<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
MEGO MORTGAGE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 6162 88-0286042
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
1000 PARKWOOD CIRCLE, SUITE 500
ATLANTA, GEORGIA 30339
(770) 952-6700
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------------
JAMES L. BELTER
EXECUTIVE VICE PRESIDENT
MEGO MORTGAGE CORPORATION
1000 PARKWOOD CIRCLE, SUITE 500
ATLANTA, GEORGIA 30339
(770) 952-6700
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<C> <C>
FERN S. WATTS, ESQ. JOERG H. ESDORN, ESQ.
GREENBERG TRAURIG HOFFMAN GIBSON, DUNN & CRUTCHER LLP
LIPOFF ROSEN & QUENTEL, P.A. 200 PARK AVENUE
1221 BRICKELL AVENUE NEW YORK, NEW YORK 10166
MIAMI, FLORIDA 33131 (212) 351-4000
(305) 579-0500 (FACSIMILE) (212) 351-4035
(FACSIMILE) (305) 579-0717
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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 statement 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=======================================================================================================================
PROPOSED
MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED PRICE(1) FEE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $0.01 per
share.................................. $45,029,687.50 $13,646
=======================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
================================================================================
<PAGE> 2
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 10, 1997
3,500,000 SHARES
MEGO MORTGAGE CORPORATION
COMMON STOCK
[MEGO LOGO]
---------------------
All of the 3,500,000 shares of common stock, par value $0.01 per share (the
"Common Stock"), offered hereby (the "Offering"), are being sold by Mego
Mortgage Corporation, a Delaware corporation (the "Company"). The Common Stock
is currently listed on the Nasdaq National Market under the symbol "MMGC." On
November 7, 1997, the last reported sales price of the Common Stock on the
Nasdaq National Market was $11.125 per share. See "Price Range of Common Stock."
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 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.
<TABLE>
<CAPTION>
==============================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $ $ $
- --------------------------------------------------------------------------------------------------------------
Total(3)................................. $ $ $
==============================================================================================================
</TABLE>
(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses payable by the Company estimated to be $500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
525,000 additional shares of Common Stock at the Price to Public less the
Underwriting Discounts and Commissions, solely to cover over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $ , $ and $ , respectively. See
"Underwriting."
---------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by them, and 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 the shares of
Common Stock will be made against payment therefor at the offices of Friedman,
Billings, Ramsey & Co., Inc., Arlington, Virginia, the representative of the
several Underwriters (the "Representative"), or in book-entry form through the
book-entry facilities of The Depository Trust Company on or about ,
1997.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC. CIBC OPPENHEIMER
The date of this Prospectus is , 1997
<PAGE> 3
MEGO MORTGAGE CORPORATION
[MAP]
MAP OF THE CONTINENTAL UNITED STATES
SHOWING TOP SIX STATES, HEADQUARTERS AND BRANCH OFFICES.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT AND STABILIZING TRANSACTIONS, THE PURCHASE OF
SUCH SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE SECURITIES OFFERED HEREBY ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
<PAGE> 4
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) gives effect to a 1,600-for-1 stock split
effected in October 1996 and (ii) assumes no exercise of the Underwriters'
over-allotment option to purchase from the Company up to an additional 525,000
shares of Common Stock.
This Prospectus contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by and information currently available to management. Such
forward-looking statements are principally contained in the sections "Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and include, without limitation, the
Company's expectation and estimates as to the Company's business operations,
including the introduction of new products and future financial performance,
including growth in revenues and net income and cash flows. In addition, in
those and other portions of this Prospectus, the words "anticipates,"
"believes," "estimates," "expects," "plans," "intends" and similar expressions,
as they relate to the Company or its management, are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company's management with respect to future events, and are subject to certain
risks, uncertainties and assumptions, including the risk factors described in
this Prospectus. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated or
expected. The Company does not intend to update these forward-looking
statements.
THE COMPANY
Mego Mortgage Corporation (the "Company") is a specialized consumer finance
company that originates, purchases, sells, securitizes and services consumer
loans consisting primarily of conventional uninsured home improvement and debt
consolidation loans which are generally secured by liens on residential property
("Conventional Loans"). The Company has historically originated loans through
its network of independent correspondent lenders ("Correspondents") and home
improvement construction contractors ("Dealers"). Until May 1996, the Company
originated only home improvement loans insured under the Title I credit
insurance program ("Title I Loans") of the Federal Housing Administration (the
"FHA"). Subject to certain limitations, the Title I program provides for
insurance of 90% of the outstanding principal balance of the loan, and certain
other costs. The Company began its conventional lending operations to high
credit quality and higher income borrowers than the typical Title I borrower in
May 1996 in order to leverage its existing network of Correspondents and
Dealers. Pursuant to these programs, the Company originates uninsured
conventional home improvement loans to facilitate larger home improvement and
remodeling projects which exceed the FHA Title I program loan limits, as well as
enable borrowers to use all or a portion of the proceeds for debt consolidation.
Debt consolidation loan proceeds are used to shift high interest rate credit
card debt and other consumer finance obligations into a single monthly mortgage
payment. Such Conventional Loans when added to existing senior lien balances may
have a post funding combined loan-to-value ratio ("LTV") of up to 125% of the
underlying properties' value. At August 31, 1997, the Company's Conventional
Loan portfolio had a weighted-average combined LTV of 112%. For the three months
ended August 31, 1996 and the year ended August 31, 1997, the Company originated
$11.2 million and $428.8 million of Conventional Loans, respectively, which
constituted 22.5% and 81.4% of the Company's total loan originations during the
respective periods.
The profile of the Company's borrowers is typified by individuals who own
their homes 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, particularly
those who wish to consolidate debt, 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 the higher
interest rates that the Company receives in its loan programs as compared to the
interest rates charged by banks and other
1
<PAGE> 5
traditional financial institutions. The Company has developed a proprietary
credit index profile ("CIP") that includes as a significant component the credit
evaluation score methodology developed by Fair, Isaac and Company ("FICO") to
classify borrowers on the basis of likely future performance. The other
components of the Company's credit scoring system include debt-to-income ratio,
employment history and residence stability. The Company currently makes
Conventional Loans only to those borrowers with an "A" or "B" credit grade,
representing the two lowest credit risk levels, using the CIP. At August 31,
1997, the Company's Conventional Loan borrowers had a weighted-average FICO
score of 672, an average annual income of $57,468, an average of 8.6 years of
current industry employment, and an average of 4.3 years of residence in the
underlying mortgaged property. The Company receives varying rates of interest
based upon the borrower's credit profile and income and assumed risk. For the
years ended August 31, 1996 and 1997, the loans originated by the Company had a
weighted-average interest rate of 14.03% and 13.92%, respectively.
The Company's loan originations increased to $526.9 million during the year
ended August 31, 1997 from $139.4 million during the year ended August 31, 1996.
The Company's revenues increased to $54.8 million for the year ended August 31,
1997 from $23.6 million for the year ended August 31, 1996. For the year ended
August 31, 1997, the Company had net income of $14.7 million compared to $6.9
million for the year ended August 31, 1996. 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 currently sells substantially all the loans it originates
either through securitizations at a yield below the stated interest rate on the
loans, generally retaining the right to service the loans and to receive any
amounts in excess of the yield to the purchasers, or through whole loan sales to
third party institutional purchasers. In connection with whole loan sales, the
Company either sells the loans on a servicing retained basis at a yield below
the stated interest rate on the loans or on a servicing released basis at a
premium. The Company has completed seven securitizations from March 1996 through
October 1997, and expects to sell a substantial portion of its loan production
through securitizations in the future. 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. However, the Company continues to
make whole loan sales on either a servicing released or servicing retained
basis. Sales on a servicing released basis and some sales on a servicing
retained basis enable the Company to generate a cash premium at the time of
sale. At August 31, 1997, the Company serviced $618.5 million of loans it had
sold through whole loan sales and securitizations, and $9.6 million of loans it
owned.
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.
STRATEGIC INITIATIVES
The Company's strategic plan is to continue to expand its lending
operations while maintaining the credit quality of its portfolio. The Company's
strategies include: (i) offering new complementary loan products such as
non-conforming first mortgage loans; (ii) expanding its existing network of
Correspondents and Dealers; (iii) initiating direct mortgage lending; and (iv)
mitigating negative cash flow by continuing to sell a portion of the Company's
originations in secondary market transactions for cash premiums, seeking to
increase the amount of warehouse credit lines available to the Company and
developing loan products which are salable for cash premiums.
Subprime First Mortgage Lending. The Company intends to expand its loan
product lines commencing in November 1997 to include the origination of subprime
conventional residential first mortgage loans ("First Mortgage Loans") by
leveraging its existing relationships. The Company intends to originate this
product solely for sale at cash premiums in the secondary market, without
recourse for credit losses or risk of prepayment. With respect to this new
product line, increased emphasis will be placed on the underlying collateral
value of the residence with such value fully supported by independent
appraisals. Prior to funding any loans in this new product line, the Company
plans to obtain contractual forward purchase commitments for this product line
from third party financial institutions.
2
<PAGE> 6
Correspondent and Dealer Networks. At August 31, 1997, the Company had
developed a network of 694 active Correspondents and 670 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 and Dealers. The Company
also intends to increase its number of active Correspondents and Dealers by
greater penetration of existing markets, due to its broader product line.
Direct Lending. In order to diversify its loan source channels, the
Company commenced direct to consumer origination of Conventional Loans in
September 1997. The Company has entered into an agreement with a consumer
finance institution for the acquisition of loan referrals of pre-qualified
potential borrowers whose credit profiles and/or higher LTV requirements may not
meet the referring institution's conforming loan product guidelines, but may be
suitable for approval and funding under the Company's existing product mix. The
Company expects to enter into similar agreements with additional lenders. In the
direct to consumer origination channel, origination fees are typically paid by
the borrowers to the Company and are expected to exceed the Company's cost of
referrals. This program is unlike Correspondent originations which require
upfront cash premiums for the acquisition of loans with no related offsets.
Accordingly, this channel of origination requires less upfront cash than the
Company's historical methods. The Company anticipates that as it expands its
lending operations it will continue to realize economies of scale thereby
reducing its average loan origination costs and enhancing its profitability.
Over the long-term, the Company will seek to reduce its dependency on outside
funding sources. See "Business -- Business Strategy."
RELATIONSHIP WITH MEGO FINANCIAL; SPIN-OFF
The Company was formed in June 1992 as a wholly-owned subsidiary of Mego
Financial Corp. ("Mego Financial"), a publicly traded company, and commenced
origination of loans in March 1994. In November 1996, the Company consummated an
underwritten initial public offering (the "IPO") of 2.3 million shares of Common
Stock. As a result of the consummation of the IPO, Mego Financial's ownership of
the Company was reduced to approximately 81.3% of the outstanding Common Stock.
On September 2, 1997, Mego Financial distributed all of its 10.0 million shares
of Common Stock of the Company to Mego Financial's shareholders in a tax-free
spin-off (the "Spin-off"). 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 owed to Mego Financial and its subsidiary,
Preferred Equities Corporation ("PEC"). The amount of debt owed to Mego
Financial and PEC was $12.8 million at August 31, 1996 and $10.1 million at
August 31, 1997. It is not anticipated that Mego Financial will provide funds to
the Company or guarantee the Company's indebtedness in the future, although it
may do so. The Company intends to use a portion of the net proceeds of this
Offering to repay $3.9 million of debt owed to Mego Financial. See "Use of
Proceeds." The Company also has agreements with PEC for the provision of
management services and loan servicing. See "Certain Transactions."
RECENT DEVELOPMENTS
In October 1997, the Company consummated a private placement (the "Private
Placement") of $40.0 million aggregate principal amount of its 12 1/2% Senior
Subordinated Notes due 2001 (the "Notes"), which increased the aggregate
principal amount of Notes outstanding from $40.0 million to $80.0 million. (The
$40.0 million of Notes sold in the Private Placement are referred to herein as
the "Additional Notes" and the original $40.0 million of outstanding Notes are
referred to herein as the "Existing Notes"). The Company used approximately
$29.0 million of the net proceeds of the Private Placement to reduce amounts
outstanding under the Company's lines of credit and $3.9 million of the net
proceeds to repay debt owed to Mego Financial. The balance of the net proceeds
has been and will be used to originate and securitize loans. Prior to the
consummation of the Private Placement, the Company obtained the required
consents pursuant to a solicitation (the "Consent Solicitation") to amendments
(the "Indenture Amendments") to the indenture governing the Notes (the "Original
Indenture" and as amended, the "Indenture"), which among other things permitted
the issuance of the Additional Notes and modified certain covenants applicable
to the Company. In
3
<PAGE> 7
connection with the Consent Solicitation, the Company made consent payments of
$10.00 cash per $1,000 principal amount of Existing Notes to holders thereof who
properly furnished their consents to the Indenture Amendments.
Pursuant to the Spin-off, effective on September 2, 1997, Mego Financial
distributed all of its 10.0 million shares of the Company's Common Stock to Mego
Financial's shareholders. The Company believes that the Spin-off will not have a
material adverse effect on the Company's business or strategic plans, and
expects the Spin-off to provide the Company with a simplified corporate
structure and increased flexibility with respect to financing options and tax
planning.
As of September 2, 1997, Jeffrey S. Moore became Chief Executive Officer of
the Company. See "Management." Additionally, the Company determined to change
its fiscal year-end from August 31 to December 31, effective December 31, 1997.
In June and August 1997, the Company completed its first two non-monoline
insured securitizations pursuant to which it sold pools of loans amounting to
$104.6 million and $73.3 million, respectively. The Company will continue to
service the sold loans and is entitled to receive a servicing fee of 1.0% from
payments in respect of interest on the sold loans. From March 1996 to date, the
Company has completed seven securitizations pursuant to which it has sold loan
pools having an aggregate principal balance of approximately $531.3 million.
In October 1997, the Company entered into a revolving credit facility with
a financial institution providing for an initial advance of up to $5.0 million
secured by certain residual interest and interest only securities. This credit
facility bears an annual interest rate of the higher of (i) the prime rate as
established by The Chase Manhattan Bank, N.A., plus 2.5% or (ii) 9.0%. This
credit facility may be increased to an aggregate principal amount of up to $8.8
million with additional lender participations.
THE OFFERING
Common Stock offered by
the Company................... 3,500,000 shares(1)
Common Stock to be outstanding
after the Offering.............. 15,800,000 shares(1)(2)
Use of proceeds................. The Company intends to apply the net proceeds
of the Offering to repay debt to Mego
Financial, pay down amounts outstanding under
the Company's lines of credit and provide
capital to originate and securitize loans.
See "Use of Proceeds."
Nasdaq symbol................... MMGC
- ---------------
(1) Does not include 525,000 shares of Common Stock subject to the Underwriters'
over-allotment option.
(2) Does not include an aggregate of (i) 10,000 shares of Common Stock remaining
reserved for issuance under the Company's 1996 Stock Option Plan (the "1996
Plan") and (ii) 2,000,000 shares of Common Stock reserved for issuance under
the Company's 1997 Stock Option Plan (the "1997 Plan"), which Plan is
subject to stockholder approval. See "Management -- Company Stock Option
Plans."
RISK FACTORS
Investment in the shares 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 changes
in interest rates; risks related to the Company's dependence on securitization
and other sale transactions; risks related to the fact that the Company has
operated, and expects to continue to operate for the foreseeable future, on a
negative cash flow basis; risks relating to significant outstanding
indebtedness; risks associated with capitalized mortgage servicing rights and
valuation of mortgage related securities; risks
4
<PAGE> 8
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 subprime first mortgage lending including the reliance on
contractual commitments for the purchase of First Mortgage Loans; 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
credit enhancement; risks relating to dependence on financing and need for
additional financing; 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 and services provided by PEC;
and risks associated with competition, restrictions on dividends, shares
eligible for future sale, volatility of the stock market, and factors inhibiting
a takeover of the Company.
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. Certain reclassifications have been made
to conform prior years with the current presentation.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------
1994(1) 1995 1996 1997
------- ------- ------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of loans............................... $ 579 $12,233 $16,539 $ 45,123
Net unrealized gain on mortgage related
securities(2).................................... -- -- 2,697 3,518
Loan servicing income, net.......................... -- 873 3,348 3,036
Interest income, net of interest expense of $107,
$468, $1,116, and $6,374......................... 172 473 988 3,133
------- ------- ------- -----------
Total revenues........................................ 751 13,579 23,572 54,810
------- ------- ------- -----------
Total costs and expenses.............................. 2,262 7,660 12,417 31,000
------- ------- ------- -----------
Income (loss) before income taxes(3).................. (1,511) 5,919 11,155 23,810
Income taxes(3)....................................... -- 2,277 4,235 9,062
------- ------- ------- -----------
Net income (loss)..................................... $(1,511) $ 3,642 $ 6,920 $ 14,748
======= ======= ======= ===========
Net income per share.................................. $ 1.25
===========
Weighted-average number of common shares and common
share equivalents................................... 11,802,192
===========
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 31, 1997
--------------------------------------
AS OF AUGUST 31, PRO FORMA
--------------------------- PRO AS
1994(1) 1995 1996 ACTUAL FORMA(4) ADJUSTED(4)(5)
------- ------- ------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION
DATA:
Cash and cash equivalents....... $ 824 $ 752 $ 443 $ 6,104 $ 11,601 $ 39,399
Loans held for sale, net........ 1,463 3,676 4,610 9,523 9,523 9,523
Mortgage related
securities(2)................. -- -- 22,944 106,299 106,299 106,299
Excess servicing rights(2)...... 904 14,483 12,121 -- -- --
Mortgage servicing rights....... -- 1,076 3,827 9,507 9,507 9,507
Total assets.................... 5,122 24,081 50,606 154,200 161,724 189,522
Total liabilities............... 983 13,300 32,905 61,093 28,217 19,817
Subordinated debt............... -- -- -- 40,000 80,400(6) 80,400(6)
Total stockholders' equity...... 4,139 10,781 17,701 53,107 53,107 89,305
</TABLE>
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<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------
1994(1) 1995 1996 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
OPERATING DATA:
Loans originated................................. $8,164 $87,751 $139,367 $526,917
Weighted average interest rate on loans
originated..................................... 14.18% 14.55% 14.03% 13.92%
Servicing portfolio (end of year):
Company-owned loans:
Conventional................................ $ -- $ -- $ 922 $ 8,661
Title I..................................... 1,471 3,720 3,776 902
------ ------- -------- --------
Total Company-owned loans.............. 1,471 3,720 4,698 9,563
------ ------- -------- --------
Sold and securitized loans:
Conventional................................ -- -- 10,501 363,961
Title I..................................... 6,555 88,566 198,990 254,544
------ ------- -------- --------
Total sold and securitized loans.......... 6,555 88,566 209,491 618,505
------ ------- -------- --------
Total servicing portfolio.............. $8,026 $92,286 $214,189 $628,068
====== ======= ======== ========
Conventional Loan delinquency data(7):
31-60 days past due............................ -- -- 0.44% 0.40%
61-90 days past due............................ -- -- 0.00 0.20
91 days and over past due...................... -- -- 0.00 0.34
Title I Loan delinquency data(7):
31-60 days past due............................ 2.06% 2.58% 2.27% 3.19%
61-90 days past due............................ 0.48 0.73 0.90 1.68
91 days and over past due...................... 0.36 0.99 4.78(8) 7.06
91 days and over past due, net of claims
filed(9).................................... 0.26 0.61 2.05 5.20
Outstanding claims filed with HUD(10).......... 0.10 0.38 2.73 1.86
Amount of FHA insurance available for Title I
Loans serviced (end of year)................... $ 813 $ 9,552 $ 21,205 $ 21,094(11)
Amount of FHA insurance available as a percentage
of Title I Loans serviced (end of year)........ 10.13% 10.35% 10.46% 8.26%(11)
Total delinquency data:
31-60 days past due............................ 2.06% 2.58% 2.17% 1.54%
61-90 days past due............................ 0.48 0.73 0.85 0.80
91 days and over past due...................... 0.36 0.99 4.53(8) 3.07
91 days and over past due, net of claims
filed(12)................................... 0.26 0.61 1.94 2.32
Outstanding claims filed with HUD(13)............ 0.10 0.38 2.59 0.75
Aggregate losses on liquidated loans(14)......... $ -- $ 16.8 $ 32.0 $ 201.0
</TABLE>
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(1) The Company commenced originating loans in March 1994.
(2) Mortgage related securities represent interests retained by the Company in
loan sale transactions and the excess of the interest rate payable by an
obligor on a sold loan over the yield to purchasers, after payment of
servicing and other fees. Pursuant to the implementation of SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"), the Company has
reclassified, as of January 1, 1997, excess servicing rights as interest
only receivables which are carried as mortgage related securities.
(3) The results of operations of the Company were included in the consolidated
federal income tax returns filed by Mego Financial through the date of the
Spin-off. Mego Financial allocated income taxes to the Company calculated
on a separate return basis. See "Certain Transactions."
(4) Gives effect to (i) the issuance of the Additional Notes pursuant to the
Private Placement and (ii) the application of the net proceeds therefrom.
(5) As adjusted to give effect to (i) the sale of the shares offered hereby (at
an assumed offering price of $11.125 per share after deducting underwriting
discounts and commissions and estimated expenses of
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<PAGE> 10
the Offering) and (ii) the application of the estimated net proceeds from
the Offering, as described under "Use of Proceeds."
(6) Represents $80.0 million principal amount of Notes and $400,000 of premium
with respect to the $40.0 million of Additional Notes, which premium will
be amortized over the life of the Additional Notes.
(7) Represents the dollar amount of delinquent loans as a percentage of total
dollar amount of each respective type of loan serviced by the Company
(including loans owned by the Company) as of the year end. Conventional
Loan delinquencies for the years ended August 31, 1996 and 1997 represented
0.31% and 10.35%, respectively, of the Company's total delinquencies. The
Company did not originate Conventional Loans until May 1996.
(8) During fiscal 1996, the processing and payment of claims filed with HUD
were delayed. See "Business -- Loan Servicing."
(9) Represents the dollar amount of delinquent Title I Loans net of delinquent
Title I Loans for which claims have been filed with HUD and payment is
pending as a percentage of the total dollar amount of Title I Loans
serviced by the Company (including loans owned by the Company) as of the
dates indicated.
(10) 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 the
total dollar amount of Title I Loans serviced by the Company (including
loans owned by the Company) as of the dates indicated.
(11) If all claims filed with HUD had been processed and paid as of August 31,
1997, the amount of FHA insurance available for all serviced Title I Loans
would have been reduced to $16.5 million, which as a percentage of Title I
Loans serviced would have been 6.6%.
(12) 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 the total dollar amount of loans serviced by the Company
(including loans owned by the Company) as of the dates indicated.
(13) Represents the dollar amount of Title I Loans for which claims have been
filed with HUD and payment is pending as a percentage of the total dollar
amount of loans serviced by the Company (including loans owned by the
Company) as of the dates indicated.
(14) On Title I Loans, a loss is recognized upon receipt of payment of a claim
or final rejection thereof. Claims paid in a period may relate to a claim
filed in an earlier period. Since the Company commenced its Title I lending
operations in March 1994, there has been no final rejection of a claim by
the FHA. Aggregate losses on liquidated Title I Loans related to 700 Title
I insurance claims made by the Company, as servicer, since commencing
operations through August 31, 1997. Losses on Title I Loans liquidated 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.
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<PAGE> 11
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.
The risk factors described below contain certain forward-looking statements and
information relating to the Company that are based on the beliefs of management
as well as assumptions made by and information currently available to
management. In addition to factors that may be described elsewhere in this
Prospectus, the Company specifically wishes to advise readers that the factors
listed below could cause actual results to differ materially from those
expressed in any forward-looking statement. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated or expected. The Company does not intend to update these
forward-looking statements.
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 loans are, in
part, a function of the difference between fixed long-term interest rates, at
which the Company originates its loans, and adjustable short-term interest
rates, at which the Company finances such loans until the closing of the sale of
such loans. Generally, short-term rates are lower than long-term rates and the
Company benefits from the positive interest rate differentials during the time
the loans are held by the Company pending the closing of the sale of such loans.
During the period from 1994 through the present, the interest rate differential
was high and this fact contributed significantly to the Company's net interest
income. The interest rate differential may not continue at such favorable levels
in the future.
Changes in interest rates during the period between the time an interest
rate is established on a loan and the time such loan is sold affect the revenues
realized by the Company from loans. In connection with the origination of loans,
the Company issues loan commitments for periods of up to 45 days in the case of
Correspondents and 90 days in the case of Dealers. Furthermore, the period of
time between the closing on a loan and the sale of such loan generally ranges
from 10 to 90 days. Increases in interest rates during these periods will result
in lower gains (or even losses) on sales of loans than would be recorded if
interest rates had remained stable or had declined. Furthermore, the Company
intends to expand its warehouse lines of credit and increase the quantity of
loans held for sale, thereby increasing its exposure to the risk of interest
rate increases. 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, 1996 and 1997, 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"). In addition, the yield on one class of notes issued pursuant to each
of the Company's June 1997 and August 1997 securitizations is equal to the
lesser of one-month LIBOR plus 14 basis points and 12.5 basis points,
respectively, or 12.0% or 11.0%, respectively, per annum. 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, 1997 the Company had 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. To the extent that the
Company engages in hedging transactions in the future, there can be no assurance
that it will be successful in mitigating the adverse impact of changes in
interest rates.
Interest rate levels also affect the Company's excess servicing spread. The
Company generally retains the servicing rights to the loans it sells. The yield
to the purchaser is generally lower than the average stated interest rates on
the loans, as a result of which the Company earns an excess servicing spread on
the loans it sells. Increases in interest rates or competitive pressures may
result in reduced servicing spreads, thereby reducing or eliminating the gains
recognized by the Company upon the sale of loans in the future.
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<PAGE> 12
Increases in interest rates may require the Company to write down the value
of its mortgage related securities, which could have a material adverse effect
on the Company's financial condition and results of operations.
CAPITALIZED EXCESS SERVICING RIGHTS, MORTGAGE SERVICING RIGHTS AND VALUATION OF
MORTGAGE RELATED SECURITIES
At August 31, 1996 and 1997, the Company's Statements of Financial
Condition reflected excess servicing rights of $12.1 million and $0,
respectively, mortgage related securities of $22.9 million and $106.3 million,
respectively, and mortgage servicing rights of $3.8 million and $9.5 million,
respectively. The Company derives a portion of its income by realizing gains
upon the whole loan sale of loans and sale of loan participations due to the
excess servicing rights or mortgage related securities associated with such
loans recorded at the time of sale and the capitalization of mortgage servicing
rights recorded at origination. Excess servicing rights or mortgage related
securities represent the excess of the interest rate payable by a borrower on a
loan over the interest rate passed through to the purchaser acquiring an
interest in the loan, less the Company's normal servicing fee and other
applicable recurring fees. Effective January 1, 1997, the Company adopted SFAS
No. 125. As a result of the adoption of SFAS No. 125, excess servicing rights
have been reclassified as mortgage related securities which are carried at fair
market value and periodically marked to market. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent Accounting
Pronouncements."
The Company records significant gains on sale of loans through
securitizations based in part on the estimated fair value of the mortgage
related securities retained by the Company and on the estimated fair value of
retained mortgage servicing rights related to such loans. In a securitization,
the Company retains a residual interest security and may retain an interest only
strip security. The fair value of the residual interest and interest only strip
security is the present value of the estimated net cash flows to be received
after considering the effects of prepayments and credit losses, and where
applicable net of FHA insurance recoveries on Title I Loans. The capitalized
mortgage servicing rights and mortgage related securities are valued using
prepayment, default and interest rate assumptions that the Company believes are
reasonable. The amount of revenue recognized 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, capitalized mortgage servicing rights and
mortgage related securities reflected on the Company's Statements of Financial
Condition at August 31, 1996 and 1997 was approximately 12%.
Although the Company believes that it has made reasonable estimates of the
fair value of the mortgage related securities and mortgage servicing rights
likely to be realized, the rate of prepayment, rate of default, and the
estimates of the future costs of servicing utilized by the Company are estimates
and actual results may vary from such estimates. The gain recognized by the
Company upon the sale of loans will have been understated or overstated if
prepayments and/or defaults are less than or greater than anticipated,
respectively. Higher levels of future prepayments, and/or an increase in
delinquencies or liquidations, would result in a lower valuation of the mortgage
related securities and impairment of the mortgage servicing rights, thereby
adversely affecting the Company's earnings in the period of 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 future excess servicing income, thereby reducing the gains recognized by the
Company upon the sale of loans or loan participations in the future.
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/or provide reserves, which
could 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 or mortgage servicing rights. No assurance can be
given that the mortgage related securities or mortgage servicing rights could in
fact be sold at their carrying
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<PAGE> 13
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, 1996 and 1997, the Company sold an aggregate of
approximately $637.8 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. During the years ended August 31, 1996
and 1997, in order to fix the yield on such loans, the Company reacquired an
aggregate of $512.2 million of such loans and included the loans in pools of
loans sold in its first seven securitization transactions. As a result of the
reacquisitions and subsequent sales in the securitization transactions, the
gains on sale and mortgage related securities 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 mortgage
related securities. 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 AND SALE 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 or debt consolidation 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 has consummated seven securitization transactions, which
involve the pooling and sale of loans, since it commenced securitizations in
March 1996 and intends to continue to sell loans through securitization
transactions from time to time as opportunities arise. Pursuant to these
securitizations, pass-through securities 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 or on economically
favorable terms. 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 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 years ended August
31, 1996 and 1997, the Company operated on a negative cash flow basis using
$15.3 million and $70.4 million, respectively, funded primarily from borrowings,
due primarily to an increase in loans originated and sold. In connection with
certain 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 is subject to over-collateralization requirements and 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
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<PAGE> 14
warehouse lines of credit and other external funding sources. There can be no
assurance that any such funding sources will be available to the Company at any
given time or as to the favorableness of the terms on which such funding may be
available. If the capital sources of the Company were to decrease, the rate of
growth of the Company would be negatively affected. See "-- Dependence on
Financing; Need for Additional Financing" and "-- Dependence on PEC and Prior
Dependence on Mego Financial."
The pooling and servicing agreements and sale 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 unpaid principal amount
of the loans in the related pool to exceed the aggregate principal balance of
the outstanding investor securities. 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 any guarantee of the related senior interests as a condition to
obtaining insurance or by the rating agencies as a condition to obtaining the
desired rating on the various classes of notes 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."
At August 31, 1997, the Company had outstanding indebtedness of $85.7
million. The Company's $65.0 million warehouse line of credit expires in June
1998, at which time the outstanding balance thereunder is payable in full unless
renewed by the parties. The Company's $25.0 million credit facility secured by
mortgage related securities expires in April 1998, unless renewed by the
parties. The Company's $5.0 million credit facility secured by mortgage related
securities expires in October 2002, unless renewed by the parties. There can be
no assurance that cash from operations will be sufficient to enable the Company
to make required interest and principal payments on its debt obligations and
other required payments, and the Company may encounter liquidity problems which
could affect its ability to meet such obligations while attempting to withstand
competitive pressures. In addition, the Company's credit agreements contain
covenants which among other things require it to meet certain minimum net worth
tests and to not exceed certain ratios relating to liabilities. These covenants
limit the Company's ability to incur additional indebtedness which could have a
material adverse effect on the Company's ability to continue to increase its
loan origination activities. If the Company does not comply with these
covenants, its lenders may be entitled to terminate the Company's credit
agreements and declare its obligations under such agreements immediately due and
payable. Any such termination and declaration would have a material adverse
effect on the Company's financial condition and results of operations. See
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SIGNIFICANT OUTSTANDING INDEBTEDNESS AND LEVERAGE
The Company currently has significant outstanding indebtedness and is
significantly leveraged. As of August 31, 1997, the Company had outstanding
indebtedness of $85.7 million. In addition, in October 1997, the Company issued
$40.0 million of Additional Notes pursuant to the Private Placement. The Company
is also a party to certain warehouse facilities for the financing of its loan
originations, which facilities are secured by loans financed thereby, as well as
other additional secured credit facilities. In addition, subject to the
limitations set forth in the Indenture governing the Notes, the Company may
incur substantial amounts of additional indebtedness, including additional
secured indebtedness and up to an additional $70.0 million of Notes. Upon
certain events of default under the Company's credit facilities, the lenders
could elect to declare all amounts outstanding, together with accrued and unpaid
interest thereon, to be immediately due and payable. If the Company were unable
to repay those amounts, the lenders could proceed against the collateral granted
them to secure that indebtedness. If any of such indebtedness were to be
accelerated, there can be no
11
<PAGE> 15
assurance that the assets of the Company would be sufficient to repay in full
that indebtedness and the other indebtedness of the Company.
The Company's ability to make payments of principal and interest on, or to
refinance its indebtedness depends on its future operating performance, which to
a certain extent is subject to economic, financial, competitive and other
factors beyond its control. The degree to which the Company is leveraged could
have important consequences to stockholders, including (i) the Company's
vulnerability to adverse general economic and industry conditions, (ii) the
Company's ability to obtain additional financing for future working capital
expenditures (including loan originations), general corporate purposes or other
purposes, and (iii) the dedication of a substantial portion of the Company's
cash flow from operations to the payment of principal and interest on
indebtedness, thereby reducing the funds available for operations and future
business opportunities.
POSSIBLE TERMINATION OF SERVICING RIGHTS
The pooling and servicing agreements and sale 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 August 31, 1997, the rolling three-month average
annual default rates on the pools of loans sold in the March 1996 and August
1996 securitization transactions exceeded 6.5%, the permitted limit set forth in
the related pooling and servicing agreements. Accordingly, this condition could
result in the termination of the Company's servicing rights with respect to
those pools of loans by the trustee, the master servicer or the insurance
company providing credit enhancement for those transactions. 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 a material adverse effect on the valuation of the Company's
mortgage servicing rights and results of operations in the amount of such
mortgage servicing rights ($2.4 million before income taxes at August 31, 1997)
on the date of termination. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Possible Termination of
Servicing Rights."
CONTINGENT RISKS
Risks Associated with Loan Delinquencies and Loan Defaults
Loan delinquencies and other loan defaults by obligors expose the Company
to risks of loss and reduced net earnings. The loan delinquency and default
risks to which the Company's business is subject become more acute in an
economic slowdown or recession. During such periods, loan delinquencies and
other defaults generally increase. In addition, significant declines in market
values of the properties that secure loans serviced by the Company reduce
homeowners' equity in their homes and their borrowing power, thereby increasing
the likelihood of delinquencies and defaults. Although the Company's loans are
generally secured by liens on real property, because of the relatively high LTVs
of most of the Company's loans, in most cases the collateral for such loans will
not be sufficient to cover the principal amount of the loans in the event of
default. The Company relies principally on the creditworthiness of the borrower
and to a lesser extent on the underlying collateral for repayment of its
Conventional Loans, and on FHA insurance with respect to Title I Loans. As a
result, many of the Company's loans equal or exceed the value of the mortgaged
properties. Upon the occurrence of a default by a borrower, the Company
evaluates the cost effectiveness of foreclosing on the property. To the extent
that borrowers with high LTVs default on their loan obligations, the Company is
less likely to use foreclosure as a means to mitigate its losses. Under these
circumstances, losses would be charged to the Company's allowances for credit
losses on loans sold and held for sale, except to the extent that FHA insurance
proceeds are available. If the Company is required to absorb losses on such
loans in excess of its allowances, it could have a material adverse effect on
the Company's financial position and results of operations.
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<PAGE> 16
Risks Associated with Loans Sold with Servicing Retained
Since the Company sells the greater portion of loans which it originates
with servicing retained on a limited recourse basis, the Company retains some
degree of risk on substantially all such loans. In connection with servicing
retained 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. In most securitizations, these reserves are structured
as over-collateralization as opposed to cash reserves. 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 securities 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 securities, 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. If such a reserve falls below the required level or if payments
received on securitized loans are insufficient to make required payments of
principal and interest on the senior securities, the Company may be required to
write down the value of the mortgage related securities which would result in a
charge to earnings in the period of adjustment. 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.
Risks Associated with Title I Loans
During the period of time that loans are held pending sale, the Company is
subject to various 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. With respect to Title I Loans, 90% of the principal
balances of such loans are insured by the FHA; however, during the period such
loans are held in the Company's loan portfolio, the Company bears at least a
portion of the risk of delinquencies and defaults with respect to the uninsured
portion of such loans. Moreover, even as to the insured portion of a Title I
Loan, 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 initially 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 and
securitizations 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 the FHA. The current level of
FHA insurance available as a percentage of Title I Loans serviced has declined
to 8.26% at August 31, 1997 from 10.46% at August 31, 1996 primarily due to (i)
an increase in loss experience in the Title I Loan portfolio, (ii) expedited
processing and payment of claims by the FHA and (iii) a decline in the level of
new Title I Loan originations which generate FHA insurance availability.
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<PAGE> 17
As a percentage of the total serviced portfolio, the principal balance of
loans contractually past due 91 days or more ranged from 0.99% as of August 31,
1995 to 4.53% as of August 31, 1996 and 3.07% as of August 31, 1997. The rise in
delinquencies from August 31, 1995 to August 31, 1997, substantially all of
which pertain to the portfolio of Title I Loans, is consistent with the expected
seasoning of the portfolio. This increase includes approximately 0.75% of the
serviced portfolio pursuant to which claims have been filed with HUD. As of
August 31, 1997, the Company had received payment on 700 claims filed with HUD
aggregating $11.3 million pertaining to $11.7 million of principal amount of
Title I Loans.
Risks Associated with Conventional Loans
The Company began originating Conventional Loans through its Correspondents
in May 1996 and through its Dealers in September 1996. For the three months
ended August 31, 1996 and fiscal year ended August 31, 1997, such loans totaled
$11.2 million and $428.8 million, respectively, and constituted 22.5% and 81.4%,
respectively, of the Company's total loan originations. During the period of
time that such loans are held in the Company's loan portfolio, 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 $75,000 with fixed rates of interest and terms of up to 25 years. The
proceeds of these loans are utilized to pay for home improvements and/or 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 creditworthiness
of the borrowers as opposed to underlying collateral value of the properties. In
virtually all cases, the Company takes a lien, generally junior in priority, on
each of the properties. The Company's Conventional Loans when added to existing
senior lien balances may have a post funding combined LTV of up to 125% of the
underlying properties' value. At August 31, 1997, the Company's Conventional
Loan portfolio had a weighted-average combined LTV of 112%. As of August 31,
1997, 0.94% of the principal amount of the Company's serviced Conventional Loans
were more than 30 days contractually past due.
RISKS ASSOCIATED WITH SUBPRIME FIRST MORTGAGE LOANS
The Company intends to expand its loan product lines to include the
origination of First Mortgage Loans to those borrowers with a credit grade
ranging from "A" to "C". With respect to this new product line, increased
emphasis will be placed on the underlying collateral value of the residence.
Certain of these borrowers may be credit-impaired. During the period of time
that such loans are held in the Company's loan portfolio, the Company will
generally be subject to a higher risk of delinquency and possibly higher losses
than loans made to more creditworthy borrowers, particularly during periods of
economic downturn or recession. Any sustained period of such increased losses
could have a material adverse effect on the Company's results of operations and
financial condition. Furthermore, the Company must obtain the necessary
warehouse financing for this product line prior to funding any First Mortgage
Loans. There can be no assurance that the Company will be able to obtain such
financing on favorable terms, if at all. The Company intends to sell its First
Mortgage Loans for cash premiums, though no assurance can be given that a market
will exist for such loans. If the Company were unable to sell such loans, were
to sell them at lower than expected prices or if the proposed purchasers were to
fail to honor their forward purchase commitments, there could be a material
adverse effect on the Company's results of operations and financial condition.
RISK OF CLAIMS
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
14
<PAGE> 18
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 that 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) access capital markets, (iii) securitize or otherwise sell
loans, (iv) offer attractive products to prospective borrowers, (v) attract and
retain qualified underwriting, servicing and other personnel, (vi) market its
loan products successfully, including its direct loan and First Mortgage Loan
products, and (vii) establish and maintain relationships with Correspondents and
Dealers in states in which the Company is currently active. 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, including systems, personnel and facilities, 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 and First Mortgage 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. Failure by the
Company to manage its growth effectively or sustain historical increases in loan
origination volume, could have a material adverse effect on the Company's
results of operations and financial condition.
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. Although the Company
completed its first two non-monoline insured securitizations in June and August
1997, all of the other five securitizations consummated by the Company to date
have included monoline insurance. In the absence of such credit enhancements,
the Company might 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. Insurance companies may be unwilling or
unable to provide such insurance for a variety of reasons, including factors
related to the loan pool being securitized as well as factors unrelated to the
Company and the loan pool such as internal concentration limits and loss
experience. 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."
15
<PAGE> 19
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 $65.0 million which may be increased to $90.0 million,
if additional lender commitments are made, is secured by loans prior to sale and
expires in June 1998. At August 31, 1997, an aggregate of $8.5 million was
outstanding under such line of credit which was then limited to $40.0 million,
leaving $31.5 million available for borrowing. 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 March and August 1996
securitizations in exchange for a $3.0 million advance. In October 1996, the
Company entered into an agreement with the same financial institution for the
purchase of up to $2.0 billion of loans by that institution over a five-year
period. In April 1997, the Company entered into an agreement with the same
financial institution providing for a revolving credit facility of 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 August 1997, this revolving credit facility was increased to
$25.0 million. In October 1997, the Company entered into a revolving credit
facility providing for an initial advance of up to $5.0 million secured by
certain residual interest and interest only securities, which may be increased
to up to $8.8 million with additional lender participations. In the event that
the proceeds received by the Company from the 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 was not
successful in maintaining or replacing existing financing or obtaining
additional financing, or selling its loans, 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. In addition, the Company's credit facilities and the Indenture
governing the Notes limit the Company's ability to issue additional debt and
impose restrictions on the Company. There can be no assurance that such
limitations and restrictions would not have a material adverse effect on the
Company.
CONCENTRATION OF OPERATIONS
Approximately 26% of the dollar volume of the Company's servicing portfolio
at, and approximately 21% of the dollar volume of loans originated by the
Company during the year ended, August 31, 1997 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 15% of the dollar volume of the Company's
servicing portfolio at, and approximately 16% of the dollar volume of loans
originated by the Company during the year ended, August 31, 1997 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.
16
<PAGE> 20
LEGISLATIVE AND REGULATORY RISKS
Members of Congress and government officials from time to time have
suggested the elimination of or further limitation on the mortgage interest
deduction for federal income tax purposes 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 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. Although Conventional Loans have recently accounted for the
majority of the Company's loan originations, the Title I portion of the
Company's business is dependent on the continuation of the Title I Loan program,
which is federally funded. For the years ended August 31, 1996 and 1997, 91.7%
and 18.6%, respectively, of the principal amount of the Company's loan
originations consisted of Title I Loans. In May 1997, HUD proposed modifications
to the Title I program which would eliminate the origination of Title I Loans
through Dealers. The Company is unable to predict whether such modifications
will be ultimately adopted. 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
The continued success of the Company is largely dependent upon the efforts
of Jerome J. Cohen, Chairman of the Board, Jeffrey S. Moore, President and Chief
Executive Officer, James L. Belter, Executive Vice President and Chief Financial
Officer, Christopher M.G. DeWinter -- Vice President -- Corporate Development,
and other key personnel. Although the Company has entered into employment
agreements with each of Messrs. Cohen, Moore, Belter and DeWinter which expire
in 2002, 2000, 1999 and 1999, respectively, the loss of the services of any of
such individuals or certain other key employees could have a material adverse
effect on the Company's business and results of operations. The continued
success of the Company is also
17
<PAGE> 21
dependent upon its ability to hire and retain additional qualified managerial
and sales and marketing personnel. See "Management."
DEPENDENCE ON PEC AND PRIOR DEPENDENCE ON MEGO FINANCIAL
Prior to the consummation of the Company's IPO in November 1996, the
Company was dependent on Mego Financial to provide, among other things, (i)
funds for operations without interest and (ii) guarantees of the Company's
financing arrangements. Subsequent to the IPO, Mego Financial has advanced funds
to the Company to pay servicing fees owed to PEC and amounts due others. In
connection with the Spin-off, in August 1997, the Company and Mego Financial
entered into an agreement (the "Payment Agreement") with respect to the
Company's repayment after the Spin-off of debt owed by it to Mego Financial. It
is not anticipated that Mego Financial will continue to make loans to the
Company or provide guarantees of the Company's financing arrangements in the
future, although it may do so in the future on an arms length basis. There can
be no assurance that the absence of such financing or guarantees will not have a
material adverse effect on the Company. In addition, the Company has been, and
after the Spin-off continues to be, dependent on PEC to provide management
services and management information systems, including services of certain of
PEC's 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 found. See "Certain
Transactions."
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. The
Company anticipates that it may encounter further competition from these
competitors as it commences direct originations and offers new First Mortgage
Loan products. 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 sixth largest lender of Title I Loans, based on volume of loans originated,
for the calendar quarter ended June 30, 1997. Due to the variance in the
estimates of the size of the conventional home improvement and debt
consolidation loan markets, the Company is unable to accurately estimate its
competitive position in those markets.
The Company depends largely on its Correspondents and Dealers for its
originations of loans. The Company's competitors also seek to establish
relationships with the Company's Correspondents and Dealers, none of whom is
required to deal exclusively with the Company. The Company's future results may
become more exposed to fluctuations in the volume and cost of its loans
resulting from competition from other purchasers of such loans, market
conditions and other factors.
PORTION OF PROCEEDS TO BENEFIT MEGO FINANCIAL
The Company intends to use a portion of the aggregate net proceeds of the
Offering to repay a portion of the debt owed to Mego Financial. See "Use of
Proceeds."
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."
18
<PAGE> 22
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 15,800,000 shares
of Common Stock outstanding (16,325,000 shares if the over-allotment option
granted to the Underwriters is exercised in full). of these shares will
be subject to agreements that prohibit the sale of such shares for a period of
90 days after completion of the Offering. Upon consummation of the Offering (or
after the 90 day period with respect to the shares), all outstanding
shares 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. Additionally, 10,000 and 2,000,000 shares of Common
Stock are reserved for issuance under the Company's 1996 Plan and 1997 Plan,
respectively, subject to stockholder approval of the 1997 Plan. The Company
intends to register under the Securities Act all shares reserved for issuance
under the 1996 Plan and 1997 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 Plans." 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."
VOLATILITY OF STOCK MARKET
The stock market has in recent years 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. In
addition, the market price of the Common Stock could be subject to significant
fluctuations in response to the Company's operating results and other factors.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Underwriting."
FACTORS INHIBITING TAKEOVER
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. 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. 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 or otherwise
restrict 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. In addition, the Change of Control provisions of the Notes, as
well as the change in control provisions of certain of the Company's employment
agreements with its senior executives, could inhibit a takeover of the Company.
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. Upon the occurrence of a Change of Control, the
holders of the Notes will be entitled to require the Company to repurchase up to
all outstanding Notes of the holders requiring such repurchase. This provision
would further inhibit any takeover of the Company.
19
<PAGE> 23
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby assuming an offering price of $11.125 per share, after deducting
underwriting discounts and commissions and estimated expenses of the Offering,
are estimated to be approximately $36.2 million ($41.7 million if the
Underwriters' over-allotment option is exercised in full). The Company currently
intends to use approximately $3.9 million of the aggregate net proceeds received
by the Company from the Offering to repay debt owed to Mego Financial pursuant
to the Payment Agreement which does not bear interest and is due on the
consummation of certain transactions and in no event later than August 31, 1998,
and approximately $ million to reduce the amounts outstanding under the
Company's warehouse line of credit, which currently bears interest at 1.75% over
the Federal Funds Funding Rate and expires June 19, 1998, and reduce amounts
outstanding under the Company's revolving lines of credit, which currently bear
interest ranging from 2.0% to 3.5% over one-month LIBOR. 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.
PRICE RANGE OF COMMON STOCK
The Common Stock was first quoted and began trading on the Nasdaq National
Market on November 19, 1996 under the symbol "MMGC."
Set forth below are the high and low sales prices of the Common Stock as
reported on the Nasdaq National Market for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C> <C> <C>
Fiscal Year Ended August 31, 1997:
First Quarter (from November 19, 1996 through November 30,
1996).................................................. $12 $10 3/4
Second Quarter............................................ 15 3/4 10 1/8
Third Quarter............................................. 14 5/8 8
Fourth Quarter............................................ 13 1/2 9
September 1, 1997 through November 7, 1997.................. 14 7/8 11 1/8
</TABLE>
On November 7, 1997, the last sales price of the Common Stock as reported
by the Nasdaq National Market was $11.125 per share. The approximate number of
record holders of the Common Stock as of November 7, 1997 was 1,667.
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.
20
<PAGE> 24
CAPITALIZATION
The following table sets forth as of August 31, 1997, (i) the actual
capitalization of the Company, (ii) the capitalization of the Company giving pro
forma effect to the issuance of the Additional Notes pursuant to the Private
Placement and the application of the net proceeds therefrom and (iii) the
capitalization of the Company giving pro forma effect to the issuance of the
Additional Notes and the application of the net proceeds therefrom as adjusted
as of such date to give effect to the sale of the 3,500,000 shares of Common
Stock offered hereby at an assumed offering price of $11.125 per share (after
deducting underwriting discounts and commissions and estimated expenses of the
Offering), and the application of the net proceeds from the 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, 1997
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Debt:
Warehouse line of credit................................. $ 8,500 $ 4,500 $ --
Revolving lines of credit................................ 24,976 -- --
Other notes and contracts payable........................ 2,096 2,096 2,096
12 1/2 Senior Subordinated Notes due 2001................ 40,000 80,400(1) 80,400(1)
Debt owed to Mego Financial and PEC...................... 10,099 6,199 2,299
-------- -------- --------
Total debt....................................... 85,671 93,195 84,795
-------- -------- --------
Stockholders' 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; 12,300,000 shares outstanding, actual and
pro forma; 15,800,000 shares outstanding pro forma as
adjusted(2)........................................... 123 123 158
Additional paid-in capital............................... 29,185 29,185 65,348
Retained earnings........................................ 23,799 23,799 23,799
-------- -------- --------
Total stockholders' equity....................... 53,107 53,107 89,305
-------- -------- --------
Total capitalization............................. $138,778 $146,302 $174,100
======== ======== ========
</TABLE>
- ---------------
(1) Represents $80.0 million principal amount of Notes and $400,000 of premium
with respect to the $40.0 million of Additional Notes, which premium will be
amortized over the life of the Additional Notes.
(2) Does not include (i) 10,000 shares of Common Stock remaining reserved for
issuance upon the exercise of stock options granted and available to be
granted under the Company's 1996 Plan and (ii) 2,000,000 shares of Common
Stock reserved for issuance upon the exercise of stock options available to
be granted under the Company's 1997 Plan, which plan is subject to
stockholder approval. See "Management--Company Stock Option Plans."
21
<PAGE> 25
SELECTED FINANCIAL DATA
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
The selected Statements of Operations data and Statements of Financial
Condition data set forth below have been derived from the financial statements
of the Company. The financial statements as of August 31, 1996 and 1997 and for
each of the three years in the period ended August 31, 1997 have been audited by
Deloitte & Touche LLP, independent auditors, and are included elsewhere in this
Prospectus. The financial statements as of August 31, 1994 and August 31, 1995
and for the year ended August 31, 1994 have been audited by Deloitte & Touche
LLP, independent auditors, and are not included herein. Certain
reclassifications have been made to conform prior years with the current
presentation. 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 1997
------- ------- ------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sale of loans................................ $ 579 $12,233 $16,539 $ 45,123
Net unrealized gain on mortgage related
securities(2)..................................... -- -- 2,697 3,518
Loan servicing income, net........................... -- 873 3,348 3,036
Interest income, net of interest expense of $107,
$468, $1,116, and $6,374.......................... 172 473 988 3,133
------- ------- ------- ----------
Total revenues............................... 751 13,579 23,572 54,810
------- ------- ------- ----------
Costs and expenses:
Net provision for credit losses...................... 96 864 55 6,300
Depreciation and amortization........................ 136 403 394 672
Other interest....................................... 22 187 167 245
General and administrative:
Payroll and benefits.............................. 975 3,611 5,031 11,181
Commissions and selling........................... 13 552 2,013 2,768
Credit reports.................................... 13 133 367 1,387
Rent and lease expenses........................... 85 249 338 1,091
Professional services............................. -- 177 732 652
Servicing fees paid to affiliate.................. 13 232 709 1,874
Management services by affiliate.................. 442 690 671 967
FHA insurance..................................... 11 231 572 558
Other............................................. 456 331 1,368 3,305
------- ------- ------- ----------
Total costs and expenses..................... 2,262 7,660 12,417 31,000
------- ------- ------- ----------
Income (loss) before income taxes(3)................... (1,511) 5,919 11,155 23,810
Income taxes(3)........................................ -- 2,277 4,235 9,062
------- ------- ------- ----------
Net income (loss)...................................... $(1,511) $ 3,642 $ 6,920 $ 14,748
======= ======= ======= ==========
Net income per share................................... $ 1.25
==========
Weighted-average number of common shares and common
share equivalents.................................... 11,802,192
==========
</TABLE>
22
<PAGE> 26
<TABLE>
<CAPTION>
AS OF AUGUST 31, AS OF AUGUST 31, 1997
--------------------------- --------------------------------------
PRO FORMA
PRO AS
1994(1) 1995 1996 ACTUAL FORMA(4) ADJUSTED(4)(5)
------- ------- ------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION
DATA:
Cash and cash equivalents....... $ 824 $ 752 $ 443 $ 6,104 $ 11,601 $ 39,399
Loans held for sale, net........ 1,463 3,676 4,610 9,523 9,523 9,523
Mortgage related
securities(2)................. -- -- 22,944 106,299 106,299 106,299
Excess servicing rights(2)...... 904 14,483 12,121 -- -- --
Mortgage servicing rights....... -- 1,076 3,827 9,507 9,507 9,507
Total assets.................... 5,122 24,081 50,606 154,200 161,724 189,522
Total liabilities............... 983 13,300 32,905 61,093 28,217 19,817
Subordinated debt............... -- -- -- 40,000 80,400(6) 80,400(6)
Total stockholders' equity...... 4,139 10,781 17,701 53,107 53,107 89,305
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------
1994(1) 1995 1996 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
OPERATING DATA:
Loans originated..................................... $8,164 $87,751 $139,367 $526,917
Weighted-average interest rate on loans originated... 14.18% 14.55% 14.03% 13.92%
Servicing portfolio (end of year):
Company-owned loans:
Conventional.................................... $ -- $ -- $ 922 $ 8,661
Title I......................................... 1,471 3,720 3,776 902
------ ------- -------- --------
Total Company-owned loans.................. 1,471 3,720 4,698 9,563
------ ------- -------- --------
Sold and securitized loans:
Conventional.................................... -- -- 10,501 363,961
Title I......................................... 6,555 88,566 198,990 254,544
------ ------- -------- --------
Total sold and securitized loans........... 6,555 88,566 209,491 618,505
------ ------- -------- --------
Total servicing portfolio.................. $8,026 $92,286 $214,189 $628,068
====== ======= ======== ========
Conventional Loan delinquency data(7):
31-60 days past due................................ -- -- 0.44% 0.40%
61-90 days past due................................ -- -- 0.00 0.20
91 days and over past due.......................... -- -- 0.00 0.34
Title I Loan delinquency data(7):
31-60 days past due................................ 2.06% 2.58% 2.27% 3.19%
61-90 days past due................................ 0.48 0.73 0.90 1.68
91 days and over past due.......................... 0.36 0.99 4.78(8) 7.06
91 days and over past due, net of claims
filed(9)........................................ 0.26 0.61 2.05 5.20
Outstanding claims filed with HUD(10).............. 0.10 0.38 2.73 1.86
Amount of FHA insurance available for Title I Loans
serviced (end of year)............................. $ 813 $ 9,552 $ 21,205 $ 21,094(11)
Amount of FHA insurance available as a percentage of
Title I Loans serviced (end of year)............... 10.13% 10.35% 10.46% 8.26%(11)
Total delinquency data:
31-60 days past due................................ 2.06% 2.58% 2.17% 1.54%
61-90 days past due................................ 0.48 0.73 0.85 0.80
91 days and over past due.......................... 0.36 0.99 4.53(8) 3.07
91 days and over past due, net of claims
filed(12)....................................... 0.26 0.61 1.94 2.32
Outstanding claims filed with HUD(13)................ 0.10 0.38 2.59 0.75
Aggregate losses on liquidated loans(14)............. $ -- $ 16.8 $ 32.0 $ 201.0
</TABLE>
23
<PAGE> 27
- ---------------
(1) The Company commenced originating loans in March 1994.
(2) Mortgage related securities represent interests retained by the Company in
loan sale transactions and the excess of the interest rate payable by an
obligor on a sold loan over the yield to purchasers, after payment of
servicing and other fees. Pursuant to the implementation of SFAS No. 125,
the Company has reclassified, as of January 1, 1997, excess servicing
rights as interest only receivables which are carried as mortgage related
securities.
(3) The results of operations of the Company were included in the consolidated
federal income tax returns filed by Mego Financial through the date of the
Spin-off. Mego Financial allocated income taxes to the Company calculated
on a separate return basis. See "Certain Transactions."
(4) Gives effect to (i) the issuance of the Additional Notes pursuant to the
Private Placement and (ii) the application of the net proceeds therefrom.
(5) As adjusted to give effect to (i) the sale of the shares offered hereby (at
an assumed offering price of $11.125 per share after deducting underwriting
discounts and commissions and estimated expenses of the Offering) and (ii)
the application of the estimated net proceeds from the Offering, as
described under "Use of Proceeds."
(6) Represents $80.0 million principal amount of Notes and $400,000 of premium
with respect to the $40.0 million of Additional Notes, which premium will
be amortized over the life of the Additional Notes.
(7) Represents the dollar amount of delinquent loans as a percentage of total
dollar amount of each respective type of loan serviced by the Company
(including loans owned by the Company) as of the year end. Conventional
Loan delinquencies for the years ended August 31, 1996 and 1997 represented
0.31% and 10.35%, respectively, of the Company's total delinquencies. The
Company did not originate Conventional Loans until May 1996.
(8) During fiscal 1996, the processing and payment of claims filed with HUD
were delayed. See "Business -- Loan Servicing."
(9) Represents the dollar amount of delinquent Title I Loans net of delinquent
Title I Loans for which claims have been filed with HUD and payment is
pending as a percentage of the total dollar amount of Title I Loans
serviced by the Company (including loans owned by the Company) as of the
dates indicated.
(10) 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 the
total dollar amount of Title I Loans serviced by the Company (including
loans owned by the Company) as of the dates indicated.
(11) If all claims filed with HUD had been processed and paid as of August 31,
1997, the amount of FHA insurance available for all serviced Title I Loans
would have been reduced to $16.5 million, which as a percentage of Title I
Loans serviced would have been 6.6%.
(12) 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 the total dollar amount of loans serviced by the Company
(including loans owned by the Company) as of the dates indicated.
(13) Represents the dollar amount of Title I Loans for which claims have been
filed with HUD and payment is pending as a percentage of the total dollar
amount of loans serviced by the Company (including loans owned by the
Company) as of the dates indicated.
(14) On Title I Loans, a loss is recognized upon receipt of payment of a claim
or final rejection thereof. Claims paid in a period may relate to a claim
filed in an earlier period. Since the Company commenced its Title I lending
operations in March 1994, there has been no final rejection of a claim by
the FHA. Aggregate losses on liquidated Title I Loans related to 700 Title
I insurance claims made by the Company, as servicer, since commencing
operations through August 31, 1997. Losses on Title I Loans liquidated 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.
24
<PAGE> 28
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. The Company sells
substantially all the loans it originates either through securitizations at a
yield below the stated interest rate on the loans, generally retaining the right
to service the loans and to receive any amounts in excess of the yield to the
purchasers, or through whole loan sales to third party institutional purchasers.
In connection with whole loan sales, the Company either sells the loans on a
servicing retained basis at a yield below the stated interest rate on the loans
or on a servicing released basis. All sales on a servicing released basis and
some sales on a servicing retained basis are at a premium. Certain of the
regular interests of the related securitizations are sold, with the interest
only and residual class securities generally retained by the Company.
The Company recognizes revenue from the gain on sale of loans, unrealized
gain on mortgage related securities, 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 substantially all loans sold through August 31,
1997, however, during the third and fourth quarters of fiscal 1997, $59.2
million of loans were sold with servicing released. Net loan servicing income
represents servicing fee income and other ancillary fees received for servicing
loans less the amortization of capitalized mortgage servicing rights and through
January 1, 1997, the date of adoption of SFAS No. 125, excess servicing rights.
Mortgage servicing rights are amortized in proportion to and over the period of
estimated net servicing income. Excess servicing rights were amortized in
proportion to and over the estimated lives of the loans.
Gain on sale of loans includes the gain on sale resulting from
securitizations and whole loan sales. The gain on sale is determined by an
allocation of the cost of the securities based on the relative fair values of
the interests sold and the interests retained. In a securitization, the Company
retains a residual interest security and may retain an interest only strip
security. The fair value of the residual interest and interest only strip
security is the present value of the estimated net cash flows to be received
after considering the effects of estimated prepayments and credit losses, and
where applicable net of FHA insurance recoveries on Title I Loans. 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 or over-collateralization 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 these estimates.
25
<PAGE> 29
The present value of expected net cash flows from the sale of loans is
recorded at the time of sale as mortgage related securities. Mortgage related
securities are periodically revalued (marked to market), with a resulting charge
or credit to income, under the caption of net unrealized gain in the Company's
Statements of Operations, based on actual payments by the obligors and any
needed adjustments to the underlying assumptions of prepayment speeds, rate of
default and discount rate. The expected cash flows used to determine the value
of mortgage related securities have been reduced for potential losses, net of
FHA insurance recoveries on Title I Loans, under recourse provisions 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 related securities and mortgage
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. As a result of the adoption of SFAS No. 125,
mortgage related securities are carried at fair market value and periodically
marked to market. As of August 31, 1997, mortgage related securities totaled
$106.3 million and mortgage servicing rights totaled $9.5 million.
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, 1995, 1996 and 1997. The Company has developed
its assumptions based on experience with its own portfolio, available market
data and ongoing consultation with its financial advisors.
There can be no assurance that the Company's estimates used to determine
the fair value of mortgage related securities and mortgage servicing rights will
remain appropriate for the life of the loans. If actual loan prepayments or
credit losses exceed the Company's estimates, the carrying value of the
Company's mortgage related securities and mortgage servicing rights may have to
be written down through a charge against earnings.
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 16 of Notes to
Financial Statements.
The Company continues to implement its business growth strategy through
product line diversification, expansion of its Correspondent and Dealer
operations and additions to of its loan source channels, 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 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 and mortgage 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 1997 Compared to Fiscal 1996
The Company originated $526.9 million of loans during fiscal 1997 compared
to $139.4 million of loans during fiscal 1996, an increase of 278.1%. 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
26
<PAGE> 30
number of states served. At August 31, 1997, the Company had 694 active
Correspondents and 670 active Dealers, compared to 310 active Correspondents and
435 active Dealers at August 31, 1996. Of the $526.9 million of loans originated
during fiscal 1997, $428.8 million were Conventional Loans and $98.1 million
were Title I Loans compared to $11.6 million of Conventional Loans and $127.8
million of Title I Loans during fiscal 1996.
The following table sets forth certain data regarding loans originated by
the Company during fiscal 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------
1996 1997
-------------------- --------------------
<S> <C> <C> <C> <C>
PRINCIPAL AMOUNT OF LOANS ORIGINATED:
Correspondents:
Title I.......................................... $ 82,596,197 59.3% $ 50,814,931 9.7%
Conventional..................................... 11,582,108 8.3 409,603,281 77.7
------------ ----- ------------ -----
Total Correspondents..................... 94,178,305 67.6 460,418,212 87.4
------------ ----- ------------ -----
DEALERS:
Title I.......................................... 45,188,721 32.4 47,269,541 9.0
Conventional..................................... -- -- 19,228,957 3.6
------------ ----- ------------ -----
Total Dealers............................ 45,188,721 32.4 66,498,498 12.6
------------ ----- ------------ -----
Total principal amount of loans
originated............................. $139,367,026 100.0% $526,916,710 100.0%
============ ===== ============ =====
NUMBER OF LOANS ORIGINATED:
Correspondents:
Title I.......................................... 4,382 50.9% 2,445 12.0%
Conventional..................................... 392 4.6 12,831 62.7
------------ ----- ------------ -----
Total Correspondents..................... 4,774 55.5 15,276 74.7
------------ ----- ------------ -----
Dealers:
Title I.......................................... 3,836 44.5 3,893 19.0
Conventional..................................... -- -- 1,296 6.3
------------ ----- ------------ -----
Total Dealers............................ 3,836 44.5 5,189 25.3
------------ ----- ------------ -----
Total number of loans originated......... 8,610 100.0% 20,465 100.0%
============ ===== ============ =====
</TABLE>
See Notes 2 and 5 of Notes to Financial Statements.
Total revenues increased 132.5% to $54.8 million for fiscal 1997 from $23.6
million for fiscal 1996. The increase was primarily the result of the increased
volume of loans originated and the sale of such loans.
Gain on sale of loans and net unrealized gain on mortgage related
securities increased 152.9% to $48.6 million during fiscal 1997 from $19.2
million during fiscal 1996. The increase was primarily due to increased loan
sales of $521.6 million during fiscal 1997 compared to $137.9 million during
fiscal 1996.
27
<PAGE> 31
The following table sets forth the principal balance of loans sold or
securitized, related gain on sale data and loans serviced for fiscal 1996 and
1997.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------
1996 1997
--------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
WHOLE LOAN SALES SOLD WITH RECOURSE AND SECURITIZATIONS:
Principal amount of loans sold:
Title I................................................... $127,414 $ 62,097
Conventional.............................................. 10,494 360,411
-------- --------
Total principal balance........................... $137,908 $422,508
======== ========
Gain on sale of loans....................................... $ 16,539 $ 41,132
======== ========
Net unrealized gain on mortgage related securities.......... $ 2,697 $ 3,524
======== ========
Gain on sale of loans as a percentage of principal balance
of loans sold............................................. 12.0% 9.7%
======== ========
Gain on sale of loans plus net unrealized gain on mortgage
related securities as a percentage of principal balance of
loans sold................................................ 13.9% 10.6%
======== ========
WHOLE LOAN SALES SOLD WITH SERVICING RELEASED AND SALES TO
FNMA:
Principal amount of loans sold:
Title I................................................... $ -- $ 39,810
Conventional.............................................. -- 59,189
-------- --------
Total principal balance........................... $ -- $ 98,999
======== ========
Gain on sale of loans....................................... $ -- $ 3,991
======== ========
Net unrealized loss on mortgage related securities.......... $ -- $ (6)
======== ========
Gain on sale of loans as a percentage of principal balance
of loans sold............................................. 0.0% 4.0%
======== ========
Gain on sale of loans plus net unrealized loss on mortgage
related securities as a percentage of principal balance of
loans sold................................................ 0.0% 4.0%
======== ========
LOANS SERVICED AT END OF YEAR (INCLUDING LOANS SECURITIZED,
SOLD TO INVESTORS, AND HELD FOR SALE):
Title I................................................... $202,766 $255,446
Conventional.............................................. 11,423 372,622
-------- --------
Total servicing portfolio......................... $214,189 $628,068
======== ========
</TABLE>
See Note 2 of Notes to Financial Statements.
Loan servicing income, net decreased 9.3% to $3.0 million during fiscal
1997 from $3.3 million during fiscal 1996. The decrease was primarily the result
of the reclassification of net revenue in compliance with SFAS No. 125, and
increased interest advances and reduced servicing fees related to $34.0 million
in delinquent serviced loans at August 31, 1997 compared to $16.2 million at
August 31, 1996.
Interest income on loans held for sale and mortgage related securities, net
of interest expense, increased 217.1% to $3.1 million during fiscal 1997 from
$988,000 during fiscal 1996. The increase was primarily the result of the
increase in the average size of the portfolio of loans held for sale, the
increased mortgage related securities portfolio and the reclassification of net
revenue in compliance with SFAS No. 125.
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, mortgage servicing rights, and
valuation of these assets. Implementation of interest rate risk management
strategies may decrease spreads, decrease gains on sale of loans, or otherwise
decrease revenues from those which might otherwise occur in a stable interest
rate environment without such strategies in place. The Company intends to
28
<PAGE> 32
thoroughly analyze the cost of such strategies compared to the risks which would
be mitigated prior to implementation of any strategy.
The net provision for credit losses increased to $6.3 million for fiscal
1997 from $55,000 for fiscal 1996. The increase in the provision was directly
related to the increase in the volume of loans originated and the increased
ratio of Conventional Loans to Title I Loans originated during fiscal 1997
compared to fiscal 1996. 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 for credit
losses and estimated credit losses on loans sold through securitizations are
considered in the Company's valuation of its residual interest securities. 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 originated and sold. See Notes 2 and 5 of Notes to Financial
Statements.
Total general and administrative expenses increased 101.5% to $23.8 million
during fiscal 1997 compared to $11.8 million during fiscal 1996. The increase
was primarily a result of increased credit reports expense due to increased loan
origination volume, increased rent and lease expense due to facilities
expansion, increased loan servicing expenses due to an increase in loans
serviced, and increased payroll related to the hiring of additional
underwriting, loan processing, administrative, loan quality control and other
personnel as a result of the expansion of the Company's business.
Payroll and benefits expense increased 122.2% to $11.2 million during
fiscal 1997 from $5.0 million during fiscal 1996 primarily due to an increased
number of employees. The number of employees increased to 405 at August 31, 1997
from 170 at August 31, 1996 due to increased staff necessary to support the
business expansion and maintain quality control.
Commissions and selling expenses increased 37.5% to $2.8 million during
fiscal 1997 from $2.0 million during fiscal 1996, while loan originations
increased by $387.5 million or 278.1% to $526.9 million at August 31, 1997. The
sales network expanded to substantially all states, adding new personnel and
offices to further the loan origination growth strategy.
Credit reports expense increased 277.9% to $1.4 million during fiscal 1997
from $367,000 during fiscal 1996, due to increased loan origination volume to
$526.9 million during fiscal 1997 from $139.4 million during fiscal 1996.
Rent and lease expense increased 222.8% to $1.1 million during fiscal 1997
from $338,000 during fiscal 1996, due to increased expansion costs for the
corporate headquarters and additional branch offices.
Servicing fees paid to PEC increased 164.3% to $1.9 million during fiscal
1997 from $709,000 during fiscal 1996 due primarily to a larger loan servicing
portfolio.
Management services by affiliate increased 44.1% to $967,000 during fiscal
1997 from $671,000 during fiscal 1996. These expenses represent services
provided by PEC, including executive, accounting, legal, management information,
data processing, human resources, advertising and promotional materials.
Other general and administrative expenses increased 141.6% to $3.3 million
during fiscal 1997 from $1.4 million during fiscal 1996 due primarily to
increased expenses related to the ongoing expansion of facilities.
Income before income taxes increased to $23.8 million for fiscal 1997 from
$11.2 million for fiscal 1996; therefore, the provision for income taxes
increased to $9.1 million for fiscal 1997 compared to $4.2 million for fiscal
1996.
As a result of the foregoing, the Company's net income increased 113.1% to
$14.7 million for fiscal year 1997 from $6.9 million for fiscal 1996.
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
29
<PAGE> 33
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 310 active Correspondents and 435 active Dealers, compared to 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 during fiscal 1995.
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 ORIGINATED:
Correspondents:
Title I........................................... $63,792,680 72.7% $ 82,596,197 59.3%
Conventional...................................... -- -- 11,582,108 8.3
----------- ----- ------------ -----
Total Correspondents...................... 63,792,680 72.7 94,178,305 67.6
----------- ----- ------------ -----
Dealers -- Title I.................................. 23,957,829 27.3 45,188,721 32.4
----------- ----- ------------ -----
Total principal amount of loans
originated.............................. $87,750,509 100.0% $139,367,026 100.0%
=========== ===== ============ =====
NUMBER OF LOANS ORIGINATED:
Correspondents:
Title I........................................... 3,437 59.1% 4,382 50.9%
Conventional...................................... -- -- 392 4.6
----------- ----- ------------ -----
Total Correspondents...................... 3,437 59.1 4,774 55.5
----------- ----- ------------ -----
Dealers -- Title I.................................. 2,381 40.9 3,836 44.5
----------- ----- ------------ -----
Total number of loans originated.......... 5,818 100.0% 8,610 100.0%
=========== ===== ============ =====
</TABLE>
See Notes 2 and 5 of Notes to Financial Statements.
Total revenues increased 73.6% to $23.6 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
--------- ----------
(THOUSANDS OF DOLLARS)
<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 $ 16,539
Net unrealized gain on mortgage related securities.......... -- 2,697
------- --------
Gain on sale of loans and unrealized gain on mortgage
related securities........................................ $12,233 $ 19,236
======= ========
Gain on sale of loans as a percentage of principal balance
of loans sold............................................. 14.3% 12.0%
======= ========
Gain on sale of loans and unrealized gain on mortgage
related securities as a percentage of principal balance of
loans sold................................................ 14.3% 13.9%
======= ========
</TABLE>
See Note 2 of Notes to Financial Statements.
Loan servicing income, net 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
30
<PAGE> 34
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.
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, mortgage servicing rights, and
valuation of these assets. Implementation of interest rate risk management
strategies may decrease spreads, decrease gains on sale of loans, or otherwise
decrease revenues from those 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 net provision for credit losses decreased 93.6% to $55,000 for fiscal
1996 from $864,000 for fiscal 1995 due to the increased level of loans
securitized and sold in fiscal 1996 compared to fiscal 1995. 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 for credit losses and estimated credit losses on loans
sold through securitizations are considered in the Company's valuation of its
residual interest securities. 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. Servicing costs
on a per loan basis may increase as problem Conventional Loans may require
greater costs to service. See Notes 2 and 5 of Notes to Financial Statements.
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.
Credit reports expense increased 175.9% to $367,000 during fiscal 1996 from
$133,000 during fiscal 1995 due to an increase in loan origination volume to
$139.4 million during fiscal 1996 from $87.8 million during fiscal 1995.
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 2.8% 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 $85,000 and $29,000, respectively, which amounts were included in other
interest expense. During fiscal 1995 and 1996, the
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<PAGE> 35
Company paid PEC for developing certain computer programming, incurring costs of
$36,000 and $56,000, respectively. See Note 16 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 313.3% to $1.4 million
for fiscal 1996 from $331,000 for fiscal 1995 primarily due to increased
expenses related to expansion of facilities and increased communications
expense. The Company is continually enhancing its loan production systems to
provide for the automation of the loan origination process. 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; therefore the provision for income taxes
increased to $4.2 million for fiscal 1996 compared to $2.3 million for fiscal
1995.
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.
FINANCIAL CONDITION
August 31, 1997 Compared to August 31, 1996
Cash and cash equivalents increased to $6.1 million at August 31, 1997 from
$443,000 at August 31, 1996, primarily as a result of the use of the proceeds
from the Company's Common Stock and debt offerings in November 1996, and other
borrowing proceeds, to acquire short term investments after repayment of debt.
Restricted cash deposits increased 54.0% to $6.9 million at August 31, 1997
from $4.5 million at August 31, 1996, primarily due to an increase in the
aggregate amount of loans securitized.
Loans held for sale, net, increased 106.6% to $9.5 million at August 31,
1997 from $4.6 million at August 31, 1996, primarily as a result of the
Company's increased loan originations and the timing of loan sales. See Notes 2
and 5 of Notes to Financial Statements.
The Company provides an allowance for credit losses, in an amount which, in
the Company's judgment, will be adequate to absorb losses on loans, after FHA
insurance recoveries on the Title I 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 which utilizes historical experience and
current economic factors. These reviews take into consideration changes in the
nature and level of the portfolio, historical rates, collateral values, and
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 and the allowance for credit losses on loans sold with
resource for the fiscal year ended August 31, 1997 consist of the following
(thousands of dollars):
<TABLE>
<S> <C>
Balance at August 31, 1996.................................. $ 1,015
Provision for credit losses............................... 23,048
Reductions to the provision due to securitizations or
loans sold without recourse............................ (16,748)
Reductions due to charges to allowance for credit
losses................................................. (201)
--------
Balance at August 31, 1997.................................. $ 7,114
========
</TABLE>
The allowance for credit losses and the allowance for credit losses on
loans sold with resource consist of the following at these dates:
<TABLE>
<CAPTION>
AUGUST 31,
----------------------
1996 1997
-------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Allowance for credit losses................................. $ 95 $ 100
Allowance for credit losses on loans sold with recourse..... 920 7,014
------ ------
Total..................................................... $1,015 $7,114
====== ======
</TABLE>
32
<PAGE> 36
See Notes 2 and 5 of Notes to Financial Statements.
Excess servicing rights decreased to $0 at August 31, 1997 from $12.1
million at August 31, 1996 due to the implementation of SFAS 125, which requires
the reclassification of excess servicing rights as mortgage related securities
which are carried at fair market value. The excess cash flow created through
securitizations which had been recognized as excess servicing rights on loans
repurchased and securitized is included in the cost basis of the mortgage
related securities. Mortgage related securities were $106.3 million at August
31, 1997 and $22.9 million at August 31, 1996. The increase was due to the
increased value of loans originated and securitized and the reclassification of
excess servicing rights. See Notes 2, 6 and 7 of Notes to Financial Statements.
Mortgage servicing rights increased 148.4% to $9.5 million at August 31,
1997 from $3.8 million at August 31, 1996 as a result of increased loan
originations with subsequent loan sales with servicing retained to $462.4
million during fiscal 1997 from $137.9 million during fiscal 1996. See Notes 2
and 8 of Notes to Financial Statements.
Property and equipment, net, increased 148.9% to $2.2 million at August 31,
1997 from $865,000 at August 31, 1996 due to increased purchases of office
equipment related to facility expansion. See Notes 2 and 9 of Notes to Financial
Statements.
Other receivables increased to $7.9 million at August 31, 1997 from $59,000
at August 31, 1996, primarily as a result of a $7.6 million receivable from a
financial institution related to a whole loan sale on August 29, 1997. The funds
from the sale transaction were received in September 1997.
Prepaid debt expenses increased 993.5% to $2.4 million at August 31, 1997
from $216,000 at August 31, 1996 primarily due to debt expense related to the
$40.0 million of subordinated debt issued in November 1996. See Note 13 of Notes
to Financial Statements.
Prepaid commitment fee increased to $2.3 million at August 31, 1997 from $0
at August 31, 1996 due to the commitment fee related to the value of warrants
issued in conjunction with a loan purchase agreement for up to $2.0 billion of
loans with a financial institution. The commitment fee is being amortized as the
commitment for the purchase of loans is being utilized. See Note 3 of Notes to
Financial Statements.
Notes and contracts payable increased 150.6% to $35.6 million at August 31,
1997 from $14.2 million at August 31, 1996 due to increased borrowings by the
Company to fund loan originations as a result of the overall growth in the
Company's business. See Note 11 of Notes to Financial Statements.
Accounts payable and accrued liabilities increased 90.8% to $7.8 million at
August 31, 1997 from $4.1 million at August 31, 1996 primarily as a result of
the increased amounts due to investors on sold loans and the timing of accruals
and payments.
Allowance for credit losses on loans sold with recourse increased 662.4% to
$7.0 million at August 31, 1997 from $920,000 at August 31, 1996 primarily due
to increased loan sales. 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 for credit losses and estimated credit losses on
loans sold through securitizations are considered in the Company's valuation of
its residual interest securities. See Notes 2 and 5 of Notes to Financial
Statements.
Stockholders' equity increased 200.0% to $53.1 million at August 31, 1997
from $17.7 million at August 31, 1996 as a result of the IPO and net income of
$14.7 million during fiscal 1997. See Notes 1, 2, 13 and 14 of Notes to
Financial Statements.
33
<PAGE> 37
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. See Notes 2 and 5 of Notes to Financial
Statements.
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. See Notes 2, 6 and 7 of Notes to Financial Statements.
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 Notes 2, 6 and 7 of Notes to
Financial Statements.
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 loan
originations and the resulting increase in sales of loans with servicing
retained from $85.4 million during fiscal 1995 to $137.9 million during fiscal
1996. See Notes 2 and 8 of Notes to Financial Statements.
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. See Notes 2 and 9 of Notes to Financial
Statements.
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
securitizations which were available for financing to meet the Company's cash
requirements. The Company had a $10.0 million revolving facility for the
financing of mortgage related securities. See Note 11 of Notes to Financial
Statements.
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
34
<PAGE> 38
are considered in the Company's valuation of its residual interest securities.
See Notes 2 and 5 of Notes to Financial Statements.
Due to Mego Financial 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. See Notes 1, 2, 13 and 14 of Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $6.1 million at August 31, 1997 compared to
$443,000 at August 31, 1996.
In November 1996, the Company consummated the IPO pursuant to which it
issued 2.3 million shares of Common Stock at $10.00 per share. Concurrently with
the IPO, the Company issued the $40.0 million of Existing Notes in an
underwritten public offering. The Company used approximately $13.9 million of
the aggregate net proceeds from these offerings to repay intercompany debt due
to Mego Financial and PEC and approximately $24.3 million to reduce the amounts
outstanding under the Company's lines of credit. The balance of the net proceeds
has been used to originate loans.
