<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 28, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
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 (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 the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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(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. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED NOTE PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12 1/2% Senior Subordinated Notes
Series C due 2001................... $40,000,000 $1,000 $40,000,000 $12,122
========================================================================================================================
</TABLE>
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.
MEGO MORTGAGE CORPORATION
OFFER TO EXCHANGE
ITS
12 1/2% SENIOR SUBORDINATED NOTES SERIES C DUE 2001
($40,000,000 PRINCIPAL AMOUNT)
FOR ANY AND ALL OUTSTANDING UNREGISTERED
12 1/2% SENIOR SUBORDINATED NOTES SERIES B DUE 2001
($40,000,000 PRINCIPAL AMOUNT)
---------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON , 1998, UNLESS EXTENDED.
---------------------
Mego Mortgage Corporation, a Delaware corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together constitute
the "Exchange Offer"), to exchange its 12 1/2% Senior Subordinated Notes Series
C due 2001 (the "Exchange Notes") for an equal principal amount of its
outstanding 12 1/2% Senior Subordinated Notes Series B due 2001 (the "Additional
Notes"), of which an aggregate of $40,000,000 in principal amount is outstanding
as of the date hereof. The form and terms of the Exchange Notes are the same as
the form and term of the Additional Notes except that (i) the Company's offer
and exchange of the Exchange Notes will have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and, therefore, the
Exchange Notes will not bear legends restricting their transfer, and (ii)
Holders (as defined herein) of Exchange Notes will not be entitled to certain
rights under the Registration Rights Agreement (as defined herein), which rights
will terminate when the Exchange Offer is consummated, except as specifically
provided in the Registration Rights Agreement (as defined herein). The Exchange
Notes will evidence the same debt as the Additional Notes (which they replace)
and will be issued under and be entitled to the same benefits of the Indenture
(as defined herein) governing the Additional Notes, as well as the Company's
currently outstanding $40,000,000 principal amount of its 12 1/2% Senior
Subordinated Notes Series A due 2001 (the "Original Notes," and together with
the Additional Notes and the Exchange Notes, the "Notes").
The Company will accept for exchange any and all validly tendered
Additional Notes on or prior to 5:00 p.m., New York City time, on ,
1998 (if and as extended, the "Expiration Date"). Tenders of Additional Notes
may be withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Additional Notes being tendered for exchange. Additional
Notes may be tendered only in integral multiples of $1,000.
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH HOLDERS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
EXCHANGE FOR THE EXCHANGE NOTES.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is , 1997
<PAGE> 3
The Additional Notes were sold by the Company on October 20, 1997 to
Friedman, Billings, Ramsey & Co., Inc. (the "Initial Purchaser") in a
transaction not registered under the Securities Act in reliance upon the
exemption provided in Section 4(2) of the Securities Act. The Initial Purchaser
subsequently resold the Additional Notes in transactions not requiring
registration under the Securities Act or applicable state securities laws to (i)
qualified institutional buyers pursuant to Rule 144A under the Securities Act,
(ii) a limited number of Accredited Investors, within the meaning of Rule 501(a)
promulgated under the Securities Act and (iii) foreign purchasers outside the
United States in reliance on Regulation S promulgated under the Securities Act.
Accordingly, the Additional Notes may not be reoffered, resold or otherwise
transferred in the United States unless so registered or unless an applicable
exemption from the registration requirements of the Securities Act is available.
The Exchange Notes are being offered hereunder in order to satisfy the
obligations of the Company under the Registration Rights Agreement. See "The
Exchange Offer -- Purpose and Effect of the Exchange Offer."
Based on existing interpretations of the Securities Act by the staff of the
Securities and Exchange Commission (the "Commission") set forth in several no
action letters to third parties, and subject to the immediately following
sentence, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer may be offered for resale, resold and otherwise transferred by
Holders thereof without further registration under the Securities Act. However,
any Holder of Additional Notes who is an "affiliate" of the Company or who
intends to participate in the Exchange Offer for the purpose of distributing the
Exchange Notes (i) will not be able to rely on the interpretation of the staff
of the Commission set forth in the above referenced no action letters, (ii) will
not be able to tender Additional Notes in the Exchange Offer and (iii) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or transfer of Additional Notes,
unless such sale or transfer is made pursuant to an exemption from such
requirements.
Each Holder of the Additional Notes (other than the specified Holders
previously mentioned) who wishes to exchange Additional Notes for Exchange Notes
in the Exchange Offer will be required to make certain representations,
including that (i) it is not an affiliate of the Company or any Subsidiary
Guarantor (as defined in "Description of the Notes"), (ii) any Exchange Notes to
be received by it will be acquired in the ordinary course of its business and
(iii) at the time of consummation of the Exchange Offer, it has no arrangement
with any person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Notes. In addition, in connection with any
resales of Exchange Notes, any broker-dealer (a "Participating Broker-Dealer")
who acquired the Additional Notes for its own account as a result of market-
making activities must deliver a prospectus meeting the requirements of the
Securities Act. The Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the Exchange Notes (other than a resale of an unsold allotment from the
original sale of the Additional Notes) with the prospectus contained in this
Exchange Offer Registration Statement (as defined herein). Under the
Registration Rights Agreement, the Company is required to allow Participating
Broker-Dealers and other persons, if any, subject to similar prospectus delivery
requirements to use the prospectus contained in this Exchange Offer Registration
Statement in connection with the resale of such Exchange Notes.
Holders of Additional Notes whose Additional Notes are not tendered and
accepted in the Exchange Offer will continue to hold such Additional Notes and
will be entitled to all the rights and preferences and will be subject to the
limitations applicable thereto under the Indenture, and with respect to
transfer, under the Securities Act and, except as set forth above, will have no
further rights under the Registration Rights Agreement.
The Company will pay all the expenses incurred by it incident to the
Exchange Offer. Any Additional Notes not accepted for exchange for any reason
will be returned without expense to the tendering Holders thereof as promptly as
practicable after the expiration or termination of the Exchange Offer. See "The
Exchange Offer."
The Company does not intend to list the Exchange Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. To the extent that Additional Notes are tendered and
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<PAGE> 4
accepted in the Exchange Offer, the trading market for untendered and tendered
but unaccepted Additional Notes could be adversely affected.
The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to this Exchange Offer
will be issued in the form of one or more fully registered global notes, which
will be deposited with, or on behalf of, The Depository Trust Company (the
"Depositary") and registered in its name or in the name of Cede & Co., its
nominee. Beneficial interests in the global notes representing the Exchange
Notes will be shown on, and transfers thereof will be effected only through,
records maintained by the Depositary and its participants. After the initial
issuance of each global note, Exchange Notes in certificated form will be issued
in exchange for the global note only as set forth in the Indenture. See
"Description of the Notes -- Book-Entry, Delivery and Form."
ii
<PAGE> 5
SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. Unless otherwise indicated, all
information in this Prospectus gives effect to (i) a 1,600-for-1 stock split
effected in October 1996 and (ii) certain amendments to the Indenture pursuant
to which the Original Notes and the Additional Notes were, and the Exchange
Notes will be, issued.
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,
expected, planned or intended. 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 traditional financial institutions.
The Company has developed a proprietary credit index profile ("CIP") that
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<PAGE> 6
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
November 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. Currently, 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 December 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.
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.
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<PAGE> 7
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 fine.
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 its
common stock, $.01 par value (the "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 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. The Company
repaid $3.9 million of debt to Mego Financial in October 1997 with the proceeds
of the Private Placement (as defined herein). 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 the Equity Offering (as defined herein) to repay
$3.9 million of debt owed to Mego Financial. The Company also has agreements
with PEC for the provision of management services and loan servicing. See
"Certain Transactions."
RECENT DEVELOPMENTS
On November 12, 1997, the Company filed a Registration Statement with the
Commission relating to its proposed public offering (the "Equity Offering") of
3,500,000 shares of its Common Stock. An overallotment option granted to the
underwriters of the Equity Offering would increase the size of the offering to
4,025,000 shares of Common Stock. The Company intends to use the net proceeds of
the Equity Offering to repay an additional approximately $3.9 million of debt
owed to Mego Financial, pay down amounts under its lines of credit and provide
capital to originate and securitize loans. There can be no assurance that the
Equity Offering will in fact be consummated.
In October 1997, the Company consummated a private placement (the "Private
Placement") of the Additional Notes which increased the aggregate principal
amount of Notes outstanding from $40.0 million to $80.0 million. 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 the Exchange Notes and
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<PAGE> 8
modified certain covenants applicable to the Company. In connection with the
Consent Solicitation, the Company made consent payments of $10.00 cash per
$1,000 principal amount of Original Notes to Holders thereof who properly
furnished their consents to the Indenture Amendments.
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.
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.
TERMS OF THE EXCHANGE OFFER
The Exchange Offer......... The Company is offering to exchange $1,000
principal amount of its Exchange Notes for each
$1,000 principal amount of its outstanding
Additional Notes that are properly tendered and
accepted. As of the date of this Prospectus, $40.0
million in aggregate principal amount of the
Additional Notes are outstanding. Upon consummation
of the Exchange Offer, the terms of the Exchange
Notes (including the principal amount, interest
rate, maturity and ranking) will be identical in
all material respects to the terms of the
Additional Notes for which they may be exchanged
pursuant to the Exchange Offer, except that the
Exchange Notes have been registered under the
Securities Act, and therefore will not bear legends
restricting their transfer and will not contain
terms providing for an increase in the interest
rate thereon under certain circumstances described
in the Registration Rights Agreement. See "The
Exchange Offer -- Purpose and Effect of the
Exchange Offer." As of the Record Date (as defined
herein), there are registered Holders of
Additional Notes.
Minimum Condition.......... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Additional
Notes being tendered for exchange.
Expiration Date............ 5:00 p.m., New York City time, on ,
1998 (the Expiration Date "Expiration Date"). See
"The Exchange Offer -- Terms of the Exchange Offer;
Expiration Date; Termination."
Exchange Date.............. The date of acceptance for exchange of the
Additional Notes will be the first business day
practicable following the Expiration Date.
Accrued Interest on the
Exchange Notes and
Additional Notes......... The Exchange Notes will bear interest from their
respective issuance dates at the same rate and upon
the same terms as the Additional Notes. Holders
whose Additional Notes are accepted for exchange
will receive
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<PAGE> 9
accrued and unpaid interest thereon to, but not
including, the issuance date of the Exchange Notes
and will be deemed to have waived the right to
receive any payment in respect of interest on the
Additional Notes accrued from and after the date of
issuance of the Exchange Notes. Such accrued but
unpaid interest on the Additional Notes will be
payable with the first interest payment on the
Exchange Notes.
Conditions of the Exchange
Offer.................... The Exchange Offer is subject to certain customary
conditions, including (i) no commencement of any
action, legal or governmental, with respect to the
Exchange Offer or which the Company reasonably
determines would make it inadvisable to proceed
with the Exchange Offer, (ii) no banking moratorium
or similar event or international calamity
involving the United States, and (iii) no material
adverse change in the business or prospects of the
Company. The Company expects that the foregoing
conditions will be satisfied. All such conditions
may be waived by the Company. Holders of Additional
Notes may have certain rights and remedies against
the Company under the Registration Rights Agreement
should the Company fail to consummate the Exchange
Offer. See "The Exchange Offer -- Conditions of the
Exchange Offer."
Procedures for Tendering
Additional Notes......... See "The Exchange Offer -- Procedures for Tendering
Additional Notes."
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
See "The Exchange Offer -- Withdrawal Rights."
Acceptance of Additional
Notes and Delivery of
Exchange Notes........... Subject to the satisfaction or waiver of all
conditions of the Exchange Offer, the Company will
accept for exchange any and all Additional Notes
that are properly tendered to the Exchange Agent
(as defined herein) in the Exchange Offer prior to
5:00 p.m., New York City time, on the Expiration
Date. See "The Exchange Offer -- Acceptance of
Additional Notes for Exchange; Delivery of Exchange
Notes."
Certain Federal Income Tax
Considerations........... For a discussion of certain federal income tax
consequences of the exchange of the Additional
Notes, see "Certain Federal Income Tax
Considerations."
Exchange Agent............. American Stock Transfer & Trust Company is the
exchange agent (the "Exchange Agent"). The address
and telephone number of the Exchange Agent are set
forth in "The Exchange Offer -- Exchange Agent."
TRANSFER RESTRICTIONS ON EXCHANGE NOTES
Exchange Notes............. Based upon interpretations by the staff of the
Commission, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer to
Participating Broker-Dealers may be offered for
resale, resold, and otherwise transferred by a
Participating Broker-Dealer upon compliance with
the prospectus delivery requirements, but without
compliance with the registration requirements, of
the Securities Act. The Company has agreed that for
a period of 180 days following consummation of the
Exchange Offer it will make this Prospectus
available, for use in connection with any such
resale, to any Participating Broker-Dealer that
5
<PAGE> 10
notifies the Company in the Letter of Transmittal
that it may be subject to such prospectus delivery
requirements. The Company believes that during such
period of time, delivery of this Prospectus, as it
may be amended or supplemented, will satisfy the
prospectus delivery requirements of a Participating
Broker-Dealer engaged in market-making or other
trading activities. See "The Exchange Offer" and
"Plan of Distribution." Based upon interpretations
by the staff of the Commission, the Company
believes that Exchange Notes issued pursuant to the
Exchange Offer may be offered for resale, resold,
and otherwise transferred by a Holder thereof
(other than a Restricted Holder (as defined herein)
or a Participating Broker-Dealer) without
compliance with the registration and prospectus
delivery requirements of the Securities Act.
EFFECT ON HOLDERS OF ADDITIONAL NOTES
Additional Notes........... As a result of the making of this Exchange Offer,
and upon acceptance for exchange of all validly
tendered Additional Notes pursuant to the terms of
this Exchange Offer, the remaining Holders of the
Additional Notes will have no further registration
or other rights under the Registration Rights
Agreement, except under certain limited
circumstances. Holders of the Additional Notes who
do not tender their Additional Notes in the
Exchange Offer will continue to hold such
Additional Notes and will be entitled to all the
rights and limitations applicable thereto under the
Indenture. All untendered, and tendered but
unaccepted, Additional Notes will continue to be
subject to the restrictions on transfer provided
for in the Additional Notes and the Indenture. To
the extent that Additional Notes are tendered and
accepted in the Exchange Offer, the trading market,
if any, for the Additional Notes could be adversely
affected. See "Risk Factors -- Consequences of
Failure to Exchange."
DESCRIPTION OF THE EXCHANGE NOTES
Securities Offered......... $40,000,000 aggregate principal amount of the
Company's 12 1/2% Senior Subordinated Notes Series
C due December 1, 2001.
Interest Payment Dates..... Semi-annually on June 1 and December 1 of each year
commencing June 1, 1998.
Subsidiary Guarantees...... The obligations of the Company under the Notes will
be jointly and severally guaranteed by each of its
future Restricted Subsidiaries, other than Special
Purpose Subsidiaries (each as defined herein). See
"Description of the Notes -- Subsidiary
Guarantees."
Optional Redemption........ The Notes are not redeemable at any time by the
Company prior to maturity, except that, until
December 1, 1998, the Company may redeem, at its
option, up to 35% of the original principal amount
of the Notes at the redemption price set forth
herein, plus accrued and unpaid interest, if any,
to the redemption date with the net proceeds of one
or more Public Equity Offerings (as defined herein)
if at least 65% of the original principal amount of
the Notes remains outstanding after such
redemption. See "Description of the
Notes -- Optional Redemption."
Mandatory Redemption....... None.
6
<PAGE> 11
Sinking Fund............... None.
Ranking.................... The Notes will be general unsecured obligations of
the Company, subordinated in right of payment to
all existing and future Senior Indebtedness (as
defined herein) of the Company, and will be senior
in right of payment to all Indebtedness (as defined
herein) of the Company that by its terms is
expressly subordinated in right of payment to the
Notes. Each Subsidiary Guarantee (as defined
herein) will be a general unsecured obligation of
the Subsidiary Guarantor (as defined herein),
subordinated in right of payment to all Senior
Indebtedness of such Subsidiary Guarantor, and will
be senior in right of payment to all Indebtedness
of such Subsidiary Guarantor that by its terms is
expressly subordinated in right of payment to the
Subsidiary Guarantees. As of August 31, 1997, after
giving effect to the issuance of the Additional
Notes pursuant to the Private Placement and the
application of the net proceeds therefrom, the
outstanding Senior Indebtedness of the Company, on
a consolidated basis, would have been approximately
$6.6 million.
Change of Control.......... Upon a Change of Control (as defined herein),
Holders of the Notes will have the option to
require the Company to repurchase all outstanding
Notes of the Holders requiring such repurchase at
101% of their principal amount, plus accrued
interest to the date of repurchase. There can be no
assurance that the Company will have the funds
available to repurchase the Notes in the event of a
Change of Control.
Certain Covenants.......... The Indenture pursuant to which the Exchange Notes
will be, and the Original Notes and the Additional
Notes were, issued contains certain covenants that,
among other things, limit the ability of the
Company and its subsidiaries to incur certain
indebtedness, pay dividends and make other
distributions, engage in transactions with
affiliates, sell assets (including stock of
subsidiaries), issue subsidiary preferred stock,
create certain liens, engage in mergers or
consolidations and enter into any arrangement that
would impose certain restrictions on the ability of
subsidiaries to make dividend and other payments to
the Company. See "Description of the
Notes -- Certain Covenants."
Amendment or Waiver of
Indenture Provisions..... Certain provisions of the Indenture, including
those related to Change of Control, may be amended
or waived with the consent of the Holders of at
least the majority in principal amount of then
outstanding Notes.
Use of Proceeds............ No proceeds will be received by the Company from
the Exchange Offer. The net proceeds from the sale
of the Additional Notes, however, were used to
provide capital to originate and securitize loans,
to repay debt owed to Mego Financial and to pay
down the amounts outstanding under the Company's
lines of credit.
RISK FACTORS
Before tendering Additional Notes for Exchange Notes offered hereby,
Holders of Additional Notes should carefully consider all of the matters
described herein under "Risk Factors," including, among others: Holders of
Additional Notes who do not exchange pursuant to the Exchange Offer will suffer
certain adverse consequences; risks relating to subordination and leverage;
consequences of a change of control; risks related to the fact that the Company
has operated, and expects to continue to operate for the foreseeable future, on
a
7
<PAGE> 12
negative cash flow basis; risks relating to changes in interest rates; risks
related to the Company's dependence on securitization and other sale
transactions; risks associated with capitalized mortgage servicing rights and
valuation of mortgage related securities; risks relating to possible termination
of servicing rights; contingent risks including the risks relating to losses
from loan delinquencies and other loan defaults; risks relating to 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.
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
===========
Ratio of earnings to fixed charges(4)............. N/A 7.69x 2.38x 5.59x(5)
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 31, AS OF AUGUST 31, 1997
--------------------------- -------------------------------------
PRO FORMA
PRO AS
1994(1) 1995 1996 ACTUAL FORMA(6) ADJUSTED(6)(7)
------- ------- ------- -------- --------- --------------
<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(8) 80,400(8)
Total stockholders' equity......... 4,139 10,781 17,701 53,107 53,107 89,305
</TABLE>
8
<PAGE> 13
<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
======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 31,
------------------------------------------
1994(1) 1995 1996 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
DELINQUENCY DATA:
Conventional Loan delinquency data(9):
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(9):
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(10) 7.06
91 days and over past due, net of claims
filed(11)................................ 0.26 0.61 2.05 5.20
Outstanding claims filed with HUD(12)....... 0.10 0.38 2.73 1.86
Amount of FHA insurance available for
Title I Loans serviced...................... $ 813 $ 9,552 $ 21,205 $ 21,094(13)
Amount of FHA insurance available as a
percentage of Title I Loans serviced........ 10.13% 10.35% 10.46% 8.26%(13)
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(10) 3.07
91 days and over past due, net of claims
filed(14)................................ 0.26 0.61 1.94 2.32
Outstanding claims filed with HUD(15)......... 0.10 0.38 2.59 0.75
Aggregate losses on liquidated loans(16)...... $ -- $ 16.8 $ 32.0 $ 201.0
</TABLE>
- ---------------
(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."
9
<PAGE> 14
(4) Earnings include pretax income, the portion of rents representative of the
interest factor and interest on debt. Fixed charges include interest on
indebtedness, prepaid commitment fees and the portion of rents
representative of the interest factor.
(5) Ratio computed giving pro forma effect for the total additional interest
expense resulting from the issuance of the Additional Notes at an interest
rate of 12 1/2% in lieu of the interest expense recorded by the Company
under its existing lines of credit repaid with the net proceeds of the
Private Placement.
(6) Gives effect to (i) the issuance of the Additional Notes pursuant to the
Private Placement and (ii) the application of the net proceeds therefrom.
(7) As adjusted to give effect to (i) the sale of the shares proposed to be
offered pursuant to the Equity Offering (at an assumed offering price of
$11.125 per share after deducting underwriting discounts and commissions
and estimated expenses of the Equity Offering) and (ii) the application of
the estimated net proceeds from the Equity Offering.
(8) 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 Exchange Notes.
(9) 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.
(10) During fiscal 1996, the processing and payment of claims filed with HUD
were delayed. See "Business -- Loan Servicing."
(11) 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.
(12) 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.
(13) 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%.
(14) 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.
(15) 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.
(16) 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.
10
<PAGE> 15
RISK FACTORS
Investment in the Exchange Notes offered hereby involves a high degree of
risk, including the risks described below. Each prospective investor should
carefully consider the following risk factors inherent in and affecting the
business of the Company and the Exchange Offer before tendering their Additional
Notes for Exchange Notes offered hereby. The risk factors described below are
generally applicable to the Additional Notes as well as the Exchange Notes,
other than the risk factor entitled "Consequences of Failure to Exchange." In
addition, 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.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Additional Notes who do not exchange their Additional Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Additional Notes as set forth in the legend
thereon as a consequence of the issuance of the Additional Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Additional Notes may not be offered or sold unless registered under
the Securities Act and applicable state securities laws, or pursuant to an
exemption therefrom. Except under certain limited circumstances set forth in the
Registration Rights Agreement, the Company does not intend to register the
Additional Notes under the Securities Act. In addition, any Holder of Additional
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the Exchange Notes may be deemed to have received restricted
securities and, if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. To the extent Additional Notes are tendered and accepted in
the Exchange Offer, the trading market, if any, for the Additional Notes not
tendered could be adversely affected. See "The Exchange Offer."
SUBORDINATION AND LEVERAGE
The Notes (including the Subsidiary Guarantees) are subordinated in right
of payment to all existing and future Senior Indebtedness, including all
warehouse indebtedness and all other indebtedness for borrowed money. The
Company currently has significant outstanding indebtedness and is significantly
leveraged. As of August 31, 1997, after giving effect to the issuance of the
Additional Notes pursuant to the Private Placement and the application of the
net proceeds therefrom, the Company would have had outstanding indebtedness of
approximately $93.2 million, of which approximately $6.6 million was Senior
Indebtedness to which the Notes are subordinated. See "Capitalization." In
addition, subject to the limitations set forth in the Indenture, the Company and
its future Subsidiaries may incur substantial amounts of additional
indebtedness, much of which is expected to constitute Senior Indebtedness. By
reason of the subordination of the Notes, in the event of insolvency,
bankruptcy, liquidation, reorganization, dissolution or winding up of the
business of the Company or any Subsidiary Guarantor or upon default in payment
with respect to or acceleration of any Senior Indebtedness of the Company or any
Subsidiary Guarantor or an event of default with respect to certain Senior
Indebtedness continuing for up to 179 days, the assets of the Company or the
Subsidiary Guarantor would be available to pay the amounts due on the Notes only
after such Senior Indebtedness had been paid in full. The Company is a party to
certain warehouse facilities for the financing of its loan originations, which
facilities are secured by the loans financed thereby. The Company also has
certain additional secured credit facilities and, subject to the limitations set
forth in the Indenture, may have additional amounts of secured indebtedness in
the future. The Notes (including the Subsidiary Guarantees) are effectively
subordinated to all such secured obligations to the extent of the collateral,
irrespective of whether payments on the Notes (including the Subsidiary
Guarantees) are otherwise permitted to be made under the subordination
provisions in the Indenture prior to payment of such other indebtedness in full.
Upon certain events of default under such facilities, the lenders could elect to
declare all amounts outstanding, together with accrued and unpaid interest
11
<PAGE> 16
thereon, to be immediately due and payable. If the Company were unable to repay
those amounts, the lenders could proceed against the collateral granted them to
secure that indebtedness. If any of such indebtedness were to be accelerated,
there can be no assurance that the assets of the Company would be sufficient to
repay in full that indebtedness and the other indebtedness of the Company,
including the Notes.
The Company's ability to make payments of principal and interest on, or to
refinance its indebtedness (including the Notes) depends on its future operating
performance, which to a certain extent is subject to economic, financial,
competitive and other factors beyond its control. The degree to which the
Company is leveraged could have important consequences to the Holders of the
Notes, including (i) the Company's vulnerability to adverse general economic and
industry conditions, (ii) the Company's ability to obtain additional financing
for future working capital expenditures (including loan originations), general
corporate purposes or other purposes, and (iii) the dedication of a substantial
portion of the Company's cash flow from operations to the payment of principal
and interest on indebtedness, thereby reducing the funds available for
operations and future business opportunities.
CONSEQUENCES OF CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Holders of the Notes would
be entitled to require the Company to repurchase up to all outstanding Notes of
the Holders requiring such repurchase at a purchase price equal to 101% of the
principal amount of such Notes plus accrued and unpaid interest thereon to the
date of repurchase. Failure by the Company to make such a repurchase would
result in a default under the Indenture. In addition, the future indebtedness of
the Company and the Subsidiaries may contain prohibitions on the occurrence of
certain events that would constitute a Change of Control or require such
indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the Holders of the Notes of their right to require the Company to repurchase
the Notes could cause a default under such indebtedness due to the financial
effect of such repurchase on the Company or otherwise, even if the Change of
Control itself does not cause a default. In the event of a Change of Control,
there can be no assurance that the Company would have sufficient assets to
repurchase the Notes and to satisfy its other obligations under the Notes and
any such other indebtedness or would be permitted to make such repurchase in
compliance with the subordination provisions in the Indenture. See "Description
of the Notes -- Change of Control."
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
12
<PAGE> 17
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.
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.
INCREASED PREPAYMENTS AND OTHER FACTORS MAY ADVERSELY AFFECT VALUATION OF
SERVICING RIGHTS AND 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,
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<PAGE> 18
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 (see "-- Competition"
below) 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 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 require-
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ments 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
Among other things, 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 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.
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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."
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.
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
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<PAGE> 21
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.
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.
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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 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
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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."
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
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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 Equity 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.
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
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impaired by such government action. Accordingly, the reduction or elimination of
these tax benefits would have a material adverse effect on the demand for loans
of the kind offered by the Company.
The Company's business is subject to extensive regulation, supervision and
licensing by federal, state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of its operations. The Company's consumer lending
activities are subject to the Federal Truth-in-Lending Act and Regulation Z
(including the Home Ownership and Equity Protection Act of 1994), the Federal
Equal Credit Opportunity Act and Regulation B, as amended ("ECOA"), the Fair
Credit Reporting Act of 1970, as amended, the Federal Real Estate Settlement
Procedures Act ("RESPA") and Regulation X, the Home Mortgage Disclosure Act and
the Federal Debt Collection Practices Act, as well as other federal and state
statutes and regulations of, and examinations by, the Department of Housing and
Urban Development ("HUD") and state regulatory authorities with respect to
originating, processing, underwriting, selling, securitizing and servicing
loans. These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on loan applicants, regulate assessment, collection,
foreclosure and claims handling, investment and interest payments on escrow
balances and payment features, mandate certain disclosures and notices to
borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan
amounts. Failure to comply with these requirements can lead to loss of approved
status, termination or suspension of servicing contracts without compensation to
the servicer, demands for indemnification or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.
Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, there can be no assurance that more restrictive
laws, rules and regulations will not be adopted in the future that could make
compliance more difficult or expensive. See "Business -- Government Regulation."
To date, a substantial portion of the loans originated by the Company have
been Title I Loans. 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.
FRAUDULENT CONVEYANCES AND PREFERENTIAL TRANSFERS
The ability of the Holders of the Notes or the Trustee (as defined herein)
to enforce the Subsidiary Guarantees may be limited by certain fraudulent
conveyance and similar laws. Various fraudulent conveyance and similar laws have
been enacted for the protection of creditors and may be utilized by a court of
competent jurisdiction to avoid the Subsidiary Guarantees or to subordinate the
obligations of the Company under the Notes or the obligations of any Subsidiary
Guarantor under its Subsidiary Guarantee to obligations (including trade
payables) that do not otherwise constitute Senior Indebtedness. The requirements
for establishing a fraudulent conveyance vary depending on the law of the
jurisdiction which is being applied. Generally, if in a bankruptcy,
reorganization, rehabilitation or similar proceeding in respect of the Company
or a Subsidiary Guarantor, or in a lawsuit by or on behalf of creditors against
the Company or a Subsidiary Guarantor, a court were to find that (i) the Company
or a Subsidiary Guarantor, as the case may be, incurred indebtedness in
connection with the Notes (including the Subsidiary Guarantees) with the intent
of hindering, delaying or defrauding current or future creditors of the Company
or the Subsidiary Guarantor, as the case may be, or (ii) the Company or a
Subsidiary Guarantor, as the case may be, received less than reasonably
equivalent value or fair consideration for incurring such indebtedness, as the
case may be, and either (a) was insolvent at
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the time of the incurrence of such indebtedness, (b) was rendered insolvent by
reason of incurring such indebtedness, (c) was at such time engaged or about to
engage in a business or transaction for which its assets constituted
unreasonably small capital or (d) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they matured, such court
could, with respect to the Company or the Subsidiary Guarantor, as the case may
be, declare void in whole or in part the obligations of the Company or such
Subsidiary Guarantor in connection with the Notes (including the Subsidiary
Guarantees) and/or subordinate claims with respect to the Notes to all other
debts of the Company or the Subsidiary Guarantors, as applicable. If the
obligations of the Company or the Subsidiary Guarantors were subordinated, there
can be no assurance that after payment of the other debts of the Company or the
Subsidiary Guarantors, there would be sufficient assets to pay such subordinated
claims with respect to the Notes and the Subsidiary Guarantees.
Generally, for purposes of the foregoing, an entity will be considered
insolvent if the sum of its respective debts is greater than the fair saleable
value of all of its property at a fair valuation or if the present fair saleable
value of its assets is less than the amount that will be required to pay its
probable liability on its existing debts, as they become absolute and mature.
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against the
Company or any Subsidiary Guarantor within 90 days after any payment by the
Company or such Subsidiary Guarantor with respect to the Notes or a Subsidiary
Guarantee, respectively, or the incurrence of a Subsidiary Guarantee or if the
Company or such Subsidiary Guarantor anticipated becoming insolvent at the time
of such payment or incurrence, all or a portion of such payment or guarantee
could be avoided as a preferential transfer and the recipient of such payment
could be required to return such payment.
PERMISSIBLE OPERATION THROUGH SUBSIDIARIES
Although the Company currently has no Subsidiaries other than one Special
Purpose Subsidiary, it is permitted to conduct future operations through
Subsidiaries. If it forms or acquires Subsidiaries in the future, the Company
may be required to rely, at least in part, upon payment from its Subsidiaries to
generate the funds necessary to meet its obligations, including the payment of
interest on and principal of the Notes. The ability of the Subsidiaries to make
such payments will be subject to, among other things, applicable state laws, and
may be subject to certain net worth maintenance requirements under warehouse
credit facilities of subsidiaries that are permitted under the Indenture. See
"Description of the Notes -- Certain Covenants -- Limitation on Restrictions of
Distributions from Restricted Subsidiaries." Claims of creditors of the
Company's Subsidiaries will generally have priority as to the assets of such
Subsidiaries over the claims of the Company.
Although the Subsidiary Guarantees would provide the Note Holders with a
direct claim against the assets of the Subsidiary Guarantors, enforcement of the
Subsidiary Guarantees against any Subsidiary Guarantors would be subject to
certain "suretyship" defenses available to guarantors generally, and such
enforcement would also be subject to certain defenses available to the
Subsidiary Guarantors in certain circumstances. See "-- Fraudulent Conveyances
and Preferential Transfers." Although the Indenture contains waivers of most
"suretyship" defenses, certain of those waivers may not be enforced by a court
in a particular case. To the extent that the Subsidiary Guarantees are not
enforceable, the Notes would be effectively subordinated to all liabilities of
the Company's Subsidiaries, including trade payables of such Subsidiaries,
whether or not such liabilities otherwise constitute Senior Indebtedness under
the Indenture. See "-- Subordination and Leverage," above.
DEPENDENCE ON 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,
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<PAGE> 27
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 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 have attracted (and could continue to 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.
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
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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.
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<PAGE> 29
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Additional Notes were sold by the Company on October 20, 1997, to the
Initial Purchaser pursuant to a Purchase Agreement. The Initial Purchaser
subsequently resold the Additional Notes to (i) qualified institutional buyers
pursuant to Rule 144A under the Securities Act, (ii) a limited number of
qualified Accredited Investors, within the meaning of Rule 501(a) promulgated
under the Securities Act and (iii) foreign purchasers outside of the United
States in reliance on Regulation S promulgated under the Securities Act. In
connection with the Company's sale of the Additional Notes, the Company and the
Initial Purchaser entered into the Registration Rights Agreement pursuant to
which the Company agreed, at its cost, (i) to file with the Commission on or
before November 28, 1997, and to use its best efforts to cause to become
effective on or before January 12, 1998, a registration statement (the "Exchange
Offer Registration Statement") with respect to the Exchange Offer and (ii) to
use its best efforts to cause the Exchange Offer to be consummated on or prior
to February 11, 1998. This registration statement is intended to satisfy the
Company's obligations under the Registration Rights Agreement. Upon the
effectiveness of the Exchange Offer Registration Statement, the Company will
offer to the Holders of the Additional Notes the opportunity to exchange their
Additional Notes for a like principal amount of Exchange Notes, to be issued
without a legend restricting their transfer and which may, subject to certain
exceptions described below, be reoffered and resold by the Holder without
restrictions or limitations under the Securities Act. The term "Holder" with
respect to any Note means any person in whose name such Note is registered on
the books of the Company.
Based on existing interpretations of the Securities Act by the staff of the
Commission set forth in several no action letters to third parties, and subject
to the immediately following sentence, the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by Holders thereof without further registration under
the Securities Act. However, any Holder of Additional Notes who is an
"affiliate" of the Company or who intends to participate in the Exchange Offer
for the purpose of distributing the Exchange Notes (i) will not be able to rely
on the interpretation of the staff of the Commission set forth in the above
referenced no action letters, (ii) will not be able to tender Additional Notes
in the Exchange Offer and (iii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any sale or
transfer of Additional Notes, unless such sale or transfer is made pursuant to
an exemption from such requirements.
Each Holder of the Additional Notes (other than the specified Holders
previously mentioned) who wishes to exchange Additional Notes for Exchange Notes
in the Exchange Offer will be required to make certain representations,
including that (i) it is not an affiliate of the Company or any Subsidiary
Guarantor, (ii) any Exchange Notes to be received by it will be acquired in the
ordinary course of its business and (iii) at the time of consummation of the
Exchange Offer, it has no arrangement with any person to participate in the
distribution (within the meaning of the Securities Act) of the Exchange Notes.
In addition, in connection with any resales of Exchange Notes, any Participating
Broker-Dealer who acquired the Additional Notes for its own account as a result
of market-making activities must deliver a prospectus meeting the requirements
of the Securities Act. The Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the Exchange Notes (other than a resale of an unsold allotment from the
original sale of the Additional Notes) with the prospectus contained in this
Exchange Offer Registration Statement. Under the Registration Rights Agreement,
the Company is required to allow Participating Broker-Dealers and other persons,
if any, subject to similar prospectus delivery requirements to use the
prospectus contained in this Exchange Offer Registration Statement in connection
with the resale of such Exchange Notes.
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 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, (i) as promptly as practicable, file with the
Commission a Shelf Registration Statement covering resales of the Additional
Notes (the "Shelf Registration Statement"), (ii) use its best
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<PAGE> 30
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 (iii) 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. The Company will,
in the event of the filing of a Shelf Registration Statement, provide to each
Holder of Additional Notes copies of the prospectus which is part of the Shelf
Registration Statement, notify each such Holder when the Shelf Registration
Statement has become effective and take certain other actions as are required to
permit unrestricted resales of the Additional Notes. A Holder of Additional
Notes who sells such Additional Notes pursuant to the Shelf Registration
Statement generally will be required to be named as a selling securityholder in
the related prospectus and to deliver the prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such a Holder (including
certain indemnification obligations). In addition, each Holder of Additional
Notes will be required to deliver information to be used in connection with the
Shelf Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the Registration Rights Agreement
in order to have their Additional Notes included in the Shelf Registration
Statement and to benefit from the provisions regarding liquidated damages set
forth in the following paragraph.
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 the 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 clause (i) above, January 12, 1998 in the case of clause
(ii) above, or February 11, 1998 in the case of clause (iii) above, which rate
will be increased by an additional one-half of one percent per annum for each
90-day period that 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
less than, the original interest rate of the Additional Notes; 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 the original interest rate of the
Additional Notes on the date on which the Additional Notes become eligible for
sale under Rule 144 without limitation as to volume.
If the Exchange Offer is consummated, the Additional Notes that remain
outstanding thereafter, the Exchange Notes issued in connection with the
Exchange Offer and the Original Notes will be treated as a single class of
securities under the Indenture.
Following the consummation of the Exchange Offer, Holders of Additional
Notes not tendered will generally not have any further registration rights and
the Additional Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for the Additional Notes
could be adversely affected.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying letter of transmittal (the "Letter of
Transmittal"), to exchange $1,000 in principal amount of
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<PAGE> 31
Exchange Notes for each $1,000 in principal amount of its outstanding Additional
Notes. Exchange Notes will be issued only in integral multiples of $1,000 to
each tendering Holder whose Additional Notes are accepted in the Exchange Offer.
The Company will accept any and all Additional Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date (as
defined in "-- Expiration Date; Extensions; Amendments"). Additional Notes that
are not accepted for exchange will be returned as promptly as practicable after
the Expiration Date. Holders may tender all or a portion of their Additional
Notes pursuant to the Exchange Offer.
The form and terms of the Exchange Notes under the Indenture will be
identical in all material respects to the form and terms of the Additional
Notes, except that (i) the offering of the Exchange Notes will have been
registered under the Securities Act and hence the Exchange Notes will not bear
legends restricting the transfer thereof, and (ii) Holders of Exchange Notes
will not be entitled to certain rights intended for Holders of unregistered
securities under the Registration Rights Agreement which will terminate upon
consummation of the Exchange Offer. The Exchange Notes evidence the same debt as
the Additional Notes (which they replace) and will be issued under, and be
entitled to the benefits of, the Indenture governing the Additional Notes, as
well as the Original Notes. The Exchange Notes will bear interest from their
date of issuance at the same rate and upon the same terms as the Original Notes
and the Additional Notes. See "Description of the Notes." Accrued and unpaid
interest on the Additional Notes accepted for exchange for the period to but not
including the date of issuance of the Exchange Notes (the "Exchange Date") will
be paid to the Holders of Exchange Notes on the first Interest Payment Date (as
defined in "Description of the Notes") following the date of issuance of the
Exchange Notes. Holders whose Additional Notes are accepted for exchange will be
deemed to have waived the right to receive any payment in respect of interest on
the Additional Notes accrued on and after the Exchange Date.
As of , 1997, $40,000,000 aggregate principal amount of the
Additional Notes were outstanding and registered in the name of Cede & Co., as
nominee for the Depository. Solely for reasons of administration (and for no
other purpose) the Company has fixed the close of business on ,
1997, as the record date (the "Record Date") for the Exchange Offer for purposes
of determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially. Only a registered Holder of Additional Notes (or such
Holder's legal representative or attorney-in-fact) as reflected on the records
of the Trustee under the Indenture may participate in the Exchange Offer. There
will be no fixed record date for determining registered Holders of Additional
Notes entitled to participate in the Exchange Offer.
Holders of Additional Notes do not have any appraisal or dissenters' rights
under the General Corporation Law of the State of Delaware or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Securities Act and
the rules and regulations of the Commission promulgated thereunder.
The Company shall be deemed to have accepted validly tendered Additional
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for tendering Holders
of Additional Notes for the purposes of receiving the Exchange Notes from the
Company.
If any tendered Additional Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Additional Notes will be
returned, without expense, to the tendering Holder thereof as promptly as
practicable after the Expiration Date.
Tendering Holders will not be required to pay brokerage commissions or fees
or, subject to the instructions of the Letter of Transmittal, transfer taxes
with respect to the exchange of Additional Notes for Exchange Notes pursuant to
the Exchange Offer. The Company will pay all charges and expenses, other than
certain taxes which may be levied in the event of any transfer of ownership, in
connection with the Exchange Offer. See "-- Fees and Expenses."
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<PAGE> 32
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after each date previously scheduled as an Expiration Date, unless
otherwise required by applicable law or regulation.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Additional Notes, to extend the Exchange Offer or if any of the
conditions set forth below under "-- Conditions of the Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension, or termination to the Exchange Agent, or (ii)
to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination, or amendment will be followed as promptly as
practicable by a public announcement thereof. If the Exchange Offer is amended
in a manner determined by the Company to constitute a material change, the
Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered Holders, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the amendment and the manner of disclosure to
the registered Holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, termination, or amendment of the Exchange
Offer, the Company shall not have an obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from their date of issuance. Holders
of Additional Notes that are accepted for exchange will receive, in cash,
accrued interest thereon to, but not including, the date of issuance on the
Exchange Notes. Such interest will be paid with the first interest payment on
the Exchange Notes. Interest on the Additional Notes accepted for exchange will
cease to accrue on the day prior to the issuance of the Exchange Notes.
The Exchange Notes bear interest (as do the Original Notes and the
Additional Notes) at a rate equal to 12 1/2% per annum. Interest on the Exchange
Notes is payable on each June 1 and December 1, commencing on June 1, 1998.
PROCEDURES FOR TENDERING ADDITIONAL NOTES
To tender in the Exchange Offer, a Holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such Additional Notes into
the Exchange Agent's account at the Depositary (the "Book-Entry Transfer
Facility") pursuant to the procedures for book-entry transfer described below,
must be received by the Exchange Agent prior to the Expiration Date or (ii) the
Holder must comply with the guaranteed delivery procedures described below. THE
METHOD OF DELIVERY OF LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS
AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OTHER REQUIRED DOCUMENTS SHOULD BE
SENT TO THE COMPANY. Delivery of all documents must be made to the Exchange
Agent at its address set forth below. Holders may also request their respective
brokers, dealers, commercial banks, trust companies or nominees to effect such
tender for such Holders.
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The tender by a Holder of Additional Notes will constitute an agreement
between such Holder and the Company in accordance with the terms and subject to
the conditions set forth herein and in the Letter of Transmittal. Any beneficial
owner whose Additional Notes are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and who wishes to tender should
contact such registered Holder promptly and instruct such registered Holder to
tender on his behalf.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor" institution within the meaning of Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act") (each an "Eligible Institution") unless the Additional Notes tendered
pursuant thereto are tendered for the account of an Eligible Institution.
If the Letter of Transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such person should so indicate
when signing, and unless waived by the Company, evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Additional Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all
Additional Notes not properly tendered or any Additional Notes the acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the absolute right to waive any irregularities or conditions of
tender as to particular Additional Notes. The Company's interpretation of the
terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) will be final and binding on all parties. Unless waived,
any defects or irregularities in connection with tenders of Additional Notes
must be cured within such time as the Company shall determine. Neither the
Company, the Exchange Agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of Additional
Notes, nor shall any of them incur any liability for failure to give such
notification. Tenders of Additional Notes will not be deemed to have been made
until such irregularities have been cured or waived. Any Additional Notes
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
without cost to such Holder by the Exchange Agent, unless otherwise provided by
the Holder in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
In addition, the Company reserves the right, in its sole discretion,
subject to the provisions of the Indenture, (i) to purchase or make offers for
any Additional Notes that remain outstanding subsequent to the Expiration Date
or, as set forth under "--Conditions of the Exchange Offer," (ii) to terminate
the Exchange Offer in accordance with the terms of the Exchange Offer and
Registration Rights Agreement, (iii) to redeem Additional Notes as a whole or in
part at any time and from time to time, as set forth under "Description of the
Notes -- Optional Redemption" and (iv) to the extent permitted by applicable
law, to purchase Additional Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
ACCEPTANCE OF ADDITIONAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Additional Notes properly tendered will be accepted for exchange on the
first business day practicable following the Expiration Date, and the Exchange
Notes will be issued promptly after acceptance of the Additional Notes. See
"-- Conditions of the Exchange Offer." For purposes of the Exchange Offer,
Additional Notes shall be deemed to have been accepted as validly tendered for
exchange when, as and if the Company has given oral or written notice thereof to
the Exchange Agent.
In all cases, issuance of Exchange Notes for Additional Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of a Book-Entry Confirmation of such
Additional Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility, a properly completed and duly executed Letter of Transmittal and all
other required documents. If any tendered Additional Notes are not accepted for
any reason set forth in the terms and conditions of the
29
<PAGE> 34
Exchange Offer, such unaccepted or such nonexchanged Additional Notes will be
credited to an account maintained with such Book-Entry Transfer Facility as
promptly as practicable after the expiration or termination of the Exchange
Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Additional Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Additional Notes by causing
the Book-Entry Transfer Facility to transfer such Additional Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance with
such Book-Entry Transfer Facility's procedures for transfer. However, the Letter
of Transmittal or facsimile thereof with any required signature guarantees and
any other required documents must, in any case, be transmitted to and received
by the Exchange Agent at the address set forth below under "-- Exchange Agent"
on or prior to the Expiration Date or the guaranteed delivery procedures
described below must be complied with. Delivery of documents to the Depository
in accordance with the Depository's procedures does not constitute delivery to
the Exchange Agent.
EXCHANGING BOOK-ENTRY NOTES
The Exchange Agent and the Book Entry Transfer Facility have confirmed that
any financial institution that is a participant in the Book Entry Transfer
Facility may utilize the Book Entry Transfer Facility Automated Tender Offer
Program ("ATOP") procedures to tender Additional Notes.
Any participant in the Book Entry Transfer Facility may make book-entry
delivery of Additional Notes by causing the Book Entry Transfer Facility to
transfer such Additional Notes into the Exchange Agent's account in accordance
with the Book Entry Transfer Facility's ATOP procedures for transfer. However,
the exchange for the Additional Notes so tendered will only be made after a
Book-Entry Confirmation of such book-entry transfer of Additional Notes into the
Exchange Agent's account, and timely receipt by the Exchange Agent of an Agent's
Message (as such term is defined in the next sentence) and any other documents
required by the Letter of Transmittal. The term "Agent's Message" means a
message, transmitted by the Book Entry Transfer Facility and received by the
Exchange Agent and forming part of a Book-Entry Confirmation, which states that
the Book Entry Transfer Facility has received an express acknowledgment from a
participant tendering Additional Notes that are the subject of such Book-Entry
Confirmation that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal, and that the Company may enforce such
agreement against such participant.
Tenders may be made only in principal amounts of $1,000 and integral
multiples thereof. Subject to the foregoing, Holders may tender less than the
aggregate principal amounts represented by the Additional Notes deposited with
the Exchange Agent provided they appropriately indicate this fact in the Letter
of Transmittal accompanying the tendered Additional Notes.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Additional Notes and (i) whose Additional
Notes are not immediately available, (ii) who cannot deliver their Additional
Notes, the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date or (iii) who cannot complete the procedure
for book-entry transfer on a timely basis, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Additional Notes and the principal amount of Additional Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within three business days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) or, in the case of a book-entry
transfer, an Agent's Message, together with the certificate(s) representing
the Additional Notes, or a Book-Entry Confirmation, as the case may
30
<PAGE> 35
be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof) or, in the case of a book-entry transfer, an Agent's
Message, as well as the certificate(s) representing all tendered Additional
Notes in proper form for transfer, or a Book-Entry Confirmation, as the
case may be, and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within three business days after the
Expiration Date.
WITHDRAWAL RIGHTS
Tenders of the Additional Notes may be withdrawn at any time prior to 5:00
p.m. New York City time on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at its address set forth below under "-- Exchange
Agent." Any such notice of withdrawal must (i) specify the name of the person
having deposited the Additional Notes to be withdrawn (the "Depositor"), (ii)
identify the Additional Notes to be withdrawn (including the certificate number
or numbers and principal amount of such Additional Notes if applicable), (iii)
be signed by the Holder in the same manner as the original signature on the
Letter of Transmittal by which such Additional Notes were tendered (including
any required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Additional Notes register the
transfer of such Additional Notes into the name of the person withdrawing the
tender, and (iv) specify the name in which such Additional Notes are to be
reregistered, if different from that of the Depositor. If Additional Notes have
been tendered pursuant to the procedure for book-entry transfer described above,
any notice of withdrawal must specify the name and number of the account at the
Book-Entry Transfer Facility to be credited with the withdrawn Additional Notes
and otherwise comply with the procedures of the Book-Entry Transfer Facility.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, whose determination
shall be final and binding on all parties. The Additional Notes so withdrawn, if
any, will be deemed not to have been validly tendered for exchange for purposes
of the Exchange Offer. Any Additional Notes which have been tendered for
exchange but which are withdrawn will be returned to the Holder thereof without
costs to such Holder as soon as practicable after withdrawal. Properly withdrawn
Additional Notes may be retendered by following one of the procedures described
under "-- Procedures for Tendering Additional Notes" above at any time on or
prior to the Expiration Date.
Any Additional Notes which have been tendered but which are not accepted
for payment due to withdrawal, rejection of tender or termination of the
Exchange Offer will be returned as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer to the Holder thereof
without cost to such Holder (or, in the case of Additional Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry transfer procedures described above, such
Additional Notes will be credited to an account maintained with such Book-Entry
Transfer Facility for the Additional Notes).
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue the Exchange Notes in
exchange for, any Additional Notes and may terminate or amend the Exchange Offer
if, any time before the acceptance of the Additional Notes for exchange or the
exchange of the Exchange Notes for the Additional Notes, any of the following
events shall occur, which occurrence, in the sole judgment of the Company and
regardless of the circumstances (including any action by the Company) giving
rise to any such events, make it inadvisable to proceed with the Exchange Offer:
(i) there shall be threatened, instituted, or pending any action or
proceeding before, or any injunction, order, or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission (a) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof or (b) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of
the Additional Notes pursuant
31
<PAGE> 36
to the Exchange Offer, or any statute, rule, regulation, order or
injunction shall be sought, proposed, introduced, enacted, promulgated, or
deemed applicable to the Exchange Offer or any of the transactions
contemplated by the Exchange Offer by any domestic or foreign government or
governmental authority or any action shall have been taken, proposed, or
threatened by any domestic or foreign government or governmental authority
that, in the reasonable judgment of the Company, might directly or
indirectly result in any of the consequences referred to in clauses (a) or
(b) above or, in the reasonable judgment of the Company, might result in
the Holders of the Exchange Notes having obligations with respect to
resales and transfer of Exchange Notes that are greater than those
described in the interpretation of the Commission referred to herein or
would otherwise in the reasonable judgment of the Company make it
inadvisable to proceed with the Exchange Offer; provided, however, that the
Company will use reasonable efforts to modify or amend the Exchange Offer
or to take such other reasonable steps as to make the provisions of this
section inapplicable;
(ii) there shall have occurred (a) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States or any limitation by any governmental agency or authority which
adversely affects the extension of credit or (b) a commencement of wars,
armed hostilities, or other similar international calamity directly or
indirectly involving the United States, or, in the case of any of the
foregoing existing at the time of the commencement of the Exchange Offer, a
material acceleration or worsening thereof; or
(iii) any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operation, or
prospects of the Company that, in the reasonable judgment of the Company,
is or may be adverse to the Company or any Subsidiary Guarantor, or the
Company shall have become aware of facts that, in the sole judgment of the
Company, have or may have adverse significance with respect to the value of
the Additional Notes or the Exchange Notes;
(iv) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Additional Notes and
return all tendered Additional Notes to the tendering Holders (or, in the case
of Additional Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Additional Notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the Additional Notes),
(ii) extend the Exchange Offer and retain all Additional Notes tendered prior to
the Expiration Date, subject, however, to the rights of Holders to withdraw such
Additional Notes (see "-- Withdrawal Rights"), or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all validly tendered
Additional Notes which have not been withdrawn. If such waiver constitutes a
material change to the Exchange Offer, the Company will promptly disclose such
waiver by means of a prospectus supplement that will be distributed to the
registered Holders, and the Company will extend the Exchange Offer for a period
of five to ten business days, depending upon the significance of the waiver and
the manner of disclosure to the registered Holders, if the Exchange Offer would
otherwise expire during such five to ten business day period.
The Company expects that the foregoing conditions will be satisfied. The
foregoing conditions are for the sole benefit of the Company and may be asserted
by the Company regardless of the circumstances giving rise to any such condition
or may be waived by the Company in whole or in part at any time and from time to
time in its reasonable discretion. The failure by the Company at any time to
exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time. Any determination by the Company concerning
the events described above will be final and binding upon all parties.
In addition, the Company will not accept for exchange any Additional Notes
tendered, and no Exchange Notes will be issued in exchange for any such
Additional Notes, if at such time any stop order shall be threatened or in
effect with respect to the Exchange Offer Registration Statement or the
qualification of the Indenture under the Trust Indenture Act of 1939.
32
<PAGE> 37
Holders of Additional Notes may have certain rights and remedies against
the Company under the Registration Rights Agreement should the Company fail to
consummate the Exchange Offer, notwithstanding any nonfulfillment of the above
conditions. Such conditions are not intended to modify such rights and remedies
in any respect.
TERMINATION OF CERTAIN RIGHTS
Holders of the Additional Notes to whom this Exchange Offer is made have
special rights under the Registration Rights Agreement that will terminate upon
the consummation of the Exchange Offer. The Registration Rights Agreement
provides that certain rights under such agreement (including the right to
receive prospective increases in the interest rate on the Additional Notes)
shall terminate upon the occurrence of each of (i) the filing with the
Commission of the Exchange Offer Registration Statement on or prior to November
28, 1997, or (ii) the effectiveness under the Securities Act of the Exchange
Offer Registration Statement on or prior to January 12, 1998, or (iii) the
consummation of the Exchange Offer on or prior to February 11, 1998.
EXCHANGE AGENT
American Stock Transfer & Trust Company has been appointed as Exchange
Agent for the Exchange Offer. Questions and requests for assistance and requests
for additional copies of the Prospectus, the Letter of Transmittal, and other
related documents should be addressed to the Exchange Agent as follows:
By Registered or Certified Mail, Overnight By Facsimile:
Courier or By Hand:
American Stock Transfer & Trust Company ( )
40 Wall Street
New York, New York 10005 Confirmed by Telephone:
Attention: (212) 936-5100
(Originals of all documents
submitted by facsimile should
be sent promptly by hand,
overnight courier or
registered or certified mail)
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telephone or in person by officers and regular employees of the
Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses incurred in connection therewith.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Additional Notes pursuant to the Exchange Offer. If, however, a transfer tax
is imposed for any reason other than the exchange of Additional Notes pursuant
to the Exchange Offer, then the amount of any transfer taxes (whether imposed on
the registered Holder or any other persons) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering Holder.
REGULATORY APPROVALS
The Company does not believe that the receipt of any material federal or
state regulatory approvals will be necessary in connection with the Exchange
Offer, other than the effectiveness of the Exchange Offer Registration Statement
under the Securities Act.
OTHER
Participation in the Exchange Offer is voluntary and Holders of Additional
Notes should carefully consider whether to accept the terms and conditions
thereof. Holders of the Additional Notes are urged to consult their financial
and tax advisors in making their own decisions on what action to take with
respect to the Exchange offer.
33
<PAGE> 38
CONSEQUENCES OF FAILURE TO PROPERLY TENDER ADDITIONAL NOTES IN THE EXCHANGE
OFFER
Issuance of the Exchange Notes in exchange for the Additional Notes
pursuant to the Exchange Offer will be made only after timely receipt by the
Exchange Agent of such Additional Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents. Therefore, Holders of
the Additional Notes desiring to tender such Additional Notes in exchange for
Exchange Notes should allow sufficient time to ensure timely delivery. The
Company is under no duty to give notification of defects or irregularities with
respect to tenders of Additional Notes for exchange. Additional Notes that are
not tendered or that are tendered but not accepted by the Company for exchange,
will, following consummation of the Exchange Offer, continue to be subject to
the existing restrictions upon transfer thereof under the Securities Act and,
upon consummation of the Exchange Offer, certain rights under the Registration
Rights Agreement will terminate.
In the event the Exchange Offer is consummated, the Company will not be
required to register the unexchanged Additional Notes, except under certain
limited circumstances as provided in the Registration Rights Agreement.
Unexchanged Additional Notes will continue to be subject to the following
restrictions on transfer: (i) the unexchanged Additional Notes may be resold
only if registered pursuant to the Securities Act, if any exemption from
registration is available thereunder or if neither such registration nor such
exemption is required by law and (ii) the unexchanged Additional Notes will bear
a legend restricting transfer in the absence of registration or an exemption
therefrom. The Company does not currently anticipate that it will register the
unexchanged Additional Notes under the Securities Act. To the extent that
Additional Notes are tendered and accepted in connection with the Exchange
Offer, any trading market for unexchanged Additional Notes could be adversely
affected.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Additional Notes, as reflected in the Company's accounting records on the date
of the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer will be amortized over the
remaining term of the Exchange Notes.
34
<PAGE> 39
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange
Additional Notes in like principal amount, the terms of which are identical in
all material respects to the Exchange Notes. The Additional Notes surrendered in
exchange for the Exchange Notes will be retired and cancelled and cannot be
reissued. Accordingly, issuance of the Exchange Notes will not result in any
increase in the indebtedness of the Company. Net proceeds from the sale of the
privately placed Additional Notes were approximately $38.1 million. Such
proceeds were used by the Company to provide working capital to originate and
securitize loans, to repay a portion of the debt owed to its former parent Mego
Financial and reduce amounts outstanding under the Company's lines of credit.
35
<PAGE> 40
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 Company's proposed sale of 3,500,000
shares of Common Stock in the Equity Offering at an assumed offering price of
$11.125 per share (after deducting underwriting discounts and commissions and
estimated expenses of the Equity Offering), and the application of the net
proceeds from the Equity Offering. 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 Exchange 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 Employee Stock Option Plan (the "1996
Plan") and (ii) 2,000,000 shares of Common Stock reserved for issuance upon
the exercise of stock options granted and available to be granted under the
Company's 1997 Employee Stock Option Plan (the "1997 Plan"), which plan is
subject to stockholder approval. See "Management -- Company Stock Option
Plans."
36
<PAGE> 41
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, 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
===========
Ratio of earnings to fixed charges(4)................. N/A 7.69x 2.38x 5.59x(5)
======= ======= ======= ===========
</TABLE>
37
<PAGE> 42
<TABLE>
<CAPTION>
AS OF AUGUST 31, 1997
--------------------------------------
AS OF AUGUST 31, PRO FORMA
--------------------------- PRO AS
1994(1) 1995 1996 ACTUAL FORMA(6) ADJUSTED(6)(7)
------- ------- ------- -------- -------- --------------
<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(8) 80,400(8)
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
====== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 31,
-------------------------------------
1994 1995 1996 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
DELINQUENCY DATA:
Conventional Loan delinquency data(9):
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(9):
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(10) 7.06
91 days and over past due, net of claims
filed(11)....................................... 0.26 0.61 2.05 5.20
Outstanding claims filed with HUD(12).............. 0.10% 0.38% 2.73% 1.86%
Amount of FHA insurance available for Title I Loans
serviced........................................... $ 813 $9,552 $21,205 $21,094(13)
Amount of FHA insurance available as a percentage of
Title I Loans serviced............................. 10.13% 10.35% 10.46% 8.26%(13)
</TABLE>
38
<PAGE> 43
<TABLE>
<CAPTION>
AS OF AUGUST 31,
-------------------------------------
1994 1995 1996 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
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(10) 3.07
91 days and over past due, net of claims
filed(14)....................................... 0.26 0.61 1.94 2.32
Outstanding claims filed with HUD(15)................ 0.10% 0.38% 2.59% 0.75%
Aggregate losses on liquidated loans(16)............. $ -- $ 16.8 $ 32.0 $ 201.0
</TABLE>
- ---------------
(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) Earnings include pretax income, the portion of rents representative of the
interest factor and interest on debt. Fixed charges include interest on
indebtedness, prepaid commitment fees and the portion of rents
representative of the interest factor.
(5) Ratio computed giving pro forma effect for the total additional interest
expense resulting from the issuance of the Additional Notes at an interest
rate of 12 1/2% in lieu of the interest expense recorded by the Company
under its existing lines of credit repaid with the net proceeds of the
Private Placement.
(6) Gives effect to (i) the issuance of the Additional Notes pursuant to the
Private Placement and (ii) the application of the net proceeds therefrom.
(7) As adjusted to give effect to (i) the sale of the shares proposed to be
offered pursuant to the Equity Offering (at an assumed offering price of
$11.125 per share after deducting underwriting discounts and commissions
and estimated expenses of the Equity Offering) and (ii) the application of
the estimated net proceeds from the Equity Offering.
(8) 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 Exchange Notes.
(9) 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.
(10) During fiscal 1996, the processing and payment of claims filed with HUD
were delayed. See "Business -- Loan Servicing."
(11) 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.
(12) 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.
(13) 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%.
39
<PAGE> 44
(14) 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.
(15) 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.
(16) 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.
40
<PAGE> 45
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. Currently, 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.
41
<PAGE> 46
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 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
42
<PAGE> 47
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.
43
<PAGE> 48
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
44
<PAGE> 49
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
45
<PAGE> 50
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
46
<PAGE> 51
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> 52
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
recourse 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>
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<PAGE> 53
The allowance for credit losses and the allowance for credit losses on
loans sold with recourse 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>
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
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<PAGE> 54
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.
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.
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<PAGE> 55
Allowances for credit losses and for loans sold with recourse increased
slightly by 3.8% to $920,000 at August 31, 1996 from $886,000 at August 31,
1995. Loans sold with recourse which were reacquired and included in the 1996
securitizations decreased the need for this allowance while increased loan sales
increased the allowance requirements. Recourse to the Company on sales of loans
is governed by the agreements between the purchasers and the Company. The
allowance for credit losses on loans sold with recourse represents the Company's
estimate of its probable future credit losses to be incurred over the lives of
the loans considering estimated future FHA insurance recoveries on Title I
Loans. No allowance for credit losses on loans sold with recourse is established
on loans sold through securitizations, as the Company has no recourse obligation
under those securitization agreements. Estimated credit losses on loans sold
through securitizations are considered in the Company's valuation of its
residual interest securities. 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 Original 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 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 Original 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
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<PAGE> 56
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 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 as of such date.
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
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<PAGE> 57
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.
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
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<PAGE> 58
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 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
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<PAGE> 59
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 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 Equity Offering will be sufficient to satisfy its contemplated cash
requirements for approximately 12 months following the consummation of the
Equity 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
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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 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.
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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 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
November 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
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terms than through whole loan sales. However, the Company continues to make
whole loan sales on either a servicing released or servicing retained basis.
Currently, 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 December 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,
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limited the Company's market penetration. The Company began offering
Conventional Loans through existing select Correspondents in May 1996. In order
to maintain the Company's customer service excellence, the Company has gradually
increased the number of Correspondents 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 December 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 multifamily 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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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 December
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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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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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>
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
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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 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
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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 (the "Uniform Standards of Appraisal") 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 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.
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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 Standards of
Appraisal. 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 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.
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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.
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.
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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 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
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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> 76
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> 77
(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> 78
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> 79
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> 80
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 has attracted (and
could continue to 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> 81
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> 82
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 be 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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<PAGE> 83
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., a 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 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, be 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 October
1994, she served as a Vice President for Unity Mortgage Corporation where she
was responsible for
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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.
Norman D. Perry. Mr. Perry, age 53, joined the Company as Vice
President -- Alternative Lending in November 1997. From August 1997 until
joining the Company, Mr. Perry served as a consultant to the Company's
alternative lending division. From September 1996 until August 1997, Mr. Perry
served as Executive Vice President and director of National Capital Holdings,
Inc. where he was responsible for developing and implementing lending programs
and packages and marketing programs, among other things. From July 1993 to
September 1996, Mr. Perry founded and served as general sales manager of
Industry Mortgage Company, L.P. where he was responsible for the development of
correspondent lending, sales and marketing. From March 1990 to June 1993, Mr.
Perry served as Regional Vice President of Express Financial Services, Inc.
where he was responsible for the development of a title, appraisal and property
report, as well as the development of marketing strategies related to such
company's products and services.
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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
AWARDS
ANNUAL COMPENSATION ---------------------------
--------------------------------------------------- NUMBER OF
OTHER ANNUAL OPTIONS/SARS ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION(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 1996 159,080 50,000 4,330 -- --
President, Chief 1997 180,003 100,000 15,896 100,000 --
Financial Officer 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
------------------------------------------------------------ POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS/SARS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR 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,
Chief Financial Officer and
Treasurer
</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.
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<PAGE> 88
(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.
(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
IN-THE-MONEY
NUMBER OF UNEXERCISED OPTIONS/SARS
OPTIONS/SARS HELD AT 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.
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<PAGE> 89
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 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
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<PAGE> 90
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 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
commenced 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.
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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
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>
AMOUNT OF PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP OWNERSHIP
- --------------------------------------- -------------------- ----------
<S> <C> <C>
Robert Nederlander(2)....................................... 974,541 7.9%
Eugene I. Schuster and Growth Realty, Inc. ("GRI")(3)....... 920,409 7.5%
Jerome J. Cohen(4).......................................... 504,534 4.1%
Jeffrey S. Moore(5)......................................... 15,242 *
James L. Belter............................................. 6,408 *
Herbert B. Hirsch(6)........................................ 803,994 6.5%
Don A. Mayerson(7).......................................... 396,392 3.2%
Spencer I. Browne(8)........................................ 5,000 *
Jeremy Wiesen(9)............................................ -- --
FBR Ashton, Limited Partnership and affiliates(10).......... 922,869 7.5%
All executive officers and directors of the Company as a
group (9 persons)(11)..................................... 2,706,111 22.0%
</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 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,
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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 & Co., Inc. is an affiliate of each of Ashton, Opportunity Fund,
Offshore Management and Investment Management and of Mr. Friedman.
(11) See Notes (2)-(9).
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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 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
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<PAGE> 95
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. Upon consummation of the Private Placement $3.9
million was paid in accordance with the Payment Agreement. 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 the Equity 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.
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DESCRIPTION OF THE NOTES
GENERAL
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.
Principal of, premium, if any, and interest (including in the case of the
Additional Notes, Added Interest, if any) on the Notes will be payable, and the
Notes may be exchanged or transferred, at the office or agency of the Company in
the Borough of Manhattan, the City of New York (which initially shall be the
corporate trust office of the Trustee, at 40 Wall Street, New York, New York
10005), except that, at the option of the Company, payment of interest
(including in the case of the Additional Notes, Added Interest, if any) may be
made by check mailed to the address of the Holders as such address appears in
the Note register; provided that (i) all payments with respect to Global Notes
(as defined herein) are required to be made in same day funds in accordance with
the policies of the Depositary (as defined below) and (ii) all payments with
respect to Notes the Holders or beneficial owners of which have given wire
transfer instructions to the Company will be required to be made by wire
transfer of immediately available funds to the accounts specified by such
Persons. See "-- Same-Day Settlement and Payment."
The Exchange Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000. No
service charge shall be made for any registration of transfer or exchange of
Notes.
CERTAIN TERMS OF THE EXCHANGE NOTES
The Exchange Notes will be general unsecured obligations of the Company,
subordinated in right of payment to all Senior Indebtedness of the Company and
will mature on December 1, 2001. The aggregate principal amount of the Original
Notes and the Exchange Notes will be limited to $80,000,000, except that,
subject to compliance with the covenants thereof (including paragraph (a) of the
covenant described under "-- Certain Covenants -- Limitation on Indebtedness"),
the Indenture will permit the issuance of up to $70,000,000 in additional
securities (the "Future Notes") which will have the same terms as and will be
part of the same series of securities as the Original Notes and the Exchange
Notes, will rank in all respect pari passu with the Original Notes and the
Exchange Notes and will have the benefit of the same Indenture covenants as the
Original Notes and the Exchange Notes. References in this Description of the
Notes to the "Notes" include any Future Notes so issued.
The Exchange Notes will bear interest at an annual rate of 12 1/2% from the
date of issuance of the Exchange Notes, payable semi-annually to Holders of
record at the close of business on the May 15 or November 15 immediately
preceding the interest payment date on June 1 and December 1 of each year,
commencing June 1, 1998. The Company will pay interest on overdue principal at
1% per year in excess of such rate and will pay interest on overdue installments
of interest at such higher rate to the extent lawful. Interest on the Exchange
Notes will be computed on the basis of a 360-day year of twelve 30-day months.
SUBSIDIARY GUARANTEES
The Notes will be unconditionally guaranteed (a "Subsidiary Guarantee") by
all entities that become Subsidiaries of the Company after the Original Note
Issue Date other than Special Purpose Subsidiaries
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(together, the "Subsidiary Guarantors", and each of them, a "Subsidiary
Guarantor"), unless any such Subsidiary is designated an "Unrestricted
Subsidiary" in accordance with the terms of the Indenture. There currently are
no Subsidiary Guarantors. Each Subsidiary Guarantor's obligations under its
Subsidiary Guarantee will be unsecured obligations of such Subsidiary Guarantor,
subordinated in right of payment to all Senior Indebtedness of such Subsidiary
Guarantor, and will be joint and several with the obligations of each other
Subsidiary Guarantor under its respective Subsidiary Guarantee. In addition, the
Indenture provides that, in the event the Company designates a Restricted
Subsidiary to be an Unrestricted Subsidiary, then such Restricted Subsidiary
will be released and relieved of any obligations under its Subsidiary Guarantee;
provided that such designation is conducted in accordance with the applicable
provisions of the Indenture. See "-- Certain Covenants -- Restricted Payments,"
"-- Certain Definitions -- Unrestricted Subsidiary" and "-- Investments."
The Indenture includes a covenant by the Company to cause each future
Restricted Subsidiary (other than a Special Purpose Subsidiary) to execute a
Subsidiary Guarantee. The obligations of each Subsidiary Guarantor under its
Subsidiary Guarantee will be limited so as to reduce the risk that they would be
found to constitute a fraudulent conveyance under applicable law. See "Risk
Factors -- Fraudulent Conveyances and Preferential Transfers."
SUBORDINATION
The Indebtedness represented by the Notes and the Subsidiary Guarantees is
subordinated in right of payment to all existing and future Senior Indebtedness
of the Company and the Subsidiary Guarantors, respectively, including without
limitation all obligations of the Company or any Subsidiary Guarantor under any
Warehouse Facility, and will be senior in right of payment to all future
Indebtedness of the Company and the Subsidiary Guarantors that by its terms is
expressly subordinated in right of payment to the Notes or the Subsidiary
Guarantees as described in the Indenture ("Junior Subordinated Obligations"). As
of August 31, 1997, after giving effect to the issuance of the Additional Notes
pursuant to the Private Placement and the application of the net proceeds
therefrom, the outstanding Senior Indebtedness of the Company, on a consolidated
basis, would have been approximately $6.6 million. As of August 31, 1997, the
Company had no Subsidiaries other than one Special Purpose Subsidiary. See
"Capitalization." Although the Indenture contains limitations on the amount of
additional Indebtedness which the Company and the Restricted Subsidiaries may
incur, the amount of such Indebtedness is likely to be substantial, and
substantially all such Indebtedness may be Senior Indebtedness. See "-- Certain
Covenants -- Limitations on Indebtedness."
If any Senior Indebtedness is disallowed, avoided or subordinated pursuant
to the provisions of Section 548 of the Bankruptcy Law or any applicable state
fraudulent conveyance law, such Indebtedness nevertheless will constitute Senior
Indebtedness for purposes of the Indenture.
The Company may not pay the principal of, premium, if any, or interest
(including in the case of the Additional Notes, Added Interest, if any) on, the
Notes or make any deposit pursuant to the provisions described under
"Defeasance" below and may not repurchase, redeem, defease or otherwise retire
any Notes (collectively, "pay" or a "payment" with respect to the Notes) if (i)
any Senior Indebtedness of the Company is not paid when due or (ii) any other
default on any such Senior Indebtedness occurs and the maturity thereof has been
accelerated in accordance with its terms, unless, in either case, (x) the
default has been cured or waived and any such acceleration has been rescinded or
(y) such Senior Indebtedness has been paid in full. During the continuance of
any default (other than a default described in clause (i) or (ii) of the
preceding sentence) with respect to any Designated Senior Indebtedness of the
Company pursuant to which the maturity thereof may be accelerated immediately
without further notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods, the Company may
not pay the Notes for a period (a "Payment Blockage Period") commencing upon the
receipt by the Company and the Trustee of written notice of such default from
the Representative of any Designated Senior Indebtedness specifying an election
to effect a Payment Blockage Period (a "Blockage Notice") and ending 179 days
thereafter (or earlier if such Payment Blockage Period is terminated (i) by
written notice to the Trustee and the Company from the Person or Persons who
gave such Blockage Notice, (ii) by repayment in full of such Designated Senior
Indebtedness or (iii) because the default giving rise to such Blockage Notice is
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no longer continuing). Notwithstanding the provisions described in the
immediately preceding sentence (but subject to the provisions contained in the
next preceding sentence), unless the holders of such Designated Senior
Indebtedness or the Representative of such holders shall have accelerated the
maturity of such Designated Senior Indebtedness, the Company may resume payments
on the Notes after such Payment Blockage Period. Not more than one Blockage
Notice may be given in any consecutive 360-day period, irrespective of the
number of defaults with respect to Designated Senior Indebtedness during such
period.
Upon any payment or distribution of the assets of the Company to creditors
upon a total or partial liquidation or total or partial dissolution of the
Company or in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property (whether voluntary or
involuntary), (i) the holders of Senior Indebtedness of the Company will be
entitled to receive payment in full before the holders of the Notes are entitled
to receive any payment, and (ii) until the Senior Indebtedness of the Company is
paid in full, any payment to which the Holders of the Notes would be entitled
but for this provision will be made to holders of Senior Indebtedness as their
interests may appear, except that Holders may receive shares of stock or
Indebtedness of the Company that is subordinated to Senior Indebtedness of the
Company to at least the same extent as the Notes.
No Subsidiary Guarantor may make any payment under its Subsidiary Guarantee
with respect to any payment with respect to the Notes if (i) any Senior
Indebtedness of any Subsidiary Guarantor is not paid when due or (ii) any other
default on any such Senior Indebtedness occurs and the maturity thereof has been
accelerated in accordance with its terms, unless, in either case, (x) the
default has been cured or waived and any such acceleration has been rescinded or
(y) such Senior Indebtedness has been paid in full. During the continuance of
any default (other than a default described in clause (i) or (ii) of the
preceding sentence) with respect to any Designated Senior Indebtedness of any
Subsidiary Guarantor pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect such acceleration) or the expiration of any applicable grace periods,
such Subsidiary Guarantor may not make any payment with respect to the Notes for
a period (a "Subsidiary Guarantor Payment Blockage Period") commencing upon the
receipt by the Subsidiary Guarantor and the Trustee of written notice of such
default from the Representative of any Designated Senior Indebtedness of such
Subsidiary Guarantor specifying an election to effect a Subsidiary Guarantor
Payment Blockage Period (a "Subsidiary Guarantor Blockage Notice") and ending
179 days thereafter (or earlier if such Subsidiary Guarantor Payment Blockage
Period is terminated (i) by written notice to the Trustee and the Subsidiary
Guarantors from the Person or Persons who gave such Subsidiary Guarantor
Blockage Notice, (ii) by repayment in full of such Designated Senior
Indebtedness of such Subsidiary Guarantor or (iii) because the default giving
rise to such Subsidiary Guarantor Blockage Notice is no longer continuing).
Notwithstanding the provisions described in the immediately preceding sentence
(but subject to the provisions contained in the next preceding sentence and the
next paragraph), unless the holders of such Senior Indebtedness of such
Subsidiary Guarantor or the Representative of such holders shall have
accelerated the maturity of such Designated Senior Indebtedness of such
Subsidiary Guarantor, such Subsidiary Guarantor may resume payments under its
Subsidiary Guarantee after such Subsidiary Guarantor Payment Blockage Period.
Not more than one Subsidiary Guarantor Blockage Notice may be given with respect
to the Subsidiary Guarantors in any consecutive 360-day period, irrespective of
the number of defaults with respect to Designated Senior Indebtedness of the
Subsidiary Guarantors during such period.
Upon any payment or distribution of the assets of any Subsidiary Guarantor
to creditors upon a total or partial liquidation or total or partial dissolution
of the Subsidiary Guarantor or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Subsidiary Guarantor or its
property (whether voluntary or involuntary), (i) the holders of Senior
Indebtedness of such Subsidiary Guarantor will be entitled to receive payment in
full before the holders of the Notes are entitled to receive any payment, and
(ii) until the Senior Indebtedness of such Subsidiary Guarantor is paid in full,
any payment to which the Holders of the Notes would be entitled but for this
provision will be made to holders of Senior Indebtedness of such Subsidiary
Guarantor as their interests may appear, except that Holders may receive shares
of stock or Indebtedness that is subordinated to Senior Indebtedness of the
Subsidiary Guarantor to at least the same extent as the Subsidiary Guarantees.
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In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company or any Subsidiary Guarantor shall be
received by the Trustee or the Holders at a time when such payment or
distribution is prohibited by the foregoing provisions, such payment or
distribution shall be held in trust for the benefit of the holders of Senior
Indebtedness of such Person, and shall be paid or delivered by the Trustee or
such Holders, as the case may be, to the holders of such Senior Indebtedness
remaining unpaid or unprovided for or to their Representative, ratably according
to the aggregate amounts remaining unpaid on account of the Senior Indebtedness
held or represented by each, for application to the payment of all Senior
Indebtedness remaining unpaid, to the extent necessary to pay or to provide for
the payment of all such Senior Indebtedness in full after giving effect to any
concurrent payment or distribution to the holders of such Senior Indebtedness.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of Senior Indebtedness
or any Representative thereof of the acceleration. If the Trustee provides such
notice, the Trustee also will notify the Company of the acceleration.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, holders of the Notes may recover less, ratably, than
other creditors of the Company or the Subsidiary Guarantors (including trade
creditors), or may recover nothing.
OPTIONAL REDEMPTION
The Notes will not be redeemable prior to maturity, except that, at any
time and from time to time prior to December 1, 1998, the Company may redeem in
the aggregate up to 35% of the sum of the respective original principal amounts
of the Notes with the proceeds of one or more Public Equity Offerings, at a
redemption price (expressed as a percentage of principal amount) of 112 1/2%
plus accrued interest (including in the case of the Additional Notes, Added
Interest, if any) to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest (including in the case of
the Additional Notes, Added Interest, if any) due on the relevant interest
payment date); provided, however, that the aggregate principal amount of the
Notes that remain outstanding after each such redemption is at least equal to
65% of the sum of the respective original principal amounts of the outstanding
Notes.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part, the notice of
redemption relating to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note.
SINKING FUND
There will be no mandatory sinking fund for the Notes.
MANDATORY OFFERS TO PURCHASE THE NOTES
The Indenture requires the Company to purchase all of the outstanding Notes
tendered by the Holders upon the occurrence of a Change of Control and to offer
to purchase a portion of the outstanding Notes under certain other
circumstances. See "Change of Control" and "Certain Covenants -- Limitations on
Asset Sales."
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of outstanding
Notes will have the right to require that the Company repurchase such Holder's
Notes at a purchase price in cash equal to 101% of the principal amount thereof
plus accrued and unpaid interest (including in the case of Additional Notes,
Added Interest, if any), if any, to the date of purchase (subject to the right
of Holders of record on the relevant record date to receive interest (including
in the case of Additional Notes, Added Interest, if any) due on the relevant
interest payment date).
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A "Change of Control" will be deemed to have occurred:
(i) upon any merger or consolidation of the Company or Parent with or
into any person or any sale, transfer or other conveyance, whether direct
or indirect, of all or substantially all of the assets of the Company or
Parent (in each case on a consolidated basis), in one transaction or a
series of related transactions, if, in the case of any such merger or
consolidation, the securities of the Company or Parent, as applicable, that
are outstanding immediately prior to such transaction and which represent
100% of the aggregate voting power of the Voting Stock of the Company or
Parent are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of the
surviving corporation that represent, immediately after such transaction,
at least a majority of the aggregate voting power of the Voting Stock of
the surviving corporation, provided, however, that the sale by the Company,
its Subsidiaries or Parent from time to time of Receivables in the ordinary
course of business shall not be treated hereunder as a sale of all or
substantially all the assets of the Company or Parent;
(ii) when any "person" or "group" (as such terms are used for purposes
of Sections 13(d) and 14(d) of the Exchange Act, whether or not
applicable), other than any or all of the Excluded Persons, is or becomes
the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of (A) more than 40% of the then outstanding
shares of Voting Stock of the Company or (B) more than 40% (or, if the
Excluded Persons, in the aggregate, then hold more than 40% of the
outstanding shares of Voting Stock of the Parent, more than 45%) of the
then outstanding shares of Voting Stock of the Parent; or
(iii) when, during any period of 24 consecutive months after the
Existing Note Issue Date, individuals who at the beginning of any such
24-month period constituted the Board of Directors of the Company or the
board of directors of Parent (together with any new directors whose
election by such Board or board or whose nomination for election by the
stockholders of the Company or Parent, as applicable, was approved by a
vote of a majority of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination
for election was previously so approved), cease for any reason to
constitute a majority of the Board of Directors of the Company or the board
of directors of Parent, as applicable, then in office.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (i) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest (including in the case
of Additional Notes, Added Interest, if any), if any, to the date of purchase
(subject to the right of Holders of record on the relevant record date to
receive interest (including in the case of Additional Notes, Added Interest, if
any) on the relevant interest payment date); (ii) the circumstances and relevant
facts regarding such Change of Control (including, in the case of any merger,
consolidation or sale of all or substantially all assets, information with
respect to pro forma results of operations, cash flow and capitalization after
giving effect to such Change of Control); (iii) the repurchase date (which shall
be no earlier than 30 days nor later than 60 days from the date such notice is
mailed); and (iv) the instructions determined by the Company, consistent with
the covenant described hereunder, that a Holder must follow in order to have its
Notes purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other applicable securities laws or
regulations in connection with the repurchase of Notes pursuant to the covenant
described hereunder. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company will comply with the applicable securities laws and regulations and
will not be deemed to have breached its obligations under the covenant described
hereunder by virtue thereof.
Effective September 2, 1997, Mego Financial distributed all capital stock
of the Company held by it to its shareholders and ceased to be the "Parent" of
the Company for purposes of the Indenture. Accordingly, as of
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such date, the covenants and other provisions in the Indenture relating to the
"Parent" of the Company (such as the Change of Control provisions described
above which relate to "Parent") ceased to apply to Mego Financial, and will
continue to be inapplicable to Mego Financial for so long as Mego Financial owns
less than 40% of the Voting Stock of the Company and thus continues not to be a
"Parent" as defined in the Indenture. As a result, a merger or change of control
involving Mego Financial, for example, will not trigger the Change of Control
repurchase obligations described above for so long as Mego Financial continues
to own less than 40% of the Voting Stock of the Company. The Spin-off did not
constitute a Change of Control under the Indenture.
The phrase "all or substantially all" of the assets of the Company is
likely to be interpreted by reference to applicable state law at the relevant
time, and will be dependent on the facts and circumstances existing at such
time. As a result, there may be a degree of uncertainty in ascertaining whether
a sale or transfer of "all or substantially all" of the assets of the Company
has occurred. However, a sale of Receivables in the ordinary course of business
will not constitute a Change of Control, regardless of the magnitude of such
sale.
The Change of Control purchase feature was the result of negotiations
between the Company and the underwriters of the Original Notes at the time that
the Original Notes were offered. Management has no present intention to engage
in a transaction involving a Change of Control, although it is possible that the
Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could enter into certain transactions, including
acquisitions, refinancings or other recapitalizations, that would not constitute
a Change of Control under the Indenture, but that could increase the amount of
indebtedness outstanding at such time or otherwise affect the Company's capital
structure or credit ratings. Restrictions on the ability of the Company and its
Restricted Subsidiaries to Incur additional Indebtedness and Preferred Stock of
Subsidiaries are contained in the covenants described under "-- Certain
Covenants -- Limitation on Indebtedness," "-- Certain Covenants -- Limitation on
Liens" and "-- Certain Covenants -- Limitation on Preferred Stock of
Subsidiaries." Such restrictions can be waived only with the consent of the
Holders of a majority in principal amount of the Notes (with the Holders of
Notes voting as one class) then outstanding. Except for the limitations
contained in such covenants, however, the Indenture will not contain any
covenant or provision that may afford Holders of the Notes protection in the
event of a highly leveraged transaction, reorganization, restructuring, merger,
spin-off or similar transaction that may adversely affect such Holders.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repurchased or prepaid upon a Change of Control.
Moreover, the exercise by the Holders of their right to require the Company to
repurchase the Notes could cause a default under such indebtedness, even if the
Change of Control itself does not, due to the financial effect of such
repurchase on the Company. If a Change of Control should occur, the rights of
the Holders to receive payment for their Notes would be subject to the prior
rights of the holders of any Senior Indebtedness. See "-- Subordination."
Finally, the Company's ability to pay cash to the Holders of Notes following the
occurrence of a Change of Control may be limited by the Company's then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required repurchases. The provisions under
the Indenture relating to the Company's obligation to make an offer to
repurchase Notes as a result of a Change of Control may be waived or modified
with the written consent of the Holders of a majority in principal amount of
outstanding Notes. As a result, a Holder may not be able to avail itself of its
right to require the Company to repurchase Notes upon a Change of Control.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Exchange Notes will be made in immediately available
funds. All payments of principal, premium, if any, and interest (including in
the case of the Additional Notes Added Interest, if any) will be made by the
Company in immediately available funds. The Exchange Notes will trade in the
Same-Day Funds Settlement System of the Depositary until maturity, and secondary
market trading activity for the Exchange Notes will therefore settle in
immediately available funds.
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CERTAIN COVENANTS
Set forth below are descriptions of certain covenants set forth in the
Indenture.
Limitation on Indebtedness. (a) The Company will not Incur, and the
Company will not permit any Restricted Subsidiary to Incur, directly or
indirectly (i) any Unsecured Senior Indebtedness unless (A) the Adjusted
Consolidated Leverage Ratio, on the date of such Incurrence and after giving
effect thereto, does not exceed 1.0 to 1.0, (B) the Consolidated Leverage Ratio,
on the date of such Incurrence and after giving effect thereto, does not exceed
2.0 to 1.0, (C) the Stated Maturity of such Indebtedness is at least 91 days
after the Stated Maturity of the Notes, and (D) the Average Life of such
Indebtedness is longer than the Average Life of the Notes, or (ii) any
Indebtedness (other than Unsecured Senior Indebtedness) or any Disqualified
Stock unless, on the date of such Incurrence and after giving effect thereto,
the Consolidated Leverage Ratio does not exceed 2.0 to 1.0.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness:
(1) Permitted Warehouse Indebtedness and Guarantees by the Company of
any Permitted Warehouse Indebtedness of Restricted Subsidiaries, provided
that to the extent any such Indebtedness ceases to constitute Permitted
Warehouse Indebtedness of the Company or a Restricted Subsidiary, such
event shall be deemed to constitute the Incurrence of such Indebtedness
(and any such Guarantees, but without duplication) by the Company or such
Subsidiary, as the case may be;
(2) the Notes and the Subsidiary Guarantees;
(3) Hedging Obligations directly related to: (i) Indebtedness
permitted to be Incurred by the Company or the Restricted Subsidiaries
pursuant to the Indenture; (ii) Receivables held by the Company or its
Restricted Subsidiaries pending sale or that have been sold pursuant to a
Warehouse Facility; or (iii) Receivables with respect to which the Company
or any Restricted Subsidiary has an outstanding purchase or offer
commitment, financing commitment or security interest;
(4) Indebtedness outstanding on the Original Note Issue Date (other
than Permitted Warehouse Indebtedness and Guarantees thereof, which shall
be permissible under this paragraph (b) only pursuant to clause (1) above);
(5) Indebtedness or Disqualified Stock issued to and held by the
Company or a Wholly Owned Restricted Subsidiary; provided, however, that
any subsequent issuance or transfer of any Capital Stock that results in
any such Wholly Owned Restricted Subsidiary ceasing to be a Wholly Owned
Restricted Subsidiary or any subsequent transfer of such Indebtedness or
Disqualified Stock (other than to the Company or a Wholly Owned Restricted
Subsidiary) will be deemed, in each case, to constitute the Incurrence of
such Indebtedness or issuance of such Disqualified Stock by the issuer
thereof;
(6) Indebtedness or Disqualified Stock of a Restricted Subsidiary
Incurred on or prior to the date on which such Subsidiary was acquired by
the Company, other than Indebtedness or Disqualified Stock Incurred in
connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Subsidiary or was
acquired by the Company; provided, however, that on the date of such
acquisition and after giving effect thereto, the Company would have been
able to Incur at least $1.00 of Indebtedness pursuant to paragraph (a)
above; and
(7) while no Default or Event of Default exists, Refinancing
Indebtedness in respect of Indebtedness Incurred pursuant to paragraph (a)
or clause (4) or (6) of this paragraph (b).
(c) Notwithstanding the foregoing, (i) the Company and its Restricted
Subsidiaries may not Incur any Indebtedness (other than the Notes and the
Subsidiary Guarantees) if such Indebtedness is subordinate or junior in ranking
in any respect to any Senior Indebtedness unless such Indebtedness ranks pari
passu with or junior or subordinate to the Notes, (ii) the Company and its
Restricted Subsidiaries shall not Incur any Indebtedness if the proceeds thereof
are used, directly or indirectly, to Refinance any Junior Subordinated
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Obligations unless such Indebtedness shall be subordinated to the Notes or the
Subsidiary Guarantees, as applicable, to at least the same extent as such Junior
Subordinated Obligations, and (iii) no Restricted Subsidiary that is not a
Subsidiary Guarantor shall incur, directly or indirectly, any Indebtedness,
except that any Special Purpose Subsidiary may incur Indebtedness to the extent
permitted by the definition of "Special Purpose Subsidiary." Unsecured
Indebtedness is not deemed to be subordinate or junior to secured Indebtedness
merely because it is unsecured.
(d) For purposes of determining compliance with the foregoing covenant: (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in good faith, will
classify such item of Indebtedness and be required to include the amount and
type of such Indebtedness in one of the above clauses; and (ii) an item of
Indebtedness may be divided and classified in more than one of the types of
Indebtedness described above.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company will
not permit any Restricted Subsidiary to Incur, directly or indirectly, any
Preferred Stock except:
(a) Preferred Stock issued to and held by the Company or a Wholly
Owned Restricted Subsidiary; provided, however, that any subsequent
issuance or transfer of any Capital Stock that results in any such Wholly
Owned Restricted Subsidiary ceasing to be a Wholly Owned Restricted
Subsidiary or any subsequent transfer of such Preferred Stock (other than
to the Company or a Wholly Owned Restricted Subsidiary) will be deemed, in
each case, to constitute the Incurrence of such Preferred Stock by the
issuer thereof; and
(b) Preferred Stock of a Restricted Subsidiary Incurred or issued and
outstanding on or prior to the date on which such Restricted Subsidiary was
acquired by the Company, other than Preferred Stock Incurred or issued in
connection with, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Subsidiary became a Restricted
Subsidiary or was acquired by the Company; provided, however, that on the
date of such acquisition and after giving effect thereto, the Company would
have been able to Incur at least $1.00 of Indebtedness pursuant to
paragraph (a) of the covenant described under "Limitation on Indebtedness."
Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its properties (including Capital Stock
of a Subsidiary), whether owned at the Original Note Issue Date or thereafter
acquired, other than Permitted Liens, without effectively providing that the
Notes shall be secured equally and ratably with (or prior to) the obligations so
secured for so long as such obligations are so secured.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, make a Restricted
Payment if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (i) a Default shall have occurred and be continuing (or
would result therefrom); (ii) the Company is not able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under
"Limitation on Indebtedness"; or (iii) the aggregate amount of such Restricted
Payment and all other Restricted Payments since the Original Note Issue Date
(amounting to no such Restricted Payments through August 31, 1997) would exceed
the sum of: (A) 33% of the Consolidated Adjusted Net Income accrued during the
period (treated as one accounting period) from the beginning of the fiscal
quarter during which the Original Note Issue Date occurred to the end of the
most recent fiscal quarter prior to the date of such Restricted Payment for
which financial statements are available (or, in case such Consolidated Adjusted
Net Income shall be a deficit, minus 100% of such deficit) (amounting to ($26.9
million) through August 31, 1997); and (B) the aggregate Net Cash Proceeds
received by the Company from the issuance or sale after the Original Note Issue
Date ($0 through August 31, 1997) of (1) Capital Stock of the Company (other
than Disqualified Stock) or (2) debt securities of the Company, but only if,
when and to the extent such debt securities have been converted into any such
Capital Stock (other than, in each case, an issuance or sale to a Subsidiary of
the Company and other than an issuance or sale to an employee stock ownership
plan or to a trust established by the Company or any of its Subsidiaries for the
benefit of their employees).
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(b) While no Default or Event of Default exists, the provisions of the
foregoing paragraph (a) shall not prohibit: (i) any purchase or redemption of
Capital Stock or Junior Subordinated Obligations of the Company to the extent
made by exchange for, or out of the proceeds of the substantially concurrent
sale of, Capital Stock of the Company (other than Disqualified Stock and other
than Capital Stock issued or sold to (A) a Subsidiary of the Company or (B) an
employee stock ownership plan or to a trust established by the Company or any of
its Subsidiaries for the benefit of their employees, except to the extent that
the funds used by such plan or trust are attributable to employee
contributions); provided, however, that (A) such purchase or redemption shall be
excluded in the calculation of the amount of Restricted Payments and (B) the Net
Cash Proceeds from such sale shall be excluded from the calculation of amounts
under clause (iii)(B) of paragraph (a) above; (ii) any payment, purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value
of Junior Subordinated Obligations made by exchange for, or out of the proceeds
of the substantially concurrent sale of, Indebtedness of the Company that is
permitted to be Incurred pursuant to the covenant described under "-- Limitation
on Indebtedness"; provided, however, that, such purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value shall be
excluded in the calculation of the amount of Restricted Payments; and (iii)
dividends paid within 60 days after the date of declaration thereof if at such
date of declaration such dividend would have complied with the covenant
described hereunder; provided, however, that such dividend shall be included in
the calculation of the amount of Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or permit to
exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary (a) to pay dividends or make any other
distributions on its Capital Stock to the Company or a Restricted Subsidiary or
pay any Indebtedness owed to the Company or any Restricted Subsidiary, (b) to
make any loans or advances to the Company or any Restricted Subsidiary or (c) to
transfer any of its property or assets to the Company or any Restricted
Subsidiary, except: (i) any encumbrance or restriction pursuant to an agreement
in effect at the Original Note Issue Date and listed on a schedule to the
Indenture; (ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement applicable to such Subsidiary prior to the
date on which such Subsidiary was acquired by the Company (other than an
agreement entered into in connection with, or in anticipation of, the
transaction or series of related transactions pursuant to which such Subsidiary
became a Subsidiary or was acquired by the Company) and outstanding on such
date; (iii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to any other agreement contained in any amendment to an
agreement referred to in clause (i) or (ii) of this covenant or this clause
(iii); provided, however, that the encumbrances and restrictions with respect to
such Restricted Subsidiary contained in any such amendment are no less favorable
to the Holders than encumbrances and restrictions with respect to such
Restricted Subsidiary contained in the agreements referred to in clause (i) or
(ii) of the covenant described hereunder, as the case may be; (iv) any such
encumbrance or restriction consisting of customary non-assignment provisions in
leases governing leasehold interests to the extent such provisions restrict the
transfer of the lease or the property leased thereunder; (v) in the case of
clause (c) above, restrictions contained in security agreements or mortgages
securing Indebtedness of a Restricted Subsidiary otherwise permissible under the
Indenture to the extent such restrictions restrict the transfer of the property
subject to such security agreements or mortgages; (vi) with respect to the
ability of a Restricted Subsidiary to pay dividends or make any other
distributions on its Capital Stock to the Company, any Permitted Warehouse
Indebtedness Limitation; and (vii) any restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of such
Restricted Subsidiary pending the closing of such sale or disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company will
not, and will not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless: (i) the Company or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at least
equal to the fair market value (including as to the value of any non-cash
consideration), as determined in good faith by the Board of Directors, of the
shares and assets subject to such Asset Disposition and at least 85% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or
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Temporary Cash Investments; (ii) an amount equal to 100% of the Net Available
Cash from such Asset Disposition is applied by the Company (or such Restricted
Subsidiary, as the case may be):
(A) first, to the extent the Company or such Restricted Subsidiary
elects either (x) to acquire Additional Assets or (y) to prepay, repay,
redeem or purchase Senior Indebtedness of the Company or such Restricted
Subsidiary, as the case may be (other than in either case Indebtedness owed
to the Company or an Affiliate of the Company), in each case within 180
days from the later of the date of such Asset Disposition or the receipt of
such Net Available Cash;
(B) second, to the extent of the balance of such Net Available Cash
after application in accordance with clause (A), for the Company to make an
offer to the holders of outstanding Notes to purchase such Notes pursuant
to and subject to the conditions contained in the Indenture; and
(C) third, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B), to any
application not prohibited by the Indenture; and (iii) at the time of such
Asset Disposition no Default shall have occurred and be continuing (or
would result therefrom). Pending application of Net Available Cash pursuant
to this covenant, such Net Available Cash shall be invested in Temporary
Cash Investments.
For the purposes of this covenant, the following are deemed to be cash: (x)
the assumption of Indebtedness (other than Junior Subordinated Obligations) of
the Company or any Restricted Subsidiary, and the release of the Company or such
Subsidiary from all liability on such Indebtedness, in connection with such
Asset Disposition and (y) securities received by the Company or any Restricted
Subsidiary from the transferee that are promptly converted by the Company or
such Subsidiary into cash or Temporary Cash Investments.
(b) In the event of an Asset Disposition that requires an offer to purchase
outstanding Notes, the Company will be required to purchase Notes tendered
pursuant to an offer by the Company for the Notes at a purchase price of 100% of
their principal amount plus accrued but unpaid interest (including in the case
of Additional Notes, Added Interest, if any) in accordance with the procedures
(including prorating in the event of oversubscription) set forth in the
Indenture. If the aggregate purchase price of Notes tendered pursuant to such
offer is less than the Net Available Cash allotted to the purchase thereof, the
Company will be permitted to apply the remaining Net Available Cash in
accordance with clause (a)(ii)(C) above. The Company shall not be required to
make such an offer to purchase Notes pursuant to this covenant if the Net
Available Cash available therefor is less than $1,000,000 (which lesser amount
shall be carried forward for purposes of determining whether such an offer is
required with respect to any subsequent Asset Disposition).
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to the
covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with provisions of the covenant
described hereunder, the Company will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
this covenant by virtue thereof.
Limitation on Affiliate Transactions. The Company will not, and will not
permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including without limitation the making of any loan, advance,
Guarantee or capital contribution to or for the benefit of, the purchase, sale,
lease or exchange of any property with, the entering into or amending of
employee compensation arrangements with, or the rendering of any service) with
or for the benefit of, any Affiliate of the Company (an "Affiliate Transaction")
unless the terms thereof: (i) are in the ordinary course of business and
consistent with past practice; (ii) are fair to the Company or such Restricted
Subsidiary and are no less favorable to the Company or such Restricted
Subsidiary than those that could be obtained at the time of such transaction in
arm's-length dealings with a Person who is not an Affiliate; (iii) if such
Affiliate Transaction involves an amount in excess of $500,000, (A) are set
forth in writing and (B) have been approved by a majority of the members of the
Board of Directors having no personal stake in such Affiliate Transaction; and
(iv) if such Affiliate Transaction involves an amount in excess of $3,000,000,
have been determined by a nationally recognized
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investment banking firm to be fair, from a financial standpoint, to the Company
and its Restricted Subsidiaries.
The provisions of the foregoing paragraph shall not apply to (a)
transactions exclusively between or among the Company and any Wholly Owned
Restricted Subsidiary or between or among Wholly Owned Restricted Subsidiaries,
(b) any Restricted Payment permitted to be made under the covenant described
under "-- Limitation on Restricted Payments," (c) any employment or related
arrangement entered into by the Company or any Restricted Subsidiary in the
ordinary course of business on terms customary in the consumer finance business,
provided any such arrangement is approved by the disinterested members of the
Board of Directors, (d) customary directors fees and indemnities, and (e)
payments required by the Tax Sharing Agreement or any renewal thereof on
substantially similar terms, provided, however, in the case of each of the
foregoing clauses (a) through (d), that such transactions are not otherwise
prohibited by the Indenture. The provisions of clause (iv) of the foregoing
paragraph shall not apply to transactions between the Company and PEC pursuant
to agreements in effect on the Original Note Issue Date and renewals thereof on
substantially similar terms.
As a result of the Spin-off, no further payments by the Company to Mego
Financial under the Tax Sharing Agreement are required with respect to taxes
accruing for periods after the Spin-off.
Merger and Consolidation. The Company will not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
related transactions, all or substantially all its assets to, any Person,
unless: (i) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the United
States of America or any State thereof and the Successor Company (if not the
Company) shall expressly assume, by an indenture supplemental thereto, executed
and delivered to the Trustee, in form satisfactory to the Trustee, all of the
Company's obligations under the Notes and the Indenture; (ii) immediately after
giving effect to such transaction (and treating any Indebtedness that becomes an
obligation of the Successor Company or any Restricted Subsidiary as a result of
such transaction as having been Incurred by such Successor Company or such
Restricted Subsidiary at the time of such transaction), no Default shall have
occurred and be continuing; (iii) immediately after giving effect to such
transaction, the Successor Company would be able to incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"Limitation on Indebtedness;" (iv) immediately after giving effect to such
transaction, the Successor Company shall have Consolidated Net Worth in an
amount that is not less than the Consolidated Net Worth of the Company prior to
such transaction; and (v) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor Company, in the case of a
lease, shall not be released from the obligation to pay the principal of,
premium, if any, and interest (including in the case of the Additional Notes,
Added Interest, if any) on the Notes.
The Indenture provides that no Restricted Subsidiary may consolidate with
or merge with or into (whether or not such Restricted Subsidiary is the
surviving Person) another Person, whether or not affiliated with such Restricted
Subsidiary, unless (i) subject to the provisions of the following paragraph, the
Person formed by or surviving any such consolidation or merger (if other than
such Restricted Subsidiary) assumes all the obligations of such Restricted
Subsidiary, pursuant to a supplemental indenture, in form and substance
satisfactory to the Trustee, under the Indenture; (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists; (iii) such
Restricted Subsidiary, or any Person formed by or surviving any such
consolidation or merger, would have Consolidated Net Worth (immediately after
giving effect to such transaction) equal to or greater than the Consolidated Net
Worth of such Restricted Subsidiary immediately preceding the transaction; and
(iv) the Restricted Subsidiary would be permitted, immediately after giving
effect to such transaction, to Incur at least $1.00 of additional Indebtedness
pursuant to paragraph (a) in the covenant described above under the caption
"Certain Covenants -- Limitation on Indebtedness"; provided that the foregoing
provisions will not restrict the ability of a Subsidiary to consolidate or merge
with the Company or a Wholly Owned Restricted Subsidiary.
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The Indenture provides that, in the event of a sale or other disposition of
all of the assets of any Subsidiary (other than to or with the Company or a
Wholly Owned Restricted Subsidiary), by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the Capital Stock of any
Subsidiary (other than to the Company or a Wholly Owned Restricted Subsidiary),
then such Restricted Subsidiary (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the Capital Stock of
such Subsidiary) or the corporation acquiring the property (in the event of a
sale or other disposition of all of the assets of such Restricted Subsidiary)
will be released and relieved of any obligations under its Subsidiary Guarantee;
provided that the Net Cash Proceeds of such sale or other disposition are
applied in accordance with the applicable provisions of the Indenture.
Limitation on Investment Company Status. The Company shall not take, and
shall not permit any Restricted Subsidiary to take, any action, or otherwise
permit to exist any circumstance, that would require the Company or such
Restricted Subsidiary to register as an "investment company" under the
Investment Company Act of 1940, as amended.
Line of Business. The Company will not, and will not permit any Subsidiary
to, engage in any line of business that is not a Related Business.
Payments for Consent. The Indenture provides that neither the Company nor
any Restricted Subsidiary will, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
of any Notes for or as an inducement to any consent, waiver or amendment of any
of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or agreed to be paid to all Holders of the
Notes that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
SEC Reports. Notwithstanding that the Company may not be required to
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company shall file with the SEC and provide the Trustee and
Holders with such annual reports, quarterly reports and such other information,
documents and reports as are specified in Sections 13 and 15(d) of the Exchange
Act and applicable to a U.S. corporation subject to such Sections, such
information, documents and other reports to be so filed and provided at the
times specified for the filing of such information, documents and reports under
such Sections.
