses in connection with protecting, maintaining or preserving the Collateral and the Bank's interests therein, whether through judicial proceedings or otherwise, or in defending or prosecuting any actions, suits or proceedings arising out of or relating to the Collateral; and all such amounts that are paid by the Bank shall, until reimbursed by the Borrower, constitute further obligation of the Borrower secured by the Collateral. (e) The Borrower will not create, assume or suffer to exist any lien, claim, charge or encumbrance of any kind upon any of the Collateral, of or by any individual (or association of individuals), entity or governmental instrumentality, claimed or asserted against, through or under the Borrower. (f) The Borrower will not change its chief executive office or remove its books and records concerning the Collateral from the address herein, unless it shall have given at least 30 days' prior written notice of such change or removal to the Bank, specifying the new address or addresses. (g) Without limiting the generality of any other provision hereof, the Borrower shall indemnify, protect, save and keep harmless the Bank from and against any reduction in the amount payable out of the Collateral to the Bank, or any other loss, cost or expense (including legal fees) incurred by the Bank, as the result of the Borrower's breach of clause (e) of this paragraph. 9. INDEMNITY. (a) The Borrower hereby agrees to indemnify and hold the Bank harmless from and against all costs, claims and expenses, including reasonable attorney's fees incurred in connection with the performance of the Bank's duties or in enforcing its rights hereunder or under any of the Documents. The Bank may rely upon and shall be protected in acting or refraining from acting upon any written notice, instruction or request furnished to it hereunder and believed by it to be genuine and to have been signed by the proper party or parties. (b) With respect to any payments received by the Bank on behalf of the Borrower, the Borrower hereby acknowledges that the Bank is acting solely as a collection agent at the Borrower's request and for its convenience; that the Bank shall not be deemed to be the agent of any other party and that the Bank shall not be liable to any other party hereto or to any third party for any act of omission on its part unless arising from bad faith or willful misconduct. (c) The Borrower agrees to pay when due, and to indemnify and hold the Bank harmless from, all license, filing and registration fees and assessments, and all sales, use, property, excise and other taxes and charges (other than those measured by the Bank's net income) now or hereafter imposed by any governmental body or agency upon or with respect to this Loan Agreement, the Loan, or the creation and continued perfection of the security interests created hereby, and any of the Collateral. 6 (d) The indemnities set forth in this paragraph shall survive the expiration or earlier termination of this Loan Agreement with respect to acts or events occurring or alleged to have occurred prior to such expiration or earlier termination. 10. DEFAULT. If any one or more of the following events (herein called "Events of Default") shall occur: (a) default in the payment of any installment of principal or interest when due under the Note; or (b) default by the Borrower in the observance or performance of any other agreement hereunder or under any agreement or document given to evidence or secure the Loan and such default shall continue for a period of 30 days. The Bank agrees to give Borrower notice of such default within a reasonable time, but in no event shall failure by the Bank to give such notice constitute a waiver of the Bank's right or a release of Borrower's obligations hereunder or under such agreement or document; or (c) if any warranty or representation or statement of any material fact made by the Borrower in connection with the Loan, whether contained in any related document, this Loan Agreement or any certificate or other related document delivered to the Bank in connection herewith proves to be untrue in any material respect; or (d) the Borrower shall file a petition, answer or consent for relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy law or other similar law, or consent to the institution of proceedings thereunder or to the filing of any such petition or to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, fiscal agent, sequestrator (or other similar official) of the Borrower or of any substantial part of its property, or if the Borrower fails generally to pay any of its debts as they become due, or if corporate action shall be taken for the purpose of effecting any of the foregoing; or (e) an order or decree shall be entered by any court of competent jurisdiction approving a petition for relief in respect of the Borrower or of all or a substantial part of its assets, providing for the appointing of a receiver, liquidator, assignee, trustee, custodian , fiscal agent or sequestrator (or similar official) of the Borrower or of a substantial part of its property or ordering the winding-up, dissolution or liquidation of its affairs, and such order or decree shall continue unstayed and in effect for a period of 60 days; or (f) Franklin Credit Management Corporation shall materially breach the Agreement; THEN, if such Event of Default has occurred, the Note (with interest accrued thereon), and all other amounts then owing by the Borrower hereunder and pursuant to other loans and advances made by the Bank to the Borrower collateralized by the Notes shall become and be immediately due and payable, all without presentment, demand, protest or notice of any kind; and, in the case of any other Event of Default, the Bank may declare the Note (with interest accrued thereon), and all other amounts then owing by the Borrower collateralized by an assignment of the Notes, to be due and payable, whereupon the same shall become and be immediately due and payable, all without presentment, demand, protest or notice of any kind; and, in addition to all other rights and remedies granted to the Bank in this Loan Agreement and in any other instrument or agreement securing, evidencing or relating to the Note or Notes, the Bank may pursue all of the rights and remedies with respect to the Collateral of a secured party under the Uniform Commercial Code or other applicable law and or all right provided herein, or in any other applicable security or loan agreement, all 7 of which rights and remedies, to the full extent permitted by the law, shall be cumulative. Without limiting the generality of the foregoing, the Borrower agrees that in any such event, the Bank, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon the Borrower or any person (all and each of which demands, advertisements and/or notices are hereby expressly waived), may forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give options or options to purchase or otherwise dispose of and deliver the Collateral (or contract to do so), or any part thereof, in one or more parcels at public or private sale or sales, at any exchange or broker's board or at any of the Bank's offices or elsewhere at Bank, such prices as it may deem best, for cash, credit or for future delivery without assumption of any credit risk. The Bank shall have the right upon any such public sale or sales, to the extent permitted by law, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Borrower, which right or equity is hereby expressly released. The Borrower further agrees, at the Bank's request, to assemble the Collateral, make it available to the Bank at places which the Bank shall reasonably select, whether at the Borrower's premises or elsewhere. The Bank shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale (after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care, safekeeping or otherwise of any or all of the Collateral or in any way relating to the rights of the Bank hereunder, including reasonable attorney's fees and legal expenses) to the payment in whole or in part of the Loan in such order as the Bank may elect and only after so applying such net proceeds and after the payment of the Bank of any other amount required by any provision of law need the Bank account for the surplus, if any, to the Borrower. To the extent permitted by applicable law, the Borrower waives all claims, damages, and demands against the Bank arising out of the repossession, retention or sale of the Collateral provided and to the extent that such claims, damages and demands do not result from the gross negligence or willful misconduct of the Bank or its agents. The Borrower agrees that the Bank need not give more than 30 days' notice (which notification shall be deemed given when mailed by an overnight delivery service, postage prepaid, addressed to the Borrower at its address set forth herein) of the time and place of any public sale or of the time after which a private sale may take place and that such notice is reasonable notification of such matters. 11. NOTICES: All notices and other communications hereunder shall be in writing and shall be deemed given when delivered in person or by a nationally recognized overnight courier service, or three (3) days after being deposited in the United States Mail, first class, registered or certified, return receipt requested, with postage prepaid and addressed to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): The Borrower: 6 Harrison Street New York, New York 10013 The Bank: 110 East Main Street Salineville, OH 43945 With a copy to: Rick L. Hull Sky Bank 8 66 East Main Street Salineville, OH 43945 12. RECEIPT OF FUNDS BY BORROWER. Should the Borrower, notwithstanding the grant to the Bank of a first priority security interest in and to the Collateral at any time while any of the Loan remain unsatisfied, receive any amount representing funds due, or proceeds of, any of the Collateral, such sums shall be held by the Borrower in trust for the Bank, shall be segregated from other funds of the Borrower, and shall be immediately paid by the Borrower to the Bank in the form so received, together with any necessary endorsement thereon. 13. LIEN; SETOFF BY BANK. The Borrower hereby grants to the Bank a continuing lien for any and all present and future indebtedness and obligations of the Borrower to the Bank upon any and all monies, securities and other property of the Borrower, and the proceeds thereof, now or hereafter held or received by, or in transit to, the Bank from or for the Borrower, whether for safekeeping, custody, pledge, transmission, collection or otherwise, and also upon any and all deposits (general or special) and credits of the Borrower with, and any and all claims of the Borrower against, the Bank, at any time existing. Upon the occurrence of an Event of Default, the Bank is hereby authorized at any time and from time to time, without notice to the Borrower, to setoff, appropriate and apply any or all items hereinabove referred to which are property of the Borrower against the Borrower's outstanding obligation plus interest accrued thereon. 14. PAYMENT OF EXPENSES AND TAXES; PERFORMANCE BY BANK OF BORROWER'S OBLIGATIONS. (a) The Borrower agrees, whether or not the transactions contemplated by this Loan Agreement, shall be consummated, to pay (i) a merchant banking fee in the sum of $________ which fee is hereby incorporated into the principal amount of the Loan, (ii) all costs and expenses of the Bank in connection with the negotiation, preparation, execution and delivery of this Loan Agreement, and the other documents relating hereto, including, without limitation, the reasonable fees and disbursements of counsel to the Bank (not to exceed $2,000.00), (iii) all fees and taxes in connection with the filing or recording of this Loan Agreement or any other document or instrument required hereby (including, without limitation, the filing of financing statements and (iv) all costs and expenses of the Bank in connection with the enforcement of this Loan Agreement and the Loan, including all legal fees and disbursements arising in connection therewith. The Borrower also agrees to pay, and to indemnify and save the Bank harmless from any delay in paying all taxes, including without limitation, sales, use, stamp and personal property taxes (other than any corporate income, capital, franchise or similar taxes payable by the Bank with respect to the payments made to the Bank hereunder or thereunder) and all license, filing, and registration fees and assessments and other charges, if any, which may be payable or determined to be payable in connection with the execution, delivery and performance of this Loan Agreement or the Note or any modification thereof. (b) If the Borrower fails to perform or comply with any of its agreements contained herein and the Bank shall itself perform or comply, or otherwise cause performance or compliance with such agreement, the expenses of the Bank incurred in connection with such performance or compliance, together with interest thereon at the rate provided for in the Note, shall be payable by the Borrower to the Bank on demand and until such payment, shall constitute an obligation secured by the Collateral. 15. LITIGATION. Borrower agrees that, upon written notice from the Bank, the Borrower will permit 9 the Bank to bring any claims or suits against any party to this or any of the Documents, in the Borrower's name, and with respect thereto, the Bank agrees to hold harmless from and indemnify the Borrower for any liabilities arising from or under such claims or suits which arise from the Bank's gross negligence or willful misconduct. The Bank shall keep the Borrower reasonably informed as to the progress and status of such claims or suits. 16. SUBMISSION TO JURISDICTION. The parties agree to irrevocably submit to the jurisdiction of the federal and state courts of the State of Ohio, and hereby waive any objections which they might have now or hereafter to the laying of venue for any suit, action or proceeding based upon or arising out of this Loan Agreement, the Notes or the Documents in any such court. 17. NO WAIVER, CUMULATIVE REMEDIES. No failure to exercise, and no delay in exercising on the part of the Bank, any right, power or privilege hereunder or under the Note or under any of the other Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any other right, power or privilege hereunder or thereunder preclude any other or further exercise hereof or thereof or the exercise of any right, power or privilege. The rights and remedies of the Bank hereunder and under the Note or the Documents are cumulative and not exclusive of any rights or remedies provided by law, and all such rights and remedies may be exercised singly or concurrently. 18. SURVIVAL OF AGREEMENT, ETC. All agreements, representations and warranties made herein, in the Note, the Documents and in any certificate, financial or other statement furnished at any time under or in connection with Loan Agreement, shall survive the delivery of the Note and the making of the Loan hereunder. 19. MODIFICATIONS, ETC. Neither this Loan Agreement, the Note nor any provision of the Documents may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by both parties. 20. CONSTRUCTION. This Loan Agreement, the Note, and Documents and the rights and obligations of the parties hereunder and thereunder, shall be construed and interpreted in accordance with the laws of the State of Ohio, without giving effect to principles of conflict of laws. 21. SUCCESSORS. This Loan Agreement, the Note and Documents shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns. 22. ENTIRE AGREEMENT. This Loan Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and all prior discussions, understandings, arrangements and agreements relating thereto are merged herein. 23. PARTIAL INVALIDITY. If any provision of this Loan Agreement is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Loan Agreement as a whole, but this Loan Agreement shall be construed as though it did not contain the particular provision or provisions held to be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to the extent as shall be permitted by law. 10 IN WITNESS WHEREOF, the parties have caused this Loan Agreement to be duly executed and delivered as of the day and year first above written. Borrower: __________________________________ By: Bank: Sky Bank __________________________________ By: 11 PROMISSORY NOTE $__________ New York, New York _________, 200_ FOR VALUE RECEIVED, _____________ (the "Borrower"), hereby unconditionally promises to pay to the order of Sky Bank (the "Bank"), at P.O. Box 159, Salineville, Ohio 43945, the sum ________________________ ($________), together with an initial interest rate of ____%. The interest rate will be adjusted monthly on the first day of each month, based upon the following Index: Federal Home Loan Bank of Cincinnati 30 day advance rate, plus ___ basis points. This Note shall be for a term of Thirty Six (36) months, amortized over a term of Two Hundred Forty (240) months. Beginning _________, there shall be monthly principal payments of ______________ Dollars and Twenty Cents ($_______), plus interest as billed monthly until maturity. The interest rate charged herein shall be adjusted monthly as changes in the above-referenced index occur. The Federal Home Loan Bank of Cincinnati 30 day advance rate shall mean the higher rate of interest as published daily by Bloomberg under the symbol FHL5LBR1. Amounts payable on this Note are payable in lawful money of the United States of America in immediately available funds at the offices of the Bank and in good and available funds, or at such other address as the holder of the Note may designate in writing. If this Note or any installment hereof becomes due and payable on a Saturday, Sunday or public holiday under the laws of the State of Ohio, the due date thereof shall be extended to the next succeeding full business day. This Note is the Note referred to in the Term Loan and Security Agreement (the "Loan Agreement"), dated the date hereof, between the Borrower and the Bank, and is entitled to the benefits thereof and is subject to mandatory payment in whole or in part as provided therein and is further subject to the terms of that certain Agreement executed by Franklin Credit Management Corporation and Bank on March 20, 1997, and Modification Agreements dated December 1, 1998, April 1, 2000, September 15, 2001, December 14, 2001, and March 19, 2003, respectfully, copies of which are attached hereto and made a part hereof. This Note is secured by certain collateral as more fully described and provided in the Loan Agreement. Upon the occurrence of any one or more of the Events of Default specified in the Loan Agreement, all amounts then remaining unpaid on this Note may be declared to be immediately due and payable as provided in the Loan Agreement. 12 Promissory Note Page 2 __________ Prepayment of this Loan is subject to the terms as more fully outlined in the Agreement referred to above. This Note shall be construed in accordance with and governed by the laws of the State of Ohio without giving effect to the principles thereof relating to the conflict of laws. For any dispute arising under this Note or in connection herewith, the Borrower hereby irrevocably submits to, consents to, and waives any objection to, the jurisdiction of the courts of the State of Ohio or the United States Courts for the Northern District of Ohio. Trial by jury is waived by the Borrower for collection hereof. It is the intention of the parties hereto to comply strictly with the usury laws of the State of Ohio and applicable Federal law; therefore, it is agreed that notwithstanding any provision to the contrary in this Note, no such provision shall require the payment or permit the collection of interest in excess of the maximum amount permitted by law. Borrower _____________________________________ By: 13 ASSIGNMENT The undersigned, Franklin Credit Management Corporation, a New York Corporation, ("Franklin") for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, hereby irrevocably, absolutely, and unconditionally, sells, assigns, transfers and sets over unto ___________ ("Tribeca") all the right, title and interest of Franklin in, to and under the following: (1) All rights of Franklin created under that certain Loan Sale Agreement entered into by and between Franklin Credit Management Corporation and _________, dated ________________. (2) All Promissory Notes purchased by Franklin pursuant to the above referenced Loan Sale Agreement. (3) All Collateral securing repayment of the Promissory Notes referred to in item 1 herein. Franklin further represents to Tribeca as follows: a. All Collateral Documents and all signatures thereon are, to the best of their knowledge, genuine. The Collateral Documents have not been altered or modified by them or by any other person or entity. b. It has no actual notice or knowledge of the existence of any (i) pending claims (including fraud claims), litigation, offsets or other charges with respect to the Collateral Documents or (ii) default under the Collateral Documents or any condition which, with notice and/or passage of time, would constitute an event of default under the Collateral Documents. This Assignment shall apply to and bind Franklin and its successors and assigns. IN WITNESS WHEREOF, Franklin has executed this Assignment this ___ day of ____, 200_. Franklin Credit Management Corporation A New York Corporation _____________________________ By: 14 ASSIGNMENT The undersigned, _______________, a ___________, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, hereby irrevocably, absolutely, and unconditionally, sells, assigns, transfers and sets over unto Sky Bank ("Sky") all the right, title and interest of _______________ ("Tribeca") in, to and under the following: (1) All rights of Tribeca created under that assignment from Franklin Credit Management Corporation of its interest under that certain Loan Sale Agreement entered into by and between Franklin Credit Management Corporation and ________________, dated _______________. (2) All Collateral for the repayment of the Promissory Notes referred to in item 1 herein. Tribeca further represents to Sky as follows: a. All Collateral Documents and all signatures thereon are, to the best of their knowledge, genuine. The Collateral Documents have not been altered or modified by them or by any other person or entity. b. It has no actual notice or knowledge of the existence of any (i) pending claims (including fraud claims), litigation, offsets or other charges with respect to the Collateral Documents or (ii) default under the Collateral Documents or any condition which, with notice and/or passage of time, would constitute an event of default under the Collateral Documents. This Assignment shall apply to and bind Tribeca and its successors and assigns. IN WITNESS WHEREOF, Tribeca has executed this Assignment this __th day of ______, 200_. Borrower ___________________________________ By: 15 POWER OF ATTORNEY _______________, a corporation organized existing under the laws of the State of New York, with its principal office at 6 Harrison Street, City of New York, County of New York and State of New York, appoints Sky Bank ("Sky"), 10 East Main Street, Village of Salineville, County of Columbiana and State of Ohio as its attorney-in-fact in and for the State of Ohio for the following purposes: To accept possession of all deeds, leases, mortgages and assignments of mortgages and deeds of trust and conveyance hereunder; and execute any and all instruments in writing whatever kind and nature, if they be necessary, and be necessary and deemed proper by Sky to effectively assure its appropriate collateral lien position in the mortgages presently owned by Tribeca which were pledged by the corporation to Sky as collateral. The authority of this attorney-in-fact, to exercise any powers granted, will commence on the date of execution hereof and will remain in effect until the indebtedness owed by the corporation to Sky is satisfied in full. Authority to grant this Power of Attorney was conferred by resolution of the Board of Directors of Tribeca dated _________________________. A copy of said resolution is attached hereto. Tribeca through its Board of Directors ratifies and confirms everything that the attorney-in-fact may lawfully do by virtue of this instrument. 16 -2- Dated this __th day of ____, 200_. Borrower ___________________________________ By: THE STATE OF NEW YORK SS: NEW YORK COUNTY Before me a Notary Public in and for said County and State, personally appeared _____________, _______________, of _______________, the corporation which executed the foregoing instrument, who acknowledged that he did sign said instrument on behalf of said corporation and by authority of its Board of Directors; and is the free corporate deed of the corporation. In Testimony Whereof, I have hereunto set my hand and fixed my official seal on this ___ day of ______, 200_. ___________________________________ NOTARY PUBLIC 17 EXHIBIT "B" 18 EX-10.9 6 y07373exv10w9.txt EMPLOYMENT AGREEMENT Exhibit 10.9 EMPLOYMENT AGREEMENT JEFFREY R. JOHNSON This EMPLOYMENT AGREEMENT ("Agreement"), effective as of the 1st day of October, 4 2004, by and between Franklin Credit Management Corporation ("FCMC" or "Company") and Jeffrey R. Johnson ("Employee"). RECITALS A. FCMC is a Corporation organized under the laws of the State of Delaware. B. FCMC desires to employ Employee, and Employee desires to accept employment from FCMC. C. The parties desire to record the arrangements made for such employment. AGREEMENT IT IS, THEREFORE, AGREED: 1. Definitions: For the purposes of this Agreement, the following capitalized terms shall have the following meanings: a. FCMC or Company shall mean Franklin Credit Management Corporation and its current and future subsidiaries. b. Employee shall mean Jeffrey R. Johnson. c. Competitor shall mean any person, company, firm or corporation which: (1) actually competes with the Company, its subsidiaries or affiliates in the acquisition, origination, servicing and resolution of performing, sub-performing, and nonperforming residential mortgage loan and residential real estate; (2) is engaged in a business in which the Company, its subsidiaries or affiliates are principally engaged; or (3) is engaged in a business which the Company, its subsidiaries or affiliates have at the date of Employee's termination of employment reasonably certain plans to principally engage within twelve months of the Employee's termination (collectively, "Business of the Company"). d. Executive Bonus Pool shall mean that bonus pool established pursuant to Company policy, for each fiscal year, equal to ten (10%) percent of the after tax consolidated net profits of the Company in excess of $500,000, which percentage may be adjusted in the reasonable discretion of the Company's Board of Directors. The after tax net earnings shall be determined by the consolidated audited financial statements of the Company. e. Change in Control shall mean the occurrence of one or more of the following events: (1) If (i) any "person"(as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the total voting power represented by the Company's then outstanding voting securities who is not already such as of the date of this Agreement, and (ii) Thomas J. Axon, members of Mr. Axon's family, and entities in which Mr. Axon has an interest ("TJA") shall have beneficial ownership of less than twenty percent (20%) or more of the total voting power represented by the Company's then outstanding voting securities; (2) The consummation of a tender or exchange offer; one or more contested elections related to the election of directors of the Company; a reorganization, merger or consolidation, or the acquisition of assets of another corporation, or any combination of the foregoing transactions (each, a "Business Combination"), which results in a change in the composition of the Board, as a result of which fewer than fifty percent (50%) of the directors are Incumbent Directors. (3) Company's shares shall cease to be registered under Section 12(b) or 12(g) under the Securities Exchange Act of 1934, as amended.; or, (4) A sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, the term "Change of Control" shall not be deemed to have occurred if the Company files for bankruptcy protection, or if a petition for involuntary relief is filed against the Company. f. Incumbent Directors shall mean directors who either (A) are directors of the Company as of the date hereof or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of those directors, or if such determination is being made by a committee of the Board of directors, a majority of the directors on such committee, whose election or nomination was not in connection with any transaction described in subsections (1) or (2) of Section 1(e) or in connection with an actual or threatened proxy contest relating to the election of directors of the Company. g. Board of Directors shall mean the Board of Directors of the Company or any committee of the Board of Directors that is then charged with making compensation decisions with respect to the Employee. 2. Employment/Term. Effective October 1, 2004, FCMC hereby employs Employee as the Chief Executive Officer and the President of FCMC. FCMC shall cause -2- Employee to be elected as a director of the Company as soon as possible after October 1, 2004. The term of employment shall be for the period of five (5) years commencing October 1, 2004, unless terminated sooner pursuant to the provision of Section 11 of this Agreement. a. Place of Employment. During the term of employment, Employee shall be based at the Company's principal executive offices, which shall be in the New York City metropolitan area (including the surrounding area of New Jersey), subject to reasonable travel required in the performance of Employee's duties. 3. Duties and Authority. The responsibilities of Employee shall include management, control, administration, and operation of the following aspects of the business and affairs of the Company and its subsidiaries: a. Employee's duties shall include those duties normally customarily associated with position of CEO and President. Without limitation, Employee shall be responsible for the general and active management of the affairs of the Company, including but not limited to but not limited to: (i) supervision and evaluation of the Company and its staff; (ii) developing, implementing and reviewing strategic plans for each business segment; (iii) developing operating budgets for each business segment; (iv) review and oversight of regulatory issues and compliance; (v) oversight of information technology including management information systems; (vi) responsibility for management reporting and financial reporting packages. b. Employee shall report directly to the Board of Directors. All employees of the Company, other than the Chairman of the Board shall report directly or indirectly to the Employee; and, c. Employee shall submit to the Board of Directors from time to time such recommendations and information concerning any phase of Company policy or administration as may seem necessary to Employee to be in the best interests of the Company. 