In October 1997, the Company consummated the Private Placement pursuant to
which it issued $40.0 million of Additional Notes, which increased the aggregate
principal amount of the outstanding Notes from $40.0 million to $80.0 million.
The Company used approximately $3.9 million of the net proceeds from the Private
Placement to repay Intercompany Debt due to Mego Financial and approximately
$29.0 million to reduce the amounts outstanding under the Company's lines of
credit. The balance of the net proceeds has been and will be used to originate
loans. Prior to the Private Placement, the Company obtained consents pursuant to
the Consent Solicitation to amendments to the Original Indenture, which among
other things permitted the issuance of the Additional Notes, modified certain
covenants applicable to the Company and will permit the issuance of an
additional $70.0 million of principal amount of the Notes. In connection with
the Consent Solicitation, the Company made consent payments of $10.00 cash per
$1,000 principal amount of Existing Notes to holders thereof who properly
furnished their consents to the amendments to the Original Indenture.
The Company's cash requirements arise from loan originations, payments of
operating and interest expenses, over-collateralization requirements related to
securitization transactions and deposits to reserve accounts related to loan
sale transactions. Loan originations are initially funded principally through
the Company's $65.0 million warehouse line of credit pending the sale of loans
in the secondary market. In addition, the Company has an agreement providing for
the purchase of up to $2.0 billion of loans over a five-year period, of which
$1.5 billion remained to be purchased at August 31, 1997. Substantially all of
the loans originated by the Company are sold. Loans under the warehouse line of
credit are repaid primarily from the proceeds from the sale of loans in the
secondary market. These proceeds totaled approximately $85.0 million, $135.5
million and $522.0 million for the years ended August 31, 1995, 1996 and 1997,
respectively.
The Company has operated since March 1994, and expects to continue to
operate for the foreseeable future, on a negative cash flow basis. In connection
with securitizations and certain whole loan sales, 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 is subject to over-collateralization requirements and incurs
significant expenses in connection with securitizations and incurs tax
liabilities as a result of the gain on sale.
The pooling and servicing agreements and sale 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
35
<PAGE> 39
the senior interests issued by the related trust or cover interest shortfalls.
This retention causes the aggregate unpaid principal amount of the loans in the
related pool to exceed the aggregate principal balance of the outstanding
investor securities. 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 any
guarantee of the related interests as a condition to obtaining insurance or by
the rating agencies as a condition to obtaining the desired 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.
Certain whole loan sale transactions require 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, 1997, amounts on deposit in
such reserve accounts totaled $6.9 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. Loan originations
are initially funded principally through the Company's $65.0 million warehouse
line of credit that was executed in June 1997, which replaced a previous $20.0
million warehouse line of credit. See Note 11 of Notes to Financial Statements.
At August 31, 1997, $8.5 million was outstanding under this warehouse line. In
excess of 98.5% of the aggregate loans originated by the Company through August
31, 1997 had been sold.
The $65.0 million warehouse line of credit, which is secured by loans prior
to sale, became effective in June 1997 and was increased from $40.0 million to
$55.0 million in September 1997 and to $65.0 million in October 1997. The
Company has the option of borrowing funds under the $65.0 million warehouse line
of credit, subject to certain conditions, at an annual rate equal to (i) the
higher of the corporate base rate of interest announced by The First National
Bank of Chicago from time to time or the weighted-average of rates on overnight
federal funds transactions, as published by the Federal Reserve Bank of New
York, plus 0.5%, (ii) the Federal Funds Funding Rate plus 1.75% or (iii) the
Eurodollar Base Rate. All of the Company's funding under the warehouse line of
credit currently bears interest at an annual rate equal to the Federal Funds
Funding Rate plus 1.75%, and expires June 26, 1998. The warehouse line of credit
may be increased to $90.0 million under certain circumstances if additional
lender commitments are made. The agreement requires the Company to maintain
minimum adjusted tangible net worth (defined as net worth less intangibles plus
subordinated debt) of $65.0 million plus 50% of the Company's cumulative net
income since November 30, 1996, plus all net proceeds received by the Company
through the sale or issuance of stock or additional subordinated notes. At
August 31, 1997, the Company's actual adjusted tangible net worth calculated
pursuant to the agreement was $88.1 million, and the required minimum adjusted
tangible net worth at that date was $71.1 million. Additionally, the following
material covenant restrictions exist: i) the ratio of total liabilities (not
including subordinated notes) divided by tangible net worth (including
subordinated notes) cannot exceed 3:1, and ii) total liabilities must be less
than the aggregate of 100% of cash plus 93% of loans held for sale plus 55% of
restricted cash and mortgage related securities. At August 31, 1997, the ratio
of total liabilities to tangible net worth was 0.69:1 and total liabilities were
$61.1 million, which was $16.1 million under the maximum amount allowed. See
Note 11 of Notes to Financial Statements.
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<PAGE> 40
In September 1996, the Company entered into a repurchase agreement with
another financial institution pursuant to which the Company may pledge the
interest only certificates from its securitizations in exchange for advances. In
April 1997, the Company entered into a pledge and security agreement with the
same financial institution which currently provides for a revolving credit
facility of up to $25.0 million, less any amounts outstanding under the
repurchase agreement, with respect to which credit facility $25.0 million was
outstanding at August 31, 1997. This facility is secured by a pledge of certain
of the Company's interest only and residual class 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. A portion of the loans under the agreement bears
interest at one-month LIBOR + 3.5%, expires one year from the initial advance,
and requires the Company to maintain a minimum net worth of the greater of $35.0
million, or following fiscal year end 1997, 80% of net worth as of August 31,
1997. The portion of the credit line agreement applicable to a repurchase
agreement secured by insured interest only certificates bears interest at
one-month LIBOR + 2.0%. At August 31, 1997, the required net worth was $35.0
million and the Company's actual net worth was $53.1 million. Additionally, the
agreement requires the Company to maintain a debt-to-net-worth ratio not to
exceed 2.5:1. At August 31, 1997, the ratio was 1.74:1.
In October 1997, the Company entered into a revolving credit facility with
a financial institution providing for an initial advance of up to $5.0 million
secured by certain residual interest and interest only securities. This credit
facility bears an annual interest rate of the higher of (i) the prime rate as
established by The Chase Manhattan Bank, N.A., plus 2.5% or (ii) 9.0%. This
credit facility may be increased to an aggregate principal amount of up to $8.8
million with additional lender participations. The credit agreement contains
financial covenants similar to those contained in the warehouse line of credit
agreement discussed above.
Certain material covenant restrictions also exist in the Indenture
governing the Notes. These covenants include limitations on the Company's
ability to incur indebtedness, grant liens on its assets and to enter into
extraordinary corporate transactions. The Company may not incur indebtedness if,
on the date of such incurrence and after giving thereto, the Consolidated
Leverage Ratio (as defined below) would exceed 2:1, subject to certain
exceptions. At August 31, 1997, the Consolidated Leverage Ratio was 1.65:1. The
Consolidated Leverage Ratio is the ratio of (i) total debt, including
subordinated debt, but excluding the Permitted Warehouse Indebtedness (as
defined below), accounts payable outstanding less than 60 days, and the tax
sharing payable to Mego Financial from the Company, to (ii) the consolidated net
worth of the Company. The Permitted Warehouse Indebtedness generally is the
outstanding amount under the warehouse line of credit agreement. At August 31,
1997, the Original Indenture provided that the Permitted Warehouse Indebtedness
could not exceed three times the Company's consolidated tangible net worth. At
August 31, 1997, this ratio was .06:1. In addition, an increasing amount of the
Company's mortgage related securities are required to remain unpledged. At
August 31, 1997, that requirement was $39.9 million, and at that date $60.9
million of mortgage related securities were pledged and $45.4 million of
mortgage related securities were unpledged.
In addition, the Indenture Amendments provide, among other things, that the
Company may not incur Unsecured Senior Indebtedness (as defined in the
Indenture), if the Adjusted Consolidated Leverage Ratio (as defined below), on
the date of such incurrence after giving effect thereto, exceeds 1:1. The
Adjusted Consolidated Leverage Ratio is the ratio of (i) the amount of all
Unsecured Senior Indebtedness to (ii) the sum of (A) Consolidated Adjusted Net
Income (net income minus gain on sale of loans and net unrealized gain on
mortgage related securities plus provision for credit losses, depreciation and
amortization and amortization of excess servicing rights) from September 1, 1997
to the end of the most recent fiscal quarter and (B) the aggregate net proceeds
received by the Company from the issuance or sale of stock or debt securities
converted to stock, after September 1, 1997. Furthermore, the Indenture
Amendments impose a limit on the amount of mortgage related securities that must
remain unpledged and remove the limitation on the amount of Permitted Warehouse
Indebtedness.
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. The lack of
adequate capital may
37
<PAGE> 41
result in the curtailment of loan originations and thereby impair the Company's
revenue and income stream. At August 31, 1997, no commitments existed for
material capital expenditures.
In furtherance of the Company's strategy to sell loans through
securitizations, in March 1996, August 1996, December 1996, March 1997, May
1997, June 1997 and August 1997, the Company completed its first seven
securitizations pursuant to which it sold pools of loans of $84.2 million, $48.8
million, $67.3 million, $89.7 million, $63.5 million, $104.6 million and $73.3
million, respectively. The Company previously reacquired $77.7 million, $36.2
million, $67.3 million, $89.7 million, $63.5 million, $104.6 million and $73.3
million of such loans, respectively. Pursuant to these securitizations,
pass-through securities evidencing interests in the pools of loans were sold in
public offerings. The Company continues to service the sold loans and is
entitled to receive from payments in respect of interest on the sold loans, not
in default, a servicing fee equal to 1.25% of the balance of each loan with
respect to the March 1996 transaction and 1.0% with respect to the other
transactions. In addition, from each securitization, the Company has received
residual interest securities, contractual rights, and in certain of the
transactions, also received interest only strip securities, all of which were
recorded as mortgage related securities on the Statements of Financial
Condition. The residual interest securities and the contractual rights represent
the excess differential (after payment of any servicing, interest and other
fees, and the contractual obligations payable to the note and certificate
holders) between the interest paid by the obligors of the sold loans and the
yield on the sold notes, certificates and interest only strip securities. Also,
from the two securitizations completed during fiscal 1996 and the first two
securitizations completed in fiscal 1997, the Company has also received interest
only strip securities. These interest only securities yield annual rates between
0.45% and 1.00% calculated on the principal balance of the loans not in default.
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 and, as servicer, may be required to advance interest in connection
with the securitizations.
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 or debt consolidation 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.
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 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.
In April 1995, the Company entered into a continuing agreement with a
financial institution pursuant to which an aggregate of approximately $694.7
million in principal amount of loans had been sold at August 31, 1997 for an
amount approximately 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 25% of the principal amount of Title I Loans which are
more than 60 days delinquent plus 100% of the principal amount of Conventional
Loans which are more than 60 days delinquent. In the first quarter of fiscal
1997, 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, of which $1.5 billion remained to be purchased at August 31, 1997.
Pursuant to the agreement, Mego Financial issued to the financial institution
four-year warrants to purchase 1.0 million shares of Mego Financial's common
stock at an exercise price of $7.125 per share. The agreement
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also provides 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 ($150.0 million through September 30, 1997), the financial institution
shall not be obligated to purchase, and the Company shall not be obligated to
sell, loans under the agreement. The value of the warrants, estimated at $3.0
million (0.15% of the commitment amount) as of the commitment date, is being
amortized as the commitment for the purchase of loans is utilized. The Company
has agreed to pay to Mego Financial the value of the warrants as described under
"Certain Transactions."
In May 1995 and June 1995, the Company reacquired from the same institution
an aggregate of approximately $25.0 million of Title I Loans for an amount equal
to their remaining principal balance, which were sold in May and June 1995 to a
financial institution for an amount equal to their remaining principal balance.
Pursuant to the sale 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.
Net cash used in the Company's operating activities for fiscal 1995, 1996
and 1997 was $11.8 million, $15.3 million and $70.4 million, respectively.
During fiscal 1995, 1996 and 1997, cash provided by financing activities
amounted to $12.0 million, $15.6 million and $77.7 million, respectively.
Prior to the consummation of the Company's IPO in November 1996, the
Company was dependent on Mego Financial to provide, among other things, (i)
funds for operations without interest and (ii) guarantees of the Company's
financing arrangements. Subsequent to the IPO, Mego Financial has advanced funds
to the Company to pay servicing fees owed to PEC and amounts due others.
Although it may do so, it is not anticipated that Mego Financial will advance
funds to the Company or guarantee the Company's financing arrangements in the
future.
The Company believes that, based upon current levels of loan originations
and loan sales, funds from operations and financing activities, borrowings under
its existing credit facilities and the net proceeds from the Private Placement
and Offering will be sufficient to satisfy its contemplated cash requirements
for approximately 12 months following the consummation of the Offering.
Management anticipates that in the future the Company may determine to raise
funds through additional public or private offerings of its debt or equity
securities.
POSSIBLE TERMINATION OF SERVICING RIGHTS
As described in Note 8 of Notes to Financial Statements, the pooling and
servicing agreements and sale 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 August 31, 1997, the rolling three-month average annual default rates on the
pools of loans sold in the March 1996 and August 1996 securitization
transactions exceeded 6.5%, the permitted limit set forth in the related pooling
and servicing agreements. Accordingly, this condition could result in the
termination of the Company's servicing rights with respect to the pools of loans
by the trustee, the master servicer or the insurance company providing credit
enhancement for those transactions. 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 Company's
results of operations in the amount of the affected mortgage servicing rights
($2.4 million before tax at August 31, 1997) on the date of termination. The
Company has taken certain steps designed to reduce the default rates on these
pools 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 hiring of
additional personnel to collect delinquent accounts, the assignment of
additional personnel specifically assigned to the collection of
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these pools of loans and the renegotiation of the terms of certain delinquent
accounts in these pools 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
obligations the interest rates of which 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
Effective September 1, 1994, the Company adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights -- an amendment of SFAS No. 65" ("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%. 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 was effective
for fiscal years beginning after December 15, 1995. The adoption of SFAS No. 121
did not have a material adverse effect on the Company's 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. However, effective August 20, 1997, the
Company converted all outstanding employee stock options to stock appreciation
rights ("SARs") which resulted in compensation expense of $220,000; therefore,
disclosure under SFAS 123 is not applicable. The Company has elected to continue
to apply the provisions of Accounting Principles Board ("APB") Opinion No. 25
"Accounting for Stock Issued to Employees," and will provide pro forma
disclosure for SFAS No. 123 if applicable. See Note 17 of Notes to Financial
Statements.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" 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
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servicing income or loss and (b) assessment for asset impairment or increased
obligation based on their fair values. The statement requires that the Company's
excess servicing rights be measured at fair market value and be reclassified as
interest only receivables and accounted for in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". As required
by the statement, the Company adopted the new requirements effective January 1,
1997. Implementation of the statement did not 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 approximated fair value.
SFAS No. 128, "Earnings per Share" ("SFAS No. 128") was issued by the FASB
in March 1997, effective for financial statements issued after December 15,
1997. SFAS No. 128 provides simplified standards for the computation and
presentation of earnings per share ("EPS"), making EPS comparable to
international standards. SFAS No. 128 requires dual presentation of "Basic" and
"Diluted" EPS, by entities with complex capital structures, replacing "Primary"
and "Fully Diluted" EPS under APB Opinion No. 15.
Basic EPS excludes dilution from Common Stock equivalents and is computed
by dividing income available to stockholders by the weighted-average number of
shares of Common Stock outstanding for the period. Diluted EPS reflects the
potential dilution from Common Stock equivalents, similar to fully diluted EPS,
but uses only the average stock price during the period as part of the
computation.
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 loan volume is not impacted by seasonal climate changes and, with
the exclusion of the holiday season, tends to be stable throughout the year.
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BUSINESS
GENERAL
The Company is a specialized consumer finance company that originates,
purchases, sells, securitizes and services consumer loans consisting primarily
of uninsured Conventional Loans which are generally secured by liens on
residential property. The Company has historically originated loans through its
network of Correspondents and Dealers. Until May 1996, the Company originated
only Title I Loans. Subject to certain limitations, the Title I program provides
for insurance of 90% of the principal balance of the loan, and certain other
costs. The Company began its conventional lending operations to high credit
quality and higher income borrowers than the typical Title I borrower in May
1996 in order to leverage its existing network of Correspondents and Dealers.
Pursuant to these programs, the Company originates uninsured conventional home
improvement loans to facilitate larger home improvement and remodeling projects
which exceed the FHA Title I program loan limits, as well as enable borrowers to
use all or a portion of the proceeds for debt consolidation. Debt consolidation
loan proceeds are used to shift high interest rate credit card debt and other
consumer finance obligations into a single monthly mortgage payment. Such
Conventional Loans when added to existing senior lien balances may have a post
funding combined LTV of up to 125% of the underlying properties' value. At
August 31, 1997, the Company's Conventional Loan portfolio had a
weighted-average combined LTV of 112%. For the three months ended August 31,
1996 and the year ended August 31, 1997, the Company originated $11.2 million
and $428.8 million of Conventional Loans, respectively, which constituted 22.5%
and 81.4% of the Company's total loan originations during the respective
periods.
The profile of the Company's borrowers is typified by individuals who own
their homes 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, particularly
those who wish to consolidate debt, 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 the higher
interest rates that the Company receives in its loan programs as compared to the
interest rates charged by banks and other traditional financial institutions.
The Company has developed the CIP that includes as a significant component the
credit evaluation score methodology developed by FICO to classify borrowers on
the basis of likely future performance. The other components of the Company's
credit scoring system include debt-to-income ratio, employment history and
residence stability. The Company currently makes Conventional Loans only to
those borrowers with an "A" or "B" credit grade, representing the two lowest
credit risk levels, using the CIP. At August 31, 1997, the Company's
Conventional Loan borrowers had a weighted-average FICO score of 672, an average
annual income of $57,468, an average of 8.6 years of current industry
employment, and an average of 4.3 years of residence in the underlying mortgaged
property. The Company receives varying rates of interest based upon the
borrower's credit profile and income and assumed risk. For the years ended
August 31, 1996 and 1997, the loans originated by the Company had a
weighted-average interest rate of 14.03% and 13.92%, respectively.
The Company's loan originations increased to $526.9 million during the year
ended August 31, 1997 from $139.4 million during the year ended August 31, 1996.
The Company's revenues increased to $54.8 million for the fiscal year ended
August 31, 1997 from $23.6 million for the year ended August 31, 1996. For the
year ended August 31, 1997, the Company had net income of $14.7 million compared
to $6.9 million for the year ended August 31, 1996. 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 currently sells substantially all the loans it originates
either through securitizations at a yield below the stated interest rate on the
loans, generally retaining the right to service the loans and to receive any
amounts in excess of the yield to the purchasers, or through whole loan sales to
third party institutional purchasers. In connection with whole loan sales, the
Company either sells the loans on a servicing retained basis at a yield below
the stated interest rate on the loans or on a servicing released basis at a
premium. The Company has completed seven securitizations from March 1996 through
October 1997, and expects to sell a substantial portion of its loan production
through securitizations in the future. Through access to securitization, the
Company believes that it has the ability to sell higher volumes of loans on more
favorable terms than
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through whole loan sales. However, the Company continues to make whole loan
sales on either a servicing released or servicing retained basis. Sales on a
servicing released basis and some sales on a servicing retained basis enable the
Company to generate a cash premium at the time of sale. At August 31, 1997, the
Company serviced $618.5 million of loans it had sold through whole loan sales
and securitizations, and $9.6 million of loans it owned.
HOME IMPROVEMENT AND DEBT CONSOLIDATION LOAN INDUSTRY
Home Improvement
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 1996 expenditures
estimated at $119.1 billion. The Company targets that portion of the estimated
$119.1 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 Conventional 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 for the Company's
products 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
grew from $375.0 million during 1988 to $1.5 billion during 1996. 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. In May 1997, HUD
proposed modifications to the Title I program which would eliminate the
origination of Title I Loans through Dealers.
Debt Consolidation
A growing number of financial institutions, including the Company, are
originating loans wherein the proceeds are used to reduce outstanding consumer
finance obligations. These loans may also be made in conjunction with a home
improvement project where the borrower seeks to enhance the value of his
residence and ultimately reduce his monthly debt service obligations. These
consumer finance obligations are often in the form of unsecured credit card debt
which have high interest rates and relatively short term maturities. Under this
type of loan accommodation, the consumer uses the loan proceeds to consolidate
multiple outstanding obligations into a single loan. In turn, the consumer
receives the benefit of a lower interest rate and an extended loan maturity
thereby reducing the amount of monthly debt service obligations, and in certain
instances may receive a tax benefit arising from the borrowing. These loan
products are typically secured with a mortgage lien on the consumer's primary
residence. These liens are typically in a junior position and when combined with
first mortgage liens exceed the market value of the subject residence. The
Company makes debt consolidation loans to high credit quality qualified
borrowers who have demonstrated a credit history of
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honoring their financial obligations on a timely basis in accordance with the
Company's criteria. Within the mortgage lending industry it is typical for loans
to qualified borrowers to be limited to the amount which, when added to the
outstanding senior debt on the property, will not exceed 125% of the market
value of the property. For the fiscal year ended August 31, 1997, the Company's
portfolio of Conventional Loans originated had a weighted-average combined LTV
of 112%.
STRATEGIC INITIATIVES
The Company's strategic plan is to continue to expand its lending
operations while maintaining the credit quality of its portfolio. The Company's
strategies include: (i) offering new complementary loan products such as First
Mortgage Loans; (ii) expanding its existing network of Correspondents and
Dealers; (iii) initiating direct mortgage lending; and (iv) mitigating negative
cash flow by continuing to sell a portion of the Company's originations in
secondary market transactions for cash premiums, seeking to increase the amount
of warehouse credit lines available to the Company and developing loan products
which are salable for cash premiums. At August 31, 1997, the Company had
developed a nationwide network of 694 active Correspondents and 670 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 its loan production. The Company also intends to increase its lending
operations by greater penetration of existing markets, due to its broader
product lines. The Company anticipates that as it expands its lending
operations, it will continue to realize economies of scale thereby reducing its
average loan origination costs and enhancing its profitability. Over the
long-term, the Company will seek to reduce its dependency on outside funding
sources.
Product Extension and Expansion
The Company intends to continue to review its loan programs and introduce
new loan products that meet the needs of its customers. The Company will also
evaluate products or programs that it believes are complementary to its current
products for the purpose of enhancing revenue by leveraging and enhancing the
Company's value to its existing network of Correspondents and Dealers. The
Company believes that its introduction of new loan products will enhance its
relationship with its Dealers and Correspondents and enable it to become a
favored 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. Initially all of these loans, which permit loan amounts up
to $75,000 with fixed rates and 25-year maturities, were secured by a lien,
generally junior in priority, on the respective primary residence. In the first
quarter of fiscal 1997, the Company commenced offering pure debt consolidation
loans through its Correspondent Division and non-FHA insured loans through its
Dealer Division. The Company commenced offering unsecured conventional home
improvement loans limited to a maximum loan amount of $15,000 through its Dealer
Division in the second quarter of fiscal 1997. The Company intends to expand its
loan product lines commencing in November 1997 to include the origination of
subprime First Mortgage Loans by leveraging its existing relationships. The
Company intends to originate this product solely for sale at cash premiums in
the secondary market, without recourse for credit losses or risk of prepayment.
With respect to this new product line, increased emphasis will be placed on the
underlying collateral value of the residence with such value fully supported by
independent appraisals. Prior to funding any loans in this new product line, the
Company plans to obtain contractual forward purchase commitments for this
product line from third party financial institutions.
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 through existing
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select Correspondents in May 1996. In order to maintain the Company's customer
service excellence, the Company has gradually increased the number of
Correspondents through 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, comprising $460.4
million of originations during the year ended August 31, 1997. The Company
intends to commence offering First Mortgage Loans through its Correspondents in
November 1997. 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 has provided conventional products, including unsecured conventional
home improvement loans, as well as its existing Title I product through 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
complementing the Conventional Loan programs presently offered. 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 addition, the Company
believes that this strategy may offset the potential loss of Dealer Title I Loan
originations as a result of the new Title I proposed regulations which, if
adopted, could end Dealer participation in Title I originations. See "Risk
Factors -- Legislative and Regulatory Risks."
Initiation of Direct Loan Originations
In order to diversify its loan source channels, the Company commenced
direct to consumer origination of Conventional Loans in September 1997. The
Company has entered into an agreement with a consumer finance institution for
the acquisition of loan referrals of pre-qualified potential borrowers whose
credit profiles and/or higher LTV requirements may not meet the referring
institution's conforming loan product guidelines, but may be suitable for
approval and funding under the Company's existing product mix. The Company
expects to enter into similar agreements with additional lenders. In the direct
to consumer origination channel, origination fees are typically paid by the
borrowers to the Company and are expected to exceed the Company's cost of
referrals. This program is unlike Correspondent originations which require
upfront cash premiums for the acquisition of loans with no related offsets.
Accordingly, this channel of origination requires less upfront cash than the
Company's historical methods.
Mitigation of Negative Cash Flow
The Company intends to improve its cash flow in several ways, including by
expanding its warehouse line of credit, continuing whole loan sales on a
servicing released basis and commencing direct to consumer loan originations.
Through the expansion of its warehouse line of credit, the Company will be able
to hold a greater quantity of loans for sale which the Company believes will
enable it to increase its interest income and reduce its exposure to the
volatility of the capital markets. Whole loan sales with servicing released
enable the Company to generate a cash premium at the time of sale thereby
increasing the Company's cash flow. In the direct to consumer origination
channel, origination fees are typically paid by the borrowers to the Company and
are expected to exceed the cost of referrals. This program is unlike
Correspondent originations which require upfront cash premiums for the
acquisition of loans with no related offsets. Accordingly, this channel of
origination requires less upfront cash than the Company's historical methods.
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LOAN PRODUCTS
To date, the Company has originated Conventional and Title I Loans.
Historically, both types of loans are typically secured by a junior lien on the
borrower's principal residence, although the Company occasionally originates and
purchases unsecured home improvement loans with borrowers that have an excellent
credit history. The Company's loan products include: (i) fixed rate,
Conventional Loans, secured by single family residences, with terms and
principal amounts ranging from 60 to 300 months and up to $75,000; and (ii)
fixed rate, secured and unsecured Title I Loans with terms and principal amounts
ranging from 36 to 240 months and up to $25,000. 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, with regard
to Conventional Loans, luxury items such as in-ground swimming pools. Debt
consolidation loans, whereby the consumer is reducing or retiring high-rate
short-term consumer debt, have become an increasing component of the Company's
Conventional Loan originations. The Company lends to borrowers of varying
degrees of creditworthiness. See "-- Loan Processing and Underwriting."
Conventional Loans
A Conventional Loan is a non-insured debt consolidation or home improvement
loan typically undertaken to retire consumer debt and/or pay for a home
improvement project. Virtually 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
originally began originating Conventional Loans through its Correspondent
Division in the third quarter of fiscal 1996 and began offering such loan
products through its Dealer Division in the first quarter of fiscal 1997.
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. Most of
the Company's Conventional Loans have relatively high LTVs and, accordingly, in
such cases the collateral for such loans will not be sufficient to cover the
principal amount of the loans in the event of default. The Company relies
principally on the creditworthiness of the borrower and to a lesser extent on
the underlying collateral for repayment of its Conventional Loans. The portfolio
of Conventional Loans generated during the fiscal year ended August 31, 1997
indicates on average that the borrowers have received an "A-" grade under the
Company's CIP, have an average debt-to-income ratio of 37%, post funding, and
the subject properties are 100% owner occupied. On average, the market value of
the underlying property is $118,200 without added value from the respective home
improvement work, the amount of senior liens is $105,500 and the loan size is
$30,400. 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.
The principal amount of a secured Title I Loan may not exceed $25,000, in
the case of a loan for the improvement of a single family structure, and
$60,000, in the case of a loan for the improvement of a multi-family structure.
Loans up to a maximum of $7,500 in principal amount may qualify as unsecured
Title I Loans.
Title I Loans are required to bear fixed rates of interest and, with
limited exceptions, be fully amortizing with equal weekly, biweekly, semimonthly
or monthly installment payments. Title I Loan terms may not be
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<PAGE> 50
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.
Subprime First Mortgage Loans
The Company intends to expand its loan product lines commencing in November
1997 to include the origination of subprime First Mortgage Loans to those
borrowers with a credit grade ranging from "A" to "C". Loan amounts may range up
to a maximum of $600,000 for "A" credit borrowers with maturities of up to 360
months. It is expected that the average loan amount pursuant to this program
would be less than $100,000. With respect to this new product line, increased
emphasis will be placed on the underlying collateral value of the residence with
such value fully supported by independent appraisals. Borrowers with a credit
grade of "A" may borrow up to 90% of the underlying property's appraised value,
borrowers with a credit grade of "B" may borrow up to 85% of appraised value and
borrowers with a credit grade of "C" may borrow up to 75% of appraised value. It
is the Company's intention to pool these first mortgage loans for eventual sale
in the secondary market on a servicing released basis, without recourse for
credit losses or risk of prepayment, and thereby generate cash premiums. Prior
to funding any loans in this new product line, the Company plans to obtain
contractual forward purchase commitments for this product line from third party
financial institutions. The purchasing institution would provide specific prior
approval for any loan in excess of $250,000.
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. The Correspondent Division utilizes
eleven account executives supervised by the Vice President -- Correspondent
Marketing responsible for
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<PAGE> 51
developing and maintaining relationships with Correspondents. At August 31,
1997, the Company had a network of 694 active Correspondents.
In addition to purchasing individual Direct Title I Loans and Conventional
Loans, from time to time the Correspondent Division purchases small portfolios
of loans from Correspondents. Each loan purchased is underwritten by Company
personnel prior to purchase in order to ensure compliance with the Company's
guidelines.
The Dealer Division originates loans through a network of Dealers,
consisting of home improvement construction contractors approved by the Company,
by acquiring individual retail installment contracts ("Installment Contracts")
from Dealers. An Installment Contract is an agreement between the Dealer and the
borrower pursuant to which the Dealer performs the improvements to the property
and the borrower agrees to pay in installments the price of the improvements.
Before entering into an Installment Contract with a borrower, the Dealer assists
the borrower in submitting a loan application to the Company. If the loan
application is approved, the Dealer enters into an Installment Contract with the
borrower, the Dealer assigns the Installment Contract to the Company upon
completion of the home improvements and the Company, upon receipt of the
requisite loan documentation (described below) and completion of a satisfactory
telephonic interview with the borrower, pays the Dealer pursuant to the terms of
the Installment Contract. The Dealer Division, and to a limited extent, the
Correspondent Division, maintains 19 branch offices located in Waldwick, 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; Richmond, Virginia;
Scottsdale, Arizona; Patchogue, New York; Woburn, Massachusetts; Dublin,
California; Stuart, Florida; Miami Lakes, Florida; and Brentwood, Tennessee,
through which it conducts its marketing to Dealers or Correspondents 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 15 field
representatives supervised by the Director of Dealer Marketing who are
responsible for marketing to Dealers. At August 31, 1997, the Company had a
network of 670 active Dealers doing business in 34 states and the District of
Columbia. The Company commenced offering Conventional Loans through its Dealer
Division in the first quarter of 1997.
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 vice president of compliance, whose staff performs
periodic reviews of 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 and 1997, the Company originated $94.2 million and $460.4 million,
respectively, of loans from Correspondents and paid total premiums of $2.8
million or 3.0%, and $18.3 million or 4.0%, respectively, 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
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<PAGE> 52
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 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 following table sets forth certain data regarding loan applications
processed and loans originated by the Company during the fiscal years indicated.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------
1995 1996 1997
------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Total Loan Applications:
Number processed............ 27,608 42,236 92,165
Number approved............. 15,956 20,910 52,269
Approved ratio.............. 57.8% 49.5% 56.7%
Loan Originations:
Principal balance of loans
originated:
Correspondents:
Title I................ $63,792,680 72.7% $ 82,596,197 59.3% $ 50,814,931 9.7%
Conventional........... -- -- 11,582,108 8.3 409,603,281 77.7
----------- ----- ------------ ----- ------------ -----
Total
Correspondents.... 63,792,680 72.7 94,178,305 67.6 460,418,212 87.4
----------- ----- ------------ ----- ------------ -----
Dealers:
Title I................ 23,957,829 27.3 45,188,721 32.4 47,269,541 9.0
Conventional........... -- -- -- -- 19,228,957 3.6
----------- ----- ------------ ----- ------------ -----
Total Dealers....... 23,957,829 27.3 45,188,721 32.4 66,498,498 12.6
----------- ----- ------------ ----- ------------ -----
Total principal
balance of
loans............. $87,750,509 100.0% $139,367,026 100.0% $526,916,710 100.0%
=========== ===== ============ ===== ============ =====
Number of loans originated:
Correspondents:
Title I................ 3,437 59.1% 4,382 50.9% 2,445 12.0%
Conventional........... -- -- 392 4.6 12,831 62.7
----------- ----- ------------ ----- ------------ -----
Total
Correspondents.... 3,437 59.1 4,774 55.5 15,276 74.7
----------- ----- ------------ ----- ------------ -----
Dealers:
Title I................ 2,381 40.9 3,836 44.5 3,893 19.0
Conventional........... -- -- -- -- 1,296 6.3
----------- ----- ------------ ----- ------------ -----
Total Dealers....... 2,381 40.9 3,836 44.5 5,189 25.3
----------- ----- ------------ ----- ------------ -----
Total number of
loans
originated........ 5,818 100.0% 8,610 100.0% 20,465 100.0%
=========== ===== ============ ===== ============ =====
Average principal balance of
loans originated............ $ 15,083 $ 16,187 $ 25,747
Weighted-average interest rate
on loans originated......... 14.55% 14.03% 13.92%
Weighted-average term of loans
originated (months)......... 188 198 226
</TABLE>
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In order to diversify its loan source channels, the Company commenced
direct to consumer origination of Conventional Loans in September 1997. The
Company expects to enter into contractual agreements with third party lenders
for the acquisition of loan referrals of qualified potential borrowers whose
status may not meet the referring institution's conforming loan product
guidelines, but may be suitable for approval and funding under the Company's
existing product mix. In the direct to consumer origination channel, origination
fees are typically paid by the consumer to the Company and are expected to
exceed the cost of referrals. This program is unlike Correspondent originations
which require upfront cash premiums for the acquisition of loans with no related
offsets. Accordingly, this channel of origination requires less upfront cash
than the Company's historical methods.
The referred applicants will be contacted immediately by a Company loan
representative who will seek to design a loan program to meet the applicant's
specific needs. The Company intends to operate a national retail lending
organization through a network of regional marketing centers. Each marketing
center will provide direct mortgage sales coverage for a specific geographic
area. The Company intends to establish these retail marketing centers in five
major regions: Atlanta, Georgia; Philadelphia, Pennsylvania; Chicago, Illinois;
Denver, Colorado; and San Francisco, California. The Company anticipates that
all loan processing, approvals, fundings and loan administration will be
performed at the Company's corporate headquarters in Atlanta, Georgia.
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 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. Loan applications are also reviewed to ascertain whether or not
they satisfy the Company's underwriting criteria, including loan-to-value
ratios, occupancy status, borrower income qualifications, employment stability,
purchaser requirements and necessary insurance and property appraisal
requirements.
The Company has developed the 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 FICO,
a consulting firm specializing in creating default predictive models through a
high number of variable components. A FICO score is calculated by a system of
scorecards. FICO uses actual credit data on millions of consumers, and applies
complex mathematical methods to perform extensive research into credit patterns
that forecast credit performance. The principal components of the FICO
predictive model include a consumer's credit payment history, outstanding debt,
availability and pursuit of new credit, and types of credit in use. Through this
scorecard process, FICO identifies distinctive credit patterns, which patterns
correspond to a likelihood that a consumer will make his loan payments as agreed
in the future. The score is based on all the credit-related data in the credit
report, not just negative data such as missed payments. 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 ascending credit
risks and descending quality, from "A" credits to "D" credits, with subratings
within those categories. Quality is a function of both the borrower's
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 combined LTV was 75% or
less which would raise the
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<PAGE> 54
credit risk to the Company to a "B" or better depending on the borrower's debt
service capability. Depending on loan size, typical combined LTVs for approved
"A" and "B" credits range from 90% to 125%, while combined LTVs for approved "C"
credits range from 60% up to 90% with extraordinary compensating factors.
The Company's underwriters review the applicant's credit history, based on
the information contained in the application as well as reports available from
credit reporting bureaus and the Company's CIP score, to determine the
applicant's acceptability under the Company's underwriting guidelines. Based on
the underwriter's approval authority level, certain exceptions to the guidelines
may be made when there are compensating factors subject to approval from a
corporate officer. The underwriter's decision is communicated to the
Correspondent or Dealer and, if approved, fully explains the proposed loan
terms. The Company endeavors to respond to the Correspondent or Dealer on the
same day the application is received.
The Company issues a commitment to purchase a pre-approved loan upon the
receipt of a fully completed loan package. Commitments indicate loan amounts,
fees, funding conditions, approval expiration dates and interest rates. Loan
commitments are generally issued for periods of up to 45 days in the case of
Correspondents and 90 days in the case of Dealers. Prior to disbursement of
funds, all loans are carefully reviewed by funding auditors to ensure that all
documentation is complete, all contingencies specified in the approval have been
met and the loan is closed in accordance with Company and regulatory procedures.
The Company also purchases loans from a limited number of Correspondents on
a wholesale basis whereby typically bi-weekly volume of closed loans is
submitted for purchase. Each loan is individually underwritten and audited by
Correspondent Division underwriting personnel prior to purchase.
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 combined LTV levels. The Company will only originate
Conventional Loans to borrowers with an "A" or "B" credit grade using the CIP.
For the fiscal year ended August 31, 1997, the Company's portfolio of
Conventional Loans originated had been evaluated on average as an "A-" credit
risk and had a weighted-average (i) FICO score of 670, (ii) gross debt-to-income
ratio of 37%, post funding, (iii) interest rate of 14.03% and (iv) combined LTV
of 112%, as well as an average loan amount of $30,400. 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 originated by the Company, as well as the
maximum combined LTVs 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 with an original
principal balance in excess of $35,000, the Company generally requires an
appraisal of the mortgaged property as a condition to the commitment to
purchase. If an appraisal is utilized, the Company requires the independent
appraiser to be state licensed and certified. The Company requires that all
independent 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 Conventional Loan, the Company audits the
appraisal for accuracy to ensure 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 housing 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 further substantiate the value of the subject property.
In lieu of requiring a new appraisal, for Conventional Loans with original
principal balances of less than $50,000, the Company may accept a HUD-1
settlement statement no older than 12 months, a broker's price
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<PAGE> 55
opinion, a tax assessment, an existing drive-by appraisal or a Uniform
Residential Appraisal Report no older than 12 months. With respect to
Conventional Loans with an original principal balance in excess of $35,000 but
less than $40,000, the Company may accept the stated value of the mortgaged
property if the borrower meets certain credit criteria.
The Company also requires a title report on all subject properties securing
its Conventional Loans to verify property ownership, lien position and the
possibility of outstanding tax liens or judgments. In the case of loans in the
first lien position, the Company requires a full title insurance policy
substantially in compliance with the requirements of the American Loan Title
Association.
The applicant is required to secure hazard insurance and may be required to
secure flood insurance if the mortgaged property has been identified by the
Federal Emergency Management Agency ("FEMA") as having special flood hazards.
Title I Loans
The Company originates Title I Loans to borrowers with an "A" to "C" credit
grade based on CIP score and lien position. For the fiscal year ended August 31,
1997, the Company's Title I portfolio had been evaluated as a "B+" credit risk
and had a weighted average FICO score of 647. 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 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 time frames
specified by the Title I program. 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.
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.
Subprime First Mortgage Loans
The Company intends to originate First Mortgage Loans through the
Correspondent loan source network as well as through specifically approved
brokers. Loan amounts may range up to a maximum of $600,000 for "A" credit
borrowers with maturities of up to 360 months. It is expected that the average
loan amount pursuant to this program would be less than $100,000. All mortgages
generated under this program would be limited to a first lien position. Loan
amounts would be limited by credit grade to a percentage of the appraised value
of the underlying property. Full appraisals generated by approved licensed
appraisers would be required on all loans within the Uniform Standard of
Professional Appraisal Standard Board of the Appraisal Foundation. Any loan
amount of $250,000 or more would require two independent appraisals. Borrowers
with an "A" credit grade could qualify for loans up to 90% of appraised value
while borrowers with a "B" or "C" credit grade would be limited to 85% and 75%
of the appraised value, respectively. The credit grade will be determined by
using the CIP. Loan applications will be processed in similar fashion to the
Company's Conventional Loans. Prior to funding any First Mortgage Loans, the
Company expects to obtain the necessary warehouse financing for this product
line. Additionally, the Company expects to enter into contractual forward
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<PAGE> 56
purchase commitments for this product line from third party institutions,
without recourse for credit losses or risk of prepayment. The purchasing
institution would provide specific prior approval for any loan in excess of
$250,000.
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 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.
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<PAGE> 57
The Company is continually enhancing this system to provide for the
automation of the loan origination process as well as loan file indexing and
routing. These enhancements include electronic routing of loan application
facsimile transmissions, automated credit report inquiries and consumer credit
scoring along with on-screen underwriting and approval functions. These
enhancements will continue to (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. In October 1997, the Company entered into a five-year
$986,000 equipment financing arrangement in order to facilitate these ongoing
enhancements.
The Company is currently in the process of conforming all of its
computerized systems to be year 2000 ("Y2000") compliant. Many of these systems
are already Y2000 compliant and the Company expects such systems to be in full
compliance before the end of 1999.
LOAN SERVICING
The Company's strategy has been to retain the bulk of 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 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.
The Company is a HUD approved lender and a FNMA approved seller/servicer.
As such, it is subject to 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
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<PAGE> 58
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, $3.3 million and $3.0 million for
the years ended August 31, 1995, 1996 and 1997, respectively, constituting 6.4%,
14.2% and 5.5%, respectively, of the Company's total revenues in such periods.
The decrease in net loan servicing income from fiscal 1996 to fiscal 1997 was
primarily the result of the reclassification of net revenue as a result of the
adoption of SFAS No. 125 and increased interest advances and reduced servicing
fees related to the increase in delinquent serviced loans. As of August 31,
1997, the Company increased the size of the loan portfolio it services to
approximately $628.1 million from approximately $214.2 million as of August 31,
1996, an increase of approximately $413.9 million or 193.2%. As of August 31,
1996, the size of the serviced loan portfolio increased 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.
The following table sets forth certain information regarding the Company's
loan servicing for the fiscal years indicated:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
1995 1996 1997
------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Servicing portfolio at beginning of year................ $ 8,026 $ 92,286 $214,189
Additions to servicing portfolio........................ 87,751 139,367 526,917
Reductions in servicing portfolio(1).................... (3,491) (17,464) (113,038)
------- -------- --------
Servicing portfolio at end of year...................... $92,286 $214,189 $628,068
======= ======== ========
Servicing portfolio at end of year:
Company-owned loans:
Conventional....................................... $ -- $ 922 $ 8,661
Title I............................................ 3,720 3,776 902
------- -------- --------
Total Company-owned loans..................... 3,720 4,698 9,563
------- -------- --------
Sold and securitized loans:
Conventional....................................... -- 10,501 363,961
Title I............................................ 88,566 198,990 254,544
------- -------- --------
Total sold and securitized loans.............. 88,566 209,491 618,505
------- -------- --------
Total servicing portfolio..................... $92,286 $214,189 $628,068
======= ======== ========
</TABLE>
- ---------------
(1) Reductions result from scheduled payments, prepayments, loans sold with
servicing released, and write-offs during the period.
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<PAGE> 59
The following table sets forth the Title I Loan and Conventional Loan
delinquency and Title I insurance claims experience of loans serviced by the
Company as of the dates indicated:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------------
1995 1996 1997
------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Conventional Loan delinquency data(1):
31-60 days past due............................... -- 0.44% 0.40%
61-90 days past due............................... -- 0.00 0.20
91 days and over past due......................... -- 0.00 0.34
Title I Loan delinquency data(1):
31-60 days past due............................... 2.58% 2.27% 3.19%
61-90 days past due............................... 0.73 0.90 1.68
91 days and over past due......................... 0.99 4.78(2) 7.06
91 days and over past due, net of claims
filed(3)....................................... 0.61 2.05 5.20
Outstanding claims filed with HUD(4).............. 0.38 2.73 1.86
Amount of FHA insurance available for Title I Loans
serviced.......................................... $ 9,552 $ 21,205 $ 21,094(5)
Amount of FHA insurance available as a percentage of
Title I Loans serviced............................ 10.35% 10.46% 8.26%(5)
Total delinquency data:
31-60 days past due............................... 2.58% 2.17% 1.54%
61-90 days past due............................... 0.73 0.85 0.80
91 days and over past due......................... 0.99 4.53(2) 3.07
91 days and over past due, net of claims
filed(6)....................................... 0.61 1.94 2.32
Outstanding claims filed with HUD(7)................ 0.38 2.59 0.75
Number of Title I insurance claims filed............ 23 255 269
Total servicing portfolio........................... $92,286 $214,189 $628,068
Title I Loans serviced.............................. 92,286 202,766 255,446
Conventional Loans serviced......................... -- 11,423 372,622
Aggregate losses on liquidated loans(8)............. $ 16.8 $ 32.0 $ 201.0
</TABLE>
- ---------------
(1) Represents the dollar amount of delinquent loans as a percentage of total
dollar amount of each respective type of loan serviced by the Company
(including loans owned by the Company) as of fiscal year end. Conventional
Loan delinquencies for the year ended August 31, 1996 and 1997 represented
0.31% and 10.35%, respectively, of the Company's total delinquencies. The
Company did not originate Conventional Loans until May 1996.
(2) During fiscal 1996, the processing and payment of claims filed with HUD was
delayed.
(3) Represents the dollar amount of delinquent Title I 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 Title I Loans serviced by
the Company (including loans owned by the Company) as of the dates
indicated.
(4) 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 Title I Loans serviced by the Company (including loans
owned by the Company) as of the dates indicated.
(5) If all claims with HUD had been processed as of August 31, 1997, the amount
of FHA insurance available for all Title I Loans serviced would have been
reduced to $16.5 million, which as a percentage of Title I Loans serviced
would have been 6.6%.
(6) 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 the total dollar amount of loans serviced by the Company
(including loans owned by the Company) as of the dates indicated.
(7) 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 the total
dollar amount of total loans serviced by the Company (including loans owned
by the Company) as of the dates indicated.
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<PAGE> 60
(8) On Title I Loans, a loss is recognized upon receipt of payment of a claim or
final rejection thereof. Claims paid in a period may relate to a claim filed
in an earlier period. Since the Company commenced its Title I lending
operations in March 1994, there has been no final rejection of a claim by
the FHA. Aggregate losses on liquidated Title I Loans related to 700 Title I
insurance claims made by the Company, as servicer, since commencing
operations through August 31, 1997. Losses on liquidated Title I 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.
Sale of Loans
The Company customarily sells the loans it originates. In furtherance of
the Company's strategy to sell loans through securitizations, in March 1996,
August 1996, December 1996, March 1997, May 1997, June 1997 and August 1997, the
Company completed its first seven securitizations pursuant to which it sold
pools of $84.2 million, $48.8 million, $67.3 million, $89.7 million, $63.5
million, $104.6 million and $73.3 million, respectively, of loans. Pursuant to
these securitizations, pass-through securities evidencing interests in the pools
of loans were sold in public offerings. The Company continues to service the
sold loans and is entitled to receive from payments in respect of interest on
the sold loans, not in default, a servicing fee equal to 1.25% of the balance of
each loan with respect to the March 1996 transaction and 1.0% with respect to
the other transactions. In addition, from each securitization, the Company has
received residual interest securities, contractual rights, and in certain of the
transactions, also received interest only strip securities, all of which were
recorded as mortgage related securities on the Statements of Financial
Condition. The residual interest securities and the contractual rights represent
the excess differential (after payment of any servicing, interest and other
fees, and the contractual obligations payable to the note and certificate
holders) between the interest paid by the obligors of the sold loans and the
yield on the sold notes, certificates and interest only strip securities. Also,
from the first two securitizations completed during fiscal 1996 and the first
two securitizations completed in fiscal 1997, the Company has also received
interest only strip securities. These interest only securities yield annual
rates between 0.45% and 1.00% calculated on the principal balance of the loans
not in default. 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 and, as servicer, may be required to advance interest
in connection with the securitizations.
The Company also sells the loans it originates through whole loan sales 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 a lesser extent, the
Company also sells whole loans, with servicing released, which are sold at a
premium.
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<PAGE> 61
The following table sets forth certain data regarding loans securitized or
sold by the Company during the periods indicated with servicing retained, and
excluding loans sold with servicing released:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
1995 1996 1997
------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Principal amount of loans sold to third party
purchasers............................................ $85,363 $137,908 $462,318
Gain on sales of loans to third party purchasers........ 12,233 16,539 43,154
Net unrealized gain on mortgage related securities...... -- 2,697 3,518
Weighted-average stated interest rate on loans sold to
third party purchasers................................ 14.53% 14.09% 13.91%
Weighted-average pass-through interest rate on loans
sold to third party purchasers........................ 8.36 7.50 7.36
Weighted-average excess spread retained on loans sold... 6.17 6.59 6.55
</TABLE>
At August 31, 1995, 1996 and 1997, the Company's Statements of Financial
Condition reflected excess servicing rights of approximately $14.5 million,
$12.1 million and $0, respectively, mortgage related securities of approximately
$0, $22.9 million and $106.3 million, respectively, and mortgage servicing
rights of approximately $1.1 million, $3.8 million and $9.5 million,
respectively. As a result of the adoption of SFAS No. 125, effective January 1,
1997, excess servicing rights have been reclassified as mortgage related
securities which are carried at fair market value. The Company derives a portion
of its income by realizing gains upon the whole loan sale of loans and sale of
loan participations due to the excess servicing rights or mortgage related
securities associated with such loans recorded at the time of sale and the
capitalization of mortgage servicing rights recorded at origination. Excess
servicing rights or mortgage related securities represent the excess of the
interest rate payable by a borrower on a loan over the interest rate passed
through to the purchaser acquiring an interest in the loan, less the Company's
normal servicing fee and other applicable recurring fees.
The Company records significant gains on sale of loans through
securitizations based in part on the estimated fair value of the mortgage
related securities retained by the Company and on the estimated value of
retained mortgage servicing rights related to such loans. In a securitization,
the Company retains a residual interest security and may retain an interest only
strip security. The fair value of the residual interest and interest only strip
security is the present value of the estimated net cash flows to be received
after considering the effects of prepayments and credit losses, and where
applicable net of FHA insurance recoveries on Title I Loans. In whole loan sales
with servicing retained, 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 (classified as interest only securities
and included in mortgage related securities subsequent to January 1, 1997) less
estimated future credit losses relating to the loans sold. Mortgage related
securities represent interests retained by the Company in loan sale transactions
comprised of the excess of the interest rate and principal payable by an obligor
on a sold loan over the interest rate and principal payable to purchasers, after
payment of servicing and other fees.
Capitalized mortgage servicing rights and mortgage related securities are
valued 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, capitalized mortgage servicing rights and mortgage related
securities reflected on the Company's Statements of Financial Condition at
August 31, 1995, 1996 and 1997, was approximately 12.0%. The estimate of fair
value of mortgage servicing rights was based on a range of 100 to 125 basis
points per year servicing fee, reduced by estimated costs of servicing.
Periodically, interest earned on mortgage related securities is accrued and
the securities' valuations are adjusted to reflect market conditions. These
adjustments, which can be either positive or negative, are recorded as net
unrealized gain on mortgage related securities. Mortgage servicing rights are
amortized in
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<PAGE> 62
proportion to, and over the period of estimated net servicing income, as an
offset against the excess servicing rights component of servicing income accrued
in connection with such loans. The mortgage servicing rights are periodically
evaluated for impairment, based on criteria established by the Company at the
time of origination. Although the Company believes that it has made reasonable
estimates of the mortgage related securities and mortgage servicing rights
likely to be realized, the rate of prepayment, rate of default, and the
estimates of the future costs of servicing utilized by the Company are estimates
and actual results may vary from such estimates. The gain recognized by the
Company upon the sale of loans will have been understated or overstated if
prepayments and/or defaults are less than or greater than anticipated,
respectively. Higher levels of future prepayments, and/or an increase in
delinquencies or liquidations, would result in a lower valuation of the mortgage
related securities and impairment of the mortgage servicing rights, thereby
adversely affecting the Company's earnings in the period of adjustment. The
Company has developed its assumptions based on experience with its own
portfolio, available market data and ongoing consultation with industry
participants. 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.
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 or pursuant to a securitization. On loans held for sale, the Company
earns interest at long-term rates, financed by lines of credit which bear
interest at short-term interest rates. Normally, short-term interest rates are
lower than long-term interest rates and the Company earns a positive spread on
its loans held for sale. The average warehouse period for a loan ranges from six
to 90 days, and the balance of loans in warehouse, net of allowance for credit
losses and deferred loan fees, was approximately $3.7 million, $4.6 million and
$9.5 million as of August 31, 1995, 1996 and 1997, respectively. The Company's
interest income, net of interest expense was $473,000, $988,000 and $3.1 million
for the years ended August 31, 1995, 1996 and 1997, 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 loan volume is not impacted by seasonal climate changes and, with
the exclusion of the holiday season, tends 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 sixth largest lender of Title I
Loans, based on volume of loans originated, for the calendar quarter ended June
30, 1997. 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
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<PAGE> 63
providing prompt, professional service to its Correspondents and Dealers and,
depending on circumstances, by providing competitive lending rates.
Competition can take many forms including convenience in obtaining a loan,
customer service, marketing and distribution channels, amount and term of the
loan, and interest rates. In addition, the current level of gains realized by
the Company and its existing competitors on the sale of loans could attract
additional competitors into this market with the possible effect of lowering
gains on future loan sales owing to increased loan origination competition.
GOVERNMENT REGULATION
The Company's consumer lending activities are subject to the Federal
Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity
Protection Act of 1994), ECOA, the Fair Credit Reporting Act of 1970, as
amended, RESPA and Regulation X, the Home Mortgage Disclosure Act, the Federal
Debt Collection Practices Act and the Housing Act, as well as other federal and
state statutes and regulations affecting the Company's activities. Failure to
comply with these requirements can lead to loss of approved status, termination
or suspension of servicing contracts without compensation to the servicer,
demands for indemnifications or mortgage loan repurchases, certain rights of
rescission for mortgage loans, class action lawsuits and administrative
enforcements actions.
The Company presently is subject to the rules and regulations of, and
examinations by, HUD, FHA and other federal and state regulatory authorities
with respect to originating, underwriting, funding, acquiring, selling and
servicing consumer and mortgage loans. In addition, there are other federal and
state statutes and regulations affecting such activities. These rules and
regulations, among other things, impose licensing obligations on the Company,
establish eligibility criteria for loans, prohibit discrimination, provide for
inspection and appraisals of properties, require credit reports on prospective
borrowers, regulate payment features and, in some cases, fix maximum interest
rates, fees and loan amounts. The Company is required to submit annual audited
financial statements to various governmental regulatory agencies that require
the maintenance of specified net worth levels. The Company's affairs are also
subject to examination, at all times, by the Federal Housing Commissioner to
assure compliance with FHA regulations, policies and procedures. For more
information regarding regulation of the Company under Title I, see "-- Loan
Products -- 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.
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<PAGE> 64
EMPLOYEES
As of August 31, 1997, the Company had 405 employees, including four
executive officers, 83 managerial personnel, 23 marketing and sales specialists
and 292 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
The Company's corporate headquarters are located in 45,950 square feet of
office space 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. Monthly rentals are $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 $14,530 per month, plus a pro rata share of any operating expense increases,
pursuant to a lease that expires in March 1999. The Company also leases office
space on short-term or month-to-month leases in Waldwick, New Jersey; Kansas
City, Missouri; Austin, Texas; Oklahoma City, Oklahoma; Seattle, Washington;
Waterford, Michigan; Columbus, Ohio; Elmhurst, Illinois; Philadelphia,
Pennsylvania; Denver, Colorado; Richmond, Virginia; Scottsdale, Arizona;
Patchogue, New York; Woburn, Massachusetts; Dublin, California; Stuart, Florida;
Miami Lakes, Florida; and Brentwood, Tennessee.
LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is, from time to time,
named in lawsuits. The Company believes that it has meritorious defenses to
these lawsuits and that resolution of these matters will not have a material
adverse effect on the business or financial condition of the Company.
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<PAGE> 65
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...................................... 69 Chairman of the Board
Jeffrey S. Moore..................................... 39 President, Chief Executive Officer and
Director
James L. Belter...................................... 50 Executive Vice President, Chief Financial
Officer and Treasurer
Christopher M. G. DeWinter........................... 32 Vice President -- Corporate Development
Robert Nederlander................................... 64 Director
Herbert B. Hirsch.................................... 61 Director
Don A. Mayerson...................................... 70 Director
Spencer I. Browne.................................... 47 Director
Jeremy Wiesen........................................ 55 Director
</TABLE>
Jerome J. Cohen has been Chairman of the Board of the Company since April
1995 and served as Chief Executive Officer of the Company from June 1992 until
September 2, 1997. Mr. Cohen has been the President and a Director of Mego
Financial since January 1988. From April 1992 until June 1997, Mr. Cohen was 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 Executive Officer since September 2, 1997. From December 1993 to September
1997, Mr. Moore served as the Company's Chief Operating Officer. In addition,
Mr. Moore was instrumental in the organization of the Company and has served as
a director of the Company since its formation in 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 and Treasurer since September 1996. Prior
to being elected Executive Vice President, Mr. Belter served as Senior Vice
President of the Company from October 1993 to March 1995. 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 that 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.
Christopher M.G. DeWinter has been Vice President -- Corporate Development
of the Company since July 1997. Prior to joining the Company, from February 1996
to June 1997 Mr. DeWinter served as a Vice President in the Financial
Institutions Group of Oppenheimer & Co., Inc., where he was involved with
mergers and acquisitions and debt and equity offerings. Prior to joining
Oppenheimer & Co., Inc., from July 1994 to January 1996, Mr. DeWinter was with
the real estate group of First Empire State Corp.
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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 and from 1993 to 1996 as
Vice Chairman. Mr. Nederlander remains a director of Allis-Chalmers Corp. In
1995, Mr. Nederlander became a director of Hospitality Franchise Systems,
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 a Director of the Company since consummation of
the IPO in November 1996. 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 home builder in Colorado.
Jeremy Wiesen has been a Director of the Company since consummation of the
IPO in November 1996. 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 other than the Chairman
who receives an annual fee of $30,000. Members of the Board of Directors of the
Company who are not employees of the Company receive an annual retainer fee of
$30,000 plus $1,500 for chairing a committee or $1,000 for serving as a member
of a committee. In addition, each Board member receives $1,000 for each Board
meeting (but only $500 for a Committee meeting held on the same day as a Board
meeting). Directors are also reimbursed for their expenses incurred in attending
meetings of the Board of Directors and its committees.
In August 1997, the Company entered into Consulting Agreements (the
"Consulting Agreements") with Don A. Mayerson and Herbert B. Hirsch, directors
of the Company (the "Consultants"), which expire
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August 31, 1999. Pursuant to such Consulting Agreements, Messrs. Mayerson and
Hirsch shall receive an annual consulting fee of $250,000 and $150,000,
respectively. Each of the Consulting Agreements further provides that the
Company will indemnify and hold the Consultants harmless, to the extent
permitted by law, from any and all costs, expenses or damages incurred by them
as a result of any claim, suit, action or judgment arising out of their
activities as a consultant to the Company. In the event of a change in control
(as defined in the agreements) of the Company during the term of the Consulting
Agreements, the Company may, in its sole discretion, pay each of the Consultants
a lump sum equal to the annual consulting fees such Consultant would have
received through August 31, 1999. The Consulting Agreements are not contingent
upon such persons remaining as directors of the Company.
Each of the Company's directors and Messrs. Belter and DeWinter have orally
agreed with the Company to enter into agreements as of August 20, 1997 regarding
each such person's continued service with the Company and retention by the
Company as a consultant thereafter. Each of these agreements has a term
commencing on the termination of such person's existing consulting or employment
agreement or directorship, as the case may be, and terminating on August 31,
2004, unless earlier terminated as a result of death or disability. For the
period of each such person's service as a consultant under these agreements,
such person shall not receive any compensation but shall be deemed to have
continued in the service of the Company for purposes of determining vested
rights under, and the continued exercisability of, any SARs and options granted
by the Company before the execution of such agreements, and in any SARs or
options granted in the future unless otherwise expressly provided in the grants
of such SARs or options.
The Company has an Audit Committee, Executive Committee, Stock Option
Committee, Compensation Committee and Nominating 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 are 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 are
Jerome J. Cohen, Jeffrey S. Moore and Robert Nederlander. The Executive
Committee has 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 are
Jeremy Wiesen and Spencer I. Browne. The Stock Option Committee has 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) ("Section 162(m)") of the Internal Revenue
Code of 1986, as amended (the "Code").
Compensation Committee. The members of the Compensation Committee are
Robert Nederlander, Jeremy Wiesen and Spencer I. Browne. The Compensation
Committee has the authority to approve the compensation of the Company's
executive officers, except to the extent that such compensation is subject
to Section 162(m) of the Code. The Compensation Committee has a special
subcommittee consisting of Jeremy Wiesen and Spencer I. Browne, which
subcommittee has the authority to approve executive compensation and
agreements that are subject to Section 162(m) of the Code.
Nominating Committee. The members of the Nominating Committee are
Robert Nederlander, Jerome J. Cohen and Don A. Mayerson. The Nominating
Committee has the responsibility to recommend the nominees for election as
directors of the Company to the Board of Directors.
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
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opinions. As a result of the restatement of Mego Financial's financial
statements and certain trading in Mego Financial's common stock, the Securities
and Exchange Commission (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. Messrs. Moore, Belter, DeWinter,
Browne and Wiesen have never been officers or directors of Mego Financial.
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
(including those that are also Company 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 56, 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 Loan Administration and Financial Management 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 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.
John Kostelich -- Mr. Kostelich, age 34, 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. In addition, he is responsible for the Correspondent
and Wholesale Operations and Sales Divisions. 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
Manager of Quality Control and Correspondent Support Operations, Senior
Compliance Officer, Assistant Vice President and Regional Manager and Branch
Manager.
Debra C. Turner -- Ms. Turner, age 37, has served as Vice
President -- Administration since October 1996 and is responsible for the
management of quality assurance and policy development and acts as liaison to
the President's office. From April 1996 to September 1996, Ms. Turner served as
the Southeast Division Operations Manager for Ameriquest Mortgage Corporation
where she was responsible for assisting in the establishment and management of
branch offices, training all sales and technical staff and acting as liaison
between branch and corporate offices. From October 1994 to April 1996, Ms.
Turner served as Chase Manhattan Mortgage Corporation's Retail Manager for the
State of Georgia where she was responsible for, among other things, establishing
and managing branches throughout the State of Georgia. From June 1991 to
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<PAGE> 69
October 1994, she served as a Vice President for Unity Mortgage Corporation
where she was responsible for establishing retail branches throughout the
Southeast region and training all sales and technical staff. From September 1990
to June 1991, Ms. Turner served as an Operations Manager for Sears Mortgage
Corporation. From April 1984 to September 1990, Ms. Turner served in various
capacities for American Residential Mortgage, a.k.a. ICA Mortgage Corp.,
including Vice President -- National Production and Southeast Division
Operations Supervisor.
Robert H. Chastain -- Mr. Chastain, age 38, has served as Vice
President -- Corporate Counsel since June 1997. From November 1993 to June 1997,
Mr. Chastain was an attorney with the firm of Aiken & Associates, Atlanta,
Georgia. Prior to joining Aiken & Associates, from March 1990 to November 1993,
Mr. Chastain was an attorney with the firm of Cashin, Morton & Mullins, Atlanta,
Georgia. From February 1984 to September 1988, he served as a law clerk and from
October 1988 to March 1990 as an attorney with the firm of McCalla, Raymer,
Padrick, Cobb & Nichols, Atlanta, Georgia. Mr. Chastain's legal experience has
focused on, among other areas, loan workouts and foreclosures, asset
securitizations and REMIC trusts, FHA, FNMA and FHLMC loan servicing, and
general corporate and structured business arrangements. Mr. Chastain has been
licensed to practice law in the State of Georgia since 1988 and is a member of
the Georgia Bar Association.
Bobbie Jeannotte -- Ms. Jeannotte, age 47, has served as Vice
President -- Human Resources since May 1997. From June 1996 to May 1997, Ms.
Jeannotte served as Vice President -- Human Resources for SunStar Acceptance
Corporation, a division of NationsBank, where she was responsible for
establishing a Human Resources department and overall management of the various
human resources functions. From December 1994 to June 1996, Ms. Jeannotte served
as Senior Vice President -- Human Resources for Fleet Finance, Inc. where she
was responsible for human resources, training and development and administration
services, supervising a staff of 15-20 employees. From June 1984 to June 1994,
Ms. Jeannotte served as the Assistant Vice President -- Human Resources for
Continental Insurance where she was responsible for human resources and training
and development areas along with providing advice and counsel with respect to
various human resource issues.
Anthony W. Loper -- Mr. Loper, age 34, has served as Vice
President -- Retail Operations since July 1997. From October 1996 to June 1997,
Mr. Loper served as Vice President -- Mid-Atlantic Territory of Transamerica
Financial Services. From October 1995 to October 1996, he served as Vice
President -- U.K. Operations of Transamerica Trust. From September 1988 to
September 1995, Mr. Loper served in various managerial capacities with
Transamerica Financial Services, including District Manager and Executive Branch
Manager.
Forrest Parkhurst Young, Jr. -- Mr. Young, age 32, has served as Vice
President -- Retail Business Development since August 1997. From October 1996 to
May 1997, Mr. Young served as Vice President Branch Systems of Transamerica
Mortgage Company. From August 1989 to October 1996, he served in various
managerial capacities with Transamerica Financial Services, including Business
Development Manager.
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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 two other executive officers whose annual salary and bonus during the
fiscal years presented exceeded $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------ ----------------------------
OTHER ANNUAL NUMBER OF
COMPENSATION OPTIONS/SARS ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS (1) GRANTED(2) COMPENSATION
- --------------------------- ----------- -------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Jerome J. Cohen(3) 1995 $ 64,388 $ -- $ -- -- $ --
Chairman of the Board 1996 65,748 -- -- -- --
1997 150,000 -- 13,877 100,000 --
Jeffrey S. Moore 1995 $200,003 $ -- $13,963 -- $ --
President and Chief 1996 200,003 86,084 13,625 -- --
Executive Officer 1997 200,002 203,149 30,191 500,000 --
James L. Belter 1995 $150,003 $ 50,000 $ 1,510 -- $ --
Executive Vice President, 1996 159,080 50,000 4,330 -- --
Chief Financial Officer 1997 180,003 100,000 15,896 100,000 --
and Treasurer
</TABLE>
- ---------------
(1) Other annual compensation consists of car allowances, contributions to
401(k) plans and moving expenses.
(2) Except for 100,000 SARs granted to Mr. Moore under the Company's 1997 Plan,
which grant is subject to stockholder approval of the 1997 Plan, represents
SARs which were initially granted as options to purchase Common Stock under
the Company's 1996 Plan and subsequently converted into SARs in connection
with the Spin-off. In October 1997, the Board of Directors authorized the
purchase by the Company of all outstanding SARs. See "-- Company Stock
Option Plans" below.
(3) Mr. Cohen served as the Company's Chief Executive Officer from June 1992
until September 2, 1997. Mr. Cohen's compensation is included in the
management fees paid to PEC. See "Certain Transactions."
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning grants of
stock options or stock appreciation rights ("SARs") made during the fiscal year
ended August 31, 1997 to the Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE AT
NUMBER OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS/SARS STOCK PRICE APPRECIATION FOR
UNDERLING GRANTED TO OPTION TERM
OPTIONS/SARS EMPLOYEES IN EXERCISE EXPIRATION -----------------------------
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE 5%($) 10%($)
- ---- ------------ ------------ ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Jerome J. Cohen 100,000 8.9% $10.00 11/18/06 $ 710,000 $ 1,853,000
Chairman of the Board
Jeffrey S. Moore 500,000(1) 44.7 (2) (3) 3,834,000(4) 10,007,000(5)
President and Chief
Executive Officer
James L. Belter 100,000 8.9 10.00 11/18/06 710,000 1,853,000
Executive Vice President
and Chief Financial
Officer
</TABLE>
- ---------------
(1) Represents (i) 400,000 SARs granted under the Company's 1996 Plan and (ii)
100,000 SARs granted under the Company's 1997 Plan, which grant is subject
to stockholder approval of the 1997 Plan.
(2) Of such SARs, (i) 300,000 have an exercise price of $10.00 per share and
(ii) 200,000 have an exercise price of $12.00 per share.
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(3) Of such SARs, (i) 300,000 expire on November 18, 2006 and (ii) 200,000
expire on August 19, 2007.
(4) The potential realizable value of the 300,000 SARs granted at an exercise
price of $10.00 per share would be $2,130,000 and the potential realizable
value of the 200,000 SARs granted at $12.00 per share would be $1,704,000
assuming a 5% annual appreciation in value.
(5) The potential realizable value of the 300,000 SARs granted at an exercise
price of $10.00 per share would be $5,559,000 and the potential realizable
value of the 200,000 SARs granted at an exercise price of $12.00 would be
$4,448,000 assuming a 10% annual appreciation in value.
AGGREGATED FISCAL YEAR-END OPTION/SAR VALUE TABLE
The following table sets forth certain information concerning unexercised
stock options/SARs held by the Named Executive Officers as of August 31, 1997.
No stock options/SARs were exercised by the Named Executive Officers during the
fiscal year ended August 31, 1997. In October 1997, the Board of Directors
authorized the purchase by the Company of all outstanding SARs. See "-- Company
Stock Option Plans" below.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS HELD AT OPTIONS/SARS HELD AT
AUGUST 31, 1997 AUGUST 31, 1997(1)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jerome J. Cohen.................................. -- 100,000 $-- $175,000
Jeffrey S. Moore................................. -- 500,000 -- 525,000(2)
James L. Belter.................................. -- 100,000 -- 175,000
</TABLE>
- ---------------
(1) The closing sales price of the Company's Common Stock as reported on the
Nasdaq National Market on August 29, 1997 was $11.75. Value is calculated by
multiplying (a) the difference between $11.75 and each SAR exercise price by
(b) the number of shares of Common Stock underlying the SAR.
(2) Does not include 200,000 SARs granted at an exercise price of $12.00 per
share since such price was above the closing sale price of the Common Stock
on August 29, 1997.
EMPLOYMENT AGREEMENTS
In August 1997, the Company entered into an employment/consulting agreement
with Jerome J. Cohen, the Company's Chairman of the Board of Directors, which
expires in December 2002. During the term of the Employment/Consulting
Agreement, Mr. Cohen shall receive an annual Chairman's fee of at least $30,000.
During the term of such agreement, Mr. Cohen shall also receive (i) an annual
consulting fee in the amount of $120,000 and (ii) an annual incentive bonus
equal to one and one-quarter percent (1.25%) of the Company's pre-Federal tax
(and after state and local tax) income for the prior calendar year; provided
that the incentive bonus payable in March 1998 shall be based solely on the
Company's pre-tax income for the period commencing September 1, 1997 and ending
December 31, 1997. The incentive bonus and any incentive bonus payments under
the employment/consulting agreement are subject to stockholder approval at such
time or times as required under Section 162(m) of the Code. The
employment/consulting agreement further provides that the Company will indemnify
and hold Mr. Cohen harmless, to the extent permitted by law, to and from any and
all costs, expenses or damages incurred by him as a result of any claim, suit,
action or judgment arising out of his activities as a consultant to the Company.
In the event of a change in control of the Company during the term of the
employment/consulting agreement, the Company may, in its sole discretion, pay
Mr. Cohen a lump sum equal to sum of (i) the annual consulting fees that would
have been received during the remaining term of such agreement and (ii) the
incentive bonuses that would have been received during the remaining term of
such agreement, increased by an assumed compounded growth in such income of 20%
per annum and appropriately discounted to present value.
The Company has entered into an employment agreement with Jeffrey S. Moore
effective as of the consummation of the Spin-off and terminating on December 31,
2000 (the "Initial Term"). Pursuant to the terms of such agreement, the term of
employment shall automatically be extended for additional one (1) year periods
unless the Company or Mr. Moore provides written notice to the other of an
intent to terminate the
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agreement at least 60 days prior to the expiration of the calendar year, which
termination shall be effective on the second anniversary of the first day of the
calendar year following such notification (the "Extended Term," and together
with the Initial Term shall be referred to as the "Employment Term"). The
agreement provides for an annual base salary of at least $250,000, which base
salary shall be increased during each year of the Employment Term commencing on
or after January 1, 1999, by the greater of (i) $25,000 or (ii) an adjustment
based on an increase in the Consumer Price Index for All Urban Consumer for
Atlanta, Georgia. During the Employment Term, commencing in March 1998, Mr.
Moore shall also be entitled to receive a bonus equal to one and one-quarter
percent (1.25%) of the Company's pre-Federal tax (and after state and local tax)
income for the prior calendar year (the "Incentive Bonus"); provided that the
Incentive Bonus payable in March 1998 shall be based solely on the Company's
pre-federal tax (and after state and local tax) income for the period commencing
September 1, 1997 and ending December 31, 1997. The Incentive Bonus and any
Incentive Bonus payments under the agreement will be subject to stockholder
approval at such time or times as required under Section 162(m) of the Code and
treasury regulations promulgated thereunder. Mr. Moore shall also be entitled to
receive for each calendar year during the Employment Term, deferred compensation
(the "Deferred Compensation") in an amount equal to one percent (1.0%) of the
amount of "Gain on sale of loans," including the net gain on the whole loans,
and any portion of the net gain from sales of loans securitized transactions
included in net unrealized gain on mortgage related securities, resulting from
the sales of conventional home improvement loans, debt consolidation loans,
Title I Loans and nonconforming mortgage loans (collectively, the "Loans") and
the net gain from the sale of loans in any other form of transaction not
included in the foregoing; provided that the Deferred Compensation payable
beginning March 1, 1998 shall be based solely on the Company's gain on sale of
Loans for the period commencing September 1, 1997 and ending December 31, 1997.
The accrual of such deferred compensation for each year shall be conditioned on
the Company achieving a percentage return on stockholders' equity of at least
ten percent (10%) during such year or an average of ten percent (10%) per year
over the previous two years. The Deferred Compensation due for any year shall be
payable in 24 equal installments commencing on March 1 of the following year. As
with the Incentive Bonus, the Deferred Compensation and Deferred Compensation
payments will be subject to stockholder approval at such time or times as
required under Section 162(m) of the Code and treasury regulations promulgated
thereunder. The agreement provides that the Company use its best efforts to
obtain stockholder approval of the Incentive Bonus and Deferred Compensation
provisions of the agreement at an annual meeting of the Company's stockholders
to occur no later than January 31, 1998. Mr. Moore shall also be entitled to
participate, to the extent eligible, in all benefit plans and programs as are
generally provided from time to time by the Company to its senior executives.
Upon termination for "cause," Mr. Moore shall only be entitled to receive his
base salary through the effective date of such termination. In the event Mr.
Moore's employment is terminated due to a non-extension of the term of the
employment agreement, the Company shall pay Mr. Moore $600,000 in twelve equal
monthly installments. In the event of a change in control as defined in the
employment agreement, the Company (or its successor) shall be required to pay
Mr. Moore $1.0 million within thirty (30) days following such change in control.
In addition, if (i) within sixty (60) days following a change in control Mr.
Moore voluntarily terminates his employment and is no longer employed by the
Company (or its successor) under another employment agreement, the Company shall
pay Mr. Moore (x) 125% of the prior year's or annualized current year's
Incentive Bonus, whichever is higher, if the change in control occurs during the
Initial Term of the Agreement, or (y) 125% of the annualized current year's
Incentive Bonus, if the change in control occurs after the Initial Term of the
Agreement, with either of such payments being payable 50% at termination and the
balance in twelve equal monthly installments, or (ii) within one (1) year
following a change in control the Company (or its successor) terminates the
employment agreement without cause, the Company shall pay Mr. Moore compensation
in aggregate amount no less than one year's base salary, and (x) 250% of the
annualized current year's Incentive Bonus, if the change in control occurs after
the Initial Term of the Agreement, or (y) 125% of the prior year's or annualized
current year's Incentive Bonus, whichever is greater, multiplied by the number
of full calendar years remaining to the end of the Initial Term of the Agreement
plus a fraction the numerator of which is the number of months during any
partial year remaining to the end of the Initial Term and the denominator of
which is twelve or by 2, whichever is greater, if the change of control occurs
during the Initial Term of the Agreement, with either of such payments being
payable 50% within 60 days of termination and the balance in
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twelve equal monthly installments. Mr. Moore will be prohibited from competing
with the Company during the Employment Term and for a period of one (1) year
following the termination of his employment.
The Company has entered into employment agreements with James L. Belter,
the Company's Executive Vice President, Chief Financial Officer and Treasurer,
and Christopher M.G. DeWinter, the Company's Vice President -- Corporate
Development. Mr. Belter's employment agreement has an initial term which com
menced on September 1, 1997 and terminates on December 31, 1999 and Mr.
DeWinter's employment agreement has an initial term which commenced on July 1,
1997 and terminates on December 31, 1999. Mr. Belter's and Mr. DeWinter's
agreements provide for annual base salaries of $200,000 and $130,000,
respectively. The agreements also provide that such executives shall be entitled
to receive discretionary performance bonuses based on factors determined by the
Company. Notwithstanding the foregoing, Mr. Belter is guaranteed to receive a
bonus of $100,000 for each of the first two years of his employment agreement
and Mr. DeWinter is guaranteed to receive a $75,000 bonus for the first year of
his employment agreement. In the event the executives are terminated without
"cause," they will be entitled to receive a lump sum payment equal to (i) the
value of any unpaid salary through the remainder of the employment term plus
(ii) the guaranteed bonus, to the extent not already paid for the year during
which his employment was terminated. Upon termination for "cause," each of
Messrs. Belter and DeWinter shall only be entitled to receive his base salary
through the effective date of such termination. The executives shall also be
entitled to participate, to the extent eligible, in all benefit plans and
programs as are generally provided from time to time by the Company to its
senior executives.
COMPANY STOCK OPTION PLANS
Under the Company's 1996 Plan, 10,000 shares of Common Stock remain
reserved for issuance upon exercise of stock options. Prior to the Spin-off,
such options were accompanied by stock appreciation rights ("SARs") which would
become exercisable as determined by the Board, or a Committee thereof, only if
Mego Financial did not give approval to the exercise of the option. The 1996
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 1996 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 Code) may be granted to a director who
is not also an employee of the Company or a subsidiary.
The 1996 Plan provides for the granting of both incentive stock options and
nonqualified stock options. Options may be granted under the 1996 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 1996 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 1996 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 1996 Plan are
subject to stockholder approval. Unless terminated sooner, the 1996 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 1996 Plan. In connection with the Spin-off, all options outstanding under
the 1996 Plan were converted into SARs. As of August 31, 1997, an aggregate of
915,000 SARs were issued and outstanding under the 1996 Plan.
In August 1997, the Company's Board of Directors adopted, subject to
stockholder approval, the Company's 1997 Plan. Under the 1997 Plan, as amended
by the Board of Directors in October 1997, 2,000,000 shares of Common Stock are
reserved for issuance upon the exercise of stock options and/or SARs granted
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under such plan. The Company's Board of Directors, or a committee thereof,
administers and interprets the 1997 Plan and is authorized to grant options
and/or SARs thereunder to any person who has rendered services to the Company,
except that no incentive stock options may be granted to any person who is not
also an employee of the Company or any subsidiary. As of August 31, 1997, a
total of 137,500 SARs had been granted under the 1997 Plan subject to
stockholder approval of that plan, of which (i) 100,000 SARs had been granted to
Jeffrey S. Moore pursuant to the terms of his employment agreement and (ii)
7,500 SARs were granted to each of the directors, other than Jerome J. Cohen and
Jeffrey S. Moore.
On October 22, 1997, the Board of Directors authorized the purchase by the
Company of all of the SARs granted under the 1996 Plan and the 1997 Plan at a
purchase price of $1.00 for each SAR granted at an exercise price of $10.00 to
$11.00 per share and $0.70 for each SAR granted at an exercise price of $12.00
per share. In addition, in October 1997, options to purchase an aggregate of
1,052,500 shares were granted under the 1997 Plan at an exercise price of $14.75
per share, subject to stockholder approval of the 1997 Plan. Of the total
aggregate options granted, Jeffrey S. Moore was granted options to purchase
500,000 shares, Jerome J. Cohen was granted options to purchase 100,000 shares,
and James L. Belter was granted options to purchase 100,000 shares; all of which
were granted subject to stockholder approval of the 1997 Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee was formed by the Board of Directors
in August 1997. The Compensation Committee is comprised of Robert Nederlander,
Spencer I. Browne and Jeremy Wiesen, non-employee directors. The Compensation
Committee has a special subcommittee consisting of Jeremy Wiesen and Spencer I.
