<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14 1996
REGISTRATION NO. 333-12443
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MEGO MORTGAGE CORPORATION
(Name of Registrant as Specified in its Charter)
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<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)
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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>
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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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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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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 NOVEMBER 14, 1996
2,000,000 SHARES
MEGO MORTGAGE CORPORATION [LOGO]
COMMON STOCK
------------------------
All of the 2,000,000 shares of Common Stock offered hereby (the "Offering")
are being sold by Mego Mortgage Corporation (the "Company"). Mego Financial
Corp. ("Mego Financial") currently owns 100% of the outstanding Common Stock.
Upon completion of the Offering, Mego Financial will own approximately 83.3% of
the Company's outstanding Common Stock (approximately 81.3% if the Underwriters
exercise their over-allotment option in full). The sale of the Common Stock
offered hereby is contingent upon the completion of a concurrent offering by the
Company (the "Note Offering") of an aggregate of $40,000,000 of % Senior
Subordinated Notes due 2001.
Prior to the Offering, there has been no public trading market for the
Common Stock, and there can be no assurance that any active trading market will
develop. It is currently anticipated that the initial public offering price will
be between $11.00 and $13.00 per share. See "Underwriting" for information
relating to the factors to be considered in determining the initial public
offering price.
The Common Stock has been approved for quotation on The Nasdaq National
Market ("Nasdaq") under the symbol "MMGC."
SEE "RISK FACTORS" ON PAGES 8 THROUGH 18 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
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 DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share........................... $ $ $
Total(3)............................ $ $ $
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</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the Offering estimated at $675,000 payable by
the Company.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 300,000 additional shares of
Common Stock for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters when, as and if
delivered to and accepted by them, subject to their right to withdraw, cancel or
reject orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates representing the shares of Common Stock
will be made against payment on or about , 1996, at the office of
Oppenheimer & Co., Inc., Oppenheimer Tower, World Financial Center, New York,
New York 10281.
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OPPENHEIMER & CO., INC. FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1996
<PAGE> 3
MEGO MORTGAGE CORPORATION
MAP
MAP OF THE CONTINENTAL UNITED STATES SHOWING TOP SIX STATES, HEADQUARTERS AND
BRANCH OFFICES.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK 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> 4
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 (i) assumes no exercise of the Underwriters'
over-allotment option to purchase from the Company up to an additional 300,000
shares of Common Stock and (ii) 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. For the three
months ended August 31, 1996, such loans totalled $11.2 million and constituted
22.5% of the Company's total 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 14.03%.
The Company's loan originations increased to $139.4 million during the year
ended August 31, 1996 from $87.8 million during the year ended August 31, 1995
and $8.2 million during the six months in which it originated loans in the year
ended August 31, 1994. The Company's revenues increased to $25.0 million for the
year ended August 31, 1996 from $13.6 million for the year ended August 31, 1995
and $751,000 for the year ended August 31, 1994. For the year ended August 31,
1996, the Company had net income of $6.9 million compared to $3.6 million for
the year ended August 31, 1995. As a result of its substantial growth in 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.
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 $133.0 million and expects to sell a
substantial portion of its loan production through securitizations in the
future. At August 31, 1996, the Company serviced $209.5 million of loans it had
sold, and $4.7 million of loans it owned.
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
3
<PAGE> 5
terms. At August 31, 1996, the Company had developed a network of approximately
310 active Correspondents and approximately 435 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 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. See "Business -- Business Strategy."
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.
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
Offering, Mego Financial will own approximately 83.3% of the outstanding Common
Stock (approximately 81.3% if the Underwriters exercise their over-allotment
option in full). As a result of its ownership interest, upon completion of the
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 and other
obligations ("Intercompany Debt") to Mego Financial and its subsidiary Preferred
Equities Corporation ("PEC"). The amount of Intercompany Debt was $8.5 million
at August 31, 1995 and $12.8 million at August 31, 1996. The Company intends to
use a portion of the aggregate net proceeds from the Offering and the Note
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 PEC for the provision of management services and loan servicing
and an agreement with Mego Financial for tax sharing. See "Use of Proceeds" and
"Certain Transactions."
THE OFFERING
Common Stock offered by the
Company............................. 2,000,000 shares
Common Stock to be outstanding after
the Offering........................ 12,000,000 shares(1)
Use of proceeds..................... The Company intends to use the
aggregate net proceeds of the Offering
and the Note Offering to provide
capital to originate and securitize
loans, to repay Intercompany Debt and
to pay down the amounts outstanding
under the Company's lines of credit.
See "Use of Proceeds."
Proposed Nasdaq symbol.............. MMGC
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(1) Does not include 925,000 shares of Common Stock reserved for issuance upon
exercise of stock options to be granted under the Company's 1996 Employee
Stock Option Plan (the "Stock Option Plan"). See "Management -- Company
Stock Option Plan."
4
<PAGE> 6
RISK FACTORS
Investment in the Common Stock offered hereby involves a high degree of
risk. Each prospective investor should carefully consider all of the matters
described herein under "Risk Factors," including, among others, risks relating
to control by Mego Financial; risks relating to changes in interest rates; risks
relating to the Company's dependence on securitization transactions; the fact
that the Company has operated, and expects to continue to operate, on a negative
cash flow basis; risks relating to possible termination of servicing rights;
contingent risks including the risks relating to losses from loan delinquencies
and other loan defaults; risks relating to the Company's limited operating
history; risks inherent in the implementation of the Company's growth strategy;
risks relating to the Company's dependence on continued access to adequate
credit facilities; risks relating to the Note Offering; risks relating to the
Company's concentration of operations in California and Florida; legislative and
regulatory risks; risks relating to the Company's dependence on management, Mego
Financial and PEC; risks associated with competition; the fact that purchasers
of the Common Stock in the Offering will experience substantial dilution;
restrictions on dividends; the absence of a public market for the Common Stock;
and factors inhibiting a takeover of the Company.
CONCURRENT OFFERING OF SUBORDINATED NOTES
Concurrent with the Offering, the Company is offering $40.0 million
aggregate principal amount of % Senior Subordinated Notes due 2001 (the
"Notes") by a separate prospectus. The consummation of the Offering and the Note
Offering are conditioned upon each other. Upon the consummation of the Note
Offering, the Company will be significantly leveraged. As of August 31, 1996,
after giving effect to the Note Offering and application of the net proceeds
therefrom as described in "Use of Proceeds," the Company would have had
outstanding indebtedness of approximately $40.9 million. The Company will be
required to make scheduled payments of principal and interest regardless of the
Company's cash flow from operations. The Company's ability to make payments of
principal and interest on the Notes depends on its future operating performance
and its ability to obtain financing in the future. See "Description of Note
Offering."
5
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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 31,
---------------------------
1994(1) 1995 1996
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<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of loans........................................... $ 579 $12,233 $17,994
Net unrealized gain on mortgage related securities(2)........... -- -- 2,697
Loan servicing income........................................... -- 873 3,348
Interest income, net of interest expense of $107, $468 and
$1,116....................................................... 172 473 988
-------- ------- -------
Total revenues.................................................... 751 13,579 25,027
Total costs and expenses.......................................... 2,262 7,660 13,872
-------- ------- -------
Income (loss) before income taxes(3).............................. (1,511) 5,919 11,155
Income taxes(3)................................................... -- 2,277 4,235
-------- ------- -------
Net income (loss)................................................. $(1,511) $ 3,642 $ 6,920
======== ======= =======
Pro forma net income per share(4)................................. $ 0.60
=======
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 31, AS OF AUGUST 31, 1996
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1994(1) 1995 ACTUAL AS ADJUSTED(5)
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<S> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Loans held for sale, net.............................. $1,463 $ 3,676 $ 4,610 $ 4,610
Excess servicing rights............................... 904 14,483 12,121 12,121
Mortgage related securities(2)........................ -- -- 22,944 22,944
Total assets.......................................... 5,122 24,081 50,606 86,173
Total liabilities..................................... 983 13,300 32,905 46,827
Total stockholder's equity............................ 4,139 10,781 17,701 39,346
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------
1994(1) 1995 1996
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<S> <C> <C> <C>
OPERATING DATA:
Loans originated.............................................. $8,164 $87,751 $139,367
Weighted average interest rate on loans originated............ 14.18 % 14.55% 14.03%
Servicing portfolio (end of year):
Company-owned loans......................................... $1,471 $ 3,720 $ 4,698
Sold loans.................................................. 6,555 88,566 209,491
------ ------- --------
Total............................................... $8,026 $92,286 $214,189
====== ======= ========
Delinquency period(6):
31-60 days past due......................................... 2.06 % 2.58% 2.17%
61-90 days past due......................................... 0.48 0.73 0.85
91 days and over past due................................... 0.36 0.99 4.53(7)
91 days and over past due, net of claims filed(8)........... 0.26 0.61 1.94
Claims filed with HUD(9)...................................... 0.10 0.38 2.59
Amount of FHA insurance available (end of year)............... $ 813 $ 9,552 $ 21,205(10)
Amount of FHA insurance available as a percentage of loans
serviced (end of year)...................................... 10.13 % 10.35% 9.90%
Ratio of earnings to fixed charges(11)........................ N/A 7.69x 2.29x(12)
</TABLE>
6
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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) Shares used in computing pro forma net income per share include the
weighted average of common stock outstanding during the period. There were
no common stock equivalents. Historical per share data is not included
because the data is not considered relevant or indicative of the ongoing
operations of the Company. Net income utilized in the calculation of pro
forma net income per share has been reduced by an estimated pro forma
interest expense in the amount of $1,544,000 and a related tax benefit of
$587,000 based upon the application of a 13% interest rate to the Company's
average balance of non-interest bearing debt payable to Mego Financial. Pro
forma net income per share would change by $0.01 with a 1% change in the
interest rate utilized.
(5) As adjusted to give effect to (i) the sale of the shares of Common Stock
offered hereby (at an assumed initial public offering price of $12.00 per
share and after deducting underwriting discounts and estimated expenses of
the Offering), (ii) the sale of the Notes pursuant to the Note Offering
(after deducting underwriting discounts and estimated expenses of the Note
Offering) and (iii) the application of the estimated net proceeds from the
Offering and the Note Offering as described under "Use of Proceeds."
(6) 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.
(7) During fiscal 1996, the processing and payment of claims filed with HUD
were delayed. See "Business -- Loan Servicing."
(8) 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.
(9) 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.
(10) 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
$16,215,000, which as a percentage of loans serviced would have been 7.77%.
(11) Earnings include pretax income, the portion of rents representative of the
interest factor and interest on debt. Fixed charges include interest on
indebtedness, prepaid commitment fees and the portion of rents
representative of the interest factor.
(12) Ratio computed giving pro forma effect for the total additional interest
expense resulting from the proposed issuance by the Company of $40,000,000
of Notes at an assumed interest rate of 13% in lieu of the interest expense
recorded by the Company under its existing lines of credit intended to be
repaid with the proceeds of the Offering and the Note Offering.
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RISK FACTORS
Investment in the Common Stock 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 which involve risks and
uncertainties. 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.
CONTROL BY MAJORITY STOCKHOLDER
Upon completion of the 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' over-allotment
option is exercised 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 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
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" and "Description of Capital Stock."
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
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<PAGE> 10
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 years ended August 31, 1995 and 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
August 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.
CAPITALIZED EXCESS SERVICING RIGHTS AND VALUATION OF MORTGAGE RELATED SECURITIES
At August 31, 1996, the Company's statement of financial condition
reflected excess servicing rights of $12.1 million, mortgage related securities
of $22.9 million and mortgage servicing rights of $3.8 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 statement
of financial condition 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 statement of
financial condition at August 31, 1995 and 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 and unrealized gain on mortgage related securities will have been
overstated if prepayments or defaults are greater than anticipated.
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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 loan 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."
In order to provide availability under its warehouse line of credit, during
the years ended August 31, 1995 and 1996, the Company sold an aggregate of
approximately $175.8 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 $77.7 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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. Pursuant to these securitizations, pass-through
certificates evidencing interests in the pools of loans were sold in public
offerings. 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, the conformity of loan pools to
rating agency requirements and, to the extent that monoline insurance is used,
the requirements of
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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 -- NEGATIVE CASH FLOW
As a result of the substantial growth in 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 year ended August
31, 1996, the Company operated on a negative cash flow basis using $15.3 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 pooling and servicing agreements relating to 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 loans through securitizations to
the extent excess servicing distributions are required to be retained or applied
to reduce principal or cover interest shortfalls 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."
POSSIBLE TERMINATION OF SERVICING RIGHTS
The pooling and servicing agreements relating to the Company's
securitization transactions contain provisions with respect to the maximum
permitted loan delinquency rates and loan default rates, which, if exceeded,
would allow the termination of the Company's right to service the related loans.
At September 30, 1996, the default rates on the pool of loans sold in the March
1996 securitization transaction exceeded the permitted limit set forth in the
related pooling and servicing agreement. Accordingly, this condition could
result in the termination of the Company's servicing rights with respect to that
pool of loans by the trustee, the master servicer or the insurance company
providing credit enhancement for that transaction. The mortgage servicing rights
on this pool of loans were approximately $1.4 million at August 31, 1996.
Although the insurance company has indicated that it, and to its knowledge the
trustee and the master servicer, has no present intention to terminate the
Company's servicing rights, no assurance can be given that one or more of such
parties will not exercise its right to terminate. In the event of such
termination, there would be an adverse effect on the valuation of the Company's
mortgage servicing rights. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Possible Termination of
Servicing Rights."
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
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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 (if any).
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. Similarly, in connection with loan
securitizations, the residual certificates retained by the Company are
subordinated to the payment of scheduled principal and interest on the senior
certificates issued by the securitization trust. In the event that payments
received on the loans are insufficient to make scheduled payments of principal
and interest on the senior certificates, the amounts otherwise distributable
with respect to the residual certificates will be used to cover the shortfall,
thereby reducing the stream of revenues from such residual certificates.
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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Business -- Loan
Servicing -- Sale of Loans" and Note 2 of Notes to Financial Statements.
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, 95% 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 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.
As a percentage of the total serviced portfolio, the principal balance of
loans contractually past due 91 days or more has increased from 0.99% as of
August 31, 1995 to 4.53% as of August 31, 1996. This rise in delinquencies, all
of which pertain to the portfolio of Title I Loans, represents an expected
seasoning of the portfolio. This increase includes approximately 2.59% of the
serviced portfolio pursuant to which claims have been filed with HUD. As of
August 31, 1996, the Company had received payment on 83 claims filed with
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HUD aggregating $1.3 million. As of August 31, 1996, none of the Company's
Conventional Loans were more than 30 days contractually past due.
The Company began originating Conventional Loans through its Correspondents
in May 1996. For the three months ended August 31, 1996, such loans totalled
$11.2 million and constituted 22.5% of the Company's total loan originations.
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. The Company's Conventional Loan program provides for loan amounts up
to $60,000 with fixed rates of interest and terms up to 20 years. The proceeds
of these loans are utilized to pay for home improvements and for consolidation
of existing debt. The Company has focused on those borrowers who have
demonstrated excellent payment history on their existing credit. Heavier
reliance in the approval of these loans has been placed on the credit worthiness
of the borrowers as opposed to underlying collateral value of the properties.
The Company takes a lien, generally junior in priority, on each of the
properties, however on average the total debt to market value, including the
Company's loan, has been 110%.
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.
LIMITED OPERATING HISTORY
The Company began originating Title I Loans in March 1994 and began
offering Conventional Loans in May 1996. The Company's prospects must be
considered in light of the risks, delays, expenses and difficulties frequently
encountered in connection with an early-stage business in a highly-regulated,
competitive environment. No assurance can be given that the Company will
successfully implement any of its plans or develop its current operations in a
timely or effective manner or whether the Company will be able to continue to
generate significant revenues or operate profitably.
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. See "Business -- Business Strategy."
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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 or inability 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.
Furthermore, a downgrading of the insurer's credit rating or its withdrawal of
credit enhancement 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."
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 August
31, 1996, an aggregate of $3.3 million was outstanding under such line of credit
and $16.7 million was available for borrowing. In addition, at August 31, 1996,
the Company had a $10.0 million facility for the financing of excess servicing
rights and mortgage related securities, of which $10.0 million was outstanding
on that date. The revolving loan has an 18-month revolving credit period
expiring in December 1997, followed by a 30-month amortization period. 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. In November
1996, the Company entered into an agreement with the same financial institution
for the purchase of $2.0 billion of loans over a five-year period. The Company
has also received a commitment from the financial institution 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 Note 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. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 11 of Notes to Financial
Statements.
RISKS RELATED TO THE NOTE OFFERING
The ability of the Company to make payments of interest and principal on
the Notes will depend on the cash reserves and other liquid assets held by the
Company and any proceeds from any future financings. If the Company were unable
to make such payments, it would result in a default under the Indenture
governing the Notes (the "Indenture"), as well as a default under certain of the
Company's other agreements, which would have a material adverse effect on the
Company's financial condition. The Indenture also includes certain covenants
that, among other things, restrict: (i) the incurrence of indebtedness; (ii) the
creation of liens, other than certain permitted liens; (iii) consolidations,
mergers and the sale of assets; (iv) certain transactions with affiliates; (v)
the incurrence of indebtedness and issuance of preferred stock by subsidiaries;
(vi) the making of restricted payments (including restrictions on the payment of
dividends on the Common Stock); (vii) the
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imposition of certain distribution restrictions on subsidiaries; and (viii) the
making of guarantees by subsidiaries. If the Company does not comply with these
covenants, the holders of the Notes will be entitled, under certain
circumstances, to declare the Notes immediately due and payable, which would
have a material adverse effect on the Company's financial condition. In
addition, the Indenture provides that, upon certain events constituting a change
of control of the Company, the holders of the Notes would be entitled to require
the Company to repurchase up to all of the outstanding Notes, plus accrued and
unpaid interest, if any, to the date of repurchase. The Company's failure to
repurchase the Notes would result in a default under the Indenture, which would
have a material adverse effect on the Company's financial condition.
INCOME TAXES
The Company files a consolidated federal income tax return with its parent,
Mego Financial. Income taxes for the Company are provided for on a separate
return basis. As part of its former tax sharing arrangement, the Company
recorded a liability to Mego Financial for federal income taxes applied to the
Company's financial statement income after giving consideration to applicable
income tax law and statutory rates. Under a new tax sharing agreement with Mego
Financial, the Company will record a liability to Mego Financial calculated on a
separate company basis. The Company accounts for taxes under SFAS No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"), which requires an asset and
liability approach. The provision for income taxes includes deferred income
taxes, which result from reporting items of income and expense for financial
statement purposes in different accounting periods than for income tax purposes.
The Company also provides for state income taxes at the rate of 6% of income
before income taxes.
CONCENTRATION OF OPERATIONS
Approximately 36.2% of the dollar volume of the Company's servicing
portfolio at, and approximately 28.5% of the dollar volume of loans originated
by the Company during the year ended, August 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.
In addition, approximately 12.5% of the dollar volume of the Company's
servicing portfolio at, and approximately 15.0% of the dollar volume of loans
originated by the Company during the year ended, August 31, 1996 were secured by
properties located in Florida. As a result, the Company's results of operations
and financial condition are dependent upon general trends in the Florida economy
and its residential real estate market.
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 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
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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.
DEPENDENCE ON MANAGEMENT
Certain of the Company's loan agreements with financial institutions
contain provisions to the effect that if at least three of the four senior
members of management of the Company do not continue to hold such positions or
control the Company, whether due to death, disability, resignation or otherwise,
the lenders have the right to declare the loans in default. In addition, one of
such agreements also provides that the lender has the right to declare the loan
in default upon the death of, or any reduction of the management responsibility
of, more than one of these four senior managers. In such event, there is no
assurance that the lenders will consider replacement managers acceptable to them
and not declare such instruments in default. The Company has not entered into
employment agreements with any of such senior managers.
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
16
<PAGE> 18
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. According to a report issued by HUD, the Company was the fourth
largest lender of Title I Loans, based on volume of loans originated, for the
quarter ended June 30, 1996. Due to the variance in the estimates of the size of
the conventional home improvement loan market, the Company is unable to
accurately estimate its competitive position in that market.
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 are
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.
PORTION OF PROCEEDS TO BENEFIT MAJORITY STOCKHOLDER
The Company intends to use a portion of the aggregate net proceeds of the
Offering and the Note Offering to repay Intercompany Debt owed to Mego
Financial. See "Use of Proceeds."
DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in net book value per share of Common Stock from the public
offering price per share of Common Stock. See "Dilution."
NO DIVIDENDS
The Company has not paid any cash dividends to date and does not intend to
pay cash dividends in the foreseeable future. In addition, certain agreements to
which the Company is a party, including the Indenture, restrict the Company's
ability to pay dividends on the Common Stock. The Company intends to retain
earnings to finance the development and expansion of its business. See "Dividend
Policy."
ABSENCE OF PUBLIC MARKET; POSSIBLE FLUCTUATIONS OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market for the Common
Stock will develop or that, if developed, it will be sustained after the
Offering or that it will be possible to resell the shares of Common Stock at or
above the initial public offering price. The market price of the Common Stock
could be subject to significant fluctuations in response to the Company's
operating results and other factors. In addition, the stock 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 Common Stock. See "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Underwriting."
17
<PAGE> 19
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 12,000,000 shares
of Common Stock outstanding (12,300,000 shares if the over-allotment option
granted to the Underwriters is exercised in full). Of these shares, 2,000,000
shares (2,300,000 shares if the over-allotment option granted to the
Underwriters is exercised in full) will be freely tradeable without restriction
or registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless held by affiliates of the Company. All of the remaining 10,000,000
shares of Common Stock held by Mego Financial will be "restricted securities" as
that term is defined in Rule 144 promulgated under the Securities Act. All of
such shares will become eligible for sale under Rule 144 commencing 90 days
after the consummation of the Offering. Mego Financial has agreed not to sell
any such shares of Common Stock for 180 days from the date of this Prospectus
without the prior written consent of Oppenheimer & Co., Inc. and Friedman,
Billings, Ramsey & Co., Inc. on behalf of the Underwriters. See "Underwriting."
Additionally, upon consummation of the Offering, 925,000 shares of Common Stock
will be reserved for issuance under the Company's Stock Option Plan. The Company
intends to register under the Securities Act all shares reserved for issuance
under its Stock Option Plan. Shares covered by such registration will be
eligible for resale in the public market, subject to Rule 144 limitations
applicable to affiliates. See "Management -- Company Stock Option Plan." Future
sales of substantial amounts of Common Stock in the public market, or the
availability of such shares for future sale, could impair the Company's ability
to raise capital through an offering of securities and may adversely affect the
then-prevailing market prices. See "Shares Eligible for Future Sale."
FACTORS INHIBITING TAKEOVER
As Mego Financial will continue to own in excess of 80% of the Common Stock
after the 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.
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby, based upon an assumed initial public offering price of $12.00
per share and after deducting underwriting discounts and estimated expenses of
the Offering, are estimated to be approximately $21.6 million ($25.0 million if
the Underwriters' over-allotment option is exercised in full). The net proceeds
to the Company from the Note Offering, after deducting underwriting discounts
and estimated expenses of the Note Offering, are estimated to be approximately
$37.6 million.
The Company currently intends to use approximately $12.8 million of the
aggregate net proceeds received by the Company from the Offering and the Note
Offering to repay Intercompany Debt which does not bear interest and is due on
demand and approximately $13.3 million to reduce the amounts outstanding under
the Company's warehouse and revolving lines of credit, which currently bear
interest at rates ranging from 1.0% to 2.0% over the prime rate and which expire
in August 1997 and December 1997, respectively. 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.
DIVIDEND POLICY
The Company has not paid any cash dividends to date. The Company intends to
retain any future earnings for the operation and expansion of its business and
does not currently anticipate paying cash dividends on the Common Stock in the
foreseeable future. Any future determination as to the payment of such cash
dividends would depend upon a number of factors, including future earnings,
results of operations, capital requirements, the Company's financial condition
and any restrictions under credit agreements, including the Indenture, existing
from time to time, as well as such other factors as the Board of Directors might
deem relevant. No assurance can be given that the Company will pay any dividends
in the future.
19
<PAGE> 21
DILUTION
The net book value of the Company's Common Stock as of August 31, 1996 was
$17.7 million or approximately $1.77 per share. Net book value per share
represents the amount of the Company's stockholder's equity divided by
10,000,000 shares of Common Stock outstanding.
Net book value dilution per share represents the difference between the
amount per share paid by purchasers of shares of Common Stock in the Offering
and the pro forma net book value per share of Common Stock immediately after
completion of the Offering. After giving effect to the sale by the Company of
2,000,000 shares of Common Stock in the Offering at an assumed initial public
offering price of $12.00 per share and the application of the estimated net
proceeds therefrom, the pro forma net book value of the Company as of August 31,
1996 would have been $39.3 million or $3.28 per share. This represents an
immediate increase in net book value of $1.51 per share to the existing
stockholder and an immediate dilution in net book value of $8.72 per share to
purchasers of Common Stock in the Offering, as illustrated in the following
table.
<TABLE>
<S> <C> <C>
Assumed public offering price per share.................................. $ 12.00
Net book value per share as of August 31, 1996......................... $ 1.77
Increase per share attributable to new investors....................... 1.51
Pro forma net book value per share after the Offering.................... 3.28
--------
Net book value dilution per share to new investors....................... $ 8.72
========
</TABLE>
The following table sets forth as of August 31, 1996 the difference between
the existing stockholder and the purchasers of shares in the Offering with
respect to the number of shares purchased from the Company, the total
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholder.......... 10,000,000 83.3% $ 8,000,000 25.0% $ 0.80
New investors................. 2,000,000 16.7 24,000,000 75.0 12.00
---------- ----- --------- -----
Total............... 12,000,000 100.0% $32,000,000 100.0%
========== ===== ========= =====
</TABLE>
20
<PAGE> 22
CAPITALIZATION
The following table sets forth the capitalization of the Company at August
31, 1996, and as adjusted as of such date to give effect to (i) the sale of the
2,000,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $12.00 per share (after deducting underwriting discounts and
estimated expenses of the Offering), (ii) the sale of the Notes pursuant to the
Note Offering (after deducting underwriting discounts and estimated expenses of
the Note Offering) and (iii) the application of the net proceeds from the
Offering and the Note 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>
AUGUST 31, 1996
-------------------
AS
ACTUAL ADJUSTED
------- -------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Warehouse line of credit............................................... $ 3,265 $ --(1)
Revolving line of credit............................................... 10,000 --(1)
Other notes and contracts payable...................................... 932 932
% senior subordinated notes due 2001................................. -- 40,000
Intercompany debt...................................................... 12,813 --
------- -------
Total debt..................................................... 27,010 40,932
------- -------
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(2)..................................... 100 120
Additional paid-in capital............................................. 8,550 30,175
Retained earnings...................................................... 9,051 9,051
------- -------
Total stockholder's equity............................................. 17,701 39,346
------- -------
Total capitalization........................................... $44,711 $80,278
======= =======
</TABLE>
- ---------------
(1) The Company intends to use a portion of the net proceeds of the Offering and
the Note Offering to reduce the amounts outstanding under these lines of
credit. Such lines of credit may remain available for future use.
(2) Does not include 925,000 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. See "Management -- Company Stock
Option Plan," "Underwriting" and "Description of Capital Stock."
21
<PAGE> 23
PRO FORMA SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the year ended
August 31, 1996 on a pro forma basis to give effect to the estimated pro forma
interest expense of the Company's proposed offering of $40,000,000 of Notes at
an assumed interest rate of 13% in lieu of the interest expense recorded by the
Company under its existing notes and contracts payable without giving effect for
any earnings factor on funds not applied to pay off existing debt.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
AUGUST 31, 1996
-------------------
PRO
ACTUAL FORMA
------- -------
(IN THOUSANDS
EXCEPT PER SHARE
AMOUNT)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Interest income, net................................................... $ 988 $ 2,104
Other revenues......................................................... 24,039 24,039
------- -------
Total revenues................................................. 25,027 26,143
------- -------
Costs and expenses:
Other interest......................................................... 167 5,200
Other costs and expenses............................................... 13,705 13,705
------- -------
Total costs and expenses....................................... 13,872 18,905
------- -------
Income before income taxes............................................... 11,155 7,238
Income taxes............................................................. 4,235 2,750
------- -------
Net income............................................................... $ 6,920 $ 4,488
======= =======
Net income per share..................................................... $ 0.45
=======
</TABLE>
22
<PAGE> 24
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected Statement of Operations data and Statement of Financial
Condition data set forth below have been derived from the financial statements
of the Company. The financial statements as of and for the years ended August
31, 1994, 1995 and 1996 have been audited by Deloitte & Touche LLP, independent
auditors, and are included elsewhere in this Prospectus. 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.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------
1994(1) 1995 1996
------- ------- -------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of loans........................................... $ 579 $12,233 $17,994
Net unrealized gain on mortgage related securities(2)........... -- -- 2,697
Loan servicing income........................................... -- 873 3,348
Interest income, net of interest expense of $107, $468 and
$1,116....................................................... 172 473 988
------- ------- -------
Total revenues.......................................... 751 13,579 25,027
------- ------- -------
Costs and expenses:
Provision for credit losses..................................... 96 864 1,510
Depreciation and amortization................................... 136 403 394
Other interest.................................................. 22 187 167
General and administrative:
Payroll and benefits......................................... 975 3,611 5,031
Commissions and selling...................................... 13 552 2,013
Professional services........................................ -- 177 732
Servicing fees paid to affiliate............................. 13 232 709
Management services by affiliate............................. 442 690 671
FHA insurance................................................ 11 231 572
Other........................................................ 554 713 2,073
------- ------- -------
Total costs and expenses................................ 2,262 7,660 13,872
------- ------- -------
Income (loss) before income taxes(3).............................. (1,511) 5,919 11,155
Income taxes(3)................................................... -- 2,277 4,235
Net income (loss)................................................. $(1,511) $ 3,642 $ 6,920
======= ======= =======
Pro forma net income per share(4)................................. $ 0.60
=======
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 31, AS OF AUGUST 31, 1996
---------------- ------------------------
1994(1) 1995 ACTUAL AS ADJUSTED(5)
------ ------- ------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Loans held for sale, net.............................. $1,463 $ 3,676 $ 4,610 $ 4,610
Excess servicing rights............................... 904 14,483 12,121 12,121
Mortgage related securities(2)........................ -- -- 22,944 22,944
Total assets.......................................... 5,122 24,081 50,606 86,173
Total liabilities..................................... 983 13,300 32,905 46,827
Total stockholder's equity............................ 4,139 10,781 17,701 39,346
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------
1994(1) 1995 1996
------ ------- --------
<S> <C> <C> <C>
OPERATING DATA:
Loans originated......................................... $8,164 $87,751 $139,367
Weighted average interest rate on loans originated....... 14.18% 14.55% 14.03%
Servicing portfolio (end of year):
Company-owned loans.................................... $1,471 $ 3,720 $ 4,698
Sold loans............................................. 6,555 88,566 209,491
------ ------- -------
Total.......................................... $8,026 $92,286 $214,189
====== ======= =======
Delinquency period(6):
31-60 days past due.................................... 2.06% 2.58% 2.17%
61-90 days past due.................................... 0.48 0.73 0.85
91 days and over past due.............................. 0.36 0.99 4.53(7)
91 days and over past due, net of claims filed(8)...... 0.26 0.61 1.94
Claims filed with HUD(9)................................. 0.10 0.38 2.59
Amount of FHA insurance available (end of year).......... $ 813 $ 9,552 $ 21,205(10)
Amount of FHA insurance available as a percentage
of loans serviced (end of year)........................ 10.13% 10.35% 9.90%(10)
Ratio of earnings to fixed charges(11)................... N/A 7.69x 2.29x(12)
</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) Shares used in computing pro forma net income per share include the
weighted average of common stock outstanding during the period. There were
no common stock equivalents. Historical per share data is not included
because the data is not considered relevant or indicative of the ongoing
operations of the Company. Net income utilized in the calculation of pro
forma net income per share has been reduced by an estimated pro forma
interest expense in the amount of $1,544,000 and a related tax benefit of
$587,000 based upon the application of a 13% interest rate to the Company's
average balance of non-interest bearing debt payable to Mego Financial. Pro
forma net income per share would change by $0.01 with a 1% change in the
interest rate utilized.
(5) As adjusted to give effect to (i) the sale of the shares of Common Stock
offered hereby (at an assumed initial public offering price of $12.00 per
share and after deducting underwriting discounts and estimated expenses of
the Offering), (ii) the sale of the Notes pursuant to the Note Offering
(after deducting underwriting discounts and estimated expenses of the Note
Offering) and (iii) the application of the estimated net proceeds from the
Offering and the Note Offering as described under "Use of Proceeds."
(6) 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.
(7) During fiscal 1996, the processing and payment of claims filed with HUD
were delayed. See "Business -- Loan Servicing."
(8) 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.
(9) 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.
(10) 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
$16,215,000, which as a percentage of loans serviced would have been 7.77%.
(11) Earnings include pretax income, the portion of rents representative of the
interest factor and interest on debt. Fixed charges include interest on
indebtedness, prepaid commitment fees and the portion of rents
representative of the interest factor.
(12) Ratio computed giving pro forma effect for the total additional interest
expense resulting from the proposed issuance by the Company of $40,000,000
of Notes at an assumed interest rate of 13% in lieu of the interest expense
recorded by the Company under its existing lines of credit intended to be
repaid with the proceeds of the Offering and the Note Offering.
24
<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 years ended August 31, 1995 and 1996
include full years of 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. Certain 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 related
securities and loans held for sale. The gain on sale of mortgage related
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 residual interest
security. The fair value of the interest only strip and residual interest
security is the present value of the estimated cash flows to be received after
considering the effects of estimated prepayments and credit losses, net of FHA
insurance recoveries. 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 the excess cash flows 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. Although the Company believes that it has made
reasonable estimates of the fair value of the mortgage related securities, the
rate of prepayments and default rates utilized are estimates, and actual
experience may vary from its estimates.
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, net of FHA insurance recoveries, under recourse provisions
25
<PAGE> 27
of the sales agreements. The allowance for credit 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 and excess
servicing rights, the Company projects net cash flows 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 August 31, 1996, mortgage
servicing rights totaled $3.8 million, excess servicing rights totaled $12.1
million and mortgage related securities totaled $22.9 million.
There can be no assurance that the Company's estimates used to determine
the fair value of mortgage and excess 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 of the Company's mortgage and excess
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.
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, 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 provision for credit losses. PEC, a
wholly-owned subsidiary of Mego Financial, provides loan servicing and
management services to the Company the costs of which are charged to general and
administrative expenses. See "Certain Transactions" and Note 14 of Notes to
Financial Statements.
The Company continues to implement its business growth strategy through
both product line and geographic diversification and expansion of its
Correspondent and Dealer operations, in an effort to increase both loan
origination volume and servicing volume. See "Business -- Business Strategy."
Implementation of this strategy has increased the Company's total assets through
growth in excess servicing rights, mortgage servicing assets and mortgage
related securities and has been funded through increased borrowings. While this
growth has increased the Company's revenues through increased gain on sales of
loans, loan servicing income and net interest income, it has also increased the
general and administrative expense and provision for credit losses associated
with the growth in loans originated and serviced. Continued increases in the
Company's total assets and increasing earnings can continue only so long as
origination volumes continue to exceed paydowns of loans serviced and previous
period origination volumes. Additionally, the fair value of mortgage related
securities, mortgage servicing rights and excess servicing rights owned by the
Company may be adversely affected by changes in the interest rate environment
which could affect the discount rate and prepayment assumptions used to value
the assets. Any such adverse change in assumptions could have a material adverse
effect on the Company's results of operations and financial condition.
RESULTS OF OPERATIONS
Fiscal 1996 Compared to Fiscal 1995
The Company originated $139.4 million of loans during fiscal 1996 compared
to $87.8 million of loans during fiscal 1995, an increase of 58.8%. 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 August 31, 1996, the Company had approximately
310 active Correspondents and 435 active Dealers, compared to approximately 150
active Correspondents and 170 active Dealers at August 31, 1995. Of the $139.4
million of loans originated in fiscal 1996, $11.6 million were Conventional
Loans. The Company did not originate Conventional Loans in fiscal 1995.
26
<PAGE> 28
The following table sets forth certain data regarding loans originated by
the Company during fiscal 1995 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------------
1995 1996
--------------------- ----------------------
<S> <C> <C> <C> <C>
Principal amount of loans:
Correspondents:
Title I.................................... $63,792,680 72.7% $ 82,596,197 59.3%
Conventional............................... -- -- 11,582,108 8.3
----------- ----- ----------- -----
Total Correspondent................... 63,792,680 72.7 94,178,305 67.6
----------- ----- ----------- -----
Dealers -- Title I............................ 23,957,829 27.3 45,188,721 32.4
----------- ----- ----------- -----
Total................................. $87,750,509 100.0% $139,367,026 100.0%
=========== ===== =========== =====
Number of loans:
Correspondents:
Title I.................................... 3,437 59.1% 4,382 50.9%
Conventional............................... -- -- 392 4.6
----------- ----- ----------- -----
Total Correspondent................... 3,437 59.1 4,774 55.5
----------- ----- ----------- -----
Dealers -- Title I............................ 2,381 40.9 3,836 44.5
----------- ----- ----------- -----
Total................................. 5,818 100.0% 8,610 100.0%
=========== ===== =========== =====
</TABLE>
See Notes 2 and 5 of Notes to Financial Statements.
Total revenues increased 84.3% to $25.0 million for fiscal 1996 from $13.6
million for fiscal 1995. The increase was primarily the result of the increased
volume of loans originated and the sale of such loans. The following table sets
forth the principal balance of loans sold or securitized and related gain on
sale data for fiscal 1995 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST
31,
------------------
1995 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Principal amount of loans sold:
Title I................................................................. $85,363 $127,414
Conventional............................................................ -- 10,494
------- --------
Total........................................................... $85,363 $137,908
======= ========
Gain on sale of loans..................................................... $12,233 $ 17,994
Net unrealized gain on mortgage related securities........................ -- 2,697
------- --------
Gain on sale of loans and unrealized gain on mortgage related
securities.............................................................. $12,233 $ 20,691
======= ========
Gain on sale of loans as a percentage of principal balance of loans
sold.................................................................... 14.3% 13.0%
Gain on sale of loans and unrealized gain on mortgage related securities
as a percentage of principal balance of loans sold...................... 14.3% 15.0%
</TABLE>
See Note 2 of Notes to Financial Statements.
Loan servicing income increased 283.5% to $3.3 million for fiscal 1996 from
$873,000 for fiscal 1995. The increase was primarily the result of a 61.6%
increase in the amount of loan sale activity in fiscal 1996 with the servicing
rights retained by the Company, to $137.9 million for fiscal 1996 from $85.4
million for fiscal 1995.
Interest income on loans held for sale and mortgage related securities, net
of interest expense, increased 108.9% to $988,000 during fiscal 1996 from
$473,000 during fiscal 1995. The increase was primarily the result of the
increase in the average size of the portfolio of loans held for sale, and the
increased mortgage related securities portfolio.
27
<PAGE> 29
The Company intends to consider strategies to mitigate the interest rate
risks associated with the loan origination/warehousing function, funding its
portfolio of mortgage related securities, excess servicing rights, mortgage
servicing rights, and valuation of these assets. Implementation of interest rate
risk management strategies may decrease spreads, decrease gain on sale of loans,
or otherwise decrease revenues from that which might otherwise occur in a stable
interest rate environment without such strategies in place. The Company intends
to thoroughly analyze the cost of such strategies compared to the risks which
would be mitigated prior to implementation of any strategy.
The provision for credit losses increased 74.8% to $1.5 million for fiscal
1996 from $864,000 for fiscal 1995. The increase in the provision was directly
related to the increase in volume of loans originated in fiscal 1996 compared to
fiscal 1995. 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 estimated FHA
insurance recoveries on loans originated and sold. As the Company increases its
mix of Conventional Loan originations as compared to Title I Loan originations,
the provision for credit losses as a percentage of loans originated can be
expected to increase due to the increased credit risk associated with
Conventional Loans. Servicing costs on a per loan basis may also increase as
problem Conventional Loans may require greater costs to service.
Total general and administrative expenses increased 90.2% to $11.8 million
for fiscal 1996 from $6.2 million for fiscal 1995. The increase was primarily a
result of increased payroll related to the hiring of additional underwriting,
loan processing, administrative, 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.
Payroll and benefits expense increased 39.3% to $5.0 million for fiscal
1996 from $3.6 million for fiscal 1995. The number of employees increased from
105 as of fiscal year end 1995 to 170 as of fiscal year end 1996, due to
increased staff necessary to support the business expansion and improve quality
control.
Commissions and selling expenses increased 264.7% to $2.0 million for
fiscal 1996 from $552,000 for fiscal 1995 while loan originations increased by
$51.6 million from fiscal 1995 to 1996. The sales network expanded to
substantially all states, adding new personnel and offices to further the loan
origination growth strategy.
Professional services increased 313.6% to $732,000 for fiscal 1996 from
$177,000 for fiscal 1995 due primarily to increased audit and legal services and
consultation fees.
Servicing fees paid to affiliate increased 205.6% to $709,000 for fiscal
1996 from $232,000 for fiscal 1995. The increase was a result of the increase in
the size of the loan portfolio serviced by PEC. Management services by affiliate
decreased 2.9% to $671,000 for fiscal 1996 from $690,000 for fiscal 1995. These
expenses represent services provided by PEC, including executive, accounting,
legal, management information, data processing, human resources, advertising and
promotional materials. During fiscal 1995 and 1996, the Company incurred
interest expense to PEC of $5,000 and $29,000, respectively, which amounts were
included in other interest expense. During fiscal 1995 and 1996, the Company
paid PEC for developing certain computer programming, incurring costs of $36,000
and $56,000, respectively. See Note 14 of Notes to Financial Statements.
FHA insurance increased 147.6% to $572,000 for fiscal 1996 from $231,000
for fiscal 1995. The increase was primarily attributable to the increased volume
of loan originations and loans serviced.
Other general and administrative expenses increased 190.7% to $2.1 million
for fiscal 1996 from $713,000 for fiscal 1995 primarily due to increased
expenses related to expansion of facilities and increased communications
expense. The Company is enhancing its loan production systems. These
enhancements are expected to cost approximately $50,000 and will be funded from
the Company's normal operating cash flow. See "Business -- Loan Production
Technology Systems."
Income before income taxes increased 88.5% to $11.2 million for fiscal 1996
from $5.9 million for fiscal 1995.
28
<PAGE> 30
As a result of the foregoing, net income increased 90.0% to $6.9 million
for fiscal 1996 from $3.6 million for fiscal 1995.
Fiscal 1995 Compared to Fiscal 1994
The Company commenced originating loans in March 1994. Total revenues
increased 1,708.1% 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. The Company originated $87.8 million of
loans during fiscal 1995 compared to $8.2 million of loans during fiscal 1994,
an increase of 974.9%. 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 fiscal 1994 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------------
1994 1995
------------------ -------------------
<S> <C> <C> <C> <C>
Principal amount of loans:
Correspondents...................................... $5,251,647 64.3% $63,792,680 72.7%
Dealers............................................. 1,492,318 18.3 23,957,829 27.3
Bulk purchase....................................... 1,420,150 17.4 -- --
---------- ----- ----------- -----
Total....................................... $8,164,115 100.0% $87,750,509 100.0%
========== ===== =========== =====
Number of loans:
Correspondents...................................... 338 47.4% 3,437 59.1%
Dealers............................................. 164 23.0 2,381 40.9
Bulk purchase....................................... 211 29.6 -- --
---------- ----- ----------- -----
Total....................................... 713 100.0% 5,818 100.0%
========== ===== =========== =====
</TABLE>
The Company sold $85.4 million in principal balance of loans during fiscal
1995, recognizing a gain on sale of loans of $12.2 million. The Company sold
$6.6 million in principal balance 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 14.3% 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 6.2% 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%.
Loan servicing income was $873,000 during fiscal 1995. This income was the
result of the sale of $85.4 million 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.
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 growth in the size of the portfolio of loans held for sale of
151.3% to $3.7 million at August 31, 1995 from $1.5 million at August 31, 1994.
The provision for credit losses increased 800.0% to $864,000 for fiscal
1995 from $96,000 for fiscal 1994 due to increased loan originations. Provision
for credit losses relating to unsold loans is recorded as expense 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 estimated FHA insurance recoveries on
Title I Loans.
29
<PAGE> 31
Depreciation and amortization expense increased 196.3% to $403,000 for
fiscal 1995 from $136,000 for fiscal 1994 as a result of the purchase of
additional equipment, the expansion of the Company's facilities and additional
software development costs.
Other interest expense increased 750.0% to $187,000 for fiscal 1995 from
$22,000 for fiscal 1994 as a result of increased capitalized lease obligations.
Total general and administrative expenses increased 209.1% to $6.2 million
for fiscal 1995 from $2.0 million for fiscal 1994. The increase was primarily 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. Commissions and selling
expenses increased to $552,000 for fiscal 1995 from $13,000 for fiscal 1994 due
to the expansion of the sales network and facilities to support increased loan
origination growth. Included in general and administrative expenses were
servicing fees paid to PEC in the amount of $13,000 and $232,000 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. See Note 14 of
Notes to Financial Statements. FHA insurance expense increased to $231,000 for
fiscal 1995 from $11,000 for fiscal 1994 due to increased volume of Title I Loan
originations.
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
August 31, 1996 Compared to August 31, 1995
Cash decreased 41.1% to $443,000 at August 31, 1996 from $752,000 at August
31, 1995 primarily as a result of the timing of loan originations, sales, and
borrowings.
Restricted cash deposits increased 76.7% to $4.5 million at August 31, 1996
from $2.5 million at August 31, 1995 due to increased volume of loans serviced
for others pursuant to agreements which restrict a small percentage of cash
relative to the volume of loans serviced, as well as loan payments collected
from borrowers.
Loans held for sale, net increased 25.4% to $4.6 million at August 31, 1996
from $3.7 million at August 31, 1995 primarily as a result of increased loan
originations from $87.8 million for fiscal 1995 to $139.4 million for fiscal
1996, and the timing of loan sales.
Excess servicing rights decreased 16.3% to $12.1 million at August 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 fiscal 1996 securitizations as well as normal
amortization of such excess servicing rights. The excess cash flow created
through securitization which had been recognized as excess servicing rights on
loans reacquired and securitized are included in the cost basis of the mortgage
related securities.
Mortgage related securities were $22.9 million at August 31, 1996 as a
result of the Company's securitization transactions during fiscal 1996. There
was no corresponding asset at August 31, 1995. See Note 2 of Notes to Financial
Statements.
30
<PAGE> 32
Mortgage servicing rights increased 255.7% to $3.8 million at August 31,
1996 from $1.1 million at August 31, 1995 as a result of additional sales of
mortgage originations and the resulting increase in sales of loans serviced from
$85.4 million during fiscal 1995 to $137.9 million during fiscal 1996.
Property and equipment, net, increased 101.6% to $865,000 at August 31,
1996 from $429,000 at August 31, 1995 due to increased purchases of office
equipment related to facility expansion.
Notes and contracts payable increased 873.7% to $14.2 million at August 31,
1996 from $1.5 million at August 31, 1995 due to increased levels of mortgage
servicing rights and mortgage related securities created through loan
securitization which were available for financing to meet the Company's cash
requirements. The Company has a $10.0 million revolving facility for the
financing of mortgage related securities.
Accounts payable and accrued liabilities increased 81.6% to $4.1 million at
August 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 increased
slightly by 3.8% to $920,000 at August 31, 1996 from $886,000 at August 31,
1995. Loans sold with recourse which were reacquired and included in the 1996
securitizations decreased the need for this allowance while increased loan sales
increased the allowance requirements. Recourse to the Company on sales of loans
is governed by the agreements between the purchasers and the Company. The
allowance for credit losses on loans sold with recourse represents the Company's
estimate of its probable future credit losses to be incurred over the lives of
the loans considering estimated future FHA insurance recoveries on Title I
Loans. No allowance for credit losses on loans sold with recourse is established
on loans sold through securitizations, as the Company has no recourse obligation
under those securitization agreements. Estimated credit losses on loans sold
through securitizations are considered in the Company's valuation of its
residual interest securities.
Due to parent company increased 41.9% to $12.0 million at August 31, 1996
from $8.5 million at August 31, 1995. The increase was primarily attributable to
the increase in the federal tax provision owed to Mego Financial as a result of
the filing of a consolidated federal tax return.
Stockholder's equity increased 64.2% to $17.7 million at August 31, 1996
from $10.8 million at August 31, 1995 as a result of net income of $6.9 million
during fiscal 1996.
August 31, 1995 Compared to August 31, 1994
Cash decreased 8.7% to $752,000 at August 31, 1995 from $824,000 at August
31, 1994 primarily as a result of the timing of loan originations, sales and
borrowings.
Restricted cash deposits were $2.5 million at August 31, 1995 due to
activity on loans serviced for others pursuant to agreements which restrict a
small percentage of cash relative to the volume of loans serviced, as well as
loan payments collected from borrowers. There was no corresponding asset at
August 31, 1994.
Loans held for sale, net, increased 151.3% to $3.7 million at August 31,
1995 from $1.5 million at August 31, 1994 primarily as a result of timing of
loan sales and growth in loan originations.
Excess servicing rights increased 1,502.1% to $14.5 million at August 31,
1995 from $904,000 at August 31, 1994. 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 increase in excess servicing rights was primarily a
result of increases in loans sold with excess servicing rights.
Mortgage servicing rights were $1.1 million at August 31, 1995 as a result
of sales of loans which resulted in an increase in the principal balance of sold
loans serviced and implementation of SFAS No. 122. There was no corresponding
asset at August 31, 1994.
31
<PAGE> 33
Notes and contracts payable increased 128.9% to $1.5 million at August 31,
1995 from $637,000 at August 31, 1994 due to increased borrowings under the
Company's warehouse line of credit and the timing of loan sales.
Accounts payable and accrued liabilities increased 699.6% to $2.2 million
at August 31, 1995 from $280,000 at August 31, 1994, primarily as a result of
increases in accrued payroll, interest and other operational costs, due to
expansion and growth of the Company.
Allowances for credit losses and for loans sold with recourse increased to
$886,000 at August 31, 1995 from $66,000 at August 31, 1994, primarily due to
increased loans held for sale and loans sold under recourse provisions. Recourse
to the Company on sales of loans is governed by the agreements between the
purchasers and the Company. The allowance for credit losses on loans sold with
recourse represents the Company's estimate of its probable future credit losses
to be incurred over the lives of the loans, considering estimated future FHA
insurance recoveries on Title I Loans.
Due to parent company was $8.5 million at August 31, 1995. There was no
corresponding liability at August 31, 1994. Advances from Mego Financial plus
income tax provisions owed to Mego Financial were the primary components of this
liability. See Note 14 of Notes to Financial Statements.
Stockholder's equity increased 160.5% to $10.8 million at August 31, 1995
from $4.1 million at August 31, 1994 as a result of net income of $3.6 million
during fiscal 1995, compared to a net loss of $1.5 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash of $443,000 at August 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
years ended August 31, 1995 and 1996 was approximately $11.8 million and $15.3
million, respectively. This use was funded primarily from the reinvestment of
proceeds from the sale of loans in the secondary market totaling approximately
$85.0 million and $135.5 million for the years ended August 31, 1995 and 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 August 31, 1996, amounts on deposit in such
reserve accounts totaled $4.5 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 August 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
August 31, 1996, $3.3 million was outstanding under the Warehouse Line and $16.7
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 plus 50% of the Company's cumulative
32
<PAGE> 34
net income after May 1, 1996, and a minimum level of profitability of at least
$500,000 per rolling six month period. In addition, the Company had a $10.0
million revolving credit facility from the same lender, with respect to which
$10.0 million was outstanding on that date. This facility 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 statements of financial
condition, payable to the Company pursuant to its securitization agreements. 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 plus 50% of the Company's cumulative net income after May
1, 1996, 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 "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 $175.8
million in principal amount of loans had been sold at August 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 $77.7 million and $36.2 million, respectively, of the
Title I Loans in connection with its first two securitization transactions. In
September 1996, the Company entered into a repurchase agreement with the
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. In November 1996, the Company entered into an agreement with the same
financial institution, providing for the purchase of up to $2.0 billion of loans
over a five-year period. Pursuant to the agreement, Mego Financial issued to the
financial institution four-year warrants to purchase 1,000,000 shares of Mego
Financial's common stock at an exercise price of $7.125 per share. The agreement
also provides (i) that so long as the aggregate principal balance of loans
purchased by the financial institution and not resold to third parties exceeds
$100.0 million, the financial institution shall not be obligated to purchase,
and the Company shall not be obligated to sell, loans under the agreement and
(ii) that the percentage of conventional loans owned by the financial
institution at any one time and acquired pursuant to the agreement shall not
exceed 65% of the total amount of loans owned by the financial institution at
such time and acquired pursuant to the agreement. The value of the warrants,
estimated at $3.0 million (0.15% of the commitment amount) as of the commitment
date, will be charged to the Company and amortized as the commitment for the
purchase of loans is utilized. The financial institution has also committed to
provide the Company with a separate one-year facility of up to $11.0 million,
less any amounts
33
<PAGE> 35
advanced under the repurchase agreement, for the financing of the interest only
and residual certificates from future securitizations.
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 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 $48.8
million, respectively, of Title I Loans. The Company previously reacquired at
par $77.7 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
statement of financial condition), 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 fiscal 1995 and fiscal 1996, the Company used cash of $11.8 million
and $15.3 million, respectively, in operating activities. During fiscal 1995 and
fiscal 1996, the Company provided cash of $12.0 million and $15.6 million,
respectively, in financing activities. During fiscal 1995 and fiscal 1996, the
Company used cash of $274,000 and $637,000, 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 Note Offering will be sufficient to satisfy its contemplated
cash requirements for at least twelve months following the consummation of the
Offering.
POSSIBLE TERMINATION OF SERVICING RIGHTS
As described in Note 8 of Notes to Financial Statements, the pooling and
servicing agreements relating to the Company's securitization transactions
contain provisions with respect to the maximum permitted loan delinquency rates
and loan default rates, which, if exceeded, would allow the termination of the
Company's right to service the related loans. At September 30, 1996, the default
rates on the pool of loans sold in the March 1996 securitization transaction
exceeded the permitted limit set forth in the related pooling and servicing
agreement. Accordingly, this condition could result in the termination of the
Company's servicing rights with respect to that pool of loans by the trustee,
the master servicer or the insurance company providing credit enhancement for
that transaction. The mortgage servicing rights on this pool of loans were
approximately $1.4 million at August 31, 1996. Although the insurance company
has indicated that it has, and to its knowledge, the trustee and the master
servicer have, no present intention to terminate the Company's servicing rights,
no assurance can be given that one or more of such parties will not exercise its
right to terminate. In the event of such termination, there would be an adverse
effect on the valuation of the Company's mortgage servicing rights and the
results of operations in the amount of the mortgage servicing rights ($1.4
million before tax and $870,000 after tax at August 31, 1996) on the date of
termination. The Company has taken certain steps designed to reduce the default
rates on this pool of loans as well as its other loans. These steps include the
hiring of a divisional manager in charge of collection of delinquent loans, the
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hiring of additional personnel to collect delinquent accounts, the assignment of
additional personnel specifically assigned to the collection of this pool of
loans and the renegotiation of the terms of certain delinquent accounts in this
pool of loans within the guidelines promulgated by HUD.
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 held for sale 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 loss
exposure may be affected by changes in the national economy. See Note 4 of Notes
to Financial Statements.
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.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS No. 125") was issued by the FASB in
June 1996. SFAS No. 125 provides 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.
It 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, 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 statement will require that the Company's existing and
future excess servicing receivables be measured at fair market value and be
reclassified as interest only strip securities and accounted for in accordance
with SFAS No. 115. As required by the statement, the Company will adopt the new
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requirements effective January 1, 1997. It is not anticipated that upon
implementation, the statement will have any material impact on the financial
statements of the Company, as the book value of the Company's excess servicing
rights and mortgage related securities approximates fair value.
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.
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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. For the three months
ended August 31, 1996, such loans totalled $11.2 million which represents 22.5%
of the Company's total loan originations for that quarter.
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.
The Company quotes higher interest rates for those borrowers exhibiting a higher
degree of risk. The borrowers' credit standing and/or lack of collateral may
preclude them from obtaining alternative funding. For the year ended August 31,
1996, the loans originated by the Company had a weighted average interest rate
of 14.03%.
The credit evaluation methodology developed by Fair, Isaac and Company
takes into consideration a number of factors in the borrower's credit history.
These include, but are not limited to, (i) the length of time the borrower's
credit history has been on file with the respective credit reporting agency,
(ii) the number of open credit accounts, (iii) the amount of open revolving
credit availability, (iv) the payment history on the open credit accounts and
(v) the number of recent inquiries for the borrower's credit file which may
indicate additional open credit accounts not yet on file. Based on this
information Fair, Isaac and Company will assign a score to the borrower's credit
file which is updated periodically. Based on their statistical analysis, this
score will indicate the percentage of borrowers in that score range expected to
become 90 days delinquent on an additional loan. The score ascribed by Fair,
Isaac and Company weighs heavily in the Company's approval process; however its
effects, whether positive or negative, can be mitigated by the other factors
described above.
The Company's loan originations increased to $139.4 million during the
fiscal year ended August 31, 1996 from $87.8 million during the fiscal year
ended August 31, 1995 and $8.2 million during the six months in which it
originated loans in the fiscal year ended August 31, 1994. The Company's
revenues increased to $25.0 million for the year ended August 31, 1996 from
$13.6 million for the fiscal year ended August 31, 1995 and $751,000 for the
fiscal year ended August 31, 1994. For the year ended August 31, 1996, the
Company had net income of $6.9 million compared to $3.6 million for the year
ended August 31, 1995. As a result of the substantial growth in 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.
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 $133.0 million and expects to sell a
substantial portion of its loan production through securitizations in the
future. At August 31, 1996, the Company serviced $209.5 million of loans it had
sold, and $4.7 million of loans it owned.
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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 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
August 31, 1996, the Company had developed a nationwide network of approximately
310 active Correspondents and approximately 435 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
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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. Since
it commenced operations, the Company has originated Title I Loans from both its
Dealers and Correspondents. In May 1996, the Company broadened these activities
to include non-FHA insured home improvement loans and combination home
improvement and debt consolidation loans. To date, these non-FHA insured loans
have been originated solely through Correspondents. All of these loans, which
permit loan amounts up to $60,000 with fixed rates and 20-year maturities, are
secured by a lien, generally junior in priority, on the respective primary
residence. The Company intends to offer pure debt consolidation loans in the
first quarter of fiscal 1997. The Company also intends to offer non-FHA insured
loans through its Dealer division in the first quarter of 1997 and to make
direct debt consolidation loans to borrowers originated by the Dealer division
in conjunction with home improvement financing.
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.
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
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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.
The Company has focused its Conventional Loan program on that segment of
the marketplace with higher credit quality borrowers who may have limited equity
in their residence after giving effect to the amount of senior liens. The
portfolio of Conventional Loans generated through August 31, 1996 indicates on
average that the borrowers have received an A grade under the Company's
proprietary credit index profile, have an average debt-to-income ratio of 38%
and the subject properties are 100% owner occupied. On average, the market value
of the underlying property is $123,000 without added value from the respective
home improvement work, the amount of senior liens of $107,000 and the loan size
is $28,500. Typically, there is not enough equity in the property to cover a
junior lien in the event that a senior lender forecloses on the property. More
than 99% of the loans comprising the Company's Conventional Loan portfolio are
secured by junior liens.
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.
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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 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 August 31, 1996, the
Company had a network of approximately 310 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 211 loans with an aggregate remaining principal balance of $1.4
million.
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
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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 13 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, Woodbridge, Virginia and Bowie, Maryland 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 13 field representatives supervised by the Vice
President-National Marketing who are responsible for marketing to Dealers. At
August 31, 1996, the Company had a network of approximately 435 active Dealers
doing business in 32 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 pays its Correspondents premiums on the loans it purchases
based on the credit score of the borrower and the interest rate on the
respective loan. Additional premiums are paid to Correspondents based on the
volume of loans purchased from such Correspondents in a monthly period. During
fiscal 1996 the Company originated $94.2 million of loans from Correspondents
and paid total premiums of $2.8 million or 3.0% of such loans.
None of the Company's arrangements with its Dealers or Correspondents is on
an exclusive basis. Each relationship is documented by either a Dealer Purchase
Agreement or a Correspondent Purchase Agreement. Pursuant to a Dealer Purchase
Agreement, the Company may purchase from a Dealer loans that comply with the
Company's underwriting guidelines at a price acceptable to the Company. With
respect to each loan purchased, the Dealer makes customary representations and
warranties regarding, among other things, the credit history of the borrower,
the status of the loan and its lien priority if applicable, and agrees to
indemnify the Company with respect to such representations and warranties.
Pursuant to a Correspondent Purchase Agreement, the Company may purchase loans
through a Correspondent, subject to receipt of specified documentation. The
Correspondent makes customary representations and warranties regarding, among
other things, the Correspondent's corporate status, as well as regulatory
compliance, good title, enforceability and payments and advances of the loans to
be purchased. The Correspondent covenants to, among other things, keep Company
information confidential, provide supplementary information, maintain government
approvals with respect to Title I Loans and to refrain from certain
solicitations of the Company's borrowers. The Correspondent also agrees to
indemnify the Company for misrepresentations or non-performance of its
obligations.
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.
42
<PAGE> 44
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,
-----------------------------------------------------------------
1994 1995 1996
------------------ ------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Total Loan Applications:
Number processed....................................... 3,512 27,608 42,236
Number approved........................................ 1,984 15,956 20,910
Approval ratio......................................... 56.5% 57.8% 49.5%
Loan Originations:
Principal balance of loans:
Correspondents:
Title I.............................................. $5,251,647 64.3% $63,792,680 72.7% $ 82,596,197 59.3%
Conventional......................................... -- -- -- -- 11,582,108 8.3
---------- ----- ----------- ----- ------------ -----
Total Correspondents............................. 5,251,647 64.3 63,792,680 72.7 94,178,305 67.6
---------- ----- ----------- ----- ------------ -----
Dealers................................................ 1,492,318 18.3 23,957,829 27.3 45,188,721 32.4
Bulk purchase.......................................... 1,420,150 17.4 -- -- -- --
---------- ----- ----------- ----- ------------ -----
Total............................................ $8,164,115 100.0% $87,750,509 100.0% $139,367,026 100.0%
========== ===== =========== ===== ============ =====
Number of Loans:
Correspondents:
Title I.............................................. 338 47.4% 3,437 59.1% 4,382 50.9%
Conventional......................................... -- -- -- -- 392 4.6
---------- ----- ----------- ----- ------------ -----
Total Correspondents............................. 338 47.4 3,437 59.1 4,774 55.5
---------- ----- ----------- ----- ------------ -----
Dealers................................................ 164 23.0 2,381 40.9 3,836 44.5
Bulk purchase.......................................... 211 29.6 -- -- -- --
---------- ----- ----------- ----- ------------ -----
Total............................................ 713 100.0% 5,818 100.0% 8,610 100.0%
========== ===== =========== ===== ============ =====
Average principal balance of loans..................... $ 11,430 $ 15,083 $ 16,187
Weighted average interest rate on loans originated..... 14.18% 14.55% 14.03%
Weighted average term of loans originated (months)..... 175 188 198
</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, 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 under-
43
<PAGE> 45
writer'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 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
44
<PAGE> 46
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.
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
45
<PAGE> 47
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. These enhancements to improve loan production systems
are expected to cost approximately $50,000 and will be funded from the Company's
normal operating cash flows.
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 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.
46
<PAGE> 48
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 (120 days under California law) 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 $3.3 million for the years ended
August 31, 1995 and 1996, respectively, constituting 6.4% and 13.4%,
respectively, of the Company's total revenues in such periods. As of August 31,
1996, the Company had increased the size of the loan portfolio it services to
approximately $214.2 million from approximately $92.3 million as of August 31,
1995, an increase of approximately $121.9 million or 132.1%. The Company's loan
servicing portfolio is subject to reduction by normal amortization, prepayment
of outstanding loans and defaults.
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<PAGE> 49
The following table sets forth certain information regarding the Company's
loan servicing for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------
1994(1) 1995 1996
------ ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Servicing portfolio at beginning of year................ $ -- $ 8,026 $ 92,286
Additions to servicing portfolio........................ 8,164 87,751 139,367
Reductions in servicing portfolio(2).................... 138 3,491 17,464
------ ------- --------
Servicing portfolio at end of year...................... $8,026 $92,286 $214,189
====== ======= ========
Servicing portfolio (end of year):
Company-owned loans................................... 1,471 3,720 4,698
Sold loans............................................ 6,555 88,566 209,491
------ ------- --------
Total......................................... $8,026 $92,286 $214,189
====== ======= ========
</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,
------------------------------------
1994(1) 1995 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Delinquency period(2)
31-60 days past due................................... 2.06% 2.58% 2.17%
61-90 days past due................................... 0.48 0.73 0.85
91 days and over past due............................. 0.36 0.99 4.53(3)
91 days and over past due, net of claims filed(4)..... 0.26 0.61 1.94
Claims filed with HUD(5)................................ 0.10 0.38 2.59%
Number of Title I insurance claims...................... 1 23 255
Total servicing portfolio at end of period.............. $8,026 $ 92,286 $ 214,189
Amount of FHA insurance available....................... 813 9,552 21,205(6)
Amount of FHA insurance available as a percentage of
loans serviced (end of year).......................... 10.13% 10.35% 9.90%(6)
Losses on liquidated loans(7)........................... $ -- $ 16.8 $ 32.0
</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 year ended August 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 $16,215,000, which as a
percentage of loans serviced would have been 7.77%.
(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
48
<PAGE> 50
liquidated Title I Loans related to 83 of the 338 Title I insurance claims
made by the Company since commencing operations through August 31, 1996.
Losses on liquidated loans will increase as the balance of 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 96.87% 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. To date, the purchasers in
whole loan sales have been two banks and another financial institution.
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,
-----------------------------------
1994(1) 1995 1996
------ ------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Principal amount of loans sold to third party
purchasers........................................ $6,555 $85,363 $137,908(2)
Gain on sales of loans to third party purchasers.... 579 12,233 17,994
Net unrealized gain on mortgage related
securities........................................ -- -- 2,697
Weighted average stated interest rate on loans sold
to third party purchasers......................... 14.15% 14.53% 14.09%
Weighted average pass-through interest rate on loans
sold to third party purchasers.................... 8.54 8.36 7.50
Weighted average excess spread retained on loans
sold.............................................. 5.61 6.17 6.59
</TABLE>
--------------------
(1) The Company commenced originating loans in March 1994.
(2) Includes $10.5 million of Conventional Loans.
At August 31, 1995 and 1996, the Company's statement of financial condition
reflected excess servicing rights of approximately $14.5 million and $12.1
million, respectively. The Company also retains mortgage related securities
through securitization transactions. At August 31, 1996, the Company's statement
of financial condition reflected $22.9 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
49
<PAGE> 51
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 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 statement of financial condition at August 31, 1995 and 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 1996, the Company's statement of financial condition
reflected mortgage servicing rights of approximately $1.1 million and $3.8
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 years ended August 31, 1995
and 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 $48.8
million, respectively, of Title I Loans. The Company previously reacquired at
par $77.7 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
50
<PAGE> 52
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 $3.7 million and
$4.6 million as of August 31, 1995 and 1996, respectively. The Company's
interest income, net of interest expense was $473,000 and $988,000 for the years
ended August 31, 1995 and 1996, respectively.
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. According to
a report issued by HUD, the Company was the fourth largest lender of Title I
Loans, based on volume of loans originated, for the quarter ended June 30, 1996.
Due to the variance in the estimates of the size of the conventional home
improvement loan market, the Company is unable to accurately estimate its
competitive position in that market. 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 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,
51
<PAGE> 53
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."
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 August 31, 1996, the Company had 170 employees, including six
executive officers, 78 managerial and staff professional personnel, 13 marketing
and sales specialists and 73 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, Woodbridge, Virginia and Bowie, Maryland.
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.
52
<PAGE> 54
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
David A. Cleveland......................... 39 Vice President and Chief Accounting Officer
Robert Nederlander......................... 63 Director
Herbert B. Hirsch.......................... 60 Director
Don A. Mayerson............................ 69 Director
Spencer I. Browne.......................... 46 Director Nominee
Jeremy Wiesen.............................. 54 Director Nominee
</TABLE>
Jerome J. Cohen has been Chairman of the Board of the Company since April
1995 and Chief Executive Officer of the Company since June 1992. 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
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<PAGE> 55
its Manufacturer Funding Division and was responsible for the marketing of its
indirect home improvement loan programs to home improvement contractors.
David A. Cleveland has been Vice President and Chief Accounting Officer of
the Company since October 1996. Mr. Cleveland has been Chief Accounting Officer
of Mego Financial since October 1996. From June 1990 to July 1996, Mr. Cleveland
served as Senior Vice President and Controller of PriMerit Bank, a federal
savings bank. Mr. Cleveland does not currently serve on a full time basis in his
capacities with the Company.
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. Mr. Nederlander has been Chairman of the
Board of Riddell Sports Inc. since April 1988 and was Riddell Sports Inc.'s
Chief Executive Officer from April 1988 through March 1993. From February 1992
until June 1992, Mr. Nederlander was also Riddell Sports Inc.'s interim
President and Chief Operating Officer. Since November 1981, Mr. Nederlander has
been President and a Director of the Nederlander Organization, Inc., owner and
operator of one of the world's largest chains of legitimate theaters. He served
as the Managing General Partner of the New York Yankees from August 1990 until
December 1991, and has been a limited partner since 1973. Since October 1985,
Mr. Nederlander has been President of the Nederlander Television and Film
Productions, Inc.; Vice Chairman of the Board from February 1988 to early 1993
of Vacation Spa Resorts, Inc., an affiliate of Mego Financial; and Chairman of
the Board of Allis-Chalmers Corp. from May 1989 to 1993, when he became Vice
Chairman. In 1995, Mr. Nederlander became a director of HFS Incorporated. In
October 1996, Mr. Nederlander became a director of News Communications, Inc., a
publisher of community oriented free circulation newspapers. Mr. Nederlander was
a senior partner in the law firm of Nederlander, Dodge and Rollins in Detroit,
Michigan, from 1960 to 1989.
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.
Spencer I. Browne has been nominated and has agreed to become a Director of
the Company upon consummation of the Offering. For more than five years prior to
September 1996, Mr. Browne held various executive and management positions with
several publicly traded companies engaged in businesses related to the
residential and commercial mortgage loan industry. From August 1988 until
September 1996, Mr. Browne served as President, Chief Executive Officer and a
director of Asset Investors Corporation ("AIC"), a New York Stock Exchange
("NYSE") traded company he co-founded in 1986. He also served as President,
Chief Executive Officer and a director of Commercial Assets, Inc., an American
Stock Exchange traded company affiliated with AIC, from its formation in October
1993 until September 1996. In addition, from June 1990 until March 1996, Mr.
Browne served as President and a director of M.D.C. Holdings, Inc., an NYSE
traded company and the parent company of a major homebuilder in Colorado.
Jeremy Wiesen has been nominated and has agreed to become a Director of the
Company upon consummation of the Offering. Mr. Wiesen has been an Associate
Professor of Business Law and Accounting at the Leonard N. Stern School of
Business at New York University since 1972.
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.
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<PAGE> 56
Upon the effective date of the Registration Statement of which this
Prospectus forms a part, the Company will have an Audit Committee, Executive
Committee and Stock Option Committee. The following is a brief description of
the Company's committees and identification of the members thereof:
Audit Committee. The members of the Audit Committee will initially be
Robert Nederlander, Jeremy Wiesen and Spencer I. Browne. The Audit Committee's
functions include recommending to the Board the engagement of the Company's
independent certified public accountants, reviewing with the accountants the
plan and results of their audit of the Company's financial statements and
determining the independence of the accountants.
Executive Committee. The members of the Executive Committee will initially
be Jerome J. Cohen, Jeffrey S. Moore and Robert Nederlander. The Executive
Committee will have the authority to exercise all of the powers of the Board to
the extent permitted by the Delaware General Corporation Law.