4. Compensation. FCMC shall pay to Employee the following compensation: a. Salary. Employee shall receive an initial annual salary of $325,000, payable on a semimonthly basis, which annual salary may be adjusted upward (but not downward) by the Board of Directors. b. Bonuses. In addition to the salary set forth above, Employee shall receive an annual bonus based on the net income after taxes of FCMC. The annual bonus shall be determined as follows: (1) For each fiscal year of FCMC during which Employee is employed by FCMC, Employee shall be entitled to a 25% participation in the Executive Bonus Pool. With regard to the Company's fiscal year ending on December 31, 2004, Employee shall be entitled to a bonus equal to 25% of the Executive Bonus Pool, -3- prorated to reflect Employee's three months of employment with the Company. The parties agree that Employee's bonus from the Executive Bonus Pool for fiscal year 2004 shall not be determined solely or primarily on the after-tax net earnings of the Company for the fourth quarter of fiscal year 2004. Such bonus for each fiscal year shall be paid to Employee within sixty (60) days of the filing of the Company's year end financial statements with the Securities and Exchange Commission. (2) In the event Employee's employment with the Company ends on any date other than December 31 of a fiscal year, Employee's bonus from the Executive Bonus Pool for such fiscal year shall be determined in a manner consistent with the prior paragraph, subject however to prorating the number of months (full and partial) he was employed during such fiscal year. c. Stock. As additional compensation for services provided under this agreement, Employee shall be granted 100,000 shares of restricted common stock of the Company (the "Restricted Award") by November 30, 2004 (the "Grant Date"). On the Grant Date, none of the Restricted Award shall be vested. The Restricted Award shall vest on the following schedule: 10,000 shares on January 1, 2005 5,000 shares on each of April 1; July 1; October 1 2005; January 1, 2006; 5,000 shares on each of April 1; July 1; October 1 2006; January 1, 2007; 6,250 shares on each of April 1; July 1; October 1 2007; January 1, 2008; 6,250 shares on each of April 1; July 1; October 1 2008; January 1, 2009. (1) Employee acknowledges that the shares subject to the Restricted Award shall be restricted stock and subject to restrictions imposed by Federal and/or State securities laws. (2) The Restricted Award is subject to forfeiture to the extent that it has not become vested and nonforfeitable in accordance with the vesting schedule set forth above. Except as provided in subsection (c)(3) of this Section or Section 13, in the event that Employee's employment by the Company terminates prior to any of the vesting dates set forth in this subsection, any portion of the Restricted Award that has not become vested and nonforfeitable on or prior to the date of such termination shall be forfeited. (3) In the event of a Change of Control, all restrictions, including but not limited to completion of the vesting periods applicable to the Restricted Award, will be deemed to have expired, and the entire Restricted Award shall immediately become fully vested and nonforfeitable. (4) Employee will make an election under Section 83(b) of the Internal Revenue Code of 1986, as amended, with regard to the shares subject to the Restricted Award. FCMC shall reimburse Employee on a grossed up basis for any taxes -4- resulting from Employee having made such election at Employee's incremental tax rate (covering Social Security, and all applicable state, local, and federal taxes). (5) Employee shall have registration rights with respect to the Restricted Award, including piggyback registration rights with respect to underwritten public offerings of the Company (subject to a customary underwriter's cutback), and two demand registration rights on Form S-3 or S-8 if the Company is eligible for the use of such forms, subject to customary and reasonable blackout periods; in each case to the extent Employee is not then eligible to sell all of the vested shares subject to the Restricted Award within a three month period under Rule 144, promulgated under the Securities Act of 1933, as amended. Additionally, Employee shall be subject to and entitled to ordinary and customary arrangements relating to the registration process, expenses and indemnification and contribution. (6) Purchase of Shares. Employee shall purchase and the Company shall sell 20,000 shares of common stock of FCMC at per share equal to the weighted average closing price of the Company's stock during the month of September 2004. (7) Employee acknowledges that the stock to be purchased shall not initially be registered and shall be subject to resale restrictions based on federal and state securities laws. 5. Certain Benefits. a. Vacation and other benefits. During each twelve-month period that Employee is employed by FCMC, Employee shall be entitled to four weeks (i.e., twenty days) of paid vacation plus regular personal days and holidays in accordance with the policies of FCMC. Up to five (5) unused vacation days can be accrued or aggregated from one twelve-month period to the next. In addition, Employee shall be entitled to participate in all present and future benefit plans and/or fringe benefits provided by FCMC to its other executive officers. b. Car Allowance. Throughout the term of employment, Employee shall receive a car allowance of $1,000 per month to cover purchase or lease expense of vehicle, gas, maintenance, insurance and parking. Employee shall also receive a paid parking space in the vicinity of the Company's offices. c. Expense Reimbursements. Employee is authorized to incur reasonable, ordinary and necessary expenses in carrying out his duties and responsibilities under this Agreement, including, without limitation, expenses for travel, business entertainment and similar items related to such duties and responsibilities. The Company will reimburse Employee for all such expenses upon presentation by Employee from time to time of appropriately itemized and documented accounts of such expenditures, consistent with the Company's policy. -5- d. Legal Reimbursement. The Company shall reimburse Employee for his legal costs incurred in connection with this Agreement and related matters. 6. Moving Expenses. a. The Company shall provide Employee temporary housing in the New York City (NYC) metropolitan area for up to 90 days from date of employment. FCMC will manage the process of finding suitable housing. b. The Company shall reimburse Employee for two house hunting trips to NYC for Nancy Johnson, utilizing cost-effective airfare and ground transportation. c. The Company shall reimburse Employee for bi-monthly trips to Atlanta during the 90 day interim housing period, utilizing cost-effective airfare and ground transportation. d. The Company shall pay costs associated with renting an apartment in NYC; including, but not limited broker fees, legal costs to review a lease and similar items; but excluding rental payments, tenant improvements and similar items. e. The Company shall pay for the movement and temporary storage (for up to 60 days) of the household goods of Employee and members of his household. f. The Company shall pay for the travel expenses to move Employee and members of his household to NYC. g. The Company shall reimburse Employee for reasonable other moving expenses upon submission of an itemized list. h. The Company shall reimburse Employee for costs associated with the closing of the sale of the residence in Atlanta, GA. That includes broker fees up to a commission of 4% and other reasonable costs to be submitted to the Company. This assumes a house sale price of approximately $1,000,000. i. The Company shall discuss with Employee actions to be taken if the Atlanta residence does not sell within 90 days. For example, FCMC would consider reimbursing Employee the monthly mortgage payments that will be due while the house is in the sales process. j. The Company shall pay Employee an amount necessary to gross up the non-deductible relocation costs at Employee's incremental tax rate (covering Social Security, and all applicable State, Local, and Federal Taxes). 7. Acknowledgments. FCMC is in the Business of the Company in both the New York City metropolitan area and on a national basis. Employee acknowledges that: a. FCMC's services are highly specialized; -6- b. FCMC has a proprietary interest in its methods and processes; and, c. Documents and other information regarding FCMC's methods, pricing and costs are highly confidential and constitute trade secrets. 8. Trade secrets and confidential information. During the term of this Agreement, Employee may have access to, and become familiar with, various trade secrets and confidential information belonging to FCMC, its subsidiaries or affiliates. Employee acknowledges that such confidential information and trade secrets are owned and shall continue to be owned solely by FCMC, its subsidiaries or affiliates. During the term of his employment and for thirty-six (36) months (or for so long as a trade secret remains a trade secret under applicable law) after such employment terminates for any reason, regardless of whether termination is initiated by FCMC or Employee, Employee agrees not to use, communicate, reveal or otherwise make available such information for any purpose whatsoever, or to divulge such information to any person, partnership, corporation or entity other than Employer or persons expressly designated by Employer, unless Employee is compelled to disclose it by judicial process. 9. Restrictive covenants. a. Full-time Employment. During the period of his employment, Employee shall not, directly or indirectly, alone or as a member of any partnership, or as an officer, director, shareholder, or employee of any corporation, engage in or be concerned with any other paid employment, except as otherwise authorized in writing by the Company. Notwithstanding the foregoing, nothing herein shall preclude Employee from participating in charitable, educational, religious and community affairs and organizations, from serving as a member of the board of directors of a corporation (so long as such corporation does not compete directly or indirectly with the Company and is not otherwise involved in the purchase and/or sell of sub-prime loans), from managing personal investments made by him, and leasing and managing any investment property including his principal residence. b. Non-competition. Employee agrees that: (1) During the period of Employee's employment by the Company, Employee will not accept employment with, or act as a consultant, contractor, advisor, or in any other capacity for, a Competitor, or enter into competition with FCMC, its subsidiaries or affiliates, with regard to the Business of Company either by himself or through any entity owned or managed in whole or in part by Employee, and Employee shall not make any preparations to compete with the Company with regard to the Business of Company. (2) During the term of this Agreement and for a period of nine (9) months after termination of Employee's employment by the Company for any reason, regardless of whether the termination is initiated by FCMC or Employee, Employee shall not solicit or make, or cause to make, any offer of employment to any employee of the -7- Company, it subsidiaries or affiliates, for the purpose of inducing such employee to terminate his or her employment with the Company, or its subsidiaries or affiliates. (3) For a period of twelve (12) months after termination of Employee's employment for any reason, regardless of whether the termination is initiated by the Company or Employee, or for a period of time equal to the length of Employee's employment with FCMC if such tenure is less than twelve (12) months, Employee will not, directly or indirectly, solicit for the purchase or sale of financial assets any person, company, firm, or corporation from whom the Company purchased financial assets or to whom the Company sold assets originated by the Company during the last twelve (12) months of Employee's employment or during the period of Employee's employment with the Company if such tenure is less than twelve (12) months. Employee agrees not to so solicit such customers on behalf of himself or any other person, firm, company, or corporation, if such solicitation is for the purchase or sale of the same or similar types of financial assets purchased or sold by the Company. c. The parties have attempted to limit Employee's right to compete only to the extent necessary to protect FCMC from unfair competition. The parties recognize, however, that reasonable people may differ in making such a determination. Consequently, the parties hereby agree that, if the scope or enforceability of the restrictive covenant is in any way disputed at any time, a court or other trier of fact may modify and enforce the covenant to the extent that it believes the covenant is reasonable under the circumstances existing at that time. d. Employee further acknowledges that each of the covenants set forth in this Section is reasonable and necessary for the protection of the Company's business interests, that irreparably injury will result to the Company if Employee breaches any of the terms of said covenants, and that in the event of Employee's actual or threatened breach of any such covenants, the Company will have no adequate remedy at law. 10. Remedies. Employee acknowledges that: (1) compliance with Sections 8 and 9 herein is necessary to protect FCMC's business and good will; (2) a breach of those Sections will irreparably and continually damage FCMC; and (3) an award of money damages will not be adequate to remedy such harm. Consequently, Employee agrees that, in the event he breaches or threatens to breach any of these covenants, FCMC shall be entitled to both: (1) a preliminary or permanent injunction in order to prevent the continuation of such harm; and (2) money damages, insofar as they can be determined, including, without limitation, all reasonable costs and attorneys' fees incurred by the FCMC in enforcing the provisions of this Agreement if FCMC is successful in establishing Employee's breach of these covenants. Nothing in this Agreement, however, shall prohibit FCMC from also pursuing any other remedy. -8- 11. Termination. a. Termination by Either Party. Either party may terminate Employee's employment "without cause" by giving thirty (30) days prior written notice to the other. b. Termination by Company. Employee's employment may be terminated by the Company "for cause" if he: (1) continually fails or refuses to perform one or more of his material assigned duties to the Company; (2) continually fails or refuses to comply with one or more policies of the Company; (3) breaches any of the material terms of this Agreement; or, (4) commits any criminal, fraudulent or dishonest act related to his employment (other than an arm's length dispute relating to the erroneous reporting of an immaterial amount as an expense) relating to the Company or any of its assets or opportunities; Notwithstanding the forgoing, the Company shall not be entitled to terminate Employee for cause under subsections (1), (2) or (3) of this subsection unless: (i) Employee has been given written notice describing in reasonable detail the alleged breaches and stating that such breaches are grounds for termination for cause under this Section, and (ii) Employee fails to cure such breaches within ten (10) days after receipt of such notice. In the event that the Company terminates Employee for cause pursuant to the provisions of this subsection and it is later determined by a court of competent jurisdiction that such cause did not exist, Employee's termination shall be deemed to be a termination by the Company without cause. In such event: (1) Employee shall be entitled to receive Severance pursuant to the terms of this Agreement as if the termination was made by the Company without cause, and (2) the entire Restricted Award shall become fully vested and nonforfeitable. c. Termination by Employee. Employee shall have the right to terminate his employment for "good reason." For the purposes of this Agreement, good reason shall be limited to the following: (1) The Company transfers the place of Employee's employment in violation of Section 2 (a) of this Agreement; (2) The Company breaches any of the material terms of Sections 2, 4, 5 or 6 of this Agreement or the Company knowingly misrepresented or failed to disclose to Employee a material financial, regulatory or legal matter of, or involving, the Company prior to the execution of this Agreement; -9- (3) Any material diminution by the Company of Employee's duties or responsibilities, except in connection with the termination of Employee's employment by the Company, as a result of permanent disability, or as a result of Employee's death; (4) Employee is requested by the Company to either act or fail to act in an unethical or illegal manner; or (5) Employee is removed as CEO, President or Director of the Company. Notwithstanding the forgoing, Employee shall not be entitled to terminate his employment for good reason under subsection (4) of this subsection: (i) unless Employee has given the Company reasonable written notice of the act, or failure to act, which Employee contends is unethical or illegal, or (2) if the Company has obtained an opinion of counsel opining that Employee has not been requested to act or fail to act in an unethical or illegal manner. d. Termination Due to Incapacity. In the event Employee is unable to perform his material duties because of illness or disability for a continuous period of 120 days, the Company may terminate this Agreement without further notice. e. Termination Due to Death. This Agreement shall terminate upon the death of Employee, subject to the rights and obligations of each party contained herein. 12. Severance. a. Conditions under which Severance is Paid. (1) Termination for Cause. In the event the Company terminates Employee's employment for cause, the Employee shall receive nothing other than any accrued salary, payment for accrued but unused vacation time, and reimbursement of expenses already incurred under Sections 5 and/or 6 hereof. Any portion of the Restricted Award that has not become vested and nonforfeitable on or prior to the date of such termination shall be forfeited. (2) Termination Without Cause. In the event the Company terminates Employee's employment without cause, the Employee shall receive the severance pay provided in subsection (b) of this Section in addition to any accrued salary, accrued bonus, payment for accrued but unused vacation time, and reimbursement of expenses already incurred under Sections 5 and/or 6 hereof. Any portion of the Restricted Award that has not become vested and nonforfeitable on or prior to the date of such termination shall be forfeited. (3) Termination by Employee. In the event Employee terminates his employment without good reason, the Employee shall receive nothing other than any accrued salary, accrued bonus, payment for accrued but unused vacation -10- time, and reimbursement of expenses already incurred under Sections 5 and/or 6 hereof. Any portion of the Restricted Award that has not become vested and nonforfeitable on or prior to the date of such termination shall be forfeited. (4) Termination by Employee for Good Reason. In the event Employee terminates his employment with good reason, Employee shall receive the severance pay provided in subsection (b) of this Section in addition to any accrued salary, accrued bonus, payment for accrued but unused vacation time, and reimbursement of expenses already incurred under Section 5 and/or 6 hereof. (5) Termination following Change in Control. In the event Employee's employment is terminated (either by the Company or by Employee) following a Change in Control, Employee shall receive the severance pay provided in subsection (b) of this Section. Notwithstanding the forgoing, this subsection shall not apply to a termination of Employee for cause, following a Change in Control. (6) Death or Disability. In the event of Employee's death or disability under Section 11 above, Employee or his estate shall receive the severance pay provided in subsection (b) of this Section in addition to any accrued salary, accrued bonus, payment for accrued but unused vacation time and reimbursement of expenses already incurred under Section 5 and/or 6 hereof. In addition, in the event of Employee's death or disability under Section 11 above, the entire Restricted Award shall immediately become fully vested and nonforfeitable b. Amount of Severance. To the extent severance is payable to Employee pursuant to subsection (a) of this Section, Employee shall be entitled to receive the severance payments provided for in subparts (1), (2) and (3) of this subsection: (1) Vacation; Bonus. Employee shall be paid by the Company in a lump sum in respect of all accrued and unused vacation within ten days after termination of employment in an amount based on Employee's current base salary. (2) Employee shall be paid a prorated bonus from the Executive Bonus Pool as determined by, or consistent with, the method of computation, and timing set forth in Section 4 hereof. (3) Additional Lump Sum Payment. Employee shall be entitled to receive payment, in a lump sum, in the following amounts: (i) if the termination occurs prior to January 1, 2006 - $225,000; (ii) if the termination occurs on or after January 1, 2006 - $225,000 plus $13,542 for each month (or partial month) of employment with the Company after December 31, 2005. However, in no event shall the amount paid pursuant to this subsection exceed Employee's salary as of the date of such termination -11- plus an amount equal to the value of Employee's total benefits for the prior twelve (12) month period, as of the date of such termination. c. Effect of Severance Payments. The severance payments set forth in this Section are payments made as liquidated damages and not as a penalty. In the event Employee's employment is terminated and Employee is not entitled to severance in accordance with subsection (a) of this Section, Employee shall be entitled to no further compensation or payments from the Company, except as set forth above. d. Cooperation. On termination of employment with the Company, Employee shall provide the Company a written resignation from all positions with the Company, its subsidiaries and affiliates, and any other documents that the Company may need to effectuate severance of the relationship 13. Effect of Termination. Notwithstanding any other provision of this Agreement (including but not limited to Section 12(a)(6), related to Death and Incapacity, and Section 4(c)(3), related to Change in Control), in the event Employee's employment is terminated pursuant to Section 11 of this Agreement by Employee for good reason, then any unvested portion of the Restricted Award under Section 4(c) shall immediately vest and become nonforfeitable. 14. Return of the Company Property. On termination of employment, Employee shall return to the Company all keys, correspondence, contracts, reports, price lists, manuals, forms, mailing lists, customer lists, advertising materials, ledgers, supplies, equipment, checks, petty cash and all documents of any form relating to the Business of the Company or its subsidiaries or affiliates in his possession or control. 15. Notice. Any notice required to be given hereunder shall be in writing sent by registered mail, return receipt requested, to FCMC at No. 6 Harrison Street, Fifth Floor, New York, New York 10016, Attention Thomas J. Axon, and to Employee at the address contained in the personal records of the Company or to such changed address as a party may designate by like notice to the other party. The effective date of such notice shall be its mailing date. 16. Entire Agreement. This Agreement supersedes all agreements previously made by the parties relating to its subject matter. There are no other understandings or agreements between the parties. 17. No Violation or Default. Employee hereby represents and warrants that the execution of this Agreement by him will not violate the provisions of or constitute a default under any other agreement or arrangement to which Employee is party or otherwise bound. 18. Indemnification. The Company shall indemnify Employee in Employee's capacity as an officer and director, if and as applicably, under the terms and conditions of the agreement in place between the Company and its other Officers and Directors, which may be revised from time to time. -12- 19. Non-Waiver. No delay or failure by either party to exercise any right under this Agreement, and no partial or single exercise under it, shall constitute a waiver of that or any other right. 20. Headings. Headings in this Agreement are for convenience only and shall not be used to interpret or construe its provisions. 21. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of New York. 22. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 23. Binding Effect. The provisions of this Agreement shall be binding upon and inure to the benefits of each of the parties and their respective successors and assigns. 24. Tax Gross Up. Employee shall receive any series of tax "gross up" payments necessary in order to fully defray any and all federal, state, and local taxes, from whatsoever jurisdictions, that Employee may recognize or incur as a result of the payments, benefits, or other income items referenced in Sections 4(c)(4) and 6(j), and to defray all such taxes on such payments themselves, so as to equalize such taxes and avoid Employee having to be out-of-pocket or otherwise bear such taxes himself. Both parties agree to negotiate in good faith any changes to this Agreement as may be reasonably necessary to avoid any of the compensation of the Employee being determined to be deferred compensation and thereby subjecting any of the parties to excise taxes or other penalties under the American Jobs Creation Act of 2004, and any regulations promulgated thereunder. 25. Survival. All rights of either party hereunder that by their terms are intended to survive termination of employment, (including without limitation Employee's rights to severance compensation, continuing benefits, indemnification, tax gross up, and for reimbursement for expenses validly incurred prior to termination), shall survive the termination or non-renewal of Employee's employment hereunder. -13- IN WITNESS WHEREOF, the parties hereto have signed this Agreement. effective as of October 1, 2004. EMPLOYEE: Date: _________________________ __________________________________________ Jeffrey R. Johnson FCMC: Franklin Credit Management Corporation Date: _________________________ By: ____________________________________ Name: Thomas Axon Title: Chairman -14- EX-10.10 7 y07373exv10w10.txt REGISTRATION RIGHTS AGREEMENT Exhibit 10.10 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement is made effective as of October 4, 2004, by and between Franklin Credit Management Corporation, a Delaware corporation (the "Company"), and Jeffrey R. Johnson, a New York resident. WHEREAS, Holder has acquired shares of Common Stock of the Company; and WHEREAS, the Company has agreed to grant to Holder the rights and benefits provided herein. NOW THEREFORE, for and in consideration of the covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms shall have the following respective meanings: (a) "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. (b) "Common Stock" shall mean the Company's $0.01 par value per share common stock. (c) "Exchanne Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission issued under such Act, as they each may, from time to time, be in effect. (d) "Holder" shall mean Jeffrey R. Johnson, so long as he holds at least 25% of the Shares originally issued to HIM and any transferee of Jeffrey R. Johnson so long as the Shares held by such transferee represent at least 1% of the outstanding capital stock of the Company and provided such transferee agreed in writing with the Company at the time of receipt of the Shares to hold such stock subject to all the restrictions of this Agreement. (e) "Registrable Securities" shall mean (i) the Shares of Common Stock of the Company and (ii) any securities issued as a dividend or other distribution with respect to, or in exchange or in replacement of, the securities referred to in subsection (i). For purposes of this Agreement, a Registrable Security ceases to be a Registrable Security when it has been effectively registered under the Securities Act and sold or distributed to the public in accordance with an effective registration statement covering it. (f) "Registration Expenses" shall mean all expenses (except for "Selling Expenses" as defined below) incurred by the Company in complying with Sections 2 or 3 of this Agreement, including, without limitation, all registration and fling fees, printing expenses, reasonable fees and disbursements of counsel for the Company and, subject to Section 4, in the case of a registration referred to in subsection 2(a) or Section 3, the reasonable fees and disbursements of one counsel for Holder. (g) The terms "register", "registered" and "registration" shall refer to a registration effected by preparing and filing a Registration Statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such Registration Statement. (h) "Registration Statement" shall mean a registration statement on Form S-3 or Form S-8 filed by the Company with the Commission for a public offering and sale of securities of the Company. (i) "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute, and the RULES and regulations of the Commission issued under such Act, as they each may, from time to time, be in effect. (j) "Selling Expenses" shall mean all underwriting discounts and selling commissions, applicable to the sale of Registrable Securities pursuant to Sections 2 or 3, and all fees and disbursements of one counsel for Holder not included in Registration Expenses and any and all fees, expenses and other costs arising from the engagement of an underwriter requested by Holder pursuant to Section 2(a). (k) "Shares" shall mean: (i) the 100,000 shares of Common Stock outstanding on the date hereof issued to the Holder pursuant to Section 4.c of the Employment Agreement, effective October 1,2004 between the Holder and the Company (the "Employment Agreement"), to the extent such shares have then vested and (ii) the 20,000 shares of Common Stock outstanding on the date hereof issued to the Holder pursuant to the Section 4.c.6 of the Employment Agreement]. 2. Required Registrations. (a) If at any time the Company shall be requested in writing by a Holder or Holders representing a majority of the Registrable Securities then outstanding to effect the registration under the Securities Act of Registrable Securities, the Company shall, as expeditiously as practicable, use reasonable efforts to effect the registration on a Registration Statement of all shares of Registrable Securities which the Company has been requested to register. At the request of Holder, the Company shall seek to have each offering pursuant to this Section 2(a) managed, on a basis requested by Holder, by a recognized regional or national underwriter selected by Holder and approved by the Company, such approval not to be unreasonably withheld. The Company shall not be obligated to cause to become effective more than two registration statements pursuant to which Registrable Securities are registered under this Section 2(a). Notwithstanding the foregoing, if the Company shall furnish to the Holder a certificate signed by the Chairman of the Board, Chief Executive Officer or Chief Financial Officer of the Company stating that the Board has made the good faith judgment that it would be detrimental to the Company and its stockholders for such registration statement to be filed in the near future, then the Company's obligation to use its reasonable efforts to file and cause to become effective such registration statement may be deferred for a reasonable period of time. This deferral right may not be exercised by the Company on more than two occasions in any 12-month period or exceed 180 days in the aggregate in any 12-month period. (b) The Company may include in a registration requested under this Section 2: (i) any authorized but unissued shares of Common Stock for sale by the Company, and (ii) any issued shares of its Common Stock and with respect to which 2 registration rights have been granted by the Company ("Management Stock"); provided, however, that such shares shall not be included to the extent that the managing underwriter of the shares so proposed to be registered determines in good faith that the inclusion of such shares will interfere with the successful marketing of the shares of Registrable Securities to be included therein. If the offering to which a Registration Statement under this Section 2 relates is an underwritten offering, and if, after all shares of Common Stock proposed to be offered by the Company and all such shares of Management Stock have been excluded from such registration, a greater number of shares of Registrable Securities is offered for participation in such underwriting than in the opinion of the managing underwriter can be accommodated without adversely affecting the underwriting, the amount of Registrable Securities held by Holder and proposed to be included in such underwriting shall be reduced to a number deemed satisfactory by the managing underwriter. 