<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MAY 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________________ TO __________________
COMMISSION FILE NUMBER: 0-21689
MEGO MORTGAGE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 88-0286042
(STATE OR OTHER JURISDICTION OF (I. R. S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1000 PARKWOOD CIRCLE, SUITE 500, ATLANTA, GEORGIA 30339
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(770) 952-6700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 17, 1998, there were 30,566,667 shares of Common Stock, $.01
par value per share, of the Registrant outstanding.
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<PAGE> 2
MEGO MORTGAGE CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Condensed Financial Statements (unaudited)
Condensed Statements of Financial Condition at
August 31, 1997 and May 31, 1998...................................................................1
Condensed Statements of Operations for the Three and Nine Months Ended
May 31, 1997 and 1998 ............................................................................2
Condensed Statements of Cash Flows for the Nine Months Ended
May 31, 1997 and 1998 .............................................................................3
Condensed Statements of Stockholders' Equity (Deficit) for the Nine Months Ended
May 31, 1998 ......................................................................................4
Notes to Condensed Financial Statements............................................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................................................15
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................34
Item 4. Results of Votes of Security Holders..............................................................34
Item 5. Other.............................................................................................34
Item 6. Exhibits and Reports on Form 8-K..................................................................35
SIGNATURE ..................................................................................................37
</TABLE>
i
<PAGE> 3
MEGO MORTGAGE CORPORATION
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
May 31,
August 31, 1998
1997 (unaudited)
---------- -----------
(thousands of dollars, except
per share amounts)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,104 $ 13,130
Cash deposits, restricted 6,890 6,345
Loans held for sale, net of allowance for credit losses of $100 at August 31,
1997 and $1,407 at May 31, 1998 and net of lower of cost or market allowance
of $0 at August 31, 1997 and $9,561 at May 31, 1998 9,523 17,297
Mortgage related securities, at fair value 106,299 65,841
Mortgage servicing rights 9,507 6,329
Other receivables 7,945 3,644
Property and equipment, net of accumulated depreciation of $675 and $1,221 2,153 1,630
Organizational costs, net of amortization 289 145
Prepaid debt expenses 2,362 4,565
Prepaid commitment fee 2,333 --
Deferred state income tax asset -- 2,157
Other assets 795 356
--------- ---------
TOTAL ASSETS $ 154,200 $ 121,439
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Notes and contracts payable $ 35,572 $ 31,274
Accounts payable and accrued liabilities 17,858 27,755
Allowance for credit losses on loans sold with recourse 7,014 8,022
State income taxes payable 649 --
--------- ---------
Total liabilities 61,093 67,051
Subordinated debt 40,000 80,343
--------- ---------
Stockholders' equity (deficit):
Preferred Stock, $.01 par value per share
(Authorized--5,000,000 shares) -- --
Common Stock, $.01 par value per share
(Authorized--50,000,000 shares;
Issued and outstanding--12,300,000 at August 31, 1997 and May 31, 1998 123 123
Additional paid-in capital 29,185 36,823
Retained earnings (accumulated deficit) 23,799 (62,901)
--------- ---------
Total stockholders' equity (deficit) 53,107 (25,955)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 154,200 $ 121,439
========= =========
</TABLE>
See notes to condensed financial statements.
1
<PAGE> 4
MEGO MORTGAGE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
---------------------------- ----------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
(thousands of dollars, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES:
Gain (loss) on sale of loans $ 13,226 $ (17,371) $ 28,650 $ (15,562)
Net unrealized gain (loss) on mortgage related securities 2,305 (27,360) 5,213 (44,120)
Loan servicing income (loss), net 726 (1,367) 1,924 1,137
Interest income 2,911 4,026 5,940 13,201
Less: interest expense (1,774) (3,894) (3,922) (11,175)
------------ ------------ ------------ ------------
Net interest income 1,137 132 2,018 2,026
------------ ------------ ------------ ------------
Net revenues (losses) 17,394 (45,966) 37,805 (56,519)
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Net provision for credit losses 4,107 108 5,018 2,404
Depreciation and amortization 173 338 469 844
Other interest 122 103 220 330
General and administrative:
Payroll and benefits 3,351 4,185 8,490 14,925
Professional services 505 1,101 1,496 3,637
Sub-servicing fees 523 524 1,180 1,795
Other services 324 479 831 1,615
Rent and lease expenses 313 408 815 1,118
Travel 248 212 716 967
Credit reports 352 8 885 474
FHA insurance 136 192 414 335
Other 349 537 919 1,737
------------ ------------ ------------ ------------
Total costs and expenses 10,503 8,195 21,453 30,181
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes 6,891 (54,161) 16,352 (86,700)
Income Taxes 2,619 -- 6,230 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 4,272 $ (54,161) $ 10,122 $ (86,700)
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
------
Net income (loss) $ 0.35 $ (4.40) $ 0.87 $ (7.05)
============ ============ ============ ============
Weighted-average number of common shares outstanding 12,300,000 12,300,000 11,634,432 12,300,000
============ ============ ============ ============
Diluted:
--------
Net income (loss) $ 0.35 $ (4.40) $ 0.86 $ (7.05)
============ ============ ============ ============
Weighted-average number of common shares
and common share equivalents outstanding 12,379,368 12,300,000 11,723,630 12,300,000
============ ============ ============ ============
</TABLE>
See notes to condensed financial statements.
2
<PAGE> 5
MEGO MORTGAGE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended May 31,
-------------------------
1997 1998
----------- -----------
(thousands of dollars)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 10,122 $ (86,700)
--------- ---------
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Additions to mortgage servicing rights (5,538) (3,529)
Write-off of mortgage servicing rights -- 3,804
Net unrealized (gain) loss on mortgage related securities (5,213) 44,120
Additions to mortgage related securities (50,185) --
Adjustments to mortgage related securities -- 1,869
Net provisions for estimated credit losses 5,018 915
Depreciation and amortization expense 469 844
Amortization of prepaid debt expense 337 1,142
Amortization and write-off of prepaid commitment fee 513 4,333
Amortization of mortgage servicing rights 1,642 2,903
Accretion of residual interest on mortgage related securities (2,684) (7,295)
Payments on mortgage related securities 815 974
Amortization of mortgage related securities 956 790
Additions to deferred loan fees, net (325) (9,337)
Additions to prepaid debt expenses, net -- (1,318)
Additions to prepaid commitment fee, net -- (2,000)
Loans originated for sale, net of loan fees (347,661) (337,050)
Payments on loans held for sale 164 1,896
Proceeds from sale of loans 326,617 336,745
Changes in operating assets and liabilities:
(Increase) decrease in cash deposits, restricted (1,613) 545
(Increase) decrease in other assets, net (1,324) 4,664
Increase in state income taxes payable (708) (649)
Increase in deferred state income tax asset -- (2,157)
(Decrease) increase in other liabilities, net (3,487) 17,557
--------- ---------
Total adjustments (82,207) 59,766
--------- ---------
Net cash used in operating activities (72,085) (26,934)
--------- ---------
Cash Flows From Investing Activities:
Purchase of property and equipment (1,477) (58)
Proceeds from sale of property and equipment 5 --
--------- ---------
Net cash used in investing activities (1,472) (58)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from borrowings on notes and contracts payable 309,562 333,899
Payments on notes and contracts payable (290,922) (338,197)
Proceeds from issuance of subordinated debt, net 37,750 38,373
Proceeds from sale of common stock 20,658 --
Amortization of premium of subordinated debt -- (57)
--------- ---------
Net cash provided by financing activities 77,048 34,018
--------- ---------
Net Increase in Cash and Cash Equivalents 3,491 7,026
Cash and Cash Equivalents--Beginning of Period 443 6,104
--------- ---------
Cash and Cash Equivalents--End of Period $ 3,934 $ 13,130
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,470 $ 4,997
========= =========
State income taxes $ 1,691 $ 504
========= =========
Supplemental Disclosure of Non-Cash Activities:
Addition to prepaid commitment fee and other liabilities in
connection with loan sale commitment received $ 3,000 $ --
========= =========
Increase in deferred federal income tax asset related to Spin-off $ -- $ 2,354
========= =========
Increase in additional paid-in capital related to settlement
of amount payable related to Spin-off $ -- $ 5,284
========= =========
</TABLE>
See notes to condensed financial statements.
3
<PAGE> 6
MEGO MORTGAGE CORPORATION
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Retained
$.01 par value Additional Earnings
-------------------------- Paid-In (Accumulative
Shares Amount Capital Deficit) Total
---------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
(thousands of dollars, except per share amounts)
Balance at August 31, 1997 12,300,000 $ 123 $ 29,185 $ 23,799 $ 53,107
Increase in additional paid-in capital due to
adjustment of deferred federal income tax
asset related to Spin-off -- -- 2,354 -- 2,354
Increase in additional paid-in capital due to
settlement of amount payable to
Mego Financial Corp. related to Spin-off
(see Note 7 of Notes to Condensed Financial
Statements) -- -- 5,284 -- 5,284
Net loss for the nine months ended
May 31, 1998 -- -- -- (86,700) (86,700)
---------- ------------ ------------ ------------ ------------
Balance at May 31, 1998 (unaudited) 12,300,000 $ 123 $ 36,823 $ (62,901) $ (25,955)
========== ============ ============ ============ ============
</TABLE>
See notes to condensed financial statements.
4
<PAGE> 7
MEGO MORTGAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1997 AND 1998
1. CONDENSED FINANCIAL STATEMENTS
In the opinion of management, when read in conjunction with the audited
Financial Statements for the years ended August 31, 1996 and 1997, contained in
the Form 10-K of Mego Mortgage Corporation filed with the Securities and
Exchange Commission for the year ended August 31, 1997, the accompanying
unaudited Condensed Financial Statements contain all of the information
necessary to present fairly the financial position of Mego Mortgage Corporation
at May 31, 1998, the results of its operations for the three and nine months
ended May 31, 1997 and 1998, the change in stockholders' equity (deficit) for
the nine months ended May 31, 1998 and the cash flows for the nine months ended
May 31, 1997 and 1998. Certain reclassifications, including the reclassification
of commission and selling expenses of $675,000 and $493,000 for the quarters
ended May 31, 1997 and 1998, respectively, and $1.9 million and $1.7 million for
the nine months ended May 31, 1997 and 1998, respectively, into their component
expense categories within general and administrative expenses, have been made to
conform prior periods with the current period presentation. On June 1, 1998,
$11.2 million of the $13.1 million of cash and cash equivalents shown on the
Company's Statement of Financial Condition was utilized to reduce the Company's
indebtedness.
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") 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. In the
opinion of management, all material adjustments necessary for the fair
presentation of these statements have been included herein, which are normal and
recurring in nature. The results of operations for the three and nine months
ended May 31, 1998 are not necessarily indicative of the results to be expected
for the full year.
The Company records gain on sale of loans as required by Statement of
Financial Accounting Standards No. 125 ("SFAS 125") which, among other things,
requires management to estimate the fair value of certain mortgage related
securities and servicing assets utilizing future prepayment and loss
assumptions. Such assumptions will differ from actual results and the difference
could be material. Management utilizes assumptions based on a variety of factors
including historical trends, consultation with its financial advisors, and
assumptions utilized by its peers. Historical trends may not be an indication of
future results which may be affected by changes in interest rates, credit
quality, availability of alternative financing options, and general economic
conditions. The application of SFAS 125 is required for all entities with
certain mortgage banking activities including originators and sellers of
mortgage loans. Management believes that its assumptions are similar to those
utilized by other subprime mortgage loan originators.
2. NATURE OF OPERATIONS
Mego Mortgage Corporation (the "Company") was incorporated on June 12,
1992, in the state of Delaware. The Company, through its wholesale and retail
divisions, 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. At
May 31, 1998, as a result of prior claims, no FHA insurance remained with
respect to the Company's portfolio of Title I Loans. In May 1996, the Company
commenced the origination of conventional home improvement loans and debt
consolidation loans ("Conventional Loans"), which generally are secured by
residential real estate, through its network of mortgage bankers and dealers. In
December 1997, the Company commenced the origination of subprime conventional
residential First
5
<PAGE> 8
MEGO MORTGAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1997 AND 1998
Mortgage Loans ("First Mortgage Loans"). During the nine months ended May 31,
1998, the Company's loan originations were comprised of 92.0% Conventional
Loans, 5.5% Title I Loans and 2.5% First Mortgage 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, $.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
IPO, the Company issued $40.0 million of 12.5% senior subordinated notes due in
2001 (the "1996 Notes") in an underwritten public offering. On September 2,
1997, Mego Financial distributed all of its 10 million shares of the Company's
Common Stock to Mego Financial shareholders in a tax-free spin-off (the
"Spin-off"). In October 1997, the Company issued an additional $40.0 million of
12.5% senior subordinated notes due in 2001 (the "Additional Notes", and
together with the 1996 Notes, the "Old Notes") in a private placement (the "1997
Private Placement"). See Note 9. The proceeds from the sale of the Old Notes
were used by the Company to repay borrowings, including borrowings from Mego
Financial, and to provide funds for loan originations, the securitizations of
loans and working capital.
The Company has historically operated on a negative cash flow basis.
During the years ended August 31, 1996 and 1997 and the six months ended
February 28, 1997 and 1998, the Company, primarily due to a substantial increase
in loans originated and sold, used $15.3 million, $70.4 million, $39.6 million
and $59.5 million of cash, respectively, principally funded from borrowings. As
a result of a $32.5 million loss recognized for the six months ended February
28, 1998, and due to the fact that the Company was not in compliance with
certain provisions of its warehouse and other debt agreements, the Company was
restricted its ability to incur additional indebtedness. As a consequence of its
inability to incur additional indebtedness, the Company was required to reduce
substantially its loan originations and to liquidate its portfolio of loans in
order to raise cash to operate. In addition, the Company determined to: (i) seek
new financing which resulted, in July 1998, in a recapitalization of the Company
(see Note 3) and (ii) change the manner in which it conducts its operations.
The Company's future operations will focus, among other things, on: (i)
increasing its sales of whole loans in the secondary market on a servicing
released or servicing retained basis for cash premiums and reducing its reliance
on securitizations as a method to sell loans; (ii) implementing additional cost
saving measures beyond the recent internal restructuring which resulted in a
reduction of approximately 32% of its workforce; (iii) offering new
complementary loan products and increasing the origination of non-conforming
First Mortgage Loans; (iv) continuing to diversify its loan production channels
by increasing its direct loan originations through its own efforts and through
the acquisition of originators of retail mortgage loans; and (v) completing the
restructuring of the Company's Board of Directors and recruiting additional
executive management personnel.
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 perspective borrowers. 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, among other things, by changes in the
national economy.
6
<PAGE> 9
MEGO MORTGAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1997 AND 1998
3. SUBSEQUENT EVENTS
Recapitalization
In an effort to accomplish its strategic goals and return itself to a
strong financial position, on July 1, 1998, the Company completed a series of
transactions to recapitalize the Company (the "Recapitalization"). Pursuant to
the Recapitalization, the Company raised approximately $87.5 million of new
equity. Two strategic partners, City National Bank of West Virginia ("City
National Bank"), a wholly owned subsidiary of City Holding Company ("City
Holding Company"), and Sovereign Bancorp, Inc. ("Sovereign") each purchased
10,000 shares of the Company's newly-designated Series A Convertible Preferred
Stock (the "Preferred Stock") at a purchase price of $1,000 per share. City
National Bank and Sovereign each have been granted an option, which expires in
December 2000, to acquire 6.67 million shares of the Company's Common Stock at
$1.50 per share (the "Option"). Each share of Preferred Stock is convertible
into 666.67 shares of Common Stock, subject to adjustment, 180 days after their
date of issuance. The Preferred Stock will be mandatorily converted into Common
Stock on June 18, 2000. City National Bank and Sovereign each has a right of
first refusal to purchase the Company in the event the Company's Board of
Directors determines to sell the Company. In addition, other private investors
purchased an aggregate of 5,000 shares of Preferred Stock at a purchase price of
$1,000 per share and 16.67 million shares of Common Stock at a purchase price of
$1.50 per share. All of the foregoing sales were made pursuant to private
placements.
As part of the Recapitalization, the Company completed an offer to
exchange (the "Exchange Offer") new subordinated notes and Preferred Stock,
subject to certain limitations, for any and all of the outstanding $80.0 million
principal amount of the Company's Old Notes. Pursuant to the Exchange Offer, the
Company issued approximately 37,500 shares of Preferred Stock at an issuance
price of $1,000 per share and $41.5 million principal amount of new 12 1/2%
Subordinated Notes due 2001 (the "New Notes") in exchange for approximately
$79.0 million of Old Notes. Less than $1.0 million principal amount of the Old
Notes remain outstanding. The net proceeds of the Recapitalization in the amount
of $40.3 million were used to repay indebtedness including $1.6 million to Mego
Financial, pay interest of $5.1 million on the Old Notes, to provide capital to
originate loans and for other general corporate purposes.
Upon completion of the Recapitalization, Jerome J. Cohen, Robert
Nederlander, Herbert B. Hirsch and Don A. Mayerson resigned as directors of the
Company and Edward B. "Champ" Meyercord was elected the Company's Chairman of
the Board of Directors and Chief Executive Officer. Mr. Meyercord has been a
special consultant to the Company since May 1998. City National Bank and
Sovereign each have the right to nominate one board member and each may nominate
an additional board member if they exercise their Option. The holders of the New
Notes and two private investors each have the right to nominate one board
member. City National Bank, the holders of the New Notes and one of the two
private investors each has nominated one member to the Company's Board of
Directors. Sovereign and the other private investor have not exercised their
right to nominate a board member but alternatively have exercised their right to
have a representative to attend each board meeting. See Item 5 "Other".
Financing Arrangements
The Company has executed a new warehouse line of credit for up to $90.0
million with Sovereign (the "Sovereign Warehouse Line") which replaced the
Company's existing warehouse line of credit which matured on May 29, 1998 and
was repaid in full on June 29, 1998. The Sovereign Warehouse Line is renewable,
at Sovereign's option, at six-month intervals, for up to five years, may be
increased with certain consents, and contains pricing/fees which vary by product
and the dollar amount outstanding. The Sovereign Warehouse Line is to be secured
by specific loans held for sale. If the Company determines to seek additional
warehouse financing, Sovereign has a right of first refusal to provide such
additional financing at market rates.
7
<PAGE> 10
MEGO MORTGAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1997 AND 1998
The Company currently has four significant sources of financing and
liquidity: (i) $40.3 million in net proceeds from the sale of Preferred and
Common Stock in the Recapitalization; (ii) the Sovereign Warehouse Line of $90.0
million; (iii) a revolving line of credit for up to $25.0 million, less amounts
outstanding under repurchase agreements (the "First Revolving Credit Facility")
which expires on December 31, 1998; and (iv) a second revolving credit facility
for up to $5.0 million which may, under certain circumstances, be increased to
$8.8 million (the "Second Revolving Credit Facility"). Each of the First and
Second Revolving Credit Facilities are secured by certain of the Company's
mortgage related securities. The Flow Purchase Agreement (as defined) provides
the Company with an additional source of liquidity. The Company believes that
its financing sources are adequate to meet its current needs.
As a result of the losses the Company recognized during the nine months
ended May 31, 1998 and at May 31, 1998, the Company was not in compliance with
certain provisions of: (i) its then existing warehouse line of credit; (ii) the
pledge and security agreement, as amended, governing the First Revolving Credit
Facility; (iii) the Second Revolving Credit Facility; and (iv) the indenture
(the "Indenture") governing the Old Notes. Specifically, its then existing
warehouse line of credit agreement required the Company to maintain: (i) funded
debt (as defined therein) not to exceed a calculated maximum, and at May 31,
1998, funded debt exceeded the calculated maximum by $17.5 million; and (ii) a
minimum tangible net worth requirement (as defined therein) and at May 31, 1998,
tangible net worth was $61.7 million below the minimum. The pledge and security
agreement governing the First Revolving Credit Facility requires the Company to
maintain: (i) a minimum net worth (as defined therein) of $42.5 million and at
May 31, 1998, net worth was a deficit of $27.0 million; and (ii) a ratio of
debt-to-net worth not to exceed 2.5:1, and at May 31, 1998, the ratio of
debt-to-net worth was incalculable due to the deficit in Stockholders' equity.
The Second Revolving Credit Facility requires the Company to maintain a minimum
net worth (as defined therein) and at May 31, 1998, the calculated net worth was
$22.8 million below the requirement. The indenture governing the Old Notes
requires the Company, in order to incur additional indebtedness, to maintain:
(i) a minimum net worth (as defined therein) and (ii) a maximum consolidated
leverage ratio (as defined therein) not to exceed 2:1 and at May 31, 1998,
neither ratio was calculable due to the deficit in Stockholders' equity.
As a result of the Recapitalization, the Company is currently in
compliance with the performance covenants contained in its debt agreements.
Specifically, the Company's then existing warehouse line of credit matured on
May 29, 1998 and was repaid, in full, on June 29, 1998. The First Revolving
Credit Facility's requirement of: (i) a minimum net worth of $42.5 million
which, prior to the Recapitalization, the Company's net worth was a deficit of
$27.0 million, and after giving effect to the Recapitalization, net worth was
$60.3 million; and (ii) the ratio of debt-to-net worth is not to exceed 2.5:1
which, prior to the Recapitalization, the ratio was incalculable due to the
deficit in Stockholders' equity and after giving effect to the Recapitalization,
the ratio is 1.7:1. The Second Revolving Credit Facility's requirement of net
worth was, prior to the Recapitalization, $22.8 million below the minimum, and
after giving effect to the Recapitalization, was $26.9 million above the
minimum. The Indenture governing the Old Notes requirements of minimal net worth
and a maximum consolidated leverage ratio were incalculable prior to the
Recapitalization due to the deficit in Stockholders' equity and, after giving
effect to the Recapitalization, net worth exceeded the minimum required by $55.6
million and the consolidated leverage ratio was 1.6:1 which is below the 2:1
maximum.
Flow Purchase Agreement
As part of the Recapitalization, the Company entered into a flow
purchase commitment (the "Flow Purchase Agreement") with Sovereign pursuant to
which Sovereign has agreed to purchase up to $400.0 million per year of the
Company's high loan-to-value loans at specified prices. Up to $200.0 million of
the $400.0 million can be loans, the principal amount of which, when added to
the outstanding senior debt on the property, will not exceed 125% of the
property's market value. Sovereign also has a right of first refusal to acquire
certain non-conforming loans originated by the Company at market prices and
terms. The Flow Purchase Agreement expires in September 2001.
8
<PAGE> 11
MEGO MORTGAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1997 AND 1998
Termination of Master Purchase Agreement
As part of the Recapitalization and concurrent with the execution of
the Flow Purchase Agreement with Sovereign, the Company terminated its existing
Master Purchase Agreement with a financial institution which had provided for
such financial institution to purchase up to $2.0 billion of loans over a
five-year period ending in September 2001. In connection with the termination of
the Master Purchase Agreement, the remaining unamortized prepaid commitment fees
associated with the Master Purchase Agreement, totaling approximately $2.8
million, were written-off and are reflected as a charge to earnings as a loss on
the sale of loans in the Company's Statement of Operations.
Servicing Agreements
As part of the Recapitalization, the Company sold to City Mortgage
Services ("City Mortgage Services"), a division of City National Bank, its
existing mortgage servicing rights (the "Bulk Servicing Purchase Agreement") for
a cash purchase price equal to 90% of the book value of such rights at time of
transfer. The Company is committed to sell approximately $6.3 million of its
existing mortgage servicing rights resulting in a loss on this transaction of
approximately $703,000 which is reflected as a charge to earnings in the
Company's Statement of Operations. Additionally, the Company and City Mortgage
Services have entered into an agreement for City Mortgage Services to service
all of the Company's mortgage loans held for sale and loans sold on a servicing
retained basis by the Company (the "Flow Servicing Agreement"). The Company has
an option, contingent upon the delivery to City Mortgage Services of servicing
on $1.0 billion of additional loans, to purchase up to a 20% equity position in
a new entity to be created should City National Bank determines to spin-off its
City Mortgage Services division. Upon completion of the transfer of servicing to
City Mortgage Services, the Company anticipates eliminating substantially its
entire Collections and Claims staff.
Summary Pro Forma Financial Data
The following summary financial data sets forth the assets, liabilities
and stockholders' equity (deficit) at August 31, 1997 and May 31, 1998, and as
adjusted as of May 31, 1998 to give effect to the Recapitalization:
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
AS OF MAY 31, AS OF MAY 31,
1998 1998
------------- -------------
(thousands of dollars)
<S> <C> <C>
Assets $ 121,439 $ 164,481 (1)
Liabilities 67,051 60,078 (2)
Subordinated debt 80,343 42,500 (3)
Stockholders' equity (deficit)
Preferred stock -- 1 (4)
Common stock 123 306 (5)
Paid-in capital 36,823 124,497 (6)
Retained earnings (accumulated deficit) (62,901) (62,901)
Total stockholders' equity (deficit) (25,955) 61,903
Total liabilities and stockholders' equity (deficit) $ 121,439 $ 164,481
</TABLE>
(1) Assumes receipt of $50.0 million from the issuance of 25,000
shares of Preferred Stock at $1,000 per share and 16,666,667
shares of Common Stock at $1.50 per share, net of approximately
$2.4 million to repay in full its existing warehouse line,
approximately $5.1 million for interest on the Old Notes,
approximately $1.3 million to payoff a liability owed to a
subsidiary of Mego Financial, and the payment of approximately
$480,000 of expenses associated with the Recapitalization.
9
<PAGE> 12
MEGO MORTGAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1997 AND 1998
(2) Represents the payment of principal and interest on the warehouse
line, interest on the Old Notes and the payment and adjustment of
an amount owed to Mego Financial net of liabilities associated
with the Recapitalization.
(3) Represents the effect of the exchange offer pursuant to which
$80.3 million principal and premium amount of Old Notes were
exchanged for $41.5 million principal amount of New Notes and
37,500 shares of Preferred Stock. Less than $1.0 million principal
amount of Old Notes remain outstanding.
(4) Represents the issuance of an aggregate of 62,500 shares of
Preferred Stock at $1,000 per share, 37,500 of which were issued
in exchange for $37.5 million principal amount of Old Notes and
the sale of 25,000 shares of Preferred Stock for cash.
(5) Represents the sale of an aggregate of 16,666,667 shares of Common
Stock at $1.50 per share for cash, and the issuance of an
additional 1,600,000 shares of Common Stock to the Company's
placement agent as compensation for its services related to the
Recapitalization.
(6) Represents the change to Paid-in capital from the adjustment of an
amount owed to Mego Financial and the issuance of Common and
Preferred Stock at a price above par.
4. WRITE-DOWN OF LOANS HELD FOR SALE
Pursuant to recourse provisions under certain whole loan sale
agreements, the Company was obligated to repurchase Conventional and Title I
Loans with an aggregate principal balance of approximately $15.4 million at May
31, 1998. These loans, which are reflected in the Company's Statement of
Financial Condition under Loans Held for Sale, were valued utilizing the
Company's estimate of the price to be received upon their final disposition.
Based on the estimated price, a lower of cost or market allowance of $4.5
million was recorded for the three month and nine month periods ended May 31,
1998, as a charge to gain (loss) on sale of loans in the Company's Statement of
Operations. An additional lower of cost or market allowance of $5.2 million
relating to the $13.3 million principal balance of the Company's loans held for
sale at May 31, 1998 was recorded for the three month and nine month periods
ended May 31, 1998, as a charge to gain (loss) on sale of loans in the Company's
Statement of Operations.
5. WRITE-DOWN OF MORTGAGE RELATED SECURITIES
Based on, among other things, delinquencies in the Company's
securitized portfolio of Conventional Loans that were higher than anticipated,
the Company, in consultation with its financial advisors, revised the loss
assumptions utilized to determine the cash flow anticipated to be received on
its mortgage related securities backed by these loans. On a cumulative basis,
the new assumptions project aggregate losses of approximately 14.5% of the
original portfolio loan balance as compared to approximately 9% under the
Company's prior assumptions. The Company also determined it appropriate to
increase from 12% to 14.5% the discount rate used to calculate the present value
of the cash flow anticipated to be received over the life of the loans.
During the three and nine months ended May 31, 1998, the Company
experienced higher than anticipated levels of loan delinquencies and higher than
anticipated levels of voluntary prepayments with respect to its Title I Loans,
resulting in a downward adjustment to the carrying value of the Company's
portfolio of mortgage related securities backed by Title I Loans.
Higher than anticipated levels of defaults on securitized loans and
loans in which the Company otherwise retains an interest reduces the aggregate
amount of excess cash flow from the loans backing these securities. The excess
cash flow that would have been distributed to the Company is instead distributed
to the holders of securities or other interests backed by the loans that are
senior to the Company's mortgage related securities backed by these Title I
Loans.
10
<PAGE> 13
MEGO MORTGAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1997 AND 1998
The application of the Company's revised prepayment and loss
assumptions and the increase in the discount rate which the Company uses to
calculate the present value of the cash flow the Company anticipated to be
received from the loans backing the Company's mortgage related securities,
resulted in a downward adjustment to the carrying value of the Company's
mortgage related securities of approximately $23.2 million and $38.7 million for
the three and nine month periods ended May 31, 1998. At May 31, 1998, mortgage
related securities were $65.8 million compared to $91.3 million at February 28,
1998, $94.3 million at November 30, 1997 and $106.3 million at August 31, 1997.
Changes in the methodology used in calculating the carrying value of
the Company's mortgage related securities are being implemented based on, among
other things, pertinent information received from a number of market sources,
consultations with the Company's financial advisors and management's belief as
to current market conditions. The Company's new assumptions with respect to
prepayments and defaults on the Company's portfolio of securitized Conventional
Loans do not reflect the actual performance to date of such loans.
6. WRITE-DOWN OF MORTGAGE SERVICING RIGHTS
Due to the implementation of the new methodology referred to above in
calculating the carrying value of its mortgage related securities, the carrying
value of the Company's mortgage servicing rights was negatively impaired by
approximately $1.1 million in the three and nine month periods ended May 31,
1998. This impairment was recorded as a loss on servicing revenue in the
Company's Statement of Operations.
As part of the Recapitalization, the Company entered into the Bulk
Servicing Purchase Agreement with City Mortgage Services for the sale of the
Company's mortgage servicing rights to City Mortgage Services. The terms of the
Bulk Servicing Purchase Agreement provide for a cash purchase price equal to 90%
of the book value of such rights at the time the transfer of servicing is
consummated. The Company incurred a loss on this transaction for the 10%
discount on the sale of such rights of approximately $703,000 and it will incur
an additional loss associated with an administration fee to be charged by City
Mortgage Services to service certain seriously delinquent loans. This adjustment
for the 10% discount was reflected in the three and nine month periods ended May
31, 1998 as a charge to earnings in the Company's Statement of Operations.
7. SETTLEMENT OF AMOUNT PAYABLE TO MEGO FINANCIAL CORP.
Prior to the Spin-off, the Company filed a consolidated federal income
tax return with Mego Financial's affiliated group under a Tax Allocation and
Indemnity Agreement dated November 19, 1996. In April 1998, Mego Financial
agreed to reduce the income tax portion of a payable that the Company owed Mego
Financial under such Tax Allocation and Indemnity Agreement by $5.3 million. As
part of the Recapitalization, the payment of approximately $869,000 owed at May
31, 1998 under the Tax Allocation and Indemnity Agreement to Mego Financial was
forgiven by Mego Financial. The $869,000 will be reflected as an addition to
Stockholders' equity (deficit) in the Company's fourth quarter.
8. RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" ("SFAS No. 125") was issued by the
FASB in June 1996. SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
This statement also provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured borrowings.
It requires that liabilities and derivatives incurred or obtained by transferors
as part of a transfer of financial assets be initially measured at fair value.
SFAS No. 125 also requires that servicing assets be measured by allocating the
carrying amount between the assets sold and retained interests based on their
relative fair values at the date of transfer. Additionally, this statement
requires that the servicing assets and liabilities be subsequently measured by
(a) amortization in proportion to and over the period of estimated net servicing
income or loss and (b) assessment for asset impairment or increased obligation
based on their fair values. SFAS No. 125
11
<PAGE> 14
MEGO MORTGAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1997 AND 1998
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 No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." As required by SFAS No. 125,
the Company adopted the new requirements effective January 1, 1997, and applied
them prospectively. Implementation of SFAS 125 did not have any material impact
on the financial statements of the Company, as the book value of the Company's
mortgage related securities approximated fair value.
The following table reflects the components of mortgage related
securities as required by SFAS No. 125 at May 31, 1998 (thousands of dollars):
<TABLE>
<CAPTION>
<S> <C>
Interest only strip securities $ 3,783
Residual interest securities 55,654
Interest only receivables (formerly excess servicing rights) 6,404
-------
Total mortgage related securities $65,841
=======
</TABLE>
All mortgage related securities are classified as trading securities
and are recorded at their estimated fair value. Changes in the estimated fair
value are recorded in current operations. See Note 5.
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 Accounting Principles Board ("APB") Opinion No.
15.
Basic EPS excludes dilution from common stock equivalents and is
computed by dividing income (loss) 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.
Data utilized in calculating earnings per share under SFAS 128 is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
------------------------------ ---------------------------
1997 1998 1997 1998
------------ ------------ ------------ -------------
(thousands of dollars)
<S> <C> <C> <C> <C>
Basic:
- -----
Net income (loss) $ 4,272 $ (54,161) $ 10,122 $ (86,700)
============ ============ ============ ============
Weighted-average number of common shares
outstanding 12,300,000 12,300,000 11,634,432 12,300,000
============ ============ ============ ============
Diluted:
- -------
Net income (loss) $ 4,272 $ (54,161) $ 10,122 $ (86,700)
============ ============ ============ ============
Weighted-average number of common shares and
common share equivalents outstanding 12,379,368 12,300,000 11,733,630 12,300,000
============ ============ ============ ============
</TABLE>
12
<PAGE> 15
MEGO MORTGAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1997 AND 1998
The following tables reconcile the net income (loss) applicable to
common stockholders, basic and diluted shares, and EPS for the following
periods:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31, 1997 THREE MONTHS ENDED MAY 31, 1998
----------------------------------------- -----------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------------- ------------- ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
(thousands of dollars, except per share amounts)
Net income (loss) $ 4,272 $ (54,161)
------------ --------------
BASIC EPS
Income (loss) applicable to
common stockholders 4,272 12,300,000 $ 0.35 (54,161) 12,300,000 $ (4.40)
============ ============
Effect of dilutive securities:
Stock options - 79,368 - -
------------ ------------ ------------- ------------
DILUTED EPS
Income (loss) applicable to
common stockholders and
assumed conversions $ 4,272 12,379,368 $ 0.35 $ (54,161) 12,300,000 $ (4.40)
============ ============ ============ ============== ============ ============
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED MAY 31, 1997 NINE MONTHS ENDED MAY 31, 1998
----------------------------------------- -----------------------------------------
PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------------- ------------- ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
(thousands of dollars, except per share amounts)
Net income (loss) $ 10,122 $ (86,700)
------------ -------------
BASIC EPS
Income (loss) applicable to
common stockholders 10,122 11,634,432 $ 0.87 (86,700) 12,300,000 $ (7.05)
============ ============
Effect of dilutive securities:
Stock options - 89,198 - -
------------ ------------ ------------- ------------
DILUTED EPS
Income (loss) applicable to
common stockholders and
assumed conversions $ 10,122 11,723,630 $ 0.86 $ (86,700) 12,300,000 $ (7.05)
============ ============ ============ ============= ============ ============
</TABLE>
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"), and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No.
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. SFAS No.
131 establishes standards of reporting by publicly held business enterprises and
disclosure of information about operating segments in annual financial
statements and, to a lesser extent, in interim financial reports issued to
shareholders. SFAS Nos. 130 and 131 are effective for fiscal years beginning
after December 15, 1997. As both SFAS Nos. 130 and 131 deal with financial
statement disclosure, the Company does not anticipate the adoption of these new
standards will have a material impact on its financial position, results of
operations or cash flows. The Company has not yet determined what its reporting
segments will be under SFAS No. 131.
13
<PAGE> 16
MEGO MORTGAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 1997 AND 1998
9. 1997 PRIVATE PLACEMENT
In October 1997, the Company sold $40.0 million of Additional Notes in
the 1997 Private Placement which increased the aggregate principal amount of
outstanding 12.5% senior subordinated notes from $40.0 million to $80.0 million
(collectively referred to in Note 3 as the Old Notes). The Company used the net
proceeds from the sale, after deducting expenses, to repay $3.9 million of debt
due to Mego Financial, $29.0 million to reduce the amount outstanding under the
Company's lines of credit and the balance of $5.5 million for working capital.
The Additional Notes are subject to the indenture governing the Company's Old
Notes. In connection with the Company's solicitation of holders of the 1996
Notes to amend the indenture to permit the Company's sale of the Additional
Notes, the Company made consent payments totaling $392,000 ($10.00 cash per
$1,000 principal amount of the 1996 Notes) to holders of the 1996 Notes that
properly furnished their consents to the amendments to such indenture.
As part of the Recapitalization, $37.5 million principal amount of Old
Notes were exchanged for approximately 37,500 shares of Preferred Stock and
$41.5 million principal amount of Old Notes were exchanged for an equal
principal amount of New Notes. Less than $1.0 million principal amount of Old
Notes remain outstanding. The Company may elect to defease the Old Notes by
tendering the required sum to the Indenture trustee.
14
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations section contains certain forward-looking
statements and information relating to Mego Mortgage Corporation (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
include, without limitation, the Company's expectation and estimates as to the
Company's business operations, including the introduction of new loan programs
and products and future financial performance, including growth in revenues and
net income and cash flows. In addition, included herein 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. Also, the Company specifically advises
readers that the factors listed under the caption "Liquidity and Capital
Resources" 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 following discussion and analysis should be read in conjunction
with the Condensed Financial Statements, including the notes thereto, contained
elsewhere herein and in the Financial Statements, including the notes thereto,
in the Company's Form 10-K for the fiscal year ended August 31, 1997.
RECENT DEVELOPMENTS
The Company has historically operated on a negative cash flow basis.
During the years ended August 31, 1996 and 1997 and the six months ended
February 28, 1997 and 1998, the Company, primarily due to a substantial increase
in loans originated and sold, used $15.3 million, $70.4 million, $39.6 million
and $59.5 million of cash, respectively, principally funded from borrowings.
