<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MEGO MORTGAGE CORPORATION
(Name of Registrant as Specified in its Charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 6162 88-0286042
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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1000 PARKWOOD CIRCLE, SUITE 500
ATLANTA, GEORGIA 30339
(770) 952-6700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
JAMES L. BELTER
EXECUTIVE VICE PRESIDENT
MEGO MORTGAGE CORPORATION
1000 PARKWOOD CIRCLE, SUITE 500
ATLANTA, GEORGIA 30339
(770) 952-6700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPY OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
GARY EPSTEIN, ESQ. STEVEN R. FINLEY, ESQ.
FERN S. WATTS, ESQ. GIBSON, DUNN & CRUTCHER LLP
GREENBERG, TRAURIG, HOFFMAN, 200 PARK AVENUE
LIPOFF, ROSEN & QUENTEL, P.A. NEW YORK, NEW YORK 10166
1221 BRICKELL AVENUE (212) 351-4000
MIAMI, FLORIDA 33131 (FACSIMILE) (212) 351-4035
(305) 579-0500
(FACSIMILE) (305) 579-0717
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
% Senior Subordinated Notes
due 2001..................... $40,000,000 100% $40,000,000 $12,122
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933. Exclusive of
accrued interest, if any.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
MEGO MORTGAGE CORPORATION
(CROSS REFERENCE SHEET PURSUANT TO ITEM 501 OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
- ------------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors....... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Cover Page; Underwriting
6. Dilution................................... *
7. Selling Security Holders................... *
8. Plan of Distribution....................... Cover Page; Underwriting
9. Description of Securities to be
Registered............................... Prospectus Summary; Description of the
Notes
10. Interests of Named Experts and Counsel..... *
11. Information With Respect to the
Registrant............................... Prospectus Summary; Risk Factors;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
Principal Stockholders; Certain
Transactions; Description of the Notes;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. *
</TABLE>
- ---------------
* Omitted because response is negative or inapplicable.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 4, 1996
PROSPECTUS
$40,000,000
MEGO MORTGAGE CORPORATION
% SENIOR SUBORDINATED NOTES DUE 2001
Mego Mortgage Corporation (the "Company") is offering hereby (the
"Offering") $40.0 million principal amount of its % Senior Subordinated Notes
due 2001 (the "Notes"). Interest on the Notes will be payable semiannually on
and of each year, commencing , 1997. The Notes
are not redeemable at any time prior to , 1999, except that, until
, 1998, the Company may redeem, at its option, up to 35% of the original
principal of the Notes at the redemption price set forth herein plus accrued
interest to the date of redemption with the net proceeds of one or more Public
Equity Offerings (as defined herein), if at least 65% of the original principal
amount of the Notes remain outstanding after such redemption. On or after
, 1999, the Notes are redeemable at the option of the Company in whole or
in part, at the redemption prices set forth herein plus accrued interest to the
date of redemption. Upon the occurrence of a Change of Control (as defined
herein), holders of the Notes will have the right to require the Company to
repurchase their Notes, in whole or in part, at a purchase price equal to 101%
of the aggregate principal amount thereof, plus accrued and unpaid interest, if
any, to the repurchase date. The Notes will be general unsecured obligations of
the Company, subordinated in right of payment to all Senior Indebtedness (as
defined herein) of the Company. In addition, the obligations of the Company
under the Notes will be jointly and severally guaranteed (Subsidiary Guarantees,
as defined herein) on an unsecured, subordinated basis by each of the Company's
future Restricted Subsidiaries, other than Special Purpose Subsidiaries (each as
defined herein). The Subsidiary Guarantees will be subordinated in right of
payment to all Senior Indebtedness of the Subsidiary Guarantors. As of May 31,
1996, after giving pro forma effect to the offering of the Notes, the
outstanding Senior Indebtedness of the Company, on a consolidated basis, would
have been approximately $ million. There is no established trading market
for the Notes and the Company does not intend to apply for a listing of the
Notes on any national securities exchange. See "Description of the Notes."
Concurrently with the Offering by the Company, the Company is offering
2,000,000 shares of common stock, par value $0.01 per share (the "Common
Stock"), of the Company (the "Common Stock Offering"). The sale of the Notes
being offered hereby is contingent upon the completion of the Common Stock
Offering.
THE NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 9 HEREOF FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED CAREFULLY BY PROSPECTIVE PURCHASERS OF THE NOTES OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK
HAS NOT PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
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<S> <C> <C> <C>
Per Note............................ % % %
Total............................... $ $ $
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</TABLE>
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
------------------------
The Notes are offered by the Underwriters, subject to receipt and
acceptance by the Underwriters, approval of certain legal matters by counsel for
the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify such offers and to reject orders in whole or
in part. It is expected that delivery of the Notes will be made through the
facilities of The Depository Trust Company on or about , 1996.
------------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC. OPPENHEIMER & CO., INC.
The date of this Prospectus is , 1996
<PAGE> 4
[MAP OF LOCATIONS TO BE INSERTED]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. Unless otherwise indicated, all
information in this Prospectus gives effect to a 1,600-for-1 stock split
effected in October 1996.
THE COMPANY
Mego Mortgage Corporation (the "Company") is a specialized consumer finance
company that originates, purchases, sells and services consumer loans consisting
primarily of home improvement loans secured by liens on the improved property.
Through its network of independent correspondent lenders ("Correspondents") and
home improvement construction contractors ("Dealers"), the Company initially
originated only home improvement loans insured under the Title I credit
insurance program ("Title I Loans") of the Federal Housing Administration (the
"FHA"). The Title I program provides for insurance of 90% of the principal
balance of the loan, and certain other costs. The Company began offering
conventional uninsured home improvement loans and debt consolidation loans
("Conventional Loans") through its Correspondents in May 1996 and such loans
have become a significant portion of its current loan originations.
The Company's borrowers are individuals who own their home and have
verifiable income but may have limited access to traditional financing sources
due to insufficient home equity, limited credit history or high ratios of debt
service to income. These borrowers require or seek a high degree of personalized
service and prompt response to their loan applications. As a result, the
Company's borrowers generally are not averse to paying higher interest rates
that the Company charges for its loan programs as compared to the interest rates
charged by banks and other traditional financial institutions. The Company has
developed a proprietary credit index profile that includes as a significant
component the credit evaluation score methodology developed by Fair, Isaac and
Company to classify borrowers on the basis of likely future performance. The
other components of the Company's scoring system include debt to income ratio,
employment history and residence stability. The Company charges varying rates of
interest based upon the borrower's credit profile and income. For the year ended
August 31, 1996, the loans originated by the Company had a weighted average
interest rate of 14.0%.
The Company's loan originations increased to $139.3 million during the year
ended August 31, 1996 from $87.8 million during the year ended August 31, 1995
and $8.1 million during the six months in which it originated loans in the year
ended August 31, 1994. The Company's revenues increased to $13.6 million for the
year ended August 31, 1995 from $751,000 for the year ended August 31, 1994. For
the nine months ended May 31, 1996, the Company had revenues of $17.4 million
compared to $6.8 million for the nine months ended May 31, 1995. For the nine
months ended May 31, 1996, the Company had net income of $4.6 million compared
to $1.2 million for the nine months ended May 31, 1995.
The Company sells substantially all the loans it originates through either
whole loan sales to third party institutional purchasers or securitizations at a
yield below the stated interest rate on the loans, retaining the right to
service the loans and receive any amounts in excess of the yield to the
purchasers. The Company completed its first two securitizations of Title I Loans
in March and August 1996 totalling $133.1 million and expects to sell a
substantial portion of its loan production through securitizations in the
future. At May 31, 1996, the Company serviced $166.3 million of loans it had
sold.
The Company's strategic plan is to continue to expand its lending
operations while maintaining its credit quality. The Company's strategies
include: (i) offering new loan products; (ii) expanding its network of
Correspondents and Dealers; (iii) entering new geographic markets; (iv)
realizing operational efficiencies through economies of scale; and (v) using
securitizations to sell higher volumes of loans on more favorable terms. At May
31, 1996, the Company had developed a network of approximately 265 active
Correspondents and approximately 445 active Dealers. The Company's
Correspondents generally offer a wide variety of loans and its Dealers typically
offer home improvement loans in conjunction with debt consolidation. By offering
a more diversified product line, including Conventional Loans, and maintaining
its high level of service, the
3
<PAGE> 6
Company has increased the loan production from its existing network of
Correspondents. The Company also intends to increase its number of active
Correspondents and Dealers by greater penetration of existing markets, because
of its broader product line, and through expansion into new geographic markets.
The Company anticipates that as it expands its lending operations it will
realize economies of scale, thereby reducing its average loan origination costs
and enhancing its profitability. In addition, the Company intends to continue to
sell its loan production through securitizations as opportunities arise. Through
access to securitization, the Company believes that it has the ability to sell
higher volumes of loans on more favorable terms than through whole loan sales.
The Company was incorporated under the laws of the State of Delaware in
1992. The Company's principal executive offices are located at 1000 Parkwood
Circle, Suite 500, Atlanta, Georgia 30339, and its telephone number is (770)
952-6700.
CONCURRENT OFFERING OF COMMON STOCK
Concurrently with the Offering, the Company is offering 2,000,000 shares of
Common Stock (plus up to an additional 300,000 shares to cover over-allotments,
if any) by a separate prospectus in the Common Stock Offering. The consummation
of the Offering and the Common Stock Offering are conditioned upon each other.
In connection with the Common Stock Offering, the Company has applied for
quotation of the Common Stock on The Nasdaq National Market under the symbol
"MMGC."
RELATIONSHIP WITH MEGO FINANCIAL
Mego Financial Corp. ("Mego Financial"), a publicly traded company,
currently owns 100% of the outstanding Common Stock. Upon completion of the
Common Stock Offering, Mego Financial will own approximately 83.3% of the
outstanding Common Stock (approximately 81.3% if the underwriters of the Common
Stock Offering exercise their over-allotment option in full). As a result of its
ownership interest, upon completion of the Common Stock Offering, Mego Financial
will have voting control on all matters submitted to stockholders of the
Company, including the election of directors and the approval of extraordinary
corporate transactions. See "Principal Stockholders." In order to fund the
Company's past operations and growth, and in conjunction with filing
consolidated tax returns, the Company incurred debt to Mego Financial
("Intercompany Debt"). The amount of Intercompany Debt was $8.5 million at
August 31, 1995 and $12.0 million at May 31, 1996. The Company intends to use a
portion of the aggregate net proceeds from the Offering and the Common Stock
Offering to repay Intercompany Debt. It is not anticipated that Mego Financial
will continue to provide funds to the Company or guarantee the Company's
indebtedness following consummation of the Offering. The Company also has
agreements with its affiliate, Preferred Equities Corporation ("PEC"), for the
provision of management services and loan servicing and an agreement with Mego
Financial and its direct and indirect subsidiaries for tax sharing. See "Use of
Proceeds" and "Certain Transactions."
4
<PAGE> 7
THE OFFERING
Amount offered...................... $40.0 million aggregate principal
amount.
Maturity date....................... , 2001.
Interest payment dates.............. and of each
year, commencing , 1997.
Subsidiary Guarantees............... The obligations of the Company under
the Notes will be jointly and severally
guaranteed by each of the future
Restricted Subsidiaries, other than
Special Purpose Subsidiaries. See
"Description of the Notes -- Subsidiary
Guarantees."
Optional redemption................. The Notes are not redeemable by the
Company prior to , 1999,
except that, until , 1998,
the Company may redeem, at its option,
up to 35% of the original principal
amount of the Notes at the redemption
price set forth herein plus accrued
interest to the date of redemption with
the net proceeds of one or more Public
Equity Offerings if at least 65% of the
original principal amount of the Notes
remains outstanding after such
redemption. On or after ,
1999, the Notes will be redeemable at
the option of the Company in whole or
in part, at the redemption prices set
forth herein, plus accrued interest to
the date of redemption. See
"Description of the Notes -- Optional
Redemption."
Mandatory redemption................ None.
Ranking............................. The Notes will be general unsecured
obligations of the Company,
subordinated in right of payment to all
existing and future Senior Indebtedness
of the Company and will be senior in
right of payment to all Indebtedness
(as defined herein) of the Company that
by its terms is expressly subordinated
in right of payment to the Notes. Each
Subsidiary Guarantee will be a general
unsecured obligation of the Subsidiary
Guarantor, subordinated in right of
payment to all Senior Indebtedness of
such Subsidiary Guarantor and will be
senior in right of payment to all
Indebtedness of such Subsidiary
Guarantor that by its terms is
expressly subordinated in right of
payment to the Subsidiary Guarantee. As
of May 31, 1996, after giving pro forma
effect to the issuance of the Notes,
the outstanding Senior Indebtedness of
the Company, on a consolidated basis,
would have been approximately $
million.
Change of Control................... Upon a Change of Control, holders of
the Notes will have the option to
require the Company to repurchase up to
all outstanding Notes of the holders
requiring such repurchase at 101% of
their principal amount, plus accrued
interest to the date of repurchase.
There can be no assurance that the
Company will have
5
<PAGE> 8
the funds available to repurchase the
Notes in the event of a Change of
Control.
Certain covenants................... The Indenture (as defined herein)
pursuant to which the Notes will be
issued will contain certain covenants
that, among other things, limit the
ability of the Company and its
subsidiaries to incur certain
indebtedness, pay dividends and make
other distributions, engage in
transactions with affiliates, sell
assets (including stock of
subsidiaries), issue subsidiary
preferred stock, create certain liens,
engage in mergers or consolidations and
enter into any arrangement that would
impose certain restrictions on the
ability of subsidiaries to make
dividend and other payments to the
Company. See "Description of the
Notes -- Certain Covenants."
Amendment or waiver of Indenture
provisions.......................... Certain provisions of the Indenture,
including those related to Change of
Control, may be amended or waived with
the consent of the holders of at least
the majority in principal amount of
then outstanding Notes.
Use of proceeds..................... The Company intends to use the
aggregate net proceeds from the
Offering and the Common Stock Offering
to provide capital to originate and
securitize loans and to repay
Intercompany Debt. See "Use of
Proceeds."
6
<PAGE> 9
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The summary financial information set forth below should be read in
conjunction with the financial statements, related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST NINE MONTHS
31, ENDED MAY 31,
----------------- ----------------
1994(1) 1995 1995 1996
------- ------- ------ -------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of loans.................................... $ 579 $12,233 $6,098 $11,621
Net unrealized gain on mortgage related securities(2).... -- -- -- 2,182
Interest income, net..................................... 172 473 313 538
Loan servicing income.................................... -- 873 418 3,049
------- ------- ------- -------
Total revenues............................................. 751 13,579 6,829 17,390
Total costs and expenses................................... 2,262 7,660 4,975 9,927
------- ------- ------- -------
Income (loss) before income taxes(3)....................... (1,511) 5,919 1,854 7,463
Income taxes(3)............................................ -- 2,277 651 2,833
------- ------- ------- -------
Net income (loss).......................................... $(1,511) $ 3,642 $1,203 $ 4,630
======= ======= ======= =======
Net income (loss) per share................................ $ (0.15) $ 0.36 $ 0.12 $ 0.46
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 31, AS OF MAY 31, 1996
----------------- ------------------------
1994(1) 1995 ACTUAL AS ADJUSTED(4)
------- ------- ------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Loans held for sale, net.............................. $1,463 $ 3,676 $ 4,671 $ 4,671
Excess servicing rights............................... 904 14,483 12,796 12,796
Mortgage related securities(2)........................ -- -- 15,144 15,144
Total assets.......................................... 5,122 24,081 40,499
Total liabilities..................................... 983 13,300 25,088
Total stockholder's equity............................ 4,139 10,781 15,411
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST NINE MONTHS
31, ENDED MAY 31,
----------------- ------------------
1994(1) 1995 1995 1996
------- ------- ------- --------
<S> <C> <C> <C> <C>
OPERATING DATA:
Loans originated...................................... $8,133 $87,751 $52,521 $ 89,391
Weighted average interest rate on loans originated.... 14.18 % 14.55% 14.47% 14.23%
Servicing portfolio (period end):
Company-owned loans................................. $1,471 $ 3,720 $ 6,250 $ 4,763
Sold loans.......................................... 6,555 88,566 52,400 166,285
------- ------- --------
Total....................................... $8,026 $92,286 $58,650 $171,048
======= ======= ========
Delinquency period(5):
31-60 days past due................................. 2.06 % 2.57% 1.27% 2.41%
61-90 days past due................................. 0.48 0.73 0.39 0.78
91 days and over past due........................... 0.26 0.99 0.68 4.34(6)
91 days and over past due, net of claims filed(7)... 0.26 0.99 0.68 2.38
Claims filed with HUD(8).............................. -- -- -- 1.96
Amount of FHA insurance available (period end)........ $ 831 $ 9,552 $ 6,029 $ 18,084(9)
Amount of FHA insurance available as a percentage of
loans serviced (period end)......................... 10.36 % 10.35% 10.28% 10.57%(9)
Ratio of earnings to fixed charges(10)................ N/A 7.69x 5.27x 10.23x
</TABLE>
7
<PAGE> 10
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(1) The Company commenced originating loans in March 1994.
(2) Mortgage related securities consist of certificates representing interests
retained by the Company in securitization transactions.
(3) The results of operations of the Company are included in the consolidated
Federal income tax returns filed by Mego Financial, the Company's sole
stockholder. Mego Financial allocates income taxes to the Company
calculated on a separate return basis. See "Certain Transactions."
(4) As adjusted to give effect to (i) the sale of the Notes offered hereby
(after deducting underwriting discounts and estimated expenses of the
Offering), (ii) the sale of the shares of Common Stock pursuant to the
Common Stock Offering (at an assumed initial public offering price of
$ per share and after deducting underwriting discounts and estimated
expenses of the Common Stock Offering) and (iii) the application of the
estimated net proceeds from the Offering and the Common Stock Offering as
described under "Use of Proceeds."
(5) Represents the dollar amount of delinquent loans as a percentage of total
dollar amount of loans serviced by the Company (including loans owned by
the Company) as of the date indicated.
(6) During the nine month period ended May 31, 1996, the processing and payment
of claims filed with HUD was delayed. See "Business -- Loan Servicing."
(7) Represents the dollar amount of delinquent loans net of delinquent Title I
Loans for which claims have been filed with HUD and payment is pending as a
percentage of total dollar amount of loans serviced by the Company
(including loans owned by the Company) as of the date indicated.
(8) Represents the dollar amount of delinquent Title I Loans for which claims
have been filed with HUD and payment is pending as a percentage of total
dollar amount of loans serviced by the Company (including loans owned by
the Company) as of the date indicated.
(9) If all claims filed with HUD had been processed and paid as of period end,
the amount of FHA insurance available would have been reduced to
$15,063,000, which as a percentage of loans serviced would have been 8.98%.
(10) Earnings include pretax income, the portion of rents representative of the
interest factor and interest on debt. Fixed charges include interest on
indebtedness (including the Notes), prepaid commitment fees and the portion
of rents representative of the interest factor.
8
<PAGE> 11
RISK FACTORS
Investment in the Notes offered hereby involves a high degree of risk,
including the risks described below. Each prospective investor should carefully
consider the following risk factors inherent in and affecting the business of
the Company and this offering before making an investment decision. This
Prospectus contains forward-looking statements within the meaning of Section 27A
of the Securities Act. Discussions containing such forward-looking statements
may be found in the material set forth under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as in the Prospectus generally.
Actual events or results may differ as a result of various factors, including,
without limitation, the risk factors set forth below and the matters set forth
in the Prospectus generally.
SUBORDINATION AND LEVERAGE
The Notes (including the Subsidiary Guarantees) will be subordinated in
right of payment to all existing and future Senior Indebtedness, including all
warehouse indebtedness and all other indebtedness for borrowed money. The
Company currently has significant outstanding indebtedness and subsequent to the
Offering, the Company will be significantly leveraged. As of May 31, 1996, after
giving effect to the Offering, the Company would have had outstanding
indebtedness of approximately $ million, of which approximately $
million would have been Senior Indebtedness to which the Notes are subordinated.
See "Capitalization." In addition, subject to the limitations set forth in the
Indenture, the Company and its future Subsidiaries (as defined herein) may incur
substantial amounts of additional indebtedness, much of which is expected to
constitute Senior Indebtedness. By reason of the subordination of the Notes, in
the event of insolvency, bankruptcy, liquidation, reorganization, dissolution or
winding up of the business of the Company or any Subsidiary Guarantor (as
defined herein) or upon default in payment with respect to or acceleration of
any Senior Indebtedness of the Company or any Subsidiary Guarantor or an event
of default with respect to certain Senior Indebtedness continuing for up to 179
days, the assets of the Company or the Subsidiary Guarantor would be available
to pay the amounts due on the Notes only after such Senior Indebtedness had been
paid in full. The Company is a party to certain warehouse facilities for the
financing of its loan originations, which facilities are secured by the loans
financed thereby. The Company also has certain additional secured credit
facilities and, subject to the limitations set forth in the Indenture, may have
additional amounts of secured indebtedness in the future. The Notes (including
the Subsidiary Guarantees) are effectively subordinated to all such secured
obligations to the extent of the collateral, irrespective of whether payments on
the Notes (including the Subsidiary Guarantees) are otherwise permitted to be
made under the subordination provisions in the Indenture prior to payment of
such other indebtedness in full. Upon certain events of default under such
facilities, the lenders could elect to declare all amounts outstanding, together
with accrued and unpaid interest thereon, to be immediately due and payable. If
the Company were unable to repay those amounts, the lenders could proceed
against the collateral granted them to secure that indebtedness. If any of such
indebtedness were to be accelerated, there can be no assurance that the assets
of the Company would be sufficient to repay in full that indebtedness and the
other indebtedness of the Company, including the Notes.
The Company's ability to make payments of principal and interest on, or to
refinance its indebtedness (including the Notes) depends on its future operating
performance, which to a certain extent is subject to economic, financial,
competitive and other factors beyond its control. The degree to which the
Company is leveraged could have important consequences to the holders of the
Notes, including (i) the Company's vulnerability to adverse general economic and
industry conditions, (ii) the Company's ability to obtain additional financing
for future working capital expenditures (including loan originations), general
corporate purposes or other purposes, and (iii) the dedication of a substantial
portion of the Company's cash flow from operations to the payment of principal
and interest on indebtedness, thereby reducing the funds available for
operations and future business opportunities.
CONSEQUENCES OF CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the holders of the Notes would
be entitled to require the Company to repurchase up to all outstanding Notes of
the holders requiring such repurchase at a purchase
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price equal to 101% of the principal amount of such Notes plus accrued and
unpaid interest thereon to the date of repurchase. Failure by the Company to
make such a repurchase would result in a default under the Indenture. In
addition, the future indebtedness of the Company and the Subsidiaries may
contain prohibitions on the occurrence of certain events that would constitute a
Change of Control or require such indebtedness to be repurchased upon a Change
of Control. Moreover, the exercise by the holders of the Notes of their right to
require the Company to repurchase the Notes could cause a default under such
indebtedness due to the financial effect of such repurchase on the Company or
otherwise, even if the Change of Control itself does not cause a default. In the
event of a Change of Control, there can be no assurance that the Company would
have sufficient assets to repurchase the Notes and to satisfy its other
obligations under the Notes and any such other indebtedness or be permitted to
make such repurchase in compliance with the subordination provisions in the
Indenture. See "Description of the Notes -- Change of Control."
LIQUIDITY -- DEPENDENCE ON SECURITIZATION TRANSACTIONS
The values of and markets for the sale of the Company's loans are dependent
upon a number of factors, including general economic conditions, interest rates
and government regulations. Adverse changes in those factors may affect the
Company's ability to originate or sell loans in the secondary market for
acceptable prices within reasonable time frames. The ability of the Company to
sell loans in the secondary market is essential for continuation of the
Company's loan origination activities. A reduction in the size of the secondary
market for home improvement loans would adversely affect the Company's ability
to sell its loans in the secondary market with a consequent adverse impact on
the Company's profitability and future originations.
The Company entered into its first two securitization transactions, which
involve the pooling and sale of loans, in March 1996 and August 1996 and intends
to continue to sell loans through securitization transactions from time to time
as opportunities arise. There can be no assurance that the Company will be able
to securitize its loan production efficiently. Securitization transactions may
be affected by a number of factors, some of which are beyond the Company's
control, including, among other things, conditions in the securities markets in
general, conditions in the asset-backed securitization market and the conformity
of loan pools to rating agency requirements and, to the extent that monoline
insurance is used, the requirements of such insurers. Adverse changes in the
securitization market could impair the Company's ability to originate and sell
loans through securitizations on a favorable or timely basis. Any such
impairment could have a material adverse effect upon the Company's results of
operations and financial condition. Furthermore, the Company's quarterly
operating results can fluctuate significantly as a result of the timing and
level of securitizations.
LIQUIDITY -- CASH FLOW
As a result of its increased volume of loan originations, the Company has
operated since March 1994, and expects to continue to operate for the
foreseeable future, on a negative cash flow basis. During the nine months ended
May 31, 1996, the Company operated on a negative cash flow basis using $8.0
million in operations that was funded primarily from borrowings, due primarily
to an increase in loans originated and the Company's sale of loans. In
connection with whole loan sales and securitizations, the Company recognizes a
gain on sale of the loans upon the closing of the transaction and the delivery
of the loans, but does not receive the cash representing such gain until it
receives the excess servicing spread, which is payable over the actual life of
the loans sold. The Company incurs significant expenses in connection with
securitizations and incurs tax liabilities as a result of the gain on sale. The
Company must maintain external sources of cash to fund its operations and pay
its taxes and therefore must maintain warehouse lines of credit and other
external funding sources. If the capital sources of the Company were to
decrease, the rate of growth of the Company would be negatively affected. See
"-- Dependence on Mego Financial and PEC."
The documents governing the Company's securitizations require the Company
to build over-collateralization levels through retention within each
securitization trust of excess servicing distributions and application thereof
to reduce the principal balances of the senior interests issued by the related
trust or cover interest shortfalls. This retention causes the aggregate
principal amount of the loans in the related pool to exceed the aggregate
principal balance of the outstanding investor certificates. Such
over-collateralization amounts serve as credit enhancement for the related trust
and therefore are available to absorb losses realized on loans held by such
trust. The Company continues to be subject to the risks of default and
foreclosure following the sale of
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<PAGE> 13
loans through securitizations to the extent excess servicing distributions are
required to be retained or applied to reduce principal from time to time. Such
retained amounts are predetermined by the entity issuing the guarantee of the
related senior interests and are a condition to obtaining insurance and an
AAA/Aaa rating thereon. In addition, such retention delays cash distributions
that otherwise would flow to the Company through its retained interest, thereby
adversely affecting the flow of cash to the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
After giving pro forma effect to the Offering and the Common Stock
Offering, the Company would have had net income of $ million for the nine
months ended May 31, 1996 and its ratio of earnings to fixed charges would have
been . However, this ratio is not necessarily indicative of the
adequacy of the Company's cash flow from operating activities to cover fixed
charges because net income consists largely of non-cash items. There can be no
assurance that cash from operations will be sufficient to enable it to make
required interest payments on its debt obligations and other required payments,
and the Company may encounter liquidity problems which could affect its ability
to meet such obligations while attempting to withstand competitive pressures.
INTEREST RATE RISKS
Changes in interest rates affect the Company's business in a variety of
ways, including decreased demand for loans during periods of higher interest
rates, fluctuations in profits derived from the difference between short-term
and long-term interest rates and increases in prepayment rates during periods of
lower interest rates. The profits realized by the Company from home improvement
loans are, in part, a function of the difference between fixed long-term
interest rates, at which the Company originates its home improvement loans, and
adjustable short-term interest rates, at which the Company finances such loans
until the closing of the sale of such loans. Generally, short-term rates are
lower than long-term rates and the Company benefits from the positive interest
rate differentials during the time the loans are held by the Company pending the
closing of the sale of such loans. During the period from 1994 through the
present, the interest rate differential was high and this fact contributed
significantly to the Company's net interest income. The interest rate
differential may not continue at such favorable levels in the future.
Changes in interest rates during the period between the time an interest
rate is established on a loan and the time such loan is sold affect the revenues
realized by the Company from loans. In connection with the origination of loans,
the Company issues loan commitments for periods of up to 45 days in the case of
Correspondents and 90 days in the case of Dealers. Furthermore, the period of
time between the closing on a loan and the sale of such loan generally ranges
from 10 to 90 days. Increases in interest rates during these periods will result
in lower gains (or even losses) on sales of loans than would be recorded if
interest rates had remained stable or had declined. Changes in interest rates
after the sale of loans also affect the profits realized by the Company with
respect to loan sale transactions in which the yield to the purchaser is based
on an adjustable rate. During the year ended August 31, 1995 and the nine months
ended May 31, 1996, the Company sold loans under an agreement which provides for
the yield to the purchaser to be adjusted monthly to a rate equal to 200 basis
points over the one-month London Interbank Offered Rate ("LIBOR"). An increase
in LIBOR would result in a decrease in the Company's future income from such
sold loans resulting in a charge to earnings in the period of adjustment.
Although through May 31, 1996 the Company has not suffered losses in connection
with the sale of Title I Loans or Conventional Loans as a result of interest
rate changes, there can be no assurance that such losses will not occur in the
future. To date, the Company has not hedged its interest rate risk, although it
may do so in the future. To the extent that the Company engages in hedging
transactions, there can be no assurance that it will be successful in mitigating
the adverse impact of changes in interest rates.
Interest rate levels also affect the Company's excess servicing spread. The
Company generally retains the servicing rights to the loans it sells. The yield
to the purchaser is generally lower than the average stated interest rates on
the loans, as a result of which the Company earns an excess servicing spread on
the loans it sells. Increases in interest rates or competitive pressures may
result in reduced servicing spreads, thereby reducing or eliminating the gains
recognized by the Company upon the sale of loans in the future.
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CAPITALIZED EXCESS SERVICING RIGHTS AND VALUATION OF MORTGAGE RELATED SECURITIES
At May 31, 1996, the Company's balance sheet reflected excess servicing
rights of $12.8 million, mortgage related securities of $15.1 million and
mortgage servicing rights of $2.7 million. The Company derives a significant
portion of its income by realizing gains upon the sale of loans due to the
excess servicing rights associated with such loans recorded at the time of sale
and the capitalization of mortgage servicing rights recorded at origination.
Excess servicing rights as capitalized on the Company's balance sheet represent
the excess of the interest rate payable by an obligor on a loan over the
interest rate passed through to the purchaser acquiring an interest in such
loan, less the Company's normal servicing fee and other applicable recurring
fees.
The Company records gains on sale of loans through securitizations and
whole loan sales based in part on the estimated fair value of the mortgage
related securities (residual and interest only securities) retained by the
Company and on the estimated fair value of retained mortgage servicing rights
related to such loans. When loans are sold, the Company recognizes as current
revenue the present value of the excess servicing rights expected to be realized
over the anticipated average life of loans sold less future estimated credit
losses relating to the loans sold. Mortgage related securities consist of
certificates representing the excess of the interest rate payable by an obligor
on a sold loan over the yield on pass-through certificates sold pursuant to a
securitization transaction, after payment of servicing and other fees. The
capitalized excess servicing rights, and capitalized mortgage servicing rights
and valuation of mortgage related securities are computed using prepayment,
default and interest rate assumptions that the Company believes are reasonable.
The amount of revenue recognized upon the sale of loans will vary depending on
the assumptions utilized. The weighted average discount rate used to determine
the present value of the balance of capitalized excess servicing rights and
capitalized mortgage servicing rights reflected on the Company's balance sheet
at August 31, 1995 and May 31, 1996 was approximately 12%. Capitalized excess
servicing rights are amortized over the lesser of the estimated or actual
remaining life of the underlying loans as an offset against the excess servicing
rights component of servicing income actually received in connection with such
loans. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Although the Company believes that it has made reasonable estimates of the
fair value of the mortgage related securities, the excess servicing rights and
mortgage servicing rights likely to be realized, the rate of prepayment and the
amount of defaults utilized by the Company are estimates and actual experience
may vary from its estimates. The gain recognized by the Company upon the sale of
loans will have been overstated if prepayments or defaults are greater than
anticipated. Higher levels of future prepayments could result in excess
servicing rights and mortgage servicing rights amortization expense exceeding
realized excess servicing rights and mortgage servicing rights, thereby
adversely affecting the Company's servicing income and resulting in a charge to
earnings in the period of adjustment. Similarly, if delinquencies or
liquidations were to be greater than initially assumed, excess servicing rights
and mortgage servicing rights amortization would occur more quickly than
originally anticipated, which would have an adverse effect on servicing income
in the period of such adjustment. The Company periodically reviews its
prepayment assumptions in relation to current rates of prepayment and, if
necessary, reduces the remaining asset to the net present value of the estimated
remaining future excess servicing rights. Rapid increases in interest rates or
competitive pressures may result in a reduction of excess servicing income
recognized by the Company upon the sale of loans in the future, thereby reducing
the gains recognized by the Company upon such sales. Higher levels of
prepayments than initially assumed would result in a charge to earnings in the
period of adjustment.
Increases in interest rates or higher than anticipated rates of loan
prepayments or credit losses on the underlying loans of the Company's mortgage
related securities or similar securities may require the Company to write down
the value of such mortgage related securities and result in a material adverse
impact on the Company's results of operations and financial condition. The
Company is not aware of an active market for the mortgage related securities,
excess servicing rights or mortgage servicing rights. No assurance can be given
that the mortgage related securities, capitalized excess servicing rights or
mortgage servicing rights could in fact be sold at their carrying value, if at
all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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In order to provide availability under its warehouse line of credit, during
the year ended August 31, 1995 and the nine months ended May 31, 1996, the
Company sold an aggregate of approximately $138.5 million of loans under an
agreement which provides for the yield to the purchaser to be adjusted monthly
to a rate equal to 200 basis points over LIBOR. The Company is not obligated to
reacquire and the purchaser is not obligated to resell such loans. In March 1996
and August 1996, in order to fix the yield on such loans, the Company reacquired
$77.8 million and $36.2 million, respectively, of such loans and included the
loans in pools of loans sold in its first two securitization transactions. As a
result of the reacquisitions and subsequent sales in the securitization
transactions, the gains on sale and excess servicing rights recognized upon the
initial sales of the loans in such periods were recalculated without any
material adverse effect on the Company's earnings. The Company anticipates that
in the future it may sell and then reacquire loans to be resold pursuant to
securitizations, which will result in recalculation of the initial gain on sale
and excess servicing rights. Any such recalculation in such periods could have a
material adverse effect on the Company's earnings in the period of
recalculation.
CONTINGENT RISKS
Loan delinquencies and other loan defaults by obligors expose the Company
to risks of loss and reduced net earnings. The loan delinquency and default
risks to which the Company's business is subject become more acute in an
economic slowdown or recession. During such periods, loan delinquencies and
other defaults generally increase. In addition, significant declines in market
values of the properties that secure loans serviced by the Company reduce
homeowners' equity in their homes and their borrowing power, thereby increasing
the likelihood of delinquencies and defaults. Because most of the Company's
borrowers generally lack significant equity in their homes, the likelihood of
default may be further increased. This lack of equity also increases the risk
that, upon the occurrence of a customer default, the Company would be unlikely
to recover more than the amount insured.
Although the Company sells substantially all loans which it originates on a
limited recourse basis, the Company retains some degree of risk on substantially
all loans sold. In connection with whole loan sales, the excess servicing
payable to the Company is subordinated to the payment of scheduled principal and
interest due to the purchasers of such loans. The Company is required under the
loan sale documentation to establish reserves which are typically based on a
percentage of the principal balances of such loans and funded from the excess
servicing spread received by the Company. If a reserve falls below the required
level, the Company is obligated under the loan sale documentation to restore the
reserve from the servicing spread received by the Company, thereby reducing the
stream of revenue from the servicing spread. Although the Company believes it
maintains adequate reserves for potential losses from delinquencies and
defaults, there can be no assurance that such levels of reserves will be
adequate in the future. In addition, documents governing the Company's
securitizations and whole loan sales require the Company to commit to reacquire
or replace loans that do not conform to the representations and warranties made
by the Company at the time of sale. When borrowers are delinquent in making
monthly payments on loans included in a securitization trust, the Company is
required to advance interest payments with respect to such delinquent loans to
the extent that the Company deems such advances ultimately recoverable. These
advances require funding by the Company but have priority of repayment from the
succeeding month's collections.
During the period of time that loans are held pending sale, the Company is
subject to the various business risks associated with the lending business,
including the risk of borrower default, the risk of foreclosure and the risk
that a rapid increase in interest rates would result in a decline in the value
of loans to potential purchasers. To date, a significant portion of the loans
originated by the Company qualify under Title I of the National Housing Act
pursuant to which 90% of the principal balances of such loans are insured by the
FHA; however, the Company bears the risk of delinquencies and defaults with
respect to the uninsured portion of such loans. Moreover, even as to the insured
portion, the amount of reimbursement to which the Company is entitled pursuant
to Title I is limited to the amount of insurance coverage in its reserve account
established by the FHA. The amount of insurance coverage in a lender's reserve
account is equal to 10% of the original principal amount of all Title I Loans
originated and reported for insurance coverage by the lender less the amount of
all insurance claims approved for payment in connection with losses on such
loans and less amounts transferred in
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connection with sales of loans. The Company also would sustain a loss on loans
if defaults occur that are not cured and proceeds from FHA insurance or the
foreclosure on and disposition of property securing a defaulted loan are less
than the amounts due on the loan plus carrying and other costs. Furthermore,
Title I sets forth requirements to be satisfied by the lender in connection with
the origination of Title I Loans and the submission of claims for insurance. The
exhaustion of the reserves or the Company's failure to comply with Title I
requirements could result in denial of payment by FHA.
The Company began originating Conventional Loans in May 1996 and expects
that such loans will become a significant portion of its loan portfolio. During
the period of time that such loans are held for sale, the Company bears the risk
of delinquencies and defaults with respect to the entire principal amount of and
interest on such loans and the risk that the realizable value of the property
securing such loans will not be sufficient to repay the borrower's obligations
to the Company. Significant defaults under these loans could have a material
adverse effect on the Company's results of operations and financial condition.
In the ordinary course of its business, the Company is subject to claims
made against it by borrowers and private investors arising from, among other
things, losses that are claimed to have been incurred as a result of alleged
breaches of fiduciary obligations, misrepresentations, errors and omissions of
employees, officers and agents of the Company (including its appraisers),
incomplete documentation and failures by the Company to comply with various laws
and regulations applicable to its business. The Company believes that liability
with respect to any currently asserted claims or legal actions is not likely to
be material to the Company's results of operations or financial condition;
however, any claims asserted in the future may result in legal expenses or
liabilities which could have a material adverse effect on the Company's results
of operations and financial condition.
RISKS RELATING TO GROWTH STRATEGY
The Company's strategic plan contemplates the continued expansion of its
mortgage lending operations. The Company's ability to continue implementing its
expansion strategy depends on its ability to increase the volume of loans it
originates while maintaining credit quality and managing its resulting growth.
The Company's ability to increase its volume of loans will depend on, among
other factors, its ability to (i) obtain and maintain increasingly larger lines
of credit, (ii) securitize pools of loans for sale, (iii) offer attractive
products to prospective borrowers, (iv) attract and retain qualified
underwriting, servicing and other personnel, (v) market its loan products
successfully and (vi) establish and maintain relationships with Correspondents
and Dealers in states in which the Company is currently active and in additional
states. The Company's ability to manage growth as it pursues its expansion
strategy will be dependent upon, among other things, its ability to (i) maintain
appropriate procedures, policies and systems to ensure that the Company's loan
portfolio does not have an unacceptable level of credit risk and loss, (ii)
satisfy its need for additional financing on reasonable terms, (iii) manage the
costs associated with expanding its infrastructure and (iv) continue operating
in competitive, economic, regulatory and judicial environments that are
conducive to the Company's business activities. As part of its expansion
strategy, the Company has begun to offer a more diversified product line,
including Conventional Loans which expose the Company to greater risks than
Title I Loans. There can be no assurance that the Company will be able to
continue to grow successfully.
DEPENDENCE ON CREDIT ENHANCEMENT
In order to gain access to the securitization market, the Company has
relied on credit enhancements provided by a monoline insurance carrier to
guarantee outstanding senior interests in the related securitization trusts to
enable it to obtain an AAA/Aaa rating for such interests. The Company has not
attempted to structure a mortgage loan pool for sale through a securitization
based solely on the internal credit characteristics of the pool or the Company's
credit. In the absence of such credit enhancements, the Company would be unable
to market its loans through securitizations at reasonable rates. Any substantial
reductions in the size or availability of the securitization market for the
Company's loans, or the unwillingness of insurance companies to insure the
senior interests in the Company's loan pools, could have a material adverse
effect on the Company's results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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DEPENDENCE ON FINANCING; NEED FOR ADDITIONAL FINANCING
The Company's business operations require continued access to adequate
credit facilities. The Company is dependent on the availability of credit
facilities for the origination of loans prior to their sale. The Company has a
financing arrangement for the financing of Title I and Conventional Loan
originations prior to the sale of such loans, which provides for a warehouse
line of credit of up to $20.0 million which expires in August 1997. At May 31,
1996, an aggregate of $3.0 million was outstanding under such line of credit and
$17.0 million was available for borrowing. In addition, at May 31, 1996, the
Company had a $5.0 million demand note facility, of which $5.0 million was
outstanding on that date. As of June 28, 1996, this facility was replaced by a
$10.0 million facility for the financing of excess servicing rights and mortgage
related securities. In September 1996, the Company entered into a repurchase
agreement with a financial institution pursuant to which it pledged the interest
only certificates from its two 1996 securitizations in exchange for a $3.0
million advance. The Company also received a commitment from the same financial
institution for the purchase of $2.0 billion of loans over a five-year period,
as well as a commitment for up to $11.0 million, reduced by any amounts advanced
under the repurchase agreement, for the financing of the interest only and
residual certificates from future securitizations. In the event that the
proceeds received by the Company from the Offering and the Common Stock Offering
together with cash flow from operations and its existing credit facilities prove
to be insufficient to meet the Company's capital requirements, the Company may
be required to seek additional financing. There can be no assurance that such
financing will be available on favorable terms, or at all. To the extent that
the Company were not successful in maintaining or replacing existing financing
or obtaining additional financing, or selling its loans or receivables, it would
have to curtail its activities, which would have a material adverse effect on
the Company.
INCOME TAXES
For Federal income tax purposes the Company reports its income in a
consolidated return filed by Mego Financial. As part of a tax sharing
arrangement, the Company records a liability to Mego Financial for Federal
income taxes calculated at the Federal statutory rate (currently 34%) applied to
the Company's financial statement income before giving consideration to income
tax expense. The Company also provides for state income taxes at the rate of 6%
of income before income taxes.
CONCENTRATION OF OPERATIONS IN CALIFORNIA
Approximately 38.3% of the dollar volume of the Company's servicing
portfolio at, and approximately 27.9% of the dollar volume of loans originated
by the Company during the nine months ended, May 31, 1996 were secured by
properties located in California. Although the Company is expanding its network
nationally, significant portions of the Company's servicing portfolio and loan
originations are likely to remain concentrated in California for the foreseeable
future. Consequently, the Company's results of operations and financial
condition are dependent upon general trends in the California economy and its
residential real estate market. The California economy has experienced a
slowdown or recession over the last several years that has been accompanied by a
sustained decline in the California real estate market. Residential real estate
market declines may adversely affect the value of the properties securing loans
to the extent that the principal balances of such loans, together with any
primary financing on the mortgaged properties, will equal or exceed the value of
the mortgaged properties. In addition, California historically has been
vulnerable to certain natural disaster risks, such as earthquakes and
erosion-caused mudslides, which are not typically covered by the standard hazard
insurance policies maintained by borrowers. Uninsured disasters may adversely
impact borrowers' ability to repay loans made by the Company. The existence of
adverse economic conditions or the occurrence of such natural disasters in
California could have a material adverse effect on the Company's results of
operations and financial condition.
LEGISLATIVE AND REGULATORY RISKS
Members of Congress and government officials from time to time have
suggested the elimination of the mortgage interest deduction for federal income
tax purposes, either entirely or in part, based on borrower income, type of loan
or principal amount. Because many of the Company's loans are made to borrowers
for the
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purpose of consolidating consumer debt or financing other consumer needs, the
competitive advantages of tax deductible interest, when compared with
alternative sources of financing, could be eliminated or seriously impaired by
such government action. Accordingly, the reduction or elimination of these tax
benefits would have a material adverse effect on the demand for loans of the
kind offered by the Company.
The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. The Company's consumer lending
activities are subject to the Federal Truth-in-Lending Act and Regulation Z
(including the Home Ownership and Equity Protection Act of 1994), the Federal
Equal Credit Opportunity Act and Regulation B, as amended ("ECOA"), the Fair
Credit Reporting Act of 1970, as amended, the Federal Real Estate Settlement
Procedures Act ("RESPA") and Regulation X, the Home Mortgage Disclosure Act and
the Federal Debt Collection Practices Act, as well as other federal and state
statutes and regulations of, and examinations by, the Department of Housing and
Urban Development ("HUD") and state regulatory authorities with respect to
originating, processing, underwriting, selling, securitizing and servicing
loans. These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on loan applicants, regulate assessment, collection,
foreclosure and claims handling, investment and interest payments on escrow
balances and payment features, mandate certain disclosures and notices to
borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan
amounts. Failure to comply with these requirements can lead to loss of approved
status, termination or suspension of servicing contracts without compensation to
the servicer, demands for indemnification or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.
Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will not be adopted in the future that could make
compliance more difficult or expensive. See "Business -- Government Regulation."
To date, a substantial portion of the loans originated by the Company have
been Title I Loans. Accordingly, a substantial part of the Company's business is
dependent on the continuation of the Title I Loan program, which is federally
funded. In August 1995, bills were introduced in both houses of the United
States Congress that would, among other things, abolish HUD, of which the FHA is
a part, reduce federal spending for housing and community development activities
and eliminate the Title I Loan program. Other changes to HUD have been proposed,
which, if adopted, could affect the operation of the Title I Loan program.
Discontinuation of or a significant reduction in the Title I Loan program or the
Company's authority to originate loans under the Title I Loan program could have
a material adverse effect on the Company's results of operations and financial
condition.
FRAUDULENT CONVEYANCES AND PREFERENTIAL TRANSFERS
The ability of the holders of the Notes or the Trustee (as defined herein)
to enforce the Subsidiary Guarantees may be limited by certain fraudulent
conveyance and similar laws. Various fraudulent conveyance and similar laws have
been enacted for the protection of creditors and may be utilized by a court of
competent jurisdiction to avoid the Subsidiary Guarantees or to subordinate the
obligations of the Company under the Notes or the obligations of any Subsidiary
Guarantor under its Subsidiary Guarantee to obligations (including trade
payables) that do not otherwise constitute Senior Indebtedness. The requirements
for establishing a fraudulent conveyance vary depending on the law of the
jurisdiction which is being applied. Generally, if in a bankruptcy,
reorganization, rehabilitation or similar proceeding in respect of the Company
or a Subsidiary Guarantor, or in a lawsuit by or on behalf of creditors against
the Company or a Subsidiary Guarantor, a court were to find that (i) the Company
or a Subsidiary Guarantor, as the case may be, incurred indebtedness in
connection with the Notes (including the Subsidiary Guarantees) with the intent
of hindering, delaying or defrauding current or future creditors of the Company
or the Subsidiary Guarantor, as the case may be, or (ii) the Company or a
Subsidiary Guarantor, as the case may be, received less than reasonably
equivalent
16
<PAGE> 19
value or fair consideration for incurring such indebtedness, as the case may be,
and either (a) was insolvent at the time of the incurrence of such indebtedness,
(b) was rendered insolvent by reason of incurring such indebtedness, (c) was at
such time engaged or about to engage in a business or transaction for which its
assets constituted unreasonably small capital or (d) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, such court could, with respect to the Company or the Subsidiary
Guarantor, as the case may be, declare void in whole or in part the obligations
of the Company or such Subsidiary Guarantor in connection with the Notes
(including the Subsidiary Guarantees) and/or subordinate claims with respect to
the Notes to all other debts of the Company or the Subsidiary Guarantors, as
applicable. If the obligations of the Company or the Subsidiary Guarantors were
subordinated, there can be no assurance that after payment of the other debts of
the Company or the Subsidiary Guarantors, there would be sufficient assets to
pay such subordinated claims with respect to the Notes and the Subsidiary
Guarantees.
Generally, for purposes of the foregoing, an entity will be considered
insolvent if the sum of its respective debts is greater than the fair saleable
value of all of its property at a fair valuation or if the present fair saleable
value of its assets is less than the amount that will be required to pay its
probable liability on its existing debts, as they become absolute and mature.
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against the
Company or any Subsidiary Guarantor within 90 days after any payment by the
Company or such Subsidiary Guarantor with respect to the Notes or a Subsidiary
Guarantee, respectively, or if the Company or such Subsidiary Guarantor
anticipated becoming insolvent at the time of such payment, all or a portion of
such payment could be avoided as a preferential transfer and the recipient of
such payment could be required to return such payment.
PERMISSIBLE OPERATION THROUGH SUBSIDIARIES
Although the Company currently has no Subsidiaries, it is permitted to
conduct future operations through Subsidiaries. If it forms or acquires
Subsidiaries in the future, the Company may be required to rely, at least in
part, upon payment from its Subsidiaries to generate the funds necessary to meet
its obligations, including the payment of interest on and principal of the
Notes. The ability of the Subsidiaries to make such payments will be subject to,
among other things, applicable state laws, and may be subject to certain net
worth maintenance requirements under warehouse credit facilities of subsidiaries
that are permitted under the Indenture. See "Description of the Notes -- Certain
Covenants -- Limitation on Restrictions of Distributions from Restricted
Subsidiaries." Claims of creditors of the Company's Subsidiaries will generally
have priority as to the assets of such Subsidiaries over the claims of the
Company.
Although the Subsidiary Guarantees provide the Note holders with a direct
claim against the assets of the Subsidiary Guarantors, enforcement of the
Subsidiary Guarantees against any Subsidiary Guarantors would be subject to
certain "suretyship" defenses available to guarantors generally, and such
enforcement would also be subject to certain defenses available to the
Subsidiary Guarantors in certain circumstances. See " --Fraudulent Conveyances
and Preferential Transfers." Although the Indenture contains waivers of most
"suretyship" defenses, certain of those waivers may not be enforced by a court
in a particular case. To the extent that the Subsidiary Guarantees are not
enforceable, the Notes would be effectively subordinated to all liabilities of
the Company's Subsidiaries, including trade payables of such Subsidiaries,
whether or not such liabilities otherwise constitute Senior Indebtedness under
the Indenture. See " -- Subordination and Leverage," above.
DEPENDENCE ON EXECUTIVE OFFICERS
Certain of the Company's loan agreements and loan sale agreements with
financial institutions contain provisions to the effect that if more than a
specified number of certain of the senior executive officers of the Company do
not continue to hold such positions or control the Company, whether due to
death, disability or otherwise, the lenders or purchasers have the right to
declare the loans or agreements in default. In such event, there is no assurance
that the lenders or purchasers will consider replacement executive officers
acceptable to them and not declare such instruments in default.
17
<PAGE> 20
DEPENDENCE ON MEGO FINANCIAL AND PEC
The Company has been dependent on Mego Financial to provide, among other
things, (i) funds for operations without interest and (ii) guarantees of the
Company's financing arrangements. The Company anticipates that no further
financing or guarantees will be made by Mego Financial following the completion
of the Offering. There can be no assurance that the absence of such financing or
guarantees will not have a material adverse effect on the Company, particularly
as the Company seeks to grow. In addition, the Company has been dependent on its
affiliate, PEC, to provide management services, routine loan collection services
and management information systems, including services of certain of its
executive officers. There can be no assurance that PEC will continue to provide
such services. The loss of such services could have a material adverse effect on
the Company if suitable replacements are not made.
COMPETITION
The consumer finance industry is highly competitive. Competitors in the
consumer finance business include mortgage banking companies, commercial banks,
credit unions, thrift institutions, credit card issuers and finance companies.
Certain of the Company's competitors are substantially larger, have greater name
recognition and have more capital and other resources than the Company.
Competition in the home improvement and debt consolidation loan business can
take many forms including convenience in obtaining a loan, customer service,
marketing and distribution channels and interest rates. In addition, the current
level of gains realized by the Company and its existing competitors on the sale
of loans could attract additional competitors to this market with the possible
effect of lower gains on loan sales resulting from increased loan origination
competition.
The Company depends largely on its Correspondents and Dealers for its
originations of loans. The Company's competitors also seek to establish
relationships with the Company's Correspondents and Dealers, none of whom is
required to deal exclusively with the Company. The Company's future results may
become more exposed to fluctuations in the volume and cost of its loans
resulting from competition from other purchasers of such loans, market
conditions and other factors.
CONTROL BY MAJORITY STOCKHOLDER
Upon completion of the Common Stock Offering, the Company's current sole
stockholder, Mego Financial, will beneficially own approximately 83.3% of the
outstanding shares of Common Stock (approximately 81.3% if the underwriters of
the Common Stock Offering exercise their over-allotment option in full) and will
therefore be able to elect the entire Board of Directors and control all matters
submitted to stockholders for a vote, all fundamental corporate matters,
including the selection of management and key personnel, whether the Company
engages in any mergers, acquisitions or other business combinations or whether
Mego Financial, at some time in the future, divests all or any portion of its
interest in the Company by means of a distribution to its stockholders or
otherwise. The Common Stock Offering has been structured in such a way as to
facilitate the ability of Mego Financial, should it so determine in the future,
to effect a subsequent tax free distribution of all or a portion of Mego
Financial's shares in the Company to its shareholders, although there is no
assurance that any such distribution will occur. The Company has been advised
that Mego Financial may seek a ruling from the Internal Revenue Service, as is
customary, that such a distribution would be tax free. There is no assurance
that it will obtain such a ruling. Pursuant to the Amended and Restated
Certificate of Incorporation of the Company (the "Certificate of Incorporation")
and an agreement between Mego Financial and the Company, no additional shares of
Common Stock may be issued by the Company that would reduce Mego Financial's
interest below 80% without Mego Financial's written approval, so long as Mego
Financial owns at least 80% of the issued and outstanding Common Stock of the
Company (the "Eighty Percent Period"). In addition, although the Certificate of
Incorporation provides for the issuance of one or more series of preferred stock
from time to time, during the Eighty Percent Period no shares of any other class
of capital stock may be issued without Mego Financial's written approval during
such period, nor may the Company invest in or form any corporation without such
approval. Amendments to the Company's bylaws and changes to the Board are also
subject to such approval during the Eighty Percent
18
<PAGE> 21
Period. Any decision as to whether any transactions of the type mentioned above
ultimately occur will be solely within the discretion of Mego Financial. See
"Principal Stockholders."
PORTION OF PROCEEDS TO BENEFIT MAJORITY STOCKHOLDER
The Company intends to use a portion of the aggregate net proceeds of the
Offering and the Common Stock Offering to repay Intercompany Debt owed to Mego
Financial. See "Use of Proceeds."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
Prior to the Offering, there has been no public market for the Notes. There
can be no assurance that an active trading market for the Notes will develop or
that, if developed, it will be sustained after the Offering or that it will be
possible to resell the Notes at or above the initial public offering price. The
market price of the Notes could be subject to significant fluctuations in
response to the Company's operating results and other factors. In addition, the
market in recent years has experienced extreme price and volume fluctuations
that often have been unrelated or disproportionate to the operating performance
of companies. Such fluctuations, and general economic and market conditions, may
adversely affect the market price of the Notes. The Notes will not be listed on
any securities exchange or quoted on The Nasdaq National Market. See "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Underwriting."
FACTORS INHIBITING TAKEOVER
As Mego Financial will continue to own in excess of 80% of the Common Stock
after the Common Stock Offering, no takeover would be successful without its
consent. Changes in the management or ownership of Mego Financial or a reduction
in the number of shares owned by Mego Financial, however, could have an effect
on the likelihood of a takeover. However, the Certificate of Incorporation
provides that no additional shares of Common Stock may be issued that would
reduce Mego Financial's interest below 80% without its written approval during
the Eighty Percent Period. In addition, although the Certificate of
Incorporation provides for the issuance of one or more series of preferred stock
from time to time, during the Eighty Percent Period no shares of any other class
of capital stock may be issued without Mego Financial's written approval. Even
in the event that at some later date Mego Financial's percentage ownership in
the Company is significantly reduced, certain provisions of the Company's
Certificate of Incorporation and Amended and Restated Bylaws (the "Bylaws") may
be deemed to have anti-takeover effects and may delay, defer or prevent a
takeover attempt that a stockholder might consider in its best interest. The
Company's Certificate of Incorporation authorizes the Board to determine the
rights, preferences, privileges and restrictions of unissued series of preferred
stock and to fix the number of shares of any series of preferred stock and the
designation of any such series, without any vote or action by the Company's
stockholders. Thus, the Board may authorize and issue shares of preferred stock
with voting or conversion rights that could adversely affect the voting or other
rights of holders of the Common Stock. In addition, the issuance of preferred
stock may have the effect of delaying, deferring or preventing a change of
control of the Company, since the terms of the preferred stock that might be
issued could potentially prohibit the Company's consummation of any merger,
reorganization, sale of substantially all of its assets, liquidation or other
extraordinary corporate transaction without the approval of the holders of the
outstanding shares of the preferred stock. Other provisions of the Company's
Certificate of Incorporation and Bylaws (i) provide that special meetings of the
stockholders may be called only by the Board of Directors or upon the written
demand of the holders of not less than 30% of the votes entitled to be cast at a
special meeting and (ii) establish certain advance notice procedures for
nomination of candidates for election as directors by stockholders and for
stockholder proposals to be considered at annual stockholders' meetings. Mego
Financial could also vote to amend the Company's Certificate of Incorporation or
Bylaws without the vote of any other holders of the Common Stock. Upon the
occurrence of a Change of Control, the holders of the Notes will be entitled to
require the Company to repurchase up to all outstanding Notes of the holders
requiring such repurchase. This provision would further inhibit any takeover of
the Company. See "Description of the Notes -- Change of Control."
19
<PAGE> 22
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby,
after deducting underwriting discounts and estimated expenses of the Offering,
are estimated to be approximately $ million. The net proceeds to the Company
from the Common Stock Offering, based upon an assumed initial public offering
price of $ per share and after deducting underwriting discounts and
estimated expenses of the Common Stock Offering, are estimated to be
approximately $ million ($ million if the underwriters of the Common
Stock Offering exercise their over-allotment option in full).
The Company currently intends to use approximately $ of the
aggregate net proceeds received by the Company from the Offering and the Common
Stock Offering to repay Intercompany Debt which does not bear interest and is
due on demand. The remaining net proceeds will be used to provide capital to
originate and securitize loans. Pending such use, the net proceeds received by
the Company will be invested in high quality, short term interest-bearing
investment and deposit accounts and may be used to temporarily reduce the
amounts outstanding under the Company's lines of credit, which currently bear
interest at rates ranging from 1.0% to 2.0% over the prime rate.
20
<PAGE> 23
CAPITALIZATION
The following table sets forth the capitalization of the Company at May 31,
1996, and as adjusted as of such date to give effect to (i) the sale of the
Notes offered hereby (after deducting underwriting discounts and estimated
expenses of the Offering), (ii) the sale of the 2,000,000 shares of Common Stock
pursuant to the Common Stock Offering (at an assumed initial public offering
price of $ per share and after deducting underwriting discounts and
estimated expenses of the Common Stock Offering) and (iii) the application of
the net proceeds from the Offering and the Common Stock Offering as described
under "Use of Proceeds." This table should be read in conjunction with the
financial statements, the related notes and the other financial information
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MAY 31, 1996
-------------------
AS
ACTUAL ADJUSTED
------- -------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Warehouse line of credit............................................... $ 3,012 $ 3,012
Demand note............................................................ 5,000 5,000
Other notes and contracts payable...................................... 860 860
% Senior Subordinated Notes due 2001................................. -- 40,000
Intercompany Debt...................................................... 11,963 --
------- -------
Total debt..................................................... $20,835 $48,872
======= =======
Stockholder's equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares
issued and outstanding.............................................. -- --
Common stock, $.01 par value; 50,000,000 shares authorized; 10,000,000
shares issued and outstanding, actual and 12,000,000 shares issued
and outstanding, as adjusted(1)..................................... 5,000
Additional paid-in capital............................................. 3,650
Retained earnings...................................................... 6,761 6,761
------- -------
Total stockholder's equity............................................. 15,411
------- -------
Total capitalization........................................... $36,246 $
======= =======
</TABLE>
- ---------------
(1) Does not include 900,000 shares of Common Stock reserved for issuance upon
the exercise of stock options available to be granted under the Company's
Stock Option Plan or 300,000 shares of Common Stock issuable pursuant to
the underwriters' over-allotment option in the Common Stock Offering. See
"Management -- Stock Option Plan" and "Underwriting."
21
<PAGE> 24
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected Statement of Operations Data and Balance Sheet Data set forth
below have been derived from the financial statements of the Company. The
financial statements as of August 31, 1994 and 1995 and for each of the two
years in the period ended August 31, 1995 have been audited by Deloitte & Touche
LLP, independent auditors, and are included elsewhere in this Prospectus. The
selected data as of May 31, 1996 and for the nine month periods ended May 31,
1995 and 1996 are derived from the unaudited financial statements of the
Company, which, in the opinion of management, include all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the information set forth therein. The selected financial
information set forth below should be read in conjunction with the financial
statements, the related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus. The results of operations for the nine months ended May 31, 1996 may
not be indicative of results of operations to be expected for the full year.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST NINE MONTHS
31, ENDED MAY 31,
----------------- ----------------
1994(1) 1995 1995 1996
------- ------- ------ -------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of loans.................................... $ 579 $12,233 $6,098 $11,621
Net unrealized gain on mortgage related securities(2).... -- -- -- 2,182
Interest income, net..................................... 172 473 313 538
Loan servicing income.................................... -- 873 418 3,049
------- ------- ------- -------
Total revenues................................... 751 13,579 6,829 17,390
------- ------- ------- -------
Costs and expenses:
Other interest........................................... 22 187 58 120
Provision for credit losses.............................. 96 864 558 815
Depreciation and amortization............................ 136 403 260 641
Commissions and selling.................................. 13 552 339 1,560
General and administrative:
Payroll and benefits.................................. 975 3,611 2,442 3,550
Professional services................................. -- 409 244 716
Services by affiliate................................. 442 690 503 503
FHA insurance......................................... 11 231 110 390
Other................................................. 567 713 461 1,632
------- ------- ------- -------
Total costs and expenses......................... 2,262 7,660 4,975 9,927
------- ------- ------- -------
Income (loss) before income taxes(3)....................... (1,511) 5,919 1,854 7,463
Income taxes(3)............................................ -- 2,277 651 2,833
Net income (loss).......................................... $(1,511) $ 3,642 $1,203 $ 4,630
======= ======= ======= =======
Net income (loss) per share................................ $ (0.15) $ 0.36 $ 0.12 $ 0.46
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 31, AS OF MAY 31, 1996
---------------- ------------------------
1994(1) 1995 ACTUAL AS ADJUSTED(4)
------ ------- ------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Loans held for sale, net.............................. $1,463 $ 3,676 $ 4,671 $ 4,671
Excess servicing rights............................... 904 14,483 12,796 12,796
Mortgage related securities(2)........................ -- -- 15,144 15,144
Total assets.......................................... 5,122 24,081 40,499
Total liabilities..................................... 983 13,300 25,088
Total stockholder's equity............................ 4,139 10,781 15,411
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
YEAR ENDED AUGUST NINE MONTHS ENDED
31, MAY 31,
------------------ -----------------------
1994(1) 1995 1995 1996
------ ------- ------- -----------
<S> <C> <C> <C> <C>
OPERATING DATA:
Loans originated.................................. $8,133 $87,751 $52,521 $ 89,391
Weighted average interest rate on loans
originated...................................... 14.18% 14.55% 14.47% 14.23%
Servicing portfolio (period end):
Company-owned loans............................. 1,471 3,720 6,250 4,763
Sold loans...................................... 6,555 88,566 52,400 166,285
------ ------- -------
Total................................... $8,026 $92,286 $58,650 $ 171,048
====== ======= =======
Delinquency period(5):
31-60 days past due............................. 2.06% 2.57% 1.27% 2.41%
61-90 days past due............................. 0.48 0.73 0.39 0.78
91 days and over past due....................... 0.26 0.99 0.68 4.34(6)
91 days and over past due, net of claims
filed(7)..................................... 0.26 0.99 0.68 2.38
Claims filed with HUD(8).......................... -- -- -- 1.96
Amount of FHA insurance available (period end).... $ 831 $ 9,552 $ 6,029 $ 18,084(9)
Amount of FHA insurance available as a percentage
of loans serviced (period end).................. 10.36% 10.35% 10.28% 10.57%(9)
Ratio of earnings to fixed charges(10)............ N/A 7.69x 5.27x 10.23x
</TABLE>
- ---------------
(1) The Company commenced originating loans in March 1994.
(2) Mortgage related securities consist of certificates representing interests
retained by the Company in securitization transactions.
(3) The results of operations of the Company are included in the consolidated
Federal income tax returns filed by Mego Financial, the Company's sole
stockholder. Mego Financial allocates income taxes to the Company
calculated on a separate return basis. See "Certain Transactions."
(4) As adjusted to give effect to (i) the sale of the Notes offered hereby
(after deducting underwriting discounts and estimated expenses of the
Offering), (ii) the sale of the 2,000,000 shares of Common Stock pursuant
to the Common Stock Offering (at an assumed initial public offering price
of $ per share and after deducting underwriting discounts and estimated
expenses of the Common Stock Offering) and (iii) the application of the
estimated net proceeds from the Offering and the Common Stock Offering as
described under "Use of Proceeds."
(5) Represents the dollar amount of delinquent loans as a percentage of total
dollar amount of loans serviced by the Company (including loans owned by
the Company) as of the date indicated.
(6) During the nine month period ended May 31, 1996, the processing and payment
of claims filed with HUD was delayed. See "Business -- Loan Servicing."
(7) Represents the dollar amount of delinquent loans net of delinquent Title I
Loans for which claims have been filed with HUD and payment is pending as a
percentage of total dollar amount of loans serviced by the Company
(including loans owned by the Company) as of the date indicated.
(8) Represents the dollar amount of delinquent Title I Loans for which claims
have been filed with HUD and payment is pending as a percentage of total
dollar amount of loans serviced by the Company (including loans owned by
the Company) as of the date indicated.
(9) If all claims filed with HUD had been processed and paid as of period end,
the amount of FHA insurance available would have been reduced to
$15,063,000, which as a percentage of loans serviced would have been 8.98%.
(10) Earnings include pretax income, the portion of rents representative of the
interest factor and interest on debt. Fixed charges include interest on
indebtedness (including the Notes), prepaid commitment fees and the portion
of rents representative of the interest factor.
23
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements, including the notes thereto, contained elsewhere in
this Prospectus.
GENERAL
The Company began originating loans on March 1, 1994 and, accordingly, the
Company's results of operations for the year ended August 31, 1995 include a
full year's operations, while results for the year ended August 31, 1994 include
only six months of loan originations.
The Company recognizes revenue from the gain on sale of loans, interest
income and servicing income. Interest income, net, represents the interest
received on loans in the Company's portfolio prior to their sale, net of
interest paid under its credit agreements. The Company continues to service all
loans sold to date. Net loan servicing income represents servicing fee income
and other ancillary fees received for servicing loans less the amortization of
capitalized mortgage servicing rights. Mortgage servicing rights are amortized
over the estimated net future servicing fee income.
The Company sells its loans through whole loan sales to third party
purchasers, retaining the right to service the loans and to receive any amounts
in excess of the guaranteed yield to the purchasers. In addition, the Company
has commenced the sale of loans through securitizations. Most of the regular
interests of the related securitizations are sold, with the interest only and
residual class securities retained by the Company.
Gain on sale of loans includes the gain on sale of mortgage backed
securities and the gain on sale of loans. The gain on sale of mortgage backed
securities is determined by an allocation of the cost of the securities based on
the relative fair value of the securities sold and the securities retained. The
Company generally retains an interest only strip security and the residual
interest security. The fair value of the interest only strip and residual
interest security is the present value of the estimated cash flow to be received
after considering the effects of estimated prepayments and credit losses. The
net unrealized gain on mortgage related securities represents the difference
between the allocated cost basis of the securities and the estimated fair value.
As the holder of the residual securities, the Company is entitled to
receive certain excess cash flows. These excess cash flows are calculated as the
difference between (a) principal and interest paid by borrowers and (b) the sum
of (i) pass-through interest and principal to be paid to the holders of the
regular securities and interest only securities, (ii) trustee fees, (iii)
third-party credit enhancement fees, (iv) servicing fees and (v) estimated loan
pool losses. The Company's right to receive this excess cash flow is subject to
the satisfaction of certain reserve requirements which are specific to each
securitization and are used as a means of credit enhancement.
The Company carries interest only and residual securities at fair value. As
such, the carrying value of these securities is affected by changes in market
interest rates and prepayment and loss experiences of these and similar
securities. The Company estimates the fair value of the interest only and
residual securities utilizing prepayment and credit loss assumptions the Company
believes to be appropriate for each particular securitization. To the Company's
knowledge, there is no active market for the sale of these interest only and
residual securities. The range of values attributable to the factors used in
determining fair value is broad. Accordingly, the Company's estimate of fair
value is subjective.
The present value of expected net cash flows from the sale of loans is
recorded at the time of sale as excess servicing rights and mortgage related
securities. Excess servicing rights are amortized as a charge to income, as
payments are received on the retained interest differential over the estimated
life of the underlying loans. The expected cash flows used to determine the
excess servicing rights asset and mortgage related securities have been reduced
for potential losses under recourse provisions of the sales agreements. The
allowance for losses on loans sold with recourse represents the Company's
estimate of losses to be incurred in connection with the recourse provisions of
the sales agreements.
To determine the fair value of the mortgage servicing rights, the Company
projects net cash flows
24
<PAGE> 27
expected to be received over the life of the loans. Such projections assume
certain servicing costs, prepayment rates and credit losses. These assumptions
are similar to those used by the Company to value the residual securities. As of
May 31, 1996, mortgage servicing rights totaled $2.7 million.
There can be no assurance that the Company's estimates used to determine
the fair value of mortgage servicing rights will remain appropriate for the life
of the loans. If actual loan prepayments or credit losses exceed the Company's
estimates, the carrying value for the Company's mortgage servicing rights may
have to be written down through a charge against earnings. The Company will not
write up such assets to reflect slower than expected prepayments, although
slower prepayments may increase future earnings as the Company will receive cash
flows in excess of those anticipated. Fluctuations in interest rates may also
result in a write-down of the Company's mortgage servicing rights in subsequent
periods.
The Company discounts cash flows on its loan sales at the rate it believes
an independent third-party purchaser would require as a rate of return. The cash
flows were discounted to present value using discount rates which averaged 12.0%
for the years ended August 31, 1994 and 1995 and the nine months ended May 31,
1995 and 1996. The Company has developed its assumptions based on experience
with its own portfolio, available market data and ongoing consultation with its
financial advisors.
Total costs and expenses consist primarily of general and administrative
expenses, depreciation and amortization, and interest expense on borrowings to
finance loan originations. Mego Financial provides the services of certain of
its executive officers to the Company. General and administrative expenses
include the portion of the salaries of such executive officers allocated to and
paid by the Company. See "Certain Transactions."
RESULTS OF OPERATIONS
Nine Months Ended May 31, 1996 Compared to Nine Months Ended May 31, 1995
The Company originated $89.0 million of Title I Loans during the nine
months ended May 31, 1996 compared to $52.5 million of Title I Loans during the
nine months ended May 31, 1995, an increase of 69.5%. The increase is a result
of the overall growth in the Company's business, including an increase in the
number of active Correspondents and Dealers and an increase in the number of
states served. At May 31, 1996, the Company had approximately 265 active
Correspondents and 445 active Dealers in 36 states, compared to approximately
120 active Correspondents and 125 active Dealers in 31 states at May 31, 1995.
The Company originated $385,000 of Conventional Loans during the nine months
ended May 31, 1996 and did not originate Conventional Loans during the nine
months ended May 31, 1995.
The following table sets forth certain data regarding loans originated by
the Company during the nine months ended May 31, 1995 and 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31,
-----------------------------------------------
1995 1996
--------------------- ---------------------
<S> <C> <C> <C> <C>
Principal amount of loans:
Correspondents:
Title I..................................... $40,405,634 76.9% $57,625,881 64.5%
Conventional................................ -- -- 384,900 0.4
----------- ----- ----------- -----
Total Correspondent.................... 40,405,634 76.9% 58,010,781 64.9%
----------- ----- ----------- -----
Dealers........................................ 12,115,753 23.1 31,379,719 35.1
----------- ----- ----------- -----
Total.................................. $52,521,387 100.0% $89,390,500 100.0%
=========== ===== =========== =====
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31,
1995 1996
----------- -----------
<S> <C> <C> <C> <C>
Number of loans:
Correspondents:
Title I..................................... 2,171 62.5% 3,130 53.2%
Conventional................................ -- -- 13 0.2
----------- ----- ----------- -----
Total Correspondent.................... 2,171 62.5 3,143 53.4
----------- ----- ----------- -----
Dealers........................................ 1,302 37.5 2,742 46.6
----------- ----- ----------- -----
Total.................................. 3,473 100.0% 5,885 100.0%
=========== ===== =========== =====
</TABLE>
The Company sold $88.0 million of Title I Loans and $50,000 of Conventional
Loans during the nine months ended May 31, 1996, recognizing a gain on sale of
loans of $11.6 million and a net unrealized gain on mortgage related securities
of $2.2 million. The Company sold $47.4 million of Title I Loans during the nine
months ended May 31, 1995 recognizing a gain on sale of loans of $6.1 million
and no net unrealized gain on mortgage related securities because there were no
securitization transactions in such period. The increase in gain on sale of
loans was primarily a result of increased volume of loans sold. As a percentage
of loans sold, gain on sale of loans was 13.2% during the nine months ended May
31, 1996 compared to 12.8% during the nine months ended May 31, 1995. The
weighted average gross excess spreads on sold loans was 5.7% and 6.7% for the
nine months ended May 31, 1995 and 1996, respectively. A weighted average
discount rate of 12% per year was used in the determination of the gain on sale
for both periods.
Interest income, net of interest expense increased 71.9% to $538,000 during
the nine months ended May 31, 1996 from $313,000 during the nine months ended
May 31, 1995. The increase was primarily the result of the increase in the size
of the portfolio of loans held for sale.
Net loan servicing income increased 617.7% to $3.0 million during the nine
months ended May 31, 1996 from $418,000 during the nine months ended May 31,
1995. The increase was primarily the result of the increase in the amount of
loans sold with the servicing rights retained by the Company, which increased to
$166.3 million at May 31, 1996 from $54.1 million at May 31, 1995.
Total revenues increased 155.9% to $17.4 million for the nine months ended
May 31, 1996 from $6.8 million for the nine months ended May 31, 1995. The
increase was primarily the result of the increased volume of loans originated
and the sale of such loans.
Total costs and expenses increased 98.0% to $9.9 million for the nine
months ended May 31, 1996 from $5.0 million for the nine months ended May 31,
1995. General and administrative expenses increased 78.9% to $6.8 million from
$3.8 million primarily as a result of increased payroll related to the hiring of
additional loan quality control and other personnel in contemplation of the
expansion of the Company's business and costs related to the opening of
additional offices. The Company has paid its affiliate, PEC, servicing fees in
an amount equal to 50 basis points of the principal balance of loans serviced
per year. In addition, the Company has paid management fees to PEC in an amount
equal to the direct and indirect expenses of PEC for the services rendered by
PEC's employees to the Company, including an allocable portion of the salaries
and expenses of such employees based upon the percentage of time such employees
spend performing services for the Company. Included in general and
administrative expenses were servicing fees paid to PEC in the amount of $87,000
and $479,000 for the nine months ended May 31, 1995 and 1996, respectively, and
management fees paid to PEC in the amount of $503,000 and $503,000 for the nine
months ended May 31, 1995 and 1996, respectively. The provision for credit
losses increased 46.1% to $815,000 from $558,000. At May 31, 1996, the Company
had established a provision for credit losses equal to 1.0% of loans sold. Other
interest increased 106.9% to $120,000 from $58,000 representing interest on
capitalized lease obligations. Depreciation and amortization expense increased
146.5% to $641,000 from $260,000 as a result of the purchase of additional
equipment, the expansion of the Company's facilities and additional development
costs.