DEFAULTS
An Event of Default is defined in the Indenture as: (i) a default in the
payment of interest (including in the case of the Additional Notes, Added
Interest, if any) on the Notes when due, continued for 30 days; (ii) a default
in the payment of principal of and premium, if any, on any Note when due at its
Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration of acceleration or otherwise; (iii) the failure by the Company or
any Subsidiary Guarantor to comply with any of its obligations in the covenants
described under "Change of Control," "Subsidiary Guarantees" or under "Certain
Covenants -- Merger and Consolidation," or "-- Limitation on Sales of Assets and
Subsidiary Stock"; (iv) the failure by the Company or any Subsidiary Guarantor
to comply with any of its obligations in the covenants described above under
"Certain Covenants -- Limitation on Affiliate Transactions," "-- Limitation on
Indebtedness," "-- Limitation on Preferred Stock of Restricted Subsidiaries,"
"-- Limitation on Liens," "-- Limitation on Restricted Payments," "-- Limitation
on Restrictions on Distributions from Restricted Subsidiaries," "-- Limitation
on Investment Company Status" or "-- SEC Reports" and 30 days or more shall have
expired after a Senior Officer of the Company first becomes aware of such
failure; (v) the failure by the Company or any Subsidiary Guarantor to comply
for 30 days after notice with its other agreements contained in the Indenture;
(vi) Indebtedness of the Company or any Subsidiary is not paid within any
applicable grace period after final maturity or is accelerated by the holders
thereof because of a default and the total amount of such Indebtedness unpaid or
accelerated exceeds $2,000,000 (the "cross acceleration provision"); (vii)
certain events of bankruptcy, insolvency or reorganization of the Company or a
Subsidiary (the "bankruptcy provisions"); (viii) any judgment or decree for the
payment of money in excess of $1,000,000 is rendered against the Company or a
Subsidiary, remains outstanding for a period of 60 days following such judgment
and is not discharged, waived or stayed (the "judgment default provision"); or
(ix) any Subsidiary Guarantee
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ceases to be effective (except if permitted by the Indenture), is held to be
invalid in a judicial proceeding or its validity is contested by the Company or
any Restricted Subsidiary. However, a default under clause (v) will not
constitute an Event of Default until the Trustee or the Holders of 25% in
principal amount of the outstanding Notes notify the Company of the Default and
the Company does not cure such Default within the time specified after receipt
of such notice.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of, premium, if any, and accrued but unpaid interest (including in the
case of the Additional Notes, Added Interest, if any) on all the Notes to be due
and payable. Upon such a declaration, such principal, premium, if any, and
interest (including in the case of the Additional Notes, Added Interest, if any)
shall be due and payable immediately. If an Event of Default relating to certain
events of bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of, premium, if any, and any accrued but unpaid
interest (including in the case of the Additional Notes, Added Interest, if any)
on all the Notes will ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any Holders
of the Notes. Under certain circumstances, the Holders of a majority in
principal amount of the outstanding Notes may rescind any such acceleration with
respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders of the Notes unless
such Holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium, if any, or interest (including in the case of the
Additional Notes, Added Interest, if any) when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such Holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
Holders of at least 25% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such Holders have offered the
Trustee reasonable security or indemnity against any loss, liability or expense,
(iv) the Trustee has not complied with such request within 60 days after the
receipt thereof and the offer of security or indemnity and (v) the Holders of a
majority in principal amount of the outstanding Notes have not given the Trustee
a direction inconsistent with such request within such 60-day period. Subject to
certain restrictions, the Holders of a majority in principal amount of the
outstanding Notes have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
Holder or that would involve the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder of outstanding Notes
notice of the Default within 60 days after it occurs. Except in the case of a
Default in the payment of principal of, premium, if any, or interest (including
in the case of the Additional Notes, Added Interest, if any) on any Note, the
Trustee may withhold notice if and so long as a committee of its trust officers
determines that withholding notice is not opposed to the interest of the
Holders. In addition, the Company is required to deliver to the Trustee, within
120 days after the end of each fiscal year, a certificate indicating whether the
signers thereof know of any Default that occurred during the previous year. The
Company also is required to deliver to the Trustee, within 30 days after a
Senior Officer of the Company or any Subsidiary becomes aware of the occurrence
thereof, written notice of any event which would constitute certain Defaults,
their status and what action the Company or such Subsidiary is taking or
proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be further amended with
the consent of the Holders of a majority in principal amount of the Notes then
outstanding, voting as one class (including consents obtained in connection with
a tender offer or exchange for the Notes), and any past Default or compliance
with any provisions may be waived with the consent of the Holders of a majority
in principal amount of the Notes then outstanding. However, without the consent
of each Holder of an outstanding Note affected thereby, no
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amendment or waiver may, among other things, (i) reduce the amount of Notes
whose Holders must consent to an amendment, (ii) reduce the rate of or extend
the time for payment of interest (including in the case of the Additional Notes,
Added Interest, if any) on any Note, (iii) reduce the principal of or extend the
Stated Maturity of any Note, (iv) reduce the premium payable upon the redemption
or acceleration of any Note or change the time at which any Note may be redeemed
as described under "Optional Redemption", (v) make any Note payable in money
other than that stated in the Note, (vi) impair the right of any Holder to
receive payment of principal of, premium, if any, and interest (including in the
case of the Additional Notes, Added Interest, if any) on such Holder's Notes on
or after the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such Holder's Notes, (vii) make any change to the
provisions of the Indenture relating to subordination of the Notes, (viii)
release any Subsidiary Guarantee of the Notes (except in connection with any
such Subsidiary being designated an Unrestricted Subsidiary or its Capital Stock
or assets being disposed of, in each case to the extent permissible under the
Indenture), or (ix) make any change in the amendment provisions which require
each Holder's consent or in the waiver provisions.
Without the consent of any Holder, the Company and Trustee may further
amend the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation of the obligations of the
Company or any Subsidiary Guarantor under the Indenture, to provide for
uncertificated Notes in addition to or in place of certificated Notes (provided
that the uncertificated Notes are issued in registered form for purposes of
Section 163(f) of the Code, or in a manner such that the uncertificated Notes
are described in Section 163(f)(2)(B) of the Code), to add guarantees with
respect to the Notes, to secure the Notes, to add to the covenants of the
Company for the benefit of the Holders or to surrender any right or power
conferred upon the Company, to modify the provisions relating to global Notes,
restrictions on transfer and legends set forth in the Indenture with respect to
any Future Notes not then outstanding, to make any change that does not
adversely affect the rights of any Holder or to comply with any requirement of
the SEC in connection with the qualification of the Indenture under the Trust
Indenture Act.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company will
mail to Holders a notice briefly describing such amendment. However, the failure
to give such notice to all Holders, or any defect therein, will not impair or
affect the validity of the amendment.
TRANSFER
A Holder will be able to register the transfer of or exchange the Notes
only in accordance with the provisions of the Indenture, and the restrictions
described under "Transfer Restrictions." The Company may require payment of a
sum sufficient to cover any tax, assessment or other governmental charge payable
in connection with certain registrations of transfers and exchanges.
DEFEASANCE
The Company and the Subsidiary Guarantors at any time may terminate all
their respective obligations under the Notes, the Subsidiary Guarantees and the
Indenture ("legal defeasance"), except for certain obligations, including those
respecting the defeasance trust and obligations to register the transfer or
exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and
to maintain a registrar and paying agent in respect of the Notes. The Company at
any time may terminate its obligations under "Change of Control" and under the
covenants described under "Certain Covenants" (other than the covenant described
under "-- Merger and Consolidation"), the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Subsidiaries and the
judgment default provision described under "-- Defaults" and the limitations
contained in clauses (iii) and (iv) under "Certain Covenants -- Merger and
Consolidation" ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be
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accelerated because of an Event of Default with respect thereto (other than an
Event of Default with respect to the obligations referred to in the first
sentence of the immediately preceding paragraph). If the Company exercises its
covenant defeasance option, payment of the Notes may not be accelerated because
of an Event of Default under the provisions described in the last sentence of
the foregoing paragraph.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee unencumbered money or
U.S. Government Obligations for the payment of principal of, premium, if any,
and interest (including in the case of the Additional Notes, Added Interest, if
any) on the Notes to redemption or maturity, as the case may be, and must comply
with certain other conditions, including delivery to the Trustee of an Opinion
of Counsel to the effect that Holders will not recognize income, gain or loss
for federal income tax purposes as a result of such deposit and defeasance and
will be subject to federal income tax on the same amount and in the same manner
and at the same times as would have been the case if such deposit and defeasance
had not occurred (and, in the case of legal defeasance only, such Opinion of
Counsel must be based on a ruling of the Internal Revenue Service or other
change in applicable federal income tax law).
CONCERNING THE TRUSTEE
American Stock Transfer & Trust Company is the Trustee under the Indenture
and has been appointed by the Company as Registrar and Paying Agent with regard
to the Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder, unless
such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
BOOK-ENTRY, DELIVERY AND FORM
Except for any Exchange Notes issued in certificated form without coupons
as described below under "-- Certificated Securities" ("Certificated
Securities"), all Exchange Notes will be represented by one or more global notes
(the "Global Exchange Notes") without coupons. (The Global Exchange Notes, along
with any global notes representing Original Notes and Additional Notes, herein
collectively are referred to as the "Global Notes.") Each of the Global Exchange
Notes will be issued in a denomination equal to the outstanding Exchange Notes
represented thereby and will be held by the DTC, as depositary for the Exchange
Notes (the "Depositary"), or its nominee. Beneficial interests in the Global
Exchange Notes will be shown on, and transfers thereof will be effected only
through, records maintained in book-entry form by the Depositary (with respect
to its Participants' interests) and its participants.
Notwithstanding anything herein to the contrary, Exchange Notes originally
purchased by persons outside the United States pursuant to sales in accordance
with Regulation S under the Securities Act will be represented upon issuance by
a Global Exchange Note which will not be exchangeable for Certificated Notes
until the expiration of the "40-day restricted period" within the meaning of
Rule 903(c)(2) of Regulation S under the Securities Act.
The Depositary is a limited-purpose trust company organized under the New
York Banking Law that was created to hold securities for its participating
organizations (collectively, the "Participants" or the "Deposi-
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tary's Participants") and to facilitate the clearance and settlement of
transactions in such securities between Participants through electronic
book-entry changes in accounts of its Participants. The Depositary's direct
Participants ("Direct Participants") include securities brokers and dealers
(including the Initial Purchaser), banks and trust companies, clearing
corporations and certain other organizations. Access to the Depositary's system
is also available to other entities such as brokers, dealers, banks and trust
companies (collectively, the "Indirect Participants" or the "Depositary's
Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly. Persons who are not
Participants may beneficially own securities held by or on behalf of the
Depositary only through the Depositary's Participants or the Depositary's
Indirect Participants.
Pursuant to procedures established by the Depositary, upon deposit of the
Global Exchange Notes, the Depositary will credit the accounts of Participants
with portions of the principal amount of the Global Exchange Notes. Purchases of
participation interests in the Global Exchange Notes under the Depositary's
system must be made by or through Direct Participants, which will receive a
credit for the Exchange Notes on the Depositary's records. The ownership
interest of the beneficial owner of each Exchange Note is in turn to be recorded
on the Direct and Indirect Participants' records and ownership of the Exchange
Notes evidenced by the Global Exchange Notes will be shown on, and the transfer
of ownership thereof will be effected only through, records maintained and
procedures established by the Depositary (with respect to the interests of the
Depositary's Participants) and the Indirect Participants.
So long as the Depositary or its nominee (the "Global Note Holder") is the
registered owner of any Notes, the Global Note Holder will be considered the
sole Holder under the Indenture of any Notes evidenced by a Global Note.
Beneficial owners of Notes evidenced by a Global Note will not be considered the
owners or Holders thereof under the Indenture for any purpose, including with
respect to the giving of any directions, instructions or approvals to the
Trustee thereunder. Accordingly, beneficial owners of an interest in a Global
Note must rely on the procedures of the Depositary, and if such person is not a
Participant, on the procedures of the Participant or Indirect Participant
through which such person owns its interest, to exercise any rights and fulfill
any obligations of a Holder under the Indenture. None of the Company, the
Trustee, the Registrar or any Paying Agent will have any responsibility or
liability for any aspect of the records of the Depositary, any Participant or
any Indirect Participant or for maintaining, supervising or reviewing any
records of any of them relating to the Notes, and each of the Company, the
Trustee, the Registrar or any Paying Agent may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
Payments in respect of the principal of, premium, if any, and interest
(including in the case of the Additional Notes, Added Interest) on any Notes
registered in the name of the Global Note Holder on the applicable record date
will be payable by the Trustee to or at the direction of the Global Note Holder
in its capacity as the registered Holder under the Indenture. Under the terms of
the Indenture, the Company and the Trustee may treat the persons in whose names
Notes, including the Global Notes, are registered as the owners thereof for the
purpose of receiving such payments. Consequently, none of the Company, the
Trustee, the Registrar or the Paying Agent has or will have any responsibility
or liability for the payment of such amounts (or the timing of such payments) to
beneficial owners of Notes. The Company believes, however, that it is currently
the policy of the Depositary to immediately credit the accounts of the relevant
Participants with such payments, in amounts proportionate to their respective
holdings of beneficial interests in the relevant security as shown on the
records of the Depositary. Payments by the Depositary's Participants and the
Depositary's Indirect Participants to the beneficial owners of Notes will be
governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
Although the Depositary and its Participants are expected to follow the
foregoing procedures in order to facilitate transfers of interests in the Global
Notes among Participants, they are under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
None of the Company, the Trustee, the Registrar or any Paying Agent will have
any responsibility for the performance by the Depositary, Participants or
Indirect Participants of their respective obligations under the rules and
procedures governing their operations.
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The information in this section concerning the Depositary and its
book-entry system has been obtained from sources that the Company believe to be
reliable, but the Company takes no responsibility for the accuracy thereof.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in a
Global Note may, upon request to the Trustee, exchange such beneficial interest
for Certificated Securities. Upon any such exchange, the Trustee is required to
register such Certificated Securities in the name of, and cause the same to be
delivered to, such person or persons (or the nominee of any thereof). All
Exchange Notes that are or become Certificated Securities will be subject to the
legend requirements described under "Transfer Restrictions" below. In addition,
if (i) the Company notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a Depositary and the Company is unable to
locate a qualified successor within 90 days, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
the form of Certificated Securities under the Indenture, or (iii) if a Default
or Event of Default occurs and any owner of a beneficial interest in a Global
Note so requests, then, upon surrender by the Global Note Holder of a Global
Note, Notes in the form of Certificated Securities will be issued to each person
that the Global Note Holder and the Depositary identify as being the beneficial
owner of the related Notes. Upon the transfer of Certificated Securities to a
person entitled to hold an interest in a Global Note under the Indenture, such
Certificated Securities may, unless a Global Note has previously been exchanged
for Certificated Securities, be exchanged for an interest in a Global Note
representing the principal amount of Notes being transferred.
CERTAIN DEFINITIONS
"Additional Assets" means: (i) any operating property or assets (including
Receivables, but excluding Indebtedness and Capital Stock of the acquiring
Person) used or useful in a Related Business; (ii) the Capital Stock of a Person
that becomes a Restricted Subsidiary as a result of the acquisition of such
Capital Stock by the Company or another Restricted Subsidiary; or (iii) Capital
Stock constituting a minority interest in any Person that at such time is a
Restricted Subsidiary; provided, however, that any such Restricted Subsidiary
described in clause (ii) or (iii) is primarily engaged in a Related Business.
"Additional Note Issue Date" means the date on which the Additional Notes
were originally issued.
"Adjusted Consolidated Leverage Ratio" as of any date of determination
means the ratio of (i) the aggregate amount of all Unsecured Senior Indebtedness
of the Company and its Restricted Subsidiaries, to (ii) the sum of: (A)
Consolidated Adjusted Net Income accrued during the period (treated as one
accounting period) from September 1, 1997 to the end of the most recent fiscal
quarter prior to such date of determination for which financial statements are
available (or, in case such Consolidated Adjusted Net Income shall be a deficit,
minus 100% of such deficit); and (B) the aggregate Net Cash Proceeds received by
the Company from the issuance or sale after September 1, 1997 of (1) Capital
Stock of the Company (other than Disqualified Stock) or (2) debt securities of
the Company, but only if, when and to the extent such debt securities have been
converted into any such Capital Stock (other than, in each case, an issuance or
sale to a Subsidiary of the Company and other than an issuance or sale to an
employee stock ownership plan or to a trust established by the Company or any of
its Subsidiaries for the benefit of their employees).
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; provided that a
Person shall be deemed to have such power with respect to the Company if such
Person is the beneficial owner of Capital Stock representing 10% or more of the
total voting power of the Voting Stock (on a fully diluted basis) of the Company
or of rights or warrants to purchase such Capital Stock (whether or not
currently exercisable). The terms "controlling" and "controlled" have meanings
correlative to the foregoing.
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"Asset Disposition" means (i) any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
the Company or any Restricted Subsidiary, including any disposition by means of
a merger, consolidation or similar transaction (each referred to for the
purposes of the definition as a "disposition"), but excluding any merger,
consolidation or sale of assets of the Company subject to and permitted by the
first paragraph of the covenant described under "Certain Covenants -- Merger and
Consolidation," of: (a) any shares of Capital Stock of a Subsidiary (other than
director's qualifying shares or shares required by applicable law to be held by
a Person other than the Company or a Subsidiary); (b) all or substantially all
the assets of, or of any division or line of business of the Company or any
Restricted Subsidiary; (c) any other assets of the Company or any Restricted
Subsidiary with a book or fair market value, together with other assets disposed
of in the same or related transactions, exceeding $500,000; or (d) any Excess
Spread Receivables (other than, in the case of clauses (a), (b), (c) or (d)
above, (1) a disposition of Receivables in the ordinary course of business, (2)
a disposition by a Restricted Subsidiary to the Company or by the Company or a
Subsidiary to a Wholly Owned Restricted Subsidiary or (3) any grant of a
Permitted Lien) or (ii) the issuance of Capital Stock by any Restricted
Subsidiary to any Person other than the Company or any Wholly Owned Restricted
Subsidiary.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligation" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP. The amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Adjusted Net Income" means, for any period, (a) Consolidated
Net Income minus (b) gain on sale of loans and net unrealized gain on mortgage
related securities, plus (c) provision for credit losses, amortization and
depreciation (including amortization of excess servicing rights or any
reclassification thereof), in each case for such period and for the Company and
its Restricted Subsidiaries.
"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of all Indebtedness of the Company and its
Restricted Subsidiaries, excluding (A) Permitted Warehouse Indebtedness and
Guarantees thereof permitted to be Incurred pursuant to clause (b)(1) of the
covenant described under "Certain Covenants -- Limitation on Indebtedness," (B)
Hedging Obligations permitted to be Incurred pursuant to clause (b)(3) of the
covenant described under "Certain Covenants -- Limitation on Indebtedness" and
(C) Junior Subordinated Obligations of the Company to (ii) the Consolidated Net
Worth of the Company.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries for such period determined in
accordance with GAAP; provided, however, that there shall not be included in
such Consolidated Net Income: (i) any net income of any person if such Person is
not a Restricted Subsidiary, except that (A) subject to the exclusion contained
in clause (iv) below, the Company's equity in
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the net income of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually distributed
by such Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the limitations contained in
clause (iii) below) and (B) the Company's equity in a net loss of any such
Person for such period shall be included in determining such Consolidated Net
Income; (ii) any net income (or loss) of any Person acquired by the Company or a
Restricted Subsidiary in a pooling of interests transaction for any period prior
to the date of such acquisition; (iii) any net income of any Restricted
Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions by such
Restricted Subsidiary, directly or indirectly, to the Company, except that (A)
subject to the exclusion contained in clause (iv) below, the Company's equity in
the net income of any such Restricted Subsidiary for such period shall be
included in such Consolidated Net Income to the extent that cash could have been
distributed by such Restricted Subsidiary during such period to the Company or
another Restricted Subsidiary as a dividend or other distribution (subject, in
the case of a dividend or other distribution paid to another Restricted
Subsidiary, to the limitation contained in this clause) and (B) the Company's
equity in a net loss of any such Restricted Subsidiary for such period shall be
included in determining such Consolidated Net Income; (iv) any gain (but not
loss) realized upon the sale or other disposition of any assets of the Company
or its consolidated Restricted Subsidiaries (including pursuant to any
sale-and-leaseback arrangement) which is not sold or otherwise disposed of in
the ordinary course of business and any gain (but not loss) realized upon the
sale or other disposition of any Capital Stock of any Person; (v) extraordinary
gains or losses; and (vi) the cumulative effect of a change in accounting
principles, in each case determined in accordance with GAAP.
"Consolidated Net Worth" means the consolidated stockholders' equity of the
Company and its Subsidiaries, as determined in accordance with GAAP, as of the
end of the most recent fiscal quarter of the Company for which financial
statements are available, less (i) all write-ups by the Company or any
Restricted Subsidiary (other than write-ups resulting from foreign currency
translations, write-ups of tangible assets of a going concern business made
within 12 months after acquisition thereof and write-ups of Excess Spread
Receivables or mortgage servicing rights in accordance with GAAP), (ii) all
Investments in unconsolidated Subsidiaries or Persons that are not Restricted
Subsidiaries (except Temporary Cash Investments), (iii) all unamortized debt
discount and expense and unamortized deferred charges of the Company and its
Restricted Subsidiaries, in each case as of such date and (iv) any amounts
attributable to Disqualified Stock. The "Consolidated Net Worth" of a Restricted
Subsidiary means the consolidated net worth of such Subsidiary and its
Subsidiaries (if any), determined on an equivalent basis. For purposes of this
definition, "deferred charges" does not include deferred taxes, costs associated
with mortgage servicing rights and loan origination costs, in each case to the
extent deferred in accordance with GAAP.
"Currency Agreement" means, with respect to any Person, any foreign
exchange contract, currency swap agreement or other similar agreement to which
such Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means, as of any date of determination,
any Senior Indebtedness if the unpaid principal amount thereof, or the amount of
Senior Indebtedness committed to be extended by the lender or lenders under the
related credit facility, equals or exceeds $1,000,000 on such date.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
that by its terms (or by the terms of any security in to which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holders thereof, in each case in whole
or in part on or prior to the first anniversary of the Stated Maturity of the
Notes.
"Eligible Excess Spread Receivables" means Excess Spread Receivables of the
Company and its Restricted Subsidiaries, other than (i) any Excess Spread
Receivables created as the result of the securitization or sale of other Excess
Spread Receivables, and (ii) any Excess Spread Receivables attributable
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to any whole loan sale of Receivables, unless the Person or Persons holding such
Receivables (a) is a GSE or (b) has then outstanding senior unsecured and
unsupported long-term debt rated Baa2 or better by Moody's Investors Service,
Inc. and BBB or better by Standard & Poor's Ratings Group.
"Excess Spread" means (i) with respect to a "pool" of Receivables that has
been sold to a trust or other Person in a securitization, the excess of (a) the
weighted average coupon on each pool of Receivables sold over (b) the sum of the
pass-through interest rate plus a normal servicing fee, a trustee fee, an
insurance fee and an estimate of annual future credit losses related to such
assets, in each case calculated in accordance with any applicable GAAP, and (ii)
with respect to Receivables that have been sold to a Person in a whole loan
sale, the cash flow of the Company and its Restricted Subsidiaries from such
Receivables, net of, to the extent applicable, a normal servicing fee, a trustee
fee, an insurance fee and an estimate of annual future credit losses related to
such assets, in each case calculated in accordance with any applicable GAAP.
"Excess Spread Receivables" of a Person means the contractual or
certificated right to Excess Spread capitalized on such Person's consolidated
balance sheet (the amount of which shall be the present value of the Excess
Spread, calculated in accordance with GAAP, net of any allowance for losses on
loans sold with recourse or other liability allocable thereto, to the extent not
otherwise reflected in such amount). Excess Spread Receivables (a) include
mortgage backed securities attributable to Receivables sold by the Company or
any Subsidiary, and (b) do not include any mortgage servicing rights.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Person" means (i) any Existing Holder, (ii) any corporation or
limited liability company controlled by one or more Existing Holders, (iii) any
partnership the general partners of which are or are corporations controlled by
one or more Existing Holders and (iv) any trust of which any Existing Holder is
the trustee and at least 80% of the beneficial interests in which are owned by
such Existing Holder and the spouse or lineal descendants of such Existing
Holder. For purposes of this definition, "control" means the beneficial
ownership of at least 80% of the Voting Stock of a Person.
"Existing Holders" means Robert Nederlander, Eugene I. Schuster, Jerome J.
Cohen, Herbert B. Hirsch and Don A. Mayerson.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including those set forth in (i) the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants, (ii) statements and pronouncements of
the Financial Accounting Standards Board, (iii) such other statements by such
other entity as approved by a significant segment of the accounting profession
and (iv) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and similar
written statements from the accounting staff of the SEC and releases of the
Emerging Issues Task Force.
"GSE" means Federal National Mortgage Association or Federal Home Loan
Mortgage Corporation.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
Person and any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning. The term "Guarantor" means any person Guaranteeing any
obligation.
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"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holders" means the Person in whose name a Note is registered on the
Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall be deemed the Incurrence
of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication): (i) the principal of and premium, if any,
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person; (iii) all obligations of such Person issued or
assumed as the deferred purchase price of property, all conditional sale
obligations of such Person and all obligations of such Person under any title
retention agreement (including any such obligations under repurchase agreements,
but excluding trade accounts payable and expense accruals arising in the
ordinary course of business not overdue by more than 60 days); (iv) all
obligations of such Person for the reimbursement of any obligor on any letter of
credit, banker's acceptance or similar credit transaction; (v) the amount of all
obligations of such Person with respect to the redemption, repayment or other
repurchase of any Disqualified Stock (but excluding any accrued dividends) or,
in the case of a Subsidiary of such Person, any Preferred Stock (but excluding
any accrued dividends); (vi) Warehouse Indebtedness; (vii) in connection with
each sale of any Excess Spread Receivables, the maximum aggregate claim (if any)
that the purchaser thereof could have against such Person if the payments
anticipated in connection with such Excess Spread Receivables are not collected;
(viii) all obligations of the type referred to in clauses (i) through (vii) of
other Persons and all dividends of other Persons for the payment of which, in
either case, such Person is responsible or liable, directly or indirectly, as
obligor, guarantor or otherwise, including by means of any Guarantee; (ix) all
obligations of the type referred to in clauses (i) through (viii) of other
Persons secured by any Lien on any property or asset of such Person (whether or
not such obligation is assumed by such Person), the amount of such obligation
being deemed to be the lesser of the value of such property or assets or the
amount of the obligation so secured; and (x) to the extent not otherwise
included in this definition, Hedging Obligations of such Person. Notwithstanding
the foregoing, "Indebtedness" shall not include obligations under the Tax
Sharing Agreement or any renewal or other modification thereof that complies
with the covenant described under "Certain Covenants -- Limitation on Affiliate
Transactions." Except in the case of Warehouse Indebtedness (the amount of which
shall be determined in accordance with the definition thereof), the amount of
unconditional Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above. The
amount of any Indebtedness under clause (viii) of this definition shall be equal
to the amount of the outstanding obligation for which such Person is responsible
or liable, directly or indirectly, including by way of Guarantee.
Notwithstanding the foregoing, any securities issued in a securitization by a
special purpose owner trust or similar entity formed by or on behalf of a Person
and to which Receivables have been sold or otherwise transferred by or on behalf
of such Person or its Restricted Subsidiaries shall not be treated as
Indebtedness of such Person or its Restricted Subsidiaries under the Indenture,
regardless of whether such securities are treated as indebtedness for tax
purposes, provided (1) neither the Company nor any of its Restricted
Subsidiaries (other than Special Purpose Subsidiaries) (a) provides credit
support of any kind (including any undertaking, agreement or instrument that
would constitute Indebtedness), except for credit support in the form of
"over-collateralization" of the senior certificates issued in, or subordination
of or recourse to all or a portion of Excess Spread Receivables attributable to,
such securitization, in each case to the extent reflected in the book value of
such Excess Spread Receivables, or (b) is directly or indirectly liable (as a
guarantor or otherwise), and (2) no default with respect to such securities
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any of its
Restricted Subsidiaries to
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declare a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity.
"Interest-only Certificate" means a certificate issued in a securitization
of a pool of Receivables which pays a fixed or floating interest rate on a
notional principal amount.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement, repurchase agreement, futures contract or other financial
agreement or arrangement designed to protect the Company or any Restricted
Subsidiary against fluctuations in interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business, other than
Receivables, that are recorded as trade accounts on the balance sheet of the
lender) or other extensions of credit (including by way of Guarantee or similar
arrangement) or capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the account
or use of others), or any purchase or acquisition of Capital Stock, Indebtedness
(including Receivables) or other similar instruments issued by, such Person. For
purposes of the definitions of "Unrestricted Subsidiary" and "Restricted
Payment" and the covenant described under "Certain Covenants -- Limitation on
Restricted Payments," (i) "Investment" shall include the greater of the fair
market value and the book value of the Investments by the Company and its
Restricted Subsidiaries in such Subsidiary at the time it is so designated; and
(ii) any property transferred to or from a Person shall be valued at its fair
market value at the time of such transfer, in each case as determined in good
faith by the Board of Directors.
"Junior Subordinated Obligation" is defined under "Subordination."
"Legal Holiday" means any Saturday, Sunday or other day on which banks in
the States of New York or Georgia are authorized or obligated by law to be
closed for business.
"Lien" means (i) any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof) and (ii) any claim (whether direct or
indirect through subordination or other structural encumbrance) against any
Excess Spread Receivables sold or otherwise transferred by such Person to a
buyer, unless such Person is not liable for any losses thereon.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payment received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other non-cash form) in each
case net of (i) all legal, title and recording tax expenses, commissions and
other fees and expenses incurred, and all federal, state, provincial, foreign
and local taxes required to be accrued as a liability under GAAP as a
consequence of such Asset Disposition, (ii) all payments made on any
Indebtedness which is secured by any assets subject to such Asset Disposition,
in accordance with the terms of any Lien upon or other security agreement of any
kind with respect to such assets, or which must by its terms, or in order to
obtain a necessary consent to such Asset Disposition, or by applicable law be,
repaid out of the proceeds from such Asset Disposition, and (iii) the deduction
of appropriate amounts provided by the seller as a reserve, in accordance with
GAAP, against any liabilities associated with the property or other assets
disposed of in such Asset Disposition and retained by the Company or any
Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds," with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
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"Non-Recourse Debt" means indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides a Guarantee or other credit
support of any kind (including any undertaking, agreement or instrument that
would constitute Indebtedness), (b) is directly or indirectly liable (as the
primary obligor or otherwise), or (c) constitutes the lender; and (ii) no
default with respect to which (including any rights that the holders thereof may
have to take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries (other than the Notes and the
Subsidiary Guarantees) to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated maturity.
"Original Note Issue Date" means November 22, 1996, the date on which the
Original Notes were originally issued.
"Parent" means Mego Financial and its successors, but only while such
company beneficially owned 40% or more of the Voting Stock of the Company.
"PEC" means Preferred Equities Corporation and its successors.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary: (i) in a Wholly Owned Restricted Subsidiary or a Person that, upon
the making of such Investment, will become a Wholly Owned Restricted Subsidiary;
provided, however, that the primary business of such Wholly Owned Restricted
Subsidiary is a Related Business; (ii) in another Person if as a result of such
Investment such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the Company or a
Wholly Owned Restricted Subsidiary; provided, however, that such Person's
primary business is a Related Business; (iii) while no Default or Event of
Default exists, any Investment in Persons engaged in a Related Business,
provided the aggregate amount of all Investments made by the Company and its
Restricted Subsidiaries after the Original Note Issue Date that constitute
Permitted Investments under this clause (iii) (and, without limitation, not
including Permitted Investments under clause (i) above), on any date (the "date
of determination"), may not exceed the sum of (a) $6,000,000, plus (b) the
excess, if any, of (A) 25% of Consolidated Net Income during the period (treated
as one accounting period) from the beginning of the first fiscal quarter
commencing after the Original Note Issue Date to the end of the fiscal quarter
ended most recently prior to the date of determination for which financial
statements are available (or, in case such Consolidated Net Income shall be a
deficit, zero), over (B) the aggregate amount of Restricted Payments made by the
Company and its Restricted Subsidiaries after the Original Note Issue Date
(other than a Restricted Payment permitted to be made pursuant to clause (i) or
(ii) f paragraph (b) of the covenant described above under "Certain
Covenants -- Limitation on Restricted Payments"), (iv) in the form of Temporary
Cash Investments; (v) in the form of receivables (other than Receivables) owing
to the Company or any Restricted Subsidiary if created or acquired in the
ordinary course of business and payable or dischargeable in accordance with
customary trade terms; (vi) in the form of payroll, travel and similar advances
to cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vii) in the form of loans or advances to employees made in
the ordinary course of business consistent with past practices of the Company or
such Restricted Subsidiary in an aggregate amount not to exceed $250,000
outstanding at any time; (viii) in the form of stock, obligations or securities
received in settlement of debts created in the ordinary course of business and
owing to the Company or any Restricted Subsidiary or in satisfaction of
judgments; (ix) in any Person to the extent such Investment represents the
non-cash portion of the consideration received for an Asset Disposition as
permitted pursuant to the covenant described under "Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock," provided the
amount thereof does not exceed 10% of Consolidated Net Worth; (x) in the form of
Receivables of the Company or any Restricted Subsidiary; and (xi) in the form of
Excess Spread Receivables, subordinated certificates or Interest-only
Certificates arising from a securitization or sale of Receivables by the Company
or any of its Wholly Owned Restricted Subsidiaries (including any securitization
of a "pool" of receivables that, in addition to Receivables, also includes
loans, leases or other receivables of Persons other than the Company or any
Wholly Owned Restricted Subsidiary).
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"Permitted Liens" means, with respect to the Company and any Restricted
Subsidiary: (i) pledges or deposits by such Person under worker's compensation
laws, unemployment insurance laws or similar legislation, or good faith deposits
in connection with bids, tenders, contracts (other than for the payment of
Indebtedness) or leases to which such Person is a party, or deposits to secure
public or statutory obligations of such Person or deposits of cash or United
States government bonds to secure surety or appeal bonds to which such Person is
a party, or deposits as security for contested taxes or for the payment of rent,
in each case Incurred in the ordinary course of business; (ii) Liens imposed by
law, such as carriers', warehousemen's and mechanics' Liens, in each case for
amounts not yet due or being contested in good faith by appropriate proceedings
or other Liens arising out of judgments or awards against such Person with
respect to which such Person shall then be proceeding with an appeal or other
proceedings for review; (iii) Liens for property taxes not yet subject to
penalties for nonpayment or which are being contested in good faith and by
appropriate proceedings; (iv) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights of way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property, or
leases, subleases or other Liens incidental to the conduct of the business of
such Person or to the ownership of its properties which were not Incurred in
connection with Indebtedness and which do not in the aggregate materially
adversely affect the value of said properties or materially impair their use in
the operation of the business of such Person; (v) Liens securing Indebtedness of
such Person Incurred to finance the construction, purchase or lease of, or
repairs, improvements or additions to, equipment (including vehicles) of such
Person (but excluding Capital Stock of another Person); provided, however, that
the Lien may not extend to any other property owned by such Person or any of its
Subsidiaries at the time the Lien is Incurred, and the Indebtedness secured by
the Lien may not be Incurred more than 180 days after the later of the
acquisition, completion of construction, repair, improvement, addition or
commencement of full operation of the property subject to the Lien; (vi) Liens
on Receivables of the Company or a Restricted Subsidiary, as the case may be, to
secure Indebtedness permitted under the provisions described in clause (b)(1)
under "-- Certain Covenants -- Limitation on Indebtedness"; (vii) Liens on
Excess Spread Receivables (or on the Capital Stock of any Person substantially
all the assets of which are Excess Spread Receivables); provided, however, that
no such Liens may encumber Eligible Excess Spread Receivables of the Company and
its Restricted Subsidiaries (including by way of any such Lien on Capital Stock
of any such Person) in an amount equal to the sum of (1) the Specified
Percentage in effect at the creation of such Lien (the "determination date") of
the unpaid principal amount as of the determination date of the Notes and all
other unsecured Indebtedness of the Company and its Restricted Subsidiaries
other than (x) Junior Subordinated Obligations and (y) liabilities referred to
in clause (E) of the last sentence of the definition of Unsecured Senior
Indebtedness (collectively, the "Specified Unsecured Indebtedness"; the amount
under this subclause (1) being the "Base Set Aside"), plus (2) 25% of the
excess, if any, of (x) the total amount of Eligible Excess Spread Receivables
shown on the balance sheet of the Company and its Restricted Subsidiaries,
determined on a consolidated basis in accordance with GAAP, as of the
determination date, over (y) the Base Set Aside, provided that the sum of the
Base Set Aside plus the amount in this clause (2) shall not exceed 200% of
Specified Unsecured Indebtedness; (viii) Liens existing on the Original Note
Issue Date and listed on a schedule to the Indenture; (ix) Liens on property or
shares of Capital Stock of another Person at the time such other Person becomes
a Restricted Subsidiary of such Person; provided, however, that (A) such Liens
are not created, incurred or assumed in connection with, or in contemplation of,
such other Person becoming a Subsidiary or being designated a Restricted
Subsidiary and (B) such Liens may not extend to any other property owned by such
Person or any of its Restricted Subsidiaries; (x) Liens on property at the time
such Person or any of its Restricted Subsidiaries acquires the property,
including any acquisition by means of a merger or consolidation with or into
such Person or a Restricted Subsidiary of such Person; provided, however, that
(A) such Liens are not created, incurred or assumed in connection with, or in
contemplation of, such acquisition and (B) such Liens may not extend to any
other property owned by such Person or any of its Restricted Subsidiaries; (xi)
Liens securing Indebtedness or other obligations of a Restricted Subsidiary of
such Person owing to such Person or a Wholly Owned Restricted Subsidiary of such
Person; (xii) Liens (other than on any Excess Spread Receivables) securing
Hedging Obligations of the Company or such Restricted Subsidiary so long as such
Hedging Obligations relate to Indebtedness that is, and is permitted under the
Indenture to be, secured by a Lien on the same property securing such Hedging
Obligations; (xiii) Liens to secure any Refinancing (or
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successive Refinancings) as a whole, or in part, of any Indebtedness of the
Company or such Restricted Subsidiary secured by any Lien referred to in the
foregoing clauses (v), (viii) and (ix); provided, however, that (A) such new
Lien shall be limited to all or part of the same property that secured the
original Lien (plus improvements to or on such property), (B) the Indebtedness
secured by such Lien at such time is not increased to any amount greater than
the sum of (1) the outstanding principal amount or, if greater, committed amount
of the Indebtedness described under clause (v), (viii) or (ix), as the case may
be, at the time the original Lien became a Permitted Lien and (2) an amount
necessary to pay any fees and expenses, including premiums, related to such
refinancing, refunding, extension, renewal or replacement and (C) the Average
Life of such Indebtedness is not decreased, and (xiv) any Lien in the form of
"over-collateralization" of the senior certificates issued in, or subordination
of or recourse to all or a portion of Excess Spread Receivables of the Company
or any Subsidiary attributable to a securitization of Receivables, in each case
to the extent reflected in the book value of such Excess Spread Receivables,
which Lien is in favor of the holders of other interests in the trust relating
to such securitization, provided, however, that notwithstanding any of the
foregoing clauses, no Lien on Eligible Excess Spread Receivables, other than a
Lien permissible under the foregoing clauses (vii) and (xiv), shall be a
Permitted Lien. Notwithstanding the foregoing, "Permitted Liens" will not
include any Lien described in clause (v), (ix) or (x) above to the extent such
Lien applies to any Additional Assets acquired directly or indirectly from Net
Available Cash pursuant to the covenant described under "Certain
Covenants--Limitation on Sale of Assets and Subsidiary Stock." Without
limitation, for purposes of clause (vii) of this definition, the Incurrence of
any Indebtedness (or an increase in the amount of any Indebtedness) secured by a
Lien on Excess Spread Receivables shall be considered the incurrence of a new
Lien on such Excess Spread Receivables, irrespective of whether a Lien securing
other Indebtedness (or a lesser amount of Indebtedness) already exists on such
assets at the time of such Incurrence.
"Permitted Warehouse Indebtedness" means Warehouse Indebtedness in
connection with a Warehouse Facility; provided, however, that (i) the assets
being financed are eligible to be recorded as held for sale on the consolidated
balance sheet of the Company and its Restricted Subsidiaries in accordance with
GAAP, (ii) Warehouse Indebtedness constitutes Permitted Warehouse Indebtedness
only (a) if, in the case of Warehouse Indebtedness under a Purchase Facility,
recourse with respect to the obligations of the Company and its Restricted
Subsidiaries under such Warehouse Facility is limited to the Receivables
financed thereby or (b) in the case of any other Warehouse Indebtedness, to the
extent of the lesser of (A) the amount advanced by the lender with respect to
the Receivables financed under the Warehouse Facility, and (B) the principal
amount of such Receivables, and (iii) any such Indebtedness has not been
outstanding in excess of 360 days.
"Permitted Warehouse Indebtedness Limitation" means, with respect to any
Warehouse Indebtedness of any Restricted Subsidiary, any covenant in the credit
documents under which such Warehouse Indebtedness is incurred to maintain the
consolidated net worth of such Restricted Subsidiary at a specified dollar
amount, provided that such covenant does not require such consolidated net worth
to be maintained at a level in excess of 85% of the consolidated net worth of
such Restricted Subsidiary shown on the most recently available consolidated
balance sheet of such Restricted Subsidiary at the time such credit documents
are entered into, amended or renewed. For purposes of this definition,
"consolidated net worth" shall be determined in accordance with GAAP.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock" as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such corporation.
"Principal" of a Note means the principal of the Note payable on the Note
which is due or overdue or is to become due at the relevant time.
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"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Purchase Facility" means any Warehouse Facility pursuant to which the
Company or a Restricted Subsidiary sells Receivables to a financial institution
or other Person and retains a right of first refusal (or a right with similar
effect) upon the subsequent resale of such Receivables by such financial
institution.
"Receivables" means loans, leases and receivables purchased or originated
by the Company or any Restricted Subsidiary in the ordinary course of business;
provided, however, that for purposes of determining the amount of a Receivable
at any time, such amount shall be determined in accordance with GAAP,
consistently applied, as of the most recent practicable date.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the
Existing Note Issue Date or Incurred in compliance with the Indenture, including
Indebtedness that Refinances Refinancing Indebtedness; provided, however, that
(i) such Refinancing Indebtedness has a Stated Maturity no earlier than the
Stated Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced, (iii) such Refinancing Indebtedness has an aggregate principal
amount (or, if Incurred with original issue discount, an aggregate issue price)
that is equal to or less than the aggregate principal amount (or, if Incurred
with original issue discount, the aggregate accreted value) then outstanding or
committed (plus fees and expenses, including any premium and defeasance costs)
under the Indebtedness being Refinanced, and (iv) in the case of Refinancing
Indebtedness that Refinances any Junior Subordinated Obligations, such
Refinancing Indebtedness constitutes a Junior Subordinated Obligation; provided
further, however, that Refinancing Indebtedness shall not include (x)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or
another Subsidiary or (y) Indebtedness of the Company or a Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any consumer lending business or any financial
service business directly relating to such business.
"Representative" means, with respect to any Senior Indebtedness, any holder
thereof or any agent, trustee or other representative for any such holder.
"Restricted Payment" with respect to any Person means: (i) the declaration
or payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or
indirect holders of its Capital Stock (other than (A) dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock), and (B)
dividends or distributions payable solely to the Company or a Wholly Owned
Restricted Subsidiary; (ii) the purchase, redemption or other acquisition or
retirement for value of any Capital Stock of the Company held by any Person or
of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Wholly Owned Restricted Subsidiary), including the
exercise of any option to exchange any Capital Stock (other than into Capital
Stock of the Company that is not Disqualified Stock); (iii) the payment,
purchase, repurchase, redemption, defeasance or other acquisition or retirement
for value, prior to scheduled maturity, scheduled repayment or scheduled sinking
fund payment of any Junior Subordinated Obligations of the Company or any
Restricted Subsidiary; or (iv) the making of any Investment (other than a
Permitted Investment) in any Person. Notwithstanding the foregoing, solely for
purposes of calculating the aggregate amount of "other Restricted Payments since
the Original Note Issue Date," as used in clause (iii) of paragraph (a) of the
covenant described under "-- Certain Covenants -- Limitation on Restricted
Payments," any Investment that constitutes a Permitted Investment under clause
(iii) of the definition of "Permitted Investment" shall be considered a
Restricted Payment (but such a Permitted Investment shall not be considered a
Restricted Payment for any other purpose).
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"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Senior Indebtedness" means principal of and interest (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company or a Subsidiary, as applicable, to the
extent postpetition interest is allowed in such proceeding) and premium, if any,
on (a) any Indebtedness of the Company or any Restricted Subsidiary of the type
referred to in clause (i), (ii), (iii), (iv) or (vi) of the definition of
"Indebtedness," or (b) all Guarantees by the Company or any Restricted
Subsidiary with respect to Indebtedness referred to in the foregoing clause (a),
unless, in the case of clause (a) or (b), the instrument under which such
Indebtedness is incurred expressly provides that it is pari passu with or
subordinated in right of payment to the Notes (in the case of Indebtedness being
Incurred by the Company) or the Subsidiary Guarantee of such Restricted
Subsidiary (in the case of Indebtedness being Incurred by any Restricted
Subsidiary). Notwithstanding the foregoing, Senior Indebtedness shall not
include (a) any liability for federal, state, local, foreign or other taxes, (b)
any Indebtedness of the Company or any Restricted Subsidiary to any Affiliates
(including obligations under the Tax Sharing Agreement, as amended from time to
time), (c) any trade accounts payable and expense accruals, (d) any Indebtedness
that is Incurred in violation of the Indenture, and (e) Indebtedness owed for
compensation or for services rendered.
"Special Purpose Subsidiary" means a Restricted Subsidiary formed in
connection with a securitization of Receivables (i) all the Capital Stock of
which (other than directors' qualifying shares and shares held by other Persons
to the extent such shares are required by applicable law to be held by a Person
other than the Company or a Restricted Subsidiary) is owned by the Company or
one or more Restricted Subsidiaries, (ii) that has no assets other than Excess
Spread Receivables created in such securitization, (iii) that conducts no
business other than holding such Excess Spread Receivables, and (iv) that has no
Indebtedness (other than (a) short-term Indebtedness to the Company or any
Wholly Owned Restricted Subsidiary attributable to the purchase by such
Restricted Subsidiary from the Company or such Wholly Owned Restricted
Subsidiary of such Receivables, which Indebtedness is paid in full upon closing
of such securitization, and (b) Indebtedness permitted to be Incurred pursuant
to paragraph (a) of the covenant described under "Certain
Covenants -- Limitation on Indebtedness" that is secured by a Permitted Lien on
such Excess Spread Receivables and no other assets of such Restricted
Subsidiary).
"Specified Percentage" means (i) at any time prior to the date that is 6
months after the Original Note Issue Date, 0%, (ii) subject to clause (i), at
any time prior to the date that is 12 months after the Original Note Issue Date,
20%, (iii) subject to clauses (i) and (ii), at any time prior to the date that
is 18 months after the Original Note Issue Date, 40%, (iv) subject to clauses
(i), (ii) and (iii), at any time prior to the date that is 24 months after the
Original Note Issue Date, 90%, and (v) at any other time, 125%.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Wholly Owned Subsidiaries of such Person or (iii) one or
more Wholly Owned Subsidiaries of such Person. Unless otherwise specified,
"Subsidiary" means a Subsidiary of the Company.
"Tax Sharing Agreement" means the tax allocation and indemnity agreement,
dated as of November 22, 1996, by and between Mego Financial and the Company,
without regard to any amendments, supplements or other modifications thereof
after the Original Note Issue Date.
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"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed as to principal and interest by the United States of
America or any agency thereof and maturing within 180 days after acquisition
thereof; (ii) investments in demand deposit accounts or time deposit accounts,
certificates of deposit and money market deposits maturing within 180 days of
the date of acquisition thereof issued by a bank or trust company that is not an
Affiliate of the Company and that is organized under the laws of the United
States of America or any state thereof, which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $500,000,000 and has
outstanding debt which is rated "AA" (or similar equivalent rating) or higher by
at least one nationally recognized statistical rating organization (as defined
in Rule 436 under the Securities Act) or any money-market fund sponsored by a
registered broker-dealer or mutual fund distributor; (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above; (iv) investments in commercial
paper, maturing not more than 90 days after the date of acquisition, issued by a
corporation (other than an Affiliate of the Company) organized and in existence
under the laws of the United States of America with a rating of "P-1" or higher
according to Moody's Investors Service, Inc. or "A-1" or higher according to
Standard & Poor's Ratings Group; and (v) investments in securities with
maturities of six months or less from the date of acquisition issued or fully
guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by Standard & Poor's Ratings Group or Moody's Investors Service,
Inc.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless (a) such Subsidiary or any of its Subsidiaries
owns any Capital Stock or Indebtedness of, or holds any Lien on any property of,
the Company or any other Subsidiary of the Company that is not a Subsidiary of
the Subsidiary to be so designated or (b) any such Subsidiary has outstanding
any Indebtedness other than Non-Recourse Debt; provided, however, that such
designation would be a permitted Restricted Investment under the covenant
described under "-- Certain Covenants -- Limitation on Restricted Payments." The
Board of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that immediately after giving effect to such
designation (x) the Company could Incur $1.00 of additional Indebtedness under
paragraph (a) of the covenant described under "-- Certain
Covenants -- Limitation on Indebtedness" and (y) no Default or Event of Default
shall have occurred and be continuing or would result therefrom (giving pro
forma effect to the Incurrence of the Indebtedness of such Subsidiary). Any such
designation by the Board of Directors shall be evidenced by the Company to the
Trustee by promptly filing with the Trustee a copy of the board resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing provisions. If any Subsidiary at
any time shall fail to meet the foregoing requirements for designation as an
Unrestricted Subsidiary, it shall thereafter be designated as a Restricted
Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary
shall be deemed to be Incurred by such Subsidiary as of such date.
"Unsecured Senior Indebtedness" means principal of and premium, if any, on
(a) any Indebtedness of the Company or any Restricted Subsidiary of the type
referred to in clause (i), (iii), (iv) and (vi) of the definition of
"Indebtedness" and (b) all Guarantees by the Company or any Restricted
Subsidiary with respect to Indebtedness referred to in the foregoing clause (a),
unless in the case of clauses (a) and (b), the instrument under which such
Indebtedness is Incurred expressly provides that it is pari passu with or
subordinated in right of payment to the Notes (in the case of Indebtedness being
Incurred by the Company) or the Subsidiary Guarantee of such Restricted
Subsidiary (in the case of Indebtedness being Incurred by any Restricted
Subsidiary), which Indebtedness or Guarantees referred to in the foregoing
clauses (a) and (b), respectively, are not secured by a Lien on any assets of
the Company or any Restricted Subsidiary; provided however, that Warehouse
Indebtedness Incurred in the ordinary course of business shall not be deemed to
be unsecured, unless forty-five (45) days after such Warehouse Indebtedness is
Incurred, no Lien on the related Receivables has attached, in which case such
Indebtedness shall be deemed Unsecured Senior Indebtedness incurred at such
time. Notwithstanding the foregoing, Unsecured Senior Indebtedness shall not
include
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(A) any liability for federal, state, local, foreign or other taxes, (B) any
Indebtedness of the Company or any Restricted Subsidiary to any Affiliates
(including obligations under the Tax Sharing Agreement, as amended from time to
time), (C) any trade accounts payable and expense accruals, (D) Indebtedness
owed for compensation or for services rendered and (E) any liabilities on
account of warrant obligations under the Payment Agreement, to the extent such
liabilities do not constitute Senior Indebtedness.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Warehouse Facility" means any funding arrangement with a financial
institution or other lender or purchaser exclusively to finance the purchase or
origination of Receivables by the Company or a Restricted Subsidiary of the
Company for the purpose of pooling such Receivables prior to securitization or
sale in the ordinary course of business, including any Purchase Facilities.
"Warehouse Indebtedness" means the consideration received by the Company or
its Restricted Subsidiaries under a Warehouse Facility with respect to
Receivables until such time such Receivables are (i) securitized, (ii)
repurchased by the Company or its Restricted Subsidiaries or (iii) sold by the
counterpart under the Warehouse Facility to a Person who is not an Affiliate of
the Company.
"Wholly Owned Restricted Subsidiary" means a Restricted Subsidiary all the
Capital Stock of which (other than directors' qualifying shares and shares held
by other Persons to the extent such shares are required by applicable law to be
held by a Person other than the Company or a Restricted Subsidiary) is owned by
the Company or one or more Wholly Owned Restricted Subsidiaries.
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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 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.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion of the material United States federal income tax
consequences of the Exchange Offer is for general information only. It is based
on the Internal Revenue Code of 1986, as amended to the date hereof (the
"Code"), existing and proposed Treasury regulations and judicial and
administrative determinations, all of which are subject to change at any time,
possibly on a retroactive basis. The following relates only to Additional Notes,
and Exchange Notes received therefor, that are held as "capital assets" within
the meaning of Section 1221 of the Code by persons who are citizens or residents
of the United States. It does not discuss state, local, or foreign tax
consequences, nor does it discuss tax consequences to categories of holders that
are subject to special rules, such as foreign persons, tax-exempt organizations,
insurance companies, banks, and dealers in stocks and securities. Tax
consequences may vary depending on the particular status of an investor. No
rulings will be sought from the Internal Revenue Service ("IRS") with respect to
the federal income tax consequences of the Exchange Offer.
THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME
TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO EXCHANGE ADDITIONAL
NOTES FOR EXCHANGE NOTES. EACH INVESTOR SHOULD CONSULT WITH SUCH INVESTOR'S OWN
TAX ADVISOR CONCERNING THE APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER
TAX LAWS TO SUCH INVESTOR'S PARTICULAR SITUATION BEFORE DETERMINING WHETHER TO
ACCEPT THE EXCHANGE OFFER.
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THE EXCHANGE OFFER
The exchange of Additional Notes for Exchange Notes pursuant to the
Exchange Offer will not constitute a material modification of the terms of the
Additional Notes and, therefore, such exchange will not constitute an exchange
for federal income tax purposes. Accordingly, such exchange will have no federal
income tax consequences to holders of Additional Notes, either those who
exchange or those who do not, and each holder of Additional Notes will continue
to be required to include interest on the Additional Notes in its gross income
in accordance with its method of accounting for federal income tax purposes and
the Company intends, to the extent required, to take such position.
BACKUP WITHHOLDING
Under the Code, a holder of an Additional Note may be subject, under
certain circumstances, to "backup withholding" at a 31% rate with respect to
payments in respect of interest thereon or the gross proceeds from the
disposition thereof. This withholding generally applies only if the holder (i)
fails to furnish his or her social security or other taxpayer identification
number ("TIN") within a reasonable time after request therefor, (ii) furnishes
an incorrect TIN, (iii) is notified by the IRS that he or she has failed to
report properly payments of interest and dividends and the IRS has notified the
Company that he or she is subject to backup withholding, or (iv) fails, under
certain circumstances, to provide a certified statement, signed under penalty of
perjury, that the TIN provided is his or her correct number and that he or she
is not subject to backup withholding. Any amount withheld from a payment to a
holder under the backup withholding rules is allowable as a credit against such
holder's federal income tax liability, provided that the required information is
furnished to the IRS. Corporations and certain other entities described in the
Code and the Treasury regulations are exempt from such withholding if their
exempt status is properly established.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Additional Notes where such Additional Notes were acquired as a
result of market-making activities or other trading activities. The Company has
agreed that for a period of 180 days after the Expiration Date, it will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until , 1998,
all dealers effecting transactions in the Exchange Notes may be required to
deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes receive by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer other than commissions or concessions of any
brokers or dealers and will indemnify the
123
<PAGE> 128
holders of the Exchange Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the Exchange Notes offered hereby
will be passed upon for the Company by Greenberg Traurig Hoffman Lipoff Rosen &
Quentel, P.A., Miami, Florida.
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 are included in reliance upon the report of such firm given 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 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: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-4 (together with all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act, with respect to the Exchange
Offer. 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.
124
<PAGE> 129
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> 130
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> 131
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> 132
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> 133
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> 134
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> 135
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> 136
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> 137
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> 138
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> 139
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> 140
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> 141
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> 142
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> 143
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> 144
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> 145
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> 146
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> 147
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> 148
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.
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
F-20
<PAGE> 149
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
AUGUST 31,
-------------
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 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
F-21
<PAGE> 150
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-22
<PAGE> 151
MEGO MORTGAGE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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> 152
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 Original 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 Original 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> 153
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> 154
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> 155
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> 156
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> 157
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> 158
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY BY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... 1
Risk Factors.......................... 11
The Exchange Offer.................... 25
Use of Proceeds....................... 35
Capitalization........................ 36
Selected Financial Data............... 37
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 41
Business.............................. 58
Management............................ 78
Principal Stockholders................ 88
Certain Transactions.................. 90
Description of the Notes.............. 92
Description of Capital Stock.......... 121
Certain Federal Income Tax
Considerations...................... 122
Plan of Distribution.................. 123
Legal Matters......................... 124
Experts............................... 124
Available Information................. 124
Index to Financial Statements......... F-1
</TABLE>
---------------------
Until , 1998, (90 days after the date of this Prospectus), all dealers
effecting transactions in the Exchange Notes, whether or not participating in
this Exchange Offer, may be required to deliver a Prospectus. This is in
addition to the obligations of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
======================================================
======================================================
$40,000,000
MEGO MORTGAGE
CORPORATION
[MEGO MORTGAGE
CORPORATION LOGO]
OFFER FOR ALL OUTSTANDING
12 1/2% SENIOR SUBORDINATED NOTES
SERIES B DUE 2001
IN EXCHANGE FOR
12 1/2% SENIOR SUBORDINATED NOTES
SERIES C DUE 2001
------------------------
PROSPECTUS
------------------------
, 1997
======================================================
<PAGE> 159
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 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
II-1
<PAGE> 160
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 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.
II-2
<PAGE> 161
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
3.1(4) -- Amended and Restated Certificate of Incorporation of the
Registrant.
3.2(4) -- By-Laws of thc Registrant, as amended.
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.
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.
</TABLE>
II-3
<PAGE> 162
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
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.
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.
</TABLE>
II-4
<PAGE> 163
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
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.
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.
</TABLE>
II-5
<PAGE> 164
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
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(7) -- 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(7) -- 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(7) -- Credit Agreement dated as of October 27, 1997 between the
Registrant and Textron Financial Corporation, as Agent.
10.47(7) -- Security Agreement, dated as of October 27, 1997 between the
Registrant and Textron Financial Corporation, as Agent.
10.48(7) -- Note, dated October 27, 1997 issued by the Registrant to
Textron Financial Corporation.
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 -- Promissory Note dated April 17, 1997 and 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.
</TABLE>
II-6
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
10.59* -- Loan Purchase Agreement dated April 18, 1997 between the
Registrant and First Alliance Mortgage Company.
10.60(7) -- 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.
12.1 -- Computation of earnings to fixed charges.
21.1(7) -- 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).
25.1(3) -- Statement of eligibility of trustee
27.1(6) -- Financial Data Schedule (for SEC use only)
99.1* -- Letter of Transmittal
</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.
(7) Filed as part of the Registration Statement on Form S-1 filed by the
Company, as amended (File No. 333-39935) and incorporated herein by
reference.
II-7
<PAGE> 166
ITEM 22. UNDERTAKINGS
(a) (1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement: (i) to include any
prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement; (iii) to include any material information with respect
to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-8
<PAGE> 167
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 26, 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 26, 1997
- -----------------------------------------------------
Jerome J. Cohen
/s/ JEFFREY S. MOORE President, Chief Executive November 26, 1997
- ----------------------------------------------------- Officer and Director
Jeffrey S. Moore (Principal Executive
Officer)
/s/ JAMES L. BELTER Executive Vice President, November 26, 1997
- ----------------------------------------------------- Chief Financial Officer and
James L. Belter Treasurer (Principal
Accounting Officer)
/s/ ROBERT NEDERLANDER Director November 26, 1997
- -----------------------------------------------------
Robert Nederlander
/s/ HERBERT B. HIRSCH Director November 26, 1997
- -----------------------------------------------------
Herbert B. Hirsch
/s/ DON A. MAYERSON Director November 26, 1997
- -----------------------------------------------------
Don A. Mayerson
/s/ SPENCER I. BROWNE Director November 26, 1997
- -----------------------------------------------------
Spencer I. Browne
/s/ JEREMY WIESEN Director November 26, 1997
- -----------------------------------------------------
Jeremy Wiesen
</TABLE>
II-9
<PAGE> 1
EXHIBIT 10.45
SERVICING AGREEMENT
By and Among
MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-4,
the Issuer,
U.S. BANK NATIONAL ASSOCIATION,
D/B/A FIRST BANK NATIONAL ASSOCIATION,
as Indenture Trustee and Co-Owner Trustee
NORWEST BANK MINNESOTA, N.A.,
as Master Servicer
and
MEGO MORTGAGE CORPORATION,
as Servicer
-------
MEGO MORTGAGE HOME LOANS
-------
Dated as of August 16, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I DEFINITIONS.............................................................................................3
SECTION 1.01. DEFINITIONS.....................................................................................3
SECTION 1.02. FORMS..........................................................................................12
SECTION 1.03. INTERPRETATION.................................................................................12
SECTION 1.04. INTEREST CALCULATIONS..........................................................................12
ARTICLE II REPRESENTATIONS, WARRANTIES AND COVENANTS.............................................................12
SECTION 2.01. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE INDENTURE TRUSTEE.............................12
SECTION 2.02. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SERVICER......................................13
SECTION 2.03. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE MASTER SERVICER...............................16
SECTION 2.04. NOTICE TO MASTER SERVICER......................................................................17
ARTICLE III [RESERVED]...........................................................................................17
ARTICLE IV ASSIGNMENT OF AGREEMENT...............................................................................18
SECTION 4.01. ASSIGNMENT OF RIGHTS...........................................................................18
SECTION 4.02. ASSIGNMENT OF SERVICING OBLIGATIONS............................................................18
ARTICLE V FURTHER COOPERATION; CONFLICTS.........................................................................19
SECTION 5.01. REVIEW OF SERVICING REPORTS....................................................................19
SECTION 5.02. CONFLICTS......................................................................................19
SECTION 5.03. INSPECTIONS; OTHER ASSISTANCE..................................................................19
ARTICLE VI SERVICING DUTIES OF THE SERVICER......................................................................20
SECTION 6.01. GENERAL SCOPE OF DUTIES........................................................................20
SECTION 6.02. SPECIFIC DUTIES; COLLATERAL PROTECTION.........................................................21
SECTION 6.03. SERVICING RECORD; COLLECTIONS; REMITTANCES TO COLLECTION ACCOUNT...............................23
SECTION 6.04. ANNUAL STATEMENT AS TO COMPLIANCE; NOTICE OF TERMINATION EVENTS................................26
SECTION 6.05. COMPENSATION...................................................................................28
SECTION 6.06. ADVANCES; COMPENSATING INTEREST................................................................29
SECTION 6.07. REIMBURSEMENT OF ADVANCES......................................................................30
SECTION 6.08. MODIFICATIONS, WAIVERS, AMENDMENTS AND CONSENTS................................................30
SECTION 6.09. DUE-ON-SALE; DUE-ON-ENCUMBRANCE................................................................31
SECTION 6.10. FORECLOSURE....................................................................................32
SECTION 6.11. SALE OF FORECLOSED PROPERTIES..................................................................33
SECTION 6.12. MANAGEMENT OF REAL ESTATE OWNED................................................................34
SECTION 6.13. INSPECTIONS....................................................................................35
SECTION 6.14. MAINTENANCE OF INSURANCE.......................................................................35
SECTION 6.15. RELEASE OF FILES...............................................................................36
SECTION 6.16. [RESERVED].....................................................................................38
SECTION 6.17. SEGREGATION OF LOANS; REPORTS..................................................................38
SECTION 6.18. LATE REPORT CHARGE.............................................................................38
ARTICLE VII TERMINATION AND LIABILITIES..........................................................................39
SECTION 7.01. VOLUNTARY TERMINATION..........................................................................39
SECTION 7.02. INVOLUNTARY TERMINATION OF SERVICER............................................................40
</TABLE>
(i)
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION 7.03. SERVIER'S DUTIES UPON TERMINATION; PAYMENT TO SERVICER.........................................43
SECTION 7.04. AGREEMENT TO PAY ATTORNEYS' FEES...............................................................44
ARTICLE VIII INSURANCE COVERAGE..................................................................................45
SECTION 8.01. FIDELITY BOND COVERAGE.........................................................................45
SECTION 8.02. ERRORS AND OMISSIONS INSURANCE.................................................................45
SECTION 8.03. LIABILITY INSURANCE............................................................................45
ARTICLE IX NOTICE OF CLAIMS......................................................................................46
SECTION 9.01. NOTICE OF CLAIMS...............................................................................46
SECTION 9.02. USE OF COUNSEL.................................................................................46
ARTICLE X [RESERVED].............................................................................................47
ARTICLE XI MISCELLANEOUS PROVISIONS..............................................................................47
SECTION 11.01. AMENDMENTS, CHANGES AND MODIFICATIONS.........................................................47
SECTION 11.02. GOVERNING LAW.................................................................................47
SECTION 11.03. NOTICES.......................................................................................47
SECTION 11.04. SEVERABILITY..................................................................................47
SECTION 11.05. TERM OF AGREEMENT.............................................................................47
SECTION 11.06. LIMITATION OF LIABILITY OF PARTIES............................................................48
SECTION 11.07. LIMITATION OF LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS OF A PARTY...............48
SECTION 11.08. SURVIVAL OF OBLIGATIONS AND COVENANTS.........................................................48
SECTION 11.09. COUNTERPARTS..................................................................................48
SECTION 11.10. FORMS AND REPORTS.............................................................................48
SECTION 11.11. INDEMNIFICATION...............................................................................48
SECTION 11.12. RECITALS AND HEADINGS.........................................................................49
SECTION 11.13. RELATIONSHIP OF THE PARTIES...................................................................50
SECTION 11.14. [RESERVED]....................................................................................50
SECTION 11.15. RECORDATION OF AGREEMENT......................................................................50
</TABLE>
EXHIBIT A DESIGNATED SERVICERS
EXHIBIT B FORM OF SERVICER REPORT
EXHIBIT C LOAN SCHEDULE
(ii)
<PAGE> 4
THIS SERVICING AGREEMENT (the "Agreement"), is made and entered into as
of August 16, 1997 by and among MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-3 (the
"Issuer"), U.S. BANK NATIONAL ASSOCIATION, d/b/a FIRST BANK NATIONAL ASSOCIATION
(in its capacities as "Indenture Trustee" and "Co-Owner Trustee"), NORWEST BANK
MINNESOTA, N.A. (the "Master Servicer"), and MEGO MORTGAGE CORPORATION (the
"Servicer").
W I T N E S S E T H:
WHEREAS, the Servicer is engaged as an independent contractor in the
business of servicing conventional home improvement loans and debt consolidation
loans; and
WHEREAS, the Sale and Servicing Agreement contemplates the execution of
this Agreement and that the Loans will be serviced pursuant to the provisions
hereof; and
WHEREAS, the Issuer, the Indenture Trustee, the Master Servicer and the
Servicer desire to execute this Agreement to define the rights, duties and
obligations of the Servicer with respect to the servicing of the Loans;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained herein, the Issuer, the Indenture Trustee, the Master
Servicer and the Servicer each agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. DEFINITIONS.
All terms defined in this Article I (except as expressly provided
otherwise herein or unless the context otherwise requires) shall have the
respective meanings specified in this Article I for all purposes of this
Agreement. Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned in the Sale and Servicing Agreement and, if any
definition herein conflicts with the definition for such term in the Sale and
Servicing Agreement, the definition in the Sale and Servicing Agreement shall
control.
"ADVANCE" means the amounts paid and advanced by the Servicer pursuant
to Section 6.06(a) and (b) hereof.
"AGGREGATE PRINCIPAL BALANCE" means, as of any date of determination,
the sum of the principal balances for all Loans serviced by the Servicer
hereunder.
3
<PAGE> 5
"AGREEMENT" means this Servicing Agreement entered into by and among
the Issuer, the Indenture Trustee, the Co-Owner Trustee, the Master Servicer and
the Servicer, and all exhibits, amendments, and supplements hereto.
"BUSINESS DAY" means any day of the week other than Saturday, Sunday,
or a day which banking institutions in the City of New York or the city in which
either the Master Servicer's or the Servicer's servicing operations are located
are authorized or obligated by Law or executive order, or government decree to
close.
"CIVIL RELIEF ACT" means the Soldiers' and Sailors' Relief Act of 1940,
as amended.
"CLOSING DATE" means August 29, 1997.
"CODE" means the Internal Revenue Code of 1986, as it may be amended
from time to time, and Treasury Regulations promulgated thereunder.
"COLLECTION ACCOUNT" means the account established and maintained
pursuant to Section 6.03(g).
"CUMULATIVE NET LOSSES" means, 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 Loan received after the Due Period in which such Loan
became a Defaulted Loan.
"DEBTOR RELIEF LAWS" means any applicable state or federal liquidation,
conservatorship, bankruptcy, insolvency, rearrangement, moratorium,
reorganization, or similar debt or relief laws from time to time in effect
affecting the enforcement of creditors' rights generally and general equitable
principles (regardless of whether such enforcement is considered in a proceeding
in equity or at law).
"DEFAULTED LOAN" means a Loan with respect to which: (a) the Property
has been acquired through foreclosure or similar proceeding and sold, (b) any
portion of a Monthly Payment is more than 180 calendar days past due (without
giving effect to any grace period), or (c) the Servicer has determined in
accordance with customary servicing practices that the Loan is uncollectible.
"DESIGNATED SERVICER" means each Person, if any, listed on Exhibit A
hereto designated by the Servicer to perform the Servicer's duties, liabilities,
and obligations hereunder with respect to certain Loans, each of which
Designated Servicer (other than Preferred Equities Corporation) shall be an
Eligible Servicer and is subject to approval of the Master Servicer. Each
Designated Servicer listed on Exhibit A on the Closing Date shall be deemed to
have been approved by the Master Servicer.
"DISTRIBUTION DATE" means the twenty-fifth (25th) day of the month, or
if such 25th day is not a Business Day, the immediately following Business Day,
commencing in September 1997.
4
<PAGE> 6
"DUE DATE" means, with respect to each Loan, the date on which Monthly
Payments are due pursuant to the terms of the related Debt Instrument.
"DUE PERIOD" means, 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, with respect
to the September 1997 Distribution Date, the Due Period shall mean the period
from August 16, 1997 to August 31, 1997.
"ELIGIBLE ACCOUNT" means (i) a segregated trust account that is
maintained with the corporate trust department of a depository institution the
(A) 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, (ii) a segregated direct deposit account maintained with a depository
institution or trust company organized under the laws of the United States or
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 Agency.
"ELIGIBLE SERVICER" means a Person that is either (a) (i) is servicing
a portfolio of mortgage loans, (ii) is legally qualified to service, and is
capable of servicing, the Loans and has all licenses required to service
mortgage loans, (iii) has demonstrated the ability to service professionally and
competently a portfolio of mortgage loans similar to the Loans with reasonable
skill and care, and (iv) has a net worth calculated in accordance with generally
accepted accounting principles of at least $500,000, or (v) has been approved in
writing by Standard & Poor's, or (b) is Norwest Bank Minnesota, N.A., Mego
Mortgage Corporation or Preferred Equities Corporation.
"FILE" means the Indenture Trustee's Home Loan File or the Servicer's
Home Loan File, as the context requires.
"FORECLOSED PROPERTY" means with respect to any Mortgage Loan any
Property acquired by the Issuer 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 a
foreclosure or other proceeding with respect to the related
Loan; or
5
<PAGE> 7
(iii) the acquisition by the Co-Owner Trustee of title thereto by
operation of law.
"FORECLOSURE ADVANCE" has the meaning ascribed thereto in Section
6.06(b) of this Agreement.
"GNMA" means the Government National Mortgage Association.
"HUD" means the United States Department of Housing and Urban
Development and any successor thereto.
"INDENTURE TRUSTEE" means U.S. Bank National Association, d/b/a First
Bank National Association, or any duly appointed successor thereto.
"INDEPENDENT" means when used with respect to any specified Person,
such Person (i) is in fact independent of the Servicer, the Master Servicer, the
Depositor (as defined in the Sale and Servicing Agreement) or any of their
respective affiliates, (ii) does not have any direct financial interest in or
any material indirect financial interest in any of the Servicer, the Master
Servicer, the Depositor or any of their respective affiliates and (iii) is not
connected with any of the Servicer, 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 the Servicer, 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.
"INSURANCE PROCEEDS" means, with respect to any Property, all amounts
collected in respect of related title or other insurance policy, and not
required to be applied to the restoration of the related Property or paid to the
related Obligor.
"INTEREST ADVANCE" has the meaning ascribed thereto in Section 6.06(a)
of this Agreement.
"ISSUER" means Mego Mortgage Home Loan Owner Trust 1997-4.
"LAW" means all applicable statutes, laws, ordinances, regulations,
orders, writs, injunctions, or decrees of the United States or any agency
thereof, or any state or political subdivision thereof, or any court of
competent jurisdiction thereof.
"LIQUIDATION PROCEEDS" means amounts (other than Insurance Proceeds)
received in connection with the liquidation of Defaulted Loans, whether through
trustee's sale, foreclosure sale, or otherwise.
6
<PAGE> 8
"LOAN" means the home loans subject to this Agreement from time to time
identified on the Loan Schedule.
"LOAN RATE" means, with respect to any Loan, the fixed, floating or
adjustable annual rate of interest set forth in the related Debt Instrument, as
may be reduced by application of the Civil Relief Act.
"LOAN SCHEDULE" means, as of any date, the schedule of Loans serviced
under this Agreement and attached to this Agreement as Exhibit C. Each Loan
Schedule shall specify with respect to each Loan the information set forth in
Exhibit C hereto.
"MASTER SERVICER" means Norwest Bank Minnesota, N.A., a national
banking association, in its capacity as Master Servicer under this Agreement,
its successors in interest or any Person appointed as successor master servicer
pursuant to the provisions of the Sale and Servicing Agreement.
"MATURITY DATE" means, with respect to any Loan, the date on which the
last payment of principal is due and payable under the related Debt Instrument.
"MONTHLY PAYMENT" means with respect to any 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 6.08). The Monthly Payment related to a Servicer
Determination Date or a Distribution Date shall be the Monthly Payment due for
the preceding Due Period.
"MORTGAGE" means, with respect to any Mortgage Loan, the mortgage, deed
of trust or other security instrument creating a lien (and in a title theory
state the document conveying title to the Mortgaged Property as security for the
related Loan) or other security interest on the related Mortgaged Property.
"MORTGAGE LOAN" means a Mortgage Loan acquired by the Issuer pursuant
to the Sale and Servicing Agreement and serviced by the Servicer pursuant to
this Agreement.
"MORTGAGED PROPERTY" means, with respect to any Mortgage Loan, any fee
interest in the residential property subject to the lien of the related
Mortgage.
"MORTGAGOR" means, with respect to any Mortgage Loan, the Obligor(s) on
the related Debt Instrument.
"NET DELINQUENCY CALCULATION AMOUNT" means, 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
7
<PAGE> 9
of the preceding Due Period over (y) the aggregate of the amounts of Excess
Spread for the three preceding Distribution Dates.
"NET LOAN LOSSES" means as of any Distribution Date and with respect to
the Home Loans that become Defaulted Loans during the immediately preceding Due
Period, the aggregate Principal Balances of such Defaulted 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 Loans, including, without limitation, any Insurance Proceeds.
"NET LOAN RATE" means, with respect to each Loan, the related Loan Rate
less the rate at which the Servicing Fee is calculated.
"NONRECOVERABLE ADVANCES" means with respect to any Loan, (i) any
Interest Advance previously made and not reimbursed pursuant to Section
5.01(c)(i)(b) of the Sale and Servicing Agreement, or (ii) an Interest Advance
proposed to be made in respect of a Loan which, in either case, in the good
faith business judgment of the Master Servicer, as evidenced by an Officer's
Certificate delivered to the Servicer 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 Loan.
"NOTICE ADDRESS" means, unless each party is notified otherwise:
(a) As to the Issuer and the Owner Trustee:
Mego Mortgage Home Loan Owner Trust 1997-4
c/o Wilmington Trust Company
Corporate Trust Administration
Rodney Square North
1100 North Market Street
Wilmington, Delaware 19890
(b) As to the Indenture Trustee or Co-Owner Trustee:
U.S. Bank National Association, d/b/a First Bank
National Association
First Trust Center
180 East Fifth Street
Suite 200
St. Paul, Minnesota 55101
Attention: Structured Finance: Mego 1997-4
8
<PAGE> 10
(c) As to the Master Servicer:
Norwest Bank Minnesota, N.A.
11000 Broken Land Parkway
Columbia, Maryland 21044-3562
Attention: Master Servicing Department
Mego Mortgage Home Loan Owner Trust
1997-4
(d) As to the Servicer:
Mego Mortgage Corporation
1000 Parkwood Circle, Suite 500
Atlanta, Georgia 30339
Attention: Jeffrey S. Moore
President
"OBLIGOR" means, with respect to any Loan, the obligor(s) on the
related Debt Instrument.
"OFFICER'S CERTIFICATE" means a certificate executed by a Servicing
Officer certifying that (i) the Servicer has complied with all of the terms and
conditions hereof and (ii) the representations, warranties, and covenants
contained in Article II hereof are true and correct as of the date of such
certificate and (iii) as to such other matters as required by this Agreement.
"OWNER TRUSTEE" means Wilmington Trust Company, as owner trustee under
the Trust Agreement, and any successor owner trustee under the Trust Agreement.
"PAYMENT" means with respect to any Loan or the related Foreclosed
Property and any Distribution Date or related Servicer Determination Date, all
amounts received or collected on account of principal and interest by or on
behalf of the 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 Servicer during the period commencing on the
first day of the preceding Due Period and ending prior to such Servicer
Determination Date) in respect of such 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 Loan (or, in the case of
any Foreclosed Property, to amounts previously due on the related Foreclosed
Loan) of any related Insurance Proceeds, Liquidation Proceeds, any related
condemnation awards or settlements or any payments made by any related guarantor
or third-party credit-support provider;
9
<PAGE> 11
(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 (and as defined in) Section
11.01(b) of the Sale and Servicing Agreement;
provided, however, that any amount the Servicer shall be entitled to retain as
additional servicer compensation pursuant to Section 6.05(a) shall be excluded
from the calculation of Payment.
"PERSON" means an individual, corporation, limited liability company,
partnership, association, joint-stock company, trust, unincorporated
organization or joint venture, or a court or a government or any agency or
political subdivision thereof.
"PRINCIPAL PREPAYMENT" means any payment made by the related Obligor or
other receipt of principal in full due on a Loan that is received in advance of
the scheduled maturity date of such Loan.
"PROPERTY" means a Mortgaged Property.
"SALE AND SERVICING AGREEMENT" means that certain Sale and Servicing
Agreement, dated as of August 16, 1997, by and among Mego Mortgage Home Loan
Owner Trust 1997-4, as Issuer, Financial Asset Securities Corp., as Depositor,
Mego Mortgage Corporation, as Seller and Servicer, Norwest Bank Minnesota, N.A.,
as Master Servicer, and U.S. Bank National Association, d/b/a First Bank
National Association, as Indenture Trustee and Co-Owner Trustee, relating to the
Mego Mortgage Home Loan Owner Trust 1997-4 Securities.
"SERVICER" means the servicer whose name and notice address appear on
the signature page of this Agreement, or any successor thereto appointed
pursuant to Article VII hereof with the consent of the Master Servicer and the
Indenture Trustee.
"SERVICER DETERMINATION DATE" means, except as provided in the next
sentence, with respect to any Distribution Date, the fifth (5th) Business Day
preceding each Distribution Date. The first such Servicer Determination Date
will be September 18, 1997.
"SERVICER REPORTING DATE" means the fifth (5th) Business Day preceding
each Servicer Determination Date, but in no event earlier than the tenth (10th)
calendar day of any month.
"SERVICING FEE" means, with respect to any Distribution Date (other
than the first Distribution Date), one-twelfth of the Servicing Fee rate of
1.00% times the Aggregate Principal Balance as of the opening of business on the
first day of the month preceding the month of such Distribution Date. With
10
<PAGE> 12
respect to the first Distribution Date, 15/360 times 1.00% times the Initial
Pool Principal Balance). The Servicing Fee shall be payable as provided in
Section 6.05 hereof.
"SERVICING OFFICER" means an officer of the Servicer responsible for
the administration and servicing of the Loans whose name and specimen signature
appear on a list of servicing officers furnished to the Master Servicer at
Closing, as such list may be amended from time to time.
"SERVICING RECORD" means the books and records for each Loan
established pursuant to Section 6.03.
"61+ DAY DELINQUENT LOAN" means, as of any Servicer Determination Date
or related Distribution Date, a Loan, other than a Defaulted Loan, with respect
to which any portion of a Monthly Payment is, as of the end of the related Due
Period, 61 days or more past due (without giving effect to any grace period, and
including Home Loans in foreclosure and Foreclosed Properties that are not
otherwise Defaulted Loans) and unpaid by the Obligor.
"61+ DELINQUENCY PERCENTAGE (ROLLING SIX MONTH)" means, as of any
Servicer 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 which is equal to the
aggregate principal balance of Loans that are 61+ Day Delinquent Loans as of the
end of such Due Period and the denominator of which is the Aggregate Principal
Balance of the Loans as of the end of such Due Period.
"TOTAL EXPECTED LOAN LOSS PERCENTAGE" means, as of any date of
determination, 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 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 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 and (d) the aggregate Principal
Balance of the 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.
"TRUST" means the Issuer.
SECTION 1.02. FORMS.
All forms specified by the text hereof or by reference to exhibits
attached hereto shall be substantially as set forth herein, subject to such
changes that do not alter the substantive rights of the parties hereto or as may
be required by applicable Laws hereafter enacted.
SECTION 1.03. INTERPRETATION.
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Unless the context requires otherwise, words of the masculine gender
shall be construed to include correlative words of the feminine and neuter
genders and vice versa, and words of the singular number shall be construed to
include correlative words of the plural number and vice versa. This Agreement,
and all the terms and provisions hereof, shall be liberally construed to effect
the purposes set forth herein and to sustain the validity of this Agreement.
SECTION 1.04. INTEREST CALCULATIONS.
All payments of interest on the Loans shall be accounted for on the
basis of a 30-day month and 360-day year. No Loan will be accounted for on the
basis of simple interest.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
SECTION 2.01. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
INDENTURE TRUSTEE.
The Indenture Trustee represents and warrants to, and covenants with,
the Master Servicer and the Servicer as of the Closing Date that:
(a) The Indenture Trustee is a national banking association
duly organized under the laws of the United States, is validly existing
and in good standing, and has the corporate power and authority under
the laws of the United States to conduct its corporate trust business
as now conducted.
(b) The Indenture Trustee has full power and authority to
enter into and perform all transactions contemplated herein and no
consent, approval, authorization, or order of any federal, state, or
local court or governmental agency or body governing or having
jurisdiction with respect to the Indenture Trustee's trust powers is
required for the Indenture Trustee to enter into this Agreement and to
perform its obligations hereunder.
(c) The execution, delivery, and performance by it of this
Agreement (a) do not violate any provision of any law or regulation
governing the banking and trust powers of the Indenture Trustee or any
order, writ, judgment, or decree of any court, arbitrator, or
governmental authority applicable to the Indenture Trustee or any of
its assets, (b) do not violate any provision of its corporate charter
or by-laws, or (c) to the best of its knowledge do not violate any
provision of, or constitute, with or without notice or lapse of time, a
default under, or result in the creation or imposition of any lien on
any of the property of the Issuer pursuant to the provisions of any
mortgage, indenture, contract, agreement or other undertaking other
than this Agreement to which it is a party.
(d) This Agreement has been duly executed and delivered by the
Indenture Trustee and constitutes the legal, valid, and binding
agreement of the Indenture Trustee,
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enforceable 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.
SECTION 2.02. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
SERVICER.
The Servicer represents and warrants to, and covenants with, the
Issuer, the Indenture Trustee and the Master Servicer as of the Closing Date
that:
(a) Servicer is a corporation duly organized, validly
existing, and in good standing under the laws of the jurisdiction of
its incorporation and has all licenses necessary to carry on its
business as now being conducted and is licensed, qualified and in good
standing in each state where the Property is located if the laws of
such state require licensing or qualification in order to conduct
business of the type conducted by Servicer and perform its obligations
hereunder; Servicer has corporate power and authority to execute and
deliver this Agreement and to perform in accordance herewith; the
execution, delivery and performance of this Agreement by Servicer and
the consummation of the transactions contemplated hereby have been duly
and validly authorized by all necessary corporate action; this
Agreement evidences the valid, binding and enforceable obligation of
Servicer, and all requisite corporate action has been taken by Servicer
to make this Agreement valid, binding and enforceable upon Servicer in
accordance with its terms, subject to the effect of Debtor Relief Laws,
none of which will effect the ownership of the Loans by the Issuer;
(b) All actions, approvals, consents, waivers, exemptions,
variances, franchises, orders, permits, authorizations, rights and
licenses required to be taken, given or obtained, as the case may be,
by or from any federal, state or other governmental authority or agency
that are necessary in connection with the execution and delivery by
Servicer of this Agreement, have been duly taken, given or obtained, as
the case may be, are in full force and effect on the date hereof, are
not subject to any pending proceedings or appeals (administrative,
judicial or otherwise) and either the time within which any appeal
therefrom may be taken or review thereof may be obtained has expired or
no review thereof may be obtained or appeal therefrom taken, and are
adequate to authorize the consummation of the transactions contemplated
by this Agreement on the part of Servicer and the performance by
Servicer of its obligations under this Agreement;
(c) Neither the execution and delivery of this Agreement, the
consummation of the transactions contemplated herein, nor the
fulfillment of or compliance with the terms of this Agreement will
result in the breach of any terms or provisions of the certificate of
incorporation or by-laws of Servicer or result in 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
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instrument to which Servicer or its property is subject, or result in
the violation of any law, rule, regulation, order, judgment or decree
to which Servicer or its property is subject;
(d) Servicer does not believe, nor does it have any reason or
cause to believe, that it cannot perform each and every covenant of the
Servicer contained in this Agreement;
(e) There is no action, suit, proceeding or investigation
pending or, to the best of Servicer's knowledge, threatened against
Servicer which, either in any one instance or in the aggregate, may (i)
result in any material adverse change in the business, operations,
financial condition, properties or assets of Servicer or in any
material impairment of the right or ability of Servicer to carry on its
business substantially as now conducted, or in any material liability
on the part of Servicer or of any action taken or to be taken in
connection with the obligations of Servicer contemplated herein, or
which would be likely to impair materially the ability of Servicer to
perform under the terms of this Agreement, or (ii) which would draw
into question the validity of this Agreement;
(f) Servicer 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 Servicer or its properties or
might have consequences that would materially and adversely affect the
execution and delivery of this Agreement and its performance hereunder;
(g) The Servicer is solvent and will not be rendered insolvent
as a result of the performance of its obligations pursuant to this
Agreement;
(h) The Servicer has not waived any default, breach, violation
or event of acceleration existing under any Debt Instrument or any
related Mortgage;
(i) The Servicer shall comply with, and shall service each
Loan, in accordance with the terms of this Agreement and all applicable
laws, and all reasonable instructions of the Master Servicer not in
conflict with any of the foregoing;
(j) The Servicer shall at all times act in good faith in a
commercially reasonable manner and shall comply with all applicable
state and federal laws affecting the servicing of the Loans;
(k) From time to time the Servicer shall report, as more fully
set forth in this Agreement, information relating to the Loans to the
Master Servicer and shall do every act and thing that may be necessary
or required to perform its duties under this Agreement;
(l) The 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
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in which the nature of its business requires such qualification, it
shall maintain all licenses, permits and 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. The
Servicer has no present intention to dissolve or otherwise dispose of
all or substantially all of its assets, and or to voluntarily
consolidate with or merge into any other entity or permit one or more
other entities to consolidate with or merge into it. If the Servicer
consolidates with or merges into another entity, or permits one or more
entities to consolidate or merge into it, or sells or otherwise
transfers to another such entity all or substantially all of its assets
and thereafter dissolves, and if the surviving, resulting, or
transferee entity, as the case may be, is not an Eligible Servicer or
is otherwise not reasonably acceptable to the Master Servicer, the
Servicer shall be deemed to have requested a voluntary termination
pursuant to Section 7.01 hereof;
(m) No information, Officer's Certificate, statement furnished
in writing, or report required hereunder, delivered by the Servicer to
the Master Servicer or its agents shall, to the best knowledge of the
Servicer, contain any untrue statement of a material fact or omit to
state a material fact necessary to make the information, certificate,
statement, or report not misleading and there has been no material
adverse change in the financial condition of the Servicer since the
date of the Servicer's most recent audited financial statements;
(n) The Servicer is a mortgage banker, state or national bank,
or a lender that actively provides servicing of loans on residential
housing, and the transactions contemplated by this Agreement are in the
ordinary course of business of the Servicer;
(o) The origination and collections practices used by the
Servicer and its respective affiliates with respect to the Loans have
been in all respects legal, proper, prudent and customary in the
mortgage lending and servicing business;
(p) The Servicer is an Eligible Servicer;
(q) The Servicer shall at all times maintain stockholders'
equity, calculated in accordance with generally accepted accounting
principles, of at least $32,000,000;
(r) The Servicer has caused and will cause to be performed any
and all acts required to be performed by the Servicer to preserve the
rights and remedies of the Indenture Trustee in any insurance policies
applicable to the Loans including, without limitation, in each case,
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 Indenture Trustee; and
(s) Neither this Agreement nor any statement, report or other
document furnished or to be furnished pursuant to this Agreement by
Servicer or in connection with the transactions contemplated hereby and
thereby by Servicer contains any untrue statement
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of material fact or omits to state a material fact necessary to make
the statements contained herein or therein not misleading.
(t) The Servicer's Home Loan Files will be located in the
State of Georgia and will not be removed to another state without an
Opinion of Counsel to the effect that such removal will not affect the
taxation of the Trust Estate.
SECTION 2.03. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE MASTER
SERVICER.
The Master Servicer represents and warrants to, and covenants with, the
Issuer, the Indenture Trustee and the Servicer as of the Closing Date that:
(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 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, has duly authorized the
execution, delivery and performance of this Agreement, has duly
executed and delivered this Agreement, and this Agreement, when duly
authorized, executed and delivered by the other parties hereto, 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, the
consummation of the transactions required of it herein or therein, nor
the fulfillment of or compliance with the terms and conditions of this
Agreement 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
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 upon the
execution and delivery of this Agreement and its performance of and
compliance with the terms hereof 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 of any federal, state or local governmental or regulatory
authority (A) asserting the invalidity of this Agreement, (B) seeking
to prevent the consummation of any of the transactions contemplated by
this Agreement, or (C) seeking any determination or ruling that would
materially and adversely
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affect the ability of the Master Servicer to perform its obligations
under this Agreement; and
(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.
SECTION 2.04. NOTICE TO MASTER SERVICER.
If, at any time, any representation or warranty of the Servicer set
forth in this Agreement is not true and correct in any material respect as of
the time made, the Servicer shall immediately notify the Master Servicer of such
fact and provide a full and accurate explanation thereof.
ARTICLE III
[RESERVED]
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ARTICLE IV
ASSIGNMENT OF AGREEMENT
SECTION 4.01. ASSIGNMENT OF RIGHTS
(a) The Servicer acknowledges that, from time to time, (i) the
Indenture Trustee and the Master Servicer may assign their respective right,
title and interest in this Agreement with respect to one or more Loans and (ii)
the Indenture Trustee may appoint a successor master servicer hereunder, as
provided below. The Indenture Trustee or the Master Servicer, as the case may
be, shall provide the Servicer ten (10) days prior notice of any such assignment
or appointment; provided, however, that the failure to give such notice shall
not affect the validity of such assignment or appointment. The Servicer consents
to each such assignment and waives any further notice thereof.
In the event the Master Servicer is terminated as master servicer under
the Sale and Servicing Agreement, a successor master servicer shall be appointed
pursuant to the terms of the Sale and Servicing Agreement and the Indenture
Trustee or such successor master servicer shall provide the Servicer written
notice of such appointment. Upon such appointment, the successor master servicer
shall be the successor in all respects to the Master Servicer in its capacity as
master servicer under this Agreement and shall be subject to all the
responsibilities, restrictions, duties and liabilities relating thereto placed
on the Master Servicer by the terms and provisions of this Agreement. Upon
receipt of the written notice described in this section, and until such
successor master servicer is terminated or replaced, the Servicer shall
recognize and deal with the successor master servicer under this Agreement as
master servicer hereunder for all purposes without any further action on the
part of any party hereto.
SECTION 4.02. ASSIGNMENT OF SERVICING OBLIGATIONS.
Except as otherwise provided in Section 2.02(n) and this Section 4.02,
the Servicer may not assign any of its rights or privileges hereunder or make or
enter into any delegation, subcontract, authorization or appointment with
respect to any of its duties, liabilities or obligations hereunder without the
prior written consent of the Master Servicer. Exhibit A hereto contains the name
of each Designated Servicer, each of which Designated Servicer (other than any
Designated Servicer listed on Exhibit A on the Closing Date) is subject to the
approval of the Master Servicer. Notwithstanding any subservicing agreement, any
of the provisions of this Agreement relating to agreements or arrangements
between the Servicer and a Designated Servicer, or reference to actions taken
through a Designated Servicer or otherwise, the Servicer shall remain obligated
and primarily liable for the servicing and administration of the Loans in
accordance with the provisions of this Agreement without diminution of such
obligation or liability by virtue of such subservicing agreement or arrangement
or by virtue of indemnification from the Designated Servicer and to the same
extent and under the same terms and conditions as if the Servicer alone were
servicing and administering the Loans. For purposes of this Agreement, the
Servicer shall be deemed to have received payments on Loans when any Designated
Servicer has received such payment. The Servicer shall be entitled to enter into
any agreement with a Designated Servicer providing for indemnification of the
Servicer by the Designated
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Servicer, and nothing contained in this Agreement shall be deemed to limit or
modify such indemnification.
ARTICLE V
FURTHER COOPERATION; CONFLICTS
SECTION 5.01. REVIEW OF SERVICING REPORTS.
In the event the reports pertaining to any Loan are, in the reasonable
judgment of the Master Servicer, defective in accordance with the terms of this
Agreement, Servicer shall cooperate with the Master Servicer in curing such
defects.
SECTION 5.02. CONFLICTS.
Nothing in this Agreement shall preclude the Servicer, in its
individual capacity, from entering into other mortgage loans or other financial
transactions with any Obligor other than refinancing any Loan.
SECTION 5.03. INSPECTIONS; OTHER ASSISTANCE.
(a) Servicer shall allow, and shall cause each Designated
Servicer to allow, the Master Servicer's and the Indenture Trustee's
representatives at any time and from time to time, during normal
business hours, reasonable access to Servicer's or Designated
Servicer's premises where services in respect of the Loans are being
provided to examine Servicer's performance under this Agreement and to
cooperate with Servicer's and the Designated Servicer's staff to
facilitate the servicing of the Loans. The Servicer shall provide, and
shall cause each Designated Servicer to provide, to representatives of
the Master Servicer and the Indenture Trustee reasonable access to the
documentation regarding the Loans and to those employees of the
Servicer who are responsible for the performance of the Servicer's
duties hereunder and to the books of account, records, reports, and
other papers of the Servicer and to allow such persons to discuss its
affairs, finances, and accounts with those employees and independent
accountants for the purpose of reviewing or evaluating the financial
condition of the Servicer. In each case, such access (i) shall be
afforded upon reasonable request and during normal business hours, and
(ii) shall not interfere with the normal business operations of the
Servicer or the Designated Servicer, as applicable. Nothing in this
section shall derogate from the obligation of the Servicer to observe
any applicable law prohibiting disclosure of information regarding the
Obligors, and the failure of the Servicer to provide access as provided
in this section as a result of such obligation shall not constitute a
breach of this section.
(b) If the Master Servicer or the Indenture Trustee receives
any written inquiries, legal notices or other legal documents, or other
written communications relating to a
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Loan, the recipient shall furnish a copy thereof to the Servicer within
five Business Days of receipt of such notice or other communication.
ARTICLE VI
SERVICING DUTIES OF THE SERVICER
SECTION 6.01. GENERAL SCOPE OF DUTIES.
(a) From and after the date hereof, the Servicer shall service
and administer the Loans pursuant to the terms hereof without regard to
the terms of any other agreement with respect to the servicing of the
Loans.
(b) The Servicer's duties hereunder are generally to provide
loan administration servicing on behalf of the Master Servicer as agent
for the Issuer, including but not limited to the collection of payments
for the reduction of principal and application of interest, the
remittance of collected payments, certain foreclosure services as
specified herein, and the employment of collection personnel to perform
such services. Subject to the terms and conditions set forth herein,
the Servicer shall service and administer the Loans in accordance with
all requirements of applicable law, and otherwise in accordance with
all other terms of this Agreement and the terms of the respective Loans
(including the related Debt Instruments and Mortgages), on behalf of
the Master Servicer as agent for the Issuer and consistent with the
ordinary practices of prudent mortgage lending institutions, but
without regard to: (i) any relationship that the Servicer or any
affiliate of the Servicer may have with the related Obligor; (ii) the
Servicer's obligation to make Advances pursuant to this Agreement; or
(iii) the Servicer's right to receive compensation for its services
hereunder.
(c) Subject only to the above-described servicing standards
and the terms of this Agreement and of the respective Loans, the
Servicer shall have full power and authority, to do or cause to be done
any and all things in connection with such servicing and administration
which it may deem necessary or desirable (including exercising any
remedy under any 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 the Sale and
Servicing Agreement or applicable law, and except that the consent of
the Indenture Trustee shall be required prior to the taking of any
action with respect to any Loan or Property as to which the Servicer is
on notice of any potential environmental liabilities with respect to
such Property), subject only to applicable laws, this Agreement, and
the respective Loans. In performing its obligations hereunder the
Servicer shall at all times act in good faith in a commercially
reasonable manner. In connection with the servicing of the Loans, the
Servicer shall prepare and execute any and all financing statements,
continuation statements and other
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documents or instruments necessary to maintain the lien created by any
Loan on the related Property. The Servicer may agree to modifications,
waivers, amendments, subordinations, consents to or with respect to any
documents related to the Loan only as permitted by Section 6.08. The
Servicer shall notify the Master Servicer of any such action and the
date thereof, and shall provide the Master Servicer on each Servicer
Reporting Date a status report with respect to such actions. The
Servicer shall deliver to the Master Servicer for deposit in the
related File an original counterpart of the agreement relating to such
action and a copy of such agreement for the Master Servicer's records
promptly following the execution thereof. The Servicer shall service
and administer the Loans in accordance with applicable state and
federal law and shall provide to the borrowers under the Loans any
reports required to be provided to them thereby. At the direction of
the Master Servicer, the Indenture Trustee shall execute any powers of
attorney and other documents, prepared or provided by the Servicer,
necessary or appropriate to enable the Servicer to carry out its
servicing and administrative duties hereunder and necessary to maintain
the lien created by any Mortgage on the related Mortgaged Property or
any portion thereof; provided, however, that the Servicer shall
indemnify the Indenture Trustee and the Master Servicer for any loss to
the Indenture Trustee or the Master Servicer resulting from any
negligence with respect to, or misuse of, any such power of attorney by
the Servicer.
(d) The Servicer agrees to provide the Master Servicer with
such information as is necessary to enable the Master Servicer to
monitor the number and aggregate principal balance of Loans that are
the subject of modifications, waivers or amendments pursuant to Section
6.01(c), and as may be necessary to enable the Master Servicer to
comply with its reporting obligations under the Sale and Servicing
Agreement.
SECTION 6.02. SPECIFIC DUTIES; COLLATERAL PROTECTION.
(a) From the Closing Date to the termination of this
Agreement, Servicer shall service the Loans as required herein, as
servicer on behalf of Master Servicer as agent for the Issuer and,
subject to the provisions of this Agreement, shall do all things
necessary to perform such services, including without limitation:
(i) preparing and maintaining such books and
records and preparing and transmitting such reports concerning
the Loans as Servicer prepares and maintains for loans held
for its own account and as may be reasonably requested by the
Master Servicer (provided that such books and records shall be
clearly marked to reflect the ownership of each Loan by the
Owner Trustee and the Co-Owner Trustee and the pledge thereof
to the Indenture Trustee for the benefit of the
Securityholders);
(ii) receiving, processing and accounting for
payments and credits on the Loans;
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(iii) responding as appropriate in writing or by
telephone to borrower inquiries, requests or billing error
notices and making appropriate adjustments;
(iv) use its best efforts to collect all payments
called for under the terms and provisions of the Loans, and
shall, to the extent such procedures shall be consistent with
this Agreement, follow such collection procedures as it would
follow with respect to mortgage loans comparable to the Loans
and held for its own account; provided, however, that the
Servicer shall not modify or waive any provision of any Loan
except as provided in Section 6.08;
(v) providing supplies, telecommunications and
data transmission and processing equipment and programs as
needed to permit the proper administration and operation of
all Loans; and
(vi) remitting all collected payments to the
Collection Account, as applicable, in accordance with Section
6.03(e) of this Agreement.
(b) Servicer shall be responsible for safeguarding the
Indenture Trustee's interest in each Property and rights under any
agreements relating to the Loans, including, without limitation:
(i) Upon written notice to the Servicer from the
Master Servicer of the necessity for same, the Servicer shall
notify in writing each of the Obligors of the sale of the
Loans to the Issuer;
(ii) Servicer shall promptly notify the Master
Servicer whenever it receives notice or otherwise becomes
aware of any notice of liens, bankruptcies, condemnations,
probate proceedings, tax sales, partitions, local ordinance
violations, condemnations or proceedings in eminent domain
that would, in Servicer's judgment, impair the Indenture
Trustee's security; and Servicer shall on behalf of the Master
Servicer as agent for the Indenture Trustee undertake
appropriate action to preserve its security for the related
Loan; and
(iii) Servicer shall advise the Master Servicer with
respect to requests for partial releases, easements,
substitutions, divisions, subordinations, alterations, or
waivers of security instrument terms and shall enter into any
of the foregoing only in accordance with Section 6.01(c).
(c) Servicer shall not solicit any Obligor to refinance the
related Loan.
SECTION 6.03.00 SERVICING RECORD; COLLECTIONS; REMITTANCES TO
COLLECTION ACCOUNT.
(a) The Servicer shall establish and maintain books and
records (a "Servicing Record") in which the Servicer shall record all
payments received or collected by or on
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behalf of the Servicer in respect of each Loan and each Foreclosed
Property relating to such Loan and all amounts owing to the Servicer in
compensation for services rendered by the Servicer hereunder and in
reimbursement of costs and expenses incurred by the Servicer hereunder
in respect of such Loan.
(b) Except as otherwise provided herein, amounts received or
collected by the Servicer from or on behalf of any Obligor or in
respect of any Foreclosed Property shall be recorded to the applicable
Servicing Record:
(i) in the case of any amount received or collected
directly by the Servicer, promptly following deposit of the
receipt or collection in the Collection Account (but in any
event not later than the Servicer Determination Date next
following the date of receipt or collection by the Servicer);
and
(ii) amounts received or collected by the Servicer in
connection with the sale of any Loan or any Foreclosed
Property shall be so recorded on and as of the date of
receipt. Each Servicing Record shall separately reflect
amounts so received or collected by the Servicer in each Due
Period. Any prepaid Monthly Payment received on any Loan shall
be recorded as a prepaid monthly payment when received. All
Payments received from or on behalf of an Obligor shall be
allocated first, to the oldest payment overdue at such time
and apportioned, as to such oldest payment first to scheduled
interest (other than default interest) due on such oldest
payment date and second, to any principal due and payable in
accordance with the related Debt Instrument, and third, to
default interest, late charges and other amounts payable under
the related obligations.
(c) The Servicer shall record separately to each Servicing
Record relating to each Servicer Determination Date, on a Loan-by-Loan
basis, each of the following Payments collected or received by the
Servicer, the Master Servicer or the Indenture Trustee in respect of
each Loan and each Foreclosed Property relating to such Loan:
(i) all payments on account of principal (including
all Principal Prepayments);
(ii) all payments on account of interest;
(iii) all amounts paid by or on behalf of the related
Obligor in respect of Foreclosure Advances previously advanced
by the Servicer;
(iv) all revenues received or collected in respect
of any Foreclosed Property including, without limitation, all
proceeds of the sale of any Foreclosed Property pursuant to
Section 6.11 of this Agreement;
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(v) all Liquidation Proceeds and any Insurance
Proceeds not required to be applied to the restoration of the
property securing the Loan or paid to the Obligor;
(vi) all proceeds received in connection with the
purchase or repurchase of a Loan by Mego Mortgage Corporation
pursuant to the Sale and Servicing Agreement and all
Substitution Adjustment Amounts;
(vii) 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 a Loan and not specified above; and
(viii) any and all other amounts received in respect
of Loans and not specified above.
(d) Notwithstanding anything to the contrary herein, the
Servicer shall not be required to record in the Servicing Record, and
the Servicer shall not have any right or interest in, any amount due or
received with respect to any Loan or any related Foreclosed Property
subsequent to the date of repurchase of such Loan or Foreclosed
Property from the Issuer.
(e) On or before each Servicer Determination Date, the
Servicer shall separately record in each Servicing Record, the items
required to be included in the Servicer Certificate and additionally
the following items with respect to the Loans to the extent not
included therein:
(i) any unpaid or current Servicing Fees due the
Servicer with respect to the preceding Due Period;
(ii) the amount of fees incurred during the
preceding Due Period to be paid to any Independent contractor
hired by the Servicer to operate and manage a Foreclosed
Property;
(iii) all amounts due as of the end of the preceding
Due Period in reimbursement of Interest Advances and for which
the Servicer is entitled to be reimbursed in accordance with
Section 6.07, and all collections of interest in respect of
related Loans;
(iv) all amounts due as of the end of the preceding
Due Period in reimbursement of Foreclosure Advances and for
which the Servicer is entitled to be reimbursed in accordance
with Section 6.07 (separately identifying the type and amount
of each expense then due);
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(v) based on information provided to the Servicer
by the Master Servicer, all Other Fees required to be
distributed pursuant to the Sale and Servicing Agreement, as
applicable on the next succeeding Distribution Date;
(vi) promptly following each Distribution Date, the
aggregate amount of the Master Servicer Fee, the Servicer Fee,
the Indenture Trustee Fee and the Owner Trustee Fee Reserve
paid to the Master Servicer, the Servicer, the Indenture
Trustee and the Servicer, respectively, on such Distribution
Date, in each case pursuant to the Sale and Servicing
Agreement;
(vii) promptly following each Distribution Date, the
aggregate amount of Interest Advances and Foreclosure Advances
reimbursed to the Master Servicer or the Servicer;
(viii) the principal balance of Loans that became
Defaulted Loans during the prior Due Period;
(ix) the 61+ Day Delinquency Percentage (Rolling
Six Month) and the Net Delinquency Calculation Amount;
(x) identification by loan number, Obligor name,
address of Property, and principal balance of each Loan with
respect to which the Master Servicer has requested that the
Indenture Trustee obtain the environmental report required by
the Sale and Servicing Agreement in connection with deciding
to foreclose on or otherwise acquire title to the related
Property;
(xi) the principal balance of each Loan with
respect to which the Master Servicer, in consultation with the
Servicer, has determined under Section 6.10(a) in good faith,
in accordance with customary mortgage loan servicing
practices, that all amounts which it expects to receive with
respect to such Loan have been received; and
(xii) any other information, requested of the
Servicer in writing by the party making such request, with
respect to the Loans reasonably required by the Master
Servicer or the Indenture Trustee to determine the amount of
required distributions under the Sale and Servicing Agreement
and determinable by the Servicer without undue burden from the
Servicer or the items otherwise required to be maintained in
each Servicing Record.