As a result of a $32.5 million loss recognized by the Company for the
six months ended February 28, 1998, and due to the fact that the Company was not
in compliance with certain provisions of its warehouse and other debt
agreements, the Company was restricted in its ability to incur additional
indebtedness. As a consequence of its inability to borrow additional funds to
make new loans, the Company substantially curtailed its loan originations. Loan
originations for the three months ended May 31, 1998, February 28, 1998,
November 30, 1997 and May 31,1997 totaled $9.9 million, $111.3 million, $199.9
million and $173.9 million, respectively. From January 1, 1998, when the
curtailment of new originations began, until the completion of the
Recapitalization on July 1, 1998 (which includes the three months ended May 31,
1998 and three of the months in the nine months ended May 31, 1998), the
Company's activities consisted of the liquidation of its portfolio of mortgage
loans, the proceeds from which were used to reduce the Company's indebtedness,
and the maintenance of its systems and personnel necessary to enable the Company
to recommence operations. These matters, among others, raised substantial doubt
in the opinion of Deloitte & Touche, the Company's independent auditors, about
the Company's ability to continue as a going concern.
In an effort to accomplish its strategic goals and return itself to a
strong financial position, on July 1, 1998, the Company completed its
Recapitalization, providing the Company with approximately $87.5 million of new
equity. Two strategic partners, City National Bank of West Virginia ("City
National Bank") a wholly owned subsidiary of City Holding Company ("City Holding
Company"), and Sovereign Bancorp, Inc. ("Sovereign") each purchased 10,000
shares of the Company's newly-designated Series A Convertible Preferred Stock
(the "Preferred Stock") at a purchase price of $1,000 per share. City National
Bank and Sovereign each have been granted an option, which expires in December
2000, to acquire 6.67 million shares of the Company's Common Stock ("Common
Stock) at $1.50 per share (the "Option"). Each share of Preferred Stock is
convertible into 666.67 shares of Common Stock, subject to adjustment, 180 days
from their date of issuance. The Preferred Stock will be mandatorily converted
into Common Stock on the second anniversary of the issuance of the Preferred
Stock. City
15
<PAGE> 18
National Bank and Sovereign each has a right of first refusal to purchase the
Company in the event the Company's Board of Directors determines to sell the
Company. In addition, other private investors purchased an aggregate of 5,000
shares of Preferred Stock at a purchase price of $1,000 per share and 16.67
million shares of Common Stock at a purchase price of $1.50 per share. An
additional 1.6 million shares of Common Stock were issued to the Company's
placement agent as the placement agent's fees for the Recapitalizaiton. All of
the foregoing sales were made pursuant to private placements.
The net proceeds from the Recapitalization of approximately $40.3
million were used to pay interest of approximately $5.1 million on the Old
Notes, to repay, in full, a line of credit that matured on May 29, 1998, to pay
loan and management fees and other miscellaneous charges due to Mego Financial
of $1.6 million and to pay a portion of the costs of the Recapitalization of
approximately $480,000. The balance will be used to originate new loans, for
general and administrative expenses and other corporate purposes. See Note 3 to
Notes to Condensed Financial Statements.
As part of the Recapitalization, the Company completed its Exchange
Offer for any and all of the outstanding $80.0 million principal amount of the
Company's Old Notes. Pursuant to the Exchange Offer, the Company issued
approximately 37,500 shares of Preferred Stock at an issuance price of $1,000
per share and $41.5 million principal amount of new 12 1/2% Subordinated Notes
due 2001 in exchange for approximately $79.0 million of Old Notes. Less than
$1.0 million of the Old Notes remain outstanding. The Company may elect to
defease the Old Notes.
To return the Company to profitability and a strong financial position,
the Company has initiated changes in its operations designed to reduce its loan
origination costs and implemented measures to place the Company on a cash flow
neutral basis for fiscal 1999.
The Company intends to increase the percentage of whole loan sales in
the secondary market for cash premiums and reduce its historical dependence on
securitizations due to the negative cash flow generated by securitizations as a
method to sell loans. The Company will also attempt to reduce the acquisition
premiums paid to its network of mortgage bankers for Conventional Loans. During
the Company's 1997 fiscal year, these cash acquisition premiums totaled $18.0
million or approximately 3.5% of the Company's total loan originations. In
addition, the Company is implementing additional cost saving measures beyond its
recent internal restructuring which resulted in the reduction of its workforce
by approximately 32%.
Increasing the Company's originations of first mortgage loans using its
existing mortgage banker relationships, developing a broker network and
providing direct consumer lending are also significant goals of the Company's
strategic initiatives. The Company originates first mortgage loans solely for
sale at cash premiums in the secondary market substantially without recourse for
credit losses or risk of prepayment.
The Company commenced direct to consumer origination of Conventional
Loans in September 1997. In its direct to consumer origination channel,
origination fees are typically paid by the borrowers to the Company, the amount
of which is anticipated to exceed the Company's origination cost of the loan.
This is unlike loans purchased from the Company's network of mortgage bankers
that are paid up front cash premiums to acquire loans, with no related offsets.
The Company intends to increase its direct origination of mortgage loans through
its own efforts and through the acquisition of retail mortgage brokers and other
retail loan originators. The Company believes that, by acquiring originators of
retail loans, the Company can lower its overall cost of originating mortgage
loans and improve its profitability. The Company is not in negotiation at this
time to acquire any loan originators.
There can be no assurance that these changes to the Company's
operations and new measures to improve the Company's cash flow will be
successful.
As part of the Recapitalization, the Company, entered into agreements
with Sovereign, for a new $90.0 million warehouse line, (subject to the
availability of collateral), and a mortgage loan purchase and sale commitment.
In addition, the Company agreed to sell City Mortgage Services ("City Mortgage
Services"), a division of City National Bank, its existing mortgage servicing
portfolio for approximately $7.0 million in cash.
16
<PAGE> 19
The Company also entered into an agreement with City Mortgage Services for City
Mortgage Services to service all of the mortgage loans that the Company owned at
the date of the Recapitalization. In addition, the Company and City Mortgage
Services entered into an agreement for City Mortgage Services to service all of
the mortgage loans originated or purchased by the Company after the
Recapitalization on a servicing retained basis, which will allow the Company to
substantially eliminate its loan collection and servicing division, while
enabling the Company to take advantage of the collection and servicing skills of
one of its strategic partners. The Company has an option to acquire 20% of this
servicing platform subject to certain conditions, including the delivery by the
Company to City Mortgage Services of $1.0 billion of additional loans to
service.
GENERAL
The Company is a specialty consumer finance company that originates,
purchases, sells and securitizes consumer loans consisting primarily of
conventional uninsured home improvement and debt consolidation loans which are
generally secured by first or second liens on residential property
("Conventional Loans"). The Company historically has originated loans through a
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 principal balance of the
loan and certain other costs. At May 31, 1998, as a result of prior claims, no
FHA insurance remained with respect to the Company's portfolio of Title I Loans.
Title I The Company began offering Conventional Loans through its Correspondents
in May 1996 and through its Dealers in September 1996.
Since May 1996, Conventional Loans have accounted for an increasing
portion of the Company's loan originations. For the three months ended February
28, May 31, August 31, and November 30, 1997 and February 28 and May 31, 1998,
the Company originated $89.7 million, $149.5 million, $158.5 million, $187.8
million, $116.5 million and $5.6 million of Conventional Loans, respectively,
which constituted 80.6%, 85.9%, 88.4%, 93.9%, 91.5% and 57.0%, respectively, of
the Company's total loan originations during the periods. For the nine months
ended May 31, 1997 and 1998, the Company originated $270.3 million and $309.9
million of Conventional Loans, respectively, which constituted 77.8% and 92.0%,
respectively, of the Company's total loan originations during the periods.
To broaden its channels of origination and to reduce its overall cost
of loan origination, the Company commenced the direct to consumer origination of
Conventional Loans in the three months ended November 30, 1997. To increase the
amount of loans from this new origination channel, the Company has entered into
contractual arrangements with third-party financial institutions for
underwriting qualified consumer loan applications. These applications do not
conform to those institutions' loan programs, but may be suitable for approval
and funding under the Company's product lines that are not available at the
third-party institutions. By making direct consumer loans, the Company avoids
the payment of premiums that it incurs with the acquisition of completed loans
from its network of mortgage bankers. It is anticipated that the permissible
fees charged to consumers on the direct loans will cover the cost of the
underwriting and origination expenses and place the Company on a positive cash
flow basis with respect to its direct to consumer loan originations.
In December 1997, the Company began originating subprime residential
first mortgage loans ("First Mortgage Loans"). The Company originates First
Mortgage Loans through its network of mortgage bankers and brokers. The Company
believes that there are several advantages to originating First Mortgage Loans
including (i) a more liquid secondary market exists for such loans, (ii) the
average principal amount of such loans is typically twice that of a Conventional
Loan and (iii) such loans are originated by mortgage bankers and brokers that
historically sell them to the Company at lower premiums than Conventional Loans.
For the nine months ended May 31, 1998, the Company originated $8.5 million of
First Mortgage Loans.
The Company has historically sold substantially all the loans it
originated either through securitizations at a yield below the stated interest
rate on the loans, generally retaining the right to service the loans and
receiving any
17
<PAGE> 20
amounts in excess of the yield to the purchasers, or through the sale of whole
loans to third-party institutional purchasers in the secondary market. In
connection with whole loan sales, the Company generally 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 to their principal
balance. In connection with securitizations, certain of the interests in the
related securitizations were generally sold to institutional purchasers, with
the interest only and residual class securities generally retained by the
Company. The Company presently intends to dispose of a majority of its loan
originations through whole loan sales on a servicing retained basis, at a
premium, and reduce its historical dependence on securitizations. Loans sold
servicing retained will be serviced by City Mortgage Services pursuant to the
Flow Servicing Agreement.
The Company recognizes revenue from gain (loss) on sale of loans,
unrealized gain (loss) 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, plus accretion of interest
related to mortgage related securities, net of interest paid under its credit
agreements. The Company continues to service a substantial amount of loans it
sold through May 31, 1998. However, during the nine months ended May 31, 1998,
$181.6 million principal balance of loans were sold servicing released. Net loan
servicing income represents servicing fee income and other ancillary fees
received for servicing loans less: (i) the amortization of capitalized mortgage
servicing rights, (ii) and through January 1, 1997, the date of adoption of
Statement of Financial Accounting Standards No. 125 ("SFAS 125"), the
amortization of excess servicing rights. Mortgage servicing rights are amortized
in proportion to, and over the period of, estimated net servicing income or over
the estimated lives of the related loans. As reflected in Note 3 to Notes to
Condensed Financial Statements, the Company has entered into the Bulk Servicing
and Flow Servicing Agreements pursuant to which it sold its present and up to an
additional $1.0 billion of future loan servicing to City Mortgage Services as
part of the Recapitalization.
Gain (loss) on sale of loans includes the gain on sale resulting from
securitizations and whole loan sales. The gain on sale in securitization
transactions 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.
The Company's retained interests are referred to as "mortgage related
securities." From a securitization, the Company generally retains a residual
interest mortgage related security and may retain an interest only strip
mortgage related security. The Company carries its mortgage related securities
at their estimated fair value. Included in the Company's mortgage related
securities is the estimated fair value of prepayment penalties (where
applicable) the Company anticipates it will receive from borrowers who repay
their loan within a specified period (generally within three years) after the
loan is made. The fair value of these mortgage related securities is the present
value of the anticipated net cash flows to be received after considering the
effects of anticipated prepayments and credit losses and, where applicable, net
of estimated FHA insurance recoveries on Title I Loans. The net unrealized gain
(loss) on mortgage related securities represents the difference between the
allocated cost basis of the securities and their estimated fair value.
The fair value of the Company's mortgage related securities are
affected by, among other things, changes in market interest rates and prepayment
and loss experiences of these and similar securities. The Company estimates the
fair value of its mortgage related securities utilizing prepayment and credit
loss assumptions on the mortgage loans backing these securities that the Company
believes to be appropriate for the characteristics (weighted-average interest
rate, weighted-average maturity date, etc.) of the mortgage loans backing each
particular securitization. To the Company's knowledge, there is no active market
for the sale of these securities.
During the three months ended November 30, 1997, the Company
experienced voluntary prepayment activity and delinquencies with respect to its
securitized Conventional Loans, which substantially exceeded the levels, which
had been assumed for the applicable time frame. As a result of this increase,
the Company adjusted the assumptions previously utilized in calculating the
carrying value of its mortgage related securities as of November 30, 1997.
The application of these revised assumptions to the Company's portfolio
of Conventional Loans backing its mortgage related securities caused the Company
to adjust the carrying value of such securities by approximately $10.2 million
at November 30, 1997. Additional negative adjustments of approximately $3.9
million to the carrying value of mortgage related securities backed by Title I
Loans and other sales were also recognized during the three
18
<PAGE> 21
months ended November 30, 1997, due to higher levels of defaults and prepayments
than had been previously anticipated. After calculating the effect of accretion
of interest, amortization of residuals and increased prepayment penalty fees,
the carrying value of the Company's mortgage related securities was reduced to
$94.3 million as of November 30, 1997 from $106.3 million as of August 31, 1997.
As a result of, among other things, the application of the revised prepayment
and loss assumptions, the Company recorded a $14.1 million charge to earnings
during the three months ended November 30, 1997.
Based on, among other things, continued higher than anticipated levels
of delinquencies, the Company's loss assumptions have been further modified as
of May 31, 1998. On a cumulative basis, the new loss assumptions assume
aggregate losses of approximately 14.5% of the original portfolio loan balance
as compared to approximately 9% under the Company's prior model, which had been
implemented in the three month period ending November 30, 1997.
In addition, the Company has elected to use a voluntary prepayment
curve which ramps from a 4.5% annualized rate in month one to a 15.25%
annualized rate in month 12. The annualized rate reaches 18.25% in month 18,
where the prepayment speed remains constant until month 36. At that point, the
prepayment speed declines by 0.5% per month until it reaches 15.25% in month 43,
where it remains for the remaining life of the portfolio. The prepayment
assumption is exclusive of regularly scheduled principle and interest payments
on the loans.
Based on assumptions of voluntary prepayment speeds and losses, the
Company projects the anticipated cash flow to be received from the loans backing
the Company's mortgage related securities. To determine the fair value of its
mortgage related securities, the Company discounts the projected cash flow at
the rate it believes an independent third-party purchaser would require as a
rate of return. As a result, the Company increased from 12% to 14.5%, the rate
the Company uses to discount to present value the cash flow anticipated to be
received on the Company's mortgage related securities from the mortgage loans
backing these securities.
The Company has revised its assumptions based on information from a
variety of sources including, among other things, the Company's experience with
its own portfolio of loans, pertinent information from a variety of market
sources and consultations with its financial advisors. However, the Company has
not obtained an independent evaluation of the assumptions utilized in
calculating the carrying value of its mortgage related securities for any period
subsequent to August 31, 1997. In the three months ended May 31, 1998, taken as
a whole, negative adjustments of approximately $27.4 million were recognized.
See Note 5 to Notes to Condensed Financial Statements.
Although the Company believes that it has made reasonable estimates of
the prepayments and default rates in determining the fair value of the Company's
mortgage related securities, the rate of prepayments and default rates utilized
are estimates, and actual experience will vary from these estimates and such
variances may be material. There can be no assurance that the revised prepayment
and loss assumptions used to determine the fair value of the Company's mortgage
related securities and mortgage servicing rights will remain appropriate for the
life of the loans backing such securities. If actual loan prepayments or credit
losses vary from the Company's estimates, the carrying value of the Company's
mortgage related securities and mortgage servicing rights, if any, may have to
be further adjusted through a charge or credit to earnings.
19
<PAGE> 22
RESULTS OF OPERATIONS
As previously discussed, the Company's operations, since January 1,
1998, have consisted principally of the liquidation of its portfolio of loans,
the proceeds from which were used to reduce the Company's indebtedness. During
this period, the Company focused on obtaining new financing and initiating new
strategic initiatives to return the Company to profitability while maintaining
its systems and a level of personnel necessary to recommence operations. As a
result, the Company does not believe that its results for the three and nine
months ended May 31, 1998 are comparable to its results for the three and nine
months ended May 31, 1997.
Loans Originated
The following table sets forth certain data regarding loans originated
by the Company during the three and nine months ended May 31, 1997 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31, NINE MONTHS ENDED MAY 31,
-------------------------------------- ---------------------------------------
1997 1998 1997 1998
-------------------- ----------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(thousands of dollars)
PRINCIPAL BALANCE OF LOANS
ORIGINATED:
Correspondents(1):
Title I $ 11,970 6.9% $ 140 1.4% $ 42,481 12.2% $ 7,056 2.1%
Conventional 144,634 83.1 2,579 26.2 263,395 75.8 289,043 85.8
--------- ------- -------- ------- --------- ------- --------- -------
Total correspondents 156,604 90.0 2,719 27.6 305,876 88.0 296,099 87.9
Dealers:
Title I 12,427 7.2 350 3.5 34,852 10.0 11,595 3.4
Conventional 4,908 2.8 155 1.6 6,932 2.0 14,001 4.2
--------- ------- -------- ------- --------- ------- --------- -------
Total dealers 17,335 10.0 505 5.1 41,784 12.0 25,596 7.6
Retail:
Conventional - - 2,887 29.3 - - 6,851 2.0
First Mortgage - - 469 4.7 - - 712 0.2
--------- ------- -------- ------- --------- ------- --------- -------
Total retail - - 3,356 34.0 - - 7,563 2.2
First Mortgage - - 3,282 33.3 - - 7,792 2.3
--------- ------- -------- ------- --------- ------- --------- -------
Total principal amount
of loans originated $ 173,939 100.0% $ 9,862 100.0% $ 347,660 100.0% $ 337,050 100.0%
========= ======= ======== ======= ========= ======= ========= =======
NUMBER OF LOANS ORIGINATED:
Correspondents:
Title I 565 9.0% 6 2.3% 2,058 15.0% 326 2.9%
Conventional 4,377 70.0 77 29.3 8,337 60.8 8,837 78.8
--------- ------- -------- ------- --------- ------- --------- -------
Total correspondents 4,942 79.0 83 31.6 10,395 75.8 9,163 81.7
Dealers:
Title I 1,018 16.2 27 10.3 2,925 21.3 971 8.7
Conventional 299 4.8 9 3.4 392 2.9 742 6.6
--------- ------- -------- ------- --------- ------- --------- -------
Total dealers 1,317 21.0 36 13.7 3,317 24.2 1,713 15.3
Retail:
Conventional - - 80 30.4 - - 199 1.8
First Mortgage - - 11 4.2 - - 16 0.1
--------- ------- -------- ------- --------- ------- --------- -------
Total retail - - 91 34.6 - - 215 1.9
First Mortgage - - 53 20.1 - - 126 1.1
--------- ------- -------- ------- --------- ------- --------- -------
Total number of loans
originated 6,259 100.0% 263 100.0% 13,712 100.0% 11,217 100.0%
========= ======= ======== ======= ========= ======= ========= =======
</TABLE>
(1) As part of its strategic initiatives to reduce the cost of its originations,
the Company is focusing on Mortgage Bankers and intends to reduce substantially
its historical focus on Correspondents.
20
<PAGE> 23
Loans Serviced
The following table sets forth the principal balance of loans serviced
as at May 31, 1997 and 1998:
<TABLE>
<CAPTION>
MAY 31,
-----------------------------------------------------------
1997 1998
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
LOANS SERVICED AT END OF PERIOD (INCLUDING LOANS
SECURITIZED, SOLD TO INVESTORS AND HELD FOR SALE):
Title I $ 248,361 48.1% $ 231,917 42.4%
Conventional 268,065 51.9 312,338 57.2
First Mortgage - - 1,990 0.4
--------------- -------- --------------- --------
Total loans serviced at end of period $ 516,426 100.0% $ 546,245 100.0%
=============== ======== =============== ========
</TABLE>
Loans Sold
The following table sets forth the principal balance of loans sold or
securitized and related gain on sale data for the three and nine months ended
May 31, 1997 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
---------------------------- ----------------------------
1997 1998 1997 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
(thousands of dollars)
ALL LOANS SOLD:
Principal amount of loans sold:
Title I $ 22,879 $ 5,549 $ 78,545 $ 19,406
Conventional 136,297 44,975 248,072 310,259
First Mortgage - 3,596 - 5,684
---------- ---------- ---------- ----------
Total principal balances $ 159,176 $ 54,120 $ 326,617 $ 335,349
========== ========== ========== ==========
Gain (loss) on sale of loans $ 13,226 $ (9,206) $ 28,650 $ (7,397)
========== ========== ========== ==========
Net unrealized gain (loss) on mortgage related
securities $ 2,305 $ (28,121) $ 5,213 $ (44,881)
========== ========== ========== ==========
Gain (loss) on sale of loans as a percentage of
principal balance of loans sold 8.3% (17.0)% 8.8% (2.21)%
Gain (loss) on sale of loans plus net unrealized gain
(loss) on mortgage related securities as a
percentage of principal balance of loans sold 9.8% (69.0)% 10.4% (15.6)%
WHOLE LOAN SALES SOLD WITH RECOURSE AND
SECURITIZATIONS:
Principal amount of loans sold:
Title I $ 9,032 $ - $ 64,697 $ (8,770)(1)
Conventional 126,296 8,280 238,072 162,535
---------- ---------- ---------- ----------
Total principal balances $ 135,328 $ 8,280 $ 302,769 $ 153,765
========== ========== ========== ==========
WHOLE LOAN SALES SOLD WITH SERVICING RELEASED AND
SALES TO FNMA:
Principal amount of loans sold:
Title I $ 13,847 $ 5,549 $ 13,847 $ 28,176
Conventional 10,001 36,695 10,001 147,724
First Mortgage - 3,596 - 5,684
---------- ---------- ---------- ----------
Total principal balances $ 23,848 $ 45,840 $ 23,848 $ 181,584
========== ========== ========== ==========
</TABLE>
- ------------------
21
<PAGE> 24
(1) Negative Title I Loan sales resulted from the repurchase of Title I
Loans sold, with recourse, from a financial institution and the sale of
certain of such loans to the Federal National Mortgage Association
("FNMA"), without recourse.
The percentage of gain on sale of loans can vary for several reasons,
including the relative amounts of Conventional and Title I Loans, each of which
type of loan has different (i) estimated prepayment rates, (ii) weighted-average
interest rates, (iii) weighted-average maturities and (iv) estimated future
delinquency and default rates. Historically, the gain on sale of loans sold
through securitizations has been much higher than the gain on the sale of whole
loans in the secondary market. However Company intends to reduce the use of
securitizations as a method to dispose of loans in the future because of the
negative cash flow associated with this method of selling loans.
As the holder of mortgage related securities issued in securitizations,
the Company is entitled to receive certain excess cash flows from the loans
backing the securitization. These excess cash flows are calculated as the
positive 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 securities issued in securitization that are senior to the mortgage related
securities owned by the Company, (ii) trustee fees, (iii) third-party credit
enhancement fees, (iv) servicing fees and (v) estimated loan losses. The
Company's right to receive the excess cash flows is subject to the satisfaction
of certain reserve or over-collateralization requirements that are specific to
each securitization and are used as a means of credit enhancement.
Loan Delinquency
The Company considers a loan delinquent when a scheduled payment has
not been received within 30 days of its due date. The following table sets forth
the delinquency experienced on the loans being serviced by the Company unless
otherwise specified and Title I insurance claims experience:
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1997 1998
---------- ------------
<S> <C> <C>
(thousands of dollars)
Delinquency period (1):
31-60 days past due 1.54% 1.93%
61-90 days past due 0.80 0.91
91 days and over past due 3.07 6.29
31 days and over past due, total delinquencies 5.41 9.13
91 days and over past due, net of claims filed (2) 2.32 5.57
Outstanding claims filed with HUD (3) 0.75 0.73
Outstanding number of Title I insurance claims filed 269 229
Total serviced portfolio $ 628,068 $ 546,245
Title I Loans serviced 255,446 231,917
Conventional Loans serviced 372,622 312,338
First Mortgage Loans serviced - 1,990
Amount of FHA insurance available for Title I Loans serviced 21,094 16,229 (4)
Amount of FHA insurance available as a percentage of Title I Loans serviced 8.26% 7.00% (4)
Aggregate losses on liquidated loans for the year and nine months
ended (5) $ 201 $ 7
</TABLE>
- ------------------
(1) Represents the dollar amount of delinquent loans 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. Conventional Loan
delinquencies represented 10.4% and 28.3%, respectively, of the
Company's total delinquencies at August 31, 1997 and May 31, 1998.
22
<PAGE> 25
(2) Represents the dollar amount of delinquent loans, net of delinquent
Title I Loans for which claims have been filed with the U.S. Department
of Housing and Urban Development ("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.
(3) 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. At
May 31, 1998, as a result of prior claims, no FHA insurance remained
with respect to the Company's portfolio of Title I Loans.
(4) If all claims filed with HUD had been processed as of May 31, 1998, the
amount of FHA insurance available for all serviced Title I Loans would
have been reduced to $12.4 million, which as a percentage of Title I
Loans serviced would have been 5.4%.
(5) 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. The aggregate losses on liquidated
Title I Loans related to 994 Title I insurance claims made by the
Company, as servicer, since commencing operations through May 31, 1998.
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.
The pooling and servicing agreements and sale and servicing agreements
related 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, during the period the Company owns such
servicing, the termination of the Company's right to service the related loans.
At May 31, 1998, the rolling three-month average annual default rates on the
pools of loans sold in the March 1996, August 1996 and December 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. No assurance can be
given that the insurance company, trustee or master servicer will not exercise
its right to terminate the Company's servicing rights.
As part of the Recapitalization, the Company entered into the Bulk
Servicing Agreement with City Mortgage Services pursuant to which the Company
sold its existing mortgage servicing rights to City Mortgage Services. The terms
of the Bulk Servicing Purchase Agreement provide for a cash purchase price equal
to 90% of the book value of such rights at May 30, 1998. The Company estimates
proceeds from the sale of approximately $6.3 million and that it will incur a
loss on this transaction of approximately $703,000 which is recorded as a charge
to earnings in the Company's Statement of Operations. Additionally, the Company
and City Mortgage Services have entered into an agreement for City Mortgage
Services to service all of the Company's new mortgage loans originated after the
Recapitalization held for sale by the Company or sold on a servicing retained
basis. The Company has an option, contingent, among other things, upon delivery
to City Mortgage Services of servicing on $1.0 billion of additional loans, to
purchase up to a 20% equity position in a new entity to be created if City
National Bank determines to spin-off its City Mortgage Services division. Upon
completion of the transfer of servicing to City Mortgage Services, the Company
anticipates eliminating substantially its entire collections and claims staff.
The pooling and servicing agreements and sale and servicing agreements
also require that certain delinquency and default rates not exceed certain
thresholds. If these thresholds are exceeded, higher levels of
over-collateralization are required which may cause a delay in, or reduce, the
cash receipts to the Company as a holder of the residual interest, causing an
adverse valuation adjustment to the carrying value of the mortgage related
security.
23
<PAGE> 26
Delinquencies on loans serviced by the Company have also decreased the
Company's amount of loan servicing income recorded during the nine months ended
May 31, 1998 as the Company's loan servicing income has been reduced by the
amount of interest advances paid to the owners of these loans, which advances
the Company expects to recover.
Delinquencies on loans serviced by the Company have increased to $49.9
million at May 31, 1998 from $49.5 million at February 28, 1998, $46.9 million
at November 30, 1997 and $34.0 million at August 31, 1997. Since the Company
began originating Title I Loans in 1994, a greater level of delinquencies has
appeared than expected on such loans less than two years old. Conventional Loan
delinquencies represented 10.4% and 28.3%, respectively, of the Company's total
delinquencies at August 31, 1997 and May 31, 1998.
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 or
applied 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 their applicable rating thereon. In
addition, such retention delays cash distributions that otherwise would flow to
the Company through its retained mortgage related securities, 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 between the higher interest rate of the loan and the lower yield
paid to the loan purchaser is required to be maintained in a reserve account to
the extent of the subordination requirements. The subordination requirements
generally provide that the excess interest spread is payable to the reserve
account until a specified percentage of the principal balances of the sold loans
is accumulated therein. Excess interest spread payable to the Company is subject
to being utilized first to replenish cash paid from the reserve account to fund
shortfalls in collections of interest from borrowers who default on the payments
on the loans until the Company's deposits into the reserve account equal the
specified percentage. The excess interest required to be deposited and
maintained in the respective reserve accounts is not available to support the
cash flow requirements of the Company. At May 31, 1998, amounts on deposit in
such reserve accounts total $6.3 million.
Three Months Ended May 31, 1998 compared to Three Months Ended May 31, 1997
As previously discussed, the Company's operations, since January 1,
1998, have consisted principally of the liquidation of its portfolio of loans,
the proceeds from which were used to reduce the Company's indebtedness. During
this period, the Company focused on obtaining new financing and on initiating
new strategic initiatives to return the Company to profitability while
maintaining its systems and a level of personnel necessary to recommence
operations. As a result, the Company does not believe that its results for the
three and nine months ended May 31, 1998 are comparable to its results for the
three and nine months ended May 31, 1997.
The Company originated $9.9 million of loans during the three months
ended May 31, 1998 compared to $173.9 million of loans during the three months
ended May 31, 1997, a decrease of 94.3%. The decrease is a result, among other
things, of the Company's negative operating cash flow, a $32.5 million loss for
the six months ended February 28, 1998, and its inability to borrow additional
amounts to originate loans because the Company was not in compliance with
certain provisions of its warehouse line, other debt agreements and the
Indenture governing the Old Notes. As a consequence of its inability to borrow
additional amounts to fund new loan originations, the Company, after January 1,
1998, was required to reduce substantially its loan originations and to
liquidate its portfolio of loans in order to raise cash to operate. See Note 3
of Notes to Condensed Financial Statements. Of the $9.9 million of loans
originated during the three months ended May 31, 1998, $5.6 million were
Conventional Loans, $0.5 million were Title I Loans and $3.8 million were First
Mortgage Loans compared to $149.5 million of Conventional Loans, $24.4 million
of Title I Loans and no First Mortgage Loans during the three months ended May
31, 1997.
24
<PAGE> 27
Net revenues (losses) decreased to a loss of $46.0 million during the
three months ended May 31, 1998 from revenues of $17.4 million during the three
months ended May 31, 1997. The decrease was primarily the result of the downward
valuation adjustment to the Company's mortgage related securities, which is
reflected in the net unrealized loss on mortgage related securities, and the
lower of cost or market adjustment on the Company's portfolio of loans, which is
reflected in the gain (loss) on sale of loans. The lower of cost or market
adjustment was based on the Company's estimate of the proceeds to be received
when these loans are sold. See Note 5 of Notes to Condensed Financial
Statements.
The combined gain (loss) on sale of loans and net unrealized gain
(loss) on mortgage related securities resulted in a loss of $44.7 million during
the three months ended May 31, 1998 as compared to a gain of $15.5 million
during the three months ended May 31, 1997. The Company's downward valuation
adjustment of $23.2 million, at May 31, 1998, in the fair value of the Company's
mortgage related securities, is the result of changes in (i) the prepayment and
loss assumptions utilized by the Company in calculating the anticipated cash
flow to be received from the mortgage loans backing such securities; and (ii)
write downs of an aggregate of $9.7 million to reduce to the lower of cost or
market the remaining $13.3 million principal amount of the Company's mortgage
loans held for sale at May 31, 1998 and approximately $15.4 million principal
amount of mortgage loans the Company was obligated to repurchase at May 31, 1998
under the recourse provisions of certain whole loan sale agreements. The lower
of cost or market adjustment was based on the Company's estimate of the proceeds
to be received when these loans are sold. See Note 4 of Notes to Condensed
Financial Statements.
In addition, the Company's gain (loss) on the sale of loans was
substantially lower in the three months ended May 31, 1998 as compared to the
three months ended May 31, 1997. In the three months ended May 31, 1997, the
Company's loans were sold in securitizations, which generated substantially
higher gains than whole loan sales in the secondary market, the method of
disposition of loans the Company used in the three months ended May 31, 1998. As
part of the Company's strategic initiatives, it intends to increase whole loan
sales in the secondary market for cash and to decrease its historical reliance
on securitizations to sell loans. The sale of loans in a securitization
generates substantial negative cash flow.
Loan servicing income, net, decreased $2.1 million to a loss of $1.4
million during the three months ended May 31, 1998 from income of $726,000
during the three months ended May 31, 1997. The decrease was the result of
adjustments in the third quarter totaling approximately $2.3 million for loan
prepayment penalties, changes in parameters of the serviced portfolio including
its weighted-average coupon, weighted-average maturity and delinquency rates and
a loss of $703,000 on the sale of servicing rights to City Mortgage Services
although the servicing portfolio increased to $546.2 million at May 31, 1998
from $516.4 million at May 31, 1997. See Note 6 of Notes to Condensed Financial
Statements.
Interest income on loans held for sale and accretion of interest on
mortgage related securities, net of interest expense, decreased $1.0 million to
$132,000 during the three months ended May 31, 1998 from $1.1 million during the
three months ended May 31, 1997. The decrease was primarily the result of
interest accrued on the Additional Notes during the quarter ended May 31, 1998
and a lower inventory of loans held for sale.
The net provision for credit losses decreased $4.0 million to $108,000
for the three months ended May 31, 1998 from of $4.1 million for the three
months ended May 31, 1997. The decrease in the provision was directly related to
the decrease in the volume of loans originated and the ratio of Conventional
Loans to Title I Loans originated during the three months ended May 31, 1998,
compared to the three months ended May 31, 1997, and a change in the Company's
business strategy to focus on whole loan sales in the secondary market on a
non-recourse basis rather than securitizations to sell loans. An allowance for
credit losses is not established on loans sold through securitizations or on
whole loan sales on a servicing released basis, because the Company typically
does not have recourse obligations for credit losses on loans sold in a
securitization. Estimated credit losses on loans sold through securitizations
are considered in the Company's valuation of its mortgage related 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.
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<PAGE> 28
Total general and administrative expenses increased $1.5 million to
$7.6 million during the three months ended May 31, 1998 compared to $6.1 million
during the three months ended May 31, 1997. The increase was primarily a result
of increased professional services due to increased outside legal and audit
expenses associated with additional Securities and Exchange Commission ("SEC")
filings and with amendments to existing debt agreements, increased loan
servicing expenses due to an increase in loans serviced and increased payroll
and benefits 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 during the period prior to the reduction in
the workforce. The individual changes in general and administrative expense are
discussed below.
Payroll and benefits expense increased $834,000 to $4.2 million during
the three months ended May 31, 1998 from $3.4 million during the three months
ended May 31, 1997 primarily due to an increased number of employees and
expenses associated with a 32% reduction of the Company's workforce from its
peak in early January 1998. Although the number of employees decreased to 294 at
May 31, 1998 from 332 at May 31, 1997, the average number of employees employed
during the third quarter was higher in the quarter ending May 31, 1998 than the
quarter ending May 31, 1997. This increase in the number of employees was due to
increased staff necessary to support the then business expansion and to maintain
quality control. Savings from the 32% reduction in the Company's workforce will
not be realized until subsequent accounting periods.
Credit reports decreased $344,000 to $8,000 during the three months
ended May 31, 1998 from $352,000 for the three months ended May 31, 1997, due to
the decrease in loan originations during the current quarter.
Rent and lease expenses increased $95,000 to $408,000 during the three
months ended May 31, 1998 from $313,000 for the three months ended May 31, 1997
due to the annual escalation charge and reflecting new tenant discounts for
office space at its corporate offices.
Professional services increased $596,000 to $1.1 million during the
three months ended May 31, 1998 from $505,000 for the three months ended May 31,
1997, due to increased outside legal and audit expenses and reclassification of
certain consulting and management services expenses that were previously
classified in different line items. A significant portion of the increase in
professional services was due to actions taken by the Company subsequent to
January 1, 1998 as a result of its adverse financial position.
Other services increased $155,000 to $479,000 during the three months
ended May 31, 1998 from $324,000 for the three months ended May 31, 1997 due to
increased telephone and overnight shipping charges.
FHA insurance expenses increased $56,000 to $192,000 during the three
months ended May 31, 1998 from $136,000 during the three months ended May 31,
1997 due to increased volume of insured Title I Loans.
Travel expenses decreased $36,000 to $212,000 during the three months
ended May 31, 1998 from $248,000 during the three months ended May 31, 1997 due
to lower loan originations and decreased business activity during the current
quarter.
Other general and administrative expenses increased $188,000 to
$538,000 during the three months ended May 31, 1998 from $349,000 during the
three months ended May 31, 1997 due primarily to increased expenses related to
the then business expansion.
The loss before income taxes was $54.2 million for the three months
ended May 31, 1998 compared to income of $6.9 million for the three months ended
May 31, 1997. Due to the uncertainty as to whether the Company will be able to
utilize any additional net operating loss ("NOL's") in the foreseeable future,
no provision for an income tax benefit was made for the current quarter. An
income tax expense of $2.6 million was provided for in three months ended May
31, 1997.
As a result of the foregoing, the Company incurred a net loss of $54.2
million for the three months ended May 31, 1998 compared to net income of $4.3
million for the three months ended May 31, 1997.
26
<PAGE> 29
Nine Months Ended May 31, 1998 compared to Nine Months Ended May 31, 1997
As previously discussed, the Company's operations, since January 1,
1998, have consisted principally of the liquidation of its portfolio of loans,
the proceeds from which were used to reduce the Company's indebtedness. During
this period, the Company focused on obtaining new financing and initiating new
strategic initiatives to return the Company to profitability while maintaining
its systems and a level of personnel necessary to recommence operations. As a
result, the Company does not believe that its results for the three and nine
months ended May 31, 1998 are comparable to its results for the three and nine
months ended May 31, 1997.
The Company originated $337.1 million of loans during the nine months
ended May 31, 1998 compared to $347.2 million of loans during the nine months
ended May 31, 1997, a decrease of 3.0%. The decrease is a result of the
Company's negative operating cash flow and a $32.5 million loss generated in the
first six months of fiscal 1998, which resulted in restrictions on additional
borrowings due to non-compliance with certain provisions under its warehouse
line, other debt agreements, and the indenture governing the Old Notes. As a
consequence of its inability to borrow additional amounts to fund new loan
originations, the Company, after January 1, 1998, was required to reduce
substantially its loan originations and to liquidate its portfolio of loans in
order to raise cash to operate. Of the $337.1 million of loans originated during
the nine months ended May 31, 1998, $309.9 million were Conventional Loans,
$18.7 million were Title I Loans and $8.5 million were First Mortgage Loans
compared to $270.3 million of Conventional Loans, $77.4 million of Title I Loans
and no First Mortgage Loans during the nine months ended May 31, 1997.