Browne, which subcommittee has the authority to approve executive compensation
and agreements that are subject to Section 162(m) of the Code. Jerome J. Cohen,
Chairman of the Board and former Chief Executive Officer, participated in
deliberations concerning compensation of executive officers during fiscal 1997.
Mr. Cohen's compensation was determined by the Board of Directors of Mego
Financial.
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus,
information with respect to the beneficial ownership of the Common Stock by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the Named Executive Officers and (iv) all directors and executive
officers of the Company as a group. Unless otherwise noted, the Company believes
that all persons named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned by them.
<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP
AMOUNT OF -------------------
BENEFICIAL BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP OFFERING OFFERING
- --------------------------------------- ---------- -------- --------
<S> <C> <C> <C>
Robert Nederlander(2)....................................... 974,541 7.9% 6.2%
Eugene I. Schuster and Growth Realty, Inc. ("GRI")(3)....... 920,409 7.5% 5.8%
Jerome J. Cohen(4).......................................... 529,534 4.3% 3.4%
Jeffrey S. Moore(5)......................................... 15,242 * *
James L. Belter............................................. 6,408 * *
Herbert B. Hirsch(6)........................................ 803,994 6.5% 5.1%
Don A. Mayerson(7).......................................... 396,392 3.2% 2.5%
Spencer I. Browne(8)........................................ 5,000 * *
Jeremy Wiesen(9)............................................ -- -- --
FBR Ashton, Limited Partnership and affiliates(10).......... 922,869 7.5% 5.8%
All executive officers and directors of the Company as a
group (9 persons)(11)..................................... 2,731,111 22.2% 17.3%
</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. Does not include
47,600 shares of Common Stock owned by the Robert E. Nederlander
Foundation, an entity organized and operated exclusively for charitable
purposes (the "Foundation"), of which Mr. Nederlander is President. Mr.
Nederlander disclaims beneficial ownership of the shares owned by the
Foundation.
(3) 321 Fisher Building, Detroit, Michigan 48202. These shares are 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.
(4) 1125 N.E. 125th Street, Suite 206, North Miami, Florida 33161. Excludes
52,507 shares of Common Stock owned by Mr. Cohen's spouse and 238,000
shares of Common Stock 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. Also excludes 14,280 shares of
Common Stock owned by the Rita and Jerome J. Cohen Foundation, Inc., an
entity organized and operated exclusively for charitable purposes (the
"Cohen Foundation"), of which Mr. Cohen is President. Mr. Cohen disclaims
beneficial ownership of the shares owned by the Cohen Foundation.
(5) 1000 Parkwood Circle, Suite 500, Atlanta, Georgia 30339.
(6) 230 East Flamingo Road, Las Vegas, Nevada 89109.
(7) 1125 N.E. 125th Street, Suite 206, North Miami, Florida 33161.
(8) 1660 Holly Street, Denver, Colorado 80220.
(9) 254 East 68th Street, New York, New York 10021.
(10) 1001 19th Street North, Arlington, VA 22209. Based upon a Schedule 13D
dated October 21, 1997 filed jointly with the Commission. Includes 814,187
shares of Common Stock as to which FBR Ashton, Limited Partnership
("Ashton") has sole voting and dispositive power, 80,122 shares as to which
FBR
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Opportunity Fund, Ltd. Class A ("Opportunity Fund") has sole voting and
dispositive power, and 28,560 shares as to which Mr. Emanuel J. Friedman
has sole voting and dispositive power. Friedman, Billings, Ramsey
Investment Management, Inc. ("Investment Management") serves as general
partner and discretionary investment manager to Ashton; FBR Offshore
Management, Inc. ("Offshore Management") serves as discretionary manager to
Opportunity Fund. Mr. Friedman serves as portfolio manager for Ashton and
Opportunity Fund. Ashton, Opportunity Fund and Mr. Friedman each disclaims
beneficial ownership of shares owned by the others. Investment Management,
Offshore Management and Mr. Friedman each disclaims beneficial ownership of
shares owned by the others. Friedman, Billings & Ramsey, Inc. is an
affiliate of each of Ashton, Opportunity Fund, Offshore Management and
Investment Management and of Mr. Friedman. See "Underwriting."
(11) See Notes (2)-(9).
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
For taxable periods up to the date of the Spin-off, the results of
operations of the Company are includable in the tax returns filed by Mego
Financial's affiliated group for federal income tax purposes. Under a tax
allocation and indemnity agreement with Mego Financial currently in effect, the
Company records a liability to Mego Financial for federal income taxes
calculated on a separate company basis. Under a prior tax sharing arrangement
with Mego Financial, 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. In
addition, both the agreement and the arrangement provide that the Company and
Mego Financial each will indemnify the other under certain circumstances.
Following the Spin-off, the Company will remain liable for any amounts payable
to Mego Financial pursuant to the tax sharing agreements in effect prior to the
date of the Spin-off. From and after the date of the Spin-off, the Company no
longer will file consolidated returns with Mego Financial's affiliated group but
will file separate consolidated returns with the Company's subsidiaries.
MANAGEMENT SERVICES 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 provided 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, 1995 and 1996, approximately $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, 1995 and 1996, the Company paid PEC for developing certain computer
programming, incurring costs of $36,000 and $56,000, respectively.
The Company entered into a formal management services agreement with PEC
(the "Management Agreement"), 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. Such agreement currently
remains in
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effect. The Company anticipates that adjustments will be made under the
Management Agreement to reduce the fee payable by the Company for the portion
allocated to Jerome J. Cohen's compensation upon stockholder approval of Mr.
Cohen's employment/consulting agreement.
SERVICING AGREEMENT WITH PEC
Prior to September 1, 1996, the Company had an arrangement with PEC
pursuant to which it paid servicing fees of 50 basis points on the principal
balance of loans serviced per year. For the years ended August 31, 1995 and
1996, the Company paid servicing fees to PEC of approximately $232,000 and
$709,000, respectively. The Company entered into a servicing agreement with PEC
(the "Servicing Agreement"), effective as of September 1, 1996, providing for
the payment of servicing fees of 50 basis points on the principal balance of
loans serviced per year. For the year ended August 31, 1997, the Company paid
servicing fees to PEC of $1.9 million under the Servicing Agreement. Such
agreement currently remains in effect. For the years ended August 31, 1995, 1996
and 1997, the Company incurred interest expense in the amount of $85,000,
$29,000 and $16,000, respectively, related to fees payable to PEC for these
services. The interest rates were based on PEC's average cost of funds and
equaled 11.8% in 1995, 10.68% in 1996 and 10.48% in 1997. The Servicing
Agreement is also terminable upon 90 days notice by either party. Effective
September 1, 1997, the servicing fees were reduced to 40 basis points per year
and the parties agreed to further reduce the servicing fees to 35 basis points
per year on the later to occur of (i) January 1, 1998 or (ii) the first day of
the month following the month in which the Company's portfolio serviced by PEC
equals or exceeds $1.0 billion.
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. As of August 31, 1995, 1996 and 1997, the amount of
intercompany debt owed to Mego Financial was $8.5 million, $12.0 million and
$9.7 million, respectively. Prior to the IPO, Mego Financial had guaranteed the
Company's obligations under the Company's credit agreements and an office lease.
The guarantees of the Company's credit agreements were released upon
consummation of the IPO. The Company did not pay any compensation to Mego
Financial for such guarantees.
In October 1996, the Company entered into an agreement with a financial
institution, providing for the purchase by the financial institution of $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 1.0
million shares of Mego Financial's common stock. The value of the warrants,
estimated at $3.0 million (0.15% of the commitment amount) as of the commitment
date (the "Warrant Value") plus a $150,000 fee, are being amortized as the
commitment for the purchase of loans is utilized. The Company has agreed to pay
Mego Financial the Warrant Value as it is amortized as described below. As of
August 31, 1997, $817,000 of the Warrant Value and such fee had been amortized.
On August 29, 1997, the Company and Mego Financial entered into the Payment
Agreement with respect to the Company's repayment after the Spin-off of (i) a
portion of the debt owed by the Company to Mego Financial as of May 31, 1997
aggregating approximately $3.4 million (the "May Amounts") and (ii) debt owed by
the Company to Mego Financial as of August 31, 1997 in addition to the May
Amounts (the "Excess Amounts"). The May Amounts consist of a portion of the debt
owed by the Company to Mego Financial as of May 31, 1997 in respect of funds
advanced by Mego Financial to the Company through such date, the portion of the
Warrant Value amortized through such date and amounts owed under the tax
allocation and indemnification agreement between Mego Financial and the Company
as of such date. The Excess Amounts consist of funds advanced by Mego Financial
to the Company during the period commencing June 1, 1997 and ending August 31,
1997 (the "Excess Period"), the portion of the Warrant Value amortized during
the Excess Period and amounts accrued under the tax allocation and
indemnification agreement during the Excess Period. Pursuant to the Payment
Agreement, the Company agreed to repay the May Amounts upon the earlier to occur
of (i) the first consummation after the date of the agreement of a public or
private debt or equity transaction by the Company of at least $25.0 million in
amount or (ii) August 31, 1998. $3.9 million was paid upon consummation of the
Private Placement in accordance with the Payment Agreement.
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The Company further agreed to repay the Excess Amounts upon the earlier to occur
of (i) the second consummation after the date of the agreement of a public or
private debt or equity transaction by the Company of at least $25.0 million in
amount or (ii) August 31, 1998. The Company intends to use $3.9 million of the
net proceeds from this Offering to repay debt owed to Mego Financial in
accordance with the Payment Agreement. The amount of the amortization of the
Warrant Value for each of the months of September, October, November and
December 1997 will be payable January 31, 1998. Commencing in January 1998, the
unpaid balance of the Warrant Value will continue to be amortized on a monthly
basis and the amount of such amortization will be due and payable within 30 days
from the end of each fiscal quarter.
Under the Payment Agreement, Mego Financial may, but is not obligated to,
make advances to PEC on behalf of the Company. Advances, if any, by Mego
Financial on behalf of the Company to PEC will be due and payable within 30 days
after the close of the month in which such advance was made. Under the Payment
Agreement, any amount owed by the Company to Mego Financial that is not paid
when due will bear interest from such due date until paid at the rate of 10.0%
per annum.
Although Mego Financial may provide funds to the Company or guarantee the
Company's indebtedness or other obligations in the future, it is not anticipated
that Mego Financial will do so.
DESCRIPTION OF NOTES; EXCHANGE OFFER
The Company has issued an aggregate of $80.0 million principal amount of
Notes under the Indenture. 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 were exhibits to the Registration Statement governing the
Notes. Capitalized terms not otherwise defined herein have the meanings
specified in the Indenture.
The Notes are limited in aggregate principal amount to $150.0 million
($80.0 million of which has been issued to date) and mature on December 1, 2001.
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all Senior Indebtedness of the Company. Interest on the
Notes accrues at a rate of 12 1/2% per year and is payable in cash semi-annually
on June 1 and December 1 of each year, commencing June 1, 1997 or the next
interest payment date following issuance of such Notes.
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
101% of the principal amount thereof plus accrued and unpaid interest, if any,
to the date of purchase.
The Indenture governing the Notes contains certain covenants, including
limitations on 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 Company has entered into a registration rights agreement (the
"Registration Rights Agreement") with Friedman, Billings, Ramsey & Co., Inc.,
the initial purchaser of the Additional Notes (the "Initial Purchaser") pursuant
to which the Company agreed, for the benefit of the holders of the Additional
Notes, at the Company's cost, (i) to file a registration statement (the
"Exchange Offer Registration Statement") with respect to a registered offer to
exchange (the "Exchange Offer") the Additional Notes for notes of the Company
with terms substantially identical in all material respects to the Additional
Notes (the "Exchange Notes"), except that the Exchange Notes will not contain
terms with respect to transfer restrictions, registration rights or interest
rate increase (as described below), with the Commission on or before November
28, 1997 and (ii) to use its best efforts to cause the Exchange Offer
Registration Statement to be declared effective under the Securities Act on or
before January 12, 1998.
In the event that the applicable interpretations of the staff of the
Commission or any changes in law do not permit the Company to effect the
Exchange Offer or if for any other reason the Exchange Offer
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Registration Statement is not declared effective on or prior to January 12,
1998, or the Exchange Offer is not consummated on or prior to February 11, 1998,
or the Initial Purchaser or any broker-dealer that acquired Additional Notes
directly from the Company or any affiliate of the Company notifies the Company,
the Company will at its cost, (a) as promptly as practicable, file with the
Commission a shelf registration statement (the "Shelf Registration Statement")
covering resales of the Additional Notes, (b) use its best efforts to cause the
Shelf Registration Statement to be declared effective under the Securities Act
on or prior to February 11, 1998 (or promptly in the event of a request by the
Initial Purchaser) and (c) use its best efforts to keep effective the Shelf
Registration Statement for a period of two years after its effective date (or
for a period of one year after such effective date if such Shelf Registration
Statement is filed at the request of the Initial Purchaser) or, for such shorter
period, when all of the Additional Notes covered by the Shelf Registration
Statement have been sold pursuant thereto, when there cease to be Additional
Notes outstanding that are subject to transfer restrictions or when all
Additional Notes covered by the Shelf Registration Statement become tradeable
under Rule 144 without regard to volume limitations.
In the event that (i) the Exchange Offer Registration Statement is not
filed with the Commission on or prior to November 28, 1997, (ii) the Exchange
Offer Registration Statement is not declared effective on or prior to January
12, 1998, or (iii) the Exchange Offer is not consummated on or prior to February
11, 1998 and a Shelf Registration Statement is not declared effective on or
prior to February 11, 1998, the interest rate borne by the Additional Notes
shall be increased by one-half of one percent per annum following November 28,
1997 in the case of (i) above, January 12, 1998 in the case of clause (ii) above
or February 11, 1998 in the case of (iii) above, which rate will be increased by
an additional one-half of one percent per annum for each 90-day period that any
such additional interest continues to accrue; provided that the aggregate
increase in such interest rate will in no event exceed one percent per annum.
Upon (x) the filing of the Exchange Offer Registration Statement after November
28, 1997, (y) the effectiveness of the Exchange Offer Registration Statement
after January 12, 1998, or (z) the day before the date of the consummation of
the Exchange Offer or the effectiveness of a Shelf Registration Statement, as
the case may be, after February 11, 1998, the interest rate borne by the
Additional Notes from the date of such filing, effectiveness or the day before
the date of the consummation, as the case may be, will be reduced by the full
amount of the related increase from, but not to less than 12 1/2% per annum;
provided, however, that (a) if after any such reduction in interest rate, a
different event specified in clause (i), (ii) or (iii) above occurs, the
interest rate may again be increased and thereafter reduced pursuant to the
foregoing provisions, and (b) such rate will also be reduced to 12 1/2% per
annum on the date on which the Additional Notes become eligible for sale under
Rule 144 without limitation as to volume.
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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 or incorporated by reference 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.
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 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 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" (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
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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 am 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 and Bylaws contain certain
provisions that could discourage potential takeover attempts and make more
difficult attempts by stockholders to change management. 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 is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 15,800,000 shares
of Common Stock outstanding (16,325,000 shares if the Underwriters'
over-allotment option is exercised in full). Subject to the lock-up provisions
described below, all of these shares will be freely transferable without
restriction or registration under the Securities Act, unless held by persons
deemed to be "affiliates" of the Company (as that term is defined under the
Securities Act).
In general, under Rule 144 a person (or persons whose shares are
aggregated) including an affiliate, who has beneficially owned his shares for a
year, 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 158,000 shares immediately after
the Offering, or 163,250 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 two years, may sell such shares in the public market under
78
<PAGE> 82
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 Securities Act, unless
thereafter held by an "affiliate" of the Company.
The Company and certain of its officers, directors and shareholders have
agreed with the Underwriters that they will not, without the prior written
consent of the Representative, offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, any shares, or any securities convertible
into or exchangeable or exercisable for shares, of Common Stock for a period of
90 days after the date of the completion of this Offering, subject to certain
limited exceptions.
The Company has reserved an aggregate of (i) 10,000 shares of Common Stock
for issuance pursuant to the 1996 Plan and (ii) 2,000,000 shares of Common Stock
for issuance under the 1997 Plan, subject to stockholder approval of that Plan.
The Company intends to register such shares on Form S-8 following the Offering.
Subject to restrictions imposed pursuant to the 1996 and 1997 Plans, shares of
Common Stock issued pursuant to such plans 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 -- Company Stock Option Plans."
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.
79
<PAGE> 83
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), through the Representative, have
severally agreed to purchase from the Company, and the Company has agreed to
sell to the Underwriters, the respective number of shares of Common Stock set
forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc.......................
CIBC Oppenheimer Corp. .....................................
---------
Total............................................. 3,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters 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 this Offering, the public offering price
and other selling terms may be changed by the Underwriters.
The Company and certain of its officers, directors and shareholders have
agreed with the Underwriters that they will not, without the prior written
consent of the Representative, offer, sell, contract to sell or otherwise
dispose of, directly or indirectly, any shares, or any securities convertible
into or exchangeable or exercisable for shares, of Common Stock for a period of
90 days after the date of the completion of this Offering, subject to certain
limited exceptions.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to an additional
525,000 shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 3,500,000 and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option in whole or in part only to cover
over-allotments made in connection with the sale of the shares of Common Stock
offered hereby. If purchased, the Underwriters will offer such additional shares
on the same terms as those on which the 3,500,000 shares are being offered.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they have discretionary
authority.
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.
80
<PAGE> 84
Friedman, Billings, Ramsey & Co., Inc. was a managing underwriter for the
Company's IPO and for the Company's offerings of Existing and Additional Notes,
for which services Friedman, Billings, Ramsey & Co., Inc. received customary
compensation. Friedman, Billings, Ramsey & Co., Inc. in the past has provided
certain investment banking services to the Company and affiliates of the
Company. Several affiliates of Friedman, Billings, Ramsey & Co., Inc.
beneficially own an aggregate of approximately 7.5% of the outstanding shares of
Common Stock of the Company. See "Principal Stockholders." CIBC Oppenheimer
Corp. was a managing underwriter for the IPO and for the Company's offering of
Existing Notes, for which services it received customary compensation. In
addition, CIBC Oppenheimer Corp. 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 CIBC Oppenheimer Corp. has received and will
receive customary fees and commissions.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters may also engage in passive market-making activities in the Common
Stock in accordance with Rule 103 of Regulation M. The Underwriters may also
create a short position for the account of the Underwriters by selling more
Common Stock in connection with the Offering than they are committed to purchase
from the Company, and in such case may purchase Common Stock in the open market
following completion of the Offering to cover all or a portion of such short
position. The Underwriters may also cover all or a portion of such short
position by exercising the Underwriters' over-allotment option referred to
above. In addition, the Representative, on behalf of the Underwriters, may
impose penalty bids under contractual arrangements with the Underwriters whereby
it may reclaim from an Underwriter (or dealer participating in the Offering) for
the account of other Underwriters, the selling concession with respect to Common
Stock that is distributed in the Offering but subsequently purchased for the
account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock at a level above that which might otherwise prevail in the open
market. The imposition of a penalty bid might also affect the price of the
Common Stock to the extent that it could discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that any of the
Underwriters will engage in any such transactions or that such transactions, if
commenced, will not be discontinued without notice.
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.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Commission. Such reports
and other information filed with the Commission are available for inspection and
copying at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, and at the
Commission's Regional Offices located at Citicorp
81
<PAGE> 85
Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661, and at Seven
World Trade Center, New York, NY 10048. Copies of such documents may also be
obtained from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, DC 20549, at prescribed rates. In addition,
copies of such documents may be obtained through the Commission's Internet
address at http://www.sec.gov. The Company's Common Stock is authorized for
quotation on the Nasdaq National Market System and, accordingly, such materials
and other Nasdaq National Market System and, accordingly, such materials and
other information can also be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, DC
20006.
The Company has filed with 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 shares
of 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 shares of 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 aforementioned public reference facilities of the Commission upon payment of
the fees described by the Commission, or may be examined without charge at such
facilities.
82
<PAGE> 86
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, 1996 and
1997................................................... F-3
Statements of Operations -- Years ended August 31, 1995,
1996 and 1997.......................................... F-4
Statements of Cash Flows -- Years ended August 31, 1995,
1996 and 1997.......................................... F-5
Statements of Stockholders' Equity -- Years ended August
31, 1995, 1996 and 1997................................ F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 87
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Mego Mortgage Corporation
Atlanta, Georgia
We have audited the accompanying statements of financial condition of Mego
Mortgage Corporation (the "Company") as of August 31, 1996 and 1997, and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended August 31, 1997. 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 present fairly, in all material
respects, the financial position of Mego Mortgage Corporation at August 31, 1996
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended August 31, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
San Diego, California
October 17, 1997, except for the third and fourth paragraphs of Note 18 as to
which the date is
October 22, 1997
F-2
<PAGE> 88
MEGO MORTGAGE CORPORATION
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------
1996 1997
------- --------
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 443 $ 6,104
Cash deposits, restricted................................... 4,474 6,890
Loans held for sale, net of allowance for credit losses of
$95 and $100.............................................. 4,610 9,523
Mortgage related securities, at fair value.................. 22,944 106,299
Excess servicing rights..................................... 12,121 --
Mortgage servicing rights................................... 3,827 9,507
Other receivables........................................... 59 7,945
Property and equipment, net of accumulated depreciation of
$279 and $675............................................. 865 2,153
Organizational costs, net of amortization................... 482 289
Prepaid debt expenses....................................... 216 2,362
Prepaid commitment fee...................................... -- 2,333
Other assets................................................ 565 795
------- --------
Total assets...................................... $50,606 $154,200
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and contracts payable............................... $14,197 $ 35,572
Accounts payable and accrued liabilities.................. 4,066 7,759
Allowance for credit losses on loans sold with recourse... 920 7,014
Due to Mego Financial Corp. .............................. 11,994 9,653
Due to affiliated company................................. 819 446
State income taxes payable................................ 909 649
------- --------
Total liabilities................................. 32,905 61,093
------- --------
Subordinated debt........................................... -- 40,000
------- --------
Stockholders' equity:
Common stock, $.01 par value per share
(authorized--50,000,000 shares; issued and
outstanding -- 10,000,000 and 12,300,000).............. 100 123
Additional paid-in capital................................ 8,550 29,185
Retained earnings......................................... 9,051 23,799
------- --------
Total stockholders' equity........................ 17,701 53,107
------- --------
Total liabilities and stockholders' equity........ $50,606 $154,200
======= ========
</TABLE>
See notes to financial statements.
F-3
<PAGE> 89
MEGO MORTGAGE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
-------------------------------
1995 1996 1997
------- ------- -----------
(THOUSANDS OF DOLLARS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES:
Gain on sale of loans....................................... $12,233 $16,539 $ 45,123
Net unrealized gain on mortgage related securities.......... -- 2,697 3,518
Loan servicing income, net.................................. 873 3,348 3,036
Interest income............................................. 941 2,104 9,507
Less: interest expense...................................... (468) (1,116) (6,374)
------- ------- -----------
Net interest income....................................... 473 988 3,133
------- ------- -----------
Total revenues.................................... 13,579 23,572 54,810
------- ------- -----------
COST AND EXPENSES:
Net provision for credit losses............................. 864 55 6,300
Depreciation and amortization............................... 403 394 672
Other interest.............................................. 187 167 245
General and administrative:
Payroll and benefits...................................... 3,611 5,031 11,181
Commissions and selling................................... 552 2,013 2,768
Credit reports............................................ 133 367 1,387
Rent and lease expenses................................... 249 338 1,091
Professional services..................................... 177 732 652
Servicing fees paid to affiliate.......................... 232 709 1,874
Management services by affiliate.......................... 690 671 967
FHA insurance............................................. 231 572 558
Other..................................................... 331 1,368 3,305
------- ------- -----------
Total costs and expenses.......................... 7,660 12,417 31,000
------- ------- -----------
Income before income taxes.................................. 5,919 11,155 23,810
Income taxes................................................ 2,277 4,235 9,062
------- ------- -----------
Net income.................................................. $ 3,642 $ 6,920 $ 14,748
======= ======= ===========
EARNINGS PER COMMON SHARE:
Primary:
Net income................................................ $ 1.25
===========
Weighted-average number of common shares and common share
equivalents outstanding................................ 11,802,192
===========
Fully diluted:
Net income................................................ $ 1.25
===========
Weighted-average number of common shares and common share
equivalents outstanding................................ 11,802,192
===========
</TABLE>
See notes to financial statements.
F-4
<PAGE> 90
MEGO MORTGAGE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
---------------------------------
1995 1996 1997
--------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 3,642 $ 6,920 $ 14,748
--------- --------- ---------
Adjustments to reconcile net income to net cash used in
operating activities:
Additions to mortgage servicing rights.................... (1,176) (3,306) (7,184)
Additions to excess servicing rights...................... (14,098) (20,563) --
Net unrealized gain on mortgage related securities........ -- (2,697) (3,518)
Additions to mortgage related securities.................. -- -- (64,987)
Net provisions for estimated credit losses................ 864 55 6,300
Deferred income taxes (benefit)........................... 230 673 (3,267)
Depreciation and amortization expense..................... 403 394 672
Amortization of prepaid debt expense...................... 50 163 684
Amortization of prepaid commitment fee.................... -- -- 817
Amortization of excess servicing rights................... 519 2,144 --
Amortization of mortgage servicing rights................. 100 555 1,504
Accretion of residual interest on mortgage related
securities.............................................. -- (243) (4,796)
Payments on mortgage related securities................... -- 1,547 1,111
Amortization of mortgage related securities............... -- -- 956
Loans originated for sales, net of loan fees.............. (87,751) (139,367) (526,917)
Payments on loans held for sale........................... 131 504 431
Proceeds from sale of loans............................... 84,952 135,483 514,413
Changes in operating assets and liabilities:
Increase in cash deposits, restricted................... (2,532) (1,942) (2,416)
Decrease (increase) in other assets, net................ 325 1,056 (1,813)
Increase (decrease) in state income taxes payable....... 264 670 (260)
Increase in other liabilities, net...................... 1,959 1,827 3,531
Additions to due to affiliated company.................. 3,581 2,100 3,810
Payments on due to affiliated company................... (3,305) (1,281) (4,183)
--------- --------- ---------
Total adjustments................................... (15,484) (22,228) (85,112)
--------- --------- ---------
Net cash used in operating activities............... (11,842) (15,308) (70,364)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (274) (608) (1,688)
Proceeds from the sale of property and equipment............ -- -- 4
--------- --------- ---------
Net cash used in investing activities............... (274) (608) (1,684)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on notes and contracts payable..... 77,178 146,448 511,878
Payments on notes and contracts payable..................... (76,357) (133,709) (490,503)
Additions in Due to Mego Financial.......................... 10,836 8,368 13,020
Payments on Due to Mego Financial........................... (2,613) (5,500) (15,094)
Issuance of subordinated debt, net.......................... -- -- 37,750
Proceeds from sale of common stock.......................... -- -- 20,658
Increase in additional paid-in capital...................... 3,000 -- --
--------- --------- ---------
Net cash provided by financing activities........... 12,044 15,607 77,709
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (72) (309) 5,661
CASH AND CASH EQUIVALENTS -- BEGINNING OF YEAR.............. 824 752 443
--------- --------- ---------
CASH AND CASH EQUIVALENTS -- END OF YEAR.................... $ 752 $ 443 $ 6,104
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................ $ 618 $ 964 $ 5,212
========= ========= =========
State income taxes...................................... $ 3 $ 25 $ 1,691
========= ========= =========
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 $ --
========= ========= =========
Addition to prepaid commitment fee and Due to Mego
Financial in connection with loan sale commitment
received................................................ $ -- $ -- $ 3,000
========= ========= =========
</TABLE>
See notes to financial statements.
F-5
<PAGE> 91
MEGO MORTGAGE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
$.01 PAR VALUE ADDITIONAL RETAINED
------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------- ------ ---------- --------- -------
(THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Balance at September 1, 1994................... 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
Sale of common stock, net of issuance costs.... 2,300,000 23 20,635 -- 20,658
Net income for the year ended August 31,
1997......................................... -- -- -- 14,748 14,748
---------- ---- ------- ------- -------
Balance at August 31, 1997..................... 12,300,000 $123 $29,185 $23,799 $53,107
========== ==== ======= ======= =======
</TABLE>
See notes to financial statements.
F-6
<PAGE> 92
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED AUGUST 31, 1995, 1996 AND 1997
1. NATURE OF OPERATIONS
Mego Mortgage Corporation (the "Company") was incorporated on June 12,
1992, in the State of Delaware. The Company, through its loan correspondents and
home improvement contractors, is primarily engaged in the business of
originating, selling, servicing and pooling home improvement and debt
consolidation loans, certain of 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 the Title I credit insurance 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 loans, generally secured by residential real
estate, and debt consolidation loans ("Conventional Loans") through its network
of loan correspondents and dealers. During fiscal 1995, all loans originated
were Title I Loans. During fiscal 1996, 91.7% of loans originated were Title I
Loans and 8.3% of loans originated were Conventional Loans. The Company's loan
originations during the fiscal year ended August 31, 1997 were comprised of
81.4% Conventional Loans and 18.6% Title I Loans.
The Company was formed as a wholly-owned subsidiary of Mego Financial Corp.
("Mego Financial") and remained so until November 1996, when the Company issued
2.3 million shares of its Common Stock at $.01 par value per share (the "Common
Stock"), in an underwritten public offering (the "IPO") at $10.00 per share. As
a result of this transaction, Mego Financial's ownership in the Company was
reduced from 100% at August 31, 1996 to 81.3%. Concurrently with the Common
Stock offering, the Company issued $40.0 million of 12.5% Senior Subordinated
Notes due in 2001 in an underwritten public offering. The proceeds from the
offerings received by the Company have been used to repay borrowings and provide
funds for originations and securitizations of loans. In October 1997, the
Company issued an additional $40.0 million of 12.5% Senior Subordinated Notes
due 2001 in a private placement (the "Private Placement"). See Note 13 for
further discussion.
On September 2, 1997, Mego Financial distributed all of its 10 million
shares of the Company's Common Stock to its shareholders in a tax-free spin-off
("Spin-off").
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 in compliance with Statement of Financial
Accounting Standards ("SFAS") No. 91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases" ("SFAS 91"), with no amortization recorded in the interim period prior
to sale.
Mortgage Related Securities -- In fiscal 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 REMIC 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 over-collateralization
or build over-collateralization levels through retention of distributions by the
REMIC trust otherwise payable to the Company as the residual interest holder.
This over-collateralization causes the
F-7
<PAGE> 93
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 over-collateralization 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 over-
collateralization, 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.
In fiscal 1997, the Company completed two non-monoline securitizations of a
total of five securitizations completed during fiscal 1997. The Company also
completed two owner's trust securitizations, and a combined REMIC and grantor
trust securitization in fiscal 1997.
The two transactions, completed in June and August 1997, were accomplished
on a senior subordinated basis without insurance as a credit enhancement and
were generally collateralized by conventional home improvement and debt
consolidation mortgage loans with typically high loan-to-value ratios. The other
three insured securitization transactions were collateralized by a combination
of Title I and Conventional Loans. The two owner's trust securitizations were
completed in March and May 1997. These securitizations were comprised of Title I
and Conventional Loans. The REMIC/grantor trust securitization, completed in
December 1996, placed all secured Title I Loans and those Conventional Loans
which qualified with a loan-to-value ratio of 125% or less, into the REMIC pool,
and the grantor trust pool was comprised of unsecured Title I Loans and other
Conventional Loans which did not qualify for the REMIC pool.
Pursuant to these securitizations, various classes of home loan
asset-backed notes and certificates were issued and sold in public offerings.
The Company has received residual interest securities, contractual rights, and
in certain of these transactions, also received interest only strip securities,
all of which were recorded as mortgage related securities on the Statements of
Financial Condition. The residual interest securities and the contractual rights
represent the excess differential (after payment of any servicing, interest and
other fees, and the contractual obligations payable to the note and certificate
holders) between the interest paid by the obligors of the sold loans and the
yield on the sold notes, certificates, and interest only strip securities. Also,
from the two securitizations completed in fiscal 1996 and the first two
securitizations completed in fiscal 1997, the Company has also received interest
only strip securities. These interest only strip securities yield annual rates
between 0.45% and 1.00% calculated on the principal balance of loans not in
default. 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 and as servicer, may be required to advance interest in connection
with the securitizations.
The Company adopted 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 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 Federal Housing Administration ("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. During fiscal 1995, 1996
and 1997, the Company generally utilized annual
F-8
<PAGE> 94
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
prepayment assumptions ranging from 1% to 15%, annual estimated loss factor
assumptions of up to 1.75%, and annual weighted-average discount rates of 12%
for Title I and Conventional Loans. 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.
In accordance with SFAS No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" as later described in this
footnote, existing and future excess servicing rights have been measured at fair
market value and have been reclassified, as of January 1, 1997, as interest only
strip receivables and carried as mortgage related securities and accounted for
in accordance with SFAS 115.
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. In sales of loans through
securitization transactions, the Company retains residual interest securities
and may retain interest only strip securities. The fair value of the interest
only strip securities and residual interest securities is the present value of
the estimated cash flow to be received after considering the effects of
estimated prepayments and credit losses. The interest only strip securities and
residual interest securities are included in mortgage related securities on 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
approximated 12% for each of the years ended August 31, 1995, 1996, and 1997.
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 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 is
estimated by calculating the present value of expected net cash flows from
mortgage servicing rights 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 a 100,
125 and 100 basis points per annum, respectively, servicing fee reduced by
estimated costs of servicing for the years ended August 31, 1995, 1996 and 1997.
The estimated net cash flow from servicing utilized a discount rate of 12% for
all three years. At August 31, 1995, 1996 and 1997, 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 loan type and 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
F-9
<PAGE> 95
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
market data and ongoing consultation with its investment bankers. Effective
January 1, 1997, the Company prospectively adopted SFAS 125 (as defined below)
which supersedes SFAS 122.
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 FHA insurance recoveries on loans originated.
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
organization of the operations of the Company, which commenced loan originations
on March 1, 1994, are being amortized over a five year period. These
organizational costs are comprised of costs to incorporate, legal, accounting
and other professional fees associated with the organization of the Company.
Such amortization is included in depreciation and amortization expense on the
Statements of Operations. Accumulated amortization related to organizational
costs was $289,000, $482,000, and $675,000 during the years ended August 31,
1995, 1996 and 1997, 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 the fair value of its 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 or on
whole loan sales with servicing released, as the Company has no recourse
obligation for credit losses under those securitization agreements or whole loan
sale agreements and 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 $85.0 million, $118.1 million and $415.5 million during the years ended
August 31, 1995, 1996 and 1997, 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 recognized on a cash basis.
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 are amortized in proportion to and
F-10
<PAGE> 96
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
over the period of estimated servicing income. Late charges and other
miscellaneous income are recognized when collected. Costs to service loans are
recorded to expense as incurred.
Income Taxes -- The Company has filed consolidated federal income tax
returns 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. For periods after September 2, 1997 (after the
Spin-off), the Company will file separate consolidated federal income tax
returns.
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 was
effective for fiscal years beginning after December 15, 1995. There was no
material effect upon adoption on results of operations or financial condition at
August 31, 1997.
At August 31, 1995, effective September 1, 1994, the Company adopted SFAS
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 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%. The Company has developed its
assumptions based on experience with its own portfolio, available market data
and ongoing consultation with its investment bankers.
In October 1995, the 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. However, effective August
20, 1997, the Company converted all outstanding employee stock options to stock
appreciation rights ("SARs") which resulted in additional compensation expense
of $220,000; therefore, disclosure under SFAS 123 is not applicable. The Company
has elected to continue to apply the provisions of Accounting Principles Board
("APB") Opinion No. 25 "Accounting for Stock Issued to Employees", and will
provide pro forma disclosure for SFAS 123 if applicable. See Note 17.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" ("SFAS 125") was issued by the FASB in June
1996 and supersedes SFAS 122, effective
F-11
<PAGE> 97
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
January 1, 1997. 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 or loss and (b) assessment for asset impairment or increased obligation
based on their fair values. The statement requires the Company's excess
servicing rights be measured at fair market value and be reclassified as
interest only receivables, carried as mortgage related securities, and accounted
for in accordance with SFAS 115. As required by the statement, the Company
adopted the new requirements effective January 1, 1997, and applied them
prospectively. The statement had no material impact on the financial statements
of the Company. The book value of the Company's mortgage related securities
approximates fair value.
The following table reflects the components of mortgage related securities
as required by SFAS 125 as follows:
<TABLE>
<CAPTION>
AUGUST 31
----------------------
1996 1997
--------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Interest only strip securities.............................. $ 4,602 $ 6,398
Residual interest securities................................ 18,342 84,597
Interest only receivables (formerly excess servicing
rights)................................................... -- 15,304
------- --------
Total mortgage related securities................. $22,944 $106,299
======= ========
</TABLE>
All mortgage related securities are classified as trading securities and
are recorded at their estimated fair values. Changes in the estimated fair
values are recorded in current operations.
The FASB issued SFAS No. 128, "Earnings per Share" ("SFAS 128") in March
1997, effective for financial statements issued after December 15, 1997. The
statement provides simplified standards for the computation and presentation of
earnings per share ("EPS"), making EPS comparable to international standards.
SFAS 128 requires dual presentation of "Basic" and "Diluted" EPS, by entities
with complex capital structures, replacing "Primary" and "Fully Diluted" EPS
under APB Opinion No. 15.
Basic EPS excludes dilution from Common Stock equivalents and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution from Common Stock equivalents, similar to fully diluted EPS,
but uses only the average stock price during the period as part of the
computation.
F-12
<PAGE> 98
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Data utilized in calculating pro forma earnings per share under the SFAS
128 statement are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
BASIC:
Net income................................. $ 3,642,000 $ 6,920,000 $14,748,000
=========== =========== ===========
Weighted-average number of common shares... 10,000,000 10,000,000 11,802,192
=========== =========== ===========
DILUTED:
Net income................................. $ 3,642,000 $ 6,920,000 $14,748,000
=========== =========== ===========
Weighted-average number of common shares
and common share equivalents
outstanding.............................. 10,000,000 10,000,000 11,802,192
=========== =========== ===========
</TABLE>
The following tables reconcile the net income applicable to common
stockholders, basic and diluted shares, and EPS for the following periods:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1995 YEAR ENDED AUGUST 31, 1996
----------------------------------- -----------------------------------
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income............ $3,642,000 $6,920,000
---------- ----------
BASIC EPS
Income applicable to
common
stockholders........ 3,642,000 10,000,000 $0.36 6,920,000 10,000,000 $0.69
---------- ===== ---------- =====
Effect of dilutive
securities:
Warrants............ -- -- -- --
Stock options....... -- -- -- --
---------- ---------- ---------- ----------
DILUTED EPS
Income applicable to
common stockholders
and assumed
conversions......... $3,642,000 10,000,000 $0.36 $6,920,000 10,000,000 $0.69
========== ========== ===== ========== ========== =====
</TABLE>
F-13
<PAGE> 99
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997
------------------------------------
PER-SHARE
INCOME SHARES AMOUNT
----------- ---------- ---------
<S> <C> <C> <C>
Net income.......................................... $14,748,000
-----------
BASIC EPS
Income applicable to common stockholders............ 14,748,000 11,802,192 $1.25
---------- =====
Effect of dilutive securities:
Warrants.......................................... -- --
Stock options..................................... -- --
----------- ----------
DILUTED EPS
Income applicable to common stockholders and assumed
conversions....................................... $14,748,000 11,802,192 $1.25
=========== ========== =====
</TABLE>
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 million and the establishment of a $.01 par value per share effective October
28, 1996.
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 disclosures 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 Statements 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-14
<PAGE> 100
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 and 1997
are set forth below :
<TABLE>
<CAPTION>
AUGUST 31, 1996 AUGUST 31, 1997
------------------------- -------------------------
CARRYING ESTIMATED FAIR CARRYING ESTIMATED FAIR
VALUE VALUE VALUE VALUE
-------- -------------- -------- --------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash equivalents(a)................... $ 443 $ 443 $ 6,104 $ 6,104
Loans held for sale, net(b).................... 4,610 5,371 9,523 11,414
Mortgage related securities(c)................. 22,944 22,944 106,299 106,299
Excess servicing rights(c)..................... 12,121 12,121 -- --
Mortgage servicing rights(c)................... 3,827 3,827 9,507 9,507
FINANCIAL LIABILITIES:
Notes and contracts payable(d)................. 14,197 14,197 35,572 35,572
Subordinated debt(a)........................... -- -- 40,000 40,000
</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% at August 31, 1996 and 9.32% at August 31, 1997, which approximates
fair value.
At August 31, 1996 and 1997, the Company had $59.6 million and $190.5
million, respectively, in outstanding commitments to originate and purchase
loans. A fair value of the commitments was estimated at $6.8 million at August
31, 1996 and $14.9 million at August 31, 1997 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.
In the first quarter of fiscal 1997, the Company entered into an agreement
with a financial institution, providing for the purchase of up to $2.0 billion
of loans over a 5 year period. At August 31, 1997, $1.5 billion of loans
remained to be purchased under this commitment and the estimated fair value of
such commitment was $308.5 million by calculating a theoretical gain or loss on
the sale of a funded loan, 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. Pursuant to the agreement, Mego Financial issued to the financial
institution four-year warrants to purchase 1 million shares of Mego Financial's
common stock at an exercise price of $7.125 per share. The value of the warrants
of $3.0 million plus a $150,000 fee (0.15% of the commitment amount) as of the
commitment date (the "Warrant Value"), are being amortized as the commitment for
the purchase of loans is utilized. The Company has agreed to pay Mego Financial
the value of the warrants. At August 31, 1997, $2.3 million remained outstanding
as a prepaid commitment fee.
The fair value estimates made at August 31, 1996 and 1997 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
F-15
<PAGE> 101
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. The Company had no other off-balance sheet instruments at August
31, 1996 and 1997.
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.
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, as well as public and private sales
of debt and equity securities. 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 and 1997, 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 over-collateralization to
generally 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 trusts. The Company's last two securitizations
were completed without the requirement of an insurance policy. 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 all 50 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. At August 31, 1997, 26% of the
dollar value of loans serviced had been originated in California and 15% in
Florida. No other state accounted for more than 10% of the servicing portfolio
for either period. 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.
F-16
<PAGE> 102
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 $88.6
million, $81.5 million and $88.2 million at August 31, 1995, 1996 and 1997,
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, 1996 and 1997, the Company had outstanding
commitments to extend credit or purchase loans in the amounts of $53.4 million,
$59.6 million and $190.5 million, 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 commitments 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.
Additionally, in the first quarter of fiscal 1997, the Company entered into
an agreement with a financial institution, providing for the purchase of up to
$2.0 billion of loans over a 5 year period. At August 31, 1997, $1.5 billion of
loans remained to be purchased from the Company under this commitment.
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, consist of the
following:
<TABLE>
<CAPTION>
AUGUST 31,
---------------
1996 1997
------ ------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Loans held for sale......................................... $4,699 $9,345
Deferred loan fees.......................................... 6 278
Less allowance for credit losses............................ (95) (100)
------ ------
Total............................................. $4,610 $9,523
====== ======
</TABLE>
The Company recognizes revenue from the gain on sale of loans, unrealized
gain on mortgage related securities, interest income and loan 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 debt agreements.
Net loan servicing income represents servicing fee income and other ancillary
fees received for servicing loans less the
F-17
<PAGE> 103
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
amortization of capitalized mortgage servicing rights and excess servicing
rights through January 1, 1997, which was the date of adoption of SFAS 125.
Mortgage servicing rights are amortized in proportion to and over the period of
estimated net servicing income, and excess servicing rights were amortized in
proportion to and over the estimated lives of the loans.
The Company primarily sells loans through securitizations, and also sells
whole loans to third party purchasers. Certain of the regular interests of the
related securitizations are sold, with the interest only and residual interest
securities retained by the Company. The Company sells its loans through whole
loan sales to third party purchasers, generally retaining the right to service
the loans and to receive any amounts in excess of the guaranteed yield to the
purchasers. The Company also sells its loans through whole loan sales to third
party purchasers on a servicing released basis pursuant to which the Company
receives a cash premium.
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 Title I 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, historical rates, collateral values, current
and future economic conditions which may affect the obligors' ability to pay and
overall portfolio quality. Changes in the allowance for credit losses and the
allowance for credit losses on loans sold with recourse consist of the
following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
-------------------------
1995 1996 1997
---- ------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Balance at beginning of year................................ $ 96 $ 960 $ 1,015
Provision for credit losses................................. 864 1,510 23,048
Reductions to the provision due to securitizations or loans
sold without recourse..................................... -- (1,455) (16,748)
Reductions due to charges to allowance for credit losses.... -- -- (201)
---- ------- --------
Balance at end of year...................................... $960 $ 1,015 $ 7,114
==== ======= ========
Allowance for credit losses................................. $ 74 $ 95 $ 100
Allowance for credit losses on loans sold with recourse..... 886 920 7,014
---- ------- --------
Total............................................. $960 $ 1,015 $ 7,114
==== ======= ========
</TABLE>
During fiscal 1996 and 1997, $113.9 million and $398.3 million,
respectively, of loans sold under recourse provisions were repurchased and
securitized as further described in Note 2. Reductions to the provision 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-18
<PAGE> 104
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Loans serviced and originated consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1996 1997
-------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Amount of Title I Loan originations......................... $127,785 $ 98,085
Amount of Conventional Loan originations.................... 11,582 428,832
-------- --------
Total............................................. $139,367 $526,917
======== ========
Loans serviced (including notes securitized, sold to
investors, and held for sale):
Title I................................................... $202,766 $255,446
Conventional.............................................. 11,423 372,622
-------- --------
Total............................................. $214,189 $628,068
======== ========
</TABLE>
6. MORTGAGE RELATED SECURITIES
Mortgage related securities consist of interest only strips and residual
interest certificates of FHA Title I and Conventional 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. Mortgage related securities consist of the
following as required by SFAS 125:
<TABLE>
<CAPTION>
AUGUST 31,
------------------
1996 1997
------- --------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Interest only strip securities.............................. $ 4,602 $ 6,398
Residual interest securities................................ 18,342 84,597
Interest only receivables (formerly excess servicing
rights)................................................... -- 15,304
------- --------
Total............................................. $22,944 $106,299
======= ========
</TABLE>
Activity in mortgage related securities consist of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
--------------------
1996 1997
-------- ---------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Balance at beginning of year................................ $ -- $ 22,944
Additions due to securitizations, at cost................... 20,096 61,100
Net unrealized gain......................................... 2,697 3,518
Accretion of residual interest.............................. 243 4,796
Net transfers from excess servicing rights.................. -- 15,052
Principal reductions........................................ (92) (1,111)
------- --------
Balance at end of year...................................... $22,944 $106,299
======= ========
</TABLE>
The Company had no mortgage related securities at August 31, 1995.
F-19
<PAGE> 105
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. EXCESS SERVICING RIGHTS
Activity in excess servicing rights consist of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------
1995 1996 1997
-------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Balance at beginning of year............................ $ 904 $ 14,483 $ 12,121
Plus additions.......................................... 14,098 20,563 3,887
Less amortization....................................... (519) (2,144) (956)
Less amounts related to loans repurchased, securitized
and transferred to mortgage related securities........ -- (20,781) (15,052)
------- -------- --------
Balance at end of year.................................. $14,483 $ 12,121 $ --
======= ======== ========
</TABLE>
As of August 31, 1995, 1996 and 1997, excess servicing rights, which are
reported as mortgage related securities in the Company's Statements of Financial
Condition, consisted of excess cash flows on serviced loans totaling $88.6
million, $81.5 million and $88.2 million, yielding weighted-average interest
rates of 13.3%, 12.8% and 12.5% and net of normal servicing and pass-through
fees with weighted-average pass-through yields to the investor of 8.4%, 8.1% and
8.8%, respectively. These loans were sold under recourse provisions as described
in Note 2.
During fiscal 1996 and 1997, $113.9 million and $398.3 million,
respectively, of loans sold were repurchased and securitized as further
described in Note 2. Excess servicing rights related to the loans repurchased
and securitized of $20.8 million and $71.9 million, respectively, were
transferred to the cost basis of the mortgage related securities as a result of
these transactions at August 31, 1996 and 1997.
Of the Title I Loans sold in the year ended August 31, 1995, $56.9 million
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 and 5.688% per annum at August 31, 1997. The
principal balance of Title I and Conventional Loans subject to the LIBOR
adjustment was $29.3 million at August 31, 1996 and $48.6 million at August 31,
1997. 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 at August 31, 1996 and
$1.9 million at August 31, 1997.
8. MORTGAGE SERVICING RIGHTS
Activity in mortgage servicing rights consist of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
-------------------------------
1995 1996 1997
-------- -------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Balance at beginning of year............................. $ -- $1,076 $ 3,827
Plus additions........................................... 1,176 3,306 7,184
Less amortization and reductions......................... (100) (555) (1,504)
------ ------ -------
Balance at end of year................................... $1,076 $3,827 $ 9,507
====== ====== =======
</TABLE>
The Company had no valuation allowance for mortgage servicing rights during
fiscal 1995, 1996 or 1997, as the cost basis of mortgage servicing rights
approximated fair value.
F-20
<PAGE> 106
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 August 31,
1997, the default rates on the March 1996 and August 1996 securitization pooling
and servicing agreements exceeded the permitted level. The mortgage servicing
rights for these agreements were approximately $2.4 million at August 31, 1997.
In the event of such termination, there would be an adverse effect on the
valuation of the Company's mortgage servicing rights.
9. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
---------------
1996 1997
------ ------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Office equipment and furnishings............................ $ 640 $1,702
EDP equipment............................................... 470 948
Building improvements....................................... -- 144
Vehicles.................................................... 34 34
------ ------
1,144 2,828
Less accumulated depreciation............................... (279) (675)
------ ------
Total............................................. $ 865 $2,153
====== ======
</TABLE>
10. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
AUGUST31,
-------------
1996 1997
----- -----
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Accrued income from securitizations......................... $203 $537
Software costs, net of amortization (See Note 16)........... 154 92
Deposits and impounds....................................... 99 80
Other....................................................... 109 86
---- ----
Total............................................. $565 $795
==== ====
</TABLE>
11. NOTES AND CONTRACTS PAYABLE
Notes and contracts payable consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
-----------------
1996 1997
------- -------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Note payable -- warehouse line of credit.................... $ 3,265 $ 8,500
Note payable -- revolving line of credit.................... 10,000 24,976
Other....................................................... 932 2,096
------- -------
Total............................................. $14,197 $35,572
======= =======
</TABLE>
Loan originations are initially funded principally through the Company's
new $40.0 million warehouse line of credit that was executed in June 1997 and
increased to $65.0 million in October 1997, which replaces a
F-21
<PAGE> 107
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
previous $20.0 million warehouse line of credit. At August 31, 1997, $8.5
million was outstanding under this new warehouse line of credit. In excess of
98.5% of the aggregate loans originated by the Company through August 31, 1997
had been sold. Net cash used in the Company's operating activities was funded
primarily from the reinvestment of proceeds from the sale of loans in the
secondary market totaling approximately $522.0 million during fiscal 1997. The
loan sale transactions generally 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. 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, 1997, amounts on deposit in such
reserve accounts totaled $6.9 million.
The new $40.0 million warehouse line of credit increased effective October
17, 1997 to $65.0 million, bears interest at the lower of the one-month LIBOR +
1.50% or the Federal Funds rate plus 0.25%, expires June 15, 1998, and is
secured by loans prior to sale. The agreement requires the Company to maintain
adjusted minimum tangible net worth of $65.0 million plus 50% of the Company's
cumulative net income since November 30, 1996, plus all net proceeds received by
the Company through the sale or issuance of stock or additional subordinated
notes. At August 31, 1997, the adjusted tangible net worth as defined in the
agreement was $88.1 million, and the required minimum adjusted tangible net
worth at that date was $71.1 million. Additionally, the following material
covenant restrictions exist: i) the ratio of total liabilities (not including
subordinated notes) divided by adjusted tangible net worth (including
subordinated notes) cannot exceed 3:1, and ii) total liabilities must be less
than the aggregate of 100% of cash plus 93% of loans held for sale plus 55% of
restricted cash and mortgage related securities. At August 31, 1997, the ratio
of total liabilities to adjusted tangible net worth was 0.69:1 and total
liabilities were $61.1 million, which was $16.1 million under the maximum amount
allowed.
In April 1997, the Company entered into a pledge and security agreement
with another financial institution for an $11.0 million revolving credit
facility. The amount which can be borrowed under the agreement was increased to
$15.0 million in June 1997 and $25.0 million in July 1997. This facility is
secured by a pledge of certain of the Company's interest only and residual class
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. A portion of the loans under the
credit line agreement bears interest at one-month LIBOR + 3.5%, expiring one
year from the initial advance, and requires the Company to maintain a minimum
net worth requirement of the greater of $35.0 million, or 80% of net worth,
following fiscal year end 1997. The portion of the credit line agreement
applicable to a repurchase agreement secured by insured interest only
certificates is at one-month LIBOR + 2.0%. At August 31, 1997, the required net
worth was $35.0 million and the Company's actual net worth was $53.1 million.
Additionally, the agreement requires the Company to maintain a debt-to-net-worth
ratio not to exceed 2.5:1. At August 31, 1997, the ratio was 1.74:1.
Certain material covenant restrictions exist in the Indenture governing the
Notes. These covenants include limitations on the Company's ability to incur
indebtedness, grant liens on its assets and to enter into extraordinary
corporate transactions. The Company may not incur indebtedness if, on the date
of such incurrence and after giving effect thereto, the Consolidated Leverage
Ratio would exceed 2:1, subject to certain exceptions. At August 31, 1997, the
Consolidated Leverage Ratio was 1.65:1. The Consolidated Leverage Ratio is the
ratio of (i) total debt, including subordinated debt, but excluding the
Permitted Warehouse Indebtedness (as defined below), accounts payable
outstanding less than 60 days, and the tax sharing payable to Mego Financial by
the Company, to (ii) the consolidated net worth of the Company. The Permitted
Warehouse Indebtedness generally is the outstanding amount under the warehouse
line of credit
F-22
<PAGE> 108
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
agreement. At August 31, 1997, this ratio was 0.06:1. In addition, an increasing
amount of the Company's mortgage related securities are required to remain
unpledged. At August 31, 1997, that requirement was $39.9 million, and at that
date $60.9 million of mortgage related securities were pledged, and $45.4
million of mortgage related securities were unpledged. See Note 18.
At August 31, 1996 and 1997, contracts payable consisted of $932,000 and
$2.1 million, respectively, in obligations under lease purchase arrangements
secured by property and equipment, bearing a weighted average interest rate of
9.32% at August 31, 1997.
Scheduled maturities of the Company's contracts payable of $2.1 million at
August 31, 1997 are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 31,
--------------------------------
TOTAL 1998 1999 2000 2001 2002
- ------ ---- ---- ---- ---- ----
(THOUSANDS OF DOLLARS)
<C> <C> <C> <C> <C> <C>
$2,096 $554 $536 $522 $413 $ 71
</TABLE>
12. INCOME TAXES
As described in Note 2, prior to the Spin-off, the Company recorded 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. Income tax expense has been computed as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
--------------------------------
1995 1996 1997
-------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Income before income taxes................................. $5,919 $11,155 $23,810
====== ======= =======
Federal income taxes at 34% of income...................... $2,013 $ 3,793 $ 8,095
State income taxes, net of federal income tax benefit...... 234 442 943
Other...................................................... 30 -- 24
------ ------- -------
Income tax expense......................................... $2,277 $ 4,235 $ 9,062
====== ======= =======
Income tax expense is comprised of the following:
Current.................................................. $2,047 $ 3,562 $12,319
Deferred................................................. 230 673 (3,257)
------ ------- -------
Total............................................ $2,277 $ 4,235 $ 9,062
====== ======= =======
</TABLE>
F-23
<PAGE> 109
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, (b) temporary
differences between the timing of revenue recognition for book purposes and
income tax purposes and (c) operating loss and tax credit carryforwards. The tax
effects of significant items comprising the Company's net deferred tax
(liability) asset, included in Due to Mego Financial are as follows:
<TABLE>
<CAPTION>
AUGUST 31,
----------------
1996 1997
------ ------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Deferred tax assets:
Realized gain on mortgage related securities.............. $ 386 $2,373
Other..................................................... -- 91
------ ------
386 2,464
------ ------
Deferred tax liabilities:
Difference between book and tax carrying value of
assets................................................. 98 110
Unrealized gain on mortgage related securities............ 1,025 --
Other..................................................... 166 --
------ ------
1,289 110
------ ------
Net deferred tax (liability) asset................ $ (903) $2,354
====== ======
</TABLE>
13. SUBORDINATED DEBT
In November 1996, the Company consummated the IPO, pursuant to which it
issued 2.3 million shares of Common Stock at $10.00 per share. Concurrently with
the IPO, the Company issued the Existing Notes in the amount of $40.0 million
due in 2001 in an underwritten public offering. The Company used approximately
$13.9 million of the aggregate net proceeds from these offerings to repay
Intercompany Debt due to Mego Financial and Preferred Equities Corporation
("PEC") and approximately $24.3 million to reduce the amounts outstanding under
the Company's lines of credit. The balance of the net proceeds has been used to
originate loans. The balance at August 31, 1997 for these notes was $40.0
million. Prepaid debt expenses related to these notes were $2.4 million at
August 31, 1997 and are being amortized over the term of the Existing Notes. See
Note 18 for a description of subsequent subordinated debt issuance.
14. ADDITIONAL PAID-IN CAPITAL
In 1995, Mego Financial contributed $3.0 million to the Company as
additional paid-in capital. In November 1996, additional paid-in capital was
increased by $20.6 million due to the sale of 2.3 million shares of Common
Stock, net of issuance costs, in the IPO. See Notes 1 and 13.
F-24
<PAGE> 110
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES
The Company leases an office under the terms of an operating lease that
expires March 31, 1999. During fiscal 1995, 1996 and 1997, the Company's rent
expense related to this lease was $154,000, $164,000 and $161,000, respectively.
In April 1996, the Company executed an operating lease for its main offices in a
second location which it occupied in late 1996. The 1996 lease commenced
September 1, 1996 and expires August 31, 2002. The Company's rent expense
related to this lease was $827,000 for the fiscal year ended August 31, 1997.
Future minimum rental payments under these operating leases at August 31, 1997
are set forth below (thousands of dollars):
<TABLE>
<CAPTION>
For the years ended August 31,
- ------------------------------
<S> <C>
1998........................................................ $1,080
1999........................................................ 1,025
2000........................................................ 942
2001........................................................ 961
2002........................................................ 814
------
Total............................................. $4,822
======
</TABLE>
Additionally, in October 1997, the Company entered into a five year
$986,000 equipment financing arrangement which will result in annual payments of
approximately $248,000 per year. 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.
16. RELATED PARTY TRANSACTIONS
During the years ended August 31, 1995, 1996 and 1997, PEC, a wholly-owned
subsidiary of Mego Financial, provided certain services to the Company including
loan servicing and collection for a cost of $232,000, $709,000 and $1.9 million,
respectively. In addition, PEC provided services including executive,
accounting, legal, management information, data processing, human resources,
advertising and promotional materials (management services) totaling $690,000,
$671,000 and $967,000, which amounts were included in general and administrative
expenses for the years ended August 31, 1995, 1996 and 1997, respectively.
Included in other interest expense for the years ended August 31, 1995, and 1996
and 1997, are $85,000, $29,000 and $16,000, respectively, related to advances
from PEC.
During the years ended August 31, 1995, 1996 and 1997, the Company paid PEC
for developing certain computer programming (see Note 10), incurring costs of
$36,000, $56,000 and $0, respectively. The Company is amortizing these costs
over a five year period. During fiscal 1995, 1996 and 1997, amortization of
$26,000, $29,000 and $62,000, 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 and contractual
arrangements for services performed by PEC have been reasonable and are
representative of an approximation of the expense the Company would have
incurred had it operated as a stand alone entity performing such services.
At August 31, 1995, 1996, and 1997, the Company had a non-interest bearing
liability to Mego Financial of $8.5 million, $12.0 million and $9.7 million,
respectively, for federal income taxes and cash advances. On August 29, 1997,
the Company and Mego Financial entered into an agreement (the "Payment
Agreement") with respect to the Company's repayment after the Spin-off of (i) a
portion of the debt owed by the Company
F-25
<PAGE> 111
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
to Mego Financial as of May 31, 1997 aggregating approximately $3.4 million (the
"May Amounts") and (ii) debt owed by the Company to Mego Financial as of August
31, 1997 in addition to the May Amounts (the "Excess Amounts"). The May Amounts
consist of a portion of the debt owed by the Company to Mego Financial as of May
31, 1997 in respect of funds advanced by Mego Financial to the Company through
such date, the portion of the Warrant Value amortized through such date and
amounts owed under the tax allocation and indemnification agreement between Mego
Financial and the Company as of such date. The Excess Amounts consist of funds
advanced by Mego Financial to the Company during the period commencing June 1,
1997 and ending August 31, 1997 (the "Excess Period"), the portion of the
Warrant Value amortized during the Excess Period and amounts accrued under the
tax allocation and indemnification agreement during the Excess Period. Pursuant
to the Payment Agreement, the Company has agreed to repay the May Amounts upon
the earlier to occur of (i) the first consummation after the date of the
agreement of a public or private debt or equity transaction by the Company of at
least $25.0 million in amount or (ii) August 31, 1998. The Company further
agreed to repay the Excess Amounts upon the earlier to occur of (i) the second
consummation after the date of the agreement of a public or private debt or
equity transaction by the Company of at least $25.0 million in amount or (ii)
August 31, 1998. The amount of the amortization of the Warrant Value for each of
the months of September, October, November and December 1997 will be payable
January 31, 1998. Commencing in January 1998 the unpaid balance of the Warrant
Value will be continue to be amortized on a monthly basis and the amount of such
amortization will be due and payable within 30 days from the end of each fiscal
quarter.
At August 31, 1996 and 1997, the Company had a non-interest bearing
liability to PEC of $819,000 and $466,000, respectively, relating to charges for
services to the Company. Under the Payment Agreement, Mego Financial may, but is
not obligated to, make advances to PEC on behalf of the Company. Advances, if
any, by Mego Financial on behalf of the Company to PEC will be due and payable
within 30 days after the close of the month in which such advance was made.
Under the Payment Agreement, any amount owed by the Company to Mego Financial
that is not paid when due will bear interest from such due date until paid at
the rate of 10.0% per annum. In October 1997, $3.9 million was paid to Mego
Financial, which included the May Amounts.
Activity due to Mego Financial consist of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
----------------------------------
1995 1996 1997
------- ------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Balance at beginning of year..................... $ -- $ 8,453 $ 11,994
Provision for federal income taxes............... 2,013 3,566 7,630
Cash advances from Mego Financial................ 9,053 5,475 5,123
Repayment of advances............................ (2,613) (5,500) (15,094)
------- ------- --------
Balance at end of year........................... $ 8,453 $11,994 $ 9,653
======= ======= ========
Average balance during the year.................. $ 2,275 $11,874 $ 6,876
======= ======= ========
</TABLE>
The Company anticipates issuing Common Stock and subordinated debt to
support its cash flow needs in the future. Although it may do so, Mego Financial
is not anticipated to provide funds to the Company or guarantee its indebtedness
and it has no obligation to do so.
17. STOCK OPTIONS
In November 1996 and August 1997, the Company authorized the reservation of
925,000 and 1 million shares, respectively, of Common Stock for issuance upon
the exercise of options to purchase Common Stock granted under the Company's
1996 Stock Option Plan and 1997 Stock Option Plan. Effective August 20,
F-26
<PAGE> 112
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1997, the Company converted all outstanding employee stock options to SARs which
resulted in additional compensation expense of approximately $220,000. See Note
18.
18. SUBSEQUENT EVENTS
In October 1997, the Company issued $40.0 million of 12.5% Senior
Subordinated Notes ("Additional Notes") due in 2001 in the Private Placement
which increased the aggregate principal amount of outstanding 12.5% Senior
Subordinated Notes from $40.0 million to $80.0 million. The Company used the net
proceeds of the Private Placement to repay $3.9 million of debt due to Mego
Financial, $29.0 million to reduce the amounts outstanding under the Company's
lines of credit, and to provide capital to originate and securitize loans. These
Additional Notes are subject to the Indenture governing all of the Company's
subordinated notes.
The Company has entered into a registration rights agreement with Friedman,
Billings, Ramsey & Co., Inc. ("Registration Rights Agreement") pursuant to which
the Company agreed, for the benefit of the holders of the Additional Notes, at
the Company's cost, (i) to file a registration statement (the "Exchange Offer
Registration Statement") with respect to a registered offer to exchange the
Additional Notes ("Exchange Offer") for notes of the Company with terms
identical in all material respects to the Additional Notes ("Exchange Notes")
(except that the Exchange Notes will not contain terms with respect to transfer
restrictions or interest rate increases) with the Securities and Exchange
Commission on or before November 28, 1997 and (ii) to use its best efforts to
cause the Exchange Offer Registration Statement to be declared effective under
the Securities Act on or before January 12, 1998. Promptly after the Exchange
Offer Registration Statement has been declared effective, the Company will offer
the Exchange Notes in exchange for surrender of the Additional Notes. The
Company will keep the Exchange Offer open for not less than 30 days (or longer
if required by applicable law) after the date notice of the Exchange Offer is
mailed to the holders of the Additional Notes. For each Additional Note validly
tendered to the Company pursuant to the Exchange Offer and not withdrawn by the
holder thereof, the holder of such Notes will receive Exchange Notes having a
principal amount equal to that of the tendered Additional Notes. Interest on
each Exchange Note will accrue from the last interest payment date on which
interest was paid on the tendered Additional Notes in exchange therefor or, if
no interest has been paid on such Additional Notes, from the date of its
original issue.
On October 22, 1997 the Board of Directors (the "Board") of the Company
voted, subject to shareholder approval, to amend the Company's 1997 Stock Option
Plan to increase the number of shares of stock reserved for issuance upon the
exercise of options to purchase Common Stock granted from one million to two
million shares.
Additionally, the Board voted to purchase all of the outstanding SARs. The
SARs will be bought at $1.00 per share for those SARs previously held at $10.00
to $11.00 per share and $0.70 per share for those SARs previously held at $12.00
per share. Effective October 22, 1997, new employee stock options were granted
at fair market value which was $14.75 per share on October 21, 1997 in the
amount of 1,052,500 options, issued subject to stockholder approval of the 1997
Stock Option Plan. In addition to the accrued compensation expense of $220,000
recorded in fiscal 1997 (See Note 17), the Company will incur an additional
$761,250 of expense, excluding payroll tax items, related to the purchase of the
SARs.
On August 20, 1997, the Company's Board of Directors determined to change
the Company's fiscal year-end from August 31 to December 31, effective December
31, 1997 and accordingly filed a Current Report on Form 8-K on September 4,
1997. The Company intends to file a Transition Report on Form 10-K for the four
month transition period ended December 31, 1997.
F-27
<PAGE> 113
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables reflect quarterly financial data for the Company.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------------------------------
NOVEMBER 30, FEBRUARY 29, MAY 31, AUGUST 31,
1995 1996 1996 1996
------------ ------------ ----------- -----------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES:
Gain on sale of loans and mortgage related
securities................................ $ 5,965 $ 4,845 $ 2,151 $ 6,275
Interest income, net........................ 138 (3) 403 450
Financial income and other.................. 891 870 1,288 299
----------- ----------- ----------- -----------
Total revenues.................... 6,994 5,712 3,842 7,024
----------- ----------- ----------- -----------
EXPENSES:
Operating expenses.......................... 2,805 2,882 3,305 3,203
Net provision for credit losses............. 297 200 (524) 82
Interest.................................... 47 31 42 47
----------- ----------- ----------- -----------
Total expenses.................... 3,149 3,113 2,823 3,332
----------- ----------- ----------- -----------
Income before income taxes.................. 3,845 2,599 1,019 3,692
Income tax expense.......................... 1,538 1,040 255 1,402
----------- ----------- ----------- -----------
Net income.................................. $ 2,307 $ 1,559 $ 764 $ 2,290
=========== =========== =========== ===========
EARNINGS PER SHARE:
Primary..................................... $ 0.23 $ 0.16 $ 0.08 $ 0.23
=========== =========== =========== ===========
Fully-diluted............................... $ 0.23 $ 0.16 $ 0.08 $ 0.23
=========== =========== =========== ===========
WEIGHTED-AVERAGE NUMBER OF SHARES
OUTSTANDING:
Primary..................................... 10,000,000 10,000,000 10,000,000 10,000,000
=========== =========== =========== ===========
Fully-diluted............................... 10,000,000 10,000,000 10,000,000 10,000,000
=========== =========== =========== ===========
</TABLE>
F-28
<PAGE> 114
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------------------------------
NOVEMBER 30, FEBRUARY 28, MAY 31, AUGUST 31,
1996 1997 1997 1997
------------ ------------ ----------- -----------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES:
Gain on sale of loans and mortgage related
securities................................ $ 9,366 $ 8,966 $ 15,532 $ 14,777
Interest income, net........................ 355 526 1,137 1,115
Financial income and other.................. 638 560 726 1,112
----------- ----------- ----------- -----------
Total revenues.................... 10,359 10,052 17,395 17,004
----------- ----------- ----------- -----------
EXPENSES:
Operating expenses.......................... 4,589 5,352 6,274 8,240
Net provision for credit losses............. 1,711 (800) 4,108 1,281
Interest.................................... 47 51 122 25
----------- ----------- ----------- -----------
Total expenses.................... 6,347 4,603 10,504 9,546
----------- ----------- ----------- -----------
Income before income taxes.................. 4,012 5,449 6,891 7,458
Income tax expense.......................... 1,533 2,078 2,619 2,832
----------- ----------- ----------- -----------
Net income.................................. $ 2,479 $ 3,371 $ 4,272 $ 4,626
=========== =========== =========== ===========
EARNINGS PER SHARE:
Primary..................................... $ 0.24 $ 0.27 $ 0.35 $ 0.38
=========== =========== =========== ===========
Fully-diluted............................... $ 0.24 $ 0.27 $ 0.35 $ 0.38
=========== =========== =========== ===========
WEIGHTED-AVERAGE NUMBER OF SHARES
OUTSTANDING:
Primary..................................... 10,317,102 12,476,069 12,379,368 12,300,000
=========== =========== =========== ===========
Fully-diluted............................... 10,319,051 12,544,291 12,379,368 12,300,000
=========== =========== =========== ===========
</TABLE>
F-29
<PAGE> 115
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT 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 ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. 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 DATE SUBSEQUENT TO THE
DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... 1
Risk Factors.......................... 8
Use of Proceeds....................... 20
Price Range of Common Stock........... 20
Dividend Policy....................... 20
Capitalization........................ 21
Selected Financial Data............... 22
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 25
Business.............................. 42
Management............................ 62
Principal Stockholders................ 72
Certain Transactions.................. 73
Description of Notes; Exchange
Offer............................... 75
Description of Capital Stock.......... 77
Shares Eligible for Future Sale....... 78
Underwriting.......................... 80
Legal Matters......................... 81
Experts............................... 82
Available Information................. 83
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
3,500,000 SHARES
MEGO MORTGAGE
CORPORATION
[MEGO LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
CIBC OPPENHEIMER
, 1997
======================================================
<PAGE> 116
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......... $ 13,646
NASD filing fee............................................. 5,003
Nasdaq National Market additional listing fee............... *
Printing expenses........................................... *
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
Fees and expenses (including legal fees) for qualifications
under state securities laws............................... *
Transfer agent's fees and expenses.......................... *
Miscellaneous............................................... *
----------
Total............................................. $ 500,000
==========
</TABLE>
- ---------------
* To be provided by amendment.
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 corporation against any liability asserted against
such officer or director and incurred by him or her in any such
II-1
<PAGE> 117
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 the Board
in the specific case upon receipt of an undertaking by or on behalf of the
director or officer to repay
II-2
<PAGE> 118
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
On October 20, 1997, the Company consummated a private placement of an
aggregate of $40.0 million of its 12 1/2% Senior Subordinated Notes due 2001
(the "Notes"). The Notes were sold only (i) to Qualified Institutional Buyers in
compliance with Rule 144A under the Securities Act, (ii) to a limited number of
"accredited investors" (as defined in Rule 501(a) of Regulation D promulgated
under the Securities Act and (iii) pursuant to sales that occurred outside the
United States within the meaning of Regulation S promulgated under the
Securities Act. Friedman Billings, Ramsey & Co., Inc. ("FBR") was the initial
purchaser of the Notes. The Notes were sold for cash. FBR, as initial purchaser,
purchased the Notes at a price of 95.95% of the aggregate principal amount of
the Notes (representing 95% of the $40.4 million total purchase price to
investors).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
1.1* -- Underwriting Agreement.
3.1(4) -- Amended and Restated Certificate of Incorporation of the
Registrant.
3.2(4) -- By-Laws of thc Registrant, as amended.
4.1(4) -- Specimen Common Stock Certificate.
5.1* -- Opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel
P.A.
10.1(4) -- 1996 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.
</TABLE>
II-3
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
</TABLE>
10.9(4) -- Form of Tax Allocation and Indemnity Agreement dated as of
November 22, 1996 between the Registrant and Mego Financial
Corp.
10.10(4) -- Loan Program Sub-Servicing Agreement between the Registrant
and Preferred Equities Corporation dated as of September 1,
1996.
10.11(4) -- 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(4) -- 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.
10.14(4) -- 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(4) -- Loan Purchase Agreement dated as of August 1, 1996 between
Financial Asset Securities Corp., as Purchaser, and the
Registrant, as Seller.
10.18(4) -- 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. I to Warehousing Credit and Security Agreement
dated as of August 9, 1996 between the Registrant and First
National Bank of Boston.
10.20(4) -- 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(4) -- 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 dated as of November 22, 1996 between the
Registrant and American Stock Transfer & Trust Company.
10.26(4) -- Master Repurchase Agreement dated as of September 4, 1996
between the Registrant and Greenwich Capital Markets. Inc.
10.27(4) -- Letter agreement dated October 1, 1996 between the
Registrant and Greenwich Capital Markets. Inc.
10.28(4) -- 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.
II-4
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
10.29(4) -- Agreement dated as of November 22, 1996 between the
Registrant and Mego Financial Corp.
10.30(4) -- Commitment letter between the Registrant and Greenwich
Capital Markets. Inc. dated September 17, 1996.
10.31(5) -- Loan Purchase Agreement dated as of November 1, 1996 between
Financial Asset Securities Corp. and the Registrant.
10.32(5) -- Pooling and Servicing Agreement dated as of November 1, 1996
among Financial Asset Securities Corp., the Registrant,
Norwest Bank Minnesota, N.A. and First Trust of New York,
National Association.
10.33(5) -- Home Loan Purchase Agreement dated as of March 1, 1997
between Financial Asset Securities Corp. and the Registrant.
10.34(5) -- Sale and Servicing Agreement dated as of March 1, 1997 among
Mego Mortgage Home Loan Owner Trust 1997-1, Financial Asset
Securities Corp., the Registrant, Norwest Bank Minnesota,
N.A. and First Trust of New York, National Association.
10.35(5) -- Trust Agreement dated as of March 1, 1997 among Financial
Asset Securities Corp., the Registrant, Wilmington Trust
Company and First Trust of New York, National Association.
10.36(5) -- Home Loan Purchase Agreement dated as of May 1, 1997 between
Financial Asset Securities Corp. and the Registrant.
10.37(5) -- Sale and Servicing Agreement dated as of May 1, 1997 among
Mego Mortgage Home Loan Owner Trust 1997-2, Financial Asset
Securities Corp., the Registrant, Norwest Bank Minnesota
N.A. and First Trust of New York, National Association.
10.38(5) -- Trust Agreement dated as of May 1, 1997 among Financial
Asset Securities Corp., the Registrant, Wilmington Trust
Company and First Trust of New York, National Association.
10.39(5) -- Home Loan Purchase Agreement dated as of June 14, 1997
between Financial Asset Securities Corp. and the Registrant.
10.40(5) -- Sale and Servicing Agreement dated as of June 14, 1997 among
Mego Mortgage Home Loan Owner Trust 1997-3, Financial Asset
Securities Corp., the Registrant, Norwest Bank Minnesota
N.A. and First Trust of New York, National Association.
10.41(5) -- Trust Agreement dated as of June 14, 1997 among Financial
Asset Securities Corp., the Registrant, Wilmington Trust
Company and First Bank National Association.
10.42(6) -- Agreement between Mego Financial Corp. and the Registrant,
dated August 29, 1997.
10.43 -- Sale and Servicing Agreement dated August 16, 1997 among
Mego Mortgage Home Loan Owner Trust 1997-4 as Issuer,
Financial Asset Securities Corp. as Depositor, the
Registrant as Seller and Servicer, Norwest Bank Minnesota,
N.A., as Master Servicer, and U.S. Bank National
Association, as Indenture Trustee and Co-Owner Trustee.
10.44 -- Home Loan Purchase Agreement dated August 16, 1997 between
Financial Asset Securities Corp. as Purchaser and the
Registrant as Seller.
10.45* -- Servicing Agreement dated August 16, 1997 between the
Registrant and Norwest Bank Minnesota, N.A.
10.46 -- Credit Agreement dated as of October 27, 1997 between the
Registrant and Textron Financial Corporation, as Agent.
10.47 -- Security Agreement, dated as of October 27, 1997 between the
Registrant and Textron Financial Corporation, as Agent.
10.48 -- Note, dated October 27, 1997 issued by the Registrant to
Textron Financial Corporation.
</TABLE>
II-5
<PAGE> 121
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
10.49* -- Credit Agreement dated as of June 20, 1997 between the
Registrant and The First National Bank of Chicago, as agent.
10.50* -- Letter Agreement dated July 1, 1997 between the Registrant
and The First National Bank of Chicago, as agent for the
lenders party thereto.
10.51* -- Letter Agreement dated August 26, 1997 between the
Registrant and The First National Bank of Chicago, as agent.
10.52* -- Amendment to Credit Agreement dated September 5, 1997
between the Registrant, The First National Bank of Chicago,
as agent and as lender, Bank United and Guaranty Federal
Bank, F.S.B.
10.53* -- Fourth Amendment to Credit Agreement dated October 16, 1997
between the Registrant and The First National Bank of
Chicago, as agent and as lender, Bank United, Guaranty
Federal Bank, F.S.B., and Harris Trust and Savings Bank.
10.54* -- Security and Collateral Agency Agreement dated June 20, 1997
among the Registrant, The First National Bank of Chicago, as
agent, and First Chicago National Processing Corporation.
10.55* -- Tri-Party Agreement dated as of June 20, 1997 among the
Registrant, The First National Bank of Chicago and Greenwich
Capital Markets, Inc.
10.56* -- Agreement Regarding Subservicing dated as of June 20, 1997
among the Registrant, The First National Bank of Chicago, as
agent, and Preferred Equities Corporation.
10.57* -- Pledge and Security Agreement dated as of April 17, 1997
between the Registrant and Greenwich Capital Markets, Inc.
10.58* -- Note Endorsements No. 1, No. 2 and No. 3 dated June 13,
1997, June 20, 1997 and July 15, 1997, respectively, to Note
issued by the Registrant to Greenwich Capital Markets, Inc.
10.59* -- Loan Purchase Agreement dated April 18, 1997 between the
Registrant and First Alliance Mortgage Company.
10.60 -- 1997 Stock Option and Stock Appreciation Rights Plan.
10.61* -- Employment Agreement dated as of September 1, 1997 between
the Registrant and Jerome J. Cohen.
10.62* -- Employment Agreement dated as of September 2, 1997 between
the Registrant and Jeffrey S. Moore.
10.63* -- Employment Agreement dated as of September 2, 1997 between
the Registrant and James Belter.
10.64* -- Employment Agreement dated as of September 2, 1997 between
the Registrant and Chris DeWinter.
10.65* -- Consultancy Agreement dated as of September 1, 1997 between
the Registrant and Don A. Mayerson.
10.66* -- Consultancy Agreement dated as of September 1, 1997 between
the Registrant and Herbert B. Hirsch.
10.67* -- First Supplemental Indenture dated as of October 20, 1997
between the Registrant and American Stock Transfer & Trust
Company.
10.68* -- Registration Rights Agreement dated as of October 20, 1997
between the Registrant and Friedman, Billings, Ramsey & Co.,
Inc.
10.69* -- Settlement Servicer Provider Agreement dated October 23,
1997 between the Registrant and Transamerica Home Loan.
</TABLE>
II-6
<PAGE> 122
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
21.1 -- Subsidiaries of the Registrant.