(f) [reserved]
(g) The Indenture Trustee shall maintain an account (a
"Collection Account") in the name and for the benefit of the Indenture
Trustee at a depository institution selected by it, which shall be an
Eligible Account and shall provide the location and designation of
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such account to the Master Servicer in writing. All Payments received
by Servicer (except for the additional servicing compensation to be
retained by the Servicer pursuant to Section 6.05 hereof) shall be
deposited by the Servicer into the Collection Account no later than the
second Business Day following the date of receipt thereof by the
Servicer. The Servicer shall have no right to make withdrawals from the
Collection Account. The Indenture Trustee shall withdraw amounts
deposited into the Collection Account no later than two (2) Business
Days prior to each Distribution Date.
(h) If any amount is deposited in a Collection Account in
error, the Servicer may notify the Master Servicer and the Indenture
Trustee in writing of the amount of such deposit and in connection
therewith shall be required to provide such information to the Master
Servicer as may be necessary in the opinion of the Master Servicer to
verify the accuracy of such certification. The Master Servicer shall
make such verification within one Business Day following receipt of
such notice, and if it agrees with the Servicer that such amount was
deposited in error in the Collection Account, promptly instruct the
Indenture Trustee in writing to withdraw such erroneous amount from the
Collection Account and remit it directly to the Servicer. Upon receipt
of instructions from the Master Servicer, the Indenture Trustee shall
promptly withdraw the erroneous deposit and remit the same to the
Servicer; provided, however, that if the Master Servicer has not
received evidence reasonably satisfactory to it of the Servicer's
entitlement to reimbursement pursuant to this section, or if the
Servicer has prior thereto been reimbursed, the Master Servicer shall
have no obligation to instruct the Indenture Trustee to make, and the
Indenture Trustee shall not be obligated to make, any distribution in
respect of such amount.
(i) The Servicer covenants and agrees, to the extent required
by law, to send to each Obligor with respect to a Loan specified in a
written notice from the Indenture Trustee or the Master Servicer, if
any, a written notice informing such Obligor of the sale of its Loan to
the Issuer.
SECTION 6.04. ANNUAL STATEMENT AS TO COMPLIANCE; NOTICE OF TERMINATION
EVENTS.
(a) The Servicer will deliver to Master Servicer, the
Indenture Trustee, the Owner Trustee and the Depositor within 150 days
following the end of each fiscal year of the Servicer, an Officer's
Certificate stating with respect to the Loans serviced hereunder, that:
(i) a review of the activities of the Servicer
during the preceding fiscal year (or in connection with the
first such Officer's Certificate the period from the Closing
Date through the end of such fiscal year) and of the
Servicer's performance under this Agreement with respect to
such Loans has been made under the supervision of the officer
who signed such Officer's Certificate;
(ii) to the best of such officer's knowledge, based
on such review, the Servicer has fulfilled all its obligations
under this Agreement throughout such year (or such portion of
such year), or if there has been a default in the fulfillment
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of any such obligation, such Officer's Certificate shall
specify each such default known to such signer and the nature
and status thereof and what action the Servicer proposes to
take with respect thereto; and
(iii) the Servicer's fidelity bond coverage, errors
and omissions insurance coverage and liability insurance
coverage continue in full force and effect and continue to
comply with the requirements of Sections 8.01, 8.02, and 8.03
of this Agreement.
(b) Within 150 days following the end of each fiscal year of
the Servicer, the Servicer at its expense, shall cause a firm of
Independent Accountants acceptable to the Master Servicer to furnish to
the Master Servicer, the Owner Trustee and the Indenture Trustee a
report, prepared in accordance with generally accepted accounting
principles (the "Accountant's Servicer Report") including: (i) an
opinion on the financial position of the Servicer at the end of its
most recent fiscal year, and the results of operations and changes in
financial position of the Servicer for such year then ended on the
basis of an examination conducted in accordance with generally accepted
auditing standards, and (ii) a letter or letters to the effect that,
based on an examination of certain specified documents and records
relating to the servicing of the Servicer's mortgage loan portfolio
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. The Servicer shall be required to
pay all expenses incurred by it in connection with such examination,
including fees and disbursements of independent accountants and
expenses incurred in connection with distribution of reports to the
Master Servicer.
(c) In addition, the Servicer will provide to the Master
Servicer, the Owner Trustee and the Indenture Trustee a report of a
firm of Independent Accountants acceptable to the Master Servicer which
shall state that (1) a review in accordance with agreed upon procedures
was made of such number of Servicer Certificates which the Independent
Accountants deem necessary to carry out their review of 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 Servicer
Certificates so examined were found. The Accountant's Report shall also
indicate that the firm is independent of the Servicer within the
meaning of the Code of Professional Ethics of the American Institute of
Certified Public Accountants.
(d) At the expense of the Servicer, annually within 90 days of
each anniversary of the Closing Date, the Servicer (and each Designated
Servicer) shall cause a firm of nationally recognized independent
public accountants designated by the Master Servicer to
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review, in accordance with agreed upon procedures, the servicing books
and records of the Servicer (and any Designated Servicer) to evaluate
the Servicer's performance under this Agreement in order to confirm
that the records of the Servicer accurately reflect collections,
delinquencies and other relevant data with respect to the Loans
reported to the Master Servicer, and that such data is accurately
reported to the Master Servicer. Any such review shall be conducted
upon reasonable notice during normal business hours. Any exceptions or
errors disclosed by such procedures shall be included in a report
delivered to the Master Servicer, the Indenture Trustee, the Owner
Trustee and the Depositor (the "Servicer Review Report").
(e) The Servicer shall deliver to the Master Servicer, the
Owner Trustee and the Indenture Trustee promptly after having obtained
knowledge thereof, but in no event later than two 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 cause
the Servicer to be involuntarily terminated under Section 7.02.
SECTION 6.05. COMPENSATION.
In consideration for services rendered hereunder, the Servicer
shall be entitled to the following amounts; provided, however, that the right to
receive compensation for servicing the Loans may not be transferred in whole or
in part except in connection with the transfer of all of the Servicer's
responsibilities and obligations as permitted under this Agreement:
(a) the Servicing Fee, which shall be due and payable to the
Servicer as distributed from the Note Distribution Account by the
Indenture Trustee pursuant to the Sale and Servicing Agreement; and
(b) in respect of each Loan, all prepayment penalties and
assumption and processing fees paid by any Obligor, and all similar
fees customarily associated with the servicing of home improvement
loans paid by any Obligor (including, but not limited to, late charges)
in each case paid to and retained by the Servicer from related Obligor
payments designated specifically for such purpose.
SECTION 6.06. ADVANCES; COMPENSATING INTEREST.
(a) With respect to each Loan (other than a Defaulted Loan),
not later than the close of business on the Servicer Determination
Date, the Servicer shall advance from the Servicer's own funds or from
funds on deposit in the Collection Account in respect of amounts
available for future Distribution Dates, an amount equal to the amount,
if any, by which (i) the aggregate portions of Monthly Payments due on
all Loans at the related Net Loan Rate during the preceding Due Period
allocable to interest exceeds (ii) the aggregate amount to be deposited
into the Note Distribution Account with respect to all Loans and such
Distribution Date and allocated in accordance with Section 6.03(c) to
interest (an "Interest Advance"). Notwithstanding anything in this
paragraph to the contrary, the
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Servicer shall not be required to make any Interest Advance (i) if the
Master Servicer determines that such Interest Advance, if made, would
constitute a Nonrecoverable Advance, or (ii) with respect to shortfalls
in interest resulting from application of the Civil Relief Act or from
full or partial prepayments of any Loan. 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 Servicer in the remittance for the following month.
The Servicer shall provide the Master Servicer written evidence of the
remittance to the Collection Account of each Interest Advance on the
Business Day following the day of remittance.
(b) The Servicer shall advance (each, a "Foreclosure Advance")
from its own funds the following amounts in respect of any Mortgage
Loan or Foreclosed Property, as applicable, only if (i) in the
Servicer's good faith judgment, the Servicer would make such an advance
if it or an affiliate held the affected Mortgage Loan or Foreclosed
Property for its own account and (ii) the Master Servicer, after
consultation with the Servicer, determines that such amounts will be
recoverable from related Payments or foreclosure proceeds and approves
such advance in writing:
(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 proceedings in respect of
any such Loan pursuant to Section 6.10;
(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 to 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 preserve
and maintain each Foreclosed Property;
(v) all fees and expenses payable to any
Independent Contractor hired to operate and manage a
Foreclosed Property; and
(vi) all fees and expenses of any independent
appraiser or other real estate expert retained pursuant to
Section 6.11.
SECTION 6.07. REIMBURSEMENT OF ADVANCES.
(a) The Servicer shall be entitled to be reimbursed for any
Interest Advance on a Loan from Payments in respect of that Loan or, if
such Loan shall become a Defaulted
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Loan or an Interest Advance shall become a Nonrecoverable Advance and
the Servicer shall not have been fully reimbursed for any Interest
Advances with respect to such Loan, the Servicer shall be entitled to
be reimbursed for the outstanding amount of such Interest Advances from
Payments of unrelated Loans to the extent such amounts are distributed
to the Master Servicer with respect to Interest Advances by the Issuer
pursuant to the Sale and Servicing Agreement. No interest shall accrue
on any unreimbursed Interest Advance for any period prior to the
reimbursement thereof.
(b) The Servicer shall be entitled to be reimbursed for any
Foreclosure Advance in respect of any Loan from Payments in respect of
that Loan, or if the Payments for such Loan are insufficient to
reimburse the full amount of the Foreclosure Advance, from Payments of
unrelated Loans to the extent such amounts are distributed to the
Master Servicer with respect to Foreclosure Advances by the Issuer
pursuant to the Sale and Servicing Agreement. No interest shall accrue
on any unreimbursed Foreclosure Advance for any period prior to the
reimbursement thereof.
(c) The Master Servicer shall offset against amounts otherwise
distributable to the Servicer under this section, amounts, if any,
which were required to be deposited in any Collection Account with
respect to the related Due Period, but which were not so deposited.
SECTION 6.08. MODIFICATIONS, WAIVERS, AMENDMENTS AND CONSENTS.
(a) The Servicer shall not agree to any modification, waiver,
or amendment of any provision of any Loan unless, in the Servicer's
good faith judgment, (i) such modification, waiver, or amendment would
minimize the loss that might otherwise be experienced with respect to
such Loan, and (ii) such Loan has experienced a payment default or a
payment default is reasonably foreseeable by the Servicer.
(b) Notwithstanding anything herein to the contrary, the
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 any senior lien.
(c) The Servicer shall notify the Master Servicer and the
Indenture Trustee of any modification, waiver or amendment of any
provision of any 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 have
been satisfied.
SECTION 6.09. DUE-ON-SALE; DUE-ON-ENCUMBRANCE.
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(a) If any Loan contains a provision, in the nature of a
"due-on-sale" clause, which by its terms:
(i) provides that such 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 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 Loan is an asset of the Issuer, the Servicer
shall consult with the Master Servicer regarding any right the Trust or
the Indenture Trustee may have as the obligee of record with respect to
such Loan (1) to accelerate the payments thereon, or (2) to withhold
its consent to any such sale or other transfer, and shall take such
action as Master Servicer shall direct.
(b) If any Loan contains a provision, in the nature of a
"due-on-encumbrance" clause, which by its terms:
(i) provides that such 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 Loan is an asset of the Trust, the Servicer
shall consult with the Master Servicer regarding any right the Trust or
the Indenture Trustee may have as the obligee of record with respect to
such Loan (x) to accelerate the payments thereon, or (y) to withhold
its consent to the creation of any such lien or other encumbrance, and
shall take such action as the Master Servicer shall direct.
SECTION 6.10. FORECLOSURE.
(a) If any Monthly Payment due under any Loan is not paid when
the same becomes due and payable, or if the Obligor fails to perform
any other covenant or obligation under the Loan and such failure
continues beyond any applicable grace period, the Servicer shall,
following consultation with the Master Servicer, take appropriate
action with respect to such Loan that the Servicer deems is in the best
interest of the Issuer.
In the event that the Servicer, in consultation with the
Master Servicer, determines not to proceed against the Property or
Obligor, as applicable, on or before the Determination Date following
such determination the Servicer shall determine in good faith in
accordance with customary servicing practices that all amounts which it
expects to receive with respect to such
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Loan have been received. If the Servicer makes such a determination, it
shall be reflected in the Servicing Record in accordance with Section
6.03.
(b) With respect to any Loan, unless otherwise prohibited by
applicable law, the Servicer upon consultation with the Master
Servicer, on behalf of the Trust and the Indenture Trustee, may, at any
time, institute 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.
In accordance with the criteria for proceeding against the
Property set forth in Section 6.10(a), the 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 Servicer's reasonable judgement such action is likely to result in
a positive economic benefit to the Issuer by creating net liquidation
proceeds (after reimbursement of all amounts owed with respect to such
Loan to the Master Servicer or the Servicer) and provided that, with
respect to any Property, prior to taking title thereto, the 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
Servicer and 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 Servicer shall follow such practices and procedures in a
manner which is consistent with the Servicer's procedure for
foreclosure with respect to similar loans held in the Servicer's
portfolio for its own account or, if there are no such loans, loans
serviced by the Servicer for others, giving due consideration to
accepted servicing practices of prudent lending institutions. To the
extent required by Section 6.06, the 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 6.12. 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 6.11. SALE OF FORECLOSED PROPERTIES.
(a) The Servicer may sell Property only on the terms and
subject to the conditions set forth in this Section 6.11 and in Section
6.10.
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(b) Upon approval of the Master Servicer, the Servicer may
offer to sell to any Person any Foreclosed Property, if and when the
Servicer determines consistent with the servicing standards contained
herein and the criteria set forth in Section 6.10 that such a sale
would be in the best interests of the Issuer, but shall, in any event,
so offer to sell any Foreclosed Property in accordance with the
criteria set forth in Section 6.10. The Servicer shall give the Master
Servicer and 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
Loan, unreimbursed Foreclosure Advances plus the outstanding
amount of any liens superior in priority to the lien of the
foreclosed Loan; and
(ii) all unpaid interest accrued thereon at the
related Net Loan Rate through the date of sale.
In the absence of any such bids, the Servicer shall accept the highest
bid from any Person that the Servicer determines to be a fair price for
such Foreclosed Property, if the highest bidder is a Person that is
Independent, or by an Independent appraiser retained by the Servicer
and approved 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 Servicer shall offer the affected Foreclosed
Property to any Person that is Independent 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 that
is not Independent and that had submitted a bid previously may resubmit
its original bid, and the Servicer may accept, upon approval of the
Master Servicer, the highest outstanding cash bid, regardless of from
whom received and shall follow any instructions of the Master Servicer
in effecting the sale of any Property.
(c) In determining whether any bid constitutes a fair price
for any Foreclosed Property, the Servicer shall take into account, and
any independent 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 Property or Foreclosed
Property, the physical condition of the Property or Foreclosed Property
and the state of the local and national economies.
(d) Subject to the provisions of Section 6.10, the Servicer
shall act on behalf of the Master Servicer for the benefit of the
Issuer 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 Issuer, the Indenture Trustee, or the Master Servicer, and shall
be consummated in accordance with the terms of this Agreement. If
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consummated in accordance with this Agreement, the Servicer shall not
have any liability to the Indenture Trustee or the Master Servicer with
respect to the purchase price for any Foreclosed Property accepted and
approved by the Master Servicer.
SECTION 6.12. MANAGEMENT OF REAL ESTATE OWNED.
(a) If the Issuer acquires any Foreclosed Property pursuant to
Section 6.10, the 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 Servicer manages and operates similar property
owned by the Servicer or any of its affiliates on such terms and for
such period as the Master Servicer may direct after consultation with
the Servicer.
(b) The Servicer may contract with any Independent contractor
for the operation and management of any Foreclosed Property, provided
that:
(i) the terms and conditions of any such contract
may not be inconsistent herewith;
(ii) any such contract shall require, or shall be
administered so as to require, that the Independent Contractor
remit rents and other revenue generated from the property to
the 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 6.12(c)
relating to any such contract or to actions taken through any
such Independent Contractor shall be deemed to relieve the
Servicer of any of its duties and obligations to the Master
Servicer or the Issuer with respect to the operation and
management of any such Foreclosed Property; and
(iv) the 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 Servicer shall be entitled to enter into any agreement with any
Independent Contractor performing services for it related to its duties
and obligations hereunder which contract may provide for
indemnification of the Servicer by such Independent Contractor, and
nothing in this Agreement shall be deemed to limit or modify such
indemnification. The 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
6.06(b)(v), in the manner provided in Section 6.07(b).
SECTION 6.13. INSPECTIONS.
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The Servicer shall inspect or cause to be inspected each Property and
Foreclosed Property at such times and in such manner as are consistent with the
servicing standards set forth in Section 6.01.
SECTION 6.14. MAINTENANCE OF INSURANCE.
(a) The Servicer shall maintain or cause to be maintained for
each Foreclosed Property such types and amounts of insurance as the
Master Servicer shall deem reasonable. The Servicer shall maintain for
each Loan, fire and hazard insurance naming Mego Mortgage Corporation
as loss payee thereunder providing for extended coverage in an amount
that is at least equal to the least of (i) the maximum insurable value
of the improvements securing the Loan from time to time, (ii) the
combined principal balance owing on such Loan and any mortgage loan
senior to such 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 Loan is located in a federally designated flood
area, the hazard insurance to be maintained for the related Loan shall
include flood insurance to the extent such flood insurance is available
and the 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 Loan, (B) the combined principal balance
owing on such Loan and any mortgage loan senior to such Loan and
(C) the maximum amount of insurance available under the National Flood
Insurance Act of 1968, as amended.
(b) Any amounts collected by the Servicer under any insurance
policies shall be paid over or applied by the Servicer as follows:
(i) in the case of amounts received in respect of any
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 Loan, or, to the extent not so
used,
(B) in reduction of the principal balance of
the related Loan, in which event such amounts shall
be credited to the related Servicing Record,
unless the related Loan documents require a different
application, in which case such amounts shall be applied in
the manner provided therein; and
(ii) subject to Section 6.12, in the case of amounts
received in respect of any Foreclosed Property, for the
restoration or repair of such Foreclosed Property, unless the
Servicer determines, consistent with the servicing standards
set forth in Section 6.01, that such restoration or repair is
not in the best economic interest of the Issuer, in which
event such amounts shall be credited, as
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of the date of receipt, to the applicable Servicing Record as
an Obligor payment received from the operation of such
Foreclosed Property.
SECTION 6.15.00 RELEASE OF FILES.
(a) If, with respect to any Loan:
(i) the outstanding principal balance of such Loan
plus all interest accrued thereon and other amounts due
thereunder shall have been paid;
(ii) the Servicer shall have received, in escrow,
payment in full of such Loan in a manner customary for such
purposes;
(iii) such Loan has been repurchased or a Qualified
Substitute Loan has been conveyed to the Trust pursuant to the
Sale and Servicing Agreement;
(iv) the related Foreclosed Property has been sold
pursuant to Section 6.11; or
(v) such Loan or the related Foreclosed Property
has been sold in connection with the termination of the
Issuer;
then, in each case, the Servicer shall have delivered to the Indenture
Trustee and the Master Servicer an Officer's Certificate, signed by a
Servicing Officer, to the effect that the Servicer has complied with
all of its obligations hereunder with respect to such Loan and
requesting that the Indenture Trustee release to the Servicer the
related File, then the Indenture Trustee shall, within three (3)
Business Days or such shorter period as may be required by applicable
law, release, or cause to be released, the related File (unless such
file previously has been released) 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 Loan
in the Servicer or such other Person as may be specified in such
certification, 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 Loan, the Servicer may request the release of a File
by providing to the Indenture Trustee and the Master Servicer a written
request of the Servicer, signed by a Servicing Officer and stating the
reason for release of the related File (or any requested portion
thereof) and the date by which the Servicer expects to return the
related File (or any requested portion thereof). Such receipt shall
obligate the Servicer, to return the 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 the 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
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returned the File (or such portion thereof) to the Indenture Trustee,
upon receipt of a certificate certifying that any of such condition has
been satisfied. The Indenture Trustee shall provide a copy of such
receipt to the Master Servicer.
(c) All documents and instruments held in the custody of the
Servicer (as agent for the Indenture Trustee) shall be held by the
Servicer for the benefit of, and as agent for, the Certificateholders
and the Indenture Trustee as the owner thereof. It is intended that by
the Servicer's agreement pursuant to this Section 6.15(c) the Indenture
Trustee shall be deemed to have possession of the documents and
instruments in the custody of the Servicer for purposes of Section
9-305 of the Uniform Commercial Code of the State in which such
documents or instruments are located. The Servicer shall promptly
report to the Master Servicer and the Indenture Trustee, any failure by
it to hold the documents and instruments as herein provided and shall
promptly take appropriate action to remedy any such failure. In acting
as custodian of such documents and instruments, the Servicer agrees not
to assert any legal or beneficial ownership interest in the Loans or
such documents or instruments. The Servicer agrees to indemnify the
Master Servicer, the Certificateholders 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 Master Servicer, the Certificateholders or the
Indenture Trustee as the result of any act or omission by the Servicer
relating to the maintenance and custody of such documents or
instruments; provided, however, that the Servicer will not be liable
(i) for any portion of any such amount resulting from the negligence or
misconduct of the Master Servicer, any Certificateholder or the
Indenture Trustee and (ii) for any portion of any such amount resulting
from the Servicer's compliance with any instructions or directions
consistent with this Agreement issued to the Servicer by the Master
Servicer, the Certificateholders or the Indenture Trustee. The Master
Servicer and the Indenture Trustee shall have no duty to monitor or
otherwise oversee the Servicer's performance as custodian hereunder.
SECTION 6.16. [RESERVED].
SECTION 6.17. SEGREGATION OF LOANS; REPORTS.
The Servicer shall segregate any documents related to the Loans in its
possession from all other assets. Not later than 3:00 p.m. (Eastern time) on the
Servicer Reporting Date following each Due Period, the Servicer shall submit to
the Master Servicer a Servicer Certificate, substantially in the forms attached
hereto as Exhibit B, which shall include, without limitation, (i) an accounting
report summarizing the activity in the Servicing Record with respect to payments
collected, (ii) default management reports summarizing the status of delinquent
Loans, Loans in bankruptcy and Loans in foreclosure including, without
limitation, the Servicer's then current 61+ Delinquency Percentage (Rolling Six
Month) and the current Net Delinquency Calculation Amount, (iii) certification
that all amounts required to be deposited to the Collection Account for the
related Due Period were so deposited and that the amount of any such withdrawals
from the Collection Account for such Due Period conform to the amounts of such
required withdrawals as reported by the Servicer to the Master
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Servicer, or identifying the amount of any discrepancies, and (iv) a statement
to the effect that the Loans are owned by the Issuer, and shall provide from
time to time as requested by the Master Servicer, such additional information as
the Master Servicer may reasonably require.
SECTION 6.18.00 LATE REPORT CHARGE.
The Servicer hereby acknowledges that the Servicer Certificate required
to be provided to the Master Servicer under Section 6.17 hereof must be
delivered in a timely manner to enable the Master Servicer to meet its reporting
obligations to the Indenture Trustee. The following charges will apply to all
late Servicer Certificates and to all Servicer Certificates which are incomplete
and adversely affect the ability of the Master Servicer to meet its reporting
obligations:
<TABLE>
<S> <C>
First occurrence: No charge.
Second occurrence: $100 for each day (not to exceed $500) report is late or remains incomplete as
described above.
Third occurrence: $250 for each day (not to exceed $1,250) report is late or remains incomplete as
described above.
Fourth occurrence: $500 for each day (not to exceed $2,500) report is late or remains incomplete
as described above.
Fifth or more: $500 for each day (not to exceed $2,500) report is late or remains incomplete
as described above. Servicer may be subject to termination under
Section 7.02 hereof.
</TABLE>
The Master Servicer will notify the Servicer of the first occurrence and will
provide reasonable assistance to the Servicer to remedy the situation. Following
the first occurrence, the Master Servicer will notify the Servicer in writing of
each subsequent occurrence. Payment of all charges as identified in the Master
Servicer's notice to the Servicer is required to be made within ten days of
billing by the Master Servicer. The Master Servicer, in its sole discretion, may
waive any of the charges provided for in this Section 6.18.
ARTICLE VII
TERMINATION AND LIABILITIES
SECTION 7.01. VOLUNTARY TERMINATION.
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The Servicer shall not have the right to resign from the obligations
and duties hereby imposed on it, unless it shall be prohibited by applicable law
from performing such obligation and duties, in which case, the Servicer shall
cooperate in the orderly transfer of servicing to the successor subservicer
designated by the Master Servicer, and the Servicer shall continue to perform
such duties as are not prohibited until such transfer is completed. Except as
permitted by Section 2.02(n), or Article IV, Servicer shall have no right or
privilege to assign, subcontract, or transfer its rights and duties under this
Agreement. The Servicer may request a voluntary termination of this Agreement.
Upon such request, the Servicer will use its best efforts to secure three bids
from qualified subservicers and present the bids to the Master Servicer. The
Master Servicer shall consent to such voluntary termination if (a) one or more
of such bids are reasonably acceptable to the Master Servicer or (b) the Master
Servicer has consented to the substitution of a different substitute subservicer
whose name has not been submitted by the Servicer, provided that, in either
case, the successor servicer (a) is an Eligible Servicer, and (b) executes an
agreement pursuant to which the successor subservicer accepts and assumes all of
the Servicer's duties, liabilities and obligations hereunder from and after the
date of such successor subservicer's acceptance and makes representations and
warranties similar to those set forth in Section 2.02 hereof. A bid from a
successor subservicer who does not meet the foregoing requirements shall not be
deemed acceptable to the Master Servicer. Upon termination of the Servicer
pursuant to this Section 7.01 and the completion of all of the Servicer's
obligations under this Agreement, the Servicer shall be entitled to all amounts
paid by the successor subservicer with respect to the transfer of the Servicer's
duties, liabilities and obligations hereunder less any costs and expenses of the
Issuer, the Indenture Trustee or the Master Servicer incurred in connection with
such transfer. No resignation of the Servicer shall become effective until the
Master Servicer or the Indenture Trustee or a successor servicer, as accepted
above, shall have assumed the Servicer's servicing responsibilities. The
Servicer shall comply with Section 7.03 hereof in the event of the consent of
the Master Servicer to such voluntary termination.
SECTION 7.02. INVOLUNTARY TERMINATION OF SERVICER.
The Master Servicer or the Indenture Trustee at the direction of the
Majority Securityholders may, by written notice, terminate all of the Servicer's
rights pursuant to this Agreement with respect to all Loans upon the happening
of any one or more of the following events:
(a) Failure of the Servicer to deposit to the Collection
Account all moneys relating to the Loans received by the Servicer no
later than the second Business Day following receipt thereof by the
Servicer, which failure continues unremedied for two Business Days;
(b) Upon two Business Days after the related Servicer
Determination Date, failure of the Servicer to make any Advance as
required by this Agreement, failure of the Servicer to purchase any
Loan as required pursuant to Article III or Section 6.10(b), or failure
of Servicer to make any other advance of funds at the time and in the
manner required by this Agreement;
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(c) Any representation, warranty, or statement of the Servicer
made in this Agreement or any certificate, report, or other writing
delivered pursuant hereto shall be determined to have been false in any
material respect as of the time made;
(d) Failure of the 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 thirty (30)
days after the earlier of (1) the date on which the Servicer gives
notice of such failure to the Master Servicer and (2) the date on which
written notice of such failure, requiring the same to be remedied,
shall have been given to the Servicer by the Master Servicer; provided
that, if the Master Servicer determines in the reasonable exercise of
its discretion, that such failure cannot be corrected under any
reasonable circumstances despite the Servicer's best efforts within
such period, the Master Servicer, may immediately terminate the
Servicer pursuant to this section;
(e) Issuance or entry of a decree or order of a court, agency
or supervisory authority having jurisdiction in the premises appointing
a conservator, receiver, liquidator, assignee, trustee, custodian,
sequestrator or other similar official in any bankruptcy, insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceeding affecting the Servicer or substantially all of its
properties, or for the winding-up or liquidation of its affairs, if
such decree or order shall have remained in force undischarged or
unstayed for a period of sixty (60) days or the commencement of 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 and such case is not dismissed within sixty
(60) days;
(f) Consent by the Servicer to the appointment of a
conservator, receiver or liquidator in any bankruptcy, insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceeding affecting the Servicer or substantially all of its
properties;
(g) Admission in writing by the Servicer of its inability to
pay its debts generally as they mature, or the filing of a petition to
take advantage of any applicable bankruptcy or insolvency statute or
Debtor Relief Laws, the making of an assignment for the benefit of
creditors, or the voluntary suspension of payment of its obligations;
(h) Termination of the Sale and Servicing Agreement;
(i) Failure of the Servicer for a period of more than thirty
days to pay to the Master Servicer any late charges assessed pursuant
to Section 6.18 hereof after written notice thereof to Servicer;
(j) Failure by the Servicer to deliver to the Master Servicer
the Servicer Certificate by the Servicer Reporting Date, or failure on
the part of the Servicer to observe its covenants and agreements set
forth in Section 2.02(i);
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(k) The entry of a decree or order for relief by a court or
regulatory authority having jurisdiction in respect of the 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 Servicer or of any substantial part of their respective
properties or ordering the winding up or liquidation of the affairs of
the 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;
(l) The commencement by the 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 Servicer to the appointment of or
taking possession by a receiver, liquidator, assignee, trustee,
custodian, sequestrator or other similar official of the Servicer or of
any substantial part of its property or the making by the Servicer of
an assignment for the benefit of creditors or the failure by the
Servicer generally to pay its debts as such debts become due or the
taking of corporate action by the Servicer in furtherance of any of the
foregoing or the admission in writing by the Servicer of an inability
to pay its debts as they become due;
(m) The Master Servicer determines that the performance by the
Servicer of its servicing duties hereunder with respect to the Loans is
not, in the reasonable opinion of the Master Servicer, after
consultation with the Servicer, in conformity with acceptable standards
after considering the following factors: (A) the terms and conditions
of this Agreement, (B) conformity with the servicing standards, (C) the
Servicer's practices as of the Closing Date, provided that such
practices are either (i) consistent with industry standards for the
servicing of loans similar to the Loans or (ii) the Servicer's
historical practices and procedures; or
(n) The Total Expected Loan Loss Percentage exceeds 21.1250%
prior to the fifth anniversary of the Cut-Off Date or 31.6875%
thereafter.
then, and in each and every such case, the Master Servicer or the Indenture
Trustee at the direction of the Majority Securityholders may, by notice in
writing to the Servicer, terminate all of the rights and obligations of the
Servicer as Servicer under this Agreement and in and to the Loans and the
proceeds thereof. On and after the receipt by the Servicer of such written
notice, and the appointment of and acceptance of a successor subservicer, all
authority, power, obligations and responsibilities of the Servicer with respect
to the Loans shall pass to and be vested in and become the responsibilities and
obligations of such successor subservicer. The Servicer agrees to cooperate with
the successor subservicer in effecting the termination of the responsibilities
and rights of the Servicer hereunder. The
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Servicer shall give written notice of the occurrence of any event in this
Section 7.02 to the Master Servicer within two (2) days of the happening of such
event.
The Master Servicer, with the consent of the Indenture Trustee, who may
request consent of the Majority Securityholders, may waive any default by the
Servicer under this Section 7.02. Upon any such waiver of a past default, such
default shall cease to exist, and any 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.
SECTION 7.03. SERVIER'S DUTIES UPON TERMINATION; PAYMENT TO SERVICER.
(a) From and after the receipt by the Servicer of such written
notice of its termination from the Master Servicer or the Indenture
Trustee pursuant to Section 7.02, or upon a termination pursuant to
Section 7.01 hereof:
(i) The Master Servicer may terminate all of the
rights and obligations of the Servicer under this Agreement;
(ii) The Servicer shall cooperate with the Master
Servicer and the Indenture Trustee in effecting the
termination of the Servicer's responsibilities and rights
hereunder, including, without limitation, the transfer to the
successor servicer for administration by it of all cash
amounts that shall at the time be held by the prior Servicer
for deposit, or have been deposited by the prior Servicer, in
the Collection Accounts or thereafter received with respect to
the Loans and the delivery to the successor servicer of all
Files and a computer tape in readable form containing the
Servicing Record and any other information necessary to enable
the successor servicer to service the Loans and the other
Issuer Property;
(iii) All authority and power of the Servicer under
this Agreement shall pass to and be vested in the Master
Servicer or its designee, and without limiting the generality
of the foregoing, the Master Servicer or such designee shall
be authorized and empowered to execute and deliver, on behalf
and at the expense of the Servicer, as attorney-in-fact or
otherwise, any and all documents and other instruments, and to
do or accomplish all other acts and things necessary or
appropriate to effect the transfer and endorsement or
assignment of the Loans and the Loan Files and related
documents, or otherwise; and
(iv) The Servicer shall promptly (and in any event
no later than ten Business Days subsequent to such notice)
provide the Master Servicer, or its designee with all
documents and records requested by it to enable it to assume
the Servicer's functions hereunder, and cooperate with the
Master Servicer or its designee in effecting the termination
of the Servicer's responsibilities and rights hereunder,
including, without limitation, the transfer within one
Business Day to the Master Servicer or its designee for
administration by it of all cash amounts
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which shall at the time be or should have been remitted
pursuant to this Agreement or thereafter be received with
respect to the Loans or any related property (provided,
however, that the Servicer shall continue to be entitled to
receive all amounts accrued or owing to it under this
Agreement on or prior to the date of such termination).
(b) The Servicer agrees to indemnify and hold the Issuer, the
Indenture Trustee and the Master Servicer harmless from any and all
loss, damage and expenses (including reasonable attorney's fees) that
any of them may incur in connection with the Servicer's failure to
perform in compliance with this Agreement.
(c) Notwithstanding anything to the contrary herein, the
Servicer shall remain liable for all liabilities and obligations
incurred by it as Servicer hereunder prior to the time that termination
under Section 7.01 or Section 7.02 becomes effective, including the
obligation to indemnify the Master Servicer pursuant to Section 11.12
hereof in connection with the servicing of the Loans under this
Agreement prior to such termination. In addition, the Master Servicer
may set off and deduct any amounts owed by the terminated Servicer from
any amounts payable to the terminated Servicer. The terminated Servicer
shall grant the Master Servicer reasonable access to the terminated
Servicer's premises at the terminated Servicer's expense.
(d) The Servicer agrees to cooperate with any successor
subservicer in effecting the transfer of the Servicer's subservicing
responsibilities and rights hereunder, including, without limitation,
the transfer to such successor subservicer of all relevant records and
documents and a computer tape in readable form (including any Files in
the possession of the Servicer and the Servicing Record) and all
amounts credited to the Servicing Record or thereafter received with
respect to the Loans and not otherwise permitted to be retained by the
Servicer pursuant to this Agreement. In addition, the Servicer, at its
sole cost and expense, shall prepare, execute, and deliver to the
successor subservicer all Files and shall do or accomplish all other
acts necessary or appropriate to effect such termination and transfer
of subservicing responsibilities.
(e) If requested by the Master Servicer, the successor
servicer shall direct the Obligors to make all payments under the Loans
directly to the successor servicer, or to a lockbox established by the
Servicer at the direction of the Master Servicer at the prior
Servicer's expense.
SECTION 7.04. AGREEMENT TO PAY ATTORNEYS' FEES.
If it is determined in a judicial proceeding that any party to this
Agreement has failed to perform under any provision of this Agreement, and if
one or more of the other parties shall employ attorneys or incur other expenses
to enforce the performance, or observance of the terms of this Agreement by the
nonperforming party, or to perform such obligations itself or themselves, then
such
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parties, to the extent permitted by Law, shall be reimbursed by the
nonperforming party, on demand, for reasonable attorneys' fees and other
out-of-pocket expenses.
ARTICLE VIII
INSURANCE COVERAGE
SECTION 8.01. FIDELITY BOND COVERAGE.
At its sole cost and expense, Servicer shall obtain and maintain at all
times during the term of this Agreement fidelity bond coverage with a
responsible surety company with respect to all of Servicer's employees as may be
necessary to protect the Issuer, the Indenture Trustee and the Master Servicer
against losses, including, without limitation, those arising from theft,
embezzlement, fraud, or misplacement of funds, money, or documents. The issuer,
policy terms and forms and amounts of coverage, including applicable
deductibles, shall be satisfactory to the Master Servicer, but in any event the
amount of such coverage shall conform to FNMA levels. The Servicer shall provide
to the Master Servicer upon request written evidence of such insurance coverage.
Servicer agrees to notify the Master Servicer and the Indenture Trustee in
writing within five (5) days of the cancellation or termination of any such
coverage. Servicer further agrees to notify the Master Servicer and the
Indenture Trustee in writing within five (5) days of filing a claim under such
coverage and to assign to the Master Servicer for the benefit of the Indenture
Trustee and the Issuer the proceeds of such coverage allocable to losses
suffered with respect to the property of the Issuer.
SECTION 8.02. ERRORS AND OMISSIONS INSURANCE.
At its sole cost and expense, Servicer shall obtain and maintain at all
times during the term of this Agreement errors and omissions insurance coverage
covering 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 satisfactory to the Master Servicer, but in any event the
amount of such coverage shall conform to FNMA levels. Servicer agrees to notify
the Master Servicer and the Indenture Trustee in writing within five (5) days of
the cancellation or termination of any such errors and omissions insurance
coverage. The Servicer shall provide to the Master Servicer and the Indenture
Trustee upon request written evidence of such insurance coverage.
SECTION 8.03. LIABILITY INSURANCE.
At its sole cost and expense, Servicer shall obtain and maintain at all
times during the term of this Agreement such comprehensive general liability,
automobile liability, workers' compensation and other insurance as may be
necessary to protect the interests of Servicer, the Issuer, the Indenture
Trustee and the Master Servicer in connection with the performance of this
Agreement, and which, with respect to property acquired by the Servicer upon
foreclosure of a Loan, shall provide for comprehensive general liability
coverage in such amount and on such terms as may be required by the Master
Servicer. The Servicer shall provide to the Master Servicer and the Indenture
Trustee upon
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request written evidence of such insurance coverage. Servicer agrees to notify
the Master Servicer and the Indenture Trustee in writing within five (5) days of
the cancellation or termination of any such coverage.
ARTICLE IX
NOTICE OF CLAIMS
SECTION 9.01. NOTICE OF CLAIMS.
Servicer shall promptly notify the Master Servicer and the Indenture
Trustee in writing of any and all litigation and claims made or threatened
against the Issuer, the Indenture Trustee, the Master Servicer or Servicer in
connection with this Agreement of which the Servicer becomes aware other than
those relating solely to the foreclosure of prior liens on Property. Likewise,
each of the Master Servicer and the Indenture Trustee agrees to notify the
Servicer promptly in writing of any and all litigation and claims made or
threatened against the Issuer, the Indenture Trustee, the Master Servicer or
Servicer in connection with this Agreement of which such party becomes aware
other than those relating solely to the foreclosure of prior liens on Property.
SECTION 9.02. USE OF COUNSEL.
To the extent that legal counsel may be required in connection with a
claim made against Master Servicer or the Indenture Trustee related to
Servicer's performance of its duties under this Agreement, Servicer shall, at
Master Servicer's direction, use counsel selected, retained and paid directly by
Master Servicer or the Indenture Trustee ("Master Servicer Counsel") in
connection with all matters requiring legal counsel, and Servicer shall
cooperate with Master Servicer, the Indenture Trustee and Master Servicer
Counsel in connection with such matters and shall do everything reasonably
requested of it in connection with such matters. Servicer's failure to use such
Master Servicer Counsel or approved counsel or to cooperate as required in this
Section 9.02 shall constitute a material breach of this Agreement. The
requirements of this Section 9.02 shall not apply to Servicer's retention, use
and payment of its own counsel to advise it with respect to its rights under
this Agreement or claims made against Servicer that are not also against any of
the Master Servicer or the Indenture Trustee.
ARTICLE X
[RESERVED]
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ARTICLE XI
MISCELLANEOUS PROVISIONS
SECTION 11.01.00 AMENDMENTS, CHANGES AND MODIFICATIONS.
This Agreement may be amended, changed, modified, or altered only with
written consent of the Issuer, the Indenture Trustee, the Master Servicer and
the Servicer by an instrument in writing that specifically refers to this
Agreement and that is executed by all parties adversely affected by such
amendment, change, modification or alteration.
SECTION 11.02.00 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.
SECTION 11.03.00 NOTICES.
All demands, notices, certificates or other communications hereunder
shall be in writing (unless otherwise specified) and shall be deemed given when
personally delivered or four (4) Business Days after mailing by United States
Postal Service Second Day Priority Mail, postage prepaid, return receipt
requested, addressed to the appropriate Notice Address.
SECTION 11.04.00 SEVERABILITY.
In the event any provision of this Agreement shall be held invalid or
unenforceable by any court of competent jurisdiction, such holding shall not
invalidate or render unenforceable any other provision hereof. Such invalid or
unenforceable provision shall be amended, if possible, in accordance with
Section 11.01 hereof in order to accomplish the purposes of this Agreement.
SECTION 11.05.00 TERM OF AGREEMENT.
With respect to each Loan, the term of this Agreement shall end upon
the earlier to occur of (i) termination of all of Servicer's rights pursuant to
this Agreement with respect to all Loans as provided in Section 7.01 or 7.02, or
(ii) as provided in Section 6.15.
SECTION 11.06.00 LIMITATION OF LIABILITY OF PARTIES.
Each party to this Agreement shall be liable under this Agreement only
to the extent that obligations are imposed upon the party against whom
enforcement is sought.
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SECTION 11.07.00 LIMITATION OF LIABILITY OF DIRECTORS, OFFICERS,
EMPLOYEES AND AGENTS OF A PARTY.
No director, officer, employee or agent of any party to this Agreement
shall be individually liable to any other party for taking of any action or for
refraining to take any action in good faith pursuant to this Agreement or for
errors in judgment. In addition, in the event any party to this Agreement is
entitled to indemnification hereunder, the officers, directors, employees, and
agents of such party shall also be entitled to indemnification hereunder to the
same extent and under the same circumstances as such party.
SECTION 11.08.00 SURVIVAL OF OBLIGATIONS AND COVENANTS.
The representations, warranties and covenants of Servicer under
Sections 2.02, 7.04 and 11.11 hereof shall survive the expiration of this
Agreement, termination or resignation of Servicer under this Agreement and any
assignment of this Agreement or the rights of the Servicer hereunder by the
Servicer and shall be continuing without regard to any such expiration,
termination, resignation or assignment.
SECTION 11.09.00 COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of
which shall be an original, provided, however, that all such counterparts shall
together constitute one and the same Agreement.
SECTION 11.10.00 FORMS AND REPORTS.
All forms or reports required by this Agreement will be prescribed by
the Master Servicer from time to time and may be amended, supplemented, or
replaced as the Master Servicer shall deem appropriate.
SECTION 11.11.00 INDEMNIFICATION.
The Servicer agrees to, and does hereby indemnify and hold harmless the
Issuer, the Indenture Trustee and the Master Servicer and their respective
directors, officers, employees, and agents, and their successors and assigns
against, and shall reimburse the Issuer, the Indenture Trustee and the Master
Servicer, as applicable, for any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, claims, costs, expenses and
disbursements of any kind or nature whatsoever, including reasonable fees and
expenses of counsel and expenses of litigation which may be imposed on, incurred
by or asserted against any of such indemnified parties, in any way related to,
or arising out of, this Agreement or any of the transactions contemplated
herein, to the extent that any of the same results from or arises out of (1) any
material breach of any representation or warranty made by the Servicer in this
Agreement, (2) the negligence, willful misfeasance, or bad faith of the Servicer
in the performance of its duties under this Agreement or by reason of reckless
disregard of its obligations and duties under this Agreement, or (3) from any
material breach by the Servicer of any covenant or obligation of the Servicer
under this Agreement or any schedule, written statement, document or certificate
furnished by
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Servicer pursuant to this Agreement; provided, however, that no such party shall
be entitled to indemnification hereunder for any loss attributable solely to
such party's own gross negligence or willful misconduct. The indemnities
contained in this Section 11.11 shall survive the termination of this Agreement.
The indemnity obligations set forth in this Section 11.11 shall be in addition
to (but not exclusive of) any other remedies set forth in this Agreement, but in
no event shall this indemnity or any other remedy to which a party may be
entitled provide recovery for amounts already recovered under any other
provision of this Agreement or any other agreement or from any other source.
The Servicer may rely on the written instructions and directions of the
Master Servicer pursuant to the terms of this Agreement and shall not be liable
to the Issuer, the Indenture Trustee or the Master Servicer for any action taken
or for refraining from the taking of any action in good faith pursuant to such
instructions and directions; provided, however, that this provision shall not
protect the Servicer against any material breach of any representation or
warranty made herein or material failure to perform its obligations in
compliance with any standard of care set forth in this Agreement, or any
liability that would otherwise be imposed by reason of any material breach of
the terms and conditions of this Agreement.
The Master Servicer agrees to, and does hereby indemnify and hold the
Servicer harmless against, and shall reimburse the Servicer for any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, expenses and disbursements of any kind or nature whatsoever which
may be imposed on, incurred by or asserted against the Servicer with respect to
any action taken or not taken in good faith pursuant to the instructions and
directions of the Master Servicer as provided herein.
SECTION 11.12.00 RECITALS AND HEADINGS.
The terms and phrases used in the recitals of this Agreement have been
included for convenience of reference only and the meaning, construction, and
interpretation of such words and phrases for purposes of this Agreement shall be
determined by reference to Section 1.01 hereof. The table of contents, titles
and headings of the articles and sections of this Agreement have been inserted
for convenience of reference only and are not to be considered a part hereof and
shall not in any way modify or restrict any of the terms or provisions hereof
and shall not be considered or given any effect in construing this Agreement or
any provision hereof in ascertaining intent, if any questions of intent should
arise.
SECTION 11.13.00 RELATIONSHIP OF THE PARTIES.
In performing its duties and obligations hereunder, Servicer shall be
an independent contractor with, and not an agent of, the Issuer, the Indenture
Trustee or the Master Servicer. Nothing herein contained shall be deemed or
construed to create a partnership or joint venture among the Issuer, the
Indenture Trustee or the Master Servicer and the Servicer.
SECTION 11.14.00 [RESERVED].
48
<PAGE> 50
SECTION 11.15.00 RECORDATION OF AGREEMENT.
To the extent permitted by applicable law, this Agreement may be
recorded in all appropriate public offices for real property records in all the
counties or other comparable jurisdictions in which any or all of the Properties
are situated, and in any other appropriate public recording office or elsewhere,
such recordation to be effected by the Servicer at the expense of the Issuer, if
the Indenture Trustee determines that such recordation materially and
beneficially affects the interests of the affected Certificateholders, and the
Servicer provides written notice to the Master Servicer.
[SIGNATURE PAGE FOLLOWS]
49
<PAGE> 51
IN WITNESS WHEREOF, the Servicer, the Master Servicer, the Issuer, and
the Indenture Trustee have caused their names to be signed hereto by their
respective officers duly authorized as of the date and year first above written.
ISSUER:
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:
------------------------------------
INDENTURE TRUSTEE
AND CO-OWNER TRUSTEE:
U.S. BANK NATIONAL ASSOCIATION, d/b/a
FIRST BANK NATIONAL ASSOCIATION
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
MASTER SERVICER:
NORWEST BANK MINNESOTA, N.A.
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
SERVICER:
MEGO MORTGAGE CORPORATION
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
<PAGE> 52
EXHIBIT A
DESIGNATED SERVICERS
1. Preferred Equities Corporation
A-1
<PAGE> 53
EXHIBIT B
FORM OF SERVICER REPORT
SERVICER CERTIFICATE
MEGO MORTGAGE HOME LOAN OWNER TRUST 1997-4
================================================================================
<TABLE>
<S> <C> <C>
DUE PERIOD: (date)
DISTRIBUTION AMOUNT:
Payments Received On Loans:
Interest:
Ending Aggregate Principal Balance
of Loans as of the preceding
Monthly Cutoff $ 0.00
--------------
Less: Total Amount of New Defaulted Loans from Prior Due Period: $ 0.00
--------------
Adjusted Beginning Aggregate Principal Balance: $ 0.00
--------------
Weighted Average Interest Rate: 0.0000%
--------------
Number of Days: 30/360
--------------
Scheduled Interest (Less interest collected on defaulted loans): $ 0.00(a)
--------------
Actual Interest Collected: $ 0.00(b)
--------------
Total Interest Advanced: $ 0.00(a-b)
--------------
Interest Advanced: $ 0.00
--------------
Principal:
Regular Installments: $ 0.00
--------------
Adjustments to Regular Installments: $ 0.00
--------------
Total Regular Installments: $ 0.00
--------------
Curtailments: $ 0.00
--------------
Adjustments to Curtailments: $ 0.00
--------------
Total Curtailments: $ 0.00
--------------
Paid in Fulls: $ 0.00
--------------
Adjustments to Paid in Fulls: $ 0.00
--------------
Total Paid in Fulls: $ 0.00
--------------
Foreclosures/Other:
Default Principal Activity $ 0.00
--------------
Total Principal Collections: $ 0.00
--------------
</TABLE>
B-1
<PAGE> 54
<TABLE>
<S> <C> <C>
Loans Purchased By Servicer
as of the Monthly Cutoff:
100% of the Principal Balance
of Loans: $ 0.00
--------------
Unpaid Accrued Interest for such
Loans: $ 0.00
--------------
TOTAL PRINCIPAL AND INTEREST DISTRIBUTION AMOUNT: $ 0.00
--------------
DEFAULTED LOANS:
Total amount of Defaulted Loans (Cumulative): $ 0.00
--------------
(a+b+c)
Foreclosed Property Sold: $ 0.00(a)
------------
Loans 180 Days Past Due: $ 0.00(b)
------------
Loans Determined to be Uncollectible: $ 0.00(c)
------------
Total amount of Loans which became Defaulted Loans
during the Due Period: $ 0.00
--------------
Collections Received on Defaulted Loans: $ 0.00
--------------
(a+b+c+d)
Interest Received: $ 0.00(a)
------------
Principal Received: $ 0.00(b)
------------
Foreclosure Funds: $ 0.00(c)
------------
Other: $ 0.00(d)
------------
Remaining Defaulted Loan Balance Reflecting all
Collections Received, less expenses
of recoveries (Net Loan Losses): $ 0.00
------------
Aggregate UPB of Loans between
31 and 60 Days Past Due: $ 0.00
------------
Aggregate UPB of Loans between
61 and 90 Days Past Due: $ 0.00
------------
Aggregate UPB of Loans more
than 90 Days Past Due: $ 0.00
------------
Total loans to be foreclosed #
(see attached)
</TABLE>
B-2
<PAGE> 55
<TABLE>
<CAPTION>
DELINQUENCY INFORMATION:
<S> <C> <C>
61 Day + Delinquency Percentage (Rolling Six Month):
(c+f+i+l+o+r)/6
Period: (date)
All Loans 61+ Days Delinquent: $ 0.00
------------
Less:
Defaulted Loans Included: $ 0.00
------------
61 Day Delinquent Loans: $ 0.00(a)
------------
Aggregate UPB: $ 0.00(b)
------------
Delinquency Percentage: $ 0.00(c)(a/b)
------------
Period: (date)
All Loans 61+ Days Delinquent: $ 0.00
------------
Less:
Defaulted Loans Included: $ 0.00
------------
61 Day Delinquent Loans: $ 0.00(d)
------------
Aggregate UPB: $ 0.00(e)
------------
Delinquency Percentage: $ 0.00(f)(d/e)
------------
Period: (date)
All Loans 61+ Days Delinquent: $ 0.00
------------
Less:
Defaulted Loans Included: $ 0.00
------------
61 Day Delinquent Loans: $ 0.00(g)
------------
Aggregate UPB: $ 0.00(h)
------------
Delinquency Percentage: $ 0.00(i)(g/h)
------------
Period: (date)
All Loans 61+ Days Delinquent: $ 0.00
------------
Less:
Defaulted Loans Included: $ 0.00
------------
61 Day Delinquent Loans: $ 0.00(j)
------------
Ending Aggregate UPB: $ 0.00(k)
------------
Delinquency Percentage: (l) (j/k)
------------
Period: (date)
All Loans 61+ Days Delinquent: $ 0.00
------------
Less:
Defaulted Loans Included: $ 0.00
------------
61 Day Delinquent Loans: $ 0.00(m)
------------
Ending Aggregate UPB: $ 0.00(n)
------------
Delinquency Percentage: (o) (m/n)
------------
Period: (date)
All Loans 61+ Days Delinquent: $ 0.00
------------
Less:
Defaulted Loans Included: $ 0.00
------------
61 Day Delinquent Loans: $ 0.00(p)
</TABLE>
B-3
<PAGE> 56
<TABLE>
<S> <C> <C>
Ending Aggregate UPB: $ 0.00(q)
-----------
Delinquency Percentage: -----------(r) (p/q)
OVERCOLLATERALIZATION:
Overcollateralization Target Amount: $ 0.00
------------
Actual Overcollateralization Amount: $ 0.00
------------
Net Delinquency Calculation Amount: $ 0.00
------------
ADVANCES:
Advances made by Servicer with respect to
this Reporting Period:
Foreclosure Advances: $ 0.00
-----------
Interest Advances: $ 0.00
-----------
Total Advances This Period: $ 0.00
-----------
Cumulative Advances made by Servicer:
Foreclosure Advances: $ 0.00
-----------
Interest Advances: $ 0.00
-----------
Total Advances: $ 0.00
-----------
ADVANCES SERVICER ENTITLED TO REIMBURSEMENT:
Foreclosure Advances: $ 0.00
-----------
Interest Advances: $ 0.00
-----------
Total Advances: $ 0.00
-----------
FEES:
Master Servicing Fee: $ 0.00
------------
Servicing Fees: $ 0.00
------------
Indenture Trustees Fees: $ 0.00
------------
Owner Trustee Fee Reserve: $ 0.00
------------
Other Fees: $ 0.00
------------
OTHER:
Unpaid Principal Balance - Current Loans: $ 0.00
------------
Total Unpaid Principal Balance: $ 0.00
------------
</TABLE>
B-4
<PAGE> 57
All information included in this Certificate is based on the detailed accounting
and servicing reports provided to the Master Servicer. Additionally, all loans
have been serviced and accounted for in accordance with the applicable
requirements of the Servicing Agreement.
Date:
--------------
Certified By: Signature:
------------------------------------
Typed Name:
-----------------------------------
Title:
----------------------------------------
THIS SERVICER CERTIFICATE TO BE SUPPORTED BY DETAILED ACCOUNTING AND SERVICING
REPORTS AS REQUESTED BY THE MASTER SERVICER.
B-5
<PAGE> 58
EXHIBIT C
LOAN SCHEDULE
Attached
<PAGE> 1
EXHIBIT 10.49
CREDIT AGREEMENT
by and among
MEGO MORTGAGE CORPORATION,
THE LENDERS PARTY HERETO,
and
THE FIRST NATIONAL BANK OF CHICAGO,
AS AGENT
dated as of June 20, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS......................................................................................... -1-
ARTICLE II THE CREDITS........................................................................................-24-
2.1. Commitment, Sublimits and Types of Advances.....................................-24-
2.1.1. Commitment and Lending Sublimits......................................-24-
2.1.2. Borrowing Base Sublimits..............................................-25-
2.1.3. Types of Advances.....................................................-25-
2.2. Primary Advances................................................................-25-
2.3. Buy Down Advances...............................................................-25-
2.4. Swingline Advances..............................................................-26-
2.5. Reallocation of Swingline Advances..............................................-26-
2.6. Fees............................................................................-27-
2.6.1. Facility Fees.........................................................-27-
2.6.2. Closing Fees..........................................................-27-
2.6.3. Agent Fees............................................................-27-
2.6.4. Collateral Agent Fees.................................................-27-
2.6.5. Deficiency Fees Payable in connection with Buy Down Loans.............-27-
2.7. Method of Selecting Types and Interest Periods for New Advances.................-27-
2.8. Conversion and Continuation of Outstanding Advances.............................-28-
2.9. Reductions to Aggregate Commitment..............................................-29-
2.10. Principal Payments..............................................................-29-
2.10.1. Optional Principal Payments............................................-29-
2.10.2. Required Payments Related to Borrowing Base............................-29-
2.10.3. Settlement Account Payments............................................-29-
2.10.4. Final Payment on Termination Date......................................-30-
2.11. Changes in Interest Rate, Etc...................................................-30-
2.12. Rates Applicable After Default..................................................-30-
2.13. Method of Payment...............................................................-30-
2.14. Notes; Telephonic Notices.......................................................-31-
2.15. Interest Payment Dates; Interest and Fee Basis..................................-31-
2.16. Notification by the Agent.......................................................-31-
2.17. Lending Installations...........................................................-31-
2.18. Non-Receipt of Funds by the Agent...............................................-32-
ARTICLE III CHANGE IN CIRCUMSTANCES...........................................................................-32-
3.1. Yield Protection................................................................-32-
3.2. Changes in Capital Adequacy Regulations.........................................-33-
3.3. ................................................................................-33-
3.4. Funding Indemnification.........................................................-33-
3.5. Lender Statements; Survival of Indemnity........................................-33-
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE IV CONDITIONS PRECEDENT; WITHHOLDING TAX EXEMPTION....................................................-34-
4.1. Effectiveness...................................................................-34-
4.2. Each Advance....................................................................-35-
4.3. Withholding Tax Exemption.......................................................-36-
ARTICLE V REPRESENTATIONS AND WARRANTIES......................................................................-36-
5.1. Corporate Existence and Standing................................................-36-
5.2. Authorization and Validity......................................................-36-
5.3. No Conflict; Government Consent.................................................-36-
5.4. Financial Statements............................................................-37-
5.5. Material Adverse Change.........................................................-37-
5.6. Taxes...........................................................................-37-
5.7. Litigation and Contingent Obligations...........................................-37-
5.8. Subsidiaries....................................................................-37-
5.9. ERISA...........................................................................-38-
5.10. Accuracy of Information.........................................................-38-
5.11. Regulation U....................................................................-38-
5.12. Material Agreements.............................................................-38-
5.13. Compliance With Laws............................................................-38-
5.14. Ownership of Properties.........................................................-38-
5.15. Plan Assets; Prohibited Transactions............................................-38-
5.16. Investment Company Act..........................................................-38-
5.17. Public Utility Holding Company Act..............................................-39-
5.18. FHA and FNMA Eligibility........................................................-39-
5.19. Subordinated Indebtedness.......................................................-39-
5.20. Eligibility.....................................................................-39-
5.21. Recourse Servicing..............................................................-39-
ARTICLE VI COVENANTS..........................................................................................-39-
6.1. Financial Reporting.............................................................-39-
6.2. Use of Proceeds.................................................................-42-
6.3. Notice of Default...............................................................-42-
6.4. Conduct of Business.............................................................-42-
6.5. Taxes...........................................................................-42-
6.6. Insurance.......................................................................-42-
6.7. Compliance with Laws............................................................-43-
6.8. Maintenance of Properties.......................................................-43-
6.9. Inspection......................................................................-43-
6.10. Dividends.......................................................................-43-
6.11. Indebtedness....................................................................-43-
6.12. Merger..........................................................................-44-
6.13. Sale of Assets..................................................................-44-
6.14. Investments and Acquisitions....................................................-45-
6.15. Liens...........................................................................-45-
6.16. Affiliates......................................................................-46-
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C> <C>
6.17. Financial Covenants.............................................................-46-
6.17.1. Adjusted Leverage Ratio................................................-46-
6.18. Compliance with Security Agreement..............................................-47-
6.19. Recourse Servicing..............................................................-47-
6.20. FHA and FNMA Approvals..........................................................-47-
6.21. Approved Investor Commitments...................................................-47-
6.22. Settlement Account..............................................................-47-
6.23. Subordinated Indebtedness.......................................................-47-
6.24. Excluded Subsidiaries...........................................................-47-
ARTICLE VII DEFAULTS..........................................................................................-48-
ARTICLE VIII COLLATERAL, ACCELERATION AND OTHER REMEDIES......................................................-50-
8.1. Security and Collateral Agency Agreement........................................-50-
8.2. AP Qualifying Loans.............................................................-50-
8.3. Release of Collateral...........................................................-50-
8.4. Settlement Account..............................................................-51-
8.5. Termination.....................................................................-51-
8.6. Acceleration....................................................................-51-
8.7. Other Remedies..................................................................-51-
8.8. Application of Proceeds.........................................................-53-
8.9. Preservation of Rights..........................................................-53-
ARTICLE IX AMENDMENTS; WAIVERS; GENERAL PROVISIONS............................................................-53-
9.1. Amendments and Waivers..........................................................-53-
9.2. Survival of Representations.....................................................-54-
9.3. Governmental Regulation.........................................................-54-
9.4. Taxes...........................................................................-55-
9.5. Entire Agreement................................................................-55-
9.6. Several Obligations; Benefits of this Agreement.................................-55-
9.7. Expenses; Indemnification.......................................................-55-
9.8. Nonliability of Lenders.........................................................-55-
9.9. Severability of Provisions......................................................-56-
9.10. Headings........................................................................-56-
9.11. Numbers of Documents............................................................-56-
9.12. Accounting......................................................................-56-
9.13. Confidentiality.................................................................-56-
9.14. Nonreliance.....................................................................-56-
9.15. Disclosure......................................................................-56-
ARTICLE X THE AGENT AND THE COLLATERAL AGENT..................................................................-57-
10.1. Appointment; Nature of Relationship.............................................-57-
10.2. Powers..........................................................................-57-
10.3. General Immunity................................................................-57-
10.4. No Responsibility for Loans, Recitals, Etc......................................-57-
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<S> <C> <C>
10.5. Action on Instructions of Lenders...............................................-58-
10.6. Employment of Agents and Counsel................................................-58-
10.7. Reliance on Documents; Counsel..................................................-58-
10.8. Agent's Reimbursement and Indemnification.......................................-58-
10.9. Notice of Default...............................................................-58-
10.10. Rights as a Lender..............................................................-59-
10.11. Lender Credit Decision..........................................................-59-
10.12. Successor Agent.................................................................-59-
ARTICLE XI SETOFF; RATABLE PAYMENTS...........................................................................-60-
11.1. Setoff..........................................................................-60-
11.2. Ratable Payments................................................................-60-
11.3. Custodial Accounts..............................................................-60-
ARTICLE XII ASSIGNMENTS; PARTICIPATIONS; COMMITMENT INCREASES.................................................-60-
12.1. Successors and Assigns..........................................................-60-
12.2. Participations..................................................................-61-
12.2.1. Permitted Participants; Effect.........................................-61-
12.2.2. Voting Rights..........................................................-61-
12.2.3. Benefit of Setoff......................................................-61-
12.3. Assignments.....................................................................-61-
12.3.1. Permitted Assignments..................................................-61-
12.3.2. Effect; Effective Date.................................................-61-
12.4 Commitment Increases............................................................-62-
12.4.1. Increases to Aggregate Commitment......................................-62-
12.4.2. Procedure for Increases and Addition of New Lenders....................-62-
12.5. Dissemination of Information....................................................-62-
12.6. Tax Treatment...................................................................-63-
ARTICLE XIII NOTICES..........................................................................................-63-
13.1. Notices.........................................................................-63-
13.2. Change of Address...............................................................-63-
ARTICLE XIV COUNTERPARTS......................................................................................-63-
ARTICLE XV CHOICE OF LAW, CONSENT TO JURISDICTION, WAIVER OF JURY TRIAL.......................................-63-
15.1. CHOICE OF LAW...................................................................-63-
15.2. CONSENT TO JURISDICTION.........................................................-63-
15.3. WAIVER OF JURY TRIAL............................................................-64-
</TABLE>
-iv-
<PAGE> 6
<TABLE>
<CAPTION>
SCHEDULES
<S> <C>
SCHEDULE "1" COMMITMENTS AND COMMITMENT PERCENTAGE
SCHEDULE "2" LIST OF APPROVED INVESTORS
SCHEDULE "3" SUBSIDIARIES AND OTHER INVESTMENTS
SCHEDULE "4" INDEBTEDNESS AND LIENS
SCHEDULE "5" BORROWER'S UNDERWRITING STANDARDS
SCHEDULE "6" BORROWER'S PROPERTY VALUATION PROCEDURES
SCHEDULE "7" DESCRIPTION OF TRUSTEE'S RIGHT TO TERMINATE THE BORROWER'S
RIGHTS TO SERVICE CERTAIN SECURITIZATIONS
SCHEDULE "8" DESCRIPTION OF EXISTING AGREEMENTS WITH AFFILIATES
SCHEDULE "9" FORM OF DELINQUENCY, DEFAULT AND LOSS REPORT
EXHIBITS
EXHIBIT "A" NOTE
EXHIBIT "B" FORM OF OPINION
EXHIBIT "C" FORM OF GREENWICH TRI-PARTY AGREEMENT
EXHIBIT "D" COLLATERAL TRANSMITTAL
EXHIBIT "E" AGREEMENT TO PLEDGE
EXHIBIT "F" COMPLIANCE CERTIFICATE
EXHIBIT "G" BORROWING BASE CERTIFICATE
EXHIBIT "H" FORM OF PEC TRI-PARTY AGREEMENT
EXHIBIT "I" SECURITY AND COLLATERAL AGENCY AGREEMENT
EXHIBIT "J" ASSIGNMENT AGREEMENT
EXHIBIT "K" FORM OF AMENDMENT FOR AN INCREASED OR NEW COMMITMENT
EXHIBIT "L" LOAN/CREDIT RELATED MONEY TRANSFER INSTRUCTION
EXHIBIT "M" MARKET VALUATION FORMULA
EXHIBIT "N" INITIAL APPROVED MARKET VALUE REFERENCE INVESTORS
</TABLE>
-v-
<PAGE> 7
CREDIT AGREEMENT
This Agreement, dated as of June 20, 1997, is among Mego Mortgage
Corporation, a Delaware corporation, the Lenders, and The First National Bank of
Chicago, as Agent.
RECITALS
The revolving credit facility made available to the Borrower pursuant
to this Agreement shall be used for the origination, acquisition and warehousing
of FHA Title I secured and unsecured loans and conventional debt consolidation
and home improvement residential secured and unsecured loans pending their sale
or securitization. In consideration of the foregoing and for other good and
valuable consideration, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement:
"Acquisition" means any transaction, or any series of related
transactions, consummated on or after the date of this Agreement, by which the
Borrower or any of its Included Subsidiaries (i) acquires any going business or
all or substantially all of the assets of any firm, corporation or limited
liability company, or division thereof, whether through purchase of assets,
merger or otherwise or (ii) directly or indirectly acquires (in one transaction
or as the most recent transaction in a series of transactions) at least a
majority (in number of votes) of the securities of a corporation which have
ordinary voting power for the election of directors (other than securities
having such power only by reason of the happening of a contingency) or a
majority (by percentage or voting power) of the outstanding ownership interests
of a partnership or limited liability company.
"Additional Required Qualifying Loan Documents" means the instruments
and documents described in Schedule "B" to the Security Agreement.
"Adjusted Tangible Net Worth" means Tangible Net Worth, plus the lesser
of (a) the then-outstanding principal balance of the Subordinated Notes and (b)
$90,000,000.
"Advance" means a borrowing hereunder (or conversion or continuation
thereof) consisting of the aggregate amount of the several Loans made on the
same Borrowing Date (or date of conversion or continuation) by some or all of
the Lenders to the Borrower of the same Type and, in the case of Fixed Rate
Advances, for the same Interest Period.
"Affiliate" of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such Person. A Person
shall be deemed to control another Person if the controlling Person owns 10% or
more of any class of voting securities (or other ownership interests) of the
controlled Person or possesses, directly or indirectly, the power to direct or
cause the direction of the
<PAGE> 8
management or policies of the controlled Person, whether through ownership of
stock, by contract or otherwise.
"Agent" means The First National Bank of Chicago in its capacity as
agent for the Lenders pursuant to Article X, and not in its individual capacity
as a Lender, and any successor Agent appointed pursuant to Article X.
"Aggregate Commitment" means, as of any date, the aggregate of the
Lenders' then-current Commitments under this Agreement, as reduced or increased
from time to time, but in no event shall the Aggregate Commitment exceed
$90,000,000 without the approval of the Borrower, the Agent and all of the
Lenders. The Aggregate Commitment as of the date hereof is $40,000,000, as shown
on Schedule "1".
"Agreement" means this credit agreement, as it may be amended or
modified and in effect from time to time.
"Agreement Accounting Principles" means GAAP, applied in a manner
consistent with that used in preparing the financial statements referred to in
Section 5.4.
"Agreement to Pledge" means a written pledge substantially in the form
of Exhibit "E" to this Agreement executed by the Borrower and delivered by
facsimile to the Collateral Agent, specifically identifying all Qualifying Loans
with respect to which the Required Qualifying Loan Documents are not being
delivered on or before the Pledge Date of such Qualifying Loan.
"Alternate Base Rate" means, for any day, a rate of interest per annum
equal to the higher of (i) the Corporate Base Rate for such day and (ii) the sum
of the Federal Funds Effective Rate for such day plus 1/2% per annum.
"Alternate Base Rate Advance" means an Advance which bears interest at
the Alternate Base Rate.
"Alternate Base Rate Loan" means a Loan which bears interest at the
Alternate Base Rate.
"AP Qualifying Loan" means, on any date, any Qualifying Loan which has
been identified in an Agreement to Pledge and for which the Collateral Agent has
not received the Required Qualifying Loan Documents for such Qualifying Loan by
such date.
"Applicable Margin" means one and one-half percent (1.50%) per annum.
"Approved Investor" means, as of any time, any of the institutions
listed on Schedule "2" attached hereto and any other institution approved in
writing by the Agent (with prompt notice to the Lenders), such approval not to
be unreasonably withheld, which Approved Investor shall be approved for (i) the
purchase of Title I Qualifying Loans if it has a "1" following its name, (ii)
the purchase of Conventional HI/DC Qualifying Loans if it has a "2" following
its name and/or (iii) entering into repurchase agreements if it has a "3"
following its name; provided that any such institutions listed on Schedule "2"
or previously approved by the Agent may be eliminated as an Approved Investor
(or as an Approved Investor of a specific type) by written notice to the
Borrower from the Agent, which elimination notice shall be given only for
reasonable cause or at the election of the Required Lenders, and in either case
any commitments issued by any such
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<PAGE> 9
formerly-Approved Investor after such elimination shall not constitute Approved
Investor Commitments, but commitments of such formerly-Approved Investor
existing at the time of such elimination shall continue to be Approved Investor
Commitments.
"Approved Investor Commitment" means a commitment issued by an Approved
Investor to purchase Qualifying Loans from the Borrower and from the Collateral
Agent pursuant to the applicable Tri-Party Agreement with such Approved
Investor.
"Approved Shareholders" means any of Mr. Robert Nederlander, Mr. Jerome
J. Cohen, Mr. Don A. Mayerson, Mr. Eugene I. Schuster or Mr. Herbert B. Hirsch
or any entity in which one or more of such individuals holds a majority of the
voting stock or interests.
"Article" means an article of this Agreement unless another document is
specifically referenced.
"Assignment" means a duly executed assignment for the benefit of the
Lenders of a Mortgage, of the indebtedness secured thereby, and of all documents
and rights related to the Qualifying Loan secured by such Mortgage in accordance
with the requirements of the Security Agreement.
"Authorized Officer" means any of the Chairman, President or any Vice
President of the Borrower, acting singly.
"Basic Eligibility Requirements" for a Pledged Qualifying Loan shall
mean that each of the following statements is accurate and complete with respect
to such Pledged Qualifying Loan:
(i) The Borrower is the legal and equitable owner and
holder of such Pledged Qualifying Loan and has full power and authority
to pledge such Pledged Qualifying Loan. Such Pledged Qualifying Loan
and each commitment of a Person to purchase Qualifying Loans from the
Borrower (including Approved Investor Commitments) has been duly and
validly issued to the Borrower, and each Pledged Qualifying Loan
constitutes Eligible Collateral, has been duly and validly pledged to
the Collateral Agent for the benefit of the Secured Parties and is
subject to no Lien other than the lien of the Security Agreement in
favor of the Agent for the benefit of the Lenders.
(ii) Each requirement of any federal, state or local law
including, without limitation, the Title I Regulations (with respect to
Title I Qualifying Loans), usury, truth-in-lending, real estate
settlement procedures, consumer credit protection, equal credit
opportunity or disclosure laws applicable to such Pledged Qualifying
Loan has been complied with.
(iii) With respect to each Pledged Qualifying Loan:
(1) it has been originated either by the
Borrower or by the dealer or correspondent from whom the
Borrower has acquired such Pledged Qualifying Loan, it meets
all of the Borrower's underwriting requirements and all
Required Qualifying Loan Documents and Additional Required
Qualifying Loan Documents have been duly executed and
delivered by the parties thereto,
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<PAGE> 10
(2) it is valid and enforceable in accordance
with its terms, without defense or offset, subject to
bankruptcy and similar laws and other general restrictions on
creditors' rights and equitable principles (whether raised in
an equity proceeding or an action at law),
(3) if such Pledged Qualifying Loan is secured
by a Mortgage, the property securing such Pledged Qualifying
Loan is free and clear of all Liens except in favor of the
Borrower subject only to (a) the Lien of current real property
taxes and assessments not yet due and payable; (b) covenants,
conditions and restrictions, rights of way, easements and
other matters of the public record, as of the date of
recording, as are acceptable to mortgage lending institutions
generally and which do not materially adversely affect the
value of such property; (c) other matters to which like
properties are commonly subject which do not materially
interfere with the benefits of the security intended to be
provided by said Mortgage or the use, enjoyment, value or
marketability of the related property; and (d) senior mortgage
Liens to the extent permissible under the underwriting
standards applicable to such Pledged Qualifying Loan,
(4) it has been correctly described in the
Collateral Transmittal submitted to the Collateral Agent in
respect of such Pledged Qualifying Loan,
(5) it has been fully funded to the obligor or,
if such Pledged Qualifying Loan is a conventional home
improvement loan which is evidenced by a RIC or combined debt
consolidation/home improvement loan which is partially
evidenced by a RIC and has been acquired by the Borrower from
a home improvement dealer, labor and materials to be performed
and installed for the benefit of the obligor have been
completed and a completion certificate executed by obligor
reflecting acceptance of such labor and materials has been
delivered to the Borrower,
(6) unless a Qualifying Loan was originated by
the Borrower, the correspondent or dealer from whom the
Borrower has acquired such Pledged Qualifying Loan has been
paid the full acquisition price therefor, in either case by
wire transfer, transmittal through the "Automated Clearing
House" or any similar private clearing house for interbank
transfers of funds, cashier's check or a cleared check or
draft and, if any such item has not been collected upon and
paid to the payee thereof, such amounts have been reflected in
Uncleared Loan Funding Checks and deducted in calculating the
Borrowing Base,
(7) the Collateral Agent has in its possession
(other than with respect to Pledged Qualifying Loans which are
then the subject of an Agreement to Pledge) all Required
Qualifying Loan Documents other than those documents and
instruments which are in the possession of the Borrower
pursuant to a Trust Receipt or in the possession of a Person
to whom delivery was made pursuant to an Investor Transmittal
Letter,
(8) if such Pledged Qualifying Loan is secured
by a Mortgage, such Mortgage and all assignments necessary to
convey such Mortgage to the Borrower have
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<PAGE> 11
been or will be promptly duly recorded where necessary and
each is in a form which will comply with all applicable state
or local recording, registration and filing laws and
regulations,
(9) except to the extent permitted by clause (v)
of the definition of "Eligible Qualifying Loan", there are no
defenses, counterclaims or offsets of any nature whatsoever
with respect to such Pledged Qualifying Loan or the
indebtedness evidenced and secured thereby or with respect to
any Required Qualifying Loan Document and, other than the
related Required Qualifying Loan Documents and Additional
Required Qualifying Loan Documents, there are no instruments
or documents evidencing, securing or guaranteeing payment of
the indebtedness constituting such Pledged Qualifying Loan
which have not been delivered to the Collateral Agent,
(10) each Assignment (a) has been duly authorized
by all necessary corporate action by the Borrower, duly
executed and delivered by the Borrower and is the legal, valid
and binding obligation of the Borrower enforceable in
accordance with its terms, subject to bankruptcy and similar
laws and other general restrictions on creditors' rights and
equitable principles, and (b) is in a form which will comply
with all applicable laws including all applicable recording,
filing and registration laws and regulations and is adequate
and legally sufficient for the purpose intended to be
accomplished thereby, including, without limitation, the
assignment of the rights, powers and benefits of the Borrower
as mortgagee,
(11) upon the recordation of each Assignment and
assuming the possession of the Required Qualifying Loan
Documents by the Collateral Agent and filing of Uniform
Commercial Code financing statements in proper form in the
applicable filing offices, the Collateral Agent, for the
benefit of the Lenders, will have a valid and perfected first
priority security interest in such Pledged Qualifying Loan and
all proceeds, products and profits derived therefrom,
including, without limitation, all moneys, goods, insurance
proceeds and other tangible or intangible property received
upon liquidation thereof, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and other laws
affecting the enforcement of creditors' rights generally and
to general principles of equity,
(12) except for those Qualifying Loans which are
not secured by a Mortgage, the market value of the premises
securing such Pledged Qualifying Loan has been determined, at
the origination or acquisition of the related Qualifying Loan,
by the Borrower in accordance with valuation procedures
described on Schedule "6" attached hereto and is in compliance
with the Borrower's applicable underwriting standards set
forth in Schedule "5",
(13) (a) except for any Title I Qualifying Loans,
all fire and casualty policies covering the premises
encumbered by each Pledged Qualifying Loan (i) name the
Borrower as an insured (subject to the prior rights of senior
mortgage holders) under a standard mortgagee clause not less
favorable in coverage to the mortgagee than is customarily
used in the state where such premises is located, (ii) are in
full force and effect, and (iii) afford insurance against fire
and such other risks as are usually insured
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<PAGE> 12
against in the broad form of extended coverage insurance from
time to time available and (b) if such Pledged Qualifying Loan
is secured by a Mortgage on premises located in a flood plain
as shown on applicable federal flood zone maps, insurance
protecting the owner of the premises and the Borrower (subject
to the prior rights of senior mortgage holders) against flood
hazards as required by FHA is in full force and effect.
(iv) There shall be no breach of the covenants
contained in Paragraph 12 of the Security Agreement and there shall be
no breach of any of the following covenants (the sole remedy for which
shall be the removal of such Pledged Qualifying Loan as Eligible
Collateral):
(1) the Borrower shall not (a) amend or
modify, or waive any of the terms and conditions of, or settle
or compromise any claim in respect of, any Pledged Qualifying
Loan or any rights related to any of the foregoing, if such
amendment, modification or waiver materially and adversely
affects the Collateral Value of such Pledged Qualifying Loan,
or impairs the marketability of such Pledged Qualifying Loan
or (b) release any security or obligor, or, through any other
activity or inactivity, cause any Pledged Qualifying Loan
which shall have been eligible for purchase to become
ineligible for purchase in accordance with the Approved
Investor Commitment related to such Pledged Qualifying Loan,
(2) the Borrower shall not sell,
assign, transfer or otherwise dispose of, or grant any option
with respect to, or pledge or otherwise encumber (except
pursuant to the Security Agreement), any of the Collateral or
any interest therein, other than sales effected pursuant to an
Approved Investor Commitment and related Investor Transmittal
Letters or following a release thereof as provided in Section
8.3 with respect to releases of Pledged Qualifying Loans,
(3) the Borrower is the servicer for
and shall service all Pledged Qualifying Loans in accordance
with the requirements of the Approved Investor Commitments
through a Subservicing Agreement with Preferred Equities
Corporation, an Affiliate of Borrower, and subject to the
terms of the PEC Tri-Party Agreement,
(4) the Borrower shall hold all escrow
funds, if any, collected in respect of Pledged Qualifying
Loans in trust, without commingling the same with any other
fund, and apply the same for the purposes for which such funds
were collected provided that such obligation with respect to
Pledged Qualifying Loans shall not arise until 30 days after
the origination or acquisition of the applicable Qualifying
Loan,
(5) the Borrower shall observe and
perform all of its obligations in connection with each
Approved Investor Commitment related to any Pledged Qualifying
Loan. Within forty-eight (48) hours after a request therefor
by the Agent, a copy of each Approved Investor Commitment
certified by the Borrower, or if requested by the Agent at any
time after a Default has occurred, the originals of such
Approved Investor Commitments shall be delivered to the Agent,
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<PAGE> 13
(6) the Borrower shall hold any prepayment
(which term excludes the principal portion of scheduled
monthly payments made on a Qualifying Loan) arising from or
relating to any Pledged Qualifying Loan in trust, as security
for the Lenders, until such Qualifying Loan is removed from
the Borrowing Base or the Collateral Value of such Qualifying
Loan is appropriately reduced on account of such prepayment,
in each case in accordance with this Agreement or, if a
Default has occurred and is continuing under this Agreement,
then immediately remit to the Agent such prepayments (and all
interest and earnings thereon or with respect thereto),
(7) the Borrower shall do, execute, acknowledge
and deliver, or cause to be done, executed, acknowledged and
delivered, all such other acts, instruments and transfers
(including, without limitation, Assignments) as the Agent or
the Collateral Agent may reasonably request from time to time
in order to create and maintain a perfected first priority
security interest in the Collateral in favor of the Lenders
and to create, maintain and preserve the security and benefits
intended to be afforded by this Agreement, subject to no prior
or equal security interest, lien, charge or encumbrance, or
agreement purporting to grant to any Person a security
interest in the Collateral, and
(8) the Borrower shall promptly notify the Agent
and the Collateral Agent of the occurrence of any event which
would cause any Eligible Collateral to become Ineligible
Collateral, provided that such notification arising from
delinquent payments or prepayments shall be given at the times
and in the manner expressly provided herein.
"Borrower" means Mego Mortgage Corporation, a Delaware corporation, and
its successors and assigns.
"Borrowing Base" means, as of any date, subject to the Borrowing Base
Sublimits, the sum of the amounts determined by applying the following
percentages to the Collateral Values of the following categories of Eligible
Collateral, without duplication as any asset is converted from one category to
another, as described below (and the Borrower, by including any Pledged
Qualifying Loan in any computation of the Borrowing Base, shall be deemed to
represent and warrant to the Agent, the Collateral Agent and the Lenders that
such Pledged Qualifying Loan constitutes Eligible Collateral):
(i) one hundred percent (100%) of that portion
of the balance in the Settlement Account in excess of $100,000,
(ii) ninety-seven percent (97%) of the Collateral
Value of Eligible Title I Qualifying Loans, and
(iii) ninety-five percent (95%) of the Collateral
Value of Eligible Conventional HI/DC Qualifying Loans,
less the aggregate amount of Uncleared Loan Funding Checks on such date.
In connection with the Borrowing Base, the Agent is hereby authorized
by the Lenders to grant temporary waivers of strict compliance by the Borrower
with the eligibility requirements regarding
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<PAGE> 14
qualification of any Collateral as Eligible Collateral or with the Lending
Sublimits or Borrowing Base Sublimits when the Agent deems it appropriate, in
its sole discretion, if the aggregate amount of deviation from strict
compliance, based on the Collateral Value so included in the Borrowing Base and
the amount of excess permitted over the Lending Sublimits or Borrowing Base
Sublimits does not exceed $200,000 at any time or up to any amount for up to
three (3) Business Days, if the satisfaction of such eligibility requirements or
sublimits cannot be independently determined because of events beyond the
reasonable control of the Borrower (i.e. natural disasters, transmission
failures, etc.), provided that, if such determination cannot be made for more
than one (1) Business Day, the Borrower certifies in writing that all such
eligibility requirements and sublimits are in fact satisfied.
"Borrowing Base Certificate" means a certificate executed by the chief
financial officer of the Borrower (or another Authorized Officer of the
Borrower) to be delivered to the Agent substantially in the form attached hereto
as Exhibit "G".
"Borrowing Base Sublimits" is defined in Section 2.1.2.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Borrowing Notice" is defined in Section 2.8.
"Business Day" means (i) with respect to any borrowing, payment or rate
selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on
which banks generally are open in Chicago, Houston, Atlanta and New York for the
conduct of substantially all of their commercial lending activities and on which
dealings in United States dollars are carried on in the London interbank market
and (ii) for all other purposes, a day (other than a Saturday or Sunday) on
which banks generally are open in Chicago, Houston, Atlanta and New York for the
conduct of substantially all of their commercial lending activities.
"Buy Down Advance" means an Advance made by one or more of the Lenders,
on a non-prorata basis, at the Buy Down Rate.
"Buy Down Loan" means a Loan which bears interest at the Buy Down Rate.
"Buy Down Rate" means, with respect to a Buy Down Loan, a per annum
rate of interest equal to the sum of (i) one eighth of one percent (0.125%) plus
(ii) the Applicable Margin.
"Capital Expenditures" means, without duplication, any expenditures for
any purchase or other acquisition of any asset which would be classified as a
fixed or capital asset on a consolidated balance sheet of the Borrower and its
Included Subsidiaries prepared in accordance with Agreement Accounting
Principles excluding (i) the cost of assets acquired with Capitalized Lease
Obligations, (ii) expenditures of insurance proceeds to rebuild or replace any
asset after a casualty loss, and (iii) leasehold improvement expenditures for
which the Borrower or an Included Subsidiary is reimbursed promptly by the
lessor.
"Capitalized Lease" of a Person means any lease of Property by such
Person as lessee which would be capitalized on a balance sheet of such Person
prepared in accordance with Agreement Accounting Principles.
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<PAGE> 15
"Capitalized Lease Obligations" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with
Agreement Accounting Principles.
"Change in Control" means that Mego Financial, directly or indirectly
through one or more of its Subsidiaries, shall cease to own, free and clear of
all liens or other encumbrances, at least 51% of the outstanding shares of
voting stock of the Borrower on a fully diluted basis unless at all times
thereafter no Person, or two or more Persons acting in concert (other than Mego
Financial and one or more of the Approved Shareholders) shall hold beneficial
ownership (within the meaning of Rule 13d-3 of the Securities and Exchange
Commission under the Securities Exchange Act of 1934) of more of the outstanding
shares of voting stock of the Borrower than are then held by the Approved
Shareholders in the aggregate.
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.
"Collateral" means all right, title and interest of the Borrower, of
every kind and nature, in and to all of the following property, assets and
rights of the Borrower wherever located, whether now existing or hereafter
arising, and whether now or hereafter owned, acquired by or accruing or owing to
the Borrower, and all proceeds and products thereof:
(i) all Pledged Qualifying Loans, whether Eligible
Collateral or Ineligible Collateral (unless released in accordance with
Section 8.3 hereof), including all Required Qualifying Loan Documents
related thereto;
(ii) any commitments or other agreements issued by the FHA
to insure or guarantee any Pledged Qualifying Loan;
(iii) the Settlement Account and all uncollected deposits
into the Settlement Account;
(iv) all property related to the foregoing, including
without limitation, the right to service Pledged Qualifying Loans while
owned by the Borrower, all accounts and general intangibles of
whatsoever kind so related and all documents or instruments delivered
to the Collateral Agent in respect of any Pledged Qualifying Loan,
including, without limitation, the right to receive all insurance
proceeds and condemnation awards which may be payable in respect of the
premises encumbered by any Mortgage securing a Pledged Qualifying Loan;
and
(v) all proceeds and products of any of the foregoing.
"Collateral Agent" means First Chicago National Processing Corporation
or its successor, as Collateral Agent under the Security Agreement.
"Collateral Agent Review Procedure" means the required review steps set
forth in Exhibit "1" to the Security Agreement.
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<PAGE> 16
"Collateral Transmittal" means a transmittal from the Borrower to the
Collateral Agent in written form of the following information for the following
submissions or special treatment of different types of Collateral: (i) the
information described on Exhibit "D" for each AP Qualifying Loan covered by any
Agreement to Pledge, and (ii) the information described on Exhibit "D" (other
than the entry thereon for "AP Status Code") for each Pledged Qualifying Loan
not covered by an Agreement to Pledge.
"Collateral Value" means, with respect to each asset included in
Eligible Collateral on any given day, a value determined as follows:
(i) Cash shall be conclusively determined between the
Collateral Agent and the Agent to avoid duplication with the Collateral
Value of other Collateral; and
(ii) Each Pledged Qualifying Loan shall be valued at the
lowest of (A) (i) for all Pledged Qualifying Loans other than HLTV
Loans, one hundred percent (100%) of the unpaid principal balance of
such Qualifying Loan on its Pledge Date or (ii) for all Pledged
Qualifying Loans that are also HLTV Loans, ninety-five percent (95%) of
the unpaid principal balance of such Qualifying Loan on its Pledge
Date, or (B) the net acquisition cost (including any discounts and
excluding any servicing released premium) of such Qualifying Loan, if
acquired by the Borrower, or (C) the weighted average purchase price
(expressed as a percentage of par) committed to by Greenwich Capital
under its most recent "Pricing Letter" (as defined in the Greenwich
Tri-Party Agreement) delivered to the Agent which could cover such
Qualifying Loan applied to the unpaid principal balance of such
Qualifying Loan on its Pledge Date or (D) at the discretion of the
Agent, if the Agent believes in good faith that the commitment of
Greenwich Capital may not be available, the then-current market value
of such Qualifying Loan as determined by the Agent based upon a survey
conducted by the Agent of two or more of the investors identified on
Exhibit N attached hereto and any other investor suggested by the
Borrower and approved by the Agent which is then selling or buying such
type of Qualifying Loan and taking the pricing (or, if more than one
firm responds to the survey, the average of the pricing) received from
such survey less, in each case, (E) any full or partial principal
prepayments made on account of such Pledged Qualifying Loan after its
Pledge Date. The values described in (A) and (B) of the preceding
sentence (including the determination as to whether or not such Pledged
Qualifying Loan is an HLTV Loan) shall be as determined by the Borrower
as of the Pledge Date of the applicable Pledged Qualifying Loan and
reported to the Collateral Agent on the Pledge Date. The values
calculated under (C) above shall be recalculated not less than monthly
upon each issuance by Greenwich Capital of a new "Pricing Letter" (or,
if such Pledged Qualifying Loan is covered only by a different Approved
Investor, by such other Approved Investor's similar pricing report) and
shall be computed by the Borrower and reported to the Collateral Agent
within two (2) Business Days after such issuance.
"Commitment" means, for each Lender, the sum of such Lender's Primary
Commitment and Swingline Commitment, if any.
"Commitment Percentage" means, for each Lender as of any date, the
percentage of the Aggregate Commitment represented by such Lender's Commitment,
as it may be amended from time to time, which initially shall be as set forth on
Schedule "1".
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"Condemnation" is defined in Section 7.8.
"Contingent Obligation" of a Person means any agreement, undertaking or
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of, or otherwise becomes or
is contingently liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other financial condition
of any other Person, or otherwise assures any creditor of such other Person
against loss, including, without limitation, any comfort letter, operating
agreement or take-or-pay contract excluding, however, any contingent obligations
of the Borrower to repurchase Qualifying Loans or to indemnify any party having
an interest in such Qualifying Loans against any loss arising from breaches of
any representations or warranties made by the Borrower regarding the
then-current condition of such Qualifying Loans at the time of the creation of
such party's interest therein.
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower or any of its Subsidiaries, are
treated as a single employer under Section 414 of the Code.
"Conventional HI/DC Qualifying Loan" means a Qualifying Loan which is
either (i) a home improvement loan made solely for the purpose of funding
improvements to a Single Family Residence, (ii) a debt consolidation loan made
solely for the purposes of repaying other debts of the obligor thereunder, or
(iii) a combination of such a home improvement loan and a debt consolidation
loan.
"Conversion/Continuation Notice" is defined in Section 2.8.
"Corporate Base Rate" means a rate per annum equal to the corporate
base rate of interest announced by First Chicago from time to time, changing
when and as said corporate base rate changes.
"Coverage Requirement" means, as of any date, the aggregate unpaid
principal amount then outstanding under this Agreement.
"Covered Loan" means any Eligible Qualifying Loan that is subject to an
Approved Investor Commitment issued by, and meets all of the requirements for
sale to, at least one Approved Investor, and which, when aggregated with all
other Eligible Qualifying Loans then subject to such Approved Investor
Commitment, would not cause the aggregate principal balance of such Eligible
Qualifying Loans to exceed the maximum amount of Qualifying Loans that such
Approved Investor is then obliged to purchase.
"Debt Evidence" means a Mortgage Note, an Unsecured Note or a RIC.
"Default" means an event described in Article VII.
"Effective Date" is defined in Section 4.1.
"Eligible Collateral" means, as of any date, all Eligible Conventional
HI/DC Qualifying Loans and Eligible Title I Qualifying Loans.
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<PAGE> 18
"Eligible Conventional HI/DC Qualifying Loan" means an Eligible
Qualifying Loan which: (i) is a Conventional HI/DC Qualifying Loan, (ii) is in
conformance with the Borrower's existing underwriting standards as outlined on
Schedule "5" attached, (iii) was for an original principal amount at origination
of less than $100,000, (iv) if such Eligible Qualifying Loan is secured by a
Mortgage, had a loan-to-value ratio at origination of not more than 125% using
the Borrower's market value determination of the premises securing such Eligible
Qualifying Loan as described in clause (iii)(12) of the definition of "Basic
Eligibility Requirements", (v) is either (A) a Covered Loan or (B) if it is not
a Covered Loan on any date, would not cause Eligible Collateral to have included
Eligible Qualifying Loans that are not Covered Loans on more than thirty (30)
days during the then-current fiscal quarter of the Borrower, and (vi) does not
have a FICO score of less than 600.
"Eligible Qualifying Loan" means any Pledged Qualifying Loan:
(i) which meets the Basic Eligibility Requirements;
(ii) which has no monthly installment of principal and/or
interest which is more than 30 days past due;
(iii) which has not been included in the Borrowing Base for
one hundred twenty (120) days or more after its Pledge Date;
(iv) which was acquired by the Borrower not more than
thirty (30) days prior to its Pledge Date, except for Reinstated
Qualifying Loans;
(v) which is not subject to warranty claims or disputes
between the obligor thereunder and the general contractor performing
the home improvement work which (i) remain unresolved for 90 or more
days after first being asserted, or (ii) when combined with all other
claims with respect to Pledged Qualifying Loans, would cause such
combined claims to exceed $500,000 in the aggregate, or (iii) would
cause such Pledged Qualifying Loan to be ineligible for purchase by an
Approved Investor under the applicable Approved Investor Commitment,
including without limitation the Borrower's inability to make any
representations and warranties regarding such Pledged Qualifying Loan;
(vi) for which, if it is an AP Qualifying Loan:
(1) such AP Qualifying Loan has been executed
and delivered by the obligor thereunder and, if secured by a
Mortgage, such Mortgage has become a valid lien securing
actual indebtedness and the Borrower has not learned of any
information to the contrary and has not received any returned
proceeds of its acquisition of such AP Qualifying Loan from
the dealer or correspondent originating such Pledged
Qualifying Loan,
(2) the Borrower has received all of the
Required Qualifying Loan Documents and Additional Required
Qualifying Loan Documents from the obligor thereunder or from
the dealer or correspondent originating such AP Qualifying
Loan on or before the date of the related Agreement to Pledge,
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<PAGE> 19
(3) the Collateral Agent has received the
Required Qualifying Loan Documents within seven (7) Business
Days after the date of the related Agreement to Pledge, and
(4) the Collateral Value of such AP Qualifying
Loan, when aggregated with the Collateral Values attributable
to all AP Qualifying Loans, does not exceed the greater of (x)
fifteen percent (15%) of the Aggregate Commitment or (y)
$9,000,000,
(vii) which, if subject to an Investor Transmittal Letter
or Trust Receipt and if said Pledged Qualifying Loan was:
(1) withdrawn by the Borrower for purposes of
correcting clerical or other non-substantive documentation
problems: (i) the promissory note and other documents relating
to said Pledged Qualifying Loan were returned to the
Collateral Agent within fifteen (15) calendar days from the
date of withdrawal, (ii) said Pledged Qualifying Loan was
released to the Borrower pursuant to a Trust Receipt and (iii)
the Collateral Value of said Pledged Qualifying Loan when
added to the Collateral Value of all other Pledged Qualifying
Loans which have been similarly released to the Borrower does
not exceed two percent (2%) of the Aggregate Commitment,
(2) shipped by the Collateral Agent directly to
an Approved Investor for purchase pursuant to the applicable
transmittal letter, the full purchase price therefor has been
received by the Collateral Agent (or said Pledged Qualifying
Loan has been returned to the Collateral Agent) within
twenty-five (25) days from the date of shipment by the
Collateral Agent, or
(3) shipped by the Collateral Agent directly to
a custodian for purposes of formation of a pool supporting a
Security pursuant to the applicable transmittal letter, the
Security is issued and sold and the purchase price therefor
has been received by the Collateral Agent (or said Pledged
Qualifying Loan has been returned to the Collateral Agent)
within twenty-five (25) days from the date of shipment by the
Collateral Agent, and
(viii) which if it is an HLTV Loan, has a FICO score such
that the weighted average of all FICO scores for HLTV Loans is 655 or
higher.
"Eligible Title I Qualifying Loan" means an Eligible Qualifying Loan
which: (i) is a Title I Qualifying Loan, (ii) is underwritten to the
then-current underwriting standards of FHA, (iii) (A) is a Covered Loan or (B)
if it is not a Covered Loan on any date, would not cause Eligible Collateral to
have included Eligible Qualifying Loans that are not Covered Loans on more than
thirty (30) days during the then-current fiscal quarter of the Borrower, (iv)
does not have a FICO of less than 550, and (v) is not subject to claims
processing with FHA.
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<PAGE> 20
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating to
(i) the protection of the environment, (ii) the effect of the environment on
human health, (iii) emissions, discharges or releases of pollutants,
contaminants, hazardous substances or wastes into surface water, ground water or
land, or (iv) the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants, hazardous
substances or wastes or the clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of l974, as
amended from time to time, and any rule or regulation issued thereunder.
"Eurodollar Advance" means an Advance which bears interest at a
Eurodollar Rate.
"Eurodollar Base Rate" means, with respect to one, two or three month
Interest Periods, the rate determined by the Agent to be the rate at which First
Chicago offers to place deposits in U.S. dollars with first-class banks in the
London interbank market at approximately 11 a.m. (London time) two Business Days
prior to the first day of such Interest Period, in the approximate amount of
$1,000,000 and having a maturity approximately equal to such Interest Period.
"Eurodollar Loan" means a Loan which bears interest at a Eurodollar
Rate.
"Eurodollar Rate" means, with respect to a Eurodollar Advance for the
relevant Interest Period, the sum of (i) the quotient of (a) the Eurodollar Base
Rate applicable to such Interest Period, divided by (b) one minus the Reserve
Requirement (expressed as a decimal) applicable to such Interest Period, plus
(ii) the Applicable Margin. The Eurodollar Rate shall be rounded to the next
higher multiple of 1/16 of 1% if the rate is not such a multiple.
"Excluded Subsidiary" is defined in Section 6.24 hereof.
"Facility Fee Rate" means a percentage of one-fifth of one percent
(0.20%) per annum.
"Federal Agency" means FNMA or FHA.
"Federal Funds Effective Rate" means, for any day, an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations at approximately 10 a.m. (Chicago
time) on such day on such transactions received by the Agent from three Federal
funds brokers of recognized standing selected by the Agent in its sole
discretion.
"Federal Funds Funding Rate" means, with respect to any Fed Funds Loan
for any day, the rate per annum equal to the consensus (or if no consensus
exists, the arithmetic average) of the rates at which reserves are offered by
first class banks to other first class banks (at approximately the time at which
the applicable Borrowing Notice or Conversion/Continuation Notice is received or
the time at which an
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<PAGE> 21
automatic continuation is deemed to have occurred) on such day (or if such day
is not a Business Day, on the immediately preceding Business Day) on overnight
federal funds transactions with members of the Federal Reserve System arranged
by federal funds brokers, received by the Agent from three federal funds brokers
of recognized standing selected by the Agent in its sole discretion; provided,
however, that in lieu of determining the rate in the foregoing manner, the Agent
may substitute therefor the consensus (or if no consensus exists, the arithmetic
average) of the rates at which reserves are offered by first class banks to
other first class banks at 10:00 a.m. (Chicago time) on such day (or if such day
is not a Business Day, on the immediately preceding Business Day) on overnight
federal funds transactions with members of the Federal Reserve System arranged
by federal funds brokers, received by the Agent from three federal funds brokers
of recognized standing selected by the Agent in its sole discretion.
"Federal Funds Rate" means, for any day, an interest rate per annum
equal to (i) the Federal Funds Funding Rate for such day plus (ii) one quarter
of one percent (0.25%) plus (iii) the Applicable Margin.
"Fed Funds Advance" means an Advance which bears interest at the
Federal Funds Rate.
"Fed Funds Loan" means any Loan made as a part of a Fed Funds Advance.
"Fees" is defined in Section 2.6.
"FHA" means the Federal Housing Administration or other agency,
corporation or instrumentality of the United States to which the powers and
duties of the Federal Housing Administration have been transferred.
"FHA Title I Approved Mortgagee" means an institution that is approved
by the FHA to act as a servicer and mortgagee of record with respect to a Title
I Qualifying Loan insured by the FHA.
"FICO" means the "delinquency predictor" model established by Fair
Isaac Co. and shown on a credit report prepared by Equifax, TRW or Trans Union.
"First Chicago" means The First National Bank of Chicago in its
individual capacity, and its successors.
"Fixed Rate" means the Eurodollar Rate.
"Fixed Rate Advance" means an Advance which bears interest at a Fixed
Rate.
"Fixed Rate Loan" means a Loan which bears interest at a Fixed Rate.
"FNMA" means the Federal National Mortgage Association or any corporate
successor thereto.
"GAAP" means generally accepted accounting principles as in effect from
time to time, consistently applied.
"Greenwich Capital" means Greenwich Capital Markets, Inc.
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<PAGE> 22
"Greenwich Tri-Party Agreement" means an agreement among Borrower,
Greenwich Capital and the Agent on behalf of the Lenders with respect to the
Approved Investor Commitment issued by Greenwich Capital, in the form attached
hereto as Exhibit "C".
"HLTV Loan" means any Eligible Conventional HI/DC Qualifying Loan which
(i) is secured by a Mortgage and (ii) had a loan-to-value ratio at origination
of one hundred percent (100%) or more using the Borrower's market value
determination of the premises securing such Eligible Conventional HI/DC
Qualifying Loan as described in clause (iii)(12) of the definition of "Basic
Eligibility Requirements".
"Included Subsidiary" means, as of any date, any Subsidiary of the
Borrower which is not then an Excluded Subsidiary.
"Indebtedness" of a Person means such Person's (i) obligations for
borrowed money, (ii) obligations representing the deferred purchase price of
Property or services (other than accounts payable arising in the ordinary course
of such Person's business payable on terms customary in the trade), (iii)
obligations, whether or not assumed, secured by Liens or payable out of the
proceeds or production from property now or hereafter owned or acquired by such
Person, (iv) obligations which are evidenced by notes, acceptances, or other
instruments, (v) Capitalized Lease Obligations, (vi) Contingent Obligations,
(vii) Letters of Credit, (viii) Sale and Leaseback Transactions, (ix) Operating
Lease Obligations, and (x) Net Mark-to-Market Exposure of Rate Hedging
Agreements.
"Indenture" means a certain Indenture dated as of November 22, 1996
with American Stock Transfer & Trust Company as indenture trustee, as amended
from time to time hereafter, which governs the Subordinated Notes.
"Ineligible Collateral" means any Pledged Item that does not at the
time constitute Eligible Collateral.
"Interest Period" means, with respect to a Eurodollar Advance, a period
of one, two or three months commencing on a Business Day, all as selected by the
Borrower pursuant to this Agreement. An Interest Period of one, two or three
months shall end on the day which corresponds numerically to such date one, two
or three months thereafter, provided, however, that if there is no such
numerically corresponding day in such next, second or third succeeding month,
such Interest Period shall end on the last Business Day of such next, second or
third succeeding month. If an Interest Period would otherwise end on a day which
is not a Business Day, such Interest Period shall end on the next succeeding
Business Day, provided, however, that if, with respect to a one, two or three
month Interest Period, said next succeeding Business Day falls in a new calendar
month, such Interest Period shall end on the immediately preceding Business Day.
"Investment" of a Person means any loan, advance (other than
commission, travel and similar advances to officers and employees made in the
ordinary course of business), extension of credit (other than accounts
receivable arising in the ordinary course of business on terms customary in the
trade) or contribution of capital by such Person; stocks, bonds, mutual funds,
partnership interests, notes, debentures or other securities owned by such
Person; any deposit accounts and certificate of deposit owned by such Person;
and structured notes, derivative financial instruments and other similar
instruments or contracts owned by such Person.
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<PAGE> 23
"Investor Transmittal Letter" means either a "Whole Loan Sale
Transmittal Letter" or a "Warehouse-Related MBS Transmittal Letter"
substantially in the form of Exhibits "4" and "5" to the Security Agreement.
"IO Securities" means a security representing an undivided interest in
all or a portion of the interest payments due on a pool of Qualifying Loans.
"Lenders" means the lending institutions listed on the signature pages
of this Agreement and their respective successors and assigns.
"Lending Installation" means, with respect to a Lender or the Agent,
any office, branch, subsidiary or affiliate of such Lender or the Agent.
"Lending Sublimits" is defined in Section 2.1.1.
"Letter of Credit" of a Person means a letter of credit or similar
instrument which is issued upon the application of such Person or upon which
such Person is an account party or for which such Person is in any way liable.
"Lien" means any lien (statutory or other), mortgage, pledge,
hypothecation, assignment, deposit arrangement, encumbrance or preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever (including, without limitation, the interest of a vendor or
lessor under any conditional sale, Capitalized Lease or other title retention
agreement).
"Loan" means, with respect to a Lender, such Lender's loan made
pursuant to Article II (or any conversion or continuation thereof).
"Loan Documents" means this Agreement and the Notes, the Security
Agreement, the PEC Tri-Party Agreement, the Greenwich Tri-Party Agreement and
the other documents and agreements contemplated hereby and executed by the
Borrower in favor of the Agent or any Lender.
"Material Adverse Effect" means a material adverse effect on (i) the
business, Property, condition (financial or otherwise), results of operations,
or prospects of the Borrower and its Subsidiaries taken as a whole, (ii) the
ability of the Borrower to perform its obligations under the Loan Documents, or
(iii) the validity or enforceability of any of the Loan Documents or the rights
or remedies of the Agent or the Lenders thereunder.