Stock Option Committee. The members of the Stock Option Committee will
initially be Jeremy Wiesen and Spencer I. Browne. The Stock Option Committee
will have the authority to approve the grant of options under the Company's
Stock Option Plan to any employee of the Company who, on the last day of the
taxable year of the Company, is (i) the Chief Executive Officer of the Company
or who is acting in such capacity, (ii) among the four highest compensated
officers of the Company and its affiliates (other than the Chief Executive
Officer), or (iii) otherwise considered to be a "Covered Employee" within the
meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended.
Mego Financial and the Company have restated certain of their previously
issued financial statements, including certain financial statements upon which
their independent auditors had rendered unqualified opinions. See Note 16 of
Notes to Financial Statements. As a result of the restatement of Mego
Financial's financial statements and certain trading in Mego Financial's common
stock, the Commission has commenced a formal investigation to determine, among
other things, whether Mego Financial, and/or its officers and directors,
violated applicable federal securities laws in connection with the preparation
and filing of Mego Financial's previously issued financial statements or such
trading. Certain of such officers and directors are also officers and/or
directors of the Company. Possible penalties for violation of federal securities
laws include civil remedies, such as fines and injunctions, as well as criminal
sanctions. There can be no assurance that Mego Financial and/or its officers and
directors will not be found to have violated the federal securities laws or that
the Company will not be affected by the investigation or any sanction.
KEY EMPLOYEES
Robert Bellacosa -- Mr. Bellacosa, age 54, has served as Vice
President -- 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 -- 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 -- 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
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<PAGE> 57
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.
Yancy Lockie -- Mr. Lockie, age 33, has served as Vice President -- 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 -- 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"). As of
August 31, 1996, no stock options had been granted or were outstanding.
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 $ -- $ 5,400 25,000 $ --
President and Chief 1995 200,003 -- 13,963 -- --
Operating Officer 1996 200,003 86,084 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."
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
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<PAGE> 58
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 Offering, 925,000 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.
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<PAGE> 59
The following table sets forth information with respect to options to be
granted under the Plan upon consummation of the Offering to (i) each Named
Officer and (ii) each director and nominee for director. All of the options are
incentive stock options (other than the options being granted to Spencer I.
Browne and Jeremy Wiesen), are being granted with an exercise price equal to the
offering price, are subject to the consummation of the Offering and are being
granted in 1996.
<TABLE>
<CAPTION>
NAME OF GRANTEE NUMBER OF SHARES
- ----------------------------------------------------------------------------- ----------------
<S> <C>
Robert Nederlander........................................................... 25,000
Jerome J. Cohen.............................................................. 100,000
Jeffrey S. Moore............................................................. 300,000
James L. Belter.............................................................. 100,000
Herbert B. Hirsch............................................................ 25,000
Don A. Mayerson.............................................................. 25,000
Michael G. Ebinger........................................................... 50,000
Spencer I. Browne............................................................ 25,000
Jeremy Wiesen................................................................ 25,000
----------------
Total.............................................................. 675,000
=============
</TABLE>
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 Offering, Mego Financial will own
approximately 83.3% of the issued and outstanding Common Stock of the Company
(approximately 81.3% if the Underwriters' over-allotment option is exercised 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 and director nominee of the Company, (iii) each of the Named
Executive Officers and (iv) all directors, director nominees and executive
officers of the Company as a group. Unless otherwise noted, the
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<PAGE> 60
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
-------------------
AMOUNT AND NATURE OF BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP OFFERING OFFERING
- ----------------------------------------------------------- -------------------- -------- --------
<S> <C> <C> <C>
Robert Nederlander(2)...................................... 2,133,697 11.4% 9.5%
Eugene I. Schuster and Growth Realty Inc. ("GRI")(3)....... 1,933,634 10.4 8.7
Jerome J. Cohen(4)......................................... 1,127,823 6.1 5.1
Jeffrey S. Moore(5)........................................ 15,000 * *
James L. Belter(6)......................................... 9,000 * *
Michael G. Ebinger(7)...................................... 3,000 * *
Herbert B. Hirsch(8)....................................... 1,699,623 9.1 7.6
Don A. Mayerson(9)......................................... 824,414 4.4 3.7
Spencer I. Browne(10)...................................... 10,000 * *
Jeremy Wiesen(11).......................................... -- -- --
All executive officers and directors of the Company as a
group
(9 persons)(12).......................................... 5,822,557 30.2 25.2
</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 21,000
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.
(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
21,000 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 15,000
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 9,000
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 21,000 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
59
<PAGE> 61
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
21,000 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) 1660 Holly Street, Denver, Colorado 80220.
(11) 254 East 68th Street, New York, New York 10021.
(12) See Notes (2)-(11).
CERTAIN TRANSACTIONS
The Company has entered into the following transactions with its affiliates
in the past three years. The Company believes that each of these transactions is
on terms at least as favorable to the Company as those which could have been
negotiated with an unaffiliated third party.
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 and Mego Financial will enter into a
tax allocation and indemnity agreement. Under that agreement, for periods ending
after the Offering, the tax liability of the Company will be allocated pursuant
to a method that would impose on the Company liability for an amount that
corresponds to the liability that the Company would incur if it filed a separate
tax return. In addition, the agreement provides that the Company and Mego
Financial each will indemnify the other under certain circumstances.
MANAGEMENT AGREEMENT WITH PEC
The Company and PEC were parties to a management services arrangement (the
"Management Arrangement") pursuant to which certain executive, accounting,
legal, management information, data processing, human resources, advertising and
promotional personnel of PEC provide services to the Company on an as needed
basis. The Management Arrangement provided 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 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. In addition, during the years ended
August 31, 1994, 1995 and 1996, the Company paid PEC for developing certain
computer programming, incurring costs of $130,000, $36,000 and $56,000,
respectively.
The Company has entered into a formal management agreement with PEC,
effective as of September 1, 1996, pursuant to which PEC has agreed to provide
the following services to the Company for an aggregate annual fee of
approximately $967,000 payable monthly: strategic planning, management and tax;
accounting and finance; legal; management information systems; insurance
management; human resources; and purchasing. Either party has the right to
terminate all or any of these services upon 90 days' notice with a corresponding
reduction in fees.
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<PAGE> 62
SERVICING AGREEMENT WITH PEC
The Company had an arrangement with PEC pursuant to which it paid 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 $13,000, $232,000 and $709,000, respectively. The Company has entered
into a servicing agreement with PEC, effective as of September 1, 1996,
providing for the payment of servicing fees of 50 basis points of the principal
balance of loans serviced per year. For the years ended August 31, 1995 and
1996, the Company incurred interest expense in the amount of $85,000 and
$29,000, respectively, related to fees payable to PEC for these services. The
interest rates were based on PEC's average cost of funds and equalled 11.8% in
1995 and 10.68% in 1996.
FUNDING AND GUARANTEES BY MEGO FINANCIAL
In order to fund the Company's past operations and growth, and in
conjunction with filing consolidated returns, the Company incurred Intercompany
Debt to Mego Financial. For the years ended August 31, 1995 and 1996, the amount
of Intercompany Debt owed to Mego Financial was $8.5 million and $12.0 million,
respectively. Mego Financial has guaranteed the Company's obligations under the
Warehouse Line, the Revolving Loan and the Company's new office lease. Such
guarantees currently extend for the term of the loans and the lease. The Company
has not paid any compensation to Mego Financial for such guarantees.
It is not anticipated that Mego Financial will continue to provide funds to
the Company or guarantee the Company's indebtedness or other obligations
following consummation of the Offering.
DESCRIPTION OF NOTE OFFERING
Concurrent with the Offering, the Company is offering the Notes by a
separate prospectus pursuant to the Note Offering. The following summary of the
principal terms of the Notes does not purport to be complete and is qualified in
its entirety by reference to all of the provisions of the Indenture governing
the Notes and the Notes, copies of which will be filed as exhibits to the
Registration Statement governing the Notes. Capitalized terms not otherwise
defined herein have the meanings specified in the Indenture.
The Notes will be limited in aggregate principal amount to $40.0 million
and will mature on , 2001. The Notes will be general unsecured
obligations of the Company, subordinated in right of payment to all Senior
Indebtedness of the Company. Interest on the Notes will accrue at a rate of
% per year and will be payable in cash semi-annually on and
of each year, commencing , 1997.
Upon the occurrence of a Change of Control (as defined in the Indenture),
each holder of Notes will have the right to require that the Company repurchase
all or a portion of such holder's Notes at a purchase price in cash equal to %
of the principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase.
The Indenture governing the Notes will contain certain covenants, including
limitations on the incurrence of indebtedness, the incurrence of indebtedness
and issuance of preferred stock by subsidiaries, the making of restricted
payments (including restrictions on the payment of dividends on the Common
Stock), the imposition of certain distribution restrictions on subsidiaries,
transactions with affiliates, the existence of liens, the making of guarantees
by subsidiaries, mergers and sales of assets.
The Offering is conditioned upon the consummation of the Note Offering.
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<PAGE> 63
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, $.01 par value, and 5,000,000 shares of Preferred Stock, par value
$.01 per share. No shares of Preferred Stock have been issued to date. The
following brief description of the Company's capital stock does not purport to
be complete and is subject in all respects to applicable law and the provisions
of the Company's Certificate of Incorporation and Bylaws, copies of which have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voted for the election of directors can
elect all of the directors. The holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share ratably in
all assets remaining available for distribution to them after payment of
liabilities and after provision has been made for each class of stock, if any,
having preference over the Common Stock.
Upon completion of the Offering, the Company's existing sole stockholder
will beneficially own approximately 83.3% of the outstanding shares of Common
Stock (approximately 81.3% if the Underwriters' over-allotment option is
exercised in full) and will therefore be able to elect the entire Board of
Directors and control all matters submitted to stockholders for a vote.
During the Eighty Percent Period, no additional shares of Common Stock may
be issued that would reduce Mego Financial's ownership interest in the Common
Stock below 80% of the issued and outstanding shares of Common Stock without
Mego Financial's written approval, and no shares of any other class of capital
stock may be issued without Mego Financial's written approval. The shares of
Common Stock offered hereby will be, when issued and paid for, fully paid and
non-assessable.
PREFERRED STOCK
Although the Company has no present plans to issue shares of Preferred
Stock, Preferred Stock may be issued from time to time in one or more classes or
series with such designations, powers, preferences, rights, qualifications,
limitations and restrictions as may be fixed by the Company's Board of
Directors. The Board of Directors, without obtaining stockholder approval other
than written approval from Mego Financial during the Eighty Percent Period,
could issue the Preferred Stock with voting and/or conversion rights and thereby
dilute the voting power and equity of the holders of Common Stock and adversely
effect the market price of such stock. The issuance of Preferred Stock could
also be used as an antitakeover measure by the Company without any further
action by the stockholders.
PAYMENT OF DIVIDENDS
The Company has never paid any cash dividends on its capital stock. The
Company intends to retain all of its future earnings to finance its operations
and does not anticipate paying cash dividends in the foreseeable future. In
addition, certain agreements to which the Company is a party, including the
Indenture, restrict the Company's ability to pay dividends on the Common Stock.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the Company's outstanding voting stock) from engaging in a "business
combination"
62
<PAGE> 64
(as defined in Section 203) with the Company for three years following the date
that person became an interested stockholder unless: (i) before that person
became an interested stockholder, the Board approved the transaction in which
the interested stockholder became an interested stockholder or approved the
business combination; (ii) upon completion of the transaction that resulted in
the interested stockholders becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the Company outstanding at
the time the transaction commenced (excluding stock held by directors who are
also officers of the Company and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer); or (iii) on or
following the date on which that person became an interested stockholder, the
business combination is approved by the Company's Board and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least
66 2/3% of the outstanding voting stock of the Company not owned by the
interested stockholder.
Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who was not an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the Company's directors, if that extraordinary transaction is approved or not
opposed by a majority of the directors (but not less than one) who were
directors before any person became an interested stockholder in the previous
three years or who were recommended for election or elected to succeed such
directors by a majority of such directors then in office.
Pursuant to Section 162 of the Delaware General Corporation Law, the Board
of Directors of the Company can, without stockholder approval, issue shares of
capital stock, which may have the effect of delaying, deferring or preventing a
change of control of the Company. Other than pursuant to the Offering, the
Company has no plan or arrangement for the issuance of any shares of capital
stock other than in the ordinary course pursuant to the Stock Option Plan.
CERTAIN CHARTER AND BYLAW PROVISIONS
The Company's Certificate of Incorporation contains certain provisions that
could discourage potential takeover attempts and make more difficult attempts by
stockholders to change management. The Company's 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 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 Certificate of Incorporation and Bylaws
provide (i) that special meetings of 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.
The Certificate of Incorporation permits the Board of Directors to create
new directorships and the Company's Bylaws permit the Board of Directors to
elect new directors to serve the full term of the class of directors in which
the new directorship was created. The Bylaws also provide that the Board of
Directors (or its remaining members, even though less than a quorum) is
empowered to fill vacancies on the Board of Directors occurring for any reason
for the remainder of the terms of the class of directors in which the vacancy
occurred.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock will be American
Stock Transfer & Trust Company.
63
<PAGE> 65
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 12,000,000 shares
of Common Stock outstanding (12,300,000 shares if the Underwriters'
over-allotment option is exercised in full). Of those shares, the 2,000,000
shares sold in the Offering (2,300,000 shares if the Underwriters'
over-allotment option is exercised in full) will be freely transferable without
restriction or registration under the Act, unless purchased by persons deemed to
be "affiliates" of the Company (as that term is defined under the Act). The
remaining 10,000,000 shares of Common Stock to be outstanding immediately
following the Offering ("restricted shares") may only be sold in the public
market if such shares are registered under the Act or sold in accordance with
Rule 144 promulgated under the Act.
In general, under Rule 144 a person (or persons whose shares are
aggregated) including an affiliate, who has beneficially owned his shares for
two years, may sell in the open market within any three-month period a number of
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of the Company's Common Stock (approximately 120,000 shares immediately after
the Offering, 123,000 shares if the over-allotment option is exercised in full)
or (ii) the average weekly trading volume in the Common Stock in the
over-the-counter market during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain limitations on the manner of
sale, notice requirements and availability of current public information about
the Company. A person (or persons whose shares are aggregated) who is deemed not
to have been an "affiliate" of the Company at any time during the 90 days
preceding a sale by such person and who has beneficially owned his shares for at
least three years, may sell such shares in the public market under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, notice
requirements or availability of current information referred to above.
Restricted shares properly sold in reliance upon Rule 144 are thereafter freely
tradeable without restrictions or registration under the Act, unless thereafter
held by an "affiliate" of the Company.
The Company has reserved an aggregate of 925,000 shares of Common Stock for
issuance pursuant to the Stock Option Plan and the Company intends to register
such shares on Form S-8 following the Offering. Subject to restrictions imposed
pursuant to the Stock Option Plan, shares of Common Stock issued pursuant to the
Stock Option Plan after the effective date of any Registration Statement on Form
S-8 will be available for sale in the public market without restriction to the
extent they are held by persons who are not affiliates of the Company, and by
affiliates pursuant to Rule 144. See "Management -- Stock Option Plan."
Prior to the Offering, there has been no trading market for the Common
Stock. No prediction can be made as to the effect, if any, that future sales of
shares pursuant to Rule 144 or otherwise will have on the market price
prevailing from time to time. Sales of substantial amounts of the Common Stock
in the public market following the Offering could adversely affect the then
prevailing market price. All of the 10,000,000 shares of Common Stock held by
Mego Financial will be eligible for sale under Rule 144 commencing 90 days after
consummation of the Offering. Mego Financial has agreed that it will not sell or
otherwise transfer any shares of Common Stock to the public for 180 days after
the Offering without the prior written consent of Oppenheimer & Co., Inc. and
Friedman, Billings, Ramsey & Co., Inc., on behalf of the Underwriters. See
"Underwriting."
64
<PAGE> 66
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
among the Company and the underwriters named below (the "Underwriters"), for
whom Oppenheimer & Co., Inc. ("Oppenheimer") and Friedman, Billings, Ramsey &
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 numbers of shares of
Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Oppenheimer & Co., Inc. ..................................................
Friedman, Billings, Ramsey & Co., Inc. ...................................
---------
Total........................................................... 2,000,000
=========
</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 and pay for all of the above shares of Common Stock if any are
purchased.
The Underwriters have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock 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
$ per share of Common Stock. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per share of
Common Stock on sales to certain other dealers. After the initial public
offering, 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
Common Stock. Although the Common Stock has been approved for quotation on
Nasdaq, there can be no assurance that any active trading market will develop
for the Common Stock or, if developed, will be maintained. The initial public
offering price will be determined through negotiations among the Company and the
Representatives. The factors to be considered in determining the initial public
offering price will include the history of and the prospects for the industry in
which the Company competes, the ability of the Company's management, the past
and present operations of the Company, the historical results of operations of
the Company, the prospects for future earnings of the Company, the general
condition of the securities markets at the time of the Offering and the recent
market prices of securities of generally comparable companies.
The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to an aggregate of 300,000 additional shares of Common Stock at the
public offering price less the underwriting discount. If the Underwriters
exercise such over-allotment option, the Underwriters have severally agreed,
subject to certain conditions, to purchase approximately the same percentage
thereof as the number of shares of Common Stock offered hereby. The Underwriters
may exercise such option only to cover over-allotments made in connection with
the sale of the shares of Common Stock offered hereby.
The Company and Mego Financial have agreed that they will not, without the
prior written consent of the Representatives, directly or indirectly, offer,
sell, grant any option to purchase or otherwise dispose (or announce the offer,
sale, grant of any option to purchase or other disposition) of any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for shares of Common Stock for a period of 180 days after the date of this
Prospectus.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they have discretionary
authority.
65
<PAGE> 67
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act, and to
contribute to payments that the Underwriters may be required to make in
respect thereof.
Oppenheimer 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 has received and will receive customary fees
and commissions.
LEGAL MATTERS
The legality of the shares of Common Stock 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.
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 Common Stock 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 Common
Stock 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, 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.
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<PAGE> 68
MEGO MORTGAGE CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Financial Statements:
Statements of Financial Condition -- August 31, 1995 and 1996....................... F-3
Statements of Operations -- Years Ended August 31, 1994, 1995 and 1996.............. F-4
Statements of Cash Flows -- Years Ended August 31, 1994, 1995 and 1996.............. F-5
Statements of Stockholder's Equity -- Years Ended August 31, 1994, 1995 and 1996.... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 69
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Mego Mortgage Corporation
Las Vegas, Nevada
We have audited the accompanying statements of financial condition of Mego
Mortgage Corporation (a wholly owned subsidiary of Mego Financial Corp.) (the
"Company") as of August 31, 1995 and 1996, and the related statements of
operations, stockholder's equity and of cash flows for each of the three years
in the period ended August 31, 1996. 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,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended August 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 16 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 effective September 1, 1994.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
October 28, 1996
F-2
<PAGE> 70
MEGO MORTGAGE CORPORATION
STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
AUGUST 31,
-----------------
1995 1996
------- -------
<S> <C> <C>
ASSETS
Cash....................................................................... $ 752 $ 443
Cash deposits, restricted.................................................. 2,532 4,474
Loans held for sale, net of allowance for credit losses of $74 and $95..... 3,676 4,610
Mortgage related securities, at fair value................................. -- 22,944
Excess servicing rights.................................................... 14,483 12,121
Mortgage servicing rights.................................................. 1,076 3,827
Other receivables.......................................................... 142 59
Property and equipment, net of accumulated depreciation of $108 and $279... 429 865
Organizational costs, net of amortization.................................. 675 482
Other assets............................................................... 316 781
------- -------
TOTAL ASSETS..................................................... $24,081 $50,606
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Notes and contracts payable.............................................. $ 1,458 $14,197
Accounts payable and accrued liabilities................................. 2,239 4,066
Allowance for credit losses on loans sold with recourse.................. 886 920
Due to parent company.................................................... 8,453 11,994
Due to affiliated company................................................ -- 819
State income taxes payable............................................... 264 909
------- -------
Total liabilities................................................ 13,300 32,905
------- -------
Stockholder's equity:
Common Stock -- $.01 par value per share
Authorized -- 50,000,000 shares
Issued and outstanding -- 10,000,000 shares........................... 100 100
Additional paid in capital............................................... 8,550 8,550
Retained earnings........................................................ 2,131 9,051
------- -------
Total stockholder's equity....................................... 10,781 17,701
------- -------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY....................... $24,081 $50,606
======= =======
</TABLE>
See notes to financial statements.
F-3
<PAGE> 71
MEGO MORTGAGE CORPORATION
STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
---------------------------------------
1994 1995 1996
----------- ------- -----------
(AS
RESTATED --
NOTE 16)
<S> <C> <C> <C>
REVENUES
Gain on sale of loans................................ $ 579 $12,233 $ 17,994
Net unrealized gain on mortgage related securities... -- -- 2,697
Loan servicing income................................ -- 873 3,348
Interest income, net of interest expense of $107,
$468, and $1,116.................................. 172 473 988
------- ------- -------
Total revenues............................... 751 13,579 25,027
------- ------- -------
COSTS AND EXPENSES
Provision for credit losses.......................... 96 864 1,510
Depreciation and amortization........................ 136 403 394
Other interest....................................... 22 187 167
General and administrative:
Payroll and benefits.............................. 975 3,611 5,031
Commissions and selling........................... 13 552 2,013
Professional services............................. -- 177 732
Servicing fees paid to affiliate.................. 13 232 709
Management services by affiliate.................. 442 690 671
FHA insurance..................................... 11 231 572
Other............................................. 554 713 2,073
------- ------- -------
Total costs and expenses..................... 2,262 7,660 13,872
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES...................... (1,511) 5,919 11,155
INCOME TAXES........................................... -- 2,277 4,235
------- ------- -------
NET INCOME (LOSS)...................................... $(1,511) $ 3,642 $ 6,920
======= ======= =======
PRO-FORMA NET INCOME PER SHARE (Note 2) (Unaudited).... $ 0.60
=======
Weighted average number of common shares outstanding
(Note 2)............................................. 10,000,000
==========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 72
MEGO MORTGAGE CORPORATION
STATEMENTS OF CASH FLOW
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
-----------------------------------
1994 1995 1996
------------- -------- --------
(AS
RESTATED--
NOTE 16)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................................................. ($1,511) $ 3,642 $ 6,920
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Additions to mortgage servicing rights....................................... -- (1,176) (3,306)
Additions to excess servicing rights......................................... (904) (14,098) (20,563)
Net unrealized gain on mortgage related securities........................... -- -- (2,697)
Provisions for estimated credit losses....................................... 96 864 1,510
Deferred income taxes........................................................ -- 230 673
Depreciation and amortization expense........................................ 136 403 394
Amortization of excess servicing rights...................................... -- 519 2,144
Amortization of mortgage servicing rights.................................... -- 100 555
Accretion of residual interest in mortgage related securities................ -- -- (243)
Repayments of mortgage related securities.................................... -- -- 92
Loans originated for sale, net of loan fees.................................. (8,164) (87,751) (139,367)
Repayments on loans held for sale............................................ 116 131 504
Proceeds from sale of loans.................................................. 6,397 84,952 135,483
Changes in operating assets and liabilities:
Increase in cash deposits, restricted...................................... -- (2,532) (1,942)
(Increase) decrease in other assets, net................................... (342) 375 1,248
Increase in state income taxes payable..................................... -- 264 670
Increase in other liabilities, net......................................... 279 1,959 1,827
Additions to due to affiliated company..................................... 1,547 3,581 2,100
Payments on due to affiliated company...................................... (2,052) (3,305) (1,281)
-------- -------- --------
Total adjustments....................................................... (2,891) (15,484) (22,199)
-------- -------- --------
Net cash used in operating activities................................... (4,402) (11,842) (15,279)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................................. (263) (274) (637)
-------- -------- --------
Net cash used in investing activities................................... (263) (274) (637)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on notes and contracts payable........................ 6,275 77,178 146,448
Payments on notes and contracts payable........................................ (5,638) (76,357) (133,709)
Additions in due to parent company............................................. -- 10,836 8,368
Payments on due to parent company.............................................. -- (2,613) (5,500)
Receipt of common stock subscription........................................... 4,500 -- --
Increase in additional paid-in capital......................................... -- 3,000 --
-------- -------- --------
Net cash provided by financing activities............................... 5,137 12,044 15,607
-------- -------- --------
NET INCREASE (DECREASE) IN CASH.................................................. 472 (72) (309)
CASH -- BEGINNING OF YEAR........................................................ 352 824 752
-------- -------- --------
CASH -- END OF YEAR.............................................................. $ 824 $ 752 $ 443
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest..................................................................... $ 38 $ 618 $ 964
======== ======== ========
Income taxes................................................................. $ -- $ 3 $ 25
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
In connection with the securitization of loans and creation of mortgage related
securities, the Company retained an interest only security and a residual
interest security............................................................ $ -- $ -- $ 20,096
======== ======== ========
In connection with the organization of the Company, the Company's parent issued
475,000 shares of its Common Stock to an unrelated entity for services
rendered..................................................................... $ 650 $ -- $ --
======== ======== ========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 73
MEGO MORTGAGE CORPORATION
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED AUGUST 31, 1994 AND 1995 AND 1996
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------- PAID IN EARNINGS
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 1, 1993................... 10,000,000 $100 $4,900 $ -- $ 5,000
Additional paid-in capital..................... -- -- 650 -- 650
Net loss for the year ended August 31, 1994 (as
restated -- Note 16)......................... -- -- -- (1,511) (1,511)
---------- ---- ------ ------- -------
BALANCE AT AUGUST 31, 1994 (AS RESTATED -- NOTE
16).......................................... 10,000,000 100 5,550 (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..................... 10,000,000 100 8,550 2,131 10,781
Net income for the year ended August 31,
1996......................................... -- -- -- 6,920 6,920
---------- ---- ------ ------- -------
BALANCE AT AUGUST 31, 1996..................... 10,000,000 $100 $8,550 $ 9,051 $17,701
========== ==== ====== ======= =======
</TABLE>
See notes to financial statements.
F-6
<PAGE> 74
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1994, 1995 AND 1996
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, selling, servicing and pooling home improvement
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 cumulative maximum coverage equal
to 10% of all Title I Loans originated by the Company. In May 1996, the Company
commenced the origination of conventional home improvement and equity loans
through its network of loan correspondents.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Deposits, Restricted -- Restricted cash represents cash on deposit
which is restricted in accordance with the loan sale agreements 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
agreements.
Loans Held for Sale -- Loans held for sale are carried at the lower of
aggregate cost or market value in the accompanying Statements of Financial
Condition, net of allowance for credit losses. Loan origination fees and direct
origination costs are deferred until the loan is sold.
Mortgage Related Securities -- In 1996, the Company securitized a majority
of loans originated into the form of a REMIC. A REMIC is a trust issuing
multi-class securities with certain tax advantages to investors and which
derives its cash flow from a pool of underlying mortgages. Certain of the senior
classes of the REMICs are sold, and an interest only strip and a subordinated
residual class are retained by the Company. The subordinated residual class is
in the form of residual certificates and are classified as residual interest
securities. The documents governing the Company's securitizations require the
Company to establish initial overcollateralization or build
overcollateralization levels through retention of distributions by the REMIC
trust otherwise payable to the Company as the residual interest holder. This
overcollateralization causes the aggregate principal amount of the loans in the
related pool and/or cash reserves to exceed the aggregate principal balance of
the outstanding investor certificates. Such excess amounts serve as credit
enhancement for the related REMIC trust. To the extent that borrowers default on
the payment of principal or interest on the loans, losses will reduce the
overcollateralization and cash flows otherwise payable to the residual interest
security holder to the extent that funds are available. If payment defaults
exceed the amount of overcollateralization, as applicable, the insurance policy
maintained by the related REMIC trust will pay any further losses experienced by
holders of the senior interests in the related REMIC trust. The Company does not
have any recourse obligations for credit losses in the REMIC trust. The residual
interests are amortized to operations over the contractual lives of the loans,
considering future estimated prepayments utilizing an amortization method which
approximates the level yield method.
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 financial statement impact as
a result of adopting SFAS 115.
In accordance with the provisions of SFAS 115, the Company classifies
residual interest 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
F-7
<PAGE> 75
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of the weighted average coupon on each pool of loans securitized over the sum of
the pass-through interest rate, servicing fees, a trustee fee, an insurance fee
and an estimate of annual future credit losses, net of FHA insurance recoveries,
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, and loss
assumptions that the Company believes market participants would use for similar
financial instruments and are discounted using an interest rate that the Company
believes a purchaser unrelated to the seller of such a financial instrument
would require. The Company utilized prepayment assumptions of 14%, estimated
loss factor assumptions of 1%, and weighted average discount rates of 12%. The
valuation includes consideration of characteristics of the loans including loan
type and size, interest rate, origination date, and term. The Company also uses
other available information such as externally prepared reports on prepayment
rates and industry default rates of the type of loan portfolio under review. To
the Company's knowledge, there is no active market for the sale of these
mortgage related securities. The range of values attributable to the factors
used in determining fair value is broad. Although the Company believes that it
has made reasonable estimates of the fair value of the mortgage related
securities, the rate of prepayments and default rates utilized are estimates,
and actual experience may vary.
Revenue Recognition-Gain on Sale of Loans -- Gain on sale of loans includes
the gain on sale of mortgage related securities and the gain on sale of loans
held for sale. In accordance with Emerging Issues Task Force (EITF) Issue No.
88-11, the gain on sale of mortgage related 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 a residual interest security.
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 recorded 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, net of FHA insurance recoveries,
under recourse provisions of the sales agreements. The allowance for losses on
loans sold with recourse represents the Company's estimate of losses, net of FHA
insurance recoveries, to be incurred in connection with the recourse provisions
of the sales agreements and is shown separately as a liability in the Company's
Statements of Financial Condition.
In discounting cash flows related to loan sales, the Company defers
servicing income at annual rates of 1% 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% for the years ended August 31, 1994, 1995, and 1996. 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" (SFAS 122) 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
is estimated by calculating 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. 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
F-8
<PAGE> 76
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
a 125 basis points per annum servicing fee reduced by estimated costs of
servicing using a discount rate of 12% for the year ended August 31, 1996, and a
100 basis points per annum servicing fee reduced by estimated costs of servicing
using a discount rate of 12% for the year ended August 31, 1995. At August 31,
1995 and August 31, 1996, the book value of mortgage servicing rights
approximated fair value. The Company periodically reviews mortgage servicing
rights to determine impairment. This review is performed on a disaggregated
basis, based upon 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 recorded as expense 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 estimated Federal Housing Authority (FHA) insurance
recoveries on Title I Loans.
Property and Equipment -- Property and equipment is stated at cost and is
depreciated over its estimated useful life (generally five years) using the
straight-line method. Costs of maintenance and repairs that do not improve or
extend the life of the respective assets are recorded as expense.
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 expense on the
Statements of Operations. Accumulated amortization related to organizational
costs was $289,000 and $482,000 at August 31, 1995 and 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 the sale of the related loans.
Allowance for Credit 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 credit losses on loans sold with recourse
represents the Company's estimate of its probable future credit losses to be
incurred over the lives of the loans, considering estimated future FHA insurance
recoveries on Title I Loans. No allowance for credit losses on loans sold with
recourse is established on loans sold through securitizations, as the Company
has no recourse obligation under those securitization agreements. Estimated
credit losses on loans sold through securitizations are considered in the
Company's valuation of its residual interest securities.
Proceeds from the sale of loans with recourse provisions were $6,397,000,
$84,952,000, and $118,082,000 for the years ended August 31, 1994, 1995, and
1996, respectively.
Interest Income -- Interest income is recorded as earned. Interest income
represents the interest earned on loans held for sale during the period prior to
their securitization or other sale, mortgage related securities, and short term
investments. In accordance with EITF Issue No. 89-4, the Company computes an
effective yield based on the carrying amount of each mortgage related security
and its estimated future cash flow. This yield is then used to accrue interest
income on the mortgage related security.
During the period that a Title I Loan is 30 days through 270 days
delinquent, the Company accrues interest at the HUD guaranteed rate of 7% in
lieu of the contractual rate of the loan. When a Title I Loan becomes over 270
days contractually delinquent, it is placed on non-accrual status and interest
is recognized only as cash is received. Interest income on conventional loans
greater than 90 days delinquent is generally to be recognized on a cash basis.
F-9
<PAGE> 77
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 loan servicing income. Capitalized mortgage servicing
rights and excess servicing rights are amortized systematically to reduce loan
servicing income to an amount representing normal servicing income and the
present value discount. Late charges and other miscellaneous income are
recognized when collected. Costs to service loans are recorded to expense as
incurred.
Income Taxes -- The Company files a consolidated federal income tax return
with its parent, Mego Financial. Income taxes for the Company are provided for
on a separate return basis. As part of a tax sharing arrangement, the Company
has recorded a liability to Mego Financial for federal income taxes applied to
the Company's financial statement income after giving consideration to
applicable income tax law and statutory rates. The Company accounts for taxes
under SFAS No. 109, "Accounting for Income Taxes" (SFAS 109), which requires an
asset and liability approach.
The provision for income taxes includes deferred income taxes, which result
from reporting items of income and expense for financial statement purposes in
different accounting periods than for income tax purposes. 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 does
not anticipate any material effect upon adoption on results of operations or
financial condition.
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), which establishes financial accounting and reporting
standards for stock-based employee compensation plans. Those plans include all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the stock.
This statement also applies to transactions in which an entity issues its
equity instruments to acquire goods or services from nonemployees. Those
transactions must be accounted for based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. SFAS 123 is 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.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" (SFAS 125) was issued by FASB in June 1996.
SFAS 125 provides 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. It 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 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, 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 statement will require that the Company's existing and future excess
servicing receivables be measured at fair market value and be reclassified as
interest only strip securities and accounted for in accordance with
F-10
<PAGE> 78
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SFAS 115. As required by the statement, the Company will adopt the new
requirements effective January 1, 1997. It is not anticipated that upon
implementation, the statement will have any material impact on the financial
statements of the Company, as the book value of the Company's excess servicing
rights and mortgage related securities approximates fair value.
Stock Split -- The accompanying financial statements retroactively reflect
a 1,600 for 1 stock split, an increase in authorized shares of common stock to
50,000,000, and the establishment of a $.01 par value per share effective
October 28, 1996.
Pro Forma Net Income Per Share (Unaudited) -- Shares used in computing pro
forma net income per share include the weighted average of common stock
outstanding during the period, adjusted for the 1,600 for 1 stock split. There
were no common stock equivalents. Historical per share data is not included on
the Statements of Operations because the data is not considered relevant or
indicative of the ongoing operations of the Company. Net income utilized in the
calculation of pro forma net income per share has been reduced by an estimated
pro forma interest expense in the amount of $1,544,000 and a related tax benefit
of $587,000 based upon the application of a 13% interest rate to the Company's
average balance of non-interest bearing debt payable to Mego Financial. Pro
forma net income per share would change by $0.01 with a 1% change in the
interest rate utilized.
Reclassification -- Certain reclassifications have been made to conform
prior years with the current year presentation.
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.
3. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments" (SFAS
107), requires disclosure of estimated fair value information for financial
instruments, whether or not recognized in the Statement of Financial Condition.
Fair values are based upon 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-11
<PAGE> 79
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 August 31, 1996 are set
forth below (thousands of dollars):
<TABLE>
<CAPTION>
CARRYING ESTIMATED FAIR
VALUE VALUE
-------- --------------
<S> <C> <C>
Financial Assets:
Cash(a)...................................................... $ 443 $ 443
Loans held for sale, net(b).................................. 4,610 5,371
Mortgage related securities(c)............................... 22,944 22,944
Excess servicing rights(c)................................... 12,121 12,121
Mortgage servicing rights(c)................................. 3,827 3,827
Financial Liabilities:
Notes and contracts payable(d)............................... 14,197 14,197
</TABLE>
- ---------------
(a) Carrying value was used as the estimate of fair value.
(b) Since it is the Company's business to sell loans it originates, the fair
value was estimated by using outstanding commitments from investors
adjusted for non-qualified loans and the collateral securing such loans.
(c) The fair value was estimated by discounting future cash flows of the
instruments using discount rates, default, loss and prepayment assumptions
based upon available market data, opinions from investment bankers and
portfolio experience.
(d) Notes payable generally are adjustable rate, indexed to the prime rate;
therefore, carrying value approximates fair value. Contracts payable
represent capitalized equipment leases with a weighted average interest
rate of 9.48%, which approximates fair value.
At August 31, 1996, the Company had $59,597,000 in outstanding commitments
to originate and purchase loans and no other off-balance sheet financial
instruments. A fair value of the commitments was estimated at $6.8 million by
calculating a theoretical gain or loss on the sale of a funded loan adjusted for
an estimate of loan commitments not expected to fund, considering the difference
between investor yield requirements and the committed loan rates. The estimated
fair value is not necessarily representative of the actual gain to be recorded
on such loan sales in the future.
The fair value estimates made at August 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
the sale of the entire portion of the financial instruments. Because no market
exists for a substantial portion of the financial instruments, fair value
estimates may be based upon 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 upon 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.
F-12
<PAGE> 80
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. CONCENTRATIONS OF RISK
Availability of Funding Source -- The Company funds substantially all of
the loans which it originates or purchases with borrowings through its financing
facilities and internally generated funds. These borrowings are in turn repaid
with the proceeds received by the Company from selling such loans through loan
sales or securitizations. Any failure to renew or obtain adequate financing
under its financing facilities, or other borrowings, or any substantial
reduction in the size of or pricing in the markets for the Company's loans,
could have a material adverse effect on the Company's operations. To the extent
that the Company is not successful in maintaining or replacing existing
financings, it would have to curtail its loan production activities or sell
loans earlier than is optimal, thereby having a material adverse effect on the
Company's results of operations and financial condition.
Dependence on Securitizations -- In 1996, the Company pooled and sold
through securitizations an increasing percentage of the loans that it
originated. The Company derives a significant portion of its income by
recognizing gains on sale of loans through securitizations which are due in part
to the fair value, recorded at the time of sale, of residual interests and
interest only securities retained. Adverse changes in the securitization market
could impair the Company's ability to 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.
The Company has relied on credit enhancement and overcollateralization to
achieve the "AAA/Aaa" rating for the senior interests in its securitizations.
The credit enhancement has generally been in the form of an insurance policy
issued by an insurance company insuring the timely repayment of senior interests
in each of the REMIC trusts. There can be no assurance that the Company will be
able to obtain credit enhancement in any form from the current insurer or any
other provider of credit enhancement on acceptable terms or that future
securitizations will be similarly rated. A downgrading of the insurer's credit
rating or its withdrawal of credit enhancement could have a material adverse
effect on the Company's results of operations and financial condition.
Geographic Concentrations -- The Company's servicing portfolio and loans
sold with recourse are geographically diversified within the United States. The
Company services mortgage loans in 47 states and the District of Columbia. At
August 31, 1996, 36% of the dollar value of loans serviced had been originated
in California, and 13% in Florida. No other state accounted for more than 10% of
the servicing portfolio. The risk inherent in such concentrations is dependent
upon regional and general economic stability which affects property values and
the financial stability of the borrowers.
Credit Risk -- 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 and loans sold under recourse provisions. The
outstanding balance of loans sold with recourse provisions totaled $88,566,000
and $81,458,000 at August 31, 1995 and 1996, respectively.
Off-Balance Sheet Activities -- These financial instruments consist of
commitments to extend credit to borrowers and commitments to purchase loans from
others. As of August 31, 1995 and 1996, the Company had outstanding commitments
to extend credit or purchase loans in the amounts of $53,447,000 and
$59,597,000, respectively. These commitments do not represent the expected total
cash outlay of the Company, as historically only 40% of these commitments result
in loan originations or purchases. The prospective borrower or seller is under
no obligation as a result of the Company's commitment. The Company's credit and
interest rate risk is therefore limited to those commitment which result in loan
originations and purchases. The commitments are made for a specified fixed rate
of interest, therefore the Company is exposed to interest rate risk, to the
extent changes in market interest rates change prior to the origination and
prior to the sale of the loan.
F-13
<PAGE> 81
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interest Rate Risk -- The Company's profitability is in part determined by
the difference, or "spread," between the effective rate of interest received on
the loans originated or purchased by the Company and the interest rates payable
under its financing facilities during the warehousing period and yield required
by investors on loan sales and securitizations. The spread can be adversely
affected after a loan is originated or purchased and while it is held during the
warehousing period by increases in the interest rate demanded by investors in
securitizations or sales. In addition, because the loans originated and
purchased by the Company have fixed rates, the Company bears the risk of
narrowing spreads because of interest rate increases during the period from the
date the loans are originated or purchased until the closing of the sale or
securitization of such loans. Additionally, the fair value of mortgage related
securities, mortgage servicing rights and excess servicing rights owned by the
Company may be adversely affected by changes in the interest rate environment
which could effect the discount rate and prepayment assumptions used to value
the assets. Any such adverse change in assumptions could have a material adverse
effect on the Company's results of operations and financial condition.
5. LOANS HELD FOR SALE, ALLOWANCE FOR CREDIT LOSSES, LOAN ORIGINATIONS, AND
LOANS SERVICED
Loans held for sale, net of allowance for credit losses, consisted of the
following (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
---------------
1995 1996
------ ------
<S> <C> <C>
Loans held for sale.................................................. $3,750 $4,705
Less allowance for credit losses..................................... (74) (95)
------ ------
Total...................................................... $3,676 $4,610
====== ======
</TABLE>
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 obligors' ability to pay, collateral values and overall portfolio
quality. Changes in the allowance for credit losses for loans consisted of the
following (thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
---------------------
1994 1995 1996
---- ---- -------
<S> <C> <C> <C>
Balance at beginning of year.................................... $-- $ 96 $ 960
Provisions for credit losses.................................... 96 864 1,510
Reductions due to reacquisition and securitization.............. -- -- (1,455)
--- ---- ------
Balance at end of year.......................................... $96 $960 $ 1,015
=== ==== ======
Allowance for credit losses..................................... $30 $ 74 $ 95
Allowance for credit losses on loans sold with recourse......... 66 886 920
--- ---- ------
Total................................................. $96 $960 $ 1,015
=== ==== ======
</TABLE>
During 1996, $113,917,000 of loans sold under recourse provisions were
repurchased and securitized as further described in Note 2. Reductions due to
reacquisition and securitization represent the allowance for credit losses on
loans sold with recourse transferred to the cost basis of the mortgage related
securities as a result of these transactions.
F-14
<PAGE> 82
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Loans serviced and originated consisted of the following (thousands of
dollars):
<TABLE>
<CAPTION>
AUGUST 31,
------------------
1995 1996
------- --------
<S> <C> <C>
Amount of Title I Loan originations............................... $87,751 $127,785
Amount of conventional loan originations.......................... -- 11,582
------- --------
Total................................................... $87,751 $139,367
======= ========
Loans serviced (including loans securitized, loans sold to
investors and loans held for sale)
Title I Loans................................................... $92,286 $202,766
Conventional loans.............................................. -- 11,423
------- --------
Total................................................... $92,286 $214,189
======= ========
</TABLE>
6. MORTGAGE RELATED SECURITIES
Mortgage related securities consist of interest only strips and residual
interest certificates of FHA Title I Loan asset-backed securities collateralized
by loans originated, purchased and serviced by the Company.
Mortgage related securities are classified as trading securities and are
recorded at estimated fair value. Changes in the estimated fair value are
recorded in current operations. As of August 31, 1996 mortgage related
securities consisted of the following (thousands of dollars):
<TABLE>
<S> <C>
Interest only securities................................................... $ 4,602
Residual interest securities............................................... 18,342
-------
Total............................................................ $22,944
=======
</TABLE>
No mortgage related securities were owned during 1995.
Activity in mortgage related securities consisted of the following for the
year ended August 31, 1996 (thousands of dollars):
<TABLE>
<S> <C>
Balance at beginning of year............................................... $ --
Additions due to securitizations, at cost.................................. 20,096
Net unrealized gain........................................................ 2,697
Accretion of residual interest............................................. 243
Principal reductions....................................................... (92)
-------
Balance at end of year........................................... $22,944
=======
</TABLE>
7. EXCESS SERVICING RIGHTS
Activity in excess servicing rights consisted of the following (thousands
of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
-------------------------
1994 1995 1996
---- ------- --------
<S> <C> <C> <C>
Balance at beginning of year................................ $ -- $ 904 $ 14,483
Plus additions.............................................. 904 14,098 20,563
Less amortization........................................... -- (519) (2,144)
Less amounts related to loans repurchased, securitized and
transferred to mortgage related securities................ -- -- (20,781)
---- ------- -------
Balance at end of year............................ $904 $14,483 $ 12,121
==== ======= =======
</TABLE>
F-15
<PAGE> 83
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of August 31, 1994, 1995 and 1996, excess servicing rights consisted of
excess cash flows on serviced loans totaling $6,555,000, $88,566,000 and
$81,458,000, yielding weighted average interest rates of 12.9%, 13.3% and 12.8%,
and net of normal servicing and pass-through fees with weighted average
pass-through yields to the investor of 8.5%, 8.4% and 8.1%, respectively. These
loans were sold under recourse provisions as described in Note 2.
During 1996, $113,917,000 of loans sold were repurchased and securitized as
further described in Note 2. Excess servicing rights related to the loans
repurchased and securitized of $20,781,000 were transferred to the cost basis of
the mortgage related securities as a result of these transactions.
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, 1996. The principal balance of loans subject to the
LIBOR adjustment was $29,255,000 at August 31, 1996. The effect of an increase
or decrease in LIBOR of 100 basis points (1%) applied to those loans would be a
decrease or increase, respectively, to the Company's future pre-tax income of
approximately $956,000.
8. MORTGAGE SERVICING RIGHTS
Activity in mortgage servicing rights consisted of the following (thousands
of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
----------------------
1994 1995 1996
---- ------ ------
<S> <C> <C> <C>
Balance at beginning of year................................... $ -- $ -- $1,076
Plus additions................................................. -- 1,176 3,306
Less amortization.............................................. -- (100) (555)
---- ------ ------
Balance at end of year............................... $ -- $1,076 $3,827
==== ====== ======
</TABLE>
As indicated in Note 2, the Company adopted the provisions of SFAS 122
effective September 1, 1994.
The Company had no valuation allowance for mortgage servicing rights during
1994, 1995 and 1996, as the cost basis of mortgage servicing rights approximated
fair value.
The pooling and servicing agreements relating to the securitization
transactions contain provisions with respect to the maximum permitted loan
delinquency rates and loan default rates, which, if exceeded, would allow the
termination of the Company's right to service the related loans. At September
30, 1996, the default rates on one pooling and servicing agreement exceeded the
permitted level. The mortgage servicing rights for this agreement were
approximately $1.4 million at August 31, 1996. In the event of such termination,
there would be an adverse effect on the valuation of the Company's mortgage
servicing rights.
F-16
<PAGE> 84
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
--------------
1995 1996
----- ------
<S> <C> <C>
Office equipment and furnishings..................................... $ 337 $ 640
EDP equipment........................................................ 166 470
Vehicles............................................................. 34 34
----- ------
537 1,144
Less accumulated depreciation........................................ (108) (279)
----- ------
Total property and equipment, net.......................... $ 429 $ 865
===== ======
</TABLE>
10. OTHER ASSETS
Other assets consisted of the following (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
--------------
1995 1996
----- ------
<S> <C> <C>
Deferred borrowing costs............................................. $ 129 $ 216
Software costs, net of amortization (See Note 14).................... 127 154
Other................................................................ 60 411
---- ----
Total...................................................... $ 316 $ 781
==== ====
</TABLE>
11. NOTES AND CONTRACTS PAYABLE
Notes and contracts payable consisted of the following (thousands of
dollars):
<TABLE>
<CAPTION>
AUGUST 31,
----------------
1995 1996
------ -------
<S> <C> <C>
Note payable -- warehouse line of credit............................ $1,039 $ 3,265
Note payable -- revolving line of credit............................ -- 10,000
Other............................................................... 419 932
------ -------
Total..................................................... $1,458 $14,197
====== =======
</TABLE>
Notes payable at August 31, 1996 included $3,265,000 of borrowings
outstanding under a Warehousing Credit and Security Agreement with a lender 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
August 31, 1996) and are collateralized by security interests in the Company's
loans held for sale. The warehouse line of credit matures on August 9, 1997.
At August 31, 1996, the Company had a $10,000,000 revolving line of credit
with the same lender maturing on June 30, 2000, bearing interest at the bank's
prevailing prime rate plus 2% (10.25% at August 31, 1996). This facility was
secured by a pledge of the Company's excess servicing rights and mortgage
related securities. The facility has an 18 month revolving credit period
expiring on approximately December 31, 1997, followed by a 30 month payment
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) 6
times the aggregate of the excess servicing rights and mortgage related
securities payments actually received by the Company over the most recent 3
month period. The agreement contains certain restrictions, including but not
limited to, restrictions on additional indebtedness and restrictions on capital
distributions, through minimum tangible net worth requirements of $12.5 million
plus 50% of cumulative net income since May 1, 1996 (50% of cumulative net
income for the period May 1, 1996 to August 31, 1996 was $1.1 million).
F-17
<PAGE> 85
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Both the warehouse line of credit and the revolving line of credit are
subject to a requirement of the maintenance of a minimum tangible net worth of
$12,500,000 plus 50% of cumulative net income since May 1, 1996 and a minimum
level of profitability of at least $500,000 per rolling six month period. Both
lines of credit have been guaranteed by Mego Financial.
At August 31, 1995 and 1996, contracts payable consisted of $419,000 and
$932,000, respectively, in obligations under lease purchase arrangements secured
by property and equipment, bearing a weighted average interest rate of 9.48%.
Scheduled maturities of the Company's contracts payable of $932,000 at
August 31, 1996 are as follows (thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
----------------------------------------
TOTAL 1997 1998 1999 2000 2001
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
$ 932 $255 $272 $221 $179 $5
</TABLE>
12. ADDITIONAL PAID-IN CAPITAL
In 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 through the issuance of 475,000 shares of
common stock of Mego Financial. The Mego Financial common stock was issued 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. The value of the Mego Financial stock was based upon the closing bid
price of Mego Financial stock as of the date of the agreement with the third
party, reduced by (a) an estimate of the costs which would be incurred to
register the stock to allow its sale to the public; and (b) an estimate of the
discount a seller would incur upon selling a large block of shares. The Company
reduced the due to parent company account as a result of this transaction.
13. COMMITMENTS AND CONTINGENCIES
The Company leases an office under the terms of an operating lease that
expires March 31, 1999. During fiscal 1994, 1995 and 1996, the Company's rent
expense related to this lease was $54,000, $154,000 and $164,000, respectively.
In April 1996, the Company executed an operating lease for its main offices in a
second location which it will occupy in late 1996. The 1996 lease commences
September 1, 1996, expires August 31, 2002, and is guaranteed by Mego Financial.
Future minimum rental payments under these operating leases are set forth below
(thousands of dollars):
<TABLE>
<S> <C>
FOR THE YEARS ENDED AUGUST 31,
1997........................................................................ $ 943
1998........................................................................ 1,071
1999........................................................................ 1,005
2000........................................................................ 939
2001........................................................................ 957
Thereafter.................................................................. 978
------
Total............................................................. $5,893
======
</TABLE>
In the general course of business the Company, at various times, has been
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 affect on the business or financial condition of the Company.
F-18
<PAGE> 86
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. RELATED PARTY TRANSACTIONS
During the years ended August 31, 1994, 1995, and 1996, Preferred Equities
Corporation (PEC), a wholly-owned subsidiary of Mego Financial, provided certain
services to the Company including loan servicing and collection for a cost of
$13,000, $232,000, and $709,000, respectively. In addition, the affiliate
provided services including executive, accounting, legal, management
information, data processing, human resources, advertising and promotional
materials (management services) totaling $442,000, $690,000, and $671,000 which
amounts were included in general and administrative expenses for the years ended
August 31, 1994, 1995, and 1996, respectively. Included in other interest
expense for the years ended August 31, 1995 and 1996, are $85,000 and $29,000
related to advances from PEC.
During the years ended August 31, 1994, 1995 and 1996, the Company paid PEC
for developing certain computer programming (see Note 10), 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, 1995 and 1996, amortization
of $13,000, $26,000 and $29,000, respectively, was included in expense. The
Company's agreement with PEC regarding loan servicing and collection services
charges the Company an annual rate of 0.5% of outstanding loans serviced by PEC
calculated and paid on a monthly basis. The costs charged to the Company for
management services provided by PEC represent an estimate of the costs incurred
by PEC which would have been incurred by the Company had it been operating as a
stand alone entity.
Management believes the allocation methodologies for services performed by
PEC is reasonable and is representative of an approximation of the expense the
Company would incur if it operated as a stand alone entity, unrelated to PEC.
At August 31, 1995 and 1996, the Company had a non-interest bearing
liability to Mego Financial of $8,453,000 and $11,994,000, respectively, for
federal income taxes and cash advances, which is due on demand and has not as
yet been paid. At August 31, 1996, the Company had a non-interest bearing
liability to PEC of $819,000 relating to charges for services to the Company.
Activity in due to parent company consisted of the following (thousands of
dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST
31,
--------------------------
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Balance at beginning of year............................... $ -- $ -- $ 8,453
Provision for federal taxes................................ -- 2,013 3,566
Cash advances from parent.................................. -- 9,053 5,475
Repayments of advances..................................... -- (2,613) (5,500)
------ ------- -------
Balance at end of year........................... $ -- $ 8,453 $11,994
====== ======= =======
Average balance during the year............................ $ -- $ 2,275 $11,874
====== ======= =======
</TABLE>
The Company anticipates issuing common stock and subordinated debt to the
public to support its cash flow needs in the future. Subsequent to these
transactions, it is not anticipated that Mego Financial will continue to provide
funds to the Company or guarantee its indebtedness. At August 31, 1996, 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
leases described in Notes 11 and 13.
F-19
<PAGE> 87
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. 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%). 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, 1995 and 1996, income tax expense has been
computed as follows (thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST
31,
--------------------------
1994 1995 1996
------- ------ -------
<S> <C> <C> <C>
Income (loss) before income taxes.......................... $(1,511) $5,919 $11,155
======= ====== =======
Federal income taxes at 34% of income...................... $ -- $2,013 $ 3,793
State income taxes, net of federal income tax benefit...... -- 264 442
------- ------ -------
Income tax expense......................................... $ -- $2,277 $ 4,235
======= ====== =======
</TABLE>
Income tax expense is comprised of the following (thousands of dollars):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
-------------------------
1994 1995 1996
------- ------ ------
<S> <C> <C> <C>
Current..................................................... $ -- $2,047 $3,562
Deferred.................................................... -- 230 673
------- ------ ------
Total............................................. $ -- $2,277 $4,235
======= ====== ======
</TABLE>
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, included in due to parent company, as of August 31, 1995 and 1996 are
as follows (thousands of dollars):
<TABLE>
<CAPTION>
AUGUST 31,
-------------
1995 1996
---- ------
<S> <C> <C>
Deferred tax liabilities:
Difference between book and tax carrying value of assets............ $ -- $ 98
Unrealized gain on mortgage related securities...................... -- 1,025
Mortgage servicing rights........................................... 591 164
Other............................................................... 16 2
---- ------
607 1,289
---- ------
Deferred tax assets:
Allowances for credit losses........................................ 366 386
Difference between book and tax carrying value of assets............ 11 --
---- ------
377 386
---- ------
Net deferred tax liability.................................. $230 $ 903
==== ======
</TABLE>
16. 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.
F-20
<PAGE> 88
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for its sales of loans under SFAS No. 65, "Accounting
for Certain Mortgage Banking Activities" and SFAS No. 91 which require that
certain estimates and assumptions (such as the impact of prepayments,
cancellations and the discount period and rate) be made in order to compute the
present value of the income stream to be received over the estimated lives of
the loans sold by the Company. The Company determined that the estimates and
assumptions it used previously required revision. The net effect of the
restatement for the year ended August 31, 1994 was a decrease in income before
income taxes of $421,000. The effect on the Statement of Financial Condition at
August 31, 1994, was primarily a reduction of excess servicing rights.
The Company determined that it erroneously included certain expenses in
deferred organizational costs related to the fiscal year ended August 31, 1994.
Accordingly, costs and expenses were understated by $725,000 and amortization of
the organizations costs was overstated by $3,000. The effect of this restatement
on the Statement of Operations was to reduce income before income taxes in 1994
by $722,000. The effect of this restatement on the Statement of Financial
Condition of the Company at August 31, 1994, was to reduce other assets by
$722,000.
The restatement also included other miscellaneous adjustments. A summary of
the effect of the restatement on the Statement of Operations for the year ended
August 31, 1994 is as follows (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 expense.............................................. 57 107
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>
17. SUBSEQUENT EVENT (UNAUDITED)
In September 1996, the Company received a commitment from a financial
institution providing for the purchase of up to $2.0 billion of loans over a
five year period. Upon closing of the final agreement, Mego Financial will issue
to the financial institution four-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, estimated at $3.0 million (0.15% of the commitment
amount) as of the commitment date, will be recorded as a commitment fee and
charged to expense as the commitment 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 a separate $3.0 million repurchase
agreement, for the financing of the interest only and residual certificates from
future securitizations.
F-21
<PAGE> 89
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY BY ANY OF THE SECURITIES OFFERED HEREBY IN
ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 8
Use of Proceeds........................... 19
Dividend Policy........................... 19
Dilution.................................. 20
Capitalization............................ 21
Pro Forma Selected Financial Data......... 22
Selected Financial Data................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 25
Business.................................. 37
Management................................ 53
Principal Stockholders.................... 58
Certain Transactions...................... 60
Description of Note Offering.............. 61
Description of Capital Stock.............. 62
Shares Eligible for Future Sale........... 64
Underwriting.............................. 65
Legal Matters............................. 66
Experts................................... 66
Additional Information.................... 66
Index to Financial Statements............. F-1
</TABLE>
---------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
2,000,000 SHARES
MEGO MORTGAGE CORPORATION
COMMON STOCK
MEGO (LOGO)
------------------------
PROSPECTUS
------------------------
OPPENHEIMER & CO., INC.
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 90
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....................... $ 11,104
NASD filing fee........................................................... 3,720
Nasdaq National Market listing fee........................................ 47,500
Printing expenses......................................................... 100,000
Accounting fees and expenses.............................................. 280,000
Legal fees and expenses................................................... 175,000
Fees and expenses (including legal fees) for qualifications under state
securities laws......................................................... 5,000
Transfer agent's fees and expenses........................................ 15,000
Miscellaneous............................................................. 37,676
--------
Total........................................................... $675,000
========
</TABLE>
All amounts except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq listing 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> 91
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> 92
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 -- Specimen Common Stock Certificate.
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 -- Form of Tax Allocation and Indemnity Agreement to be entered into between the
Registrant and Mego Financial Corp.
10.10 -- Loan Program Sub-Servicing Agreement between the Registrant and Preferred Equities
Corporation dated as of September 1, 1996.
10.11* -- 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* -- Loan Purchase Agreement between Financial Asset Securities Corp., as Purchaser,
and the Registrant, as Seller, dated as of March 21, 1996.
10.13(3) -- 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> 93
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------------------------------
<C> <C> <S>
10.14* -- 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(3) -- 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(3) -- Credit Agreement dated as of June 28, 1996 between the Registrant and First
National Bank of Boston as Agent.
10.17* -- Loan Purchase Agreement dated as of August 1, 1996 between Financial Asset
Securities Corp., as Purchaser, and the Registrant, as Seller.
10.18* -- Pooling and Servicing Agreement dated as of August 1, 1996 between Financial Asset
Securities Corp., as Purchaser, and the Registrant, as Seller.
10.19(3) -- 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(3) -- Amendment to Master Loan Purchase and Servicing Agreement between Greenwich
Capital Financial Products, Inc. and the Registrant dated February 1, 1996.
10.22(3) -- 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 -- Services and Consulting Agreement between the Registrant and Preferred Equities
Corporation dated as of September 1, 1996.
10.24(3) -- Employment Agreement between the Registrant and Jeffrey S. Moore dated January 1,
1994.
10.25(3) -- Form of Indenture to be entered into between the Registrant and the Indenture
Trustee.
10.26 -- Master Repurchase Agreement dated as of September 4, 1996 between the Registrant
and Greenwich Capital Markets, Inc.
10.27 -- Letter agreement dated October 1, 1996 between the Registrant and Greenwich
Capital Markets, Inc.
10.28 -- Amended and Restated Master Loan Purchase and Servicing Agreement dated as of
October 1, 1996 among the Registrant, Mego Financial Corp. and Greenwich Capital
Markets, Inc.
10.29 -- Form of Agreement to be entered into between the Registrant and Mego Financial
Corp.
10.30 -- Commitment letter between the Registrant and Greenwich Capital Markets, Inc. dated
September 17, 1996.
12.1 -- Computation of Ratio of Earnings to Fixed Charges.
21.1* -- Subsidiaries of the Registrant.
23.1 -- Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. (included in
its opinion filed as Exhibit 5.1).
23.2 -- Consent of Deloitte & Touche LLP.
23.3* -- Consent of Director Nominees.
24.1* -- Power of Attorney.
27.1* -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
* Previously filed.
(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, as amended (File No. 333-13421), and incorporated herein by
reference.
II-4
<PAGE> 94
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, 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> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, State of Georgia, on November 13, 1996.
MEGO MORTGAGE CORPORATION
By: /s/ JEROME J. COHEN
------------------------------------
Jerome J. Cohen,
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the 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 November 13, 1996
- --------------------------------------------- Chief Executive Officer
Jerome J. Cohen
/s/ JEFFREY S. MOORE* President, Chief Operating November 13, 1996
- --------------------------------------------- Officer and Director
Jeffrey S. Moore
/s/ JAMES L. BELTER* Executive Vice President November 13, 1996
- --------------------------------------------- and Chief Financial
James L. Belter Officer
/s/ ROBERT NEDERLANDER* Director November 13, 1996
- ---------------------------------------------
Robert Nederlander
/s/ HERBERT B. HIRSCH* Director November 13, 1996
- ---------------------------------------------
Herbert B. Hirsch
/s/ DON A. MAYERSON Director November 13, 1996
- ---------------------------------------------
Don A. Mayerson
*By: /s/ JEROME J. COHEN
- ---------------------------------------------
Jerome J. Cohen
Attorney-in-fact
</TABLE>
II-6
<PAGE> 1
EXHIBIT 1.1
2,000,000 Shares
MEGO MORTGAGE CORPORATION
Common Stock
UNDERWRITING AGREEMENT
, 1996
-----------
Oppenheimer & Co., Inc.
Friedman, Billings, Ramsey & Co., Inc.
c/o Oppenheimer & Co., Inc.
Oppenheimer Tower
World Financial Center
New York, New York 10281
On behalf of the Several
Underwriters named on
Schedule I attached hereto.
Ladies and Gentlemen:
Mego Mortgage Corporation, a Delaware corporation (the
"Company"), proposes to issue and sell to you and the other underwriters named
on Schedule I to this Agreement (the "Underwriters"), for whom you are acting
as Representatives, an aggregate of 2,000,000 shares (the "Firm Shares") of the
Company's common stock, $0.01 par value (the "Common Stock"). In addition, the
Company proposes to grant to the Underwriters an option to purchase up to an
additional 300,000 shares (the "Option Shares") of Common Stock from it for the
purpose of covering over-allotments in connection with the sale of the Firm
Shares. The Firm Shares and the Option Shares are together called the
"Shares."
1. Sale and Purchase of the Shares. On the basis of the
representations, warranties and agreements contained in, and subject to the
terms and conditions of, this Agreement:
(a) The Company agrees to sell to each of the
Underwriters and each of the Underwriters, severally and not jointly,
agrees to purchase from the Company the respective number of Firm
Shares (subject to such adjustment as you may determine to avoid
fractional shares) which bears the same proportion to the number of
Firm Shares
<PAGE> 2
to be sold by the Company as the number of Firm Shares set forth
opposite the name of such Underwriter on Schedule I to this Agreement
bears to the total number of Firm Shares to be sold by the Company, in
each case at a purchase price of $___ per share (the "Initial Price").
(b) The Company grants to the several Underwriters an
option to purchase, severally and not jointly, all or any part of the
Option Shares at the Initial Price. The number of Option Shares to be
purchased by each Underwriter shall be the same percentage (adjusted
by the Representatives to eliminate fractions) of the total number of
Option Shares to be purchased by the Underwriters as such Underwriter
is purchasing of the Firm Shares. Such option may be exercised only
to cover over-allotments in the sales of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time on
or before 12:00 noon, New York City time, on the business day before
the Firm Shares Closing Date (as defined below), and only once
thereafter within 30 days after the date of this Agreement, in each
case upon written or telegraphic notice, or oral or telephonic notice
confirmed by written or telegraphic notice, by the Representatives to
the Company no later than 12:00 noon, New York City time, on the
business day before the Firm Shares Closing Date or at least two
business days before the Option Shares Closing Date (as defined
below), as the case may be, setting forth the number of Option Shares
to be purchased and the time and date (if other than the Firm Shares
Closing Date) of such purchase.
2. Delivery and Payment. Delivery by the Company of the
Firm Shares to the Representatives for the respective accounts of the
Underwriters, and payment of the purchase price by certified or official bank
check or checks payable in same day funds to the Company, shall take place at
the offices of Gibson, Dunn & Crutcher LLP, 200 Park Avenue, New York, New York
10166, at 10:00 a.m., New York City time, on the third (fourth, if pricing
occurs after 4:30 p.m. New York City time) business day following the date of
this Agreement, or at such time on such other date, not later than ten business
days after the date of this Agreement, as shall be agreed upon by the Company
and the Representatives (such time and date of delivery and payment are called
the "Firm Shares Closing Date").
In the event the option with respect to the Option Shares is
exercised, delivery by the Company of the Option Shares to the Representatives
for the respective accounts of the Underwriters and payment of the purchase
price by certified or official bank check or checks payable in same day funds
to the Company shall take place at the offices of Oppenheimer & Co., Inc.
specified above at the time and on the date (which may be the same date as, but
in no event shall be earlier than, the Firm Shares Closing Date) specified in
the notice referred to in Section 1(b) (such time and date of delivery and
payment are called the "Option Shares Closing Date"). The Firm Shares Closing
Date and the Option Shares Closing Date are called, individually, a "Closing
Date" and, together, the "Closing Dates."
Certificates evidencing the Shares shall be registered in such
names and shall be in such denominations as the Representatives shall request
at least two full business days before the Firm Shares Closing Date or, in the
case of Option Shares, on the day of notice of
2
<PAGE> 3
exercise of the option as described in Section l(b) and shall be made available
to the Representatives for checking and packaging, at such place as is
designated by the Representatives, on the full business day before the Firm
Shares Closing Date (or the Option Shares Closing Date in the case of the
Option Shares).
3. Registration Statement and Prospectus; Public
Offering. The Company has prepared in conformity with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the published
rules and regulations thereunder (the "Rules") adopted by the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-1
(No. 333-12443), including a preliminary prospectus relating to the Shares, and
has filed with the Commission the registration statement and such amendments
thereof as may have been required to the date of this Agreement. Copies of
such registration statement (including all amendments thereof) and of the
related preliminary prospectus have heretofore been delivered by the Company to
you. The term "preliminary prospectus" means any preliminary prospectus (as
described in Rule 430 of the Rules) included at any time as a part of the
registration statement. The Registration Statement as amended at the time and
on the date it becomes effective (the "Effective Date"), including all exhibits
and information, if any, deemed to be part of the Registration Statement
pursuant to Rule 424(b) and Rule 430A of the Rules, is called the "Registration
Statement." The term "Prospectus" means the prospectus in the form first used
to confirm sales of the Shares (whether such prospectus was included in the
Registration Statement at the time of effectiveness or was subsequently filed
with the Commission pursuant to Rule 424(b) of the Rules).
The Company understands that the Underwriters propose to make
a public offering of the Shares, as set forth in and pursuant to the
Prospectus, as soon after the Effective Date and the date of this Agreement as
the Representatives deem advisable. The Company hereby confirms that the
Underwriters and dealers have been authorized to distribute or cause to be
distributed each preliminary prospectus and are authorized to distribute the
Prospectus (as from time to time amended or supplemented if the Company
furnishes amendments or supplements thereto to the Underwriters).
4. Representations and Warranties of the Company. The
Company hereby represents and warrants to, and agrees with, each Underwriter as
follows:
(a) On the Effective Date the Registration Statement
complied, and on the date of the Prospectus, on the date any
post-effective amendment to the Registration Statement shall become
effective, on the date any supplement or amendment to the Prospectus
is filed with the Commission and on each Closing Date, the
Registration Statement and the Prospectus (and any amendment thereof
or supplement thereto) will comply, in all material respects, with the
applicable provisions of the Securities Act and the Rules and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations of the Commission thereunder; the
Registration Statement did not, as of the Effective Date, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein
3
<PAGE> 4
not misleading; and on the other dates referred to above neither
the Registration Statement nor the Prospectus, nor any
amendment thereof or supplement thereto, will contain any untrue
statement of a material fact or will omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading. When any related preliminary
prospectus was first filed with the Commission (whether filed as part
of the registration statement or any amendment thereto or pursuant to
Rule 424(a) of the Rules) and when any amendment thereof or supplement
thereto was first filed with the Commission, such preliminary
prospectus as amended or supplemented complied in all material
respects with the applicable provisions of the Securities Act and the
Rules and did not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
Notwithstanding the foregoing, the Company makes no representation or
warranty as to information furnished in writing by the Representatives
on behalf of the several Underwriters specifically for inclusion in
the Registration Statement, any preliminary prospectus or the
Prospectus, which includes only the last paragraph on the cover page,
the paragraph with respect to stabilization on the inside front cover
page of the Prospectus and the statements contained under the caption
"Underwriting" in the Prospectus.
(b) All contracts and other documents required to be
filed as exhibits to the Registration Statement have been filed with
the Commission as exhibits to the Registration Statement.
(c) The financial statements of the Company (including
all notes and schedules thereto) included in the Registration
Statement and Prospectus present fairly the financial position, the
results of operations and cash flows and the shareholders' equity and
the other information purported to be shown therein of the Company at
the respective dates and for the respective periods to which they
apply; and such financial statements have been prepared in conformity
with generally accepted accounting principles, consistently applied
throughout the periods involved, and all adjustments necessary for a
fair presentation of the results for such periods have been made.
(d) Deloitte & Touche LLP, whose reports are filed with
the Commission as a part of the Registration Statement, are and,
during the periods covered by their reports, were independent public
accountants as required by the Securities Act and the Rules.
(e) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware. The Company is duly qualified and in good standing as a
foreign corporation in each jurisdiction in which the character or
location of its assets or properties (owned, leased or licensed) or
the nature of its business makes such qualification necessary except
for such jurisdictions where the failure to so qualify would not have
a material adverse effect on the assets or properties, business,
results of operations or financial condition of the
4
<PAGE> 5
Company and in each jurisdiction in which it originates or purchases
loans. Except as disclosed in the Registration Statement and the
Prospectus, the Company does not own, lease or license any material
asset or property or conduct any business outside the United States of
America. The Company has all requisite corporate power and authority,
and all necessary authorizations, approvals, consents, orders,
licenses, certificates and permits of and from all governmental or
regulatory bodies or any other person or entity, to own, lease and
license its assets and properties and conduct its business as now
being conducted and as described in the Registration Statement and the
Prospectus except for such authorizations, approvals, consents,
orders, licenses, certificates and permits the failure to so obtain
would not have a material adverse effect upon the assets or
properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company; no such authorization,
approval, consent, order, license, certificate or permit contains a
materially burdensome restriction other than as disclosed in the
Registration Statement and the Prospectus; and the Company has all
such corporate power and authority, and such authorizations,
approvals, consents, orders, licenses, certificates and permits to
enter into, deliver and perform this Agreement and to issue and sell
the Shares (except as may be required under the Securities Act and
state and foreign Blue Sky laws).
(f) The Company owns or possesses adequate and
enforceable rights to use all trademarks, trademark applications,
trade names, service marks, copyrights, copyright applications,
licenses, know-how and other similar rights and proprietary knowledge
(collectively, "Intangibles") necessary for the conduct of its
business as described in the Registration Statement and the
Prospectus. The Company has not received any notice of, nor to its
best knowledge is aware of, any infringement of or conflict with
asserted rights of others with respect to any Intangibles which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse effect upon the
assets or properties, business, results of operations, prospects or
condition (financial or otherwise) of the Company.