23.1* -- Consent of Greenberg Traurig Hoffman Lipoff Rosen & Quentel,
P.A. (included in its opinion to be filed as Exhibit 5.1).
23.2 -- Consent of Deloitte & Touche LLP.
24.1 -- Power of Attorney (included in signature page).
27.1(6) -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
* To be filed by amendment.
(1) Filed as part of the Form 10-K for the fiscal year ended August 31, 1994 of
Mego Financial Corp. and incorporated herein by reference.
(2) Filed as part of the Form 10-K for the fiscal year ended August 31, 1995 of
Mego Financial Corp. and incorporated herein by reference.
(3) Filed as part of the Registration Statement on Form S-1 filed by the
Company, as amended (File No. 333-13421) and incorporated herein by
reference.
(4) Filed as part of the Registration Statement on Form S-1 filed by the
Company, as amended (File No. 333-12443) and incorporated herein by
reference.
(5) Filed as part of the Form 10-Q for the quarter ended May 31, 1997 filed by
the Company and incorporated herein by reference.
(6) Filed as part of the Form 10-K for the fiscal year ended August 31, 1997
filed by the Company and incorporated herein by reference.
ITEM 17. UNDERTAKINGS.
(a) 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.
(b) 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 posteffective amendment that contains a form of prospectus shall
be decreed 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-7
<PAGE> 123
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on November 10, 1997.
MEGO MORTGAGE CORPORATION
By: /s/ JEFFREY S. MOORE
------------------------------------
Jeffrey S. Moore
President and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jeffrey S. Moore and James L. Belter and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each said attorneys-in-fact and agents or any
of them or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JEROME J. COHEN Chairman of the Board November 10, 1997
- -----------------------------------------------------
Jerome J. Cohen
/s/ JEFFREY S. MOORE President, Chief November 10, 1997
- ----------------------------------------------------- Executive Officer and
Jeffrey S. Moore Director (Principal
Executive Officer)
/s/ JAMES L. BELTER Executive Vice November 10, 1997
- ----------------------------------------------------- President, Chief
James L. Belter Financial Officer and
Treasurer (Principal
Accounting Officer)
/s/ ROBERT NEDERLANDER Director November 10, 1997
- -----------------------------------------------------
Robert Nederlander
/s/ HERBERT B. HIRSCH Director November 10, 1997
- -----------------------------------------------------
Herbert B. Hirsch
/s/ DON A. MAYERSON Director November 10, 1997
- -----------------------------------------------------
Don A. Mayerson
/s/ SPENCER I. BROWNE Director November 10, 1997
- -----------------------------------------------------
Spencer I. Browne
/s/ JEREMY WIESEN Director November 10, 1997
- -----------------------------------------------------
Jeremy Wiesen
</TABLE>
II-8
<PAGE> 1
EXHIBIT 10.43
EXECUTION COPY
SALE AND SERVICING AGREEMENT
Dated as of August 16, 1997
among
MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-4
(Issuer)
FINANCIAL ASSET SECURITIES CORP.
(Depositor)
MEGO MORTGAGE CORPORATION
(Seller and Servicer)
NORWEST BANK MINNESOTA, N.A.
(Master Servicer)
and
U.S. BANK NATIONAL ASSOCIATION, D/B/A
FIRST BANK NATIONAL ASSOCIATION
(Indenture Trustee and Co-Owner Trustee)
MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-4
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I.
DEFINITIONS
<S> <C> <C>
Section 1.01 Definitions .................................................................... 1
Section 1.02 Other Definitional Provisions .................................................. 26
Section 1.03 Interest Calculations .......................................................... 26
ARTICLE II.
CONVEYANCE OF THE HOME LOANS
Section 2.01 Conveyance of the Home Loans ................................................... 28
Section 2.02 Reserved ....................................................................... 28
Section 2.03 Ownership and Possession of Home Loan Files .................................... 28
Section 2.04 Books and Records .............................................................. 29
Section 2.05 Delivery of Home Loan Documents ................................................ 29
Section 2.06 Acceptance by Indenture Trustee of the Home Loans; Certain
Substitutions; Initial Certification ........................................... 32
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
Section 3.01 Representations and Warranties of the Depositor
Section 3.02 Representations, Warranties and Covenants of the Master
Servicer ....................................................................... 34
Section 3.03 Representations and Warranties of Mego ......................................... 37
Section 3.04 [Reserved] ..................................................................... 45
Section 3.05 Purchase and Substitution ...................................................... 45
ARTICLE IV.
ADMINISTRATION AND SERVICING OF HOME LOANS
Section 4.01 Servicing Standard ............................................................. 48
Section 4.02 Servicing Arrangements ......................................................... 49
Section 4.03 Servicing Record ............................................................... 50
Section 4.04 Annual Statement as to Compliance; Notice of Event of Default .................. 53
Section 4.05 Annual Independent Accountants' Report; Servicer Review
Report ......................................................................... 53
Section 4.06 Access to Certain Documentation and Information Regarding Home
Loans........................................................................... 54
Section 4.07 [Reserved] ..................................................................... 55
Section 4.08 Advances ....................................................................... 55
Section 4.09 Reimbursement of Interest Advances and Foreclosure Advances .................... 56
Section 4.10. Modifications, Waivers, Amendments and Consents ................................ 57
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 4.11. Due-On-Sale; Due-on-Encumbrance ................................................ 57
Section 4.12. Collection Procedures; Foreclosure Procedures .................................. 58
Section 4.13. Sale of Foreclosed Properties .................................................. 59
Section 4.14. Management of Real Estate Owned ................................................ 60
Section 4.15. Inspections .................................................................... 61
Section 4.16. Maintenance of Insurance ....................................................... 61
Section 4.17. Release of Files ............................................................... 62
Section 4.18. Filing of Continuation Statements .............................................. 63
Section 4.19. Fidelity Bond .................................................................. 64
Section 4.20. Errors and Omissions Insurance ................................................. 64
ARTICLE V.
ESTABLISHMENT OF TRUST ACCOUNTS
Section 5.01 Collection Account and Note Distribution Account ............................... 65
Section 5.02 Allocation of Losses ........................................................... 69
Section 5.03 Certificate Distribution Account ............................................... 69
Section 5.04 Trust Accounts; Trust Account Property ......................................... 70
Section 5.05 Servicer to Pay Owner Trustee Fee .............................................. 73
ARTICLE VI.
STATEMENTS AND REPORTS; SPECIFICATION OF TAX MATTERS
Section 6.01 Master Servicing Certificate ................................................... 74
Section 6.02 Statement to Securityholders ................................................... 74
ARTICLE VII.
THE MASTER SERVICER
Section 7.01 Indemnification; Third Party Claims ............................................ 75
Section 7.02 Merger or Consolidation of the Master Servicer ................................. 75
Section 7.03 Limitation on Liability of the Master Servicer and Others ...................... 76
Section 7.04 Master Servicer Not to Resign; Assignment ...................................... 76
Section 7.05 Relationship of Master Servicer to Issuer and the Indenture
Trustee ........................................................................ 77
Section 7.06 Master Servicer May Own Notes .................................................. 77
ARTICLE VIII.
DEFAULT
Section 8.01 Events of Default .............................................................. 78
Section 8.02 Consequences of an Event of Default ............................................ 79
Section 8.03 Appointment of Successor ....................................................... 80
Section 8.04 Notification to Certificateholders ............................................. 80
Section 8.05 Waiver of Past Defaults ........................................................ 81
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
ARTICLE IX.
TERMINATION
<S> <C> <C>
Section 9.01 Termination .................................................................... 82
Section 9.02 Notice of Termination .......................................................... 82
ARTICLE X.
MISCELLANEOUS PROVISIONS
Section 10.01 Acts of Securityholders ........................................................ 83
Section 10.02 Amendment ...................................................................... 83
Section 10.03 Recordation of Agreement ....................................................... 84
Section 10.04 Duration of Agreement .......................................................... 84
Section 10.05 Governing Law .................................................................. 84
Section 10.06 Notices ........................................................................ 84
Section 10.07 Severability of Provisions ..................................................... 85
Section 10.08 No Partnership ................................................................. 85
Section 10.09 Counterparts ................................................................... 85
Section 10.10 Successors and Assigns ......................................................... 85
Section 10.11 Headings ....................................................................... 85
Section 10.12 Actions of Securityholders ..................................................... 86
Section 10.13 Reports to Rating Agencies ..................................................... 86
Section 10.14 Inconsistencies Among Transaction Documents .................................... 87
</TABLE>
EXHIBITS
EXHIBIT A Home Loan Schedule
EXHIBIT B Form of Master Servicer Certificate
EXHIBIT C Form of Monthly Statement to Securityholders
EXHIBIT D Underwriting Guidelines
EXHIBIT E Form of Servicing Agreement
iii
<PAGE> 5
This Sale and Servicing Agreement is entered into effective as of
August 16, 1997, among MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-4, a Delaware
business trust (the "Issuer" or the "Trust"), FINANCIAL ASSET SECURITIES CORP.,
a Delaware corporation, as Depositor (the "Depositor"), MEGO MORTGAGE
CORPORATION, a Delaware corporation ("Mego"), as Seller (in such capacity, the
"Seller") and Servicer (in such capacity, the "Servicer"), NORWEST BANK
MINNESOTA, N.A., as Master Servicer (the "Master Servicer"), and U.S. BANK
NATIONAL ASSOCIATION, D/B/A FIRST BANK NATIONAL ASSOCIATION, a national banking
association, as Indenture Trustee on behalf of the Noteholders (in such
capacity, the "Indenture Trustee") and as Co-Owner Trustee on behalf of the
Securityholders and Residual Instrument holders (in such capacity, the "Co-Owner
Trustee").
PRELIMINARY STATEMENT
WHEREAS, the Issuer desires to purchase a pool of Home Loans which were
originated or purchased by the Seller and sold to the Depositor in the ordinary
course of business of the Seller;
WHEREAS, the Depositor is willing to purchase from the Seller and sell
such Home Loans to the Issuer; and
WHEREAS, the Master Servicer is willing to service such Home Loans in
accordance with the terms of this Agreement;
NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto hereby agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.01 Definitions. Whenever used in this Agreement, the
following words and phrases, unless the context otherwise requires, shall have
the meanings specified in this Article.
Accrual Period: With respect to the first Distribution Date and the
Class A-1 Notes, the period commencing on the Closing Date and ending on the day
immediately preceding such Distribution Date (27 days). With respect to any
subsequent Distribution Date and the Class A-1 Notes, the period commencing on
the immediately preceding Distribution Date and ending on the day immediately
preceding such subsequent Distribution Date. With respect to the first
Distribution Date and the Classes of Securities other than the Class A-1 Notes,
the period commencing on the Cut-Off Date and ending on the last day of the
month of the Cut-Off Date (15 days). With respect to any Classes of Securities
other than the Class A-1 Notes for any subsequent Distribution Date, the
calendar month preceding the month of such Distribution Date based on a 360-day
year consisting of twelve 30-day months.
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<PAGE> 6
Aggregate Note Principal Balance: With respect to any Distribution
Date, the aggregate of the Class Principal Balances of the Notes.
Agreement: This Sale and Servicing Agreement and all amendments hereof
and supplements hereto.
Allocable Loss Amount: With respect to each Distribution Date, the
excess, if any, of (a) the aggregate of the Class Principal Balances of all
Classes of Securities (after giving effect to all distributions on such
Distribution Date) over (b) the Pool Principal Balance as of the end of the
preceding Due Period.
Allocable Loss Amount Priority: With respect to any Distribution Date,
sequentially, to the Certificates, the Class M-2 Notes and the Class M-1 Notes,
in that order, until the respective Class Principal Balances thereof are reduced
to zero.
Assignment of Mortgage: With respect to each Home Loan secured by a
Mortgage, an assignment, notice of transfer or equivalent instrument sufficient
under the laws of the jurisdiction wherein the related Property is located to
reflect of record the sale of the related Home Loan to the Trust as follows:
"U.S. Bank National Association, d/b/a First Bank National Association, as
Indenture Trustee and Co-Owner Trustee for the Mego Mortgage Home Loan Owner
Trust 1997-4".
Business Day: Any day other than (i) a Saturday or Sunday, or (ii) a
day on which banking institutions in New York City or in the city in which the
Corporate Trust Office of the Indenture Trustee is located or the city in which
the Master Servicer's or Servicer's servicing operations are located and are
authorized or obligated by law or executive order to be closed.
Certificate Distribution Account: The account established and
maintained pursuant to Section 5.03.
Certificate: Any Certificate issued pursuant to the Trust Agreement.
Certificateholder: A holder of any Certificate.
Certificateholders' Interest Carry-Forward Amount: With respect to any
Distribution Date and the Certificates, the sum of (i) the excess of (A) the
Certificateholders' Monthly Interest Distributable Amount for the preceding
Distribution Date and any outstanding Certificateholders' Interest Carry-Forward
Amount on such preceding Distribution Date, over (B) the amount of interest that
is actually distributed to the Certificateholders on such preceding Distribution
Date plus (ii) interest on such excess, to the extent permitted by law, at the
applicable Certificate Pass-Through Rate from such proceeding Distribution Date
through the current Distribution Date.
Certificateholders' Interest Distributable Amount: With respect to any
Distribution Date and the Certificates, the sum of the Certificateholders'
Monthly Interest Distributable Amount and
2
<PAGE> 7
the Certificateholders' Interest Carry-Forward Amount for such Distribution
Date; provided however, that on the Distribution Date, if any, on which the
Class Principal Balance of the Certificates is reduced to zero through
application of an Allocable Loss Amount, the Certificateholders' Interest
Distributable Amount shall be reduced by an amount equal to the portion, if any,
of the Allocable Loss Amount that would be allocable to the Classes of Mezzanine
Notes without giving effect to this proviso.
Certificateholders' Monthly Interest Distributable Amount: With respect
to any Distribution Date and the Certificates, interest accrued during the
related Accrual Period at the Certificate Pass-Through Rate on the Class
Principal Balance of the Certificates immediately preceding such Distribution
Date (or, in the case of the first Distribution Date, on the Closing Date).
Certificate Optimal Principal Balance: With respect to any Distribution
Date prior to the Stepdown Date, zero; and with respect to any other
Distribution Date, the Pool Principal Balance as of the preceding Determination
Date minus the sum of (i) the aggregate Class Principal Balance of the Notes
(after taking into account any distributions made on such Distribution Date in
reduction of the Class Principal Balances of the Notes prior to such
determination) and (ii) the Overcollateralization Target Amount for such
Distribution Date; provided however, that the Certificate Optimal Principal
Balance amount shall never be less than zero or greater than the Original Class
Principal Balance of the Certificates.
Certificate Pass-Through Rate: The per annum rate of 7.95%; provided,
however, with respect to any Distribution Date after the first Distribution Date
on which either the Mego or the Master Servicer may exercise its option to
purchase the Home Loans pursuant to Section 9.01(b), the Certificate
Pass-Through Rate shall be 8.45%.
Certificate Register: The register established pursuant to Section 3.4
of the Trust Agreement.
Class: With respect to the Notes, all Notes bearing the same class
designation, and with respect to the Certificates, the Certificates shall be
deemed to be one class.
Class A-1 Note: Any Class A-1 Note in the form attached to the
Indenture as Exhibit A-1.
Class A-2 Note: Any Class A-2 Note in the form attached to the
Indenture as Exhibit A-2.
Class A-3 Note: Any Class A-3 Note in the form attached to the
Indenture as Exhibit A-3.
Class A-4 Note: Any Class A-4 Note in the form attached to the
Indenture as Exhibit A-4.
3
<PAGE> 8
Class M-1 Optimal Principal Balance: With respect to any Distribution
Date prior to the Stepdown Date, zero; and with respect to any other
Distribution Date, the Pool Principal Balance as of the preceding Determination
Date minus the sum of (i) the aggregate Class Principal Balance of the Senior
Notes (after taking into account distributions made on such Distribution Date in
reduction of the Class Principal Balances of the Classes of Senior Notes prior
to such determination) and (ii) the greater of (x) the sum of (1) 27.00% of the
Pool Principal Balance as of the preceding Determination Date and (2) the
Overcollateralization Target Amount for such Distribution Date (calculated
without giving effect to the proviso in the definition thereof) or (y) 0.50% of
the Original Pool Principal Balance; provided however, that the Class M-1
Optimal Principal Balance shall never be less than zero or greater than the
Original Class Principal Balance of the Class M-1 Notes.
Class M-2 Optimal Principal Balance: With respect to any Distribution
Date prior to the Stepdown Date, zero; with respect to any other Distribution
Date, the Pool Principal Balance as of the preceding Determination Date minus
the sum of (i) the aggregate Class Principal Balance of the Senior Notes (after
taking into account any distributions made on such Distribution Date in
reduction of the Class Principal Balances of the Classes of Senior Notes prior
to such determination) plus the Class Principal Balance of the Class M-1 Notes
(after taking into account any distributions made on such Distribution Date in
reduction of the Class Principal Balance of the Class M-1 Notes prior to such
determination) and (ii) the greater of (x) the sum of (1) 12.50% of the Pool
Principal Balance as of the preceding Determination Date and (2) the
Overcollateralization Target Amount for such Distribution Date (without giving
effect to the proviso in the definition thereof) or (y) 0.50% of the Original
Pool Principal Balance; provided, however, that the Class M-2 Optimal Principal
Balance shall never be less than zero or greater than the Original Class
Principal Balance of the Class M-2 Notes.
Class M-1 Note: Any Class M-1 Note in the form attached to the
Indenture as Exhibit A.
Class M-2 Note: Any Class M-2 Note in the form attached to the
Indenture as Exhibit A.
Class Principal Balance: With respect to each Class and as of any date
of determination, the Original Class Principal Balance of such Class reduced by
the sum of (i) all amounts previously distributed in respect of principal of
such Class on all previous Distribution Dates and (ii) with respect to the Class
M-1, Class M-2 Notes and the Certificates, all Allocable Loss Amounts applied in
reduction of principal of such Class on all previous Distribution Dates.
Closing Date: August 29, 1997.
Code: The Internal Revenue Code of 1986, as amended from time to time,
and Treasury Regulations promulgated thereunder.
4
<PAGE> 9
Collected Amount: With respect to any Determination Date or related
Distribution Date, the sum of the amount on deposit in the Note Distribution
Account on such Determination Date plus the amounts required to be deposited
into the Note Distribution Account pursuant to Section 5.01(b).
Collection Account: The account denominated as a Collection Account and
maintained or caused to be maintained by the Indenture Trustee pursuant to
Section 5.01.
Corporate Trust Office: The office of the Indenture Trustee at which
any particular time its corporate business shall be principally administered,
located on the Closing Date at U.S. Bank National Association, d/b/a First Bank
National Association, 180 East 5th Street, St. Paul, Minnesota 55101, Attention:
Structured Finance.
Co-Owner Trustee: U.S. Bank National Association, d/b/a First Bank
National Association, a national banking association, in its capacity as the
Co-Owner Trustee under the Trust Agreement acting on behalf of the
Securityholders, or any successor co-owner trustee under the Trust Agreement.
Cumulative Net Losses: With respect to any Distribution Date, the
aggregate amount of Net Loan Losses calculated for such Distribution Date and
each prior Distribution Date, reduced by any recoveries in respect of principal
on a Defaulted Home Loan received after the Due Period in which such Home Loan
became a Defaulted Home Loan.
Cut-Off Date: With respect to any Home Loan, the opening of business on
August 16, 1997.
Debt Instrument: The note or other evidence of indebtedness evidencing
the indebtedness of an Obligor under a Home Loan.
Defaulted Home Loan: A Home Loan with respect to which: (i) the
Property has been acquired through foreclosure or similar proceedings and sold,
(ii) any portion of a Monthly Payment is more than 180 calendar days past due
(without giving effect to any grace period), or (iii) the Servicer has
determined in accordance with customary servicing practices, that the Home Loan
is uncollectible.
Defective Home Loan: A Home Loan required to be repurchased pursuant to
Section 3.05 hereof.
Delivery: When used with respect to Trust Account Property means:
(a) with respect to bankers' acceptances, commercial paper,
negotiable certificates of deposit and other obligations that
constitute "instruments" within the meaning of Section 9-105(1)(i) of
the UCC and are susceptible of physical delivery, transfer thereof to
the Indenture Trustee or its nominee or custodian by physical delivery
5
<PAGE> 10
to the Indenture Trustee or its nominee or custodian endorsed to, or
registered in the name of, the Indenture Trustee or its nominee or
custodian or endorsed in blank, and, with respect to a certificated
security (as defined in Section 8-102 of the UCC) transfer thereof (i)
by delivery of such certificated security endorsed to, or registered in
the name of, the Indenture Trustee or its nominee or custodian or
endorsed in blank to a financial intermediary (as defined in Section
8-313 of the UCC) and the making by such financial intermediary of
entries on its books and records identifying such certificated
securities as belonging to the Indenture Trustee or its nominee or
custodian and the sending by such financial intermediary of a
confirmation of the purchase of such certificated security by the
Indenture Trustee or its nominee or custodian, or (ii) by delivery
thereof to a "clearing corporation" (as defined in Section 8-102(3) of
the UCC) and the making by such clearing corporation of appropriate
entries on its books reducing the appropriate securities account of the
transferor and increasing the appropriate securities account of a
financial intermediary by the amount of such certificated security, the
identification by the clearing corporation of the certificated
securities for the sole and exclusive account of the financial
intermediary, the maintenance of such certificated securities by such
clearing corporation or a "custodian bank" (as defined in Section
8-102(4) of the UCC) or the nominee of either subject to the clearing
corporation's exclusive control, the sending of a confirmation by the
financial intermediary of the purchase by the Indenture Trustee or its
nominee or custodian of such securities and the making by such
financial intermediary of entries on its books and records identifying
such certificated securities as belonging to the Indenture Trustee or
its nominee or custodian (all of the foregoing, "Physical Property"),
and, in any event, any such Physical Property in registered form shall
be in the name of the Indenture Trustee or its nominee or custodian;
and such additional or alternative procedures as may hereafter become
appropriate to effect the complete transfer of ownership of any such
Trust Account Property (as defined herein) to the Indenture Trustee or
its nominee or custodian, consistent with changes in applicable law or
regulations or the interpretation thereof;
(b) with respect to any securities issued by the U.S.
Treasury, FNMA or FHLMC that is a book-entry security held through the
Federal Reserve System pursuant to federal book-entry regulations, the
following procedures, all in accordance with applicable law, including
applicable federal regulations and Articles 8 and 9 of the UCC:
book-entry registration of such Trust Account Property to an
appropriate book-entry account maintained with a Federal Reserve Bank
by a financial intermediary that is also a "depository" pursuant to
applicable federal regulations and issuance by such financial
intermediary of a deposit advice or other written confirmation of such
book-entry registration to the Indenture Trustee or its nominee or
custodian of the purchase by the Indenture Trustee or its nominee or
custodian of such book-entry securities; the making by such financial
intermediary of entries in its books and records identifying such
book-entry security held through the Federal Reserve System pursuant to
federal book-entry regulations as belonging to the Indenture Trustee or
its nominee or custodian and indicating that such custodian holds such
Trust Account Property solely as agent for the Indenture Trustee or its
nominee or custodian; and such additional or alternative
6
<PAGE> 11
procedures as may hereafter become appropriate to effect complete
transfer of ownership of any such Trust Account Property to the
Indenture Trustee or its nominee or custodian, consistent with changes
in applicable law or regulations or the interpretation thereof; and
(c) with respect to any item of Trust Account Property that is
an uncertificated security under Article 8 of the UCC and that is not
governed by clause (b) above, registration on the books and records of
the issuer thereof in the name of the financial intermediary, the
sending of a confirmation by the financial intermediary of the purchase
by the Indenture Trustee or its nominee or custodian of such
uncertificated security, the making by such financial intermediary of
entries on its books and records identifying such uncertificated
certificates as belonging to the Indenture Trustee or its nominee or
custodian.
Depositor: Financial Asset Securities Corp., a Delaware corporation,
and any successor thereto.
Determination Date: With respect to any Distribution Date, the fifth
Business Day preceding such Distribution Date.
Distribution Date: The 25th day of any month or if such 25th day is not
a Business Day, the first Business Day immediately following such day,
commencing in September 1997.
DTC: The Depository Trust Company.
Due Date: With respect to any Monthly Payment, the date on which such
Monthly Payment is required to be paid pursuant to the related Debt Instrument.
Due Period: With respect to any Determination Date or Distribution
Date, the calendar month immediately preceding such Determination Date or
Distribution Date, as the case may be; provided, however, that with respect to
the September 1997 Distribution Date, Due Period shall mean the period from
August 16, 1997 to August 31, 1997.
DCR: Duff & Phelps Credit Rating Co.
Early Termination Notice Date: Any date on which the Pool Principal
Balance is less than 10% of the Initial Principal Balance.
Eligible Account: At any time, an account which is any of the
following: (i) A segregated trust account that is maintained with the corporate
trust department of a depository institution (A) the long-term debt obligations
of which are at such time rated by each Rating Agency in one of their two
highest long-term rating categories, or (B) short-term debt obligations of which
are then rated by each Rating Agency in their highest short-term rating category
or (C) a segregated trust account department of a federal or state chartered
depository institution or trust company having capital and surplus of not less
than $100,000,000 acting in its fiduciary capacity;
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<PAGE> 12
(ii) a segregated direct deposit account maintained with a depository
institution or trust company organized under the laws of the United States of
America, or any of the States thereof, or the District of Columbia, having a
certificate of deposit, short term deposit or commercial paper rating of at
least A-1+ by Standard & Poor's and P-1 by Moody's or (iii) an account that will
not cause any Rating Agency to downgrade or withdraw its then current rating(s)
assigned to the Notes as evidenced in writing by such Rating Agency.
Eligible Servicer: (a) Either a Person that (i) is servicing a
portfolio of mortgage loans, (ii) is legally qualified to service, and is
capable of servicing, the Home Loans and has all licenses required to service
mortgage loans, (iii) has demonstrated the ability professionally and
competently to service a portfolio of mortgage loans similar to the Home Loans
with reasonable skill and care, (iv) has a net worth calculated in accordance
with generally accepted accounting principles of at least $500,000 and (v) has
been approved in writing by the Rating Agencies or (b) Mego Mortgage
Corporation, Preferred Equities Corporation or Norwest Bank Minnesota, N.A.
Event of Default: As described in Section 8.01 hereof.
Excess Spread. With respect to any Distribution Date, the positive
excess, if any, of (x) the Collected Amount with respect to such Distribution
Date over (y) the amount distributed pursuant to clauses (i) and (ii) of Section
5.01(c) on such Distribution Date.
FDIC: The Federal Deposit Insurance Corporation and any successor
thereto.
FHLMC: The Federal Home Loan Mortgage Corporation and any successor
thereto.
FICO Score: The credit evaluation scoring methodology developed by
Fair, Isaac and Company.
Final Maturity Date: With respect to the following Classes of
Securities:
<TABLE>
<S> <C>
Class A-1 Notes: September 25, 2023
Class A-2 Notes: September 25, 2023
Class A-3 Notes: September 25, 2023
Class A-4 Notes: September 25, 2023
Class M-1 Notes: September 25, 2023
Class M-2 Notes: September 25, 2023
Certificates: September 25, 2023
</TABLE>
Fitch: Fitch Investors Service, L.P.
FNMA: The Federal National Mortgage Association and any successor
thereto.
Foreclosure Advances: As defined in Section 4.08(b).
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<PAGE> 13
Foreclosed Loan. As of any date of determination, any Mortgage Loan
that has been discharged as a result of (i) the completion of foreclosure or
comparable proceedings; (ii) the Owner Trustee's acceptance of the deed or other
evidence of title to the related Property in lieu of foreclosure or other
comparable proceeding; or (iii) the acquisition by the Owner Trustee of title to
the related Property by operation of law.
Foreclosed Property. With respect to any Mortgage Loan, any Property
acquired by the Trust as a result of:
(i) the completion of foreclosure or comparable proceedings
with respect to the related Mortgage Loan;
(ii) the Co-Owner Trustee's acceptance of the deed or other
evidence of title to the related Property in lieu of foreclosure or
other proceeding with respect to the related Loan; or
(iii) the acquisition by the Co-Owner Trustee of title thereto
by operation of law.
Grant: As defined in the Indenture.
HUD: The United States Department of Housing and Urban Development and
any successor thereto.
Home Loan: An individual home loan that is conveyed to the Issuer
pursuant to this Agreement on the Closing Date, together with the rights and
obligations of a holder thereof and payments of principal in respect of such
Home Loan received on or after the Cut-Off Date and payments of interest in
respect of such Home Loan due on or after the Cut-Off Date, the Home Loans
subject to this Agreement being identified on the Home Loan Schedule as amended
from time to time and annexed hereto as Exhibit A.
Home Loan File: The Indenture Trustee's Home Loan File and the
Servicer's Home Loan File.
Home Loan Interest Rate: The fixed annual rate of interest borne by a
Debt Instrument, as shown on the related Home Loan Schedule.
Home Loan Pool: The pool of Home Loans.
Home Loan Purchase Agreement: The home loan purchase agreement between
the Seller, as seller, and the Depositor, as purchaser, dated as of August 16,
1997.
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<PAGE> 14
Home Loan Schedule: The schedule of Home Loans specifying with respect
to each Home Loan, the information set forth on Exhibit A attached hereto, as
amended or supplemented from time to time.
Indenture: The Indenture, dated as of August 16, 1997, between the
Issuer and the Indenture Trustee.
Indenture Trustee: U.S. Bank National Association, d/b/a First Bank
National Association, a national banking association, as Indenture Trustee under
the Indenture and this Agreement acting on behalf of the Noteholders, or any
successor indenture trustee under the Indenture and this Agreement.
Indenture Trustee Fee: With respect to any Distribution Date, the
greater of (A) one-twelfth of 0.0275% times the Pool Principal Balance of the
Home Loans as of the opening of business on the first day of the calendar month
preceding the calendar month of such Distribution Date (or, with respect to the
first Distribution Date, the Original Pool Principal Balance); and (B) $500.00.
Indenture Trustee's Home Loan File: As defined in Section 2.05.
Independent: When used with respect to any specified Person, such
Person (i) is in fact independent of Mego, the Master Servicer, the Depositor or
any of their respective affiliates, (ii) does not have any direct financial
interest in or any material indirect financial interest in any of Mego, the
Master Servicer, the Depositor or any of their respective affiliates and (iii)
is not connected with any of Mego, the Master Servicer, the Depositor or any of
their respective affiliates, as an officer, employee, promoter, underwriter,
trustee, partner, director or Person performing similar functions; provided,
however, that a Person shall not fail to be Independent of Mego, the Master
Servicer, the Depositor or any of their respective affiliates merely because
such Person is the beneficial owner of 1% or less of any class of securities
issued by Mego, the Master Servicer, the Depositor or any of their respective
affiliates, as the case may be.
Independent Accountants: A firm of nationally recognized certified
public accountants which is Independent.
Independent Contractor: As defined in Section 4.14(b).
Insurance Policies: With respect to any Property, any related insurance
policy.
Insurance Proceeds: With respect to any Property, all amounts collected
in respect of Insurance Policies and not required to be applied to the
restoration of the related Property or paid to the related Obligor.
Interest Advance: As defined in Section 4.08(a).
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<PAGE> 15
Interest Determination Date: With respect to any Accrual Period, the
second London Business Day preceding the commencement of such Accrual Period.
Issuer: Mego Mortgage Home Loan Owner Trust 1997-4.
London Business Day: Any day on which banks in the City of London or
New York City are open and conducting transactions in United States dollars.
Loss Reimbursement Entitlement: With respect to any Distribution Date
and the Class M-1 Notes, Class M-2 Notes or the Certificates, the amount of
Allocable Loss Amounts applied to the reduction of the Class Principal Balance
of such Class pursuant to Section 5.02 and not reimbursed pursuant to Section
5.01 or 5.03 hereof as of such Distribution Date, plus (in the case of the Class
M-1 Notes and Class M-2 Notes) interest accrued on the unreimbursed portion
thereof at the applicable Note Interest Rate through the end of the Due Period
immediately preceding such Distribution Date; however, no interest shall accrue
on any amount of any such accrued and unpaid interest.
Majority Securityholders: (i) Until such time as the sum of the
Aggregate Note Principal Balance has been reduced to zero, the holder or holders
of in excess of 50% of the Class Principal Balance of all Classes of Notes (as a
result of which the holders of the Certificates and the Residual Instruments
shall be excluded from any rights or actions of the Majority Securityholders
during such period); (ii) thereafter and until such time as the Class Principal
Balance of the Certificate has been reduced to zero, the holder or holders of in
excess of 50% of the Class Principal Balance of the Certificates (as a result of
which the holders of the Residual Instruments shall be excluded from any rights
or actions of the Majority Securityholders during such period); and (iii)
thereafter, the holder or holders of in excess of 50% of the Percentage Interest
of the Residual Instruments.
Master Servicer: Norwest Bank Minnesota, N.A., a national banking
association, its successors in interest or any successor master servicer
appointed as herein provided.
Master Servicer Certificate: As defined in Section 6.01.
Master Servicer Fee: With respect to any Distribution Date, 1/12 times
0.08% times the Pool Principal Balance as of the opening of business on the
first day of the month preceding the month of such Distribution Date (or, with
respect to the first Distribution Date, the Original Pool Principal Balance).
Master Servicing Officer: Any officer of the Master Servicer
responsible for the administration and servicing of the Home Loans whose name
and specimen signature appears on a list of servicing officers furnished to the
Indenture Trustee by the Master Servicer, as such list may from time to time be
amended.
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<PAGE> 16
Maturity Date: With respect to any Home Loan and as of any date of
determination, the date on which the last payment of principal is due and
payable under the related Debt Instrument.
Mezzanine Notes: The Class M-1 Notes and the Class M-2 Notes.
Monthly Cut-Off Date: The last day of any calendar month, and with
respect to any Distribution Date or related Determination Date, the last day of
the calendar month immediately preceding such Distribution Date or related
Determination Date.
Monthly Payment: With respect to any Home Loan and any Due Period, the
payment of principal and interest due in such Due Period from the Obligor
pursuant to the related Debt Instrument (as amended or modified, if applicable,
pursuant to Section 4.10). The Monthly Payment related to a Determination Date
or a Distribution Date shall be the Monthly Payment due for the preceding Due
Period.
Moody's: Moody's Investors Service, Inc., or any successor thereto.
Mortgage: With respect to any Mortgage Loan, the mortgage, deed of
trust or other instrument creating a mortgage lien (and in a title theory state
the document conveying title to the Property as security for the related Loan)
or other security interest on the related Property.
Mortgage Loan: As of any date of determination, each of the Home Loans,
secured by an interest in a Property, transferred and assigned to the Indenture
Trustee pursuant to Section 2.01(a).
Mortgagee or Obligee: With respect to any Home Loan as of any date of
determination, the holder of the related Debt Instrument and any related
Mortgage as of such date.
Mortgagor or Obligor: With respect to any Home Loan, the obligor(s) on
the related Debt Instrument.
Net Delinquency Calculation Amount: With respect to any Distribution
Date, beginning with the sixth Distribution Date, the excess, if any, of (x) the
product of (a) the product of 2.5 times the 61+ Delinquency Percentage (Rolling
Six-Month) and (b) the Pool Principal Balance as of the preceding Due Period
over (y) the aggregate of the amounts of Excess Spread for the three preceding
Distribution Dates.
Net Loan Losses: With respect to any Distribution Date and the Home
Loans that become Defaulted Home Loans during the immediately preceding Due
Period, the aggregate Principal Balance of such Defaulted Home Loans as of the
last day of such Due Period, after giving effect to any recoveries attributable
to principal from whatever source received during such Due Period with respect
to such Defaulted Home Loans, including without limitation any Insurance
Proceeds.
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<PAGE> 17
Net Loan Rate: With respect to each Home Loan, the related Home Loan
Interest Rate, less the rate at which the Servicer Fee is calculated.
Nonrecoverable Advances: With respect to any Home Loan, (i) any
Interest Advance previously made and not reimbursed pursuant to Section
5.01(c)(i)(b), or (ii) an Interest Advance proposed to be made in respect of a
Home Loan which, in either case, in the good faith business judgment of the
Master Servicer, as evidenced by an Officer's Certificate delivered to Mego and
the Indenture Trustee no later than the Business Day following such
determination, would not be recoverable ultimately from the Payments received in
subsequent Due Periods in respect of that Home Loan.
Note(s): One or more of the Senior Notes, the Class M-1 Notes and the
Class M-2 Notes.
Note Distribution Account: The account established and maintained
pursuant to Section 5.01(a)(2).
Noteholder: A holder of a Note.
Noteholders' Interest Carry-Forward Amount: With respect to any
Distribution Date and each Class of Notes, the sum of (i) the excess of (A) the
applicable Noteholders' Monthly Interest Distributable Amount for the preceding
Distribution Date and any outstanding Noteholders' Interest Carry-Forward Amount
for such Class on such preceding Distribution Date, over (B) the amount in
respect of interest that is actually paid on such Class of Notes on such
preceding Distribution Date plus (ii) interest on such excess, to the extent
permitted by law, at the applicable Note Interest Rate from such preceding
Distribution Date through the current Distribution Date.
Noteholders' Interest Distributable Amount: With respect to each
Distribution Date and each Class of Notes, the sum of the applicable
Noteholders' Monthly Interest Distributable Amount and the applicable
Noteholders' Interest Carry-Forward Amount for such Class of Notes, if any, for
such Distribution Date.
Noteholders' Monthly Interest Distributable Amount: With respect to
each Distribution Date and Class of Notes, interest accrued during the related
Accrual Period at the respective Note Interest Rate for such Class of Notes on
the Class Principal Balance of such Class immediately preceding such
Distribution Date (or, in the case of the first Distribution Date, on the
Closing Date).
Note Interest Rate: With respect to each Class of Notes, the per annum
rate of interest payable to the holders of such Class of Notes. The Note
Interest Rate with respect to the Class A-1 Notes is the lesser of (a) the sum
of (i) One-Month LIBOR and (ii) 0.125% or (b) 11.00% (provided that, for the
initial Distribution Date, the Class A-1 Note Interest Rate will be 5.75%); the
Note Interest Rate with respect to the Class A-2 Notes is equal to 6.77% per
annum; the Note Interest Rate with respect to the Class A-3 Notes is equal to
7.03% per annum; the Note Interest
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<PAGE> 18
Rate with respect to the Class A-4 Notes is equal to 7.39% per annum; the Note
Interest Rate with respect to the Class M-1 Notes is equal to 7.50% per annum;
and the Note Interest Rate with respect to the Class M-2 Notes is equal to 7.65%
per annum; provided, however, with respect to the Class A-4, Class M-1 and Class
M-2 Notes with respect to any Distribution Date after the first Distribution
Date on which either Mego or the Master Servicer may exercise its option to
purchase the Home Loans pursuant to Section 9.01(b), the Note Interest Rate
shall be 7.89%, 8.00% and 8.15% per annum, respectively.
Note Register: The register established pursuant to Section 2.3 of the
Indenture.
Obligee: See Mortgagee.
Obligor: See Mortgagor.
Officer's Certificate: A certificate signed by (i) any Master Servicing
Officer or (ii) the Chairman of the Board, the Vice Chairman of the Board, the
President, a Vice President, an Assistant Vice President, the Treasurer, the
Secretary or one of the Assistant Treasurers or Assistant Secretaries of the
Depositor or Mego, as the case may be, as required by this Agreement.
One-Month LIBOR: With respect to any Accrual Period and the Class A-1
Notes, the rate determined by the Indenture Trustee on the related Interest
Determination Date on the basis of the offered rates of the Reference Banks for
one-month United States dollar deposits, as such rates appear on the Telerate
Screen 3750, as of 11:00 a.m. (London time) on such Interest Determination Date.
On each Interest Determination Date, One-Month LIBOR for the related Accrual
Period will be established by the Indenture Trustee as follows:
(i) If on such Interest Determination Date two or more
Reference Banks provide such offered quotations,
One-Month LIBOR for the related Accrual Period shall
be the arithmetic mean of such offered quotations
(rounded upwards if necessary to the nearest whole
multiple of 0.0625%.
(ii) If on such Interest Determination Date fewer than two
Reference Banks provide such offered quotations,
One-Month LIBOR for the related Accrual Period shall
be the higher of (i) One-Month LIBOR as determined on
the previous Interest Determination Date and (ii) the
Reserve Interest Rate.
Opinion of Counsel. A written opinion of counsel (who is acceptable to
the Rating Agencies), who may be employed by Mego, the Master Servicer, the
Depositor or any of their respective affiliates.
Original Class Principal Balance: In the case of the Class A-1 Notes,
$23,600,000; in the case of the Class A-2 Notes, $18,000,000; in the case of the
Class A-3 Notes, $4,150,000; in the
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<PAGE> 19
case of the Class A-4 Notes, $7,957,000; in the case of the Class M-1 Notes,
$9,715,000; in the case of the Class M-2 Notes, $5,315,000 and in the case of
the Certificates, $4,583,262.
Original Pool Principal Balance: $73,320,262.07 which is the Pool
Principal Balance, as of the Cut-Off Date.
Other Fees: With respect to any Distribution Date, (i) amounts in
respect of fees and expenses due to any provider of services to the Trust,
except the Indenture Trustee, the Master Servicer, the Servicer and also except
any Person, the fees of which are required by this Agreement to be paid by the
Master Servicer, the Servicer, or the Indenture Trustee; (ii) any taxes assessed
against the Trust; and (iii) the reasonable transition expenses of a successor
Master Servicer incurred in acting as successor Master Servicer.
Overcollateralization Amount: With respect to any Distribution Date,
the amount equal to the excess of (A) the Pool Principal Balance as of the last
day of the related Due Period over (B) the aggregate of the Class Principal
Balances of the Securities (after giving effect to all distributions on the
Classes of Securities on such Distribution Date).
Overcollateralization Deficiency Amount: With respect to any
Distribution Date, the excess, if any, of the Overcollateralization Target
Amount over the Overcollateralization Amount (such Overcollateralization Amount
to be calculated after giving effect to all prior distributions on the Classes
of Securities on such Distribution Date pursuant to Section 5.01(c)(i) and (ii)
hereof).
Overcollateralization Target Amount: (A) With respect to any
Distribution Date occurring prior to the Stepdown Date, an amount equal to the
greater of (x) 7.50% of the Original Pool Principal Balance or (y) the Net
Delinquency Calculation Amount; (B) with respect to any other Distribution Date,
an amount equal to the greater of (x) 15% of the Pool Principal Balance as of
the end of the related Due Period or (y) the Net Delinquency Calculation Amount;
provided, however, that the Overcollateralization Target Amount shall in no
event be less than 0.50% of the Original Pool Principal Balance.
Ownership Interest: As to any Security, any ownership or security
interest in such Security, including any interest in such Security as the holder
thereof and any other interest therein, whether direct or indirect, legal or
beneficial, as owner or as pledgee.
Owner Trustee: Wilmington Trust Company, as owner trustee under the
Trust Agreement, and any successor owner trustee under the Trust Agreement.
Owner Trustee Fee: $4,000.
Owner Trustee Fee Reserve: With respect to any Distribution Date,
$333.33.
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<PAGE> 20
Payment: With respect to any Home Loan or the related Foreclosed
Property and any Distribution Date or related Determination Date, all amounts
received or collected on account of principal and interest by or on behalf of
the Master Servicer during the preceding Due Period (or with respect to the
interest component of any Monthly Payment due during such Due Period, received
or collected by or on behalf of the Master Servicer during the period commencing
on the first day of the preceding Due Period and ending prior to such
Determination Date) in respect of such Home Loan or Foreclosed Property from
whatever source, including without limitation, amounts received or collected
from, or representing:
(i) the related Obligor;
(ii) the application to amounts due on such Home Loan (or, in
the case of any Foreclosed Property, to amounts previously due on the
related Foreclosed Loan) of any related Insurance Proceeds (to the
extent provided in Section 4.16(b)), any related condemnation awards or
settlements or any payments made by any related guarantor or
third-party credit-support provider;
(iii) the operation or sale of the related Foreclosed
Property;
(iv) the Purchase Price with respect to such Home Loan or
Substitution Adjustment Amounts with respect thereto; or
(v) the Termination Price pursuant to Section 9.01(b);
provided, however, that any amount the Servicer shall be entitled to retain as
additional servicer compensation pursuant to Section 6.05(a) of the Servicing
Agreement shall be excluded from the calculation of Payment.
Percentage Interest: As defined in the Trust Agreement.
Permitted Investments: Each of the following:
(a) Direct obligations of the United States of America
(including obligations issued or held in book-entry form on the books of the
Department of the Treasury, and CATS and TIGRS) or obligations the principal of
and interest on which are unconditionally guaranteed by the United States of
America.
(b) Bonds, debentures, notes or other evidence of indebtedness
issued or guaranteed by any of the following federal agencies and provided such
obligations are backed by the full faith and credit of the United States of
America (stripped securities are only permitted if they have been stripped by
the agency itself):
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<PAGE> 21
1. U.S. Export-Import Bank (Eximbank)
A. Direct obligations or fully guaranteed
certificates of beneficial ownership
2. Farmers Home Administration (FmHA)
A. Certificates of beneficial ownership
3. Federal Financing Bank
4. Federal Housing Administration (FHA)
A. Debentures
5. General Services Administration
A. Participation certificates
6. U.S. Maritime Administration
A. Guaranteed Title XI financing
7. U.S. Department of Housing and Urban Development
(HUD)
A. Project Notes
B. Local Authority Bonds
C. New Communities Debentures - U.S. government
guaranteed debentures
D. U.S. Public Housing Notes and Bonds - U.S.
government guaranteed public housing notes
and bonds
(c) Bonds, debentures, notes or other evidence of indebtedness
issued or guaranteed by any of the following non-full faith and credit U.S.
government agencies that are rated by both Rating Agencies in either the highest
long-term rating categories or in one of the top two highest short-term rating
categories (stripped securities are only permitted if they have been stripped by
the agency itself):
1. Federal Home Loan Bank System
A. Senior debt obligations
2. Federal Home Loan Mortgage Corporation (FHLMC)
A. Participation Certificates
B. Senior debt obligations
3. Federal National Mortgage Association (FNMA)
A. Mortgage-backed securities and senior debt
obligations
4. Student Loan Marketing Association
A. Senior debt obligations
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<PAGE> 22
5. Resolution Funding Corp. obligations
6. Farm Credit System
A. Consolidated systemwide bonds and notes
(d) Money market funds registered under the Investment Company
Act of 1940, as amended, whose shares are registered under the Securities Act,
and having a rating by Standard & Poor's of AAAm-G; AAAm; or AAm and a rating by
Moody's of Aaa.
(e) Certificates of deposit secured at all times by collateral
described in (a) and/or (b) above. Such certificates must be issued by
commercial banks, savings and loan associations or mutual savings banks which
have a short term rating by Moody's of P-1 or higher and by Standard & Poor's of
A-1 or higher. The collateral must be held by a third party and the Indenture
Trustee must have a perfected first security interest in the collateral.
(f) Certificates of deposit, savings accounts, deposit
accounts or money market deposits which are fully insured by FDIC, including BIF
and SAIF.
(g) Investment agreements, including guaranteed investment
contracts, acceptable to each Rating Agency.
(h) Commercial paper rated "Prime - 1" by Moody's and "A-1" or
better by Standard & Poor's.
(i) Bonds or notes issued by any state or municipality which
are rated by Moody's and Standard & Poor's in the highest long term rating
categories or one of the two highest short-term rating categories assigned by
such agencies.
(j) Federal funds or bankers acceptances with a maximum term
of one year of any bank which has an unsecured, uninsured and unguaranteed
obligation rating of "Prime - 1" by Moody's and "A-1" or "A" or better by
Standard & Poor's.
(k) Repurchase agreements providing for the transfer of
securities from a dealer bank or securities firm (seller/borrower) to the Trust
(buyer/lender), and the transfer of cash from the Trust to the dealer bank or
securities firm with an agreement that the dealer bank or securities firm will
repay the cash plus a yield to the Trust in exchange for the securities at a
specified date.
Repurchase agreements ("repos") must satisfy the following
criteria.
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<PAGE> 23
1. Repos must be between the Trust and a dealer bank or
securities firm which are:
A. Primary dealers on the Federal Reserve
reporting dealer list which are rated A or
better by Standard & Poor's and P-1 by
Moody's, or
B. Banks rated "A" or above by Standard &
Poor's and P-1 by Moody's.
2. The written repo contract trust must include the
following:
A. Securities which are acceptable for transfer
are:
(1) Direct U.S. governments, or
(2) Federal agencies backed by the full
faith and credit of the U.S.
government (or FNMA or FHLMC) other
than mortgage backed securities.
B. The term of the repo may be up to 30 days
C. The collateral must be delivered to the
Indenture Trustee (if the Indenture Trustee
is not supplying the collateral) or third
party acting as agent for the Indenture
Trustee (if the Indenture Trustee is
supplying the collateral)
before/simultaneous with payment (perfection
by possession of certificated securities).
D. Valuation of Collateral
(1) The securities must be valued
weekly, marked-to-market at current
market price plus accrued interest.
(a) The value of collateral must be
equal to 104% of the amount of cash
transferred by the Trust to the
dealer bank or security firm under
the repo plus accrued interest. If
the value of securities held as
collateral slips below 104% of the
value of the cash transferred by
the Trust, then additional cash
and/or acceptable securities must
be transferred. If, however, the
securities used as collateral are
FNMA or FHLMC, then the value of
collateral must equal 105%.
3. Legal opinion which must be delivered to the
Indenture Trustee:
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<PAGE> 24
a. Repo meets guidelines under state law for
legal investment of public funds.
Each reference in this definition of "Permitted Investments" to the
Rating Agency shall be construed, in the case of each subparagraph above
referring to each Rating Agency, as a reference to Standard & Poor's and
Moody's.
Person: Any individual, corporation, partnership, joint venture,
limited liability company, association, joint-stock company, trust, national
banking association, unincorporated organization or government or any agency or
political subdivision thereof.
Physical Property: As defined in the definition of "Delivery" above.
Pool Principal Balance: With respect to any date of determination, the
sum of the Principal Balances for all Home Loans as of the end of the preceding
Due Period.
Principal Balance: With respect to any Home Loan, and for any date of
determination, the Principal Balance of such Home Loan as of the Cut-Off Date
minus all principal reductions credited against the Principal Balance of such
Home Loan on or subsequent to the Cut-Off Date for such Home Loan; provided,
that with respect to any Defaulted Home Loan, the Principal Balance shall be
zero as of the end of the Due Period in which such Home Loan becomes a Defaulted
Home Loan.
Property: The property (real, personal or mixed) encumbered by the
Mortgage which secures the Debt Instrument evidencing a secured Home Loan.
Prospectus: The Depositor's final Prospectus, dated June 20, 1997, as
supplemented by the Prospectus Supplement.
Prospectus Supplement: The Prospectus Supplement dated as of August 26,
1997, prepared by the Seller and the Depositor in connection with the issuance
and sale of the Securities.
Purchase Price: With respect to a Home Loan, means the Principal
Balance of such Home Loan as of the date of purchase, plus unpaid accrued
interest at the related Home Loan Interest Rate to the last day of the month in
which such purchase occurs (without regard to any Interest Advance that may have
been made with respect to such Home Loan).
Qualified Substitute Home Loan: A Home Loan: (i) having characteristics
such that the representations and warranties made pursuant to Section 3.03(b)
with respect to the Home Loans are true and correct as of the date of
substitution with respect to such Home Loan; (ii) each Monthly Payment with
respect to such Home Loan shall be greater than or equal to the Monthly Payments
due in the same Due Period on the Home Loan for which such Qualified Substitute
Home Loan is replacing; (iii) the Maturity Date with respect to such Home Loan
shall be no later
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than the Maturity Date of the Home Loan for which such Qualified Substitute Home
Loan is replacing; (iv) as of the date of substitution, the Principal Balance of
such Home Loan is less than or equal to (but not more than 1% less than) the
Principal Balance of the Home Loan for which such Qualified Substitute Home Loan
is replacing; (v) the Home Loan Interest Rate with respect to such Home Loan is
at least equal to the Home Loan Interest Rate of the Home Loan for which such
Qualified Substitute Home Loan is replacing; (vi) with respect to which the FICO
score is equal to or greater than the FICO score for such Home Loan for which
such Qualified Substitute Home Loan is replacing; and (vii) which is not a real
estate mortgage within the meaning of Treasury Regulation ss.301.7701(i) - 1(d);
provided however, in the event more than one Qualified Substitute Home Loan is
replacing one or more Defective Home Loans on any date, in which case (i) the
weighted average Home Loan Interest Rate for such Qualified Substitute Home
Loans must equal or exceed the weighted average Home Loan Interest Rate of the
Defective Home Loans immediately prior to giving effect to the substitution, in
each case weighted on the basis of the outstanding Principal Balance of such
loans as of such day, (ii) the sum of the Monthly Payments with respect to such
Qualified Substitute Home Loans shall be greater than or equal to the Monthly
Payments due in the same Due Period on the Defective Home Loans being replaced,
and (iii) as of the date of substitution, the aggregate Principal Balances of
such Qualified Substitute Home Loans are less than or equal to (but not more
than 1% less than) the aggregate Principal Balances of the Defective Home Loans
being replaced.
Rating Agency or Rating Agencies: Any of (i) Standard & Poor's, (ii)
Fitch, or (iii) DCR or, if no such organization or successor is any longer in
existence, "Rating Agency" shall be a nationally recognized statistical rating
organization or other comparable person designated by the Issuer, notice of
which designation shall have been given to the Indenture Trustee and the Master
Servicer.
Ratings: The ratings initially assigned to the Notes and the
Certificates by the Rating Agencies, as evidenced by letters from the Rating
Agencies.
Record Date: With respect to each Distribution Date, the close of
business on the last Business Day of the month immediately preceding the month
in which such Distribution Date occurs; provided that the first Record Date will
be September 5, 1997.
Reference Banks: Bankers Trust Company, Barclay's Bank Plc, The Bank of
Tokyo and National Westminster Bank Plc; provided that if any of the foregoing
banks are not suitable to serve as a Reference Bank, then any leading banks
selected by the Indenture Trustee which are engaged in transactions in
Eurodollar deposits in the international Eurocurrency market (i) with an
established place of business in London, England, (ii) not controlling, under
the control of or under common control with the Depositor or any affiliate
thereof, (iii) whose quotations appear on the Telerate Screen 3750 on the
relevant Interest Determination Date and (iv) which have been designated as such
by the Indenture Trustee.
Regular Distribution Amount: With respect to any Distribution Date, the
lesser of (a) the Collected Amount less the amounts required to be distributed
pursuant to Section 5.01(c)(i) on
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such Distribution Date or (b) the sum of (i) the Noteholders' Interest
Distributable Amount, (ii) the Certificateholders' Interest Distributable Amount
and (iii) the Regular Principal Distribution Amount, in each case for such
Distribution Date.
Regular Principal Distribution Amount: With respect to each
Distribution Date, an amount equal to the lesser of:
(A) the aggregate of the Class Principal Balances of the Classes of
Securities immediately prior to such Distribution Date; or
(B) The sum of the following amounts (without duplication) with respect
to the immediately preceding Due Period: that portion of all Payments received
on Home Loans allocable to principal for such Distribution Date, including all
full and partial principal prepayments (including (i) such payments in respect
of such Home Loans that became Defaulted Home Loans on or prior to the end of
the preceding Due Period, (ii) the portion of the Purchase Price allocable to
principal of all Defective Loans or Defaulted Loans and the portion of the
Termination Price, if any, set forth in Section 9.01(b) allocable to principal
with respect to the Home Loans, and (iii) any Substitution Adjustment Amounts
deposited to the Note Distribution Account pursuant to Section 3.05 on the
previous Determination Date).
Reserve Interest Rate: With respect to any Interest Determination Date,
the rate per annum that the Indenture Trustee determines to be either (i) the
arithmetic mean (rounded upwards if necessary to the nearest whole multiple of
0.0625%) of the one-month United States dollar lending rates which New York City
banks selected by the Indenture Trustee are quoting on the relevant Interest
Determination Date to the principal London offices of leading banks in the
London interbank market or (ii) in the event that the Indenture Trustee can
determine no such arithmetic mean, the lowest one-month United States dollar
lending rate which New York City banks selected by the Indenture Trustee are
quoting on such Interest Determination Date to leading European banks.
Residual Instruments: The instruments evidencing the right to the
amount remaining, if any, after all prior distributions have been made under
this Agreement, the Indenture and the Trust Agreement on each Distribution Date
and certain other rights to receive amounts hereunder and under the Trust
Agreement.
Responsible Officer: When used with respect to the Master Servicer or
the Indenture Trustee, any officer of the Master Servicer or any officer within
the Corporate Trust Office of the Indenture Trustee, respectively, including
with respect to each, any Vice President, Assistant Vice President, Secretary,
Assistant Secretary or any other officer of the Indenture Trustee or Master
Servicer customarily performing functions similar to those performed by any of
the above designated officers and also, with respect to a particular matter, any
other officer to whom such matter is referred because of such officer's
knowledge of and familiarity with the particular subject. When used with respect
to the Issuer, any officer in the Corporate Trust Administration Department of
the Owner Trustee with direct responsibility for the administration of the Trust
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Agreement and this Agreement on behalf of the Issuer. When used with respect to
the Depositor or the Seller, the President or any Vice President, Assistant Vice
President, or any Secretary or Assistant Secretary.
SAIF: The Savings Association Insurance Fund, as from time to time
constituted, created under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, or if at any time after the execution of this
instrument the Savings Association Insurance Fund is not existing and performing
duties now assigned to it, the body performing such duties on such date.
Securities: The Notes and/or the Certificates, as applicable.
Securities Act: The Securities Act of 1933, as amended.
Securityholder: A holder of a Note or Certificate, as applicable.
Seller: Mego, in its capacity as the seller hereunder.
Senior Notes: The Class A-1, Class A-2, Class A-3 and Class A-4 Notes.
Senior Optimal Principal Balance: With respect to any Distribution Date
prior to the Stepdown Date, zero; with respect to any other Distribution Date,
an amount equal to the Pool Principal Balance as of the preceding Determination
Date minus the greater of (a) the sum of (1) 53.50% of the Pool Principal
Balance as of the preceding Determination Date and (2) the Overcollateralization
Target Amount for such Distribution Date (without giving effect to the proviso
in the definition thereof) or (b) 0.50% of the Original Pool Principal Balance;
provided however, that the Senior Optimal Principal Balance shall never be less
than zero or greater than the Aggregate Note Principal Balance as of the Closing
Date.
Series or Series 1997-4: Mego Mortgage Home Loan Asset Backed
Securities, Series 1997-4.
Servicer: Mego, in its capacity as the servicer hereunder, or any other
Eligible Servicer with whom the Master Servicer has entered into a Servicing
Agreement pursuant to Section 4.02.
Servicer Fee: With respect to any Distribution Date (other than the
first Distribution Date), 1/12 times 1.00% times the Pool Principal Balance, as
of the opening of business on the first day of the month preceding the month of
such Distribution Date. With respect to the first Distribution Date, 15/360
times 1.00% times the Original Pool Principal Balance.
Servicer Review Report: As defined in Section 4.05(d).
Servicer Termination Event: With respect to the Servicing Agreement,
the events specified in Section 7.02 therein.
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Servicer's Home Loan Files: As defined in Section 2.05(b).
Servicing Agreement: The servicing agreement dated as of August 16,
1997 between Mego, as Servicer, the Master Servicer, the Indenture Trustee and
the Trust and any other agreement entered into in accordance with Section 4.02.
Standard & Poor's: Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc., or any successor thereto.
Stepdown Date: The first Distribution Date occurring after August 2000
as to which all of the following conditions exist:
(1) the Pool Principal Balance has been reduced to an amount less than
or equal to 50% of the Original Pool Principal Balance;
(2) the Net Delinquency Calculation Amount is less than 7.50% of the
Original Pool Principal Balance; and
(3) the aggregate Class Principal Balance of the Senior Notes (after
giving effect to distributions of principal on such Distribution Date) will be
able to be reduced on such Distribution Date (such determination to be made by
the Indenture Trustee prior to making actual distributions on such Distribution
Date) to an amount equal to or less than the excess of (i) the Pool Principal
Balance as of the preceding Determination Date over (ii) the greater of (1) the
sum of (x) 53.50% of the Pool Principal Balance as of the preceding
Determination Date and (y) the Overcollateralization Target Amount for such
Distribution Date (such Overcollateralization Target Amount calculated without
giving effect to the proviso in the definition thereof and calculated pursuant
only to clause (B) in the definition thereof) or (2) 0.50% of the Original Pool
Principal Balance.
Servicing Record. The records for each Home Loan maintained by the
Master Servicer pursuant to Section 4.03.
Servicing Standard. The standard set forth in Section 4.01(a).
61+ Day Delinquent Loan. With respect to any Determination Date or
related Distribution Date, a Home Loan, other than a Defaulted Home Loan, with
respect to which any portion of a Monthly Payment is, as of the related Monthly
Cut-Off Date, 61 days or more past due (without giving effect to any grace
period and including Home Loans in foreclosure and Foreclosed Property that are
not otherwise Defaulted Home Loans) and unpaid by the Obligor.
61+ Delinquency Percentage (Rolling Six Month). With respect to any
Determination Date or related Distribution Date, the average of the percentage
equivalents of the fractions determined for each of the six immediately
preceding Due Periods the numerator of each of which is equal to the aggregate
Principal Balance of Home Loans that are 61+ Day Delinquent
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Loans as of the end of such Due Period and the denominator of which is the Pool
Principal Balance as of the end of such Due Period.
Substitution Adjustment Amount: The meaning assigned to such term in
Section 3.05.
Substitution Date: As defined in Section 3.05.
Termination Date: The earlier of (a) the Distribution Date in September
2023 and (b) the Distribution Date next following the Monthly Cut-Off Date
coinciding with or next following the date of the liquidation or disposition of
the last asset held by the Trust pursuant to Sections 4.13 or 9.01.
Termination Price: As defined in Section 9.01(b).
Total Expected Loan Loss Percentage: With respect to any Distribution
Date, the percentage equivalent of the fraction, the numerator of which is equal
to the sum of (a) Cumulative Net Losses for such Distribution Date, (b) 25% of
the aggregate Principal Balance of Home Loans which are between 31 and 60 days
past due (without giving effect to any grace period) as of the last day of the
preceding Due Period, (c) 50% of the aggregate Principal Balance of Home Loans
which are between 61 and 90 days past due (without giving effect to any grace
period) as of the last day of the preceding Due Period, (d) the aggregate
Principal Balance of the Home Loans which are more than 90 days past due
(without giving effect to any grace period) as of the last day of the preceding
Due Period and the denominator of which is the Original Pool Principal Balance.
Transaction Documents. This Agreement, the Home Loan Purchase
Agreement, the Trust Agreement, the Servicing Agreement, the Indenture and the
Administration Agreement.
Trust: The Issuer.
Trust Account Property: The Trust Accounts, all amounts and investments
held from time to time in any Trust Account and all proceeds of the foregoing.
Trust Accounts: The Note Distribution Account, the Certificate
Distribution Account and the Collection Account.
Trust Agreement: The Trust Agreement dated as of August 16, 1997, among
the Depositor, the Co-Owner Trustee, the Owner Trustee and Mego Mortgage
Corporation.
Trust Estate: The assets subject to this Agreement, the Trust Agreement
and the Indenture and assigned to the Indenture Trustee, which assets consist
of: (i) such Home Loans as from time to time are subject to this Agreement,
including Qualified Substitute Home Loans added to the Trust from time to time,
together with the Servicer's Home Loan Files and the Indenture Trustee's Home
Loan Files relating thereto and all proceeds thereof, (ii) the Mortgages and
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security interests in Properties, (iii) all payments of principal in respect of
Home Loans received on or after the Cut-Off Date and payments of interest in
respect of Home Loans due on or after the Cut-Off Date, (iv) such assets as from
time to time are identified as Foreclosed Property, (v) such assets and funds as
are from time to time deposited in the Collection Account, the Note Distribution
Account and the Certificate Distribution Account, including amounts on deposit
in such accounts which are invested in Permitted Investments, (vi) the Issuer's
rights under the Insurance Policies and any Insurance Proceeds, and (vii) all
right, title and interest of the Depositor in and to the obligations of the
Seller under the Home Loan Purchase Agreement in which the Depositor acquired
the Home Loans from the Seller.
Section 1.02 Other Definitional Provisions.
(a) Capitalized terms used herein and not otherwise defined herein have
the meanings assigned to them in the Indenture and the Trust Agreement.
(b) All terms defined in this Agreement shall have the defined meanings
when used in any certificate or other document made or delivered pursuant hereto
unless otherwise defined therein.
(c) As used in this Agreement and in any certificate or other document
made or delivered pursuant hereto or thereto, accounting terms not defined in
this Agreement or in any such certificate or other document, and accounting
terms partly defined in this Agreement or in any such certificate or other
document to the extent not defined, shall have the respective meanings given to
them under generally accepted accounting principles. To the extent that the
definitions of accounting terms in this Agreement or in any such certificate or
other document are inconsistent with the meanings of such terms under generally
accepted accounting principles, the definitions contained in this Agreement or
in any such certificate or other document shall control.
(d) The words "hereof," "herein," "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement; Article, Section, Schedule
and Exhibit references contained in this Agreement are references to Articles,
Sections, Schedules and Exhibits in or to this Agreement unless otherwise
specified; and the term "including" shall mean "including without limitation."
(e) The definitions contained in this Agreement are applicable to the
singular as well as the plural forms of such terms and to the masculine as well
as to the feminine and neuter genders of such terms.
(f) Any agreement, instrument or statute defined or referred to herein
or in any instrument or certificate delivered in connection herewith means such
agreement, instrument or statute as from time to time amended, modified or
supplemented and includes (in the case of agreements or instruments) references
to all attachments thereto and instruments incorporated therein; references to a
Person are also to its permitted successors and assigns.
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Section 1.03 Interest Calculations.
Except as otherwise set forth herein, all calculations of accrued
interest on the Home Loans, the Notes (except the Class A-1 Notes), the
Certificates and accrued fees shall be made on the basis of a 360-day year
consisting of twelve 30-day months. All calculations on the Class A-1 Notes
shall be made on the basis of the actual number of days in the applicable
Accrual Period and a 360-day year.
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ARTICLE II.
CONVEYANCE OF THE HOME LOANS
Section 2.01 Conveyance of the Home Loans.
(a) As of the Closing Date, in consideration of the Issuer's delivery
of the Notes, Certificates and Residual Instruments to the Depositor or its
designee, upon the order of the Depositor, the Depositor, as of the Closing Date
and concurrently with the execution and delivery hereof, does hereby sell,
transfer, assign, set over and otherwise convey to the Issuer, without recourse,
but subject to the other terms and provisions of this Agreement, all of the
right, title and interest of the Depositor in and to the Trust Estate. The
foregoing sale, transfer, assignment, set over and conveyance does not and is
not intended to result in a creation or an assumption by the Issuer of any
obligation of the Depositor, the Seller or any other person in connection with
the Trust Estate or under any agreement or instrument relating thereto except as
specifically set forth herein.
(b) As of the Closing Date, the Issuer acknowledges the conveyance to
it of the Trust Estate, including from the Depositor all right, title and
interest of the Depositor in and to the Trust Estate, receipt of which is hereby
acknowledged by the Issuer, and the acceptance of which is made in good faith
and without notice or knowledge of any adverse claims or liens. Concurrently
with such delivery and in exchange therefor, the Issuer has pledged to the
Indenture Trustee the Trust Estate, and the Indenture Trustee, pursuant to the
written instructions of the Issuer, has executed and caused to be authenticated
and delivered the Notes to the Depositor or its designee, upon the order of the
Issuer. In addition, concurrently with such delivery and in exchange therefor,
the Owner Trustee, pursuant to the instructions of the Depositor, has executed
(not in its individual capacity, but solely as Owner Trustee on behalf of the
Issuer) and caused to be authenticated and delivered the Certificates and
Residual Instruments to the Depositor or its designee, upon the order of the
Depositor.
Section 2.02 Reserved.
Section 2.03 Ownership and Possession of Home Loan Files.
Upon the issuance of the Securities, with respect to the Home Loans,
the ownership of each Debt Instrument, the related Mortgage and the contents of
the related Servicer's Home Loan File and the Indenture Trustee's Home Loan File
shall be vested in the Owner Trustee and the Co-Owner Trustee and pledged to the
Indenture Trustee for the benefit of the Noteholders, although possession of the
Servicer's Home Loan Files (other than items required to be maintained in the
Indenture Trustee's Home Loan Files) on behalf of and for the benefit of the
Securityholders shall remain with Mego, and the Indenture Trustee shall take
possession of the Indenture Trustee's Home Loan Files as contemplated in Section
2.06.
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Section 2.04 Books and Records.
The sale of each Home Loan shall be reflected on the Depositor's or the
Seller's, as the case may be, balance sheets and other financial statements as a
sale of assets by the Depositor or the Seller, as the case may be, under
generally accepted accounting principles ("GAAP"). The Master Servicer shall
maintain, or cause to be maintained pursuant to Section 4.03, a complete set of
books and records for each Home Loan which shall be clearly marked to reflect
the ownership of each Home Loan by the Owner Trustee and the Co-Owner Trustee
and the pledge to the Indenture Trustee for the benefit of the Securityholders.
It is the intention of the parties hereto that the transfers and
assignments contemplated by this Agreement shall constitute a sale of the Home
Loans and the other property specified in Section 2.01(a) from the Depositor to
the Trust and such property shall not be property of the Depositor. If the
assignment and transfer of the Home Loans and the other property specified in
this Section 2.01(a) to the Owner Trustee and Co-Owner Trustee pursuant to this
Agreement or the conveyance of the Home Loans or any of such other property to
the Owner Trustee and Co-Owner Trustee is held or deemed not to be a sale or is
held or deemed to be a pledge of security for a loan, the Depositor intends that
the rights and obligations of the parties shall be established pursuant to the
terms of the Agreement and that, in such event, (i) the Depositor shall be
deemed to have granted and does hereby grant to the Owner Trustee and Co-Owner
Trustee a first priority security interest in the entire right, title and
interest of the Depositor in and to the Home Loans and all other property
conveyed to the Owner Trustee and Co-Owner Trustee pursuant to Section 2.01 and
all proceeds thereof, and (ii) this Agreement shall constitute a security
agreement under applicable law. Within five days of the Closing Date, the
Depositor shall cause to be filed UCC-1 financing statements naming the Owner
Trustee and Co-Owner Trustee as "secured parties" and describing the Home Loans
being sold by the Depositor to the Trust with the office of the Secretary of
State of the State in which the Depositor is located.
Section 2.05 Delivery of Home Loan Documents.
(a) With respect to each Home Loan, on the Closing Date the Seller, at
the direction of the Depositor, shall have delivered or caused to be delivered
to the Indenture Trustee each of the following documents (collectively, the
"Indenture Trustee's Home Loan Files"):
(i) The original Debt Instrument, showing a complete chain of
endorsements or assignments from the named payee to the Trust and
endorsed as follows: "Pay to the order of U.S. Bank National
Association, d/b/a First Bank National Association, as Indenture
Trustee and Co-Owner Trustee for Mego Mortgage Home Loan Owner Trust
1997-4, without recourse";
(ii) If such Home Loan is a Mortgage Loan, the original
Mortgage with evidence of recording indicated thereon (except that a
true copy thereof certified by an appropriate public official may be
substituted); provided, however, that if the Mortgage with evidence of
recording thereon cannot be delivered concurrently with the execution
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and delivery of this Agreement solely because of a delay caused by the
public recording office where such Mortgage has been delivered for
recordation, there shall be delivered to the Indenture Trustee a copy
of such Mortgage certified as a true copy in an Officer's Certificate
which shall certify that such Mortgage has been delivered to the
appropriate public recording office for recordation, and there shall be
promptly delivered to the Indenture Trustee such Mortgage with evidence
of recording indicated thereon upon receipt thereof from the public
recording official (or a true copy thereof certified by an appropriate
public official may be delivered to the Indenture Trustee);
(iii) If such Home Loan is a Mortgage Loan, the original
Assignment of Mortgage, in recordable form. Such assignments may be
blanket assignments, to the extent such assignments are effective under
applicable law, for Mortgages covering Mortgaged Properties situated
within the same county. If the Assignment of Mortgage is in blanket
form an assignment of Mortgage need not be included in the individual
Home Loan File;
(iv) If such Home Loan is a Mortgage Loan, all original
intervening assignments of the Mortgage, showing a complete chain of
assignments from the named mortgagee to the assignor to the Indenture
Trustee, with evidence of recording thereon (or true copies thereof
certified by appropriate public officials may be substituted);
provided, however, that if the intermediate assignments of mortgage
with evidence of recording thereon cannot be delivered concurrently
with the execution and delivery of this Agreement solely because of a
delay caused by the public recording office where such assignments of
Mortgage have been delivered for recordation, there shall be delivered
to the Indenture Trustee a copy of each such assignment of Mortgage
certified as a true copy in an Officer's Certificate of Mego, which
shall certify that each such assignment of Mortgage has been delivered
to the appropriate public recording office for recordation, and there
shall be promptly delivered to the Indenture Trustee such assignments
of Mortgage with evidence of recording indicated thereon upon its
receipt thereof from the public recording official (or true copies
thereof certified by an appropriate public official may be delivered to
the Indenture Trustee);
(v) An original of each assumption or modification agreement,
if any, relating to such Home Loan.
(b) With respect to each Home Loan, on the Closing Date, the Seller, at
the direction of the Depositor, shall have delivered or caused to be delivered
to Mego, as the designated agent of the Indenture Trustee each of the following
documents (collectively, the "Servicer's Home Loan Files"): (A) an original or
copy of truth-in-lending disclosure, (B) an original or copy of the credit
application, (C) an original or copy of the consumer credit report, (D) an
original or copy of verification of employment and income, or verification of
self-employment income, (E) an original or copy of contract of work or written
description with cost estimates, if applicable, (F) an original or copy of
report of inspection of improvements to the Property, if applicable, (G) to the
extent not included in (B), an original or a copy of a written verification,
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or an underwriter's notation of obtaining a verbal verification from the holder
of any senior mortgage or deed of trust that such Mortgagor at the time of
origination was not more than 30 days delinquent on any senior mortgage or deed
of trust on the Property, (H) (a) if the original principal balance is between
$35,001 and $40,000, (1) evidence that the borrower has a FICO Score of at least
640, a debt to income ratio no greater than 45%, and disposable income of at
least $1,500 per month, or (2) (I) a copy of the HUD-1 Closing Statement
indicating the sale price, or (II) an Uniform Residential Appraisal Report, or
(III) a Drive-By Appraisal documented on either FHLMC Form 704 or FNMA Form
2055, or (IV) a tax assessment, or (V) a broker's price opinion; (b) if the
original principal balance is between $40,001 and $50,000, (1) a copy of the
HUD-1 Closing Statement indicating the sale price, or (2) an Uniform Residential
Appraisal Report, or (3) a Drive-By Appraisal documented on either FHLMC Form
704 or FNMA Form 2055, or (4) a tax assessment, or (5) a broker's price opinion;
or (c) if the original principal balance exceeds $50,000, a full Uniform
Residential Appraisal Report prepared by a national appraisal firm, and (I) an
original or a copy of a title search as of the time of origination with respect
to the Property.
(c) [Reserved]
(d) The Indenture Trustee shall take and maintain continuous physical
possession of the Indenture Trustee's Home Loan Files in the State of Minnesota,
and in connection therewith, shall act solely as agent for the holders of the
Securities in accordance with the terms hereof and not as agent for Mego or any
other party.
(e) Within 60 days of the Closing Date, Mego, at its own expense, shall
cause the Indenture Trustee to record each Assignment of Mortgage (which may be
a blanket assignment if permitted by applicable law) in the appropriate real
property or other records; provided, however, the Indenture Trustee need not
cause to be recorded any such Assignment of Mortgage which relates to a Mortgage
Loan in any jurisdiction under the laws of which, as evidenced by an Opinion of
Counsel delivered by Mego (at Mego's expense) to the Indenture Trustee, and the
Rating Agencies, the recordation of such Assignment of Mortgage is not necessary
to protect the Indenture Trustee's interest in the related Mortgage Loan against
the claims of any subsequent transferee or any creditor of the Depositor or the
Seller. With respect to any Assignment of Mortgage as to which the related
recording information is unavailable within 60 days following the Closing Date,
such Assignment of Mortgage shall be submitted for recording within 30 days
after receipt of such information but in no event later than one year after the
Closing Date. The Indenture Trustee shall be required to retain a copy of each
Assignment of Mortgage submitted for recording. In the event that any such
Assignment of Mortgage is lost or returned unrecorded because of a defect
therein, Mego shall promptly prepare a substitute Assignment of Mortgage or cure
such defect, as the case may be, and thereafter the Indenture Trustee shall be
required to submit each such Assignment of Mortgage Loan for recording.
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Section 2.06 Acceptance by Indenture Trustee of the Home Loans;
Certain Substitutions; Initial Certification.
(a) The Indenture Trustee agrees to execute and deliver on the Closing
Date an acknowledgment of receipt of the Indenture Trustee's Home Loan File for
each Home Loan. The Indenture Trustee declares that it will hold such documents
and any amendments, replacements or supplements thereto, as well as any other
assets included in the Trust Estate, upon and subject to the conditions set
forth herein for the benefit of the Securityholders in good faith and without
notice of any adverse claims or liens. The Indenture Trustee agrees, for the
benefit of the Securityholders to review each Indenture Trustee's Home Loan File
within 45 days after the Closing Date (or, with respect to any Qualified
Substitute Home Loan, within 45 days after the conveyance of the related Home
Loan to the Trust) and to deliver to the Seller, the Depositor, the Indenture
Trustee, the Issuer and the Master Servicer a certification to the effect that,
as to each Home Loan listed in the Home Loan Schedule (other than any Home Loan
paid in full or any Home Loan specifically identified in such certification as
not covered by such certification), (i) all documents required to be delivered
to the Indenture Trustee pursuant to this Agreement are in its possession (other
than as expressly permitted in Section 2.05), (ii) all documents delivered by
the Depositor and the Seller to the Indenture Trustee pursuant to Section 2.05
have been reviewed by the Indenture Trustee and have not been mutilated or
damaged and appear regular on their face (handwritten additions, changes or
corrections shall not constitute irregularities if initialed by the Obligor) and
relate to such Home Loan, (iii) based on the examination of the Indenture
Trustee, and only as to the foregoing documents, the information set forth on
the Home Loan Schedule accurately reflects the information set forth in the
Indenture Trustee's Home Loan File and (iv) each Debt Instrument has been
endorsed as provided in Section 2.05. Neither the Issuer nor the Indenture
Trustee shall be under any duty or obligation (i) to inspect, review or examine
any such documents, instruments, certificates or other papers to determine that
they are genuine, enforceable, or appropriate for the represented purpose or
that they are other than what they purport to be on their face or (ii) to
determine whether any Indenture Trustee's Home Loan File should include any of
the documents specified in Section 2.05(a)(v).
(b) The Servicer's Home Loan File shall be held in the custody of Mego
for the benefit of, and as agent for, the Securityholders, the Indenture Trustee
and the Issuer, as the owner thereof. It is intended that by Mego's agreement
pursuant to this Section 2.06(b) the Indenture Trustee shall be deemed to have
possession of the Servicer's Home Loan Files for purposes of Section 9-305 of
the Uniform Commercial Code of the State in which such documents or instruments
are located. Mego shall promptly report to the Indenture Trustee any failure by
it to hold the Servicer's Home Loan File as herein provided and shall promptly
take appropriate action to remedy any such failure. In acting as custodian of
such documents and instruments, Mego agrees not to assert any legal or
beneficial ownership interest in the Home Loans or such documents or
instruments. Mego agrees to indemnify the Securityholders and the Indenture
Trustee for any and all liabilities, obligations, losses, damages, payments,
costs, or expenses of any kind whatsoever which may be imposed on, incurred by
or asserted against the Securityholders or the Indenture Trustee as the result
of any act or omission by Mego relating
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to the maintenance and custody of such documents or instruments which have been
delivered to Mego; provided, however, that Mego will not be liable for any
portion of any such amount resulting from the negligence or misconduct of any
Securityholder or the Indenture Trustee and provided, further, that Mego will
not be liable for any portion of any such amount resulting from Mego's
compliance with any instructions or directions consistent with this Agreement
issued to Mego by the Indenture Trustee. The Indenture Trustee shall have no
duty to monitor or otherwise oversee Mego's performance as custodian hereunder.