"Mego Financial" means Mego Financial Corp., a New York corporation,
which currently holds in excess of 80% of the common voting stock in the
Borrower.
"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.
"Mortgage Note" means a note evidencing the indebtedness secured by a
Mortgage.
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<PAGE> 24
"Multiemployer Plan" means a Plan maintained pursuant to a collective
bargaining agreement or any other arrangement to which the Borrower or any
member of the Controlled Group is a party to which more than one employer is
obligated to make contributions.
"Net Mark-to-Market Exposure" of a Person means, as of any date of
determination, the excess (if any) of all unrealized losses over all unrealized
profits of such Person arising from Rate Hedging Agreements. "Unrealized losses"
means the fair market value of the cost to such Person of replacing such Rate
Hedging Agreement as of the date of determination (assuming the Rate Hedging
Agreement were to be terminated as of that date), and "unrealized profits" means
the fair market value of the gain to such Person of replacing such Rate Hedging
Agreement as of the date of determination (assuming such Rate Hedging Agreement
were to be terminated as of that date).
"Net Worth" means as of any date of determination thereof, the net
worth of the Borrower and its Included Subsidiaries on a consolidated basis as
determined in accordance with Agreement Accounting Principles.
"Notes" means promissory notes evidencing amounts that may be advanced
from time to time under this Agreement in substantially the form of Exhibit "A"
attached hereto, each duly executed by the Borrower and payable to the order of
a Lender, including any amendment, modification, renewal or replacement of such
promissory notes.
"Notice of Assignment" is defined in Section 12.3.2.
"Obligations" means all unpaid principal of and accrued and unpaid
interest on the Notes, all accrued and unpaid fees and all expenses,
reimbursements, indemnities and other obligations of the Borrower to the Lenders
or to any Lender, the Agent, the Collateral Agent or any indemnified party
hereunder arising under the Loan Documents.
"Operating Lease Obligations" means, as at any date of determination,
the amount obtained by aggregating the present values, determined in the case of
each particular Operating Lease by applying a discount rate (which discount rate
shall equal the discount rate which would be applied under Agreement Accounting
Principles if such Operating Lease were a Capitalized Lease) from the date on
which each fixed lease payment is due under such Operating Lease to such date of
determination, of all fixed lease payments due under all Operating Leases of the
Borrower and its Included Subsidiaries.
"Operating Lease" of a Person means any lease of Property (other than a
Capitalized Lease) by such Person as lessee which has an original term
(including any required renewals and any renewals effective at the option of the
lessor) of one year or more.
"Participants" is defined in Section 12.2.1.
"Payment Date" means the first day of each month.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
thereto.
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<PAGE> 25
"PEC Tri-Party Agreement" means the agreement among the Borrower, the
Agent for the benefit of the Lenders and Preferred Equities Corporation, an
Affiliate of Borrower, with respect to the subservicing of the Pledged
Qualifying Loans, in the form attached hereto as Exhibit "H".
"Permitted Warehouse Indebtedness" means Indebtedness of the Borrower
or any Included Subsidiary which is either (i) secured by Qualifying Loans that
are not of a type that could be an Eligible Qualifying Loan under this Agreement
or (ii) secured by Qualifying Loans that could be Eligible Qualifying Loans
under this Agreement but do not then qualify for inclusion in the Borrowing Base
and which are pledged to the Collateral Agent for the benefit of the holders of
such Indebtedness (or if not pledged to the Collateral Agent, other arrangements
have been made to ensure to the Agent's satisfaction that the Lenders'
collateral pool does not overlap with the collateral pool securing such other
Indebtedness), provided in each case that the Agent has received copies of all
loan documents governing such Indebtedness confirming that, or has received
written confirmation from the holders of such Indebtedness that, such conditions
have been satisfied.
"Person" means any natural person, corporation, firm, joint venture,
partnership, association, limited liability company, enterprise, trust or other
entity or organization, or any government or political subdivision or any
agency, department or instrumentality thereof.
"Plan" means an employee pension benefit plan which is covered by Title
IV of ERISA or subject to the minimum funding standards under Section 412 of the
Code as to which the Borrower or any member of the Controlled Group may have any
liability.
"Pledge Date" means the date on which a Qualifying Loan is first
delivered in pledge to the Collateral Agent or is otherwise made subject to a
security interest in favor of the Agent or Collateral Agent for the benefit of
the Lenders, provided that the date of delivery of a Qualifying Loan covered by
an Agreement to Pledge shall be deemed to be the date of delivery of such
Agreement to Pledge even after subsequent delivery of the related Required
Qualifying Loan Documents.
"Pledged Qualifying Loans" means all Qualifying Loans that are from
time to time delivered (or, in the case of AP Qualifying Loans, are committed to
be delivered) to the Collateral Agent pursuant to this Agreement and the
Security Agreement.
"Primary Advance" means a Eurodollar Advance, a Fed Funds Advance, a
Buy Down Advance or an Alternate Base Rate Advance.
"Primary Commitment" means, for each Lender, the obligation of such
Lender to make Loans not exceeding the amount set forth as its "Primary
Commitment" (which equals its Commitment minus its Swingline Commitment, if any)
on Schedule "1" attached hereto or as set forth in any Notice of Assignment
relating to any assignment that has become effective pursuant to Section 12.3.2,
as such amount may be modified from time to time pursuant to the terms hereof.
"Primary Commitment Percentage" means, for each Lender as of any date,
the quotient of (a) such Lender's Primary Commitment divided by (b) the
aggregate Primary Commitments (which equals the Aggregate Commitment minus the
Swingline Commitment), which Primary Commitment Percentage shall initially be as
set forth on Schedule "1" attached hereto, as it may be amended from time to
time.
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<PAGE> 26
"Primary Loan" means a Loan consisting of a portion of a Primary
Advance.
"Property" of a Person means any and all property, whether real,
personal, tangible, intangible, or mixed, of such Person, or other assets owned,
leased or operated by such Person.
"Purchasers" is defined in Section 12.3.1.
"Qualifying Loan" means (i) a loan of money evidenced by a Mortgage
Note or an Unsecured Note or (ii) a RIC, whether or not secured by a Mortgage.
"Rate Hedging Agreement" means an agreement, device or arrangement
providing for payments which are related to fluctuations of interest rates,
exchange rates or forward rates, including, but not limited to,
dollar-denominated or cross-currency interest rate exchange agreements, forward
currency exchange agreements, interest rate floor, cap or collar protection
agreements, forward rate currency or interest rate options, puts and warrants.
"Rate Hedging Obligations" of a Person means any and all obligations of
such Person, whether absolute or contingent and howsoever and whensoever
created, arising, evidenced or acquired (including all renewals, extensions and
modifications thereof and substitutions therefor), under (i) any and all Rate
Hedging Agreements, and (ii) any and all cancellations, buy backs, reversals,
terminations or assignments of any Rate Hedging Agreement.
"Recourse Servicing" means any servicing rights under a Servicing
Agreement which obligates the Borrower either to repurchase Qualifying Loans
upon default by the borrower thereunder or to indemnify any party having an
interest in such Qualifying Loans against any loss arising from such a default
for reasons other than a breach of any representations or warranties regarding
the condition of such Qualifying Loans at origination which were made by the
Borrower as originator of such Qualifying Loans, provided that "Recourse
Servicing" shall not be deemed to include any servicing rights which provide for
recourse against the Borrower which is contractually limited to recovery against
the value of any related IO Securities, Residual Certificates or excess
servicing rights held by the Borrower or the cash flows to be received thereon
as a result of their subordination to senior securities, certificates or rights
created and governed by the same documents that created and govern such IO
Securities, Residual Certificates and excess servicing rights.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor thereto
or other regulation or official interpretation of said Board of Governors
relating to reserve requirements applicable to member banks of the Federal
Reserve System.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor or other
regulation or official interpretation of said Board of Governors relating to the
extension of credit by banks for the purpose of purchasing or carrying margin
stocks applicable to member banks of the Federal Reserve System.
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<PAGE> 27
"Reinstated Qualifying Loan" means a Title I Qualifying Loan or a
Conventional HI/DC Qualifying Loan previously sold by the Borrower which the
Borrower has repurchased as a result of a default by the obligor thereunder
which default has subsequently been cured so that such Qualifying Loan qualifies
as an Eligible Qualifying Loan, including without limitation meeting all
requirements of the applicable Approved Investor Commitment, notwithstanding
such prior default and repurchase.
"Reportable Event" means a reportable event as defined in Section 4043
of ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events as to which the PBGC by regulation waived the
requirement of Section 4043(a) of ERISA that it be notified within 30 days of
the occurrence of such event, provided, however, that a failure to meet the
minimum funding standard of Section 412 of the Code and of Section 302 of ERISA
shall be a Reportable Event regardless of the issuance of any such waiver of the
notice requirement in accordance with either Section 4043(a) of ERISA or Section
412(d) of the Code.
"Required Lenders" means Lenders in the aggregate having at least 75%
of the Aggregate Commitment or, if the Aggregate Commitment has been terminated,
Lenders in the aggregate holding at least 75% of the aggregate unpaid principal
amount of the outstanding Advances.
"Required Qualifying Loan Documents" means the instruments and
documents described in Schedule "A" to the Security Agreement, as applicable to
a particular Qualifying Loan, which are required to be delivered to the
Collateral Agent.
"Reserve Requirement" means, with respect to the Eurodollar Rate
applicable to an Interest Period, the maximum aggregate reserve requirement
(including all basic, supplemental, marginal and other reserves) which is
imposed under Regulation D on eurocurrency liabilities.
"Residential Mortgage Loan" means a Qualifying Loan secured by a
Mortgage on a Single Family Residence.
"Residual Certificates" means a security (whether identified as a
certificate, instrument or interest) representing the residual interest in a
real estate mortgage investment conduit or other entity formed by the Borrower
and in which Borrower has retained a residual interest which residual interest
is only payable on a fully subordinated basis after all regular interests in
and/or debt issued by such entity has been fully repaid.
"Restricted Assets" means "cash deposits, restricted", "excess
servicing rights" and "mortgage-related securities, at fair value", as such
categories are established and valued under Agreement Accounting Principles and
disclosed by the consolidated financial statements of the Borrower and its
Included Subsidiaries.
"RIC" means a retail installment contract evidencing indebtedness
arising from home improvements made for the benefit of the obligor thereunder.
"Risk-Based Capital Guidelines" is defined in Section 3.2.
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<PAGE> 28
"Sale and Leaseback Transaction" means any sale or other transfer of
Property by any Person with the intent to lease such Property as lessee.
"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.
"Secured Parties" is defined in Paragraph 1 of the Security Agreement.
"Security or Securities" means a security representing an undivided
fractional interest in a pool of Title I Qualifying Loans or Conventional HI/DC
Qualifying Loans, which security is issued or sponsored by the Borrower, or an
Affiliate of Borrower.
"Security Agreement" means the Security and Collateral Agency Agreement
as of even date herewith, substantially in the form of Exhibit "I" attached
hereto, by and among the Borrower, the Agent, and the Collateral Agent, pursuant
to which a security interest is created in favor of the Collateral Agent for the
Lenders under this Agreement in certain Collateral to be pledged pursuant to
this Agreement, as the same may, from time to time, be further supplemented,
modified or amended.
"Servicing Agreement" means a written contract of the Borrower with
another Person to act on behalf of such other Person to, among other things,
receive payments in respect of Qualifying Loans and to service Qualifying Loans,
whether or not such Qualifying Loans are Pledged Qualifying Loans.
"Settlement Account" means the account established pursuant to Section
8.4.
"Single Employer Plan" means a Plan maintained by the Borrower or any
member of the Controlled Group for employees of the Borrower or any member of
the Controlled Group.
"Single Family Residence" means a one to four family dwelling unit,
which may be a condominium unit but which shall not be a mobile home,
manufactured housing or a dwelling unit in a cooperative apartment building.
"Subordinated Indebtedness" of a Person means (i) any Indebtedness of
the Borrower to Mego Financial (other than Tax Agreement Indebtedness), the
payment of which is subordinated to payment of the Obligations to the written
satisfaction of the Required Lenders, and (ii) the Subordinated Notes.
"Subordinated Notes" means (i) those senior subordinated unsecured
promissory notes of the Borrower issued and outstanding from time to time
pursuant to the Indenture, which notes currently bear interest at 12.5% per
annum payable semi-annually with the entire principal sum being due on December
1, 2001, as such Indenture may be amended from time to time hereafter with the
prior written approval of the Agent, such approval not to be unreasonably
withheld or delayed, and (ii) any subordinated unsecured promissory notes of the
Borrower issued and outstanding from time to time pursuant to indentures
executed and delivered after the date hereof, provided that such notes and
indenture provide for no principal payments thereunder prior to the Termination
Date and have otherwise been reviewed and approved by the Agent, such approval
not to be unreasonably withheld or delayed.
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<PAGE> 29
"Subservicing Agreement" means a Servicing Agreement between the
Borrower and a Person which does not own the Qualifying Loans being serviced
thereunder but only has servicing or other non-ownership rights with respect
thereto.
"Subsidiary" of a Person means (i) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(ii) any partnership, limited liability company, association, joint venture or
similar business organization more than 50% of the ownership interests having
ordinary voting power of which shall at the time be so owned or controlled.
Unless otherwise expressly provided, all references herein to a "Subsidiary"
shall mean a Subsidiary of the Borrower.
"Substantial Portion" means, with respect to the Property of the
Borrower and its Subsidiaries, Property which (i) represents more than 10% of
the consolidated assets of the Borrower and its Subsidiaries as would be shown
in the consolidated financial statements of the Borrower and its Subsidiaries as
at the beginning of the twelve-month period ending with the month in which such
determination is made, or (ii) is responsible for more than 10% of the
consolidated net sales or of the consolidated net income of the Borrower and its
Subsidiaries as reflected in the financial statements referred to in clause (i)
above.
"Swingline Advance" means an Advance made by the Swingline Lender under
the special availability provisions described in Section 2.4 bearing interest at
the Alternate Base Rate.
"Swingline Commitment" means the obligation of the Swingline Lender to
make Swingline Loans not exceeding in the aggregate the amount of Five Million
Dollars ($5,000,000) as shown on Schedule "1", as such amount may be modified
from time to time pursuant to the terms hereof.
"Swingline Lender" means First Chicago.
"Swingline Loan" means a Loan consisting of a portion of a Swingline
Advance.
"Tangible Net Worth" means Net Worth less the sum of the following
(without duplication): (a) any assets of the Borrower and its consolidated
Included Subsidiaries which would be treated as intangibles under Agreement
Accounting Principles including, without limitation, good-will, research and
development costs, trade-marks, trade names, copyrights, patents and unamortized
debt discount and expenses (but without deduction of (i) any write-ups of assets
made in accordance with Agreement Accounting Principles or (ii) any IO
Securities, Residual Certificates, mortgage servicing rights or excess servicing
rights as determined in accordance with Agreement Accounting Principles), (b)
loans or other extensions of credit to officers of the Borrower or of any of its
consolidated Subsidiaries other than Qualifying Loans made to such Persons in
the ordinary course of business, and (c) any loans or extensions of credit to
Excluded Subsidiaries and Affiliates.
"Tax Agreement Indebtedness" means any and all Indebtedness of the
Borrower to Mego Financial under the tax-sharing agreement described on Schedule
6.16, as amended from time to time, on account of the Borrower's share of the
consolidated federal income tax liability of the Borrower and Mego Financial.
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<PAGE> 30
"Termination Date" means June 15, 1998.
"Title I Qualifying Loan" means either a Residential Mortgage Loan or
an unsecured loan which (i) is a home improvement loan made solely for the
purpose of funding improvements to a Single Family Residence owned by the
obligor under such loan and (ii) is insured by the FHA pursuant to Title I,
Section 2 of the National Housing Act, as amended and in effect from time to
time, and the Title I Regulations.
"Title I Regulations" means 24 C.F.R. Parts 201 and 202, and other
issuances of the United States Department of Housing and Urban Development
relating to Title I Qualifying Loans, including the related handbooks,
circulars, notices and mortgage letters, each as amended and in effect from time
to time.
"Transfer of Note Report" means, with respect to each Title I
Qualifying Loan, the Title I Transfer of Note Report as contained in the United
States Department of Housing and Urban Development form number HUD-27030 (8-86)
or any update or modification thereof. To the extent permissible under
applicable H.U.D. rules and regulations, one Transfer of Note Report may be
utilized for multiple Title I Qualifying Loans.
"Transferee" is defined in Section 12.5.
"Tri-Party Agreement" means the Greenwich Tri-Party Agreement or a
similar agreement satisfactory to the Required Lenders with any other Approved
Investor.
"Trust Receipt" means a trust receipt substantially in the form of
Exhibit "2" to the Security Agreement.
"Type" means, with respect to any Advance, its nature as an Alternate
Base Rate Advance, Buy Down Advance, Eurodollar Advance, Fed Funds Advance or
Swingline Advance.
"Uncleared Loan Funding Checks" shall mean any check or draft issued by
the Borrower or other item which represents all or any portion of the amount to
be secured by a Pledged Qualifying Loan if such check or draft or other item has
not been collected upon and paid to the named payee therein in good funds.
"Unfunded Liabilities" means the amount (if any) by which the present
value of all vested and unvested accrued benefits under all Single Employer
Plans exceeds the fair market value of all such Plan assets allocable to such
benefits, all determined as of the then most recent valuation date for such
Plans using PBGC actuarial assumptions for single employer plan terminations.
"Unmatured Default" means an event which but for the lapse of time or
the giving of notice, or both, would constitute a Default.
"Unsecured Note" means a note evidencing any indebtedness which is not
secured by a Mortgage.
"Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of
the outstanding voting securities of which shall at the time be owned or
controlled, directly or indirectly, by such Person or one or more Wholly-Owned
Subsidiaries of such Person, or by such Person and one or more Wholly-Owned
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Subsidiaries of such Person, or (ii) any partnership, limited liability company,
association, joint venture or similar business organization 100% of the
ownership interests having ordinary voting power of which shall at the time be
so owned or controlled.
The foregoing definitions shall be equally applicable to both the
singular and plural forms of the defined terms.
ARTICLE II
THE CREDITS
2.1. Commitment, Sublimits and Types of Advances.
2.1.1. Commitment and Lending Sublimits. From and including
the date of this Agreement and prior to the Termination Date, each Lender
severally agrees, on the terms and conditions set forth in this Agreement
(including the lending sublimits (the "Lending Sublimits") set forth below and
the Borrowing Base Sublimits under Section 2.1.2), to make Loans to the Borrower
from time to time; provided that, on any date, after giving effect to such Loans
and all other loans that the Borrower has requested be made on such date under
this Agreement:
(1) the aggregate principal balance then outstanding
under all Loans then held by such Lender shall not exceed the amount of
such Lender's then-current Commitment;
(2) the aggregate principal balance then outstanding of
all Primary Loans then held by such Lender shall not exceed the amount
of such Lender's Primary Commitment;
(3) the aggregate principal balance of all outstanding
Swingline Loans held by the Swingline Lender on such date shall not
exceed the Swingline Lender's Swingline Commitment;
(4) the aggregate principal balance of all outstanding
Advances under this Agreement on such date shall not exceed the
Aggregate Commitment; and
(5) the Coverage Requirement on such date shall not
exceed the lowest of (i) the Aggregate Commitment or (ii) the
then-current Borrowing Base or (iii) the maximum purchase price payable
by the Approved Investors (including without limitation Greenwich
Capital) after taking into account all minimum and maximum limits
established by the applicable Approved Investor Commitments and the
most recent Pricing Letters issued thereunder, all as confirmed in
writing to the Agent by the Approved Investors pursuant to the
Tri-Party Agreements.
Subject to the terms of this Agreement, the Borrower may borrow, repay and
reborrow at any time prior to the Termination Date. The Commitments to lend
hereunder shall expire on the Termination Date.
2.1.2. Borrowing Base Sublimits. The maximum amount that can
be credited toward the Borrowing Base from certain types of Collateral shall be
limited (the "Borrowing Base Sublimits") so that:
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(1) the Borrowing Base value attributable to Eligible
Conventional HI/DC Qualifying Loans having FICO scores of 600 to 620
shall not exceed, in the aggregate, 6% of the Aggregate Commitment;
(2) the Borrowing Base value attributable to Title I
Qualifying Loans which are not secured by a Mortgage shall not exceed,
in the aggregate, 5% of the Aggregate Commitment; and
(3) the Borrowing Base value attributable to Conventional
HI/DC Qualifying Loans which are not secured by a Mortgage shall not
exceed, in the aggregate, 5% of the Aggregate Commitment.
2.1.3. Types of Advances. Each Advance hereunder shall
consist of one or more Alternate Base Rate Advances, Buy Down Advances, Fixed
Rate Advances, Fed Funds Advances or Swingline Advances requested by the
Borrower in accordance with Sections 2.7 and 2.8. Primary Advances shall be
generally available as provided in Section 2.2. Buy Down Advances shall only be
available as provided in Section 2.3. Swingline Advances shall only be available
as provided in Section 2.4.
2.2. Primary Advances. Subject to the terms and conditions herein
the Borrower may request any of the Primary Advances (other than Buy Down
Advances) from the Lenders on a pro rata basis in accordance with each such
Lender's Primary Commitment Percentage. Primary Advances shall accrue interest
at the Eurodollar Rate, the Federal Funds Rate or the Alternate Base Rate, as
selected by the Borrower in accordance with Sections 2.7 and 2.8.
2.3. Buy Down Advances. On or before the first day of each month,
the Borrower may, at its option, allocate a portion of the Commitment of each
Lender (with the consent of such Lender) to be available for Buy Down Advances
and notify the Agent of such allocation. During such calendar month Buy Down
Loans can only be requested from Lenders identified in such a notice to the
Agent and the aggregate principal balance of all Buy Down Loans from each such
Lender outstanding during such month cannot exceed the portion of such Lender's
Commitment so allocated for such month. To the extent a Lender has agreed with
the Borrower and so communicated to the Agent, the Borrower may request Buy Down
Loans from such Lender on a non-pro rata basis. The Agent will collect and remit
interest on such Buy Down Loans at the Buy Down Rate, but shall not be obligated
to confirm any matters with respect to Net Deposits maintained with such Lender
or to collect any fees or amounts charged by such Lender with regard to any
deficiency in such Net Deposits. Upon the occurrence of any Default each such
Buy-Down Loan shall be automatically converted to an Alternate Base Rate Loan.
Buy Down Loans are based upon the expectation that the
Borrower will maintain average daily "Net Deposits" of at least 100% of the
amount of each Buy Down Loan with the Lender providing such Buy Down Loan during
the term of such Buy Down Loan. The term "Net Deposits" shall mean all
non-interest bearing time and demand deposits which are maintained by Borrower
at such Lender after deduction of any portion of such deposits necessary in such
Lender's reasonable discretion to compensate such Lender for all reserve
requirements of the Federal Reserve Board, all insurance assessments of the
Federal Deposit Insurance Corporation and other service and activity charges.
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Each Lender shall impose its own requirements upon the
Borrower in dealing with deviations in actual Net Deposits from projected Net
Deposits. If the daily average of Net Deposits maintained by the Borrower at
such Lender during any month is less than the daily average outstanding
principal balance of such Lender's Buy Down Loans for such month, the deficiency
may, at such Lender's discretion, either be made up by maintaining a
corresponding excess amount of Net Deposits with such Lender thereafter, or the
Borrower will pay to such Lender a balance deficiency fee based on such
deficiency. If the daily average of Net Deposits maintained by the Borrower with
such Lender during any calendar month exceeds the daily average outstanding
principal balance of such Lender's Buy Down Loans for the applicable borrowing
period, any excess may be credited against Net Deposits required to support such
Lender's Buy Down Loans in following months in a manner acceptable to the
Borrower and such Lender. All such matters shall be governed by separate
understandings among such Lender and the Borrower and the Agent shall have no
responsibility therefor.
2.4. Swingline Advances. Subject to the terms and conditions herein
(including the Lending Sublimits), the Borrower may request Swingline Advances
from only the Swingline Lender on a non-pro rata basis. On any Borrowing Date
each Swingline Advance requested by the Borrower shall be funded to the Borrower
by the Swingline Lender in the amount designated in the Borrowing Notice. If any
amounts are advanced by the Swingline Lender to cover checks or wire transfers
from Borrower accounts maintained with the Swingline Lender when there are
insufficient funds in such accounts to cover the applicable check or wire
transfer and sufficient funds are not deposited in the applicable account before
the close of business on the day on which the applicable check or wire transfer
request is honored, then the Borrower shall be deemed to have requested, and the
Swingline Lender may (but shall not be obligated to) elect to make, a Swingline
Advance at the Alternate Base Rate to pay such overdraft amount (even if such a
Swingline Advance would cause the aggregate amount of all outstanding Swingline
Advances to exceed the Swingline Commitment); provided however, that (i) the
Swingline Lender shall not make any such Swingline Advance to the extent such
Advance would cause the Coverage Requirement to exceed the lesser of (A) the
Aggregate Commitment or (B) the then-current Borrowing Base, and (ii) the
reallocations of any such Swingline Advances among the Lenders shall be as set
forth in, but subject to the provisions of, Section 2.5. The Borrower may, from
time to time upon five (5) Business Days advance written notice to the Lenders,
elect to convert all or any portion (in multiples of $500,000) of the Swingline
Lender's Swingline Commitment into an increase in the Primary Commitment of the
Swingline Lender. Once so converted the Swingline Commitment shall not be
restored or increased without the written consent of the Swingline Lender.
2.5. Reallocation of Swingline Advances. With respect to all
Swingline Advances, at the request of Swingline Lender given at any time,
whether or not a Default or Unmatured Default has occurred, all Swingline
Advances shall be reallocated among all Lenders, in accordance with each
Lender's Commitment Percentage, and shall thereafter be deemed Alternate Base
Rate Advances. Each Lender holding less than its Commitment Percentage of all
such Advances being allocated shall immediately purchase for cash and at face
value such participations in the Notes held by other Lenders, and make such
other adjustments, as may be needed to cause each Lender to hold its Commitment
Percentage of such Advances. Notwithstanding the preceding provisions of this
Section 2.5, (i) the obligation of each Lender to purchase participations
described in the preceding sentence with respect to any particular Swingline
Advance is subject to the condition that the Swingline Lender believed in good
faith that all conditions under Section 4.2 were satisfied at the time the
applicable Swingline Advance was made, and (ii) no Lender shall be required to
so purchase such participations to the extent that such purchase would cause
such
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Lender's share of the aggregate unpaid principal amount of all Loans then
outstanding under this Agreement to exceed its Commitment hereunder.
Notwithstanding anything to the contrary contained in this Agreement, after any
such reallocation has occurred: (i) the Swingline Commitment shall be zero and
(ii) all future Advances, if any, shall be made as Alternate Base Rate Advances.
2.6. Fees. The Borrower shall pay the following fees (the "Fees"):
2.6.1. Facility Fees. A facility fee based on the Aggregate
Commitment from time to time from and after the date hereof, calculated at the
Facility Fee Rate, expressed as a per diem rate on the actual Aggregate
Commitment for each day during the preceding full or partial calendar quarter,
payable in arrears, on the last day of each such calendar quarter and on the
Termination Date. This fee shall be paid to the Agent and allocated among the
Lenders on a pro rata basis in accordance with their respective Commitments
during such quarter.
2.6.2. Closing Fees. A closing fee based on the Aggregate
Commitment in effect on the date hereof, calculated as one-twentieth of one
percent (0.05%) on the Aggregate Commitment, payable on the first to occur of
(i) March 31, 1997 and (ii) the Effective Date. This fee shall be paid to the
Agent and allocated among the Lenders on a pro rata basis in accordance with
their respective Commitments on the date hereof.
2.6.3. Agent Fees. Any fees payable to the Agent pursuant to
the Borrower's letter agreement with the Agent dated December 23, 1996.
2.6.4. Collateral Agent Fees. Any fees payable to Collateral
Agent for its services rendered pursuant to the Security Agreement as agreed to
by the Borrower and charged by Collateral Agent from time to time.
2.6.5. Deficiency Fees Payable in connection with Buy Down
Loans. The Borrower shall pay any fees and other charges when due to any Lender
providing Buy Down Loans under separate agreement as described in Section 2.3.
2.7. Method of Selecting Types and Interest Periods for New
Advances. The Borrower shall select the Type of Advance and, in the case of each
Fixed Rate Advance, the Interest Period applicable to each Advance from time to
time. The Borrower shall give the Agent irrevocable notice (a "Borrowing
Notice") not later than (i) noon (Chicago time) on the Borrowing Date of each
Alternate Base Rate Advance, Buy Down Advance or Fed Funds Advance, (ii) 4:00
p.m. (Chicago time) on the proposed Borrowing Date for each Swingline Advance,
and (iii) 10:00 a.m. (Chicago time) at least three Business Days before the
Borrowing Date for each Eurodollar Advance, specifying:
(a) the Borrowing Date, which shall be a Business Day, of such
Advance,
(b) the aggregate amount of such Advance, which shall not be less
than $4,000,000 or a multiple of $100,000 in excess thereof
(other than a Swingline Advance which shall have no minimum
amount),
(c) the Type of Advance selected,
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(d) in the case of each Eurodollar Advance, the Interest Period
applicable thereto, and
(e) if such Advance includes one or more Buy Down Loans, the
Lender or Lenders designated for such Buy Down Loans and the
amount of such Buy Down Loans allocated to each such Lender.
Not later than noon (Chicago time) on each Borrowing Date, with respect to all
Advances other than Swingline Advances, each Lender shall make available its
Loan or Loans comprising such Advance, in funds immediately available in Chicago
to the Agent at its address specified pursuant to Article XIII. Swingline
Advances may be made available at any time up to the close of business with
respect to Swingline Advances. The Agent will make the funds so received from
the Lenders available to the Borrower at the Agent's aforesaid address.
2.8. Conversion and Continuation of Outstanding Advances. An
Alternate Base Rate Advance shall continue as an Alternate Base Rate Advance
unless and until such Alternate Base Rate Advance is converted into another Type
of Advance (other than a Buy Down Advance or Swingline Advance). A Buy Down
Advance shall continue as a Buy Down Advance unless and until the Borrower has
paid any such Buy Down Advance by noon (Chicago time) on any Business Day. A Fed
Funds Advance shall continue as a Fed Funds Advance unless and until (a) such
Advance is converted into a different Type of Advance (other than a Buy Down
Advance or a Swingline Advance) in accordance with the terms hereof or (b) the
Borrower has paid any such Fed Funds Advance prior to noon (Chicago time) on any
Business Day. A Swingline Advance shall continue as a Swingline Advance unless
and until the Borrower has paid any such Swingline Advance prior to 3:00 p.m.
(Chicago time) on any Business Day. Each Eurodollar Advance shall continue as a
Eurodollar Advance until the end of the then applicable Interest Period
therefor, at which time such Eurodollar Advance shall be automatically converted
into an Alternate Base Rate Advance unless the Borrower shall have given the
Agent a Conversion/Continuation Notice requesting that, at the end of such
Interest Period, such Eurodollar Advance either continue as a Eurodollar Advance
for the same or another Interest Period or be converted into an Advance of
another Type (other than a Buy Down Advance or Swingline Advance). Buy Down
Advances and Swingline Advances may be repaid out of new Advances hereunder but
may not be converted directly to a different Type of Advance. The Borrower may
elect from time to time to convert all or any part of an Advance of any Type
(other than a Buy Down Advance or Swingline Advance) into any other Type or
Types of Advances (other than a Buy Down Advance or Swingline Advance); provided
that any conversion of any Eurodollar Advance shall be made on, and only on, the
last day of the Interest Period applicable thereto. The Borrower shall give the
Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion
of an Alternate Base Rate Advance or a Fed Funds Advance or conversion or
continuation of a Eurodollar Advance not later than (i) noon (Chicago time) on
the date of the requested conversion, in the case of a conversion into an
Alternate Base Rate Advance or a Fed Funds Advance or (ii) 10:00 a.m. (Chicago
time) at least three Business Days prior to the date of the requested conversion
into or continuation of a Eurodollar Advance, specifying:
(i) the requested date which shall be a Business Day, of such
conversion or continuation,
(ii) the aggregate amount and Type of the Advance which is to be
converted or continued, and
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(iii) the amount and Type(s) of Advance(s) into which such Advance
is to be converted or continued and, in the case of a
conversion into or continuation of a Eurodollar Advance, the
duration of the Interest Period applicable thereto.
2.9. Reductions to Aggregate Commitment. The Borrower may from time
to time permanently reduce the Aggregate Commitment, in whole or in part,
ratably among the Lenders in integral multiples of $10,000,000, upon at least 30
Business Days' prior written notice to the Agent, which notice shall specify the
amount of any such reduction. On or before the effective date of any such
reduction, the Borrower shall, if necessary, repay sufficient Loans to prevent
the remaining outstanding Loans hereunder, after giving effect to such permanent
reduction, from exceeding the Lending Sublimits. Upon any reduction of the
Aggregate Commitment, upon the election of the Swingline Lender, the aggregate
Swingline Commitment shall be reduced by an amount to be determined by the
Swingline Lender in its sole discretion up to the same percentage as the
reduction in the Aggregate Commitment.
2.10. Principal Payments.
2.10.1. Optional Principal Payments. The Borrower may from
time to time pay, without penalty or premium, all or any portion of the
outstanding Alternate Base Rate Advances or Buy Down Advances upon two Business
Days' prior notice to the Agent. A Fixed Rate Advance may not be paid prior to
the last day of the applicable Interest Period unless the Borrower
simultaneously pays the amounts due under Section 3.4. Fed Funds Advances and
Swingline Advances may be paid on any Business Day provided that the Borrower
has given the Agent written notice of such repayment on the date of such
intended payment by (i) 10:00 a.m. (Chicago time) for Fed Funds Advances and
(ii) noon (Chicago time) for Swingline Advances. All optional principal payments
shall be applied to the Type of Advance designated by the Borrower when making
such payment, provided that any payments received during the continuance of a
Default and after Section 2.5 has been invoked shall be applied on a pro rata
basis to all Advances then outstanding. Payments so allocated to an Advance
shall be distributed to the Lenders holding the Loans comprising such Advance on
a pro rata basis in accordance with the respective unpaid principal balances of
such Loans.
2.10.2. Required Payments Related to Borrowing Base. On any
date that the Coverage Requirement is in excess of the then-current Borrowing
Base, the Borrower shall, prior to the close of business on such date, either
deliver sufficient Eligible Collateral to eliminate such excess or make a
mandatory payment to the Agent for the benefit of the Lenders in the amount of
such excess. Any such payment shall be allocated as directed by the Borrower
unless a Default (other than the Borrower's obligation to so deliver Eligible
Collateral or make a mandatory payment by the close of business on such day)
then exists and Section 2.5 has been invoked in which case such payment shall be
allocated in accordance with the Lenders' respective outstanding Loans and in
conjunction with the procedures described in Section 2.5, with such payments
applied first to accrued and unpaid interest and thereafter to principal.
2.10.3. Settlement Account Payments. Prior to the occurrence
of a Default, to the extent the amounts in the Settlement Account are not needed
to keep the Borrowing Base at least equal to the Coverage Requirement, the
Borrower may withdraw or otherwise direct the application of such amounts. Upon
the occurrence of a Default (and during the continuance thereof), at the
direction of the Required Lenders, the Agent may declare a portion of the
principal balance of the Loans, equal to any amounts then
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on deposit in the Settlement Account and any deposits made in the Settlement
Account during the continuance of such Default, to be due and payable without
demand (unless previously declared due and payable). Such amount shall be
withdrawn from the Settlement Account by the Agent and shall be applied to the
Obligations in accordance with Section 8.8.
2.10.4. Final Payment on Termination Date. Any outstanding
Advances and all other unpaid Obligations, unless required to be paid earlier
pursuant to the terms hereof, shall be paid in full by the Borrower on the
Termination Date.
2.11. Changes in Interest Rate, Etc. Each Alternate Base Rate
Advance shall bear interest on the outstanding principal amount thereof, for
each day from and including the date such Advance is made or is converted into
an Alternate Base Rate Advance pursuant to Section 2.8 to but excluding the date
it becomes due or is converted into a Eurodollar Advance pursuant to Section 2.8
hereof, at a rate per annum equal to the Alternate Base Rate for such day.
Changes in the rate of interest on that portion of any Advance maintained as an
Alternate Base Rate Advance will take effect simultaneously with each change in
the Alternate Base Rate. The interest rate on each Swingline Advance or Fed
Funds Advance shall be recalculated daily for each day that such Swingline
Advance or Fed Funds Advance is continued under Section 2.8. Each Eurodollar
Advance shall bear interest on the outstanding principal amount thereof from and
including the first day of the Interest Period applicable thereto to (but not
including) the last day of such Interest Period at the interest rate determined
as applicable to such Eurodollar Advance. Not more than six (6) different
Interest Periods may be in effect at any time and no Interest Period may end
after the Termination Date.
2.12. Rates Applicable After Default. Notwithstanding anything to
the contrary contained in Section 2.7 or 2.8, during the continuance of a
Default or Unmatured Default the Required Lenders may, at their option, by
notice to the Borrower (which notice may be revoked at the option of the
Required Lenders notwithstanding any provision of Section 9.1 requiring
unanimous consent of the Lenders to reductions in interest rates), declare that
no Advance may be made as, converted into or continued as a Fixed Rate Advance.
If any Default occurs under Section 7.6 or 7.7 or if any Advance is not paid at
maturity, whether by acceleration or otherwise, (i) each Eurodollar Advance
shall bear interest for the remainder of the applicable Interest Period at the
rate otherwise applicable to such Interest Period plus 2% per annum and (ii)
each Advance (other than those under clause (i) above) shall bear interest at a
rate per annum equal to the Alternate Base Rate plus 2% per annum. During the
continuance of any other Default the Required Lenders may, at their option, by
notice to the Borrower (which notice may be revoked at the option of the
Required Lenders notwithstanding any provision of Section 9.1 requiring
unanimous consent of the Lenders to reductions in interest rates), declare that
(i) each Eurodollar Advance shall bear interest for the remainder of the
applicable Interest Period at the rate otherwise applicable to such Interest
Period plus 2% per annum and (ii) each Advance (other than those under clause
(i) above) shall bear interest at a rate per annum equal to the Alternate Base
Rate plus 2% per annum.
2.13. Method of Payment. All payments of the Obligations hereunder
shall be made, without setoff, deduction, or counterclaim, in immediately
available funds to the Agent at the Agent's address specified pursuant to
Article XIII, or at any other Lending Installation of the Agent specified in
writing by the Agent to the Borrower, on the date when due by (i) noon (Chicago
time) with respect to all Advances other than Swingline Advances, or (ii) 4:00
p.m. (Chicago time) with respect to Swingline Advances and all such payments
shall be applied in accordance with Section 2.10.1. Notwithstanding the
foregoing, if the
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Borrower fails to give the Agent notice of repayment of a Fed Funds Advance
before 10:00 a.m. (Chicago time) on the Business Day that the Borrower intends
to repay such Fed Funds Advance, any payment of such Fed Funds Advance received
by the Agent on such Business Day shall be deemed to have been received by the
Agent at the opening of business on the following Business Day. Each payment
delivered to the Agent for the account of any Lender shall be delivered promptly
by the Agent to such Lender in the same type of funds that the Agent received at
its address specified pursuant to Article XIII or at any Lending Installation
specified in a notice received by the Agent from such Lender. The Agent is
hereby authorized to charge the account of the Borrower maintained with First
Chicago for each payment of principal, interest and fees as it becomes due
hereunder.
2.14. Notes; Telephonic Notices. Each Lender is hereby authorized to
record the principal amount of each of its Loans and each repayment on the
schedules attached to its Notes, provided, however, that neither the failure to
so record nor any error in such recordation shall affect the Borrower's
obligations under such Notes. The Borrower hereby authorizes the Lenders and the
Agent to extend, convert or continue Advances, effect selections of Types of
Advances and to transfer funds based on telephonic notices made by any person or
persons the Agent or any Lender in good faith believes to be acting on behalf of
the Borrower. The Borrower agrees to deliver promptly to the Agent a written
confirmation, if such confirmation is requested by the Agent or any Lender, of
each telephonic notice signed by an Authorized Officer. If the written
confirmation differs in any material respect from the action taken by the Agent
and the Lenders, the records of the Agent and the Lenders shall govern absent
manifest error.
2.15. Interest Payment Dates; Interest and Fee Basis. Interest
accrued on each Advance other than a Eurodollar Advance shall be payable on each
Payment Date, commencing with the first such date to occur after the date hereof
and at maturity. Interest accrued on each Eurodollar Advance shall be payable on
the last day of its applicable Interest Period, on any date on which the
Eurodollar Advance is prepaid, whether by acceleration or otherwise, and at
maturity. Interest and Fees shall be calculated for actual days elapsed on the
basis of a 360-day year. Interest shall be payable for the day an Advance is
made but not for the day of any payment on the amount paid if payment is
received at the place of payment prior to the time required for payment as set
forth in Section 2.13. If any payment of principal of or interest on an Advance
or of Fees shall become due on a day which is not a Business Day, such payment
shall be made on the next succeeding Business Day and, in the case of a
principal payment, such extension of time shall be included in computing
interest in connection with such payment.
2.16. Notification by the Agent. Promptly after receipt thereof, the
Agent will notify each Lender of the contents of each Aggregate Commitment
reduction notice, Borrowing Notice, Conversion/Continuation Notice, and
repayment notice received by it hereunder. Promptly upon determination thereof,
the Agent will notify each Lender and the Borrower of the interest rate
applicable to each Eurodollar Advance. When any Fed Funds Advances or Alternate
Base Rate Advances are outstanding or have been requested, the Agent will give
each Lender making or holding any such Loans and the Borrower prompt notice of
each change in such rates.
2.17. Lending Installations. Each Lender may book its Loans at any
Lending Installation selected by such Lender and may change its Lending
Installation from time to time. All terms of this Agreement shall apply to any
such Lending Installation and the Notes shall be deemed held by each Lender for
the benefit of such Lending Installation. Each Lender may, by written or telex
notice to the Agent and
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the Borrower, designate a Lending Installation through which Loans will be made
by it and for whose account Loan payments are to be made.
2.18. Non-Receipt of Funds by the Agent. Unless the Borrower or a
Lender, as the case may be, notifies the Agent prior to the date on which it is
scheduled to make payment to the Agent of (i) in the case of a Lender, the
proceeds of a Loan or an Advance or (ii) in the case of the Borrower, a payment
of principal, interest or Fees to the Agent for the account of the Lenders, that
it does not intend to make such payment, the Agent may assume that such payment
has been made. The Agent may, but shall not be obligated to, make the amount of
such payment available to the intended recipient in reliance upon such
assumption. If such Lender or the Borrower, as the case may be, has not in fact
made such payment to the Agent, the recipient of such payment shall, on demand
by the Agent, repay to the Agent the amount so made available together with
interest thereon in respect of each day during the period commencing on the date
such amount was so made available by the Agent until the date the Agent recovers
such amount at a rate per annum equal to (i) in the case of payment due from a
Lender, the Federal Funds Effective Rate for such day or (ii) in the case of
payment due from the Borrower, the interest rate applicable to the relevant
Loan. Notwithstanding the preceding sentence, if the Agent has made the amount
of any such payment available to the Borrower and a Lender has not in fact paid
such payment to the Agent, the amount due to the Agent from the Borrower shall,
to the extent a Swingline Advance would then be available to the Borrower, be
deemed to be a Swingline Advance made on the date the corresponding amount was
so made available to the Borrower by the Agent.
ARTICLE III
CHANGE IN CIRCUMSTANCES
3.1. Yield Protection. If any law or any governmental or
quasi-governmental rule, regulation, policy, guideline or directive (whether or
not having the force of law), or any interpretation thereof, or the compliance
of any Lender therewith,
(i) subjects any Lender or any applicable Lending Installation to
any tax, duty, charge or withholding on or from payments due
from the Borrower (excluding federal or state taxation of the
overall net income of any Lender or applicable Lending
Installation), or changes the basis of taxation of payments to
any Lender in respect of its Loans or other amounts due it
hereunder, or
(ii) imposes or increases or deems applicable any reserve,
assessment, insurance charge, special deposit or similar
requirement against assets of, deposits with or for the
account of, or credit extended by, any Lender or any
applicable Lending Installation (other than reserves and
assessments taken into account in determining the interest
rate applicable to Fixed Rate Advances), or
(iii) imposes any other condition the result of which is to increase
the cost to any Lender or any applicable Lending Installation
of making, funding or maintaining loans or reduces any amount
receivable by any Lender or any applicable Lending
Installation in connection with loans, or requires any Lender
or any applicable Lending Installation to make any payment
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calculated by reference to the amount of loans held or
interest received by it, by an amount deemed material by such
Lender,
then, within 15 days of demand by such Lender, the Borrower shall pay such
Lender that portion of such increased expense incurred or reduction in an amount
received which such Lender determines is attributable to making, funding and
maintaining its Loans and its Commitment.
3.2. Changes in Capital Adequacy Regulations. If a Lender
determines the amount of capital required or expected to be maintained by such
Lender, any Lending Installation of such Lender or any corporation controlling
such Lender is increased as a result of a Change, then, within 15 days of demand
by such Lender, the Borrower shall pay such Lender the amount necessary to
compensate for any shortfall in the rate of return on the portion of such
increased capital which such Lender determines is attributable to this
Agreement, its Loans or its obligation to make Loans hereunder (after taking
into account such Lender's policies as to capital adequacy). "Change" means (i)
any change after the date of this Agreement in the Risk-Based Capital Guidelines
or (ii) any adoption of or change in any other law, governmental or
quasi-governmental rule, regulation, policy, guideline, interpretation, or
directive (whether or not having the force of law) after the date of this
Agreement which affects the amount of capital required or expected to be
maintained by any Lender or any Lending Installation or any corporation
controlling any Lender. "Risk-Based Capital Guidelines" means (i) the risk-based
capital guidelines in effect in the United States on the date of this Agreement,
including transition rules, and (ii) the corresponding capital regulations
promulgated by regulatory authorities outside the United States implementing the
July 1988 report of the Basle Committee on Banking Regulation and Supervisory
Practices Entitled "International Convergence of Capital Measurements and
Capital Standards," including transition rules, and any amendments to such
regulations adopted prior to the date of this Agreement.
3.3. Availability of Types of Advances. If any Lender determines
that maintenance of any of its Fixed Rate Loans at a suitable Lending
Installation would violate any applicable law, rule, regulation or directive,
whether or not having the force of law, the Agent shall suspend the availability
of the affected Type of Advance and require any Fixed Rate Advances of the
affected Type to be either repaid or converted to Alternate Base Rate Advances,
at the Borrower's election; or if the Required Lenders determine that (i)
deposits of a type or maturity appropriate to match fund Fixed Rate Advances or
Fed Funds Advances are not available, or (ii) an interest rate applicable to a
Type of Advance does not accurately reflect the cost of making an Advance of
such Type, then, if for any reason whatsoever the provisions of Section 3.1 are
inapplicable, the Agent shall suspend the availability of the affected Type of
Advance with respect to any Fixed Rate Advances or Fed Funds Advances made after
the date of any such determination, provided that such suspension shall not
affect the availability of Alternate Base Rate Advances upon compliance with the
terms hereof.
3.4. Funding Indemnification. If any payment of a Fixed Rate
Advance occurs on a date which is not the last day of the applicable Interest
Period, whether because of acceleration, prepayment or any other reason (except
for a repayment required under Section 3.3 due to the violation of a law, rule,
regulation or directive that was in effect at the time the Borrower presented
the Borrowing Notice for the Fixed Rate Advance so required to be repaid), or a
Fixed Rate Advance is not made, continued or converted on the date specified by
the Borrower for any reason other than default by the Lenders, the Borrower will
indemnify each Lender for any loss or cost incurred by it resulting therefrom,
including,
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without limitation, any loss or cost in liquidating or employing deposits
acquired to fund or maintain the Fixed Rate Advance.
3.5. Lender Statements; Survival of Indemnity. To the extent
reasonably possible, each Lender shall designate an alternate Lending
Installation with respect to its Fixed Rate Loans to reduce any liability of the
Borrower to such Lender under Sections 3.1 and 3.2 or to avoid the
unavailability of a Type of Advance under Section 3.3, so long as such
designation is not disadvantageous to such Lender. Each Lender shall deliver a
written statement of such Lender to the Borrower (with a copy to the Agent) as
to the amount due, if any, under Section 3.1, 3.2 or 3.4. Such written statement
shall set forth in reasonable detail the calculations upon which such Lender
determined such amount and shall be final, conclusive and binding on the
Borrower in the absence of manifest error. Determination of amounts payable
under such Sections in connection with a Fixed Rate Loan shall be calculated as
though each Lender funded its Fixed Rate Loan through the purchase of a deposit
of the type and maturity corresponding to the deposit used as a reference in
determining the Eurodollar Rate applicable to such Loan, whether in fact that is
the case or not. Unless otherwise provided herein, the amount specified in the
written statement of any Lender shall be payable on demand after receipt by the
Borrower of such written statement. The obligations of the Borrower under
Sections 3.1, 3.2 and 3.4 shall survive payment of the Obligations and
termination of this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT; WITHHOLDING TAX EXEMPTION
4.1. Effectiveness. This Agreement shall not be effective and no
Lender shall be required to make the initial Advance hereunder until a date (the
"Effective Date") upon which the Borrower has furnished or caused to be
furnished to the Agent (with sufficient copies for the Lenders) the following:
(i) Copies of the certificate of incorporation of the Borrower,
together with all amendments, and a certificate of good
standing, both certified by the appropriate governmental
officer in its jurisdiction of incorporation.
(ii) Copies, certified by the Secretary or Assistant Secretary of
the Borrower, of its by-laws and of its Board of Directors'
resolutions (and resolutions of other bodies, if any are
deemed necessary by counsel for any Lender) authorizing the
execution of the Loan Documents.
(iii) An incumbency certificate, executed by the Secretary or
Assistant Secretary of the Borrower, which shall identify by
name and title and bear the signature of the officers of the
Borrower authorized to sign the Loan Documents and to make
borrowings hereunder, upon which certificate the Agent and the
Lenders shall be entitled to rely until informed of any change
in writing by the Borrower.
(iv) A certificate, signed by the chief financial officer of the
Borrower, stating that on the initial Borrowing Date no
Default or Unmatured Default has occurred and is continuing.
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(v) A written opinion of the Borrower's counsel, addressed to the
Lenders in substantially the form of Exhibit "B" hereto.
(vi) Notes payable to the order of each of the Lenders.
(vii) A fully executed Security Agreement, together with such executed
UCC-1 financing statements as the Agent may reasonably request.
(viii) Written money transfer instructions, in substantially the form of
Exhibit "L" hereto, addressed to the Agent and signed by an
Authorized Officer, together with such other related money
transfer authorizations as the Agent may have reasonably
requested.
(ix) A fully executed PEC Tri-Party Agreement, together with evidence
satisfactory to Agent of the signatories' authority to execute
such agreement.
(x) Fully executed Greenwich Capital Tri-Party Agreement and Tri-Party
Agreements from any other Approved Investors then required to
support all Eligible Collateral at the time of the initial
Advance, together with evidence satisfactory to Agent of the
signatories' authority to execute such agreements.
(xi) The most recently completed review by the Agent's internal
auditors or outside auditors of the Borrower's or PEC's servicing
of the Qualifying Loans shall have been deemed acceptable by the
Required Lenders.
(xii) A Borrowing Base Certificate dated as of the Effective Date has
been executed and delivered to the Agent.
(xiii) Establishment and funding of the Settlement Account.
(xiv) Payment of all Fees due and payable on or before the Effective
Date.
(xv) Such other documents as any Lender or its counsel may have
reasonably requested.
4.2. Each Advance. The Lenders shall not be required to make any
Advance (other than an Advance that, after giving effect thereto and to the
application of the proceeds thereof, does not increase the aggregate amount of
outstanding Advances), unless on the applicable Borrowing Date:
(i) There exists no Default or Unmatured Default.
(ii) The representations and warranties contained in Article V are true
and correct in all material respects as of such Borrowing Date
except to the extent (A) any such representation or warranty is
stated to relate solely to an earlier date, in which case such
representation or warranty shall be true and correct on and as of
such earlier date or (B) the Borrower has advised the Agent in
writing in detail of any change in circumstances that causes a
specified modification to any such representation and warranty to
be needed to make such representation and warranty true and
correct in all material respects and the
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Required Lenders have, in their sole discretion, acknowledged and
accepted in writing the existence of such change in circumstances
and the nature of such modification.
(iii) All legal matters incident to the making of such Advance shall be
satisfactory to the Lenders and their counsel.
Each Borrowing Notice with respect to each such Advance shall
constitute a representation and warranty by the Borrower that, after giving
effect to the amount of the Advance being requested, (a) the conditions
contained in Sections 4.2(i), (ii) and (iii) have been satisfied, (b) the
Borrower has provided the Collateral Agent with the true and correct information
necessary to calculate the Collateral Value for all Eligible Collateral, (c) the
then current Borrowing Base is equal to or greater than the Coverage Requirement
and (d) no Lending Sublimit has been exceeded. Any Lender may require a duly
completed compliance certificate in substantially the form of Exhibit "F" hereto
as a condition to making an Advance.
4.3. Withholding Tax Exemption. At least five Business Days prior
to the first date on which interest or fees are payable hereunder for the
account of any Lender, each Lender that is not incorporated under the laws of
the United States of America, or a state thereof, agrees that it will deliver to
each of the Borrower and the Agent two duly completed copies of United States
Internal Revenue Service Form 1001 or 4224, certifying in either case that such
Lender is entitled to receive payments under this Agreement and the Notes
without deduction or withholding of any United States federal income taxes. Each
Lender which so delivers a Form 1001 or 4224 further undertakes to deliver to
each of the Borrower and the Agent two additional copies of such form (or a
successor form) on or before the date that such form expires (currently, three
successive calendar years for Form 1001 and one calendar year for Form 4224) or
becomes obsolete or after the occurrence of any event requiring a change in the
most recent forms so delivered by it, and such amendments thereto or extensions
or renewals thereof as may be reasonably requested by the Borrower or the Agent,
in each case certifying that such Lender is entitled to receive payments under
this Agreement and the Notes without deduction or withholding of any United
States federal income taxes, unless an event (including without limitation any
change in treaty, law or regulation) has occurred prior to the date on which any
such delivery would otherwise be required which renders all such forms
inapplicable or which would prevent such Lender from duly completing and
delivering any such form with respect to it and such Lender advises the Borrower
and the Agent that it is not capable of receiving payments without any deduction
or withholding of United States federal income tax.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lenders that:
5.1. Corporate Existence and Standing. Each of the Borrower and its
Subsidiaries is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has all
requisite authority to conduct its business in each jurisdiction in which its
business is conducted, to the extent failure to maintain such authority would
have a material adverse effect on the business of the Borrower and its
Subsidiaries taken as a whole.
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5.2. Authorization and Validity. The Borrower has the corporate
power and authority and legal right to execute and deliver the Loan Documents
and to perform its obligations thereunder. The execution and delivery by the
Borrower of the Loan Documents and the performance of its obligations thereunder
have been duly authorized by proper corporate proceedings, and the Loan
Documents constitute legal, valid and binding obligations of the Borrower
enforceable against the Borrower in accordance with their terms, except as
enforceability may be limited by bankruptcy, insolvency or similar laws
affecting the enforcement of creditors' rights generally.
5.3. No Conflict; Government Consent. Neither the execution and
delivery by the Borrower of the Loan Documents, nor the consummation of the
transactions therein contemplated, nor compliance with the provisions thereof
will violate any law, rule, regulation, order, writ, judgment, injunction,
decree or award binding on the Borrower or any of its Subsidiaries or the
Borrower's or any Subsidiary's articles of incorporation or by-laws or the
provisions of any indenture, instrument or agreement to which the Borrower or
any of its Subsidiaries is a party or is subject, or by which it, or its
Property, is bound, or conflict with or constitute a default thereunder, or,
except as created by the Loan Documents, result in the creation or imposition of
any Lien in, of or on the Property of the Borrower or a Subsidiary pursuant to
the terms of any such indenture, instrument or agreement. No order, consent,
approval, license, authorization, or validation of, or filing, recording or
registration with, or exemption by, or other action in respect of any
governmental or public body or authority, or any subdivision thereof, is
required to authorize, or is required in connection with the execution, delivery
and performance of, or the legality, validity, binding effect or enforceability
of, any of the Loan Documents (other than filings to perfect the Liens granted
pursuant to the Security Agreement).
5.4. Financial Statements. The August 31, 1996 audited and the
February 28, 1997 unaudited financial statements of the Borrower heretofore
delivered to the Lenders were prepared in accordance with GAAP in effect on the
date such statements were prepared (except that such unaudited statements do not
contain footnotes) and fairly present the consolidated financial condition and
operations of the Borrower at such date and the results of its operations for
the period then ended (subject to normal year-end adjustments). The Lenders
acknowledge that the Borrower has recently created a Subsidiary to hold 1% of
the Residual Certificates issued in connection with the securitization of
certain Qualifying Loans which will be reflected in the Borrower's subsequent
consolidated financial statements.
5.5. Material Adverse Change. Since February 28, 1997, there has
been no change in the business, Property, prospects, condition (financial or
otherwise) or results of operations of the Borrower and its Subsidiaries which
could reasonably be expected to have a Material Adverse Effect.
5.6. Taxes. Mego Financial, on a consolidated basis with the
Borrower, has filed all United States federal tax returns and all other tax
returns which are required to be filed and have paid all taxes due pursuant to
said returns or pursuant to any assessment received by the Borrower, except such
taxes, if any, as are being contested in good faith by appropriate proceedings
and as to which adequate reserves have been provided in accordance with
Agreement Accounting Principles and as to which no Lien exists. The consolidated
United States income tax returns of Mego Financial and the Borrower have not
been audited by the Internal Revenue Service for any year after the fiscal year
ended August 31, 1988. No tax liens have been filed and no claims are being
asserted with respect to any such taxes. The charges, accruals and reserves on
the books of the Borrower in respect of any taxes or other governmental charges
are adequate.
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5.7. Litigation and Contingent Obligations. There is no litigation,
arbitration, governmental investigation, proceeding or inquiry pending or, to
the knowledge of any of their officers, threatened against or affecting the
Borrower or any of its Subsidiaries which could reasonably be expected to have a
Material Adverse Effect or which seeks to prevent, enjoin or delay the making of
the Loans or Advances. Other than any liability incident to such litigation,
arbitration or proceedings, the Borrower has no material contingent obligations
not provided for or disclosed in the financial statements referred to in Section
5.4.
5.8. Subsidiaries. Schedule "3" hereto contains an accurate list of
all Subsidiaries of the Borrower as of the date of this Agreement, setting forth
their respective jurisdictions of incorporation and the percentage of their
respective capital stock owned by the Borrower or other Subsidiaries and whether
such Subsidiary is an Included Subsidiary or an Excluded Subsidiary. All of the
issued and outstanding shares of capital stock of such Subsidiaries have been
duly authorized and issued and are fully paid and non-assessable.
5.9. ERISA. The Unfunded Liabilities of all Single Employer Plans
do not in the aggregate exceed $500,000. Neither the Borrower nor any other
member of the Controlled Group has incurred, or is reasonably expected to incur,
any withdrawal liability to Multiemployer Plans in excess of $500,000 in the
aggregate. Each Plan complies in all material respects with all applicable
requirements of law and regulations, no Reportable Event has occurred with
respect to any Plan, neither the Borrower nor any other members of the
Controlled Group has withdrawn from any Plan or initiated steps to do so, and no
steps have been taken to reorganize or terminate any Plan.
5.10. Accuracy of Information. No information, exhibit or report
furnished by the Borrower or any of its Subsidiaries to the Agent or to any
Lender in connection with the negotiation of, or compliance with, the Loan
Documents contained any material misstatement of fact or omitted to state a
material fact or any fact necessary to make the statements contained therein not
misleading.
5.11. Regulation U. Margin stock (as defined in Regulation U)
constitutes less than 25% of those assets of the Borrower and its Subsidiaries
which are subject to any limitation on sale, pledge, or other restriction
hereunder.
5.12. Material Agreements. Neither the Borrower nor any Subsidiary
is a party to any agreement or instrument or subject to any charter or other
corporate restriction which could reasonably be expected to have a Material
Adverse Effect. Except as disclosed on Schedule "7" hereto or in the Borrower's
financial statements, neither the Borrower nor any Subsidiary is in default in
the performance, observance or fulfillment of any of the obligations, covenants
or conditions contained in (i) any agreement to which it is a party, which
default could reasonably be expected to have a Material Adverse Effect or (ii)
any agreement or instrument evidencing or governing Indebtedness.
5.13. Compliance With Laws. The Borrower and its Subsidiaries have
complied with all applicable statutes, rules, regulations, orders and
restrictions of any domestic or foreign government or any instrumentality or
agency thereof, having jurisdiction over the conduct of their respective
businesses or the ownership of their respective Property if failure to comply
could reasonably be expected to have a Material Adverse Effect.
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5.14. Ownership of Properties. Except as set forth on Schedule "4"
hereto, on the date of this Agreement, the Borrower and its Subsidiaries will
have good title, free of all Liens other than those permitted by Section 6.15,
to all of the Property and assets reflected in the financial statements as owned
by it.
5.15. Plan Assets; Prohibited Transactions. The Borrower is not an
entity deemed to hold "plan assets" within the meaning of 29 C.F.R. ss.
2510.3-101 of an employee benefit plan (as defined in Section 3(3) of ERISA)
which is subject to Title I of ERISA or any plan (within the meaning of Section
4975 of the Code); and neither the execution of this Agreement and the making of
Loans hereunder do not give rise to a prohibited transaction within the meaning
of Section 406 of ERISA or Section 4975 of the Code.
5.16. Investment Company Act. Neither the Borrower nor any
Subsidiary thereof is an "investment company" or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.
5.17. Public Utility Holding Company Act. Neither the Borrower nor
any Subsidiary is a "holding company" or a "subsidiary company" of a "holding
company", or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company", within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
5.18. FHA and FNMA Eligibility. The Borrower is (i) an FHA Title I
Approved Mortgagee in good standing, meets all eligible requirements of law and
governmental regulation so as to be eligible to originate, purchase, hold and
service Title I Qualifying Loans insured by FHA under the Title I Regulations
and is an approved seller and servicer in good standing of Title I Qualifying
Loans insured by FHA under the Title I Regulations and (ii) a FNMA
seller/servicer in good standing.
5.19. Subordinated Indebtedness. The Obligations constitute senior
indebtedness which is entitled to the benefits of the subordination provisions
of the Subordinated Notes and all other outstanding Subordinated Indebtedness.
5.20. Eligibility. Each Pledged Qualifying Loan having a Collateral
Value included in determining the Borrowing Base constitutes Eligible Collateral
hereunder and, when aggregated with other Pledged Qualifying Loans of a similar
type or status, does not cause any violation of a Borrowing Base Sublimit.
5.21. Recourse Servicing. The Borrower does not have any Recourse
Servicing.
ARTICLE VI
COVENANTS
During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:
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6.1. Financial Reporting. The Borrower will maintain, for itself
and each Subsidiary, a system of accounting established and administered in
accordance with generally accepted accounting principles, and furnish to the
Lenders:
(i) Within 120 days after the close of each of its fiscal years,
an unqualified audit report certified by independent certified
public accountants, acceptable to the Lenders, prepared in
accordance with Agreement Accounting Principles on a
consolidated and consolidating basis (consolidating statements
need not be certified by such accountants), to the extent
applicable, for itself and the Subsidiaries, including
statements of financial condition as of the end of such
period, related profit and loss and changes in shareholders'
equity statements, and a statement of cash flows, accompanied
by (a) any management letter prepared by said accountants and
(b) a certificate of said accountants that, in the course of
their examination necessary for their certification of the
foregoing, they have obtained no knowledge of any Default or
Unmatured Default, or if, in the opinion of such accountants,
any Default or Unmatured Default shall exist, stating the
nature and status thereof.
(ii) Within 60 days after the close of the first three quarterly
periods of each of its fiscal years, for itself and the
Subsidiaries, consolidated and consolidating, to the extent
applicable, unaudited statements of financial condition as at
the close of each such period and consolidated and
consolidating profit and loss statements (showing a breakout
of servicing sales gains attributed to servicing originated in
prior periods), a changes in shareholders' equity statement
and a statement of cash flows for the period from the
beginning of such fiscal year to the end of such quarter, all
certified (subject to normal year-end adjustments) by its
chief financial officer or chief accounting officer.
(iii) Together with the financial statements required under Sections
6.1(i) and (ii), a compliance certificate in substantially the
form of Exhibit "F" hereto signed by its chief financial
officer or chief accounting officer showing the calculations
necessary to determine compliance with this Agreement and that
no Default or Unmatured Defaults exists, or if any Default or
Unmatured Default exists, stating the nature and status
thereof.
(iv) As soon as available but in any event within 45 days after the
end of each calendar month an executive summary regarding the
Borrower's production and servicing. Such summary shall show
separately information concerning any Qualifying Loans or
Securities with respect to which there is recourse to the
Borrower.
(v) As soon as available, but in any event within ten (10) days
after the end of each month, a certificate from an Authorized
Officer as to (i) those specific Eligible Qualifying Loans
which became Ineligible Collateral during such month due to
the existence of a past due payment exceeding the time limit
set forth in clause (ii) of the definition of Eligible
Qualifying Loan, (ii) the most recent delinquency, default
data and loss statistics on each pool of Qualifying Loans
serviced by the Borrower under its Servicing Agreements or
under any whole loan sale agreements or similar agreements in
which the Borrower retains an economic interest in, or
recourse with respect to, such pool of Qualifying Loans,
together with a summary of the applicable delinquency, default
and loss levels, if any, under each of such Servicing
Agreements or other agreements at which the Borrower's
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right to receive servicing income thereunder can be reduced or
interrupted or at which the Borrower could be required to
provide additional security for the benefit of any senior
interests in such pool, such data and statistics to be
presented in the form attached hereto as Schedule "9".
(vi) If the Borrower has any Rate Hedging Agreements then in
effect, as soon as available but in any event within 15 days
after the end of each month, a secondary marketing report for
such month reasonably satisfactory to the Agent.
(vii) As soon as available, but in any event within 30 days after
the end of each month (or, with respect to the last month of
any fiscal quarter, 45 days), a certificate from the
Borrower's chief financial officer as to the total liabilities
of the Borrower and its Included Subsidiaries on a
consolidated basis, as of the last day of the preceding month,
as determined in accordance with Agreement Accounting
Principles.
(viii) As soon as available, but in any event within 150 days after
the beginning of each fiscal year of the Borrower, a copy of
the plan and forecast (including a projected consolidated and
consolidating balance sheet, income statement and cash flow
statement) of the Borrower for such fiscal year.
(ix) As soon as available and in any event within 10 days after the
end of each calendar month (and within one Business Day after
any request therefor by the Agent, which requests shall be
made only when the Agent reasonably determine such a delivery
is necessary), a Borrowing Base Certificate (which shall
include the Borrower's reconciliation of any discrepancies
from the Collateral Agent's reports on the status of Eligible
Collateral at the end of such month (or the end of the prior
Business Day, if requested by the Agent as set forth above).
(x) Within 10 days after the issuance of Borrower's response
thereto (but in no event later than 20 days after the
Borrower's receipt of such reports) copies of all compliance
and audit reports received from FHA (including each statement
of the Borrower's insurance coverage reserve account with the
FHA and all notices regarding loan transfer or other
adjustments thereto), Greenwich Capital or any other Approved
Investor and the Borrower's response thereto; and promptly
upon receipt, a copy of any notice from (i) FHA to the effect
that it is or is contemplating withdrawing its approval of the
Borrower as a FHA Title I Approved Mortgagee, or as an
approved seller and servicer for Title I Qualifying Loans or
(ii) Greenwich Capital or any other Approved Investor to the
effect that it is contemplating terminating any existing
Approved Investor Commitment or ceasing to issue any further
such Approved Investor Commitments to the Borrower.
(x) Within 270 days after the close of each fiscal year, a
statement of the Unfunded Liabilities of each Single Employer
Plan, certified as correct by an actuary enrolled under ERISA.
(xi) As soon as possible and in any event within 10 days after the
Borrower knows that any Reportable Event has occurred with
respect to any Plan, a statement, signed by the chief
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financial officer of the Borrower, describing said Reportable
Event and the action which the Borrower proposes to take with
respect thereto.
(xii) As soon as possible and in any event within 10 days after
receipt by the Borrower, a copy of (a) any notice or claim to
the effect that the Borrower or any of its Subsidiaries is or
may be liable to any Person as a result of the release by the
Borrower, any of its Subsidiaries, or any other Person of any
toxic or hazardous waste or substance into the environment,
and (b) any notice alleging any violation of any federal,
state or local environmental, health or safety law or
regulation by the Borrower or any of its Subsidiaries, which,
in either case, could reasonably be expected to have a
Material Adverse Effect.
(xiii) Promptly upon the furnishing thereof to the shareholders of
the Borrower, copies of all financial statements, reports and
proxy statements so furnished.
(xiv) Promptly upon the filing thereof, copies of all registration
statements and annual, quarterly, monthly or other regular
reports which the Borrower or any of its Subsidiaries files
with the Securities and Exchange Commission.
(xv) Within 10 days after the Borrower's receipt thereof, copies of
all reports, analysis and comments received by the Borrower
from the rating agencies or any investment banks or other
analysts with respect to the Borrower's prior, existing or
proposed debt or equity offerings and placements and
securitizations of Qualifying Loans.
(xvi) Within 10 days after the Borrower's delivery thereof to any
prospective investors, copies of any offering memorandum,
prospectus or private placement memorandum regarding the
securitization of the Borrower's Qualifying Loans.
(xvii) Within 10 days after the Borrower's receipt thereof, copies of
any servicing certificates, reports or other material
regarding the status of Qualifying Loans or the Borrower's
servicing thereof issued by any trustee under the Borrower's
securitizations of Qualifying Loans.
(xviii) Such other information (including non-financial information)
as the Agent or any Lender may from time to time reasonably
request.
6.2. Use of Proceeds. The Borrower will, and will cause each
Subsidiary to, only use the proceeds of the Advances for the financing purposes
described in the recitals hereto or to reimburse the Borrower for its funds
previously advanced for such financing purposes. The Borrower will not, nor will
it permit any Subsidiary to, use any of the proceeds of the Advances to purchase
or carry any "margin stock" (as defined in Regulation U) or to make any
Acquisition for which the board of directors of the Person being acquired has
not consented to such Acquisition.
6.3. Notice of Default. The Borrower will, and will cause each
Subsidiary to, give prompt notice in writing to the Lenders of the occurrence of
any Default or Unmatured Default and of any other
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development, financial or otherwise, which could reasonably be expected to have
a Material Adverse Effect.
6.4. Conduct of Business. The Borrower will, and will cause each
Subsidiary to, carry on and conduct its business in substantially the same
manner and in substantially the same fields of enterprise as is conducted
generally from time to time by companies in the consumer finance business in the
United States and to do all things necessary to remain duly incorporated,
validly existing and in good standing as a domestic corporation in its
jurisdiction of incorporation and maintain all requisite authority to conduct
its business in each jurisdiction in which its business is conducted to the
extent failure to maintain such authority would have a material adverse effect
on the business of the Borrower and its Subsidiaries taken as a whole. The
Borrower will use its best efforts to adhere in all material respects to
customary practices and standards in the industry insofar as adherence to such
practices and standards would require the Borrower to cause obligors to comply
with their obligations under such Pledged Qualifying Loans with respect to any
real estate securing such indebtedness.
6.5. Taxes. Borrower will timely file or cause to be filed,
complete and correct United States federal (on a consolidated basis with Mego
Financial's filing) and applicable foreign, state and local tax returns required
by law and pay when due all taxes, assessments and governmental charges and
levies upon it or its income, profits or Property, except those which are being
contested in good faith by appropriate proceedings and with respect to which
adequate reserves have been set aside in accordance with Agreement Accounting
Principles.
6.6. Insurance. The Borrower will, and will cause each Subsidiary
to, maintain with financially sound and reputable insurance companies insurance
on all their Property in such amounts and covering such risks as is consistent
with sound business practice, and the Borrower will furnish to any Lender upon
request full information as to the insurance carried. The Borrower will at all
times, upon request of the Agent, furnish to the Agent copies of its, and each
of its Subsidiaries', current fidelity bond and of its, and each of its
Subsidiaries', insurance policy containing mortgage bankers errors and omissions
coverage, and such bonds and policies, to the extent possible, shall each
provide that it is not cancelable without thirty (30) days prior written notice
to the Agent.
6.7. Compliance with Laws. The Borrower will, and will cause each
Subsidiary to, comply with all laws, rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject to the
extent failure to so comply would have a material adverse effect on the business
of the Borrower and its Subsidiaries taken as a whole.
6.8. Maintenance of Properties. The Borrower will, and will cause
each Subsidiary to, do all things necessary to maintain, preserve, protect and
keep its Property in good repair, working order and condition, and make all
necessary and proper repairs, renewals and replacements so that its business
carried on in connection therewith may be properly conducted at all times.
6.9. Inspection. The Borrower will, and will cause each Subsidiary
to, permit the Agent, the Collateral Agent and the Lenders, by their respective
representatives and agents, to inspect any of the Property, corporate books and
financial records of the Borrower and each Subsidiary, to examine and make
copies of the books of accounts and other financial records of the Borrower and
each Subsidiary, and to discuss the affairs, finances and accounts of the
Borrower and each Subsidiary with, and to be advised as
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to the same by, their respective officers at such reasonable times and intervals
as the Agent, the Collateral Agent or any Lender may designate. Without limiting
the generality of the foregoing, a third party auditor approved by the Required
Lenders shall have the right to audit the internal controls of Borrower and
Preferred Equities Corporation or any successor subservicer, review the method
of calculating the Borrowing Base, and perform such other reviews as may be
required to insure that the Borrower maintains books and records in accordance
with the requirements of this Agreement and sound business practices. Such
audits may be done twice per year at the Borrower's cost, with Lenders to pay
for any additional audits done during the calendar year.
6.10. Dividends. The Borrower will not, nor will it permit any
Included Subsidiary to, declare or pay any dividends or make any distributions
on its capital stock (other than dividends payable in its own capital stock) or
redeem, repurchase or otherwise acquire or retire any of its capital stock at
any time outstanding, except that, provided no Default then exists hereunder,
(i) any Included Subsidiary may declare and pay dividends or make distributions
to the Borrower or to a Wholly-Owned Subsidiary which is also an Included
Subsidiary, or (so long as such dividends or distributions are paid or made on a
pro-rata basis to Borrower, directly or indirectly, as well) to others holding
an interest in any such Subsidiary which is not a Wholly-Owned Subsidiary which
is also an Included Subsidiary, and (ii) the Borrower may declare and pay
dividends or make distributions (other than payments of Tax Sharing Indebtedness
which shall not be subject to this Section 6.10) in a cumulative amount not to
exceed the sum of (A) thirty-three percent (33%) of the Borrower's aggregate
positive net income (excluding losses and determined in accordance with
Agreement Accounting Principles) for each fiscal quarter ending after the
Effective Date and (B) the aggregate net cash proceeds obtained by the Borrower
or its Included Subsidiaries through the issuance or sale of stock (or the
conversion of any convertible debt of Borrower to stock) during such fiscal
quarters.
6.11. Indebtedness. The Borrower will not, nor will it permit any
Included Subsidiary to, create, incur or suffer to exist any Indebtedness which
would (a) constitute Indebtedness of any type (including Contingent Obligations)
other than:
(i) the Subordinated Notes (not to exceed $90,000,000 in the
aggregate);
(ii) Tax Agreement Indebtedness or Subordinated Indebtedness due
and owing from time to time to Mego Financial;
(iii) Indebtedness secured solely by "excess servicing rights" or
"mortgage-related securities" (as such categories of assets
are established and valued under Agreement Accounting
Principles and disclosed on the Borrower's consolidated
financial statements) or by the stock of any Included
Subsidiary holding such "excess servicing rights" or
"mortgage-related securities" or proceeds thereof as its sole
assets;
(iv) the Obligations under this Agreement;
(v) Indebtedness created by the Borrower's obligation to
repurchase Qualifying Loans or IO Securities sold to Greenwich
Capital or other third parties subject to repurchase
agreements, but only to the extent the Agent has given prior
written approval to the identity of such other third parties
and the terms of such repurchase agreements;
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(vi) Rate Hedging Agreements, to the extent the counter-parties to
any such Agreements involving projected annual payments by the
Borrower in excess of $1,000,000, before netting, have been
approved by the Agent;
(vii) Capitalized Lease Obligations and Indebtedness created solely
for the purpose of financing all or a portion of the purchase
price for Borrower's operating assets, provided the total
Indebtedness permitted under this Section 6.11(a)(vii)
outstanding at any time shall not exceed $2,750,000;
(viii) Operating Lease Obligations related to the Borrower's existing
and former principal office and the Borrower's existing and
future branch offices up to an aggregate annual rental
obligation of $2,000,000; and
(ix) Permitted Warehouse Indebtedness; or
(b) cause (A) total liabilities of the Borrower and its Included Subsidiaries on
a consolidated basis, as determined in accordance with Agreement Accounting
Principles, less (B) all Subordinated Indebtedness to exceed the sum of the
following percentages of the values of the following categories of assets of the
Borrower and its Included Subsidiaries, as such categories and values are
established by Agreement Accounting Principles and disclosed on the Borrower's
financial statements:
(i) 100% of "cash";
(ii) 93% of "loans held for sale, net" (provided that any
Qualifying Loan owned by the Borrower for more than 180 days
after the date of its origination, if originated by the
Borrower, or after the date of its acquisition, if acquired by
the Borrower, shall be excluded from such category); and
(iii) 55% of Restricted Assets.
6.12. Merger. The Borrower will not, nor will it permit any Included
Subsidiary to, merge or consolidate with or into any other Person, except that
an Included Subsidiary may merge into the Borrower or a Wholly-Owned Subsidiary
which is also an Included Subsidiary.
6.13. Sale of Assets. The Borrower will not, nor will it permit any
Included Subsidiary to, lease, sell or otherwise dispose of its Property, to any
other Person, except:
(i) Sales of Qualifying Loans in the ordinary course of business.
(ii) Sales of Securities.
(iii) Leases, sales or other dispositions of its Property that,
together with all other Property of the Borrower and its
Included Subsidiaries previously leased, sold or disposed of
(other than Qualifying Loans in the ordinary course of
business and Securities) as permitted by this Section during
the twelve-month period ending with the month in which any
such
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lease, sale or other disposition occurs, do not constitute a
Substantial Portion of the Property of the Borrower and its
Included Subsidiaries.
6.14. Investments and Acquisitions. The Borrower will not, nor will
it permit any Included Subsidiary to, make or suffer to exist any Investments
(including without limitation, loans and advances to, and other Investments in,
Subsidiaries), or commitments therefor, or to create any Subsidiary or to become
or remain a partner in any partnership or joint venture, or to make any
Acquisition of any Person, except:
(i) Short-term obligations of, or fully guaranteed by, the United
States of America.
(ii) Commercial paper rated A-l or better by Standard and Poor's
Ratings Group, a division of McGraw Hill, or P-l or better by
Moody's Investors Service, Inc.
(iii) Demand deposit accounts maintained in the ordinary course of
business.
(iv) Certificates of deposit issued by and time deposits with
commercial banks (whether domestic or foreign) having capital
and surplus in excess of $100,000,000.
(v) Investments in existence on the date hereof and described in
Schedule "3" hereto.
(vi) Investments in the ordinary course of the Borrower's mortgage
banking business to purchase: (a) Qualifying Loans (and in
connection with commitments to purchase the same); and (b)
real estate acquired by foreclosure.
(vii) Investments in the ordinary course of the Borrower's mortgage
banking business to enter into Rate Hedging Agreements to the
extent permitted pursuant to Section 6.11.
(viii) Investments in Subsidiaries, whether created or acquired,
which (i) have executed and delivered either a joinder in this
Agreement and thereby assumed joint and several liability for
the Borrower's obligations hereunder or a guaranty of the
Borrower's obligations hereunder in each case in form and
substance satisfactory to the Agent and provided that the
Obligations as so undertaken by such Subsidiary constitute
"Senior Indebtedness" under the Indenture or any other
indenture governing any Subordinated Notes issued hereafter or
(ii) are Excluded Subsidiaries.
(ix) Investments in Subsidiaries which are single purpose,
bankruptcy remote entities created to facilitate
securitization of the Borrower's Qualifying Loans and are
wholly owned by the Borrower, directly or indirectly, and do
not have any Indebtedness.
6.15. Liens. The Borrower will not, nor will it permit any Included
Subsidiary to, create, incur, or suffer to exist any Lien in, of or on the
Property of the Borrower or any of its Included Subsidiaries, except:
(i) Liens for taxes, assessments or governmental charges or levies
on its Property if the same shall not at the time be
delinquent or thereafter can be paid without penalty, or are
being
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contested in good faith and by appropriate proceedings and for
which adequate reserves in accordance with GAAP shall have
been set aside on its books.
(ii) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar liens arising in the
ordinary course of business which secure payment of
obligations not more than 60 days past due.
(iii) Liens arising out of pledges or deposits under worker's
compensation laws, unemployment insurance, old age pensions,
or other social security or retirement benefits, or similar
legislation.
(iv) Utility easements, building restrictions and such other
encumbrances or charges against real property as are of a
nature generally existing with respect to properties of a
similar character and which do not in any material way affect
the marketability of the same or interfere with the use
thereof in the business of the Borrower or the Subsidiaries.
(v) Liens existing on the date hereof and described in Schedule
"4" hereto.
(vi) Liens in favor of the Agent and the Collateral Agent, for the
benefit of the Lenders, granted pursuant to this Agreement or
the Security Agreement.
(vii) Liens with respect to IO Securities, Residual Certificates or
excess servicing rights arising from the documents creating
and governing such securities, certificates and rights as a
result of the subordinate nature of such assets to other
senior interests created and governed by such documents.
(viii) Liens securing Indebtedness permitted under Section
6.11(a)(iii), (vii) or (ix).
(ix) Liens on (i) Property of Subsidiaries acquired by the Company
in existence at the time of such acquisition or (ii) Property
of Excluded Subsidiaries.
6.16. Affiliates. The Borrower will not, and will not permit any
Included Subsidiary to, enter into any transaction (including, without
limitation, the purchase or sale of any Property or service) with, or make any
payment or transfer to, any Affiliate (other than the Borrower) except pursuant
to the existing agreements listed on Schedule "8" attached hereto and as may be
entered into hereafter in the ordinary course of business and pursuant to the
reasonable requirements of the Borrower's or such Included Subsidiary's business
and upon fair and reasonable terms no less favorable to the Borrower or such
Included Subsidiary than the Borrower or such Included Subsidiary would obtain
in a comparable arms-length transaction.
6.17. Financial Covenants.
6.17.1. Adjusted Leverage Ratio. The Borrower will not permit,
as of the end of any calendar month, the ratio of (A) total liabilities of the
Borrower and its Included Subsidiaries on a consolidated basis, as determined in
accordance with Agreement Accounting Principles, less Subordinated Indebtedness
to (B) Adjusted Tangible Net Worth to exceed 3.0 to 1.0.
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6.17.2. Adjusted Tangible Net Worth. The Borrower will not,
at any time permit its Adjusted Tangible Net Worth to be less than $65,000,000
plus fifty percent (50%) of the sum of (i) the sum of the Borrower's positive
net income (excluding losses and determined in accordance with Agreement
Accounting Principles) for each fiscal quarter ending after November 30, 1996
plus (ii) 100% of the net proceeds obtained by the Borrower 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).
6.18. Compliance with Security Agreement. The Borrower will not fail
to perform in any material respect any of its obligations under the Security
Agreement or enter into similar security agreements for Qualifying Loans not
included in Collateral with any Person other than the Collateral Agent.
6.19. Recourse Servicing. The Borrower will not at any time acquire
or create any Recourse Servicing beyond the Recourse Servicing held by the
Company on the Effective Date.
6.20. FHA and FNMA Approvals. The Borrower (i) will maintain its
status as a FHA Title I Approved Mortgagee and remain approved by FHA as a
seller/servicer of Title I Qualifying Loans, (ii) will maintain its status as an
approved seller/servicer for FNMA for Title I Qualifying Loans unless terminated
solely as a result of the Borrower's failure to sell the required number of
loans to maintain such status, and (iii) will not permit the FHA or FNMA to
withdraw such approval of the Borrower.
6.21. Approved Investor Commitments. The Borrower will, at all times
through the Termination Date, keep the Approved Investor Commitment with
Greenwich Capital and the Greenwich Tri-Party Agreement in full force and effect
without any reduction or modification adverse to the Lenders except for
limitations expressly provided therein, unless specifically approved in writing
in advance by the Required Lenders. The Borrower shall maintain all other
Approved Investor Commitments to the extent needed to cover the Pledged
Qualifying Loans and perform all of its obligations in connection with such
Approved Investor Commitments.
6.22. Settlement Account. The Borrower agrees to maintain the
Settlement Account with the Agent with a minimum balance of $100,000 at all
times prior to the Termination Date. The Borrower hereby grants to the Agent for
the benefit of the Lenders a security interest in such Settlement Account and
all deposits therein and interest earned thereon. The Agent shall, in addition
to any other rights available to it, have the right, without notice to the
Borrower, to set off all or any portion of the Settlement Account against the
Obligations at any time after a Default has occurred and is continuing.
6.23. Subordinated Indebtedness. The Borrower will not, and will not
permit any Subsidiary to, make any amendment or modification to any indenture,
note or other agreement evidencing or governing any Subordinated Indebtedness,
or directly or indirectly voluntarily prepay, defease or in substance defease,
purchase, redeem, retire or otherwise acquire, any Subordinated Indebtedness,
other than with proceeds of other Subordinated Indebtedness or proceeds of any
issuance of stock in the Borrower or its Included Subsidiaries.
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6.24. Excluded Subsidiaries. The Borrower shall have the right to
create, from time to time, an "Excluded Subsidiary" 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 Borrower's Adjusted Tangible Net Worth for purposes of calculating the
Borrower's compliance with this Agreement and shall not be included in certain
other calculations as indicated herein and (ii) the Borrower'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 Borrower's then-current Adjusted Tangible Net Worth. No
Subsidiary shall constitute an Excluded Subsidiary until the Borrower has given
written notice of such designation to the Agent and certified that such
Subsidiary meets the requirements of this Section 6.24.
ARTICLE VII
DEFAULTS
The occurrence of any one or more of the following events shall
constitute a Default:
7.1. Any representation or warranty made or deemed made by or on
behalf of the Borrower or any of its Subsidiaries to the Lenders or the Agent
under or in connection with this Agreement, any Loan, or any certificate or
information delivered in connection with this Agreement or any other Loan
Document shall be materially false on the date as of which made (it being
understood that if any of the representations and warranties made in connection
with the definition of "Borrowing Base" are not true and correct as of any date
with respect to any Pledged Item, such Pledged Item shall be removed from
Eligible Collateral as the sole remedy for such failure).
7.2. Nonpayment of principal of any Note when due (including but
not limited to payments required pursuant to Section 2.10.2), or nonpayment of
interest upon any Note or of any Fee or other obligations under any of the Loan
Documents within five days after the same becomes due.
7.3. The breach by the Borrower of any of the terms or provisions
of Sections 6.2, 6.10, 6.11, 6.12, 6.13, 6.14, 6.15, 6.17, 6.19, 6.20, 6.21,
6.22 or 6.23.
7.4. The breach by the Borrower (other than a breach which
constitutes a Default under any other Section of this Article VII) of any of the
terms or provisions of this Agreement which is not remedied within 30 days after
the earlier to occur of (i) receipt of written notice from the Agent or any
Lender of such breach or (ii) the date that the Borrower obtains knowledge of
such breach.
7.5. Failure of the Borrower or any of its Subsidiaries to pay when
due either (i) the Capitalized Leases with NBD Bank, Agent's Affiliate, or (ii)
any other Indebtedness aggregating in excess of $5,000,000 (collectively, items
(i) and (ii) being referred to as "Material Indebtedness"); or the default by
the Borrower or any of its Subsidiaries in the performance of any term,
provision or condition contained in any agreement under which any such Material
Indebtedness was created or is governed which has not been waived by the holder
or holders of such Material Indebtedness, or any other event shall occur or
condition exist which has not been so waived, the effect of which is to cause,
or to permit the holder or holders of such Material Indebtedness to cause, such
Material Indebtedness to become due prior to its
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stated maturity; or any Material Indebtedness of the Borrower or any of its
Subsidiaries shall be declared to be due and payable or required to be prepaid
or repurchased (other than by a regularly scheduled payment) prior to the stated
maturity thereof; or the Borrower or any of its Subsidiaries shall not pay, or
admit in writing its inability to pay, its debts generally as they become due.
7.6. The Borrower or any of its Subsidiaries shall (i) have an
order for relief entered with respect to it under the Federal bankruptcy laws as
now or hereafter in effect, (ii) make an assignment for the benefit of
creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment
of a receiver, custodian, trustee, examiner, liquidator or similar official for
it or any Substantial Portion of its Property, (iv) institute any proceeding
seeking an order for relief under the Federal bankruptcy laws as now or
hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or
seeking dissolution, winding up, liquidation, reorganization, arrangement,
adjustment or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors or fail to file an
answer or other pleading denying the material allegations of any such proceeding
filed against it, (v) take any corporate action to authorize or effect any of
the foregoing actions set forth in this Section 7.6 or (vi) fail to contest in
good faith any appointment or proceeding described in Section 7.7.
7.7. Without the application, approval or consent of the Borrower
or any of its Subsidiaries, a receiver, trustee, examiner, liquidator or similar
official shall be appointed for the Borrower or any of its Subsidiaries or any
Substantial Portion of its Property, or a proceeding described in Section
7.6(iv) shall be instituted against the Borrower or any of its Subsidiaries and
such appointment continues undischarged or such proceeding continues undismissed
or unstayed for a period of 60 consecutive days.
7.8. Any court, government or governmental agency shall condemn,
seize or otherwise appropriate, or take custody or control of (each a
"Condemnation"), all or any portion of the Property of the Borrower and its
Subsidiaries which, when taken together with all other Property of the Borrower
and its Subsidiaries so condemned, seized, appropriated, or taken custody or
control of, during the twelve-month period ending with the month in which any
such Condemnation occurs, constitutes a Substantial Portion.
7.9. The Borrower or any of its Subsidiaries shall fail within 30
days to pay, bond or otherwise discharge any judgment or order for the payment
of money in excess of $500,000, which is not stayed on appeal or otherwise being
appropriately contested in good faith.
7.10. Any Change in Control shall occur.
7.11. The occurrence of any "default", as defined in any Loan
Document (other than this Agreement or the Notes) or the breach of any of the
terms or provisions of any Loan Document (other than this Agreement or the
Notes), which default or breach continues beyond any period of grace therein
provided.
7.12. The Security Agreement shall for any reason fail to create a
valid and perfected first priority security interest in any collateral purported
to be covered thereby, except as permitted by the terms of the Security
Agreement, or the Security Agreement shall fail to remain in full force or
effect or any action shall be taken to discontinue or to assert the invalidity
or unenforceability of the Security Agreement, or the Borrower shall fail to
comply with any of the terms or provisions of the Security Agreement.
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7.13. The Unfunded Liabilities of all Single Employer Plans shall
exceed in the aggregate $500,000 or any Reportable Event shall occur in
connection with any Plan.
7.14. The Borrower or any other member of the Controlled Group shall
have been notified by the sponsor of a Multiemployer Plan that it has incurred
withdrawal liability to such Multiemployer Plan in an amount which, when
aggregated with all other amounts required to be paid to Multiemployer Plans by
the Borrower or any other member of the Controlled Group as withdrawal liability
(determined as of the date of such notification), exceeds $500,000 or requires
payments exceeding $100,000 per annum.
7.15. The representations and warranties set forth in "Section 5.15
Plan Assets; Prohibited Transactions" shall at any time not be true and correct.
7.16. PEC shall breach or default in the performance of its
obligations under the PEC Tri-Party Agreement or the subservicing agreement
described therein, which breach or default continues beyond any period of grace
therein provided, provided that such breach or default by PEC shall not
constitute a Default if the Borrower has not later than 7 days after the
occurrence of such breach or default (or the expiration of any grace period, if
applicable) replaced PEC with a replacement subservicer satisfactory to the
Agent.
7.17. Greenwich Capital shall breach or default in the performance of
its obligations under the Greenwich Tri-Party Agreement or the Approved Investor
Commitment described therein, which breach or default continues beyond any
period of grace therein provided unless the Borrower has, prior to the
expiration of any such grace period available to Greenwich Capital with respect
to such breach or default, obtained Approved Investor Commitments, and related
Tri-Party Agreements, from other Approved Investors covering Eligible Collateral
having an aggregate Borrowing Base value at least equal to the then-existing
Coverage Requirement.
7.18. The Borrower shall breach or default in the performance of the
Borrower's obligations under the Approved Investor Commitment issued to the
Borrower by Greenwich Capital, which breach or default, if subject to cure under
the terms thereof, continues without cure or waiver beyond a date that is two
(2) Business Days prior to the expiration of the cure period available to the
Borrower thereunder.
ARTICLE VIII
COLLATERAL, ACCELERATION AND OTHER REMEDIES
8.1. Security and Collateral Agency Agreement. Pursuant to the
Security Agreement, a security interest in and a continuing lien upon the
Collateral has been created in favor of the Collateral Agent for the benefit of
the Lenders.
8.2. AP Qualifying Loans. The Borrower agrees that while it is in
possession of any Required Qualifying Loan Documents for an AP Qualifying Loan,
it will hold same in trust and as agent and bailee for the Collateral Agent,
without authority to make any other disposition thereof, or of the proceeds
thereof, except as may be otherwise permitted in writing by the Collateral
Agent. The Borrower assumes the responsibility for loss or destruction of any
such Required Qualifying Loan Documents until the same are delivered to the
Collateral Agent.
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8.3. Release of Collateral. Upon the request of the Borrower
Borrower delivered from time to time to the Agent and the Collateral Agent but
subject to Section 6.22, the Agent shall authorize the Collateral Agent to
release Collateral (including Ineligible Collateral) specified in such notice
from the lien of this Agreement, if, but only if, (i) at the time of such
release no Default or Unmatured Default shall have occurred and then be
continuing, (ii) the Borrowing Base, after giving effect to such release, is at
least equal to the Coverage Requirement or any payment under Section 2.10 which
may be required as a result of such release has been made and (iii) the release
of such Collateral will not create a violation of any Lending Sublimit or
Borrowing Base Sublimit.
8.4. Settlement Account. There is hereby established with the
Agent, for the benefit of the Lenders, a "cash collateral" account of the
Borrower, Account #19-29623 ("Settlement Account") into which shall be deposited
all cash proceeds from the sale of any Pledged Qualifying Loan. Only the Agent
shall have access to the Settlement Account. All amounts in the Settlement
Account shall be applied as described in Section 2.10.3.
8.5. Termination. If all Commitments under this Agreement shall
have expired or been terminated pursuant to the express terms hereof and no
Obligations shall be outstanding, the Agent shall promptly deliver or cause to
be delivered all cash standing to the credit of the Settlement Account and shall
cause the Collateral Agent to return to the Borrower all Required Qualifying
Loan Documents and any other items relating to the Pledged Qualifying Loans
delivered to the Collateral Agent and not previously returned to the Borrower or
delivered at the Borrower's direction hereunder. The receipt by the Borrower of
any cash in the Settlement Account and of all such items related to the Pledged
Qualifying Loans returned or delivered to the Borrower pursuant to any provision
of this Agreement, together with UCC-3 termination statements executed by the
Agent, shall be a complete and full acquittance for all items related to the
Pledged Qualifying Loans so delivered.
8.6. Acceleration. If any Default described in Section 7.6 or 7.7
occurs with respect to the Borrower, the obligations of the Lenders to make
Loans hereunder shall automatically terminate and the Obligations shall
immediately become due and payable without any election or action on the part of
the Agent or any Lender. If any other Default occurs, the Required Lenders (or
the Agent with the consent of the Required Lenders) may (i) terminate the
obligations of the Lenders to make Loans hereunder and they shall, upon notice
to the Borrower, terminate and/or (ii) declare the Obligations to be due and
payable, whereupon the Obligations shall become immediately due and payable,
without presentment, demand, protest or notice of any kind, all of which the
Borrower hereby expressly waives.
If, within 30 days after acceleration of the maturity of the
Obligations or termination of the obligations of the Lenders to make Loans
hereunder as a result of any Default (other than any Default as described in
Section 7.6 or 7.7 with respect to the Borrower) and before any judgment or
decree for the payment of the Obligations due shall have been obtained or
entered, the Required Lenders (in their sole discretion) shall so direct, the
Agent shall, by notice to the Borrower, rescind and annul such acceleration
and/or termination.
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8.7. Other Remedies.
(i) Unless a Default shall have occurred and then be
continuing, the Borrower shall be entitled to receive and collect
directly all sums payable to the Borrower in respect of the Collateral
except proceeds from the sale thereof which shall be deposited into
the Settlement Account for application pursuant to Section 2.10.3.
(ii) Upon the occurrence of a Default and during the
continuance thereof, the Agent and the Collateral Agent, on
behalf of the Lenders, shall be entitled to all the rights and
remedies hereunder and in the Security Agreement, subject to the
limitations and requirements of Paragraph 16 thereof, and all other
rights or remedies at law or in equity existing or conferred upon the
Lenders by other jurisdictions or other applicable law.
(iii) Following the occurrence and during the continuance of
a Default or an Unmatured Default, no Lender shall be obligated to
fund any Loan hereunder.
(iv) Following the occurrence of a Default and during the
continuance thereof, the Borrower agrees that the Borrower and the
Agent shall, if so directed by a vote of the Required Lenders,
implement certain procedures with respect to the Borrower's funding of
AP Qualifying Loans, all at the Borrower's sole expense. Such
procedures may include, but are not limited to: (i) reducing the
advance rate against Eligible Collateral which are AP Qualifying Loans
for purposes of determining the Collateral Value component of the
Borrowing Base, (ii) requiring that if (A) AP Qualifying Loans are
acquired with wire transfers, such wire transfers originate from
accounts located at a lending office of a Lender, (B) AP Qualifying
Loans are acquired with funds from accounts which are not located at a
lending office of a Lender, the financial institution which holds such
account enter into an agreement with the Borrower and the Agent which
shall provide that the Agent shall have exclusive dominion and control
over the funds in such account, (iii) requiring the Borrower to provide
the Agent and the Lenders with such information regarding the
acquisition of such AP Qualifying Loans as the Required Lenders may
reasonably request. The Borrower, at its expense, shall from time to
time execute and deliver to the Agent or the Collateral Agent all such
assignments, certificates, supplemental documents, and financing
statements, and shall do all other acts or things, as the Agent may
reasonably request in order to more fully implement such procedures.
(v) The Borrower waives, to the extent permitted by law,
any right to require the Agent or any Lender to (i) proceed against any
Person, (ii) proceed against or exhaust any of the Collateral or pursue
its rights and remedies as against the Collateral in any particular
order or (iii) pursue any other remedy in its power.
(vi) The Agent on behalf of the Lenders may, but shall not
be obligated to, advance any sums or do any act or thing necessary to
uphold and enforce the lien and priority of, or the security intended
to be afforded by, any Pledged Qualifying Loans, including, without
limitation, payment of delinquent taxes or assessments and insurance
premiums. The Borrower shall provide any and all information required
by the Agent to administer this Agreement or collect on the Collateral.
All advances, charges, costs and expenses, including reasonable
attorneys fees,
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incurred or paid by the Agent in exercising any right, power or remedy
conferred by this Agreement, or in the enforcement hereof (or by any
Lender acting on instruction of the Required Lenders in the
enforcement hereof), together with interest thereon at the rate per
annum of 2% plus the Alternate Base Rate from the time of payment
until repaid, shall become a part of the Obligations.
(vii) Following the occurrence of a Default and the
acceleration of the Obligations the Agent shall be entitled to receive
and collect all sums payable to the Borrower in respect of the
Collateral and (a) the Agent, at the request of the Required Lenders,
may in its own name or in the name of the Borrower or otherwise,
demand, sue for, collect or receive any money or property at any time
payable or receivable on account of or in exchange for any of the
Collateral, (b) the Borrower shall receive and hold in trust for the
Lenders any amounts thereafter received by the Borrower upon or in
respect of any of the Collateral, advising the Agent as to the source
of such funds and, if the Agent so requests at the direction of the
Required Lenders, forthwith paying such amounts to the Agent, and (c)
any and all amounts so received and collected by the Agent either
directly or from the Borrower shall be deposited in the Settlement
Account.
8.8. Application of Proceeds. After a Default and acceleration of
the Obligations, the proceeds of any sale or enforcement of all or any part of
the Collateral pursuant to the Security Agreement and the balance of any moneys
in the Settlement Account shall be applied by the Agent:
FIRST, to the payment of all costs and expenses of such sale
or enforcement, including reasonable compensation to the Agent's
agents and counsel, and all expenses, liabilities and advances made or
incurred by the Agent or any Lender acting on instructions of the
Required Lenders in connection therewith;
SECOND, to the payment of all costs and expenses incurred by
the Collateral Agent under the Security Agreement;
THIRD, to the payment of the outstanding principal balance of,
and all accrued and unpaid interest on and Fees attributable to, all
Loans under this Agreement, ratably according to the amount so due to
each Lender, until such amounts are paid in full;
FOURTH, to the extent proceeds remain after application under
the preceding subparagraphs, to the payment of all remaining
Obligations, until such amounts are paid in full; and
FIFTH, to the payment to the Borrower, or to its successors or
assigns, or as a court of competent jurisdiction may direct, of any
surplus then remaining from such proceeds.
The Agent shall have absolute discretion as to the time of application
of any such proceeds, moneys or balances in accordance with this Agreement. If
the proceeds of any such sale are insufficient to cover the costs and expenses
of such sale, as aforesaid, and the payment in full of the Obligations, the
Borrower shall remain liable for any deficiency.
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8.9. Preservation of Rights. No delay or omission of the
Lenders or the Agent to exercise any right under the Loan Documents shall
impair such right or be construed to be a waiver of any Default or an
acquiescence therein, and the making of a Loan notwithstanding the existence of
a Default or the inability of the Borrower to satisfy the conditions precedent
to such Loan shall not constitute any waiver or acquiescence. Any single or
partial exercise of any such right shall not preclude other or further exercise
thereof or the exercise of any other right, and no waiver, amendment or other
variation of the terms, conditions or provisions of the Loan Documents
whatsoever shall be valid unless in writing signed by the Lenders required
pursuant to Section 9.1, and then only to the extent in such writing
specifically set forth. All remedies contained in the Loan Documents or by law
afforded shall be cumulative and all shall be available to the Agent and the
Lenders until the Obligations have been paid in full.
ARTICLE IX
AMENDMENTS; WAIVERS; GENERAL PROVISIONS
9.1. Amendments and Waivers. Other than (a) Commitment
increases pursuant to Section 12.4 (which may be accomplished solely by the
Borrower, the Agent and the subject Lender) and (b) temporary waivers of
Collateral eligibility permitted pursuant to the definition of "Borrowing Base"
(which may be accomplished solely by the Agent), the Required Lenders (or the
Agent with the consent in writing of the Required Lenders) and the Borrower may
enter into agreements supplemental hereto for the purpose of adding or
modifying any provisions to the Loan Documents or changing in any manner the
rights of the Lenders or the Borrower hereunder or waiving any Default
hereunder; provided, however, that no such supplemental agreement shall,
without the consent of each Lender directly or indirectly affected thereby:
(i) Extend the final maturity of any Loan or Note or forgive all
or any portion of the principal amount thereof, or reduce the
rate or extend the time of payment of interest or fees thereon.
(ii) Reduce the percentage specified in the definition of Required
Lenders.
(iii) Extend the Termination Date, or reduce the amount of or extend
the payment date for the mandatory payments required under
Section 2.10, or increase the amount of the Commitment of any
Lender hereunder (other than in accordance with Section 12.4).
(iv) Amend this Section 9.1.
(v) Except as provided herein or in the Security Agreement,
release any Collateral.
(vi) Amend the definitions of "Eligible Title I Qualifying Loan,"
"Eligible Conventional HI/DC Qualifying Loan", "Borrowing Base"
or "Collateral Value".
(vii) Permit the Borrower to assign its rights under this Agreement
or amend or waive any restriction on the Borrower's ability to
assign its rights or obligations under any of the Loan
Documents.
(viii) Amend or waive any Lending Sublimits or Borrowing Base
Sublimits.
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(ix) Amend or waive any provision herein regarding the
indemnification of the Agent, the Collateral Agent or any
Lender.
(x) Amend or waive any provision herein regarding the allocation
among the Lenders of any payments or proceeds received by the
Agent hereunder.
No amendment of any provision of this Agreement relating to the Agent or the
Collateral Agent shall be effective without the written consent of the Agent or
the Collateral Agent, as the case may be. In addition, the consent of the
Collateral Agent shall be required for the effectiveness of any amendment
referred to in Section 9.1(iv), (v), (vi), (viii) and/or (ix) above. The Agent
may waive payment of the fee required under Section 12.3.2 without obtaining
the consent of any other party to this Agreement.
9.2. Survival of Representations. All representations and
warranties of the Borrower contained in this Agreement shall survive delivery of
the Notes and the making of the Loans herein contemplated.
9.3. Governmental Regulation. Anything contained in this Agreement
to the contrary notwithstanding, no Lender shall be obligated to extend credit
to the Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.
9.4. Taxes. Any taxes (excluding federal or state income taxes on
the overall net income of any Lender) or other similar assessments or charges
made by any governmental or revenue authority in respect of the Loan Documents
shall be paid by the Borrower, together with interest and penalties, if any.
9.5. Entire Agreement. The Loan Documents embody the entire
agreement and understanding among the Borrower, the Agent, the Collateral Agent
and the Lenders and supersede all prior agreements and understandings among the
Borrower, the Agent and the Lenders relating to the subject matter thereof,
other than the fee letter described in Section 2.7.3 and any other agreements
entered into in connection with the fees described in Sections 2.7.4 and 2.7.5.
9.6. Several Obligations; Benefits of this Agreement. The
respective obligations of the Lenders hereunder are several and not joint and no
Lender shall be the partner or agent of any other (except to the extent to which
the Agent is authorized to act as such). The failure of any Lender to perform
any of its obligations hereunder shall not relieve any other Lender from any of
its obligations hereunder. This Agreement shall not be construed so as to
confer any right or benefit upon any Person other than the parties to this
Agreement and their respective successors and assigns.