Net revenues (losses) were $56.5 million during the nine months ended
May 31, 1998 compared with revenues of $37.8 million during the nine months
ended May 31, 1997. The decrease was primarily the result of the downward
valuation adjustment to the Company's mortgage related securities which is
reflected in net unrealized gain (loss) on mortgage related securities, the
change in business strategy to focus on whole loan sales for cash premiums
rather than securitization to sell loans, and the lower of cost or market
adjustment on the Company's portfolio of loans which is reflected in the gain
(loss) on sale of loans. The lower of cost or market adjustment was based on the
Company's estimate of the proceeds to be received when these loans are sold.
See Note 5 of Notes to Condensed Financial Statements.
The combined gain (loss) on sale of loans and net unrealized gain
(loss) on sale of mortgage related securities resulted in a loss of $59.7
million during the nine months ended May 31, 1998 from a gain of $33.9 million
during the nine months ended May 31, 1997. The decrease was primarily due to the
change in business strategy to focus on whole loan sales for cash premiums
rather than securitizations to sell loans, and a change in assumptions on
voluntary prepayment speeds, defaults and the discount rate utilized by the
Company in calculating the carrying value of its mortgage related securities and
determining the gain (loss) on loan sales. See Note 5 of Notes to Condensed
Financial Statements.
Loan servicing income, net, decreased $787,000 to $1.1 million during
the nine months ended May 31, 1998 from $1.9 million during the nine months
ended May 31, 1997. The decrease was the result of adjustments in the third
quarter totaling approximately $2.4 million, change in assumptions utilized by
the Company to calculate the carrying value of loans with servicing retained and
a loss of $703,000 on the sale of servicing rights to City Mortgage Services
although the servicing portfolio increased to $546.2 million at May 31, 1998
from $516.4 million at May 31, 1997. See Note 6 of Notes to Condensed Financial
Statements.
Interest income on loans held for sale and mortgage related securities,
net of interest expense, increased $8,000 to $2.0 million during the nine months
ended May 31, 1998 from $2.0 million during the nine months ended May 31, 1997.
The decrease was primarily the result of interest accrued on the Additional
Notes during the nine months ended May 31, 1998.
The net provision for credit losses decreased $2.6 million to $2.4
million for the nine months ended May 31, 1998 from $5.0 million for the nine
months ended May 31, 1997. The decrease in the provision was directly related to
the decrease in the volume of loans originated and the ratio of Conventional
Loans to Title I Loans originated during the nine months ended May 31, 1998
compared to the nine months ended May 31, 1997, and to
27
<PAGE> 30
focus on whole loan sales rather than securitizations to sell loans. An
allowance for credit losses is not established on loans sold through
securitizations or on whole loan sales on a servicing released basis, because
the Company typically does not have recourse obligations for credit losses on
loans sold in a securitization. Estimated credit losses on loans sold through
securitizations are considered in the Company's valuation of its mortgage
related 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.
Total general and administrative expenses increased to $26.6 million
during the nine months ended May 31, 1998 from $15.7 million during the nine
months ended May 31, 1997. The increase was primarily a result of increased
professional services due to increased outside legal and audit expenses
associated with, additional SEC filings and amendments to existing debt
agreements, increased loan servicing expenses due to an increase in loans
serviced and increased payroll and benefits 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 during the
period prior to its reduction in its workforce. The individual changes in
general and administrative expenses are discussed in more detail below.
Payroll and benefits expense increased $6.4 million to $14.9 million
during the nine months ended May 31, 1998 from $8.5 million during the nine
months ended May 31, 1997 primarily due to an increased number of employees
during the then expansion and expenses associated with the reduction in the
Company's workforce. Although the number of employees decreased to 294 at May
31, 1998 from 332 at May 31, 1997, the average number of employees employed
during the nine months was higher in the nine months ended May 31, 1998 than the
nine months ended May 31, 1997. This increase in the number of employees was due
to increased staff necessary to support the then business expansion and to
maintain quality control. From its peak in early January 1998, the workforce has
since been reduced by 32%, pursuant to the Company's restructuring.
Credit reports decreased $411,000 to $474,000 during the nine months
ended May 31, 1998 from $885,000 for the nine months ended May 31, 1997 due to
the decrease in loan originations during the third quarter of fiscal 1998.
Rent and lease expenses increased $303,000 to $1.1 million for the nine
months ended May 31, 1998 from $815,000 for the nine months ended May 31, 1997
due to annual escalation charges and due to the prior year reflecting new tenant
discounts for office space at the Company's corporate offices.
Professional services increased $2.1 million to $3.6 million for the
nine months ended May 31, 1998 from $1.5 million for the nine months ended May
31, 1997, due to increased outside legal and audit expenses associated with the
1997 Private Placement, additional SEC filings and amendments to existing debt
agreements and reclassification of certain consulting and management services
expenses that were previously classified in different line items. A substantial
portion of the increase in professional services was due to actions taken by the
Company subsequent to January 1, 1998 as a result of its adverse financial
position.
Sub-servicing fees increased $615,000 to $1.8 million for the nine
months ended May 31, 1998 from $1.2 million for the nine months ended May 31,
1997 due primarily to a larger average loan servicing portfolio, notwithstanding
a lower sub-servicing rate paid to the sub-servicer in the latter part of the
nine months ended May 31, 1998.
Other services increased $784,000 to $1.6 million during the nine
months ended May 31, 1998 from $831,000 for the nine months ended May 31, 1997
due to higher telephone and overnight mailing expenses during the first six
months of fiscal 1998.
FHA insurance expense decreased $79,000 to $335,000 during the nine
months ended May 31, 1998 from $414,000 during the nine months ended May 31,
1997 due to decreased volume of insured Title I loans.
28
<PAGE> 31
Travel expenses increased $251,000 to $967,000 during the nine months
ended May 31, 1998 from $716,000 during the nine months ended May 31, 1997 due
to increased travel necessary to support the then business expansion during the
first six months of fiscal 1998.
Other general and administrative expenses increased $819,000 to $1.7
million during the nine months ended May 31, 1998 from $919,000 during the nine
months ended May 31, 1997 due primarily to increased expenses related to the
expansion of facilities related to the then business expansion.
Loss before income taxes decreased to $86.7 million for the nine months
ended May 31, 1998 from income of $16.4 million for the nine months ended May
31, 1997. Due to the inability to predict whether the Company will be able to
utilize any additional NOL's in the foreseeable future, no provision for income
taxes was made for the nine months ended May 31, 1998. An income tax expense of
$6.2 million was provided for in the nine months ended May 31, 1997.
As a result of the foregoing, the Company incurred a net loss of $87.7
million for the nine months ended May 31, 1998 compared to net income of $10.1
million for the nine months ended May 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Uses
As previously discussed, the Company's operations, since January 1,
1998, have consisted principally of the liquidation of its portfolio of loans
the proceeds from which were used to reduce the Company's indebtedness. During
this period, the Company focused on obtaining new financing and initiating new
strategic initiatives to return the Company to profitability while maintaining
its systems and a level of personnel necessary to recommence operations. As a
result, the Company does not believe that its liquidity at May 31, 1998 is
comparable to its liquidity at May 31, 1997.
Cash and cash equivalents were $13.1 million at May 31, 1998 compared
to $6.1 million at August 31, 1997. On June 1, 1998, $11.2 million of the $13.1
million of the Company's cash and cash equivalents was utilized to reduce the
Company's indebtedness to its warehouse lender. The warehouse loan, which
matured on May 29, 1998, was repaid in full on June 29, 1998. The Company's
liquidity is primarily used to originate loans, pay operating and interest
expenses, to fulfill over-collateralization requirements related to the
securitization of loans, if any, and make deposits to reserve accounts related
to loan sale transactions. Prior to the Recapitalization, loan originations were
initially funded principally through the Company's warehouse line pending the
sale of loans in the secondary market or in securitizations. Substantially all
of the loans originated by the Company are sold. The warehouse line is repaid
primarily from the proceeds from the sale of the loans collateralizing the line
in the secondary market or in securitizations. The Company resumed the
origination of new loans on July 1, 1998. The Company's cash requirements
require continued access to sources of debt financing and sales of loans in the
secondary market.
Recapitalization
To improve its adverse financial and cash position, the Company, on
July 1, 1998, completed the Recapitalization of the Company. Pursuant to the
Recapitalization, the Company raised approximately $87.5 million of new equity.
Two strategic partners, City National Bank, and Sovereign, each purchased 10,000
shares of the Company's newly-designated Series A Convertible Preferred Stock at
a purchase price of $1,000 per share. City Holding Company and Sovereign each
have been granted an option, which expires in December 2000, to acquire 6.67
million shares of the Company's Common Stock at $1.50 per share. Each share of
Preferred Stock is convertible into 666.67 shares of Common Stock, subject to
adjustment, 180 days from their date of issuance. The Preferred Stock will be
mandatorily converted into Common Stock on the second anniversary of the
issuance of the Preferred Stock. City National Bank and Sovereign each has a
right of first refusal to purchase the Company in the event the Company's Board
of Directors determines to sell the Company. In addition, other private
investors purchased an aggregate of 5,000 shares of Preferred Stock at a
purchase price of $1,000 per share and 16.67 million
29
<PAGE> 32
shares of Common Stock at a purchase price of $1.50 per share. All of the
foregoing sales were made pursuant to private placements.
The net proceeds from the Recapitalization of approximately $40.3
million were used to pay interest of approximately $5.1 million on the Old
Notes, to pay in full the indebtedness of approximately $2.5 million under the
existing warehouse line of credit which matured on May 29, 1998, to pay loan and
management fees and other miscellaneous charges due to Mego Financial of $1.6
million and to pay a portion of the costs of the Recapitalization of
approximately $480,000. The balance will be used to originate new loans, for
general and administrative expenses and other corporate purposes. See Note 3 of
Notes to Condensed Financial Statements.
Exchange Offer
As part of the Recapitalization, the Company completed its Exchange
Offer for any and all of the outstanding $80.0 million principal amount of the
Company's Old Notes. Pursuant to the Exchange Offer, the Company issued
approximately 37,500 shares of Preferred Stock at an issuance price of $1,000
per share and $41.5 million principal amount of new 12 1/2% Subordinated Notes
due 2001 in exchange for approximately $79.0 million of Old Notes. Less than
$1.0 million of the Old Notes remain outstanding. The Company may elect to
defease the Old Notes by tendering the amount required sum to the Indenture
trustee.
New Notes
As a result of the Exchange Offer, $80.0 million principal amount of
the Company's Old Notes were exchanged for approximately 37,500 shares of
Preferred Stock at an issuance price of $1,000 per share and $41.5 million
principal amount of new 12 1/2% Subordinated Notes due 2001. The New Notes
contain certain restrictive covenants with respect to limitations on
indebtedness, liens, affiliate transactions, and mergers or consolidations.
Sovereign Warehouse Line of Credit
The Company has executed a warehouse line of credit for up to $90.0
million with Sovereign that replaced the Company's warehouse line of credit that
matured on May 29, 1998 and was repaid in full on June 29, 1998. The Sovereign
Warehouse Line is renewable, at Sovereign's option, in six-month intervals for
up to five years, may be increased with certain consents and contains
pricing/fees that vary by product and by the dollar amount outstanding. The
Sovereign Warehouse Line is secured by specific loans held for sale and bears
interest at LIBOR plus an amount based on the average outstanding balance. If
the Company determines to seek additional warehouse financing, Sovereign has a
right of first refusal to provide such additional financing at market rates. At
May 31, 1998 and through July 17, 1998, the Company did not have any funds
borrowed under the Sovereign Warehouse Line.
Liquidity Sources
The Company currently has four significant sources of financing and
liquidity: (i) approximately $40.3 million in net proceeds from the sale of
Preferred and Common Stock in the Recapitalization; (ii) the new Sovereign
Warehouse Line of $90.0 million; (iii) the First Revolving Credit Facility for
up to $25.0 million, less amounts outstanding under repurchase agreements which
expires December 31, 1998; and (iv) the Second Revolving Credit Facility for up
to $5.0 million which may, under certain circumstances, be increased to $8.8
million. Each of the First and Second Revolving Credit Facilities is secured by
certain of the Company's mortgage related securities. In addition, the Flow
Purchase Agreement provides the Company with an additional source of liquidity.
The pledge and security agreement governing the First Revolving Credit
Facility provides the Company with $25.0 million of liquidity, less amounts
outstanding under repurchase agreements, of which $10.0 million was outstanding
as of May 31, 1998. The First Revolving Credit Facility matures on December 31,
1998 and contains certain covenants relating to the maintenance of minimum net
worth and debt-to-net worth requirements. At May 31, 1998, the Company was not
in compliance with (i) the minimum net worth requirement of $42.5 million and
actual net worth was a deficit of $27.0 million; and (ii) the requirement that
the Company's debt-to-net worth ratio
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<PAGE> 33
exceed 2.5:1. The Company's compliance with the debt-to-net worth ratio was
incalculable due to a negative net worth. As of July 1, 1998, the Company was in
compliance with the terms of the First Revolving Credit Facility.
The Second Revolving Credit Facility provides the Company with up to
$5.0 million of liquidity, which may, under certain circumstances, be increased,
to $8.8 million. At May 31, 1998 the Company had $5.0 million borrowed under
this facility. The Second Revolving Credit Facility matures in October 2002 and
contains certain covenants including restrictions on the incurrence of certain
liens, limitations on asset dispositions and mergers and requires the
maintenance of certain financial ratios and compliance with certain financial
tests and limitations. As calculated prior to the Recapitalization, at May 31,
1998, the Company was not in compliance in the maintenance of a minimal net
worth requirement. As of July 1, 1998, the Company was in compliance with the
terms of the Second Revolving Credit Facility.
The Company also has entered into a flow purchase agreement with
Sovereign pursuant to which Sovereign has agreed to purchase up to $400.0
million of the Company's high loan-to-value loans per year at specified prices.
Up to $200.0 million of the $400.0 million can be loans the principal amount of
which, when added to the outstanding senior debt on the property, will not
exceed 125% of the property's market value. Sovereign has a right of first
refusal under certain circumstances and conditions to acquire certain
non-conforming loans originated by the Company at market prices and terms. The
Flow Servicing Agreement expires in September 2001.
The Company believes that its current financing sources are adequate to
meet its needs. At May 31, 1998, no commitments existed for additional material
capital expenditures.
Net cash used in the Company's operating activities for the nine months
ended May 31, 1997 and 1998 was $72.1 million and $27.0 million, respectively.
During the nine months ended May 31, 1997 and 1998, the Company used net cash of
$1.5 million and $58,000, respectively, in investing activities, which was
substantially expended for office equipment and furnishing and data processing
equipment. During the nine months ended May 31, 1997 and 1998, cash provided by
financing activities amounted to $77.0 million and $34.1 million, respectively.
FINANCIAL CONDITION
As previously discussed, the Company's operations, since January 1,
1998, have consisted principally of the liquidation of its portfolio of loans
the proceeds from which were used to reduce the Company's indebtedness. During
this period, the Company focused on obtaining new financing and initiating new
strategic initiatives to return the Company to profitability while maintaining
its systems and a level of personnel necessary to recommence operations. As a
result, the Company does not believe that its financial condition at May 31,
1998 is comparable to its financial condition at May 31, 1997.
May 31, 1998 compared to August 31, 1997
Cash and cash equivalents increased 115.1% to $13.1 million at May 31,
1998 from $6.1 million at August 31, 1997 primarily as a result of the sale of
loans in process as of May 31, 1998. On June 1, 1998, approximately $11.2
million of the $13.1 million cash and cash equivalents at May 31, 1998, was paid
to the Company's warehouse lender on June 1, 1998. The warehouse line which was
repaid, in full, on June 29, 1998, matured on May 31, 1998.
Restricted cash deposits decreased 7.9% to $6.3 million at May 31, 1998
from $6.9 million at August 31, 1997 primarily due to a reduction of collected
funds due investors which were in transit as of that date.
Loans held for sale, net, increased 81.6% to $17.3 million at May 31,
1998 from $9.5 million at August 31, 1997 primarily as a result of the timing of
loan sales, with no securitization transaction during the three and nine months
ended May 31, 1998 and $9.7 million of loans which the Company has agreed to
repurchase under recourse agreements.
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<PAGE> 34
Changes in the allowance for credit losses and the allowance for credit
losses on loans sold with recourse for the three and nine months ended May 31,
1998 consist of the following (thousands of dollars):
<TABLE>
<S> <C>
Balance at February 28, 1998 $ 9,401
Provision for credit losses -
Reductions to the provision due to securitizations or loans sold without recourse (1,381)
Reductions due to charges to allowance for credit losses 2
---------
Balance at May 31, 1998 $ 8,022
=========
Balance at August 31, 1997 $ 7,114
Provision for credit losses 915
Reductions to the provision due to securitizations or loans sold without recourse -
Reductions due to charges to allowance for credit losses (7)
---------
Balance at May 31, 1998 $ 8,022
=========
</TABLE>
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, MAY 31,
1997 1998
--------------- ---------------
<S> <C> <C>
(thousands of dollars)
Allowance for credit losses $ 100 $ 0
Allowance for credit losses on loans sold with recourse 7,014 8,022
--------------- ---------------
Total $ 7,114 $ 8,022
=============== ===============
</TABLE>
The increase in the allowance for credit losses and the allowance for
credit losses on loans sold with recourse is primarily due to higher than
anticipated losses on Title I Loans. Although the Company believes it has made
reasonable estimates of the losses on Title I Loans, there can be no assurance
that the actual losses will not vary from these estimates.
Pursuant to recourse provisions under certain whole loan sale
agreements, the Company was obligated to repurchase Conventional and Title I
Loans with an aggregate principal balance of approximately $15.4 million at May
31, 1998. These loans have been valued utilizing management's estimate of the
price to be received upon their final disposition and a lower of cost or market
allowance of $4.5 million was recorded for the three month and nine month
periods ended May 31, 1998, as a charge to gain (loss) on sale of loans in the
Company's Statement of Operations. An additional lower of cost or market
allowance of $5.2 million was recorded for the three month and nine month
periods ended May 31, 1998, as a charge to gain (loss) on sale of loans in the
Company's Statement of Operations relating to the $13.3 million remaining
principal balance of the Company's loans held for sale at May 31, 1998. Mortgage
related securities decreased $40.5 million to $65.8 million at May 31, 1998 from
$106.3 million at August 31, 1997 substantially due to the downward adjustment
to their carrying value. See Note 5 of Notes to Condensed Financial Statements.
Mortgage servicing rights decreased $3.2 million to $6.3 million at May
31, 1998 from $9.5 million at August 31, 1997 due to downward adjustments of the
servicing rights of approximately $1.1million and to
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<PAGE> 35
establishing an allowance for a 10% discount on the sale of servicing rights to
City Mortgage Services. See Note 6 to Notes to Condensed Financial Statements.
Other receivables decreased $4.3 million to $3.6 million at May 31,
1998 from $7.9 million at August 31, 1997 primarily due to a payment of deferred
charges due to the Company from whole loan sales prior to August 31, 1997.
Prepaid debt expenses increased $2.2 million to $4.6 million at May 31,
1998 from $2.4 million at August 31, 1997 primarily due to the debt expense
related to the additional $40.0 million of senior subordinated notes sold in
October 1997.
Prepaid commitment fees decreased $2.3 million to $0 at May 31, 1998
from $2.3 million at August 31, 1997 due to the respective purchase commitment
being terminated.
The deferred income tax asset of $2.2 million at May 31, 1998 was
comprised of only state income taxes, while no such benefit was previously
reported. However, no deferred income tax asset was established for potential
federal income tax benefits, as management is unable to predict its ability to
utilize the federal tax benefits over the next several years. Prior to the
Spin-off, income taxes were included in the Due to Mego Financial caption since
Mego Financial filed a consolidated tax return.
Other assets decreased 55.2% to $356,000 at May 31, 1998 from $795,000
at August 31, 1997 primarily due to a reclassification of accrued fees on
securitizations to other receivables of $541,000.
Notes and contracts payable decreased $4.3 million to $31.3 million at
May 31, 1998 from $35.6 million at August 31, 1997 due to the decreased
borrowings by the Company caused by curtailment of loan originations.
Accounts payable and accrued liabilities increased $9.9 million to
$27.8 million at May 31, 1998 from $17.9 million at August 31, 1997 primarily
due to interest on the Old Notes and the repayment of a warehouse line from the
net proceeds of the Recapitalization on June 29, 1998.
Allowance for credit losses on loans sold with recourse increased $1.0
million to $8.0 million at May 31, 1998 from $7.0 million at August 31, 1997
primarily due to increased loan sales. Recourse to the Company on sales of loans
is governed by the agreements between the purchasers and the Company. The
allowance for credit losses on loans sold with recourse represents the Company's
estimate of its probable future credit losses to be incurred over the lives of
the loans considering estimated future FHA insurance recoveries on Title I
Loans. Due to prior claims, the Company's Title I Loans have no FHA insurance.
An allowance for credit losses is not established on loans sold through
securitizations, because the Company typically has no recourse obligations for
credit losses on loans sold in a securitization. Estimated credit losses on
loans sold through securitizations are considered in the Company's valuation of
its mortgage related securities.
Stockholders' equity (deficit) decreased $79.1 million to a deficit of
$26.0 million at May 31, 1998 from $53.1 million at August 31, 1997 as a result
of the net loss of $86.7 million during the nine months ended May 31, 1998,
partially offset by an increase in additional paid-in capital related to a
federal income tax benefit which was a result of the Spin-off. See Note 7 of
Notes to Condensed Financial Statements.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 23, 1998, an action was filed in the United States District
Court for the Northern District of Georgia by Robert J. Feeney, as a purported
class action against the Company and Jeffrey S. Moore, then the Company's
President and Chief Executive Officer. The complaint alleges, among other
things, that the defendants violated the federal securities laws in connection
with the preparation and issuance of certain of the Company's financial
statements. The named plaintiff seeks to represent a class consisting of
purchasers of the Common Stock between April 11, 1997 and December 18, 1997, and
seeks damages in an unspecified amount, costs, attorney's fees and such other
relief as the court my deem just and proper. The Company believes it has
meritorious defenses to this lawsuit, adequate insurance and that any resolution
of this lawsuit will not have a material adverse effect on the business or
financial condition of the Company.
On or about June 30, 1998, the suit was amended to include Mego
Financial, a former parent of the Company, as a defendant.
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.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
The annual meeting of shareholders was held on June 8, 1998 in Atlanta,
Georgia. Of the 12,300,000 shares of Common Stock entitled to vote, 6,801,744
shares were represented at the meeting by proxies and all 6,801,744 shares voted
affirmatively to each of the proposals submitted to shareholders in the
Company's Proxy Statement dated May 27, 1998:
(1) to elect Jerome J. Cohen, Jeffrey S. Moore, Robert
Nederlander, Herbert B. Hirsch, Don A. Mayerson and Spencer I.
Browne as Directors of the Company;
(2) to approve a transaction or series of transactions pursuant to
which the Company will sell a number of shares of Common Stock
below the greater of book or market value and a number of
shares of Preferred Stock convertible into Common Stock at a
conversion price below the greater of book or market value
which will likely result in the issuance of shares of Common
Stock and Preferred Stock convertible into shares of Common
Stock constituting more than 20% of the Company's outstanding
Common Stock and will likely result in a change of control of
the Company;
(3) to approve the amendment of the Company's Certificate of
Incorporation to increase the number of authorized shares of
Common Stock from 50,000,000 to 400,000,000 shares; and
(4) to approve the Company's 1997 Stock Option and Stock
Appreciation Rights Plan.
ITEM 5. OTHER
Subsequent to the annual shareholders meeting and pursuant to a meeting
of the Board of Directors held after completion of the Recapitalization of the
Company, Champ Meyercord, 57, was elected the Company's Chairman of the Board
and Chief Executive Officer. Mr. Meyercord has been a special consultant to the
Company since May 1998.
Upon completion of the Recapitalization, Jerome J. Cohen, Robert
Nederlander, Herbert B. Hirsch and Don A. Mayerson resigned as directors. Mr.
Meyercord is joined on the new Company Board of Directors by Jeff S. Moore, who
continues as President of the Company; David J. Vida, Jr., President of City
Mortgage Services, a division of City National Bank; Hubert M. Stiles, Jr.,
President of T. Rowe Price Recovery Fund II, L.P.; Wm. Paul Ralser, Chief
Executive Officer and Chairman of the Board of First Fidelity Bancorp, Inc.
located in Irvine, Calif.; and Spencer I. Browne, a special consultant to the
Company who was first elected to the Board of Directors in November 1996.
34
<PAGE> 37
Mr. Jeff S. Moore, President and Director and Mr. James L. Belter,
Executive Vice President, CFO and Treasurer have agreed to terminate their prior
employment contracts with the Company and have executed term sheets for the
basis of new employment contracts with the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
10.78 Preferred Stock Purchase Agreement dated as of June 9, 1998 between City National Bank of West Virginia
and Mego Mortgage Corporation
10.79 Stock Option Agreement dated as of June 29, 1998 by Mego Mortgage Corporation in favor of City National Bank
of West Virginia
10.80 Registration Rights Agreement dated as of June 29, 1998 between Mego Mortgage Corporation and
City National Bank of West Virginia*
10.81 Bulk Servicing Purchase Agreement dated as of June 26, 1998 between City National Bank of
West Virginia and Mego Mortgage Corporation
10.82 Servicing Agreement dated as of June 26, 1998 between Mego Mortgage Corporation and City
Mortgage Services
10.83 Subservicing Agreement dated as of June 29, 1998 between Mego Mortgage Corporation and City
Mortgage Services
10.84 City Mortgage Services Option Agreement dated as of June 29, 1998 between City National Bank
of West Virginia and Mego Mortgage Services*
10.85 Right of First Refusal Agreement dated as of June 29, 1998 among City National Bank of West
Virginia, Sovereign Bancorp, Inc. and Mego Mortgage Corporation
10.86 Preferred Stock Purchase Agreement dated as of June 9, 1998 between Mego Mortgage Corporation
and Sovereign Bancorp, Inc.
10.87 Stock Option Agreement Dated as of June 29, 1998 by Mego Mortgage Corporation in favor of
Sovereign Bancorp, Inc.
10.88 Registration Rights Agreement dated as of June 29, 1998 between Mego Mortgage Corporation in
favor of Sovereign Bancorp, Inc.*
10.89 Participation Agreement dated as of June 29, 1998 between Mego Mortgage Corporation and
Sovereign Bank*
10.90 Master Mortgage Loan Purchase Agreement dated as of June 29, 1998 between Sovereign Bank and
Mego Mortgage Corporation*
10.91 Form of Custodian Agreement dated as of June 29, 1998 among Sovereign Bank, State Street Bank and
Trust Company and Mego Mortgage Corporation*
10.92 Common Stock Purchase Agreement dated as of June 9, 1998 between Mego Mortgage Corporation
and Emanuel J. Friedman*
10.93 Registration Rights Agreement dated as of June 29, 1998 between Mego Mortgage Corporation and
Emanuel J. Friedman*
10.94 Indenture dated as of June 29, 1998 between Mego Mortgage Corporation and American Stock Transfer
& Trust Company, as Trustee*
10.95 Form of Note issued pursuant to Indenture dated as of June 29, 1998 between Mego Mortgage
Corporation and American Stock Transfer & Trust Company, as Trustee*
</TABLE>
35
<PAGE> 38
<TABLE>
<S> <C>
10.96 Registration Rights Agreement dated as of June 29, 1998 between Mego Mortgage Corporation and
Friedman, Billings, Ramsey & Co., Inc., as placement agent*
10.97 Registration Rights Agreement dated as of June 29, 1998 between Mego Mortgage Corporation and
Friedman, Billings, Ramsey & Co., Inc., as placement agent*
10.98 Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock
of Mego Mortgage Corporation*
10.1A Co-Sale Agreement dated as of June 29, 1998 among Mego Mortgage Corporation, Emanuel J.
Friedman, Friedman, Billings, Ramsey & Co., Inc., City National Bank of West Virginia and
Sovereign Bancorp, Inc.
10.2A Employment Agreement dated June 23, 1998 between Mego Mortgage Corporation and Edward B.
"Champ" Meyercord*
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
* To be filed by amendment
(b) Reports on Form 8-K
A report on Form 8-K dated March 30, 1998 was filed on March 31, 1998
to report that the Company's Board of Directors revoked and rescinded its
actions previously taken changing the fiscal year end to December 31 and
determined that the Company's fiscal year end shall revert back to August 31. A
report on Form 8-K dated May 13, 1998 was filed on May 20, 1998 to report that
the Company proposes to engage in a series of transactions to recapitalize the
Company and in connection with the preparation of a private placement offering
memorandum, the Company has reissued its financial statements as of August 31,
1996 and 1997 and for each of the three years in the period ended August 31,
1997 and, as a result of events occurring subsequent to August 31, 1997, the
Company's independent auditors, Deloitte & Touche LLP, have reissued their
report on the Company's financial statements as of August 31, 1996 and 1997 and
for each of the three years in the period ended August 31, 1997 to include an
explanatory paragraph related to the Company's ability to continue as a going
concern. A report on Form 8-K dated July 1, 1998 was filed on July 15, 1998 to
report that the Company completed a series of transactions intended to
recapitalize the Company pursuant to which the Company generated approximately
$87.5 million of new equity which resulted in a change in control of the
Company.
36
<PAGE> 39
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MEGO MORTGAGE CORPORATION
By:/s/ James L. Belter
-------------------------------------
James L. Belter
Executive Vice President
Treasurer and Chief Financial Officer
Date: July 20, 1998
37
<PAGE> 1
EXHIBIT 10.78
MEGO MORTGAGE CORPORATION
AND
CITY NATIONAL BANK OF WEST VIRGINIA
PREFERRED STOCK
PURCHASE AGREEMENT
JUNE 9, 1998
<PAGE> 2
Table of Contents
<TABLE>
<CAPTION>
Page
-----
<S> <C> <C>
Section 1. Definitions...........................................................................................6
Section 2. Agreement to Sell and Purchase the Securities.........................................................6
Section 3. Option Shares. ......................................................................................7
Section 4. Issuance of the Certificates Representing, the Securities.............................................8
Section 5. Representations, Warranties and Covenants of the Company..............................................8
5.1. Organization and Qualification............................................................8
5.2. Authorized Capital Stock..................................................................9
5.3. Due Execution, Delivery and Performance..................................................10
5.4. Offering Memorandum and Additional Information...........................................11
5.5 Legal Proceedings........................................................................11
5.6. No Material Adverse Change...............................................................12
5.7. Law and Regulation.......................................................................12
5.8. Accounting Matters.......................................................................13
5.9. Compliance with Securities Laws..........................................................14
5.10. Intangibles.............................................................................14
5.11. Title...................................................................................15
5.12. Contracts...............................................................................15
5.13. No Violation............................................................................15
5.14. Transactions with Affiliates............................................................16
5.15. No Manipulation.........................................................................16
5.16. Taxes...................................................................................16
5.17. Investment Company Act of 1940..........................................................16
5.18. Use of Proceeds.........................................................................16
5.19. Board of Directors......................................................................16
5.20. Certificates............................................................................18
5.21. Rolly White.............................................................................18
5.22. Mortgage-Related Asset Revaluation......................................................18
5.23. Other Transactions......................................................................18
5.24 Regulatory Compliance; Veto Right Relating to Impermissible Activities...................18
5.25. Best Efforts............................................................................19
5.26. Due Diligence...........................................................................19
5.27 Waiver of Certain Claims.................................................................19
Section 6. Representations, Warranties and Covenants of Purchaser...............................................20
6.1. Compliance with United States Securities Laws............................................20
6.2. Status of Purchaser......................................................................20
6.3. Restrictions on Re-Sale..................................................................21
6.4. Due Execution, Delivery and Performance of the Purchase Agreement and Other
Obligations....................................................................................22
6.5. Representations, Warranties and Covenants at Closing.....................................22
Section 7. Survival of Representations, Warranties, Covenants and Agreements. .................................22
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 8. Conditions to Closing................................................................................23
8.1. Exchange Offer...........................................................................23
8.2. Additional Equity........................................................................23
8.3 Purchaser Board Approval..................................................................23
8.4. Waiver of Change of Control Payments.....................................................23
8.5. Servicing Purchase Agreements............................................................24
8.6. Registration Rights Agreement............................................................24
8.7. Opinion of Greenberg Traurig.............................................................24
8.8. Comfort Letter...........................................................................29
8.9. Offering Memorandum......................................................................29
8.10. Other Transactions......................................................................30
8.11. No Material Adverse Effect..............................................................30
8.12. Certificates............................................................................30
8.13. Regulatory Matters......................................................................30
8.14. Consents................................................................................31
8.15. Related Party Indebtedness..............................................................31
8.16. Documents...............................................................................31
8.17. Additional Matters Relating to Option Shares............................................31
8.18. Additional Conditions...................................................................31
(a) Certificate of Designation........................................................31
(b) Letter from FBR...................................................................31
(c) Warehouse Line Agreement..........................................................32
(d) Flow Loan Purchase Agreement......................................................32
(e) Right of First Refusal............................................................32
(f) Amendment of Placement Agreement..................................................32
(g) Agreements with FBR and Emanuel J. Friedman.......................................32
(h) Employment and Non-Competition Agreements.........................................33
(i) Option Agreement..................................................................33
Section 9. Conditions to Closing...............................................................................33
Section 10. Compliance with the Securities Act..................................................................33
10.1. Information Available...................................................................33
10.2. Legend Requirement......................................................................33
Section 11. Broker's Fee........................................................................................34
Section 12. Notices.............................................................................................35
Section 13. Amendments..........................................................................................35
Section 14. Headings............................................................................................36
Section 15. Enforcement.........................................................................................36
Section 16. Governing Law.......................................................................................36
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 17. Severability........................................................................................36
Section 18. Counterparts........................................................................................36
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
EXHIBIT A
DRAFT OF OFFERING MEMORANDUM DATED JUNE 8,1998..........................................................37
EXHIBIT B
TERMS OF REGISTRATION RIGHTS AGREEMENT..................................................................38
EXHIBIT C
TERMS OF SERIES A PREFERRED STOCK.......................................................................39
EXHIBIT D
TERMS OF BULK SERVICING PURCHASE AGREEMENT..............................................................40
EXHIBIT E
TERMS OF FLOW SERVICING PURCHASE AGREEMENT..............................................................41
EXHIBIT F
JURISDICTIONS OF FOREIGN QUALIFICATION..................................................................43
EXHIBIT G
OTHER TRANSACTIONS......................................................................................44
EXHIBIT H
FBR LETTER RE: VOTING OF SHARES.........................................................................45
EXHIBIT I
TERMS OF WAREHOUSE LINE AGREEMENT.......................................................................46
EXHIBIT J
TERMS OF FLOW LOAN PURCHASE AGREEMENT...................................................................47
EXHIBIT K
TERMS OF RIGHT OF FIRST REFUSAL AGREEMENT...............................................................48
EXHIBIT L
LIST OF EMPLOYEES REQUIRED TO ENTER INTO EMPLOYMENT
AGREEMENTS..............................................................................................50
</TABLE>
iii
<PAGE> 5
MEGO MORTGAGE CORPORATION
PREFERRED STOCK
PURCHASE AGREEMENT
This Preferred Stock Purchase Agreement is made as of June 9,
1998, by and between City National Bank of West Virginia, a national banking
association, with its principal offices at 3601 MacCorkle Avenue, Charleston,
West Virginia (the "Purchaser"), and Mego Mortgage Corporation (the "Company"),
a Delaware corporation, with its principal offices at 1000 Parkwood Circle, 5th
Floor, Atlanta, Georgia.
WHEREAS, the Company is engaging in a plan of recapitalization
(the "Recapitalization") which includes the following: (i) a private offering
(the "Common Stock Offering") of shares of its common stock, par value $.0l per
share (the "Common Stock"); (ii) a private offering (the "Series A Preferred
Stock Offering") by the Company of shares of its Series A Convertible Preferred
Stock, par value $.0l per share (the "Series A Preferred Stock"); and (iii) an
exchange offer to occur concurrent with the Common Stock Offering and the Series
A Preferred Stock Offering (together, the "Offerings") and as a condition
thereto to exchange shares of Series A Preferred Stock and/or new 12.5%
Subordinated Notes Due 2001 ("New Notes") of the Company or a combination
thereof, subject to certain limitations, for any and all of the outstanding
12.5% Senior Subordinated Notes Due 2001 of the Company, subject to certain
conditions (the "Exchange Offer");
WHEREAS, the Company will enter into a Placement Agreement
(the "Placement Agreement"), with Friedman, Billings, Ramsey & Company,
Incorporated ("FBR"), a Virginia corporation, pursuant to which FBR will act as
placement agent in connection with the issue and sale of the Common Stock and
Series A Preferred Stock (together with the New Notes, the "Securities") to be
issued in the Offerings, and;
<PAGE> 6
WHEREAS, the completion of the Offerings (the "Closing") is
scheduled to take place on June 18, 1998, or such other date (the "Closing
Date") as is agreed upon by the Company and FBR;
WHEREAS, the Company wishes to offer and sell to Purchaser,
and Purchaser wishes to buy from the Company, on the terms and conditions set
forth herein, up to 10,000 shares of Series A Preferred Stock having an
aggregate liquidation amount of $10,000,000 for a purchase price of $ 1,000 per
share, or $10,000,000 in aggregate;
WHEREAS, the Company wishes to grant to Purchaser an option to
purchase up to 6,666,667 shares of Common Stock at a purchase price of $1.50 per
share, on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained in this Purchase Agreement, the parties agree as
follows:
Section 1. Definitions. Capitalized terms not otherwise
defined herein shall have the meanings assigned to them in the draft of the
Company's Offering Memorandum dated June 9, 1998 (the "Offering Memorandum"),
attached hereto as Exhibit A.
Section 2. Agreement to Sell and Purchase the Securities.
Subject to the terms and conditions of this Purchase Agreement, that certain
registration rights agreement (the "Registration Rights Agreement") to be
entered into by and between the Company and Purchaser, as provided in Exhibit B
hereto, and the Placement Agreement, the Company agrees to sell and Purchaser
agrees to buy 10,000 shares (the "Initial Shares") of Series A Preferred Stock
having an aggregate liquidation amount of $ 1 0,000,000 for a purchase price of
$ 1,000 per share, or $10,000,000 in the aggregate (the "Purchase Price"). The
terms of the Series A Preferred Stock will be as set forth on Exhibit C hereto.