(c) Upon determination by the Master Servicer, the Depositor, Mego or
the Indenture Trustee that any document constituting a part of any Home Loan
File was not delivered to the Indenture Trustee or, with respect to any document
constituting the Servicer's Home Loan File, to Mego, as custodian for the
Indenture Trustee and the Issuer, by the time required hereby (which in the case
of (A) a failure to deliver a recorded mortgage or recorded assignment pursuant
to Section 2.05(a)(ii) or (a)(iv) (only under the circumstances in which a delay
is caused by the public recording office and an Officer's Certificate is
required to be provided thereunder) shall be the 20 month anniversary of the
Closing Date, (B) a failure to deliver an inspection report pursuant to Section
2.05(b)(F) shall be the 12 month anniversary of the Closing Date, (C) a failure
to deliver each other document constituting a part of any Indenture Trustee's
Home Loan File shall be the Closing Date and (D) a failure to deliver each
document (other than those described in clause (B) above) specified in Section
2.05(b) shall be 45 Business Days after the Closing Date) to be so delivered or
was defective in any material respect when delivered to the Indenture Trustee,
the party identifying any of the foregoing shall give prompt written notice to
the other parties. Nothing contained herein shall require the Indenture Trustee
to undertake any independent investigation or to make any review of any Home
Loan File other than as provided for in this Section 2.06. Mego, upon receipt of
such notice, shall comply with the cure, substitution and repurchase provisions
of Section 3.05 hereof.
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ARTICLE III.
REPRESENTATIONS AND WARRANTIES
Section 3.01 Representations and Warranties of the Depositor.
The Depositor hereby represents, warrants and covenants with and to the
Issuer, and the Indenture Trustee, on behalf of the Securityholders, and the
Master Servicer, as of the Closing Date:
(a) The Depositor is a corporation duly organized, validly existing,
and in good standing under the laws of the State of Delaware and has all
licenses necessary to carry on its business as now being conducted. The
Depositor has the power and authority to execute and deliver this Agreement and
to perform in accordance herewith; the execution, delivery and performance of
this Agreement (including all instruments of transfer to be delivered pursuant
to this Agreement) by the Depositor and the consummation of the transactions
contemplated hereby have been duly and validly authorized by all necessary
action of the Depositor; this Agreement evidences the valid, binding and
enforceable obligation of the Depositor; and all requisite action has been taken
by the Depositor to make this Agreement valid, binding and enforceable upon the
Depositor in accordance with its terms, subject to the effect of bankruptcy,
insolvency, reorganization, moratorium and other, similar laws relating to or
affecting creditors' rights generally or the application of equitable principles
in any proceeding, whether at law or in equity;
(b) The consummation of the transactions contemplated by this Agreement
will not result in (i) the breach of any terms or provisions of the Articles of
Incorporation or Bylaws of the Depositor, (ii) the breach of any term or
provision of, or conflict with or constitute a default under or result in the
acceleration of any obligation under, any material agreement, indenture or loan
or credit agreement or other material instrument to which the Depositor, or its
property is subject, or (iii) the violation of any law, rule, regulation, order,
judgment or decree to which the Depositor or its respective property is subject;
(c) The Depositor is not in default with respect to any order or decree
of any court or any order, regulation or demand of any federal, state, municipal
or other governmental agency, which default might have consequences that would
materially and adversely affect the condition (financial or otherwise) or
operations of the Depositor or its properties or might have consequences that
would materially and adversely affect its performance hereunder.
Section 3.02 Representations, Warranties and Covenants of the Master
Servicer.
The Master Servicer hereby represents, warrants and covenants with and
to the Depositor, the Issuer, Mego, the Indenture Trustee and the
Securityholders as of the Closing Date:
(a) The Master Servicer is a national banking association duly
organized and validly existing under the laws of the United States of America,
with full power and authority to own
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its properties and conduct its business as such properties are presently owned
and such business is presently conducted;
(b) The Master Servicer has the full power and authority to execute,
deliver and perform, and to enter into and consummate all transactions
contemplated by this Agreement and each other Transaction Document to which it
is a party, has duly authorized the execution, delivery and performance of this
Agreement and each other Transaction Document to which it is a party, has duly
executed and delivered this Agreement and each other Transaction Document to
which it is a party, and this Agreement and each other Transaction Document to
which it is a party, when duly authorized, executed and delivered by the other
parties thereto, will constitute a legal, valid and binding obligation of the
Master Servicer, enforceable against it in accordance with its terms;
(c) Neither the execution and delivery of this Agreement or any other
Transaction Document to which the Master Servicer is a party, the consummation
of the transactions required of the Master Servicer herein or therein, nor the
fulfillment of or compliance with the terms and conditions of this Agreement or
any other Transaction Document to which the Master Servicer is a party will
conflict with or result in a breach of any of the terms, conditions or
provisions of the Master Servicer's charter or bylaws or any legal restriction
or any material agreement or instrument to which the Master Servicer is now a
party or by which it is bound, or which would adversely affect the
administration of the Trust as contemplated hereby, or constitute a material
default or result in an acceleration under any of the foregoing, or result in
the violation of any law, rule, regulation, order, judgment or decree to which
the Master Servicer or its property is subject;
(d) The Master Servicer is not in default, and the execution and
delivery of this Agreement and each other Transaction Document to which it is a
party and its performance of and compliance with the terms hereof and thereof
will not constitute a violation of, any law, any order or decree of any court,
or any order, regulation or demand of any federal, state or local governmental
or regulatory authority;
(e) No action, suit or other proceeding or investigation is pending or,
to the Master Servicer's knowledge, threatened before any court or any federal,
state or local governmental or regulatory authority (A) asserting the invalidity
of this Agreement or any other Transaction Document to which the Master Servicer
is a party, (B) seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or any other Transaction Document to which the
Master Servicer is a party, or (C) seeking any determination or ruling that
would materially and adversely affect the ability of the Master Servicer to
perform its obligations under this Agreement or any other Transaction Document
to which the Master Servicer is a party;
(f) No consent, approval, authorization or order of, registration or
filing with or notice to, any court or any federal, state or local government or
regulatory authority is required for the execution, delivery and performance by
the Master Servicer of this Agreement or any other
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Transaction Document to which the Master Servicer is a party (other than those
that have been obtained or will be obtained prior to the Closing Date);
(g) Neither this Agreement nor any other Transaction Document to which
the Master Servicer is a party nor any statement, report or other document
furnished or to be furnished by the Master Servicer pursuant to this Agreement
or any other Transaction Document to which the Master Servicer is a party or in
connection with the transactions contemplated hereby and thereby 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;
(h) The statements contained in the section of the Prospectus
Supplement entitled "The Master Servicer" which describe the Master Servicer are
true and correct in all material respects, and such section of the Prospectus
Supplement does not contain any untrue statement of a material fact with respect
to the Master Servicer and does not omit to state a material fact necessary to
make the statements contained therein with respect to the Master Servicer not
misleading;
(i) The Master Servicer is solvent, and the Master Servicer will not be
rendered insolvent as a result of the performance of its obligations pursuant to
this Agreement and any other Transaction Document to which the Master Servicer
is a party;
(j) The Servicing Agreement conforms to the requirements for a
Servicing Agreement contained in this Agreement;
(k) The Master Servicer, or an affiliate thereof, the primary business
of which is the servicing of home loans such as the Home Loans, is an Eligible
Servicer, and the Master Servicer or such affiliate possesses all state and
federal licenses necessary for servicing the Home Loans in accordance with this
Agreement;
(l) The Master Servicer has not waived any default, breach, violation
or event of acceleration existing under any Debt Instrument or the related
Mortgage;
(m) The Master Servicer will cause to be performed any and all acts
required to be performed by the Master Servicer or Servicer to preserve the
rights and remedies of the Trust and the Indenture Trustee in any Insurance
Policies applicable to the Home Loans, including, without limitation, any
necessary notifications of insurers, assignments of policies or interests
therein, and establishments of co-insured, joint loss payee and mortgagee rights
in favor of the Trust and the Indenture Trustee;
(n) The Master Servicer shall comply with, and shall service, or cause
to be serviced, each Home Loan, in accordance with all applicable laws, all
rules and regulations issued thereunder, and all administrative publications
published pursuant thereto; and
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(o) The Master Servicer agrees that, so long as it shall continue to
serve in the capacity contemplated under the terms of this Agreement, it shall
remain in good standing under the laws governing its creation and existence and
qualified under the laws of each state in which it is necessary to perform its
obligations under this Agreement or in which the nature of its business requires
such qualification, it shall maintain or cause an affiliate to maintain all
licenses, permits and other approvals required by any law or regulations, as may
be necessary to perform its obligations under this Agreement and to retain all
rights to service the Loans, and it shall not dissolve or otherwise dispose of
all or substantially all of its assets.
It is understood and agreed that the representations and warranties set
forth in this Section 3.02 shall survive the issuance and delivery of the
Securities and shall be continuing as long as any Security shall be outstanding
or this Agreement has not been terminated.
Section 3.03 Representations and Warranties of Mego.
(a) The Seller hereby represents and warrants to the Depositor, the
Issuer, the Indenture Trustee, the Master Servicer and the Securityholders, that
as of the Closing Date:
(i) Mego is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Mego is
duly qualified to do business, is in good standing and has obtained all
necessary licenses, permits, charters, registrations and approvals
(together, "approvals") necessary for the conduct of its business as
currently conducted and the performance of its obligations under the
Transaction Documents, in each jurisdiction in which the failure to be
so qualified or to obtain such approvals would render any Transaction
Document unenforceable in any respect or would have a material adverse
effect upon the Transaction;
(ii) Mego has full power and authority to execute, deliver
and perform, and to enter into and consummate all transactions required
of it by this Agreement and each other Transaction Document to which it
is a party; has duly authorized the execution, delivery and performance
of this Agreement and each other Transaction Document to which it is a
party; has duly executed and delivered this Agreement and each other
Transaction Document to which it is a party; when duly authorized,
executed and delivered by the other parties hereto, this Agreement and
each other Transaction Document to which it is a party will constitute
a legal, valid and binding obligation of Mego enforceable against it in
accordance with its terms, except as such enforceability may be limited
by general principles of equity (whether considered in a proceeding at
law or in equity);
(iii) Neither the execution and delivery of this Agreement or
any of the other Transaction Documents to which Mego is a party, the
consummation of the transactions required of it herein or under any
other Transaction Document, nor the fulfillment of or compliance with
the terms and conditions of this Agreement or any of the other
Transaction Documents will conflict with or result in a breach of any
of the
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terms, conditions or provisions of Mego's charter or by-laws or any
legal restriction or any material agreement or instrument to which Mego
is now a party or by which it is bound, or which would adversely affect
the creation and administration of the Trust as contemplated hereby, or
constitute a material default or result in an acceleration under any of
the foregoing, or result in the violation of any law, rule, regulation,
order, judgment or decree to which Mego or its respective property is
subject;
(iv) There is no action, suit, proceeding, investigation or
litigation pending against Mego or, to its knowledge, threatened,
which, if determined adversely to Mego, would materially adversely
affect the sale of the Loans, the issuance of the Securities and
Residual Instruments, the execution, delivery or enforceability of this
Agreement or any other Transaction Document, or which would have a
material adverse affect on the financial condition of Mego;
(v) No consent, approval, authorization or order of any
court or governmental agency or body is required for: (a) the
execution, delivery and performance by Mego of, or compliance by Mego
with, this Agreement, (b) the issuance of the Securities and Residual
Instruments, (c) the sale of the Home Loans under the Home Loan
Purchase Agreement or (d) the consummation of the transactions required
of it by this Agreement, except: (A) such as shall have been obtained
before the Closing Date, and (B) such as may be required under state
securities or "Blue Sky" laws in connection with the sale of the
Securities by the Underwriter;
(vi) Mego is not in default with respect to any order or
decree of any court or any order, regulation or demand of any federal,
state, municipal or governmental agency, which default might have
consequences that would materially and adversely affect the condition
(financial or other) or operations of Mego or its properties or might
have consequences that would materially and adversely affect its
performance hereunder;
(vii) Mego received fair consideration and reasonably
equivalent value in exchange for the sale of the Home Loans to the
Depositor;
(viii) Mego has transferred the Home Loans without any intent
to hinder, delay or defraud any of its creditors;
(b) Mego hereby agrees for the benefit of the Depositor, the Issuer,
the Indenture Trustee and the Securityholders that the failure of any of the
following representations and warranties to be true and correct as to any Home
Loan as of the Cut-Off Date for such Home Loan, or such later date if so
specified in such representation and warranty, gives rise to the remedy
specified in Section 3.05;
(i) The information pertaining to each Home Loan set
forth in the Home Loan Schedule was true and correct in all material
respects as of the applicable Cut-Off Date;
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(ii) As of the Cut-off Date, all the Home Loans are between 0
and 29 days past due; Mego has not advanced funds, induced, solicited
or knowingly received any advance of funds from a party other than the
Obligor, directly or indirectly, for the payment of any amount required
by the Home Loan;
(iii) The terms of the Debt Instrument and the related
Mortgage contain the entire agreement of the parties and have not been
impaired, waived, altered or modified in any respect, except by written
instruments reflected in the related Home Loan File and recorded, if
necessary, to maintain the lien priority of the related Mortgage; and
no other instrument of waiver, alteration, expansion 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 is part of the related Home Loan File and the
payment terms of which are reflected in the related Home Loan Schedule;
(iv) The Debt Instrument and the related Mortgage are not
subject to any set-off, claims, counterclaim or defense and will not
have such in the future with respect to the goods and services provided
under the Debt Instrument, including the defense of usury or of fraud
in the inducement, nor will the operation of any of the terms of the
Debt Instrument and the related Mortgage, or the exercise of any right
thereunder, render such Debt Instrument or 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;
(v) Any and all requirements of any federal, state or local
law applicable to the Home Loan (including any law applicable to the
origination, servicing and collection practices with respect thereto)
have been complied with;
(vi) No Debt Instrument or Mortgage has been satisfied,
cancelled, rescinded or subordinated, in whole or part; and Mego has
not waived the performance by the Obligor of any action, if the
Obligor's failure to perform such action would cause the Debt
Instrument or Mortgage Loan to be in default, except as otherwise
permitted by clause (iii); and the related 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,
subordination, release, cancellation or rescission;
(vii) Each Mortgage is a valid, subsisting and enforceable
lien on the related Property, including the land and all buildings on
the Property;
(viii) The Debt Instrument and the related Mortgage are
genuine and each is the legal, valid and binding obligation of the
maker thereof, enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization
or other similar laws affecting creditors' rights in general and by
general principles of equity;
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(ix) To Mego's best knowledge, all parties to the Debt
Instrument and the related Mortgage had legal capacity at the time to
enter into the Home Loan and to execute and deliver the Debt Instrument
and the related Mortgage, and the Debt Instrument and the related
Mortgage have been duly and properly executed by such parties;
(x) As of the applicable Cut-Off Date, the proceeds of the
Home Loan have been fully disbursed and there is no requirement for
future advances thereunder, and any and all applicable requirements set
forth in the Home Loan documents have been complied with; the Obligor
is not entitled to any refund of any amounts paid or due under the Debt
Instrument or the related Mortgage;
(xi) Immediately prior to the sale, transfer and assignment
to the Depositor, Mego will have good and indefeasible legal title to
the Home Loan, the related Debt Instrument and the related Mortgage and
the full right to transfer such Home Loan, the related Debt Instrument
and the related Mortgage, and Mego will have been the sole owner
thereof, subject to no liens, pledges, charges, mortgages, encumbrances
or rights of others, except for such liens as will be released
simultaneously with the transfer and assignment of the Home Loans to
the Depositor (and the Home Loan File will contain no evidence
inconsistent with the foregoing); and immediately upon the sale,
transfer and assignment contemplated by the Home Loan Purchase
Agreement, the Depositor will hold good title to, and be the sole owner
of each Home Loan, the related Debt Instrument and the related
Mortgage, free of all liens, pledges, charges, mortgages, encumbrances
or rights of others;
(xii) Except for those Home Loans referred to in Section
3.03(b)(ii) above that are delinquent as of the Closing Date, there is
no default, breach, violation or event of acceleration existing under
the Home Loan, the related Debt Instrument and the related Mortgage and
there is 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 neither Mego nor its
predecessors have waived any default, breach, violation or event of
acceleration;
(xiii) The Debt Instrument and the related Mortgage contain
customary and enforceable provisions such as to render the rights and
remedies of the holder thereof adequate for the realization against the
Property of the benefits of the security provided thereby, including,
(A) in the case of any Mortgage designated as a deed of trust, by
trustee's sale, and (B) otherwise by judicial foreclosure;
(xiv) Each Home Loan is a fixed rate loan; the Debt
Instrument shall mature within not more than 25 years, from the date of
origination of the Home Loan; the Debt Instrument is payable in
substantially equal Monthly Payments, with interest payable in arrears,
and requires a Monthly Payment which is sufficient to fully amortize
the original principal balance over the original term and to pay
interest at the related
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Home Loan Interest Rate; interest on each Home Loan is calculated on
the basis of a 360 day year consisting of twelve 30-day months, and the
Debt Instrument does not provide for any extension of the original
term;
(xv) The related Debt Instrument is not and has not been
secured by any collateral except the lien of the corresponding
Mortgage;
(xvi) With respect to any Mortgage Loan, if the related
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, or a valid
substitution of trustee has been recorded, and no extraordinary fees or
expenses are or will become payable to the trustee under the deed of
trust, except in connection with default proceedings and a trustee's
sale after default by the Obligor;
(xvii) Mego has no knowledge of any circumstances or
conditions not reflected in the representations set forth herein, or in
the Home Loan Schedule, or in the related Home Loan File with respect
to the related Mortgage, the related Property or the Obligor which
could reasonably be expected to materially and adversely affect the
value of the related Property, or the marketability of the Mortgage
Loan or to cause the Mortgage Loan to become delinquent or otherwise in
default;
(xviii) Assuming no material change to the applicable law or
regulations in effect as of the Closing Date, after the consummation of
the transactions contemplated by this Agreement, the Master Servicer on
behalf of the Trust and the Indenture Trustee will have the ability to
foreclose or otherwise realize upon a Property, if the Home Loan is a
Mortgage Loan, or to enforce the provisions of the related Home Loan
against the Obligor thereunder, if the foreclosure upon any such
Property or enforcement of the provisions of the related Home Loan
against the Obligor are undertaken as set forth in Section 4.12;
(xix) There exists a Home Loan File relating to each Home
Loan and such Home Loan File contains all of the original or certified
documentation listed in Section 2.05 for such Home Loan, subject to
applicable grace periods set forth in Section 2.06(c). Each Indenture
Trustee's Home Loan File has been delivered to the Indenture Trustee
and each Servicer's Home Loan File is being held in trust by Mego for
the benefit of, and as agent for, the Indenture Trustee, the
Securityholders and the Owner Trustee as the owner thereof. Each
document included in the Home Loan File which is required to be
executed by the Obligor has been executed by the Obligor in the
appropriate places. With respect to each Mortgage Loan, the related
Assignment of Mortgage to the Indenture Trustee is in recordable form
and is acceptable for recording under the laws of the jurisdiction in
which the Property is located. All blanks on any form required to be
completed have been so completed;
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(xx) Each Property is improved by a residential dwelling
and is not a Home Loan in respect of a manufactured home or mobile home
or the land on which a manufactured home or mobile home has been
placed;
(xxi) Each Mortgage Loan was originated by Mego in
accordance with Mego's "Debt Consolidation Loan Program", "Combination
Debt Consolidation Home Improvement Loan Program", "Renovator 125 Loan
Program" and "Zero Equity Loan Program" underwriting guidelines, as
applicable, attached hereto as Exhibit D;
(xxii) If the Property securing any Mortgage Loan is in an
area identified by the Federal Emergency Management Agency ("FEMA") as
having special flood hazards, unless the community in which the area is
situated is participating in the National Flood Insurance Program and
the regulations thereunder or less than a year has passed since FEMA
notification regarding such hazards, a flood insurance policy is in
effect with respect to such Property with a generally acceptable
carrier which complies with Section 102(a) of the Flood Disaster
Protection Act of 1973; all improvements upon each Property are insured
by a generally acceptable insurer against loss by fire hazards of
extended coverage and such other hazards as are customary in the area
where the Property is located pursuant to insurance policies conforming
to the requirements of the Agreement; all such policies contain a
standard mortgage clause naming Mego, its successors and assigns, as
loss payee;
(xxiii) All costs, fees and expenses incurred in originating
and closing the Home Loan and in recording the related Mortgage were
paid and the Obligor is not entitled to any refund of any amounts, paid
or due to the Obligee pursuant to the Debt Instrument or any related
Mortgage;
(xxiv) There is no obligation on the part of Mego or any
other party other than the Obligor to make payments with respect to
the Home Loan;
(xxv) At the time of origination of the Home Loan, each
related prior lien, if any, was not 30 or more days delinquent;
(xxvi) With respect to each Mortgage Loan, the related
Mortgage contains an enforceable provision requiring the consent of the
Mortgagee to assumption of the related Mortgage Loan upon sale of the
Property;
(xxvii) With respect to any Mortgage Loan, there is no
homestead or other exemption available to the Mortgagor which would
materially interfere with the right to sell the related Property at a
trustee's sale or the right to foreclose the Mortgage; no relief has
been requested or allowed to the Mortgagor under the Civil Relief Act;
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(xxviii) The related Home Loan File for each Home Loan
contains a title document with respect to such Home Loan reflecting
that title to the related Property is vested at least 50% in the
Obligor under such Home Loan;
(xxix) Each Property (including each residential dwelling
improvement thereon) is free of damage which materially and adversely
affects the value thereof;
(xxx) Each Home Loan was originated in compliance with all
applicable laws and, to the best of Mego's knowledge, no fraud or
misrepresentation was committed by any Person in connection therewith;
(xxxi) Each Home Loan has been serviced in accordance with
all applicable laws and, to the best of Mego's knowledge, no fraud or
misrepresentation was committed by any Person in connection therewith;
(xxxii) The transfer, assignment and conveyance of the Debt
Instruments and the Mortgages by Mego to the Depositor were not subject
to the bulk transfer laws or any similar statutory provisions in effect
in any applicable jurisdiction;
(xxxiii) Any Home Loan originated in the State of Texas, was
originated pursuant to either Chapter 3 or Chapter 6 of the Texas
Consumer Credit Code;
(xxxiv) As of the applicable Cut-Off Date, no Obligor is a
debtor under proceedings under the Bankruptcy Code, and no such Obligor
has defaulted in payments on a Home Loan after the filing of such
bankruptcy case, whether under a plan or reorganization or otherwise;
(xxxv) Mego has not advanced funds, or induced, solicited
or knowingly received any advance of loan payments from a party other
than, with respect to a Mortgage Loan, the owner of the Property
subject to the Mortgage;
(xxxvi) Mego originated the Home Loans through its network
of dealers and correspondents;
(xxxvii) Each Home Loan conforms, and all such Home Loans in
the aggregate conform, to the description thereof set forth in the
Prospectus Supplement;
(xxxviii) Each Home Loan either complies with the Home
Ownership and Equity Protection Act of 1994 or is not subject to such
act;
(xxxix) Mego has caused to be performed or shall cause to be
performed within 15 Business Days of the Closing Date any and all acts
required to preserve the rights and remedies of the Trust and the
Indenture Trustee in any insurance policies applicable to each Home
Loan, including, without limitation, any necessary notifications
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of insurers, assignments of policies or interests therein, and
establishment of coinsured, joint loss payee and mortgagee rights in
favor of the Indenture Trustee;
(xl) To Mego's best knowledge, there exists no violation of
any environmental law (either local, state or federal), rule or
regulation in respect of the Property which violation has or could have
a material adverse effect on the market value of such Property. Mego
has no knowledge of any pending action or proceeding directly involving
the related Property in which compliance with any environmental law,
rule or regulation is in issue; and, to Mego's best knowledge, nothing
further remains to be done to satisfy in full all requirements of each
such law, rule or regulation constituting a prerequisite to the use and
enjoyment of such Property;
(xli) None of the Mortgage Loans is secured by Mortgages on
non- owner occupied Mortgaged Properties;
(xlii) On the Closing Date, 55% or more (by aggregate
Principal Balance) of the Home Loans do not constitute "real estate
mortgages" for the purpose of Treasury Regulation ss.301.7701(i) - 1(d)
under the Code. For this purpose a Home Loan constitutes a "real estate
mortgage" if the Home Loan is an "obligation principally secured by an
interest in real property." For this purpose an "obligation is
principally secured by an interest in real property" if it satisfies
either test set out in paragraph (1) or paragraph (2) below.
(1) The 80-percent test. An obligation is principally
secured by an interest in real property if the fair
market value of the interest in real property
securing the obligation was at least equal to 80
percent of the adjusted issue price of the obligation
at the time the obligation was originated (or, if
later, the time the obligation was significantly
modified).
For purposes of this paragraph (1), the fair market
value of the real property interest must be first
reduced by the amount of any lien on the real
property interest that is senior to the obligation
being tested, and must be further reduced by a
proportionate amount of any lien that is in parity
with the obligation being tested. The adjusted issue
price of an obligation is its issue price plus the
amount of accrued original issue discount, if any, as
of the date of determination.
(2) Alternative test. An obligation is principally
secured by an interest in real property if
substantially all of the proceeds of the obligation
were used to acquire or to improve or protect an
interest in real property that, at the
origination date, is the only security for the
obligation. For purposes of this test, loan
guarantees made by the United States or any state (or
any political subdivision, agency, or instrumentality
of the United States or of any state), or other third
party credit enhancement are not viewed as
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additional security for a loan. An obligation is not
considered to be secured by property other than real
property solely because the obligor is personally
liable on the obligation. For this purpose only,
substantially all of the proceeds of the obligations
means 66 2/3% or more of the gross proceeds.
(xliii) With respect to each Home Loan that is not a first
mortgage loan, either (i) no consent for the Home Loan is required by
the holder of the related prior lien or (ii) such consent has been
obtained and has been delivered to the Indenture Trustee;
(xliv) No Home Loan was selected from Mego's assets in a
manner which would cause it to be adversely selected as to credit risk
from the pool of home loans owned by Mego.
Section 3.04 [Reserved].
Section 3.05 Purchase and Substitution.
(a) It is understood and agreed that the representations and warranties
set forth in Sections 3.03 shall survive the conveyance of the Home Loans to the
Issuer, the Grant of the Home Loans to the Indenture Trustee and the delivery of
the Securities to the Securityholders and shall be continuing as long as any
Security is outstanding. Upon discovery by the Depositor, the Master Servicer,
the Seller, the Owner Trustee, the Indenture Trustee or any Securityholder of a
breach of any of such representations and warranties made pursuant to Section
3.03(b), the party discovering such breach shall give prompt written notice to
the others. In the event of a determination in Section 2.06(c) or a breach of a
representation and warranty made pursuant to Section 3.03(b) that materially and
adversely affects the value of the Home Loans or the interest of the
Securityholders, or which materially and adversely affects the interests of the
Securityholders in the related Home Loan in the case of a representation and
warranty relating to a particular Home Loan (notwithstanding that such
representation and warranty was made to the Seller's best knowledge), and a
failure within sixty Business Days of discovery or receipt of notice of such
failure to effect a cure of the circumstances giving rise to such defect, Mego
shall be obligated, on the Monthly Cut-Off Date next succeeding the expiration
of such sixty-day period, to repurchase (or substitute for, to the extent
permitted by subsection (b) below) the affected Home Loan. It is understood and
agreed that the obligation of Mego to repurchase or substitute any such Home
Loan pursuant to this Section shall constitute the sole remedy against it with
respect to such breach of the foregoing representations or warranties or the
existence of the foregoing conditions. With respect to representations and
warranties made by Mego pursuant to Section 3.03(b) that are made to Mego's best
knowledge, if it is discovered by any of the Depositor, the Master Servicer, the
Seller, Mego, the Indenture Trustee, the Owner Trustee, or any Securityholder
that the substance of such representation and warranty is inaccurate and such
inaccuracy materially and adversely affects the value of the related Home Loan,
notwithstanding
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Mego's lack of knowledge, such inaccuracy shall be deemed a breach of the
applicable representation and warranty.
If Mego is required to repurchase any Home Loan on a Monthly Cut-Off
Date that is not a Business Day, such repurchase shall be made on the last
Business Day preceding such Monthly Cut-Off Date. Any Home Loan required to be
purchased or repurchased pursuant to this Section 3.05(a) is referred to as a
"Defective Home Loan".
(b) Mego shall be obligated to repurchase a Defective Home Loan for the
Purchase Price, payable to the Indenture Trustee in cash on the Monthly Cut-Off
Date specified in Section 3.05(a) above, for deposit in the Note Distribution
Account. Notwithstanding the foregoing, Mego may elect in lieu of the repurchase
of a Defective Home Loan as provided in this Section 3.05, to substitute, as of
the Monthly Cut-off Date specified in Section 3.05(a), a Qualified Substitute
Home Loan for the Defective Home Loan in accordance with the provisions of this
Section 3.05.
(c) Mego shall notify the Master Servicer, and the Indenture Trustee in
writing not less than five Business Days before the related Determination Date
which is on or before the date on which Mego would otherwise be required to
repurchase such Home Loan pursuant to Section 3.05(a) of its intention to effect
a substitution under this Section. On such Determination Date (the "Substitution
Date"), Mego shall deliver to the Indenture Trustee a list of the Home Loans to
be substituted for by such Qualified Substitute Home Loans, and attaching as an
exhibit a supplemental Home Loan Schedule (the "Supplemental Loan Schedule")
setting forth the same type of information appearing on the Home Loan Schedule
and representing as to the accuracy thereof. In connection with any substitution
pursuant to this Section 3.05, to the extent that the aggregate Principal
Balance of any Qualified Substitute Home Loan or Home Loans is less than the
aggregate Principal Balance of the corresponding Home Loan or Home Loans as of
the end of the Due Period prior to the Determination Date on which the
substitution is being made, Mego shall deposit such difference (a "Substitution
Adjustment Amount") to the Note Distribution Account on such date.
(d) Concurrently with the satisfaction of the conditions set forth in
this Section 3.05 and the Grant of such Qualified Substitute Home Loans to the
Indenture Trustee pursuant to the Indenture, Exhibit A to this Agreement shall
be deemed to be amended to exclude all Home Loans being replaced by such
Qualified Substitute Home Loans and to include the information set forth on the
Supplemental Loan Schedule with respect to such Qualified Substitute Home Loans,
and all references in this Agreement to Home Loans shall include such Qualified
Substitute Home Loans and be deemed to be made on or after the related
Substitution Date, as the case may be, as to such Qualified Substitute Home
Loans.
(e) With respect to all Defective Home Loans or other Home Loans
repurchased by Mego pursuant to this Agreement, upon the deposit of the Purchase
Price therefor to the Note Distribution Account, the Indenture Trustee shall
assign to Mego, without recourse, representation or warranty, all the Indenture
Trustee's right, title and interest in and to such Defective Home
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Loans or Home Loans, which right, title and interest were conveyed to the
Indenture Trustee pursuant to Section 2.01. The Indenture Trustee shall take any
actions as shall be reasonably requested by Mego to effect the repurchase of any
such Home Loans.
(f) The Servicer may, at its option, purchase from the Trust any
Defaulted Home Loan or substitute a Qualified Substitute Home Loan for any
Defaulted Home Loan, provided, however, that the aggregate of Principal Balances
of Defaulted Home Loans purchased or replaced pursuant to this Section 3.05(f)
shall not exceed 10% of the Original Pool Principal Balance. If the Servicer
elects to purchase a Defaulted Home Loan, the Servicer shall deposit the
Purchase Price in the Note Distribution Account on the Monthly Cut-Off Date
following the date on which such election is made. Any substitution of a
Defaulted Home Loan for a Qualified Substitute Home Loan by the Servicer shall
be performed in accordance with the substitution provisions set forth in Section
3.05(c) and Section 3.05(d).
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ARTICLE IV.
ADMINISTRATION AND SERVICING OF HOME LOANS
Section 4.01 Servicing Standard.
(a) The Master Servicer is hereby authorized to act as agent for the
Trust and in such capacity shall manage, service, administer and make
collections on the Home Loans, and perform the other actions required by the
Master Servicer under this Agreement. In performing its obligations hereunder
the Master Servicer shall at all times act in good faith in a commercially
reasonable manner and in accordance with applicable law and the Debt Instruments
and Mortgages. The Master Servicer shall have full power and authority, acting
alone and/or through the Servicer as provided in Section 4.02, subject only to
this Agreement and the respective Home Loans, to do any and all things in
connection with such servicing and administration which are consistent with the
ordinary practices of prudent mortgage lending institutions, but without regard
to:
(i) any relationship that the Master Servicer, the Servicer
or any affiliate of the Master Servicer or any Servicer may have with
the related Obligor:
(ii) Mego's obligations to repurchase or substitute for a
Defective Home Loan pursuant to Section 3.05;
(iii) the ownership of any Securities by the Master Servicer
or any affiliate of the Master Servicer;
(iv) the Master Servicer's obligation to make Interest
Advances pursuant to Section 4.08(a) or to make Foreclosure Advances
pursuant to Section 4.08(b); or
(v) the Master Servicer's right to receive compensation for
its services as provided in Section 5.01(c)(i)(a).
The Master Servicer may take any action hereunder, including exercising
any remedy under any Home Loan, retaining counsel in connection with the
performance of any of its obligations hereunder and instigating litigation to
enforce any obligation of any Obligor, without the consent or approval of the
Indenture Trustee, unless any such consent or approval is expressly required
hereunder or under applicable law.
(b) The Indenture Trustee shall execute and return to the Master
Servicer or the Servicer designated in a written instruction from the Master
Servicer to the Indenture Trustee, within 5 days of the Indenture Trustee's
receipt any and all documents or instruments necessary to maintain the lien
created by any Mortgage on the related Property or any portion thereof, and,
within 5 days of request by the Master Servicer or the Servicer therefor a power
of attorney in
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favor of the Master Servicer or Servicer with respect to any modification,
waiver, or amendment to any document contained in any Home Loan File and any and
all instruments of satisfaction or cancellation, or of partial or full release
or discharge, and all other comparable instruments, with respect to the Home
Loans and with respect to the related Mortgaged Properties prepared and
delivered to the Indenture Trustee by the Master Servicer or any Servicer, all
in accordance with the terms of this Agreement.
(c) The Indenture Trustee shall furnish the Master Servicer or Servicer
within 5 days of request of a Master Servicing Officer therefor any powers of
attorney and other documents necessary and appropriate to carry out its
servicing and administrative duties hereunder, including any documents or powers
of attorney necessary to foreclose any Home Loan. The forms of any such powers
or documents shall be appended to such requests.
Section 4.02 Servicing Arrangements.
(a) On or prior to the date hereof, the Master Servicer has entered
into a Servicing Agreement with respect to all of the Home Loans, in
substantially the form of the Form of the Servicing Agreement attached hereto as
Exhibit E with Mego, as Servicer. Upon the termination of the Servicing
Agreement, the Master Servicer may only appoint or consent to the appointment or
succession of a successor Servicer under the Servicing Agreement and may only
enter into a substitute servicing agreement which is in form and substance as
the Servicing Agreement attached hereto as Exhibit E and with a Person
acceptable to the Indenture Trustee. The Master Servicer shall not consent to
any material amendment, modification or waiver of the provisions of a Servicing
Agreement without the consent of the Indenture Trustee.
(b) No provision of this Agreement or the Servicing Agreement shall be
deemed to relieve the Master Servicer of any of its duties and obligations to
the Indenture Trustee on behalf of Securityholders with respect to the servicing
and administration of the Home Loans as provided hereunder; it being understood
that the Master Servicer shall be obligated with respect thereto to the same
extent and under the same terms and conditions as if it alone were performing
all duties and obligations set forth in this Agreement in connection with the
collection, servicing and administration of such Home Loans.
(c) Without limitation of the provisions of Section 4.02(b), the Master
Servicer shall (i) review the servicing reports prepared by the Servicer in
order to ensure the accuracy thereof, (ii) otherwise monitor the performance by
the Servicer under the Servicing Agreement and notify the Indenture Trustee of
any Servicer Termination Event, and (iii) be obligated to ensure that the
Servicer deposits Payments into the Collection Account. In the event the
Servicer fails to make such deposit, the Master Servicer will deposit such
amounts as set forth in Section 5.01(a)(1).
(d) The Master Servicer agrees that it shall at all times be prepared
to perform the obligations of the Servicer if the Servicer fails to perform its
duties and obligations under the Servicing Agreement.
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(e) The Servicing Agreement may provide that the Servicer may retain,
as additional compensation, prepayment penalties, assumption and processing fees
paid by any Obligor and all similar fees customarily associated with the
servicing of the Home Loans, including, but not limited to late charges, paid by
any Obligor.
(f) Mego, as Servicer, shall provide information to the Master Servicer
monthly in a mutually agreeable format in order to enable the Master Servicer to
independently reconfirm the loan-by-loan reconciliation of the outstanding
Principal Balance of each Home Loan included in such information. The Master
Servicer shall prepare exception reports, if necessary, showing all Principal
Balance differences between the information provided by the Servicer and the
confirmations prepared by the Master Servicer and shall furnish such reports to
the Indenture Trustee.
Section 4.03 Servicing Record.
(a) The Master Servicer shall establish and maintain books and records
for the Home Loans (the "Servicing Record"), in which the Master Servicer shall
record: (i) all Payments received or collected by or on behalf of the Master
Servicer (through the Servicer or otherwise) or received by the Indenture
Trustee in respect of each Home Loan and each Foreclosed Property and (ii) all
amounts owing to the Master Servicer in compensation for services rendered by
the Master Servicer hereunder or in reimbursement of costs and expenses incurred
by the Master Servicer hereunder.
(b) Except as otherwise provided herein, amounts received or collected
by or on behalf of the Master Servicer or the Indenture Trustee from or on
behalf of any Obligor or in respect of any Foreclosed Property shall be credited
to the Servicing Record:
(i) promptly following direct receipt or direct collection
by the Master Servicer;
(ii) in the case of a Home Loan directly serviced by a
Servicer, promptly following deposit of the receipt or collection in
the related Collection Account; or
(iii) in the case of any amount received directly by the
Indenture Trustee, promptly following the Master Servicer's actual
knowledge of receipt by the Indenture Trustee;
but in any event not later than the Determination Date next following the date
of receipt or collection by or on behalf of the Master Servicer (through the
Servicer or otherwise) or receipt by the Indenture Trustee. Amounts received or
collected by the Master Servicer in connection with the purchase or repurchase
of any Home Loan or any Foreclosed Property shall be so recorded on and as of
the date of receipt. The Servicing Record shall separately reflect amounts so
received or collected by the Master Servicer in each Due Period.
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(c) The Master Servicer shall credit to the Servicing Record relating
to each Determination Date, on a Home Loan-by-Home Loan basis, each of the
following Payments collected or received by or on behalf of the Master Servicer
(through the Servicer or otherwise) or received by the Indenture Trustee in
respect of each Home Loan and each Foreclosed Property:
(i) all payments on account of principal;
(ii) all payments on account of interest;
(iii) all proceeds of the purchase or repurchase of any Home
Loan pursuant to Section 3.05 and all Substitution Adjustment Amounts;
(iv) all amounts paid by or on behalf of the related Obligor
in respect of Foreclosure Advances previously advanced by the Master
Servicer or the Servicer;
(v) all revenues received or collected in respect of any
Foreclosed Property, including all proceeds of the sale of any
Foreclosed Property pursuant to Section 4.13;
(vi) all proceeds of the sale of the Home Loans and any
Foreclosed Properties pursuant to Section 9.01; and
(vii) all Insurance Proceeds, any condemnation awards or
settlements or any payments made by any related guarantor or
third-party credit-support provider and any and all other amounts
received in respect of Home Loans and not specified above.
(d) Notwithstanding anything to the contrary herein, the Master
Servicer shall not be required to credit to the Servicing Record, and neither
the Master Servicer nor any Securityholder shall have any right or interest in
any amount due or received with respect to any Home Loan or any related
Foreclosed Property subsequent to the date of purchase of such Home Loan or
Foreclosed Property from the Trust.
(e) The Master Servicer shall separately record in the Servicing Record
the items required to be included in the Master Servicer Certificate and
additionally the following items to the extent not included therein:
(i) on or before each Determination Date, the related unpaid
Master Servicer Fee due the Master Servicer on the next Distribution
Date;
(ii) on or before each Determination Date, all amounts
retained by the Servicer in respect of the preceding Due Period in
respect of amounts due Independent Contractors hired by the Master
Servicer to operate and manage a Foreclosed Property pursuant to
Section 4.14(b);
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(iii) on or before each Determination Date, the amount of
unreimbursed Interest Advances in respect of prior Distribution Dates
and the amount which the Master Servicer or the Servicer is entitled to
be reimbursed therefor in accordance with Section 4.09;
(iv) on or before each Determination Date, all amounts due
in accordance with Section 4.09 as of the preceding Monthly Cut-Off
Date in reimbursement of Foreclosure Advances previously advanced by
the Master Servicer or the Servicer (separately identifying the type
and amount of each then due);
(v) on or before each Determination Date and based on
information provided to the Master Servicer by the Indenture Trustee,
all Other Fees distributable pursuant to Section 5.01(c)(iii)(d) on the
next succeeding Distribution Date;
(vi) promptly following each Distribution Date, the
aggregate amount of the Master Servicer Fee, Servicer Fee and the
Indenture Trustee Fee paid to the Master Servicer, Servicer and
Indenture Trustee respectively, on such Distribution Date pursuant to
Section 5.01(c)(i)(a) and the aggregate amount of the Owner Trustee Fee
Reserve paid to the Servicer, on such Distribution Date pursuant to
Section 5.01(c)(i)(c);
(vii) promptly following each Distribution Date, the
aggregate amount of Interest Advances and Foreclosure Advances
reimbursed to the Master Servicer or the Servicer on such Distribution
Date;
(viii) on or before each Determination Date, the Principal
Balance of Home Loans that became Defaulted Home Loans during the prior
Due Period;
(ix) on or before each Determination Date, identification by
loan number, Obligor name, address of Property and Principal Balance of
such Home Loan with respect to which the Master Servicer has requested
that the Indenture Trustee obtain the environmental report required by
Section 4.12 in connection with deciding pursuant to Section 4.12 to
foreclose on or otherwise acquire title to the related Property;
(x) on or before each Determination Date, the Principal
Balance of each such Home Loan with respect to which the Master
Servicer has determined under the circumstances described in Section
4.12(a) in good faith in accordance with customary mortgage loan
servicing practices that all amounts which it expects to receive with
respect to such Home Loan have been received; and
(xi) on or before each Determination Date, any other
information with respect to the Home Loans reasonably required by the
Indenture Trustee to determine the amount required to be distributed
pursuant to Section 5.01(c) and determinable by the Master Servicer
without undue burden from the Servicer or the items otherwise required
to be maintained in each Servicing Record.
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Section 4.04 Annual Statement as to Compliance; Notice of Event of
Default.
(a) The Master Servicer will deliver to the Indenture Trustee and the
Depositor on or before May 31 of each year, beginning in 1998 an Officer's
Certificate signed by two Responsible Officers of the Master Servicer stating
with respect to the Trust, that:
(i) a review of the activities of the Master Servicer during
the preceding calendar year (or in connection with the first such
Officer's Certificate the period from the Closing Date through the end
of 1997) and of the Master Servicer's performance under this Agreement
with respect to such Trust has been made under the supervision of the
signer of such Officer's Certificate; and
(ii) to the best of such signer's knowledge, based on such
review, the Master Servicer has fulfilled all its obligations under
this Agreement throughout such year (or such portion of such year), or
there has been a default in the fulfillment of any such obligation, in
which case such Officer's Certificate shall specify each such default
known to such signer and the nature and status thereof and what action
the Master Servicer proposes to take with respect thereto.
(b) The Master Servicer shall deliver to the Indenture Trustee and the
Depositor, promptly after having obtained knowledge thereof, but in no event
later than 2 Business Days thereafter, written notice in an Officer's
Certificate of any event which with the giving of notice or lapse of time, or
both, would become an Event of Default under Section 8.01. Each of Mego, the
Depositor, the Indenture Trustee, the Owner Trustee and the Master Servicer
shall deliver to the other of such Persons promptly after having obtained
knowledge thereof, but in no event later than 2 Business Days thereafter,
written notice in an Officer's Certificate of any event which with the giving of
notice or lapse of time, or both, would become an Event of Default under Section
8.01.
Section 4.05 Annual Independent Accountants' Report; Servicer Review
Report.
(a) The Master Servicer shall cause a firm of Independent Accountants,
who may also render other services to the Master Servicer, to deliver to the
Indenture Trustee, Owner Trustee and the Depositor on or before May 31 (or 150
days after the end of the Master Servicer's fiscal year) of each year, beginning
on the first May 31 (or other applicable date) after the date that is six months
after the Closing Date, with respect to the twelve months ended the immediately
preceding December 31 (or other applicable date) (or such other period as shall
have elapsed from the Closing Date to the date of such certificate) a report,
conducted in accordance with generally accepted accounting principles (the
"Accountant's Report") including: (i) an opinion on the financial position of
the Master Servicer at the end of its most recent fiscal year, and the results
of operations and changes in financial position of the Master Servicer for such
year then ended on the basis of an examination conducted in accordance with
generally accepted auditing standards, and (ii) a statement to the effect that,
based on an examination of certain specified documents and records relating to
the servicing of the Master Servicer's mortgage loan portfolio
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or the affiliate of the Master Servicer principally engaged in the servicing of
mortgage loans conducted in compliance with the audit program for mortgages
serviced for FNMA, the United States Department of Housing and Urban Development
Mortgagee Audit Standards or the Uniform Single Attestation Program for Mortgage
Bankers (the "Applicable Accounting Standards") such firm is of the opinion that
such servicing has been conducted in compliance with the Applicable Accounting
Standards except for such exceptions as such firm shall believe to be immaterial
and such other exceptions as shall be set forth in such statement.
(b) In addition, the Master Servicer will provide a report of a firm of
Independent Accountants which shall state that (1) a review in accordance with
agreed upon procedures was made of such number of Master Servicer Certificates
which the Independent Accountants deem necessary to carry out their review of
Master Servicer performance, but in no case less than two and (2) except as
disclosed in the Accountant's Report, no exceptions or errors in the Master
Servicer Certificates so examined were found. The Accountant's Report shall also
indicate that the firm is independent of the Master Servicer within the meaning
of the Code of Professional Ethics of the American Institute of Certified Public
Accountants.
(c) The Master Servicer shall mail a copy of the Servicer Review Report
and any report or statement of the Servicer prepared pursuant to Section 6.04 of
the Servicing Agreement to the Indenture Trustee.
(d) The Master Servicer, at the expense of the Servicer, shall cause a
firm of Independent Accountants to review, annually within 90 days after each
anniversary of the Closing Date, in accordance with agreed upon procedures the
performance of the Servicer under the Servicing Agreement in order to confirm
that the records of the Servicer accurately reflect collections, delinquencies
and other relevant data with respect to the Home Loans reported to the Master
Servicer for the purpose of preparation of the Servicing Record, and that such
data is accurately reported to the Master Servicer for reflection in the
Servicing Record. Any exceptions or errors disclosed by such procedures shall be
included in a report delivered to the Master Servicer, the Indenture Trustee,
Owner Trustee and the Depositor (the "Servicer Review Report").
Section 4.06 Access to Certain Documentation and Information Regarding
Home Loans.
The Master Servicer shall provide to representatives of the Indenture
Trustee reasonable access to (a) the documentation regarding the Home Loans and
to those employees of the Master Servicer who are responsible for the
performance of the Master Servicer's duties hereunder and (b) the books of
account, records, reports and other papers of the Master Servicer and to discuss
its affairs, finances and accounts with its employees and Independent
accountants for the purpose of reviewing or evaluating the financial condition
of the Master Servicer. The Master Servicer shall provide such access to any
Securityholder only in such cases where the Master Servicer is required by
applicable statutes or regulations (whether applicable to the Master Servicer or
to such Securityholder) to permit such Securityholder to review such
documentation. In each case, such access shall be afforded without charge but
only upon reasonable request and during Section shall derogate from the
obligation of the Master Servicer
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to observe any applicable law prohibiting disclosure of information regarding
the Obligors, and the failure of the Master Servicer to provide access as
provided in this Section as a result of such obligation shall not constitute a
breach of this Section. Any Securityholder, by its acceptance of a Security (or
by acquisition of its beneficial interest therein), shall be deemed to have
agreed to keep confidential and not to use for its own benefit any information
obtained by it pursuant to this Section, except as may be required by applicable
law or by any applicable regulatory authority.
Section 4.07 [Reserved]
Section 4.08 Advances.
(a) With respect to the Home Loans (other than Defaulted Home Loans)
and each Distribution Date, the Master Servicer shall advance from its own funds
and deposit into the Note Distribution Account or from funds on deposit in the
related Collection Account in respect of amounts available for distribution on
future Distribution Dates, no later than the related Determination Date, the
excess, if any, of (i) the aggregate of the portions of the Monthly Payments due
with respect to all Home Loans in the related Due Period allocable to interest
(calculated at a rate equal to the Net Loan Rate) over (ii) the aggregate amount
to be deposited into the Note Distribution Account with respect to all Home
Loans and such Distribution Date and allocated in accordance with Section
4.03(c) to interest (such amounts, "Interest Advances"). Any funds so applied
from funds on deposit in the Collection Account in respect of amounts available
for distribution on future Distribution Dates shall be reimbursed by the Master
Servicer on or before any future Distribution Date to the extent that funds on
deposit in the Note Distribution Account applied in the order of priority set
forth in such Section 5.01(c) would be less than the amount required to be
distributed pursuant to Section 5.01(c) on such dates as a result of such
Interest Advances.
Notwithstanding anything herein to the contrary, no Interest Advance
shall be required to be made hereunder (i) if the Master Servicer determines
that such Interest Advance would, if made, constitute a Nonrecoverable Advance
or (ii) with respect to shortfalls in interest resulting from application of the
Soldiers' and Sailors' Relief Act or from full or partial prepayments of any
Loan.
(b) The Master Servicer shall advance from its own funds the following
amounts in respect of any Mortgage Loan or Foreclosed Property, as applicable
(collectively, "Foreclosure Advances"):
(i) all third party costs and expenses (including legal fees
and costs and expenses relating to bankruptcy or insolvency proceedings
in respect of any Obligor) associated with the institution of
foreclosure or other similar proceedings in respect of any Home Loan
pursuant to Section 4.12;
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(ii) all insurance premiums due and payable in respect of
each Foreclosed Property, prior to the date on which the related
Insurance Policy would otherwise be terminated;
(iii) all real estate taxes and assessments in respect of each
Foreclosed Property that have resulted in the imposition of a lien
thereon, other than amounts that are due but not yet delinquent;
(iv) all costs and expenses necessary to maintain each
Foreclosed Property;
(v) all fees and expenses payable to any Independent
Contractor hired to operate and manage a Foreclosed Property pursuant
to Section 4.14(b); and
(vi) all fees and expenses of any Independent appraiser or
other real estate expert retained by the Indenture Trustee pursuant to
Section 4.13(a).
The Master Servicer shall advance the Foreclosure Advances described in clauses
(i) through (vi) above if, but only if, it has approved the foreclosure or other
similar proceeding in writing and the Master Servicer would make such an advance
if it or an affiliate held the affected Mortgage Loan or Foreclosed Property for
its own account and, in the Master Servicer's good faith judgment, such advance
would not constitute a nonrecoverable advance. In making such assessment with
respect to the institution of such proceedings, the Master Servicer shall not
advance funds with respect to a Mortgage Loan unless the appraised value of the
related Property exceeds the sum of (i) the amounts necessary to satisfy any
liens prior to the liens on Mortgages securing such Mortgage Loan and (ii) the
reasonably anticipated costs of foreclosure or similar proceedings.
Section 4.09 Reimbursement of Interest Advances and Foreclosure
Advances.
(a) The Master Servicer shall be entitled to be reimbursed pursuant to
Section 5.01(c) for previously unreimbursed Interest Advances made from its own
funds or any such previously unreimbursed Interest Advance by the Servicer with
respect to a Home Loan on Distribution Dates subsequent to the Distribution Date
in respect of which such Interest Advance was made from Payments with respect to
such Home Loan. If an Interest Advance shall become a Nonrecoverable Advance or
if a Home Loan shall become a Defaulted Home Loan and the Master Servicer or
Servicer shall not have been fully reimbursed for any such Interest Advances
with respect to such Home Loan, the Master Servicer or Servicer, as applicable,
shall be entitled to be reimbursed for the outstanding amount of such Interest
Advances from unrelated Home Loans pursuant to Section 5.01(c)(i)(b). No
interest shall be due to the Master Servicer in respect of any Interest Advance
for any period prior to the reimbursement thereof.
(b) The Master Servicer shall be entitled to be reimbursed pursuant to
Section 5.01(c)(i)(b) from related Payments for Foreclosure Advances advanced on
or prior to the related
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Monthly Cut-Off Date but only to the extent the Master Servicer has satisfied
the requirements of Section 4.08. No interest shall be due to the Master
Servicer in respect of any Foreclosure Advance for any period prior to the
reimbursement thereof.
(c) The Indenture Trustee shall offset against amounts otherwise
distributable to the Master Servicer pursuant to Section 5.01(c), amounts, if
any, which were required to be deposited in any Collection Account pursuant to
Section 5.01(c) with respect to the related Due Period but which were not so
deposited.
Section 4.10. Modifications, Waivers, Amendments and Consents.
(a) The Master Servicer shall not agree to any modification, waiver or
amendment of any provision of any Home Loan unless, in the Master Servicer's
good faith judgment, (i) such modification, waiver or amendment would minimize
the loss that might otherwise be experienced with respect to such Home Loan, and
(ii) such Home Loan has experienced a payment default or a payment default is
reasonably foreseeable by the Master Servicer. The Master Servicer may agree to
subordinate the position of the security interest in the Property which secures
any Mortgage Loan, provided such subordination (i) would permit the Obligor to
refinance a senior lien to take advantage of a lower interest rate or (ii) would
permit the Obligor to extend the term of the senior lien. Notwithstanding the
foregoing, no modification, waiver or amendment of a Home Loan shall involve the
execution by the Obligor of a new Debt Instrument or a new Mortgage.
(b) The Master Servicer shall notify the Indenture Trustee of any
modification, waiver or amendment of any provision of any Home Loan and the date
thereof, and shall deliver to the Indenture Trustee for deposit in the related
Home Loan File, an original counterpart of the agreement relating to such
modification, waiver or amendment, promptly following the execution thereof.
Such notice shall state that the conditions contained in this Section 4.10 have
been satisfied.
Section 4.11. Due-On-Sale; Due-on-Encumbrance.
(a) If any Home Loan contains a provision, in the nature of a
"due-on-sale" clause, which by its terms:
(i) provides that such Home Loan shall (or may at the
Obligee's option) become due and payable upon the sale or other
transfer of an interest in the related Property; or
(ii) provides that such Home Loan may not be assumed without
the consent of the related Obligee in connection with any such sale or
other transfer,
then, for so long as such Home Loan is included in the Trust, the Master
Servicer, on behalf of the Indenture Trustee, shall exercise any right the Trust
or the Indenture Trustee may have as the
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Obligee of record with respect to such Home Loan (x) to accelerate the payments
thereon, or (y) to withhold its consent to any such sale or other transfer, in a
manner consistent with the servicing standard set forth in Section 4.01.
(b) If any Home Loan contains a provision, in the nature of a
"due-on-encumbrance" clause, which by its terms:
(i) provides that such Home Loan shall (or may at the
Obligee's option) become due and payable upon the creation of any lien
or other encumbrance on the related Property; or
(ii) requires the consent of the related Obligee to the
creation of any such lien or other encumbrance on the related Property,
then, for so long as such Home Loan is included in the Trust, the Master
Servicer, on behalf of the Trust or the Indenture Trustee, shall exercise any
right the Indenture Trustee may have as the Obligee of record with respect to
such Home Loan (x) to accelerate the payments thereon, or (y) to withhold its
consent to the creation of any such lien or other encumbrance, in a manner
consistent with the servicing standard set forth in Section 4.01.
(c) Nothing in this Section 4.11 shall constitute a waiver of the
Indenture Trustee's right to receive notice of any assumption of a Home Loan,
any sale or other transfer of the related Property or the creation of any lien
or other encumbrance with respect to such Property.
(d) Except as otherwise permitted by Section 4.10, the Master Servicer
shall not agree to modify, waive or amend any term of any Home Loan in
connection with the taking of, or the failure to take, any action pursuant to
this Section 4.11.
Section 4.12. Collection Procedures; Foreclosure Procedures.
(a) If any Monthly Payment due under any Home Loan is not paid when the
same is due and payable, or if the Obligor fails to perform any other covenant
or obligation under such Home Loan and such failure continues beyond any
applicable grace period, the Master Servicer shall take such action as it shall
deem to be in the best interest of the Trust; including but not limited to
proceeding against the Property securing such Home Loan. In the event that the
Master Servicer determines not to proceed against the Property, on or before the
Determination Date following such determination the Master Servicer shall
determine in good faith in accordance with customary servicing practices that
all amounts which it expects to receive with respect to such Home Loan have been
received. If the Master Servicer makes such a determination, it shall be
reflected in the Servicing Record pursuant to Section 4.03(e)(xi).
(b) In accordance with the criteria for proceeding against the Property
set forth in Section 4.12(a), unless otherwise prohibited by applicable law or
court or administrative order, the Master Servicer, on behalf of the Trust and
the Indenture Trustee, may, at any time, institute
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foreclosure proceedings, exercise any power of sale to the extent permitted by
law, obtain a deed in lieu of foreclosure, or otherwise acquire possession of or
title to the related Property, by operation of law or otherwise. The Master
Servicer shall be permitted to institute foreclosure proceedings, repossess,
exercise any power of sale to the extent permitted by law, obtain a deed in lieu
of foreclosure, or otherwise acquire possession of or title to any Property, by
operation of law or otherwise only in the event that in the Master Servicer's
reasonable judgement such action is likely to result in a positive economic
benefit to the Trust by creating net liquidation proceeds (after reimbursement
of all amounts owed with respect to such Home Loan to the Master Servicer or the
Servicer) and provided that, with respect to any Property, prior to taking title
thereto, the Master Servicer has requested that the Indenture Trustee obtain,
and the Indenture Trustee shall have obtained, an environmental review to be
performed on such Property by a company with recognized expertise, the scope of
which is limited to the review of public records and documents for information
regarding whether such Property has on it, under it or is near, hazardous or
toxic material or waste. If such review reveals that such Property has on it,
under it or is near hazardous or toxic material or waste or reveals any other
environmental problem, the Indenture Trustee shall provide a copy of the related
report to the Master Servicer and title shall be taken to such Property only
after obtaining the written consent of the Indenture Trustee.
In connection with any foreclosure proceeding on a Mortgage Loan, the
Master Servicer shall follow such practices and procedures in a manner which is
consistent with the Master Servicer's procedure for foreclosure with respect to
similar loans held in the Master Servicer's portfolio for its own account or, if
there are no such loans, such loans serviced by the Master Servicer for others,
giving due consideration to accepted servicing practices of prudent lending
institutions. To the extent required by Section 4.08, the Master Servicer shall
advance all necessary and proper Foreclosure Advances until final disposition of
the Foreclosed Property and shall manage such Foreclosed Property pursuant to
Section 4.14. If, in following such foreclosure procedures, title to the
Foreclosed Property is acquired, the deed or certificate of sale shall be issued
to the Co-Owner Trustee and the Indenture Trustee.
Section 4.13. Sale of Foreclosed Properties.
(a) The Master Servicer may offer to sell to any Person any Foreclosed
Property, if and when the Master Servicer determines consistent with the
Servicing Standard and that such a sale would be in the best interests of the
Trust. The Master Servicer shall give the Indenture Trustee not less than five
days' prior notice of its intention to sell any Foreclosed Property, and shall
accept the highest bid received from any Person for any Foreclosed Property in
an amount at least equal to the sum of:
(i) the Principal Balance of the related foreclosed Home Loan,
unreimbursed Foreclosure Advances plus the outstanding amount of any
liens superior in priority, if any, to the lien of the foreclosed Home
Loan; and
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(ii) all unpaid interest accrued thereon at the related Home
Loan Interest Rate through the date of sale.
In the absence of any such bid, the Master Servicer shall accept the highest bid
received from any Person that is determined to be a fair price for such
Foreclosed Property by the Master Servicer, if the highest bidder is a Person
that is Independent, or by an Independent appraiser retained by the Master
Servicer, if the highest bidder is a Person that is not Independent. In the
absence of any bid determined to be fair as aforesaid, the Master Servicer shall
offer the affected Foreclosed Property for sale to any Person, other than an
Interested Person, in a commercially reasonable manner for a period of not less
than 10 or more than 30 days, and shall accept the highest cash bid received
therefor in excess of the highest bid previously submitted. If no such bid is
received, any Person who is not Independent may resubmit its original bid, and
the Master Servicer shall accept the highest outstanding cash bid, regardless of
from whom received. No Interested Person shall be obligated to submit a bid to
purchase any Foreclosed Property, and notwithstanding anything to the contrary
herein, neither the Indenture Trustee, in its individual capacity, nor any of
its affiliates may bid for or purchase any Foreclosed Property pursuant hereto.
(b) In determining whether any bid constitutes a fair price for any
Foreclosed Property the Master Servicer shall take into account, and any
appraiser or other expert in real estate matters shall be instructed to take
into account, as applicable, among other factors, the financial standing of any
tenant of the Foreclosed Property, the physical condition of the Foreclosed
Property, and the state of the local and national economies.
(c) The Master Servicer shall act on behalf of the Indenture Trustee in
negotiating and taking any other action necessary or appropriate in connection
with the sale of any Foreclosed Property, including the collection of all
amounts payable in connection therewith. Any sale of a Foreclosed Property shall
be without recourse to the Indenture Trustee, the Master Servicer or the Trust,
and if consummated in accordance with the terms of this Agreement, neither the
Master Servicer nor the Indenture Trustee shall have any liability to any
Securityholder with respect to the purchase price therefor accepted by the
Master Servicer or the Indenture Trustee.
Section 4.14. Management of Real Estate Owned.
(a) If the Trust acquires any Foreclosed Property pursuant to Section
4.12, the Master Servicer shall have full power and authority, subject only to
the specific requirements and prohibitions of this Agreement, to do any and all
things in connection therewith as are consistent with the manner in which the
Master Servicer manages and operates similar property owned by the Master
Servicer or any of its affiliates, all on such terms and for such period as the
Master Servicer deems to be in the best interests of Securityholders.
(b) The Master Servicer may contract with any Person that is
Independent (an "Independent Contractor") for the operation and management of
any Foreclosed Property, provided that:
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(i) the terms and conditions of any such contract may not be
inconsistent herewith;
(ii) any such contract shall require, or shall be
administered to require, that the Independent Contractor remit all
related Payments to the Master Servicer as soon as practicable, but
in no event later than two Business Days following the receipt
thereof by such Independent Contractor;
(iii) none of the provisions of this Section 4.14(b) relating
to any such contract or to actions taken through any such Independent
Contractor shall be deemed to relieve the Master Servicer of any of its
duties and obligations to the Indenture Trustee for the benefit of
Securityholders with respect to the operation and management of any
such Foreclosed Property; and
(iv) the Master Servicer shall be obligated with respect
thereto to the same extent as if it alone were performing all duties
and obligations in connection with the operation and management of such
Foreclosed Property.
The Master Servicer shall be entitled to enter into any agreement with any
Independent Contractor performing services for it related to its duties and
obligations hereunder for indemnification of the Master Servicer by such
Independent Contractor, and nothing in this Agreement shall be deemed to limit
or modify such indemnification. The Master Servicer shall be solely liable for
all fees owed by it to any such Independent Contractor, but shall be entitled to
be reimbursed for all such fees advanced by it pursuant to Section 4.08(b)(v) in
the manner provided in Section 4.09(b).
Section 4.15. Inspections.
The Master Servicer shall inspect or cause to be inspected each
Property that secures any Home Loan at such times and in such manner as are
consistent with the servicing standard set forth in Section 4.01.
Section 4.16. Maintenance of Insurance.
(a) The Master Servicer shall cause to be maintained for each
Foreclosed Property acquired by the Trust such types and amounts of insurance
coverage as the Master Servicer shall deem reasonable. The Master Servicer shall
cause to be maintained for each Home Loan, fire and hazard insurance naming Mego
as loss payee thereunder providing extended coverage in an amount which is at
least equal to the least of (i) the maximum insurable value of the improvements
securing such Home Loan from time to time, (ii) the combined principal balance
owing on such Home Loan and any mortgage loan senior to such Home Loan and (iii)
the minimum amount required to compensate for damage or loss on a replacement
cost basis. In cases in which any Property securing a Home Loan is located in a
federally designated flood area, the hazard insurance to be maintained for the
related Home Loan shall include flood insurance
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to the extent such flood insurance is available and the Master Servicer has
determined such insurance to be necessary in accordance with accepted mortgage
loan servicing standards for mortgage loans similar to the Mortgage Loans. All
such flood insurance shall be in amounts equal to the least of (A) the maximum
insurable value of the improvement securing such Home Loan, (B) the combined
principal balance owing on such Home Loan and any mortgage loan senior to such
Home Loan and (c) the maximum amount of insurance available to the lender under
the National Flood Insurance Act of 1968, as amended.
(b) Any amounts collected by the Master Servicer under any Insurance
Policies, shall be paid over or applied by the Master Servicer as follows:
(i) In the case of amounts received in respect of any Home
Loan:
(A) for the restoration or repair of the affected
Property, in which event such amounts shall be released to the
Obligor in accordance with the terms of the related Debt
Instrument or to the extent not so used,
(B) in reduction of the Principal Balance of the related
Home Loan, in which event such amounts shall be credited to
the Servicing Record,
unless the related instruments require a different application, in which case
such amounts shall be applied in the manner provided therein; and
(ii) Subject to Section 4.14, in the case of amounts received
in respect of any Foreclosed Property, for the restoration or repair of
such Foreclosed Property, unless the Master Servicer determines,
consistent with the servicing standard set forth in Section 4.01, that
such restoration or repair is not in the best economic interest of the
Trust, in which event such amounts shall be credited, as of the date of
receipt, to the applicable Servicing Record, as a Payment received from
the operation of such Foreclosed Property.
Section 4.17. Release of Files.
(a) If with respect to any Home Loan:
(i) the outstanding Principal Balance of such Home Loan plus
all interest accrued thereon shall have been paid;
(ii) the Master Servicer, or the Servicer shall have
received, in escrow, payment in full of such Home Loan in a manner
customary for such purposes;
(iii) such Home Loan has become a Defective Loan and has been
repurchased or a Qualified Substitute Home Loan has been conveyed to
the Trust pursuant to Section 3.05;
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(iv) such Home Loan or the related Foreclosed Property has
been sold in connection with the termination of the Trust pursuant to
Section 9.01; or
(v) the related Foreclosed Property has been sold pursuant to
Section 4.13.
In each such case, the Servicer shall deliver a certificate to the effect that
the Servicer has complied with all of its obligations under the Servicing
Agreement with respect to such Home Loan and requesting that the Indenture
Trustee release to the Servicer the related Home Loan File, then the Indenture
Trustee shall, within three Business Days or such shorter period as may be
required by applicable law, release (unless such Home Loan File has previously
been released), the related Home Loan File to the Servicer and execute and
deliver such instruments of transfer or assignment, in each case without
recourse, as shall be necessary to vest ownership of such Home Loan in the
Servicer or such other Person as may be specified in such certificate, the forms
of any such instrument to be appended to such certificate.
(b) From time to time and as appropriate for the servicing or
foreclosure of any Home Loan, the Indenture Trustee shall, upon request of the
Servicer, release the related Home Loan File (or any requested portion thereof)
to the Servicer. Such receipt shall obligate the Servicer, to return the Home
Loan File (or such portion thereof) to the Indenture Trustee when the need
therefor by the Servicer, no longer exists unless any of the conditions
specified in subsection (a) above, is satisfied prior thereto. The Indenture
Trustee shall release such receipt to the Servicer (i) upon the Servicer's
return of such Home Loan File (or such portion thereof) to the Indenture Trustee
or (ii) if any of the conditions specified in subsection (a) has been satisfied,
and the Servicer has not yet returned such Home Loan File (or such portion
thereof) to the Indenture Trustee, upon receipt of a certificate certifying that
any of such condition has been satisfied.
Section 4.18. Filing of Continuation Statements.
On or before the fifth anniversary of the filing of any financing
statements by Mego and the Depositor, respectively, with respect to the assets
conveyed to the Trust, Mego and the Depositor shall prepare, have executed by
the necessary parties and file in the proper jurisdictions all financing and
continuation statements necessary to maintain the liens, security interests, and
priorities of such liens and security interests that have been granted by Mego
and the Depositor, respectively, and Mego and the Depositor shall continue to
file on or before each fifth anniversary of the filing of any financing and
continuation statements such additional financing and continuation statements
until the Trust has terminated pursuant to Section 9.1 of the Trust Agreement.
The Indenture Trustee agrees to cooperate with Mego and the Depositor in
preparing, executing and filing such statements. The Indenture Trustee agrees to
notify Mego and the Depositor no later than the third Distribution Date prior to
each such fifth anniversary of the requirement to file such financing and
continuation statements. The filing of any such statement with respect to Mego
and the Depositor shall not be construed as any indication of an intent of any
party contrary to the expressed intent set forth in Section 2.04 hereof. If Mego
or the Depositor has ceased to do business whenever any such financing and
continuation statements
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must be filed or Mego or the Depositor fails to file any such financing
statements or continuation statements at least one month prior to the expiration
thereof, the Indenture Trustee shall perform the services required under this
Section 4.18.
Section 4.19. Fidelity Bond.
The Master Servicer shall maintain a fidelity bond in such form and
amount as is customary for entities acting as custodian of funds and documents
in respect of loans on behalf of institutional investors and shall cause each
Servicer to maintain such fidelity bond in an amount that conforms to FNMA
levels.
Section 4.20. Errors and Omissions Insurance.
The Master Servicer shall obtain and maintain at all times during the
term of this Agreement errors and omissions insurance coverage covering the
Master Servicer and its employees issued by a responsible insurance company. The
issuer, policy terms and forms and amounts of coverage, including applicable
deductibles shall be in such form and amount as is customary for entities acting
as master servicers. The Master Servicer agrees to notify the Indenture Trustee
in writing within five (5) days of the Master Servicer's receipt of notice of
the cancellation or termination of any such errors and omissions insurance
coverage. The Master Servicer shall cause the Servicer to maintain such errors
and omissions insurance coverage as provided herein and in an amount that
conforms to FNMA Levels.
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ARTICLE V.
ESTABLISHMENT OF TRUST ACCOUNTS
Section 5.01 Collection Account and Note Distribution Account.
(a) (1) Establishment of Collection Account. The Indenture Trustee has
heretofore established or caused to be established and shall hereafter maintain
or cause to be maintained a separate account denominated a Collection Account,
which in each case is and shall continue to be an Eligible Account in the name
of the Indenture Trustee and shall be designated "U.S. Bank National
Association, d/b/a First Bank National Association, as Indenture Trustee in
trust for Mego Mortgage Home Loan Asset Backed Securities, Series 1997-4,
Collection Account." The Master Servicer shall cause all applicable Payments
received by the Servicer to be deposited to the Collection Account no later than
the second Business Day following the date of receipt thereof by the Servicer.
The Indenture Trustee shall provide to the Master Servicer and the Servicer a
monthly statement of all activity in the Collection Account. Funds in the
Collection Account shall be invested in accordance with Section 5.04.
(2) Establishment of Note Distribution Account. The Indenture Trustee
has heretofore established with itself in its trust capacity at its corporate
trust department for the benefit of Securityholders an account referred to
herein as a Note Distribution Account. The Indenture Trustee shall at all times
maintain the Note Distribution Account as an Eligible Account and shall cause
such account to be designated "U.S. Bank National Association, d/b/a First Bank
National Association, as Indenture Trustee in trust for Mego Mortgage Home Loan
Asset Backed Securities, Series 1997-4 Note Distribution Account."
(b) Withdrawals from Collection Account. No later than the second
Business Day preceding each Distribution Date, the Indenture Trustee shall
withdraw amounts from the Collection Account representing the Payments with
respect to the related Determination Date on deposit therein and deposit such
amounts into the Note Distribution Account and liquidate the Permitted
Investments in which such amounts are invested and distribute all net investment
earnings to the Servicer.
(c) Withdrawals from Note Distribution Account. On each Distribution
Date, the Indenture Trustee shall liquidate the Permitted Investments in which
amounts on deposit in the Note Distribution Account are invested and distribute
all net investment earnings to the Servicer and, to the extent funds are
available in the Note Distribution Account, the Indenture Trustee (based on the
information contained in the Master Servicer Certificate for such Distribution
Date) shall make the following withdrawals from the Note Distribution Account by
10:00 a.m. (New York City time) on such Distribution Date, in the following
order of priority:
(i) to distribute on such Distribution Date the following
amounts pursuant to the Indenture, from the Collected Amount, in the
following order:
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(a) concurrently, to (x) the Master Servicer, the
Master Servicer Fee, (y) the Servicer, the Servicer Fee, and
(z) to the Indenture Trustee, the Indenture Trustee Fee, in
each case for such Distribution Date;
(b) to the Master Servicer or Servicer, any amount in
respect of reimbursement of Interest Advances or Foreclosure
Advances, to which the Master Servicer or any Servicer is
entitled pursuant to Section 4.09 with respect to such
Distribution Date;
(c) to the Servicer, the Owner Trustee Fee Reserve,
for such Distribution Date;
(ii) to distribute on such Distribution Date the Regular
Distribution Amount pursuant to the Indenture, from the Collected
Amount remaining after the application of clause (i), in the following
order:
(a) to the holders of each Class of Senior Notes, an
amount equal to the applicable Noteholders' Interest
Distributable Amount for such Distribution Date (any shortfall
to be allocated, pro rata, based on the amount each such Class
would be entitled to receive in the absence of any such
shortfall);
(b) first, to the holders of Class M-1 Notes and then
to the holders of the Class M-2 Notes, in that order, an
amount equal to the applicable Noteholders' Interest
Distributable Amount for such Distribution Date;
(c) to the Certificate Distribution Account for
distribution pursuant to Section 5.03(b) to holders of the
Certificates, an amount equal to the Certificateholders'
Interest Distributable Amount for such Distribution Date;
(d) sequentially, to the holders of the Class A-1,
Class A-2, Class A-3 and Class A-4 Notes, in that order, until
the respective Class Principal Balances thereof are reduced to
zero, the amount necessary to reduce the aggregate Class
Principal Balance of the Senior Notes to the Senior Optimal
Principal Balance for such Distribution Date;
(e) first, to the holders of the Class M-1 Notes and
then to the holders of the Class M-2 Notes, the amount
necessary to reduce the Class Principal Balances thereof to
the Class M-1 Optimal Principal Balance and the Class M-2
Optimal Principal Balance, respectively, for such Distribution
Date;
(f) to the Certificate Distribution Account for
distribution pursuant to Section 5.03(b) to holders of the
Certificates, the amount necessary to
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reduce the Class Principal Balance thereof to the Certificate
Optimal Principal Balance for such Distribution Date; and
(g) sequentially, to the Class M-1 Notes, Class M-2
Notes and the Certificates, in that order, until their
respective Loss Reimbursement Entitlements have been paid in
full (in the case of the Class M-1 and Class M-2 Notes, first
to the reimbursement of Allocable Loss Amounts, until
completely reimbursed, and then to any accrued interest
thereon) (such amounts to be distributed to the holders of the
Certificates pursuant to this clause (g) shall be deposited in
the Certificate Distribution Account).
(iii) On each Distribution Date, the Indenture Trustee
shall distribute the Excess Spread, if any, in the following order of
priority:
(a) in an amount equal to the Overcollateralization
Deficiency Amount, if any, as follows:
(i) sequentially, to the holders of the
Class A-1, Class A-2, Class A-3 and Class A-4 Notes,
in that order, until the respective Class Principal
Balances thereof are reduced to zero, the amount
necessary to reduce the aggregate of their Class
Principal Balances to the Senior Optimal Principal
Balance for such Distribution Date;
(ii) first, to the holders of the Class M-1
Notes and then to the holders of the Class M-2 Notes,
as principal, until the respective Class Principal
Balances thereof have been reduced to the Class M-1
Optimal Principal Balance and Class M-2 Optimal
Principal Balance, respectively, for such
Distribution Date; and
(iii) to the Certificate Distribution
Account for distribution pursuant to Section 5.03(b)
to the holders of the Certificates, until the Class
Principal Balance thereof has been reduced to the
Certificate Optimal Principal Balance for such
Distribution Date; and
(b) sequentially, to the Class M-1 Notes, the Class
M-2 Notes and the Certificates, in that order, until their
respective Loss Reimbursement Entitlements, if any, have been
paid in full (in the case of the Class M-1 and Class M-2
Notes, first to the reimbursement of Allocable Loss Amounts,
until completely reimbursed, and then to any accrued interest
thereon) (such amounts to be distributed to the holders of the
Certificates pursuant to this clause (b) shall be deposited in
the Certificate Distribution Account); and
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(c) to any successor Master Servicer, if any, for
such Distribution Date, amounts payable in accordance with
Section 8.03(c) in addition to the Master Servicer Fee;
(d) to the Person entitled thereof, payments in
respect of Other Fees; and
(e) for deposit into the Certificate Distribution
Account, for distribution pursuant to Section 5.03(b) on such
Distribution Date, to the holders of the Residual Instruments,
any remaining amount.
(d) Additional Withdrawals from Collection Account. On the third
Business Day prior to each Distribution Date, the Indenture Trustee, at the
direction of the Master Servicer shall also make the following withdrawals from
the Collection Account, in no particular order of priority:
(i) to withdraw any amount not required to be
deposited in the Collection Account or deposited therein in
error; and
(ii) to clear and terminate the Collection Account in
connection with the termination of this Agreement.
(e) All distributions made on each Class of Notes on each Distribution
Date will be made on a pro rata basis among the Noteholders of such Class of
record on the preceding Record Date based on the Percentage Interest represented
by their respective Notes, and except as otherwise provided in the next
succeeding sentence, shall be made by wire transfer of immediately available
funds to the account of such Noteholder, if such Noteholder shall own of record
Notes representing at least a $1,000,000 Denomination and shall have so notified
the Indenture Trustee, and otherwise by check mailed, via first class mail,
postage prepaid, to the address of such Noteholder appearing in the Note
Register. The final distribution on each Note will be made in like manner, but
only upon presentment and surrender of such Note at the location specified in
the notice to Noteholders of such final distribution. Notwithstanding the
reduction of the Class Principal Balance of a Class to zero, the final
distribution with respect to each Class shall be made upon the earlier of (a)
the reduction of any Loss Reimbursement Entitlement with respect thereto to
zero, or (b) the Final Maturity Date for such Class.
Whenever the Indenture Trustee, based on a Master Servicer Certificate,
expects that the final distribution with respect to a Class of Securities will
be made on the next Distribution Date, the Indenture Trustee shall, as soon as
practicable, mail to each Holder of such Class of Securities as of the
applicable Record Date a notice to the effect that:
(i) the Indenture Trustee expects that the final distribution
with respect to such Class of Securities will be made on such
Distribution Date, and
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(ii) no interest shall accrue on such Class of Securities
after such Distribution Date provided that the final distribution
occurs on such Distribution Date.
Section 5.02 Allocation of Losses.
(a) In the event that the Payments received or collected in respect of
a Home Loan are less than the related Principal Balance plus accrued interest
thereon, or any Obligor makes a partial payment of any Monthly Payment due on a
Home Loan, such Payments or partial payment shall be applied to payment of the
related Debt Instrument, first to interest accrued at the Home Loan Interest
Rate and then to principal.
(b) On any Distribution Date, any Allocable Loss Amounts shall be
applied to the reduction of the Class Principal Balances of the Certificates,
the Class M-2 and Class M-1 Notes in accordance with the Allocable Loss Amount
Priority.
Section 5.03 Certificate Distribution Account.
(a) Establishment. No later than the Closing Date, the Indenture
Trustee, will establish and maintain with the Indenture Trustee for the benefit
of the Owner Trustee on behalf of the Certificateholders and holders of Residual
Instruments one or more separate Eligible Accounts, which while the Indenture
Trustee holds such Trust Account shall be entitled "Certificate Distribution
Account, U.S. Bank National Association, d/b/a First Bank National Association,
as Co-Owner Trustee, in trust for the Mego Mortgage Home Loan Asset Backed
Securities, Series 1997-4". Funds in the Certificate Distribution Account shall
be invested in accordance with Section 5.04.
(b) Distributions. On each Distribution Date, the Indenture Trustee
shall withdraw from the Note Distribution Account all amounts required to be
deposited in the Certificate Distribution Account with respect to the preceding
Due Period pursuant to Section 5.01(c)(ii)(c), (f) and (g) and
5.01(c)(iii)(a)(iii), (b) and (e) and will remit such amount to the Owner
Trustee or the Co-Owner Trustee for deposit into the Certificate Distribution
Account. On each Distribution Date, the Owner Trustee or the Co-Owner Trustee
shall distribute all amounts on deposit in the Certificate Distribution Account
to the Certificateholders and the holders of the Residual Instruments, as
specified and in accordance with the amounts calculated pursuant to the
foregoing sections of Section 5.01.