3. Incidental Registrations. (a) If at any time or from time to time the Company shall determine to register any of its Common Stock ("Initially Proposed Shares"), for its own account or for the account of any of its stockholders (other than Holder), other than a registration relating solely to employee benefit plans, or a registration relating solely to a Commission Rule 145 transaction or any Rule adopted by the Commission in substitution therefor or in amendment thereto, or a registration on any registration form on which the Shares are eligible to be registered or which does not include substantially the same information as would be required to be included in a Registration Statement covering the sale of Registrable Securities, the Company will: (i) promptly give to Holder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable Blue sky or other state securities laws if any); and (ii) include in such registration (and any related qualification under Blue Sky laws or other compliance), and in any underwriting involved therein, all of the Registrable Securities requested by the Holder in a written request within ten (10) days after the giving of such written notice by the Company, subject to the limitations set forth in Section 3(b). (b) If the registration of which the Company gives notice is for a registered public offering involving an underwritten public offering, the Company shall so advise Holder as a part of the written notice given pursuant to Section 3(a)(i). In such event the right of Holder to registration pursuant to this Section 3 shall be conditioned upon Holder's participation in such underwritten public offering and the inclusion of Holder's Registrable Securities in the underwritten public offering to the extent provided herein. If Holder proposes to distribute his securities through such underwritten public offering, he shall (together with the Company) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwritten public offering by the Company. Notwithstanding any other provision of this Section 3, if the underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, all of the Initially Proposed Shares shall be included in such offering before any Registrable Securities are so included, and further, the underwriter otherwise 3 may limit the number of Registrable Securities to be included in the registration and underwritten public offering, provided that such limitation shall be applied to all Holders and holders of Management Stock seeking to include shares in such underwriting on the basis of "incidental" or piggy-back registration rights pro rata based on the number of shares they are seeking to have included in the registration. The Company shall so advise Holder of such limitation (unless Holder has not elected to distribute any of his Registrable Securities through such underwritten public offering), and the number of shares of Registrable Securities that may be included in the registration. No Registrable Securities or shares of Management Stock excluded from the underwritten public offering by reason of the underwriter's marketing limitation shall be included in such registration. If the terms of any such underwritten public offering differ materially from the terms (including range of offering price) previously communicated to Holder, Holder may elect to withdraw therefrom by written notice to the Company and the underwriter, which notice, to be effective, must be received by the Company at least two (2) business days before the anticipated effective date of the Registration Statement. In the event that the contemplated sale does not involve an underwritten public offering and a determination that the inclusion of the Registrable Securities adversely affects the marketing of the shares shall be made by the Board of Directors of the Company in its good faith discretion, then no Registrable Securities are required hereby to be included in the contemplated sale. (c) The Company may at any time withdraw or abandon any Registration Statement which triggers the provisions of this Section 3 without any liability to Holder. 4. Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification and compliance pursuant to subsection 2(a) and Section 3 shall be paid by the Company. All Selling Expenses incurred in connection with any registration pursuant to subsection 2(a) and Section 3 shall be paid by the Holders. 5. Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Agreement, the Company will keep Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: (a) prepare and file with the Commission a Registration Statement with respect to such Registrable Securities, and use its reasonable efforts in good faith to cause such Registration Statement to become and remain effective as provided herein; (b) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus included in such Registration Statement as may be necessary or advisable to comply in all material respects with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such Registration Statement or as may be necessary to keep such Registration Statement effective and current, but for no longer than six (6) months subsequent to the effective date of such registration; (c) furnish to Holder such number of copies of such Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto), the prospectus included in such Registration Statement (including each preliminary prospectus), and such other documents as Holder may reasonably request in order to facilitate the disposition of such Registrable Securities held by Holder; 4 (d) enter into such customary agreements and take all such other action in connection therewith as Holder may reasonably request in order to expedite or facilitate the disposition of such Registrable Securities; (e) use its reasonable efforts in good faith to register and qualify the Registrable Securities covered by such Registration Statement under such securities or Blue Sky laws of such jurisdictions as Holder shall reasonably request and do any and all such other acts and things as may be reasonably necessary or advisable to enable Holder to consummate the disposition in such jurisdictions of the Registrable Securities held by Holder; provided, however, that the Company shall not be required in connection therewith to qualify to do business or file a general consent to service of process in any such jurisdiction nor shall the Company be required to take any position or change in accounting methods in order to effect such registration if the Board of Directors determines in good faith that the same would be materially detrimental to the Company; (f) furnish to Holder a signed counterpart, addressed to Holder, of (i) an opinion of counsel for the Company, dated the effective date of the Registration Statement, and, to the extent available to Holder from the independent auditors of the Company, (ii) a "comfort" letter signed by the independent public accountants who have certified the Company's financial statements included in the Registration Statement, covering substantially the same matters with respect to the Registration Statement (and the prospectus included therein) and (in the case of the "comfort" letter) with respect to events subsequent to the date of the financial statements, as are customarily covered (at the time of such registration) in opinions of issuer's counsel and in "comfort" letters delivered to the underwriters in underwritten public offerings of securities; provided, that the requirements of this subsection (f) shall apply only to Holder if he is including at least 100,000 shares (such number to be appropriately adjusted in the event of stock splits, stock combinations, stock dividends or similar recapitalizations) of Registrable Securities in such registration; (g) use its reasonable efforts in good faith to cause the Registrable Securities covered by such Registration Statement: (i) to be listed on any securities exchange or any automated quotation system on which similar securities issued by the Company are then listed, to the extent the Company satisfies applicable listing requirements; or (ii) if not then listed on any exchange or automated quotation system, to be eligible for trading in any over-the-counter market or trading system in which the securities of the same class are then traded; and (h) cooperate with Holder to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be distributed or sold and not bearing any restrictive legends and enable such Registrable Securities to be issued in such denominations and registered in such names as Holder may reasonably request at least one business day prior to the closing of any distribution or sale of Registrable Securities. Notwithstanding the foregoing provisions of this Section 5, (1) Holder will not (until further notice) effect sales thereof after receipt of electronic, facsimile or written notice from the Company to suspend sales to permit the Company to correct or update such Registration Statement or prospectus; provided, the obligations of the Company with respect to maintaining any Registration Statement current and effective shall be extended by a period of days equal to the period such suspension is in effect; and (2) at the end of any period during which the Company is obligated to keep any Registration 5 Statement current and effective as provided by this Section 5 (and any extensions thereof required by subsection 5(f)(l), Holder shall discontinue sales of shares pursuant to such Registration Statement upon notice from the Company of its intention to remove from registration the Registrable Securities covered by such Registration Statement which remain unsold, and Holder shall notify the Company of the number of shares registered which remain unsold promptly after receipt of such notice from the Company. 6. Indemnification. (a) The Company will indemnify Holder if Registrable Securities held by Holder are included in the securities with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter of such Registrable Securities, if any, and each person who controls such underwriter, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on (i) any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other similar document (including any related Registration Statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, or (ii) any violation by the Company of any federal, state or common law rule or regulation applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse Holder, such underwriter and each person who controls such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, provided that the Company will not be liable to Holder or underwriter in any such case to the extent that such claim, loss, damage, liability or expense arises out of or is based on (i) any untrue statement or omission made in reliance upon and in conformance with written information furnished to the Company by or on behalf of Holder or such underwriter and which was furnished specifically for the purpose of being used therein or (ii) a failure by Holder to deliver a final prospectus to his transferee if any material change has been made to the preliminary prospectus. (b) Holder will, if Registrable Securities held by Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such registration, qualification or compliance, each person who controls the Company or such underwriter within the meaning of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such Registration Statement, prospectus, offering circular or other similar document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and will reimburse the Company, such directors, officers, partners, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement or omission is made in such Registration Statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by or 6 on behalf of Holder and which was furnished specifically for the purpose of being used therein; provided, however, that the liability of Holder under this Section 6 shall be limited to an amount equal to the proceeds to Holder of Registrable Securities sold as contemplated herein. (c) Each party entitled to indemnification under this Section 6 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party, at such party's expense, to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense (except for the payment of fees, costs and expenses provided for below), and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement, unless such failure to give notice shall materially and adversely affect the Indemnifying Party's defense of any such claim or any such litigation. No Indemnifying Party, in the defense of any such claim or litigation shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Notwithstanding the election of the Indemnifying Party to assume the defense of any such claim or litigation, the Indemnified Party shall have the right to employ separate counsel and to participate in the defense of such claim or litigation, and the Indemnifying Party shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of the counsel chosen by the Indemnifying Party to represent the Indemnified Party would present such counsel with a conflict of interest; (ii) the defendants in, or targets of, any such claim or litigation include both the Indemnified Party and the Indemnifying Party and the Indemnified Party shall have been advised by counsel in writing that there may be legal defenses available to it or to other Indemnified Parties which are different from or additional to those available to the Indemnifying Party (in which case the Indemnifying Party shall not have the right to direct the defense of such action on behalf of the Indemnified Party); (iii) in the exercise of the Indemnified Party's reasonable judgment, the Indemnifying Party shall not have employed satisfactory counsel to represent the Indemnified Party within a reasonable time after notice of the institution of such claim or litigation; or (iv) the Indemnifying Party shall authorize the Indemnified Party to employ separate counsel at the expense of the Indemnifying Party. The Indemnified Party shall not settle any such claim or litigation without the consent of the Indemnifying Party such consent not to be unreasonably withheld. (d) Notwithstanding the foregoing provisions of this Section 6, if a registration is subject to a firm commitment underwriting, neither the Company nor Holder shall be required to indemnify any other party to a greater extent than the obligation of the Company or Holder to the underwriters pursuant to the underwriting agreement pertaining to such registration. (e) If the indemnification provided for in this Section 6 from the Indemnifying Party is unavailable to an Indemnified Party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to therein, then the Indemnifying 7 Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Parties in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Parties shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such Indemnifying Party or Indemnified Parties, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 6(e) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 7. Information by Holder. In connection with any registration hereunder, Holder shall furnish to the Company in writing such information regarding Holder and the distribution proposed by Holder as the Company may reasonably request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Agreement. 8. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Company's capital stock to the public without registration, the Company agrees to use its reasonable efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act. 9. Rule 144 Sales. Notwithstanding anything contained in this Sections 2 and 3 to the contrary, Holder shall not have any registration rights pursuant to Sections 2 or 3 herein if all of Holder's Registrable Securities may then be sold within a single three-month period pursuant to Rule 144 under the Securities Act. 10. Notices. All notices, requests, consents and other communications required or permitted hereunder shall be in writing and shall be hand delivered or mailed postage prepaid by registered or certified mail or transmitted by facsimile transmission (with immediate telephonic confirmation thereafter), If to the Company, to: Franklin Credit Management Corporation Six Harrison Street New York, New York 10013 Attention: General Counsel Telephone No.: (212) 925-8745 Facsimile No.: (212) 925-1971 8 Attention: General Counsel with a copy (which shall not constitute notice) to: Kramer, Levin, Naftalis & Frankel LLP 919 Third Avenue New York, New York 10022 Attention: J. Michael Mayerfeld, Esq. Facsimile No.: (212) 715-8000 If to the Executive, to: Jeffrey R. Johnson 166 Duane Street #3C New York, NY 10013 Telephone No.: Facsimile No.: 646-613-9434 If to any other Holder, to such name at such address as such Holder shall have indicated in a written notice delivered to the other parties to this Agreement, or at such other address as the Company or the Executive may specify by written notice to the other, and each such notice, request, consent and other communication shall for all purposes of the Agreement be treated as being effective or having been given when delivered if delivered personally, upon receipt of facsimile confirmation if transmitted by facsimile, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of United States mail, addressed and postage prepaid as aforesaid. 11. Lockup. If the Company shall so deliver such a request in writing to the Holders, each Holder shall not effect any public or private sale or distribution of any Registrable Securities (other than the Holder Shares) during the 15-day period prior to, and during the 180-day period (or such longer period as the managing underwriter(s) of such offering shall require of the Company's officers and directors generally) beginning on, the closing date of any underwritten public offering of shares of Common Stock made for the Company's own account. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 9 12. Miscellaneous. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware and may not be amended or modified without the prior written consent of the Company and Holder. Each of the parties hereto hereby irrevocably waives any and all right to trial by jury in any legal proceeding arising out of or related to this agreement or the transactions contemplated hereby. This Agreement reflects the entire understanding of the parties hereto with respect to the subject matter hereof. This Agreement may be executed in one or more counterparts, All of which taken together shall constitute one and same instrument. The Company may add additional parties hereto from time to time by execution of a counterpart signature page. IN WITNESS WHEREOF, the parties have hereunto affixed their hands and seals as of the date first above written. Holder: Franklin Credit Management Corporation /s/ Jeffrey R. Johnson By: /s/ Thomas J. Axon - ------------------------------- -------------------------------- JEFFREY R. JOHNSON Name: Thomas J. Axon ------------------------------ Title: Chairman ----------------------------- 10 EX-10.11 8 y07373exv10w11.txt RESTRICTED STOCK GRANT AGREEMENT Exhibit 10.11 FRANKLIN CREDIT MANAGEMENT CORPORATION RESTRICTED STOCK GRANT AGREEMENT THIS AGREEMENT, made as of the 4th day of November 2004, between Franklin Credit Management Corporation (the "Company") and Jeffrey R. Johnson (the "Participant").l WHEREAS, the Company has engaged the Participant to serve as its Chief Executive Officer and President pursuant to an Employment Agreement, dated as of October 1, 2004 (the "Employment Agreement"); WHEREAS, in consideration of the Participant agreeing to be so engaged pursuant to the Employment Agreement, the Company has agreed to grant the Participant an award of certain shares of the Company's stock as set forth in this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto hereby agree as follows: 1. Grant of Restricted Stock. Pursuant to, and subject to, the terms and conditions set forth herein, the Company hereby grants to the Participant 100,000 restricted shares (the "Restricted Stock") of common stock of the Company, par value $0.01 per share ("Common Stock"). 2. Grant Date. The Grant Date of the Restricted Stock is as of November 30, 2004. 3. Vesting. Subject to the further provision of this Agreement, the Restricted Stock shall vest with respect the number of shares Restricted Stock specified below on the following dates (each, a "Vesting Date"):
VESTING DATE SHARES VESTING January 1, 2005 10,000 April 1, 2005 5,000 July 1, 2005 5,000 October 1, 2005 5,000 January 1, 2006 5,000 April 1, 2006 5,000 July 1, 2006 5,000 October 1, 2006 5,000 January 1, 2007 5,000 April 1, 2007 6,250 July 1, 2007 6,250 October 1, 2007 6,250 January 1, 2008 6,250 April 1, 2008 6,250 July 1, 2008 6,250
VESTING DATE SHARES VESTING October 1, 2008 6,250 January 1, 2009 6,250
4. Accelerated Vesting. Upon the occurrence of (i) a "Change in Control" (as defined in the Employment Agreement), (ii) a final determination by a court of competent jurisdiction that a termination by the Company of the Employment Agreement by the Company pursuant to Section 11.b. thereof (for cause) was without cause, (iii) a termination of the Employment Agreement by the Participant pursuant to Section 11.c. thereof (good reason), (iv) a termination by the Company of the Employment Agreement pursuant to Section 11.d or 11.e thereof (incapacity or death), all then unvested shares of Restricted Stock shall immediately vest. 5. Restrictions on Transferability. Until a share of Restricted Stock vests, such share may not be sold, assigned, transferred, alienated, commuted, anticipated, or otherwise disposed of (except by will or the laws of descent and distribution), or pledged or hypothecated as collateral for a loan or as security for the performance of any obligation, or be otherwise encumbered, and are not subject to attachment, garnishment, execution or other legal or equitable process, and any attempt to do so shall be null and void. If the Participant attempts to dispose of or encumber the Participant's unvested shares of Restricted Stock, such shares of Restricted Stock, together with any property in respect of such shares held by the custodian pursuant to Section 8 hereof, shall be forfeited as of the date of such attempted transfer and the Participant promptly shall return to the Company any certificates evidencing such shares. 6. Termination of Employment. Except as otherwise provided in Section 4, in the event that the Participant's employment with the Company terminates for any reason, all unvested shares of Restricted Stock, together with any property in respect of such shares held by the custodian pursuant to Section 8 hereof, shall be forfeited as of the date of such termination of employment and the Participant promptly shall return to the Company any certificates evidencing such shares and provide any document(s) or agreement(s) reasonably required by the Company to evidence and effect the surrender of such shares. 7. Issuance of Certificates. (a) Reasonably promptly after the Grant Date, the Company shall issue and deliver to the Participant stock certificates, registered in the name of the Participant, evidencing the shares of Restricted Stock. Each such certificate may bear the following legend: "THE SALE, TRANSFER, ASSIGNMENT, PLEDGE, HYPOTHECATION ENCUMBRANCE OR OTHER DISPOSAL OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS OF A RESTRICTED STOCK GRANT AGREEMENT BETWEEN FRANKLIN CREDIT MANAGEMENT CORPORATION AND THE HOLDER OF RECORD OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE. NO TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IN CONTRAVENTION OF SUCH RESTRICTED STOCK GRANT AGREEMENT SHALL BE VALID OR EFFECTIVE. COPIES OF SUCH AGREEMENT MAY BE OBTAINED BY WRITTEN REQUEST MADE -2- BY THE HOLDER OF RECORD OF THE CERTIFICATE TO THE SECRETARY OF FRANKLIN CREDIT MANAGEMENT CORPORATION." Such legend shall not be removed from such certificates until such shares of Restricted Stock vest. (b) Reasonably promptly after any such shares of Restricted Stock vest pursuant to Sections 3 and 4 hereof, in exchange for the surrender to the Company of the certificates evidencing such shares of Restricted Stock delivered to the Participant under Section 7(a) hereof, the Company shall issue and deliver to the Participant (or the Participant's legal representative, beneficiary or heir) certificates evidencing such shares of Restricted Stock, free of the legend provided in Section 7(a) hereof, together with any property in respect of such shares held by the custodian pursuant to Section 8 hereof. (c) The Participant shall not be deemed for any purpose to be, or have rights as, a shareholder of the Company by virtue of the grant of Restricted Stock, except to the extent a stock certificate is issued therefor pursuant to Section 7(a) hereof, and then only from the date such certificate is issued. Upon the issuance of a stock certificate, the Participant shall have the rights of a shareholder with respect to the Restricted Stock, including the right to vote the shares, subject to the restrictions on transferability, the forfeiture provisions and the requirement that dividends be held in escrow until the shares vest, as set forth in this Agreement. 8. Dividends, etc. Any property, including cash dividends, received by a Participant with respect to a share of Restricted Stock as a result of any dividend, recapitalization, merger, consolidation, combination, exchange of shares or otherwise and for which the Grant Date occurs prior to such event but which has not vested as of the date of such event, will not vest until such share of Restricted Stock vests, and shall be promptly deposited with the Company or a custodian designated by the Company. The Company shall or shall cause such custodian to issue to the Participant a receipt evidencing the property held by it in respect of the Restricted Stock. 9. Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any party hereto upon any breach or default of any party under this Agreement, shall impair any such right, power or remedy of such party, nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring, nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party or any provisions or conditions of this Agreement, must be in a writing signed by such party and shall be effective only to the extent specifically set forth in such writing. 10. Right of Discharge Preserved. Nothing in this Agreement shall confer upon the Participant the right to continue in the employ or other service of the Company or one of the Company's subsidiaries, or affect any right which the Company may have to terminate such employment or service. -3- 11. Integration. This Agreement contains the entire understanding of the parties with respect to its subject matter. There are no restrictions, agreements, promises, representations, warranties, covenants or undertakings with respect to the subject matter hereof other than those expressly set forth herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to its subject matter. 12. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 13. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware, without regard to the provisions governing conflict of laws. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its duly authorized officer, and the Participant has hereunto signed this Agreement on his own behalf, thereby representing that he has carefully read and understands this Agreement as of the day and year first written above. FRANKLIN CREDIT MANAGEMENT CORPORATION By: __________________________ Name: __________________________ Title: __________________________ ------------------------------------- JEFFREY R. JOHNSON -4- EX-10.12 9 y07373exv10w12.txt SUBLEASE AGREEMENT Exhibit 10.12 LEHMAN BROTHERS HOLDINGS INC. Sublandlord and FRANKLIN CREDIT MANAGEMENT CORPORATION Subtenant ------------------------------------------------------ SUBLEASE ------------------------------------------------------ March 4, 2005 TABLE OF CONTENTS 1. Term................................................................... 2 2. Annual Fixed Rent and Additional Rent.................................. 2 3. Use of the Sublease Premises........................................... 4 4. Incorporation of Overlease Terms....................................... 4 5. Non-Applicability of Certain Provisions of the Overlease............... 7 6. Sublease Subject to Overlease.......................................... 8 7. Utilities and Services................................................. 10 8. Compliance with Law.................................................... 10 9. Alterations............................................................ 10 10. Signage................................................................ 11 11. Insurance.............................................................. 11 12. Non-Liability and Indemnification...................................... 12 13. Access; Change in Facilities........................................... 13 14. Damage or Destruction.................................................. 13 15. Eminent Domain......................................................... 14 16. At End of Term......................................................... 15 17. Environmental Matters; Compliance with Law............................. 16 18. Rules and Regulations.................................................. 17 19. Estoppel Certificates.................................................. 17 20. No Personal Liability.................................................. 18 21. No Recording........................................................... 18 22. Smoking Policy......................................................... 18 23. No Assignment or Subletting............................................ 18 24. Additional Rights and Services......................................... 26 25. Right of First Offer................................................... 27 26. Right of First Offer for 40th Floor.................................... 31 27. Brokerage.............................................................. 34 28. Assignment of the Overlease............................................ 34 29. Notices and Cure Periods; Conditions of Limitation and Remedies........ 34 30. Condition of the Sublease Premises; Sublandlord's Contribution......... 36 31. Security............................................................... 38 32. Miscellaneous.......................................................... 40 33. Valid Authority........................................................ 40 34. Failure to Give Possession............................................. 41 35. Consent of Overlandlord under the Overlease............................ 41 36. Termination of Overlease............................................... 41 37. Sublandlord Consent.................................................... 42 38. Subtenant Default...................................................... 42 39. Sublandlord Default.................................................... 42 40. Governmental Incentives................................................ 43 41. Quiet Enjoyment........................................................ 43 42. Attorneys' Fees........................................................ 43