Income before income taxes increased 294.7% to $7.5 million for the nine
months ended May 31, 1996 from $1.9 million for the nine months ended May 31,
1995.
26
<PAGE> 29
Income taxes increased 330.1% to $2.8 million for the nine months ended May
31, 1996 from $651,000 for the nine months ended May 31, 1995.
As a result of the foregoing, net income increased 283.3% to $4.6 million
for the nine months ended May 31, 1996 from $1.2 million for the nine months
ended May 31, 1995.
Fiscal 1995 Compared to Fiscal 1994
The Company commenced originating loans in March 1994. The Company
originated $87.8 million of loans during fiscal 1995 compared to $8.1 million of
loans during fiscal 1994, an increase of 984.0%. The increase was a result of
the overall growth in Company's business. At August 31, 1995, the Company had
approximately 150 active Correspondents and 170 active Dealers in 34 states,
compared to approximately 14 active Correspondents and 30 active Dealers in 14
states at August 31, 1994.
The following table sets forth certain data regarding Title I Loans
originated by the Company during the years ended August 31, 1994 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------
1994 1995
------------------ -------------------
<S> <C> <C> <C> <C>
Principal amount of loans:
Correspondents...................................... $5,238,311 64.4% $63,792,680 72.7%
Dealers............................................. 1,488,529 18.3 23,957,829 27.3
Bulk purchase....................................... 1,406,000 17.3 -- --
---------- ----- ----------- -----
Total....................................... $8,132,840 100.0% $87,750,509 100.0%
========== ===== =========== =====
Number of loans:
Correspondents...................................... 338 47.4% 3,437 59.1%
Dealers............................................. 165 23.1 2,375 40.9
Bulk purchase....................................... 210 29.5 -- --
---------- ----- ----------- -----
Total....................................... 713 100.0% 5,812 100.0%
========== ===== =========== =====
</TABLE>
The Company sold $85.7 million of loans during fiscal 1995, recognizing a
gain on sale of loans of $12.2 million. The Company sold $6.6 million of loans
during fiscal 1994 recognizing a gain on sale of loans of $579,000. As a
percentage of loans sold, gain on sale of loans was 14.2% during fiscal 1995
compared to 8.8% during fiscal 1994. The increase in gain on sale was primarily
a result of increased volume of loans sold and a wider differential between the
stated interest rate on the loans and the yield to purchasers. The weighted
average gross excess spread on sold loans was 5.6% and 6.1% for fiscal 1994 and
1995, respectively. The weighted average discount rate used in the determination
of the gain on sale for both periods was 12%.
Interest income, net of interest expense increased 175.0% to $473,000
during fiscal 1995 from $172,000 during fiscal 1994. The increase was primarily
the result of the increase in the size of the portfolio of loans held for sale.
Net loan servicing income was $873,000 during fiscal 1995. This income was
the result of the sale of Title I Loans, with the right to service the loans
being retained by the Company. The Company had no loan servicing income in
fiscal 1994 because the Company did not sell any loans until August 31, 1994.
Total revenues increased 1,710.9% to $13.6 million for fiscal 1995 from
$751,000 for fiscal 1994. The increase was primarily the result of the increased
volume of loans originated and the sale of such loans.
Total costs and expenses increased 234.8% to $7.7 million for fiscal 1995
from $2.3 million for fiscal 1994. General and administrative expenses increased
185.0% to $5.7 million from $2.0 million primarily as a result of increased
payroll related to the hiring of additional personnel in contemplation of the
expansion and projected growth of the Company's business and costs related to
the opening of additional offices. Included in general and administrative
expenses were servicing fees paid to PEC in the amount of $11,000 and $174,000
for fiscal 1994 and 1995, respectively, and management fees paid to PEC in the
amount of $442,000 and $690,000 for fiscal 1994 and 1995, respectively. The
provision for credit losses increased 800.0% to $864,000
27
<PAGE> 30
from $96,000. At August 31, 1995, the Company had established a provision for
credit losses equal to 1.0% of Title I Loans sold. Other interest increased
222.4% to $187,000 from $58,000 consisting of interest on capitalized lease
obligations. Depreciation and amortization expense increased 146.5% to $641,000
from $260,000 as a result of the purchase of additional equipment, the expansion
of the Company's facilities and additional development costs.
Income (loss) before income taxes increased to income of $5.9 million for
fiscal 1995 from a loss of $1.5 million for its six months of operations in
fiscal 1994.
Effective September 1, 1994, the Company adopted SFAS No. 122 which
requires that a mortgage banking enterprise recognize as separate assets the
rights to service mortgage loans for others, regardless of how those servicing
rights are acquired. The effect of adopting SFAS No. 122 on the Company's
financial statements was to increase income before income taxes by $1.1 million
for fiscal 1995.
As a result of the foregoing, net income (loss) increased to net income of
$3.6 million for fiscal 1995 from a net loss of $1.5 million for fiscal 1994.
FINANCIAL CONDITION
May 31, 1996 Compared to August 31, 1995
Cash increased 11.8% to $841,000 at May 31, 1996 from $752,000 at August
31, 1995 primarily as a result of increased borrowings.
Loans held for sale, net increased 27.0% to $4.7 million at May 31, 1996
from $3.7 million at August 31, 1995 primarily as a result of increased loan
originations and the timing of loan sales in the first nine months of fiscal
1996.
Mortgage related securities were $15.1 million at May 31, 1996 as a result
of the Company's first securitization transaction in March 1996 and consist of
an interest only security of $3.0 million and a residual interest security of
$12.1 million. There was no corresponding asset at August 31, 1995.
Excess servicing rights decreased 11.7% to $12.8 million at May 31, 1996
from $14.5 million at August 31, 1995. Excess servicing rights are calculated
using prepayment, default and interest rate assumptions that the Company
believes market participants would use for similar rights. The Company believes
that the excess servicing rights recognized at the time of sale do not exceed
the amount that would be received if such rights were sold at fair market value
in the marketplace. The decrease in excess servicing rights was primarily a
result of loans sold with excess servicing rights recognized which were
reacquired and included in the March 1996 securitization as well as normal
amortization of such excess servicing rights. The excess cash flow which had
been recognized as excess servicing rights is included in the valuation of the
residual securities.
Mortgage servicing rights increased 145.5% to $2.7 million at May 31, 1996
from $1.1 million at August 31, 1995 as a result of additional sales of mortgage
originations and the resulting increase in sold loans serviced from $88.6
million to $166.3 million.
Notes and contracts payable increased 493.3% to $8.9 million at May 31,
1996 from $1.5 million at August 31, 1995, due to increased borrowings.
Accounts payable and accrued liabilities increased 22.7% to $2.7 million at
May 31, 1996 from $2.2 million at August 31, 1995, primarily as a result of
increases in accrued payroll, interest and other unpaid operational costs.
Allowances for credit losses and for loans sold with recourse decreased
16.2% to $838,000 at May 31, 1996 from $1.0 million at August 31, 1995. The
decrease was a result of loans sold with recourse which were reacquired and
included in the March 1996 securitization. The estimated credit losses are
included in the valuation of the residual securities.
Stockholder's equity increased 42.6% to $15.4 million at May 31, 1996 from
$10.8 million at August 31, 1995 as a result of net income of $4.6 million
during the first nine months of fiscal 1996.
28
<PAGE> 31
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash of $841,000 at May 31, 1996 compared to cash of
$752,000 at August 31, 1995.
The Company's cash requirements arise from loan originations, payments of
operating and interest expenses and deposits to reserve accounts related to loan
sale transactions. Loan originations are initially funded principally through
the Company's $20.0 million warehouse line of credit pending the sale of loans
in the secondary market. Substantially all of the loans originated by the
Company are sold. Net cash used in the Company's operating activities for the
year ended August 31, 1995 and the nine months ended May 31, 1996 was
approximately $10.3 million and $8.0 million, respectively. This use was funded
primarily from the reinvestment of proceeds from the sale of loans in the
secondary market totaling approximately $85.2 million and $88.1 million for the
year ended August 31, 1995 and the nine months ended May 31, 1996, respectively.
The loan sale transactions required the subordination of certain cash flows
payable to the Company to the payment of scheduled principal and interest due to
the loan purchasers. In connection with certain of such sale transactions, a
portion of amounts payable to the Company from the excess interest spread is
required to be maintained in a reserve account to the extent of the
subordination requirements. The subordination requirements generally provide
that the excess interest spread is payable to the reserve account until a
specified percentage of the principal balances of the sold loans is accumulated
therein.
Excess interest spread payable to the Company is subject to being utilized
first to replenish cash paid from the reserve account to fund shortfalls in
collections of interest from borrowers who default on the payments on the loans
until the Company's deposits into the reserve account equal the specified
percentage. The excess interest required to be deposited and maintained in the
respective reserve accounts is not available to support the cash flow
requirements of the Company. At May 31, 1996, amounts on deposit in such reserve
accounts totaled $2.4 million.
Adequate credit facilities and other sources of funding, including the
ability of the Company to sell loans in the secondary market, are essential for
the continuation of the Company's loan origination operations. At May 31, 1996,
the Company had a $20.0 million warehouse line of credit (the "Warehouse Line")
for the financing of loan originations which expires in August 1997. At May 31,
1996, $3.0 million was outstanding under the Warehouse Line and $17.0 million
was available. The Warehouse Line bears interest at the prime rate plus 1.0% per
year and is secured by loans prior to sale. The agreement with the lender
requires the Company to maintain a minimum tangible net worth of $12.5 million,
and a minimum level of profitability of at least $500,000 per rolling six month
period. In addition, at May 31, 1996, the Company had a $5.0 million demand note
facility from the same lender, with respect to which $5.0 million was
outstanding on that date. This note was secured by a pledge of the Company's
excess servicing rights and the interest only and residual class certificates
("Certificates") relating to securitizations carried as "Mortgage related
securities" on the Company's balance sheets, payable to the Company pursuant to
its securitization agreements. As of June 28, 1996, this note was replaced by a
$10.0 million revolving credit loan from the same lender (the "Revolving Loan"),
with the same security. The Revolving Loan has an 18-month revolving credit
period followed by a 30-month amortization period, and requires the Company to
maintain a minimum tangible net worth of $12.5 million and a minimum level of
profitability of at least $500,000 per rolling six month period. Borrowings
under the Revolving Loan cannot exceed the lesser of (i) 40% of the Company's
excess servicing rights and Certificates or (ii) six times the aggregate of the
excess servicing rights and Certificate payments actually received by the
Company over the most recent three-month period. While the Company believes that
it will be able to maintain its existing credit facilities and obtain
replacement financing as its credit arrangements mature and additional
financing, if necessary, there can be no assurance that such financing will be
available on favorable terms, or at all.
From time to time, the Company has sold loans through whole loan sales. In
August 1994, the Company entered into an agreement with a bank pursuant to which
an aggregate of $38.3 million in principal amount of loans had been sold at
December 31, 1995, for an amount equal to their remaining principal balance and
accrued interest. Pursuant to the agreement, the purchaser is entitled to
receive interest at a rate equal to the sum of 187.5 basis points and the yield
paid on four-year Federal Government Treasury obligations at the time of the
sale. The Company retained the right to service the loans and the right to
receive the difference (the
29
<PAGE> 32
"Excess Interest") between the sold loans' stated interest rate and the yield to
the purchaser. The Company is required to maintain a reserve account equal to
1.0% of the declining principal balance of the loans sold pursuant to the
agreement funded from the Excess Interest received by the Company less its
servicing fee to fund shortfalls in collections from borrowers who default in
the payment of principal or interest.
In April 1995, the Company entered into a continuing agreement with a
financial institution pursuant to which an aggregate of approximately $138.5
million in principal amount of loans had been sold at May 31, 1996 for an amount
equal to their remaining principal balances. Pursuant to the agreement, the
purchaser is entitled to receive interest at a variable rate equal to the sum of
200 basis points and the one-month LIBOR rate as in effect from time to time.
The Company retained the right to service the loans and the right to receive the
Excess Interest. The Company is required to maintain a reserve account equal to
2.5% of the proceeds received by the Company from the sale of loans pursuant to
the agreement plus the Excess Interest received by the Company less its
servicing fee to fund shortfalls in collections from borrowers who default in
the payment of principal or interest. In May 1995 and June 1995, the Company
reacquired an aggregate of approximately $25.0 million of such Title I Loans for
an amount equal to their remaining principal balance, which were sold to a
financial institution. In March 1996 and August 1996, the Company reacquired an
additional $77.8 million and $36.2 million, respectively, of the Title I Loans
in connection with its first two securitization transactions.
In May 1995, the Company entered into an agreement with a bank pursuant to
which an aggregate of $25.0 million in principal amount of loans had been sold
at June 30, 1995 for an amount equal to their remaining principal balance.
Pursuant to the agreement, the purchaser is entitled to receive interest at a
rate equal to the sum of 190 basis points and the yield paid on four-year
Federal Government Treasury obligations at the time of the sale. The Company
retained the right to service the loans and the right to receive the Excess
Interest. The agreement requires the Company to maintain a reserve account equal
to 1.0% of the declining principal balance of the loans sold pursuant to the
agreement funded from the Excess Interest received by the Company less its
servicing fee to fund shortfalls in collections from borrowers who default in
the payment of principal or interest.
In September 1996, the Company entered into a repurchase agreement with a
financial institution pursuant to which the Company pledged the interest only
certificates from its two 1996 securitizations in exchange for a $3.0 million
advance. The Company also received a commitment from the same financial
institution, providing for the purchase of up to $2.0 billion of loans over a
five-year period. In consideration of the purchase commitment, Mego Financial
will issue to the financial institution five-year warrants to purchase 1,000,000
shares of Mego Financial's common stock at an exercise price of $7.125 per
share. The value of the warrants will be charged to the Company as the
commitment for the purchase of loans is utilized. The financial institution has
also agreed to provide the Company a separate one-year facility of up to $11.0
million, less any amounts advanced under the repurchase agreement, for the
financing of the interest only and residual certificates from future
securitizations.
In furtherance of the Company's strategy to sell loans through
securitizations, in March 1996 and August 1996, the Company completed its first
two securitizations pursuant to which it sold pools of $84.2 million and $48.9
million, respectively, of Title I Loans. The Company previously reacquired at
par $77.8 million and $36.2 million of such loans, respectively. Pursuant to
these securitizations, pass-through certificates evidencing interests in the
pools of loans were sold in a public offering. The Company continues to
subservice the sold loans and is entitled to receive from payments in respect of
interest on the sold loans a servicing fee equal to 1.25% of the balance of each
loan with respect to the March transaction and 1.0% with respect to the August
transaction. In addition, with respect to both transactions, the Company
received certificates (carried as "Mortgage related securities" on the Company's
balance sheet), representing the interest differential, after payment of
servicing and other fees, between the interest paid by the obligors of the sold
loans and the yield on the sold certificates. The Company may be required to
repurchase loans that do not conform to the representations and warranties made
by the Company in the securitization agreements.
During the nine months ended May 31, 1996 and the year ended August 31,
1995, the Company used cash of $8.0 million and $10.3 million, respectively, in
operating activities. During the nine months ended
30
<PAGE> 33
May 31, 1996 and the year ended August 31, 1995, the Company provided cash of
$8.6 million and $10.5 million, respectively, in financing activities. During
the nine months ended May 31, 1996 and the year ended August 31, 1995, the
Company used cash of $488,000 and $274,000, respectively, in investing
activities, which was substantially expended for office equipment and
furnishings and data processing equipment.
The Company believes that funds from operations and financing activities,
borrowings under its existing credit facilities and the net proceeds from the
Offering and the Common Stock Offering will be sufficient to satisfy its
contemplated cash requirements for at least 12 months following the consummation
of the Offering.
EFFECTS OF CHANGING PRICES AND INFLATION
The Company's operations are sensitive to increases in interest rates and
to inflation. Increased borrowing costs resulting from increases in interest
rates may not be immediately recoverable from prospective purchasers. The
Company's loans consist primarily of fixed-rate long term installment contracts
that do not increase or decrease as a result of changes in interest rates
charged to the Company. In addition, delinquency and cancellation rates may be
affected by changes in the national economy.
RECENT ACCOUNTING PRONOUNCEMENTS
At August 31, 1995, effective September 1, 1994, the Company adopted SFAS
No. 122, which requires that a mortgage banking enterprise recognize as separate
assets the rights to service mortgage loans for others, regardless of how those
servicing rights are acquired. The effect of adopting SFAS No. 122 on the
Company's financial statements was to increase income before income taxes by
$1.1 million for the year ended August 31, 1995. The fair value of capitalized
mortgage servicing rights was estimated by taking the present value of expected
net cash flows from mortgage servicing using assumptions the Company believes
market participants would use in their estimates of future servicing income and
expense, including assumptions about prepayment, default and interest rates.
Capitalized mortgage servicing rights are amortized in proportion to and over
the period of estimated net servicing income. The estimate of fair value was
based on a 100 basis points per year servicing fee, reduced by estimated costs
of servicing, and using a discount rate of 12% in 1995. The Company has
developed its assumptions based on experience with its own portfolio, available
market data and ongoing consultation with its investment bankers.
The Financial Accounting Standards Board (the "FASB") has issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS No. 121"). SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS No. 121 is effective
for fiscal years beginning after December 15, 1995. The Company has not
determined the effect upon adoption on its results of operation or financial
condition.
The FASB has issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which establishes financial accounting and
reporting standards for stock-based employee compensation plans and for
transactions in which an entity issues its equity instruments to acquire goods
or services from nonemployees. SFAS No. 123 is generally effective for fiscal
years beginning after December 15, 1995. The Company intends to provide the pro
forma and other additional disclosures about stock-based employee compensation
plans in its 1997 financial statements as required by SFAS No. 123.
The FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"). SFAS
No. 125 provides new accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. SFAS No. 125
also provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings and requires
that liabilities and derivatives incurred or obtained by transferors as part of
a transfer of financial assets be initially measured at fair value. SFAS No. 125
also requires that servicing assets be measured by allocating the carrying
amount between the assets sold and retained interests based on their relative
fair values at the date of transfer. Additionally, SFAS No. 125 requires that
the servicing assets and liabilities be subsequently measured by (i)
amortization in proportion to and over the period of estimated net servicing
income and (ii) assessment for asset impairment or increased obligation based on
their fair
31
<PAGE> 34
values. The Company has not adopted SFAS No. 125 for the current period, but
must adopt the new requirements effective January 1, 1997. The Company has not
yet determined the effect of SFAS No. 125 on its results of operations or
financial condition in the period of adoption.
SEASONALITY
Home improvement loan volume tracks the seasonality of home improvement
contract work. Volume tends to build during the spring and early summer months,
particularly with regard to pool installations. A decline is typically
experienced in late summer and early fall until temperatures begin to drop. This
change in seasons precipitates the need for new siding, window and insulation
contracts. Peak volume is experienced in November and early December and
declines dramatically from the holiday season through the winter months. Debt
consolidation and home equity loan volume are not impacted by seasonal climate
changes and, with the exclusion of the holiday season, tend to be stable
throughout the year.
32
<PAGE> 35
BUSINESS
GENERAL
The Company is a specialized consumer finance company that originates,
purchases, sells and services consumer loans consisting primarily of home
improvement loans secured by liens on the improved property. Through its network
of Correspondents and Dealers, the Company initially originated only Title I
Loans. The Title I program provides for insurance of 90% of the principal
balance of the loan, and certain other costs. The Company began offering
Conventional Loans through its Correspondents in May 1996 and such loans have
become a significant portion of its current loan originations.
The Company's borrowers are individuals who own their home and have
appropriate verifiable income but may have limited access to traditional
financing sources due to insufficient home equity, limited credit history or
high ratios of debt service to income. These borrowers require or seek a high
degree of personalized service and prompt response to their loan applications.
As a result, the Company's borrowers generally are not averse to paying higher
interest rates that the Company charges for its loan programs as compared to the
interest rates charged by banks and other traditional financial institutions.
The Company has developed a proprietary credit index profile that includes as a
significant component the credit evaluation score methodology developed by Fair,
Isaac and Company to classify borrowers on the basis of likely future
performance. The other components of the Company's scoring system include debt
to income ratio, employment history and residence stability. The Company charges
varying rates of interest based upon the borrower's credit profile and income.
For the year ended August 31, 1996, the loans originated by the Company had a
weighted average interest rate of 14.0%.
The Company's loan originations increased to $139.3 million during the
fiscal year ended August 31, 1996 from $87.8 million during the fiscal year
ended August 31, 1995 and $8.1 million during the six months in which it
originated loans in the fiscal year ended August 31, 1994. The Company's
revenues increased to $13.6 million for the fiscal year ended August 31, 1995
from $751,000 for the fiscal year ended August 31, 1994. For the nine months
ended May 31, 1996, the Company had revenues of $17.4 million compared to $6.8
million for the nine months ended May 31, 1995. For the nine months ended May
31, 1996, the Company had net income of $4.6 million compared to $1.2 million
for the nine months ended May 31, 1995.
The Company sells substantially all the loans it originates through either
whole loan sales to third party institutional purchasers or securitizations at a
yield below the stated interest rate on the loans, retaining the right to
service the loans and receive any amounts in excess of the guaranteed yield to
the purchasers. The Company completed its first two securitizations of Title I
Loans in March and August 1996 totalling $133.1 million and expects to sell a
substantial portion of its loan production through securitizations in the
future. At May 31, 1996, the Company serviced $166.3 million of loans it had
sold.
HOME IMPROVEMENT LOAN INDUSTRY
According to data released by the Commerce Department's Bureau of the
Census, expenditures for home improvement and repairs of residential properties
have exceeded $100.0 billion per year since 1992 with 1995 expenditures
estimated at $112.6 billion. The Company targets the estimated $40.0 billion of
those expenditures which are for owner-occupied single-family properties where
improvements are performed by professional remodelers. As the costs of home
improvements escalate, home owners are seeking financing as a means to improve
their property and maintain and enhance its value. The National Association of
Home Builders Economics Forecast in 1995 estimates that home improvement
expenditures will exceed $200.0 billion by the year 2003. Two types of home
improvement financing are available to borrowers, the Title I program
administered by the FHA, which is authorized to partially insure qualified
lending institutions against losses, and uninsured loans where the lender relies
more heavily on the borrower's creditworthiness, debt capacity and the
underlying collateral. Both types of loans are generally secured with a real
estate mortgage lien on the property improved.
The conventional home improvement financing market continues to grow, as
many homeowners have limited access to traditional financing sources due to
insufficient home equity, limited credit history or high
33
<PAGE> 36
ratios of debt service to income. Conventional loan proceeds can be used for a
variety of improvements such as large remodeling projects, both interior and
exterior, kitchen and bath remodeling, room additions and in-ground swimming
pools. Borrowers also have the opportunity to consolidate a portion of their
outstanding debt in order to reduce their monthly debt service.
According to the FHA, the amount of single family Title I Loans originated
has grown from $375.0 million during 1988 to $1.3 billion during 1995. Based on
FHA data, the Company estimates that it had an 8.6% market share of the property
improvement Title I loan market in calendar 1995. Out of approximately 3,100
lenders participating in the program in 1995, according to FHA data, the Company
was the third largest originator of property improvement Title I Loans. Under
Title I, the payment of approximately 90% of the principal balance of a loan is
insured by the United States of America in the event of a payment default. The
Title I program generally limits the maximum amount of the loan to $25,000 and
restricts the type of eligible improvements and the use of the loan proceeds.
Under Title I, only property improvement loans to finance the alteration, repair
or improvement of existing single family, multifamily and non-residential
structures are allowed. The FHA does not review individual loans at the time of
approval. In the case of a Title I Loan less than $7,500, no equity is required
in the property to be improved and the loan may be unsecured.
BUSINESS STRATEGY
The Company's strategic plan is to continue to expand its lending
operations while maintaining its credit quality. The Company's strategies
include: (i) offering new loan products ; (ii) expanding its existing network of
Correspondents and Dealers ; (iii) entering new geographic markets; (iv)
realizing operational efficiencies through economies of scale; and (v) using
securitizations to sell higher volumes of loans on more favorable terms. At May
31, 1996, the Company had developed a nationwide network of approximately 265
active Correspondents and approximately 445 active Dealers. The Company's
Correspondents generally offer a wide variety of loans and its Dealers typically
offer home improvement loans in conjunction with debt consolidation. By offering
a more diversified product line, including Conventional Loans, and maintaining
its high level of service, the Company has increased the loan production from
its existing network of Correspondents. The Company anticipates that as it
expands its lending operations it will realize economies of scale thereby
reducing its average loan origination costs and enhancing its profitability. In
addition, the Company intends to continue to sell its loan production through
securitizations as opportunities arise. Through access to securitization, the
Company believes that it has the ability to sell higher volumes of loans on more
favorable terms than in whole loan sales.
Product Extension and Expansion
The Company intends to continue to review its loan programs and introduce
new loan products to meet the needs of its customers. The Company will also
evaluate products or programs that it believes are complementary to its current
products for the purpose of enhancing revenue by leveraging and enhancing the
Company's value to its existing network of Correspondents and Dealers. The
Company believes that its introduction of new loan products will enhance its
relationship with its Dealers and Correspondents and enable it to become a
single source for their various financing needs.
Expansion of Correspondent Operations
The Company seeks to increase originations of loans from select
Correspondents. The Company has expanded its product line to include
Conventional Loans to meet the needs of its existing network of Correspondents.
Prior to May 1996, the Company originated only Title I Loans. This limited its
ability to attract the more sophisticated Correspondent that offered a multitude
of loan products and, accordingly, limited the Company's market penetration. The
Company began offering Conventional Loans to existing select Correspondents in
May 1996. In order to maintain the Company's customer service excellence, the
Company has gradually increased the number of Correspondents to which it has
offered Conventional Loans. Since the Company commenced offering Conventional
Loans, the loan production of the Company's Correspondent division has
significantly increased. The Company believes that it is well positioned to
expand this segment without any material increase in concentration or quality
risks.
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Expansion of Dealer Operations
The Company seeks to expand its Dealer network and maximize loan
originations from its existing network by offering a variety of innovative
products and providing consistent and prompt service at competitive prices. The
Company will provide conventional products as well as its existing Title I
product to its Dealers in order to meet the needs of the diverse borrower
market. The Company targets Dealers that typically offer financing to their
customers and attempts to retain and grow these relationships by providing
superior customer service, personalized attention and prompt approvals and
fundings. The Company has been unable to fully meet the needs of its Dealers
because of Title I program limits on the amount and types of improvements which
may be financed. The Company intends to meet the needs of its Dealers with new
Conventional Loan programs. These programs allow for more expensive project
financing such as in-ground swimming pools and substantial remodeling as well as
financing for creditworthy borrowers with limited equity who are in need of debt
consolidation and borrowers with marginal creditworthiness and substantial
equity in their property. With this strategy, the Company believes it can
achieve further market penetration of its existing Dealer network and gain new
Dealers and market share in areas in which the Title I product is less
successful because of its restrictions.
Nationwide Geographic Expansion
The Company intends to continue to expand its Correspondent and Dealer
network on a nationwide basis and to enhance its value to its existing network.
The Company's strategy involves (i) focusing on geographic areas that the
Company currently underserves and (ii) tailoring the Company's loan programs to
better serve its existing markets and loan sources.
Maximization of Flexibility in Loan Sales
The Company employs a two-pronged strategy of disposing of its loan
originations primarily through securitizations and, to a lesser extent, through
whole loan sales. By employing this dual strategy, the Company has the
flexibility to better manage its cash flow, diversify its exposure to the
potential volatility of the capital markets and maximize the revenues associated
with the gain on sale of loans given market conditions existing at the time of
disposition. The Company has recently been approved by FNMA as a seller/servicer
of Title I Loans, as a result of which the Company is eligible to sell such
loans to FNMA on a servicing retained basis.
LOAN PRODUCTS
The Company originates Title I and Conventional Loans. Both types of loans
are typically secured by a first or junior lien on the borrower's principal
residence, although the Company occasionally originates and purchases unsecured
loans with borrowers that have an excellent credit history. Borrowers use loan
proceeds for a wide variety of home improvement projects, such as
exterior/interior remodeling, structural additions, roofing and plumbing, as
well as luxury items such as in-ground swimming pools, and for debt
consolidation. The Company lends to borrowers of varying degrees of
creditworthiness. See "Loan Processing and Underwriting."
Conventional Loans
A Conventional Loan is a non-insured home improvement or home equity loan
typically undertaken to pay for a home improvement project, home improvement and
debt consolidation combination or a debt consolidation. Substantially all of the
Conventional Loans originated by the Company are secured by a first or junior
mortgage lien on the borrower's principal residence. Underwriting for
Conventional Loans varies according to the Company's evaluation of the
borrower's credit risk and income stability as well as the underlying
collateral. The Company will rely on the underlying collateral and equity in the
property for borrowers judged to be greater credit risks. The Company targets
the higher credit quality segment of borrowers. The Company has begun
originating Conventional Loans through its Correspondent Division and plans to
begin offering such loan products to its Dealer Division.
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Title I Loan Program
The National Housing Act of 1934 (the "Housing Act"), Sections 1 and 2(a),
authorized the creation of the FHA and the Title I credit insurance program
("Title I"). Under the Housing Act, the FHA is authorized to insure qualified
lending institutions against losses on certain types of loans, including loans
to finance the alteration, repair or improvement of existing single family,
multi-family and nonresidential real property structures. Under Title I, the
payment of approximately 90% of the principal balance of a loan and certain
other amounts is insured by the United States of America in the event of a
payment default.
Title I and the regulations promulgated thereunder establish criteria
regarding (i) who may originate, acquire, service and sell Title I Loans, (ii)
Title I Loan eligibility of improvements and borrowers, (iii) the principal
amounts and terms of and security for Title I Loans, (iv) the use and
disbursement of loan proceeds, (v) verification of completion of improvements,
(vi) the servicing of Title I Loans in default and (vii) the processing of
claims for Title I insurance.
The principal amount of a secured Title I Loan may not exceed $25,000, in
the case of a loan for the improvement of a single family structure, and
$60,000, in the case of a loan for the improvement of a multi-family structure.
Loans up to a maximum of $7,500 in principal amount may qualify as unsecured
Title I Loans.
Title I Loans are required to bear fixed rates of interest and, with
limited exceptions, be fully amortizing with equal weekly, bi-weekly,
semi-monthly or monthly installment payments. Title I Loan terms may not be less
than six months nor more than 240 months in the case of secured Title I Loans or
120 months in the case of unsecured Title I Loans. Subject to other federal and
state regulations, the lender may establish the interest rate to be charged in
its discretion.
Title I generally provides for two types of Title I Loans, direct loans
("Direct Title I Loans") and dealer loans ("Dealer Title I Loans"). Direct Title
I Loans are made directly by a lender to the borrower and there is no
participation in the loan process by the contractor, if any, performing the
improvements. In the case of Dealer Title I Loans, the Dealer, a contractor
performing the improvements, assists the borrower in obtaining the loan,
contracts with the borrower to perform the improvements, executes a retail
installment contract with the borrower and, upon completion of the improvements,
assigns the retail installment contract to the Title I lender. Each Dealer must
be approved by the Title I lender in accordance with HUD requirements. Direct
Title I Loans are closed by the lender in its own name with the proceeds being
disbursed directly to the borrower prior to completion of the improvements. The
borrower is generally required to complete the improvements financed by a Direct
Title I Loan within six months of receiving the proceeds. In the case of Dealer
Title I Loans, the lender is required to obtain a completion certificate from
the borrower certifying that the improvements have been completed prior to
disbursing the proceeds to the Dealer.
The FHA charges a lender an annual fee equal to 50 basis points of the
original principal balance of a loan for the life of the loan. A Title I lender
or Title I sponsored lender is permitted to require the borrower to pay the
insurance premium with respect to the loan. In general, the borrowers pay the
insurance premiums with respect to Title I Loans originated through the
Company's Correspondents but not with respect to Title I Loans originated
through the Company's Dealers. Title I provides for the establishment of an
insurance coverage reserve account for each lender. The amount of insurance
coverage in a lender's reserve account is equal to 10% of the original principal
amount of all Title I Loans originated or purchased and reported for insurance
coverage by the lender less the amount of all insurance claims approved for
payment. The amount of reimbursement to which a lender is entitled is limited to
the amount of insurance coverage in the lender's reserve account.
LENDING OPERATIONS
The Company has two principal divisions for the origination of loans, the
Correspondent Division and the Dealer Division. The Correspondent Division
represents the Company's largest source of loan originations. Through its
Correspondent Division, the Company originates loans through a nationwide
network of Correspondents including financial intermediaries, mortgage
companies, commercial banks and savings and
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<PAGE> 39
loan institutions. The Company typically originates loans from Correspondents on
an individual loan basis, pursuant to which each loan is pre-approved by the
Company and is purchased immediately after the closing. The Correspondent
Division conducts operations from its headquarters in Atlanta, Georgia, with a
vice president of operations responsible for underwriting and processing and
five account executives supervised by the Vice President-National Marketing
responsible for developing and maintaining relationships with Correspondents. At
May 31, 1996, the Company had a network of approximately 265 active
Correspondents.
In addition to purchasing individual Direct Title I Loans and Conventional
Loans, from time to time the Correspondent Division purchases portfolios of
loans from Correspondents. In March 1994, the Company purchased a portfolio of
Direct Title I Loans originated by another financial institution, which
consisted of 210 loans with an aggregate remaining principal balance of $1.4
million, an average balance of $6,695, a weighted average interest rate of
15.46% and a weighted average remaining term of 101 months.
The Dealer Division originates Dealer Title I Loans through a network of
Dealers, consisting of home improvement construction contractors approved by the
Company, by acquiring individual retail installment contracts ("Installment
Contracts") from Dealers. An Installment Contract is an agreement between the
Dealer and the borrower pursuant to which the Dealer performs the improvements
to the property and the borrower agrees to pay in installments the price of the
improvements. Before entering into an Installment Contract with a borrower, the
Dealer assists the borrower in submitting a loan application to the Company. If
the loan application is approved, the Dealer enters into an Installment Contract
with the borrower, the Dealer assigns the Installment Contract to the Company
upon completion of the home improvements and the Company, upon receipt of the
requisite loan documentation (described below) and completion of a satisfactory
telephonic interview with the borrower, pays the Dealer pursuant to the terms of
the Installment Contract. The Dealer Division maintains 12 branch offices
located in Montvale, New Jersey, Kansas City, Missouri, Las Vegas, Nevada,
Austin, Texas, Oklahoma City, Oklahoma, Seattle, Washington, Waterford,
Michigan, Columbus, Ohio, Elmhurst, Illinois, Philadelphia, Pennsylvania,
Denver, Colorado and Woodbridge, Virginia through which it conducts its
marketing to Dealers in the state in which the branch is located as well as
certain contiguous states. The Dealer Division is operated with a vice president
of operations responsible for loan processing and underwriting, two regional
managers, and 12 field representatives supervised by the Vice President-National
Marketing who are responsible for marketing to Dealers. At May 31, 1996, the
Company had a network of approximately 445 active Dealers doing business in 23
states. The Company intends to commence offering Conventional Loans through its
Dealer Division.
Correspondents and Dealers qualify to participate in the Company's programs
only after a review by the Company's management of their reputations and
expertise, including a review of references and financial statements, as well as
a personal visit by one or more representatives of the Company. Title I requires
the Company to reapprove its Dealers annually and to monitor the performance of
those Correspondents that are sponsored by the Company. The Company's compliance
function is performed by a director of compliance and loan administration, whose
staff performs periodic reviews of portfolio loans and Correspondent and Dealer
performance and may recommend to senior management the suspension of a
Correspondent or a Dealer. The Company believes that its system of acquiring
loans through a network of Correspondents and Dealers and processing such loans
through a centralized loan processing facility has (i) assisted the Company in
minimizing its level of capital investment and fixed overhead costs and (ii)
assisted the Company in realizing certain economies of scale associated with
evaluating and acquiring loans. The Company does not believe that the loss of
any particular Correspondent or Dealer would have a material adverse effect upon
the Company. See "Loan Processing and Underwriting."
The Company originates and acquires a limited variety of loan products,
including: (i) fixed rate, secured Title I Loans, secured by single family
residences, with terms and principal amounts ranging from 60 to 240 months and
approximately $3,000 to $25,000, respectively; and (ii) fixed rate, unsecured
Title I Loans with terms and principal amounts ranging from 36 to 120 months and
approximately $2,500 to $7,500, respectively. As part of the Company's strategic
plan, the Company has commenced originating non-FHA insured Conventional Loans
utilizing its established network of Correspondents.
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The following table sets forth certain data regarding loan applications
processed and loans originated by the Company during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, NINE MONTHS ENDED MAY 31,
----------------------------------------- ------------------------------------------
1994 1995 1995 1996
------------------ ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Loan Applications:
Number processed.................... 3,512 27,608 17,053 28,699
Number approved..................... 1,984 15,956 9,722 14,100
Approval ratio...................... 56.5% 57.8% 57.0% 49.1%
Loan Originations:
Principal balance of loans:
Correspondents:
Title I........................... $5,238,311 64.4% $63,792,680 72.7% $40,405,634 76.9% $57,625,881 64.5%
Conventional...................... -- -- -- -- -- -- 384,900 0.4
---------- ----- ----------- ----- ----------- ----- ----------- -----
Total Correspondents.......... 5,238,311 64.4 63,792,680 72.7 40,405,634 76.9 58,010,781 64.9
---------- ----- ----------- ----- ----------- ----- ----------- -----
Dealers............................. 1,488,529 18.3 23,957,829 27.3 12,115,753 23.1 31,379,719 35.1
Bulk purchase....................... 1,406,000 17.3 -- -- -- -- -- --
---------- ----- ----------- ----- ----------- ----- ----------- -----
Total......................... $8,132,840 100.0% $87,750,509 100.0% $52,521,387 100.0% $89,390,500 100.0%
========== ===== =========== ===== =========== ===== =========== =====
Number of Loans:
Correspondents:
Title I........................... 338 47.4% 3,437 59.1% 2,171 62.5% 3,130 53.2%
Conventional...................... -- -- -- -- -- -- 13 0.2
---------- ----- ----------- ----- ----------- ----- ----------- -----
Total Correspondents.......... 338 47.4 3,437 59.1 2,171 62.5 3,143 53.4
---------- ----- ----------- ----- ----------- ----- ----------- -----
Dealers............................. 165 23.1 2,375 40.9 1,302 37.5 2,742 46.6
Bulk purchase....................... 210 29.5 -- -- -- -- -- --
---------- ----- ----------- ----- ----------- ----- ----------- -----
Total......................... 713 100.0% 5,812 100.0% 3,473 100.0% 5,885 100.0%
========== ===== =========== ===== =========== ===== =========== =====
Average principal balance of
loans............................. $ 11,407 $ 15,096 $ 15,123 $ 15,180
Weighted average interest rate on
loans originated.................. 14.18% 14.55% 14.47% 14.23%
Weighted average term of loans
originated (months)............... 175 188 185 194
</TABLE>
LOAN PROCESSING AND UNDERWRITING
The Company's loan application and approval process generally is conducted
over the telephone with applications usually received at the Company's
centralized processing facility from Correspondents and Dealers by facsimile
transmission. Upon receipt of an application, the information is entered into
the Company's system and processing begins. All loan applications are
individually analyzed by employees of the Company at its loan processing
headquarters in Atlanta, Georgia.
The Company has developed a proprietary credit index profile ("CIP") as a
statistical credit based tool to predict likely future performance of a
borrower. A significant component of this customized system is the credit
evaluation score methodology developed by Fair, Isaac and Company ("FICO"), a
consulting firm specializing in creating default predictive models through a
high number of variable components. The other components of the CIP include debt
to income analysis, employment stability, self employment criteria, residence
stability and occupancy status of the subject property. By utilizing both
scoring models in tandem, all applicants are considered on the basis of their
ability to repay the loan obligation while allowing the Company to maintain its
risk based pricing for each loan.
Based upon FICO score default predictors and the Company's internal CIP
score, loans are classified by the Company into gradations of descending credit
risks and quality, from "A" credits to "D" credits, with subratings within those
categories. Quality is a function of both the borrowers creditworthiness, and
the extent of the value of the collateral, which is typically a second lien on
the borrower's primary residence. "A+" credits generally have a FICO score
greater than 680. An applicant with a FICO score of less than 620 would be rated
a "C" credit unless the loan-to-value ratio was 75% or less which would raise
the credit risk to the Company to a "B" or better depending on the borrower's
debt service capability. Depending on loan size,
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typical loan-to-value ratios for "A" and "B" credits range from 90% to 125%,
while loan-to-value ratios for "C" and "D" credits range from 60% up to 90% with
extraordinary compensating factors.
The Company's underwriters review the applicant's credit history, based on
the information contained in the application as well as reports available from
credit reporting bureaus and the Company's CIP score, to determine the
applicant's acceptability under the Company's underwriting guidelines. Based on
the underwriter's approval authority level, certain exceptions to the guidelines
may be made when there are compensating factors subject to approval from a
corporate officer. The underwriter's decision is communicated to the
Correspondent or Dealer and, if approved, fully explains the proposed loan
terms. The Company endeavors to respond to the Correspondent or Dealer on the
same day the application is received.
The Company issues a commitment to purchase a pre-approved loan upon the
receipt of a fully completed loan package. Commitments indicate loan amounts,
fees, funding conditions, approval expiration dates and interest rates. Loan
commitments are generally issued for periods of up to 45 days in the case of
Correspondents and 90 days in the case of Dealers. Prior to disbursement of
funds, all loans are carefully reviewed by funding auditors to ensure that all
documentation is complete, all contingencies specified in the approval have been
met and the loan is closed in accordance with Company and regulatory procedures.
Conventional Loans
The Company has implemented policies for its Conventional Loan program that
are designed to minimize losses by adhering to high credit quality standards or
requiring adequate loan-to-value levels. The Company will only make Conventional
Loans to borrowers with an "A" or "B" credit grade using the CIP. Through August
31, 1996, the Company's portfolio of Conventional Loans originated through its
Correspondent Division had been evaluated as an "A" credit risk and had a
weighted average (i) FICO score of 661, (ii) gross debt to income ratio of 38%,
(iii) interest rate of 14.04% and (iv) loan-to-value ratio of 110%, as well as
an average loan amount of $28,569. Substantially all of the Conventional Loans
originated to date by the Company are secured by first or second mortgage liens
on single family, owner occupied properties.
Terms of Conventional Loans made by the Company, as well as the maximum
loan-to-value ratios and debt service to income coverage (calculated by dividing
fixed monthly debt payments by gross monthly income), vary depending upon the
Company's evaluation of the borrower's creditworthiness. Borrowers with lower
creditworthiness generally pay higher interest rates and loan origination fees.
As part of the underwriting process for Conventional Loans, the Company
generally requires an appraisal of the collateral property as a condition to the
commitment to purchase. The Company requires independent appraisers to be state
licensed and certified. The Company requires that all appraisals be completed
within the Uniform Standards of Professional Appraisal Practice as adopted by
the Appraisal Standards Board of the Appraisal Foundation. Prior to originating
a loan, the Company audits the appraisal for accuracy and to insure that the
appraiser used sufficient care in analyzing data to avoid errors that would
significantly affect the appraiser's opinion and conclusion. This audit includes
a review of economic demand, physical adaptability of the real estate,
neighborhood trends and the highest and best use of the real estate. In the
event the audit reveals any discrepancies as to the method and technique that
are necessary to produce a credible appraisal, the Company will perform
additional property data research or may request a second appraisal to be
performed by an independent appraiser selected by the Company in order to
substantiate further the value of the subject property.
The Company also requires a title report on all subject properties securing
its loans to verify property ownership, lien position and the possibility of
outstanding tax liens or judgments. In the case of larger loan amounts or first
liens, the Company requires a full title insurance policy in compliance with the
American Land Title Association.
Title I Loans
The Title I Loans originated by the Company are executed on forms meeting
FHA requirements as well as federal and state regulations. Loan applications and
Installment Contracts are submitted to the Company's
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processing headquarters for credit verification. The information provided in
loan applications is first verified by, among other things, (i) written
confirmations of the applicant's income and, if necessary, bank deposits, (ii) a
formal credit bureau report on the applicant from a credit reporting agency,
(iii) a title report, (iv) if necessary, a real estate appraisal and (v) if
necessary, evidence of flood insurance. Appraisals for Title I Loans, when
necessary, are generally prepared by pre-approved independent appraisers that
meet the Company's standards for experience, education and reputation. Loan
applications are also reviewed to ascertain whether or not they satisfy the
Company's underwriting criteria, including loan-to-value ratios (if non-owner
occupied), borrower income qualifications, employment stability, purchaser
requirements and necessary insurance and property appraisal requirements. The
Company will make Title I Loans to borrowers with an "A" to "C" credit grade
based on CIP score and lien position. Since the implementation of the CIP
scoring system in February 1996, through August 31, 1996, the Company's
portfolio of Title I Loans originated through its Correspondent and Dealer
Divisions had been evaluated as a "C+" and "B" credit risk, respectively, and
had a weighted average FICO score of 637 and 645, respectively. The Company's
underwriting guidelines for Title I Loans meet FHA's underwriting criteria.
Completed loan packages are sent to the Company's Underwriting Department for
predisbursement auditing and funding.
Subject to underwriting approval of an application forwarded to the Company
by a Dealer, the Company issues a commitment to purchase an Installment Contract
from a Dealer upon the Company's receipt of a fully completed loan package and
notice from the borrower of satisfactory work completion. Subject to
underwriting approval of an application forwarded to the Company by a
Correspondent, the Company issues a commitment to purchase a Title I Loan upon
the Company's receipt of a fully completed and closed loan package.
The Company's underwriting personnel review completed loan applications to
verify compliance with the Company's underwriting standards, FHA requirements
and federal and state regulations. In the case of Title I Loans being acquired
from Dealers, the Company conducts a prefunding telephonic interview with the
property owner to determine that the improvements have been completed in
accordance with the terms of the Installment Contract and to the owner's
satisfaction. The Company utilizes a nationwide network of independent
inspectors to perform on-site inspections of improvements within the timeframes
specified by the Title I program.
Since the Company does not currently originate any Title I Loans with an
original principal balance in excess of $25,000, the FHA does not individually
review the Title I Loans originated by the Company.
QUALITY CONTROL
The Company employs various quality control personnel and procedures in
order to insure that loan origination standards are adhered to and regulatory
compliance is maintained while substantial growth is experienced in the
servicing portfolio.
In accordance with Company policy, the Quality Control Department reviews a
statistical sample of loans closed each month. This review is generally
completed within 60 days of funding and circulated to appropriate department
heads and senior management. Finalized reports are maintained in the Company's
files for a period of two years from completion. Typical review procedures
include reverification of employment and income, re-appraisal of the subject
property, obtaining separate credit reports and recalculation of debt-to-income
ratios. The statistical sample is intended to cover 10% of all new loan
originations with particular emphasis on new Correspondents and Dealers.
Emphasis will also be placed on those loan sources where higher levels of
delinquency are experienced, physical inspections reveal a higher level of
non-compliance, or payment defaults occur within the first six months of
funding. On occasion, the Quality Control Department may review all loans
generated from a particular loan source in the event an initial review
determines a higher than normal number of exceptions. The account selection of
the Quality Control Department is also designed to include a statistical sample
of loans by each underwriter and each funding auditor and thereby provide
management with information as to any aberration from Company policies and
procedures in the loan origination process.
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<PAGE> 43
Under the direction of the Vice President of Credit Quality and Regulatory
Compliance, a variety of review functions are accomplished. On a daily basis, a
sample of recently approved loans are reviewed to insure compliance with
underwriting standards. Particular attention is focused on those underwriters
who have developed a higher than normal level of exceptions. In addition to this
review, the Company has developed a staff of post-disbursement review auditors
which reviews 100% of recently funded accounts, typically within two weeks of
funding. All credit reports are analyzed, debt-to-income ratios recalculated,
contingencies monitored and loan documents inspected. Exception reports are
forwarded to the respective Vice Presidents of Production as well as senior
management. The Company also employs a Physical Inspection Group that is
responsible for monitoring the inspection of all homes which are the subject of
home improvement loans. Non-compliance is tracked by loan source and serves as
another method of evaluating a loan source relationship.
The Company has expended substantial amounts in developing its Quality
Control and Compliance Department. The Company recognizes the need to monitor
its operations continually as it experiences substantial growth. Feedback from
these departments provides senior management with the information necessary to
take corrective action when appropriate, including the revision and expansion of
its operating policies and procedures.
LOAN PRODUCTION TECHNOLOGY SYSTEMS
The Company utilizes a sophisticated computerized loan origination tracking
system that allows it to monitor the performance of Dealers and Correspondents
and supports the marketing efforts of the Dealer and Correspondent Divisions by
tracking the marketing activities of field sales personnel. The system automates
various other functions such as Home Mortgage Disclosure Act and HUD reporting
requirements and routine tasks such as decline letters and the flood
certification process. The system also affords management access to a wide range
of decision support information such as data on the approval pipeline, loan
delinquencies by source, and the activities and performance of underwriters and
funders. The Company uses intercompany electronic mail, as well as an
electronic-mail link with its affiliate, PEC, to facilitate communications and
has an electronic link to PEC that allows for the automated transfer of accounts
to PEC's servicing system.
The Company is enhancing this system to provide for the automation of the
loan origination process as well as loan file indexing and routing. These
enhancements will include electronic routing of loan application facsimile
transmissions, automated credit report inquiries and consumer credit scoring
along with on-screen underwriting and approval functions. Where feasible the
system will interface with comparable systems of the Company's Dealers and
Correspondents. The Company expects that these enhancements will (i) increase
loan production efficiencies by minimizing manual processing of loan
documentation, (ii) enhance the quality of loan processing by use of uniform
electronic images of loan files and (iii) facilitate loan administration and
collections by providing easier access to loan account information. The
implementation of these enhancements is expected to be substantially completed
prior to December 1996.
LOAN SERVICING
The Company's strategy has been to retain the servicing rights associated
with the loans it originates. The Company's loan servicing activities include
responding to borrower inquiries, processing and administering loan payments,
reporting and remitting principal and interest to the whole loan purchasers who
own interests in the loans and to the trustee and others with respect to
securitizations, collecting delinquent loan payments, processing Title I
insurance claims, conducting foreclosure proceedings and disposing of foreclosed
properties and otherwise administering the loans. The Company's various loan
sale and securitization agreements allocate a portion of the difference between
the stated interest rate and the interest rate passed through to purchasers of
its loans to servicing revenue. Servicing fees are collected by the Company out
of monthly loan payments. Other sources of loan servicing revenues include late
charges and miscellaneous fees. The Company uses a sophisticated computer based
mortgage servicing system that it believes enables it to provide effective and
efficient administering of Conventional and Title I Loans. The servicing system
is an on-line real time system developed and maintained by the Company's
affiliate, PEC. It provides payment processing and cashiering functions,
automated payoff statements, on-line collections, statement and notice mailing
along
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<PAGE> 44
with a full range of investor reporting requirements. The Company has entered
into a subservicing agreement with PEC for the use of the system and continuous
support. The monthly investor reporting package includes a trial balance,
accrued interest report, remittance report and delinquency reports. Formal
written procedures have been established for payment processing, new loan
set-up, customer service, tax and insurance monitoring.
The Company is a HUD approved lender and a FNMA approved seller/servicer.
As such, it is subject to a thorough due diligence review of its policies,
procedures, and business, and is qualified to underwrite, sell and service Title
I Loans on behalf of the FHA and FNMA.
The Company's loan collection functions are organized into two areas of
operation: routine collections and management of nonperforming loans.
Routine collection personnel are responsible for collecting loan payments
that are less than 60 days contractually past due and providing prompt and
accurate responses to all customer inquiries and complaints. These personnel
report directly to the Company's Vice President of Loan Administration.
Borrowers are contacted on the due date for each of the first six payments in
order to encourage continued prompt payment. Generally, after six months of
seasoning, collection activity will commence if a loan payment has not been made
within five days of the due date. Borrowers usually will be contacted by
telephone at least once every five days and also by written correspondence
before the loan becomes 60 days delinquent. With respect to loan payments that
are less than 60 days late, routine collections personnel utilize a system of
mailed notices and telephonic conferences for reminding borrowers of late
payments and encouraging borrowers to bring their accounts current. Installment
payment invoices and return envelopes are mailed to each borrower on a monthly
basis. The Company has bilingual customer service personnel available.
Once a loan becomes 30 days past due, a collection supervisor generally
analyzes the account to determine the appropriate course of remedial action. On
or about the 45th day of delinquency, the supervisor determines if the property
needs immediate inspection to determine if it is occupied or vacant. Depending
upon the circumstances surrounding the delinquent account, a temporary
suspension of payments or a repayment plan to return the account to current
status may be authorized by the Vice President of Loan Administration. In any
event, it is the Company's policy to work with the delinquent customer to
resolve the past due balance before Title I claim processing or legal action is
initiated.
Nonperforming loan management personnel are responsible for collecting
severely delinquent loan payments (over 60 days late), filing Title I insurance
claims or initiating legal action for foreclosure and recovery. Operating from
the Company's headquarters in Atlanta, Georgia, collection personnel are
responsible for collecting delinquent loan payments and seeking to mitigate
losses by providing various alternatives to further actions, including
modifications, special refinancing and indulgence plans. Title I insurance claim
personnel are responsible for managing Title I insurance claims, utilizing a
claim management system designed to track insurance claims for Title I Loans so
that all required conditions precedent to claim perfection are met. In the case
of Conventional Loans, a foreclosure coordinator will review all previous
collection activity, evaluate the lien and equity position and obtain any
additional information as necessary. The ultimate decision to foreclose, after
all necessary information is obtained, is made by an officer of the Company.
Foreclosure regulations and practices and the rights of the owner in default
vary from state to state, but generally procedures may be initiated if: (i) the
loan is 90 days or more delinquent; (ii) a notice of default on a senior lien is
received; or (iii) the Company discovers circumstances indicating potential loss
exposure.
Net loan servicing income was $873,000 and $3.0 million for the year ended
August 31, 1995 and the nine month period ended May 31, 1996, respectively,
constituting 6.4% and 17.2%, respectively, of the Company's total revenues in
such periods. As of May 31, 1996, the Company had increased the size of the loan
portfolio it services to approximately $171.0 million from approximately $92.3
million as of August 31, 1995, an increase of approximately 85.3%. The Company's
loan servicing portfolio is subject to reduction by normal amortization,
prepayment of outstanding loans and defaults.
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<PAGE> 45
The following table sets forth certain information regarding the Company's
loan servicing for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, NINE MONTHS
---------------- ENDED
1994(1) 1995 MAY 31, 1996
------ ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Servicing portfolio at beginning of period.............. $ -- $ 8,026 $ 92,286
Additions to servicing portfolio........................ 8,317 87,757 89,391
Reductions in servicing portfolio(2).................... 291 3,491 10,629
Servicing portfolio (period end):
Company-owned loans................................... 1,471 3,720 4,763
Sold loans............................................ 6,555 88,566 166,285
------ ------- --------
Total......................................... $8,026 $92,286 $171,048
====== ======= ========
</TABLE>
- ---------------
(1) The Company commenced originating loans in March 1994.
(2) Reductions result from scheduled payments, prepayments and write-offs during
the period.
The following table sets forth the delinquency and Title I insurance claims
experience of loans serviced by the Company as of the dates indicated:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, MAY 31,
1994(1) 1995 1996
---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Delinquency period(2)
31-60 days past due................................... 2.06% 2.57% 2.41%
61-90 days past due................................... 0.48 0.73 0.78
91 days and over past due............................. 0.26 0.99 4.34(3)
91 days and over past due, net of claims filed(4)..... 0.26 0.99 2.38
Claims filed with HUD(5)................................ -- -- 1.96%
Number of Title I insurance claims...................... 1 5 219
Total servicing portfolio at end of period.............. $8,026 $ 92,286 $171,048
Amount of FHA insurance available....................... 831 9,552 18,084(6)
Amount of FHA insurance available as a percentage of
loans serviced........................................ 10.36% 10.35% 10.57%(6)
Losses on liquidated loans(7)........................... $ -- $ -- $ 7.6
</TABLE>
- ---------------
(1) The Company commenced originating loans in March 1994.
(2) Represents the dollar amount of delinquent loans as a percentage of total
dollar amount of loans serviced by the Company (including loans owned by
the Company) as of the date indicated.
(3) During the nine-month period ended May 31, 1996, the processing and payment
of claims filed with HUD was delayed.
(4) Represents the dollar amount of delinquent loans net of delinquent Title I
Loans for which claims have been filed with HUD and payment is pending as a
percentage of total dollar amount of loans serviced by the Company
(including loans owned by the Company) as of the date indicated.
(5) Represents the dollar amount of delinquent Title I Loans for which claims
have been filed with HUD and payment is pending as a percentage of total
dollar amount of loans serviced by the Company (including loans owned by
the Company) as of the date indicated.
(6) If all claims with HUD had been processed as of period end, the amount of
FHA insurance available would have been reduced to $15,063,000, which as a
percentage of loans serviced would have been 8.98%.
(7) A loss is recognized upon receipt of payment of a claim or final rejection
thereof. Claims paid in a period may relate to a claim filed in an earlier
period. Since the Company commenced its Title I lending operations in March
1994, there has been no final rejection of a claim by the FHA. Aggregate
losses on liquidated Title I Loans related to 29 of the 225 Title I
insurance claims made by the Company since commencing operations through
May 31, 1996. Losses on liquidated loans will increase as the balance of
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<PAGE> 46
the claims are processed by HUD. The Company has received an average
payment from HUD equal to 90% of the outstanding principal balance of such
Title I Loans, plus appropriate interest and costs.
The Company has received an average amount equal to 96.68% of the
outstanding principal balance of Title I Loans for which claims have been made,
each payment including certain interest and costs. The processing and payment of
claims filed with HUD have been delayed for a number of reasons including (i)
furloughs experienced by HUD personnel in December 1995 and January 1996, (ii)
the growth in the volume of Title I Loans originated from approximately $750
million in 1994 to $1.3 billion in 1995 without a corresponding increase in HUD
personnel to service claims and (iii) the transition of processing operations to
regional centers during the second and third quarters of 1996. It is expected
that once appropriate staffing and training have been completed at HUD regional
centers, the timeframe for payment of HUD claims will be significantly
shortened.
Sale of Loans
The Company customarily sells the loans it originates to third party
purchasers or, in the case of a third party purchaser not eligible to own a
Title I Loan, sells Title I Loan participation certificates backed by Title I
Loans. Whether the Company sells a loan or a loan participation, the Company
typically retains the right to service the loans for a servicing fee. The
Company typically sells loans for an amount approximating the then remaining
principal balance. The purchasers are entitled to receive interest at yields
below the stated interest rates of the loans. In connection with such sales, the
Company is typically required to deposit into a reserve account the excess
servicing spread received by it, less its servicing fee, up to a specified
percentage of the principal balance of the loans, to fund shortfalls in
collections that may result from borrower defaults.
The following table sets forth certain data regarding Title I Loans sold by
the Company during the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST
31, NINE MONTHS
------------------ ENDED
1994(1) 1995 MAY 31, 1996
------ ------- ------------
<S> <C> <C> <C>
Principal amount of loans sold to third party
purchasers........................................ $6,555 $85,363 $ 88,073
Gain on sales of loans to third party purchasers.... 579 12,233 11,621
Net unrealized gain on mortgage related
securities........................................ -- -- 2,182
Weighted average stated interest rate on loans sold
to third party purchasers......................... 14.15% 14.53% 14.26%
Weighted average pass-through interest rate on loans
sold to third party purchasers.................... 8.53 8.42 7.56
Weighted average excess spread retained on loans
sold.............................................. 5.62 6.11 6.70
</TABLE>
--------------------
(1) The Company commenced originating loans in March 1994.
At August 31, 1995 and May 31, 1996, the Company's balance sheet reflected
excess servicing rights of approximately $14.5 million and $12.8 million,
respectively. The Company also retains mortgage related securities through
securitization transactions. At May 31, 1996, the Company's balance sheet
reflected $15.1 million of mortgage related securities. The Company derives a
significant portion of its income by realizing gains upon the sale of loans and
loan participations due to the excess servicing rights associated with such
loans. Excess servicing rights represent the excess of the interest rate payable
by a borrower on a loan over the interest rate passed through to the purchaser
of an interest in the loan, less the Company's normal servicing fee and other
applicable recurring fees. Mortgage related securities consist of certificates
representing the excess of the interest rate payable by an obligor on a sold
loan over the yield on pass through certificates sold pursuant to a
securitization transaction, after payment of servicing and other fees. When
loans are sold, the Company recognizes as current revenue the present value of
the excess servicing rights expected to be realized over the anticipated average
life of the loans sold less future estimated credit losses relating to the loans
sold. The capitalized excess servicing rights and valuation of mortgage related
securities are computed using prepayment, default and interest rate assumptions
that the Company believes are reasonable based on experience with its own
portfolio, available market data and ongoing consultation with industry
participants. The amount
44
<PAGE> 47
of revenue recognized by the Company upon the sale of loans or loan
participations will vary depending on the assumptions utilized. The weighted
average discount rate used to determine the present value of the balance of
capitalized excess servicing rights reflected on the Company's balance sheet at
August 31, 1995 and May 31, 1996 was approximately 12.0%.
Capitalized excess servicing rights are amortized over the lesser of the
estimated or actual remaining life of the underlying loans as an offset against
the excess servicing rights component of servicing income actually received in
connection with such loans. Although the Company believes that it has made
reasonable estimates of the excess servicing rights likely to be realized, the
rate of prepayment and the amount of defaults utilized by the Company are
estimates and experience may vary from its estimates. The gain recognized by the
Company upon the sale of loans will have been overstated if prepayments or
defaults are greater than anticipated. Higher levels of future prepayments would
result in capitalized excess servicing rights amortization expense exceeding
realized excess servicing rights, thereby adversely affecting the Company's
servicing income and resulting in a charge to earnings in the period of
adjustment. Similarly, if delinquencies or liquidations were to be greater than
was initially assumed, capitalized excess servicing rights amortization would
occur more quickly than originally anticipated, which would have an adverse
effect on servicing income in the period of such adjustment. The Company
periodically reviews its prepayment assumptions in relation to current rates of
prepayment and, if necessary, reduces the remaining asset to the net present
value of the estimated remaining future excess servicing income. Rapid increases
in interest rates or competitive pressures may result in a reduction of future
excess servicing income, thereby reducing the gains recognized by the Company
upon the sale of loans or loan participations in the future.
At August 31, 1995 and May 31, 1996, the Company's balance sheet reflected
mortgage servicing rights of approximately $1.1 million and $2.7 million,
respectively. The fair value of capitalized mortgage servicing rights was
estimated by taking the present value of expected net cash flows from mortgage
servicing using assumptions the Company believes market participants would use
in their estimates of future servicing income and expense, including assumptions
about prepayment, default and interest rates. Capitalized mortgage servicing
rights are amortized in proportion to and over the period of estimated net
servicing income. The estimate of fair value was based on a range of 100 to 125
basis points per year servicing fee, reduced by estimated costs of servicing,
and using a discount rate of 12% in the year ended August 31, 1995 and the nine
months ended May 31, 1996. The Company has developed its assumptions based on
experience with its own portfolio, available market data and ongoing
consultation with industry participants.
In furtherance of the Company's strategy to sell loans through
securitizations, in March 1996 and August 1996, the Company completed its first
two securitizations pursuant to which it sold pools of $84.2 million and $48.9
million, respectively, of Title I Loans. The Company previously reacquired at
par $77.8 million and $36.2 million of such loans, respectively. Pursuant to
these securitizations, pass-through certificates evidencing interests in the
pools of loans were sold in a public offering. The Company continues to
subservice the sold loans and is entitled to receive from payments in respect of
interest on the sold loans a servicing fee equal to 1.25% of the balance of each
loan with respect to the March transaction and 1.0% with respect to the August
transaction. In addition, with respect to both transactions, the Company
received certificates (carried as "Mortgage related securities" on the Company's
balance sheet), representing the interest differential, after payment of
servicing and other fees, between the interest paid by the obligors of the sold
loans and the yield on the sold certificates. The Company may be required to
repurchase loans that do not conform to the representations and warranties made
by the Company in the securitization agreements.
The Company typically earns net interest income during the "warehouse"
period between the closing or assignment of a loan and its delivery to a
purchaser. On loans held for sale, the Company earns interest at long-term
rates, financed by lines of credit which bear interest at short-term interest
rates. Normally, short-term interest rates are lower than long-term interest
rates and the Company earns a positive spread on its loans held for sale. The
average warehouse period for a loan ranges from six to 90 days, and the balance
of loans in warehouse was approximately $1.5 million and $3.1 million as of
August 31, 1995 and May 31, 1996, respectively. The Company's interest income,
net of interest expense was $473,000 and $538,000 for the year ended August 31,
1995 and the nine months ended May 31, 1996, respectively.
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<PAGE> 48
SEASONALITY
Home improvement loan volume tracks the seasonality of home improvement
contract work. Volume tends to build during the spring and early summer months,
particularly with regard to pool installations. A decline is typically
experienced in late summer and early fall until temperatures begin to drop. This
change in seasons precipitates the need for new siding, window and insulation
contracts. Peak volume is experienced in November and early December and
declines dramatically from the holiday season through the winter months. Debt
consolidation and home equity loan volume are not impacted by seasonal climate
changes and, with the exclusion of the holiday season, tend to be stable
throughout the year.
COMPETITION
The consumer finance industry is highly competitive. Competitors in the
home improvement and debt consolidation loan business include mortgage banking
companies, commercial banks, credit unions, thrift institutions, credit card
issuers and finance companies. Certain of the Company's competitors are
substantially larger and have more capital and other resources than the Company.
The Company faces substantial competition within both the home improvement
and debt consolidation loan industry. The home improvement and debt
consolidation loan industry is dominated by widely diversified mortgage banking
companies, commercial banks, savings and loan institutions, credit card
companies, financial service affiliates of Dealers and unregulated financial
service companies, many of which have substantially greater personnel and
financial resources than those of the Company. At present, these types of
competitors dominate the home improvement and debt consolidation loan industry;
however, no one lender or group of lenders dominates the industry. The Company
believes that Greentree Financial Corp., The Money Store, First Plus Financial
Inc., Associates First Capital Corporation and Empire Funding Corp. are some of
the its largest direct competitors. The Company competes principally by
providing prompt, professional service to its Correspondents and Dealers and,
depending on circumstances, by providing competitive lending rates.
Competition can take many forms including convenience in obtaining a loan,
customer service, marketing and distribution channels, amount and term of the
loan, and interest rates. In addition, the current level of gains realized by
the Company and its existing competitors on the sale of loans could attract
additional competitors into this market with the possible effect of lowering
gains on future loan sales owing to increased loan origination competition.
GOVERNMENT REGULATION
The Company's consumer lending activities are subject to the Federal
Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity
Protection Act of 1994), ECOA, the Fair Credit Reporting Act of 1970, as
amended, RESPA and Regulation X, the Home Mortgage Disclosure Act, the Federal
Debt Collection Practices Act and the Housing Act, as well as other federal and
state statutes and regulations affecting the Company's activities. Failure to
comply with these requirements can lead to loss of approved status, termination
or suspension of servicing contracts without compensation to the servicer,
demands for indemnifications or mortgage loan repurchases, certain rights of
rescission for mortgage loans, class action lawsuits and administrative
enforcements actions.
The Company presently is subject to the rules and regulations of, and
examinations by, HUD, FHA and other federal and state regulatory authorities
with respect to originating, underwriting, funding, acquiring, selling and
servicing consumer and mortgage loans. In addition, there are other federal and
state statutes and regulations affecting such activities. These rules and
regulations, among other things, impose licensing obligations on the Company,
establish eligibility criteria for loans, prohibit discrimination, provide for
inspection and appraisals of properties, require credit reports on prospective
borrowers, regulate payment features and, in some cases, fix maximum interest
rates, fees and loan amounts. The Company is required to submit annual audited
financial statements to various governmental regulatory agencies that require
the maintenance of specified net worth levels. The Company's affairs are also
subject to examination, at all times, by the Federal Housing Commissioner to
assure compliance with FHA regulations, policies and procedures. For more
information regarding regulation of the Company under Title I, see "Title I Loan
Program."
46
<PAGE> 49
The Company is a HUD approved Title I mortgage lender and is subject to the
supervision of HUD. The Company is also a FNMA approved seller/servicer and is
subject to the supervision of FNMA. In addition, the Company's operations are
subject to supervision by state authorities (typically state banking or consumer
credit authorities), many of which generally require that the Company be
licensed to conduct its business. This normally requires state examinations and
reporting requirements on an annual basis.
The Federal Consumer Credit Protection Act ("FCCPA") requires a written
statement showing an annual percentage rate of finance charges and requires that
other information be presented to debtors when consumer credit contracts are
executed. The Fair Credit Reporting Act requires certain disclosures to
applicants concerning information that is used as a basis for denial of credit.
ECOA prohibits discrimination against applicants with respect to any aspect of a
credit transaction on the basis of sex, marital status, race, color, religion,
national origin, age, derivation of income from public assistance program, or
the good faith exercise of a right under the FCCPA.
The interest rates which the Company may charge on its loans are subject to
state usury laws, which specify the maximum rate which may be charged to
consumers. In addition, both federal and state truth-in-lending regulations
require that the Company disclose to its customers prior to execution of the
loans, all material terms and conditions of the financing, including the payment
schedule and total obligation under the loans. The Company believes that it is
in compliance in all material respects with such regulations.
EMPLOYEES
As of May 31, 1996, the Company had 153 employees, including seven
executive officers, 67 managerial and staff professional personnel, 19 marketing
and sales specialists and 60 general administrative and support personnel and
loan processors. None of the Company's employees is represented by a collective
bargaining unit. The Company believes that its relations with its employees are
satisfactory.
PROPERTIES
In order to accommodate the Company's growth, a lease of new corporate
headquarters was executed in April 1996 for 45,950 square feet at 1000 Parkwood
Circle, Atlanta, Georgia. This lease is for an initial six year term expiring
August 2002 with a conditional option to extend the term to August 2007. After
an initial partial rent abatement period of six months, monthly rentals will be
$73,711 plus a pro rata share of any operating expense increase. This lease rate
will escalate 2% per year throughout the term of the lease. The Company also
leases 10,478 square feet of office space at its prior headquarters location in
Atlanta, Georgia, at a rental of $13,193 per month, pursuant to a lease that
expires in March 1999. The Company intends to sublease this office space for the
remaining term of its lease. The Company also leases office space on short-term
or month-to-month leases in Kansas City, Missouri, Austin, Texas, Montvale, New
Jersey, Oklahoma City, Oklahoma, Seattle, Washington, Waterford, Michigan,
Columbus, Ohio, Elmhurst, Illinois, Philadelphia, Pennsylvania, Denver, Colorado
and Woodbridge, Virginia.
LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is, from time to time,
named in lawsuits. The Company believes that it has meritorious defenses to
these lawsuits and that resolution of these matters will not have a material
adverse effect on the business or financial condition of the Company.
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<PAGE> 50
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Jerome J. Cohen............................ 68 Chairman of the Board and Chief Executive
Officer
Jeffrey S. Moore........................... 38 President, Chief Operating Officer and
Director
James L. Belter............................ 49 Executive Vice President and Chief
Financial Officer
Michael G. Ebinger......................... 40 Vice President, National Marketing
Robert Nederlander......................... 63 Director
Herbert B. Hirsch.......................... 60 Director
Don A. Mayerson............................ 69 Director
</TABLE>
Jerome J. Cohen has been Chairman of the Board and Chief Executive Officer
of the Company since April 1995. Mr. Cohen has been the President and a Director
of Mego Financial since January 1988. Since April 1992, Mr. Cohen has been a
Director of Atlantic Gulf Communities Inc., formerly known as General
Development Corporation, a publicly held company engaged in land development,
land sales and utility operations in Florida and Tennessee. Mr. Cohen does not
currently serve on a full time basis in his capacities with the Company.
Jeffrey S. Moore has been the President of the Company since April 1995 and
Chief Operating Officer since December 1993. In addition, Mr. Moore has served
as a director of the Company since June 1992. Prior to being elected President,
Mr. Moore served as an Executive Vice President of the Company from June 1992 to
March 1995. Mr. Moore was the founder and from August 1984 until March 1992,
served as President, Chief Executive Officer and a director of Empire Funding
Corp., a privately-held, nationwide consumer finance company specializing in
originating, purchasing, selling and servicing FHA Title I and other home
improvement mortgage loans. Mr. Moore serves as a director of the Title One Home
Improvement Lenders Association and is a member of its Legislative and
Regulatory Affairs Committee.
James L. Belter has been Executive Vice President of the Company since
April 1995 and Chief Financial Officer since September 1996. Prior to joining
the Company, from May 1989 to September 1993, Mr. Belter served as the
President, Chief Operating Officer and a director of Del-Val Capital
Corporation, a commercial finance company. From April 1985 to April 1989, Mr.
Belter served as Executive Vice President of Security Capital Credit
Corporation, a commercial finance company, where he was responsible for the
formation of the company's installment receivable lending division. From
November 1976 to April 1985, Mr. Belter served as a corporate Vice President of
Barclays Business Credit, Inc. where he managed a unit specializing in financing
portfolios of consumer contracts including residential second mortgages, home
improvement contracts, timeshare and land sales.
Michael G. Ebinger has served as Vice President of National Marketing since
June 1995. From January 1995 to June 1995, Mr. Ebinger served as Director of
National Accounts of the Correspondent Division. From 1989 to 1994, Mr. Ebinger
served as Director of National Accounts for the home improvement division of
Greentree Financial Corporation, where he developed and managed the national
account program which created a network of over 1,000 home improvement
contractors. From 1987 to 1989, he served as West Coast Regional Manager for
VIPCO, a division of Crane Plastics, a manufacturer of replacement vinyl siding.
From 1986 to 1987, he served as National Accounts Manager for Security Pacific
Financial Services Corporation in its Manufacturer Funding Division and was
responsible for the marketing of its indirect home improvement loan programs to
home improvement contractors.
Robert Nederlander has been a Director of the Company since September 1996.
Mr. Nederlander has been the Chairman of the Board and Chief Executive Officer
of Mego Financial since January 1988.
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<PAGE> 51
Mr. Nederlander is a member of the Company's Audit Committee. Since July 1995,
Mr. Nederlander has served on the Board of Directors of Hospitality Franchise
Systems, Inc. Mr. Nederlander has been President of Nederlander Organization,
Inc., a company principally engaged in the theatrical business, since 1981.
Since May 1989, Mr. Nederlander served as the Chairman of the Board and Chief
Executive Officer of Allis-Chalmers Corporation, a publicly held company engaged
in the machinery, equipment repair and women's shoulder pad business, and since
November 1993, Mr. Nederlander has served as Vice Chairman of Allis-Chalmers
Corporation. Between August 1990 and December 1991, Mr. Nederlander was the
managing general partner of the New York Yankees Baseball Club. Since April
1988, Mr. Nederlander has been the Chairman of the Board of Riddell Sports,
Inc., a publicly held company principally engaged in the manufacture of football
helmets and other athletic protective equipment and the licensing of trademarks.
Herbert B. Hirsch has been a Director of the Company since the Company's
formation in June 1992. Mr. Hirsch has been the Senior Vice President, Chief
Financial Officer, Treasurer and a Director of Mego Financial since January
1988. Mr. Hirsch served as Vice President and Treasurer of the Company from June
1992 to September 1996.
Don A. Mayerson has been a Director of the Company since the Company's
formation in June 1992. Mr. Mayerson has been the Secretary of Mego Financial
since January 1988 and the Executive Vice President and General Counsel of Mego
Financial since April 1988. Mr. Mayerson served as Vice President, General
Counsel and Secretary of the Company from June 1992 to September 1996.
The Company's officers are elected annually by the Board of Directors and
serve at the discretion of the Board of Directors. The Company's directors hold
office until the next annual meeting of stockholders and until their successors
have been duly elected and qualified. The Company reimburses all directors for
their expenses in connection with their activities as directors of the Company.