Purchaser shall pay the Purchase Price on the Closing Date in New York Clearing
House Funds, to the account of the Company.
2
<PAGE> 7
The Company represents to Purchaser that, prior to the
Closing, the Company will be executing substantially identical purchase
agreements with respect to shares of Common Stock and Series A Preferred Stock
(except for the name and address of the Purchaser and the number of shares of
Series A Preferred Stock and Common Stock purchased) with certain other
investors (the "Other Purchasers") for an aggregate purchase price of at least
$20,000,000. Purchaser and Other Purchasers are hereinafter sometimes referred
to as the "Purchasers," and this Purchase Agreement and such other Purchase
Agreements are hereinafter sometimes referred to as the "Purchase Agreements."
Section 3. Option Shares. In addition, upon the basis of the
warranties and representations and other terms and conditions herein set forth,
the Company will at the Closing grant an option (the "Option") to the Purchaser
to purchase from the Company up to 6,666,667 additional shares of Common Stock
at a purchase price of $1.50 per share (the "Option Shares"), which option will
be evidenced by an Option Agreement (the "Option Agreement") which shall be
delivered by the Company to Purchaser at the Closing and which shall include
antidilution provisions in form and substance satisfactory to Purchaser. The
Option will expire 180 days after the second anniversary of the Closing Date and
may be exercised in whole or in part at any time and from time to time upon
written notice by the Purchaser to the Company setting forth the number of
Option Shares as to which the Purchaser is then exercising the Option and the
time and date of payment and delivery for such Option Shares. Any such time and
date of delivery (a "Date of Delivery") shall be determined by Purchaser, but
shall not be later than five full business days (nor earlier, without the
consent of the Company, than three full business days) after the exercise of
said option (and the delivery of such notice, such delivery date being
3
<PAGE> 8
referred to as the "Notice Date"). Each closing at which the documents relating
to the purchase of Option Shares are exchanged is referred to as an "Option
Closing." The Initial Shares and the Option Shares are referred to as the
"Shares."
Section 4. Issuance of the Certificates Representing, the
Securities. At the Closing and at each Option Closing, the Company will cause to
be delivered to the Purchaser, one certificate for the Initial Shares or the
Option Shares being purchased, as applicable, registered in the name of
Purchaser as set forth on the signature page hereof (or in such other name as
may be designated by Purchaser to the Company in writing) upon payment of the
applicable purchase price therefor.
Section 5. Representations, Warranties and Covenants of the
Company. The Company hereby represents and warrants to, and covenants with,
Purchaser as follows:
5.1. Organization and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has all requisite power and authority, and
all necessary authorizations, approvals, consents, orders, licenses,
certificates and permits of and from all governmental or regulatory bodies or
any other person or entity, to own, lease and license its assets and properties
and conduct its business as now being conducted and as described in the Offering
Memorandum, except for such authorizations, approvals, consents, orders,
licenses, certificates and permits the failure to so obtain would not have a
material adverse effect upon the assets or properties, business, results of
operations, prospects or condition (financial or otherwise) of the Company and
its subsidiaries, taken as a whole (a "Material Adverse Effect"); no such
authorization, approval, consent, order, license, certificate or permit contains
a materially burdensome
4
<PAGE> 9
restriction other than as disclosed in the Offering Memorandum; and the Company
has all such corporate power and authority, and has or will have as of the
Closing such authorizations, approvals, consents, orders, licenses, certificates
and permits as shall be necessary to enter into, deliver and perform this
Agreement, the Purchase Agreements and the Other Transaction Documents (as
defined in Section 5.3, below) and to issue and sell the Securities (except as
may be required under state securities laws). The Company is duly qualified to
do business and is in good standing in every jurisdiction where such
qualification is required by controlling law and where the failure to so qualify
is reasonably likely to have a Material Adverse Effect. The Company has no
subsidiaries that would be deemed to be "significant subsidiaries" for purposes
of Rule 1-02 of Regulation S-X promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), substituting in the tests set forth in
such rule the figure "5%" in each case for "10%. "
5.2. Authorized Capital Stock. The authorized, issued
and outstanding capital stock of the Company is as set forth in the Offering
Memorandum. All issued and outstanding shares of Company capital stock have been
duly and validly authorized and issued, are fully paid and nonassessable, have
been issued in compliance with all federal and state securities laws, and have
not been issued in violation of or subject to any preemptive right, cosale
right, registration right, right of first refusal or other similar right. All of
the outstanding shares of capital stock of the Company's subsidiaries have been
duly and validly authorized and issued and are fully paid and non-assessable and
are owned, directly or indirectly, by the Company, free and clear of any lien,
pledge, charge, security interest or other encumbrance. The Shares have been
duly authorized and, in the case of the Option Shares, reserved for issuance,
and, when
5
<PAGE> 10
issued and sold pursuant to this Purchase Agreement and, in the case of the
Option Shares, the Option Agreement, will be duly and validly issued, fully paid
and nonassessable and none of them will be issued in violation of any preemptive
or other similar right. Except as disclosed in the Offering Memorandum, there is
no outstanding option, warrant or other right calling for the issuance of, and
there is no commitment, plan or arrangement to issue, any share of capital stock
of the Company or any subsidiary or any security convertible into, or
exercisable or exchangeable for, such capital stock. The shares of Common Stock
into which the Initial Shares are convertible (the "Underlying Common Stock")
have been duly authorized and reserved for issuance and, when issued upon such
conversion, will be duly and validly issued, fully paid and nonassessable and
none of them will be issued in violation of any preemptive or other similar
right. The Shares and the Common Stock conform in all material respects to all
statements in relation thereto contained in the Offering Memorandum.
5.3. Due Execution, Delivery and Performance. The
execution, delivery and performance of each of this Agreement and the Placement
Agreement, the Registration Rights Agreement, the Purchase Agreements entered
into with the Other Purchasers, the Option Agreement and the similar Option
Agreement between the Company and Sovereign Bancorp, Inc. ("Sovereign"), the
Bulk Servicing Purchase Agreement and the Flow Servicing Purchase Agreement
referred to in Section 8.5 below (the "Servicing Purchase Agreements"), the
Warehouse Line Agreement referred to in Section 8.18(d) below, and the Flow
Purchase Agreement referred to in Section 8.18(e) below (collectively, the
"Other Transaction Documents") by the Company (a) have been (or prior to Closing
will be) duly authorized by all requisite corporate action of the Company and
(b) will not violate (i) the Certificate of
6
<PAGE> 11
Incorporation or Bylaws of the Company, or (ii) any provision of any indenture,
mortgage, agreement, contract, or other instrument to which the Company or any
of its subsidiaries is bound or be in conflict with, or result in a breach of or
constitute (upon notice or lapse of time or both) a default under any such
indenture, mortgage, agreement, contract, or other instrument or result in the
creation or imposition of any lien, security interest, mortgage, pledge, charge
or other encumbrance of any nature whatsoever upon any of the properties or
assets of the Company or any of its subsidiaries, except for any such
violations, conflicts, breaches or defaults which have been waived in writing as
of the Closing or would not have a Material Adverse Effect. Upon execution and
delivery, this Agreement and the Other Transaction Documents will constitute
legal, valid and binding obligations of the Company, enforceable in accordance
with their respective terms, except insofar as the enforcement thereof may be
limited by bankruptcy law or other laws relating to or affecting the enforcement
of creditors' rights generally or by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in equity or at law)
and except as rights to indemnity or contribution may be limited under
applicable law.
5.4. Offering Memorandum and Additional Information.
The Company has furnished, and Purchasers acknowledge receipt of the Offering
Memorandum.
The Offering Memorandum when combined with the
documents incorporated by reference therein does not, and any amendment or
supplement thereto will not, contain any 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 not misleading. Each document incorporated by reference
into the Offering Memorandum complies in all material respects with the
requirements of the Exchange Act, and the Commission's rules and regulations
thereunder ("Exchange Act Regulations") and, when read together with the other
information in the Offering Memorandum, does not contain an untrue statement of
a
7
<PAGE> 12
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.
5.5. Legal Proceedings. There are no actions, suits,
investigations or proceedings pending or threatened other than as disclosed in
the Offering Memorandum (including the documents incorporated by reference
therein and provided to the Purchasers) to which the Company or any of its
subsidiaries is a party or to which any of their properties is subject before or
by any court or governmental agency or both which is reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect; and to the
knowledge of the Company, no such actions, suits, investigations or proceedings
are threatened by any person, corporation or governmental agency or body.
5.6. No Material Adverse Change. Subsequent to the
respective dates as of which information is given in the Offering Memorandum,
and except as specifically described therein, there has not been (i) any
material adverse change in the business, properties or assets described or
referred to in the Offering Memorandum, or the results of operations, condition
(financial or otherwise) earnings, operations, business or business prospects,
of the Company and its subsidiaries, taken as a whole, (ii) any transaction
entered into (whether binding or nonbinding) by the Company and/or its
subsidiaries that is material to the Company and its subsidiaries, taken as a
whole, except transactions in the ordinary course of business, (iii) any
obligation that is material to the Company and its subsidiaries, direct or
indirect, contingent or noncontingent, matured or unmatured, absolute or
otherwise, incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock (other than upon the exercise of stock options described in the Offering
Memorandum) or outstanding indebtedness of the Company or its subsidiaries
(other than indebtedness incurred in the ordinary course of business consistent
with past practice), (v) any dividend or distribution of any kind declared, paid
or made on the capital stock of the Company or any of its subsidiaries, or (vi)
8
<PAGE> 13
any change in senior management or key employees, and no such change or event is
reasonably expected.
5.7. Law and Regulation. The Company and its
subsidiaries are in compliance with, and conduct their respective businesses in
conformity with all applicable laws and governmental regulations governing the
businesses conducted by the Company and its subsidiaries, as the case may be,
except for failures to comply or conform which would not have a Material Adverse
Effect.
5.8. Accounting Matters. Deloitte & Touche LLP
("D&T"), which has audited the financial statements, together with the related
notes, of the Company as of August 3 1, 1997 and 1996, and for each of the three
years ended August 31, 1997, 1996, and 1995, which are included in the Offering
Memorandum, are independent public accountants as required by the Securities Act
of 1933, as amended (the "Securities Act") and the Securities Act Regulations
(as if the Offering Memorandum was a prospectus filed as part of a registration
statement filed under the Securities Act).
The financial statements included or incorporated by reference
in the Offering Memorandum comply as to form in all material respects with
applicable accounting requirements of the Securities Act, the Securities Act
Regulations, the Exchange Act, and the Exchange Act Regulations, including
Regulation S-X under the Securities Act (as if such financial statements were
filed with or incorporated by reference in a registration statement under the
Securities Act), and said financial statements present fairly the financial
position of the Company and its Subsidiaries on a consolidated basis as of the
dates indicated and the results of their operations for the periods specified;
except as otherwise stated in the Offering Memorandum, such financial statements
have been prepared in conformity with generally accepted accounting principles
applied on a consistent basis and such financial statements are consistent in
all material respects with financial statements and other reports filed by the
Company and its Subsidiaries with the Commission; the supporting schedules
included are incorporated
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by reference in the Offering Memorandum and present fairly the information
required to be stated therein. The selected and summary financial and
statistical data included in the Offering Memorandum present fairly the
information shown therein and have been compiled on a basis consistent with the
audited financial statements presented therein.
The Company and each of its subsidiaries (i) make and keep
books and records which, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of assets; (ii) maintain a system of internal
accounting controls sufficient to provide reasonable assurance that: (a)
transactions are executed in accordance with management's general or specific
authorizations, (b) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets, (c) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect thereto, and (d) access
to assets is permitted only with management's general or specific authorization;
and (iii) otherwise conform to the requirements of the Exchange Act, Section
13(b) and Regulation 13b-2 thereunder and shall continue to do so for so long as
Purchaser holds any Shares.
5.9. Compliance with Securities Laws. Assuming (i)
the accuracy of the representations and warranties of FBR and the Purchasers as
set forth in the Placement Agreement and the Purchase Agreements, and (ii) that
the Purchaser, the Other Purchasers and the participants in the Exchange Offer
are either "qualified institutional buyers" (as defined in Rule 144A under the
Securities Act) or "accredited investors" (as defined in Rule 5 01 (a) under the
Securities Act) (the Company having received representations from such persons
to such effect),
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the Company has complied with all applicable federal and state securities or
Blue Sky laws in connection with the Offerings and the Offerings are or will be
exempt from registration under such laws.
5.10. Intangibles. The Company owns or possesses
adequate and enforceable rights to use all trademarks, trademark applications,
trade names, service marks, copyrights, copyright applications, licenses,
know-how and other similar rights and proprietary knowledge (collectively,
"Intangibles") necessary for the conduct of its business as described in the
Offering Memorandum. The Company has not received any notice of, nor to its best
knowledge is aware of, any infringement of or conflict with asserted rights of
others with respect to any Intangibles which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a Material
Adverse Effect.
5.11. Title. The Company has good title to each of
the items of personal property which are reflected in the financial statements
referred to in Section 5.8 or are referred to in the Offering Memorandum as
being owned by it and valid and enforceable leasehold interests in each of the
items of real and personal property which are referred to in the Offering
Memorandum as being leased by it, in each case free and clear of all liens,
encumbrances, claims, security interests and defects, other than those described
in the Offering Memorandum and those which do not and will not have a Material
Adverse Effect.
5.12. Contracts. Each material contract or agreement
to which the Company is a party is in full force and effect and is valid and
enforceable by and against the Company in accordance with its terms, assuming
the due authorization, execution and delivery thereof by each of the other
parties thereto. Except as disclosed in the Offering Memorandum, neither the
Company, nor to the best knowledge of the Company, any other party is in default
in the observance or performance of any
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term or obligation to be performed by it under any such agreement, and no event
has occurred which with notice or lapse of time or both would constitute such a
default, in any such case which default or event would have a Material Adverse
Effect. Except as described in the Offering Memorandum, no default exists, and
no event has occurred which with notice or lapse of time or both would
constitute a default, in the due performance and observance of any term,
covenant or condition, by the Company of any other agreement or instrument to
which the Company is a party or by which it or its properties or business may be
bound or affected which default or event would have a Material Adverse Effect.
5.13. No Violation. The Company is not in violation
of any term or provision of its Certificate of Incorporation or Bylaws or of any
franchise, license, permit, judgment, decree, order, statute, rule or
regulation, where the consequences of such violation would have a Material
Adverse Effect.
5.14. Transactions with Affiliates. No transaction
has occurred or is contemplated between or among the Company and any of its
officers or directors or any affiliate or affiliates of any such officer or
director that would have been required to be described in the Offering
Memorandum if it were part of a Registration Statement under the Securities Act
and is not described in the Offering Memorandum.
5.15. No Manipulation. The Company has not taken,
nor will it take, directly or indirectly, any action designed to or which
might reasonably be expected to cause or result in, or which has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of any of the Shares.
5.16. Taxes. The Company or its former parent, Mego
Financial Corp., has filed all Federal, state, local and foreign tax returns
which are required to be filed by the Company through the date hereof, or has
received extensions thereof, and has paid all taxes shown on such returns and
all assessments received by it to the extent that the same are material and have
become due.
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5.17. Investment Company Act of 1940. The Company
is not, and will not become upon the issuance and sale of the Securities and the
application of net proceeds therefrom as described in the Offering Memorandum
under the caption "Use of Proceeds," an "investment company" or, assuming that
FBR is not an "investment company," an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of 1940, as
amended (the "1940 Act").
5.18. Use of Proceeds. The Company will apply the
proceeds from the Offerings as set forth in the Offering Memorandum.
5.19. Board of Directors. As of the Closing, the
Board of Directors of the Company shall have seven members and Purchaser shall
be entitled at the Closing or at any time thereafter to designate one member,
who shall be appointed to the Board of Directors promptly following his
designation and who shall also be elected to any executive or similar committee
of the Board of Directors. After the Closing and until the first date on which
Purchaser holds shares of Series A Preferred Stock (on an as-converted basis)
and Common Stock representing less than 7.0% of the outstanding shares of Common
Stock (including the number of shares of Common Stock into which all outstanding
shares of Series A Preferred Stock are convertible) (the "7% Termination Date")
(a) the Board of Directors shall continue to have seven members (as adjusted
pursuant to the following sentence and the similar provision of the Preferred
Stock Purchase Agreement of even date herewith between the Company and
Sovereign), and (b) Purchaser shall be entitled to nominate one member of the
Board of Directors at each meeting of shareholders at which directors are
elected, and such member shall also be elected to any executive or similar
committee of the Board of Directors. Promptly following the
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first to occur of (i) the purchase by Purchaser pursuant to the exercise of the
Option of all of the Option Shares, or (ii) the acquisition by Purchaser by
exercise of the Option or otherwise of such number of shares of Common Stock
that Purchaser shall immediately following such acquisition own in the aggregate
15 percent (I 5%) or more of the then outstanding shares of Common Stock, the
number of members of the Board of Directors shall be increased by one and
Purchaser shall be entitled to designate one additional member of the Board of
Directors, such designee to be promptly appointed by the Board of Directors to
fill the vacancy so created. Thereafter and until the 7% Termination Date,
Purchaser shall be entitled to nominate two members of the Board of Directors at
each meeting of shareholders at which directors are elected, and one such member
designated by Purchaser shall be elected to any executive or similar committee
of the Board of Directors. The Company shall use its best efforts to cause the
nominees of Purchaser to be elected to the Board of Directors and appointed to
such committee. In addition, Purchaser shall have the right at all times until
the 7% Termination Date to designate a representative (who shall be reasonably
satisfactory to the Company) who shall be given notice of and who shall have the
right to attend all meetings of the Board of Directors of the Company and all
meetings of any executive or similar committee of the Board of Directors.
5.20. Certificates. Any certificates signed by any
officer of the Company or its subsidiaries, and delivered to the Purchasers or
to counsel for the Purchasers pursuant to the terms of this Agreement shall be
deemed a representation and warranty by the Company to the Purchaser as to the
matters covered thereby.
5.21. Rolly White. Prior to Closing, the Company
shall offer Rolly White a senior position with the Company with responsibilities
relating to loan production and retail acquisitions and shall use commercially
reasonable efforts to employ Mr. White in such position as soon as possible.
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5.22. Mortgage-Related Asset Revaluation.
Immediately following Closing, the Company shall cooperate with Purchaser, with
the advice of their respective advisors, to arrive at a mutually satisfactory,
and more conservative set of assumptions to be used to value the
mortgage-related assets carried on the Company's balance sheet.
5.23. Other Transactions. The material terms of all
of the transactions relating to the Recapitalization are accurately disclosed on
Exhibit F.
5.24. Regulatory Compliance; Veto Right Relating to
Impermissible Activities. To comply with the interpretive positions of the
Office of the Comptroller of the Currency ("OCC") governing a national bank that
takes a non-controlling interest in an enterprise, for so long as Purchaser
holds any of the Company's capital stock, (i) the Company shall engage only in
activities that are part of, or incidental to, the business of banking and (ii)
the Company shall be subject to OCC supervision, regulation and examination. The
provisions of the preceding clause (i) are interpreted to grant Purchaser the
right to "veto" engagement by the Company in activities other than those
contemplated therein, as required by the applicable interpretative positions of
the OCC, and may be specifically enforced by Purchaser. The provisions of the
preceding clause (ii) are for the benefit of and enforceable by the OCC.
5.25. Best Efforts. The Company shall cooperate with
Purchaser and shall use its reasonable best efforts to do or cause to be done
all things necessary or appropriate on its part in order to effect the
consummation of the transactions contemplated under this Agreement.
5.26. Due Diligence. In order to permit Purchaser
to perform further due diligence, the Company shall give to Purchaser and its
accountants, counsel and other authorized representatives reasonable access
during normal business hours throughout the period prior to the Closing Date to
all of its properties, books, records, contracts and other documents relating
to its business as Purchaser may reasonably request, subject to the obligation
of Purchaser and its authorized
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representatives to maintain the confidentiality of all non-public information
concerning the Company obtained by reason of such access.
5.27. Waiver of Certain Claims. The Company
acknowledges that Purchaser and its affiliated entities may now and in the
future compete directly or indirectly with the Company. The Company hereby
waives and covenants not to sue Purchaser and Purchaser's affiliated entities,
and the officers, directors, employees and agents of each of them (including,
without limitation, any person who is appointed to the Board of Directors of the
Company pursuant to Section 5.19 above) and the heirs, personal representatives,
successors and assigns of each of them (collectively, the "Released Parties") in
connection with any and all claims, causes of action, counterclaims, set offs
and rights of contribution, at law or in equity, which the Company (alone or in
combination with others) may in the future have against the Released Parties or
any of them for any liability for any loss, damage, injury, or expense of any
kind arising from or relating to any: (i) conflict or alleged conflict of
interest, (ii) breach or alleged breach of any fiduciary duty which may be owed
to the Company (including, without limitation any breach or alleged breach of
the duty of loyalty arising under the corporate opportunity doctrine), or (iii)
violation or alleged violation of any similar duty or obligation which may arise
by reason of the fact that Purchaser and/or Purchaser's affiliated entities will
following consummation of the transactions contemplated by this Agreement be a
stockholder of the Company, have one or more of its designees serving as
directors of the Company, be a provider of credit to the Company, a purchaser of
mortgages from the Company, a provider of services to the Company, or otherwise.
Section 6. Representations, Warranties and Covenants of
Purchaser.
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Purchaser hereby represents, warrants and covenants to the Company as follows:
6.1. Compliance with United States Securities Laws.
Purchaser understands and acknowledges that the Shares and the Underlying Common
Stock have not been registered under the Securities Act, and that the Shares and
the Underlying Common Stock may not be offered or sold in the United States or
to, or for the account or benefit of, any "U.S. person" (as defined in
Regulation S under the Securities Act), unless such Securities are registered
under the Securities Act or such offer or sale is made pursuant to an exemption
from the registration requirements of the Securities Act. The Shares are being
offered and sold in reliance on an exemption from registration pursuant to
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder.
Purchaser further represents that it has read and understands the investor
notices and legends set forth in the Offering Memorandum.
6.2. Status of Purchaser. Purchaser is purchasing
the Shares and will acquire the Underlying Common Stock for its own account or
for persons or accounts as to which it exercises investment discretion. Such
Purchaser is an "accredited investor" (as defined in Rule 501 (a) under the
Securities Act) and is knowledgeable, sophisticated and experienced in making,
and is qualified to make, decisions with respect to investments in restricted
securities and has requested, received, reviewed and considered all information
it deems relevant in making a decision to execute this Purchase Agreement and
to purchase the Shares. Purchaser has agreed to purchase the Shares for
investment and not with a view to distribution. To the extent that any
certificate representing the Shares is registered in the name of Purchaser's
nominee, Purchaser confirms that such nominee is acting as custodian for
Purchaser of the Shares represented thereby.
6.3. Restrictions on Re-Sale. Purchaser understands
that the Shares and the Underlying Common Stock are only transferable on the
books and records of the Company and its
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<PAGE> 22
Transfer Agent and Registrar and that the Company and the Transfer Agent and
Registrar will not register any transfer of the Shares or Underlying Common
Stock which the Company in good faith believes violates the restrictions set
forth in this Section 6.3 or violates any state or federal securities laws.
Purchaser will not, directly or indirectly, voluntarily offer, sell, pledge,
transfer or otherwise dispose of (or solicit any offers to buy, purchase or
otherwise acquire or take a pledge of) its rights under this Purchase Agreement
or the Shares or Underlying Common Stock otherwise than in compliance with the
Securities Act, any applicable state securities or blue sky laws and any
applicable securities laws of jurisdictions outside the United States, and the
rules and regulations promulgated thereunder.
Purchaser understands that the Company intends to register the
Option Shares and the Underlying Common Stock under the Securities Act as
contemplated in the Registration Rights Agreement. After registration of the
Option Shares and the Underlying Common Stock under the Securities Act,
Purchaser agrees to comply with the prospectus delivery and all other
requirements of the Securities Act in connection with any sale or other
disposition of the Option Shares and the Underlying Common Stock. Purchaser
agrees that Purchaser or its broker will deliver to each transferee a copy of a
current prospectus until the Company gives written notice to the Purchaser that
delivery of a current prospectus is no longer required. Purchaser agrees to
confirm with the Company that the prospectus is in fact current and that the
Option Shares and the Underlying Common Stock may be lawfully sold prior to any
sale or other disposition by Purchaser.
6.4. Due Execution, Delivery and Performance of the
Purchase Agreement and Other Obligations. Upon approval of this Agreement and
the transactions contemplated herein by its Board of Directors: Purchaser will
have full right, power, authority and capacity to enter into this Purchase
Agreement and to consummate the transactions contemplated hereby; the execution,
delivery and performance of this Purchase Agreement by Purchaser will have been
duly authorized by all requisite corporate action of Purchaser; upon the
execution and delivery of this Purchase Agreement by
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<PAGE> 23
Purchaser, this Purchase Agreement shall constitute the legal, valid and binding
obligations of Purchaser, enforceable against Purchaser in accordance with its
terms except insofar as the enforcement thereof may be limited by bankruptcy law
or other laws relating to or affecting the enforcement of creditors' rights
generally or by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law) and except as
rights to indemnity and contribution may be limited under applicable law.
6.5. Representations, Warranties and Covenants at
Closing. Each of the representations and warranties contained in this Section 6
is true and correct as of the date of this Purchase Agreement and will be true
and correct as of the Closing Date or the applicable Date of Delivery with the
same effect as though such representations and warranties had been made on and
as of such date. Each of the covenants contained in this Section 6 will have
been performed as of the Closing Date or the applicable Date of Delivery if
performance is required as of such date by this Section 6.
Section 7. Survival of Representations, Warranties,
Covenants and Agreements. Notwithstanding any investigation made by either party
to this Purchase Agreement, all representations, warranties, covenants and
agreements made by the Company and Purchaser herein shall survive the execution
of this Purchase Agreement, the delivery of certificates representing the Shares
and the receipt of payment for the Shares.
Section 8. Conditions to Closing. The obligations of
the Purchaser hereunder are subject to (i) the accuracy of the representations
and warranties on the part of the Company in all material respects on the date
hereof, at the Closing Date and at each Date of Delivery, (ii) the
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performance by the Company of its obligations hereunder in all material
respects, and (iii) the following further conditions:
8.1. Exchange Offer. The Company shall have
consummated the Exchange Offer with respect to at least $76 million in aggregate
principal amount of Original Notes.
8.2. Additional Equity. The Company shall have
consummated the sale of additional shares of Common Stock and Series A Preferred
Stock pursuant to the Offerings for aggregate gross proceeds to the Company of
not less than $20,000,000.
8.3. Purchaser Board Approval. Purchaser's Board of
Directors shall have approved this Purchase Agreement and the transactions
contemplated hereby. Purchaser warrants and represents that such approval has
been obtained as of the date hereof.
8.4. Waiver of Change of Control Payments. All
current and former directors, officers, employees and consultants of the Company
or any subsidiary who would be entitled as a result of the consummation of the
Recapitalization to receive payments or other benefits pursuant to "change of
control" provisions of any agreement between such person and the Company or any
subsidiary shall have irrevocably waived their rights to receive such payments
or benefits and the Company shall have irrevocably determined not to make such
payments.
8.5. Servicing Purchase Agreements. The Company and
Purchaser shall have entered into a Bulk Servicing Purchase Agreement including
the terms set forth on Exhibit D and a Flow Servicing Purchase Agreement
including the terms set forth on Exhibit E
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<PAGE> 25
and each such Agreement shall have been determined by Purchaser in the exercise
of its sole and absolute discretion to be satisfactory in form and substance.
8.6. Registration Rights Agreement. The Company and
Purchaser shall have entered into the Registration Rights Agreement and such
agreement shall have been determined by Purchaser in the exercise of its sole
and absolute discretion to be satisfactory in form and substance.
8.7. Opinion of Greenberg Traurig. The Company
shall have furnished to the Purchaser on the Closing Date and on each Date of
Delivery an opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A.,
counsel for the Company, addressed to the Purchaser and dated the Closing Date
and each Date of Delivery and in form reasonably satisfactory to Hunton &
Williams, counsel for the Purchaser, stating that:
(a) the authorized shares of capital stock of
the Company conform as to legal matters to the description thereof contained in
the Offering Memorandum under the heading "Description of Capital Stock"; the
Company has an authorized capitalization as set forth in the Offering Memorandum
under the caption "Capitalization"; the issued and outstanding shares of capital
stock of the Company have been duly and validly authorized and issued and are
fully paid and non-assessable; to such counsel's knowledge, except as set forth
in the Offering Memorandum, there are no outstanding (i) securities or
obligations of the Company convertible into or exercisable or exchangeable for
any shares of capital stock of the Company, (ii) warrants, rights, or options to
subscribe for or purchase from the Company any shares of capital stock or any
such convertible or exchangeable securities or obligations, or (iii) obligations
of the Company to issue any shares of capital stock, any such convertible or
exchangeable
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securities or obligation, or any such warrants, rights, or options; the Shares
have been duly authorized and, in the case of the Option Shares, reserved for
issuance, and, when issued and sold pursuant to this Purchase Agreement and, in
the case of the Option Shares, the Option Agreement, will be duly and validly
issued, fully paid and nonassessable; the shares of Common Stock into which the
Shares are convertible have been duly authorized and reserved for issuance and,
when issued upon such conversion in accordance with the terms thereof, will be
duly and validly issued, fully paid and nonassessable.
(b) the Company has been duly incorporated and
is validly existing and in good standing under the laws of the State of Delaware
with all requisite corporate power and authority to own, lease and license its
assets and properties and conduct its business as now being conducted and as
described in the Offering Memorandum and to enter into, deliver and perform this
Agreement, the Purchase Agreements and the Other Transaction Documents;
(c) the Company is duly qualified in or
registered by and in good standing as a foreign corporation in each jurisdiction
listed on Exhibit F hereto; (d) to such counsel's knowledge, except as described
in the Offering Memorandum, the Company is not in breach of, or in default under
(nor has any event occurred that with notice, lapse of time, or both would
constitute a breach of or default under) its Certificate of Incorporation or in
the performance or observation of any obligation, agreement, covenant, or
condition contained in any license, indenture, mortgage, deed of trust, loan or
credit agreement, or any other agreement or instrument known to such counsel to
which the Company or any of its subsidiaries is a party or by which any of them
or their respective properties may be bound or affected or under any law,
regulation, or rule or any decree, judgment, or order applicable to the Company
or any of its
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subsidiaries, except such breaches or defaults that are not reasonably likely to
have a Material Adverse Effect;
(e) the execution, delivery, and performance
of this Agreement and the Other Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated under this
Agreement and the Other Transaction Documents, as the case may be, do not and
will not conflict with, or result in any breach of, or constitute a default
under (nor constitute any event that with notice, lapse of time, or both would
constitute a breach of or default under) (i) any provisions of the Company's
certificate of incorporation or by-laws, (ii) any provision of any license,
indenture, mortgage, deed of trust, loan or credit agreement, or other agreement
or instrument known to such counsel and to which the Company or any subsidiary
is a party or by which any of them or their respective properties may be bound
or affected, or (iii) to such counsel's knowledge, assuming (x) the accuracy of
the representations and warranties of the Company, FBR and the Purchasers set
forth in the Placement Agreement, the Purchase Agreements and the Other
Transaction Documents, and (y) that the Purchaser, the Other Purchasers and the
participants in the Exchange Offer are either "qualified institutional buyers"
(as defined in Rule 144A under the Securities Act) or accredited investors" (as
defined in Rule 501 (a) under the Securities Act), any law or regulation or any
decree, judgment, or order applicable to the Company or any subsidiary, except
in the case of clause (ii) for such conflicts, breaches, or defaults that have
been waived or individually or in the aggregate are not reasonably likely to
have a Material Adverse Effect;
(f) the Company has full corporate power, and
authority to enter into and perform this Agreement and the Other Transaction
Documents and to consummate the transactions contemplated herein; this Agreement
and the Other Transaction Documents have been duly authorized, executed, and
delivered by the Company and will constitute valid and binding agreements of
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the Company enforceable against the Company in accordance with their terms,
except as may be limited by bankruptcy, insolvency, reorganization, moratorium,
or similar laws affecting creditors' rights generally, and by general principles
of equity, whether considered at law or in equity, and except as rights to
indemnity or contribution may be limited under applicable law;
(g) assuming (x) the accuracy of the
representations and warranties of the Company, FBR and the Purchasers set forth
in the Placement Agreement, the Purchase Agreements and the Other Transaction
Documents, and (y) that the Purchaser, the Other Purchasers and the participants
in the Exchange Offer are either "qualified institutional buyers" (as defined in
Rule 144A under the Securities Act) or "accredited investors" (as defined in
Rule 501 (a) under the Securities Act), no approval, authorization, consent, or
order of or filing with any federal or, to such counsel's knowledge, state
governmental or regulatory commission, board, body, authority, or agency is
required in connection with the execution, delivery, and performance by the
Company of this Agreement and the Other Transaction Documents or the
consummation of the transactions contemplated hereby and thereby by the Company,
or the sale and delivery of the Shares by the Company as contemplated hereby,
other than (i) the filing of a certificate of designation of the Series A
Preferred Stock with the Secretary of State of Delaware, (ii) the filing of a
Current Report on Form 8-K, (iii) filings required pursuant to the terms of the
Registration Rights Agreement and any other registration rights agreements
entered into pursuant to the Offerings and the Exchange Offer, and (iv) as may
be required pursuant to any state securities laws;
(h) to such counsel's knowledge, each of the
Company and its subsidiaries has all necessary licenses, authorizations,
consents, and approvals and has made all necessary filings required under any
federal, state, or local law, regulation or rule, and has obtained all necessary
authorizations, consents, and approvals from other persons, required to conduct
their respective businesses, as described in the Offering Memorandum, except to
the extent that any failure to
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have any such licenses, authorizations, consents, or approvals would not,
individually or in the aggregate, have a Material Adverse Effect; to such
counsel's knowledge, neither the Company nor any of its subsidiaries is in
violation of, in default under, or has received any notice regarding a possible
violation, default, or revocation of any such license, authorization, consent,
or approval or any federal, state, local, or foreign law, regulation, or decree,
order, or judgment applicable to the Company or any of its subsidiaries, which
would result in a Material Adverse Effect; and no such license, authorization,
consent, or approval contains a materially burdensome restriction that is not
adequately disclosed in the Offering Memorandum;
(i) the issuance and sale of the Shares by the
Company is not subject to preemptive or other similar rights arising by
operation of law, under the Certificate of Incorporation or Bylaws of the
Company or under any agreement known to such counsel to which the Company or any
of its subsidiaries is a party;
(j) the form of certificate used to evidence
the Common Stock complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the Certificate of
Incorporation and Bylaws of the Company and the requirements of The Nasdaq
National Market;
(k) the statements under the captions
"Business -- Government Regulation," "Description of the Original Notes,"
"Description of the New Notes," "Description of Capital Stock" and "Certain
Federal Income Tax Consequences" in the Offering Memorandum, insofar as such
statements constitute a summary of the legal matters referred to therein,
constitute accurate summaries thereof in all material respects;
(1) except as described in the Offering
Memorandum, to such counsel's knowledge, there are no actions, suits,
investigations or proceedings pending to which the Company or any of its
subsidiaries is a party or to which any of their properties is subject before or
by
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any court or governmental agency or both, which is reasonably likely to have,
individually or in the aggregate, a Material Adverse Effect,
(m) neither the Company nor any of its
subsidiaries is, or solely as a result of transactions contemplated hereby and
the application of the proceeds from the sale of the Shares or the consummation
of the Recapitalization, will become an "investment company" or, assuming that
FBR is not an "investment company," a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended
(the " 1 940 Act").
In addition, such counsel shall state that they have
participated in conferences with the directors, officers and employees of the
Company and its independent public accountants at which the contents of the
Offering Memorandum were discussed and, although such counsel is not passing
upon and does not assume responsibility for the accuracy, completeness, or
fairness of the statements contained in the Offering Memorandum (except as and
to the extent stated above), they have no reason to believe that the Offering
Memorandum, as of its date and as of the date of such counsel's opinion,
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading (it being understood that, in each case, such counsel
need express no view with respect to the financial statements and other
financial and statistical data included in the Offering Memorandum).
8.8. Comfort Letter. The Purchaser shall have received
from Deloitte & Touche LLP, letters relating to the Offering Memorandum dated as
of the Closing Date and each Date of Delivery, as applicable, addressed to the
Purchaser and in form and substance satisfactory to it.
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8.9. Offering Memorandum. The Offering Memorandum,
as amended or supplemented after the date hereof, shall not, in Purchaser's
reasonable judgment, (i) disclose a material change in the assets or properties,
business, results of operations, prospects or condition (financial or otherwise)
of the Company and its subsidiaries taken as a whole, as described in the
Offering Memorandum, or (ii) contain an untrue statement of material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading.
8.10. Other Transactions. There shall have been,
in Purchaser's reasonable judgment, no material change in the terms of the
transactions described in Exhibit G.
8.11. No Material Adverse Effect. Between the time
of execution of this Agreement and the Closing Date or the relevant Date of
Delivery no event shall have occurred which has had or is reasonably likely to
have a Material Adverse Effect.
8.12. Certificates. The Company will, on the
Closing Date and on each Date of Delivery, deliver to the Purchaser a
certificate of the Chief Executive Officer and the Chief Financial Officer of
the Company to the effect that, to each of such officer's knowledge, the
representations and warranties of the Company set forth in this Agreement are
true and correct as of such date and the conditions set forth in Sections 8.1,
8.2, 8.4, 8.10, 8.11, 8.14 and 8.15 of this Agreement have been met. The
Company shall have furnished to the Purchaser such other documents and
certificates as to the accuracy and completeness of any statement in the
Offering Memorandum, the representations, warranties and statements of the
Company contained herein, and the performance by the Company of its covenants
contained herein, and the
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fulfillment of any conditions contained herein as of the Closing Date or any
Date of Delivery as the Purchaser may reasonably request.
8.13. Regulatory Matters. Purchaser shall have
received all approvals from the OCC and any other regulatory agency having
jurisdiction over Purchaser, necessary to consummate the transactions
contemplated by this Agreement.
8.14. Consents. The Company shall have obtained
in writing all consents of third parties necessary to permit the consummation of
the transactions contemplated by this Agreement and the Other Transaction
Documents and no such consent shall contain any term or condition that Purchaser
reasonably deems to be materially disadvantageous to the Company or Purchaser.
8.15. Related Party Indebtedness. At the Closing,
the Company shall have no outstanding indebtedness to Mego Financial Corp.