EXHIBIT A - Floor Plan of Sublease Premises -i- EXHIBIT B - Overlease EXHIBIT C - Plans and Specifications EXHIBIT D - Form of Letter of Credit EXHIBIT E - Exclusions from Incorporated Provisions SCHEDULE 1 - Sublandlord Furniture SCHEDULE 2 - Sublandlord's Work -ii- SUBLEASE AGREEMENT OF SUBLEASE ("Sublease") dated as of the 4th day of March 2005, by and between Lehman Brothers Holdings Inc., a Delaware corporation having an office at 745 Seventh Avenue, New York, New York 10019 ("Sublandlord"), and Franklin Credit Management Corporation, a Delaware corporation having an office at Six Harrison Street, New York, New York 10013 ("Subtenant"). W I T N E S S E T H: WHEREAS, by Lease dated as of October 13, 1993, between 101 Hudson Leasing Associates ("Overlandlord"), as landlord, and Sublandlord, as tenant, and as amended by Lease Term Commencement Date Agreement dated as of June 30, 1994, First Amendment to Lease dated as of August 30, 1994, Second Amendment to Lease dated as of June 30, 1995, Third Amendment to Lease dated as of April, 1996, Fourth Amendment to Lease dated as of July 15, 1998, Fifth Amendment to Lease dated as of March, 2000, Agreement to Partially Surrender Space and Sixth Amendment of Lease dated as of June 1, 2004, and Agreement to Partially Surrender Space and Seventh Amendment of Lease dated as of November 17, 2004 (collectively, the "Overlease"), Sublandlord leased from Overlandlord certain premises (the "Premises") in the building (the "Building") located at 101 Hudson Street, Jersey City, New Jersey (and more fully described in the Overlease) for a term to expire on December 31, 2010 (subject to renewal or earlier termination in accordance with the terms thereof); and WHEREAS, Subtenant desires to sublet from Sublandlord the entire twenty-fifth (25th) floor of the Building, consisting of approximately 33,866 rentable square feet (which Sublandlord represents was measured in accordance with BOMA standards) as more particularly shown on the floor plan annexed hereto and made a part hereof as Exhibit A (the "Sublease Premises"), upon the terms and subject to the provisions and conditions hereinafter set forth; NOW, THEREFORE, the parties hereto, in consideration of the mutual covenants, conditions and agreements hereinafter contained, do hereby agree as follows: 1. Term. Sublandlord hereby sublets the Sublease Premises to Subtenant, and Subtenant hereby sublets the Sublease Premises from Sublandlord, for a term (the "Term") which shall commence on the date (the "Commencement Date") that shall be fifteen (15) days after the latest to occur of (i) the execution and delivery of this Sublease by the parties hereto, (ii) the date that Overlandlord shall have consented to this Sublease and shall have agreed to enter into a direct lease with Subtenant effective as of the Expiration Date with respect to the Sublease Premises, (iii) delivery of the Sublease Premises to Subtenant and (iv) substantial completion of Sublandlord's Work (as hereinafter defined), and which shall end on December 30, 2010 (the "Expiration Date"), unless sooner terminated in accordance with the provisions of this Sublease. Sublandlord shall notify Subtenant when Sublandlord's Work is substantially complete. If the Commencement Date does not occur on or prior to the ninetieth (90th) day after the date hereof, then Subtenant shall have the right to terminate this Lease, by giving notice thereof to Sublandlord not later than the one hundredth tenth (110th) day after the date hereof (it being understood that time shall be of the essence as to the date by which Subtenant has the right to exercise such right to terminate the Sublease). 2. Annual Fixed Rent and Additional Rent. A. Subject to Subparagraph 2I below, Subtenant covenants and agrees that, during and throughout the entire Term, Subtenant shall pay to Sublandlord annual fixed rent ("Fixed Rent") in the amount of Seven Hundred Sixty One Thousand Nine Hundred Eighty Five and no/100 Dollars ($761,985.00) per annum (in monthly installments of Sixty Three Thousand Four Hundred Ninety Eight and 75/100 Dollars ($63,498.75) during and for the period commencing on the Commencement Date and continuing through and including the Expiration Date, which annual amount (including any increases to same pursuant to the terms of this Sublease) shall be increased by the sum of $33,866 on each anniversary of the Commencement Date (with a corresponding increase to each monthly installment (including any increases to same pursuant to the terms of this Sublease) in the sum of $2,822.17 on each anniversary of the Commencement Date). Subtenant covenants and agrees to pay the Fixed Rent to Sublandlord, in lawful money of the United States, in equal monthly installments in advance, on or prior to the first day of each calendar month during the Term, without any deduction, offset, abatement, defense and/or counterclaim whatsoever, except as otherwise expressly set forth herein. The monthly installment of Fixed Rent payable on account of any partial calendar month during the Term, if any, shall be prorated. B. In addition to the Fixed Rent payable hereunder, Subtenant covenants to pay, for each Calendar Year, any part of which shall occur during the Term, as additional rent ("Additional Charges"), without any deduction, offset, abatement, defense and/or counterclaim whatsoever (except as otherwise expressly set forth herein), the charges that are set forth herein, including, without limitation, all amounts that are required to be paid as Additional Rent to Overlandlord pursuant to the terms of the Overlease that are incorporated in this Sublease pursuant to the terms hereof and which are payable with respect to the Sublease Premises for periods occurring wholly or in part within the Term. -2- C. Subtenant shall pay all Additional Charges payable under said Subparagraph 2B directly to Sublandlord at least five (5) Business Days prior to the respective due dates under the Overlease for the payment of such charges. D. Subject to the provisions of Subparagraph 2E below, all payments of Fixed Rent and Additional Charges (Fixed Rent and Additional Charges are collectively referred to herein as "Rent") shall be made by good and sufficient check (subject to collection) currently dated, drawn on a bank which is a member of the New York Clearing House or any successor thereto, issued directly from Subtenant, without endorsements, to the order of Lehman Brothers Holdings Inc. E. Upon at least thirty (30) days prior written notice to Sublandlord, Subtenant may elect to pay monthly installments of Fixed Rent and/or Additional Charges at a domestic bank identified by Sublandlord, by wire transfer of immediately available federal funds, to the account of Sublandlord. If Subtenant shall have elected to pay Fixed Rent and/or Additional Charges by wire transfer, then Subtenant shall not be in default of Subtenant's obligation to pay Fixed Rent and/or Additional Charges, nor shall any interest be imposed, if and for so long as Subtenant shall timely comply with Sublandlord's wire instructions in connection with such payments. Accordingly, if Subtenant shall have timely complied with Sublandlord's instructions pertaining to a wire transfer, but the funds shall thereafter have been misdirected or not accounted for properly by the recipient bank designated by Sublandlord, then the same shall not relieve Subtenant's obligation to make the payment so wired, but shall toll the due date for such payment until the wired funds shall have been located. Except as expressly provided to the contrary in this Subparagraph 2E, in no event shall Subtenant's wiring of any Rent to Sublandlord as provided herein be deemed any waiver of Sublandlord's rights and remedies under this Sublease. F. Intentionally Omitted. G. Notwithstanding anything to the contrary contained in this Sublease, all sums of money, other than Fixed Rent, as shall become due and payable by Subtenant to Sublandlord under this Sublease shall be deemed to be Additional Charges, and Sublandlord shall have the same rights and remedies in the event of non-payment of Additional Charges as are available to Sublandlord for the non-payment of Fixed Rent. H. Modifying the provisions of Section 6.1 of the Overlease, as such provisions pertain to this Sublease, the references therein to Base Rent, Tenant's Proportion [sic] Share of Operating Expenses, Floor Common Area Costs and the Management Fee shall be deemed to refer collectively to Fixed Rent and Additional Charges. I. Notwithstanding anything to the contrary provided in Subparagraph 2A above, Sublandlord hereby excuses Subtenant's obligation to pay Fixed Rent for the seven (7) month period commencing on the Commencement Date. J. In the event that Overlandlord permits Subtenant to make payments of the Fixed Rent and/or Additional Charges directly to Overlandlord, then at Sublandlord's option Subtenant shall make such payments directly to Overlandlord in lieu of -3- Sublandlord, with simultaneous proof of each such payment sent to Sublandlord in a form reasonably satisfactory to Sublandlord, and such payment shall satisfy Subtenant's corresponding obligation hereunder; provided, however that subject to the terms of the Overlease, (i) Sublandlord reserves the right at any time to cause Subtenant to resume making such payments directly to Sublandlord and (ii) in no event shall such arrangement be deemed to create a landlord-tenant relationship between Overlandlord and Subtenant. 3. Use of the Sublease Premises. Subtenant shall use and occupy the Sublease Premises for general and executive offices and uses incidental thereto in accordance with the terms and conditions of the Overlease (the "Permitted Use"), and for no other purpose, and further covenants not to do any act which will result in a violation of the Overlease. 4. Incorporation of Overlease Terms. A. All capitalized and other terms not otherwise defined herein shall have the meanings ascribed to them in the Overlease, unless the context clearly requires otherwise. B. Except as herein otherwise expressly provided, all of the terms, provisions, covenants and conditions contained in the Overlease are hereby made a part hereof to the extent they apply to the Sublease Premises during the Term. Subject to the terms of the immediately preceding sentence, the rights and obligations contained in the Overlease are, during the term of this subletting, hereby imposed upon the respective parties hereto, with Sublandlord being substituted for "Landlord", and Subtenant being substituted for "Tenant", with respect to the Overlease; provided, however, that Sublandlord shall not be liable to Subtenant for any failure in performance resulting from the failure in performance by Overlandlord under the Overlease of the corresponding covenant of the Overlease (except to the extent any such failure results from a default by Sublandlord under the Overlease), and Sublandlord's obligations hereunder are accordingly conditional where such obligations require such parallel performance by Overlandlord. It is expressly agreed that notwithstanding the incorporation of any provisions of the Overlease in this Sublease, Sublandlord shall not be obligated to perform any obligation which is the obligation of Overlandlord under the Overlease, except as otherwise expressly set forth herein. Sublandlord shall have no liability to Subtenant by reason of the default of Overlandlord under the Overlease. Subtenant recognizes that Sublandlord is not in a position and shall not be required to render any of the services or utilities, to make repairs, replacements, restorations, alterations or improvements or to perform any of the obligations required of Overlandlord by the terms of the Overlease. Subtenant also recognizes that those representations, warranties and covenants made by Sublandlord to Subtenant per the terms of this Subparagraph 4B regarding compliance with laws or Hazardous Materials shall be based solely on the representations, warranties and covenants made by Overlandlord to Sublandlord under the Overlease, and that any certifications that Sublandlord shall be required to deliver with respect to any such matters shall be based solely on the certifications delivered by Overlandlord to Sublandlord under the Overlease; provided, however, that to the extent any such representations and warranties were made to the knowledge of Overlandlord, such representations and warranties shall include the actual knowledge of Sublandlord at the time such representations and warranties are made to Subtenant. Sublandlord agrees, however, to use commercially -4- reasonable efforts to enforce Sublandlord's rights against Overlandlord under the Overlease for the benefit of Subtenant to the extent that such rights are related to the Sublease Premises, upon Subtenant's written request therefor (and to forward to Overlandlord any notices or requests for consent as Subtenant may reasonably request). To the extent such enforcement arises out of an action by Subtenant not expressly permitted by the terms of the Overlease, Subtenant shall promptly reimburse Sublandlord for any and all costs which Sublandlord shall incur in expending such efforts, and Subtenant does hereby indemnify and agree to hold Sublandlord harmless from and against any and all claims, liabilities, damages, costs and expenses (including, without limitation, reasonable attorney's fees and disbursements) incurred by Sublandlord in expending such efforts, and such indemnity shall survive the Expiration Date or sooner termination of this Sublease. If, after written request from Subtenant, Sublandlord shall fail or refuse to take action as required hereunder for the enforcement of Sublandlord's rights against Overlandlord with respect to the Sublease Premises within a reasonable period of time, Subtenant shall have the right to take such action in it own name (and Sublandlord shall reasonably cooperate with Subtenant in doing so), and for such purpose and only to such extent, all of the rights of Sublandlord under the Overlease are hereby conferred upon and conditionally assigned to Subtenant and Subtenant hereby is subrogated to such rights to the extent that the same shall apply to the Sublease Premises; provided, however, that (i) Subtenant shall only have such rights if Subtenant shall not be in default under this Sublease beyond applicable notice and/or cure periods, and (ii) Sublandlord shall have the right to require Subtenant to discontinue such action if in the reasonable opinion of Sublandlord such action may cause a cancellation, forfeiture or termination of the Overlease or Sublandlord's estate and rights thereunder with respect to the Premises. Nothing in this Subparagraph 4B shall require Sublandlord to institute any suit or action to enforce any such rights. Subtenant acknowledges that the failure of Overlandlord to provide any services or comply with any obligations under the Overlease shall not entitle Subtenant to any abatement or reduction in Rent payable hereunder, except to the extent that Subtenant would be entitled to an abatement or reduction in rent payable under the Overlease and Sublandlord actually receives such abatement or reduction from Overlandlord. Sublandlord recognizes that those representations, warranties and covenants made by Subtenant to Sublandlord under the incorporated terms of the Overlease shall apply only to the Sublease Premises. C. Wherever the Overlease refers to the "Premises", such references for the purposes hereof shall be deemed to refer to the Sublease Premises. D. Wherever the Overlease refers to the "Lease", such references for the purposes hereof shall be deemed to refer to this Sublease. E. Wherever the Overlease refers to "Base Rent", such references for the purposes hereof shall be deemed to refer to Fixed Rent. F. Wherever the Overlease refers to "Additional Rent", such references for the purposes hereof shall be deemed to refer to Additional Charges. G. Wherever the Overlease refers to "Tenant's Work", such references for the purposes hereof shall be deemed to refer to Subtenant's Work. -5- H. Wherever the Overlease refers to a "Notice", such references for the purposes hereof shall be deemed to refer to a notice described in Subparagraph 29A of this Sublease. I. All references in the Overlease to "Operating Expenses", "Tenant's Proportionate Share", the "Management Fee", the "Floor Common Areas", the "Floor Common Area Costs", and the "Generator/UPS Costs" shall be deemed deleted. J. All references in the Overlease to the "Security Area" shall be deemed deleted. K. Wherever the Overlease refers to an obligation of the landlord thereunder being part of "Landlord's Work", such obligation shall be deemed to have been satisfied, and Sublandlord shall have no obligation to perform such obligation. L. Wherever the Overlease refers to payment being made in accordance with Article 5 of the Overlease, such payment for the purposes hereof shall be required to be made in accordance with Paragraph 2 of this Sublease. M. Wherever the Overlease refers to an obligation commencing on the Base Rent Commencement Date or the Additional Rent Commencement Date, such obligation shall be deemed to commence on the first day following the expiration of the rent concession period described in Subparagraph 2I above. N. Sublandlord represents that, as of the date hereof, (i) the Overlease annexed hereto as Exhibit B and made a part hereof is a true and complete copy of the Overlease; (ii) to Sublandlord's actual knowledge (but without having made any independent investigation), no event has occurred which with the passage of time or giving of notice, or both, could ripen into a default under the Overlease nor has Sublandlord given or received any notice of default under the Overlease; (iii) there are no offsets or defenses existing against the enforcement of the Overlease; (iv) to Sublandlord's actual knowledge (but without having made any independent investigation), no condemnation proceeding is pending or threatened against the Building or the Sublease Premises; and (v) to Sublandlord's actual knowledge (but without having made any independent investigation), there is no pending or threatened litigation affecting Sublandlord's interest in the Overlease or in the Sublease Premises. O. Notwithstanding anything in the Overlease to the contrary, Subtenant hereby agrees to pay to Sublandlord monthly an amount equal to Sublandlord's actual cost of providing chilled water to the Sublease Premises during the Term, based on submeter readings for the Sublease Premises (the "Chilled Water Cost"). For purposes of this Sublease, the Chilled Water Cost shall be deemed to be included within the definition of Additional Charges. P. Following receipt of any notice from the Overlandlord having an effect on this Sublease or the Sublease Premises, Sublandlord shall promptly deliver a copy of same to Subtenant. -6- 5. Non-Applicability of Certain Provisions of the Overlease. A. The following provisions of the Overlease shall not be incorporated in this Sublease by reference: (i) the Fundamental Lease Provisions; (ii) the following sections of the Overlease: Section 1.1, Section 1.2.1 through Section 1.2.3, Section 1.2.6, the second sentence of Section 1.2.7, Section 1.2.9, Section 1.2.10, Section 1.2.12, Section 1.2.13, Section 1.2.20, Section 1.2.22.1, Section 1.2.23, Section 1.2.25.1, Section 1.2.26.1, Section 1.2.28, Section 1.2.30 through Section 1.2.42, Section 1.2.45 through 1.2.47, Section 1.2.56 through Section 1.2.62, Section 1.2.65, Section 1.2.66, Section 1.2.68 through Section 1.2.76, Section 1.2.78 through Section 1.2.83, Section 1.2.87 through Section 1.2.90, Section 1.2.97, Section 1.2.98, Section 1.2.100 through Section 1.2.110 and Section 1.2.111.1, the portion of the first sentence of Section 8.1(iv) commencing with the words "provided, however" and the balance of such Section 8.1(iv), the second, fifth, sixth and seventh sentences of Section 8.1(vi), Section 8.1(viii), Section 8.2(b), Section 8.2(c), Section 8.2(d), the last sentence of Section 8.5, the first sentence of Section 8.6(a)(i), Section 8.6(a)(ii), Section 8.6(b), Section 8.6(c), Section 8.7, Section 8.8(b), the third sentence of Section 8.9 and the balance of such Section 8.9, the last sentence of Section 8.11, the third sentence of Section 8.12, Section 8.13, the first sentence of Section 9.1, the first and last sentences of Section 10.1, Section 10.2, Section 10.3, the last sentence of Section 11.2(a), Section 11.2(c), the last sentence of Section 12.2, Section 12.7, the second and fifth sentences of Section 13.1, Section 14.3, Section 14.5, Section 17.1, Section 17.8, the second sentence of Section 18.3, the portion of the fourth sentence of Section 21.1 commencing with the words "provided such Superior Landlord" and the balance of such Section 21.1, Section 21.3, Section 24.1 through Section 24.7, the second sentence of Section 24.11, Section 24.13, Section 25.1 through Section 25.4, Section 25.7, Section 26.2, Section 34.1, Section 34.3(d), the first sentence of Section 34.4(b), Section 34.8(b), Section 34.9, Section 40.4, Section 40.13, and Section 40.20; (iii) the following articles of the Overlease: Article 2, Article 3, Article 4, Article 5, Article 7 (except Section 7.4), Article 15, Article 16, Article 19, Article 20, Article 23, Article 29, Article 30, Article 31, Article 32, Article 33, Article 35, Article 36, Article 37, Article 38 and Article 39; (iv) the following Exhibits of the Overlease: Exhibit A, Exhibit A-1, Exhibit A-2, Exhibit A-3, Exhibit A-4, Exhibit A-5, Exhibit B, Exhibit D, Exhibit E, Exhibit F, Exhibit G, Exhibit H, Exhibit I, Exhibit J, Exhibit L, Exhibit M, Exhibit N, Exhibit P and Exhibit Q; and (v) the Fifth Amendment to Lease dated as of March 2000 between Overlandlord and Sublandlord; (vi) Sections 1 through 7, Sections 8(a)(i) through 8(a)(iii), Section 8(b)(ii) and Section 8(b)(iv) of the Agreement to Partially Surrender Space and Sixth Amendment of Lease and the balance of such agreement (except to the extent that each of those sections contain defined terms used in the remaining sections); and -7- (vii) Additionally, and without limiting anything else contained in this Sublease, those provisions of the Overlease that are set forth in Exhibit E attached hereto shall not be incorporated into this Sublease. 6. Sublease Subject to Overlease. A. This Sublease is expressly made subject and subordinate to all of the terms and conditions of the Overlease and to all items and matters of record which the Overlease is subject and subordinate, except as specifically provided to the contrary in this Sublease, to the extent applicable to the Sublease Premises. Subtenant hereby assumes and covenants that, throughout the Term, Subtenant shall observe and perform all of the provisions of the Overlease (other than the provisions expressly excluded as set forth in Paragraph 5 above) to the extent applicable to the Sublease Premises, which are to be observed and performed by the tenant thereunder. Subtenant covenants that Subtenant shall not do any act, matter or thing which will be, result in, or constitute a violation or breach of or a default under the Overlease; it being expressly agreed to by Subtenant that any such violation, breach or default shall constitute a material breach by Subtenant of a substantial obligation under this Sublease, subject to the notice and cure periods herein provided. Subtenant hereby agrees that Subtenant shall indemnify and hold Sublandlord harmless from and against all claims, liabilities, penalties and expenses, including, without limitation, reasonable attorneys' fees and disbursements, arising from or in connection with any default by Subtenant in Subtenant's performance of those terms, covenants and conditions of the Overlease which are or shall be applicable to Subtenant, as above provided, and all amounts payable by Subtenant to Sublandlord on account of such indemnity shall be deemed to be Additional Charges hereunder and shall be payable upon demand. The indemnity set forth in the immediately preceding sentence shall survive indefinitely. In any case where the consent or approval of Overlandlord shall be required pursuant to the Overlease, Sublandlord's consent shall also be required hereunder. B. Subject to the terms of any SNDA (as hereinafter defined), if any, entered into between Overlandlord and Subtenant, Subtenant covenants and agrees that if, by reason of a default on the part of Sublandlord (as the tenant under the Overlease) under the Overlease, the Overlease or the leasehold estate created thereunder is terminated, then Subtenant will, at the option of Overlandlord, which shall be exercised in the sole and absolute discretion of the Overlandlord, attorn to Overlandlord on the terms and conditions set forth in this Sublease, and will recognize Overlandlord as Subtenant's landlord under this Sublease, provided that Overlandlord accepts such attornment, having no obligation to do so, in which event Overlandlord shall assume all prospective obligations of Sublandlord under this Sublease, provided that under no circumstances shall Overlandlord be liable for any brokerage commission due in connection with this Sublease or any renewal or extension thereof, and Overlandlord shall not be (i) liable in any way to Subtenant for any act or omission, neglect or default on the part of Sublandlord under this Sublease, except to the extent that (A) such act or omission, neglect or default continues after the date that Overlandlord succeeds to Sublandlord's interest in this Sublease and (B) such act or omission, neglect or default is of a nature that Overlandlord can cure by performing a service or making a repair, (ii) responsible for any monies owing by, or on deposit with, Sublandlord for the credit of Subtenant, whether in the nature of security or otherwise, unless and to the extent such monies are delivered to Overlandlord, (iii) subject to any -8- offset or counterclaim which theretofore accrued to Subtenant against Sublandlord, (iv) bound by any previous prepayment of rent or additional rent for more than one month except in the nature of a security deposit, or (v) responsible for the performance or completion of any work to be done by Sublandlord under this Sublease to render the Sublease Premises ready for occupancy by Subtenant or by any monetary obligations of Sublandlord with respect to contributions to the cost of Subtenant's Work (as hereinafter defined). C. Subtenant agrees to be bound, for all purposes of this Sublease, by any modifications or amendments to the Overlease. Sublandlord agrees not to amend or modify the Overlease in any way that would discriminate against Subtenant, or which would increase Subtenant's monetary obligations hereunder, shorten the term hereof or decrease Subtenant's rights with respect to the Permitted Use of the Sublease Premises, or which would otherwise materially adversely affect Subtenant's rights or obligations hereunder or permit the same to be cancelled or terminated, without Subtenant's prior written consent, provided, however, that Sublandlord shall have the right to terminate this Sublease, and this Sublease shall be deemed terminated, in the event that the Overlease is terminated in accordance with the provisions of Article 24 or Article 25 of the Overlease or Subparagraph 36B hereof. D. Subtenant shall not take any action or do or permit to be done anything which would result in any additional cost or other liability to Sublandlord except for customary tenant charges, the payment for which Subtenant shall be responsible. Sublandlord shall not take any action or do or permit to be done anything under the Overlease which would result in an additional cost or liability to Subtenant that Subtenant would not have had under the terms and provisions hereof. E. If there are any provisions in this Sublease that are inconsistent with the Overlease, the provisions of this Sublease shall govern unless to do so would result in a default under the Overlease in which case the terms of the Overlease shall govern. -9- 7. Utilities and Services. Supplementing those provisions of Article 8 of the Overlease that have been incorporated into this Sublease, as such provisions are applicable to the Sublease Premises, the term "Electrical Capacity" shall mean seven (7) watts per rentable square foot of space within the Sublease Premises. Subtenant shall contract directly with PSE&G for electrical service to the Sublease Premises and shall pay PSE&G all costs and expenses directly based upon the existing submeter for the Sublease Premises, without payment of any administration fee to Sublandlord. Sublandlord confirms that the electrical submeter on the twenty-fifth (25th) floor only measures the electricity used on the twenty-fifth (25th) floor. 8. Compliance with Law. Supplementing those provisions of Article 10 of the Overlease that have been incorporated into this Sublease, as such provisions are applicable to the Sublease Premises, Subtenant shall pay all costs, expenses, fines, penalties and damages which may be imposed upon Sublandlord, Overlandlord, Master Landlord, and/or any mortgagee of the Land and/or the Building to the extent due to Subtenant's failure to fully and promptly comply with the provisions of Section 10.1 of the Overlease, as such provisions are applicable to the Sublease Premises. 9. Alterations. Modifying (to the extent of any inconsistency between such provisions and this Paragraph 9) the provisions of Article 12 of the Overlease, as such provisions are applicable to the Sublease Premises: A. Any and all Alterations proposed to be made by Subtenant in the Sublease Premises (including, without limitation, Subtenant's Work) shall be subject to: (i) Sublandlord's prior written consent, which consent shall not be unreasonably withheld or conditioned, and if Sublandlord shall fail to approve or disapprove of Subtenant's proposed Alterations within five (5) Business Days of Subtenant's request thereof, such Alterations shall be deemed to be approved by Sublandlord (subject to Paragraph 9B below), provided that (x) such Alteration is non-structural, and (y) such Alteration does not affect or involve any portion of the Building or the Building systems outside of the Sublease Premises; (ii) if and to the extent that any such Alteration must be removed and restored pursuant to the Overlease, Subtenant will be deemed to have agreed to perform such removal and restoration on or prior to the Expiration Date; and (iii) if and to the extent Overlandlord's consent would be required under the Overlease if Sublandlord, as tenant under the Overlease, were making such Alterations, Overlandlord's prior written consent. Sublandlord shall not charge Subtenant any supervisory fee in connection with Sublandlord's review of the construction of an Alteration. To the extent permitted by the Overlease, Subtenant shall have the right to construct any Alteration subject to and in accordance with the terms hereof during or after business hours; provided that Subtenant promptly reimburses Sublandlord for any costs incurred by Sublandlord under the Overlease in connection therewith. Such obligation to reimburse Sublandlord shall be deemed to be included in the definition of Additional Charges hereunder. At the time of Sublandlord's consent to a proposed Alteration by Subtenant, Sublandlord shall have the right to specify that, as a condition to such consent, such Alteration shall be removed from the Sublease Premises at the expiration or earlier termination of this Sublease. On or prior to the expiration or earlier termination of this Sublease, Subtenant shall so remove from the Sublease Premises such Alteration as so requested by Sublandlord, pursuant to the terms of Paragraph 16 below. If Sublandlord does not so specify that such Alteration shall be removed from the Sublease Premises, Subtenant shall not be -10- obligated thereafter to remove such Alteration from the Sublease Premises, unless requested by the Overlandlord or required pursuant to the Overlease. B. In any instance where Overlandlord's consent to an Alteration proposed to be made by Subtenant shall be required, and Overlandlord shall withhold such consent, then Sublandlord's consent to such Alteration shall be deemed withheld, and Sublandlord shall not be deemed unreasonable in withholding such consent. 