9.7. Expenses; Indemnification. The Borrower shall reimburse the
Agent and the Collateral Agent for any costs, internal charges (other than any
charges or allocations based on the salaries of or time spent by any
non-attorney employees of the Agent or Collateral Agent) and out-of-pocket
expenses (including attorneys' fees and time charges of attorneys for the Agent
and the Collateral Agent, which attorneys may be employees of the Agent or the
Collateral Agent) paid or incurred by the Agent or the Collateral Agent in
connection with the preparation, negotiation, execution, delivery, review,
amendment, modification, and administration of the Loan Documents. The Borrower
also agrees to reimburse the Agent, the Collateral Agent and the Lenders for any
costs, internal charges and out-of-pocket expenses (including attorneys' fees
and time charges of attorneys for the Agent, the Collateral Agent and the
Lenders, which attorneys may be employees of the Agent, the Collateral Agent or
the Lenders) paid or
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incurred by the Agent, the Collateral Agent or any Lender in connection with
the collection and enforcement of the Loan Documents. The Borrower further
agrees to indemnify the Agent, the Collateral Agent and each Lender, its
directors, officers and employees against all losses, claims, damages,
penalties, judgments, liabilities and expenses (including, without limitation,
all expenses of litigation or preparation therefor whether or not the Agent,
the Collateral Agent or any Lender is a party thereto) which any of them may
pay or incur arising out of or relating to this Agreement, the other Loan
Documents, the transactions contemplated hereby or the direct or indirect
application or proposed application of the proceeds of any Loan hereunder
except to the extent that they are determined by a court of competent
jurisdiction in a final and non-appealable order to have resulted from the
gross negligence or willful misconduct of the party seeking indemnification.
The obligations of the Borrower under this Section shall survive the
termination of this Agreement.
9.8. Nonliability of Lenders. The relationship between the Borrower
and the Lenders, the Agent and the Collateral Agent shall be solely that of
borrower and lender. Neither the Agent nor any Lender shall have any fiduciary
responsibilities to the Borrower. Neither the Agent, the Collateral Agent nor
any Lender undertakes any responsibility to the Borrower to review or inform the
Borrower of any matter in connection with any phase of the Borrower's business
or operations. The Borrower agrees that neither the Agent, the Collateral Agent
nor any Lender shall have liability to the Borrower (whether sounding in tort,
contract or otherwise) for losses suffered by the Borrower in connection with,
arising out of, or in any way related to, the transactions contemplated and the
relationship established by the Loan Documents, or any act, omission or event
occurring in connection therewith, unless it is determined by a court of
competent jurisdiction in a final and non-appealable order that such losses
resulted from the gross negligence or willful misconduct of the party from which
recovery is sought, or with respect to the liability of any Lender, from the
failure of such Lender to fund a Loan when required under the terms of this
Agreement. Neither the Agent, the Collateral Agent nor any Lender shall have
any liability with respect to, and the Borrower hereby waives, releases and
agrees not to sue for, any special, indirect or consequential damages suffered
by the Borrower in connection with, arising out of, or in any way related to the
Loan Documents or the transactions contemplated thereby.
9.9. Severability of Provisions. Any provision in any Loan Document
that is held to be inoperative, unenforceable, or invalid in any jurisdiction
shall, as to that jurisdiction, be inoperative, unenforceable, or invalid
without affecting the remaining provisions in that jurisdiction or the
operation, enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of all Loan Documents are declared
to be severable.
9.10. Headings. Section headings in the Loan Documents are for
convenience of reference only, and shall not govern the interpretation of any of
the provisions of the Loan Documents.
9.11. Numbers of Documents. All statements, notices, closing
documents, and requests hereunder shall be furnished to the Agent with
sufficient counterparts so that the Agent may furnish one to each of the
Lenders.
9.12. Accounting. Except as provided to the contrary herein, all
accounting terms used herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with Agreement Accounting
Principles.
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9.13. Confidentiality. Each Lender agrees to hold any confidential
information which it may receive from the Borrower pursuant to this Agreement in
confidence, except for disclosure (i) to its Affiliates and to other Lenders and
their respective Affiliates, (ii) to legal counsel, accountants, and other
professional advisors to that Lender or to a Transferee, (iii) to regulatory
officials, (iv) to any Person as requested pursuant to or as required by law,
regulation, or legal process, (v) to any Person in connection with any legal
proceeding to which that Lender is a party, and (vi) permitted by Section 12.5.
9.14. Nonreliance. Each Lender hereby represents that it is not
relying on or looking to any margin stock (as defined in Regulation U of the
Board of Governors of the Federal Reserve System) for the repayment of the Loans
provided for herein.
9.15. Disclosure. The Borrower and each Lender hereby (i)
acknowledge and agree that NBD Bank, an Affiliate of First Chicago, holds
certain Capitalized Leases with the Borrower and First Chicago and/or its
Affiliates from time to time may hold other investments in, make other loans to
or have other relationships with the Borrower, and (ii) waive any liability of
First Chicago or such Affiliate to the Borrower or any Lender, respectively,
arising out of or resulting from the existence of such investments, loans or
relationships or conflicts of interest related thereto other than liabilities
arising out of the gross negligence or willful misconduct of First Chicago or
its Affiliates.
ARTICLE X
THE AGENT AND THE COLLATERAL AGENT
10.1. Appointment; Nature of Relationship. The First National Bank
of Chicago is hereby appointed by the Lenders as the Agent hereunder and under
each other Loan Document, and each of the Lenders irrevocably authorizes the
Agent to act as the contractual representative of such Lender with the rights
and duties expressly set forth herein and in the other Loan Documents. First
Chicago National Processing Corporation is hereby appointed by the Lenders as
the Collateral Agent hereunder and under the Security Agreement, and each of the
Lenders irrevocably authorizes the Collateral Agent to act as the contractual
representative of such Lender with the rights and duties expressly set forth
herein and in the Security Agreement. The Agent and the Collateral Agent are
hereby authorized to enter into the Security Agreement on behalf of the Lenders
and all obligations of the Lenders thereunder shall be binding upon each Lender
as if such Lender had executed the Security Agreement. For purposes of this
Article X (other than Section 10.12), each reference to the term "Agent" shall
be deemed to be a collective reference to the Agent and the Collateral Agent.
The Agent agrees to act as such contractual representative upon the express
conditions contained in this Article X. Notwithstanding the use of the defined
term "Agent," it is expressly understood and agreed that the Agent shall have
not have any fiduciary responsibilities to any Lender by reason of this
Agreement or any other Loan Document and that the Agent is merely acting as the
representative of the Lenders with only those duties as are expressly set forth
in this Agreement and the other Loan Documents. In its capacity as the Lenders'
contractual representative, the Agent (i) does not hereby assume any fiduciary
duties to any of the Lenders, (ii) is a "representative" of the Lenders within
the meaning of Section 9-105 of the Uniform Commercial Code and (iii) is acting
as an independent contractor, the rights and duties of which are limited to
those expressly set forth in this Agreement and the other Loan Documents.
Without limiting Section 10.3 below, each of the Lenders hereby agrees to assert
no claim against the Agent on any agency theory or any other theory of liability
for breach of fiduciary duty, all of which claims each Lender hereby waives.
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10.2. Powers. The Agent shall have and may exercise such powers
under the Loan Documents as are specifically delegated to the Agent by the terms
of each thereof, together with such powers as are reasonably incidental thereto.
The Agent shall have no implied duties to the Lenders, or any obligation to the
Lenders to take any action thereunder except any action specifically provided by
the Loan Documents to be taken by the Agent.
10.3. General Immunity. Neither the Agent nor any of its directors,
officers, agents or employees shall be liable to the Borrower, the Lenders or
any Lender for any action taken or omitted to be taken by it or them hereunder
or under any other Loan Document or in connection herewith or therewith except
for its or their own gross negligence or willful misconduct, or with respect to
the liability of any Lender, for the failure of such Lender to fund a Loan when
required under the terms of this Agreement.
10.4. No Responsibility for Loans, Recitals, Etc. Neither the Agent
nor any of its directors, officers, agents or employees shall be responsible for
or have any duty to ascertain, inquire into, or verify (i) any statement,
warranty or representation made in connection with any Loan Document or any
borrowing hereunder; (ii) the performance or observance of any of the covenants
or agreements of any obligor under any Loan Document, including, without
limitation, any agreement by an obligor to furnish information directly to each
Lender; (iii) the satisfaction of any condition specified in Article IV, except
receipt of items required to be delivered to the Agent; (iv) the validity,
enforceability, effectiveness, sufficiency or genuineness of any Loan Document
or any other instrument or writing furnished in connection therewith; or (v) the
value, sufficiency, creation, perfection or priority of any interest in any
collateral security. The Agent shall have no duty to disclose to the Lenders
information that is not required to be furnished by the Borrower to the Agent at
such time, but is voluntarily furnished by the Borrower to the Agent (either in
its capacity as Agent or in its individual capacity).
10.5. Action on Instructions of Lenders. The Agent shall in all
cases be fully protected in acting, or in refraining from acting, hereunder and
under any other Loan Document in accordance with written instructions signed by
the Required Lenders, and such instructions and any action taken or failure to
act pursuant thereto shall be binding on all of the Lenders and on all holders
of Notes. The Lenders hereby acknowledge that the Agent shall be under no duty
to take any discretionary action permitted to be taken by it pursuant to the
provisions of this Agreement or any other Loan Document unless it shall be
requested in writing to do so by the Required Lenders. The Agent shall be fully
justified in failing or refusing to take any action hereunder and under any
other Loan Document unless it shall first be indemnified to its satisfaction by
the Lenders pro rata against any and all liability, cost and expense that it may
incur by reason of taking or continuing to take any such action.
10.6. Employment of Agents and Counsel. The Agent may execute any of
its duties as Agent hereunder and under any other Loan Document by or through
employees, agents, and attorneys-in-fact and shall not be answerable to the
Lenders, except as to money or securities received by it or its authorized
agents, for the default or misconduct of any such agents or attorneys-in-fact
selected by it with reasonable care. The Agent shall be entitled to advice of
counsel concerning all matters pertaining to the agency hereby created and its
duties hereunder and under any other Loan Document.
10.7. Reliance on Documents; Counsel. The Agent shall be entitled to
rely upon any Note, notice, consent, certificate, affidavit, letter, telegram,
statement, paper or document believed by it to be
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genuine and correct and to have been signed or sent by the proper person or
persons, and, in respect to legal matters, upon the opinion of counsel selected
by the Agent, which counsel may be employees of the Agent.
10.8. Agent's Reimbursement and Indemnification. The Lenders agree
to reimburse and indemnify the Agent ratably in proportion to their respective
Commitments (or, if the Commitments have been terminated, in proportion to their
Commitments immediately prior to such termination) (i) for any amounts not
reimbursed by the Borrower for which the Agent is entitled to reimbursement by
the Borrower under the Loan Documents, (ii) for any other expenses incurred by
the Agent on behalf of the Lenders, in connection with the preparation,
execution, delivery, administration and enforcement of the Loan Documents and
(iii) for any liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind and nature
whatsoever which may be imposed on, incurred by or asserted against the Agent in
any way relating to or arising out of the Loan Documents or any other document
delivered in connection therewith or the transactions contemplated thereby, or
the enforcement of any of the terms thereof or of any such other documents,
provided that no Lender shall be liable for any of the foregoing to the extent
they arise from the gross negligence or willful misconduct of the Agent. The
obligations of the Lenders under this Section 10.8 shall survive payment of the
Obligations and termination of this Agreement.
10.9. Notice of Default. The Agent shall not be deemed to have
knowledge or notice of the occurrence of any Default or Unmatured Default
hereunder unless the Agent has received written notice from a Lender or the
Borrower referring to this Agreement describing such Default or Unmatured
Default and stating that such notice is a "notice of default". In the event
that the Agent receives such a notice, the Agent shall give prompt notice
thereof to the Lenders.
10.10. Rights as a Lender. In the event the Agent is a Lender, the
Agent shall have the same rights and powers hereunder and under any other Loan
Document as any Lender and may exercise the same as though it were not the
Agent, and the term "Lender" or "Lenders" shall, at any time when the Agent is a
Lender, unless the context otherwise indicates, include the Agent in its
individual capacity. The Agent may accept deposits from, lend money to, and
generally engage in any kind of trust, debt, equity or other transaction, in
addition to those contemplated by this Agreement or any other Loan Document,
with the Borrower or any of its Subsidiaries in which the Borrower or such
Subsidiary is not restricted hereby from engaging with any other Person. The
Agent, in its individual capacity, is not obligated to remain a Lender.
10.11. Lender Credit Decision. Each Lender acknowledges that it has,
independently and without reliance upon the Agent or any other Lender and based
on the financial statements prepared by the Borrower and such other documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and the other Loan Documents. Each Lender
also acknowledges that it will, independently and without reliance upon the
Agent 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 and the other Loan Documents.
10.12. Successor Agent. The Agent may resign at any time by giving
written notice thereof to the Lenders and the Borrower, such resignation to be
effective upon the appointment of a successor Agent or, if no successor Agent
has been appointed, forty-five days after the retiring Agent gives notice of its
intention to resign. Upon any such resignation, the Required Lenders shall have
the right to appoint, on behalf of the Borrower and the Lenders, a successor
Agent. If no successor Agent shall have been so appointed by the
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Required Lenders within thirty days after the resigning Agent's giving notice
of its intention to resign, then the resigning Agent may appoint, on behalf of
the Borrower and the Lenders, a successor Agent. If the Agent has resigned and
no successor Agent has been appointed, the Lenders may perform all the duties
of the Agent hereunder and the Borrower shall make all payments in respect of
the Obligations to the applicable Lender and for all other purposes shall deal
directly with the Lenders. No successor Agent shall be deemed to be appointed
hereunder until such successor Agent has accepted the appointment. Any such
successor Agent shall be a commercial bank having capital and retained earnings
of at least $250,000,000. Upon the acceptance of any appointment as Agent
hereunder by a successor Agent, such successor Agent shall thereupon succeed to
and become vested with all the rights, powers, privileges and duties of the
resigning Agent. Upon the effectiveness of the resignation of the Agent, the
resigning Agent shall be discharged from its duties and obligations hereunder
and under the Loan Documents. After the effectiveness of the resignation of an
Agent, the provisions of this Article X shall continue in effect for the
benefit of such Agent in respect of any actions taken or omitted to be taken by
it while it was acting as the Agent hereunder and under the other Loan
Documents.
ARTICLE XI
SETOFF; RATABLE PAYMENTS
11.1. Setoff. In addition to, and without limitation of, any rights
of the Lenders under applicable law, if the Borrower becomes insolvent, however
evidenced, or any Default occurs, any and all deposits (including all account
balances, whether provisional or final and whether or not collected or
available) and any other Indebtedness at any time held or owing by any Lender to
or for the credit or account of the Borrower may be offset and applied toward
the payment of the Obligations owing to such Lender, whether or not the
Obligations, or any part hereof, shall then be due.
11.2. Ratable Payments. If any Lender, whether by setoff or
otherwise, has payment made to it upon its Loans (other than payments received
pursuant to Section 3.1, 3.2 or 3.4) in a greater proportion than that received
by any other Lender, such Lender agrees, promptly upon demand, to purchase a
portion of the Loans held by the other Lenders so that after such purchase each
Lender will hold its ratable proportion of Loans. If any Lender, whether in
connection with setoff or amounts which might be subject to setoff or otherwise,
receives collateral or other protection for its Obligations or such amounts
which may be subject to setoff, such Lender agrees, promptly upon demand, to
take such action necessary such that all Lenders share in the benefits of such
collateral ratably in proportion to their Loans. In case any such payment is
disturbed by legal process, or otherwise, appropriate further adjustments shall
be made.
11.3. Custodial Accounts. The Borrower agrees that funds received
and held by the Borrower as custodian for any mortgage pools or Security which
are deposited into accounts with any Lender shall be clearly identified as
custodial accounts, and each Lender agrees that each provision of the foregoing
subsections of this Article XI shall not apply to such custodial accounts. The
Borrower shall not deposit any of its general funds in any custodial accounts or
otherwise commingle funds in any custodial accounts.
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ARTICLE XII
ASSIGNMENTS; PARTICIPATIONS; COMMITMENT INCREASES
12.1. Successors and Assigns. The terms and provisions of the Loan
Documents shall be binding upon and inure to the benefit of the Borrower and the
Lenders and their respective successors and assigns, except that (i) the
Borrower shall not have the right to assign its rights or obligations under the
Loan Documents and (ii) any assignment by any Lender must be made in compliance
with Section 12.3. Notwithstanding clause (ii) of this Section, any Lender may
at any time, without the consent of the Borrower or the Agent, assign all or any
portion of its rights under this Agreement and its Notes to a Federal Reserve
Bank; provided, however, that no such assignment to a Federal Reserve Bank shall
release the transferor Lender from its obligations hereunder. The Agent may
treat the payee of any Note as the owner thereof for all purposes hereof unless
and until such payee complies with Section 12.3 in the case of an assignment
thereof or, in the case of any other transfer, a written notice of the transfer
is filed with the Agent. Any assignee or transferee of a Note agrees by
acceptance thereof to be bound by all the terms and provisions of the Loan
Documents. Any request, authority or consent of any Person, who at the time of
making such request or giving such authority or consent is the holder of any
Note, shall be conclusive and binding on any subsequent holder, transferee or
assignee of such Note or of any Note or Notes issued in exchange therefor.
12.2. Participations.
12.2.1 Permitted Participants; Effect. Any Lender may,
in the ordinary course of its business and in accordance with applicable law, at
any time sell to one or more banks or other entities ("Participants")
participating interests in any Loan owing to such Lender, any Note held by such
Lender, any Commitment of such Lender or any other interest of such Lender under
the Loan Documents. In the event of any such sale by a Lender of participating
interests to a Participant, such Lender's obligations under the Loan Documents
shall remain unchanged, such Lender shall remain solely responsible to the other
parties hereto for the performance of such obligations, such Lender shall remain
the holder of any such Note for all purposes under the Loan Documents, all
amounts payable by the Borrower under this Agreement shall be determined as if
such Lender had not sold such participating interests, and the Borrower and the
Agent shall continue to deal solely and directly with such Lender in connection
with such Lender's rights and obligations under the Loan Documents.
12.2.2. Voting Rights. Each Lender shall retain the sole
right to approve, without the consent of any Participant, any amendment,
modification or waiver of any provision of the Loan Documents other than any
amendment, modification or waiver with respect to any Loan or Commitment in
which such Participant has an interest which forgives principal, interest or
fees or reduces the interest rate or fees payable with respect to any such Loan
or Commitment, postpones any date fixed for any payment of principal of, or
interest or fees on, any such Loan or Commitment or releases any portion of
Collateral (other than as expressly permitted pursuant to the Loan Documents).
12.2.3. Benefit of Setoff. The Borrower agrees that each
Participant shall be deemed to have the right of setoff provided in Section 11.1
in respect of its participating interest in amounts owing under the Loan
Documents to the same extent as if the amount of its participating interest were
owing directly to it as a Lender under the Loan Documents, provided that each
Lender shall retain the right of
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setoff provided in Section 11.1 with respect to the amount of participating
interests sold to each Participant. The Lenders agree to share with each
Participant, and each Participant, by exercising the right of setoff provided
in Section 11.1, agrees to share with each Lender, any amount received pursuant
to the exercise of its right of setoff, such amounts to be shared in accordance
with Section 11.2 as if each Participant were a Lender.
12.3. Assignments.
12.3.1. Permitted Assignments. Any Lender may, in the
ordinary course of its business and in accordance with applicable law, at
any time assign to one or more banks or other entities ("Purchasers") all or
any part of its rights and obligations under the Loan Documents. Such
assignment shall be substantially in the form of Exhibit "J" hereto or in such
other form as may be agreed to by the parties thereto. The consent of the
Borrower and the Agent shall be required prior to an assignment becoming
effective with respect to a Purchaser which is not a Lender or an Affiliate
thereof; provided, however, that if a Default has occurred and is continuing,
the consent of the Borrower shall not be required. Such consent shall not be
unreasonably withheld or delayed. Each such assignment which is for less than
the remaining amount of the assigning Lender's Commitment shall not leave the
assigning Lender with a Commitment of less than $10,000,000.
12.3.2. Effect; Effective Date. Upon (i) delivery to the
Agent of a notice of assignment, substantially in the form attached as
Annex "I" to Exhibit "J" hereto (a "Notice of Assignment"), together with any
consents required by Section 12.3.1, and (ii) payment of a $2,500 fee to the
Agent for processing such assignment, such assignment shall become effective on
the effective date specified in such Notice of Assignment. The Notice of
Assignment shall contain a representation by the Purchaser to the effect that
none of the consideration used to make the purchase of the Commitment and Loans
under the applicable assignment agreement are "plan assets" as defined under
ERISA and that the rights and interests of the Purchaser in and under the Loan
Documents will not be "plan assets" under ERISA. On and after the effective
date of such assignment, such Purchaser shall for all purposes be a Lender
party to this Agreement and any other Loan Document executed by the Lenders and
shall have all the rights and obligations of a Lender under the Loan Documents,
to the same extent as if it were an original party hereto, and no further
consent or action by the Borrower, the Lenders or the Agent shall be required
to release the transferor Lender with respect to the percentage of the
Aggregate Commitment and Loans assigned to such Purchaser. Upon the
consummation of any assignment to a Purchaser pursuant to this Section 12.3.2,
the transferor Lender, the Agent and the Borrower shall make appropriate
arrangements so that replacement Notes are issued to such transferor Lender and
new Notes or, as appropriate, replacement Notes, are issued to such Purchaser,
in each case in principal amounts reflecting their Commitment, as adjusted
pursuant to such assignment. In addition, within a reasonable time after the
effective date of any assignment, the Agent shall, and is hereby authorized and
directed to, revise Schedule "1" reflecting the revised commitments and
percentages of each of the Lenders and shall distribute such revised Schedule
"1" to each of the Lenders and the Borrower, whereupon such revised Schedule
shall replace the old Schedule and become part of this Agreement.
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12.4 Commitment Increases.
12.4.1. Increases to Aggregate Commitment. The
Borrower shall have the right to increase the Aggregate Commitment by obtaining
additional Commitments, either from one or more of the Lenders or another
lending institution provided that (A) the Agent has approved the identity of
any such new Lender, such approval not to be unreasonably withheld, (B) any
such new Lender assumes all of the rights and obligations of a "Lender"
hereunder, and (C) the procedure described in Section 12.4.2 has been complied
with, provided further that the Aggregate Commitment shall not at any time
exceed $90,000,000 without the approval of the Agent and all of the Lenders.
12.4.2. Procedure for Increases and Addition of New
Lenders. This Agreement permits certain increases in a Lender's Commitment and
the admission of new Lenders providing new Commitments, without any consents or
approvals from the other Lenders. Any amendment hereto for such an increase or
addition shall be in the form attached hereto as Exhibit "K" and shall only
require the written signatures of the Agent, the Borrower and the Lender(s)
being added or increasing their Commitment, subject only to the approval of all
Lenders if any such increase would cause the Aggregate Commitment to exceed
$90,000,000. In addition, within a reasonable time after the effective date of
any increase, the Agent shall, and is hereby authorized and directed to, revise
Schedule "1", reflecting such increase and shall distribute such revised
Schedule to each of the Lenders and the Borrower, whereupon such revised
Schedule shall replace the old Schedule and become part of this Agreement.
12.5. Dissemination of Information. The Borrower
authorizes each Lender to disclose to any Participant or Purchaser or any other
Person acquiring an interest in the Loan Documents by operation of law (each a
"Transferee") and any prospective Transferee any and all information in such
Lender's possession concerning the creditworthiness of the Borrower and its
Subsidiaries; provided that each Transferee and prospective Transferee agrees
to be bound by Section 9.13 of this Agreement.
12.6. Tax Treatment. If any interest in any Loan Document
is transferred to any Transferee which is organized under the laws of any
jurisdiction other than the United States or any State thereof, the transferor
Lender shall cause such Transferee, concurrently with the effectiveness of such
transfer, to comply with the provisions of Section 4.3.
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ARTICLE XIII
NOTICES
13.1. Notices. Except as otherwise permitted by Section 2.14 with
respect to borrowing notices, all notices, requests and other communications to
any party hereunder shall be in writing (including bank wire, facsimile
transmission or similar writing) and shall be given to such party: (x) in the
case of the Borrower, the Agent or any Lender, at its address or facsimile
number set forth on the signature pages hereof, (y) in the case of the
Collateral Agent, at its address or facsimile number set forth on the signature
pages of the Security Agreement or (z) in the case of any party, such other
address or facsimile number as such party may hereafter specify for the purpose
by notice to the Agent and the Borrower. Each such notice, request or other
communication shall be effective (i) if given by facsimile transmission, when
transmitted to the facsimile number specified in this Section and confirmation
of receipt is received, (ii) if given by mail, 72 hours after such communication
is deposited in the mails with first class postage prepaid, addressed as
aforesaid or (iii) if given by any other means, when delivered at the address
specified in this Section; provided that notices to the Agent under Article II
shall not be effective until received.
13.2. Change of Address. The Borrower, the Agent and any Lender may
each change the address for service of notice upon it by a notice in writing to
the other parties hereto.
ARTICLE XIV
COUNTERPARTS
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one agreement, and any of the parties
hereto may execute this Agreement by signing any such counterpart. This
Agreement shall be effective when it has been executed by the Borrower, the
Agent and the Lenders and each party has notified the Agent by telex or
telephone that it has taken such action.
ARTICLE XV
CHOICE OF LAW, CONSENT TO JURISDICTION, WAIVER OF JURY TRIAL
15.1. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING
A CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE
WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS,
BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
15.2. CONSENT TO JURISDICTION. THE BORROWER HEREBY IRREVOCABLY
SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR
ILLINOIS STATE COURT SITTING IN CHICAGO IN ANY ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER HEREBY IRREVOCABLY AGREES
THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND
DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR
HEREAFTER HAVE AS TO THE
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VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT
SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF
THE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS
OF ANY OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE
AGENT OR ANY LENDER OR ANY AFFILIATE OF THE AGENT OR ANY LENDER INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN CHICAGO,
ILLINOIS.
15.3. WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT AND EACH LENDER
HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR
INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE
RELATIONSHIP ESTABLISHED THEREUNDER.
{Rest of page intentionally left blank}
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<PAGE> 74
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have
executed this Agreement as of the date first above written.
MEGO MORTGAGE CORPORATION, a Delaware
corporation
By:
-------------------------------------------
Print Name:
-----------------------------------
Title:
----------------------------------------
1000 Parkwood Circle, Fifth
Floor Atlanta, Georgia 30339
Phone: (800) 550-6346 Fax:
Fax: (800) 694-6346
Attention: Jeff S. Moore, President
THE FIRST NATIONAL BANK OF CHICAGO,
Individually and as Agent
By:
-------------------------------------------
Print Name:
-----------------------------------
Title:
----------------------------------------
One First National Plaza
Chicago, Illinois 60670
Phone: (312) 732-1100
Fax: (312) 732-6222
Attention: Ann H. Chudacoff
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<PAGE> 75
BANK UNITED
By:
---------------------------------------
Print Name:
-------------------------------
Title:
------------------------------------
400 Colony Square, Suite 200
Atlanta, Georgia 30361
Phone: (404) 877-9192
Fax: (404) 877-9195
Attention: John D. West
Regional Director
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<PAGE> 76
SCHEDULE "1"
COMMITMENTS AND COMMITMENT PERCENTAGES
<TABLE>
<CAPTION>
PRIMARY
COMMITMENT PRIMARY COMMITMENT SWINGLINE
LENDER COMMITMENT PERCENTAGE COMMITMENT PERCENTAGE COMMITMENT
------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
The First National $20,000,000 50.0000% $15,000,000 42.8571% $5,000,000
Bank of Chicago
Bank United $20,000,000 50.0000% $20,000,000 57.1429% -0-
</TABLE>
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<PAGE> 77
SCHEDULE "2"
LIST OF APPROVED INVESTORS
Greenwich Capital Markets, Inc. (1, 2, 3)
Greenwich Capital Financial Products, Inc.(1, 2, 3)
BankBoston, N.A. (1)
Atlantic Bank (1)
Federal National Mortgage Association (1)
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<PAGE> 78
SCHEDULE "3"
SUBSIDIARIES AND OTHER INVESTMENTS
(See Sections 5.8 and 6.14)
<TABLE>
<CAPTION>
Investment
Excluded Owned Amount of Percent Jurisdiction of
In By Investment Ownership Organization or Included
- ---------- ----- ---------- ---------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Mego Mortgage Borrower $3,000.00 100% Delaware Excluded
Home Loan
Acceptance
Corporation
</TABLE>
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<PAGE> 79
SCHEDULE "4"
INDEBTEDNESS AND LIENS
(See Sections 5.14, 6.11 and 6.15)
<TABLE>
<CAPTION>
Maturity and
Indebtedness Indebtedness Property Amount of
Incurred By Owed To Encumbered (If Any) Indebtedness
- ----------- ------- ------------------- -------------
<S> <C> <C> <C>
Mego Bank Boston, Specifically Up to $30,000,000
Mortgage N.A., (formerly Pledged Unsold Matures August, 1997,
Corporation known as The Loan To be satisfied at the
First National Inventory closing of this
Bank of Boston transaction.
Mego Greenwich Specific Mortgage Up to $11,000,000
Mortgage Capital Related Securities Matures in May, 1988
Corporation Markets, Inc.
</TABLE>
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<PAGE> 80
SCHEDULE "5"
BORROWER'S UNDERWRITING STANDARDS
-74-
<PAGE> 81
SCHEDULE "6"
BORROWER'S PROPERTY VALUATION PROCEDURES
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<PAGE> 82
SCHEDULE "7"
DESCRIPTION OF TRUSTEE'S RIGHT TO TERMINATE
THE BORROWER'S RIGHTS TO SERVICE CERTAIN SECURITIZATIONS
(See Section 5.12)
Description of Trustee's Right to Terminate the Borrower's Rights to Service
First Securitization - Mego Mortgage FHA Title I Loan Trust 1996-1.
Pooling and servicing agreements relating to the Borrower'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 Borrower's right to service the related loans. At present,
the delinquency rates on the pools of loans sold in the March 1996
securitization transaction, Mego Mortgage FHA Title I Loan Trust 1996-1, and
the August 1996 securitization, Mego Mortgage Title I Loan Trust 1996-2,
exceeds the permitted limit set forth in the related pooling and servicing
agreement. Accordingly, this condition could result in the termination of the
Borrower's servicing rights with respect to those pools of loans by the
trustee, the master servicer or the insurance company providing credit
enhancement for that transaction. Although the insurance company has indicated
that it, and to its knowledge, the trustee and the master servicer have no
present intention to terminate the Borrower's servicing rights related to those
pools of loans, 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 Borrower's mortgage
servicing rights and the results of operations in the amount of mortgage
servicing rights on the date of termination.
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<PAGE> 83
SCHEDULE "8"
DESCRIPTION OF EXISTING AGREEMENTS WITH AFFILIATES
(See Section 6.16)
1) Services and Consulting Agreement dated as of September 1, 1996
between Borrower and Preferred Equities Corporation.
2) Loan Program Sub-Servicing Agreement entered into as of September 1,
1996 between Borrower and Preferred Equities Corporation, as amended
by letter agreement dated December 1, 1996.
3) Tax Allocation and Indemnity Agreement between Borrower and Mego
Financial Corp. dated as of Nov. 1996.
4) Agreement between Borrower and Mego Financial Corp. dated Nov. 1996 in
which Borrower agrees to take no action which could reduce Mego
Financial Corp.'s ownership of Borrower below 80% without the consent
of Mego Financial Corp.
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<PAGE> 84
SCHEDULE "9"
FORM OF DELINQUENCY, DEFAULT AND LOSS REPORT
-78-
<PAGE> 85
EXHIBIT "A"
NOTE
June 20, 1997
MEGO MORTGAGE CORPORATION, a Delaware corporation (the "Borrower"),
promises to pay to the order of _________________________________ (the
"Lender") the lesser of the Lender's Commitment under the Agreement (as
hereinafter defined) or the aggregate unpaid principal amount of all Loans made
by the Lender to the Borrower pursuant to Article II of the Agreement, in
immediately available funds at the main office of The First National Bank of
Chicago in Chicago, Illinois, as Agent, together with interest on the unpaid
principal amount hereof at the rates and on the dates set forth in the
Agreement. The Borrower shall pay the principal of and any accrued and unpaid
interest on the Loans in full on the Termination Date, unless payment is
required or permitted earlier pursuant to the terms of the Agreement.
The Lender shall, and is hereby authorized to, record on the schedule
attached hereto, or to otherwise record in accordance with its usual practice,
the date and amount of each Loan and the date and amount of each principal
payment hereunder.
This Note is one of the Notes issued pursuant to, and is entitled to
the benefits of, the Credit Agreement dated as of June 20, 1997 (which, as it
may be amended or modified and in effect from time to time, is herein called
the "Agreement"), among the Borrower, the lenders party thereto, including the
Lender, and The First National Bank of Chicago, as Agent, to which Agreement
reference is hereby made for a statement of the terms and conditions governing
this Note, including the terms and conditions under which this Note may be
prepaid or its maturity date accelerated. This Note is secured pursuant to the
Security Agreement, all as more specifically described in the Agreement, and
reference is made thereto for a statement of the terms and provisions thereof.
Capitalized terms used herein and not otherwise defined herein are used with
the meanings attributed to them in the Agreement.
This Note is to be governed by and construed and enforced in
accordance with the laws of the State of Illinois.
MEGO MORTGAGE CORPORATION, a Delaware
corporation
By:
----------------------------------
Print Name:
--------------------------
Title:
-------------------------------
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<PAGE> 86
SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL
TO
NOTE OF MEGO MORTGAGE CORPORATION,
DATED JUNE 20, 1997
<TABLE>
<CAPTION>
Principal Maturity Principal
Amount of of Interest Amount Unpaid
Date Loan Period Paid Balance
- ---- ---------- ----------- ------------ -------
<S> <C> <C> <C> <C>
</TABLE>
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<PAGE> 87
EXHIBIT "B"
FORM OF OPINION
June 20, 1997
The Agent and the Lenders who are parties to the
Credit Agreement described below.
Gentlemen/Ladies:
We are counsel for Mego Mortgage Corporation (the "Borrower"), and
have represented the Borrower in connection with its execution and delivery of
a Credit Agreement dated as of June 20, 1997 (the "Agreement") among the
Borrower, the Lenders named therein, and The First National Bank of Chicago, as
Agent, and providing for Advances in an aggregate principal amount not
exceeding $40,000,000 at any one time outstanding. All capitalized terms used
in this opinion and not otherwise defined herein shall have the meanings
attributed to them in the Agreement.
We have examined the Borrower's certificate of incorporation, by-laws,
resolutions, the Loan Documents, the Uniform Commercial Code financing
statements (the "Financing Statements") relating to the Loan Documents and such
other matters of fact and law which we deem necessary in order to render this
opinion. Based upon the foregoing, it is our opinion that:
l. The Borrower is a corporation duly incorporated, validly
existing and in good standing under the laws of its state of incorporation and
has all requisite corporate authority to conduct its business in each
jurisdiction in which its business is conducted, to the extent failure to
maintain such authority would have a material adverse effect on the business of
the Borrower.
2. The execution and delivery of the Loan Documents by the
Borrower and the performance by the Borrower of the Obligations have been duly
authorized by all necessary corporate action and proceedings on the part of the
Borrower and will not:
(a) require any consent of the Borrower's shareholders;
(b) violate any law, rule or regulation, binding on the
Borrower or the Borrower's certificate of incorporation or by-laws or
any order, writ, judgment, injunction, decree, award, indenture,
instrument or agreement binding upon the Borrower of which we are
aware (except that we express no opinion as to any law, rule,
regulation, order, writ, judgment, injunction, decree, award,
indenture or agreement the violation of which would not have a
material adverse effect on the Borrower); or
(c) except as created by the Loan Documents, result in,
or require, the creation or imposition of any Lien pursuant to the
provisions of any indenture, instrument or agreement binding upon the
Borrower of which we are aware.
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<PAGE> 88
3. Upon the execution of the Loan Documents by [Authorized
Officers], the Loan Documents shall be duly executed and delivered by the
Borrower and constitute legal, valid and binding obligations of the Borrower
enforceable in accordance with their terms except to the extent the enforcement
thereof may be limited by bankruptcy, insolvency or similar laws affecting the
enforcement of creditors' rights generally and subject also to the availability
of equitable remedies if equitable remedies are sought.
4. To the best of our knowledge, there is no litigation or
proceeding against the Borrower which, if adversely determined, could
reasonably be expected to have a Material Adverse Effect.
5. No approval, authorization, consent, adjudication or order of
any federal or Delaware governmental authority, which has not been obtained by
the Borrower, is required to be obtained by the Borrower in connection with the
execution and delivery of the Loan Documents, the borrowings under the
Agreement or in connection with the payment by the Borrower of the Obligations.
6. The Obligations constitute senior indebtedness which is
entitled to the benefits of the subordination provisions of all outstanding
Subordinated Notes.
7. The provisions of the Collateral Documents are sufficient to
create in favor of the Lenders a security interest in all right, title and
interest of the Borrower in those items and types of collateral described in
the Collateral Documents in which a security interest may be created under
Article 9 of the Uniform Commercial Code as in effect in Illinois. Upon the
execution of the Financing Statements by [Authorized Officers], the Financing
Statements shall be duly executed by the Borrower. The description of the
collateral set forth in said financing statements is sufficient to perfect a
security interest in the items and types of collateral described therein in
which a security interest may be perfected by the filing of a financing
statement under the Uniform Commercial Code as in effect in each state
indicated in Exhibit A hereto. Such filings, together with the payment of any
required filing fees, are sufficient to perfect the security interest created
by the Collateral Documents in all right, title and interest of the Borrower in
those items and types of collateral described in the Collateral Documents in
which a security interest may be perfected by the filing of a financing
statement under the Uniform Commercial Code in such states, except that we
express no opinion as to personal property affixed to real property in such
manner as to become a fixture under the laws of any state in which the
collateral may be located and we call your attention to the fact that the
Lenders' security interest in certain of such collateral may not be perfected
by filing financing statements under the Uniform Commercial Code.
This opinion may be relied upon by the Agent, the Lenders and their
participants, assignees and other transferees.
Very truly yours,
-----------------------------------
NOTE: Counsel's opinion will be limited to Federal law the General
Corporation Law of Delaware and Florida law except counsel will
opine as to UCC in Illinois and for purposes of the opinion in
paragraph 3 counsel will assume substantive law or Illinois is
substantially similar to Florida law. In addition, as to
factual matters counsel will rely on representations of the
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<PAGE> 89
Borrower. Also, counsel's opinion will contain its
standard qualifications and assumptions. For purposes of the
opinion in paragraph 2(b) counsel will assume Bank of Boston
has been paid and has released existing liens.
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<PAGE> 90
EXHIBIT "C"
FORM OF GREENWICH TRI-PARTY AGREEMENT
-84-
<PAGE> 91
EXHIBIT "D"
COLLATERAL TRANSMITTAL
1. CUSTOMER NAME _____________________________________________
2. LOAN NUMBER _______________________________________________
3. MORTGAGOR _________________________________________________
SURNAME ONLY
4. AP STATUS CODE ____________________________________________
5. DEPOSIT DATE ______________________________________________
6. ORIGINAL NOTE AMOUNT $_____________________________________
7. OUTSTANDING PRINCIPAL BALANCE $____________________________
8. ACQUISITION COST $_________________________________________
9. TAKE-OUT VALUE $___________________________________________
10. NOTE DATE _________________________________________________
11. NOTE RATE _________________________________________________
12. LOAN TYPE _________________________________________________
13. LOAN LTV __________________________________________________
(FOR SECURED CONVENTIONAL ONLY)
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EXHIBIT "E"
AGREEMENT TO PLEDGE
SECURITY AGREEMENT AS PROVIDED FOR BY
THE UNIFORM COMMERCIAL CODE OF ILLINOIS
Mego Mortgage Corporation (the "Borrower") pursuant to that certain
Credit Agreement dated as of April _____, 1997 (as amended, extended and
replaced from time to time, the "Credit Agreement") among the Borrower, The
First National Bank of Chicago, as agent, and certain other Lenders, and
pursuant to that certain Security and Collateral Agency Agreement among the
Borrower, the Agent, the Lenders and First Chicago National Processing
Corporation (the "Collateral Agent") for new value this day received, and as
security for the payment of any and all indebtedness and obligations of the
Borrower under the Credit Agreement, hereby creates and grants to the
Collateral Agent for the benefit of the lenders under the Credit Agreement a
security interest in and to the mortgage loans identified as AP Qualifying
Loans by the inclusion of an "AP Status Code" on the Borrower's Collateral
Transmittals on the date indicated below which provide the information
concerning the AP Qualifying Loans required by the Credit Agreement. All
capitalized terms used herein shall have the meanings given to them in the
Credit Agreement.
MEGO MORTGAGE CORPORATION, a Delaware
corporation
By:
------------------------------------
Its:
-----------------------------------
Dated:_______________, 199_.
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<PAGE> 93
EXHIBIT "F"
COMPLIANCE CERTIFICATE
To: The Lenders parties to the
Credit Agreement Described Below
This Compliance Certificate is furnished pursuant to that certain
Credit Agreement dated as of June 20, 1997 (as amended, modified, renewed or
extended from time to time, the "Agreement") among the Mego Mortgage
Corporation (the "Borrower"), the lenders party thereto and The First National
Bank of Chicago, as Agent for the Lenders. Unless otherwise defined herein,
capitalized terms used in this Compliance Certificate have the meanings
ascribed thereto in the Agreement.
THE UNDERSIGNED HEREBY CERTIFIES THAT:
1. I am the duly elected _____________________ of the Borrower;
2. I have reviewed the terms of the Agreement and I have made, or
have caused to be made under my supervision, a detailed review of the
transactions and conditions of the Borrower and its Subsidiaries during the
accounting period covered by the attached financial statements;
3. The examinations described in paragraph 2 did not disclose, and I
have no knowledge of, the existence of any condition or event which constitutes
a Default or Unmatured Default during or at the end of the accounting period
covered by the attached financial statements or as of the date of this
Certificate, except as set forth below; and
4. Schedule I attached hereto sets forth financial data and
computations evidencing the Borrower's compliance with certain covenants of the
Agreement, all of which data and computations are true, complete and correct.
5. Schedule II attached hereto sets forth the various reports and
deliveries which are required under the Credit Agreement, the Security
Agreement and the other Loan Documents and the status of compliance.
Described below are the exceptions, if any, to paragraph 3 by listing,
in detail, the nature of the condition or event, the period during which it has
existed and the action which the Borrower has taken, is taking, or proposes to
take with respect to each such condition or event:
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<PAGE> 94
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
The foregoing certifications, together with the computations set forth
in Schedule I hereto and the financial statements delivered with this
Certificate in support hereof, are made and delivered this _____ day of
______________, 19___.
----------------------------------
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<PAGE> 95
SCHEDULE I TO COMPLIANCE CERTIFICATE
Compliance as of _________, 199_ with
Provisions of ______ and ________ of
the Agreement
-89-
<PAGE> 96
SCHEDULE II TO COMPLIANCE CERTIFICATE
Reports and Deliveries
-90-
<PAGE> 97
EXHIBIT "G"
BORROWING BASE CERTIFICATE
Reference is made to that certain Credit Agreement (the "Credit
Agreement"), among MEGO MORTGAGE CORPORATION (the "Borrower"), the lenders
named therein (the "Lenders") and The First National Bank of Chicago, as agent
for the Lenders, dated as of June 20, 1997. Capitalized terms not otherwise
defined herein are used with the same meanings as in the Credit Agreement.
<TABLE>
<CAPTION>
Borrowing Base:(1)
- --------------
<S> <C>
Collateral Value of the following Eligible Collateral:
1. Eligible Title I Qualifying Loans $
-------------------------------------------
Total times .97 $
-------------------------------------------
2. Eligible Conventional HI/DC Qualifying Loans $
-------------------------------------------
(a) Non-HLTV Loans with FICO scores of over 620 $
-------------------------------------------
(b) HLTV Loans with FICO scores of over 620 $
-------------------------------------------
(c) Non-HLTV Loans with FICO scores of 600-620 $
-------------------------------------------
(d) HLTV Loans with FICO scores of 600-620 $
-------------------------------------------
(e) 6% of Aggregate Commitment $
-------------------------------------------
(f) Total (sum of (i) items (a) and (b) and (ii) lower $
of (A) the sum of items (c) and (d) or (B) item (e)) -------------------------------------------
times .95
3. Excess of Unsecured Title I Qualifying Loans $
over 5% of Aggregate Commitment -------------------------------------------
over 5% of Aggregate Commitment
times .97
4. Excess of Unsecured Conventional HI/DC Qualifying $
Loans over 5% of Aggregate Commitment -------------------------------------------
times .95
</TABLE>
__________________________________
(1) Each category excludes any Collateral which is Ineligible
Collateral as of the date hereof, except for ineligibility due
to delinquencies which is addressed on an aggregated basis by an
adjustment to the Borrowing Base.
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<PAGE> 98
<TABLE>
<S> <C>
Borrowing Base from Eligible Collateral $
(sum of Items 1 and 2(f) less Items 3 and 4) -------------------------------------------
Add: Unrestricted Balance in Settlement Account $
in excess of $100,000* -------------------------------------------
Less: Uncleared Loan Funding Checks $
-------------------------------------------
Reconciling Items: Timing Difference
Loan Detail Difference
--------------------------------------------
BORROWING BASE
============================================
COVERAGE REQUIREMENT:
Advances $
-------------------------------------------
EXCESS OF BORROWING BASE OVER
COVERAGE REQUIREMENT $
-------------------------------------------
</TABLE>
* After deduction of proceeds from disposition of Eligible Collateral
included in Borrowing Base calculation for the Business Day such
proceeds are received, to avoid duplication.
Certification: To the best of the knowledge and belief (after
reasonable investigation) of the officer of the Borrower executing this
Certificate, the Borrower hereby certifies to The First National Bank of
Chicago for the benefit of lenders under the Credit Agreement that: (a) the
above information is, and the computations are accurate and complete and in
accordance with the requirements of the Credit Agreement, and (b) as of the
date hereof, (1) all representations and warranties of the Borrower set forth
in the Credit Agreement are accurate and complete, (2) there does not exist a
Default or an Unmatured Default under the Credit Agreement, and (3) the
Borrower has given written notice to The First National Bank of Chicago of any
Default or Unmatured Default if such now exists under the Credit Agreement.
IN WITNESS WHEREOF, the Borrower has caused this Borrowing Base
Certificate to be executed and delivered by its duly authorized officer this
___ day of __________, 199_.
MEGO MORTGAGE CORPORATION
By:
----------------------------------
Name:
Title:
-92-
<PAGE> 99
EXHIBIT "H"
FORM OF PEC TRI-PARTY AGREEMENT
-93-
<PAGE> 100
EXHIBIT "I"
SECURITY AND COLLATERAL AGENCY AGREEMENT
-94-
<PAGE> 101
EXHIBIT "J"
ASSIGNMENT AGREEMENT
This Assignment Agreement (this "Assignment Agreement") between
__________________________ (the "Assignor") and _________________ (the
"Assignee") is dated as of _________________, 19__. The parties hereto agree
as follows:
1. PRELIMINARY STATEMENT. The Assignor is a party to a Credit
Agreement (which, as it may be amended, modified, renewed or extended from time
to time is herein called the "Credit Agreement") described in Item 1 of
Schedule 1 attached hereto ("Schedule 1"). Capitalized terms used herein and
not otherwise defined herein shall have the meanings attributed to them in the
Credit Agreement.
2. ASSIGNMENT AND ASSUMPTION. The Assignor hereby sells and
assigns to the Assignee, and the Assignee hereby purchases and assumes from the
Assignor, an interest in and to the Assignor's rights and obligations under the
Credit Agreement such that after giving effect to such assignment the Assignee
shall have purchased pursuant to this Assignment Agreement the percentage
interest specified in Item 3 of Schedule 1 of all outstanding rights and
obligations under the Credit Agreement relating to the facilities listed in
Item 3 of Schedule 1 and the other Loan Documents. The aggregate Commitment
(or Loans, if the applicable Commitment has been terminated) purchased by the
Assignee hereunder is set forth in Item 4 of Schedule 1.
3. EFFECTIVE DATE. The effective date of this Assignment
Agreement (the "Effective Date") shall be the later of the date specified in
Item 5 of Schedule 1 or two Business Days (or such shorter period agreed to by
the Agent) after a Notice of Assignment substantially in the form of Annex "I"
attached hereto has been delivered to the Agent. Such Notice of Assignment
must include any consents required to be delivered to the Agent by Section
12.3.1 of the Credit Agreement. In no event will the Effective Date occur if
the payments required to be made by the Assignee to the Assignor on the
Effective Date under Sections 4 and 5 hereof are not made on the proposed
Effective Date. The Assignor will notify the Assignee of the proposed
Effective Date no later than the Business Day prior to the proposed Effective
Date. As of the Effective Date, (i) the Assignee shall have the rights and
obligations of a Lender under the Loan Documents with respect to the rights and
obligations assigned to the Assignee hereunder and (ii) the Assignor shall
relinquish its rights and be released from its corresponding obligations under
the Loan Documents with respect to the rights and obligations assigned to the
Assignee hereunder.
4. PAYMENTS OBLIGATIONS. On and after the Effective Date, the
Assignee shall be entitled to receive from the Agent all payments of principal,
interest and fees with respect to the interest assigned hereby. The Assignee
shall advance funds directly to the Agent with respect to all Loans and
reimbursement payments made on or after the Effective Date with respect to the
interest assigned hereby. [In consideration for the sale and assignment of
Loans hereunder, (i) the Assignee shall pay the Assignor, on the Effective
Date, an amount equal to the principal amount of the portion of all Alternate
Base Rate Loans assigned to the Assignee hereunder and (ii) with respect to
each Fixed Rate Loan made by the Assignor and assigned to the Assignee
hereunder which is outstanding on the Effective Date, (a) on the last day of
the Interest Period therefor or (b) on such earlier date agreed to by the
Assignor and the Assignee or (c) on the date on which any such Fixed Rate Loan
either becomes due (by acceleration or otherwise) or is
-95-
<PAGE> 102
prepaid (the date as described in the foregoing clauses (a), (b) or (c) being
hereinafter referred to as the "Payment Date"), the Assignee shall pay the
Assignor an amount equal to the principal amount of the portion of such Fixed
Rate Loan assigned to the Assignee which is outstanding on the Payment Date.
If the Assignor and the Assignee agree that the Payment Date for such Fixed
Rate Loan shall be the Effective Date, they shall agree to the interest rate
applicable to the portion of such Loan assigned hereunder for the period from
the Effective Date to the end of the existing Interest Period applicable to
such Fixed Rate Loan (the "Agreed Interest Rate") and any interest received by
the Assignee in excess of the Agreed Interest Rate shall be remitted to the
Assignor. In the event interest for the period from the Effective Date to but
not including the Payment Date is not paid by the Borrower with respect to any
Fixed Rate Loan sold by the Assignor to the Assignee hereunder, the Assignee
shall pay to the Assignor interest for such period on the portion of such Fixed
Rate Loan sold by the Assignor to the Assignee hereunder at the applicable rate
provided by the Credit Agreement. In the event a prepayment of any Fixed Rate
Loan which is existing on the Payment Date and assigned by the Assignor to the
Assignee hereunder occurs after the Payment Date but before the end of the
Interest Period applicable to such Fixed Rate Loan, the Assignee shall remit to
the Assignor the excess of the prepayment penalty paid with respect to the
portion of such Fixed Rate Loan assigned to the Assignee hereunder over the
amount which would have been paid if such prepayment penalty was calculated
based on the Agreed Interest Rate. The Assignee will also promptly remit to
the Assignor (i) any principal payments received from the Agent with respect to
Fixed Rate Loans prior to the Payment Date and (ii) any amounts of interest on
Loans and fees received from the Agent which relate to the portion of the Loans
assigned to the Assignee hereunder for periods prior to the Effective Date, in
the case of Alternate Base Rate Loans or fees, or the Payment Date, in the case
of Fixed Rate Loans, and not previously paid by the Assignee to the Assignor.]*
In the event that either party hereto receives any payment to which the other
party hereto is entitled under this Assignment Agreement, then the party
receiving such amount shall promptly remit it to the other party hereto.
*Each Assignor may insert its standard payment provisions in lieu of the
payment terms included in this Exhibit.
5. FEES PAYABLE BY THE ASSIGNEE. The Assignee shall pay to the
Assignor a fee on each day on which a payment of interest or facility fees is
made under the Credit Agreement with respect to the amounts assigned to the
Assignee hereunder (other than a payment of interest or facility fees for the
period prior to the Effective Date or, in the case of Fixed Rate Loans, the
Payment Date, which the Assignee is obligated to deliver to the Assignor
pursuant to Section 4 hereof). The amount of such fee shall be the difference
between (i) the interest or fee, as applicable, paid with respect to the
amounts assigned to the Assignee hereunder and (ii) the interest or fee, as
applicable, which would have been paid with respect to the amounts assigned to
the Assignee hereunder if each interest rate was ___ of 1% less than the
interest rate paid by the Borrower or if the facility fee was ___ of 1% less
than the facility fee paid by the Borrower, as applicable. In addition, the
Assignee agrees to pay ___% of the recordation fee required to be paid to the
Agent in connection with this Assignment Agreement.
6. REPRESENTATIONS OF THE ASSIGNOR; LIMITATIONS ON THE ASSIGNOR'S
LIABILITY. The Assignor represents and warrants that it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any adverse claim created by the Assignor. It is
understood and agreed that the assignment and assumption hereunder are made
without recourse to the Assignor and that the Assignor makes no other
representation or warranty of any kind to the Assignee. Neither the Assignor
nor any of its officers, directors, employees, agents or attorneys shall be
-96-
<PAGE> 103
responsible for (i) the due execution, legality, validity, enforceability,
genuineness, sufficiency or collectability of any Loan Document, including
without limitation, documents granting the Assignor and the other Lenders a
security interest in assets of the Borrower or any guarantor, (ii) any
representation, warranty or statement made in or in connection with any of the
Loan Documents, (iii) the financial condition or creditworthiness of the
Borrower or any guarantor, (iv) the performance of or compliance with any of
the terms or provisions of any of the Loan Documents, (v) inspecting any of the
Property, books or records of the Borrower, (vi) the validity, enforceability,
perfection, priority, condition, value or sufficiency of any collateral
securing or purporting to secure the Loans or (vii) any mistake, error of
judgment, or action taken or omitted to be taken in connection with the Loans
or the Loan Documents.
7. REPRESENTATIONS OF THE ASSIGNEE. The Assignee (i) confirms
that it has received a copy of the Credit Agreement, together with copies of
the financial statements requested by the Assignee and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Assignment Agreement, (ii) agrees that it will,
independently and without reliance upon the Agent, the Assignor or any other
Lender and based on such documents and information at it shall deem appropriate
at the time, continue to make its own credit decisions in taking or not taking
action under the Loan Documents, (iii) appoints and authorizes the Agent to
take such action as agent on its behalf and to exercise such powers under the
Loan Documents as are delegated to the Agent by the terms thereof, together
with such powers as are reasonably incidental thereto, (iv) agrees that it will
perform in accordance with their terms all of the obligations which by the
terms of the Loan Documents are required to be performed by it as a Lender, (v)
agrees that its payment instructions and notice instructions are as set forth
in the attachment to Schedule 1, (vi) confirms that none of the funds, monies,
assets or other consideration being used to make the purchase and assumption
hereunder are "plan assets" as defined under ERISA and that its rights,
benefits and interests in and under the Loan Documents will not be "plan
assets" under ERISA, [and (viii) attaches the forms prescribed by the Internal
Revenue Service of the United States certifying that the Assignee is entitled
to receive payments under the Loan Documents without deduction or withholding
of any United States federal income taxes].*
*to be inserted if required by the Credit Agreement.
8. INDEMNITY. The Assignee agrees to indemnify and hold the
Assignor harmless against any and all losses, costs and expenses (including,
without limitation, reasonable attorneys' fees) and liabilities incurred by the
Assignor in connection with or arising in any manner from the Assignee's
non-performance of the obligations assumed under this Assignment Agreement.
9. SUBSEQUENT ASSIGNMENTS. After the Effective Date, the
Assignee shall have the right pursuant to Section 12.3.1 of the Credit
Agreement to assign the rights which are assigned to the Assignee hereunder to
any entity or person, provided that (i) any such subsequent assignment does not
violate any of the terms and conditions of the Loan Documents or any law, rule,
regulation, order, writ, judgment, injunction or decree and that any consent
required under the terms of the Loan Documents has been obtained and (ii)
unless the prior written consent of the Assignor is obtained, the Assignee is
not thereby released from its obligations to the Assignor hereunder, if any
remain unsatisfied, including, without limitation, its obligations under
[Sections 4, 5 and 8] hereof.
10. REDUCTIONS OF AGGREGATE COMMITMENT. If any reduction in the
Aggregate Commitment occurs between the date of this Assignment Agreement and
the Effective Date, the percentage
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<PAGE> 104
interest specified in Item 3 of Schedule 1 shall remain the same, but the
dollar amount purchased shall be recalculated based on the reduced Aggregate
Commitment.
11. ENTIRE AGREEMENT. This Assignment Agreement and the attached
Notice of Assignment embody the entire agreement and understanding between the
parties hereto and supersede all prior agreements and understandings between
the parties hereto relating to the subject matter hereof.
12. GOVERNING LAW. This Assignment Agreement shall be governed by
the internal law, and not the law of conflicts, of the State of Illinois.
13. NOTICES. Notices shall be given under this Assignment
Agreement in the manner set forth in the Credit Agreement. For the purpose
hereof, the addresses of the parties hereto (until notice of a change is
delivered) shall be the address set forth in the attachment to Schedule 1.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment
Agreement by their duly authorized officers as of the date first above written.
[NAME OF ASSIGNOR]
By:
-------------------------------
Title:
-------------------------------
-------------------------------
-------------------------------
[NAME OF ASSIGNEE]
By:
-------------------------------
Title:
-------------------------------
-------------------------------
-------------------------------
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<PAGE> 105
SCHEDULE 1
to Assignment Agreement
<TABLE>
<S> <C> <C> <C> <C> <C>
1. Description and Date of Credit Agreement:
2. Date of Assignment Agreement: , 19
------------- --
3. Amounts (As of Date of Item 2 above):
Facility Facility Facility Facility
1* 2* *3 *4
-------- -------- --------- --------
a. Total of Commitments
(Loans)** under
Credit Agreement $ $ $ $
-------- -------- ---------
b. Assignee's Percentage
of each Facility purchased
under the Assignment
Agreement*** % % % %
-------- -------- --------- --------
c. Amount of Assigned Share in
each Facility purchased under
the Assignment
Agreement $ $ $ $
--------- -------- ---------
4. Assignee's Aggregate (Loan
Amount)** Commitment Amount
Purchased Hereunder: $
5. Proposed Effective Date:
---------
</TABLE>
Accepted and Agreed:
[NAME OF ASSIGNOR] [NAME OF ASSIGNEE]
By: By:
------------------------------ ---------------------------------
Title: Title:
--------------------------- ------------------------------
* Insert specific facility names per Credit Agreement
** If a Commitment has been terminated, insert outstanding Loans in
place of Commitment
*** Percentage taken to 10 decimal places
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<PAGE> 106
Attachment to SCHEDULE 1 to ASSIGNMENT AGREEMENT
Attach Assignor's Administrative Information Sheet, which must
include notice address for the Assignor and the Assignee
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<PAGE> 107
ANNEX "I"
to Assignment Agreement
NOTICE
OF ASSIGNMENT
____________________, 19__
To: [NAME OF BORROWER]*
-------------------
-------------------
[NAME OF AGENT]
-------------------
-------------------
From: [NAME OF ASSIGNOR] (the "Assignor")
[NAME OF ASSIGNEE] (the "Assignee")
1. We refer to that Credit Agreement (the "Credit
Agreement") described in Item 1 of Schedule 1 attached hereto ("Schedule 1").
Capitalized terms used herein and not otherwise defined herein shall have the
meanings attributed to them in the Credit Agreement.
2. This Notice of Assignment (this "Notice") is given and
delivered to the Borrower and the Agent pursuant to Section 12.3.2 of the
Credit Agreement.
3. The Assignor and the Assignee have entered into an
Assignment Agreement, dated as of ___________, 19__ (the "Assignment"),
pursuant to which, among other things, the Assignor has sold, assigned,
delegated and transferred to the Assignee, and the Assignee has purchased,
accepted and assumed from the Assignor the percentage interest specified in
Item 3 of Schedule 1 of all outstandings, rights and obligations under the
Credit Agreement relating to the facilities listed in Item 3 of Schedule 1.
The Effective Date of the Assignment shall be the later of the date specified
in Item 5 of Schedule 1 or two Business Days (or such shorter period as agreed
to by the Agent) after this Notice of Assignment and any consents and fees
required by Sections 12.3.1 and 12.3.2 of the Credit Agreement have been
delivered to the Agent, provided that the Effective Date shall not occur if any
condition precedent agreed to by the Assignor and the Assignee has not been
satisfied.
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<PAGE> 108
*To be included only if consent must be obtained from the Borrower pursuant to
Section 12.3.1 of the Credit Agreement.
-102-
<PAGE> 109
4. The Assignor and the Assignee hereby give to the Borrower
and the Agent notice of the assignment and delegation referred to herein. The
Assignor will confer with the Agent before the date specified in Item 5 of
Schedule 1 to determine if the Assignment Agreement will become effective on
such date pursuant to Section 3 hereof, and will confer with the Agent to
determine the Effective Date pursuant to Section 3 hereof if it occurs
thereafter. The Assignor shall notify the Agent if the Assignment Agreement
does not become effective on any proposed Effective Date as a result of the
failure to satisfy the conditions precedent agreed to by the Assignor and the
Assignee. At the request of the Agent, the Assignor will give the Agent
written confirmation of the satisfaction of the conditions precedent.
5. The Assignor or the Assignee shall pay to the Agent on or
before the Effective Date the processing fee of $2,500 required by Section
12.3.2 of the Credit Agreement.
6. If Notes are outstanding on the Effective Date, the
Assignor and the Assignee request and direct that the Agent prepare and cause
the Borrower to execute and deliver new Notes or, as appropriate, replacements
notes, to the Assignor and the Assignee. The Assignor and, if applicable, the
Assignee each agree to deliver to the Agent the original Note received by it
from the Borrower upon its receipt of a new Note in the appropriate amount.
7. The Assignee advises the Agent that notice and payment
instructions are set forth in the attachment to Schedule 1.
8. The Assignee hereby represents and warrants that none of
the funds, monies, assets or other consideration being used to make the
purchase pursuant to the Assignment are "plan assets" as defined under ERISA
and that its rights, benefits, and interests in and under the Loan Documents
will not be "plan assets" under ERISA.
9. The Assignee authorizes the Agent to act as its agent
under the Loan Documents in accordance with the terms thereof. The Assignee
acknowledges that the Agent has no duty to supply information with respect to
the Borrower or the Loan Documents to the Assignee until the Assignee becomes a
party to the Credit Agreement.*
*May be eliminated if Assignee is a party to the Credit Agreement prior to the
Effective Date.
NAME OF ASSIGNOR NAME OF ASSIGNEE
By: By:
------------------------------- ------------------------------
Title: Title:
---------------------------- ---------------------------
ACKNOWLEDGED [AND CONSENTED TO] ACKNOWLEDGED [AND CONSENTED TO]
BY [NAME OF AGENT] BY [NAME OF BORROWER]
By: By:
------------------------------- ------------------------------
Title: Title:
--------------------------- ---------------------------
-103-
<PAGE> 110
[Attach photocopy of Schedule 1 to Assignment]
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<PAGE> 111
EXHIBIT "K"
FORM OF AMENDMENT FOR AN INCREASED OR NEW COMMITMENT
This AMENDMENT is made as of the _____ day of __________, 19___ by and
among Mego Mortgage Corporation (the "Borrower"), The First National Bank of
Chicago, as agent under the "Credit Agreement" (as defined below) (the "Agent")
and _________________________ (the "Supplemental Lender").
The Borrower, the Agent and certain other Lenders, as described
therein, are parties to a Credit Agreement dated as of June 20, 1997 (the
"Credit Agreement"). All terms used herein and not otherwise defined shall
have the same meaning given to them in the Credit Agreement.
Pursuant to Section 12.4.1 of the Credit Agreement, the Borrower has
the right to increase the Aggregate Commitment by obtaining additional
Commitments upon satisfaction of certain conditions. Pursuant to Section
12.4.2 of the Credit Agreement, this Amendment requires only the signature of
the Borrower, the Agent and the Supplemental Lender so long as the Aggregate
Commitment is not increased above $90,000,000.
The Supplemental Lender is either (a) an existing Lender which is
increasing its Commitment, or (b) a new Lender which is a lending institution
whose identity the Agent will approve by its signature below.
In consideration of the foregoing, such Supplemental Lender, from and
after the date hereof shall have a Commitment of $_______________, consisting
of a Primary Commitment of $__________ and a Swingline Commitment of
$____________ resulting in a new Aggregate Commitment of $_______________ as of
the date hereof, and if it is a new Lender, the Supplemental Lender hereby
assumes all of the rights and obligations of a Lender under the Credit
Agreement.
The Borrower has executed and delivered to the Supplemental Lender as
of the date hereof new or amended and restated Notes in the form attached to
the Credit Agreement as Exhibit A to evidence the new or increased Commitment
of the Supplemental Lender.
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<PAGE> 112
IN WITNESS WHEREOF, the Agent, the Borrower and the Supplemental
Lender have executed this Amendment as of the date shown above.
MEGO MORTGAGE CORPORATION
By:
-----------------------------------
Its
---------------------------
By:
-----------------------------------
Its
---------------------------
THE FIRST NATIONAL BANK OF CHICAGO, as
Agent
By:
-----------------------------------
Its
---------------------------
-106-
<PAGE> 113
EXHIBIT "L"
LOAN/CREDIT RELATED MONEY TRANSFER INSTRUCTION
To The First National Bank of Chicago,
as Agent (the "Agent") under the Credit Agreement
Described Below.
Re: Credit Agreement, dated June 20, 1997 (as the same may be amended or
modified, the "Credit Agreement"), among Mego Mortgage Corporation
(the "Borrower"), the Lenders named therein and the Agent.
Capitalized terms used herein and not otherwise defined herein shall
have the meanings assigned thereto in the Credit Agreement.
The Agent is specifically authorized and directed to act upon the
following standing money transfer instructions with respect to the proceeds of
Advances or other extensions of credit from time to time until receipt by the
Agent of a specific written revocation of such instructions by the Borrower,
provided, however, that the Agent may otherwise transfer funds as hereafter
directed in writing by the Borrower in accordance with Section 13.1 of the
Credit Agreement or based on any telephonic notice made in accordance with
Section 2.14 of the Credit Agreement.
Facility Identification Number(s)
----------------------------------------------
Customer/Account Name
---------------------------------------------------------
Transfer Funds To
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
For Account No.
----------------------------------------------------------------
Reference/Attention To
---------------------------------------------------------
Authorized Officer (Customer Representative) Date
---------------------------
- -------------------------------------------- -------------------------------
(Please Print) Signature
Bank Officer Name Date
---------------------------
- -------------------------------------------- -------------------------------
(Please Print) Signature
(Deliver Completed Form to Credit Support Staff For Immediate Processing)
-107-
<PAGE> 114
EXHIBIT "M"
MARKET VALUATION FORMULA
See most recent pricing letter from Greenwich Capital Markets,
Inc. or other Approved Investors.
-108-
<PAGE> 115
EXHIBIT "N"
INITIAL APPROVED MARKET VALUE REFERENCE INVESTORS
1. Cityscape Corp.
2. First Plus Financial, Inc.
3. The Money Store
4. Clearview Capital
5. Greentree Financial Corp.
6. Statewide
7. Associates
8. Preferred Credit Corp.
-109-
<PAGE> 1
Exhibit 10.50
July 1, 1997
The First National Bank of Chicago
One First National Plaza
Chicago, Illinois 60670
Attention: Patrick J. Power
Bank United
400 Colony Square, Suite 200
Atlanta, Georgia 30361
Attention: John D. West
Re: CREDIT AGREEMENT DATED JUNE 20, 1997
Gentlemen:
This letter will confirm our request for an amendment to the above
Credit Agreement to accommodate our sales of Qualifying Loans to Greenwich
Capital in the two following respects:
(1) In the paragraph of the definition of "Borrowing Base" authorizing
the Agent to grant temporary waivers, the amount of $200,000 will be increased
to $2,000,000 from the date hereof through October 31, 1997; and
(2) In clause (vi)(2) of the definition of "Eligible Qualifying Loan"
the following phrase will be added at the end thereof "and, if the Borrower has
subsequently delivered possession of such Required Qualifying Loan Documents and
Additional Required Qualifying Loan Documents to a third party, such third party
has been approved by the Agent and has executed a bailee letter satisfactory to
the Agent acknowledging the security interest therein held by the Collateral
Agent for the benefit of the Lenders".
All capitalized terms used herein and not otherwise defined shall have
the meaning given to them in the Credit Agreement referenced above. A form of
the bailee letter referred to in item (2) above is attached to this letter.
If these modifications are acceptable, please execute and return a copy
of this letter.
Very truly yours,
MEGO MORTGAGE CORPORATION
By:
--------------------------------
Its:
--------------------------------
<PAGE> 2
APPROVED:
THE FIRST NATIONAL BANK OF CHICAGO,
individually as a Lender and as Agent
By:
----------------------------------
Title:
-------------------------------
BANK UNITED, as a Lender
By:
----------------------------------
Title:
-------------------------------
<PAGE> 3
July 1, 1997
FIRST CHICAGO NATIONAL PROCESSING
CORPORATION, as Collateral Agent
1111 Arroyo Parkway, Suite 630
Pasadena, California 91105
Attention: Manager
Re: MEGO MORTGAGE CORPORATION
This letter will evidence our agreement to forward to you from time to
time schedules of loan numbers listing loans delivered to the undersigned by
MEGO MORTGAGE CORPORATION (the "Borrower") which are being held by the
undersigned pending their sale to Greenwich Capital Markets, Inc. Nothing herein
shall be deemed to be an undertaking that the undersigned has reviewed any of
the loan documents for completeness or compliance with your credit facility.
The undersigned acknowledges that you as "Collateral Agent" and the
Borrower have advised the undersigned that such loans comprise a portion of the
collateral under that certain Credit Agreement dated as of June 20, 1997 by and
among the Borrower, The First National Bank of Chicago (the "Agent") and the
lenders thereunder, as amended from time to time and that each of the loans is
subject to a security interest in favor of the undersigned on behalf of the
lenders under such Credit Agreement which security interest shall be
automatically released upon your remittance of the full amount of the purchase
price of such loan (as set forth on the schedule attached hereto) by wire
transfer to the following account of the Borrower.
WIRE INSTRUCTIONS TO SETTLEMENT ACCOUNT
The First National Bank of Chicago, ABA No.
071000013,
for the account of Mego Mortgage Corporation, Account No. 19-29623,
Cash Collateral Account
Pending the purchase of each loan and until payment therefor is
received, the aforesaid security interest therein will remain in full force and
effect, and the undersigned shall hold possession of such loans and the
documentation evidencing same as custodian, agent and bailee for and on behalf
of the Collateral Agent for the benefit of the Lenders. In no event shall any
loan be returned or sales proceeds remitted to the Borrower.
Sincerely,
FIRST TRUST NATIONAL ASSOCIATION
By:
-----------------------------------
Title:
-----------------------------------
Address:
------------------------------
<PAGE> 4
The undersigned Borrower agrees to and acknowledges the terms of this
letter. The instructions set forth in this letter cannot be altered except by
written instructions executed by Collateral Agent.
MEGO MORTGAGE CORPORATION
By:
-----------------------------------
Title:
-----------------------------------
Address:
------------------------------
<PAGE> 1
Exhibit 10.51
August 26, 1997
The First National Bank of Chicago
One First National Plaza
Chicago, Illinois 60670
Attention: Patrick J. Power
Bank United
400 Colony Square, Suite 200
Atlanta, Georgia 30361
Attention: John D. West
Re: CREDIT AGREEMENT DATED JUNE 20, 1997
Gentlemen:
This letter will confirm our request for an additional amendment to the
above Credit Agreement to accommodate our sales of Qualifying Loans to Greenwich
Capital. This supplements our request of July 1, 1997 which you have previously
approved, permitting Qualifying Loans to be included as AP Qualifying Loans when
held by First Trust National Association under the bailee letter attached to the
July 1, 1997 letter. The current request seeks an amendment as follows:
(1) In clause (vi)(4) of the definition of "Eligible Qualifying Loan"
the following phrase will be added at the end thereof "provided that such
maximum amount shall be temporarily increased to $20,000,000 for August 28, 1997
and August 29, 1997 so long as the Collateral Value of AP Qualifying Loans which
are not in the possession of First Trust National Association pursuant to the
bailee letter referred to in clause (vi)(2) above and which have not been
identified on a schedule forwarded by First Trust National Association to the
Collateral Agent shall not exceed $13,000,000 on such two days".
All capitalized terms used herein and not otherwise defined shall have
the meaning given to them in the Credit Agreement referenced above.
If this modification is acceptable, please execute and return a copy of
this letter.
Very truly yours,
MEGO MORTGAGE CORPORATION
By:
--------------------------------
Its:
--------------------------------
<PAGE> 2
APPROVED:
THE FIRST NATIONAL BANK OF CHICAGO,
individually as a Lender and as Agent
By:
----------------------------------
Title:
-------------------------------
BANK UNITED, as a Lender
By:
----------------------------------
Title:
-------------------------------
<PAGE> 1
Exhibit 10.52
AMENDMENT TO CREDIT AGREEMENT
THIS AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is made as of the
5th day of September, 1997, by and among MEGO MORTGAGE CORPORATION, a Delaware
corporation ("Borrower"), THE FIRST NATIONAL BANK OF CHICAGO, a national banking
association ("First Chicago"), in First Chicago's capacity as Agent and Lender
under the "Credit Agreement" (as defined below), BANK UNITED, a federal savings
bank ("Bank United") (First Chicago and Bank United in their capacities as
Lenders being referred to as the "Initial Lenders") and GUARANTY FEDERAL BANK,
F.S.B., a federal savings bank (the "New Lender").
RECITALS
A. Borrower and the Initial Lenders entered into a certain Credit
Agreement dated as of June 20, 1997, as amended by letter agreements dated July
1, 1997 and August 26, 1997 (the "Credit Agreement"). All capitalized terms used
in this Amendment and not otherwise defined herein shall have the meanings
ascribed to such terms in the Credit Agreement.
B. Pursuant to the terms of the Credit Agreement, the Initial Lenders
agreed to provide Borrower with a revolving credit facility in the maximum
amount of $40,000,000. The parties hereto desire to amend the Credit Agreement
in order to, among other things, (i) admit the New Lender as a "Lender" under
the Credit Agreement and increase the maximum amount of the Facility to
$55,000,000, (ii) adjust the respective Percentages of the Lenders, and (iii)
change certain reporting requirements.
NOW, THEREFORE, in consideration of the foregoing Recitals and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS
1. The foregoing Recitals to this Amendment hereby are incorporated into
and made a part of this Amendment.
2. From and after the "Effective Date", as defined below, each of the
Initial Lenders and the New Lender shall be considered a "Lender" under the
Credit Agreement and the Loan Documents. Borrower and the Initial Lenders hereby
consent to the addition of the New Lender as a Lender. From and after the
Effective Date, the New Lender's Commitment and Percentage shall be as shown
below the New Lender's signature block on this Amendment and the Aggregate
Commitment shall be $55,000,000. The adjusted Percentages for the Initial
Lenders are also shown on the signature pages to this Amendment.
3. The "Effective Date" shall be the date on which all of the following
conditions shall have been fulfilled (or waived by the Initial Lenders and New
Lender):
(i) no Default or Event of Default then exists;
<PAGE> 2
(ii) Borrower shall have executed and delivered to the
Agent or its counsel for delivery to the New Lender a Note in the
amount of such New Lender's Commitment;
(iii) either the Effective Date shall take place on the
last day of an Interest Period or the only Advances outstanding on the
Effective Date shall be Alternate Base Rate Advances or Fed Funds
Advances;
(iv) Borrower shall have executed and delivered, or
caused to be executed and delivered, to the Agent or its counsel (and,
upon receipt from Borrower, the Agent or its counsel shall deliver to
the other Lenders) a certificate dated as of the Effective Date signed
by Borrower (i) confirming that no Default or Event of Default exists
under the Loan Documents; and (ii) representing and warranting that the
Loan Documents are then in full force and effect and that, to the best
of its knowledge, Borrower then has no defenses or offsets to, or
claims or counterclaims relating to, its obligations under the Loan
Documents; and
(v) Borrower shall have paid to the New Lender an
upfront fee equal to one-twentieth of one percent (0.05%) of the New
Lender's Commitment.
If the Effective Date has not occurred by October 1, 1997, any Initial Lender or
the New Lender may, by written notice to all other parties hereto, elect to
terminate this Amendment which thereupon shall have no further force or effect
and the Credit Agreement shall continue as if this Amendment had not been
executed.
4. New Lender, on the Effective Date, agrees to purchase from First
Chicago and Bank United, in equal shares, and First Chicago and Bank United
hereby agree to sell to New Lender in equal shares, without recourse, a portion
of the Obligations equal to the New Lender's Percentage of the then outstanding
principal balance of all Advances then outstanding and held by the Initial
Lenders on the Effective Date prior to the purchase by the New Lender. Such
purchase by the New Lender shall not change the aggregate principal amount of
all Advances outstanding on the Effective Date. Such purchase shall be effected
by wire transfer of immediately available funds in the appropriate amounts to
the Agent for remittance to the Initial Lenders on the Effective Date. Borrower
irrevocably and unconditionally agrees that from and after the Effective Date
the portion of the Obligations so funded by the New Lender shall be evidenced by
and shall be deemed to be an Advance by the New Lender under such New Lender's
Note as of the date of such purchase and shall be treated as such for purposes
of calculating interest and fees accruing from and after the date of such
purchase under the Credit Agreement (as amended by this Amendment). All interest
and fees accruing on such portion of the Obligations prior to the date of such
purchase shall be paid when due to the Agent for remittance to the Initial
Lenders in equal shares.
-2-
<PAGE> 3
5. Article VI of the Credit Agreement is hereby amended as follows:
(i) the words "As soon as available . . .
Qualifying Loan, (ii)" in lines 1-5 of Section 6.1(v) are deleted and
replaced with "Not later than 45 days after the end of each month, a
certificate from an Authorized Officer, with respect to the last day
of such month, as to";
(ii) Section 6.1(vii) is deleted;
(iii) the words ", including a listing of these specific
Eligible Qualifying Loans which become Ineligible Collateral during
such month (or partial month, if requested by the Agent as set forth
above) due to the existence of a past due payment exceeding the time
limit set forth in clause (ii) of the definition of Eligible Qualifying
Loan" are added at the end of Section 6.1(ix); and
(iv) the words ", as of the end of any calendar month,"
are deleted from lines 1-2 of Section 6.17.1 and replaced with the
words ", at any time".
6. Article IX of the Credit Agreement is hereby amended by adding the
following Section at the end thereof:
"9.16 MAXIMUM INTEREST. Notwithstanding the foregoing
paragraphs and all other provisions of this Agreement and the Notes,
none of the terms and provisions of this Agreement or the Notes shall
ever be construed to create a contract to pay to the Lenders for the
use, forbearance or detention of money, interest in excess of the
maximum amount of interest permitted to be charged by the Lenders to
the Borrower under applicable state or federal law from time to time in
effect, and the Borrower shall never be required to pay interest in
excess of such maximum amount. If, for any reason interest is paid
hereon in excess of such maximum amount, then promptly upon any
determination that such excess has been paid the Lenders will, at their
option, either refund such excess to the Borrower or apply such excess
to the principal owing under the Notes."
7. Exhibit G to the Credit Agreement, BORROWING BASE CERTIFICATE, is
hereby amended by deleting the words "except for ineligibility due to
delinquencies which is addressed on an aggregated basis by an adjustment to the
Borrowing Base" from footnote 1 thereto.
8. Except as specifically modified hereby, the Credit Agreement is and
remains unmodified and in full force and effect and is hereby ratified and
confirmed. All references in the Loan Documents to the "Agreement" or the
"Credit Agreement" henceforth shall be deemed to refer to the Credit Agreement
as amended by this Amendment.
9. This Amendment may be executed in any number of counterparts, all of
which taken together shall constitute one agreement, and any of the parties
hereto may execute this Amendment by signing any such counterpart. This
Amendment shall be construed in accordance with the internal laws (and not the
law of conflicts) of the State of Illinois, but giving effect to federal laws
applicable to national banks. This Amendment shall be effective when it has been
executed by Borrower, the Initial Lenders and the New Lender and each party has
notified the Agent by telecopy or telephone that it has taken such action.
-3-
<PAGE> 4
IN WITNESS WHEREOF, the Borrower, the Initial Lenders and the New
Lender have executed this Amendment as of the date first above written.
MEGO MORTGAGE CORPORATION, a
DELAWARE CORPORATION
By:
------------------------------------
Print Name:
---------------------------
Title:
---------------------------------
1000 Parkwood Circle, Fifth Floor
Atlanta, Georgia 30339
Phone: (800) 550-6346
Fax: (800) 694-6346
Attention: Jeff S. Moore, President
Commitment: $20,000,000 THE FIRST NATIONAL BANK OF CHICAGO,
Commitment Percentage: 36.3636% INDIVIDUALLY AND AS AGENT
Primary Commitment: $15,000,000
Swingline Commitment: $5,000,000
Primary Commitment By:
Percentage: 30.0000% -------------------------------------
Print Name:
------------------------------
Title:
----------------------------------
One First National Plaza
Chicago, Illinois 60670
Phone: (312) 732-1100
Fax: (312) 732-6222
Attention:Ann H. Chudacoff
-4-
<PAGE> 5
Commitment: $20,000,000 BANK UNITED
Commitment Percentage: 36.3636%
Primary Commitment: $20,000,000
Swingline Commitment: -0- By:
Primary Commitment -------------------------------------
Percentage: 40.0000%
Print Name:
------------------------------
Title:
----------------------------------
400 Colony Square, Suite 200
Atlanta, Georgia 30361
Phone: (404) 877-9192
Fax: (404) 877-9195
Attention: John D. West
Regional Director
Commitment: $15,000,000 GUARANTY FEDERAL BANK, F.S.B.
Commitment Percentage: 27.2728%
Primary Commitment: $15,000,000
Swingline Commitment: -0- By:
Primary Commitment --------------------------------------
Percentage: 30.0000%
Print Name:
------------------------------
Title:
----------------------------------
8333 Douglas Avenue, 11th Floor
Dallas, Texas 75225
Phone: (214) 360-2845
Fax: (214) 360-1660
Attention: James Meintjes
-5-
<PAGE> 1
Exhibit 10.53
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (the "Amendment") is made as
of the 16th day of October, 1997, by and among MEGO MORTGAGE CORPORATION, a
Delaware corporation ("Borrower"), THE FIRST NATIONAL BANK OF CHICAGO, a
national banking association ("First Chicago"), in First Chicago's capacity as
Agent and Lender under the "Credit Agreement" (as defined below), BANK UNITED, a
federal savings bank ("Bank United"), GUARANTY FEDERAL BANK, F.S.B., a federal
savings bank ("Guaranty Federal") (First Chicago, Bank United and Guaranty
Federal in their capacities as Lenders being referred to as the "Prior Lenders")
and HARRIS TRUST AND SAVINGS BANK, an Illinois banking corporation (the "New
Lender").
RECITALS
A. Borrower and the Prior Lenders are parties to a certain Credit
Agreement dated as of June 20, 1997, as amended by letter agreements dated July
1, 1997 and August 26, 1997 and an Amendment to Credit Agreement dated as of
September 5, 1997 (the "Credit Agreement"). All capitalized terms used in this
Amendment and not otherwise defined herein shall have the meanings ascribed to
such terms in the Credit Agreement.
B. Pursuant to the terms of the Credit Agreement, the Prior Lenders
agreed to provide Borrower with a revolving credit facility in the maximum
amount of $55,000,000. The parties hereto desire to amend the Credit Agreement
in order to, among other things, (i) admit the New Lender as a "Lender" under
the Credit Agreement and increase the maximum amount of the Facility to
$65,000,000 and (ii) adjust the respective Percentages of the Lenders.
NOW, THEREFORE, in consideration of the foregoing Recitals and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
AGREEMENTS
1. The foregoing Recitals to this Amendment hereby are incorporated
into and made a part of this Amendment.
2. From and after the "Effective Date", as defined below, each of the
Prior Lenders and the New Lender shall be considered a "Lender" under the Credit
Agreement and the Loan Documents. Borrower and the Prior Lenders hereby consent
to the addition of the New Lender as a Lender. From and after the Effective
Date, the New Lender's Commitment and Percentage shall be as shown below the New
Lender's signature block on this Amendment and the Aggregate Commitment shall be
$65,000,000. The adjusted Percentages for the Prior Lenders are also shown on
the signature pages to this Amendment.
3. The "Effective Date" shall be the date on which all of the following
conditions shall have been fulfilled (or waived by the Prior Lenders and New
Lender):
<PAGE> 2
(i) no Default or Event of Default then exists;
(ii) Borrower shall have executed and delivered to the
Agent or its counsel for delivery to the New Lender a Note in the
amount of such New Lender's Commitment;
(iii) either the Effective Date shall take place on the
last day of an Interest Period or the only Advances outstanding on the
Effective Date shall be Alternate Base Rate Advances or Fed Funds
Advances;
(iv) Borrower shall have executed and delivered, or
caused to be executed and delivered, to the Agent or its counsel (and,
upon receipt from Borrower, the Agent or its counsel shall deliver to
the other Lenders) a certificate dated as of the Effective Date signed
by Borrower (i) confirming that no Default or Event of Default exists
under the Loan Documents; and (ii) representing and warranting that the
Loan Documents are then in full force and effect and that, to the best
of its knowledge, Borrower then has no defenses or offsets to, or
claims or counterclaims relating to, its obligations under the Loan
Documents; and
(v) Borrower shall have paid to the New Lender an
upfront fee equal to one-twentieth of one percent (0.05%) of the New
Lender's Commitment.
If the Effective Date has not occurred by November 30, 1997, any Prior Lender or
the New Lender may, by written notice to all other parties hereto, elect to
terminate this Amendment which thereupon shall have no further force or effect
and the Credit Agreement shall continue as if this Amendment had not been
executed.
4. New Lender, on the Effective Date, agrees to purchase from First
Chicago, Bank United and Guaranty Federal, on a pro rata basis in accordance
with their respective Percentages in effect immediately prior to this Amendment,
and First Chicago, Bank United and Guaranty Federal hereby agree to sell to New
Lender on such a pro rata basis, without recourse, a portion of the Obligations
equal to the New Lender's Percentage of the then outstanding principal balance
of all Advances (other than any Buy Down Advances and Swingline Advances then
outstanding) then outstanding and held by the Prior Lenders on the Effective
Date prior to the purchase by the New Lender. Such purchase by the New Lender
shall not change the aggregate principal amount of all Advances outstanding on
the Effective Date. Such purchase shall be effected by wire transfer of
immediately available funds in the appropriate amounts to the Agent for
remittance to the Prior Lenders on the Effective Date. Borrower irrevocably and
unconditionally agrees that from and after the Effective Date the portion of the
Obligations so funded by the New Lender shall be evidenced by and shall be
deemed to be an Advance by the New Lender under such New Lender's Note as of the
date of such purchase and shall be treated as such for purposes of calculating
interest and fees accruing from and after the date of such purchase under the
Credit Agreement (as amended by this Amendment). All interest and fees
accruing on such portion of the Obligations prior to the date of such purchase
shall be paid when due to the Agent for remittance to the Prior Lenders on such
a pro rata basis.
-2-
<PAGE> 3
5. Section 2.3 of the Credit Agreement is hereby amended by
adding the following sentence at the end of the first paragraph thereof:
"Any such Alternate Base Rate Loan shall continue to be held on a
non-pro rata basis by the applicable Lender making the related Buy-Down
Loan and, notwithstanding anything herein to the contrary, such
Alternate Base Rate Loan shall not be reallocated on a pro rata basis
among the Lenders."
6. Except as specifically modified hereby, the Credit Agreement is and
remains unmodified and in full force and effect and is hereby ratified and
confirmed. All references in the Loan Documents to the "Agreement" or the
"Credit Agreement" henceforth shall be deemed to refer to the Credit Agreement
as amended by this Amendment.
7. This Amendment may be executed in any number of counterparts, all of
which taken together shall constitute one agreement, and any of the parties
hereto may execute this Amendment by signing any such counterpart. This
Amendment shall be construed in accordance with the internal laws (and not the
law of conflicts) of the State of Illinois, but giving effect to federal laws
applicable to national banks. This Amendment shall be effective when it has been
executed by Borrower, the Prior Lenders and the New Lender and each party has
notified the Agent by telecopy or telephone that it has taken such action.
IN WITNESS WHEREOF, the Borrower, the Prior Lenders and the New Lender
have executed this Amendment as of the date first above written.
MEGO MORTGAGE CORPORATION, a
DELAWARE CORPORATION
By:
------------------------------------
Print Name:
---------------------------
Title:
---------------------------------
1000 Parkwood Circle, Fifth Floor
Atlanta, Georgia 30339
Phone: (800) 550-6346
Fax: (800) 694-6346
Attention: Jeff S. Moore, President
-3-
<PAGE> 4
Commitment: $20,000,000 THE FIRST NATIONAL BANK OF CHICAGO,
Commitment Percentage: 30.7692% INDIVIDUALLY AND AS AGENT
Primary Commitment: $15,000,000
Swingline Commitment: $5,000,000
Primary Commitment By:
Percentage: 25.0000% -------------------------------
Print Name:
------------------------
Title:
-----------------------------
One First National Plaza
Chicago, Illinois 60670
Phone: (312) 732-1100
Fax: (312) 732-6222
Attention:Ann H. Chudacoff
Commitment: $20,000,000 BANK UNITED
Commitment Percentage: 30.7692%
Primary Commitment: $20,000,000
Swingline Commitment: -0-
Primary Commitment By:
Percentage: 33.3333% -------------------------------
Print Name:
------------------------
Title:
-----------------------------
400 Colony Square, Suite 200
Atlanta, Georgia 30361
Phone: (404) 877-9192
Fax: (404) 877-9195
Attention: John D. West
Regional Director
-4-
<PAGE> 5
Commitment: $15,000,000 GUARANTY FEDERAL BANK, F.S.B.
Commitment Percentage: 23.0769%
Primary Commitment: $15,000,000
Swingline Commitment: -0-
Primary Commitment By:
Percentage: 25.0000% -------------------------------
Print Name:
----------------------------
Title:
---------------------------------
8333 Douglas Avenue, 11th Floor
Dallas, Texas 75225
Phone: (214) 360-2845
Fax: (214) 360-1660
Attention:James Meintjes
Commitment: $10,000,000 HARRIS TRUST AND SAVINGS BANK
Commitment Percentage: 15.3846%
Primary Commitment: $10,000,000
Swingline Commitment: -0-
Primary Commitment By:
Percentage: 16.6667% ----------------------------------
Print Name:
---------------------------
Title:
--------------------------------
111 West Monroe Street
P. O. Box 755
Chicago, Illinois 60690
Phone: (312) 461-4514
Fax: (312) 765-8382
Attention: Michael Houlihan
Vice President
-5-
<PAGE> 1
Exhibit 10.54
SECURITY AND COLLATERAL AGENCY AGREEMENT
THIS SECURITY AND COLLATERAL AGENCY AGREEMENT (the "Security
Agreement") is made and dated as of June 20, 1997, by and among MEGO MORTGAGE
CORPORATION, a Delaware corporation (the "Borrower"), THE FIRST NATIONAL BANK OF
CHICAGO, a national banking association, acting in its capacity as
administrative agent for the lenders from time to time participating in the
Credit Agreement (as defined below) (in such capacity, the "Agent"), and FIRST
CHICAGO NATIONAL PROCESSING CORPORATION, a Delaware corporation, as collateral
agent for the Secured Parties (as defined below) (in such capacity, the
"Collateral Agent").
RECITALS
A. Pursuant to a Credit Agreement dated as of even date herewith among
the Borrower, the lenders named therein (the "Lenders") and the Agent (as
amended from time to time, the "Credit Agreement") the Lenders agreed to extend
credit to the Borrower on the terms and subject to the conditions set forth
therein. Capitalized terms not otherwise defined herein are used with the same
meanings as in the Credit Agreement.
B. As a condition precedent to the effectiveness of the Credit
Agreement, the Borrower is required to execute and deliver this Security
Agreement.
NOW, THEREFORE, in consideration of the above Recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
AGREEMENT
1. Appointment of Collateral Agent. Pursuant to the terms of the Credit
Agreement, each Lender has appointed the Collateral Agent to act as secured
party, agent, bailee and custodian for the exclusive benefit of the Lenders, the
Agent and the Collateral Agent with respect to the Collateral. The Lenders, the
Agent and the Collateral Agent are hereinafter referred to collectively and
severally as the "Secured Parties". The Collateral Agent hereby accepts such
appointment and agrees to maintain and hold all Collateral at any time delivered
to it as secured party, agent, bailee and custodian for the exclusive benefit of
the Secured Parties. The Collateral Agent and the Borrower agree that the
Collateral Agent is acting and will act with respect to the Collateral for the
exclusive benefit of the Secured Parties and is not, and shall not at any time
in the future be, subject, with respect to the Collateral, in any manner or to
any extent, to the direction or control of the Borrower except as expressly
permitted hereunder and under the other Loan Documents. The Collateral Agent
agrees to act in accordance with this Security Agreement and in accordance with
any written instructions properly delivered pursuant hereto. Under no
circumstances shall the Collateral Agent deliver possession of Collateral to the
Borrower except in accordance with the express terms of this Security Agreement
or the other Loan Documents or as instructed by the Agent.
<PAGE> 2
2. Delivery and Categorization of Collateral.
(a) General. The Borrower shall deliver Collateral Transmittals to
the Collateral Agent from time to time identifying Qualifying Loans that the
Borrower intends to include in Collateral by delivering to the Collateral Agent
the Required Qualifying Loan Documents (as described on Schedule A attached
hereto) for such Qualifying Loans. Such delivery shall be made prior to
inclusion of such Qualifying Loans in Collateral, other than for AP Qualifying
Loans identified in the applicable Collateral Transmittal and covered by an
Agreement to Pledge. The Collateral Agent's responsibility to review the
Required Qualifying Loan Documents is limited to the review steps described on
Exhibit 1 hereto, said review of the Required Qualifying Loan Documents
delivered on any Business Day to be completed before the opening of business of
the Collateral Agent on the next succeeding Business Day.
(b) Agreements to Pledge. The Collateral Agent, upon receipt of a
Collateral Transmittal describing the AP Qualifying Loans to be covered by an
Agreement to Pledge and an Agreement to Pledge as of that date, shall include
such AP Qualifying Loans as Eligible Collateral in the Collateral Value
Determination (as defined in Paragraph 6(a) below). The Borrower shall deliver
the Required Qualifying Loan Documents for each such AP Qualifying Loan not
later than the seventh (7th) Business Day after the Pledge Date of such AP
Qualifying Loan. When a delivery of what purports to be the Required Qualifying
Loan Documents for an AP Qualifying Loan is received by the Collateral Agent on
a given Business Day such AP Qualifying Loan shall no longer be treated as an AP
Qualifying Loan for purposes of the maximum amount of AP Qualifying Loans that
can be included in Eligible Collateral, and shall be included in any Collateral
Value Determination or other calculation involving the value of the Borrowing
Base on such Business Day prior to reviewing the same hereunder on the
assumption that such AP Qualifying Loan is Eligible Collateral, and provided
that such Required Qualifying Loan Documents are reviewed in accordance with the
steps described on Exhibit 1 hereto before the opening of business of the
Collateral Agent on the next succeeding Business Day.
(c) Identification of Collateral. All Qualifying Loans at any time
delivered to the Collateral Agent hereunder shall be held by the Collateral
Agent in a fire resistant vault, drawer or other suitable depositary maintained
and controlled solely by the Collateral Agent, conspicuously marked to show the
respective interests of the Secured Parties therein and not commingled with any
other assets or property of, or held by, the Collateral Agent.
3. Grant of Security Interest. The Borrower hereby pledges and assigns
to the Collateral Agent for the benefit of the Secured Parties, and grants to
the Collateral Agent for the benefit of the Secured Parties a first priority
security interest in, the property described in Paragraph 4 below (collectively
and severally, the "Collateral") to secure payment of the Obligations.
4. Collateral. The Collateral shall consist of all right, title and
interest of the Borrower, of every kind and nature, in and to all of the
following property, assets and rights of the Borrower wherever located, whether
now existing or hereafter arising, and whether now or hereafter owned, acquired
by or accruing or owing to the Borrower, and all proceeds and products thereof:
(a) all Pledged Qualifying Loans, whether Eligible Collateral or
Ineligible Collateral (unless released in accordance with Section 8.3 of the
Credit Agreement), including all Required Qualifying Loan Documents related
thereto;
(b) any commitments or other agreements issued by the FHA to insure
any Pledged Qualifying Loan;
(c) the Settlement Account and all uncollected deposits into the
Settlement Account;
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(d) all property related to the foregoing, including without
limitation, the right to service Pledged Qualifying Loans while owned by the
Borrower, all accounts and general intangibles of whatsoever kind so related and
all documents or instruments delivered to the Collateral Agent in respect of any
Pledged Qualifying Loans, including, without limitation, the right to receive
all insurance proceeds and condemnation awards which may be payable in respect
of the premises encumbered by any Mortgage securing a Pledged Qualifying Loan;
and
(e) all proceeds and products of any of the foregoing.
5. Collateral Agent's Review of Collateral. Upon any receipt of
Required Qualifying Loan Documents for any Qualifying Loan, the Collateral Agent
shall review the same and verify that:
(a) All Required Qualifying Loan Documents relating to such
Qualifying Loan appear regular on their face and are in the Collateral Agent's
possession; and
(b) The statements set forth on Exhibit 1 hereto are accurate and
complete in all respects.
Such verification for Collateral delivered during any period covered by a
collateral report referred to in Paragraph 8 below shall be set forth in such
report. If the Collateral Agent notes any exception in the review described in
subparagraph (a) or (b) above or questions, in its reasonable discretion, the
genuineness, regularity, propriety, or accuracy of any item of Collateral, the
Collateral Agent shall note the same as Ineligible Collateral in its next
Collateral Value Determination delivered to the Agent. In the event that the
Borrower has been requested by the Agent and the Collateral Agent to deliver the
"Additional Required Qualifying Loan Documents" (as described on Schedule B
attached hereto) with respect to any Qualifying Loan, the Collateral Agent shall
review and verify such Additional Required Qualifying Loan Documents consistent
with the obligations of the Collateral Agent above.
6. Collateral Value Determination; Determination Assumptions.
(a) On each Business Day, the Collateral Agent shall compute the
value of the Borrowing Base (a "Collateral Value Determination") and notify the
Agent thereof.
(b) In making any Collateral Value Determination or other
calculation involving a determination of the value of the Borrowing Base, the
Collateral Agent shall be permitted to rely, without independent investigation
of the correctness thereof, on:
(1) The most recent information supplied by, or at the direction
of, the Borrower to the Collateral Agent, pursuant to the Credit
Agreement with respect to Uncleared Loan Funding Checks;
(2) The information supplied by the Borrower to the Collateral
Agent on the related Collateral Transmittal, with respect to the net
acquisition cost (including any discounts and excluding any servicing
released premium) of any Qualifying Loan, the unpaid principal balance
of any Qualifying Loan as of its Pledge Date, the weighted average
purchase price used in the related Collateral Value calculation, the
loan-to-value ratio of such Qualifying Loan, if secured and not a Title
I Qualifying Loan, at origination and the amount of full or partial
principal prepayments made on account of any Qualifying Loan; and
(3) The information supplied by the Borrower to the Collateral
Agent, whether written or in any other form acceptable to the
Collateral Agent, with respect to a determination as to whether amounts
received in the Settlement Account represent the purchase price paid
for a specific Qualifying Loan and, consequently, whether the
Collateral Value of such Qualifying Loan should be removed from such
calculation.
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7. Handling of Collateral; Settlement Account.
(a) From time to time until otherwise notified by the Required
Lenders (by telephone, telegraph or otherwise), the Collateral Agent is hereby
authorized to release documentation relating to Qualifying Loans to the Borrower
against a trust receipt executed by the Borrower in the form of Exhibit 2
hereto. The Collateral Agent will maintain all original trust receipts in a
vault, drawer or other suitable depositary with a one hour fire rating
maintained and controlled solely by Collateral Agent. The Borrower hereby
represents and warrants that any request by the Borrower for release of
Collateral under this subparagraph (a) shall be solely for the purposes of
correcting clerical or other non-substantial documentation problems in
preparation of returning such Collateral to the Collateral Agent for ultimate
sale or exchange and that the Borrower has requested such release in compliance
with all terms and conditions of such release set forth herein and in the Credit
Agreement, including, without limitation, the sublimit contained in clause
(vii)(1) of the definition of Eligible Qualifying Loan.
(b) Prior to the occurrence of a Default, upon delivery by the
Borrower to the Collateral Agent of a shipping request substantially in the form
of that attached hereto as Exhibit 3, the Collateral Agent will transmit
Qualifying Loans held by it as directed by the Borrower as follows:
(1) If the transmittal is of documentation for Qualifying Loans
in the possession of the Collateral Agent in connection with the sale
thereof to an Approved Investor, such transmittal will be under cover
of a transmittal letter substantially in the form of that attached
hereto as Exhibit 4, subject to modification of such Exhibit 4 pursuant
to Paragraph 7(f) hereof at the request of the Agent.
(2) If the transmittal is of documentation for Qualifying Loans
in connection with the shipment to a custodian or trustee for the
formation of a mortgage pool supporting a Security (any such Security
supported by any such Qualifying Loans being referred to herein as a
"Warehouse-Related Security"), such transmittal will be under cover of
a transmittal letter substantially in the form of that attached hereto
as Exhibit 5, subject to modification of such Exhibit 5 pursuant to
Paragraph 7(f) hereof at the request of the Agent.
In no event shall the Collateral Agent have any obligation to obtain written
acknowledgement of receipt from the addressee of any transmittal letter or other
communication sent by the Collateral Agent hereunder.
(c) All amounts payable on account of the sale of Pledged Qualifying
Loans (including, but not limited to, a sale pursuant to a repurchase agreement)
will be instructed to be paid directly by the purchaser to the Settlement
Account. Pursuant to Paragraph 3 above the Borrower has granted a security
interest in and lien upon the Settlement Account and in any and all amounts at
any time held therein as collateral security for the benefit of the Secured
Parties. This Paragraph 7(c) shall constitute notice to the Collateral Agent of
such security interest pursuant to the Uniform Commercial Code of all relevant
jurisdictions and any other law or regulation requiring such notice. This
Paragraph 7(c) shall further constitute irrevocable notice to the Collateral
Agent that the Settlement Account is a "no access" account to the Borrower and
the Collateral Agent except to the extent expressly permitted hereunder. The
Collateral Agent shall hold such security interest in and lien upon the
Settlement Account and all funds at any time held therein for the benefit of
Secured Parties with all rights of a secured party under the Uniform Commercial
Code of all relevant jurisdictions.
(d) Prior to the occurrence of a Default, the Collateral Agent shall
take such steps as it may be reasonably directed from time to time by the
Borrower in writing (or by telephone confirmed in writing if so required by the
recipient of such direction) which are not inconsistent with the provisions of
this Security Agreement and the other Loan Documents and which the Borrower
deems necessary to enable the Borrower to perform and comply with Approved
Investor Commitments and with other agreements for the sale or other disposition
in whole or in part of Qualifying Loans.
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(e) Following the occurrence of a Default, the Collateral Agent
shall not, and shall incur no liability to the Borrower or any other Person for
refusing to, deliver any item of Collateral to the Borrower or any other Person
(other than under existing Approved Investor Commitments) without the express
prior written consent and at the direction of all of the Lenders under Section
9.1 of the Credit Agreement.
(f) Notwithstanding the provisions of Paragraph 7(b) above, the
Agent may, at any time, require that the following modification be made to all
of its transmittal letters or only to transmittal letters to certain Approved
Investors designated by the Agent:
(i) The second sentence of the second full paragraph of the form
of whole loan sale transmittal letter attached hereto as Exhibit 4 and
the second sentence of the second full paragraph of the form of
warehouse related security transmittal letter attached hereto as
Exhibit 5 shall be deleted and each replaced with the following
sentence:
"Each of the Qualifying Loans is subject to a security interest
in favor of First Chicago National Processing Corporation (the
"Collateral Agent") on behalf of the Secured Parties, which
security interest shall be automatically released upon your
remittance of an amount equal to the greater of (1) the purchase
price for such Qualifying Loans (as set forth on the schedule
attached hereto), and (2) $________, which is the collateral
value assigned by the Collateral Agent to such Qualifying Loans.
Such amount shall be remitted by wire transfer to the following
account:",
in which case the amount to be inserted in the blank in clause two of
such revised provision shall be an amount equal to the amount of the
Borrowing Base which is attributable to the Qualifying Loans being
delivered pursuant to the transmittal letter; and
8. Report. The Collateral Agent shall deliver to the Borrower and the
Lenders: (a) on or before the seventh day of each month, a collateral report in
substantially the same form of that attached hereto as Exhibit 6 with respect to
the status of the value of the Borrowing Base as of the date of the most recent
Borrowing Base Certificate provided by the Borrower pursuant to the Credit
Agreement, and (b) from time to time, such other reports and information as the
Required Lenders may from time to time reasonably request. In preparing any such
reports the Collateral Agent shall be entitled to rely, without independent
investigation (other than the review steps described on Exhibit 1 hereto), on
information supplied to the Collateral Agent by the Borrower. The Collateral
Agent may, with the approval of the Borrower and the Agent, alter the format of
any report required hereunder, provided such modified report contains the same
information previously furnished in the unmodified report.