8.16. Documents. The Company shall have delivered
to Purchaser executed copies of the Purchase Agreements entered into with the
Other Purchasers and all other agreements between the Company and any Other
Purchasers or any holder of the Original Notes or the New Notes relating to the
Offerings or the Recapitalization.
8.17. Additional Matters Relating to Option
Shares. In connection with the purchase by Purchaser of Option Shares, the
Company shall deliver to the Purchaser on the Date of Delivery such documents as
the Purchaser may reasonably request with respect to the good standing of the
Company, the due authorization and issuance of the Option Shares and other
matters related to the issuance of the Option Shares.
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8.18. Additional Conditions. The obligations of
Purchaser hereunder are further subject to the satisfaction of each of the
following conditions:
(a) Certificate of Designation. The
certificate of designation of the Series A Preferred Stock shall have been
determined by Purchaser in the exercise of its sole and absolute discretion to
be satisfactory in form and substance.
(b) Letter from FBR. FBR shall have
delivered to Purchaser a letter in the form attached hereto as Exhibit H.
(c) Warehouse Line Agreement. The Company
and Sovereign Bank, a federally chartered savings bank ("Sovereign Bank") shall
have entered into a Warehouse Line Agreement, which Agreement: (i) shall
include, inter alia, the terms set forth in Exhibit I hereto, and (ii) shall
otherwise have been determined by Purchaser in the exercise of its sole and
absolute discretion to be satisfactory in form and substance.
(d) Flow Loan Purchase Agreement. The
Company and Sovereign Bank shall have entered into a Flow Loan Purchase
Agreement, which Agreement: (i) shall include, inter alia, the terms set forth
in Exhibit J hereto, (ii) shall provide that the Company shall retain servicing
rights with respect to all loans purchased in the Flow Loan Purchase Agreement,
and (iii) shall otherwise have been determined by Purchaser in the exercise of
its sole and absolute discretion to be satisfactory in form and substance.
(e) Right of First Refusal. The Company and
Purchaser shall have entered into a Right of First Refusal Agreement, which
Agreement: (i) shall include, inter alia, the terms set forth in Exhibit K
hereto, and (ii) shall otherwise have been determined by Purchaser in the
exercise of its sole and absolute discretion to be satisfactory in form and
substance.
(f) Amendment of Placement Agreement. The
Company and FBR shall have entered into an Amendment to the Placement Agreement
under the terms of which the parties
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thereto agree that the fees to be paid to FBR shall be paid by the delivery of
shares of Common Stock valued at $1.50 per share.
(g) Agreements with FBR and Emanuel J.
Friedman. Purchaser shall have entered into Agreements with each of FBR and
Emanuel J. Friedman with respect to shares of Common Stock held by FBR in its
investment account and by Emanuel J. Friedman under the terms of which Purchaser
is granted a right of first refusal and a "tag along" right, which Agreements
shall have been determined by Purchaser in the exercise of it sole and absolute
discretion to be satisfactory in form and substance.
(h) Employment and Non-Competition
Agreements. The Company shall have entered into an Employment Agreement or other
retention arrangement (including a 12 month covenant not to compete) with at
least three of the four Company employees identified on Exhibit L hereto, which
Agreements or other retention arrangement shall have been determined by
Purchaser in its sole and absolute discretion to be satisfactory in form and
substance.
(i) Option Agreement. The Option Agreement
shall have been executed by the Company and delivered to Purchaser and shall
have been determined by Purchaser in its sole and absolute discretion to be
satisfactory in form and substance.
Section 9. Conditions to Closing. The obligations of the
Company hereunder are subject to (i) the accuracy of the representations and
warranties on the part of the Purchaser in all material respects on the date
hereof, at the Closing Date and at each Date of Delivery, and (ii) the
performance by the Purchaser of its obligations hereunder in all material
respects.
Section 10. Compliance with the Securities Act.
10.1. Information Available. So long as Purchaser
holds any shares of the Company's capital stock, the Company will furnish to
each Purchaser:
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(a) as soon as practicable after available,
one copy of (i) its Annual Report to Shareholders, and (ii) if not included in
substance in the Annual Report to Shareholders, its Annual Report on Form 10-K,
and (iii) each of its Quarterly Reports to Shareholders and its Quarterly
Reports on Form 10-Q, and
(b) upon the reasonable request of Purchaser,
all other information of a kind that is generally available to the public.
10.2. Legend Requirement. Purchaser hereby agrees
that the Shares and the Underlying Common Stock will be subject to Section 6.3
hereof and to that effect the following legend will appear on the Shares and any
Underlying Common Stock until such time as the Company may deem such legend to
be no longer required under the federal or state securities laws:
The Securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended, of the United States of
America (the "Act") and may have been issued in reliance upon the
exemption set forth in Section 4(2) of the Securities Act and Rule 506
promulgated thereunder. The Securities represented by this certificate
may not be offered, sold, transferred or otherwise disposed of in the
United States or to, of for the account or benefit of, any "U.S.
person" (as defined in Regulation S) unless registered under the Act or
an exemption from the registration requirements of the Act is
available.
Section 11. Broker's Fee. Purchaser acknowledges that the
Company has advised it that the Company intends to pay FBR (the "Placement
Agent"): (i) a fee (the "Offerings Fee") equal to 6.0% of the gross proceeds
received from the sale of the shares of Common Stock (except for those shares
sold to Emanuel J. Friedman) and Series A Preferred Stock sold in the Offerings
and shares of Common Stock (except for those shares sold to Emanuel J. Friedman
or his affiliates) sold in the Rights Offering; and (ii) a fee (the "Advisory
Fee") of $1,000,000 as
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<PAGE> 36
financial advisor in connection with the Recapitalization. Purchaser further
acknowledges that the Company has advised it that the Offerings Fee is payable
upon consummation of the Offerings in Common Stock valued at the Offering Price
and the Advisory Fee is payable upon consummation of the Rights Offering in
Common Stock valued at the Offering Price. Placement Agent shall not receive any
fee in connection with the acquisition of shares of the Underlying Common Stock
pursuant to the exercise by Purchaser of the Option. Purchaser further
acknowledges that the Company has advised it that the Company has also agreed:
(i) to reimburse the Placement Agent on request by the Placement Agent for the
Placement Agent's out-of-pocket expenses, including, among other things, the
fees and expenses of legal counsel; and (ii) to indemnify the Placement Agent
against certain liabilities, including liabilities under the Securities Act, and
other liabilities incurred in connection with the Offerings, and to contribute
to payments the Placement Agent may be required to make in respect thereof. The
parties hereto hereby represent that there are no other brokers or finders
entitled to compensation in connection with the sale of the securities
contemplated hereby.
Section 12. Notices. All notices, requests, consents and other
communications hereunder shall be in writing, shall be mailed by registered air
mail, postage prepaid, or sent by facsimile transmission with a confirmation
copy sent by registered mail, and shall be deemed given when so mailed:
(a) if to the Company, to I 000 Parkwood Circle,
Atlanta, Georgia 30339, Attention: Jeffrey S. Moore, or to such other person at
such other place as the Company shall designate to the Purchaser in writing;
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<PAGE> 37
(b) if to Purchaser, to 3601 MacCorkle Avenue,
Charleston, West Virginia, Attention: Robert A. Henson, or at such other address
or addresses as Purchaser may have furnished to the Company, with a copy to
Hunton & Williams, 951 East Byrd Street, Richmond, Virginia 23219, Attention:
Randall S. Parks; or
(c) if to any transferee or transferees of
Purchaser, at such address or addresses as shall have been furnished to the
other parties hereto at the time of the transfer or transfers, or at such other
address or addresses as may have been furnished by such transferee or
transferees to the other parties hereto in writing.
Section 13. Amendments. No amendment, interpretation or
waiver of any of the provisions of this Purchase Agreement shall be effective
unless made in writing and signed by the parties to this Purchase Agreement.
Section 14. Headings. The headings of the sections,
subsections and subparagraphs of this Purchase Agreement are used for
convenience only and shall not affect the meaning or interpretation of the
contents of this Purchase Agreement.
Section 15. Enforcement. The failure to enforce or to require
the performance at any time of any of the provisions of this Purchase Agreement
shall in no way be construed to be a waiver of such provisions, and shall not
affect either the validity of this Purchase Agreement or any part hereof or the
right of any party thereafter to enforce each and every provision in accordance
with the terms of this Purchase Agreement.
Section 16. Governing Law. This Purchase Agreement and the
relationships of the parties in connection with the subject matter of this
Purchase Agreement shall be governed
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<PAGE> 38
by and determined in accordance with the laws of the State of Georgia in the
United States of America.
Section 17. Severability. If any severable provision of this
Purchase Agreement is held to be invalid or unenforceable by any judgment of a
tribunal of competent jurisdiction, the remainder of this Purchase Agreement
shall not be affected by such judgment, and the Purchase Agreement shall be
carried out as nearly as possible according to its original terms and intent.
Section 18. Counterparts. This Purchase Agreement may be
executed in counterparts, all of which shall constitute one agreement, and each
such counterpart shall be deemed to have been made, executed and delivered on
the date set out at the head of this Purchase Agreement without regard to the
dates or times when such counterparts may actually have been made, executed or
delivered.
Section 19. Assignment. This Purchase Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of, as the case
may be, and be enforceable by and against the parties hereto and their
respective successors and assigns, but neither this Purchase Agreement nor any
of the rights, interests or obligations of the parties hereunder shall be
assigned by any of the parties hereto without the prior written consent of each
of the other parties.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives the day and
year first above written.
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MEGO MORTGAGE CORPORATION
By: /s/ Jeff S. Moore
---------------------------------
Name: Jeff S. Moore
Title: President and CEO
CITY NATIONAL BANK OF WEST
VIRGINIA
By: /s/ Robert A. Henson
---------------------------------
Name: Robert A. Henson
Title: Chief Financial Officer
35
<PAGE> 1
EXHIBIT 10.79
STOCK OPTION AGREEMENT
MADE as of this 29th day of June, 1998 by MEGO MORTGAGE CORPORATION, a
Delaware corporation with its principal offices at 1000 Parkwood Circle, 5th
Floor, Atlanta, Georgia 30339 (the "Company"), in favor of CITY NATIONAL BANK OF
WEST VIRGINIA, a national banking association with its principal offices at 3601
MacCorkle Avenue, Charleston, West Virginia (the "Holder").
Background:
This Agreement is executed pursuant to the terms of a Preferred Stock
Purchase Agreement dated as of June 9, 1998 entered into by the Company and the
Holder (the "Preferred Stock Purchase Agreement"). Capitalized terms not
otherwise defined herein shall have the meanings given to them in the Preferred
Stock Purchase Agreement.
WITNESSETH:
NOW, THEREFORE, in consideration of the mutual undertakings set forth in
the Preferred Stock Purchase Agreement and other good and valuable
consideration, the Company, intending to be legally bound, hereby agrees as
follows:
1. Definitions. For purposes of this Agreement, the following terms shall
have the meanings indicated below, unless the context otherwise requires:
(a) "Agreement" shall mean this Agreement and any future amendments,
restatements, modifications or supplements hereof or hereto.
(b) "Board" shall mean the Board of Directors of the Company, as
comprised from time to time.
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<PAGE> 2
(c) "Capital Stock" shall mean the Common Stock, and any other stock
of any class, whether now or hereafter authorized, which has the right to
participate in the distribution of earnings and assets of the Company without
limit as to amount or percentage. "Capital Stock" shall not include any shares
at any time directly or indirectly owned by the Company.
(d) "Closing Price" with respect to the Common Stock on any day shall
mean: (i) if the Common Stock is listed or admitted for trading on a national
securities exchange (which shall include for this purpose the Nasdaq National
Market) the reported last sales price regular way or, if no such reported sale
occurs on such day, the average of the closing bid and asked prices regular way
on such day, in each case as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which such class of security is listed or admitted to
trading, or (ii) if the Common Stock is not listed or admitted to trading on any
national securities exchange, the last quoted sales price, or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market
on such day as reported by NASDAQ or any comparable system then in use or, if
not so reported, as reported by any New York Stock Exchange member firm
reasonably selected by the Company for such purpose.
(e) "Fair Market Value" with respect to the Common Stock on any day
shall mean the average of the daily Closing Prices of a share of Common Stock
for the 10 consecutive business days ending on the most recent business day for
which a Closing Price is available; provided, however, that in the event that
Fair Market Value is determined during a period following the announcement by
the Company of: (i) a dividend or distribution on the Common Stock, or (ii) any
subdivision, combination or reclassification of the Common Stock and prior to
the expiration of 10 business days after the ex-dividend date for
2
<PAGE> 3
such dividend or distribution, or the record date for such subdivision,
combination or reclassification, then, and in each such case, the Closing Price
for each day during such period of 10 consecutive business days which falls
prior to such ex-dividend date shall be appropriately adjusted.
(f) "Option" shall mean the option herein provided to purchase the
whole block or any part of the block of shares of Common Stock purchasable
hereunder.
(g) "Option Price" shall mean the price per share at which Common
Stock is purchasable hereunder, as such price may be adjusted from time to time
pursuant hereto.
(h) "Option Stock" shall mean, individually or collectively, as
appropriate, any share or shares of Common Stock purchased upon exercise of the
Options.
2. Grant of Option. The Company hereby grants to the Holder the right to
purchase, at any time up to 180 days after the second anniversary of the Closing
Date (the "Expiration Date"), up to 6,666,667 shares of fully paid and
non-assessable Common Stock at an exercise price of $1.50 per share (subject to
adjustment as hereinafter provided).
3. Exercise of Options. This Option may be exercised in whole or in part
(but not as to a fractional share of Common Stock) by the surrender of this
Agreement, properly endorsed, at any office of the Company and upon payment to
it by certified or bank cashier's check of the Option Price for the shares
purchasable thereunder. The persons entitled to the shares of Option Stock so
purchased shall be treated for all purposes as the holders of such shares as of
the close of business on the date of exercise. Certificates for the shares of
Option Stock so purchased, together with a new Agreement or Agreements of like
tenor representing in the aggregate the right to purchase the
3
<PAGE> 4
number of shares of Common Stock with respect to which the Option has not been
exercised (each such Agreement to be for such portion of the total shares of
Option Stock as the holder thereof shall designate), and shall be issued and
delivered to the persons so entitled within a reasonable time, not exceeding ten
(10) days, after such exercise.
4. Exchange. This Agreement is exchangeable, upon the surrender thereof
by the Holder at any office of the Company, for a new Agreement or Agreements of
like tenor representing in the aggregate the right to purchase the number of
shares of Option Stock then purchasable hereunder, each of such new Agreements
to represent the right to subscribe for and purchase such portion of the
aggregate number of shares of Option Stock issuable hereunder as shall be
designated by the Holder at the time of such surrender.
5. Transfer. This Agreement is transferable, in whole or in part, at any
office of the Company by the Holder in person or by duly authorized attorney,
upon presentation of the Agreement, properly endorsed, for transfer.
6. Certain Covenants of the Company. The Company covenants and agrees
that all Option Stock which may be issued upon the exercise of this Option will,
upon issuance, be duly and validly issued, fully paid and non-assessable and
free from all taxes, liens, encumbrances, options, preemptive rights, and other
charges with respect to the issue thereof; and, if any other outstanding shares
of the Company's Common Stock are then listed on a national or regional
securities exchange or on the Nasdaq National Market System, will be so listed.
The Company further covenants and agrees that, during the period within which
this Option may be exercised: (a) the Company shall, at all times, have
authorized and reserved for the purpose of issue upon exercise of the Option
evidenced by this Agreement, a sufficient number of shares of Common Stock, and
(b) the Company will not,
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<PAGE> 5
by amendment of its Certificate of Incorporation or through any
reclassification, capital reorganization, consolidation, merger, sale or
conveyance of assets, dissolution, liquidation, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Agreement, but will at all times in good faith
assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
Holder hereunder.
7. Adjustment of Purchase Price and Number of Shares. The number and kind
of securities purchasable upon the exercise of the Option and the Option Price
shall be subject to adjustment from time to time upon the occurrence of certain
events as follows:
(a) Mergers and Reclassifications. If after the date hereof there
shall be any reclassification, capital reorganization or change of the Common
Stock (other than as a result of a subdivision, combination or stock dividend
provided for in Section 7(b) hereof), or any consolidation of the Company with,
or merger of the Company into, another corporation or other business
organization (other than a merger in which the Company is the continuing
corporation and which does not result in any reclassification or change of the
outstanding Common Stock), or any sale or conveyance to another corporation or
other business organization of all or substantially all of the assets of the
Company, then, as a condition of such reclassification, reorganization, change,
consolidation, merger, sale or conveyance, lawful provisions shall be made, and
duly executed documents evidencing the same from the Company or its successor
shall be delivered to the Holder, so that the Holder shall thereafter have the
right to purchase, at a total price not to exceed that payable upon the exercise
of the Option in full, the kind and amount of shares of stock and other
securities and property which the Holder would have received upon such
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<PAGE> 6
reclassification, reorganization, change, consolidation, merger, sale or
conveyance if the Holder had exercised the Option in full immediately prior to
such reclassification, reorganization, change, consolidation, merger, sale or
conveyance, and in any such case appropriate provisions shall be made with
respect to the rights and interest of the Holder to the end that the provisions
hereof (including without limitation, provisions for the adjustment of the
Option Price and the number of shares issuable hereunder) shall thereafter be
applicable in relation to any shares of stock or other securities and property
thereafter deliverable upon exercise hereof.
(b) Dividends; Subdivisions; Combinations. If after the date hereof
the Company shall subdivide the Common Stock, by split-up or otherwise, or
combine the Common Stock, or issue additional shares of Common Stock in payment
of a stock dividend on the Common Stock: (i) the number of shares of Option
Stock issuable upon the exercise of this Option shall forthwith be
proportionately increased in the case of a subdivision or stock dividend, or
proportionately decreased in the case of a combination, and (ii) the Option
Price shall forthwith be proportionately decreased in the case of subdivision or
stock dividend, or proportionately increased in the case of a combination.
(c) Adjustments for Issuances Below Option Price. In case the Company
shall at any time or from time to time after the date hereof issue or sell any
shares of Common Stock (other than shares issued in transactions to which
Sections 7(a) or 7(b) hereof apply), for consideration per share less than the
Option Price in effect immediately prior to the time of such issue or sale, or
pay any dividend or make any other distribution upon the Common Stock payable in
cash, property or securities of the Company other than Common Stock or in
securities of a corporation other than the Company, then forthwith upon such
issue or sale, or upon the payment of such dividend or the making of such other
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<PAGE> 7
distribution, as the case may be, the Option Price shall (until another such
issue or sale, or dividend or other distribution) be reduced to a price
(calculated to the nearest cent) determined by dividing: (i) an amount equal to
the sum of (x) the number of shares of Common Stock outstanding immediately
prior to such issue or sale or the payment of such dividend or the making of
such other distribution, multiplied by the Option Price in effect immediately
prior to such event, plus (y) the consideration, if any, received by the Company
upon such issue or sale minus (z) the aggregate amount of such dividend or other
distribution in respect of Common Stock, by (ii) the total number of shares of
Common Stock outstanding immediately after such issue or sale or dividend or
other distribution. Further, the number of shares of Option Stock purchasable
hereunder shall be increased to a number determined by dividing: (i) the number
of shares of Option Stock purchasable hereunder immediately prior to such issue
or sale or dividend or other distribution, multiplied by the Option Price
hereunder immediately prior to such event, by (ii) the Option Price in effect
immediately after the foregoing adjustment. Notwithstanding the foregoing, no
adjustment shall be made under this Section 7(c) if the same issuance or sale
would result in a greater adjustment under Section 7(d) below.
(d) Adjustments for Issuance Below Fair Market Value. In case the
Company shall at any time or from time to time after the date hereof issue or
sell any shares of Common Stock (other than shares issued in transactions to
which Sections 7(a) or 7(b) hereof apply), for consideration per share less than
the Fair Market Value per share of outstanding Common Stock on the date of such
issuance or sale, or on the first date of the announcement of such issuance or
sale (whichever is less), then, effective immediately prior to the time of such
issuance, sale or announcement, the number of shares of Common Stock purchasable
upon exercise of this Option shall be adjusted by multiplying the number of
shares of Common Stock subject to purchase upon exercise of this Option by a
fraction, the
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<PAGE> 8
numerator of which shall be the total number of shares of Common stock
outstanding immediately after such issuance or sale and the denominator of which
shall be an amount equal to the sum of (A) the number of shares of Common Stock
outstanding immediately prior to such issuance or sale, plus (B) the number of
shares of Common Stock which the aggregate consideration, if any, received by
the Company upon such issuance or sale would buy at the Fair Market Value
thereof, as of the date immediately prior to such issuance, sale or announcement
(whichever is less). In the event of any such adjustment, the Option Price shall
be adjusted to a number determined by dividing the Option Price in effect
immediately prior to such issuance or sale by the fraction used for purposes of
the aforementioned adjustment. Notwithstanding the foregoing, there shall be no
adjustment pursuant to this Section 7(d) for the issuance of shares of Common
Stock upon exercise of the Option held by City National or upon conversion of
shares of Series A Preferred Stock, and no adjustment shall be made under this
Section 7(d) if the same issuance or sale would result in a greater adjustment
under Section 7(c) above.
(e) Special Rules. For the purpose of Sections 7(c) and 7(d), the
following provisions shall also be applicable:
(i) If, after the date hereof, the Company shall in any manner
offer any rights to subscribe for or to purchase shares of Common Stock, at
a price less than the Option Price or less than the Fair Market Value per
share of Common Stock in effect immediately prior to the time of the
offering of such rights or the granting of such options, as the case may
be, all shares of Common Stock which the holders of such rights or options
shall be entitled to subscribe for or purchase pursuant to such rights or
options shall be deemed to be issued or sold as of the date of the offering
of such rights or the granting of such options, as the case may be, and the
minimum aggregate consideration
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<PAGE> 9
named in such rights or options for the Common Stock covered thereby, plus
the consideration received by the Company for such rights or options, shall
be deemed to be the consideration actually received by the Company (as of
the date of the offering of such rights or the granting of such options, as
the case may be) for the issue or sale of such shares.
(ii) If, after the date hereof, the Company shall in any manner
issue or sell any shares of any class or obligations directly or indirectly
convertible into or exchangeable for shares of Common Stock and the price
per share for which Common Stock is deliverable upon such conversion or
exchange (determined by dividing: (i) the total minimum amount received or
receivable by the Company in consideration of the issue or sale of such
convertible or exchangeable shares or obligations, plus the total minimum
amount of premiums, if any, payable to the Company upon conversion or
exchange, by (ii) the total number of shares of Common Stock necessary to
effect the conversion or exchange of all such convertible or exchangeable
shares or obligations) shall be less than Option Price or the Fair Market
Value per share of the Common Stock in effect immediately prior to the time
of such issue or sale, then such issue or sale shall be deemed to be an
issue or sale (as of the date of issue or sale of such convertible or
exchangeable shares or obligations) of the total maximum number of shares
of Common Stock necessary to effect the conversion or exchange of all such
convertible or exchangeable shares or obligations, and the total minimum
amount received or receivable by the Company in consideration of the issue
or sale of such convertible or exchangeable shares or obligations, plus the
total minimum amount of premiums, if any, payable to the Company upon
exchange or conversion, shall be deemed to be the consideration actually
received (as of the date of the issue
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<PAGE> 10
or sale of such convertible or exchangeable shares or obligations) for
the issue or sale of such Common Stock.
(iii) In the case of any dividend or other distribution on the
Common Stock of the Company payable in property, securities of the
Company other than Common Stock or securities of a corporation other
than the Company, such dividend or other distribution shall be deemed
to have been paid or made at a value equal to the fair market value of
the property or securities so distributed. Any dividend or distribution
referred to in this clause (iii) shall be deemed to have been paid or
made on the day following the date fixed for determination of
stockholders entitled to receive such dividend or distribution.
(iv) In determining the amount of consideration received by the
Company for Common Stock, securities convertible thereinto or
exchangeable therefor, or rights or options for the purchase thereof,
no deduction shall be made for expenses or underwriting discounts or
commissions paid by the Company. The Board shall determine in good
faith the fair market value of the amount of consideration other than
the money received by the Company upon the issue by it of any of its
securities. The Board shall also determine in good faith the fair
market value of any dividend or other distribution made upon Common
Stock payable in property, securities of the Company other than Common
Stock or securities of a corporation other than the Company. The Board
shall, in the event that any Common Stock, securities convertible
thereinto or exchangeable therefor, or rights or options for the
purchase thereof are issued with other stock, securities or assets of
the Company, determine in good faith what part of the consideration
received therefor is applicable to the issue of the Common Stock,
securities convertible thereinto or
10
<PAGE> 11
exchangeable therefor, or rights or options for the purchase thereof.
(v) If there shall be any change in (A) the minimum
aggregate consideration named in the rights or options referred to in
clause (i) above, (B) the consideration received by the Company for such
rights or options, (C) the price per share for which Common Stock is
deliverable upon the conversion or exchange of the convertible or
exchangeable shares or obligations referred to in clause (ii) above, (D)
the number of shares which may be subscribed for or purchased pursuant to
the rights or options referred to in clause (i) above, or (E) the rate at
which the convertible or exchangeable shares or obligations referred to in
clause (ii) above are convertible into or exchangeable for Common Stock,
then the Option Price in effect at the time of such event shall be
readjusted to the Option Price which would have been in effect at such time
had such rights, options, or convertible or exchangeable shares or
obligations still outstanding provided for such changed consideration,
price per share, number of shares, or rate of conversion or exchange, as
the case may be, at the time initially offered, granted, issued or sold,
but only if as a result of such adjustment the Option Price then in effect
hereunder is thereby reduced.
(f) Other Action Affecting Capital Stock. If, after the date
hereof, the Company shall take any action affecting the Capital Stock, other
than an action described in any of the foregoing Sections 7(a) through 7(d)
hereof inclusive, which in the opinion of the Board would have a material
adverse effect upon the rights or economic interests of the Holder, the Option
Price and the number of shares of Option Stock purchasable hereunder shall be
adjusted in such manner and at such time as the Board on the advice of the
Company's independent public
11
<PAGE> 12
accountants may in good faith determine to be equitable in the circumstances.
(g) No Adjustment for Certain Transactions. Notwithstanding the
foregoing, no adjustment shall be made to the Option Price or to the number of
shares of Common Stock issuable upon exercise of this Option in connection with
the following transactions:
(i) the Common Stock Offering, the Series A Preferred Stock
Offering, the Exchange Offer or the Rights Offering (as such terms are
defined in the Offering Memorandum);
(ii) the issuance of up to 6,710,000 shares of Common Stock
pursuant to options granted, expected to be granted or available to be
granted to Company employees as described in Footnote 4 on page 44 of the
Offering Memorandum; or
(iii) the issuance of up to 3,000,000 shares of Common Stock
to the Placement Agent as described in Section 11 of the Preferred Stock
Purchase Agreement.
8. Notice of Adjustments. In the event that the Company shall take any
action which pursuant to Section 7(a) through 7(d) or Section (f) hereof may
result in an adjustment of the Option Price and the number of shares of Option
Stock purchasable upon exercise of the Option, the Company will give to the
Holder at its last address known to the Company written notice of such action
(by first class mail, postage prepaid) ten (10) days in advance of its effective
date in order to afford to the Holder an opportunity to exercise the Option
prior to the effective date. Such notice shall contain the Company's certificate
signed by its President or Vice President and by its Treasurer or Assistant
Treasurer or its Secretary or Assistant
12
<PAGE> 13
Secretary, setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated (including a description of the basis on which the Board made any
determination hereunder), and the Option Price and number of shares of Option
Stock purchasable after giving effect to such adjustment. In the event that the
actual adjustment required by such event is different from that set forth in
such notice, the Company shall promptly mail to each Holder a revised
certificate and notice in accordance with this Section 8.
9. Fractional Shares. No fractional shares of Common Stock will be
issued in connection with any purchase hereunder but in lieu of such fractional
shares, the Company shall make a cash payment therefor equal in amount to the
product of the applicable fraction multiplied by the Option Price then in
effect.
10. Transfer to Comply with the Securities Act. Notwithstanding any
other provision contained herein, the Option and any Option Shares may not be
sold, transferred, pledged, hypothecated or otherwise disposed of except as
follows: (a) to a person who, in the opinion of counsel to the Company, is a
person to whom the Option or the Option Shares may legally be transferred
without registration and without the delivery of a current prospectus under the
Securities Act with respect thereto and then only against receipt of an
agreement of such person to comply with the provisions of this Section 10 with
respect to any resale or other disposition of such securities; or (b) to any
person upon delivery of a prospectus then meeting the requirements of the
Securities Act relating to such securities and the offering thereof for such
sale or disposition, and thereafter to all successive assignees.
11. Legend. Unless the Option Shares have been registered under the
Securities Act, upon exercise of the Option
13
<PAGE> 14
and the issuance of any of the Optin Shares, all certificates representing such
securities shall bear on the face thereof substantially the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be sold, offered for sale, assigned, transferred or otherwise disposed
of, unless registered pursuant to the provisions of that Act or unless
an opinion of counsel to the Company is obtained stating that such
disposition is in compliance with an available exemption from such
registration.
12. Expiration Date. To the extent not previously exercised, the
Option provided for in this Agreement shall expire as of the close of business
on the Expiration Date and shall be void thereafter.
13. Notices. All notices and other communications herein shall be
given in the manner required by Section 12 of the Preferred Stock Purchase
Agreement.
14. Loss, Theft, Destruction or Mutilation. Upon receipt by the
Company of reasonable evidence satisfactory to it of the ownership of and the
loss, theft, destruction or mutilation of this Agreement and (in the case of
loss, theft, or destruction) of reasonable indemnity and (in the case of
mutilation) upon surrender and cancellation thereof, the Company will execute
and deliver, in lieu thereof, a new Agreement of like tenor.
14
<PAGE> 15
15. Headings. The descriptive headings of the several sections of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
IN WITNESS WHEREOF, the Company, intending to be legally bound hereby,
has caused this Agreement to be signed by its duly authorized officer.
MEGO MORTGAGE CORPORATION
By: /s/ Jeffrey A. Moore
-----------------------------------------
President
Attest: /s/ Robert V. Bellacosa
-------------------------------------
Secretary
- ------------------------- :
:ss.
COUNTY OF Cobb :
---------------
On this 25th day of June, 1998, before me, a notary public,
the undersigned officer, personally appeared Jeffrey A. Moore, who acknowledged
himself to be the ______________________ of MEGO MORTGAGE CORPORATION, a
Delaware corporation, and that he as such officer, being authorized to do so,
executed the foregoing instrument for the purposes therein contained by signing
the name of the corporation by himself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official
seal.
/s/ Deborah C. Decker
-----------------------------------
Notary Public
15
<PAGE> 1
EXHIBIT 10.81
BULK SERVICING PURCHASE AGREEMENT
by and between
THE CITY NATIONAL BANK OF WEST VIRGINIA
(Purchaser)
and
MEGO MORTGAGE CORPORATION
(Seller)
Dated as of June 26, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE I DEFINITIONS.............................................................................................1
1.1. "Administrative Fee Mortgage".......................................................................1
1.2. "Advances"..........................................................................................1
1.3. "Agency"............................................................................................2
1.4. "Ancillary Income"..................................................................................2
1.5. "Business Day"......................................................................................2
1.6. "Closing Date"......................................................................................2
1.7. "Collateral"........................................................................................2
1.8. "Current In Bankruptcy Mortgage"....................................................................2
1.9. "Deposit"...........................................................................................2
1.10. "FHA"..............................................................................................2
1.11 "FNMA"..............................................................................................2
1.12. "Final Mortgage Documentation".....................................................................2
1.13. "HUD"..............................................................................................3
1.14. "In Bankruptcy"....................................................................................3
1.15. "In Foreclosure"...................................................................................3
1.16. "In Litigation"....................................................................................3
1.17. "Interim Period"...................................................................................3
1.18. "Investor".........................................................................................3
1.19. "Legal Title"......................................................................................3
1.20 "Master Servicer"...................................................................................3
1.21. "Mortgage".........................................................................................4
1.22. "Mortgage File"....................................................................................4
1.23. "Prior Servicer"...................................................................................4
1.24. "Purchase Price"...................................................................................4
1.25. "Purchaser"........................................................................................4
1.26. "Related Accounts".................................................................................4
1.27. "Sale Agreement"...................................................................................4
1.28. "Seller"...........................................................................................4
1.29. "Servicing"........................................................................................4
1.30. "Servicing Agreement"..............................................................................5
1.31. "Title I"..........................................................................................5
1.32. "Transfer Date"....................................................................................5
ARTICLE II SALE AND TRANSFER OF SERVICING.........................................................................5
2.1. Items to be Sold....................................................................................5
2.2. Closing Date........................................................................................5
</TABLE>
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<TABLE>
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2.3. Transfer Date.......................................................................................6
2.4. Actions Required Prior to the Transfer Date.........................................................6
2.5. Examination of Mortgage Documents...................................................................7
2.6. Undertaking by Purchaser............................................................................7
2.7. Preparation and Modification of Exhibits............................................................8
ARTICLE III CONSIDERATION.........................................................................................9
3.1. Purchase Price......................................................................................9
3.2. Payment............................................................................................10
3.3. Advances...........................................................................................11
3.4. Other Costs........................................................................................11
ARTICLE IV GENERAL REPRESENTATIONS AND WARRANTIES OF SELLER......................................................11
4.1. Due Incorporation and Good Standing................................................................12
4.2. Authority and Capacity.............................................................................12
4.3. Effective Agreement................................................................................12
4.4. Statements Made; Notification of Breach............................................................12
ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER AS TO
SERVICING & MORTGAGES...................................................................................13
5.1. Compliance with Law and Other Requirements.........................................................13
5.2. Filing of Reports..................................................................................13
5.3. Related Accounts...................................................................................14
5.4. Escrow Analysis....................................................................................14
5.5. Compliance with Insurance Contracts................................................................14
5.6. Title Insurance....................................................................................14
5.7. Errors and Omissions Insurance.....................................................................15
5.8. Sole Servicer......................................................................................15
5.9. Authorizations.....................................................................................15
5.10. Capital...........................................................................................15
5.11. Title to the Servicing Rights and Escrow Accounts.................................................15
5.12. Mortgage Documents................................................................................16
5.13. Validity of Mortgages.............................................................................16
5.14. Physical Damage; Condemnation.....................................................................16
5.15. No Uninsured Mortgages............................................................................16
5.16. Application of Funds..............................................................................17
5.17. Custodial Accounts................................................................................17
5.18. Payoff Statements.................................................................................17
5.19. Mortgage Files....................................................................................17
5.20. Tax Identification Numbers........................................................................17
5.21. Litigation........................................................................................18
5.22. Mortgage Disbursement.............................................................................18
</TABLE>
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<TABLE>
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5.23. No Forgiven Payment...............................................................................18
5.24. Unpaid Principal Balances.........................................................................18
5.25. Payment of Taxes, Insurance Premiums, etc.........................................................18
5.26. Effective Insurance...............................................................................19
5.27. Flood Insurance; Certifications...................................................................19
5.28. Other Insurance...................................................................................19
5.29. Real Property Tax Identifications and Descriptions................................................19
5.30. Compliance with Contractual Obligations...........................................................20
5.31. No Accrued Liabilities............................................................................20
5.32. Foreclosure.......................................................................................20
5.33. Servicing Agreements..............................................................................20
5.34. Investor and Master Servicer Approvals............................................................20
5.35. Non-Recourse Loans................................................................................20
5.36. Agency and Investor Requirements..................................................................21
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PURCHASER...........................................................21
6.1. Due Incorporation and Good Standing................................................................21
6.2. Authority and Capacity.............................................................................21
6.3. Effective Agreement................................................................................22
6.4. Good Standing......................................................................................22
ARTICLE VII COVENANTS............................................................................................22
7.1. Notice to Mortgagors...............................................................................22
7.2. Notice to Taxing Authorities and Insurance Companies...............................................23
7.3. Delivery of Servicing Records......................................................................23
7.4. Delivery of Mortgage Documents.....................................................................23
7.5. Escrow/Impound Balances; Unearned Fees.............................................................23
7.6. Remittances and Investor Reports After Transfer Date...............................................23
7.7. Mortgage Payments Received After Transfer Date.....................................................24
7.8. Misapplied Payments................................................................................24
7.9. Books and Records..................................................................................24
7.10. Compliance with Regulations.......................................................................24
7.11. Related Accounts..................................................................................25
7.12. Servicing Transfer Guidelines.....................................................................25
7.13. Documents After Transfer Date.....................................................................25
7.14. FEMA Notices......................................................................................25
7.15. Short-Year Escrow Statements......................................................................25
7.16. Solicitation by Seller............................................................................25
7.17 Solicitation by the Purchaser; Payoff Information..................................................26
ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER....................................................26
8.1. Delivery of Servicing Data and Records.............................................................26
</TABLE>
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8.2. Correctness of Representations and Warranties......................................................27
8.3. Compliance with Conditions.........................................................................27
8.4. Preferred Stock Purchase Agreement.................................................................27
8.5. Review of Mortgage Files...........................................................................27
8.6. Servicing Agreements...............................................................................28
8.7. Documentation of Transfer..........................................................................28
ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER.........................................................28
9.1. Correctness of Representations and Warranties......................................................28
9.2. Compliance with Conditions.........................................................................28
9.3. Documentation of Transfer..........................................................................28
9.4. Preferred Stock Purchase Agreement.................................................................28
9.5 Payment of Deposit by Purchaser.....................................................................29
ARTICLE X MISCELLANEOUS..........................................................................................29
10.1. Costs and Expenses................................................................................29
10.2. Indemnification by Seller.........................................................................29
10.3. Indemnification by Purchaser......................................................................30
10.4. Failure to Deliver Documents......................................................................31
10.5. Repurchase of Servicing...........................................................................31
10.6. Supplementary Information.........................................................................31
10.7. Financial Statements..............................................................................32
10.8. Confidentiality...................................................................................32
10.9. Broker's Fees.....................................................................................32
10.10. Survival of Representations and Warranties.......................................................32
10.11. Form of Payment to be Made.......................................................................32
10.12. Assignment.......................................................................................33
10.13. Notices..........................................................................................33
10.14. Waivers..........................................................................................33
10.15. Entire Agreement; Amendment......................................................................34
10.16. Binding Effect...................................................................................34
10.17. Headings.........................................................................................34
10.18. Applicable Laws..................................................................................34
10.19. Incorporation of Exhibits........................................................................34
10.20. Counterparts.....................................................................................34
10.21. Further Assurances...............................................................................34
</TABLE>
Exhibit A The Mortgages
Exhibit B Servicing Agreements
Exhibit C Advances
Exhibit D Servicing Fee Rates
Exhibit E Administrative Fee Mortgages
iv
<PAGE> 6
Exhibit F Recoveries from Casualty Insurance
Exhibit G Loans with Incorrect or Missing Tax Identification
Exhibit H Pending Litigation
Exhibit I Mortgages with Other Insurance
Exhibit J Investor Approvals
Exhibit K Schedule of Servicing Information
Exhibit L Required Loan Documentation
v
<PAGE> 7
BULK SERVICING PURCHASE AGREEMENT
This Bulk Servicing Purchase Agreement (the "Sale Agreement") is dated
as of the 26th day of June, 1998, by and between THE CITY NATIONAL BANK OF WEST
VIRGINIA, a national banking association (the "Purchaser") and MEGO MORTGAGE
CORPORATION, a Delaware corporation (the "Seller").