(c) All distributions made on the Certificates on each Distribution
Date will be made on a pro rata basis among the Certificateholders of record on
the immediately preceding Record Date based on the Percentage Interest
represented by their respective Certificates, and except as otherwise provided
in the next succeeding sentence, shall be made by wire transfer of immediately
available funds to the account of such Certificateholder, if such
Certificateholder shall own of record Certificates representing at least a 30%
Percentage Interest and shall have so notified the Owner Trustee or Co-Owner
Trustee, and otherwise by check mailed, via first class mail, postage prepaid,
to the address of such Certificateholder appearing in the Certificate
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Register. The final distribution on each Certificate will be made in like
manner, but only upon presentment and surrender of such Certificate at the
location specified in the notice to holders of the Certificates of such final
distribution. Notwithstanding the reduction of the Class Principal Balance of a
Class to zero, the final distribution with respect to each Class shall be made
upon the earlier of (a) the reduction of any Loss Reimbursement Entitlement with
respect thereto to zero, and (b) the Final Maturity Date for such Class.
(d) All distributions made on the Residual Instruments on each
Distribution Date will be made on a pro rata basis among the holders of Residual
Instruments of record on the immediately preceding Record Date based on the
Percentage Interest represented by such Residual Instruments, and except as
otherwise provided in the next succeeding sentence, shall be made by wire
transfer of immediately available funds to the account of such holders of
Residual Instruments, if such holders of Residual Instruments shall own of
record Residual Instruments representing at least a 30% Percentage Interest and
shall have so notified the Owner Trustee or Co-Owner Trustee, and otherwise by
check mailed, via first class mail, postage prepaid, to the address of such
holder of Residual Instruments appearing in the Certificate Register. The final
distribution on each Residual Instrument will be made in like manner, but only
upon presentment and surrender of such Residual Instrument at the location
specified in the notice to holders of the Residual Instruments of such final
distribution.
Section 5.04 Trust Accounts; Trust Account Property.
(a) Control of Trust Accounts. Each of the Trust Accounts established
hereunder has been pledged by the Issuer to the Indenture Trustee under the
Indenture and shall be subject to the lien of the Indenture. In addition to the
provisions hereunder, each of the Trust Accounts shall also be established and
maintained pursuant to the Indenture. Amounts distributed from each Trust
Account in accordance with the Indenture and this Agreement shall be released
from the lien of the Indenture upon such distribution thereunder or hereunder.
The Indenture Trustee shall possess all right, title and interest in all funds
on deposit from time to time in the Trust Accounts (other than the Certificate
Distribution Account) and in all proceeds thereof and all such funds,
investments, proceeds shall be part of the Trust Account Property and the Trust
Estate. If, at any time, any Trust Account ceases to be an Eligible Account, the
Indenture Trustee (or the Master Servicer on its behalf) shall within 10
Business Days (or such longer period, not to exceed 30 calendar days, as to
which each Rating Agency may consent) (i) establish a new Trust Account as an
Eligible Account, (ii) terminate the ineligible Trust Account, and (iii)
transfer any cash and investments from such ineligible Trust Account to such new
Trust Account.
With respect to the Trust Accounts (other than the Certificate
Distribution Account), the Indenture Trustee agrees, by its acceptance hereof,
that each such Trust Account shall be subject to the sole and exclusive custody
and control of the Indenture Trustee for the benefit of the Securityholders and
the Issuer, as the case may be, and the Indenture Trustee shall have sole
signature and withdrawal authority with respect thereto.
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In addition to this Agreement and the Indenture, the Certificate
Distribution Account established hereunder also shall be subject to and
established and maintained in accordance with the Trust Agreement. Subject to
rights of the Indenture Trustee hereunder and under the Indenture, the Owner
Trustee and the Co-Owner Trustee shall possess all right, title and interest for
the benefit of the Securityholders in all funds on deposit from time to time in
the Certificate Distribution Account and in all proceeds thereof (including all
income thereon) and all such funds, investments, proceeds and income shall be
part of the Trust Account Property and the Trust Estate. Subject to the rights
of the Indenture Trustee, the Owner Trustee and Co-Owner Trustee agree, by its
acceptance hereof, that such Certificate Distribution Account shall be subject
to the sole and exclusive custody and control of the Owner Trustee or Co-Owner
Trustee for the benefit of the Issuer and the parties entitled to distributions
therefrom, including without limitation, the Certificateholders, the holders of
Residual Instruments and the Owner Trustee and the Co-Owner Trustee shall have
sole signature and withdrawal authority with respect to the Certificate
Distribution Account. Notwithstanding the preceding, the distribution of amounts
from the Certificate Distribution Account in accordance with Section 5.03(b)
also shall be made for the benefit of the Indenture Trustee (with respect to its
duties under the Indenture and this Agreement relating to the Trust Estate), and
the Indenture Trustee (in its capacity as Indenture Trustee) shall have the
right, but not the obligation to take custody and control of the Certificate
Distribution Account and to cause the distribution of amounts therefrom in the
event that the Owner Trustee or Co-Owner Trustee fails to distribute such
amounts in accordance with Section 5.03(b).
The Master Servicer shall have the power, revocable by the Indenture
Trustee or by the Owner Trustee or Co-Owner Trustee with the consent of the
Indenture Trustee, to instruct the Indenture Trustee, Co-Owner Trustee or Owner
Trustee to make withdrawals and payments from the Trust Accounts for the purpose
of permitting the Master Servicer to carry out its respective duties hereunder
or permitting the Indenture Trustee or Owner Trustee to carry out its duties
herein or under the Indenture or the Trust Agreement, as applicable.
(b) (1) Investment of Funds. The funds held in any Trust Account may
only be invested (to the extent practicable and consistent with any requirements
of the Code) in Permitted Investments, as directed by a Responsible Officer of
Mego in writing. In any case, funds in any Trust Account must be available for
withdrawal without penalty, and any Permitted Investments and the funds held in
any Trust Account, other than the Note Distribution Account, must mature or
otherwise be available for withdrawal, not later than three (3) Business Days
immediately preceding the Distribution Date next following the date of such
investment and shall not be sold or disposed of prior to its maturity subject to
Section 5.04(b)(2) below. Amounts deposited to the Note Distribution Account
pursuant to Section 5.01(b) prior to each Distribution Date shall be invested in
Permitted Investments which are overnight investments from the date of deposit
to the Business Day preceding each Distribution Date. All interest and any other
investment earnings on amounts or investments held in any Trust Account shall be
deposited into such Trust Account immediately upon receipt by the Indenture
Trustee, or in the case of the Certificate Distribution Account, the Owner
Trustee or Co-Owner Trustee, as applicable. All Permitted Investments in which
funds in any Trust Account (other than the Certificate Distribution Account)
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are invested must be held by or registered in the name of "U.S. Bank National
Association, d/b/a First Bank National Association, as Indenture Trustee, in
trust for the Mego Mortgage Home Loan Asset Backed Securities, Series 1997-4".
While the Co-Owner Trustee holds the Certificate Distribution Account, all
Permitted Investments in which funds in the Certificate Distribution Account are
invested shall be held by or registered in the name of "U.S. Bank National
Association, d/b/a First Bank National Association, as Co-Owner Trustee, in
trust for the Mego Mortgage Home Loan Asset Backed Securities, Series 1997-4".
(2) Insufficiency and Losses in Trust Accounts. If any amounts are
needed for disbursement from any Trust Account and sufficient uninvested funds
are not available to make such disbursement, the Indenture Trustee, or Owner
Trustee or Co-Owner Trustee in the case of the Certificate Distribution Account,
shall cause to be sold or otherwise converted to cash a sufficient amount of the
investments in such Trust Account. The Indenture Trustee, or Owner Trustee or
Co-Owner Trustee in the case of the Certificate Distribution Account, shall not
be liable for any investment loss or other charge resulting therefrom, unless
such loss or charge is caused by the failure of the Indenture Trustee or Owner
Trustee or Co-Owner Trustee, respectively, to perform in accordance with this
Section 5.04.
If any losses are realized in connection with any investment in any
Trust Account pursuant to this Agreement and the Indenture, then Mego shall
deposit the amount of such losses (to the extent not offset by income from other
investments in such Trust Account) in such Trust Account immediately upon the
realization of such loss. All interest and any other investment earnings on
amounts held in any Trust Account shall be taxed to the holders of the Residual
Instruments.
(c) Subject to Section 6.1 of the Indenture, the Indenture Trustee
shall not in any way be held liable by reason of any insufficiency in any Trust
Account held by the Indenture Trustee resulting from any investment loss on any
Permitted Investment included therein (except to the extent that the Indenture
Trustee is the obligor and has defaulted thereon).
(d) With respect to the Trust Account Property, the Indenture
Trustee acknowledges and agrees that:
(1) any Trust Account Property that is held in deposit
accounts shall be held solely in the Eligible Accounts; and each such
Eligible Account shall be subject to the exclusive custody and control
of the Indenture Trustee, and the Indenture Trustee shall have sole
signature authority with respect thereto;
(2) any Trust Account Property that constitutes Physical
Property shall be delivered to the Indenture Trustee in accordance with
paragraph (a) of the definition of "Delivery" and shall be held,
pending maturity or disposition, solely by the Indenture Trustee or a
financial intermediary (as such term is defined in Section 8-313(4) of
the UCC) acting solely for the Indenture Trustee;
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(3) any Trust Account Property that is a book-entry security
held through the Federal Reserve System pursuant to federal book-entry
regulations shall be delivered in accordance with paragraph (b) of the
definition of "Delivery" and shall be maintained by the Indenture
Trustee, pending maturity or disposition, through continued book-entry
registration of such Trust Account Property as described in such
paragraph; and
(4) any Trust Account Property that is an "uncertificated
security" under Article VIII of the UCC and that is not governed by
clause (3) above shall be delivered to the Indenture Trustee in
accordance with paragraph (c) of the definition of "Delivery" and shall
be maintained by the Indenture Trustee, pending maturity or
disposition, through continued registration of the Indenture Trustee's
(or its nominee's) ownership of such security.
Section 5.05 Servicer to Pay Owner Trustee Fee. On the Distribution
Date occurring in September each year during the term of this Agreement,
commencing in September 1998, the Servicer shall pay to the Owner Trustee, the
Owner Trustee Fee.
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ARTICLE VI.
STATEMENTS AND REPORTS; SPECIFICATION OF TAX MATTERS
Section 6.01 Master Servicing Certificate. On each Determination Date,
the Master Servicer shall deliver to the Indenture Trustee, the Owner Trustee
and Co-Owner Trustee, a certificate containing the items described in Exhibit B
hereto (each, a "Master Servicer Certificate"), prepared as of the related
Determination Date and executed by a Master Servicing Officer. No later than the
Business Day following each Determination Date, the Master Servicer shall
deliver to the Indenture Trustee, in a format consistent with other electronic
loan level reporting supplied by the Master Servicer in connection with similar
transactions, "loan level" information with respect to the Home Loans as of the
related Determination Date, to the extent that such information has been
provided to the Master Servicer by the Servicer. The Indenture Trustee may rely
on the Master Servicer Certificate with respect to the matters set forth
therein.
Section 6.02 Statement to Securityholders. On or before the third
Business Day following each Distribution Date, the Indenture Trustee shall mail:
to each Holder of a Security (with a copy to the Depositor and the Rating
Agency) at its address shown on the Certificate Register or Note Register, as
applicable, a statement, based on information set forth in the Master Servicer
Certificate for such Distribution Date, substantially in the form of Statement
to Securityholders attached hereto as Exhibit C, respectively, together with a
copy of such related Master Servicer Certificate.
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ARTICLE VII.
THE MASTER SERVICER
Section 7.01 Indemnification; Third Party Claims.
(a) The Master Servicer shall be liable in accordance herewith only to
the extent of the obligations specifically imposed upon and undertaken by the
Master Servicer herein and the representations made by the Master Servicer.
(b) The Master Servicer shall indemnify, defend and hold harmless the
Trust, the Indenture Trustee, Owner Trustee, the Co-Owner Trustee, Mego and the
Depositor, their respective officers, directors, agents and employees and the
Securityholders from and against any and all costs, expenses, losses, claims,
damages, and liabilities to the extent that such cost, expense, loss, claim,
damage or liability arose out of, or was imposed upon the Trust, Indenture
Trustee, the Owner Trustee, the Co-Owner Trustee, Mego, the Depositor, or the
Securityholders through the breach of this Agreement by the Master Servicer, the
negligence, willful misfeasance, or bad faith of the Master Servicer in the
performance of its duties under this Agreement or by reason of reckless
disregard of its obligations and duties under this Agreement. Such
indemnification shall include, without limitation, reasonable fees and expenses
of counsel and expenses of litigation.
Section 7.02 Merger or Consolidation of the Master Servicer.
The Master Servicer shall not merge or consolidate with any other
person, convey, transfer or lease substantially all its assets as an entirety to
another Person, or permit any other Person to become the successor to the Master
Servicer's business unless, after the merger, consolidation, conveyance,
transfer, lease or succession, the successor or surviving entity (i) shall be an
Eligible Servicer, (ii) shall be capable of fulfilling the duties of the Master
Servicer contained in this Agreement and (iii) shall have a long-term debt
rating which is BBB and Baa2 by Standard & Poor's and Moody's respectively. Any
corporation (i) into which the Master Servicer may be merged or consolidated,
(ii) resulting from any merger or consolidation to which the Master Servicer
shall be a party, (iii) which acquires by conveyance, transfer or lease
substantially all of the assets of the Master Servicer, or (iv) succeeding to
the business of the Master Servicer, in any of the foregoing cases shall execute
an agreement of assumption to perform every obligation of the Master Servicer
under this Agreement and, whether or not such assumption agreement is executed,
shall be the successor to the Master Servicer under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties to this Agreement, anything in this Agreement to the contrary
notwithstanding; provided, however, that nothing contained herein shall be
deemed to release the Master Servicer from any obligation. The Master Servicer
shall provide notice of any merger, consolidation or succession pursuant to this
Section 7.02 to the Owner Trustee, the Indenture Trustee and each Rating Agency.
Notwithstanding the foregoing, as a condition to the consummation of the
transactions referred
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to in clauses (i) through (iv) above, (x) immediately after giving effect to
such transaction, no representation or warranty made pursuant to Section 3.02
shall have been breached (for purposes hereof, such representations and
warranties shall speak as of the date of the consummation of such transaction),
and (y) the Master Servicer shall have delivered to the Owner Trustee and the
Indenture Trustee an Officer's Certificate and an Opinion of Counsel each
stating that such consolidation, merger or succession and such agreement of
assumption comply with this Section 7.02 and that all conditions precedent, if
any, provided for in this Agreement relating to such transaction have been
complied with.
Section 7.03 Limitation on Liability of the Master Servicer and Others.
Neither the Master Servicer nor any of its directors, officers,
employees or agents shall be under any liability to the Trust or to the
Securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to this Agreement, or for errors in judgment;
provided, however, that this provision shall not protect the Master Servicer or
any such Person against any breach of warranties, representations or covenants
made herein or any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence in performing or failing to perform
duties hereunder or by reason of reckless disregard of obligations and duties
hereunder. The Master Servicer and any of its directors, officers, employees or
agents 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.
Section 7.04 Master Servicer Not to Resign; Assignment.
(a) The Master Servicer shall not resign from the obligations and
duties hereby imposed on it except (i) with the consent of the Rating Agencies
or (ii) upon determination that by reason of a change in legal requirements the
performance of its duties under this Agreement would cause it to be in violation
of such legal requirements in a manner which would result in a material adverse
effect on the Master Servicer. Any such determination permitting the resignation
of the Master Servicer by reason of a change in such legal requirements shall be
evidenced by an Opinion of Counsel to such effect delivered and acceptable to
the Indenture Trustee. No resignation of the Master Servicer shall become
effective until the Indenture Trustee or a successor master servicer shall have
assumed the Master Servicer's servicing responsibilities and obligations in
accordance with Section 8.02.
(b) Notwithstanding anything to the contrary herein, the Master
Servicer shall remain liable for all liabilities and obligations incurred by it
as Master Servicer hereunder prior to the time that any resignation or
assignment referred to in subsection (a) above or termination under Section 8.01
becomes effective, including the obligation to indemnify the Indenture Trustee
pursuant to Section 7.01(b) hereof.
(c) The Master Servicer agrees to cooperate with any successor Master
Servicer in effecting the transfer of the Master Servicer's servicing
responsibilities and rights hereunder pursuant to subsection (a), including,
without limitation, the transfer to such successor of all
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relevant records and documents (including any Home Loan Files in the possession
of the Master Servicer and the Servicing Record) and all amounts credited to the
Servicing Record or thereafter received with respect to the Home Loans and not
otherwise permitted to be retained by the Master Servicer pursuant to this
Agreement. In addition, the Master Servicer, at its sole cost and expense, shall
prepare, execute and deliver any and all documents and instruments to the
successor Master Servicer including all Home Loan Files in its possession and do
or accomplish all other acts necessary or appropriate to effect such termination
and transfer of servicing responsibilities.
Section 7.05 Relationship of Master Servicer to Issuer and the
Indenture Trustee.
The relationship of the Master Servicer (and of any successor to the
Master Servicer as servicer under this Agreement) to the Issuer and the
Indenture Trustee under this Agreement is intended by the parties hereto to be
that of an independent contractor and not of a joint venturer, agent or partner
of the Issuer or the Indenture Trustee.
Section 7.06 Master Servicer May Own Notes.
Each of the Master Servicer and any affiliate of the Master Servicer
may in its individual or any other capacity become the owner or pledgee of Notes
with the same rights as it would have if it were not the Master Servicer or an
affiliate thereof except as otherwise specifically provided herein. Notes so
owned by or pledged to the Master Servicer or such affiliate shall have an equal
and proportionate benefit under the provisions of this Agreement, without
preference, priority, or distinction as among all of the Notes, provided that
any Notes owned by the Master Servicer or any affiliate thereof, during the time
such Notes are owned by them, shall be without voting rights for any purpose set
forth in this Agreement. The Master Servicer shall notify the Indenture Trustee
promptly after it or any of its affiliates becomes the owner or pledgee of a
Note.
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ARTICLE VIII.
DEFAULT
Section 8.01 Events of Default.
For purposes of this Agreement, each of the following shall constitute
an "Event of Default."
(a) failure by the Master Servicer to deposit or cause the Servicer to
deposit all applicable Payments in the Collection Account no later than the
second Business Day following receipt thereof by the Master Servicer or
Servicer, which failure continues unremedied for two Business Days; or
(b) failure on the part of the Master Servicer duly to observe or
perform in any material respect any of its other covenants or agreements
contained in this Agreement that continues unremedied for a period of 30 days
after the earlier of (x) the date on which the Master Servicer gives notice of
such failure to the Indenture Trustee pursuant to Section 4.04(b) and (y) the
date on which written notice of such failure, requiring the same to be remedied,
shall have been given to the Master Servicer by the Indenture Trustee, or to the
Master Servicer and the Indenture Trustee pursuant to the direction of the
Majority Securityholders; or
(c) failure by the Master Servicer to deliver to the Indenture Trustee
the Master Servicer Certificate by the fourth Business Day prior to each
Distribution Date; or
(d) the entry of a decree or order for relief by a court or regulatory
authority having jurisdiction in respect of the Master Servicer in an
involuntary case under the federal bankruptcy laws, as now or hereafter in
effect, or another present or future, federal or state, bankruptcy, insolvency
or similar law, or appointing a receiver, liquidator, assignee, trustee,
custodian, sequestrator or other similar official of the Master Servicer or of
any substantial part of its properties or ordering the winding up or liquidation
of the affairs of the Master Servicer and the continuance of any such decree or
order unstayed and in effect for a period of 60 consecutive days or the
commencement of an involuntary case under the federal bankruptcy laws, as now or
hereinafter in effect, or another present or future federal or state bankruptcy,
insolvency or similar law and such case is not dismissed within 60 days; or
(e) the commencement by the Master Servicer of a voluntary case under
the federal bankruptcy laws, as now or hereinafter in effect, or any other
present or future, federal or state bankruptcy, insolvency or similar law, or
the consent by the Master Servicer to the appointment of or taking possession by
a receiver, liquidator, assignee, trustee, custodian, sequestrator or other
similar official of the Master Servicer or of any substantial part of its
property or the making by the Master Servicer of an assignment for the benefit
of creditors or the failure by the Master Servicer generally to pay its debts as
such debts become due or the taking of corporate
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action by the Master Servicer in furtherance of any of the foregoing or the
admission in writing by the Master Servicer of an inability to pay its debts as
they become due; or
(f) any representation, warranty or statement of the Master Servicer
made in this Agreement or any certificate, report or other writing delivered
pursuant hereto shall prove to be incorrect in any material respect as of the
time when the same shall have been made, and the incorrectness of such
representation, warranty or statement has a material adverse effect on the Trust
and, within 30 days of the earlier of (x) the date on which the Master Servicer
gives notice of such failure to the Indenture Trustee pursuant to Section
4.04(b) and (y) the date on which written notice thereof shall have been given
to the Master Servicer by the Indenture Trustee or the Majority Securityholders,
the circumstances or condition in respect of which such representation, warranty
or statement was incorrect shall not have been eliminated or otherwise cured; or
(g) failure on the part of the Master Servicer to deposit into the Note
Distribution Account within 3 Business Days following the related Determination
Date any Interest Advance pursuant to Section 4.08; or
(h) the Total Expected Loan Loss Percentage exceeds 21.1250% prior to
the fifth anniversary of the Cut-Off Date or 31.6875% thereafter.
Section 8.02 Consequences of an Event of Default.
If an Event of Default shall occur and be continuing, the Indenture
Trustee at the direction of the Majority Securityholders, by notice given in
writing to the Master Servicer may terminate all of the rights and obligations
of the Master Servicer under this Agreement. On or after the receipt by the
Master Servicer of such written notice, and the appointment of and acceptance by
a successor Master Servicer, all authority, power, obligations and
responsibilities of the Master Servicer under this Agreement, whether with
respect to the Securities or the Trust or otherwise, shall pass to, be vested in
and become obligations and responsibilities of the successor Master Servicer;
provided, however, that the successor Master Servicer shall have no liability
with respect to any obligation which was required to be performed by the prior
Master Servicer prior to the date that the successor Master Servicer becomes the
Master Servicer or any claim of a third party based on any alleged action or
inaction of the prior Master Servicer. The successor Master Servicer is
authorized and empowered by this Agreement to execute and deliver, on behalf of
the prior Master Servicer, as attorney-in-fact or otherwise, any and all
documents and other instruments and to do or accomplish all other acts or things
necessary or appropriate to effect the purposes of such notice of termination.
The prior Master Servicer agrees to cooperate with the successor Master Servicer
in effecting the termination of the responsibilities and rights of the prior
Master Servicer under this Agreement, including, without limitation, the
transfer to the successor Master Servicer for administration by it of all cash
amounts that shall at the time be held by the prior Master Servicer for deposit,
or have been deposited by the prior Master Servicer, in the Collection Account
or thereafter received with respect to the Home Loans and the delivery to the
successor Master Servicer of all Home Loan Files in the Master Servicer's
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possession and a computer tape in readable form containing the Servicing Record
and any other information necessary to enable the successor Master Servicer to
service the Home Loans. In addition to any other amounts that are then payable
to the terminated Master Servicer under this Agreement, the terminated Master
Servicer shall then be entitled to receive (to the extent provided by Section
4.09) out of the Collected Amount, reimbursements for any outstanding Interest
Advances made during the period prior to the notice pursuant to this Section
8.02 which terminates the obligation and rights of the terminated Master
Servicer under this Agreement. The Indenture Trustee and the successor Master
Servicer may set off and deduct any amounts owed by the terminated Master
Servicer from any amounts payable to the terminated Master Servicer. The
terminated Master Servicer shall grant the Indenture Trustee, and the successor
Master Servicer reasonable access to the terminated Master Servicer's premises
at the terminated Master Servicer's expense.
Section 8.03 Appointment of Successor.
(a) On or after the time the Master Servicer receives a notice of
termination pursuant to Section 8.02 or upon the resignation of the Master
Servicer pursuant to Section 7.04, the Indenture Trustee shall be the successor
in all respects to the Master Servicer in its capacity as master servicer under
this Agreement and the transactions set forth or provided for in this Agreement,
and shall be subject to all the responsibilities, restrictions, duties,
liabilities and termination provisions relating thereto placed on the Master
Servicer by the terms and provisions of this Agreement. The Indenture Trustee
shall take such action, consistent with this Agreement, as shall be necessary to
effectuate any such succession. If the Indenture Trustee or any other successor
Master Servicer is acting as Master Servicer hereunder, it shall be subject to
termination under Section 8.02 upon the occurrence of an Event of Default
applicable to it as Master Servicer.
(b) Any successor Master Servicer appointed pursuant to the provisions
of this Agreement shall execute, acknowledge and deliver to the Indenture
Trustee and its predecessor Master Servicer an instrument accepting such
appointment hereunder, and thereupon the resignation or removal of the
predecessor Master Servicer shall become effective.
(c) Any successor Master Servicer shall be entitled to such
compensation (whether payable out of the Collected Amount or otherwise) as the
Master Servicer would have been entitled to under the Agreement if the Master
Servicer had not resigned or been terminated hereunder. In addition, any
successor Master Servicer shall be entitled, to reasonable transition expenses
incurred in acting as successor Master Servicer pursuant to Section
5.01(c)(iii)(c).
Section 8.04 Notification to Certificateholders.
Upon any termination of the Master Servicer or appointment of a
successor to the Master Servicer, the Indenture Trustee shall give prompt
written notice thereof to Securityholders at their respective addresses
appearing in the Note Register and Certificate Register.
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Section 8.05 Waiver of Past Defaults.
The Majority Securityholders may, on behalf of all Securityholders,
waive any default by the Master Servicer in the performance of its obligations
hereunder and its consequences. Upon any such waiver of a past default, such
default shall cease to exist, and any 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.
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ARTICLE IX.
TERMINATION
Section 9.01 Termination.
(a) This Agreement shall terminate upon notice to the Indenture Trustee
of either: (a) the later of (i) the satisfaction and discharge of the Indenture
pursuant to Section 4.1 of the Indenture or (ii) the disposition of all funds
with respect to the last Home Loan and the remittance of all funds due hereunder
and the payment of all amounts due and payable to the Indenture Trustee, the
Owner Trustee, the Co-Owner Trustee, the Issuer, the Master Servicer and the
Servicer; or (b) the mutual consent of the Master Servicer, the Depositor, the
Seller and all Securityholders in writing.
(b) Subject to the provisions of the following sentence, Mego or, if
such option is not exercised by Mego, the Master Servicer may, at its option
upon not less than thirty days' prior notice given to the Indenture Trustee at
any time on or after the applicable Early Termination Notice Date, purchase on
the Termination Date specified in such notice, all, but not less than all, the
Home Loans and Foreclosed Properties then included in the Trust, at a purchase
price (the "Termination Price"), payable in cash, equal to the sum of:
(i) the Principal Balance of each Home Loan included in the
Trust as of such Monthly Cut-Off Date;
(ii) all unpaid interest accrued on the Principal Balance of
each such Loan at the related Home Loan Interest Rate to such Monthly
Cut-Off Date; and
(iii) the aggregate fair market value of each Foreclosed
Property included in the Trust on such Monthly Cut-Off Date, as
determined by an Independent appraiser acceptable to the Trustee as of
a date not more than thirty days prior to such Monthly Cut-Off Date.
The expense of any Independent appraiser required under this Section 9.01(b)
shall be a nonreimbursable expense of the party exercising the purchase option
pursuant to this Section 9.01(b). Mego or the Master Servicer shall effect the
purchase referred to in this Section 9.01(b) by deposit of the Termination Price
into the Note Distribution Account.
Section 9.02 Notice of Termination.
Notice of termination of this Agreement or of early redemption and
termination of the Securities shall be sent (i) by the Indenture Trustee to the
Noteholders in accordance with Section 2.6(b) of the Indenture and (ii) by the
Owner Trustee or Co-Owner Trustee to the Certificateholders and holders of
Residual Instruments in accordance with Section 9.1(d) of the Trust Agreement.
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ARTICLE X.
MISCELLANEOUS PROVISIONS
Section 10.01 Acts of Securityholders.
Except as otherwise specifically provided herein, whenever
Securityholder action, consent or approval is required under this Agreement,
such action, consent or approval shall be deemed to have been taken or given on
behalf of, and shall be binding upon, all Securityholders if the Majority
Securityholders agree to take such action or give such consent or approval.
Section 10.02 Amendment.
(a) This Agreement may be amended from time to time by the Depositor,
the Master Servicer, the Seller and the Issuer by written agreement with notice
thereof to the Securityholders, without the consent of any of the
Securityholders, to cure any error or ambiguity, to correct or supplement any
provisions hereof which may be defective or inconsistent with any other
provisions hereof or to add any other provisions with respect to matters or
questions arising under this Agreement; provided, however, that such action will
not adversely affect in any material respect the interests of the
Securityholders. An amendment described above shall be deemed not to adversely
affect in any material respect the interests of the Securityholders if either
(i) an opinion of counsel is obtained to such effect, or (ii) the party
requesting the amendment obtains a letter from each of the Rating Agencies
confirming that the amendment, if made, would not result in the downgrading or
withdrawal of the rating then assigned by the respective Rating Agency to any
Class of Securities then outstanding.
(b) This Agreement may also be amended from time to time by the
Depositor, the Master Servicer, the Seller and the Issuer by written agreement,
with the prior written consent of the Indenture Trustee and the Majority
Securityholders, for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of this Agreement, or of modifying
in any manner the rights of the Securityholders; provided, however, that no such
amendment shall (i) reduce in any manner the amount of, or delay the timing of,
collections of payments on Home Loans or distributions which are required to be
made on any Security, without the consent of the holders of 100% of each Class
of Notes, Certificates or Residual Instruments affected thereby, (ii) adversely
affect in any material respect the interests of the holders of any Class of
Notes, Certificates or Residual Instruments in any manner other than as
described in (i), without the consent of the holders of 100% of such Class of
Notes, the Certificates or Residual Instruments, respectively, or (iii) reduce
the percentage of any Class of Notes, Certificates or Residual Instruments, the
holders of which are required to consent to any such amendment, without the
consent of the holders of 100% of such Class of Notes or the Certificates or
Residual Instruments.
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<PAGE> 88
(c) It shall not be necessary for the consent of Securityholders under
this Section to approve the particular form of any proposed amendment, but it
shall be sufficient if such consent shall approve the substance thereof.
Prior to the execution of any amendment to this Agreement, the Issuer
shall be entitled to receive and rely upon an opinion of counsel stating that
the execution of such amendment is authorized or permitted by this Agreement.
The Issuer may, but shall not be obligated to, enter into any such amendment
which affects the Issuer's own rights, duties or immunities under this
Agreement.
Section 10.03 Recordation of Agreement.
To the extent permitted by applicable law, this Agreement, or a
memorandum thereof if permitted under applicable law, is subject to recordation
in all appropriate public offices for real property records in all of the
counties or other comparable jurisdictions in which any or all of the Mortgaged
Properties are situated, and in any other appropriate public recording office or
elsewhere, such recordation to be effected by the Master Servicer at the
Securityholders' expense on direction of the Indenture Trustee or the Majority
Securityholders, but only when accompanied by an opinion of counsel to the
effect that such recordation materially and beneficially affects the interests
of the Securityholders or is necessary for the administration or servicing of
the Home Loans.
Section 10.04 Duration of Agreement.
This Agreement shall continue in existence and effect until terminated
as herein provided.
Section 10.05 Governing Law.
THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES
HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS, WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
Section 10.06 Notices.
All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if personally delivered at or mailed
by overnight mail, certified mail or registered mail, postage prepaid, to: (i)
in the case of the Depositor, FINANCIAL ASSET SECURITIES CORP., 600 Steamboat
Road, Greenwich, Connecticut 06830, Attention: Peter McMullin, or such other
addresses as may hereafter be furnished to the Securityholders and the other
parties hereto in writing by the Depositor, (ii) in the case of the Issuer, Mego
Mortgage Home Loan Owner Trust 1997-4, c/o Wilmington Trust Company, Rodney
Square North, 1100 North Market Street, Wilmington, Delaware 19890, Attention:
Emmett R. Harmon, or such other
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<PAGE> 89
address as may hereafter be furnished to the Securityholders and the other
parties hereto, (iii) in the case of the Seller and Servicer, MEGO MORTGAGE
CORPORATION, 1000 Parkwood Circle, Atlanta, Georgia 30339, Attention: Jeff
Moore, President, or such other address as may hereafter be furnished to the
Securityholders and the other parties hereto, (iv) in the case of the Indenture
Trustee or Co-Owner Trustee, U.S. BANK NATIONAL ASSOCIATION, D/B/A FIRST BANK
NATIONAL ASSOCIATION, 180 East Fifth Street, St. Paul, Minnesota 55101,
Attention: Structured Finance: Mego 1997-4, (v) in the case of the Master
Servicer, 11000 Broken Land Parkway, Columbia, Maryland 21044-3562, Attention:
Master Servicing Department, Mego Mortgage Home Loan Owner Trust 1997-4; and
(vi) in the case of the Securityholders, as set forth in the applicable Note
Register and Certificate Register. Any such notices shall be deemed to be
effective with respect to any party hereto upon the receipt of such notice by
such party, except that notices to the Securityholders shall be effective upon
mailing or personal delivery.
Section 10.07 Severability of Provisions.
If any one or more of the covenants, agreements, provisions or terms of
this Agreement shall be held invalid for any reason whatsoever, then such
covenants, agreements, provisions or terms shall be deemed severable from the
remaining covenants, agreements, provisions or terms of this Agreement and shall
in no way affect the validity or enforceability of the other covenants,
agreements, provisions or terms of this Agreement.
Section 10.08 No Partnership.
Nothing herein contained shall be deemed or construed to create any
partnership or joint venture between the parties hereto and the services of the
Master Servicer shall be rendered as an independent contractor.
Section 10.09 Counterparts.
This Agreement may be executed in one or more counterparts and by the
different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed to be an original; such counterparts, together, shall
constitute one and the same Agreement.
Section 10.10 Successors and Assigns.
This Agreement shall inure to the benefit of and be binding upon the
Master Servicer, the Seller, the Servicer, the Depositor, the Issuer, the
Indenture Trustee and the Securityholders and their respective successors and
permitted assigns.
Section 10.11 Headings.
The headings of the various sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed to be part of
this Agreement.
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Section 10.12 Actions of Securityholders.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Agreement to be given or taken by
Securityholders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Securityholders in person or by agent
duly appointed in writing; and except as herein otherwise expressly provided,
such action shall become effective when such instrument or instruments are
delivered to the Depositor, the Master Servicer or the Issuer. Proof of
execution of any such instrument or of a writing appointing any such agent shall
be sufficient for any purpose of this Agreement and conclusive in favor of the
Depositor, the Master Servicer and the Issuer if made in the manner provided in
this Section.
(b) The fact and date of the execution by any Securityholder of any
such instrument or writing may be proved in any reasonable manner which the
Depositor, the Master Servicer or the Issuer deems sufficient.
(c) Any request, demand, authorization, direction, notice, consent,
waiver or other act by a Securityholder shall bind every holder of every
Security issued upon the registration of transfer thereof or in exchange
therefor or in lieu thereof, in respect of anything done, or omitted to be done,
by the Depositor, the Master Servicer or the Issuer in reliance thereon, whether
or not notation of such action is made upon such Security.
(d) The Depositor, the Master Servicer or the Issuer may require
additional proof of any matter referred to in this Section 10.12 as it shall
deem necessary.
Section 10.13 Reports to Rating Agencies.
(a) The Indenture Trustee shall provide to each Rating Agency copies of
statements, reports and notices, to the extent received or prepared by the
Master Servicer hereunder, as follows:
(i) copies of amendments to this Agreement;
(ii) notice of any substitution or repurchase of any Home
Loans;
(iii) notice of any termination, replacement, succession,
merger or consolidation of either the Master Servicer or the Issuer;
(iv) notice of final payment on the Notes, the Certificates
and the Residual Instruments;
(v) notice of any Event of Default;
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(vi) copies of the annual independent auditor's report
delivered pursuant to Section 4.05, and copies of any compliance
reports delivered by the Master Servicer hereunder including Section
4.04; and
(vii) copies of any Master Servicer's Certificate pursuant to
Section 6.02(b); and
(b) With respect to the requirement of the Indenture Trustee to provide
statements, reports and notices to the Rating Agencies such statements, reports
and notices shall be delivered to the Rating Agencies at the following
addresses: (i) if to Standard & Poor's, 26 Broadway, 15th Floor, New York, New
York 10004-1064, Attention: Asset-Backed Monitoring Department; (ii) if to DCR,
55 East Monroe Street, 35th Floor, Chicago, Illinois 60603, Attention: MBS
Monitoring; or (iii) if to Fitch, One State Street Plaza, New York, New York
10004, Attention: Glenn Costello.
Section 10.14 Inconsistencies Among Transaction Documents.
In the event certain provisions of a Transaction Document conflict with
the provisions of this Sale and Servicing Agreement, the parties hereto agree
that the provisions of this Sale and Servicing Agreement shall be controlling.
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<PAGE> 92
IN WITNESS WHEREOF, the following have caused their names to be signed
by their respective officers thereunto duly authorized, as of the day and year
first above written, to this SALE AND SERVICING AGREEMENT.
MEGO MORTGAGE HOME
LOAN OWNER TRUST 1997-4,
By: Wilmington Trust Company, not in its individual
capacity but solely as Owner Trustee
By:
-------------------------------------------------
Name:
Title:
FINANCIAL ASSET SECURITIES CORP.,
as Depositor
By:
-------------------------------------------------
Name: Peter McMullin
Title: Vice President
MEGO MORTGAGE CORPORATION,
as Seller and Servicer
By:
-------------------------------------------------
Name: James L. Belter
Title: Executive Vice President
U.S. BANK NATIONAL ASSOCIATION,
D/B/A FIRST BANK NATIONAL ASSOCIATION
as Indenture Trustee and Co-Owner Trustee
By:
-------------------------------------------------
Name: Lynn Steiner
Title: Assistant Vice President
88
<PAGE> 93
NORWEST BANK MINNESOTA, N.A. as Master
Servicer
By:
-------------------------------------------------
Name:
Title:
89
<PAGE> 94
THE STATE OF _____________ )
)
COUNTY OF ________________ )
BEFORE ME, the undersigned authority, a Notary Public, on this day
personally appeared Emmett R. Harmon, known to me to be a person and officer
whose name is subscribed to the foregoing instrument and acknowledged to me that
the same was the act of the said WILMINGTON TRUST COMPANY, NOT IN ITS INDIVIDUAL
CAPACITY BUT IN ITS CAPACITY AS OWNER TRUSTEE of MEGO MORTGAGE HOME LOAN OWNER
TRUST 1997-4, as Issuer, and that he executed the same as the act of such
corporation for the purpose and consideration therein expressed, and in the
capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF WILMINGTON TRUST COMPANY, this the 29th
day of August, 1997.
_______________________________________________________
Notary Public, State of ________
THE STATE OF _____________ )
)
COUNTY OF ________________ )
BEFORE ME, the undersigned authority, a Notary Public, on this day
personally appeared Peter McMullin, known to me to be a person and officer whose
name is subscribed to the foregoing instrument and acknowledged to me that the
same was the act of the said FINANCIAL ASSET SECURITIES CORP., as the Depositor,
and that he executed the same as the act of such corporation for the purpose and
consideration therein expressed, and in the capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF FINANCIAL ASSET SECURITIES CORP., this
the 29th day of August, 1997.
_______________________________________________________
Notary Public, State of ________
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<PAGE> 95
THE STATE OF _____________ )
)
COUNTY OF ________________ )
BEFORE ME, the undersigned authority, a Notary Public, on this day
personally appeared James L. Belter, known to me to be the person and officer
whose name is subscribed to the foregoing instrument and acknowledged to me that
the same was the act of the said MEGO MORTGAGE CORPORATION, as the Seller and
Servicer, and that he executed the same as the act of such corporation for the
purposes and consideration therein expressed, and in the capacity therein
stated.
GIVEN UNDER MY HAND AND SEAL OF MEGO MORTGAGE CORPORATION, this the
29th day of August, 1997.
_______________________________________________________
Notary Public, State of ________
THE STATE OF _____________ )
)
COUNTY OF ________________ )
BEFORE ME, the undersigned authority, a Notary Public, on this day
personally appeared Lynn Steiner, known to me to be the person and officer whose
name is subscribed to the foregoing instrument and acknowledged to me that the
same was the act of the said U.S. BANK NATIONAL ASSOCIATION, D/B/A FIRST BANK
NATIONAL ASSOCIATION, a national banking association, as the Indenture Trustee,
and Co-Owner Trustee, and that she executed the same as the act of such entity
for the purposes and consideration therein expressed, and in the capacity
therein stated.
GIVEN UNDER MY HAND AND SEAL OF FIRST TRUST OF NEW YORK, NATIONAL
ASSOCIATION, this the 29th day of August, 1997.
_______________________________________________________
Notary Public, State of ________
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<PAGE> 96
THE STATE OF _____________ )
)
COUNTY OF ________________ )
BEFORE ME, the undersigned authority, a Notary Public, on this day
personally appeared _____________________, known to me to be the person and
officer whose name is subscribed to the foregoing instrument and acknowledged to
me that the same was the act of the said NORWEST BANK MINNESOTA, N.A., as the
Master Servicer, and that he executed the same as the act of such corporation
for the purpose and consideration therein expressed, and in the capacity therein
stated.
GIVEN UNDER MY HAND AND SEAL OF NORWEST BANK MINNESOTA, N.A., this the
29th day of August, 1997.
_______________________________________________________
Notary Public, State of ________
92
<PAGE> 1
EXHIBIT 10.44
EXECUTION COPY
===============================================================================
FINANCIAL ASSET SECURITIES CORP.,
as Purchaser,
and
MEGO MORTGAGE CORPORATION,
as Seller,
HOME LOAN PURCHASE AGREEMENT
===============================================================================
Dated as of August 16, 1997
<PAGE> 2
Table of Contents
<TABLE>
<CAPTION>
Page
----
ARTICLE I.
DEFINITIONS
<S> <C> <C>
Section 1.1 Definitions.......................................................................... 1
ARTICLE II.
SALE OF HOME LOANS; PAYMENT OF PURCHASE PRICE
Section 2.1 Sale of Home Loans................................................................... 2
Section 2.2 [Reserved]........................................................................... 2
Section 2.3 Obligations of Seller Upon Sale...................................................... 2
Section 2.4 Payment of Purchase Price for the Home Loans. ..................................... 4
ARTICLE III.
REPRESENTATIONS AND
WARRANTIES; REMEDIES FOR BREACH
Section 3.1 Seller Representations and Warranties................................................ 5
ARTICLE IV.
SELLER'S COVENANTS
Section 4.1 Covenants of the Seller.............................................................. 7
ARTICLE V.
INDEMNIFICATION BY THE SELLER
Section 5.1 Indemnification...................................................................... 7
Section 5.2 Limitation on Liability of the Seller................................................ 7
ARTICLE VI.
TERMINATION
Section 6.1 Termination.......................................................................... 10
ARTICLE VII.
MISCELLANEOUS PROVISIONS
Section 7.1 Amendment............................................................................ 10
Section 7.2 Governing Law........................................................................ 10
Section 7.3 Notices.............................................................................. 10
Section 7.4 Severability of Provisions........................................................... 11
Section 7.5 Counterparts......................................................................... 11
Section 7.6 Further Agreements................................................................... 11
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 7.7 Intention of the Parties...................................................................... 11
Section 7.8 Successors and Assigns; Assignment of Purchase Agreement...................................... 12
Section 7.9 Survival...................................................................................... 12
Section 7.10 Third-Party Beneficiaries..................................................................... 12
EXHIBITS AND SCHEDULES
Schedule I Schedule of Home Loans
</TABLE>
ii
<PAGE> 4
HOME LOAN PURCHASE AGREEMENT (the "Purchase Agreement"), dated
as of August 16, 1997, between Mego Mortgage Corporation ("Mego" or the
"Seller") and FINANCIAL ASSET SECURITIES CORP., ("FASCO" and together with any
assignee of FASCO, the "Purchaser").
W I T N E S S E T H
WHEREAS, the Seller is the owner of a pool of fixed-rate home
improvement and debt consolidation loans and retail installment sale contracts
(the "Home Loans") secured by first and junior mortgages, deeds of trust and
security deeds on certain residential and investment properties (the
"Properties") as listed on Schedule I attached hereto and the Related Documents
thereto (as defined below);
WHEREAS, the parties hereto desire that the Seller sell all
its right, title and interest in and to the Home Loans and the Related Documents
to the Purchaser pursuant to the terms of this Purchase Agreement; and
WHEREAS, pursuant to the terms of a Sale and Servicing
Agreement, dated as of August 16, 1997 (the "Sale and Servicing Agreement"),
among Mego Mortgage Home Loan Owner Trust 1997-4, as issuer (the "Trust"),
FASCO, as depositor (the "Depositor"), Mego, as Seller and servicer (the
"Servicer"), Norwest Bank Minnesota, N.A., as master servicer (the "Master
Servicer"), and U.S. Bank National Association, d/b/a First Bank National
Association, as indenture trustee (the "Indenture Trustee") and co-owner trustee
(the "Co-Owner Trustee"), the Purchaser will sell, transfer, assign and
otherwise convey to the Trust all its right, title and interest in and to the
Home Loans and this Purchase Agreement;
NOW, THEREFORE, in consideration of the mutual covenants
herein contained, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.1 Definitions. Capitalized terms used but not
defined herein have the meanings assigned thereto in the Sale and Servicing
Agreement.
Registration Statement. The Purchaser's registration statement
on Form S-3 (No. 333-29381), in the form in which it became effective under the
Securities Act of 1933, as amended, on June 20, 1997 including any documents
incorporated by reference therein.
Base Prospectus. The prospectus, dated June 20, 1997 attached
to the Prospectus Supplement relating to the Notes and Certificates.
1
<PAGE> 5
ARTICLE II.
SALE OF HOME LOANS; PAYMENT OF PURCHASE PRICE
Section 2.1 Sale of Home Loans. The Seller, concurrently with
the execution and delivery of this Purchase Agreement, does hereby sell, assign,
set over, and otherwise convey to the Purchaser, without recourse other than as
expressly provided herein and in the Sale and Servicing Agreement, all of its
right, title and interest in, to and under the following, whether now existing
or hereafter acquired and wherever located: (i) as of the Cut-Off Date, the Home
Loans delivered to the Indenture Trustee on the Closing Date, including the
related Principal Balance and all payments of principal in respect of Home Loans
received on or after the Cut-Off Date and payments of interest in respect of
Home Loans due on or after the CutOff Date, (ii) the Home Loan Files, (iii) any
Insurance Policies and related Insurance Proceeds, (iv) the Mortgages and
security interests in Mortgaged Properties which secure the Home Loans, (v) any
and all documents or electronic records relating to the Home Loans, (vi) all
proceeds of any of the foregoing.
Section 2.2 [Reserved].
Section 2.3 Obligations of Seller Upon Sale. In connection
with any transfer pursuant to Section 2.1 hereof, the Seller further agrees, at
its own expense, on or prior to the Closing Date (a) to indicate in its books
and records that the Home Loans have been sold to the Purchaser pursuant to this
Purchase Agreement and (b) to deliver to the Purchaser a computer file
containing a true and complete list of all Home Loans specifying for each Home
Loan, as of the Cut-Off Date, (i) its account number and (ii) its Principal
Balance. Such file, which forms a part of Exhibit A to the Sale and Servicing
Agreement, shall also be marked as Schedule I to this Purchase Agreement and is
hereby incorporated into and made a part of this Purchase Agreement.
The Seller agrees to prepare, execute and file UCC-1 financing
statements with the County Clerk of Cobb (which shall have been filed on or
before the Closing Date with respect to the Home Loans describing the Home Loans
and naming the Seller as debtor and, the Purchaser as secured party (and
indicating that such loans have been assigned to the Trust) all necessary
continuation statements and any amendments to the UCC-1 financing statements
required to reflect a change in the name or corporate structure of the Seller or
the filing of any additional UCC-1 financing statements due to the change in the
principal office of the Seller, as are necessary to perfect the sale of the
Seller's interest in each Home Loan and the proceeds thereof.
In connection with any conveyance by the Seller, the Seller
shall on behalf of the Purchaser deliver to, and deposit with the Indenture
Trustee, as assignee of the Purchaser, on or before the Closing Date the
following documents or instruments with respect to each Home Loan (the "Related
Documents"); provided, that the documents or instruments listed in clause (f)
below may be held in the custody of the Seller on behalf of the Indenture
Trustee.
With respect to each Home Loan:
2
<PAGE> 6
(a) The original Debt Instrument, showing a complete chain
of endorsements or assignments from the named payee to the Trust
and endorsed as follows: "Pay to the order of U.S. Bank National
Association, d/b/a First Bank National Association, as Indenture
Trustee and Co-Owner Trustee for Mego Mortgage Home Loan Owner
Trust 1997-4 without recourse";
(b) If such Home Loan is a Mortgage Loan, the original
Mortgage with evidence of recording indicated thereon (except
that a true copy thereof certified by an appropriate public
official may be substituted); provided, however, that if the
Mortgage with evidence of recording thereon cannot be delivered
concurrently with the execution and delivery of this Purchase
Agreement solely because of a delay caused by the public
recording office where such Mortgage has been delivered for
recordation, there shall be delivered to the Indenture Trustee a
copy of such Mortgage certified as a true copy in an Officer's
Certificate which shall certify that such Mortgage has been
delivered to the appropriate public recording office for
recordation, and there shall be promptly delivered to the
Indenture Trustee such Mortgage with evidence of recording
indicated thereon upon receipt thereof from the public recording
official (or a true copy thereof certified by an appropriate
public official may be delivered to the Indenture Trustee);
(c) If such Home Loan is a Mortgage Loan, an original
Assignment of the Mortgage, in recordable form. Such assignment
may be a blanket assignment, to the extent that blanket
assignments are effective under applicable law, for Mortgages
covering Properties situated in the same county. If the
assignment of Mortgage is in blanket form, an assignment of
Mortgage need not be included in the individual Home Loan File;
(d) If such Home Loan is a Mortgage Loan, all original
intermediate assignments of the Mortgage, showing a complete
chain of assignments from the named mortgagee to the assignor to
the Indenture Trustee, with evidence of recording thereon (or
true copies thereof certified by appropriate public officials may
be substituted); provided, however, that if the intervening
assignments of mortgage with evidence of recording thereon cannot
be delivered concurrently with the execution and delivery of this
Purchase Agreement solely because of a delay caused by the public
recording office where such Assignments of Mortgage have been
delivered for recordation, there shall be delivered to the
Indenture Trustee a copy of each such assignment of Mortgage
certified as a true copy in an Officer's Certificate which shall
certify that each such assignment of Mortgage has been delivered
to the appropriate public recording office for recordation, and
there shall be promptly delivered to the Indenture Trustee such
assignments of Mortgage with evidence of recording indicated
thereon upon its receipt thereof from the public recording
official (or true copies thereof certified by an appropriate
public official may be delivered to the Indenture Trustee);
(e) An original of each assumption or modification
agreement, if any, relating to such Home Loan; and
(f) (i) an original or copy of the truth-in-lending
disclosure, (ii) an original or copy of the credit application,
(iii) an original or copy of the consumer credit report, (iv) an
original or copy of verification of employment and income, or
verification of self-
3
<PAGE> 7
employment income, (v) an original or copy of the contract of
work or written description with cost estimates, if applicable,
(vi) an original or copy of the report of inspection of
improvements to the Property, if applicable, (vii) to the extent
not included in (ii), an original or a copy of a written
verification, or an underwriter's notation of obtaining a verbal
verification that the Obligor at the time of origination was not
more than 30 days delinquent on any senior mortgage or deed of
trust on the Property, (viii) (1) if the original principal
balance is between $35,001 and $40,000, (A) evidence that the
borrower has a FICO Score of at least 640, a debt to income ratio
no greater than 45%, and disposable income of at least $1,500 per
month, or (B) (I) a copy of the HUD-1 Closing Statement
indicating the sale price, or (II) an Uniform Residential
Appraisal Report, or (III) a Drive-By Appraisal documented on
either FHLMC Form 704 or FNMA Form 2055, or (IV) a tax
assessment, or (V) a broker's price opinion; (2) if the original
principal balance is between $40,001 and $50,000, (A) a copy of
the HUD-1 Closing Statement indicating the sale price, or (B) an
Uniform Residential Appraisal, or (C) a Drive-By Appraisal
documented on either FHLMC Form 704 or FNMA Form 2055, or (D) a
tax assessment, or (E) a broker's price opinion, or (3) if the
original principal balance exceeds $50,000, a full Uniform
Residential Appraisal Report prepared by a national appraisal
firm, and (ix) an original or a copy of a title search as of the
time of origination with respect to the Property.
With respect to any documents referred to clauses (b) and (d)
above that are not delivered to the Indenture Trustee because of a delay caused
by the public recording office, such documents shall be delivered to the
Indenture Trustee in accordance with the terms of such clauses by the Seller if
such documents are received by it or by the Purchaser if such documents are
received by it.
The Seller further hereby confirms to the Purchaser that, as
of the Closing Date it has caused the portions of the Seller's electronic ledger
relating to the Home Loans to be clearly and unambiguously marked to indicate
that the Home Loans have been sold to the Purchaser.
The Purchaser hereby acknowledges its acceptance of all right,
title and interest to the Home Loans and other property, now existing and
hereafter created, conveyed to it pursuant to Section 2.1 hereof.
The parties hereto intend that each of the transactions set
forth herein be a sale by the Seller to the Purchaser of all the Seller's right,
title and interest in and to the Home Loans and other property described above.
In the event the transactions set forth herein are deemed not to be a sale, the
Seller hereby grants to the Purchaser a security interest in all of the Seller's
right, title and interest in, to and under the Home Loans and other property
described above, whether now existing or hereafter created, to secure all of the
Seller's obligations hereunder; and this Purchase Agreement shall constitute a
security agreement under applicable law.
Section 2.4 Payment of Purchase Price for the Home Loans. (a)
In consideration of the sale of the Home Loans from the Seller to the Purchaser
on the Closing Date, the Purchaser agrees to pay to the Seller on the Closing
Date by transfer of immediately
4
<PAGE> 8
available funds, an amount equal to $72,772,978.01 (which includes accrued
interest) (before deducting expenses payable by the Seller to the Purchaser)
(the "Purchase Price").
(b) Within 60 days of the Closing Date, the Seller, at its own
expense, shall cause the Indenture Trustee to record each Assignment of Mortgage
in favor of the Indenture Trustee (which may be a blanket assignment if
permitted by applicable law) in the appropriate real property or other records;
provided, however, the Indenture Trustee need not record any assignment which
relates to a Home Loan in any jurisdiction under the laws of which, as evidenced
by an Opinion of Counsel delivered by the Seller (at the Seller's expense) to
the Indenture Trustee, the recordation of such Assignment is not necessary to
protect the Indenture Trustee's and the Securityholders' interest in the related
Home Loan. With respect to any Assignment of Mortgage as to which the related
recording information is unavailable within 60 days following the Closing Date,
such Assignment of Mortgage shall be submitted for recording within 30 days
after receipt of such information but in no event later than one year after the
Closing Date. The Indenture Trustee shall be required to retain a copy of each
Assignment of Mortgage submitted for recording. In the event that any such
Assignment of Mortgage is lost or returned unrecorded because of a defect
therein, the Seller shall promptly prepare a substitute Assignment of Mortgage
or cure such defect, as the case may be, and thereafter the Trustee shall be
required to submit each such Assignment of Mortgage for recording.
ARTICLE III.
REPRESENTATIONS AND
WARRANTIES; REMEDIES FOR BREACH
Section 3.1 Seller Representations and Warranties. (a) The
Seller represents and warrants to the Purchaser as of Closing Date that:
(i) The Seller is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Delaware with full power and authority to own its properties and
conduct its business as such properties are presently owned and
such business is presently conducted;
(ii) The Seller has full power and authority to execute,
deliver and perform, and to enter into and consummate all
transactions required of it by this Purchase Agreement and each
other Transaction Document to which it is a party; has duly
authorized the execution, delivery and performance of this
Purchase Agreement and each other Transaction Document to which
it is a party; has duly executed and delivered this Purchase
Agreement and each other Transaction Document to which it is a
party; when duly authorized, executed and delivered by the other
parties hereto, this Purchase Agreement and each other
Transaction Document to which it is a party will constitute a
legal, valid and binding obligation of the Seller enforceable
against it in accordance with its terms, except as enforceability
may be limited by bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditors' rights
generally and by equitable limitations on the availability of
specific remedies, regardless of whether such enforceability is
considered in a proceeding in equity or at law;
5
<PAGE> 9
(iii) Neither the execution and delivery of this Purchase
Agreement or any of the other Transaction Documents to which the
Seller is a party, the consummation of the transactions required
of it herein or under any other Transaction Document, nor the
fulfillment of or compliance with the terms and conditions of
this Purchase Agreement or any of the other Transaction Documents
will conflict with or result in a breach of any of the terms,
conditions or provisions of the Seller's charter or by-laws or
any legal restriction or any material agreement or instrument to
which the Seller is now a party or by which it is bound, or which
would adversely affect the creation and administration of the
Trust as contemplated hereby, or constitute a material default or
result in an acceleration under any of the foregoing, or result
in the violation of any law, rule, regulation, order, judgment or
decree to which the Seller or its property is subject;
(iv) There is no action, suit, proceeding, investigation
or litigation pending against the Seller or, to its knowledge,
threatened, which, if determined adversely to the Seller, would
materially adversely affect the sale of the Home Loans, the
execution, delivery or enforceability of this Purchase Agreement
or any other Transaction Document, or which would have a material
adverse affect on the financial condition of the Seller;
(v) No consent, approval, authorization or order of any
court or governmental agency or body is required for: (a) the
execution, delivery and performance by the Seller of, or
compliance by the Seller with, this Purchase Agreement, (b) the
sale of the Home Loans or (c) the consummation of the
transactions required of it by this Purchase Agreement;
(vi) The Seller is not in default with respect to any
order or decree of any court or any order, regulation or demand
of any federal, state, municipal or governmental agency, which
default might have consequences that would materially and
adversely affect the condition (financial or other) or operations
of the Seller or its properties or might have consequences that
would materially and adversely affect its performance hereunder;
(vii) The Seller received fair consideration and reasonably
equivalent value in exchange for the sale of the Home Loans to
the Purchaser; and
(viii) The Seller has transferred the Home Loans without any
intent to hinder, delay or defraud any of its creditors.
(b) The Seller further represents and warrants to the
Purchaser that with respect to the Home Loans as of the Cut-Off Date each of the
representations and warranties contained in Section 3.03(b) of the Sale and
Servicing Agreement are true and correct.
It is understood and agreed that the representations and
warranties set forth in this Section 3.1(b) shall survive delivery of the
respective Home Loan Files to the Indenture Trustee on behalf of the Purchaser.
In the event that (a) any of the representations and warranties of the Seller in
Section 3.03(b) of the Sale and Servicing Agreement are determined
6
<PAGE> 10
to be untrue in a manner that materially and adversely affects the interests of
the Securityholders in any Home Loan with respect to which such representation
or warranty is made and (b) the Seller shall fail to cure such breach within the
time period specified in Section 3.05 of the Sale and Servicing Agreement, the
Seller shall be obligated to repurchase or substitute the affected Home Loan(s)
in accordance with the provisions of Section 3.05 of the Sale and Servicing
Agreement.
With respect to representations and warranties made by Mego
pursuant to this Section 3.1(b) that are made to the Seller's best knowledge, if
it is discovered by any of the Depositor, the Seller, the Indenture Trustee or
the Owner Trustee that the substance of such representation and warranty is
inaccurate and such inaccuracy materially and adversely affects the value of the
related Home Loan, notwithstanding the Seller's lack of knowledge, such
inaccuracy shall be deemed a breach of the applicable representation and
warranty.
ARTICLE IV.
SELLER'S COVENANTS
Section 4.1 Covenants of the Seller. The Seller hereby
covenants that except for the transfer hereunder, the Seller will not sell,
pledge, assign or transfer to any other Person, or grant, create, incur, assume
or suffer to exist any lien on, any Home Loan, or any interest therein; and the
Seller will defend the right, title and interest of the Trust, as assignee of
the Purchaser, in, to and under the Home Loans, against all claims of third
parties claiming through or under the Seller.
ARTICLE V.
INDEMNIFICATION BY THE SELLER
Section 5.1 Indemnification. The Seller agrees to indemnify
and hold harmless the Purchaser from and against any loss, liability, expense,
damage, claim or injury (other than those resulting solely from defaults on the
Home Loans) arising out of or based on this Agreement including, without
limitation, in connection with the origination or prior servicing of the Home
Loans by reason of any acts, omissions, or alleged acts or omissions arising out
of activities of the Seller, originator or prior servicer, including reasonable
attorneys' fees and other costs or expenses incurred in connection with the
defense of any actual or threatened action, proceeding or claim; provided that
the Seller shall not indemnify the Purchaser if such loss, liability, expense,
damage or injury is due to the Purchaser's willful misfeasance, bad faith or
negligence or by reason of the Purchaser's reckless disregard of its obligations
hereunder. The provisions of this indemnity shall run directly to and be
enforceable by an injured party subject to the limitations hereof.
Section 5.2 Limitation on Liability of the Seller. None of the
directors or trustees or officers or employees or agents of the Seller shall be
under any liability to the Purchaser, it being expressly understood that all
such liability is expressly waived and released as a condition of, and as
consideration for, the execution of this Purchase Agreement; provided, however,
that this provision shall not protect any such Person against any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith or
negligence
7
<PAGE> 11
in the performance of duties hereunder. Except as expressly provided herein and
in the Sale and Servicing Agreement, the Seller shall not be under any liability
to the Trust, the Owner Trustee, the Co-Owner Trustee or the Securityholders.
The Seller and any director or officer or 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.
Section 5.3 Indemnification (a) The Seller agrees to indemnify and hold
harmless the Purchaser, the directors of the Purchaser and each person, if any,
who controls the Purchaser within the meaning of Section 15 of the Securities
Act of 1933 (the "Act") or Section 20 of the Securities Exchange Act of 1934
(the "Exchange Act"), from and against any and all losses, claims, damages,
liabilities or judgments (including without limiting the foregoing the
reasonable legal and other expenses incurred in connection with any action, suit
or proceeding or any claim asserted) arising out of (i) any untrue statement or
alleged untrue statement of a material fact contained under any of the captions
"Mego Mortgage Corporation", and "The Pool" in the Prospectus Supplement or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances in which they were made, not misleading or (ii)
any information concerning the Seller, the Home Loans or the Seller's operations
based on any untrue statement or alleged untrue statement of a fact contained in
any information provided by the Seller to the Purchaser, or any material
omission from the information purported to be provided thereby, and disseminated
to any Rating Agency, Deloitte & Touche or prospective investors (directly or
indirectly through available information systems) in connection with the
issuance, marketing or offering of the Notes and Certificates. This indemnity
agreement will be in addition to any liability which the Seller may otherwise
have pursuant to this Purchase Agreement.
(b) The Purchaser agrees to indemnify and hold harmless the
Seller and each person, if any, who controls the Seller within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act from and against any and
all losses, claims, damages and liabilities caused by (A) any untrue statement
or alleged untrue statement of a material fact contained in (i) the Prospectus
Supplement under the caption "Description of the Securities", "Description of
the Transfer and Servicing Agreements", and "Prepayment and Yield
Considerations"; (ii) the Base Prospectus; or (iii) the Registration Statement
(other than the information with respect to the Seller contained in the
Prospectus Supplement) or (B) any omission or alleged omission to state a
material fact, in the case of the Registration Statement (other than the
information with respect to the Seller contained in the Prospectus Supplement),
required to be stated therein or necessary to make the statements therein not
misleading, and in the case of the section of the Prospectus Supplement
specified in clause (A) (i) of this sentence and the Base Prospectus, necessary
in order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. This indemnity agreement will be in
addition to any liability which the Purchaser may have pursuant to this Purchase
Agreement.
(c) In case any action or proceeding (including any
governmental or regulatory investigation or proceeding) shall be instituted
involving any person in respect of which indemnity may be sought pursuant to
either of the two preceding paragraphs, such person (hereinafter called the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (hereinafter called the "indemnifying party") in writing
and the
8
<PAGE> 12
indemnifying party, upon request of the indemnified party, shall assume the
defense thereof, including the employment of counsel reasonably satisfactory to
the indemnified party to represent the indemnified party and any others the
indemnifying party may designate and shall pay the fees and disbursements of
such counsel related to such proceeding. In any such action or proceeding, any
indemnified party shall have the right to retain its own counsel, but the fees
and expenses of such counsel shall be at the expense of such indemnified party
unless (1) the indemnifying party and the indemnified party shall have mutually
agreed to the retention of such counsel or (2) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying party
and the indemnified party and representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests between
them. It is understood that the indemnifying party shall not, in connection with
any proceeding or related proceedings in the same jurisdiction, be liable for
the reasonable fees and expenses of more than one separate firm (in addition to
any local counsel) for any indemnified party and each person, if any, who
controls such indemnified party within the meaning of either Section 15 of the
Act or Section 20 of the Exchange Act, and it is also understood that expenses
shall be reimbursed as they are incurred. In the case of any such separate firm
for any indemnified party and any director, officer and control person of the
indemnified party, such firm shall be designated in writing by such indemnified
party. The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(d) If the indemnification provided for in this Section 5.3 is
unavailable to an indemnified party in respect of any losses, claims, damages,
liabilities or judgments referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities and expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the indemnified party on the one hand
and the indemnifying party on the other from the sale of the Home Loans or (ii)
if the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
indemnified party on the one hand and the indemnifying party 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. For purposes of the foregoing, the benefit received by
the Seller from the sale of the Home Loans shall be deemed to equal the amount
of the gross proceeds received by the Seller from such sale, and the benefit
received by the Purchaser for such sale shall be deemed to equal the amount
specified in the paragraph below. The relative fault of the Purchaser on the one
hand and the Seller on the other shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
Purchaser or by the Seller and the parties' relative intent,
9
<PAGE> 13
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Seller and the Purchaser agree that it would not be just
and equitable if contribution pursuant to this Section 5.3(d) were determined by
pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 5.3(d), in no event shall the
Purchaser be required to contribute any amount in excess of $668,182.94. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
ARTICLE VI.
TERMINATION
Section 6.1 Termination. The respective obligations and
responsibilities of the Seller and the Purchaser created hereby shall terminate,
except for the Seller's and Purchaser's indemnity obligations as provided
herein, upon the termination of the Trust as provided in Article XI of the Sale
and Servicing Agreement.
ARTICLE VII.
MISCELLANEOUS PROVISIONS
Section 7.1 Amendment. This Purchase Agreement may be amended
from time to time by the Seller and the Purchaser, by written agreement signed
by the Seller and the Purchaser.
Section 7.2 Governing Law. This Purchase Agreement shall be
governed by and construed in accordance with the laws of the State of New York
and the obligations, rights and remedies of the parties hereunder shall be
determined in accordance with such laws.
Section 7.3 Notices. All demands, notices and communications
hereunder shall be in writing and shall be deemed to have been duly given if
personally delivered at or mailed by registered mail, postage prepaid, addressed
as follows:
(a) if to the Seller:
Mego Mortgage Corporation
1000 Parkwood Circle, Suite 500
Atlanta, Georgia 30339
Attention: Jeff S. Moore, President
10
<PAGE> 14
or, such other address as may hereafter be furnished to the Purchaser in writing
by the Seller.
(b) if to FASCO
Financial Asset Securities Corp.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: General Counsel
or such other address as may hereafter be furnished to the Seller in writing by
the Purchaser.
Section 7.4 Severability of Provisions. If any one or more of
the covenants, agreements, provisions of terms of this Purchase Agreement shall
be held invalid for any reason whatsoever, then such covenants, agreements,
provisions or terms shall be deemed severable from the remaining covenants,
agreements, provisions or terms of this Purchase Agreement and shall in no way
affect the validity of enforceability of the other provisions of this Purchase
Agreement.
Section 7.5 Counterparts. This Purchase Agreement may be
executed in one or more counterparts and by the different parties hereto on
separate counterparts, each of which, when so executed, shall be deemed to be an
original and such counterparts, together, shall constitute one and the same
agreement.
Section 7.6 Further Agreements. The Purchaser and the Seller
each agree to execute and deliver to the other such amendments to documents and
such additional documents, instruments or agreements as may be necessary or
appropriate to effectuate the purposes of this Purchase Agreement or in
connection with the offering of securities representing interests in the Home
Loans.
Without limiting the generality of the foregoing, as a further
inducement for the Purchaser to purchase the Home Loans from the Seller, the
Seller will cooperate with the Purchaser in connection with the sale of any of
the securities representing interests in the Home Loans. In that connection, the
Seller will provide to the Purchaser any and all information and appropriate
verification of information, whether through letters of its auditors and counsel
or otherwise, as the Purchaser shall reasonably request and will provide to the
Purchaser such additional representations and warranties, covenants, opinions of
counsel, letters from auditors, and certificates of public officials or officers
of the Seller as are reasonably required in connection with such transactions
and the offering of investment grade securities rated by Duff & Phelps Credit
Ratings Co., Fitch Investors Services L.P. and Standard & Poor's Rating
Services.
Section 7.7 Intention of the Parties. It is the intention of
the parties that the Purchaser is purchasing, and the Seller is selling, the
Home Loans rather than pledging the Home Loans to secure a loan by the Purchaser
to the Seller. Accordingly, the parties hereto each intend to treat the
transaction for federal income tax purposes and all other purposes as a sale by
the Seller, and a purchase by the Purchaser, of the Home Loans. The Purchaser
will have the right to review the Home Loans and the related Home Loan Files to
determine the
11
<PAGE> 15
characteristics of the Home Loans which will affect the federal income tax
consequences of owning the Home Loans and the Seller will cooperate with all
reasonable requests made by the Purchaser in the course of such review.
Section 7.8 Successors and Assigns; Assignment of Purchase
Agreement. The Agreement shall bind and inure to the benefit of and be
enforceable by the Seller, the Purchaser and the Trustee. The obligations of the
Seller under this Purchase Agreement cannot be assigned or delegated to a third
party without the consent of the Purchaser, which consent shall be at the
Purchaser's sole discretion, except that the Purchaser acknowledges and agrees
that the Seller may assign its obligations hereunder to any Person into which
the Seller is merged or any corporation resulting from any merger, conversion or
consolidation to which the Seller is a party or any Person succeeding to the
business of the Seller. The parties hereto acknowledge that FASCO is acquiring
the Home Loans for the purpose of contributing them to the Trust that will issue
(i) the Residual Instruments and the Certificates representing undivided
interests in such Home Loans and (ii) the Notes which will be secured by such
Home Loans. As an inducement to FASCO to purchase the Home Loans, the Seller
acknowledges and consents to the assignment by FASCO to the Trust of all of
FASCO's rights against the Seller pursuant to this Purchase Agreement and to the
enforcement or exercise of any right or remedy against the Seller pursuant to
this Purchase Agreement by the Owner Trustee and Co-Owner Trustee under the Sale
and Servicing Agreement. Such enforcement of a right or remedy by the Owner
Trustee and Co-Owner Trustee shall have the same force and effect as if the
right or remedy had been enforced or exercised by FASCO directly.
Section 7.9 Survival. The representations and warranties set
forth in Article III and the provisions of Article V shall survive the purchase
of the Home Loans hereunder.
Section 7.10 Third-Party Beneficiaries. This Purchase
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective successors and permitted assigns. Except as otherwise
provided in this Section 7.10 no other Person shall have the right or obligation
hereunder.
12
<PAGE> 16
IN WITNESS WHEREOF, the Seller and the Purchaser have caused
this Home Loan Purchase Agreement to be duly executed on their behalf by their
respective officers thereunto duly authorized as of the day and year first above
written.
FINANCIAL ASSET SECURITIES CORP.,
as Purchaser
By:
------------------------------
Name: Peter McMullin
Title: Vice President
MEGO MORTGAGE CORPORATION,
as Seller
By:
-------------------------------
Name: James L. Belter
Title: Executive Vice President
<PAGE> 17
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 29th day of August 1997 before me, a Notary Public in and for
said State, personally appeared Peter McMullin known to me to be a Vice
President of FINANCIAL ASSET SECURITIES CORP., the corporation that executed the
within instrument, and also known to me to be the person who executed it on
behalf of said corporation, and acknowledged to me that such corporation
executed the within instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.
-----------------------------------
Notary Public
<PAGE> 18
STATE OF ATLANTA )
) ss.:
COUNTY OF COBB )
On the [____] day of August 1997 before me, a Notary Public in and for
said State, personally appeared James L. Belter, known to me to be the Executive
Vice President of MEGO MORTGAGE CORPORATION, the company that executed the
within instrument, and also known to me to be the person who executed it on
behalf of said corporation, and acknowledged to me that such corporation
executed the within instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.
-----------------------------------
Notary Public
<PAGE> 19
SCHEDULE I
Loan Schedule
See Exhibit A to Sale and Servicing Agreement
<PAGE> 1
EXHIBIT 10.46
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MEGO MORTGAGE CORPORATION
CREDIT AGREEMENT
Dated as of October 27, 1997
TEXTRON FINANCIAL CORPORATION, Agent
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
1. Definitions; Certain Rules of Construction.....................................................1
2. The Credits...................................................................................12
2.1. Revolving Credit.........................................................................12
2.1.1. Revolving Loan......................................................................12
2.1.2. Maximum Amount of Tranche Credit....................................................12
2.1.3. Borrowing Requests..................................................................12
2.1.4. Approval of New Tranche.............................................................13
2.1.5. Notes...............................................................................13
2.2. Term Credit. ...........................................................................14
2.3. Application of Proceeds..................................................................14
2.3.1. Revolving Loan......................................................................14
2.3.2. Specifically Prohibited Applications................................................14
2.4. Nature of Obligations of Lenders to Make Extensions of Credit............................14
3. Interest; Fees................................................................................14
3.1. Interest.................................................................................14
3.2. Prepayment Fee...........................................................................15
3.3. Changes in Circumstances; Yield Protection...............................................15
3.3.1. Taxes...............................................................................15
3.3.2. Capital Adequacy....................................................................15
3.3.3. Regulatory Changes..................................................................16
3.3.4. Compensation Claims.................................................................16
3.3.5. Mitigation..........................................................................16
3.4. Computations of Interest and Fees........................................................16
4. Payment.......................................................................................17
4.1. Payment at Maturity......................................................................17
4.2. Required Prepayments.....................................................................17
4.2.1. Contingent Required Prepayments.....................................................17
4.3. Voluntary Prepayments....................................................................17
4.4. Reborrowing; Application of Payments, etc................................................17
4.4.1. Reborrowing.........................................................................18
4.4.2. Order of Application................................................................18
4.4.3. Payment with Accrued Interest, etc..................................................18
4.4.4. Payments for Lenders................................................................18
5. Conditions to Extending Credit................................................................18
5.1. Conditions on Initial Tranche Closing Dates..............................................18
5.1.1. Notes...............................................................................18
5.1.2. Payment of Fees.....................................................................18
5.1.3. Legal Opinions......................................................................18
5.1.4. Security Agreement..................................................................19
5.1.5. Perfection of Security..............................................................19
5.1.6. Proper Proceedings..................................................................19
5.1.7. General.............................................................................19
5.2. Conditions to Each Extension of Credit...................................................20
5.2.1. Officer's Certificate...............................................................20
5.2.2. Legality, etc.......................................................................20
6. General Covenants.............................................................................20
6.1. Taxes and Other Charges; Accounts Payable................................................20
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
6.1.1. Taxes and Other Charges.............................................................20
6.1.2. Accounts Payable....................................................................21
6.2. Conduct of Business, etc.................................................................21
6.2.1. Types of Business...................................................................21
6.2.2. Statutory Compliance................................................................21
6.2.3. Compliance with Material Agreements.................................................21
6.2.4. Transactions with Affiliates........................................................21
6.3. Insurance................................................................................21
6.4. Financial Statements and Reports.........................................................22
6.4.1. Annual Reports......................................................................22
6.4.2......................................................................................23
Quarterly Reports..........................................................................23
6.4.3. Monthly Borrowing Base..............................................................24
6.4.4. Other Reports.......................................................................24
6.4.5. Notice of Litigation, Defaults, etc.................................................25
6.4.6. Other Information...................................................................25
6.4.7. Preparation of Reports..............................................................25
6.5. Certain Financial Tests..................................................................26
6.5.1. Consolidated Adjusted Tangible Net Worth............................................26
6.5.2. Consolidated Adjusted Leverage Ratio................................................26
6.6. Liens....................................................................................26
6.7. Asset Dispositions and Mergers...........................................................26
7. Representations and Warranties................................................................27
7.1. Organization and Business................................................................27
7.1.1. The Company.........................................................................27
7.1.2. Subsidiaries........................................................................27
7.1.3. Qualification.......................................................................28
7.2. Financial Statements and Other Information; Material Agreements; Credit
References...............................................................................28
7.2.1. Financial Statements and Other Information..........................................28
7.2.2. Material Agreements.................................................................29
7.2.3. Credit References...................................................................29
7.3. Changes in Condition.....................................................................29
7.4. Title to Assets..........................................................................29
7.5. Operations in Conformity With Law, etc...................................................29
7.6. Litigation...............................................................................29
7.7. Authorization and Enforceability.........................................................30
7.8. No Legal Obstacle to Agreements..........................................................30
7.9. Defaults.................................................................................31
7.10. Tax Returns.............................................................................31
7.11. Certain Business Representations........................................................31
7.11.1. Antitrust..........................................................................31
7.11.2. Consumer Protection................................................................31
7.12. Pension Plans...........................................................................32
7.13. Government Regulation; Margin Stock.....................................................32
7.13.1. Government Regulation..............................................................32
7.13.2. Margin Stock.......................................................................32
7.14. Disclosure..............................................................................32
8. Defaults......................................................................................32
8.1. Events of Default.......................................................................32
8.1.1. Payment............................................................................32
8.1.2. Specified Covenants................................................................32
</TABLE>
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8.1.3. Other Covenants.....................................................................33
8.1.4. Representations and Warranties......................................................33
8.1.5. Cross Default, etc..................................................................33
8.1.6. Ownership; Liquidation; etc.........................................................33
8.1.7. Enforceability, etc.................................................................34
8.1.8. Judgments...........................................................................34
8.1.9. Bankruptcy, etc.....................................................................34
8.1.10. Material Adverse Change............................................................35
8.2. Certain Actions Following an Event of Default............................................35
8.2.1. Terminate Obligation to Extend Credit...............................................35
8.2.2. Specific Performance; Exercise of Rights............................................35
8.2.3. Acceleration........................................................................35
8.2.4. Enforcement of Payment; Credit Security; Setoff.....................................36
8.2.5. Cumulative Remedies.................................................................36
8.3. Annulment of Defaults....................................................................36
8.4. Waivers..................................................................................36
9. Expenses; Indemnity...........................................................................37
9.1. Expenses.................................................................................37
9.2. General Indemnity........................................................................37
10. Operations; Agent............................................................................38
10.1. Interests in Credits....................................................................38
10.2. Agent's Authority to Act, etc...........................................................38
10.3. Company to Pay Agent, etc...............................................................38
10.4. Lender Operations for Advances, etc.....................................................38
10.4.1. Advances...........................................................................38
10.4.2. Agent to Allocate Payments, etc....................................................39
10.4.3. Delinquent Lenders; Nonperforming Lenders..........................................39
10.5. Sharing of Payments, etc................................................................40
10.6. Agent's Resignation.....................................................................40
10.7. Concerning the Agent....................................................................41
10.7.1. Action in Good Faith, etc..........................................................41
10.7.2. No Implied Duties, etc.............................................................41
10.7.3. Validity, etc......................................................................41
10.7.4. Compliance.........................................................................41
10.7.5. Employment of Agents and Counsel...................................................42
10.7.6. Reliance on Documents and Counsel..................................................42
10.7.7. Agent's Reimbursement..............................................................42
10.8. Rights as a Lender......................................................................42
10.9. Independent Credit Decision.............................................................42
10.10. Indemnification........................................................................43
11. Successors and Assigns; Lender Assignments and Participations................................43
11.1. Assignments by Lenders..................................................................43
11.1.1. Assignees and Assignment Procedures................................................43
11.1.2. Terms of Assignment and Acceptance.................................................44
11.1.3. Register...........................................................................45
11.1.4. Acceptance of Assignment and Assumption............................................45
11.1.5. Federal Reserve Bank...............................................................46
11.1.6. Further Assurances.................................................................46
11.2. Credit Participants.....................................................................46
12. Brokers Fees.................................................................................47
13. Confidentiality..............................................................................47
</TABLE>
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14. Notices......................................................................................48
15. Course of Dealing; Amendments and Waivers....................................................48
16. No Strict Construction.......................................................................50
17. Defeasance...................................................................................50
18. Venue; Service of Process, etc...............................................................50
19. WAIVER OF JURY TRIAL.........................................................................51
20. General......................................................................................51
</TABLE>
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EXHIBITS
1 - Tranches and Securitization Agreements
2.1.5 - Note
5.1.4 - Security Agreement
5.2.1 - Officer's Certificate
7.1 - Company and its Subsidiaries
7.2.2 - Material Agreements
7.9 - Defaults under other Agreements
10.1 - Percentage Interests
11.1.1 - Assignment and Acceptance
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MEGO MORTGAGE CORPORATION
CREDIT AGREEMENT
This Agreement, dated as of October 27, 1997, is among Mego Mortgage
Corporation, a Delaware corporation (the "Company"), the Lenders from time to
time party hereto and Textron Financial Corporation, both in its capacity as a
Lender and in its capacity as Agent for itself and the other Lenders. The
parties agree as follows:
1. Definitions; Certain Rules of Construction. Certain capitalized terms
are used in this Agreement and in the other Credit Documents with the specific
meanings defined below in this Section 1. Except as otherwise explicitly
specified to the contrary or unless the context clearly requires otherwise, (a)
the capitalized term "Section" refers to sections of this Agreement, (b) the
capitalized term "Exhibit" refers to exhibits to this Agreement, (c) references
to a particular Section include all subsections thereof, (d) the word
"including" shall be construed as "including without limitation", (e) accounting
terms not otherwise defined herein have the meaning provided under GAAP, (f)
references to a particular statute or regulation include all rules and
regulations thereunder and any successor statute, regulation or rules, in each
case as from time to time amended, modified and in effect and (g) references to
a particular Person include such Person's successors and assigns to the extent
not prohibited by this Agreement and the other Credit Documents. References to
"the date hereof" mean the date first set forth above.