Directors of the Company who are also employees of the Company do not receive
additional compensation for their services as directors. Members of the Board of
Directors of the Company who are not employees of the Company receive an annual
fee of $20,000 for four Board meetings per year plus $2,500 for each additional
meeting attended in person and $1,000 for each additional telephonic meeting
attended. Directors are also reimbursed for their expenses incurred in attending
meetings of the Board of Directors and its committees.
KEY EMPLOYEES
Robert Bellacosa -- Mr. Bellacosa, age 54, has served as Vice President of
Financial Management since October 1993 and Secretary since September 1996. From
May 1989 to October 1993, Mr. Bellacosa served as Senior Vice President of
Accounting for Del-Val Capital Corp. From May 1985 to May 1989, he served as
Vice President of Security Capital Credit Corp. where he was responsible for
loan administration of commercial real estate and term receivable lending
functions. From 1974 to 1985, he served as Vice President for Aetna Business
Credit, Inc. which was purchased by Barclays American Business Credit, Inc. and
was responsible for the management of loan administration for special term
receivables.
Jack Elrod -- Mr. Elrod, age 40, has served as Vice President of Loan
Administration since May 1995. From March 1994 to May 1995, Mr. Elrod served as
a Senior Underwriter for ITT Financial Corporation. From March 1993 to March
1994, he served as Branch Manager for Commercial Credit Corporation and from
January 1977 to February 1993, he served as Assistant Vice President and
District Manager of Household Finance Corporation.
Samuel Schultz -- Mr. Schultz, age 47, has served as Vice President of
Credit Quality since June 1996 and as Vice President of the Company's Dealer
Division Operations from December 1993 until June 1996. Mr. Schultz was a
consultant to the Company from June 1993 until December 1993. From September
1990 to June 1993, he served as Vice President of Underwriting for Empire
Funding Corp., a nationwide consumer finance company specializing in the
purchase of FHA Title I and other home improvement mortgage loans. From February
1988 to September 1990, he served as a Senior Manager for Avco Financial
Services. From October 1985 to February 1988, he served as a Department Manager
for Associates Financial Services Inc. Prior to 1985, and since 1971, Mr.
Schultz's experience includes collections and originations of consumer finance
loans for Postal Finance, Turner Mortgage and other consumer finance companies.
49
<PAGE> 52
Jeffrey Rast -- Mr. Rast, age 46, has served as Vice President of
Correspondent Division Operations since July 1994. From March 1989 to December
1993, Mr. Rast served as Senior Vice President and Regional Manager for Barclays
American Financial Corp. From December 1987 to March 1989, he served as
President and Chief Operating Officer of Bankwest Industrial Bank. From January
1981 to December 1987, he served as Vice President and Regional Manager of
Manufacturers Hanover Financial Services. From January 1974 to December 1982, he
served in various positions including District and Branch Manager for ITT
Financial Services.
Yancy Lockie -- Mr. Lockie, age 33, has served as Vice President of Dealer
Division Operations since July 1996. From September 1993 to June 1996, Mr.
Lockie served as Manager of Real Estate Underwriting for NationsCredit Financial
Services and was responsible for underwriting of real estate and indirect home
improvement loans for 245 branches and from December 1990 to August 1993, he
served as Branch Manager for NationsCredit Financial Services. From 1987 to
November 1990, he served as a Senior Assistant Manager and Senior Underwriter
for Household Finance Corporation.
John Kostelich -- Mr. Kostelich, age 33, has served as Vice President of
Project Management since June 1996 and is responsible for developing and
implementing the Company's policies and procedures for new and diversified loan
products. From June 1995 to June 1996, Mr. Kostelich served as Director of
Compliance for the Company. From 1985 to 1995, he served in various positions
for ITT Consumer Financial Corporation, including Director of Quality Control
and Correspondent Support Operations, Senior Compliance Officer, in which he
managed special projects for the Chairman of the company, Regional Manager and
Branch Manager.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation earned by the Company's chief executive officer and each
of the three other executive officers whose annual salary and bonus during the
fiscal years presented exceeded $100,000 (the "Named Executive Officers"). The
Company did not grant any stock options to the Named Executive Officers during
the fiscal year ended August 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------------- ------------------------
OTHER NUMBER OF
FISCAL ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) GRANTED(2) COMPENSATION
- ------------------------------ ------ -------- ------- --------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Jerome J. Cohen(3)............ 1994 $ 75,000 $ -- $ -- -- $ --
Chairman of the Board and 1995 64,388 -- -- -- --
Chief Executive Officer 1996 65,748 -- -- -- --
Jeffrey S. Moore.............. 1994 $126,771 $ -- $ 5,140 25,000 $ --
President and Chief 1995 200,003 -- 13,963 -- --
Operating Officer 1996 286,087 86,385 13,625 -- --
James L. Belter............... 1994 $ 98,079 $ -- $ -- 15,000 $ --
Executive Vice President and 1995 150,003 50,000 1,510 -- --
Chief Financial Officer 1996 159,080 50,000 4,330 -- --
Michael G. Ebinger............ 1994 $ -- $ -- $ -- -- $ --
Vice President 1995 55,320 -- 5,609 15,000 --
1996 110,011 11,500 -- -- --
</TABLE>
- ---------------
(1) Other annual compensation consists of car allowances, contributions to
401(k) plans and moving expenses.
(2) Represents options to purchase shares of Mego Financial's common stock paid
as compensation for services rendered to the Company.
(3) Mr. Cohen's compensation is included in the management fees paid to PEC. See
"Certain Transactions."
50
<PAGE> 53
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement with Jeffrey S. Moore
which expires on December 31, 1998 and which provides for an annual base salary
of $200,000. In addition, Mr. Moore is to receive an incentive bonus each
calendar year equal to 1.5% of the Company's after tax income, provided that
certain scheduled sales goals are met, as well as deferred compensation of 1% of
the gain on sale from sales of loans during such year, payable in 48 equal
installments. In the event payments of the incentive bonus and deferred
compensation due in any year exceed $500,000, then the excess over $500,000 is
only payable with the approval of the Company's Board of Directors.
COMPANY STOCK OPTION PLAN
Under the Company's Stock Option Plan (the "Plan"), which will be effective
upon the consummation of the Common Stock Offering, 900,000 shares of Common
Stock will be reserved for issuance upon exercise of stock options. The options,
even if vested, may not be exercised without the written approval of Mego
Financial during the Eighty Percent Period. Such shares will be accompanied by
stock appreciation rights which will become exercisable as determined by the
Board, or a Committee thereof, only if Mego Financial does not give approval to
the exercise of the option. The Plan is designed as a means to retain and
motivate key employees and directors. The Company's Board of Directors, or a
committee thereof, administers and interprets the Plan and is authorized to
grant options thereunder to all eligible employees and directors of the Company,
except that no incentive stock options (as defined in Section 422 of the
Internal Revenue Code) may be granted to a director who is not also an employee
of the Company or a subsidiary.
The Plan will provide for the granting of both incentive stock options and
nonqualified stock options. Options will be granted under the Plan on such terms
and at such prices as determined by the Company's Board of Directors, or a
committee thereof, except that the per share exercise price of incentive stock
options cannot be less than the fair market value of the Common Stock on the
date of grant. Each option is exercisable after the period or periods specified
in the related option agreement, but no option may be exercisable after the
expiration of ten years from the date of grant. Options granted to an individual
who owns (or is deemed to own) at least 10% of the total combined voting power
of all classes of stock of the Company must have an exercise price of at least
110% of the fair market value of the Common Stock on the date of grant and a
term of no more than five years. The Plan also authorizes the Company to make or
guarantee loans to optionees to enable them to exercise their options. Such
loans must (i) provide for recourse to the optionee, (ii) bear interest at a
rate no less than the prime rate of interest, and (iii) be secured by the shares
of Common Stock purchased. The Board of Directors has the authority to amend or
terminate the Plan, provided that no such action may impair the rights of the
holder of any outstanding option without the written consent of such holder, and
provided further that certain amendments of the Plan are subject to stockholder
approval. Unless terminated sooner, the Plan will continue in effect until all
options granted thereunder have expired or been exercised, provided that no
options may be granted ten years after commencement of the Plan.
The following table sets forth information with respect to options to be
granted under the Plan upon consummation of the Common Stock Offering to (i)
each Named Officer and (ii) each director and nominee for director. All of the
options are nonstatutory, are being granted with an exercise price equal to the
offering price, are subject to the consummation of the Common Stock Offering and
are being granted in 1996.
<TABLE>
<CAPTION>
NAME OF GRANTEE NUMBER OF SHARES
- ----------------------------------------------------------------------------- ----------------
<S> <C>
Robert Nederlander...........................................................
Jerome J. Cohen..............................................................
Jeffrey S. Moore.............................................................
James L. Belter..............................................................
Herbert B. Hirsch............................................................
Don A. Mayerson..............................................................
</TABLE>
51
<PAGE> 54
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not currently have a Compensation Committee. Mr. Cohen
participated in deliberations concerning compensation of executive officers
during fiscal 1996. Mr. Cohen's compensation was determined by the Board of
Directors of Mego Financial.
BONUS PLAN
The Company does not currently have a bonus plan but anticipates it may
adopt a bonus plan pursuant to which an aggregate of not in excess of 2 1/2% of
pretax income will be distributed to officers and key employees.
PRINCIPAL STOCKHOLDERS
Mego Financial currently owns 10,000,000 shares of Common Stock (after
giving effect to the 1,600-for-one stock split), representing 100% of all the
issued and outstanding Common Stock of the Company. After giving effect to the
issuance of the Common Stock pursuant to the Common Stock Offering, Mego
Financial will own approximately 83.3% of the issued and outstanding Common
Stock of the Company (approximately 81.3% if the underwriters of the Common
Stock Offering exercise their over-allotment option in full).
The following table sets forth, as of the date of this Prospectus,
information with respect to the beneficial ownership of the common stock of Mego
Financial by (i) each person known by the Company to be the beneficial owner of
more than 5% of the outstanding shares of common stock of Mego Financial, (ii)
each director of the Company, (iii) each of the Named Executive Officers and
(iv) all directors and executive officers of the Company as a group. Unless
otherwise noted, the Company believes that all persons named in the table have
sole voting and investment power with respect to all shares of common stock of
Mego Financial beneficially owned by them.
<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP
ATTRIBUTABLE TO
THE COMPANY
---------------------------
BEFORE THE AFTER THE
AMOUNT AND NATURE OF COMMON STOCK COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP OFFERING OFFERING
- ------------------------------------------------- -------------------- ------------ ------------
<S> <C> <C> <C>
Robert Nederlander(2)............................ 2,126,697 11.6% 9.7%
Eugene I. Schuster and Growth Realty Inc.
("GRI")(3)..................................... 1,933,634 10.5 8.7
Jerome J. Cohen(4)............................... 1,120,823 6.1 5.1
Jeffrey S. Moore(5).............................. 5,000 * *
James L. Belter(6)............................... 3,000 * *
Michael G. Ebinger(7)............................ 3,000 * *
Herbert B. Hirsch(8)............................. 1,692,623 9.2 7.7
Don A. Mayerson(9)............................... 817,414 4.5 3.7
All executive officers and directors of the
Company as a group (7 persons)(10)............. 5,768,557 30.1 25.1
</TABLE>
- ---------------
* Less than 1%.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this Prospectus
upon the exercise of options and warrants. Each beneficial owner's
percentage ownership is determined by assuming that options and warrants
that are held by such person (but not those held by any other person) and
that are exercisable within 60 days from the date of this Prospectus have
been exercised.
(2) 810 Seventh Avenue, 21st Floor, New York, New York 10019. Includes 14,000
shares issuable under an option granted pursuant to the Mego Financial
Stock Option Plan, to the extent exercisable within the next 60 days, and
250,000 shares issuable upon the exercise of warrants held by an affiliate
of Mr. Nederlander which are presently exercisable.
52
<PAGE> 55
(3) 321 Fisher Building, Detroit, Michigan 48202. Consists of 1,683,634 shares
held of record by GRI, a wholly-owned subsidiary of Venture Funding, Ltd.
of which Mr. Schuster is a principal shareholder, Director and Chief
Executive Officer, and 250,000 shares issuable upon the exercise of
warrants held by an affiliate of Mr. Schuster which are presently
exercisable.
(4) 1125 N.E. 125th Street, Suite 206, North Miami, Florida 33161. Includes
14,000 shares issuable under an option granted pursuant to the Mego
Financial Stock Option Plan, to the extent exercisable within the next 60
days, and 200,000 shares issuable upon the exercise of warrants held by Mr.
Cohen which are presently exercisable. Excludes 103,503 shares owned by Mr.
Cohen's spouse and 500,000 shares owned by a trust for the benefit of his
children over which Mr. Cohen does not have any investment or voting power,
as to which he disclaims beneficial ownership.
(5) 1000 Parkwood Circle, Suite 500, Atlanta, Georgia 30339. Includes 5,000
shares issuable under an option granted pursuant to the Mego Financial
Stock Option Plan, to the extent exercisable within the next 60 days.
(6) 1000 Parkwood Circle, Suite 500, Atlanta, Georgia 30339. Includes 3,000
shares issuable under an option granted pursuant to the Mego Financial
Stock Option Plan, to the extent exercisable within the next 60 days.
(7) 1000 Parkwood Circle, Suite 500, Atlanta, Georgia 30339. Includes 3,000
shares issuable under an option granted pursuant to the Mego Financial
Stock Option Plan, to the extent exercisable within the next 60 days.
(8) 230 East Flamingo Road, Las Vegas, Nevada 89109. Includes 14,000 shares
issuable under an option granted pursuant to the Mego Financial Stock
Option Plan, to the extent exercisable within the next 60 days, and 200,000
shares issuable upon the exercise of warrants held by Mr. Hirsch which are
presently exercisable. Excludes 10,000 shares held by the daughter of Mr.
Hirsch as custodian for a minor child as to which he disclaims beneficial
ownership, and 21,666 shares held by a family trust, as to which he
disclaims beneficial ownership.
(9) 1125 N.E. 125th Street, Suite 206, North Miami, Florida 33161. Includes
14,000 shares issuable under an option granted pursuant to the Mego
Financial Stock Option Plan, to the extent exercisable within the next 60
days, and 100,000 shares issuable upon the exercise of warrants held by Mr.
Mayerson which are presently exercisable. Excludes 56,667 shares owned by
Mr. Mayerson's spouse, as to which he disclaims beneficial ownership.
(10) See Notes (2)-(9).
CERTAIN TRANSACTIONS
TAX SHARING AND INDEMNITY AGREEMENT
After the Offering, the results of operations of the Company will continue
to be included in the tax returns filed by Mego Financial's affiliated or
combined group for federal income tax purposes. The members of the group,
including the Company, currently are parties to a tax allocation arrangement
that allocates the liability for those taxes among them. Effective on
consummation of the Offering, the Company, Mego Financial and the other members
of the tax reporting group will enter into a tax allocation and indemnity
agreement. Under that agreement, for periods ending after the Offering, the tax
liabilities of each entity in the group will be allocated pursuant to a method
that would impose on the Company liability for an amount that corresponds (with
various modifications) to the liability that the Company would incur if it filed
a separate tax return. In addition, the agreement provides that the Company and
the other members of the group each will indemnify the other under certain
circumstances.
MANAGEMENT AGREEMENT WITH PEC
The Company and PEC are parties to a management services agreement (the
"Management Agreement") pursuant to which certain employees of PEC provide
services to the Company on an as needed basis. The Management Agreement provides
for the payment by the Company of a management fee to PEC in an amount equal to
the direct and indirect expenses of PEC related to the services rendered by its
employees to
53
<PAGE> 56
the Company, including an allocable portion of the salaries and expenses of such
employees based upon the percentage of time such employees spend performing
services for the Company. For the years ended August 31, 1994, 1995 and 1996,
$442,000, $690,000 and $671,000, respectively, of the salaries and expenses of
certain employees of PEC were attributable to and paid by the Company in
connection with services rendered by such employees to the Company.
SERVICING AGREEMENT WITH PEC
The Company has an arrangement with PEC pursuant to which it pays servicing
fees of 50 basis points of the principal balance of loans serviced per year. For
the years ended August 31, 1994, 1995 and 1996, the Company paid servicing fees
to PEC of $11,000, $174,000 and $709,000, respectively. The Company anticipates
that prior to consummation of the Offering it will enter into a servicing
agreement with PEC providing for the payment of servicing fees of 50 basis
points of the principal balance of loans serviced per year.
GUARANTEES BY MEGO FINANCIAL
Mego Financial has guaranteed the Company's obligations under the Warehouse
Line, the Revolving Loan and the Company's new office lease.
54
<PAGE> 57
DESCRIPTION OF THE NOTES
GENERAL
The Notes are to be issued under an Indenture, to be dated as of
, 1996 (the "Indenture"), between the Company and American Stock Transfer &
Trust Company, as Trustee (the "Trustee"). A copy of the form of the Indenture
is filed as an exhibit to the Registration Statement of which this Prospectus is
a part. The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Indenture, including the definitions of
certain terms therein and those terms made a part thereof by the Trust Indenture
Act of 1939, as amended.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee, at 40 Wall Street, New York, New
York 10005), except that, at the option of the Company, payment of interest may
be made by check mailed to the address of the Holders as such address appears in
the Note register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
shall be made for any registration of transfer or exchange of Notes, but the
Company may require payment of an amount sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF THE NOTES
The Notes will be general unsecured obligations of the Company,
subordinated in right of payment to all Senior Indebtedness of the Company, will
be limited to $40,000,000 aggregate principal amount, and will mature on
, 2001. The Notes will bear interest at the rate shown on the cover page
hereof from , 1996, or from the most recent date to which interest
has been paid or provided for, payable semiannually to Holders of record at the
close of business on the or immediately preceding the interest
payment date on and of each year, commencing , 1997.
The Company will pay interest on overdue principal at 1% per year in excess of
such rate and will pay interest on overdue installments of interest at such
higher rate to the extent lawful. Interest on the Notes will be computed on the
basis of a 360-day year of twelve 30-day months.
SUBSIDIARY GUARANTEES
The Notes will be unconditionally guaranteed (a "Subsidiary Guarantee") by
all future Subsidiaries of the Company other than Special Purpose Subsidiaries
(together, the "Subsidiary Guarantors", and each of them, a "Subsidiary
Guarantor"), unless any such Subsidiary is designated an "Unrestricted
Subsidiary" in accordance with the terms of the Indenture. Each Subsidiary
Guarantor's obligations under its Subsidiary Guarantee will be unsecured
obligations of such Subsidiary Guarantor, subordinated in right of payment to
all Senior Indebtedness of such Subsidiary Guarantor, and will be joint and
several with the obligations of each other Subsidiary Guarantor under its
Subsidiary Guarantee of the Notes. In addition, the Indenture will provide that,
in the event the Company designates a Restricted Subsidiary to be an
Unrestricted Subsidiary, then such Restricted Subsidiary will be released and
relieved of any obligations under its Subsidiary Guarantee; provided that such
designation is conducted in accordance with the applicable provisions of the
Indenture. See "-- Certain Covenants -- Restricted Payments", "-- Certain
Definitions -- Unrestricted Subsidiary" and "-- Investments."
The Indenture will include a covenant by the Company to cause each future
Restricted Subsidiary (other than a Special Purpose Subsidiary) to execute a
Subsidiary Guarantee. The obligations of each Subsidiary Guarantor under its
Subsidiary Guarantee will be limited so as to reduce the risk that they would be
found to constitute a fraudulent conveyance under applicable law. See "Risk
Factors -- Fraudulent Conveyances and Preferential Transfers."
55
<PAGE> 58
SUBORDINATION
The Indebtedness represented by the Notes and the Subsidiary Guarantees
will be subordinated in right of payment to all existing and future Senior
Indebtedness of the Company and the Subsidiary Guarantors, respectively,
including without limitation all obligations of the Company or any Subsidiary
Guarantor under any Warehouse Facility, and will be senior in right of payment
to all future Indebtedness of the Company and the Subsidiary Guarantors that by
its terms is expressly subordinated in right of payment to the Notes or the
Subsidiary Guarantees as described in the Indenture ("Junior Subordinated
Obligations"). As of May 31, 1996, the Company had approximately $ million
of Senior Indebtedness outstanding and had no Subsidiaries. See
"Capitalization." Although the Indenture contains limitations on the amount of
additional Indebtedness which the Company and the Restricted Subsidiaries may
incur, the amount of such Indebtedness is likely to be substantial, and
substantially all such Indebtedness may be Senior Indebtedness. See "-- Certain
Covenants -- Limitations on Indebtedness."
If any Senior Indebtedness is disallowed, avoided or subordinated pursuant
to the provisions of Section 548 of the Bankruptcy Law or any applicable state
fraudulent conveyance law, such Indebtedness nevertheless will constitute Senior
Indebtedness for purposes of the Indenture.
The Company may not pay the principal of, premium, if any, or interest on,
the Notes or make any deposit pursuant to the provisions described under
"Defeasance" and may not repurchase, redeem, defease or otherwise retire any
Notes (collectively, "pay the Notes" or "make a payment with respect to the
Notes") if (i) any Senior Indebtedness of the Company is not paid when due or
(ii) any other default on any such Senior Indebtedness occurs and the maturity
thereof has been accelerated in accordance with its terms, unless, in either
case, (x) the default has been cured or waived and any such acceleration has
been rescinded or (y) such Senior Indebtedness has been paid in full. During the
continuance of any default (other than a default described in clause (i) or (ii)
of the preceding sentence) with respect to any Designated Senior Indebtedness of
the Company pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods, the
Company may not pay the Notes for a period (a "Payment Blockage Period")
commencing upon the receipt by the Company and the Trustee of written notice of
such default from the Representative of any Designated Senior Indebtedness
specifying an election to effect a Payment Blockage Period (a "Blockage Notice")
and ending 179 days thereafter (or earlier if such Payment Blockage Period is
terminated (i) by written notice to the Trustee and the Company from the Person
or Persons who gave such Blockage Notice, (ii) by repayment in full of such
Designated Senior Indebtedness or (iii) because the default giving rise to such
Blockage Notice is no longer continuing). Notwithstanding the provisions
described in the immediately preceding sentence (but subject to the provisions
contained in the next preceding sentence), unless the holders of such Designated
Senior Indebtedness or the Representative of such holders shall have accelerated
the maturity of such Designated Senior Indebtedness, the Company may resume
payments on the Notes after such Payment Blockage Period. Not more than one
Blockage Notice may be given in any consecutive 360-day period, irrespective of
the number of defaults with respect to Designated Senior Indebtedness during
such period.
Upon any payment or distribution of the assets of the Company to creditors
upon a total or partial liquidation or total or partial dissolution of the
Company or in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property (whether voluntary or
involuntary), (i) the holders of Senior Indebtedness of the Company will be
entitled to receive payment in full before the holders of the Notes are entitled
to receive any payment, and (ii) until the Senior Indebtedness of the Company is
paid in full, any payment to which the Holders of the Notes would be entitled
but for this provision will be made to holders of Senior Indebtedness as their
interests may appear, except that Holders may receive shares of stock or debt
securities of the Company that are subordinated to Senior Indebtedness of the
Company to at least the same extent as the Notes.
No Subsidiary Guarantor may make any payment under its Subsidiary Guarantee
with respect to any payment with respect to the Notes if (i) any Senior
Indebtedness of any Subsidiary Guarantor is not paid when due or (ii) any other
default on any such Senior Indebtedness occurs and the maturity thereof has been
56
<PAGE> 59
accelerated in accordance with its terms, unless, in either case, (x) the
default has been cured or waived and any such acceleration has been rescinded or
(y) such Senior Indebtedness has been paid in full. During the continuance of
any default (other than a default described in clause (i) or (ii) of the
preceding sentence) with respect to any Designated Senior Indebtedness of any
Subsidiary Guarantor pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods,
such Subsidiary Guarantor may not make any payment with respect to the Notes for
a period (a "Subsidiary Guarantor Payment Blockage Period") commencing upon the
receipt by the Subsidiary Guarantor and the Trustee of written notice of such
default from the Representative of any Designated Senior Indebtedness of such
Subsidiary Guarantor specifying an election to effect a Subsidiary Guarantor
Payment Blockage Period (a "Subsidiary Guarantor Blockage Notice") and ending
179 days thereafter (or earlier if such Subsidiary Guarantor Payment Blockage
Period is terminated (i) by written notice to the Trustee and the Subsidiary
Guarantors from the Person or Persons who gave such Subsidiary Guarantor
Blockage Notice, (ii) by repayment in full to such Designated Senior
Indebtedness of such Subsidiary Guarantor or (iii) because the default giving
rise to such Subsidiary Guarantors Blockage Notice is no longer continuing).
Notwithstanding the provisions described in the immediately preceding sentence
(but subject to the provisions contained in the next preceding sentence), unless
the holders of such Senior Indebtedness of such Subsidiary Guarantor or the
Representative of such holders shall have accelerated the maturity of such
Designated Senior Indebtedness of such Subsidiary Guarantor, such Subsidiary
Guarantor may resume payments under its Subsidiary Guarantee after such
Subsidiary Guarantor Payment Blockage Period. Not more than one Subsidiary
Guarantor Blockage Notice may be given with respect to the Subsidiary Guarantors
in any consecutive 360-day period, irrespective of the number of defaults with
respect to Designated Senior Indebtedness of the Subsidiary Guarantors during
such period.
Upon any payment or distribution of the assets of any Subsidiary Guarantor
to creditors upon a total or partial liquidation or total or partial dissolution
of the Subsidiary Guarantor or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Subsidiary Guarantor or its
property (whether voluntary or involuntary), (i) the holders of Senior
Indebtedness of such Subsidiary Guarantor will be entitled to receive payment in
full before the holders of the Notes are entitled to receive any payment, and
(ii) until the Senior Indebtedness of such Subsidiary Guarantor is paid in full,
any payment to which the Holders of the Notes would be entitled but for this
provision will be made to holders of Senior Indebtedness of such Subsidiary
Guarantor as their interests may appear, except that Holders may receive shares
of stock or debt securities that are subordinated to Senior Indebtedness of the
Subsidiary Guarantor to at least the same extent as the Subsidiary Guarantees.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company or any Subsidiary Guarantor shall be
received by the Trustee or the Holders at a time when such payment or
distribution is prohibited by the foregoing provisions, such payment or
distribution shall be held in trust for the benefit of the holders of Senior
Indebtedness of such Person, and shall be paid or delivered by the Trustee or
such Holders, as the case may be, to the holders of such Senior Indebtedness
remaining unpaid or unprovided for or to their Representative, ratably according
to the aggregate amounts remaining unpaid on account of the Senior Indebtedness
held or represented by each, for application to the payment of all Senior
Indebtedness remaining unpaid, to the extent necessary to pay or to provide for
the payment of all such Senior Indebtedness in full after giving effect to any
concurrent payment or distribution to the holders of such Senior Indebtedness.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of Senior Indebtedness
or any Representative thereof of the acceleration. If the Trustee provides such
notice, the Trustee also will notify the Company of the acceleration.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, holders of the Notes may recover less, ratably, than
other creditors of the Company or the Subsidiary Guarantors, or may recover
nothing.
57
<PAGE> 60
OPTIONAL REDEMPTION
The Notes will not be redeemable prior to , 1999, except as
provided below. Thereafter, the Notes will be redeemable, at the Company's
option, in whole or in part, at any time or from time to time, upon not less
than 30 nor more than 60 calendar days' prior notice mailed by first-class mail
to each Holder's registered address, at the following redemption prices
(expressed in percentages of principal amount), plus accrued interest to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month period commencing on of the years set forth
below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
-------------------------------------------------------------------------- ----------
<S> <C>
1999...................................................................... %
2000 and thereafter....................................................... %
</TABLE>
In addition, at any time and from time to time prior to , 1998,
the Company may redeem in the aggregate up to 35% of the original principal
amount of the Notes with the proceeds of one or more Public Equity Offerings, at
a redemption price (expressed as a percentage of principal amount) of %
plus accrued interest to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date); provided, however, that the aggregate principal amount
of the Notes that remain outstanding after each such redemption is at least
equal to 65% of the original principal amount of the Notes.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part, the notice of
redemption relating to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note.
SINKING FUND
There will be no mandatory sinking fund for the Notes.
MANDATORY OFFERS TO PURCHASE THE NOTES
The Indenture will require the Company to purchase all of the outstanding
Notes tendered by the Holders upon the occurrence of a Change of Control and to
offer to purchase a portion of the outstanding Notes under certain other
circumstances. See "Change of Control" and "Certain Covenants -- Limitations on
Asset Sales."
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder will have the right
to require that the Company repurchase such Holder's Notes at a purchase price
in cash equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date).
A "Change of Control" will be deemed to have occurred:
(i) upon any merger or consolidation of the Company with or into any
person or any sale, transfer or other conveyance, whether direct or
indirect, of all or substantially all of the assets of the Company, on a
consolidated basis, in one transaction or a series of related transactions,
if, in the case of any such merger or consolidation, the securities of the
Company that are outstanding immediately prior to such transaction and
which represent 100% of the aggregate voting power of the Voting Stock of
the Company are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of the
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surviving corporation that represent, immediately after such transaction,
at least a majority of the aggregate voting power of the Voting Stock of
the surviving corporation, provided, however, that the sale by the Company
or its Subsidiaries from time to time of Receivables in the ordinary course
of business shall not be treated hereunder as a sale of all or
substantially all the assets of the Company;
(ii) when any "person" or "group" (as such terms are used for purposes
of Sections 13(d) and 14(d) of the Exchange Act, whether or not
applicable), other than any or all of the Excluded Persons, is or becomes
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 40% of the then outstanding
shares of Voting Stock of the Company; or
(iii) when, during any period of 24 consecutive months after the Issue
Date, individuals who at the beginning of any such 24-month period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board or whose nomination for election by
the stockholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election was previously
so approved), cease for any reason to constitute a majority of the Board of
Directors of the Company then in office.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (i) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of Holders of record on the relevant record
date to receive interest on the relevant interest payment date); (ii) the
circumstances and relevant facts regarding such Change of Control (including, in
the case of any merger, consolidation or sale of all or substantially all
assets, information with respect to pro forma results of operations, cash flow
and capitalization after giving effect to such Change of Control); (iii) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (iv) the instructions determined by
the Company, consistent with the covenant described hereunder, that a Holder
must follow in order to have its Notes purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other applicable securities laws or
regulations in connection with the repurchase of Notes pursuant to the covenant
described hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company will comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under the covenant described
hereunder by virtue thereof.
The phrase "all or substantially all" of the assets of the Company is
likely to be interpreted by reference to applicable state law at the relevant
time, and will be dependent on the facts and circumstances existing at such
time. As a result, there may be a degree of uncertainty in ascertaining whether
a sale or transfer of "all or substantially all" of the assets of the Company
has occurred. However, a sale of Receivables in the ordinary course of business
will not constitute a Change of Control, regardless of the magnitude of such
sale.
The Change of Control purchase feature is a result of negotiations between
the Company and the Underwriters. Management has no present intention to engage
in a transaction involving a Change of Control, although it is possible that the
Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could enter into certain transactions, including
acquisitions, refinancings or other recapitalizations, that would not constitute
a Change of Control under the Indenture, but that could increase the amount of
indebtedness outstanding at such time or otherwise affect the Company's capital
structure or credit ratings. Restrictions on the ability of the Company and its
Restricted Subsidiaries to Incur additional Indebtedness are contained in the
covenants described under "-- Certain Covenants -- Limitation
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on Indebtedness," "-- Certain Covenants -- Limitation on Liens" and "-- Certain
Covenants -- Limitation on Preferred Stock of Subsidiaries." Such restrictions
can be waived only with the consent of the Holders of a majority in principal
amount of the Notes then outstanding. Except for the limitations contained in
such covenants, however, the Indenture will not contain any covenant or
provision that may afford Holders of the Notes protection in the event of a
highly leveraged transaction, reorganization, restructuring, merger, spin-off or
similar transaction that may adversely affect such Holders.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repurchased or prepaid upon a Change of Control.
Moreover, the exercise by the Holders of their right to require the Company to
repurchase the Notes could cause a default under such indebtedness, even if the
Change of Control itself does not, due to the financial effect of such
repurchase on the Company. If a Change of Control should occur, the rights of
the Holders to receive payment for their Notes would be subject to the prior
rights of the holders of any Senior Indebtedness. See "Subordination." Finally,
the Company's ability to pay cash to the Holders of Notes following the
occurrence of a Change of Control may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases. The provisions under
the Indenture relating to the Company's obligation to make an offer to
repurchase the Notes as a result of a Change of Control may be waived or
modified with the written consent of the Holders of a majority in principal
amount of the Notes. As a result, a Holder may not be able to avail itself of
its right to require the Company to repurchase the Notes upon a Change of
Control.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made in immediately available funds. All
payments of principal, premium, if any, and interest will be made by the Company
in immediately available funds. The Notes will trade in the Same-Day Funds
Settlement System of The Depository Trust Company ("DTC") until maturity, and
secondary market trading activity for the Notes will therefore settle in
immediately available funds.
CERTAIN COVENANTS
Set forth below are descriptions of certain covenants set forth in the
Indenture.
Limitation on Indebtedness. (a) The Company will not Incur, and the
Company will not permit any Restricted Subsidiary to Incur, directly or
indirectly, any Indebtedness or Disqualified Stock if, on the date of such
Incurrence and after giving effect thereto, the Consolidated Leverage Ratio
exceeds 2.0 to 1.0.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(1) Permitted Warehouse Indebtedness and Guarantees by the Company of
any Permitted Warehouse Indebtedness of Restricted Subsidiaries, provided
that (i) on the date of such Incurrence and giving effect to any such
Incurrence, the aggregate principal amount of Permitted Warehouse
Indebtedness permitted under this clause (1), together with the amount of
all then outstanding Warehouse Indebtedness (other than Permitted Warehouse
Indebtedness) of the Company and its Restricted Subsidiaries permitted
under clause (a) above, shall not exceed 300% of Consolidated Net Worth at
such time, and (ii) that to the extent any such Indebtedness ceases to
constitute Permitted Warehouse Indebtedness of the Company or a Restricted
Subsidiary, such event shall be deemed to constitute the Incurrence of such
Indebtedness (and any such Guarantees, but without duplication) by the
Company or such Subsidiary, as the case may be;
(2) the Notes and the Subsidiary Guarantees;
(3) Hedging Obligations directly related to: (i) Indebtedness
permitted to be Incurred by the Company or the Restricted Subsidiaries
pursuant to the Indenture; (ii) Receivables held by the Company or its
Restricted Subsidiaries pending sale or that have been sold pursuant to a
Warehouse Facility; or (iii) Receivables with respect to which the Company
or any Restricted Subsidiary has an outstanding purchase or offer
commitment, financing commitment or security interest;
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(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1) of this paragraph (b));
(5) Indebtedness or Disqualified Stock issued to and held by the
Company or a Wholly Owned Restricted Subsidiary; provided, however, that
any subsequent issuance or transfer of any Capital Stock that results in
any such Wholly Owned Restricted Subsidiary ceasing to be a Wholly Owned
Restricted Subsidiary or any subsequent transfer of such Indebtedness or
Disqualified Stock (other than to the Company or a Wholly Owned Restricted
Subsidiary) will be deemed, in each case, to constitute the Incurrence of
such Indebtedness or issuance of such Disqualified Stock by the issuer
thereof;
(6) Indebtedness or Disqualified Stock of a Restricted Subsidiary
Incurred on or prior to the date on which such Subsidiary was acquired by
the Company, other than Indebtedness or Disqualified Stock Incurred in
connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or was
acquired by the Company; provided, however, that on the date of such
acquisition and after giving effect thereto, the Company would have been
able to Incur at least $1.00 of Indebtedness pursuant to paragraph (a)
above; and
(7) while no Default or Event of Default exists, Refinancing
Indebtedness in respect of Indebtedness Incurred pursuant to paragraph (a)
or clause (4) or (6) of this paragraph (b).
(c) Notwithstanding the foregoing, (i) the Company and its Restricted
Subsidiaries may not Incur any Indebtedness (other than the Notes and the
Subsidiary Guarantees) if such Indebtedness is subordinate or junior in ranking
in any respect to any Senior Indebtedness unless such Indebtedness is a Junior
Subordinated Obligation, (ii) the Company and its Restricted Subsidiaries shall
not Incur any Indebtedness if the proceeds thereof are used, directly or
indirectly, to Refinance any Junior Subordinated Obligations unless such
Indebtedness shall be subordinated to the Notes or the Subsidiary Guarantees, as
applicable, to at least the same extent as such Junior Subordinated Obligations,
and (iii) no Restricted Subsidiary that is not a Subsidiary Guarantor shall
incur, directly or indirectly, any Indebtedness. Unsecured Indebtedness is not
deemed to be subordinate or junior to secured Indebtedness merely because it is
unsecured.
(d) For purposes of determining compliance with the foregoing covenant: (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in good faith, will
classify such item of Indebtedness and be required to include the amount and
type of such Indebtedness in one of the above clauses; and (ii) an item of
Indebtedness may be divided and classified in more than one of the types of
Indebtedness described above.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any Restricted Subsidiary to Incur, directly or indirectly, any
Preferred Stock except:
(a) Preferred Stock issued to and held by the Company or a Wholly
Owned Restricted Subsidiary; provided, however, that any subsequent
issuance or transfer of any Capital Stock that results in any such Wholly
Owned Restricted Subsidiary ceasing to be a Wholly Owned Restricted
Subsidiary or any subsequent transfer of such Preferred Stock (other than
to the Company or a Wholly Owned Restricted Subsidiary) will be deemed, in
each case, to constitute the Incurrence of such Preferred Stock by the
issuer thereof; and
(b) Preferred Stock of a Restricted Subsidiary Incurred or issued and
outstanding on or prior to the date on which such Restricted Subsidiary was
acquired by the Company, other than Preferred Stock Incurred or issued in
connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Restricted
Subsidiary or was acquired by the Company; provided, however, that on the
date of such acquisition and after giving effect thereto, the Company would
have been able to Incur at least $1.00 of Indebtedness pursuant to
paragraph (a) of the covenant described under "Limitation on Indebtedness."
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Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary, directly or indirectly, to Incur or permit to exist any
Lien of any nature whatsoever on any of its properties (including Capital Stock
of a Subsidiary), whether owned at the Issue Date or thereafter acquired, other
than Permitted Liens, without effectively providing that the Notes shall be
secured equally and ratably with (or prior to) the obligations so secured for so
long as such obligations are so secured.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary, directly or indirectly, to make a Restricted
Payment if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (i) a Default shall have occurred and be continuing (or
would result therefrom); (ii) the Company is not able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under
"Limitation on Indebtedness"; or (iii) the aggregate amount of such Restricted
Payment and all other Restricted Payments since the Issue Date would exceed the
sum of: (A) 33% of the Consolidated Adjusted Net Income accrued during the
period (treated as one accounting period) from the beginning of the fiscal
quarter during which the Issue Date occurs to the end of the most recent fiscal
quarter prior to the date of such Restricted Payment for which financial
statements are available (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit); and (B) the aggregate Net Cash Proceeds
received by the Company from the issuance or sale after the Issue Date of (1)
Capital Stock of the Company (other than Disqualified Stock) or (2) debt
securities of the Company, but only if, when and to the extent such debt
securities have been converted into any such Capital Stock (other than, in each
case, an issuance or sale to a Subsidiary of the Company and other than an
issuance or sale to an employee stock ownership plan or to a trust established
by the Company or any of its Subsidiaries for the benefit of their employees).
(b) While no Default or Event of Default exists, the provisions of the
foregoing paragraph (a) shall not prohibit: (i) any purchase or redemption of
Capital Stock or Junior Subordinated Obligations of the Company to the extent
made by exchange for, or out of the proceeds of the substantially concurrent
sale of, Capital Stock of the Company (other than Disqualified Stock and other
than Capital Stock issued or sold to (A) a Subsidiary of the Company or (B) an
employee stock ownership plan or to a trust established by the Company or any of
its Subsidiaries for the benefit of their employees, except to the extent that
the funds used by such plan or trust are attributable to employee
contributions); provided, however, that (A) such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such sale shall be excluded from the calculation of amounts
under clause (iii)(B) of paragraph (a) above; (ii) any payment, purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value
of Junior Subordinated Obligations made by exchange for, or out of the proceeds
of the substantially concurrent sale of, Indebtedness of the Company that is
permitted to be Incurred pursuant to the covenant described under "Limitation on
Indebtedness"; provided, however, that, such purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value shall be excluded in the
calculation of the amount of Restricted Payments; and (iii) dividends paid
within 60 days after the date of declaration thereof if at such date of
declaration such dividend would have complied with the covenant described
hereunder; provided, however, that such dividend shall be included in the
calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary, directly or indirectly, to create or otherwise cause or permit to
exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary (a) to pay dividends or make any other
distributions on its Capital Stock to the Company or a Restricted Subsidiary or
pay any Indebtedness owed to the Company or any Restricted Subsidiary, (b) to
make any loans or advances to the Company or any Restricted Subsidiary or (c) to
transfer any of its property or assets to the Company or any Restricted
Subsidiary, except: (i) any encumbrance or restriction pursuant to an agreement
in effect at the Issue Date and listed on a schedule to the Indenture; (ii) any
encumbrance or restriction with respect to a Restricted Subsidiary pursuant to
an agreement applicable to such Subsidiary prior to the date on which such
Subsidiary was acquired by the Company (other than an agreement entered into in
connection with, or in anticipation of, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or was
acquired by the Company) and outstanding on such date; (iii) any encumbrance
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or restriction with respect to a Restricted Subsidiary pursuant to any other
agreement contained in any amendment to an agreement referred to in clause (i)
or (ii) of this covenant or this clause (iii); provided, however, that the
encumbrances and restrictions with respect to such Restricted Subsidiary
contained in any such agreement or amendment are no less favorable to the
Holders than encumbrances and restrictions with respect to such Restricted
Subsidiary contained in the agreements referred to in clause (i) or (ii) of the
covenant described hereunder, as the case may be; (iv) any such encumbrance or
restriction consisting of customary non-assignment provisions in leases
governing leasehold interests to the extent such provisions restrict the
transfer of the lease or the property leased thereunder; (v) in the case of
clause (c) above, restrictions contained in security agreements or mortgages
securing Indebtedness of a Restricted Subsidiary otherwise permissible under the
Indenture to the extent such restrictions restrict the transfer of the property
subject to such security agreements or mortgages; (vi) with respect to the
ability of a Restricted Subsidiary to pay dividends or make any other
distributions on its Capital Stock to the Company, any Permitted Warehouse
Indebtedness Limitation; and (vii) any restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company will
not, and will not permit any Restricted Subsidiary, directly or indirectly, to
consummate any Asset Disposition unless: (i) the Company or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including as to the value of any non-cash
consideration), as determined in good faith by the Board of Directors, of the
shares and assets subject to such Asset Disposition and at least 85% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or Temporary Cash Investments; (ii) an amount equal to 100%
of the Net Available Cash from such Asset Disposition is applied by the Company
(or such Restricted Subsidiary, as the case may be):
(A) first, to the extent the Company or such Restricted Subsidiary
elects either (x) to acquire Additional Assets or (y) to prepay, repay,
redeem or purchase Senior Indebtedness of the Company or such Restricted
Subsidiary, as the case may be (other than in either case Indebtedness owed
to the Company or an Affiliate of the Company), in each case within 180
days from the later of the date of such Asset Disposition or the receipt of
such Net Available Cash;
(C) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (A), to make an offer to the
Holders of the Notes to purchase Notes pursuant to and subject to the
conditions contained in the Indenture; and
(D) third, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B), to any
application not prohibited by the Indenture;
and (iii) at the time of such Asset Disposition no Default shall have occurred
and be continuing (or would result therefrom). Pending application of Net
Available Cash pursuant to this covenant, such Net Available Cash shall be
invested in Temporary Cash Investments.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents: (x) the assumption of Indebtedness (other than Junior
Subordinated Obligations) of the Company or any Restricted Subsidiary, and the
release of the Company or such Subsidiary from all liability on such
Indebtedness, in connection with such Asset Disposition and (y) securities
received by the Company or any Restricted Subsidiary from the transferee that
are promptly converted by the Company or such Subsidiary into cash or Temporary
Cash Investments.
(b) In the event of an Asset Disposition that requires an offer to purchase
the Notes, the Company will be required to purchase Notes tendered pursuant to
an offer by the Company for the Notes at a purchase price of 100% of their
principal amount plus accrued but unpaid interest in accordance with the
procedures (including prorating in the event of oversubscription) set forth in
the Indenture. If the aggregate purchase price of Notes tendered pursuant to
such offer is less than the Net Available Cash allotted to the purchase thereof,
the Company will be permitted to apply the remaining Net Available Cash in
accordance with clause (a)(ii)(D) above. The Company shall not be required to
make such an offer to purchase Notes pursuant to
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this covenant if the Net Available Cash available therefor is less than
$1,000,000 (which lesser amount shall be carried forward for purposes of
determining whether such an offer is required with respect to any subsequent
Asset Disposition).
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to the
covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with provisions of the covenant
described hereunder, the Company will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
this clause by virtue thereof.
Limitation on Affiliate Transactions. The Company will not, and will not
permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including without limitation the making of any loan, advance,
guarantee or capital contribution to or for the benefit of, the purchase, sale,
lease or exchange of any property with, the entering into or amending of
employee compensation arrangements with, or the rendering of any service with or
for the benefit of, any Affiliate of the Company (an "Affiliate Transaction")
unless the terms thereof: (i) are in the ordinary course of business and
consistent with past practice; (ii) are fair to the Company or such Restricted
Subsidiary and are no less favorable to the Company or such Restricted
Subsidiary than those that could be obtained at the time of such transaction in
arm's-length dealings with a Person who is not such an Affiliate; (iii) if such
Affiliate Transaction involves an amount in excess of $500,000, (A) are set
forth in writing and (B) have been approved by a majority of the members of the
Board of Directors having no personal stake in such Affiliate Transaction; and
(iv) if such Affiliate Transaction involves an amount in excess of $3,000,000,
have been determined by a nationally recognized investment banking firm to be
fair, from a financial standpoint, to the Company and its Restricted
Subsidiaries.
The provisions of the foregoing paragraph shall not apply to (a)
transactions exclusively between or among the Company and any Wholly Owned
Restricted Subsidiary or between or among Wholly Owned Restricted Subsidiaries,
(b) any Restricted Payment permitted to be made under the covenant described
under "-- Limitation on Restricted Payments," (c) any employment or related
arrangement entered into by the Company or any Restricted Subsidiary in the
ordinary course of business on terms customary in the consumer finance business,
provided any such arrangement is approved by the disinterested members of the
Board of Directors, (d) customary directors fees and indemnities, and (e)
payments required by the Tax Sharing Agreement or any renewal thereof on
substantially similar terms, provided, however, in the case of each of the
foregoing clauses (a) through (d), that such transactions are not otherwise
prohibited by the Indenture. The provisions of clause (iv) of the foregoing
paragraph shall not apply to transactions between the Company and PEC pursuant
to agreements in effect on the Issue Date and described under "Certain
Transactions" and renewals thereof on substantially similar terms.
Merger and Consolidation. The Company will not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
related transactions, all or substantially all its assets to, any Person,
unless: (i) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the United
States of America or any State thereof and the Successor Company (if not the
Company) shall expressly assume, by an indenture supplemental thereto, executed
and delivered to the Trustee, in form satisfactory to the Trustee, all of the
Company's obligations under the Notes and the Indenture; (ii) immediately after
giving effect to such transaction (and treating any Indebtedness that becomes an
obligation of the Successor Company or any Restricted Subsidiary as a result of
such transaction as having been Incurred by such Successor Company or such
Restricted Subsidiary at the time of such transaction), no Default shall have
occurred and be continuing; (iii) immediately after giving effect to such
transaction, the Successor Company would be able to incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"Limitation on Indebtedness;" (iv) immediately after giving effect to such
transaction, the Successor Company shall have Consolidated Net Worth in an
amount that is not less than the Consolidated Net Worth of the Company prior to
such transaction; and (v) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture.
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The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor Company, in the case of a
lease, shall not be released from the obligation to pay the principal of,
premium, if any, and interest on the Notes.
The Indenture will provide that no Restricted Subsidiary may consolidate
with or merge with or into (whether or not such Restricted Subsidiary is the
surviving Person) another Person, whether or not affiliated with such Restricted
Subsidiary, unless (i) subject to the provisions of the following paragraph, the
Person formed by or surviving any such consolidation or merger (if other than
such Restricted Subsidiary) assumes all the obligations of such Restricted
Subsidiary, pursuant to a supplemental indenture, in form and substance
satisfactory to the Trustee, under the Indenture; (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists; (iii) such
Restricted Subsidiary, or any Person formed by or surviving any such
consolidation or merger, would have Consolidated Net Worth (immediately after
giving effect to such transaction) equal to or greater than the Consolidated Net
Worth of such Restricted Subsidiary immediately preceding the transaction; and
(iv) the Restricted Subsidiary would be permitted, immediately after giving
effect to such transaction, to Incur at least $1.00 of additional Indebtedness
pursuant to paragraph (a) in the covenant described above under the caption
"Certain Covenants -- Limitation on Indebtedness"; provided that the foregoing
provisions will not restrict the ability of a Subsidiary to consolidate or merge
with the Company or another Wholly Owned Restricted Subsidiary.
The Indenture will provide that, in the event of a sale or other
disposition of all of the assets of any Subsidiary (other than to or with the
Company or a Wholly Owned Restricted Subsidiary), by way of merger,
consolidation or otherwise, or a sale or other disposition of all of the Capital
Stock of any Subsidiary (other than to the Company or a Wholly Owned Restricted
Subsidiary), then such Restricted Subsidiary (in the event of a sale or other
disposition, by way of such a merger, consolidation or otherwise, of all of the
Capital Stock of such Subsidiary) or the corporation acquiring the property (in
the event of a sale or other disposition of all of the assets of such Restricted
Subsidiary) will be released and relieved of any obligations under its
Subsidiary Guarantee; provided that the Net Cash Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of the
Indenture.
Limitation on Investment Company Status. The Company shall not take, and
shall not permit any Restricted Subsidiary to take, any action, or otherwise
permit to exist any circumstance, that would require the Company or such
Restricted Subsidiary to register as an "investment company" under the
Investment Company Act of 1940, as amended.
Line of Business. The Company will not, and will not permit any
Subsidiary, to engage in any line of business that is not a Related Business.
Payments for Consent. The Indenture will provide that neither the Company
nor any Restricted Subsidiary will, directly or indirectly, pay or cause to be
paid any consideration, whether by way of interest, fee or otherwise, to any
Holder of any Notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or agreed to be paid to all Holders of the
Notes that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
SEC Reports. Notwithstanding that the Company may not be required to
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company shall file with the SEC and provide the Trustee and
Holders with such annual reports, quarterly reports and such other information,
documents and reports as are specified in Sections 13 and 15(d) of the Exchange
Act and applicable to a U.S. corporation subject to such Sections, such
information, documents and other reports to be so filed and provided at the
times specified for the filing of such information, documents and reports under
such Sections.
DEFAULTS
An Event of Default is defined in the Indenture as: (i) a default in the
payment of interest on the Notes when due, continued for 30 days; (ii) a default
in the payment of principal of and premium, if any, on any
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Note when due at its Stated Maturity, upon optional redemption, upon required
repurchase, upon declaration of acceleration or otherwise; (iii) the failure by
the Company or any Subsidiary Guarantor to comply with any of its obligations in
the covenants described under "Change of Control," "Subsidiary Guarantees" or
under "Certain Covenants -- Merger and Consolidation," or "-- Limitation on
Sales of Assets and Subsidiary Stock"; (iv) the failure by the Company or any
Subsidiary Guarantor to comply with any of its obligations in the covenants
described above under "Certain Covenants -- Limitation on Affiliate
Transactions", "-- Limitation on Indebtedness," "-- Limitation on Preferred
Stock of Restricted Subsidiaries," "-- Limitation on Liens," "-- Limitation on
Restricted Payments," "-- Limitation on Restrictions of Distributions from
Restricted Subsidiaries," "-- Limitation on Investment Company Status" or
"-- SEC Reports" and 30 days or more shall have expired after a Senior Officer
of the Company first becomes aware of such failure; (v) the failure by the
Company or any Subsidiary Guarantor to comply for 30 days after notice with its
other agreements contained in the Indenture; (vi) Indebtedness of the Company or
any Subsidiary is not paid within any applicable grace period after final
maturity or is accelerated by the holders thereof because of a default and the
total amount of such Indebtedness unpaid or accelerated exceeds $2,000,000 (the
"cross acceleration provision"); (vii) certain events of bankruptcy, insolvency
or reorganization of the Company or a Subsidiary (the "bankruptcy provisions");
or (viii) any judgment or decree for the payment of money in excess of
$1,000,000 is rendered against the Company or a Subsidiary, remains outstanding
for a period of 60 days following such judgment and is not discharged, waived or
stayed (the "judgment default provision"). However, a default under clause (v)
will not constitute an Event of Default until the Trustee or the Holders of 25%
in principal amount of the outstanding Notes notify the Company of the Default
and the Company does not cure such Default within the time specified after
receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of, premium, if any, and accrued but unpaid interest on all the Notes
to be due and payable. Upon such a declaration, such principal, premium, if any,
and interest shall be due and payable immediately. If an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization of the
Company occurs and is continuing, the principal of, premium, if any, any accrued
but unpaid interest on all the Notes will ipso facto become and be immediately
due and payable without any declaration or other act on the part of the Trustee
or any Holders of the Notes. Under certain circumstances, the Holders of a
majority in principal amount of the outstanding Notes may rescind any such
acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders of the Notes unless
such Holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium, if any, or interest when due, no Holder may
pursue any remedy with respect to the Indenture or the Notes unless (i) such
Holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) Holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy, (iii) such Holders have
offered the Trustee reasonable security or indemnity against any loss, liability
or expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity and (v) the
Holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the Holders of a majority in principal
amount of the outstanding Notes have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the trustee determines is unduly prejudicial to the rights of any other
Holder or that would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder of the Notes notice
of the Default within 60 days after it occurs. Except in the case of a Default
in the payment of principal of, premium, if any, or interest on any Note, the
Trustee may withhold notice if and so long as a committee of its trust officers
determines that withholding notice is not
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opposed to the interest of the Holders. In addition, the Company is required to
deliver to the Trustee, within 120 days after the end of each fiscal year, a
certificate indicating whether the signers thereof know of any Default that
occurred during the previous year. The Company also is required to deliver to
the Trustee, within 30 days after a Senior Officer of the Company or any
Subsidiary becomes aware of the occurrence thereof, written notice of any event
which would constitute certain Defaults, their status and what action the
Company or such Subsidiary is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past Default or compliance with any provisions
may be waived with the consent of the Holders of a majority in principal amount
of the Notes then outstanding. However, without the consent of each Holder of an
outstanding Note affected thereby, no amendment or waiver may, among other
things, (i) reduce the amount of Notes whose Holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest on
any Note, (iii) reduce the principal of or extend the Stated Maturity of any
Note, (iv) reduce the premium payable upon the redemption or acceleration of any
Note or change the time at which any Note may be redeemed as described under
"Optional Redemption", (v) make any Note payable in money other than that stated
in the Note, (vi) impair the right of any Holder to receive payment of principal
of, premium, if any, and interest on such Holder's Notes on or after the due
dates therefor or to institute suit for the enforcement of any payment on or
with respect to such Holder's Notes, (vii) make any change to the provisions of
the Indenture relating to subordination of the Notes, (viii) release any
Guarantee of the Notes (except in connection with any such Subsidiary being
designated an Unrestricted Subsidiary, to the extent permissible under the
Indenture), or (ix) make any change in the amendment provisions which require
each Holder's consent or in the waiver provisions.
Without the consent of any Holder, the Company and Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the Company
under the Indenture, to provide for uncertificated Notes in addition to or in
place of certificated Notes (provided that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, or in a manner
such that the uncertificated Notes are described in Section 163(f)(2)(B) of the
Code), to add guarantees with respect to the Notes, to secure the Notes, to add
to the covenants of the Company for the benefit of the Holders or to surrender
any right or power conferred upon the Company, to make any change that does not
adversely affect the rights of any Holder or to comply with any requirement of
the SEC in connection with the qualification of the Indenture under the Trust
Indenture Act.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company will
mail to Holders a notice briefly describing such amendment. However, the failure
to give such notice to all Holders, or any defect therein, will not impair or
affect the validity of the amendment.
TRANSFER
A Holder will be able to register the transfer of or exchange the Notes
only in accordance with the provisions of the Indenture. The Company may require
payment of a sum sufficient to cover any tax, assessment or other governmental
charge payable in connection with certain registrations of transfers and
exchanges.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to
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register the transfer or exchange of the Notes, to replace mutilated, destroyed,
lost or stolen Notes and to maintain a registrar and paying agent in respect of
the Notes. The Company at any time may terminate its obligations under "Change
of Control" and under the covenants described under "Certain Covenants" (other
than the covenant described under "-- Merger and Consolidation"), the operation
of the cross acceleration provision, the bankruptcy provisions with respect to
Subsidiaries and the judgment default provision described under "-- Defaults"
and the limitations contained in clauses (iii) and (iv) under "Certain
Covenants -- Merger and Consolidation" ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto (other than an Event of Default with
respect to the obligations referred to in the first sentence of the immediately
preceding paragraph). If the Company exercises its covenant defeasance option,
payment of the Notes may not be accelerated because of an Event of Default under
the provisions described in the last sentence of the foregoing paragraph.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee unencumbered money or
U.S. Government Obligations for the payment of principal of, premium, if any,
and interest on the Notes to redemption or maturity, as the case may be, and
must comply with certain other conditions, including delivery to the Trustee of
an Opinion of Counsel to the effect that Holders will not recognize income, gain
or loss for federal income tax purposes as a result of such deposit and
defeasance and will be subject to federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable federal income tax law).
CONCERNING THE TRUSTEE
American Stock Transfer & Trust Company is to be the Trustee under the
Indenture and has been appointed by the Company as Registrar and Paying Agent
with regard to the Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder, unless
such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
BOOK-ENTRY, DELIVERY AND FORM
The Notes will initially be issued in the form of one or more Global Notes
(the "Global Note"). The Global Note will be deposited on the Issue Date with,
or on behalf of, The Depository Trust Company (the "Depositary") and registered
in the name of Cede & Co., as nominee of the Depositary (such nominee being
referred to herein as the "Global Note Holder").
The Company has been advised by the Depositary that the Depositary is a
limited-purpose trust company that was created to hold securities for its
participating organizations (collectively, the "Participants" or the
"Depositary's Participants") and to facilitate the clearance and settlement of
transactions in such securities between Participants through electronic
book-entry changes in accounts of its Participants. The Depositary's
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Participants include securities brokers and dealers (including the
Underwriters), banks and trust companies, clearing corporations and certain
other organizations. Access to the Depositary's system is also available to
other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants" or the "Depositary's Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants may
beneficially own securities held by or on behalf of the Depositary only through
the Depositary's Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Underwriters with portions of the
principal amount of the Global Note and (ii) ownership of the Notes evidenced by
the Global Note will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by the Depositary (with respect to the
interests of the Depositary's Participants), the Depositary's Participants and
the Depositary's Indirect Participants. Prospective purchasers are advised that
the laws of some states require that certain persons take physical delivery in
definitive form of securities that they own. Consequently, the ability to
transfer Notes evidenced by the Global Note will be limited to such extent.
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of any
Notes evidenced by the Global Note for the purposes of receiving payment on the
Notes, receiving notices, and for all other purposes under the Indenture and the
Notes. Beneficial owners of Notes evidenced by the Global Note will not be
considered the owners or Holders thereof under the Indenture for any purpose,
including with respect to the giving of any directions, instructions or
approvals to the Trustee thereunder. Neither the Company nor the Trustee will
have any responsibility or liability for any aspect of the records of the
Depositary or for maintaining, supervising or reviewing any records of the
Depositary relating to the Notes. Accordingly, each person owning a beneficial
interest in the Global Note must rely on the procedures of the Depositary, and,
if such person is not a Participant, on the procedures of the Participant
through which such person owns its interest, to exercise any rights of a holder
under the Indenture. The Company understands that under existing industry
practices, in the event that the Company requests any action of holders or that
an owner of a beneficial interest in the Global Note desires to give or take any
action which a holder is entitled to give or take under the Indenture, the
Depositary would authorize the Participants holding the relevant beneficial
interest to give or take such action and such Participants would authorize
beneficial owners owning through such Participants to give or take such action
or would otherwise act upon the instructions of beneficial owners owning through
them.
Payments in respect of the principal of, and premium, if any, and interest
on any Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by the Trustee to or at the direction of the Global
Note Holder in its capacity as the registered Holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the persons in
whose names Notes, including the Global Note, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Company nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to beneficial owners of the Notes. The Company believes,
however, that it is currently the policy of the Depositary to immediately credit
the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holdings of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
If (i) the Company notifies the Trustee in writing that the Depositary is
no longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
certificated form, or (iii) there shall have occurred and be continuing a
Default or an Event of Default with respect to any of the Notes represented by
the Global Note, then, upon surrender by the Global Note Holder of its Global
Note, Notes in certificated form will be issued to each person that the Global
Note Holder and the Depositary identify as being the beneficial owner of the
related Notes.
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Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
CERTAIN DEFINITIONS
"Additional Assets" means: (i) any operating property or assets (including
Receivables, but excluding Indebtedness and Capital Stock of the Person) used or
useful in a Related Business; (ii) the Capital Stock of a Person that becomes a
Restricted Subsidiary as a result of the acquisition of such Capital Stock by
the Company or another Subsidiary; or (iii) Capital Stock constituting a
minority interest in any Person that at such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in clause (ii)
or (iii) is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; provided that a
Person shall be deemed to have such power with respect to the Company if such
Person is the beneficial owner of Capital Stock representing 10% or more of the
total voting power of the Voting Stock (on a fully diluted basis) of the Company
or of rights or warrants to purchase such Capital Stock (whether or not
currently exercisable). The terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Disposition" means (i) any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
the Company or any Restricted Subsidiary, including any disposition by means of
a merger, consolidation or similar transaction (each referred to for the
purposes of the definition as a "disposition"), of: (a) any shares of Capital
Stock of a Subsidiary (other than director's qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Subsidiary); (b) all or substantially all the assets of any division or line of
business of the Company or any Restricted Subsidiary; (c) any other assets of
the Company or any Restricted Subsidiary with a book or fair market value,
together with other assets disposed of in the same or related transactions,
exceeding $500,000; or (d) any Excess Spread Receivables (other than, in the
case of clauses (a), (b), (c) or (d) above, (1) a disposition of Receivables in
the ordinary course of business, (2) a disposition by a Restricted Subsidiary to
the Company or by the Company or a Subsidiary to a Wholly Owned Restricted
Subsidiary or (3) any grant of a Permitted Lien) or (ii) the issuance of Capital
Stock by any Restricted Subsidiary to any Person other than the Company or any
Wholly Owned Restricted Subsidiary.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP. The amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
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"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of all Indebtedness of the Company and its
Restricted Subsidiaries, excluding (A) Permitted Warehouse Indebtedness and
Guarantees thereof permitted to be Incurred pursuant to clause (b)(1) of the
covenant described under "Certain Covenants -- Limitation on Indebtedness," (B)
Hedging Obligations permitted to be Incurred pursuant to clause (b)(4) of the
covenant described under "Certain Covenants -- Limitation on Indebtedness" and
(C) Junior Subordinated Obligations of the Company to (ii) the Consolidated Net
Worth of the Company.
"Consolidated Adjusted Net Income" means, for any period, (a) Consolidated
Net Income minus (b) gain on sale of loans and net unrealized gain on mortgage
related securities, plus (c) provision for credit losses, amortization and
depreciation (including amortization of excess servicing rights), in each case
for such period and for the Company and its Restricted Subsidiaries.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries for such period; provided, however,
that there shall not be included in such Consolidated Net Income: (i) any net
income of any person if such Person is not a Restricted Subsidiary, except that
(A) subject to the exclusion contained in clause (iv) below, the Company's
equity in the net income of any such Person for such period shall be included in
such Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company or a Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution paid to a Restricted Subsidiary, to the
limitations contained in clause (iii) below) and (B) the Company's equity in a
net loss of any such Person for such period shall be included in determining
such Consolidated Net Income; (ii) any net income (or loss) of any Person
acquired by the Company or a Restricted Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition; (iii) any net
income of any Restricted Subsidiary if such Restricted Subsidiary is subject to
restrictions, directly or indirectly, on the payment of dividends or the making
of distributions by such Restricted Subsidiary, directly or indirectly, to the
Company, except that (A) subject to the exclusion contained in clause (iv)
below, the Company's equity in the net income of any such Restricted Subsidiary
for such period shall be included in such Consolidated Net Income to the extent
that cash could have been distributed by such Restricted Subsidiary during such
period to the Company or another Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid to
another Restricted Subsidiary, to the limitation contained in this clause) and
(B) the Company's equity in a net loss of any such Restricted Subsidiary for
such period shall be included in determining such Consolidated Net Income; (iv)
any gain (but not loss) realized upon the sale or other disposition of any
assets of the Company or its consolidated Restricted Subsidiaries (including
pursuant to any sale-and-leaseback arrangement) which is not sold or otherwise
disposed of in the ordinary course of business and any gain (but not loss)
realized upon the sale or other disposition of any Capital Stock of any Person;
(v) extraordinary gains or losses; and (vi) the cumulative effect of a change in
accounting principles.
"Consolidated Net Worth" means the consolidated stockholders' equity of the
Company and its Subsidiaries, as determined in accordance with GAAP, as of the
end of the most recent fiscal quarter of the Company for which financial
statements are available, less (i) all write-ups by the Company or any
Restricted Subsidiary (other than write-ups resulting from foreign currency
translations and write-ups of tangible assets of a going concern business made
within 12 months after acquisition thereof), (ii) all Investments in
unconsolidated Subsidiaries or Persons that are not Restricted Subsidiaries
(except Temporary Cash Investments), (iii) all unamortized debt discount and
expense and unamortized deferred charges of the Company and its Restricted
Subsidiaries, in each case as of such date, and (iv) any amounts attributable to
Disqualified Stock.
"Currency Agreement" means, with respect to any Person, any foreign
exchange contract, currency swap agreement or other similar agreement to which
such Person is a party or a beneficiary.
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"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means, as of any date of determination,
any Senior Indebtedness if the unpaid principal amount thereof, or the amount of
Senior Indebtedness committed to be extended by the lender or lenders under the
related credit facility, equals or exceeds $1,000,000 on such date.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
that by its terms (or by the terms of any security in to which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holders thereof, in each case in whole
or in part on or prior to the first anniversary of the Stated Maturity of the
Notes.
"Eligible Excess Spread Receivables" means Excess Spread Receivables of the
Company and its Restricted Subsidiaries, other than (i) any Excess Spread
Receivables created as the result of the securitization or sale of other Excess
Spread Receivables, and (ii) any Excess Spread Receivables attributable to any
whole loan sale of Receivables, unless the Person or Persons holding such
Receivables (a) is a GSE or (b) has then outstanding senior unsecured and
unsupported long-term debt rated Baa2 or better by Moody's Investors Service,
Inc. and BBB or better by Standard & Poor's Ratings Group.
"Excess Spread" means (i) with respect to a "pool" of Receivables that has
been sold to a trust or other Person in a securitization, the excess of (a) the
weighted average coupon on each pool of Receivables sold over (b) the sum of the
pass-through interest rate plus a normal servicing fee, a trustee fee, an
insurance fee and an estimate of annual future credit losses related to such
assets, in each case calculated in accordance with the GAAP, and (ii) with
respect to Receivables that have been sold to a Person in a whole loan sale, the
cash flow of the Company and its Restricted Subsidiaries from such Receivables,
net of, to the extent applicable, a normal servicing fee, a trustee fee, an
insurance fee and an estimate of annual future credit losses related to such
assets, in each case calculated in accordance with GAAP.
"Excess Spread Receivables" of a Person means the contractual or
certificated right to Excess Spread capitalized on such Person's consolidated
balance sheet (the amount of which shall be the present value of the Excess
Spread, calculated in accordance with GAAP, net of any allowance for losses on
loans sold with recourse or other liability allocable thereto, to the extent not
otherwise reflected in such amount). Excess Spread Receivables (a) include
mortgage backed securities attributable to Receivables sold by the Company or
any Subsidiary, and (b) do not include any mortgage servicing rights.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Person" means (i) any Existing Holder, (ii) any corporation or
limited liability company controlled by one or more Existing Holders, (iii) any
partnership the general partners of which are or are corporations controlled by
one or more Existing Holders and (iv) any trust of which any Existing Holder is
the trustee and at least 80% of the beneficial interests in which are owned by
such Existing Holder and the spouse or lineal descendants of such Existing
Holder. For purposes of this definition, "control" means the beneficial
ownership of at least 80% of the Voting Stock of a Person.
"Existing Holders" means Robert Nederlander, Eugene I. Schuster, Jerome J.
Cohen, Herbert B. Hirsch and Don A. Mayerson.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in
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staff accounting bulletins and similar written statements from the accounting
staff of the SEC and releases of the Emerging Issues Task Force.
"GSE" means Federal National Mortgage Association or Federal Home Loan
Mortgage Corporation.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
Person and any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" means any person Guaranteeing any
obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holders" or "Noteholders" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication): (i) the principal of and premium, if any,
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person; (iii) all obligations of such Person issued or
assumed as the deferred purchase price of property, all conditional sale
obligations of such Person and all obligations of such Person under any title
retention agreement (including any such obligations under repurchase agreements,
but excluding trade accounts payable and expense accruals arising in the
ordinary course of business not overdue by more than 60 days); (iv) all
obligations of such Person for the reimbursement of any obligor on any letter of
credit, banker's acceptance or similar credit transaction; (v) the amount of all
obligations of such Person with respect to the redemption, repayment or other
repurchase of any Disqualified Stock (but excluding any accrued dividends) or,
in the case of a Subsidiary of such Person, any Preferred Stock (but excluding
any accrued dividends); (vi) Warehouse Indebtedness; (vii) in connection with
each sale of any Excess Spread Receivables, the maximum aggregate claim (if any)
that the purchaser thereof could have against such Person if the payments
anticipated in connection with such Excess Spread Receivables are not collected;
(viii) all obligations of the type referred to in clauses (i) through (vii) of
other Persons and all dividends of other Persons for the payment of which, in
either case, such Person is responsible or liable, directly or indirectly, as
obligor, guarantor or otherwise, including by means of any Guarantee; (ix) all
obligations of the type referred to in clauses (i) through (viii) of other
Persons secured by any Lien on any property or asset of such Person (whether or
not such obligation is assumed by such Person), the amount of such obligation
being deemed to be the lesser of the value of such property or assets or the
amount of the obligation so secured; and (x) to the extent not otherwise
included in this definition, Hedging Obligations of such Person. Notwithstanding
the foregoing, "Indebtedness" shall not include obligations under the Tax
Sharing Agreement or any renewal or other modification thereof that complies
with the covenant described under "Certain Covenants -- Limitation on Affiliate
Transactions." Except in the case of Warehouse Indebtedness (the amount of which
shall be determined in accordance with the definition thereof), the amount of
Indebtedness of any Person at any date shall be the
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outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date.
Notwithstanding the foregoing, any securities issued in a securitization by a
special purpose owner trust or similar entity formed by or on behalf of a Person
and to which Receivables have been sold or otherwise transferred by or on behalf
of such Person or its Restricted Subsidiaries shall not be treated as
Indebtedness of such Person or its Restricted Subsidiaries under the Indenture,
regardless of whether such securities are treated as indebtedness for tax
purposes, provided (1) neither the Company nor any of its Restricted
Subsidiaries (other than Special Purpose Subsidiaries) (a) provides credit
support of any kind (including any undertaking, agreement or instrument that
would constitute Indebtedness), except for credit support in the form of
"over-collateralization" of the senior certificates issued in, or subordination
of or recourse to all or a portion of Excess Spread Receivables attributable to,
such securitization, in each case to the extent reflected in the book value of
such Excess Spread Receivables, or (b) is directly or indirectly liable (as a
guarantor or otherwise), and (2) no default with respect to such securities
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated maturity.
"Interest-only Certificate" means a certificate issued in a securitization
of a pool of Receivables which pays a fixed or floating interest rate on a
notional principal amount.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, repurchase agreement, futures contract or other financial
agreement or arrangement designed to protect the Company or any Restricted
Subsidiary against fluctuations in interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business, other than
Receivables, that are recorded as trade accounts on the balance sheet of the
lender) or other extensions of credit (including by way of Guarantee or similar
arrangement) or capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the account
or use of others), or any purchase or acquisition of Capital Stock, Indebtedness
(including Receivables) or other similar instruments issued by, such Person. For
purposes of the definitions of "Unrestricted Subsidiary" and "Restricted
Payment" and the covenant described under "Certain Covenants -- Limitation on
Restricted Payments," (i) "Investment" shall include the greater of (A) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of any Subsidiary of the Company at the
time that such Subsidiary is designated an Unrestricted Subsidiary and (B) the
aggregate amount of Investments by the Company and its Restricted Subsidiaries
in such Subsidiary at the time it is so designated; provided, however, that upon
a redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from a Person shall be
valued at its fair market value at the time of such transfer, in each case as
determined in good faith by the Board of Directors.
"Issue Date" means the date on which the Notes are originally issued.
"Junior Subordinated Obligation" is defined under "Subordination."
"Lien" means (i) any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof) and (ii) any claim (whether direct or
indirect through subordination or other structural encumbrance) against any
Excess Spread Receivables sold or otherwise transferred by such Person to a
buyer, unless such Person is not liable for any losses thereon.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payment received by way of deferred payment of
principal pursuant to a note or installment receivable or
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otherwise, but only as and when received, but excluding any other consideration
received in the form of assumption by the acquiring Person of Indebtedness or
other obligations relating to such properties or assets or received in any other
noncash form) in each case net of (i) all legal, title and recording tax
expenses, commissions and other fees and expenses incurred, and all Federal,
state, provincial, foreign and local taxes required to be accrued as a liability
under GAAP, as a consequence of such Asset Disposition, (ii) all payments made
on any Indebtedness which is secured by any assets subject to such Asset
Disposition, in accordance with the terms of any Lien upon or other security
agreement of any kind with respect to such assets, or which must by its terms,
or in order to obtain a necessary consent to such Asset Disposition, or by
applicable law be, repaid out of the proceeds from such Asset Disposition, and
(iii) the deduction of appropriate amounts provided by the seller as a reserve,
in accordance with GAAP, against any liabilities associated with the property or
other assets disposed in such Asset Disposition and retained by the Company or
any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Non-Recourse Debt" means indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides a Guarantee or other credit
support of any kind (including any undertaking, agreement or instrument that
would constitute Indebtedness), (b) is directly or indirectly liable (as the
primary obligor or otherwise), or (c) constitutes the lender; and (ii) no
default with respect to which (including any rights that the holders thereof may
have to take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries (other than the Notes and the
Subsidiary Guarantees) to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated maturity.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary: (i) in a Wholly Owned Restricted Subsidiary or a Person that, upon
the making of such Investment, will become a Wholly Owned Restricted Subsidiary;
provided, however, that the primary business of such Wholly Owned Restricted
Subsidiary is a Related Business; (ii) in another Person if as a result of such
Investment such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the Company or a
Wholly Owned Restricted Subsidiary; provided, however, that such Person's
primary business is a Related Business; (iii) while no Default or Event of
Default exists, any Investment in Persons engaged in a Related Business,
provided the aggregate amount of all Investments made by the Company and its
Restricted Subsidiaries after the Issue Date that constitute Permitted
Investments under this clause (iii)(and, without limitation, not including
Permitted Investments under clause (i) above), on any date (the "date of
determination"), may not exceed the sum of (a) $6,000,000, plus (b) the excess,
if any, of (A) 25% of Consolidated Net Income during the period (treated as one
accounting period) from the beginning of the first fiscal quarter commencing
after the Issue Date to the end of the fiscal quarter ended most recently prior
to the date of determination for which financial statements are available (or,
in case such Consolidated Net Income shall be a deficit, zero), over (B) the
aggregate amount of Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issue Date (other than a Restricted Payment permitted to
be made pursuant to clause (i) or (ii) paragraph (b) of the covenant described
above under "Certain Covenants -- Limitation on Restricted Payments"), (iv) in
the form of Temporary Cash Investments; (v) in the form of receivables (other
than Receivables) owing to the Company or any Restricted Subsidiary if created
or acquired in the ordinary course of business and payable or dischargeable in
accordance with customary trade terms; (vi) in the form of payroll, travel and
similar advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses for accounting purposes and that are made
in the ordinary course of business; (vii) in the form of loans or advances to
employees made in the ordinary course of business consistent with past practices
of the Company or such Restricted Subsidiary in an aggregate amount not to
exceed $250,000 outstanding at any time; (viii) in the form of stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Company or any Restricted
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Subsidiary or in satisfaction of judgments; (ix) in any Person to the extent
such Investment represents the non-cash portion of the consideration received
for an Asset Disposition as permitted pursuant to the covenant described under
"Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock",
provided the amount thereof does not exceed 10% of Consolidated Net Worth; (x)
in the form of Receivables of the Company or any Restricted Subsidiary; and (xi)
in the form of Excess Spread Receivables, subordinated certificates or
Interest-only Certificates arising from a securitization or sale of Receivables
by the Company or any of its Wholly Owned Restricted Subsidiaries (including any
securitization of a "pool" of receivables that, in addition to Receivables, also
includes loans, leases or other receivables of Persons other than the Company or
any Wholly Owned Restricted Subsidiary).