(g) The Company has good title to each of the items of
personal property which are reflected in the financial statements
referred to in Section 4(c) or are referred to in the Registration
Statement and the Prospectus as being owned by it and valid and
enforceable leasehold interests in each of the items of real and
personal property which are referred to in the Registration Statement
and the Prospectus as being leased by it, in each case free and clear
of all liens, encumbrances, claims, security interests and defects,
other than those described in the Registration Statement and the
Prospectus and those which do not and will not have a material adverse
effect upon the assets or properties, business, results of operations
or financial condition of the Company.
(h) Except as disclosed in the Registration Statement and
the Prospectus with respect to the Commission's investigation of Mego
Financial Corp. (the Company's parent), there is no litigation or
governmental or other proceeding or investigation before any court or
before or by any public body or board pending or, to the best
knowledge
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<PAGE> 6
of the Company, threatened (and the Company does not know of any basis
therefor) against, or involving the assets, properties or business of,
the Company which would materially adversely affect the value or the
operation of any such assets or properties or the business, results of
operations, prospects or condition (financial or otherwise) of the
Company.
(i) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
except as described therein, (1) there has not been any material
adverse change in the assets or properties, business, results of
operations, prospects or condition (financial or otherwise), of the
Company, whether or not arising from transactions in the ordinary
course of business; (2) the Company has not sustained any material
loss or interference with its assets, businesses or properties
(whether owned or leased) from fire, explosion, earthquake, flood or
other calamity, whether or not covered by insurance, or from any labor
dispute or any court or legislative or other governmental action,
order or decree; and (3) and since the date of the latest balance
sheet included in the Registration Statement and the Prospectus,
except as reflected therein, the Company has not (a) issued any
securities or incurred any liability or obligation, direct or
contingent, for borrowed money, except such liabilities or obligations
incurred in the ordinary course of business, (b) entered into any
transaction not in the ordinary course of business or (c) declared or
paid any dividend or made any distribution on any shares of its stock
or redeemed, purchased or otherwise acquired or agreed to redeem,
purchase or otherwise acquire any shares of its stock.
(j) There is no document or contract of a character
required to be described in the Registration Statement or Prospectus
or to be filed as an exhibit to the Registration Statement which is
not described or filed as required. Each agreement listed in the
Exhibits to the Registration Statement is in full force and effect and
is valid and enforceable by and against the Company in accordance with
its terms, assuming the due authorization, execution and delivery
thereof by each of the other parties thereto. Except as disclosed in
the Registration Statement and the Prospectus with respect to the
possible termination of servicing rights, neither the Company,
nor to the best knowledge of the Company, any other party is in
default in the observance or performance of any term or obligation to
be performed by it under any such agreement, and no event has occurred
which with notice or lapse of time or both would constitute such a
default, in any such case which default or event would have a material
adverse effect on the assets or properties, business, results of
operations, prospects or condition (financial or otherwise) of the
Company. No default exists, and no event has occurred which with
notice or lapse of time or both would constitute a default, in the due
performance and observance of any term, covenant or condition, by the
Company of any other agreement or instrument to which the Company is a
party or by which it or its properties or business may be bound or
affected which default or event would have a material adverse effect
on the assets or properties, business, results of operations,
prospects or condition (financial or otherwise) of the Company.
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<PAGE> 7
(k) The Company is not in violation of any term or
provision of its charter or bylaws or of any franchise, license,
permit, judgment, decree, order, statute, rule or regulation, where
the consequences of such violation would have a material adverse
effect on the assets or properties, business, results of operations,
prospects or condition (financial or otherwise) of the Company.
(l) Neither the execution, delivery and performance of
this Agreement by the Company nor the consummation of any of the
transactions contemplated hereby (including, without limitation, the
issuance and sale by the Company of the Shares) will give rise to a
right to terminate or accelerate the due date of any payment due
under, or conflict with or result in the breach of any term or
provision of, or constitute a default (or an event which with notice
or lapse of time or both would constitute a default) under, or require
any consent or waiver under, or result in the execution or imposition
of any lien, charge or encumbrance upon any properties or assets of
the Company pursuant to the terms of, any indenture, mortgage, deed of
trust or other agreement or instrument to which the Company is a party
or by which it or any of its respective properties or businesses is
bound, or any franchise, license, permit, judgment, decree, order,
statute, rule or regulation applicable to the Company or violate any
provision of the charter or bylaws of the Company, except for such
consents or waivers which have already been obtained and are in full
force and effect.
(m) The Company has an authorized and outstanding capital
stock as set forth under the caption "Capitalization" in the
Prospectus. All of the outstanding shares of Common Stock have been
duly and validly issued and are fully paid and nonassessable and were
not issued in violation of any preemptive or other similar right. The
Company has no subsidiaries. The Shares, when issued and sold
pursuant to this Agreement, will be duly and validly issued, fully
paid and nonassessable and none of them will be issued in violation of
any preemptive or other similar right. Except as disclosed in the
Registration Statement and the Prospectus, there is no outstanding
option, warrant or other right calling for the issuance of, and there
is no commitment, plan or arrangement to issue, any share of stock of
the Company or any security convertible into, or exercisable or
exchangeable for, such stock. The Common Stock and the Shares conform
in all material respects to all statements in relation thereto
contained in the Registration Statement and the Prospectus.
(n) No holder of any security of the Company has the
right to have any security owned by such holder included in the
Registration Statement or to demand registration of any security owned
by such holder during the period ending 180 days after the date of
this Agreement. The sole shareholder of the Company has delivered to
the Representatives its enforceable written agreement that it will
not, for a period of 180 days after the date of this Agreement, offer
for sale, sell, distribute, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, or exercise any
registration rights with respect to, any shares of Common Stock (or
any securities
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<PAGE> 8
convertible into, exercisable for, or exchangeable for any shares of
Common Stock) owned by it, without the prior written consent of the
Representatives.
(o) All necessary corporate action has been duly and
validly taken by the Company to authorize the execution, delivery and
performance of this Agreement and the issuance and sale of the Shares
by the Company. This Agreement has been duly and validly authorized,
executed and delivered by the Company and constitutes the legal, valid
and binding obligation of the Company enforceable against the Company
in accordance with its terms, except (A) as the enforceability hereof
may be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles and (B) to the extent
that rights to indemnity or contribution under this Agreement may be
limited by Federal and state securities laws or the public policy
underlying such laws.
(p) The Company is not involved in any labor dispute nor,
to the knowledge of the Company, is any such dispute threatened, which
dispute would have a material adverse effect on the assets or
properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company.
(q) No transaction has occurred between or among the
Company and any of its officers or directors or any affiliate or
affiliates of any such officer or director that is required to be
described in and is not described in the Registration Statement and
the Prospectus.
(r) The Company has not taken, nor will it take, directly
or indirectly, any action designed to or which might reasonably be
expected to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of the Common Stock to facilitate the sale
or resale of any of the Shares.
(s) The Company or its parent, Mego Financial Corp., has
filed all Federal, state, local and foreign tax returns which are
required to be filed by the Company through the date hereof, or has
received extensions thereof, and has paid all taxes shown on such
returns and all assessments received by it to the extent that the same
are material and have become due.
(t) The Shares have been duly authorized for quotation on
The Nasdaq National Market System.
(u) The Company has prepared and filed with the
Commission a registration statement on Form S-1 (No. 333-13421)
including a prospectus (including any amendments or supplements
thereto, the "Note Registration Statement") registering up to $40.0
million of the Company's __% Senior Subordinated Notes due 2001 (the
"Notes") in connection with the proposed public offering of the Notes.
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<PAGE> 9
(v) The Company is not, and will not become upon the
issuance and sale of the Shares as herein contemplated and the
application of net proceeds therefrom as described in the Prospectus
under the caption "Use of Proceeds," an "investment company" or an
entity "controlled" by an "investment company" as such terms are
defined in the Investment Company Act of 1940, as amended (the "1940
Act").
5. Conditions of the Underwriters' Obligations. The
obligations of the Underwriters under this Agreement are several and not joint.
The respective obligations of the Underwriters to purchase the Shares are
subject to each of the following terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 6(a)(i) of this Agreement.
(b) No order preventing or suspending the use of any
preliminary prospectus or the Prospectus shall have been or shall be
in effect and no order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings for such
purpose shall be pending before or threatened by the Commission, and
any requests for additional information on the part of the Commission
(to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of the
Representatives.
(c) The representations and warranties of the Company
contained in this Agreement and in the certificates delivered
pursuant to Section 5(d) shall be true and correct when made and on
and as of each Closing Date as if made on such date and the Company
shall have performed all covenants and agreements and satisfied all
the conditions contained in this Agreement required to be performed
or satisfied by it at or before such Closing Date.
(d) The Representatives shall have received on each
Closing Date a certificate, addressed to the Representatives and dated
such Closing Date, of the chief executive or chief operating officer
and the chief financial officer or chief accounting officer of the
Company to the effect that the signers of such certificate have
carefully examined the Registration Statement, the Prospectus and this
Agreement and that the representations and warranties of the Company
in this Agreement are true and correct on and as of such Closing Date
with the same effect as if made on such Closing Date and the Company
has performed all covenants and agreements and satisfied all
conditions contained in this Agreement required to be performed or
satisfied by it at or prior to such Closing Date.
(e) The Representatives shall have received on the
Effective Date, at the time this Agreement is executed and on each
Closing Date a signed letter from Deloitte & Touche LLP addressed to
the Representatives and dated, respectively, the Effective Date, the
date of this Agreement and each such Closing Date, in form and
substance reasonably satisfactory to the Representatives, confirming
that they are
9
<PAGE> 10
independent accountants within the meaning of the Securities Act and
the Rules, that the response to Item 10 of the Registration Statement
is correct insofar as it relates to them and stating in effect that:
(i) in their opinion the audited financial
statements and financial statement schedules included in the
Registration Statement and the Prospectus and reported on by
them comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and
the Rules;
(ii) on the basis of a reading of the amounts
included in the Registration Statement and the Prospectus
under the headings "Summary Financial Data" and "Selected
Financial Data," carrying out certain procedures (but not an
examination in accordance with generally accepted auditing
standards) which would not necessarily reveal matters of
significance with respect to the comments set forth in such
letter, a reading of the minutes of the meetings of the
stockholders and directors of the Company, and inquiries of
certain officials of the Company who have responsibility for
financial and accounting matters of the Company as to
transactions and events subsequent to the date of the latest
audited financial statements, except as disclosed in the
Registration Statement and the Prospectus, nothing came to
their attention which caused them to believe that:
(A) the amounts in "Summary Financial
Data," and "Selected Financial Data" included in the
Registration Statement and the Prospectus do not
agree with the corresponding amounts in the audited
and unaudited financial statements from which such
amounts were derived; or
(B) with respect to the Company, there
were, at a specified date not more than three
business days prior to the date of the letter, any
changes in the capital stock or long- term
indebtedness of the Company or any decreases in net
income, total assets, working capital, total revenues
or stockholders' equity of the Company, as compared
with the amounts shown on the Company's audited
balance sheet for the fiscal year ended August 31,
1996 included in the Registration Statement; and
(iii) they have performed certain other procedures
as a result of which they determined that certain information
of an accounting, financial or statistical nature (which is
limited to accounting, financial or statistical information
derived from the general accounting records of the Company)
set forth in the Registration Statement and the Prospectus and
reasonably specified by the Representatives agrees with the
accounting records of the Company.
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<PAGE> 11
References to the Registration Statement and the Prospectus in this
paragraph (e) are to such documents as amended and supplemented at the
date of the letter.
(f) The Representatives shall have received on each
Closing Date from Greenberg, Traurig, Hoffman, Lipoff, Rosen &
Quentel, P.A., counsel for the Company, an opinion, addressed to the
Representatives and dated such Closing Date, and stating in effect
that:
(i) The Company has been duly organized and is
validly existing as a corporation in good standing under the
laws of the State of Delaware. The Company is duly qualified
and in good standing as a foreign corporation in each
jurisdiction in which the character or location of its assets
or properties (owned, leased or licensed) or the nature of its
business makes such qualification necessary, except for such
jurisdictions where the failure to so qualify would not have a
material adverse effect on the assets or properties, business,
results of operations, prospects or condition (financial or
otherwise) of the Company.
(ii) The Company has all requisite corporate power
and authority to own, lease and license its assets and
properties and conduct its business as now being conducted and
as described in the Registration Statement and the Prospectus;
and the Company has all requisite corporate power and
authority and all necessary authorizations, approvals,
consents, orders, licenses, certificates and permits to enter
into, deliver and perform this Agreement and to issue and sell
the Shares other than those required under the Securities Act
and state and foreign Blue Sky laws.
(iii) The Company has authorized and issued capital
stock as set forth in the Registration Statement and the
Prospectus; the certificates evidencing the Shares are in due
and proper legal form and have been duly authorized for
issuance by the Company; all of the outstanding shares of
Common Stock of the Company have been duly and validly
authorized and, to the best of such counsel's knowledge, have
been duly and validly issued and are fully paid and
nonassessable and none of them was issued in violation of any
preemptive or other similar right. To the best of such
counsel's knowledge, the Company has no subsidiaries. The
Shares when issued and sold pursuant to this Agreement will
be duly and validly issued, outstanding, fully paid and
nonassessable and will not have been issued in violation of
any preemptive or other similar right. To the best of such
counsel's knowledge, except as disclosed in the Registration
Statement and the Prospectus, there is no outstanding option,
warrant or other right calling for the issuance of, and no
commitment, plan or arrangement to issue, any share of stock
of the Company or any security convertible into, exercisable
for, or exchangeable for stock of the Company. The Common
Stock and the Shares conform in all material respects to the
11
<PAGE> 12
descriptions thereof contained in the Registration Statement
and the Prospectus.
(iv) The agreement of the Company's sole stockholder
stating that for a period of 180 days from the date of this
Agreement it will not, without the prior written consent of
the Representatives, sell, grant any option for the sale of,
or otherwise dispose of, directly or indirectly, any shares of
Common Stock (or any securities convertible into, exercisable
for, or exchangeable for any shares of Common Stock) owned by
it has been duly and validly delivered by it and constitutes
the legal, valid and binding obligation of it enforceable
against it in accordance with its terms, except as the
enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the enforcement of creditors' rights
generally and by general equitable principles.
(v) All necessary corporate action has been duly and
validly taken by the Company to authorize the execution,
delivery and performance of this Agreement and the issuance
and sale of the Shares. This Agreement has been duly and
validly authorized, executed and delivered by the Company and
constitutes the legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its
terms except (A) as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the enforcement of creditors'
rights generally and by general equitable principles and (B)
to the extent that rights to indemnity or contribution under
this Agreement may be limited by Federal or state securities
laws or the public policy underlying such laws.
(vi) Neither the execution, delivery and performance
of this Agreement by the Company nor the consummation of any
of the transactions contemplated hereby (including, without
limitation, the issuance and sale by the Company of the
Shares) will give rise to a right to terminate or accelerate
the due date of any payment due under, or conflict with or
result in the breach of any term or provision of, or
constitute a default (or any event which with notice or lapse
of time, or both, would constitute a default) under, or
require consent or waiver under, or result in the execution or
imposition of any lien, charge or encumbrance upon any
properties or assets of the Company pursuant to the terms of
any indenture, mortgage, deed of trust, note or other
agreement or instrument of which such counsel is aware and to
which the Company is a party or by which it or any of its
properties or businesses is bound, except for such consents
and waivers which have already been obtained, or any
franchise, license,
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<PAGE> 13
permit, judgment, decree, order, statute, rule or regulation
of which such counsel is aware or violate any provision of the
charter or bylaws of the Company.
(vii) To the best of such counsel's knowledge,
except as disclosed in the Registration Statement and the
Prospectus with respect to the possible termination of
servicing rights, no default exists, and no event has occurred
which with notice or lapse of time, or both, would constitute a
default, in the due performance and observance of any term,
covenant or condition by the Company of any indenture,
mortgage, deed of trust, note or any other agreement or
instrument to which the Company is a party or by which it or
any of its assets or properties or businesses may be bound or
affected, where the consequences of such default would have a
material and adverse effect on the assets,
properties,business, results of operations, prospects or
condition (financial or otherwise) of the Company.
(viii) To the best of such counsel's knowledge, the
Company is not in violation of any term or provision of its
charter or bylaws or any franchise, license, permit, judgment,
decree, order, statute, rule or regulation, where the
consequences of such violation would have a material and
adverse effect on the assets or properties, businesses,
results of operations, prospects or condition (financial or
otherwise) of the Company.
(ix) No consent, approval, authorization or order of
any court or governmental agency or body is required for the
performance of this Agreement by the Company or the
consummation of the transactions contemplated hereby, except
such as have been obtained under the Securities Act and such
as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by
the several Underwriters.
(x) To the best of such counsel's knowledge, except
as disclosed in the Registration Statement and the Prospectus
with respect to the Commission's investigation of Mego
Financial Corp., there is no litigation or governmental or
other proceeding or investigation, before any court or before
or by any public body or board pending or threatened against,
or involving the assets, properties or businesses of, the
Company which would have a material adverse effect upon the
assets or properties, business, results of operations,
prospects or condition (financial or otherwise) of the Company.
(xi) The statements in the Prospectus under the
captions "Description of Capital Stock," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources,"
"Business-Government Regulation," "Shares Eligible for Future
Sale," "Management-Employment Agreement," "Management-Company
Stock Option Plan," and "Certain Transactions," insofar as
such statements constitute
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<PAGE> 14
a summary of documents referred to therein or matters of law,
are fair summaries in all material respects and accurately
present the information called for with respect to such
documents and matters. To the best of such counsel's
knowledge, all contracts and other documents required to be
filed as exhibits to, or described in, the Registration
Statement have been so filed with the Commission or are
fairly described in the Registration Statement, as the
case may be.
(xii) The Registration Statement, all preliminary
prospectuses and the Prospectus and each amendment or
supplement thereto (except for the financial statements and
schedules and other financial and statistical data included
therein, as to which such counsel expresses no opinion) comply
as to form in all material respects with the requirements of
the Securities Act and the Rules.
(xiii) The Registration Statement has become
effective under the Securities Act, and, to the best of such
counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or
are threatened, pending or contemplated.
(xiv) The Shares to be sold under this Agreement to
the Underwriters are duly authorized for quotation on The
Nasdaq National Market.
(xv) The Company is not, and will not become upon
and as a result of the sale of the Shares and the application
of the net proceeds therefrom as described in the Prospectus
under the caption "Use of Proceeds," an "investment company,"
as such term is defined in the 1940 Act.
To the extent deemed advisable by such counsel, they may rely
as to matters of fact on certificates of responsible officers of the
Company and public officials and on the opinions of other counsel
satisfactory to the Representatives as to matters which are governed
by laws other than the laws of the States of Florida or New York, the
General Corporation Law of the State of Delaware and the Federal laws
of the United States; provided that such counsel shall state that in
their opinion the Underwriters and they are justified in relying on
such other opinions. Copies of such certificates and other opinions
shall be furnished to the Representatives and counsel for the
Underwriters.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of
the Company, representatives of the Representatives and
representatives of the independent certified public accountants of the
Company, at which conferences the contents of the Registration
Statement and the Prospectus and related matters were discussed and,
although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and the Prospectus
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<PAGE> 15
(except as specified in the foregoing opinion), on the basis of the
foregoing, no facts have come to the attention of such counsel which
lead such counsel to believe that the Registration Statement at the
time it became effective (except with respect to the financial
statements and notes and schedules thereto and other financial data,
as to which such counsel need express no belief) contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or that the Prospectus as amended or
supplemented (except with respect to the financial statements and
notes schedules thereto and other financial data, as to which such
counsel need make no statement) on the date thereof contained any
untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(g) All proceedings taken in connection with the sale of
the Firm Shares and the Option Shares as herein contemplated shall be
reasonably satisfactory in form and substance to the Representatives
and their counsel and the Underwriters shall have received on each
Closing Date from Gibson, Dunn & Crutcher LLP a favorable opinion,
addressed to the Representatives and dated such Closing Date, with
respect to the Shares, the Registration Statement and the Prospectus,
and such other related matters, as the Representatives may reasonably
request, and the Company shall have furnished to Gibson, Dunn &
Crutcher LLP such documents as they may reasonably request for the
purpose of enabling them to pass upon such matters.
(h) The Representatives shall have received on each
Closing Date a certificate, addressed to the Representatives, and
dated such Closing Date, of an executive officer of the Company to the
effect that as of such Closing Date, neither the Company nor any of
its affiliates does business with the government of Cuba or with any
person or affiliate located in Cuba.
(i) The Note Registration Statement registering the Notes
shall have become effective under the Securities Act, and no stop
order suspending the effectiveness of the Note Registration Statement
has been issued and no proceedings for that purpose shall have been
instituted or be threatened, pending or contemplated, and the offering
of the Notes, in an aggregate amount not to exceed $40.0 million,
shall have been consummated as contemplated in the Note Registration
Statement on the Firm Closing Date.
6. Covenants of the Company.
(a) The Company covenants and agrees with each
Underwriter as follows:
(i) The Company shall prepare the Prospectus in a
form approved by the Representatives and file such Prospectus
pursuant to Rule 424(b) under the Securities Act not later
than the Commission's close of business on the
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<PAGE> 16
second business day following the execution and delivery of
this Agreement, or, if applicable, such earlier time as may be
required by Rule 430A(a)(3) under the Securities Act, and
shall promptly advise the Representatives (A) when any
amendment to the Registration Statement shall have become
effective, (B) of any request by the Commission for any
amendment of the Registration Statement or the Prospectus or
for any additional information, (C) of the prevention or
suspension of the use of any preliminary prospectus or the
Prospectus or of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration
Statement or the institution or threatening of any proceeding
for that purpose and (D) of the receipt by the Company of any
notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or
the initiation or threatening of any proceeding for such
purpose. The Company shall not file any amendment of the
Registration Statement or supplement to the Prospectus unless
the Company has furnished the Representatives a copy for its
review prior to filing and shall not file any such proposed
amendment or supplement to which the Representatives
reasonably object. The Company shall use its best efforts to
prevent the issuance of any such stop order and, if issued, to
obtain as soon as possible the withdrawal thereof.
(ii) If, at any time when a prospectus relating to
the Shares is required to be delivered under the Securities
Act and the Rules, any event occurs as a result of which the
Prospectus as then amended or supplemented would include any
untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein in the
light of the circumstances under which they were made not
misleading, or if it shall be necessary to amend or supplement
the Prospectus to comply with the Securities Act or the Rules,
the Company promptly shall prepare and file with the
Commission, subject to the second sentence of paragraph (i) of
this Section 6(a), an amendment or supplement which shall
correct such statement or omission or an amendment which shall
effect such compliance.
(iii) The Company shall make generally available to
its security holders and to the Representatives as soon as
practicable, but not later than 45 days after the end of the
12-month period beginning at the end of the fiscal quarter of
the Company during which the Effective Date occurs (or 90 days
if such 12-month period coincides with the Company's fiscal
year), an earning statement (which need not be audited) of the
Company, covering such 12-month period, which shall satisfy
the provisions of Section 11(a) of the Securities Act or Rule
158 of the Rules.
(iv) The Company shall furnish to the
Representatives and counsel for the Underwriters, without
charge, signed copies of the Registration Statement (including
all exhibits thereto and amendments thereof) and to each
16
<PAGE> 17
other Underwriter a copy of the Registration Statement
(without exhibits thereto) and all amendments thereof and, so
long as delivery of a prospectus by an Underwriter or dealer
may be required by the Securities Act or the Rules, as many
copies of any preliminary prospectus and the Prospectus and
any amendments thereof and supplements thereto as the
Representatives may reasonably request.
(v) The Company shall cooperate with the
Representatives and their counsel in endeavoring to qualify
the Shares for offer and sale under the laws of such
jurisdictions as the Representatives may designate and shall
maintain such qualifications in effect so long as required for
the distribution of the Shares; provided, however, that the
Company shall not be required in connection therewith, as a
condition thereof, to qualify as a foreign corporation or to
execute a general consent to service of process in any
jurisdiction or subject itself to taxation as doing business
in any jurisdiction.
(vi) For a period of five years after the date of
this Agreement, the Company shall supply to the
Representatives, and to each other Underwriter who may so
request in writing, copies of such financial statements and
other periodic and special reports as the Company may from
time to time distribute generally to the holders of any class
of its capital stock and to furnish to the Representatives a
copy of each annual or other report it shall be required to
file with the Commission (including the Report on Form SR
required by Rule 463 of the Rules).
(vii) Without the prior written consent of the
Representatives, for a period of 180 days after the date of
this Agreement, the Company shall not issue, sell or register
with the Commission (other than on Form S-8 or on any
successor form), or otherwise dispose of, directly or
indirectly, any equity securities of the Company (or any
securities convertible into or exercisable or exchangeable for
equity securities of the Company), except for the issuance of
the Shares pursuant to the Registration Statement and the
issuance of shares pursuant to the Company's existing stock
option plan. In the event that during this period, (A) any
shares are issued pursuant to the Company's existing stock
option plan or (B) any registration is effected on Form S-8 or
on any successor form, the Company shall obtain the written
agreement of such grantee or purchaser or holder of such
registered securities that, for a period of 180 days after the
date of this Agreement, such person will not, without the
prior written consent of the Representatives, offer for sale,
sell, distribute, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, or exercise any
registration rights with respect to, any shares of Common
Stock (or any securities convertible into, exercisable for, or
exchangeable for any shares of Common Stock) owned by such
person.
17
<PAGE> 18
(viii) On or before completion of this offering, the
Company shall make all filings required under applicable
securities laws and by The Nasdaq National Market System
(including any required registration under the Exchange Act).
(b) The Company agrees to pay, or reimburse if paid by
the Representatives, whether or not the transactions contemplated
hereby are consummated or this Agreement is terminated, all costs and
expenses incident to the public offering of the Shares and the
performance of the obligations of the Company under this Agreement
including those relating to: (i) the preparation, printing, filing
and distribution of the Registration Statement including all exhibits
thereto, each preliminary prospectus, the Prospectus, all amendments
and supplements to the Registration Statement and the Prospectus, and
the printing, filing and distribution of this Agreement; (ii) the
preparation and delivery of certificates for the Shares to the
Underwriters; (iii) the registration or qualification of the Shares
for offer and sale under the securities or Blue Sky laws of the
various jurisdictions referred to in Section 6(a)(v), including the
reasonable fees and disbursements of counsel for the Underwriters in
connection with such registration and qualification and the
preparation, printing, distribution and shipment of preliminary and
supplementary Blue Sky memoranda; (iv) the furnishing (including costs
of shipping and mailing) to the Representatives and to the
Underwriters of copies of each preliminary prospectus, the Prospectus
and all amendments or supplements to the Prospectus, and of the
several documents required by this Section to be so furnished, as may
be reasonably requested for use in connection with the offering and
sale of the Shares by the Underwriters or by dealers to whom Shares
may be sold; (v) the filing fees of the National Association of
Securities Dealers, Inc. in connection with its review of the terms of
the public offering; (vi) the furnishing (including costs of shipping
and mailing) to the Representatives and to the Underwriters of copies
of all reports and information required by Section 6(a)(vi); (vii)
inclusion of the Shares for quotation on The Nasdaq National Market;
and (viii) all transfer taxes, if any, with respect to the sale and
delivery of the Shares by the Company to the Underwriters. Subject to
the provisions of Section 9, the Underwriters agree to pay, whether or
not the transactions contemplated hereby are consummated or this
Agreement is terminated, all costs and expenses incident to the
performance of the obligations of the Underwriters under this
Agreement not payable by the Company pursuant to the preceding
sentence, including, without limitation, the fees and disbursements of
counsel for the Underwriters.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act against any and all losses, claims, damages and
liabilities, joint or several (including any reasonable investigation,
legal and other expenses incurred in connection with, and any amount
paid in
18
<PAGE> 19
settlement of, any action, suit or proceeding or any claim asserted),
to which they, or any of them, may become subject under the Securities
Act, the Exchange Act or other Federal or state law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or
liabilities arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in any
preliminary prospectus, the Registration Statement or the Prospectus
or any amendment thereof or supplement thereto, or arise out of or are
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; provided, however, that such
indemnity shall not inure to the benefit of any Underwriter (or any
person controlling such Underwriter) on account of any losses, claims,
damages or liabilities arising from the sale of the Shares to any
person by such Underwriter if such untrue statement or omission or
alleged untrue statement or omission was made in such preliminary
prospectus, the Registration Statement or the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with
information furnished in writing to the Company by the Representatives
on behalf of any Underwriter specifically for use therein, which
includes only the statements contained in the last paragraph of the
cover page, in the paragraph relating to stabilization on the inside
front cover page of the Prospectus and the statements contained under
the caption "Underwriting" in the Prospectus. This indemnity
agreement will be in addition to any liability which the Company may
otherwise have.
(b) Each Underwriter agrees, severally and not jointly,
to indemnify and hold harmless the Company, each person, if any, who
controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, each director of the
Company, and each officer of the Company who signs the Registration
Statement, to the same extent as the foregoing indemnity from the
Company to each Underwriter, but only insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue
statement or omission or alleged untrue statement or omission with
respect to such Underwriter which was made in any preliminary
prospectus, the Registration Statement or the Prospectus, or any
amendment thereof or supplement thereto, in reliance upon and in
conformity with information furnished in writing to the Company by the
Representatives on behalf of any Underwriter specifically for use
therein, which includes only the statements contained in the last
paragraph of the cover page, in the paragraph relating to
stabilization on the inside front cover page of the Prospectus and the
statements contained under the caption "Underwriting" in the
Prospectus; provided, however, that the obligation of any Underwriter
to indemnify the Company (including any controlling person, director
or officer thereof) shall be limited to the net proceeds received by
the Company from such Underwriter.
(c) Any party that proposes to assert the right to be
indemnified under this Section 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 an
19
<PAGE> 20
indemnifying party or parties under this Section, notify each such
indemnifying party of the commencement of such action, suit or
proceeding, enclosing a copy of all papers served. No indemnification
provided for in Section 6(a) or 6(b) shall be available to any party
who shall fail to give notice as provided in this Section 6(c) if the
party to whom notice was not given was unaware of the proceeding to
which such notice would have related and was prejudiced by the failure
to give such notice but the omission so to notify such indemnifying
party of any such action, suit or proceeding shall not relieve it from
any liability that it may have to any indemnified party for
contribution or otherwise than under this Section. In case any such
action, suit or proceeding shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate in,
and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party, and
after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof and the approval by the
indemnified party of such counsel, the indemnifying party shall not be
liable to such indemnified party for any legal or other expenses,
except as provided below and except for the 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, but the fees and
expenses of such counsel shall be at the expense of such indemnified
party unless (i) the employment of counsel by such indemnified party
has been authorized in writing by the indemnifying parties, (ii) the
indemnified party shall have reasonably concluded that there may be a
conflict of interest between the indemnifying parties and the
indemnified party in the conduct of the defense of such action (in
which case the indemnifying parties shall not have the right to direct
the defense of such action on behalf of the indemnified party) or
(iii) the indemnifying parties shall not have employed counsel to
assume the defense of such action within a reasonable time after
notice of the commencement thereof, in each of which cases the fees
and expenses of counsel shall be at the expense of the indemnifying
parties. An indemnifying party shall not be liable for any settlement
of any action, suit, proceeding or claim effected without its written
consent.
8. Contribution. In order to provide for just and
equitable contribution in circumstances in which the indemnification provided
for in Section 7(a) is due in accordance with its terms but for any reason is
held to be unavailable from the Company, the Company and the Underwriters shall
contribute to the aggregate losses, claims, damages and liabilities (including
any investigation, legal and other expenses reasonably incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding or
any claims asserted, but after deducting any contribution received by the
Company from persons other than the Underwriters, such as persons who control
the Company within the meaning of the Securities Act, officers of the Company
who signed the Registration Statement and directors of the Company, who may
also be liable for contribution) to which the Company and one or more of the
Underwriters may be subject in such proportion as is appropriate to reflect
the relative
20
<PAGE> 21
benefits received by the Company on the one hand and the Underwriters on the
other from the offering of the Shares or, if such allocation is not permitted
by applicable law or indemnification is not available as a result of the
indemnifying party not having received notice as provided in Section 7 hereof,
in such proportion as is appropriate to reflect not only the relative benefits
referred to above but also the relative fault of the Company on the one hand
and the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Underwriters shall be deemed to be in
the same proportion as (x) the total proceeds from the offering (net of
underwriting discounts but before deducting expenses) received by the Company,
as set forth in the table on the cover page of the Prospectus, bear to (y) the
underwriting discounts received by the Underwriters, as set forth in the table
on the cover page of the Prospectus. The relative fault of the Company or the
Underwriters shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact related to
information supplied by the Company or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this
Section 8 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 8, (i) in no case shall any
Underwriter (except as may be provided in the Agreement Among Underwriters) be
liable or responsible for any amount in excess of the underwriting discount
applicable to the Shares purchased by such Underwriter hereunder, and (ii) the
Company shall be liable and responsible for any amount in excess of such
underwriting discount; provided, however, that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 8, each person, if
any, who controls an Underwriter within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act shall have the same rights
to contribution as such Underwriter, and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act or Section 20(a)
of the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to clauses (i) and
(ii) in the immediately preceding sentence of this Section 8. Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a
claim for contribution may be made against another party or parties under this
Section, notify such party or parties from whom contribution may be sought, but
the omission so to notify such party or parties from whom contribution may be
sought shall not relieve the party or parties from whom contribution may be
sought from any other obligation it or they may have hereunder or otherwise
than under this Section. No party shall be liable for contribution with
respect to any action, suit, proceeding or claim settled without its written
consent. The Underwriter's obligations to contribute pursuant to this Section
8 are several in proportion to their respective underwriting commitments and
not joint.
21
<PAGE> 22
9. Termination. This Agreement may be terminated with
respect to the Shares to be purchased on a Closing Date by the Representatives
by notifying the Company at any time:
(a) in the absolute discretion of the Representatives at
or before any Closing Date: (i) if on or prior to such date, any
domestic or international event or act or occurrence has materially
disrupted, or in the opinion of the Representatives will in the future
materially disrupt, the securities markets; (ii) if there has occurred
any new outbreak or material escalation of hostilities or other
calamity or crisis the effect of which on the financial markets of the
United States is such as to make it, in the judgment of the
Representatives, inadvisable to proceed with the offering; (iii) if
there shall be such a material adverse change in general financial,
political or economic conditions or the effect of international
conditions on the financial markets in the United States is such as to
make it, in the judgment of the Representatives, inadvisable or
impracticable to market the Shares; (iv) if trading in the Shares has
been suspended by the Commission or trading generally on the New York
Stock Exchange, Inc. or on the American Stock Exchange, Inc. has been
suspended or limited, or minimum or maximum ranges for prices for
securities shall have been fixed, or maximum ranges for prices for
securities have been required, by said exchanges or by order of the
Commission, the National Association of Securities Dealers, Inc., or
any other governmental or regulatory authority; or (v) if a banking
moratorium has been declared by any state or Federal authority, or
(b) at or before any Closing Date, that any of the
conditions specified in Section 5 shall not have been fulfilled when
and as required by this Agreement.
If this Agreement is terminated pursuant to any of its
provisions, the Company shall not be under any liability to any Underwriter,
and no Underwriter shall be under any liability to the Company, except that (y)
if this Agreement is terminated by the Representatives or the Underwriters
because of any failure, refusal or inability on the part of the Company to
comply with the terms or to fulfill any of the conditions of this Agreement,
the Company will reimburse the Underwriters for all out-of-pocket expenses
(including the reasonable fees and disbursements of their counsel) incurred by
them in connection with the proposed purchase and sale of the Shares or in
contemplation of performing their obligations hereunder and (z) no Underwriter
who shall have failed or refused to purchase the Shares agreed to be purchased
by it under this Agreement, without some reason sufficient hereunder to justify
cancellation or termination of its obligations under this Agreement, shall be
relieved of liability to the Company or to the other Underwriters for damages
occasioned by its failure or refusal.
10. Substitution of Underwriters. If one or more of the
Underwriters shall fail (other than for a reason sufficient to justify the
cancellation or termination of this Agreement under Section 9) to purchase on
any Closing Date the Shares agreed to be purchased on such Closing Date by such
Underwriter or Underwriters, the Representatives may find one or more
substitute underwriters to purchase such Shares or make such other
22
<PAGE> 23
arrangements as the Representatives may deem advisable or one or more of the
remaining Underwriters may agree to purchase such Shares in such proportions as
may be approved by the Representatives, in each case upon the terms set forth
in this Agreement. If no such arrangements have been made by the close of
business on the business day following such Closing Date,
(a) if the number of Shares to be purchased by the
defaulting Underwriters on such Closing Date shall not exceed 10% of
the Shares that all the Underwriters are obligated to purchase on such
Closing Date, then each of the nondefaulting Underwriters shall be
obligated to purchase such Shares on the terms herein set forth in
proportion to their respective obligations hereunder; provided, that
in no event shall the maximum number of Shares that any Underwriter
has agreed to purchase pursuant to Section 1 be increased pursuant to
this Section 10 by more than one-ninth of such number of Shares
without the written consent of such Underwriter, or
(b) if the number of Shares to be purchased by the
defaulting Underwriters on such Closing Date shall exceed 10% of the
Shares that all the Underwriters are obligated to purchase on such
Closing Date, then the Company shall be entitled to an additional
business day within which it may, but is not obligated to, find one or
more substitute underwriters reasonably satisfactory to the
Representatives to purchase such Shares upon the terms set forth in
this Agreement.
In any such case, either the Representatives or the Company
shall have the right to postpone the applicable Closing Date for a period of
not more than five business days in order that necessary changes and
arrangements (including any necessary amendments or supplements to the
Registration Statement or Prospectus) may be effected by the Representatives
and the Company. If the number of Shares to be purchased on such Closing Date
by such defaulting Underwriter or Underwriters shall exceed 10% of the Shares
that all the Underwriters are obligated to purchase on such Closing Date, and
none of the nondefaulting Underwriters or the Company shall make arrangements
pursuant to this Section within the period stated for the purchase of the
Shares that the defaulting Underwriters agreed to purchase, this Agreement
shall terminate with respect to the Shares to be purchased on such Closing Date
without liability on the part of any nondefaulting Underwriter to the Company
and without liability on the part of the Company, except in both cases as
provided in Sections 6(b), 7, 8 and 9. The provisions of this Section shall
not in any way affect the liability of any defaulting Underwriter to the
Company or the nondefaulting Underwriters arising out of such default. A
substitute underwriter hereunder shall become an Underwriter for all purposes
of this Agreement.
11. Miscellaneous. The respective agreements,
representations, warranties, indemnities and other statements of the Company or
its officers and of the Underwriters set forth in or made pursuant to this
Agreement shall remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
the officers, directors or controlling persons referred to in Sections 7 and 8
hereof, and shall
23
<PAGE> 24
survive delivery of and payment for the Shares. The provisions of Sections
6(b), 7, 8 and 9 shall survive the termination or cancellation of this
Agreement.
This Agreement has been and is made for the benefit of the
Underwriters and the Company and their respective successors and assigns, and,
to the extent expressed herein, for the benefit of persons controlling any of
the Underwriters or the Company, and directors and officers of the Company, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser of Shares from any Underwriter merely
because of such purchase.
All notices and communications hereunder shall be in writing
and mailed or delivered or by telephone or telegraph if subsequently confirmed
in writing, (a) if to the Representatives, c/o Oppenheimer & Co., Inc.,
Oppenheimer Tower, World Financial Center, New York, New York 10281 Attention:
Mark C. Biderman and (b) if to the Company, to its agent for service as such
agent's address appears on the cover page of the Registration Statement.
This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without regard to principles
of conflict of laws.
24
<PAGE> 25
This Agreement may be signed in any number of counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument. Please confirm that the
foregoing correctly sets forth the agreement among us.
Very truly yours,
MEGO MORTGAGE CORPORATION
By:
--------------------------
Title:
Confirmed:
OPPENHEIMER & CO., INC.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Acting severally on behalf of themselves
and as representative of the several
Underwriters named in Schedule I annexed
hereto.
By: OPPENHEIMER & CO., INC.
By:
------------------------------
Title:
25
<PAGE> 26
SCHEDULE I
NUMBER OF
FIRM SHARES
NAME TO BE PURCHASED
- ----------------------------------------------------------- ----------------
Oppenheimer & Co., Inc. . . . . . . . . . . . . . . . . . .
Friedman, Billings, Ramsey & Co., Inc. . . . . . . . . . .
-------------
Total . . . . . . . . . . . . . . . . . . . . . . 2,000,000
=============
26
<PAGE> 1
EXHIBIT 4.1
NUMBER MEGO MORTGAGE CORPORATION SHARES
Incorporated Under the Laws
of the State of Delaware
SEE REVERSE FOR CERTAIN
DEFINITIONS
CUSIP 585165 10 3
This Certifies that
------------------------------------------------------------
- --------------------------------------------------------------------------------
Is the Registered Holder of
-----------------------------------------------------
- --------------------------------------------------------------------------------
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.01
PER SHARE
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation
and the facsimile signatures of its duly authorized officers.
Dated:
Vice President and Secretary Chairman and Chief Executive Officer
<PAGE> 2
MEGO MORTGAGE CORPORATION
The Corporation is authorized to issue Common Stock and Preferred Stock. The
Board of Directors of the Corporation has authority to fix the number of shares
and the designation of any series of Preferred Stock and to determine or alter
the rights, preferences, privileges, and restrictions granted to or imposed upon
any unissued series of Preferred Stock.
This certificate and the shares represented hereby shall be subject to all of
the provisions of the Certificate of Incorporation of this Corporation and of
the amendments thereto, by all of which the holder by acceptance hereof is
bound. The Corporation will furnish without charge to the holders hereof upon
request a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of designation, and the
number of shares constituting each such class and series. Any such request
should be made at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship and not as
tenants in common UNIF GIFT MIN ACT -- (Cust) _______________ Custodian
(Minor) __________ under Uniform Gift to Minors Act (State)__________
Additional abbreviations may also be used though not in the above list.
For Value Received _________________________________________ hereby
sells, assigns and transfers unto_______________________________________________
________________________________________________________________________________
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF
ASSIGNEE
________________________________________________________________________________
(PLEASE PRINT OR TYPE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
___________ shares of the capital stock represented by the
___________________________________ within Certificate and does hereby
irrevocably constitute and appoint ______________________________________
Attorney to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
DATED:_____________________________ SIGNED:________________________________
<PAGE> 3
SIGNED:_________________________________
NOTICE: The signature to this assignment
must correspond with the name as written
upon the face of the certificate, in every
particular, without alteration or
enlargement or any change whatsoever.
SIGNATURE(S) GUARANTEED: SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT
UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM,
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
Exhibit 5.1
November 13, 1996
Mego Mortgage Corporation
1000 Parkwood Circle, Suite 500
Atlanta, Georgia 30339
Gentlemen:
On September 20, 1996, Mego Mortgage Corporation, a Delaware
corporation (the "Company"), filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 (Registration No. 333-12443) (the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act"). The Registration Statement relates to the sale by the Company of up to
2,000,000 shares of the Company's Common Stock, par value $.01 per share (the
"Common Stock"), and an additional 300,000 shares upon the exercise of the
underwriters' overallotment option (such shares of Common Stock are hereinafter
collectively referred to as the "Shares"). We have acted as counsel to the
Company in connection with the preparation and filing of the Registration
Statement.
In connection with the Registration Statement, we have examined,
considered and relied upon copies of the following documents (collectively, the
"Documents"): (i) the Company's Amended and Restated Certificate of
Incorporation and Bylaws; (ii) resolutions of the Company's Board of Directors
authorizing the offering and the issuance of the Shares to be sold by the
Company and related matters; (iii) the Registration Statement and all amendments
and exhibits thereto; and (iv) such other documents and instruments that we have
deemed necessary for the expression of the opinions herein contained. In making
the foregoing examinations, we have assumed without investigation the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals, the conformity to authentic original documents of all documents
submitted to us as copies, and the veracity of the Documents. As to various
questions of fact material to the opinion expressed below, we have relied, to
the extent we deemed reasonably appropriate, upon the representations or
certificates of officers and/or directors of the Company and upon documents,
records and instruments furnished to us by the Company, without independently
verifying the accuracy of such certificates, documents, records or instruments.
Based upon the foregoing examination, and subject to the qualifications
set forth below, we are of the opinion that the Shares have been duly and
validly authorized, and when issued and
<PAGE> 2
Mego Mortgage Corporation
November 13, 1996
Page 2
delivered in accordance with the terms of the Underwriting Agreement filed as
Exhibit 1.1 to the Registration Statement, will be validly issued, fully paid
and non-assessable.
Although we have acted as counsel to the Company in connection with the
preparation and filing of the Registration Statement, our engagement has been
limited to certain matters about which we have been consulted. Consequently,
there exist matters of a legal nature involving the Company in which we have not
been consulted and have not represented the Company. This opinion letter is
limited to the matters stated herein and no opinions may be implied or inferred
beyond the matters expressly stated herein. The opinions expressed herein are
given as of this date, and we assume no obligation to update or supplement our
opinions to reflect any facts or circumstances that may come to our attention or
any change in law that may occur or become effective at a later date.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our name under the caption "Legal
Matters" in the prospectus comprising a part of the Registration Statement. In
giving such consent, we do not thereby admit that we are included within the
category of persons whose consent is required under Section 7 of the Act or the
rules and regulations promulgated thereunder.
Sincerely,
GREENBERG, TRAURIG, HOFFMAN,
LIPOFF, ROSEN & QUENTEL, P.A.
<PAGE> 1
EXHIBIT 10.1
---------------------------------------
MEGO MORTGAGE CORPORATION
1996 STOCK OPTION PLAN
---------------------------------------
1. Purpose. The purpose of this Plan is to advance the interests of
Mego Mortgage Corporation, a Delaware corporation (the "Company"), by providing
an additional incentive to attract, retain and motivate qualified and competent
persons who are key to the Company and its Subsidiaries, including employees,
officers and directors, and upon whose efforts and judgment the success of the
Company is largely dependent, through the encouragement of stock ownership in
the Company by such persons.
2. Definitions. As used herein, the following terms shall have the
meaning indicated:
(a) "Affiliate" shall mean any corporation other than the
Company that is a member of an affiliated group of corporations, as defined in
Section 1504 (determined without regard to Section 1504(b)) of the Code, of
which the Company is a member.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(d) "Committee" shall mean the committee appointed to
administer the Plan with respect to Covered Employees pursuant to Section 14(b)
hereof.
(e) "Common Stock" shall mean the Company's Common Stock, par
value $0.01 per share.
(f) "Company" shall refer to Mego Mortgage Corporation, a
Delaware corporation.
(g) "Covered Employee" shall mean any individual who, on the
last day of the taxable year of the Company, is (i) the Chief Executive Officer
of the Company or is acting in such capacity (the "CEO") and (ii) among the four
highest compensated officers (other than the CEO) of the Company. The
determination of whether an individual is the CEO or among the four highest
compensated officers shall be determined pursuant to Section 162(m) of the Code
and the regulations promulgated thereunder.
(h) "Director" shall mean a member of the Board or of the
Board of Directors of any Subsidiary.
<PAGE> 2
(i) "Effective Date" shall mean the commencement date of the
Company's initial public offering of Common Stock as contemplated by the
Company's Registration Statement on Form S-1 (Registration No. 333-12443)
initially filed with the Securities and Exchange Commission on September 20,
1996.
(j) "Eighty Percent Control" shall refer to control of the
Company within the meaning of Section 368(c) of the Code, that is ownership of
at least 80% of the total combined voting power of all classes of stock entitled
to vote for directors of the Company and at least 80% of the total number of
shares of each other class of stock of the Company, all as defined in Section
368(c) of the Code.
(k) "Eighty Percent Holder" shall refer to Mego Financial.
(l) "Eighty Percent Period" shall refer to that period during
which the Eighty Percent Holder has Eighty Percent Control.
(m) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(n) "Fair Market Value" of a Share on any date of reference
shall be the "Closing Price" (as defined below) of the Common Stock on the
business day immediately preceding such date or on such date, unless the Board
shall determine otherwise in a fair and uniform manner. For the purpose of
determining Fair Market Value, the "Closing Price" of the Common Stock on any
business day shall be (i) if the Common Stock is listed or admitted for trading
on any United States national securities exchange, or if actual transactions are
otherwise reported on a consolidated transaction reporting system, the last
reported sale price of Common Stock on such exchange or reporting system, as
reported in any newspaper of general circulation, (ii) if the Common Stock is
quoted on the National Association of Securities Dealers Automated Quotations
System ("Nasdaq"), or any similar system of automated dissemination of
quotations of securities prices in common use, the last reported sale price of
Common Stock for such day on such system, or (iii) if neither clause (i) or (ii)
is applicable, the mean between the high bid and low asked quotations for the
Common Stock as reported by the National Quotation Bureau, Incorporated if at
least two securities dealers have inserted both bid and asked quotations for
Common Stock on at least five of the ten preceding days. If neither (i), (ii),
or (iii) above is applicable, then Fair Market Value shall be determined in good
faith by the Board in a fair and uniform manner.
(o) "Incentive Stock Option" shall mean an incentive stock
option as defined in Section 422 of the Code.
(p) "Mego Financial" shall refer to Mego Financial Corp., a
New York corporation and majority stockholder of the Company.
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<PAGE> 3
(q) "Non-Employee Director" shall refer to a Director who is
not an employee of the Company or any Affiliate.
(r) "Non-Qualified Stock Option" shall mean an Option which is
not an Incentive Stock Option.
(s) "Option" (when capitalized) shall mean any option granted
under this Plan.
(t) "Optionee" shall mean a person to whom a stock option is
granted under this Plan or any person who succeeds to the rights of such person
under this Plan by reason of the death of such person.
(u) "Outside Director" shall mean a member of the Board who
(i) is not a current employee of the Company or any Affiliate, (ii) is not a
former employee of the Company or any Affiliate who receives compensation for
prior services (other than benefits under a tax-qualified retirement plan)
during the taxable year; (iii) has not been an officer of the Company or any
Affiliate; (iv) does not receive Remuneration either directly or indirectly, in
any capacity other than as a director; and (v) satisfies any other conditions
that shall from time to time be required to qualify as an "outside director"
under Section 162(m) of the Code and the regulations thereunder and as a
"Non-Employee Director" under Rule 16b-3 promulgated under the Exchange Act. For
this purpose, "Remuneration" shall have the meaning afforded that term pursuant
to Treasury Regulations issued under Section 162(m) of the Code, and shall
exclude any de minimis remuneration excluded under those Treasury Regulations.
(v) "Plan" shall mean this 1996 Stock Option Plan for the
Company.
(w) "Restricted Option" shall mean an Option the
exercisability of which is restricted pursuant to Section 9 hereof.
(x) "SAR" shall mean a stock appreciation right granted in
tandem with a Restricted Option pursuant to Section 9 hereof.
(y) "Share(s)" shall mean a share or shares of the Common
Stock.
(z) "Subsidiary" shall mean any corporation (other than the
Company) in any unbroken chain of corporations beginning with the Company if, at
the time of the granting of the Option, each of the corporations other than the
last corporation in the unbroken chain owns stock possessing 50 percent or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.
3. Shares and Options. The Board may grant to Optionees from time to
time, Options to purchase an aggregate of up to 925,000 Shares from authorized
and unissued Shares. If any Option granted under the Plan shall terminate,
expire, or be canceled or surrendered as to any Shares, new Options may
thereafter be granted covering such Shares. An Option granted
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<PAGE> 4
hereunder shall be either an Incentive Stock Option or a Non-Qualified Stock
Option as determined by the Board at the time of the grant of such Option and
shall clearly state whether it is an Incentive Stock Option or Non-Qualified
Stock Option. All Incentive Stock Options shall be granted within 10 years from
the effective date of this Plan.
4. Dollar Limitation. Options otherwise qualifying as Incentive Stock
Options hereunder will not be treated as Incentive Stock Options to the extent
that the aggregate Fair Market Value (determined at the time the Option is
granted) of the Shares, with respect to which Options meeting the requirements
of Code Section 422(b) are exercisable for the first time by any individual
during any calendar year (under all plans of the Company and any Subsidiary),
exceeds $100,000.
5. Conditions for Grant of Options.
(a) Each Option shall be evidenced by an option agreement that
may contain any term deemed necessary or desirable by the Board, provided such
terms are not inconsistent with this Plan or any applicable law. Optionees shall
be those persons selected by the Board who are employees and/or Directors of the
Company or any Subsidiary.
(b) In granting Options, the Board shall take into
consideration the contribution the person has made to the success of the Company
or its Subsidiaries and such other factors as the Board shall determine. The
Board shall also have the authority to consult with and receive recommendations
from officers and other personnel of the Company and its Subsidiaries with
regard to these matters. The Board may, from time to time in granting Options,
prescribe such other terms and conditions concerning such Options as it deems
appropriate, including, without limitation, (i) prescribing the date or dates on
which the Option becomes exercisable, (ii) providing that the Option rights
accrue or become exercisable in installments over a period of years, upon
termination of the Eighty Percent Period with the consent of the Eighty Percent
Holder, and/or upon the attainment of stated goals, or (iii) relating an Option
to the continued employment of the Optionee for a specified period of time,
provided that such terms and conditions are not more favorable to an Optionee
than those expressly permitted herein.
(c) The Options granted to employees under this Plan shall be
in addition to regular salaries, pension, life insurance or other benefits
related to their employment with the Company or its Subsidiaries. Neither the
Plan nor any Option granted under the Plan shall confer upon any person any
right to employment or continuance of employment by the Company or its
Subsidiaries.
(d) Notwithstanding any other provision of this Plan, and in
addition to any other requirements of this Plan, the aggregate number of Options
granted to any one Optionee may not exceed 35% of the total number of options
that may be granted under the Plan.
(e) Notwithstanding any other provision of this Plan, and in
addition to any other requirements of this Plan, Options may not be granted to a
Covered Employee unless the
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<PAGE> 5
grant of such Option is authorized by, and all of the terms of such Options are
determined by, a Committee that is appointed in accordance with Section 14 of
this Plan and all of whose members are Outside Directors.
(f) Incentive Stock Options may not be granted to any person
who is not an employee of the Company or of its parent or subsidiary, as those
terms are defined in Section 424 of the Code, at the date of grant.
6. Option Price. The option price per Share of any Option shall be any
price determined by the Board, but shall not be less than the par value per
Share; provided, however, that in no event shall the option price per Share of
any Incentive Stock Option be less than the Fair Market Value of the Shares
underlying such Option on the date such Option is granted.
7. Exercise of Options. An Option shall be deemed exercised when (i)
the Company or the Board has received written notice of such exercise in
accordance with the terms of the Option, (ii) full payment of the aggregate
option price of the Shares as to which the Option is exercised has been made,
and (iii) arrangements that are satisfactory to the Board in its sole discretion
have been made for the Optionee's payment to the Company of the amount that is
necessary for the Company or Subsidiary employing the Optionee to withhold in
accordance with applicable Federal or state tax withholding requirements. Unless
further limited by the Board in any Option, the option price of any Shares
purchased shall be paid in cash, by certified or official bank check, by money
order, with Shares owned by the Optionee (including the withholding of Shares
issuable upon exercise of the Option so long as such transaction does not
violate the requirements of Rule 16b-3 promulgated under the Exchange Act) or by
a combination of the above; provided further, however, that the Board in its
sole discretion may accept a personal check in full or partial payment of any
Shares. If the exercise price is paid in whole or in part with Shares, the value
of the Shares surrendered shall be their Fair Market Value on the date the
Option is exercised. The Company in its sole discretion may, on an individual
basis or pursuant to a general program established in connection with this Plan,
and subject to applicable law, lend money to an Optionee, guarantee a loan to an
Optionee, or otherwise assist an Optionee to obtain the cash necessary to
exercise all or a portion of an Option granted hereunder or to pay any tax
liability of the Optionee attributable to such exercise. If the exercise price
is paid in whole or part with Optionee's promissory note, such note shall (i)
provide for full recourse to the maker, (ii) be collateralized by the pledge of
the Shares that the Optionee purchases upon exercise of such Option, (iii) bear
interest at a rate no less than the prime rate of the Company's principal
lender, and (iv) contain such other terms as the Board in its sole discretion
shall reasonably require. No Optionee shall be deemed to be a holder of any
Shares subject to an Option unless and until a stock certificate or certificates
for such Shares are issued to such person(s) under the terms of this Plan. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such stock certificate is issued, except as
expressly provided in Section 11 hereof.
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<PAGE> 6
8. Exercisability of Options. Except as provided in Section 9 hereof or
otherwise provided in this Section 8, any Option shall become exercisable in
such amounts, at such intervals and upon such terms as the Board shall provide
in such Option; provided, however, no Option or portion thereof shall be
exercisable until six months from the date of grant.
(a) The expiration date of an Option shall be determined by
the Board at the time of grant, but in no event shall an Option be exercisable
after the expiration of 10 years from the date of grant of the Option.
(b) Unless otherwise provided in any Option, each outstanding
Option shall become immediately fully exercisable:
(i) if there occurs any transaction (which shall
include a series of transactions occurring within 60 days or occurring
pursuant to a plan), that has the result that stockholders of the
Company immediately before such transaction cease to own at least 51%
of the voting stock of the Company or of any entity that results from
the participation of the Company in a reorganization, consolidation,
merger, liquidation or any other form of corporate transaction;
(ii) if the stockholders of the Company shall approve
a plan of merger, consolidation, reorganization, liquidation or
dissolution in which the Company does not survive (unless the approved
merger, consolidation, reorganization, liquidation or dissolution is
subsequently abandoned); or
(iii) if the stockholders of the Company shall
approve a plan for the sale, lease, exchange or other disposition of
all or substantially all the property and assets of the Company (unless
such plan is subsequently abandoned);
provided, however, that this Section 8(b) shall not apply to accelerate the
exercisability of any Option as a result of the distribution of all or part of
the shares in the Company owned by Mego Financial to the stockholders of Mego
Financial or to any of its affiliates, regardless of the manner in which such
shares are distributed.
(c) Subject to the restrictions of Section 9, the Board may in
its sole discretion accelerate the date on which any Option may be exercised and
may accelerate the vesting of any Shares subject to any Option.
9. Restrictions on Grant and Exercise of Options During Eighty Percent
Period; Issuance of SARs in Tandem with Restricted Options.
(a) Options granted pursuant to the Plan may not be
exercised at any time during the Eighty Percent Period without the prior written
consent of the Eighty Percent Holder (the "Restricted Options"). An Optionee
desiring to exercise Restricted Options must send written notice (the
"Optionee's Notice") to the Company and the Eighty Percent Holder of his desire
to
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<PAGE> 7
exercise a Restricted Option. The Eighty Percent Holder shall, in its sole and
absolute discretion, notify the Optionee in writing whether it will permit the
exercise of all or a portion of a Restricted Option or require that the
Restricted Option remain subject to the restrictions contained in this Section
9. In the event that the Eighty Percent Holder shall fail to provide its
written consent within 10 days after receipt of the Optionee's Notice, the
Optionee's request shall be deemed to have been denied.
(b) Each grant of a Restricted Option shall be accompanied by
a grant of an SAR in tandem with the Restricted Option. If and only to the
extent that any Optionee's request to exercise a Restricted Option is denied
pursuant to Section 9(a), then the Optionee may exercise the SARs that were
issued in tandem with the Restricted Option the exercise of which has been so
denied. Upon the Optionee's exercise of an SAR, the Optionee shall be paid, in
cash, an amount equal to the product of (i) the amount by which the Fair Market
Value per share of Common Stock on the date on which the SAR is exercised
exceeds the exercise price per share of Common Stock for the Restricted Option
with which the SAR has been granted in tandem, multiplied by (ii) the number of
shares subject to the SAR that have been exercised. Any exercise of an SAR by an
Optionee shall only occur during the period beginning on the third business day
following the release by the Company of its quarterly or annual financial
results and ending on the last business day of the quarter in which such release
was made. Upon an Optionee's exercise of an SAR, the Restricted Option with
respect to which the SAR was issued in tandem shall terminate to the extent of
the number of shares with respect to which the SAR was exercised.
(c) Each SAR issued in tandem with a Restricted Option may be
exercised in the same manner and shall be subject to the same provisions and
restrictions applicable to Options under this Plan. In the event that any
Optionee's employment by the Company or any Subsidiary or service as a Director
shall terminate, any SARs held by such Optionee on the date of termination may
be exercised if and to the extent otherwise permitted under Section 9(b) hereof
during the same period, by the same person or persons, and to the same extent as
the Options with respect to which they were issued in tandem could have been
exercised by such Optionee but for the restrictions set forth in Section 9(a).
(d) An Option shall cease to be subject to the restrictions
set forth in Section 9(a), and thus shall cease to be a Restricted Option, upon
the expiration of the Eighty Percent Period, at which time any unexercised SAR's
issued in tandem with such Option shall terminate.
10. Termination of Option Period.
(a) The unexercised portion of any Option granted to an
Optionee who is not a Non-Employee Director shall automatically and without
notice terminate and become null and void at the time of the earliest to occur
of the following:
(i) three months after the date on which the
Optionee's employment with the Company and/or a Subsidiary is
terminated for any reason other than by reason
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<PAGE> 8
of (A) Cause, which shall mean "Cause" under such Optionee's
employment agreement, if any, and which, solely for purposes of this
Plan, also shall mean the termination of the Optionee's employment
with the Company and/or a Subsidiary (or, in the case of an Optionee
who is a Director but not an employee of the Company or any
Subsidiary, the removal of the Optionee as a Director) by reason of
any act or any failure to act, by the Optionee that constitutes (1)
misfeasance or malfeasance in connection with the performance by him
of his duties and responsibilities as an employee or Director of the
Company or any Subsidiary; (2) fraud, embezzlement or breach of trust;
(3) any criminal act other than minor traffic infractions; or (4) the
willful or knowing refusal by the Optionee to perform substantially
all or any portion of his duties and responsibilities as an employee
or Director of the Company or any Subsidiary; (B) the Optionee's
mental or physical disability (within the meaning of Code Section
22(e)) as determined by a medical doctor satisfactory to the Board, or
(C) the Optionee's death;
(ii) immediately upon the termination of the
Optionee's employment with the Company or a Subsidiary (or in the case
of an Optionee who is a Director but not an employee of the Company or
any Subsidiary, the removal of the Optionee as a Director) for Cause;
(iii) twelve months after the date on which the
Optionee's employment with the Company or any Subsidiary, or service as
a Director, is terminated by reason of mental or physical disability
(within the meaning of Code Section 22(e)) as determined by a medical
doctor satisfactory to the Board; or
(iv) (A) twelve months after the date of the
Optionee's death or (B) three months after the date of the Optionee's
death if such death shall occur during the one year period specified in
Subsection 10(a)(iii) hereof; provided, however, that the Board may
provide for Restricted Options to terminate at such other times as the
Board may, in its sole discretion, determine.
(b) The unexercised portion of any Option granted to an
Optionee who is a Non-Employee Director shall automatically and without notice
terminate and become null and void at the time of the earliest to occur of the
following:
(i) immediately upon the termination of the
Optionee's service as a Non-Employee Director for Cause, which shall
mean the removal of the Optionee as a Director by reason of any act or
any failure to act, by the Optionee that constitutes (A) misfeasance or
malfeasance in connection with the performance by him of his duties and
responsibilities as a Director; (B) fraud, embezzlement or breach of
trust; (C) any criminal act other than minor traffic infractions; or
(D) the willful or knowing refusal by the Optionee to perform
substantially all or any portion of his duties and responsibilities as
a Director;
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<PAGE> 9
(ii) at the expiration of the term of the Option, if
(A) the Optionee fails to be re-elected as a Non-Employee Director,
notwithstanding the Optionee's willingness to serve as such, (B) the
Optionee ceases to be a Non-Employee Director by reason of mental or
physical disability (within the meaning of Code Section 22(e)) as
determined by a medical doctor satisfactory to the Board or (C) the
Optionee ceases to be a Non-Employee Director as a result of his death.
(iii) three months after the date on which the
Optionee's service as a Non-Employee Director is terminated for any
reason other than a reason set forth in Subsections 10(b)(i) or
10(b)(ii) hereof.
(c) Notwithstanding the foregoing, the Board, in its sole
discretion, may extend the term of any Non-Qualified Stock Option granted under
the Plan.
(d) If the exercise term of an Option otherwise would expire
while the Option is a Restricted Option, then neither the Option (nor the SAR
issued in tandem therewith,) shall terminate until three months after the date
on which the Option is no longer a Restricted Option.
(e) The Board, in its sole discretion, may by giving written
notice (the "Cancellation Notice") cancel, effective upon the date of the
consummation of any corporate transaction described in Subsections 8(b)(ii) or
(iii) hereof, any Option that remains unexercised on such date. Such
Cancellation Notice shall be given a reasonable period of time prior to the
proposed date of such cancellation and may be given either before or after
approval of such corporate transaction.
11. Adjustment of Shares.
(a) If at any time while the Plan is in effect or unexercised
Options are outstanding, there shall be any increase or decrease in the number
of issued and outstanding Shares through the declaration of a stock dividend or
through any recapitalization resulting in a stock split-up, combination or
exchange of Shares, then and in such event:
(i) appropriate adjustment shall be made in the
maximum number of Shares available for grant under the Plan, so that
the same percentage of the Company's issued and outstanding Shares
shall continue to be subject to being so optioned; and
(ii) appropriate adjustment shall be made in the
number of Shares and the exercise price per Share thereof then subject
to any outstanding Option, so that the same percentage of the Company's
issued and outstanding Shares shall remain subject to purchase at the
same aggregate exercise price.
(b) Subject to the specific terms of any Option, the Board may
change the terms of Options outstanding under this Plan, subject to written
approval of the Eighty Percent Holder during the Eighty Percent Period,
including with respect to the option price or the number
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<PAGE> 10
of Shares subject to the Options, or both, when, in the Board's sole
discretion, such adjustments become appropriate by reason of a corporate
transaction described in Subsections 8(b)(ii) or (iii) hereof.
(c) Except as otherwise expressly provided herein, the
issuance by the Company of shares of its capital stock of any class, or
securities convertible into shares of capital stock of any class, either in
connection with direct sale or upon the exercise of rights or warrants to
subscribe therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, shall not affect, and no
adjustment by reason thereof shall be made with respect to the number of or
exercise price of Shares then subject to outstanding Options granted under the
Plan.
(d) Without limiting the generality of the foregoing, the
existence of outstanding Options granted under the Plan shall not affect in any
manner the right or power of the Company to make, authorize or consummate (i)
any or all adjustments, recapitalizations, reorganizations or other changes in
the Company's capital structure or its business; (ii) any merger or
consolidation of the Company; (iii) any issue by the Company of debt securities
or preferred or preference stock that would rank above the Shares subject to
outstanding Options; (iv) the dissolution or liquidation of the Company; (v) any
sale, transfer or assignment of all or any part of the assets or business of the
Company; or (vi) any other corporate act or proceeding, whether of a similar
character or otherwise; although the foregoing shall remain subject to the
provisions in the Company's Amended and Restated Certificate of Incorporation.
12. Transferability of Options.
(a) No Incentive Stock Option, and unless the Board's prior
written consent is obtained and the transaction does not violate the
requirements of Rule 16b-3 promulgated under the Exchange Act no Non-Qualified
Stock Option, shall be subject to alienation, assignment, pledge, charge or
other transfer other than by the Optionee by will or the laws of descent and
distribution, and any attempt to make any such prohibited transfer shall be
void. Each Option shall be exercisable during the Optionee's lifetime only by
the Optionee, or in the case of a Non-Qualified Stock Option that has been
assigned or otherwise transferred with the Board's prior written consent, only
by the assignee consented to by the Board.
(b) Unless the Board's prior written consent is obtained and
the transaction does not violate the requirements of Rule 16b-3 promulgated
under the Exchange Act, no Shares acquired by an Officer, as that term is
defined under Rule 16b-3, of the Company or Director pursuant to the exercise of
an Option may be sold, assigned, pledged or otherwise transferred prior to the
expiration of the six-month period following the date on which the Option was
granted.
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<PAGE> 11
13. Issuance of Shares.
(a) Notwithstanding any other provision of this Plan, the
Company shall not be obligated to issue any Shares unless it is advised by
counsel of its selection that it may do so without violation of the applicable
Federal and State laws pertaining to the issuance of securities, and may require
any stock so issued to bear a legend, may give its transfer agent instructions,
and may take such other steps, as in its judgment are reasonably required to
prevent any such violation.
(b) As a condition of any sale or issuance of Shares upon
exercise of any Option, the Board may require such agreements or undertakings,
if any, as the Board may deem necessary or advisable to assure compliance with
any such law or regulation including, but not limited to, the following:
(i) a representation and warranty by the Optionee to
the Company, at the time any Option is exercised, that he is acquiring
the Shares to be issued to him for investment and not with a view to,
or for sale in connection with, the distribution of any such Shares;
and
(ii) a representation, warranty and/or agreement to
be bound by any legends that are, in the opinion of the Board,
necessary or appropriate to comply with the provisions of any
securities law deemed by the Board to be applicable to the issuance of
the Shares and are endorsed upon the Share certificates.
14. Administration of the Plan.
(a) Except as set forth in Section 14(b) below, the Plan shall
be administered by the Board.
(b) In the case of Options granted to Covered Employees, the
Plan shall be administered by the Committee, which shall consist of not less
than two Directors, each of whom shall be Outside Directors. In the case of
Options granted to Covered Employees, the Committee shall have all of the
powers of the Board with respect to the Plan and all references herein to the
Board shall refer to the Committee with respect to the Options granted by the
Committee. Any member of the Committee may be removed at any time, with or
without cause, by resolution of the Board, and any vacancy occurring in the
membership of the Committee may be filled by appointment of the Board.
(c) The Board, from time to time, may adopt rules and
regulations for carrying out the purposes of the Plan. The Board's
determinations and its interpretation and construction of any provision of the
Plan shall be final and conclusive.
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<PAGE> 12
(d) Any and all decisions or determinations of the Board shall
be made either (i) by a majority vote of the members of the Board at a meeting
or (ii) without a meeting by the unanimous written approval of the members of
the Board.
15. Incentive Options for 10% Stockholders. Notwithstanding any other
provisions of the Plan to the contrary, an Incentive Stock Option shall not be
granted to any person owning directly or indirectly (through attribution under
Section 424(d) of the Code) at the date of grant, stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company (or of
its parent or subsidiary, as those terms are defined in Section 424 of the Code,
at the date of grant) unless the option price of such Option is at least 110% of
the Fair Market Value of the Shares subject to such Option on the date the
Option is granted, and such Option by its terms is not exercisable after the
expiration of five years from the date such Option is granted.
16. Interpretation.
(a) As it is the intent of the Company that the Plan comply in
all respects with Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3"),
any ambiguities or inconsistencies in construction of the Plan shall be
interpreted to give effect to such intention, and if any provision of the Plan
is found not to be in compliance with Rule 16b-3, such provision shall be deemed
null and void to the extent required to permit the Plan to comply with Rule
16b-3. The Board may from time to time adopt rules and regulations under, and
amend, the Plan in furtherance of the intent of the foregoing.
(b) The Plan shall be administered and interpreted so that all
Incentive Stock Options granted under the Plan will qualify as Incentive Stock
Options under section 422 of the Code. If any provision of the Plan should be
held invalid for the granting of Incentive Stock Options or illegal for any
reason, such determination shall not affect the remaining provisions hereof, but
instead the Plan shall be construed and enforced as if such provision had never
been included in the Plan.
(c) This Plan shall be governed by the laws of the State of
Delaware.
(d) Headings contained in this Plan are for convenience only
and shall in no manner be construed as part of this Plan.
(e) Any reference to the masculine, feminine, or neuter gender
shall be a reference to such other gender as is appropriate.
17. Amendment and Discontinuation of the Plan. The Board may from time
to time amend the Plan or any Option granted hereunder which is not granted to
or held by a Covered Employee. Additionally, the Committee may from time to
time amend any Option granted to or held by a Covered Employee.
Notwithstanding the foregoing, except to the extent provided in Section 11, no
such amendment may, without approval by the stockholders of the Company,
- 12 -
<PAGE> 13
(i) increase the number of securities which may be issued under the Plan, (ii)
modify the requirements as to eligibility for participation in the Plan or (iii)
increase the aggregate number of Options that may be granted to any one
Optionee; provided, however, that, except to the extent provided in Section 10,
no amendment or suspension of the Plan or any Option issued hereunder shall
substantially impair any Option previously granted to any Optionee without the
consent of such Optionee.