10. Signage. Modifying (to the extent of any inconsistency between such provisions and this Paragraph 10) those provisions of Article 14 of the Overlease that have been incorporated into this Sublease, as such provisions are applicable to the Sublease Premises, the installation of any Tenant's Corridor Signs proposed to be installed by Subtenant in the Sublease Premises shall be subject to Overlandlord's prior written consent to the extent such consent would be required if Sublandlord, as tenant under the Overlease, were proposing the installation of such Tenant's Corridor Signs. 11. Insurance. Modifying (to the extent of any inconsistency between such provisions and this Paragraph 11) the provisions of Article 17 of the Overlease, as such provisions are applicable to the Sublease Premises: A. Subtenant shall, at its own cost and expense, obtain, maintain and keep in force during the Term for the benefit of Sublandlord, Subtenant, Overlandlord and such other parties as are named in the Overlease, the coverage required under Article 17 of the Overlease. B. Sublandlord, Overlandlord and such other parties as are required to be named pursuant to the Overlease, including, without limitation, Overlandlord's agents and any mortgagee or lessor or lessee under any ground or underlying lease, shall be named as additional insureds in said policies and shall be protected against all liability occasioned by an occurrence insured against under said policies. All of said policies of insurance shall be: (i) written as "occurrence" policies, (ii) written as primary policy coverage and not contributing with or in excess of any coverage which Sublandlord may carry, and (iii) issued by insurance companies which are rated not less than "A" in Best's Key Rating Guide, and which are licensed to do business in the State of New Jersey. Said policies shall also provide that the insurer will give Sublandlord at least thirty (30) days prior written notice of cancellation of said policy or of any material modification thereof, and shall comply with all of the provisions of Article 17 of the Overlease. Subtenant shall deliver to Sublandlord the policies of insurance or certificates thereof, together with evidence of the payment of premiums thereon, prior to the Commencement Date, and shall thereafter furnish to Sublandlord, at least twenty (20) days prior to the expiration of any such policies and any renewals thereof, a new policy or certificate in lieu thereof, with evidence of the payment of premiums thereon. C. Subtenant shall pay all premiums and charges for all of said policies, and, if Subtenant shall fail to make any payment when due or carry any such policy within five (5) Business Days after Sublandlord delivers written notice of such failure to Subtenant, Sublandlord may, but shall not be obligated to, make such payment or carry such -11- policy, and the amount paid by Sublandlord, with interest thereon at the interest rate specified in the Overlease for late payment of Base Rent from the date of such payment or the issuance of such policy, shall be repaid to Sublandlord by Subtenant on demand, and all such amounts so repayable, together with such interest, shall be deemed to constitute Additional Charges hereunder. Payment by Sublandlord of any such premium, or the carrying by Sublandlord of any such policy, shall not be deemed to waive or release the default of Subtenant with respect thereto. D. The waiver granted by Subtenant pursuant to Section 17.6 of the Overlease, as incorporated herein by reference, shall run in favor of Sublandlord, Overlandlord and such other parties as are named in the Overlease. The waiver granted by Overlandlord pursuant to Section 17.5 of the Overlease, incorporated herein by reference, shall be deemed given by Sublandlord and run in favor of Subtenant. E. Notwithstanding anything to the contrary contained in Article 17 of the Overlease, and notwithstanding the limits of insurance specified in this Paragraph 11, Subtenant agrees to defend, indemnify and hold harmless Sublandlord, and the agents, partners, shareholders, directors, officers and employees of Sublandlord, from and against all damage, loss, liability, cost and expense (including, without limitation, engineers', architects' and attorneys' fees and disbursements) resulting from any of the risks for which Subtenant is required to insure under this Paragraph 11 and said Article 17, but subject to the waiver of subrogation by Sublandlord pursuant to Paragraph 11(D). Such indemnification shall operate whether or not Subtenant has placed and maintained the insurance specified in this Paragraph 11, and whether or not proceeds from such insurance (such insurance having been placed and maintained) actually are collectible from one or more of the aforesaid insurance companies; provided, however, that Subtenant shall be relieved of its obligation of indemnity herein pro tanto of the amount actually recovered by Sublandlord from one or more of said insurance companies by reason of injury or damage to or loss sustained on the Sublease Premises. 12. Non-Liability and Indemnification. A. Neither Sublandlord nor Sublandlord's agents shall be liable for: (i) any damage to property of Subtenant or of others entrusted to employees of Sublandlord or to Sublandlord's agents, nor for the loss or damage to any property of Subtenant or of any of Subtenant's agents, employees or contractors by theft or otherwise; (ii) any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, mold, rain, snow or leaks from any part of the Building or from the pipes, appliances or plumbing works or from the roof, street or sub-surface or from any other place or by dampness or by any other cause of whatsoever nature, unless such injury or damage is caused by the negligent act or omission or willful misconduct of Sublandlord and is not otherwise subject to the provisions of Sections 17.4, 17.5 and 17.6 of the Overlease; (iii) any such damage caused by other tenants or persons in the Building (other than Sublandlord, Subtenant, their respective Affiliates and all of their respective agents) or caused by operations in construction of any private, public or quasi-public work; or (iv) any latent defect in the Sublease Premises or in the Building. -12- B. Subtenant agrees to indemnify, protect, defend and save harmless, Sublandlord and Sublandlord's partners, officers, directors, contractors, agents, affiliates and employees (individually and collectively, the "Indemnified Party") from and against any and all liability (statutory or otherwise), claims, suits, demands, damages, judgments, costs, fines, penalties, interest and expenses (including reasonable counsel and other professional fees and disbursements incurred in any action or proceeding, whether between Subtenant and the Indemnified Party, or between the Indemnified Party and any third party or otherwise) (collectively, "Claims"), to which any such Indemnified Party may be subject or suffer arising from, or in connection with: (i) any liability or claim for any injury to, or death of, any person or persons, or damage to property (including any loss of use thereof), occurring in or about the Sublease Premises, or (ii) the use and occupancy of the Sublease Premises, or from any work, installation or thing whatsoever done or omitted (other than by Sublandlord or by Sublandlord's agents or employees) in or about the Sublease Premises during the Term and during the period of time, if any, prior to the Commencement Date that Subtenant may have been given access to the Sublease Premises, or (iii) any default by Subtenant in the performance of Subtenant's obligations under this Sublease, or (iv) any negligent or otherwise wrongful act or omission of Subtenant or of any of Subtenant's agents, employees or contractors. Notwithstanding anything to the contrary contained in this Paragraph, in no event shall Subtenant be obligated to indemnify an Indemnified Party for the negligence or willful misconduct of an Indemnified Party. The indemnity in this Paragraph shall be subject to Sublandlord's waiver of subrogation set forth in Section 11(D). C. Sublandlord agrees to indemnify, protect, defend and save harmless Subtenant and Subtenant's shareholders, officers, directors, contractors, agents, affiliates and employees (individually and collectively, the "Subtenant Indemnified Party") from and against any and all Claims, to which any such Subtenant Indemnified Party may be subject or suffer arising from, or in connection with: (i) any default by Sublandlord in the performance of Sublandlord's obligations under this Sublease or the Overlease or (ii) any negligent or otherwise wrongful act or omission (where there is a duty to act) of Sublandlord or of any of Sublandlord's agents, employees or contractors. Notwithstanding anything to the contrary contained in this Paragraph, in no event shall Sublandlord be obligated to indemnify a Subtenant Indemnified Party from Subtenant's negligence or willful misconduct. The indemnity in this Paragraph shall be subject to Subtenant's waiver of subrogation set forth in Paragraph 11(D). 13. Access; Change in Facilities. Supplementing the provisions of Article 22 of the Overlease, as such provisions are applicable to the Sublease Premises, Subtenant hereby (i) acknowledges the rights granted to Overlandlord and other parties pursuant to Article 22 of the Overlease, (ii) agrees that neither Sublandlord nor Overlandlord shall have any liability to Subtenant in connection with the exercise of such rights in accordance with said Article 22, except as otherwise set forth in said Article 22 and elsewhere in the Overlease, and (iii) agrees to cooperate with Overlandlord to the extent that Sublandlord, as tenant under the Overlease, is required to cooperate with Overlandlord pursuant to the provisions of said Article 22. 14. Damage or Destruction. Modifying (to the extent of any inconsistency between such provisions and this Paragraph 14) and supplementing those provisions of Article -13- 24 of the Overlease that have been incorporated into this Sublease, as such provisions are applicable to the Sublease Premises: A. If, as a result of all or a portion of the Sublease Premises being damaged or rendered untenantable by fire or other casualty, Sublandlord, as tenant under the Overlease, shall be entitled to a rent abatement with respect to such damaged portion of the Sublease Premises pursuant to Article 24 of the Overlease, the Rent under this Sublease shall also abate, it being understood and agreed that Subtenant shall not be entitled to any abatement under this Sublease if the abatement granted to Sublandlord under the Overlease is on account of any portion of the Premises that is not part of the Sublease Premises. B. If (i) all or a portion of the Sublease Premises is damaged or rendered untenantable by fire or other casualty, (ii) the Overlease has not been terminated pursuant to any provision of Article 24 thereof, and (iii) Sublandlord shall have notified Subtenant that the time period estimated to substantially complete Landlord's Restoration Work, as determined pursuant to Section 24.4(a) of the Overlease, exceeds 270 days, then Subtenant shall have the right to terminate this Sublease, but only by giving written notice thereof to Sublandlord within fifteen (15) days after receipt of notice from Sublandlord pursuant to clause (iii) of this Subparagraph 14B. In the event that the time period estimated to substantially complete Landlord's Restoration Work, as determined pursuant to Section 24.4(a) of the Overlease, did not exceed 270 days but the Landlord's Restoration Work is in fact not completed within such 270 day period (subject to Force Majeure, but not for a period greater than thirty (30) days), then Subtenant shall have the right to terminate this Sublease by giving written notice thereof to Sublandlord within fifteen (15) days after the expiration of such 270 day period. If Subtenant shall exercise such right to terminate this Sublease, then: (x) this Sublease and the term and estate hereby granted shall expire on the thirtieth (30th) day after Sublandlord's receipt of such notice with the same effect as if that were the date hereinbefore set for the expiration of the Term, and (y) the Fixed Rent and Additional Charges shall be apportioned as of such date. Subtenant shall make available (or pay over) to Sublandlord the proceeds of insurance carried by Subtenant pursuant to Paragraph 11 above with respect to such fire or other casualty (excluding any insurance proceeds received by Subtenant for any of Subtenant's personal property or trade fixtures). C. The provisions of this Paragraph 14 shall be considered an express agreement governing any case of damage to or destruction of the Building or any part thereof by fire or other casualty, and any law now or hereafter in force which is inconsistent with the provisions of this Paragraph 14 shall have no application in such case. 15. Eminent Domain. Modifying (to the extent of any inconsistency between such provisions and this Paragraph 15) and supplementing those provisions of Article 25 of the Overlease that have been incorporated into this Sublease, as such provisions are applicable to the Sublease Premises: A. In the event that all of the Sublease Premises shall be acquired or condemned by eminent domain, this Sublease shall terminate as of the earliest of: (i) the date of the vesting of title in the condemning authority; (ii) the date that Subtenant is dispossessed by the -14- condemning authority; and (iii) the date that the Overlease shall be terminated pursuant to Article 25 thereof, as if said date were the Expiration Date. B. If only a portion of the Sublease Premises shall be so acquired or condemned then, unless the Sublease shall be terminated by virtue of the Overlease having been terminated pursuant to the terms of Article 25 thereof, this Sublease shall continue in full force and effect. In such case, if Sublandlord, as tenant under the Overlease, shall be entitled to a rent abatement with respect to such taken portion of the Sublease Premises pursuant to Article 25 of the Overlease, the Rent under this Sublease shall also abate, it being understood and agreed that Subtenant shall not be entitled to any abatement under this Sublease if the abatement granted to Sublandlord under the Overlease is on account of any portion of the Premises that is not part of the Sublease Premises. In the event that the Sublease remains in effect in accordance with the foregoing terms of this Paragraph 15(B) and (i) the Landlord's Restoration Work, if any, is in fact not completed within the 270 day period following the condemnation (subject to Force Majeure but not for a period greater than thirty (30) days) or (ii) the portion of the Sublease Premises that is not condemned cannot reasonably be used for general office purposes, the Subtenant shall have the right to terminate this Sublease by delivering written notice thereof to Sublandlord within fifteen (15) days after the expiration of such 270 day period in the case of clause (i) or thirty (30) days after the date of such condemnation in the case of clause (ii), and such termination shall be effective ten (10) days after the date of such notice. C. In the event of any such acquisition or condemnation of all or part of the Sublease Premises, (i) Subtenant shall not receive any portion of the award for any such acquisition or condemnation, and (ii) Subtenant shall have no claim against Sublandlord or Overlandlord for the value of any unexpired portion of the Term and agrees not to join in any claim made by Overlandlord or Sublandlord and to execute all further documents that may be required in order to facilitate the collection of the award by Overlandlord. Notwithstanding the foregoing, provided that, in the exercise of Sublandlord's reasonable business judgment, neither Overlandlord nor Sublandlord will be adversely affected, Subtenant shall have the right to make a separate claim for Subtenant's moving expenses, business dislocation expenses, furnishings, fixtures and other personal property, and the unamortized cost of Subtenant's Alterations, including Subtenant's Work which were paid for by Subtenant and not attributable to Sublandlord's Contribution. 16. At End of Term. Modifying (to the extent of any inconsistency between such provisions and this Paragraph 16) the provisions of Article 28 of the Overlease, as such provisions are applicable to the Sublease Premises: A. Upon the expiration or sooner termination of this Sublease, unless Subtenant shall be continuing to occupy the Sublease Premises immediately thereafter pursuant to a direct lease between Subtenant and Overlandlord, Subtenant shall vacate and surrender the Sublease Premises in broom-clean condition, restore the Sublease Premises to the condition required by the Overlease upon the expiration of the Overlease (except that Subtenant shall have no obligation to remove any Alterations or other improvements that were existing in the Sublease Premises as of the Commencement Date), and shall forthwith repair any damage to the Sublease Premises caused by such restoration and any permitted or required removal from the Sublease -15- Premises of any furniture (including, without limitation, the Furniture (as defined in Paragraph 30)), moveable trade fixtures, improvements, any of Subtenant's Alterations which were requested to be removed by Sublandlord as a condition of Sublandlord's consent to the installation of such Alteration or any other property so removed from the Sublease Premises. B. The parties recognize and agree that the damage to Sublandlord resulting from any failure by Subtenant to timely surrender possession of the Sublease Premises as aforesaid will be substantial and will exceed the amount of the monthly installments of the Fixed Rent payable hereunder. Subtenant therefore agrees that if possession of the Sublease Premises is not surrendered to Sublandlord on the Expiration Date or sooner termination of this Sublease in accordance with the terms hereof, in addition to any other right or remedy Sublandlord may have hereunder or at law or in equity, Subtenant shall pay to Sublandlord for each month and for each portion of any month during which Subtenant holds over in the Sublease Premises after the Expiration Date or sooner termination of this Sublease, a sum equal to two (2) times the aggregate of the portion of the Fixed Rent and Additional Charges which were payable under this Sublease with respect to the last month of the Term. In addition to making all required payments under this Subparagraph 16B, Subtenant shall, in the event of Subtenant's failure to surrender the Sublease Premises in accordance with Article 28 of the Overlease, as modified by this Paragraph 16 and in the manner aforesaid, also indemnify and hold Sublandlord harmless from and against any and all cost, expense, damage, claim, loss or liability resulting from any delay or failure by Subtenant in so surrendering the Sublease Premises, including any consequential damages (to the extent the failure to surrender continued for sixty (60) days following the termination of this Sublease) suffered by Sublandlord and any claims made by Overlandlord or any succeeding occupant founded on such delay or failure, and any and all reasonable attorneys' fees, disbursements and court costs incurred by Sublandlord in connection with any of the foregoing. Nothing herein contained shall be deemed to permit Subtenant to retain possession of the Sublease Premises after the Expiration Date or sooner termination of this Sublease, and no acceptance by Sublandlord of payments from Subtenant after the Expiration Date or sooner termination of this Sublease shall be deemed to be other than on account of the amount to be paid by Subtenant in accordance with the provisions of this Paragraph 16, which provisions shall survive the Expiration Date or sooner termination of this Sublease. 17. Environmental Matters; Compliance with Law. Modifying (to the extent of any inconsistency between such provisions and this Paragraph 17) and supplementing those provisions of Articles 10 and 34 of the Overlease that have been incorporated into this Sublease, as such provisions are applicable to the Sublease Premises: A. Subtenant represents and warrants to Sublandlord that (i) Subtenant's NAICS (North American Industry Classification System) Number, as designated by the Office of Management and Budget is 523999, and (ii) such NAICS number is not subject to ISRA as presently adopted and promulgated. B. Subtenant's indemnification obligations under Section 34.3(c) of the Overlease (which shall apply only with respect to the Sublease Premises during the Term) -16- shall run in favor of Sublandlord, Overlandlord and such other parties as are set forth in said Section 34.3(c). C. Sublandlord represents and warrants to Subtenant that, as of the date hereof (i) to the knowledge of Sublandlord, there are no Hazardous Materials located within the Sublease Premises in violation of Applicable Law; and (ii) there are no Hazardous Materials located within the Sublease Premises in violation of Applicable Law that were brought or introduced to the Sublease Premises by an act of Sublandlord. D. Subtenant agrees to cooperate with Overlandlord to the extent that Sublandlord, as tenant under the Overlease, is required to cooperate with Overlandlord pursuant to the provisions of Section 34.4. E. Sublandlord represents and warrants to Subtenant that, on the date hereof (i) to the knowledge of Sublandlord, the Sublease Premises complies with all Legal Requirements including, without limitation, all building and fire codes and the Americans with Disabilities Act of 1990; and (ii) Sublandlord has not taken any action that has resulted in the Sublease Premises failing to comply on the date hereof with all Legal Requirements including, without limitation, all building and fire codes and the Americans with Disabilities Act of 1990. 18. Rules and Regulations. Subtenant shall fully and promptly comply with all requirements of the rules and regulations of the Building and related facilities, copies of which are attached to the Overlease. Subtenant acknowledges that Overlandlord, subject to the terms of the Overlease, shall at all times have the right to change such rules and regulations and/or Building services or to promulgate other rules and regulations and/or Building services in such manner as may be reasonable for safety, care or cleanliness of the Building and related facilities or premises, and for preservation of good order therein, all of which rules and regulations and/or Building services, changes and amendments will be forwarded to Subtenant in writing and shall be carried out and observed by Subtenant. Subtenant shall further be responsible for the compliance with such rules and regulations and/or Building services by the employees, contractors, servants, agents, visitors, licensees and invitees of Subtenant. In the event of any conflict between the provisions of this Sublease and the provisions of such rules and regulations, then the provisions of such rules and regulations shall control. 19. Estoppel Certificates. A. At any time and from time to time before or during the Term, Subtenant shall, within twenty (20) days after request by Sublandlord, execute, acknowledge and deliver to Sublandlord a statement in writing addressed to Sublandlord and/or to such other party(ies) as Sublandlord may reasonably designate: (i) certifying that this Sublease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), (ii) stating the dates to which the Fixed Rent, Additional Charges and other charges have been paid, (iii) stating whether or not, to the knowledge of the signer of such certificate, there exists any default by either party in the performance of any covenant, agreement, term, provision or condition contained in this Sublease, and, if so, specifying each such default of which the signer may have knowledge, and (iv) setting -17- forth such other information as Sublandlord may reasonably request concerning this Sublease; it being intended that any such statement delivered pursuant to this Subparagraph 19A may be relied upon by Sublandlord or by an assignee of Sublandlord's interest. B. Sublandlord agrees, in connection with any proposed assignment of this Sublease or subletting of the Sublease Premises by Subtenant, within twenty (20) days after request by Subtenant, to execute, acknowledge and deliver to Subtenant a statement in writing addressed to Subtenant: (i) certifying that this Sublease is then in full force and effect and has not been modified (or if modified, setting forth all modifications), (ii) setting forth, to the knowledge of Sublandlord, the date to which the Fixed Rent and Additional Charges have been paid, and (iii) stating whether or not, to the knowledge of Sublandlord (but without having made any independent investigation), Subtenant is in default under this Sublease, and, if Subtenant is in default, identifying all such defaults; it being intended that any such statement delivered pursuant to Subparagraph 19B may be relied upon by a permitted assignee or sublessee of Subtenant's interest in this Sublease. 20. No Personal Liability. The liability of Sublandlord to Subtenant for any and all defaults by Sublandlord under this Sublease for the entire Term shall be capped at the aggregate amount of $2,000,000.00 and in no event shall Subtenant have any right to receive or collect a greater amount from Sublandlord in connection with any damages incurred by Subtenant hereunder. In no event shall Subtenant (or any Person claiming by, through or under Subtenant) make any claim against the direct or indirect shareholders, officers, directors, individuals, employees, partners, affiliates, members or joint venturers of Sublandlord for any deficiency, nor shall any direct or indirect shareholders, officers, directors, individuals, employees, partners, affiliates, members or joint venturers of Sublandlord, Overlandlord or the lessor under any ground or underlying lease have or be subject to levy, attachment or other enforcement of a remedy sought by Subtenant or anyone claiming by, through or under Subtenant for any breach or claim hereunder. 21. No Recording. Neither party shall have the right to record this Sublease, and the same shall not be recorded. 22. Smoking Policy. Subtenant shall not permit smoking in the Sublease Premises. 