"Permitted Liens" means, with respect to the Company and any Restricted
Subsidiary: (i) pledges or deposits by such Person under worker's compensation
laws, unemployment insurance laws or similar legislation, or good faith deposits
in connection with bids, tenders, contracts (other than for the payment of
Indebtedness) or leases to which such Person is a party, or deposits to secure
public or statutory obligations of such Person or deposits of cash or United
States government bonds to secure surety or appeal bonds to which such Person is
a party, or deposits as security for contested taxes or for the payment of rent,
in each case Incurred in the ordinary course of business; (ii) Liens imposed by
law, such as carriers', warehousemen's and mechanics' Liens, in each case for
amounts not yet due or being contested in good faith by appropriate proceedings
or other Liens arising out of judgments or awards against such Person with
respect to which such Person shall then be proceeding with an appeal or other
proceedings for review; (iii) Liens for property taxes not yet subject to
penalties for nonpayment or which are being contested in good faith and by
appropriate proceedings; (iv) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights of way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property, or
leases, subleases or other Liens incidental to the conduct of the business of
such Person or to the ownership of its properties which were not Incurred in
connection with Indebtedness and which do not in the aggregate materially
adversely affect the value of said properties or materially impair their use in
the operation of the business of such Person; (v) Liens securing Indebtedness of
such Person Incurred to finance the construction, purchase or lease of, or
repairs, improvements or additions to, equipment (including vehicles) of such
Person (but excluding Capital Stock of another Person); provided, however, that
the Lien may not extend to any other property owned by such Person or any of its
Subsidiaries at the time the Lien is Incurred, and the Indebtedness secured by
the Lien may not be Incurred more than 180 days after the later of the
acquisition, completion of construction, repair, improvement, addition or
commencement of full operation of the property subject to the Lien; (vi) Liens
on Receivables of the Company or a Restricted Subsidiary, as the case may be, to
secure Indebtedness permitted under the provisions described in clause (b)(1)
under "-- Certain Covenants -- Limitation on Indebtedness" or clause (a) under
"-- Certain Covenants -- Limitation on Preferred Stock of Subsidiaries"; (vii)
Liens on Excess Spread Receivables (or on the Capital Stock of any Person
substantially all the assets of which are Excess Spread Receivables); provided,
however, that no such Liens may encumber Eligible Excess Spread Receivables in
an amount equal to the sum of (1) the Specified Percentage in effect at the
creation of such Lien (the "determination date") of the unpaid principal amount
as of the determination date of the Notes and all other unsecured Indebtedness
of the Company and its Restricted Subsidiaries that does not constitute Junior
Subordinated Obligations (collectively, the "Specified Unsecured Indebtedness";
the amount under this subclause (1) being the "Base Set Aside"), plus (2) 25% of
the excess, if any, of (x) the total amount of Eligible Excess Spread
Receivables shown on the balance sheet of the Company and its Restricted
Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of
the determination date, over (y) the Base Set Aside, provided that the sum of
the Base Set Aside plus the amount in this clause (2) (the "Excess Set Aside")
shall not exceed 200% of Specified Unsecured Indebtedness, plus (3) 10% of the
excess, if any, of (x) the amount under the foregoing subclause (2)(x), over (y)
the sum of the Base Set Aside plus the Excess Set Aside; (viii) Liens existing
on the Issue Date and listed on a schedule to the Indenture; (ix) Liens on
property or shares of Capital Stock of another Person at the time such other
Person becomes a Restricted Subsidiary of such Person; provided, however, that
(A) such Liens are not created, incurred or assumed in connection with, or in
contemplation of, such other Person becoming a Subsidiary or being designated a
Restricted Subsidiary and (B) such Liens may not extend to any other
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property owned by such Person or any of its Restricted Subsidiaries; (x) Liens
on property at the time such Person or any of its Restricted Subsidiaries
acquires the property, including any acquisition by means of a merger or
consolidation with or into such Person or a Restricted Subsidiary of such
Person; provided, however, that (A) such Liens are not created, incurred or
assumed in connection with, or in contemplation of, such acquisition and (B)
such Liens may not extend to any other property owned by such Person or any of
its Restricted Subsidiaries; (xi) Liens securing Indebtedness or other
obligations of a Restricted Subsidiary of such Person owing to such Person or a
Wholly Owned Restricted Subsidiary of such Person; (xii) Liens (other than on
any Excess Spread Receivables) securing Hedging Obligations of the Company or
such Restricted Subsidiary so long as such Hedging Obligations relate to
Indebtedness that is, and is permitted under the Indenture to be, secured by a
Lien on the same property securing such Hedging Obligations; (xiii) Liens to
secure any Refinancing (or successive Refinancings) as a whole, or in part, of
any Indebtedness of the Company or such Restricted Subsidiary secured by any
Lien referred to in the foregoing clauses (v), (viii) and (ix); provided,
however, that (A) such new Lien shall be limited to all or part of the same
property that secured the original Lien (plus improvements to or on such
property), (B) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (1) the outstanding principal
amount or, if greater, committed amount of the Indebtedness described under
clause (v), (viii) or (ix), as the case may be, at the time the original Lien
became a Permitted Lien and (2) an amount necessary to pay any fees and
expenses, including premiums, related to such refinancing, refunding, extension
renewal or replacement and (C) the Average Life of such Indebtedness is not
decreased, and (xiv) any Lien in the form of "over-collateralization" of the
senior certificates issued in, or subordination of or recourse to all or a
portion of Excess Spread Receivables of the Company or any Subsidiary
attributable to a securitization of Receivables, in each case to the extent
reflected in the book value of such Excess Spread Receivables, which Lien is in
favor of the holders of other interests in the trust relating to such
securitization, provided, however, that notwithstanding any of the foregoing
clauses, no Lien on Eligible Excess Spread Receivables, other than a Lien
permissible under the foregoing clauses (vii) and (xiv), shall be a Permitted
Lien. Notwithstanding the foregoing, "Permitted Liens" will not include any Lien
described in clause (v), (ix) or (x) above to the extent such Lien applies to
any Additional Assets acquired directly or indirectly from Net Available Cash
pursuant to the covenant described under "Certain Covenants -- Limitation on
Sale of Assets and Subsidiary Stock." Without limitation, for purposes of clause
(vii) of this definition, the Incurrence of any Indebtedness (or an increase in
the amount of any Indebtedness) secured by a Lien on Excess Spread Receivables
shall be considered the incurrence of a new Lien on such Excess Spread
Receivables, irrespective of whether a Lien securing other Indebtedness (or a
lesser amount of Indebtedness) already exists on such assets at the time of such
Incurrence.
"Permitted Warehouse Indebtedness" means Warehouse Indebtedness in
connection with a Warehouse Facility; provided, however, that (i) the assets
being financed are eligible to be recorded as held for sale on the consolidated
balance sheet of the Company and its Restricted Subsidiaries in accordance with
GAAP, (ii) Warehouse Indebtedness constitutes Permitted Warehouse Indebtedness
only (a) if, in the case of Warehouse Indebtedness under a Purchase Facility,
recourse with respect to the obligations of the Company and its Restricted
Subsidiaries under such Warehouse Facility is limited to the Receivables
financed thereby or (b) in the case of any other Warehouse Indebtedness, to the
extent of the lesser of (A) the amount advanced by the lender with respect to
the Receivables financed under the Warehouse Facility, and (B) the principal
amount of such Receivables, and (iii) any such Indebtedness has not been
outstanding in excess of 360 days.
"Permitted Warehouse Indebtedness Limitation" means, with respect to any
Warehouse Indebtedness of any Restricted Subsidiary, any covenant in the credit
documents under which such Warehouse Indebtedness is incurred to maintain the
consolidated net worth of such Restricted Subsidiary at a specified dollar
amount, provided that such covenant does not require such consolidated net worth
to be maintained at a level in excess of 85% of the consolidated net worth of
such Restricted Subsidiary at the time such credit documents are entered into,
amended or renewed. For purposes of this definition, "consolidated net worth"
shall be determined in accordance with GAAP.
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"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock" as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such corporation.
"Principal" of a Note means the principal of the Note payable on the Note
which is due or overdue or is to become due at the relevant time.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Purchase Facility" means any Warehouse Facility pursuant to which the
Company or a Restricted Subsidiary sells Receivables to a financial institution
or other Person and retains a right of first refusal (or a right with similar
effect) upon the subsequent resale of such Receivables by such financial
institution.
"Receivables" means loans, leases and receivables purchased or originated
by the Company or any Restricted Subsidiary in the ordinary course of business;
provided, however, that for purposes of determining the amount of a Receivable
at any time, such amount shall be determined in accordance with GAAP,
consistently applied, as of the most recent practicable date.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced, (iii) such Refinancing Indebtedness has an aggregate principal
amount (or, if Incurred with original issue discount, an aggregate issue price)
that is equal to or less than the aggregate principal amount (or, if Incurred
with original issue discount, the aggregate accreted value) then outstanding or
committed (plus fees and expenses, including any premium and defeasance costs)
under the Indebtedness being Refinanced, and (iv) in the case of Refinancing
Indebtedness that Refinances any Junior Subordinated Obligations, such
Refinancing Indebtedness constitutes a Junior Subordinated Obligation; provided
further, however, that Refinancing Indebtedness shall not include (x)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or
another Subsidiary or (y) Indebtedness of the Company or a Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any consumer lending business or any financial
service business directly relating to such business.
"Representative" means, with respect to any Senior Indebtedness, any holder
thereof or any agent, trustee or other representative for any such holder.
"Restricted Payment" with respect to any Person means: (i) the declaration
or payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or
indirect holders of its Capital Stock (other than (A) dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock), and (B)
dividends or distributions payable solely to the Company or a Wholly Owned
Restricted Subsidiary; (ii) the purchase, redemption or other acquisition or
retirement for value of any Capital Stock of the Company held by any Person or
of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Wholly Owned Restricted Subsidiary), including the
exercise of any
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option to exchange any Capital Stock (other than into Capital Stock of the
Company that is not Disqualified Stock); (iii) the payment, purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value,
prior to scheduled maturity, scheduled repayment or scheduled sinking fund
payment of any Junior Subordinated Obligations of the Company or any Restricted
Subsidiary; or (iv) the making of any Investment (other than a Permitted
Investment) in any Person. Notwithstanding the foregoing, solely for purposes of
calculating the aggregate amount of "other Restricted Payments since the Issue
Date," as used in clause (iii) of paragraph (a) of the covenant described under
"-- Certain Covenants -- Limitation on Restricted Payments," any Investment that
constitutes a Permitted Investment under clause (iii) of the definition of
"Permitted Investment" shall be considered a Restricted Payment (but such a
Permitted Investment shall not be considered a Restricted Payment for any other
purpose).
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Senior Indebtedness" means principal of and interest (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company or a Subsidiary, as applicable, to the
extent postpetition interest is allowed in such proceeding) and premium, if any,
on (a) any Indebtedness of the Company or any Restricted Subsidiary of the type
referred to in clause (i), (ii), (iii), (iv) or (vi) of the definition of
"Indebtedness," or (b) all Guarantees by the Company or any Restricted
Subsidiary with respect to Indebtedness referred to in the foregoing clause (a),
unless the instrument under which such Indebtedness is incurred expressly
provides that it is pari passu with or subordinated in right of payment to the
Notes (in the case of Indebtedness being Incurred by the Company) or the
Subsidiary Guarantee of such Restricted Subsidiary (in the case of Indebtedness
being Incurred by any Restricted Subsidiary). Notwithstanding the foregoing,
Senior Indebtedness shall not include (a) any liability for federal, state,
local, foreign or other taxes, (b) any Indebtedness of the Company or any
Restricted Subsidiary to any Affiliates (including obligations under the Tax
Sharing Agreement, as amended from time to time), (c) any trade accounts payable
and expense accruals, (d) any Indebtedness that is Incurred in violation of the
Indenture, and (e) Indebtedness owed for compensation or for services rendered.
"Special Purpose Subsidiary" means a Restricted Subsidiary formed in
connection with a securitization of Receivables (i) all the Capital Stock of
which (other than directors' qualifying shares and shares held by other Persons
to the extent such shares are required by applicable law to be held by a Person
other than the Company or a Restricted Subsidiary) is owned by the Company or
one or more Restricted Subsidiaries, (ii) that has no assets other than Excess
Spread Receivables created in such securitization, (iii) that conducts no
business other than holding such Excess Spread Receivables, and (iv) that has no
Indebtedness (other than short-term Indebtedness to the Company or any Wholly
Owned Restricted Subsidiary attributable to the purchase by such Restricted
Subsidiary from the Company or such Wholly Owned Restricted Subsidiary of such
Receivables, which Indebtedness is paid in full upon closing of such
securitization).
"Specified Percentage" means (i) at any time prior to the date that is 6
months after the Issue Date, 0%, (ii) subject to clause (i), at any time prior
to the date that is 12 months after the Issue Date, 20%, (iii) subject to
clauses (i) and (ii), at any time prior to the date that is 18 months after the
Issue Date, 40%, (iv) subject to clauses (i), (ii) and (iii), at any time prior
to the date that is 24 months after the Issue Date, 90%, and (v) at any other
time, 125%.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such
79
<PAGE> 82
Person, (ii) such Person and one or more Wholly Owned Subsidiaries of such
Person or (iii) one or more Wholly Owned Subsidiaries of such Person. Unless
otherwise specified, "Subsidiary" means a Subsidiary of the Company.
"Tax Sharing Agreement" means the agreement, dated as of ,
1996, by and among Mego Financial, the Company and certain affiliates of Mego
Financial, without regard to any amendments, supplements or other modifications
thereof after the Issue Date.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed as to principal and interest by the United States of
America or any agency thereof and maturing within 180 days after acquisition
thereof; (ii) investments in demand deposit accounts or time deposit accounts,
certificates of deposit and money market deposits maturing within 180 days of
the date of acquisition thereof issued by a bank or trust company that is not an
Affiliate of the Company and that is organized under the laws of the United
States of America or any state thereof, which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $500,000,000 and has
outstanding debt which is rated "AA" (or similar equivalent rating) or higher by
at least one nationally recognized statistical rating organization (as defined
in Rule 436 under the Securities Act) or any money-market fund sponsored by a
registered broker-dealer or mutual fund distributor; (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above; (iv) investments in commercial
paper, maturing not more than 90 days after the date of acquisition, issued by a
corporation (other than an Affiliate of the Company) organized and in existence
under the laws of the United States of America with a rating of "P-1" or higher
according to Moody's Investors Service, Inc. or "A-1" or higher according to
Standard & Poor's Ratings Group; and (v) investments in securities with
maturities of six months or less from the date of acquisition issued or fully
guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by Standard & Poor's Ratings Group or Moody's Investors Service,
Inc.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless (a) such Subsidiary or any of its Subsidiaries
owns any Capital Stock or Indebtedness of, or holds any Lien on any property of,
the Company or any other Subsidiary of the Company that is not a Subsidiary of
the Subsidiary to be so designated or (b) any such Subsidiary has outstanding
any Indebtedness other than Non-Recourse Debt; provided, however, that such
designation would be a permitted Restricted Investment under the covenant
described under " -- Certain Covenants -- Limitation on Restricted Payments".
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation (x) the Company could Incur $1.00 of additional Indebtedness
under paragraph (a) of the covenant described under " -- Certain
Covenants -- Limitation on Indebtedness" and (y) no Default or Event of Default
shall have occurred and be continuing or would result therefrom. Any such
designation by the Board of Directors shall be evidenced by the Company to the
Trustee by promptly filing with the Trustee a copy of the board resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
80
<PAGE> 83
"Warehouse Facility" means any funding arrangement with a financial
institution or other lender or purchaser exclusively to finance the purchase or
origination of Receivables by the Company or a Restricted Subsidiary of the
Company for the purpose of pooling such Receivables prior to securitization or
sale in the ordinary course of business, including any Purchase Facilities.
"Warehouse Indebtedness" means the consideration received by the Company or
its Restricted Subsidiaries under a Warehouse Facility with respect to
Receivables until such time such Receivables are (i) securitized, (ii)
repurchased by the Company or its Restricted Subsidiaries or (iii) sold by the
counterpart under the Warehouse Facility to a Person who is not an Affiliate of
the Company.
"Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary all the
Capital Stock of which (other than directors' qualifying shares and shares held
by other Persons to the extent such shares are required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary) is owned by
the Company or one or more Wholly Owned Restricted Subsidiaries.
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of which
(other than directors' qualifying shares and shares held by other Persons to the
extent such shares are required by applicable law to be held by a Person other
than the Company or a Subsidiary) is owned by the Company or one or more Wholly
Owned Subsidiaries.
81
<PAGE> 84
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
with respect to the Offering among the Company and the underwriters named below
(the "Underwriters"), for whom Friedman, Billings, Ramsey & Co., Inc. and
Oppenheimer & Co., Inc. are acting as representatives (the "Representatives"),
each of the Underwriters has severally agreed to purchase from the Company, and
the Company has agreed to sell to the Underwriters, the respective aggregate
principal amount of the Notes set forth opposite their names below.
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
NAME AMOUNT OF NOTES
-------------------------------------------------------------------- -------------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc. ............................. $
Oppenheimer & Co., Inc. ............................................
---------
Total..................................................... $40,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The Underwriters are committed to
purchase all of the Notes if any are purchased.
The Underwriters propose to offer the Notes directly to the public at the
initial public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of % of
the principal amount. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of % of the principal amount on sales to certain
other dealers. The offering of the Notes is made for delivery when, as and if
accepted by the Underwriters and is subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any offer for the purchase of the Notes. After the
initial public offering of the Notes, the public offering price and other
selling terms may be changed by the Underwriters.
Prior to the Offering, there has been no public trading market for the
Notes and there can be no assurance that any active trading market will develop
for the Notes or, if developed, will be maintained.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the federal securities laws, or
to contribute to payments that the Underwriters may be required to make in
respect thereof.
Oppenheimer & Co., Inc. has provided from time to time, and expects to
provide in the future, investment banking and financial services to the Company
and its affiliates, for which Oppenheimer & Co., Inc. has received and will
receive customary fees and commissions.
LEGAL MATTERS
The legality of the Notes offered hereby will be passed upon for the
Company by Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A., Miami,
Florida. Gibson, Dunn & Crutcher LLP, New York, New York has acted as counsel
for the Underwriters in connection with the Offering.
82
<PAGE> 85
EXPERTS
The financial statements included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein and elsewhere in the registration statement, and are so included in
reliance upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits and schedules thereto, the "Registration Statement") under
the Securities Act, with respect to the Notes offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement.
For further information with respect to the Company and the Notes offered
hereby, reference is hereby made to such Registration Statement. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete and, in each instance, reference is made
to the copy of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. Copies of the Registration Statement, including all exhibits thereto,
may be obtained from the Commission's principal office at 450 Fifth Street,
N.W., Washington, D.C. 20549, upon payment of the fees prescribed by the
Commission, or may be examined without charge at the offices of the Commission
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, as well as the
Commission's regional offices at Seven World Trade Center, Suite 1300, New York,
New York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. In addition, copies of the Registration
Statement and related documents may be obtained from the Commission's web site
at http://www.sec.gov.
Upon completion of the Offering and the Common Stock Offering, the Company
will be subject to the reporting requirements of the Securities Exchange Act of
1934, as amended, and in accordance therewith will file annual and quarterly
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information may be inspected, and copies of
such material may be obtained upon payment of prescribed fees, at the
Commission's Public Reference Section at the addresses set forth above.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements of the Company which have been certified
by its independent public accountants.
83
<PAGE> 86
MEGO MORTGAGE CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Financial Statements:
Balance Sheets -- August 31, 1994 and 1995 and May 31, 1996 (unaudited)............. F-3
Statements of Operations -- Years Ended August 31, 1994 and 1995 and Nine Months
Ended May 31, 1995 and 1996 (unaudited).......................................... F-4
Statements of Cash Flows -- Years Ended August 31, 1994 and 1995 and Nine Months
Ended May 31, 1995 and 1996 (unaudited).......................................... F-5
Statements of Stockholder's Equity -- Years Ended August 31, 1994 and 1995 and Nine
Months Ended May 31, 1995 and 1996 (unaudited)................................... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 87
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Mego Mortgage Corporation
Las Vegas, Nevada
We have audited the accompanying balance sheets of Mego Mortgage
Corporation (a wholly owned subsidiary of Mego Financial Corp.) (the "Company")
as of August 31, 1994 and 1995, and the related statements of operations,
stockholder's equity and of cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of August 31,
1994 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
As discussed in Note 13 to the financial statements, the accompanying 1994
financial statements have been restated.
As discussed in Note 2 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights.
Las Vegas, Nevada
February 29, 1996
(October , 1996 as to the last paragraph of Note 2)
The accompanying financial statements retroactively reflect the effect of a
sixteen-hundred-for-one stock split of the common stock which is to be effected
before the effective date of this Registration Statement. The above opinion is
in the form which will be signed by Deloitte & Touche LLP upon consummation of
such stock split, which is described in Note 2 of Notes to Financial Statements,
and assuming that, from February 29, 1996 to the date of such stock split, no
other events shall have occurred that would affect the accompanying financial
statements and notes thereto.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
October 1, 1996
F-2
<PAGE> 88
MEGO MORTGAGE CORPORATION
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------- MAY 31,
1994 1995 1996
-------------- ------- -----------
(AS RESTATED-- (UNAUDITED)
NOTE 15)
<S> <C> <C> <C>
ASSETS
Cash...................................................... $ 824 $ 752 $ 841
Cash deposits, restricted................................. -- 2,532 2,399
Loans held for sale, net.................................. 1,463 3,676 4,671
Mortgage related securities, at fair value................ -- -- 15,144
Excess servicing rights................................... 904 14,483 12,796
Mortgage servicing rights................................. -- 1,076 2,738
Other receivables......................................... 313 142 15
Due from affiliate........................................ 276 -- --
Property and equipment, at cost, net...................... 237 429 800
Organizational costs, net................................. 867 675 530
Other assets.............................................. 238 316 565
------- ------- -------
TOTAL ASSETS.................................... $ 5,122 $24,081 $40,499
======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Notes and contracts payable............................. $ 637 $ 1,458 $ 8,872
Accounts payable and accrued liabilities................ 280 2,239 2,678
Allowance for losses on loans sold with recourse........ 66 886 838
State income taxes payable.............................. -- 264 687
Due to affiliated company............................... -- -- 50
Due to parent company................................... -- 8,453 11,963
------- ------- -------
Total liabilities............................... 983 13,300 25,088
------- ------- -------
Commitments (Note 12)
Stockholder's equity (Note 2):
Common Stock -- $.01 par value per share
Authorized -- 50,000,000 shares
Issued and outstanding -- 10,000,000 shares.......... 5,000 5,000 5,000
Additional paid in capital.............................. 650 3,650 3,650
Retained earnings (accumulated deficit)................. (1,511) 2,131 6,761
------- ------- -------
Total stockholder's equity...................... 4,139 10,781 15,411
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY...... $ 5,122 $24,081 $40,499
======= ======= =======
</TABLE>
See notes to financial statements.
F-3
<PAGE> 89
MEGO MORTGAGE CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
AUGUST 31, MAY 31,
-------------------------- -------------------------
1994 1995 1995 1996
----------- ---------- ---------- ----------
(AS (UNAUDITED)
RESTATED --
NOTE 15)
<S> <C> <C> <C> <C>
REVENUES
Gain on sale of loans................. $ 579 $ 12,233 $ 6,098 $ 11,621
Net unrealized gain on mortgage
related securities................. -- -- -- 2,182
Net loan servicing income............. -- 873 418 3,049
Interest income, net.................. 172 473 313 538
-------- ------- ------- -------
Total revenues................ 751 13,579 6,829 17,390
-------- ------- ------- -------
COSTS AND EXPENSES
Provision for credit losses........... 96 864 558 815
Depreciation and amortization......... 136 403 260 641
Commissions and selling............... 13 552 339 1,560
Other interest........................ 22 187 58 120
General and administrative
Payroll and benefits............... 975 3,611 2,442 3,550
Professional services.............. -- 409 244 716
Services by affiliate.............. 442 690 503 503
FHA insurance...................... 11 231 110 390
Other.............................. 567 713 461 1,632
-------- ------- ------- -------
Total costs and expenses...... 2,262 7,660 4,975 9,927
-------- ------- ------- -------
INCOME BEFORE INCOME TAXES.............. (1,511 ) 5,919 1,854 7,463
INCOME TAXES............................ -- 2,277 651 2,833
-------- ------- ------- -------
NET INCOME (LOSS)....................... $ (1,511 ) $ 3,642 $ 1,203 $ 4,630
======== ======= ======= =======
NET INCOME (LOSS) PER SHARE (Note 2).... $ (0.15 ) $ 0.36 $ 0.12 $ 0.46
======== ======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING (Note 2).................. 10,000,000 10,000,000 10,000,000 10,000,000
======== ======= ======= =======
</TABLE>
See notes to financial statements.
F-4
<PAGE> 90
MEGO MORTGAGE CORPORATION
STATEMENTS OF CASH FLOW
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
AUGUST 31, MAY 31,
------------------------ -------------------
1994 1995 1995 1996
------------- -------- -------- --------
(AS (UNAUDITED)
RESTATED--
NOTE 15)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................................... $(1,511) $ 3,642 $ 1,203 $ 4,630
------- -------- -------- --------
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Gain on sale of loans............................................... (579) (12,233) (6,098) (11,621)
Net unrealized gain on mortgage related securities.................. -- -- -- (2,182)
Provision for credit losses......................................... 96 864 558 815
Income tax.......................................................... -- 2,277 651 2,833
Depreciation and amortization....................................... 136 403 260 641
Amortization of excess servicing rights............................. -- 519 241 1,730
Amortization of other assets........................................ 50 50 50 75
Increase in loans originated, net................................... (8,019) (87,556) (52,438) (89,391)
Proceeds from sale of loans......................................... 6,555 85,297 47,448 88,073
Changes in operating assets and liabilities:
Increase (decrease) in cash deposits, restricted.................. -- (2,532) (1,438) 133
Increase (decrease) in excess servicing rights.................... (355) (1,865) (986) (1,257)
Increase in mortgage servicing rights............................. -- (1,176) (697) (2,022)
(Increase) decrease in other assets............................... (549) 16 98 (343)
Increase in accounts payable and accrued liabilities.............. 279 1,959 1,125 414
------- -------- -------- --------
Total adjustments.............................................. (2,386) (13,977) (11,226) (12,642)
------- -------- -------- --------
Net cash used in operating activities.......................... (3,897) (10,335) (10,023) (8,012)
------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on notes and contracts payable............... 6,275 77,178 47,860 92,202
Payments on notes and contracts payable............................... (5,638) (76,357) (43,705) (84,788)
Increase in due (from) to affiliate................................... (505) 276 1,901 50
Increase in due to parent............................................. -- 6,440 1,200 1,125
Receipt of common stock subscription.................................. 4,500 -- 3,000 --
Increase in paid in capital........................................... -- 3,000 -- --
------- -------- -------- --------
Net cash provided by financing activities...................... 4,632 10,537 10,256 8,589
------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................................... (263) (274) (168) (488)
------- -------- -------- --------
Net cash used in investing activities.......................... (263) (274) (168) (488)
------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH......................................... 472 (72) 65 89
CASH -- BEGINNING OF PERIOD............................................. 352 824 824 752
------- -------- -------- --------
CASH -- END OF PERIOD................................................... $ 824 $ 752 $ 889 $ 841
======= ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................................ $ 38 $ 618 $ 254 $ 560
======= ======== ======== ========
Income taxes........................................................ $ -- $ 3 $ -- $ --
======= ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
In connection with the organization of the Company, the Company's
parent contributed $650,000 to the Company as additional paid-in
capital by the issuance of 475,000 shares of its Common Stock to an
unrelated entity for services rendered.............................. $ 650 $ -- $ -- $ --
======= ======== ======== ========
In connection with the transfer of mortgage backed securities, the
Company retained an interest only security and a residual interest
security............................................................ $ -- $ -- $ -- $ 15,144
======= ======== ======== ========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 91
MEGO MORTGAGE CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED AUGUST 31, 1994 AND 1995 AND THE
NINE MONTHS ENDED MAY 31, 1996 (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
------------------- PAID IN (ACCUMULATED)
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------ ---------- ------------- -------
(NOTE 2)
<S> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 31, 1993................. 10,000,000 $5,000 $ -- $ -- $ 5,000
Additional paid in capital............... -- -- 650 -- 650
Net loss for the year ended August 31, 1994
(as restated -- Note 15)................. -- -- -- (1,511) (1,511)
----- ------ ------ ------- --------
BALANCE AT AUGUST 31, 1994 (AS RESTATED --
NOTE 15)................................. 10,000,000 5,000 650 (1,511) 4,139
Additional paid in capital............... -- -- 3,000 -- 3,000
Net income for the year ended August 31,
1995..................................... -- -- -- 3,642 3,642
----- ------ ------ ------- --------
BALANCE AT AUGUST 31, 1995................. 10,000,000 5,000 3,650 2,131 10,781
Net income for the nine months ended
May 31, 1996............................. -- -- -- 4,630 4,630
----- ------ ------ ------- --------
BALANCE AT MAY 31, 1996 (UNAUDITED)........ 10,000,000 $5,000 $3,650 $ 6,761 $15,411
===== ====== ====== ======= ========
</TABLE>
See notes to financial statements.
F-6
<PAGE> 92
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1994 AND 1995
AND THE NINE MONTHS ENDED MAY 31, 1995 (UNAUDITED) AND 1996 (UNAUDITED)
1. NATURE OF OPERATIONS
Mego Mortgage Corporation (the "Company") was incorporated on June 12,
1992, in the State of Delaware. The authorized capital stock of the Company is
50,000,000 shares of Common Stock with a par value of $.01 per share. The
Company issued a total of 10,000,000 shares of its capital stock to Mego
Financial Corp. ("Mego Financial"), a New York corporation, for $5,000,000 and
became a wholly-owned subsidiary of Mego Financial. The Company, through its
loan correspondents and home improvement contractors, is primarily engaged in
the business of originating, servicing, pooling and selling home improvement
loans ("Loans"), which qualify under the provisions of Title I of the National
Housing Act which is administered by the U.S. Department of Housing and Urban
Development ("HUD"). Pursuant to that program 90% of the principal balances of
the Loans are U.S. government insured ("Title I Loans"), with a cumulative
maximum equal to 10% of all Title I Loans originated by the Company. In May
1996, the Company commenced the origination of conventional home improvement
loans through its network of loan correspondents.
Interim Unaudited Financial Information -- In the opinion of management,
the accompanying unaudited financial statements contain all adjustments
(consisting only of various normal accruals) necessary to present fairly the
Company's financial position, results of operations and cash flows. The
financial position at May 31, 1996 is not necessarily indicative of the
financial position to be expected at August 31, 1996 and results of operations
for the nine months ended May 31, 1996 are not necessarily indicative of the
results of operations to be expected for the year ending August 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Deposits, Restricted -- Restricted cash represents cash on deposit
which is restricted in accordance with the Loan sale agreement and untransmitted
funds received from collection of Loans which have not as yet been disbursed to
the purchasers of such Loans in accordance with the Loan sale agreement.
Loans Held for Sale -- Loans held for sale are carried at the lower of cost
or market value in the accompanying balance sheets, net of allowance for credit
losses. Cost includes the cost of origination.
Mortgage Related Securities -- The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115") on September 1, 1995. There was no
cumulative effect as a result of adopting SFAS 115.
In accordance with the provisions of SFAS No. 115, the Company classifies
residual interests securities and interest only securities as trading securities
which are recorded at fair value with any unrealized gains or losses recorded in
the results of operations in the period of the change in fair value. Valuations
at origination and at each reporting period are based on discounted cash flow
analyses. The cash flows are estimated as the excess of the weighted average
coupon on each pool of loans sold over the sum of the pass-through interest
rate, a servicing fee, a trustee fee, an insurance fee and an estimate of annual
future credit losses related to the loans securitized, over the life of the
loans. These cash flows are projected over the life of the loans using
prepayment, default, loss, and interest rate assumptions that market
participants would use for similar financial instruments subject to prepayment,
credit and interest rate risk and are discounted using an interest rate that a
purchaser unrelated to the seller of such a financial instrument would demand.
Revenue Recognition-Gain on Sales of Loans -- Gain on sale of loans
includes the gain on sale of mortgage backed securities and the gain on sale of
Loans. In accordance with EITF 88-11, the gain on sale of mortgage backed
securities is determined by an allocation of the cost of the securities based on
the relative fair value of the securities sold and the securities retained. The
Company retains an interest only strip security and the residual interest
security. The fair value of the interest only strip and residual interest
security is the present value of the estimated cash flow to be received after
considering the effects of estimated prepayments
F-7
<PAGE> 93
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and credit losses. The interest only strip and residual interest security are
included in Mortgage related securities in the balance sheet.
The present value of expected net cash flows from the sale of loans are
recorded at the time of sale as Excess servicing rights. Excess servicing rights
are amortized as a charge to income, as payments are received on the retained
interest differential over the estimated life of the underlying Loans. Excess
servicing rights are carried at the lower of unamortized cost or estimated fair
value. The expected cash flows used to determine the Excess servicing rights
asset have been reduced for potential losses under recourse provisions of the
sales agreements. The Allowance for losses on loans sold with recourse
represents the Company's estimate of losses to be incurred in connection with
the recourse provisions of the sales agreements and is shown separately as a
liability on the Company's balance sheet.
In discounting cash flows related to loan sales the Company defers
servicing income at annual rates of 1.00% to 1.25% and discounts cash flows on
its sales at the rate it believes a purchaser would require as a rate of return.
The cash flows were discounted to present value using discount rates which
averaged 12.0% for the years ended August 31, 1994 and 1995 and the nine months
ended May 31, 1995 and 1996, respectively. The Company has developed its
assumptions based on experience with its own portfolio, available market data
and ongoing consultation with its investment bankers.
In determining expected cash flows, management considers economic
conditions at the date of sale. In subsequent periods, these estimates may be
revised as necessary using the original discount rate, and any losses arising
from prepayment and loss experience will be recognized as realized.
Mortgage Servicing Rights -- At August 31, 1995, effective September 1,
1994, the Company adopted the provisions of SFAS No. 122 "Accounting for
Mortgage Servicing Rights, an amendment of SFAS No. 65" which requires that a
mortgage banking enterprise recognize as separate assets the rights to service
mortgage loans for others however those servicing rights are acquired. The
effect of adopting SFAS No. 122 on the Company's financial statements was to
increase income before income taxes by $1,076,000 for the year ended August 31,
1995. The fair value of capitalized mortgage servicing rights was estimated by
taking the present value of expected net cash flows from mortgage servicing
using assumptions the Company believes market participants would use in their
estimates of future servicing income and expense, including assumptions about
prepayment, default and interest rates. Capitalized mortgage servicing rights
are amortized in proportion to and over the period of estimated net servicing
income. The estimate of fair value was based on a one hundred basis points per
annum servicing fee reduced by estimated costs of servicing using a discount
rate of 12% for the nine months ended May 31, 1995, and a one hundred
twenty-five basis points per annum servicing fee reduced by estimated costs of
servicing using a discount rate of 12% for the nine months ended May 31, 1996.
At August 31, 1995 and May 31, 1996, the capitalized servicing rights
approximated fair value. The Company periodically reviews capitalized servicing
fees receivable to evaluate for impairment. This review is performed on a
disaggregated basis based on date of origination. Impairment is recognized in a
valuation allowance for each pool in the period of impairment. The Company has
developed its assumptions based on experience with its own portfolio, available
market data and ongoing consultation with its investment bankers.
Allowance for Credit Losses -- Provision for credit losses relating to
unsold Loans is charged to income in amounts sufficient to maintain the
allowance at a level considered adequate to provide for anticipated losses
resulting from liquidation of outstanding Loans. The provision for credit losses
is based upon periodic analysis of the portfolio, economic conditions and
trends, historical credit loss experience, borrowers' ability to repay,
collateral values and giving effect to estimated FHA Insurance recoveries on
Title I Loans.
Property and Equipment -- Property and equipment is stated at cost and is
depreciated over its estimated life (5 years) using the straight-line method.
Costs of maintenance and repairs that do not improve or extend the life of the
respective assets are charged to expense. The cost and related accumulated
depreciation of
F-8
<PAGE> 94
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
property sold or retired are removed from the accounts and any gains or losses
realized are included in the determination of income.
Organizational Costs -- Organizational costs associated with the
commencement of originating, purchasing, selling and servicing of Title I Loans
are being amortized over a five year period which commenced on March 1, 1994.
Such amortization is included in Depreciation and amortization. Accumulated
amortization was $96, $289 and $434 at August 31, 1994 and 1995 and May 31,
1996, respectively.
Loan Origination Costs and Fees -- Loan origination costs and fees
including non-refundable Loan origination fees and incremental direct costs
associated with Loan originations are deferred and amortized over the lives of
the Loans. Unamortized Loan origination costs and fees are recorded as expense
or income upon sale of the related Loans.
Allowance for Losses on Loans Sold with Recourse -- Recourse to the Company
on sales of Loans is governed by the agreements between the purchasers and the
Company. The allowance for losses on Loans sold with recourse represents the
Company's best estimate of its probable future credit losses to be incurred over
the life of the Loans, giving effect to estimated FHA Insurance recoveries on
Title I Loans.
Net Loan Servicing Income -- Fees for servicing Loans originated or
acquired by the Company and sold with servicing rights retained are generally
based on a stipulated percentage of the outstanding principal balance of such
Loans and are recognized when earned. Interest received on Loans sold, less
amounts paid to investors, is reported as Net loan servicing income. Capitalized
excess servicing rights are amortized systematically to reduce Net loan
servicing income to an amount representing normal servicing income and the
present value discount. Late charges and other ancillary income are recognized
when collected. Costs to service Loans are charged to income as incurred.
Income Taxes -- For Federal income tax purposes the Company reports its
income in a consolidated return filed by its parent, Mego Financial. As part of
a tax sharing arrangement, the Company records a liability to Mego Financial for
Federal income taxes calculated at the Federal statutory rate (currently 34%)
applied to the Company's financial statement income before giving consideration
to income tax expense. The Company also provides for state income taxes at the
rate of 6% of Income before income taxes.
Recently Issued Accounting Standards -- The Financial Accounting Standards
Board (the "FASB") has issued Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121").
SFAS 121 requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. SFAS 121 is
effective for fiscal years beginning after December 15, 1995. The Company has
not determined the effect upon adoption on results of operation or financial
condition.
The FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which establishes financial accounting and reporting
standards for stock-based employee compensation plans and for transactions in
which an entity issues its equity instruments to acquire goods or services from
nonemployees. SFAS 123 is generally effective for fiscal years beginning after
December 15, 1995. The Company intends to provide the pro forma and other
additional disclosure about stock-based employee compensation plans in its 1997
financial statements as required by SFAS 123.
The FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." This statement provides
new accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. This statement also provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings and requires that liabilities
and derivatives incurred or obtained by transferors as part of a transfer of
financial assets be initially measured at fair value. It also requires that
servicing assets be measured by
F-9
<PAGE> 95
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
allocating the carrying amount between the assets sold and retained interests
based on their relative fair values at the date of transfer. Additionally, this
statement requires that the servicing assets and liabilities be subsequently
measured by (a) amortization in proportion to and over the period of estimated
net servicing income and (b) assessment for asset impairment or increased
obligation based on their fair values. The Company has not adopted the new
standard for the current period, but must adopt the new requirements effective
January 1, 1997. The Company has not determined the effect on results of
operations or financial condition in the period of adoption.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Income (Loss) Per Share -- Shares used in computing income (loss) per share
include the weighted average of common stock outstanding during the period
adjusted for the proposed sixteen-hundred-for-one stock split. There are no
common stock equivalents.
Reclassification -- Certain prior years information has been reclassified
to conform with current period presentation.
Stock Split -- The accompanying financial statements retroactively reflect
a proposed sixteen-hundred-for-one stock split, an increase in authorized shares
of Common Stock to 50,000,000 and the establishment of a $.01 par value per
share which are to be effective before the effective date of the Registration
Statement covering shares issued in the Company's initial public offering of its
Common Stock.
3. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments" ("SFAS 107"), requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statement of financial condition. Fair values are based on estimates using
present value or other valuation techniques in cases where quoted market prices
are not available. 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 instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
F-10
<PAGE> 96
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Estimated fair values, carrying values and various methods and assumptions
used in valuing the Company's financial instruments at May 31, 1996 are set
forth below (in thousands of dollars).
<TABLE>
<CAPTION>
CARRYING ESTIMATED FAIR
VALUE VALUE
-------- --------------
<S> <C> <C>
Financial Assets:
Cash(a).............................................................. $ 841 $ 841
Loans held for sale, net(b).......................................... 4,671 4,814
Mortgage related securities(c)....................................... 15,144 15,144
Excess servicing rights(c)........................................... 12,796 12,796
Mortgage servicing rights(c)......................................... 2,738 2,738
Financial Liabilities:
Notes and contracts payable(d)....................................... 8,872 8,872
</TABLE>
- ------------------------
(a) The carrying value of cash is considered to be a reasonable estimate of fair
value.
(b) Since it is the Company's business to sell loans it originates, the fair
value was estimated by using current investor yields or outstanding
commitments from investors after consideration of non-qualified loans and
the collateral securing such loans.
(c) The fair value was estimated by discounting future cash flows using rates
available for instruments with similar terms and remaining maturities.
(d) Notes payable generally are adjustable rate and indexed to the prime rate;
therefore, carrying value is a reasonable estimate of fair value. Contracts
payable represent capitalized equipment leases with implicit fixed interest
rates ranging from 8.81% to 9.93%, which approximate fair value in the
aggregate.
The fair value estimates made at May 31, 1996 were based upon pertinent
market data and relevant information on the financial instruments at that time.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the entire portion of the financial instrument.
Because no market exists for a portion of the financial instruments, fair value
estimates may be based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are based on existing on-and-off balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For instance, the Company has certain fee-generating
business lines (e.g., its loan servicing operations) that were not considered in
these estimates since these activities are not financial instruments. In
addition, the tax implications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in any of the estimates.
Off-Balance Sheet Activities -- The Company is exposed to on-balance sheet
credit risk related to its loans held for sale and mortgage related securities.
The Company is exposed to off-balance sheet credit risk related to loans which
the Company has committed to originate.
The Company is party to financial instruments with off-balance sheet credit
risk in the normal course of business. These financial instruments include
commitments to extend credit to borrowers and commitments to purchase loans from
others. As of August 31, 1995 and May 31, 1996, the Company had outstanding
commitments to extend credit or purchase loans in the amounts of $53,447,000 and
$49,120,000, respectively.
F-11
<PAGE> 97
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LOANS HELD FOR SALE, NET
Loans held for sale, net (in thousands of dollars) consisted of the
following at:
<TABLE>
<CAPTION>
AUGUST 31,
----------------- MAY 31,
1994 1995 1996
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Loans held for sale................................... $1,493 $3,750 $ 4,766
Less: Allowance for credit losses..................... 30 74 95
------ ------ ------
Net total................................... $1,463 $3,676 $ 4,671
====== ====== ======
</TABLE>
The serviced Loan portfolio which includes Loans sold to investors and
Loans retained by the Company aggregate approximately $8,027,000, $92,286,000
and $171,048,000 at August 31, 1994 and 1995 and May 31, 1996, respectively.
At August 31, 1994 and 1995 and May 31, 1996, the Company was contingently
liable for losses, to the extent not covered by FHA insurance, with respect to
Loans sold with recourse totaling $6,555,000, $88,565,000 and $83,801,000,
respectively.
During the years ended August 31, 1994 and 1995 and the nine months ended
May 31, 1996, the Company originated 497, 5,818 and 5,900 Title I and
conventional loans respectively, with Loan proceeds of $8,133,000, $87,751,000
and $89,391,000, respectively. Additionally, the Company was servicing 11,700
Loans with an unpaid principal balance of $171,048,000 at May 31, 1996.
The Company provides an allowance for credit losses, in an amount which in
the Company's judgment will be adequate to absorb losses after FHA insurance
recoveries on the Loans, that may become uncollectible. The Company's judgment
in determining the adequacy of this allowance is based on its continual review
of its portfolio of Loans which utilizes historical experience and current
economic factors. These reviews take into consideration changes in the nature
and level of the portfolio, current and future economic conditions which may
affect the obligor's ability to pay, collateral values and overall portfolio
quality. Changes in the allowance for credit losses for Loans (in thousands of
dollars) consisted of the following:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED AUGUST FOR THE NINE
31, MONTHS ENDED
------------- MAY 31,
1994 1995 1996
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
Balance at beginning of year............................. $-- $ 96 $ 960
Provisions for credit losses on Company generated
Loans.................................................. 68 864 815
Provision for credit losses on acquired Loans............ 28 -- --
Reductions due to reacquisition and securitization....... -- -- (842)
--- ---- -----
Balance at end of year................................... $96 $960 $ 933
=== ==== =====
Allowance for credit losses.............................. $30 $ 74 $ 95
Allowance for Loans sold with recourse................... 66 886 838
--- ---- -----
Total.......................................... $96 $960 $ 933
=== ==== =====
</TABLE>
F-12
<PAGE> 98
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. MORTGAGE RELATED SECURITIES
Mortgage related securities are classified as trading securities and are
carried at estimated market value. Changes in the estimated market value are
recorded in current operations. As of May 31, 1996 mortgage related securities
(in thousands of dollars) consisted of the following:
<TABLE>
<S> <C>
Interest only security..................................................... $ 2,992
Residual interest security................................................. 12,152
-------
Total............................................................ $15,144
=======
</TABLE>
6. EXCESS SERVICING RIGHTS
Activity in excess servicing rights (in thousands of dollars) consisted of
the following:
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE NINE MONTHS
ENDED AUGUST 31, ENDED MAY 31,
---------------- -------------------
1994 1995 1995 1996
---- ------- ------ --------
<S> <C> <C> <C> <C>
Beginning balance............................. $ -- $ 904 $ 904 $ 14,483
Plus additions................................ 904 14,098 7,084 15,675
Less amortization............................. -- (519) (241) (1,730)
Less transfers to securities.................. -- -- -- (15,632)
---- ------- ------ --------
Ending balance...................... $904 $14,483 $7,747 $ 12,796
==== ======= ====== ========
</TABLE>
The Company sold $6,555,000, $85,182,000 and $88,073,000 of Title I Loans
in the fiscal years ended August 31, 1994 and 1995 and the nine months ended May
31, 1996, respectively, at an average yield to the purchaser of 8.5%, 8.4% and
7.1%, respectively.
During the nine months ended May 31, 1995 and 1996, the Company sold
$55,889,000 and $88,073,000 of Title I Loans to financial institutions. From the
proceeds $43,688,000 and $79,856,000, respectively, were used to pay debt. The
Title I Loans bear interest rates averaging 14.5% and 14.3%, respectively, and
were sold to yield returns averaging 8.6% and 7.1%, respectively, to the
purchaser, with any excess interest received from the obligors being payable to
the Company.
During the years ended August 31, 1994 and 1995 and the nine months ended
May 31, 1996, amortization of the Excess servicing rights was zero, $519,000 and
$1,730,000, respectively, and reduces Net loan servicing income.
Of the Title I Loans sold in the year ended August 31, 1995, $56,922,000 of
such Loans were sold to a purchaser, in a series of sales commencing on April
21, 1995, under a continuing sales agreement which provides for the yield to the
purchaser to be adjusted monthly to a rate equal to 200 basis points (2%) per
annum over the one-month London Interbank Offered Rate ("LIBOR"). LIBOR was
5.875% per annum at August 31, 1995. Certain loans were reacquired and sold as
part of a securitization in March 1996. The principal balance of Loans subject
to the LIBOR adjustment was $28,823,000 at May 31, 1996. The effect of an
increase or decrease in LIBOR of 100 basis points (1.0%) applied to those Loans
would be a decrease or increase, respectively, to the Company's future pre-tax
income of approximately $953,000.
The Company's serviced portfolio is geographically diversified within the
United States. The Company services mortgage loans in 45 states and the District
of Columbia. At May 31, 1996, 38% of the dollar value of loans serviced had been
originated in California and no other state accounted for more than 10% of the
serviced portfolio. The risk inherent in such concentration is dependent upon
regional and general economic stability which affects property values and the
financial well-being of the borrowers.
F-13
<PAGE> 99
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. MORTGAGE SERVICING RIGHTS
Activity in mortgage servicing rights (in thousands of dollars) consisted
of the following:
<TABLE>
<CAPTION>
FOR THE YEARS FOR THE NINE
ENDED AUGUST MONTHS ENDED
31, MAY 31,
--------------- ---------------
1994 1995 1995 1996
---- ------ ---- ------
<S> <C> <C> <C> <C>
Beginning balance.................................. $ -- $ -- $ -- $1,076
Plus additions..................................... -- 1,176 697 2,023
Less amortization.................................. -- (100) (46) (361)
---- ------ ---- ------
Ending balance........................... $ -- $1,076 $651 $2,738
==== ====== ==== ======
</TABLE>
As indicated in Note 2, the Company adopted the provisions of SFAS No. 122
effective September 1, 1994.
8. PROPERTY AND EQUIPMENT
Property and equipment (in thousands of dollars) consisted of the following
at:
<TABLE>
<CAPTION>
AUGUST 31,
-------------- MAY 31,
1994 1995 1996
---- ----- -------
<S> <C> <C> <C>
Office equipment and furnishings......................... $180 $ 337 $ 617
Vehicles................................................. -- 34 34
EDP equipment............................................ 83 166 374
---- ----- -------
263 537 1,025
Less accumulated depreciation............................ (26) (108) (225 )
---- ----- -------
Total property and equipment, net.............. $237 $ 429 $ 800
==== ===== ========
</TABLE>
9. OTHER ASSETS
Other assets (in thousands of dollars) consisted of the following at:
<TABLE>
<CAPTION>
AUGUST 31,
------------- MAY 31,
1994 1995 1996
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred loan costs...................................... $ 50 $129 $ 104
Software costs, net of amortization (Note 13)............ 117 127 163
Other.................................................... 71 60 298
---- ---- ----
Total.......................................... $238 $316 $ 565
==== ==== ====
</TABLE>
10. NOTES AND CONTRACTS PAYABLE
Notes and contracts payable (in thousands of dollars) consisted of the
following at:
<TABLE>
<CAPTION>
AUGUST 31,
------------- MAY 31,
1994 1995 1996
---- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable -- warehouse line of credit.................... $373 $1,039 $ 3,012
Note payable -- demand...................................... -- -- 5,000
Contracts payable........................................... 264 419 860
---- ------ ------
Total............................................. $637 $1,458 $ 8,872
==== ====== ======
</TABLE>
F-14
<PAGE> 100
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Notes payable at May 31, 1996 included $3,012,000 of borrowings outstanding
under a Warehousing Credit and Security Agreement with a bank that provides
available credit facilities up to $20,000,000. The outstanding borrowings bear
interest at the bank's prevailing prime rate plus 1% (9.25% at May 31, 1996) and
are collateralized by security interests in the Company's Loans held for sale.
The revolving line of credit is due for renewal on August 9, 1997. Availability
of borrowings under this credit facility is subject to certain conditions as
specified in such agreement. Beginning as of August 11, 1995, the terms of this
credit facility contain, among other provisions, financial covenants requiring
the maintenance of a minimum tangible net worth of $7,500,000 (changed to
$12,500,000 in August 1996), a minimum level of profitability of at last
$500,000 per six month period and certain restrictions, including but not
limited to, restrictions on additional indebtedness. This note is guaranteed by
Mego Financial.
In addition to the $20.0 million warehouse line of credit, at May 31, 1996,
the Company had a $5.0 million demand note facility from the same lender
expiring August 31, 1996, bearing interest at the bank's prime rate plus 2%,
with respect to which $5.0 million was outstanding on that date. This facility
was secured by a pledge of the Company's Excess servicing rights (together with
the Mortgage related securities). As of June 28, 1996, this facility was
replaced by a $10.0 million revolving credit loan from the same lender, with the
same security. The new facility has an eighteen month revolving credit period
followed by a thirty month payment period, and requires the Company to maintain
a minimum tangible net worth of $12.5 million and a minimum level of
profitability of at least $500,000 per rolling six month period. Borrowings
under this facility cannot exceed the lesser of (a) 40% of the Company's Excess
servicing rights and Mortgage related securities or (b) six times the aggregate
of the Excess servicing rights and Mortgage related securities payments actually
received by the Company over the most recent three month period. The agreement
contains certain restrictions, including but not limited to, restrictions on
additional indebtedness. Both lines of credit have been guaranteed by Mego
Financial.
At August 31, 1994 and 1995 and the nine months ended May 31, 1996,
Contracts payable consisted of $264,000, $419,000 and $860,000, respectively, in
obligations under lease purchase arrangements secured by Property and equipment,
bearing an interest rate of prime plus 1%.
The prime rate of interest was 8.25% at May 31, 1996.
Scheduled maturities of the Company's debt, excluding lines of credit of
$8,012,000 at May 31, 1996 are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
-------------------------------------------------------
TOTAL 1996 1997 1998 1999 2000 THEREAFTER
- ----- ---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
$860 $46 $224 $246 $192 $145 $7
==== === ==== ==== ==== ====
</TABLE>
11. PAID IN CAPITAL
During fiscal 1995, Mego Financial contributed $3,000,000 to the Company as
Additional paid in capital. During fiscal 1994, Mego Financial contributed
$650,000 to the Company as Additional paid in capital by the issuance of 475,000
shares of Common Stock of Mego Financial to an unrelated company for its
services in obtaining the necessary HUD approval, state licensing and other
matters in connection with the organization of the Company.
12. COMMITMENTS
The Company leases its main office under the terms of a lease that expires
March 31, 1999. During fiscal 1994, 1995 and the nine months ended May 31, 1996,
the Company's rent expense related to this lease was $54,000, $154,000 and
$123,000, respectively. Future minimum rental payments under the lease (in
thousands of dollars) are set forth below. In April 1996, the Company executed a
lease in another location on space for
F-15
<PAGE> 101
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
its main offices which it will occupy in September 1996. The 1996 lease
commences September 1, 1996, expires August 31, 2002 and is guaranteed by Mego
Financial. Future minimum rental payments under the lease (in thousands of
dollars) are set forth below.
<TABLE>
<CAPTION>
1995 1996
FOR THE YEARS ENDED AUGUST 31, LEASE LEASE
---------------------------------------------------------------------- ----- ------
<S> <C> <C>
1996.................................................................. $ 42 $ --
1997.................................................................. 169 774
1998.................................................................. 169 902
1999.................................................................. 84 921
2000.................................................................. -- 939
Thereafter............................................................ -- 1,935
---- ------
Total....................................................... $ 464 $5,471
==== ======
</TABLE>
13. RELATED PARTY TRANSACTIONS
During the years ended August 31, 1994 and 1995 and the nine months ended
May 31, 1996, an affiliated company, Preferred Equities Corporation ("PEC"),
provided certain services to the Company including loan servicing and collection
of $13,000, $174,000 and $479,000, respectively. In addition, certain expenses
including executive, accounting, legal, management information, advertising and
promotional materials totalling $442,000, $690,000 and $503,000 are included in
General and administrative expenses for the years ended August 31, 1994 and 1995
and the nine months ended May 31, 1996, respectively. Included in Interest
expense for the year ended August 31, 1995 and the nine months ended May 31,
1996, is $85,000 and $23,000 related to advances from PEC. At August 31, 1995,
PEC transferred the related receivable to Mego Financial.
During the years ended August 31, 1994, 1995 and the nine months ended May
31, 1996, the Company paid PEC for developing certain computer programming (see
Note 8), incurring costs of $130,000, $36,000 and $56,000, respectively. The
Company is amortizing these costs over a five year period. During fiscal 1994
and 1995 and for the nine months ended May 31, 1996, amortization of $13,000,
$26,000 and $20,000, respectively, was included in expense.
At May 31, 1996 and at August 31, 1995, the Company had a non-interest
bearing liability to Mego Financial of $11,963,000 and $8,453,000, respectively,
for Federal income taxes and cash advances, which is due on demand and has not
as yet been paid. At August 31, 1994, the Company had a receivable from PEC of
$276,000 resulting from an adjustment in charges for services to the Company,
which amount was subsequently paid during September 1994.
It is the Company's belief that Mego Financial, its parent, will continue
to provide the Company with sufficient financial support, as circumstances
warrant, to enable the Company to meet its obligations as they become due.
However, Mego Financial has no contractual obligation to provide such support
other than its guaranty of the warehouse line of credit, revolving credit loan
and operating lease described in Notes 10 and 12.
F-16
<PAGE> 102
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. INCOME TAXES
As described in Note 2, the Company records a liability to Mego Financial
for Federal income taxes at the statutory rate (currently 34%) applied to Income
before income taxes. State income taxes are computed at the appropriate state
rate (6%) net of any available operating loss carryovers and are recorded as
State income taxes payable. For the years ended August 31, 1994 and 1995, Income
tax expense has been computed (in thousands of dollars) as follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED FOR THE NINE
AUGUST 31, MONTHS ENDED
---------------- MAY 31,
1994 1995 1996
------- ------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Income (loss) before income taxes....................... $(1,511) $5,919 $7,463
======= ====== ======
Federal income taxes at 34% of income................... $ -- $2,013 $2,385
State income taxes at 6% of income after application of
prior year carryforward............................... -- 264 448
------- ------ ------
Income tax expense...................................... $ -- $2,277 $2,833
======= ====== ======
</TABLE>
As part of a tax sharing arrangement, the Company records a liability to
its parent, Mego Financial, for Federal income taxes calculated at the Federal
statutory rate (currently 34%) applied to the Company's financial statement
income before giving consideration to income tax expense.
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST
31, NINE MONTHS
------------------ ENDED MAY
1994 1995 31, 1996
----- ------ -----------
<S> <C> <C> <C>
Current........................................... $ -- $1,670 $ 1,340
Deferred.......................................... -- 607 1,493
----- ------ -----------
Total................................... $ -- $2,277 $ 2,833
===== ====== ============
</TABLE>
F-17
<PAGE> 103
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, (b) temporary
differences between the timing of revenue recognition for book purposes and
income tax purposes and (c) operating loss and tax credit carryforwards. The tax
effects of significant items comprising the Company's net deferred tax liability
as of August 31, 1994 and 1995, and May 31, 1996 (in thousands of dollars), are
as follows:
<TABLE>
<CAPTION>
AUGUST 31,
---------------- MAY 31,
1994 1995 1996
----- ------ -------
<S> <C> <C> <C>
Deferred tax liabilities:
Difference between book and tax carrying value of
assets........................................... $ -- $ 1 $ 117
Timing of revenue recognition...................... -- 541 1,283
Mortgage servicing rights.......................... -- 366 931
----- ------ -------
-- 908 2,331
----- ------ -------
Deferred tax assets:
Operating loss carryforward........................ 514 -- --
Difference between book and tax carrying value of
assets........................................... 5 -- --
Timing of revenue recognition...................... 22 301 285
----- ------ -------
541 301 285
----- ------ -------
Valuation allowance..................................... 541 -- --
----- ------ -------
Net deferred tax liability.................... $ -- $ 607 $2,046
----- ------ -------
</TABLE>
15. RESTATEMENT
Subsequent to the issuance of its financial statements for the year ended
August 31, 1994, the Company determined that certain adjustments were required
to be made to the previously reported amounts as of and for the year ended
August 31, 1994.
As a result, the Company restated such previously reported amounts to
reflect appropriate estimates and assumptions used to determine the discounted
revenue related to the gain on Loans sold by the Company during fiscal 1994, to
properly record deferred loan origination costs included in Loans held for sale,
net and to write-off certain expenses previously included in Organizational
costs. The restatement also included other miscellaneous adjustments.
A summary of the effect of the restatement on the Balance Sheet at August
31, 1994 is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
<S> <C> <C>
Loans held for sale, net...................................... $ 1,416 $ 1,463
Excess servicing rights....................................... 1,246 904
Due from affiliate............................................ 145 276
Organizational costs, net of amortization..................... 1,756 867
Other assets.................................................. 271 238
Accounts payable and accrued liabilities...................... 230 280
Allowance for losses on Loans sold with recourse.............. 59 66
Accumulated deficit........................................... (368) (1,511)
</TABLE>
F-18
<PAGE> 104
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the effect of the restatement on the Statement of Operations
for the year ended August 31, 1994 is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
<S> <C> <C>
Gain on sale of Loans......................................... $ 1,206 $ 579
Interest income............................................... 298 279
Interest...................................................... 79 129
Provision for credit losses................................... 133 96
Depreciation and amortization................................. 189 136
Commissions and selling....................................... -- 13
General and administrative.................................... 1,471 1,995
Net loss...................................................... (368) (1,511)
</TABLE>
F-19
<PAGE> 105
------------------------------------------------------
------------------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND ANY INFORMATION OR
REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY
PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------------
TABLE OF CONTENTS
------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 9
Use of Proceeds............................ 20
Capitalization............................. 21
Selected Financial Data.................... 22
Management's Discussion and Analysis of
Financial Condition and Results
of Operations............................ 24
Business................................... 33
Management................................. 48
Principal Stockholders..................... 52
Certain Transactions....................... 53
Description of the Notes................... 55
Underwriting............................... 82
Legal Matters.............................. 82
Experts.................................... 83
Additional Information..................... 83
Index to Financial Statements.............. F-1
</TABLE>
UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A
PROSPECTUS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$40,000,000
MEGO MORTGAGE CORPORATION
% SENIOR SUBORDINATED
NOTES DUE 2001
------------------------------
PROSPECTUS
------------------------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
OPPENHEIMER & CO., INC.
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 106
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses in connection with the offering
described in this registration statement will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee....................... $ 12,122
NASD filing fee........................................................... 4,500
Printing expenses......................................................... *
Accounting fees and expenses.............................................. *
Legal fees and expenses................................................... *
Fees and expenses (including legal fees) for qualifications under state
securities laws......................................................... *
Transfer agent's fees and expenses........................................ *
Miscellaneous............................................................. *
--------
Total........................................................... $ *
========
</TABLE>
- ---------------
* To be provided by amendment
All amounts except the Securities and Exchange Commission registration fee
and the NASD filing fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145(a) of the Delaware General Corporation Law (the "GCL") provides
that a Delaware corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no cause to believe his
or her conduct was unlawful.
Section 145(b) of the GCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by such person in connection with the defense or
settlement of such action or suit if he or she acted under similar standards,
except that no indemnification may be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of his or her duty to the
corporation unless and only to the extent that the court in which such action or
suit was brought shall determine that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to be indemnified for such expenses which the court shall
deem proper.
Section 145 of GCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsection (a) and (b) or in the defense of any
claim, issue or matter therein, such officer or director shall be indemnified
against expenses actually and reasonably incurred by him or her in connection
therewith; that indemnification provided for by Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation may purchase and maintain insurance on behalf of a
director or officer of the
II-1
<PAGE> 107
corporation against any liability asserted against such officer or director and
incurred by him or her in any such capacity or arising out of his or her status
as such, whether or not the corporation would have the power to indemnify him or
her against such liabilities under Section 145.
As permitted by Section 102(b)(7) of the GCL, the Company's Amended and
Restated Certificate of Incorporation provides that a director shall not be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. However, such provision does not eliminate or
limit the liability of a director for acts or omissions not in good faith or for
breaching his or her duty of loyalty, engaging in intentional misconduct or
knowingly violating a law, paying a dividend or approving a stock repurchase
which was illegal, or obtaining an improper personal benefit. A provision of
this type has no effect on the availability of equitable remedies, such as
injunction or rescission, for breach of fiduciary duty.
The Company's Bylaws require the Company to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company) by reason
of the fact that he is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, that he had
reasonable cause to believe that his conduct was unlawful.
In addition, the Company's Bylaws require the Company to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Company to procure a judgment in its favor by reason of the fact that he is or
was a director, officer, employee or agent of the Company, or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, except that no indemnification may
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable for negligence or misconduct in the performance
of his duty to the Company unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Any indemnification (unless ordered by a court) made by the Company may be
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct as set forth
above. Such determination must be made (i) by the Board by a majority vote of a
quorum consisting of directors who were not parties to such action, suit or
proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable,
a quorum of disinterested directors so directs, by independent legal counsel in
a written opinion, or (iii) by the stockholders.
To the extent that a director, officer, employee or agent of the Company
has been successful on the merits or otherwise in defense of any covered action,
suit or proceeding, or in defense of any covered claim, issue or matter therein,
he will be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
Expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding may be paid by the Company in advance of the
final disposition of such action, suit or proceeding as authorized by
II-2
<PAGE> 108
the Board in the specific case upon receipt of an undertaking by or on behalf of
the director or officer to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Company as authorized in
the Amended and Restated Certificate of Incorporation. Such expenses incurred by
other employees and agents may be so paid upon such terms and conditions, if
any, as the Board deems appropriate.
The Company presently maintains policies of directors' and officers'
liability insurance in the amount of $30.0 million.
Pursuant to the Underwriting Agreement to be filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify the directors,
officers and controlling persons of the Registrant against certain civil
liabilities that may be incurred in connection with the Offering, including
certain liabilities under the Securities Act of 1933, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities that were not registered under the 1933 Act have been issued
or sold by the Registrant within the past three years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------
<C> <C> <S>
1.1* -- Underwriting Agreement.
3.1* -- Amended and Restated Certificate of Incorporation of the Registrant.
3.2* -- By-laws of the Registrant, as amended.
4.1* -- Form of Note.
4.2* -- Form of Indenture.
5.1* -- Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A.
10.1* -- Stock Option Plan
10.2(1) -- Agreement for Line of Credit and Commercial Promissory Note between the
Registrant and First National Bank of Boston, dated January 4, 1994.
10.3(1) -- Agreement between the Registrant and Hamilton Consulting, Inc., dated January
31, 1994.
10.4(1) -- Loan Purchase and Sale Agreement dated March 22, 1994, between the Registrant as
Buyer, and Southwest Beneficial Finance, Inc. as Seller.
10.5(1) -- Master Loan Purchase and Servicing Agreement dated as of August 26, 1994,
between the Registrant as Seller, and First National Bank of Boston, as
Purchaser.
10.6(2) -- Master Loan Purchase and Servicing Agreement dated April 1, 1995, by and between
Greenwich Capital Financial Products, Inc. and the Registrant.
10.7(2) -- Participation and Servicing Agreement dated May 25, 1995, by and between
Atlantic Bank, N.A. and the Registrant.
10.8(2) -- Warehousing Credit and Security Agreement, dated as of August 11, 1995, between
the Registrant and First National Bank of Boston.
10.9* -- Tax Sharing Agreement among the Registrant, Mego Financial Corp., Preferred
Equities Corporation and the subsidiaries of Preferred Equities Corporation.
10.10* -- Servicing Agreement between the Registrant and Preferred Equities Corporation.
10.11(3) -- Servicing Agreement by and among Mego Mortgage FHA Title I Loan Trust 1996-1,
First Trust of New York, National Association, as Trustee, Norwest Bank
Minnesota, N.A., as Master Servicer and the Registrant, as Servicer dated as of
March 21, 1996.
10.12(3) -- Loan Purchase Agreement between Financial Asset Securities Corp., as Purchaser,
and the Registrant, as Seller, dated as of March 21, 1996.
10.13 -- Indemnification Agreement among MBIA Insurance Corporation, as Insurer, the
Registrant, as Seller and Greenwich Capital Markets, Inc. as Underwriter, dated
as of March 29, 1996.
</TABLE>
II-3
<PAGE> 109
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------
<C> <C> <S>
10.14(3) -- Pooling and Servicing Agreement, dated as of March 21, 1996, among the
Registrant, Financial Asset Securities Corp., as Depositor, First Trust of New
York, National Association, as Trustee and Contract of Insurance Holder and
Norwest Bank Minnesota, N.A., as Master Servicer.
10.15 -- Insurance Agreement among MBIA Insurance Corporation, as Insurer, Norwest Bank
Minnesota, N.A., as Master Servicer, the Registrant, as Seller, Servicer and
Claims Administrator, Financial Asset Securities Corp., as Depositor, Greenwich
Capital Financial Products, Inc., and First Trust of New York, National
Association, as Trustee and Contract of Insurance Holder, dated as of March 21,
1996.
10.16 -- Credit Agreement dated as of June 28, 1996 between the Registrant and First
National Bank of Boston as Agent.
10.17(3) -- Loan Purchase Agreement dated as of August 1, 1996 between Financial Asset
Securities Corp., as Purchaser, and the Registrant, as Seller.
10.18(3) -- Pooling and Servicing Agreement dated as of August 1, 1996 between Financial
Asset Securities Corp., as Purchaser, and the Registrant, as Seller.
10.19 -- Amendment No. 1 to Warehousing Credit and Security Agreement dated as of August
9, 1996 between the Registrant and First National Bank of Boston.
10.20* -- Office Lease by and between MassMutual and the Registrant dated April 1996.
10.21 -- Amendment to Master Loan Purchase and Servicing Agreement between Greenwich
Capital Financial Products, Inc. and the Registrant dated February 1, 1996.
10.22 -- Amendment No. 2 to Master Loan Purchase and Servicing Agreement between
Greenwich Capital Financial Products, Inc. and the Registrant dated July 1,
1996.
10.23* -- Management Agreement between Mego Financial Corp. and the Registrant dated
October 1996.
10.24 -- Employment Agreement between the Registrant and Jeffrey S. Moore dated January
1, 1994.
12.1(3) -- Computation of Ratio of Earnings to Fixed Charges.
21.1(3) -- Subsidiaries of the Registrant.
23.1* -- Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. (to be
included in its opinion to be filed as Exhibit 5.1*).
23.2 -- Consent of Deloitte & Touche LLP.
24.1 -- Reference is made to the Signatures section of this Registration Statement for
the Power of Attorney contained therein.
25.1* -- Statement of Eligibility of Trustee.
27.1(3) -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
* To be filed by amendment
(1) Filed as part of the Form 10-K for the fiscal year ended August 31, 1994 of
Mego Financial Corp. and incorporated herein by reference.
(2) Filed as part of the Form 10-K for the fiscal year ended August 31, 1995 of
Mego Financial Corp. and incorporated herein by reference.
(3) Filed as part of the Registration Statement on Form S-1 filed by the Company
on September 20, 1996 (File No. 333-12443) and incorporated herein by
reference.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise,
II-4
<PAGE> 110
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 111
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on October 3, 1996.
MEGO MORTGAGE CORPORATION
By: /s/ JEROME J. COHEN
------------------------------------
Jerome J. Cohen,
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jerome J. Cohen and Don A. Mayerson and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorneys-in-fact and agents or any
of them or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- -------------------
<C> <S> <C>
/s/ JEROME J. COHEN Chairman of the Board and October 3, 1996
- --------------------------------------------- Chief Executive Officer
Jerome J. Cohen
/s/ JEFFREY S. MOORE President, Chief Operating October 3, 1996
- --------------------------------------------- Officer and Director
Jeffrey S. Moore
/s/ JAMES L. BELTER Executive Vice President October 3, 1996
- --------------------------------------------- and Chief Financial
James L. Belter Officer
/s/ ROBERT NEDERLANDER Director October 3, 1996
- ---------------------------------------------
Robert Nederlander
/s/ HERBERT B. HIRSCH Director October 3, 1996
- ---------------------------------------------
Herbert B. Hirsch
/s/ DON A. MAYERSON Director October 3, 1996
- ---------------------------------------------
Don A. Mayerson
</TABLE>
II-6
<PAGE> 1
EXHIBIT 10.13
EXECUTION COPY
================================================================================
MBIA INSURANCE CORPORATION,
as Insurer
MEGO MORTGAGE CORPORATION,
as Seller
and
GREENWICH CAPITAL MARKETS, INC.
as Underwriter
INDEMNIFICATION AGREEMENT
Mego Mortgage FHA Title I Loan Trust 1996-1
FHA Title I Loan Asset-Backed Certificates, Series 1996-1
Class A-1, Class A-2, Class A-3 and Class S
Dated as of March 29, 1996
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Definitions...................................................................1
Section 2. Representations and Warranties of the Insurer.................................2
Section 3. Agreements, Representations and Warranties of the Underwriter.................3
Section 4. Agreements, Representations and Warranties of the Seller......................3
Section 5. Indemnification...............................................................5
Section 6. Insurer Undertaking...........................................................5
Section 7. Notice To Be Given Insurer....................................................5
Section 8. Notice To Be Given the Underwriter............................................6
Section 9. Notice To Be Given the Seller.................................................7
Section 10. Contribution..................................................................8
Section 11 Notices.......................................................................9
Section 12. Governing Law, Etc...........................................................10
Section 13. Insurance Agreement..........................................................10
Section 14. Limitations..................................................................10
Section 15. Counterparts.................................................................10
TESTIMONIUM....................................................................Signature Page
SIGNATURES.....................................................................Signature Page
</TABLE>
<PAGE> 3
INDEMNIFICATION AGREEMENT
This Agreement, dated as of March 29, 1996 (this "Agreement"), is by and
among MBIA Insurance Corporation (the "Insurer"), as the Insurer under the
Certificate Guaranty Insurance Policy (the "Policy") issued in connection with
the Certificates described below, Mortgage Corporation (the "Seller") and
Greenwich Capital Markets, Inc. (the "Underwriter").
Section 1. DEFINITIONS. As used in this Agreement, the following terms
shall have the respective meanings stated herein, unless the context clearly
requires otherwise, in both singular and plural form, as appropriate.
Capitalized terms used in this Agreement but not otherwise defined herein will
have the meanings ascribed to such terms in the Pooling and Servicing Agreement
(as defined below).
"Act" means the Securities Act of 1933, as amended, together with all
related rules and regulations.
"Certificates" means the Mego Mortgage FHA Title I Loan Trust 1996-1, FHA
Title I Loan Asset-Backed Certificates, Series 1996-1 issued pursuant to the
Pooling and Servicing Agreement.
"Depositor" means Financial Asset Securities Corp.
"Indemnified Party" means any party entitled to any indemnification
pursuant to Section 5 below, as the context requires.
"Indemnifying Party" means any party required to provide indemnification
pursuant to Section 5 below, as the context requires.
"Insurance Agreement" means the Insurance Agreement, dated as of March 21,
1996, by and among the Seller, as seller, claims administrator and servicer, the
Depositor, First Trust of New York, National Association, as trustee, Norwest
Bank Minnesota, N.A., as master servicer and the Insurer.
"Insurer Party" means the Insurer and its respective parents, subsidiaries
and affiliates and any shareholder, director, officer, employee, agent or any
"controlling person" (as such term is used in the Act) of any of the foregoing.
"Losses" means (i) any actual out-of-pocket loss paid by the party
entitled to indemnification or contribution hereunder and (ii) any actual
out-of-pocket costs and expenses paid by such party, including reasonable fees
and expenses of its counsel, to the extent not paid, satisfied or reimbursed
from funds provided by any other Person (provided that the foregoing shall not
create or imply any obligation to pursue recourse against any such other
Person).
<PAGE> 4
"Person" means any individual, partnership, joint venture, corporation,
trust fund or unincorporated organization or any government or agency or
political subdivision thereof.