18. Effective Date and Termination Date. The Plan shall be effective
upon the Effective Date and shall terminate on the 10th anniversary of the
Effective Date.
- 13 -
<PAGE> 1
EXHIBIT 10.9
TAX ALLOCATION AND INDEMNITY AGREEMENT
Agreement dated as of , 1996, between Mego Financial Corp., a
New York corporation ("Parent"), and Mego Mortgage Corporation, a Delaware
corporation ("MMC").
WITNESSETH
WHEREAS, the parties hereto (along with wholly owned
subsidiaries of Parent) are members of an affiliated group as defined in section
1504(a) of the Internal Revenue Code of 1986, as amended (the "Code") of which
Parent is the common parent (the "Affiliated Group"); and
WHEREAS, the Affiliated Group has filed consolidated Federal
income tax returns for prior taxable years and will be required to file a
consolidated Federal income tax return for its taxable year ending February 28,
1997 and for subsequent taxable years; and
WHEREAS, MMC contemplates acquiring new shareholders unrelated
to members of the Affiliated Group that will own not more than 20 percent of the
total voting power or total value of its stock; and
WHEREAS, it is the intent of the parties hereto that an
agreement be entered into (i) to allocate the consolidated Federal income tax
liability of the Affiliated Group between, on the one hand, Parent, on behalf of
itself and its wholly owned subsidiaries other than the Company (collectively,
"Parent Group"), and, on the other hand, MMC pursuant to a method specified in
regulations of the Treasury Department that would impose on Parent and MMC, for
the period beginning March 1, 1996 through February 28, 1997 and for subsequent
periods, liability for an amount that approximates the liability that Parent
Group and MMC each would incur if (a) Parent Group filed Federal income tax
returns as a separate affiliated group as defined in Code section 1504(a) and
(b) MMC filed separate Federal income tax returns and (ii) to provide that
Parent and MMC each shall bear its agreed portion of the liability of the
Affiliated Group for consolidated Federal income tax in respect of prior
periods.
NOW, THEREFORE, in consideration of the mutual covenants and
promises contained herein, the parties hereto agree as follows:
1. FILING OF CONSOLIDATED RETURNS. A consolidated Federal
income tax return shall be filed by Parent for the taxable year ending February
28, 1997, and for each subsequent taxable period in respect of which this
Agreement is in effect and for which the Affiliated Group is required or
permitted to file a consolidated Federal income tax return.
<PAGE> 2
2. CURRENT AND FUTURE TAXABLE PERIODS. For the taxable year of
the Affiliated Group ending February 28, 1997 and for each taxable period
thereafter, the Affiliated Group shall be divided into Parent Group and MMC
(referred to hereafter as two separate "groups"). It being the parties'
intent, among other things, that MMC pay to Parent in respect of each taxable
year in which MMC would be liable for Federal income tax if it filed a separate
Federal income tax return an amount approximately equal to its Federal income
tax liability computed on a separate company basis, the consolidated Federal
income tax liability of the Affiliated Group shall be allocated between Parent,
on behalf of Parent Group, and MMC in accordance with the method set forth in
Treasury regulation sections 1.1552-1(a)(2) and 1.1502-33(d)(3) (using a fixed
percentage of 100%) by considering Parent Group and MMC each as a member of an
affiliated group consisting of two members, except that (i) modifications to the
separate taxable income of each corporation will be made in accordance with
Treasury regulation section 1.1552-1(a)(2)(ii)(a) through (i) in the same manner
as if all corporations were members of a single affiliated group, (ii)(a)
carryforwards of losses and credits shall not be taken into account to the
extent those items are deemed absorbed in allocating the tax liability of the
Affiliated Group for prior taxable years, and (b) carrybacks of losses and
credits shall be taken into account only to the extent those items are deemed
absorbed in allocating the tax liability of the Affiliated Group for the taxable
year. The corporate surtax exemption shall be allocated among all members of the
Affiliated Group in proportion to their relative taxable incomes computed
without regard to the surtax exemption. Any liability of the Affiliated Group
for alternative minimum tax, environmental tax or any other Federal income tax
imposed on the Affiliated Group on a consolidated basis by any section of the
Code other than Code section 11 shall be allocated in accordance with any
reasonable method that is consistent with the principles of this Agreement and
the provisions of any governing Treasury regulations or other administrative
pronouncements of the Internal Revenue Service. In no event shall MMC pay more
Federal income tax in any period of one or more taxable years than MMC would
have paid for the same period if it had filed a separate consolidated Federal
income tax return, and any taxes not paid by reason of this limitation shall be
paid by Parent.
3. PAYMENTS. MMC shall pay to Parent installments of estimated
tax, computed pursuant to the principles set forth in section 2 above, no later
than the due dates for payments of estimated tax by the Affiliated Group. Any
payments of estimated tax by MMC to Parent shall be taken into account in
determining the payment due from MMC pursuant to section 2, and any overpayment
of estimated tax shall be refunded to MMC. A refund or payment of tax,
calculated on the basis of the amount of tax payable for the taxable year as
calculated by Parent as of the due date (without regard to extensions) for the
Federal income tax return of the Affiliated Group, shall be paid no later than
that due date, and any adjustment to the amount of refund or payment of tax,
calculated on the basis of the amount of tax payable for that taxable year as
shown on the Federal income tax return of the Affiliated Group as of the due
date (with regard to extensions), shall be paid no later than that due date.
4. PRIOR TAXABLE PERIODS. For the taxable year of the
Affiliated Group ending February 29, 1996 and for each taxable period prior
thereto to which applies an oral understanding among the members of the
Affiliated Group regarding payments among members of the Affiliated Group in
respect of Federal income tax, pursuant to which Preferred Equities Corporation,
a Nevada corporation, and MMC each paid Parent an amount each year equal to the
product of its book income for the prior year and the relevant marginal
corporate Federal income
2
<PAGE> 3
tax rate (the "Prior Agreement"), the Federal income tax liability of the
Affiliated Group shall be allocated among the members of the Affiliated Group in
accordance with the Prior Agreement. For purposes of this Agreement, references
to Parent Group shall be treated, in respect of taxable periods to which the
Prior Agreement applies, as references to the members of the Affiliated Group
that are members of Parent Group.
5. ADJUSTMENTS TO TAX LIABILITY. If the consolidated Federal
income tax liability of the Affiliated Group is adjusted for any taxable period,
whether by means of an amended return or claim for refund or after an audit by
the Internal Revenue Service, or if there is any other adjustment relevant to
the computation of the liability of any member of the Affiliated Group pursuant
to the Prior Agreement, the Federal income tax liability of MMC pursuant to
section 2 or section 4 of this Agreement shall be recomputed, if necessary, to
give effect to those adjustments as if they had been part of the original
computation pursuant to section 2 or section 4. The obligation to make any
payment of additional Federal income tax or the right to receive any refund of
Federal income tax shall be allocated between Parent and MMC accordingly,
provided, however, that in no event shall MMC be required to make any payment to
Parent if and to the extent that payment, combined with amounts previously paid
by MMC with respect to the taxable year in question, would be inconsistent with
the last sentence of section 2 of this Agreement. Any additional tax that MMC is
obligated to pay shall be paid to Parent, and any refund of tax to which MMC is
entitled to receive shall be paid by Parent, within ten days of, respectively,
the date MMC receives notice from Parent or the date Parent receives the refund
from the Treasury Department.
6. APPOINTMENT OF PARENT AS AGENT. Parent shall prepare and
file the consolidated Federal income tax returns of the Affiliated Group and any
other returns, documents or statements required to be filed with the Internal
Revenue Service. In its sole discretion, Parent shall have the right in
connection with any of those returns, documents or statements to determine (i)
the manner in which the return, document or statement shall be prepared and
filed, including, without limitation, the manner in which any item of income,
gain, loss, deduction, credit or any other item shall be reported, (ii) whether
any extension shall be requested and (iii) the elections that will be made by
the Affiliated Group or any members thereof. Each member of the Affiliated Group
shall execute and file those consents, elections, appointments, powers of
attorney and other documents that Parent determines may be necessary or
appropriate for the proper filing of those returns, documents or statements.
Each member of the Affiliated Group shall provide Parent or any other member of
the Affiliated Group any data necessary for the proper and timely filing of
returns, documents or statements and otherwise shall cooperate as necessary to
carry out the purposes of this Agreement.
7. PAYMENTS BY PARENT. Parent shall cause distributions or
other payments to be made to it by one or more of its wholly owned subsidiaries
of amounts sufficient if necessary to enable Parent to meet its obligations to
MMC under this Agreement.
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<PAGE> 4
8. INDEMNIFICATION
a. GENERAL PRINCIPLES. It is the intent of this
Agreement that Parent and MMC each be liable for an amount in respect of Federal
income tax of the Affiliated Group as that amount is determined pursuant to this
Agreement or the Prior Agreement and that Parent and MMC each receive its
respective share, as so allocated, of any reduction in Federal income tax
liability of the Affiliated Group.
b. INDEMNIFICATION. Parent shall be responsible for,
and shall protect, defend, indemnify and hold harmless MMC from, any amount in
respect of Federal income tax allocable to Parent pursuant to this Agreement or
the Prior Agreement. MMC shall be responsible for, and shall protect, defend,
indemnify and hold harmless Parent from, any amount in respect of Federal income
tax allocable to MMC pursuant to this Agreement or the Prior Agreement.
9. RETENTION OF BOOKS AND RECORDS. No member of the Affiliated
Group shall destroy or permit the destruction of any books, records or files
pertaining to any other member of the Affiliated Group without first having
offered in writing to deliver those books, records and files to the other
member, and the other member shall have the right upon prior notice to inspect
and to copy the same at any time during business hours for any proper purpose.
10. OTHER INCOME AND FRANCHISE TAXES. The liability of Parent,
on behalf of Parent Group, and of MMC in respect of state, local and foreign
income and franchise taxes that are computed pursuant to provisions applicable
to affiliated, combined, unitary or other groups shall be determined and paid in
a manner consistent with the provisions of this Agreement used to determine the
liability of Parent, on behalf of Parent Group, and of MMC in respect of Federal
income tax. Calculation of the separate liability of Parent Group and of MMC for
these other taxes shall conform to the appropriate state, local and foreign
income and franchise tax provisions governing affiliated, combined, unitary or
other groups.
11. ENTIRE UNDERSTANDING. This Agreement constitutes the
entire agreement of the parties concerning the subject matter hereof and,
effective as of the date hereof and for the taxable periods to which this
Agreement applies, supersedes all other agreements. This Agreement shall
allocate the tax liabilities of the Affiliated Group for the period March 1,
1996 through February 28, 1997, and all subsequent taxable years unless Parent
and MMC agree to terminate this Agreement. Notwithstanding its termination, this
Agreement shall continue in effect with respect to any payment or refund due for
any taxable periods prior to termination.
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of any successor, whether by statutory merger,
acquisition of assets or otherwise, to any of the parties hereto, to the same
extent as if the successor had been an original party to the Agreement.
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<PAGE> 5
13. EXPENSES. Parent and MMC each shall bear any and all
expenses that arises from its obligations under this Agreement.
14. NOTICES. All notices and other communications hereunder
shall be in writing and shall be delivered by hand or mailed by registered or
certified mail (return receipt requested) to the parties at the following
addresses (or at such other addresses for a party as shall be specified by like
notice) and shall be deemed given on the date on which the notice is received.
If to Parent:
Mego Financial Corp.
1125 N.E. 125 Street
Suite 206
North Miami, Florida 33161
Attention: Jerome J. Cohen
If to MMC:
Mego Mortgage Corporation
1000 Parkwood Circle
Suite 500
Atlanta, Georgia 30339
Attention: Jeffrey S. Moore
President
15. RESOLUTION OF DISPUTES. Any dispute between the parties
with respect to this Agreement shall be resolved by a public accounting firm or
a law firm reasonably satisfactory to Parent and MMC or pursuant to an
alternative dispute arrangement agreed to by the parties.
16. LEGAL ENFORCEABILITY. Any provision of this Agreement that
is prohibited or unenforceable in any jurisdiction shall be ineffective as to
that jurisdiction to the extent of that prohibition or unenforceability without
invalidating the remaining provisions hereof. Any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable that provision in any other jurisdiction. Without prejudice to any
rights or remedies otherwise available to any party hereto, each party hereto
acknowledges that damages would be an inadequate remedy for any breach of the
provisions of this Agreement and agrees that the obligations of the parties
hereunder shall be specifically enforceable.
5
<PAGE> 6
17. CONTROLLING LAW. This Agreement shall be governed by the
laws of the State of Florida.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives as of the date
first written above.
Mego Financial Corp.
by_______________________________
[Name]
[Title]
Mego Mortgage Corporation
by_______________________________
[Name]
[Title]
6
<PAGE> 1
EXHIBIT 10.10
LOAN PROGRAM
SUB-SERVICING AGREEMENT
THIS AGREEMENT ("Agreement"), made and entered into as of September 1,
1996, by and between PREFERRED EQUITIES CORPORATION, a Nevada corporation
("PEC") and MEGO MORTGAGE CORPORATION, a Delaware corporation, ("MMC").
WHEREAS, MMC, pursuant to its Loan Program ("LP"), originates or purchases
real estate secured and unsecured loans made under the U.S. Department of
Housing and Urban Development's ("HUD"), Federal Housing Administration ("FHA"),
Title One Insurance Program and also originates or purchases real estate secured
loans not insured by any governmental agency, (hereinafter collectively referred
to as "Loans"); and
WHEREAS, MMC desires that PEC shall perform certain accounting, payment
processing, and other administrative services in connection with such loans,
("SERVICING").
NOW, THEREFORE, MMC AND PEC MUTUALLY AGREE AS FOLLOWS:
ARTICLE 1. WARRANTIES AND REPRESENTATIONS OF PARTIES
A. PEC hereby makes the following warranties and representations:
the obligations of PEC under this Agreement have been duly authorized by
the Board of Directors of PEC, or are within the scope and coverage of a
general authorization adopted by its Board, which is in full force and
effect; the officers of PEC signatory hereto are authorized to sign this
agreement; and upon execution and deliver of this Agreement by PEC, the
obligations of PEC under this Agreement will be the legal, valid and
binding obligations of PEC, enforceable in accordance with the terms of
this Agreement. PEC is not subject to any charter, by-law, indenture,
mortgage, lien, lease, agreement, instrument, order, judgment or decree,
or any other restriction of any kind or character, which would prevent
the consummation of the transactions contemplated by this Agreement. The
execution of this Agreement and the consummation of the transactions
contemplated by this Agreement will not constitute a default under the
provisions of any of the foregoing or result in a violation of any law,
rule, regulation, order, judgment or decree to which PEC or its property
is subject. There is no litigation pending or, to PEC's knowledge,
threatened, which, if determined adversely to PEC, would adversely affect
the execution, delivery or enforceability of this Agreement, or the
ability of PEC to perform all of its obligations under this Agreement or
which would have a material adverse effect on PEC's financial condition.
PEC holds all federal, state and other licenses, authorizations,
approvals, orders and contents, including, without limitation, those
required by FHA, as are reasonably necessary to PEC'S performance under
this Agreement in
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<PAGE> 2
compliance with applicable laws and secondary market requirements. PEC
is duly organized, validly existing, and in good standing under the laws
of the State of Nevada.
The representations and warranties given herein will be deemed to be made
anew at the time of transfer of any Loans to PEC for servicing hereunder. In
the event of any occurrence which would make any of the representations or
warranties above untrue or misleading, PEC agrees to notify MMC, in writing,
within five (5) business days of that occurrence.
B. MMC hereby makes the following warranties and representations, which
MMC acknowledges are a material inducement to PEC to enter into this Agreement
and which will be relied upon by PEC.
The execution of this Agreement by MMC and the performance of the
obligations of MMC under this Agreement have been duly authorized by the Board
of Directors of MMC, or are within the scope and coverage of a general
authorization adopted by its Board, which is in full force and effect and the
application of which includes the officers of MMC's signatory hereto. Upon
execution and delivery of this Agreement by MMC, the obligations of MMC under
this Agreement will be the legal, valid and binding obligations of MMC,
enforceable in accordance with the terms of this Agreement. MMC is not subject
to any charter, by-law, indenture, mortgage, lien, lease, agreement, instrument,
order, judgment or decree, or any other restriction of any kind or character,
which would prevent the consummation of the transactions contemplated by this
Agreement; and the execution of this Agreement and the consummation of the
transactions contemplated by this Agreement will not constitute a default under
the provisions of any of the foregoing or result in a violation of any law,
rule, regulation, order, judgment or decree to which MMC or its property is
subject. There is no litigation pending or, to MMC's knowledge, threatened,
which ,if determined adversely to MMC, would adversely affect, the execution,
delivery or enforceability of this Agreement, or the ability of MMC to perform
all of its obligations under this Agreement or which would have a material
adverse effect on MMC's financial condition. MMC holds all federal, state and
other licenses, authorizations, approvals, orders and contents, including,
without limitation, those required by FHA, as are reasonably necessary to its
performance under this Agreement in compliance with applicable law and secondary
market requirements. MMC is duly organized, validly existing, and in good
standing under the laws of the State of Delaware.
The representations and warranties given herein will be deemed to be made
anew at the time of transfer of any Loans from MMC to PEC for servicing
hereunder. In the event of any occurrence which would make any of the
representations or warranties above untrue or misleading, MMC agrees to notify
PEC, in writing, within five (5) business days of that occurrence.
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<PAGE> 3
ARTICLE 2. DELIVERY OF LOAN INFORMATION
MMC has delivered and will deliver to PEC, a reconciliation with
respect to each Loan to be serviced by PEC.
ARTICLE 3. SERVICING OF LOAN PORTFOLIOS
A. On the day of receipt of such Loan information, PEC shall enter
such Loans into its computer system.
B. PEC shall mail to each borrower a monthly statement which shall
set forth the amount due and the due date for each payment. Each initial monthly
statement shall advise each borrower that PEC has been retained to service such
Loans on behalf of MMC and directing borrowers to make payments by check or
money order payable as directed.
C. PEC shall diligently service and use its best efforts to obtain
on behalf of MMC each such payment when due, or as soon thereafter as possible.
The obligation to contact Obligors will be assumed by MMC on loans that are more
than sixty (60) days delinquent. PEC shall use only such methods as are
acceptable to MMC and are in accord with the provisions of the Fair Debt
Collection Practices Act, and MMC shall have the right at any time to review
such methods. All interest calculations shall be made in conformance with the
terms and conditions set forth in MMC's Title I Note or non-Title I Note.
E. PEC shall promptly after receipt of any payment, but in no case
later than the next business day following the receipt of such payment, deposit
same in bank accounts established by MMC for such purpose. These accounts shall
be opened in the name of MMC and PEC shall be authorized to make deposits
thereto only.
F. PEC shall deposit the received monies due MMC into said MMC
accounts. PEC shall record the date, amount and type of these deposits in the
computer generated loan data compiled for the benefit of MMC, such deposits to
include the following:
1. All principal and interest payments received by PEC on behalf
of MMC.
2. "NSF" fees received by PEC on behalf of MMC.
3. Late fees received by PEC on behalf of MMC.
4. Any and all other monies received by PEC on behalf of MMC.
5. HUD Impounds.
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<PAGE> 4
G. PEC shall not waive or vary the terms of any loan in any manner
whatsoever or consent to a postponement of compliance by the borrower with any
of the terms or provisions thereof, or in any manner grant an indulgence,
reduction or forgiveness of the amount due on such Loan to the borrower, except
as directed in writing by MMC. PEC shall make a diligent effort to collect any
Loan in default for a period not to exceed sixty (60) days; thereafter, PEC
shall turn over any such Loan to MMC for further collection. All such Loans
shall remain in the principal balance of Loans PEC is Servicing until such time
any such Loan is (i) reinstated, in which case it shall be returned to PEC for
collection in the ordinary course and remain in the principal balance
calculation of Loans being serviced or (ii) until foreclosed upon or submitted
to HUD for claim by MMC, at which time any such Loan will be removed from the
principal balance calculation of Loans PEC is Servicing.
H. With respect to Loans insured by FHA and/or HUD, PEC shall
satisfy and comply with, and use its best efforts to obtain compliance by the
borrower with all applicable provisions and requirements of any laws relating to
FHA and/or HUD, and all rules and regulations promulgated pursuant thereto,
including the prompt and timely giving of all notices required to be given by
FHA and/or HUD. PEC shall be liable for damages for any insurance claims
rejected by FHA and/or HUD where such rejection arises out of PEC's grossly
negligent failure to perform any of its duties and obligations under this
Agreement or under FHA and/or HUD requirements.
I. PEC shall deliver to each borrower, after the end of each
calendar year, but not later than January 31, a statement indicating the total
amount of interest paid by each borrower during the calendar year. PEC shall
deliver to MMC a complete listing of such statements, including the principal
balance of each account as of December 31, and totals for both principal and
interest. Such listing shall be provided to MMC no later than January 31
following the end of the year which is the subject matter of this statement.
J. PEC shall prepare all reports as required by FHA, HUD, or the
Internal Revenue Service and reports as customary to such servicing agreements
and reasonably required by MMC.
K. PEC shall maintain such facilities, equipment, and personnel as
are at all times adequate for the performance of PEC'S duties hereunder.
L. PEC shall maintain adequate books and records setting forth
payments received and disbursements, if any, made pursuant to this Agreement,
which books and records shall clearly state the respective interest and
principal payments of each borrower. Said books shall be available for
examination and audit by MMC at any time during normal business hours. MMC
shall exercise good faith efforts to give PEC advance notice of MMC'S desire to
examine/audit said records in order to minimize the
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<PAGE> 5
disruption of the business operations of PEC. All such records shall be
maintained by PEC in accordance with generally accepted accounting practices.
M. PEC shall furnish to MMC within one hundred twenty (120) days
after the end of PEC'S fiscal year (August 31) a certified audit relating to
PEC'S financial statements, as well as the statements of any subsidiaries of PEC
which perform services for MMC.
N. PEC shall handle any borrower inquiries and correspondence
received with copies to MMC in disputed matters, other than for Loans turned
over to MMC for collection after sixty (60) days of delinquency.
O. PEC shall service all Loans in the same diligent manner in which
it services its own receivables.
P. PEC shall, with the written consent of MMC, have the right to
subcontract any of its duties and responsibilities under this Agreement to a
duly licensed third party; however, no such subcontracting shall limit PEC's
liability under this Agreement.
ARTICLE 4. COMPENSATION
PEC shall bill MMC monthly for Servicing of Loans performed
hereunder. MMC shall pay PEC within ten (10) days of receipt of such billing, a
monthly servicing fee of one twelfth (1/12) of one half of one percent (0.50%)
of the outstanding principal balance of all Loans being serviced on the first
day of the prior month.
A. The parties agree that payment pursuant to this Article
represents full compensation to PEC for all duties and responsibilities required
under this Agreement.
B. Under no circumstances shall PEC have the right to assert any
lien or encumbrance against any of MMC'S Loans or have any right to deprive MMC
of title to or ownership of MMC Loans under this Agreement.
ARTICLE 5. INSURANCE
A. PEC shall maintain throughout the terms of this Agreement
Fidelity Coverage (or furnish a Direct Surety Bond issued in favor of MMC) on
policy forms normally used by servicers of the same class as PEC. Such coverage
shall be in the amount at least equal to a percentage of its total servicing
portfolio as set forth in the schedule below, and to be in compliance with HUD
and/or Fannie Mae requirements. (Total servicing portfolio shall mean loans
serviced by PEC for itself, MMC or others).
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<PAGE> 6
<TABLE>
<S> <C> <C>
0.4% First $ 50,000,000.00 of principal serviced
0.2% Next 50,000,000.00 of principal serviced
0.15% Next 400,000,000.00 of principal serviced
0.125% Next 500,000,000.00 of principal serviced
0.1% Over 1,000,000,000.00 of principal serviced
</TABLE>
A deductible clause in the amount of $5,000.00 or 0.1% of the face amount
of Fidelity Coverage, whichever is higher, is permissible. Deviations from
foregoing requirements will be considered by PEC upon request.
B. PEC shall maintain throughout the term of this Agreement errors
and omissions insurance in the amount of $1,000,000.00 on those of its employees
having access to the Loan documents or to any amounts paid by MMC borrowers.
C. PEC shall maintain throughout the term of this Agreement valuable
papers insurance in amounts sufficient to protect against loss of documents
transmitted to PEC by MMC.
D. PEC shall forward to MMC evidence of payment by the renewal date
of each policy and within thirty (30) days of each policy renewal date insurance
renewal certificates to certify that such insurance remains in full force and
effect.
E. PEC shall promptly notify MMC if any insurance required by this
Agreement is canceled for any reason within ten (10) business days of PEC'S
knowledge of the cancellation. PEC shall promptly notify MMC of any insurer's
refusal to renew any insurance at the expiration of the premium period. PEC
shall also notify MMC of any more restrictive terms required by an insurer as a
condition for renewal.
ARTICLE 6. LOAN DATA PROPERTY OF MMC
Only the data relating to MMC's Loans contained in the computer
files of PEC is the property of MMC. PEC'S software is owned exclusively by
PEC. PEC agrees to furnish such data to MMC on a computer printout, or other
appropriate format, with instructions necessary to enable MMC to use such data.
Such data shall be furnished as required within four weeks following a special
request by MMC.
ARTICLE 7. INDEMNIFICATION
A. PEC agrees to indemnify, defend and hold harmless MMC for any
loss, damage, reasonable expense, claims, and/or causes of action that may be
asserted against MMC as a result of any gross negligence or willful misconduct
on the part of PEC, its agents or employees in the performance of the services
required by this Agreement.
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<PAGE> 7
B. PEC shall, within 48 hours, report to MMC all cases of
embezzlement or other fraudulent, criminal or dishonest acts by the officers,
employees or agents of PEC in the servicing of any Loans of MMC or others by
PEC.
ARTICLE 8. DURATION AND TERMINATION OF AGREEMENT
A. This Agreement shall be in effect for one (1) year from the date
hereof unless terminated sooner pursuant to paragraphs B through F below. Unless
written notice is provided by either party hereto not less than ninety (90) days
prior to the expiration of this one (1) year term, and the Agreement is not
otherwise terminated pursuant hereto, this Agreement shall be extended until
terminated under paragraphs B through F below.
B. This Agreement may be terminated in whole or in part at any time
by mutual written agreement of MMC and PEC.
C. This Agreement may be terminated in whole or in part by MMC at any time
with or without cause upon ninety (90) days advance written notice to PEC.
D. This Agreement may be terminated in whole or in part by PEC at
any time with or without cause upon ninety (90) days advance written notice to
MMC.
E. MMC and PEC each retain the right to terminate this Agreement
immediately upon the occurrence of any of the following events affecting either
PEC or MMC:
1. The insolvency of either company;
2. The filing by or against either company of a petition
under any provision of bankruptcy law, or of an
assignment for the benefit of creditors;
3. The appointment by any public or supervisory authority
of any person or firm in charge of either company or
its assets;
4. A material breach by either company of any covenant,
representation, or warranty contained herein which
breach is not cured within ten (10) business days of
receipt by the breaching party of written notice
thereof from the party asserting that a breach has
occurred;
5. The issuance by an appropriate public monitoring or
supervisory authority of a cease and desist order or
its equivalent involving the safety, soundness or
financial
7
<PAGE> 8
liability of either company or against either company's
directors and officers.
6. If MMC becomes delinquent in paying PEC; delinquency
shall be defined as any amounts which are thirty (30)
days past due.
F. Upon termination of this Agreement, PEC shall promptly deliver to
MMC all Loan payments received and supply all such reports, Loan documents and
information as may be required by MMC, to any person or entity designated by MMC
and shall use its best efforts to effect the orderly and efficient transfer of
administration to a new servicer designated by MMC including preparation of
accounting statements, and/or computer tapes, in such form as may be reasonably
requested by MMC. PEC shall in no event have the right to assert a lien or
claim on, or offset against, any Loan documents or Loan payments.
ARTICLE 9. GENERAL PROVISIONS
A. Loan shall mean a loan, evidenced by a Note, purchase contract or
otherwise originated by MMC under the FHA Title I Program of the National
Housing Act, or any other insured or uninsured lending programs.
B. There shall be no modification of this Agreement unless agreed to
by both parties in writing.
C. No waiver by either party of any covenant or condition of this
Agreement shall be valid unless in writing and signed by the party so waiving.
D. This Agreement shall be governed by the laws of the State of
Georgia.
E. Invalidation of any one of the provisions of this Agreement, by
judgment or court order, shall in no way affect any other provisions herein
contained, which provisions shall remain in full force and effect.
F. PEC contracts with MMC hereunder as an independent contractor.
G. PEC may not assign this Agreement or its duties hereunder without
the prior written consent of MMC, provided however that PEC may delegate/assign
one or more of the Servicing duties set forth in this Agreement to one of PEC's
wholly owned subsidiaries or to an agent(s) of PEC.
H. This Agreement and all obligations and rights arising hereunder
shall bind and inure to the benefit of MMC and PEC and their respective
successors in interest and permitted assigns.
8
<PAGE> 9
I. Headings to sections of this Agreement are for convenience of
reference only and shall not be considered in the interpretation or performance
of this Agreement.
J. This Agreement shall be executed on one or more copies, but such
counterparts shall together constitute but one and the same Agreement.
K. In the event any Trustee or loan purchaser terminates MMC's
authority to service any of the Loans covered hereby, this Agreement shall
terminate as to such Loans.
L. All notices, requests and demands to or upon the respective
parties shall be deemed to have been given or made when personally delivered or
when deposited in the mail, first class, mail registered or certified, return
receipt requested and post prepaid as follows:
<TABLE>
<S> <C>
8.2.1 If to PEC, to:
Preferred Equities Corporation
4310 Paradise Road
Las Vegas, Nevada 89109
Attention: Frederick H. Conte, Executive Vice
President and Chief Operating Officer
8.2.2 If to MMC, to:
Mego Mortgage Corporation
1000 Parkwood Circle, Suite 500
Atlanta, Georgia 30339
Attention: James L. Belter, Executive Vice
President, Treasurer and Chief Financial
Officer
</TABLE>
or to such other address as either such party shall notify the other.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers, as of the date hereof.
MEGO MORTGAGE CORPORATION PREFERRED EQUITIES CORPORATION
/s/ James L. Belter /s/ Frederick H. Conte
- ------------------------------- ------------------------------
By: James L. Belter By: Frederick H. Conte
Executive Vice President Executive Vice President
_______________________________ _______________________________
DATE DATE
9
<PAGE> 1
EXHIBIT 10.20
Office Lease
by and between
MassMutual and
MEGO MORTGAGE CORPORATION
For: 1000 Parkwood
1000 Parkwood Circle
Atlanta, GA 30339
A "MassMutual" Property
<PAGE> 2
MM Equity No. 9201
OFFICE LEASE
THIS LEASE, is made as of this 9th day of April, 1996 by and between
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, a Massachusetts corporation
("Landlord") through its agent CORNERSTONE REAL ESTATE ADVISERS, INC., having
an address at 1050 Crown Pointe Parkway, Suite 1780, Atlanta, Georgia 30338 and
MEGO MORTGAGE CORPORATION, a Delaware corporation ("Tenant") having its
principal office at 1000 Parkwood Circle, Suite 500, Atlanta GA 30339.
INDEX
Article Title
1. Basic Provisions
2. Premises, Term and Commencement Date
3. Rent
4. Operating Expenses
5. Landlord's Work, Tenant's Work, Alterations and Additions
6. Use
7. Services
S. Insurance
9. Indemnification
10. Casualty Damage
11. Condemnation
12. Repair and Maintenance
13. Inspection of Premises
14. Surrender of Premises
15. Holding Over
16. Subletting and Assignment
17. Subordination, Attornment and Mortgagee Protection
18. Estoppel Certificate
19. Defaults
20. Remedies of Landlord
21. Quiet Enjoyment
22. Accord and Satisfaction
23. Security Deposit
24. Brokerage Commission
25. Force Majeure
26. Parking
27. Hazardous Materials
28. Additional Rights Reserved by Landlord
29. Defined Terms
30. Miscellaneous Provisions
EXHIBITS
Exhibit A Plan Showing Property and Premises
Exhibit B Landlord's Work
Exhibit C Tenant's Work
Exhibit D Building's Rules and Regulations; Janitorial Specifications
Exhibit E Commencement Date Confirmation
Exhibit F Special Stipulations
Exhibit G Guaranty
<PAGE> 3
ARTICLE 1.
BASIC PROVISIONS
A. Tenant's Tradename: MEGO MORTGAGE CORPORATION
B. Tenant's Address: 1000 Parkwood Circle, Suite 500, Atlanta, GA 30339
C. Office Building Name: 1000 PARKWOOD
Address: 1000 Parkwood Circle Atlanta, GA 30339
D. Premises: Suites: 500 and 600
Approximate Square feet (Rentable): 45,950
E. Landlord: Massachusetts Mutual Life Insurance Company
F. Landlord's Address: c/o: Cornerstone Real Estate Advisers, Inc.
1050 Crown Pointe Parkway, Suite 1780
Atlanta, GA 30338
G. Building Manager/Address: CARTER & ASSOCIATES
1275 Peachtree St., Atlanta, GA 30367-1801
H. Commencement Date: July 1. 1996
1. Expiration Date: June 30, 2002
J. Options to Extend: See Special Stipulations
K. Security Deposit: $ 73,711.46
L. Monthly Rent: $73, 711.46
M. Operating Expenses Base: 1996 Actual Expenses (To Be Determined)
N. Tenant's Pro Rata Share: 21.86 %. Tenant's Pro Rata Share shall be
determined by and adjusted by Landlord from time to time (but shall not be
readjusted sooner than the commencement of the second Lease year), by
dividing the Tenant's Rentable Square Feet of the Premises by the rentable
area of the Building and multiplying the resulting quotient, to the second
decimal place, by one hundred.
0. Normal Business Hours of Building:
<TABLE>
<S> <C>
Monday through Friday: 7:00 a.m. to 7:00 p.m.
Saturday- 8:00 a.m. to 1:30 p.m.
Sunday: a. m. to p.m.
</TABLE>
P. Prepaid Rent: None
Q. Parking Spaces: 184
Fee (parking spaces x rate/per month): $0.00 for Initial Term
R. Brokers: Carter & Associates, L.L.C. (Agent for Landlord)
Koll Management Services, Inc. (Agent for Tenant)
<PAGE> 4
The foregoing provisions shall be interpreted and applied in accordance with
the other provisions of this Lease set forth below. In the event of any
ambiguity or dispute in interpretation, the foregoing provisions shall
control. The capitalized terms, and the terms defined in Article 29, shall
have the meanings set forth herein or therein (unless otherwise modified in
the Lease) when used as capitalized terms in other provisions of the lease.
ARTICLE 2.
PREMISES, TERMS AND COMMENCEMENT DATE
Landlord hereby leases and demises to the Tenant and Tenant hereby takes and
team from Landlord that certain space identified in Article 1 and shown on a
plan attached hereto as Exhibit A ("Premises") for a term ("Term") commencing on
the Commencement Date and ending on the Expiration Date set forth in Article 1,
unless sooner terminated as provided herein, subject, to the provisions herein
contained. The Commencement Date set forth in Article 1 shall be advanced to
such earlier date as Tenant commences occupancy of the Premises for the conduct
of its business. Such date shall be confirmed by execution of the Commencement
Date Confirmation in the form as set forth in Exhibit E. If Landlord delays
delivering possession of the Premises or substantial completion of any
Landlord's Work under Exhibit B, this Lease shall not be void or voidable,
except as provided in Article 5. and Landlord shall have no liability for loss
or damage resulting therefrom.
ARTICLE 3.
RENT
A. Monthly Rent. Tenant shall pay Monthly Rent in advance on or before the
first day of each month of the Term. If the Term shall commence and end on a
day other than the first day of a month, the Monthly Rent for the first and last
partial month shall be prorated on a per diem basis. Upon the execution of this
Lease, Tenant shall pay one installment of Monthly Rent for the first full month
of the Term and a prorated Monthly Rent for any partial month which may precede
it.
B. Additional Rent. All costs and expenses which Tenant assumes or agrees to
pay and any other sum payable by Tenant pursuant to this Lease, including,
without limitation, its share of Operating Expenses, shall be deemed Additional
Rent.
C. Rent. Monthly Rent, Additional Rent and Operating Expenses and any other
amounts which Tenant is or becomes obligated to pay Landlord under this Lease
are herein referred to collectively as 'Rent', and all remedies applicable to
the nonpayment of Rent shall be applicable thereto. Landlord may apply payments
received from Tenant to any obligations of Tenant then accrued, without regard
to such obligations as may be designated by Tenant.
D. Place of Payment, Late Charge. Rent and other charges required to be
paid under this Lease, no matter how described, shall be paid by Tenant to
Landlord at the Building Manager's address listed in Article 1, or to such other
person and/or address as Landlord may designate in writing, without any prior
notice or demand therefor and, other than as may be allowed by state or local
law, without deduction or set-off or counterclaim and without relief from any
valuation or appraisement laws. In the event Tenant fails to pay Rent due under
this Lease within Ten (10) days of due date of said Rent, Tenant shall pay to
Landlord a late charge of ten percent (10%) on the amount overdue.
ARTICLE 4.
OPERATING EXPENSES
A. Payment of Operating Expenses. It is agreed that during each Lease Year
beginning with the first month of the second Lease Year and each month
thereafter during the original Lease Term, or any extension thereof, Tenant
shall pay to Landlord as Additional Rent, at the same time as the Monthly Rent
is paid, an amount equal
<PAGE> 5
to one-twelfth (1/12) of Landlord's reasonable estimate of Tenant's Pro Rata
Share of any projected increase in the Operating Expenses for a particular Lease
Year in excess of the Operating Expenses Base (the "Estimated Escalation
Increase"). A final adjustment (the "Escalation Reconciliation") shall be made
between the parties as soon as practicable following the end of each Lease Year,
but in no event later than ninety (90) days after the end of each Lease Year. In
computing the Estimated Escalation Increase for any particular Lease Year,
Landlord shall take into account any prior increases in Tenant's Pro Rata Share
of Operating Expenses. If during any Lease Year the Estimated Escalation
Increase is less than the Estimated Escalation Increase for the previous Lease
Year on which Tenant's share of Operating Expenses were based for said year,
such Additional Rent payments, attributable to Estimated Escalation Increase, to
be paid by Tenant for the new Lease Year shall be decreased accordingly;
provided, however, in no event will the Rent paid by Tenant hereunder ever be
less than the Monthly Rent, its Pro Rata Share of the Operating Expenses Base,
plus all other amounts of Additional Rent.
As soon as practicable following the end of each Lease Year during the initial
Lease Term, or any extension thereof, including the first Lease Year, Landlord
shall submit to Tenant a statement prepared by Landlord, setting forth the
Estimated Escalation Increase, if any. Beginning with the second Lease Year,
the statement shall also set forth the Escalation Reconciliation for the Lease
Year just completed. To the extent that the Operating Expense Escalation is
different from the Estimated Escalation Increase upon which Tenant paid Rent
during the Lease Year just completed, Tenant shall pay Landlord the difference
in cash within thirty (30) days following receipt by Tenant of such statement
from Landlord, or receive a credit on the next payment of Rent owing hereunder
as the case may be. Until Tenant receives such statement, Tenant's Rent for
the new Lease Year shall continue to be paid at the rate being paid for the
particular Lease Year just completed, but Tenant shall commence payment to
Landlord of the monthly installment of Additional Rent on the basis of said
statement beginning on the first day of the month following the month in which
Tenant receives such statement. In addition to the above, if, during any
particular Lease Year, there is a change in the information on which Landlord
based the estimate upon which Tenant is then making its estimated payment of
Operating Expenses so that such Estimated Escalation Increase furnished to
Tenant is no longer accurate, Landlord shall be permitted to revise such
Estimated Escalation Increase by notifying Tenant, and there shall be such
adjustments made in the Additional Rent on the first day of the month
following the serving of such statement on Tenant as shall be necessary by
either increasing or decreasing, as the case may be, the amount of Additional
Rent then being paid by Tenant for the balance of the Lease Year (but in no
event shall any such decrease result in a reduction of the rent below the
Monthly Rent, Tenant's Pro Rata Share of the Operating Expenses Base, plus all
other amounts of Additional Rent), as well as a payment by Tenant or credit to
the Tenant as appropriate based upon the amount theretofore paid by Tenant
during such particular Lease Year pursuant to the prior estimate.
Landlord's and Tenant's responsibilities with respect to the Operating Expense
adjustment described herein shall survive the expiration or early termination
of this Lease.
If the Building is not fully occupied during any particular Lease Year,
Landlord shall adjust those Operating Expenses which are affected by Building
occupancy for the particular Lease Year, or portion thereof, as the case may
be, to reflect an occupancy of not less than ninety-five percent (95%) of all
such rentable area of the Building.
B. Disputes Over Operating Expenses. If Tenant disputes the amount of an
adjustment or the proposed estimated increase or decrease in Operating Expenses,
Tenant shall give Landlord written notice of such dispute within thirty (30)
days after Landlord advises Tenant of such adjustment or proposed increase or
decrease. Tenant's failure to give such notice shall waive its right to dispute
the amounts so determined. If Tenant timely objects, Tenant shall have the right
if Landlord disagrees with Tenant, to engage its own Accountants or experts
("Tenant's Accountants") for the purpose of verifying the accuracy of the
statement in dispute, or the reasonableness of the adjustment or estimated
increase or decrease. If Tenant's Accountants determine that an error has been
made, Landlord and Tenant's Accountants shall endeavor to agree upon the matter,
failing which Landlord and Tenant's Accountants shall jointly select an
independent certified public accounting firm (the "Independent Accountant")
which firm shall conclusively determine whether the adjustment or estimated
increase or decrease is reasonable, and if not. what amount is reasonable. Both
parties shall be bound by such
<PAGE> 6
determination. If Tenant's Accountants do not participate in choosing the
Independent Accountant within 20 days notice by Landlord, then Landlord's
determination of the adjustment or estimated increase or decrease shall be
conclusively determined to be reasonable and Tenant shall be bound thereby. All
costs incurred by Tenant in obtaining Tenant's Accountants and the cost of the
Independent Accountant shall be paid by Tenant unless Tenant's Accountants
disclose an error, acknowledged by Landlord (or found to have conclusively
occurred by the Independent Accountant), of more than ten percent, (10%) in the
computation of the total amount of Operating Expense as set forth in the
statement submitted by Landlord with respect to the matter in dispute; in which
event Landlord shall pay the reasonable costs incurred by Tenant in obtaining
such audits. Tenant shall continue to timely pay Landlord the amount of the
prior year's adjustment and adjusted Additional Rent determined to be incorrect
as aforesaid until the parties have concurred as to the appropriate adjustment
or have deemed to be bound by the determination of the Independent Accountant in
accordance with the preceding terms. Landlord's delay in submitting any
statement contemplated herein for any Lease Year shall not affect the provisions
of this Paragraph, nor constitute a waiver of Landlord's rights as set forth
herein for said Lease Year or any subsequent Lease Years during the Lease Term
or any extensions thereof.
ARTICLE 5.
LANDLORD'S WORK, TENANT'S WORK, ALTERATIONS
AND ADDITIONS
A. Landlord's Work. Landlord shall diligently proceed to construct the
Premises in accordance with Landlord's obligations as set forth in the work
letter attached hereto as Exhibit B, and hereinafter referred to as "Landlord's
Work". Landlord will deliver the Premises to Tenant with all of Landlord's Work
completed to Tenant's reasonable satisfaction (except for minor and non-material
punch list items which Landlord shall diligently work to complete and which in
Landlord's reasonable judgment will not delay completion of Tenant's Work, as
defined in subparagraph B of this Article) on or before the number of days
specified in Exhibit B and Tenant agrees thereupon to commence and complete
Tenant's Work on or before the Commencement Date. If Landlord is delayed in
completing Landlord's Work by strike, shortages of labor or materials, delivery
delays or other matters beyond the reasonable control of Landlord, then Landlord
shall give notice thereof to Tenant and the date on which Landlord is to turn
the Premises over to Tenant for Tenant's Work and the Commencement Date shall be
postponed for an equal number of days as the delay as set forth in the notice.
Providing, however, if such delays exceed ninety (90) days, then either Landlord
or Tenant upon notice to the other shall have other shall have the right to
terminate this Lease without liability to either party. If the Commencement
Date is postponed as aforesaid, Tenant agrees upon request of Landlord to
execute a writing confirming the Commencement Date on such form as set forth in
Exhibit E attached hereto.
B. Tenant's Work. On and after the date specified in the immediately
preceding subparagraph A for delivery of the Premises to Tenant for Tenant's
Work, Tenant, at its sole cost and expense, shall perform and complete all other
improvements to the Premises (herein called "Tenant's Work") including, but not
limited to, all improvements, work and requirements required of Tenant under the
foregoing work letter. Tenant shall complete all of Tenant's Work in good and
workmanlike manner, fully paid for and free from liens, in accordance with the
plans and specifications approved by Landlord and Tenant as provided in Exhibit
C, on or prior to the scheduled Commencement Date. Tenant shall also have the
right during this period to come onto the Premises to install its mixtures and
prepare the Premises for the operation of Tenant's business. Notwithstanding
the fact that foregoing activities by Tenant will occur prior to the scheduled
Commencement Date, Tenant agrees that all of Tenant's obligations provided for
in this Lease shall apply during such period with the exception of any
obligation to pay Rent.
C. Alterations. Except as provided in the immediately preceding
subparagraph, Tenant shall make no alterations or additions to the Premises
without the prior written consent of the Landlord, which consent Landlord shall
not unreasonably withhold.
D. Liens. Tenant shall give Landlord at least ten (10) days prior written
notice (or such additional time as may be necessary under applicable laws) of
the commencement of any Tenant's Work, to afford Landlord the
<PAGE> 7
opportunity of posting and recording notices of nonresponsiblity. Tenant will
not cause or permit as a result of Tenant's work any mechanic's, materialman's
or similar liens or encumbrances to be filed or exist against the Premises or
the Building or Tenant's interest in this Lease in connection with work done by
Tenant under this Article. A Tenant may contest such lien but shall nonetheless
remove any such lien or encumbrance by bond or otherwise within twenty (20) days
from the date of their existence. If Tenant fails to do so, Landlord may pay
the amount or take such other action as Landlord deems reasonably necessary to
remove any such lien or encumbrance, without being responsible to investigate
the validity thereof. The amounts so paid and costs incurred by Landlord shall
be deemed Additional Rent under this Lease and payable in full upon demand.
ARTICLE 6.
USE
A. Use. Tenant shall use the Premises for general office purposes, and for
no other purpose whatsoever, subject to and in compliance with all other
provisions of this Lease, including without limitation the Building's Rules and
Regulations attached as Exhibit D hereto. Tenant and its invitees shall also
have the nonexclusive right along with other tenants of the Building and others
entitled to use the same and subject to such rules and regulations as Landlord
in its discretion may impose from time to time to use the Common Areas.
B. Restrictions. Tenant shall not at any time use or occupy, or suffer or
permit anyone to use or occupy, the Premises or do or permit anything to be done
in the Premises which: (a) causes or is liable to cause injury to persons, to
the Building or its equipment, facilities or systems; (b) impairs or tends to
impair the character, reputation or appearance of the Building as a first class
office building; (c) impairs or tends to impair the proper and economic
maintenance, operation and repair of the Building or its equipment, facilities
or systems; or, (d) annoys or inconveniences or tends to annoy or inconvenience
other tenants or occupants of the Building.
C. Compliance with Laws. Tenant shall keep and maintain the Premises, its
use thereof and its business in compliance with all governmental laws,
ordinances, rules and regulations. Tenant shall comply with all Laws relating
to the Premises and Tenant's use thereof, including without limitation, Laws
requiring the Premises to be closed on Sundays or any other days or hours and
Laws in connection with the health. safety and building codes, and any permit or
license requirements. Landlord makes no representation that the Premises are
suitable for Tenant's purposes.
ARTICLE 7.
SERVICES
A. Climate Control. Landlord shall provide climate control to the Premises
during Normal Business Hours of Building as set forth in Article 1 as required
in Landlord's reasonable judgment for the comfortable use and occupation of the
Premises. If Tenant requires climate control at any other time, Landlord shall
use reasonable efforts to furnish such service upon reasonable notice from
Tenant, and Tenant shall pay all of Landlord's actual costs therefore on demand.
The performance by Landlord of its obligations under this Article is subject to
Tenant's compliance with the conditions of occupancy and connected electrical
load established by Landlord. Use of the Premises or any part thereof in a
manner exceeding the heating, ventilating or air-conditioning ("HVAC") design
conditions including occupancy and connected electrical load), including
rearrangement of partitioning which interferes with normal operation of the
HVAC in the Premises, or the use of computer or data processing machines or
other machines or equipment, may require changes in the HVAC or plumbing
systems or controls servicing the Premises or portions thereof, in order to
provide comfortable occupancy. Any such required change shall be made by
Landlord at Tenant's expense as alterations in accordance with the provisions
of Article 5, but only to the extent permitted and upon the conditions set
forth in that Article.
<PAGE> 8
B. Elevator Service. If the Building is equipped with elevators, Landlord,
during Normal Business Hours of Building, shall furnish elevator service to the
premises to be used in common with others. At least one elevator shall remain
in service during all hours that are not Normal Business Hours of the Building.
Landlord may designate a specific elevator for use as a service elevator.
C. Janitorial Services. Landlord shall make janitorial and cleaning
services available to the Premises. Tenant shall pay to Landlord on demand the
costs incurred by Landlord for (i) extra cleaning in the Premises required
because of (A) misuse or neglect on the part of Tenant or Tenant's agents,
contractors, invitees, employees and customers, (B) the use of portion of the
Premises for special purposes requiring greater or more difficult cleaning work
than office areas, (C) interior glass partitions or unusual quantities of
interior glass surfaces, and (D) non-building standard materials or finishes
installed by Tenant or at its request; and (ii) removal from the Premises of any
refuse and rubbish of Tenant in excess of that ordinarily accumulated in general
office occupancy or at times other than Landlord's standard cleaning times.
D. Water and Electricity. Landlord shall make available domestic water in
reasonable quantities to the common areas ( and to the Premises if so designated
in Exhibit B) and cause electric service equivalent to the watt load to be
supplied for lighting the Premises and for the operation of Ordinary Office
Equipment. "Ordinary Office Equipment" shall mean office equipment wired for
120 volt electric service and rated and using less than 6 amperes or 750 watts
of electric current. Landlord shall have the exclusive right to make any
replacement of lamps, fluorescent tubes and lamp ballasts in the Premises.
Landlord may adopt a system of relamping and ballast replacement periodically on
a group basis in accordance with good management practice. Tenant's use of
electric energy in the Premises shall not at any time exceed the capacity of any
of the risers, piping, electrical conductors and other equipment in or serving
the Premises. In order to insure that such capacity is not exceeded and to
avert any possible adverse effect upon the Building's electric system, Tenant
shall not, without Landlord's prior written consent in each instance, connect
appliances or heavy duty equipment, other than ordinary office equipment, to the
Building's electric system or make any alteration or addition to the Building's
electric system. Should Landlord grant its consent in writing, all additional
risers, piping and electrical conductors or other equipment therefor shall be
provided by Landlord and the cost thereof shall be paid by Tenant within 10 days
of Landlord's demand therefor. As a condition to granting such consent,
Landlord may require Tenant to agree to an increase in Monthly Rent by the
expected cost to Landlord of such additional service, that is, the cost of the
additional electric energy to be made available to Tenant based upon the
estimated additional capacity of such additional risers, piping and electrical
conductors or other equipment. If Landlord and Tenant cannot agree thereon,
such cost shall be determined by an independent electrical engineer, to be
selected by Landlord and paid equally by both parties.
E. Separate Meters. Landlord may install separate meters for the Premises
to register the usage of all or any one of the utilities and in such event
Tenant shall pay for the cost of electricity usage as metered which is in excess
of the reasonable watt load (as established by the Landlord), or in the case of
other utilities, the metered usage in excess of that usage reasonably
anticipated by Landlord. Tenant shall reimburse Landlord for the cost of
installation of meters if such usage exceeds the watt load (or such anticipated
usage, as the case may be) by more than 10 percent. In any event, Landlord may
require Tenant to reduce its consumption to the watt load or such anticipated
usage.
F. Interruptions. Landlord does not warrant that any of the services
referred to above, or any other services which Landlord may supply, will be free
from interruption and Tenant acknowledges that any one or more of such services
may be suspended by reason of accident, repairs, inspections, alterations or
improvements necessary to be made, or by strikes or lockouts, or by reason of
operation of law, or causes beyond the reasonable control of Landlord. Any
interruption or discontinuance of service shall not be deemed an eviction or
disturbance of Tenant's use and possession of the Premises, or any part thereof,
nor render Landlord liable to Tenant for damages, nor relieve Tenant from
performance of Tenant's obligations under this Lease. Notwithstanding, should
such interruption or discontinuance of service continue for ten (10) consecutive
business days, Tenant shall be entitled to abate Rent for each day thereafter
that such service is not restored. Landlord shall however, exercise reasonable
diligence to restore any service so interrupted.
G. Utilities Provided by Tenant. Tenant shall make application in Tenant's
own name for all utilities not provided by Landlord and shall: (i) comply with
all utility company regulations for such utilities, including requirements for
<PAGE> 9
the installation of meters, and (ii) obtain such utilities directly from, and
pay for the same when due directly to, the applicable utility company. The term
"utilities" for purposes hereof shall include but not be limited to electricity,
gas, water, sewer, steam, fire protection, telephone and other communication and
alarm services, as well as HVAC, and all taxes or other charges thereon. Tenant
shall install and connect all equipment and lines required to supply such
utilities to the extent not already available at or serving the Premises, or at
Landlord's option shall repair, alter or replace any such existing items. Tenant
shall maintain, repair and replace all such items, operate the same, and keep
the same in good working order and condition. Tenant shall not install any
equipment or fixtures, or use the same, so as to exceed the safe and lawful
capacity of any utility equipment or lines serving the same. The installation,
alteration, replacement or connection of any utility equipment and lines shall
be subject to the requirements for alterations of the Premises set forth in
Article 5. Tenant shall ensure that all HVAC equipment is installed and
operated at all times in a manner to prevent roof leaks, damage, or noise due to
vibrations or improper installation, maintenance or operation.
ARTICLE 8
INSURANCE
A. Required Insurance. Tenant shall maintain insurance policies, with
responsible companies licensed to do business in the state where the Building is
located and satisfactory to Landlord, naming Landlord, Landlord's Building
Manager or agent, Tenant and any Mortgagee of Landlord, as their respective
interest may appear, at its own cost and expense including (i) "all risk"
property insurance which shall be primary on the lease improvements referenced
in Article 5 and Tenant's property, including its goods, equipment and
inventory, in an amount adequate to cover their replacement cost; (ii) income
loss coverage, (iii) comprehensive general liability insurance on an occurrence
basis with limits of liability in an amount not less than $1,000,000 (One
Million Dollars) combined single limit for each occurrence. The comprehensive
general liability policy shall include contractual liability which includes the
provisions of Article 9 herein.
On or before the Commencement Date of the Lease, Tenant shall furnish to
Landlord and its Building Manager, certificates of insurance evidencing the
aforesaid insurance coverage, including naming Landlord and Landlord's Building
Manager or agent as additional insureds. Renewal certificates shall be
furnished at least thirty (30) days prior to the expiration date of such
insurance policies showing the above coverage to be in full force and effect.
All such insurance shall provide that it cannot be canceled except upon
thirty (30) days prior written notice to Landlord or designated property
manager or agent. Tenant shall comply with all rules and directives of any
insurance board, company or agency determining rates of hazard coverage for the
Premises, including but not limited to the installation of any equipment and/or
the correction of any condition necessary to prevent any increase in such
rates.
B. Subrogation. Landlord and Tenant each agree that neither Landlord nor
Tenant will have any claim against the other for any loss, damage or injury
which is covered by insurance carried by either party and for which recovery
from such insurer is made, notwithstanding the negligence of either party in
causing the loss. This release shall be valid only if the insurance policy in
question permits waiver of subrogation or if the insurer agrees in writing that
such waiver of subrogation will not affect coverage under said policy. Each
party agrees to use its best efforts to obtain such an agreement from its
insurer if the policy does not expressly permit a waiver of subrogation.
C. Waiver of Claims. Except for claims arising from Landlord's intentional
or grossly negligent acts that are not covered by Tenant's insurance hereunder,
Tenant waives all claims against Landlord for injury or death to persons, damage
to property or to any other interest of Tenant sustained by Tenant or any party
claiming, through Tenant resulting from: (i) any occurrence in or upon the
Premises, (ii) leaking of roofs, bursting, stoppage or leaking of water, gas,
sewer or steam pipes or equipment, including sprinklers, (iii) wind, rain, snow,
ice, flooding, freezing, fire, explosion, earthquake, excessive heat or cold, or
other casualty, (iv) the Building, Premises, or the operating and mechanical
systems or equipment of the Building, being defective, out of repair, or
failing, and (v) vandalism, malicious mischief, theft or other acts of omission
of any other parties including without limitation, other tenants, contractors
and invitees at the Building. Subject to claims arising from Landlord's
intentional or grossly negligent
<PAGE> 10
acts, Tenant agrees that Tenant's property loss risks shall be borne by its
insurance, and Tenant agrees to look solely to and seek recovery only from its
insurance carriers in the event of such losses. For purposes hereof, any
deductible amount shall be treated as though it were recoverable under such
policies.
ARTICLE 9.
INDEMNIFICATION
Except for claims arising from Landlord's intentional or grossly negligent acts
or for claims asserted directly by Landlord against Tenant or vice versa,
Tenant shall indemnify and hold harmless Landlord and its agents, successors
and assigns, including its Building Manager, from and against all injury, loss,
costs, expenses, claims or damage (including attorney's fees and disbursements)
to any person or property arising from, related to, or in connection with any
use or occupancy of the Premises by or any act or omission (including, without
limitation, construction and repair of the Premises arising out of Tenant's
Work or subsequent work) of Tenant, its agents, contractors, employees,
customers, and invitees, which indemnity extends to any and all claims arising
form any breach or default in the performance of any obligation on Tenant's
part to be performed under the terms of this Lease. This indemnification shall
survive the expiration or termination of the Lease Term., for any action or
proceeding brought within one (1) year of any such expiration or termination.
Landlord shall not be liable to Tenant for any damage by or from any act or
negligence of any co-tenant or other occupant of the Building, or by any owner
or occupants of adjoining or contiguous property. Landlord shall not be liable
for any injury or damage to persons or property resulting in whole or in part
from the criminal activities of others. To the extent not covered by all risk
property insurance, Tenant agrees to pay for all damage to the Building, as
well as all damage to persons or property of other tenants or occupants
thereof, caused by the negligence, fraud or willful misconduct of Tenant or any
of its agents, contractors, employees, customers and invitees. Landlord shall
be liable to Tenant or shall indemnify Tenant for any damage incurred by Tenant
resulting from Landlord's gross negligence, fraud or willful misconduct or for
any default by Landlord in the observance or performance by Landlord of any of
the terms, covenants and conditions of this Lease on Landlord's part to be
observed or performed and Landlord fails to cure such default within the time
frames called for in this Lease or a reasonable time.
ARTICLE 10.
CASUALTY DAMAGE
Tenant shall promptly notify Landlord or the Building Manger of any fire or
other casualty to the Premises or to the extent it knows of damage, to the
Building. In the event the Premises or any substantial part of the Building is
wholly or partially damaged or destroyed by fire or other casualty, the Landlord
will proceed to restore the same to substantially the same condition existing
immediately prior to such damage or destruction unless such damage or
destruction is incapable of repair or restoration within one hundred twenty
(120) days, in which event Landlord may, at Landlord's option and by written
notice given to Tenant within thirty (30) days of such damage or destruction,
declare this Lease terminated as of the happening of such damage or destruction.
To the extent after fire or other casualty that Tenant shall be deprived of the
use and occupancy of the Premises or any portion thereof as a result of any such
damage, destruction or the repair thereof, providing Tenant did not cause the
fire or other casualty, Tenant shall be relieved of the same ratable portion of
the fixed rental hereunder as the amount of damaged or useless space in the
Premises as reasonably determined by Landlord and Tenant.
ARTICLE 11.
CONDEMNATION
In the event of a condemnation or taking of the entire Premises by a public or
quasi-public authority, this Lease shall terminate as of the date title vests
in the public or quasi-public authority. In the event of a taking or
condemnation of fifteen percent (15%) or more (but less than the whole) of the
Building and without regard to
<PAGE> 11
whether the Premises are part of such taking or condemnation, Landlord may elect
to terminate this Lease by giving notice to Tenant within sixty (60) days of
Landlord receiving notice of such condemnation. In the event of a condemnation
or taking of twenty-five percent (25%) or more of the Premises, which taking or
condemnation results in (i) the Premises being no longer accessible by Tenant,
or (ii) utility services no longer being provided to the Premises, either of
which events prevent Tenant from operating its business in the ordinary course
and if Landlord is unable to provide reasonably acceptable alternative space to
Tenant within thirty (30) days from the date of the court order authorizing such
condemnation or taking then Tenant may elect to terminate this Lease by giving
Landlord thirty (30) days prior written notice after the thirty (30) day
relocation period. All compensation awarded for any condemnation shall be the
property of Landlord, whether such damages shall be awarded as a compensation
for diminution in the value of the leasehold or to the fee of the Premises, and
Tenant hereby assigns to Landlord all of Tenant's right, title and interest in
and to any and all such compensation. Providing, however that in the event this
Lease is terminated, Tenant shall be entitled to a separate claim available to
Tenant for loss of leasehold improvements (including fixtures paid for by
Tenant), the taking of Tenant's personal property and for costs of moving.
Notwithstanding the foregoing to the contrary, any condemnation award to Tenant
shall be available only to the extent such award is payable separately to Tenant
and does not diminish the award available to Landlord or any Lender of Landlord
and such award shall be limited to the amount of Rent actually paid by Tenant to
Landlord for the period of time for which the award is given. Any additional
portion of such award shall belong to Landlord.
ARTICLE 12.
REPAIR AND MAINTENANCE
A. Tenant's Obligations. Tenant shall keep the Premises in good working order,
repair and condition (which condition shall be neat, clean and sanitary, and
free of pests and rodents) and in compliance with all Laws now or hereafter
adopted pertaining to the Premises and shall diligently maintain and repair all
nonstructural aspects of the Premises not included in Landlord's obligations
below.
B. Landlord's Obligations. Landlord shall maintain (i) the foundations, roof,
perimeter walls and exterior windows, and all structural aspects of the
Building, and (ii) all nonstructural aspects of the Building which relate to the
Common Areas or to more than one tenant's premises, or which no tenant of the
Building is required to maintain and repair, including all systems and
facilities necessary for the operation of the Building and the provision of
services and utilities as required herein (except to the extent that any of the
foregoing items are installed by or on behalf of, or are the property of,
Tenant). Landlord shall also make any routine or ordinary necessary repairs to
the Building standard mechanical, HVAC, electrical, and Plumbing systems in or
servicing the Premises (the cost of which shall be included in Operating
Expenses under Article 4, unless such costs are capital in nature), excluding
repairs required to be made by Tenant pursuant to this Article. Landlord shall
have no responsibility to make any repairs unless and until Landlord receives
written notice of the need for such repair or Landlord otherwise is aware that
repairs are needed. Landlord shall have thirty (30) days in which to make such
repairs or maintenance after receiving notice from Tenant or otherwise becoming
aware of the need, unless such repairs or maintenance cannot be completed within
such thirty (30) day period. In such case, Landlord shall diligently commence
and pursue the completion of such repairs and/or maintenance within such thirty
(30) day period. If such repairs and maintenance cannot be completed with
thirty (30) days or a reasonable time thereafter so long as Landlord is
diligently pursuing completion of same, then Tenant's Rent shall abate
commencing on the forty-fifth (45th) day after Landlord commences the repair and
maintenance for each day until completion. Landlord shall make every reasonable
effort to perform all such repairs or maintenance in such a manner (in its
judgment) so as to cause minimum interference with Tenant and the Premises but
Landlord shall not be liable to Tenant for any interruption or loss of business
pertaining to such activities. Landlord shall have the right to require that any
damage caused by the willful misconduct of Tenant or any of Tenant's agents,
contractors, employees, invitees or customers, be paid for and performed by the
Tenant (without limiting Landlord's other remedies herein).
C. General Obligations. Alterations to the Premises required from time to time
to comply with applicable laws, requirements of any board of property insurance
underwriters or similar entity, or reasonable requirements of Landlord's or
Tenant's insurers shall be made by the party to this Lease responsible for
maintaining and repairing
<PAGE> 12
the applicable aspect of the Premises hereunder. Notwithstanding the foregoing,
in the event that Landlord is required to make any such alteration as the result
of any use of the Premises by Tenant (i) which was not contemplated at the time
this Lease was signed and (ii) which is not common to 50% or more of the tenants
of the Building, Tenant shall reimburse Landlord upon demand for all expenses
reasonably incurred by Landlord in connection therewith, plus 10% of such
expenses to cover Landlord's internal administrative costs. If reasonably
necessary to comply with changes in applicable laws and requirements, Landlord
may take back a portion or portions of the Premises provided that the Monthly
Rent and Additional Rent shall be abated in proportion to any resulting
impairment of Tenant's use of the Premises; and provided further that, if such
impairment (in the aggregate) exceeds impairment of Tenant's use of the
Premises; and provided further that, if such impairment (in the aggregate)
exceeds 5%. Tenant shall be entitle to terminate this Lease by irrevocable
written notice to Landlord within 20 business days following the date of such
taking. Landlord warrant to Tenant that, as of the Commencement Date, all
aspects of the Premises comprising Landlord's Work, if any, shall comply with
all applicable laws, with the requirements of Landlord's insurers, and with the
requirements of all boards of property insurance underwriters and similar
entities.
D. Signs and Obstructions. Tenant shall not obstruct or permit the obstruction
of light, halls, Common Areas, roofs, parapets, stairways or entrances to the
Building or the Premises and will not affix, paint, erect or inscribe any sign,
projection, awning, signal or advertisement of any kind to any part of the
Building or the Premises, including the inside or outside of the windows or
doors, without the written consent of Landlord. Landlord shall have the right
to withdraw such consent at any time and to require Tenant to remove any sign,
projection, awning, signal or advertisement to be affixed to the Building or the
Premises. If such work is done by Tenant through any person, firm or
corporation not designated by Landlord, or without the express written consent
of Landlord, Landlord shall have the right to remove such signs, projections,
awnings, signals or advertisements without being liable to the Tenant by reason
thereof and to charge the cost of such removal to Tenant as Additional Rent,
payable within ten (10) days of Landlord's demand therefor.
E. Outside Services. Landlord shall provide for and Tenant shall not otherwise
permit, except by a person or company reasonably satisfactory to and approved by
Landlord: (i) the extermination of vermin in, on or about the Premises; (ii)
the servicing of heating, ventilating and air conditioning equipment; (iii) the
collection of rubbish and trash other than in compliance with local government
health requirements and in accordance with the rules and regulations established
by Landlord, which shall minimally provide that Tenant's rubbish and trash shall
be kept in containers located so as not to be visible to members of the public
and in a sanitary and neat condition; or (iv) the window cleaning, janitorial
services or similar work in the Premises.
In the remaining 180 days of the initial Lease Term or any extended term, Tenant
shall permit the Landlord, the Building Manager and its authorized
representatives to enter the Premises to show the Premises during Normal
Business Hours of Building. Tenant shall allow the Landlord's Building Manager
and its authorized agents reasonable access to the Premises to inspect the
Premises and to make such repairs, improvements or additions in the Premises or
in the Building of which they are a part as may be necessary or appropriate.
Landlord shall make every effort to perform all such repairs, improvements and
additions in such a manner (in its judgment) so as to cause minimum interference
with Tenant and the Premises but so long as Landlord performs same during
reasonable hours Landlord shall not be liable to Tenant for any interruption or
loss of business pertaining to such activities.
ARTICLE 14.
SURRENDER OF PREMISES
Upon the expiration of the Term, or sooner termination of the Lease, Tenant
shall quit and surrender to Landlord the Premises, broom clean, in good order
and condition, normal wear and tear and damage by fire and other casualty
excepted. All leasehold improvements that are not fixtures, and fixtures that
can be removed by Tenant with the Premises repaired to its original condition,
reasonable wear and tear excepted, such as light fixtures and HVAC equipment,
wall coverings, carpeting and drapes, in or serving the Premises, whether
installed by Tenant or Landlord, shall be Tenant's property. Any property not
removed upon expiration of the Term, or soon termination
<PAGE> 13
of the Lease, shall be deemed to have been abandoned by Tenant and may be
retained or disposed of by Landlord at Tenant's expense free of any and all
claims of Tenant, as Landlord shall desire. All property not removed from the
Premises by Tenant may be handled or stored by Landlord at Tenant's expense and
Landlord shall not be liable for the value, preservation or safekeeping thereof.
At Landlord's option all or part of such property may be conclusively deemed to
have been conveyed by Tenant to Landlord as if by bill of sale without payment
by Landlord. The Tenant hereby waives to the maximum extent allowable the
benefit of all laws now or hereafter in force in this state or elsewhere
exempting property from liability for rent or for debt.
ARTICLE 15.
HOLDING OVER
Tenant shall pay Landlord 200% of the amount of Rent then applicable prorated on
a per diem basis for each day Tenant shall retain possession of the Premises or
any part thereof after expiration or earlier termination of this Lease, together
with all damages sustained by Landlord on account thereof. The foregoing
provisions shall not serve as permission for Tenant to hold-over, nor serve to
extend the Term (although Tenant shall remain bound to comply with all
provisions of this Lease until Tenant vacates the Premises) and Landlord shall
have the right at any time thereafter to enter and possess the Premises and
remove all property and persons therefrom.
ARTICLE 16.
SUBLETTING AND ASSIGNMENT
Tenant shall not, without the prior written consent of Landlord (which shall
not be unreasonably withheld so long as such proposed replacement tenant meets
the criteria, in Landlord's sole discretion, as set forth below), endorsed
thereon, list the Premises or any part thereof as available for assignment or
sublease with any broker or agent or otherwise advertise, post, communicate or
solicit prospective assignees or subtenants through any direct or indirect
means, nor assign this Lease or any interest thereunder, or sublet Premises or
any part thereof, or permit the use of Premises by any party other than Tenant.
In the event that during the term of this Lease, Tenant desires to sublease
and introduces Landlord to a proposed replacement tenant for Tenant, which
replacement tenant is of financial strength at least equal to that of Tenant
(as determined by Landlord in its reasonable discretion) and has a use for
Premises and a number of employees reasonably consistent with that of Tenant's
operation, the Landlord may consider such replacement tenant and promptly
notify Tenant as to Landlord's choice, at Landlord's sole discretion, of the
following:
(1) That Landlord consents to a subleasing of Premises to such replacement
tenant provided that Tenant shall remain fully liable for all of its
obligations and liabilities under this Lease and provided further that
Landlord shall be entitled to any profit obtained by Tenant from such
subletting or assignment; or;
(2) That upon such replacement tenant's entering into a mutually satisfactory
new Lease for the Premises with Landlord, then Tenant shall be released
from all further obligations and liabilities under this Lease (excepting
only unpaid rentals or any unperformed covenants then past due under this
Lease or any guarantee by Tenant of replacement tenant's obligations); or
(3) That Landlord declines to consent to such sublease or assignment due to
failure to adequately establish the proposed replacement Tenant's
financial strength and proposed use of and operations upon Premises.
Tenant shall submit or cause to be submitted audited financial statements
or financial statements certified by an executive officer or general
partner of the proposed subtenant or assignee in order to validate such
entity's financial strength.
Without the prior written consent of Landlord, Tenant may not assign any
options to sublessee(s) or assignee(s) hereunder, all such options being deemed
personal to Tenant only. Consent by Landlord hereunder shall in no way operate
as a waiver by Landlord of, or to release or discharge Tenant from, any
liability under this Lease or be
<PAGE> 14
construed to relieve Tenant from obtaining Landlord's consent to any subsequent
assignment, subletting, transfer, use of occupancy.
ARTICLE 17.