W I T N E S S E T H:
WHEREAS, Seller owns the right to service certain one-to-four family
mortgage loans, including a limited number of unsecured loans, described in
Exhibit A attached hereto (collectively the "Mortgages" or each a "Mortgage")
having an aggregate outstanding principal balance as of the date hereof of
$535,803,578.07. Each owner of a Mortgage is referred to herein as an
"Investor";
WHEREAS, the rights and responsibilities of Seller with respect to
servicing the Mortgages under the servicing agreements identified in Exhibit B
hereto, and the maintenance and servicing of the Related Accounts are sometimes
hereinafter referred to as the "Servicing";
WHEREAS, Purchaser desires to purchase and Seller desires to sell all
right, title and interest in and to the Servicing in accordance with the terms
and conditions of this Sale Agreement; and
NOW, THEREFORE, in consideration of the mutual covenants made herein
and for other good and valuable consideration the sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1. "Administrative Fee Mortgage".
A Mortgage that is three (3) or more scheduled payments past
due, In Bankruptcy (and not a Current In Bankruptcy Mortgage), In Foreclosure or
In Litigation.
1.2. "Advances".
With respect to any Mortgage, the amounts advanced but not
recovered by Seller prior to the Transfer Date in connection with the
performance of servicing functions (including, without limitation, advances in
respect of principal, interest, taxes, insurance premiums, reasonable
expenditures related to foreclosure proceedings, bankruptcy proceedings and
other litigation, and expenses incurred in upkeep and making repairs to
Collateral).
<PAGE> 8
1.3. "Agency".
FHA or HUD.
1.4. "Ancillary Income".
With respect to each Mortgage, late fees, assumption fees,
impound and escrow earnings, where permitted by law, and other fees and amounts
(other than monthly servicing fees expressed as a specified number of basis
points per annum) that the servicer is entitled to retain in accordance with the
related Servicing Agreement.
1.5. "Business Day".
Any day other than (a) a Saturday or Sunday, or (b) a day on
which banking institutions in the State of West Virginia or the State of Georgia
are authorized or obligated by law or by executive order to be closed.
1.6. "Closing Date".
Close of business on June 29, 1998.
1.7. "Collateral".
The property securing a Mortgage.
1.8. "Current In Bankruptcy Mortgage".
A Mortgage that (a) is In Bankruptcy as of the Closing Date
and (b) is current in accordance with the terms of the related Note on the
Closing Date and on the Transfer Date.
1.9. "Deposit".
The amount described in Section 3.2(a) hereof.
1.10. "FHA".
The Federal Housing Administration.
1.11 "FNMA".
Fannie Mae.
1.12. "Final Mortgage Documentation".
All documents and information described in Sections 2.4, 7.1
through 7.4 and 8.1 hereof.
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<PAGE> 9
1.13. "HUD".
The United States Department of Housing and Urban Development.
1.14. "In Bankruptcy".
With respect to any Mortgage, a voluntary or involuntary
petition under Title 11 of the United States Code, or a proceeding under similar
laws for the relief of debtors, that has been filed by or against a mortgagor,
guarantor or other person or entity who presently holds title to the Collateral.
The status In Bankruptcy shall continue with respect to a Mortgage until the
Collateral is released from the jurisdiction of the bankruptcy or other court in
which the matter is pending, regardless of whether the proceeding has been
dismissed or otherwise concluded.
1.15. "In Foreclosure".
With respect to any Mortgage, action (including, without
limitation, referral to legal counsel for institution of an appropriate
proceeding) has been initiated, or should have been initiated pursuant to
applicable Master Servicer, Investor, Agency or insurer requirements or
guidelines or the applicable Servicing Agreement, to acquire title to the
Collateral in a foreclosure sale or pursuant to any comparable procedure
permitted under applicable law.
1.16. "In Litigation".
With respect to any Mortgage, a pending action before a court
or an administrative or regulatory agency or an arbitration or other dispute
resolution proceeding (not including an action, petition or proceeding that
would cause the Mortgage to be In Foreclosure or In Bankruptcy) that may
materially and adversely affect the Mortgage.
1.17. "Interim Period".
With respect to each Mortgage, the period of time beginning on
the Closing Date and ending on the Business Day immediately preceding the
Transfer Date.
1.18. "Investor".
As defined in the recitals hereof. With respect to any
Mortgage that is securitized, the "Investor" shall be deemed to be FNMA or the
related trustee or trustees or the related owner or owners, as applicable.
1.19. "Legal Title".
All indicia of legal ownership of the Servicing and any
Related Accounts and all other legal rights, obligations and duties with respect
to the Servicing and any Related Accounts.
1.20 "Master Servicer".
As defined in the applicable Servicing Agreements.
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<PAGE> 10
1.21. "Mortgage".
As defined in the recitals hereof.
1.22. "Mortgage File".
With respect to any Mortgage, the individual loan file or
files and/or microfilm duplicate thereof or computer data file containing the
original or copy of the note and related mortgage or deed of trust, together
with all mortgage papers and documents, evidence of payment of taxes and
insurance premiums, tax receipts, if any, and insurance policies, insurance
premium receipts, if any, water stock certificates, ledger sheets, payment
records, insurance claim files and correspondence, collection files and
correspondence, historical computerized data files and other papers and records
reasonably required to document and service such Mortgage in accordance with
applicable Master Servicer, Investor or Agency guidelines. Such documents may be
provided on microfilm.
1.23. "Prior Servicer".
Each servicer who serviced any Mortgage prior to Seller.
1.24. "Purchase Price".
As defined in Section 3.1 hereof.
1.25. "Purchaser".
As defined in the first paragraph of this Sale Agreement.
1.26. "Related Accounts".
Any accounts maintained by Seller relating to the Servicing to
be transferred to Purchaser pursuant to the terms of this Sale Agreement
including (i) mortgage escrow/impound accounts, if any, and (ii) the account or
accounts containing amounts collected by Seller constituting the payment of
principal and interest with respect to the Mortgages.
1.27. "Sale Agreement".
As defined in the first paragraph of this agreement.
1.28. "Seller".
As defined in the first paragraph of this Sale Agreement.
1.29. "Servicing".
With respect to each Mortgage, all rights and duties of the
servicer, as set forth in the related Servicing Agreement, including but not
limited to, the rights to collect and receive all
-4-
<PAGE> 11
amounts payable with respect to the related Mortgage and to receive and retain
all servicing fees and Ancillary Income that may be retained in accordance with
the related Servicing Agreement.
1.30. "Servicing Agreement".
With respect to each Mortgage, any agreement setting forth the
terms and conditions for the servicing of such Mortgage on behalf of the related
Investor or Master Servicer, including but not limited to, an applicable pooling
and servicing agreement, servicing agreement or Investor seller/servicer guide,
as amended, pursuant to which Seller is currently servicing the Mortgages, and
any related purchase agreement or other agreement with the related Investor or
Master Servicer. If no such agreement sets forth the terms and conditions for
the servicing of a Mortgage, then with respect to that Mortgage, the term
"Servicing Agreement" shall be deemed to be prudent mortgage banking practices
for servicing mortgages of a similar size and type.
1.31. "Title I".
Title I of the National Housing Act of 1934, as amended, and
the related rules and regulations promulgated thereunder.
1.32. "Transfer Date".
The date set forth in Section 2.4.
ARTICLE II
SALE AND TRANSFER OF SERVICING
2.1. Items to be Sold.
Subject to and upon the terms and conditions of this Sale
Agreement, Seller shall, as hereinafter provided, sell, transfer, assign and
deliver to Purchaser all right, title and interest in and to (a) the Servicing
of the Mortgages, (b) any Related Accounts and (c) Seller's rights to all
servicing compensation and Ancillary Income due the servicer of the Mortgages on
and after the Transfer Date. Except as otherwise noted herein, Seller shall
cease all servicing responsibilities related to the Mortgages, and the right of
Seller to any portion of the servicing fees and Ancillary Income collected with
respect to the Mortgages shall terminate, on the last Business Day preceding the
Transfer Date.
2.2. Closing Date.
(a) On the Closing Date, Purchaser shall pay the Deposit, as
defined in Section 3.2(a), to Seller. For the period between
the Closing Date and the Transfer Date (the
"Interim Period"), Seller shall continue to service the
Mortgages and shall retain the right to receive all servicing
fees and Ancillary Income related to Servicing of the
Mortgages.
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(b) During the Interim Period, Seller shall pay, perform and
discharge all liabilities and obligations relating to
ownership of the Servicing and all the rights, obligations and
duties with respect to any Related Accounts until the transfer
of such items on the Transfer Date. During such period, Seller
agrees to service the Mortgages at all times in accordance
with (i) any applicable Master Servicer, Investor or Agency
requirements, (ii) all applicable statutes, federal and state
regulations and contractual provisions of applicable Servicing
Agreements and Mortgage insurers, and (iii) all prudent
mortgage banking practices. Unless otherwise mutually agreed
upon by Purchaser and Seller, Seller's right to service each
Mortgage and receive any servicing fees and Ancillary Income
shall terminate on the last Business Day preceding the
Transfer Date. Such servicing fees and Ancillary Income shall
be apportioned pro rata for partial months during the Interim
Period.
2.3. Transfer Date.
The Transfer Date shall be July 31, 1998. On the Transfer
Date, (i) Purchaser or its designee shall assume all servicing responsibilities
with respect to the Mortgages and any Related Accounts, (ii) Seller shall assign
to Purchaser, and Purchaser shall assume, the right to receive all servicing
fees and Ancillary Income with respect to the servicing of Mortgages and all
obligations under the Servicing Agreements, and (iii) Legal Title to the
Servicing (including mortgagee of record status, if applicable) and any Related
Accounts shall be transferred to Purchaser or its designee.
2.4. Actions Required Prior to the Transfer Date.
The following actions shall be taken with respect to the
Mortgages for which the Servicing is being sold to Purchaser. On or prior to the
Transfer Date (except that Seller shall have fifteen days after the Transfer
Date to prepare and send to the appropriate recorder's office for recording,
with a certified copy to Purchaser, assignments where required) Seller shall,
with respect to the Mortgages, at Seller's sole cost and expense:
(a) Assign to Purchaser, by appropriate endorsements and
individual assignments, all of Seller's right, title and
interest in and to the Servicing Agreements (except Seller's
right to any Excess Spread or Excess Yield, as those terms are
defined in the Servicing Agreements with First National Bank
of Boston, Greenwich Capital Markets, Inc. and Atlantic Bank),
notes and mortgages (or deeds of trust) related to the
Servicing to the extent required by any applicable Master
Servicer, Investor and Agency requirements and applicable
Servicing Agreements. Seller shall prepare and record the
assignments, if any, required to reflect changes in mortgagee
of record status (if necessary), including intervening
assignments if not previously prepared and recorded. Seller
shall also prepare assignments of Mortgages from Purchaser to
the appropriate Investors, if required by applicable Investor
requirements or Servicing Agreements, and provide such
assignments and copies of executed assignments required by the
first two sentences of this subparagraph, if any, (with a
certification that each assignment has been submitted
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for recording) to Purchaser. Additionally, Seller shall
deliver such other appropriately executed and authenticated
instruments of sale, assignment, transfer and conveyance to
Purchaser, including limited powers of attorney, as Purchaser
or its counsel may reasonably request in order to accomplish
the transfer to Purchaser of all of Seller's rights related to
the Servicing (for example, Seller's rights with respect to
foreclosures, bankruptcies, payoffs and insurance/guarantee
claims, but excluding Title I insurance claims). Such
instruments provided by Seller shall be reasonably
satisfactory in form to Purchaser and its counsel. Seller and
Purchaser hereby acknowledge and agree that all such
assignments and endorsements are made solely for the
administrative convenience of Purchaser in its capacity as
servicer of the Mortgages.
(b) Deliver to Purchaser or Purchaser's document custodian all
Mortgage documents in the possession of Seller for each
Mortgage for which documents are required by the related
Servicing Agreement or Master Servicer or Investor
requirements to be held by a custodian or the servicer of the
related Investor's loan. Such documents and any other
documents relating to each Mortgage in the possession of any
document custodian pursuant to the related Servicing Agreement
shall include all documents required by applicable regulations
and contractual provisions and shall contain true and correct
copies of such documents as Purchaser may require to transfer
title of the Collateral in the event of foreclosure.
2.5. Examination of Mortgage Documents.
Purchaser shall during the period prior to the Transfer Date
have reasonable access during business hours to Seller's books, records and
accounts with respect to the Mortgages and any Related Accounts to be
transferred on the Transfer Date. Purchaser shall use its reasonable best
efforts not to disrupt Seller's normal business in exercising the foregoing
right.
2.6. Undertaking by Purchaser.
(a) Purchaser covenants and agrees, upon acceptance of the
assignment of the Servicing and any Related Accounts with
respect to the Mortgages, to cause the same to be serviced in
accordance with the terms and conditions of the applicable
Servicing Agreements or Master Servicer, Investor or Agency
requirements and all Federal, state or local laws, regulations
or rules, and to the extent not in conflict with the
foregoing, consistent with the procedures and standards by
which Purchaser services loans held for Purchasers' own
account and the accounts of its affiliates and consistent with
mortgage loan servicing standards exercised by prudent
mortgage lending institutions that service mortgage loans of
the same amount and type as the Mortgages.
(b) Prior to the Closing Date, Purchaser shall provide to Seller a
copy of Purchaser's servicing guidelines setting forth the
procedures and standards by which Purchaser services mortgages
held for Purchaser's own account. Purchaser acknowledges that
Seller has entered into this Sale Agreement in reliance upon
the Purchaser's
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independent status, the adequacy of its servicing facilities,
plan, personnel, records and procedures, its integrity,
reputation and financial standing.
(c) On and after the Transfer Date, Purchaser shall provide to
Seller copies of all monthly reports required to be filed
under any Servicing Agreement or otherwise, including, but not
limited to, reports to any Master Servicer, Investor, Agency,
insurer or governmental agencies having jurisdiction over the
Servicing. Purchaser shall provide such copies to Seller at
the time such reports are filed.
(d) Purchaser shall not be responsible for the servicing acts and
omissions of Seller or any Prior Servicer that occur, or for
any servicing obligations or liabilities of Seller or any
Prior Servicer that arise, prior to the Transfer Date. Seller
shall not be responsible for the servicing acts and omissions
of Purchaser or any future servicer that occur, or for any
servicing obligations or liabilities of Purchaser or future
servicers that arise, on or after the Transfer Date.
2.7. Preparation and Modification of Exhibits.
Exhibits to this Sale Agreement shall be prepared and modified
as follows:
(a) Exhibit A, in the form attached hereto on the Closing Date,
has been prepared by Seller and is intended to include
information as it is known at the end of business on June 24,
1998. Seller shall prepare and deliver to Purchaser not later
than August 4, 1998, (i) revisions of Exhibit A that includes
information as it exists at the end of July 1998 and (ii)
Exhibits B through L.
(b) It is understood and agreed by the parties that the Exhibits
provided by Seller pursuant to Section 2.7(a) hereof may not
accurately reflect in every respect the information attributed
to such Exhibits in this Sale Agreement. The parties agree
that each such Exhibit will be reviewed in light of the
requirements hereof and, if necessary, revised from time to
time following the Closing Date so that on the Transfer Date
each such Exhibit will accurately reflect the information
attributed to it herein. Each reference herein to such an
Exhibit will be deemed to be a reference to that Exhibit as it
may have been revised through the Transfer Date. (For example,
the purpose of Exhibit A, as qualified by Exhibit B, shall
always be to list the mortgages for which Servicing is
transferred hereunder on the Closing Date, but the version of
Exhibit A that will be ultimately controlling for purposes of
the transactions contemplated by this Sale Agreement shall be
the version in effect on the Transfer Date.) If the
information reflected in a modification of an Exhibit requires
an adjustment of the Purchase Price or aggregate
Administrative Fee, the adjustment shall be made as provided
in Section 3.1.
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ARTICLE III
CONSIDERATION
3.1. Purchase Price.
In full consideration for the sale of the Servicing as
specified in Article II hereof, and upon the terms and conditions of this Sale
Agreement, Purchaser shall pay to Seller the purchase price (the "Purchase
Price") as follows:
(a) Ninety percent (90%) of the book value of the Servicing and
other rights purchased hereunder as set forth on the books of
the Seller on the Transfer Date, determined in accordance with
GAAP and consistent with the valuation methodology used to
calculate such book value in the Company's financial
statements included in the Offering Memorandum, as defined in
the Preferred Stock Purchase Agreement dated June 9, 1998 (the
"Offering Memorandum"), by and between Seller and Purchaser,
less the amount of any Advances and any Title I insurance
premiums not collected from the borrower under any Mortgage.
(b) It is understood and agreed that if, within 120 days of the
Transfer Date, the principal balance of any Mortgage used in
computing the Purchase Price shall be found to be incorrectly
computed, the book value of the Servicing and other rights
purchased hereunder shall be promptly and appropriately
adjusted and the Purchase Price recalculated on the basis of
such adjusted book value.
(c) It is understood and agreed that if, within 120 days of the
Transfer Date, the servicing fee rate specified in Exhibit D
hereto shall be found to be incorrectly stated as to any
Mortgage, or if any other error in the computation of the
Purchase Price is discovered, the Purchase Price shall be
promptly and appropriately adjusted.
(d) The amount of any adjustment to the Purchase Price shall be
remitted to the party in whose favor the adjustment is to be
made by the other party within ten (10) calendar days after
the remitting party determines or is given notice of the
determination that there was an error in the Purchase Price.
The parties shall cooperate following the Transfer Date in
making such determinations with respect to the Mortgages.
(e) At Seller's option, Purchaser shall accept transfer of
servicing for Mortgages designated by Seller that were, as of
the Closing Date, or became during the Interim Period,
Administrative Fee Mortgages. Seller shall exercise this
option, if at all, by giving Purchaser at least thirty (30)
days' notice before the Transfer Date and identifying the
Administrative Fee Mortgages that it will transfer to
Purchaser on the Transfer Date. Seller will pay Purchaser an
administrative fee (the "Administrative Fee") for each
Administrative Fee Mortgage, if any, that Seller transfers to
Purchaser. The Administrative Fee shall be $750 for each
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Administrative Fee Mortgage. Upon payment of the
Administrative Fee, and notwithstanding any representation or
warranty set forth herein, Seller shall have no further
liability with respect to any Administrative Fee Mortgage for
any servicing expense incurred by Purchaser on or after the
Transfer Date that is attributable to acts or omissions of the
related borrower. Mortgages determined to be Administrative
Fee Mortgages are listed on Exhibit E hereto.
3.2. Payment.
The Purchase Price shall be paid as follows:
(a) On the Closing Date, Purchaser will pay to the Seller a
Deposit equal to twenty-five percent (25%) of the Purchase
Price, as estimated as of the Closing Date.
(b) Purchaser shall pay to Seller, on the later of (i) the fifth
Business Day following the Transfer Date or (ii) the date when
substantially all Mortgage Files and custodial files have been
received by Purchaser, an amount equal to the difference
between (A) seventy-five percent (75%) of the Purchase Price,
calculated as of the Transfer Date and (B) the amount paid by
the Purchaser to the Seller pursuant to paragraph (a) of this
Section 3.2.
(c) Purchaser will pay Seller the balance of the Purchase Price
(the "Balance"), adjusted in accordance with Section 3.1
hereof, as follows:
(i) On the last Business Day of each calendar month
following the Transfer Date, Purchaser will pay to Seller an
amount determined by multiplying the Balance by a fraction the
numerator of which is the aggregate unpaid principal balance
at the Transfer Date of the Mortgages transferred to the
Purchaser for which Final Mortgage Documentation has been
received and the denominator of which is the aggregate unpaid
principal balance at the Transfer Date of the Mortgages
transferred to the Purchaser.
(ii) Notwithstanding clause (i), Purchaser shall pay
Seller the final ten percent (10%) of the Purchase Price only
after Purchaser has received Final Mortgage Documentation for
all the Mortgages.
(d) Seller will pay Purchaser on the Transfer Date the aggregate
Administrative Fee determined as described in Section 3.1(e)
hereof.
(e) If Purchaser defaults on the payment of the Purchase Price
(and the conditions precedent in Article VIII have been
performed in full), (i) Seller shall refund to Purchaser an
amount equal to (A) that portion of the Purchase Price
previously received by Seller, less (B) ten percent (10%) of
the Purchase Price, and (ii) Purchaser, at its expense, shall
promptly return to Seller all Mortgage documentation and other
documentation that it has received from Seller in connection
with the transactions contemplated by this Sale Agreement.
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<PAGE> 17
(f) If Seller defaults on its obligations hereunder (or the
conditions precedent in Article VIII hereof have not been
performed in full), (i) Seller shall, within five (5) Business
Days after receipt of Purchaser's demand, pay to Purchaser (A)
the portion of the Purchase Price previously received by
Seller, plus (B) an additional amount equal to ten percent
(10%) of the Purchase Price, and (ii) Purchaser, at Seller's
expense, shall promptly return to Seller all Mortgage
documentation and other documentation that it has received
from Seller in connection with the transactions contemplated
by this Sale Agreement. The provisions of this Section 3.2(f)
shall be in addition to and not in limitation of the rights
and remedies available to the parties at law or equity or
otherwise provided to them herein upon a breach of this Sale
Agreement.
3.3. Advances.
With respect to each Mortgage, Purchaser shall reimburse
Seller for the Advances set forth on Exhibit C to the extent that the Purchaser
recovers such reimbursement from amounts received with respect to such Mortgage.
Purchaser shall transfer any such reimbursement to Seller within five (5)
Business Days of Purchaser's receipt of the reimbursement.
3.4. Other Costs.
(a) Seller shall be responsible, at its sole cost and expense, to
take such actions as are necessary to obtain any and all
approvals or consents required to be delivered by Seller to
the Purchaser pursuant to this Agreement.
(b) Seller shall comply, at its sole cost and expense, with
Purchaser's reasonable requirements pertaining to the
processing and shipping of loan files, insurance files, tax
records, collection records, and any other documents that are
reasonably necessary to service the Mortgages.
(c) Seller shall be responsible, at its sole cost and expense, to
take such actions as are necessary to deliver all Mortgage
documents to Purchaser or Purchaser's designated document
custodian as required by Section 2.4(b).
(d) Seller shall bear the risk of loss of or to the Mortgage
documents until the Mortgage documents are unloaded and
accepted by Purchaser or Purchaser's designated custodian at
Purchaser's receiving facility or at the receiving facility of
Purchaser's designated custodian.
ARTICLE IV
GENERAL REPRESENTATIONS AND WARRANTIES OF SELLER
As an inducement to Purchaser to enter into this Sale Agreement, Seller
represents and warrants as follows (it being acknowledged that each such
representation and warranty relates to
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<PAGE> 18
material matters upon which Purchaser relied, and it being understood that each
such representation and warranty is made to the Purchaser as of the Closing Date
and Transfer Date except as otherwise specifically stated):
4.1. Due Incorporation and Good Standing.
Seller is a corporation duly organized and validly existing
under the laws of the State of Delaware. Seller and each Prior Servicer or
sub-servicer were qualified or licensed to transact business in each
jurisdiction in which its activities with respect to the Mortgages or the
Servicing require it to be qualified or licensed.
4.2. Authority and Capacity.
Seller has all requisite power, authority and capacity to
enter into this Sale Agreement and to perform the obligations required of it
hereunder. The execution and delivery of this Sale Agreement and the
consummation of the transactions contemplated hereby have each been duly and
validly authorized by all necessary corporate action. This Sale Agreement
constitutes the valid and legally binding agreement of Seller enforceable in
accordance with its terms, except as the enforceability hereof may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance, or other laws
relating to or affecting the enforcement of creditors' rights or the collection
of debtors' obligations in general or by general equitable principles. No
offset, counterclaim or defense exists to Seller's full performance of this Sale
Agreement, except as may result from the Mortgages In Litigation, as set forth
on Exhibit H.
4.3. Effective Agreement.
The execution, delivery and performance of this Sale Agreement
by Seller, its compliance with the terms hereof and the consummation of the
transactions contemplated hereby (assuming the receipt of various consents
required pursuant to this Agreement) will not violate, conflict with, result in
a breach of, constitute a default under, be prohibited by or require any
additional approval under the articles of incorporation, bylaws, or any
instrument or agreement to which Seller is a party or by which it is bound or
which affects the Servicing, or any state or federal law, rule or regulation or
any judicial or administrative decree, order, ruling or regulation applicable to
it or to the Servicing.
4.4. Statements Made; Notification of Breach.
No representation, warranty or statement made by Seller in
this Sale Agreement or in any Exhibit hereto, written statement or certificate
furnished by Seller to Purchaser in connection with the transactions
contemplated hereby, including specifically the servicing fee rate applicable to
the Mortgages and the method of calculating such rate as set forth in Exhibit D
hereto and the Mortgage balances as set forth in Exhibit A hereto, contains or
will contain any untrue statement of a material fact or omits or will omit to
state a material fact materially necessary to make the statements contained
herein or therein not misleading. Seller shall promptly notify Purchaser in
writing upon its discovery or receipt of notice (which may come
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from Purchaser or any other person or entity) that Seller has breached any of
its covenants, representations or warranties made herein.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLER AS TO SERVICING &
MORTGAGES
As further inducement to Purchaser to enter into this Sale Agreement,
Seller represents and warrants to Purchaser, with respect to the Servicing, each
Mortgage and each Related Account, as set forth in Sections 5.1 through 5.38
hereof.
5.1. Compliance with Law and Other Requirements.
Prior to the Transfer Date, neither Seller nor any Prior
Servicer or originator has violated in any material respect any applicable law,
regulation, ordinance, order, injunction or decree, or any other requirement of
any governmental body, court, Master Servicer, Investor, Agency or insurer or
any provision of any Servicing Agreement in connection with the origination or
servicing of the Mortgages, the violation of which would have a material adverse
effect on the Servicing or any of the Mortgages. Without limitation of the
foregoing, Seller, any prior Servicer or originator and any other party
originally named as payee under the promissory notes with respect to the
Mortgages have complied in all material respects, and Seller will continue to so
comply through the Transfer Date, with every applicable federal, state or local
law, statute and ordinance, and any rule, regulation or order issued thereunder,
pertaining to the subject matter of this Sale Agreement. Each party originally
named as payee under a promissory note and as mortgagee under the mortgage (or
deed of trust) with respect to a Mortgage was lender-approved by the related
Investor at all relevant times and was qualified to do business in the state in
which the applicable property is located as well as the states in which such
note or mortgage was executed if qualification was required of such party under
the law of the applicable state.
5.2. Filing of Reports.
Up to and including the Transfer Date, Seller, all Prior
Servicers and/or subservicers and any originator of any Mortgage, have filed or
will file all reports required under any Servicing Agreement, Master Servicer,
Investor or Agency requirements or otherwise, including, but not limited to,
reports to any Master Servicer, Investor, Agency, insurer and governmental
agencies having jurisdiction over the Servicing. Seller warrants that all
reports required to be made by the Internal Revenue Code of 1986, as amended,
have been filed. Seller shall provide to the mortgagors a year-end statement and
IRS Forms 1098, 1099 and 1041, as applicable, for the period ended on the last
Business Day preceding the Transfer Date. Seller shall provide to Purchaser
electronic or hard copies of any such year-end statements that have been
produced on any loan within seven (7) business days of Purchaser's request for
such statement.
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5.3. Related Accounts.
The Related Accounts are being maintained in accordance with
applicable law, the terms of the Servicing Agreements related to the Servicing
and the Mortgage documents and, where applicable, in accordance with the
requirements of any applicable Master Servicer, Investor, Agency,
insurers and other governmental agencies having jurisdiction. The Related
Accounts have been maintained using the Aggregate Accounting Methodology. Except
for payments that are past due under the terms of the Mortgage documents, all
escrow balances, if any, required by the Mortgage documents and paid to Seller
for the account of the mortgagors are on deposit in the appropriate escrow
accounts. The Seller warrants that it is not currently and has not been required
to pay any interest on any escrow/impound account.
5.4. Escrow Analysis.
The escrow portions of the Related Accounts, if any, have been
analyzed in accordance with RESPA guidelines. Seller has (i) analyzed the
payments for escrow deposits required to be deposited into the Related Accounts,
and (ii) with respect to any deficiency discovered at the time of such analysis
in the amount of the payments required to be made in respect thereof, adjusted
the amount of such payments so that, assuming all required payments are timely
made, such deficiency will be eliminated. Seller has refunded all overages in
accordance with HUD Regulation 4330.1. A hard copy of the latest annual escrow
analysis will be in each individual mortgage loan file prior to transfer.
5.5. Compliance with Insurance Contracts.
Seller, all Prior Servicers and any originator of any Mortgage
have complied with all obligations under all applicable insurance contracts,
including the private mortgage insurance contracts, which might adversely affect
any of the Servicing. Seller, all Prior Servicers and any originator of any
Mortgage have not taken any action or failed to take any action which might
cause the cancellation of or otherwise affect any of the private mortgage
insurance contracts relating to the Mortgages.
5.6. Title Insurance.
If required by any appropriate Master Servicer, Agency,
Investor or Servicing Agreement, an acceptable title policy, title report or
abstract of title has been issued for each Mortgage, insuring (in the case of
any title insurance policies) that the Mortgage, security deed or deed of trust
relating thereto is a valid lien on the property therein described, which has
not been modified except as permitted by such Agency, Investor, Master Servicer
or Servicing Agreement. Each such title policy or abstract of title extends
coverage to successors and assigns as additional named insureds of said policy
running to the benefit of the Seller, its successors or assigns. Each such title
report may be relied upon and enforced by the Seller, its successors or assigns.
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<PAGE> 21
5.7. Errors and Omissions Insurance.
Seller has in full force and effect an errors and omissions
policy with respect to its servicing operations and a Financial Institutions
Fidelity Blanket Bond in an amount sufficient to comply with applicable Agency
guidelines.
5.8. Sole Servicer.
Seller is the sole servicer of each of the Mortgages, except
for (i) those Mortgages for which Preferred Equities Corporation performs
certain servicing activities as a delegated agent of Seller and (ii) those
Mortgages serviced by Norwest as Master Servicer. Seller has used and shall
continue to use its best efforts to have Preferred Equities Corporation
cooperate in the performance of Seller's obligations under this Sale Agreement.
Seller represents and warrants that on and after the Transfer Date, neither
Seller nor Purchaser has any obligation to continue to engage Preferred Equities
Corporation to perform any servicing activities with respect to the Mortgages.
5.9. Authorizations.
No authorizations, approval or consent of or declaration of
filing including, but not limited to, any filing required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 as amended, with any
Federal State or local governmental authority or regulatory body, is necessary
or required of the Seller in connection with the execution and delivery of this
Agreement or the performance by the Seller, except approvals required by an
appropriate Master Servicer, Investor or Agency, if any, for the transfer of the
Servicing.
5.10. Capital.
As of the Transfer Date, the Seller's capital level is in full
compliance with applicable provisions of the Servicing Agreements and any
applicable Master Servicer, Agency or Investor requirements.
5.11. Title to the Servicing Rights and Escrow Accounts.
Seller is the lawful owner of the Servicing, is custodian of
any Related Accounts and has the sole right and authority to transfer the
Servicing as contemplated hereby, subject to any required Master Servicer,
Investor or Agency approvals, and is aware of no adverse claims to or
encumbrances on the Servicing or Related Accounts. The transfer, assignment and
delivery of the Servicing and of the Related Accounts in accordance with the
terms and conditions of this Agreement shall vest in Purchaser all rights as
servicer free and clear of any and all claims, charges, defenses, offsets, and
encumbrances of any kind or nature whatsoever, including, but not limited to,
those of Seller or Prior Servicers. The Servicing is not hypothecated, assigned
or pledged as collateral for any obligations of Seller.
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<PAGE> 22
5.12. Mortgage Documents.
The Mortgage documents are genuine, legally valid, binding
and enforceable obligations of the mortgagor and have been duly executed by a
mortgagor of legal capacity, and all insertions in any Mortgage document were
correct when made. The Mortgage documents upon origination were in compliance
with applicable law, any applicable provisions of the Servicing Agreements, and
any Master Servicer, Investor, Agency and insurer requirements and are complete
in all material respects with regard to origination and servicing activity.
Seller has no knowledge of any mortgagor defense to payment with respect to any
Mortgage, other than the Mortgages In Litigation set forth on Exhibit H.
5.13. Validity of Mortgages.
To the best of Seller's knowledge, no facts exist which would
impair the validity of the Mortgages, any other loan document or the Collateral.
Except as permitted by the Servicing Agreements and any applicable Master
Servicer, Investor or Agency requirements, the terms of each Mortgage have not
been modified, no party thereto has been released in whole or in part, and no
part of the mortgaged property has been released. The full original principal
amount of the Mortgage has been advanced to the mortgagor or paid to third
parties on its behalf in accordance with the Servicing Agreements and any
applicable Master Servicer, Agency or Investor guidelines, regulations and
requirements.
5.14. Physical Damage; Condemnation.
To the best of Seller's knowledge, there exists no (i)
physical damage to the Collateral securing the Mortgages from fire, flood,
windstorm, earthquake, tornado, hurricane, mudslide or any other similar
casualty, or (ii) notice of condemnation with respect to a mortgaged property,
which physical damage or condemnation would cause any Mortgage to become
delinquent or adversely affect the value or marketability of any Mortgage,
Servicing or the Collateral securing such Mortgage. If timely repair is
presently being undertaken with casualty insurance proceeds or an insurance
claim is being processed with the insurance company, no breach of this warranty
shall occur as long as there will be no diminution in the value of the
Collateral from the value it had prior to the casualty loss.
5.15. No Uninsured Mortgages.
To the best of Seller's knowledge, there are no uninsured
casualty losses or casualty losses where coinsurance has been or Seller has
reason to believe will be, claimed by the insurance company, or where the loss,
exclusive of contents, is greater than the net recovery from the hazard
insurance as identified under Exhibit F. No casualty insurance proceeds have
been used to reduce Mortgage Loan balances or for any other purposes except to
make repairs to the mortgage premises or as otherwise allowed by applicable
Servicing Agreements and any applicable Master Servicer, Investor or Agency
requirements, regulations and guidelines. Except as otherwise noted in the
related Mortgage File, all damages with respect to which casualty insurance
proceeds have been received by or through Seller have been properly repaired or
are in the process of such repair with such proceeds in accordance with
applicable Servicing
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Agreements and any applicable Master Servicer, Agency or Investor requirements,
regulations and guidelines.
5.16. Application of Funds.
Seller represents and warrants that it has not advanced or
otherwise recorded a payment not actually received with respect to any Mortgage.
Except as noted in the related Mortgage File, all monies received with respect
to each Mortgage have been properly accounted for
and applied in accordance with the related Mortgage documents, including all
remittances required to have been made to Investors. Seller shall be responsible
for resolving any disputes regarding the application of funds prior to the
Transfer Date, including, but not limited to, such a dispute between Seller and
The First National Bank of Boston.
5.17. Custodial Accounts.
Custodial accounts have been established and continuously
maintained in accordance with each Servicing Agreement, any applicable Agency
requirements, and other applicable laws and regulations, and all payments which
have been received in connection with each Mortgage have been duly and regularly
deposited to the custodial accounts, and all disbursements therefrom have been
made in accordance with said agreements, requirements, laws, and regulations.
5.18. Payoff Statements.
All payoff and assumption statements with respect to each
Mortgage provided by Seller, its agent, or any Prior Servicers to mortgagors or
their agents were complete and accurate.
5.19. Mortgage Files.
The Mortgage Files for each Mortgage will contain, upon
transfer of the Servicing to Purchaser, all items required by applicable
Servicing Agreements and any applicable Master Servicer, Investor or Agency
requirements, or such items shall be supplied by Seller in accord with
applicable Servicing Agreements and any Master Servicer, Investor or Agency
requirements. Except as reflected in the related Mortgage File, no waiver,
alteration or modification in any respect has been made by Seller of the terms
and provisions of any Mortgage note or other document relating to the Mortgage,
nor have such terms and provisions been subordinated, modified or released in
whole or in part by Seller, except as plainly shown on the face of such
documents and which change is acceptable to the related Investor.
5.20. Tax Identification Numbers.
The Seller hereby agrees to provide the certification of an
authorized officer certifying that the Seller has complied with all Internal
Revenue Service and U.S. Treasury Department requirements for due diligence in
obtaining and maintaining tax identification numbers for each Mortgage. In
addition to the foregoing, the Seller agrees to reimburse the Purchaser for any
and all penalties incurred because of Internal Revenue Service or Treasury
Department requirements for any missing tax identification numbers and forms
which are
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incurred as a result of infractions which occurred prior to the
Transfer Date. Seller shall provide to Purchaser, as Exhibit G to this
Agreement, a list of each loan being transferred which has an incorrect or
missing tax identification number.
5.21. Litigation.
There is no litigation or governmental investigation pending
(other than the Mortgages In Litigation described in Exhibit H hereto and such
servicer termination events as Seller has disclosed in the Offering Memorandum)
or, to the knowledge of Seller, threatened, nor is there any order, injunction
or decree outstanding against or relating to Seller, which could have a material
adverse effect upon the Servicing or Mortgages, nor does Seller know of any
material basis for any such litigation.
5.22. Mortgage Disbursement.
Each Mortgage was fully disbursed and made or consummated in
accordance with applicable law and regulations, a violation of which would have
a material adverse effect on the Servicing.
5.23. No Forgiven Payment.
No payment of principal or interest on any Mortgage has been
forgiven, suspended or rescheduled except as disclosed, and no waiver,
alteration or modification has been made to the terms or provisions of any
Mortgage except as allowed by applicable Servicing Agreements and any applicable
Master Servicer, Investor or Agency guidelines, regulations or requirements.