"Pooling and Servicing Agreement" means the Pooling and Servicing
Agreement dated as of March 21, 1996 among the Depositor, as depositor, the
Seller, seller, claims administrator and servicer, and First Trust of New York,
National Association, as trustee.
"Prospectus Supplement" means the Prospectus Supplement with respect to
the Class A Certificates dated March 28, 1996.
"Seller Party" means the Seller, each of its parents, subsidiaries and
affiliates and any shareholder, director, officer, employee, agent or any
"controlling person" (as such term is used in the Act) of any of the foregoing.
"State Securities Law" means any state, local or foreign statute, and any
rule or regulation thereunder, regulating (i) transactions and dealings in
securities, (ii) any Person or entity engaging in such transactions or advising
with respect to securities or (iii) investment companies.
"Underwriting Party" means the Underwriter, each of its parents,
subsidiaries and affiliates and any shareholder, director, officer, employee,
agent or any "controlling person" (as such term is defined in the Act) or any
of the foregoing.
Section 2. REPRESENTATIONS AND WARRANTIES OF THE INSURER. The Insurer
represents and warrants to the Seller as follows:
(a) Organization and Licensing. The Insurer is a duly incorporated
and existing New York stock insurance company licensed to transact
financial guaranty insurance business under the laws of the State of New
York.
(b) Corporate Power. The Insurer has the corporate power and
authority to issue the Policy and execute and deliver this Agreement and
the Insurance Agreement and to perform all of its obligations hereunder
and thereunder.
(c) Authorization; Approvals. The issuance of the Policy and the
execution, delivery and performance of this Agrreement and the Insurance
Agreement have been duly
2
<PAGE> 5
authorized by all necessary corporate proceedings. No further approvals
or filings of any kind, including, without limitation, any further
approvals of or further filings with any governmental agency or other
governmental authority, or any approval of the Insurer's board of
directors or stockholders, are necessary for the Policy, this Agreement
and the Insurance Agreement to constitute the legal, valid and binding
obligations of the Insurer.
(d) Enforceability. The Policy, when issued, and this Agreement and
the Insurance Agreement will each constitute a legal, valid and binding
obligation of the Insurer, enforceable against the Insurer in accordance
with its terms, subject, as to the enforcement of remedies, to
bankruptcy, insolvency, reorganization, rehabilitation, moratorium and
other similar laws affecting the enforceability of creditors' rights
generally and to general principles of equity and, in the case of this
Agreement, subject to principles of public policy limiting the right to
enforce the indemnification provisions contained herein insofar as such
provisions relate to indemnification for liabilities arising under the
securities laws.
(e) Financial Information. The balance sheet of the Insurer as of
December 31, 1994 and the related statements of income, stockholders'
equity and cash flows for the fiscal year then ended, and the
accompanying footnotes, together with an opinion thereon dated February
1, 1995 of Coopers & Lybrand, independent certified public accountants, a
copy of which is attached as Annex I to the Prospectus Supplement (the
"Insurer Audited Financial Statements"), fairly present in all material
respects the financial condition of the Insurer as of such date and for
the period covered by such statements in accordance with generally
accepted accounting principles consistently applied. The balance sheet of
the Insurer as of September 30, 1995 and the related statements of income,
stockholders' equity and cash flows for the period then ended, a copy of
which is attached as Annex I to the Prospectus Supplement (the "Insurer
Unaudited Financial Statements" and, together with the Insurer Audited
Financial Statements, the "Insurer Financial Statements") present fairly
in all material respects the financial condition of the Insurer as of such
date and for the period covered by such statements in accordance with
generally accepted accounting principles applied in a manner consistent
with the accounting principles used in preparing the Insurer Audited
Financial Statements, and, since September 30, 1995 there has been no
material change in such financial condition of the Insurer which would
materially and adversely affect its ability to perform its obligations
under the Policy.
(f) Insurer Information. The information in the Prospectus
Supplement as of the date hereof under the captions "THE CERTIFICATE
GUARANTY INSURANCE POLICY" and "THE CERTIFICATE INSURER" (the "Insurer
Information") is true and correct in all material respects.
3
<PAGE> 6
(g) No Litigation. There are no actions, suits, proceedings or
investigations pending or, to the best of the Insurer's knowledge,
threatened against it at law or in equity or before or by any court,
governmental agency, board or commission or any arbitrator which, if
decided adversely, would materially and adversely affect its condition
(financial or otherwise) or operations or which would materially and
adversely affect its ability to perform its obligations under this
Agreement, the Policy or the Insurance Agreement.
(h) Exemption From Registration. The Policy is exempt from
registration under the Act.
Section 3. AGREEMENTS, REPRESENTATIONS AND WARRANTIES OF THE
UNDERWRITER. The Underwriter represents and warrants to and agrees with the
Seller and the Insurer that the information as of the date hereof under the
caption "METHOD OF DISTRIBUTION" in the Prospectus Supplement and the third
paragraph of page S-2 of the Prospectus Supplement (the "Underwriter
Information") is true and correct in all material respects and does not contain
any untrue statement of a material fact or omit to state therein a fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
Section 4. AGREEMENTS, REPRESENTATIONS AND WARRANTIES OF THE SELLER. The
Seller represents and warrants to and agrees with the Insurer as follows:
(a) Seller Information. The information in the "Prospectus
Supplement (other than the Insurer Information, the Insurer Financial
Statements and the Underwriter Information) (the "Seller Information") is
true and correct in all material respects and does not contain any untrue
statement of a material fact, or omit to state therein a fact necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(b) Organization. The Seller is duly incorporated under the laws of
the state of its incorporation. The Seller is in good standing in each
jurisdiction in which the nature of its business, or the properties owned
or leased by it, makes such qualification necessary.
(c) Corporate Power. The Seller has the corporate power and
authority to execute and deliver this Agreement, the Insurance Agreement
and the Pooling and Servicing Agreement and to perform all of its
obligations hereunder and thereunder.
(d) Authorization; Approvals. The execution, delivery and
performance of this Agreement, the Insurance Agreement and the Pooling
and Servicing Agreement by the Seller have been duly authorized by all
necessary corporate proceedings. No further
4
<PAGE> 7
approvals or filings of any kind, including, without limitation, any
further approvals of or further filing with any governmental agency or
other governmental authority, or any approval of the Seller's board of
directors or stockholders, are necessary for this Agreement, the Insurance
Agreement and the Pooling and Servicing Agreement to constitute the legal,
valid and binding obligations of the Seller.
(e) Enforceability. This Agreement, the Insurance Agreement and the
Pooling and Servicing Agreement will each constitute a legal, valid and
binding obligation of the Seller, each enforceable in accordance with its
terms, subject, as to the enforcement of remedies, to bankruptcy,
insolvency, reorganization, moratorium and other similar laws affecting
the enforceability of creditors' rights generally applicable in the event
of the bankruptcy, insolvency or reorganization of the Seller and to
general principles of equity and, in the case of this Agreement and the
Insurance Agreement, subject to principles of public policy limiting the
right to enforce the indemnification provisions contained herein insofar
as such provisions relate to indemnification for liabilities arising
under the securities laws.
(f) No Litigation. There are no actions, suits, proceedings or
investigations pending or, to the best of the Seller's knowledge,
threatened against it at law or in equity or before any court,
governmental agency, board or commission or any arbitrator which, if
decided adversely, would materially and adversely affect its condition
(financial or otherwise) or operations or which would materially and
adversely affect its ability to perform its obligations under this
Agreement, the Insurance Agreement or the Pooling and Servicing
Agreement.
(g) No Conflicts. To the extent material to the enforceability of
the Insurance Agreement, this Agreement or the Pooling and Servicing
Agreement, neither the execution by the Seller of the Insurance
Agreement, this Agreement or the Pooling and Servicing Agreement, nor the
performance by the Seller of its obligations thereunder, will conflict
with any provisions of the certificate of incorporation or the bylaws of
the Seller, nor result in a breach of, or constitute a default under, any
material agreement or other instrument to which the Seller is a party or
by which any of its property is bound, nor violate any judgment, order or
decree applicable to the Seller of any governmental or regulatory body,
administrative agency, court or arbitrator having jurisdiction over the
Seller.
Section 5. INDEMNIFICATION. (a) The Insurer hereby agrees, upon the
terms and subject to the conditions of this Agreement, to indemnify, defend and
hold harmless each Seller Party and each Underwriter Party against any and all
Losses incurred by it with respect to the offer and sale of any of the Class A
Certificates and resulting from the Insurer's breach of any of its
representations and warranties set forth in Section 2 of this Agreement.
(b) The Underwriter hereby agrees upon the terms and subject to the
conditions of this Agreement, to indemnify, defend and hold harmless each
Seller Party and each Insurer Party
5
<PAGE> 8
against any and all Losses incurred by it with respect to the offer and sale of
any Certificates and resulting from the Underwriter's breach of any of its
representations and warranties set forth in Section 3 of this Agreement.
(c) The Seller hereby agrees, upon the terms and subject to the conditions
of this Agreement, to indemnify, defend and hold harmless each Insurer Party
against any and all Losses incurred by it with respect to the offer and sale of
any of the Certificates and resulting from the Seller's breach of any of its
representations and warranties set forth in Section 4 of this Agreement.
(d) Upon the incurrence of any Losses entitled to indemnification
hereunder, the Indemnifying Party shall reimburse the Indemnified Party
promptly upon establishment by the Indemnified Party to the Indemnifying Party
of the Losses incurred.
Section 6. INSURER UNDERTAKING. The Insurer hereby agrees that, in
connection with the sale of any of the Certificates, the Insurer will furnish to
either the Underwriter or the Seller, upon written request of such party and not
at the expense of the Insurer, copies of the Insurer's most recent financial
statements (annual or interim, as the case may be) prepared in accordance with
generally accepted accounting principles (subject, as to interim statements, to
normal year-end adjustments) within a reasonable time after they are available.
Section 7. NOTICE TO BE GIVEN INSURER. Except as provided below in
Section 10 with respect to contribution, the indemnification provided herein by
the Insurer shall be the exclusive remedy of each Underwriter Party or Seller
Party for the Losses resulting from the Insurer's breach of a representation,
warranty or agreement hereunder; provided, however, that each Underwriter Party
or Seller Party shall be entitled to pursue any other remedy at law or in equity
for any such breach so long as the damages sought to be recovered shall not
exceed the Losses incurred thereby resulting from such breach. In the event
that any action or regulatory proceeding shall be commenced or claim asserted
which may entitle any Underwriter Party or Seller Party to be indemnified under
this Agreement, such party shall give the Insurer written or telegraphic notice
of such action or claim reasonably promptly after receipt of written notice
thereof. The Insurer shall be entitled to participate in the defense of any
such action or claim in reasonable cooperation with, and with the reasonable
cooperation of, each Underwriter Party or Seller Party. The Indemnified Party
will have the right to employ its own counsel in any such action in addition to
counsel for the Insurer, but the fees and expenses of such counsel will be at
the expense of such Indemnified Party unless (1) the employment of counsel by
the Indemnified Party at its expense has been authorized in writing by the
Insurer,
6
<PAGE> 9
(2) the Insurer has not in fact employed counsel to assume the defense of such
action within a reasonable time after receiving notice of the commencement of
the action or (3) the named parties to any such action include, on the one hand,
the Insurer, and, on the other hand, the Indemnified Party, and such Indemnified
Party shall have been advised by counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the Insurer (in which case, if such Indemnified Party notifies the
Insurer in writing that it elects to employ separate counsel at the expense of
the Insurer, the Insurer shall not have the right to assume the defense of such
action or proceeding on such Indemnified Party's behalf), in each of which cases
the reasonable fees and expenses of counsel (including local counsel) will be at
the expense of the Insurer, and all such fees and expenses will be reimbursed
promptly as they are incurred but, in connection with any one action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, the Insurer shall not be
liable for the fees and expenses of more than one counsel for all Seller Parties
and more than one counsel for all Underwriter Parties. The Underwriter Parties
or Seller Parties shall cooperate with the Insurer Parties in resolving any
event which would give rise to an indemnity obligation pursuant to Section 5(a)
hereof in the most efficient manner. No settlement of any such claim or action
shall be entered into without the consent of each Seller Party or each
Underwriter Party, who is subject to such claim or action, on the one hand, and
each Insurer Party who is subject to such claim or action, on the other hand;
provided, however, that the consent of such Seller Party or Underwriter Party,
shall not be required if such settlement fully discharges, with prejudice
against the plaintiff, the claim or action against such Seller Party or
Underwriter Party. Any failure by a Seller Party or an Underwriter Party, to
comply with the provisions of this Section shall relieve the Insurer of
liability only if such failure is materially prejudicial to any legal pleadings,
grounds, defenses or remedies in respect thereof or the Insurer's financial
liability hereunder, and then only to the extent of such prejudice.
Section 8. NOTICE TO BE GIVEN THE UNDERWRITER. Except as provided below
in Section 10 with respect to contribution, the indemnification provided herein
by the Underwriter shall be the exclusive remedy of any Insurer Party or Seller
Party for the Losses resulting from the Underwriter's breach of a
representation, warranty or agreement hereunder; provided, however, that each
Insurer or Party Seller Party shall be entitled to pursue any other remedy at
law or in equity for any such breach so long as the damages sought to be
recovered shall not exceed the Losses incurred thereby resulting from such
breach. In the event that any action or regulatory proceeding shall be
commenced or claim asserted which may entitle any Insurer Party or Seller Party
to be indemnified under this Agreement, such party shall give the Underwriter
written or telegraphic notice of such action or claim reasonably promptly after
receipt of written notice thereof. The UnderwriterUnderwriter shall be entitled
to participate in the defense of any such action or claim in reasonable
cooperation with, and with the reasonable cooperation of, each Insurer Party,
each Seller Party or each DepositoSeller Party, as the case may be. The
Indemnified Party will have the right to employ its own counsel in any such
action in addition to counsel for the
7
<PAGE> 10
Underwriter, but the fees and expenses of such counsel will be at the expense of
such Indemnified Party unless (1) the employment of counsel by the Indemnified
Party at its expense has been authorized in writing by the Underwriter, (2) the
Underwriter has not in fact employed counsel to assume the defense of such
action within a reasonable time after receiving notice of the commencement of
the action or (3) the named parties to any such action include, on the one hand,
the Underwriter, and, on the other hand, the Indemnified Party, and such
Indemnified Party shall have been advised by counsel that there may be one or
more legal defenses available to it which are different from or additional to
those available to the Underwriter (in which case, if such Indemnified Party
notifies the Underwriter in writing that it elects to employ separate counsel at
the expense of the Underwriter, the Underwriter shall not have the right to
assume the defense of such action or proceeding on such Indemnified Party's
behalf), in each of which cases the reasonable fees and expenses of counsel
(including local counsel) will be at the expense of the UnderwriterUnderwriter,
and all such fees and expenses will be reimbursed promptly as they are incurred
but, in connection with any one action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, the Underwriter shall not be liable for the fees
and expenses of more than one counsel for all Insurer Parties or more than one
counsel for all Seller Parties. The Insurer Parties and Seller Parties shall
cooperate with the Underwriter Parties in resolving any event which would give
rise to an indemnification obligation pursuant to Section 5(b) hereof in the
most efficient manner. No settlement of any such claim or action shall be
entered into without the consent of each Insurer Party or each Seller Party, as
the case may be, who is subject to such claim or action, on the one hand, and
each Underwriter Party who is subject to such claim or action, on the other
hand; provided, however, that the consent of such Insurer Party or such Seller
Party shall not be required if such settlement fully discharges, with prejudice
against the plaintiff, the claim or action against such Insurer Party, or such
Seller Party. Any failure by an Insurer Party or an Seller Party, as the case
may be, to comply with the provisions of this Section shall relieve the
Underwriter of liability only if such failure is materially prejudicial to any
legal pleadings, grounds, defenses or remedies in respect thereof or the
Underwriter's liability hereunder, and then only to the extent of such
prejudice.
Section 9. NOTICE TO BE GIVEN THE SELLER. Except as provided below in
Section 10 with respect to contribution, the indemnification provided herein by
the Seller shall be the exclusive remedy of each Insurer Party, or each
Underwriter Party for the Losses resulting from the Seller's breach of a
representation, warranty or agreement hereunder; provided, however, that the
Insurer Party or the Underwriter Party, shall be entitled to pursue any other
remedy at law or in equity for any such breach so long as the damages sought to
be recovered shall not exceed the Losses incurred thereby resulting from such
breach. In the event that any action or regulatory proceeding shall be
commenced or claim asserted
8
<PAGE> 11
which may entitle an Insurer Party or an Underwriter Party to be indemnified
under this Agreement, such party shall give the Seller written or telegraphic
notice of such action or claim reasonably promptly after receipt of written
notice thereof. The Seller shall be entitled to participate in the defense of
any such action or claim in reasonable cooperation with, and with the reasonable
cooperation of, each Insurer Party or each Underwriter Party. The Indemnified
Party will have the right to employ its own counsel in any such action in
addition to counsel for the Seller, but the fees and expenses of such counsel
will be at the expense of such Indemnified Party unless (1) the employment of
counsel by the Indemnified Party at its expense has been authorized in writing
by the Seller, (2) the Seller has not in fact employed counsel to assume the
defense of such action within a reasonable time after receiving notice of the
commencement of the action or (3) the named parties to any such action include,
on the one hand, the Seller, and, on the other hand, the Indemnified Party, and
such Indemnified Party shall have been advised by counsel that there may be one
or more legal defenses available to it which are different from or additional to
those available to the Seller (in which case, if such Indemnified Party notifies
the Seller in writing that it elects to employ separate counsel at the expense
of the Seller, the Seller shall not have the right to assume the defense of such
action or proceeding on such Indemnified Party's behalf), in each of which cases
the reasonable fees and expenses of counsel (including local counsel) will be at
the expense of the Seller, and all such fees and expenses will be reimbursed
promptly as they are incurred but, in connection with any one action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, the Seller shall not be
liable for the fees and expenses of more than one counsel for all Insurer
Parties and more than one counsel for all Underwriter Parties. The Insurer
Parties and the Underwriter Parties shall cooperate with each Seller Party in
resolving any event which would give rise to an indemnification obligation
pursuant to Section 5(c) hereof in the most efficient manner. No settlement of
any such claim or action shall be entered into without the consent of each
Insurer Party, or Underwriter Party who is subject to such claim or action, on
the one hand, and the Seller Party, on the other hand; provided, however, that
the consent of such Insurer Party or Underwriter Party, shall not be required if
such settlement fully discharges, with prejudice against the plaintiff, the
claim or action against such Insurer Party or Underwriter Party. Any failure by
an Insurer Party or Underwriter Party, as the case may be, to comply with the
provisions of this Section shall relieve the Seller of liability only if such
failure is materially prejudicial to any legal pleadings, grounds, defenses or
remedies in respect thereof or the Seller's liability hereunder, and then only
to the extent of such prejudice.
9
<PAGE> 12
Section 10. CONTRIBUTION. (a) To provide for just and equitable
contribution if the indemnification provided by the Insurer is determined to be
unavailable for any Underwriter Party or Seller Party (other than by reason of
failure to comply with Section 5 or 7 of this Agreement), the Insurer shall
contribute to the compensation for Losses arising from any breach of a
representation or warranty set forth in this Agreement on the basis of the
relative fault of and relative benefit to all Underwriter Parties, all Seller
Parties and all Insurer Parties, respectively.
(b) To provide for just and equitable contribution if the indemnification
provided by the Seller is determined to be unavailable for any Insurer
Party (other than by reason of failure to comply with Section 5 or 9 of
this Agreement), the Seller shall contribute to the compensation for Losses
arising from any breach of a representation or warranty set forth in this
Agreement on the basis of the relative fault of and relative benefit to all
Underwriter Parties, Seller Parties and all Insurer Parties.
(c) To provide for just and equitable contribution if the indemnification
provided by the Underwriter is determined to be unavailable for any Insurer
Party or Seller Party (other than by reason of failure to comply with Section 5
or 8 of this Agreement), the Underwriter shall contribute to the compensation
for Losses arising from any breach of a representation or warranty set forth in
this Agreement on the basis of the relative fault of and relative benefit to all
Underwriter Parties, all Seller Parties and all Insurer Parties.
(d) The relative fault of each Indemnifying Party, on the one hand, and
of each Indemnified Party, on the other hand, shall be determined by reference
to, among other things, whether the breach of, or alleged breach of, any of its
representations and warranties set forth in Section 2, 3, or 4 of this Agreement
relates to information supplied by, or action within the control of, the
Indemnifying Party or the Indemnified Party and the Parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
breach.
(e) Relative benefit with respect to the Seller, the Underwriter and the
Insurer shall be deemed to be in the same proportions as (i) the net proceeds
from the sale of the Loans as specified
10
<PAGE> 13
in the Purchase Agreement received by the Seller bears to (ii) the total
underwriting discounts and commissions received by the Underwriter in connection
with the offering the Class A Certificates and (iii) the aggregate Premium (as
defined in the Insurance Agreement) paid to the Insurer, as the case may be.
(f) The parties hereto agree that the Insurer shall be solely responsible
for the Insurer Information and for the Insurer Financial Statements, that the
Underwriter shall be responsible for the Underwriter Information, Prospectus
Supplement.
(g) No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(h) The indemnity and contribution agreements contained in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter Party, any Seller Party,
or any Insurer Party, (ii) the issuance of any Certificates or the Policy or
(iii) any termination of the Pooling and Servicing Agreement.
(i) Upon the incurrence of any Losses entitled to contribution hereunder,
the contributor shall reimburse the party entitled to contribution promptly
upon establishment by the party entitled to contribution to the contributor of
the Losses incurred.
Section 11. NOTICES. All notices and other communications provided for
under this Agreement shall be addressed to the address set forth below as to
each party or at such other address as shall be designated by a party in a
written notice to the other party.
If to the Insurer: MBIA Insurance Corporation
113 King Street
Armonk, NY 10504
Attention: General Counsel
If to the Underwriter: Greenwich Capital Markets, Inc.
600 Steamboat Road
Greenwich, CT 06830
Attention: Kari Skilbred
11
<PAGE> 14
If to the Seller: Mego Mortgage Corporation
210 Interstate North Parkway
Suite 250
Atlanta, GA 30339
Attention: Jeff Moore
Section 12. GOVERNING LAW, ETC. This Agreement shall be deemed to be a
contract under the laws of the State of New York and shall be governed by and
construed in accordance with the laws of the State of New York without regard
to its conflicts of laws provisions. This Agreement may not be assigned by any
party without the express written consent of each other party. Amendments of
this Agreement shall be in writing signed by each party. This Agreement shall
not be effective until executed by each party hereto.
Section 13. INSURANCE AGREEMENT. This Agreement in no way limits or
otherwise affects the indemnification obligations of the Seller under the
Insurance Agreement.
Section 14. LIMITATIONS. Nothing in this Agreement shall be construed as
a representation or undertaking by the Insurer concerning maintenance of the
rating currently assigned to its claims-paying ability by Moody's Investors
Service, Inc. ("Moody's") and/or Standard & Poor's Ratings Services, a division
of The McGraw-Hill Companies, Inc. ("S&P"), or any other rating agency
(collectively, the "Rating Agencies").
Section 15. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall together constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective officers thereunto duly
authorized, all as of the date first above written.
MBIA INSURANCE CORPORATION
By /s/
------------------------------------
Title
---------------------------------
MEGO MORTGAGE CORPORATION
By /s/
------------------------------------
Title
---------------------------------
GREENWICH CAPITAL MARKETS, INC.
By /s/
------------------------------------
Title
---------------------------------
Mego 1996-1
Indemnification Agreement
Signature Page
<PAGE> 1
EXHIBIT 10.15
EXECUTION COPY
================================================================================
MBIA INSURANCE CORPORATION,
as Insurer
NORWEST BANK MINNESOTA, N.A.,
as Master Servicer
MEGO MORTGAGE CORPORATION,
as Seller, Servicer and Claims Administrator
FINANCIAL ASSET SECURITIES CORP.
as Depositor
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.,
as GCFP
and
FIRST TRUST OF NEW YORK, NATIONAL ASSOCIATION,
as Trustee and Contract of Insurance Holder
INSURANCE AGREEMENT
Mego Mortgage FHA Title I Loan Trust 1996-1
FHA Title I Loan Asset-Backed Certificates, Series 1996-1
Class A-1, Class A-2, Class A-3 and Class S
Dated as of March 21, 1996
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TABLE OF CONTENTS
(This Table of Contents is for convenience of reference only and shall not
be deemed to be a part of this Agreement. All capitalized terms used in this
Agreement and not otherwise defined shall have the meanings set forth in
Article I of this Agreement.)
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ARTICLE I
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DEFINITIONS ........................................................................................ 1
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 2.01. .......................................... Representations and Warranties of the Seller. 4
Section 2.02. ................................................... Affirmative Covenants of the Seller. 7
Section 2.03. ...................................................... Negative Covenants of the Seller. 13
Section 2.04. .................................................... Affirmative Covenants of Depositor. 13
Section 2.05. ........................................................ Negative Covenant of Depositor. 14
Section 2.06. Affirmative Covenants of the Claims Administrator and the Contract of Insurance Holder. 14
Section 2.07. ................................. Representations and Warranties of the Master Servicer. 16
Section 2.08. .......................................... Affirmative Covenants of the Master Servicer. 19
Section 2.09. ............................................ Negative Covenants of the Master Servicer . 25
Section 2.10. .................... Additional Covenants of Depositor, Seller and Claims Administrator. 26
ARTICLE III
THE POLICY; REIMBURSEMENT
Section 3.01. ................................................................ Issuance of the Policy. 26
Section 3.02. ........................................................... Payment of Fees and Premium. 29
Section 3.03. ....................................... Reimbursement and Additional Payment Obligation. 29
Section 3.04. .................................... Indemnification by Seller; Limitation of Liability. 31
Section 3.05. ........................... Indemnification by Master Servicer; Limitation of Liability. 32
SSction 3.06. ...................................... Indemnification by GCFP; Limitation of Liability. 34
Section 3.07. ..................................................................... Payment Procedure. 35
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ARTICLE IV
FURTHER AGREEMENTS
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Section 4.01. ....................................... Effective Date; Term of the Insurance Agreement. 36
Section 4.02. ......................................... Further Assurances and Corrective Instruments. 36
Section 4.03. .................................................................. Obligations Absolute. 36
Section 4.04. .......................................... Assignments; Reinsurance; Third-Party Rights. 38
Section 4.05. .............................................................. Liability of the Insurer. 38
Section 4.06. .......................................................................... Legal Action. 39
Section 4.07. .......... Trustee, Depositor, Seller and Master Servicer To Join in Enforcement Action. 39
ARTICLE V
DEFAULTS; REMEDIES
Section 5.01. ......................................................... .................... Defaults. 39
Section 5.02. ......................................................... Remedies; No Remedy Exclusive. 40
Section 5.03. ............................................................................... Waivers. 41
ARTICLE VI
MISCELLANEOUS
Section 6.01. ....................................................................... Amendments, Etc. 41
Section 6.02. ............................................................................... Notices. 41
Section 6.03. .......................................................................... Severability. 43
Section 6.04. ......................................................................... Governing Law. 43
Section 6.05. ............................................................... Consent to Jurisdiction. 43
Section 6.06. ................................................................ Consent of the Insurer. 44
Section 6.07. .......................................................................... Counterparts. 44
Section 6.08. .............................................................................. Headings. 44
Section 6.09. .................................................................. Trial by Jury Waived. 44
Section 6.10. ..................................................................... Limited Liability. 44
Section 6.11. ...................................................................... Entire Agreement. 44
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TESTIMONIUM
SIGNATURES
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INSURANCE AGREEMENT
INSURANCE AGREEMENT (this "Insurance Agreement"), dated as of March 21,
1996 by and among MEGO MORTGAGE CORPORATION, as seller, servicer and claims
administrator (together with its permitted successors and assigns, the
"Seller"), NORWEST BANK MINNESOTA, N.A., in its capacity as Master Servicer
under the PSA described below (together with its permitted successors and
assigns, the "Master Servicer"), FINANCIAL ASSET SECURITIES CORP., a Delaware
corporation (the "Depositor"), GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
("GCFP"), MBIA INSURANCE CORPORATION (the "Insurer") and FIRST TRUST OF NEW
YORK, NATIONAL ASSOCIATION, as Trustee and Contract of Insurance Holder (the
"Trustee").
WHEREAS, the Pooling and Servicing Agreement dated as of March 21, 1996
relating to the Mego Mortgage FHA Title I Loan Trust 1996-1, FHA Title I Loan
Asset-Backed Certificates, Series 1996-1, Class A-1, Class A-2, Class A-3 and
Class S by and among the Seller, the Master Servicer, the Depositor and the
Trustee (the "PSA") provides for, among other things, the issuance of mortgage
asset backed certificates, representing fractional ownership interests in the
trust estate established thereby and the Insurer has issued its certificate
guaranty insurance policy (the "Policy") that guarantees certain payments due
from the Trust (as defined herein) on the Mego Mortgage FHA Title I Loan Trust
1996-1, FHA Title I Loan Asset-Backed Certificates, Series 1996-1, Class A-1,
Class A-2, Class A-3 and Class S (as defined in the PSA); and
WHEREAS, the Insurer shall be paid an insurance premium pursuant to the
PSA, and the details of such premium are set forth herein; and
WHEREAS, the Seller, the Depositor and the Master Servicer have undertaken
certain obligations in consideration for the Insurer's issuance of the Policy;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereto agree as follows:
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ARTICLE I
DEFINITIONS
The terms defined in this Article I shall have the meanings provided
herein for all purposes of this Insurance Agreement, unless the context clearly
requires otherwise, in both singular and plural form, as appropriate. Unless
the context clearly requires otherwise, all capitalized terms used herein and
not otherwise defined in this Article I shall have the meanings assigned to
them in the PSA. All words used herein shall be construed to be of such gender
or number as the circumstances require. This "Insurance Agreement" shall mean
this Insurance Agreement as a whole and as the same may, from time to time
hereafter, be amended, supplemented or modified. The words "herein," "hereby,"
"hereof," "hereto," "hereinabove" and "hereinbelow," and words of similar
import, refer to this Insurance Agreement as a whole and not to any particular
paragraph, clause or other subdivision hereof, unless otherwise specifically
noted.
"Base Prospectus" means the Prospectus dated March 20, 1996.
"Code" means the Internal Revenue Code of 1986, including, unless the
context otherwise requires, the rules and regulations thereunder, as amended
from time to time.
"Commission" means the Securities and Exchange Commission.
"Commitment" means the letter of commitment from the Insurer to the Seller
dated March 29, 1996.
"Date of Issuance" means the date on which the Policy is issued as
specified therein.
"Default" means any event which results, or which with the giving of
notice or the lapse of time or both would result, in an Event of Default.
"Event of Default" means any event of default specified in Section 5.01 of
this Insurance Agreement.
"Financial Statements" means, with respect to the Seller, the balance
sheets as of August 31, 1994 and August 31, 1995 and the statements of income,
retained earnings and cash flows for the 12-month period then ended and the
notes thereto and, with respect to the Master Servicer, the balance sheets as
of December 31, 1994 and the statements of income, retained earnings and cash
flows for the 12-month period then ended and the notes thereto.
"Fiscal Agent" means the Fiscal Agent, if any, designated pursuant to the
terms of the Policy.
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"Indemnification Agreement" means the Indemnification Agreement dated as
of March 29, 1996 among the Insurer, the Seller and the Underwriter.
"Investment Company Act" means the Investment Company Act of 1940,
including, unless the context otherwise requires, the rules and regulations
thereunder, as amended.
"Late Payment Rate" means, for any Distribution Date, the rate of interest
as it is publicly announced by Citibank, N.A. at its principal office in New
York, New York as its prime rate (any change in such prime rate of interest to
be effective on the date such change is announced by Citibank, N.A.) plus 2%.
The Late Payment Rate shall be computed on the basis of a year of 365 days
calculating the actual number of days elapsed. In no event shall the Late
Payment Rate exceed the maximum rate permissible under any applicable law
limiting interest rates.
"Loan Purchase Agreement" means the Loan Purchase Agreement dated as of
March 21, 1996 between the Seller and the Depositor.
"Material Adverse Change" means, in respect of any Person, a material
adverse change in (i) the business, financial condition, results of operations
or properties of such Person or (ii) the ability of such Person to perform its
obligations under any of the Transaction Documents.
"Moody's" means Moody's Investors Service, Inc., a Delaware corporation,
and any successor thereto, and, if such corporation shall for any reason no
longer perform the functions of a securities rating agency, "Moody's" shall be
deemed to refer to any other nationally recognized rating agency designated by
the Insurer.
"Notice of Claim" means a Notice of Claim and Certificate in the form
attached as Exhibit A to the Policy.
"Offering Document" means the Prospectus Supplement dated March 28, 1996
of the Depositor in respect of the Class A Certificates and any amendment or
supplement thereto, other than the Registration Statement, and any other
offering document in respect of the Securities prepared by the Depositor, the
Seller or the Master Servicer that makes reference to the Policy.
"Owners" means registered holders of Securities.
"Person" means an individual, joint stock company, trust, unincorporated
association, joint venture, corporation, business or owner trust, partnership
or other organization or entity (whether governmental or private).
"Premium" means the premium payable in accordance with Section 3.02 of
this Insurance Agreement.
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"Premium Percentage" shall have the meaning ascribed to such term in
Section 3.02 hereof.
"Registration Statement" means Registration Statement number 33-99018
(including any documents incorporated by reference therein pursuant to the
Securities Exchange Act during the period from March 20, 1996 through and
including March 29, 1996 with respect to the Transaction, including the Base
Prospectus but excluding the Prospectus Supplement.
"Securities" means the Senior Certificates issued by the Trust pursuant
to the PSA.
"Securities Act" means the Securities Act of 1933, including, unless the
context otherwise requires, the rules and regulations thereunder, as amended
from time to time.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
including, unless the context otherwise requires, the rules and regulations
thereunder, as amended from time to time.
"S&P" means Standard & Poor's Rating Services, and any successor thereto,
and, if such corporation shall for any reason no longer perform the functions
of a securities rating agency, "S&P" shall be deemed to refer to any other
nationally recognized rating agency designated by the Insurer.
"Term of the Insurance Agreement" shall be determined as provided in
Section 4.01 of this Insurance Agreement.
"Transaction" means the transactions contemplated by the Transaction
Documents, including the transactions described in the Offering Document.
"Transaction Documents" means this Insurance Agreement, the
Indemnification Agreement, the Commitment, the PSA, the Servicing Agreement,
the Underwriting Agreement, and the Loan Purchase Agreement.
"Trust" means the trust created pursuant to the PSA.
"Trustee" means First Trust of New York, National Association, a national
banking association, as trustee under the PSA, and any successor to the Trustee
under the PSA.
"Trust Indenture Act" means the Trust Indenture Act of 1939, including,
unless the context otherwise requires, the rules and regulations thereunder, as
amended from time to time.
"Underwriter " means Greenwich Capital Markets, Inc.
"Underwriting Agreement" means the Underwriting Agreement between the
Underwriter and the Depositor with respect to the offer and sale of the Class A
Certificates, as the same may be
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amended from time to time.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 2.01. REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller
represents, warrants and covenants as follows:
(a) Due Organization and Qualification. The Seller is a
corporation, duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation. The Seller is duly
qualified to do business, is in good standing and has obtained all
necessary licenses, permits, charters, registrations and approvals
(together, "approvals") necessary for the conduct of its business as
currently conducted and as described in the Offering Document and the
performance of its obligations under the Transaction Documents, in each
jurisdiction in which the failure to be so qualified or to obtain such
approvals would render any Transaction Document unenforceable in any
respect or would have a material adverse effect upon the Transaction.
(b) Power and Authority. The Seller has all necessary corporate
power and authority to conduct its business as currently conducted and,
as described in the Offering Document, to execute, deliver and perform
its obligations under the Transaction Documents to which it is a party
and to consummate the Transaction.
(c) Due Authorization. The execution, delivery and performance of
the Transaction Documents to which the Seller is a party by the Seller
have been duly authorized by all necessary corporate action and do not
require any additional approvals or consents, or other action by or any
notice to or filing with any Person, including, without limitation, any
governmental entity (other than the Transfer of Note Report with the FHA)
or the Seller's stockholders, which have not previously been obtained or
given by the Seller.
(d) Noncontravention. Neither the execution and delivery of the
Transaction Documents, to which the Seller is a party, by the Seller, the
consummation of the transactions contemplated thereby nor the
satisfaction of the terms and conditions of the Transaction Documents:
(i) conflicts with or results in any breach or violation of
any provision of the certificate of incorporation or bylaws of the
Seller or any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award currently in effect
having applicability to the Seller or any of their material
properties, including regulations issued by an administrative
agency or other governmental authority
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having supervisory powers over the Seller;
(ii) constitutes a default by the Seller under or a breach of
any provision of any material loan agreement, mortgage, indenture
or other material agreement or instrument to which the Seller is a
party or by which any of its properties, which are individually or
in the aggregate material to the Seller, is or may be bound or
affected; or
(iii) results in or requires the creation of any lien upon or
in respect of any assets of the Seller (other than as created by
the Transaction Documents).
(e) Legal Proceedings. There is no action, proceeding or
investigation by or before any court, governmental or administrative
agency or arbitrator against or affecting the Seller or any of its
subsidiaries, or any properties or rights of the Seller or any of its
subsidiaries, pending or, to the Seller's knowledge after reasonable
inquiry, threatened, which, in any case, could reasonably be expected to
result in a Material Adverse Change with respect to the Seller.
(f) Valid and Binding Obligations. The Transaction Documents to
which the Seller is a party, when executed and delivered by the Seller,
will constitute the legal, valid and binding obligations of the Seller,
enforceable in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally
and general equitable principles and public policy considerations as to
rights of indemnification for violations of federal securities laws. The
Seller will not at any time in the future deny that the Transaction
Documents to which it is a party constitute the legal, valid and binding
obligations the Seller.
(g) Financial Statements. The Financial Statements of the Seller,
copies of which have been furnished to the Insurer in March, 1996, (i)
are, as of the dates and for the periods referred to therein, complete
and correct in all material respects, (ii) present fairly the financial
condition and results of operations of the Seller as of the dates and for
the periods indicated and (iii) have been prepared in accordance with
generally accepted accounting principles consistently applied, except as
noted therein (subject as to interim statements to normal year-end
adjustments). Since the date of the most recent Financial Statements of
the Seller, there has been no Material Adverse Change in respect of the
Seller. Except as disclosed in the Financial Statements of the Seller,
the Seller is not subject to any contingent liabilities or commitments
that, individually or in the aggregate, have a material possibility of
causing a Material Adverse Change in respect of the Seller.
(h) Compliance With Law, Etc. No practice, procedure or policy
employed, or
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proposed to be employed, by the Seller in the conduct of its
business violates any law, regulation, judgment, agreement, order or
decree applicable to any of them that, if enforced, could reasonably be
expected to result in a Material Adverse Change with respect to the
Seller.
(i) Taxes. The Seller and the Seller's parent company or companies
have filed prior to the date hereof all federal and state tax returns
that are required to be filed and paid all taxes, including any
assessments received by them that are not being contested in good faith,
to the extent that such taxes have become due, except for any failures to
file or pay that, individually or in the aggregate, would not result in a
Material Adverse Change with respect to the Seller.
(j) Accuracy of Information. Neither the Transaction Documents, nor
the Offering Document, nor other information relating to the Loans, the
operations of the Seller (including servicing or origination of loans) or
the financial condition of the Seller as set forth in the Financial
Statements furnished to the Insurer in March, 1996 (collectively, the
"Documents"), as amended, supplemented or superseded, furnished to the
Insurer by the Seller contain any statement of a material fact by the
Seller which was untrue or misleading in any material adverse respect
when made. The Seller has no knowledge or circumstances that could
reasonably be expected to cause a Material Adverse Change with respect to
the Seller. Since the furnishing of the Documents, there has been no
change nor any development or event involving a prospective change known
to the Seller that would render any of the Documents untrue or misleading
in a material respect.
(k) [Reserved]
(l) Transaction Documents. Each of the representations and
warranties of the Seller contained in the Transaction Documents is true
and correct in all material respects, and the Seller hereby makes each
such representation and warranty to, and for the benefit of, the Insurer
as if the same were set forth in full herein; provided that the remedy
for any breach of this paragraph shall be limited to the remedies
specified in the related Transaction Document.
(m) Solvency. The Seller is solvent and will not be rendered
insolvent by the Transaction and, after giving effect to the Transaction,
the Seller will not be left with an unreasonably small amount of capital
with which to engage in its business, nor does the Seller intend to
incur, or believe that it has incurred, debts beyond its ability to pay
as they mature. The Seller does not contemplate the commencement of
insolvency, bankruptcy, liquidation or consolidation proceedings or the
appointment of a receiver, liquidator, conservator, trustee or similar
official in respect of the Seller or any of its assets.
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(n) Principal Place of Business. The principal place of business of
the Seller is located in Atlanta, Georgia.
Section 2.02. AFFIRMATIVE COVENANTS OF THE SELLER. The Seller hereby
agrees that during the Term of the Insurance Agreement, unless the Insurer
shall otherwise expressly consent in writing:
(a) Compliance With Agreements and Applicable Laws. The Seller
shall not be in default under the Transaction Documents to which it is a
party and shall comply with all material requirements of any law, rule or
regulation applicable to it. The Seller shall not agree to any amendment
to or modification of the terms of any Transaction Documents unless the
Insurer shall have otherwise consented.
(b) Corporate Existence. The Seller, and its successors and
assigns, shall maintain its corporate existence and shall at all times
continue to be duly organized under the laws of its jurisdiction of
incorporation and duly qualified and duly authorized (as described in
subsections 2.01(a), (b) and (c) hereof) and shall conduct its business
in accordance with the terms of its certificate of incorporation and
bylaws.
(c) Financial Statements; Accountants' Reports; Other Information.
The Seller shall keep or cause to be kept in reasonable detail books and
records of account of its assets and business, including, but not limited
to, books and records relating to the Transaction. The Seller shall
furnish or cause to be furnished to the Insurer:
(i) Annual Financial Statements. As soon as available, and in
any event within 120 days after the close of each fiscal year of
the Seller, the audited consolidated balance sheets of the Seller
and its subsidiaries as of the end of such fiscal year and the
related audited consolidated statements of income, changes in
shareholders' equity and cash flows for such fiscal year, all in
reasonable detail and stating in comparative form the respective
figures for the corresponding date and period in the preceding
fiscal year, prepared in accordance with generally accepted
accounting principles, consistently applied, and accompanied by the
audit opinion of the Seller's independent accountants (which shall
be a nationally recognized independent public accounting firm) and
by the certificate specified in Section 2.02(d) hereof.
(ii) Quarterly Financial Statements. As soon as available,
and in any event within 90 days after each of the first three
fiscal quarters of each fiscal year of the Seller, the unaudited
consolidated balance sheets of the Seller and its subsidiaries as
of the end of such fiscal quarter and the related unaudited
consolidated statements of income, changes in shareholders' equity
and cash flows
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such fiscal quarter, all in reasonable detail and stating in
comparative form the respective figures for the corresponding
date and period in the preceding fiscal year, prepared in
accordance with generally accepted accounting principles,
consistently applied, and accompanied by the certificate specified
in Section 2.02(d) hereof.
(iii) Initial and Continuing Reports. On or before the
Closing Date, the Seller will provide the Insurer a copy of the
magnetic tape to be delivered to the Trustee on the Closing Date
setting forth as to each Loan, the information required under the
definition of "Loan Schedule" at Section 1.01 of the PSA.
(iv) Certain Information. Upon the reasonable request of the
Insurer, the Seller shall promptly provide copies of any requested
proxy statements, financial statements, reports and registration
statements which the Seller files with, or delivers to, the
Commission or any national securities exchange.
(v) Other Information. Promptly upon receipt thereof, copies
of all schedules, financial statements or other similar reports
delivered to or by the Seller pursuant to the terms of the PSA and,
promptly upon request, such other data as the Insurer may
reasonably request.
All financial statements specified in clauses (i) and (ii) above
shall be furnished in consolidated form for the Seller and all its
subsidiaries.
The Insurer agrees that it and its agents, accountants and attorneys
shall keep confidential all financial statements, reports and other
information delivered by the Seller pursuant to this subsection 2.02(c)
to the extent provided in subsection 2.02(e) hereof.
(d) Compliance Certificate. The Seller shall deliver to the
Insurer, concurrently with the delivery of the financial statements
required pursuant to subsection 2.02(c)(i) and (ii) hereof, one or more
certificates signed by an officer of the Seller authorized to execute
such certificates on behalf of the Seller stating that:
(i) a review of the Seller's performance under the Transaction
Documents during such period has been made under such officer's
supervision;
(ii) to the best of such individual's knowledge following
reasonable inquiry, no Default or Event of Default has occurred, or
if a Default or Event of Default has occurred, specifying the
nature thereof and, if the Seller has a right to cure pursuant to
the Transaction Documents, stating in reasonable detail (including,
if applicable, any supporting calculations) the steps, if any,
being taken by the Seller to cure such Default or Event of Default
or to otherwise comply with the terms of
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the agreement to which such Default or Event of Default relates;
(iii) the attached Financial Statements submitted in
accordance with subsection 2.02(c)(i) or (ii), as the case may be,
hereof are complete and correct in all material respects and
present fairly the financial condition and results of operations of
the Seller as of the dates and for the periods indicated, in
accordance with generally accepted accounting principles
consistently applied; and
(iv) the Seller, so long as it is the servicer under the
Servicing Agreement, has in full force and effect a blanket
fidelity bond (or direct surety bond) and an errors and omissions
insurance policy in accordance with the terms and requirements of
Section 8.01 of the Servicing Agreement.
(e) Access to Records; Discussions With Officers and Accountants.
On an annual basis, or upon the occurrence of a Material Adverse Change,
the Seller shall, upon the request of the Insurer, permit the Insurer or
its authorized agents, at the expense of the Insurer, at reasonable times
and upon reasonable notice:
(i) to inspect the books and records of the Seller as they may
relate to the Securities, the obligations of the Seller under the
Transaction Documents, and the Transaction;
(ii) to discuss the affairs, finances and accounts of the
Seller with the chief operating officer and the chief financial
officer of the Seller; and
(iii) with the Seller's consent, which consent shall not be
unreasonably withheld, to discuss the affairs, finances and
accounts of the Seller with the Seller's independent accountants,
provided that an officer of the Seller shall have the right to be
present during such discussions.
Such inspections and discussions shall be conducted during normal
business hours and shall not unreasonably disrupt the business of the
Seller. The books and records of the Seller will be maintained at the
address of the Seller designated herein for receipt of notices, unless
the Seller shall otherwise advise the parties hereto in writing.
The Insurer agrees that it and its shareholders, employees,
directors, agents, accountants and attorneys shall keep confidential any
matter of which it becomes aware through such inspections or discussions
(unless readily available from public sources), except as may be
otherwise required by regulation, law or court order or by appropriate
governmental authorities or as necessary to preserve its rights or
security under or to enforce the Transaction Documents, provided that the
foregoing shall not limit the right of
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the Insurer to make such information available to its regulators,
securities rating agencies, reinsurers, credit and liquidity providers,
counsel and accountants. If the Insurer is required (by oral questions,
interrogatories, requests for information or documents subpoena, civil
investigative demand or similar process) to disclose any information of
which it becomes aware through such inspections or discussions, the
Insurer will promptly notify the Seller of such request(s) so that the
Seller may seek an appropriate protective order and/or waive the
Insurer's compliance with the provisions of this Insurance Agreement.
If, in the absence of a protective order or the receipt of a waiver
hereunder, the Insurer is, nonetheless, in the opinion of its counsel,
compelled to disclose such information to any tribunal or else stand
liable for contempt or suffer other censure or significant penalty, the
Insurer may disclose such information to such tribunal that the Insurer
is compelled to disclose, provided that a copy of all information
disclosed is provided to the Seller promptly upon such disclosure.
(f) Notice of Material Events. The Seller shall be obligated
promptly to inform the Insurer in writing of the occurrence of any of the
following to the extent any of the following relate to it:
(i) the submission of any claim or the initiation or written
threat of any legal process, litigation or administrative or
judicial investigation, or rule making or disciplinary proceeding
by or against the Seller that (A) could be required to be disclosed
to the Commission or to the Seller's shareholders or (B) could
result in a Material Adverse Change with respect to the Seller, or
the promulgation of any proceeding or any proposed or final rule
which would result in a Material Adverse Change with respect to the
Seller;
(ii) any change in the location of the Seller's principal
offices or any change in the location of the Seller's books and
records;
(iii)the occurrence of any Default or Event of Default or of
any Material Adverse Change;
(iv) the commencement of any proceedings by or against the
Seller under any applicable bankruptcy, reorganization,
liquidation, rehabilitation, insolvency or other similar law now or
hereafter in effect or of any proceeding in which a receiver,
liquidator, conservator, trustee or similar official shall have
been, or may be, appointed or requested for the Seller or any of
its assets; or
(v) the receipt of notice that (A) the Seller is being placed
under regulatory supervision, (B) any license, permit, charter,
registration or approval necessary for the conduct of the Seller's
business is to be, or may be suspended or revoked, or (C) the
Seller is to cease and desist any practice, procedure or policy
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employed by the Seller in the conduct of its business, and such
cessation may result in a Material Adverse Change with respect to
the Seller.
(g) Financing Statements and Further Assurances. The Seller will
cause to be filed all necessary financing statements or other
instruments, and any amendments or continuation statements relating
thereto, necessary to be kept and filed in such manner and in such places
as may be required by law to preserve and protect fully the interest of
the Trustee in the Trust. The Seller shall, upon the request of the
Insurer, from time to time, execute, acknowledge and deliver, or cause to
be executed, acknowledged and delivered, with ten days of such request,
such amendments hereto and such further instruments and take such further
action as may be reasonably necessary to effectuate the intention,
performance and provisions of the Transaction Documents. In addition,
the Seller agrees to cooperate with S&P and Moody's in connection with
any review of the Transaction that may be undertaken by S&P and Moody's
after the date hereof.
(h) Maintenance of Licenses. The Seller, or any successors thereof,
shall maintain all required licenses, permits, charters and registrations
which are material to the conduct of its business.
(i) Disclosure Document. Each Offering Document prepared by or on
behalf of the Seller and delivered with respect to the Securities shall
clearly disclose that the Policy is not covered by the property/casualty
insurance security fund specified in Article 76 of the New York Insurance
Law.
(j) Third-Party Beneficiary. The Seller consents to the Insurer as
a third-party beneficiary in respect of the PSA and hereby incorporates
and restates its representations, warranties and covenants as set forth
therein for the benefit of the Insurer; provided, however, that, with
respect to the representations of the Seller in Section 2.03 of the PSA
relating to the Loans, the remedies for any breach of such
representations shall be limited to the remedies specified in the PSA.
(k) Servicing of Loans. The Seller will provide the Insurer with
written notice of any change or amendment to any Transaction Document to
which it is a party as currently in effect and agrees that it will not
make any change or amendment to any Transaction Document without the
prior written consent of the Insurer thereto.
(l) Maintenance of Trust. On or before each March 21, beginning in
1997, so long as any of the Securities are outstanding, the Seller shall
furnish, or cause to be furnished, to the Insurer and the Trustee an
Officers' Certificate either stating that such action has been taken with
respect to the recording, filing, rerecording and refiling of any
financing statements and continuation statements as is necessary to
maintain the interest of
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the Trustee created by the PSA with respect to the Trust and reciting the
details of such action or stating that no such action is necessary to
maintain such interests. Such Officers' Certificate shall also describe
the recording, filing, rerecording and refiling of any financing
statements and continuation statements that will be required to maintain
the interest of the Trustee in the Trust until the date such next
Officers' Certificate is due. The Seller will use its best efforts to
cause any necessary recordings or filings to be made with respect to the
Trust.
(m) Closing Documents. The Seller shall provide or cause to be
provided to the Insurer an executed original copy of each document
executed in connection with the Transaction within 30 days after the date
of closing (except with respect to subsequent transfers of Loans).
(n) Preference Payments. With respect to any Preference Amount (as
defined in the Policy), the Seller, for so long as the Seller is the
Servicer, shall provide to the Insurer upon the request of the Insurer:
(i) a certified copy of the final nonappealable order of a
court having competent jurisdiction ordering the recovery by a
trustee in bankruptcy as voidable preference amounts included in
previous distributions under Section 4.02 of the PSA to any Owner
pursuant to the United States Bankruptcy Code;
(ii) an opinion of counsel satisfactory to the Insurer, and
upon which the Insurer shall be entitled to rely, stating that such
order is final and is not subject to appeal;
(iii) an assignment in such form as reasonably required by the
Insurer, irrevocably assigning to the Insurer all rights and claims
of the Seller, the Trustee and any Certificateholder relating to or
arising under the Mortgage Loan against the debtor which made such
preference payment or otherwise with respect to such preference
amount; and
(iv) appropriate instruments to effect (when executed by the
affected party) the appointment of the Insurer as agent for the
Trustee and any Certificateholders in any legal proceeding relating
to such preference payment being in a form satisfactory to the
Insurer.
(o) Additional Reporting. The Seller shall prepare for the benefit
of the Insurer and deliver to the Insurer the letters, certificates and
reports specified in Sections 6.04 and 6.17 of the Servicing Agreement
and Section 4.08 of the PSA. In addition, the Seller shall provide the
Insurer with monthly reports for all transactions utilizing the Contract
of
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Insurance used in the Transaction.
(p) Power of Attorney. The Seller represents and warrants that, to
the best of the Seller's knowledge, the Power of Attorney of the Trustee
dated March 29, 1996 (the "Power of Attorney") is sufficient to enable
the Seller to perform its duties as Claims Administrator and hereby
covenants to immediately notify the Trustee and the Insurer in writing if
any person named in the Power of Attorney is no longer an officer of the
Seller or is otherwise unable to act as attorney-in-fact under the Power
of Attorney or if the Seller has knowledge that the Power of Attorney is
no longer sufficient and the Seller hereby covenants to use its best
efforts to obtain any powers of attorney or other documents necessary to
perform its duties as Claims Administrator.
Section 2.03. NEGATIVE COVENANTS OF THE SELLER. The Seller hereby agrees
that during the Term of the Insurance Agreement, unless the Insurer shall
otherwise expressly consent in writing:
(a) Impairment of Rights. The Seller shall not take any action, or
fail to take any action, if such action or failure to take action may
result in a material adverse change as described in clause (ii) of the
definition of Material Adverse Change with respect to the Seller, or may
interfere with the enforcement of any rights of the Insurer under or with
respect to the Transaction Documents. The Seller shall give the Insurer
written notice of any such action or failure to act on the earlier of:
(i) the date upon which any publicly available filing or release is made
with respect to such action or failure to act or (ii) promptly prior to
the date of consummation of such action or failure to act. The Seller
shall furnish to the Insurer all information requested by it that is
reasonably necessary to determine compliance with this paragraph.
(b) Adverse Selection Procedure. The Seller will not use any
adverse selection procedure in selecting Loans to be transferred to the
Trustee from the outstanding Loans that qualify under the PSA for
inclusion in the Trust.
(c) Waiver, Amendments, Etc. Except in accordance with the
Transaction Documents, the Seller shall not waive, modify or amend, or
consent to any waiver, modification or amendment of, any of the terms,
provisions or conditions of the Transaction Documents without the consent
of the Insurer.
(d) Mortgage Loan Agreements; Charge-off Policy. Except as
otherwise permitted in the PSA, the Seller shall not alter or amend any
Loan or their respective charge-off policies in a manner that materially
adversely affects the Insurer unless the Insurer shall have previously
given its consent, which consent shall not be unreasonably
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withheld.
Section 2.04. AFFIRMATIVE COVENANTS OF DEPOSITOR. The Depositor hereby
agrees that during the Term of the Insurance Agreement, unless the Insurer
shall otherwise expressly agree in writing:
(a) Financing Statements and Further Assurances. The Depositor will
cause to be filed all necessary financing statements or other
instruments, and any amendments or continuation statements relating
thereto, necessary to be kept and filed in such manner and in such places
as may be required by law to preserve and protect fully the interest of
the Trustee in the Trust. The Depositor shall, upon the request of the
Insurer, from time to time, execute, acknowledge and deliver, or cause to
be executed, acknowledged and delivered, with ten days of such request,
such amendments hereto and such further instruments and take such further
action as may be reasonably necessary to effectuate the intention,
performance and provisions of the Transaction Documents. In addition,
the Depositor agrees to cooperate with S&P and Moody's in connection with
any review of the Transaction that may be undertaken by S&P and Moody's
after the date hereof.
(b) Disclosure Document. Each Offering Document delivered with
respect to the Securities shall clearly disclose that the Policy is not
covered by the property/casualty insurance security fund specified in
Article 76 of the New York Insurance Law.
Section 2.05. NEGATIVE COVENANT OF DEPOSITOR. The Depositor shall not
amend its certificate of incorporation without the Insurer's prior written
consent.
Section 2.06. AFFIRMATIVE COVENANTS OF THE CLAIMS ADMINISTRATOR AND THE
CONTRACT OF INSURANCE HOLDER. The Claims Administrator and the Trustee, as
Contract of Insurance Holder, hereby covenant and agree that during the term of
this Agreement:
(a) Access to Records; Discussions With Officers and Accountants.
The Claims Administrator and the Contract of Insurance Holder shall, upon
the request of the Insurer, permit the Insurer, or its authorized agent,
at the expense of the Insurer, at reasonable times and upon reasonable
notice:
(i) to inspect such books and records of the Claims
Administrator and the Contract of Insurance Holder as may relate to
the Certificates, the Loans, the obligations of the Claims
Administrator and the Contract of Insurance Holder under the
Transaction Documents, the business of the Claims Administrator and
the Contract of Insurance Holder and the transactions consummated
in connection herewith;
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(ii) to discuss the affairs, finances and accounts of the
Claims Administrator and the Contract of Insurance Holder as they
relate to the Certificates with an appropriate officer of the
Claims Administrator or the Contract of Insurance Holder, as
applicable; and
(iii) to discuss the affairs, finances and accounts of the
Claims Administrator and the Contract of Insurance Holder as they
relate to the Certificates with the independent public accountants
of the Claims Administrator or the Contract of Insurance Holder, as
applicable, provided that an appropriate officer of the Claims
Administrator and the Contract of Insurance Holder, as applicable,
shall have the right to be present during such discussions.
Such inspections and discussions shall be conducted during normal
business hours and shall not unreasonably disrupt the business of the
Claims Administrator or the Contract of Insurance Holder.
(b) Inform Insurer of Material Events. The Claims Administrator
and the Contract of Insurance Holder shall promptly inform the Insurer and
the Trustee in writing of the following:
(i) any default or any fact or event which results, or which
with notice or the passage of time, or both, would result in an
event of default under any Transaction Document or would constitute
a material breach of a representation, warranty or covenant by the
Claims Administrator or the Contract of Insurance Holder under any
Transaction Document;
(ii) the submission of any claim or the initiation of any
legal process, litigation or administrative or judicial
investigation against the Claims Administrator, the Contract of
Insurance Holder, the Seller or the Master Servicer, as the case
may be, in any federal, state or local court or before any
governmental body or agency, or before any arbitration board, or
any such proceedings threatened by any governmental agency, which,
if adversely determined, would have a material adverse effect upon
the ability of the Claims Administrator, the Contract of Insurance
Holder, the Seller or the Master Servicer, as the case may be, to
perform its obligations under any Transaction Document;
(iii) the submission of any claim or the initiation of any
legal process, litigation or administrative or judicial
investigation against the Claims Administrator, the Contract of
Insurance Holder, the Seller or the Master Servicer, as the case
may be, in any federal, state or local court or before any
arbitration board, or any such proceeding threatened by any
governmental agency, which, if
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adversely determined, would have a material adverse effect on the
Loans as a whole; and
(iv) the commencement of any proceedings by or against the
Claims Administrator, the Contract of Insurance Holder, the Seller
or the Servicer, as the case may be, under any applicable
bankruptcy, reorganization, liquidation, insolvency or other
similar law now or hereafter in effect or of any proceeding in
which a receiver, liquidator, trustee or other similar official
shall have been, or may be, appointed or requested for the Claims
Administrator, the Contract of Insurance Holder, the Seller or the
Servicer.
(c) Access to HUD Audit Letters. The Contract of Insurance Holder
shall, upon the written request of the Insurer, furnish the Insurer
copies of all HUD audit letters addressed to the Contract of Insurance
Holder received within the last five years and received during the term
of this Agreement and the Contract of Insurance Holder's responses to all
such letters.
(d) Power of Attorney. If the Contract of Insurance Holder
receives notice from the Claims Administrator that any person named in
the Power of Attorney is no longer an officer of the Claims Administrator
or is otherwise unable to act as attorney-in-fact under the Power of
Attorney, or if the Seller is no longer acting as Claims Administrator,
the Contract of Insurance Holder shall immediately appoint an
attorney-in-fact or attorneys-in-fact, as the case may be, nominated by
the Claims Administrator, acceptable to the Insurer and qualified to
perform as attorney-in-fact or attorneys-in-fact, as the case may be,
under a power of attorney acceptable to the Insurer.
Section 2.07. REPRESENTATIONS AND WARRANTIES OF THE MASTER SERVICER. The
Master Servicer represents, warrants and covenants, as follows:
(a) Due Organization and Qualification. The Master Servicer is a
national banking association, duly organized, validly existing and in
good standing under the laws of the United States of America. The Master
Servicer is duly qualified to do business, is in good standing and has
obtained all necessary licenses, permits, charters, registrations and
approvals (together, "approvals") necessary for the conduct of its
business as currently conducted and as described in the Offering Document
and the performance of its obligations under the Transaction Documents,
in each jurisdiction in which the failure to be so qualified or to obtain
such approvals would render any Transaction Document unenforceable in any
respect or would have a material adverse effect upon the Transaction.
(b) Power and Authority. The Master Servicer has all necessary
power and authority to conduct its business as currently conducted and,
as described in the Offering
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Document, to execute, deliver and perform its obligations under the
Transaction Documents and to consummate the Transaction.
(c) Due Authorization. The execution, delivery and performance of
the Transaction Documents to which the Master Servicer is a party by the
Master Servicer have been duly authorized by all necessary action and do
not require any additional approvals or consents, or other action by or
any notice to or filing with any Person, including, without limitation,
any governmental entity or the Master Servicer's stockholders, which have
not previously been obtained or given by the Master Servicer.
(d) Noncontravention. Neither the execution and delivery of the
Transaction Documents by the Master Servicer, the consummation of the
transactions contemplated thereby nor the satisfaction of the terms and
conditions of the Transaction Documents:
(i) conflicts with or results in any breach or violation of
any provision of the charter, certificate of incorporation or
bylaws of the Master Servicer or any law, rule, regulation, order,
writ, judgment, injunction, decree, determination or award
currently in effect having applicability to the Master Servicer or
any of their material properties, including regulations issued by
an administrative agency or other governmental authority having
supervisory powers over the Master Servicer;
(ii) constitutes a default by the Master Servicer under or a
breach of any provision of any material loan agreement, mortgage,
indenture or other material agreement or instrument to which the
Master Servicer is a party or by which any of its properties, which
are individually or in the aggregate material to the Master
Servicer, is or may be bound or affected; or
(iii) results in or requires the creation of any lien upon or
in respect of any assets of the Master Servicer.
(e) Legal Proceedings. There is no action, proceeding or
investigation by or before any court, governmental or administrative
agency or arbitrator against or materially affecting the Master Servicer,
or any of its subsidiaries, or any properties or rights of the Master
Servicer, or any of its subsidiaries, pending or, to the Master
Servicer's knowledge after reasonable inquiry, threatened, which, in any
case, could reasonably be expected to result in a Material Adverse Change
with respect to the Master Servicer.
(f) Valid and Binding Obligations. The Transaction Documents to
which the Master Servicer is a party (other than the Securities), when
executed and delivered by the Master Servicer, will constitute the legal,
valid and binding obligations of the Master Servicer enforceable in
accordance with their respective terms, except as such enforceability
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may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting creditors' rights generally and general
equitable principles and public policy considerations as to rights of
indemnification for violations of federal securities laws. The Master
Servicer will not at any time in the future deny that the Transaction
Documents to which it is a party constitute the legal, valid and binding
obligations of the Master Servicer.
(g) Financial Statements. The Financial Statements of the Master
Servicer, copies of which have been furnished to the Insurer, (i) are, as
of the dates and for the periods referred to therein, complete and
correct in all material respects, (ii) present fairly the financial
condition and results of operations of the Master Servicer as of the
dates and for the periods indicated and (iii) have been prepared in
accordance with generally accepted accounting principles consistently
applied, except as noted therein (subject as to interim statements to
normal year-end adjustments). Since the date of the most recent
Financial Statements of the Master Servicer, there has been no Material
Adverse Change in respect of the Master Servicer. Except as disclosed in
the Financial Statements of the Master Servicer, the Master Servicer is
not subject to any contingent liabilities or commitments that,
individually or in the aggregate, have a material possibility of causing
a Material Adverse Change in respect of the Master Servicer.
(h) Compliance With Law, Etc. No practice, procedure or policy
employed, or proposed to be employed, by the Master Servicer in the
conduct of its business violates any law, regulation, judgment,
agreement, order or decree applicable to any of them that, if enforced,
could reasonably be expected to result in a Material Adverse Change with
respect to the Master Servicer.
(i) Taxes. The Master Servicer and the Master Servicer's parent
company or companies have filed prior to the date hereof all federal and
state tax returns that are required to be filed and paid all taxes,
including any assessments received by them that are not being contested
in good faith, to the extent that such taxes have become due, except for
any failures to file or pay that, individually or in the aggregate,
would not result in a Material Adverse Change with respect to the Master
Servicer.
(j) Accuracy of Information. Neither the Transaction Documents nor
other information relating to the Loans, the operations of the Master
Servicer (including servicing or origination of loans) or the financial
condition of the Master Servicer (collectively, the "Documents"), as
amended, supplemented or superseded, furnished to the Insurer by the
Master Servicer contain any statement of a material fact by the Master
Servicer which was untrue or misleading in any material adverse respect
when made. The Master Servicer has no knowledge or circumstances that
could reasonably be expected to cause a Material Adverse Change with
respect to the Master Servicer. Since the furnishing of the Documents,
there has been no change nor any development or event involving a
prospective
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change known to the Master Servicer that would render any of the
Documents untrue or misleading in a material respect.
(k) Compliance With Securities Laws. The information in the Offering
Document set forth under the heading "THE MASTER SERVICER" does not
contain any untrue statement of a material fact and does not omit to
state a material fact necessary to make the statements made therein, in
light of the circumstances under which they were made, not misleading.
(l) Transaction Documents. Each of the representations and
warranties of the Master Servicer contained in the Transaction Documents
is true and correct in all material respects, and the Master Servicer
hereby makes each such representation and warranty to, and for the
benefit of, the Insurer as if the same were set forth in full herein,
provided that the remedy for any breach of this paragraph shall be
limited to the remedies specified in the related Transaction Document.
(m) Solvency. The Master Servicer is solvent and will not be
rendered insolvent by the Transaction and, after giving effect to the
Transaction, the Master Servicer will not be left with an unreasonably
small amount of capital with which to engage in its business, nor does
the Master Servicer intend to incur, or believe that it has incurred,
debts beyond its ability to pay as they mature. The Master Servicer does
not contemplate the commencement of insolvency, bankruptcy, liquidation
or consolidation proceedings or the appointment of a receiver,
liquidator, conservator, trustee or similar official in respect of the
Master Servicer or any of its assets.
(n) Principal Place of Business. The principal place of business
for the master servicing activities of the Master Servicer is located in
Columbia, Maryland.
Section 2.08. AFFIRMATIVE COVENANTS OF THE MASTER SERVICER. The Master
Servicer hereby agrees that during the Term of the Insurance Agreement, unless
the Insurer shall otherwise expressly consent in writing:
(a) Compliance With Agreements and Applicable Laws. The Master
Servicer shall not be in default under the Transaction Documents and
shall comply with all material requirements of any law, rule or
regulation applicable to it. The Master Servicer shall not agree to any
amendment to or modification of the terms of any Transaction Documents
unless the Insurer shall have otherwise consented.
(b) Corporate Existence. The Master Servicer, and its successors
and assigns, shall maintain its existence and shall at all times continue
to be duly organized under the laws of the United States of America or
another jurisdiction of organization and duly
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qualified and duly authorized (as described in subsections 2.07(a), (b)
and (c) hereof) and shall conduct its business in accordance with the
terms of its charter or certificate of incorporation and bylaws.
(c) Financial Statements; Accountants' Reports; Other Information.
The Master Servicer shall keep or cause to be kept in reasonable detail
books and records of account of its assets and business, including, but
not limited to, books and records relating to the Transaction. The
Master Servicer shall furnish or cause to be furnished to the Insurer:
(i) Annual Financial Statements. As soon as available, and in
any event within 120 days after the close of each fiscal year of
the Master Servicer, the audited consolidated balance sheets of the
Master Servicer and its subsidiaries as of the end of such fiscal
year and the related audited consolidated statements of income,
changes in shareholders' equity and cash flows for such fiscal
year, all in reasonable detail and stating in comparative form the
respective figures for the corresponding date and period in the
preceding fiscal year, prepared in accordance with generally
accepted accounting principles, consistently applied, and
accompanied by the audit opinion of the Master Servicer's
independent accountants (which shall be a nationally recognized
independent public accounting firm) and by the certificate
specified in Section 2.08(d) hereof.
(ii) Quarterly Financial Statements. As soon as available,
and in any event within 90 days after each of the first three
fiscal quarters of each fiscal year of the Master Servicer, the
unaudited consolidated balance sheets of the Master Servicer and
its subsidiaries as of the end of such fiscal quarter and the
related unaudited consolidated statements of income, changes in
shareholders' equity and cash flows for such fiscal quarter, all in
reasonable detail and stating in comparative form the respective
figures for the corresponding date and period in the preceding
fiscal year, prepared in accordance with generally accepted
accounting principles, consistently applied, and accompanied by the
certificate specified in Section 2.08(d) hereof.
(iii) Continuing Reports. Thereafter, the Master Servicer
shall deliver to the Insurer not later than 12:00 noon, New York
City time, on each Determination Date the Master Servicer
Certificate required by Section 4.01(c) of the PSA.
(iv) Certain Information. Upon the reasonable request of the
Insurer, the Master Servicer shall promptly provide copies of any
requested proxy statements, financial statements, reports and
registration statements which the Master Servicer files with, or
delivers to, the Commission or any national securities exchange.
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(v) Other Information. Promptly upon receipt thereof, copies
of all schedules, financial statements or other similar reports
delivered to or by the Master Servicer pursuant to the terms of the
PSA and, promptly upon request, such other data as the Insurer may
reasonably request.
All financial statements specified in clause (i) above shall be
furnished in consolidated form for the Master Servicer and all its
affiliates in the event the Master Servicer shall consolidate its
financial statements with its affiliates.
The Insurer agrees that it and its agents, accountants and attorneys
shall keep confidential all financial statements, reports and other
information delivered by the Master Servicer pursuant to this subsection
2.08(c) to the extent provided in subsection 2.09(e) hereof.
(d) Compliance Certificate. The Master Servicer shall deliver to
the Insurer, concurrently with the delivery of the financial statements
required pursuant to subsection 2.08(c)(i) and (ii) hereof, one or more
certificates signed by a Master Servicing Officer of the Master Servicer
authorized to execute such certificates on behalf of the Master Servicer
stating that:
(i) a review of the Master Servicer performance under the
Transaction Documents during such period has been made under such
officer's supervision;
(ii) to the best of such individual's knowledge following
reasonable inquiry, no Default or Event of Default has occurred,
or if a Default or Event of Default has occurred, specifying the
nature thereof and, if the Master Servicer has a right to cure
pursuant to Section 7.01 of the PSA, stating in reasonable detail
(including, if applicable, any supporting calculations) the steps,
if any, being taken by the Master Servicer to cure such Default or
Event of Default or to otherwise comply with the terms of the
agreement to which such Default or Event of Default relates;
(iii) the attached Financial Statements submitted in
accordance with subsection 2.09(c)(i) or (ii), as the case may be,
hereof are complete and correct in all material respects and
present fairly the financial condition and results of operations of
the Master Servicer as of the dates and for the periods indicated,
in accordance with generally accepted accounting principles
consistently applied; and
(iv) the Master Servicer has in full force and effect a
blanket fidelity bond (or direct surety bond) and an errors and
omissions insurance policy in accordance with the terms and
requirements of Section 3.20 of the PSA.
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(e) Access to Records; Discussions With Officers and Accountants.
On an annual basis, or upon the occurrence of a Material Adverse Change,
the Master Servicer shall, upon the request of the Insurer, permit the
Insurer or its authorized agents, at the expense of the Insurer, at
reasonable times and upon reasonable notice:
(i) to inspect the books and records of the Master Servicer as
they may relate to the Securities, the obligations of the Master
Servicer under the Transaction Documents, and the Transaction;
(ii) to discuss the affairs, finances and accounts of the
Master Servicer with the chief operating officer and the chief
financial officer of the Master Servicer, as the case may be; and
(iii) with the Master Servicer's consent, which consent shall
not be unreasonably withheld, to discuss the affairs, finances and
accounts of the Master Servicer with the Master Servicer's
independent accountants, provided that an officer of the Master
Servicer shall have the right to be present during such
discussions.
Such inspections and discussions shall be conducted during normal
business hours and shall not unreasonably disrupt the business of the
Master Servicer. The books and records of the Master Servicer will be
maintained at the address of the Master Servicer designated herein for
receipt of notices, unless the Master Servicer shall otherwise advise the
parties hereto in writing.
The Insurer agrees that it and its shareholders, employees,
directors, agents, accountants and attorneys shall keep confidential any
matter of which it becomes aware through such inspections or discussions
(unless readily available from public sources), except as may be
otherwise required by regulation, law or court order or requested by
appropriate governmental authorities or as necessary to preserve its
rights or security under or to enforce the Transaction Documents,
provided that the foregoing shall not limit the right of the Insurer to
make such information available to its regulators, securities rating
agencies, reinsurers, credit and liquidity providers, counsel and
accountants. If the Insurer is requested or required (by oral questions,
interrogatories, requests for information or documents subpoena, civil
investigative demand or similar process) to disclose any information of
which it becomes aware through such inspections or discussions, the
Insurer will promptly notify the Master Servicer of such request(s) so
that the Master Servicer may seek an appropriate protective order and/or
waive the Insurer's compliance with the provisions of this Insurance
Agreement. If, in the absence of a protective order or the receipt of a
waiver hereunder, the Insurer is, nonetheless, in the opinion of its
counsel, compelled to disclose such information to any tribunal or else
stand liable for contempt or
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suffer other censure or significant penalty, the Insurer may disclose
such information to such tribunal that the Insurer is compelled to
disclose, provided that a copy of all information disclosed is provided
to the Master Servicer promptly upon such disclosure.
(f) Notice of Material Events. The Master Servicer shall be
obligated promptly to inform the Insurer in writing of the occurrence of
any of the following to the extent any of the following relate to it:
(i) the submission of any claim or the initiation or threat of
any legal process, litigation or administrative or judicial
investigation, or rule making or disciplinary proceeding by or
against the Master Servicer that (A) could be required to be
disclosed to the Commission or to the Master Servicer's
shareholders or (B) could result in a Material Adverse Change with
respect to the Master Servicer, or the promulgation of any
proceeding or any proposed or final rule which would result in a
Material Adverse Change with respect to the Master Servicer;
(ii) any change in the location of the Master Servicer's
principal offices or any change in the location of the Master
Servicer's books and records;
(iii) the occurrence of any Default or Event of Default or of
any Material Adverse Change;
(iv) the commencement of any proceedings by or against the
Master Servicer under any applicable bankruptcy, reorganization,
liquidation, rehabilitation, insolvency or other similar law now or
hereafter in effect or of any proceeding in which a receiver,
liquidator, conservator, trustee or similar official shall have
been, or may be, appointed or requested for the Master Servicer or
any of its or their assets; or
(v) the receipt of notice that (A) the Master Servicer is
being placed under regulatory supervision, (B) any license, permit,
charter, registration or approval necessary for the conduct of the
Master Servicer's business is to be, or may be suspended or
revoked, or (C) the Master Servicer is to cease and desist any
practice, procedure or policy employed by the Master Servicer in
the conduct of its business, and such cessation may result in a
Material Adverse Change with respect to the Master Servicer.