SUBORDINATION, ATTORNMENT AND MORTGAGEE PROTECTION
Subject to Tenant receiving and executing a satisfactory subordination,
nondisturbance and attornment agreement from a proposed Lender ("SNDA"), this
Lease shall be subject and subordinate to all Mortgages now or hereafter placed
upon the Building, and all other encumbrances and matters of public record
applicable to the Building, including without limitation, any reciprocal
easement or operating agreements, covenants, conditions and restrictions and
Tenant shall not act or permit the Premises to be operated in violation
therefore. Subject to Tenant's receipt and execution of a satisfactory SNDA,
if any foreclosure or power of sale proceedings initiated by any Lender or a
deed in lieu is granted (or if any ground lease is terminated), Tenant agrees,
upon written request of any such Lender or any purchaser at such foreclosure
sale, to attorn and pay Rent to such party and to execute and deliver any
instruments necessary or appropriate to evidence or effectuate such attornment.
In the event of attornment, no Lender shall be: (i) liable for any act or
omission of Landlord, or subject to any offsets or defenses which Tenant might
have against Landlord (prior to such Lender becoming Landlord under such
attornment), (ii) liable for any security deposit or bound by any prepaid Rent
not actually received by such Lender, or (iii) bound by any future modification
of this Lease not consented to by such Lender who becomes Landlord. Any Lender
may elect to make this Lease prior to the lien of its Mortgage, and if the
Lender under any prior Mortgage shall require, this Lease shall be prior to any
subordinate Mortgage; such elections shall be effective upon written notice to
Tenant. Provided Lender has given its address for notices to Tenant, Tenant
agrees to give any Lender by certified mail, return receipt requested, a copy of
any notice of default served by Tenant upon Landlord, provided that prior to
such notice Tenant has been notified in writing (by way of service on Tenant of
a copy of any assignment of leases, or otherwise) of the name and address of
such Lender. Tenant further agrees that if Landlord shall have failed to cure
such default within the time permitted Landlord for cure under this Lease, any
such Lender whose address has been so provided to Tenant shall have an
additional period of thirty (30) days in which to cure (or such additional time
as may be required due to causes beyond such Lender's control, including time to
obtain possession of the Building by power of sale or judicial action or deed in
lieu of foreclosure). The provisions of this Article shall be self-operative;
however, Tenant shall execute such documentation as Landlord or any Lender may
request from time to time in order to confirm the matters set forth in this
Article in recordable form. To the extent not expressly prohibited by Law,
Tenant waives the provisions of any Law now or hereafter adopted which may give
or purport to give Tenant any right or election to terminate or otherwise
adversely affect this Lease or Tenant's obligations hereunder if such
foreclosure or power of sale proceedings are initiated, prosecuted or completed.
ARTICLE 18.
ESTOPPEL CERTIFICATE
Tenant shall from time to time, upon written request by Landlord or Lender,
deliver to Landlord or Lender, within ten (10) days after from receipt of such
request, a statement in writing on a form prepared by Landlord and/or Lender
and delivered with any such written request certifying: (i) that this Lease is
unmodified and in full force and effect (or if there have been modifications,
identifying such modifications and certifying that the Lease, as modified, is
in full force and effect); (ii) the dates to which the Rent has been paid;
(iii) that Landlord is not in default under any provision of this Lease (or if
Landlord is in default, specifying each such default); and, (iv) the address to
which notices to Tenant shall be sent; it being understood that any such
statement so delivered may be relied upon in connection with any lease,
mortgage or transfer.
Tenant's failure to deliver such statement within such time shall be conclusive
upon Tenant that: (i) this Lease is in full force and effect and not modified
except as Landlord may represent; (ii) not more than one month's Rent has been
paid in advance; (iii) there are no defaults by Landlord; and, (iv) notices to
Tenant shall be sent to Tenant's Address as set forth in Article 1 of this
Lease. Notwithstanding the presumptions of this Article, Tenant shall not be
relived of its obligation to deliver said statement.
<PAGE> 15
ARTICLE 19.
DEFAULTS
If Tenant: (i) fails to pay within five (5) days of the date due any
installment or other payment of Rent, or to keep in effect any insurance
required to be maintained; or (ii) becomes insolvent, makes an assignment for
the benefit of creditors, files a voluntary bankruptcy or any involuntary
petition in bankruptcy is filed against Tenant which petition is not dismissed
within sixty (60) days of its filing, or (iv) fails to perform or observe any
of the other covenants, conditions or agreements contained herein on Tenant's
part to be kept or performed and such failure shall continue for thirty (30)
days after notice thereof given by or on behalf of Landlord, or (v) if the
interest of Tenant shall be offered for sale or sold under execution or other
legal process if Tenant makes any transfer, assignment, conveyance, sale,
pledge, disposition of all or a substantial portion of Tenant's property, then
any such event or conduct shall constitute a "default" hereunder. Should
Tenant vacate or abandon the Premises at any time during the initial Lease Term
or any extension thereof and cease paying Rent, then Landlord shall have all
rights and remedies provided for in this Lease and at law. Should Tenant
continue paying Rent in accordance with the terms of this Lease, then Landlord
shall have the right to market, show and re-lease the Premises or any portion
thereof to another Tenant. Landlord shall give Tenant no less than thirty (30)
days written notice prior to re-letting the Premises or any portion thereof to
another tenant and Tenant shall have such thirty (30) day period in which to
remove all of its personal property and to repair any and all damage to the
Premises or any portion thereof being leased. Tenant shall deliver the Premises
or such portion to landlord in its original condition, reasonable wear and tear
excepted. Landlord's leasing of a portion of the Premises only shall not
release Tenant from its obligations hereunder to continue to pay Rent for the
remaining portion of the Premises not leased. Rent shall be prorated based on
the amount of the Premises remaining to be leased.
If Tenant shall file a voluntary petition pursuant to the United States
Bankruptcy Reform Act of 1978, as the same may be from time to time be amended
(the "Bankruptcy Code"), or take the benefit of any insolvency act or be
dissolved, or if an involuntary petition be filed against Tenant pursuant to
the Bankruptcy Code and said petition is not dismissed within thirty (30) days
after such filing, or if a receiver shall be appointed for its business or its
assets and the appointment of such receiver is not vacated within thirty (30)
days after such appointment, or if it shall make an assignment for the benefit
of its creditors, then Landlord shall have all of the rights provided for in
the event of nonpayment of the Rent.
ARTICLE 20.
REMEDIES OF LANDLORD
The remedies provided Landlord under this Lease are cumulative.
(a) Upon the occurrence of any default, Landlord may serve notice on Tenant
that the Term and the estate hereby vested in Tenant and any and all other
rights of Tenant hereunder shall cease on the date specified in such notice and
on the specified date this Lease shall cease and expire as fully and with the
effect as if the Term had expired for passage of time.
(b) Without terminating this Lease in case of a default or if this Lease shall
be terminated for default as provided herein, Landlord may re-enter the
Premises, remove Tenant, or cause Tenant to be removed from the Premises in
such manner as Landlord may deem advisable, with legal process in accordance
with all applicable laws, and using such reasonable force as may be necessary.
In the event of re-entry without terminating this Lease, Tenant shall continue
to be liable for all rents and other charges accruing or coming due under this
Lease.
(c) If Landlord, without terminating this Lease, shall re-enter the Premises or
if this Lease shall be terminated as provided in paragraph (a) above:
<PAGE> 16
(i) All Rent due from Tenant to Landlord shall thereupon become due and
shall be paid up to the time of re-entry, dispossession or expiration,
together with reasonable costs and expenses (including, without limitation,
attorney's fees) of Landlord;
(ii) Landlord, without any obligation to do so, may re-let the Premises or
any part thereof for a term or terms which may be at Landlord's option be
less than or exceed the period which would otherwise have constituted the
balance of the Term and may grant such concessions in re-letting as
Landlord, in the exercise of its reasonable business judgment, deems
desirable. In connection with such re-letting, Tenant shall be liable for
all costs of the re-letting including, without limitation, free rent,
leasing commissions, legal fees and alteration and remodeling costs;
(iii) If Landlord shall have terminated this Lease, Tenant shall also be
liable to Landlord for all damages provided for in law and under this Lease
resulting from Tenant's breach including, without limitation, the difference
between the aggregate rentals reserved under the terms of this Lease for the
balance of the Term together with all other sums payable hereunder as Rent
for the balance of the Term, less the fair rental value of the Premises for
that period determined as of the date of such termination. For purposes of
this paragraph, tenant shall be deemed to include any guarantor or surety of
the Lease.
(d) In addition to the above, Landlord shall have any and all other rights
provided a Landlord under law or equity for breach of a lease or tenancy by a
Tenant.
ARTICLE 21.
QUIET ENJOYMENT
Landlord covenants that subject to the conditions and limitations set forth in
this Lease, Tenant, upon paying the Rent and performing all of its other
obligations under this Lease, shall peacefully and quietly have, hold and enjoy
the Premises throughout the Term or until this Lease is otherwise terminated as
herein provided.
ARTICLE 22.
ACCORD AND SATISFACTION
No payment by Tenant or receipt by Landlord of an amount less than full payment
of rent then due and payable shall be deemed to be other than on account of the
Rent then due and payable, nor shall any endorsement or statement on any check
or any letter accompanying any check or payment as rent be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice
to Landlord's right to recover the balance of such rent or pursue any other
remedy provided for in this Lease or available at law or in equity.
ARTICLE 23.
SECURITY DEPOSIT
To secure the faithful performance by Tenant of all of the covenants, conditions
and agreements set forth in this Lease to be performed by it, including, without
limitation, foregoing such covenants, conditions and agreements in this Lease
which become applicable upon its termination by re-entry or otherwise, Tenant
has deposited with Landlord the sum shown in Article 1 as a "Security Deposit"
on the understanding:
(a) that the Security Deposit or any portion thereof may be applied to any
default that may exist, without prejudice to any other remedy or remedies which
the Landlord may have on account thereof, and upon such application Tenant shall
pay Landlord on demand the amount of the Security Deposit so applied which shall
be added to the remaining Security Deposit so the same will be restored to its
original amount;
<PAGE> 17
(b) that should the Premises be conveyed by Landlord, the Security Deposit
or any balance thereof may be turned over to the Landlord's grantee, and if the
same be turned over as aforesaid, Tenant hereby releases Landlord from any and
all liability with respect to the Security Deposit and its application or
return, and Tenant agrees to look solely to such grantee for such application
or return; and,
(c) that Landlord may commingle the Security Deposit with other funds and
not be obligated to pay Tenant any interest;
(d) that other than as may be applied by Landlord against any rent then
due, the Security Deposit shall not be considered as advance payment of Rent or
a measure of damages for any default by Tenant, nor shall it be a bar or defense
to any actions by Landlord against Tenant;
(c) that if Tenant shall faithfully perform all of the covenants and
agreements contained in this Lease on the part of the Tenant to be performed,
the Security Deposit or any then remaining balance thereof, shall be returned to
Tenant, without interest, within thirty (30) days after the expiration of the
Term. Tenant further covenants that it will not assign or encumber the money
deposited herein as a Security Deposit and that neither Landlord nor its
successors or assigns shall be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance.
ARTICLE 24.
BROKERAGE COMMISSION
Landlord and Tenant represent and warrant to each other that neither has dealt
with any broker, finder or agent except for the Broker(s) identified in Article
1. Landlord and Tenant represent and warrant to each other that (except with
respect to the Broker identified in Article 1 and with whom Landlord has entered
into a separate brokerage agreement) no broker, agent, commission salesperson,
or other person has represented Tenant or Landlord in the negotiations for and
procurement of this Lease and of the Premises and that no commissions, fees, or
compensation of any kind are due and payable in connection herewith to each
other any broker, agent commission salesperson, or other person. Tenant and
Landlord agree to indemnify and hold harmless from any and all claims, suits, or
judgments (including, without limitation, reasonable attorneys' fees and court
costs incurred in connection with any such claims, suits, or judgments, or in
connection with the enforcement of this indemnity) for any fees, commissions, or
compensation of any kind which arise out of or are in any way connected with any
claimed agency relationship not referenced in Article 1.
ARTICLE 25.
FORCE MAJEURE
Landlord shall be excused for the period of any delay in the performance of any
obligation hereunder when prevented from so doing by a cause or causes beyond
its control, including all labor disputes, civil commotion, war, war-like
operations, invasion, rebellion, hostilities, military or usurped power,
sabotage, governmental regulations or controls, fire or other casualty,
inability to obtain any material, services or financing, or through acts of God.
Tenant shall similarly be excused for delay in the performance of any obligation
hereunder; provided:
(a) nothing contained in this Section or elsewhere in this Lease shall be
deemed to excuse or permit any delay in the payment of the Rent, or any
delay in the cure of any default which may be cured by the payment of
money unless Tenant is prevented by any of the foregoing events from
operating its business in the ordinary course or is denied access to the
Premises;
(b) no reliance by Tenant upon this Section shall limit or restrict in any
way Landlord's right of self-help as provided in this Lease; and
<PAGE> 18
(c) Tenant shall not be entitled to rely upon this Section unless it shall
first have given Landlord notice of the existence of any force majeure
preventing the performance of an obligation of Tenant within five days
after the commencement of the force majeure.
ARTICLE 26.
PARKING
(a) Landlord hereby grants to Tenant the right to use the Parking Spaces
as identified in Article 1 and shown on Exhibit A. Landlord, at its sole
election, may designate the types and locations of said Parking Spaces and
Landlord shall have the right, at Landlord's sole election, to change said
types and locations from time to time; provided, however, such designation
shall be uniformly applied and shall not unfairly favor any tenant in the
Building.
(b) Tenant shall not pay a Parking Fee during the initial Term of this
Lease. However, during any extensions, Landlord shall be entitled to charge a
Parking Fee to Tenant if other buildings in the area of the Building are
charging parking fees for comparable space. If Landlord charges such a Fee
during any extension, Tenant shall pay Landlord a Parking Fee, as Additional
Rent, payable monthly in advance with the Monthly Rent. Thereafter, and
throughout the extension Term, the parking rate for each type of parking space
provided to Tenant hereunder shall be the prevailing parking rate, as Landlord
may designate from time to time, at Landlord's sole election, for each such
type of parking space. In addition to the right reserved hereunder by Landlord
to designate the parking rate from time to time, Landlord shall have the right
to change the parking rate at any time to include therein any amounts levied,
assessed, imposed or required to be paid to any governmental authority on
account of the parking of motor vehicles, including all sums required to be
paid pursuant to transportation controls imposed by the Environmental
Protection Agency under the Clean Air Act of 1970, as amended, or otherwise
required to be paid by any governmental authority with respect to the parking,
use, or transportation of motor vehicles, or the reduction or control of motor
vehicle traffic, or motor vehicle pollution.
(c) If requested by Landlord, Tenant shall notify Landlord of the license
plate number, year, make and model of the automobiles entitled to use the
Parking Spaces and if requested by Landlord, such automobiles shall be
identified by automobile window stickers provided by landlord, and only such
designated automobiles shall be permitted to use the Parking Spaces. if
Landlord institutes such an identification procedure, Landlord may provide
additional parking spaces for use by customers and invitees of Tenant on a
daily basis at prevailing parking rates, if any, are being charged as set forth
in (b) above. At Landlord's sole election, Landlord may make validation
stickers available to Tenant for any such additional parking spaces, provided,
however, if Landlord makes validation stickers available to any other tenant in
the Building, Landlord shall make such validation stickers available to Tenant.
(d) The Parking Spaces and additional parking spaces provided for herein
are provided solely for the accommodation of Tenant, its customers and
invitees, and Landlord assumes no responsibility or liability of any kind
whatsoever from whatever cause with respect to the automobile parking areas,
including adjoining streets, sidewalks, driveways, property and passageways, or
the use thereof by Tenant or tenant's employees, customers, agents, contractors
or invitees.
ARTICLE 27.
HAZARDOUS MATERIALS
A. Definition of Hazardous Materials. The term "Hazardous Materials" for
purposes hereof shall mean any chemical, substance, materials or waste or
component thereof which is now or hereafter listed, defined or regulated as a
hazardous or toxic chemical, substance, materials or waste or component thereof
by any federal, state or local governing or regulatory body having jurisdiction,
or which would trigger any employee or community "right-to-know" requirements
adopted by any such body, or for which any such body has adopted any
requirements for the preparation or distribution of a materials safety data
sheet ("MSDS").
<PAGE> 19
B. No Hazardous Materials. Tenant shall not transport, use, store, maintain,
generate, manufacture, handle, dispose, release or discharge any Hazardous
Materials. However, the foregoing provisions shall not prohibit the
transportation to and from, and use, storage, maintenance and handling within
the Premises of Hazardous Materials customarily used in the business or activity
expressly permitted to be undertaken in the Premises under Article 6, provided:
(a) such Hazardous Materials shall be used and maintained only in such
quantities as are reasonably necessary for such permitted use of the Premises
and the ordinary course of Tenant's business therein, strictly in accordance
with applicable Law, highest prevailing standards, and the manufacturers'
instructions therefor, (b) such Hazardous Materials shall not be disposed of,
released or discharged in the Building, and shall be transported to and from the
Premises in compliance with all applicable Laws, and as Landlord shall
reasonably require, (c) if any applicable Law or Landlord's trash removal
contractor requires that any such Hazardous Materials be disposed of separately
from ordinary trash, Tenant shall make arrangements at Tenant's expense for such
disposal directly with a qualified and licensed disposal company at a lawful
disposal site (subject to scheduling and approval by Landlord), and (d) any
remaining such Hazardous Materials shall be completely, properly and lawfully
removed from the Building upon expiration or earlier termination of this Lease.
C. Notices to Landlord. Tenant shall promptly notify Landlord of: (i) any
enforcement, cleanup or other regulatory action taken or threatened by any
governmental or regulatory authority with respect to the presence of any
Hazardous Materials on the Premises or the migration thereof from or to other
property, (ii) any demands or claims made or threatened by any party relating
to any loss or injury resulting from any Hazardous Materials on the Premises,
(iii) any release, discharge or nonroutine, improper or unlawful disposal or
transportation of any Hazardous Materials on or from the Premises or in
violation of this Article, and (iv) any matters where Tenant is required by Law
to give a notice to any governmental or regulatory authority respecting any
Hazardous Materials on the Premises. Landlord shall have the right (but no
obligation) to join and participate, as a party, in any legal proceedings or
actions affecting the Premises initiated in connection with any environmental,
health or safety law. At such times as Landlord may reasonably request, Tenant
shall provide Landlord with a written list, certified to be true and complete,
identifying any Hazardous Materials then used, stored, or maintained upon the
Premises, the use and approximate quantity of each such materials, a copy of
any MSDS issued by the manufacturer therefor, and such other information as
Landlord may reasonably require or as may be required by Law. Landlord shall
also provide written notice to Tenant of any presence, release, or discharge of
any Hazardous Materials affecting the Premises.
D. Indemnification of Landlord. If any Hazardous Materials are released,
discharged or disposed of by Tenant or any other occupant of the Premises, or
their employees, agents, invitees or contractors, on or about the Building in
violation of the foregoing provisions, Tenant shall immediately, properly and
in compliance with applicable Laws clean up, remediate and remove the Hazardous
Materials from the Building and any other affected property and clean or
replace any affected personal property (whether or not owned by landlord), at
Tenant's expense (without limiting Landlord's other remedies therefore).
Tenant shall further be required to indemnify and hold Landlord, Landlord's
directors, officers, employees and agents harmless from and against any and all
claims, demands, liabilities, losses, damages, penalties and judgments directly
or indirectly arising out of or attributable to a violation of the provisions
of this Article by Tenant, Tenant's occupants, employees, contractors or
agents. Any clean up, remediation and removal work shall be subject to
Landlord's prior written approval (except in emergencies), and shall include,
without limitation, any testing, investigation, and the preparation and
implementation of any remedial action plan required by any governmental body
having jurisdiction or reasonably required by landlord. If Landlord or any
Lender or governmental body arranges for any tests or studies showing that this
Article has been violated, Tenant shall pay for the costs of such tests. The
provisions of this Article shall survive the expiration or earlier termination
of this Lease. Landlord shall be responsible, but only to the extent required
by applicable federal or state Laws, to clean up or cause the clean up of any
release or discharge of Hazardous Materials in the Premises. Should the
Premises and/or the Building not be accessible due to any enforcement, cleanup
or other regulatory action pertaining to any release or discharge of Hazardous
Materials not caused by Tenant, or any of its employees, agents, invitees or
contractors, then Rent shall abate for each day the Premises and/or the
Building is not accessible.
<PAGE> 20
ARTICLE 28.
ADDITIONAL RIGHTS RESERVED BY LANDLORD
In addition to any other rights provided for herein, Landlord reserves the
following rights exercisable without liability to Tenant for damage or injury
to property, person or business and without effecting an eviction, constructive
or actual, or disturbance of Tenant's use or possession or giving rise to any
claim:
(a) To name the Building and to change the name or street address of
the Building;
(b) To install and maintain all signs on the exterior and interior of
the Building;
(c) To designate all sources furnishing sign painting and lettering;
(d) During the last ninety (90) days of the Term, if Tenant has
vacated the Premises, to decorate, remodel, repair, alter or otherwise
prepare the Premises for reoccupancy, without affecting Tenant's obligation
to pay Rent for the Premises;
(e) To have pass keys to the Premises and all doors therein, excluding
Tenant's vaults and safes;
(f) On reasonable prior notice to Tenant, to exhibit the Premises to
any prospective purchaser, Lender, mortgagee, or assignee of any mortgage
on the Building or Land and to others having an interest therein at any
time during the Term, and to prospective tenants during the last six months
of the Term;
(g) To take any and all reasonable measures, including entering the
Premises for the purpose of making inspections, repairs, alterations,
additions and improvements to the Premises or to the Building (including
for the purpose of checking, calibrating, adjusting and balancing controls
and other parts of the Building Systems), as may be necessary or desirable
for the operation, improvement, safety, protection or preservation of the
Premises or the Building, or in order to comply with all Laws, orders and
requirements of governmental or other authority, or as may otherwise be
permitted or required by this Lease; provided, however, that Landlord shall
use its best efforts (except in an emergency) to minimize interference with
Tenant's business in the Premises;
(h) To relocate various facilities within the Building and on the land
of which the Building is a part if Landlord shall determine such relocation
to be in the best interest of the development of the Building and Property,
provided that such relocation shall not materially restrict access to or
enjoyment of the Premises; and
(i) To install vending machines of all kinds in the Premises and the
Building and to receive all of the revenue derived therefrom, provided,
however, that no vending machines shall be installed by Landlord in the
Premises unless Tenant so requests.
ARTICLE 29.
DEFINED TERMS
A. "Building" shall refer to the Building named in Article 1 of which the
leased Premises are a part (including all modifications, additions and
alterations made to the Building during the term of this Lease), the real
property on which the same is located, all plazas, common areas and any other
areas located on said real property and designated by Landlord for use by all
tenants in the Building. A plan showing the Building is attached hereto as
Exhibit A and made a part hereof and the Premises is defined in Article 2 and
shown on said Exhibit A by cross-hatched lines.
B. "Common Areas" shall mean and include all areas, facilities, equipment,
directories and signs of the Building (exclusive of the Premises and areas
leased to other Tenants) made available and designated by Landlord for the
<PAGE> 21
common and joint use and benefit of Landlord, Tenant and other tenants and
occupants of the Building including, but not limited to, lobbies, public
washrooms, hallways, sidewalks, parking areas, landscaped areas and service
entrances. Common Areas may further include such areas in adjoining properties
under reciprocal easement agreements, operating agreements or other such
agreements now or hereafter in effect and which are available to Landlord,
Tenant and Tenant's employees and invitees. Landlord reserves the right in its
sole discretion and from time to time, to construct, maintain, operate, repair,
close, limit, take out of service, alter, change, and modify all or any part of
the Common Areas.
C. "Default Rate" shall mean fourteen percent (14%) per annum, or the highest
rate permitted by applicable law, whichever shall be less.
D. "Hazardous Materials" shall have the meaning set forth in Article 27.
E. "Landlord" and "Tenant" shall be applicable to one or more parties as the
case may be, and the singular shall include the plural, and the neuter shall
include the masculine and feminine; and if there be more than one, the
obligations thereof shall be joint and several. Fro purposes of any provisions
indemnifying or limiting the liability of Landlord, the term "Landlord" shall
include Landlord's present and future partners, beneficiaries, trustees,
officers, directors, employees, shareholders, principals, agents, affiliates,
successors and assigns.
F. "Law" or "Laws" shall mean all federal, state, county and local
governmental and municipal laws, statutes, ordinances, rules, regulations,
codes, decrees, orders and other such requirements, applicable equitable
remedies and decisions by courts in cases where such decisions are binding
precedents in the state in which the Building is located, and decisions of
federal courts applying the Laws of such state.
G. "Lease" shall mean this lease executed between Tenant and Landlord,
including any extensions, amendments or modifications and any Exhibits attached
hereto.
H. "Lease Year" shall mean each calendar year or portion thereof during the
Term, and any initial or final partial calendar years shall be "Partial Lease
Years".
I. "Lender" shall mean the holder of a Mortgage at the time in question, and
where such Mortgage is a ground lease, such term shall refer to the ground
lessee.
J. "Mortgage" shall mean all mortgages, deeds of trust, ground leases and
other such encumbrances now or hereafter placed upon the Building or any part
thereof with the written consent of Landlord and all renewals, modifications,
consolidations, replacements or extensions thereof, and all indebtedness now or
hereafter secured thereby and all interest thereon.
K. "Operating Expenses" shall mean all reasonable operating expenses of any
kind or nature which are necessary, ordinary or customarily incurred in
connection with the operation, maintenance or repair of the Building as
reasonably determined by Landlord.
Operating Expenses shall include, but not be limited to:
1.1 all real property taxes and assessments levied against the Building
by any governmental or quasi-governmental authority. The foregoing
shall include all federal, state, county, or local governmental, special
district, improvement district, municipal or other political subdivision
taxes, fees, levies, assessments, charges or other impositions of every
kind and nature, whether general, special, ordinary or extraordinary,
respecting the Building, including without limitation, real estate taxes,
general and special assessments, interest on any special assessments paid
in installments, transit taxes, water and sewer rents, taxes based upon
the receipt of rent, personal property taxes imposed upon the fixtures,
machinery, equipment, apparatus, appurtenances, furniture and other
personal property used in connection with the Building which Landlord
shall pay during any calendar year, any portion of which occurs during the
Term (without regard to any different fiscal year used by such government
or municipal authority except as 31
<PAGE> 22
provided below). Provided, however, any taxes which shall be levied on
the rentals of the Building shall be determined as if the Building were
Landlord's only property, and provided further that in no event shall the
term "taxes or assessment," as used herein, include any net federal or
state income taxes levied or assessed on Landlord, unless such taxes are a
specific substitute for real property taxes. Such term shall, however,
include gross taxes on rentals, if any. Expenses incurred by Landlord for
tax consultants and in contesting the amount or validity of any such taxes
or assessments shall be included in such computations. All of the
preceding clause K (1.1) is collectively referred to as the "Tax" or
"Taxes".
1.2 all "assessments", including so-called special assessments, levy,
charge, or tax imposed by any authority having the direct power to tax,
including any city, county, state or federal government, or any school,
agricultural, lighting, water, drainage, or other improvement or special
district thereof, against the Premises of the Building or any legal or
equitable interest of Landlord therein. For the purposes of this lease,
any special assessments shall be deemed payable in such number of
installments as is permitted by law, whether or not actually so paid. If
as of the Commencement Date the Building has not been fully assessed as a
completed project, for the purpose of computing the Operating Expenses
for any adjustment required herein or under Article 4, the Tax shall be
adjusted by Landlord, as of the date on which the adjustment is to be
made, to reflect full completion of the Building including all standard
Tenant finish work if the method of taxation of real estate prevailing to
the time of execution hereof shall be, or has been altered, so as to
cause the whole or any part of the taxes now, hereafter or theretofore
levied, assessed or imposed on real estate to be levied, assessed or
imposed on Landlord, wholly or partially, as a capital levy or otherwise,
or on or measured by the rents received therefrom, then such new or
altered taxes attributable to the Building shall be included within the
term real estate taxes, except that the same shall not include any
enhancement of said tax attributable to other income of Landlord.
1.3 reasonable costs of supplies, including, but not limited to, the
cost of relamping all Building standard lighting as the same may be
required from time to time;
1.4 reasonable costs incurred in connection with obtaining and providing
energy for the Building, including, but not limited to, costs of propane,
butane, natural gas, steam, electricity, solar energy and fuel oils, coal
or any other energy sources;
1.5 reasonable costs of water and sanitary and storm drainage services;
1.6 reasonable costs of janitorial and security services;
1.7 reasonable costs of general maintenance and repairs, including costs
under HVAC and other mechanical maintenance contracts and maintenance,
repairs and replacement of equipment and tools used in connection with
operating the Building;
1.8 reasonable costs of maintenance and replacement of landscaping;
1.9 insurance premiums, including fire and all-risk coverage, together
with loss of rent endorsements, the part of any claim required to be paid under
the deductible portion of any insurance polices carried by Landlord in
connection with the Building (where Landlord is unable to obtain insurance
without such deductible from a major insurance carrier at reasonable rates),
public liability insurance and any other insurance carried by Landlord on the
Building, or any component parts thereof (all such insurance shall be in such
amounts as may be required by any holder of a Mortgage or as Landlord may
reasonably determine);
1.10 labor costs, including wages and other payments, costs to Landlord of
worker's compensation and disability insurance, payroll taxes and welfare
fringe benefits.
1.11 reasonable and ordinary professional building management fees
required for management of the Building;
<PAGE> 23
1.12 reasonable legal, accounting, inspection, and other consultation fees
(including, without limitation, fees charged by consultants retained by
Landlord for services that are designed to produce a reduction in Operating
Expenses or to reasonably improve the operation, maintenance or state of repair
of the Building) incurred in the ordinary course of operating the Building or
in connection with making the computations required hereunder or in any audit
of operations of the Building; but shall not include any of the foregoing fees
incurred by Landlord in any tenant litigation matter;
1.13 the costs of improvements or structural repairs or replacements made
in or to the Building in order to conform to changes, subsequent to the date of
this Lease, in any applicable laws, ordinances, rules, regulations or orders of
any governmental or quasi-governmental authority having jurisdiction over the
Building (herein "Required Improvements") or the costs incurred by Landlord to
install a new or replacement item for the purpose of reducing Operating
Expenses (herein "Cost savings Improvements"), and a reasonable reserve for all
other improvements and structural repairs and replacements reasonably necessary
to permit Landlord to maintain the Building in its current class. The
expenditures for Required Improvements and Cost Savings Improvements shall be
amortized over the useful life of such improvement or structural repair or
replacement (as determined by Landlord). All costs so amortized shall bear
interest on the amortized balance at the rate of twelve percent(12%) per annum
or such higher rate as may have been paid by Landlord on funds borrowed for the
purpose of constructing improvements. However, such Cost Savings Improvements
will not be passed through to the Tenant if same do not reduce Operating
Expenses.
In making any computations contemplated hereby, Landlord shall also be
permitted to make such adjustments and modifications to the provisions of this
paragraph and Article 4 as shall be reasonable and necessary to achieve the
intention of the parties hereto.
L. "Rent" shall have the meaning specified therefor in Article 3.
M. "Tax" or "Taxes" shall have the meaning set forth in Article 29(K)(1.1).
All other capitalized terms shall have the definition set forth in the Lease.
ARTICLE 30.
MISCELLANEOUS PROVISIONS
A. RULES AND REGULATIONS.
Tenant shall comply with all of the rules and regulations promulgated by
Landlord from time to time for the Building. A copy of the current rule and
regulations is attached hereto as Exhibit D.
B. EXECUTION OF LEASE.
If more than one person or entity executes this Lease as Tenant, each such
person or entity shall be jointly and severally liable for observing and
performing each of the terms, covenants, conditions and provisions to be
observed or performed by Tenant.
C. NOTICES.
All notices under this Lease shall be in writing and will be deemed sufficiently
given for all purposes if, to Tenant, by delivery to Tenant at the Premises
during the hours the Building is open for business or by certified mail, return
receipt requested or by overnight delivery service (with one acknowledged
receipt), to Tenant at the address set forth below, and if to Landlord, by
certified mail, return receipt requested or by overnight delivery service (with
one acknowledged receipt), at the addresses set forth below.
<PAGE> 24
Landlord: at address shown in Article 1.
with an additional copy to Building Manager at address shown in Article 1.
Tenant: at address shown in Article 1.
with copy to: Jon Joseph, c/o Mego Financial Corp., 4310 Paradise Rd., Las
Vegas, NV 89109.
If any alleged default on the part of the Landlord hereunder occurs, Tenant
shall give written notice to Landlord in the manner herein set forth and shall
afford Landlord a reasonable opportunity to cure any such default. In
addition, Tenant shall send notice of such default by certified or registered
mail, postage prepaid, to the holder of any Mortgage whose address Tenant has
been notified in writing, and shall afford such Mortgage holder a reasonable
opportunity to cure any alleged default on Landlord's behalf.
D. TRANSFERS.
The term "Landlord" appearing herein shall mean only the owner of the Building
from time to time and, upon a sale or transfer of its interest in the Building,
the then Landlord and transferring party shall have no further obligations or
liabilities for matters accruing after the date of transfer of that interest
and Tenant, upon such sale or transfer, shall look solely to the successor
owner and transferee of the Building for performance of Landlord's obligations
hereunder.
E. SHORING.
If any excavation or construction is made adjacent to, upon or within the
Building, or any part thereof, Tenant shall subject to the receipt of a written
request stating the proposed date (s) and time(s) of such excavation or
construction, afford to any and all persons causing or authorized to cause such
excavation or construction license to enter upon the Premises for the purpose
of doing such work as such persons shall deem necessary to preserve the
Building or any portion thereof from injury or damage and to support the same
by proper foundations, braces and supports, so long as it does not interfere
with Tenant's reasonable business use of the Premises.
F. RELATIONSHIP OF THE PARTIES.
Nothing contained in this Lease shall be construed by the parties hereto, or by
any third party, as constituting the parties as principal and agent, partners
or joint ventures, nor shall anything herein render either party (other than a
guarantor) liable for the debts and obligations of any other party, it being
understood and agreed that the only relationship between Landlord and tenant is
that of Landlord and Tenant.
G. ENTIRE AGREEMENT: MERGER.
This Lease and all exhibits hereto embodies the entire agreement and
understanding between the parties respecting the Lease and the Premises and
supersedes all prior negotiations; agreements and understanding between the
parties, all of which are merged herein. No provision of this Lease may be
modified, waived or discharged except by an instrument in writing signed by the
party against which enforcement of such modification, waiver or discharge is
sought.
H. NO REPRESENTATION BY LANDLORD.
Neither Landlord nor any agent of Landlord has made any representations,
warranties, or promises with respect to the Premises or the Building except as
expressly set forth herein.
<PAGE> 25
I. LIMITATION OF LIABILITY.
Notwithstanding any provision in this Lease to the contrary, under no
circumstances shall Landlord's liability or that of its directors, officer,
employees and agents for failure to perform any obligations arising out of or in
connection with the Lease or for any breach of the terms or conditions of this
Lease (whether written or implied) exceed the greater of $50,000 or Landlord's
equity interest in the Building. Any judgments rendered against Landlord shall
be satisfied solely out of proceeds of sale of Landlord's interest in the
Building. No personal judgment shall lie against Landlord upon extinguishment
of its rights in the Building and any judgments so rendered shall not give rise
to any right of execution or levy against Landlord's assets. The provisions
hereof shall inure to Landlord's successors and assigns including any Lender.
The foregoing provisions are not intended to relieve Landlord from the
performance of any of Landlord's obligations under this Lease, but only to limit
the personal liability of Landlord in case of recovery of a judgment against
Landlord; nor shall the foregoing be deemed to limit Tenant's rights to obtain
injunctive relief or specific performance or other remedy which may be accorded
Tenant by law or under this Lease. If Tenant claims or asserts that Landlord
has violated or failed to perform a covenant under the Lease, Tenant's sole
remedy shall be an action for specific performance, declaratory judgment or
injunction and in no event shall Tenant be entitled to any money damages in any
action or by way of set off, defense or counterclaim and Tenant hereby
specifically waives the right to any money damages or other remedies.
J. MEMORANDUM OF LEASE.
At the request of either party, the other will execute a memorandum of lease in
recordable form setting forth such provisions of this Lease as Landlord deems
desirable and as may be required by law in order to permit the recording of the
form in the appropriate public office. The party recording the memorandum of
Lease shall pay for the cost of recordation.
K. NO WAIVERS: AMENDMENTS.
Failure of Landlord to insist upon strict compliance by Tenant of any condition
or provision of this Lease shall not be deemed a waiver by Landlord of that
condition. No waiver shall be effective against Landlord unless in writing and
signed by Landlord. Similarly, this Lease cannot be amended except by a
writing signed by Landlord and Tenant.
L. SUCCESSORS AND ASSIGNS.
The conditions, covenants and agreements contained herein shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, successors and assigns.
M. GOVERNING LAW.
This Lease shall be governed by the law of the State where the Building is
located.
N. EXHIBITS.
All exhibits attached to this Lease are a part hereof and are incorporated
herein by reference and all provisions of such exhibits shall constitute
agreements, promises and covenants of this Lease.
O. CAPTIONS.
The captions and headings used in this Lease are for convenience only and in no
way define or limit the scope, interpretation or content of this Lease.
P. COUNTERPARTS.
This Lease may be executed in one (1) or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and the
same instrument.
<PAGE> 26
IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties
have duly executed this Lease with the Exhibits attached hereto as of the day
and year first written above.
LANDLORD:
MASSACHUSETTS MUTUAL LIFE INSURANCE
COMPANY
By:
CORNERSTONE REAL ESTATE ADVISERS,
INC.
Its Authorized Agent
By: /s/ William F. Runge
- ------------------------------ -----------------------------
Witness Witness William F. Runge
Vice President
Date:_____________________________
TENANT:
MEGO MORTGAGE CORPORATION
By: /s/ James L. Belter
- ------------------------------ ------------------------------
Witness Name Printed: James L. Belter
Title: Executive Vice President
Date:_____________________________
SECRETARY'S CERTIFICATE
I, Robert V. Bellacosa, Assistant Secretary of MEGO MORTGAGE CORPORATION,
Tenant, hereby certify that the officer executing the foregoing Lease on behalf
of Tenant is duly authorized to act on behalf of and bind the Tenant.
(Corporate Seal) /s/
------------------------------
Assistant Secretary
Date:______________________________
<PAGE> 27
EXHIBIT B
Landlord's Work
See Special Stipulations Nos. 2 and 3.
<PAGE> 28
EXHIBIT C
Tenant's Work
None.
<PAGE> 29
EXHIBIT D
Building's Rule and Regulations
1. The sidewalks, entrances, passages, courts, elevators, vestibules, stairways,
corridors or halls of the Building shall not be obstructed or encumbered or used
for any purpose other than ingress and egress to and from the premises demised
to any tenant or occupant.
2. No awnings or other projection shall be attached to the outside walls or
windows of the Building without the prior consent of Landlord. No curtains,
blinds, shades, or screens shall be attached to or hung in, or used in
connection with, any window or door of the premises demised to any tenant or
occupant, without the prior consent of Landlord. Such awnings, projections,
curtains, blinds, shades, screens or other fixtures must be of a quality, type,
design and color, and attached in a manner, approved by Landlord.
3. No sign, advertisement, object, notice or other lettering shall be
exhibited, inscribed, painted or affixed on any part of the outside or inside of
the premises demised to any tenant or occupant of the Building without the prior
consent of Landlord. Interior signs on doors and directory tables, if any,
shall be of a size, color and style approved by Landlord.
4. The sashes, sash doors, skylights, windows, and doors that reflect or admit
light and air into the halls, passageways or other public places in the Building
shall not be covered or obstructed, nor shall any bottles, parcels, or other
articles be placed on any window sills.
5. No show cases or other articles shall be put in front of or affixed to any
part of the exterior of the Building, nor placed in the halls, corridors,
vestibules or other public parts of the Building.
6. The water and wash closets and other plumbing fixtures shall not be used for
any purposes other than those for which they were constructed, and no sweepings,
rubbish, rags, or other substances shall be thrown therein. No tenant shall
bring or keep, or permit to be brought or kept, any inflammable, combustible,
explosive or hazardous fluid, materials, chemical or substance in or about the
premises demised to such tenant.
7. Other than for Landlord's work, no tenant or occupant shall mark, paint,
drill into, or in any way deface any part of the Building or the premises
demised to such tenant or occupant. No boring, cutting or stringing of wires
shall be permitted, except with the prior consent of Landlord, and as Landlord
may direct. No tenant or occupant shall install any resilient tile or similar
floor covering in the premises demised to such tenant or occupant except in a
manner approved by Landlord.
8. No bicycles, vehicles or animals of any kind shall be brought into or kept
in or about the premises demised to any tenant. No cooking (except with
microwave oven) shall be done or permitted in the Building by any tenant without
the approval of the Landlord. No tenant shall cause or permit any unusual or
objectionable odors to emanate from the premises demised to such tenant.
9. No space in the Building shall be used for manufacturing, for the storage of
merchandise, or for the sale of merchandise, goods, or property of any kind at
auction, without the prior consent of Landlord.
10. No tenant shall make, or permit to be made, any unseemly or disturbing
noises or disturb or interfere with other tenants or occupants of the Building
or neighboring buildings or premises whether by the use of any musical
instrument, radio, television set or other audio device, unmusical noise,
whistling, singing, or in any other way. Nothing shall be thrown out of any
doors or window.
<PAGE> 30
11. No additional locks or bolts of any kind shall be placed upon any of the
doors or windows, no shall any changes be made in locks or the mechanism
thereof. Each tenant must, upon the termination of its tenancy, restore to
Landlord all keys of stores, offices and toilet rooms, either furnished to, or
otherwise procured by, such tenant.
12. All removals from the Building, or the carrying in or out of the Building
or the premises demised to any tenant, of any safes, freight, furniture or
bulky matter of any description must take place at such time and in such manner
as Landlord or its agents may determine, from time to time. Landlord reserves
the right to inspect all freight to be brought into the Building and to exclude
from the Building all freight which violates any of the Rules and Regulations
or the provisions of such tenant's lease.
13. No tenant shall use or occupy, or permit any portion of the premises
demised to such tenant to be used or occupied, as an office for a public
stenographer or typist, or to a barber or manicure shop, or as an employment
bureau. No tenant or occupant shall engage or pay any employees in the
Building, except those actually working for such tenant or occupant in the
Building, nor advertise for day laborers giving an address at the Building.
Tenant may advertise for employees (such as secretaries, receptionists,
executives or other office employees).
14. No tenant or occupant shall purchase spring water, ice, food, beverage,
lighting maintenance, cleaning towels or other like service, from any company
or person not approved by Landlord. No vending machines of any description
shall be installed, maintained or operated upon the premises demised to any
tenant without the prior consent of Landlord, which shall not be unreasonably
withheld.
15. Landlord shall have the right to prohibit any advertising by any tenant or
occupant which, in Landlord's opinion, tends to impair the reputation of the
Building or its desirability as a building for offices, and upon notice from
Landlord, such tenant or occupant shall refrain from or discontinue such
advertising.
16. Landlord reserves the right to exclude from the Building, between the
hours of 6:00 P.M. and 8:00 A.M. on business days and at all hours on
Saturdays, Sundays and holidays, all persons who do not present a pass to the
Building signed by Landlord. Landlord will furnish passes to persons for whom
any tenant requests such passes. Each tenant shall be responsible for all
persons for whom it requests such passes and shall be liable to Landlord for
all acts of such persons.
17. Each tenant, before closing and leaving the premises demised to such
tenant at any time, shall see that all entrance doors are locked and all
windows closed. Corridor doors, when not in use, shall be kept closed.
18. Landlord shall, at its expense, provide artificial light in the premises
for Landlord's agents, contractors, and employees while performing janitorial
or other cleaning services and making repairs or alterations in said premises.
19. No premises shall be used, or permitted to be used for lodging or
sleeping, or for any immoral or illegal purposes.
20. The requirements of tenants will be attended to only upon written notice
to Landlord or application at the office of Landlord. Building employees shall
not be required to perform, and shall not be requested by any tenant or occupant
to perform, and work outside of their regular duties, unless under specific
instructions from the office of Landlord.
21. Canvassing, soliciting and peddling in the Building are prohibited and
each tenant and occupant shall cooperate in seeking their prevention.
<PAGE> 31
22. There shall not be used in the Building, either by any tenant or occupant
or by their agents or contractors, in the delivery or receipt of
merchandise, freight, or other matter, any hand trucks or other means of
conveyance except those equipped with rubber tires, rubber side guards and
such other safeguards as Landlord may require.
23. If the premises demised to any tenant become infested with vermin, such
tenant, at its sole cost and expense, shall cause its premises to be
exterminated, from time to time, to the satisfaction of Landlord, and
shall employ such exterminators therefor as shall be approved by Landlord.
24. No premises shall be used, or permitted to be used, at any time, without
the prior approval of Landlord, as a store for the sale or display of
goods, wares or merchandise of any kind, or as a restaurant, shop, booth,
bootlack or other stand, or for the conduct of any business or occupation
which predominantly involves direct patronage of the general public in the
premises demised to such tenant, or for manufacturing or for other similar
purposes.
25. No tenant shall clean any window in the building from the outside.
26. No tenant shall move, or permit to be moved, into or out of the Building
or the premises demised to such tenant, any heavy or bulky matter, without
the specific approval of Landlord. If any such matter requires special
handling, only a qualified person shall be employed to perform such
special handling. No tenant shall place, or permit to be placed, on any
part of the floor or floors of the premises demised to such tenant, a load
exceeding the floor load per square foot which such floor was designed to
carry and which is allowed by law. Landlord reserves the right to
prescribe the weight and position of safes and other heavy matter, which
must be placed so as to distribute the weight.
27. Landlord shall provide and maintain an alphabetical directory board in
the first floor (main lobby) of the Building and no other directory shall
be permitted without the prior consent of Landlord. Each tenant shall be
allowed one line on such board unless otherwise agreed to in writing.
28. With respect to work being performed by a tenant in its premises with the
approval of Landlord, the tenant shall refer all contractors, contractor's
representatives and installation technicians to Landlord for it
supervision, approval and control prior to the performance of any work or
services. This provision shall apply to all work performed in the Building
including installation of telephones, telegraph equipment, electrical
devices and attachments, and installations of every nature affecting
floors, walls, woodwork, trim, ceilings, equipment and any other physical
portion of the Building.
29. Landlord shall not be responsible for lost or stolen personal property,
equipment, money, or jewelry from the premises of tenants or public rooms
whether or not such loss occurs when the Building or the premises are
locked against entry.
30. Landlord shall not permit entrance to the premises of tenants by use of
pass keys controlled by Landlord, to any person at any time without
written permission from such tenants, except employees, contractors, or
service personnel directly supervised by Landlord and employees of the
United States Postal Service, and special delivery companies such as
Federal Express.
31. Each tenant and all of tenant's employees and invitees shall observe and
comply with the driving and parking signs and markers on the Land
surrounding the Building, and Landlord shall not be responsible for any
damage to any vehicle towed because of noncompliance with parking
regulations.
32. Without Landlord's prior approval, no tenant shall install any radio or
television antenna, loudspeaker, music system or other device on the roof
or exterior walls of the Building or on common walls with adjacent
tenants.
33. Each tenant shall store all trash and garbage within its premises or in
such other areas specifically designated by Landlord. No materials shall
be placed in the trash boxes or receptacles in the Building unless such
materials may be disposed of in the ordinary and customary manner of
removing and disposing of trash and garbage and
<PAGE> 32
will not result in a violation of any law or ordinance governing such
disposal. All garbage and refuse shall be only through entryways and
elevators provided for such purposed and at such times as Landlord shall
designate.
34. No tenant shall employ any persons other than the janitor or Landlord for
the purpose of cleaning its premises without the prior consent of Landlord.
No tenant shall cause any unnecessary labor by reason of its carelessness
or indifference in the preservation of good order and cleanliness. Janitor
service shall include ordinary dusting and cleaning by the janitor assigned
to such work and shall not include beating of carpets or rugs or moving of
furniture or other special services. Janitor service shall be furnished
Mondays through Fridays, legal holidays excepted; janitor service shall
not be furnished to areas which are occupied after 9:30 P.M. Window
cleaning shall be done only by Landlord, and only between 6:00 A.M. and
5:00 P.M.
<PAGE> 33
EXHIBIT E
COMMENCEMENT DATE CONFIRMATION
DECLARATION BY LANDLORD AND TENANT AS TO DATE OF DELIVERY AND
ACCEPTANCE OF POSSESSION OF PREMISES
Attached to and made a part of the Lease dated the ___________day of
___________________, 1996, entered into and by MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY as LANDLORD, and MEGO MORTGAGE CORPORATION as TENANT.
LANDLORD AND TENANT do hereby declare that possession of the Premises was
accepted by TENANT on the ______day of ___________________1996. The Premises
required to be constructed and finished by and accepted by TENANT, the Lease is
now in full force and effect, and as of the date hereof, LANDLORD has fulfilled
all of its obligations under the Lease. The Lease Commencement Date is hereby
established as ____________________, 1996. The Term of this Lease shall
terminate on _______________________. 2002.
LANDLORD:
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
By: CORNERSTONE REAL ESTATE ADVISER, INC.
Its authorized agent
By:__________________________________________
Name Printed:
Title: Vice President
Date:
TENANT:
MEGO MORTGAGE CORPORATION
By:_________________________________________
Name Printed:
Title:
Date:
<PAGE> 34
EXHIBIT "F"
SPECIAL STIPULATIONS
1.) Pursuant to Article 1, Paragraph L., and Article 3 of the Lease, the
following Monthly Rent Schedule shall apply during the Term of the Lease:
<TABLE>
<S> <C>
Months 01 through 06: $51,333.33 per month
Months 07 through 12: $73,711.46 per month
Months 13 through 24: $75,204.83 per month
Months 25 through 36 $76,708.93 per month
Months 37 through 48 $78,232.17 per month
Months 49 through 60 $79,794.47 per month
Months 61 through 72 $81,395.83 per month
</TABLE>
The above Monthly Rent schedule incorporates an annual escalation of two (2%)
percent added to the initial Monthly Rent rate of $19.25 per rentable square
foot per year. The above Monthly Rent schedule also incorporates a reduction
during the first six (6) months of the Term whereby Tenant is receiving an
abatement of Monthly Rent for a portion of the Premises equaling 13,950
rentable square feet.
2.) Pursuant to Exhibit "B" of this Lease, Landlord shall provide a Tenant
Improvement Allowance for the renovation/construction of the Premises in
an amount equal to $14.00 per rentable square foot (or a total of
$643,300.00). Any cost for the renovation/construction of the Premises
that exceeds $643,300.00 and not included as an additional Landlord cost
herein or in Paragraph 2 of these Special Stipulations, shall be at the
expense of the Tenant. Additionally, Landlord shall pay for the cost of
the architectural/construction drawings in accordance with the agreement
sent to Troy & Associates in the total amount of $0.63 per rentable square
foot (or a total of $28,948.50) plus reasonable reimbursable expenses.
Landlord shall also pay a management fee to Landlord's fee manager for the
cost of the construction management of the renovation/construction work.
3.) In addition to the items in Paragraph 1 above, Landlord shall renovate
the elevator lobbies and restrooms located on the fifth (5th) and sixth
(6th) floors of the Building in a manner similar to the third (3rd) floor
of the Building. Subject to Landlord's approval, color selections for the
materials used to renovate the elevator lobbies herein may be chosen by
Tenant. Landlord shall also pay for the cost to remove the existing
raised computer flooring located on the fifth (5th) and sixth (6th) floors
of the Premises as well as the components existing beneath the raised
flooring that do not have a reusable value to Tenant's renovation work.
Such work described herein shall be completed in conjunction with the
renovation/construction of the Premises and performed by the same
contractor who is performing the renovation/construction work of the
Premises.
4.) RIGHT OF FIRST REFUSAL. Provided Tenant is not then in default of this
Lease and is then occupying the Premises, Tenant shall have the right of first
refusal on the following suite(s), located on the fourth (4th) floor of the
Building. Such right of first refusal shall be granted to Tenant provided
Tenant provides Landlord written notice no less than one hundred eighty (180)
days prior to the applicable expiration date for such suite(s) that Tenant
wishes to hold the right of first refusal on for any of the specific suites
listed below and further identified on the attached Exhibit "SS-1". The
expiration date of the current leases and the dates by which Tenant must notify
<PAGE> 35
Landlord of its desire to obtain the right of first refusal are outlined below:
<TABLE>
<S> <C> <C> <C> <C>
Suite A Lease Expires: 6/30/96 Notice Date: Upon Lease Execution
Suite B Lease Expires: 12/31/97 Notice Date: 6/30/97
Suite C Lease Expires: 11/30/98 Notice Date: 5/31/98
Suite D* Lease Expires: 5/31/97 Notice Date: 11/30/96
Suite E Lease Expires: vacant Notice Date: Upon Lease Execution
Suite F Lease Expires: 3/31/97 Notice Date: 9/30/96
Suite G Lease Expires: 10/14/97 Notice Date: 4/14/97
Suite H Lease Expires: 10/31/98 Notice Date: 4/31/98
Suite I* Lease Expires: 3/31/98 Notice Date: 9/30/97
</TABLE>
*Suite I and Suite D have extension rights. Tenant's ability to be offered a
right of first refusal on these suites shall be subject to the existing tenant
extending the term of the lease.
In the event Tenant notifies Landlord within the 180 day notice period above,
then Tenant shall have the fire right to lease the identified suites prior to
Landlord's leasing to another third party. In the event Landlord has a bona
fide third party interested in leasing any of the identified suites above, and
Tenant has properly notified Landlord of its intent, Landlord shall provide
Tenant with written notice and Tenant shall have five (5) business days to
confirm with Landlord its desire to lease the identified suite(s). Landlord
and Tenant shall then have fifteen (15) days to negotiate in good faith the
terms and conditions of the lease of such space and diligently pursue the
consummation of a lease amendment evidencing such agreed upon terms and
conditions. In the event Landlord and Tenant are unable to agree upon the
terms and conditions of such space within the fifteen (I 5) day period,
Landlord shall be free to lease such space to any third party and no further
right of first refusal shall exist to Tenant pertaining to such suite.
5.) OPTION TO EXTEND. Provided Tenant is not then in default, nor has ever
been in material default of this Lease, and is then occupying the Premises,
Tenant shall have the option to extend this Lease for an additional sixty (60)
months at the then market rate for office space in the Building. Such option
to extend shall be exercisable by Tenant providing no less than nine (9) months
written notice to Landlord of its desire to extend this Lease. Landlord and
Tenant shall agree to execute a lease amendment evidencing the terms and
conditions of such extension no later than six (6) months prior to the
Expiration Date of this Lease. If such Lease extension is not executed by
Tenant and Landlord by the date that is six (6) months prior to the Expiration
Date, this option to extend shall be null and void.
<PAGE> 36
EXHIBIT G
LEASE GUARANTY
The undersigned Guarantor, in consideration of Ten Dollars ($10.00) and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and of the leasing by MASSACHUSETTS MUTUAL LEFE INSURANCE
COMTANY, a Massachusetts corporation, as Landlord, to MEGO MORTGAGE CORPORATION,
a Delaware corporation, as Tenant, of certain premises located at 1000 Parkwood,
Suites 500 and 600, Atlanta, Georgia, pursuant to and as defined in a lease
entitled Office Lease between them dated on or about this date (herein as
amended or modified called the "Lease"), does hereby unconditionally guarantee
the payment of all rent and other charges and the performance by Tenant of all
of its obligations under the Lease. And the Guarantor further covenants and
agrees with Landlord, as follows:
(a) That if an Event of Default, as defined in said Lease, shall have
occurred and be continuing, the Guarantor will, on demand, well and truly pay
to Landlord any and all payments that have or will become due to Landlord under
the Lease, and will perform or cause to be performed all of the covenants in
the Lease to be performed by Tenant and, in addition, will pay all damages that
may arise in consequence of such event of default and all costs and attorneys'
fees that may be incurred by Landlord in enforcing Tenant's covenants and
agreements set forth in the Lease or in enforcing the covenants and agreements
of the Guarantor herein.
(b) That, at Landlord's option, the Guarantor may be brought into any
action or proceeding commenced by Landlord against Tenant in connection with
and based upon the Lease or any provision thereof, or Landlord may proceed
separately against Guarantor, and recovery may be had against Guarantor in any
such action or proceeding or in any independent action or proceeding against
Guarantor, without any requirement that Landlord, its successors or assigns,
first assert, prosecute or exhaust any remedy or claim against Tenant, its
successors and/or assigns.
(c) That in the event of any bankruptcy, reorganization, winding-up or
similar proceedings with respect to Tenant, no discharge, modification or
limitation of Tenant's liability under the Lease which may now or hereafter he
imposed by any federal, state or other law or regulation applicable to such
proceedings shall discharge, limit or modify the obligation of Guarantor
hereunder, which obligation is co-extensive with Tenant's liability as set
forth in the Lease without regard to any such discharge, limitation or
modification.
(d) That this Guaranty shall remain in full force and effect as to any
renewal, extension, modification or amendment of the Lease and shall guarantee
performance and payment under the Lease by any assignee of the interest of the
Tenant under the Lease.
(e) That Landlord's interest under this Guaranty may be assigned by it by
way of security or otherwise without the consent of the undersigned.
(f) Guarantor shall be entitled to receive notices of events of default
under the Lease and notices or demands given by Landlord to Tenant.
(g) Landlord may, from time to time, without notice to or consent of the
undersigned, (i) retain or obtain the primary or secondary liability of any
party or parties, in addition to the undersigned, with respect to any of the
obligations guaranteed hereby, (ii) extend or renew for any period (whether or
not longer than the original period) or alter any of the obligations guaranteed
hereby, (iii) release or compromise any liability of the Tenant or any liability
of any other party or parties primarily or secondarily liable on any of the
obligations guaranteed hereby, and (iv) release, compromise or subordinate its
title or security interest, if any, in all or any property now or hereafter
securing any of the obligations guaranteed hereby.
(h) The undersigned waives: (i) notice of the existence or creation of all
or any of the obligations guaranteed hereby, (ii) notice of any alteration,
amendment, increase, extension or exchange of any of the obligations guaranteed
hereby or of any events of a nature set out in the preceding or succeeding
<PAGE> 37
paragraphs, (iii) notice of any amendment or modification of the Lease, (iv) all
diligence in collection or protection of or realization upon the obligations
guaranteed hereby or any thereof, any obligation hereunder, or any security
therefor, and (v) the right to require Landlord to proceed against Tenant on any
of the obligations guaranteed hereby. Landlord agrees that it will use
reasonably diligent efforts to proceed against Tenant prior to taking action
under this Guaranty.
(i) No delay or failure on the part of Landlord in the exercise of any
right or remedy shall operate as a waiver thereof, and no single or partial
exercise by Landlord of any right or remedy shall preclude other or future
exercise thereof or the exercise of any other right or remedy. No action of
Landlord permitted hereunder shall impair or affect this Guaranty.
0) Guarantor waives any right of subrogation or contribution which such
Guarantor may have or hereafter obtain as against the Tenant. Without limiting
the foregoing, in the event of a default for the nonpayment of a monetary
obligation that has occurred and is continuing, Guarantor subordinates any
monetary claim which it may have or obtain against the Tenant and any debt
which such Guarantor holds or hereafter obtains from Tenant to the indebtedness
due Landlord under the Lease and this Guaranty.
(k) This Guaranty has been made and delivered in the State of Georgia and
shall be construed and governed under Georgia law.
(l) Wherever possible, each provision of this Guaranty shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Guaranty shall be prohibited by or invalid under
such law, such provision shall be ineffective to the extent of such prohibition
of invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Guaranty.
(m) Masculine pronouns include the feminine and neuter. This Guaranty
binds and inures to the benefit of Landlord, Guarantor and their heirs,
successors and assigns.
(n) This Guaranty shall expire on April 9, 1999 if the following
conditions precedent have been met. If all of the following conditions
precedent have not been met as of April 9, 1999, then this Guaranty shall
remain in full force and effect throughout the term of the Lease and shall not
expire until the earlier of April 9, 2002 or the earlier termination of the
Lease unless such earlier termination is the result of a default by Tenant
whereby this Guaranty shall not expire until April 9, 2002:
(i) On or before the end of the 1998 fiscal year, the audited
financial statements of Tenant, Mego Mortgage Corporation, for the fiscal
year ended 1998 shall demonstrate that Tenant has a net worth of at least
Twenty Million Dollars ($20,000,000.00), as certified by an independent
certified public accountant reasonably acceptable to Landlord. Tenant's
fiscal year ends on August 31.
(ii) As of the end of each of the 1996, 1997 and 1998 fiscal years of
the Tenant, Tenant shall have a minimum net income after taxes of Two
Million Five Hundred Thousand Dollars ($2,500,000.00), as demonstrated by
audited financial statements certified by an independent certified public
accountant reasonably acceptable to Landlord.
(iii) Tenant shall not then be in default under the Lease and shall not
have defaulted under the Lease more than three (3) times during the first
three (3) years of the Lease Term without curing same in accordance with
the terms of the Lease.
If the foregoing conditions precedent have been met as of April 9, 1999,
Landlord will provide Guarantor notice that this Guaranty has expired as of
April 9, 1999.
<PAGE> 38
IN WITNESS WHEREOF, the Guarantor has signed and sealed this Guaranty the
10th day of April, 1996.
GUARANTOR:
MEGO FINANCIAL CORP.
Attest: By:
Title: Tide:
Print Name: Print Name:
[CORPORATE SEAL]
<PAGE> 1
EXHIBIT 10.23
SERVICES AND CONSULTING AGREEMENT
THIS AGREEMENT ("Agreement") dated as of September 1, 1996, is entered
into by and between MEGO MORTGAGE CORPORATION ("MMC"), a Delaware corporation,
and PREFERRED EQUITIES CORPORATION ("PEC"), a Nevada Corporation.
BACKGROUND OF AGREEMENT
a. MMC and PEC are affiliated companies by virtue of having a common
parent, Mego Financial Corp., which owns, as of the date of this Agreement, all
of the issued and outstanding stock of MMC and PEC.
b. MMC has utilized the services of PEC and certain of PEC's
officers, executives and staff to aid MMC in its business operations including,
without limitation, management, legal and planning services, for which the
estimated cost thereof to PEC has been charged and allocated to MMC on the
accounting books of the parties.
c. MMC and PEC have decided to enter into this Agreement for the
purpose of (i) documenting and detailing PEC's support services to MMC and (ii)
providing a schedule (the "Schedule"), attached hereto and made a part hereof,
of the services to be provided by PEC to MMC and the corresponding cost of same,
as shown on the Schedule.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements hereinafter contained, the parties hereto do hereby
agree as follows:
ARTICLE 1. APPOINTMENT; TERM
1.1 On the terms and subject to the conditions set forth in this
Agreement, MMC hereby appoints PEC as a Management Consultant and Service
Provider to MMC to provide the services shown, and for the remuneration shown,
on the Schedule attached hereto and made a part hereof; and PEC accepts such
appointment. Nothing contained herein shall be deemed a delegation by MMC, or
an acceptance by PEC, of any responsibility for or authority from MMC for the
management of its business and affairs, which responsibility and authority shall
at all times be and remain vested in the Board of Directors, shareholders and
management of MMC.
1.2 The term of this agreement shall commence as of the date of this
Agreement and shall continue for an initial one-year period. Thereafter, it
shall continue unless and until canceled by either party on a whole or partial
basis (as defined in Article 6.2 hereof) by notice given no later than ninety
(90) days prior to the prospective whole or partial termination.
ARTICLE 2. PROPRIETARY INFORMATION AND SECRECY
2.1 Each party shall (i) keep secret and confidential all know-how, plans,
data and other industrial property ("Proprietary Information") owned and
specified as secret and confidential by the other party and (ii) use its best
effort to prevent its employees, agents,
1
<PAGE> 2
representatives and shareholders from divulging to others any such Proprietary
Information and utilizing any such Proprietary Information except in connection
with the business or operations of the other party. The provisions of this
Article 2 shall survive for a period of one (1) year following the entire
termination of this Agreement for whatever reason. Excluded from such
requirement to keep Proprietary Information secret and confidential are the
following:
a. Information which, at the time of disclosure, is in the public
domain;
b. Information which, after disclosure to the other party, enters the
public domain, except where such entry is the result of a breach of this
Agreement;
c. Information which, prior to disclosure hereunder, was already in
the other party's possession;
d. Information which, subsequent to disclosure hereunder, is obtained
by a party from a third person who is lawfully in possession of such Proprietary
Information and not subject to a contractual or fiduciary relationship with
respect to such Proprietary Information and who does not require such party to
refrain from disclosing such information; and
e. Information which is required to be disclosed by either party or
any of their affiliates in a filing with the Securities and Exchange Commission
or any other governmental agency or in any other disclosure document required by
such authorities or information required to be disclosed in a legal proceeding.
ARTICLE 3. SCOPE OF DUTIES OF PEC
3.1 PEC shall, at the reasonable request of MMC from time to time
during the term hereof, advise and consult with MMC and its management and
provide various services with respect to MMC's operations, financial activities
and business affairs, as shown on the attached Schedule, subject to PEC's
reasonable convenience and other business activities. Without limitation, the
initial services to be provided by PEC shall include management consulting,
treasury, accounting, legal, management information, administrative,
communications and advertising.
3.2 Such services shall be performed only during regular business
hours on weekdays except at the option of PEC, and shall be performed by such
employees or agents of PEC as PEC, in its sole discretion, deems appropriate.
ARTICLE 4. NO RESTRICTIONS
It is understood that this Agreement shall not restrict PEC or any
affiliate of PEC from engaging in any business activities, including those
which may be deemed to be competitive with MMC, and that this Agreement shall
not obligate PEC to bring to MMC any business opportunities that may come to
PEC in its business activities.
2
<PAGE> 3
ARTICLE 5. COMPENSATION; EXPENSES
As full compensation for PEC's services hereunder, MMC hereby agrees to
pay to PEC $967,000.00 per annum, payable at $80,583.33 a month, due and
payable on the first business day of each month. PEC's performance of any and
all services is subject to MMC's timely monthly payments.
ARTICLE 6. SCHEDULE REVISION; WHOLE OR PARTIAL TERMINATION
6.1 Not later than sixty (60) days prior to the September 1, 1997, and
annually thereafter for the term of this Agreement, PEC shall provide MMC with a
revised Schedule detailing the services and cost thereof, PEC is to provide MMC
during the next year. Within ten (10) days of the receipt of any such Schedule,
MMC may advise PEC of any service listed on the Schedule it does not wish PEC to
perform and/or request PEC to perform additional services. Any additional
services PEC agrees to perform shall be added to the Schedule to be performed
for a fee mutually agreeable to PEC and MMC.
6.2 Notwithstanding the provisions of Section 1.2 hereof, at any time
during the term of the Agreement, either party may terminate this Agreement in
whole or in part by giving the other party written notice of such termination
not later than ninety (90) days prior to the proposed termination date. Any
partial termination(s) must specifically detail the line item description of the
services on the Schedule that are subject to termination. All payments due
prior to any said whole or partial termination shall be prorated to the date of
cancellation on a per diem basis, and thereafter neither party shall have a duty
to perform or accept such services subject only to MMC's duty to pay for all
services rendered to the date of whole or partial termination.
ARTICLE 7. LIMITATIONS ON LIABILITY OF PEC; INDEMNIFICATION OF PEC
7.1 Notwithstanding anything to the contrary contained in this
Agreement, PEC shall not be liable to MMC for any loss or damage of any nature
suffered by MMC occasioned by or arising from any act or omission, or alleged
act or omission, of PEC or any officer, employee or agent of PEC in the
performance or the nonperformance of this Agreement or any part hereof, or the
consequences of any action or course of action taken by MMC pursuant to this
Agreement, unless directly caused by PEC's gross negligence or willful
misconduct or an act of bad faith in breach of this Agreement. In no event
shall PEC be responsible for MMC's loss of profits and/or other consequential
loss or damage howsoever caused and whether or not occasioned or caused by the
act, default or negligence of PEC.
7.2 MMC shall indemnify, defend and hold harmless PEC and each of its
officers and employees performing services hereunder from and against any and
all demands, claims, actions or causes of actions, judgments, assessments,
losses, liabilities, damages or penalties and reasonable attorney's fees and
related disbursements (collectively "Losses") arising out of or due to the
performance by PEC or any such officers and employees of any of PEC's duties or
obligations hereunder unless such Losses are directly caused by PEC's gross
negligence or willful misconduct or an act of bad faith in breach of this
Agreement.
3
<PAGE> 4
ARTICLE 8. INDEMNIFICATION OF MMC
PEC agrees to indemnify, defend and hold harmless MMC for any loss, damage,
reasonable expense, claims, and/or causes of action that may be asserted against
MMC as a result of any gross negligence or willful misconduct on the part of
PEC, its agents or employees in the performance of the services required by this
Agreement.
ARTICLE 9. MISCELLANEOUS
9.1 Notwithstanding anything to the contrary contained in this
Agreement, PEC shall be deemed to be an independent contractor for all purposes
hereof and shall not be deemed to be, and shall not, for the purposes of this
Agreement, hold itself out as, an agent or partner of, or joint venturer with
MMC; and, except as specifically provided herein, PEC shall take no action,
without the prior consent of MMC, by which any third party might infer that PEC
is such an agent, partner or joint venturer.
9.2 All notices, requests and demands to or upon the respective
parties shall be deemed to have been given or made when personally delivered or
when deposited in the mail, first class mail, registered or certified, return
receipt requested and postage prepaid as follows:
9.2.1 If to PEC, to:
Preferred Equities Corporation
4310 Paradise Road
Las Vegas, Nevada 89109
Attention: Frederick H. Conte,
Executive Vice President and
Chief Operating Officer
9.2.2 If to MMC, to:
Mego Mortgage Corporation
1000 Parkwood Circle, Suite 500
Atlanta, Georgia 30339
Attention: James L. Belter, Executive Vice President,
Treasurer
and Chief Financial Officer
or to such other address as either such party shall notify the other.
9.3 No failure to exercise and no delay in exercising, on the part of
either party hereto, any right, power or privilege hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof of the
exercise of any other right, power or privilege. No modification or waiver of
any provision of this Agreement, nor consent to any departure from the
provisions hereof, shall be effective unless the same shall be in writing from
the party so modifying, waiving or consenting and then such waiver or consent
shall be given only in the specific instance and for the purpose for which it is
given. No notice to either party shall entitle such party to any other of
further notice in other or similar circumstances unless expressly provided for
herein. No course of
4
<PAGE> 5
dealing between any of the parties shall operate as a waiver of any of their
respective rights under this Agreement.
9.4 The captions of the various sections of this Agreement have been
inserted only for the purpose of convenience, and shall not be deemed in any
matter to modify, define, enlarge or restrict any of the provisions of this
Agreement.
9.5 This Agreement shall be binding upon and inure to the benefit of
the parties and their respective successors and assigns. Notwithstanding the
foregoing, neither party shall assign or transfer any rights or obligations
hereunder, except that PEC may assign or transfer this Agreement and its rights
and obligations hereunder to a successor corporation in the event of a merger,
consolidation or transfer or sale of all or substantially all of the assets of
PEC. Any purported assignment, other than as provided above, shall be null and
void.
9.6 This Agreement contains the entire agreement between the parties
hereto with respect to the subject matter hereof, supersedes all prior written
agreements and negotiations and oral understanding, if any, and may not be
amended, supplemented or discharged except by performance or by an instrument in
writing signed by both of the parties hereto.
9.7 This Agreement shall be construed in accordance with and governed
by the laws of the State of Georgia.
9.8 Nothing contained in this Agreement, express or implied, shall
confer upon any other person not a party to this Agreement any rights or
remedies under or by virtue of this Agreement.
9.9 This Agreement shall be executed on one or more copies, but such
counterparts shall together constitute but one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered by their respective duly authorized officer or officers
thereunto duly authorized as of the day and year first set forth above.