23. No Assignment or Subletting. A. Subject to the terms of this Paragraph 23, Subtenant, on its own behalf and on behalf of its heirs, distributees, executives, administrators, legal representatives, successors and assigns, covenants and agrees that Subtenant shall not, by operation of law or otherwise: (i) assign, whether by merger, consolidation or otherwise, mortgage or encumber its interest in this Sublease, in whole or in part, or (ii) sublet, or permit the subletting of, the Sublease Premises or any part thereof, or (iii) permit the Sublease Premises or any part thereof to be occupied or used for desk space, mailing privileges or otherwise by any Person other than Subtenant without the prior written consent of Sublandlord (which may be granted or withheld in Sublandlord's sole and absolute discretion) and of Overlandlord (if and to the extent required -18- under the Overlease) in each instance. Any violation of the provisions of this Subparagraph 23A shall constitute a default under this Sublease. B. If Subtenant shall desire to assign this Sublease or sublet all or any portion of the Sublease Premises, Subtenant shall submit to Sublandlord a written request for Sublandlord's consent to such assignment or subletting, which request shall be accompanied by the following information: (i) the name and address of the proposed assignee or subtenant; (ii) if Subtenant desires to sublet only a portion of the Sublease Premises, a description of the portion to be sublet, together with a floor plan thereof; (iii) the terms and conditions of the proposed assignment or subletting; (iv) the nature and character of the business of the proposed assignee or subtenant and its proposed use of the Sublease Premises; and (v) current financial information and any other information Sublandlord may reasonably request with respect to the proposed assignee or subtenant, including, without limitation, its most recent financial report. Sublandlord, by notice given to Subtenant within ten (10) Business Days after receipt of Subtenant's request for consent to any such assignment or sublease (the "Termination Notice"), may terminate this Sublease on a date to be specified in said notice (the "Termination Date"), which date shall be not earlier than one (1) day before the effective date of the proposed assignment or subletting nor later than thirty (30) days after said effective date; provided, however, that within the earlier to occur of (i) five (5) Business Days after the delivery of the Termination Notice and (ii) one (1) Business Day prior to the Termination Date, Subtenant may, by written notice delivered to Sublandlord, rescind its written request to assign or sublet. If such request is timely rescinded, the Sublease shall not terminate as provided in the immediately preceding sentence. If the Sublease is terminated, Subtenant shall vacate and surrender the Sublease Premises on or before the Termination Date as if it were the Expiration Date. If Subtenant proposes to sublet only a portion of the Sublease Premises, Sublandlord, by notice given to Subtenant within ten (10) Business Days after receipt of Subtenant's request for consent (the "Elimination Notice"), may elect to eliminate such portion of the Sublease Premises (said portion hereinafter called the "Eliminated Space") from the Sublease Premises commencing on the date (hereinafter called the "Elimination Date") immediately prior to the proposed commencement date of the term of the proposed subletting, and in the event such notice is given: (a) the Eliminated Space shall be eliminated from the Sublease Premises; (b) Subtenant shall surrender the Eliminated Space to Sublandlord on or prior to the Elimination Date in the same manner as if said Elimination Date were the Expiration Date; (c) if the Eliminated Space shall constitute less than an entire floor, Sublandlord, at Sublandlord's expense, shall have the right to make any alterations and installations in the Sublease Premises required, in Sublandlord's reasonable judgment, to make the Eliminated Space a self-contained rental unit with access through corridors to the elevators and core toilets serving the Eliminated Space, and Sublandlord and any tenant or other occupant of the Eliminated Space shall have the right to use the core toilets and any corridors providing access from the Eliminated Space to the core area in common with Subtenant and any other permitted occupants of the Sublease Premises, and the right to install signs and directional indicators in or about such corridors indicating the name and location of such tenant or other occupant; and (d) (x) the Fixed Rent shall be reduced in the proportion which the area of the Eliminated Space bears to the total area of the Sublease Premises immediately prior to the Elimination Date (including an equitable portion of the area of any corridors referred to in clause (c) of this sentence as part of the area of the Eliminated Space for the purpose of computing such reduction), and (y) any prepaid portion of Fixed Rent and -19- Additional Charges for any period after the Elimination Date allocable to the Eliminated Space shall be refunded by Sublandlord to Subtenant. Notwithstanding the foregoing, if within the earlier to occur of (i) five (5) Business Days after delivery of the Elimination Notice and (ii) one (1) Business Day prior to the Elimination Date, Subtenant delivers a written notice to Sublandlord rescinding its written request to sublet, the Eliminated Space shall not be removed from the Sublease Premises as provided in the immediately preceding sentence. At the request of Sublandlord, Subtenant shall execute and deliver an instrument or instruments, in form satisfactory to Sublandlord, setting forth any modifications to this Sublease contemplated in or resulting from the operation of the foregoing provisions of this Subparagraph 23B; however, neither Sublandlord's nor Subtenant's failure to execute or deliver any such instrument shall vitiate the effect of the foregoing provisions of this Subparagraph 23B. C. Notwithstanding anything to the contrary contained in this Paragraph 23, if Sublandlord does not exercise its right to terminate this Sublease or to eliminate the Eliminated Space from the Sublease Premises pursuant to Subparagraph 23B above, provided that Subtenant is not in default under any of the terms, covenants and conditions of this Sublease beyond applicable notice and/or cure periods, Subtenant shall have the right to assign this Sublease or sublet any portion of the Sublease Premises, subject to all of the following terms and conditions: (i) Subtenant shall have complied with the provisions of the Overlease and shall obtain, prior to the effective date of such assignment or sublease, the consent of Overlandlord to such assignment or sublease (if required under the Overlease); (ii) Subtenant shall obtain the prior written consent of Sublandlord to such proposed assignment or sublease, which consent shall not be unreasonably withheld, it being agreed and understood that in any instance where Overlandlord shall withhold consent to such proposed assignment or sublease, then Sublandlord's consent to such proposed assignment or sublease shall be deemed withheld, and Sublandlord shall not be deemed unreasonable in withholding such consent; (iii) In Sublandlord' s reasonable judgment, the proposed assignee or subtenant is engaged in a business, and the Sublease Premises will be used in a manner, which (x) is in keeping with the then standards of the Building, (y) is limited to the use for the purposes set forth in this Sublease, and for no other purposes and (z) will not impose any additional material burden upon Overlandlord in the operation of the Building; (iv) The proposed assignee or subtenant shall be reputable and shall have, in the reasonable judgment of Sublandlord, sufficient financial worth to perform the obligations of the subtenant under the sublease as evidenced by the presentation to Sublandlord of financial and other information regarding the proposed subtenant including, without limitation, its business experience, a current financial statement, and such other information as Sublandlord may reasonably request; (v) Subtenant shall not have (x) negotiated or entered into a proposed assignment or subletting with any tenant, subtenant or occupant of any space in the -20- Building or any Person with whom Sublandlord is then negotiating (or with whom Sublandlord has, in the previous seven (7) month period, negotiated) to assign or sublease space in the Building or with the Affiliate (as hereinafter defined) of any such tenant, subtenant or occupant or Person with whom Sublandlord is then negotiating (or with whom Sublandlord has, in the previous six (6)-month period, negotiated), or (y) advertised the Sublease Premises for assignment or subletting at a rental lower than the rental at which Sublandlord is then offering to rent or assign space in the Building (but Subtenant may list the Sublease Premises with brokers for a lower rental than the rental at which Sublandlord is then offering to rent or assign space in the Building, but only to the extent not prohibited by the Overlease). For the purposes of this Sublease, the term "Affiliate" shall mean an entity which (1) Controls, (2) is under the Control of, or (3) is under common Control with, the entity in question. For the purposes of this Sublease, "Control" or "control" shall mean (i) direct or indirect ownership of more than fifty percent (50%) of the outstanding voting stock of a corporation or other majority equity interest if not a corporation, or (ii) the power or authority to control the management or affairs of an entity, whether by reason of (a) direct or indirect ownership of a particular portion of the total equity interest in such entity, (b) the terms of a contract, or (c) another means; (vi) No subletting shall be for a term ending later than one (1) day prior to the Expiration Date, unless (x) Subtenant has complied with the provisions hereof regarding assignment by Subtenant of this Sublease (as if such subletting were an assignment of the Sublease) and (y) Subtenant has entered into a direct lease with Overlandlord for the Sublease Premises to commence immediately after the Expiration Date; (vii) The assignment or sublease shall be subject and subordinate to all provisions of this Sublease and the Overlease and all of the rights of Sublandlord hereunder and of Overlandlord under the Overlease; (viii) Subtenant shall deliver to Sublandlord a duplicate original of such assignment instrument or sublease, in form reasonably acceptable to Sublandlord, duly executed by Subtenant and the assignee or subtenant, as applicable, prior to the effective date thereof; (ix) The assignment instrument or sublease shall provide that it is subject and subordinate to this Sublease and to the matters to which this Sublease is or shall be subordinate, and any sublease shall provide that that, in the event of termination, re-entry or dispossession by Sublandlord under this Sublease, Sublandlord may, at its option, take over any of the right, title and interest of Subtenant, as sublessor, under such sublease, and the subtenant shall, at Sublandlord's option, attorn to Sublandlord pursuant to the then executory provisions of such sublease, except that Sublandlord shall not (w) be liable for any previous act or omission of Subtenant under such sublease, except to the extent that (A) such act or omission continues after the date that Sublandlord succeeds to Subtenant's interest in such sublease and (B) such act or omission is of a nature that Sublandlord can cure by performing a service or making a repair, (x) be subject to any counterclaim, offset or defense, which theretofore accrued to such subtenant against Subtenant, (y) be bound by any previous modification of such sublease not consented to by Sublandlord or by any previous prepayment of more than one (1) month's rent, or (z) be bound by any obligations to make any payments to such sublessor (in the nature of landlord -21- contributions or otherwise) (it being acknowledged and agreed, however, that the provisions of this Subparagraph 23C(ix) shall be self operative, and that no further instrument shall be required to give effect to this provision); (x) The subtenant shall have no right whatsoever to further sublet the Sublease Premises or any portion thereof or to assign its interest in the sublease; (xi) The assignee or subtenant shall not be entitled, directly or indirectly, to diplomatic or sovereign immunity and shall be subject to service of process in, and the jurisdiction of the courts of, the State of New Jersey; (xii) There shall not be more than three (3) assignees or subtenants or occupants (including Subtenant) of the Sublease Premises; and (xiii) All subleases shall be of a shape or configuration such that the area proposed to be sublet and the remainder of the Sublease Premises shall in Sublandlord's reasonable judgment constitute commercially marketable separate rental units. D. Subtenant shall reimburse Sublandlord on demand for all reasonable costs (including, without limitation, all reasonable legal fees and disbursements, as well as the costs of making investigations as to the acceptability of the proposed subtenant and costs due to Overlandlord) which may be incurred by Sublandlord in connection with a request by Subtenant that Sublandlord consent to any proposed assignment or sublease. E. Subtenant hereby waives any claim against Sublandlord for money damages which Subtenant may have based upon any assertion that Sublandlord has unreasonably withheld or delayed any consent to an assignment or subletting pursuant to the provisions of this Sublease. Subtenant agrees that its sole remedy shall be an action or proceeding to enforce such provisions or for specific performance. Nothing contained in this Paragraph limits Subtenant's rights to recover actual damages (but not consequential, punitive or special damages) sustained by Subtenant in a court of competent jurisdiction (x) to the extent deriving from Sublandlord's unreasonably withholding Sublandlord's consent to a proposed sublease or assignment (in cases where Sublandlord has expressly agreed not to so unreasonably withhold such consent), and (y) if such court makes a final unappealable determination that Sublandlord so unreasonably withheld such consent capriciously and in bad faith. F. Sublease Profits/Assignment Profits. (i) If Sublandlord shall give its consent to any sublease of the Sublease Premises, Subtenant shall pay to Sublandlord, as Additional Charges, 50% of any and all Sublease Profits (as hereinafter defined) actually received by Subtenant. For purposes of this Sublease, the term "Sublease Profits" shall be deemed to mean the amount by which (i) all rents, additional charges or other consideration payable under the sublease to, or in connection with the subletting by, Subtenant (including, but not limited to, sums paid for the sale or rental of Subtenant's fixtures, leasehold improvements, equipment, furniture or other personal property less, in the case of the sale thereof, the then net unamortized or undepreciated cost of any such fixtures, leasehold improvements, equipment, furniture or other personal property which were -22- provided and installed in the Sublease Premises at the sole cost and expense of Subtenant and for which Sublandlord has not given an allowance or other credit, determined on the basis of Subtenant's federal income tax returns) after deducting therefrom those amounts that are deducted in determining Net Profits under Section 20.4(c) of the Overlease, exceed the (ii) Fixed Rent and Additional Charges with respect to the portion of the Sublease Premises to be subleased accruing during the term of such sublease pursuant to the terms of this Sublease. The sums payable under this Subparagraph 23F(i) shall be paid to Sublandlord as and when payable by the subtenant to Subtenant. (ii) If Sublandlord shall give its consent to any assignment of this Sublease, Subtenant shall pay to Sublandlord, as Additional Charges, 50% of any and all Assignment Proceeds (as hereinafter defined) actually received by Subtenant. For the purposes of this Sublease, the term "Assignment Proceeds" shall mean all consideration payable to Subtenant in connection with such assignment (including, but not limited to, sums paid for the sale or rental of Subtenant's fixtures, leasehold improvements, equipment, furniture or other personal property less, in the case of the sale thereof, the then net unamortized or undepreciated cost of any such fixtures, leasehold improvements, equipment, furniture or other personal property which were provided and installed in the Sublease Premises at the sole cost and expense of Subtenant and for which Sublandlord has not given an allowance or other credit, determined on the basis of Subtenant's federal income tax returns) after deducting therefrom those amounts that are deducted in determining Net Profits under Section 20.5(f) of the Overlease. The sums payable under this Subparagraph 23F(ii) shall be paid to Sublandlord as and when payable by the subtenant to Subtenant. G. Any attempted assignment or subletting made contrary to the provisions of this Paragraph 23 shall be null and void; provided, however, that Sublandlord may collect an amount equal to the then Rent from the sublessee or assignee as a fee for its use and occupancy, and shall apply the amount so collected to the Rent reserved in this Sublease. No such assignment, subletting, occupancy or use, whether with or without Sublandlord's prior consent, nor any such collection or application of Rent or fee for use and occupancy, shall be deemed a waiver by Sublandlord of any term, covenant or condition of this Sublease or the acceptance by Sublandlord of such assignee, subtenant, occupant or user as tenant hereunder. No consent by Sublandlord or Overlandlord (if required under the Overlease) to any assignment or subletting shall in any manner be considered to relieve Subtenant from obtaining Sublandlord's and Overlandlord's (if required under the Overlease) express written consent to any further assignment or subletting. The provisions of this Paragraph 23 shall apply to each and every assignment and sublease Subtenant proposes to enter into during the Term. For the purposes of this Paragraph 23, "sublettings" shall be deemed to include all sub-sublettings as well as sublettings. H. (i) If Subtenant is a corporation, the direct or indirect transfer and/or exchange of fifty (50%) percent or more (aggregating all prior transfers) of the shares of Subtenant or of the shares of any corporation of which Subtenant is a subsidiary, including transfers by operation of law and including a related or unrelated series of transactions, shall be deemed an assignment of this Sublease for purposes of this Paragraph 23; provided, however, that Sublandlord shall not unreasonably withhold its consent to such an assignment. -23- (ii) If Subtenant is a partnership, the direct or indirect transfer of fifty (50%) percent or more (aggregating all prior transfers) of the partnership interests of Subtenant, including transfers by operation of law and including a related or unrelated series of transactions, shall be deemed an assignment of this Sublease for all purposes of this Paragraph 23; provided, however, that Sublandlord shall not unreasonably withhold its consent to such an assignment. (iii) If Subtenant is a limited liability company, the direct or indirect transfer of fifty (50%) percent or more (aggregating all prior transfers) of the membership interests of Subtenant, including transfers by operation of law and including a related or unrelated series of transactions, shall be deemed an assignment of this Sublease for all purposes of this Paragraph 23; provided, however, that Sublandlord shall not unreasonably withhold its consent to such an assignment. I. Notwithstanding anything to the contrary set forth in this Lease, neither any assignment of Subtenant's interest in this Sublease nor any subletting, occupancy or use of the Sublease Premises or any part thereof by any entity other than Subtenant, nor any collection of Rent by Sublandlord from any entity other than Subtenant, nor any application of any such Rent to Subtenant's obligations hereunder shall, in any circumstances, relieve the Subtenant named herein (and subsequent Subtenants) of its obligations under this Sublease on Subtenant's part to be observed and performed (including without limitation, Subtenant's obligation to pay Rent to Sublandlord in accordance with the terms hereof). In furtherance thereof, the Subtenant named herein (and subsequent Subtenants) agrees that it shall be the primary obligor of its obligations, responsibilities, liabilities, indemnities and other covenants under this Sublease, regardless of any assignment, sublease or license permitted or not permitted hereunder. J. Subtenant acknowledges that the Option and the 40th Floor Option (pursuant to Paragraphs 25 and 26 hereof) are personal to the subtenant named herein and any assignee, sublessee or other transferee of this Sublease shall not have such rights. K. Notwithstanding anything to the contrary set forth in this Paragraph 23, Subtenant shall have the right to assign this Sublease or sublease or permit occupancy of all or a portion of the Sublease Premises to an Affiliate of Subtenant without Sublandlord's prior consent, but subject to the prior written consent of Overlandlord if required in accordance with the terms of the Overlease, and without Sublandlord having the right to (y) terminate the Sublease or eliminate a portion of the Sublease Premises (as contemplated by Paragraph 23(B) above) or (z) share in the Sublease Profits or Assignment Proceeds arising from such assignment, sublease or occupancy arrangement; in all cases provided that (i) Subtenant gives to Sublandlord, not later than the fifteenth (15th) day after any such assignment, sublease or occupancy arrangement is consummated, an instrument, duly executed by the assigning Subtenant and the aforesaid Affiliate of Subtenant, in form reasonably satisfactory to Sublandlord, to the effect that such Affiliate assumes all of the obligations of Subtenant arising hereunder from and after the date of such assignment, and (ii) Subtenant, with such notice, provides Sublandlord with reasonable evidence to the effect that the entity to which Subtenant is so assigning, subleasing or entering into an occupancy arrangement with constitutes an Affiliate -24- of Subtenant (such permitted transfer to be known as a "Permitted Affiliate Transfer"). Notwithstanding the foregoing, in the event that subsequent to a Permitted Affiliate Transfer, the assignee thereunder is no longer an Affiliate of the Subtenant named herein, then such change shall be deemed a prohibited transfer under this Paragraph 23 and Sublandlord shall have all rights and remedies with respect thereto, including, without limitation, the right to (y) terminate the Sublease (as contemplated by Paragraph 23(B) above) and/or (z) share in the Sublease Profits arising from such assignment, sublease or occupancy arrangement. Notwithstanding the immediately preceding sentence, if the assignee of a Permitted Affiliate Transfer is no longer an Affiliate of the Subtenant named herein, and Subtenant provides Sublandlord with evidence of such assignee's net worth reasonably satisfactory to Sublandlord and posts security with Sublandlord reasonably satisfactory to Sublandlord, then such change shall not be deemed a prohibited transfer as provided in the immediately preceding sentence. L. Notwithstanding anything to the contrary set forth in this Paragraph 23, the merger or consolidation of Subtenant into or with another entity shall be permitted without Sublandlord's prior consent, but subject to the prior written consent of Overlandlord if required in accordance with the terms of the Overlease, and without Sublandlord having the right to (y) terminate the Sublease (as contemplated by Paragraph 23(B) above) or (z) share in the Sublease Profits or Assignment Proceeds arising from such assignment, sublease or occupancy arrangement, provided that (i) such merger or consolidation is not principally for the purpose of transferring the subleasehold estate created by this Sublease, (ii) the new entity has a net worth equal to or greater than the lesser of (I) Subtenant's net worth on the date hereof and (II) Subtenant's net worth immediately prior to such merger or consolidation, (iii) Subtenant gives Sublandlord notice of such merger or consolidation not later than the fifteenth (15th) day after the occurrence thereof, and (iv) Subtenant provides Sublandlord with reasonable evidence that the requirements described in clauses (i) and (ii) above have been satisfied, promptly after Sublandlord's request therefor (such permitted transfer to be known as a "Permitted Corporate Transfer"). M. Notwithstanding anything to the contrary set forth in this Paragraph 23, the assignment of Subtenant's entire interest hereunder in connection with the sale of all or substantially all of the assets of Subtenant shall be permitted without Sublandlord's prior consent, but subject to the prior written consent of Overlandlord if required in accordance with the terms of the Overlease, and without Sublandlord having the right to (y) terminate the Sublease (as contemplated by Paragraph 23(B) above) or (z) share in the Sublease Profits or Assignment Proceeds arising from such assignment, sublease or occupancy arrangement, provided that (i) Subtenant gives to Sublandlord, not later than the fifteenth (15th) day after any such assignment is consummated, an instrument, duly executed by the assigning Subtenant and the assignee, in form reasonably satisfactory to Sublandlord, to the effect that such assignee assumes all of the obligations of the subtenant arising hereunder from and after the date of such assignment, (ii) such sale of all or substantially all of the assets of Subtenant is not principally for the purpose of transferring the subleasehold estate created by this Sublease, (iii) the assignee has a net worth equal to or greater than the lesser of (I) Subtenant's net worth on the date hereof and (II) Subtenant's net worth immediately prior to such merger or consolidation and (iv) Subtenant provides Sublandlord with reasonable evidence that the requirements described in clauses (ii) -25- and (iii) above have been satisfied, promptly after Sublandlord's request therefor (such permitted transfer to be known as a "Permitted Sale Transfer"). 24. Additional Rights and Services. A. Subject to Overlandlord's approval (if required under the Overlease), throughout the Term, Subtenant shall have the right, without additional payment to Sublandlord, to use Subtenant's Proportionate Share of spaces or slots in the computerized directory in the Building that Sublandlord is entitled to use under Article 15 of the Overlease, under the terms and conditions set forth therein. "Subtenant's Proportionate Share" shall mean a fraction, the numerator of which is the number of rentable square feet of the Sublease Premises at the applicable time and the denominator of which is the Rentable Area of the Premises at the applicable time. As of the date hereof, Subtenant's Proportionate Share is 33,866/392,877 or 8.62%. B. Subtenant shall have the right, without additional payment to Sublandlord, to obtain on a monthly basis throughout the Term from the operator of the Parking Garage, Subtenant's Proportionate Share of the number of parking spaces allocated to Sublandlord pursuant to the Overlease. Sublandlord will cooperate reasonably with Subtenant, at Subtenant's expense, to obtain such spaces. Subtenant shall contract directly with the Parking Garage operator with respect to the payment of parking rates therefor and the administration of monthly parking passes. C. Subtenant shall have the right throughout the Term without additional payment to Sublandlord, subject to Sublandlord's prior approval, not to be unreasonably withheld or delayed, to use Subtenant's Proportionate Share of space in the Roof Area Premises and risers serving the Sublease Premises for the uses set forth in, and in accordance with the terms of, the Overlease. D. To the extent that Sublandlord's generators at the Premises have sufficient capacity (as reasonably determined by Sublandlord), Subtenant shall have the right to connect to such generators and shall pay to Sublandlord Sublandlord's connection fee and a charge of $20,000 per year in equal monthly installments as Additional Charges for Subtenant's use of generator capacity. Such connection right shall continue so long as Subtenant complies with the terms of this Subparagraph 24D until Subtenant disconnects from Sublandlord's generators. E. Subject to the terms of the Overlease and the provisions of this Sublease, Subtenant shall have the right to install additional air-conditioning units and air-handling equipment so long as the Electrical Capacity for the Sublease Premises is not exceeded and Subtenant pays to Sublandlord any Chilled Water Costs associated therewith. F. Subtenant shall have the right to use the freight elevator serving the Sublease Premises and the Loading Dock for the uses set forth in, and in accordance with the terms of, the Overlease; provided that Subtenant promptly reimburses Sublandlord for any costs incurred by Sublandlord under the Overlease in connection therewith. Such obligation to -26- reimburse Sublandlord shall be deemed to be included in the definition of Additional Charges hereunder. 25. Right of First Offer. A. Subject to the terms of this Paragraph 25, Sublandlord shall not sublease to any party other than Subtenant portions of the Premises, other than the Sublease Premises and other than the portion of the Premises located on the fortieth (40th) floor which shall be governed by Paragraph 26 below (each such portion of the Premises that becomes available for sublease and is the subject of an Option Notice, the "Option Space"), without first instituting the procedure described in this Paragraph 25. B. Sublandlord shall institute the procedure described in this Paragraph 25 by giving notice thereof (the "Option Notice") to Subtenant, which Option Notice shall (i) state that Sublandlord desires to sublease the Option Space, (ii) have annexed thereto a floor plan depicting the Option Space, and (iii) set forth the date that Sublandlord reasonably expects the Option Space to be vacant and available for Subtenant's occupancy (such date designated by Sublandlord being referred to herein as the "Scheduled Option Space Commencement Date"). Sublandlord shall exercise commercially reasonable efforts to deliver the Option Notice to Subtenant at least nine (9) months prior to the Scheduled Option Space Commencement Date; provided, however, that Sublandlord shall not incur any liability or be deemed in default hereunder for failure to deliver the Option Notice at least nine (9) months prior to the Scheduled Option Space Commencement Date. C. Subtenant shall have the option (the "Option") to lease the Option Space for a term (the "Option Term") commencing on the Option Space Commencement Date (as hereinafter defined) and expiring on the Expiration Date by giving notice thereof (the "Response Notice") to Sublandlord not later than the tenth (10th) Business Day after the date that Sublandlord gives the Option Notice to Subtenant. Time shall be of the essence as to the date by which Subtenant must give the Response Notice to Sublandlord to exercise the Option. If Subtenant does not give the Response Notice to Sublandlord on or prior to the tenth (10th) Business Day after the date that Sublandlord gives the Option Notice to Subtenant, then Sublandlord shall thereafter have the right to sublease the Option Space (or any part thereof) to any other party on terms acceptable to Sublandlord in Sublandlord `s sole discretion without being required to make any other offer to Subtenant regarding the Option Space under this Paragraph 25. Subtenant shall not have the right to revoke a Response Notice given to Sublandlord pursuant to this Paragraph 25. D. Subtenant's right to sublease the Option Space is subject to the rights of National Union Fire Insurance Company of Pittsburgh, PA ("NUFIC") and all third parties that have entered into leases, subleases, licenses or other agreements with Sublandlord prior to the date hereof with respect to such space and, accordingly, if any such third party elects to sublease such space pursuant to the terms of such leases, subleases, licenses or other agreements as such terms exist on the date hereof, Sublandlord shall have no obligation to give an Option Notice to Subtenant with respect to such space and Subtenant shall not have the right to sublease such space. Further, Subtenant shall not have the right to exercise the Option with -27- respect to all or any portion of the Option Space in connection with such Option Space being leased to any subtenant that then occupies such Option Space and exercises an option or right to extend such subtenant's sublease therefor. Subtenant's exercise of the Option shall be ineffective if, on the date that Subtenant gives the Response Notice, a default has occurred hereunder and is continuing, beyond applicable notice and/or cure periods. If (i) Subtenant exercises the Option, and (ii) at any time prior to the Option Space Commencement Date, a default has occurred hereunder and is continuing beyond applicable notice and/or cure periods, then, at any time prior to the Option Space Commencement Date, Sublandlord shall have the right to declare Subtenant's exercise of the Option ineffective by giving notice thereof to Subtenant, in which case Sublandlord shall have the right to lease the Option Space (or any portion thereof) to any other Person on terms acceptable to Sublandlord in Sublandlord's sole discretion. E. If Subtenant exercises the Option in accordance with the provisions of this Paragraph 25, then, on the Option Space Commencement Date for the Option Space, (i) the Option Space, in broom clean condition, shall be added to the Sublease Premises for purposes of this Sublease (except as otherwise provided in this Paragraph 25E); (ii) Sublandlord shall not be obligated to perform any work or make any installations in the Option Space or grant Subtenant a work allowance therefor; (iii) in connection with Subtenant's exercising Subtenant's rights as set forth in this Paragraph 25 to lease Option Space, the Fixed Rent for the Option Space shall be an amount equal to the Fair Market Rent (as hereinafter defined) therefor, as determined below. The Fixed Rent for the Option Space shall escalate as, when and in the same proportion, if any, that the Fixed Rent for the remainder of the Sublease Premises escalates as provided in this Sublease. F. If, at any time prior to the Scheduled Option Space Commencement Date, Sublandlord has a reasonable expectation that Sublandlord will be unable to deliver possession of the Option Space to Subtenant on the Scheduled Option Space Commencement Date because of the holding over or retention of possession thereof by any tenant, undertenant or other occupant, then Sublandlord shall give prompt notice thereof to Subtenant (any such notice given by Sublandlord to Subtenant being referred to herein as an "Option Space Holdover Notice"). Sublandlord shall include in the Option Space Holdover Notice Sublandlord `s good faith estimate of the delay in Sublandlord `s delivery to Subtenant of possession of the Option Space that Sublandlord then expects to result from any such holding over or retention of possession. If (a) Sublandlord gives an Option Space Holdover Notice to Subtenant, and (b) Sublandlord