(g) Financing Statements and Further Assurances. The Master
Servicer will cause to be filed all necessary financing statements or
other instruments, and any amendments or continuation statements relating
thereto, necessary to be kept and filed in such manner and in such places
as may be required by law to preserve and protect fully
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the interest of the Trustee in the Trust. The Master Servicer shall,
upon the request of the Insurer, from time to time, execute, acknowledge
and deliver, or cause to be executed, acknowledged and delivered, with
ten days of such request, such amendments hereto and such further
instruments and take such further action as may be reasonably necessary
to effectuate the intention, performance and provisions of the
Transaction Documents. In addition, the Master Servicer agrees to
cooperate with S&P and Moody's in connection with any review of the
Transaction that may be undertaken by S&P and Moody's after the date
hereof.
(h) Maintenance of Licenses. The Master Servicer, or any successors
thereof, shall maintain all licenses, permits, charters and registrations
which are material to the conduct of its business.
(i) Disclosure Document. Each Offering Document prepared by or on
behalf of the Master Servicer and delivered with respect to the
Securities shall clearly disclose that the Policy is not covered by the
property/casualty insurance security fund specified in Article 76 of the
New York Insurance Law.
(j) Third-Party Beneficiary. The Master Servicer agrees that the
Insurer shall have all rights of a third-party beneficiary in respect of
the PSA and hereby incorporates and restates its representations,
warranties and covenants as set forth therein for the benefit of
the Insurer.
(k) Servicing of Loans. The Master Servicer will provide the
Insurer with written notice of any change or amendment to any Transaction
Document as currently in effect and agrees that it will not make any
change or amendment to any Transaction Document without the prior written
consent of the Insurer thereto.
(l) Maintenance of Trust. On or before each March 21, beginning in
1997, so long as any of the Securities are outstanding, the Master
Servicer shall furnish, or cause to be furnished, to the Insurer and the
Trustee an Officers' Certificate either stating that such action has been
taken with respect to the recording, filing, rerecording and refiling of
any financing statements and continuation statements as is necessary to
maintain the interest of the Trustee created by the PSA with respect to
the Trust and reciting the details of such action or stating that no such
action is necessary to maintain such interests. Such Officers'
Certificate shall also describe the recording, filing, rerecording and
refiling of any financing statements and continuation statements that
will be required to maintain the interest of the Trustee in the Trust
until the date such next Officers' Certificate is due. The Master
Servicer will use its best efforts to cause any necessary recordings or
filings to be made with respect to the Trust.
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(m) Closing Documents. The Master Servicer shall provide or cause
to be provided to the Insurer an executed original copy of each document
executed in connection with the Transaction within 30 days after the date
of closing (except with respect to subsequent transfers of Loans).
(n) Preference Payments. With respect to any Preference Amount (as
defined in the Policy), the Master Servicer shall provide to the Insurer
upon the request of the Insurer:
(i) a certified copy of the final nonappealable order of a
court having competent jurisdiction ordering the recovery by a
trustee in bankruptcy as voidable preference amounts included in
previous distributions under Section 4.02 of the PSA to any Owner
pursuant to the United States Bankruptcy Code;
(ii) an opinion of counsel satisfactory to the Insurer, and
upon which the Insurer shall be entitled to rely, stating that such
order is final and is not subject to appeal;
(iii) an assignment in such form as reasonably required by the
Insurer, irrevocably assigning to the Insurer all rights and claims
of the Master Servicer, the Trustee and any Certificateholder
relating to or arising under the Mortgage Loan against the debtor
which made such preference payment or otherwise with respect to
such preference amount; and
(iv) appropriate instruments to effect (when executed by the
affected party) the appointment of the Insurer as agent for the
Trustee and any Certificateholders in any legal proceeding relating
to such preference payment being in a form satisfactory to the
Insurer.
(o) Additional Reporting. The Master Servicer shall prepare the
following for the benefit of the Insurer:
(i) To the extent that the Master Servicer is directly
servicing any of the Loans, an annual letter prepared by a firm of
independent certified public accountants acceptable to the Insurer,
whose acceptance may not be unreasonably withheld, stating that
such firm has examined the Master Servicer's operations in
accordance with the requirements of the Uniform Single Audit
Program for Mortgage Bankers.
(ii) An annual certificate stating that the Master Servicer is
in compliance, in all material respects, with all of its
obligations and responsibilities
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outlined in the PSA.
(iii) Monthly reports which include distributions made to the
holders of the Certificates, delinquency and default information
with respect to the mortgage pool, the status of all loans for
which claims with the FHA have been made and the outstanding amount
available under the Contract of Insurance. In addition, the Master
Servicer shall provide the Insurer with monthly reports for all
transactions utilizing the same Contract of Insurance as the one to
which the loans underlying the Certificates are subject.
Section 2.09. NEGATIVE COVENANTS OF THE MASTER SERVICER . The Master
Servicer hereby agrees that during the Term of the Insurance Agreement, unless
the Insurer shall otherwise expressly consent in writing:
(a) Impairment of Rights. The Master Servicer shall not take any
action, or fail to take any action, if such action or failure to take
action may result in a material adverse change as described in clause
(ii) of the definition of Material Adverse Change with respect to the
Master Servicer, or may interfere with the enforcement of any rights of
the Insurer under or with respect to the Transaction Documents. The
Master Servicer shall give the Insurer written notice of any such action
or failure to act on the earlier of: (i) the date upon which any
publicly available filing or release is made with respect to such action
or failure to act or (ii) promptly prior to the date of consummation of
such action or failure to act. The Master Servicer shall furnish to the
Insurer all information requested by it that is reasonably necessary to
determine compliance with this paragraph.
(b) Waiver, Amendments, Etc. Except in accordance with the
Transaction Documents, the Master Servicer shall not waive, modify or
amend, or consent to any waiver, modification or amendment of, any of the
terms, provisions or conditions of the Transaction Documents without the
consent of the Insurer.
(c) Mortgage Loan Agreements; Charge-off Policy. Except as
otherwise permitted in the PSA, the Master Servicer shall not alter or
amend any Mortgage Loan or their respective charge-off policies in a
manner that materially adversely affects the Insurer unless the Insurer
shall have previously given its consent, which consent shall not be
unreasonably withheld.
Section 2.10. ADDITIONAL COVENANTS OF DEPOSITOR, SELLER AND CLAIMS
ADMINISTRATOR. None of the Seller, the Depositor or the Claims Administrator
shall submit, or cause to be submitted, a claim to the FHA in respect of the
Loans if the amount of such claim would, when aggregated with all prior claims
made to the FHA in respect of the Loans, exceed the Trust Designated Insurance
Amount without the prior written consent of the Insurer. In the event that
claims are made under
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the Contract of Insurance in respect of the Loans in excess of the Trust
Designated Insurance Amount, the Class R Certificateholders shall not receive
distributions until such time as an amount equal to such excess claims (the
"Excess Claim Amount") has been deposited into a reserve account acceptable to
the Insurer. The Excess Claim Amount will be deposited at the direction of the
Insurer in other MBIA-insured Mego Title I transactions or distributed to the
Class R Certificateholders at the direction of the Insurer. The Excess Claim
Amount shall be equal to 90% of the excess of (x) the claims made under the
Contract of Insurance for the 1996-1 transaction over (y) the Trust Designated
Insurance Amount.
ARTICLE III
THE POLICY; REIMBURSEMENT
Section 3.01. ISSUANCE OF THE POLICY. The Insurer agrees to issue the
Policy on the Closing Date subject to satisfaction of the conditions precedent
set forth below:
(a) Payment of Initial Premium and Expenses. The Insurer shall have
been paid, by the Seller, that portion of a nonrefundable Premium payable
on the Closing Date and the Seller shall agree to reimburse or pay
directly other fees and expenses identified in Section 3.02 as payable,
and the Insurer shall have received a fully executed copy of the
Commitment.
(b) Transaction Documents. The Insurer shall have received a copy
of each of the Transaction Documents, in form and substance satisfactory
to the Insurer, duly authorized, executed and delivered by each party
thereto.
(c) Certified Documents and Resolutions. The Insurer shall have
received a copy of (i) the charter or certificate of incorporation and
bylaws of the Master Servicer and the Seller, (ii) the resolutions of the
Seller's Board of Directors authorizing the execution, delivery and
performance by the Seller of the Transaction Documents and the
transactions contemplated thereby, and (iii) the resolutions of the
Depositor's Board of Directors authorizing the issuance of the Securities
and the execution, delivery and performance by the Depositor of the
Transactions Documents and the transactions contemplated thereby
certified by the Secretary or an Assistant Secretary of the Master
Servicer, the Seller and the Depositor, respectively (which certificate
shall state that such charter or certificate of incorporation, bylaws and
resolutions are in full force and effect without modification on the Date
of Issuance).
(d) Incumbency Certificate. The Insurer shall have received a
certificate of the Secretary or an Assistant Secretary of the Master
Servicer and the Seller certifying the names and signatures of the
officers of the Master Servicer and the Seller authorized to
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execute and deliver the Transaction Documents and that shareholder
consent to the execution and delivery of such documents is not necessary.
(e) Representations and Warranties; Certificate. The
representations and warranties of the Master Servicer and the Seller set
forth or incorporated by reference in this Insurance Agreement shall be
true and correct as of the Date of Issuance as if made on the Date of
Issuance and the Insurer shall have received a certificate of appropriate
officers of the Master Servicer and the Seller to that effect.
(f) Opinions of Counsel. (i) The law firm of Brown & Wood shall
have issued its favorable opinion or opinions, in form and substance
acceptable to the Insurer and its counsel, regarding the corporate
existence and authority of the Seller and the Depositor and the validity
and enforceability of the Transaction Documents against such parties.
(ii) The law firm of Brown & Wood shall have furnished its opinions,
in form and substance acceptable to the Insurer and its counsel,
regarding the sale of the home improvement loans and the tax treatment of
payments on the Certificates under federal and New York tax laws.
(iii) Legal opinions shall be furnished by Swidler & Berlin in form
and substance acceptable to the Insurer, regarding the ability to assign
and transfer the rights to file and collect claims with FHA to a
successor servicer or trustee.
(iv) The Insured shall have been provided with opinions, in form and
substance acceptable to the Insurer and its counsel, to the effect that:
(A) the Trustee is an "investing lender" in good standing under 24
CFR Section 202.7 and authorized to purchase, hold and sell loans that
have been originated and insured under 24 CFR Part 201 and there are no
administrative actions pending or threatened which, if successful, could
change such good standing;
(B) the Seller is a "non-supervised lender" in good standing under
24 CFR Section 202.5 and authorized to originate, purchase, hold,
service and sell loans insured under 24 CFR Part 201 and there are no
administrative actions pending or threatened which, if successful, could
change such good standing; and
(C) all actions necessary under Title I to permit the Seller, as
claims administrator, to act as the duly authorized agent and
attorney-in-fact of the Trustee, as if a duly authorized officer of the
Trustee itself were so acting, for purposes of handling all aspects of
administering, processing and submitting FHA claims to HUD/FHA.
(v) The Insurer shall have received such other opinions of counsel,
in form and
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substance acceptable to the Insurer and its counsel, addressing such
other matters as the Insurer may reasonably request.
(g) Approvals, Etc. The Insurer shall have received true and
correct copies of all approvals, licenses and consents, if any,
including, without limitation, any required approval of the shareholders
of the Master Servicer and the Seller, required in connection with the
Transaction.
(h) No Litigation, Etc. No suit, action or other proceeding,
investigation or injunction, or final judgment relating thereto, shall be
pending or threatened before any court or governmental agency in which it
is sought to restrain or prohibit or to obtain damages or other relief in
connection with the Transaction Documents or the consummation of the
Transaction.
(i) Legality. No statute, rule, regulation or order shall have been
enacted, entered or deemed applicable by any government or governmental
or administrative agency or court that would make the transactions
contemplated by any of the Transaction Documents illegal or otherwise
prevent the consummation thereof.
(j) Satisfaction of Conditions of the Underwriting Agreement. All
conditions in the Underwriting Agreement relating to the investors'
obligation to purchase the Securities shall have been satisfied.
(k) Issuance of Ratings. The Insurer shall have received
confirmation that the risk secured by the Policy constitutes a BBB risk
by S&P and a Baa risk by Moody's and that the Certificates, when issued,
will be rated "AAA" by S&P and "Aaa" by Moody's.
(l) No Default. No Default or Event of Default shall have occurred.
(m) Additional Items. The Insurer shall have received such other
documents, instruments, approvals or opinions requested by the Insurer as
may be reasonably necessary to effect the Transaction, including, but not
limited to, evidence satisfactory to the Insurer that the conditions
precedent, if any, in the Transaction Documents have been satisfied.
(n) Underwriting Agreement. The Insurer shall have received copies
of each of the documents, and specifically be entitled to rely on each of
the documents, required to be delivered to the Underwriter pursuant to
the Underwriting Agreement.
(o) Conform to Documents. The Insurer and its counsel shall have
determined that all documents, certificates and opinions to be delivered
in connection with the Certificates conform to the terms of the PSA, the
Commitment, the Offering Document and this Insurance Agreement.
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(p) Compliance With Commitment. All other terms, conditions and
requirements of the Commitment shall have been satisfied.
(q) HUD Audit Letters. The Insurer shall have received copies of
all HUD audit letters addressed to the Contract of Insurance Holder
received within the last five years and the Contract of Insurance
Holder's response to such letters.
The issuance of the Policy will be conclusive evidence of satisfaction or
waiver of any of the conditions set forth in this Section 3.01.
Section 3.02. PAYMENT OF FEES AND PREMIUM.
(a) Legal and Accounting Fees. The Seller shall pay or cause to be
paid, on the Date of Issuance, legal fees and disbursements incurred by
the Insurer in connection with the issuance of the Policy in accordance
with the terms of the Commitment. Any fees of the Insurer's auditors
payable in respect of any amendment or supplement to the Offering
Document or any other Offering Document incurred after the Date of
Issuance shall be paid by the Seller on demand.
(b) Premium. In consideration of the issuance by the Insurer of the
Policy, the Insurer shall be entitled to receive the Premium in an amount
equal to the product of 0.0308% and the outstanding Certificate balance
of the Class A Certificates on the Closing Date. On each Distribution
Date following the Closing Date, beginning in April 1996 and monthly
thereafter, the Seller shall pay, or cause to be paid, to the Insurer an
amount (rounded to the nearest dollar) equal to 0.0308% or the
outstanding principal balance of the Class A Certificates on the Business
Day immediately preceding the Determination Date for which such payment
is due; provided, however, no Premium shall be due to the Insurer so long
as the Insurer shall have failed to make a payment required under the
Policy in accordance with its terms. The Premium paid hereunder or under
the PSA shall be nonrefundable without regard to whether the Insurer
makes any payment under the Policy or any other circumstances relating to
the Securities or provision being made for payment of the Certificates
prior to maturity. The Seller shall make all payments of Premium to be
made by them by wire transfer to an account designated from time to time
by the Insurer by written notice to the Seller.
Section 3.03. REIMBURSEMENT AND ADDITIONAL PAYMENT OBLIGATION. (a) In
accordance with the priorities established in Section 4.05 of the PSA, the
Insurer shall be entitled to reimbursement for any payment made by the Insurer
under the Policy, which reimbursement shall be due and payable on the date that
any amount is to be paid pursuant to a Notice (as defined in the Policy), in an
amount equal to the amount to be so paid and all amounts previously paid that
remain unreimbursed, together with interest on any and all amounts remaining
unreimbursed (to the extent
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permitted by law, if in respect of any unreimbursed amounts representing
interest) from the date such amounts became due until paid full (after as well
as before judgment), at a rate of interest equal to the Late Payment Rate.
(b) The Seller agrees to pay to the Insurer as follows: anything in
subsection 3.03(a) to the contrary notwithstanding, the Insurer shall be
entitled to reimbursement from the Seller (i) for payments made under the
Policy arising as a result of the Seller's failure to repurchase any Mortgage
Loan required to be repurchased by it pursuant to the PSA, together with
interest on any and all amounts remaining unreimbursed (to the extent permitted
by law, if in respect of any unreimbursed amounts representing interest) from
the date such amounts became due until paid in full (after as well as before
judgment), at a rate of interest equal to the Late Payment Rate, and (ii) for
payments made under the Policy, arising as a result of the Seller's failure to
deposit into the Collection Account any amount required to be so deposited by
it pursuant to the PSA, together with interest on any and all amounts remaining
unreimbursed (to the extent permitted by law, if in respect to any unreimbursed
amounts representing interest) from the date such amounts became due until paid
in full (after as well as before judgment), at a rate of interest equal to the
Late Payment Rate.
(c) The Seller agrees to pay to the Insurer as follows: any and all
charges, fees, costs and expenses that the Insurer may reasonably pay or incur,
including, but not limited to, attorneys' and accountants' fees and expenses,
in connection with (i) any accounts established to facilitate payments under
the Policy to the extent the Insurer has not been immediately reimbursed on the
date that any amount is paid by the Insurer under the Policy, (ii) the
enforcement, defense or preservation of any rights in respect of any of the
Transaction Documents, including defending, monitoring or participating in any
litigation or proceeding (including any insolvency or bankruptcy proceeding in
respect of any Transaction participant or any affiliate thereof) relating to
any of the Transaction Documents, any party to any of the Transaction
Documents, in its capacity as such a party, or the Transaction, (iii) any
amendment, waiver or other action with respect to, or related to, any
Transaction Document, whether or not executed or completed, or (iv) preparation
of bound volumes of the Transaction documents; costs and expenses shall include
a reasonable allocation of compensation and overhead attributable to the time
of employees of the Insurer spent in connection with the actions described in
clause (ii) above, and the Insurer reserves the right to charge a reasonable
fee as a condition to executing any waiver or consent proposed in respect of
any of the Transaction Documents.
(d) The Seller agrees to pay to the Insurer as follows: interest on any
and all amounts described in subclauses (b), (c), (e) and (f) of this Section
3.03 from the date payable or paid by such party until payment thereof in full,
and interest on any and all amounts described in Section 3.02 from the date due
until payment thereof in full, in each case, payable to the Insurer at the Late
Payment Rate per annum.
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(e) Following termination of the PSA pursuant to Section 9.01 thereof, the
Seller agrees to reimburse the Insurer for any Insured Payments required to be
made pursuant to the Policy subsequent to the date of such termination.
(f) The Master Servicer agrees to pay the Insurer as follows:
the Insurer shall be entitled to reimbursement from the Master
Servicer for payments made under the Policy arising as a result of (i)
the Master Servicer's failure to deposit into the Collection Account any
amount required to be so deposited by the Master Servicer pursuant to the
PSA and (ii) the Master Servicer's failure to repurchase any Mortgage
Loan required to be purchased by it under the PSA, together with interest
on any and all amounts remaining unreimbursed (to the extent permitted by
law, if in respect to any unreimbursed amounts relating to interest) from
the date such amounts became due until paid in full (after as well as
before judgment), at a rate of interest equal to the Late Payment Rate.
All such amounts are to be immediately due and payable without demand.
Section 3.04. INDEMNIFICATION BY SELLER; LIMITATION OF LIABILITY. (a) In
addition to any and all rights of indemnification or any other rights of the
Insurer pursuant hereto or under law or equity, the Seller and any successors
thereto agree to pay, and to protect, indemnify and save harmless, the Insurer
and its officers, directors, shareholders, employees, agents, and each person,
if any, who controls the Insurer within the meaning of either Section 15 of the
Securities Act of 1933, as amended, or Section 20 of the Securities and
Exchange Act of 1934, as amended, from and against any and all claims, losses,
liabilities (including penalties), actions, suits, judgments, demands, damages,
costs or reasonable expenses (including, without limitation, reasonable fees
and expenses of attorneys, consultants and auditors and reasonable costs of
investigations) or obligations whatsoever paid by the Insurer (herein
collectively referred to as "Liabilities") of any nature arising out of or
relating to the transactions contemplated by the Transaction Documents by
reason of:
(i) any untrue statement or alleged untrue statement of a material
fact contained in the Offering Document or in any amendment or supplement
thereto or in any preliminary offering document other than the Base
Prospectus or the Registration Statement, or arising out of or based upon
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, except insofar as such Liabilities arise out of or are
based upon any such untrue statement or omission or allegation thereof
based upon the Insurer Information or the Underwriter Information (as
such terms are defined in the Indemnification Agreement) or the Master
Servicer Information (as defined in Section 3.05 hereof);
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(ii) to the extent not covered by clause (i) above, any act or
omission of the Seller in connection with the offering, issuance, sale or
delivery of the Certificates other than by reason of false or misleading
information provided by the Insurer, the Underwriter or the Master
Servicer in writing for inclusion in the Offering Document as specified
in clause (i) above or the allegation thereof;
(iii) the misfeasance or malfeasance of, or negligence or theft
committed by, any director, officer, employee or agent of the Seller;
(iv) the violation by the Seller of any federal or state securities,
banking or antitrust laws, rules or regulations in connection with the
issuance, offer and sale of the Certificates or the transactions
contemplated by the Transaction Documents;
(v) the violation by the Seller of any federal or state laws, rules
or regulations relating to the maximum amount of interest permitted to be
received on account of any loan of money or with respect to the Loans;
(vi) the breach by the Seller of any of its obligations under this
Agreement or any of the Transaction Documents to which the Seller is a
party; and
(vii) the breach by the Seller of any representation or warranty on
the part of the Seller contained in the Transaction Documents to which
the Seller is a party or in any certificate or report furnished or
delivered to the Insurer thereunder.
This indemnity provision shall survive the termination of this Agreement and
shall survive until the statute of limitations has run on any causes of action
which arise from one of these reasons and until all suits filed as a result
thereof have been finally concluded.
(b) Any party which proposes to assert the right to be indemnified under
this Section 3.04 will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim is to
be made against the Seller under this Section 3.04, notify the Seller of the
commencement of such action, suit or proceeding, enclosing a copy of all papers
served. In case any action, suit or proceeding shall be brought against any
indemnified party and it shall notify the Seller of the commencement thereof,
the Seller shall be entitled to participate in, and, to the extent that it
shall wish, to assume the defense thereof, with counsel satisfactory to such
indemnified party, and after notice from the Seller to such indemnified party
of its election so to assume the defense thereof, the Seller shall not be
liable to such indemnified party for any legal or other expenses other than
reasonable costs of investigation subsequently incurred by such indemnified
party in connection with the defense thereof. The indemnified party shall have
the right to employ its counsel in any such action the defense of which is
assumed by the Seller in accordance with the terms of this subsection (b), but
the fees and
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expenses of such counsel shall be at the expense of such indemnified party
unless the employment of counsel by such indemnified party has been authorized
by the Seller. The Seller shall not be liable for any settlement of any action
or claim effected without its consent.
Section 3.05. INDEMNIFICATION BY MASTER SERVICER; LIMITATION OF
LIABILITY. (a) In addition to any and all rights of indemnification or any
other rights of the Insurer pursuant hereto or under law or equity, the Master
Servicer and any successors thereto agree to pay, and to protect, indemnify and
save harmless, the Insurer and its officers, directors, shareholders,
employees, agents, and each person, if any, who controls the Insurer within the
meaning of either Section 15 of the Securities Act of 1933, as amended, or
Section 20 of the Securities and Exchange Act of 1934, as amended, from and
against any and all claims, losses, liabilities (including penalties), actions,
suits, judgments, demands, damages, costs or reasonable expenses (including,
without limitation, reasonable fees and expenses of attorneys, consultants and
auditors and reasonable costs of investigations) or obligations whatsoever paid
by the Insurer (herein collectively referred to as "Liabilities") of any nature
arising out of or relating to the transactions contemplated by the Transaction
Documents by reason of:
(i) any untrue statement or alleged untrue statement of a material
fact contained in the Offering Document under the heading "THE MASTER
SERVICER" (hereinafter, referred to as the "Master Servicer Information")
or in any amendment or supplement thereto or in any preliminary offering
document, or arising out of or based upon 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;
(ii) to the extent not covered by clause (i) above, any act or
omission of the Master Servicer in connection with the offering,
issuance, sale or delivery of the Certificates other than by reason of
false or misleading information provided by the Insurer in writing for
inclusion in the Offering Document as specified in clause (i) above or
the allegation thereof;
(iii) the misfeasance or malfeasance of, or negligence or theft
committed by, any director, officer, employee or agent of the Master
Servicer;
(iv) the violation by the Master Servicer of any federal or state
securities, banking or antitrust laws, rules or regulations in connection
with the issuance, offer and sale of the Certificates or the transactions
contemplated by the Transaction Documents;
(v) the violation by the Master Servicer of any federal or state
laws, rules or regulations relating to the maximum amount of interest
permitted to be received on account of any loan of money or with respect
to the Loans;
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(vi) the breach by the Master Servicer of any of its obligations
under this Agreement or any of the Transaction Documents to which the
Master Servicer is a party; and
(vii) the breach by the Master Servicer of any representation or
warranty on the part of the Master Servicer contained in the Transaction
Documents to which the Master Servicer is a party or in any certificate
or report furnished or delivered to the Insurer thereunder.
This indemnity provision shall survive the termination of this Agreement and
shall survive until the statute of limitations has run on any causes of action
which arise from one of these reasons and until all suits filed as a result
thereof have been finally concluded.
(b) Any party which proposes to assert the right to be indemnified under
this Section 3.05 will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim is to
be made against the Master Servicer under this Section 3.05, notify the Master
Servicer of the commencement of such action, suit or proceeding, enclosing a
copy of all papers served. In case any action, suit or proceeding shall be
brought against any indemnified party and it shall notify the Master Servicer
of the commencement thereof, the Master Servicer shall be entitled to
participate in, and, to the extent that it shall wish, to assume the defense
thereof, with counsel satisfactory to such indemnified party, and after notice
from the Master Servicer to such indemnified party of its election so to assume
the defense thereof, the Master Servicer shall not be liable to such
indemnified party for any legal or other expenses other than reasonable costs
of investigation subsequently incurred by such indemnified party in connection
with the defense thereof. The indemnified party shall have the right to employ
its counsel in any such action the defense of which is assumed by the Master
Servicer in accordance with the terms of this subsection (b), but the fees and
expenses of such counsel shall be at the expense of such indemnified party
unless the employment of counsel by such indemnified party has been authorized
by the Master Servicer. The Master Servicer shall not be liable for any
settlement of any action or claim effected without its consent.
Section 3.06. INDEMNIFICATION BY GCFP; LIMITATION OF LIABILITY. (a) In
addition to any and all rights of indemnification or any other rights of the
Insurer pursuant hereto or under law or equity, GCFP and any successors thereto
agree to pay, and to protect, indemnify and save harmless, the Insurer and its
officers, directors, shareholders, employees, agents, and each person, if any,
who controls the Insurer within the meaning of either Section 15 of the
Securities Act of 1933, as amended, or Section 20 of the Securities and
Exchange Act of 1934, as amended, from and against any and all claims, losses,
liabilities (including penalties), actions, suits, judgments, demands, damages,
costs or reasonable expenses (including, without limitation, reasonable fees
and expenses of attorneys, consultants and auditors and reasonable costs of
investigations) or obligations whatsoever paid by the Insurer (herein
collectively referred to as "Liabilities") of any nature arising
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out of or relating to the transactions contemplated by the Transaction
Documents by reason of:
(i) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, or arising out of or based
upon 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, except insofar as such Liabilities arise out of or are
based upon any such untrue statement or omission or allegation thereof
based upon the Insurer Information or the Underwriter Information (as
such terms are defined in the Indemnification Agreement) or the Master
Servicer Information;
(ii) to the extent not covered by clause (i) above, any act or
omission of the Depositor in connection with the offering, issuance, sale
or delivery of the Certificates other than by reason of false or
misleading information provided by the Insurer, the Underwriter, the
Seller or the Master Servicer in writing for inclusion in the Offering
Document or as specified in clause (i) above or the allegation thereof;
(iii) the misfeasance or malfeasance of, or negligence or theft
committed by, any director, officer, employee or agent of the Depositor;
(iv) the violation by the Depositor of any federal or state
securities, banking or antitrust laws, rules or regulations in connection
with the issuance, offer and sale of the Certificates or the transactions
contemplated by the Transaction Documents;
(v) the breach by the Depositor of any of its obligations under this
Agreement or any of the Transaction Documents to which the Depositor is a
party; and
(vi) the breach by the Depositor of any representation or warranty
on the part of the Depositor contained in the Transaction Documents to
which the Depositor is a party or in any certificate or report furnished
or delivered to the Insurer thereunder.
This indemnity provision shall survive the termination of this Agreement and
shall survive until the statute of limitations has run on any causes of action
which arise from one of these reasons and until all suits filed as a result
thereof have been finally concluded.
(b) Any party which proposes to assert the right to be indemnified under
this Section 3.06 will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect of which a claim is to
be made against GCFP under this Section 3.06, notify GCFP of the commencement
of such action, suit or proceeding, enclosing a copy of all papers served. In
case any action, suit or proceeding shall be brought against any indemnified
party and it shall notify GCFP of the commencement thereof, GCFP shall be
entitled to participate in, and, to the extent that it shall wish, to assume
the defense thereof, with counsel
37
<PAGE> 41
satisfactory to such indemnified party, and after notice from GCFP to such
indemnified party of its election so to assume the defense thereof, GCFP shall
not be liable to such indemnified party for any legal or other expenses other
than reasonable costs of investigation subsequently incurred by such
indemnified party in connection with the defense thereof. The indemnified
party shall have the right to employ its counsel in any such action the defense
of which is assumed by GCFP in accordance with the terms of this subsection
(b), but the fees and expenses of such counsel shall be at the expense of such
indemnified party unless the employment of counsel by such indemnified party
has been authorized by GCFP. GCFP shall not be liable for any settlement of any
action or claim effected without its consent.
Section 3.07. PAYMENT PROCEDURE. In the event of any payment by the
Insurer, the Trustee, the Master Servicer and the Seller agree to accept the
voucher or other evidence of payment as prima facie evidence of the propriety
thereof and the liability therefor to the Insurer except in the case of
manifest error. All payments to be made to the Insurer under this Insurance
Agreement shall be made to the Insurer in lawful currency of the United States
of America in immediately available funds at the notice address for the Insurer
as specified in the PSA on the date when due or as the Insurer shall otherwise
direct by written notice to the other parties hereto. In the event that the
date of any payment to the Insurer or the expiration of any time period
hereunder occurs on a day which is not a Business Day, then such payment or
expiration of time period shall be made or occur on the next succeeding
Business Day with the same force and effect as if such payment was made or time
period expired on the scheduled date of payment or expiration date. Payments
to be made to the Insurer under this Insurance Agreement shall bear interest at
the Late Payment Rate from the date when due to the date paid.
ARTICLE IV
FURTHER AGREEMENTS
Section 4.01. EFFECTIVE DATE; TERM OF THE INSURANCE AGREEMENT. This
Insurance Agreement shall take effect on the Date of Issuance and shall remain
in effect until the later of (a) such time as the Insurer is no longer subject
to a claim under the Policy and the Policy shall have been surrendered to the
Insurer for cancellation and (b) all amounts payable to the Insurer by the
Master Servicer, the Claims Administrator, the Contract of Insurance Holder or
the Seller or from any other source under the Transaction Documents and all
amounts payable under the Securities have been paid in full; provided, however,
that the provisions of Sections 3.02 and 3.03 hereof shall survive any
termination of this Insurance Agreement.
Section 4.02. FURTHER ASSURANCES AND CORRECTIVE INSTRUMENTS. (a)
Excepting at such times as a default in payment under the Policy shall exist or
shall have occurred, none of the Master Servicer, the Claims Administrator, the
Contract of Insurance Holder, the Seller or the Trustee shall grant any waiver
of rights under any of the Transaction Documents to which any of them is a
party
38
<PAGE> 42
without the prior written consent of the Insurer, and any such waiver
without the written consent of the Insurer shall be null and void and of no
force or effect.
(b) To the extent permitted by law, the Master Servicer, the Claims
Administrator, the Contract of Insurance Holder and the Seller agree that they
will, from time to time, execute, acknowledge and deliver, or cause to be
executed, acknowledged and delivered, such supplements hereto and such further
instruments as the Insurer may request and as may be required in the Insurer's
judgment to effectuate the intention of or facilitate the performance of this
Insurance Agreement.
Section 4.03. OBLIGATIONS ABSOLUTE. (a) The obligations of the Master
Servicer, the Claims Administrator, the Contract of Insurance Holder or the
Seller hereunder shall be absolute and unconditional and shall be paid or
performed strictly in accordance with this Insurance Agreement under all
circumstances irrespective of:
(i) any lack of validity or enforceability of, or any amendment or
other modifications of, or waiver, with respect to any of the Transaction
Documents, the Securities or the Policy;
(ii) any exchange or release of any other obligations hereunder;
(iii) the existence of any claim, setoff, defense, reduction,
abatement or other right that the Master Servicer, the Claims
Administrator, the Contract of Insurance Holder or the Seller may have at
any time against the Insurer or any other Person;
(iv) any document presented in connection with the Policy proving to
be forged, fraudulent, invalid or insufficient in any respect or any
statement therein being untrue or inaccurate in any respect;
(v) any payment by the Insurer under the Policy against presentation
of a certificate or other document that does not strictly comply with
terms of the Policy;
(vi) any failure of the Master Servicer, the Claims Administrator,
the Contract of Insurance Holder or the Seller to receive the proceeds
from the sale of the Securities; or
(vii) any breach by the Master Servicer, the Claims Administrator,
the Contract of Insurance Holder or the Seller of any representation, or
warranty or covenant contained in any of the Transaction Documents.
(b) The Master Servicer, the Claims Administrator, the Contract of
Insurance Holder, the Seller and any and all others who are now or may become
liable for all or part of the obligations of the Master Servicer, the Claims
Administrator, the Contract of Insurance Holder or the Seller
39
<PAGE> 43
under this Insurance Agreement agree to be bound by this Insurance Agreement
and (i) to the extent permitted by law, waive and renounce any and all
redemption and exemption rights and the benefit of all valuation and
appraisement privileges against the indebtedness and obligations evidenced by
any Transaction Document or by any extension or renewal thereof; (ii) waive
presentment and demand for payment, notices of nonpayment and of dishonor,
protest of dishonor and notice of protest; (iii) waive all notices in
connection with the delivery and acceptance hereof and all other notices in
connection with the performance, default or enforcement of any payment
hereunder, except as required by the Transaction Documents; (iv) waive all
rights of abatement, diminution, postponement or deduction, or any defense
other than payment, or to any right of setoff or recoupment arising out of any
breach under any of the Transaction Documents, by any party thereto or any
beneficiary thereof, or out of any obligation at any time owing to the Master
Servicer, the Claims Administrator, the Contract of Insurance Holder or the
Seller; (v) agree that its liabilities hereunder shall, except as otherwise
expressly provided in this Section 4.03, be unconditional and without regard to
any setoff, counterclaim or the liability of any other Person for the payment
hereof; (vi) agree that any consent, waiver or forbearance hereunder with
respect to an event shall operate only for such event and not for any
subsequent event; (vii) consent to any and all extensions of time that may be
granted by the Insurer with respect to any payment hereunder or other
provisions hereof and to the release of any security at any time given for any
payment hereunder, or any part thereof, with or without substitution, and to
the release of any Person or entity liable for any such payment; and (viii)
consent to the addition of any and all other makers, endorsers, guarantors and
other obligors for any payment hereunder, and to the acceptance of any and all
other security for any payment hereunder, and agree that the addition of any
such obligors or security shall not affect the liability of the parties hereto
for any payment hereunder.
(c) Nothing herein shall be construed as prohibiting the Master Servicer
or the Seller from pursuing any rights or remedies it may have against any
other Person in a separate legal proceeding.
Section 4.04. ASSIGNMENTS; REINSURANCE; THIRD-PARTY RIGHTS. (a) This
Insurance Agreement shall be a continuing obligation of the parties hereto and
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns. Neither the Master Servicer, the
Claims Administrator, the Contract of Insurance Holder nor the Seller may
assign its rights under this Insurance Agreement, or delegate any of its duties
hereunder, without the prior written consent of the Insurer.
(b) The Insurer shall have the right to give participations in its rights
under this Insurance Agreement and to enter into contracts of reinsurance with
respect to the Policy upon such terms and conditions as the Insurer may in its
discretion determine, provided that no such grant of a participation or
contract of reinsurance shall (i) be executed if such transaction would affect
any then current rating on the Certificates, (ii) affect any obligation of the
Insurer hereunder or under the Policy or (iii) require the Seller, the
Depositor, the Master Servicer or the Trustee to correspond
40
<PAGE> 44
with any party other than the Insurer.
(c) In addition, the Insurer shall be entitled to assign or pledge to any
bank or other lender providing liquidity or credit with respect to the
Transaction or the obligations of the Insurer in connection therewith any
rights of the Insurer under the Transaction Documents or with respect to any
real or personal property or other interests pledged to the Insurer, or in
which the Insurer has a security interest, in connection with the Transaction.
(d) Except as provided herein with respect to participants and reinsurers,
nothing in this Insurance Agreement shall confer any right, remedy or claim,
express or implied, upon any Person, including, particularly, any Owner, other
than the Insurer against the Master Servicer, the Claims Administrator, the
Contract of Insurance Holder or the Seller, and all the terms, covenants,
conditions, promises and agreements contained herein shall be for the sole and
exclusive benefit of the parties hereto and their successors and permitted
assigns. Neither the Trustee nor any Owner shall have any right to payment
from any Premiums paid or payable hereunder or under the PSA or from any other
amounts paid by the Master Servicer or the Seller pursuant to Section 3.02 or
3.03 hereof.
Section 4.05. LIABILITY OF THE INSURER. Neither the Insurer nor any of
its officers, directors or employees shall be liable or responsible for: (a)
the use that may be made of the Policy by the Trustee or for any acts or
omissions of the Trustee in connection therewith; or (b) the validity,
sufficiency, accuracy or genuineness of documents delivered to the Insurer (or
its Fiscal Agent) in connection with any claim under the Policy, or of any
signatures thereon, that are believed by the Insurer to be genuine and to have
been signed or presented by the proper party or parties, even if such documents
or signatures should in fact prove to be in any or all respects invalid,
insufficient, fraudulent or forged (unless the Insurer shall have actual
knowledge thereof). In furtherance and not in limitation of the foregoing, the
Insurer (or its Fiscal Agent) may accept documents that appear on their face to
be in order, without responsibility for further investigation.
Section 4.06. LEGAL ACTION. The Insurer shall have the right to bring an
action seeking injunctive relief to perform the terms of the related pooling
and servicing agreement providing for the maintenance of the Contract of
Insurance and the filing and paying of claims thereunder and to prevent the
claims from filing claims in an aggregate amount which exceeds the amount of
FHA Insurance allocated to any particular transaction pursuant to the terms of
the related pooling and servicing agreement.
Section 4.07. TRUSTEE, DEPOSITOR, SELLER AND MASTER SERVICER TO JOIN IN
ENFORCEMENT ACTION. To the extent necessary to enforce any right of the
Insurer in or remedy of the Insurer under any Mortgage Loan, the Trustee, the
Depositor, the Claims Administrator, the Contract of Insurance Holder, the
Seller and the Master Servicer agree to join in any action initiated by the
Trust or the Insurer for the protection of such right or exercise of such
remedy.
41
<PAGE> 45
ARTICLE V
DEFAULTS; REMEDIES
Section 5.01. DEFAULTS. The occurrence of any of the following events
shall constitute an Event of Default hereunder:
(a) Any representation or warranty made by the Master Servicer, the
Claims Administrator, the Contract of Insurance Holder or the Seller
hereunder or under the Transaction Documents, or in any certificate
furnished hereunder or under the Transaction Documents, shall prove to be
untrue or incomplete in any material respect;
(b)(i) The Master Servicer or the Seller shall fail to pay when due
any amount payable by the Master Servicer or the Seller hereunder or (ii)
a legislative body has enacted any law that declares or a court of
competent jurisdiction shall find or rule that this Insurance Agreement
or the PSA is not valid and binding on the Master Servicer, the Claims
Administrator, the Contract of Insurance Holder or the Seller;
(c) The occurrence and continuance of an "Event of Default" under
the PSA (as defined therein);
(d) Any failure on the part of the Master Servicer, the Claims
Administrator , the Contract of Insurance Holder or the Seller duly to
observe or perform in any material respect any other of the covenants or
agreements on the part of the Master Servicer or the Seller contained in
this Insurance Agreement or in any other Transaction Document which
continues unremedied for a period of 30 days with respect to this
Insurance Agreement, or, with respect to any other Transaction Document,
beyond any cure period provided for therein, after the date on which
written notice of such failure, requiring the same to be remedied, shall
have been given to the Master Servicer, the Claims Administrator, the
Contract of Insurance Holder or the Seller, as applicable, by the Insurer
(with a copy to the Trustee) or by the Trustee (with a copy to the
Insurer);
(e) A decree or order of a court or agency or supervisory authority
having jurisdiction in the premises in an involuntary case under any
present or future federal or state bankruptcy, insolvency or similar law
or the appointment of a conservator or receiver or liquidator or other
similar official in any insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Master
Servicer, the Claims Administrator , the Contract of Insurance Holder or
the Seller and such decree or order shall have remained in force
undischarged or unstayed for a period of 90 consecutive days;
42
<PAGE> 46
(f) The Master Servicer, the Claims Administrator, the Contract of
Insurance Holder or the Seller shall consent to the appointment of a
conservator or receiver or liquidator or other similar official in any
insolvency, readjustment of debt, marshaling of assets and liabilities or
similar proceedings of or relating to the Master Servicer or the Seller
or of or relating to all or substantially all of the property of either;
or
(g) The Master Servicer, the Claims Administrator, the Contract of
Insurance Holder or the Seller shall admit in writing its inability to
pay its debts generally as they become due, file a petition to take
advantage of or otherwise voluntarily commence a case or proceeding under
any applicable bankruptcy, insolvency, reorganization or other similar
statute, make an assignment for the benefit of its creditors or
voluntarily suspend payment of its obligations.
Section 5.02. REMEDIES; NO REMEDY EXCLUSIVE. (a) Upon the occurrence of
an Event of Default, the Insurer may exercise any one or more of the rights and
remedies set forth below:
(i) declare all indebtedness of every type or description then owed
by the Master Servicer, the Claims Administrator, the Contract of
Insurance Holder or the Seller to the Insurer to be immediately due and
payable, and the same shall thereupon be immediately due and payable;
(ii) exercise any rights and remedies under the PSA in accordance
with the terms of the PSA or direct the Trustee to exercise such remedies
in accordance with the terms of the PSA; or
(iii) take whatever action at law or in equity as may appear
necessary or desirable in its judgment to collect the amounts then due
under this Insurance Agreement or the PSA or to enforce performance and
observance of any obligation, agreement or covenant of the Master
Servicer, the Claims Administrator, the Contract of Insurance Holder or
the Seller under this Insurance Agreement or the PSA.
(b) Unless otherwise expressly provided, no remedy herein conferred upon
or reserved is intended to be exclusive of any other available remedy, but each
remedy shall be cumulative and shall be in addition to other remedies given
under this Insurance Agreement, the PSA or existing at law or in equity. No
delay or omission to exercise any right or power accruing under this Insurance
Agreement or the PSA upon the happening of any event set forth in Section 5.01
hereof shall impair any such right or power or shall be construed to be a
waiver thereof, but any such right and power may be exercised from time to time
and as often as may be deemed expedient. In order to entitle the Insurer to
exercise any remedy reserved to the Insurer in this Article, it shall not be
necessary to give any notice, other than such notice as may be required in this
Article.
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<PAGE> 47
Section 5.03. WAIVERS. (a) No failure by the Insurer to exercise, and no
delay by the Insurer in exercising, any right hereunder shall operate as a
waiver thereof. The exercise by the Insurer of any right hereunder shall not
preclude the exercise of any other right, and the remedies provided herein to
the Insurer are declared in every case to be cumulative and not exclusive of
any remedies provided by law or equity.
(b) The Insurer shall have the right, to be exercised in its complete
discretion, to waive any Event of Default hereunder, by a writing setting forth
the terms, conditions and extent of such waiver signed by the Insurer and
delivered to the Master Servicer, the Claims Administrator , the Contract of
Insurance Holder and the Seller. Unless such writing expressly provides to the
contrary, any waiver so granted shall extend only to the specific event or
occurrence which gave rise to the Event of Default so waived and not to any
other similar event or occurrence which occurs subsequent to the date of such
waiver.
ARTICLE VI
MISCELLANEOUS
Section 6.01. AMENDMENTS, ETC. This Insurance Agreement may be amended,
modified or terminated only by written instrument or written instruments signed
by the parties hereto. The Master Servicer agrees to promptly provide a copy
of any amendment to this Insurance Agreement to the Trustee and the rating
agencies. No act or course of dealing shall be deemed to constitute an
amendment, modification or termination hereof.
Section 6.02. NOTICES. All demands, notices and other communications to
be given hereunder shall be in writing (except as otherwise specifically
provided herein) and shall be mailed by registered mail or personally delivered
or telecopied to the recipient as follows:
(a) To the Insurer:
MBIA Insurance Corporation
113 King Street
Armonk, NY 10504
Attention: Insured Portfolio Management-- Structured Finance
(IPM-SF)
Mego Mortgage FHA Title I Trust 1996-1
Telecopy No.: (914) 765-3164
Confirmation: (914) 273-4545
(in each case in which notice or other communication to the Insurer
refers to an Event of Default, a claim on the Policy or with respect to
which failure on the part of the
44
<PAGE> 48
Insurer to respond shall be deemed to constitute consent or acceptance,
then a copy of such notice or other communication should also be sent to
the attention of each of the general counsel and the Insurer and shall be
marked to indicate "URGENT MATERIAL ENCLOSED.")
(b) To the Seller, Servicer and Claims Administrator:
Mego Mortgage Corporation
Suite 250
210 Interstate North Parkway
Atlanta, GA 30339
Attention: Jeff Moore
Telecopy No.: (800) 694-6346
Confirmation: (800) 550-6346
(c) To the Master Servicer:
Norwest Bank Minnesota, N.A.
11000 Broken Land Parkway
Columbia, MD 21044-3562
Attention: Master Servicing Department
FHA Title I Loan Trust 1996-1
Telecopy No.: (410) 884-2363
Confirmation: (410) 884-2056
(d) To the Trustee and Contract of
Insurance Holder:
First Trust of New York, National Association
c/o First Bank National Association
180 East Fifth Street
St. Paul, MN 55101
Attention: Structured Finance
Telecopy No.: (612) 244-0089
Confirmation: (612) 244-5021
(e) To the Depositor:
Financial Asset Securities Corp.
600 Steamboat Road
Greenwich, CT 06830
45
<PAGE> 49
Attention: Charles A. Forbes
Telecopy No.:
Confirmation:
(f) To GCFP:
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, CT 06830
Attention:
Telecopy No.:
Confirmation:
A party may specify an additional or different address or addresses by
writing mailed or delivered to the other parties as aforesaid. All such
notices and other communications shall be effective upon receipt.
Section 6.03. SEVERABILITY. In the event that any provision of this
Insurance Agreement shall be held invalid or unenforceable by any court of
competent jurisdiction, the parties hereto agree that such holding shall not
invalidate or render unenforceable any other provision hereof. The parties
hereto further agree that the holding by any court of competent jurisdiction
that any remedy pursued by any party hereto is unavailable or unenforceable
shall not affect in any way the ability of such party to pursue any other
remedy available to it.
Section 6.04. GOVERNING LAW. This Insurance Agreement shall be governed
by and construed in accordance with the laws of the State of New York.
Section 6.05. CONSENT TO JURISDICTION. (a) The parties hereto hereby
irrevocably submit to the jurisdiction of the United States District Court for
the Southern District of New York and any court in the State of New York
located in the City and County of New York, and any appellate court from any
thereof, in any action, suit or proceeding brought against it and to or in
connection with any of the Transaction Documents or the transactions
contemplated thereunder or for recognition or enforcement of any judgment, and
the parties hereto hereby irrevocably and unconditionally agree that all claims
in respect of any such action or proceeding may be heard or determined in such
New York state court or, to the extent permitted by law, in such federal court.
The parties hereto agree that a final judgment in any such action, suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law.
(b) To the extent permitted by applicable law, the parties hereto shall
not seek and hereby waive the right to any review of the judgment of any such
court by any court of any other
46
<PAGE> 50
nation or jurisdiction which may be called upon to grant an enforcement of such
judgment.
(c) Nothing contained in this Insurance Agreement shall limit or affect
the Insurer's right to serve process in any other manner permitted by law or to
start legal proceedings relating to any of the Transaction Documents against
the Master Servicer or the Seller or its or their property in the courts of any
jurisdiction.
Section 6.06. CONSENT OF THE INSURER. In the event that the consent of
the Insurer is required under any of the Transaction Documents, the
determination whether to grant or withhold such consent shall be made by the
Insurer in its sole discretion without any implied duty towards any other
Person, except as otherwise expressly provided therein.
Section 6.07. COUNTERPARTS. This Insurance Agreement may be executed in
counterparts by the parties hereto, and all such counterparts shall constitute
one and the same instrument.
Section 6.08. HEADINGS. The headings of Articles and Sections and the
Table of Contents contained in this Insurance Agreement are provided for
convenience only. They form no part of this Insurance Agreement and shall not
affect its construction or interpretation. Unless otherwise indicated, all
references to Articles and Sections in this Insurance Agreement refer to the
corresponding Articles and Sections of this Insurance Agreement.
Section 6.09. TRIAL BY JURY WAIVED. Each party hereto hereby waives, to
the fullest extent permitted by law, any right to a trial by jury in respect of
any litigation arising directly or indirectly out of, under or in connection
with any of the Transaction Documents or any of the transactions contemplated
thereunder. Each party hereto (A) certifies that no representative, agent or
attorney of any party hereto has represented, expressly or otherwise, that it
would not, in the event of litigation, seek to enforce the foregoing waiver and
(B) acknowledges that it has been induced to enter into the Transaction
Documents to which it is a party by, among other things, this waiver.
Section 6.10. LIMITED LIABILITY. No recourse under any Transaction
Document shall be had against, and no personal liability shall attach to, any
officer, employee, director, affiliate or shareholder of any party hereto, as
such, by the enforcement of any assessment or by any legal or equitable
proceeding, by virtue of any statute or otherwise in respect of any of the
Transaction Documents, the Certificates or the Policy, it being expressly
agreed and understood that each Transaction Document is solely a corporate
obligation of each party hereto, and that any and all personal liability,
either at common law or in equity, or by statute or constitution, of every such
officer, employee, director, affiliate or shareholder for breaches by any party
hereto of any obligations under any Transaction Document is hereby expressly
waived as a condition of and in consideration for the execution and delivery of
this Insurance Agreement.
Section 6.11. ENTIRE AGREEMENT. This Insurance Agreement and the Policy
set forth the
47
<PAGE> 51
entire agreement between the parties with respect to the subject matter
thereof, and this Insurance Agreement supersedes and replaces any agreement or
understanding that may have existed between the parties prior to the date
hereof in respect of such subject matter.
48
<PAGE> 52
IN WITNESS WHEREOF, the parties hereto have executed this Insurance
Agreement, all as of the day and year first above mentioned.
MBIA INSURANCE CORPORATION
By /s/
-----------------------------
Title
--------------------------
NORWEST BANK MINNESOTA, N.A.,
as Master Servicer
By /s/
-----------------------------
Title
--------------------------
MEGO MORTGAGE CORPORATION, as
Seller, Servicer and Claims
Administrator
By /s/
-----------------------------
Title
--------------------------
FINANCIAL ASSET SECURITIES CORP.,
as Depositor
By /s/
-----------------------------
Title
--------------------------
FIRST TRUST OF NEW YORK,
NATIONAL ASSOCIATION, as
Trustee and Contract of Insurance
Holder
By /s/
-----------------------------
Title
--------------------------
Mego 1996-1
Insurance Agreement
Signature Page
<PAGE> 53
GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC., as GCFP
By /s/
-----------------------------
Title
--------------------------
Mego 1996-1
Insurance Agreement
Signature Page
<PAGE> 1
EXHIBIT 10.16
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MEGO MORTGAGE CORPORATION
CREDIT AGREEMENT
Dated as of June 28, 1996
THE FIRST NATIONAL BANK OF BOSTON, Agent
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
Page
<S> <C> <C>
1. Definitions; Certain Rules of Construction................................. 1
1.1. "Affiliate"........................................................ 1
1.2. "Agent"............................................................ 1
1.3. "Agreement"........................................................ 1
1.4. "Applicable Rate".................................................. 1
1.5. "Assignee"......................................................... 2
1.6. "Assignment and Acceptance"........................................ 2
1.7. "Atlantic Agreement"............................................... 2
1.8. "Bank of Boston"................................................... 2
1.9. "Banking Day"...................................................... 2
1.10. "Bankruptcy Code".................................................. 2
1.11. "Bankruptcy Default"............................................... 2
1.12. "Base Rate"........................................................ 2
1.13. "Borrowing Base"................................................... 2
1.14. "Boston Agreement"................................................. 3
1.15. "Boston Office".................................................... 3
1.16. "By-laws".......................................................... 3
1.17. "Capitalized Lease"................................................ 3
1.18. "Capitalized Lease Obligations".................................... 3
1.19. "Cash Equivalents"................................................. 3
1.20. "Charter".......................................................... 4
1.21. "Class R Certificates"............................................. 4
1.22. "Class S Certificates"............................................. 4
1.23. "Closing Date"..................................................... 4
1.24. "Collection Accounts".............................................. 4
1.25. "Code"............................................................. 4
1.26. "Commitment"....................................................... 4
1.27. "Company".......................................................... 4
1.28. "Computation Covenants"............................................ 4
1.29. "Consolidated"..................................................... 4
1.30. "Consolidated Net Income".......................................... 5
1.31. "Consolidated Pro Forma Debt Service".............................. 5
1.32. "Consolidated Tangible Net Worth".................................. 6
1.34. "Conversion Date".................................................. 6
1.35. "Credit Documents"................................................. 6
1.36. "Credit Obligations"............................................... 7
1.37. "Credit Participant"............................................... 7
1.38. "Credit Security".................................................. 7
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
1.39. "Default".......................................................... 7
1.40. "Demand Loan"...................................................... 7
1.41. "Distribution"..................................................... 7
1.42. "Distributable Excess Spread"...................................... 8
1.43. "Distribution Date"................................................ 8
1.44. "ERISA"............................................................ 8
1.45. "ERISA Group Person"............................................... 8
1.46. "Eurodollars"...................................................... 9
1.47. "Eurodollar Basic Rate"............................................ 9
1.48. "Eurodollar Interest Period"....................................... 9
1.49. "Eurodollar Office"................................................ 9
1.50. "Eurodollar Pricing Options"....................................... 9
1.51. "Eurodollar Rate".................................................. 9
1.52. "Eurodollar Reserve Rate".......................................... 10
1.53. "Event of Default"................................................. 10
1.54. "Excess Servicing Rights".......................................... 10
1.55. "Exchange Act"..................................................... 10
1.56. "Federal Funds Rate"............................................... 10
1.57. "Fee Letter"....................................................... 10
1.58. "Final Maturity Date".............................................. 10
1.59. "Financial Officer"................................................ 10
1.60. "Financing Debt"................................................... 11
1.61. "Funding Liability"................................................ 11
1.62. "GAAP"............................................................. 11
1.63. "Guarantee"........................................................ 11
1.64. "Guarantor"........................................................ 12
1.65. "Greenwich Agreement".............................................. 12
1.66. "Indebtedness"..................................................... 12
1.67. "Indemnified Party"................................................ 13
1.68. "Initial Closing Date"............................................. 13
1.69. "Interest Rate Protection Agreement"............................... 13
1.70. "Investment"....................................................... 13
1.71. "Legal Requirement"................................................ 14
1.72. "Lender"........................................................... 14
1.73. "Lending Officer".................................................. 14
1.74. "Lien"............................................................. 14
1.75. "Loan"............................................................. 15
1.76. "Loan Sale Agreements"............................................. 15
1.77. "Margin Stock"..................................................... 15
1.78. "Material Adverse Change".......................................... 15
1.79. "Material Agreements".............................................. 15
1.80. "Maximum Amount of Revolving Credit"............................... 15
1.81. "Net Excess Spread"................................................ 15
</TABLE>
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<TABLE>
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1.82. "Notes"............................................................ 16
1.83. "Obligor".......................................................... 16
1.84. "Overdue Reimbursement Rate"....................................... 16
1.85. "Payment Date"..................................................... 16
1.86. "Percentage Interest".............................................. 16
1.87. "Person"........................................................... 16
1.88. "Plan"............................................................. 17
1.89. "Private Loan Sale Agreements"..................................... 17
1.90. "Public Securitization Agreements"................................. 17
1.91. "Register"......................................................... 17
1.92. "Required Lenders"................................................. 17
1.93. "Revolving Loan"................................................... 17
1.94. "Revolving Notes".................................................. 17
1.95. "S&P".............................................................. 17
1.96. "Security Agreement"............................................... 17
1.97. "Stockholder Guarantee"............................................ 17
1.98. "Subsidiary"....................................................... 17
1.99. "Tax".............................................................. 17
1.100. "Term Loan"........................................................ 18
1.101. "Term Note"........................................................ 18
1.102. "United States Funds".............................................. 18
1.103. "Wholly Owned Subsidiary".......................................... 18
2. The Credits................................................................ 18
2.1. Revolving Credit................................................... 18
2.1.1. Revolving Loan............................................ 18
2.1.2. Maximum Amount of Revolving Credit........................ 18
2.1.3. Borrowing Requests........................................ 18
2.1.4. Revolving Notes........................................... 19
2.2. Term Credit........................................................ 19
2.2.1. Term Loan................................................. 19
2.2.2. Term Notes................................................ 19
2.3. Application of Proceeds............................................ 19
2.3.1. Revolving Loan............................................ 20
2.3.2. Term Loan................................................. 20
2.3.3. Specifically Prohibited Applications...................... 20
3. Interest; Eurodollar Pricing Options; Fees................................. 20
3.1. Interest........................................................... 20
3.2. Eurodollar Pricing Options......................................... 20
3.2.1. Election of Eurodollar Pricing Options.................... 20
3.2.2. Notice to Lenders and Company............................. 21
3.2.3. Selection of Eurodollar Interest Periods.................. 21
</TABLE>
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<TABLE>
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3.2.4. Additional Interest....................................... 22
3.2.5. Violation of Legal Requirements........................... 22
3.2.6. Funding Procedure......................................... 23
3.3. Commitment Fees.................................................... 23
3.4. Prepayment Fee..................................................... 23
3.5. Changes in Circumstances; Yield Protection......................... 23
3.5.1. Reserve Requirements, etc................................. 23
3.5.2. Taxes..................................................... 24
3.5.3. Capital Adequacy.......................................... 24
3.5.4. Regulatory Changes........................................ 24
3.5.5. Compensation Claims....................................... 25
3.5.6. Mitigation................................................ 25
3.6. Computations of Interest and Fees.................................. 25
4. Payment.................................................................... 25
4.1. Payment at Maturity................................................ 26
4.2. Required Prepayments............................................... 26
4.2.1. Contingent Required Prepayments........................... 26
4.2.2. Scheduled Prepayments..................................... 26
4.3. Voluntary Prepayments.............................................. 26
4.4. Reborrowing; Application of Payments, etc.......................... 26
4.4.1. Reborrowing............................................... 26
4.4.2. Order of Application...................................... 26
4.4.3. Payment with Accrued Interest, etc........................ 27
4.4.5. Payments for Lenders...................................... 27
5. Conditions to Extending Credit............................................. 27
5.1. Conditions on Initial Closing Date................................. 27
5.1.1. Revolving Notes........................................... 27
5.1.2. Payment of Fees........................................... 27
5.1.3. Legal Opinions............................................ 27
5.1.4. Security Agreement........................................ 28
5.1.5. Perfection of Security.................................... 28
5.1.6. Stockholder Guarantee..................................... 28
5.1.7. Repayment of Demand Loan.................................. 28
5.1.8. Proper Proceedings........................................ 28
5.1.9. General................................................... 28
5.2. Conditions to Each Extension of Credit............................. 29
5.2.1. Officer's Certificate..................................... 29
5.2.2. Legality, etc............................................. 29
6. General Covenants.......................................................... 29
6.1. Taxes and Other Charges; Accounts Payable.......................... 29
</TABLE>
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<TABLE>
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6.1.1. Taxes and Other Charges.......................................... 29
6.1.2. Accounts Payable................................................. 30
6.2. Conduct of Business, etc.................................................. 30
6.2.1. Types of Business................................................ 30
6.2.2. Statutory Compliance............................................. 30
6.2.3. Compliance with Material Agreements.............................. 30
6.3. Insurance................................................................. 30
6.3.1. Liability Insurance.............................................. 30
6.4. Financial Statements and Reports.......................................... 31
6.4.1. Annual Reports................................................... 31
6.4.2. Monthly Reports.................................................. 32
6.4.3. Monthly Borrowing Base........................................... 32
6.4.4. Other Reports.................................................... 32
6.4.5. Notice of Litigation, Defaults, etc.............................. 33
6.4.6. Other Information................................................ 33
6.5. Certain Financial Tests................................................... 33
6.5.1. Consolidated Tangible Net Worth.................................. 33
6.5.2. Consolidated Net Income.......................................... 34
6.5.3. Net Excess Spread to Consolidated Pro Forma Debt Service......... 34
6.6. Indebtedness.............................................................. 34
6.7. Guarantees; Letters of Credit............................................. 35
6.8. Liens..................................................................... 36
6.9. Investments and Acquisitions.............................................. 37
6.10. Distributions............................................................. 38
6.11. Asset Dispositions and Mergers............................................ 38
6.12. Derivative Contracts...................................................... 38
6.13. Negative Pledge Clauses................................................... 39
6.14. Transactions with Affiliates.............................................. 39
6.15. Accounts to be Maintained with Bank of Boston............................. 39
6.16. Transfer of Funds from Collection Accounts................................ 39
7. Representations and Warranties.................................................... 39
7.1. Organization and Business................................................. 39
7.1.1. The Company...................................................... 39
7.1.2. Subsidiaries..................................................... 40
7.1.3. The Guarantor.................................................... 40
7.1.4. Qualification.................................................... 40
7.2. Financial Statements and Other Information; Material Agreements........... 41
7.2.1. Financial Statements and Other Information....................... 41
7.2.2. Material Agreements.............................................. 42
7.3. Agreements Relating to Financing Debt, Investments, etc................... 42
7.4. Changes in Condition...................................................... 42
7.5. Title to Assets........................................................... 42
</TABLE>
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<TABLE>
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7.6. Operations in Conformity With Law, etc.................................... 42
7.7. Litigation................................................................ 42
7.8. Authorization and Enforceability.......................................... 43
7.9. No Legal Obstacle to Agreements........................................... 43
7.10. Defaults.................................................................. 44
7.11. Tax Returns............................................................... 44
7.12. Certain Business Representations.......................................... 44
7.12.1. Antitrust........................................................ 44
7.12.2. Consumer Protection.............................................. 44
7.13. Pension Plans............................................................. 45
7.14. Government Regulation; Margin Stock....................................... 45
7.14.1. Government Regulation............................................ 45
7.14.2. Margin Stock..................................................... 45
7.15. Disclosure................................................................ 45
8. Defaults.......................................................................... 45
8.1. Events of Default......................................................... 45
8.1.1. Payment.......................................................... 45
8.1.2. Specified Covenants.............................................. 45
8.1.3. Other Covenants.................................................. 45
8.1.4. Representations and Warranties................................... 46
8.1.5. Cross Default, etc............................................... 46
8.1.6. Ownership; Liquidation; etc...................................... 46
8.1.7. Enforceability, etc.............................................. 47
8.1.8. Judgments........................................................ 47
8.1.9. FHA Insurance.................................................... 47
8.1.10. Bankruptcy, etc................................................. 47
8.1.11. Change in Management............................................. 48
8.2. Certain Actions Following an Event of Default............................. 48
8.2.1. Terminate Obligation to Extend Credit............................ 48
8.2.2. Specific Performance; Exercise of Rights......................... 48
8.2.3. Acceleration..................................................... 48
8.2.4. Enforcement of Payment; Credit Security; Setoff.................. 49
8.2.5. Cumulative Remedies.............................................. 49
8.3. Annulment of Defaults..................................................... 49
8.4. Waivers................................................................... 49
9. Expenses; Indemnity............................................................... 50
9.1. Expenses.................................................................. 50
9.2. General Indemnity......................................................... 50
10. Operations; Agent................................................................. 51
</TABLE>
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<TABLE>
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11. Successors and Assigns; Lender Assignments and Participations..................... 51
11.1. Assignments by Lenders.................................................... 51
11.1.1. Assignees and Assignment Procedures............................. 51
11.1.2. Terms of Assignment and Acceptance.............................. 52
11.1.3. Register........................................................ 53
11.1.4. Acceptance of Assignment and Assumption......................... 53
11.1.5. Federal Reserve Bank............................................ 54
11.1.6. Further Assurances.............................................. 54
11.2. Credit Participants....................................................... 54
12. Confidentiality .................................................................. 55
13. Notices........................................................................... 55
14. Course of Dealing; Amendments and Waivers......................................... 56
15. No Strict Construction............................................................ 56
16. Defeasance........................................................................ 56
17. Venue; Service of Process......................................................... 56
18. WAIVER OF JURY TRIAL.............................................................. 57
19. General........................................................................... 57
</TABLE>
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EXHIBITS
2.1.4 - Revolving Note
2.2.2 - Term Note
5.1.4 - Security Agreement
5.1.6 - Stockholder Guarantee
5.2.1 - Officer's Certificate
7.1 - Company and its Subsidiaries
7.2.2 - Material Agreements
7.3 - Financing Debt, Certain Investments, etc.
7.7 - Litigation
7.9 - Legal Obstacles
11.1.1 - Form of Assignment and Acceptance
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MEGO MORTGAGE CORPORATION
CREDIT AGREEMENT
This Agreement, dated as of June 28, 1996, is among Mego Mortgage
Corporation, a Delaware corporation (the "Company"), the Lenders from time to
time party hereto and The First National Bank of Boston, both in its capacity
as a Lender and in its capacity as Agent for itself and the other Lenders. The
parties agree as follows:
1. Definitions; Certain Rules of Construction. Certain capitalized terms are
used in this Agreement and in the other Credit Documents with the specific
meanings defined below in this Section 1. Except as otherwise explicitly
specified to the contrary or unless the context clearly requires otherwise, (a)
the capitalized term "Section" refers to sections of this Agreement, (b) the
capitalized term "Exhibit" refers to exhibits to this Agreement, (c) references
to a particular Section include all subsections thereof, (d) the word
"including" shall be construed as "including without limitation", (e)
accounting terms not otherwise defined herein have the meaning provided under
GAAP, (f) references to a particular statute or regulation include all rules
and regulations thereunder and any successor statute, regulation or rules, in
each case as from time to time in effect and (g) references to a particular
Person include such Person's successors and assigns to the extent not
prohibited by this Agreement and the other Credit Documents. References to
"the date hereof" mean the date first set forth above.
1.1. "Affiliate" means, with respect to the Company (or any other
specified Person), any other Person directly or indirectly controlling,
controlled by or under direct or indirect common control with the Company (or
such specified Person), and shall include (a) any officer or director or
general partner of the Company (or such specified Person) and (b) any Person of
which the Company (or such specified Person) or any Affiliate (as defined in
clause (a) above) of the Company (or such specified Person) shall, directly or
indirectly, beneficially own either (i) at least 10% of the outstanding equity
securities having the general power to vote or (ii) at least 10% of all equity
interests.
1.2. "Agent" means Bank of Boston in its capacity as agent for the Lenders
hereunder, as well as its successors and assigns in such capacity.
1.3. "Agreement" means this Credit Agreement as from time to time amended,
modified and in effect.
1.4. "Applicable Rate" means, at any date, the sum of:
(a) (i) with respect to each portion of the Loan subject to a
Eurodollar Pricing Option, the sum of 5% plus the Eurodollar Rate
with respect to such Eurodollar Pricing Option;
<PAGE> 11
(ii) with respect to each other portion of the Loan, the sum
of 2% plus the Base Rate;
plus (b) an additional 2% effective on the day the Agent
notifies the Company that the interest rates hereunder are
increasing as a result of the occurrence and continuance of an Event
of Default until the earlier of such time as (i) such Event of
Default is no longer continuing or (ii) such Event of Default is
deemed no longer to exist, in each case pursuant to Section 8.3.
1.5. "Assignee" is defined in Section 11.1.1.
1.6. "Assignment and Acceptance" is defined in Section 11.1.1.
1.7. "Atlantic Agreement" means, collectively, the Master Loan
Participation and Servicing Agreements dated as of May 25, 1995 and June 28,
1995, as amended from time to time, between Atlantic Bank N.A. and the Company
with respect to FHA Insured Title I Home Improvement Loans Series 1995-1A and
- -1B.
1.8. "Bank of Boston" means The First National Bank of Boston.
1.9. "Banking Day" means any day other than Saturday, Sunday or a day on
which banks in Boston, Massachusetts or Atlanta, Georgia are authorized or
required by law or other governmental action to close and, if such term is used
with reference to a Eurodollar Pricing Option, any day on which dealings are
effected in the Eurodollars in question by first-class banks in the inter-bank
Eurodollar markets in New York, New York.
1.10. "Bankruptcy Code" means Title 11 of the United States Code.
1.11. "Bankruptcy Default" means an Event of Default referred to in
Section 8.1.10.
1.12. "Base Rate" means, on any date, the greater of (a) the rate of
interest announced by Bank of Boston at the Boston Office as its Base Rate or
(b) the sum of 1/2% plus the Federal Funds Rate.
1.13. "Borrowing Base" means, on any date the lesser of:
(a) 40% of Excess Servicing Rights as of the most recently
completed month for which financial statements have been (or are required
to have been) furnished to the Lenders in accordance with Section 6.4.2
and
(b) 600% of the aggregate Net Excess Spread for the period of
three consecutive months ending with the month described in clause (a)
above;
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provided, however, that the Borrowing Base shall be reduced to $1.00 at
any time when the Company has failed to furnish the computation of the
Borrowing Base required by Section 6.4.3 within five days after such
computation was originally due.
1.14. "Boston Agreement" means the Master Loan Purchase and Servicing
Agreement dated as of August 26, 1994, as amended from time to time, between
The First National Bank of Boston and the Company with respect to Fixed Rate
FHA Insured Title I Home Improvement Loans.
1.15. "Boston Office" means the principal banking office of Bank of Boston
in Boston, Massachusetts.
1.16. "By-laws" means all written by-laws, rules, regulations and all
other documents relating to the management, governance or internal regulation
of any Person other than an individual, or interpretive of the Charter of such
Person, all as from time to time in effect.
1.17. "Capitalized Lease" means any lease which is required to be
capitalized on the balance sheet of the lessee in accordance with GAAP,
including Statement Nos. 13 and 98 of the Financial Accounting Standards Board.
1.18. "Capitalized Lease Obligations" means the amount of the liability
reflecting the aggregate discounted amount of future payments under all
Capitalized Leases calculated in accordance with GAAP, including Statement Nos.
13 and 98 of the Financial Accounting Standards Board.
1.19. "Cash Equivalents" means:
(a) negotiable certificates of deposit, time deposits (including
sweep accounts), demand deposits and bankers' acceptances having a
maturity of nine months or less and issued by any United States financial
institution having capital and surplus and undivided profits aggregating
at least $100,000,000 and rated at least Prime-1 by Moody's or A-1 by S&P
or issued by any Lender;
(b) corporate obligations having a maturity of nine months or less
and rated at least Prime-1 by Moody's or A-1 by S&P or issued by any
Lender;
(c) any direct obligation of the United States of America or any
agency or instrumentality thereof, or of any state or municipality
thereof, (i) which has a remaining maturity at the time of purchase of
not more than one year or which is subject to a repurchase agreement with
any Lender (or any other financial institution referred to in clause (a)
above) exercisable within one year from the time of purchase and (ii)
which, in the case of obligations of any state or municipality, is rated
at least
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<PAGE> 13
Aa by Moody's or AA by S&P; and
(d) any mutual fund or other pooled investment vehicle rated at
least Aa by Moody's or AA by S&P which invests principally in obligations
described above.
1.20. "Charter" means the articles of organization, certificate of
incorporation, statute, constitution, joint venture agreement, partnership
agreement, trust indenture, limited liability company agreement or other
charter document of any Person other than an individual, each as from time to
time in effect.
1.21. "Class R Certificates" means the Class R certificates issued to the
Company by Mego Mortgage FHA Title I Loan trust 1996-1 and any similar
certificates issued to the Company in future public securitization offerings.
1.22. "Class S Certificates" means the Class S certificates issued to the
Company by Mego Mortgage FHA Title I Loan trust 1996-1 and any similar
certificates issued to the Company in future public securitization offerings.
1.23. "Closing Date" means the Initial Closing Date, the Conversion Date
and each other date on which any extension of credit is made pursuant to
Sections 2.1, 2.2 or 2.3.
1.24. "Collection Accounts" means accounts into which the Company is
required to deposit cash payments that it receives with respect to loans that
it has sold and with respect to which it acts as a servicing agent, which
payments are held for the benefit of the purchasers of such loans.
1.25. "Code" means the federal Internal Revenue Code of 1986.
1.26. "Commitment" means, with respect to any Lender, such Lender's
obligations to extend the credits contemplated by Section 2. The original
Commitments are set forth in Exhibit 10 and the current Commitments are
recorded from time to time in the Register.
1.27. "Company" means Mego Mortgage Corporation, a Delaware corporation.
1.28. "Computation Covenants" means Sections 6.5, 6.6.7, 6.6.11, 6.6.12,
and 6.10.2.
1.29. "Consolidated" and "Consolidating", when used with reference to any
term, mean that term as applied to the accounts of the Company (or other
specified Person) and all of its Subsidiaries (or other specified group of
Persons), if any, or such of its Subsidiaries as may be specified, consolidated
(or combined) or consolidating (or combining), as the case may be, in
accordance with GAAP and with appropriate deductions for minority interests in
Subsidiaries.
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<PAGE> 14
1.30. "Consolidated Net Income" means, for any period, the net income (or
loss) of the Company and its Subsidiaries, determined in accordance with GAAP
on a Consolidated basis; provided, however, that Consolidated Net Income shall
not include:
(a) the income (or loss) of any Person accrued prior to the date
such Person becomes a Subsidiary or is merged into or consolidated with
the Company or any of its Subsidiaries;
(b) the income (or loss) of any Person (other than a Subsidiary)
in which the Company or any of its Subsidiaries has an ownership
interest; provided, however, that (i) Consolidated Net Income shall
include amounts in respect of the income of such Person when actually
received in cash by the Company or such Subsidiary in the form of
dividends or similar Distributions and (ii) Consolidated Net Income shall
be reduced by the aggregate amount of all Investments, regardless of the
form thereof, made by the Company or any of its Subsidiaries in such
Person for the purpose of funding any deficit or loss of such Person;
(c) all amounts included in computing such net income (or loss) in
respect of (i) the write-up of any asset on or after August 31, 1995, or
(ii) the retirement of any Indebtedness or equity at less than face value
after August 31, 1995;
(d) extraordinary and nonrecurring gains; and
(e) the income of any Subsidiary to the extent the payment of such
income in the form of a Distribution or repayment of Indebtedness to the
Company or a Wholly Owned Subsidiary is not permitted, whether on account
of any Charter or By-law restriction, any agreement, instrument, deed or
lease or any law, statute, judgment, decree or governmental order, rule
or regulation applicable to such Subsidiary.
1.31. "Consolidated Pro Forma Debt Service" means, for any period, the sum
of the following items, projected to be accrued by the Company and its
Subsidiaries:
(a) interest expense (including commitments fees) payable in
connection with Loans under this Credit Agreement, plus
(b) the aggregate amount of all mandatory scheduled payments,
mandatory scheduled prepayments, and mandatory reductions in revolving
loans as a result of reductions in revolving credit availability, to the
extent required under this Agreement.