5.24. Unpaid Principal Balances.
The amount of the unpaid principal balance for each Mortgage
is correct as set forth on Exhibit A as of the date Exhibit A was prepared, and
there are no defenses, setoffs or counterclaims against such Mortgages, except
the Mortgages In Litigation set forth on Exhibit H. All payments received by
Seller with respect to any Mortgage have been remitted and properly accounted
for in accordance with the terms of applicable Servicing Agreements and any
applicable Master Servicer, Investor or Agency requirements.
5.25. Payment of Taxes, Insurance Premiums, etc.
If required by the related Servicing Agreement or Master
Servicer, Agency or Investor requirements, Seller shall pay or cause to be paid,
prior to the Transfer Date, all real estate, special assessments, water, sewer
or like tax bills issued by the jurisdiction (including all interest, late
payments and penalties in connection therewith) and relating to the property
securing the Mortgage, where such a tax bill has been received that is due and
owing without penalty to such taxing authority prior to or on the Transfer Date,
and those due thirty (30) days after the Transfer Date provided a tax bill has
been received prior to the Transfer Date. Seller shall provide to Purchaser a
list of those loans on which tax bills are due but despite Seller's best
efforts, it has been unable to obtain a bill to pay. Seller and any Prior
Servicers have paid when
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due all flood insurance premiums, hazard insurance premiums, ground rents and
mortgage insurance premiums. In the event Purchaser incurs any delinquent
interest, late penalties and/or payments as a result of either incorrect parcel
identification numbers or property addresses, Seller hereby indemnifies
Purchaser for such penalties and shall reimburse Purchaser in full for such
expenses up to and including the next billing period for each taxing entity.
5.26. Effective Insurance.
All required insurance policies have been issued by insurance
companies rated, at the time the related Mortgage was closed, B+ or higher as
determined by the then-current edition of Best's Key Rating Guide and remain in
full force and effect. Seller has complied with all insurance contract
obligations which, if not complied with, might have a material adverse effect on
the Servicing. To the best of Seller's knowledge each building or other
improvement located on the premises covered by each Mortgage is insured in the
manner required under applicable mortgagee clauses against (i) loss or damage by
fire and from such other insurable risks and against hazards as are set forth in
the standard extended coverage form of endorsement, and (ii) such other hazards
required by applicable Servicing Agreements, the related Master Servicer,
Investor or Agency, if any. To the best of Seller's knowledge, all premiums for
such insurance have been paid to date. Seller has no knowledge and has not
received notice that any of the said buildings or other improvements have been
affected in any substantial manner or suffered any material loss as a result of
any fire, explosion, accident, strike, riot, war, Act of God or act of a public
enemy.
5.27. Flood Insurance; Certifications.
To the best of Seller's knowledge, adequate flood hazard
insurance is in full force and effect as required under applicable Servicing
Agreements, laws, regulations or Master Servicer, Investor or Agency guidelines
in an amount representing coverage not less than the least of (i) the
outstanding principal balance, or (ii) the maximum amount of insurance which is
available under the Act. Seller agrees to effect a blanket assignment of the
"life-of-loan" flood monitoring contracts for all Mortgages, which flood
certifications currently are or will be in all of Mortgage Files.
5.28. Other Insurance.
All Mortgages, if any, for which mortgage/credit life
insurance, accidental death, disability, unemployment insurance, or any similar
insurance is paid as part of the mortgagor's monthly payment shall be identified
in Exhibit I.
5.29. Real Property Tax Identifications and Descriptions.
To the best of Seller's knowledge, all real property tax
identifications and property descriptions contained in any Mortgage document are
complete and legally sufficient.
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5.30. Compliance with Contractual Obligations.
Seller and all Prior Servicers and originators have complied
with all of their contractual obligations, including all Servicing Agreements
and applicable Master Servicer, Investor and Agency requirements, that relate to
the origination, underwriting or servicing of each Mortgage, the breach of which
might materially adversely affect the Servicing, except that Seller has
disclosed certain servicer termination events in the Offering Memorandum.
5.31. No Accrued Liabilities.
Except for such transfer and termination fees as may be
imposed in connection with the sale contemplated hereby and which are to be paid
by Seller, there are no accrued liabilities of Seller with respect to the
Mortgages or the Servicing, and Seller does not know of any events that could
result in any such accrued liabilities arising against Purchaser as successor to
the Servicing. All distributions due any Investor from Seller have been made,
and except for the dispute between Seller and The First National Bank of Boston
(which Seller is entirely responsible for resolving), there are no claims by any
Investor that Seller has defaulted in its obligations to any Investor regarding
such payments.
5.32. Foreclosure.
The foreclosure proceedings initiated with respect to each
Mortgage that is In Foreclosure at the Closing Date will have been properly
conducted in accordance with all applicable law, Servicing Agreements and any
related Master Servicer, Investor or Agency requirements, and to the best of
Seller's knowledge, no extraordinary costs or expenses will be required to
complete such foreclosure proceedings.
5.33. Servicing Agreements.
Each Servicing Agreement related to any Mortgage is in full
force and effect. Purchaser acknowledges that Seller has disclosed certain
servicer termination events in the Offering Memorandum. Seller has not received
notice from any Master Servicer that the Servicing with respect to any Mortgage
has been terminated or is proposed to be transferred to another servicer.
5.34. Investor and Master Servicer Approvals.
Seller has prepared all forms, documents and other information
requested by each Investor and Master Servicer and has obtained each Investor
and/or Master Servicer approval required by any applicable Servicing Agreements
or Master Servicer, Investor or Agency requirements, for the transfer of the
Servicing from Seller to Purchaser pursuant hereto. Such consents and approvals
are attached hereto as Exhibit J.
5.35. Non-Recourse Loans.
If a Mortgage has been sold to an Agency or Investor, such
Mortgage has been sold to the Agency or Investor with the notes endorsed on a
"non-recourse" basis, other than for a
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breach of representations or warranties, i.e., such Agency or Investor may not
demand repurchase because of mortgagor default and such Agency or Investor bears
the economic risk of a Mortgage default, unless the default results from a
breach of representations and warranties.
5.36. Agency and Investor Requirements.
Seller, all Prior Servicers or sub-servicers and any
originator of any Mortgage have performed all obligations to be performed under
applicable Agency and Investor requirements, if any, and no event has occurred
and is continuing which, but for the passage of time or the giving of notice or
both, would constitute an event of default thereunder. Seller and all Prior
Servicers have serviced the Mortgages and have kept and maintained complete and
accurate books and records in connection therewith, all in accordance with
applicable Agency and Investor requirements, if any. Seller further specifically
warrants that, as of both the Closing Date and the Transfer Date, no such Agency
or Investor has required that Seller indemnify such Agency or Investor in whole
or in part for any mortgage loans, except for breaches of representations and
warranties, and further that there are no outstanding purchase or
indemnification requests by such Agency or Investor, as of both the Closing Date
and the Transfer Date.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PURCHASER
As an inducement to Seller to enter into this Sale Agreement, Purchaser
represents and warrants as follows (it being acknowledged that each such
representation and warranty relates to material matters upon which Seller
relied, and it being understood that each such representation and warranty is
made to the Seller as of the Closing Date and the Transfer Date):
6.1. Due Incorporation and Good Standing.
Purchaser is a national banking association duly organized and
validly existing under the laws of the United States of America. Purchaser is
qualified or licensed to transact business in each jurisdiction in which its
activities with respect to the Mortgages or the Servicing require it to be
qualified or licensed.
6.2. Authority and Capacity.
Purchaser has all requisite power, authority and capacity to
enter into this Sale Agreement and to perform the obligations required of it
hereunder. The execution and delivery of this Sale Agreement and the
consummation of the transactions contemplated hereby have each been duly and
validly authorized by all necessary corporate action. This Sale Agreement
constitutes the valid and legally binding agreement of Purchaser enforceable in
accordance with its terms, except as the enforceability hereof may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance, or other laws
relating to or affecting the enforcement of creditors' rights or the collection
of debtors' obligations in general or by general equitable
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principles. No offset, counterclaim or defense exists to Purchaser's full
performance of this Sale Agreement.
6.3. Effective Agreement.
The execution, delivery and performance of this Sale Agreement
by Purchaser, its compliance with the terms hereof and the consummation of the
transactions contemplated hereby will not violate, conflict with, result in a
breach of, constitute a default under, be prohibited by or require any
additional approval under the certificate of incorporation, bylaws, or any
instrument or agreement to which Purchaser is a party or by which it is bound or
which affects the Servicing, or any state or federal law, rule or regulation or
any judicial or administrative decree, order, ruling or regulation applicable to
it or to the Servicing.
6.4. Good Standing.
Purchaser is, and shall be at all times this Sale Agreement is
in effect, in good standing with all appropriate regulatory authorities and
agencies to the extent that such good standing is necessary to ensure that
consummation of the transactions contemplated by this Sale Agreement is not
materially and adversely affected.
ARTICLE VII
COVENANTS
7.1. Notice to Mortgagors.
(a) Seller shall, in a manner that complies with all applicable
laws, prepare and mail to the mortgagor of each Mortgage no
later than fifteen (15) days prior to the Transfer Date a
letter advising the mortgagor of the transfer of Servicing to
Purchaser; provided, however, the content and format of the
letter shall have the prior written approval of Purchaser,
which shall not be unreasonably withheld. A copy of said
notice shall be placed in each Mortgage File prior to the
Transfer Date or Purchaser will accept by electronic means a
facsimile of each letter. If such a copy or facsimile is not
available, Seller can provide Purchaser with a certification
stating that all the letters were mailed in a timely manner
using all RESPA guidelines. Attached to the certification will
be a list of all mortgagors who received the letter.
(b) Purchaser shall mail to the mortgagor of each Mortgage a
letter meeting applicable legal requirements advising the
Mortgagor of the Transfer of Servicing to the Purchaser no
later than fifteen (15) days after the Transfer Date;
provided, however, the content and format of the letter shall
have prior approval of Seller, which shall not be unreasonably
withheld.
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(c) Purchaser and Seller will consult to coordinate the mailing of
each letter in a timely manner. Seller and Purchaser shall
divide the costs associated with preparing and mailing the
notices required pursuant to this Section 7.2.
7.2. Notice to Taxing Authorities and Insurance Companies.
If required by the terms of a Mortgage, no later than fifteen
(15) days prior to the Transfer Date, Seller shall, at Seller's expense,
transmit to the applicable taxing authorities or tax service company and
insurance companies and/or agents, notification of the assignment of the
Servicing for such Mortgage and instructions to deliver all notices, tax bills
and insurance statements, as the case may be, to Purchaser from and after the
Transfer Date. Seller will provide Purchaser with copies of those notifications
either by electronic means, on microfiche or hard copy, unless otherwise agreed
to by the parties.
7.3. Delivery of Servicing Records.
Seller shall forward to Purchaser no later than five (5)
Business Days following the Transfer Date all servicing records in the
possession of Seller relating to each Mortgage, including the information
enumerated in Exhibit K.
7.4. Delivery of Mortgage Documents.
Seller shall provide Purchaser no later than five (5) Business
Days following the Transfer Date the loan documentation described in Exhibit L
for the Mortgages.
7.5. Escrow/Impound Balances; Unearned Fees.
Seller shall provide Purchaser within five (5) Business Days
after the Transfer Date with immediately available funds in the amount of:
(a) Any escrow, suspense balances and other servicing account
balances associated with the Mortgages net of the collectible
receivables. Seller shall provide Purchaser with an accounting
statement of any such escrow and suspense balances and loss
draft balances sufficient to enable Purchaser to reconcile the
amount of such payment with the accounts of the Mortgages; and
(b) All collected but unearned assumption or service fees as of
the Transfer Date.
7.6. Remittances and Investor Reports After Transfer Date.
As applicable, Seller shall be responsible for making
appropriate remittances and filing reports, as required by each Servicing
Agreement and any applicable Master Servicer, Investor or Agency requirements,
covering servicing activity through July 31, 1998.
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7.7. Mortgage Payments Received After Transfer Date.
The amount of any Mortgage payments received by Seller on or
after the Transfer Date shall be forwarded to Purchaser in the form received
with any necessary endorsements by overnight mail within one (1) Business Day of
the date of receipt, for a period of sixty (60) days after the Transfer Date,
and thereafter by first class mail within one (1) Business Day of the date of
receipt. Seller will forward with such payments sufficient information to permit
processing of the payment by Purchaser.
7.8. Misapplied Payments.
Misapplied payments shall be processed as follows:
(a) Both parties shall cooperate in correcting misapplication
errors.
(b) The party receiving notice of a misapplied payment occurring
prior to the Transfer Date and discovered on or after the
Transfer Date shall immediately notify the other party.
(c) If a misapplied payment that occurred prior to the Transfer
Date cannot be identified by either party and the misapplied
payment has resulted in a shortage in a Mortgage account,
Seller shall be liable for the amount of such shortage. Seller
shall reimburse Purchaser for the amount of such shortage
within thirty (30) days after receipt of written demand
therefor from Purchaser.
(d) If a misapplied payment has created an improper Purchase Price
as the result of an inaccurate outstanding principal balance,
a check shall be issued to the party shorted by the improper
payment application within ten (10) Business Days after notice
thereof by the other party.
(e) Any check issued under the provisions of this Section 7.8
shall be accompanied by a statement indicating the purpose of
the check, the mortgagor and property address involved, and
the corresponding Seller and/or Purchaser account number.
7.9. Books and Records.
On the Transfer Date, the books, records and accounts of
Seller with respect to the Mortgages shall be in accordance with all applicable
Master Servicer, Investor and Agency requirements.
7.10. Compliance with Regulations.
On and after the Transfer Date, Purchaser shall comply with
all applicable laws and regulations with respect to, and which might affect, any
of the Mortgages or the Servicing.
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7.11. Related Accounts.
On and after the Transfer Date, the Related Accounts shall be
maintained in accordance with applicable law and the terms of the Mortgages and,
where applicable, in accordance with the regulations of the governmental
agencies having jurisdiction with respect thereto.
7.12. Servicing Transfer Guidelines.
Seller and Purchaser each agrees to use its reasonable best
efforts to implement the Servicing transfer contemplated herein in accordance
with this Sale Agreement, any applicable Servicing Agreement, applicable Master
Servicer, Investor or Agency requirements and all applicable federal and state
legislative or regulatory requirements.
7.13. Documents After Transfer Date.
Seller agrees to forward to Purchaser, on and after the
Transfer Date, any notice, tax bill, cancellation notice or other documentation
(identified with Purchaser loan number) involving any Mortgage by personal or
second day delivery for the first sixty (60) days following the Transfer Date
and thereafter, mailed by regular mail.
7.14. FEMA Notices.
If required by the related Servicing Agreement, Master
Servicer, Agency or Investor requirements, or any other rule, regulation or
statute, Seller agrees to provide to the Federal Emergency Management Agency and
HUD at Seller's expense any required notice of the transfer of Servicing
hereunder.
7.15. Short-Year Escrow Statements.
As applicable, and at Seller's expense, Seller shall be
obligated to provide to the mortgagor or mortgagors an escrow statement for each
Mortgage covering the portion of the calendar year through the last Business Day
preceding the Transfer Date.
7.16. Solicitation by Seller.
(a) On or after the Closing Date, Seller will not intentionally or
directly solicit, and Seller shall exercise reasonable efforts
to prevent any of its affiliates or related parties from
intentionally or directly soliciting by means of direct mail,
by telephone or a personal solicitation, a refinance of any
Mortgage or solicitation of related mortgage products, nor
will it directly or indirectly assist or be employed by or
participate with any other party in soliciting a refinance of
a Mortgage or otherwise solicit a mortgagor for optional
insurance or related mortgage products for the life of such
Mortgage. Seller will not be liable under this provision
should the mortgagor, correspondent or Prior Servicer solicit
the refinance, provided that the correspondent or Prior
Servicer is not a subsidiary, affiliate or related party of
Purchaser.
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(b) On or after the Closing Date, Seller shall not directly
solicit in connection with any Mortgage for the sale of any
financial product, including but not limited to
mortgage-related optional insurance, hazard insurance, flood
insurance and deposit accounts of all types.
(c) This Section 7.16 shall not be interpreted to prohibit
advertising of any sort intended for the general public, or
any response thereto.
(d) If permissible, Purchaser shall promptly notify Seller of any
requests for payoff information Purchaser receives pertaining
to the Mortgage Loans and provide such information as is
necessary from Seller to solicit for the sale of any financial
product offered by Seller.
7.17 Solicitation by the Purchaser; Payoff Information.
(a) On or after the Closing Date, Purchaser will not intentionally
or directly solicit, and Purchaser shall exercise reasonable
efforts to prevent any of its affiliates or related parties
from intentionally or directly soliciting by means of direct
mail, by telephone or a personal solicitation, a refinance of
any Mortgage, nor will it directly or indirectly assist or be
employed by or participate with any other party in soliciting
a refinance of a Mortgage. Purchaser will not be liable under
this provision should the mortgagor, correspondent or Prior
Servicer solicit the refinance, provided that the
correspondent or Prior Servicer is not a subsidiary or
affiliate of Purchaser.
(b) This Section 7.17 shall not be interpreted to prohibit
advertising of any sort intended for the general public, or to
any response thereto.
(c) As permitted by any applicable Servicing Agreement, Master
Servicer, Investor or Agency requirements, or Federal, state
or local statutes and regulations, Purchaser shall promptly
notify Seller if Purchaser receives any requests for payoff
information pertaining to the Mortgages, and Purchaser shall
supply to Seller such information as is necessary for Seller
to solicit for the sale of any financial product offered by
Seller.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser under this Sale Agreement are subject, at
Purchaser's option, to the satisfaction at or prior to the Transfer Date of each
of the following conditions:
8.1. Delivery of Servicing Data and Records.
Seller shall provide Purchaser with servicing information
consisting of a master loan tape, a history tape and a payee tape covering the
Mortgages. An initial set of these tapes
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shall be received by Purchaser no later than June 30, 1998. A final set of tapes
shall be sent to the following address:
City Mortgage Services
c/o City National Bank of West Virginia
25 Gatewater Road
Cross Lanes, West Virginia 25313
Attn: A. Lawrence Crimmins, Jr.
by August 2, 1998. If receipt by Purchaser of a final set of these tapes is
delayed beyond such specified dates, Seller will pay Purchaser $100 for each
calendar day of such delay. The tapes shall be accompanied with a hard copy
trial balance and related reports and shall include (i) the information set
forth in Exhibit K and (ii) evidence that Internal Revenue Service Forms 1098
and 1099 have been prepared and transmitted annually to all appropriate parties
during the period that Seller has owned the Servicing. Within five (5) days
after the Transfer Date Seller shall deliver to Purchaser the related servicing
files containing the documentation set forth in Exhibit L, provided that where
the original documents are held by a trustee or a custodian, the servicing file
shall include copies. Purchaser acknowledges that the delivery of Servicing data
on Exhibits K and L are made to the best of Seller's actual possession of items
listed on Exhibits K and L; Seller acknowledges that failure to provide the
information or documents on Exhibits K and L may give rise to a claim under
Section 10.2 to the extent such failure results in a loss, cost or other damage
to Purchaser. Purchaser shall have approved and accepted all documentation that
may be reasonably required to effectuate the transfer of the Servicing.
8.2. Correctness of Representations and Warranties.
The representations and warranties made by Seller in this Sale
Agreement are true and correct in all material respects and shall continue to be
true and correct in all material respects on the Closing Date and the Transfer
Date.
8.3. Compliance with Conditions.
All of the terms, covenants and conditions of this Sale
Agreement required to be complied with and performed by Seller at or prior to
the Transfer Date shall have been duly complied with and performed in all
material respects.
8.4. Preferred Stock Purchase Agreement.
The transactions contemplated by the Preferred Stock Purchase
Agreement, dated June 9, 1998, between Seller and Purchaser shall have been
consummated before the Closing Date.
8.5. Review of Mortgage Files.
During the Interim Period, Purchaser shall be provided between
the Closing Date and the Transfer Date during regular business hours reasonable
access to the books, records and accounts of Seller with respect to the
Mortgages, related Servicing Agreements, and any Related
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Accounts and shall have determined that the books, records, and accounts of
Seller with respect to the Servicing are acceptable and the information provided
to Purchaser is complete and correct in all material respects. Purchaser shall
use its reasonable best efforts not to disturb the conduct of Seller's business.
8.6. Servicing Agreements.
The related Servicing Agreements shall be in full force and
effect. Purchaser acknowledges that Seller has disclosed certain servicer
termination events as Seller has disclosed in the Offering Memorandum.
8.7. Documentation of Transfer.
Purchaser shall have approved and accepted all documentation
used to effectuate the transfer of Servicing contemplated by this Sale
Agreement, which approval and acceptance shall not be unreasonably withheld.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
The obligations of Seller under this Sale Agreement are subject, at the
option of Seller, to the satisfaction at or prior to the Transfer Date of each
of the following conditions:
9.1. Correctness of Representations and Warranties.
The representations and warranties made by Purchaser in this
Sale Agreement are true and correct and shall continue to be true and correct on
the Transfer Date.
9.2. Compliance with Conditions.
All of the terms, conditions and covenants of this Sale
Agreement required to be complied with and performed by Purchaser at or prior to
the Transfer Date shall have been duly complied with and performed.
9.3. Documentation of Transfer.
Purchaser shall have approved and accepted all documentation
used to effectuate the transfer of Servicing contemplated by this Sale
Agreement, which approval and acceptance shall not be unreasonably withheld.
9.4. Preferred Stock Purchase Agreement.
The transactions contemplated by the Preferred Stock Purchase
Agreement, dated June 9, 1998, between Seller and Purchaser shall have been
consummated before the Closing Date.
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9.5 Payment of Deposit by Purchaser.
Purchaser shall have paid to Seller the Deposit as set forth
in Section 3.2(a).
ARTICLE X
MISCELLANEOUS
10.1. Costs and Expenses.
Certain costs and expenses incurred in connection with the
transactions contemplated hereby shall be paid as follows:
(a) Seller shall pay all reasonable costs associated with the
transfer of the Servicing to Purchaser, including the costs of
shipping files to Purchaser and to Purchaser's custodian, any
recording or filing fees, Investor transfer fees, Seller
custodian charges, and all other costs associated with the
preparation, filing and due recording of Mortgage assignments
including intervening assignments, and any other expenses
incurred by Seller or its affiliates.
(b) Except as provided in (a) above, Purchaser shall pay the
expenses incurred by it or its affiliates in connection with
the transactions contemplated hereby, whether or not the
transactions hereby contemplated shall be consummated,
including but not limited to expenses incurred in conducting
its due diligence and the fees and expenses of its
professional advisors.
(c) Before, on and after the Transfer Date, Seller shall pay all
custodial fees relating to the Mortgage documents (except for
special expenses associated with Purchaser's servicing
activities and fees charged for the retrieval of documents for
Purchaser's use, if any).
10.2. Indemnification by Seller.
Seller shall indemnify and hold Purchaser harmless from and
shall reimburse Purchaser for any losses, damages, deficiencies, claims, causes
of action or expenses of any nature (including reasonable attorneys' fees)
incurred by Purchaser before or after the Closing Date that:
(a) Result from any material misrepresentation made by Seller in
this Sale Agreement or in any schedule, written statement or
certificate furnished to Purchaser by Seller pursuant to this
Sale Agreement, or any material breach or violation of any
representation or warranty made by Seller in this Sale
Agreement; as to any representation or warranty qualified to
Seller's knowledge, Seller shall be obligated to indemnify
Purchaser as to any such matter regardless of whether Seller
did or did not have knowledge of such matter;
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(b) Result from the material breach of any covenant or promise of
Seller contained in this Sale Agreement or in any schedule,
written statement or certificate furnished by Seller pursuant
to this Sale Agreement;
(c) Result from errors of improper servicing by Seller in
servicing any of the Mortgages prior to the Transfer Date
(including, without limiting this clause (c), any failure by
Seller to determine and apply correctly an adjustable interest
rate on any Mortgage) or litigation existing or pending on the
Closing Date involving the Servicing of any of the Mortgages
or litigation involving the servicing of any Mortgage arising
out of matters occurring prior to the Transfer Date;
(d) Arise out of the litigation currently pending against Seller
as described on Exhibit H hereto or out of such servicer
termination events as Seller has disclosed in the Offering
Memorandum; or
(e) Result from Seller's failure to comply with any Servicing
Agreement or applicable rules, regulations or guidelines of a
Master Servicer, Investor or Agency with respect to the
Servicing, including the dispute between Seller and The First
National Bank of Boston.
10.3. Indemnification by Purchaser.
Purchaser shall indemnify and hold Seller harmless from and
shall reimburse Seller for any losses, damages, deficiencies, claims, causes of
action or expenses of any nature (including reasonable attorneys' fees) incurred
by Seller and arising on or after the Transfer Date that:
(a) Result from any material misrepresentation made by Purchaser
in this Sale Agreement or in any schedule, written statement
or certificate furnished by Purchaser pursuant to this Sale
Agreement;
(b) Result from any material breach or violation of any
representation or warranty made by Purchaser in this Sale
Agreement, or the material breach of any covenant of Purchaser
contained in this Sale Agreement or in any schedule, written
statement or certificate furnished by Purchaser pursuant to
this Sale Agreement;
(c) Result from the Servicing of any Mortgage on or after the
Transfer Date, provided, however, that Purchaser shall not be
liable to Seller for any deficiencies in the performance of
any pool of Mortgages unless such deficiency is caused
primarily by Purchaser's (i) gross negligence, (ii) willful
misconduct or (iii) breach of the applicable Servicing
Agreement, Master Servicer, Investor or Agency requirements,
or Federal, state or local statute or regulation; provided,
however, that Purchaser shall have no indemnification
obligation to Seller in connection with any servicer
termination event that exists on or before the Transfer Date
pursuant to any such requirement or regulation; or
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(d) Result from litigation arising out of matters occurring on or
after the Transfer Date and involving the Servicing of any
Mortgage.
10.4. Failure to Deliver Documents.
The Seller acknowledges the necessity that Purchaser have by
the times specified herein possession of the records, documents and other
information that Seller is required hereunder to deliver to Purchaser.
Accordingly, without limiting any other remedy of Purchaser set out in this Sale
Agreement, Seller and Purchaser agree that, subject to Seller's right to notice
and opportunity to cure, if Purchaser incurs expense because of the failure of
Seller to deliver by the times specified herein the records, documents and other
information that Seller is required to deliver to Purchaser hereunder, Seller
will reimburse Purchaser for such expense to the extent that it is reasonably
incurred. Purchaser, after advising Seller in writing of such expenses and
describing how the amount was determined, may offset such expenses against the
Balance that it holds pursuant to Section 3.2(c) hereof.
10.5. Repurchase of Servicing.
If, at any time during the life of a Mortgage, Purchaser
discovers that any of the representations and warranties contained in Articles
IV and V hereof were not accurate in all material respects at the time they were
made by Seller and such inaccuracy results from Seller's failure to follow
applicable Servicing Agreements or any applicable Master Servicer, Investor or
Agency rules, regulations and guidelines, giving rise to a right of
indemnification under Section 10.2 hereunder, Purchaser shall give prompt
written notice of such fact to Seller, and, subject to Seller's having an
opportunity to cure any such defect or violation as is reasonable under the
circumstances then existing and is permitted by the applicable Servicing
Agreement, Master Servicer, Investor or Agency, Purchaser may elect to have
Seller, in lieu of indemnifying Purchaser, repurchase from Purchaser the right
to service those Mortgages that are affected by the inaccurate representation
and warranty. If, at any time during the life of a Mortgage, Purchaser is
required to repurchase (or is permitted to repurchase and elects to have Seller
repurchase) such Mortgage from an Investor, subject to Seller's right to notice
and opportunity to cure, Seller shall repurchase the Mortgage from Purchaser at
the Investor repurchase price (as determined under any applicable Investor
guidelines). When Seller is required to repurchase or reclaim Servicing of a
Mortgage from Purchaser, such repurchase shall be accomplished within the time
period permitted or required by the applicable Investor, and such repurchase
shall be accomplished within fifteen (15) Business Days following Seller's
receipt from Purchaser of written demand and support documentation from
Purchaser pursuant hereto. Upon completion of such purchase or repurchase or
reclaiming by Seller, Purchaser shall promptly forward to Seller all servicing
records and all documents relating to such repurchased Servicing.
10.6. Supplementary Information.
From time to time on, before or after the Transfer Date,
Seller shall furnish Purchaser such incidental information, which is reasonably
available to Seller, supplementary to the information contained in the documents
and schedules delivered pursuant hereto and shall
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<PAGE> 38
file such reports as Purchaser may reasonably request to service in accordance
with any applicable Servicing Agreement or Master Servicer, Investor or Agency
requirements.
10.7. Financial Statements.
Purchaser will provide to Seller, as soon as available, and in
any event within 90 days after the end of each fiscal year of City Holding
Company, certified financial statements of City Holding Company, prepared by
independent certified accountants in accordance with generally accepted
accounting principles. Purchaser will provide to Seller, upon Seller's request,
City Holding Company's unaudited quarterly financial statements.
10.8. Confidentiality.
Each party and its respective affiliates shall hold, and shall
cause their respective directors, officers, employees and authorized
representatives to hold, in strict confidence and not use or disclose to any
other person without the prior written consent of the other party all
information concerning customers or proprietary business procedures, servicing
fees or prices, policies or plans of the other party or any of its affiliates
received by them from the other party in connection with the transactions
contemplated hereby. Neither party shall take any action that would permit the
use of such information by a third party. Nothwithstanding this Section 10.8,
Purchaser shall be permitted to use or disclose such information as may be
necessary for Purchaser or its affiliates to solicit in connection with any
Mortgage for the sale of mortgage-related products not involving the extension
of credit secured by real estate.
10.9. Broker's Fees.
Seller shall be responsible for the fees, if any, of Friedman,
Billings, Ramsey & Co., Inc., its advisor, in connection with the transactions
contemplated by this Sale Agreement. Each party hereto represents and warrants
to the other that it has made no other agreement to pay any agent, finder,
broker or other representative any fee or commission in the nature of a finder's
or originator's fee arising out of or in connection with the subject matter of
this Sale Agreement. The parties hereto covenant with each other and agree to
indemnify and hold each other harmless from and against any such other
obligation or liability and any expense (including reasonable attorneys' fees)
incurred in investigation or defending any claim based upon the other party's
actions in connection with such other obligation or liability.
10.10. Survival of Representations and Warranties.
Each party hereto covenants and agrees that the
representations and warranties in this Sale Agreement, and in any document
delivered or to be delivered pursuant hereto, shall survive the Closing Date and
the Transfer Date.
10.11. Form of Payment to be Made.
Except as to payments that are rightfully deducted from funds
due to Purchaser pursuant to the terms of this Sale Agreement, Purchaser shall
pay to Seller the amounts required by Article III by wire of immediately
available Fed funds in accordance with Seller's instructions.
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10.12. Assignment.
Prior to the Transfer Date, Purchaser may assign its rights
under this Sale Agreement only upon (a) receipt of approval by Seller, which
Seller will not unreasonably withhold, and (b) reimbursement of Seller for all
costs reasonably incurred by Seller as a result of Purchaser's assignment.
10.13. Notices.
All notices, requests, demands and other communications that
are required or permitted to be given under this Sale Agreement shall be in
writing and shall be deemed to have been duly given upon the delivery, express
mail delivery or mailing thereof by registered or certified mail, return receipt
requested, postage prepaid:
(a) If to Seller, to:
Mego Mortgage Corporation
1000 Parkwood Circle, Suite 500
Atlanta, Georgia 30339
Attn: Jeffery S. Moore
with a copy to: Robert H. Chastain, Esquire
(b) If to Purchaser, to:
City Mortgage Services
c/o City National Bank of West Virginia
25 Gatewater Road
Cross Lanes, West Virginia 25313
Attn: A. Lawrence Crimmins, Jr.
with a copy to:
Hunton & Williams
951 E. Byrd Street
Richmond, Virginia 23219
Attn: Randall S. Parks
or to such other address as Purchaser or Seller shall have specified in writing
to the others in the manner specified above.
10.14. Waivers.
Either Purchaser or Seller may, by written notice to the
other:
(a) Extend the time for the performance of any of the obligations
or other transactions of the other; and
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<PAGE> 40
(b) Waive compliance with any of the terms, conditions or
covenants required to be complied with by the other hereunder.
The waiver by any party hereto of a breach of any provision of this
Sale Agreement shall not operate or be construed as a waiver of any other
subsequent breach or provision.
10.15. Entire Agreement; Amendment.
This Sale Agreement constitutes the entire agreement between
the parties with respect to the sale and purchase of the Servicing and
supersedes all prior agreements with respect thereto. This Sale Agreement may be
amended and any provision hereof waived, but only in writing signed by the party
against whom such amendment or waiver is sought to be enforced.
10.16. Binding Effect.
This Sale Agreement shall inure to the benefit of and be
binding upon the parties hereto and their successors and assigns. The parties
agree that, except as otherwise set forth herein, each may assign this Sale
Agreement to a third party so long as (i) such assignment cannot reasonably be
deemed to have an adverse effect on the other party, and (ii) written consent is
obtained from the other party prior to the assignment of the Sale Agreement.
Nothing in this Sale Agreement, express or implied, is intended to confer on any
person other than the parties hereto and their successors and assigns, any
rights, obligations, remedies or liabilities.
10.17. Headings.
Headings on the Articles and Sections in this Sale Agreement
are for reference purposes only and shall not be deemed to have any substantive
effect.
10.18. Applicable Laws.
This Sale Agreement shall be construed in accordance with the
laws of the State of West Virginia without reference to its principles of
conflict of laws.
10.19. Incorporation of Exhibits.
Exhibits A through L attached hereto shall be incorporated
herein and shall be understood to be a part hereof as though included in the
body of this Sale Agreement.
10.20. Counterparts.
This Sale Agreement may be executed in counterparts, each of
which, when so executed and delivered, shall be deemed to be an original and all
of which, taken together, shall constitute one and the same agreement.
10.21. Further Assurances.
Purchaser and Seller agree that each will, from time to time,
execute, acknowledge and deliver, or cause to be executed, acknowledged and
delivered, such
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<PAGE> 41
supplements hereto and such further instruments or documents as may reasonably
be required or appropriate to further express the intention, or to facilitate
the performance, of this Sale Agreement and consummation of the transactions
contemplated hereby.
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<PAGE> 42
IN WITNESS WHEREOF, each of the undersigned parties to this Sale
Agreement has caused this Sale Agreement to be duly executed in its corporate
name by one of its duly authorized officers, all as of the date first above
written.
SELLER: MEGO MORTGAGE CORPORATION
ATTEST: By:/s/ Jeff S. Moore
------------------------------------
Name: Jeff S. Moore
----------------------------------
/s/Robert H. Chastain
- ---------------------------------- Title: President
---------------------------------
PURCHASER: THE CITY NATIONAL BANK OF
WEST VIRGINIA
ATTEST: By:/s/ Robert A. Henson
------------------------------------
Name: Robert A. Henson
----------------------------------
/s/M.B. Carr
- ---------------------------------- Title: CFO
---------------------------------
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<PAGE> 1
EXHIBIT 10.82
SERVICING AGREEMENT
DATED AS OF JUNE 26, 1998
BETWEEN
MEGO MORTGAGE CORPORATION
AND
CITY MORTGAGE SERVICES, AS SERVICER
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I DEFINITIONS.............................................................................................1
ARTICLE II ENGAGEMENT OF SERVICER.................................................................................8
Section 2.01. Contract for Servicing; Possession of Servicing Files..............................................8
Section 2.02. Representations, Warranties and Covenants of the Corporation......................................10
Section 2.03. Representations, Warranties and Covenants of Servicer.............................................11
Section 2.04. Covenants Relating to Mortgage Loans..............................................................13
ARTICLE III ASSIGNMENT OF AGREEMENT..............................................................................13
Section 3.01. Assignment of Owners' Rights......................................................................13
Section 3.02. Delegation of Owners' Rights and Duties...........................................................14
Section 3.03. Delegation of Servicing Obligations...............................................................14
ARTICLE IV SERVICING DUTIES OF SERVICER..........................................................................15
Section 4.01. Servicing of Mortgage Loans.......................................................................15
Section 4.02. Collections and Remittances.......................................................................16
Section 4.03. Advances..........................................................................................17
Section 4.04. Reimbursement of Advances.........................................................................17
Section 4.05. Collection of Insurance Premiums, Taxes and Assessments...........................................18
Section 4.06. Assumptions.......................................................................................18
Section 4.07. Realization upon Defaulted Mortgage Loans.........................................................20
Section 4.08. Reports...........................................................................................21
Section 4.09. Maintenance of Hazard Insurance...................................................................22
Section 4.10. Release of Mortgage Loans.........................................................................24
Section 4.11. Maintenance of Fidelity Bond and Errors and Omissions Insurance...................................25
Section 4.12. Financial and Other Information...................................................................25
Section 4.13. Liability of Servicer for Expenses of Owners......................................................26
Section 4.14. Servicing Compensation............................................................................26
Section 4.15. Notification of Adjustments.......................................................................27
ARTICLE V TERMINATION AND LIABILITIES............................................................................28
Section 5.01. Limitation on Resignation and Assignment by the Servicer..........................................28
Section 5.02. Termination for Cause.............................................................................28
Section 5.03. Early Termination.................................................................................29
Section 5.04. Transfer of Terminated Servicer's Servicing.......................................................30
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C> <C>
Section 5.05. Access to Servicer's Records and Agreement to Pay Attorneys' Fees.................................30
Section 5.06. No Remedy Exclusive...............................................................................31
Section 5.07. Limitation on Liability of the Servicer and Others................................................31
Section 5.08. Merger or Consolidation of the Servicer...........................................................32
ARTICLE VI GENERAL PROVISIONS....................................................................................32
Section 6.01. Amendments, Changes and Modifications.............................................................32
Section 6.02. Governing Law.....................................................................................32
Section 6.03. Notices...........................................................................................32
Section 6.04. Severability......................................................................................33
Section 6.05. Further Assurances and Corrective Instruments.....................................................33
Section 6.06. Term of Agreement.................................................................................33
Section 6.07. Survival of Obligations and Covenants.............................................................33
Section 6.08. Forms and Reports.................................................................................33
Section 6.09. Indemnification...................................................................................33
Section 6.10. Servicer as Independent Contractor................................................................34
Section 6.11. Counterparts......................................................................................34
</TABLE>
Exhibit A Permitted Investments
Exhibit B Monthly Accounting Package
Exhibit C Form of Request for Release
Exhibit D Form of Annual Statement as to Compliance
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<PAGE> 4
SERVICING AGREEMENT
This SERVICING AGREEMENT, dated as of June 26, 1998 (the same, as
amended or supplemented from time to time, the "Agreement"), is made and entered
into by and between MEGO MORTGAGE CORPORATION, a Delaware corporation (the
"Corporation"), and CITY MORTGAGE SERVICES, a division of City National Bank of
West Virginia, a national banking association (together with its successors and
permitted assigns, the "Servicer").