9. No Reliance. The Collateral Agent shall not be responsible to any
Secured Party for any recitals, statements, representations or warranties
contained herein or in any other Loan Document; or for the execution,
effectiveness, genuineness, validity, enforceability, collectability, accuracy,
completeness or sufficiency of this Security Agreement or any other Loan
Document or instruments executed and delivered, or which could have been
executed or delivered, in connection with this Security Agreement or the other
Loan Documents, including, without limitation, the attachment, creation,
effectiveness or perfection of the security interests granted or purported to be
granted hereunder in and to the Collateral. The Collateral Agent shall be
entitled to refrain from exercising any discretionary powers or actions under
this Security Agreement or any other Loan Document until the Collateral Agent
shall have received the prior written consent of one hundred percent (100%) of
the Lenders to such action.
10. Costs and Expenses. The Collateral Agent shall notify the Borrower
of all extraordinary costs and expenses of the Collateral Agent directly
relating to the Collateral Agent's performance of this Security Agreement, and
such extraordinary costs and
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<PAGE> 6
expenses shall be paid promptly by the Borrower or, if already paid by the
Collateral Agent, the Borrower promptly shall reimburse the Collateral Agent
therefor. For the purposes of this provision, extraordinary costs and expenses
shall include, without limitation, expenses of legal counsel to the Collateral
Agent and the expenses of the Collateral Agent in furnishing any additional
reports and information requested by the Required Lenders pursuant to Paragraph
8(b) above.
11. Availability of Documents. Each Lender and its agents, accountants,
attorneys and auditors will be permitted from time to time upon reasonable
notice to the Collateral Agent and the Borrower, and at such time as may be
mutually acceptable to such Lender, the Collateral Agent and the Borrower (but
in no event later than two weeks after such Lender's original requested date) to
examine (to the extent permitted by applicable law) the files, documents,
records and other papers in the possession or under the control of the
Collateral Agent relating to any or all Collateral and to make copies thereof.
Prior to the occurrence of a Default, any such activity will be at the cost and
expense of the Lender conducting such activity; following the occurrence of a
Default, all reasonable out-of-pocket costs and expenses associated with the
exercise by Secured Parties of their rights under this Paragraph 11 shall be
promptly paid by the Borrower upon demand of any Lender made through the Agent.
12. Covenants of the Borrower. The Borrower hereby agrees: (a) to
procure, execute and deliver from time to time any endorsements, assignments,
financing statements and other writings reasonably deemed necessary or
appropriate by the Collateral Agent to perfect, maintain and protect its
security interest hereunder and the priority thereof and to deliver promptly to
the Collateral Agent all originals of any Collateral or proceeds thereof
consisting of chattel paper or instruments (provided that the Borrower may
retain originals of the completion certificates for home improvement loans and
any other original documents which the Borrower is obligated by applicable law
or regulation to retain); (b) not to surrender or lose possession of (other than
to the Collateral Agent), sell, encumber, or otherwise dispose of or transfer,
any Collateral or right or interest therein other than shipment of Qualifying
Loans under Approved Investor Commitments and as otherwise permitted under
Paragraph 7 above and as otherwise permitted by the Credit Agreement; (c) at all
times to account fully for and promptly to deliver to the Collateral Agent, in
the form received, all Collateral or proceeds thereof received, endorsed to the
Collateral Agent as appropriate and accompanied by such assignments and powers,
duly executed, as the Collateral Agent shall reasonably request, and until so
delivered all Collateral and proceeds thereof shall be held in trust for the
Collateral Agent for the benefit of the Secured Parties; (d) at any reasonable
time, upon demand by the Collateral Agent, to exhibit to and allow inspection by
the Collateral Agent (or Persons designated by the Collateral Agent) of the
Collateral and the records concerning the Collateral; (e) to keep the records
concerning the Collateral at the location(s) set forth in Paragraph 22 below and
not to remove such records from such location(s) without thirty (30) days prior
written notice to the Collateral Agent; (f) at the reasonable request of the
Collateral Agent, to place on each of its records pertaining to the Collateral a
legend, in form and content satisfactory to the Collateral Agent, indicating
that such Collateral has been assigned to the Collateral Agent for the benefit
of the Secured Parties; (g) to keep the Collateral insured against loss, damage,
theft, and other risks customarily covered by insurance, and such other risks as
the Collateral Agent may reasonably request; (h) to do all acts that a prudent
investor would deem necessary or desirable to maintain, preserve and protect the
Collateral; (i) not knowingly to use any Collateral or permit any Collateral to
be used unlawfully or in violation of any provision of this Security Agreement
or the Credit Agreement or any applicable statute, regulation or ordinance or
any policy of insurance covering the Collateral; (j) to pay (or require to be
paid) prior to their becoming delinquent all taxes, assessments, insurance
premiums, charges, encumbrances and liens now or hereafter imposed upon or
affecting any Collateral (excluding those imposed on or affecting any real
estate securing the Pledged Qualifying Loans) except as otherwise permitted by
the Credit Agreement; (k) to notify the Collateral Agent before any such change
shall occur of any change in the Borrower's name, identity or structure through
merger, consolidation or otherwise; (l) to appear in and defend, at the
Borrower's cost and expense, any action or proceeding which may affect its title
to or the Collateral Agent's interest for the benefit of the Secured Parties in
the Collateral unless the failure to do so would not have a Material Adverse
Effect; (m) to keep accurate and complete records of the Collateral and to
provide the Collateral Agent with such records and such reports and information
relating to the Collateral as the Collateral Agent may reasonably request from
time to time; and (n) to comply with all laws, regulations and ordinances
relating to the possession, operation, maintenance and
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<PAGE> 7
control of the Collateral. Notwithstanding the foregoing, the requirements of
subclauses (a) through (j) and (l) through (n) shall not apply to any Collateral
which is not required to be included in the computation of the value of the
Borrowing Base in order for the Borrower to be in compliance with the
requirements of the Credit Agreement and the failure of the Borrower to comply
with its obligations under such subclauses with respect to any Pledged
Qualifying Loans of Collateral shall cause such Pledged Qualifying Loans to
become Ineligible Collateral.
13. Collection of Collateral Payments.
(a) The Borrower shall, at its sole cost and expense, endeavor to
obtain payment, when due and payable, of all sums due or to become due with
respect to any Collateral ("Collateral Payments" or a "Collateral Payment"),
consistent with all requirements of law and contractual obligations binding upon
the Borrower. Upon the request of the Collateral Agent following the occurrence
of a Default and acceleration of the Obligations (and subject to the
requirements of applicable law), the Borrower will notify and direct any party
who is or might become obligated to make any Collateral Payment to make payment
thereof to the Collateral Agent (or to an FHA Title I Approved Mortgagee
designated by the Collateral Agent or to the Borrower in care of the Collateral
Agent) at such address as the Collateral Agent may designate. The Borrower will
reimburse the Collateral Agent promptly upon demand for all reasonable
out-of-pocket costs and expenses, including reasonable attorneys' fees and
litigation expenses, incurred by the Collateral Agent in seeking to collect any
Collateral Payment.
(b) Following the occurrence of a Default and acceleration of the
Obligations, upon the request of the Collateral Agent the Borrower will transmit
and deliver to the Collateral Agent, forthwith upon receipt and in the form
received, all cash, checks, drafts and other instruments for the payment of
money (properly endorsed where required so that such items may be collected by
the Collateral Agent or an FHA Title I Approved Mortgagee designated by the
Collateral Agent) which may be received by the Borrower at any time as payment
on account of any Collateral Payment and if such request shall be made, until
delivery to the Collateral Agent, such items will be held in trust for the
Collateral Agent for the benefit of the Secured Parties and will not be
commingled by the Borrower with any of its other funds or property. Thereafter,
the Collateral Agent is hereby authorized and empowered to endorse the name of
the Borrower on any check, draft or other instrument for the payment of money
received by the Collateral Agent on account of any Collateral Payment if the
Collateral Agent believes such endorsement is necessary or desirable for
purposes of collection.
(c) The Borrower hereby agrees to indemnify, defend and save
harmless the Collateral Agent and its agents, officers, employees and
representatives from and against all liabilities and reasonable expenses on
account of any adverse claim asserted against the Collateral Agent relating to
any moneys received by the Collateral Agent on account of any Collateral Payment
(other than as a direct result of the gross negligence or willful misconduct of
the Collateral Agent) and such obligation of the Borrower shall continue in
effect after and notwithstanding the discharge of the Obligations and/or the
release of the security interest granted in Paragraph 3 above.
14. Authorized Action by Collateral Agent. The Borrower hereby
irrevocably appoints the Collateral Agent as its attorney-in-fact to do (but the
Collateral Agent shall not be obligated to and shall incur no liability to the
Borrower or any third party for failure so to do) at any time and from time to
time at the request and direction of the Required Lenders, given after the
occurrence of a Default and, except in the case of clause (b) of this sentence,
after acceleration of the Obligations (which request and direction must be in
writing if so requested by the Collateral Agent), any act which the Borrower is
obligated by this Security Agreement to do, and to exercise such rights and
powers as the Borrower might exercise with respect to the Collateral, including,
without limitation, the right to (a) collect by legal proceedings or otherwise
and endorse, receive and receipt for all dividends, interest, payments, proceeds
and other sums and property now or hereafter payable on or on account of the
Collateral; (b) insure, process, service and preserve the Collateral; (c)
transfer the Collateral to the Collateral Agent's own or its nominee's name; and
(d) make any compromise or settlement, and take any other action it deems
advisable with respect to the Collateral. Notwithstanding anything contained
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herein, in no event shall the Collateral Agent be required to make any
presentment, demand or protest, or give any notice and the Collateral Agent need
not take any action to preserve any rights against any prior party or any other
person in connection with the Obligations or with respect to the Collateral.
15. Default and Remedies.
(a) Upon the occurrence of a Default and following the acceleration
of the Obligations, the Collateral Agent shall at the request and direction of
the Agent on behalf of the Required Lenders (which request and direction must be
in writing if so requested by the Collateral Agent), without notice to or demand
upon the Borrower: (a) foreclose or otherwise enforce the Collateral Agent's
security interest for the benefit of the Secured Parties in the Collateral in
any manner permitted by law or provided for hereunder; (b) sell or otherwise
dispose of the Collateral or any part thereof at one or more public or private
sales or at any brokers board or on any securities exchange, whether or not such
Collateral is present at the place of sale, for cash or credit or future
delivery and without assumption of any credit risk, on such terms and in such
manner as the Collateral Agent may determine; (c) require the Borrower to
assemble the Collateral and/or books and records relating thereto and make such
available to the Collateral Agent at a place to be designated by the Collateral
Agent; (d) enter into property where any Collateral or books and records
relating thereto are located and take possession thereof with or without
judicial process; and (e) prior to the disposition of the Collateral, prepare it
for disposition in any manner and to the extent the Collateral Agent deems
appropriate. Whether or not the Collateral Agent exercises any right given
pursuant to this Paragraph 15, upon the occurrence of any Default and following
the acceleration of the Obligations, the Collateral Agent on behalf of the
Secured Parties shall have as to any Collateral all other rights and remedies
provided for herein and all rights and remedies of a secured party under the
Illinois Uniform Commercial Code and, in addition thereto and not in lieu
thereof, all other rights or remedies at law or in equity existing or conferred
upon the Collateral Agent on behalf of the Secured Parties by other
jurisdictions or other applicable law or given to the Collateral Agent on behalf
of the Secured Parties pursuant to any security agreement or other instrument or
agreement heretofore, now, or hereafter given as security for the Borrower's
obligations hereunder.
(b) Upon any sale or other disposition pursuant to this Security
Agreement, the Collateral Agent shall have the right to deliver, assign and
transfer to the purchaser thereof the Collateral or portion thereof so sold or
disposed of and all proceeds thereof shall be promptly transmitted to the Agent
for allocation to the Secured Parties in accordance with the Credit Agreement.
Each purchaser at any such sale or other disposition shall hold the Collateral
free from any claim or right of whatever kind, including any equity or right of
redemption of the Borrower, and the Borrower specifically waives (to the extent
permitted by law) all rights of redemption, stay or appraisal which it has or
may have under any rule of law or statute now existing or hereafter adopted. The
Collateral Agent shall give the Borrower only such notice and shall publish such
notice as may be required by the Illinois Uniform Commercial Code or by other
applicable law of the intention to make any such public or private sale or sale
at broker's board or on a securities exchange, provided that the Collateral
Agent shall give the Borrower not less than 10 days prior notice of such sale.
Any such sale shall be held at such time or times within the ordinary business
hours and at such place or places permitted by the Illinois Uniform Commercial
Code. The Collateral Agent agrees that Title I Qualifying Loans included in
Collateral shall be sold only to purchasers which are (or have trustees or
custodians holding such Title I Qualifying Loans which are) licensed to accept a
transfer of the FHA insurance reserve applicable to such Title I Qualifying
Loans. At any such sale the Collateral may be sold in one lot as an entirety or
in separate parcels, as the Collateral Agent may determine. The Collateral Agent
may adjourn any public or private sale or cause the same to be adjourned from
time to time by announcement at the time and place fixed for the sale, and such
sale may be made at any time or place to which the same may be so adjourned. In
case of any sale of all or any part of the Collateral on credit or for future
delivery, the Collateral so sold may be retained by the Collateral Agent until
the selling price is paid by the purchaser thereof, neither the Collateral
Agent, the Agent nor the Lenders shall incur any liability in case of the
failure of such purchaser to take up and pay for the Collateral so sold and, in
case of any such failure, such Collateral may again be sold as provided herein.
Nothing contained in this Agreement shall prohibit any Lender or Lenders from
purchasing the Collateral at
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such sale.
16. Waiver. Neither the Agent, the Collateral Agent nor any Lender
shall incur any liability as a result of the sale of the Collateral, or any part
thereof, at any public or private sale. The Borrower hereby waives (to the
extent permitted by law) any claims it may have against the Agent, the
Collateral Agent and any Lender arising by reason of the fact that the price at
which the Collateral may have been sold at such private sale was less than the
price which might have been obtained at a public sale or was less than the
aggregate amount of the Obligations then outstanding.
17. Resignation/Removal. The Collateral Agent may resign at any time by
giving sixty (60) days prior written notice thereof to the Lenders and the
Borrower. The Collateral Agent also agrees to resign (i) within sixty (60) days
after written notice by the Borrower requesting the resignation of the
Collateral Agent, provided that no Default has occurred and is continuing at the
time of such request, or (ii) in the event it or one of its affiliates ceases to
be a Lender under the Credit Agreement. In addition, in the event the Collateral
Agent fails to perform its obligations under this Agreement in any material
manner and fails to correct its performance within thirty (30) days of written
notice of such failure given by not less than the Required Lenders, then the
Collateral Agent may be removed upon thirty (30) days written notice given by
not less than the Required Lenders. Upon any such resignation or removal: (1) so
long as there has not occurred and is continuing a Default, the Borrower shall
appoint from among the Lenders (which appointment shall be subject to the
approval of the Required Lenders, such approval not to be unreasonably withheld
or delayed), and (2) following the occurrence and during the continuance of a
Default, the Required Lenders shall appoint from among the Lenders, a successor
agent for such Collateral Agent. If the Borrower and/or Required Lenders, as
applicable, are unable to agree on the appointment of a successor agent by a
date 10 days prior to the effective date of such resignation or removal, as the
case may be, the retiring agent shall appoint one of the Lenders as a successor
agent for the Lenders. Any such successor agent shall succeed to the rights,
powers and duties of the retiring agent and the term "Collateral Agent" shall
mean such successor agent effective upon its appointment, and the former agent's
rights, powers and duties shall be terminated, without any other or further act
or deed on the part of such former agent or any of the parties to this Security
Agreement or any of the other Loan Documents or successors thereto.
Notwithstanding the foregoing, the Collateral Agent shall continue to hold the
Pledged Qualifying Loans and the security interest created hereunder for the
benefit of the Secured Parties until such Pledged Qualifying Loans and security
interest have been effectively transferred to a successor agent. After the
resignation or removal of any Collateral Agent hereunder as Collateral Agent,
the provisions of this Security Agreement shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Collateral Agent under
this Security Agreement.
18. Confidentiality. The Collateral Agent agrees to take normal and
reasonable precautions and exercise due care to maintain the confidentiality of
all non-public information provided to it by the Borrower or by any other party
on the Borrower's behalf in connection with this Security Agreement or the other
Loan Documents and agrees and undertakes that neither it nor any of its
Affiliates shall disclose any such information for any purpose or in any manner
other than pursuant to the terms contemplated by this Security Agreement or the
other Loan Documents. The Collateral Agent, its Affiliates and their respective
employees, officers and directors may disclose such information (1) at the
request of any regulatory authority or in connection with an examination of such
Person by any such authority, (2) pursuant to subpoena or other court process,
(3) when required to do so in accordance with the provisions of any applicable
law, (4) at the express direction of any other governmental authority of any
State of the United States of America or of any other jurisdiction in which such
Person conducts its business, (5) to such Person's independent auditors,
attorneys and other professional advisors, (6) if such information has become
public other than through disclosure by such Person or any Lender, (7) in
connection with any litigation involving such Person, and (8) to any Affiliate
of such Person. Notwithstanding the foregoing, the Borrower authorizes the
Collateral Agent to disclose to any lending institution proposed by the Borrower
to become a Lender under the Credit Agreement or any prospective or actual
Participants such financial and other information in its possession (i) which
has been delivered to the Collateral Agent pursuant to the Loan Documents or
which has been delivered to the Collateral Agent by the Borrower prior to
entering into the Loan
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<PAGE> 10
Documents or (ii) which is reasonably necessary to effectuate the purposes of
the Credit Agreement and this Security Agreement, provided that unless otherwise
agreed by the Borrower, such lending institution or Participant shall agree to
keep such information confidential to the same extent required of the Collateral
Agent hereunder.
19. Binding Upon Successors. All rights of the Collateral Agent and the
other Secured Parties under this Security Agreement shall inure to the benefit
of the Collateral Agent and the other Secured Parties and their successors and
assigns, and all obligations of the Borrower shall bind its successors and
assigns.
20. Entire Agreement; Severability. This Security Agreement contains
the entire security agreement and collateral agency agreement with respect to
the Collateral among Secured Parties and the Borrower. All waivers by the
Borrower provided for in this Security Agreement have been specifically
negotiated by the parties with full cognizance and understanding of their
rights. If any of the provisions of this Security Agreement shall be held
invalid or unenforceable, this Security Agreement shall be construed as if not
containing such provisions, and the rights and obligations of the parties hereto
shall be construed and enforced accordingly.
21. Choice of Law. This Security Agreement shall be construed in
accordance with and governed by the laws of the State of Illinois and, where
applicable and except as otherwise defined herein, terms used herein shall have
the meanings given them in the Illinois Uniform Commercial Code.
22. Place of Business; Records. The Borrower represents and warrants
that its chief place of business is at the address set forth beneath its
signature below, and that its books and records concerning the Collateral are
kept at its chief place of business in Cobb County, Georgia and at the offices
of PEC in Las Vegas, Nevada.
23. Notice. Any written notice, consent or other communication provided
for in this Security Agreement shall be delivered or sent as provided in the
Credit Agreement.
EXECUTED the day and year first above written.
MEGO MORTGAGE CORPORATION, a Delaware
corporation
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
Address: 1000 Parkwood Circle, Suite 500
Atlanta, Georgia 30339
THE FIRST NATIONAL BANK OF CHICAGO, a
national banking association, as Agent
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
-10-
<PAGE> 11
FIRST CHICAGO NATIONAL PROCESSING
CORPORATION, a Delaware corporation, as
Collateral Agent
By:
--------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
-11-
<PAGE> 12
EXHIBITS AND SCHEDULES
TO
SECURITY AGREEMENT
<TABLE>
<CAPTION>
SCHEDULE DOCUMENT
-------- --------
<S> <C>
A Required Qualifying Loan Documents
B Additional Required Qualifying Loan Documents
EXHIBIT DOCUMENT
------- --------
1 Required Review Steps
2 Form of Trust Receipt
3 Form of Shipping Request
4 Form of Whole Loan Sale Transmittal Letter
5 Form of Warehouse-Related Security Transmittal
6 Form of Collateral Report
</TABLE>
-12-
<PAGE> 13
SCHEDULE A
TO SECURITY AGREEMENT
REQUIRED QUALIFYING LOAN DOCUMENTS
1. Original of note or retail installment contract executed in
favor of the Borrower (endorsed or assigned to the Borrower if
purchased by the Borrower) and endorsed by the Borrower in
blank or, in the case of retail installment contracts,
accompanied by an executed separate assignment in blank.
2. Unless such Qualifying Loan is unsecured, the mortgage or deed
of trust securing the above note or retail installment
contract. In lieu of a recorded document, the Collateral Agent
may accept a copy certified by an Authorized Officer of the
Borrower.
3. Unless such Qualifying Loan is unsecured, an assignment of the
mortgage or deed of trust by the Borrower in blank in
recordable form and originals or copies, certified by an
Authorized Officer of the Borrower, of proper assignments of
the related mortgage or deed of trust from the original
holder, through any subsequent transferees, to the Borrower.
4. For Title I Qualifying Loans, an executed Transfer of Note
Report to a nominee of the Collateral Agent which is licensed
to accept a transfer of the FHA insurance reserve applicable
to such Title I Qualifying Loans, completed in full except for
the box requiring the FHA case number, which may be a single
blanket Transfer of Note Report with a schedule of all Pledged
Title I Qualifying Loans to be attached by the Collateral
Agent so long as such a blanket form is acceptable to HUD.
-13-
<PAGE> 14
SCHEDULE B
TO SECURITY AGREEMENT
ADDITIONAL REQUIRED QUALIFYING LOAN DOCUMENTS
1. Except for unsecured Qualifying Loans, the original mortgage or deed of
trust securing the note or retail installment contract.
2. Except for secured or unsecured Title I Qualifying Loans, evidence of fire
and extended coverage insurance in an amount not less than the highest of
the following: (a) 90% of the insurable value of the improvements, and (b)
an amount sufficient to prevent co-insurance. The Collateral Agent
reserves the right to obtain a loss payable endorsement in its favor if it
so desires.
3. Evidence of Notice to Customer required by the federal Truth-in-Lendingh
Law and Federal Reserve Regulation Z.
4. For Title I Qualifying Loans, premium billings and FHA case numbers,
together with evidence of payment of such premiums, all when available.
5. Except for unsecured Qualifying Loans, a title report on the related
Property written by a title company and containing exceptions satisfactory
to the Collateral Agent.
6. Either a copy of the certificate of completion or a property inspection
report certified by the Borrower for all home improvement or combined home
improvement/debt consolidation loans, as required by the Borrower's
underwriting standards attached as Schedule 5 to the Credit Agreement.
7. Other documentation as the Collateral Agent may reasonably deem
appropriate, as well as documentation necessary to fulfill requirements of
the Approved Investor Commitments.
8. Such additional documents as may be necessary in the opinion of the
Collateral Agent to transfer to the Collateral Agent, for the benefit of
the Secured Parties, the title to any Collateral pledged and/or
hypothecated pursuant to the Security Agreement.
-14-
<PAGE> 15
EXHIBIT 1
TO SECURITY AGREEMENT
REQUIRED REVIEW STEPS
1. All submitted documents are consistent with the related Collateral
Transmittal as to borrower name, loan face amount, loan type and the
Borrower's loan number.
2. The note or retail installment contract, as the case may be, the
mortgage/deed of trust (if applicable) and each intervening assignment (if
applicable) each bears an original signature or signatures which appear to
be those of the person or persons named as the maker and
mortgagor/trustor, or, in the case of a certified copy of the
mortgage/deed of trust and intervening assignment, such copy bears what
appears to be a reproduction of such signature or signatures.
3. Except for (a) the endorsement to the Borrower of the note in the event
such loan was purchased by the Borrower and (b) the endorsement in blank
of the note by the Borrower, neither the note, the retail installment
contract, the mortgage/deed of trust (if applicable), nor the
assignment(s) of the mortgage/deed of trust (if applicable) contain any
irregular writings which appear on their face to affect the validity of
any such endorsement or to restrict the enforceability of the document on
which they appear.
4. The note is endorsed in blank or the assignment of retail installment
contract by the Borrower to the Collateral Agent bears an original
signature, as applicable.
5. The assignment by the Borrower to the Collateral Agent of any
mortgage/deed of trust, if applicable, bears an original signature.
-15-
<PAGE> 16
EXHIBIT 2
TO SECURITY AGREEMENT
FORM OF TRUST RECEIPT
_______________, 19__
The undersigned, MEGO MORTGAGE CORPORATION, a Delaware corporation (the
"Borrower"), acknowledges receipt from FIRST CHICAGO NATIONAL PROCESSING
CORPORATION, acting as agent, bailee and custodian (in such capacity "Collateral
Agent") for the exclusive benefit of the Lenders pursuant to the Security
Agreement (as those terms and capitalized terms not otherwise defined herein are
defined in that certain Credit Agreement dated as of June 20, 1997, among the
Lenders, the Borrower and the Agent, as amended from time to time), of the
following described documentation for the identified Qualifying Loans (the
"Collateral Documents"), possession of which is herewith entrusted to the
Borrower solely for the purpose of correcting documentary defects relating
thereto:
Loan Document
Borrower Name Loan Number Note Amount Delivered
------------- ----------- ----------- -------------
It is hereby acknowledged that a security interest pursuant to the
Illinois Uniform Commercial Code in the Collateral hereinabove described and in
the proceeds of said Collateral has been granted to Collateral Agent for the
benefit of the Secured Parties pursuant to the Security Agreement.
The Borrower hereby represents and warrants that the aggregate value
included in the Borrowing Base on account of the Qualifying Loans for which the
Collateral Documents are requested to be released hereunder plus all other
Qualifying Loans which are currently released to the Borrower pursuant to
similar trust receipts does not exceed two percent (2%) of the current Aggregate
Commitment.
In consideration of the aforesaid delivery by Collateral Agent (or by its
duly appointed sub-agent), the Borrower hereby agrees to hold said Collateral in
trust for Collateral Agent on behalf of the Secured Parties as provided under
and in accordance with all provisions of the Security Agreement and to return
said Collateral to Collateral Agent no later than the close of business on the
fifteenth calendar day following the date hereof or, if such day is not a
Business Day, on the immediately succeeding Business Day.
MEGO MORTGAGE CORPORATION, a Delaware
corporation
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
-16-
<PAGE> 17
EXHIBIT 3
TO SECURITY AGREEMENT
FORM OF SHIPPING REQUEST
Date:
-------------
FIRST CHICAGO NATIONAL PROCESSING CORPORATION,
as Collateral Agent
1111 Arroyo Parkway, Suite 630
Pasadena, California 91105
Attention: Manager
This letter is to serve as authorization for you to endorse and ship the
following loans:
Loan Number Borrower Name Note Amount
to the following address under Commitment #__________ (the "Commitment") from an
Approved Investor as follows:
NAME:
ADDRESS:
ATTENTION:
Please endorse the notes as follows:
Please ship the loan documents either by ____________________ or by such other
courier service as we have designated to you as "approved". The courier shall
act as an independent contractor bailee acting solely on your behalf as
Collateral Agent for the Secured Parties (as defined in that certain Credit
Agreement dated as of June 20, 1997, by and among the Borrower, The First
National Bank of Chicago, as agent and certain lenders, as the same may be
amended, extended or replaced from time to time and to which reference is made
for the definitions of all capitalized terms used herein), but we acknowledge
and agree that you are not responsible for any delays in shipment caused by the
courier or any other actions or inactions of the courier, including, without
limitation, any loss of any loan documents; however, because the Commitment
expires on _______________, 199__, we ask that you deliver the loan documents to
the courier no later than _______________, 199__.
-17-
<PAGE> 18
Please have the courier bill us by using our acct #__________. If you should
have any questions, or should feel the need for additional documentation, please
do not hesitate to call _______________.
MEGO MORTGAGE CORPORATION, a Delaware
corporation
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
-18-
<PAGE> 19
EXHIBIT 4
TO SECURITY AGREEMENT
(Direct Investor)
FORM OF WHOLE LOAN SALE TRANSMITTAL LETTER
------------------------------------------
[LETTERHEAD OF COLLATERAL AGENT]
Date: Name of Delivery Service:
------------------ ------------------------
Airbill No.:
------------------------
[Approved Investor]
-----------------
- ------------------------------
- ------------------------------
Re: Mego Mortgage Corporation; Sale of Qualifying Loans
Attached please find those Qualifying Loans listed separately on the
attached schedule, which Qualifying Loans are owned by MEGO MORTGAGE CORPORATION
(the "Borrower") and are being delivered to you for purchase.
The Qualifying Loans comprise a portion of the Collateral under (and as
the term "Collateral" and capitalized terms not otherwise defined herein are
defined in) that certain Credit Agreement dated as of June 20, 1997 by and among
the Borrower, the Agent and the Lenders thereunder, as amended from time to
time. Each of the Qualifying Loans is subject to a security interest in favor of
the undersigned on behalf of the Secured Parties which security interest shall
be automatically released upon your remittance of the full amount of the
purchase price of such Qualifying Loan (as set forth on the schedule attached
hereto) by wire transfer to the following account of the Borrower:
WIRE INSTRUCTIONS TO SETTLEMENT ACCOUNT:
----------------------------------------
----------------------------------------
----------------------------------------
Pending your purchase of each Qualifying Loan and until payment
therefor is received, the aforesaid security interest therein will remain in
full force and effect, and you shall hold possession of such Collateral and the
documentation evidencing same as custodian, agent and bailee for and on behalf
of the Secured Parties. In the event any Qualifying Loan is unacceptable for
purchase, return the rejected item directly to the Collateral Agent at the
address set forth below. The Qualifying Loan must be so returned or sales
proceeds remitted in full no later than twenty-five (25) days from the date
hereof. In no event shall any Qualifying Loan be returned or sales proceeds
remitted to the Borrower. If you are unable to comply with the above
instructions, please so advise the undersigned immediately.
NOTE: BY ACCEPTING THE QUALIFYING LOANS DELIVERED TO YOU WITH THIS
LETTER, YOU CONSENT TO BE THE CUSTODIAN, AGENT AND BAILEE FOR THE SECURED
PARTIES ON THE TERMS DESCRIBED IN THIS LETTER. THE UNDERSIGNED, AS COLLATERAL
AGENT, REQUESTS THAT YOU ACKNOWLEDGE RECEIPT OF THE ENCLOSED QUALIFYING LOANS
AND THIS LETTER BY SIGNING AND RETURNING THE ENCLOSED COPY OF THIS LETTER TO THE
UNDERSIGNED; HOWEVER, YOUR FAILURE TO DO SO DOES NOT NULLIFY SUCH CONSENT.
-19-
<PAGE> 20
Sincerely,
FIRST CHICAGO NATIONAL PROCESSING
CORPORATION, as Collateral Agent
By:
----------------------------------------
Title:
-------------------------------------
Address: 1111 Arroyo Parkway, Suite 630
Pasadena, California 91105
The undersigned Borrower agrees to and acknowledges the terms of this
letter and, notwithstanding any contrary understanding with or instructions to
you, the addressee of this letter, the Borrower instructs you to act according
to the instructions set forth in this letter. These instructions cannot be
altered except by written instructions executed by Collateral Agent.
MEGO MORTGAGE CORPORATION
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
ACKNOWLEDGEMENT OF RECEIPT
[Approved Investor]
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
Date:
---------------------------
-20-
<PAGE> 21
EXHIBIT 5
TO SECURITY AGREEMENT
(Pool Formation)
FORM OF WAREHOUSE-RELATED SECURITY TRANSMITTAL LETTER
[COLLATERAL AGENT LETTERHEAD]
Date:_______________
[Pool Custodian]
- -------------------------
- -------------------------
Re: Mego Mortgage Corporation;
Shipment of Qualifying Loans for Pool Formation
Attached please find those Qualifying Loans listed separately on the
attached schedule, which are owned by MEGO MORTGAGE CORPORATION, a Delaware
corporation (the "Borrower"), and are being delivered to you, as
custodian/trustee (the "Pool Custodian"), in connection with the sale of such
Qualifying Loans to a depositor as a part of the formation of a mortgage pool
supporting the issuance of a mortgage-backed security.
The Qualifying Loans comprise a portion of the Collateral under (and as
the term "Collateral" and capitalized terms not otherwise defined herein are
defined in) that certain Credit Agreement dated as of June 20, 1997, by and
among the Borrower, the Agent and the Lenders, as amended from time to time.
Each of the Qualifying Loans is subject to a security interest in favor of
Collateral Agent for the benefit of the Secured Parties, which security interest
shall be automatically released upon your remittance of the full amount of the
purchase price of such Qualifying Loan (as set forth on the schedule attached
hereto) by wire transfer to the following account of Borrower:
WIRING INSTRUCTIONS TO SETTLEMENT ACCOUNT:
---------------------------------
---------------------------------
---------------------------------
Pending your remittance of such amount, the aforesaid security interest
in each Qualifying Loan will remain in full force and effect, and you shall hold
such Collateral as custodian, agent and bailee for and on behalf of the Secured
Parties. In the event any Qualifying Loan is unacceptable for pool formation,
return the rejected item directly to the undersigned, as Collateral Agent, at
the address set forth below. Each Qualifying Loan must be so returned or the
proper amount remitted to the Collateral Agent no later than twenty-five (25)
days from the date hereof. In no event shall any Qualifying Loan be returned or
proceeds relating thereto be remitted to the Borrower. If you are unable to
comply with the above instructions, please so advise the undersigned
immediately.
NOTE: BY ACCEPTING THE QUALIFYING LOANS DELIVERED TO YOU WITH THIS
LETTER, YOU CONSENT TO BE THE CUSTODIAN, AGENT AND BAILEE FOR THE SECURED
PARTIES ON THE TERMS DESCRIBED IN THIS LETTER. THE UNDERSIGNED, AS COLLATERAL
AGENT, REQUESTS THAT YOU ACKNOWLEDGE RECEIPT OF THE ENCLOSED QUALIFYING LOANS
AND THIS LETTER BY SIGNING AND RETURNING THE ENCLOSED COPY OF THIS LETTER TO THE
UNDERSIGNED; HOWEVER, YOUR FAILURE
-21-
<PAGE> 22
TO DO SO DOES NOT NULLIFY SUCH CONSENT.
Sincerely,
FIRST CHICAGO NATIONAL PROCESSING
CORPORATION, as Collateral Agent
By:
------------------------------------
Title:
----------------------------------
Address: 1111 Arroyo Parkway, Suite 630
Pasadena, California 91105
ACKNOWLEDGEMENT OF RECEIPT
[Pool Custodian]
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
Date:
-------------------------------
-22-
<PAGE> 23
EXHIBIT 6
TO SECURITY AGREEMENT
FORM OF COLLATERAL REPORT
<TABLE>
<CAPTION>
BORROWING BASE $ AMOUNT LIMIT OVER LIMIT
-------------- ---------------------------------------------
<S> <C> <C> <C> <C>
Eligible Title I Qualifying Loans (97%) ---------- ---------- ----------
plus Eligible Conventional HI/DC Qualifying Loans
---------- ---------- ----------
(a) Non-HLTV Loans
---------- ---------- ----------
(b) HLTV Loans
---------- ---------- ----------
equals Borrowing Base before status limits
---------- ---------- ----------
Status Limits
---------- ---------- ----------
(a) Eligible Conventional HI/DC Qualifying
Loans with FICOs of 600 to 620
(6% of Aggregate Commitment)
---------- ---------- ----------
(b) Agreements to Pledge
(greater of (i) 15% of Aggregate
Commitment or (ii) $9,000,000)
---------- ---------- ----------
(c) Trust Receipts (2% of Aggregate Commitment)
---------- ---------- ----------
(d) Unsecured Title I Qualifying Loans
(5% of Aggregate Commitment)
---------- ---------- ----------
(e) Unsecured Conventional HI/DC
Qualifying Loans
(5% of Aggregate Commitment)
---------- ---------- ----------
Borrowing Base after status limits
plus Unrestricted Balance in Settlement Account
in excess of $100,000*
----------
less Ucleared Loan Funding Checks
----------
equals Adjusted Borrowing Base
----------
less Coverage Requirement (Facility Outstandings)
----------
equals Borrowing Base excess/(shortfall)
----------
</TABLE>
* After deduction of proceeds from disposition of Eligible Collateral
included in Borrowing Base calculation for the Business Day such
proceeds are received, to avoid duplication.
-23-
<PAGE> 1
EXHIBIT 10.55
TRI-PARTY AGREEMENT
This Tri-Party Agreement is made as of June 20, 1997 by and among MEGO
MORTGAGE CORPORATION ("Borrower"), GREENWICH CAPITAL MARKETS, INC. ("Greenwich")
and THE FIRST NATIONAL BANK OF CHICAGO, as agent ("Agent") for itself and the
other "Lenders" from time to time under a Revolving Credit Agreement of even
date herewith among Agent, Borrower and certain banks which are parties thereto
(the "Credit Agreement").
Borrower, Greenwich and Mego Financial Corp. ("Guarantor") have entered
into an Amended and Restated Master Loan Purchase and Servicing Agreement dated
as of October 1, 1996 (the "MLPSA"), pursuant to which Greenwich has, among
other things, agreed to purchase "FHA Loans" and "Conventional Loans" (as such
terms are defined in the MLPSA) from Borrower from time to time upon
satisfaction of the conditions contained in the MLPSA. All capitalized terms
used herein and not otherwise defined shall have the meaning given to them in
the MLPSA.
Borrower, Agent and the Lenders have entered into the Credit Agreement
pursuant to which the Lenders have agreed to provide secured financing for the
Borrower's origination, acquisition and warehousing of certain of such FHA Loans
and Conventional Loans, to the extent such Loans meet the eligibility
requirements of the Credit Agreement, for sale to Greenwich and other investors.
This Tri-Party Agreement shall not be effective until Borrower has terminated
its existing revolving credit agreement with BankBoston, N.A. (formerly known as
The First National Bank of Boston) and the existing collateral assignment of the
original MLPSA made in connection therewith has been terminated by written
notice delivered to Greenwich.
As a condition to any advances to Borrower under the Credit Agreement,
the Agent and Lenders have required that (i) all such Loans being acquired or
originated by Borrower and pledged as collateral pursuant to the Credit
Agreement must be eligible for purchase by Greenwich or other investors approved
by the Lenders; and (ii) purchase commitments from Greenwich or such other
approved investors covering the full amount of all such Loans be in full force
and effect at all times while such Loans are pledged as collateral pursuant to
the Credit Agreement, subject to Borrower's right to maintain pledged loans in
excess of such purchase commitments for not more than 30 days during any fiscal
quarter of Borrower.
The Borrower and the Lenders have requested that this Tri-Party
Agreement be executed and delivered to supplement the MLPSA, to provide for the
delivery of certain notices and other information from Greenwich directly to the
Agent on behalf of the Lenders, and to confirm the terms under which Greenwich
will purchase Loans in which First Chicago National Processing Corporation, in
its capacity as the "Collateral Agent" (as defined under the Credit Agreement)
holds a security interest for the benefit of the Lenders, if such Loans are to
be sold to satisfy the indebtedness of the Borrower under the Credit Agreement.
Greenwich will benefit from the Borrower's increased ability to acquire
or originate Loans for sale to Greenwich as a result of the extension of credit
by the Lenders to the Borrower under the Credit Agreement.
THEREFORE, in consideration of the foregoing, Greenwich, Borrower and
the Agent, for itself and on behalf of the Lenders, agree as follows:
1. Status of MLPSA.
(a) Greenwich hereby confirms to the Agent that the MLPSA is
in full force
<PAGE> 2
and effect and that no Event of Default or, to the knowledge of
Greenwich, breach or default which with the passage of time or the giving of
notice would become an Event of Default on the part of Borrower, now exists
under the MLPSA. Greenwich further confirms to the Agent with regard to the
MLPSA that, as of the date hereof:
(i) the aggregate principal balance of Loans sold to
Greenwich thereunder (excluding all Loans resold or transferred by
Greenwich pursuant to a Purchaser Disposition prior to the date of
this Tri-Party Agreement) is $99,165,314.57 as of May 30, 1997 (the
"Transferred Loans"), leaving $50,834,685.43 of the $150,000,000
current Portfolio Limit (which has temporarily been increased from
$100,000,000 to $150,000,000 until August 31, 1997) available and
unused as of May 30, 1997;
(ii) the aggregate principal balance of all Loans sold to
Greenwich thereunder (without exclusion) is $326,102,717.30, leaving
$1,673,897,282.70 of the $2 billion maximum commitment thereunder
available and unused as of May 30, 1997;
(iii) the most recent Pricing Letter is attached hereto as
Exhibit A and made a part hereof;
(iv) Greenwich has permanently waived the 65% limitation on
Conventional Loans contained in clause (iv) of Section 2(a) of the
MLPSA;
(v) to Greenwich's knowledge, as of the date hereof,
Borrower is not obligated to repurchase any Transferred Loans or
provide Qualified Substitute Loans for Transferred Loans under
Section 7.03 of the MLPSA;
(vi) the Guaranty of Borrower's obligations under the MLPSA
originally provided by Mego Financial Corp. has been released upon
compliance with Section 32 of the MLPSA;
(vii) the definition of "Note" in the MLPSA includes retail
installment contracts executed by the "Obligor" under a Loan; and
(viii) the Loans underwritten by Borrower in accordance with
Borrower's Undeirwriting Programs listed on Schedule A hereto are
eligible for purchase by Greenwich under the MLPSA.
(b) Greenwich agrees to use reasonable efforts to deliver copies
of all subsequent Pricing Letters to the Agent on the same day as delivery
to the Borrower. Borrower agrees to deliver a copy of each such Pricing
Letter to the Agent no later than the time the Borrower delivers an executed
copy to Greenwich. Borrower and Greenwich agree to amend the form of Pricing
Letter to include a statement of the remaining unused and available Portfolio
Limit. Greenwich agrees that, if the Portfolio Limit is to be reassessed at any
time under Section 2(a) of the MLPSA, no reduction in the Portfolio Limit shall
be effective as between Greenwich and the Agent unless Greenwich shall have
given the Agent at least 30 days prior written notice of the amount of such
reduction, provided that no notice shall be necessary to reduce the Portfolio
Limit to $100,000,000 on August 31, 1997 on the expiration of the temporary
increase described above.
2. Greenwich Commitment to Purchase from Lenders. If any sale to
Greenwich of the
-2-
<PAGE> 3
Loans held as collateral under the Credit Agreement is made at
the request or direction of the Agent, rather than in the ordinary course at the
request or direction of the Borrower, such sale will occur only if and when
Borrower has defaulted in its obligations under the Credit Agreement. Greenwich
agrees, upon request by the Agent, for the benefit of the Agent and the Lenders
to purchase any Loans held as collateral under the Credit Agreement (the
"Pledged Loans") for the Purchase Price determined by Greenwich in accordance
with the MLPSA, provided that (i) no Event of Default (or default that with the
passage of time would constitute an Event of Default) by the Borrower under the
MLPSA has occurred and is then continuing, (ii) in Greenwich's reasonable
judgment, no material adverse change has occurred (other than solely as a result
of the existence of a default by the Borrower under the Credit Agreement) in the
value or marketability of the Transferred Loans, the financial condition of the
Borrower or the ability of the Borrower to fulfill its obligations (including
without limitation its ability to make corporate and loan-related
representations and warranties and to effect any required repurchases) under the
MLPSA and (iii) the Borrower and each such Pledged Loan is in compliance in all
material respects with the standards set forth in Section 7.02 of the MLPSA and,
after giving effect to the purchase of such Pledged Loans, the conditions to
purchase Loans from the Borrower, as if the Borrower had offered such Loans
directly pursuant to the MLPSA, set forth in Section 2 of the MLPSA would be
satisfied. Subject to the foregoing, the Borrower hereby irrevocably directs and
authorizes Greenwich to take such actions and purchase such Pledged Loans upon
presentation of a statement by the Agent that the Borrower has defaulted in its
obligations under the Credit Agreement, without any obligation on the part of
Greenwich to inquire into the existence of such a default by the Borrower under
the Credit Agreement or to require any further confirmation or direction from
the Borrower, it being expressly understood and agreed that the Borrower shall
be fully liable for all of its obligations under the MLPSA with respect to such
Pledged Loans.
3. No Assumption. Neither the Agent nor the Lenders shall be deemed
solely by virtue of this Tri-Party Agreement to have assumed any of the
obligations of the Borrower under the MLPSA, each of which obligations the
Borrower covenants and agrees with the Lenders to perform and observe as if this
Tri-Party Agreement had not been made. Neither the Agent nor the Lenders, by
entering into this Tri-Party Agreement, shall have any obligations to sell any
Loans to Greenwich or shall have any liability to Greenwich as a result of any
Loans not being sold to Greenwich.
4. Amendments to MLPSA. Greenwich agrees that (other than increases in
the Portfolio Limit or other matters which will not adversely affect the Agent
or the Lenders) Greenwich will not amend, change, modify, or terminate by
agreement the MLPSA without using reasonable efforts to give at least 30 days
prior notice thereof to the Agent. The Borrower will not waive any provision of
the MLPSA which would in any material respect reduce the obligations of
Greenwich thereunder.
5. Notices of Default. Greenwich agrees that it will use reasonable
efforts to furnish to the Agent copies of all written notices given to the
Borrower with respect to any default of the Borrower under the MLPSA,
simultaneously with the giving of such notice to the Borrower. The Agent agrees
that it will use reasonable efforts to furnish to Greenwich copies of all
written notices given to the Borrower with respect to any default of the
Borrower under the Credit Agreement, simultaneously with the giving of such
notice to the Borrower.
6. Payments for Loans. Greenwich agrees, and the Borrower hereby
irrevocably directs Greenwich, to forward all payments due or to become due to
the Borrower from Greenwich under the MLPSA on account of Loans shipped to
Greenwich by the "Collateral Agent" under the
-3-
<PAGE> 4
Credit Agreement only to the Borrower's Account No. 19-29623 at the Agent, until
Greenwich receives written notice from the Agent of the termination of the
Credit Agreement and any further security interest for the benefit of the
Lenders in the Loans then owned by the Borrower.
7. Indemnity by Borrower. In consideration of Greenwich's joinder in
this Tri-Party Agreement, the Borrower agrees to hold Greenwich harmless from
and indemnify Greenwich against any loss, claim, proceeding, or expense
(including reasonable attorneys' fees and disbursements) incurred or arising out
of any act or omission taken or made by Greenwich in accordance with the
provisions of this Tri-Party Agreement during the term hereof (including any act
or omission in reliance on the Agent's authority to bind the Lenders as
described below), except to the extent due to Greenwich's gross negligence or
willful misconduct.
8. Reliance by Greenwich. Except to the extent expressly stated therein
to the contrary, Greenwich shall be entitled to rely upon, and shall be
protected in acting on, the directions, notices, requests, consents and other
written advice given by the Agent as being the fully authorized and binding
action of the Lenders under the Credit Agreement.
9. Notices. All demands, notices and communications hereunder shall be
in writing and shall be given by registered or certified mail, return receipt
requested, by private delivery service or by telecopier at the following
addresses or telephone numbers, as the case may be, as follows:
(a) if to the Borrower:
Mego Mortgage Corporation
1000 Parkwood Circle, 5th Floor
Atlanta, Georgia 30339
Fax No.: (800) 694-6346
Attention: Jeffrey S. Moore
President
with a copy to:
Jerome J. Cohen
Mego Mortgage Corporation
4310 Paradise Road
Las Vegas, Nevada 89109]
Fax No.: (702) 369-4398
(b) if to the Agent or the Lenders:
The First National Bank of Chicago
One First National Plaza
Chicago, Illinois 60670
Attention: Ann H. Chudacoff
Fax No.: (312) 732-6222
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<PAGE> 5
with a copy to:
Patrick G. Moran
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
Fax No.: (312) 876-7934
(c) if to Greenwich:
Greenwich Capital Markets, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: Peter McMullin
Fax No.: (203) 629-4640
with a copy to:
Greenwich Capital Markets, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: General Counsel
Fax No.: (203) 629-4571
or such other address or telephone number as may hereafter be furnished to the
other parties by like notice. Any such demand, notice or communication hereunder
shall be deemed to have been received on the date delivered to or received at
the premises of the addressee (as evidenced, in the case of registered or
certified mail, by the date noted on the return receipt).
10. Severability Clause. Any provision of this Tri-Party Agreement which
is prohibited or which is held to be void or unenforceable shall be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof. To the extent permitted by applicable law, the
parties hereto waive any provision of law which prohibits or renders void or
unenforceable any provision hereof.
11. Counterparts. This Tri-Party Agreement may be executed
simultaneously in any number of counterparts. Each counterpart shall be deemed
to be an original, and all such counterparts shall constitute one and the same
instrument.
12. Governing Law. The Tri-Party Agreement shall be construed in
accordance with the laws of the State of New York without regard to any
conflicts of law provisions and the obligations, rights and remedies of the
parties hereunder shall be determined in accordance with the laws of the State
of New York, except to the extent preempted by federal law.
13. Successors and Assigns. This Tri-Party Agreement shall bind and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors and assigns.
14. Waivers. No term or provision of this Tri-Party Agreement may be
waived or modified unless such waiver or modification is in writing and signed
by the party against whom such waiver or modification is sought to be enforced.
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<PAGE> 6
15. Exhibits. The exhibits to this Tri-Party Agreement are hereby
incorporated and made a part hereof and are an integral part of this Tri-Party
Agreement.
16. Further Agreements. The parties each agree to execute and deliver to
the other such reasonable and appropriate additional documents, instruments or
agreements as may be necessary or appropriate to effectuate the purposes of this
Tri-Party Agreement.
17. Entire Agreement. This Tri-Party Agreement constitutes the entire
agreement of the three parties with respect to the subject matter hereof and
supersedes all prior agreements, oral and written, between the three parties
hereto with respect to the subject matter hereof, and the provisions of this
Tri-Party Agreement shall survive each closing of the transactions contemplated
by the MLPSA and each Pricing Letter. In the event that there exist
inconsistencies between this Tri-Party Agreement and the MLPSA or any Pricing
Letter, this Tri-Party Agreement shall control. Notwithstanding anything herein
to the contrary, however, except as expressly provided herein with respect to
Greenwich's obligations to the Agent under Section 2, nothing contained in this
Tri-Party Agreement shall create, or be deemed to create, any lesser or greater
obligation on the part of Greenwich to purchase Loans, or the Borrower to sell
Loans, under the MLPSA.
In witness of the foregoing the parties have executed and delivered this
Tri-Party Agreement as of the date first above written.
MEGO MORTGAGE CORPORATION THE FIRST NATIONAL BANK OF
(the "Borrower") CHICAGO, as agent for the Lenders (the
"Agent")
By: By:
--------------------------- ------------------------------------
Name: Name:
------------------------- ----------------------------------
Title: Title:
------------------------ ---------------------------------
GREENWICH CAPITAL MARKETS, INC.
("Greenwich")
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
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<PAGE> 7
EXHIBIT A
PRICING LETTER
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<PAGE> 8
SCHEDULE A
BORROWER'S UNDERWRITING PROGRAMS
-8-
<PAGE> 1
Exhibit 10.56
AGREEMENT REGARDING SUBSERVICING
This Agreement Regarding Subservicing ("Agreement") is made as of June
20, 1997 by and among MEGO MORTGAGE CORPORATION ("Borrower"), PREFERRED EQUITIES
CORPORATION ("PEC") and THE FIRST NATIONAL BANK OF CHICAGO, as agent ("Agent")
for itself and the other "Lenders" from time to time under a Revolving Credit
Agreement of even date herewith among Agent, Borrower and certain banks which
are parties thereto (the "Credit Agreement").
Borrower and PEC have entered into a Loan Program Sub-Servicing
Agreement dated as of September 1, 1996, as amended by a side letter dated
December 1, 1996, copies of which are attached hereto as Exhibit A (as amended,
the "Subservicing Agreement"), pursuant to which PEC has, among other things,
agreed to perform certain accounting, payment processing and other
administrative services with respect to certain "Loans" (as defined in the
Subservicing Agreement) originated or purchased by Borrower from time to time.
Borrower, Agent and the Lenders have entered into the Credit Agreement
pursuant to which the Lenders have agreed to provide secured financing for the
Borrower's origination, acquisition and warehousing of certain of such Loans.
The Lenders have requested that this Agreement be executed and
delivered to confirm the terms under which PEC will, at the election of the
Agent following a "Default" (as defined under the Credit Agreement), continue to
service the Loans for First Chicago National Processing Corporation, in its
capacity as the "Collateral Agent" (as defined under the Credit Agreement), any
entity which purchases the Loans from the Collateral Agent, or any other
designee or nominee of the Collateral Agent.
THEREFORE, in consideration of the foregoing, PEC, Borrower and the
Agent, for itself and on behalf of the Lenders, agree as follows:
1. Termination of Subservicing Agreement; New Subservicing Agreement.
(a) Borrower and PEC agree that, notwithstanding the provisions of
Article 8 of the Subservicing Agreement, the Subservicing Agreement shall
terminate as to the Collateral and be of no further force or effect at the
election of the Agent following a Default under the Credit Agreement. Such
termination, if any, shall be effective upon PEC's receipt of notice from the
Agent that a Default has occurred and the Agent has elected to terminate the
Subservicing Agreement as to the Collateral.
(b) PEC agrees that, at the election of the Agent following a Default
under the Credit Agreement, PEC shall enter into an agreement (a "New
Subservicing Agreement") with any entity other than the Borrower which owns any
or all of the Loans constituting Collateral (each such entity being a "Successor
Owner"). Each such New Subservicing Agreement shall be in the form of the
Subservicing Agreement attached hereto as Exhibit A (provided that, at the
election of the Successor Owner, the New Subservicing Agreement shall be in the
form of the Subservicing Agreement prior to the modification by the December 1,
1996 side letter), with such modifications as are necessary to reflect the fact
that the Successor Owner (rather than Borrower) is the owner of the Loans and
such other modifications as may be mutually agreed upon by PEC and the Successor
Owner and with a modification of Section 8D of the Subservicing Agreement to
replace the phrase "ninety (90)" with the phrase "one hundred eighty (180)". The
Borrower hereby irrevocably directs and authorizes PEC to enter into such New
Subservicing Agreements at the request of the Agent upon presentation of a
statement by the Agent that a Default has occurred under the Credit
<PAGE> 2
Agreement, without any obligation on the part of PEC to inquire into the
existence of such a Default or to require any further confirmation or direction
from the Borrower.
2. No Current Assumption. None of the Agent, the Lenders or the
Collateral Agent shall be deemed by virtue of this Agreement to have assumed any
of the obligations of the Borrower under the Subservicing Agreement, each of
which obligations the Borrower covenants and agrees with the Lenders to perform
and observe as if this Agreement had not been made. None of the Agent, the
Lenders or the Collateral Agent are under any liability of any kind to PEC
under, pursuant to, or in respect of the Subservicing Agreement.
3. Agreements Regarding Subservicing Agreement. Borrower and PEC hereby
confirm to the Agent that the Subservicing Agreement is in full force and effect
and has not been amended, and, to the best knowledge of Borrower and PEC, no
breach or default on the part of either party now exists under the Subservicing
Agreement. PEC agrees that it will furnish to the Agent copies of all written
notices given to the Borrower with respect to any default of the Borrower under
the Subservicing Agreement, simultaneously with the giving of such notice to the
Borrower. The Borrower and PEC covenant and agree that except with the prior
written consent of the Agent on behalf of the Lenders in each instance, the
Borrower and PEC will not amend, change, modify, or terminate the Subservicing
Agreement, nor will the Borrower waive any provision thereof which would in any
material respect reduce the obligations of PEC thereunder.
4. Notices. All demands, notices and communications hereunder shall be
in writing and shall be given by registered or certified mail, return receipt
requested, by private delivery service or by telecopier at the following
addresses or telephone numbers, as the case may be, as follows:
a. if to the Borrower:
Mego Mortgage Corporation
1000 Parkwood Circle, 5th Floor
Atlanta, Georgia 30339
Fax No.: (800) 694-6346
Attention: Jeffrey S. Moore
President
with a copy to:
Jerome J. Cohen
Mego Mortgage Corporation
1125 N.E. 125th Street, Suite 206
North Miami, Florida 33161
Fax No.: (305) 899-1824
b. if to the Agent or the Lenders:
The First National Bank of Chicago
One First National Plaza
Chicago, Illinois 60670
Attention: Ann H. Chudacoff
Fax No.: (312) 732-6222
-2-
<PAGE> 3
with a copy to:
Patrick G. Moran
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
Fax No.: (312) 876-7934
c. if to PEC:
Preferred Equities Corporation
4310 Paradise Road
Las Vegas, Nevada 89109
Attention: Frederick H. Conte, Executive Vice
President and Chief Operating Officer
Fax No.: (702) 369-4398
or such other address or telephone number as may hereafter be furnished to the
other parties by like notice. Any such demand, notice or communication hereunder
shall be deemed to have been received on the date delivered to or received at
the premises of the addressee (as evidenced, in the case of registered or
certified mail, by the date noted on the return receipt).
5. Severability Clause. Any provision of this Agreement which is
prohibited or which is held to be void or unenforceable shall be ineffective to
the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof. To the extent permitted by applicable law, the
parties hereto waive any provision of law which prohibits or renders void or
unenforceable any provision hereof.
6. Counterparts. This Agreement may be executed simultaneously in any
number of counterparts. Each counterpart shall be deemed to be an original, and
all such counterparts shall constitute one and the same instrument.
7. Governing Law. This Agreement shall be construed in accordance with
the laws of the State of Illinois without regard to any conflicts of law
provisions and the obligations, rights and remedies of the parties hereunder
shall be determined in accordance with the laws of the State of Illinois, except
to the extent preempted by federal law.
8. Successors and Assigns. This Agreement shall bind and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors and assigns.
9. Waivers. No term or provision of this Agreement may be waived or
modified unless such waiver or modification is in writing and signed by the
party against whom such waiver or modification is sought to be enforced.
10. Exhibits. The exhibits to this Agreement are hereby incorporated
and made a part hereof and are an integral part of this Agreement.
11. Further Agreements. The parties each agree to execute and deliver
to the other such reasonable and appropriate additional documents, instruments
or agreements as may be necessary or
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<PAGE> 4
appropriate to effectuate the purposes of this Agreement.
12. Entire Agreement. This Agreement, together with the Credit
Agreement, and the Subservicing Agreement, constitutes the entire agreement of
the parties and supersedes all prior agreements, oral and written, between the
parties with respect to the subject matter hereof.
In witness of the foregoing the parties have executed and delivered
this Agreement as of the date first above written.
MEGO MORTGAGE CORPORATION THE FIRST NATIONAL BANK OF
CHICAGO, as agent for the Lenders
By: By:
---------------------------------- --------------------------------
Name: Name:
-------------------------------- ------------------------------
Title: Title:
------------------------------- -----------------------------
PREFERRED EQUITIES CORPORATION
BY:
---------------------------------
Name:
------------------------------
Title:
-----------------------------
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<PAGE> 5
EXHIBIT A
-5-
<PAGE> 1
EXHIBIT 10.57
PLEDGE AND SECURITY AGREEMENT
This PLEDGE AND SECURITY AGREEMENT, dated as of April 17, 1997 (as
amended, supplemented or otherwise modified from time to time, this "PLEDGE
AGREEMENT"), between MEGO MORTGAGE CORPORATION, a Delaware corporation (the
"BORROWER"), having its principal place of business at 1000 Parkwood Circle,
Suite 500; Atlanta, Georgia 30339, and GREENWICH CAPITAL FINANCIAL PRODUCTS,
INC., a Delaware corporation (the "LENDER"), having an office at 600 Steamboat
Road; Greenwich, Connecticut 06830.
W I T N E S S E T H:
WHEREAS, Greenwich Capital Markets, Inc., as Initial Purchaser, the
Borrower, as Seller and Servicer, and Mego Financial Corp. have entered into the
Amended and Restated Master Loan Purchase and Servicing Agreement, dated as of
October 1, 1996 (the "PURCHASE AGREEMENT"), and the other Purchase Documents (as
defined below);
WHEREAS, the Borrower wishes to borrow certain sums from the Lender
hereunder and the Lender is willing, upon the terms and conditions set forth
below and in the Note (as defined below in the Note), to lend such sums to the
Borrower, in order to permit the Borrower to finance residual and interest-only
securities retained by the Borrower or its subsidiaries in connection with
certain securitization transactions entered into by the Borrower or its
subsidiaries;
WHEREAS, the Borrower is executing concurrently herewith the Promissory
Note, dated of even date herewith, to the order of the Lender, evidencing the
Advances (as defined below) made thereunder to the Borrower in a maximum
aggregate principal amount not to exceed $11,000,000.00 (the "NOTE"); and
WHEREAS, the Lender is willing to make the Advances to the Borrower
secured by the pledge by the Borrower of the Collateral (including the
Additional Collateral) (each as defined below);
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Borrower and the Lender hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Defined Terms. Capitalized terms used and not otherwise defined
herein shall have the respective meanings set forth in the Note. As used herein,
the following terms shall have the following meanings:
"BORROWER" shall have the meaning specified in the introductory
paragraph hereof.
<PAGE> 2
"BUSINESS DAY" means any day other than a Saturday, Sunday or other day
on which banking institutions in New York, New York, Atlanta, Georgia or
Greenwich, Connecticut are authorized or required by law or executive order to
be closed.
"CERTIFICATES" means, collectively, any residual and/or interest-only
securities or instruments retained by the Borrower or any of its subsidiaries
and issued pursuant to any pooling and servicing agreement, indenture or trust
agreement in connection with transactions in which the Lender or any of its
subsidiaries acts as an underwriter or placement agent and any other instrument
which is acceptable to the Lender in its sole discretion and has been confirmed
as such in writing by the Lender.
"COLLATERAL" shall have the meaning specified in Section 2.1 hereof.
"COLLATERAL REQUIREMENT" means, with respect to the Collateral, an
aggregate amount equal to the sum of (i) with respect to Advances made in
respect of any Certificate that is a residual certificate, 166 2/3% of the
aggregate outstanding principal amount of such Advances plus accrued interest
(i.e. a 60% advance rate); and (ii) with respect to Advances in respect of any
Certificate that it is an interest-only certificate, 133 1/3% of the aggregate
outstanding principal amount of such Advances plus accrued interest (i.e. a 75%
advance rate).
"CURRENT MARKET VALUE" means, with respect to any Collateral on any
day, the fair market value of such Collateral on such day as determined in good
faith by the Lender, applying standards of commercial reasonableness that are
customary in the industry.
"DELIVERY" means a delivery of Collateral to the Lender in accordance
with Section 2.2 hereof.
"EVENT OF DEFAULT OF BORROWER" has the meaning set forth in Section
5.1 hereof.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time.
"GOVERNMENTAL AUTHORITY" shall mean any nation, government, or state,
or any political subdivision thereof, or any court, stock exchange, entity or
agency exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"INDEBTEDNESS" means, when used with reference to any Person, any
indebtedness or other obligation created, incurred, assumed or guaranteed by a
party or with respect to which such Person has become liable, directly or
indirectly, contingently, secondarily or otherwise (other than by endorsement of
instruments in the course of collection), including without limitation,
liability by way of agreement to sell and repurchase any asset, liability
relating to the issuance of letters of credit or other forms of payment
guarantee or otherwise to insure a creditor against loss, and any indebtedness
representing or incurred to finance the acquisition
2
<PAGE> 3
of any asset acquired by such Person or to enable such Person to make a loan or
extend credit to any other party.
"LENDER" shall have the meaning specified in the introductory
paragraph hereof.
"LOAN DOCUMENTS" means, collectively, the Note, this Pledge Agreement,
the Repurchase Agreement and any other documents evidencing or relating to the
Loan or the Collateral or any other security which may now or hereafter be given
as further security for or in connection with the Loan.
"NOTE" shall have the meaning specified in the recitals hereof.
"PERSON" means any individual, partnership, corporation, limited
liability company, joint venture, association, joint stock company, trust,
unincorporated organization, or governmental entity (or any department, agency
or political subdivision thereof), or any other entity.
"PLEDGE AGREEMENT" shall have the meaning specified in the
introductory paragraph hereof.
"PURCHASE DOCUMENTS" shall have the meaning specified in Section 4.6
hereof.
"REPURCHASE AGREEMENT" shall mean that certain PSA Master Repurchase
Agreement, dated as of __________, 1996, between the Borrower and Greenwich
Capital Markets, Inc, an affiliate of the Lender.
ARTICLE II
PLEDGE AND DELIVERY OF COLLATERAL;
MANAGEMENT OF COLLATERAL
2.1 Security. As security for the payment of all obligations,
liabilities and indebtedness of the Borrower to the Lender, whether now or
hereafter owing or existing, including all obligations under this Pledge
Agreement, the Note and the other Loan Documents, and for the payment,
performance and discharge of all other obligations or undertakings now or
hereafter made for the benefit of the Lender under this Pledge Agreement, the
Note, the other Loan Documents or under any other agreement, promissory note or
undertaking now existing or hereafter entered into by the Borrower with or to
the Lender pursuant to the terms hereof, or otherwise, including any guaranty or
surety obligations of the Borrower owed to the Lender, the Borrower hereby
pledges and assigns to the Lender, and grants to the Lender, a continuing lien
and first priority security interest in, all of the Borrower's right, title and
interest in, to and under: (a) the Certificates; (b) the property identified on
any Confirmation of Advance (as defined in the Note) or delivered to the Lender
pursuant to Section 2.4 herein; (c) any other property held by the Lender or any
of its affiliates, from time to time, including any property delivered to
Greenwich Capital Markets, Inc. pursuant to the Repurchase Agreement, or
securing any other obligation of the Borrower
3
<PAGE> 4
to the Lender or any of its affiliates; and (d) all proceeds, payments, income,
products and profits derived from or related to the above described property
(all of the foregoing, together with any Additional Collateral (as hereinafter
defined), are collectively referred to herein as the "COLLATERAL").
The above-described security interests shall not be rendered void by
the fact that no obligations, liabilities or indebtedness secured by the
Collateral exist as of any particular date, but shall continue in full force and
effect until the filing of termination statements or statements of partial
release signed by the Lender with respect to the Collateral. The Borrower will
pay all filing, recording, search and other expenses reasonably incurred by the
Lender with respect to perfection of the Lender's security interest under this
Pledge Agreement and the confirmation of the priority of the Lender's security
interest in the Collateral.
2.2 Delivery of Collateral. Delivery of Collateral to the Lender or its
agent under this Pledge Agreement shall be made in the following manner: (i) in
the case of cash proceeds on the Collateral, by wire transfer of immediately
available funds to the Lender; (ii) in the case of certificated securities,
including the Certificates, by physical delivery of the certificates evidencing
such Collateral to the Lender or its designee, whenever possible in the name of
the Lender, and in all other instances, in suitable form for delivery and
transfer, accompanied by duly executed instruments of transfer or assignment in
blank or such other documentation as may be necessary to effect transfer to the
Lender whereupon the Lender may take such steps as it deems necessary to effect
the recordation or re-registration of such Collateral in its name; and (iii) in
the case of any other Collateral (such Collateral to be subject to the written
approval of the Lender, which approval may be withheld in the sole discretion of
the Lender), in such manner as the Lender shall agree to in writing. All
Collateral shall be delivered free and clear of all liens and security interests
other than the lien and security interest created in favor of the Lender under
this Pledge Agreement.
2.3 Initial Collateral. On any day that an Advance is funded, the
Borrower shall make Delivery to the Lender of Collateral satisfactory to the
Lender in an amount so that the Current Market Value of the Collateral
(determined as of the close of business on the Business Day immediately
preceding such Delivery) is at least equal to the Collateral Requirement.
2.4 Additional Collateral. If the Lender notifies the Borrower that the
Current Market Value of the Collateral at the close of business on any Business
Day is below the Collateral Requirement, the Borrower shall, on the next
Business Day, either: (a) prepay such Advances (together with interest thereon)
in part or in whole; or (b) make Delivery to the Lender of additional Collateral
("ADDITIONAL COLLATERAL") in the form satisfactory to the Lender, such that the
aggregate Current Market Value of the Collateral (including the Additional
Collateral) (determined as of the Business Day prior to such Delivery) is not
less than the Collateral Requirement.
2.5 Payments on Collateral. Each of the parties hereto expressly
acknowledge and agree that any and all distributions received by the Borrower in
respect of the Collateral will be required to be remitted directly to the Lender
until the Lender notifies the Borrower in writing that all Advances have been
repaid in full and this Pledge Agreement, the Note and each of the Loan
Documents has terminated.
4
<PAGE> 5
2.6 Application of Collections. The Lender will apply all funds
received with respect to the Collateral in accordance with Article III of the
Note.
2.7 Setoff. If an Event of Default of Borrower shall have occurred and
be continuing, the Lender is hereby authorized at any time and from time to
time, to the fullest extent permitted by law, to set-off and apply any and all
deposits and any and all indebtedness or other amounts at any time owing by the
Lender to or for the credit or the account of the Borrower against any and all
of the obligations of the Borrower now or hereafter existing under this Pledge
Agreement or any other Loan Documents held by the Lender, irrespective of
whether or not the Lender shall have made any demand under this Agreement or
such other Loan Document and although such obligations may be unmatured. The
Lender agrees to notify the Borrower promptly after any such set-off and
application made by the Lender; provided that the failure to give such notice
shall not affect the validity or effectiveness of any such set-off. The rights
of the Lender under this Section are in addition to other rights and remedies
(including other rights of setoff) which the Lender may have.
2.8 Rights in the Collateral. The Borrower shall not have the right to
modify, amend or waive any terms or conditions of the Collateral, or any rights
or interest therein, without the Lender's prior written consent. The Lender (if
it has not previously done so) may take such steps as it deems necessary to
effect the recordation or re-registration in its name of any Collateral. Lender
may repledge and rehypothecate the Collateral, on such terms as Lender deems
appropriate in its sole discretion.
2.9 Secured Party. This Pledge Agreement shall constitute a security
agreement, and the Lender shall have all of the rights in the Collateral of a
secured party, under Articles 8 and 9 of the Uniform Commercial Code as enacted
in the State of New York.
ARTICLE III
FURTHER ASSURANCES
The Borrower shall at all times and at its own expense take any and all
necessary actions, including, without limitation, making, executing, delivering,
recording, registering, or filing all such financing statements, continuation
statements, other instruments and documents, acts, deeds, conveyances, pledges,
assignments and transfers, or cause the same to be taken, as may be reasonably
requested by the Lender to assure it with respect to its first priority
perfected security interest in the Collateral granted under this Pledge
Agreement, and in order to fully effect the purposes of this Pledge Agreement,
and the Borrower agrees not to take any actions or suffer to exist any
conditions that could have an adverse effect on the Lender's rights or
privileges (including, without limitation, the security interest in the
Collateral) granted hereunder.
5
<PAGE> 6
ARTICLE IV
COVENANTS
4.1 No Liens. Except as permitted pursuant to a release by the Lender
pursuant to Section 2.9 hereof, the Borrower shall not, without the prior
written consent of the Lender, in any manner transfer, assign or further
encumber or permit the encumbrance of the Borrower's interest in the Collateral.
4.2 Delivery of Collateral. The Borrower shall promptly deliver to the
Lender if and when received by the Borrower any document or instrument
evidencing the Collateral in its possession or control not previously delivered
to the Lender.
4.3 Notices. The Borrower covenants that it shall at all times give the
Lender prompt written notice of any material adverse change in the business,
operations, properties, condition (financial or otherwise) or prospects of the
Borrower or any event that with the passage of time, the giving of notice or
both could constitute an Event of Default of Borrower.
4.4 Net Worth. The Borrower shall at all times during the term of this
Pledge Agreement maintain a "NET WORTH" (i.e., the excess of total consolidated
assets over total consolidated liabilities determined in accordance with GAAP)
equal to the greater of (a) $35,000,000.00 and (b) on any date following the
Borrower's fiscal year-end 1997, 80% of the Net Worth (as determined above) of
the Borrower as the end of the Borrower's immediately preceding fiscal year.
4.5 Debt-to-Net Worth Ratio: The Borrower shall at all times during the
term of this Pledge Agreement maintain a debt-to-Net Worth ratio, calculated in
accordance with GAAP (ratio of outstanding indebtedness (including indebtedness
hereunder and including, without duplication, obligations under guarantees of
indebtedness, but excluding indebtedness under any warehouse loan agreements) to
Net Worth) of not more than 2.5:1.
4.6 Purchase Documents. The Borrower shall at all times during the term
of this Pledge Agreement comply with all of the affirmative covenants and
negative covenants contained in the Loan Documents, the "Closing Documents" and
the "Loan Documents" (as each such term is defined in the Purchase Agreement,
collectively, the "PURCHASE DOCUMENTS").
ARTICLE V
EVENTS OF DEFAULT
5.1 Borrower. Any of the following events shall constitute an "EVENT OF
DEFAULT OF BORROWER":
(a) The Borrower shall fail to pay when due any payment of: (i)
principal or interest due under the Note in accordance with the terms thereof,
and such failure continues for a period of one (1) Business Day after the date
such payment is due and the Borrower has
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received written notice of such non-payment; or (ii) any other amounts due to
the Lender hereunder or under the Note and such failure continues for a period
of five (5) Business Days after the date such payment is due and the Borrower
has received written notice of such non-payment; or
(b) The Borrower shall without the prior written approval of the Lender
assign, transfer, encumber or convey, prior to the release of the same from the
security interest created under the Loan Documents, any or all of its rights,
title or interest in or to any item of Collateral or the proceeds thereof; the
Borrower shall attempt to do any of the foregoing; or there shall otherwise
occur any loss of or impairment to the first priority perfected status of the
security interest created under the Loan Documents and the incidents thereof; or
(c) Other than with respect to any failure to pay any amounts when due
hereunder, the Borrower shall fail to perform or to observe any other covenant
or agreement contained herein or in the other Loan Documents, and such failure
continues for a period of 30 days after written notice thereof has been given to
the Borrower by the Lender or the Borrower otherwise has knowledge thereof; or
(d) The Borrower shall default in respect of: (i) any payment
obligation under any loan from Lender or any subsidiary of Lender or any
obligation to pay for securities delivered to Borrower by Lender or a
subsidiary; (ii) the Borrower shall fail to pay any money due under any other
agreement, note, indenture or instrument evidencing, securing, guaranteeing or
otherwise relating to indebtedness of the Borrower for borrowed money, which
failure to pay constitutes an event of default under any such agreement or
instrument or constitutes a default and such default shall continue beyond any
applicable grace periods therein specified or the Borrower shall default in the
observance or performance of any other covenant or condition in any such
agreement or instrument, which default has not been waived by the creditor or
other applicable party thereunder, and such default shall continue beyond any
applicable grace periods therein specified; (iii) any other event shall occur or
condition shall exist if the effect of such event or condition is to accelerate,
or permit the acceleration of, the maturity of such indebtedness; or (iv) any
such indebtedness shall be declared due and payable prior to the stated maturity
thereof; other than, in the case of items (ii) thereof (iv), indebtedness with
respect to which the failure to pay would not, individually or in the aggregate,
be expected to have a material adverse effect on the financial condition,
operations, business or prospects of the Borrower; or
(e) Any Governmental Authority shall take any action, or any other
event shall occur, with respect to the Borrower which has a material adverse
effect on the condition (financial or otherwise) of the Borrower or on the
ability of the Borrower to perform its obligations under any of the Loan
Documents; or
(f) The Borrower shall: (i) become insolvent; (ii) be dissolved; (iii)
fail generally to pay its debts as such debts become due; (iv) commence a
voluntary case under federal bankruptcy, insolvency or other similar law; (v)
consent to the appointment of or taking of possession by a receiver, liquidator,
assignee, trustee, custodian, or sequestrator (or other similar official) of the
Borrower or of any substantial part of its property; (vi) make an
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<PAGE> 8
assignment for the benefit of creditors; or (vii) take any action intended or
likely to result in any event described in the foregoing clauses (i) through
(vi); or
(g) There shall be filed or entered in respect of the Borrower a
petition, decree or order for relief by a court having jurisdiction in the
premises in an involuntary case under the federal bankruptcy laws, as now or
hereafter constituted, or any other applicable federal, state or foreign
bankruptcy, insolvency or other similar law, or appointing a receiver,
liquidator, assignee, custodian, trustee or sequestrator (or other similar
official) of the Borrower or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and any such petition,
decree or order shall continue undismissed, unstayed and in effect for a period
of 90 days; or
(h) An "Event of Default" (as defined in Article 14 of the Purchase
Agreement) shall have occurred; or
(i) The Lender, in its good faith judgment, has reasonable cause to
believe that there has been a material adverse change in the Collateral or in
the Lender's rights under any Loan Document, the Note or the Purchase Documents
or a material subsidiary adverse change in the condition (financial or
otherwise) of the Borrower; or
(j) On any date of determination, the aggregate amount of all Advances
outstanding plus the aggregate Purchase Price (as defined in the Repurchase
Agreement) of all Purchased Securities held by Greenwich Capital Markets, Inc.
on such date shall exceed the Maximum Commitment Amount (as defined in the
Note).
ARTICLE VI
REMEDIES
6.1 Remedies. If an Event of Default of Borrower shall have occurred
and be continuing, then the Lender may, at its election, to the fullest extent
permitted by applicable law:
(a) By notice to the Borrower declare the entire unpaid principal
balance of the Note, together with interest thereon and all other amounts owing
under the Loan Documents immediately due and payable, whereupon the same shall
become immediately due and payable, and the Lender may exercise all of its
remedies under the Loan Documents with respect to the Collateral or otherwise;
provided that if an Event of Default of Borrower specified in paragraph (f) or
(g) of Section 5.1 of this Pledge Agreement shall occur, the entire unpaid
principal balance of the Note, together with interest thereon and all other
amounts owing under the Loan Documents, shall immediately and automatically
become due and payable without notice or presentment;
(b) Proceed to exercise any other rights or remedies it may have
hereunder or under the Note;
(c) Pursue any rights or remedies it may have at law, equity or
otherwise;
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(d) Cancel or otherwise terminate this Pledge Agreement, the Note and
any other agreement with the Borrower without prior notice to the Borrower (and
the Borrower will be liable to the Lender and its subsidiaries for any resulting
loss, costs and expenses), and the Lender and its subsidiaries may: (i) set off
any obligation to the Borrower hereunder or thereunder against any obligation of
the Borrower to the Lender or its subsidiaries hereunder or thereunder; and (ii)
realize upon property securing any obligation to it or its subsidiaries
hereunder or thereunder;
(e) Upon acceleration of the Note pursuant to the Loan Documents,
exercise all of the rights and remedies available to secured parties under any
applicable Uniform Commercial Code provisions, including, but not limited to,
the Lender's right to: (i) sell any or all of the Collateral in a commercially
reasonable manner and applying the proceeds thereof against any amounts owed to
the Lender by the Borrower; or (ii) in lieu of selling the Collateral, credit
the Current Market Value of the Collateral as determined in a commercially
reasonable manner against any amounts owed by the Borrower to the Lender;
provided, however, that the Borrower shall remain liable for any deficiency and
shall pay interest on such deficiency as prescribed in the Note (the Borrower
agreeing that, to the extent that applicable law requires the giving of notice
by the Lender to the Borrower of any such disposition, the minimum time required
by such law (or if no minimum time is specified, one Business Day) shall
constitute reasonable notice); provided further that, after the application of
all proceeds to or credits against the amounts owed to the Lender hereunder as
provided in this Section 6.1 (e), any surplus thereafter shall be accounted to
the Borrower in accordance with any applicable Uniform Commercial Code
provisions; and
(f) transfer or assign the Loan Documents to any Person without the
prior written consent of the Borrower.
6.2 Cost and Expenses on Default. If an Event of Default of Borrower
shall have occurred, the Lender shall be entitled to collect, in addition to
principal, interest and delinquency charges hereunder, all costs of collection,
including without limitation, reasonable attorneys' fees and disbursements,
incurred in connection with the protection or realization of collateral or in
connection with any of the Lender's collection efforts, whether or not suit on
the Note or any foreclosure proceeding is filed, and all such costs and expenses
shall be payable on demand and until paid shall also be secured by the
Collateral and other Loan Documents and by all other collateral held by the
Lender as security for the Borrower's obligations to the Lender.
ARTICLE VII
CONTINUING SECURITY INTEREST
The Borrower shall not assign or otherwise transfer this Pledge
Agreement or any interest herein without the Lender's prior written consent.
This Pledge Agreement shall create a continuing security interest in the
Collateral and shall: (a) remain in full force and effect until the final
payment in full of all amounts payable under the Note and the other Loan
Documents; (b) bind the Borrower, its successors and permitted assigns; and (c)
inure to the benefit of the Lender and its successors, transferees and assigns.
The Lender may transfer the Loan Documents to any of its successors or assigns,
by notice to the Borrower, and such other person or entity shall thereupon be
vested with all the benefits in
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respect thereof granted to the Lender herein or otherwise; provided that such
successor or assign has agreed in a writing, which shall be delivered to the
Borrower, to assume all of the obligations of the Lender under the Loan
Documents.
ARTICLE VIII
REPRESENTATIONS AND WARRANTIES
8.1 Representations and Warranties. The Borrower represents and
warrants to the Lender continuously throughout the term of the Loan, as defined
in the Note, that:
(a) It is a corporation duly organized, validly existing and in good
standing under the laws of the state of its incorporation, and is duly qualified
to do business and in good standing in each jurisdiction where the conduct of
its business or the ownership, lease or operation of its property requires such
qualification, except where the failure to be so qualified could not have
material adverse effect on the business, operations, properties, condition
(financial or otherwise) or prospects of the Borrower or impair the ability of
the Borrower to perform its obligations under any Loan Document. The Borrower
has all requisite power and authority to own and operate its property, to lease
the property it operates as lessee and to carry on its business as now being or
as proposed to be conducted;
(b) It has all requisite power and authority (including full corporate
power and authority) to execute and deliver the Loan Documents, and to perform
its obligations under each Loan Document (other than the Certificates) and has
taken or caused to be taken all necessary corporate action to authorize such
execution, delivery and performance. Each Loan Document (other than the
Certificates) constitutes the legal, valid and binding obligation of the
Borrower and is enforceable against the Borrower in accordance with its
respective terms and conditions, except as the enforceability thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement of creditors' rights generally, and
by general equitable principles regardless of whether enforcement is sought in a
proceeding in equity or at law;
(c) Neither the execution and delivery of the Loan Documents, nor the
consummation of the transactions contemplated thereby, nor compliance with the
provisions thereof, will: (i) violate any constitution, statute, regulation,
rule, injunction, judgment, order, decree, ruling, charge, or other restriction
of any government, governmental agency, or court to which the Borrower is
subject or any provision of its charter or bylaws; or (ii) conflict with, result
in a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify, or cancel, or
require any notice (other with respect to any notice contemplated hereunder with
respect to the Collateral to any trustee under any pooling and servicing
agreement, indenture or any similar agreement pursuant to which the Certificates
were issued) under any agreement, contract, lease, license, instrument, or other
arrangement to which the Borrower is a party or by which it is bound or to which
any of its assets is subject;
(d) All approvals, authorizations, consents, orders or other actions or
registrations with or notices to any person or entity required to be obtained,
made or given by the Borrower
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in connection with the execution, delivery and performance of the Loan Documents
and the consummation of the transactions contemplated thereby have been duly and
properly obtained, made or given by the Borrower and are in full force and
effect;
(e) There are no pending or, to the Borrower's knowledge, threatened
actions, suits or other proceedings by or against the Borrower before any court,
arbitrator or other Governmental Authority that challenge or affect the
legality, validity or enforceability of any Loan Document or the transactions
contemplated thereby, or that, whether individually or in the aggregate, could
have a material adverse effect on the business, operations, properties,
condition (financial or otherwise) prospects of the Borrower or impair the
ability of the Borrower to perform its obligations under any Loan Document;
(f) The Borrower has filed or caused to be filed, or Mego Financial
Corp., on behalf or the Borrower, has filed all tax returns (federal, state and
local) (or requests for extension which are routinely granted) which are
required to be filed and has paid all taxes including those which have become
due pursuant to such returns or pursuant to any assessments made against it or
any of its properties, as the case may be, and all other material taxes or other
charges imposed on it or any of its properties by any Governmental Authority;
and no tax liens have been filed;
(g) No proceeds of the Advances will be used, directly or indirectly,
by the Borrower for the purpose of purchasing or carrying any Margin Stock or
for the purpose of reducing or retiring any Indebtedness which was originally
incurred to purchase or carry Margin Stock or for any other purpose which might
cause the Advances to be a "purpose credit" within the meaning of Regulation G
of the Board of Governors of the Federal Reserve System;
(h) The Borrower has obtained any and all permits, licenses, approvals
and consents of any Governmental Authority as may be required to own, purchase,
sell or otherwise dispose of the Collateral, as the case may be, and to conduct
or to transact its business or own, lease or operate its properties and is in
material compliance with all applicable requirements of law;
(i) All financial statements of the Borrower delivered to the Lender
fully and accurately present the financial position of the Borrower, as of the
respective dates thereof in accordance with GAAP. Since November 30, 1996, there
has been no material adverse change in the business, operations, properties,
condition (financial or otherwise) or prospects of the Borrower;
(j) It is, not directly or indirectly, controlled by any Person which
is, an "investment company" within the meaning of the Investment Company Act of
1940, as amended; the Borrower is not subject to any regulation under any
federal or state statute or regulation which limits its ability to incur
Indebtedness;
(k) The lien of this Pledge Agreement constitutes a first priority
perfected and enforceable security interest in the Collateral in favor of the
Lender; on each occasion on which the Borrower makes a Delivery of Collateral to
the Lender, the Borrower will be the sole owner of that Collateral and will have
the right to receive all payments (in accordance
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with the terms of any pooling and servicing agreement, indenture or any similar
agreement pursuant to which the Certificates were issued) on the Collateral, in
each case free and clear of all liens and security interests other than the lien
of this Pledge Agreement;
(l) Except for financing statements contemplated by this Pledge
Agreement, there are no financing statements or other actions required under the
Uniform Commercial Code or similar law of any state or jurisdiction required in
connection with the grants to the Lender set forth in this Pledge Agreement;
(m) Other than as disclosed to the Lender on Schedule 1 attached
hereto, no representation or warranty made by or on behalf of Borrower contained
in any Loan Document and no information (written or oral), certificate,
financial statement or report furnished or to be furnished by or on behalf of
the Borrower thereunder or in connection with the transactions contemplated
thereby, contains or will contain an untrue statement of a material fact, or,
omits or will omit to state any material fact (including without limitation,
whether either Borrower or any of its respective officers or directors (past or
present) is (or during the last five (5) years has been) under civil or criminal
investigation by any Governmental Authority or is under indictment by any
Governmental Authority) necessary to make the statements herein or therein
contained, in light of the circumstances in which made, not misleading;
(n) It does not have any reason to believe that it will not be able to
perform in all material respects all covenants and agreements to be performed by
it under this Agreement and each of the other Loan Documents; and
(o) Each of the representations and warranties of the Borrower
contained in the other Loan Documents and the Purchase Documents is true and
correct.
ARTICLE IX
THE LENDER MAY PERFORM
At any time that an Event of Default of Borrower has occurred and is
continuing, the Borrower hereby appoints any officer or agent of the Lender as
the Borrower's true and lawful attorney-in-fact with full authority in the place
and stead of the Borrower and in the name of the Lender or otherwise, from time
to time in the Lender's discretion, to take any action and to execute any
agreements, documents and instruments which the Lender may deem necessary or
advisable to accomplish the purposes of this Pledge Agreement. The powers
conferred on the Lender hereunder are solely to protect its interest in the
Collateral and shall not impose any duty upon the Lender to exercise any such
powers.
ARTICLE X
CONDITIONS PRECEDENT
10.1 Conditions Precedent to Closing. The obligations of Lender to
enter into this Pledge Agreement and the Note and to make any Advance thereunder
are subject to the following conditions:
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(a) The receipt by Lender, concurrently with the signing of this
Pledge Agreement, in form and substance satisfactory to Lender, each of the
following:
(i) Evidence of the authority of the persons executing this Pledge
Agreement, the Note and the other Loan Documents, together with
specimen signatures of such persons; and
(ii) A certified copy of the Borrower's Certificate of Incorporation
and By-laws and a good standing certificate from the State of
Delaware dated as of, or reasonably prior to, the date hereof;
and
(iii) Certified copies of all necessary resolutions of the Board of
Directors of the Borrower authorizing the execution and delivery
and performance under this Pledge Agreement, the Note and the
other Loan Documents; and
(iv) The duly executed, original Note; and
(v) A certificate, as of the date of signing of the Pledge Agreement,
by the President, a Vice President or the Treasurer of the
Borrower certifying that the representations and warranties
contained in Article VIII hereof are true and correct, that
Borrower is in compliance with the covenants set forth in Article
IV and that no Event of Default, and no event which with notice
or lapse of time or both would become an Event of Default, has
occurred and is continuing; and
(vi) The following opinions of counsel in form and substance
reasonably satisfactory to Lender's counsel:
(A) Standard corporate opinions of Borrower regarding due
authorization, execution, consents, material litigation
and noncontravention;
(B) Enforceablility of this Pledge Agreement, the Note and
the other Loan Documents;
(C) Lien, priority and perfection opinions relating to the
pledge of Collateral from the Borrower to Lender; and
(D) Such other opinions as Lender's counsel shall reasonably
request; and
(b) Such other documents, certificates or financial or other
information as Lender may reasonably request.
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10.2 Conditions Precedent to Each Advance. In addition to each of the
conditions precedent set forth in Section 10.1 being met, the obligations of
Lender to extend each Advance hereunder shall be subject to the following
conditions:
(a) There shall not have occurred and be continuing any Event of
Default and Borrower shall be in full compliance with all of its covenants,
representations and warranties and obligations under this Pledge Agreement; and
(b) Lender shall have received a Notice of Borrowing (as defined in
the Note); and
(c) Taking into account the amount of the requested Advance, the
Current Market Value of the Collateral shall be equal to, or in excess of, the
Collateral Requirement for all Advances; and
(d) The Certificates for the Advance requested and any outstanding
Advances, together with such documents, instruments and certificates
contemplated by Section 2.2 and 2.3 hereof, shall have been delivered to Lender
or its designee.
(e) Financing statements on Form UCC-1, in form and substance
reasonably acceptable to the Lender, naming Borrower as "debtor" and Lender as
"secured party" and describing the Collateral as "collateral" thereunder, to be
filed in each jurisdiction in which it is necessary to file to perfect a
security interest in "general intangibles" (as defined in the UCC).
ARTICLE XI
MISCELLANEOUS
11.1 Successors and Assigns: No Third Party Beneficiaries. This Pledge
Agreement shall be binding upon and inure to the benefit of, the parties hereto
and their respective permitted successors and assigns. This Pledge Agreement
shall not confer any rights, obligations, remedies or liabilities upon any
Person other than the parties hereto and their permitted successors and assigns.
11.2 Governing Law. THIS PLEDGE AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO THE CONFLICTS OF LAW PRINCIPLES THEREOF.
11.3 Notices. All notices, requests, demands, claims and other
communications under this Pledge Agreement shall be in writing (unless otherwise
specified herein) and shall be deemed duly given if (and then two Business Days
after) it is sent by registered or certified mail, return receipt requested,
postage prepaid, and addressed to the intended recipient as set forth below:
IF TO BORROWER:
Mego Mortgage Corporation
1000 Parkwood Circle, Suite 500
Atlanta, Georgia 30339
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Attention: Jeff Moore
Telephone: 1-800-550-6346
Telecopy: 1-800-694-6346
IF TO THE LENDER:
Greenwich Capital Financial Products, Inc.
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: William Gallagher
Telephone: (203) 625-2700
Telecopy: (203) 629-3558
With a copy to the General Counsel
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other party
notice in the manner herein set forth.
11.4 Amendments; Waivers. This Pledge Agreement may not be amended,
modified or supplemented except in writing signed by each of the parties hereto.
Each party may, by written notice to the other, extend the time for or waive the
performance of any of the obligations of such other hereunder. The waiver by any
party hereto of a breach of this Pledge Agreement shall not operate or be
construed as a waiver of any other or subsequent breach. No delay, omission or
act by a party shall be deemed a waiver of such party's rights, powers or
remedies. No course of dealing between the parties hereto shall operate as a
waiver of any provision hereof.
11.5 Payment of Expenses; Indemnity. The Borrower shall:
(a) pay or reimburse the Lender on demand for all of its out-of-pocket
costs and expenses incurred in connection with the development, preparation, and
execution of, and any amendment, modification or supplement to, or any waiver
under, any Loan Document and any other document prepared in connection herewith
or therewith, and the consumption of the transactions contemplated thereby,
including without limitation the reasonable fees and disbursements of counsel to
the Lender;
(b) pay on demand all reasonable costs and expenses of the Lender,
including without limitation, the reasonable fees and disbursements of counsel
to the Lender, in connection with the occurrence or continuance of Event of
Default and the enforcement, collection, protection or preservation (whether
through negotiation, legal proceedings or otherwise) of this Agreement or any
other Loan Document, the Collateral, any obligation or any right, remedy, power
or privilege of the Lender hereunder or thereunder;
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(c) pay and hold the Lender harmless from and against any and all
present and future stamp, excise, recording or other similar taxes or fees
payable in connection with the execution, delivery, recording and filing of any
Loan Document and hold the Lender harmless from and against any and all
liabilities with respect to or resulting from ant delay or omission to pay such
taxes or fees; and
(d) indemnify and hold harmless the Lender and its directors,
officers, employees and agents and hold each of them harmless from and against,
any and all liability, losses, damages, penalties, actions, judgments, suits,
claim, costs, expenses and disbursements, including without limitation the
reasonable fees and disbursement of counsel to the Lender and such other
parties, incurred by any of them in connection with, arising out of or in any
way relating to any investigation, claim, litigation or other proceeding,
pending or threatened (whether or not any of them is designated a party
thereto), in connection with, arising out of or in any way related to this
Agreement or any other Document or any of the transactions contemplated herein
or therein or any use of the proceeds of any Loan by the Borrower; provided that
the Lender shall not be entitled to any indemnification for any of the foregoing
resulting from its gross negligence or willful misconduct as determined by a
court of competent jurisdiction.
If, and to the extent that, the indemnity obligations of the Borrower hereunder
may be unenforceable for any reason, the Borrower hereby agrees to make the
maximum contribution to the payment and satisfaction of each of such indemnity
obligations which is permissible under applicable law.
11.6 Limited Liability. No recourse under any Loan Document shall be
had against, and no personal liability shall attach to, any officer, employee,
director, affiliate or shareholder of any party hereto, as such, by the
enforcement of any assessment or by any legal or equitable proceeding, by virtue
of any statute or otherwise in respect of any of the Loan Documents, it being
expressly agreed and understood that each Loan Document is solely a corporate
obligation of each party hereto, and that any and all personal liability, either
at common law or in equity, or by statute or constitution, of every such
officer, employee, director, affiliate or shareholder for breaches by any party
hereto of any obligation under any Loan Document is hereby expressly waived as a
condition of and in consideration for the execution and delivery of this Pledge
Agreement.
11.7 Counterparts. This Pledge Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
11.8 Severability; Interpretation. Any term or provision of this Pledge
Agreement that is invalid, illegal or unenforceable. in any situation in any
jurisdiction shall not affect the validity, legality or enforceability of the
remaining terms and provisions hereof or the validity, legality or
enforceability of the offending term or provision in any other situation or in
any other jurisdiction.
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IN WITNESS WHEREOF, the parties hereto have caused this Pledge
Agreement to be duly executed as of the date first above written.
GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC.
By:
-------------------------------
Name:
Title:
MEGO MORTGAGE CORPORATION
By:
-------------------------------
Name:
Title:
<PAGE> 1
Exhibit 10.58
PROMISSORY NOTE
April 17, 1997
FOR VALUE RECEIVED, MEGO MORTGAGE CORPORATION, a Delaware corporation
(the "BORROWER"), hereby unconditionally promises to pay to the order of
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware corporation (the
"LENDER"), or any subsequent holder of this Promissory Note (this "NOTE"): (a)
the principal amount of ELEVEN MILLION DOLLARS ($11,000,000.00), or if less the
outstanding principal amount of all Advances (as hereinafter defined), and (b)
interest at the applicable Interest Rate (as defined below) from the date hereof
on the unpaid principal amount of such Advances from time to time outstanding.
All such payment obligations (whether in respect of principal, interest or other
payment obligations of the Borrower hereunder or under the Pledge Agreement (as
defined below)) shall be made in lawful money of the United States of America
and immediately available funds, on the dates and in the amounts specified in,
or determined in accordance with, this Note and the Pledge and Security
Agreement, dated as of the date hereof (as amended, supplemented or otherwise
modified from time to time, the "PLEDGE AGREEMENT"). Capitalized terms used and
not otherwise defined herein shall have the respective meanings set forth in the
Pledge Agreement or the Repurchase Agreement (as defined in the Pledge
Agreement), as applicable, including by way of reference to other documents.
The holder of this Note is authorized to record the date and amount of
each Advance, the interest rate on each such Advance, and the date and amount of
each payment and repayment of principal thereof, on the schedule annexed hereto
and forming a part hereof. Any such recordation shall constitute prima facie
evidence of the accuracy of the information so recorded; provided that the
failure of the holder hereof to make such recordation (or any error in such
recordation) shall not affect the obligations of the Borrower hereunder or under
the Pledge Agreement. The Note holder shall also evidence Advances by preparing
a confirmation (a "CONFIRMATION OF Advance"), which Confirmation of Advance
shall be delivered to the Borrower, that lists the amount of the Advance, the
Funding Date (as defined below) of the Advance, the Maturity Date (as defined
below) of the Advance, the Collateral (as defined below) to be delivered by
Borrower for such Advance, and the Current Market Value of the Collateral.
This Note is secured by the securities and other assets and interests
in property identified as collateral (the "COLLATERAL") in a Confirmation of
Advance and pledged to the Lender pursuant to the Pledge Agreement.
ARTICLE II
ADVANCES
A. Subject to the terms and conditions of this Note and the Pledge
Agreement, the Lender shall at the request of the Borrower lend to the Borrower,
from time to time, an aggregate maximum principal amount outstanding at any time
of $11,000,000.00 (the "MAXIMUM COMMITMENT"), to be made in one or more advances
(each, an "ADVANCE" and, collectively, "ADVANCES"; all such Advances, the
"LOAN"); provided, however, that the Maximum Commitment shall be reduced by the
aggregate Purchase Price (as defined in the
<PAGE> 2
Repurchase Agreement) of all Purchased Securities (as defined in the Repurchase
Agreement) held by Greenwich Capital Markets, Inc. on any date of determination
(the Maximum Commitment, as so reduced, the "COMMITMENT AMOUNT"). Each Advance
shall be made on a date (any such date, a "BUSINESS DAY") other than a Saturday,
Sunday or other day on which banking institutions in New York, New York,
Atlanta, Georgia or Greenwich, Connecticut are authorized or required by law or
executive order to be closed or on which the New York Stock Exchange is closed
prior to the Final Maturity Date (as defined below) (each such date on which an
Advance is made, a "FUNDING DATE"); provided that the following conditions
precedent shall have been satisfied:
(i) the representations and warranties of the Borrower in
Article VIII of the Pledge Agreement shall be true and correct on and
as of such Funding Date as if made on and as of such date; and
(ii) no Event of Default of Borrower (or event which, but for
the giving of notice, the lapse of time, or both, would constitute an
Event of Default of Borrower) shall have occurred and be continuing or
would exist after the making of the Advance on such Funding Date; and
(iii) all conditions precedent contained in Article X of the
Pledge Agreement shall have been satisfied; and
(iv) the Lender shall have received:
(x) a timely Notice of Borrowing as provided in
Paragraph B of this Article II; and
(y) in connection with the first Advance, a fully
executed original copy of the Pledge Agreement and all other Loan
Documents and evidence of the filing of UCC-1 financing statements
satisfactory to the Lender; and
(v) after the making of such Advance, the outstanding
principal amount of the aggregate of all Advances will not exceed the
Commitment Amount and will not result in the aggregate Current Market
Value of the Collateral being less than the Collateral Requirement.
B. If the Borrower wishes to receive an Advance, then the Borrower
shall give the Lender notice (a "NOTICE OF BORROWING") by no later than 2:00
p.m. two (2) Business Days prior to a Funding Date of its request for an
Advance, specifying the amount of the Advance to be advanced on such Funding
Date and the Maturity Date for such Advance. Each Advance shall mature on the
related maturity date specified for such Advance as requested by the Borrower
and as agreed to by the Lender at the time of the making of a request for an
Advance (the "MATURITY DATE"); provided that the Maturity Date shall, for any
Advance, be no later than the date which is 365 days after the date on which the
initial Advance is made hereunder (the "FINAL MATURITY DATE"). Each Advance
shall bear interest from the related Funding Date to but excluding the Maturity
Date at a rate per annum equal to LIBOR plus 3.50% and thereafter as provided in
Paragraph C of this Article II (the "INTEREST RATE"). "LIBOR" shall mean the
rate appearing at page 3750 of the Telerate Screen as one-month LIBOR and, if
such rate shall not be so quoted, the rate per annum at which deposits in U.S.
dollars for a period of one month are offered by Morgan Guaranty Trust Company
of New York (or such other prime bank in the London interbank market as the
Lender shall designate) to prime banks in the London interbank market at
approximately 11:00 a.m. (London Time) on the first Business Day of the calendar
month in which the related Funding Date is to occur (for purposes of determining
LIBOR only, a "BUSINESS DAY" shall mean a any day on which dealings between
banks may be carried on in the London interbank market). Interest shall be
calculated on the basis of a 360-day year comprised of twelve 30-day months.
2
<PAGE> 3
C. Interest accrued on each Advance is payable monthly in arrears on
the first Business Day of each calendar month, commencing on the first Business
Day of the calendar month immediately following the Funding Date related to such
Advance. If interest shall be payable hereunder on a day other than a Business
Day, the date for such payment shall be extended to the next succeeding Business
Day and, with respect to payments of principal and interest thereon shall be
payable at the then applicable rate during such extension.
D. If at any time the then outstanding Collateral Requirement exceeds
the Current Market Value of all Collateral, the Borrower shall no later than one
(1) Business Day after receipt of notice of such excess, either immediately
prepay such Advances (together with interest thereon) in part or in whole, or
pledge Additional Collateral (as defined in the Pledge Agreement) to the Lender,
such that, after the pledge of such Additional Collateral, the Collateral
Requirement does not exceed the Current Market Value of all Collateral.
ARTICLE III
GENERAL CONDITIONS
A. METHOD OF PAYMENT. All payments under this Note are payable at the
offices of the Lender at 600 Steamboat Road, Greenwich, CT 06830, or at such
other locations as the Lender shall notify the Borrower in writing. Payments on
this Note shall be made by wire transfer of immediately available funds to an
account designated by the Lender to the Borrower in writing.
B. APPLICATION OF PAYMENTS RECEIVED. Except as otherwise provided in
this Note, all payments received by the Lender on this Note shall be applied by
the Lender as follows:
FIRST, to the payment of delinquency charges, if any, plus expenses
(as described in more detail in the Pledge Agreement);
SECOND, to accrued and unpaid interest then due and owing; and
THIRD, to the reduction of principal of this Note.
C. PREPAYMENT. Subject to the provisions of Paragraph D of Article II
hereof, the Borrower may prepay this Note in whole or in part at any time
without penalty.
D. DELINQUENCY CHARGES. If the Borrower fails to: (a) pay any amount of
principal and/or interest on this Note for three (3) Business Days after such
payment becomes due, whether as a result of acceleration or otherwise; or (b)
repay any Advance on its related Maturity Date; then, the Borrower shall pay a
delinquency charge, in the case of (a) above, on such outstanding amount or, in
the case of (b) above, on all Advances, equal to four percent (4%) per annum in
excess of the Interest Rate (except as hereafter provided in Section G of this
Article III), computed from the date such payment is due to the date of receipt
of such payment by the Lender in good funds; provided, however, that if any such
delinquency charge is in excess of the amount permitted to be charged to the
Borrower under applicable federal or state law the Lender shall be entitled to
collect a delinquency charge at the highest rate permitted by such law. Until
any and all such delinquency charges are paid in full, the amount thereof shall
be secured by the Collateral and by any other collateral held by the Lender to
secure such indebtedness. Subject to Paragraph G of this Article III, the
Borrower agrees that any such delinquency charges shall not be deemed to be
additional interest or a penalty, but shall be deemed to be liquidated damages
because of the difficulty in computing the actual amount of damages in advance.
3
<PAGE> 4
E. ASSIGNMENT; NO WAIVER BY THE LENDER. The Borrower shall not assign
or otherwise transfer this Note or any interest herein without the Lender's
prior written consent, which consent may be given or withheld in the sole
discretion of the Lender. No failure on the part of the Lender to exercise any
right or remedy hereunder, whether before or after the occurrence of an Event of
Default of Borrower, shall constitute a waiver thereof, and no waiver of any
past default shall constitute a waiver of any future default or of any other
default. No failure to accelerate the debt evidenced hereby by reason of default
hereunder, acceptance of a past due installment, or indulgence granted from time
to time, shall be construed to be a waiver of the right to insist upon prompt
payment thereafter or to impose delinquency charges retroactively or
prospectively, or be deemed a waiver of the Lender's right of acceleration or a
waiver of any other right, or shall be construed so as to preclude the exercise
of any right which the Lender may have, whether by law, by agreement or
otherwise; and the Borrower and each endorser or guarantor hereby expressly
waives the benefit of any statute or rule of law or equity which would produce a
result contrary to or in conflict with the foregoing. The terms and provisions
of this Note may not be amended orally, but only by an agreement in writing
signed by the parties hereto.
F. WAIVER BY BORROWER. To the extent permitted by applicable law, the
Borrower and all others who may become liable for the payment of all or any part
of this Note hereby waive presentment, protest, demand and diligence, and waive
and renounce all rights to the benefits of any statute of limitations and any
moratorium, exemption and homestead now provided or which may hereafter be
provided by any federal or state statute, both as to itself personally and as to
all of its property, whether real or personal, against the enforcement and
collection of the obligations evidenced by this Note and any and all extensions,
renewals and modification hereof.