For purposes of computing Consolidated Pro Forma Debt Service:
(i) the amount of the Loan outstanding on the first day of
such period shall be assumed to remain outstanding during the
entire period, except to the
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<PAGE> 15
extent required to be reduced by mandatory scheduled payments,
reductions in revolving credit availability and other items
described in paragraph (b) above; and
(ii) where interest varies with a floating rate, the rate
in effect for the entire period will be assumed to be the sum of
2% plus the Base Rate in effect on the first day of the period.
1.32. "Consolidated Tangible Net Worth" means, at any date, the total of:
(a) stockholders' equity of the Company and its Subsidiaries
determined in accordance with GAAP on a Consolidated basis;
minus (b) the amount by which such stockholders' equity has been
increased after August 31, 1995 by the items described in clauses (a)
through (e) of the definition of Consolidated Net Income or by goodwill;
minus (c) the amount of intangible assets carried on the balance sheet
of the Company and its Subsidiaries determined in accordance with GAAP on
a Consolidated basis, including goodwill, patents, patent applications,
copyrights, trademarks, tradenames, research and development expense,
organizational expense, unamortized debt discount, deferred financing
charges and debt acquisition costs, but excluding Excess Servicing Rights
and Mortgage Servicing Rights.
1.33. "Constant Prepayment Rate" means, for any period, the rate at which
the home improvement loans underlying Net Excess Spread during such period are
either (a) prepaid prior to stated maturity, or (b) 150 days past due on
payments of principal or interest, as indicated in the Constant Prepayment Rate
Summary for that period.
1.34. "Conversion Date" means the earliest of (a) December 31, 1997 or (b)
such other Banking Day designated by the Agent upon at least three Banking Days
prior written notice in the event that the Constant Prepayment Rate exceeds 25%
for the most recent period of three consecutive months for which reports have
been (or are required to have been) furnished to the Lenders in accordance with
Section 6.4.3 or (c) the date Indebtedness is first incurred under Section
6.6.11.
1.35. "Credit Documents" means:
(a) this Agreement, the Notes, the Security Agreement, the
Stockholder Guarantee, the Fee Letter described in Section 5.1.2 and each
Interest Rate Protection Agreement provided by a Lender (or an Affiliate
of a Lender) to the Company or any of its Subsidiaries, each as from time
to time in effect;
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<PAGE> 16
(b) all financial statements, reports, notices, mortgages,
assignments, UCC financing statements or certificates delivered to the
Agent or any of the Lenders by the Company, any of its Subsidiaries or
any other Obligor in connection herewith; and
(c) any other present or future agreement or instrument from time
to time entered into among the Company, any of its Subsidiaries or any
other Obligor, on one hand, and the Agent or all the Lenders, on the
other hand, relating to, amending or modifying this Agreement or any
other Credit Document referred to above or which is stated to be a Credit
Document, each as from time to time in effect.
1.36. "Credit Obligations" means all present and future liabilities,
obligations and Indebtedness of the Company, any of its Subsidiaries or any
other Obligor owing to the Agent or any Lender (or any Affiliate of a Lender)
under or in connection with this Agreement or any other Credit Document,
including obligations in respect of principal, interest, prepayment fees,
commitment fees, amounts provided for in Sections 3.2.4, 3.5 and 9 and other
fees, charges, indemnities and expenses from time to time owing hereunder or
under any other Credit Document (whether accruing before or after a Bankruptcy
Default).
1.37. "Credit Participant" is defined in Section 11.2.
1.38. "Credit Security" means all assets now or from time to time
hereafter subjected to a security interest, mortgage or charge (or intended or
required so to be subjected pursuant to the Security Agreement or any other
Credit Document) to secure the payment or performance of any of the Credit
Obligations, including the assets described in section 2.1 of the Security
Agreement.
1.39. "Default" means any Event of Default and any event or condition
which with the passage of time or giving of notice, or both, would become an
Event of Default and the filing against the Company, any of its Subsidiaries or
any other Obligor of a petition commencing an involuntary case under the
Bankruptcy Code.
1.40. "Demand Loan" means the $5,000,000 loan made by Bank of Boston to
the Company on May 31, 1996.
1.41. "Distribution" means, with respect to the Company (or other
specified Person):
(a) the declaration or payment of any dividend or distribution,
including dividends payable in shares of capital stock of or other equity
interests in the Company (or such specified Person), on or in respect of
any shares of any class of capital stock of or other equity interests in
the Company (or such specified Person);
(b) the purchase, redemption or other retirement of any shares of
any class
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<PAGE> 17
of capital stock of or other equity interest in the Company (or
such specified Person) or of options, warrants or other rights for the
purchase of such shares, directly, indirectly through a Subsidiary or
otherwise;
(c) any other distribution on or in respect of any shares of any
class of capital stock of or equity or other beneficial interest in the
Company (or such specified Person);
(d) any payment of principal or interest with respect to, or any
purchase, redemption or defeasance of, Financing Debt of the Company (or
such specified Person) which by its terms or the terms of any agreement
is subordinated to the payment of the Credit Obligations; and
(e) any payment, loan or advance by the Company (or such specified
Person) to, or any other Investment by the Company (or such specified
Person) in, the holder of any shares of any class of capital stock of or
equity interest in the Company (or such specified Person), or any
Affiliate of such holder (including the payment of management and
transaction fees and expenses);
provided, however, that the term "Distribution" shall not include (i) dividends
payable in perpetual common stock of or other similar equity interests in the
Company (or such specified Person) or (ii) payments in the ordinary course of
business in respect of (A) reasonable compensation paid to employees, officers
and directors, (B) advances and reimbursements to employees for travel
expenses, drawing accounts and similar expenditures, or (C) rent paid to, or
accounts payable for services rendered or goods sold by, non-Affiliates that
own capital stock of or other equity interests in the Company (or such
specified Person).
1.42. "Distributable Excess Spread" has the same meaning as in the Public
Securitization Documents.
1.43. "Distribution Date" has the same meaning as in the Public
Securitization Documents.
1.44. "ERISA" means the federal Employee Retirement Income Security Act of
1974.
1.45. "ERISA Group Person" means the Company, any Subsidiary of the
Company and any Person which is a member of the controlled group or under
common control with the Company or any Subsidiary within the meaning of section
414 of the Code or section 4001(a)(14) of ERISA.
1.46. "Eurodollars" means, with respect to any Lender, deposits of United
States Funds in a non-United States office or an international banking
facility of such Lender.
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1.47. "Eurodollar Basic Rate" means, for any Eurodollar Interest Period,
the rate of interest at which Eurodollar deposits in an amount comparable to
the Percentage Interest of Bank of Boston in the portion of the Loan as to
which a Eurodollar Pricing Option has been elected and which have a term
corresponding to such Eurodollar Interest Period are offered to the Agent by
first class banks in the inter-bank Eurodollar market for delivery in
immediately available funds at a Eurodollar Office on the first day of such
Eurodollar Interest Period as determined by such Reference Lender at
approximately 10:00 a.m. (Boston time) two Banking Days prior to the date upon
which such Eurodollar Interest Period is to commence (which determination by
the Agent shall, in the absence of manifest error, be conclusive).
1.48. "Eurodollar Interest Period" means any period, selected as provided
in Section 3.2.1, of one, two, three or six months, commencing on any Banking
Day and ending on the corresponding date in the subsequent calendar month so
indicated (or, if such subsequent calendar month has no corresponding date, on
the last day of such subsequent calendar month); provided, however, that
subject to Section 3.2.3, if any Eurodollar Interest Period so selected would
otherwise begin or end on a date which is not a Banking Day, such Eurodollar
Interest Period shall instead begin or end, as the case may be, on the
immediately preceding or succeeding Banking Day as determined by the Agent in
accordance with the then current banking practice in the inter-bank Eurodollar
market with respect to Eurodollar deposits at the applicable Eurodollar Office,
which determination by the Agent shall, in the absence of manifest error, be
conclusive.
1.49. "Eurodollar Office" means such non-United States office or
international banking facility of any Lender as the Lender may from time to
time select.
1.50. "Eurodollar Pricing Options" means the options granted pursuant to
Section 3.2.1 to have the interest on any portion of the Loan computed on the
basis of a Eurodollar Rate.
1.51. "Eurodollar Rate" for any Eurodollar Interest Period means the rate,
rounded upward to the nearest 1/100%, obtained by dividing (a) the Eurodollar
Basic Rate for such Eurodollar Interest Period by (b) an amount equal to 1
minus the Eurodollar Reserve Rate; provided, however, that if at any time
during such Eurodollar Interest Period the Eurodollar Reserve Rate applicable
to any outstanding Eurodollar Pricing Option changes, the Eurodollar Rate for
such Eurodollar Interest Period shall automatically be adjusted to reflect such
change, effective as of the date of such change to the extent required by the
legal requirement implementing such change.
1.52. "Eurodollar Reserve Rate" means the stated maximum rate (expressed
as a decimal) of all reserves (including any basic, supplemental, marginal or
emergency reserve or any reserve asset), if any, as from time to time in
effect, required by any Legal Requirement to be maintained by any Lender
against (a) "Eurocurrency liabilities" as specified in Regulation D
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of the Board of Governors of the Federal Reserve System applicable to Eurodollar
Pricing Options, (b) any other category of liabilities that includes Eurodollar
deposits by reference to which the interest rate on portions of the Loan subject
to Eurodollar Pricing Options is determined, (c) the principal amount of or
interest on any portion of the Loan subject to a Eurodollar Pricing Option or
(d) any other category of extensions of credit, or other assets, that includes
loans subject to a Eurodollar Pricing Option by a non-United States office of
any of the Lenders to United States residents, in each case without the benefits
of credits for prorations, exceptions or offsets that may be available to a
Lender.
1.53. "Event of Default" is defined in Section 8.1.
1.54. "Excess Servicing Rights" means, at any date, excess servicing
rights of the Company and its Subsidiaries determined in accordance with GAAP
on a Consolidated basis, that (a) arise from home improvement loans sold by the
Company and (b) are not subject to any Liens other than Liens securing the
Credit Obligations and Liens created under the agreements pursuant to which
such Loans were sold.
1.55. "Exchange Act" means the federal Securities Exchange Act of 1934.
1.56. "Federal Funds Rate" means, for any day, the rate equal to the
weighted average (rounded upward to the nearest 1/8%) of the rates on overnight
federal funds transactions with members of the Federal Reserve System arranged
by federal funds brokers, (a) as such weighted average is published for such
day (or, if such day is not a Banking Day, for the immediately preceding
Banking Day) by the Federal Reserve Bank of New York or (b) if such rate is not
so published for such Banking Day, as determined by the Agent using any
reasonable means of determination. Each determination by the Agent of the
Federal Funds Rate shall, in the absence of manifest error, be conclusive.
1.57. "Fee Letter" is defined in Section 5.1.2.
1.58. "Final Maturity Date" means the earlier of (a) June 30, 2000 or (b)
the date 30 months after the Conversion Date.
1.59. "Financial Officer" of the Company (or other specified Person) means
its chief executive officer, chief financial officer, chief operating officer,
chairman, president, treasurer or any of its vice presidents whose primary
responsibility is for its financial affairs, all of whose incumbency and
signatures have been certified to the Agent by the secretary, assistant
secretary or other appropriate attesting officer of the Company (or such
specified Person).
1.60. "Financing Debt" means each of the items described in clauses (a)
through (f) of the definition of the term "Indebtedness" and, without
duplication, any Guarantees of such items.
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1.61. "Funding Liability" means (a) any Eurodollar deposit which was used
(or deemed by Section 3.2.6 to have been used) to fund any portion of the Loan
subject to a Eurodollar Pricing Option, and (b) any portion of the Loan subject
to a Eurodollar Pricing Option funded (or deemed by Section 3.2.6 to have been
funded) with the proceeds of any such Eurodollar deposit.
1.62. "GAAP" means generally accepted accounting principles as from time
to time in effect, including the statements and interpretations of the United
States Financial Accounting Standards Board; provided, however, that for
purposes of compliance with Section 6 (other than Section 6.4) and the related
definitions, "GAAP" means such principles as in effect on August 31, 1995 as
applied by the Company and its Subsidiaries in the preparation of the most
recent annual financial statements referred to in Section 7.2.1(a), and
consistently followed, without giving effect to any subsequent changes thereto.
1.63. "Guarantee" means, with respect to the Company (or other specified
Person):
(a) any guarantee by the Company (or such specified Person) of the
payment or performance of, or any contingent obligation by the Company
(or such specified Person) in respect of, any Indebtedness or other
obligation of any primary obligor;
(b) any other arrangement whereby credit is extended to a primary
obligor on the basis of any promise or undertaking of the Company (or
such specified Person), including any binding "comfort letter" or "keep
well agreement" written by the Company (or such specified Person), to a
creditor or prospective creditor of such primary obligor, to (i) pay the
Indebtedness of such primary obligor, (ii) purchase an obligation owed by
such primary obligor, (iii) pay for the purchase or lease of assets or
services regardless of the actual delivery thereof or (iv) maintain the
capital, working capital, solvency or general financial condition of such
primary obligor;
(c) any liability of the Company (or such specified Person), as a
general partner of a partnership in respect of Indebtedness or other
obligations of such partnership;
(d) any liability of the Company (or such specified Person) as a
joint venturer of a joint venture in respect of Indebtedness or other
obligations of such joint venture;
(e) any liability of the Company (or such specified Person) with
respect to the tax liability of others as a member of a group (other than
a group consisting solely of the Company and its Subsidiaries) that is
consolidated for tax purposes; and
(f) reimbursement obligations, whether contingent or matured, of
the Company (or such specified Person) with respect to letters of credit,
bankers acceptances, surety bonds, other financial guarantees and
Interest Rate Protection
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Agreements,
whether or not any of the foregoing are reflected on the balance sheet of the
Company (or such specified Person) or in a footnote thereto; provided, however,
that the term "Guarantee" shall not include endorsements for collection or
deposit in the ordinary course of business.
1.64. "Guarantor" means Mego Financial Corp., a New York corporation.
1.65. "Greenwich Agreement" means the Master Loan Purchase and Servicing
Agreement dated as of April 1, 1995, as amended from time to time, between
Greenwich Capital Financial Products, Inc. and the Company with respect to
Fixed Rate FHA Insured Title I Home Improvement Loans.
1.66. "Indebtedness" means all obligations, contingent or otherwise, which
in accordance with GAAP are required to be classified upon the balance sheet of
the Company (or other specified Person) as liabilities, but in any event
including (without duplication):
(a) borrowed money;
(b) indebtedness evidenced by notes, debentures or similar
instruments;
(c) Capitalized Lease Obligations;
(d) the deferred purchase price of assets or securities, including
related noncompetition, consulting and stock repurchase obligations
(other than ordinary trade accounts payable within six months after the
incurrence thereof in the ordinary course of business);
(e) mandatory redemption or dividend rights on capital stock (or
other equity);
(f) reimbursement obligations, whether contingent or matured, with
respect to letters of credit, bankers acceptances, surety bonds, other
financial guarantees and Interest Rate Protection Agreements (without
duplication of other Indebtedness supported or guaranteed thereby);
(g) unfunded pension liabilities; and
(h) all Guarantees in respect of Indebtedness of others.
1.67. "Indemnified Party" is defined in Section 9.2.
1.68. "Initial Closing Date" means June 30, 1996 or such other date prior
to
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September 1, 1996 agreed to by the Company and the Agent as the first
Closing Date hereunder.
1.69. "Interest Rate Protection Agreement" means any interest rate swap,
interest rate cap, interest rate hedge or other contractual arrangement that
converts variable interest rates into fixed interest rates, fixed interest
rates into variable interest rates or other similar arrangements.
1.70. "Investment" means, with respect to the Company (or other specified
Person):
(a) any share of capital stock, partnership or other equity
interest, evidence of Indebtedness or other security issued by any other
Person;
(b) any loan, advance or extension of credit to, or contribution
to the capital of, any other Person;
(c) any Guarantee of the Indebtedness of any other Person;
(d) any acquisition of all, or any division or similar operating
unit of, the business of any other Person or the assets comprising such
business, division or unit; and
(e) any other investment similar to the above.
The investments described in the foregoing clauses (a) through (e) shall
be included in the term "Investment" whether they are made or acquired by
purchase, exchange, issuance of stock or other securities, merger,
reorganization or any other method; provided, however, that the term
"Investment" shall not include (i) current trade and customer accounts
receivable for property leased, goods furnished or services rendered in the
ordinary course of business and payable in accordance with customary trade
terms, (ii) deposits, advances or prepayments to suppliers for property leased
or licensed, goods furnished and services rendered in the ordinary course of
business, (iii) advances to employees for relocation and travel expenses,
drawing accounts and similar expenditures, (iv) stock or other securities
acquired in connection with the satisfaction or enforcement of Indebtedness or
claims due to the Company (or such specified Person) or as security for any
such Indebtedness or claim or (v) demand deposits in banks or similar financial
institutions.
1.71. "Legal Requirement" means any present or future requirement imposed
upon any of the Lenders or the Company and its Subsidiaries by any law, statute,
rule, regulation, directive, order, decree, guideline (or any interpretation
thereof by courts or of administrative bodies) of the United States of America,
or any jurisdiction in which any Eurodollar Office is located or any state or
political subdivision of any of the foregoing, or by any board, governmental or
administrative agency, central bank or monetary authority of the United States.
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of America, any jurisdiction in which any Eurodollar Office is located, or any
political subdivision of any of the foregoing. Any such requirement imposed on
any of the Lenders not having the force of law shall be deemed to be a Legal
Requirement for purposes of Section 3 if such Lender reasonably believes that
compliance therewith is in the best interest of such Lender.
1.72. "Lender" means each of the Persons listed as lenders on the
signature page hereto, including Bank of Boston in its capacity as a Lender and
such other Persons who may from time to time own a Percentage Interest in the
Credit Obligations, but the term "Lender" shall not include any Credit
Participant.
1.73. "Lending Officer" means such individuals whom the Agent may
designate by notice to the Company from time to time as an officer who may
receive telephone requests for borrowings under Section 2.1.3.
1.74. "Lien" means, with respect to the Company (or any other specified
Person):
(a) any lien, encumbrance, mortgage, pledge, charge or security
interest of any kind upon any property or assets of the Company (or such
specified Person), whether now owned or hereafter acquired, or upon the
income or profits therefrom;
(b) the acquisition of, or the agreement to acquire, any property
or asset upon conditional sale or subject to any other title retention
agreement, device or arrangement (including a Capitalized Lease);
(c) the sale, assignment, pledge or transfer for security of any
accounts, general intangibles or chattel paper of the Company (or such
specified Person), with or without recourse;
(d) the transfer of any tangible property or assets for the
purpose of subjecting such items to the payment of previously outstanding
Indebtedness in priority to payment of the general creditors of the
Company (or such specified Person); and
(e) the existence for a period of more than 120 consecutive days
of any Indebtedness against the Company (or such specified Person) which
if unpaid would by law or upon a Bankruptcy Default be given any priority
over general creditors.
1.75. "Loan" means, collectively, the Revolving Loan and the Term Loan.
1.76. "Loan Sale Agreements" means, collectively, the Private Loan Sale
Agreements and the Public Securitization Agreements.
1.77. "Margin Stock" means "margin stock" within the meaning of
Regulations G,
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T, U or X of the Board of Governors of the Federal Reserve System.
1.78. "Material Adverse Change" means, since any specified date or from
the circumstances existing immediately prior to the happening of any specified
event, a material adverse change in (a) the business, assets, financial
condition, income or prospects of the Company (on an individual basis) or the
Guarantor and its Subsidiaries (on a Consolidated basis), whether as a result
of (i) general economic conditions affecting the home improvement loan
origination industry, (ii) fire, flood or other natural calamities, (iii)
regulatory changes, judicial decisions, war or other governmental action or
(iv) any other event or development, whether or not related to those enumerated
above or (b) the ability of the Obligors to perform their obligations under the
Credit Documents or (c) the rights and remedies of the Agent and the Lenders
under the Credit Documents.
1.79. "Material Agreements" is defined in Section 7.2.2.
1.80. "Maximum Amount of Revolving Credit" is defined in Section 2.1.2.
1.81. "Net Excess Spread" means, for any period, the sum of:
(a) the sum of
(a) the total cash received by the Company and its Subsidiaries
with respect to the Private Loan Sale Agreements during such period,
minus
(b) cash payments required to be made during such period to
purchasers from such receipts pursuant to the Private Loan Sale
Agreements, minus
(c) loan servicing fees and reimbursable expenses payable during
such period, minus
(d) cash advances during such period to investors with respect to
loans sold to the extent reimbursable from cash receipts described in
paragraph (a)(1), and
(b) the sum of
(1) 100% of the cash actually received by the Company during such
period with respect to Class S Certificates, plus
(2) 100% of the cash actually received by the Company during
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such period with respect to Class R Certificates, plus
(3) for periods ending before the Conversion Date, the sum of:
(i) with respect to Class R Certificates that have been
outstanding for less than 12 months as of the end of such period,
75% of the Distributable Excess Spread, if any, for Distribution
Dates within such period, plus
(ii) with respect to Class R Certificates that have been
outstanding for at least 12 months but less than 15 months as of
the end of such period, 50% of the Distributable Excess Spread, if
any, for Distribution Dates within such period.
1.82. "Notes" means, collectively, the Revolving Notes and the Term Notes.
1.83. "Obligor" means the Company, the Guarantor and each other Person
guaranteeing or providing collateral for the Credit Obligations.
1.84. "Overdue Reimbursement Rate" means, at any date, the highest
Applicable Rate then in effect.
1.85. "Payment Date" means the last Banking Day of each March, June,
September and December occurring after the Initial Closing Date.
1.86. "Percentage Interest" means (a) at all times when no Event of
Default under Section 8.1.1 and no Bankruptcy Default exists, the ratio that
the respective Commitments of the Lenders bear to the total Commitments of all
Lenders as from time to time in effect and reflected in the Register, and (b)
at all other times, the ratio that the respective amounts of the outstanding
Credit Obligations (including Letter of Credit Exposure) owing to the Lenders
in respect of extensions of credit under Section 2 bear to the total
outstanding Credit Obligations owing to all Lenders.
1.87. "Person" means any present or future natural person or any
corporation, association, partnership, joint venture, limited liability, joint
stock or other company, business trust, trust, organization, business or
government or any governmental agency or political subdivision thereof.
1.88. "Plan" means, at any date, any pension benefit plan subject to Title
IV of ERISA maintained, or to which contributions have been made or are
required to be made, by any ERISA Group Person within six years prior to such
date.
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1.89. "Private Loan Sale Agreements" means, collectively, the Atlantic
Agreement, the Boston Agreement and the Greenwich Agreement.
1.90. "Public Securitization Agreements" means the Pooling and Servicing
Agreement (FHA Title I Home Improvement Loans) dated as of March 21, 1996, as
amended from time to time, among the Company, Financial Asset Securities Corp.,
Norwest Bank Minnesota, N.A. and First Trust of New York, National
Association, together with the related Servicing Agreement for Mego Mortgage
FHA Title I Loan Trust 1996-1 and similar agreements that may be entered into
by the Company before the Conversion Date.
1.91. "Register" is defined in Section 11.1.3.
1.92. "Required Lenders" means, with respect to any approval, consent,
modification, waiver or other action to be taken by the Agent or the Lenders
under the Credit Documents which require action by the Required Lenders, such
Lenders as own at least a majority of the Percentage Interests.
1.93. "Revolving Loan" is defined in Section 2.1.4.
1.94. "Revolving Notes" is defined in Section 2.1.4.
1.95. "S&P" means Standard & Poor's Ratings Group, a division of McGraw
Hill Corporation.
1.96. "Security Agreement" is defined in Section 5.1.4.
1.97. "Stockholder Guarantee" is defined in Section 5.1.6.
1.98. "Subsidiary" means any Person of which the Company (or other
specified Person) shall at the time, directly or indirectly through one or more
of its Subsidiaries, (a) own at least 50% of the outstanding capital stock (or
other shares of beneficial interest) entitled to vote generally, (b) hold at
least 50% of the partnership, joint venture or similar interests or (c) be a
general partner or joint venturer.
1.99. "Tax" means any present or future tax, levy, duty, impost,
deduction, withholding or other charges of whatever nature at any time required
by any Legal Requirement (a) to be paid by any Lender or (b) to be withheld or
deducted from any payment otherwise required hereby to be made to any Lender,
in each case on or with respect to its obligations hereunder, the Loan, any
payment in respect of the Credit Obligations or any Funding Liability not
included in the foregoing; provided, however, that the term "Tax" shall not
include taxes imposed upon or measured by the net income of such Lender or
franchise
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taxes.
1.100. "Term Loan" is defined in Section 2.2.1.
1.101. "Term Note" is defined in Section 2.2.2.
1.102. "United States Funds" means such coin or currency of the United
States of America as at the time shall be legal tender therein for the payment
of public and private debts.
1.103. "Wholly Owned Subsidiary" means any Subsidiary of which all of the
outstanding capital stock (or other shares of beneficial interest) entitled to
vote generally (other than directors' qualifying shares and, in the case of
Foreign Subsidiaries, shares required by Legal Requirements to be held by
foreign nationals) is owned by the Company (or other specified Person)
directly, or indirectly through one or more Wholly Owned Subsidiaries.
2. The Credits.
2.1. Revolving Credit.
2.1.1. Revolving Loan. Subject to all the terms and conditions of
this Agreement and so long as no Default exists, from time to time on and
after the Initial Closing Date and prior to the Conversion Date, the
Lenders will, severally in accordance with their respective Commitments
in the Revolving Loan, make loans to the Company in such amounts as may
be requested by the Company in accordance with Section 2.1.3. The
aggregate principal amount of loans made under this Section 2.1.1 at any
one time outstanding shall in no event exceed the lesser of (a) the
Maximum Amount of Revolving Credit and (b) the Borrowing Base. In no
event will the principal amount of loans at any one time outstanding made
by any Lender pursuant to this Section 2.1 exceed such Lender's
Commitment with respect to the Revolving Loan.
2.1.2. Maximum Amount of Revolving Credit. The term "Maximum
Amount of Revolving Credit" means the lesser of (a) $10,000,000 and (b)
the amount (in an integral multiple of $100,000) from time to time
irrevocably designated by the Company to the Agent.
2.1.3. Borrowing Requests. The Company may from time to time
request a loan under Section 2.1.1 by providing to the Agent a notice
(which may be given by a telephone call received by a Lending Officer if
promptly confirmed in writing). Such notice must be not later than noon
(Boston time) on the first Banking Day (third Banking Day if any portion
of such loan will be subject to a Eurodollar Pricing Option on the
requested Closing Date) prior to the requested Closing Date for such
loan. The notice must specify (a) the amount of the requested loan
(which shall be not less than $250,000) and (b) the requested Closing
Date therefor (which shall be a Banking Day).
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Upon receipt of such notice, the Agent will promptly inform each
other Lender (by telephone or otherwise). Each such loan will be made at
the Boston Office by depositing the amount thereof to the general
account of the Company with the Agent. In connection with each such
loan, the Company shall furnish to the Agent a certificate in
substantially the form of Exhibit 5.2.1.
2.1.4. Revolving Notes. The aggregate principal amount of the
loans outstanding from time to time under this Section 2.1 is referred to
as the "Revolving Loan". The Agent shall keep a record of the Revolving
Loan. The Revolving Loan shall be deemed owed to each Lender having a
Commitment therein severally in accordance with such Lender's Percentage
Interest therein, and all payments thereon shall be for the account of
each Lender in accordance with its Percentage Interest therein. The
Company's obligations to pay each Lender's Percentage Interest in the
Revolving Loan shall be evidenced by a separate note of the Company in
substantially the form of Exhibit 2.1.4 (the "Revolving Notes"), payable
to each Lender in accordance with such Lender's Percentage Interest in
the Revolving Loan.
2.2. Term Credit.
2.2.1. Term Loan. Subject to all the terms and conditions of this
Agreement and so long as no Default exists, on the Conversion Date the
Lenders will, in accordance with their respective Percentage Interests
therein, severally lend to the Company as a term loan, an aggregate amount
equal to the Revolving Loan outstanding on such date.
The aggregate principal amount of the loans made pursuant to this
Section 2.2.1 at any one time outstanding is referred to as the "Term
Loan". In connection with the Term Loan, the Company shall furnish to the
Agent a certificate in substantially the form of Exhibit 5.2.1.
2.2.2. Term Notes. The Term Loan shall be made at the Boston
Office by crediting the amount of such loan to the Revolving Loan against
delivery to the Agent of the separate term notes of the Company (the "Term
Notes") payable to the respective Lenders. The Term Note issued to each
Lender shall be in a principal amount equal to such Lender's Percentage
Interest in the Term Loan, and shall be in substantially the form of
Exhibit 2.2.2.
2.3. Application of Proceeds.
2.3.1. Revolving Loan. Subject to Section 2.3.3, the Company will
apply the proceeds of the Revolving Loan for working capital, to repay
loans made to it by the Guarantor or its Affiliates, and for other lawful
corporate purposes of the Company and its Subsidiaries.
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2.3.2. Term Loan. The Company will apply the proceeds of the Term
Loan solely to repay the Revolving Loan.
2.3.3. Specifically Prohibited Applications. The Company will
not, directly or indirectly, apply any part of the proceeds of any
extension of credit made pursuant to the Credit Documents to purchase or
to carry Margin Stock or to any transaction prohibited by Legal
Requirements applicable to the Lenders or by the Credit Documents.
3. Interest; Eurodollar Pricing Options; Fees.
3.1. Interest. The Loan shall accrue and bear interest at a rate per
annum which shall at all times equal the Applicable Rate. Prior to any stated
or accelerated maturity of the Loan, the Company will, on each Payment Date,
pay the accrued and unpaid interest on the portion of the Loan which was not
subject to a Eurodollar Pricing Option. On the last day of each Eurodollar
Interest Period or on any earlier termination of any Eurodollar Pricing Option,
the Company will pay the accrued and unpaid interest on the portion of the Loan
which was subject to the Eurodollar Pricing Option which expired or terminated
on such date. In the case of any Eurodollar Interest Period longer than three
months, the Company will also pay the accrued and unpaid interest on the
portion of the Loan subject to the Eurodollar Pricing Option having such
Eurodollar Interest Period at three-month intervals, the first such payment to
be made on the last Banking Day of the three-month period which begins on the
first day of such Eurodollar Interest Period. On the stated or any accelerated
maturity of the Loan, the Company will pay all accrued and unpaid interest on
the Loan, including any accrued and unpaid interest on any portion of the Loan
which is subject to a Eurodollar Pricing Option. Upon the occurrence and
during the continuance of an Event of Default, the Lenders may require accrued
interest to be payable on demand or at regular intervals more frequent than
each Payment Date. All payments of interest hereunder shall be made to the
Agent for the account of each Lender in accordance with such Lender's
Percentage Interest.
3.2. Eurodollar Pricing Options.
3.2.1. Election of Eurodollar Pricing Options. Subject to all of
the terms and conditions hereof and so long as no Default exists, the
Company may from time to time, by irrevocable notice to the Agent
actually received not less than three Banking Days prior to the
commencement of the Eurodollar Interest Period selected in such notice,
elect to have such portion of the Loan as the Company may specify in such
notice accrue and bear interest during the Eurodollar Interest Period so
selected at the Applicable Rate computed on the basis of the Eurodollar
Rate. In the event the Company at any time fails to elect a Eurodollar
Pricing Option under this Section 3.2.1 for any portion of the Loan, then
such portion of the Loan will accrue and bear interest at the Applicable
Rate based on the Base Rate. No election of a Eurodollar Pricing
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Option shall become effective:
(a) if, prior to the commencement of any such Eurodollar Interest
Period, the Agent determines that (i) the electing or granting of the
Eurodollar Pricing Option in question would violate a Legal Requirement,
(ii) Eurodollar deposits in an amount comparable to the principal amount
of the Loan as to which such Eurodollar Pricing Option has been elected
and which have a term corresponding to the proposed Eurodollar Interest
Period are not readily available in the inter-bank Eurodollar market,
or (iii) by reason of circumstances affecting the inter-bank Eurodollar
market, adequate and reasonable methods do not exist for ascertaining the
interest rate applicable to such deposits for the proposed Eurodollar
Interest Period; or
(b) if any Lender shall have advised the Agent by telephone or
otherwise at or prior to noon (Boston time) on the second Banking Day
prior to the commencement of such proposed Eurodollar Interest Period
(and shall have subsequently confirmed in writing) that, after reasonable
efforts to determine the availability of such Eurodollar deposits, such
Lender reasonably anticipates that Eurodollar deposits in an amount equal
to the Percentage Interest of such Lender in the portion of the Loan as
to which such Eurodollar Pricing Option has been elected and which have a
term corresponding to the Eurodollar Interest Period in question will not
be offered in the Eurodollar market to such Lender at a rate of interest
that does not exceed the anticipated Eurodollar Basic Rate (unless the
foregoing results from a deterioration subsequent to the date hereof in
the creditworthiness of such Lender or a change in the availability of
Eurodollar markets to such Lender pursuant to legal or regulatory
restrictions).
3.2.2. Notice to Lenders and Company. The Agent will promptly
inform each Lender (by telephone or otherwise) of each notice received by
it from the Company pursuant to Section 3.2.1 and of the Eurodollar
Interest Period specified in such notice. Upon determination by the
Agent of the Eurodollar Rate for such Eurodollar Interest Period or in
the event such election shall not become effective, the Agent will
promptly notify the Company and each Lender (by telephone or otherwise)
of the Eurodollar Rate so determined or why such election did not become
effective, as the case may be.
3.2.3. Selection of Eurodollar Interest Periods. Eurodollar
Interest Periods shall be selected so that:
(a) the minimum portion of the Loan subject to any Eurodollar
Pricing Option shall be $500,000;
(b) no more than three Eurodollar Pricing Options shall be
outstanding at any one time; and
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(c) no Eurodollar Interest Period with respect to any part of the
Loan subject to a Eurodollar Pricing Option shall expire later than the
Final Maturity Date.
If on the Conversion Date all or any portion of the Revolving Loan is
subject to one or more effective Eurodollar Pricing Options, then each
such Eurodollar Pricing Option shall apply to an equal amount of the Term
Loan until the expiration of the Eurodollar Interest Period for such
Eurodollar Pricing Option.
3.2.4. Additional Interest. If any portion of the Loan subject to
a Eurodollar Pricing Option is repaid, or any Eurodollar Pricing Option
is terminated for any reason (including acceleration of maturity), on a
date which is prior to the last Banking Day of the Eurodollar Interest
Period applicable to such Eurodollar Pricing Option, the Company will pay
to the Agent for the account of each Lender in accordance with such
Lender's Percentage Interest, in addition to any amounts of interest
otherwise payable hereunder, an amount equal to the present value
(calculated in accordance with this Section 3.2.4) of interest for the
unexpired portion of such Eurodollar Interest Period on the portion of
the Loan so repaid, or as to which a Eurodollar Pricing Option was so
terminated, at a per annum rate equal to the excess, if any, of (a) the
rate applicable to such Eurodollar Pricing Option minus (b) the rate of
interest obtainable by the Agent upon the purchase of debt securities
customarily issued by the Treasury of the United States of America which
have a maturity date approximating the last Banking Day of such
Eurodollar Interest Period. The present value of such additional
interest shall be calculated by discounting the amount of such interest
for each day in the unexpired portion of such Eurodollar Interest Period
from such day to the date of such repayment or termination at a per annum
interest rate equal to the interest rate determined pursuant to clause
(b) of the preceding sentence, and by adding all such amounts for all
such days during such period. The determination by the Agent of such
amount of interest shall, in the absence of manifest error, be
conclusive. For purposes of this Section 3.2.4, if any portion of the
Loan which was to have been subject to a Eurodollar Pricing Option is not
outstanding on the first day of the Eurodollar Interest Period applicable
to such Eurodollar Pricing Option other than for reasons described in
Section 3.2.1, the Company shall be deemed to have terminated such
Eurodollar Pricing Option.
3.2.5. Violation of Legal Requirements. If any Legal Requirement
shall prevent any Lender from funding or maintaining through the purchase
of deposits in the interbank Eurodollar market any portion of the Loan
subject to a Eurodollar Pricing Option or otherwise from giving effect to
such Lender's obligations as contemplated by Section 3.2, (a) the Agent
may by notice to the Company terminate all of the affected Eurodollar
Pricing Options, (b) the portion of the Loan subject to such terminated
Eurodollar Pricing Options shall immediately bear interest thereafter at
the Applicable Rate computed on the basis of the Base Rate and (c) the
Company shall make any payment required by Section 3.2.4.
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3.2.6. Funding Procedure. The Lenders may fund any portion of the
Loan subject to a Eurodollar Pricing Option out of any funds available to
the Lenders. Regardless of the source of the funds actually used by any
of the Lenders to fund any portion of the Loan subject to a Eurodollar
Pricing Option, however, all amounts payable hereunder, including the
interest rate applicable to any such portion of the Loan and the amounts
payable under Sections 3.2.4 and 3.5, shall be computed as if each Lender
had actually funded such Lender's Percentage Interest in such portion of
the Loan through the purchase of deposits in such amount of the type by
which the Eurodollar Basic Rate was determined with a maturity the same
as the applicable Eurodollar Interest Period relating thereto and through
the transfer of such deposits from an office of the Lender having the
same location as the applicable Eurodollar Office to one of such Lender's
offices in the United States of America.
3.3. Commitment Fees. In consideration of the Lenders' commitments to
make the extensions of credit provided for in Section 2.1, the Company will pay
to the Agent for the account of the Lenders in accordance with the Lenders'
respective Commitments in the Revolving Loan, on each Payment Date and on the
Conversion Date, an amount equal to interest computed at the rate of 0.5% per
annum on the amount by which (a) the average daily Maximum Amount of Revolving
Credit during the three-month period or portion thereof ending on such Payment
Date exceeded (b) the average daily Revolving Loan during such period or
portion thereof; provided, however, that the first such payment shall be for
the period beginning on the Initial Closing Date and ending on the first
Payment Date.
3.4. Prepayment Fee. In the event the Company reduces the Maximum Amount
of Revolving Credit (or prepays the Term Loan) within one year after the
Initial Closing Date, the Company shall within one Banking Day pay to the Agent
for the account of the Lenders a prepayment fee equal to 1% of the amount of
such reduction (or the amount of the Term Loan so prepaid).
3.5. Changes in Circumstances; Yield Protection.
3.5.1. Reserve Requirements, etc. If any Legal Requirement shall
(a) impose, modify, increase or deem applicable any insurance assessment,
reserve, special deposit or similar requirement against any Funding
Liability, (b) impose, modify, increase or deem applicable any other
requirement or condition with respect to any Funding Liability, or (c)
change the basis of taxation of Funding Liabilities (other than changes
in the rate of taxes measured by the overall net income of such Lender)
and the effect of any of the foregoing shall be to increase the cost to
any Lender of issuing, making, funding or maintaining its respective
Percentage Interest in any portion of the Loan subject to a Eurodollar
Pricing Option, to reduce the amounts received or receivable by such
Lender under this Agreement or to require such Lender to make any payment
or forego any amounts otherwise payable to such Lender under this
Agreement
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(other than any Tax or any reserves that are included in
computing the Eurodollar Reserve Rate), then such Lender may claim
compensation from the Company under Section 3.5.5.
3.5.2. Taxes. All payments of the Credit Obligations shall be
made without set-off or counterclaim and free and clear of any
deductions, including deductions for Taxes, unless the Company is
required by law to make such deductions. If (a) any Lender shall be
subject to any Tax with respect to any payment of the Credit
Obligations or its obligations hereunder or (b) the Company shall be
required to withhold or deduct any Tax on any payment on the Credit
Obligations, then such Lender may claim compensation from the Company
under Section 3.5.5. Whenever Taxes must be withheld by the Company with
respect to any payments of the Credit Obligations, the Company shall
promptly furnish to the Agent for the account of the applicable Lender
official receipts (to the extent that the relevant governmental authority
delivers such receipts) evidencing payment of any such Taxes so withheld.
If the Company fails to pay any such Taxes when due or fails to remit to
the Agent for the account of the applicable Lender the required receipts
evidencing payment of any such Taxes so withheld or deducted, the Company
shall indemnify the affected Lender for any incremental Taxes and
interest or penalties that may become payable by such Lender as a result
of any such failure. In the event any Lender receives a refund of any
Taxes for which it has received payment from the Company under this
Section 3.5.2, such Lender shall promptly pay the amount of such refund
to the Company, together with any interest thereon actually earned by
such Lender.
3.5.3. Capital Adequacy. If any Lender shall determine that
compliance by such Lender with any Legal Requirement regarding capital
adequacy of banks or bank holding companies has or would have the effect
of reducing the rate of return on the capital of such Lender and its
Affiliates as a consequence of such Lender's commitment to make the
extensions of credit contemplated hereby, or such Lender's maintenance of
the extensions of credit contemplated hereby, to a level below that which
such Lender could have achieved but for such compliance (taking into
consideration the policies of such Lender and its Affiliates with respect
to capital adequacy immediately before such compliance and assuming that
the capital of such Lender and its Affiliates was fully utilized prior to
such compliance) by an amount deemed by such Lender to be material, then
such Lender may claim compensation from the Company under Section 3.5.5.
3.5.4. Regulatory Changes. If any Lender shall determine that (a)
any change in any Legal Requirement (including any new Legal Requirement)
after the date hereof shall directly or indirectly (i) reduce the amount
of any sum received or receivable by such Lender with respect to the Loan
or the return to be earned by such Lender on the Loan, (ii) impose a cost
on such Lender or any Affiliate of such Lender that is attributable to
the making or maintaining of, or such Lender's commitment to make, its
portion of the Loan, or (iii) require such Lender or any Affiliate of
such
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Lender to make any payment on, or calculated by reference to, the
gross amount of any amount received by such Lender under any Credit
Document (other than Taxes or income or franchise taxes), and (b) such
reduction, increased cost or payment shall not be fully compensated for
by an adjustment in the Applicable Rate, then such Lender may claim
compensation from the Company under Section 3.5.5.
3.5.5. Compensation Claims. Within 15 days after the receipt by
the Company of a certificate from any Lender setting forth why it is
claiming compensation under this Section 3.5 and computations (in
reasonable detail) of the amount thereof, the Company shall pay to such
Lender such additional amounts as such Lender sets forth in such
certificate as sufficient fully to compensate it on account of the
foregoing provisions of this Section 3.5, together with interest on such
amount from the 15th day after receipt of such certificate until payment
in full thereof at the Overdue Reimbursement Rate. The determination by
such Lender of the amount to be paid to it and the basis for computation
thereof hereunder shall, in the absence of manifest error, be conclusive.
In determining such amount, such Lender may use any reasonable
averaging and attribution methods.
3.5.6. Mitigation. Each Lender shall take such commercially
reasonable steps as it may determine are not disadvantageous to it,
including changing lending offices to the extent feasible, in order to
reduce amounts otherwise payable by the Company to such Lender pursuant
to Sections 3.2.4 and 3.5 or to make Eurodollar Pricing Options available
under Sections 3.2.1 and 3.2.5. In addition, the Company shall not be
responsible for costs (a) under Section 3.5 arising more than 90 days
prior to receipt by the Company of the certificate from the affected
Lender pursuant to such Section 3.5 or (b) under Section 3.2.4 arising
from the termination of Eurodollar Pricing Options more than 90 days
prior to the demand by the Agent for payment under Section 3.2.4.
3.6. Computations of Interest and Fees. For purposes of this Agreement,
interest (and any other amount expressed as interest) shall be computed on the
basis of a 360-day year for actual days elapsed. If any payment required by
this Agreement becomes due on any day that is not a Banking Day, such payment
shall, except as otherwise provided in the Eurodollar Interest Period, be made
on the next succeeding Banking Day. If the due date for any payment of
principal is extended as a result of the immediately preceding sentence,
interest shall be payable for the time during which payment is extended at the
Applicable Rate.
4. Payment.
4.1. Payment at Maturity. On the Final Maturity Date or any accelerated
maturity of the Loan, the Company will pay to the Agent for the account of the
Lenders an amount equal to the Loan then due, together with all accrued and
unpaid interest and fees with respect thereto and all other Credit Obligations
then outstanding.
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4.2. Required Prepayments.
4.2.1. Contingent Required Prepayments. If the Revolving Loan at
any time exceeds the Maximum Amount of Revolving Credit, the Company
shall within one Banking Day repay the amount of such excess to the Agent
for the account of the Lenders. If the Revolving Loan at any time
exceeds the Borrowing Base, the Company shall within 15 days either (a)
repay the amount of such excess to the Agent for the account of the
Lenders or (b) increase the Borrowing Base to eliminate such excess.
4.2.2. Scheduled Prepayments. On the last Banking Day of each of
the third, sixth, ninth, twelfth, fifteenth, eighteenth, twenty-first,
twenty-fourth, and twenty-seventh months ending after the Conversion
Date, the Company shall pay to the Agent for the account of the Lenders
the lesser of (a) 10% of the Term Loan on the Conversion Date, or (b) the
amount of the Term Loan then outstanding.
4.3. Voluntary Prepayments. In addition to the prepayments required by
Section 4.2, the Company may from time to time prepay all or any portion of the
Loan (in a minimum amount of $500,000 and an integral multiple of $100,000, or
such lesser amount as is then outstanding), without premium or penalty of any
type except as provided in Section 3.2.4 with respect to the early termination
of Eurodollar Pricing Options and Section 3.4 with respect to the prepayment
fee. The Company shall give the Agent at least one Banking Day prior notice of
its intention to prepay, specifying the date of payment, the total amount of
the Loan to be paid on such date and the amount of interest to be paid with
such prepayment.
4.4. Reborrowing; Application of Payments, etc.
4.4.1. Reborrowing. The amounts of the Revolving Loan prepaid
pursuant to Section 4.3 may be reborrowed from time to time prior to the
Conversion Date in accordance with Section 2.1, subject to the limits set
forth therein. No portion of the Term Loan prepaid hereunder may be
reborrowed.
4.4.2. Order of Application. Prepayments of the Term Loan made
pursuant to Section 4.3 shall be applied first to the principal amount of
the Term Note which is due on the Final Maturity Date and then to the
installments required to be made on the Term Loan pursuant to Section
4.2.2 in the inverse order of the maturity thereof so that no partial
prepayment of the Term Loan shall affect the obligation of the Company to
make the prepayments required by Section 4.2.2. Any prepayment of the
Loan shall be applied first to the portion of the Loan not then subject
to Eurodollar Pricing Options, then the balance of any such prepayment
shall be applied to the portion of the Loan then subject to Eurodollar
Pricing Options, in the chronological order of the respective maturities
thereof (or as the Company may otherwise specify in writing), together
with
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any payments required by Section 3.2.4.
4.4.3. Payment with Accrued Interest, etc. Upon all prepayments
of the Term Loan, the Company shall pay to the Agent the principal amount
to be prepaid, together with unpaid interest in respect thereof accrued
to the date of prepayment. Notice of prepayment having been given in
accordance with Section 4.3, and whether or not notice is given of
prepayments pursuant to Section 4.2, the amount specified to be prepaid
shall become due and payable on the date specified for prepayment.
4.4.4. Charging Accounts. The Agent may charge the accounts of
the Company (other than Collection Accounts), on the dates when the
amounts thereof become due and payable, with the amounts of principal of
and interest on the Loan, commitment fees, prepayment fees and all other
fees and amounts owing under any Credit Document.
4.4.5. Payments for Lenders. All payments of principal hereunder
shall be made to the Agent for the account of the Lenders in accordance
with the Lenders' respective Percentage Interests.
5. Conditions to Extending Credit.
5.1. Conditions on Initial Closing Date. The obligations of the Lenders
to make any extension of credit pursuant to Section 2 shall be subject to the
satisfaction, on or before the Initial Closing Date, of the conditions set
forth in this Section 5.1 as well as the further conditions in Section 5.2. If
the conditions set forth in this Section 5.1 are not met on or prior to the
Initial Closing Date, the Lenders shall have no obligation to make any
extensions of credit hereunder.
5.1.1. Revolving Notes. The Company shall have duly executed and
delivered to the Agent a Revolving Note for each Lender.
5.1.2. Payment of Fees. The Company shall have paid to the Agent
the fees required by the separate fee letter dated on or prior to the
Initial Closing Date between the Company and the Agent (the "Fee
Letter").
5.1.3. Legal Opinions. On the Initial Closing Date, the Lenders
shall have received from the following counsel their respective opinions
with respect to the transactions contemplated by the Credit Documents,
which opinions shall be in form and substance satisfactory to the
Required Lenders:
(a) Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.,
special counsel for the Company.
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(b) Ropes & Gray, special counsel for the Agent.
The Company authorizes and directs its counsel to furnish the
foregoing opinions.
5.1.4. Security Agreement. The Company shall have duly
authorized, executed and delivered to the Agent a Security Agreement in
substantially the form of Exhibit 5.1.4 (the "Security Agreement").
5.1.5. Perfection of Security. The Company shall have duly
authorized, executed, acknowledged, delivered, filed, registered and
recorded such security agreements, notices, financing statements and
other instruments as the Agent may have requested in order to perfect the
Liens purported or required pursuant to the Credit Documents to be
created in the Credit Security and shall have paid all filing or
recording fees or taxes required to be paid in connection therewith,
including any recording, mortgage, documentary, transfer or intangible
taxes.
5.1.6. Stockholder Guarantee. The Guarantor shall have duly
authorized, executed and delivered to the Agent a Guarantee in
substantially the form of Exhibit 5.1.6 (the "Stockholder Guarantee").
5.1.7. Repayment of Demand Loan. Contemporaneously with the
initial advance hereunder, the Company shall have paid in full all
principal, interest and other accrued and outstanding amounts under the
Demand Loan. All Liens securing amounts owing under the Demand Loan
shall have been released or assigned to the Agent, and the Demand Loan
shall have become terminated and of no further force or effect.
5.1.8. Proper Proceedings. This Agreement, each other Credit
Document and the transactions contemplated hereby and thereby shall have
been authorized by all necessary corporate or other proceedings. All
necessary consents, approvals and authorizations of any governmental or
administrative agency or any other Person of any of the transactions
contemplated hereby or by any other Credit Document shall have been
obtained and shall be in full force and effect.
5.1.9. General. All legal and corporate proceedings in connection
with the transactions contemplated by this Agreement shall be
satisfactory in form and substance to the Agent and the Agent shall have
received copies of all documents, including certified copies of the
Charter and By-Laws of the Company and the other Obligors, records of
corporate proceedings, certificates as to signatures and incumbency of
officers and opinions of counsel, which the Agent may have reasonably
requested in connection therewith, such documents where appropriate to be
certified by proper corporate or governmental authorities.
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5.2. Conditions to Each Extension of Credit. The obligations of the
Lenders to make any extension of credit pursuant to Section 2 shall be subject
to the satisfaction, on or before the Closing Date for such extension of
credit, of the following conditions:
5.2.1. Officer's Certificate. The representations and warranties
contained in Section 7 shall be true and correct on and as of such
Closing Date with the same force and effect as though made on and as of
such date (except as to any representation or warranty which refers to a
specific earlier date); no Default shall exist on such Closing
Date prior to or immediately after giving effect to the requested
extension of credit; no Material Adverse Change shall have occurred since
August 31, 1995; and the Company shall have furnished to the Agent in
connection with the requested extension of credit a certificate to these
effects, in substantially the form of Exhibit 5.2.1, signed by a
Financial Officer.
5.2.2. Legality, etc. The making of the requested extension of
credit shall not (a) subject any Lender to any penalty or special tax
(other than a Tax for which the Company is required to reimburse the
Lenders under Section 3.5), (b) be prohibited by any Legal Requirement or
(c) violate any credit restraint program of the executive branch of the
government of the United States of America, the Board of Governors of the
Federal Reserve System or any other governmental or administrative agency
so long as any Lender reasonably believes that compliance therewith is in
the best interests of such Lender.
6. General Covenants. The Company covenants that, until all of the Credit
Obligations shall have been paid in full and until the Lenders' commitments to
extend credit under this Agreement and any other Credit Document shall have
been irrevocably terminated, the Company and its Subsidiaries will comply with
the following provisions:
6.1. Taxes and Other Charges; Accounts Payable.
6.1.1. Taxes and Other Charges. Each of the Company and its
Subsidiaries shall duly pay and discharge, or cause to be paid and
discharged, before the same becomes in arrears, all taxes, assessments
and other governmental charges imposed upon such Person and its
properties, sales or activities, or upon the income or profits therefrom,
as well as all claims for labor, materials or supplies which if unpaid
might by law become a Lien upon any of its property; provided, however,
that any such tax, assessment, charge or claim need not be paid if the
validity or amount thereof shall at the time be contested in good faith
by appropriate proceedings and if such Person shall, in accordance with
GAAP, have set aside on its books adequate reserves with respect thereto;
and provided, further, that each of the Company and its Subsidiaries
shall pay or bond, or cause to be paid or bonded, all such taxes,
assessments, charges or other governmental claims immediately upon the
commencement of proceedings to foreclose any Lien which may have attached
as security therefor (except to the extent such
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proceedings have been dismissed or stayed).
6.1.2. Accounts Payable. Each of the Company and its Subsidiaries
shall promptly pay when due, or in conformity with customary trade terms,
all accounts payable incident to the operations of such Person not
referred to in Section 6.1.1; provided, however, that any such
Indebtedness need not be paid if the validity or amount thereof shall at
the time be contested in good faith and if such Person shall, in
accordance with GAAP, have set aside on its books adequate reserves with
respect thereto.
6.2. Conduct of Business, etc.
6.2.1. Types of Business. The Company and its Subsidiaries shall
engage only in the business of (a) originating, servicing, pooling and
selling home improvement and home equity loans and (b) other activities
related thereto.
6.2.2. Statutory Compliance. Each of the Company and its
Subsidiaries shall comply in all material respects with all valid and
applicable statutes, laws, ordinances, zoning and building codes and
other rules and regulations of the United States of America, of the
states and territories thereof and their counties, municipalities and
other subdivisions and of any foreign country or other jurisdictions
applicable to such Person, except where (a) compliance therewith shall at
the time be contested in good faith by appropriate proceedings or (b)
failure so to comply with the provisions being contested has not
resulted, or does not create a material risk of resulting, in the
aggregate in any Material Adverse Change.
6.2.3. Compliance with Material Agreements. Each of the Company
and its Subsidiaries shall comply in all material respects with the
Material Agreements (to the extent not in violation of the other
provisions of this Agreement or any other Credit Document). Without the
prior written consent of the Required Lenders, no Material Agreement
shall be amended, modified, waived or terminated in any manner that would
have in any material respect an adverse effect on the interests of the
Lenders.
6.3. Insurance.
6.3.1. Liability Insurance. Each of the Company and its
Subsidiaries shall maintain with financially sound and reputable insurers
insurance against liability for hazards, risks and liability to persons
and property, to the extent, in amounts and with deductibles at least as
favorable as those generally maintained by businesses of similar size
engaged in similar activities; provided, however, that it may effect
workers' compensation insurance or similar coverage with respect to
operations in any particular state or other jurisdiction through an
insurance fund operated by such state or jurisdiction or by meeting the
self-insurance requirements of such state or jurisdiction.
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6.4. Financial Statements and Reports. Each of the Company and its
Subsidiaries shall maintain a system of accounting in which correct entries
shall be made of all transactions in relation to their business and affairs in
accordance with generally accepted accounting practice. The fiscal year of the
Company and its Subsidiaries shall end on August 31 in each year and the fiscal
quarters of the Company and its Subsidiaries shall end on February 28 (or 29),
May 31, August 31 and November 30 in each year.
6.4.1. Annual Reports. The Company shall furnish to the Lenders
as soon as available, and in any event within 120 days after the end of
each fiscal year, the Consolidated balance sheet of the Company and its
Subsidiaries as at the end of such fiscal year, the Consolidated
statements of income, of changes in shareholders' equity and of cash
flows of the Company and its Subsidiaries for such fiscal year (all in
reasonable detail) together with comparative figures for the immediately
preceding fiscal year, all accompanied by:
(a) Reports of Deloitte & Touche LLP (or, if they cease to be
auditors of the Company and its Subsidiaries, other independent certified
public accountants of recognized national standing reasonably
satisfactory to the Required Lenders), containing no material
qualification, to the effect that they have audited the foregoing
financial statements in accordance with generally accepted auditing
standards and that such financial statements present fairly, in all
material respects, the financial position of the Company and its
Subsidiaries covered thereby at the dates thereof and the results of
their operations for the periods covered thereby in conformity with GAAP.
(b) The statement of such accountants that they have caused this
Agreement to be reviewed and that in the course of their audit of the
Company and its Subsidiaries no facts have come to their attention that
cause them to believe that any Default exists and in particular that they
have no knowledge of any Default under Sections 6.5 through 6.14 or, if
such is not the case, specifying such Default and the nature thereof.
This statement is furnished by such accountants with the understanding
that the examination of such accountants cannot be relied upon to give
such accountants knowledge of any such Default except as it relates to
accounting or auditing matters within the scope of their audit.
(c) A certificate of the Company signed by a Financial Officer to
the effect that such officer has caused this Agreement to be reviewed and
has no knowledge of any Default, or if such officer has such knowledge,
specifying such Default and the nature thereof, and what action the
Company has taken, is taking or proposes to take with respect thereto.
(d) Computations by the Company demonstrating, as of the end of
such fiscal year, compliance with the Computation Covenants, certified by
a Financial Officer.
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(e) Supplements to Exhibits 7.1 and 7.3 and Exhibit 2.3 to the
Security Agreement showing any changes in the information set forth in
such exhibits not previously furnished to the Lenders in writing, as well
as any changes in the Charter, Bylaws or incumbency of officers of the
Obligors from those previously certified to the Agent.
(f) In the event of a change in GAAP after August 31, 1995,
computations by the Company, certified by a Financial Officer,
reconciling the financial statements referred to above with financial
statements prepared in accordance with GAAP as applied to the other
covenants in Section 6 and related definitions.
6.4.2. Monthly Reports. The Company shall furnish to the Lenders
as soon as available and, in any event, within 60 days after the end of
each February, May, August, and November, and within 45 days after the
end of each other month, the internally prepared Consolidated balance
sheet of the Company and its Subsidiaries as at the end of such month and
the Consolidated statement of income of the Company and its Subsidiaries
for such month (all in reasonable detail), all accompanied by a
certificate of the Company signed by a Financial Officer to the effect
that such financial statements were prepared in accordance with GAAP and
present fairly, in all material respects, the financial position of the
Persons covered thereby at the dates thereof and the results of their
operations for the periods covered thereby, subject only to normal
year-end audit adjustments and the addition of footnotes.
6.4.3. Monthly Borrowing Base. The Company shall furnish to the
Lenders as soon as available and, in any event, within 25 days after the
end of each month, (a) a certificate of a Financial Officer supplying
computations of the Borrowing Base at the beginning of such month and
certifying that such computations were based on the monthly reports
prepared in accordance with GAAP, (b) a Constant Prepayment Rate Report,
and (c) a Three-month Excess Spread Summary.
6.4.4. Other Reports. The Company shall promptly furnish to the
Lenders:
(a) Any management letters furnished to the Guarantor or any of
its Subsidiaries by the Guarantor's auditors.
(b) All budgets, projections, statements of operations and other
reports furnished generally to the shareholders of the Company or the
Guarantor.
(c) Such registration statements, proxy statements and reports,
including Forms S-1, S-2, S-3, S-4, 10-K, 10-Q and 8-K, as may be filed
by the Company or any of its Subsidiaries or by the Guarantor with the
Securities and Exchange Commission.
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(d) Any 90-day letter or 30-day letter from the federal Internal
Revenue Service (or the equivalent notice received from state or other
taxing authorities) asserting tax deficiencies against the Guarantor or
any of its Subsidiaries.
6.4.5. Notice of Litigation, Defaults, etc. The Company shall
promptly furnish to the Lenders notice of any litigation or any
administrative or arbitration proceeding (a) which creates a material risk
of resulting, after giving effect to any applicable insurance, in the
payment by the Guarantor or the Company and its Subsidiaries of more than
$500,000 or (b) which results, or creates a material risk of resulting, in
a Material Adverse Change. Promptly upon acquiring knowledge thereof, the
Company shall notify the Lenders of the existence of any Default or
Material Adverse Change, specifying the nature thereof and what action the
Company or any Subsidiary has taken, is taking or proposes to take with
respect thereto.
6.4.6. Other Information. From time to time at reasonable
intervals upon request of any authorized officer of any Lender, each of
the Company and its Subsidiaries shall furnish to the Lenders such other
information regarding the business, assets, financial condition, income
or prospects of the Company and its Subsidiaries as such officer may
reasonably request, including copies of all tax returns, licenses,
agreements, leases and instruments to which any of the Company or its
Subsidiaries is party. The Lenders' authorized officers and
representatives shall have the right during normal business hours upon
reasonable notice and at reasonable intervals to examine the books and
records of the Company and its Subsidiaries, to make copies and notes
therefrom for the purpose of ascertaining compliance with or obtaining
enforcement of this Agreement or any other Credit Document.
6.5. Certain Financial Tests.
6.5.1. Consolidated Tangible Net Worth. Consolidated Tangible Net
Worth shall at all times equal the sum of (a) $12,500,000 plus (b) the
amount by which Consolidated Net Worth has been increased after August
31, 1995 as a result of capital contributions, the issuance of capital
stock or partnership interests of the Company or any of its Subsidiaries,
the issuance of warrants, options or other rights to acquire such capital
stock or partnership interests plus (c) 50% of Consolidated Net Income
(if positive) for the period beginning on May 1, 1996 and ending with the
most recently completed month.
6.5.2. Consolidated Net Income. On the last day of each month,
Consolidated Net Income for the period of six consecutive months then
ending shall exceed $500,000.
6.5.3. Net Excess Spread to Consolidated Pro Forma Debt Service.
On the last day of each month on or after the Conversion Date, the
quotient of dividing (a)
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400% of the aggregate Net Excess Spread (disregarding for this calculation
clause (b)(3) of the definition of that term) for the period of three
consecutive months then ending, by (b) Consolidated Pro Forma Debt Service
for the 12-month period beginning immediately after such date, shall
exceed 1.25.
6.6. Indebtedness. Neither the Company nor any of its Subsidiaries shall
create, incur, assume or otherwise become or remain liable with respect to any
Indebtedness (or become contractually committed do so), except the following:
6.6.1. Indebtedness in respect of the Credit Obligations.
6.6.2. Guarantees permitted by Section 6.7.
6.6.3. Current liabilities, other than Financing Debt, incurred in
the ordinary course of business.
6.6.4. To the extent that payment thereof shall not at the time be
required by Section 6.1, Indebtedness in respect of taxes, assessments,
governmental charges and claims for labor, materials and supplies.
6.6.5. Indebtedness secured by Liens of carriers, warehouses,
mechanics and landlords permitted by Sections 6.8.5 and 6.8.6.
6.6.6. Indebtedness in respect of judgments or awards (a) which
have been in force for less than the applicable appeal period or (b) in
respect of which the Company or any Subsidiary shall at the time in good
faith be prosecuting an appeal or proceedings for review and, in the case
of each of clauses (a) and (b), the Company or such Subsidiary shall have
taken appropriate reserves therefor in accordance with GAAP and execution
of such judgment or award shall not be levied.
6.6.7. To the extent permitted by Section 6.8.9, Indebtedness in
respect of Capitalized Lease Obligations or secured by purchase money
security interests; provided, however, that the aggregate principal
amount of all Indebtedness permitted by this Section 6.6.7 at any one
time outstanding shall not exceed $2,000,000.
6.6.8. Indebtedness in respect of deferred taxes arising in the
ordinary course of business.
6.6.9. Indebtedness in respect of inter-company loans and advances
among (a) the Company and its Subsidiaries which are not prohibited by
Section 6.9 and (b) the Company and the Guarantor or Preferred Equities
Corporation.
6.6.10. Indebtedness outstanding on the date hereof or
Indebtedness created
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by drawing down commitments to provide credit existing on the date hereof,
as described in Exhibit 7.3 and (except with respect to the Demand Note,
which shall be terminated on the Initial Closing Date) all renewals and
extensions thereof not in excess of the amount thereof outstanding (or, in
the case of commitments, committed) immediately prior to such renewal or
extension.
6.6.11. In the event that (a) at any time after August 31, 1996
the Company requests in good faith in writing an increase in the Maximum
Amount of Revolving Credit and the Lenders decline to grant such request,
and (b) the Loan is less than 30% of Excess Servicing Rights for the most
recent month for which financial statements have been (or are required to
have been) furnished to the Lenders in accordance with Section 6.4.2 and
(c) the Loan is less than 450% of Net Excess Spread for the most recent
period of three consecutive months for which financial statements have
been (or are required to have been) furnished to the Lenders in accordance
with Section 6.4.2, and (d) the test stated in Section 6.5.3 is satisfied
on the last day of the month immediately preceding the month in which the
Company proposes to incur additional indebtedness, the Company may incur
Indebtedness in an amount not exceeding a customary borrowing base
composed of Excess Servicing Rights that are not pledged as part of the
Credit Security, in which event the Revolving Loan shall convert to the
Term Loan.
6.6.12. Indebtedness (other than Financing Debt) in addition to
the foregoing; provided, however, that the aggregate amount of all such
Indebtedness at any one time outstanding shall not exceed $500,000.
6.7. Guarantees; Letters of Credit. Neither the Company nor any of its
Subsidiaries shall become or remain liable with respect to any Guarantee,
including reimbursement obligations, whether contingent or matured, under
letters of credit or other financial guarantees by third parties (or become
contractually committed do to so), except the following:
6.7.1. Guarantees of the Credit Obligations.
6.7.2. Guarantees by the Company of Indebtedness and other
obligations incurred by its Subsidiaries and permitted by Section 6.6.
6.8. Liens. Neither the Company nor any of its Subsidiaries shall create,
incur or enter into, or suffer to be created or incurred or to exist, any Lien
(or become contractually committed to do so), except the following:
6.8.1. Liens on the Credit Security that secure the Credit
Obligations or that were created under the agreements governing the sale
of the loans underlying the Credit Security.
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6.8.2. Liens to secure taxes, assessments and other governmental
charges, to the extent that payment thereof shall not at the time be
required by Section 6.1.
6.8.3. Deposits or pledges made (a) in connection with, or to
secure payment of, workers' compensation, unemployment insurance, old age
pensions or other social security, (b) in connection with casualty
insurance maintained in accordance with Section 6.3, (c) to secure the
performance of bids, tenders, contracts (other than contracts relating to
Financing Debt) or leases, (d) to secure statutory obligations or surety
or appeal bonds, (e) to secure indemnity, performance or other similar
bonds in the ordinary course of business or (f) in connection with
contested amounts to the extent that payment thereof shall not at that
time be required by Section 6.1.
6.8.4. Liens in respect of judgments or awards, to the extent that
such judgments or awards are permitted by Section 6.6.6 but only to the
extent that such Liens are junior to the Liens on the Credit Security
granted to secure the Credit Obligations.
6.8.5. Liens of carriers, warehouses, mechanics and similar Liens,
in each case (a) in existence less than 90 days from the date of creation
thereof or (b) being contested in good faith by the Company or any
Subsidiary in appropriate proceedings (so long as the Company or such
Subsidiary shall, in accordance with GAAP, have set aside on its books
adequate reserves with respect thereto).
6.8.6. Encumbrances in the nature of (a) zoning restrictions, (b)
easements, (c) restrictions of record on the use of real property, (d)
landlords' and lessors' Liens on rented premises and (e) restrictions on
transfers or assignment of leases, which in each case do not materially
detract from the value of the encumbered property or impair the use
thereof in the business of the Company or any Subsidiary.
6.8.7. Restrictions under federal and state securities laws on the
transfer of securities.
6.8.8. Liens on Excess Servicing Rights that are not pledged as
part of the Credit Security to secure Indebtedness permitted by Section
6.6.11.
6.8.9. Liens constituting (a) purchase money security interests
(including mortgages, conditional sales, Capitalized Leases and any other
title retention or deferred purchase devices) in real property, interests
in leases or tangible personal property (other than inventory) existing
or created on the date on which such property is acquired, and (b) the
renewal, extension or refunding of any security interest referred to in
the foregoing clause (a) in an amount not to exceed the amount thereof
remaining unpaid immediately prior to such renewal, extension or
refunding; provided, however,
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that (i) each such security interest shall attach solely to the particular
item of property so acquired, and the principal amount of Indebtedness
(including Indebtedness in respect of Capitalized Lease Obligations)
secured thereby shall not exceed the cost (including all such Indebtedness
secured thereby, whether or not assumed) of such item of property; and
(ii) the aggregate principal amount of all Indebtedness secured by Liens
permitted by this Section 6.8.9 shall not exceed the amount permitted by
Section 6.6.7.
6.8.10. Liens as in effect on the date hereof described in Exhibit
7.3 and securing Indebtedness permitted by Section 6.6.10.
6.8.11. Liens existing on property acquired through foreclosure by
the Company.
6.9. Investments and Acquisitions. Neither the Company nor any of its
Subsidiaries shall have outstanding, acquire or hold any Investment (including
any Investment consisting of the acquisition of any business) (or become
contractually committed to do so), except the following:
6.9.1. Cash Investments of the Company and its Subsidiaries in
Persons that have become Wholly Owned Subsidiaries and guarantors of the
Credit Obligations after the date hereof; provided, however, that no such
Investment shall involve the transfer by the Company of any material
assets other than cash.
6.9.2. Intercompany loans and advances from any Wholly Owned
Subsidiary to the Company but in each case only to the extent reasonably
necessary for Consolidated tax planning and working capital management;
6.9.3. Investments in Cash Equivalents.
6.9.4. Guarantees permitted by Section 6.7.
6.9.5. Investments in the ordinary course of business in home
improvement and home equity loans.
6.10. Distributions. Neither the Company nor any of its Subsidiaries
shall make any Distribution (or become contractually committed to do so),
except the following:
6.10.1. Subsidiaries of the Company may make Distributions to the
Company or any Wholly Owned Subsidiary of the Company and the Company and
the Company may make Investments permitted by Sections 6.9.1 and 6.9.2.
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6.10.2. So long as immediately before and after giving effect
thereto no Default exists, the Company may make Distributions to the
Guarantor after the Initial Closing Date in a cumulative amount which
shall not exceed 50% of Consolidated Net Income (if positive) for the
period beginning on May 1, 1996 and ending with the last full month
before the date a determination is being made under this Section 6.10.2.
6.10.3. The Company and its Subsidiaries may enter into
transactions with Affiliates permitted by Section 6.14.
6.10.4. So long as immediately before and after giving effect
thereto no Default exists, the Company may make payments to the Guarantor
pursuant to intercompany loans and tax sharing agreements.
6.11. Asset Dispositions and Mergers. Neither the Company nor any of its
Subsidiaries shall merge or enter into a consolidation or sell, lease, sell and
lease back, sublease or otherwise dispose of any of its assets (or become
contractually committed to do so), except the following:
6.11.1. The Company and any of its Subsidiaries may sell or
otherwise dispose of (a) home improvement loans, loan servicing rights
and Cash Equivalents in the ordinary course of business, (b) tangible
assets to be replaced in the ordinary course of business within 12 months
by other tangible assets of equal or greater value and (c) tangible
assets that are no longer used or useful in the business of the Company
or such Subsidiary in the ordinary course of business.
6.11.2. Any Wholly Owned Subsidiary of the Company may merge or be
liquidated into the Company or any other Wholly Owned Subsidiary of the
Company so long as after giving effect to any such merger to which the
Company is a party the Company shall be the surviving or resulting
Person.
6.12. Derivative Contracts. Neither the Company nor any of its
Subsidiaries shall enter into any Interest Rate Protection Agreement, foreign
currency exchange contract or other financial or commodity derivative contracts
except to provide hedge protection for an underlying economic transaction in
the ordinary course of business.
6.13. Negative Pledge Clauses. Neither the Company nor any of its
Subsidiaries shall enter into any agreement, instrument, deed or lease which
prohibits or limits the ability of the Company or any of its Subsidiaries to
create, incur, assume or suffer to exist any Lien upon any of their respective
properties, assets or revenues, whether now owned or hereafter acquired, or
which requires the grant of any collateral for such obligation if collateral is
granted for another obligation, except the following:
6.13.1. This Agreement and the other Credit Documents.
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6.13.2. Covenants in documents creating Liens permitted by Section
6.8 prohibiting further Liens on the assets encumbered thereby.
6.14. Transactions with Affiliates. Neither the Company nor any of its
Affiliates (except for the Company and its Subsidiaries) on a basis less
favorable to the Company and its Subsidiaries than would be the case if
such transaction had been effected with a non-Affiliate.
6.15. Accounts to be Maintained with Bank of Boston. The Company shall
maintain its core bank account and, to the extent it has authority to do so,
Collection Accounts, with Bank of Boston.
6.16. Transfer of Funds from Collection Accounts. The Company shall
transfer funds to which it is entitled (including, without limitation, funds
representing mortgage servicing fees owed to the Company, that are in
Collection Accounts from such Collection Accounts to its core bank account as
promptly as possible, and in any event at least once each month.
7. Representations and Warranties. In order to induce the Lenders to extend
credit to the Company hereunder, each of the Company and such of its
Subsidiaries as are party hereto from time to time jointly and severally
represents and warrants as follows:
7.1. Organization and Business.
7.1.1. The Company. The Company is a duly organized and validly
existing corporation, in good standing under the laws of Delaware, with
all power and authority, corporate or otherwise, necessary to (a) enter
into and perform this Agreement and each other Credit Document to which
it is party, (b) grant the Agent for the benefit of the Lenders the
security interests in the Credit Security owned by it to secure the
Credit Obligations and (c) own its properties and carry on the business
now conducted or proposed to be conducted by it. Certified copies of the
Charter and By-laws of the Company have been previously delivered to the
Agent and are correct and complete. Exhibit 7.1, as from time to time
hereafter supplemented in accordance with Section 6.4.1(e), sets forth,
as of the later of the date hereof or the end of the most recent fiscal
quarter for which financial statements are required to be furnished in
accordance with such Sections, (i) the jurisdiction of incorporation of
the Company, (ii) the address of the Company's principal executive office
and chief place of business, (iii) each name, including any trade name,
under which the Company conducts its business and (iv) the jurisdictions
in which the Company keeps tangible personal property.
7.1.2. Subsidiaries. Each Subsidiary of the Company is duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is
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organized, with all power and authority, corporate or otherwise, necessary
to (a) enter into and perform this Agreement and each other Credit
Document to which it is party, (b) guarantee the Credit Obligations, (c)
grant the Agent for the benefit of the Lenders the security interest in
the Credit Security owned by such Subsidiary to secure the Credit
Obligations and (d) own its properties and carry on the business now
conducted or proposed to be conducted by it. Certified copies of the
Charter and By-laws of each Subsidiary of the Company have been previously
delivered to the Agent and are correct and complete. Exhibit 7.1, as from
time to time hereafter supplemented in accordance with Section 6.4.1(e),
sets forth, as of the later of the date hereof or the end of the most
recent fiscal quarter for which financial statements are required to be
furnished in accordance with such Sections, (i) the name and jurisdiction
of organization of each Subsidiary of the Company, (ii) the address of the
chief executive office and principal place of business of each such
Subsidiary, (iii) each name under which each such Subsidiary conducts its
business, (iv) each jurisdiction in which each such Subsidiary keeps
tangible personal property, and (v) the number of authorized and issued
shares and ownership of each such Subsidiary.
7.1.3. The Guarantor. The Guarantor is a duly organized and
validly existing corporation, in good standing under the laws of New
York, with all power and authority, corporate or otherwise, necessary to
(a) enter into and perform each Credit Document to which it is party, and
(b) own its properties and carry on the business now conducted or
proposed to be conducted by it. Certified copies of the Charter and
By-laws of the Guarantor have been previously delivered to the Agent and
are correct and complete. Exhibit 7.1 sets forth (i) the jurisdiction of
incorporation of the Guarantor, (ii) the address of the Guarantor's
principal executive office and chief place of business, (iii) each name,
including any trade name, under which the Guarantor conducts its business
and (iv) the jurisdictions in which the Guarantor keeps tangible personal
property.
7.1.4. Qualification. Each of the Guarantor and its Subsidiaries
is duly and legally qualified to do business as a foreign corporation or
other entity and is in good standing in each state or jurisdiction in
which such qualification is required and is duly authorized, qualified
and licensed under all laws, regulations, ordinances or orders of public
authorities, or otherwise, to carry on its business in the places and in
the manner in which it is conducted, except for failures to be so
qualified, authorized or licensed which would not in the aggregate
result, or create a material risk of resulting, in any Material Adverse
Change.