PREFERRED EQUITIES CORPORATION, MEGO MORTGAGE CORPORATION,
a Nevada corporation a Delaware corporation
By: /s/ Frederick H. Conte By: /s/ James L. Belter
------------------------------ ------------------------------
Frederick H. Conte, James L. Belter,
Executive Vice President Executive Vice President
5
<PAGE> 1
Exhibit 10.26
Public Securities Association
40 Broad Street, New York, NY 10004-2373
Telephone (212) 809-7000
MASTER REPURCHASE AGREEMENT
Dated as of: September 4, 1996
Between:
Mego Mortgage Corporation
and
Greenwich Capital Markets, Inc.
1. Applicability
From time to time the parties hereto may enter into transactions in which
one party ("Seller") agrees to transfer to the other ("Buyer") securities or
financial instruments ("Securities") against the transfer of funds by Buyer,
with a simultaneous agreement by Buyer to transfer to Seller such Securities at
a date certain or on demand, against the transfer of funds by Seller. Each such
transaction shall be referred to herein as a "Transaction" and shall be governed
by this Agreement, including any supplemental terms or conditions contained in
Annex I hereto, unless otherwise agreed in writing.
2. Definitions
(a) "Act of Insolvency", with respect to any party, (i) the commencement by
such party as debtor of any case or proceeding under any bankruptcy, insolvency,
reorganization, liquidation, dissolution or similar law, or such party seeking
the appointment of a receiver, trustee, custodian or similar official for such
party or any substantial part of its property, or (ii) the commencement of any
such case or proceeding against such party, or another seeking such an
appointment, or the filing against a party of an application for a protective
decree under the provisions of the Securities Investor Protection Act of 1970,
which (A) is consented to or not timely contested by such party, (B) results in
the entry of an order for relief, such an appointment, the issuance of such a
protective decree or the entry of an order having a similar effect, or (C) is
not dismissed within 15 days, (iii) the making by a party of a general
assignment for the benefit of creditors, or (iv) the admission in writing by a
party of such party's inability to pay such party's debts as they become due;
(b) "Additional Purchased Securities", Securities provided by Seller to
Buyer pursuant to Paragraph 4(a) hereof;
<PAGE> 2
(c) "Buyer's Margin Amount", with respect to any Transaction as of any
date, the amount obtained by application of a percentage (which may be equal to
the percentage that is agreed to as the Seller's Margin Amount under
subparagraph (q) of this Paragraph), agreed to by Buyer and Seller prior to
entering into the Transaction, to the Repurchase Price for such Transaction as
of such date;
(d) "Confirmation", the meaning specified in Paragraph 3(b) hereof;
(e) "Income", with respect to any Security at any time, any principal
thereof then payable and all interest, dividends or other distributions thereon;
(f) "Margin Deficit", the meaning specified in Paragraph 4(a) hereof;
(g) "Margin Excess", the meaning specified in Paragraph 4(b) hereof;
(h) "Market Value", with respect to any Securities as of any date, the
price for such Securities on such date obtained from a generally recognized
source agreed to by the parties or the most recent closing bid quotation from
such a source, plus accrued income to the extent not included therein (other
than any income credited or transferred to, or applied to the obligations of,
Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to
market practice for such Securities);
(i) "Price Differential", with respect to any Transaction hereunder as of
any date, the aggregate amount obtained by daily application of the Pricing Rate
for such Transaction to the Purchase Price for such Transaction on a 360 day per
year basis for the actual number of days during the period commencing on (and
including) the Purchase Date for such Transaction and ending on (but excluding)
the date of determination (reduced by any amount of such Price Differential
previously paid by Seller to Buyer with respect to such Transaction);
(j) "Pricing Rate", the per annum percentage rate for determination of the
Price Differential;
(k) "Prime Rate", the prime rate of U.S. money center commercial banks as
published in The Wall Street Journal;
(l) "Purchase Date", the date on which Purchased Securities are transferred
by Seller to Buyer;
(m) "Purchase Price", (i) on the Purchase Date, the price at which
Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter,
such price increased by the amount of any cash transferred by Buyer to Seller
pursuant to Paragraph 4(b) hereof and decreased by the amount of any cash
<PAGE> 3
transferred by Seller to Buyer pursuant to Paragraph 4(a) hereof or applied to
reduce Seller's obligations under clause (ii) of Paragraph 5 hereof;
(n) "Purchased Securities", the Securities transferred by Seller to Buyer
in a Transaction hereunder, and any Securities substituted therefor in
accordance with Paragraph 9 hereof. The term "Purchased Securities" with respect
to any Transaction at any time also shall include Additional Purchased
Securities delivered pursuant to Paragraph 4(a) and shall exclude Securities
returned pursuant to Paragraph 4(b);
(o) "Repurchase Date", the date on which Seller is to repurchase the
Purchased Securities from Buyer, including any date determined by application of
the provisions of Paragraphs 3(c) or 11 hereof;
(p) "Repurchase Price", the price at which Purchased Securities are to be
transferred from Buyer to Seller upon termination of a Transaction, which will
be determined in each case (including Transactions terminable upon demand) as
the sum of the Purchase price and the Price Differential as of the date of such
determination, increased by any amount determined by the application of the
provisions of Paragraph 11 hereof;
(q) "Seller's Margin Amount", with respect to any Transaction as of any
date, the amount obtained by application of a percentage (which may be equal to
the percentage that is agreed to as the Buyer's Margin Amount under subparagraph
(c) of this Paragraph), agreed to by Buyer and Seller prior to entering into the
Transaction, to the Repurchase Price for such Transaction as of such date.
3. Initiation; Confirmation; Termination
(a) An agreement to enter into a Transaction may be made orally or in
writing at the initiation or either Buyer or Seller. On the Purchase Date for
the Transaction, the Purchased Securities shall be transferred to Buyer or its
agent against the transfer of the Purchase Price to an account of Seller.
(b) Upon agreeing to enter into a Transaction hereunder, Buyer or Seller
(or both), as shall be agreed, shall promptly deliver to the other party a
written confirmation of each Transaction (a "Confirmation"). The Confirmation
shall describe the Purchased Securities (including the CUSIP number, if any),
identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase
Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on
demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction,
and (v) any additional terms or conditions of the Transaction not inconsistent
<PAGE> 4
with this Agreement. The Confirmation, together with this Agreement, shall
constitute conclusive evidence of the terms agreed between Buyer and Seller with
respect to the Transaction to which the Confirmation relates, unless with
respect to the Confirmation specific objection is made promptly after receipt
thereof. In the event of any conflict between the terms of such Confirmation and
this Agreement, this Agreement shall prevail.
(c) In the case of Transactions terminable upon demand, such demand shall
be made by Buyer or Seller, no later than such time as is customary in
accordance with market practice, by telephone or otherwise on or prior to the
business day on which such termination will be effective. On the date specified
in such demand, or on the date fixed for termination in the case of Transactions
having a fixed term, termination of the Transaction will be effected by transfer
to Seller or its agent of the Purchased Securities and any income in respect
thereof received by Buyer (and not previously credited or transferred to, or
applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against
the transfer of the Repurchase Price to an account of Buyer.
4. Margin Maintenance
(a) If at any time the aggregate Market Value of all Purchased Securities
subject to all Transactions in which a particular party hereto is acting as
Buyer is less than the aggregate Buyer's Margin Amount for all such
Transactions (a "Margin Deficit"), then Buyer may by notice to Seller require
Seller in such Transactions, at Seller's option, to transfer to Buyer cash or
additional Securities reasonably acceptable to Buyer ("Additional Purchased
Securities"), so that the cash and aggregate Market Value of the Purchased
Securities, including any such Additional Purchased Securities, will thereupon
equal or exceed such aggregate Buyer's Margin Amount (decreased by the amount of
any Margin Deficit as of such date arising from any Transactions in which such
Buyer is acting as Seller).
(b) If at any time the aggregate Market Value of all Purchased Securities
subject to all Transactions in which a particular party hereto is acting as
Seller exceeds the aggregate Seller's Margin Amount for all such Transactions at
such time (a (Margin Excess"), then Seller may by notice to Buyer require Buyer
in such Transactions at such time (a "Margin Excess"), then Seller may by notice
to Buyer require Buyer in such Transactions, at Buyer's option, to transfer cash
or Purchased Securities to Seller, so that the aggregate Market Value of the
Purchased Securities, after deduction of any such cash or any Purchased
Securities so transferred, will thereupon not exceed such aggregate Seller's
Margin Amount (increased by the amount of any Margin Excess as of such date
arising from any Transactions in which such Seller is acting as Buyer),
<PAGE> 5
(c) Any cash transferred pursuant to this Paragraph shall be attributed to
such Transactions as shall be agreed upon by Buyer and Seller.
(d) Seller and Buyer may agree, with respect to any or all Transactions
hereunder, that the respective rights of Buyer or Seller (or both) under
subparagraphs (a) and (b) of this Paragraph may be exercised only where a Margin
Deficit or Margin Excess exceeds a specified dollar amount or a specified
percentage of the Repurchase Prices for such Transactions (which amount or
percentage shall be agreed to by Buyer and Seller prior to entering into any
such Transactions).
(e) Seller and Buyer may agree, with respect to any or all Transactions
hereunder, that the respective rights of Buyer and Seller under subparagraphs
(a) and (b) of this Paragraph to require the elimination of a Margin Deficit or
a Margin Excess, as the case may be, may be exercised whenever such a Margin
Deficit or Margin Excess exists with respect to any single Transaction hereunder
(calculated without regard to any other Transaction outstanding under this
Agreement).
5. Income Payments
Where a particular Transaction's term extends over an income payment date
on the Securities subject to that Transaction, Buyer shall, as the parties may
agree with respect to such Transaction (or, in the absence of any agreement, as
Buyer shall reasonably determine in its discretion), on the date such income is
payable either (i) transfer to or credit to the account of Seller an amount
equal to such income payment or payments with respect to any Purchased
Securities subject to such Transaction or (ii) apply the income payment or
payments to reduce the amount to be transferred to Buyer by Seller upon
termination of the Transaction. Buyer shall not be obligated to take any action
pursuant to the preceding sentence to the extent that such action would result
in the creation of a Margin Deficit, unless prior thereto or simultaneously
therewith Seller transfers to Buyer cash or Additional Purchased Securities
sufficient to eliminate such Margin Deficit.
6. Security Interest
Although the parties intend that all Transactions hereunder be sales and
purchases and not loans, in the event any such Transactions are deemed to be
loans, Seller shall be deemed to have pledged to Buyer as security for the
performance by Seller of its obligations under each such Transaction, and shall
be deemed to have granted to Buyer a security interest in, all of the Purchased
Securities with respect to all Transactions hereunder and all proceeds thereof.
<PAGE> 6
7. Payment and Transfer
Unless otherwise mutually agreed, all transfers of funds hereunder shall be
in immediately available funds. All securities transferred by one party hereto
to the other party (i) shall be in suitable form for transfer or shall be
accompanied by duly executed instruments of transfer or assignment in blank and
such other documentation as the party receiving possession may reasonably
request (ii) shall be transferred on the book-entry system of a Federal Reserve
Bank, or (iii) shall be transferred by any other method mutually acceptable to
Seller and Buyer. As used herein with respect to Securities, "transfer" is
intended to have the same meaning as when used in Section 8-313 of the New York
Uniform Commercial Code or, where applicable, in any federal regulation
governing transfers of the Securities.
8. Segregation of Purchased Securities
To the extent required by applicable law, all Purchased Securities in the
possession of Seller shall be segregated from other securities in its possession
and shall be identified as subject to this Agreement. Segregation may be
accomplished by appropriate identification on the books and records of the
holder, including a financial intermediary or a clearing corporation. Title to
all Purchased Securities shall pass to Buyer and, unless otherwise agreed by
Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging
in repurchase transactions with the Purchased Securities or otherwise pledging
or hypothecating the Purchased Securities, but no such transaction shall relieve
Buyer of its obligations to transfer Purchased Securities to Seller pursuant to
Paragraphs 3, 4 or 11 hereof, or of Buyer's obligation to credit or pay income
to, or apply income to the obligation of, Seller pursuant to Paragraph 5 hereof.
Required Disclosure for Transactions in Which the Seller Retains
Custody of the Purchased Securities
Seller is not permitted to substitute other securities for those
subject to this Agreement and therefore must keep Buyer's securities
segregated at all times, unless in this Agreement Buyer grants Seller the
right to substitute other securities. If Buyer grants the right to
substitute, this means that Buyer's securities will likely be commingled
with Seller's own securities during the trading day. Buyer is advised that,
during any trading day that Buyer's securities are commingled with Seller's
securities, they [will]* [may]** be subject to liens granted by Seller to
[its clearing bank]* [third parties]** and may be used by Seller for
deliveries on other securities transactions. Whenever the securities are
commingled, Seller's ability
<PAGE> 7
to resegregate substitute securities for Buyer will be subject to
Seller's ability to satisfy [the clearing]* [any]** lien or to obtain
substitute securities.
9. Substitution
(a) Seller may, subject to an agreement with and acceptance by Buyer,
substitute other Securities for any Purchased Securities. Such substitution
shall be made by transfer to Buyer of such other securities and transfer to
Seller of such Purchased Securities. After substitution, the substituted
Securities shall be deemed to be Purchased Securities.
(b) In Transactions in which the Seller retains custody of Purchased
Securities, the parties expressly agree that Buyer shall be deemed, for purposes
of subparagraph (a) of this Paragraph, to have agreed to and accepted in this
Agreement substitution by Seller of other Securities for Purchased Securities;
provided, however, that such other Securities shall have a Market Value at least
equal to the Market Value of the Purchased Securities for which they are
substituted.
10. Representations
Each of Buyer and Seller represents and warrants to the other that (i) it
is duly authorized to execute and deliver this Agreement, to enter into the
Transactions contemplated hereunder and to perform its obligations hereunder and
has taken all necessary action to authorize such execution, delivery and
performance, (ii) it will engage in such Transactions as principal (or, if
agreed in writing in advance of any Transaction by the other party hereto, as
agent for a disclosed principal), (iii) the person signing this Agreement on its
behalf is duly authorized to do so on its behalf (or on behalf of any such
disclosed principal), (iv) it has obtained all authorization of any governmental
body required in connection with this Agreement and the Transactions hereunder
and such authorizations are in full force and effect and (v) the execution,
delivery and performance of this Agreement and the Transactions hereunder will
not violate any law, ordinance, charter, by-law or rule applicable to it or any
agreement by which it is bound or by which any of its assets are affected. On
the Purchase Date for any Transaction Buyer and Seller shall each be deemed to
repeat all the foregoing representations made by it.
- --------------------------------
* Language to be used under 17 C.F.R. ss.403.4(e) if Seller is a government
securities broker or dealer other than a financial institution.
** Language to be used under 17 C.F.R. ss.403.5(d) if Seller is a financial
institution.
<PAGE> 8
11. Events of Default
In the event that (i) Seller fails to repurchase or Buyer fails to transfer
Purchased Securities upon the applicable Repurchase Date, (ii) Seller or Buyer
fails, after one business day's notice, to comply with Paragraph 4 hereof, (iii)
Buyer fails to comply with Paragraph 5 hereof, (iv) an Act of Insolvency occurs
with respect to Seller or Buyer, (v) any representation made by Seller or Buyer
shall have been incorrect or untrue in any material respect when made or
repeated or deemed to have been made or repeated, or (vi) Seller or Buyer shall
admit to the other its inability to, or its intention not to, perform any of its
obligations hereunder (each an "Event of Default"):
(a) At the option of the nondefaulting party, exercised by written
notice to the defaulting party (which option shall be deemed to have been
exercised, even if no notice is given, immediately upon the occurrence of an
Act of Insolvency), the Repurchase Date for each Transaction hereunder shall be
deemed immediately to occur.
(b) In all Transactions in which the defaulting party is acting as
Seller, if the nondefaulting party exercises or is deemed to have exercised the
option referred to in subparagraph (a) of this Paragraph, (i) the defaulting
party's obligations hereunder to repurchase all Purchased Securities in
such Transactions shall thereupon become immediately due and payable, (ii) to
the extent permitted by applicable law, the Repurchase Price with respect to
each such Transaction shall be increased by the aggregate amount obtained by
daily application of (x) the greater of the Pricing Rate for such Transaction
or the Prime Rate to (y) the Repurchase Price for such Transaction as of the
Repurchase Date as determined pursuant to subparagraph (a) of this Paragraph
(decreased as of any day by (A) any amounts retained by the nondefaulting party
with respect to such Repurchase Price pursuant to subparagraph (d)(i) of this
Paragraph, (B) any proceeds from the sale of Purchased Securities pursuant to
subparagraph (d)(i) of this Paragraph, and (C) any amounts credited to the
account of the defaulting party pursuant to subparagraph (e) of this Paragraph)
on a 360 day per year basis for the actual number of days during the period
from and including the date of the Event of Default giving rise to such option
to but excluding the date of payment of the Repurchase Price as so increased,
(iii) all Income paid after such exercise or deemed exercise shall be retained
by the nondefaulting party and applied to the aggregate unpaid Repurchase
Prices owed by the defaulting party, and (iv) the defaulting party shall
immediately deliver to the nondefaulting party any Purchased Securities subject
to such Transactions then in the defaulting party's possession.
(c) In all Transactions in which the defaulting party is acting as
Buyer, upon tender by the nondefaulting party of payment of the aggregate
Repurchase Prices for all such Transactions, the
<PAGE> 9
defaulting party's right, title and interest in all Purchased Securities subject
to such Transactions shall be deemed transferred to the nondefaulting party, and
the defaulting party shall deliver all such Purchased Securities to the
nondefaulting party.
(d) After one business day's notice to the defaulting party (which notice
need not be given if an Act of Insolvency shall have occurred, and which may be
the notice given under subparagraph (a) of this Paragraph or the notice referred
to in clause (ii) of the first sentence of this Paragraph), the nondefaulting
party may:
(i) as to Transactions in which the defaulting party is acting as
Seller, (A) immediately sell, in a recognized market at such price or
prices as the nondefaulting party may reasonably deem satisfactory,
any or all Purchased Securities subject to such Transactions and apply
the proceeds thereof to the aggregate unpaid Repurchase Prices and any
other amounts owing by the defaulting party hereunder or (B) in its
sole discretion elect, in lieu of selling all or a portion of such
Purchased Securities, to give the defaulting party credit for such
Purchased Securities in an amount equal to the price therefor on such
date, obtained from a generally recognized source or the most recent
closing bid quotation from such a source, against the aggregate unpaid
Repurchase Prices and any other amounts owing by the defaulting party
hereunder; and
(ii) as to Transactions in which the defaulting party is acting
as Buyer, (A) purchase securities ("Replacement Securities") of the
same class and amount as any Purchased Securities that are not
delivered by the defaulting party to the nondefaulting party as
required hereunder or (B) in its sole discretion elect, in lieu of
purchasing Replacement Securities, to be deemed to have purchased
Replacement Securities at the price therefor on such date, obtained
from a generally recognized source or the most recent closing bid
quotation from such a source.
(e) As to Transactions in which the defaulting party is acting as
Buyer, the defaulting party shall be liable to the nondefaulting party (i)
with respect to Purchased Securities (other than the Additional Purchased
Securities), for any excess of the price paid (or deemed paid) by the
nondefaulting party for Replacement Securities therefor over the Repurchase
Price for such Purchased Securities and (ii) with respect to Additional
Purchased Securities, for the price paid (or deemed paid) by the
nondefaulting party for the Replacement
<PAGE> 10
Securities therefor. In addition, the defaulting party shall be liable
to the nondefaulting party for interest on such remaining liability with
respect to each such purchase (or deemed purchase) of Replacement
Securities from the date of such purchase (or deemed purchase) until paid
in full by Buyer. Such interest shall be at a rate equal to the greater of
the Pricing Rate for such Transaction of the Prime Rate.
(f) For purposes of this Paragraph 11, the Repurchase Price for each
Transaction hereunder in respect of which the defaulting party is acting as
Buyer shall not increase above the amount of such Repurchase Price for such
Transaction determined as of the date of the exercise or deemed exercise by
the nondefaulting party of its option under subparagraph (a) of this
Paragraph.
(g) The defaulting party shall be liable to the nondefaulting party
for the amount of all reasonable legal or other expenses incurred by the
nondefaulting party in connection with or as a consequence of an Event of
Default, together with interest thereon at a rate equal to the greater of
the Pricing Rate for the relevant Transaction or the Prime Rate.
(h) The nondefaulting party shall have, in addition to its rights
hereunder, any rights otherwise available to it under any other agreement
or applicable law.
12. Single Agreement
Buyer and Seller acknowledge that, and have entered hereunto and will enter
into each Transaction hereunder in consideration of and in reliance upon the
fact that, all Transactions hereunder constitute a single business
and contractual relationship and have been made in consideration of each other.
Accordingly, each of Buyer and Seller agrees (i) to perform all of its
obligations in respect of each Transaction hereunder, and that a default in the
performance of any such obligations shall constitute a default by it in respect
of all Transactions hereunder, (ii) that each of them shall be entitled to set
off claims and apply property held by them in respect of any Transaction against
obligations owing to them in respect of any other Transactions hereunder and
(iii) that payments, deliveries and other transfers made by either of them in
respect of any Transaction shall be deemed to have been made in consideration of
payments, deliveries and other transfers in respect of any other Transactions
hereunder, and the obligations to make any such payments, deliveries and other
transfers may be applied against each other and netted.
<PAGE> 11
13. Notices and Other Communications
Unless another address is specified in writing by the respective party to
whom any notice or other communication is to be given hereunder, all such
notices or communications shall be in writing or confirmed in writing and
delivered at the respective addresses set forth in Annex II attached hereto.
14. Entire Agreement; Severability
This Agreement shall supersede any existing agreements between the parties
containing general terms and conditions for repurchase transactions. Each
provision and agreement herein shall be treated as separate and independent from
any other provision of agreement herein and shall be enforceable notwithstanding
the unenforceability of any such other provision or agreement.
15. Nonassignability; Termination
The rights and obligations of the parties under this Agreement and under
any Transaction shall not be assigned by either party without the prior written
consent of the other party. Subject to the foregoing, this Agreement and any
Transactions shall be binding upon and shall inure to the benefit of the parties
and their respective successors and assigns. This Agreement may be canceled by
either party upon giving written notice to the other, except that this Agreement
shall, notwithstanding such notice, remain applicable to any Transactions then
outstanding.
16. Governing Law
This Agreement shall be governed by the laws of the State of New York
without giving effect to the conflict of law principles thereof.
17. No Waivers, Etc.
No express or implied waiver of any Event of Default by either party shall
constitute a waiver of any other Event of Default and no exercise of any remedy
hereunder by any party shall constitute a waiver of its right to exercise any
other remedy hereunder. No modification or waiver of any provision of this
Agreement and no consent by any party to a departure herefrom shall be effective
unless and until such shall be in writing and duly executed by both of the
parties hereto. Without limitation on any of the foregoing, the failure to give
a notice pursuant to subparagraphs 4(a) or 4(b) hereof will not constitute a
waiver of any right to do so at a later date.
<PAGE> 12
18. Use of Employee Plan Assets
(a) If assets of any employee benefit plan subject to any provision of the
Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be
used by either party hereto (the "Plan Party") in a Transaction, the Plan Party
shall so notify the other party prior to the Transaction. The Plan Party shall
represent in writing to the other party that the Transaction does not constitute
a prohibited transaction under ERISA or is otherwise exempt therefrom, and the
other party may proceed in reliance thereon but shall not be required so to
proceed.
(b) Subject to the last sentence of subparagraph (a) of this Paragraph, any
such Transaction shall proceed only if Seller furnishes or has furnished to
Buyer its most recent available audited statement of its financial condition and
its most recent subsequent unaudited statement of its financial condition.
(c) By entering into a Transaction pursuant to this Paragraph, Seller shall
be deemed (i) to represent to Buyer that since the date of Seller's latest such
financial statements, there has been no material adverse change in Seller's
financial condition which Seller has not disclosed to Buyer, and (ii) to agree
to provide Buyer with future audited and unaudited statements of its financial
condition as they are issued, so long as it is a Seller in any outstanding
Transaction involving a Plan Party.
19. Intent
(a) The parties recognize that each Transaction is a "repurchase agreement"
as that term is defined in Section 101 of Title 11 of the United States Code, as
amended (except insofar as the type of Securities subject to such Transaction or
the term of such Transaction would render such definition inapplicable), and a
"securities contract" as that term is defined in Section 741 of Title 11 of the
United States Code, as amended.
(b) It is understood that either party's right to liquidate Securities
delivered to it in connection with Transactions hereunder or to exercise any
other remedies pursuant to Paragraph 11 hereof, is a contractual right to
liquidate such Transaction as described in Sections 555 and 559 of Title 11 of
the United States Code, as amended.
20. Disclosure Relating to Certain Federal Protections
The parties acknowledge that:
(a) in the case of Transactions in which one of the parties is a broker or
dealer registered with the Securities and Exchange Commission ("SEC") under
Section 15 of the Securities Exchange Act of 1934 ("1934 Act"), the Securities
Investor Protection
<PAGE> 13
Corporation has taken the position that the provisions of the Securities
Investor Protection Act of 1970 ("SIPA") do not protect the other party with
respect to any Transaction hereunder;
(b) In the case of Transactions in which one of the parties is a government
securities broker or a government securities dealer registered with the SEC
under Section 15C of the 1934 Act, SIPA will not provide protection to the other
party with respect to any Transaction hereunder; and
(c) in the case of Transactions in which one of the parties is a financial
institution, funds held by the financial institution pursuant to a Transaction
hereunder are not a deposit and therefore are not insured by the Federal Deposit
Insurance Corporation, the Federal Savings and Loan Insurance Corporation or the
National Credit Union Share Insurance Fund, as applicable.
Mego Mortgage Corporation Greenwich Capital Markets, Inc.
By: /s/ James L. Belter By: /s/
--------------------------
Title: Executive V.P. Title: Co- President
Date: September 5, 1996 Date: September 4, 1996
<PAGE> 14
ANNEX I
Supplemental Terms and Conditions
1. Paragraph 12 of the Agreement shall be deleted in its entirety and the
following paragraph shall be inserted in lieu thereof:
12. Single Agreement
Each party hereby agrees to fulfill all of its obligations to the
other party with respect to any transaction or agreement between them,
and agrees that a default in the performance of any such obligations
("Obligations") shall constitute an Event of Default hereunder, and
each party shall have a right of setoff against the other party for
amounts owing hereunder and any other amounts or obligations owing in
respect of any other agreement or transaction whatsoever, and that
payments and deliveries made by either party hereunder shall be
considered to have been made in consideration of payments and
deliveries made by the other party with respect to any other agreement
or transaction between them, and the Obligations to make any such
payments and deliveries may be applied against each other and netted.
As security for the performance by each party of all its Obligations,
each party hereby grants to the other a security interest in all
securities and other property (and all proceeds thereof) transferred
by such party to the other pursuant to this Agreement or any other
transaction or agreement. With respect to defaulted Obligations
which did not arise under this Agreement, such security interest may
be enforced in accordance with the provisions of applicable law or
Paragraph 11(d)(i) hereof (applying such Paragraph as if such
defaulted Obligations were owed hereunder in respect of a Transaction
in which the defaulting party is acting as Seller).
2. Pursuant to Paragraph 18 of the Agreement, if assets of an employee benefit
plan subject to any provision of the Employee Retirement Income Security Act of
1974 ("ERISA") are intended to be used by either party hereto (the "Plan Party")
in a Transaction, the Plan Party shall so notify the other party prior to the
Transaction and the other party may, at its complete discretion, upon such
notification decide not to enter into the Transaction. In addition, with respect
to each such Transaction, the Plan Party is deemed to represent to the other
party that such Transaction does not constitute a prohibited transaction under
ERISA or is otherwise exempt therefrom.
<PAGE> 15
ANNEX II
Names and Addresses for Communications Between Parties
Greenwich Capital Markets, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Phone: (203) 625-7909
Fax: (203) 629-2514
Attn: Peter Sanchez
Mego Mortgage Corporation
1000 Parkwood Circle - 5th Floor
Atlanta, GA 30339
Phone: 800-550-6346
Fax: 800-694-6346
Attn: Jeffrey S. Moore, President
<PAGE> 1
EX-10.27
GREENWICH CAPITAL MARKETS, INC.
600 STEAMBOAT ROAD
GREENWICH, CONNECTICUT 06830
October 1, 1996
Mego Mortgage Corporation
1000 Parkwood Circle
5th floor
Atlanta, Georgia 30339
Attention: Mr. James L. Belter
Chief Financial Officer and Treasurer
Gentlemen:
This letter will confirm the engagement of Greenwich Capital Markets,
Inc. ("Greenwich") by Mego Mortgage Corporation ("Company") on an exclusive
basis to render advisory services, investment banking services and
financial/structuring services generally related to Transactions (as defined
below) to the Company, and to act as the Company's exclusive agent, in
connection with the financing and/or subsequent sale of one- to four-family
residential home improvement loans ("HIP Loans") and other subsequent types of
loans originated under loan programs approved in advance by Greenwich. In
addition, under an Amended and Restated Master Loan Purchase and Servicing
Agreement among Greenwich, the Company and Mego Financial Corp., as guarantor,
dated as of the date hereof (the "Master Agreement"), the Company will be
obligated to sell and Greenwich will be obligated to purchase HIP Loans and
certain other mortgage loans as and to the extent provided in such agreement.
It is currently contemplated that the HIP Loans will consist of (i)
loans insured by the Federal Housing Administration ("FHA") pursuant to Title I
of the National Housing Act ("Title I Loans") and (ii) conventional HIP Loans.
Such conventional HIP Loans may provide for all or a portion of the Loan
proceeds to be used for debt consolidation purposes as specified in the program
underwriting guidelines pursuant to which such conventional HIP Loans were
originated. Such program underwriting guidelines must be approved in writing
by Greenwich prior to the purchase of such
<PAGE> 2
Loans by Greenwich. (It is understood that Title I Loans, which may or may not
be secured by mortgages or deeds of trust, are relatively illiquid as whole
loans since, among other reasons, FHA requires that its book-entry insurance
reserves be transferred under certain circumstances and subject to certain
restrictions when Title I Loans are transferred or assigned.) It is further
contemplated that the focus of Greenwich's services will be on general
investment banking advice primarily related to alternative means by which the
Company may (i) obtain third-party financing of the HIP Loan portfolio pursuant
to a warehousing, repurchase, commercial paper or similar arrangement, but not
including the issuance of corporate equity or debt in a private or public
offering (any such transaction, a "Financing Transaction"), and/or (ii) sell or
otherwise dispose of HIP Loans or interests therein (or secured thereby) in
transactions pursuant to which the Company would either sell HIP Loans as whole
mortgage loans or cause to be issued participation certificates or securities
evidencing ownership of, or secured by, HIP Loans pooled as Real Estate
Mortgage Investment Conduits under federal tax law (in the case of real estate
or manufactured housing loans) or otherwise (any such transaction, a
"Disposition Transaction", and Disposition Transactions and Financing
Transactions collectively, "Transactions").
1. Services to be Rendered. Greenwich shall perform such of the
following advisory services, investment banking services and
financial/structuring services as the Company may reasonably request:
a. Review of the HIP Loan Business. Greenwich shall
familiarize itself to the extent appropriate and feasible with the
characteristics of the HIP Loans. In the course of its review, Greenwich shall
rely, without independent investigation, upon (i) information supplied by the
Company, (ii) information supplied by third parties employed by the Company,
and (iii) information otherwise publicly available. Greenwich shall not be
obligated to conduct any independent investigation relative to the above noted
information. In addition, Greenwich may from time to time examine all or a
statistical sample of the HIP Loans to determine generally the characteristics
thereof. All information provided by the Company and third parties employed by
the Company to Greenwich shall be complete and accurate to the best of the
Company's knowledge.
b. Valuation of HIP Loans. Greenwich shall from time to
time perform quantitative analyses of the HIP Loans using a magnetic data tape
provided by the Company to:
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<PAGE> 3
i. stratify the relevant characteristics of the
HIP Loans (i.e. weighted average coupon,
weighted average remaining term, etc.),
ii. determine a range of values given Greenwich's
assumptions regarding, but not limited to,
prepayment rates, types of loans, collateral
characteristics, expected and historical
performance, representations and warranties,
geographic dispersion, capital and secondary
loan market conditions, Transaction
structure, etc., and
iii. present such valuations to the Company (each,
a "Valuation").
c. Marketing Initiatives for the HIP Loans. Greenwich
shall from time to time develop and implement marketing strategies specifically
oriented to the characteristics of particular HIP Loans, and in that connection
Greenwich shall:
i. advise the Company on the structure of
proposed Disposition Transactions, which will
attempt to minimize the cost of funds and
maximize proceeds;
ii. compare and analyze a variety of
securitization structures with different
credit enhancement facilities, if
appropriate;
iii. perform cost/benefit analyses for the Company
regarding collateral criteria selection,
credit enhancement levels and marketing
implications tailored to the Company's goals
for securitization and future portfolio
growth; and
iv. access Greenwich's investor/customer base in
an attempt to facilitate prompt and efficient
placements of HIP Loans in the form of whole
loans, participation certificates or
securities.
d. Education and Analysis. Greenwich shall from time to
time provide to the Company securities market education, information systems
development and review, collateral parameter selection criteria and regulatory
and balance sheet analyses.
3
<PAGE> 4
e. Potential Counterparties. Greenwich shall advise and
assist the Company in identifying specific potential counterparties for
Transactions, including (without limitation) institutional investors, lending
institutions, trustees and custodians, credit enhancers and rating agencies
("Counterparties") and shall, on behalf of the Company, contact such potential
Counterparties as the Company may designate.
f. Presentations. Greenwich shall advise and assist the
management of the Company in making presentations to the Board of Directors of
the Company concerning securitization and structured finance as it relates to
the HIP Loans.
g. Preparation of Information Summary. With the
assistance of the Company, Greenwich shall from time to time prepare a summary
of the HIP Loans ("Summary") for distribution to potential Counterparties. The
Company shall review and approve the Summary prior to its distribution. The
Company will be solely responsible for the completeness and accuracy of the
Summary.
h. Negotiations. Greenwich shall advise and assist the
Company in developing negotiating strategies for possible Transactions, and
shall negotiate on behalf of the Company with potential Counterparties, and
other persons or entities designated by the Company, in connection with
Transactions.
i. Bids and Proposals. At the Company's request,
Greenwich shall solicit, receive and evaluate bids and proposals (whether in
whole loan, participation certificate or structured form) for third-party
purchases or financings of the HIP Loans, or interests therein or secured
thereby, and advise the Company as to such bids and proposals.
j. Closings. Greenwich shall assist in coordinating
each such applicable Counterparty's due diligence and assist in the closing of
each Transaction.
k. Other Services. Greenwich shall render such other
services incidental to the Company's HIP Loan business as from time to time may
be agreed upon by Greenwich and the Company.
2. Exclusive Engagement. The Engagement created hereby is an
exclusive right to render advisory services, investment banking services and
financial/structuring services with respect to the Company's HIP Loan business
in accordance with the terms hereof. The Company agrees not to employ, appoint
or engage any other advisor, broker, investment banker, person or entity for
such purposes during the term of this agreement nor shall the Company effect,
or attempt to affect a Transaction itself during
4
<PAGE> 5
the term of this agreement. The right granted to Greenwich hereunder is a power
coupled with an interest and is irrevocable over the term of the engagement
created hereby. The Company shall refer to Greenwich all inquiries with
respect to a potential Transaction. It is understood and agreed that except as
specifically provided herein and in any agreement entered into between
Greenwich and the Company that implements the terms hereof, no revolving credit
agreement, financing facility or any other type of financial commitment is, or
is to be deemed to be, created hereby or created or implied by this agreement
or by any actions or course of conduct of Greenwich. The Company further
agrees that, during the twelve months following the full term of this exclusive
engagement, as extended pursuant to Section 3 and without regard to any early
termination pursuant to Section 7(b), the Company will not (1) directly or
indirectly seek to consummate a Transaction with any offeree, subscriber,
person or entity whose name is provided to the Company or any other Mego Entity
(as defined below) pursuant to this letter agreement, (ii) use such names
except in connection with this agreement or (iii) disclose such names to any
other advisor, broker or other person, unless prior thereto the Company has
obtained the written consent of Greenwich and shall have paid to Greenwich any
fee(s) required pursuant to Section 4(a) or (b) unless otherwise agreed in
writing by Greenwich.
3. Term. This agreement shall terminate on the earlier of (i)
September 30, 2001 and (ii) the completion of $2 billion in aggregate Sold
Principal Balances of Disposition Transactions, excluding all Sold Principal
Balances relating to HIP Loans purchased by Greenwich before the date hereof,
unless extended in writing by mutual agreement.
4. Fees.
a. Disposition Fee. Upon consummation of any
Disposition Transaction involving whole Title I Loans exclusively,
participations in Title I Loans exclusively, or securities evidencing interests
in or secured by Title I Loans exclusively, which securities are rated in one
of the two highest rating categories of a rating agency ("Specified
Securities", which term shall not include securities entitled to nominal or
disproportionately low principal or interest distributions regardless of any
rating), the Company shall pay to Greenwich for its services hereunder a cash
fee for such Disposition Transaction equal to a percentage of the Sold
Principal Balance (as defined below) of such Title I Loans or Specified
Securities, as the case may be. Such percentage shall be: (i) one percent
(1.00%) of the Sold Principal Balances, for the first $50 million of such Sold
Principal Balances in the aggregate that are settled in Disposition
Transactions; (ii) three-quarters of one percent
5
<PAGE> 6
(0.75%) of the Sold Principal Balances for the next $100 million of such Sold
Principal Balances in the aggregate that are settled in Disposition
Transactions; and (iii) one-half of one percent (0.50%) of the Sold Principal
Balances that are settled in Disposition Transactions thereafter. Such cash
fee shall be paid on the date of closing of the Disposition Transaction and
shall be payable whether or not Greenwich is acting as principal. In the event
of a Disposition Transaction involving either HIP Loans other than Title I
Loans or securities other than Specified Securities, the fee payable to
Greenwich pursuant to this Section 4(a) shall be (x) one percent (1.00%) of the
Sold Principal Balances, for the first $100 million of such Sold Principal
Balances in the aggregate that are settled in Disposition Transactions; (y)
three-quarters of one percent (0.75%) of the Sold Principal Balances for the
next $150 million of such Sold Principal Balances in the aggregate that are
settled in Disposition Transactions; and (z) one-half of one percent (0.50%) of
the Sold Principal Balances that are settled in Disposition Transactions
thereafter. Solely for purposes of calculating the fees payable to Greenwich
pursuant to clauses (i), (ii) and (iii) of the third preceding sentence, the
Sold Principal Balances described in such clauses shall include the Sold
Principal Balances of all HIP Loans purchased on or after April 29, 1996 and
subsequently settled in Disposition Transactions. The "Sold Principal Balance"
of any whole HIP Loans, participations in HIP Loans or securities evidencing
interests in or secured by HIP Loans (including Specified Securities), which
HIP Loans, participations or securities in each case are sold by the Company,
shall be the aggregate unpaid principal amount of such HIP Loans,
participations or securities calculated as of the cut-off date applicable to
settlement of the related Disposition Transaction.
It is understood and acknowledged that from time to time the Company
may originate HIP Loans that are not intended for inclusion in a Disposition
Transaction and that will be traded away ("Trade Away Loans") by the Company
and not sold to Greenwich. The parties agree that up to 5% of the Company's
loan production in any month may be "traded away" from Greenwich, subject to
the payment to Greenwich upon any such sale of a fee equal to one-quarter of
one percent of the aggregate unpaid principal amount of such Trade Away Loans
calculated as of the cut-off date(s) applicable to such sales.
It is further understood and acknowledged that from time to time the
Company may expand its product line to include other types of consumer loan
products, which may not be included in Disposition Transactions. The parties
agree that Greenwich will have the exclusive right to assist the Company to
accomplish the sale or disposition of such new loan products to third party
6
<PAGE> 7
purchasers and/or financiers on a flow delivery basis for a fee to be agreed
upon in advance of any such sale.
b. Financing Fees. Upon consummation of any Financing
Transaction, the Company shall pay to Greenwich a cash fee of one-half of one
percent (0.50%) of the gross amount committed to the Company by the
Counterparty/source of funds in the Financing Transaction. If applicable, the
Company shall also pay a cash fee calculated at such percentage of the amount
of any subsequent increase in such committed amount.
c. Mego Entity Fees. In the event any affiliate of the
Company or any entity more than 10% owned, or controlled or created, by either
(each a "Mego Entity"), shall, while this agreement shall be in effect,
consummate a Disposition Transaction, the Company shall pay, or cause such Mego
Entity to pay, the same Disposition Fee to Greenwich as the Company would have
paid had the Disposition Transaction been made by the Company. Such
Disposition Transaction shall be considered as having been made by the Company
for the purpose of calculating the applicable percentage under paragraph 4(a)
of this agreement.
d. Contingent Nature of Fees. Any fees due under
Subsection (a), (b) or (c) of this Section 4 shall be contingent upon the
consummation of the related Transaction.
e. Early Termination Fees. The Company shall pay to
Greenwich any applicable fees required under Section 7.
5. Expenses. In addition to any fees that may be payable to
Greenwich hereunder, the Company hereby agrees, from time to time upon request,
to reimburse Greenwich for all reasonable fees and disbursements of Greenwich,
including without limitation, legal fees in a structured transaction in which
Greenwich has previously purchased the HIP Loans as principal, and all of
Greenwich's reasonable legal, travel and other out-of-pocket expenses arising
out of or relating to Greenwich's engagement hereunder, provided, however,
that, unless otherwise agreed in writing, the Company shall not be responsible
for, and Greenwich shall not be obliged to incur such expenses in an amount in
excess of $10,000 in any month and $50,000 for any year. Greenwich shall
notify the Company when its expenses for any applicable period approach such
ceilings. It is understood that, unless otherwise agreed, the Company shall be
required in a Transaction to pay all costs and expenses including all
Counterparty fees and expenses of (i) issuance of securities evidencing or
secured by HIP Loans, (ii) transfer of HIP Loans to a trustee or purchaser and
(iii) Financing Transaction expenses.
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<PAGE> 8
6. Indemnification and Contribution. In the event that Greenwich
becomes involved in any capacity in any action, proceeding or investigation in
connection with any matter related to or arising out of this agreement, the
Company will from time to time reimburse Greenwich for its legal and other
expenses (including the cost of any investigation and preparation)
incurred in connection therewith as and when such expenses are incurred. The
Company hereby indemnifies Greenwich for any losses, claims, damages or
liabilities to which Greenwich may become subject as a result of any violation
of the Securities Act of 1933 or the securities laws of any state in connection
with a Transaction. The Company hereby also indemnifies Greenwich against any
losses (other than losses arising from Greenwich acting as principal for its
own account), claims, damages or liabilities to which Greenwich may become
subject in connection with any matter related to or arising out of this
agreement, provided, however, there shall be excluded from such indemnification
any such loss, claim, damage or liability which results from the gross
negligence or willful misconduct of Greenwich in performing the services which
it is to render pursuant to this agreement. The reimbursement and
indemnification obligations of the Company under this Section 6 shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any affiliates of Greenwich, the
employees, agents and controlling persons (if any) of Greenwich and shall be
binding upon and inure to the benefit of any successors, assigns, heirs and
personal representatives of the Company, Greenwich, and any affiliate of
Greenwich and any such person. Unless otherwise agreed by Greenwich, the bid
or proposal and purchase contract with each potential purchaser/Counterparty
will contain the potential purchaser's representation that it has not relied on
Greenwich, has conducted its own diligence and will hold harmless and indemnify
Greenwich from and against any liability (including attorney's fees) in
connection with any threatened, pending or completed action, proceeding or suit
arising out of a Transaction or proposed Transaction.
7. Termination of Agreement.
a. Right to Terminate. Subject to the provisions of
this Section 7, Greenwich's engagement hereunder may be terminated by either
the Company or Greenwich at any time, with cause, upon written notice to such
effect to the other party.
b. Early Termination Fee. Greenwich shall be entitled
to an early termination fee ("Early Termination Fee") if this agreement is
terminated by the Company without cause prior to the expiration of this
agreement. The Early Termination Fee shall be equal to the fees that Greenwich
would have earned
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<PAGE> 9
pursuant to Section 4(a) and (b) with respect to any Transactions described
therein during the remainder of the scheduled term of this Engagement Letter.
The Early Termination Fee shall be contingent upon and earned and payable at
the consummation of such a Transaction. Notwithstanding the foregoing, no
Early Termination Fee shall be payable by the Company if it sells HIP Loans to
third parties upon the failure of Greenwich to purchase HIP Loans under the
Master Agreement at any time that the aggregate principal balance of HIP Loans
then owned by Greenwich under the Master Agreement (such HIP Loans, the
"Portfolio Loans") equals or exceeds the Portfolio Limit (as defined in Section
2(a)(ii) of the Master Agreement) to the extent (i) such Portfolio Loans met
all of the criteria for purchase and complied with all of the representations
and warranties under the Master Agreement at the time of such sale to Greenwich
and (ii) Greenwich is unable or unwilling to execute Disposition Transactions
with respect to such Portfolio Loans to create additional capacity under the
Portfolio Limit and such inability or unwillingness is not the result of any
act or omission of the Company or any material breach by the Company of this
agreement or the Master Agreement; provided, however, that (x) the Company
shall become obligated to pay the Early Termination Fee at such time as the
Company makes any additional sales of HIP Loans to third parties after receipt
of notice that Greenwich has raised the Portfolio Limit, effected Disposition
Transactions creating additional capacity under the Portfolio Limit or
otherwise waived compliance with the Portfolio Limit and (y) for purposes of
clause (ii) of this sentence, Greenwich shall not be deemed unable to execute
Disposition Transactions with respect to any Portfolio Loans that Greenwich has
been unable to sell on a whole-loan basis to a third party as a result of the
Company's unwillingness to convey to Greenwich or such third party any rights
retained by the Company in such Portfolio Loans.
c. Binding Agreement. The Company shall not have the
right to terminate this agreement with respect to any Transaction for which a
binding agreement has been signed.
8. Documentation. The Company acknowledges that, as a condition
precedent to any closing contemplated hereby, the Company shall be obligated to
cause to be prepared at its expense and executed for each proposed Transaction
a prospectus or private placement memorandum, a pooling agreement, any
certificates or securities to be issued, a placement and/or purchase agreement
and all related and applicable documents, instruments, certificates and
opinions of counsel required by the applicable Counterparties. The Company
acknowledges that Greenwich shall require a placement, purchase or underwriting
agreement providing customary representations, warranties, indemnities and
closing conditions for the benefit of the
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<PAGE> 10
underwriter or purchaser to the extent that Greenwich underwrites any security
relating to, or purchases, HIP Loans.
9. Transactions with Affiliates and Greenwich. No provision of
this agreement shall restrict or be deemed to restrict the Company from
entering into agreements and arrangements, including Transactions, with Mego
Entities, nor, except as provided in Section 4(a) with respect to Trade Away
Loans, shall any such Transactions give rise to fees payable to Greenwich
hereunder unless otherwise agreed in writing by the Company. No provision of
this agreement shall prevent a Mego Entity and Greenwich (and its or their
affiliates) from entering into agreements pursuant to which Greenwich purchases
HIP Loans or interests therein (or secured thereby) as principal, nor shall
Greenwich, in the event of such purchase, be or be deemed to be acting as other
than a principal for its own account, and shall not be deemed to be acting as
an investment banker, an advisor or a consultant to any Mego Entity.
10. Limitations on Use of Advice. Any advice or analysis, written
or oral, rendered or provided by Greenwich to the Company pursuant to this
agreement will be solely for the information and assistance of the Company in
connection with the consideration of its strategic alternatives and shall not
be used, circulated, quoted, disclosed publicly or otherwise referred to for
any purpose, or disclosed to any person who is not an officer, director or
employee of the Company, except in each case in accordance with and subject to
the prior written consent of Greenwich. For purposes of this agreement and for
all other purposes, information furnished to Counterparties in Transactions or
prospective Transactions either by Greenwich pursuant to this letter agreement
or by the Company shall be deemed to be information prepared, approved and
furnished by the Company.
11. Greenwich Securities Positions. In the normal course of
Greenwich's trading activities, Greenwich may from time to time have long or
short positions in, and buy or sell securities, or options on securities, which
are the subject of the advice contemplated by this agreement. In connection
with transactions which Greenwich effects on behalf of the Company, Greenwich
may, in order to position itself to effect such transactions and to minimize
its risks, take long or short positions in, and buy or sell, securities or
financial instruments which are the subject of such transactions or which are
similar to such securities or financial instruments. By entering into this
agreement, the Company consents to such activities by Greenwich.
12. General Provisions.
10
<PAGE> 11
a. Cooperation. The Company shall (and shall use its
best efforts to cause third parties employed by it to) cooperate fully with
Greenwich in connection with its engagement hereunder and with each potential
Counterparty to a Transaction.
b. Company's Discretion. It is understood that the
Company shall have absolute discretion in determining whether to accept or
reject any proposed bid, proposal or Transaction.
c. Restrictions on Retention. Greenwich shall not
retain any broker, finder or other party with respect to a Transaction for
which compensation will be payable by the Company unless approved by the
Company.
d. Survival of Provisions. The provisions of Sections
6, 7 and this Section 12(d) shall survive termination of this agreement. In
addition, Sections 2 and 4 shall survive with respect to termination without
cause. Termination of this agreement shall not relieve either party of
obligations accrued and owing as of the date of termination.
e. Governing Law. THIS AGREEMENT SHALL BE INTERPRETED
AND CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK.
13. Effect of Agreement. This Engagement Letter shall be
effective as of the date hereof in all respects and shall supersede the
Engagement Letter dated October 19, 1993 (as amended by Amendment No. 1 thereto
dated April 29, 1996) (as so amended, the "Original Engagement Letter") between
Greenwich and the Company, except that the Company shall be responsible to
Greenwich for all obligations incurred to the date hereof, but not performed or
satisfied, pursuant to the Original Engagement Letter.
11
<PAGE> 12
Please confirm that the foregoing is in accordance with your
understandings and agreements with Greenwich by signing and returning to the
undersigned the duplicate of this letter enclosed herewith.
Very truly yours,
GREENWICH CAPITAL MARKETS, INC.
By: /s/
----------------------------
Name:
Title:
Address for Notice:
Telecopy No.:
ACCEPTED AND AGREED AS OF
THE DATE FIRST ABOVE WRITTEN;
MEGO MORTGAGE CORPORATION
By: /s/
------------------------
Name:
Title:
Address for Notices:
Telecopy No.:
<PAGE> 1
EX-10.28
AMENDED AND RESTATED
MASTER LOAN PURCHASE AND SERVICING AGREEMENT
GREENWICH CAPITAL MARKETS, INC.
Initial Purchaser
MEGO MORTGAGE CORPORATION
Seller and Servicer
MEGO FINANCIAL CORP.
Guarantor
Dated as of October 1, 1996
FHA Loans
and Conventional Loans
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. Agreement to Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 3. Loan Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 4. Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 5. Examination of Loan Files . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 6. Conveyance from Seller to Initial Purchaser . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 7. Representations, Warranties and Covenants; Remedies for Breach . . . . . . . . . . . . . . . . . 16
SECTION 8. Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 9. Closing Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 10. Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 11. Seller's Servicing Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 12. Removal of Loans from Inclusion Under this Agreement Upon a Whole Loan
Transfer or a Pass-Through Transfer on One or More Reconstitution Dates. . . . . . . . . . . . . . 27
SECTION 13. The Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 14. Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 15. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 16. Successor to the Seller. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 17. Transfer of FHA Insurance Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 18. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 19. Mandatory Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 20. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
-i-
<PAGE> 3
<TABLE>
Page
----
<S> <C>
SECTION 21. Severability Clause. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 22. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 23. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 24. Intention of the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 25. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 26. Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 27. Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 28. General Interpretive Principles . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 29. Reproduction of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 30. Further Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 31. Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 32. Guaranty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
EXHIBIT 1A SELLER'S OFFICER'S CERTIFICATE
EXHIBIT 1B GUARANTOR'S OFFICER'S CERTIFICATE
EXHIBIT 2 SECURITY RELEASE CERTIFICATION
EXHIBIT 3 ASSIGNMENT AND CONVEYANCE
EXHIBIT 4 CONTENTS OF EACH LOAN FILE
EXHIBIT 5 [COLLECTION ACCOUNT] [SPREAD ACCOUNT] LETTER AGREEMENT
EXHIBIT 6 SERVICING ADDENDUM
EXHIBIT 7 PRICING LETTER
EXHIBIT 8 REO ACCOUNT LETTER AGREEMENT
EXHIBIT 9A SELLER'S OFFICER'S CERTIFICATE OF CHIEF FINANCIAL OFFICER
EXHIBIT 9B GUARANTOR'S OFFICER'S CERTIFICATE OF GENERAL COUNSEL
EXHIBIT 10 CUSTODIAL AGREEMENT
EXHIBIT 11 WARRANT AGREEMENT
SCHEDULE I LOAN SCHEDULE
</TABLE>
-ii-
<PAGE> 4
AMENDED AND RESTATED
MASTER LOAN PURCHASE AND SERVICING AGREEMENT
This is an AMENDED AND RESTATED MASTER LOAN PURCHASE AND
SERVICING AGREEMENT (the "Agreement"), dated as of October 1, 1996, by and
among Greenwich Capital Markets, Inc., having an office at 600 Steamboat Road,
Greenwich, Connecticut 06830 (the "Initial Purchaser", and the Initial
Purchaser or the Person, if any, to which the Initial Purchaser has assigned
its rights and obligations as permitted hereunder as Purchaser with respect to
a Loan, and each of their respective successors and permitted assigns, the
"Purchaser"), Mego Mortgage Corporation, having an office at 1000 Parkwood
Circle, 5th floor, Atlanta, Georgia 30339 (the "Seller") and Mego Financial
Corp., having an office at 1125 Northeast 125th Street, Suite 206, North Miami,
Florida 33161 (the "Guarantor").
W I T N E S S E T H :
WHEREAS, the Seller desires to sell from time to time to
the Initial Purchaser, and the Initial Purchaser desires to purchase from time
to time from the Seller, Loans (exclusive of the Excess Yield) as described
herein on a servicing-retained basis, which shall be delivered in groups of
whole loans on various dates as provided herein (each a "Closing Date");
WHEREAS, each Loan is either secured by a mortgage, deed of
trust or other security instrument creating a lien on, or was otherwise
originated to finance improvements to, a residential dwelling located in the
jurisdiction indicated on the Loan Schedule for the related Loan Package (or
was originated under any other program which has been approved in advance by
the Purchaser), which is to be annexed hereto on each Closing Date as Schedule
I with a designation for the appropriate Loan Package Number;
WHEREAS, the Initial Purchaser and the Seller wish to
prescribe the manner of the conveyance, servicing and control of the Loans and
the Excess Yield;
WHEREAS, the Seller has agreed to establish and maintain
the Spread Account, and to transfer funds to the Spread Account from time to
time from the Excess Yield pursuant to Subsection 11.16 (Exhibit 6);
WHEREAS, the Seller and Greenwich Capital Financial
Products, Inc. ("GCFP") entered into a Master Loan Purchase and Servicing
Agreement dated as of April 1, 1995 (the "Original Agreement"), as amended by
an Amendment dated February 1, 1996 and an Amendment No. 2 ("Amendment No. 2")
dated as of July 1, 1996;
WHEREAS, the Initial Purchaser, with the consent of the
Seller, has agreed to replace GCFP as a party to this Agreement and to assume
the obligations of GCFP under the Original Agreement, as amended;
WHEREAS, the Initial Purchaser and the Seller desire to
amend and restate the Original Agreement to reflect the terms of Amendment No.
2 and certain additional terms set forth in a letter between the Seller and the
Purchaser dated September 17, 1996; and
<PAGE> 5
-2-
WHEREAS, as an additional inducement to the Initial
Purchaser to so amend and restate the Original Agreement, the Guarantor is
willing to grant certain warrants to the Initial Purchaser and has agreed,
subject to certain conditions, to guarantee the performance of the Seller's
obligations hereunder;
NOW, THEREFORE, in consideration of the premises and mutual
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Initial Purchaser
and the Seller agree as follows:
SECTION 1. Definitions. For purposes of this Agreement
the following capitalized terms shall have the respective meanings set forth
below.
Agreement: This Amended and Restated Master Loan Purchase
and Servicing Agreement including all exhibits, schedules, amendments and
supplements hereto.
Assignment and Conveyance: An assignment and conveyance of
the Loans purchased on a Closing Date in the form annexed hereto as Exhibit 3.
Assignment of Mortgage: With respect to each Mortgage
Loan, an individual assignment of a Mortgage, notice of transfer or equivalent
instrument in recordable form, sufficient under the laws of the jurisdiction
wherein the related Improved Property is located to give record notice of the
sale of the Mortgage to the Purchaser.
Bankruptcy Act: The Bankruptcy Reform Act of 1978, as
amended (Title 11 of the United States Code).
BIF: The Bank Insurance Fund of the FDIC, or any successor
thereto.
Business Day: Any day other than a Saturday or Sunday, or
a day on which banking and savings and loan institutions in the State of
Georgia are authorized or obligated by law or executive order to be closed.
Closing Date: The date or dates on which the Purchaser
from time to time shall purchase from the Seller, and the Seller from time to
time shall sell to the Purchaser, the Loans listed on the related Loan Schedule
with respect to the related Loan Package.
Closing Documents: With respect to any Closing Date, the
documents required pursuant to Section 9.
Code: The Internal Revenue Code of 1986, or any successor
statute thereto.
Collection Account: The separate account or accounts, each
of which shall be an Eligible Account, created and maintained pursuant to this
Agreement, which shall be entitled "Mego Mortgage Corporation, as servicer, in
trust for Greenwich Capital Markets, Inc. as Purchaser under that certain
Amended and Restated Master Loan Purchase and Servicing
<PAGE> 6
-3-
Agreement, dated as of October 1, 1996, among Greenwich Capital Markets, Inc.,
Mego Mortgage Corporation and Mego Financial Corp. for FHA and Conventional
Home Improvement Loans", initially established at The First National Bank of
Boston, or any other bank which has been approved in advance by the Purchaser
and the Seller.
Condemnation Proceeds: With respect to a Mortgage Loan,
all awards, compensation and settlements in respect of a taking of all or part
of an Improved Property by exercise of the power of condemnation or the right
of eminent domain.
Conventional Loan: A home improvement or other type of
loan not subject to an FHA Insurance Contract. All such conventional loans
shall be originated in compliance with underwriting guidelines which have been
approved in advance in writing by the Purchaser.
Custodial Agreement: The agreement, in the form annexed
hereto as Exhibit 10, governing the retention of the originals of each Note,
Mortgage, Assignment of Mortgage and each other Loan Document.
Custodian: The custodian under the Custodial Agreement, or
its successor in interest or permitted assign, or any successor to the
Custodian under the Custodial Agreement, as therein provided.
Cut-off Date: With respect to a Closing Date, the close of
business on the date selected by the Seller, which shall appear on the Pricing
Letter and Loan Schedule and which shall be no later than 6 days prior to, and
no earlier than 30 days prior to, such Closing Date.
Deleted Loan: A Loan replaced or to be replaced by a
Qualified Substitute Loan.
Delinquent Loan: As to any date of determination, a Loan
that is more than 60 days contractually delinquent in payment of scheduled
principal or interest as of such date and that has not been subject to a
Purchaser Disposition.
Determination Date: With respect to each Distribution
Date, the last Business Day of the preceding calendar month.
Distribution Date: The twentieth (20th) day of each month,
commencing for any Loan Package on the twentieth (20th) day of the month next
following the month in which the related Cut-off Date occurs, or if such
twentieth (20th) day is not a Business Day, the first Business Day immediately
following such twentieth (20th) day.
Due Date: The day of the month on which the Monthly
Payment is due on a Loan, exclusive of any days of grace.
Due Period: With respect to each Distribution Date, the
calendar month preceding the month of the Distribution Date.
<PAGE> 7
-4-
Eligible Account: Either (i) an account or accounts
maintained with a federal or state chartered depository institution or trust
company the short-term unsecured debt obligations of which (or, in the case of
a depository institution or trust company that is the principal subsidiary of a
holding company, the short-term unsecured debt obligations of such holding
company) are rated A-2 or higher by S&P or Prime-1 by Moody's (or a comparable
rating if another rating agency is specified by the Initial Purchaser by
written notice to the Seller) at the time any amounts are held on deposit
therein, (ii) an account or accounts the deposits in which are fully insured by
the FDIC or (iii) a trust account or accounts maintained with a federal or
state chartered depository institution or trust company acting in its fiduciary
capacity. Eligible Accounts may bear interest.
Event of Default: Any one of the events enumerated in
Subsection 14.01.
Excess Yield: When used with respect to distributions on a
Distribution Date, with respect to a Loan, an amount equal to the product of
the related Excess Yield Rate and the stated principal balance of the Loan,
calculated on the same principal balance and for the same period as interest
and pass-through interest on the related Loan at the Loan Interest Rate was
calculated.
Excess Yield Holder: Mego Mortgage Corporation and its successors and assigns.
Excess Yield Rate: With respect to each Loan, a per annum
rate of interest equal to: (a) the related Loan Interest Rate minus (b) the sum
of (i) the Pass-Through Rate and (ii) the Servicing Fee Rate.
FDIC: The Federal Deposit Insurance Corporation, or any
successor thereto.
FHA: The Federal Housing Administration, an agency within
the United States Department of Housing and Urban Development, or any successor
thereto and including the Federal Housing Commissioner and the Secretary of
Housing and Urban Development where appropriate under the FHA Regulations.
FHA Approved Mortgagee: A financial institution which
holds a valid Title I contract of insurance and continues to be approved by FHA
under 24 CFR part 202 to originate, purchase, service, and/or sell loans
insured by FHA.
FHA Insurance Contract: The contractual obligation of FHA
respecting the insurance of the FHA Loans pursuant to Title I of the National
Housing Act, as amended.
FHA Insurance Proceeds: With respect to each FHA Loan, the
proceeds of the FHA Insurance Contract.
FHA Insurance Reserves: The insurance coverage reserve
account established for the Seller by the FHA with respect to the FHA Loans in
the Seller's portfolio.
<PAGE> 8
-5-
FHA Loan: A home improvement loan subject to an FHA
Insurance Contract.
FHA Regulations: Regulations promulgated by HUD under the
National Housing Act, codified in 24 Code of Federal Regulations, and other HUD
issuances relating to FHA loans, including the related handbooks, circulars,
notices and mortgagee letters.
Final Closing Date: The Closing Date with respect to the
purchase and sale of the final Loan Package purchased hereunder, which date
shall be the earlier of (i) September 30, 2001 and (ii) the Closing Date on
which the aggregate unpaid principal balance of Loans purchased by the
Purchaser pursuant to this Agreement from and including the date hereof through
and including such Closing Date first equals at least $2 billion
($2,000,000,000).
Final Recovery Determination: With respect to any
defaulted Loan or any REO Property (other than a Loan or REO Property purchased
by the Seller pursuant to this Agreement), a determination made by the Seller
that all Insurance Proceeds, Liquidation Proceeds and other payments or
recoveries which the Seller, in its reasonable good faith judgment, expects to
be finally recoverable in respect thereof have been so recovered. The Seller
shall maintain records, prepared by a servicing officer of the Seller, of each
Final Recovery Determination.
HUD: The United States Department of Housing and Urban
Development or any successor thereto.
Impound Payments: Any payments in respect of FHA insurance
premiums required to be made by an Obligor pursuant to a rider to the related
Note.
Improved Property: The Obligor's real property improvements
which are financed by a Loan which, in the case of a Mortgage Loan, secures
repayment of a related Note, consisting of a fee simple interest in a single
parcel of real property improved by a Residential Dwelling.
Initial Closing Date: The Closing Date on which the Initial
Purchaser purchases and the Seller sells the first Loan Package hereunder.
Initial Purchaser: Greenwich Capital Markets, Inc. or any
successor.
Insurance Proceeds: With respect to each Loan, the proceeds
of any insurance policies insuring the Loan or the related Improved Property,
including, in the case of each FHA Loan, the FHA Insurance Proceeds.
Liquidation Event: With respect to any Loan or REO
Property, either of the following events: (i) a Final Recovery Determination
is made as to such Loan or REO Property; or (ii) such Loan or REO Property is
removed from this Agreement by reason of its being
<PAGE> 9
-6-
repurchased, sold or replaced pursuant to or as contemplated by any provision
of this Agreement.
Liquidation Proceeds: Amounts, other than Insurance
Proceeds and Condemnation Proceeds, received in connection with the liquidation
of a defaulted Loan through trustee's sale, foreclosure sale or otherwise,
other than amounts received following the acquisition of REO Property.
Loan: Each FHA Loan and each Conventional Loan sold,
assigned and transferred to the Purchaser pursuant to this Agreement and the
related Pricing Letter, and identified on the Loan Schedule annexed to the
respective Pricing Letter on such Closing Date, which Loan includes without
limitation the Loan File, the Monthly Payments, Principal Prepayments,
Liquidation Proceeds, Condemnation Proceeds, Insurance Proceeds, any REO
Disposition proceeds, and all other rights, benefits, proceeds and obligations
arising from or in connection with such Loan.
Loan Documents: The following documents pertaining to any
Loan:
(a) the original Note bearing all
intervening endorsements to the Seller and endorsed "Pay to the order
of _____________, without recourse" and signed in the name of the
Seller by an officer. To the extent that there is no space on the
face of the Notes for endorsements, the endorsement may be contained
on an allonge, if state law so allows. If the Loan was acquired by
the Seller in a merger, the endorsement must be by "[Seller],
successor by merger to [name of predecessor]". If the Loan was
acquired or originated by the Seller while doing business under
another name, the endorsement must be by "[Seller], formerly known as
[previous name]";
(b) with respect to each Mortgage Loan,
the original Assignment of Mortgage for each Loan, in form and
substance acceptable for recording executed by the Seller with the
assignee's name and identifying number in blank. If the Loan was
acquired by the Seller in a Merger, the Assignment of Mortgage must be
made by "[Seller], successor by merger to [name of predecessor]". If
the Loan was acquired or originated by the Seller while doing business
under another name, the Assignment of Mortgage must be by "[Seller],
formerly known as [previous name]";
(c) with respect to each Mortgage Loan,
the original Mortgage with evidence of recording thereon. If in
connection with any Loan, the Seller cannot deliver or cause to be
delivered the original Mortgage with evidence of recording thereon
prior to the related Closing Date because of a delay caused by the
public recording office where such Mortgage has been delivered for
recordation or because such Mortgage has been lost or because such
public recording office retains the original recorded Mortgage, the
Seller shall deliver or cause to be delivered to the Initial
Purchaser, a photocopy of such Mortgage, together with (i) in the case
of a delay caused by the public recording office, an Officer's
Certificate of the Seller stating that such Mortgage has been
delivered to the appropriate public recording office for recordation
and that the original recorded
<PAGE> 10
-7-
Mortgage or a copy of such Mortgage certified by such public recording
office to be a true and complete copy of the original recorded
Mortgage will be promptly delivered to the Initial Purchaser upon
receipt thereof by the Seller; or (ii) in the case of a Mortgage where
a public recording office retains the original recorded Mortgage or in
the case where a Mortgage is lost after recordation in a public
recording office, a copy of such Mortgage with the recording
information thereon certified by such public recording office to be a
true and complete copy of the original recorded Mortgage;
(d) the originals of all assumption,
modification, consolidation or extension agreements, with evidence of
recording thereon, if any;
(e) with respect to each Mortgage Loan,
the originals of all intervening Assignments of Mortgage with evidence
of recording thereon, or if any such intervening Assignment of
Mortgage has not been returned from the applicable recording office or
has been lost or if such public recording office retains the original
recorded Assignments of Mortgage, the Seller shall deliver or cause to
be delivered to the Initial Purchaser, a photocopy of such intervening
Assignment of Mortgage, together with (i) in the case of a delay
caused by the public recording office, an Officer's Certificate of the
Seller stating that such intervening Assignment of Mortgage has been
delivered to the appropriate public recording office for recordation
and that such original recorded intervening Assignment of Mortgage or
a copy of such intervening Assignment of Mortgage certified by the
appropriate public recording office to be a true and complete copy of
the original recorded intervening Assignment of Mortgage will be
promptly delivered to the Initial Purchaser upon receipt thereof by
the Seller; or (ii) in the case of an intervening Assignment of
Mortgage where a public recording office retains the original recorded
intervening Assignment of Mortgage or in the case where an intervening
Assignment of Mortgage is lost after recordation in a public recording
office, a copy of such intervening Assignment of Mortgage with
recording information thereon certified by such public recording
office to be a true and complete copy of the original recorded
intervening Assignment of Mortgage; and
(f) any other documents to be retained
by the Custodian as may be specified in the Custodial Agreement.
Loan File: The items pertaining to a particular Loan
referred to in Exhibit 4 annexed hereto, and any additional documents required
to be added to the Loan File pursuant to this Agreement.
Loan Interest Rate: With respect to each Loan, the annual
rate at which interest accrues on such Loan in accordance with the provisions
of the related Note, which rate shall be the rate set forth in the related Loan
Schedule.
Loan Package: The Loans listed on a Loan Schedule
delivered to the Purchaser at least five (5) Business Days prior to the related
Closing Date and attached as Schedule I to the related Pricing Letter on the
related Closing Date.
<PAGE> 11
-8-
Loan Package Number: The number, if any, assigned to a
Loan Package as set forth in the related Pricing Letter (for example,
"1995-4").
Loan Schedule: With respect to each Loan Package, the
schedule of Loans to be annexed as Schedule I (or a supplement thereto) to the
related Pricing Letter on each Closing Date for the Loan Package delivered on
such Closing Date in both hard copy and magnetic form, such schedule setting
forth the following information with respect to each Loan in the Loan Package:
(1) the Seller's Loan identifying number; (2) the Obligor's first and last
name; (3) the street address of the Improved Property including the state and
zip code; (4) the original months to maturity; (5) the original date of the
Mortgage; (6) the Loan Interest Rate; (7) the date on which the first Monthly
Payment was due on the Loan; (8) the stated maturity date; (9) the amount of
the Monthly Payment; (10) the last Due Date on which a Monthly Payment was
actually applied to the unpaid principal balance; (11) the original principal
amount of the Loan; (12) the actual unpaid principal balance of the Loan as of
the Cut-off Date; (13) the Servicing Fee Rate; (14) a code indicating whether
Impound Payments are applicable to the Loan; and (15) the name of any dealer,
correspondent or contractor associated with such Loan and the identification
number which the Seller has assigned to such dealer, correspondent or
contractor. With respect to the Loan Package in the aggregate, the Loan
Schedule shall set forth the following information, as of the related Cut-off
Date: (1) the number of Loans; (2) the aggregate actual unpaid principal
balance of the Loans; (3) the weighted average Loan Interest Rate of the Loans;
and (4) the weighted average maturity of the Loans. Schedule I hereto shall be
supplemented as of each Closing Date to reflect the addition of the Loan
Schedule with respect to the related Loan Package.
Monthly Advance: With respect to any Loan, the aggregate of
the advances made by the Seller on any Distribution Date pursuant to Subsection
11.15.
Monthly Payment: With respect to any Loan, the scheduled
combined payment of principal and interest payable by an Obligor under the
related Note on each Due Date.
Moody's: Moody's Investors Service, Inc. or its successor
in interest.
Mortgage: With respect to each Mortgage Loan, the mortgage,
deed of trust or other instrument creating a lien on the Improved Property
securing the Note.
Mortgage Loan: A Loan secured by a Mortgage.
Nonrecoverable Advance: Any Monthly Advance or Servicing
Advance previously made or proposed to be made in respect of a Loan or REO
Property that, in the good faith business judgment of the Seller, will not, or,
in the case of a proposed Monthly Advance or Servicing Advance, would not be,
ultimately recoverable from related late payments, Insurance Proceeds or
Liquidation Proceeds on such Loan or REO Property as provided herein.
Note: The original executed note or other evidence of the
Loan indebtedness of an Obligor.
<PAGE> 12
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Noteholder: The holder of the Note and, if applicable, the
related Mortgage.
Obligor: The obligor on a Note.
Officer's Certificate: A certificate signed by either the
President, a Vice President, the Secretary or one of the Assistant Treasurers
or Assistant Secretaries of the Person on behalf of whom such certificate is
being delivered.
Opinion of Counsel: A written opinion of counsel, who may
be salaried counsel for the Person on behalf of whom the opinion is being
given, reasonably acceptable to each Person to whom such opinion is addressed.