G. COMPLIANCE WITH USURY LAWS. It is the intention of the parties to
conform strictly to the usury laws, whether state or federal, that are
applicable to this Note. All agreements between the Borrower and the Lender,
whether now existing or hereafter arising and whether oral or written, are
hereby expressly limited so that in no contingency or event whatsoever, whether
by acceleration of maturity hereof or otherwise, shall the amount paid or agreed
to be paid to the Lender or collected by the Lender for the use, forbearance or
detention of the money to be loaned hereunder or otherwise, or for the payment
or performance of any covenant or obligation contained herein or in any of the
other Loan Documents exceed the maximum amount permissible under applicable
federal or state usury laws. If the performance of any provision hereof or of
any of the other Loan Documents, at the time performance of such provision shall
be due, shall involve exceeding the limit or validity prescribed by law, then
the performance shall be reduced to the limit of such validity; and if under any
circumstances the Lender shall receive an amount deemed interest by applicable
law which would exceed the highest lawful rate, any portion of such amount that
would constitute excessive interest under applicable usury laws shall be applied
to the reduction of the unpaid principal balance hereof or to other amounts
secured by the Collateral or the other Loan Documents and not to the payment of
interest, or, if such excessive interest exceeds the unpaid principal balance
hereof and such other amounts, the excess shall be deemed to have been a payment
made by mistake and shall be refunded to the Borrower or to any other Person
making such payment on the Borrower's behalf. All sums paid or agreed to be paid
to the Lender for the use, forbearance or detention of the indebtedness of
Borrower evidenced hereby and outstanding from time to time shall, to the extent
permitted by applicable law and to the extent necessary to preclude exceeding
the limit of validity prescribed by law, be amortized, pro-rated, allocated and
spread from the date of disbursement of the proceeds of this Note until payment
in full of the Note so that the actual rate of interest on account of such
indebtedness is uniform throughout the term hereof. The terms and provisions of
this Section shall control and supersede every other provision of all agreements
between the Borrower, any other Person who may become liable for the payment of
all or any part of this Note and the Lender.
4
<PAGE> 5
H. DUE DILIGENCE. In addition to any rights of the Lender under the
Pledge Agreement, the Borrower agrees to provide the Lender with the opportunity
to conduct continuing due diligence throughout the term of this Note and the
Pledge Agreement of the Borrower and its subsidiaries and affiliates, and their
respective directors, officers and employees. If the Lender at any time
discovers any new or previously existing but undiscovered event or condition
which in the Lender's sole discretion materially and adversely affects; (a) the
condition (financial or otherwise) of the Borrower or any of its subsidiaries;
or (b) the ability of the Borrower or any of its subsidiaries to fulfill its
obligations hereunder or under any Loan Document, the Lender will have no
further obligation to make any additional Advances.
I. GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS NOTE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES THEREOF. EACH OF THE PARTIES
HERETO HEREBY SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT SITTING
IN NEW YORK, NEW YORK, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS NOTE OR ANY OF THE OTHER LOAN DOCUMENTS, AND AGREES THAT ALL CLAIMS IN
RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH
COURT. EACH PARTY HERETO WAIVES ANY DEFENSE OF INCONVENIENT FORUM TO THE
MAINTENANCE OF ANY ACTION OR PROCEEDING SO BROUGHT. IN THE EVENT ANY SUCH
LITIGATION IS COMMENCED, EACH OF THE PARTIES HERETO AGREES THAT SERVICE OF
PROCESS MAY BE MADE, AND PERSONAL JURISDICTION OVER SUCH PERSON OBTAINED, BY
MAILING A COPY OF THE SUMMONS, COMPLAINT AND/OR OTHER PLEADINGS REQUIRED TO
COMMENCE SUCH LITIGATION TO SUCH PERSON.
J. ENFORCEMENT. Any enforcement action relating to this Note may be
brought by motion for summary judgment in lieu of a complaint pursuant to
Section 3213 of the New York Civil Practice Law and Rules.
IN WITNESS WHEREOF, the Borrower has caused this Note to be duly executed
as of the date first above written.
MEGO MORTGAGE CORPORATION
By:
------------------------------
Name:
Title:
5
<PAGE> 6
SCHEDULE TO PROMISSORY NOTE
<TABLE>
<CAPTION>
Schedule of Advances
--------------------
Amount of Total
Amount of Advance Principal Principal
Date ----------------- Repaid Outstanding
---- ------ -----------
<S> <C> <C> <C>
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
6
<PAGE> 7
NOTE
ENDORSEMENT NO. 1
June 13, 1996
Mego Mortgage Corporation (the "BORROWER") hereby agrees with Greenwich
Capital Inc. (the "LENDER") that the Promissory Note of the Borrower in favor of
the Lender, dated April 17, 1997 (the "NOTE"), in the maximum principal amount
of $11,000,000, to which this Note Endorsement No. 1 is attached, is hereby
amended to increase the maximum principal amount of the Note to $13,000,000.
Such Note, with no further action on the part of the Lender or the
Borrower, shall be deemed to be amended as of June 13, 1997, to increase the
maximum principal amount of the Note to $13,000,000.
This Note Endorsement No. 1 is given as a renewal, rearrangement and
extension of the obligations of the Borrower to the Lender under the Note and is
not given in substitution therefor or extinguishment thereof. The Borrower
hereby authorizes the Lender to attach this Note Endorsement No.1 to the Note.
Borrower: MEGO MORTGAGE CORPORATION
By:
---------------------------------------
Name:
Title:
Lender: GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC.
By:
---------------------------------------
Name:
Title:
<PAGE> 8
NOTE
ENDORSEMENT NO. 2
June 20, 1996
Mego Mortgage Corporation (the "BORROWER") hereby agrees with Greenwich
Capital Inc. (the "LENDER") that the Promissory Note of the Borrower in favor of
the Lender, dated April 17, 1997 (the "NOTE"), in the maximum principal amount
of $11,000,000, as amended by Endorsement No. 1, dated June 13, 1997, to which
this Note Endorsement No. 2 is attached, is hereby amended to increase the
maximum principal amount of the Note to $15,000,000.
Such Note, with no further action on the part of the Lender or the
Borrower, shall be deemed to be amended as of June 20, 1997, to increase the
maximum principal amount of the Note to $15,000,000.
This Note Endorsement No. 2 is given as a renewal, rearrangement and
extension of the obligations of the Borrower to the Lender under the Note and is
not given in substitution therefor or extinguishment thereof. The Borrower
hereby authorizes the Lender to attach this Note Endorsement No.2 to the Note.
Borrower: MEGO MORTGAGE CORPORATION
By:
---------------------------------------
Name:
Title:
Lender: GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC.
By:
---------------------------------------
Name:
Title:
<PAGE> 9
NOTE
ENDORSEMENT NO. 3
July 15, 1997
Mego Mortgage Corporation (the "BORROWER") hereby agrees with Greenwich
Capital Inc. (the "LENDER") that the Promissory Note of the Borrower in favor of
the Lender, dated April 17, 1997 (the "NOTE"), in the maximum principal amount
of $11,000,000, as amended by Endorsement No. 1, dated June 13, 1997, as further
amended by Endorsement No. 2, dated June 20, 1997, to which this Note
Endorsement No. 3 is attached, is hereby amended to increase the maximum
principal amount of the Note to $25,000,000.
Such Note, with no further action on the part of the Lender or the
Borrower, shall be deemed to be amended as of July 15, 1997, to increase the
maximum principal amount of the Note to $25,000,000.
This Note Endorsement No. 3 is given as a renewal, rearrangement and
extension of the obligations of the Borrower to the Lender under the Note and is
not given in substitution therefor or extinguishment thereof. The Borrower
hereby authorizes the Lender to attach this Note Endorsement No.3 to the Note.
Borrower: MEGO MORTGAGE CORPORATION
By:
---------------------------------------
Name:
Title:
Lender: GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC.
By:
---------------------------------------
Name:
Title:
<PAGE> 1
Exhibit 10.61
September 2, 1997
Mr. Jerome J. Cohen
1125 N.E. 125th Street, Suite 206
North Miami, Florida 33161
Dear Mr. Cohen:
The purpose of this letter is to acknowledge, and set forth
the terms of, our agreement with regard to your continued service on the Board
of Directors (the "Board") of Mego Mortgage Corporation (the "Company") as
Chairman and your retention by the Company as a consultant (whether or not you
continue as Chairman of the Board or otherwise continue as a director of the
Company).
1. This Agreement shall be for a term (the "Term") commencing on September
1, 1997 and terminating upon the earlier of: (i) December 31, 2002, (ii) your
death, (iii) your Disability (within the meaning of Section 72(m)(7) of the
Internal Revenue Code of 1986, as amended (the "Code")), or (iv) the date of
termination of your consultancy by the Company for "Cause" in accordance with
Section 7 herein.
2. During the period of the Term which you are serving as Chairman of the
Board, you shall receive an annual Chairman's fee of at least Thirty Thousand
Dollars ($30,000) (the "Annual Chairman's Fee") and no other retainer fee as a
member of the Board. Such Annual Chairman's Fee shall be payable in monthly
installments and shall be prorated for any partial calendar years for which you
serve as Chairman of the Board during the Term. During the Term, while serving
as Chairman of the Board you shall continue to perform the duties and functions
required of, and commensurate with, your status as Chairman of the Board and as
provided in the Company's by-laws and you shall continue to perform services
with regard to matters you are involved with as Chairman as of the date hereof.
3. If you cease to be Chairman of the Board during the Term, but continue
to serve as a director of the Company, while you are serving as a director of
the Company, you will receive compensation for your services as a director of
the Company in accordance with the Company's then current practice. This
Agreement does not impose any obligations on the Company to retain you as
Chairman or a director nor shall it impose an obligation on you to remain
Chairman or a director of the Company.
4. During the Term (whether or not you continue to serve as Chairman of the
Board or otherwise continue to serve as a director of the Company), you shall
serve as a consultant to the Company as reasonably requested by the Company. For
your services as a consultant to the Company, the Company shall pay you (i) an
annual consulting fee (the "Annual Consultant's Fee") of One Hundred Twenty
Thousand Dollars ($120,000) payable in monthly installments and prorated for any
partial calendar years during the Term and (ii) on
<PAGE> 2
the fifteenth business day of the month of March from March 15, 1998 through
March 15, 2003 (provided that the financial statements for the year prior to
payment have been completed but in no event later than March 31), the Company
shall pay to you an amount (the "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 computed and based on the financial
statements of the Company for such calendar year prepared in accordance with
generally accepted accounting principles consistently applied ("GAAP"); 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 hereunder shall be subject to stockholder
approval at such time or times as required under Code Section 162(m) and the
Treasury regulations thereunder (collectively referred herein as "Code Section
162(m)") and the Incentive Bonus shall be administered by the Code Section
162(m) Subcommittee of the Compensation Committee of the Board. The Incentive
Bonus is intended to comply with the exemption for performance based
compensation under Code Section 162(m) and any provision required thereunder
shall be deemed part of the Incentive Bonus and the provisions of the Incentive
Bonus shall be interpreted and construed in accordance therewith.
5. As a consultant, you will be an independent contractor of the Company
and, as such, will have no authority to bind the Company. In your capacity as a
consultant, subject to coordination with the Chief Executive Officer and the
Board, you shall continue to perform the services you are involved with as
Chairman as of the date hereof and you shall devote such time as necessary to be
materially involved in the Company's financial matters, specifically, in
furthering and developing the financial relationships of the Company. The
Company shall indemnify you and hold you harmless, to the fullest extent
permitted by law as, to and from any and all costs, expenses or damages incurred
by you as a result of any claim, suit, action or judgment arising out of your
activities as a consultant to or a director of the Company, and this right to
indemnification shall survive the termination of this Letter Agreement.
6. In the event of your Disability or death prior to December 31, 2002, the
Company shall pay you or your designated beneficiary (or, if none, your estate),
as the case may be, in a lump sum: (i) the Annual Consultant's Fees you would
have received during the period commencing on the date of your Disability or
death and ending on December 31, 2002 and any unpaid Annual Consultant's Fees
accrued prior to your Disability or death; (ii) any unpaid Incentive Bonus for
the preceding calendar year; and (iii) the full Incentive Bonus for the calendar
year in which you become disabled or die (calculated in accordance with Section
4 herein). Upon payment of such amounts the Company shall have no further
obligation to you hereunder.
7. If the Board shall determine that there are grounds for discharging you
from your consultancy for "Cause" (as hereinafter defined), the Company may, at
its election at any time within six (6) months after the Company shall obtain
knowledge of the grounds for termination, give you notice of its intention to
terminate you for Cause, stating the grounds for termination and specifying a
reasonable date (the "Meeting Date") on which you (or your duly authorized
representative) shall be given an opportunity if you desire to discuss such
grounds for termination at a meeting of the Board. The Company may suspend your
service relationship
<PAGE> 3
without pay during the period following notice to you of the Company's intention
to terminate you for Cause, provided that if the Company does not terminate your
consultancy for Cause hereunder, the Company shall pay you any amounts owed to
you with regard to the period of suspension.
(a) If the grounds for termination are those specified in
clause (iii) of paragraph (c) below, you shall have a period of ten (10)
business days from the Meeting Date (the "Cure Period") to cure the breach,
provided that if similar grounds arise again within one (1) year of such cure,
no new notice need be given and the Company, at its option, may immediately
terminate you for Cause.
(b) If, following discussion with you (or your duly
authorized representative) of the grounds for your termination at the Board
meeting (and the expiration of the Cure Period, if any) or, if you (or your duly
authorized representative) do not appear, following the Board meeting, the
Company shall continue its intent on discharging you for Cause, the Company
shall so notify you, and such termination shall be effective immediately.
(c) For purposes of this Agreement, the term "Cause" shall
mean: (i) conviction of a felony, whether or not such conviction is appealed;
(ii) deliberate and premeditated acts which are proven to be dishonest or
malfeasant and involve the funds or other assets of the Company; (iii) material
breach of the terms of this Agreement, as determined in good faith by at least
two-thirds ( ) of the Board (excluding you with regard to both voting and
calculating the aggregate number of Board members, if you are then serving on
the Board); (iv) you are found guilty of or are enjoined from a violation of any
state or federal securities laws, state or federal laws governing the business
of the Company, or rules and regulations of any state or federal agency
regulating any of the business of the Company; or (v) habitual use of alcohol or
drugs to a degree that such use substantially interferes with your performance
of your duties, provided the Company has given you written notice and a
reasonable opportunity to appear before the Board.
(d) If the Company terminates your consultancy for Cause
pursuant to this Section 7, it shall have no further liability or obligation
hereunder except the Company shall promptly pay you your then current Annual
Consultant's Fee owed to you through the effective date of such termination and
you shall not receive any other amounts for your services hereunder including,
without limitation, any Incentive Bonus.
8. Notwithstanding anything else herein, in the event of a Change in
Control of the Company (as defined in Exhibit A hereto) during the Term, the
Company may, in its sole and absolute discretion, pay you in a lump sum within
ten (10) days of the date of the Change in Control, in lieu of any other
amounts due hereunder, the following amounts:
(i) The Annual Consultant's Fees you would have received
during the period commencing on the date of the Change in
Control and ending on December 31, 2002 (the "Remainder
of the Term"); and
<PAGE> 4
(ii) The Incentive Bonuses you would have received during the
Remainder of the Term (the "Remaining Bonus"), discounted
to present value as set forth below. For purposes of
determining the Remaining Bonus, each applicable annual
Incentive Bonus for the Remainder of the Term will be
determined by using the Company's pre Federal-tax income
(as determined in accordance with Section 4 herein) for
the full calendar year immediately preceding the year of
the Change in Control, increased by an assumed compounded
growth in such pre Federal-tax income of twenty percent
(20%) per annum.
For purposes of the present value calculations hereunder, the
discount rate shall be deemed to be the prime lending rate charged by Citibank
on the date of the Change in Control. Notwithstanding anything herein to the
contrary, you shall have no obligation to mitigate with respect to the payments
under this Section 8. Upon payment of the amounts specified in this Section 8
(and, if applicable, Section 9), the parties hereto will have no further rights
or obligations under this Agreement.
9. If the payment made to you under Section 8 plus the value (determined
in accordance with Proposed Treasury Regulation Section 1.280G-1, Q & A 24)
of any accelerated vesting of the stock appreciation right granted pursuant to
the Stock Appreciation Right Agreement entered into between the Company and you,
dated August 20, 1997 (the "280G Amounts") taken together, and without regard to
any other benefits or amounts paid or payable to you, cause you to be subject to
any excise tax liability (the "Excise Tax") pursuant to Code Section 4999, the
Company shall pay to you an amount (the "Excise Tax Reimbursement Payment"), as
determined by the Board in its sole and absolute discretion, sufficient to
reimburse you for payment of a portion of the Excise Tax as set forth below and
not the Excise Tax or any other tax on the Excise Tax Reimbursement Payment. The
amount of the Excise Tax Reimbursement Payment payable under this Section 9
shall be an amount equal to (i) the Excise Tax, if any, due on the 280G Amounts
(calculated in accordance with Code Section 280G), multiplied by (ii) a
fraction, the numerator of which is the payment under Section 8 and the
denominator of which is the 280G Amounts. Notwithstanding the foregoing, the
amount payable to you under this Section 9 shall be limited to the then rate of
Excise Tax multiplied by the payment made to you pursuant to Section 8.
10. During the Term, you shall not enter into Competition with the Company
or any of its subsidiaries (within the meaning of Code Section 424(f)) (the
"Control Group"). For purposes of this Agreement, "Competition" shall mean the:
(i) participating, directly or indirectly, as an
individual proprietor, stockholder, officer, employee, director, joint venturer,
investor, lender, or in any capacity whatsoever (within the United States of
America, or in any country where the Control Group does business) in any (A)
activity with respect to conventional home improvement loans, debt consolidation
loans, FHA Title I loans and non-conforming mortgage loans or (B) any other
business or activity which competes with or is engaged in the same business or
activity as the Company, provided, however, that such participation shall not
include (C) the mere ownership of
<PAGE> 5
not more than five percent (5%) of the total outstanding stock of a publicly
held company; or (D) any activity engaged in with the prior written approval of
the Board; or
(ii) recruiting, soliciting or inducing, of any employee
or employees of the Control Group to terminate their employment with, or
otherwise cease their relationship with, the Control Group.
You agree that the provisions of this Section 10 are necessary
and reasonable to protect the Control Group in the conduct of its business and
to protect confidential information. If any restriction set forth with regard to
Competition is found by any court of competent jurisdiction, or an arbitrator,
to be unenforceable because it extends for too long a period of time or over too
great a range of activities or in too broad a geographic area, it shall be
interpreted to extend over the maximum period of time, range of activities or
geographic area as to which it may be enforceable and in its reduced form such
restriction shall then be enforceable in the manner contemplated hereby.
11. You undertake and agree that during the Term and thereafter you shall
hold in a fiduciary capacity for the benefit of the Control Group all secret or
confidential information, knowledge or data relating to the Control Group or
its business (which shall be defined as all such information, knowledge and
data coming to your attention by virtue of your service with the Company except
that which is otherwise public knowledge or known within the Company's
industry). During such period, you shall not, without prior written consent of
the Company, unless compelled pursuant to the order of a court or other body
having jurisdiction over such matter or unless required by lawful process or
subpoena, communicate or divulge any such information, knowledge or data to
anyone other than the Company and those designated by it. The foregoing shall
not limit the disclosure by you of such information in the course of the
performance of your duties as Chairman, director or consultant to the Company
so long as such disclosure is in good faith. In the event you are compelled by
order of a court or other governmental or legal body to communicate or divulge
any such information, knowledge or data to anyone other than the Company and
those designated by it, you shall promptly notify the Company of any such order
and shall cooperate fully with the Company at the Company's request and expense
in seeking a protective order.
12. During the Term and thereafter, you shall not make any statements or
comments (i) to any form of media of a negative nature that reasonably could be
considered to have an adverse impact on the business or reputation of the
Control Group or the Board, or (ii) to any employee of the Control Group or to
any customer of the Control Group of a negative nature that reasonably could be
considered to have an adverse impact on the business or reputation of the
Control Group or the Board, provided that in no event shall the foregoing
limitation apply to (i) compliance with legal process or subpoena, (ii)
statements in response to inquiry from a court or regulatory body, (iii) a
possible future employer in connection with employment discussions, (iv)
statements which are generally available public knowledge or which are known to
the person to whom the statement is made (other than due to acts by you which
are in violation of this Agreement), or (v) in response to inquiry from the
Board.
<PAGE> 6
13. Notwithstanding any other provision of this Agreement, in the event of
a breach or threatened breach by you of any provision of Sections 10, 11 or 12,
you and the Company agree that the Company shall be entitled to injunctive and
declaratory relief from a court of competent jurisdiction to restrain you from
committing such breach of the Agreement. Nothing in this Agreement shall be
construed as prohibiting the Company from pursuing any other remedy or remedies
including, without limitation, the recovery of damages.
The provisions of Sections 11, 12 and this Section 13 shall survive the
expiration of this Agreement or the termination of the Agreement for any reason.
14. Notwithstanding anything else herein, you and the Company hereby agree
that the calculations of any amounts payable pursuant to Sections 4 and 8 shall
be performed by the Company's then certified independent public accountants and
that such determination shall be final and binding on the parties hereto and
their respective, successors, heirs (in your case) and permitted assigns. The
calculations of any amounts payable pursuant to Sections 4 and 8 shall be based
on the financial statements of the Company for the applicable period in
accordance with GAAP.
15. All amounts payable under this Agreement are, to the extent legally
required, subject to withholding and deductions. Subject to and in accordance
with the Company's normal practices and policies, you will be entitled to
receive reimbursement for any reasonable business expenses related to the
Company incurred during the Term.
16. You acknowledge that during the Term you will not be an employee of the
Company and you will not be eligible to participate in, or receive benefits
under, any benefit plans or arrangements maintained, or contributed to, by the
Company, including without limitation, any fringe, welfare, retirement, sick
leave, vacation or incentive plans or arrangements, except in your capacity as
a director. This Section 16 will not apply to any stock options or stock
appreciation rights granted to you in your capacity as a director of the
Company.
17. This Agreement sets forth the parties' entire agreement, and supersedes
any and all prior understandings, with respect to its subject matter. This
Agreement can be amended only by a writing signed by both you and the Company.
18. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors, heirs (in your case) and
permitted assigns. This Agreement is personal to you and neither this Agreement
nor any rights hereunder may be assigned by you. No rights or obligations of
the Company under this Agreement may be assigned or transferred by the Company
except that such rights or obligations may be assigned or transferred pursuant
to a merger or consolidation in which the Company is not the continuing entity,
or pursuant to a sale of all or substantially all of the assets of the Company,
provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company and such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either contractually or as a matter of law. The Company further
agrees that, in the event of a sale as described in the preceding sentence, it
shall use its best efforts to cause such assignee or transferee to expressly
assume the liabilities, obligations and
<PAGE> 7
duties of the Company hereunder. If the assignee or transferee does not
expressly assume the liabilities, obligations and duties of the Company
hereunder, the Company shall pay you in a lump sum within ten (10) days
following the closing of the sale of all or substantially all of the assets of
the Company the amount set forth in Section 8(i), Section 8(ii) and Section 9.
19. All notices under this Agreement shall be given in writing and shall be
either delivered personally or sent by certified or registered mail, return
receipt requested, addressed to the other party at the appropriate address
first set forth above, or to such other address as such party shall designate
by written notice as aforesaid. Notices shall be deemed given when received or
two (2) days after mailing, whichever is earlier.
20. This Agreement shall be governed by, and construed under and in
accordance with, the internal laws of the State of Delaware, without reference
to rules relating to conflicts of laws.
<PAGE> 8
Please execute a copy of this Agreement and return it to me to
acknowledge your agreement to the foregoing.
MEGO MORTGAGE CORPORATION
---------------------------------
By:
Title:
Agreed:
- -----------------------------
Jerome J. Cohen
<PAGE> 9
EXHIBIT A
A "Change in Control" shall be deemed to have occurred upon:
(a) any "person" as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other
than the Company, any trustee or other fiduciary holding securities under any
employee benefit plan of the Company, or any company owned, directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of Common Stock of the Company), is or becomes
the owner (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the combined voting power of the Company's then outstanding securities;
(b) during any period of two consecutive years (not
including any period prior to the commencement of the Term), individuals who at
the beginning of such period constitute the Board, and any new director (other
than a director designated by a person who has entered into an agreement with
the Company to effect a transaction described in paragraph (a), (c) or (d) of
this Exhibit A) whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of the
two-year period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority of the Board,
provided that a Change in Control shall not occur pursuant to this subsection
(b) if Robert Nederlander, Jerome J. Cohen, Don A. Mayerson, Growth Realty, Inc.
and Herbert B. Hirsch or any of them own, either directly or indirectly
(indirect ownership shall be determined in accordance with the constructive
ownership rules under Code Section 318 and amounts indirectly owned shall also
include any stock contributed by any of the foregoing to a private foundation
and/or trust), more than ten percent (10%) of the voting stock of the Company;
(c) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the combined voting power of
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; provided, however, that a merger
or consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no person acquires more than thirty-three percent
(33%) of the combined voting power of the Company's then outstanding securities
shall not constitute a Change in Control of the Company; or
(d) the stockholders of the Company approve a plan of
complete liquidation of the Company or the closing of a sale or disposition by
the Company of all or substantially all of the assets of the Company other than
a sale of all substantially all of the assets of the Company (other than in the
ordinary course of business) to a person or persons who beneficially own,
directly or indirectly, at least fifty percent (50%) or more of the combined
voting power of the Company's then outstanding securities.
<PAGE> 1
EXHIBIT 10.62
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 2nd day of September, 1997, by and
between Mego Mortgage Corporation, a Delaware corporation having its principal
place of business at 1000 Parkwood Circle, 5th Floor, Atlanta, Georgia 30339
(hereinafter called the "Company") and Jeffrey S. Moore residing at 3651
Blakeford Drive, Marietta, Georgia 30062 (hereinafter called the "Executive").
W I T N E S S E T H :
WHEREAS, the Executive is currently employed by the Company as
its Chief Operating Officer and also serves as a director of the Company;
WHEREAS, effective as of the date hereof, the Company desires
to employ the Executive as its Chief Executive Officer and the Executive is
willing to serve in such capacity;
WHEREAS, the Company and the Executive desire to set forth the
terms and conditions of such employment.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements herein contained, the Company and the Executive
agree as follows:
<PAGE> 2
1. Employment. (a) The Company hereby agrees to employ the
Executive as its Chief Executive Officer and during the term of this Agreement
to recommend that Executive continue to be elected to the Board of Directors of
the Company (the "Board") and the Executive hereby agrees to accept continued
employment with the Company, on the terms and conditions herein contained.
(b) Except for earlier termination as provided in Section 4
hereof, Executive's employment under this Agreement shall be for a term
commencing upon the date hereof (the "Commencement Date") and ending on December
31, 2000 (the "Initial Term"). Subject to Section 4 hereof, the period of
employment shall be automatically extended for additional terms of successive
one (1) year periods unless, beginning in 1998, the Company or Executive gives
written notice to the other, at least sixty (60) days prior to the expiration of
any calendar year, of the termination of Executive's employment hereunder
("Notice of Nonextension"), which termination shall be effective on the second
anniversary of the first day of the calendar year following the calendar year
during which Notice of Nonextension was provided. The period during which the
Executive is employed hereunder is hereinafter referred to as the "Employment
Term".
2. Duties. (a) The Executive shall serve during the Employment
Term as Chief Executive Officer of the Company, reporting only to the Board. The
Executive agrees that in such office he shall perform such duties and functions
as are commensurate with his status as Chief Executive Officer of the Company as
may from time to time be determined by the Board. The Executive shall promptly
follow all legal directions of the Board. The Executive shall
2
<PAGE> 3
devote substantially all of his working time, attention, skill and efforts to
the performance of his duties hereunder. It is further understood and agreed
that nothing herein shall prevent the Executive from managing his passive
personal investments (subject to applicable Company policies on permissible
investments), and (subject to applicable Company policies) participating in
charitable and civic endeavors, so long as such activities do not interfere with
the Executive's performance of his duties hereunder.
(b) Upon request of the Board, the Executive shall also
serve as an officer and director of subsidiaries and affiliates of the Company;
provided that, any amounts received by Executive as a result of his service as
an officer or director of any subsidiary or affiliate of the Company shall serve
as an offset against the obligations of the Company hereunder.
3. Compensation and Benefits. As full compensation for his
services hereunder, and subject to all the provisions hereof:
(a) During the Employment Term, the Company shall pay the
Executive, in accordance with its normal payroll practices and subject to
required withholding, a salary at an annual rate of at least $250,000.
Executive's 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 to reflect any increase in the cost of living over the
initial annual rate of $250,000, using as the basis of such increase the
Consumer Price Index for All Urban Consumers (CPI-U) for Atlanta, Georgia (the
"Index") or in the event such Index is no longer published, such other index as
is determined in good faith to be comparable by the Board ("Base Salary"). For
purposes of Section 3(a)(ii), the annual adjustment shall reflect the
proportionate
3
<PAGE> 4
increase in the Index during the twelve (12) month period beginning December 1st
of the prior year and ending on November 30th immediately preceding the relevant
adjustment date.
(b) During the Employment Term, the Executive shall be
eligible to participate in all long term incentive plans and equity plans (but
not annual bonus plans) that are maintained by the Company from time to time
generally for its senior executive employees in accordance with the terms as in
effect from time to time.
(c) During the Employment Term, the Executive shall be
eligible to participate in all pension, welfare and fringe benefit plans, as
well as perquisites, maintained by the Company from time to time generally for
its senior executive employees in accordance with their respective terms as in
effect from time to time (other than any special arrangement entered into by
contract with an executive).
(d) In addition to the Base Salary, and subject to the last
two sentences of this paragraph (d), on the first business day of each March
(provided that the financial statements for the year prior to payment have been
completed, but in no event later than March 31) during the Employment Term
commencing with March, 1998, the Company shall pay to the Executive an amount
(the "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 computed and based on the financial statements of the Company for
such calendar year prepared in accordance with generally accepted accounting
principles consistently applied; provided that, the Incentive Bonus payable in
March 1998 shall be based solely on the Company's pre Federal-tax income for the
period commencing September 1, 1997 and ending December 31, 1997; and
4
<PAGE> 5
further provided that, except as otherwise provided herein, this Agreement was
in full force and effect for the entire calendar year and the Executive had
performed the services to the Company required by this Agreement during the
entire calendar year. It is understood and agreed that generally accepted
accounting principles for the Company's financial statements require, in
calculating pre Federal-tax income, a tax provision based on the statutory
rate(s) for corporations for all applicable state and local income taxes. The
Incentive Bonus and any Incentive Bonus payments hereunder shall be subject to
stockholder approval at such time or times as required under Code Section 162(m)
of the Internal Revenue Code of 1986, as amended (the "Code") and the Treasury
regulations thereunder (collectively referred herein as "Code Section 162(m)")
and the Incentive Bonus shall be administered by the Code Section 162(m)
Subcommittee of the Compensation Committee of the Board (the "162(m)
Subcommittee"). The Incentive Bonus is intended to comply with the exemption for
performance based compensation under Code Section 162(m) and any provision
required thereunder shall be deemed part of the Incentive Bonus and the
provisions of the Incentive Bonus shall be interpreted and construed in
accordance therewith.
(e) In addition to the Base Salary and the Incentive Bonus,
and subject to the last two sentences of this paragraph (e), the Executive shall
receive for each calendar year during the Employment Term, an amount (the
"Deferred Compensation") equal to one percent (1.00%) of the amount of "Gain on
sale of loans", including the net gain on the sale of whole loans, and any
portion of the net gain from sales of loans in securitized transactions included
in "Net unrealized gain on mortgage related securities", resulting from the
sales of conventional home improvement loans, debt consolidation loans, FHA
Title I loans and non-conforming
5
<PAGE> 6
mortgage loans (referred to herein as "Loans") and the net gain from the sale of
loans in any other form of transaction not included in the foregoing, as shown
on the Company's financial statements for such calendar year prepared as set
forth above in subsection (d) above; provided that, the Deferred Compensation
payable beginning March 1, 1998 (provided that the financial statements
applicable to the period commencing September 1, 1997 and ending December 31,
1997 have been completed, but in no event later than March 31) shall be based
solely on the Company's gain on sale for the period commencing September 1, 1997
and ending December 31, 1997; and further provided that, the Executive shall not
be entitled to receive Deferred Compensation payments for any calendar year if
the level of return on stockholder equity (the "Return on Stockholder Equity")
is not achieved in accordance with the terms of Exhibit B hereto; and further
provided that, except as otherwise provided herein, this Agreement was in full
force and effect for the entire calendar year and the Executive had performed
the services to the Company required by this Agreement during the entire
calendar year. The Deferred Compensation due for any calendar year shall be
payable in 24 equal monthly installment payments commencing on March 1 of the
following year (provided that the financial statements for the year prior to
payment have been completed, but in no event later than March 31). The Deferred
Compensation and any Deferred Compensation payments hereunder shall be subject
to stockholder approval at such time or times as required under Code Section
162(m) and shall be administered by the 162(m) Subcommittee. The Deferred
Compensation is intended to comply with the exemption for performance based
compensation under Code Section 162(m) and any provision required thereunder
shall be deemed part of the Deferred Compensation provisions (including, without
limitation, Exhibit B hereto) and shall be interpreted and construed in
6
<PAGE> 7
accordance therewith.
(f) The Company agrees to use its reasonable best efforts
to obtain the required stockholder approval of the Incentive Bonus and the
Deferred Compensation at an annual meeting of the Company's stockholders which
occurs no later than January 31, 1998. If the stockholders of the Company do not
approve the Incentive Bonus and the Deferred Compensation, the provisions of
this Agreement (other than the second sentence of Section 16(a) herein) shall
become null and void and the Company and Executive agree that they will
negotiate in good faith the terms of a new employment agreement.
(g) During the Employment Term:
(i) The Executive shall be reimbursed for his out-of-
pocket travel and entertainment expenses in accordance with the Company's normal
policy for senior executive officers, including appropriate documentation.
(ii) The Executive shall be entitled to three (3)
weeks vacation for each calendar year during the Employment Term commencing
January 1, 1998.
(iii) The Executive shall be provided with a car
allowance to be used for business purposes equivalent to similar allowances
provided to senior executives of the Company, but in no event less than $1,000
per month. Executive shall be responsible for any income tax consequences
arising from this arrangement.
7
<PAGE> 8
(iv) The Company agrees to use its reasonable best
efforts to secure for Executive a corporate country club membership, proposed by
the Executive and approved by the Company, with an initiation fee not to exceed
$50,000 and dues, fees and use expenses not to exceed $10,000 per year, to be
utilized for the obtaining of business and entertaining business connections. If
the Company has not made Executive a participant in a corporate country club
membership, the Company will reimburse Executive for the cost of a membership in
a suitable country club, approved by the Company, with an initiation fee not to
exceed $10,000 and dues, fees and expenses not to exceed $10,000 per year, to be
utilized for the obtaining of business and entertaining business connections.
Executive shall be responsible for any income tax consequences arising from this
arrangement.
4. Termination. The Employment Term shall terminate upon the
earliest of the following:
(a) the Executive's death;
(b) the termination of Executive's employment by the
Company for disability in accordance with Section 6;
(c) the termination of Executive's employment by the
Company for Cause in accordance with Section 7;
(d) the termination of the Executive's employment by the
Company without Cause in accordance with Section 8 or due to Nonextension of the
Employment Term pursuant to Section 1(b) hereof; or
8
<PAGE> 9
(e) the termination of Executive's employment by the
Executive in accordance with Section 9.
5. Death. The death of the Executive shall serve to terminate
the Employment Term in which event the Company shall have no liability or
further obligation except as follows:
(a) The Company shall pay the Executive's estate
(or, if properly designated under a plan, arrangement or Section 17 herein, as
applicable, his beneficiary) when otherwise due (i) any unpaid Base Salary for
the period prior to such termination of the Employment Term, (ii) any unpaid
Deferred Compensation earned during the years prior to the year of such
termination (paid in accordance with Section 3(e) hereof), (iii) any declared
but unpaid bonuses (including, without limitation the Incentive Bonus) earned
during the years prior to the year of such termination, (iv) any declared but
unpaid amounts due under any incentive plan earned during the years prior to
the year of such termination and (v) any other unpaid amounts due the Executive
under employee benefit, fringe benefit or incentive plans earned during the
years prior to the year of such termination (items (i) - (v) are hereinafter
referred to as "Prior Entitlements").
(b) The Executive shall have such rights under any employee
benefit, fringe benefit or incentive plan as provided in such plans (the
"Rights").
(c) The Company shall pay, in accordance with Sections 3(d)
and 3(e) herein, the Executive's estate (or, if designated in accordance with
Section 17, his beneficiary) a prorated portion of the Executive's Incentive
Bonus and/or any Deferred Compensation earned
9
<PAGE> 10
during the year in which the Executive's employment terminates in an amount
equal to the product of (i) the Incentive Bonus or Deferred Compensation, as
applicable, multiplied by (ii) a fraction, the numerator of which is the number
of days during the year in which the Executive was employed by the Company
during the year in which his employment terminates and the denominator of which
is 365 (such prorated amounts, the "Prorated Payments").
(d) The Executive's estate or his designated beneficiary
shall be entitled to receive those benefits afforded by the Company under its
then existing policies to senior executive employees who die while employed by
the Company.
6. Disability. If the Board reasonably shall determine that
the Executive has become physically or mentally incapable of performing his
material duties as provided in Section 2 of this Agreement and such incapacity
is likely to last for a period of at least one hundred eighty (180) consecutive
days from the onset of such incapacity, the Company may, at its election at any
time following the one hundred eighty (180) day period while the Executive
remains incapable of performing his duties, terminate the Executive's employment
hereunder effective immediately by giving the Executive written notice of such
termination. In such event, the Company shall have no other obligation to the
Executive or his dependents other than the Prior Entitlements, the Rights, the
Prorated Payments and any benefits offered by the Company under its then policy
to senior executives of the Company who become disabled while employed by the
Company.
7. Cause. (a) If the Board shall determine that there are
grounds for terminating the Employment Term and discharging the Executive for
"Cause" (as hereinafter defined), the Company may, at its election at any time
within six (6) months after the Company
10
<PAGE> 11
shall obtain knowledge of the grounds for termination, give the Executive notice
of its intention to terminate the Executive for Cause, stating the grounds for
termination and specifying a reasonable date (the "Meeting Date") on which the
Executive (or his duly authorized representative) shall be given an opportunity
if he desires to discuss such grounds for termination at a meeting of the Board.
The Company may suspend Executive without pay during the period following notice
to Executive of the Company's intention to terminate the Executive for Cause,
provided that if the Company does not terminate Executive's employment for Cause
hereunder, the Company shall pay Executive any amounts owed to Executive with
regard to the period of suspension.
(b) If the grounds for termination are those specified in
clause (iii) of paragraph (d) below, the Executive shall have a period of ten
(10) business days from the Meeting Date (the "Cure Period") to cure the breach,
provided that if similar grounds arise again within one (1) year of such cure,
no new notice need be given and the Company, at its option, may immediately
terminate the Executive for Cause.
(c) If, following discussion with the Executive (or his
duly authorized representative) of the grounds for his termination at the Board
meeting (and the expiration of the Cure Period, if any) or, if the Executive (or
his duly authorized representative) does not appear, following the Board
meeting, the Company shall continue its intent on discharging the Executive for
Cause, the Company shall so notify the Executive, and such termination shall be
effective immediately.
(d) For purposes of this Agreement, the term "Cause" shall
mean:
11
<PAGE> 12
(i) Conviction of a felony, whether or not such
conviction is appealed;
(ii) Deliberate and premeditated acts which are proven
to be dishonest or malfeasant and involve the funds or other assets of the
Company;
(iii) Material breach of the terms of this Agreement,
as determined in good faith by at least two-thirds (_) of the Board (excluding
the Executive with regard to both voting and calculating the aggregate number of
Board members, if he is then serving on the Board);
(iv) The Executive is found guilty of or is enjoined
from a violation of any state or federal securities laws, state or federal laws
governing the business of the Company, or rules and regulations of any state or
federal agency regulating any of the business of the Company;
(v) Habitual use of alcohol or drugs to a degree that
such use substantially interferes with Executive's performance of his duties,
provided the Company has given Executive written notice and a reasonable
opportunity to appear before the Board.
(e) If the Company shall terminate the Executive's
employment pursuant to this Section 7, it shall have no further liability or
obligation hereunder except as follows:
(i) The Company shall promptly pay the Executive his
then
12
<PAGE> 13
current Base Salary through the effective date of such termination and the
Executive shall not receive any other amounts hereunder including, without
limitation, any Prior Entitlements, Rights or Prorated Payments;
(ii) The Executive shall receive the benefits, if any,
and have the rights afforded by the Company under its then existing policies to
employees whose employment is terminated for Cause or under the specific terms
of any welfare, fringe benefit or incentive plan.
8. Termination by the Company without Cause or Nonextension of
the Term by the Company. (a) In the event the Company shall terminate the
Employment Term without Cause or the Executive's employment terminates as a
result of the Company giving a Notice of Nonextension of the Employment Term
pursuant to Section 1(b) hereof, then, except as otherwise provided in Section
10 hereof, the Company shall have no obligation to the Executive except as
follows:
(i) (A) In the event of a termination without Cause
which occurs prior to the end of the Initial Term, the
Executive shall receive, subject to required withholding, (x)
his Prior Entitlements, Rights and Prorated Payments, (y) his
Base Salary, paid in accordance with the Company's normal
payroll practices, through the end of the Initial Term,
provided that in no event shall the amount be less than one
(1) year's Base Salary and (z) an amount equal to:
I. the greater of (a) one hundred twenty five
percent (125%) of the Incentive Bonus for
the full calendar year immediately preceding
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<PAGE> 14
the year in which Executive's employment
terminates or (b) one hundred twenty five
percent (125%) of the annualized Incentive
Bonus for the full calendar year in which
the Executive's employment terminates;
multiplied by
II. the number of full calendar years remaining
to the end of the Initial Term 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 (12);
provided that, in no event shall the amount be less than the
greater of the amounts set forth in I(a) or I(b) above.
One-half (1/2) of the amount payable under this Section
8(a)(i)(A)(z) shall be paid as soon as practicable, but in no
event later than sixty (60) days following the close of the
quarter in which Executive's employment terminates (the
"Section 8(a)(i)(A) Initial Payment Date") and one-half (1/2)
of such amount shall be payable in twelve (12) equal monthly
installments commencing on the first day of the month
following the Section 8(a)(i)(A) Initial Payment Date.
(B) In the event of a termination without
Cause which occurs after the Initial Term, the Executive shall
receive, subject to required withholding, (x) his Prior
Entitlements, Rights and Prorated Payments, (y) his Base
Salary, paid in accordance with the Company's normal payroll
practices, through the end of the then current Employment Term
provided that in no event
14
<PAGE> 15
shall the amount be less than one (1) year's Base Salary and
(z) one hundred twenty five percent (125%) of the annualized
Incentive Bonus for the full calendar year in which the
Executive's employment terminates. One-half (1/2) of the
amount payable under this Section 8(a)(i)(B)(z) shall be paid
as soon as practicable, but in no event later than sixty (60)
days following the close of the quarter in which Executive's
employment terminates (the "Section 8(a)(i)(B) Initial Payment
Date") and one-half (1/2) of such amount shall be payable in
twelve (12) equal monthly installments commencing on the first
day of the month following the Section 8(a)(i)(B) Initial
Payment Date.
(C) In the event of a termination due to a
Nonextension of the Employment Term by the Company, Executive
shall receive his Prior Entitlements, Rights, Prorated
Payments and $600,000 payable in twelve (12) equal monthly
installments commencing on the first day of the first month
following Executive's termination of employment with the
Company.
(ii) During the period, if any, in which Executive
continues to receive any payments in accordance with Section
8(a)(i) above, the Executive shall not be an employee and
shall not be entitled to receive any fringes, perquisites or
benefits from the Company.
(b) The Executive shall not be required to mitigate the
amount of any payment provided for in paragraph (a) by seeking other employment
nor shall any amounts to be received by the Executive hereunder be reduced by
any other compensation earned.
15
<PAGE> 16
(c) Any amounts being paid to or on behalf of the Executive
under this Section 8 shall immediately cease if the Executive enters into
Competition (as defined in Section 11 hereof) with the Company or any subsidiary
(within the meaning of Code Section 424(f)) (the "Control Group") during the one
(1) year period following the Executive's termination of employment with the
Company and the Company shall have no further obligation to the Executive
hereunder.
9. Termination by the Executive by Notice of Nonextension;
Termination by the Executive other than by Notice of Nonextension. (a) In the
event the Executive shall terminate the Employment Term as a result of the
Executive giving a Notice of Nonextension of the Employment Term pursuant to
Section 1(b) hereof, then, except as otherwise provided in Section 10 hereof,
the Executive shall receive his Prior Entitlements, Rights, Prorated Payments
and $600,000, payable in twelve (12) equal monthly installments commencing on
the first day of the first month following his termination of employment with
the Company.
(b) In the event the Executive shall voluntarily terminate
the Employment Term other than by Notice of Nonextension, then, except as
otherwise provided in Section 10 hereof, the Company shall have no further
liability or obligation hereunder except as follows: (i) The Company shall
promptly pay the Executive his then current Base Salary through the effective
date of such termination and the Executive shall not receive any other amounts
hereunder including, without limitation, any Prior Entitlements, Rights or
Prorated Payments; (ii) The Executive shall receive the benefits, if any, and
have the rights afforded by the Company under its then existing policies to
employees who voluntarily terminate their employment or under
16
<PAGE> 17
the specific terms of any welfare, fringe benefit or incentive plan.
(c) The Executive shall not be required to mitigate the
amount of any payment provided for in paragraph (a) by seeking other employment
nor shall any amounts to be received by the Executive hereunder be reduced by
any other compensation earned.
(d) Any amounts being paid to or on behalf of the
Executive under this Section 9 shall immediately cease if the Executive enters
into Competition with the Control Group during the one (1) year period following
the Executive's termination of employment with the Company and the Company shall
have no further obligation to the Executive hereunder.
10. Change in Control. In the event of a Change in Control, as
defined in Exhibit A hereto, the Company shall have no obligation to the
Executive except as follows:
(a) The Company (or its successor) shall pay Executive
$1,000,000 in a lump sum within thirty (30) days following the date of the
Change in Control.
(b) In lieu of any other payments payable to the Executive
under Sections 8 and 9 of this Agreement (i) if within sixty (60) days
immediately following the date of the Change in Control which occurs during the
Initial Term, Executive voluntarily terminates his employment hereunder and
Executive is not employed by the Company (or its successor) under another
employment agreement (a "Successor Agreement"), Executive shall receive subject
to required withholding (x) his Prior Entitlements, Rights and Prorated Payments
and (y) the greater of (I) one hundred twenty five percent (125%) of the
Incentive Bonus for the full calendar year
17
<PAGE> 18
immediately preceding the year in which Executive's employment terminates or
(II) one hundred twenty five percent (125%) of the annualized Incentive Bonus
for the full calendar year in which the Executive's employment terminates; or
(ii) if within sixty (60) days immediately following the date of the Change in
Control which occurs after the Initial Term, Executive voluntarily terminates
his employment hereunder and Executive is not employed by the Company (or its
successor) under a Successor Agreement, Executive shall receive subject to
required withholding (x) his Prior Entitlements, Rights and Prorated Payments
and (y) one hundred twenty five percent (125%) of the annualized Incentive Bonus
for the full calendar year in which the Executive's employment terminates.
(c) In lieu of any other payments payable to the Executive
under Sections 8 and 9 of this Agreement, (i) if within one (1) year immediately
following the date of the Change in Control which occurs during the Initial
Term, the Company (or its successor) terminates the Executive's employment
hereunder without Cause and Executive is not employed under a Successor
Agreement, Executive shall receive subject to required withholding (x) his Prior
Entitlements, Rights and Prorated Payments, (y) his Base Salary, paid in
accordance with the Company's (or its successor's) normal payroll practices,
through the end of the Initial Term, provided that in no event shall the amount
be less than one (1) year's Base Salary and (z) an amount equal to:
I. the greater of (a) one hundred twenty five percent
(125%) of the Incentive Bonus for the full calendar
year immediately preceding the year in which
Executive's employment terminates or (b) one
18
<PAGE> 19
hundred twenty five percent (125%) of the annualized
Incentive Bonus for the full calendar year in which
the Executive's employment terminates; multiplied by
II. the greater of (a) the number of full calendar years
remaining to the end of the Initial Term 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 (12) or (b) two (2); or
(ii) if within one (1) year immediately following the date of the Change in
Control which occurs after the Initial Term, the Company (or its successor)
terminates the Executive's employment hereunder without Cause and Executive is
not employed under a Successor Agreement, Executive shall receive subject to
required withholding (x) his Prior Entitlements, Rights and Prorated Payments,
(y) his Base Salary, paid in accordance with the Company's (or its successor's)
normal payroll practices, through the end of the then current Employment Term
provided that in no event shall the amount be less than one (1) year's Base
Salary and (z) two hundred fifty percent (250%) of the annualized Incentive
Bonus for the full calendar year in which the Executive's employment terminates.
(d) One-half (1/2) of any amounts payable under Sections
10(b)(i)(y), 10(b)(ii)(y), 10(c)(i)(z) or 10(c)(ii)(z), as applicable, shall be
paid as soon as practicable, but in no event later than sixty (60) days
following the close of the quarter in which Executive's employment terminates
(the "Initial Payment Date") and one-half (1/2) of such amount shall be
19
<PAGE> 20
payable in twelve (12) equal monthly installments commencing on the first day of
the month following the Initial Payment Date.
(e) Any amounts being paid to or on behalf of the
Executive under paragraph (b) or (c) above shall immediately cease if (A) the
Executive becomes reemployed by the Company (or its successor) or (B) the
Executive enters into Competition with the Control Group during the one (1) year
period following the Executive's termination of employment with the Company (or
its successor).
(f) If the sum of the $1,000,000 payment made to the
Executive under Section 10(a) and any amounts paid to the Executive under
Section 10(b) or 10(c) plus the value (determined in accordance with Proposed
Treasury Regulation Section 1.280G-1, Q & A 24) of any accelerated vesting of
the stock appreciation rights granted pursuant to the three Stock Appreciation
Right Agreements entered into between the Company and the Executive, dated
August 20, 1997 (the "Stock Appreciation Right Agreements") taken together, and
without regard to any other benefits or amounts paid or payable to the Executive
(the "280G Amounts"), cause the Executive to be subject to any excise tax
liability (the "Excise Tax") pursuant to Code Section 4999, the Company shall
pay to the Executive as soon as practicable, but in no event later than ninety
(90) days following the date of the Change in Control, an amount (the "Excise
Tax Reimbursement Payment"), as determined by the Board in its sole and absolute
discretion, sufficient to reimburse Executive for payment of all or a portion of
the Excise Tax as set forth below and not the Excise Tax or any other tax on the
Excise Tax Reimbursement Payment. The amount of the Excise Tax Reimbursement
Payment payable under this Section 10(f) shall be an
20
<PAGE> 21
amount equal to (i) the Excise Tax, if any, due on the 280G Amounts (calculated
in accordance with Code Sections 280G and 4999), multiplied by (ii) a fraction,
the numerator of which is the sum of the $1,000,000 payment under Section 10(a)
and any amounts paid to the Executive under Section 10(b) or 10(c) and the
denominator of which is the 280G Amounts. Notwithstanding the foregoing, the
amount payable under this Section 10(f) shall be limited to $400,000.
11. Non-Competition, Confidential Information,
Nondisparagement. (a) During the Employment Term and for a period of one (1)
year following the termination of Executive's employment hereunder the Executive
shall not enter into Competition with the Control Group. For purposes of this
Agreement, "Competition" shall mean the:
(i) participating, directly or indirectly, as an
individual proprietor, stockholder, officer, employee, director, joint venturer,
investor, lender, or in any capacity whatsoever (within the United States of
America, or in any country where the Control Group does business) in any (A)
activity with respect to Loans or (B) any other business or activity which
competes with or is engaged in the same business or activity as the Company,
provided, however, that such participation shall not include (C) the mere
ownership of not more than five percent (5%) of the total outstanding stock of a
publicly held company; or (D) any activity engaged in with the prior written
approval of the Board; or
(ii) recruiting, soliciting or inducing, of any employee or
employees of the Control Group to terminate their employment with, or otherwise
cease their relationship with, the Control Group.
21
<PAGE> 22
Executive agrees that the provisions of this Section 11 are
necessary and reasonable to protect the Control Group in the conduct of its
business and to protect confidential information. If any restriction set forth
with regard to Competition is found by any court of competent jurisdiction, or
an arbitrator, to be unenforceable because it extends for too long a period of
time or over too great a range of activities or in too broad a geographic area,
it shall be interpreted to extend over the maximum period of time, range of
activities or geographic area as to which it may be enforceable and in its
reduced form such restriction shall then be enforceable in the manner
contemplated hereby.
(b) The Executive undertakes and agrees that during the
Employment Term and thereafter he shall hold in a fiduciary capacity for the
benefit of the Control Group all secret or confidential information, knowledge
or data relating to the Control Group or its business (which shall be defined as
all such information, knowledge and data coming to the Executive's attention by
virtue of his employment at the Company except that which is otherwise public
knowledge or known within the Company's industry). During such period, the
Executive shall not, without prior written consent of the Company, unless
compelled pursuant to the order of a court or other body having jurisdiction
over such matter or unless required by lawful process or subpoena, communicate
or divulge any such information,
22
<PAGE> 23
knowledge or data to anyone other than the Company and those designated by it.
The foregoing shall not limit the disclosure by the Executive of such
information in the course of the performance of his duties as Chief Executive
Officer so long as such disclosure is in good faith. In the event Executive is
compelled by order of a court or other governmental or legal body to communicate
or divulge any such information, knowledge or data to anyone other than the
Company and those designated by it, Executive shall promptly notify the Company
of any such order and shall cooperate fully with the Company at the Company's
request and expense in seeking a protective order.
(c) During the Employment Term and thereafter while the
Executive is receiving any amounts pursuant to Sections 8, 9 or 10 hereof, the
Executive shall not make any statements or comments (i) to any form of media of
a negative nature that reasonably could be considered to have an adverse impact
on the business or reputation of the Control Group or the Board, or (ii) to any
employee of the Control Group or to any customer of the Control Group of a
negative nature that reasonably could be considered to have an adverse impact on
the business or reputation of the Control Group or the Board, provided that in
no event shall the foregoing limitation apply to (i) compliance with legal
process or subpoena, (ii) statements in response to inquiry from a court or
regulatory body, (iii) a possible future employer in connection with employment
discussions, (iv) statements which are generally available public knowledge or
which are known to the person to whom the statement is made (other than due to
acts by the Executive which are in violation of this Agreement), or (v) in
response to inquiry from the Board.
(d) Notwithstanding any other provision of this Agreement,
in the event of a breach or threatened breach by the Executive of any provision
of this Section, the Executive and the Company agree that the Company shall be
entitled to injunctive and declaratory relief from a court of competent
jurisdiction to restrain the Executive from committing such breach of the
Agreement. Nothing in this Agreement shall be construed as prohibiting the
Company from pursuing any other remedy or remedies including, without
limitation, the recovery of damages.
23
<PAGE> 24
(e) The provisions of this Section 11 shall survive the
expiration of this Agreement or the termination of the Agreement for any reason.
12. Executive's Representation. The Executive represents and
warrants to the Company that there is no legal impediment to him performing his
obligations under this Agreement and neither entering into this Agreement nor
performing his contemplated service hereunder will violate any agreement to
which he is a party or any other legal restriction.
13. Assignment. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors, heirs (in
the case of the Executive) and permitted assigns. This Agreement is personal to
the Executive and neither this Agreement or any rights hereunder may be assigned
by the Executive. No rights or obligations of the Company under this Agreement
may be assigned or transferred by the Company except that such rights or
obligations may be assigned or transferred pursuant to a merger or consolidation
in which the Company is not the continuing entity, or pursuant to a sale of all
or substantially all of the assets of the Company, provided that the assignee or
transferee is the successor to all or substantially all of the assets of the
Company and such assignee or transferee assumes the liabilities, obligations and
duties of the Company, as contained in this Employment Agreement, either
contractually or as a matter of law. The Company further agrees that, in the
event of a sale as described in the preceding sentence, it shall use its
reasonable best efforts to cause such assignee or transferee to expressly assume
the liabilities, obligations and duties of the Company hereunder.
24
<PAGE> 25
14. Notice. Any notice to either party hereunder shall be in
writing, and shall be deemed to be sufficiently given to or served on such
party, for all purposes, if the same shall be personally delivered to such
party, or sent to such party by registered mail, postage prepaid, at the address
of such party first given above. Notices to the Company shall be addressed to
the Chairman of the Board with a copy similarly sent to the General Counsel.
Either party hereto may change the address to which notices are to be sent to
such party hereunder by written notice of such new address given to the other
party hereto. Notices shall be deemed given when received if delivered
personally or three (3) days after mailing if mailed as aforesaid.
15. Applicable Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the Delaware applicable to
contracts to be performed therein.
16. Miscellaneous. (a) This Agreement and the Stock
Appreciation Right Agreements represent the entire understanding of the parties
hereto, supersede any prior understandings or agreements between the parties,
including, without limitation, the Employment and Non-Competition Agreement by
and between Mego Mortgage Corporation and the Executive dated as of January 1,
1994 (the "Prior Employment Agreement"), and the terms and provisions of this
Agreement may not be modified or amended except in a writing signed by both
parties. Notwithstanding anything else herein, paragraphs 4(b) and 4(c) of the
Prior Employment Agreement shall remain in effect for any incentive bonus or
deferred compensation earned under the Prior Employment Agreement prior to the
Commencement Date, provided that, any incentive bonus or deferred compensation
payable thereunder for the calendar year 1997 shall be based
25
<PAGE> 26
solely on the Company's after tax income and "Gain on Sale" (as determined under
the Prior Employment Agreement) for the period commencing January 1, 1997 and
ending August 31, 1997.
(b) The Company's and the Executive's obligations under
the second sentence of Section 3(f) hereof and the Company's obligation to pay
Executive any amounts pursuant to Sections 5, 6, 8, 9 or 10 hereof shall survive
the expiration of this Agreement or a termination of this Agreement for any
reason.
(c) No waiver by either party of any breach by the other
party of any condition or provision contained in this Agreement to be fulfilled
or performed by such other party shall be deemed a waiver of a similar or
dissimilar condition or provision at the same or any prior or subsequent time.
Except to the extent otherwise specifically provided herein, any waiver must be
in writing and signed by the Executive or an authorized officer of the Company,
as the case may be.
17. Beneficiary. The Executive shall be entitled to select
(and change, to the extent permitted under any applicable law) a beneficiary or
beneficiaries to receive any compensation or benefit payable under this
Agreement following his death by giving the Company written notice thereof in
accordance with applicable Company policies. In the event of the Executive's
death or a judicial determination of his incompetence, reference in this
Agreement to the Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.
26
<PAGE> 27
18. Calculation of Certain Amounts. Notwithstanding anything
else herein, the Executive and the Company hereby agree that the calculations of
the amount of any Incentive Bonus, Deferred Compensation, Prorated Payments,
amounts payable pursuant to Sections 8(a)(i)(A)(z), 8(a)(i)(B)(z), 10(b)(i)(y),
10(b)(ii)(y), 10(c)(i)(z) and 10(c)(ii)(z) and any increase in Base Salary shall
be performed by the Company's then certified independent public accountants and
that such determination shall be final and binding on the Company, the Executive
and their respective, successors, heirs (in the case of the Executive) and
permitted assigns. The calculations of the amount of any Incentive Bonus,
Deferred Compensation, Prorated Payments and amounts payable pursuant to
Sections 8(a)(i)(A)(z), 8(a)(i)(B)(z), 10(b)(i)(y), 10(b)(ii)(y), 10(c)(i)(z)
and 10(c)(ii)(z) shall be based on the financial statements of the Company for
the applicable period in accordance with generally accepted accounting
principles consistently applied.
19. Legal Fees. The Company shall reimburse the Executive the
reasonable legal fees (based on reasonable hourly rates and disbursements)
incurred by him in connection with entering into this Agreement, provided that
in no event shall such reimbursement exceed $10,000.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the day and year first above written.
MEGO MORTGAGE CORPORATION
By:
----------------------------------
Title:
-------------------------------
EXECUTIVE
--------------------------------------
27
<PAGE> 28
Exhibit A
A "Change in Control" shall be deemed to have occurred upon:
(a) any "person" as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than
the Company, any trustee or other fiduciary holding securities under any
employee benefit plan of the Company, or any company owned, directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of Common Stock of the Company), is or becomes
the owner (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the combined voting power of the Company's then outstanding securities;
(b) during any period of two consecutive years (not including
any period prior to the Commencement Date), individuals who at the beginning of
such period constitute the Board, and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction described in paragraph (a), (c) or (d) of this Exhibit A)
whose election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds of the directors then
still in office who either were directors at the beginning of the two-year
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute at least a majority of the Board, provided
that a Change in Control shall not occur pursuant to this subsection (b) if
Robert Nederlander, Jerome J. Cohen, Don A. Mayerson, Growth Realty, Inc. and
Herbert B. Hirsch or any of them own, either directly or indirectly (indirect
ownership shall be determined in accordance with the constructive ownership
rules under Code Section 318 and amounts indirectly owned shall also include any
stock contributed by any of the foregoing to a private foundation and/or trust),
more than ten percent (10%) of the voting stock of the Company;
(c) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the combined voting power of
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; provided, however, that a merger
or consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no person acquires more than thirty-three percent
(33%) of the combined voting power of the Company's then outstanding securities
shall not constitute a Change in Control of the Company; or
(d) the stockholders of the Company approve a plan of complete
liquidation of the Company or the closing of a sale or disposition by the
Company of all or substantially all of the assets of the Company other than a
sale of all substantially all of the assets of the Company (other than in the
ordinary course of business) to a person or persons who
<PAGE> 29
beneficially own, directly or indirectly, at least fifty percent (50%) or more
of the combined voting power of the Company's then outstanding securities.
Notwithstanding the foregoing, the spinoff of the shares of
common stock of the Company by Mego Financial Corporation will not constitute a
Change in Control for purposes of this Agreement. Only one (1) Change in Control
may occur under this Agreement.
<PAGE> 30
Exhibit B
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
POTENTIAL DEFERRED COMPENSATION PERFORMANCE CRITERIA
PAYMENT
- --------------------------------------------------------------------------------
<S> <C>
March 1998 Payment A ten percent (10%) rate of Return on
Stockholder Equity for calendar year 1997.
- --------------------------------------------------------------------------------
March 1999 Payment (i) A ten percent (10%) rate of Return on
Stockholder Equity for calendar year 1998
or, (ii) a ten percent (10%) Average Annual
Rate of Return on Stockholder Equity for
calendar years 1997 and 1998.
- --------------------------------------------------------------------------------
March 2000 Payment (i) A ten percent (10%) rate of Return on
Stockholder Equity for calendar year 1999
or, (ii) a ten percent (10%) Average Annual
Rate of Return on Stockholder Equity for
calendar years 1998 and 1999.
- --------------------------------------------------------------------------------
Potential Payment Following the (i) A ten percent (10%) rate of Return on
March 2000 Payment Stockholder Equity for the calendar year for
which the potential payment is being made
or, (ii) a ten percent (10%) Average Annual
Rate of Return on Stockholder Equity for the
calendar year for which the potential
payment is being made and the calendar year
prior to the calendar year for which the
potential payment is being made.
- --------------------------------------------------------------------------------
</TABLE>
For purposes of this Agreement, including without limitation this Exhibit B, (i)
the rate of Return on Stockholder Equity shall be determined by the Company's
then certified independent public accountants in accordance with generally
accepted accounting principles, as in effect on the date of this Agreement,
consistently applied and shall be based on stockholder equity on the first day
of the calendar year and the net income earned for such calendar year, as
determined in a manner consistent with the method used for calculating
stockholder equity and net income for the Company's financial statements, and
(ii) Average Annual Rate of Return on Stockholder Equity shall mean (a) the sum
of the rate of Return on Stockholder Equity for each of the two relevant
calendar years, (b) divided by two (2). Any determination by the Company's
accountants shall be final and binding on the Company, the Executive and their
respective, successors, heirs (in the case of the Executive) and permitted
assigns.
<PAGE> 1
Exhibit 10.63
August 20, 1997
Mr. James Belter
Mego Mortgage Corporation
1000 Parkwood Circle, 5th Floor
Atlanta, Georgia 30339
Re: Terms of Employment
Dear Jim:
We are pleased to confirm that Mego Mortgage Corporation (the
"Company") has offered you a position as a senior executive officer of the
Company, subject to the terms of this letter (the "Letter Agreement"). Your
employment hereunder will commence September 2, 1997 and, unless terminated
earlier by you or the Company, will continue until December 31, 1999 (the
"Employment Term"). You will report to the Chief Executive Officer ("CEO") or
such other officer more senior to you as may be designated by the CEO from time
to time. Following the expiration of the Employment Term, your employment with
the Company shall be "at-will" and may be terminated by you or the Company at
any time.
The Company shall pay you a base salary at the rate of
$200,000 per year, in accordance with the usual payroll practices of the
Company.
While you are employed by the Company, you will be eligible to
be considered for a year-end discretionary performance bonus award based on
factors determined by the Company in accordance with the Company's executive
bonus pool program. The bonus payment, if any, shall be paid to you at the time
the Company distributes all other bonuses.
Notwithstanding the foregoing, you are guaranteed to receive a
bonus of $100,000 (the "Guaranteed Bonus") for each of the first two full years
during which you are employed (ending December 31, 1999), except if your
employment is terminated by the Company for "cause" (as determined by the Board
of Directors of the Company in its sole and absolute discretion) or you resign
voluntarily prior to December 31, 1999, any unpaid Guaranteed Bonus shall be
forfeited and you shall not be entitled to future bonus payments.
During the Employment Term, you will receive a car allowance
to be used for business purposes in the amount of $500 per month. You will be
responsible for any income tax consequences arising from this arrangement.
<PAGE> 2
James Belter
August 20, 1997
Page 2
While you are employed by the Company, you shall devote
substantially all of your business time and efforts to the performance of your
duties hereunder and use your best efforts in such endeavors, provided, however,
you shall be allowed, to manage your passive personal investments in accordance
with Company policies on personal investments.
While you are employed by the Company, you shall be entitled
to participate, to the extent eligible thereunder, in all benefit plans and
programs, in accordance with the terms thereof in effect from time to time, as
are generally provided from time to time by the Company to other senior
executives of the Company.
If your employment is terminated by the Company for any reason
other than for "cause" (as determined by the Company's Board of Directors in its
sole and absolute discretion) prior to the expiration of the Employment Term,
the Company shall pay you in the form of a lump sum, no later than fifteen (15)
days following the date of such termination of employment an amount equal to:
(A) the value of your unpaid base salary through the remainder of the Employment
Term; plus (B) if your employment terminates after January 1, 1998, any unpaid
Guaranteed Bonus for the year during which your termination of employment
occurs.
Upon termination of your employment for any reason, the
Company shall have no obligations under this Letter Agreement other than as
provided above and to pay you: (i) any base salary that you have earned but
remains unpaid and (ii) any unreimbursed business expenses otherwise
reimbursable in accordance with the Company's policies as in effect from time to
time.
This Letter Agreement is personal to you and neither the
Letter Agreement nor any rights hereunder may be assigned by you. This Letter
Agreement shall be governed by, and construed under and in accordance with, the
internal laws of the State of Delaware without reference to rules relating to
the conflicts of laws.
This Letter Agreement contains the entire agreement of the
parties relating to the subject matter hereof, and supersedes in its entirety
any and all prior agreements, understandings or representations relating to the
subject matter hereof. No modifications of this Letter Agreement shall be valid
unless made in writing and signed by the parties hereto.
Very truly yours,
MEGO MORTGAGE CORPORATION
<PAGE> 3
James Belter
August 20, 1997
Page 3
By
--------------------------
Name:
Title:
Agreed:
- ----------------------------
James Belter
<PAGE> 1
Exhibit 10.64
August 20, 1997
Mr. Chris DeWinter
26 Austin Point
Port Chester, NY 10573
Re: Terms of Employment
Dear Chris:
We are pleased to confirm that Mego Mortgage Corporation (the
"Company") has offered you a position as a senior executive officer of the
Company, subject to the terms of this letter (the "Letter Agreement"). Your
employment hereunder commenced as of July 1, 1997 and, unless terminated earlier
by you or the Company, will continue until December 31, 1999 (the "Employment
Term"). You will report to the Chief Executive Officer ("CEO") or such other
officer more senior to you as may be designated by the CEO from time to time.
Following the expiration of the Employment Term, your employment with the
Company shall be "at-will" and may be terminated by you or the Company at any
time.
The Company shall pay you a base salary at the rate of
$130,000 per year, in accordance with the usual payroll practices of the
Company.
You will receive a sign-on bonus of $25,000 (subject to all
applicable federal, state and local withholding requirements) to be paid to you
as soon as practicable, provided that you have not previously received such
bonus. While you are employed by the Company, you will be eligible to be
considered for a year-end discretionary performance bonus award based on factors
determined by the Company in accordance with the Company's executive bonus pool
program. The bonus payment, if any, shall be paid to you at the time the Company
distributes all other bonuses.
Notwithstanding the foregoing, you are guaranteed to receive a
bonus of $75,000 (the "Guaranteed Bonus") for the first full year you are
employed (ending June 30, 1998) to be paid to you on or before July 15, 1998,
except if your employment is terminated by the Company for "cause" (as
determined by the Board of Directors of the Company in its sole and absolute
discretion) or you resign
<PAGE> 2
Chris DeWinter
August 20, 1997
Page 2
voluntarily prior to July 1, 1998, the Guaranteed Bonus shall be forfeited and
you shall not be entitled to future bonus payments.
While you are employed by the Company, you shall devote
substantially all of your business time and efforts to the performance of your
duties hereunder and use your best efforts in such endeavors, provided, however,
you shall be allowed, to manage your passive personal investments in accordance
with Company policies on personal investments.
While you are employed by the Company, you shall be entitled
to participate, to the extent eligible thereunder, in all benefit plans and
programs, in accordance with the terms thereof in effect from time to time, as
are generally provided from time to time by the Company to other senior
executives of the Company; provided, that: (i) in no event shall you receive
less than three (3) weeks paid vacation for any calendar year (commencing
January 1, 1998) during the Employment Term (any unused vacation will be
forfeited) and (ii) the Company shall reimburse you for the payment of any COBRA
premium for your (and your dependents') health coverage prior to the time you
and your dependents become eligible to participate in the Company's health plan.
The Company shall also provide the following in connection
with your relocation from New York to Atlanta: (i) reimbursement of the moving
expenses paid pursuant to a contract with your moving company for moving any
household items owned by you and your dependents; (ii) reimbursement of any
realtor commissions for sale of your New York residence, up to a maximum of 7
percent of the sale price of such residence; (iii) reimbursement of up to 1.5
percent of origination fee for the origination for the facilitation of a loan to
purchase a metro area Atlanta residence. To the extent that you incur tax on
receipt of the amounts paid under subsections (ii) and (iii) above, the Company
shall make an additional payment to you so that you will have no additional cost
for receiving such amounts or any additional payment.
The Company shall also pay reasonable amounts for temporary
housing until your home in New York is sold or for a maximum of three months,
whichever comes first.
If your employment is terminated by the Company for any reason
other than for "cause" (as determined by the Company's Board of Directors in its
sole and absolute discretion) prior to the expiration of the Employment Term,
the Company shall pay you in the form of a lump sum, no later than fifteen (15)
days following the date of such termination of employment an amount equal to:
(A) the value of your unpaid base salary through the remainder of the Employment
Term; plus (B) your Guaranteed Bonus, to the extent not already paid.
<PAGE> 3
Chris DeWinter
August 20, 1997
Page 3
Upon termination of your employment for any reason, the
Company shall have no obligations under this Letter Agreement other than as
provided above and to pay you: (i) any base salary that you have earned but
remains unpaid and (ii) any unreimbursed business expenses otherwise
reimbursable in accordance with the Company's policies as in effect from time to
time.
This Letter Agreement is personal to you and neither the
Letter Agreement nor any rights hereunder may be assigned by you. This Letter
Agreement shall be governed by, and construed under and in accordance with, the
internal laws of the State of Delaware without reference to rules relating to
the conflicts of laws.
<PAGE> 4
Chris DeWinter
August 20, 1997
Page 4
This Letter Agreement contains the entire agreement of the
parties relating to the subject matter hereof, and supersedes in its entirety
any and all prior agreements, understandings or representations relating to the
subject matter hereof. No modifications of this Letter Agreement shall be valid
unless made in writing and signed by the parties hereto.
Very truly yours,
MEGO MORTGAGE CORPORATION
By
-----------------
Name:
Title:
Agreed:
- ----------------------------
Chris DeWinter
<PAGE> 1
Exhibit 10.65
August 20, 1997
Mr. Don A. Mayerson
1125 N.E. 125th Street, Suite 206
North Miami, Florida 33181
Dear Mr. Mayerson:
The purpose of this letter is to acknowledge, and set forth the terms
of our agreement with regard to your continued service on the Board of Directors
(the "Board") of Mego Mortgage Corporation (the "Company") and your retention by
the Company as a consultant.
1. This Agreement shall be for a term (the "Term") commencing on
September 1, 1997 and terminating upon the earlier of: (i) August 31, 1999, (ii)
your death, or (iii) your Disability (within the meaning of Section 72(m)(7) of
the Internal Revenue Code of 1986, as amended (the "Code")).
2. During the Term and while you are serving as a director of the
Company, you will continue to receive compensation for your services as a
director of the Company in accordance with the Company's then current practice.
3. Whether or not you continue to serve as a director during the
Term, you shall serve as a consultant as reasonably requested by the Company
with regard to matters you are or were involved with while a director, for the
remainder of the Term (the "Consultancy"). For your services as a consultant,
the Company will pay you an annual fee (the "Annual Fee") of Two Hundred Fifty
Thousand Dollars ($250,000). Such annual Fee shall be payable in monthly
installments and shall be prorated for any partial calendar years during the
Term. All amounts payable hereunder (and any amounts payable pursuant to Section
2) are, to the extent legally required, subject to withholding and deductions.
4. During the Consultancy, you will be an independent contractor of
the Company and, as a consultant, you will have no authority to bind the
Company. Subject to and in accordance with the Company's normal practices and
policies, you will be entitled to receive reimbursement for any reasonable
business expenses related to the Company incurred during the Term. The Company
shall indemnify you and hold you harmless, to the full extent permitted by law
as, to and from any and all costs, expenses or damages incurred by you as a
result of any claim, suit, action or judgment arising out of your activities as
a consultant to or a director of the Company and this right to indemnification
shall survive the termination of this Letter Agreement.
5. In the event of your Disability or death prior to August 31, 1999,
the Company shall pay you or your designated beneficiary (or, if none, your
estate), as the case may be, in a lump sum the Annual Fees you would have
received during the period commencing on the date of your Disability or death
and ending on August 31, 1999 and any unpaid Annual Fees accrued
<PAGE> 2
prior to your Disability or death. Upon payment of such amount the Company shall
have no further obligation to you hereunder.
6. Notwithstanding anything else herein, in the event of a Change in
Control of the Company (as defined in Exhibit A hereto) during the Term, the
Company may, in its sole and absolute discretion, pay you in a lump sum within
ten (10) days of the date of the Change in Control, in lieu of any other amounts
due hereunder, the Annual Fees you would have received during the period
commencing on the date of the Change in Control and ending on August 31, 1999.
Notwithstanding anything herein to the contrary, the payments under this Section
6 shall not be subject to any offset, counterclaim, recoupment, defense or other
right which the Company may have and you shall have no obligation to mitigate
with respect to such payments. Upon payment of the amounts specified in this
Section 6, the parties hereto will have no further rights or obligations under
this Agreement.
7. You acknowledge that during the Term you will not be an employee
of the Company and you will not be eligible to participate in, or receive
benefits under, any benefit plans or arrangements maintained, or contributed to,
by the Company, including without limitation, any fringe, welfare, retirement,
sick leave, vacation or incentive plans or arrangements, except in your capacity
as a director. This Section 7 will not apply to any stock options or stock
appreciation rights granted to you in your capacity as a director of the
Company.
8. This Agreement set forth the parties' entire agreement, and
supersedes any and all prior understandings, with respect to its subject matter.
This Agreement can be amended only by a writing signed by both you and the
Company.
9. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors, heirs (in your case) and
permitted assigns. This Agreement is personal to you and neither this Agreement
nor any rights hereunder may be assigned by you. No rights or obligations of the
Company under this Agreement may be assigned or transferred by the Company
except that such rights or obligations may be assigned or transferred pursuant
to a merger or consolidation in which the Company is not the continuing entity,
or pursuant to a sale of all or substantially all of the assets of the Company,
provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company and such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either contractually or as a matter of law. The Company further
agrees that, in the event of a sale as described in the preceding sentence, it
shall use its best efforts to cause such assignee or transferee to expressly
assume the liabilities, obligations and duties of the Company hereunder. If the
assignee or transferee does not expressly assume the liabilities, obligations
and duties of the Company hereunder, the Company shall pay you in a lump sum
within ten (10) days following the closing of the sale of all or substantially
all of the assets of the Company the amount set forth in Section 6.
10. All notices under this Agreement shall be given in writing and
shall be either delivered personally or sent by certified or registered mail,
return receipt requested, addressed to the other party at the appropriate
address first set forth above, or to such other address as such
-2-
<PAGE> 3
party shall designate by written notice as aforesaid. Notices shall be deemed
given when received or two (2) days after mailing, whichever is earlier.
11. This Agreement shall be governed by, and construed under and in
accordance with, the internal laws of the State of Delaware, without reference
to rules relating to conflicts of laws.
Please execute a copy of this Agreement and return it to me to
acknowledge your agreement to the foregoing.
MEGO MORTGAGE CORPORATION
By:
--------------------------
Title:
-----------------------
Agreed:
----------------------
-3-
<PAGE> 4
EXHIBIT A
A "Change in Control" shall be deemed to have occurred
upon:
(a) any "person" as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than
the Company, any trustee or other fiduciary holding securities under any
employee benefit plan of the Company, or any company owned, directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of Common Stock of the Company), is or becomes
the owner (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the combined voting power of the Company's then outstanding securities;
(b) during any period of two consecutive years (not
including any period prior to the commencement of the Term), individuals who at
the beginning of such period constitute the Board, and any new director (other
than a director designated by a person who has entered into an agreement with
the Company to effect a transaction described in paragraph (a), (c) or (d) of
this Exhibit A) whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of the
two-year period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority of the Board,
provided that a Change in Control shall not occur pursuant to this subsection
(b) if Robert Nederlander, Jerome J. Cohen, Don A. Mayerson, Growth Realty, Inc.
And Herbert B. Hirsch or any of them own, either directly or indirectly
(indirect ownership shall be determined in accordance with the constructive
ownership rules under Code Section 318 and amounts indirectly owned shall also
include any stock contributed by any of the foregoing to a private foundation
and/or trust), more than ten percent (10%) of the voting stock of the Company;
(c) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the combined voting power of
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; provided, however, that a merger
or consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no person acquires more than thirty-three percent
(33%) of the combined voting power of the Company's then outstanding securities
shall not constitute a Change in Control of the Company; or
(d) the stockholders of the Company approve a plan of
complete liquidation of the Company or the closing of a sale or disposition by
the Company of all or substantially all of the assets of the Company other than
a sale of all or substantially all of the assets of the Company (other than in
the ordinary course of business) to a person or persons who beneficially own,
directly or indirectly, at least fifty percent (50%) or more of the combined
voting power of the Company's then outstanding securities.
<PAGE> 1
Exhibit 10.66
August 20, 1997
Mr. Herbert B. Hirsch
230 East Flamingo Rd. #421
Las Vegas, Nevada 89109
Dear Mr. Hirsch:
The purpose of this letter is to acknowledge, and set forth the terms
of our agreement with regard to your continued service on the Board of Directors
(the "Board") of Mego Mortgage Corporation (the "Company") and your retention by
the Company as a consultant.
1. This Agreement shall be for a term (the "Term") commencing on
September 1, 1997 and terminating upon the earlier of: (i) August 31, 1999, (ii)
your death, or (iii) your Disability (within the meaning of Section 72(m)(7) of
the Internal Revenue Code of 1986, as amended (the "Code")).
2. During the Term and while you are serving as a director of the
Company, you will continue to receive compensation for your services as a
director of the Company in accordance with the Company's then current practice.
3. Whether or not you continue to serve as a director during the
Term, you shall serve as a consultant as reasonably requested by the Company
with regard to matters you are or were involved with while a director, for the
remainder of the Term (the "Consultancy"). For your services as a consultant,
the Company will pay you an annual fee (the "Annual Fee") of One Hundred Fifty
Thousand Dollars ($150,000). Such annual Fee shall be payable in monthly
installments and shall be prorated for any partial calendar years during the
Term. All amounts payable hereunder (and any amounts payable pursuant to Section
2) are, to the extent legally required, subject to withholding and deductions.
4. During the Consultancy, you will be an independent contractor of
the Company and, as a consultant, you will have no authority to bind the
Company. Subject to and in accordance with the Company's normal practices and
policies, you will be entitled to receive reimbursement for any reasonable
business expenses related to the Company incurred during the Term. The Company
shall indemnify you and hold you harmless, to the full extent permitted by law
as, to and from any and all costs, expenses or damages incurred by you as a
result of any claim, suit, action or judgment arising out of your activities as
a consultant to or a director of the Company and this right to indemnification
shall survive the termination of this Letter Agreement.
5. In the event of your Disability or death prior to August 31, 1999,
the Company shall pay you or your designated beneficiary (or, if none, your
estate), as the case may be, in a lump sum the Annual Fees you would have
received during the period commencing on the date of your Disability or death
and ending on August 31, 1999 and any unpaid Annual Fees accrued
<PAGE> 2
prior to your Disability or death. Upon payment of such amount the Company shall
have no further obligation to you hereunder.
6. Notwithstanding anything else herein, in the event of a Change in
Control of the Company (as defined in Exhibit A hereto) during the Term, the
Company may, in its sole and absolute discretion, pay you in a lump sum within
ten (10) days of the date of the Change in Control, in lieu of any other amounts
due hereunder, the Annual Fees you would have received during the period
commencing on the date of the Change in Control and ending on August 31, 1999.
Notwithstanding anything herein to the contrary, the payments under this Section
6 shall not be subject to any offset, counterclaim, recoupment, defense or other
right which the Company may have and you shall have no obligation to mitigate
with respect to such payments. Upon payment of the amounts specified in this
Section 6, the parties hereto will have no further rights or obligations under
this Agreement.
7. You acknowledge that during the Term you will not be an employee
of the Company and you will not be eligible to participate in, or receive
benefits under, any benefit plans or arrangements maintained, or contributed to,
by the Company, including without limitation, any fringe, welfare, retirement,
sick leave, vacation or incentive plans or arrangements, except in your capacity
as a director. This Section 7 will not apply to any stock options or stock
appreciation rights granted to you in your capacity as a director of the
Company.
8. This Agreement set forth the parties' entire agreement, and
supersedes any and all prior understandings, with respect to its subject matter.
This Agreement can be amended only by a writing signed by both you and the
Company.
9. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors, heirs (in your case) and
permitted assigns. This Agreement is personal to you and neither this Agreement
nor any rights hereunder may be assigned by you. No rights or obligations of the
Company under this Agreement may be assigned or transferred by the Company
except that such rights or obligations may be assigned or transferred pursuant
to a merger or consolidation in which the Company is not the continuing entity,
or pursuant to a sale of all or substantially all of the assets of the Company,
provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company and such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either contractually or as a matter of law. The Company further
agrees that, in the event of a sale as described in the preceding sentence, it
shall use its best efforts to cause such assignee or transferee to expressly
assume the liabilities, obligations and duties of the Company hereunder. If the
assignee or transferee does not expressly assume the liabilities, obligations
and duties of the Company hereunder, the Company shall pay you in a lump sum
within ten (10) days following the closing of the sale of all or substantially
all of the assets of the Company the amount set forth in Section 6.
10. All notices under this Agreement shall be given in writing and
shall be either delivered personally or sent by certified or registered mail,
return receipt requested, addressed to the other party at the appropriate
address first set forth above, or to such other address as such
-2-
<PAGE> 3
party shall designate by written notice as aforesaid. Notices shall be deemed
given when received or two (2) days after mailing, whichever is earlier.
11. This Agreement shall be governed by, and construed under and in
accordance with, the internal laws of the State of Delaware, without reference
to rules relating to conflicts of laws.
Please execute a copy of this Agreement and return it to me to
acknowledge your agreement to the foregoing.
MEGO MORTGAGE CORPORATION
---------------------------------
By:
------------------------------
Title:
---------------------------
Agreed:
------------------------------
-3-
<PAGE> 4
EXHIBIT A
A "Change in Control" shall be deemed to have occurred
upon:
(a) any "person" as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than
the Company, any trustee or other fiduciary holding securities under any
employee benefit plan of the Company, or any company owned, directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of Common Stock of the Company), is or becomes
the owner (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the combined voting power of the Company's then outstanding securities;
(b) during any period of two consecutive years (not
including any period prior to the commencement of the Term), individuals who at
the beginning of such period constitute the Board, and any new director (other
than a director designated by a person who has entered into an agreement with
the Company to effect a transaction described in paragraph (a), (c) or (d) of
this Exhibit A) whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of the
two-year period or whose election or nomination for election was previously so
approved, cease for any reason to constitute at least a majority of the Board,
provided that a Change in Control shall not occur pursuant to this subsection
(b) if Robert Nederlander, Jerome J. Cohen, Don A. Mayerson, Growth Realty, Inc.
And Herbert B. Hirsch or any of them own, either directly or indirectly
(indirect ownership shall be determined in accordance with the constructive
ownership rules under Code Section 318 and amounts indirectly owned shall also
include any stock contributed by any of the foregoing to a private foundation
and/or trust), more than ten percent (10%) of the voting stock of the Company;
(c) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the combined voting power of
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; provided, however, that a merger
or consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no person acquires more than thirty-three percent
(33%) of the combined voting power of the Company's then outstanding securities
shall not constitute a Change in Control of the Company; or
(d) the stockholders of the Company approve a plan of
complete liquidation of the Company or the closing of a sale or disposition by
the Company of all or substantially all of the assets of the Company other than
a sale of all or substantially all of the assets of the Company (other than in
the ordinary course of business) to a person or persons who beneficially own,
directly or indirectly, at least fifty percent (50%) or more of the combined
voting power of the Company's then outstanding securities.
<PAGE> 1
Exhibit 10.67
MEGO MORTGAGE CORPORATION
as the Issuer
and
THE PERSONS WHO FROM TIME TO TIME BECOME
SUBSIDIARY GUARANTORS
and
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as Trustee
--------------------
FIRST SUPPLEMENTAL INDENTURE
Dated as of October 20, 1997
TO
INDENTURE
Dated as of November 22, 1996
--------------------
12 1/2% Senior Subordinated Notes due 2001
<PAGE> 2
FIRST SUPPLEMENTAL INDENTURE, dated as of October 20, 1997 (the "First
Supplemental Indenture"), among Mego Mortgage Corporation, a Delaware
corporation (the "Company"), any Person that may from time to time become a
party hereto as a Subsidiary Guarantor by executing and delivering to the
Trustee a Joinder of Subsidiary Guarantor, and American Stock Transfer & Trust
Company, a New York corporation, as trustee (the "Trustee").
RECITALS
WHEREAS, the Company and the Trustee executed and delivered the
Indenture, dated as of November 22, 1996 (the "Original Indenture", and as
amended hereby, the "Indenture"), pursuant to which $40,000,000 aggregate
principal amount of 12 1/2% Senior Subordinated Notes due 2001 (the "Existing
Notes") of the Company were issued;
WHEREAS, Section 9.2 of the Indenture provides that, when authorized by
a resolution of the Board of Directors of the Company, the Company and the
Trustee may enter into a supplemental indenture to add provisions to or change,
eliminate or waive provisions of the Indenture or modify the rights of Holders
under the Indenture with the written consent of the Holders of at least a
majority in aggregate principal amount of the Notes then outstanding;
WHEREAS, the execution and delivery of this First Supplemental
Indenture have been duly authorized and approved by resolution of the Board of
Directors of the Company;
WHEREAS, the Company has solicited the consent of the Holders of the
Existing Notes to certain amendments (the "Amendments") to the Original
Indenture pursuant to that certain Consent Solicitation Statement, dated
September 22, 1997;
WHEREAS, Holders representing at least a majority in aggregate
principal amount of the Existing Notes have consented to the Amendments and
pursuant to Section 1.4 of the Indenture, evidence of such consent has been
proved to the Trustee in a manner which the Trustee has deemed satisfactory; and
WHEREAS, the Company desires and has requested that the Trustee join in
the execution and delivery of this First Supplemental Indenture for the purpose
of amending the Original Indenture.
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, it is mutually covenanted and agreed for the equal and
ratable benefit of all Holders of the Notes as follows, effective upon execution
hereof by the Trustee:
<PAGE> 3
ARTICLE ONE
AMENDMENTS TO INDENTURE
SECTION 1.1 AMENDED RECITALS AND DEFINITIONS.
Paragraph A of the Recitals of the Company hereby is amended to read in
its entirety as follows:
A. The Company has duly authorized the execution and
delivery of this Indenture to provide for the issuance of a
series of its unsecured 12 1/2% Senior Subordinated Notes due
2001 with an aggregate principal amount of $40,000,000 (herein
called the "EXISTING NOTES") and may, subject to Section 3.12,
in the future authorize the issuance of one or more additional
series of its unsecured 12 1/2% Senior Subordinated Notes due
2001 limited in aggregate principal amount to $110,000,000
(the "FUTURE NOTES" or, together with the Existing Notes, the
"NOTES"), to be issued as in this Indenture provided. All
references to "FUTURE NOTES" include, in the case of Future
Notes issued pursuant to an exemption from the registration
requirements of the Securities Act, any Notes issued in
exchange for such Future Notes pursuant to a registered
exchange offer under the Securities Act (the "EXCHANGE
NOTES").
The word "and" is hereby deleted from the end of paragraph (6) of
Section 1.1 of the Indenture. The following new paragraph (7) is added to
Section 1.1 of the Indenture, and paragraph (7) of the Original Indenture is
hereby renumbered paragraph (8):
(7) references in this Indenture to "interest" on or
with respect to the Notes include, in the case of Future Notes
subject to a Registration Rights Agreement, Added Interest;
and
In addition, each of the following definitions set forth in Section 1.1
of the Indenture hereby is amended to read in each of their entirety as follows:
"CONSOLIDATED ADJUSTED NET INCOME" means, for any
period, (a) Consolidated Net Income MINUS (b) gain on sale of
loans and net unrealized gain on mortgage related securities,
PLUS (c) provision for credit losses, amortization and
depreciation (including amortization of excess servicing
rights or any reclassification thereof), in each case for such
period and for the Company and its Restricted Subsidiaries.
"ISSUE DATE" means the date on which the Existing
Notes were originally issued.
"PERMITTED LIENS" means, with respect to the Company
and any Restricted Subsidiary: (i) pledges or deposits by such
Person under worker's compensation laws, unemployment
insurance laws or similar
2
<PAGE> 4
legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of
Indebtedness) or leases to which such Person is a party, or
deposits to secure public or statutory obligations of such
Person or deposits of cash or United States government bonds
to secure surety or appeal bonds to which such Person is a
party, or deposits as security for contested taxes or for the
payment of rent, in each case Incurred in the ordinary course
of business; (ii) Liens imposed by law, such as carriers',
warehousemen's and mechanics' Liens, in each case for amounts
not yet due or being contested in good faith by appropriate
proceedings or other Liens arising out of judgments or awards
against such Person with respect to which such Person shall
then be proceeding with an appeal or other proceedings for
review; (iii) Liens for property taxes not yet subject to
penalties for nonpayment or which are being contested in good
faith and by appropriate proceedings; (iv) minor survey
exceptions, minor encumbrances, easements or reservations of,
or rights of others for, licenses, rights of way, sewers,
electric lines, telegraph and telephone lines and other
similar purposes, or zoning or other restrictions as to the
use of real property, or leases, subleases or other Liens
incidental to the conduct of the business of such Person or to
the ownership of its properties which were not Incurred in
connection with Indebtedness and which do not in the aggregate
materially adversely affect the value of said properties or
materially impair their use in the operation of the business
of such Person; (v) Liens securing Indebtedness of such Person
Incurred to finance the construction, purchase or lease of, or
repairs, improvements or additions to, equipment (including
vehicles) of such Person (but excluding Capital Stock of
another Person); PROVIDED, HOWEVER, that the Lien may not
extend to any other property owned by such Person or any of
its Subsidiaries at the time the Lien is Incurred, and the
Indebtedness secured by the Lien may not be Incurred more than
180 days after the later of the acquisition, completion of
construction, repair, improvement, addition or commencement of
full operation of the property subject to the Lien; (vi) Liens
on Receivables of the Company or a Restricted Subsidiary, as
the case may be, to secure Indebtedness permitted under the
provisions described in clause (b)(1) of Section 10.9; (vii)
Liens on Excess Spread Receivables (or on the Capital Stock of
any Person substantially all the assets of which are Excess
Spread Receivables); PROVIDED, HOWEVER, that no such Liens may
encumber Eligible Excess Spread Receivables of the Company and
its Restricted Subsidiaries (including by way of any such Lien
on Capital Stock of any such Person) in an amount equal to the
sum of (1) the Specified Percentage in effect at the creation
of such Lien (the "DETERMINATION DATE") of the unpaid
principal amount as of the determination date of the Notes and
all other unsecured Indebtedness of the Company and its
Restricted Subsidiaries other than (x) Junior Subordinated
Obligations and (y) liabilities referred to in clause (E) of
the last sentence of the definition of "Unsecured Senior
Indebtedness"
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(collectively, the "SPECIFIED UNSECURED INDEBTEDNESS"; the
amount under this subclause (1) being the "BASE SET ASIDE"),
PLUS (2) 25% of the excess, if any, of (x) the total amount of
Eligible Excess Spread Receivables shown on the balance sheet
of the Company and its Restricted Subsidiaries, determined on
a consolidated basis in accordance with GAAP, as of the
determination date, over (y) the Base Set Aside, PROVIDED that
the sum of the Base Set Aside PLUS the amount in this clause
(2) shall not exceed 200% of Specified Unsecured Indebtedness;
(viii) Liens existing on the Issue Date and listed on Schedule
10.12 to this Indenture; (ix) Liens on property or shares of
Capital Stock of another Person at the time such other Person
becomes a Restricted Subsidiary of such Person; PROVIDED,
HOWEVER, that (A) such Liens are not created, incurred or
assumed in connection with, or in contemplation of, such other
Person becoming a Subsidiary or being designated a Restricted
Subsidiary and (B) such Liens may not extend to any other
property owned by such Person or any of its Restricted
Subsidiaries; (x) Liens on property at the time such Person or
any of its Restricted Subsidiaries acquires the property,
including any acquisition by means of a merger or
consolidation with or into such Person or a Restricted
Subsidiary of such Person; PROVIDED, HOWEVER, that (A) such
Liens are not created, incurred or assumed in connection with,
or in contemplation of, such acquisition and (B) such Liens
may not extend to any other property owned by such Person or
any of its Restricted Subsidiaries; (xi) Liens securing
Indebtedness or other obligations of a Restricted Subsidiary
of such Person owing to such Person or a Wholly Owned
Restricted Subsidiary of such Person; (xii) Liens (other than
on any Excess Spread Receivables) securing Hedging Obligations
of the Company or such Restricted Subsidiary so long as such
Hedging Obligations relate to Indebtedness that is, and is
permitted under this Indenture to be, secured by a Lien on the
same property securing such Hedging Obligations; (xiii) Liens
to secure any Refinancing (or successive Refinancings) as a
whole, or in part, of any Indebtedness of the Company or such
Restricted Subsidiary secured by any Lien referred to in the
foregoing clauses (v), (viii) and (ix); PROVIDED, HOWEVER,
that (A) such new Lien shall be limited to all or part of the
same property that secured the original Lien (plus
improvements to or on such property), (B) the Indebtedness
secured by such Lien at such time is not increased to any
amount greater than the sum of (1) the outstanding principal
amount or, if greater, committed amount of the Indebtedness
described in clause (v), (viii) or (ix), as the case may be,
at the time the original Lien became a Permitted Lien and (2)
an amount necessary to pay any fees and expenses, including
premiums, related to such refinancing, refunding, extension,
renewal or replacement and (C) the Average Life of such
Indebtedness is not decreased; and (xiv) any Lien in the form
of "over-collateralization" of the senior certificates issued
in, or subordination of or recourse to all or a portion of
Excess Spread Receivables of the Company or any Subsidiary
attributable to, a securitization of Receivables,
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<PAGE> 6
in each case to the extent reflected in the book value of such
Excess Spread Receivables, which Lien is in favor of the
holders of other interests in the trust relating to such
securitization, PROVIDED, HOWEVER, that notwithstanding any of
the foregoing clauses, no Lien on Eligible Excess Spread
Receivables (including by way of any such Lien on Capital
Stock of any such Person), other than a Lien permissible under
the foregoing clauses (vii) and (xiv), shall be a Permitted
Lien. Notwithstanding the foregoing, "Permitted Liens" will
not include any Lien described in clause (v), (ix) or (x)
above to the extent such Lien applies to any Additional Assets
acquired directly or indirectly from Net Available Cash
pursuant to Section 10.13. Without limitation, for purposes of
clause (vii) of this definition, the Incurrence of any
Indebtedness (or an increase in the amount of any
Indebtedness) secured by a Lien on Excess Spread Receivables
shall be considered the incurrence of a new Lien on such
Excess Spread Receivables, irrespective of whether a Lien
securing other Indebtedness (or a lesser amount of
Indebtedness) already exists on such assets at the time of
such Incurrence.
"SPECIAL PURPOSE SUBSIDIARY" means a Restricted
Subsidiary formed in connection with a securitization of
Receivables (i) all the Capital Stock of which (other than
directors' qualifying shares and shares held by other Persons
to the extent such shares are required by applicable law to be
held by a Person other than the Company or a Restricted
Subsidiary) is owned by the Company or one or more Restricted
Subsidiaries, (ii) that has no assets other than Excess Spread
Receivables created in such securitization, (iii) that
conducts no business other than holding such Excess Spread
Receivables, and (iv) that has no Indebtedness (other than (a)
short-term Indebtedness to the Company or any Wholly Owned
Restricted Subsidiary attributable to the purchase by such
Restricted Subsidiary from the Company or such Wholly Owned
Restricted Subsidiary of such Receivables, which Indebtedness
is paid in full upon closing of such securitization, and (b)
Indebtedness permitted to be Incurred pursuant to Section
10.9(a) that is secured by a Permitted Lien on such Excess
Spread Receivables and no other assets of such Restricted
Subsidiary).
SECTION 1.2 ADDED DEFINITIONS. Section 1.1 of the Indenture is hereby
amended by adding the following definitions in their appropriate alphabetical
location:
"ACCREDITED INVESTOR" means an accredited investor as
defined in Rule 501(a)(1), (2), (3), (5), (6) or (7) under the
Securities Act.
"ADDED INTEREST" with respect to Future Notes that
are subject to a Registration Rights Agreement, means any
added interest payable with respect to such Future Notes
pursuant to such Registration Rights Agreement.
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<PAGE> 7
"ADJUSTED CONSOLIDATED LEVERAGE RATIO" as of any date
of determination means the ratio of (i) the aggregate amount
of all Unsecured Senior Indebtedness of the Company and its
Restricted Subsidiaries to (ii) the sum of: (A) Consolidated
Adjusted Net Income accrued during the period (treated as one
accounting period) from September 1, 1997 to the end of the
most recent fiscal quarter prior to such date of determination
for which financial statements are available (or, in case such
Consolidated Adjusted Net Income shall be a deficit, minus
100% of such deficit); and (B) the aggregate Net Cash Proceeds
received by the Company from the issuance or sale after
September 1, 1997 of (1) Capital Stock of the Company (other
than Disqualified Stock) or (2) debt securities of the
Company, but only if, when and to the extent such debt
securities have been converted into any such Capital Stock
(other than, in each case, an issuance or sale to a Subsidiary
of the Company and other than an issuance or sale to an
employee stock ownership plan or to a trust established by the
Company or any of its Subsidiaries for the benefit of their
employees).
"DEFINITIVE NOTE" is defined in Section 4.3(d).
"EXCHANGE NOTES" is defined in the Recitals.
"EXCHANGE OFFER" means an offer to exchange Future
Notes issued without registration under the Securities Act for
Exchange Notes registered under the Securities Act pursuant to
any Registration Rights Agreement applicable to such Future
Notes.
"EXISTING NOTES" is defined in the Recitals.
"FUTURE NOTES" is defined in the Recitals.
"NON-U.S. PERSON" means a Person who is not a "U.S.
person," as defined in Rule 902 of Regulation S.
"PRIVATE PLACEMENT LEGEND" is defined in Section
2.4(b).
"QUALIFIED INSTITUTIONAL BUYER" or "QIB" has the
meaning specified in Rule 144A under the Securities Act.
"REGISTRATION RIGHTS AGREEMENT" means, with respect
to any Future Notes of any series, any registration rights
agreement that the Company may enter into with respect to and
benefiting such Future Notes.
"REGULATION S DEFINITIVE NOTE" is defined in Section
4.3(d).
"REGULATION S GLOBAL NOTE" is defined in Section
3.1(b).
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<PAGE> 8
"REGULATION S TEMPORARY GLOBAL NOTE" is defined in
Section 3.1(b).
"RESTRICTED GLOBAL NOTE" is defined in Section
3.1(b).
"RESTRICTED PERIOD" is defined in Section 4.3(e).
"RESTRICTED SECURITY" has the meaning assigned to
such term in Rule 144(a)(3) under the Securities Act; PROVIDED
that the Trustee shall be entitled to request and conclusively
rely on an Opinion of Counsel with respect to whether any Note
constitutes a Restricted Security.
"RESTRICTION TERMINATION DATE" means, with respect to
any series of Future Notes that are Restricted Securities when
issued, the date that is two years after the related Series
Issue Date.
"SERIES ISSUE DATE" means, with respect to any series
of Notes, the date on which Notes of such series are initially
issued hereunder, which in the case of the Existing Notes
shall be the Issue Date.
"SHELF REGISTRATION STATEMENT" means any shelf
registration statement that the Company may be required to
file and cause to be declared effective by the SEC pursuant to
any Registration Rights Agreement.
"UNSECURED SENIOR INDEBTEDNESS" means principal of
and premium, if any, on (a) any Indebtedness of the Company or
any Restricted Subsidiary of the type referred to in clause
(i), (iii), (iv) and (vi) of the definition of "Indebtedness"
and (b) all Guarantees by the Company or any Restricted
Subsidiary with respect to Indebtedness referred to in the
foregoing clause (a), unless in the case of clauses (a) and
(b), the instrument under which such Indebtedness is Incurred
expressly provides that it is PARI PASSU with or subordinated
in right of payment to the Notes (in the case of indebtedness
being Incurred by the Company) or the Subsidiary Guarantee of
such Restricted Subsidiary (in the case of Indebtedness being
Incurred by any Restricted Subsidiary), which Indebtedness or
Guarantees referred to in the foregoing clauses (a) and (b),
respectively, are not secured by a Lien on any assets of the
Company or any Restricted Subsidiary; PROVIDED HOWEVER, that
Warehouse Indebtedness Incurred in the ordinary course of
business shall not be deemed to be unsecured, unless
forty-five (45) days after such Warehouse Indebtedness is
Incurred, no Lien on the related Receivables has attached, in
which case such Indebtedness shall be deemed Unsecured Senior
Indebtedness incurred at such time. Notwithstanding the
foregoing, Unsecured Senior Indebtedness shall not include (A)
any liability for federal, state, local, foreign or other
taxes, (B) any Indebtedness of the Company or any
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<PAGE> 9
Restricted Subsidiary to any Affiliates (including obligations
under the Tax Sharing Agreement, as amended from time to
time), (C) any trade accounts payable and expense accruals,
(D) Indebtedness owed for compensation or for services
rendered and (E) any liabilities on account of warrant
obligations under the Payment Agreement dated August 29, 1997
and effective September 2, 1997 between Mego Financial and the
Company, to the extent such liabilities do not constitute
Senior Indebtedness.
SECTION 1.3 AMENDED PROVISIONS.
1.3.1. Section 2.2 of the Indenture is hereby amended to read in its
entirety as follows:
Section 2.2 FORM OF FACE OF NOTE.
MEGO MORTGAGE CORPORATION
12 1/2% Senior Subordinated Notes Due 2001
No................... $..............
Mego Mortgage Corporation, a corporation duly organized and
existing under the laws of Delaware (herein called the
"COMPANY", which term includes any Successor Company under the
Indenture hereinafter referred to), for value received, hereby
promises to pay to .........................., or registered
assigns, the principal sum of ....................... Dollars
on December 1, 2001, and to pay interest thereon from [INSERT
SERIES ISSUE DATE OF THE RELEVANT SERIES] or from the most
recent Interest Payment Date to which interest has been paid
or duly provided for, semi-annually on June 1 and December 1
in each year, commencing [INSERT FIRST INTEREST PAYMENT DATE
AFTER RELEVANT SERIES ISSUE DATE], at the rate of 12 1/2% per
annum, until the principal hereof is paid or made available
for payment, and at the rate of 1% over the rate set forth
above per annum on any overdue principal and (to the extent
that the payment of such interest shall be legally
enforceable) on any overdue installment of interest. The
interest so payable, and punctually paid or duly provided for,
on any Interest Payment Date will, as provided in such
Indenture, be paid to the Person in whose name this Note (or
one or more Predecessor Notes) is registered at the close of
business on the Regular Record Date for such interest, which
shall be the May 15 or November 15 (whether or not a Business
Day), as the case may be, next preceding such Interest Payment
Date. Any such interest not so punctually paid or duly
provided for will forthwith cease to be payable to the Holder
on such Regular Record Date and may either be paid to the
Person in whose name this Note (or one or more Predecessor
Notes) is registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest to be
fixed by the Trustee, notice whereof shall be given to Holders
of Notes not less than 10 days prior to
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<PAGE> 10
such Special Record Date, or be paid at any time in any other
lawful manner not inconsistent with the requirements of any
securities exchange on which the Notes may be listed, and upon
such notice as may be required by such exchange, all as more
fully provided in said Indenture.
Payment of the principal of (and premium, if any) and
any such interest on this Note will be made at the office or
agency of the Company maintained for that purpose in the City
of New York, Borough of Manhattan, in such coin or currency of
the United States of America as at the time of payment is
legal tender for payment of public and private debts.
Reference is hereby made to the further provisions of
this Note set forth on the reverse hereof, which further
provisions shall for all purposes have the same effect as if
set forth at this place.
Unless the certificate of authentication hereon has
been executed by the Trustee referred to on the reverse hereof
by manual signature, this Note shall not be entitled to any
benefit under the Indenture or be valid or obligatory for any
purpose.
IN WITNESS WHEREOF, the Company has caused this
instrument to be duly executed under its corporate seal.
Dated:
MEGO MORTGAGE CORPORATION
By............................
Attest:
....................................