thereafter in good faith determines that Sublandlord `s initial estimate of the extent of such delay is no longer accurate, then Sublandlord shall give promptly to Subtenant a replacement Option Space Holdover Notice (which includes Sublandlord's revised estimate of such delay). Subject to the terms of this Paragraph 25F, if Sublandlord is unable to deliver possession of the Option Space on the Scheduled Option Space Commencement Date because of the holding over or retention of possession of any tenant, undertenant or occupant in the Option Space without the consent of Sublandlord, then (i) Sublandlord shall not be subject to any liability for Sublandlord `s failure to give possession on said date, (ii) the validity of this Sublease shall not be impaired under such circumstances, nor shall the same be construed to extend the term of this Sublease with respect to such Option Space or otherwise, (iii) Subtenant waives any right to rescind this Sublease and further waives the -28- right to recover any damages which may result from Sublandlord `s failure to deliver possession of the Option Space to Subtenant on the Scheduled Option Space Commencement Date (iv) provided Subtenant is not responsible for such inability to deliver possession, the Fixed Rent and Additional Charges payable with respect to the Option Space shall be abated and the date that the Option Space is demised to Subtenant pursuant to this Paragraph 25 shall be postponed until fifteen (15) Business Days after Sublandlord gives Subtenant notice that the Option Space is vacant and available for Subtenant's occupancy or will be vacant and available for occupancy at the end of such period of fifteen (15) Business Days, provided that Subtenant actually receives occupancy on such date, and (v) Sublandlord, at Sublandlord's expense, shall use its reasonable efforts to deliver possession of the Option Space to Subtenant and in connection therewith, if necessary, shall promptly institute and diligently and in good faith prosecute holdover and any other appropriate proceedings against the occupant of the Option Space (the date that the Option Space is added to the Sublease Premises pursuant to this Paragraph 25 being referred to herein as the "Option Space Commencement Date"). If Sublandlord fails to deliver possession of the Option Space to Subtenant within one hundred twenty (120) days after the Scheduled Option Space Commencement Date, then Subtenant may elect not to lease the Option Space by notice to Sublandlord no later than fifteen (15) days after the expiration of such one hundred twenty (120) day period (it being understood that if Subtenant makes such election, then Sublandlord shall have the right to lease the Option Space to any third party without Subtenant having any rights thereto under this Paragraph 25). G. For purposes of determining the annual fair market rental value of the Option Space (the "Fair Market Rent"), the following procedure shall apply: (i) Sublandlord and Subtenant shall each contemporaneously deliver to the other a notice (each, a "Rent Notice"), on a date mutually agreed upon, but in no event later than sixty (60) days prior to the Scheduled Option Space Commencement Date, which Rent Notice shall set forth each of their respective determinations of the Fair Market Rent (Sublandlord's determination of the Fair Market Rent is referred to as "Sublandlord's Determination" and Subtenant's determination of the Fair Market Rent is referred to as "Subtenant's Determination"). (ii) If Sublandlord's Determination and Subtenant's Determination are not equal and Subtenant's Determination is lower than Sublandlord's Determination, then Sublandlord and Subtenant shall attempt to agree upon the Fair Market Rent. If Subtenant's Determination is higher than Sublandlord's Determination, then the Fair Market Rent shall be equal to Sublandlord's Determination. If Sublandlord and Subtenant mutually agree upon the determination (the "Mutual Determination") of the Fair Market Rent, then their determination shall be final and binding upon the parties. If Sublandlord and Subtenant are unable to reach a Mutual Determination within thirty (30) days after delivery of both the Sublandlord's Determination and the Subtenant's Determination to each party, then Sublandlord and Subtenant shall on the fifth (5th) day after such aforesaid thirty (30) day period jointly select an independent real estate appraiser (the "Appraiser"), whose fee shall be borne equally by Sublandlord and Subtenant. The Appraiser shall not be a person who, during the immediately preceding period of three (3) years, was employed by Sublandlord or Subtenant or any of their respective affiliates. If Sublandlord and Subtenant are unable to jointly agree on the -29- designation of the Appraiser within ten (10) days after they are requested to do so by either party, then the parties agree to allow the American Arbitration Association, or its successor (the "AAA"), to designate the Appraiser using an Expedited Arbitration Proceeding. For the purposes of this paragraph, an "Expedited Arbitration Proceeding" shall mean a binding arbitration proceeding conducted in The City of New York under the Commercial Arbitration Rules of the AAA and administered pursuant to the Expedited Procedures provisions thereof; provided, however, that with respect to any such arbitration, (i) the list of arbitrators referred to in Section E-5(b) shall be returned within five (5) Business Days from the date of mailing; (ii) the parties shall notify the AAA by telephone, within four (4) Business Days, of any objections to the arbitrator appointed and, subject to clause (vii) below, shall have no right to object if the arbitrator so appointed was on the list submitted by the AAA and was not objected to in accordance with Section E-5(b) as modified by clause (i) above; (iii) the notification of the hearing referred to in Section E-8 shall be four (4) Business Days in advance of the hearing; (iv) the hearing shall be held within seven (7) Business Days after the appointment of the arbitrator; (v) the arbitrator shall have no right to award damages; (vi) the decision of the arbitrator shall be final and binding on the parties; and (vii) the arbitrator shall not have been employed by either party (or their respective affiliates) during the period of three (3) years prior to the date of the Expedited Arbitration Proceeding. The parties shall each pay one-half (1/2) of the arbitrator's fees. (iii) The Appraiser shall conduct such hearings and investigations as he or she deems appropriate and shall, within thirty (30) days after the date of designation of the Appraiser, choose either Sublandlord's Determination or Subtenant's Determination as the better estimate of Fair Market Rent, and such choice by the Appraiser shall be conclusive and binding upon Sublandlord and Subtenant. The Fair Market Rent shall be determined taking into account all relevant factors including, without limitation, assuming that the Sublease Premises is available for general office purposes in the then rental market based upon space comparable to the Premises for a term equal to the remainder of the Term, and that no tenant allowance or free rent period is being provided. Each party shall pay its own counsel fees and expenses, if any, in connection with any arbitration under this Paragraph. The Appraiser appointed pursuant to this Paragraph shall be an independent real estate appraiser with at least ten (10) years of experience in leasing of properties which are similar in character to the Building, and a member of the American Institute of Appraisers of the National Association of Real Estate Boards and a member of the Society of Real Estate Appraisers. The Appraiser shall not have the power to add to, modify or change any of the provisions of the Sublease. After a determination has been made of the Fair Market Rent, the parties shall execute and deliver to each other an instrument setting forth the Fixed Rent for the term. (iv) If the final determination of the Fair Market Rent is not made on or before the Option Space Commencement Date in accordance with the provisions of this Paragraph, then, pending such final determination, the Fair Market Rent shall be deemed to be an amount equal to the average of Sublandlord's Determination and Subtenant's Determination. If, based upon the final determination hereunder of the Fair Market Rent, the payments made by Subtenant on account of the Fixed Rent for the period prior to the final determination of the Fair Market Rent were less than the Fixed Rent payable for such period, then Subtenant, not later than the tenth (10th) day after Sublandlord's demand therefor, shall pay -30- to Sublandlord the amount of such deficiency, together with interest thereon at the interest rate specified in the Overlease for late payment of Base Rent. If, based upon the final determination of the Fair Market Rent, the payments made by Subtenant on account of the Fixed Rent for the period prior to the final determination of the Fair Market Rent were more than the Fixed Rent due hereunder for such period, then Sublandlord, not later than the tenth (10th) day after Subtenant's demand therefor, shall pay such excess to Subtenant, together with interest thereon at the interest rate specified in the Overlease for late payment of Base Rent. H. Any subleasing of the Option Space to Subtenant as provided in this Paragraph 25 shall be subject to the approval of the Overlandlord (if required under the Overlease), which approval Sublandlord shall use good faith, commercially reasonable efforts to obtain, and any delays in the Scheduled Option Space Commencement Date due to a delay in Overlandlord approving the additional sublease of the Option Space to the Subtenant shall extend the Scheduled Option Space Commencement Date. In the event that Overlandlord objects to the sublease of the Option Space to the Subtenant, then Sublandlord shall have the right to declare Subtenant's exercise of the Option ineffective by giving notice thereof to Subtenant, in which case Sublandlord shall have the right to lease the Option Space (or any portion thereof) to any other Person on terms acceptable to Sublandlord in Sublandlord's sole discretion. 26. Right of First Offer for 40th Floor. A. Subject to the terms of this Paragraph 26, Sublandlord shall not sublease to any party other than Subtenant portions of the Premises located on the fortieth (40th) floor (each such portion of the Premises that becomes available for sublease and is the subject of an 40th Floor Option Notice, the "40th Floor Option Space"), without first instituting the procedure described in this Paragraph 26. B. Sublandlord shall institute the procedure described in this Paragraph 26 by giving notice thereof (the "40th Floor Option Notice") to Subtenant, which 40th Floor Option Notice shall (i) state that Sublandlord desires to sublease the 40th Floor Option Space, (ii) have annexed thereto a floor plan depicting the 40th Floor Option Space, and (iii) set forth the date that Sublandlord reasonably expects the 40th Floor Option Space to be vacant and available for Subtenant's occupancy (such date designated by Sublandlord being referred to herein as the "Scheduled 40th Floor Option Space Commencement Date"). Sublandlord shall exercise commercially reasonable efforts to deliver the 40th Floor Option Notice to Subtenant at least nine (9) months prior to the Scheduled 40th Floor Option Space Commencement Date; provided, however, that Sublandlord shall not incur any liability or be deemed in default hereunder for failure to deliver the 40th Floor Option Notice at least nine (9) months prior to the Scheduled 40th Floor Option Space Commencement Date. C. Subtenant shall have the option (the "40th Floor Option") to lease the 40th Floor Option Space for a term (the "40th Floor Option Term") commencing on the 40th Floor Option Space Commencement Date (as hereinafter defined) and expiring on the Expiration Date by giving notice thereof (the "40th Floor Response Notice") to Sublandlord not later than the tenth (10th) Business Day after the date that Sublandlord gives the 40th Floor Option Notice to Subtenant. Time shall be of the essence as to the date by which Subtenant must give the 40th Floor Response Notice to -31- Sublandlord to exercise the 40th Floor Option. If Subtenant does not give the 40th Floor Response Notice to Sublandlord on or prior to the tenth (10th) Business Day after the date that Sublandlord gives the 40th Floor Option Notice to Subtenant, then Sublandlord shall thereafter have the right to sublease the 40th Floor Option Space (or any part thereof) to any other party on terms acceptable to Sublandlord in Sublandlord's sole discretion without being required to make any other offer to Subtenant regarding the 40th Floor Option Space under this Paragraph 26. Subtenant shall not have the right to revoke a 40th Floor Response Notice given to Sublandlord pursuant to this Paragraph 26. D. Subtenant's right to sublease the 40th Floor Option Space is subject to the rights of NUFIC, PW Funding, Inc. and all third parties that have entered into leases, subleases, licenses or other agreements with Sublandlord prior to the date hereof with respect to such space and, accordingly, if any such third party elects to sublease such space pursuant to the terms of such leases, subleases, licenses or other agreements as such terms exist on the date hereof, Sublandlord shall have no obligation to give a 40th Floor Option Notice to Subtenant with respect to such space and Subtenant shall not have the right to sublease such space. Further, Subtenant shall not have the right to exercise the 40th Floor Option with respect to all or any portion of the 40th Floor Option Space in connection with such 40th Floor Option Space being leased to any subtenant that then occupies such 40th Floor Option Space and exercises an option or right to extend such subtenant's sublease therefor. Subtenant's exercise of the 40th Floor Option shall be ineffective if, on the date that Subtenant gives the 40th Floor Response Notice, a default by Subtenant has occurred hereunder and is continuing beyond applicable notice and/or cure periods. If (i) Subtenant exercises the 40th Floor Option, and (ii) at any time prior to the 40th Floor Option Space Commencement Date, a default by Subtenant has occurred hereunder and is continuing beyond applicable notice and/or cure periods, then, at any time prior to the 40th Floor Option Space Commencement Date, Sublandlord shall have the right to declare Subtenant's exercise of the 40th Floor Option ineffective by giving notice thereof to Subtenant, in which case Sublandlord shall have the right to lease the 40th Floor Option Space (or any portion thereof) to any other Person on terms acceptable to Sublandlord in Sublandlord's sole discretion. E. If Subtenant exercises the 40th Floor Option in accordance with the provisions of this Paragraph 26, then, on the 40th Floor Option Space Commencement Date for the 40th Floor Option Space, (i) the 40th Floor Option Space shall be added to the Sublease Premises for purposes of this Sublease (except as otherwise provided in this Paragraph 26E); (ii) Sublandlord shall not be obligated to perform any work or make any installations in the 40th Floor Option Space or grant Subtenant a work allowance therefor; (iii) in connection with Subtenant's exercising Subtenant's rights as set forth in this Paragraph 26 to lease 40th Floor Option Space, the Fixed Rent for the 40th Floor Option Space shall be an amount equal to the product of the Fixed Rent then payable per rentable square foot for the Sublease Premises, multiplied by the rentable square footage of the 40th Floor Option Space. The Fixed Rent for the 40th Floor Option Space shall escalate as, when and in the same proportion, if any, that the Fixed Rent for the remainder of the Sublease Premises escalates as provided in this Sublease. F. If, at any time prior to the Scheduled 40th Floor Option Space Commencement Date, Sublandlord has a reasonable expectation that Sublandlord will be unable -32- to deliver possession of the 40th Floor Option Space to Subtenant on the Scheduled 40th Floor Option Space Commencement Date because of the holding over or retention of possession thereof by any tenant, undertenant or other occupant, then Sublandlord shall give prompt notice thereof to Subtenant (any such notice given by Sublandlord to Subtenant being referred to herein as an "40th Floor Option Space Holdover Notice"). Sublandlord shall include in the 40th Floor Option Space Holdover Notice Sublandlord `s good faith estimate of the delay in Sublandlord `s delivery to Subtenant of possession of the 40th Floor Option Space that Sublandlord then expects to result from any such holding over or retention of possession. If (a) Sublandlord gives a 40th Floor Option Space Holdover Notice to Subtenant, and (b) Sublandlord thereafter in good faith determines that Sublandlord `s initial estimate of the extent of such delay is no longer accurate, then Sublandlord shall give promptly to Subtenant a replacement 40th Floor Option Space Holdover Notice (which includes Sublandlord's revised estimate of such delay). Subject to the terms of this Paragraph 26F, if Sublandlord is unable to deliver possession of the 40th Floor Option Space on the Scheduled 40th Floor Option Space Commencement Date because of the holding over or retention of possession of any tenant, undertenant or occupant in the 40th Floor Option Space without the consent of Sublandlord, then (i) Sublandlord shall not be subject to any liability for Sublandlord `s failure to give possession on said date, (ii) the validity of this Sublease shall not be impaired under such circumstances, nor shall the same be construed to extend the term of this Sublease with respect to such 40th Floor Option Space or otherwise, (iii) Subtenant waives any right to rescind this Sublease and further waives the right to recover any damages which may result from Sublandlord `s failure to deliver possession of the 40th Floor Option Space to Subtenant on the Scheduled 40th Floor Option Space Commencement Date (iv) provided Subtenant is not responsible for such inability to deliver possession, the Fixed Rent and Additional Charges payable with respect to the 40th Floor Option Space shall be abated and the date that the 40th Floor Option Space is demised to Subtenant pursuant to this Paragraph 26 shall be postponed until fifteen (15) Business Days after Sublandlord gives Subtenant notice that the 40th Floor Option Space is vacant and available for Subtenant's occupancy or will be vacant and available for occupancy at the end of such period of fifteen (15) Business Days, provided that Subtenant actually receives occupancy on such date, and (v) Sublandlord, at Sublandlord's expense, shall use its reasonable efforts to deliver possession of the 40th Floor Option Space to Subtenant and in connection therewith, if necessary, shall promptly institute and diligently and in good faith prosecute holdover and any other appropriate proceedings against the occupant of the 40th Floor Option Space (the date that the 40th Floor Option Space is added to the Sublease Premises pursuant to this Paragraph 26 being referred to herein as the "40th Floor Option Space Commencement Date"). If Sublandlord fails to deliver possession of the 40th Floor Option Space to Subtenant within one hundred twenty (120) days after the Scheduled 40th Floor Option Space Commencement Date, then Subtenant may elect not to lease the 40th Floor Option Space by notice to Sublandlord no later than fifteen (15) days after the expiration of such one hundred twenty (120) day period (it being understood that if Subtenant makes such election, then Sublandlord shall have the right to lease the 40th Floor Option Space to any third party without Subtenant having any rights thereto under this Paragraph 26). G. Any subleasing of the 40th Floor Option Space to Subtenant as provided in this Paragraph 26 shall be subject to the approval of the Overlandlord (if required under the Overlease), which approval Sublandlord shall use good faith, commercially reasonable efforts to obtain, and any delays in the Scheduled 40th Floor Option Space Commencement Date -33- due to a delay in Overlandlord approving the additional sublease of the 40th Floor Option Space to the Subtenant shall extend the Scheduled 40th Floor Option Space Commencement Date. In the event that Overlandlord objects to the sublease of the 40th Floor Option Space to the Subtenant, then Sublandlord shall have the right to declare Subtenant's exercise of the 40th Floor Option ineffective by giving notice thereof to Subtenant, in which case Sublandlord shall have the right to lease the 40th Floor Option Space (or any portion thereof) to any other Person on terms acceptable to Sublandlord in Sublandlord's sole discretion. 27. Brokerage. Sublandlord and Subtenant represent and warrant to each other that no broker, other than Cushman & Wakefield, Inc. of New Jersey and CB Richard Ellis (collectively, the "Brokers"), was instrumental in consummating this Sublease, and that no conversations or prior negotiations were had with any broker other than the Brokers concerning the subletting of the Sublease Premises. Subtenant shall indemnify and hold Sublandlord harmless from and against any claims (other than claims by the Brokers) for brokerage commissions or similar fees claimed by any person or entity claiming to have dealt with Subtenant or its employees or agents. Sublandlord shall indemnify and hold Subtenant harmless from and against any claims (including claims by the Brokers) for brokerage commissions or similar fees claimed by any person or entity claiming to have dealt with Sublandlord or its employees or agents. 28. Assignment of the Overlease. The term "Sublandlord" as used in this Sublease means only the tenant under the Overlease, at the time in question, so that if Sublandlord's interest in the Overlease is assigned, the assignor Sublandlord shall be thereupon released and discharged from all covenants, conditions and agreements of Sublandlord hereunder accruing with respect to the Overlease from and after the date of such assignment, but such covenants, conditions and agreements shall be binding on the assignee until thereafter assigned and assumed by the assignee in writing. 29. Notices and Cure Periods; Conditions of Limitation and Remedies. A. All notices, requests, demands and other communications (for purposes of this Paragraph 29 only, collectively, "notices") hereunder to Sublandlord or Subtenant shall be given in writing and delivered by hand, or by a reputable national overnight courier, to the addresses set forth below: If to Sublandlord: Lehman Brothers Inc. 745 Seventh Avenue, 29th Floor New York, New York 10019 Attention: Jaime Fuertes Beth E. Anisman with a copy to: Willkie Farr & Gallagher LLP 787 Seventh Avenue -34- New York, New York 10019 Attention: Steven D. Klein If to Subtenant: Franklin Credit Management Corporation Six Harrison Street New York, New York 10013 Attention: John Collins, General Counsel with a copy to: Cole, Schotz, Meisel, Forman & Leonard 25 Main Street Hackensack, New Jersey 07601 Attention: Gary M. Albrecht B. By notice given in the aforesaid manner, either party hereto may notify the other as to any change as to where and to whom such party's notices are thereafter to be addressed. C. The effective date of any notice shall be the date of receipt of such notice (or the date that such receipt is refused, if applicable). D. In connection with the incorporation by reference of notice and other time limit provisions of the Overlease into this Sublease (and except with respect to actions to be taken by Subtenant for which shorter time limits are specifically set forth in this Sublease, which time limits shall control for the purposes of this Sublease), the time limits provided in the Overlease for the giving or making of any notice by the tenant thereunder to Overlandlord, the holder of any mortgage, the lessor under any ground or underlying lease or any other party, or for the performance of any act, condition or covenant or the curing of any default by the tenant thereunder, or for the exercise of any right, remedy or option by the tenant thereunder, are changed for the purposes of this Sublease, by shortening the same in each instance: (i) to forty-five (45) calendar days with respect to all such periods of sixty (60) or more calendar or Business Days, (ii) to twenty calendar days with respect to all such periods of thirty (30) or more calendar or Business Days but less than sixty (60) calendar or Business Days, (iii) to ten (10) calendar days with respect to all such periods of twenty (20) or more calendar or Business Days but less than thirty (30) calendar or Business Days, (iv) to five (5) calendar days with respect to all such periods of ten (10) or more calendar or Business Days but less than twenty (20) calendar or Business Days, and (v) to two (2) calendar days with respect to all such periods of five (5) or more calendar or Business Days but less than ten (10) calendar or Business Days; but in any and all events to a time limit enabling Sublandlord to give any notice, perform any act, condition or covenant, cure any default, and/or exercise any option within the time limit relating thereto as contained in the Overlease. Subtenant shall, promptly upon receipt thereof, notify Sublandlord of any notice served by Overlandlord upon Subtenant under any of the provisions of the Overlease or with reference to the Sublease Premises. Sublandlord shall, promptly upon receipt thereof, notify Subtenant of any notice served by Overlandlord upon Sublandlord specifically -35- referring to the Sublease Premises. Subtenant shall promptly furnish notice to Sublandlord of any action taken by Subtenant to cure any default under, or comply with any request or demand made by Overlandlord and/or Sublandlord in connection with the Overlease (pertaining to the Sublease Premises) or this Sublease. E. Modifying the provisions of Section 26.1(c) of the Overlease, as such provisions are applicable to Subtenant and the estate created under this Sublease, the time period set forth in such Section 26.1(c) shall be deemed to be five (5) calendar days. F. Modifying (to the extent of any inconsistency between such provisions and this Subparagraph 29F) the provisions of Article 26 of the Overlease that have been incorporated into this Sublease, as such provisions are applicable to the Sublease Premises, in order for Subtenant to be entitled to a cure period in excess of thirty (30) days under Section 26.1 (d) of the Overlease, Subtenant shall complete such remedy in all events prior to such time as would subject Sublandlord or Overlandlord and their respective agents, as well as any other parties listed in Section 26.1(d) of the Overlease, to criminal prosecution or civil liability. 30. Condition of the Sublease Premises; Sublandlord's Contribution. A. It is understood and agreed that all understandings and agreements heretofore had between the parties are merged in this Sublease, which alone fully and completely expresses their agreements, and that the same are entered into after full investigation, neither party relying upon any statement or representation made by the other and not embodied in this Sublease. Subject to substantial completion of Sublandlord's Work and except as expressly provided herein, Subtenant agrees to accept possession of the Sublease Premises in "as is", "where is" and "with all faults" condition on the Commencement Date and, other than Sublandlord's Work (including the diligent completion of any punchlist items remaining after substantial completion), Sublandlord is not required to perform work of any kind, nature or description to prepare the Sublease Premises for Subtenant's occupancy; provided that Sublandlord agrees to deliver the Sublease Premises to Subtenant vacant, broom clean and free of Sublandlord's personal property (other than as described below with respect to the Furniture). Upon the Commencement Date, Sublandlord shall sell the furniture listed on Schedule 1 (the "Furniture") to Subtenant in its "as is" condition as of the date hereof, reasonable wear and tear excepted, for $10.00. Sublandlord shall ensure that the Furniture is in the Sublease Premises on the Commencement Date. Upon request, Sublandlord shall deliver a bill of sale to Subtenant conveying title to the Furniture, which instrument shall be in a form and substance reasonably acceptable to Sublandlord and Subtenant and consistent with the terms of this Paragraph 30. SUBLANDLORD MAKES NO GUARANTEES, REPRESENTATIONS, WARRANTIES OR PROMISES WITH RESPECT TO THE CONDITION OF THE FURNITURE AND SUBTENANT SHALL ACCEPT SUCH FURNITURE "AS IS" AND WITH ALL FAULTS AND DEFECTS. SUBTENANT AGREES THAT SUBLANDLORD SHALL NOT BE LIABLE FOR ANY LATENT OR PATENT DEFECTS IN THE FURNITURE, AND SHALL NOT BE BOUND IN ANY MANNER WHATSOEVER BY ANY GUARANTEES, REPRESENTATIONS, WARRANTIES OR PROMISES PERTAINING TO THE FURNITURE CLAIMED TO HAVE BEEN MADE OR FURNISHED BY SUBLANDLORD OR ANY OTHER PERSON OR ENTITY, INCLUDING, WITHOUT LIMITATION ANY -36- PARTNER, MEMBER, MANAGER, SHAREHOLDER, EMPLOYEE, AGENT, BROKER, ATTORNEY OR OTHER PERSON REPRESENTING OR PURPORTING TO REPRESENT SUBLANDLORD, WHETHER VERBALLY OR IN WRITING. SUBTENANT ACKNOWLEDGES THAT NEITHER SUBLANDLORD NOR ANY OF THE EMPLOYEES, AGENTS, REPRESENTATIVES, BROKERS OR ATTORNEYS OF SUBLANDLORD HAS MADE ANY VERBAL OR WRITTEN GUARANTEES, REPRESENTATIONS, WARRANTIES OR PROMISES WHATSOEVER TO SUBTENANT, WHETHER EXPRESS OR IMPLIED, WITH RESPECT TO THE FURNITURE. IN THE EVENT THAT THIS SUBLEASE TERMINATES PRIOR TO THE COMMENCEMENT DATE, THE SALE CONTEMPLATED BY THIS SUBPARAGRAPH 30A SHALL NOT OCCUR AND SHALL BE CONSIDERED NULL, VOID AND OF NO EFFECT. B. In connection with preparing the Sublease Premises for the initial occupancy of Subtenant, Sublandlord shall perform the work described on Schedule 2(the "Sublandlord's Work") with due dispatch, in a good and workmanlike manner, and in compliance with the Overlease and all applicable law. C. Subtenant acknowledges and agrees that any and all alterations, installations, renovations or other items of work (other than Sublandlord's Work) necessary to prepare the Sublease Premises for Subtenant's initial occupancy ("Subtenant's Work") shall be performed by Subtenant (subject to the provisions of Paragraph 9 above and the applicable provisions of the Overlease), at Subtenant's sole cost and expense subject to Subparagraph 30D below. Subtenant shall not engage any contractor to perform Subtenant's Work without obtaining Overlandlord's (if required under the Overlease) and Sublandlord's prior approval of such contractor, which approval of Sublandlord shall not be unreasonably withheld or delayed. D. Subject to the terms and conditions hereinafter set forth, Sublandlord agrees to provide to Subtenant an allowance ("Sublandlord's Contribution") for Subtenant's hard and soft construction costs in preparing the Sublease Premises for Subtenant's initial occupancy (the "Initial Alterations"), in an aggregate maximum amount equal to Six Hundred Seventy Seven Thousand Three Hundred Twenty and no/100 Dollars ($677,320.00) (i.e., $20.00 per rentable square foot of the Sublease Premises). Fifty percent (50%) of Sublandlord's Contribution shall be paid to Subtenant upon the execution and delivery of this Sublease by all parties hereto, and fifty percent (50%) of Sublandlord's Contribution shall be paid to Subtenant within thirty (30) days after Subtenant's commencement of the Initial Alterations. Subtenant agrees that the Initial Alterations shall be constructed pursuant to the plans and specifications attached hereto as Exhibit C and made a part hereof (the "Approved Plans and Specifications"). At all times during Subtenant's construction period, Subtenant shall obtain, and shall maintain, all necessary and appropriate permits, licenses, authorizations and approvals from all governmental authorities having or asserting jurisdiction, and shall deliver true copies thereof to Sublandlord. In addition, Subtenant shall deliver to Sublandlord conditional waivers of lien from all contractors, subcontractors, vendors, suppliers and materialmen who furnish materials or supplies or perform work or services and full lien waivers for all work performed, completed and paid for. No portion of the Sublandlord's Contribution shall vest in Subtenant or Subtenant's general contractor, nor shall Subtenant sell, transfer, assign, encumber or create a security interest in Sublandlord's Contribution. -37- 31. Security. A. On or prior to the Commencement Date, Subtenant shall deliver to Sublandlord a clean, irrevocable, transferable and unconditional letter of credit (the "Letter of Credit") issued by and drawn upon a commercial bank (hereinafter referred to as the "Issuing Bank") which shall be a member bank of the New York Clearinghouse Association (or, in the alternative, which shall have offices for banking purposes in the Borough of Manhattan and shall have a net worth of not less than $250,000,000, with appropriate evidence thereof to be submitted by Subtenant), which Letter of Credit shall: (i) have a term of not less than one year, (ii) be in the form annexed hereto as Exhibit D, (iii) be for the benefit of Sublandlord, its successor and assign, (iv) be in the amount of One Hundred Ninety Thousand Four Hundred Ninety Six and 25/100 Dollars ($190,496.25) (the "Security Deposit Amount"), (v) except as otherwise provided in this Subparagraph 31A, conform and be subject to the International Standby Practices (1998), International Chamber of Commerce Publication 590 (or any revision thereof or successor thereto), (vi) be fully transferable by Sublandlord without any fees or charges therefor, (vii) provide that Sublandlord shall be entitled to draw upon the Letter of Credit upon presentation to the Issuing Bank of a sight draft accompanied by Sublandlord's statement that Sublandlord is then entitled to draw upon the Letter of Credit pursuant to the terms of this Sublease, and (viii) provide that the Letter of Credit shall be deemed automatically renewed, without amendment, for consecutive periods of one year each year thereafter during the entire Term and for a period of thirty (30) days thereafter, unless the Issuing Bank shall send notice (the "Non-Renewal Notice") to Sublandlord by registered mail, return receipt requested, not less than thirty (30) days next preceding the then expiration date of the Letter of Credit that the Issuing Bank elects not to renew such Letter of Credit, in which case Sublandlord shall have the right, by sight draft on the Issuing Bank, to receive the monies represented by the then existing Letter of Credit, and to hold and/or disburse such proceeds pursuant to the terms of this Paragraph 31, unless Subtenant shall replace the Letter of Credit with a new Letter of Credit complying with the terms hereof within ten (10) days of the Non-Renewal Notice. If Sublandlord shall fail, for any reason whatsoever, to draw upon the Letter of Credit within said thirty (30) day period, and the Letter of Credit shall expire prior to the thirtieth (30th) day following the Expiration Date of the Term, then Subtenant shall, upon demand, immediately furnish Sublandlord with a replacement Letter of Credit (which shall comply with all of the conditions set forth in this Paragraph), so that Sublandlord shall have the entire Letter of Credit on hand at all times during the Term and for a period of thirty (30) days thereafter. Subtenant acknowledges and agrees that the Letter of Credit shall be delivered to Sublandlord as security for the faithful performance and observance by Subtenant of all of the covenants, agreements, terms, provisions and conditions of this Sublease, and that Sublandlord shall have the right to draw upon the Letter of Credit in any instance in which Sublandlord would have the right to use, apply or retain the whole or any part of the proceeds of such Letter of Credit pursuant to the terms of this Paragraph 31. B. Subtenant agrees that, if Subtenant shall default beyond any applicable notice and/or cure periods with respect to any of the covenants, agreements, terms, provisions and conditions that shall be the obligation of Subtenant to observe, perform or keep under the terms of this Sublease, including the payment of the Fixed Rent and Additional Charges, Sublandlord may use, apply or retain the whole or any part of the proceeds of the Letter -38- of Credit to the extent required for the payment of any Fixed Rent and Additional Charges, or any other payments as to which Subtenant shall be in default or for any monies which Sublandlord may expend or may be required to expend by reason of Subtenant's default in respect of any of the covenants, agreements, terms, provisions and conditions of this Sublease, including any damages or deficiency in the reletting of the Sublease Premises, whether such damages or deficiency accrued before or after summary proceedings or other re-entry by Sublandlord. Sublandlord shall not be required to so use, apply or retain the whole or any part of the proceeds of the Letter of Credit, but if the whole or any part thereof shall be so used, applied or retained, then Subtenant shall, upon demand, promptly deliver to Sublandlord a replacement Letter of Credit so that Sublandlord shall have a Letter of Credit for the required Security Deposit Amount on hand at all times during the Term. In the event that Subtenant shall have fully complied with all of the terms, provisions, covenants, agreements and conditions of this Sublease, the Letter of Credit shall be returned to Subtenant within thirty (30) days after the Expiration Date and delivery of exclusive possession of the Sublease Premises to Sublandlord in the condition required by this Sublease (if Subtenant does not thereafter remain in occupancy of the Sublease Premises pursuant to a direct lease with Overlandlord). In the event of any making or assignment of any ground or underlying lease or upon an assignment of Sublandlord's interest in this Sublease: (i) Sublandlord shall have the right to transfer the Letter of Credit to the assignee or lessee or transferee, (ii) upon written acknowledgment by such assignee or lessee or transferee of receipt of the Letter of Credit, Sublandlord shall thereupon be released by Subtenant from all liability for the return of such Letter of Credit, and (iii) Subtenant agrees to look solely to Sublandlord's successor for the return of said Letter of Credit; it being agreed that the provisions hereof shall apply to every transfer or assignment made of the Letter of Credit to a new Sublandlord. Subtenant further covenants that Subtenant will not assign or encumber or attempt to assign or encumber the Letter of Credit, and that neither Sublandlord nor Sublandlord's successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. -39- 32. Miscellaneous. This Sublease is made in the State of New Jersey and shall be governed by and construed under the laws thereof. This Sublease supersedes any and all other or prior understandings, agreements, covenants, promises, representations or warranties of or between the parties (which are fully merged herein). The headings in this Sublease are for purposes of reference only, and shall not limit or otherwise affect the meaning hereof. Whenever necessary or appropriate, the neuter gender as used herein shall be deemed to include the masculine and feminine; the masculine to include the feminine and neuter; the feminine to include the masculine and neuter; the singular to include the plural; and the plural to include the singular. This Sublease shall not be binding upon the parties hereto for any purpose whatsoever unless and until the parties have delivered to each other fully executed duplicate originals hereof. This Sublease may be executed in several counterparts each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 33. Valid Authority. Subtenant hereby represents and warrants to Sublandlord that: A. Subtenant is duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the full right and authority to enter into this Sublease; and B. The execution, delivery and performance of this Sublease by Subtenant: (i) has been duly authorized, (ii) does not conflict with any provisions of any instrument to which Subtenant is a party or by which Subtenant is bound, and (iii) constitutes a valid, legal and binding obligation of Subtenant. C. Sublandlord is duly organized, validly existing and in good standing under the laws of the State of Delaware, and has the full right and authority to enter into this Sublease; and D. The execution, delivery and performance of this Sublease by Sublandlord: (i) has been duly authorized, (ii) does not conflict with any provisions of any instrument to which Sublandlord is a party or by which Sublandlord is bound, and (iii) constitutes a valid, legal and binding obligation of Sublandlord. -40- 34. Failure to Give Possession. If Sublandlord shall be unable to give possession of the Sublease Premises to Subtenant on the Commencement Date, because of the holding-over or retention of possession of any subtenant, under-subtenant or other occupant or for any other reason outside of Sublandlord's reasonable control, Sublandlord shall not be subject to any liability for failure to give possession on said date and the validity of this Sublease shall not be impaired under such circumstances, nor shall the same be construed to extend the term of this Sublease, but the Fixed Rent and Additional Charges shall be abated (provided that Subtenant is not responsible for the inability to obtain possession) until the Commencement Date. The provisions of this Paragraph 34 shall be considered an express agreement governing any case of Sublandlord's failure to deliver possession of the Sublease Premises, and any law now or hereafter in force which is inconsistent with the provisions of this Paragraph 34 shall have no application in such case. 35. Consent of Overlandlord under the Overlease. This Sublease shall have no effect until Overlandlord shall have given written consent hereto. If Overlandlord does not consent to this Sublease for any reason whatsoever within twenty (20) Business Days after the date hereof, then either party may elect to cancel this Sublease by giving notice to the other party after the expiration of said twenty (20) Business Day period, but prior to the giving of said consent by Overlandlord to this Sublease. Subtenant acknowledges that Subtenant may be required to execute and deliver a consent agreement as a condition precedent to the execution thereof by Overlandlord. Subtenant agrees that Subtenant shall promptly execute and deliver to Sublandlord such consent agreement provided same is in form and substance reasonably acceptable to Subtenant. Notwithstanding anything to the contrary contained in this Paragraph 35, in the event that Overlandlord (either directly or through its attorneys) shall have forwarded a form of consent to Sublandlord within said twenty (20) Business Day period, but such consent shall not have been executed by all parties thereto for any reason whatsoever, then said twenty (20) Business Day period shall be extended by an additional period of five (5) Business Days, during which period Sublandlord and Subtenant shall diligently and in good faith take all reasonable acts necessary to obtain said consent. If either party shall have given notice of cancellation to the other party (in accordance with the provisions of this Paragraph 35), then: (i) Sublandlord shall not be obligated to take any further action to obtain such consent, (ii) Sublandlord shall return to Subtenant the Letter of Credit and (iii) this Sublease shall thereupon be deemed null and void and of no further force and effect, and neither of the parties hereto shall have any rights or claims against the other. 36. Termination of Overlease. Subject to Subtenant's attornment obligations hereunder, if the Overlease terminates for any reason then this Sublease shall also terminate. Sublandlord shall not be liable for any such termination unless such termination shall have arisen out of a default under the Overlease by Sublandlord not arising out of a default hereunder by Subtenant (and in such event, Sublandlord shall in no event be liable for consequential, special, punitive or other indirect damages). A. Sublandlord hereby agrees to request within fifteen (15) days after the date hereof that Overlandlord enter into a commercially reasonable form of subordination, non-disturbance and attornment agreement with Subtenant in Overlandlord's standard form (a "SNDA"); provided that (a) execution of an SNDA shall not be a condition to the effectiveness -41- of this Sublease and (b) failure to obtain an SNDA shall not be deemed a default by Sublandlord hereunder. B. Sublandlord covenants to Subtenant that it shall not do or fail to do any act that would result in the termination of the Overlease; provided that Sublandlord has the right to terminate the Overlease so long as either (i) the Overlease remains in effect with respect to the Sublease Premises or (ii) Subtenant and Overlandlord has executed an SNDA, in which case Sublandlord shall be permitted to terminate the Overlease without Subtenant's consent and without any liability to Subtenant. C. Sublandlord agrees to use commercially reasonable efforts to enforce Sublandlord's rights under any subordination, non-disturbance and attornment agreement it has entered into with any other party having an interest in the Premises for the benefit of Subtenant to the extent that such subordination, non-disturbance and attornment agreement relates to the Sublease Premises, upon Subtenant's written request therefor. Subtenant shall promptly reimburse Sublandlord for any and all costs which Sublandlord shall incur in expending such efforts, and Subtenant does hereby indemnify and agree to hold Sublandlord harmless from and against any and all claims, liabilities, damages, costs and expenses (including, without limitation, reasonable attorney's fees and disbursements) incurred by Sublandlord in expending such efforts, and such indemnity shall survive the Expiration Date or sooner termination of this Sublease. 37. Sublandlord Consent. In any instance in which Sublandlord is required by any provision of this Sublease or applicable law not unreasonably to withhold consent or approval, Subtenant's sole remedy (except in the case where it is judicially determined that Sublandlord acted capriciously and in bad faith) shall be an action for specific performance or injunction requiring Sublandlord to grant such consent or approval, all other remedies which would otherwise be available being hereby waived by Subtenant. 38. Subtenant Default. In addition to any remedies that Sublandlord has hereunder by virtue of the incorporation of applicable terms of the Overlease, if (a) Subtenant shall fail to perform any of its obligations hereunder and such failure shall continue beyond any notice and cure period provided for herein, or (b) Overlandlord shall give any notice of failure or default under the Overlease arising out of any failure by Subtenant to perform any of its obligations hereunder and such failure shall continue beyond applicable notice and/or cure periods then, in either case, Sublandlord shall have the right (but not the obligation) to perform or endeavor to perform such obligation, at Subtenant's expense, and Subtenant shall, within ten (10) days of Sublandlord's demand from time to time, reimburse Sublandlord for all reasonable out-of-pocket costs and expenses incurred by Sublandlord in doing so (with interest thereon at the interest rate specified in the Overlease for late payment.) In no event shall Subtenant be liable for consequential, special, punitive or other indirect damages arising from Subtenant's failure to pay any sum or perform any other obligation under the Overlease or hereunder, except as otherwise expressly provided herein. The provisions of this Paragraph 38 shall survive the termination of this Sublease. 39. Sublandlord Default. In the event of a default by Sublandlord in the payment of any sum or performance of any other obligation due under the Overlease, -42- Subtenant's sole remedy shall be to pay such sum directly to Overlandlord or perform such obligation on behalf of Sublandlord, as the case may be, and the sums so paid or expended by Subtenant shall be reimbursed to Subtenant by Sublandlord within ten (10) days after demand therefor or, at Subtenant's election, may be offset from the rent and other charges payable by Subtenant hereunder. In no event shall Sublandlord be liable for consequential, special, punitive or other indirect damages arising from Sublandlord's failure to pay any sum or perform any other obligation under the Overlease or hereunder. The provisions of this Paragraph 39 shall survive the termination of this Sublease. 40. Governmental Incentives. Sublandlord shall cooperate with Subtenant in Subtenant's efforts to negotiate, implement and receive the benefits of an incentive package with various Governmental Authorities, and to execute and deliver any supplements or modifications to this Sublease that are reasonably required in connection therewith, provided that no such Sublease modification or supplement shall (a) increase any obligation of Sublandlord under this Sublease, (b) adversely affect any right of or benefit to Sublandlord under this Sublease (except to a de minimis extent), (c) relieve Subtenant of or reduce any of its obligations under this Sublease, or (d) interfere in any material respect with Sublandlord's ability to arrange financing for Sublandlord's interest in the Sublease Premises. Any and all fees, costs and expenses imposed by the applicable Governmental Authority shall be borne solely by Subtenant, and Subtenant shall reimburse Sublandlord within thirty (30) days of Sublandlord's demand therefor, for any and all reasonable out-of-pocket fees, costs and expenses actually incurred by Sublandlord in connection with Subtenant's requests and in cooperating with Subtenant as provided in this Paragraph 40, including, without limitation, the reasonable costs and expenses of Sublandlord's counsel, consultants and professionals. 41. Quiet Enjoyment. Sublandlord covenants that Subtenant, for so long as Subtenant is not in default beyond the expiration of any applicable notice and/or cure periods, shall and may peacefully and quietly have, hold and enjoy the Sublease Premises for the Term, free from any interference or hindrance by Sublandlord, but subject to the exceptions, reservations and conditions hereof, acts or omissions of Overlandlord, the Overlease and any other superior lease or mortgage. 42. Attorneys' Fees. In connection with any litigation, including appellate proceedings, initiated by a party hereto against the other party hereto and arising out of this Sublease, the party adjudicated to be the substantially prevailing party shall be entitled to recover reasonable attorneys' fees and disbursements from the other party. 43. The term "Person" shall mean any natural person or persons, a partnership, a limited liability company, a corporation and any other form of business or legal association or entity. -43- IN WITNESS WHEREOF, Sublandlord and Subtenant have duly executed this Sublease as of the day and year first written above. SUBLANDLORD: LEHMAN BROTHERS HOLDINGS INC. By: ------------------------------------- Name: Title: SUBTENANT: FRANKLIN CREDIT MANAGEMENT CORPORATION By: ------------------------------------- Name: Title: -44- EXHIBIT A Floor Plan EXHIBIT B Overlease EXHIBIT C Plans and Specifications EXHIBIT D Form of Letter of Credit NO. _________________ Date __________ Irrevocable Letter of Credit # __________ BENEFICIARY Lehman Brothers Holdings Inc. 745 Seventh Avenue New York, New York 10019 Dear Sir(s), We hereby authorize you to value on ________________________. For the account of ______________________________________up to the aggregate amount of $ ____________________________. Available by your drafts at sight, accompanied by your statement, purportedly signed by one of your authorized officers, partners or agents, that the amount of your drawing represents funds due and payable under a certain sublease dated as of October __, 2004, executed by and between Lehman Brothers Holdings Inc. and Franklin Credit Management Corporation (the "Sublease"). This Letter of Credit may be transferred to any transferee of the interest of the sublandlord under the Sublease. It is a condition of this Letter of Credit that it shall be deemed to be automatically extended for a period of one year from the present or any future expiration date, unless we shall notify you by written notice given by registered mail or overnight express courier at least 60 days prior to such expiration date that we elect not to renew it for such additional period, in which case you shall have the right to draw on us the full amount of this Letter of Credit by your sight draft, accompanied by your signed written statement that you are drawing under Letter of Credit # ________________ because you have received notice of non-renewal from us, and the accountee is still obligated to you under the above-referenced lease. Partial draws are permitted under this Letter of Credit. All drafts drawn under this Letter of Credit must bear on their face the clause "Drawn under Letter of Credit/# ______________". Except so far as otherwise expressly stated, this Letter of Credit is subject to International Standby Practices (1998 Revision), International Chamber of Commerce Publication No. 590. EXHIBIT E Exclusions from Incorporated Provisions The following provisions of the Overlease are not incorporated into this Sublease: 1. The provisions of the Overlease providing for Overlandlord to provide liability and/or casualty insurance. 2. Any provisions requiring Overlandlord to deliver non-disturbance agreements from superior lessors or mortgagees, provided that Subtenant shall nevertheless be required to subordinate this sublease to any such superior lessors or mortgagees in the manner required by the Overlease and this Sublease. 3. The provisions of the Overlease requiring Overlandlord to indemnify, defend and/or hold harmless tenant with respect to the common or public areas of the Building. 4. The provisions of the Overlease providing for Overlandlord to provide building services, including, without limitation, security. 5. The provisions of the Overlease obligating the Overlandlord to make repairs or perform work. 6. The provisions of the Overlease obligating the Overlandlord to comply with law. 7. The provisions of the Overlease obligating the Overlandlord to restore the Building after a casualty or condemnation. Nothing set forth in this Exhibit E shall be construed to limit the obligations of Overlandlord with respect to the foregoing matters under the Overlease or the obligation of Sublandlord to enforce such obligations to the extent expressly required by this Sublease. Schedule 1 Sublandlord Furniture 14 Locker Cabinets (each cabinet measures 48"w 18"d 72"h and has 8 locker units) 62 2-Drawer Lateral Files (each measures 36"w and is dark gray) 104 Pedestals (each has a Box/Box/File configuration and is dark gray) 43 Pedestals (each has a File/File configuration and is dark gray) SCHEDULE 2 Sublandlord's Work 1. Install chilled water submeter. 2. Deliver Sublease Premises with all base building systems in good working condition. 3. Remove furniture except furniture set forth on Schedule 1 hereof and deliver Sublease Premises in broom clean condition. 4. Deliver Sublease Premises with all meters, electric panels and transformers in place on the floor. EX-21.1 10 y07373exv21w1.txt SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES Tribeca Lending Corp Rontext 1617 Corp Hudson Management FCRF X FCRF XII FCRF XVIII / XX FCRF XIX Tribeca Funding Corp XXI Greenwich First Corp XXII Greenwich Mgmt Corp XXIII Harrison Financial Corp Harrison 1st Corp 6 Harrison Corp Harrison Financial Assoc Harrison Funding Corp Greenwich Funding Corp Beach Funding Corp Ericsson Assoc, Inc Jackson Union 28 Corp Mass Fed 29 Corp NY Apt 33 Corp Ark 38 Corp Kearny 39 Corp New Haven 40 Corp North Fork 41 Corp Norwich 42 Corp St Pete 43 Corp Fort Granite 44 Corp Jersey 45 Corp Shelton 46 Corp Capt 47 Corp Garfield 48 Corp Cal Second 49 Corp Newport 50 Corp DAPT 51 Corp Island 52 Corp New Haven 53 Corp Madison 54 Corp Branford 55 Corp Coast 56 Corp Home Fed 57 Corp New Haven 58 Corp Flow Purchase 98 Corp Rapid Point 60 Corp Kearny 61 Corp Coast 62 Corp New Haven 63 Corp Emerge 64 Corp Emod 65 Corp Emsec 66 Corp Emgold 67 Corp Modgold 68 Corp First Gold 69 Corp Flow 99-70 Corp Ivy City 72 Corp Free 73 Corp Coast 74 Corp Accredit 75 Flow 99 -76 Corp Cape 77 Corp Century 78 Corp Tampa 79 Corp Firstco 80 Free 81 Corp Pancal 82 Corp WFB 83 Corp Well 84 Corp Morgan 85 Park 86 Green 89 Flow 99-88 Vantage 90 Point 91 Flow 99-92 Pancal 93 Corp Park 94 Accu 95 Corp Coast 96 Corp Park 97 Corp Pancal 98 Corp Flow 2000A Corp Accu 99 Corp FCMC 2000B Corp FLOW 2000B FCMC 2000 C Flow 2000C Penn 100 Corp Penn 100B Corp Flow 2000 D FLOW 2000 E Corp FCMC 2000 D Corp Flow 2000 F Corp Flow 2001 A Corp FCMC 2001 A Corp Flow 2001 B Corp Flow 2001 C Corp Flow 2001 D Corp FCMC 2001 B Corp Flow 2001 E Corp Tribeca Loan Corp FCMC 2001 D Corp FCMC 2001 C Corp Flow 2001 F Corp Flow 2001 G Corp Flow 2001 H Corp FCMC 2001 E Corp Flow 2001 I Corp Flow 2001 J Corp FCMC 2001 F Corp Flow 2001 K Corp Flow 2001 L Corp Flow 2002 A Corp FCMC 2002 A Corp FCMC 2002 B Corp Flow 2002 B Corp Flow 2002 C Corp Flow 2002 D Corp Flow 2002 E Corp FCMC 2002 C Corp Tribecca L Flow 2002 F Corp FCMC 2002 D Corp Flow 2002 G Corp Flow 2002 H Corp FCMC 2002 E Corp Flow 2002 I Corp Flow 2002 J Corp FCMC 2002 F Corp Flow 2002 K Corp FCMC 2002 G Corp FCMC 2002 H Corp Flow 2002 L Corp FCMC 2003 A Corp Flow 2003 A Corp FCMC 2003 B Corp Flow 2003 B Corp FCMC 2003 C Corp Flow 2003 C Corp FCMC 2003 D Corp Flow 2003 D Corp FCMC 2003 E Corp Flow 2003 E Corp Flow 2003 F Corp Flow 2003 G Corp FCMC 2003 F Corp Flow 2003 H Corp FCMC 2003 G Corp Flow 2003 I Corp FCMC 2003 H Corp Flow 2003 J Corp Flow 2003 K Corp Flow 2003 L Corp FCMC 2003 I Corp Flow 2004 A Corp FCMC 2004 A Corp Flow 2004 B Corp Flow 2004 C Corp Flow 2004 D Corp Juniper Bank FCMC 2004 C Corp FCMC 2004 B Corp Flow 2004 E Corp FCMC B-1 2004 A Corp FCMC B-1 2004 B Corp FCMC B-1 2004 C Corp FCMC B-1 2004 D Corp FCMC B-1 2004 E Corp Flow 2004 F Corp Flow 2004 G Corp FCMC 2004 D Corp FCMC 2004 E Corp FCMC 2004 F Corp FCMC 2004 G Corp FCMC 2004 H Corp FCMC 2004 I Corp Flow 2004 H Corp FCMC 2004 J Corp FCMC 2004 K Corp Flow 2004 I Corp Tribeca XI Tribeca XXII Tribeca XXIII Tribeca XXIV Tribeca XXV Tribeca XXVI Tribeca XXVII Tribeca XXVIII Tribeca XXIX Tribeca XXX Tribeca XXXI Tribeca XXXII EX-23.1 11 y07373exv23w1.txt CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.1 March 31, 2005 Deloitte & Touche LLP Two World Financial Center New York, NY 10281 The following representations, made to the best of our knowledge and belief, are being provided to you in connection with your audit of Franklin Credit Management Corp. and subsidiaries (the "Company") as to transactions and events after December 31, 2004 and to the date of this letter, your audit having been incorporated by reference in connection with a registration statement (333-122677) on Form S-8 filed by the Company with the Securities and Exchange Commission on April 7, 2005: 1. The audited financial statements and schedules incorporated by reference in the registration statement present fairly the financial position, results of operations, and cash flows of the Company as of December 31, 2004. 2. The interim financial statements incorporated by reference in the registration statement are fair presentations of the information they purport to show and have been prepared on a basis substantially consistent with the audited financial statements included therein. 3. No events have occurred subsequent to December 31, 2004 that have a material effect on the financial statements that are incorporated by reference in the registration statement or that should be disclosed in order to keep those statements from being misleading. 4. The Company has made available to you (a) all financial records and related data that would have a bearing on the purpose of your review and (b) all minutes of the meetings of stockholders, directors, and committees of directors, or summaries of actions of recent meetings for which minutes have not yet been prepared. 5. In connection with your audit of the Company's financial statements for the year ended December 31, 2004 we have previously provided representations to you dated March 31, 2005. No matters have since come to our attention that would cause us to believe that any of those representations are no longer true. We understand, in connection with the filing of the above referenced registration statement, that you have performed certain limited procedures only, principally those called for by PCAOB Interim Standard AU 711, Filings Under Federal Securities Statuses. 1 _________________________________________________________ Jeffrey Johnson, Chief Executive Officer of Franklin Credit Management Corp. _________________________________________________________ Alan Joseph, Chief Financial Officer of Franklin Credit Management Corp. _________________________________________________________ Kimberly Shaw, Vice President of Finance of Franklin Credit Management Corp. 2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement No. 333-122677 on Form S-8 of our report dated March 31, 2005, appearing in this Annual Report on Form 10-K of Franklin Credit Management Corporation for the year ended December 31, 2004. DELOITTE & TOUCHE LLP New York, New York April 7, 2005 EX-31.1 12 y07373exv31w1.txt CERTIFICATION Exhibit 31.1 I, Jeffrey R. Johnson, certify that: 1. I have reviewed this Annual Report on Form 10-K of Franklin Credit Management Corporation.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial report which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 31, 2005 By: /s/ Jeffrey R. Johnson ------------------------- Jeffrey R. Johnson Chief Executive Officer EX-31.2 13 y07373exv31w2.txt CERTIFICATION Exhibit 31.2 I, Alan Joseph, certify that: 1. I have reviewed this Annual Report on Form 10-K of Franklin Credit Management Corporation. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial report which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 31, 2005 By: /s/ Alan Joseph ------------------- Alan Joseph Chief Financial Officer EX-32.1 14 y07373exv32w1.txt CERTIFICATION Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTIONS 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Franklin Credit Management Corporation (the "Company") on Form 10-K for the year ended ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey R. Johnson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Jeffrey R. Johnson - --------------------------- Jeffrey R. Johnson Chief Executive Officer March 31, 2005 EX-32.2 15 y07373exv32w2.txt CERTIFICATION Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Franklin Credit Management Corporation (the "Company") on Form 10-K for the year ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Alan Joseph, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Alan Joseph - ------------------------- Alan Joseph Chief Financial Officer March 31, 2005 -----END PRIVACY-ENHANCED MESSAGE-----