7.2. Financial Statements and Other Information; Material Agreements.
7.2.1. Financial Statements and Other Information. The Company
has previously furnished to the Lenders copies of the following:
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(a) The audited balance sheets of the Company as at August 31 in
each of 1995, 1994 (as restated) and 1993 and the audited statements of
income and the audited Consolidated statements of changes in
shareholders' equity and of cash flows of the Company for the fiscal
years of the Company then ended.
(b) The unaudited balance sheet of the Company as at April 30,
1996 and the unaudited statements of income, of changes in shareholders'
equity and of cash flows of the Company for the portion of the fiscal
year then ended.
(c) The Guarantor's report on 10-K for its fiscal year ended
August 31, 1995, as filed with the Securities and Exchange Commission.
(d) Calculations demonstrating pro forma compliance with the
Computation Covenants as of the end of the most recent quarter preceding
the date hereof.
The audited financial statements (including the notes thereto)
referred to in clause (a) above were prepared in accordance with GAAP and
fairly present in all material respects the financial position of the
Company at the respective dates thereof and the results of its operations
for the periods covered thereby. The unaudited financial statements
referred to in clause (b) above were prepared in accordance with GAAP and
fairly present in all material respects the financial position of the
Company at the date thereof and the results of its operations for the
periods covered thereby, subject to normal year-end audit adjustment and
the addition of footnotes in the case of interim financial statements.
The Company does not have any known contingent liability material to the
Company which is not reflected in the balance sheets referred to in
clauses (a) or (b) above (or delivered pursuant to Sections 6.4.1 or
6.4.2) or in the notes thereto.
The Form 10-K referred to in clause (c) above contained all
information required to be contained therein and otherwise complied in
all material respects with the Exchange Act and the rules and regulations
thereunder. Such Form 10-K did not contain any untrue statement of
material fact or omit to state a material fact necessary in order to make
the statements contained therein not misleading in the light of the
circumstances under which they were made.
7.2.2. Material Agreements. The Company has previously furnished
to the Lenders correct and complete copies, including all exhibits,
schedules and amendments thereto, of the agreements, each as in effect on
the date hereof, listed in Exhibit 7.2.2 (the "Material Agreements").
7.3. Agreements Relating to Financing Debt, Investments, etc. Exhibit
7.3, as from time to time hereafter supplemented in accordance with Section
6.4.1, sets forth (a) the amounts (as of the dates indicated in Exhibit 7.3, as
so supplemented) of all Financing Debt of
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the Company and its Subsidiaries and all agreements which relate to such
Financing Debt, (b) all Liens and Guarantees with respect to such Financing
Debt, (c) all agreements which directly or indirectly require the Company or
any Subsidiary to sell any loans or loan servicing rights and (d) all
agreements which require the Company or any of its Subsidiaries to provide loan
servicing. The Company has furnished the Lenders with correct and complete
copies of any agreements described in clauses (a) through (d) above requested
by the Required Lenders.
7.4. Changes in Condition. Since August 31, 1995 no Material Adverse
Change has occurred.
7.5. Title to Assets. The Company and its Subsidiaries have good and
marketable title to all assets necessary for or used in the operations of their
business as now conducted by them and reflected in the most recent balance
sheet referred to in Section 7.2.1 (or the balance sheet most recently
furnished to the Lenders pursuant to Sections 6.4.1 or 6.4.2), and to all
assets acquired subsequent to the date of such balance sheet, subject to no
Liens except for Liens permitted by Section 6.8 and except for assets disposed
of as permitted by Section 6.11. The Guarantor has good and marketable title
to all assets necessary for or used in the operations of its business as now
conducted by it.
7.6. Operations in Conformity With Law, etc. The operations of the
Guarantor and its Subsidiaries as now conducted or proposed to be conducted are
not in violation of, nor is the Guarantor or its Subsidiaries in default under,
any Legal Requirement presently in effect, except for such violations and
defaults as do not and will not, in the aggregate, result, or create a material
risk of resulting, in any Material Adverse Change. The Guarantor has received
no notice of any such violation or default and has no knowledge of any basis on
which the operations of the Guarantor or its Subsidiaries, as now conducted and
as currently proposed to be conducted after the date hereof, would be held so
as to violate or to give rise to any such violation or default.
7.7. Litigation. Except as disclosed in the Guarantor's most recent Form
10-K or set forth in Exhibit 7.7, no litigation, at law or in equity, or any
formal proceeding before any court, board or other governmental or
administrative agency or any arbitrator is pending or, to the knowledge of the
Company, threatened which involves any material risk of any final judgment,
order or liability which, after giving effect to any applicable insurance, has
resulted, or creates a material risk of resulting, in any Material Adverse
Change or which seeks to enjoin the consummation, or which questions the
validity, of any of the transactions contemplated by this Agreement or any
other Credit Document. No judgment, decree or order of any court, board or
other governmental or administrative agency or any arbitrator has been issued
against or binds the Guarantor or any of its Subsidiaries or any other Obligor
which has resulted, or creates a material risk of resulting, in any Material
Adverse Change.
7.8. Authorization and Enforceability. Each of the Company and each other
Obligor has taken all corporate action required to execute, deliver and perform
this Agreement
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and each other Credit Document to which it is party. No consent
of stockholders of the Company or the Guarantor is necessary in order to
authorize the execution, delivery or performance of any Credit Document to
which the Company or the Guarantor is party. Each of this Agreement and each
other Credit Document constitutes the legal, valid and binding obligation of
each Obligor party thereto and is enforceable against such Obligor in
accordance with its terms.
7.9. No Legal Obstacle to Agreements. Neither the execution and delivery
of this Agreement or any other Credit Document, nor the making of any
borrowings hereunder, nor the guaranteeing of the Credit Obligations, nor the
securing of the Credit Obligations with the Credit Security, nor the
consummation of any transaction referred to in or contemplated by this
Agreement or any other Credit Document, nor the fulfillment of the terms hereof
or thereof or of any other agreement, instrument, deed or lease contemplated by
this Agreement or any other Credit Document, has constituted or resulted in or
will constitute or result in:
(a) any breach or termination of the provisions of any agreement,
instrument, deed or lease to which the Company, any of its Subsidiaries
or any other Obligor is a party or by which it is bound, or of the
Charter or By-laws of the Company, any of its Subsidiaries or any other
Obligor;
(b) the violation of any law, statute, judgment, decree or
governmental order, rule or regulation applicable to the Company, any of
its Subsidiaries or any other Obligor;
(c) the creation under any agreement, instrument, deed or lease of
any Lien (other than Liens on the Credit Security which secure the Credit
Obligations) upon any of the assets of the Company, any of its
Subsidiaries or any other Obligor; or
(d) any redemption, retirement or other repurchase obligation of
the Company, any of its Subsidiaries or any other Obligor under any
Charter, By-law, agreement, instrument, deed or lease.
Except as provided in Exhibit 7.9, no approval, authorization or other action
by, or declaration to or filing with, any governmental or administrative
authority or any other Person is required to be obtained or made by the
Company, any of its Subsidiaries or any other Obligor in connection with the
execution, delivery and performance of this Agreement, the Notes or any other
Credit Document, the transactions contemplated hereby or thereby, the making of
any borrowing hereunder, the guaranteeing of the Credit Obligations or the
securing of the Credit Obligations with the Credit Security (other than filings
necessary to perfect the Agent's security interest in the Credit Security).
7.10. Defaults. Neither the Guarantor nor any of its Subsidiaries is in
default under any provision of its Charter or By-laws or of this Agreement or
any other Credit Document.
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Neither the Guarantor nor any of its Subsidiaries is in default under any
provision of any agreement, instrument, deed or lease to which it is party or
by which it or its property is bound in each case so as to result, or create a
material risk of resulting, in any Material Adverse Change. Neither the
Guarantor nor any of its Subsidiaries has violated any law, judgment, decree or
governmental order, rule or regulation, in each case so as to result, or create
a material risk of resulting, in any Material Adverse Change.
7.11. Tax Returns. Each of the Guarantor and its Subsidiaries has filed
all material tax and information returns which are required to be filed by it
and has paid, or made adequate provision for the payment of, all taxes which
have or may become due pursuant to such returns or to any assessment received
by it, other than taxes and assessments being contested by the Guarantor and
its Subsidiaries in good faith by appropriate proceedings and for which
adequate reserves have been taken in accordance with GAAP. Neither the
Guarantor nor any of its Subsidiaries knows of any material additional
assessments or any basis therefor. The Guarantor reasonably believes that the
charges, accruals and reserves on the books of the Guarantor and its
Subsidiaries in respect of taxes or other governmental charges are adequate.
7.12. Certain Business Representations.
7.12.1. Antitrust. Each of the Company and its Subsidiaries is in
compliance in all material respects with all federal and state antitrust
laws relating to its business and the geographic concentration of its
business.
7.12.2. Consumer Protection. Neither the Company nor any of its
Subsidiaries is in violation of any rule, regulation, order, or
interpretation of any rule, regulation or order of the Federal Trade
Commission (including truth-in-lending), with which the failure to
comply, in the aggregate, has resulted, or creates a material risk of
resulting, in a Material Adverse Change.
7.13. Pension Plans. Each Plan is in material compliance with the
applicable provisions of ERISA and the Code. No Plan constitutes a "defined
benefit plan" (as defined in ERISA).
7.14. Government Regulation; Margin Stock.
7.14.1. Government Regulation. Neither the Company nor any of its
Subsidiaries, nor any Person controlling the Company or any of its
Subsidiaries or under common control with the Company or any of its
Subsidiaries, is subject to regulation under the Public Utility Holding
Company Act of 1935, the Federal Power Act, the Investment Company Act,
the Interstate Commerce Act or any statute or regulation which regulates
the incurring by the Company or any of its Subsidiaries of Financing Debt
as contemplated by this Agreement and the other Credit Documents.
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7.14.2. Margin Stock. Neither the Company nor any of its
Subsidiaries owns any Margin Stock.
7.15. Disclosure. Neither this Agreement nor any other Credit Document to
be furnished to the Lenders by or on behalf of the Guarantor or any of its
Subsidiaries in connection with the transactions contemplated hereby or by such
Credit Document contains any untrue statement of material fact or omits to state
a material fact necessary in order to make the statements contained herein or
therein not misleading in light of the circumstances under which they were made.
8. Defaults.
8.1. Events of Default. The following events are referred to as "Events
of Default":
8.1.1. Payment. The Company shall fail to make any payment in
respect of: (a) interest or any fee on or in respect of any of the
Credit Obligations owed by it as the same shall become due and payable,
and such failure shall continue for a period of three Banking Days, or
(b) principal of any of the Credit Obligations owed by it as the same
shall become due, whether at maturity or by acceleration or otherwise.
8.1.2. Specified Covenants. The Company or any of its
Subsidiaries shall fail to perform or observe any of the provisions of
Section 6.4.5 or Sections 6.5 through 6.14.
8.1.3. Other Covenants. The Company, any of its Subsidiaries or
any other Obligor shall fail to perform or observe any other covenant,
agreement or provision to be performed or observed by it under this
Agreement or any other Credit Document, and such failure shall not be
rectified or cured to the written satisfaction of the Required Lenders
within 30 days after the earlier of (a) notice thereof by the Agent to
the Company or (b) a Financial Officer shall have actual knowledge
thereof.
8.1.4. Representations and Warranties. Any representation or
warranty of or with respect to the Company, any of its Subsidiaries or
any other Obligor made to the Lenders or the Agent in, pursuant to or in
connection with this Agreement or any other Credit Document shall be
materially false on the date as of which it was made.
8.1.5. Cross Default, etc.
(a) The Company or any of its Subsidiaries shall fail to make any
payment when due (after giving effect to any applicable grace periods) in
respect of any Financing Debt (other than the Credit Obligations)
outstanding in an aggregate amount of principal (whether or not due) and
accrued interest exceeding $500,000;
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(b) the Company or any of its Subsidiaries shall fail to perform
or observe the terms of any agreement or instrument relating to such
Financing Debt, and such failure shall continue, without having been duly
cured, waived or consented to, beyond the period of grace, if any,
specified in such agreement or instrument, and such failure shall permit
the acceleration of such Financing Debt;
(c) all or any part of such Financing Debt of the Company or any
of its Subsidiaries shall be accelerated or shall become due or payable
prior to its stated maturity (except with respect to voluntary
prepayments thereof) for any reason whatsoever;
(d) any Lien on any property of the Company or any of its
Subsidiaries securing any such Financing Debt shall be enforced by the
obligee under such Financing Debt by foreclosure or similar action; or
(e) any holder of any such Financing Debt shall exercise any right
of rescission with respect to the issuance thereof or put or repurchase
rights against any Obligor with respect to such Financing Debt (other
than any such rights that may be satisfied with "payment in kind" notes
or other similar securities).
8.1.6. Ownership; Liquidation; etc. Except as permitted by
Section 6.11:
(a) The Guarantor shall cease to own, beneficially and of record,
at least two thirds of the voting stock and total equity capital of the
Company or Preferred Equities Corporation; or
(b) any Person, together with "affiliates" and "associates" of
such Person within the meaning of Rule 12b-2 of the Exchange Act, or any
"group" including such Person under sections 13(d) and 14(d) of the
Exchange Act, shall acquire after the date hereof beneficial ownership
within the meaning of Rule 13d-3 of the Exchange Act of 50% or more of
either the voting stock or total equity capital of the Guarantor; or
(c) the Company or the Guarantor shall initiate any action to
dissolve, liquidate or otherwise terminate its existence.
8.1.7. Enforceability, etc. Any Credit Document shall cease for
any reason (other than the scheduled termination thereof in accordance
with its terms) to be enforceable in accordance with its terms or in full
force and effect; or any party to any Credit Document shall so assert in
a judicial or similar proceeding; or the security interests created by
this Agreement or any other Credit Documents shall cease to be
enforceable and of the same effect and priority purported to be created
hereby.
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8.1.8. Judgments. A final judgment (a) which, with other
outstanding final judgments against the Company and its Subsidiaries,
exceeds an aggregate of $500,000 in excess of applicable insurance
coverage shall be rendered against the Company or any of its Subsidiaries,
or (b) which grants injunctive relief that results, or creates a material
risk of resulting, in a Material Adverse Change and in either case if, (i)
within 30 days after entry thereof, such judgment shall not have been
discharged or execution thereof stayed pending appeal or (ii) within 30
days after the expiration of any such stay, such judgment shall not have
been discharged.
8.1.9. FHA Insurance. The Company shall cease to have a contract
of insurance issued by the Federal Housing Administration under the
National Housing Act of 1934 with respect to loans eligible to be insured
under Title I of such Act.
8.1.10. Bankruptcy, etc. The Company, any of its Subsidiaries or
any other Obligor shall:
(a) commence a voluntary case under the Bankruptcy Code or
authorize, by appropriate proceedings of its board of directors or other
governing body, the commencement of such a voluntary case;
(b) (i) have filed against it a petition commencing an involuntary
case under the Bankruptcy Code that shall not have been dismissed within
60 days after the date on which such petition is filed, or (ii) file an
answer or other pleading within such 60-day period admitting or failing
to deny the material allegations of such a petition or seeking,
consenting to or acquiescing in the relief therein provided, or (iii)
have entered against it an order for relief in any involuntary case
commenced under the Bankruptcy Code;
(c) seek relief as a debtor under any applicable law, other than
the Bankruptcy Code, of any jurisdiction relating to the liquidation or
reorganization of debtors or to the modification or alteration of the
rights of creditors, or consent to or acquiesce in such relief;
(d) have entered against it an order by a court of competent
jurisdiction (i) finding it to be bankrupt or insolvent, (ii) ordering or
approving its liquidation or reorganization as a debtor or any
modification or alteration of the rights of its creditors or (iii)
assuming custody of, or appointing a receiver or other custodian for, all
or a substantial portion of its property; or
(e) make an assignment for the benefit of, or enter into a
composition with, its creditors, or appoint, or consent to the
appointment of, or suffer to exist a receiver or other custodian for, all
or a substantial portion of its property.
8.1.11. Change in Management. Any three of Jerome Cohen, Herbert
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Hirsch, Robert Nederlander and Don Mayerson shall fail to possess the
power to direct or cause the direction of the management and policies of
the Company, through stock ownership or otherwise.
8.2. Certain Actions Following an Event of Default. If any one or more
Events of Default shall occur, then in each and every such case:
8.2.1. Terminate Obligation to Extend Credit. The Agent on behalf
of the Lenders may (and upon written request of the Required Lenders the
Agent shall) terminate the obligations of the Lenders to make any further
extensions of credit under the Credit Documents by furnishing notice of
such termination to the Company.
8.2.2. Specific Performance; Exercise of Rights. The Agent on
behalf of the Lenders may (and upon written request of the Required
Lenders the Agent shall) proceed to protect and enforce the Lenders'
rights by suit in equity, action at law and/or other appropriate
proceeding, either for specific performance of any covenant or condition
contained in this Agreement or any other Credit Document or in any
instrument or assignment delivered to the Lenders pursuant to this
Agreement or any other Credit Document, or in aid of the exercise of any
power granted in this Agreement or any other Credit Document or any such
instrument or assignment.
8.2.3. Acceleration. The Agent on behalf of the Lenders may (and
upon written request of the Required Lenders the Agent shall) by notice
in writing to the Company declare all or any part of the unpaid balance
of the Credit Obligations then outstanding to be immediately due and
payable; provided, however, that if a Bankruptcy Default shall have
occurred, the unpaid balance of the Credit Obligations shall
automatically become immediately due and payable.
8.2.4. Enforcement of Payment; Credit Security; Setoff. The Agent
on behalf of the Lenders may (and upon written request of the Required
Lenders the Agent shall) proceed to enforce payment of the Credit
Obligations in such manner as it may elect, and to realize upon any and
all rights in the Credit Security. The Lenders may offset and apply
toward the payment of the Credit Obligations (and/or toward the curing of
any Event of Default) any Indebtedness from the Lenders to the respective
Obligors, including any Indebtedness represented by deposits in any
account maintained with the Lenders, regardless of the adequacy of any
security for the Credit Obligations. The Lenders shall have no duty to
determine the adequacy of any such security in connection with any such
offset.
8.2.5. Cumulative Remedies. To the extent not prohibited by
applicable law which cannot be waived, all of the Lenders' rights
hereunder and under each other Credit Document shall be cumulative.
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8.3. Annulment of Defaults. Once an Event of Default has occurred, such
Event of Default shall be deemed to exist and be continuing for all purposes of
the Credit Documents until the Required Lenders or the Agent (with the consent
of the Required Lenders) shall have waived such Event of Default in writing,
stated in writing that the same has been cured to such Lenders' reasonable
satisfaction or entered into an amendment to this Agreement which by its express
terms cures such Event of Default, at which time such Event of Default shall no
longer be deemed to exist or to have continued. No such action by the Lenders
or the Agent shall extend to or affect any subsequent Event of Default or impair
any rights of the Lenders upon the occurrence thereof. The making of any
extension of credit during the existence of any Default or Event of Default
shall not constitute a waiver thereof.
8.4. Waivers. To the extent that such waiver is not prohibited by the
provisions of applicable law that cannot be waived, each of the Company and the
other Obligors waives:
(a) all presentments, demands for performance, notices of
nonperformance (except to the extent required by this Agreement or any
other Credit Document), protests, notices of protest and notices of
dishonor;
(b) any requirement of diligence or promptness on the part of any
Lender in the enforcement of its rights under this Agreement, the Notes
or any other Credit Document;
(c) any and all notices of every kind and description which may be
required to be given by any statute or rule of law; and
(d) any defense (other than indefeasible payment in full) which it
may now or hereafter have with respect to its liability under this
Agreement, the Notes or any other Credit Document or with respect to the
Credit Obligations.
9. Expenses; Indemnity.
9.1. Expenses. Whether or not the transactions contemplated hereby shall
be consummated, the Company will pay:
(a) all reasonable expenses of the Agent (including the
out-of-pocket expenses related to forming the group of Lenders and
reasonable fees and disbursements of the counsel to the Agent) in
connection with the preparation and duplication of this Agreement and
each other Credit Document, the transactions contemplated hereby and
thereby and amendments, waivers, consents and other operations hereunder
and thereunder;
(b) all recording and filing fees and transfer and documentary
stamp and similar taxes at any time payable in respect of this Agreement,
any other Credit
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Document, any Credit Security or the incurrence of the Credit
Obligations; and
(c) all other reasonable expenses incurred by the Lenders or the
holder of any Credit Obligation in connection with the enforcement of any
rights hereunder or under any other Credit Document, including costs of
collection and reasonable attorneys' fees (including a reasonable
allowance for the hourly cost of attorneys employed by the Lenders on a
salaried basis) and expenses.
9.2. General Indemnity. The Company shall indemnify the Lenders and the
Agent and hold them harmless from any liability, loss or damage resulting from
the violation by the Company of Section 2.3. In addition, the Company shall
indemnify each Lender, the Agent, each of the Lenders' or the Agent's
directors, officers and employees, and each Person, if any, who controls any
Lender or the Agent (each Lender, the Agent and each of such directors,
officers, employees and control Persons is referred to as an "Indemnified
Party") and hold each of them harmless from and against any and all claims,
damages, liabilities and reasonable expenses (including reasonable fees and
disbursements of counsel with whom any Indemnified Party may consult in
connection therewith and all reasonable expenses of litigation or preparation
therefor) which any Indemnified Party may incur or which may be asserted
against any Indemnified Party in connection with (a) the Indemnified Party's
compliance with or contest of any subpoena or other process issued against it
in any proceeding involving the Company or any of its Subsidiaries or their
Affiliates, (b) any litigation or investigation involving the Company, any of
its Subsidiaries or their Affiliates, or any officer, director or employee
thereof, (c) the existence or exercise of any security rights with respect to
the Credit Security in accordance with the Credit Documents, or (d) this
Agreement, any other Credit Document or any transaction contemplated hereby or
thereby; provided, however, that the foregoing indemnity shall not apply to
litigation commenced by the Company against the Lenders or the Agent which
seeks enforcement of any of the rights of the Company hereunder or under any
other Credit Document and is determined adversely to the Lenders or the Agent
in a final nonappealable judgment or to the extent such claims, damages,
liabilities and expenses result from a Lender's or the Agent's gross negligence
or willful misconduct.
10. Operations; Agent. In the event that Bank of Boston is no longer the sole
Lender, the Company and Bank of Boston shall amend this Agreement to add Bank
of Boston's standard and customary operations, agency and other multi-lender
provisions.
11. Successors and Assigns; Lender Assignments and Participations. Any
reference in this Agreement or any other Credit Document to any of the parties
hereto shall be deemed to include the successors and assigns of such party, and
all covenants and agreements by or on behalf of the Company, the other
Obligors, the Agent or the Lenders that are contained in this Agreement or any
other Credit Document shall bind and inure to the benefit of their respective
successors and assigns; provided, however, that (a) the Company and its
Subsidiaries may not assign their rights or obligations under this Agreement or
any other Credit Document except for mergers or liquidations permitted by
Section 6.11, and (b) the Lenders shall be not entitled
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to assign their respective Percentage Interests in the credits extended
hereunder or their Commitments except in accordance with Section 11.1.
11.1. Assignments by Lenders.
11.1.1. Assignees and Assignment Procedures. Each Lender may (a)
without the consent of the Agent or the Company if the proposed assignee
is already a Lender hereunder or a Wholly Owned Subsidiary of the same
corporate parent of which the assigning Lender is a Subsidiary, or (b)
otherwise with the consents of the Agent and (so long as no Event of
Default exists) the Company (which consents will not be unreasonably
withheld), in compliance with applicable laws in connection with such
assignment, assign to one or more commercial banks or other financial
institutions (each, an "Assignee") all or a portion of its interests,
rights and obligations under this Agreement and the other Credit
Documents, including all or a portion of its Commitment, the portion of
the Loan at the time owing to it and the Notes held by it; provided,
however, that:
(i) the aggregate amount of the Commitment of the assigning
Lender subject to each such assignment to any Assignee other than
another Lender (determined as of the date the Assignment and
Acceptance with respect to such assignment is delivered to the
Agent) shall be not less than $3,000,000 and in increments of
$1,000,000; and
(ii) the parties to each such assignment shall execute and
deliver to the Agent an Assignment and Acceptance (the "Assignment
and Acceptance") substantially in the form of Exhibit 11.1.1,
together with the Note subject to such assignment and a processing
and recordation fee of $3,000 payable to the Agent by the
assigning Lender or the Assignee.
Upon acceptance and recording pursuant to Section 11.1.4, from and after
the effective date specified in each Assignment and Acceptance (which
effective date shall be at least five Banking Days after the execution
thereof unless waived by the Agent):
(A) the Assignee shall be a party hereto and, to
the extent provided in such Assignment and Acceptance, have
the rights and obligations of a Lender under this Agreement
and
(B) the assigning Lender shall, to the extent
provided in such assignment, be released from its obligations
under this Agreement (and, in the case of an Assignment and
Acceptance covering all or the remaining portion of an
assigning Lender's rights and obligations under this
Agreement, such Lender shall cease to be a party hereto but
shall continue to be entitled to the benefits of Sections
3.2.4, 3.5 and 9, as
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well as to any fees accrued for its account hereunder and
not yet paid).
11.1.2. Terms of Assignment and Acceptance. By executing and
delivering an Assignment and Acceptance, the assigning Lender and Assignee
shall be deemed to confirm to and agree with each other and the other
parties hereto as follows:
(a) other than the representation and warranty that it is the
legal and beneficial owner of the interest being assigned thereby free
and clear of any adverse claim, such assigning Lender makes no
representation or warranty and assumes no responsibility with respect to
any statements, warranties or representations made in or in connection
with this Agreement or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement, any other Credit
Document or any other instrument or document furnished pursuant hereto;
(b) such assigning Lender makes no representation or warranty and
assumes no responsibility with respect to the financial condition of the
Company and its Subsidiaries or the performance or observance by the
Company or any of its Subsidiaries of any of its obligations under this
Agreement, any other Credit Document or any other instrument or document
furnished pursuant hereto;
(c) such Assignee confirms that it has received a copy of this
Agreement, together with copies of the most recent financial statements
delivered pursuant to Section 7.2 or Section 6.4 and such other documents
and information as it has deemed appropriate to make its own credit
analysis and decision to enter into such Assignment and Acceptance;
(d) such Assignee will independently and without reliance upon the
Agent, such assigning Lender or any other Lender, and based on such
documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action
under this Agreement;
(e) such Assignee appoints and authorizes the Agent to take such
action as agent on its behalf and to exercise such powers under this
Agreement as are delegated to the Agent by the terms hereof, together
with such powers as are reasonably incidental thereto; and
(f) such Assignee agrees that it will perform in accordance with
the terms of this Agreement all the obligations which are required to be
performed by it as a Lender.
11.1.3. Register. The Agent shall maintain at the Boston Office a
register (the "Register") for the recordation of (a) the names and
addresses of the Lenders and the Assignees which assume rights and
obligations pursuant to an assignment under
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Section 11.1.1, (b) the Percentage Interest of each such Lender as set
forth in Exhibit 10.1 and (c) the amount of the Loan owing to each Lender
from time to time. The entries in the Register shall be conclusive, in
the absence of manifest error, and the Company, the Agent and the Lenders
may treat each Person whose name is registered therein for all purposes as
a party to this Agreement. The Register shall be available for inspection
by the Company or any Lender at any reasonable time and from time to time
upon reasonable prior notice.
11.1.4. Acceptance of Assignment and Assumption. Upon its receipt
of a completed Assignment and Acceptance executed by an assigning Lender
and an Assignee together with the Note subject to such assignment, and
the processing and recordation fee referred to in Section 11.1.1, the
Agent shall (a) accept such Assignment and Acceptance, (b) record the
information contained therein in the Register and (c) give prompt notice
thereof to the Company. Within five Banking Days after receipt of
notice, the Company, at its own expense, shall execute and deliver to the
Agent, in exchange for the surrendered Note, a new Note to the order of
such Assignee in a principal amount equal to the applicable Commitment
and Loan assumed by it pursuant to such Assignment and Acceptance and, if
the assigning Lender has retained a Commitment and Loan, a new Note to
the order of such assigning Lender in a principal amount equal to the
applicable Commitment and Loan retained by it. Such new Note shall be in
an aggregate principal amount equal to the aggregate principal amount of
such surrendered Note, and shall be dated the date of the surrendered
Note which it replaces.
11.1.5. Federal Reserve Bank. Notwithstanding the foregoing
provisions of this Section 11, any Lender may at any time pledge or
assign all or any portion of such Lender's rights under this Agreement
and the other Credit Documents to a Federal Reserve Bank; provided,
however, that no such pledge or assignment shall release such Lender from
such Lender's obligations hereunder or under any other Credit Document.
11.1.6. Further Assurances. The Company and its Subsidiaries
shall sign such documents and take such other actions from time to time
reasonably requested by an Assignee to enable it to share in the benefits
of the rights created by the Credit Documents.
11.2. Credit Participants. Each Lender may, without the consent of the
Company or the Agent, in compliance with applicable laws in connection with
such participation, sell to one or more commercial banks or other financial
institutions (each a "Credit Participant") participations in all or a portion
of its interests, rights and obligations under this Agreement and the other
Credit Documents (including all or a portion of its Commitment, the Loan owing
to it and the Note held by it); provided, however, that:
(a) such Lender's obligations under this Agreement shall remain
unchanged;
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(b) such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations;
(c) the Credit Participant shall be entitled to the benefit of the
cost protection provisions contained in Sections 3.2.4, 3.5 and 9, but
shall not be entitled to receive any greater payment thereunder than the
selling Lender would have been entitled to receive with respect to the
interest so sold if such interest had not been sold; and
(d) the Company, the Agent and the other Lenders shall continue to
deal solely and directly with such Lender in connection with such
Lender's rights and obligations under this Agreement, and such Lender
shall retain the sole right as one of the Lenders to vote with respect to
the enforcement of the obligations of the Company relating to the Loan
and Letter of Credit Exposure and the approval of any amendment,
modification or waiver of any provision of this Agreement (other than
amendments, modifications, consents or waivers that reduce the amount of
the Loan or the rate of interest thereon, extend the stated time of
payment of the Loan, increase the Commitments or release a substantial
portion of the Credit Security).
Each Obligor agrees, to the fullest extent permitted by applicable law, that
any Credit Participant and any Lender purchasing a participation from another
Lender may exercise all rights of payment (including the right of set-off),
with respect to its participation as fully as if such Credit Participant or
such Lender were the direct creditor of the Obligors and a Lender hereunder in
the amount of such participation.
12. Confidentiality. Each Lender will make no disclosure of confidential
information furnished to it by the Company or any of its Subsidiaries unless
such information shall have become public, except:
(a) in connection with operations under or the enforcement of this
Agreement or any other Credit Document to Persons who have a reasonable
need to be furnished such confidential information and who agree to
comply with the restrictions contained in this Section 12 with respect to
such information;
(b) pursuant to any statutory or regulatory requirement or any
mandatory court order, subpoena or other legal process;
(c) to any parent or corporate Affiliate of such Lender or to any
Credit Participant, proposed Credit Participant or proposed Assignee;
provided, however, that any such Person shall agree to comply with the
restrictions set forth in this Section 12 with respect to such
information;
(d) to its independent counsel, auditors and other professional
advisors with
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an instruction to such Person to keep such information confidential; and
(e) with the prior written consent of the Company, to any other
Person.
13. Notices. Except as otherwise specified in this Agreement or any other
Credit Document, any notice required to be given pursuant to this Agreement or
any other Credit Document shall be given in writing. Any notice, consent,
approval, demand or other communication in connection with this Agreement or
any other Credit Document shall be deemed to be given if given in writing
(including telex, telecopy or similar teletransmission) addressed as provided
below (or to the addressee at such other address as the addressee shall have
specified by notice actually received by the addressor), and if either (a)
actually delivered in fully legible form to such address (evidenced in the case
of a telex by receipt of the correct answerback) or (b) in the case of a
letter, unless actual receipt of the notice is required by any Credit Document,
five days shall have elapsed after the same shall have been deposited in the
United States mails, with first-class postage prepaid and registered or
certified.
If to the Company or any of its Subsidiaries, to it at its address set
forth in Exhibit 7.1 (as supplemented pursuant to Section 6.4.1), to the
attention of the President, with a copy to the Guarantor, to it at 1125
Northeast 125th Street, North Miami, Florida 33161, to the attention of Jerome
J. Cohen.
If to any Lender or the Agent, to it at its address set forth on the
signature pages of this Agreement, with a copy to the Agent.
14. Course of Dealing; Amendments and Waivers. No course of dealing between
any Lender or the Agent, on one hand, and the Company or any other Obligor, on
the other hand, shall operate as a waiver of any of the Lenders' or the Agent's
rights under this Agreement or any other Credit Document or with respect to the
Credit Obligations. Each of the Company and the Guarantors acknowledges that
if the Lenders or the Agent, without being required to do so by this Agreement
or any other Credit Document, give any notice or information to, or obtain any
consent from, the Company or any other Obligor, the Lenders and the Agent shall
not by implication have amended, waived or modified any provision of this
Agreement or any other Credit Document, or created any duty to give any such
notice or information or to obtain any such consent on any future occasion. No
delay or omission on the part of any Lender or the Agent in exercising any
right under this Agreement or any other Credit Document or with respect to the
Credit Obligations shall operate as a waiver of such right or any other right
hereunder or thereunder. A waiver on any one occasion shall not be construed
as a bar to or waiver of any right or remedy on any future occasion. No
waiver, consent or amendment with respect to this Agreement or any other Credit
Document shall be binding unless it is in writing and signed by the Agent or
the Required Lenders.
15. No Strict Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement and the other Credit Documents with
counsel sophisticated in
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financing transactions. In the event an ambiguity or question of intent or
interpretation arises, this Agreement and the other Credit Documents shall be
construed as if drafted jointly by the parties and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any provisions of this Agreement and the other Credit Documents.
16. Defeasance. When all Credit Obligations have been paid, performed and
reasonably determined by the Lenders to have been indefeasibly discharged in
full, and if at the time no Lender continues to be committed to extend any
credit to the Company hereunder or under any other Credit Document, this
Agreement and the other Credit Documents shall terminate and, at the Company's
written request, accompanied by such certificates and other items as the Agent
shall reasonably deem necessary, the Credit Security shall revert to the
Obligors and the right, title and interest of the Lenders therein shall
terminate. Thereupon, on the Obligor's demand and at their cost and expense,
the Agent shall execute proper instruments, acknowledging satisfaction of and
discharging this Agreement and the other Credit Documents, and shall redeliver
to the Obligors any Credit Security then in its possession; provided, however,
that Sections 3.2.4, 3.5, 9, 12, 17 and 18 shall survive the termination of
this Agreement.
17. Venue; Service of Process. Each of the Company and the other Obligors:
(a) Irrevocably submits to the nonexclusive jurisdiction of the
state courts of The Commonwealth of Massachusetts and to the nonexclusive
jurisdiction of the United States District Court for the District of
Massachusetts for the purpose of any suit, action or other proceeding
arising out of or based upon this Agreement or any other Credit Document
or the subject matter hereof or thereof.
(b) Waives to the extent not prohibited by applicable law that
cannot be waived, and agrees not to assert, by way of motion, as a
defense or otherwise, in any such proceeding brought in any of the
above-named courts, any claim that it is not subject personally to the
jurisdiction of such court, that its property is exempt or immune from
attachment or execution, that such proceeding is brought in an
inconvenient forum, that the venue of such proceeding is improper, or
that this Agreement or any other Credit Document, or the subject matter
hereof or thereof, may not be enforced in or by such court.
Each of the Company and the other Obligors consents to service of process in
any such proceeding in any manner at the time permitted by Chapter 223A of the
General Laws of The Commonwealth of Massachusetts and agrees that service of
process by registered or certified mail, return receipt requested, at its
address specified in or pursuant to Section 14 is reasonably calculated to give
actual notice.
18. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW THAT
CANNOT BE WAIVED, EACH OF THE COMPANY, THE OTHER OBLIGORS, THE AGENT AND THE
LENDERS WAIVES, AND COVENANTS
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<PAGE> 66
THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY
RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM OR PROCEEDING
ARISING OUT OF THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT OR THE SUBJECT MATTER
HEREOF OR THEREOF OR ANY CREDIT OBLIGATION OR IN ANY WAY CONNECTED WITH THE
DEALINGS OF THE LENDERS, THE AGENT, THE COMPANY OR ANY OTHER OBLIGOR IN
CONNECTION WITH ANY OF THE ABOVE, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER
ARISING AND WHETHER IN CONTRACT, TORT OR OTHERWISE. Each of the Company and the
other Obligors acknowledges that it has been informed by the Agent that the
provisions of this Section 18 constitute a material inducement upon which each
of the Lenders has relied and will rely in entering into this Agreement and any
other Credit Document, and that it has reviewed the provisions of this Section
18 with its counsel. Any Lender, the Agent, the Company or any other Obligor
may file an original counterpart or a copy of this Section 18 with any court as
written evidence of the consent of the Company, the other Obligors, the Agent
and the Lenders to the waiver of their rights to trial by jury.
19. General. All covenants, agreements, representations and warranties made
in this Agreement or any other Credit Document or in certificates delivered
pursuant hereto or thereto shall be deemed to have been relied on by each
Lender, notwithstanding any investigation made by any Lender on its behalf, and
shall survive the execution and delivery to the Lenders hereof and thereof.
The invalidity or unenforceability of any provision hereof shall not affect the
validity or enforceability of any other provision hereof. The headings in this
Agreement are for convenience of reference only and shall not limit or
otherwise affect the meaning hereof. This Agreement and the other Credit
Documents (including any related fee agreements with the Agent or the Lenders)
constitute the entire understanding of the parties with respect to the subject
matter hereof and thereof and supersede all prior and contemporaneous
understandings and agreements, whether written or oral. This Agreement may be
executed in any number of counterparts which together shall constitute one
instrument. This Agreement shall be governed by and construed in accordance
with the laws (other than the conflict of laws rules) of The Commonwealth of
Massachusetts.
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<PAGE> 67
Each of the undersigned has caused this Agreement to be executed and
delivered by its duly authorized officer as an agreement under seal as of the
date first above written.
MEGO MORTGAGE CORPORATION
By /s/
-------------------------------------
Title:
THE FIRST NATIONAL BANK OF BOSTON
By /s/
-------------------------------------
Title:
The First National Bank of Boston
Diversified Finance Division
100 Federal Street
Boston, Massachusetts 02110
Telecopy: (617) 434-4929
Telex: 940581
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<PAGE> 1
EXHIBIT 10.19
MEGO MORTGAGE CORPORATION
WAREHOUSING CREDIT AND SECURITY AGREEMENT
AMENDMENT NO. 1
This Agreement, dated as of August 9, 1996 (this "Agreement"), is between
Mego Mortgage Corporation, a Delaware corporation, and The First National Bank
of Boston. The parties agree as follows:
1. Credit Agreement; Definitions. This Agreement amends the Warehousing
Credit and Security Agreement dated as of August 11, 1995 among the parties
hereto (as in effect prior to giving effect to this Agreement, the "Credit
Agreement"). Terms defined in the Credit Agreement as amended hereby (the
"Amended Credit Agreement") and not otherwise defined herein are used with the
meaning so defined.
2. Amendment of Credit Agreement. Effective upon the date all the
conditions set forth in Section 4 hereof are satisfied (the "Amendment Date"),
which conditions must be satisfied no later than August 13, 1996, the Credit
Agreement is amended as follows:
2.1. Amendment of Section 1.1. The definitions of "Balance Sheet
Date," "Termination Date," "Title I Loan" and "Title I Note" in Section
1.1 of the Credit Agreement are amended to read in their entirety as
follows:
Balance Sheet Date means August 31, 1995.
Termination Date means the date which is the earliest to
occur of (i) August 8, 1997, or (ii) the date on which the Bank
accelerates the Obligations as the result of the occurrence of an
Event of Default.
Title I Loan means (i) an individual home improvement loan
insured by the FHA pursuant to Title I, Section 2 of the National
Housing Act, as amended and in effect from time to time, and (ii)
an individual home improvement loan that is not insured by the FHA;
provided, however, that the aggregate principal amount of all such
uninsured individual home improvement loans that
<PAGE> 2
constitute "Title I Loans" for purposes of the Loan Documents
shall not exceed $5,555,555 at any one time outstanding.
Title I Note means a note, bond or other evidence of
indebtedness (which may be secured by a Mortgage) which constitutes
a Title I Loan and which is in compliance with all Title I
Regulations if it is (or is to be) insured by the FHA.
Paragraphs (i)(d), (vi) and (xi) of the definition of Acceptable Loans
Receivable are amended to read in its entirety as follows:
(i)(d) If required by the Title I Regulations, a transfer of
Note Report, completed in full except for the box requiring the
FHA case number.
* * *
(vi) Such Title I Loan and Title I Collateral is in all
respects as required by and in accordance with all applicable laws
and regulations governing the same, including, without limitation,
the Title I Regulations (if applicable) and the federal Consumer
Credit Protection Act and the regulations promulgated thereunder
and all applicable usury laws and restrictions.
* * *
(xi) The property covered by a Mortgage, if any, for such
Title I Loan is free and clear of all liens except in favor of the
Company (which has assigned any and all such liens to the Bank for
the benefit of the Banks) and except as permitted by the Title I
Regulations or, in the case of Title I Loans not subject to the
Title I Regulations, liens that would be permitted by the Title I
Regulations if such loans were in fact subject to the Title I
Regulations.
Paragraphs (b)(i) and (ii) of the definition of Availability are amended
to read in their entirety as follows:
(b) (i) the sum of
(A) 95% of the then outstanding principal balance of each
Acceptable Loan Receivable with respect to an FHA-insured Title I
<PAGE> 3
Loan other than Undocumented Title I Collateral, and
(B) 90% of the then outstanding principal balance of each
Acceptable Loan Receivable with respect to Title I Loans that are
not FHA-insured other than Undocumented Title I Collateral; plus
(ii) the lesser of
(A) the sum of (1) 95% of the then outstanding principal balance of
each Acceptable Loan Receivable with respect to an FHA-insured
Title I Loan plus (2) 90% of the then outstanding principal balance
of each Acceptable Loan Receivable with respect to Title I Loans
that are not FHA-insured and, in the case of Title I Loans
described in the foregoing clauses (1) and (2), constituting
Undocumented Title I Collateral as to which an Agreement to Pledge
has been delivered to the Bank and which has not been included in
the calculation of Availability for more than the Undocumented
Period; or
(B) $4,000,000.00;
The definition of Tangible Net Worth is amended by adding at the end
thereof the following provision:
", but not deducting excess servicing rights and mortgage servicing
rights pursuant to clauses (a) and (b) above."
The definition of Transfer of Note Report is amended to read in its
entirety as follows:
Transfer of Note Report means, with respect to each Title I
Note subject to Title I Regulations, the Title I Transfer of Note
Report as contained in the United States Department of Housing and
Urban Development form number HUD-27030 (8-86) or any update or
modification thereof. To the extent permissible under applicable
H.U.D. rules and regulations, one Transfer of Note Report may be
utilized for multiple Title I Notes.
The following definition is added to Section 1.1:
1996 Credit Agreement means the Credit Agreement dated June
28, 1996, as from time to time in effect, between Mego
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<PAGE> 4
Mortgage Corporation and The First National Bank of Boston, as
Agent for itself and certain other lenders.
2.2. Amendment of Section 4.2. Section 4.2(a)(i) of the Credit
Agreement is amended to read in its entirety as follows:
(i) the sum of (A) ninety-five percent (95%) of the proceeds
of any sale of Title I Collateral representing insured Title I
Loans made pursuant to Section 4.1 above, plus (B) ninety percent
(90%) of the proceeds of any sale of Title I Collateral
representing uninsured Title I Loans made pursuant to Section 4.1
above, or
2.3. Amendment of Section 6.5. Section 6.5 of the Credit Agreement
is amended by replacing the date "August 31, 1994" with the date "August
31, 1995."
2.4. Amendment of Section 6.16. Section 6.16 of the Credit
Agreement is amended to read in its entirety as follows:
6.16. Representations Under Master Purchase Agreement. The
Company remakes and reaffirms all of its representations set forth
in the Master Purchase Agreement as if set forth at length herein,
other than representations that (a) the Title I Loans are not
subject to liens since the Company has granted liens to the Bank,
(b) the Title I Loans are all subject to the Title I Regulations
since Greenwich Capital has accepted non-FHA insured home
improvement loans under the Master Purchase Agreement and (c) are
not applicable to loans that are not subject to the Title I
Regulations.
2.5. Amendment of Section 8.1. Section 8.1(a) of the Credit
Agreement is amended to read in its entirety as follows:
(a) Indebtedness to the Bank arising under any of the Loan
Documents or Indebtedness arising under the 1996 Credit Agreement;
2.6. Amendment of Section 8.2. Clause (ii) of Section 8.2 of the
Credit Agreement is amended to read in its entirety as follows:
(ii) the encumbrances granted to the Bank hereunder and the
encumbrances granted under the 1996 Credit Agreement;
-4-
<PAGE> 5
Clause (iv) of Section 8.2 of the Credit Agreement is amended by
replacing the figure "$1,000,000.00" with "$2,000,000.00".
2.7. Amendment of Section 9. Section 9(a) of the Credit Agreement
is amended to read in its entirety as follows:
(a) The Company will not at any time permit its Tangible Net
Worth to be less than the sum of (a) $12,500,000 plus (b) the
amount by which Tangible Net Worth has been increased after August
31, 1995 as a result of capital contributions, the issuance of
capital stock or partnership interests of the Company or any of its
Subsidiaries, the issuance of warrants, options or other rights to
acquire such capital stock or partnership interest plus (c) 50% of
net income (determined in accordance with GAAP) (if positive) for
the period beginning on May 1, 1996 and ending with the most
recently completed month.
2.8. Amendment of Section 12.1. Section 12.1 of the Credit
Agreement is amended so that:
(a) the figure "$1,000,000.00" in paragraph (f) is replaced
with "$500,000",
(b) the figure "$250,000.00" in paragraph (h) is replaced
with "$500,000";
(c) paragraph (j) reads in its entirety as follows:
(j) Mego Financial Corp. shall cease to own legal and
beneficial title to at least two-thirds of the outstanding
capital stock of the Company;
(d) paragraph (m) reads in its entirety as follows:
(m) Mego Financial Corp. shall cease to own legal and
beneficial title to at least two-thirds of the outstanding
capital stock of Preferred Equities Corporation;
2.9. Amendment of Exhibit D. Exhibit D to the Credit Agreement is
amended to read as set forth in Exhibit D hereto.
-5-
<PAGE> 6
3. Representations and Warranties. The Company represents and
warrants as follows:
3.1. Legal Existence, Organization. The Company is duly organized
and validly existing and in good standing under the laws of the
jurisdiction of its organization, with all power and authority,
corporate, partnership or otherwise, necessary (a) to enter into
and perform this Agreement, the Amended Credit Agreement and the other
Loan Documents to which it is party and (b) to own its properties and
carry on the business now conducted or proposed to be conducted by it.
The Company has taken all corporate or other action required to make the
provisions of this Agreement and the Amended Credit Agreement the valid
and enforceable obligations they purport to be.
3.2. Enforceability. The Company has duly authorized, executed and
delivered this Agreement. Each of this Agreement and the Amended Credit
Agreement is the legal, valid and binding obligation of the Company and
is enforceable against it in accordance with its terms.
3.3. No Legal Obstacle to Agreements. Neither the execution,
delivery or performance of this Agreement, nor the performance of the
Amended Credit Agreement, nor the consummation of any other transaction
referred to nor contemplated by this Agreement, nor the fulfillment of
the terms hereof or thereof, has constituted or resulted in or will
constitute or result in:
(1) any breach or termination of the provisions of any agreement,
instrument, deed or lease to which the Company is a party or by which it
is bound, or of the charter documents or by-laws of the Company;
(2) the violation of any law, judgment, decree or governmental
order, rule or regulation applicable to the Company;
(3) the creation under any agreement, instrument, deed or lease of
any encumbrance (other than encumbrances on the Collateral which secure
the Obligations) upon any of the assets of the Company; or
(4) any redemption, retirement or other repurchase obligation of
the Company under any charter document, by-law, agreement, instrument,
deed or lease.
No approval, authorization or other action by, or declaration to or
filing
-6-
<PAGE> 7
with, any governmental or administrative authority or any other
Person is required to be obtained or made by the Company in connection
with the execution, delivery and performance of this Agreement or the
performance of the Amended Credit Agreement, or the consummation of the
transactions contemplated hereby or thereby.
3.4. Defaults. Immediately before and after giving effect to the
amendments set forth in Section 2, no Default will exist.
3.5. Incorporation of Representations and Warranties. The
representations and warranties set forth in Section 6 of the Amended
Credit Agreement are true and correct on the date hereof as if originally
made on and as of the date hereof.
4. Conditions. The effectiveness of this Agreement shall be subject to
the satisfaction of the following conditions, which conditions must be
satisfied prior to August 14, 1996 or this Agreement shall terminate:
4.1. Legal Opinion. On the Amendment Date, the Bank shall have
received from Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.,
special counsel for the Company, their opinion with respect to the
transactions contemplated by this Agreement, which opinion shall be in
form and substance satisfactory to the Bank. The Company authorizes and
directs its counsel to furnish the foregoing opinion.
4.2. Perfection of Security. The Company shall have duly
authorized, executed, acknowledged, delivered, filed, registered and
recorded such UCC financing statements, security agreements, notices,
transfer powers and other instruments as the Bank may have requested in
order to perfect the security interests and encumbrances purported or
required pursuant to the Loan Documents to be created in the Collateral.
4.3. Officer's Certificate. The representations and warranties of
the Company set forth or incorporated by reference herein shall be true
and correct as of the Amendment Date as if originally made on and as of
the Amendment Date; no Default shall have occurred on or prior to the
Amendment Date or hereby; and the Bank shall have received a certificate
to these effects signed by an officer of the Company in the event the
Amendment Date occurs after the date hereof.
4.4. Proper Proceedings. This Agreement, each other Loan Document
and the transactions contemplated hereby and thereby shall
-7-
<PAGE> 8
have been authorized by all necessary proceedings of the Company and any
of its Affiliates party thereto. All necessary consents, approvals and
authorizations of any governmental or administrative agency or any other
Person with respect to any of the transactions contemplated hereby or by
any other Loan Document shall have been obtained and shall be in full
force and effect. The Bank shall have received copies of all documents,
including certificates, records of corporate and partnership proceedings
and opinions of counsel, which the Bank may have reasonably requested in
connection therewith, such documents where appropriate to be certified by
proper corporate, partnership or governmental authorities.
5. Further Assurances. The Company will, promptly upon the request of
the Bank and from time to time, execute, acknowledge, deliver, file and record
all such instruments and notices, and take all such other action, as the Bank
deems necessary or advisable to carry out the intent and purposes of this
Agreement.
6. General. The Amended Credit Agreement and all of the Loan Documents
are each confirmed as being in full force and effect. This Agreement, the
Amended Credit Agreement and the other Loan Documents referred to herein or
therein constitute the entire understanding of the parties with respect to the
subject matter hereof and thereof and supersede all prior and current
understandings and agreements, whether written or oral. Each of this Agreement
and the Amended Credit Agreement is a Loan Document and may be executed in any
number of counterparts, which together shall constitute one instrument, and
shall bind and inure to the benefit of the parties and their respective
successors and assigns, including as such successors and assigns all holders of
any Note. This Agreement shall be governed by and construed in accordance with
the laws (other than the conflict of law rules) of The Commonwealth of
Massachusetts.
-8-
<PAGE> 9
Each of the undersigned has caused this Agreement to be executed and
delivered by its duly authorized officer as an agreement under seal as of the
date first above written.
MEGO MORTGAGE CORPORATION
By /s/
-------------------------------------
Title:
THE FIRST NATIONAL BANK OF BOSTON
By /s/
-------------------------------------
Title:
Each of the undersigned consents to the foregoing amendment and confirms
that the Loan Documents to which it is party remain in full force and effect:
MEGO FINANCIAL CORP.
By /s/
----------------------------------
Title:
PREFERRED EQUITIES CORPORATION
By /s/
----------------------------------
Title:
-9-
<PAGE> 10
The undersigned consents to the foregoing amendment and confirms that (a)
the Loan Documents to which it is party, including the Master Purchase
Agreement and the related Collateral Assignment and Pricing Letters remain in
full force and effect and (b) non-FHA insured home improvement loans pledged
under the Credit Agreement are included in the Master Purchase Agreement and
the related Collateral Assignment and Pricing Letters:
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
By /s/
-------------------------------
Title:
-10-
<PAGE> 1
EXHIBIT 10.21
AMENDMENT
AMENDMENT (this "Amendment") dated February 1, 1996 to Master Loan Purchase and
Servicing Agreement between Greenwich Capital Financial Products, Inc. (the
"Purchaser") and Mego Mortgage Corp. (the "Seller") dated as of April 1, 1995
(the "Master Agreement"). Unless the context otherwise clearly requires,
capitalized terms used herein and not otherwise defined herein shall have the
respective meanings assigned such terms in the Master Agreement.
WHEREAS, the Purchaser has purchased Loans from the Seller under the Master
Agreement and has executed a Pricing Letter (the "Pricing Letter") dated January
25, 1996 to purchase additional Loans;
WHEREAS, the Seller is obligated to provide certain financial statements to the
Purchaser pursuant to Section 18 of the Master Agreement;
WHEREAS, the Seller expects to be able to provide such financial statements by
February 29, 1996; and
WHEREAS, to induce the Purchaser to purchase additional Loans under the Pricing
Letter without such financial statements, the Seller has agreed to enter into
this Amendment;
NOW THEREFORE, the Purchaser and Seller hereby agree to amend the Master
Agreement as herein provided.
1. The following clause is hereby added to Section 14.01 of the Master
Agreement:
"(ix) the Seller shall fail to deliver to the Purchaser by February 29, 1996
consolidated audited financial statements of Mego Financial Corp. for fiscal
year 1995."
2. The following shall be added at the end of the penultimate paragraph of
Section 14.01 of the Master Agreement:
(Notwithstanding the foregoing, the Purchaser may in its discretion, in lieu of
terminating the Seller's servicing rights hereunder as a result of an Event of
Default described in Section 14.01 (ix), effect a Whole Loan Transfer or a
Pass-Through Transfer (exclusive of the Seller's Excess Yield) of any or all of
the Loans then held by the Purchaser pursuant to this Agreement on a servicing
released basis
<PAGE> 2
(the "Released Loans'7). Upon such disposition, the Seller shall have no
servicing rights with respect to the Released Loans but shall continue to be
obligated hereunder to service all other Loans other than the Released Loans The
Seller shall cooperate and assist in the transfer of servicing of Released Loans
to the same extent provided herein for the termination of all the Seller's
servicing rights hereunder. No compensation shall be due the Seller in respect
of any such transfer of the servicing fights of Released Loans."
3. In all other respects the Master Agreement and the Pricing Letter shall
remain in 'till force and effect
4. The Seller hereby represents to the Purchaser as of the date hereof that:
(a) The Seller believes in good faith that audited financial statements of Mego
Financial Corp. will be released to the public by February 29, 1996;
(b) Following the Purchaser's purchase of the additional Loans pursuant to the
Pricing Letter, the Warehousing Credit and Security Agreement (the "Warehouse
Agreement") between the Seller and The First National Bank of Boston will be in
full force and effect and the warehouse line available to the Seller under the
warehouse Agreement will be increased by 90% of the principal amount of Loans
purchased by the Purchaser pursuant to the Pricing Letter which immediately
prior to such purchase were pledged under the Warehouse Agreement;
(c) The Seller has no present intention to file a petition in bankruptcy with
respect to the Seller and no such action is presently contemplated. To the best
of the Seller's knowledge, Mego Financial Corp. has no such intention with
respect to itself or the Seller and no such action is presently contemplated by
Mego Financial Corp.; and
(d) The Seller has no reason to believe that a material adverse change will
occur in the condition (financial or otherwise) of the Seller or Mego Financial
Corp. between the date hereof and February 29, 1996.
<PAGE> 3
IN WITNESS WHEREOF, the Purchaser and the Seller have caused this Amendment to
be executed by their duly authorized representatives:
GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC.
By:
Name: Jay N. Levine
Title: Senior Vice President
MEGO MORTGAGE CORPORATION
By:
Name: James L. Belter
Title: Executive Vice President
<PAGE> 1
EXHIBIT 10.22
AMENDMENT NO.2
AMENDMENT No.2 (this "Amendment") dated as of JULY 1, 1996 to Master Loan
Purchase and Servicing Agreement between Greenwich Capital Financial Products,
Inc. (the "Purchaser") and Mego Mortgage Corporation (the "Seller") dated as of
April 1, 1995 as amended by Amendment dated February 1, 1996 (the "Master
Agreement"). Unless the context otherwise clearly requires, capitalized terms
used herein and not otherwise defined herein shall have the respective meanings
assigned such terms in the Master Agreement.
WHEREAS, the Master Agreement provides for the purchase and sale of FHA insured
Title I home improvement loans ("FHA Title I Loans"); and
WHEREAS, the Initial Purchaser has purchased non-FHA insured home improvement
loans ("Conventional Home Improvement Loans") from Seller pursuant to Pricing
Letters executed pursuant to the Master Agreement; and
WHEREAS, the Initial Purchaser and the Seller wish to formalize their agreement
with respect to purchases of Conventional Home Improvement Loans under The
Master Agreement;
NOW THEREFORE, the Initial Purchaser and Seller hereby agree to amend the Master
Agreement as herein provided.
1. The first recital is hereby deleted in its entirety and the following
language is substituted:
"WHEREAS, the Seller desires to sell, from time to time, to the Initial
Purchaser, and the Initial Purchaser desires to purchase Loans, from time to
time, from the Seller, exclusive of the Excess Yield, as described herein on a
servicing-retained basis, and which shall be delivered in groups of whole loans
on various dates as provided herein (each a "Closing Date");"
2. The following shall be substituted in lieu of the word "loan" in the first
line of the definition of "Loan" in Section 1:
"FHA Loan and each Conventional Loan"
3. The following definitions are hereby added to Section 1:
"Conventional Loan: A home improvement loan which is not subject to an FHA
Insurance Contract."
"FHA Loan: A home improvement loan which is subject to an FHA Insurance
Contract."
<PAGE> 2
4. Section 1 is hereby amended by inserting the word "FHA" (a) before the word
"Loans" in the definition of "FHA Insurance Contract", (b) before the word
"Loan" in the definition of "FHA Insurance Proceeds" in and (c) before the word
"Loans" in the definition of "FHA Insurance Reserves".
5. The following subsections of Section 7.02 are hereby amended and restated in
their entirety as follows:
(ii) With respect to each FHA Loan, The amount and The original term to maturity
of the Loan comply with the FHA Regulations at the time of origination unless
the requirements with respect to such FHA Loan are specifically waived by HUD
with respect to such FHA Loan.
(iii) Each Loan was originated and underwritten by the Seller in accordance
with the underwriting criteria established by The Seller and, with respect to
FHA Loans, the FHA and HUD;
(iv) Each Loan (a)(i) is an FHA Title I property improvement loan (as defined in
24 CFR Section 201.2(aa)) underwritten by The Seller or an entity which at the
time of origination, was a lender approved by the NM for participation in the
programs under Tide I of the National Housing Act, in accordance with the 'MA
requirements for the Tide I loan program as set forth in 24 CFR Parts 201 and
202, and is the subject of FHA Insurance, (ii) was originated and underwritten
in accordance with applicable FHA requirements, and (iii) was made to provide
financing for eligible home improvements for a Residential Dwelling or (b)(i) is
a conventional home improvement loan underwritten by the Seller or an entity
acceptable to the Initial Purchaser and (ii) was made to provide financing for
home improvements for a Residential Dwelling.
(xx) The origination, collection and servicing practices used by the Seller with
respect to each Note and Mortgage have been in a respects legal, proper, prudent
and customary in the mortgage origination and servicing industry and, with
respect to each FHA Loan, have satisfied all FHA requirements. The Loan has been
serviced by the Seller and any predecessor servicer in accordance with the terms
of the Note;
(xxx) Each FHA Loan was originated and has been serviced in a manner such that
the FHA Loan will be eligible for the maximum amount of insurance made available
by the FHA pursuant to Title I of The National Housing Act (subject to the
aggregate limitation of the amount of FHA insurance available for The Seller),
without any right of offset, counterclaim or any other defense by the FHA. The
Seller has reported the origination of the FHA Loan to the FHA and has obtained
or shall obtain a case number for the FHA Loan from the FHA;
(xxxvi) With respect to each Loan originated by a dealer or contractor, the
Seller is in possession of the completion certificate for the related
improvement;
(xxxvii) Seller has or will cause an amount of FHA Insurance Reserves with
respect to FHA Loans equal to 10% of the outstanding principal balance of the
FHA Loans as of the related Cut-off Date to be transferred or approved for
transfer on or prior to the related Closing Date to the Purchaser's account
maintained by the FHA; and
(xxxviii) No FHA insurance premiums with respect to an FHA Loan are due and
unpaid, and all such premiums for subsequent periods shall be timely paid.
<PAGE> 3
6. In all other respects the Master Agreement shall remain in full force and
effect,
IN WITNESS WHEREOF, the Purchaser and the Seller have caused this Amendment to
be executed by their duly authorized representatives as of the date first above
written.
GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC.
By:
Name: Jay N. Levine
Title: Senior Vice President
MEGO MORTGAGE CORPORATION
By:
Name: Robert V. Bellacosa
Title: Vice President
<PAGE> 1
EXHIBIT 10.24
EMPLOYMENT AND NON-COMPETITION AGREEMENT
THIS AGREEMENT (the "Agreement") by and between MEGO MORTGAGE CORPORATION, a
Delaware corporation (the "Company"), with its principal office located at 210
Interstate North Parkway, Suite 250, Atlanta, Ga 30339 and JEFFREY S. MOORE (the
"Employee") shall become effective on the Effective Date, as hereinafter
defined.
BACKGROUND OF THE AGREEMENT
A. The Company is about to commence the business of originating, purchasing
and selling home improvement loans ("FHA Title I Loans") which are to be insured
under the United States Department of Housing and Urban Development provisions
of Title I, Section 2 of the National Housing Act, as amended.
B. The Employee has previously been acting as an officer of the Company to
assist it in its planning phase and to obtain the necessary approvals and
licenses to commence operations;
C. The Company desires to employ the Employee as its chief operating
officer under terms that are mutually acceptable to the parties hereto;
D. The Employee desires to be employed by the Company under the terms of
this Agreement.
AGREEMENT
The Company and the Employee (individually, a "Party", and collectively,
the "Parties"), in consideration of the promises and the mutual covenants herein
set forth, agree as follows:
1. Employment. The Company hereby employs the Employee, and the Employee
hereby accepts such employment, to serve as the chief operating officer of the
Company on the terms and conditions provided in this Agreement.
2. Duties and Performance. The Employee shall serve as the chief operating
officer of the Company, and shall perform such executive and administrative
services as are generally expected of a chief operating officer, or as may be
reasonably assigned to him from time to time by the board of directors of the
Company (the "Board"). The Employee agrees to devote his full time, attention,
energy and skill to the Company's
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business and good will.
3. Term. This Agreement shall commence on the 1st day of January, 1994 (the
"Effective Date"), and terminate on December, 1998, unless sooner terminated as
provided in this Agreement.
4. Compensation.
(a) The Company shall pay to the Employee, as compensation for his
services, a salary of $200,000 for each year of this Agreement (the "Base
Compensation"). The Base Compensation shall be payable in equal installments,
the frequency of which shall be determined by the Company, but in no event less
frequently than monthly. The Company shall withhold and pay over to the
appropriate governmental agency all payroll taxes (including income, social
security and unemployment compensation taxes) required by the federal, state and
local governments with jurisdiction over the Company.
(b) In addition to the Base Compensation, and subject to the
limitation contained in Paragraph 4 (d) below, on the first business day of each
March commencing with March, 1995, the Company shall pay to the Employee an
amount (the "Incentive Bonus") equal to one and one-half percent (1.50%) of the
Company's after tax income for the prior calendar year computed and based on the
financial statements of the Company for such calendar year prepared in
accordance with generally accepted accounting principles consistently applied;
provided that this Agreement was in force for the entire prior calendar year and
the Employee had performed the services to the Company required by this
Agreement during the entire prior calendar year; and further provided that the
Employee shall not be entitled to receive any Incentive Bonus for any calendar
year in which the Company did not attain pre-tax earnings, as determined by the
financial statements of the Company for such year prepared as set forth above,
of at least the amount set forth for such year in Schedule "A" attached hereto
and made a part hereof. It is understood and agreed that generally accepted
accounting principles for the Company's financial statements require, in
calculating net after tax income, a tax provision based on the statutory Federal
tax rate for corporations as well as provision for all applicable state income
taxes. If this Agreement had been terminated during the prior calendar year
other than for "cause", as hereinafter defined, or if the Employee failed for
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any reason to perform the services required hereunder for a portion of such
calendar year, then such amount of Incentive Bonus calculated and due under this
paragraph shall be prorated and paid only for that fraction of the calendar year
during which this Agreement was in force or during which the Employee performed
the services required by this Agreement. If this Agreement had been terminated
for "cause" during the prior calendar year, no Incentive Bonus for that year
shall be paid to the Employee, as more particularly set forth in Paragraph 5 (b)
of this Agreement.
(c) In addition to the Base Compensation and the Incentive Bonus, and
subject to the limitation contained in Paragraph 4 (d) below, the Employee shall
receive for each calendar year during the term of this Agreement, an amount
("the Deferred Compensation") equal to one percent (1.00%) of the amount of
"Gain on Sale", for sales of Title I Loans and other receivables, as shown on
the Company's financial statements prepared as set forth above in this Section
4, provided that this Agreement was in force for the entire prior calendar year
and the Employee had performed the services to the Company required by this
Agreement during the entire prior calendar year; and further provided that the
Employee shall not be entitled to receive any Deferred Compensation for any
calendar year that the Company has not attained pre-tax earnings of at least the
amount set forth for such year in Schedule "A" attached hereto and made a part
hereof. If this Agreement had been terminated during the prior calendar year
other than for "cause", as hereinafter defined, or if the Employee failed for
any reason to perform the services required hereunder for a portion of such
calendar year, then such amount of Deferred Compensation calculated and due
under this paragraph shall be prorated and paid only for that fraction of the
calendar year during which this Agreement was in force or during which the
Employee performed the services required by this Agreement. If this Agreement
had been terminated for "cause" during the prior calendar year, no Deferred
Compensation for that year shall be paid to the Employee as more particularly
set forth in Paragraph 5 (b) of this Agreement. The Deferred Compensation due
for any calendar year shall be payable in 48 equal install ment payments
commencing on March 1 of the following year. Installment payments of Deferred
Compensation due hereunder shall continue after the termination of this
<PAGE> 4
Agreement unless such termination shall be for "cause" as defined in this
agreement
(d) Notwithstanding anything herein to the contrary, in the event the
aggregate amount of Incentive Bonus and Deferred Compensation to be paid to
Employee in any calendar year exceeds the sum of $500,000, any excess over
$500,000 shall be payable to Employee only if approved by the Board of Directors
of the Company, whose decision to pay such amount or not shall be in the Board's
sole judgment and discretion.
(e) In addition to the compensation described in Paragraphs 4 (a), (b)
and (c) above, the Company has caused the Company's parent, Mego Financial Corp.
("Mego") to grant to the Employee an option under Mego's Key Employee Stock
Option Plan (the "Plan") for the purchase of 25,000 shares of Mego's Common
Stock at an option price of $2.50 per share. The Employee acknowledges that he
has been provided with and is familiar with the Plan.
(f) So long as Employee is performing his duties hereunder, Employee
shall receive a monthly automobile allowance at least equivalent to similar
allowances to senior executives of other Mego subsidiaries, but in no event less
than $500 per month.
(g) The Company will reimburse the Employee for moving expenses
reasonably incurred by Employee in moving Employee and his family from Oklahoma
City, Oklahoma to Atlanta Georgia, including real estate broker commissions in
connection with the sale of Employee's Oklahoma City residence, the closing
costs incurred in the sale of Employee's Oklahoma City residence and the closing
costs and mortgage closing costs and points incurred in the purchase of his
Atlanta residence, and an amount adequate to compensate Employee for the income
tax liability, if any, attributable to the receipt of the moving expenses and
other items set forth in this sub-paragraph for which Employee was or will be
unable to obtain an income tax deduction or receive a tax benefit; PROVIDED
HOWEVER that in no event shall the aggregate amount payable under this
subparagraph for moving expenses and other items, including but not limited to
the compensation for income taxes, exceed the sum of $28,000.
(h) To assist Employee in the purchase of a home in Atlanta, and
provided such monies are utilized to purchase
<PAGE> 5
and/or furnish such residence, at the request of Employee, the Company will lend
Employee an amount not to exceed the lesser of $32,000 or 10% of the purchase
price of the residence, for a period not to exceed five years, which amount
shall bear interest at the rate of 8% per annum. Such loan shall be secured by a
second mortgage lien on Employee's Atlanta residence, and at the Company's
option by a lien on and offset against any monies due from Company to Employee
other than his Base Compensation, except that upon termination of this agreement
any balance due on such loan can be offset against Base Compensation, as well as
any Incentive Bonus, Deferred Compensation or other monies due to Employee. The
loan shall be repaid in equal monthly installments based on a 15 year
amortization with a balloon payment due at the end of five years, upon sale of
the Employee's residence or upon termination of this agreement, whichever occurs
first.
(i) The Employee shall be entitled to three weeks of vacation time
each year.
(j) The Employee shall be entitled to such health, dental, medical,
disability, life and other insurance as is provided to other executives the
Company.
(k) In addition to the foregoing, the Employee will
be entitled to incur reasonable expenses for promoting the business of the
Company. The Company shall reimburse the Employee for all such reasonable
business expenses, including cost of travel, meals and lodging while traveling
and entertainment. In addition, if the Company has not made Employee a
participant in a corporate country club membership, the Company will reimburse
Employee for the cost of a membership in a suitable country club, approved by
the Company, with an initiation fee not to exceed $10,000 and dues not to exceed
$10,000 per year, to be utilized for the obtaining of business and entertaining
business connections.
5. Termination of Employment.
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(a) The Company may immediately terminate the Em ployee's employment
for "cause" upon giving written notice of such involuntary termination to the
Employee. "Cause" shall mean any one of the following acts of, or omissions by,
or actions of others relating to, the Employee, or the occurrence of the event
described in subparagraph (vii) below:
(i) Conviction of a felony, whether or not such conviction is
appealed.
(ii) Deliberate and premeditated acts against the best interests
of the Company;
(iii) Material breach of the terms of this Agreement;
(iv) The Employee is found guilty of or is en joined from
violation of any state or federal securities laws, state or federal laws
governing the business of the Company, or rules and regulations of any state or
federal agency regulating any of the business of the Company;
(v) Misappropriation of the Company's funds or property;
(vi) Habitual use of alcohol or drugs to a degree that such use
substantially interferes with Employee's performance of his duties.
(vii) The Company has failed to attain at least the amount of
pre-tax earnings set forth in Exhibit "A" for the second, third and fourth
calendar years following the Effective Date.
(b) In the event the Employee's employment shall be terminated for
"cause" prior to the expiration of the term of this agreement, the Employee
shall be entitled only to his Base Compensation prorated to the effective date
of such termination, less any unrepaid amounts borrowed from the Company, and
shall not be entitled to any accrued but unpaid Incentive Bonus, Deferred
Compensation or vacation time, except that Employee shall be entitled to receive
accrued but unpaid Deferred Compensation for years prior to the year of
termination if Employee is terminated for the "cause" set forth in Paragraph 5
(a) (vii) above.
(c) This Agreement shall terminate immediately upon the Employee's
death or total and permanent disability. For the purposes of this Agreement,
total and permanent disability shall mean the Employee's inability to adequately
perform his duties on behalf of the Company, as reasonably determined by the
Board, for a period of ninety (90) consecutive days due to an illness or injury.
In the event of such termination, the Employee shall be entitled to his Base
Compensation prorated
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to the end of the month of his death or the date of the determination of
Employee's total and permanent disability by the Board, and any Incentive Bonus,
Deferred Compensation and vacation time for the then current year shall be
prorated to the date of such termination, and paid at such times as are
otherwise provided herein.
6. Covenant Not to Compete. The following provisions shall hereinafter be
referred to as the "Covenant Not to Compete"):
(a) The Employee agrees that during the term of this Agreement and any
renewal thereof, and for a period of six months after the expiration or
termination of this Agreement with or without cause, the Employee will not
(except as an employee of, and on behalf of, the Company), in any capacity,
directly or indirectly:
(i) engage in a business involving activities similar to that of
the Company with respect to the purchase, origination or sale of FHA Title I
Loans within the continental United States.
(ii) take any action, directly or indirectly to invest in (other
than a non-controlling ownership of securities issued by publicly held
corporations), own, manage, operate, control, participate in, be employed or
engaged by or be connected in any manner with any partnership, corporation or
other business or entity engaging in a business involving activities similar to
that of the Company with respect to the purchase, origination or sale of FHA
Title I Loans within the continental United States.
(iii) solicit or encourage other employees or officers of the
Company to terminate their employment by the Company for any purpose whatsoever.
(b) The Employee acknowledges and agrees that:
(i) the foregoing restrictions as to time and area are reasonable
for the protection of the goodwill and business of the Company against
irreparable injury.
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(ii) the foregoing restrictions do not place an undue hardship on
the Employee.
(c) The Employee agrees that the Company will be irreparably damaged
by a breach of this Covenant Not to Compete and that damages at law will be an
insufficient remedy for the Company. The Employee also agrees that the Company
shall be entitled, upon application to a court of competent jurisdiction, to
obtain injunctive relief to enforce the provisions of this Covenant Not to
Compete, which injunctive relief shall be in addition to any other rights or
remedies available to the Company.
7. Confidentiality. The Employee recognizes and acknowledges that the
services which he will perform for the Company and the knowledge which he will
obtain of the Company's proprietary information such as trade secrets,
processes, business practices, strategic plans and financial data through his
close relationship with the Company, are confidential, proprietary and valuable
in nature. The Employee therefore agrees that, other than in the regular and
proper course of the business of the Company, he will not divulge to others or
use for his own benefit, or the benefit of any person, firm, corporation or
other entity, other than the Company, at any time during or subsequent to this
employment, any information obtained in the course of his employment, concerning
such proprietary information without first obtaining the Company's written
permission, unless such information has become public knowledge by a means other
than a breach of the provisions of this Agreement.
8. Modification. No change or modification of this Agreement shall be valid
unless made in writing and signed by both of the parties hereto.
9. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
10. Assignment Prohibited. This Agreement is personal to the parties hereto
and neither party may assign or transfer any rights or obligations under this
Agreement without the written consent of the other party.
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11. Entire Agreement. This Agreement incorporates the entire agreement
between the parties and supersedes all other prior or contemporaneous
agreements, negotiations or discussions between the Employee and the Company.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the 1st day of January, 1994.
CORPORATION:
MEGO MORTGAGE
CORPORATION
BY:
-----------------------------
Title:
EMPLOYEE:
-----------------------------
Jeffrey S. Moore
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EXHIBIT "A"
YEAR 1: $1,200,000
YEAR 2: $4,225,000
YEAR 3: $6,150,000
YEAR 4: $9,000,000
YEAR 5: $12,000,000
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Mego Mortgage
Corporation on Form S-1 of our report dated February 29, 1996 (October , 1996
as to the last paragraph of Note 2), appearing in the Prospectus, which is part
of this Registration Statement, and to the references to us under the headings
"Selected Financial Data" and "Experts" in such Prospectus.
Las Vegas, Nevada
October , 1996
The financial statements of Mego Mortgage Corporation referred to in this
consent retroactively reflect the effect of a sixteen-hundred-for-one stock
split of common stock which is to be effected before the effective date of this
Registration Statement. The above consent is in the form which will be signed by
Deloitte & Touche LLP upon consummation of such stock split, which is described
in Note 2 of Notes to Financial Statements, and assuming that, from February 29,
1996 to the date of such stock split, no other events shall have occurred that
would affect the financial statements and notes thereto.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
October 1, 1996