1.3.2. The first two paragraphs of Section 2.3 of the Indenture are
hereby amended to read in their entirety as follows:
This Note is one of a duly authorized issue of
securities of the Company (herein called the "NOTES"), issued
under an Indenture, dated as of November 22, 1996 (as amended
from time to time, herein called the "INDENTURE"), among the
Company, any Person that may from time to time become a party
thereto as a Subsidiary Guarantor (as defined therein) by
executing and delivering to the Trustee a Joinder of
Subsidiary Guarantor (as defined therein), and American Stock
Transfer & Trust Company, as Trustee (herein called the
"TRUSTEE", which term includes any successor trustee under the
Indenture), to which Indenture and all indentures
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<PAGE> 11
supplemental thereto reference is hereby made for a statement
of the respective rights, limitations of rights, duties and
immunities thereunder of the Company, the Trustee and the
Holders of the Notes and of the terms upon which the Notes
are, and are to be, authenticated and delivered. This Note is
one of the Notes designated on the face hereof, limited in
aggregate principal amount to $150,000,000.
The Company may redeem, at its option, up to 35% of
the sum of the respective original aggregate principal amounts
of the Notes at any time and from time to time prior to
December 1, 1998, with the Net Cash Proceeds received by the
Company from one or more Public Equity Offerings at a
redemption price of 112 1/2% of the principal amount of the
Notes redeemed, plus accrued and unpaid interest thereon;
PROVIDED, HOWEVER, that at least 65% of the sum of the
respective original aggregate principal amounts of Notes must
remain outstanding after each such redemption; and PROVIDED,
FURTHER, that such redemption must occur within 60 days after
the closing date of any such Public Equity Offering.
Otherwise, the Notes may not be redeemed prior to their Stated
Maturity.
1.3.3. Section 2.4 of the Indenture is hereby amended to read in its
entirety as follows:
Section 2.4 FORM OF LEGENDS FOR CERTAIN NOTES.
(a) Any Global Note authenticated and delivered
hereunder shall bear a legend in substantially the following
form:
"This Note is a Global Note within the meaning of the
Indenture hereinafter referred to and is registered in the
name of a Depositary or a nominee thereof. This Note may not
be transferred to, or registered or exchanged for Notes
registered in the name of, any Person other than the
Depositary or a nominee thereof or a successor of such
Depositary or a nominee of such successor and no such transfer
may be registered, except in the limited circumstances
described in the Indenture. Every Note authenticated and
delivered upon registration of transfer of, or in exchange for
or in lieu of, this Note shall be a Global Note subject to the
foregoing, except in such limited circumstances."
(b) From the related Series Issue Date unless and
until (i) exchanged for an Exchange Note pursuant to the
related Registration Rights Agreement or (ii) sold under an
effective Shelf Registration Statement, Future Notes of any
series that constitute Restricted Securities (including
Restricted Global Notes), Regulation S Global Notes, or
Regulation S Definitive Notes shall contain a legend
substantially to the following effect (the "PRIVATE PLACEMENT
LEGEND") on the face thereof:
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<PAGE> 12
"THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT AS SET
FORTH IN THE FOLLOWING SENTENCE OR UNLESS A REGISTRATION
STATEMENT UNDER THE SECURITIES ACT IS IN EFFECT WITH RESPECT
TO THIS NOTE. BY ITS ACQUISITION HEREBY (BUT SUBJECT TO
CERTAIN RIGHTS TO REQUIRE REGISTRATION OF THE NOTES), THE
HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT), (B) IT IS AN "ACCREDITED INVESTOR" (AS
DEFINED IN RULE 501(a)(1), (2), (3), (5), (6) or (7) UNDER THE
SECURITIES ACT) OR (C) IT IS A "NON-US PERSON" (AS DEFINED IN
REGULATION S UNDER THE SECURITIES ACT); (2) AGREES THAT IT
WILL NOT PRIOR TO THE LATER TO OCCUR OF (i) TWO YEARS AFTER
THE ORIGINAL ISSUANCE OF THE NOTE EVIDENCED HEREBY OR (ii)
ACQUISITION THEREOF FROM AN AFFILIATE OF THE COMPANY (THE
"RESTRICTION TERMINATION DATE") RESELL OR OTHERWISE TRANSFER
THE NOTE EVIDENCED HEREBY OR ANY INTEREST THEREIN, EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR IN A TRANSACTION NOT REQUIRING REGISTRATION
UNDER THE SECURITIES ACT (A) TO MEGO MORTGAGE CORPORATION OR
ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A
QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A
UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN
ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES TO
THE TRUSTEE UNDER THE INDENTURE RELATING TO THIS NOTE (THE
"TRUSTEE") A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS
AND AGREEMENTS RELATING TO THE RESTRICTION ON TRANSFER OF THE
NOTES EVIDENCED HEREBY (THE FORM OF WHICH LETTER CAN BE
OBTAINED FROM MEGO MORTGAGE CORPORATION OR THE TRUSTEE), (D)
OUTSIDE THE UNITED STATES IN COMPLIANCE WITH REGULATION S
PROMULGATED UNDER THE SECURITIES ACT, (E) PURSUANT TO ANY
OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT, INCLUDING THE EXEMPTION PROVIDED BY
RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), SUBJECT IN
EACH OF THE FOREGOING CASES TO ANY REQUIREMENT OF LAW THAT THE
DISPOSITION OF THE PROPERTY OF SUCH HOLDER BE AT ALL TIMES
WITHIN SUCH HOLDER'S CONTROL AND IN COMPLIANCE WITH ANY
APPLICABLE STATE SECURITIES
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LAWS; AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO
WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE
EFFECT OF THIS LEGEND, IN CONNECTION WITH ANY TRANSFER OF THE
NOTE EVIDENCED HEREBY PRIOR TO THE RESTRICTION TERMINATION
DATE. IN THE CASE OF CERTAIN TRANSFERS PURSUANT TO CLAUSE
(2)(B) OR (2)(D), THE HOLDER MUST MAKE CERTAIN CERTIFICATIONS
TO THE TRUSTEE TO CONFIRM THAT SUCH TRANSFERS ARE BEING MADE
PURSUANT AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT
TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. IN
ADDITION, IN THE CASE OF ANY TRANSFER REFERRED TO IN CLAUSE
(2)(E) ABOVE, THE HOLDER MUST, PRIOR TO SUCH TRANSFER FURNISH
TO THE TRUSTEE SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER
INFORMATION AS THE COMPANY OR THE TRUSTEE MAY REASONABLY
REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT
TO AN EXEMPTION FROM OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT."
1.3.4. Section 3.1 of the Indenture is hereby amended to read in its
entirety as follows:
Section 3.1 GLOBAL NOTES; DEPOSITARY.
(a) The Existing Notes initially will be, and the
Future Notes and Exchange Notes initially may be, issued in
the form of one or more Global Notes. Each Global Note will be
deposited on the relevant Series Issue Date (or, in the case
of any Exchange Notes, on the date of consummation of the
relevant Exchange Offer) with The Depository Trust Company or
any other depositary designated for the Notes evidenced
thereby (the "DEPOSITARY"), or the Trustee on its behalf, and
registered in the name of Cede & Co. or any other relevant
Person, as nominee of the Depositary (such nominee being
referred to herein as the "GLOBAL NOTE HOLDER").
(b) Future Notes offered and sold to QIBs in reliance
on Rule 144A shall be issued initially in the form of one or
more Global Notes, and Future Notes offered and sold to
Accredited Investors, if so provided in the offering
memorandum with respect to such offering, shall be issued
initially in the form of one or more Global Notes (each Global
Note referenced in this sentence, a "RESTRICTED GLOBAL NOTE").
If so provided in any such offering memorandum, Future Notes
offered and sold in reliance on Regulation S shall be issued
initially in the form of one or more Global Notes (a
"REGULATION S GLOBAL NOTE"), which, if so specified in the
offering memorandum with respect to such offering, shall be
exchanged at
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<PAGE> 14
the end of the Restricted Period with respect to such
Regulation S Global Note for one or more Regulation S
Definitive Notes as provided in Section 4.3(d) (each
Regulation S Global Note subject to such exchange, a
"REGULATION S TEMPORARY GLOBAL NOTE").
1.3.5. Section 3.2 of the Indenture is hereby amended to read in its
entirety as follows:
Section 3.2 AMOUNT.
The aggregate principal amount of Notes which may be
authenticated and delivered under this Indenture is
$150,000,000.00 (One Hundred Fifty Million Dollars and No
Cents), except as for Notes authenticated and delivered
pursuant to Section 3.5, 3.6, 3.7, 4.2, 4.3, 10.13, 10.18 or
13.7.
1.3.6. The third paragraph of Section 3.6 of the Indenture is hereby
amended to read in its entirety as follows:
At the option of the Holder, Notes may be exchanged
for other Notes of any authorized denominations and of a like
aggregate principal amount and tenor, upon surrender of the
Notes to be exchanged at such office or agency. In addition,
in connection with any Exchange Offer, Future Notes shall be
exchanged for Exchange Notes of a like aggregate principal
amount and tenor, upon surrender of the Future Notes to be
exchanged at such office or agency. Whenever any Notes are so
surrendered for exchange, the Company shall execute, and the
Trustee shall authenticate and deliver, the Notes which the
Holder making the exchange is entitled to receive.
1.3.7. Section 4.2 of the Indenture is hereby amended to read in its
entirety as follows:
Section 4.2. BOOK-ENTRY PROVISIONS FOR GLOBAL NOTE
(a) Members of, or participants in, the Depositary
("AGENT MEMBERS") shall have no rights under this Indenture
with respect to any Global Note held on their behalf by the
Depositary or under any Global Note, and the Depositary may be
treated by the Company, the Trustee and any agent of the
Company or the Trustee as the absolute owner of any Global
Note for all purposes whatsoever. Any Holder of any Global
Note shall, by acceptance of such Global Note, agree that the
transfers of Interests in such Global Note may be effected
only through a book-entry system maintained by the Holder of
such Global Note (or its agent), and that ownership of an
Interest in such Global Note shall be required to be reflected
in a book-entry system. Notwithstanding the foregoing, nothing
herein shall prevent the Company, the Trustee or an agent of
the Company or the Trustee from giving effect to any written
certification, proxy or
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<PAGE> 15
other authorization furnished by the Depositary or impair, as
between the Depositary and its Agent Members, the operation of
customary practices governing the exercise of the rights of a
Holder of any Note.
(b) The Depositary must, at the time of its
designation and at all times while it serves as Depositary, be
a clearing agency registered under the Exchange Act and any
other applicable statute or regulation.
(c) Notwithstanding any other provision of this
Section, unless and until it is exchanged in whole or in part
for individual Notes represented thereby, a Global Note
representing all or a portion of the Notes may not be
transferred except as a whole by the Depositary to a nominee
of such Depositary or by a nominee of such Depositary to such
Depositary or another nominee of such Depositary or by such
Depositary or any such nominee to a successor Depositary or a
nominee of such successor Depositary. Interests of beneficial
owners in the Global Notes (each an "INTEREST") may be
transferred to Agent Members or other beneficial owners or
exchanged for Definitive Notes in accordance with the rules
and procedures of the Depositary, the provisions of this
Indenture and applicable law.
(d) If specified by the Company pursuant to Section
3.4, the Depositary may surrender a Global Note (except
Regulation S Global Notes during the Restricted Period) in
exchange in whole or in part for Definitive Notes of like
tenor and terms on such terms as are acceptable to the
Company, the Trustee and the Depositary. In addition,
Definitive Notes shall be issued to all beneficial owners in
exchange for their Interests in Global Notes if (i) the
Depositary for the Notes notifies the Company that the
Depositary is unwilling or unable to continue as Depositary
for the Global Notes or is no longer eligible to serve as
Depositary pursuant to the terms of this Indenture and a
successor Depositary is not appointed by the Company within 90
days after delivery of such notice; (ii) the Company, at its
sole discretion, notifies the Trustee in writing that it
elects to cause the issuance of Definitive Notes under this
Indenture; or (iii) there shall have occurred and be
continuing a Default with respect to any Notes represented by
the Global Notes, PROVIDED that clauses (i) and (ii) shall not
apply to Regulation S Global Notes during the Restricted
Period.
(e) In connection with the transfer of any Interest
from one Agent Member to another Agent Member not taking a
Definitive Note, but an Interest, the Depositary shall reflect
on its books and records the date, the name of the transferor
and transferee, and the amount of the Interest transferred.
(f) In connection with the issuance to beneficial
owners of Definitive Notes in exchange for any Global Note
pursuant to paragraph
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(c) or (h) of this Section, such Global Note shall be deemed
to be surrendered to the Trustee for cancellation, and the
Company shall execute and the Trustee upon receipt of a
Company Order for the authentication and delivery of
Definitive Notes shall authenticate and deliver, without
service charge:
(i) to the Depositary or to each Person specified by
such Depositary a new Definitive Note or Definitive Notes of
like tenor and terms and of any authorized denomination as
requested by such Person in aggregate principal amount equal
to and in exchange for such Person's Interest in the Global
Note; and
(ii) to such Depositary a new Global Note of like
tenor and terms and in an authorized denomination equal to the
difference, if any, between the principal amount of the
surrendered Global Note and the aggregate principal amount of
Definitive Notes delivered to Holders thereof.
Except as otherwise provided in this Indenture, any
Note authenticated and delivered upon registration of transfer
of, or in exchange for, or in lieu of, any Global Note shall
also be a Global Note and shall bear the legend specified in
Section 2.4(a) except for any Note authenticated and delivered
in exchange for, or upon registration of transfer of, a Global
Note pursuant to the preceding sentence.
(g) The Holder of any Global Note may grant proxies
and otherwise authorize any person, including Agent Members
and persons that may hold Interests through Agent Members, to
take any action which a Holder is entitled to take under this
Indenture or the Notes.
(h) Upon the exchange of any Global Note in its
entirety for Definitive Notes or another Global Note, such
Global Note shall be canceled by the Trustee.
(i) Notwithstanding anything herein to the contrary,
if at any time the Depositary for the Notes notifies the
Company that it is unwilling or unable to continue as a
Depositary for the Notes or if at any time the Depositary for
the Notes shall no longer be registered or in good standing
under the Exchange Act, or other applicable statute or
regulation, the Company shall appoint a successor Depositary
with respect to the Notes. If a successor Depositary for the
Notes is not appointed by the Company within 90 days after the
Company receives such notice or becomes aware of such
condition, the Company will execute, and the Trustee, upon
Company Request, will authenticate and deliver Definitive
Notes in an aggregate principal amount equal to the principal
amount of the Global
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<PAGE> 17
Note or Global Notes representing Notes in exchange for such
Global Note or Global Notes.
(j) The Company shall use its best efforts so that
(i) Future Notes of any series that are originally issued in a
public offering under the Securities Act will bear the same
CUSIP number as is then borne by, and will be represented by
the same Global Note as then represents, the Existing Notes,
as soon as practicable after payment of all interest payable
with respect to such Notes on the first Interest Payment Date
following the relevant Series Issue Date, and (ii) Future
Notes of any series that are not originally issued in a public
offering under the Securities Act will bear the same CUSIP
number as is then borne by, and will be represented by the
same Global Note as then represents, the Existing Notes as
soon as practicable after the earliest to occur of (A) the
Restriction Termination Date, (B) consummation of an Exchange
Offer for, or effectiveness of a Shelf Registration Statement
with respect to, all Notes of such series (if no Added
Interest has accrued with respect to such Notes) or (C)
payment of all interest (including Added Interest) payable
with respect to such Notes on the first Interest Payment Date
following consummation of an Exchange Offer for, or
effectiveness of a Shelf Registration Statement with respect
to, all Notes of such series (if any Added Interest has
accrued with respect to such Notes). As and when required by
the foregoing sentence, the Company shall cause all Global
Notes representing such Future Notes and the Existing Notes to
be exchanged for one Global Note representing both such Future
Notes and the Existing Notes. The Company's obligations under
this Section 4.2(j) are subject to (y) the issuance of
Definitive Notes pursuant to this Section 4.2 and (z)
compliance with the Depositary's rules and procedures.
1.3.8. The word "or" is hereby deleted from the end of paragraph (f) of
Section 9.1 of the Indenture. The following new paragraph (g) is added to
Section 9.1 of the Indenture, and paragraph (g) of the Original Indenture is
hereby renumbered paragraph (h):
(g) to modify the provisions relating to Global
Notes, restrictions on transfer and legends set forth herein
with respect to any series of Future Notes not then
outstanding; or
SECTION 1.4 NEW PROVISIONS. The Indenture is hereby amended to add the
following new provisions:
Section 3.12 FUTURE NOTES.
Subject to compliance with Section 10.9(a), the
Company may from time to time issue one or more series of
Future Notes in an aggregate principal amount not to exceed
$110,000,000. All Future Notes (i) shall have terms and
conditions identical to those of the Existing Notes (except
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<PAGE> 18
for provisions relating to restrictions on transfer, global
notes and any Registration Rights Agreement benefiting any
such series), (ii) will have the benefit of the same Indenture
covenants as the Existing Notes, (iii) shall rank in all
respects PARI PASSU with the Existing Notes and any other
series of Future Notes, and (iv) shall be considered part of
the same class and issue of securities as the Existing Notes
and, as such, the Holders of the Existing Notes and the
Holders of any such series of Future Notes shall vote on all
matters subject to vote of the Holders hereunder as one class.
Section 4.3. SPECIAL TRANSFER PROVISIONS.
(a) TRANSFERS TO NON-U.S. PERSONS. With respect to
any proposed transfer of any Definitive Note constituting a
Restricted Security or of an Interest in any Restricted Global
Note to any Non-U.S. Person (which Non-U.S. Person would, in
the case of a transfer of any Definitive Note or an Interest
in any Restricted Global Note during the Restricted Period,
take an Interest in a Regulation S Global Note):
(i) in the case of the transfer of
any Definitive Note constituting a Restricted
Security for a Regulation S Definitive Note or a
Regulation S Global Note, the Note Registrar shall,
whether or not such Note bears the Private Placement
Legend, register such transfer and, if applicable,
issue such Definitive Note, if (x) the requested
transfer is after the Restriction Termination Date,
or (y) the proposed transferor has delivered to the
Note Registrar a certificate substantially in the
form of Annex A hereto;
(ii) in the case of the transfer of
an Interest in any Restricted Global Note for an
Interest in a Regulation S Global Note, there shall
be delivered to the Note Registrar (x) the
certificate, if any, required by paragraph (i) above
and (y) instructions in accordance with the
Depositary's and the Note Registrar's procedures; and
(iii) in the case of the transfer of
an Interest in any Restricted Global Note for a
Regulation S Definitive Note, the Note Registrar,
upon receipt of instructions in accordance with the
Depositary's and the Note Registrar's procedures,
shall register such transfer and issue such
Definitive Note, if (x) the requested transfer is
after the Restriction Termination Date, or (y) the
proposed transferor has delivered to the Note
Registrar a certificate substantially in the form of
Annex A hereto.
With respect to all such transfers, (A) the Note
Registrar shall reflect on its books and records the date of
such transfer, (B) in the case of
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<PAGE> 19
any transfer affecting any Global Note, the Company shall
execute, and the Trustee shall authenticate and deliver to the
Depositary, a new Global Note or Global Notes in a principal
amount as appropriate to reflect such transfer, and (C) if the
transfer is of a Definitive Note, the transferred Definitive
Note shall be cancelled and, if the entire amount of such
Definitive Note was not transferred, a new Definitive Note, in
the amount of the untransferred portion of the original
Definitive Note, shall be executed by the Company,
authenticated by the Trustee, and delivered to such
transferor.
(b) TRANSFERS TO QIBS. With respect to any proposed
transfer to a QIB of any Definitive Note constituting a
Restricted Security, any Regulation S Definitive Note or an
Interest in any Regulation S Global Note (excluding transfers
to Non-U.S. Persons) (which QIB would take an Interest in a
Global Note):
(i) in the case of the transfer of
any Definitive Note (including any Regulation S
Definitive Note), the Note Registrar shall register
the transfer only upon receipt of instructions in
accordance with the Depositary's and the Note
Registrar's procedures and if (x) the requested
transfer is after the Restriction Termination Date,
or (y) the transferor has delivered to the Note
Registrar a certificate substantially in the form of
Annex B hereto; and
(ii) in the case of the transfer of
any Interest in any Regulation S Global Note, there
shall be delivered to the Note Registrar (x) the
certificate required by paragraph (i) above and (y)
instructions in accordance with the Depositary's and
the Note Registrar's procedures.
With respect to all such transfers, (A) the Note
Registrar shall reflect on its books and records the date of
such transfer, (B) if the transfer affects a Global Note, the
Company shall execute, and the Trustee shall authenticate and
deliver to the Depositary, a new Global Note or Global Notes
in a principal amount as appropriate to reflect such transfer,
and (C) if the transfer is of a Definitive Note, the
transferred Definitive Note shall be cancelled and, if the
entire amount of such Definitive Note was not transferred, a
new Definitive Note, in the amount of the untransferred
portion of the original Definitive Note, shall be executed by
the Company, authenticated by the Trustee, and delivered to
such transferor.
(c) TRANSFERS TO ACCREDITED INVESTORS. With respect
to any proposed transfer of any Definitive Note constituting a
Restricted Security or any Regulation S Definitive Note or the
proposed transfer of an Interest
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<PAGE> 20
in any Restricted Global Note or any Regulation S Global Note
to any Accredited Investor (other than a QIB):
(i) in the case of the transfer of
any Definitive Note, the Note Registrar shall
register such transfer, whether or not such Note
bears the Private Placement Legend, if (x) the
requested transfer is after the Restriction
Termination Date, or (y) the proposed transferee has
delivered to the Note Registrar a certificate
substantially in the form of Annex C hereto;
(ii) in the case of the transfer of
an Interest in any Restricted Global Note for an
Interest in another Restricted Global Note, there
shall be delivered to the Note Registrar (x) the
certificate, if any, required by paragraph (i) above
and (y) instructions in accordance with the
Depositary's and the Note Registrar's procedures; and
(iii) in the case of the transfer of
an Interest in any Restricted Global Note or any
Regulation S Global Note for a Definitive Note, the
Note Registrar, upon receipt of instructions in
accordance with the Depositary's and the Note
Registrar's procedures, shall register such transfer
and issue such Definitive Note, if (x) the requested
transfer is after the Restriction Termination Date,
or (y) the proposed transferor has delivered to the
Note Registrar a certificate substantially in the
form of Annex C hereto.
With respect to all such transfers, (A) the Note
Registrar shall reflect on its books and records the date of
such transfer, (B) in the case of any transfer affecting a
Global Note, the Company shall execute, and the Trustee shall
authenticate and deliver to the Depositary, a new Global Note
or Global Notes in a principal amount as appropriate to
reflect such transfer, and (C) if the transfer is of a
Definitive Note, the transferred Definitive Note shall be
cancelled and, if the entire amount of such Definitive Note
was not transferred, a new Definitive Note, in the amount of
the untransferred portion of the original Definitive Note,
shall be executed by the Company, authenticated by the
Trustee, and delivered to such transferor.
(d) ISSUANCE OF REGULATION S DEFINITIVE NOTES AFTER
RESTRICTED PERIOD. Interests in a Regulation S Temporary
Global Note will be exchanged for certificated notes
("REGULATION S DEFINITIVE NOTES"; all Notes other than Global
Notes being "DEFINITIVE NOTES") after the Restricted Period
upon receipt by the Trustee and the Company of representations
in form and substance acceptable to it demonstrating that the
Interests in such Regulation S Temporary Global Notes are
owned
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<PAGE> 21
either by Non-U.S. Persons or by QIBs or Accredited Investors
that acquired their Interests in such Notes in a transaction
that did not require registration under the Securities Act.
(e) TRANSFER OF INTERESTS IN ANY REGULATION S GLOBAL
NOTE. Except as otherwise specified in the relevant offering
memorandum, only Non-U.S. Persons may acquire any Interest in
a Regulation S Global Note from the Company, a distributor (as
such term is defined in Regulation S under the Securities Act)
or any of their respective affiliates, during the period from
the relevant Series Issue Date through and including the 40th
day thereafter (such period being the "RESTRICTED PERIOD").
(f) PRIVATE PLACEMENT LEGEND. Upon the registration
of transfer, exchange or replacement of Notes not bearing the
Private Placement Legend, the Note Registrar shall deliver
Notes that do not bear the Private Placement Legend. Upon the
registration of transfer, exchange or replacement of Notes
bearing the Private Placement Legend, the Note Registrar shall
deliver only Notes that bear the Private Placement Legend
(including any Restricted Global Note or any Regulation S
Global Note) unless (i) such transfer takes place after the
Restriction Termination Date or (ii) there is delivered to the
Note Registrar an Opinion of Counsel reasonably satisfactory
to the Company and the Trustee to the effect that neither such
legend nor the related restrictions on transfer are required
in order to maintain compliance with the provisions of the
Securities Act.
(g) TRANSFERS PURSUANT TO A SHELF REGISTRATION
STATEMENT. Nothing in subsections (a), (b) and (c) of this
Section 4.3 shall apply to any transfer of Notes pursuant to a
Shelf Registration Statement.
(h) GENERAL. By its acceptance of any Note bearing
the Private Placement Legend, each Holder of such a Note
acknowledges the restrictions on transfer of such Note set
forth in this Indenture and in the Private Placement Legend
and agrees that it will transfer such Note only as provided in
this Indenture. The Company shall cause the Depositary to
follow appropriate procedures so that all transfer of
Interests in any Global Note comply with the restrictions of
this Indenture, including the Private Placement Legend.
(i) The Note Registrar shall retain copies of all
letters, notices and other written communications received
pursuant to Section 4.2 or this Section 4.3 in accordance with
its usual procedures. The Company shall have the right to
inspect and make copies of all such letters, notices or other
written communications at any reasonable time upon the giving
of reasonable written notice to the Note Registrar.
20
<PAGE> 22
SECTION 1.5. NEW ANNEXES.
The Indenture is hereby amended to include Annex A, Annex B and Annex C
as attached hereto and hereby incorporated herein.
SECTION 1.6. AMENDED COVENANTS.
The second paragraph of Section 10.1 of the Indenture is hereby amended
to read in its entirety as follows:
All payments of principal, premium, if any, and
interest with respect to the Notes will be made by the Company
in immediately available funds. The Notes shall be included in
the Same-Day Funds Settlement System of The Depository Trust
Company until maturity, PROVIDED that all payments with
respect to Notes the Holders or beneficial owners of which
have given wire transfer instructions to the Company will be
required to be made by wire transfer of immediately available
funds to the accounts specified by such Persons.
Section 10.9 of the Indenture is hereby amended to read in its entirety
as follows:
Section 10.9 Limitations on Indebtedness.
(a) The Company will not Incur, and the Company will
not permit any Restricted Subsidiary to Incur, directly or
indirectly, (i) any Unsecured Senior Indebtedness unless (A)
the Adjusted Consolidated Leverage Ratio, on the date of such
Incurrence and after giving effect thereto, does not exceed
1.0 to 1.0, (B) the Consolidated Leverage Ratio, on the date
of such Incurrence and after giving effect thereto, does not
exceed 2.0 to 1.0, (C) the Stated Maturity of such
Indebtedness is at least 91 days after the Stated Maturity of
the Notes, and (D) the Average Life of such Indebtedness is
longer than the Average Life of the Notes, or (ii) any
Indebtedness (other than Unsecured Senior Indebtedness) or
Disqualified Stock if, on the date of such Incurrence and
after giving effect thereto, the Consolidated Leverage Ratio
exceeds 2.0 to 1.0.
(b) Notwithstanding the foregoing paragraph (a), the
Company and its Restricted Subsidiaries may Incur the
following Indebtedness:
(1) Permitted Warehouse Indebtedness and
Guarantees by the Company of any Permitted Warehouse
Indebtedness of Restricted Subsidiaries, PROVIDED
that to the extent any such Indebtedness ceases to
constitute Permitted Warehouse Indebtedness of the
Company or a Restricted Subsidiary, such event shall
be deemed to constitute the Incurrence of such
Indebtedness (and any such Guarantees, but without
duplication) by the Company or such Subsidiary, as
the case may be;
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<PAGE> 23
(2) the Notes and the Subsidiary Guarantees;
(3) Hedging Obligations directly related to:
(i) Indebtedness permitted to be Incurred by the
Company or the Restricted Subsidiaries pursuant to
this Section; (ii) Receivables held by the Company or
its Restricted Subsidiaries pending sale or that have
been sold pursuant to a Warehouse Facility; or (iii)
Receivables with respect to which the Company or any
Restricted Subsidiary has an outstanding purchase or
offer commitment, financing commitment or security
interest;
(4) Indebtedness outstanding on the Issue
Date (other than Permitted Warehouse Indebtedness and
Guarantees thereof, which shall be permissible under
this paragraph (b) only pursuant to clause (1)
above);
(5) Indebtedness or Disqualified Stock
issued to and held by the Company or a Wholly Owned
Restricted Subsidiary; PROVIDED, HOWEVER, that any
subsequent issuance or transfer of any Capital Stock
that results in any such Wholly Owned Restricted
Subsidiary ceasing to be a Wholly Owned Restricted
Subsidiary or any subsequent transfer of such
Indebtedness or Disqualified Stock (other than to the
Company or a Wholly Owned Restricted Subsidiary) will
be deemed, in each case, to constitute the Incurrence
of such Indebtedness or issuance of such Disqualified
Stock by the issuer thereof;
(6) Indebtedness or Disqualified Stock of a
Restricted Subsidiary Incurred on or prior to the
date on which such Subsidiary was acquired by the
Company, other than Indebtedness or Disqualified
Stock Incurred in connection with, or to provide all
or any portion of the funds or credit support
utilized to consummate, the transaction or series of
related transactions pursuant to which such
Subsidiary became a Subsidiary or was acquired by the
Company; PROVIDED, HOWEVER, that on the date of such
acquisition and after giving effect thereto, the
Company would have been able to Incur at least $1.00
of Indebtedness pursuant to paragraph (a) above; and
(7) while no Default or Event of Default
exists, Refinancing Indebtedness in respect of
Indebtedness Incurred pursuant to paragraph (a) or
clause (4) or (6) of this paragraph (b).
(c) Notwithstanding the foregoing, (i) the Company
and its Restricted Subsidiaries may not Incur any Indebtedness
(other than the Notes and the Subsidiary Guarantees) if such
Indebtedness is subordinate
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<PAGE> 24
or junior in ranking in any respect to any Senior Indebtedness
unless such Indebtedness ranks PARI PASSU with or junior or
subordinate to the Notes, (ii) the Company and its Restricted
Subsidiaries shall not Incur any Indebtedness if the proceeds
thereof are used, directly or indirectly, to Refinance any
Junior Subordinated Obligations unless such Indebtedness shall
be subordinated to the Notes or the Subsidiary Guarantees, as
applicable, to at least the same extent as such Junior
Subordinated Obligations, and (iii) no Restricted Subsidiary
that is not a Subsidiary Guarantor shall incur, directly or
indirectly, any Indebtedness, except that any Special Purpose
Subsidiary may incur Indebtedness to the extent permitted by
the definition of "Special Purpose Subsidiary." Unsecured
Indebtedness is not deemed to be subordinate or junior to
secured Indebtedness merely because it is unsecured.
(d) For purposes of determining compliance with the
foregoing: (i) in the event that an item of Indebtedness meets
the criteria of more than one of the types of Indebtedness
described above, the Company, in good faith, will classify
such item of Indebtedness and be required to include the
amount and type of such Indebtedness in one of the above
clauses; and (ii) an item of Indebtedness may be divided and
classified in more than one of the types of Indebtedness
described above.
ARTICLE TWO
MISCELLANEOUS
SECTION 2.1. DEFINITIONS. Capitalized terms used herein without
definition shall have the respective meanings specified in the Indenture.
SECTION 2.2. GOVERNING LAW. The laws of the State of New York shall
govern this First Supplemental Indenture without regard to principles of
conflict of laws that would require the application of any other law.
SECTION 2.3. COUNTERPARTS. This First Supplemental Indenture may be
executed in counterparts, each of which shall be deemed an original, but all of
which taken together shall constitute one and the same instrument.
SECTION 2.4. SURVIVAL. This First Supplemental Indenture and the
Indenture shall henceforth be read together. Except as expressly set forth
herein, the Indenture shall remain unchanged and in full force and effect in
accordance with its terms.
[Remainder of this page intentionally left blank.]
23
<PAGE> 25
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be executed and delivered as of the date first above
written.
MEGO MORTGAGE CORPORATION
By: /s/ JEFFREY S. MOORE
-----------------------------------------------
Name: Jeffrey S. Moore
Title: President and Chief Executive Officer
AMERICAN STOCK TRANSFER & TRUST
COMPANY, as Trustee
By: /s/ HERBERT J. LEMMER
-----------------------------------------------
Name: Herbert J. Lemmer
Title: Vice President
<PAGE> 26
Annex A
Form of Certificate To Be Delivered
in Connection with Transfers to Non-U.S. Persons
PURSUANT TO REGULATION S
-----------------------, ----
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Attention: Corporate Trust Administration
Re: 12 1/2% Senior Subordinated Notes due 2001 (the
"Notes") of Mego Mortgage Corporation, a Delaware
corporation (the "Company")
Ladies and Gentlemen:
In connection with our proposed transfer of $___________ aggregate
principal amount of the Notes (the "Transfer"), we confirm that (i) we are
familiar with the transfer provisions of the Indenture, dated as of November 22,
1996, as amended, by and among the Company, the Persons who from time to time
become Subsidiary Guarantors and you, as Trustee (the "Indenture"), and (ii)
such Transfer has been effected in compliance with Regulation S under the
Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we
represent that:
(1) the offer of the Notes was not made to a person in the
United States;
(2) either (a) at the time the buy offer or order was
originated, the transferee was outside the United States or we and any
person acting on our behalf reasonably believed that the transferee was
outside the United States, or (b) the transaction was executed in, on
or through the facilities of a designated off-shore securities market
and neither we nor any person acting on our behalf knows that the
transaction has been pre-arranged with a buyer in the United States;
(3) no directed selling efforts have been made in the United
States in contravention of the requirements of Rule 903(b) or Rule
904(b) of Regulation S, as applicable;
(4) the Transfer is not part of a plan or scheme to evade the
registration requirements of the Securities Act;
(5) we have advised the transferee of the transfer
restrictions applicable to the Notes; and
(6) if the Transfer will occur prior to the expiration of the
Restricted Period (as defined in the Indenture), the interest
transferred will be held by a "Non-US Person" (as defined in the
Indenture).
A-1
<PAGE> 27
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:________________________
Authorized Signature
A-2
<PAGE> 28
Annex B
Form of Certificate To Be Delivered
In Connection With Transfers To Qibs
------------------------------------
-----------------------, ----
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Attention: Corporate Trust Administration
Re: 12 1/2% Senior Subordinated Notes due 2001 (the
"Notes") of Mego Mortgage Corporation, a Delaware
corporation (the "Company")
Ladies and Gentlemen:
In connection with our proposed transfer of $___________ aggregate
principal amount of the Notes (the "Transfer"), we confirm that (i) we are
familiar with the transfer provisions of the Indenture, dated as of November 22,
1996, as amended, by and among the Company, the Persons who from time to time
become Subsidiary Guarantors and you, as Trustee (the "Indenture"), and (ii)
such Transfer has been effected in compliance with Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we
represent that:
(1) the Transfer is being made to a person whom we reasonably
believe is purchasing for its own account or accounts as to which it
exercises sole investment discretion and that such person and each such
account is a "qualified institutional buyer" within the meaning of Rule
144A under the Securities Act; and
(2) the Transfer otherwise complies with the requirements of
Rule 144A.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Rule 144A.
Very truly yours,
[Name of Transferor]
By:________________________
Authorized Signature
B-1
<PAGE> 29
Annex C
Form of Certificate To Be Delivered
in Connection with Transfers to Accredited Investors
Mego Mortgage Corporation
1000 Parkwood Circle
Suite 500
Atlanta, Georgia 30339
Ladies and Gentlemen:
In connection with our proposed purchase of $ ___________ in principal
amount of the 12 1/2% Senior Subordinated Notes due 2001 (the "Notes") of Mego
Mortgage Corporation, a Delaware corporation (the "Company"), we confirm that:
1. we are an "accredited investor" (as defined in Rule 501(a)(1), (2),
(3), (5), (6) or (7) under the Securities Act of 1933, as amended (the
"Securities Act")) (an "Accredited Investor");
2. the purchase of the Notes is for our own account or for the account
of one or more other Accredited Investors;
3. we have such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of our investment in
the Notes;
4. we and any accounts for which we are acting are each able to bear
the economic risk of our or its investment and can afford the complete loss of
such investment; and
5. we are acquiring the Notes for investment purposes and not with a
view to distribution thereof or with any present intention of offering or
selling any of the Notes in violation of the Securities Act.
We understand that the Notes have been issued in a transaction not
involving any public offering within the United States within the meaning of the
Securities Act and that the Notes have not been registered under the Securities
Act and, unless so registered, may not be sold except as permitted in the
following sentence. We agree, on our own behalf and on behalf of each account
for which we acquire any Notes, that if in the future we decide to offer,
resell, pledge or otherwise transfer such Notes, prior to the date which is two
years after the later of the date of original issue and the last date on which
the Company or any affiliate of the Company was the owner of such Notes (or any
predecessor thereto) (the "Restriction Termination Date"), such Notes may be
offered, resold, pledged or otherwise transferred only (a) to the Company or a
subsidiary thereof, (b) pursuant to a registration statement that has been
declared effective under the Securities Act, (c) for so long as the Notes are
eligible for resale pursuant to Rule 144A, to a person whom we reasonably
believe is a qualified institutional buyer under Rule 144A (a "QIB") that
purchases for its own account or for the account of a QIB and to whom notice is
given that the offer, resale, pledge or transfer is being made in reliance on
Rule 144A, (d) pursuant to offers
C-1
<PAGE> 30
and sales that occur outside the United States within the meaning of Regulation
S under the Securities Act, (e) to an Accredited Investor that is purchasing for
his, her or its own account or for the account of an Institutional Accredited
Investor, or (f) pursuant to any other available exemption from the registration
requirements of the Securities Act, subject in each of the foregoing cases to
any requirement of law that the disposition of our property or the property of
such investor account or accounts be at all times within our or their control
and to compliance with any applicable state securities laws. The foregoing
restrictions on resale will not apply subsequent to the Restriction Termination
Date. If any resale or other transfer of the Notes is proposed to be made
pursuant to clause (e) above prior to the Restriction Termination Date, the
transferor shall deliver a letter from the transferee substantially in the form
of this letter to the Company. In the case of certain offers, sales or other
transfers referred to in clause (c) or (d) above, the transferor must make
certain certifications to the Trustee to confirm that such transfers are being
made pursuant an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act. We understand that the
registrar and transfer agent for the Notes will not be required to accept for
registration of transfer any Notes acquired by us, except upon presentation of
evidence satisfactory to the Company and the transfer agent that the foregoing
restrictions on transfer have been complied with. We further understand that any
Notes acquired by us will be in the form of definitive physical certificates and
that such certificates will bear a legend reflecting the substance of this
paragraph. Each purchaser acknowledges that the Company and the Trustee reserve
the right prior to any offer, sale or other transfer prior to the Restriction
Termination Date of the Notes pursuant to clause (f) above to require the
delivery of an opinion of counsel, certifications and/or other information
satisfactory to the Company and the Trustee.
We acknowledge that you, the Company and others will rely upon our
confirmation, acknowledgments and agreements set forth herein and we agree to
notify you promptly if any of our representations or warranties herein ceases to
be accurate and complete.
You are entitled to rely upon this letter and you are irrevocably
authorized to produce this letter or a copy hereof to any interested party in
any administrative or legal proceeding or official inquiry with respect to the
matters covered hereby.
THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS
THAT WOULD REQUIRE THE APPLICATION OF THE LAW OF ANY OTHER STATE.
Date:
-----------------------------
(Name of Purchaser)
C-2
<PAGE> 31
Upon transfer, the Notes should be registered in the name of the new
beneficial owner as follows:
Name:
---------------------------------
Address:
------------------------------
------------------------------
Taxpayer ID number:
-------------------
C-3
<PAGE> 1
Exhibit 10.68
- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
DATED AS OF OCTOBER 20, 1997
BETWEEN
MEGO MORTGAGE CORPORATION
AS ISSUER
AND
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
AS INITIAL PURCHASER
- --------------------------------------------------------------------------------
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), is made and
entered into as of October 20, 1997, between MEGO MORTGAGE CORPORATION, a
Delaware corporation (the "Issuer") and FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
(the "Initial Purchaser").
This Agreement is made pursuant to the Purchase Agreement, dated
October 14, 1997, between the Issuer and the Initial Purchaser (the "Purchase
Agreement"), which provides for the sale by the Issuer to the Initial Purchaser
of $40,000,000 aggregate principal amount of 12 1/2% Senior Subordinated Notes
due 2001 (the "Additional Notes"). The Issuer's obligations under the Additional
Notes will be guaranteed by the Subsidiary Guarantors as provided in the
Indenture (such guarantees as in effect from time to time, the "Subsidiary
Guarantees"). In order to induce the Initial Purchaser to enter into the
Purchase Agreement, the Issuer has agreed to provide to the Initial Purchaser
and its respective direct and indirect transferees, among other things, the
registration rights for the Additional Notes set forth in this Agreement. The
execution of this Agreement is a condition to the closing of the transactions
contemplated by the Purchase Agreement.
The parties hereby agree as follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings (and, unless otherwise indicated, capitalized terms used herein without
definition shall have the respective meanings ascribed to them in the Purchase
Agreement):
ADDED INTEREST: See Section 4(a) hereof.
ADDITIONAL NOTES: See the introductory paragraph to this Agreement.
APPLICABLE PERIOD: See Section 2(f) hereof.
BUSINESS DAY: Any day except a Saturday, Sunday or other day in the
City of New York, or in the city of the corporate trust office of the Trustee,
on which banks are authorized to close.
CLOSING DATE: The Closing Date as defined in the Purchase Agreement.
DIRECT BROKER-DEALER BUYER: See Section 2(b) hereof.
EFFECTIVENESS TARGET DATE: January 12, 1998.
EXCHANGE ACT: The Securities Exchange Act of 1934, as amended, and the
rules and regulations of the SEC promulgated thereunder, and any succeeding
provisions thereto.
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<PAGE> 3
EXCHANGE NOTES: See Section 2(a) hereof.
EXCHANGE OFFER: See Section 2(a) hereof.
EXCHANGE OFFER COMPLETION DATE: February 11, 1998.
EXCHANGE OFFER REGISTRATION STATEMENT: See Section 2(a) hereof.
FILING DATE: November 28, 1997.
HOLDER: Any holder of Transfer Restricted Securities.
INDEMNIFIED PARTY: See Section 7 hereof.
INDEMNIFYING PARTY: See Section 7 hereof.
INDENTURE: The Indenture, dated as of November 22, 1996, by and among
the Issuer and American Stock Transfer & Trust Company, as Trustee, as amended
pursuant to the First Supplemental Indenture, pursuant to which the Additional
Notes are being issued, as it may be further amended or supplemented from time
to time in accordance with the terms thereof.
INELIGIBLE HOLDER: See Section 2(h) hereof.
INITIAL PURCHASER: See the introductory paragraph to this Agreement.
INSPECTORS: See Section 5(m) hereof.
ISSUER: See the introductory paragraph of this Agreement. (All
references herein to Issuer shall include any Subsidiary Guarantor that may from
time to time exist, and all obligations of Issuer hereunder also shall be joint
and several obligations of any Subsidiary Guarantor.)
ISSUER AFFILIATE: See Section 2(b) hereof.
INITIAL PURCHASER: See the introductory paragraph to this Agreement.
PARTICIPATING BROKER-DEALER: Any broker-dealer (as defined in the
Exchange Act), other than a Direct Broker-Dealer Buyer, that is a Holder or
beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Additional
Notes acquired for its own account as a result of market-making activities or
other trading activities that are tendered for exchange in the Exchange Offer
and that thereafter holds Exchange Notes issued in exchange therefor.
PERSON or PERSON: An individual, trustee, corporation, partnership,
joint stock company, trust, unincorporated association, union, business
association, limited liability company, limited liability partnership, firm or
other legal entity.
PROSPECTUS: The prospectus included in any Registration Statement
(including, without limitation, any prospectus subject to completion and a
prospectus that includes any information
2
<PAGE> 4
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Exchange Notes and/or the Transfer
Restricted Securities (as applicable), covered by such Registration Statement,
and all other amendments and supplements to the Prospectus, including
post-effective amendments, and all material incorporated by reference or deemed
to be incorporated by reference in such Prospectus.
PURCHASER INDEMNITEE: See Section 7 hereof.
RECORDS: See Section 5(m) hereof.
REGISTRATION DEFAULT: See Section 4(a) hereof.
REGISTRATION STATEMENT: Any registration statement of the Issuer,
including, but not limited to, the Exchange Offer Registration Statement, the
Shelf Registration Statement or a registration statement of the Issuer that
otherwise covers any of the Transfer Restricted Securities pursuant to the
provisions of this Agreement, including the Prospectus, amendments and
supplements to such registration statement, including post-effective amendments,
all exhibits, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.
RULE 144: Rule 144 promulgated pursuant to the Securities Act, as
currently in effect, as such rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the SEC.
RULE 144A: Rule 144A promulgated pursuant to the Securities Act, as
currently in effect, as such rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the SEC.
RULE 415: Rule 415 promulgated pursuant to the Securities Act, as such
rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the SEC.
SEC: The Securities and Exchange Commission.
SECURITIES ACT: The Securities Act of 1933, as amended, and the rules
and regulations of the SEC promulgated thereunder, and any succeeding provisions
thereto.
SHELF EFFECTIVENESS PERIOD: See Section 3(a) hereof.
SHELF NOTICE: See Section 2(g) hereof.
SHELF REGISTRATION STATEMENT: See Section 3(a) hereof.
SUBSIDIARY GUARANTEES: See the introductory paragraph to this
Agreement.
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<PAGE> 5
SUBSIDIARY GUARANTORS: The meaning ascribed thereto in the Indenture.
TIA: The Trust Indenture Act of 1939, as amended, and the rules and
regulations of the SEC promulgated thereunder.
TRANSFER RESTRICTED SECURITIES: The Additional Notes upon original
issuance thereof and at all times subsequent thereto, until (i) a Registration
Statement covering such Additional Notes has been declared effective by the SEC
and such Additional Notes have been disposed of in accordance with such
effective Registration Statement, (ii) such Additional Notes are sold in
compliance with Rule 144, (iii) such Additional Notes cease to be outstanding or
(iv) such Additional Notes have been exchanged for Exchange Notes.
TRUSTEE: The trustee under the Indenture and, if existent, the trustee
under any indenture governing the Exchange Notes.
UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING: A registration in
which securities of the Issuer are sold to an underwriter or underwriters for
reoffering to the public.
2. EXCHANGE OFFER
(a) The Issuer agrees to file with the SEC as soon as practicable after
the Closing Date, but in no event later than the Filing Date, an offer to
exchange (the "Exchange Offer"), any and all of the Transfer Restricted
Securities for a like aggregate principal amount of debt securities of the
Issuer as guaranteed by Subsidiary Guarantees in effect from time to time (the
"Exchange Notes"), which Exchange Notes will be (i) substantially identical in
all material respects to the Additional Notes, except that such Exchange Notes
will not contain terms with respect to transfer restrictions, registration
rights or the obligation to pay any Added Interest, (ii) entitled to the
benefits of the Indenture or a trust indenture which is identical to the
Indenture (other than such changes to the Indenture or any such identical trust
indenture as are necessary to comply with any requirements of the SEC or to
effect or maintain the qualification thereof under the TIA), and which, in
either case, has been qualified under the TIA, and (iii) registered pursuant to
an effective Registration Statement in compliance with the Securities Act. The
Exchange Offer will be registered pursuant to the Securities Act on an
appropriate form of Registration Statement (the "Exchange Offer Registration
Statement"), and will comply with all applicable tender offer rules and
regulations promulgated pursuant to the Exchange Act and shall be duly
registered or qualified pursuant to all applicable state securities or Blue Sky
laws. The Exchange Offer shall not be subject to any condition, other than that
the Exchange Offer does not violate any applicable law, policy or interpretation
of the staff of the SEC. No securities shall be included in the Exchange Offer
Registration Statement other than the Exchange Notes. The Issuer agrees to (x)
use its best efforts to cause the Exchange Offer Registration Statement to be
declared effective on or prior to the Effectiveness Target Date and to cause the
Exchange Offer to be consummated on or prior to the Exchange Offer Completion
Date and (y) keep the Exchange Offer open for not less than 30 days (or such
longer period required by applicable law), after the date that the notice of the
Exchange Offer referred to below is mailed to Holders.
4
<PAGE> 6
(b) Each Holder who participates in the Exchange Offer will be required
to represent (which representation may be contained in the letter of transmittal
contemplated by the Exchange Offer Registration Statement) that (i) any Exchange
Notes received by it will be acquired in the ordinary course of its business,
(ii) at the time of the consummation of the Exchange Offer such Holder is not
engaged in, and does not intend to engage in, and has no arrangement or
understanding with any person to participate in, the distribution of the
Exchange Notes, and (iii) such Holder is not (1) an "affiliate" of the Issuer or
any Subsidiary Guarantor (an "Issuer Affiliate") or, (2) the Initial Purchaser
or any other broker-dealer that acquired such Transfer Restricted Securities
directly from the Issuer or any Subsidiary Guarantor or any Issuer Affiliate for
resale pursuant to Rule 144A, Regulation S or another available exemption from
the registration requirements of the Securities Act (a "Direct Broker-Dealer
Buyer"). As used herein, "affiliate" shall be as defined in Rule 405 under the
Securities Act. Each Holder hereby acknowledges and agrees that any Issuer
Affiliate, any Direct Broker-Dealer Buyer, and any such Holder intending to use
the Exchange Offer to participate in a distribution of the securities to be
acquired in the Exchange Offer (i) could not under SEC policy as in effect on
the date of this Agreement participate in the Exchange Offer, and (ii) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction and that such a
secondary resale transaction of such Holder's Additional Notes should be covered
by an effective registration statement containing the selling security holder
and other information required by Item 507 and 508, as applicable, of Regulation
S-K under the Securities Act.
(c) Prior to the effectiveness of the Exchange Offer Registration
Statement, the Issuer shall provide a supplemental letter to the SEC (A) stating
that the Issuer is seeking to register the Exchange Offer on the basis of the
position of the SEC enunciated in MORGAN STANLEY AND CO., INC. (available June
5, 1991), EXXON CAPITAL HOLDINGS CORPORATION (available May 13, 1988), and
SHEARMAN & STERLING (available July 2, 1993), and similar no-action letters and
(B) including a representation that none of the Issuer or any Subsidiary
Guarantor has entered into any arrangement or understanding with any person to
distribute the Exchange Notes to be received in the Exchange Offer and that, to
the best of each of the Issuer's and Subsidiary Guarantor's knowledge, each
Holder intending to participate in the Exchange Offer is acquiring the Exchange
Notes in its ordinary course of business and has no arrangement or understanding
with any person to participate in the distribution of the Exchange Notes
received in the Exchange Offer.
(d) The Issuer hereby agrees for a period of at least 180 days after
consummation of the Exchange Offer to make available, upon written request
therefor, a prospectus meeting the requirements of the Securities Act to any
Participating Broker-Dealer for use in connection with resales of Exchange
Notes. Upon consummation of the Exchange Offer in accordance with this
Agreement, the Issuer shall have no further obligation to register Transfer
Restricted Securities pursuant to Section 3 of this Agreement, unless the Issuer
is otherwise obligated to file a Shelf Registration Statement pursuant to clause
3 of subsection (g) of this Section 2.
(e) The Issuer shall include within the Prospectus contained in the
Exchange Offer Registration Statement a section entitled "Plan of Distribution,"
reasonably acceptable to the Initial Purchaser, which shall contain a summary
statement of the positions taken or policies made
5
<PAGE> 7
by the staff of the SEC with respect to the potential "underwriter" status of
any Participating Broker-Dealer with respect to the Exchange Notes. Such "Plan
of Distribution" section shall also allow the use of the Prospectus by all
persons subject to the prospectus delivery requirements of the Securities Act,
including all Participating Broker-Dealers, and include a statement describing
the means by which Participating Broker-Dealers may resell the Exchange Notes.
(f) The Issuer shall use its best efforts to keep the Exchange Offer
Registration Statement effective and to amend and supplement the Prospectus
contained therein, in order to permit such Prospectus to be lawfully delivered
by all persons subject to the prospectus delivery requirements of the Securities
Act for such period of time as such persons must comply with such requirements
in order to resell the Exchange Notes; PROVIDED that such period shall not
exceed 180 days after consummation of the Exchange Offer (or such longer period
if extended pursuant to Section 5(j) hereof) (the "Applicable Period").
In connection with the Exchange Offer, the Issuer shall:
(i) mail as promptly as practicable to each Holder a copy of
the Prospectus forming part of the Exchange Offer Registration
Statement, together with an appropriate letter of transmittal and
related documents;
(ii) utilize the services of a depositary for the Exchange
Offer with an address in the Borough of Manhattan, The City of New
York; and
(iii) permit Holders to withdraw tendered Additional Notes at
any time prior to the close of business, New York time, on the last
Business Day on which the Exchange Offer shall remain open by sending
to the institution and at the address (located in the Borough of
Manhattan, The City of New York) specified in the notice, a telegram,
telex, facsimile transmission or letter setting forth the name of such
Holder, the principal amount of Transfer Restricted Securities
delivered for exchange and a statement that such Holder is withdrawing
his or her election to have such Transfer Restricted Securities
exchanged.
As soon as practicable after the close of the Exchange Offer, the
Issuer shall:
(i) accept for exchange all Additional Notes validly tendered
and not validly withdrawn in accordance with the Exchange Offer;
(ii) deliver, or cause to be delivered, to the Trustee for
cancellation all Additional Notes so accepted for exchange; and
(iii) cause the Trustee to authenticate and deliver promptly
to each Holder of Additional Notes, Exchange Notes equal in principal
amount to the Additional Notes of such Holder so accepted for exchange.
(g) If (1) prior to the consummation of the Exchange Offer, applicable
interpretations of the staff of the SEC do not permit the Issuer to effect the
Exchange Offer, (2) for any other reason the Exchange Offer is not consummated
on or prior to the Exchange Offer Completion
6
<PAGE> 8
Date, or (3) any Holder of Transfer Restricted Securities shall notify the
Issuer within 20 Business Days of the consummation of the Exchange Offer (and
confirm such notice in writing within five Business Days thereafter) that such
Holder is a Direct Broker-Dealer Buyer, then the Issuer shall promptly deliver
to the Holders of any Transfer Restricted Securities and the Trustee written
notice thereof (the "Shelf Notice"), and the Issuer shall file a Registration
Statement pursuant to Section 3 hereof. Following the delivery to the Holders of
Transfer Restricted Securities of a Shelf Notice, the Issuer shall not have any
further obligation to conduct the Exchange Offer pursuant to this Section 2(g),
provided, that the Issuer shall have the right, nonetheless, to proceed to
consummate the Exchange Offer notwithstanding its obligation pursuant to this
Section 2(g) (and, upon such consummation, any obligation to file a Shelf
Registration Statement arising from clause (1) or (2) (but not clause (3)) of
this Section 2(g) shall terminate) and PROVIDED that any Shelf Notice delivered
to the Holders of Transfer Restricted Securities pursuant to clause (3) of this
Section 2(g) shall result in the termination of the obligations of the Issuer to
conduct the Exchange Offer only with respect to the Holders described in clause
(3) of this Section 2(g).
3. SHELF REGISTRATION STATEMENT
If the Issuer is required to deliver a Shelf Notice as contemplated by
Section 2(g) hereof, then:
(a) SHELF REGISTRATION STATEMENT. The Issuer shall prepare and file
with the SEC, as promptly as practicable following the Shelf Notice, a
Registration Statement for an offering to be made on a continuous basis pursuant
to Rule 415 covering all of the Transfer Restricted Securities, which
registration statement, if the Shelf Notice is given pursuant to Section 2(g)(1)
or (2), may be an amendment to the Exchange Offer Registration Statement (the
"Shelf Registration Statement"). The Shelf Registration Statement shall be on
Form S-1 or another appropriate form permitting registration of the Transfer
Restricted Securities for resale by the Holders in the manner or manners
reasonably designated by them (including, without limitation, one or more
underwritten offerings). The Issuer shall not permit any securities other than
the Transfer Restricted Securities to be included in the Shelf Registration
Statement. The Issuer shall use its best efforts, as described in Section 5(b)
hereof, to cause the Shelf Registration Statement to be declared effective
pursuant to the Securities Act as promptly as practicable after the filing of
such Shelf Registration Statement, but in no event later than the Effectiveness
Target Date (or in the case of a Shelf Registration Statement filed pursuant to
Section 2(g)(3) hereof, by the later of the Effectiveness Target Date or 60 days
of receipt by the Issuer of the notice contemplated by Section 2(g)(3)), and to
keep the Shelf Registration Statement continuously effective under the
Securities Act until the earlier of (i) the date which is 24 months after its
effective date (or 12 months after such effective date if such Shelf
Registration Statement is filed pursuant to Section 2(g)(3) at the request of
the Initial Purchaser), (ii) the date that all Transfer Restricted Securities
covered by the Shelf Registration Statement have been sold in the manner set
forth and as contemplated in the Shelf Registration Statement, (iii) the date
that there ceases to be securities outstanding that constitute Transfer
Restricted Securities, or (iv) the date on which all Transfer Restricted
Securities covered by the Shelf Registration Statement become tradeable under
Rule 144 without regard to volume limitations (the "Shelf Effectiveness
Period").
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<PAGE> 9
(b) SUPPLEMENTS AND AMENDMENTS. The Issuer shall use its best efforts
to keep the Shelf Registration Statement continuously effective by supplementing
and amending the Shelf Registration Statement if required by the rules,
regulations or instructions applicable to the registration form used for such
Shelf Registration Statement, if required by the Securities Act, or if
reasonably requested by the Holders of a majority in aggregate principal amount
of the Transfer Restricted Securities covered by such Registration Statement or
by any underwriter of such Transfer Restricted Securities.
4. ADDED INTEREST
(a) The Issuer and the Initial Purchaser agree that the Holders of
Transfer Restricted Securities will suffer damages if the Issuer fails to
fulfill its obligations pursuant to Section 2 or Section 3 hereof and that it
would not be possible to ascertain the extent of such damages. Accordingly, in
the event of such failure by the Issuer to fulfill such obligations, the Issuer
agrees to pay Added Interest ("Added Interest") to each Holder of Transfer
Restricted Securities under the circumstances and to the extent set forth below:
(i) if the Exchange Offer Registration Statement has not been
filed with the SEC on or prior to the Filing Date; or
(ii) if the Exchange Offer Registration Statement is not
declared effective by the SEC on or prior to the Effectiveness Target
Date; or
(iii) if the Exchange Offer has not been consummated and the
Issuer has not exchanged Exchange Notes for all Additional Notes
validly tendered in accordance with the terms of the Exchange Offer on
or prior to the Exchange Offer Completion Date or a Shelf Registration
Statement has not been declared effective by the SEC prior to the
Exchange Offer Completion Date;
(any of the foregoing, a "Registration Default"), then, the Issuer
shall pay to each Holder of Transfer Restricted Securities, accruing from
November 28, 1997 in the case of clause (i) above, January 12, 1998 in the case
of clause (ii) above or February 11, 1998 in the case of clause (iii) above,
Added Interest in an amount equal to one-half of one percent (0.5%) per annum of
the principal amount of Transfer Restricted Securities held by such Holder;
which rate will be increased by an additional one-half of one percent (0.5%) per
annum for each 90-day period that any such Added Interest continues to accrue;
PROVIDED, HOWEVER, that Added Interest shall not at any time exceed one percent
(1.0%) per annum of the principal amount of Transfer Restricted Securities. Upon
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 such
consummation or effectiveness, as the case may be, will be reduced by the full
amount of the related increase from, but not to less than, the original interest
rate set forth on the cover page of the Offering Memorandum; PROVIDED, HOWEVER,
that (a) if after any such reduction in interest rate,
8
<PAGE> 10
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 the rate set
forth on the cover page of the Offering Memorandum on the date on which the
Additional Notes become eligible for sale under Rule 144 without limitation as
to volume.
(b) The Issuer shall notify the Trustee within one Business Day after
each and every date on which a Registration Default first occurs. Payment of
Added Interest, if any, will initially be due at the offices of the Paying Agent
(as defined in the Indenture), provided that, at the option of the Issuer, Added
Interest may be paid by check mailed to Holders at their registered addresses,
provided further that (i) all payments with respect to Global Additional Notes
(as defined in the Indenture) are required to be made in same day funds in
accordance with the policies of the Depository (as defined in the Indenture) and
(ii) all payments with respect to Additional Notes, the Holders of which have
given wire transfer instructions to the Issuer, will be required to be made by
wire transfer of immediately available funds to the accounts specified by such
Holders. Added Interest shall be paid on or before the semi-annual interest
payment date provided in the Indenture and on each payment date provided in the
Indenture including, without limitation, whether upon redemption, maturity (by
acceleration or otherwise) or purchase upon a Change of Control. Each obligation
to pay Added Interest shall be deemed to commence accruing on the date of the
applicable Registration Default and to cease accruing when all Registration
Defaults have been cured. In no event shall the Issuer pay Added Interest in
excess of the applicable maximum amount set forth above, regardless of whether
one or multiple Registration Defaults exist.
(c) The parties hereto agree that the Added Interest provided for in
this Section 4 constitutes a reasonable estimate of the damages that will be
suffered by Holders by reason of the failure to file the Exchange Offer
Registration Statement or the Shelf Registration Statement, the failure of the
Exchange Offer Registration Statement or the Shelf Registration Statement to be
declared effective, the failure to consummate the Exchange Offer or the failure
of the Shelf Registration Statement to remain effective, as the case may be, in
accordance with this Agreement. No monetary damages in addition to Added
Interest shall be payable by the Issuer to Holders by reason of the failure of
the actions set forth in this Section 4(c) to occur as set forth herein.
5. REGISTRATION PROCEDURES
In connection with the registration of any Exchange Notes or Transfer
Restricted Securities pursuant to Sections 2 or 3 hereof, the Issuer shall
effect such registration to permit the exchange of such Exchange Notes for
Additional Notes or the sale of such Transfer Restricted Securities (as
applicable), in accordance with the intended method or methods of exchange or
disposition thereof, and pursuant thereto the Issuer shall:
(a) prepare and file with the SEC a Registration Statement or
Registration Statements as prescribed by Section 2 or Section 3 hereof, and use
its best efforts to cause such Registration Statement to become effective and
remain effective as provided herein; PROVIDED that, if (1) such
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<PAGE> 11
filing is pursuant to Section 3 hereof, or (2) a Prospectus contained in an
Exchange Offer Registration Statement filed pursuant to Section 2 hereof is
required to be delivered under the Securities Act by any Participating
Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period,
before filing any Registration Statement or Prospectus or any amendments or
supplements thereto, the Issuer shall furnish to and afford the Holders of the
Transfer Restricted Securities and each such Participating Broker-Dealer, as the
case may be, covered by such Registration Statement, their counsel and the
managing underwriters, if any, a reasonable opportunity to review copies of all
such documents (including copies of any documents to be incorporated by
reference therein and all exhibits thereto), proposed to be filed (at least 5
Business Days prior to such filing, or such later date as is reasonable under
the circumstances). The Issuer shall not file any Registration Statement or
Prospectus or any amendments or supplements thereto in respect of which the
Holders, pursuant to this Agreement, must be afforded an opportunity to review
prior to the filing of such document, if the Holders of a majority in aggregate
principal amount of the Transfer Restricted Securities covered by such
Registration Statement, or such Participating Broker-Dealer, as the case may be,
their counsel, or the managing underwriters, if any, shall reasonably object on
a timely basis (except that documents filed as exhibits that are incorporated by
reference or deemed to be incorporated by reference shall not be subject to such
objections);
(b) prepare and file with the SEC such amendments and post-effective
amendments to each Shelf Registration Statement or Exchange Offer Registration
Statement, as the case may be, as may be necessary to keep such Registration
Statement continuously effective for the Shelf Effectiveness Period or the
Applicable Period, as the case may be, or such shorter period as will terminate
when all Transfer Restricted Securities covered by such Registration Statement
have been sold; cause the related Prospectus to be supplemented by any required
prospectus supplement, and as so supplemented to be filed pursuant to Rule 424
(or any similar provisions then in force), under the Securities Act; and comply
with the provisions of the Securities Act, the Exchange Act and the rules and
regulations of the SEC promulgated thereunder with respect to the disposition of
all securities covered by such Registration Statement, as so amended, or in such
Prospectus, as so supplemented, and with respect to the subsequent resale of any
Exchange Notes being sold by a Participating Broker-Dealer covered by any such
Prospectus; the Issuer shall be deemed not to have used its best efforts to keep
a Registration Statement effective during the Applicable Period or the Shelf
Effectiveness Period or otherwise when required to use its best efforts under
Sections 2, 3 and 5 hereof if the Issuer voluntarily takes any action that would
result in selling Holders of the Transfer Restricted Securities covered thereby
or Participating Broker-Dealers seeking to sell Exchange Notes not being able to
sell such Transfer Restricted Securities or such Exchange Notes during that
period, unless (i) such action is required by applicable law, or (ii) such
action is taken by it in good faith and for valid business reasons (not
including avoidance of its obligations hereunder), including the acquisition or
divestiture of assets or the preservation of the confidentiality of information
the disclosure of which may have a material adverse effect on the assets,
business, financial condition or prospects of the Issuer and any other direct or
indirect subsidiary of the Issuer, taken as a whole;
(c) if (1) a Shelf Registration Statement is filed pursuant to Section
3 hereof, or (2) a Prospectus contained in an Exchange Offer Registration
Statement filed pursuant to Section 2
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<PAGE> 12
hereof is required to be delivered under the Securities Act by any Participating
Broker-Dealer who seeks to sell Exchange Notes during the Applicable Period,
notify the selling Holders of Transfer Restricted Securities, or each known
Participating Broker-Dealer, as the case may be, their counsel and the managing
underwriters, if any, promptly and confirm such notice in writing, (i) when a
Prospectus, any prospectus supplement or post-effective amendment has been
filed, and, with respect to a Registration Statement or any post-effective
amendment, when the same has become effective (including in such notice a
written statement that any Holder may, upon request, obtain, without charge, one
conformed copy of such Registration Statement or post-effective amendment
including financial statements and schedules, documents incorporated or deemed
to be incorporated by reference and exhibits), (ii) of the issuance by the SEC
of any stop order suspending the effectiveness of a Registration Statement or of
any order preventing or suspending the use of any preliminary prospectus or the
initiation of any proceedings for that purpose, (iii) if at any time when a
Prospectus is required by the Securities Act to be delivered in connection with
sales of the Transfer Restricted Securities the representations and warranties
of the Issuer contained in any agreement (including any underwriting agreement)
contemplated by Section 5(l) hereof cease to be true and correct in any material
respect, (iv) of the receipt by the Issuer or the Subsidiary Guarantors of any
notification with respect to the suspension of the qualification or exemption
from qualification of a Registration Statement or any of the Transfer Restricted
Securities or the Exchange Notes to be sold by any Participating Broker-Dealer
for offer or sale in any jurisdiction, or the initiation of any proceeding for
such purpose, (v) of the happening of any event or any information becoming
known that makes any statement made in such Registration Statement or related
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any
changes in such Registration Statement, Prospectus or documents so that, in the
case of the Registration Statement, it will not contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and that in the case
of the Prospectus, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and (vi) of the reasonable determination of the Issuer
that a post-effective amendment to a Registration Statement would be
appropriate;
(d) if (1) a Shelf Registration Statement is filed pursuant to Section
3 hereof, or (2) a Prospectus contained in an Exchange Offer Registration
Statement filed pursuant to Section 2 hereof is required to be delivered under
the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange
Notes during the Applicable Period, use its best efforts to prevent the issuance
of any order suspending the effectiveness of a Registration Statement or of any
order preventing or suspending the use of a Prospectus or suspending the
qualification (or exemption from qualification), of any of the Transfer
Restricted Securities or the Exchange Notes (as applicable), to be sold by any
Participating Broker-Dealer, for sale in any jurisdiction, and, if any such
order is issued, to use its best efforts to obtain the withdrawal of any such
order at the earliest possible moment;
(e) if a Shelf Registration Statement is filed pursuant to Section 3
hereof and if requested by the managing underwriters, if any, or the Holders of
a majority in aggregate principal
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amount of the Transfer Restricted Securities being sold in connection with an
underwritten offering, (i) promptly incorporate in a prospectus supplement or
post-effective amendment such information relating to underwriters, if any, any
Holder of Transfer Restricted Securities or the plan of distribution of the
Transfer Restricted Securities as the managing underwriter, if any, or such
Holders may reasonably request to be included therein, (ii) make all required
filings of such prospectus supplement or such post-effective amendment as soon
as practicable after the Issuer has received notification of the matters to be
incorporated in such prospectus supplement or post-effective amendment pursuant
to clause (i), and (iii) supplement or make amendments to such Registration
Statement with such information as is required in connection with any request
made pursuant to clause (i);
(f) if (1) a Shelf Registration Statement is filed pursuant to Section
3 hereof, or (2) a Prospectus contained in an Exchange Offer Registration
Statement filed pursuant to Section 2 hereof is required to be delivered under
the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange
Notes during the Applicable Period, furnish to each selling Holder of Transfer
Restricted Securities and to each such Participating Broker-Dealer who so
requests and to counsel and each managing underwriter, if any, without charge,
one conformed copy of the Registration Statement or Registration Statements and
each post-effective amendment thereto, including financial statements and
schedules, and, if requested, all documents incorporated or deemed to be
incorporated therein by reference and all exhibits;
(g) if (1) a Shelf Registration Statement is filed pursuant to Section
3 hereof, or (2) a Prospectus contained in an Exchange Offer Registration
Statement filed pursuant to Section 2 hereof is required to be delivered under
the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange
Notes during the Applicable Period, deliver to each selling Holder of Transfer
Restricted Securities, or each such Participating Broker-Dealer, as the case may
be, its counsel, and the underwriters, if any, without charge, as many copies of
the Prospectus or Prospectuses (including each form of preliminary Prospectus),
and each amendment or supplement thereto and any documents incorporated by
reference therein, as such Persons may reasonably request; and, subject to the
last paragraph of this Section 5 hereof, the Issuer hereby consents to the use
of such Prospectus and each amendment or supplement thereto by each of the
selling Holders of Transfer Restricted Securities or each such Participating
Broker-Dealer, as the case may be, and their underwriters or agents, if any, and
dealers, if any, in connection with the offering and sale of the Transfer
Restricted Securities covered by or the sale by Participating Broker-Dealers of
the Exchange Notes pursuant to such Prospectus and any amendment or supplement
thereto;
(h) prior to any public offering of Transfer Restricted Securities or
any delivery of a Prospectus contained in the Exchange Offer Registration
Statement by any Participating Broker-Dealer who seeks to sell Exchange Notes
during the Applicable Period, to use its reasonable best efforts to register or
qualify, and to cooperate with the selling Holders of Transfer Restricted
Securities or each such Participating Broker-Dealer, as the case may be, the
underwriters, if any, and their respective counsel in connection with the
registration or qualification (or exemption from such registration or
qualification), of such Transfer Restricted Securities for offer and sale under
the securities or Blue Sky laws of such jurisdictions as any selling Holder,
Participating
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<PAGE> 14
Broker-Dealer or the managing underwriters reasonably request in writing; keep
each such registration or qualification (or exemption therefrom) effective
during the period such Registration Statement is required to be kept effective
and do any and all other acts or things reasonably necessary or advisable to
enable the disposition in such jurisdictions of the Exchange Notes held by
Participating Broker-Dealers or the Transfer Restricted Securities covered by
the applicable Registration Statement; PROVIDED that the Issuer shall not be
required to (A) qualify generally to do business in any jurisdiction where it is
not then so qualified, (B) take any action that would subject it to general
service of process in any such jurisdiction where it is not then so subject or
(C) subject it to taxation in any such jurisdiction where it is not so subject;
(i) if a Shelf Registration Statement is filed pursuant to Section 3
hereof, cooperate with the selling Holders of Transfer Restricted Securities and
the managing underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing Transfer Restricted Securities to be sold,
which certificates shall not bear any restrictive legends with respect to
transfer and shall be in a form eligible for deposit with The Depository Trust
Company, ("DTC"), and enable such Transfer Restricted Securities to be in such
denominations and registered in such names as the managing underwriters, if any,
or Holders may reasonably request at least two Business Days prior to any sale
of the Transfer Restricted Securities, for delivery in connection with the
closing of such sale of Transfer Restricted Securities pursuant to such Shelf
Registration Statement;
(j) if (1) a Shelf Registration Statement is filed pursuant to Section
3 hereof, or (2) a Prospectus contained in an Exchange Offer Registration
Statement filed pursuant to Section 2 hereof is required to be delivered under
the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange
Notes during the Applicable Period, upon the occurrence of any event
contemplated by paragraph 5(c)(v) or 5(c)(vi) above, as promptly as practicable
prepare and (subject to Section 5(a) hereof) file with the SEC, at the expense
of the Issuer, a post-effective amendment to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, or file any other required document so
that, as thereafter delivered to the purchasers of the Transfer Restricted
Securities being sold thereunder or to the purchasers of the Exchange Notes to
whom such Prospectus will be delivered by a Participating Broker-Dealer, any
such Prospectus will not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that:
(A) the Issuer may delay such preparation and filing of such supplement
or post-effective amendment pursuant to this Section 5(j) if (i) such
action is required by applicable law, or (ii) such action is taken by
it in good faith and for valid business reasons (not including
avoidance of its obligations hereunder), including the acquisition or
divestiture of assets or the preservation of the confidentiality of
information the disclosure of which may have a material adverse effect
on the assets, business, financial condition or prospects of the Issuer
and any other direct or indirect subsidiaries of the Issuer, taken as a
whole (in any such case, an "Amendment Delay");
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<PAGE> 15
(B) the Issuer may effect, in the aggregate, no more than one Amendment
Delay during the Applicable Period and such Amendment Delay shall be
for no longer than 45 Business Days;
(C) the Issuer may effect, in the aggregate, no more than two Amendment
Delays during the Shelf Effectiveness Period, provided that no more
than one Amendment Delay shall be effected during any twelve-month
period, and each such Amendment Delay shall be for no longer than 45
Business Days; and
(D) to the extent that the Issuer effects one or more Amendment Delays,
the duration of the Shelf Effectiveness Period (if such duration is
determined pursuant to clause (i) of the definition thereof) or the
maximum duration of the Applicable Period, as the case may be, shall be
extended for the aggregate amount of time that any such Amendment
Delays were in effect;
(k) prior to the effective date of the first Registration Statement
relating to the Transfer Restricted Securities, (i) provide the Trustee with
certificates for the Transfer Restricted Securities in a form eligible for
deposit with DTC and (ii) use its best efforts to provide a CUSIP number for the
Transfer Restricted Securities;
(1) in connection with an underwritten offering of Transfer Restricted
Securities pursuant to a Shelf Registration Statement, enter into an
underwriting agreement as is customary in underwritten offerings and take all
such other actions as are reasonably requested by the managing underwriters in
order to expedite or facilitate the registration or the disposition of such
Transfer Restricted Securities, and in such connection, (i) make such
representations and warranties to the underwriters, with respect to the business
of the Issuer, the Registration Statement, Prospectus and documents, if any,
incorporated or deemed to be incorporated by reference therein, in each case, as
are customarily made by issuers to underwriters in underwritten offerings, and
confirm the same if and when requested; (ii) obtain opinions of counsel to the
Issuer and updates thereof in form and substance reasonably satisfactory to the
managing underwriters, addressed to the underwriters covering the matters
customarily covered in opinions requested in underwritten offerings and such
other matters as may be reasonably requested by underwriters; (iii) obtain "cold
comfort" letters and updates thereof in form and substance reasonably
satisfactory to the managing underwriters from the Independent certified public
accountants of the Issuer (and, if necessary, any other independent certified
public accountants with respect to any business for which financial statements
and financial data are, or are required to be, included in the Registration
Statement), addressed to each of the underwriters, such letters to be in
customary form and covering matters of the type customarily covered in "cold
comfort" letters in connection with underwritten offerings and such other
matters as are reasonably requested by underwriters as permitted by STATEMENT ON
AUDITING STANDARDS NO. 72; and (iv) if an underwriting agreement is entered
into, the same shall contain indemnification provisions and procedures no less
favorable than those set forth in Section 7 hereof (or such other provisions and
procedures acceptable to Holders of a majority in aggregate principal amount of
outstanding Transfer Restricted Securities covered by such Registration
Statement and the managing underwriters or agents), with respect to all parties
to be indemnified pursuant to said Section.
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<PAGE> 16
The above shall be done at each closing under such underwriting agreement, or as
and to the extent required thereunder;
(m) if (1) a Shelf Registration Statement is filed pursuant to Section
3 hereof, or (2) a Prospectus contained in an Exchange Offer Registration
Statement filed pursuant to Section 2 hereof is required to be delivered under
the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange
Notes during the Applicable Period, make available for inspection by any selling
Holder of such Transfer Restricted Securities being sold, or each such
Participating Broker-Dealer, as the case may be, any underwriter participating
in any such disposition of Transfer Restricted Securities, if any, and any
attorney, accountant or other agent retained by any such selling Holder or each
such Participating Broker-Dealer, as the case may be, or underwriter
(collectively, the "Inspectors"), at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Issuer (collectively, the "Records"), solely as
shall be reasonably necessary to enable them to exercise any applicable due
diligence responsibilities, and cause the officers, directors and employees of
the Issuer and any of its respective subsidiaries to supply all information in
each case reasonably requested by any such Inspector in connection with such
Registration Statement, subject to such reasonable confidentiality requirements
as the Issuer or any of its respective subsidiaries may impose with respect
thereto;
(n) provide an indenture trustee for the Transfer Restricted Securities
or the Exchange Notes, as the case may be, and cause the Indenture to be
qualified under the TIA not later than the effective date of the Exchange Offer
or the first Registration Statement relating to the Transfer Restricted
Securities; and in connection therewith, cooperate with the trustee under any
such indenture and the Holders of the Transfer Restricted Securities, to effect
such changes to such indenture as may be required for such indenture to be so
qualified in accordance with the terms of the TIA; and execute, and use its best
efforts to cause such trustee to execute, all customary documents as may be
required to effect such changes, and all other forms and documents required to
be filed with the SEC to enable such indenture to be so qualified in a timely
manner;
(o) comply with all applicable rules and regulations of the SEC and, as
soon as reasonably practicable, make generally available to the holders of
Exchange Notes and the Holders, if any, consolidated earning statements of the
Issuer that satisfy the provisions of Section 11(a) of the Securities Act and
Rule 158 thereunder;
(p) if an Exchange Offer is to be consummated, upon delivery of the
Transfer Restricted Securities by Holders to the Issuer (or to such other Person
as directed by the Issuer), in exchange for the Exchange Notes, the Issuer shall
mark, or cause to be marked, on such Transfer Restricted Securities that such
Transfer Restricted Securities are being canceled in exchange for the Exchange
Notes; in no event shall such Transfer Restricted Securities be marked as paid
or otherwise satisfied;
(q) reasonably cooperate with each seller of Transfer Restricted
Securities covered by any Registration Statement and each underwriter, if any,
participating in the disposition of such
15
<PAGE> 17
Transfer Restricted Securities and their respective counsel in connection with
any filings required to be made with the National Association of Securities
Dealers, Inc. (the "NASD");
(r) use its best efforts to take all other steps necessary to effect
the registration of the Transfer Restricted Securities or the Exchange Notes
covered by a Registration Statement contemplated hereby; and
(s) use its best efforts to cause the Transfer Restricted Securities or
the Exchange Notes, as applicable, covered by an effective registration
statement required by Section 2 or Section 3 hereof to be rated with the
appropriate rating agencies, if so requested by the Holders of a majority in
aggregate principal amount of Transfer Restricted Securities relating to such
registration statement or the managing underwriters in connection therewith, if
any.
The Issuer may require each seller of Transfer Restricted Securities or
Participating Broker-Dealer as to which any registration is being effected to
furnish to the Issuer such information regarding such seller or Participating
Broker-Dealer and the distribution of such Transfer Restricted Securities or
Exchange Notes to be sold by such Participating Broker-Dealer, as the case may
be, as required to be included in a Registration Statement prepared in
accordance with the Securities Act or as the Issuer may, from time to time,
reasonably request. The Issuer may exclude from such registration the Transfer
Restricted Securities or Exchange Notes of any seller or Participating
Broker-Dealer, as the case may be, who fails to furnish such information within
a reasonable time after receiving such request.
Each Holder of Transfer Restricted Securities and each Participating
Broker-Dealer agrees by acquisition of such Transfer Restricted Securities or
Exchange Notes to be sold by such Participating Broker-Dealer, as the case may
be, that, upon receipt of' any notice from the Issuer of the happening of any
event of the kind described in Section 5(c)(ii), 5(c)(iv), 5(c)(v) or 5(c)(vi)
hereof, such Holder or such Participating Broker-Dealer shall forthwith
discontinue disposition of such Transfer Restricted Securities covered by such
Registration Statement or Prospectus or such Exchange Notes to be sold by such
Participating Broker-Dealer, as the case may be, until such Holder's or such
Participating Broker-Dealer's receipt of the copies of the supplemented or
amended Prospectus contemplated by Section 5(j) hereof, or until it is advised
in writing by the Issuer that the use of the applicable Prospectus may be
resumed, and has received copies of any amendments or supplements thereto.
6. REGISTRATION EXPENSES
(a) All fees and expenses incident to the performance of or compliance
with this Agreement by the Issuer shall be borne by the Issuer, whether or not
the Exchange Offer or a Shelf Registration Statement is filed or becomes
effective, including, without limitation, (i) all registration and filing fees
(including, without limitation, (a) fees with respect to filings required to be
made with the NASD in connection with an underwritten offering and (b) fees and
expenses of compliance with state securities or Blue Sky laws (including,
without limitation, reasonable fees and disbursements of counsel in connection
with Blue Sky qualifications of the Transfer Restricted Securities or Exchange
Notes (x) where the Holders of Transfer Restricted Securities
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<PAGE> 18
are located, in the case of the Exchange Notes, or (y) as provided in Section
5(h) hereof, in the case of Transfer Restricted Securities or Exchange Notes to
be sold by a Participating Broker-Dealer during the Applicable Period)), (ii)
printing expenses (including, without limitation, expenses of printing
certificates for Transfer Restricted Securities or Exchange Notes in a form
eligible for deposit with DTC and of printing Prospectuses if the printing of
Prospectuses is requested by the managing underwriters, if any, or, in respect
of Transfer Restricted Securities or Exchange Notes to be sold by any
Participating Broker-Dealer during the Applicable Period, by the Holders of a
majority in aggregate principal amount of the Transfer Restricted Securities
included in any Registration Statement or of such Exchange Notes, as the case
may be), (iii) messenger, telephone and delivery expenses, (iv) fees and
disbursements of counsel for the Issuer, (v) fees and disbursements of all
independent certified public accountants referred to in Section 5(l)(iii) hereof
(including, without limitation, the expenses of any special audit and "cold
comfort" letters required by or incident to such performance), (vi) rating
agency fees, (vii) Securities Act liability insurance, if the Issuer desires
such insurance, (viii) fees and expenses of all other Persons retained by the
Issuer, except as otherwise agreed with respect to Friedman, Billings, Ramsey &
Co., Inc., (ix) internal expenses of the Issuer (including, without limitation,
all salaries and expenses of officers and employees of the Issuer performing
legal or accounting duties), (x) the expense of any annual audit and (xi) the
fees and expenses incurred in connection with the listing of the securities to
be registered on any securities exchange. Nothing contained in this Section 6
shall create an obligation on the part of the Issuer to pay or reimburse any
Holder for any underwriting commission or discount, brokers' fees or accountable
or non-accountable expense reimbursement attributable to any such Holder's
Transfer Restricted Securities included in an underwritten offering pursuant to
a Registration Statement filed in accordance with the terms of this Agreement,
or to guarantee such Holder any profit or proceeds from the sale of such
Additional Notes.
(b) In connection with any Shelf Registration Statement hereunder, the
Issuer shall reimburse the Holders of the Transfer Restricted Securities being
registered in such registration for the reasonable fees and disbursements of not
more than one counsel (in addition to appropriate local counsel), chosen by the
Holders of a majority in aggregate principal amount of the Transfer Restricted
Securities to be included in such Registration Statement.
7. INDEMNIFICATION
The Issuer agrees to indemnify and hold harmless (i) the Initial
Purchaser or each Holder of Transfer Restricted Securities, each initial Holder
of Exchange Notes and each Participating Broker-Dealer, (ii) each person, if
any, who controls (within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act), any such Person (any of the persons referred
to in this clause (ii) being hereinafter referred to as a "controlling person"),
and (iii) the respective officers, directors, partners, employees,
representatives and agents of any of such Person or any controlling person (any
person referred to in clause (i), (ii) or (iii) may hereinafter be referred to
as an "Purchaser Indemnitee"), to the fullest extent lawful, from and against
any and all losses, claims, damages, judgments, actions, out-of-pocket expenses,
and other liabilities (the "Liabilities"), including without limitation and as
incurred, reimbursement of all reasonable costs of investigating, preparing,
pursuing or defending any claim or action, or any investigation or
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proceeding by any governmental agency or body, commenced or threatened,
including the reasonable fees and expenses of counsel to any Purchaser
Indemnitee, joint or several, directly or indirectly related to, based upon,
arising out of or in connection with any untrue statement or alleged untrue
statement of a material fact contained in any Registration Statement or
Prospectus (as amended or supplemented if the Issuer shall have furnished to
such Purchaser Indemnitee any amendments or supplements thereto), or any
preliminary prospectus, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except insofar as such Liabilities arise out of or are based upon
(i) any untrue statement or omission or alleged untrue statement or omission
made in reliance upon and in conformity with information relating to any
Purchaser Indemnitee furnished to the Issuer or any underwriter in writing by
such Purchaser Indemnitee expressly for use therein, or (h) any untrue statement
contained in or omission from a preliminary prospectus if a copy of the
Prospectus (as then amended or supplemented, if the Issuer shall have furnished
to or on behalf of the Holder participating in the distribution relating to the
relevant Registration Statement any amendments or supplements thereto) was not
sent or given by or on behalf of such Holder to the person asserting any such
Liabilities who purchased Additional Notes, if such Prospectus (or Prospectus as
amended or supplemented) is required by law to be sent or given at or prior to
the written confirmation of the sale of such Additional Notes to such person and
the untrue statement contained in or omission from such preliminary prospectus
was corrected in the Prospectus (or the Prospectus as amended or supplemented).
The Issuer shall notify the Holders promptly of the institution, threat or
assertion of any claim, proceeding (including any governmental investigation),
or litigation of which it shall have become aware in connection with the matters
addressed by this Agreement which involves the Issuer or a Purchaser Indemnitee.
In connection with any Registration Statement in which a Holder of
Transfer Restricted Securities or a Participating Broker-Dealer is
participating, such Holder of Transfer Restricted Securities or Participating
Broker-Dealer agrees, severally and not jointly, to indemnify and hold harmless
the Issuer, each person who controls the Issuer within the meaning of Section 15
of the Securities Act or Section 20(a) of the Exchange Act and the respective
partners, directors, officers, members, representatives, employees and agents of
such person or controlling person to the same extent as the foregoing indemnity
from the Issuer to each Purchaser Indemnitee, but only with reference to
information relating to such Purchaser Indemnitee furnished to the Issuer in
writing by such Purchaser Indemnitee expressly for use in any Registration
Statement or Prospectus, any amendment or supplement thereto, or any preliminary
Prospectus. The liability of any Purchaser Indemnitee pursuant to this paragraph
shall in no event exceed the net proceeds received by such Purchaser Indemnitee
from sales of Transfer Restricted Securities giving rise to such obligations.
If any suit, action, proceeding (including any governmental or
regulatory investigation), claim or demand shall be brought or asserted against
any person in respect of which indemnity may be sought pursuant to either of the
two preceding paragraphs, such person (the "Indemnified Party"), shall promptly
notify the person against whom such indemnity may be sought (the "Indemnifying
Party"), in writing of the commencement thereof (but the failure to so notify an
Indemnifying Party shall not relieve it from any liability which it may have
under this Section 7,
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<PAGE> 20
except to the extent the Indemnifying Party is materially prejudiced by the
failure to give notice), and the Indemnifying Party, upon request of the
Indemnified Party, shall retain counsel reasonably satisfactory to the
Indemnified Party to represent the Indemnified Party and any others the
Indemnifying Party may reasonably designate in such proceeding and shall pay the
reasonable fees and expenses actually incurred by such counsel related to such
proceeding. Notwithstanding the foregoing, in any such 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 (i) the Indemnifying Party and the Indemnified Party shall have mutually
agreed in writing to the contrary, (ii) the Indemnifying Party failed within a
reasonable time after notice of commencement of the action to assume the defense
and employ counsel reasonably satisfactory to the Indemnified Party or (iii) the
named parties to any such action (including any impleaded parties), include both
such Indemnified Party and the Indemnifying Party, or any affiliate of the
Indemnifying Party, and such Indemnified Party shall have been reasonably
advised by counsel that, either (x) there may be one or more legal defenses
available to it which are different from or additional to those available to the
Indemnifying Party or such affiliate of the Indemnifying Party or (y) a conflict
may exist between such Indemnified Party and the Indemnifying Party or such
affiliate of the Indemnifying Party (in which case the Indemnifying Party shall
not have the right to assume the defense of such action on behalf of such
Indemnified Party, it being understood, however, that the Indemnifying Party
shall not, in connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (in addition to any local counsel), for
all such indemnified parties, which firm shall be designated in writing by those
indemnified parties who sold a majority in outstanding aggregate principal
amount of Transfer Restricted Securities sold by all such indemnified parties
and any such separate firm for the Issuer, the directors, the officers and such
control persons of the Issuer as shall be designated in writing by the Issuer.
The Indemnifying Party shall not be liable for any settlement of any proceeding
effected without its written consent, which consent shall not be unreasonably
withheld, but if settled with such consent or if there be a final judgment for
the plaintiff, the Indemnifying Party agrees to indemnify any 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.
If the indemnification provided for in the first and second paragraphs
of this Section 7 is for any reason held to be unavailable to an Indemnified
Party in respect of any Liabilities referred to therein (other than by reason of
the exceptions provided therein) or is insufficient to hold harmless a party
indemnified thereunder, then each Indemnifying Party under such paragraphs, in
lieu of indemnifying such Indemnified Party thereunder, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such Liabilities
(i) in such proportion as is appropriate to reflect the relative benefits of the
Indemnified Party on the one hand and the Indemnifying Party(ies) on the other
in connection with the statements or omissions that resulted
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<PAGE> 21
in such Liabilities, 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 Indemnifying Party(ies) and the Indemnified Party, as well
as any other relevant equitable considerations. The relative fault of the Issuer
on the one hand and any Purchaser Indemnitees 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 or alleged omission to state a
material fact relates to information supplied by the Issuer or by such Purchaser
Indemnitees and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The parties agree that it would not be just and equitable if
contribution pursuant to this Section 7 were determined by PRO RATA allocation
(even if such indemnified parties were treated as one entity for such purpose),
or by any other method of allocation that 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 any Liabilities referred
to in the immediately preceding paragraph shall be deemed to include, subject to
the limitations set forth above, any reasonable legal or other expenses actually
incurred by such Indemnified Party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this Section 7, in
no event shall a Purchaser Indemnitee be required to contribute any amount in
excess of the amount by which proceeds received by such Purchaser Indemnitee
from sales of Transfer Restricted Securities or Exchange Notes exceeds the
amount of any damages that such Purchaser Indemnitee has otherwise been required
to pay by reason of such untrue or alleged untrue statement or omission or
alleged omission. For purposes of this Section 7, each person, if any, who
controls (within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act) the Initial Purchaser, a Holder of Transfer Restricted Securities,
an initial Holder of Exchange Notes or a Participating Broker-Dealer shall have
the same rights to contribution as such Initial Purchaser, such Holder of
Transfer Restricted Securities, such initial Holder of Exchange Notes or such
Participating Broker-Dealer, as the case may be, and each person, if any, who
controls (within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act) the Issuer, and each officer, director, partner, employee,
representative, agent or manager of the Issuer shall have the same rights to
contribution as the Issuer. Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or proceeding
against such party in respect of which a claim for contribution may be made
against another party or parties, notify each party or parties from whom
contribution may be sought, but the omission to so notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have under this Section 7 or otherwise, except to
the extent that any party is materially prejudiced by the failure to give
notice. No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act), shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section 7
will be in addition to any liability which the indemnifying parties may
otherwise have to the indemnified parties referred to above. The Purchaser
Indemnitee's obligations to contribute pursuant to this Section 7 are several in
proportion to the respective principal amount of Additional Notes sold by each
of the Purchaser Indemnitees hereunder and not joint.
20
<PAGE> 22
8. RULES 144 AND 144A
The Issuer covenants that it will file the reports, if any, required to
be filed by it pursuant to the Securities Act and the Exchange Act and the rules
and regulations adopted by the SEC thereunder in a timely manner and, if at any
time the Issuer is not required to file such reports, it will, upon the request
of any Holder of Transfer Restricted Securities, make available information with
respect to it required by Rule 144 and Rule 144A under the Securities Act in
order to permit sales pursuant to Rule 144 and Rule 144A. The Issuer further
covenants that it will take such further action as any Holder of Transfer
Restricted Securities may reasonably request, all to the extent required from
time to time to enable such Holder to sell Transfer Restricted Securities
without registration under the Securities Act within the limitation of the
exemptions provided by (a) Rule 144 and Rule 144A or (b) any similar rule or
regulation hereafter adopted by the SEC. The obligations of the Issuer to
furnish information under this Section 8 shall expire upon either the
consummation of the Exchange Offer or the full and complete performance of the
Issuer's registration obligations under this Agreement.
9. UNDERWRITTEN REGISTRATIONS
(a) If any of the Transfer Restricted Securities covered by any Shelf
Registration Statement are to be sold in an underwritten offering, the
investment banker or investment bankers and manager or managers that will manage
the offering will be selected by the Holders of a majority in aggregate
principal amount of such Transfer Restricted Securities included in such
offering and shall be reasonably acceptable to the Issuer.
No Holder of Transfer Restricted Securities may participate in any
underwritten registration hereunder, unless such Holder (a) agrees to sell such
Holder's Transfer Restricted Securities on the basis provided in any
underwriting arrangements approved by the Persons entitled hereunder to approve
such arrangements and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwriting arrangements.
(b) Each Holder of Transfer Restricted Securities agrees, if requested
(pursuant to a timely written notice), by the managing underwriters in an
underwritten offering or by a placement agent in a private offering of the
Issuer's debt securities, not to effect any private sale or distribution
(including a sale pursuant to Rule 144(k) or Rule 144A under the Securities Act,
but excluding non-public sales to any of its affiliates, officers, directors,
employees and controlling persons) of any of the Additional Notes except
pursuant to an Exchange Offer, other than in compliance with applicable
securities laws and in no event during the period beginning 10 days prior to,
and ending 90 days after, the closing date of the underwritten offering.
The foregoing provisions shall not apply to any Holder of Transfer
Restricted Securities if such Holder is prevented by applicable statute or
regulation from entering into any such agreement.
21
<PAGE> 23
10. MISCELLANEOUS
(a) REMEDIES. In the event of a breach by the Issuer of any of its
obligations under this Agreement, each Holder of Transfer Restricted Securities
and each Participating Broker-Dealer holding Exchange Notes, in addition to
being entitled to exercise all rights provided herein, in the Indenture or, in
the case of the Initial Purchaser, in the Purchase Agreement, or granted by law,
including recovery of damages, will be entitled to specific performance of its
rights under this Agreement. Subject to Section 4, the Issuer agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of any of the provisions of this Agreement and hereby
further agree that, in the event of any action for specific performance in
respect of such breach, it shall waive the defense that a remedy at law would be
adequate.
(b) AMENDMENTS AND WAIVERS. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to or departures from the provisions hereof may not be
given, unless the Issuer has obtained the written consent of holders of at least
a majority of the then outstanding aggregate principal amount of Transfer
Restricted Securities and Exchange Notes held by Participating Broker-Dealers
taken as one class. Notwithstanding the foregoing, a waiver or consent to or
departure from the provisions hereof with respect to a matter that relates
exclusively to the rights of Holders and Participating Broker-Dealers holding
Exchange Notes whose securities are being sold pursuant to a Registration
Statement and that does not directly or indirectly affect, impair, limit or
compromise the rights of other Holders and Participating Broker-Dealers holding
Exchange Notes may be given by holders of at least a majority in aggregate
principal amount of the Transfer Restricted Securities and Exchange Notes held
by Participating Broker-Dealers being sold by such Holders and Participating
Broker-Dealers pursuant to such Registration Statement; PROVIDED that the
provisions of this sentence may not be amended, modified or supplemented except
in accordance with the provisions of the immediately preceding sentence.
(c) NOTICES. All notices and other communications (including, without
limitation, any notices or other communications to the Trustee), provided for or
permitted hereunder shall be made in writing by delivered by facsimile (with
receipt confirmed), overnight courier or registered or certified mail, return
receipt requested, or by telegram :
(i) if to a Holder of Transfer Restricted Securities, at the
most current address given by the Trustee to the Issuer; and
(ii) if to the Issuer at the offices of the Company at 1000
Parkwood Circle, Suite 500, Atlanta, Georgia 30339, Attention:
Executive Vice President; (facsimile: 800-694-6346).
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee under the
Indenture at the address specified in such Indenture.
22
<PAGE> 24
(d) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the successors and assigns of each of the parties hereto,
including, without limitation and without the need for an express assignment or
assumption, subsequent Holders of Transfer Restricted Securities. The Issuer
agrees that the Holders of Transfer Restricted Securities and Participating
Broker-Dealers holding Exchange Notes shall be third party beneficiaries to the
agreements made hereunder by the Initial Purchaser and the Issuer, and each
Holder and Participating Broker-Dealer shall have the right to enforce such
agreements directly to the extent it deems such enforcement necessary or
advisable to protect its rights hereunder; provided, however, that such Holder
or Participating Broker-Dealer fulfills all of its obligations hereunder.
(e) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(f) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(g) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE
AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY SUBMITS TO THE
JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN
THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN
THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF
OR RELATING TO THIS AGREEMENT, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT
OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE
AFORESAID COURTS. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES, TO THE FULLEST
EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION THAT IT MAY
NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
(h) SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties hereto that they would have
23
<PAGE> 25
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.
(i) ENTIRE AGREEMENT. This Agreement, together with the Purchase
Agreement, is intended by the parties hereto as a final expression of their
agreement, and is intended to be a complete and exclusive statement of the
agreement and understanding of the parties hereto in respect of the subject
matter contained herein and therein.
(j) TRANSFER RESTRICTED SECURITIES HELD BY THE ISSUER OR ITS
AFFILIATES. Whenever the consent or approval of Holders of a specified
percentage of Transfer Restricted Securities is required hereunder, Transfer
Restricted Securities held by the Issuer or its affiliates (as such term is
defined in Rule 405 under the Securities Act), shall not be counted in
determining whether such consent or approval was given by the Holders of such
required percentage.
(k) SURVIVAL. This Agreement is intended to survive the consummation of
the transactions contemplated by the Purchase Agreement. The indemnification and
contribution obligations under Section 7 of this Agreement shall survive the
termination of the Issuer's obligations under Sections 2 and 3 of this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
ISSUER
------
MEGO MORTGAGE CORPORATION
By:
---------------------------------
Name:
Title:
INITIAL PURCHASER
-----------------
FRIEDMAN, BILLINGS, RAMSEY & CO.,
INC.
By:
---------------------------------
Name:
Title:
24
<PAGE> 1
Exhibit 10.69
SETTLEMENT SERVICE PROVIDER AGREEMENT
THIS AGREEMENT, made this 23 day of October, 1997 is between Mego Mortgage
Corporation (Lender) and Transamerica Home Loan (Provider). Provider is
engaged in the activities of a financial institution including the making of
loans. Lender is engaged in the activity of making loans and other extensions
of credit, particularly to homeowners.
In the course of its business, Provider receives applications for various
consumer loans, which may be in the form of real estate secured loans or
revolving lines of credit collectively such hereinafter being referred to as
the "Application", and such loans being hereinafter referred to as the "Covered
Loans." When it occurs that Provider rejects Applications for Covered Loans,
certain loan Applicants consent to Provider's communication of their
Applications or their identities to licensed consumer finance companies, such
consenting applications being hereinafter referred to as "Consenting
Applications." Provider is willing to provide settlement services to Lender
involving an arrangement for the communication, processing and evaluation of
information regarding Consenting Applicants to Lender, in accordance with the
terms and conditions hereof.
Lender and Provider therefore agree as follows:
1. Provider agrees to use its best efforts to secure the consent of
applicants for real estate secured consumer loan to the arrangement
contemplated herein. At such time as Provider obtains an applicant's consent
to transmit/communicate information concerning the applicant to Lender,
Provider shall promptly transmit or communicate such Consenting Application to
Lender, together with any other data and information then available to Provider
as a result of the Consenting Application.
2. For each Consenting Application that Provider has accurately and
completely processed and transmitted/communicated to Lender, Lender shall pay
Provider the sum of $185.00, payable monthly with respect to the previous
month's processed Provider Applications received, irrespective of whether
Lender consummates a credit transaction with such Consenting Applicant.
Notwithstanding the foregoing, for each Consenting Application received by
Lender where the initial contact between the Applicant and Provider occurred
between September 1, 1997 and November 1, 1997, Provider shall be paid the sum
of $125.00.
3. Lender agrees to maintain adequate records of all Consenting Applicants
for whom Lender's complete Application data has been transmitted/communicated to
Lender. Such records will be made available to Provider during business hours,
upon reasonable request.
4. Lender agrees that it will not solicit a deposit relationship with any
Consenting Applicant either on behalf of itself or an affiliate company of
Lender.
5. Lender agrees that it will observe and comply with all Federal and State
Laws and regulations with regard to any processed Consenting Applicant. Lender
agrees to indemnify and hold Provider and its employees harmless from any and
all damages, losses, costs or expenses incurred, relating to any claim, cause
of action or liability of any kind or nature arising out of the acts or
omissions of Lender. Provider agrees to indemnify and hold Lender and its
employees harmless from any and all damages, losses, costs or expenses
incurred, relating to any claim, cause of action or liability of any kind or
nature arising out of the acts of omissions of Provider prior to the time the
Consenting Applicant's Application data was transmitted/communicated to
Lender. Provider agrees to give timely notice of settlement negotiations or
defense of any legal or administrative action brought in connection therewith,
provided, however, that Provider shall have the right and authority to approve
any settlement which, upon notice to Lender, Provider reasonably believes would
have a material negative impact on Provider's business.
<PAGE> 2
6. Lender and Provider acknowledge that neither party hereto is the agent
and/or employee of any other party hereto.
7. This agreement may not be amended or modified except as agreed in writing
by the parties hereto.
8. This agreement may be terminated by either party upon fifteen (15) days
prior written notice. However, such termination shall not affect the rights of
the parties hereto with respect to any business transacted prior to the
effective date of the termination. In the event that (i) Provider is no longer
legally able to provide settlement services or to receive payment in the
manners contemplated, longer legally able to provide settlement services or to
receive payment in the manners contemplated, or (ii) a change occurs in state
of Federal law which, in either Provider's or Lender's reasonable opinion,
substantially increases costs or obligations in performing this Agreement, or
prohibits the transactions contemplated in this Agreement, the parties agree to
engage in good faith discussions with the goal of determining modifications of
the arrangements established by this Agreement that will allow the business
goals to be achieved in a manner reasonably satisfactory to both parties. In
the event no such agreement can be reached with respect to modifications,
Provider and Lender shall have the right to terminate this Agreement and will
have no further obligation or liability hereunder.
9. Lender represents and warrants that it is fully licensed, qualified to
conduct business and is good standing in the state(s) in which it conducts
business.
10. Provider represents and warrants that it is fully licensed, qualified to
conduct business and is good standing in the state(s) in which it conducts
business.
11. All correspondence and notices to Provider, and any payments for service
fees shall be directed to: MEHERIAR M. HASAN OF TRANSAMERICA HOME LOAN at the
following address 1150 S. Olive St. Ste T-2010 Los Angeles, CA 90015.
12. All correspondence and notices to Lender shall be directed to: Business
Development, C/O Mego Mortgage Corporation, 1000 Parkwood Circle, Fifth Floor,
Atlanta, Georgia 30339.
Lender: Mego Mortgage Corporation Provider: Transamerica Home Loan
By:/s/ Jeffrey S. Moore By: /s/ Meheriar M. Hasan
-------------------- ---------------------
(Authorized Officer) (Authorized Officer)
Jeffery S. Moore Meheriar M. Hasan
President & CEO Sr. Vice President
Strategic Marketing
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED AUGUST 31,
---------------------------------------
1994 1995 1996 1997
------- ------ ------- -------
<S> <C> <C> <C>
Income (loss) before provision for income taxes per income
statement.................................................... $(1,511) $5,919 $11,155 $23,810
Add
Portion of rents representative of the interest
factor(1)................................................. 28 82 112 364
Interest on indebtedness(2).................................. 129 655 1,283 6,619
------- ------ ------- -------
Income as adjusted................................... $(1,354) $6,656 $12,550 $30,793
======= ====== ======= =======
Fixed charges
Interest on indebtedness(2).................................. $ 129(2) $ 655(2) $ 147(3) $ 245
Pro forma interest on senior subordinated notes(4)........... -- -- 5,200 5,000
Prepaid commitment fees...................................... 50 129 -- --
Amortization of bond premium(5).............................. -- -- -- (100)
Portion of rents representative of the interest
factor(1)................................................. 28 82 112 364
------- ------ ------- -------
Fixed charges............................................. $ 207 $ 866 $ 5,479 $ 5,509
------- ------ ------- -------
Ratio of earnings to fixed charges............................. NM 7.69 2.29 5.59
======= ====== ======= =======
(1) Total rents................................................ $ 85 $ 249 $ 338 $ 1,091
Multiplied by 1/3.......................................... 0.33 0.33 0.33 0.33
------- ------ ------- -------
Portion of rents representative of the interest factor..... $ 28 $ 82 $ 112 $ 364
======= ====== ======= =======
(2) Based on total interest expense.
(3) Represents interest expense on debt not expected to be repaid (losses).
(4) $40.0 million of subordinated notes with an interest rate of 12 1/2% per annum.
(5) $400 of total bond premium amortization expense divided by four years.
</TABLE>
NM = NOT MEANINGFUL
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Mego Mortgage
Corporation on Form S-4 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 26, 1997