1.1. "Affiliate" means, with respect to the Company (or any other
specified Person), any other Person directly or indirectly controlling,
controlled by or under direct or indirect common control with the Company (or
such specified Person), and shall include (a) any officer or director or general
partner of the Company (or such specified Person) and (b) any Person of which
the Company (or such specified Person) or any Affiliate (as defined in clause
(a) above) of the Company (or such specified Person) shall, directly or
indirectly, beneficially own either (i) at least 10% of the outstanding equity
securities having the general power to vote or (ii) at least 10% of all equity
interests.
1.2. "Agent" means TFC in its capacity as agent for the Lenders
hereunder, as well as its successors and assigns in such capacity.
1.3. "Agreement" means this Credit Agreement as from time to time
amended, modified and in effect.
1.4. "Applicable Rate" means, during any month, the greater of (a) 9%
per annum or (b) the sum of 2.5% per annum plus the Base Rate on the first day
of such month; provided, however, that the Applicable Rate shall be increased by
an additional 2% per annum effective on the day the Agent notifies the Company
that the interest rates hereunder are increasing as a result of the occurrence
and continuance of an Event of Default until the earlier of such time as
<PAGE> 8
(i) such Event of Default is no longer continuing or (ii) such Event of Default
is deemed no longer to exist, in each case pursuant to Section 8.3.
1.5. "Assignee" is defined in Section 11.1.1.
1.6. "Assignment and Acceptance" is defined in Section 11.1.1.
1.7. "Bankruptcy Code" means Title 11 of the United States Code.
1.8. "Bankruptcy Default" means an Event of Default referred to in
Section 8.1.9.
1.9. "Base Rate" means, on any date, the per annum rate of interest
announced by The Chase Manhattan Bank as its Prime Rate.
1.10. "Borrowing Base" means, on any date and for any Tranche, 50% of
the amount carried on the Consolidated statement of financial condition of the
Company and its Included Subsidiaries in accordance with GAAP as Mortgage
Related Securities properly allocable to Residual Interest Securities and to
Interest Only Securities as reflected in the most recent Borrowing Base reports
that have been (or are required to have been) furnished to the Lenders in
accordance with Section 6.4.3, in each case (a) that are included in the Pledged
Securities Series for such Tranche approved by the TFC Loan Committee in
accordance with Section 2.1.4, (b) that begin principal amortization within the
period required by the TFC Loan Committee for such Tranche, (c) that are subject
to Trustee Payment Directions and (d) that are pledged by the Company and its
Included Subsidiaries to the Agent as collateral to secure the Credit
Obligations; provided, however, that the Borrowing Base shall be reduced to
$1.00 at any time when the Company has failed to furnish the computation of the
Borrowing Base required by Section 6.4.3 within five days after such computation
was originally due. The Borrowing Base shall be segregated so that each Pledged
Securities Series relates to a particular Tranche. Present value assumptions,
including the discount rate, for each Pledged Securities Series shall be as
originally approved by the TFC Loan Committee in connection with the Tranche
relating thereto, with such subsequent changes as are recommended by the
Company's independent accountants with the consent of TFC, which consent may not
be unreasonably withheld.
1.11. "Business Day" means any day other than Saturday, Sunday or a day
on which banks in Providence, Rhode Island, East Hartford, Connecticut or
Atlanta, Georgia are authorized or required by law or other governmental action
to close.
1.12. "By-laws" means all written by-laws, rules, regulations and all
other documents relating to the management, governance or internal regulation of
any Person other than an individual, or interpretive of the Charter of such
Person, all as from time to time in effect.
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1.13. "Charter" means the articles of organization, certificate of
incorporation, statute, constitution, joint venture agreement, partnership
agreement, trust indenture, limited liability company agreement or other charter
document of any Person other than an individual, each as from time to time in
effect.
1.14. "Closing Date" means the Initial Closing Date, the Conversion
Date and each other date on which any extension of credit is made pursuant to
Sections 2.1 or 2.2.
1.15. "Code" means the federal Internal Revenue Code of 1986.
1.16. "Commitment" means, with respect to any Lender, such Lender's
obligations to extend the credits contemplated by Section 2. The Commitments are
allocated to particular Tranches. The original Commitments are set forth in
Exhibit 10.1 and the current Commitments are recorded from time to time in the
Register.
1.17. "Company" means Mego Mortgage Corporation, a Delaware
corporation.
1.18. "Computation Covenants" means the covenants contained in Section
6.5.
1.19. "Consolidated" and "Consolidating", when used with reference to
any term, mean that term as applied to the accounts of the Company (or other
specified Person) and all of its Subsidiaries (or other specified group of
Persons), if any, or such of its Subsidiaries as may be specified, consolidated
(or combined) or consolidating (or combining), as the case may be, in accordance
with GAAP and with appropriate deductions for minority interests in
Subsidiaries.
1.20. "Consolidated Adjusted Tangible Net Worth" means Consolidated
Tangible Net Worth plus the lesser of (a) the then-outstanding principal balance
of the Subordinated Notes and (b) $150,000,000.
1.21. "Consolidated Tangible Net Worth" means, at any date, the total
of (without duplication):
(a) the net worth of the Company and its Included Subsidiaries
determined in accordance with GAAP on a Consolidated basis;
minus (b) the amount of intangible assets carried on the statement of
financial condition of the Company and its Included Subsidiaries
determined in accordance with GAAP on a Consolidated basis, including
goodwill, research and development costs, trademarks, tradenames,
copyrights, patents and unamortized debt discount and expenses (but
without deduction from such net worth of (i) any write-up of assets
made in accordance with GAAP on a Consolidated basis or (ii) Mortgage
Servicing Rights, Mortgage Related Securities or Excess Servicing
Rights);
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<PAGE> 10
minus (c) loans or other extensions of credit to officers of the
Company or any of its Subsidiaries on a Consolidated basis other than
Qualifying Loans made to such Persons in the ordinary course of
business; and
minus (d) any loans or extension of credit to Excluded Subsidiaries and
Affiliates.
1.22. "Credit Documents" means:
(a) this Agreement, the Notes and the Security Agreement, each
as from time to time in effect;
(b) all financial statements, reports, notices, mortgages,
assignments, UCC financing statements or certificates delivered to the
Agent or any of the Lenders by the Company, any of its Included
Subsidiaries or any other Obligor in connection herewith; and
(c) any other present or future agreement or instrument
(including guarantees) from time to time entered into among the
Company, any of its Included Subsidiaries or any other Obligor, on one
hand, and the Agent or all the Lenders, on the other hand, relating to,
amending or modifying this Agreement or any other Credit Document
referred to above or which is stated to be a Credit Document, each as
from time to time in effect.
1.23. "Credit Obligations" means all present and future liabilities,
obligations and Indebtedness of the Company, any of its Included Subsidiaries or
any other Obligor owing to the Agent or any Lender (or any Affiliate of a
Lender) under or in connection with this Agreement or any other Credit Document,
including obligations in respect of principal, interest, prepayment fees,
commitment fees, amounts provided for in Sections 3.3 and 9 and other fees,
charges, indemnities and expenses from time to time owing hereunder or under any
other Credit Document (whether accruing before or after a Bankruptcy Default).
1.24. "Credit Participant" is defined in Section 11.2.
1.25. "Credit Security" means all assets now or from time to time
hereafter subjected to a security interest, mortgage or charge (or intended or
required so to be subjected pursuant to the Security Agreement or any other
Credit Document) to secure the payment or performance of any of the Credit
Obligations, including the assets described in section 2.1 of the Security
Agreement.
1.26. "Default" means any Event of Default and any event or condition
which with the passage of time or giving of notice, or both, would become an
Event of Default and the filing against the Company, any of its Included
Subsidiaries or any other Obligor of a petition commencing an involuntary case
under the Bankruptcy Code.
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1.27. "Delinquency Period" is defined in Section 10.4.3.
1.28. "Delinquent Lender" is defined in Section 10.4.3.
1.29. "Delinquent Payment" is defined in Section 10.4.3.
1.30. "Designated Trust Agreement" means any trust agreement or similar
instrument entered into between the Company and the Trustee from time to time,
as from time to time in effect, relating to a Pledged Securities Series included
in the Borrowing Base pursuant to Section 2.1.4.
1.31. "ERISA" means the federal Employee Retirement Income Security Act
of 1974.
1.32. "ERISA Group Person" means the Company, any Subsidiary of the
Company and any Person which is a member of the controlled group or under common
control with the Company or any Subsidiary within the meaning of section 414 of
the Code or section 4001(a)(14) of ERISA.
1.33. "Event of Default" is defined in Section 8.1.
1.34. "Excess Servicing Rights" means, for periods prior to January 1,
1997, excess servicing rights of the Company and its Included Subsidiaries,
determined in accordance with GAAP on a Consolidated basis, that (a) arise from
home improvement, home equity or debt consolidation loans sold by the Company
and (b) are not subject to any Liens other than Liens securing the Credit
Obligations and Liens created under the agreements pursuant to which such Loans
were sold.
1.35. "Excluded Subsidiary" means a Subsidiary created by the Company
from time to time which will not be included in the definition of "Included
Subsidiary" and thus will not be subject to certain of the conditions and
restrictions imposed by this Agreement provided that (i) each such Excluded
Subsidiary shall not be included in the calculation of the Company's
Consolidated Adjusted Tangible Net Worth for purposes of calculating the
Company's compliance with this Agreement and shall not be included in certain
other calculations as indicated herein and (ii) the Company's aggregate
investment in Excluded Subsidiaries (including without limitation loans and
advances to Excluded Subsidiaries) shall not exceed at any time twenty-four
percent (24%) of the Company's then-current Consolidated Adjusted Tangible Net
Worth; provided, however, that no Subsidiary shall constitute an Excluded
Subsidiary until the Company has given written notice of such designation to the
Agent and certified that such Subsidiary meets the requirements of this
definition.
1.36. "Exchange Act" means the federal Securities Exchange Act of 1934.
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1.37. "Final Maturity Date" means the date five years after the end of
the month in which the Initial Closing Date occurs.
1.38. "Financial Officer" of the Company (or other specified Person)
means its chief executive officer, chief financial officer, chief operating
officer, chief accounting officer, chairman, president, treasurer or any of its
vice presidents whose primary responsibility is for its financial affairs, all
of whose incumbency and signatures have been certified to the Agent by the
secretary, assistant secretary or other appropriate attesting officer of the
Company (or such specified Person).
1.39. "GAAP" means generally accepted accounting principles as from
time to time in effect, including the statements and interpretations of the
United States Financial Accounting Standards Board. In the event of a change in
GAAP after the date hereof, the parties agree to negotiate in good faith to make
conforming changes to the covenants and related definitions.
1.40. "Included Subsidiary" means, as of any date, any Subsidiary of
the Company that is not then an Excluded Subsidiary, that has guaranteed payment
of the Credit Obligations pursuant to a guarantee in form and substance
reasonably satisfactory to the Agent and that has joined in and become party to
the Security Agreement on terms reasonably satisfactory to the Agent.
1.41. "Indebtedness" means all obligations, contingent or otherwise,
which in accordance with GAAP are required to be classified upon the statement
of financial condition of the Company (or other specified Person) as
liabilities, but in any event including (without duplication):
(a) borrowed money;
(b) indebtedness evidenced by notes, debentures or similar
instruments;
(c) capitalized lease obligations;
(d) the deferred purchase price of assets or securities,
including related noncompetition, consulting and stock repurchase
obligations (other than ordinary trade accounts payable within six
months after the incurrence thereof in the ordinary course of
business);
(e) mandatory redemption or dividend rights on capital stock
(or other equity);
(f) reimbursement obligations, whether contingent or matured,
with respect to letters of credit, bankers acceptances, surety bonds,
other financial guarantees and
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<PAGE> 13
interest rate protection agreements (without duplication of other
Indebtedness supported or guaranteed thereby);
(g) reimbursement obligations due and payable with respect
to payments by MBIA, Inc. or any other insurer with respect to loans
sold in a Securitization and repurchase or indemnification obligations,
whether contingent or matured, with respect to loans sold in a
Securitization; and
(h) all guarantees in respect of Indebtedness of others.
1.42. "Indemnified Party" is defined in Section 9.2.
1.43. "Initial Closing Date" means October 27, 1997 or such other date
prior to January 1, 1998 agreed to by the Company and the Agent as the first
Closing Date hereunder.
1.44. "Interest Only Securities" means a security representing the
undivided interest of the Company and its Included Subsidiaries in all or a
portion of the interest payments due on certain loans Securitized by the
Company.
1.45. "Legal Requirement" means any present or future requirement
imposed upon any of the Lenders or the Company and its Subsidiaries by any law,
statute, rule, regulation, directive, order, decree, guideline (or any
interpretation thereof by courts or of administrative bodies) of the United
States of America, or by any board, governmental or administrative agency,
central bank or monetary authority of the United States of America, or any
political subdivision of any of the foregoing. Any such requirement imposed on
any of the Lenders not having the force of law shall be deemed to be a Legal
Requirement for purposes of Section 3 if such Lender reasonably believes that
compliance therewith is in the best interest of such Lender.
1.46. "Lender" means each of the Persons listed as lenders on the
signature page hereto, including TFC in its capacity as a Lender and such other
Persons who may from time to time own a Percentage Interest in the Credit
Obligations, but the term "Lender" shall not include any Credit Participant.
1.47. "Lien" means, with respect to the Company (or any other specified
Person):
(a) any lien, encumbrance, mortgage, pledge, charge or
security interest of any kind upon any property or assets of the
Company (or such specified Person), whether now owned or hereafter
acquired, or upon the income or profits therefrom;
(b) the acquisition of, or the agreement to acquire, any
property or asset upon conditional sale or subject to any other title
retention agreement, device or arrangement (including a capitalized
lease);
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(c) the sale, assignment, pledge or transfer for security of
any accounts, general intangibles or chattel paper of the Company (or
such specified Person), with or without recourse;
(d) the transfer of any tangible property or assets for the
purpose of subjecting such items to the payment of previously
outstanding Indebtedness in priority to payment of the general
creditors of the Company (or such specified Person); and
(e) the existence for a period of more than 120 consecutive
days past due of any Indebtedness against the Company (or such
specified Person) which if unpaid would by law or upon a Bankruptcy
Default be given any priority over general creditors;
provided, however, that the rights of any holder of senior securities
to be paid prior to payment of any junior securities from the revenues
of a particular Securitization or a particular Mortgage Related
Securities shall in no event constitute a "Lien".
1.48. "Loan" means, collectively, the Revolving Loan and the Term Loan.
1.49. "Margin Stock" means "margin stock" within the meaning of
Regulations G, T, U or X of the Board of Governors of the Federal Reserve
System.
1.50. "Material Adverse Change" means, since any specified date or from
the circumstances existing immediately prior to the happening of any specified
event, a material adverse change in (a) the business, assets, financial
condition, income or prospects of the Company and its Included Subsidiaries (on
a Consolidated basis), whether as a result of (i) general economic conditions
affecting the home improvement loan and debt consolidation origination industry,
(ii) fire, flood or other natural calamities, (iii) regulatory changes, judicial
decisions, war or other governmental action or (iv) any other event or
development, whether or not related to those enumerated above or (b) the ability
of the Obligors to perform their obligations under the Credit Documents or (c)
the rights and remedies of the Agent and the Lenders under the Credit Documents.
1.51. "Material Agreements" is defined in Section 7.2.2.
1.52. "Maximum Amount of Tranche Credit" is defined in Section 2.1.2.
1.53. "Mortgage" means a mortgage, deed of trust, security deed or
similar instrument purporting to create a Lien or similar interest in real
estate and improvements thereon.
1.54. "Mortgage Related Securities" means, for any period after
December 31,
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1996, mortgage related securities of the Company and its Included Subsidiaries,
determined in accordance with GAAP on a Consolidated basis, that (a) arise from
home improvement, home equity or debt consolidation loans sold by the Company
and (b) are not subject to any Liens other than Liens securing the Credit
Obligations and Liens created under the agreements pursuant to which such Loans
were sold.
1.55. "Mortgage Servicing Rights" means, at any date, the rights of the
Company and its Included Subsidiaries, determined in accordance with GAAP on a
Consolidated basis, to service mortgage loans that are not subject to any Liens
other than Liens created under the agreements pursuant to which such Loans were
sold.
1.56. "Nonperforming Lender" is defined in Section 10.4.3.
1.57. "Notes" is defined in Section 2.1.5.
1.58. "Obligor" means the Company and any other Person providing
collateral for the Credit Obligations.
1.59. "Overdue Reimbursement Rate" means, at any date, the highest
Applicable Rate then in effect.
1.60. "Payment Date" means the first Business Day on or after the 25th
day of each month occurring after the Initial Closing Date.
1.61. "Percentage Interest" means (a) at all times when no Event of
Default under Section 8.1.1 and no Bankruptcy Default exists, the ratio that the
respective Commitments of the Lenders bear to the total Commitments of all
Lenders as from time to time in effect and reflected in the Register, and (b) at
all other times, the ratio that the respective amounts of the outstanding Credit
Obligations owing to the Lenders in respect of extensions of credit under
Section 2 bear to the total outstanding Credit Obligations owing to all Lenders.
1.62. "Performing Lender" is defined in Section 10.4.3.
1.63. "Person" means any present or future natural person or any
corporation, association, partnership, joint venture, limited liability, joint
stock or other company, business trust, trust, organization, business or
government or any governmental agency or political subdivision thereof.
1.64. "Plan" means, at any date, any pension benefit plan subject to
Title IV of ERISA maintained, or to which contributions have been made or are
required to be made, by any ERISA Group Person within six years prior to such
date.
1.65. "Pledged Securities" means, collectively, the Interest Only
Securities and the
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Residual Interest Securities that are pledged to the Agent hereunder.
1.66. "Pledged Securities Series" means Pledged Securities arising
under a single Securitization.
1.67. "Preparer" is defined in Section 6.4.7.
1.68. "Providence Office" means the principal office of TFC in
Providence, Rhode Island.
1.69. "Qualifying Loans" means (i) a loan of money evidenced by a note
evidencing the indebtedness secured by a Mortgage or a note evidencing any
indebtedness which is not secured by a Mortgage or (ii) a retail installment
contract evidencing indebtedness arising from home improvements made for the
benefit of the obligor thereunder, whether or not secured by a Mortgage.
1.70. "Register" is defined in Section 11.1.3.
1.71. "Required Lenders" means, with respect to any approval, consent,
modification, waiver or other action to be taken by the Agent or the Lenders
under the Credit Documents which require action by the Required Lenders, such
Lenders as own at least a majority of the Percentage Interests.
1.72. "Residual Interest Securities" means a security representing the
undivided residual interest of the Company and its Included Subsidiaries in all
or a portion of the interest and principal payments due on certain loans
Securitized by the Company, payable on a subordinated basis.
1.73. "Revolving Loan" is defined in Section 2.1.5.
1.74. "S&P" means Standard & Poor's Ratings Group, a division of The
McGraw Hill Companies, Inc.
1.75. "Securitized" or "Securitization" means the process of pooling
and selling loans to a real estate investment conduit or other form of trust.
1.76. "Securitization Agreements" means any documents or agreements
governing loans under a particular Securitization or that facilitate a
particular Securitization; provided, however, that the Securitization Agreements
related to each Pledged Securities Series approved in accordance with Section
2.1.4 shall be as set forth on Exhibit 1, as amended from time to time for each
Pledged Securities Series so approved by TFC.
1.77. "Security Agreement" is defined in Section 5.1.4.
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1.78. "Submissions" is defined in Section 6.4.7.
1.79. "Subordinated Indebtedness" of a Person means (a) any
Indebtedness of the Company to Mego Financial Corp. (other than Indebtedness
under the current tax sharing agreement), the payment of which is subordinated
to payment of the Credit Obligations to the written satisfaction of the Required
Lenders, and (b) the Subordinated Notes.
1.80. "Subordinated Notes" means (a) the 12-1/2% Senior Subordinated
Notes of the Company issued and outstanding from time to time pursuant to the
Indenture dated as of November 22, 1996 between the Company and American Stock
Transfer & Trust Company, as amended from time to time hereafter, including the
initial $40 million 12-1/2% Senior Subordinated Notes, the additional $40
million 12-1/2% Senior Subordinated Notes issued pursuant to the First
Supplemental Indenture thereto dated October 20, 1997 and any new supplemental
indenture, and (b) any subordinated unsecured promissory notes of the Company
issued and outstanding from time to time pursuant to indentures executed and
delivered after the date hereof, provided that such notes and indenture have
been reviewed and approved by the Agent, such approval not to be unreasonably
withheld or delayed.
1.81. "Subsidiary" means any Person of which the Company (or other
specified Person) shall at the time, directly or indirectly through one or more
of its Subsidiaries, (a) own at least 50% of the outstanding capital stock (or
other shares of beneficial interest) entitled to vote generally, (b) hold at
least 50% of the partnership, joint venture or similar interests or (c) be a
general partner or joint venturer.
1.82. "Tax" means any present or future tax, levy, duty, impost,
deduction, withholding or other charges of whatever nature at any time required
by any Legal Requirement (a) to be paid by any Lender or (b) to be withheld or
deducted from any payment otherwise required hereby to be made to any Lender, in
each case on or with respect to its obligations hereunder, the Loan or any
payment in respect of the Credit Obligations; provided, however, that the term
"Tax" shall not include taxes imposed upon or measured by the net income of such
Lender or franchise taxes.
1.83. "Term Loan" is defined in Section 2.2.
1.84. "TFC Loan Committee" means the loan committee or similar entity
of TFC that approves the Pledged Securities Series to be included in the
Borrowing Base and pledged as collateral to secure the Credit Obligations.
1.85. "TFC" means Textron Financial Corporation, a Delaware
corporation.
1.86. "Tranche" means a portion of the Loan supported by a particular
Pledged Securities Series included in the Borrowing Base.
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1.87. "Tranche Conversion Date" means, with respect to any Tranche, the
first Business Day following the revolving credit period approved by the TFC
Loan Committee and set forth on Exhibit 1; provided, however, that no Tranche
Conversation Date shall be later than April 30, 1999.
1.88. "Trustee" means the Trustee under the Designated Trust Agreement.
1.89. "Trustee Payment Directions" means irrevocable directions from
the Company to a particular Trustee to hold all amounts due to the holders of
Pledged Securities arising under a Designated Trust Agreement to be paid over to
the Agent on each Payment Date.
1.90. "Wholly Owned Subsidiary" means any Subsidiary of which all of
the outstanding capital stock (or other shares of beneficial interest) entitled
to vote generally (other than directors' qualifying shares and, in the case of
foreign subsidiaries, shares required by Legal Requirements to be held by
foreign nationals) is owned by the Company (or other specified Person) directly,
or indirectly through one or more wholly owned Subsidiaries.
2. The Credits.
2.1. Revolving Credit.
2.1.1. Revolving Loan. Subject to all the terms and conditions of
this Agreement and so long as no Default exists, from time to time on
and after the Initial Closing Date and prior to the applicable Tranche
Conversion Date, the Lenders will, severally in accordance with their
respective Commitments with respect to the particular Tranches of the
Revolving Loan, make loans to the Company in such amounts as may be
requested by the Company in accordance with Section 2.1.3. The
aggregate principal amount of loans made under this Section 2.1.1 with
respect to a particular Tranche at any one time outstanding shall in no
event exceed the lesser of (a) the Maximum Amount of Tranche Credit and
(b) the Borrowing Base allocable to such Tranche. In no event will the
principal amount of loans with respect to a particular Tranche at any
one time outstanding made by any Lender pursuant to this Section 2.1
exceed such Lender's Commitment with respect to such Tranche.
2.1.2. Maximum Amount of Tranche Credit. The term "Maximum
Amount of Tranche Credit", with respect to any particular Tranche means
the lesser of (a) the amount set forth on Exhibit 1 with respect to
such Tranche and (b) the amount (in an integral multiple of $100,000)
from time to time irrevocably designated by the Company to the Agent.
2.1.3. Borrowing Requests. The Company may from time to time
request a loan under Section 2.1.1 by providing to the Agent a written
notice. Each loan must be
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supported by a Pledged Securities Series approved by the TFC Loan
Committee. Such notice must be not later than noon (Providence time) on
the first Business Day prior to the requested Closing Date for such
loan. The notice must specify (a) the amount of the requested loan, (b)
the requested Closing Date therefor (which shall be a Business Day) and
(c) the Pledged Securities Series and Tranche for the requested
extension of credit. Upon receipt of such notice, the Agent will
promptly inform each other Lender (by telephone or otherwise) having a
Commitment in such Tranche. Each such loan will be made at the
Providence Office by wire transfer of the amount as directed by the
Company. In connection with each such loan, the Company shall furnish
to the Agent a certificate in substantially the form of Exhibit 5.2.1.
2.1.4. Approval of New Tranche. In the event the Company
wishes to establish a new Tranche to add to the Borrowing Base a new
Pledged Securities Series, the Company must provide to the Agent a
written notice of the requested increase in the Commitments, together
with copies of the Securitization Agreements for such series, related
documentation and such other material as the Agent reasonably requests,
not later than 15 Business Days prior to the establishment of such
Tranche and the inclusion of such Pledged Securities Series in the
Borrowing Base. Upon receipt of such notice, the Agent will promptly
provide such information to the TFC Loan Committee and the loan
committees of the other Lenders. The Lenders will give notice to the
Company and the other Lenders within such 15 Business Day period
whether such new Tranche and Pledged Securities Series is approved;
provided, however, that the Lenders shall have no obligation to approve
any new Tranche or Pledged Securities Series. The Company, with the
consent of the Agent, may add new Lenders to this Agreement to extend
credit under a new or existing Tranche. Such new Lenders shall execute
joinders to this Agreement in a form reasonably satisfactory to the
Agent. In connection with each new Tranche and Pledged Securities
Series approved, the Company shall issue a new Note for such Tranche
payable to each Lender in a principal amount equal to such Lender's
Percentage Interest in the Tranche and new Commitments, and the Agent
shall revise Exhibit 1 to reflect such new Tranche and Pledged
Securities Series.
2.1.5. Notes. The aggregate principal amount of the loans
outstanding from time to time under this Section 2.1 prior to the
Conversion Date is referred to as the "Revolving Loan". The Agent shall
keep a record of the Revolving Loan and each Tranche. Each Tranche
shall be deemed owed to each Lender having a Commitment therein
severally in accordance with such Lender's Percentage Interest therein,
and all payments thereon shall be for the account of each Lender in
accordance with its Percentage Interest therein. The Company's
obligations to pay each Lender's Percentage Interest in each Tranche of
the Revolving Loan shall be evidenced by a separate note of the Company
in substantially the form of Exhibit 2.1.5 (the "Notes"), payable to
each Lender in accordance with such Lender's Percentage Interest in
such Tranche of the Revolving Loan.
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2.2. Term Credit. Subject to all the terms and conditions of this
Agreement and so long as no Default exists, on the applicable Tranche Conversion
Date, the aggregate amount equal to such Tranche outstanding on such date shall
automatically convert into a term loan. The aggregate principal amount of the
loans at any one time outstanding after the respective Tranche Conversion Dates
are referred to as the "Term Loan".
2.3. Application of Proceeds.
2.3.1. Revolving Loan. Subject to Section 2.3.3, the Company
will apply the proceeds of the Revolving Loan for working capital and
for other lawful corporate purposes of the Company and its Included
Subsidiaries.
2.3.2. Specifically Prohibited Applications. The Company will
not, directly or indirectly, apply any part of the proceeds of any
extension of credit made pursuant to the Credit Documents to purchase
or to carry Margin Stock or to any transaction prohibited by Legal
Requirements applicable to the Lenders or by the Credit Documents.
2.4. Nature of Obligations of Lenders to Make Extensions of Credit.
The Lenders' obligations to extend credit under this Agreement are several and
are not joint or joint and several. The Lenders shall have no obligation to
extend additional credit under a new Tranche if the TFC Loan Committee does not
approve the new Tranche and Pledged Securities Series intended by the Company to
support such Tranche. If on any Closing Date any Lender shall fail to perform
its obligations under this Agreement, the aggregate amount of Commitments to
make the extensions of credit under this Agreement shall be reduced by the
amount of unborrowed Commitment of the Lender so failing to perform and the
Percentage Interests shall be appropriately adjusted. Lenders that have not
failed to perform their obligations to make the extensions of credit
contemplated by Section 2 may, if any such Lender so desires, assume, in such
proportions as such Lenders may agree, the obligations of any Lender who has so
failed and the Percentage Interests shall be appropriately adjusted. The
provisions of this Section 2.4 shall not affect the rights of the Company
against any Lender failing to perform its obligations hereunder.
3. Interest; Fees.
3.1. Interest. The Loan shall accrue and bear interest at a rate per
annum which shall at all times equal the Applicable Rate. Prior to any stated or
accelerated maturity of the Loan, the Company will, on each Payment Date, pay
the accrued and unpaid interest on the Loan, which payment shall be made by the
Trustees under the Designated Trust Agreements by forwarding to the Agent
amounts due to the holders of Pledged Securities for the previous month in
accordance with the Trustee Payment Directions. On the stated or any accelerated
maturity of the Loan, the Company will pay all accrued and unpaid interest on
the Loan.
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Upon the occurrence and during the continuance of an Event of Default, the
Lenders may require accrued interest to be payable on demand or at regular
intervals more frequent than each Payment Date. If at any time the amount of
accrued and unpaid interest due hereunder exceeds the amount of funds received
by the Agent from the Trustees under the Designated Trust Agreements, the
Company will pay within five Business Days the amount of such excess to the
Agent. All payments of interest hereunder shall be made to the Agent for the
account of each Lender in accordance with such Lender's Percentage Interest.
3.2. Prepayment Fee. In the event the Company prepays the Term Loan
with respect to a particular Tranche after the Tranche Conversion Date directly
or indirectly from a public debt or equity offering of the Company and its
Subsidiaries (including an offering under Rule 144A of the federal Securities
Act of 1933), the Company shall, together with such prepayment, pay to the Agent
for the account of the Lenders having a Percentage Interest in such Tranche a
prepayment fee equal to 1/2% of the amount of the Term Loan so prepaid.
3.3. Changes in Circumstances; Yield Protection.
3.3.1. Taxes. All payments of the Credit Obligations shall
be made without set-off or counterclaim and free and clear of any
deductions, including deductions for Taxes, unless the Company is
required by law to make such deductions. If (a) any Lender shall be
subject to any Tax with respect to any payment of the Credit
Obligations or its obligations hereunder or (b) the Company shall be
required to withhold or deduct any Tax on any payment on the Credit
Obligations, then such Lender may claim compensation from the Company
under Section 3.3.4. Whenever Taxes must be withheld by the Company
with respect to any payments of the Credit Obligations, the Company
shall promptly furnish to the Agent for the account of the applicable
Lender official receipts (to the extent that the relevant governmental
authority delivers such receipts) evidencing payment of any such Taxes
so withheld. If the Company fails to pay any such Taxes when due or
fails to remit to the Agent for the account of the applicable Lender
the required receipts evidencing payment of any such Taxes so withheld
or deducted, the Company shall indemnify the affected Lender for any
incremental Taxes and interest or penalties that may become payable by
such Lender as a result of any such failure. In the event any Lender
receives a refund of any Taxes for which it has received payment from
the Company under this Section 3.3.1., such Lender shall promptly pay
the amount of such refund to the Company, together with any interest
thereon actually earned by such Lender.
3.3.2. Capital Adequacy. If any Lender shall determine that
compliance by such Lender with any Legal Requirement regarding capital
adequacy of banks, bank holding companies or finance companies has or
would have the effect of reducing the rate of return on the capital of
such Lender and its Affiliates as a consequence of such Lender's
commitment to make the extensions of credit contemplated hereby, or
such Lender's maintenance of the extensions of credit contemplated
hereby, to a level below
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that which such Lender could have achieved but for such compliance
(taking into consideration the policies of such Lender and its
Affiliates with respect to capital adequacy immediately before such
compliance and assuming that the capital of such Lender and its
Affiliates was fully utilized prior to such compliance) by an amount
deemed by such Lender to be material, then such Lender may claim
compensation from the Company under Section 3.3.4.
3.3.3. Regulatory Changes. If any Lender shall determine that
(a) any change in any Legal Requirement (including any new Legal
Requirement) after the date hereof shall directly or indirectly (i)
reduce the amount of any sum received or receivable by such Lender with
respect to the Loan or the return to be earned by such Lender on the
Loan, (ii) impose a cost on such Lender or any Affiliate of such Lender
that is attributable to the making or maintaining of, or such Lender's
commitment to make, its portion of the Loan, or (iii) require such
Lender or any Affiliate of such Lender to make any payment on, or
calculated by reference to, the gross amount of any amount received by
such Lender under any Credit Document (other than Taxes or income or
franchise taxes), and (b) such reduction, increased cost or payment
shall not be fully compensated for by an adjustment in the Applicable
Rate, then such Lender may claim compensation from the Company under
Section 3.3.4.
3.3.4. Compensation Claims. Within 15 days after the receipt by
the Company of a certificate from any Lender setting forth why it is
claiming compensation under this Section 3.3 and computations (in
reasonable detail) of the amount thereof, the Company shall pay to such
Lender such additional amounts as such Lender sets forth in such
certificate as sufficient fully to compensate it on account of the
foregoing provisions of this Section 3.3, together with interest on
such amount from the 15th day after receipt of such certificate until
payment in full thereof at the Overdue Reimbursement Rate. The
determination by such Lender of the amount to be paid to it and the
basis for computation thereof hereunder shall, in the absence of
manifest error, be conclusive. In determining such amount, such Lender
may use any reasonable averaging and attribution methods.
3.3.5. Mitigation. Each Lender shall take such commercially
reasonable steps as it may determine are not disadvantageous to it,
including changing lending offices to the extent feasible, in order to
reduce amounts otherwise payable by the Company to such Lender pursuant
to Sections 3.3. In addition, the Company shall not be responsible for
costs under Section 3.3 arising more than 90 days prior to receipt by
the Company of the certificate from the affected Lender pursuant to
such Section 3.3.
3.4. Computations of Interest and Fees. For purposes of this
Agreement, interest (and any other amount expressed as interest) shall be
computed on the basis of a 360-day year for actual days elapsed. If any payment
required by this Agreement becomes due on any day that is not a Business Day,
such payment shall be made on the next succeeding Business Day.
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If the due date for any payment of principal is extended as a result of the
immediately preceding sentence, interest shall be payable for the time during
which payment is extended at the Applicable Rate.
3.5. Commitment Fees. The Company shall pay TFC the commitment fees
contemplated by Section 5.1.2. On the date when the aggregate Commitments
increase for any Tranche, the Company shall pay to the Agent a commitment fee
equal to the amount separately agreed by the Agent and the Company as indicated
on Exhibit 1 for such Tranche.
4. Payment.
4.1. Payment at Maturity. On the Final Maturity Date or any
accelerated maturity of the Loan, the Company will pay to the Agent for the
account of the Lenders an amount equal to the Loan then due, together with all
accrued and unpaid interest and fees with respect thereto and all other Credit
Obligations then outstanding.
4.2. Required Prepayments.
4.2.1. Contingent Required Prepayments. If a particular Tranche
of the Revolving Loan at any time exceeds the applicable Maximum Amount
of Tranche Credit, the Company shall within one Business Day repay the
amount of such excess to the Agent for the account of the Lenders
having an interest therein. If a particular Tranche of the Revolving
Loan at any time exceeds the Borrowing Base for such Tranche, the
Company shall within 15 Business Days either (a) repay the amount of
such excess to the Agent for the account of the Lenders having an
interest therein or (b) increase the Borrowing Base for such Tranche to
eliminate such excess.
4.2.2. Prepayment. Receipts from Pledged Securities forwarded to
the Agent by the Trustees under the Designated Trust Agreements
pursuant to Trustee Payment Directions in excess of interest required
to be paid under Section 3.1 shall be applied to the prepayment of the
related Tranche of the Loan and then to any other Credit Obligations
then outstanding.
4.3. Voluntary Prepayments. In addition to the prepayments required by
Section 4.2, the Company may from time to time prepay all or any portion of the
Loan (in a minimum amount of $500,000 and an integral multiple of $100,000, or
such lesser amount as is then outstanding), without premium or penalty of any
type except as provided in Section 3.2 with respect to any Term Loan prepayment
fee. The Company shall give the Agent at least three Business Days prior notice
of its intention to prepay, specifying the date of payment, the total amount and
Tranche of the Loan to be paid on such date and the amount of interest to be
paid with such prepayments.
4.4. Reborrowing; Application of Payments, etc.
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4.4.1. Reborrowing. The amounts of each Tranche of the Revolving
Loan prepaid pursuant to Sections 4.2 and 4.3 may be reborrowed from
time to time prior to the Tranche Conversion Date in accordance with
Section 2.1, subject to the limits set forth therein. No portion of the
Term Loan prepaid hereunder may be reborrowed.
4.4.2. Order of Application. Prepayments of the Term Loan made
pursuant to Section 4.3 shall be applied first to the principal amount
of the Term Note which is due on the Final Maturity Date and then to
any payments required to be made on the Term Loan pursuant to Section
4.2.2 so that no partial prepayment of the Term Loan shall affect the
obligation of the Company to make the prepayments required by Section
4.2.2.
4.4.3. Payment with Accrued Interest, etc. Upon all prepayments
of the Term Loan, the Company shall pay to the Agent the principal
amount to be prepaid, together with unpaid interest in respect thereof
accrued to the date of prepayment and any prepayment fee under Section
3.2. Notice of prepayment having been given in accordance with Section
4.3, and whether or not notice is given of prepayments pursuant to
Section 4.2, the amount specified to be prepaid shall become due and
payable on the date specified for prepayment.
4.4.4. Payments for Lenders. All payments of principal
hereunder shall be made to the Agent for the account of the Lenders
in accordance with the Lenders' respective Percentage Interests in the
respective Tranches.
5. Conditions to Extending Credit.
5.1. Conditions on Initial Tranche Closing Dates. The obligations of
the Lenders to make any extension of credit pursuant to Section 2 shall be
subject to the satisfaction, on or before the Initial Closing Date and the first
Closing Date under a new Tranche, of the conditions set forth in this Section
5.1 as well as the further conditions in Section 5.2. If the conditions set
forth in this Section 5.1 are not met on or prior to the Initial Closing Date,
the Lenders shall have no obligation to make any extensions of credit hereunder.
5.1.1. Notes. The Company shall have duly executed and
delivered to the Agent a Note for each Lender having an interest in
such Tranche.
5.1.2. Payment of Fees. The Company shall have paid to the Agent
the commitment fees separately agreed for such Tranche as set forth on
Exhibit 1.
5.1.3. Legal Opinions. On such Closing Date, the Lenders shall
have received from the following counsel their respective opinions with
respect to the transactions contemplated by the Credit Documents, which
opinions shall be in form
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and substance satisfactory to the Agent:
(a) Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.,
special counsel for the Company.
(b) Ropes & Gray, special counsel for the Agent.
The Company authorizes and directs its counsel to furnish the foregoing
opinion.
5.1.4. Security Agreement. On the Initial Closing Date, the
Company shall have duly authorized, executed and delivered to the Agent
a Security Agreement in substantially the form of Exhibit 5.1.4 (the
"Security Agreement"), which Security Agreement shall be modified to
include the new Pledged Securities Series for each Tranche.
5.1.5. Perfection of Security. The Company shall have duly
delivered to the Agent (or as the Agent may otherwise direct)
certificates evidencing the Pledged Securities and shall have duly
authorized, executed, acknowledged, delivered, filed, registered and
recorded such security agreements, notices, notices to, and
acknowledgments from, the Trustees, including Trustee Payment
Directions, financing statements and other instruments as the Agent may
have requested in order to perfect the Liens purported or required
pursuant to the Credit Documents to be created in the Credit Security
and shall have paid all filing or recording fees or taxes required to
be paid in connection therewith, including any recording, mortgage,
documentary, transfer or intangible taxes.
5.1.6. Proper Proceedings. This Agreement, each other Credit
Document and the transactions contemplated hereby and thereby shall
have been authorized by all necessary corporate or other proceedings.
All necessary consents, approvals and authorizations of any
governmental or administrative agency or any other Person of any of the
transactions contemplated hereby or by any other Credit Document shall
have been obtained and shall be in full force and effect.
5.1.7. General. All legal and corporate proceedings in connection
with the transactions contemplated by this Agreement shall be
satisfactory in form and substance to the Agent and the Agent shall
have received, at least 10 days prior to such Closing Date, copies of
all documents, including certified copies of the Charter and By-Laws of
the Company, records of corporate proceedings, certificates of good
standing, certified copies of the Securitization Agreements listed in
Exhibit 1, Trustee Payment Directions, certificates as to signatures
and incumbency of officers and opinions of counsel, which the Agent may
have reasonably requested in connection therewith, such documents where
appropriate to be certified by proper corporate or governmental
authorities.
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5.2. Conditions to Each Extension of Credit. The obligations of the
Lenders to make any extension of credit pursuant to Section 2 shall be subject
to the satisfaction, on or before the Closing Date for such extension of credit,
of the following conditions:
5.2.1. Officer's Certificate. The representations and warranties
contained in Section 7 shall be true and correct on and as of such
Closing Date with the same force and effect as though made on and as of
such date (except as to any representation or warranty which refers to
a specific earlier date or which has been waived, modified or consented
to by the Required Lenders); no Default shall exist on such Closing
Date prior to or immediately after giving effect to the requested
extension of credit; no Material Adverse Change shall have occurred
since August 31, 1996; and the Company shall have furnished to the
Agent in connection with the requested extension of credit a
certificate to these effects, in substantially the form of Exhibit
5.2.1, signed by a Financial Officer.
5.2.2. Legality, etc. The making of the requested extension
of credit shall not (a) subject the Lenders to any penalty or special
tax (other than a Tax for which the Company is required to reimburse
the Lenders under Section 3.3), (b) be prohibited by any Legal
Requirement or (c) violate any credit restraint regulation of the
executive branch of the government of the United States of America, the
Board of Governors of the Federal Reserve System or any other
governmental or administrative agency so long as any Lender reasonably
believes that compliance therewith is in the best interests of such
Lender.
6. General Covenants. The Company covenants that, until all of the Credit
Obligations shall have been paid in full and until the Lenders' commitments to
extend credit under this Agreement and any other Credit Document shall have been
irrevocably terminated, the Company and its Included Subsidiaries will comply
with the following provisions:
6.1. Taxes and Other Charges; Accounts Payable.
6.1.1. Taxes and Other Charges. Each of the Company and its
Included Subsidiaries shall duly pay and discharge, or cause to be paid
and discharged, before the same becomes in arrears, all taxes,
assessments and other governmental charges imposed upon such Person and
its properties, sales or activities, or upon the income or profits
therefrom, as well as all claims for labor, materials or supplies which
if unpaid might by law become a Lien upon any of its property;
provided, however, that any such tax, assessment, charge or claim need
not be paid if the validity or amount thereof shall at the time be
contested in good faith by appropriate proceedings and if such Person
shall, in accordance with GAAP, have set aside on its books adequate
reserves with respect thereto; and provided, further, that each of the
Company and its Included Subsidiaries shall pay or bond, or cause to be
paid or bonded, all such taxes,
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assessments, charges or other governmental claims immediately upon the
commencement of proceedings to foreclose any Lien which may have
attached as security therefor (except to the extent such proceedings
have been dismissed or stayed).
6.1.2. Accounts Payable. Each of the Company and its Included
Subsidiaries shall promptly pay when due, or in conformity with
customary trade terms, all accounts payable incident to the operations
of such Person not referred to in Section 6.1.1; provided, however,
that any such Indebtedness need not be paid if the validity or amount
thereof shall at the time be contested in good faith and if such Person
shall, in accordance with GAAP, have set aside on its books adequate
reserves with respect thereto.
6.2. Conduct of Business, etc.
6.2.1. Types of Business. The Company and its Included
Subsidiaries shall engage only in the business of (a) originating,
servicing, pooling and selling home improvement, home equity and debt
consolidation loans and (b) other activities related thereto.
6.2.2. Statutory Compliance. Each of the Company and its Included
Subsidiaries shall comply in all material respects with all valid and
applicable statutes, laws, ordinances, zoning and building codes and
other rules and regulations of the United States of America, of the
states and territories thereof and their counties, municipalities and
other subdivisions and of any foreign country or other jurisdictions
applicable to such Person, except where failure so to comply has not
resulted, or does not create a material risk of resulting, in the
aggregate in any Material Adverse Change.
6.2.3. Compliance with Material Agreements. Each of the Company
and its Included Subsidiaries shall comply in all material respects
with their obligations under the Material Agreements (to the extent not
in violation of the other provisions of this Agreement or any other
Credit Document). Without the prior written consent of the Required
Lenders, no Material Agreement shall be amended, modified, waived or
terminated in any manner that would have in any material respect an
adverse effect on the interests of the Lenders.
6.2.4. Transactions with Affiliates. Any transactions between the
Company or any of its Included Subsidiaries and an Affiliate of such
party shall be conducted on an arm's-length basis or on terms at least
as favorable to the Company and its Included Subsidiaries as could be
obtained from a Person that is not an Affiliate.
6.3. Insurance. Each of the Company and its Included Subsidiaries
shall maintain with financially sound and reputable insurers insurance against
liability for hazards, risks and
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liability to persons and property, to the extent, in amounts and with
deductibles at least as favorable as those generally maintained by businesses of
similar size engaged in similar activities; provided, however, that it may
effect workers' compensation insurance or similar coverage with respect to
operations in any particular state or other jurisdiction through an insurance
fund operated by such state or jurisdiction or by meeting the self-insurance
requirements of such state or jurisdiction.
6.4. Financial Statements and Reports. Each of the Company and its
Included Subsidiaries shall maintain a system of accounting in which correct
entries shall be made of all transactions in relation to their business and
affairs in accordance with generally accepted accounting practice. The fiscal
year of the Company and its Included Subsidiaries shall end on August 31, 1997
and December 31 in each year ending after such date and the fiscal quarters of
the Company and its Included Subsidiaries shall end on the last day of March,
June, September and December in each year, commencing in 1998.
6.4.1. Annual Reports. The Company shall furnish to the Lenders
as soon as available, and in any event within 120 days after the end of
each fiscal year, the Consolidated statements of financial condition of
the Company and its Subsidiaries as at the end of such fiscal year, the
Consolidated statements of income, of changes in shareholders' equity
and of cash flows of the Company and its Subsidiaries for such fiscal
year (all in reasonable detail) together with comparative figures for
the immediately preceding fiscal year, all accompanied by:
(a) Reports of Deloitte & Touche LLP (or, if they cease to be
auditors of the Company and its Subsidiaries, other independent
certified public accountants of recognized national standing reasonably
satisfactory to the Agent), containing no material qualification, to
the effect that they have audited the foregoing financial statements in
accordance with generally accepted auditing standards and that such
financial statements present fairly, in all material respects, the
financial position of the Company and its Subsidiaries covered thereby
at the dates thereof and the results of their operations for the
periods covered thereby in conformity with GAAP.
(b) The statement of such accountants that they have caused
this Agreement to be reviewed and that in the course of their audit of
the Company and its Included Subsidiaries no facts have come to their
attention that cause them to believe that any Default exists and in
particular that they have no knowledge of any Default under Sections
6.5 through 6.7 or, if such is not the case, specifying such Default
and the nature thereof. This statement is to be furnished by such
accountants with the understanding that the examination of such
accountants cannot be relied upon to give such accountants knowledge of
any such Default except as it relates to accounting or auditing matters
within the scope of their audit.
(c) The internally prepared Consolidated statements of
financial condition of
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the Company and its Included Subsidiaries as of the end of such fiscal
year, the Consolidated statements of income, of changes in
shareholders' equity and of cash flows of the Company and its Included
Subsidiaries for such fiscal year (all in reasonable detail) together
with comparative figures for the immediately preceding fiscal year,
accompanied by a certificate of the Company signed by a Financial
Officer to the effect that such financial statements have been prepared
in accordance with GAAP and present fairly, in all material respects,
the financial position of the Company and its Included Subsidiaries
covered thereby at the dates thereof and the results of their
operations for the periods covered thereby.
(d) A certificate of the Company signed by a Financial
Officer to the effect that such officer has caused this Agreement to be
reviewed and has no knowledge of any Default, or if such officer has
such knowledge, specifying such Default and the nature thereof, and
what action the Company has taken, is taking or proposes to take with
respect thereto.
(e) Computations by the Company demonstrating, as of the end
of such fiscal year, compliance with the Computation Covenants,
certified by a Financial Officer.
(f) Supplements to Exhibit 7.1 and exhibit 2.3 to the Security
Agreement showing any changes in the information set forth in such
exhibits not previously furnished to the Lenders in writing, as well as
any changes in the Charter, Bylaws or incumbency of Financial Officers
of the Obligors from those previously certified to the Agent.
(g) In the event of a change in GAAP since the most recent
audited annual financial statements, a statement as to the effect of
such changes on the Company and its Included Subsidiaries.
6.4.2. Quarterly Reports. The Company shall furnish to the
Lenders as soon as available and, in any event, within 60 days after
the end of each of the first three fiscal quarters of the Company in
each year and for the four-month period ending December 31, 1997, the
internally prepared Consolidated statements of financial condition of
the Company and its Subsidiaries (with appropriate adjustments to
exclude Excluded Subsidiaries) as of the end of such fiscal quarter,
the Consolidated statements of income, of changes in shareholders'
equity and of cash flows of the Company and its Subsidiaries (with
appropriate adjustments to exclude Excluded Subsidiaries) for such
fiscal quarter and for the portion of the fiscal year then ended (all
in reasonable detail) and comparative figures for the same period in
the preceding fiscal year, all accompanied by:
(a) A certificate of the Company signed by a Financial
Officer to the effect that such financial statements have been
prepared in accordance with GAAP and present
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fairly, in all material respects, the financial position of the Company
and its Included Subsidiaries covered thereby at the dates thereof and
the results of their operations for the periods covered thereby,
subject only to normal year-end audit adjustments and the addition of
footnotes.
(b) A certificate of the Company signed by a Financial
Officer to the effect that such officer has caused this Agreement to
be reviewed and has no knowledge of any Default, or if such officer has
such knowledge, specifying such Default and the nature thereof and what
action the Company has taken, is taking or proposes to take with
respect thereto.
(c) Computations by the Company, as of the end of such
quarter demonstrating compliance with the Computation Covenants,
signed by a Financial Officer.
(d) Supplements to Exhibit 7.1 and exhibit 3.3 to the
Security Agreement showing any changes in the information set forth in
such exhibits not previously furnished to the Lenders in writing, as
well as any changes in the Charter, Bylaws or incumbency of Financial
Officers of the Obligors from those previously certified to the Agent.
6.4.3. Monthly Borrowing Base. The Company shall furnish to
the Lenders as soon as available and, in any event, within 15 days
after the end of each month, a certificate of a Financial Officer
supplying computations of the Borrowing Base at the beginning of such
month and certifying that such computations were based on the monthly
reports prepared in accordance with GAAP; provided, however, that such
computations shall be consistent with those reflected in the Borrowing
Base computations dated as of August 31, 1997 previously furnished by
the Company to the Agent.
6.4.4. Other Reports. The Company shall promptly furnish to
the Lenders:
(a) All budgets, projections, statements of operations and
other reports furnished generally to the shareholders of the Company.
(b) Such registration statements, proxy statements and
reports, including Forms S-1, S-2, S-3, S-4, 10-K, 10-Q and 8-K, as may
be filed by the Company or any of its Included Subsidiaries with the
Securities and Exchange Commission.
(c) Any 90-day letter or 30-day letter from the federal
Internal Revenue Service (or the equivalent notice received from state
or other taxing authorities) asserting tax deficiencies against the
Company or any of its Included Subsidiaries.
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(d) Copies of any notice by a Trustee that it intends to
offset shortfalls in servicing revenues or other items under the
Securitization Agreements against Pledged Securities.
6.4.5. Notice of Litigation, Defaults, etc. The Company
shall promptly furnish to the Lenders notice of any litigation or any
administrative or arbitration proceeding (a) which creates a material
risk of resulting, after giving effect to any applicable insurance, in
the payment by the Company and its Included Subsidiaries of more than
$500,000 or (b) which results, or creates a material risk of resulting,
in a Material Adverse Change. Promptly upon acquiring knowledge
thereof, the Company shall notify the Lenders of the existence of any
Default or Material Adverse Change, specifying the nature thereof and
what action the Company or any Included Subsidiary has taken, is taking
or proposes to take with respect thereto.
6.4.6. Other Information. From time to time at reasonable
intervals upon request of any authorized officer of any Lender, each of
the Company and its Included Subsidiaries shall furnish to the Lenders
such other information regarding the business, assets, financial
condition, income or prospects of the Company and its Included
Subsidiaries as such officer may reasonably request, including copies
of all tax returns filed by the Company, licenses, agreements, leases
and instruments to which any of the Company or its Included
Subsidiaries is party. The Lenders' authorized officers and
representatives shall have the right during normal business hours upon
reasonable notice and at reasonable intervals to examine the books and
records of the Company and its Included Subsidiaries, to make copies
and notes therefrom for the purpose of ascertaining compliance with or
obtaining enforcement of this Agreement or any other Credit Document.
The Company shall use its best efforts to, or cause the Trustee or
servicing agent to, enable the Agent's authorized officers and
representatives, during normal business hours upon reasonable notice
and at reasonable intervals, to examine documents, bank statements and
other records and to make copies and notes therefrom for the purpose of
ascertaining the financial condition of the Company and its Included
Subsidiaries and the condition of the Credit Security; provided,
however, that any such examination shall be at the Company's expense,
including all travel expenses, but excluding salaries for the officers
and representatives conducting such examination.
6.4.7. Preparation of Reports. All documents, agreements,
reports, insurance, references, financial information or other
submissions (collectively "Submissions") required under this Agreement
and the transactions contemplated hereby shall be in form and substance
reasonably satisfactory to the Agent and performed at the Company's
expense. The Agent shall have the prior right of approval of any
person, firm or entity responsible for preparing each Submission
("Preparer") and may reject any Submission in its sole discretion if
the Agent reasonably believes that the experience, skill, reputation or
other aspect of the Preparer is unsatisfactory in any respect. All
reports required pursuant to this Agreement shall be addressed to the
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Agent and include the following language:
"THE UNDERSIGNED ACKNOWLEDGES THAT TEXTRON FINANCIAL CORPORATION, AS
AGENT FOR A GROUP OF LENDERS, IS RELYING ON THE WITHIN INFORMATION IN
CONNECTION WITH ITS ADVANCE TO MEGO MORTGAGE CORPORATION SECURED BY
CERTAIN COLLATERAL."
6.5. Certain Financial Tests.
6.5.1. Consolidated Adjusted Tangible Net Worth. Consolidated
Tangible Net Worth shall at all times exceed $65,000,000 plus the sum
of 50% of (a) the Company's Consolidated net income (if positive) for
each fiscal quarter (or similar reporting period) ending after November
30, 1996 plus (b) 100% of the net proceeds obtained by the Company or
its Included Subsidiaries through the issuance or sale of stock or
additional Subordinated Notes (after deduction of all costs of such
issuance or acquisition and any portion of such proceeds used to repay
previously issued Subordinated Notes).
6.5.2. Consolidated Adjusted Leverage Ratio. On the last day
of each fiscal quarter (or similar reporting period), the ratio of (a)
total liabilities of the Company and its Included Subsidiaries
determined in accordance with GAAP on a Consolidated basis less the
Subordinated Indebtedness to (b) Consolidated Adjusted Tangible Net
Worth shall not exceed 3.0 to 1.0.
6.6. Liens. Neither the Company nor any of its Included Subsidiaries
shall create, incur or enter into, or suffer to be created or incurred or to
exist, any Lien upon any Credit Security (or become contractually committed to
do so), except the following:
6.6.1. Liens that secure the Credit Obligations or that were
created under the agreements governing the securitization of the loans
underlying the Credit Security.
6.6.2. Liens to secure taxes, assessments and other
governmental charges, to the extent that payment thereof shall not at
the time be required by Section 6.1.
6.6.3. Restrictions under federal and state securities laws on
the transfer of securities.
6.7. Asset Dispositions and Mergers. Neither the Company nor any of
its Included Subsidiaries shall merge or enter into a consolidation or sell,
lease, sell and lease back, sublease or otherwise dispose of any of the Credit
Security (or become contractually committed to do so), except the following:
6.7.1. Any Wholly Owned Subsidiary of the Company may merge
or be
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liquidated into the Company or any other Wholly Owned Subsidiary of the
Company so long as after giving effect to any such merger to which the
Company is a party the Company shall be the surviving or resulting
Person.
6.7.2. The Company may sell or otherwise dispose of Pledged
Securities so long as the proceeds thereof are applied to repay in full
the related Tranche of the Loan and any accrued and unpaid interest
thereon and any other fees or Credit Obligations with respect to such
Tranche.
7. Representations and Warranties. In order to induce the Lenders to
extend credit to the Company hereunder, the Company represents and warrants as
follows:
7.1. Organization and Business.
7.1.1. The Company. The Company is a duly organized and validly
existing corporation, in good standing under the laws of Delaware, with
all power and authority, corporate or otherwise, necessary to (a) enter
into and perform this Agreement and each other Credit Document to which
it is party, (b) grant the Agent for the benefit of the Lenders the
security interests in the Credit Security owned by it to secure the
Credit Obligations and (c) own its properties and carry on the business
now conducted or proposed to be conducted by it. Certified copies of
the Charter and By-laws of the Company have been previously delivered
to the Agent and are correct and complete. Exhibit 7.1, as from time to
time hereafter supplemented in accordance with Section 6.4.1(f) and
Section 6.4.2(d), sets forth, as of the later of the date hereof or the
end of the most recent fiscal quarter for which financial statements
are required to be furnished in accordance with Section 6.4.1 or
Section 6.4.2 (i) the jurisdiction of incorporation of the Company,
(ii) the address of the Company's principal executive office and chief
place of business, (iii) each name, including any trade name, under
which the Company conducts its business and (iv) the jurisdictions in
which the Company keeps tangible personal property.
7.1.2. Subsidiaries. Each Included Subsidiary of the Company
is duly organized, validly existing and in good standing under the laws
of the jurisdiction in which it is organized, with all power and
authority, corporate or otherwise, necessary to (a) enter into and
perform this Agreement and each other Credit Document to which it is
party, (b) grant the Agent for the benefit of the Lenders the security
interest in the Credit Security owned by such Included Subsidiary to
secure the Credit Obligations and (c) own its properties and carry on
the business now conducted or proposed to be conducted by it. Certified
copies of the Charter and By-laws of each Included Subsidiary of the
Company have been previously delivered to the Agent and are correct and
complete. Exhibit 7.1, as from time to time hereafter supplemented in
accordance with Section 6.4.1(e), sets forth, as of the later of the
date hereof or the end of the most recent fiscal quarter for which
financial statements are required to be furnished in
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accordance with such Sections, (i) the name and jurisdiction of
organization of each Included Subsidiary of the Company, (ii) the
address of the chief executive office and principal place of business
of each such Included Subsidiary, (iii) each name under which each such
Included Subsidiary conducts its business, (iv) each jurisdiction in
which each such Included Subsidiary keeps tangible personal property,
and (v) the number of authorized and issued shares and ownership of
each such Included Subsidiary.
7.1.3. Qualification. Each of the Company and its Included
Subsidiaries is duly and legally qualified to do business as a foreign
corporation or other entity and is in good standing in each state or
jurisdiction in which such qualification is required and is duly
authorized, qualified and licensed under all laws, regulations,
ordinances or orders of public authorities, or otherwise, to carry on
its business in the places and in the manner in which it is conducted,
except for failures to be so qualified, authorized or licensed which
would not in the aggregate result, or create a material risk of
resulting, in any Material Adverse Change.
7.2. Financial Statements and Other Information; Material Agreements;
Credit References.
7.2.1. Financial Statements and Other Information. The Company
has previously furnished to the Lenders copies of the following:
(a) The audited statements of financial condition of the Company
as at August 31 in each of 1996, 1995 and 1994 (as restated) and the
audited statements of income and the audited Consolidated statements of
changes in shareholders' equity and of cash flows of the Company for
the fiscal years of the Company then ended.
(b) The unaudited statement of financial condition of the
Company as at May 31, 1997 and the unaudited statements of income, of
changes in shareholders' equity and of cash flows of the Company for
the portion of the fiscal year then ended.
(c) Calculations demonstrating pro forma compliance with the
Computation Covenants as of the end of the most recent quarter
preceding the date hereof.
(d) The annual statement as to compliance, annual independent
accountants report, servicer review report and any other report or
statement prepared pursuant to the Securitization Agreements listed on
Exhibit 1 as of the date hereof.
The audited financial statements (including the notes
thereto) referred to in clause (a) above were prepared in accordance
with GAAP and fairly present in all material respects the financial
position of the Company at the respective dates thereof and the results
of its operations for the periods covered thereby. The unaudited
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financial statements referred to in clause (b) above were prepared in
accordance with GAAP and fairly present in all material respects the
financial position of the Company at the date thereof and the results
of its operations for the periods covered thereby, subject to normal
year-end audit adjustment and the addition of footnotes in the case of
interim financial statements. The Company does not have any known
contingent liability material to the Company which is not reflected in
the statements of financial condition referred to in clauses (a) or (b)
above (or delivered pursuant to Sections 6.4.1 or 6.4.2) or in the
notes thereto.
7.2.2. Material Agreements. The Company has previously furnished
to the Lenders correct and complete copies, including all exhibits,
schedules and amendments thereto, of the Securitization Agreements
listed in Exhibit 1 and the other agreements, each as in effect on the
date hereof, listed in Exhibit 7.2.2 (the "Material Agreements").
7.2.3. Credit References. The Company has previously caused such
creditors as requested by the Agent to furnish the Agent with
independent credit references on the Company or principals of the
Company, each in form and substance satisfactory to the Agent.
7.3. Changes in Condition. Since August 31, 1996, no Material Adverse
Change has occurred.
7.4. Title to Assets. The Company and its Included Subsidiaries have
good and marketable title to all assets (including lessee's interests reflected
as owned assets) necessary for or used in the operations of their business as
now conducted by them and reflected in the most recent statement of financial
condition referred to in Section 7.2.1 (or the statement of financial condition
most recently furnished to the Lenders pursuant to Sections 6.4.1 or 6.4.2), and
to all assets acquired subsequent to the date of such statement of financial
condition, except for assets disposed of in the ordinary course of business.
7.5. Operations in Conformity With Law, etc. The operations of the
Company and its Included Subsidiaries as now conducted or proposed to be
conducted are not in violation of, nor is the Company or its Included
Subsidiaries in default under, any Legal Requirement presently in effect, except
for such violations and defaults as do not and will not, in the aggregate,
result, or create a material risk of resulting, in any Material Adverse Change.
The Company has received no notice of any such violation or default and has no
knowledge of any basis on which the operations of the Company or its Included
Subsidiaries, as now conducted and as currently proposed to be conducted after
the date hereof, would be held so as to violate or to give rise to any such
violation or default.
7.6. Litigation. No bankruptcy, foreclosure action or other material
litigation, at law or in equity, is pending or, to the knowledge of the Company,
threatened against the
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Company, any of its Included Subsidiaries or any Trustee under any Designated
Trust Agreement. No litigation, at law or in equity, or any proceeding before
any court, board or other governmental or administrative agency or any
arbitrator is pending or, to the knowledge of the Company, threatened which
seeks to enjoin the consummation, or which questions the validity, of any of the
transactions contemplated by this Agreement or any other Credit Document. No
judgment, decree or order of any court, board or other governmental or
administrative agency or any arbitrator has been issued against or binds the
Company, or any Trustee under a Designated Trust Agreement which has resulted,
or creates a material risk of resulting, in any Material Adverse Change. For
purposes of this Section 7.6, material litigation shall not include a matter in
which (a) the Company, any of its Included Subsidiaries or any Trustee under a
Designated Trust Agreement is the plaintiff and no counterclaim is pending or
(b) the Agent determines in its sole discretion is immaterial due to settlement,
applicable insurance coverage, frivolity or the amount of the claim.
7.7. Authorization and Enforceability. The Company has taken all
corporate action required to execute, deliver and perform this Agreement and
each other Credit Document to which it is party. No consent of stockholders of
the Company is necessary in order to authorize the execution, delivery or
performance of any Credit Document to which the Company is party. Each of this
Agreement and each other Credit Document constitutes the legal, valid and
binding obligation of the Company and is enforceable against the Company in
accordance with its terms.
7.8. No Legal Obstacle to Agreements. Neither the execution and
delivery of this Agreement or any other Credit Document, nor the making of any
borrowings hereunder by the Company, nor the guaranteeing of the Credit
Obligations by any Included Subsidiary, nor the securing of the Credit
Obligations with the Credit Security, nor the consummation of any transaction
referred to in or contemplated by this Agreement or any other Credit Document,
nor the fulfillment of the terms hereof or thereof or of any other agreement,
instrument, deed or lease contemplated by this Agreement or any other Credit
Document, has constituted or resulted in or will constitute or result in:
(a) any breach or termination of the provisions of any agreement,
instrument, deed or lease to which the Company, any of its Included
Subsidiaries or any other Obligor is a party or by which it is bound,
or of the Charter or By-laws of the Company, any of its Included
Subsidiaries or any other Obligor;
(b) the violation of any law, statute, judgment, decree or
governmental order, rule or regulation applicable to the Company, any
of its Included Subsidiaries or any other Obligor;
(c) the creation under any agreement, instrument, deed or lease
of any Lien (other than Liens on the Credit Security which secure the
Credit Obligations) upon any of the assets of the Company, any of its
Included Subsidiaries or any other Obligor; or
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<PAGE> 37
(d) any redemption, retirement or other repurchase obligation of
the Company, any of its Included Subsidiaries or any other Obligor
under any Charter, Bylaw, agreement, instrument, deed or lease.
No approval, authorization or other action by, or declaration to or filing with,
any governmental or administrative authority or any other Person is required to
be obtained or made by the Company, any of its Included Subsidiaries or any
other Obligor in connection with the execution, delivery and performance of this
Agreement, the Notes or any other Credit Document, the transactions contemplated
hereby or thereby, the making of any borrowing hereunder, the guaranteeing of
the Credit Obligations or the securing of the Credit Obligations with the Credit
Security (other than filings necessary to perfect the Agent's security interest
in the Credit Security).
7.9. Defaults. Neither the Company nor any of its Included
Subsidiaries is in default under any provision of its Charter or By-laws or of
this Agreement or any other Credit Document. Except as set forth in Exhibit 7.9,
neither the Company nor any of its Included Subsidiaries is in default under any
provision of any agreement, instrument, deed or lease to which it is party or by
which it or its property is bound in each case so as to result, or create a
material risk of resulting, in any Material Adverse Change. Neither the Company
nor any of its Included Subsidiaries has violated any law, judgment, decree or
governmental order, rule or regulation, in each case so as to result, or create
a material risk of resulting, in any Material Adverse Change.
7.10. Tax Returns. Each of the Company and its Included Subsidiaries
has filed all material tax and information returns which are required to be
filed by it and has paid, or made adequate provision for the payment of, all
taxes which have or may become due pursuant to such returns or to any assessment
received by it, other than taxes and assessments being contested by the Company
and its Included Subsidiaries in good faith by appropriate proceedings and for
which adequate reserves have been taken in accordance with GAAP. Neither the
Company nor any of its Included Subsidiaries knows of any material additional
assessments or any basis therefor. The Company reasonably believes that the
charges, accruals and reserves on the books of the Company and its Included
Subsidiaries in respect of taxes or other governmental charges are adequate.
7.11. Certain Business Representations.
7.11.1. Antitrust. Each of the Company and its Included
Subsidiaries is in compliance in all material respects with all federal
and state antitrust laws relating to its business and the geographic
concentration of its business.
7.11.2. Consumer Protection. Neither the Company nor any of its
Included Subsidiaries is in violation of any rule, regulation, order,
or interpretation of any rule,
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regulation or order of the Federal Trade Commission (including
truth-in-lending), with which the failure to comply, in the aggregate,
has resulted, or creates a material risk of resulting, in a Material
Adverse Change.
7.12. Pension Plans. Each Plan is in material compliance with the
applicable provisions of ERISA and the Code. No Plan constitutes a "defined
benefit plan" (as defined in ERISA).
7.13. Government Regulation; Margin Stock.
7.13.1. Government Regulation. Neither the Company nor any
of its Included Subsidiaries, nor any Person controlling the Company or
any of its Included Subsidiaries or under common control with the
Company or any of its Included Subsidiaries, is subject to regulation
under the Public Utility Holding Company Act of 1935, the Federal Power
Act, the Investment Company Act, the Interstate Commerce Act or any
statute or regulation which regulates the incurring by the Company or
any of its Included Subsidiaries of Indebtedness as contemplated by
this Agreement and the other Credit Documents.
7.13.2. Margin Stock. Neither the Company nor any of its
Included Subsidiaries owns any Margin Stock.
7.14. Disclosure. Neither this Agreement nor any other Credit Document
to be furnished to the Lenders by or on behalf of the Company or any of its
Included Subsidiaries in connection with the transactions contemplated hereby or
by such Credit Document contains any untrue statement of material fact or omits
to state a material fact necessary in order to make the statements contained
herein or therein not misleading in light of the circumstances under which they
were made.
8. Defaults.
8.1. Events of Default. The following events are referred to as
"Events of Default":
8.1.1. Payment. The Company shall fail to make any payment in
respect of: (a) interest or any fee on or in respect of any of the
Credit Obligations owed by it as the same shall become due and payable,
and such failure shall continue for a period of three Business Days, or
(b) principal of any of the Credit Obligations owed by it as the same
shall become due, whether at maturity or by acceleration or otherwise.
8.1.2. Specified Covenants. The Company or any of its Included
Subsidiaries shall fail to perform or observe any of the provisions of
Section 6.4.5 or Sections 6.5 through 6.7.
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8.1.3. Other Covenants. The Company, any of its Included
Subsidiaries or any other Obligor shall fail to perform or observe any
other covenant, agreement or provision to be performed or observed by
it under this Agreement or any other Credit Document, and such failure
shall not be rectified or cured to the written satisfaction of the
Required Lenders within 30 days after the earlier of (a) notice thereof
by the Agent to the Company or (b) a Financial Officer shall have
actual knowledge thereof.
8.1.4. Representations and Warranties. Any representation or
warranty of or with respect to the Company, any of its Included
Subsidiaries or any other Obligor made to the Lenders or the Agent in,
pursuant to or in connection with this Agreement or any other Credit
Document shall be false in any material respect on the date as of which
it was made.
8.1.5. Cross Default, etc.
(a) The Company or any of its Included Subsidiaries shall fail to
make any payment when due (after giving effect to any applicable grace
periods) in respect of any Indebtedness (other than the Credit
Obligations) owing to any Lender or such Lender's Affiliates
outstanding in an aggregate amount of principal (whether or not due)
and accrued interest exceeding $500,000;
(b) the Company or any of its Included Subsidiaries shall fail to
perform or observe the terms of any agreement or instrument relating to
such Indebtedness, and such failure shall continue, without having been
duly cured, waived or consented to, beyond the period of grace, if any,
specified in such agreement or instrument, and such failure shall
permit the acceleration of such Indebtedness;
(c) all or any part of such Indebtedness of the Company or any of
its Included Subsidiaries shall be accelerated or shall become due or
payable prior to its stated maturity (except with respect to voluntary
prepayments thereof) for any reason whatsoever;
(d) any Lien on any property of the Company or any of its
Included Subsidiaries securing any such Indebtedness shall be enforced
by the obligee under such Indebtedness by foreclosure or similar
action; or
(e) any holder of any such Indebtedness shall exercise any right
of rescission with respect to the issuance thereof or put or repurchase
rights against any Obligor with respect to such Indebtedness (other
than any such rights that may be satisfied with "payment in kind" notes
or other similar securities).
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8.1.6. Ownership; Liquidation; etc.
(a) any Person, together with "affiliates" and "associates" of
such Person within the meaning of Rule 12b-2 of the Exchange Act, or
any "group" including such Person under sections 13(d) and 14(d) of the
Exchange Act, shall acquire after the date hereof beneficial ownership
within the meaning of Rule 13d-3 of the Exchange Act of 50% or more of
either the voting stock or total equity capital of the Company; or
(b) the Company shall initiate any action to dissolve, liquidate
or otherwise terminate its existence.
8.1.7. Enforceability, etc. Any Credit Document shall cease for
any reason (other than the scheduled termination thereof in accordance
with its terms) to be enforceable in accordance with its terms or in
full force and effect; or any Obligor party to any Credit Document
shall so assert in a judicial or similar proceeding; or the security
interests created by this Agreement or any other Credit Documents shall
cease to be enforceable and of the same effect and priority purported
to be created hereby.
8.1.8. Judgments. A final judgment (a) which, with other
outstanding final judgments against the Company and its Included
Subsidiaries, exceeds an aggregate of $500,000 in excess of applicable
insurance coverage shall be rendered against the Company or any of its
Included Subsidiaries, or (b) which grants injunctive relief that
results, or creates a material risk of resulting, in a Material Adverse
Change and in either case if, (i) within 30 days after entry thereof,
such judgment shall not have been discharged or execution thereof
stayed pending appeal or (ii) within 30 days after the expiration of
any such stay, such judgment shall not have been discharged.
8.1.9. Bankruptcy, etc. The Company, any of its Included
Subsidiaries or any other Obligor shall:
(a) commence a voluntary case under the Bankruptcy Code or
authorize, by appropriate proceedings of its board of directors or
other governing body, the commencement of such a voluntary case;
(b) (i) have filed against it a petition commencing an
involuntary case under the Bankruptcy Code that shall not have been
dismissed within 60 days after the date on which such petition is
filed, or (ii) file an answer or other pleading within such 60-day
period admitting or failing to deny the material allegations of such a
petition or seeking, consenting to or acquiescing in the relief therein
provided, or (iii) have entered against it an order for relief in any
involuntary case commenced under the Bankruptcy Code;
(c) seek relief as a debtor under any applicable law, other than
the Bankruptcy Code, of any jurisdiction relating to the liquidation or
reorganization of debtors or to the modification or alteration of the
rights of creditors, or consent to or
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acquiesce in such relief;
(d) have entered against it an order by a court of competent
jurisdiction (i) finding it to be bankrupt or insolvent, (ii) ordering
or approving its liquidation or reorganization as a debtor or any
modification or alteration of the rights of its creditors or (iii)
assuming custody of, or appointing a receiver or other custodian for,
all or a substantial portion of its property; or
(e) make an assignment for the benefit of, or enter into a
composition with, its creditors, or appoint, or consent to the
appointment of, or suffer to exist a receiver or other custodian for,
all or a substantial portion of its property.
8.1.10. Material Adverse Change. A Material Adverse Change shall
occur that has not been waived by the Agent within five Business Days
after the occurrence thereof.
8.1.11. Change in Management. Any three of Jerome Cohen, Herbert
Hirsch, Robert Nederlander, Don Mayerson, Jeffrey Moore and James
Belter shall fail to possess the power to direct or cause the direction
of the management and policies of the Company, through stock ownership
or otherwise.
8.2. Certain Actions Following an Event of Default. If any one or
more Events of Default shall occur, then in each and every such case:
8.2.1. Terminate Obligation to Extend Credit. The Agent on
behalf of the Lenders may (and upon written request of the Required
Lenders the Agent shall) terminate the obligations of the Lenders to
make any further extensions of credit under the Credit Documents by
furnishing notice of such termination to the Company.
8.2.2. Specific Performance; Exercise of Rights. The Agent
on behalf of the Lenders may (and upon written request of the Required
Lenders the Agent shall) proceed to protect and enforce the Lenders'
rights by suit in equity, action at law and/or other appropriate
proceeding, either for specific performance of any covenant or
condition contained in this Agreement or any other Credit Document or
in any instrument or assignment delivered to the Lenders pursuant to
this Agreement or any other Credit Document, or in aid of the exercise
of any power granted in this Agreement or any other Credit Document or
any such instrument or assignment.
8.2.3. Acceleration. The Agent on behalf of the Lenders may (and
upon written request of the Required Lenders the Agent shall) by notice
in writing to the Company declare all or any part of the unpaid balance
of the Credit Obligations then outstanding to be immediately due and
payable; provided, however, that if a Bankruptcy Default shall have
occurred, the unpaid balance of the Credit Obligations
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shall automatically become immediately due and payable.
8.2.4. Enforcement of Payment; Credit Security; Setoff. The Agent
on behalf of the Lenders may (and upon written request of the Required
Lenders the Agent shall) proceed to enforce payment of the Credit
Obligations in such manner as it may elect, and to realize upon any and
all rights in the Credit Security. The Lenders may offset and apply
toward the payment of the Credit Obligations (and/or toward the curing
of any Event of Default) any Indebtedness from the Lenders to the
respective Obligors, including any Indebtedness represented by deposits
in any account maintained with the Lenders, but excluding trust
accounts or other custodial accounts, regardless of the adequacy of any
security for the Credit Obligations. The Lenders shall have no duty to
determine the adequacy of any such security in connection with any such
offset.
8.2.5. Cumulative Remedies. To the extent not prohibited by
applicable law which cannot be waived, all of the Lenders' rights
hereunder and under each other Credit Document shall be cumulative.
8.3. Annulment of Defaults. Once an Event of Default has occurred, such
Event of Default shall be deemed to exist and be continuing for all purposes of
the Credit Documents until the Required Lenders or the Agent (with the consent
of the Required Lenders) shall have waived such Event of Default in writing,
stated in writing that the same has been cured to such Lenders' reasonable
satisfaction or entered into an amendment to this Agreement which by its express
terms cures such Event of Default, at which time such Event of Default shall no
longer be deemed to exist or to have continued. No such action by the Lenders or
the Agent shall extend to or affect any subsequent Event of Default or impair
any rights of the Lenders upon the occurrence thereof. The making of any
extension of credit during the existence of any Default or Event of Default
shall not constitute a waiver thereof.
8.4. Waivers. To the extent that such waiver is not prohibited by
the provisions of applicable law that cannot be waived, each of the Company and
the other Obligors waives:
(a) all presentments, demands for performance, notices of
nonperformance (except to the extent required by this Agreement or any
other Credit Document), protests, notices of protest and notices of
dishonor;
(b) any requirement of diligence or promptness on the part of any
Lender in the enforcement of its rights under this Agreement, the Notes
or any other Credit Document;
(c) any and all notices of every kind and description (except to
the extent required by this Agreement or any other Credit Document)
which may be required to be given by any statute or rule of law; and
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(d) any defense (other than indefeasible payment in full or
breach of this Agreement by the Lenders) which it may now or hereafter
have with respect to its liability under this Agreement, the Notes or
any other Credit Document or with respect to the Credit Obligations.
9. Expenses; Indemnity.
9.1. Expenses. Whether or not the transactions contemplated hereby
shall be consummated, the Company will pay:
(a) all reasonable expenses of the Agent (including the
out-of-pocket expenses related to forming the group of Lenders, travel,
the out-of-pocket expenses related to conducting audits or inspections,
and reasonable fees and disbursements of the counsel to the Agent but
excluding any salaries of employees of the Agent or any Lender) in
connection with the preparation and duplication of this Agreement and
each other Credit Document, the transactions contemplated hereby and
thereby and amendments, waivers, consents and other operations
hereunder and thereunder;
(b) all recording and filing fees, brokers fees, commissions,
underwriting fees and insurance premiums and transfer and documentary
stamp and similar taxes at any time payable in respect of this
Agreement, any other Credit Document, any Credit Security or the
incurrence of the Credit Obligations; and
(c) all other reasonable expenses incurred by the Lenders or the
holder of any Credit Obligation in connection with the enforcement of
any rights hereunder or under any other Credit Document, including
costs of collection and reasonable attorneys' fees (including a
reasonable allowance for the hourly cost of attorneys employed by the
Lenders on a salaried basis) and expenses.