Pass-Through Rate: With respect to any Loan (or any
related REO Property), as of any date of determination, the per annum rate of
interest to be received by the Purchaser in connection with the related Loan
Package, as set forth in the related Pricing Letter.
Pass-Through Transfer: The sale or transfer of some or all
of the Loans by the Purchaser to a trust to be formed as part of a publicly
issued or privately placed mortgage-backed securities transaction.
Permitted Investments: One or more of the following:
(i) obligations of, or guaranteed as to principal and interest
by, the United States or any agency or instrumentality thereof, when such
obligations are backed by the full faith and credit of the United States;
(ii) repurchase agreements on obligations specified in clause
(i) maturing not more than one month from the date of acquisition thereof;
(iii) federal funds, certificates of deposit, demand deposits,
time deposits and bankers' acceptances (which shall each have an original
maturity of not more than ninety (90) days and, in the case of bankers'
acceptances, shall in no event have an original maturity of more than 365 days
or a remaining maturity of more than thirty (30) days denominated in United
States dollars of any U.S. depository institution or trust company incorporated
under the laws of the United States or any state thereof or of any domestic
branch of a foreign depository institution or trust company;
(iv) commercial paper (having original maturities of not more
than 270 days) of any corporation incorporated under the laws of the United
States or any state thereof rated investment grade or better by S&P or Moody's;
and
(v) a money market fund or a qualified investment fund.
<PAGE> 13
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Person: An individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization
or government or any agency or political subdivision thereof.
Pricing Letter: With respect to a Loan Package, a letter
agreement between the Initial Purchaser and the Seller in the form of Exhibit
7.
Principal Prepayment: Any payment or other recovery of
principal on a Loan which is received in advance of its scheduled Due Date
which is not accompanied by an amount of interest representing scheduled
interest due on any date or dates in any month or months subsequent to the
month of prepayment.
Purchase Price: The price paid on the related Closing Date
by the Purchaser to the Seller pursuant to the related Pricing Letter in
exchange for the Loans purchased on such Closing Date as calculated as provided
in Section 4.
Purchase Price Percentage: With respect to the Loans
purchased on any Closing Date, the percentage of par specified in the related
Pricing Letter for the type of Loans in the related Loan Package (which
percentage shall be a function of the rate required to produce a par
transaction upon securitization). The Purchase Price Percentage for the Initial
Closing Date shall be 103% for FHA Loans and 100% for Conventional Loans.
Purchaser Disposition: With respect to any Loan purchased
hereunder, the resale by the Purchaser or the transfer into a trust by the
Purchaser for the purpose of a Pass-Through Transfer or Whole Loan Transfer.
Qualified Substitute Loan: A loan substituted for a
Deleted Loan pursuant to the terms of this Agreement which must, on the date of
such substitution, (i) have an outstanding principal balance, not in excess of
the Stated Principal Balance of the Deleted Loan as of the date on which the
substitution occurs, (ii) have a Loan Interest Rate not less than (and not more
than one percentage point in excess of) the Loan Interest Rate of the Deleted
Loan, (iii) have a Pass-Through Rate identical to the Pass-Through Rate of the
Deleted Loan, (iv) have a remaining term to maturity not greater than (and not
more than one year less than) that of the Deleted Loan and (v) conform to each
representation and warranty set forth in Subsection 7.02 of this Agreement. In
the event that one or more loans are substituted for one or more Deleted Loans,
the amounts described in clause (i) hereof shall be determined on the basis of
aggregate principal balances, the Loan Interest Rates described in clause (ii)
hereof shall be determined on the basis of weighted average Loan Interest
Rates, the Pass-Through Rates described in clause (iii) hereof shall be
satisfied as to each such loan, the terms described in clause (iv) shall be
determined on the basis of weighted average remaining terms to maturity, and,
except to the extent otherwise provided in this sentence, the representations
and warranties described in clause (v) hereof must be satisfied as to each
Qualified Substitute Loan or in the aggregate, as the case may be.
<PAGE> 14
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Realized Loss: With respect to each Loan as to which a
Final Recovery Determination has been made, an amount (not less than zero) as
of the date of the Final Recovery Determination equal to:
(i) the Stated Principal Balance of the Loan as of the
date of the Final Recovery Determination; plus
(ii) interest on such Stated Principal Balance at the
related Pass-Through Rate from the Due Date as to which interest was last paid
by the Obligor or advanced by the Seller up to the date on which the Final
Recovery Determination was made; minus
(iii) the amount of all Insurance Proceeds (including
related FHA Insurance Proceeds), Condemnation Proceeds and Liquidation
Proceeds, if any, received during the month in which the Final Recovery
Determination was made, net of all amounts payable or reimbursable therefrom
with respect to such Loan for unpaid Servicing Fees and unreimbursed advances
made pursuant to Subsections 11.15 or 11.03(b) of the Servicing Addendum, or
unreimbursed Servicing Advances.
With respect to each REO Property sold or otherwise disposed of, an amount (not
less than zero) as of the date on which such REO Property was acquired pursuant
to Subsection 11.08 equal to:
(i) the Stated Principal Balance of the related Loan as of
the date on which such REO Property was acquired by the Seller on behalf of the
Purchaser; plus
(ii) interest on such Stated Principal Balance at the
Pass-Through Rate for the related Loan from the Due Date as to which interest
was last paid by the Obligor or advanced by the Seller up to the date on which
such REO Property was sold or otherwise disposed of; minus
(iii) any amounts previously distributed to the Purchaser
in respect of such REO Property pursuant to Subsection 11.08; minus
(iv) any proceeds derived from the disposition of such REO
Property, net of all amounts payable or reimbursable therefrom with respect to
such REO Property or the related Loan for unpaid Servicing Fees and
unreimbursed advances made pursuant to Subsection 11.15 or 11.03(b) of the
Servicing Addendum, or unreimbursed Servicing Advances.
Reconstitution Agreement: The agreement or agreements
entered into by the Seller and the Purchaser and/or certain third parties on
the Reconstitution Date or Dates with respect to any or all of the Loans
serviced hereunder, in connection with a Whole Loan Transfer or a Pass-Through
Transfer as provided in Section 12 hereof.
Reconstitution Date: With respect to any Loan serviced
under this Agreement, the date on which such Loan is removed from this
Agreement and reconstituted as part of a Whole Loan Transfer or Pass-Through
Transfer pursuant to Section 12 hereof.
<PAGE> 15
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Record Date: With respect to each Distribution Date, the
last Business Day of the month immediately preceding the month in which such
Distribution Date occurs.
REO Account: The separate trust account or accounts created
and maintained pursuant to this Agreement which shall be entitled "Mego
Mortgage Corporation in trust for Greenwich Capital Markets, Inc. as Purchaser
under that certain Amended and Restated Master Loan Purchase and Servicing
Agreement, dated as of October 1, 1996, among Greenwich Capital Markets, Inc.,
Mego Mortgage Corporation and Mego Financial Corp. for FHA and Conventional
Home Improvement Loans".
REO Disposition: The final sale by the Seller of any REO
Property.
REO Property: An Improved Property acquired as a result of
the liquidation of a Mortgage Loan.
Repurchase Price: With respect to any Loan, a price equal
to (i) the Stated Principal Balance of such Loan plus (ii) interest on such
Stated Principal Balance at the Pass-Through Rate from and including the last
Due Date through which interest has been paid by or on behalf of the Obligor
(including, but not limited to, a Monthly Advance made by the Seller) to the
first day of the month following the date of repurchase, less amounts received
in respect of such repurchased Loan which are being held in the Collection
Account for distribution to the Purchaser in connection with such Loan.
Residential Dwelling: Any one of the following: (i) a
detached one-family dwelling, (ii) a detached two- to four-family dwelling,
(iii) a one-family dwelling unit in a condominium project, or (iv) a detached
one-family dwelling in a planned unit development, none of which is a
co-operative or a mobile or manufactured home which is not real property under
applicable state law.
SAIF: The Savings Association Insurance Fund, or any
successor thereto.
Seller Public Offering: The initial public offering of
debt and equity securities of the Seller, proposed to be commenced in or about
November 1996.
Seriously Delinquent Loan: As to any date of determination,
a Loan that is more than 150 days contractually delinquent in payment of
scheduled principal or interest as of such date and that has not been subject
to a Purchaser Disposition.
Servicing Addendum: The terms and conditions attached
hereto as Exhibit 6 which will govern the servicing of the Loans by the Seller.
Servicing Advances: All customary, reasonable and
necessary "out-of-pocket" costs and expenses incurred by the Seller in the
performance of its servicing obligations, including, but not limited to, the
cost of (i) preservation, restoration and repair of an Improved
<PAGE> 16
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Property, (ii) any enforcement or judicial proceedings with respect to a Loan,
including foreclosure actions and (iii) the management and liquidation of REO
Property.
Servicing Fee: With respect to any Loan, the fee payable to
the Seller as servicer for each calendar month, in arrears, which is equal to
one-twelfth of the product of the Servicing Fee Rate and the unpaid principal
balance of the related Loan calculated on the same balance and for the same
period as the related interest at the Loan Interest Rate is calculated. The
right of the Seller to receive the Servicing Fee is limited to, and payable
solely from, the interest portion of related Monthly Payments collected by the
Seller and otherwise as provided in Subsection 11.03.
Servicing Fee Rate: One and one-quarter percent (1.25%)
per annum.
Servicing File: With respect to each Loan, the file
retained by the Seller consisting of originals of all documents in the Loan
File which are not delivered to the Purchaser or Custodian and copies of the
Loan Documents.
S&P: Standard & Poor's Ratings Group or its successor in
interest.
Spread Account: The account or accounts maintained pursuant
to Subsection 11.16, each of which shall be an Eligible Account.
Spread Account Depository: The First National Bank of
Boston or any successor Spread Account Depository under this Agreement which
has been approved in advance by the Purchaser and the Seller.
Stated Principal Balance: As to each Loan as of any date of
determination, (i) the unpaid principal balance of the Loan as of the related
Cut-off Date after giving effect to payments of principal received on or before
such Cut-off Date including any principal prepayments received on or before the
Cut-off Date minus (ii) all amounts previously distributed to the Purchaser
with respect to the related Loan representing payments or recoveries of
principal.
Whole Loan Transfer: Any sale or transfer of some or all
of the Loans by the Purchaser to a third party in whole loan or participation
format, which sale or transfer is not a Pass-Through Transfer. Any actual
transfer of whole Loans that are FHA Loans shall be made only to an FHA
Approved Mortgagee.
SECTION 2. Agreement to Purchase; Required
Securitizations. (a) Subject to the terms and conditions set forth in this
Agreement, the Seller shall agree to sell, and the Purchaser shall agree to
purchase, from time to time (and as frequently as weekly, at the Seller's
request) on or before the Final Closing Date, Loans (exclusive of the related
Excess Yield) having an aggregate principal balance on the related Cut-off Date
in an amount as set forth in the related Pricing Letter, or in such other
amount as agreed to by the Purchaser and the Seller as evidenced by the actual
aggregate principal balance of the Loans accepted by the
<PAGE> 17
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Purchaser on the related Closing Date (any such agreement to be evidenced by a
Pricing Letter); provided, however, that (i) the aggregate principal balance of
Loans to be sold by the Seller on any given Closing Date shall be at least $5
million ($5,000,000), (ii) at any time, the aggregate principal balance of
Loans sold to the Purchaser (excluding all Loans resold or transferred by the
Purchaser pursuant to a Purchaser Disposition prior to such time) shall not
exceed $100 million ($100,000,000) (such limit (as amended from time to time,
the "Portfolio Limit") to be reassessed on a quarterly basis), (iii) the
aggregate principal balance of Loans that the Purchaser is committed to
purchase from the Seller pursuant to this Agreement shall be $2 billion
($2,000,000,000) and (iv) the percentage of Conventional Loans owned by the
Purchaser at any one time and acquired pursuant to this Agreement shall not
exceed 65% of the total amount of Loans owned by the Purchaser at such time and
acquired pursuant to this Agreement.
(b) As more fully described in Section 12, the Seller
acknowledges that it shall cooperate fully with the Purchaser and any
prospective purchaser with respect to all customary procedures reasonably
appropriate in completing a Purchaser Disposition. The Seller acknowledges
that it is the Purchaser's intention to complete such Purchaser Dispositions
once every three months commencing no later than December 31, 1996. The Seller
shall use its best efforts to assist the Purchaser in selling to third parties
pursuant to one or more Whole Loan Transfers any and all Loans purchased by the
Purchaser that, for any reason whatsoever (including without limitation the
delinquency status of such Loans, low Loan Interest Rates associated with such
Loans, or the ineligibility of such Loans to be assets of a "real estate
mortgage investment conduit"), are not resold or transferred by the Purchaser
pursuant to a Pass-Through Transfer.
(c) The Seller acknowledges that the Initial Purchaser may
enter into a purchase and sale agreement with GCFP (the "Affiliate Purchase
Agreement") pursuant to which GCFP will agree to purchase Loans from the
Initial Purchaser to the same extent the Initial Purchaser is obligated to
purchase Loans from the Seller hereunder. The Seller agrees that during the
term of the Affiliate Purchase Agreement, to the extent GCFP agrees to purchase
a Loan Package directly from the Seller, the Seller shall deal directly with
GCFP and shall look only to GCFP for performance of such purchase obligations.
The Initial Purchaser acknowledges that the Seller shall be obligated to deal
with GCFP on the sale of any Loan Package only to the extent GCFP's obligations
with respect to such Loan Package are identical to the Initial Purchaser's
corresponding obligations hereunder. In addition, the Initial Purchaser
acknowledges that notwithstanding any obligations assumed by GCFP with respect
to a particular Loan Package, the Initial Purchaser shall remain obligated with
respect to future purchases of Loans hereunder.
(d) The Initial Purchaser hereby assumes all of the
obligations of GCFP under the Original Agreement, as amended, as though it were
a party signatory thereto.
SECTION 3. Loan Schedules. The Seller shall deliver the
Loan Schedule for a Loan Package to be purchased on a particular Closing Date
to the Purchaser at least five (5) Business Days prior to the related Closing
Date.
<PAGE> 18
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SECTION 4. Purchase Price; Fee to Purchaser. (a) On
each Closing Date, the Purchaser shall pay to the Seller the amount (the
"Purchase Price") stated in the related Pricing Letter, which amount shall be
equal to the aggregate of the percentage set forth in such Pricing Letter for
each Loan to be purchased multiplied by the Cut-off Date principal balance of
each such Loan, plus accrued interest on each such principal balance at the
Pass-Through Rate from (and including) the day following the date through which
interest has, as of the Cut-off Date, been paid by the Obligor to (but not
including) the related Closing Date for such Loan. In no instance shall the
Purchaser pay more than thirty days of accrued interest on any one Loan.
The Purchaser shall own and be entitled to receive with
respect to each Loan purchased, (1) all scheduled principal received after the
related Cut-off Date, (2) all other recoveries of principal collected after the
related Cut-off Date, and (3) all payments received after the Cut-off Date of
interest on the Loans at the Pass-Through Rate.
The Purchaser shall pay to the Seller a Profit Sharing
Payment (as defined in the related Pricing Letter).
The "Cut-off Date Balance" of a Loan will reflect the
application of all payments of principal received on or before the Cut-off
Date.
(b) Concurrently with the Initial Purchaser's execution of
this Agreement, (i) the Seller shall pay the Initial Purchaser a one-time cash
fee of $150,000 and (ii) the Guarantor shall grant the Initial Purchaser
warrants to purchase one million (1,000,000) shares of voting common stock of
the Guarantor, as set forth in the form of Warrant Agreement attached hereto as
Exhibit 11.
SECTION 5. Examination of Loan Files. The Initial
Purchaser has the right to underwrite the Loans and review the Loan Files prior
to the related Closing Date. If the Initial Purchaser makes such examination
prior to the related Closing Date and identifies any Loans that do not conform
to the representations and warranties in Subsection 7.02, such Loans may, at
the Initial Purchaser's option, be rejected for purchase by the Initial
Purchaser. If not purchased by the Initial Purchaser, such Loans shall be
deleted from the related Loan Schedule. The Initial Purchaser may, at its
option and without notice to the Seller, purchase all or part of any Loan
Package without conducting any partial or complete examination. The fact that
the Initial Purchaser has conducted or has determined not to conduct any
partial or complete examination of the Loan Files shall not affect the Initial
Purchaser's (or any of its successors' or assigns') rights to demand repurchase
or other relief or remedy provided for in this Agreement.
<PAGE> 19
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SECTION 6. Conveyance from Seller to Initial
Purchaser.
Subsection 6.01. Conveyance of Loans; Possession of
Servicing Files.
The Seller, simultaneously with the payment of the Purchase
Price, shall execute and deliver to the Initial Purchaser an Assignment and
Conveyance with respect to the related Loan Package in the form attached hereto
as Exhibit 3. The Servicing File retained by the Seller with respect to each
Loan pursuant to this Agreement shall be appropriately identified in the
Seller's computer system to reflect clearly the sale of such related Loan to
the Purchaser. The Seller shall release from its custody the contents of any
Servicing File retained by it only in accordance with this Agreement, except
when such release is required in connection with a repurchase of any such Loan
pursuant to Subsection 7.03.
Subsection 6.02. Books and Records.
Record title to each Note and, with respect to each
Mortgage Loan, the related Mortgage, as of the related Closing Date shall be in
the name of the Seller pending recordation of the Assignments of Mortgage, and
thereafter in the name of one or more designees of the Purchaser, as the
Purchaser shall designate. Notwithstanding the foregoing, beneficial ownership
of each Note and, with respect to each Mortgage Loan, the related Mortgage, in
each case exclusive of the Excess Yield, shall be vested solely in the
Purchaser. All rights arising out of the Loans including, but not limited to,
all funds received by the Seller after the related Cut-off Date on or in
connection with a Loan as provided in Section 4 shall be vested in the
Purchaser (exclusive of the Excess Yield); provided, however, that all such
funds received on or in connection with a Loan as provided in Section 4 shall
be received and held by the Seller in trust for the benefit of the Purchaser as
the owner of the Loans pursuant to the terms of this Agreement.
It is the express intention of the parties hereto that the
transactions contemplated by this Agreement be, and be construed as, a sale of
the Loans, exclusive of the Excess Yield by the Seller and not a pledge of the
Loans by the Seller to the Purchaser to secure a debt or other obligation of
the Seller. However, in the event that the Loans are held to be property of
the Seller, or if for any reason this Agreement is held or deemed to create a
security interest in the Loans then it is intended that (a) this Agreement
shall also be deemed to be a security agreement within the meaning of the
Uniform Commercial Code of any applicable jurisdiction; (b) to the extent
allowed under FHA Title I rules and regulations, in order to secure the
obligations of the Seller to the Purchaser hereunder with respect to the FHA
Loans, the Seller hereby shall be deemed to have granted to the Purchaser a
security interest in all of the Seller's right (including the power to convey
title thereto), title and interest, whether now owned or hereafter acquired, in
and to (A) the FHA Loans; (B) the FHA Insurance Reserves, all of the Seller's
other contractual rights against the FHA in relation to the Loans, and all
documents in the possession or under the control of the Seller with respect
thereto; (C) all amounts payable pursuant to the FHA Insurance Contract in
accordance with the terms thereof; and (D) any and all general intangibles
consisting of, arising from or relating to any of the foregoing, and all
proceeds of the conversion, voluntary or involuntary, of the foregoing into
cash, instruments,
<PAGE> 20
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securities or other property, including, without limitation, all amounts from
time to time held or invested in the Spread Account, any REO Account or the
Collection Accounts, whether in the form of cash, instruments, securities or
other property; (c) the possession by the Purchaser of the related Notes or
such other items of property as constitute instruments, money, negotiable
documents or chattel paper shall be deemed to be "possession by the secured
party", or possession by a purchaser or a person designated by such secured
party, for purposes of perfecting the security interest pursuant to the Uniform
Commercial Code of any applicable jurisdiction (including, without limitation,
Section 9-305, 8-313 or 8-321 thereof); (d) notifications to persons holding
such property, and acknowledgments, receipts or confirmations from persons
holding such property, shall be deemed notifications to, or acknowledgments,
receipts or confirmations from, financial intermediaries, bailees or agents (as
applicable) of the Purchaser for the purpose of perfecting such security
interest under applicable law; and (e) for purposes of the Agreement and the
Pricing Letter, "Loan Documents" shall include UCC-1 financing statements in
form acceptable for filing in the applicable jurisdictions in which are located
the principal place of business and the executive offices of the Seller and
executed by the Seller in favor of the Purchaser.
Subsection 6.03. Delivery of Loan Documents.
The Seller shall from time to time in connection with each
Closing Date, on or prior to such Closing Date, deliver and release to the
Custodian those Loan Documents as required by this Agreement or the Custodial
Agreement with respect to each Loan to be purchased and sold on the related
Closing Date and set forth on the related Loan Schedule.
The Custodian shall certify its receipt of all such Loan
Documents required to be delivered pursuant to the Custodial Agreement for the
related Closing Date, as evidenced by the Trust Receipt and Initial
Certification or Trust Receipt and Final Certification, as the case may be, of
the Custodian in the forms annexed to the Custodial Agreement. The fees and
expenses of the Custodian shall be paid by the Seller pursuant to the terms of
the Custodial Agreement.
The Seller shall forward to the Custodian original
documents evidencing an assumption, modification, consolidation or extension of
any Loan entered into in accordance with this Agreement within two (2) weeks of
their execution, provided, however, that the Seller shall provide the Custodian
with a certified true copy of any such document submitted for recordation
within two (2) weeks of its execution, and shall provide the original of any
document submitted for recordation or a copy of such document certified by the
appropriate public recording office to be a true and complete copy of the
original within ninety (90) days of its submission for recordation.
<PAGE> 21
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Subsection 6.04. Excess Yield.
Notwithstanding any other provisions of this Agreement, (i)
the sale and delivery of the Loans to the Initial Purchaser is exclusive of the
Excess Yield Holder's right, title and interest in, to, and under the Excess
Yield and (ii) subject to Subsection 11.16 of the Servicing Addendum, the right
of the Excess Yield Holder to the Excess Yield with respect to each Loan shall
be absolute and unconditional, and shall survive any Event of Default by the
Seller, any termination of the Seller as servicer hereunder and any other
event.
It is understood and intended, and is expressly covenanted
by the Purchaser and the Seller as the Excess Yield Holder, each to the other,
that neither the Excess Yield Holder nor the Purchaser shall have any right in
any manner whatsoever by virtue of the provisions of this Agreement (i) to
affect, disturb or prejudice the rights of the other, (ii) to seek to obtain
priority over or preference to the other with respect to their respective
interests in the Loans, except as provided in Subsection 11.16 of the Servicing
Addendum, or (iii) to enforce any right under this Agreement, except in the
manner herein provided and as the respective interests of the Purchaser and the
Excess Yield Holder are provided for pursuant to this Agreement.
The Excess Yield Holder and the Purchaser each agree to
execute and deliver from time to time such other instruments and documents as
may be reasonably requested by the other to further effectuate the provisions
of this Subsection 6.04.
SECTION 7. Representations, Warranties and
Covenants; Remedies for Breach.
Subsection 7.01. Representations and Warranties
Respecting the Seller.
The Seller represents, warrants and covenants to the
Purchaser as of the Initial Closing Date and each subsequent Closing Date or as
of such date specifically provided herein or in the applicable Assignment and
Conveyance:
(i) The Seller is duly organized, validly existing and in
good standing under the laws of Delaware and is and will remain in compliance
with the laws of each state in which any Improved Property is located to the
extent necessary to ensure the enforceability of each Loan and the servicing of
the Loan in accordance with the terms of this Agreement;
(ii) The Seller has the full power and authority to hold
each Loan, to sell each Loan, and to execute, deliver and perform, and to enter
into and consummate, all transactions contemplated by this Agreement. The
Seller has duly authorized the execution, delivery and performance of this
Agreement, has duly executed and delivered this Agreement, and this Agreement,
assuming due authorization, execution and delivery by the Purchaser and the
Guarantor, constitutes a legal, valid and binding obligation of the Seller
enforceable against it in accordance with its terms except as the
enforceability thereof may be limited by bankruptcy, insolvency or
reorganization;
<PAGE> 22
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(iii) The execution and delivery of this Agreement by the
Seller and the performance of and compliance with the terms of this Agreement
will not violate the Seller's certificate of incorporation or by-laws or
constitute a default under or result in a breach or acceleration of, any
material contract, agreement or other instrument to which the Seller is a party
or which may be applicable to the Seller or its assets;
(iv) The Seller is not in violation of, and the execution
and delivery of this Agreement by the Seller and its performance and compliance
with the terms of this Agreement will not constitute a violation with respect
to, any order or decree of any court or any order or regulation of any federal,
state, municipal or governmental agency having jurisdiction over the Seller or
its assets, which violation might have consequences that would materially and
adversely affect the condition (financial or otherwise) or the operation of the
Seller or its assets or might have consequences that would materially and
adversely affect the performance of its obligations and duties hereunder;
(v) The Seller is an FHA Approved Mortgagee in good
standing to service mortgages and has not been suspended as a mortgagee or
servicer by the FHA;
(vi) The Seller does not believe, nor does it have any
reason or cause to believe, that it cannot perform each and every covenant
contained in this Agreement;
(vii) The Note, the Mortgage, the Assignment of Mortgage and
any other documents required to be delivered with respect to each Loan pursuant
to the Custodial Agreement, have been delivered to the Custodian all in
compliance with the specific requirements of the Custodial Agreement. With
respect to each Loan, the Seller is in possession of a complete Loan File in
compliance with Exhibit 4, except for such documents as have been delivered to
the Custodian;
(viii) Immediately prior to the payment of the Purchase Price
for each Loan, the Seller was the owner of record of the indebtedness evidenced
by each Note and, with respect to each Mortgage Loan, the related Mortgage, and
upon the payment of the Purchase Price by the Purchaser, in the event that the
Seller retains record title, the Seller shall retain such record title to each
Mortgage Note, the related Loan Files with respect thereto and, with respect to
each Mortgage Loan, the related Mortgage, in trust for the Purchaser as the
owner thereof and only for the purpose of servicing and supervising the
servicing of each Loan;
(ix) There are no actions or proceedings against, or
investigations of, the Seller before any court, administrative or other
tribunal (A) that might prohibit its entering into this Agreement, (B) seeking
to prevent the sale of the Loans or the consummation of the transactions
contemplated by this Agreement, or (C) that might prohibit or materially and
adversely affect the performance by the Seller of its obligations under, or the
validity or enforceability of, this Agreement;
(x) No consent, approval, authorization or order of any
court or governmental agency or body is required for the execution, delivery
and performance by the Seller of, or
<PAGE> 23
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compliance by the Seller with, this Agreement or the consummation of the
transactions contemplated by this Agreement, except for such consents,
approvals, authorizations or orders, if any, that have been obtained prior to
the Closing Date;
(xi) The consummation of the transactions contemplated by
this Agreement are in the ordinary course of business of the Seller, and the
transfer, assignment and conveyance of the Notes and the Mortgages by the
Seller pursuant to this Agreement are not subject to the bulk transfer or any
similar statutory provisions;
(xii) Neither this Agreement nor any written statement,
report or other document prepared and furnished or to be prepared and furnished
by the Seller pursuant to this Agreement or in connection with the transactions
contemplated hereby contains any untrue statement of material fact or omits to
state a material fact necessary to make the statements contained herein or
therein not misleading; and
(xiii) With respect to each FHA Loan, the Seller has complied
and shall comply with the applicable provisions of the National Housing Act, as
amended and supplemented, all rules and regulations issued thereunder, and all
administrative publications published pursuant thereto including all FHA
requirements for FHA Title I loans.
Subsection 7.02. Representations and Warranties
Regarding Individual Loans.
The Seller hereby represents and warrants to the Purchaser
that, as to each Loan, as of the related Closing Date for such Loan:
(i) The information set forth in each of the related Loan
Schedule and Assignment and Conveyance is complete, true and correct;
(ii) With respect to each FHA Loan, the amount and the
original term to maturity of such FHA 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, in
the case of each FHA Loan, 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 FHA for
participation in the programs under Title I of the National Housing Act, in
accordance with the FHA requirements for the Title 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
<PAGE> 24
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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 or (c) is a Loan originated
pursuant to underwriting guidelines approved in advance in writing by the
Initial Purchaser;
(v) The Loan is in compliance with all requirements set
forth in the Pricing Letter, and the characteristics of the related Loan
Package as set forth in the related Pricing Letter are true and correct;
(vi) As of the Cut-off Date, the Loan is not more than one
payment delinquent nor has it been more than one payment delinquent, measured
as of month-end, more than twice during (a) the last twelve months in the event
the Loan was acquired but not originated by the Seller, or (b) since
origination, in the event the Loan was originated by the Seller; the Seller has
not advanced funds, or induced, solicited or knowingly received any advance of
funds from a party other than the owner of the related Improved Property,
directly or indirectly, for the payment of any amount required by the Note or
Mortgage;
(vii) The terms of the Note and, with respect to each
Mortgage Loan, the Mortgage have not been impaired, waived, altered or modified
in any respect, except by written instruments, recorded in the applicable
public recording office if necessary to maintain the lien priority of the
Mortgage, and which have been delivered to the Custodian and the terms of which
are reflected in the related Loan Schedule. No instrument of waiver,
alteration or modification has been executed, and no Obligor has been released,
in whole or in part, except in connection with an assumption agreement, which
assumption agreement has been delivered to the Purchaser and the terms of which
are reflected in the related Loan Schedule;
(viii) The Note and, if applicable, the Mortgage are not
subject to any right of rescission, set-off, counterclaim or defense, including
the defense of usury, nor will the operation of any of the terms of the Note
and the Mortgage, or the exercise of any right thereunder, render the Note or
the Mortgage unenforceable, in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury
and no such right of rescission, set-off, counterclaim or defense has been
asserted with respect thereto;
(ix) If upon origination of the Loan, the Improved Property
was in an area identified on a Flood Hazard Map or Flood Insurance Rate Map
issued by the Federal Emergency Management Agency as having special flood
hazards (and such flood insurance has been made available) a flood insurance
policy meeting the requirements of the current guidelines of the Federal
Insurance Administration is in effect, which policy, in the case of each FHA
Loan, conforms to the requirements of FHA. The Loan obligates the Obligor
thereunder to maintain all such insurance at the Obligor's cost and expense,
and on the Obligor's failure to do so, authorizes the holder of the Mortgage to
maintain such insurance at Obligor's cost and expense and to seek reimbursement
therefor from the Obligor;
(x) Any and all requirements of any federal, state or local
law including, without limitation, usury, truth in lending, real estate
settlement procedures, consumer credit
<PAGE> 25
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protection, equal credit opportunity or disclosure laws, applicable to the
origination and servicing of the Loan, have been complied with;
(xi) In the case of a Mortgage Loan, the Mortgage has not
been satisfied, cancelled, subordinated or rescinded, in whole or in part, and
the Improved Property has not been released from the lien of the Mortgage, in
whole or in part, nor has any instrument been executed that would effect any
such satisfaction, cancellation, subordination, rescission or release;
(xii) In the case of a Mortgage Loan, the Mortgage was
recorded or submitted for recordation in the appropriate public recording
office so as to perfect the lien of the Mortgage under the law of the
jurisdiction in which the Improved Property is located and is a valid, existing
and enforceable lien on the Improved Property and the Seller has full right to
sell and assign the same to the Purchaser;
(xiii) The Note and, if applicable, the related Mortgage are
genuine and each is the legal, valid and binding obligation of the maker
thereof, enforceable in accordance with its terms;
(xiv) The proceeds of the Loan have been fully disbursed to
or for the account of the Obligor and there is no obligation for the mortgagee
to advance additional funds thereunder and there are no escrows of such funds.
All costs, fees and expenses incurred in making or closing the Loan and the
recording of the Mortgage have been paid, and the Obligor is not entitled to
any refund of any amounts paid or due to the Obligor pursuant to the Note or
Mortgage;
(xv) All parties to the Note and the Mortgage had legal
capacity to enter into the Loan and to execute and deliver the Note and the
Mortgage to the extent necessary to maintain the enforceability of the Note
and, in the case of each FHA Loan, the existence of the FHA Insurance Contract
without offset, defense, surcharge or other impairment; the Note and the
Mortgage have been duly and properly executed and delivered by all parties
thereto. The Obligor is a natural person;
(xvi) The Seller is the sole legal, beneficial and equitable
owner of the Note and, if applicable, the Mortgage and has full right to
transfer and sell the Loan to the Purchaser free and clear of any encumbrance,
equity, lien, pledge, charge, claim or security interest;
(xvii) All parties which have had any interest in the Loan,
whether as mortgagee, assignee, pledgee or otherwise, are (or, during the
period in which they held and disposed of such interest, were) in compliance
with any and all applicable "doing business" and licensing requirements of the
laws of the state wherein the Improved Property is located to the extent
necessary to preserve the enforceability of the Note and, in the case of each
FHA Loan, the existence of the FHA Insurance Contract, without offset, defense,
surcharge or other impairment;
<PAGE> 26
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(xviii) There is no default, breach, violation or event of
acceleration existing under the Note or, if applicable, the Mortgage, and no
event which, with the passage of time or with notice and the expiration of any
grace or cure period, would constitute a default, breach, violation or event of
acceleration, and the Seller has not waived any default, breach, violation or
event of acceleration;
(xix) Principal payments on the Loan commenced no more than
sixty days after the proceeds of the Loan were disbursed; the Loan bears
interest at the Loan Interest Rate and the Note is payable in Monthly Payments
which are sufficient to fully amortize the original principal balance over the
original term thereof and to pay interest at the related Loan Interest Rate
(except for Loans identified in the Loan Schedule, annexed to each respective
Pricing Letter, as having a balloon payment which the Purchaser has agreed to
purchase);
(xx) The origination, collection and servicing practices
used by the Seller with respect to each Note and Mortgage have been in all
respects legal, proper, prudent and customary in the mortgage origination and
servicing industry and, in the case of 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;
(xxi) To the best of the Seller's knowledge, the Improved
Property is free of damage and waste and there is no proceeding pending for the
total or partial condemnation thereof;
(xxii) The Note and, if applicable, the Mortgage contain
customary and enforceable provisions such as to render the rights and remedies
of the holder thereof adequate for the realization against the Improved
Property of the benefits of the security provided thereby, including, (a) in
the case of a Mortgage designated as a deed of trust, by trustee's sale, and
(b) otherwise by statutory or judicial foreclosure. There is no homestead or
other exemption available to the Obligor which would interfere with the right
to sell the Improved Property at a trustee's sale or the right to foreclose the
Mortgage. The Obligor has not notified the Seller, and the Seller has no
knowledge, of any relief requested or allowed to the Obligor under the Soldiers
and Sailors Civil Relief Act of 1940;
(xxiii) With respect to each FHA Loan, the Note and, if
applicable, the Mortgage are on forms acceptable to FHA;
(xxiv) The Note is not and has not been secured by any
collateral except the lien of the applicable corresponding Mortgage on the
Improved Property and the security interest of any applicable security
agreement;
(xxv) With respect to any Mortgage Loan, in the event the
Mortgage constitutes a deed of trust, a trustee, duly qualified under
applicable law to serve as such, has been properly designated and currently so
serves and is named in the Mortgage, and no fees or expenses are or will become
payable by the Purchaser to the trustee under the deed of trust, except in
connection with a trustee's sale after default by the Obligor;
<PAGE> 27
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(xxvi) The Seller has not received notice that the Obligor has
filed for protection under applicable bankruptcy laws or that the Improved
Property has been subject to foreclosure proceedings, in connection with the
enforcement of a prior lien;
(xxvii) No Loan contains provisions pursuant to which Monthly
Payments are (a) paid or partially paid with funds deposited in any separate
account established by the Seller, the Obligor, or anyone on behalf of the
Obligor, (b) paid by any source other than the Obligor or (c) contains any
other similar provisions which may constitute a "buydown" provision. The Loan
is not a graduated payment loan and the Loan does not have a shared
appreciation or other contingent interest feature;
(xxviii) No instrument of release or waiver has been executed in
connection with the Loan, and no Obligor has been released, in whole or in
part, except in connection with an assumption agreement which has been approved
by the Purchaser (and, in the case of FHA Loans, by the FHA to the extent
required by the applicable FHA Insurance Contract) and which has been delivered
to the Purchaser, and except such Loan which contains in the related Loan File
evidence of a release or waiver; and any assumption agreement which discharged
the original borrower from all of the debt obligations in connection with the
related Loan provides for the assumption of all such debt obligations by the
party assuming the obligations under the Loan;
(xxix) Each Assignment of Mortgage is in recordable form and
is acceptable for recording under the laws of the jurisdiction in which the
Improved Property is located;
(xxx) Each FHA Loan was originated and has been serviced in a
manner such that it 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 on 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;
(xxxi) The Obligor has executed statements to the effect that
the Obligor has received all disclosure materials required by applicable law
with respect to the making of fixed rate mortgage loans and rescission
materials with respect to the making of such fixed rate mortgage loans, and
such statements are and will remain in the Loan File;
(xxxii) The Seller has no knowledge of any circumstances or
condition with respect to the Mortgage, the Improved Property, the Obligor or
the Obligor's credit standing that can reasonably be expected to cause the Loan
to become delinquent, or adversely affect the value of the Loan;
(xxxiii) The Improved Property is lawfully occupied under
applicable law; all inspections, licenses and certificates required to be made
or issued with respect to all occupied portions of the Improved Property and,
with respect to the use and occupancy of the same, including but not limited to
certificates of occupancy, have been made or obtained from the
<PAGE> 28
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appropriate authorities to the extent necessary to maintain the enforceability
of the Note and, in the case of each FHA Loan, the existence of the FHA
Insurance Contract without offset, defense, surcharge or other impairment;
(xxxiv) No error, omission, misrepresentation, negligence,
fraud or similar occurrence with respect to a Loan has taken place on the part
of any person, including without limitation the Obligor, any appraiser, any
builder or developer, or any other party involved in the origination of the
Loan or in the application of any insurance in relation to such Loan that would
render the Note unenforceable or, in the case of each FHA Loan, impair the
existence of the FHA Insurance Contract or render it subject to any offset,
defense, surcharge or other impairment;
(xxxv) Any principal advances made to the Obligor prior to the
Cut-off Date have been consolidated with the outstanding principal amount
secured by the Mortgage, and the secured principal amount, as consolidated,
bears a single interest rate and single repayment term;
(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 to the extent required by FHA, in the case of FHA Loans, or
as otherwise required under the Seller's underwriting guidelines, in the case
of Conventional Loans;
(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.
Subsection 7.03. Remedies for Breach of
Representations and Warranties.
It is understood and agreed that the representations and
warranties set forth in Subsections 7.01 and 7.02 shall survive the sale of the
Loans to the Initial Purchaser and shall inure to the benefit of the Purchaser,
notwithstanding any restrictive or qualified endorsement on any Note or
Assignment of Mortgage or the examination or lack of examination of any Loan
File. Upon discovery by either the Seller or the Purchaser of a breach of any
of the foregoing representations and warranties which materially and adversely
affects the value of the Loans or the interest of the Purchaser therein (or
which materially and adversely affects the interests of the Purchaser in the
related Loan in the case of a representation and warranty relating to a
particular Loan), the party discovering such breach shall give prompt written
notice to the other.
Within sixty (60) days (ten (10) days in the case of a breach
of the representation in Subsection 7.01(a)(vii) arising from any nondelivery
of any Transfer of Note Report (as defined in the Custodial Agreement)) of the
earlier of either discovery by or notice to the Seller of any breach of a
representation or warranty which materially and adversely affects the value
<PAGE> 29
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of a Loan or the interest of the Purchaser therein, the Seller shall promptly
use all reasonable efforts to cure such breach in all material respects and, if
such breach cannot be cured, the Seller shall, at the Purchaser's option,
repurchase such Loan at the Repurchase Price using its own funds and shall not
use funds in the Spread Account for such repurchases. The Seller shall, at the
request of the Purchaser and assuming that Seller has a Qualified Substitute
Loan, rather than repurchase the Loan as provided above, remove such Loan and
substitute in its place a Qualified Substitute Loan or Loans; provided that
such substitution shall be effected not later than 120 days after the related
Closing Date. If the Seller has no Qualified Substitute Loan, it shall
repurchase the deficient Loan. Any repurchase of a Loan pursuant to the
foregoing provisions of this Subsection 7.03 shall occur on a date designated
by the Purchaser and shall be accomplished by deposit in the Collection Account
of the amount of the Repurchase Price for distribution to the Purchaser on the
next scheduled Distribution Date.
At the time of repurchase of any deficient Loan, the Purchaser
and the Seller shall arrange for the reassignment and transfer of the
repurchased Loan and, if applicable, the related FHA Insurance Reserve to the
Seller and the delivery to the Seller of any documents held by the Custodian
relating to the repurchased Loan. In the event the Repurchase Price is
deposited in the Collection Account, the Seller shall, simultaneously with such
deposit, give written notice to the Purchaser that such deposit has taken
place. Upon such repurchase the related Loan Schedule shall be amended to
reflect the withdrawal of the repurchased Loan from this Agreement.
As to any Deleted Loan for which the Seller substitutes a
Qualified Substitute Loan or Loans, the Seller shall effect such substitution
by delivering to the Purchaser for such Qualified Substitute Loan or Loans the
Note, the Mortgage, the Assignment of Mortgage and such other documents and
agreements as are required by this Agreement, with the Note endorsed as
required therein. The Seller shall deposit in the Collection Account an amount
equal to the Monthly Payment less (a) the Servicing Fee and (b) any Impound
Payments (if applicable) received on such Qualified Substitute Loan or Loans in
the month following the date of such substitution, together with any interest
shortfall suffered by the Purchaser arising from the substitution of Loans
having differing Due Dates. Monthly Payments received with respect to
Qualified Substitute Loans in the month of substitution will be retained by the
Seller. For the month of substitution, distributions to the Purchaser will
include the Monthly Payment received on such Deleted Loan in the preceding
month, and the Seller shall thereafter be entitled to retain all amounts
subsequently received by the Seller in respect of such Deleted Loan. The
Seller shall give written notice to the Purchaser that such substitution has
taken place and shall amend the Loan Schedule to reflect the removal of such
Deleted Loan from the terms of this Agreement and the substitution of the
Qualified Substitute Loan. Upon such substitution, such Qualified Substitute
Loan or Loans shall be subject to the terms of this Agreement in all respects,
and the Seller shall be deemed to have made with respect to such Qualified
Substitute Loan or Loans, as of the date of substitution, the covenants,
representations and warranties set forth in Subsections 7.01 and 7.02.
For any month in which the Seller substitutes one or more
Qualified Substitute Loans for one or more Deleted Loans, the Seller will
determine the amount (if any) by which
<PAGE> 30
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the aggregate principal balance of all such Qualified Substitute Loans as of
the date of substitution is less than the aggregate Stated Principal Balance of
all such Deleted Loans (after application of principal payments received in the
month of substitution). The amount of such shortfall shall be distributed by
the Seller in the month following the month of substitution pursuant to the
Servicing Addendum. Accordingly, in the month of such substitution, the Seller
will deposit from its own funds into the Collection Account an amount equal to
such amount.
In addition to such cure, repurchase and substitution
obligation, the Seller shall indemnify the Purchaser and hold it harmless
against any losses, damages, penalties, fines, forfeitures, reasonable and
necessary legal fees and related costs, judgments, and other costs and expenses
resulting from any claim, demand, defense or assertion based on or grounded
upon, or resulting from, a breach of the Seller's representations and
warranties contained in this Section 7. It is understood and agreed that the
obligations of the Seller set forth in this Subsection 7.03 to cure or
repurchase a defective Loan or to substitute a Qualified Substitute Loan and to
indemnify the Purchaser as provided in this Subsection 7.03 constitute the sole
remedies of the Purchaser respecting a breach of the foregoing representations
and warranties.
Any cause of action against the Seller relating to or arising
out of the breach of any representations and warranties made in Subsections
7.01 or 7.02 shall accrue as to any Loan upon (i) discovery of such breach by
the Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by
the Seller to cure such breach or repurchase such Loan as specified above, and
(iii) demand upon the Seller by the Purchaser for compliance with the relevant
provisions of this Agreement.
Subsection 7.04 Representations and Warranties Respecting the
Purchaser.
The Purchaser represents, warrants and covenants to the Seller
as of the Initial Closing Date and each subsequent Closing Date or as of such
date specifically provided herein or in the applicable Assignment and
Conveyance:
(i) the Purchaser is an FHA-Approved Mortgagee;
(ii) no consent, approval, authorization, license or order
of any court or governmental agency or body is required for the execution,
delivery and performance by the Purchaser of, or compliance by the Purchaser
with, this Agreement or the consummation of the transactions contemplated by
this Agreement, except for such consents, approvals, authorizations, licenses
or orders, if any, that have been obtained prior to the Closing Date; and
(iii) the Purchaser has the full power and authority to
execute, deliver and perform, and to enter into and consummate, all
transactions contemplated by this Agreement. The Purchaser has duly authorized
the execution, delivery and performance of this Agreement, has duly executed
and delivered this Agreement, and this Agreement, assuming due authorization,
execution and delivery by the Seller, constitutes a legal, valid and binding
obligation of the Purchaser, enforceable against it in accordance with its
terms except as the enforceability thereof may be limited by bankruptcy,
insolvency or reorganization.
<PAGE> 31
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Subsection 7.05. Representations and
Warranties Respecting the
Guarantor.
The Guarantor represents, warrants and covenants to the
Purchaser as of the Initial Closing Date and each subsequent Closing Date or as
of such date specifically provided herein or in the applicable Assignment and
Conveyance:
(i) The Guarantor is duly organized, validly existing and
in good standing under the laws of New York;
(ii) The Guarantor has the full power and authority to
execute, deliver and perform, and to enter into and consummate, all
transactions contemplated by this Agreement. The Guarantor has duly authorized
the execution, delivery and performance of this Agreement, has duly executed
and delivered this Agreement, and this Agreement, assuming due authorization,
execution and delivery by the Purchaser and the Seller, constitutes a legal,
valid and binding obligation of the Guarantor enforceable against it in
accordance with its terms except as the enforceability thereof may be limited
by bankruptcy, insolvency or reorganization;
(iii) The execution and delivery of this Agreement by the
Guarantor and the performance of and compliance with the terms of this
Agreement will not violate the Guarantor's certificate of incorporation or
by-laws or constitute a default under or result in a breach or acceleration of,
any material contract, agreement or other instrument to which the Guarantor is
a party or which may be applicable to the Guarantor or its assets;
(iv) The Guarantor is not in violation of, and the execution
and delivery of this Agreement by the Guarantor and its performance and
compliance with the terms of this Agreement will not constitute a violation
with respect to, any order or decree of any court or any order or regulation of
any federal, state, municipal or governmental agency having jurisdiction over
the Guarantor or its assets, which violation might have consequences that would
materially and adversely affect the condition (financial or otherwise) or the
operation of the Guarantor or its assets or might have consequences that would
materially and adversely affect the performance of its obligations and duties
hereunder;
(v) The Guarantor does not believe, nor does it have any
reason or cause to believe, that it cannot perform each and every covenant
contained in this Agreement;
(vi) There are no actions or proceedings against, or
investigations of, the Guarantor before any court, administrative or other
tribunal (A) that might prohibit its entering into this Agreement, (B) seeking
to prevent the consummation of the transactions
<PAGE> 32
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contemplated by this Agreement, or (C) that might prohibit or materially and
adversely affect the performance by the Guarantor of its obligations under, or
the validity or enforceability of, this Agreement; and
(vii) No consent, approval, authorization or order of any
court or governmental agency or body is required for the execution, delivery
and performance by the Guarantor of, or compliance by the Guarantor with, this
Agreement or the consummation of the transactions contemplated by this
Agreement, except for such consents, approvals, authorizations or orders, if
any, that have been obtained prior to the Closing Date.
SECTION 8. Closing. The closing for each Loan Package
shall take place on the related Closing Date. At the Purchaser's option, the
closing shall be either: by telephone, confirmed by letter or wire as the
parties shall agree, or conducted in person, at such place as the parties shall
agree.
The closing for the Loans to be purchased on each Closing Date shall
be subject to each of the following conditions:
(a) all of the representations and warranties of the Seller
under this Agreement shall be true and correct as of
the related Closing Date and no event shall have
occurred which, with notice or the passage of time,
would constitute a default under this Agreement;
(B) the Initial Purchaser shall have received, or the
Initial Purchaser's attorneys shall have received in
escrow, all Closing Documents as specified in Section
9, in such forms as are agreed upon and acceptable to
the Purchaser, duly executed by all signatories other
than the Purchaser as required pursuant to the terms
hereof;
(c) the Seller shall have delivered and released to the
Custodian all documents required pursuant to this
Agreement; and
(d) all other terms and conditions of this Agreement shall
have been complied with.
Subject to the foregoing conditions, the Initial Purchaser shall
pay to the Seller on the related Closing Date the Purchase Price (which shall
include accrued interest, as set forth in Section 4) by wire transfer of
immediately available funds to the account designated by the Seller.
SECTION 9. Closing Documents.
(a) On or before the Initial Closing Date, the Seller shall
submit to the Initial Purchaser fully executed originals of the following
documents:
1. this Agreement, in four (4) counterparts;
2. the Custodial Agreement, in six (6) counterparts in the
form attached as Exhibit 10 hereto;
3. Collection Account and Spread Account Letter Agreements
in the form attached as Exhibit 5 hereto;
<PAGE> 33
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4. Officer's Certificates, in the form of Exhibit 1A and
Exhibit 1B hereto, including all attachments thereto;
and
5. a Seller's Officer's Certificate of Chief Financial
Officer and a Guarantor's Officer's Certificate of
General Counsel, in the form of Exhibit 9A and Exhibit
9B, respectively, hereto.
(b) The Closing Documents for the Loans to be purchased on each
Closing Date shall consist of fully executed originals of the following
documents:
1. the related Pricing Letter;
2. the related Loan Schedule;
3. Officer's Certificates, in the form of Exhibit 1A and
Exhibit 1B hereto, including all attachments thereto;
4. a Security Release Certification, in the form of
Exhibit 2 hereto executed by any Person, as requested
by the Initial Purchaser, if any of the Loans has at
any time been subject to any security interest, pledge
or hypothecation for the benefit of such Person;
5. a certificate or other evidence of merger or change of
name, signed or stamped by the applicable regulatory
authority, if any of the Loans were acquired by the
Seller by merger or acquired or originated by the
Seller while conducting business under a name other
than its present name, if applicable;
6. an Assignment and Conveyance in the form of Exhibit 3
hereto;
7. a Custodian's Trust Receipt and Initial Certification
or Trust Receipt and Final Certification, as required
under the Custodial Agreement in the form annexed
thereto; and
8. A Certificate of Good Standing of the Seller dated
within 5 days of the Closing Date.
SECTION 10. Costs. The Purchaser shall pay any
commissions due its salesmen and the legal fees and expenses of its attorneys.
All other costs and expenses incurred in connection with the transfer and
delivery of the Loans, including without limitation, the fees of the Custodian,
governmental recording fees for recording Assignments of Mortgage and the
Seller's attorneys' fees, shall be paid by the Seller.
<PAGE> 34
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SECTION 11. Seller's Servicing Obligations. The Seller,
as independent contract servicer, shall service and administer the Loans in
accordance with the terms and provisions set forth in the Servicing Addendum
attached as Exhibit 6, which Servicing Addendum is incorporated herein by
reference.
SECTION 12. Removal of Loans from Inclusion Under this
Agreement Upon a Whole Loan Transfer or a Pass-Through Transfer on One or More
Reconstitution Dates.
The Seller acknowledges and the Purchaser agrees that with
respect to some or all of the Loans, the Purchaser shall effect either:
(1) one or more Whole Loan Transfers; and/or
(2) one or more Pass-Through Transfers.
With respect to each Whole Loan Transfer or Pass-Through
Transfer, as the case may be, entered into by the Purchaser, the Seller agrees:
(1) to cooperate fully with the Purchaser and any
prospective purchaser with respect to all reasonable
requests and due diligence procedures including
participating in meetings with rating agencies, bond
insurers and such other parties as the Purchaser shall
designate and participating in meetings with
prospective purchasers of the Loans or interests
therein and providing information reasonably requested
by such purchasers;
(2) to execute all Reconstitution Agreements provided that
each of the Seller and the Purchaser is given an
opportunity to review and reasonably negotiate in good
faith the content of such documents not specifically
referenced or provided for herein;
(3) with respect to any Whole Loan Transfer or Pass-Through
Transfer, the Seller shall make the representations and
warranties regarding the Seller and, if such Whole Loan
Transfer or Pass- Through Transfer occurs within
eighteen (18) months of the Closing Date or such later
period as specified in the related Pricing Letter, the
Loans, as of the date of the Whole Loan Transfer or
Pass-Through Transfer, modified to the extent necessary
to accurately reflect the pool statistics of the Loans
as of the date of such Whole Loan Transfer or
Pass-Through Transfer and any events or circumstances
existing subsequent to the related Closing Date;
(4) to deliver to the Purchaser for inclusion in any
prospectus or other offering material such publicly
available information regarding the Seller, its
financial condition and its mortgage loan delinquency,
foreclosure and loss experience and any additional
information requested by the Purchaser, and to deliver
to the Purchaser any similar non public, unaudited
financial
<PAGE> 35
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information (which the Purchaser may, at its option and
at the Seller's cost, have audited by certified public
accountants) and such other information as is
reasonably requested by the Purchaser and which the
Seller is capable of providing without unreasonable
effort or expense, and to indemnify the Purchaser and
its affiliates for material misstatements contained in
or omissions from such information;
(5) to deliver to the Purchaser and to any Person
designated by the Purchaser, at the Seller's expense,
such statements and audit letters of reputable,
certified public accountants pertaining to information
provided by the Seller pursuant to paragraph 4 above as
shall be reasonably requested by the Purchaser;
(6) to deliver to the Purchaser, and to any Person
designated by the Purchaser, such legal documents and
Opinions of Counsel as are customarily delivered by
originators or servicers, as the case may be, and
reasonably determined by the Purchaser to be necessary
in connection with Whole Loan Transfers or Pass-Through
Transfers, as the case may be, such Opinions of Counsel
for a Pass- Through Transfer to be in a form reasonably
acceptable to the Purchaser, it being understood that
the cost of any opinions of outside special counsel
that may be required for a Whole Loan Transfer or
Pass-Through Transfer, as the case may be, shall be the
responsibility of the Seller; and
(7) to cooperate fully with the Purchaser and any
prospective purchaser with respect to the preparation
(including, but not limited to, the endorsement,
delivery, assignment, and execution) of the Loan
Documents and other related documents, and with respect
to requirements reasonably requested by the rating
agencies and credit enhancers.
SECTION 13. The Seller.
Subsection 13.01. Additional Indemnification by the
Seller.
In addition to the indemnification provided in Subsection
7.03, and subject to Subsection 13.03, the Seller shall indemnify the Purchaser
and hold the Purchaser harmless against any and all claims, losses, damages,
penalties, fines, forfeitures, reasonable and necessary legal fees and related
costs, judgments and any other costs, fees and expenses that the Purchaser may
sustain in any way related to the failure of the Seller to perform its
obligations under this Agreement including but not limited to its obligation to
service and administer the Loans in strict compliance with the terms of this
Agreement or any Reconstitution Agreement entered into pursuant to Section 12.
<PAGE> 36
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Subsection 13.02. Merger or Consolidation of the Seller.
The Seller shall keep in full force and effect its existence,
rights and franchises as a corporation under the laws of the state of its
incorporation except as permitted herein, and shall obtain and preserve its
qualification to do business as a foreign corporation in each jurisdiction in
which such qualification is or shall be necessary to protect the validity and
enforceability of this Agreement or any of the Loans, and to enable the Seller
to perform its duties under this Agreement.
Any Person into which the Seller may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Seller shall be a party, or any Person succeeding to
the business of the Seller, shall be the successor of the Seller hereunder,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto, anything herein to the contrary notwithstanding;
provided, however, that the successor or surviving Person shall be an
institution whose deposits are insured by FDIC or a company whose business is
the origination and servicing of loans, shall be an FHA Approved Mortgagee and
shall satisfy any requirements of Section 16 with respect to the qualifications
of a successor to the Seller.
Subsection 13.03. Limitation on Liability of the Seller
and Others.
Neither the Seller nor any of the officers, employees or
agents of the Seller shall be under any liability to the Purchaser for any
action taken or for refraining from the taking of any action in good faith in
connection with the servicing of the Loans pursuant to this Agreement, or for
errors in judgment; provided, however, that this provision shall not protect
the Seller or any such person against any breach of warranties or
representations made herein, or failure to perform its obligations in strict
compliance with any standard of care set forth in this Agreement, or any
liability which would otherwise be imposed by reason of any breach of the terms
and conditions of this Agreement. The Seller and any officer, employee or agent
of the Seller may rely in good faith on any document of any kind prima facie
properly executed and submitted by any Person respecting any matters arising
hereunder. The Seller shall not be under any obligation to appear in, prosecute
or defend any legal action which is not incidental to its obligation to sell,
or duty to service, the Loans in accordance with this Agreement and which in
its opinion may result in its incurring any expenses or liability; provided,
however, that the Seller may, with the consent of the Purchaser, undertake any
such action which it may deem necessary or desirable in respect to this
Agreement and the rights and duties of the parties hereto. In such event, the
legal expenses and costs of such action and any liability resulting therefrom
shall be expenses, costs and liabilities for which the Purchaser shall be
liable and the Seller shall be entitled to reimbursement therefor from the
Purchaser upon written demand except when such expenses, costs and liabilities
are subject to the Seller's indemnification under Subsections 7.03 or 13.01.
<PAGE> 37
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Subsection 13.04. Seller Not to Resign.
The Seller shall not assign this Agreement or resign from the
obligations and duties hereby imposed on it except by mutual consent of the
Seller and the Purchaser or upon the determination that its servicing duties
hereunder are no longer permissible under applicable law and such incapacity
cannot be cured by the Seller in which event the Seller may resign as servicer.
Any such determination permitting the resignation of the Seller as servicer
shall be evidenced by an Opinion of Counsel to such effect delivered to the
Purchaser which Opinion of Counsel shall be in form and substance acceptable to
the Purchaser and shall be provided at the cost of the Seller. No such
resignation shall become effective until a successor shall have assumed the
Seller's responsibilities and obligations hereunder in the manner provided in
Section 16.
Subsection 13.05. No Transfer of Servicing.
The Seller acknowledges that the Purchaser has acted in
reliance upon the Seller's independent status, the adequacy of its servicing
facilities, plant, personnel, records and procedures, its integrity, reputation
and financial standing and the continuance thereof. Without in any way limiting
the generality of this Section, the Seller shall not either assign this
Agreement or the servicing hereunder or delegate its rights or duties hereunder
or any portion thereof, or sell or otherwise dispose of all or substantially
all of its property or assets, without the prior written approval of the
Purchaser, which consent shall not be unreasonably withheld.
SECTION 14. Default.
Subsection 14.01. Events of Default.
In case one or more of the following Events of Default by the
Seller shall occur and be continuing, that is to say:
(i) any failure by the Seller to remit to the
Purchaser any payment required to be made under the terms of this Agreement
which continues unremedied for a period of three (3) Business Days after the
date upon which written notice of such failure, requiring the same to be
remedied, shall have been given to the Seller by the Purchaser; or
(ii) failure on the part of the Seller duly to
observe or perform in any material respect any other of the covenants or
agreements on the part of the Seller set forth in this Agreement which
continues unremedied for a period of thirty (30) days (except that such number
of days shall be fifteen (15) in the case of a failure to pay any premium for
any insurance policy required to be maintained under this Agreement) after the
date on which written notice of such failure, requiring the same to be
remedied, shall have been given to the Seller by the Purchaser; or
(iii) a decree or order of a court or agency or
supervisory authority having jurisdiction for the appointment of a conservator
or receiver or liquidator in any
<PAGE> 38
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insolvency, bankruptcy, readjustment of debt, marshalling of assets and
liabilities or similar proceedings, or for the winding-up or liquidation of its
affairs, shall have been entered against the Seller and such decree or order
shall have remained in force undischarged or unstayed for a period of sixty
(60) days; or
(iv) the Seller shall consent to the appointment
of a conservator or receiver or liquidator in any insolvency, bankruptcy,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings of or relating to the Seller or of or relating to all or
substantially all of its property; or
(v) the Seller shall admit in writing its
inability to pay its debts generally as they become due, file a petition to
take advantage of any applicable insolvency or reorganization statute, make an
assignment for the benefit of its creditors, or voluntarily suspend payment of
its obligations; or
(vi) failure by the Seller to be in compliance
with the "doing business" or licensing laws of any jurisdiction where an
Improved Property is located; or
(vii) the Seller ceases to meet the qualifications
of, or ceases to be, an FHA Approved Mortgagee; or
(viii) the Seller attempts to assign its right to
its servicing compensation hereunder or the Seller attempts, without the
consent of the Purchaser, to sell or otherwise dispose of all or substantially
all of its property or assets or to assign this Agreement or the servicing
responsibilities hereunder or to delegate its duties hereunder or any portion
thereof;
then, and in each and every such case, so long as an Event of Default shall not
have been remedied, the Purchaser, by notice in writing to the Seller may, in
addition to whatever rights the Purchaser may have at law or equity to damages,
including injunctive relief and specific performance, terminate all the rights
and obligations of the Seller as servicer and any obligation of Initial
Purchaser to purchase additional Loans under this Agreement. On or after the
receipt by the Seller of such written notice, all authority and power of the
Seller to service the Loans under this Agreement shall on the date set forth in
such notice pass to and be vested in the successor appointed pursuant to
Section 16.
Upon written request from the Purchaser in connection with any
such termination, the Seller shall prepare, execute and deliver, any and all
documents and other instruments, place in the Purchaser's possession all Loan
Files, and do or accomplish all other acts or things necessary or appropriate
to effect the purposes of such notice of termination, whether to complete the
transfer and endorsement or assignment of the Loans and related documents, or
otherwise, at the Seller's sole expense. The Seller agrees to cooperate with
the Purchaser and such successor in effecting the termination of the Seller's
responsibilities and rights hereunder as servicer, including, without
limitation, the transfer to such successor for administration by it of all cash
amounts which shall at the time be credited by the Seller to the Collection
Account or REO Account or thereafter received with respect to the Loans.
<PAGE> 39
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Subsection 14.02. Waiver of Defaults.
The Purchaser may waive any default by the Seller in the
performance of its obligations hereunder and its consequences. Upon any such
waiver of a past default, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been remedied for every
purpose of this Agreement. No such waiver shall extend to any subsequent or
other default or impair any right consequent thereon except to the extent
expressly so waived.
SECTION 15. Termination. The respective obligations and
responsibilities of the Seller, as servicer, shall terminate upon the earlier
of: (i) the distribution to the Purchaser of the final payment or liquidation
with respect to the last Loan (or advances of same by the Seller); or (ii) the
disposition of all property acquired upon foreclosure or deed in lieu of
foreclosure with respect to the last Loan and the remittance of all funds due
hereunder unless terminated with respect to all or a portion of the Loans on an
earlier date at the option of the Purchaser pursuant to this Section 15 or
pursuant to Section 14; or (iii) by mutual written agreement of the Seller and
the Purchaser.
SECTION 16. Successor to the Seller. Prior to
termination of the Seller's responsibilities and duties under this Agreement
pursuant to Section 14, the Purchaser shall (i) succeed to and assume all of
the Seller's responsibilities, rights, duties and obligations under this
Agreement but not any rights in or to the Excess Yield, or (ii) appoint a
successor which shall succeed to all rights and assume all of the
responsibilities, duties and liabilities of the Seller as servicer under this
Agreement but not any rights in or to the Excess Yield. Any successor to the
Seller hereunder shall be an FHA Approved Mortgagee. In connection with such
appointment and assumption, the Purchaser may make such arrangements for the
compensation of such successor out of payments on Loans as it and such
successor shall agree. In the event that the Seller's duties, responsibilities
and liabilities as servicer under this Agreement should be terminated pursuant
to the aforementioned Section, the Seller shall discharge such duties and
responsibilities during the period from the date it acquires knowledge of such
termination until the effective date thereof with the same degree of diligence
and prudence which it is obligated to exercise under this Agreement, and shall
take no action whatsoever that might impair or prejudice the rights or
financial condition of the Purchaser or such successor. The termination of the
Seller as servicer pursuant to the aforementioned section shall not become
effective until a successor shall be appointed pursuant to this Section 16 and
shall in no event relieve the Seller of the representations and warranties made
pursuant to Subsections 7.01 and 7.02 and the remedies available to the
Purchaser under Subsection 7.03. It is understood and agreed that the
provisions of such Subsections 7.01, 7.02 and 7.03 shall be applicable to the
Seller notwithstanding any resignation or termination of the Seller, or the
termination of this Agreement.
Any successor appointed as provided herein shall execute,
acknowledge and deliver to the Seller and to the Purchaser an instrument
accepting such appointment, whereupon such successor shall become fully vested
with all the rights, powers, duties, responsibilities, obligations and
liabilities of the Seller, with like effect as if originally named as a party
to this
<PAGE> 40
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Agreement provided, however, that such successor shall not assume, and Seller
shall indemnify such successor for, any and all liabilities arising out of the
Seller's acts as servicer. Any termination of the Seller as servicer pursuant
to Section 15 shall not affect any claims that the Purchaser may have against
the Seller arising prior to any such termination or resignation or remedies
with respect to such claims.
The Seller shall timely deliver to the successor the funds in
the Collection Account, the Spread Account and the REO Account and the Loan
Files and related documents and statements held by it hereunder and the Seller
shall account for all funds. The Seller shall execute and deliver such
instruments and do such other things all as may reasonably be required to more
fully and definitely vest and confirm in the successor all such rights, powers,
duties, responsibilities, obligations and liabilities of the Seller as
servicer. The successor shall make arrangements as it may deem appropriate to
reimburse the Seller for amounts the Seller actually expended as servicer
pursuant to this Agreement which the successor is entitled to retain hereunder
and which would otherwise have been recovered by the Seller pursuant to this
Agreement but for the appointment of the successor servicer.
SECTION 17. Transfer of FHA Insurance Reserves. With
respect to each Loan Package that includes any FHA Loans, no later than 15 days
following the later of (i) the receipt by the Seller from FHA of the FHA case
number for each FHA Loan and (ii) the applicable Closing Date the Seller shall
execute documents necessary to transfer the related FHA Insurance Reserves
allocable to such Loan Package to the Purchaser, or such other entity as the
Purchaser may designate by notice in writing to the Seller provided that such
entity is an FHA Approved Mortgagee. The originals of such executed documents
shall be sent to the Purchaser or the Purchaser's designee in the manner
indicated by the Purchaser.
SECTION 18. Financial Statements. The Seller understands
that the Purchaser may make available to a prospective purchaser of the Loans
from the Purchaser the Seller's annual financial statements. The Seller, if it
has not already done so, agrees to furnish promptly to the Purchaser copies of
the statements specified above.
The Seller also shall make available to the Purchaser
information on its servicing performance with respect to loans serviced for
others, including delinquency ratios. The Seller also agrees to allow access
to knowledgeable financial, accounting, origination and servicing officers of
the Seller for the purpose of answering questions asked by any prospective
purchaser regarding recent developments affecting the Seller, its loan
origination or servicing practices or the financial statements of the Seller.
The Purchaser agrees to maintain full confidentiality with regard to non-public
information of the Seller released under this section.
<PAGE> 41
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SECTION 19. Mandatory Purchase. The purchase of each
Loan (exclusive of the related Excess Yield) on or before the related Closing
Date, subject to the terms and conditions of the Pricing Letter, is mandatory.
SECTION 20. Notices. All demands, notices and
communications hereunder shall be in writing and shall be deemed to have been
duly given if mailed, by registered or certified mail, return receipt
requested, or, if by other means, when received by the other party at the
address as follows:
(i) if to the Seller:
Mego Mortgage Corporation
1000 Parkwood Circle
5th floor
Atlanta, Georgia 30339
Attention: Jeffrey S. Moore
President
With copy to: Jerome J. Cohen
Mego Mortgage Corporation
4310 Paradise Road
Las Vegas, Nevada 89109
(ii) if to the Guarantor:
Mego Financial Corp.
1125 Northeast 125th Street
Suite 206
North Miami, Florida 33161
Attention: Jerome J. Cohen
Don A. Mayerson
With copy to:
Mego Financial Corp.
4310 Paradise Road
Las Vegas, Nevada 89109
Attn: Jerome J. Cohen
(iii) if to the Purchaser:
Greenwich Capital Markets, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
<PAGE> 42
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Attn: General Counsel
or such other address as may hereafter be furnished to the other party by like
notice. Any such demand, notice or communication hereunder shall be deemed to
have been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).
SECTION 21. Severability Clause. Any part, provision,
representation or warranty of this Agreement which is prohibited or which is
held to be void or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof. Any part, provision, representation or warranty of this Agreement which
is prohibited or unenforceable or is held to be void or unenforceable in any
jurisdiction shall be ineffective, as to such jurisdiction, to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction as to any Loan shall not invalidate or render unenforceable such
provision in any other jurisdiction. To the extent permitted by applicable law,
the parties hereto waive any provision of law which prohibits or renders void
or unenforceable any provision hereof. If the invalidity of any part,
provision, representation or warranty of this Agreement shall deprive any party
of the economic benefit intended to be conferred by this Agreement, the parties
shall negotiate, in good faith, to develop a structure the economic effect of
which is nearly as possible the same as the economic effect of this Agreement
without regard to such invalidity.
SECTION 22. Counterparts. This Agreement may be executed
simultaneously in any number of counterparts. Each counterpart shall be deemed
to be an original, and all such counterparts shall constitute one and the same
instrument.
SECTION 23. Governing Law. The Agreement shall be
construed in accordance with the laws of the State of New York without regard
to any conflicts of law provisions and the obligations, rights and remedies of
the parties hereunder shall be determined in accordance with the laws of the
State of New York, except to the extent preempted by federal law.
SECTION 24. Intention of the Parties. It is the
intention of the parties that the Initial Purchaser is purchasing, and the
Seller is selling, the Loans (exclusive of Excess Yield) and not a debt
instrument of the Seller or another security. Accordingly, the parties hereto
each intend to treat the transaction for federal income tax purposes as a sale
by the Seller, and a purchase by the Purchaser, of the Loans. The Initial
Purchaser shall have the right to review the Loans and the related Loan Files
to determine the characteristics of the Loans which shall affect the federal
income tax consequences of owning the Loans and the Seller shall cooperate with
all reasonable requests made by the Initial Purchaser in the course of such
review.
<PAGE> 43
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SECTION 25. Successors and Assigns. This Agreement shall
bind and inure to the benefit of and be enforceable by the Seller and the
Purchaser and the respective successors and permitted assigns of the Seller and
the Purchaser. This Agreement shall not be assigned, pledged or hypothecated
by the Seller to a third party without the prior written consent of the
Purchaser, and shall not be assigned by the Initial Purchaser or any subsequent
Purchaser other than to an affiliate thereof without the prior written consent
of the Seller.
SECTION 26. Waivers. No term or provision of this
Agreement may be waived or modified unless such waiver or modification is in
writing and signed by the party against whom such waiver or modification is
sought to be enforced.
SECTION 27. Exhibits. The exhibits to this Agreement are
hereby incorporated and made a part hereof and are an integral part of this
Agreement.
SECTION 28. General Interpretive Principles. For
purposes of this Agreement, except as otherwise expressly provided or unless
the context otherwise requires:
(a) the terms defined in this Agreement have the meanings
assigned to them in this Agreement and include the plural as well as the
singular, and the use of any gender herein shall be deemed to include the other
gender;
(b) accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles;
(c) references herein to "Articles," "Sections,"
"Subsections," "Paragraphs," and other subdivisions without reference to a
document are to designated Articles, Sections, Subsections, Paragraphs and
other subdivisions of this Agreement;
(d) reference to a Subsection without further reference to
a Section is a reference to such Subsection as contained in the same Section in
which the reference appears, and this rule shall also apply to Paragraphs and
other subdivisions;
(e) the words "herein," "hereof," "hereunder" and other
words of similar import refer to this Agreement as a whole and not to any
particular provision; and
(f) the term "include" or "including" shall mean without
limitation by reason of enumeration.