9.2. General Indemnity. The Company shall indemnify the Lenders and the
Agent and hold them harmless from any liability, loss or damage resulting from
the violation by the Company of Section 2.3.2. In addition, the Company shall
indemnify each Lender, the Agent, each of the Lenders' or the Agent's directors,
officers and employees, and each Person, if any, who controls any Lender or the
Agent (each Lender, the Agent and each of such directors, officers, employees
and control Persons is referred to as an "Indemnified Party") and hold each of
them harmless from and against any and all claims, damages, liabilities and
reasonable expenses (including reasonable fees and disbursements of counsel with
whom any Indemnified Party may consult in connection therewith and all
reasonable expenses of litigation or preparation therefor) which any Indemnified
Party may incur or which may be asserted against any Indemnified Party in
connection with (a) the Indemnified Party's compliance with or contest of any
subpoena or other process issued against it in any proceeding involving the
Company or any of its Included Subsidiaries or their Affiliates, (b) any
litigation or investigation involving the Company, any of its Included
Subsidiaries or their Affiliates, or any
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officer, director or employee thereof, (c) the existence or exercise of any
security rights with respect to the Credit Security in accordance with the
Credit Documents, or (d) this Agreement, any other Credit Document or any
transaction contemplated hereby or thereby; provided, however, that the
foregoing indemnity shall not apply to litigation commenced by the Company
against the Lenders or the Agent which seeks enforcement of any of the rights of
the Company hereunder or under any other Credit Document and is determined
adversely to the Lenders or the Agent in a final nonappealable judgment or to
the extent such claims, damages, liabilities and expenses result from a Lender's
or the Agent's gross negligence or willful misconduct.
10. Operations; Agent.
10.1. Interests in Credits. The Percentage Interest of each Lender in
the respective Tranches of the Loan, and the related Commitments, shall be
computed based on the maximum principal amount for each Lender as set forth in
the Register, as from time to time in effect. The current Percentage Interests
are set forth in Exhibit 10.1, which may be updated by the Agent from time to
time to conform to the Register.
10.2. Agent's Authority to Act, etc. Each of the Lenders appoints and
authorizes TFC to act for the Lenders as the Lenders' Agent in connection with
the transactions contemplated by this Agreement and the other Credit Documents
(other than Interest Rate Protection Agreements) on the terms set forth herein.
All action in connection with the enforcement of, or the exercise of any
remedies (other than the Lenders' rights of set-off as provided in Section 8.2.4
or in any Credit Document) in respect of the Credit Obligations and Credit
Documents shall be taken by the Agent.
10.3. Company to Pay Agent, etc. The Company shall be fully protected
in making all payments in respect of the Credit Obligations to the Agent, in
relying upon consents, modifications and amendments executed by the Agent
purportedly on the Lenders' behalf, and in dealing with the Agent as herein
provided. The Agent may charge the accounts of the Company, on the dates when
the amounts thereof become due and payable, with the amounts of the principal of
and interest on the Loan and all other fees and amounts owing under any Credit
Document.
10.4. Lender Operations for Advances, etc.
10.4.1. Advances. On each Closing Date, each Lender shall advance
to the Agent in immediately available funds such Lender's Percentage
Interest in the particular Tranche of the Loan advanced on such Closing
Date prior to 12:00 noon (Providence time). If such funds are not
received at such time, but all applicable conditions set forth in
Section 5 have been satisfied, each Lender authorizes and requests the
Agent to advance for the Lender's account, pursuant to the terms
hereof, the Lender's respective Percentage Interest in such Tranche of
the Loan and agrees to reimburse the Agent in immediately available
funds for the amount thereof prior to 2:00 p.m. (Providence
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time) on the day any Tranche of the Loan is advanced hereunder;
provided, however, that the Agent is not authorized to make any such
advance for the account of any Lender who has previously notified the
Agent in writing that such Lender will not be performing its
obligations to make further advances hereunder; and provided, further,
that the Agent shall be under no obligation to make any such advance.
10.4.2. Agent to Allocate Payments, etc. All payments of
principal and interest in respect of the extensions of credit made
pursuant to this Agreement and other fees under this Agreement shall,
as a matter of convenience, be made by the Company to the Agent in
immediately available funds by noon (Providence time) on any Business
Day. The share of each Lender shall be credited to such Lender by the
Agent in immediately available funds by 2:00 p.m. (Providence time) on
such Business Day in such manner that the principal amount of the
Credit Obligations to be paid shall be paid proportionately in
accordance with the Lenders' respective Percentage Interests in such
Credit Obligations, except as otherwise provided in this Agreement.
Under no circumstances shall any Lender be required to produce or
present its Notes as evidence of its interests in the Credit
Obligations in any action or proceeding relating to the Credit
Obligations.
10.4.3. Delinquent Lenders; Nonperforming Lenders. In the
event that any Lender fails to reimburse the Agent pursuant to Sections
10.4.1 for the Percentage Interest in a particular Tranche of the Loan
of such lender (a "Delinquent Lender") in any credit advanced by the
Agent pursuant hereto, overdue amounts (the "Delinquent Payment") due
from the Delinquent Lender to the Agent shall bear interest, payable by
the Delinquent Lender on demand, at a per annum rate equal to (a) the
Base Rate for the first three days overdue and (b) the sum of 2% plus
the Base Rate for any longer period. Such interest shall be payable by
the Delinquent Lender to the Agent for its own account for the period
commencing on the date of the Delinquent Payment and ending on the date
the Delinquent Lender reimburses the Agent on account of the Delinquent
Payment (to the extent not paid by any Obligor as provided below) and
the accrued interest thereon (the "Delinquency Period"), whether
pursuant to the assignments referred to below or otherwise. During the
Delinquency Period, in order to make reimbursements for the Delinquent
Payment and accrued interest thereon, the Delinquent Lender shall be
deemed to have assigned to the Agent all interest, commitment fees and
other payments made by the Company under Section 3 that would have
thereafter otherwise been payable under the Credit Documents to the
Delinquent Lender. During any other period in which any Lender is not
performing its obligations to extend credit under Section 2 (a
"Nonperforming Lender"), the Nonperforming Lender shall be deemed to
have assigned to each Lender that is not a Nonperforming Lender (a
"Performing Lender") all principal and other payments made by the
Company under Section 4 that would have thereafter otherwise been
payable under the Credit Documents to the Nonperforming Lender. The
Agent shall credit a portion of such payments to each Performing Lender
in an amount equal to the Percentage Interest
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in such Tranche of such Performing Lender divided by one minus the
Percentage Interest in such Tranche of the Nonperforming Lender until
the respective portions of such Tranche of the Loan owed to all the
Lenders are the same as the Percentage Interests in such Tranche of the
Lenders immediately prior to the failure of the Nonperforming Lender to
perform its obligations under Section 2. The foregoing provisions shall
be in addition to any other remedies the Agent, the Performing Lenders
or the Company may have under law or equity against the Delinquent
Lender as a result of the Delinquent Payment or against the
Nonperforming Lender as a result of its failure to perform its
obligations under Section 2.
10.5. Sharing of Payments, etc. Each Lender agrees that (a) if by
exercising any right of set-off or counterclaim or otherwise, it shall receive
payment of (i) a proportion of the aggregate amount due with respect to its
Percentage Interest in a particular Tranche of the Loan which is greater than
(ii) the proportion received by any other Lender in respect of the aggregate
amount due with respect to such other Lender's Percentage Interest in such
Tranche of the Loan and (b) if such inequality shall continue for more than 10
days, the Lender receiving such proportionately greater payment shall purchase
participations in the Percentage Interests in such Tranche of the Loan held by
the other Lenders, and such other adjustments shall be made from time to time
(including rescission of such purchases of participations in the event the
unequal payment originally received is recovered from such Lender through
bankruptcy proceedings or otherwise), as may be required so that all such
payments of principal and interest with respect to the Loan held by the Lenders
shall be shared by the Lenders pro rata in accordance with their respective
Percentage Interests in such Tranche; provided, however, that this Section 10.5
shall not impair the right of any Lender to exercise any right of set-off or
counterclaim it may have and to apply the amount subject to such exercise to the
payment of Indebtedness of any Obligor other than such Obligor's Indebtedness
with respect to the Loan. Each Lender that grants a participation in the Credit
Obligations to a Credit Participant shall require as a condition to the granting
of such participation that such Credit Participant agree to share payments
received in respect of the Credit Obligations as provided in this Section 10.5.
The provisions of this Section 10.5 are for the sole and exclusive benefit of
the Lenders and no failure of any Lender to comply with the terms hereof shall
be available to any Obligor as a defense to the payment of the Credit
Obligations.
10.6. Agent's Resignation. The Agent may resign at any time by giving
at least 60 days' prior written notice of its intention to do so to each of the
Lenders and the Company and upon the appointment by the Required Lenders of a
successor Agent satisfactory to the Company. If no successor Agent shall have
been so appointed and shall have accepted such appointment within 45 days after
the retiring Agent's giving of such notice of resignation, then the retiring
Agent may with the consent of the Company, which shall not be unreasonably
withheld, appoint a successor Agent which shall be a bank or a trust company
organized under the laws of the United States of America or any state thereof
and having a combined capital, surplus and undivided profit of at least
$100,000,000; provided, however, that any successor Agent appointed under this
sentence may be removed upon the written request of the Required
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Lenders, which request shall also appoint a successor Agent reasonably
satisfactory to the Company. Upon the appointment of a new Agent hereunder, the
term "Agent" shall for all purposes of this Agreement thereafter mean such
successor. After any retiring Agent's resignation hereunder as Agent, or the
removal hereunder of any successor Agent, the provisions of this Agreement shall
continue to inure to the benefit of such retiring or removed Agent as to any
actions taken or omitted to be taken by it while it was Agent under this
Agreement.
10.7. Concerning the Agent.
10.7.1. Action in Good Faith, etc. The Agent and its
officers, directors, employees and agents shall be under no liability
to any of the Lenders or to any future holder of any interest in the
Credit Obligations for any action or failure to act taken or suffered
in good faith, and any action or failure to act in accordance with an
opinion of its counsel shall conclusively be deemed to be in good
faith. The Agent shall in all cases be entitled to rely, and shall be
fully protected in relying, on instructions given to the Agent by the
Required Lenders.
10.7.2. No Implied Duties, etc. The Agent shall have and may
exercise such powers as are specifically delegated to the Agent under
this Agreement or any other Credit Document together with all other
powers incidental thereto. The Agent shall have no implied duties to
any Person or any obligation to take any action under this Agreement or
any other Credit Document except for action specifically provided for
in this Agreement or any other Credit Document to be taken by the
Agent.
10.7.3. Validity, etc. The Agent shall not be responsible to
any Lender or any future holder of any interest in the Credit
Obligations (a) for the legality, validity, enforceability or
effectiveness of this Agreement or any other Credit Document, (b) for
any recitals, reports, representations, warranties or statements
contained in or made in connection with this Agreement or any other
Credit Document, (c) for the existence or value of any assets included
in any security for the Credit Obligations, (d) for the effectiveness
of any Lien purported to be included in the Credit Security, (e) for
the specification or failure to specify any particular assets to be
included in the Credit Security, or (f) unless the Agent shall have
failed to comply with Section 10.7.1, for the perfection of the
security interests in the Credit Security.
10.7.4. Compliance. The Agent shall not be obligated to ascertain
or inquire as to the performance or observance of any of the terms of
this Agreement or any other Credit Document; and in connection with any
extension of credit under this Agreement or any other Credit Document,
the Agent shall be fully protected in relying on a certificate of the
Company as to the fulfillment by the Company of any conditions to such
extension of credit.
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10.7.5. Employment of Agents and Counsel. The Agent may execute
any of its duties as Agent under this Agreement or any other Credit
Document by or through employees, agents and attorneys-in-fact and
shall not be responsible to any of the Lenders, the Company or any
other Obligor for the default or misconduct of any such agents or
attorneys-in-fact selected by the Agent acting in good faith. The Agent
shall be entitled to advice of counsel concerning all matters
pertaining to the agency hereby created and its duties hereunder or
under any other Credit Document.
10.7.6. Reliance on Documents and Counsel. The Agent shall be
entitled to rely, and shall be fully protected in relying, upon any
affidavit, certificate, cablegram, consent, instrument, letter, notice,
order, document, statement, telecopy, telegram, telex or teletype
message or writing reasonably believed in good faith by the Agent to be
genuine and correct and to have been signed, sent or made by the Person
in question, including any telephonic or oral statement made by such
Person, and, with respect to legal matters, upon an opinion or the
advice of counsel selected by the Agent.
10.7.7. Agent's Reimbursement. Each of the Lenders severally
agrees to reimburse the Agent, pro rata in accordance with such
Lender's Percentage Interest, for any reasonable expenses not
reimbursed by the Company (without limiting the obligation of the
Company to make such reimbursement): (a) for which the Agent is
entitled to reimbursement by the Company under this Agreement or any
other Credit Document, and (b) after the occurrence of a Default, for
any other reasonable expenses incurred by the Agent on the Lenders'
behalf in connection with the enforcement of the Lenders' rights under
this Agreement or any other Credit Document; provided, however, that
the Agent shall not be reimbursed for any such expenses arising as a
result of its gross negligence or willful misconduct.
10.8. Rights as a Lender. With respect to any credit extended by it
hereunder, TFC shall have the same rights, obligations and powers hereunder as
any other Lender and may exercise such rights and powers as though it were not
the Agent, and unless the context otherwise specifies, TFC shall be treated in
its individual capacity as though it were not the Agent hereunder. Without
limiting the generality of the foregoing, the Percentage Interest of TFC shall
be included in any computations of Percentage Interests. TFC and its Affiliates
may lend money to, act as trustee for and generally engage in any kind of
business with the Company, any of its Subsidiaries or any Affiliate of any of
them and any Person who may do business with or own an equity interest in the
Company, any of its Subsidiaries or any Affiliate of any of them, all as if TFC
were not the Agent and without any duty to account therefor to the other
Lenders.
10.9. Independent Credit Decision. Each of the Lenders acknowledges
that it has independently and without reliance upon the Agent, based on the
financial statements and other documents referred to in Section 7.2, on the
other representations and warranties contained herein and on such other
information with respect to the Company and its Included
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Subsidiaries as such Lender deemed appropriate, made such Lender's own credit
analysis and decision to enter into this Agreement and to make the extensions of
credit provided for hereunder. Each Lender represents to the Agent that such
Lender will continue to make its own independent credit and other decisions in
taking or not taking action under this Agreement or any other Credit Document.
Each Lender expressly acknowledges that neither the Agent nor any of its
officers, directors, employees, agents, attorneys-in-fact or Affiliates has made
any representations or warranties to such Lender, and no act by the Agent taken
under this Agreement or any other Credit Document, including any review of the
affairs of the Company and its Included Subsidiaries, shall be deemed to
constitute any representation or warranty by the Agent. Except for notices,
reports and other documents expressly required to be furnished to each Lender by
the Agent under this Agreement or any other Credit Document, the Agent shall not
have any duty or responsibility to provide any Lender with any credit or other
information concerning the business, operations, property, condition, financial
or otherwise, or creditworthiness of the Company or any Included Subsidiary
which may come into the possession of the Agent or any of its officers,
directors, employees, agents, attorneys-in-fact or Affiliates.
10.10. Indemnification. The Lenders shall severally indemnify the Agent
and its officers, directors, employees, agents, attorneys, accountants,
consultants and controlling Persons (to the extent not reimbursed by the
Obligors and without limiting the obligation of any of the Obligors to do so),
pro rata in accordance with their respective Percentage Interests, from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind
whatsoever which may at any time be imposed on, incurred by or asserted against
the Agent or such Persons relating to or arising out of this Agreement, any
other Credit Document, the transactions contemplated hereby or thereby, or any
action taken or omitted by the Agent in connection with any of the foregoing;
provided, however, that the foregoing shall not extend to actions or omissions
which are taken by the Agent with gross negligence or willful misconduct.
11. Successors and Assigns; Lender Assignments and Participations. Any
reference in this Agreement or any other Credit Document to any of the parties
hereto shall be deemed to include the successors and assigns of such party, and
all covenants and agreements by or on behalf of the Company, the other Obligors,
the Agent or the Lenders that are contained in this Agreement or any other
Credit Document shall bind and inure to the benefit of their respective
successors and assigns; provided, however, that (a) the Company and its Included
Subsidiaries may not assign their rights or obligations under this Agreement or
any other Credit Document except for mergers or liquidations permitted by
Section 6.7, and (b) the Lenders shall be not entitled to assign their
respective Percentage Interests in the credits extended hereunder or their
Commitments except in accordance with Section 11.1.
11.1. Assignments by Lenders.
11.1.1. Assignees and Assignment Procedures. Each Lender may
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(a) without the consent of the Agent or the Company if the proposed
assignee is already a Lender hereunder, an Affiliate of a Lender or a
Wholly Owned Subsidiary of the same corporate parent of which the
assigning Lender is a Subsidiary, or (b) otherwise with the consents of
the Agent and (so long as no Event of Default exists) the Company
(which consents will not be unreasonably withheld), in compliance with
applicable laws in connection with such assignments, assign to one or
more commercial banks or other financial institutions (each, an
"Assignee") all or a portion of its interests, rights and obligations
under this Agreement and the other Credit Documents, including all or a
portion of its Commitment, the portion of the Loan at the time owing to
it and the Notes held by it. The parties to each such assignment shall
execute and deliver to the Agent an Assignment and Acceptance (the
"Assignment and Acceptance") substantially in the form of Exhibit
11.1.1, together with the Note subject to such assignment and a
processing and recordation fee of $3,000 payable to the Agent by the
assigning Lender or the Assignee.
Upon acceptance and recording pursuant to Section 11.1.4, from and
after the effective date specified in each Assignment and Acceptance (which
effective date shall be at least five Business Days after the execution thereof
unless waived by the Agent):
(A) the Assignee shall be a party hereto and, to the
extent provided in such Assignment and Acceptance,
have the rights and obligations of a Lender under
this Agreement and
(B) the assigning Lender shall, to the extent provided
in such assignment, be released from its
obligations under this Agreement (and, in the case
of an Assignment and Acceptance covering all or
the remaining portion of an assigning Lender's
rights and obligations under this Agreement, such
Lender shall cease to be a party hereto but shall
continue to be entitled to the benefits of
Sections 3.3 and 9, as well as to any fees accrued
for its account hereunder and not yet paid).
11.1.2. Terms of Assignment and Acceptance. By executing
and delivering an Assignment and Acceptance, the assigning Lender and
Assignee shall be deemed to confirm to and agree with each other and
the other parties hereto as follows:
(a) other than the representation and warranty that it is
the legal and beneficial owner of the interest being assigned thereby
free and clear of any adverse claim, such assigning Lender makes no
representation or warranty and assumes no responsibility with respect
to any statements, warranties or representations made in or in
connection with this Agreement or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement,
any other Credit Document or any other instrument or document furnished
pursuant hereto;
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(b) such assigning Lender makes no representation or
warranty and assumes no responsibility with respect to the financial
condition of the Company and its Included Subsidiaries or the
performance or observance by the Company or any of its Included
Subsidiaries of any of its obligations under this Agreement, any other
Credit Document or any other instrument or document furnished pursuant
hereto;
(c) such Assignee confirms that it has received a copy of
this Agreement, together with copies of the most recent financial
statements delivered pursuant to Section 7.2 or Section 6.4 and such
other documents and information as it has deemed appropriate to make
its own credit analysis and decision to enter into such Assignment and
Acceptance;
(d) such Assignee will independently and without reliance
upon the Agent, such assigning Lender or any other Lender, and based on
such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking
action under this Agreement;
(e) such Assignee appoints and authorizes the Agent to take
such action as agent on its behalf and to exercise such powers under
this Agreement as are delegated to the Agent by the terms hereof,
together with such powers as are reasonably incidental thereto; and
(f) such Assignee agrees that it will perform in accordance
with the terms of this Agreement all the obligations which are required
to be performed by it as a Lender.
11.1.3. Register. The Agent shall maintain at the Providence
Office a register (the "Register") for the recordation of (a) the names
and addresses of the Lenders and the Assignees which assume rights and
obligations pursuant to an assignment under Section 11.1.1, (b) the
Percentage Interest of each such Lender as set forth in Exhibit 10.1
and (c) the amount of the Loan owing to each Lender from time to time.
The entries in the Register shall be conclusive, in the absence of
manifest error, and the Company, the Agent and the Lenders may treat
each Person whose name is registered therein for all purposes as a
party to this Agreement. The Register shall be available for inspection
by the Company or any Lender at any reasonable time and from time to
time upon reasonable prior notice.
11.1.4. Acceptance of Assignment and Assumption. Upon its
receipt of a completed Assignment and Acceptance executed by an
assigning Lender and an Assignee together with the Note subject to such
assignment, and the processing and recordation fee referred to in
Section 11.1.1, the Agent shall (a) accept such Assignment and
Acceptance, (b) record the information contained therein in the
Register and (c) give prompt notice thereof to the Company. Within five
Business Days after receipt of notice, the Company, at its own expense,
shall execute and deliver
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to the Agent, in exchange for the surrendered Note, a new Note to the
order of such Assignee in a principal amount equal to the applicable
Commitment and Loan assumed by it pursuant to such Assignment and
Acceptance and, if the assigning Lender has retained a Commitment and
Loan, a new Note to the order of such assigning Lender in a principal
amount equal to the applicable Commitment and Loan retained by it. Such
new Note shall be in an aggregate principal amount equal to the
aggregate principal amount of such surrendered Note, and shall be dated
the date of the surrendered Note which it replaces.
11.1.5. Federal Reserve Bank. Notwithstanding the foregoing
provisions of this Section 11, any Lender may at any time pledge or
assign all or any portion of such Lender's rights under this Agreement
and the other Credit Documents to a Federal Reserve Bank; provided,
however, that no such pledge or assignment shall release such Lender
from such Lender's obligations hereunder or under any other Credit
Document.
11.1.6. Further Assurances. The Company and its Included
Subsidiaries shall sign such documents and take such other actions from
time to time reasonably requested by an Assignee to enable it to share
in the benefits of the rights created by the Credit Documents.
11.2. Credit Participants. Each Lender may, without the consent
of the Company or the Agent, in compliance with applicable laws in connection
with such participation, sell to one or more commercial banks or other financial
institutions (each a "Credit Participant") participations in all or a portion of
its interests, rights and obligations under this Agreement and the other Credit
Documents (including all or a portion of its Commitment, the Loan owing to it
and the Note held by it); provided, however, that:
(a) such Lender's obligations under this Agreement shall
remain unchanged;
(b) such Lender shall remain solely responsible to the
other parties hereto
for the performance of such obligations;
(c) the Credit Participant shall be entitled to the benefit
of the cost protection provisions contained in Sections 3.3 and 9, but
shall not be entitled to receive any greater payment thereunder than
the selling Lender would have been entitled to receive with respect to
the interest so sold if such interest had not been sold; and
(d) the Company, the Agent and the other Lenders shall
continue to deal solely and directly with such Lender in connection
with such Lender's rights and obligations under this Agreement, and
such Lender shall retain the sole right as one of the Lenders to vote
with respect to the enforcement of the obligations of the Company
relating to the Loan and the approval of any amendment, modification or
waiver of any provision of this Agreement (other than amendments,
modifications, consents or
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waivers that reduce the amount of the Loan or the rate of interest
thereon, extend the stated time of payment of the Loan, increase the
Commitments or release a substantial portion of the Credit Security).
Each Obligor agrees, to the fullest extent permitted by applicable law, that any
Credit Participant and any Lender purchasing a participation from another Lender
may exercise all rights of payment (including the right of set-off), with
respect to its participation as fully as if such Credit Participant or such
Lender were the direct creditor of the Obligors and a Lender hereunder in the
amount of such participation.
12. Brokers Fees. Whether or not the transactions contemplated hereby
shall be consummated:
(a) the Agent shall not be required to pay any brokerage
fee, commission or similar compensation in connection with the
transactions contemplated by this Agreement; and
(b) the Company will indemnify and hold harmless the Agent
from and against any and all claims, liabilities or obligations with
respect to brokerage or finders' fees or commissions, or consulting
fees in connection with the transactions contemplated by this
Agreement.
The Agent is not aware of any brokerage fee, commission or similar compensation
required to be paid by the Agent or the Company in connection with the
transactions contemplated by this Agreement.
13. Confidentiality. Each Lender will make no disclosure of confidential
information furnished to it by the Company or any of its Subsidiaries unless
such information shall have become public, except:
(a) in connection with operations under or the enforcement
of this Agreement or any other Credit Document to Persons who have a
reasonable need to be furnished such confidential information and who
agree to comply with the restrictions contained in this Section 13 with
respect to such information;
(b) pursuant to any statutory or regulatory requirement
or any mandatory court order, subpoena or other legal process;
(c) to any parent or corporate Affiliate of such Lender or
to any Credit Participant, proposed Credit Participant or proposed
Assignee; provided, however, that any such Person shall agree to comply
with the restrictions set forth in this Section 13 with respect to such
information;
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(d) to its independent counsel, auditors and other
professional advisors with an instruction to such Person to keep such
information confidential; and
(e) with the prior written consent of the Company, to any
other Person.
14. Notices. Except as otherwise specified in this Agreement or any other
Credit Document, any notice required to be given pursuant to this Agreement or
any other Credit Document shall be given in writing. Any notice, consent,
approval, demand or other communication in connection with this Agreement or any
other Credit Document shall be deemed to be given if given in writing (including
telex, telecopy or similar teletransmission) addressed as provided below (or to
the addressee at such other address as the addressee shall have specified by
notice actually received by the addressor), and if either (a) actually delivered
in fully legible form to such address (evidenced in the case of a telex by
receipt of the correct answerback) or (b) in the case of a letter, unless actual
receipt of the notice is required by any Credit Document, five days shall have
elapsed after the same shall have been deposited in the United States mails,
with first-class postage prepaid and registered or certified.
If to the Company or any of its Included Subsidiaries, to it at its
address set forth in Exhibit 7.1 (as supplemented pursuant to Section 6.4.1), to
the attention of the President, with a copy to Jerome Cohen, Chairman, at 1125
North East 125th Street - Suite 206, North Miami, Florida 33161.
If to any Lender or the Agent, to it at its address set forth on the
signature pages of this Agreement, with a copy to the Agent.
15. Course of Dealing; Amendments and Waivers.
15.1. Course of Dealing. No course of dealing between any Lender or the
Agent, on one hand, and the Company or any other Obligor, on the other hand,
shall operate as a waiver of any of the Lenders' or the Agent's rights under
this Agreement or any other Credit Document or with respect to the Credit
Obligations. Each of the Company and the Obligors acknowledges that if the
Lenders or the Agent, without being required to do so by this Agreement or any
other Credit Document, give any notice or information to, or obtain any consent
from, the Company or any other Obligor, the Lenders and the Agent shall not by
implication have amended, waived or modified any provision of this Agreement or
any other Credit Document, or created any duty to give any such notice or
information or to obtain any such consent on any future occasion. No delay or
omission on the part of any Lender or the Agent in exercising any right under
this Agreement or any other Credit Document or with respect to the Credit
Obligations shall operate as a waiver of such right or any other right hereunder
or thereunder. A waiver on any one occasion shall not be construed as a bar to
or waiver of any right or remedy on any future occasion. No waiver, consent or
amendment with respect to this Agreement or any other Credit Document shall be
binding unless it is in writing and signed by the Agent or the Required Lenders.
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15.2. Lender Consents for Amendments. Except as otherwise set forth
herein, the Agent may (and upon the written request of the Required Lenders the
Agent shall) take or refrain from taking any action under this Agreement or any
other Credit Document, including giving its written consent to any modification
of or amendment to and waiving in writing compliance with any covenant or
condition in this Agreement or any other Credit Document or any Default or Event
of Default, all of which actions shall be binding upon all of the Lenders;
provided, however, that:
(a) Except as provided below, without the written consent of
the Lenders owning at least a majority of the Percentage Interests
(disregarding the Percentage Interest of any Delinquent Lender during
the existence of a Delinquency Period or of any Nonperforming Lender so
long as such Lender is treated equally with the other Lenders with
respect to any actions enumerated below), no written modification of,
amendment to, consent with respect to, waiver of compliance with or
waiver of a Default under, any of the Credit Documents shall be made.
(b) Without the written consent of such Lenders as own 100% of
the Percentage Interests in a particular Tranche (disregarding the
Percentage Interest of any Delinquent Lender during the existence of a
Delinquency Period or of any Nonperforming Lender so long as such
Lender is treated equally with the other Lenders with respect to any
actions enumerated below):
(i) No reduction shall be made in (A) the amount
of principal of such Tranche, (B) the interest rate on such
Tranche (other than amendments and waivers approved by the
Required Lenders that waive an increase in the Applicable
Rate as a result of an Event of Default) or (C) commitment
fees with respect to such Tranche provided herein.
(ii) No change shall be made in the stated,
scheduled time of payment of all or any portion of such
Tranche or interest thereon or fees relating to any of the
foregoing payable to all of the Lenders and no waiver shall
be made of any Default under Section 8.1.1.
(iii) No increase shall be made in the amount, or
extension of the term, of the stated Commitments for such
Tranche beyond that provided for under Section 2.
(iv) No alteration shall be made of the Lenders'
rights of set-off contained in Section 8.2.4.
(v) No release of all or a material portion of the
Credit Security relating to the Pledged Securities for a
particular Tranche or release of the
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Company or any guarantor shall be made (in any event,
without the written consent of the Lenders, the Agent may
release all Credit Security relating to the Pledged
Securities for a particular Tranche pursuant to Section 17
upon payment in full of the Credit Obligations with respect
to such Tranche and termination of the Commitments with
respect to such Tranche).
(vi) No amendment to or modification of this
Section 15.2 or the definition of "Required Lenders" shall
be made.
16. No Strict Construction. The parties have participated jointly in the
negotiation and drafting of this Agreement and the other Credit Documents with
counsel sophisticated in financing transactions. In the event an ambiguity or
question of intent or interpretation arises, this Agreement and the other Credit
Documents shall be construed as if drafted jointly by the parties and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Agreement and the other
Credit Documents.
17. Defeasance. When all Credit Obligations with respect to a particular
Tranche have been paid, performed and reasonably determined by the Lenders to
have been indefeasibly discharged in full, and if at the time no Event of
Default exists, at the Company's written request, accompanied by such
certificates and other items as the Agent shall reasonably deem necessary, the
Credit Security relating to the Pledged Securities for such Tranche shall revert
to the Obligors and the right, title and interest of the Lenders therein shall
terminate. Thereupon, on the Obligor's demand and at their cost and expense, the
Agent shall execute proper instruments, acknowledging satisfaction of and
discharging such security interests, and shall redeliver to the Obligors all
certificates evidencing any such Credit Security then in its possession;
provided, however, that Sections 3.3, 9, 13, 18 and 19 shall survive the
termination of this Agreement.
18. Venue; Service of Process, etc. Each of the Company and the other
Obligors:
(a) Irrevocably submits to the nonexclusive jurisdiction of
the state courts of Rhode Island and to the nonexclusive jurisdiction
of the United States District Court for the District of Rhode Island
for the purpose of any suit, action or other proceeding arising out of
or based upon this Agreement or any other Credit Document or the
subject matter hereof or thereof.
(b) Waives to the extent not prohibited by applicable law
that cannot be waived, and agrees not to assert, by way of motion, as a
defense or otherwise, in any such proceeding brought in any of the
above-named courts, any claim that it is not subject personally to the
jurisdiction of such court, that its property is exempt or immune from
attachment or execution, that such proceeding is brought in an
inconvenient forum, that the venue of such proceeding is improper, or
that this Agreement or any other Credit Document, or the subject matter
hereof or thereof, may
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not be enforced in or by such court.
(c) Consents to service of process in any such proceeding in
any manner at the time permitted by the general laws of the State of
Rhode Island and agrees that service of process by registered or
certified mail, return receipt requested, at its address specified in
or pursuant to Section 14 is reasonably calculated to give actual
notice.
(d) Waives to the extent not prohibited by applicable law
that cannot be waived any right it may have to claim or recover in any
such proceedings such special, exemplary or punitive damages.
19. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW
THAT CANNOT BE WAIVED, EACH OF THE COMPANY, THE OTHER OBLIGORS, THE AGENT AND
THE LENDERS WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF,
DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF
ANY ISSUE, CLAIM OR PROCEEDING ARISING OUT OF THIS AGREEMENT OR ANY OTHER CREDIT
DOCUMENT OR THE SUBJECT MATTER HEREOF OR THEREOF OR ANY CREDIT OBLIGATION OR IN
ANY WAY CONNECTED WITH THE DEALINGS OF THE LENDERS, THE AGENT, THE COMPANY OR
ANY OTHER OBLIGOR IN CONNECTION WITH ANY OF THE ABOVE, IN EACH CASE WHETHER NOW
EXISTING OR HEREAFTER ARISING AND WHETHER IN CONTRACT, TORT OR OTHERWISE. Each
of the Company and the other Obligors acknowledges that it has been informed by
the Agent that the provisions of this Section 19 constitute a material
inducement upon which each of the Lenders has relied and will rely in entering
into this Agreement and any other Credit Document, and that it has reviewed the
provisions of this Section 19 with its counsel. Any Lender, the Agent, the
Company or any other Obligor may file an original counterpart or a copy of this
Section 19 with any court as written evidence of the consent of the Company, the
other Obligors, the Agent and the Lenders to the waiver of their rights to trial
by jury.
20. General. All covenants, agreements, representations and warranties
made in this Agreement or any other Credit Document or in certificates delivered
pursuant hereto or thereto shall be deemed to have been relied on by each
Lender, notwithstanding any investigation made by any Lender on its behalf, and
shall survive the execution and delivery to the Lenders hereof and thereof. The
invalidity or unenforceability of any provision hereof shall not affect the
validity or enforceability of any other provision hereof, and any invalid or
unenforceable provision shall be modified so as to be enforced to the maximum
extent of its validity or enforceability. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof. This Agreement and the other Credit Documents (including any
related fee agreements with the Agent or the Lenders) constitute the entire
understanding of the parties with respect to the subject matter hereof and
thereof and supersede all prior and contemporaneous understandings and
agreements, whether written or
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oral. This Agreement may be executed in any number of counterparts which
together shall constitute one instrument. This Agreement shall be governed by
and construed in accordance with the laws (other than the conflict of laws
rules) of the State of Rhode Island.
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Each of the undersigned has caused this Agreement to be executed and
delivered by its duly authorized officer as an agreement under seal as of the
date first above written.
MEGO MORTGAGE CORPORATION
By
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Title:
TEXTRON FINANCIAL CORPORATION
By
---------------------------------------
Title:
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EXHIBIT 10.47
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MEGO MORTGAGE CORPORATION
SECURITY AGREEMENT
Dated as of October 27, 1997
TEXTRON FINANCIAL CORPORATION, as Agent
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<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
1. Reference to Credit Agreement; Definitions; Certain Rules of Construction....................................... 1
1.1. "Agreement".................................................................................... 1
1.2. "Pledged Securities"........................................................................... 1
1.3. "Securities Act"............................................................................... 1
1.4. "UCC".......................................................................................... 1
2. Security........................................................................................................ 1
2.1. Credit Security................................................................................. 1
2.1.1. Pledged Securities............................................................. 2
2.1.2. Chattel Paper, Instruments. etc................................................ 2
2.1.3. Deposit Accounts............................................................... 2
2.1.4. Collateral..................................................................... 2
2.1.5. Books and Records.............................................................. 2
2.1.6. Proceeds and Products.......................................................... 2
2.2. Representations, Warranties and Covenants with Respect to Credit Security...................... 3
2.2.1. Pledged Securities............................................................. 3
2.2.2. No Liens, Restrictions on Transfer............................................. 3
2.2.3. Location of Credit Security.................................................... 3
2.2.4. Trade Names.................................................................... 4
2.2.5. Insurance...................................................................... 4
2.2.6. Modifications to Credit Security............................................... 4
2.2.7. Delivery of Documents.......................................................... 4
2.2.8. Performance of Agreements...................................................... 4
2.2.9. Perfection of Credit Security.................................................. 4
2.3. Administration of Credit Security.............................................................. 5
2.4. Right to Realize upon Credit Security.......................................................... 5
2.4.1. Assembly of Credit Security; Receiver; Setoff.................................. 5
2.4.2. General Authority.............................................................. 5
2.4.3. Marshaling, etc................................................................ 6
2.4.4. Sales of Credit Security....................................................... 7
2.4.5. Sale without Registration...................................................... 7
2.4.6. Application of Proceeds........................................................ 8
2.5. Custody of Credit Security..................................................................... 8
3. General......................................................................................................... 9
Exhibit 2.1 Pledge Securities The Class S Certificate No. 1 dated March 10, 1997 with respect to the Mego Mortgage
Home Loan Owner Trust 1997-1 and the Residual Interest Instrument No. 1 dated March 10, 1997 for a 99% Residual
Interest in the Mego Mortgage Home Loan Owner Trust 1997-1 (each as from time to time modified or amended, together
with any other securities issued in replacement or exchange therefor or in refinancing thereof) issued in connection
with the following agreements, as from time to time in effect, represent Pledge Securities:1. Sale and Servicing
Agreement dated as of February 1, 1997 among the Debtor, Mego Mortgage Home Loan Owner Trust 1997-1 (the ........... 12
</TABLE>
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<PAGE> 3
EXHIBITS
2.1 - Pledged Securities
2.2 - Office and Principal Place of Business; Trade Names; Depository
Institutions
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<PAGE> 4
MEGO MORTGAGE CORPORATION
SECURITY AGREEMENT
This Agreement, dated as of October 27, 1997, is among Mego Mortgage
Corporation, a Delaware corporation (the "Company"), and Textron Financial
Corporation, a Delaware Corporation as agent (the "Agent") for itself and the
other Lenders under the Credit Agreement (as defined below). The parties agree
as follows:
1. Reference to Credit Agreement; Definitions; Certain Rules of Construction.
Reference is made to the Credit Agreement dated as of the date hereof (the
"Credit Agreement"), among the Company, the Lenders and the Agent. Capitalized
terms defined in the Credit Agreement and not otherwise defined herein are used
herein with the meanings so defined. Certain other capitalized terms are used in
this Agreement as specifically defined below in this Section 1. Except as the
context otherwise explicitly requires, (a) the capitalized term "Section" refers
to sections of this Agreement, (b) the capitalized term "Exhibit" refers to
exhibits to this Agreement, (c) references to a particular Section shall include
all subsections thereof, (d) the word "including" shall be construed as
"including without limitation", (e) terms defined in the UCC and not otherwise
defined herein have the meaning provided under the UCC, (f) references to a
particular statute or regulation include all rules and regulations thereunder
and any successor statute, regulation or rules, in each case as from time to
time amended, modified and in effect and (g) references to a particular Person
include such Person's successors and assigns to the extent not prohibited by
this Agreement and the other Credit Documents. References to "the date hereof"
mean the date first set forth above.
1.1. "Agreement" means this Security Agreement as from time to time in
effect.
1.2. "Pledged Securities" is defined in Section 2.1.1.
1.3. "Securities Act" means the federal Securities Act of 1933.
1.4. "UCC" means the Uniform Commercial Code as in effect in Rhode
Island on the date hereof; provided, however, that with respect to the
perfection of the Lender's Lien in the Credit Security and the effect of
nonperfection thereof, the term "UCC" means the Uniform Commercial Code as in
effect in any jurisdiction the laws of which are made applicable by section
9-103 of the Uniform Commercial Code as in effect in Rhode Island.
2. Security.
2.1. Credit Security. As security for the payment and performance of
the Credit Obligations, the Company pledges and collaterally grants and assigns
to the Agent for the
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benefit of the Lenders and the holders from time to time of any Credit
Obligation, and creates a security interest in favor of the Agent for the
benefit of the Lenders and such holders in, all of the Company's right, title
and interest (as owner, but not in its capacity as servicer) in and to (but none
of its obligations or liabilities with respect to) the items and types of
present and future property described in Sections 2.1.1 through 2.1.6, whether
now owned or hereafter acquired, all of which shall be included in the term
"Credit Security":
2.1.1. Pledged Securities. All rights to receive the payment
of money in respect of the specific Residual Interest Securities and
Interest Only Securities listed in Exhibit 2.1 as from time to time in
effect (the "Pledged Securities").
2.1.2. Chattel Paper, Instruments. etc. All chattel paper,
non-negotiable instruments, negotiable instruments, investment property
and documents evidencing any of the Pledged Securities.
2.1.3. Deposit Accounts. All rights to payments due to the
holders of Pledged Securities from the accounts of the Trustee into
which funds to be payable under Pledged Securities are deposited or
held under a Securitization, and all money, cash and cash equivalents
of the Company, in each case arising from payments with respect to any
of the Pledged Securities.
2.1.4. Collateral. All collateral granted by third party
obligors to, or held by, the Company with respect to the Pledged
Securities.
2.1.5. Books and Records. All books and records, including
books of account and ledgers of every kind and nature, all
electronically recorded data (including all computer programs, disks,
tapes, electronic data processing media and software used in connection
with maintaining the Company's books and records), all files and
correspondence and all receptacles and containers for the foregoing,
all with respect to the Pledged Securities.
2.1.6. Proceeds and Products. All proceeds, and products of
the items of Credit Security described or referred to in Sections 2.1.1
through 2.1.5 and, to the extent not included in the foregoing:
(a) all distributions from the Designated Trust Agreements or
Securitization Agreements with respect to the Pledged Securities,
(b) all other proceeds of insurance and guarantees, if any,
with respect to the Pledged Securities provided by MBIA Insurance
Corporation, the Federal Housing Administration or any other Person
providing coverage for loss or diminution in value of the Pledged
Securities, and
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(c) all other proceeds from the liquidation or other recovery
(if any) of loans relating to the Pledged Securities.
2.2. Representations, Warranties and Covenants with Respect to Credit
Security. The Company represents, warrants and covenants that:
2.2.1. Pledged Securities. All Pledged Securities referred to
in Section 2.1.1 shall be evidenced by certificates or instruments,
which certificates shall be delivered to the Agent with any related
assignment forms, duly completed by the Company, required by the
Securitization Agreements. The Company will, immediately upon the
receipt thereof, deliver to the Agent any certificate or similar
instrument representing any of such Pledged Securities, together with
appropriate, duly executed assignment forms. The Company will take all
steps necessary to register the pledge to the Agent on the books of the
issuer, purchaser, Trustee or custodian, as the case may be, with
respect to all Pledged Securities that are not evidenced by
certificates or other instruments.
2.2.2. No Liens, Restrictions on Transfer or Dispositions. All
Credit Security shall be free and clear of any Liens and restrictions
on the transfer thereof, including contractual provisions which
prohibit the assignment of rights under contracts, other than (a)
customary investor suitability requirements contained in the
Securitization Agreements, (b) notice requirements to the Trustee in
respect of a proposed transfer of such Pledged Securities and (c)
obligations to contribute proceeds of the Pledged Securities to spread
accounts, interest reserve funds and other similar restrictions
contained in the Securitization Agreements. Without limiting the
generality of the foregoing, the Company will exclude from contracts to
which it becomes a party after the date hereof provisions that would
prevent the Company from creating a security interest in the Credit
Security as pledged hereby. The Company will not sell, assign, transfer
or otherwise dispose of any of the Credit Security, except as
contemplated above in this Section 2.2.2 (other than sales for cash,
the proceeds of which are used to repay in full the related Tranche of
the Loan and any accrued and unpaid interest thereon and any other fees
or Credit Obligations with respect to such Tranche). None of the Credit
Security is subject to any option to purchase or similar rights of any
Person.
2.2.3. Location of Credit Security. The Company shall at all
times keep its records concerning the Credit Security at its chief
executive office and principal place of business, which office and
place of business shall be set forth in Exhibit 2.2 or, so long as the
Company shall have taken all steps reasonably necessary to perfect the
Agent's security interest in the Credit Security with respect to such
new address, at such other address as the Company may specify by notice
actually received by the
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Agent not less than 10 Business Days prior to such change of address.
2.2.4. Trade Names. The Company will not adopt or do business
under any name other than its name or names designated in Exhibit 2.2
or any other name specified by notice actually received by the Agent
not less than 10 Business Days prior to the conduct of business under
such additional name. Since its incorporation, the Company has not
changed its corporate name or adopted or conducted business under any
trade name other than a name specified on Exhibit 2.2.
2.2.5. Insurance. The Company grants to the Agent full power
and authority as its attorney-in-fact, effective upon notice to the
Company after the occurrence and during the continuance of an Event of
Default, to adjust and settle any insurance policy owned by the Company
insuring against loss to the Credit Security, to endorse any drafts
thereon and to sign receipts for any payments thereunder. Any amounts
that the Agent receives under any such policy (including return of
unearned premiums) insuring against loss to the Credit Security shall
be applied to payment of the Credit Obligations.
2.2.6. Modifications to Credit Security. Except with the prior
written consent of the Agent, the Company shall not amend or modify, or
waive any of its rights under or with respect to, any Pledged
Securities if the effect of such amendment, modification or waiver
would be to reduce the amount of any such items or to extend the time
of payment thereof, to waive any default by any other party thereto
with respect to the Pledged Securities, or to waive or impair any
remedies of the Company or the Agent under or with respect to any such
Pledged Securities. The Company will promptly give the Agent written
notice of any material decrease or adjustment with respect to any
Pledged Securities.
2.2.7. Delivery of Documents. Upon the Agent's request, the
Company shall deliver to the Agent, promptly upon the Company's receipt
thereof, copies of any agreements, instruments or documents comprising
or relating to the Credit Security. Pending such request, the Company
shall keep such items at its places of business specified pursuant to
Section 2.2.3.
2.2.8. Performance of Agreements. The Company shall perform
all servicing and other obligations required to be performed by it
under the Securitization Agreements or any other agreement relating to
the Pledged Securities or other Credit Security.
2.2.9. Perfection of Credit Security. Upon the Agent's request
from time to time, the Company will execute and deliver, and file and
record in the proper filing and recording places, all such instruments,
including financing statements, Trustee
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Payment Directions and pledgor and assignment notices, and will take
all such other action, as the Agent deems advisable for confirming to
it the Credit Security or to carry out any other purpose of this
Agreement or any other Credit Document.
2.3. Administration of Credit Security. The Credit Security shall be
administered as follows, and if an Event of Default shall have occurred, Section
2.4 shall also apply. All payments and other receipts on account of the Pledged
Securities or any other Credit Security shall be held by the Trustee under the
applicable Securitization Agreement pursuant to a Trustee Payment Direction, and
shall be paid by the Trustee at least monthly to the Agent for application to
the Credit Obligations in accordance with the Trustee Payment Direction. Any
sums collected or received and any property recovered or possessed by the
Company in connection with any Credit Security shall be received and held by the
Company in trust for and on the Lenders' behalf, shall be segregated from the
other assets and funds of the Company, and shall be delivered to the Agent for
the benefit of the Lenders.
2.4. Right to Realize upon Credit Security. Except to the extent
prohibited by applicable law that cannot be waived, this Section 2.4 shall
govern the Lenders' and the Agent's rights to realize upon the Credit Security,
and shall be applicable only if any Event of Default shall have occurred and be
continuing. The provisions of this Section 2.4 are in addition to any rights and
remedies available at law or in equity and in addition to the provisions of any
other Credit Document. In the case of a conflict between this Section 2.4 and
any other Credit Document, this Section 2.4 shall govern.
2.4.1. Assembly of Credit Security; Receiver; Setoff. The
Company shall, upon the Agent's request, assemble the Credit Security
and otherwise make it available to the Agent. The Agent may have a
receiver appointed for all or any portion of the Company's assets or
business which constitutes the Credit Security in order to manage,
protect, preserve, sell and otherwise dispose of all or any portion of
the Credit Security in accordance with the terms of the Credit
Documents, to continue the operations of the Company and to collect all
revenues and profits therefrom to be applied to the payment of the
Credit Obligations, including the compensation and expenses of such
receiver. Without interfering with the rights of any Trustee, custodian
or loan purchaser to such deposits under the Securitization Agreements,
the Agent may offset and apply toward the payment of the Credit
Obligations (and/or toward the curing of any Event of Default) any
indebtedness from any Lender to the Company, including any indebtedness
represented by deposits in any account maintained with any Lender,
regardless of the adequacy of any security for the Credit Obligations.
The Agent shall have no duty to determine the adequacy of any such
security in connection with any such offset.
2.4.2. General Authority. To the extent specified in written
notice from the Agent to the Company, the Company grants the Agent full
and exclusive power and
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<PAGE> 9
authority, subject to the other terms hereof and applicable law, to
take any of the following actions (for the sole benefit of the Lenders
and the holders from time to time of any Credit Obligations, but at the
Company's expense):
(a) To ask for, demand, take, collect, sue for and receive all
payments in respect of any Pledged Securities which the Company could
otherwise ask for, demand, take, collect, sue for and receive for its
own use.
(b) To extend the time of payment of any Pledged Securities
and to make any allowance or other adjustment with respect thereto.
(c) To settle, compromise, prosecute or defend any action or
proceeding with respect to any Pledged Securities and to enforce all
rights and remedies thereunder which the Company could otherwise
enforce.
(d) To enforce the payment of any Pledged Securities, either
in the name of the Company or in its own name, and to endorse the name
of the Company on all checks, drafts, money orders and other
instruments tendered to or received in payment of any Credit Security.
(e) To notify the third party payor with respect to any
Pledged Securities of the existence of the security interest created
hereby and to cause all payments in respect thereof thereafter to be
made directly to the Agent; provided, however, that whether or not the
Agent shall have so notified such payor, the Company will at its
expense render all reasonable assistance to the Agent in collecting
such items and in enforcing claims thereon.
(f) To sell, transfer, assign or otherwise deal in or with any
Credit Security or the proceeds thereof, as fully as the Company
otherwise could do.
2.4.3. Marshaling, etc. Neither the Agent nor the Lenders
shall be required to make any demand upon, or pursue or exhaust any of
its rights or remedies against, the Company or any other guarantor,
pledgor or any other Person with respect to the payment of the Credit
Obligations or to pursue or exhaust any of its rights or remedies with
respect to any collateral therefor or any direct or indirect guarantee
thereof or insurance with respect thereto. Neither the Agent nor the
Lenders shall be required to marshal the Credit Security or any
guarantee of the Credit Obligations or to resort to the Credit Security
or any such guarantee in any particular order, and all of its rights
hereunder or under any other Credit Document shall be cumulative. To
the extent it may lawfully do so, the Company absolutely and
irrevocably waives and relinquishes the benefit and advantage of, and
covenants not to assert against the Agent or the Lenders, any
valuation, stay, appraisement, extension, redemption or similar laws
now
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<PAGE> 10
or hereafter existing which, but for this provision, might be
applicable to the sale of any Credit Security made under the judgment,
order or decree of any court, or privately under the power of sale
conferred by this Agreement, or otherwise. Without limiting the
generality of the foregoing, the Company (a) agrees that it will not
invoke or utilize any law which might prevent, cause a delay in or
otherwise impede the enforcement of the rights of the Agent or the
Lenders in the Credit Security, (b) waives all such laws, and (c)
agrees that it will not invoke or raise as a defense to any enforcement
by the Agent or the Lenders of any rights and remedies relating to the
Credit Security or the Credit Obligations any legal or contractual
requirement with which the Agent or the Lenders may have in good faith
failed to comply. In addition, the Company waives any right to prior
notice (except to the extent expressly required by Section 2.4.4 or the
other provisions of this Agreement) or judicial hearing in connection
with foreclosure on or disposition of any Credit Security, including
any such right which the Company would otherwise have under the
Constitution of the United States of America, any state or territory
thereof or any other jurisdiction.
2.4.4. Sales of Credit Security. All or any part of the Credit
Security may be sold for cash or other value in any number of lots at
public or private sale, without demand, advertisement or notice;
provided, however, that the Agent shall give the Company 10 days' prior
written notice of the time and place of any public sale, or the time
after which a private sale may be made, which notice each of the
Company and the Agent agrees to be reasonable. At any sale or sales of
Credit Security, the Agent or the Lenders or any of their officers
acting on their behalf, or their assigns, may bid for and purchase all
or any part of the property and rights so sold, may use all or any
portion of the Credit Obligations owed to the Lenders as payment for
the property or rights so purchased, and upon compliance with the terms
of such sale may hold and dispose of such property and rights without
further accountability to the Company, except for the proceeds of such
sale or sales pursuant to Section 2.4.6. The Company acknowledges that
any such sale will be made by the Agent or the Lenders on an "as is"
basis with disclaimers of all warranties, whether express or implied.
The Company will execute and deliver or cause to be executed and
delivered such instruments, documents, assignments, waivers,
certificates and affidavits, will supply or cause to be supplied such
further information and will take such further action, as the Agent or
the Lenders shall reasonably request in connection with any such sale.
2.4.5. Sale without Registration. If, at any time when the
Agent shall determine to exercise its rights hereunder to sell all or
part of the securities included in the Credit Security, the securities
in question shall not be effectively registered under the Securities
Act (or other applicable law), the Agent may, in its sole discretion,
sell such securities by private or other sale not requiring such
registration in such manner and in such circumstances as the Agent may
deem necessary or advisable in order that such sale may be effected in
accordance with applicable securities laws without such
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<PAGE> 11
registration and the related delays, uncertainty and expense. Without
limiting the generality of the foregoing, in any event the Agent may,
in its sole discretion, (a) approach and negotiate with a single
purchaser or one or more possible purchasers to effect such sale, (b)
restrict such sale to one or more purchasers each of whom will
represent and agree that such purchaser is purchasing for its own
account, for investment and not with a view to the distribution or sale
of such securities and (c) cause to be placed on certificates
representing the securities in question a legend to the effect that
such securities have not been registered under the Securities Act (or
other applicable law) and may not be disposed of in violation of the
provisions thereof. The Company agrees that such manner of disposition
is commercially reasonable, that it will upon the Agent's request give
any such purchaser access to such information regarding the issuer of
the securities in question as the Agent may reasonably request and that
the Agent shall not incur any responsibility for selling all or part of
the securities included in the Credit Security at any private or other
sale not requiring such registration, notwithstanding the possibility
that a substantially higher price might be realized if the sale were
deferred until after registration under the Securities Act (or other
applicable law) or until made in compliance with certain other rules or
exemptions from the registration provisions under the Securities Act
(or other applicable law). The Company acknowledges that no adequate
remedy at law exists for breach by it of this Section 2.4.5 and that
such breach would not be adequately compensable in damages and
therefore agrees that this Section 2.4.5 may be specifically enforced.
2.4.6. Application of Proceeds. The proceeds of all sales and
collections by the Agent in respect of any Credit Security or other
assets of the Company under Section 2.4.4, all funds collected from the
Company and any cash contained in the Credit Security, the application
of which is not otherwise specifically provided for herein, shall be
applied as follows:
First, to the payment of the costs and expenses of such sales
and collections, the reasonable expenses of the Agent and the
reasonable fees and expenses of its special counsel;
Second, any surplus then remaining to the payment of the
Credit Obligations in such order and manner as the Agent may in its
reasonable discretion determine provided, however, that proceeds from
such sales and collections of Pledged Securities relating to a
particular Tranche shall be applied first to repay principal of and
accrued and unpaid interest on such Tranche before application to the
principal of or interest on other Tranches; and
Third, any surplus then remaining shall be paid to the
Company, subject, however, to the rights of the holder of any then
existing Lien of which the Agent has
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<PAGE> 12
actual notice.
2.5. Custody of Credit Security. Except as provided by applicable law
that cannot be waived, the Agent will have no duty as to the custody and
protection of the Credit Security, the collection of any part thereof or of any
income thereon or the preservation or exercise of any rights pertaining thereto,
including rights against prior parties, except for the use of reasonable care in
the custody and physical preservation of any Credit Security in its possession.
The Agent will not be liable or responsible for any loss or damage to any Credit
Security, or for any diminution in the value thereof, by reason of the act or
omission of any agent selected by the Agent acting in good faith.
3. General. Addresses for notices, consent to jurisdiction, jury trial waiver,
defeasance and numerous other provisions applicable to this Agreement are
contained in the Credit Agreement. The invalidity or unenforceability of any
provision hereof shall not affect the validity or enforceability of any other
provision hereof, and any invalid or unenforceable provision shall be modified
so as to be enforced to the maximum extent of its validity or enforceability.
The headings in this Agreement are for convenience of reference only and shall
not limit, alter or otherwise affect the meaning hereof. This Agreement and the
other Credit Documents constitute the entire understanding of the parties with
respect to the subject matter hereof and thereof and supersede all prior and
current understandings and agreements, whether written or oral. This Agreement
is a Credit Document and may be executed in any number of counterparts, which
together shall constitute one instrument. This Agreement shall be governed by
and construed in accordance with the laws (other than the conflict of laws
rules) of the State of Rhode Island.
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<PAGE> 13
Each of the undersigned has caused this Agreement to be executed and
delivered by its duly authorized officer as an agreement under seal as of the
date first written above.
MEGO MORTGAGE CORPORATION
By
---------------------------
Title:
TEXTRON FINANCIAL CORPORATION
as Agent under the Credit Agreement
By
---------------------------
Title:
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<PAGE> 14
EXHIBIT 2.1
Pledged Securities
The Class S Certificate No. 1 dated March 10, 1997 with respect to the
Mego Mortgage Home Loan Owner Trust 1997-1 and the Residual Interest Instrument
No. 1 dated March 10, 1997 for a 99% Residual Interest in the Mego Mortgage Home
Loan Owner Trust 1997-1 (each as from time to time modified or amended, together
with any other securities issued in replacement or exchange therefor or in
refinancing thereof) issued in connection with the following agreements, as from
time to time in effect, represent Pledged Securities:
1. Sale and Servicing Agreement dated as of February 1, 1997 among the
Debtor, Mego Mortgage Home Loan Owner Trust 1997-1 (the "Trust"), Financial
Asset Securities Corp. ("Financial Asset"), Norwest Bank Minnesota, N.A.
("Norwest"), and First Trust of New York, N.A. ("First Trust").
2. Servicing Agreement dated as of February 1, 1997 among the Debtor,
Norwest and First Trust.
3. Indenture dated as of February 1, 1997 between the Debtor and First
Trust.
4. Trust Agreement dated as of February 1, 1997 among the Debtor,
Financial Asset, First Trust and Wilmington Trust Company.
5. Insurance Agreement dated as of February 1, 1997 among the Debtor,
the Trust, Financial Asset, Norwest, First Trust, MBIA Insurance Corporation,
Mego Mortgage Home Loan Acceptance Corporation, and Greenwich Capital Financial
Products, Inc.
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<PAGE> 15
EXHIBIT 2.2
Office and Principal Place of Business; Trade Names; Depository Institutions
1. The offices where the Company maintains its records concerning the
Pledged Securities are the following:
1000 Parkwood Circle - 5th Floor
Atlanta, Georgia 30339
4310 Paradise Road
Las Vegas, Nevada 89109
2. The only trade name used by the Company, other than its corporate name,
is "Mego Acceptance Corporation"
3. Collection and depository accounts relating to the Credit Security are
all with the Trustees under the respective Securitization Agreements.
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<PAGE> 1
EXHIBIT 10.48
NOTE
N-1 October 27, 1997
FOR VALUE RECEIVED, the undersigned, Mego Mortgage Corporation, a
Delaware corporation (the "Company"), hereby promises to pay Textron Financial
Corporation (the "Lender") or order, on the Final Maturity Date, the aggregate
unpaid principal amount of the revolving and term loans made by the Lender to
the Company pursuant to the Credit Agreement referred to below. The Company
promises to pay interest from the date hereof, computed as provided in such
Credit Agreement, on the aggregate principal amount of such loans from time to
time unpaid at the per annum rate applicable to such unpaid principal amount as
provided in such Credit Agreement and to pay interest on overdue principal and,
to the extent not prohibited by applicable law, on overdue installments of
interest at the rate specified in such Credit Agreement, all such interest being
payable at the times specified in such Credit Agreement, except that all accrued
and unpaid interest shall be paid at the stated or accelerated maturity hereof
or upon the prepayment in full hereof.
Payments hereunder shall be made to Textron Financial Corporation, as
agent for the Lender, at Commerce Center, 333 East River Drive, Suite #305, East
Hartford, Connecticut 05108.
All revolving and term loans made by the Lender pursuant to the Credit
Agreement referred to below and all repayments of the principal thereof shall be
recorded by the Lender and, prior to any transfer hereof, appropriate notations
to evidence the foregoing information with respect to each such loan then
outstanding shall be endorsed by the Lender on the schedule attached hereto or
on a continuation of such schedule attached to and made a part hereof; provided,
however, that the failure of the Lender to make any such recordation or
endorsement shall not affect the obligations of the Company under this Note,
such Credit Agreement or any other Credit Document.
This Note evidences borrowings under, and is entitled to the benefits
of, and is subject to the provisions of, the Credit Agreement dated as of
October 27, 1997, as from time to time in effect (the "Credit Agreement"), among
the Company, the Lender and certain other parties. The principal of this Note is
prepayable in the amounts and under the circumstances set forth in the Credit
Agreement, and may be prepaid in whole or from time to time in part, all as set
forth in the Credit Agreement. Terms defined in the Credit Agreement are used
herein with the meanings so defined.
In case an Event of Default shall occur, the entire principal of this
Note may become or be declared due and payable in the manner and with the effect
provided in the Credit Agreement.
<PAGE> 2
This Note shall be governed by and construed in accordance with the
laws (other than the conflict of laws rules) of the State of Rhode Island.
The parties hereto, including the Company and all guarantors and
endorsers, hereby waive presentment, demand, notice, protest and all other
demands and notices in connection with the delivery, acceptance, performance and
enforcement of this Note, except as specifically otherwise provided in the
Credit Agreement, and assent to extensions of time of payment, forbearance or
other indulgence without notice.
MEGO MORTGAGE CORPORATION
By
----------------------------
Title:
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<PAGE> 1
Exhibit 10.60
- --------------------------------------------------------------------------------
MEGO MORTGAGE CORPORATION
1997 STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN
(AS AMENDED AND RESTATED EFFECTIVE OCTOBER 22, 1997)
- --------------------------------------------------------------------------------
1. PURPOSE. The purpose of this Plan is to advance the interests of
Mego (the "Company"), and its Subsidiaries by providing an additional incentive
to attract and retain qualified and competent persons who provide services to
the Company and its Subsidiaries, including employees, officers, directors, and
upon whose efforts and judgment the success of the Company and its Subsidiaries
is largely dependent, through the encouragement of stock ownership, and the
payment of benefits based upon appreciation in the value of stock, in the
Company by such persons. This Plan is an amendment and restatement of the MEGO
Mortgage Corporation 1997 Stock Option Plan, as initially adopted by the Company
on the Effective Date.
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) "Committee" shall mean the committee appointed by the Board
pursuant to Section 12(a) hereof.
(d) "Common Stock" shall mean the Company's Common Stock, par value
$0.01 per share.
(e) "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.
(f) "Director" shall mean a member of the Board.
<PAGE> 2
(g) "Effective Date" shall mean August 20, 1997. The Plan was
amended and restated effective as of October 22, 1997.
(h) "Fair Market Value" of a Share on any date of reference shall
mean the "Closing Price" (as defined below) of the Common Stock on the business
day immediately preceding such date, unless the Committee in its sole discretion
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 on such system or, if sales prices are not reported, the mean
between the closing high bid and low asked quotations for such day of Common
Stock on such system, as reported in any newspaper of general circulation 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 Committee or the Board in
a fair and uniform manner.
(i) "Incentive Stock Option" shall mean an incentive stock option as
defined in Section 422 of the Internal Revenue Code.
(j) "Internal Revenue Code" shall mean the Internal Revenue Code of
1986, as amended from time to time.
(k) "Mego Financial" shall refer to Mego Financial Corp., a New York
corporation.
(l) "Non-Employee Director" shall refer to a Director who is not an
employee of the Company or of any Affiliate other than Mego Financial and
Preferred Equities Corporation.
(m) "Non-Qualified Stock Option" shall mean an Option which is not
an Incentive Stock Option.
(n) "Officer" shall mean the Company's Chairman of the Board,
President, Chief Executive Officer, chief financial officer, chief accounting
officer, any vice-president of the Company in charge of a principal business
unit, division or function (such as sales, administration or finance), any other
officer who performs a policy-making function, or any other person who performs
similar policy-making functions for the Company. Officers of Subsidiaries shall
be deemed Officers of the Company if they perform such policy-making functions
for the
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<PAGE> 3
Company. As used in this paragraph, the phrase "policy-making function"
does not include policy-making functions that are not significant. If pursuant
to Item 401(b) of Regulation S-K (17 C.F.R. Section 229.401(b)) the Company
identifies a person as an "executive officer," the person so identified shall be
deemed an "Officer" even though such person may not otherwise be an "Officer"
pursuant to the foregoing provisions of this paragraph.
(o) "Option" (when capitalized) shall mean any option granted under
this Plan.
(p) "Optionee" shall mean a person to whom a stock option or SAR 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.
(q) "Outside Director" shall mean a member of the Board who
qualifies as an "outside director" under Section 162(m) of the Internal Revenue
Code and the regulations thereunder and as a "Non-Employee Director" under Rule
16b-3 promulgated under the Securities Exchange Act.
(r) "Plan" shall mean this 1997 Stock Option and Stock Appreciation
Rights Plan for the Company.
(s) "Securities Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended from time to time.
(t) "SAR" shall mean a stock appreciation right granted pursuant to
Section 5 hereof.
(u) "Share" shall mean a share of Common Stock.
(v) "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 AVAILABLE FOR OPTION AND SAR GRANTS. The Committee or the
Board may grant to Optionees from time to time Options and/or SAR's with respect
to an aggregate of up to Two Million (2,000,000) Shares from the Company's
authorized and unissued Shares. If any Option or SAR granted under the Plan
shall terminate, expire, or be cancelled or surrendered as to any Shares, new
Options or SAR's may thereafter be granted with respect to such Shares.
4. OPTIONS.
(a) INCENTIVE AND NON-QUALIFIED OPTIONS. An Option granted hereunder
shall be either an Incentive Stock Option or a Non-Qualified Stock Option as
determined by the
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<PAGE> 4
Committee or the Board at the time of grant of such Option and shall clearly
state whether it is an Incentive Stock Option or a Non-Qualified Stock Option.
All Incentive Stock Options shall be granted within 10 years from the effective
date of this Plan. Incentive Stock Options may not be granted to any person who
is not an employee of the Company or any Subsidiary.
(b) 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 Section 422(b) of the Internal Revenue Code are exercisable for
the first time by any individual during any calendar year (under all plans of
the Company and its parent and subsidiary corporations as defined in Section 424
of the Internal Revenue Code), exceeds $100,000.
(c) OPTION PRICE. The option price per Share of any Option shall be
any price determined by the Committee or 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.
(d) EXERCISE OF OPTIONS. An Option shall be deemed exercised when
(i) the Company 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 Committee or 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 Committee or the Board in any Option, and subject to such
guidelines as the Committee or the Board may establish, the option price of any
Shares purchased shall be paid (1) in cash, (2) by certified or official bank
check, (3) by money order, (4) with Shares, (5) by the withholding of Shares
issuable upon exercise of the Option or by any other form of cashless exercise
procedure approved by the Committee or the Board, or (6) in such other
consideration as the Committee or the Board deems appropriate, or by a
combination of the above. The Committee or 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, or through the
withholding of Shares issuable upon exercise of the Option, the value of the
Shares surrendered or withheld shall be their Fair Market Value for 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,
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 the
prime rate of the Company's principal lender, and (iv) contain such other terms
as the Board in its sole discretion shall
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<PAGE> 5
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 8 hereof.
5. Stock Appreciation Rights (SAR's).
(a) TANDEM STOCK APPRECIATION RIGHTS. The Committee shall have the
right to grant SAR's in tandem with an Option, either at the time of grant of
the Options or by amendment. Each such SAR shall be subject to the same terms
and conditions as the related Option, if any, and shall be exercisable only at
such times and to such extent as the related Option is exercisable; provided,
however, that an SAR may be exercised only when the Fair Market Value of the
Common Stock exceeds the exercise price of the related Option. An SAR shall
entitle the Optionee to surrender to the Company unexercised the related Option,
or any portion thereof, and, except as provided below, to receive from the
Company in exchange therefor, cash in the amount of the excess of the Fair
Market Value of one Share for the day of the surrender of such Option over the
exercise price per share of one Share multiplied by the number of Shares
provided for under the Option, or portion thereof, which is surrendered.
(b) FREESTANDING STOCK APPRECIATION RIGHTS. The Committee also shall
have the authority to grant SAR's unrelated to any Option that may be granted
hereunder. Each such SAR shall be subject to the terms and conditions as
determined by the Committee. Freestanding SAR's shall entitle the Optionee to
surrender to the Company a portion or all of such SAR's, and except as provided
below, to receive from the Company in exchange therefor cash in the amount of
the excess of the Fair Market Value of one Share for the day of the surrender of
such SAR over the Fair Market Value per Share (determined as of the date the SAR
was granted) multiplied by the number of SAR's that are surrendered.
(c) EXERCISE OF SAR's. An SAR shall be deemed exercised when the
Company has received written notice of such exercise in accordance with the
terms of the SAR.
6. CONDITIONS FOR GRANT OF OPTIONS AND SAR's.
(a) Each Option and SAR shall be evidenced by an option agreement or
SAR agreement, as applicable, that may contain any term deemed necessary or
desirable by the Committee or the Board, provided such terms are not
inconsistent with this Plan or any applicable law. Optionees shall be (i) those
persons selected by the Committee from the class of all regular employees of,
or persons who provide consulting or other services as independent contractors
to, the Company or its Subsidiaries, including Directors and Officers who are
regular employees, and (ii) Directors who are not employees of the Company or of
any Subsidiaries.
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<PAGE> 6
(b) In granting Options and SAR's, the Committee or 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 Committee or the
Board shall determine. The Committee or 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 Committee or
the Board may from time to time in granting Options or SAR's under the Plan
prescribe such other terms and conditions concerning such Options or SAR's as it
deems appropriate, including, without limitation, (i) prescribing the date or
dates on which the Option or SAR becomes exercisable, (ii) providing that the
Option or SAR rights accrue or become exercisable in installments over a period
of years, or upon the attainment of stated goals or both, or (iii) relating an
Option or SAR to the continued employment of the Optionee for a specified period
of time.
(c) The Options and SAR's 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 or SAR 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, an Incentive
Stock Option shall not be granted to any person owning directly or indirectly
(through attribution under Section 424(d) of the Internal Revenue 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
corporation [as defined in Section 424 of the Internal Revenue 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.
(e) Notwithstanding any other provision of this Plan, and in
addition to any other requirements of this Plan, the aggregate number of Options
and/or SAR's granted to any one Optionee may not exceed 800,000 Options and/or
SAR's, subject to adjustment as provided in Section 9 hereof.
(f) Notwithstanding any other provision of this Plan, and in
addition to any other requirements of this Plan, Options may not be granted to
any person who is, or who the Board reasonably expects will be a Covered
Employee, unless the grant of such Option is authorized by, and all of the terms
of such Options are determined by, the Committee that is appointed in accordance
with Section 12 of this Plan and all of whose members are Outside Directors.
(g) 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.
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<PAGE> 7
7. EXERCISABILITY OF OPTIONS AND SAR's. Any Option or SAR shall become
exercisable in such amounts, at such intervals and upon such terms as the
Committee or the Board shall provide in such Option or SAR, as applicable,
except as otherwise provided in this Section 7.
(a) The expiration date of an Option or SAR shall be determined by
the Committee at the time of grant, but in no event shall an Option or SAR be
exercisable after the expiration of 10 years from the date on which the Option
is granted.
(b) Unless otherwise provided in any Option or SAR, each outstanding
Option and SAR, shall become immediately fully vested and exercisable in the
event of a "Change in Control" or in the event that the Committee or the Board
exercises its discretion to provide a cancellation notice with respect to the
Option or SAR pursuant to Section 8(c) hereof and the transaction is fully
consummated. For this purpose, the term "Change in Control" shall mean:
(i) Approval by the shareholders of the Company of a
reorganization, merger, consolidation or other form of corporate transaction or
series of transactions, in each case, with respect to which persons who were the
shareholders of the Company immediately prior to such reorganization, merger or
consolidation or other transaction do not, immediately thereafter, own more than
50% of the combined voting power entitled to vote generally in the election of
directors of the reorganized, merged or consolidated company's then outstanding
voting securities, or a liquidation or dissolution of the Company or the sale of
all or substantially all of the assets of the Company (unless such
reorganization, merger, consolidation or other corporate transaction,
liquidation, dissolution or sale is subsequently abandoned); or
(ii) Individuals who, as of the date hereof, constitute the
Board (as of the date hereof the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board, provided that any person becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board (other than an
election or nomination of an individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of the Directors of the Company, as such terms are used in Rule 14a-11
of Regulation 14A of Regulation 14A promulgated under the Securities Exchange
Act) shall be, for purposes of this Agreement, considered as though such person
were a member of the Incumbent Board;
provided, however, that this Section 7(b) shall not apply to accelerate the
exercisability of any Option or SAR 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) The Committee or the Board may in its sole discretion
accelerate the date on which any Option or SAR may be exercised and may
accelerate the exercisability of any
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<PAGE> 8
Shares subject to any Option or SAR or previously acquired by the exercise of
any Option or SAR.
8. TERMINATION OF OPTION PERIOD.
(a) Except as otherwise provided in the Option or SAR, the
unexercised portion of any Option or SAR 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 (3) months after the date on which the Optionee's
employment is terminated or, in the case of a Non-Qualified Stock Option, and
unless the Committee or the Board shall otherwise determine in writing in its
sole discretion, the date on which the Optionee's employment is terminated, in
either case for any reason other than by reason of (A) Cause, which, solely for
purposes of this Plan, shall mean the termination of the Optionee's employment
by reason of (1) misfeasance or malfeasance in connection with the performance
by him of his duties and responsibilities as an employee or Director; (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; or (B) a mental or physical disability (within the meaning
of Internal Revenue Code Section 22(e)) as determined by a medical doctor
satisfactory to the Committee, or (C) death;
(ii) immediately upon the termination of the Optionee's
employment for Cause;
(iii) twelve (12) months after the date on which the Optionee's
employment, is terminated by reason of a mental or physical disability (within
the meaning of Internal Revenue Code Section 22(e)) as determined by a medical
doctor satisfactory to the Committee or the Board;
(iv) twelve (12) months after the date of termination of the
Optionee's employment by reason of death of the Optionee, or in the event the
Optionee's death shall occur during the twelve (12) month period specified in
subsection 8(a)(iii) hereof, on the later of (A) three (3) months after the
date of death of the Optionee or (B) the end of the twelve (12) month period
specified in subsection 8(a)(iii) hereof.
All references herein to the termination of the Optionee's employment shall, in
the case of a Optionee who is not an employee of the Company or a Subsidiary,
refer to the termination of the Optionee's service with the Company.
(b) Except as otherwise provided in the Option or SAR, the
unexercised portion of any Option or SAR granted to an Optionee who is a
Non-Employee Director shall automatically
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<PAGE> 9
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;
(ii) twelve (12) 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 8(b)(i) hereof.
(c) The Committee or the Board in its sole discretion may by
giving written notice ("cancellation notice") cancel, effective 30 days after
the date of, and contingent upon, the consummation of any corporate transaction
described in Subsections 7(b)(i) hereof or of any reorganization, merger,
consolidation or other form of corporate transaction in which the Company does
not survive, 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.
9. ADJUSTMENT OF SHARES.
(a) If at any time while the Plan is in effect or unexercised
Options or SAR's 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 of Options and/or SAR's under the Plan, or
available for grant to any person under the Plan, so that the same percentage of
the Company's issued and outstanding Shares shall continue to be subject to
Options and/or to SAR's; 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 or SAR, so that the same percentage of the Company's issued and
outstanding Shares shall remain subject to Options and/or SAR's at the same
aggregate exercise price.
(b) Unless otherwise provided in any Option or SAR, the Committee
or the Board may change the terms of Options and SAR's outstanding under this
Plan, with respect to the option price or grant price or the number of Shares
subject to the Options or SAR's, or both,
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<PAGE> 10
when, in the Committee's or Board's sole discretion, such adjustments become
appropriate so as to preserve but not increase benefits under the Plan.
(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
a 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 to, the number of or exercise price for Shares then
subject to outstanding Options granted under the Plan.
(d) Without limiting the generality of the foregoing, the existence
of outstanding Options or SAR's 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 or SAR's; (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.
10. TRANSFERABILITY OF OPTIONS, SAR's AND SHARES.
(a) No Incentive Stock Option or SAR, and unless the prior written
consent of the Committee or the Board is obtained and the transaction does not
violate the requirements of Rule 16b-3 promulgated under the Securities 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 and SAR 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 transferred with the prior written
consent of the Committee or the Board, only by the permitted assignee.
(b) Unless the prior written consent of the Committee or the Board
is obtained and the transaction does not violate the requirements of Rule 16b-3
promulgated under the Securities Exchange Act, no Shares acquired by an Officer
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.
11. 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,
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<PAGE> 11
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 to any sale or issuance of Shares upon exercise
of any Option, the Committee or the Board may require such agreements or
undertakings as the Committee or the Board may deem necessary or advisable to
facilitate compliance with any applicable 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 endorsed upon the certificate(s) for such Shares that are, in the
opinion of the Committee or the Board, necessary or appropriate to facilitate
compliance with the provisions of any securities laws deemed by the Committee or
the Board to be applicable to the issuance and transfer of such Shares.
12. ADMINISTRATION OF THE PLAN.
(a) Except as set forth in Section 12(b) below, the Plan shall be
administered by the Board.
(b) In the case of Options and SARs granted to individuals who are,
or who the Board reasonably expects to become, Covered Employees, the Plan shall
be administered by a committee appointed by the Board (the "Committee") which
shall be composed of two or more Directors all of whom shall be Outside
Directors. The membership of the Committee shall be constituted so as to comply
at all times with the applicable requirements of Rule 16b-3 promulgated under
the Securities Exchange Act and Section 162(m) of the Internal Revenue Code. In
the case of Options granted to such 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 Options and
SARs 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. The Committee shall serve at the pleasure of the Board and shall have the
powers designated herein and such other powers as the Board may from time to
time confer upon it.
(c) The Board may grant Options and SAR's pursuant to this Plan to
Directors who are not employees of the Company or any Subsidiary and/or other
persons to whom Options and SAR's may be granted under Sections 4(a) and 5
hereof.
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<PAGE> 12
(d) The Board, from time to time, may adopt rules and regulations
for carrying out the purposes of the Plan. The determinations by the Board, and
the interpretation and construction of any provision of the Plan or any Option
by the Board, shall be final and conclusive.
(e) 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.
13. WITHHOLDING OR DEDUCTION FOR TAXES. If at any time specified herein
for the making of any issuance or delivery of any Option or Common Stock to any
Optionee or beneficiary, or the exercise of any SAR by any Optionee or
beneficiary, any law or regulation of any governmental authority having
jurisdiction in the premises shall require the Company to withhold, or to make
any deduction for, any taxes or take any other action in connection with the
issuance, delivery or exercise then to be made, such issuance or delivery shall
be deferred until such withholding or deduction shall have been provided for by
the Optionee or beneficiary, or other appropriate action shall have been taken.
14. INTERPRETATION.
(a) As it is the intent of the Company that the Plan comply in all
respects with Rule 16b-3 promulgated under the Securities 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 Committee or 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 Internal Revenue 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.
15. AMENDMENT AND DISCONTINUATION OF THE PLAN. The Board may from time
to time amend, suspend or terminate the Plan or any Option or SAR granted to or
held by a Covered
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<PAGE> 13
Employee. Additionally, the Committee may from time to time amend any Option or
SAR granted by the Committee, provided, however, that, any amendment to the Plan
shall be subject to the approval of the Company's shareholders if such
shareholder approval is required by any federal or state law or regulation
(including, without limitation, Rule 16b-3 or to comply with Section 162(m) of
the Internal Revenue Code) or the rules of any Stock exchange or automated
quotation system on which the Common Stock may then be listed or granted. Except
to the extent provided in Sections 8 and 9 hereof, no amendment, suspension or
termination of the Plan or any Option or SAR issued hereunder shall
substantially impair the rights or benefits of any Optionee pursuant to any
Option or SAR previously granted without the consent of the Optionee.
16. 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, but shall be subject to the approval of the Company's
shareholders.
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Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Mego Mortgage Home Loan Acceptance Corporation, a Delaware corporation
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Mego Mortgage
Corporation on Form S-1 of our report dated October 17, 1997, except for the
third and fourth paragraphs of Note 18 as to which the date is October 22,
1997, appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
November 10, 1997