SECTION 29. Reproduction of Documents. This Agreement
and all documents relating thereto, including, without limitation, (a)
consents, waivers and modifications which may hereafter be executed, (b)
documents received by any party at the closing, and (c) financial statements,
certificates and other information previously or hereafter furnished, may be
reproduced by any photographic, photostatic, microfilm, micro-card, miniature
photographic or other similar process. The parties agree that any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding, whether or not the
<PAGE> 44
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original is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement, facsimile or
further reproduction of such reproduction shall likewise be admissible in
evidence.
SECTION 30. Further Agreements. The Seller and the
Purchaser each agree to execute and deliver to the other such reasonable and
appropriate additional documents, instruments or agreements as may be necessary
or appropriate to effectuate the purposes of this Agreement.
SECTION 31. Entire Agreement. This Agreement, together
with each Pricing Letter, constitutes the entire agreement of the parties and
supersedes all prior agreements, oral and written, between the parties with
respect to the subject matter hereof, and the provisions of both this Agreement
and each Pricing Letter shall survive the closing of the transactions
contemplated herein. In the event that there exist inconsistencies between
this Agreement and any Pricing Letter, this Agreement shall control.
SECTION 32. Guaranty. The Guarantor hereby guarantees,
in favor of the Initial Purchaser and its successors and permitted assigns, the
full and satisfactory performance of all commitments, obligations, covenants
and agreements (in each case financial or otherwise) of the Seller hereunder.
The foregoing guaranty shall remain in effect until such time, if any, as the
Seller Public Offering shall have been completed.
<PAGE> 45
IN WITNESS WHEREOF, the Initial Purchaser, the Seller and
the Guarantor have caused their names to be signed hereto by their respective
officers thereunto duly authorized as of the date first above written.
GREENWICH CAPITAL MARKETS, INC.
(Initial Purchaser)
By: /s/
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
MEGO MORTGAGE CORPORATION
(Seller)
By: /s/
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
MEGO FINANCIAL CORP.
(Guarantor)
By: /s/
---------------------------------------------
Name:
-------------------------------------------
Title:
------------------------------------------
<PAGE> 46
EXHIBIT 1A
SELLER'S OFFICER'S CERTIFICATE
I, Jeffrey S. Moore, hereby certify that I am the duly
elected President of Mego Mortgage Corporation, a Delaware corporation (the
"Seller"), and further certify, on behalf of the Seller as follows:
1. Attached hereto as Attachment I are a true
and correct copy of the Certificate of Incorporation and by-laws of the
Seller as are in full force and effect on the date hereof. No event has
occurred since [Month] ___, 199_ which has affected the good standing of the
Seller under the laws of the State of Delaware.
2. No proceedings looking toward merger,
liquidation, dissolution or bankruptcy of the Seller are pending or
contemplated.
3. Each person who, as an officer or
attorney-in-fact of the Seller, signed (a) the Amended and Restated Master
Loan Purchase and Servicing Agreement (the "Purchase Agreement"), dated as
of October 1, 1996, by and among the Seller, Greenwich Capital Markets, Inc.
(the "Purchaser") and Mego Financial Corp.; (b) the Pricing Letter, dated as
of [month] ____, 199_, between the Seller and the Purchaser (the "Pricing
Letter"); and (c) the Custodial Agreement dated as of April 1, 1995 among
Greenwich Capital Markets, Inc. (as assignee of Greenwich Capital Financial
Products, Inc.), First Trust National Association and the Seller and (d) any
other document delivered prior hereto or on the date hereof in connection
with the sale and servicing of the Loans in accordance with the Purchase
Agreement and the Pricing Letter was, at the respective times of such
signing and delivery, and is as of the date hereof, duly elected or
appointed, qualified and acting as such officer or attorney-in-fact, and the
signatures of such persons appearing on such documents are their genuine
signatures.
4. Attached hereto as Attachment II is a true
and correct copy of the resolutions duly adopted by the board of directors
of the Seller on [date] (the "Resolutions") with respect to the
authorization and approval of the sale and servicing of the Loans; said
Resolutions have not been amended, modified, annulled or revoked and are in
full force and effect on the date hereof.
5. Attached hereto as Attachment III is a
Certificate of Good Standing of the Seller dated [month] _________ 199_.
6. All of the representations and warranties of
the Seller contained in Subsections 7.01 and 7.02 of the Purchase Agreement
were true and correct in all material respects as of the date of the
Purchase Agreement and are true and correct in all material respects as of
the date hereof.
7. The Seller has performed all of its duties
and has satisfied all the material conditions on its part to be performed or
satisfied prior to the related Closing Date pursuant to the Purchase
Agreement and the Pricing Letter.
<PAGE> 47
-2-
All capitalized terms used herein and not otherwise
defined shall have the meaning assigned to them in the Purchase Agreement.
IN WITNESS WHEREOF, I have hereunto signed my name and
affixed the seal of the Seller.
Dated:
-------------------------------------
[Seal]
MEGO MORTGAGE CORPORATION
By:
-------------------------------
Name:
-----------------------------
Title: President
I, ___________________, Assistant Secretary of
______________ hereby certify that _______________ is the duly elected,
qualified and acting President of the Seller and that the signature appearing
above is such person's genuine signature.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated:
-------------------------------------
[Seal]
MEGO MORTGAGE CORPORATION
By:
--------------------------------
Name:
------------------------------
Title: Assistant Secretary
<PAGE> 48
EXHIBIT 1B
GUARANTOR'S OFFICER'S CERTIFICATE
I, [Jerome J. Cohen], hereby certify that I am the duly
elected President of Mego Financial Corp., a New York corporation (the
"Guarantor"), and further certify, on behalf of the Guarantor as follows:
1. Attached hereto as Attachment I are a true
and correct copy of the Certificate of Incorporation and by-laws of the
Guarantor as are in full force and effect on the date hereof. No event has
occurred since [Month] ___, 199_ which has affected the good standing of the
Guarantor under the laws of the State of New York.
2. No proceedings looking toward merger,
liquidation, dissolution or bankruptcy of the Guarantor are pending or
contemplated.
3. Each person who, as an officer or
attorney-in-fact of the Guarantor, signed (a) the Amended and Restated
Master Loan Purchase and Servicing Agreement (the "Purchase Agreement"),
dated as of October 1, 1996, by and among Mego Mortgage Corporation,
Greenwich Capital Markets, Inc. (the "Purchaser") and the Guarantor and (b)
any other document delivered prior hereto or on the date hereof in
connection with the sale and servicing of the Loans in accordance with the
Purchase Agreement was, at the respective times of such signing and
delivery, and is as of the date hereof, duly elected or appointed, qualified
and acting as such officer or attorney-in-fact, and the signatures of such
persons appearing on such documents are their genuine signatures.
4. Attached hereto as Attachment II is a true
and correct copy of the resolutions duly adopted by the board of directors
of the Guarantor on [date] (the "Resolutions") with respect to the
authorization and approval of the Guarantor's entry into the Purchase
Agreement; said Resolutions have not been amended, modified, annulled or
revoked and are in full force and effect on the date hereof.
5. Attached hereto as Attachment III is a
Certificate of Good Standing of the Guarantor dated [month] _________ 199_.
6. All of the representations and warranties of
the Guarantor contained in Subsections 7.01 and 7.02 of the Purchase
Agreement were true and correct in all material respects as of the date of
the Purchase Agreement and are true and correct in all material respects as
of the date hereof.
7. The Guarantor has performed all of its duties
and has satisfied all the material conditions on its part to be performed or
satisfied prior to the related Closing Date pursuant to the Purchase
Agreement.
<PAGE> 49
-2-
All capitalized terms used herein and not otherwise
defined shall have the meaning assigned to them in the Purchase Agreement.
IN WITNESS WHEREOF, I have hereunto signed my name and
affixed the seal of the Guarantor.
Dated:
-------------------------------------
[Seal]
MEGO FINANCIAL CORP.
By:
------------------------------
Name:
----------------------------
Title:
I, ___________________, Assistant Secretary of
______________ hereby certify that _______________ is the duly elected,
qualified and acting [title] of the Guarantor and that the signature appearing
above is such person's genuine signature.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated:
-------------------------------------
[Seal]
MEGO FINANCIAL CORP.
By:
--------------------------
Name: Don A. Mayerson
Title: Secretary
<PAGE> 50
EXHIBIT 2
SECURITY RELEASE CERTIFICATION
I. Release of Security Interest
________________________________, hereby relinquishes any
and all right, title and interest it may have in and to the Loans described in
Exhibit A attached hereto upon purchase thereof by Greenwich Capital Markets,
Inc. from the Seller named below pursuant to that certain Amended and Restated
Master Loan Purchase and Servicing Agreement, dated as of October 1, 1996, as
of the date and time of receipt by __________________________ of $_____________
for such Loans (the "Date and Time of Sale"), and certifies that all notes,
mortgages, assignments and other documents in its possession relating to such
Loans have been delivered and released to the Seller named below or its
designees as of the Date and Time of Sale.
Name and Address of Financial Institution
- -------------------------------------------
(Name)
- ------------------------------------------
(Address)
By:
---------------------------------------------
<PAGE> 51
-2-
II. Certification of Release
The Seller named below hereby certifies to Greenwich
Capital Markets, Inc. that, as of the Date and Time of Sale of the above
mentioned Loans to Greenwich Capital Markets, Inc., the security interests in
the Loans released by the above named corporation comprise all security
interests relating to or affecting any and all such Loans. The Seller warrants
that, as of such time, there are and will be no other security interests
affecting any or all of such Loans.
MEGO MORTGAGE CORPORATION
Seller
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
<PAGE> 52
EXHIBIT 3
ASSIGNMENT AND CONVEYANCE
On this ____________ day of _____________, 199__, Mego
Mortgage Corporation ("Seller") as the Seller under that certain Amended and
Restated Master Loan Purchase and Servicing Agreement, dated as of October 1,
1996 (the "Agreement"), does hereby sell, transfer, assign, set over and convey
to Greenwich Capital Markets, Inc. as Purchaser under the Agreement, without
recourse, but subject to the terms of the Agreement, all right, title and
interest of the Seller in and to the Loans (with the exception of the Excess
Yield) listed on the Loan Schedule attached hereto, together with the related
Loan Files and all rights and obligations arising under the documents contained
therein. Pursuant to Subsection 6.03 of the Agreement, the Seller has delivered
to the Purchaser the documents for each Loan to be purchased. The contents of
each related Servicing File required to be retained by the Seller to service
the Loans pursuant to the Agreement and thus not delivered to the Purchaser or
the Custodian are and shall be held in trust by the Seller for the benefit of
the Purchaser as the owner thereof. The Seller's possession of any portion of
each such Servicing File is for the sole purpose of facilitating servicing of
the related Loan pursuant to the Agreement, and such retention and possession
by the Seller shall be in a custodial capacity only. The ownership of each
Note, Mortgage, and the contents of the Loan File and Servicing File is vested
in the Purchaser, except for the Excess Yield, and the ownership of all records
and documents with respect to the related Loan prepared by or which come into
the possession of the Seller shall immediately vest in the Purchaser and shall
be retained and maintained, in trust, by the Seller at the will of the
Purchaser in such custodial capacity only.
The Seller confirms to the Purchaser that the
representations and warranties set forth in Subsections 7.01 and 7.02 of the
Agreement are true and correct as of the date hereof and makes the following
additional representations and warranties to the Purchaser, which additional
representations and warranties are hereby incorporated into Subsection 7.02 of
the Agreement:
(1) No Loan had a principal balance at
origination in excess of $_____________ nor
less than $____________ and the average
principal balance of the Loans on the Cut-off
Date was not less than $_____________;
(2) Each Loan has a Loan Interest Rate of at
least _________%. The Loans have a weighted
average Loan Interest Rate of _______% as of
the Cut-off Date; and
(3) No Loan had an original term to maturity of
more than ___ months[.][;]
[Other]
<PAGE> 53
-2-
Capitalized terms used herein and not otherwise defined
shall have the meanings set forth in the Agreement.
MEGO MORTGAGE CORPORATION
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
<PAGE> 54
EXHIBIT 4
CONTENTS OF EACH LOAN FILE
With respect to each Loan, the Loan File shall include
all documents reasonably necessary to service the Loan and, in the case of each
FHA Loan, necessary to document the Loan in accordance with FHA requirements,
which shall be available for inspection by the Purchaser and which shall be
retained by the Seller or delivered to the Purchaser.
<PAGE> 55
EXHIBIT 5
[COLLECTION ACCOUNT] [SPREAD ACCOUNT] LETTER AGREEMENT
___________________, 199_
To:
----------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
(the "Depository")
As Seller under the Amended and Restated Master Loan
Purchase and Servicing Agreement, dated as of October 1, 1996, we hereby
authorize and request you to establish an account, as a Collection Account, to
be designated as "Mego Mortgage Corporation in trust for Greenwich Capital
Markets, Inc. as Purchaser under that certain Amended and Restated Master Loan
Purchase and Servicing Agreement, dated as of October 1, 1996, among Greenwich
Capital Markets, Inc., Mego Mortgage Corporation and Mego Financial Corp. for
FHA and Conventional Home Improvement Loans." All deposits in the account shall
be subject to withdrawal therefrom by order signed by the Seller. This letter
is submitted to you in duplicate. Please execute and return one original to us.
MEGO MORTGAGE CORPORATION
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
Date:
--------------------------------------
<PAGE> 56
-2-
The undersigned, as Depository, hereby certifies that the
above-described account has been established under Account Number ____________
at the office of the Depository indicated above, and agrees to honor
withdrawals on such account as provided above. The amount deposited at any time
in the account will be insured by the Federal Deposit Insurance Corporation
through the Bank Insurance Fund ("BIF") or the Savings Association Insurance
Fund ("SAIF") subject to applicable insurance maximums.
------------------------------------------
Depository
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
Date:
-------------------------------------
<PAGE> 57
EXHIBIT 6
SERVICING ADDENDUM
SECTION 11. Servicing
Subsection 11.01 Seller to Act as Servicer.
The Seller shall administer and master service the Loans
in accordance with the Agreement and customary servicing procedures, and shall
have full power and authority, to do or cause to be done any and all things in
connection with such administration which the Seller may deem necessary or
desirable and consistent with the terms of the Agreement, including, in the
case of each FHA Loan, taking all actions that an FHA Approved Mortgagee is
permitted or required to take by the FHA.
Consistent with the terms of this Agreement, the Seller
may waive, modify or vary any term of any Loan or consent to the postponement
of strict compliance with any such term or in any manner grant indulgence to
any Obligor if in the Seller's reasonable and prudent determination such
waiver, modification, postponement or indulgence is not materially adverse to
the Purchaser or the Excess Yield Holder; provided, however, that the Seller
shall not permit any modification with respect to any Loan that would change
the Loan Interest Rate, defer or forgive the payment thereof or of any
principal or interest payments, reduce the outstanding principal amount (except
for actual payments of principal), make additional advances, extend the final
maturity date or adversely affect any FHA Insurance Contract with respect to
such Loan. Without limiting the generality of the foregoing, the Seller shall
continue, and is hereby authorized and empowered, to execute and deliver on
behalf of itself, and the Purchaser and the Excess Yield Holder, all
instruments of satisfaction or cancellation, or of partial or full release,
discharge and all other comparable instruments, with respect to the Loans and,
in the case of a Mortgage Loan, with respect to the Improved Property. If
reasonably required by the Seller, the Purchaser and the Excess Yield Holder
shall furnish the Seller with any powers of attorney and other documents
necessary or appropriate to enable the Seller to carry out its servicing and
administrative duties under this Agreement.
In servicing and administering the Loans, the Seller
shall employ procedures including collection procedures and exercise the same
care that it customarily employs and exercises in servicing and administering
loans for its own account giving due consideration to accepted mortgage
servicing practices of prudent lending institutions and the Purchaser's and the
Excess Yield Holder's reliance on the Seller.
It is understood and agreed that the Seller may delegate
certain servicing duties to qualified sub-servicers with the Purchaser's prior
written approval; provided, however, that the Seller shall remain responsible
to the Purchaser for all servicing activities notwithstanding such delegation.
The Seller shall make such inspections of an Improved
Property, if any, as are consistent with standard servicing procedures
customary to the applicable loan type and, in the case of each FHA Loan, as
required by FHA Regulations if the Seller has actual notice of
<PAGE> 58
-2-
any related condition which materially and adversely affects or may materially
and adversely affect such Improved Property. Such inspection shall be conducted
in accordance with customary servicing procedures and, in the case of each FHA
Loan, FHA servicing requirements for delinquent mortgages.
The Seller shall take all actions necessary to assure
that a case number is assigned to each FHA Loan by the FHA.
Subsection 11.02 Collection of Loan Payments.
Continuously from the date hereof until the principal and
interest on all Loans are paid in full, the Seller shall proceed diligently to
collect all payments due under each Loan when the same shall become due and
payable and shall, to the extent such procedures shall be consistent with this
Agreement, follow such collection procedures as it follows with respect to
loans comparable to the Loans held for its own account.
Subsection 11.03 Repurchase of or Realization Upon
Defaulted Loans.
(a) In the event that two or more Monthly
Payments are delinquent on or after the Due Date of succeeding Monthly Payments
with respect to a Loan, the Seller may at its option repurchase such Loan by
depositing the Repurchase Price therefor into the Collection Account. Such
repurchased Loans shall cease to be subject to this Agreement, and the
Purchaser shall convey such Loans to the Seller as contemplated by Subsection
7.03. The Seller shall use all reasonable efforts, consistent with the
procedures that the Seller would use in servicing loans for its own account
and, in the case of each FHA Loan, the requirements of FHA, with respect to any
Loan as comes into and continues in default and as to which no satisfactory
arrangements can be made for collection of delinquent payments pursuant to
Subsection 11.01, either (i) in the case of an FHA Loan, to assign the Loan to
the FHA and obtain FHA Insurance Proceeds with respect thereto or (ii) in the
case of a Mortgage Loan, with Purchaser's consent, which will not be
unreasonably withheld or delayed, to foreclose upon or otherwise comparably
convert the ownership of the related Improved Property, and, in the case of a
Loan that is not a Mortgage Loan, to collect from the Obligor amounts that are
due and unpaid. The Seller shall use all reasonable efforts to realize upon
defaulted Loans in such a manner as will maximize the receipt of principal and
interest at the Pass-Through Rate by the Purchaser, taking into account, among
other things, the timing of foreclosure proceedings, if applicable. In the
event that the Seller fails, on a timely basis, to (i) in the case of an FHA
Loan, assign the Loan to the FHA and obtain FHA Proceeds with respect thereto
or (ii) in the case of a Mortgage Loan, with purchaser's consent, which will
not be unreasonably withheld or delayed, to foreclose upon or otherwise
comparably convert the ownership of the related Improved Property or (iii) in
the case of a Loan that is not a Mortgage Loan, the Seller shall use its best
efforts to cause the obligor to bring such Loan current or (iv) deposit all FHA
Insurance Proceeds into the Collection Account, the Seller shall, at the
Purchaser's request, repurchase such Loan at the Repurchase Price.
<PAGE> 59
-3-
(b) Notwithstanding the foregoing provisions of
this Subsection 11.03, with respect to any Mortgage Loan as to which the Seller
has received actual notice of, or has actual knowledge of, the presence of any
toxic or hazardous substance on the related Improved Property the Seller shall
not either (i) obtain title to such Improved Property as a result of or in lieu
of foreclosure or otherwise, or (ii) otherwise acquire possession of, or take
any other action, with respect to, such Improved Property if, as a result of
any such action, the Purchaser would be considered to hold title to, to be a
mortgagee-in-possession of, or to be an owner or operator of such Improved
Property within the meaning of the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended from time to time, or any
comparable law, unless the Seller has also previously determined, based on his
reasonable judgment and a prudent report prepared by a Person who regularly
conducts environmental audits using customary industry standards, that:
(1) such Improved Property is in compliance with
applicable environmental laws or, if not, that it would be in the best
economic interest of the Purchaser to take such actions as are necessary to
bring the Improved Property into compliance therewith; and
(2) there are no circumstances present at such
Improved Property relating to the use, management or disposal of any
hazardous substances, hazardous materials, hazardous wastes, or
petroleum-based materials for which investigation, testing, monitoring,
containment, clean-up or remediation could be required under any federal,
state or local law or regulation, or that if any such materials are present
for which such action could be required, that it would be in the best
economic interest of the Purchaser to take such actions with respect to the
affected Improved Property.
The cost of the environmental audit report contemplated
by this Subsection 11.03 shall be advanced by the Seller, subject to the
Seller's right to be reimbursed therefor from the Collection Account as
provided in Subsection 11.05(v).
If the Seller determines, as described above, that it is
in the best economic interest of the Purchaser to take such actions as are
necessary to bring any such Improved Property into compliance with applicable
environmental laws, or to take such action with respect to the containment,
clean-up or remediation of hazardous substances, hazardous materials, hazardous
wastes, or petroleum-based materials affecting any such Improved Property, then
the Seller shall take such action as it deems to be in the best economic
interest of the Purchaser. The cost of any such compliance, containment,
cleanup or remediation shall be advanced by the Seller, subject to the Seller's
right to be reimbursed therefor from the Collection Account as provided in
Subsection 11.05(v).
(c) Proceeds received in connection with any
Final Recovery Determination, as well as any recovery resulting from a partial
collection of Insurance Proceeds or Liquidation Proceeds in respect of any
Loan, will be applied in the following order of priority: first, to any unpaid
Servicing Fees pursuant to Subsection 11.05(ii); second, to accrued and unpaid
interest on the Loan at the Pass-Through Rate, pursuant to Subsection 11.09, to
the
<PAGE> 60
-4-
date of the Final Recovery Determination, or to the Due Date prior to the
Distribution Date on which such amounts are to be distributed if not in
connection with a Final Recovery Determination; third, to any related
unreimbursed Servicing Advances and Monthly Advances and other advances
pursuant to Subsection 11.05(v); fourth, as a recovery of principal on the
Loan; and fifth, to Excess Yield pursuant to Subsection 11.09.
Subsection 11.04 Establishment of Collection
Accounts; Deposits in Collection
Accounts.
The Seller shall segregate and hold all funds collected
and received pursuant to each Loan separate and apart from any of its own funds
and general assets and shall establish and maintain one or more Collection
Accounts, in the form of time deposit or demand accounts. The creation of any
Collection Account shall be evidenced by a Collection Account Letter Agreement
in the form of Exhibit 5.
The Seller shall deposit in the Collection Account on a
daily basis, and retain therein the following payments and collections received
by it subsequent to the Cut-off Date, or received by it prior to the Cut-off
Date but allocable to a period subsequent thereto, other than in respect of
principal and interest on the Loans received on or before the Cut-off Date:
(i) all payments on account of principal on the
Loans;
(ii) all payments on account of interest on the
Loans;
(iii) all Impound Payments received on the Loans;
(iv) all Liquidation Proceeds;
(v) all Insurance Proceeds including amounts
required to be deposited pursuant to Subsection 11.07 other than proceeds to be
applied to the restoration or repair of the Improved Property or released to
the Obligor in accordance with the Seller's normal servicing procedures, the
Loan Documents or applicable law;
(vi) all Condemnation Proceeds affecting any
Improved Property which are not released to the Obligor in accordance with the
Seller's normal servicing procedures, the Loan Documents or applicable law;
(vii) all Monthly Advances;
(viii) the Repurchase Price of any Loan repurchased
in accordance with Subsections 7.03 or 11.03, and all amounts required to be
deposited by the Seller in connection with shortfalls in principal amount of
Qualified Substitute Loans pursuant to Subsection 7.03;
(ix) any amounts required to be deposited by the
Seller in connection with any REO Property pursuant to Subsection 11.08;
<PAGE> 61
-5-
(x) any amounts required to be deposited in the
Collection Account pursuant to Subsections 11.14 or 11.16; and
(xi) any late charges and assumption fees.
The foregoing requirements for deposit in the Collection Account shall be
exclusive. Such Collection Account shall be an Eligible Account. Any interest
or earnings on funds deposited in the Collection Account by the depository
institution shall accrue to the benefit of the Seller and the Seller shall be
entitled to retain and withdraw such interest from the Collection Account
pursuant to Subsection 11 .05(ii). The Seller shall give notice to the
Purchaser and the Excess Yield Holder of the location of the Collection Account
when established and prior to any change thereof.
Subsection 11.05 Permitted Withdrawals From the
Collection Account.
Subject to the order of priorities set forth in
Subsection 11.03(c), the Seller may, from time to time, withdraw from the
Collection Account for the following purposes:
(i) to reimburse itself for premiums paid under
the FHA Insurance Contract, to the extent that the Seller has received Impound
Payments with respect thereto;
(ii) to pay to itself pursuant to Subsection 11.18
as servicing compensation (a) any interest earned on funds in the Collection
Account (all such interest to be withdrawn monthly not later than each
Distribution Date); (b) the Servicing Fee from that portion of any payment or
recovery as to interest on a particular Loan; and (c) any payments in the
nature of late payment charges and assumption fees and other charges, to the
extent permitted by Subsection 11.18;
(iii) to pay to itself with respect to each Loan
that has been repurchased pursuant to Subsection 7.03 or Subsection 11.03 all
amounts received thereon and not distributed as of the date on which the
related Repurchase Price is determined;
(iv) to reimburse itself for Monthly Advances, the
Seller's right to reimburse itself pursuant to this subclause (iv) being
limited to amounts received on the related Loan which represent late
collections including related Liquidation Proceeds, Condemnation Proceeds,
Insurance Proceeds and such other amounts as may be collected by the Seller,
from the Obligor or otherwise relating to the Mortgage Loan), it being
understood that, in the case of such reimbursement, (i) the Seller's right
thereto shall be prior to the rights of Purchaser, except that, where the
Seller is required to repurchase a Loan, pursuant to Subsection 7.03, the
Seller's right to such reimbursement shall be subsequent to the payment to the
Purchaser of the Repurchase Price pursuant to Subsection 7.03, and all other
amounts required to be paid to the Purchaser with respect to such Loans, and
(ii) the Seller shall not be permitted to reimburse itself pursuant to this
subclause (iv) from any amounts transferred into the Collection Account from
the Spread Account pursuant to Subsection 11.16(c);
<PAGE> 62
-6-
(v) to reimburse itself for unreimbursed
Servicing Advances, the Seller's right to reimburse itself pursuant to this
subclause (v) with respect to any Loan being limited to related Liquidation
Proceeds, Condemnation Proceeds, Insurance Proceeds and such other amounts as
may be collected by the Seller from the Obligor or otherwise relating to the
Loan, it being understood that, in the case of such reimbursement, (i) the
Seller's right thereto shall be prior to the rights of the Purchaser, except
that, where the Seller is required to repurchase a Loan, pursuant to Subsection
7.03, the Seller's right to such reimbursement shall be subsequent to the
payment to the Purchaser of the Repurchase Price pursuant to Subsection 7.03
and all other amounts required to be paid to the Purchaser with respect to such
Loans, and (ii) the Seller shall not be permitted to reimburse itself pursuant
to this subclause (v) from any amounts transferred into the Collection Account
from the Spread Account pursuant to Subsection 11.16(c);
(vi) to reimburse the Seller for any Monthly
Advance or Servicing Advance previously made which the Seller has determined to
be a Nonrecoverable Advance; provided that, the Seller shall not be permitted
to reimburse itself pursuant to this subclause (vi) from any amounts
transferred into the Collection Account from the Spread Account pursuant to
Subsection 11.16(c);
(vii) to make distributions to the Purchaser of all
amounts distributable to the Purchaser pursuant to this Agreement in the manner
provided for in Subsection 11.09, such amounts allocated first to interest at
the Pass-Through Rate and then to principal;
(viii) to pay into the Spread Account certain
amounts representing a portion of or all of the Excess Yield, to the extent
required pursuant to Subsection 11.16; and
(ix) to clear and terminate the Collection Account
on the termination of this Agreement.
Subsection 11.06 Transfer of Accounts.
The Seller may transfer the Collection Account and/or the
Spread Account and/or any REO Account to a different depository institution
from time to time. Such transfer shall be made only upon obtaining the prior
written consent of the Purchaser and the Excess Yield Holder, which consent
shall not be unreasonably withheld. In any case, the Collection Account, the
Spread Account and any REO Account shall be an Eligible Account.
Subsection 11.07 Collection of FHA Insurance
Proceeds; Other Remedies.
In the event of a default by the Obligor with respect to
any FHA Loan, the Seller shall, subject to the Seller's rights under Subsection
11.03, consistent with the provisions of Subsection 11.01 and all requirements
of the FHA, and provided that adequate FHA Insurance Reserves exist, use all
reasonable efforts to assign the related FHA Loan to the FHA and to collect the
related FHA Insurance Proceeds. In the event that the FHA Insurance Reserves
are
<PAGE> 63
-7-
inadequate to permit the FHA to pay the FHA Insurance Proceeds with respect to
such FHA Loan, or in the event that the FHA denies the Seller's claim for FHA
Insurance Proceeds for reasons other than reasons that would constitute a
breach of the Seller's representations and warranties under Subsection 7.01 or
Subsection 7.02, the Seller shall proceed to foreclose upon or otherwise
comparably convert the ownership of the related Improved Property with respect
to any Mortgage Loan that is an FHA Loan, and, with respect to any FHA Loan
that is not a Mortgage Loan, to undertake such actions as necessary and
appropriate to collect amounts due and owing under the related Note, consistent
with the related Loan Documents, FHA Regulations and all other applicable laws
and regulations. The Seller shall deposit all FHA Insurance Proceeds into the
Collection Account promptly upon receipt thereof.
Subsection 11.08 Title, Management and Disposition of
REO Property.
In the event that title to the Improved Property is
acquired in foreclosure or by deed in lieu of foreclosure, the deed or
certificate of sale shall be taken in the name of the person designated by the
Purchaser, or in the event such person is not authorized or permitted to hold
title to real property in the state where the REO Property is located, or would
be adversely affected under the "doing business" or tax laws of such state by
so holding title, the deed or certificate of sale shall be taken in the name of
such Person or Persons as shall be consistent with an Opinion of Counsel
obtained by the Seller from an attorney duly licensed to practice law in the
state where the REO Property is located. Any Person or Persons holding such
title other than the Purchaser shall acknowledge in writing that such title is
being held as nominee for the benefit of the Purchaser.
The Seller shall either itself or through an agent
selected by the Seller, manage, conserve, protect and operate each REO Property
(and may with the prior written consent of the Purchaser temporarily rent the
same) in the same manner that it manages, conserves, protects and operates
other foreclosed property for its own account, and in the same manner that
similar property in the same locality as the REO Property is managed. The
Seller shall use all reasonable efforts to dispose of the REO Property as soon
as possible.
With respect to each REO Property, the Seller shall
segregate and hold all funds collected and received in connection with the
operation of the REO Property separate and apart from its own funds or general
assets and shall establish and maintain a separate REO Account for each REO
Property in the form of a non-interest bearing demand Eligible Account. The
creation of any REO Account shall be evidenced by a letter agreement in the
form shown in Exhibit 8. An original of such letter agreement shall be
furnished to the Purchaser upon request.
The Seller shall deposit or cause to be deposited, on a
daily basis in each REO Account all revenues received with respect to the
related REO Property and shall withdraw therefrom funds necessary for the
proper operation, management and maintenance of the REO Property, including the
fees of any managing agent acting on behalf of the Seller. The Seller shall not
be entitled to retain interest paid or other earnings, if any, on funds
deposited in such
<PAGE> 64
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REO Account. On or before each Determination Date, the Seller shall withdraw
from each REO Account and deposit into the Collection Account the net income
from the REO Property on deposit in the REO Account.
The Seller shall furnish to the Purchaser on each
Distribution Date, an operating statement for each REO Property covering the
operation of each REO Property for the previous month. Such operating statement
shall be accompanied by such other information as the Purchaser shall
reasonably request.
Each REO Disposition shall be carried out by the Seller
at such price and upon such terms and conditions as the Seller deems to be in
the best interest of the Purchaser and the Excess Yield Holder. If as of the
date title to any REO Property was acquired by the Seller there were
outstanding unreimbursed Servicing Advances with respect to the REO Property,
the Seller, upon an REO Disposition of such REO Property, shall be entitled to
reimbursement for any related unreimbursed Servicing Advances from proceeds
received in connection with such REO Disposition. The proceeds from the REO
Disposition, net of any payment to which the Seller is entitled as provided
herein, shall be deposited in the REO Account and shall be transferred to the
Collection Account on the Determination Date in the month following receipt
thereof for distribution on the succeeding Distribution Date in accordance with
Subsection 11.09.
Subsection 11.09 Distributions.
On each Distribution Date, the Seller shall distribute to
the Purchaser all amounts credited to the Collection Account during the related
Due Period which are attributable to principal and interest (adjusted to the
related Pass-Through Rate) collected with respect to each Loan (including
Liquidation Proceeds, Condemnation Proceeds and Insurance Proceeds) plus all
Monthly Advances, if any, which the Seller is obligated to make pursuant to
Subsection 11.15, minus all amounts that the Seller is entitled to withdraw
from the Collection Account pursuant to Subsection 11.05(i) through (vi) plus
any amount distributable to the Purchaser pursuant to Subsection 11.16(c) of
the Agreement.
The Seller shall deposit into the Spread Account any
amount required to be deposited therein as specified in Subsection 11.16(a).
With respect to any remittance received by the Purchaser
on or after the second Business Day following the Business Day on which such
payment was due, the Seller shall pay to the Purchaser, as applicable, interest
on any such late payment at an annual rate equal to the rate of interest as is
publicly announced from time to time at its principal office by Chemical Bank,
New York, New York, as its prime lending rate, adjusted as of the date of each
change, plus three percentage points, but in no event greater than the maximum
amount permitted by applicable law. Such interest shall be paid by the Seller
to the Purchaser, as applicable, on the date such late payment is made and
shall cover the period commencing with the day following such second Business
Day and ending with the Business Day on which such payment is made, both
inclusive. Such interest shall be remitted along with such late payment.
<PAGE> 65
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The payment by the Seller of any such interest shall not be deemed an extension
of time for payment or a waiver by the Purchaser of any Event of Default by the
Seller.
Subsection 11.10 Remittance Reports.
On the Distribution Date, the Seller shall furnish to the
Purchaser and the Excess Yield Holder or their designees a computer tape
containing, and a hard copy of, the Remittance Report, in such form as the
Purchaser may reasonably request.
Subsection 11.11 Statements to the Purchaser and the
Excess Yield Holder.
Not more than sixty days after the end of each calendar
year, the Seller shall furnish to each Person who was the Purchaser at any time
during such calendar year, (i) as to the aggregate of remittances for the
applicable portion of such year, an annual statement in accordance with the
requirements of applicable federal income tax law, and (ii) listing of the
principal balances of the Loans outstanding at the end of such calendar year.
The Seller shall prepare and file any and all tax
returns, information statements or other filings required to be delivered to
any governmental taxing authority or to any Purchaser pursuant to any
applicable law with respect to the Loans and the transactions contemplated
hereby. In addition, the Seller shall provide the Purchaser with such
information concerning the Loans as is necessary for the Purchaser to prepare
its federal income tax return as any Purchaser may reasonably request from time
to time.
Subsection 11.12 Real Estate Owned Reports.
Together with the statement furnished pursuant to
Subsection 11.08, with respect to any REO Property, the Seller shall furnish to
the Purchaser a statement covering the Seller's efforts in connection with the
sale of such REO Property and any rental of such REO Property incidental to the
sale thereof for the previous month, together with the operating statement.
Such statement shall be accompanied by such other information as the Purchaser
shall reasonably request.
Subsection 11.13 Liquidation Reports.
Upon the foreclosure sale of any Improved Property or the
acquisition thereof by the Purchaser pursuant to a deed-in-lieu of foreclosure,
the Seller shall submit to the Purchaser a liquidation report with respect to
such Improved Property.
<PAGE> 66
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Subsection 11.14 Satisfaction of Mortgages and
Release of Loan Files.
In the event the Seller satisfies or releases a Mortgage
without having obtained payment in full of the indebtedness secured by the
Mortgage or should it otherwise prejudice any right the Purchaser may have
under the mortgage instruments, the Seller, upon written demand, shall remit to
the Purchaser the then outstanding principal balance of the related Loan by
deposit thereof in the Collection Account.
From time to time and as appropriate in connection with
the servicing, assignment to the FHA, foreclosure or other enforcement of a
Loan, the Purchaser shall, upon request of the Seller and delivery to the
Purchaser of a servicing receipt signed by a servicing officer of the Seller (a
"Servicing Officer"), release the requested portion of the Loan File held by
the Purchaser to the Seller, together with any assignments necessary to enable
the Seller to perform its obligations. Such servicing receipt shall obligate
the Seller to return the related Loan Documents to the Purchaser when the need
therefor by the Seller no longer exists, unless (a) the Loan has been
liquidated and the Liquidation Proceeds relating to the Loan have been
deposited in the Collection Account, or (b) the Loan File or such document has
been delivered to (i) the FHA in connection with an assignment of the Loan to
the FHA and collection of FHA Insurance Proceeds, or (ii) an attorney, for
purposes of initiating or pursuing legal action or other proceedings to collect
amounts due under the Loan (if such Loan is not a Mortgage Loan), or (iii) with
respect to a Mortgage Loan, an attorney or a public trustee or other public
official as required by law for purposes of initiating or pursuing legal action
or proceedings for the foreclosure of the Improved Property either judicially
or non-judicially, and the Seller has delivered to the Purchaser a certificate
of a Servicing Officer certifying as to the name and address of the Person to
which such Loan File or such document was delivered and the purpose or purposes
of such delivery. Upon receipt of a certificate of a Servicing Officer stating
that such Loan was liquidated, or the FHA Insurance Proceeds received, the
servicing receipt shall be returned by the Purchaser to the Seller.
Subsection 11.15 Monthly Advances by the Seller.
(a) Not later than the close of business on the
Business Day preceding each Distribution Date, the Seller shall deposit in the
Collection Account an amount equal to all payments not previously advanced by
the Seller, whether or not deferred pursuant to Subsection 11.01, of interest
not allocable to the period prior to the Cut-off Date, at the Pass-Through
Rate, which were due on a Loan and delinquent at the close of business on the
related Determination Date.
(b) The obligation of the Seller to make such
Monthly Advances is mandatory, notwithstanding any other provision of this
Agreement, and, with respect to any Loan or REO Property, shall continue until
a Final Recovery Determination in connection therewith; provided that,
notwithstanding anything herein to the contrary, no Monthly Advance shall be
required to be made hereunder by the Seller if such Monthly Advance would, if
made, constitute a Nonrecoverable Advance. The determination by the Seller that
it has made a
<PAGE> 67
-11-
Nonrecoverable Advance or that any proposed Monthly Advance or Servicing
Advance, if made, would constitute a Nonrecoverable Advance, shall be evidenced
by an Officer's Certificate delivered to the Purchaser.
Subsection 11.16 Spread Account.
(a) The Seller shall, for the benefit of the
Purchaser, establish and maintain with the Spread Account Depository one or
more accounts (collectively, the "Spread Account"), which shall be entitled
"Mego Mortgage Corporation in trust for Greenwich Capital Markets, Inc. as
Purchaser under that certain Amended and Restated Master Loan Purchase and
Servicing Agreement, dated as of October 1, 1996, among Greenwich Capital
Markets, Inc., Mego Mortgage Corporation and Mego Financial Corp. for FHA and
Conventional Home Improvement Loans". The Seller shall deposit or cause to be
deposited monthly into the Spread Account all interest received on the Loans at
the Excess Yield Rate to the extent required to increase the aggregate amount
on deposit in the Spread Account to an amount equal to the sum of (i) 25% of
the aggregate unpaid principal balance of all Delinquent Loans other than
Seriously Delinquent Loans, (ii) in the case of any FHA Loans which are
Seriously Delinquent Loans which have had HUD claims filed but have not yet
received final rejections of claim from HUD, 25% of the aggregate unpaid
principal balance of such FHA Loans, (iii) in the case of FHA Loans which are
Seriously Delinquent Loans which either (x) have not had HUD claims filed or
(y) have had HUD claims filed and have received final rejections from HUD on
such claims, 100% of the aggregate unpaid principal balance of such FHA Loans
and (iv) 100% of the aggregate unpaid principal balance of all Conventional
Loans that are Seriously Delinquent Loans, such balances to be computed as of
the immediately preceding Determination Date. The Seller shall cause the
Spread Account Depository to deposit into the Spread Account, from the
Collection Account, any Excess Yield required to be deposited therein. To the
extent that as of any Determination Date the amount on deposit in the Spread
Account exceeds the sum described in the second preceding sentence (computed as
of such Determination Date), at the Seller's request the Purchaser shall
instruct the Spread Account Depository to release the amount of such excess to
the Seller on the related Distribution Date. Similarly, to the extent that the
amount required to be deposited into the Spread Account pursuant to the third
preceding sentence is greater than the Excess Yield for such month, the Seller
shall deposit the amount of such deficiency into the Spread Account. The
Seller shall, upon the request of the Purchaser or the Excess Yield Holder,
provide evidence that the Spread Account has been established. The Purchaser
shall not have any interest in the Spread Account other than as a holder of a
security interest therein. Amounts held in the Spread Account from time to time
shall continue to be the property of the Excess Yield Holder until withdrawn
from the Spread Account pursuant to Subsection 11.16(c). The Seller, or the
Excess Yield Holder if different from the Seller, hereby grants to the
Purchaser a security interest in the Spread Account and such assets as are
deposited and held therein from time to time and any investments thereof,
together with any and all income, proceeds and payments with respect thereto.
Such grant is made to secure the obligations of the Seller (or the Excess Yield
Holder if different from the Seller) under this Subsection 11.16.
<PAGE> 68
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The Seller (and the Excess Yield Holder, if such is not
the Seller) shall cause, at all times that the Loans are outstanding, a valid
and perfected lien on or security interest in the Spread Account to be
maintained, and a valid and perfected security interest of first priority under
the Uniform Commercial Code as in effect from time to time in the State wherein
the Spread Account is located to be maintained, in the amounts deposited in the
Spread Account and the investments thereof in order to secure the full and
timely performance of the obligations of the Excess Yield Holder pursuant to
this Subsection 11.16. Amounts properly distributed by the Spread Account
Depository to the Excess Yield Holder pursuant to Subsection 11.16(d) shall be
deemed released from the provisions of this Agreement and the security interest
established by this subsection, and the Excess Yield Holder will in no event be
required to refund any such distributed amounts. The Spread Account Depository
shall keep records that accurately reflect the funds on deposit in the Spread
Account. The amount held in the Spread Account shall be noted on the monthly
remittance reports provided to the Purchaser and the Excess Yield Holder
pursuant to Subsection 11.10.
(b) The Spread Account Depository shall at the
written direction of the Seller, so long as the Seller is the Excess Yield
Holder, invest the funds in such account in Permitted Investments, each of
which shall mature not later than one year following the date of such
investment. All such Permitted Investments shall be registered in the name of
the Spread Account Depository (in its capacity as such) or its nominee. All
income and gain realized from any such investment as well as any interest
earned on deposits in the Spread Account shall be deposited or retained in the
Spread Account and accumulated therein, pending any withdrawal or release from
the Spread Account pursuant to subsection (c) below. The Seller shall deposit
in the Spread Account (with respect to investments made hereunder of funds held
therein) an amount equal to the amount of any loss incurred in respect of any
such investment immediately upon realization of such loss. The Seller shall be
permitted, in its discretion, to liquidate any Permitted Investment. The
proceeds of such liquidated investment shall be deposited into the Spread
Account. The Spread Account Depository shall not be liable for the amount of
any loss incurred in respect of any investment, or lack of investment, of funds
held in the Spread Account, except for losses attributable to the Spread
Account Depository's failure to make payments on such Permitted Investments
issued by the Spread Account Depository, in its commercial capacity, in
accordance with their terms.
(c) On the Business Day prior to each
Distribution Date, the Seller shall deposit into the Collection Account for
distribution to the Purchaser on such Distribution Date pursuant to Subsection
11.09, an amount equal to the aggregate of all Realized Losses incurred with
respect to any Loans and REO Properties as to which Final Recovery
Determinations were made during the period ending on the related Determination
Date and any Realized Losses with respect to any Loans and REO Properties as to
which Final Recovery Determinations were made during prior periods but which
were not paid due to insufficient funds in the Spread Account. Amounts
distributable to the Purchaser shall be limited to funds represented by the
amounts then on deposit in the Spread Account (the "Spread Account Balance")
and the Seller shall not be required to supplement such funds with its own
funds except to the extent of any loss on a Permitted Investment with respect
to the Spread Account. The Spread Account Balance shall be reduced by the
amount of any Realized Losses. The Seller
<PAGE> 69
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may, in satisfaction of its obligation described in this paragraph (c), cause
the Spread Account Depository to withdraw from the Spread Account and deposit
into the Collection Account the total amount to be deposited therein for such
Distribution Date pursuant to the preceding sentences.
Notwithstanding the foregoing, in the event that the
Seller is unable to assign an FHA Loan to the FHA and to collect FHA Insurance
Proceeds (i) due to insufficient FHA Insurance Reserves or (ii) due to the
FHA's denial of a claim for reasons not constituting a breach of a
representation or warranty under Subsection 7.01 or 7.02, which denial the
Seller believes in good faith to be final, the Seller shall either, at its
option, repurchase the related FHA Loan under Subsection 11.03 or proceed to
enforce its other remedies. In the event that the Seller pursues other remedies
but no Final Recovery Determination can be made within 12 months after the date
of default under an FHA Loan with respect to (i) above and within 12 months
after final denial by the FHA of a claim with respect to (ii) above, the Seller
shall cause to be withdrawn from the Spread Account and deposited in the
Collection Account, in the manner described in this subsection, an amount equal
to the amount that would be deemed a Realized Loss if a Final Recovery
Determination could be made, and the Spread Account shall be reduced by such
amount. Any amounts subsequently received by the Seller with respect to the
related FHA Loan or REO Property shall be deposited by the Seller into the
Spread Account.
(d) Upon the termination of this Agreement, any
and all amounts remaining in the Spread Account shall be distributed to the
Excess Yield Holder.
Subsection 11.17 [Intentionally Deleted]
Subsection 11.18 Servicing Compensation.
As compensation for its services hereunder the Seller
shall be entitled to withdraw from the Collection Account or to retain from
interest payments on the Loans the amounts provided for as the Seller's
Servicing Fee. Additional servicing compensation in the form of any assumption
fees and late payment charges or other charges shall be retained by the Seller
to the extent not required to be deposited in the Collection Account. The
Seller shall be required to pay all expenses incurred by it in connection with
its servicing activities hereunder and shall not be entitled to reimbursement
therefor except as specifically provided for.
Subsection 11.19 Statement as to Compliance.
The Seller will deliver to the Purchaser not later than
120 days following the end of each fiscal year of the Seller, which as of the
Closing Date ends on the last day in August 31, in each calendar year,
beginning with the fiscal year ending August 31, 1997, an Officers' Certificate
stating, as to each signatory thereof, that (i) a review of the activities of
the Seller during the preceding year and of performance under this Agreement
has been made under such officers' supervision and (ii) to the best of such
officers' knowledge, based on such review, the Seller has fulfilled all of its
obligations under this Agreement throughout such year, or, if there has been a
default in the fulfillment of any such obligation, specifying each such default
known
<PAGE> 70
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to such officer and the nature and status thereof. Copies of such statement
shall be provided by the Purchaser to any Person identified as a prospective
purchaser of the Loans.
Subsection 11.20 Independent Public Accountants'
Servicing Report.
Not later than 90 days following the end of each fiscal
year of the Seller, beginning with the fiscal year ending August 31, 1997, the
Seller at its expense shall cause a firm of independent public accountants
(which may also render other services to the Seller) which is a member of the
American Institute of Certified Public Accountants to furnish a statement to
the Purchaser or its designee to the effect that such firm has examined certain
documents and records relating to the servicing of the Loans under this
Agreement or of loans under servicing agreements (including the Loans and this
Agreement) substantially similar one to another (such statement to have
attached thereto a schedule setting forth the servicing agreements covered
thereby) and that, on the basis of such examination conducted substantially in
compliance with the Audit Guide for Use by Independent Public Accountants in
Audits of HUD-approved Non-Supervised Mortgagees, Loan Correspondents and
Coinsuring Mortgagees (the "Audit Guide"), such firm confirms that such
servicing has been conducted in compliance with such servicing agreements
except for such significant exceptions or errors in records that, in the
opinion of such firm, the Audit Guide requires it to report. Copies of such
statement shall be provided by the Purchaser to any Person identified as a
prospective purchaser of the Loans.
Subsection 11.21 Access to Certain Documentation.
The Seller shall provide to the Office of Thrift
Supervision, the FDIC and any other federal or state banking or insurance
regulatory authority that may exercise authority over the Purchaser or the
Excess Yield Holder access to the documentation regarding the Loans serviced by
the Seller required by applicable laws and regulations. Such access shall be
afforded without charge, but only upon reasonable request and during normal
business hours at the offices of the Seller. In addition, access to the
documentation will be provided to the Purchaser, the Excess Yield Holder or any
agent thereof identified to the Seller by the Purchaser or the Excess Yield
Holder without charge, upon reasonable request during normal business hours at
the offices of the Seller.
Subsection 11.22 Status of Completion Certificates.
Upon the request of the Purchaser from time to time, the
Seller shall identify to the Purchaser the Loans as to which the Seller has not
received a completion certificate, in the case of any FHA Loan, in the form
required by FHA, whether or not the deadline for delivery of such certificate
by the Obligor has passed, together with the status of such deadline.
<PAGE> 71
EXHIBIT 7
PRICING LETTER
[Date], 199_
Greenwich Capital Markets, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attn:
Ladies and Gentlemen:
Pursuant to Section 2 of that certain Amended and
Restated Master Loan Purchase and Servicing Agreement, dated as of October 1,
1996 (the "Purchase Agreement"), among Greenwich Capital Markets, Inc. (the
"Purchaser"), Mego Mortgage Corporation (the "Seller") and Mego Financial
Corp., the Seller agrees to sell, and the Purchaser agrees to purchase on
[date] or such other date mutually agreed to by the Seller and the Purchaser
not later than 14 days following such date (the "Closing Date"), Loans having
an aggregate principal balance not in excess of $_______ and originated by the
Seller between [date] and [date] (the "Cut-off Date"). The Loan Package shall
have an adjustable Pass-Though Rate equal to 200 basis points per annum in
excess of the London Inter Bank Offered Rate ("LIBOR") for U.S. dollar deposits
for one month as quoted on Page 3750 on the Telerate Service (or such other
page as may replace Page 3750 on that service or such other service as may be
nominated for the time being by the British Bankers Association as the
information vendor for the purpose of displaying British Bankers Association
Interest Settlement Rates). The Pass-Through Rate shall adjust monthly at
30-day intervals following the Closing Date based upon LIBOR as in effect two
Business Days prior to such adjustment date.
This Pricing Letter supersedes any prior Pricing Letters
the Purchaser and the Seller have agreed to.
Capitalized terms used but not defined herein shall have
the meanings set forth in the Purchase Agreement.
The Purchase Price for the Loan Package will be the sum
of (A) _____% multiplied by the balance of the FHA Loans, (B) _____% multiplied
by the aggregate unpaid principal balance of the Conventional Loans and (C)
accrued interest (as specified in Section 4 of the Purchase Agreement). The
Purchase Price shall be paid by the Purchaser to the Seller on the Closing Date
as directed by the Seller.
Pursuant to Subsection 11.16 of the Purchase Agreement,
all interest received on the Loans at the Excess Yield Rate shall be deposited
monthly in the Spread Account to be maintained at The First National Bank of
Boston (or another depository approved by the Purchaser), and retained therein,
subject to withdrawal solely for the purpose of remittance to the Purchaser in
respect of any Realized Losses.
<PAGE> 72
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Each Loan purchased hereunder may be resold by the
Purchaser or transferred into a trust for the purpose of a Pass-Through
Transfer or Whole Loan Transfer (any such resale or transfer, a "Purchaser
Disposition") and, upon such a Purchaser Disposition, the Purchaser shall make
an additional payment (the "Disposition Payment") to the Seller in an amount
determined in this Pricing Letter to the extent that the Purchaser Disposition
is effected at a price greater than the price paid by the Purchaser.
The Disposition Payment will be equal to any amount by
which (a) the net proceeds realized by the Purchaser from a Purchaser
Disposition exceed (b) the sum of (i) the Disposition Fee payable to Greenwich
Capital Markets, Inc. ("GCM") pursuant to the engagement letter dated October
1, 1996 between GCM and the Seller and (ii) the aggregate Purchase Price paid
by the Purchaser to the Seller for the related Loans.
Amounts paid by the Purchaser hereunder shall be paid in
same day funds through the federal funds wire system.
The Purchaser shall use its reasonable best efforts to
minimize the amount of Excess Yield required to credit enhance the interest of
any investor in the Loans pursuant to any Reconstitution Agreement unless such
efforts under the then existing market conditions might reasonably lead to a
net resale price less than Par.
<PAGE> 73
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Attached hereto as Schedule I is the Loan Schedule for
the Loan Package. The related Closing Date with respect to such Loan Package
shall be [date], 199_, and the Cut-off Date will be [date], 199_.
MEGO MORTGAGE CORPORATION,
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
Agreed to and Accepted
GREENWICH CAPITAL MARKETS, INC.
By:
----------------------------
Name:
-----------------------
Title:
-------------------------
<PAGE> 74
EXHIBIT 8
REO ACCOUNT LETTER AGREEMENT
, 199
--------------------- --
To:
-----------------------------
----------------------------------------
----------------------------------------
(the "Depository")
As Seller under the Amended and Restated Master Loan
Purchase and Servicing Agreement, dated as of October 1, 1996, we hereby
authorize and request you to establish an account, as an REO Account, to be
designated as "Mego Mortgage Corporation in trust for Greenwich Capital
Markets, Inc. as Purchaser under that certain Amended and Restated Master Loan
Purchase and Servicing Agreement, dated as of October 1, 1996, among Greenwich
Capital Markets, Inc., Mego Mortgage Corporation and Mego Financial Corp. for
FHA and Conventional Home Improvement Loans." All deposits in the account
shall be subject to withdrawal therefrom by order signed by the Seller. This
letter is submitted to you in duplicate. Please execute and return one original
to us.
MEGO MORTGAGE CORPORATION
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
Date:
------------------------------------------
<PAGE> 75
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The undersigned, as Depository, hereby certifies that the
above-described account has been established under Account Number ____________
at the office of the Depository indicated above, and agrees to honor
withdrawals on such account as provided above. The amount deposited at any time
in the account will be insured by the Federal Deposit Insurance Corporation
through the Bank Insurance Fund ("BIF") or the Savings Association Insurance
Fund ("SAIF") subject to applicable insurance maximums.
------------------------------------------
Depository
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
Date:
-------------------------------------
<PAGE> 76
EXHIBIT 9A
SELLER'S OFFICER'S CERTIFICATE OF CHIEF FINANCIAL OFFICER
I, _____________, hereby certify that I am the duly
elected Vice President and Chief Financial Officer of Mego Mortgage
Corporation, a Delaware corporation (the "Seller"), and further certify, on
behalf of the Seller, as follows:
1. I am familiar with each of the material
agreements to which the Seller is a party or by which it is bound; and
2. Neither the sale nor delivery of the Loans to
the Purchaser, nor the consummation of the transactions contemplated by, nor
the fulfillment of the obligations of the Seller under the terms of the Amended
and Restated Master Loan Purchase and Servicing Agreement (the "Purchase
Agreement") dated as of October 1, 1996, among the Seller, Greenwich Capital
Markets, Inc. (the "Purchaser") and Mego Financial Corp., and the Custodial
Agreement, dated as of April 1, 1995, among Greenwich Capital Financial
Products, Inc., First Trust National Association and the Seller, materially
conflicts with or will materially conflict with, or results or will result in a
material breach of, or constitutes or will constitute a material default under,
the certificate of incorporation of the Seller, the terms of any indenture or
other agreement or instrument to which the Seller is a party or by which it is
bound or to which it is subject, or to any statute or order, rule, regulation,
writ, injunction or decree of any court, governmental authority or regulatory
body to which the Seller is subject or by which it is bound.
All capitalized terms used herein and not otherwise
defined shall have the meaning assigned to them in the Purchase Agreement.
<PAGE> 77
-2-
IN WITNESS WHEREOF, I have hereunto signed my name and
affixed the seal of the Seller.
Dated:
[Seal]
MEGO MORTGAGE CORPORATION
By:
----------------------------------------
Name:
Title: Vice President and Chief Financial
Officer
I, ________________, Assistant Secretary of
___________________________, hereby certify that ______________ is the duly
elected, qualified and acting Vice President and Chief Financial Officer of the
Seller and that the signature appearing above is such person's genuine
signature.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated:
[Seal]
MEGO MORTGAGE CORPORATION
By:
--------------------------------
Name:
Title: Assistant Secretary
<PAGE> 78
EXHIBIT 9B
GUARANTOR'S OFFICER'S CERTIFICATE OF GENERAL COUNSEL
I, _____________, hereby certify that I am the duly
elected Executive Vice President and General Counsel of Mego Financial Corp., a
New York corporation (the "Guarantor"), and further certify, on behalf of the
Guarantor, as follows:
1. I am familiar with each of the material
agreements to which the Guarantor is a party or by which it is bound; and
2. The fulfillment of the obligations of the
Guarantor under the terms of the Amended and Restated Master Loan Purchase and
Servicing Agreement (the "Purchase Agreement") dated as of October 1, 1996,
among Mego Mortgage Corporation, Greenwich Capital Markets, Inc. (the
"Purchaser") and the Guarantor does not materially conflict with and will not
materially conflict with, will not result in a material breach of, or
constitute a material default under, the certificate of incorporation of the
Guarantor, the terms of any indenture or other agreement or instrument to which
the Guarantor is a party or by which it is bound or to which it is subject, or
to any statute or order, rule, regulation, writ, injunction or decree of any
court, governmental authority or regulatory body to which the Guarantor is
subject or by which it is bound.
All capitalized terms used herein and not otherwise
defined shall have the meaning assigned to them in the Purchase Agreement.
<PAGE> 79
-2-
IN WITNESS WHEREOF, I have hereunto signed my name and
affixed the seal of the Guarantor.
Dated:
[Seal]
MEGO FINANCIAL CORP.
By:
-----------------------------------
Name:
Title: Executive Vice President and
General Counsel
I, ________________, Assistant Secretary of
_______________________, hereby certify that _____________ is the duly elected,
qualified and acting Vice President and General Counsel of the Guarantor and
that the signature appearing above is such person's genuine signature.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated:
[Seal]
MEGO FINANCIAL CORP.
By:
---------------------------------
Name:
Title: Assistant Secretary
<PAGE> 80
EXHIBIT 10
CUSTODIAL AGREEMENT
<PAGE> 81
SCHEDULE I
LOAN SCHEDULE
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EXHIBIT 10.29
AGREEMENT
This Agreement is made as of the _____ day of November, 1996, between
MEGO FINANCIAL CORP., a New York corporation ("Mego Financial"), and MEGO
MORTGAGE CORPORATION, a Delaware corporation (the "Corporation").
WHEREAS, Mego Financial and the Corporation desire to enter into this
Agreement for the purpose of providing for certain matters relating to the
relationship between Mego Financial and the Corporation.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained, the parties hereto hereby agree as
follows:
1. Restrictions Relating to Share Issuance and Acquisitions. During the
period (the "Eighty Percent Period") that and so long as Mego Financial,
presently the sole stockholder of the Corporation, holds shares having at least
80% of the total combined voting power of all classes of stock entitled to vote
for directors of the Corporation and constituting at least 80% of the total
number of shares of each other class of stock of the Corporation, all as defined
in Section 368(c) of the Internal Revenue Code of 1986, as amended (the "Code")
(all such stock in the aggregate constituting "Eighty Percent Control" and Mego
Financial being hereinafter referred to as the "Eighty Percent Holder"), and
although a vote of stockholders is not and shall not be required under
applicable law or the Corporation's Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") for the issuance of shares of
capital stock or equity securities or any debt or other instrument that is
convertible or exchangeable into stock or any other equity security of the
Corporation or any subsidiary, including options or any other rights to purchase
capital stock pursuant to any employee benefit plan or stock option plan (a
"Plan") or otherwise, that are authorized under the Certificate of
Incorporation, but unissued, or, to acquire an ownership interest in certain
assets, the advance written approval of the Eighty Percent Holder shall be
required (unless waived in writing by the Eighty Percent Holder) prior to:
(i) the Corporation taking any action, including, without
limitation, the issuance of any capital stock or other equity security or any
debt or other instrument that is convertible or exchangeable into stock or any
other equity security of the Corporation, including options, warrants or any
other rights to purchase capital stock, pursuant to any Plan or otherwise, that
would reduce the percentage of ownership of the Eighty Percent Holder in the
capital stock of the Corporation so that the Eighty Percent Holder thereafter
would not own stock constituting Eighty Percent Control (treating options,
warrants or any other rights to purchase capital stock as exercised immediately
upon issuance for purposes of making this determination) or that otherwise would
reduce (or, with the taking of any action contemplated by the instrument in
question, could reduce) the Eighty Percent Holder's ownership of the
Corporation's stock below "control" of the Corporation within the meaning of
Section 368(c) of the Code;
(ii) the Corporation acquiring or taking any action to cause
any subsidiary to acquire any direct or indirect ownership interest in any asset
that does not constitute part of an active trade or business within the meaning
of Section 355(b) of the Code; provided, however, that the Corporation or any
subsidiary may acquire any asset that is similar in nature to the assets it
holds on October 28, 1996, so long as that acquisition would not cause the
Corporation or any subsidiary not to be engaged in an active trade or business
within the meaning of Section 355(b) of the Code; or
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(iii) the Corporation taking any action to cause the issuance
of any capital stock or equity security, any debt or other instrument that is
convertible or exchangeable into stock or any other equity security by or of any
subsidiary or any right to purchase the same in the Corporation or any
subsidiary, and the Corporation shall not take any such action above without the
prior written approval of the Eighty Percent Holder.
Any attempt to take any such actions without the prior written approval of the
Eighty Percent Holder during the Eighty Percent Period shall be null and void
and any purported issuance of any capital stock or equity security or any
convertible or exchangeable debt or other instrument or any right to purchase
the same in the Corporation or any subsidiary or any acquisition in violation of
this provision shall not terminate the Eighty Percent Period.
2. Restrictions Relating to Boards of Directors and Bylaws. During the
Eighty Percent Period, the Corporation shall not take any action to (i) change
the number of its directors or the number of directors of any subsidiary, (ii)
fill any vacancy in its board of directors or in the board of directors of any
subsidiary or (iii) alter, amend or repeal, in whole or in part, its Bylaws, or
adopt new Bylaws, without the advance written approval of the Eighty Percent
Holder (unless such requirement is waived in writing by the Eighty Percent
Holder).
3. Prior Approval is not Required for Stockholder Vote. The obligations
of the Corporation contained in this Agreement to obtain the advance written
approval of the Eighty Percent Holder shall continue in effect during the Eighty
Percent Period, notwithstanding that the Corporation is required under
applicable law or its Certificate of Incorporation to have a vote of
stockholders to take any such actions, except possibly with respect to certain
acquisitions, and that the Corporation will have a vote of stockholders to take
any such actions, except possibly with respect to certain acquisitions. The
consent or lack of consent of the Eighty Percent Holder with respect to any
matter is not a vote on such matter by the Eighty Percent Holder.
4. Actions and Obligations of Mego Financial. The Corporation is
entering into this Agreement because Mego Financial has agreed to pursue an
initial public offering for the Corporation. Mego Financial agrees to exercise
its rights in a reasonably prompt manner, subject to its use of diligence
reasonably deemed necessary by Mego Financial.
5. Injunctive Relief. The Corporation agrees that any violation of the
foregoing covenants will cause irreparable injury to Mego Financial, that the
remedies at law for any such violation will be inadequate to Mego Financial, and
that Mego Financial shall, in addition to and not in limitation of any other
rights and/or remedies available at law or in equity, be entitled to temporary
and permanent injunctive relief and specific performance without the necessity
of proving actual damage.
6. Severability. Each of the covenants herein is independent and
severable. Each covenant shall remain in full force and effect regardless of the
enforceability of any other covenant herein. If it shall be determined at any
time by a court of competent jurisdiction that any provision of this Agreement
or any portion thereof is unenforceable, then such portions as shall be
determined to be unreasonably restrictive or unenforceable shall thereupon be
deemed amended as to make such restrictions reasonable in the determination of
such court and the provisions, as amended, shall be enforceable between the
parties to the same extent as if such amendment had been made prior to the date
of any alleged breach of such provision.
2
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7. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
8. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto and supersedes all prior agreements, understandings,
negotiations and discussions, both written and oral, between the parties hereto
with respect to the subject matter hereof. This Agreement may not be amended or
modified in any way except by a written instrument executed by the parties
hereto.
9. Benefits; Binding Effect. This Agreement shall be for the benefit of
and binding upon the parties hereto, their respective successors and assigns.
IN WITNESS WHEREOF, the undersigned have hereunto set hand and seal as
of the date first written above.
MEGO FINANCIAL CORP.
By:
---------------------------------
Name:
Title:
MEGO MORTGAGE CORPORATION
By:
---------------------------------
Name:
Title:
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Exhibit 10.30
GREENWICH CAPITAL MARKETS, INC.
600 STEAMBOAT ROAD
GREENWICH, CONNECTICUT 06830
September 17, 1996
Mr. Herbert B. Hirsch
Chief Financial Officer and Treasurer
Mego Mortgage Corporation
Las Vegas, Nevada 89109
Re: Interest Only/Residual Financing Facility
-----------------------------------------
Dear Herb:
Greenwich Capital Markets, Inc. ("GCM") is pleased to submit this commitment to
extend an Interest Only/Residual Financing Facility to Mego Mortgage
Corporation ("Mego") on the following terms:
Term: One year commencing on November 1, 1996 and ending on
October 31, 1997.
Amount: The aggregate dollar amount of Interest Only Certificates
("IOs"), Class R Certificates ("Residuals") and Performing
Inventory Adjustment, as defined below, to be financed under
this facility at any one time shall be the lesser of (i) the
aggregate of (a) 60% of the GCM Residual Value (as defined
below) of each Residual financed, (b) 75% of the GCM IO Value
(as defined below) of each IO financed and (c) the Performing
Inventory Adjustment and (ii) $11,000,000.
If Mego chooses to finance the Mego Mortgage FHA Title I Loan
Trust 1996-1 Class S Certificate and the 1996-2 Class S
Certificate under the separate PSA Master Repurchase Agreement
which has already been executed between GCM and Mego, then such
amount in item (ii) above shall be $8,000,000.
<PAGE> 2
Mr. Herbert Hirsch
September 17, 1996
Page 2 of 4
Fundings: Upon notice from Mego, GCM will advance funds representing
the proposed financing of such IOs and/or Residuals to Mego.
The amount of such financing will be dependent upon several
things including, but not limited to, collateral type, GCM's
IO and/or Residual Value (see below), as applicable, Advance
Rates (see below) and current market conditions.
Collateral: GCM will finance either IOs or Residuals of securitizations
underwritten and/or issued by GCM or one of its affiliates.
GCM will only finance a Residual if the IO of the related
securitization has already been either sold or financed by
GCM. If, in accordance with the preceding sentence, GCM
finances a Residual on a given securitization and an IO is
issued on a subsequent securitization, then, if such
subsequent IO is not sold by GCM, such subsequent IO must
replace the prior Residual which was already financed or
sold. Once such subsequent IO has been financed, then, to
the extent the maximum amount of the financing has not been
reached, the Residual from the prior deal can once again be
financed by GCM.
Performing
Inventory
Adjustment: If Mego so desires, GCM will lend Mego an amount equal to the
Performing Inventory Adjustment. Such Performing Inventory
Adjustment shall be equal to the sum of (i) in the case of
Title I HILs which are not delinquent the aggregate of (a) the
current outstanding balance of each such non-delinquent Title I
HIL multiplied by (b) the excess of 103% over the percent of
par paid to Mego for such same Title I HIL on the related
Closing Date and (ii) in the case of Conventional HILs which
are not delinquent the aggregate of (c) the current outstanding
balance of each such non-delinquent Conventional HIL multiplied
by (d) the excess of 100% over the percent of par paid to Mego
for such same Conventional HIL on the related Closing Date.
Interest Rate: LIBOR +350. All interest is payable monthly in arrears and is
due by the 15th day of the following month. Interest will be
calculated on the basis of a 360-day year comprised of 12
30-day months.
Advance Rate: GCM will advance 75% of the GCM IO Value and 60% of the GCM
Residual Value. The "GCM IO Value" and the "GCM Residual
Value" will be GCM's internal valuation of the related
security (and underlying collateral), in its sole discretion,
based initially on a predetermined calculation agreed upon by
both parties.
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Mr. Herbert Hirsch
September 17, 1996
Page 3 of 4
Modeling assumptions, such as overcollateralization levels in
particular, will affect the respective GCM IO and/or Residual
Values significantly. The assumptions to be used in
determining the respective GCM IO and/or Residual Values
are subject to change based on market conditions and the
performance of Mego's collateral (particularly delinquencies
and losses) and the financial condition of both Mego
Mortgage Corporation and Mego Financial Corp.
GCM Fee: As compensation for providing this Interest Only/Residual
Financing Facility, GCM will receive an upfront fee of
$50,000. Such fee shall be due and payable upon execution
of the Interest Only/Residual Financing Facility documents
by both Mego and GCM.
Covenants: Those affirmative, negative and financial covenants
customarily found in facility agreements similar in
content to the proposed transaction. Financial covenants
to be determined by GCM will include, but not be limited
to, the following:
(i) Minimum net worth during the term of the Residual
Financing Facility;
(ii) Maximum debt to equity ratio;
(iii) Maximum percentage of servicing portfolio which is
30 days or more delinquent; and
(iv) No material change of control, either executive,
management or ownership, other than that
contemplated by the upcoming equity offering.
Events of
Default: The Interest Only/Residual Financing Facility will contain
customary default provisions which will be appropriate in
the context of the proposed Interest Only/Residual
Financing Facility.
Guaranty: All commitments and obligations, financial or otherwise,
of Mego Mortgage Corporation shall be guaranteed by Mego
Financial Corp. until such time as the proposed public
offering of debt and equity of Mego Mortgage Corporation
is completed.
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Mr. Herbert Hirsch
September 17, 1996
Page 4 of 4
This commitment is subject to (a) execution of definitive documentation
reasonably satisfactory to GCM, (b) receipt of opinions reasonably
acceptable to GCM regarding the due authorization, execution and
enforceability of the facility, (c) confirmation that there has not
been any material adverse change in the condition (financial or
otherwise) of Mego or its parent and (d) approval of GCM's Credit
Committee.
Very truly yours,
/s/ Stephen M. Peet
-------------------
Stephen M. Peet
Executive Vice President
Accepted and Agreed:
Mego Mortgage Company
By: /s/ Don A. Mayerson
--------------------------
Name: Don A. Mayerson
Title: Vice President
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EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
------------------------------
1994 1995 1996
------- ------ -------
<S> <C> <C> <C>
Income (loss) before provision for income taxes per income
statement.................................................... $(1,511) $5,919 $11,155
Add
Portion of rents representative of the interest
factor(1)................................................. 28 82 112
Interest on indebtedness(2).................................. 129 655 1,283
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Income as adjusted................................... $(1,354) $6,656 $12,550
======= ====== =======
Fixed charges
Interest on indebtedness..................................... $ 129(2) $ 655(2) $ 167(3)
Pro forma interest on senior subordinated notes.............. -- -- 5,200
Prepaid commitment fees...................................... 50 129 --
Portion of rents representative of the interest
factor(1)................................................. 28 82 112
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Fixed charges............................................. $ 207 $ 866 $ 5,479
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Ratio of earnings to fixed charges............................. NM 7.69 2.29
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(1) Total rents................................................ $ 85 $ 249 $ 338
Multiplied by 1/3......................................... 0.33 0.33 0.33
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Portion of rents representative of the interest factor..... $ 28 $ 82 $ 112
======= ====== =======
(2) Based on total interest expense.
(3) Represents interest expense on debt not expected to be repaid (leases).
</TABLE>
NM = NOT MEANINGFUL
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EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-12443 of Mego Mortgage Corporation on Form S-1 of our report dated October
28, 1996 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.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
November 13, 1996