WITNESSETH:
WHEREAS, Servicer is engaged in the business of servicing one-to-four
family mortgage loans for investors;
WHEREAS, Servicer desires to service certain Mortgage Loans (as defined
below) owned by the Corporation or, following the sale or pooling and
securitization thereof, by the purchasers or other subsequent owners thereof,
and the Corporation desires Servicer's services as such a servicer; and
WHEREAS, the Corporation and Servicer desire to execute this Agreement
to define each party's rights, duties and obligations relating to the servicing
of such Mortgage Loans.
NOW, THEREFORE, in consideration of these premises and of the mutual
agreements herein set forth, and for good and valuable consideration the receipt
of which is hereby acknowledged, the Corporation and Servicer each agree as
follows:
ARTICLE I
DEFINITIONS
The following terms shall have the respective meanings specified below,
and the definitions of such terms are equally applicable to the singular and
plural forms of such terms and to the masculine, feminine and neuter genders of
such terms.
125 MORTGAGE LOANS: Any Mortgage Loan as to which the original
principal amount plus the amount of any Liens senior in priority to the Mortgage
Loan exceeds the appraised value of the Mortgaged Property.
ADVANCE: Any of an Expense Advance or T&I Advance.
AFFILIATE: As to any Person, each other Person that directly, or
indirectly through one or more intermediaries, controls or is controlled by, or
is under common control with, the Person in question.
AGREEMENT: This Servicing Agreement, including all amendments or
supplements hereto.
<PAGE> 5
BOARDING: The electronic or manual transmission to and acceptance by
the Servicer of all servicing data pertaining to a Mortgage Loan to be serviced
by the Servicer pursuant to this Agreement.
BUSINESS DAY: Any day other than a Saturday, Sunday or other day on
which banking or thrift institutions located in Charleston, West Virginia,
Atlanta, Georgia, or Wyomissing, Pennsylvania, are authorized or obligated by
Law to be closed.
CODE: The Internal Revenue Code of 1986, as amended.
COLLECTION ACCOUNT: An Eligible Account maintained by the Servicer into
which are deposited all monies received by the Servicer on account of the
Mortgage Loans and other mortgage loans serviced by the Servicer.
DEBTOR RELIEF LAWS: Any applicable liquidation, bankruptcy,
conservatorship, insolvency, rearrangement, moratorium, reorganization, or
similar Laws affecting the rights of creditors generally from time to time in
effect.
DESIGNEE SERVICER: As defined in Section 5.04.
DUE DATE: For any Mortgage Loan, a date on which a Monthly Payment is
due thereon, excluding any applicable grace period.
DUE PERIOD: With respect to any Mortgage Loan and any Remittance Date,
the period commencing on the day following the second preceding Due Date and
ending at the close of business on the immediately preceding Due Date therefor.
ELIGIBLE ACCOUNT: One or more accounts (i) that are maintained with a
Qualified Bank, (ii) the deposits in which are fully insured by the FDIC, (iii)
the deposits in which are insured by the FDIC (to the limit established by the
FDIC), and, to the extent deposits in such account exceed amounts covered by
such insurance, such deposits are continuously invested in Permitted Investments
or (iv) that are trust accounts maintained with the trust department of a
federal or state chartered depository institution or trust company acting in its
fiduciary capacity.
ESCROW ACCOUNT: An account or accounts into which shall be deposited
all Escrow Payments received with respect to the Mortgage Loan(s) for which
funds are required to be escrowed.
ESCROW PAYMENTS: With respect to a Mortgage Loan, all moneys collected
to (i) obtain or maintain the related Insurance Policy, and (ii) pay taxes or
assessments or other charges related to the related Mortgaged Property that give
rise or that may give rise to liens on such Mortgaged Property when such taxes,
assessments or other charges become due.
EVENT OF DEFAULT: As defined in Section 5.02.
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<PAGE> 6
EXPENSE ADVANCE: With respect to a Mortgage Loan, an advance by
Servicer of its own funds, including advances to pay all Expenses, but not
including any T&I Advances or advances of Monthly Payments required in
connection with securitized Mortgage Loans.
EXPENSES: With respect to a Mortgage Loan, any amounts reasonably
incurred in connection with recovery on or release of such Mortgage Loan,
including but not limited to foreclosure fees and expenses, legal fees and
expenses, appraisal and property inspection fees and expenses, maintenance,
repair and rehabilitation of the related Mortgaged Property and the costs of
collection under any Insurance Policy and any other items agreed upon in writing
by the Corporation and the affected Owner.
FHLMC: Federal Home Loan Mortgage Corporation, or any successor
thereto.
FDIC: Federal Deposit Insurance Corporation, or any successor thereto.
FNMA: Federal National Mortgage Association, or any successor thereto.
FNMA SERVICING GUIDE: The guidelines and requirements established by
FNMA regarding the servicing of single-family, conventional mortgage loans owned
by FNMA, as amended from time to time by FNMA.
GINNIE MAE: Government National Mortgage Association.
HAZARD INSURANCE: With respect to a Mortgage Loan, (i) a standard
homeowner's fire insurance policy with extended coverage, which shall provide
coverage against loss sustained by fire and such other hazards as are
customarily covered by extended coverage standard hazard insurance policies in
the area where the related Mortgaged Property is located and (ii) where required
by the applicable Owner, a standard flood insurance policy, in each case naming
the originator of such Mortgage Loan and its successors and assigns as loss
payee under a standard mortgagee clause or such other insurance policies as are
required by the applicable Mortgage and related documents.
INSURANCE POLICY: A policy or policies of insurance covering a Mortgage
Loan or related Mortgaged Property, providing (without limitation) flood
insurance coverage, Hazard Insurance coverage, special hazard insurance
coverage, Mortgage Insurance or title insurance coverage, in each case issued by
an insurer meeting the requirements of FNMA.
INSURANCE PROCEEDS: Payments received with respect to a Mortgage Loan
under any Insurance Policy or bond maintained in connection with such Mortgage
Loan.
IRS: The Internal Revenue Service of the United States.
LAW: Any applicable statute, law, ordinance, regulation, order, writ,
injunction, or decree of the United States of America or any agency thereof or
any state or political subdivision or agency thereof or any court of competent
jurisdiction.
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<PAGE> 7
LEGAL MORTGAGE FILE: For any Mortgage Loan, the file, maintained by the
related Owner or the custodian or trustee acting on behalf of the related Owner,
containing the original related Mortgage Note, Mortgage and any assignments of
such Mortgage, and such other documents as may be included in a custodial file
held by any such Owner, custodian or trustee.
LIEN: Any security interest, pledge, lien, mortgage, assignment,
charge, participation, ownership, interest, or other encumbrance, security
arrangement or any adverse claim of any nature whatsoever.
LIQUIDATED MORTGAGE LOAN: A Mortgage Loan shall be a Liquidated
Mortgage Loan on the earlier of (i) the date as to which the Servicer has
determined, in accordance with the servicing procedures specified herein, that
all Liquidation Proceeds that it expects to recover from or on account of such
Mortgage Loan have been recovered and (ii) the date as to which any portion of
amounts due pursuant to such Mortgage Loan are 180 or more days past due.
LIQUIDATION DATE: With respect to a Mortgage Loan that has been
foreclosed, the date of the final receipt of Insurance Proceeds, Liquidation
Proceeds or other payments with respect to such Mortgage Loan.
LIQUIDATION PROCEEDS: Amounts, other than Insurance Proceeds, received
in connection with the liquidation of a defaulted Mortgage Loan, whether through
trustee's sale, foreclosure sale, condemnation, taking under power of eminent
domain, conveyance in lieu of foreclosure or condemnation, or otherwise.
LOAN SETUP FEE: A fee due to the Servicer from the Corporation for each
Mortgage Loan that it agrees to service hereunder as follows: if the Corporation
delivers to the Servicer up to 1000 Mortgage Loans in a calendar month, the Loan
Setup Fee shall be $10 per loan, if the Corporation delivers to the Servicer
between 1000 and 2000 Mortgage Loans in a calendar month, the Loan Setup Fee
shall be $7 per loan, and if the Corporation delivers to the Servicer over 2000
Mortgage Loans in a calendar month, the Loan Setup Fee shall be $0 per loan. The
Loan Setup Fee shall be retained by the Servicer as described in Section 4.14
hereof.
MONTHLY ACCOUNTING PACKAGE: The accounting reports set forth in Exhibit
B hereto.
MONTHLY PAYMENT: With respect to each Mortgage Loan, the scheduled
monthly payment of principal and interest due on each related Due Date under the
terms of the related Mortgage Note.
MOODY'S: Moody's Investors Service, Inc.
MORTGAGE: With respect to a Mortgage Loan, the instrument securing the
related Mortgage Note which creates a lien on the related Mortgaged Property,
subject only to permitted encumbrances.
MORTGAGE INSURANCE: With respect to a Mortgage Loan or group of
Mortgage Loans, any insurance relating to the Mortgagor's payments thereunder,
such as private mortgage insurance or mortgage pool insurance.
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<PAGE> 8
MORTGAGE LOAN SCHEDULE: For any Transfer Date, a schedule identifying
the Mortgage Loans the servicing of which is to be transferred to the Servicer
on such Transfer Date.
MORTGAGE LOANS: Any or all one-to-four family mortgage loans secured by
the related Mortgages, and a limited number of unsecured loans, which loans will
be or are being serviced pursuant to this Agreement, as specified in any
Mortgage Loan Schedule.
MORTGAGE NOTE: With respect to a Mortgage Loan, the promissory note or
other evidence of indebtedness of the related Mortgagor.
MORTGAGED PROPERTY: With respect to a Mortgage Loan, a fee simple
interest (or, only if the property underlying the Mortgage Loan is located in an
area where a leasehold interest is customary, a leasehold interest) in
residential real property, together with improvements thereon, subject to the
lien of the related Mortgage, which property includes a single family (one- to
four-unit) residence thereon.
MORTGAGOR: With respect to a Mortgage Loan, the obligor on the related
Mortgage Note.
NET LIQUIDATION PROCEEDS: With respect to any Mortgage Loan,
Liquidation Proceeds thereof (and any Insurance Proceeds collected in connection
with liquidation thereof), net of (i) any reasonable costs and expenses incurred
by Servicer in connection with the foreclosure of such Mortgage Loan and the
sale or other disposition of the related Mortgaged Property and (ii) any
previously unreimbursed Advances made by Servicer in respect of such Mortgage
Loan (other than any Expense Advances covered by clause (i) of this definition).
NON-RECOVERABLE ADVANCE: Any Advance made by the Servicer in respect of
any Mortgage Loan which, in the good faith judgment of Servicer, will not
ultimately be recoverable by Servicer from funds received on account of such
Mortgage Loan.
NOTE RATE: The rate of interest payable by any Mortgagor on the
outstanding principal balance of his or her Mortgage Note, as specified in (or
calculated as described in) such Mortgage Note.
OFFICER: Any duly authorized officer of Servicer involved in, or
responsible for, the servicing of Mortgage Loans.
ONE-TO-FOUR FAMILY MORTGAGE LOANS: Mortgage Loans with respect to which
the related Mortgaged Property consists of a single parcel of real property with
a detached single family residence erected thereon, or a two-to-four family
residential dwelling, or an individual residential condominium unit; provided,
however, that the related Mortgaged Property does not consist of a mobile home
or the land on which the same has been placed.
OPINION OF COUNSEL: A written opinion of counsel, who may be an
employee of or the ordinary or regular outside counsel to the party on behalf of
whom the opinion is being given, reasonably acceptable to each Owner to which
such opinion is addressed.
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<PAGE> 9
OWNER: For any Mortgage Loan, the nominal or beneficial owner thereof.
The Owner of each Mortgage Loan may be the Corporation, FNMA or any entity to
whom the Corporation has transferred such Mortgage Loan and assigned its rights
under this Agreement as to such Mortgage Loan pursuant to Section 3.01 in
connection with a Whole Loan Sale.
PERMITTED INVESTMENTS: Those investments identified on Exhibit A
hereto.
PERSON: An individual, corporation, partnership, association,
joint-stock company, trust, unincorporated organization or joint venture, or a
court or a government or any agency or political subdivision thereof.
PREPAYMENT PERIOD: With respect to any Mortgage Loan and any Remittance
Date, the calendar month preceding the month in which such Remittance Date
occurs.
PRIME RATE: The rate of interest published by The Wall Street Journal,
Northeast Edition, in the money rates section, as the "Prime Rate."
PRINCIPAL PREPAYMENT: Any Mortgagor payment of principal or other
recovery of principal on a Mortgage Loan (not including the principal portion of
Insurance Proceeds or Liquidation Proceeds) which is not to be applied to any
past, current or future Monthly Payment under the Mortgage Loan.
QUALIFIED BANK: City National Bank of West Virginia, provided that it
is "well-capitalized" under applicable regulations of the Office of the
Comptroller of the Currency and any bank whose long-term unsecured debt
obligations, short-term unsecured debt obligations or commercial paper are rated
in one of a Rating Agency's two highest applicable rating categories. A bank
shall be deemed to have the requisite rating if such bank is the principal
subsidiary of a bank holding company and the long-term unsecured debt
obligations, short-term unsecured debt obligations or commercial paper of such
bank holding company are rated in the requisite category. A bank shall be deemed
the principal subsidiary of a bank holding company if the bank's net worth
exceeds 66 2/3% of the consolidated net worth of such bank holding company.
RATING AGENCY: Any of Duff & Phelps Credit Rating Co., Fitch Investors
Service, Inc., Moody's Investors Service, Inc., or Standard & Poor's
Corporation.
REMIC: A "real estate mortgage investment conduit," as defined in the
REMIC Provisions.
REMIC PROVISIONS: Provisions of the federal income tax law relating to
real estate mortgage investment conduits, which provisions appear at Sections
860A through 860G of Subchapter M of Chapter 1 of Subtitle A of the Code, and
related provisions and regulations and administrative pronouncements promulgated
thereunder, as the foregoing may be in effect from time to time, or, if such
provisions are no longer effective, such provisions of the applicable tax
statute as shall have the same operation or effect as the preceding provisions.
REMITTANCE DATE: The 10th day of each month (or the preceding Business
Day if such 10th day is not a Business Day).
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<PAGE> 10
REO PROPERTY: A Mortgaged Property that has been acquired by the Owner
of the related Mortgage Loan upon foreclosure or similar termination of the
Mortgagor's rights under such Mortgage Loan. For purposes of the Servicer's
obligation, to make Advances, a Mortgage Loan shall be deemed to continue to be
outstanding even after foreclosure thereon until final disposition of any
related REO Property.
S&P: Standard & Poor's Corporation.
SECURITIZATION: Any sale or other transfer of Mortgage Loans to a trust
or other entity for the purpose of supporting pass-through certificates,
collateralized mortgage obligations or other similar securities issued by such
entity or the creation of a pool of Mortgage Loans otherwise used to support
such securities.
SERVICING FEE: Such term as defined in Section 4.14.
SERVICING MORTGAGE FILE: With respect to a Mortgage Loan, the file
containing (i) copies of certain documents executed or delivered in connection
with the closing of such Mortgage Loan, including without limitation copies of
the Mortgage Note, Mortgage and any assignments of such Mortgage, and (ii) any
servicing documentation which relates to such Mortgage Loan of the type
customarily included by mortgage loan servicers in their servicing files.
SERVICING PROCEDURES: Such term as defined in Section 2.04(e).
SERVICING RECORDS: With respect to a Mortgage Loan, all of the
Servicer's servicing records, including without limitation all servicing files,
documents, records, data bases, computer tapes (other than proprietary computer
software of Servicer), reports of payment histories and other reports relating
to the servicing of such Mortgage Loan, but excluding any servicing
documentation which is included in the Servicing Mortgage File.
SUPPLEMENTAL FEES: With respect to any Mortgage Loan, late charges,
modification fees, subordination fees, release fees, insufficient funds charges
and related amounts received in respect of a Mortgage Loan in connection with
the servicing thereof, which amounts are not attributable to principal or
interest on such Mortgage Loan or to Escrow Payments relating thereto.
T&I ADVANCE: With respect to any Mortgage Loan, the advance by the
Servicer of its own funds to pay Escrow Payments.
TRANSFER DATE: Transfer Date(s) for any Mortgage Loans shall be the
date or dates upon which such Mortgage Loans are Boarded and the Servicer begins
to perform the servicing of such Mortgage Loans in accordance with the terms set
forth herein.
WHOLE LOAN SALE: Any sale or other transfer of Mortgage Loans from the
Corporation to an investor not involving a Securitization.
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<PAGE> 11
ARTICLE II
ENGAGEMENT OF SERVICER
SECTION 2.01. CONTRACT FOR SERVICING; POSSESSION OF SERVICING FILES.
(a) Contract for Servicing. The Corporation hereby contracts with the
Servicer exclusively to perform the servicing of all Mortgage Loans originated
or otherwise acquired by it on or after August 1, 1998 (or an earlier date
mutually agreeable to the Servicer and the Corporation), that are not sold by
the Corporation on a servicing released basis, in accordance with this
Agreement, which Mortgage Loans shall be identified on Mortgage Loan Schedules
delivered by the Corporation to the Servicer from time to time. Each Owner of
Mortgage Loans, by executing a counterpart hereof or otherwise affirmatively
adopting this Agreement, affirms its retention of Servicer to perform such
servicing on the terms and conditions set forth herein. The Corporation agrees
to encourage purchasers of loans sold by it on a servicing released basis to
retain Servicer to service such Mortgage Loans.
(b) Mechanics of Transfer. On or before the Transfer Date for any
Mortgage Loan, the Owner shall, with respect to the Mortgage Loans on the
related Mortgage Loan Schedule, deliver, in an electronic format agreed upon by
both parties, a schedule of all Mortgage Loans for which the servicing is being
transferred, and the Servicer will confirm the Boarding and Servicer's
then-customary quality control checks at the time of Boarding.
(c) Possession of Servicing Mortgage Files. On or before the related
Transfer Date, the Owner of the related Mortgage Loans shall, at Owner's expense
and upon the request of the Servicer, cause each Servicing Mortgage File to be
delivered to the Servicer, except such Servicing Mortgage Files or parts thereof
that have been deposited with the Owners' custodian. Each Servicing Mortgage
File delivered to the Servicer shall be held by the Servicer in order to service
the Mortgage Loans pursuant to this Agreement and shall be held in trust by the
Servicer for the benefit of the related Owner as the owner thereof. The
Servicer's possession of any portion of the Mortgage Loan documents shall be at
the will of the Owner for the sole purpose of facilitating servicing of the
related Mortgage Loan pursuant to this Agreement, and such retention and
possession by the Servicer shall be in a custodial capacity only. The ownership
of each Mortgage Note, Mortgage, and the contents of the Servicing Mortgage File
shall be vested in the Owner and the ownership of all records and documents with
respect to the related Mortgage Loan prepared by or which come into the
possession of the Servicer shall immediately vest in the Owner and shall be
retained and maintained, in trust, by the Servicer at the will of the Owner in
such custodial capacity only. The portion of each Servicing Mortgage File
retained by the Servicer pursuant to this Agreement shall be segregated from the
other books and records of the Servicer and shall be appropriately marked to
reflect the ownership of the related Mortgage Loan by its Owner. The Servicer
shall release from its custody the contents of any Servicing Mortgage File
retained by it only in accordance with this Agreement.
(d) Delivery of Documents to Owners. The Servicer shall forward to the
related Owner (or its designee) original documents evidencing any assumption,
modification, consolidation or extension of any Mortgage Loan entered into in
accordance with this Agreement within one week of their execution; provided,
however, that the Servicer shall provide the related
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Owner (or its designee) with a certified true copy of any such document
submitted for recordation within one week of its execution, and shall provide
the original of any document submitted for recordation or a copy of such
document certified by the appropriate public recording office to be a true and
complete copy of the original, and applicable recording information, within 120
days of its submission for recordation.
(e) Term of Corporation's Obligations. It is understood by the
Corporation and the Servicer that the Corporation will convey to the Servicer
the servicing of Mortgage Loans pursuant to this Agreement until the earlier to
occur of (i) the date on which the aggregate outstanding principal balance of
Mortgage Loans being serviced by the Servicer pursuant to this Agreement is one
billion dollars ($1,000,000,000) (the "Initial Period Termination Date") and
(ii) the date on which the Servicer is terminated for cause. It is further
understood that the Servicer shall have no right to service any Mortgage Loans
purchased by the Corporation after the Initial Period Termination Date, unless
the Corporation and the Servicer mutually agree to extend this Agreement.
(f) Servicing Changes. If, following the date of this Agreement, the
Corporation shall propose to (i) originate loans other than those currently
originated or otherwise acquired by it in the ordinary course of business which
loans would have servicing requirements different from those set forth herein;
and/or (ii) otherwise alter any aspect of its origination activities or
servicing requirements that, in each case, Servicer determines in good faith
would have a material effect on its obligations under this Agreement (any such
amendment, supplement, discontinuation, introduction or other alteration being
herein referred to as a "Servicing Change"), the Corporation shall give the
Servicer written notice of each such proposed Servicing Change accompanied, as
applicable, by a written description of each proposed loan type or amendment,
supplement or other alteration to the origination or servicing activities, which
description shall in each case be sufficiently clear, comprehensive and detailed
to provide a reasonable basis for the training of individuals who would be
required to follow the procedures described thereby (such written notice is
referred to herein as a "Servicing Change Proposal").
Within sixty (60) Business Days following the Servicer's receipt of a
Servicing Change Proposal, the Servicer shall either (i) accept such Servicing
Change Proposal by delivering to the Corporation a written notice of acceptance,
in which case the Servicing Change shall become effective on the date specified
in the Servicing Change Proposal, or (ii) deliver a written notice of
non-acceptance to the Corporation stating that (a) the performance of services
hereunder by the Servicer in accordance with such proposed Servicing Change
would result in an increase in the cost to and burden upon the Servicer of
performing services hereunder and/or (b) such proposed Servicing Change cannot
be practicably implemented. Any such notice shall contain a description of the
increased cost or burden or, as appropriate, the reason or such
impracticability. In the event the Servicer timely delivers to the Corporation
any such notice of non-acceptance in response to a Servicing Change Proposal,
such proposed Servicing Change shall not become effective unless and until
agreed upon in writing by both the Corporation and such party.
In the event that Servicer advises the Corporation that it is not
willing to enter into a Servicing Change with the Corporation at the price and
on the terms and conditions set forth in the Servicing Change Proposal, or fails
to advise the Corporation of its intentions within the sixty
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(60) day period referred to in the paragraph above, the Corporation shall be
free for a period of sixty (60) days following the expiration of such sixty (60)
day period to enter into a servicing agreement with a third party at a price and
on other terms and conditions no more favorable to such third party than those
set forth in the Servicing Change Proposal; provided, however, that the
Corporation shall forward to Servicer a complete copy of the servicing agreement
as negotiated with such third party at least five (5) business days before it is
signed.
Before the Corporation may enter into a servicing agreement with a
third party at a price or on other terms and conditions more favorable to such
third party than those set forth in the Servicing Change Proposal, the
Corporation must provide a description of the price and the material terms and
conditions (the "Terms") as proposed to such third party, and the Servicer may
accept or reject the Terms within five (5) business days thereafter. If the
Servicer accepts the Terms, the Servicer and the Corporation shall negotiate and
enter into a servicing agreement based upon the Terms.
As of the date hereof, the Corporation is not originating or otherwise
acquiring mortgage loans for the purpose of Securitization with Freddie Mac or
Ginnie Mae. A proposal by the Corporation to originate or otherwise acquire
mortgage loans for Securitization with Freddie Mac or Ginnie Mae would be a
Servicing Change.
SECTION 2.02. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
CORPORATION.
The Corporation hereby makes the following representations, warranties
and covenants to Servicer as of the date hereof and as of each Transfer Date,
and such representations, warranties and covenants shall survive transfer of
servicing of the related Mortgage Loans to Servicer on such Transfer Date:
(a) The Corporation is duly organized and validly existing under the
Laws governing its formation and existence, has all licenses necessary to carry
on its business as it is now being conducted, and is duly authorized and
qualified to transact in each applicable state any and all business contemplated
by this Agreement; the Corporation has all requisite corporate power and
authority to execute and deliver this Agreement and to perform in accordance
herewith and therewith; the execution, delivery and performance of this
Agreement by the Corporation and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by the
Corporation; this Agreement evidences the valid and binding obligation of the
Corporation, enforceable against the Corporation in accordance with its terms,
except as enforcement hereof or thereof may be limited by applicable Debtor
Relief Laws and general principles of equity, whether considered in a proceeding
at law or in equity;
(b) Any necessary approval of the transactions contemplated by this
Agreement from each federal or state regulatory authority having jurisdiction
over the Corporation has been obtained; there are no actions or proceedings
pending or affecting the Corporation that would adversely affect
its ability to perform hereunder;
(c) The consummation of the transactions contemplated by this Agreement
are in the ordinary course of business of the Corporation and will not result in
the breach of any term
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or provision of the certificate of incorporation or other organizational
documents of the Corporation 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 agreement, indenture or loan or credit
agreement or other instrument to which the Corporation or its properties are
subject, or result in the violation of any Law to which the Corporation or its
properties are subject; and
(d) To the best knowledge of the Corporation, with respect to each
Mortgage Loan, the related Mortgage Note and Mortgage are genuine and each is
the legal, valid and binding obligation of the maker thereof, enforceable in
accordance with its terms, except as enforceability may be limited by Debtor
Relief Laws and by general principles of equity, whether considered in a
proceeding at law or in equity.
SECTION 2.03. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SERVICER.
The following representations, warranties and covenants are made by
Servicer to each Owner on the date of this Agreement and shall be ongoing and in
effect throughout the term of this Agreement, except that the representations,
warranties and covenants made in Sections 2.03(h) and 2.03(i) are made only as
of the date hereof:
(a) Servicer is duly organized, validly existing and in good standing
under the Laws governing its formation and existence, has all licenses necessary
to carry on its business as it is now being conducted, and is duly authorized
and qualified to transact in each applicable state any and all business
contemplated by this Agreement and is in compliance with the Laws of each such
state to the extent necessary to ensure the enforceability of the Mortgage Loans
and the terms of this Agreement; Servicer has all requisite 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 Servicer; this Agreement has been duly executed and
delivered and evidences the valid and binding obligation of Servicer,
enforceable in accordance with its terms, except as enforcement hereof may be
limited by applicable Debtor Relief Laws and general principles of equity,
whether considered in a proceeding at law or in equity;
(b) Any necessary approval of the transactions contemplated by this
Agreement from each federal or state regulatory authority having jurisdiction
over Servicer has been obtained; there are no actions or proceedings pending or
affecting Servicer that would adversely affect its ability to perform hereunder;
(c) The consummation of the transactions contemplated by this Agreement
are in the ordinary course of business of Servicer and will not result in the
breach of any term or provision of the certificate of incorporation or bylaws 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 agreement, indenture or loan or credit agreement or other instrument
to which Servicer or its property is subject, or result in the violation of any
Law to which Servicer or its property is subject;
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(d) From time to time Servicer will report, as more fully set forth in
this Agreement, information relating to the Mortgage Loans to the applicable
Owners, and will do every act and thing which may be reasonably necessary or
required to perform its duties under this Agreement;
(e) Servicer agrees that for so long as it shall continue to serve in
the capacity contemplated under the terms of this Agreement, Servicer (i) will
not dissolve or otherwise dispose of all or substantially all of its assets and
(ii) will not voluntarily consolidate with or merge into any other entity or
permit one or more other entities to consolidate with or merge into it;
provided, however, Servicer may dispose of its assets, consolidate with or merge
into any other entity or permit one or more other entities to consolidate with
or merge into it if (A) such transferee, resulting or surviving entity (if other
than the Servicer) expressly assumes, in a form approved by such Owner, all
obligations of Servicer under this Agreement (including any accrued liabilities
thereunder), (B) such transferee, resulting or surviving entity (if other than
the Servicer) would not then be in default under any material provision of this
Agreement, and (C) such transferee, resulting or surviving entity would have a
net worth of at least $32,000,000. In connection with any disposition of assets,
consolidation or merger which is permitted pursuant to the preceding sentence,
such Owner shall release Servicer in writing from the obligations so assumed.
Such release shall be effective upon the assumption by the transferee, resulting
or surviving entity (if other than the Servicer) of all obligations of Servicer
under this Agreement, it being understood that, unless such Owner otherwise
agrees in writing, Servicer shall not be released from any liabilities arising
from events, actions or omissions by Servicer prior to the date of such
assumption;
(f) No information, certificate of an Officer, statement furnished in
writing, or report required hereunder, delivered to such Owner, will, to the
best knowledge of Servicer after due inquiry, contain any untrue statement of a
material fact or omit a material fact necessary to make the information,
certificate, statement or report not misleading;
(g) The Servicer can perform each and every covenant contained in this
Agreement;
(h) There is no action, suit, proceeding or investigation pending or
threatened against the Servicer which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Servicer, or in any
material impairment of the right or ability of the Servicer to carry on its
business substantially as now conducted, or in any material liability on the
part of the Servicer, or which would draw into question the validity of this
Agreement or of any action taken or to be taken in connection with the
obligations of the Servicer contemplated herein, or which would be likely to
impair materially the ability of the Servicer to perform under the terms of this
Agreement; and
(i) The Servicer has not dealt with any broker or agent or anyone else
who might be entitled to a fee or commission in connection with this transaction
other than the Owner.
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SECTION 2.04. COVENANTS RELATING TO MORTGAGE LOANS.
With respect to each Mortgage Loan, the following covenants of Servicer
to the related Owner shall be in effect with respect to each Mortgage Loan for
so long as such Mortgage Loan is being serviced pursuant to this Agreement:
(a) The terms, covenants and conditions of the Mortgage Loan will not
be waived, altered, impaired or modified by Servicer in any respect other than
as permitted by Section 4.01(b) hereof;
(b) Servicer will not do any act or omit to do any act which creates or
would create an offset, defense or counterclaim to the Mortgage Loan, including
the obligation of the Mortgagor to pay the unpaid principal of and interest on
the Mortgage Loan;
(c) Any fees charged and retained by Servicer with respect to the
Mortgage Loan, including Servicing Fees, Loan Setup Fees and any Supplemental
Fees, will be in compliance with all applicable Laws and industry standards;
(d) Servicer will comply with federal disclosure laws, the fair credit
reporting act and other Laws which impose requirements, restrictions or
conditions on Servicer in connection with the servicing of Mortgage Loans
hereunder; and
(e) The servicing practices to be used by the Servicer with respect to
each Mortgage Loan will be in all respects in compliance with all federal, state
and local laws, rules, regulations and requirements in connection therewith and
will be consistent with the procedures and standards by which Servicer services
loans held for Servicer's own account and the accounts of its affiliates (the
"Servicing Procedures") otherwise customary in the mortgage origination and
servicing business for loans of the same or similar size and type. Prior to the
initial Transfer Date, Servicer shall provide to the Corporation a copy of the
Servicing Procedures as currently in effect. Servicer acknowledges that the
Corporation has entered into this Agreement in reliance upon the Servicer's
independent status, the adequacy of its servicing facilities, plan, personnel,
records and procedures, and its integrity, reputation and financial standing.
ARTICLE III
ASSIGNMENT OF AGREEMENT
SECTION 3.01. ASSIGNMENT OF OWNERS' RIGHTS.
The Servicer acknowledges and agrees that, from time to time, the
Corporation (or a subsequent Owner) may assign, in writing, its right, title and
interest in and to one or more Mortgage Loans and, in connection therewith, its
rights under this Agreement with respect to such Mortgage Loans, and the
Servicer hereby consents to each such assignment. The Corporation (or any
assigning subsequent Owner) shall provide Servicer with prior written notice of
any such assignment, together with a schedule identifying the Mortgage Loans so
assigned.
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SECTION 3.02. DELEGATION OF OWNERS' RIGHTS AND DUTIES.
The Corporation or any other Owner may assign, from time to time to the
extent permitted by Law, all or a portion of the authority, rights and/or duties
of the Corporation or such Owner under this Agreement to its duly appointed
agents, including consultants, custodians or other Persons retained by the
Corporation or such Owner. Upon Servicer's receipt of written notice of the
taking of any action pursuant to this Section 3.02, Servicer shall treat any
such assignee as if it were the applicable Owner in accordance with the terms
set forth in such assignment, until notice to Servicer of any modification or
termination of such assignment. Servicer acknowledges and consents to such
actions, waives any further notice thereof and agrees to be bound thereby.
SECTION 3.03. DELEGATION OF SERVICING OBLIGATIONS.
Servicer may engage one or more subservicers to perform Servicer's
obligations under this Agreement with the prior written consent of each Owner of
Mortgage Loans to be subserviced by such subservicer. An Owner's consent to an
appointment of a subservicer as referred to in the preceding sentence shall not
be unreasonably withheld or delayed; provided that the subservicer makes the
representations, warranties and covenants made by the Servicer in Section 2.03
above, in each case to the extent applicable to it. It is understood that the
Servicer may not assign its rights hereunder to a successor Servicer without the
prior written consent of each affected Owner.
Servicer shall be entitled to delegate computational, data processing,
collection and foreclosure duties and real estate tax collection and payment
duties to subcontractors selected by Servicer without giving any notice or
obtaining any consents from Owners, provided that Servicer may not delegate a
material portion of its obligations under this Agreement without the prior
written consent of each affected Owner, which shall not be unreasonably withheld
or delayed. The Servicer shall assure that each entity retained to provide
services as specified in this section is fully licensed and holds all required
federal, state or local government franchises, certificates and permits
necessary to conduct the business in which such entity is engaged and that such
entity is reputable, knowledgeable, skilled and experienced and has the
necessary personnel, facilities and equipment required to provide the services
for which it is retained. Any entity retained in accordance with this paragraph
shall be retained solely for Servicer's account and at Servicer's sole expense
and shall not be deemed to be an agent or representative of the Owners of the
related Mortgage Loans, their successors or assigns.
No assignment, delegation, subcontract, authorization or appointment by
Servicer of a subservicer or any other subcontractor or delegatee shall relieve
Servicer of the liability and responsibilities with respect to any of its
duties, liabilities or obligations so assigned, delegated, subcontracted,
authorized or appointed, unless the related Owner otherwise consents in its sole
discretion to release Servicer from the liability and responsibilities with
respect thereto. Servicer may not pledge or encumber its rights or privileges
hereunder without the prior written consent of each affected Owner, which such
consent may be withheld in the Owner's sole discretion.
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ARTICLE IV
SERVICING DUTIES OF SERVICER
SECTION 4.01. SERVICING OF MORTGAGE LOANS.
(a) General Servicing Standards. Servicer shall manage, service and
administer the Mortgage Loans from and after their respective Transfer Dates in
conformity with the terms of this Agreement in accordance with the best
interests of the Owners thereof. In fulfilling the foregoing duties and in
administering and enforcing Mortgages, Mortgage Notes and related security
documents, and in fulfilling all of its other obligations under this Agreement,
Servicer will exercise a degree of skill and care that is consistent with
mortgage loan servicing standards exercised by prudent mortgage lending
institutions which service mortgage loans of the same type as the Mortgage Loans
in the jurisdictions where the respective related Mortgaged Properties are
located and, to the extent consistent with the foregoing, in the same manner in
which it services similar loans for its own portfolio or the portfolios of its
Affiliates and with a view to the maximization of timely recovery of principal
and interest on the Mortgage Loans, but without regard to: (i) any relationship
that the Servicer or any Affiliate of the Servicer may have with the related
Mortgagor, (ii) any obligations of the Servicer to make Advances relating to a
Mortgage Loan, or (iii) the Servicer's right to receive compensation for its
services hereunder. Servicer shall have full power and authority consistent with
the aforementioned standards, acting alone and/or through agents and designees
as permitted by Section 3.03 above, to do any and all things it may deem
necessary or desirable in connection with such servicing and administration;
provided, however, that to the extent Servicer is prohibited by any applicable
rule, regulation, judicial or administrative determination or other order
applicable to it from carrying out any of its obligations or duties provided for
herein or in any document contemplated herein, such failure shall not constitute
a breach of this Agreement.
(b) Collection Procedures. Servicer shall make reasonable and prudent
efforts to collect all payments called for under the terms and provisions of the
Mortgage Loans, consistently with the standards set forth above. Consistently
with the foregoing, Servicer in its discretion may (1) waive any late payment
charge or any assumption fees or other fees that may be collected in the
ordinary course of servicing a Mortgage Loan and (2) arrange with a Mortgagor a
schedule for the payment of due and unpaid principal and interest, if in the
Servicer's reasonable and prudent determination such waiver, modification,
postponement or indulgence is in the best interest of the Owner; provided,
however, that unless the Servicer has obtained the prior written consent of the
Owner, the Servicer shall not permit any modification with respect to any
Mortgage Loan that would change the mortgage interest rate, defer or forgive the
payment of principal or interest, reduce or increase the outstanding principal
balance (except as such balance is reduced by Servicer's collection of payments
of principal) or change the final maturity date on such Mortgage Loan if such
modification would involve more than $1,000.
(c) Amendment of Servicing Requirements. Subject to Section 2.01(e),
Servicer agrees that an Owner may modify or supplement the servicing
requirements set forth herein from time to time as they relate to its Mortgage
Loans, provided that such modifications or supplements (i) are not imposed
retroactively and (ii) are reasonably necessary or appropriate as a result of
requirements relating to the prospective Whole Loan Sale of such Mortgage Loans
or
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are reasonably necessary or appropriate to clarify or specify certain matters
relating to the servicing of the Mortgage Loans.
(d) Reconstitution upon Securitization. In connection with any
Securitization of any Mortgage Loans serviced under this Agreement, Servicer
agrees that it will enter into new servicing agreements (contained in pooling
and servicing agreements, agency guides or otherwise) with the owners of such
securitized Mortgage Loans, provided that the servicing provisions of, and the
representations, warranties and covenants of Servicer contained in, any such
agreement are substantially in accordance with those found in the servicing
agreements customarily entered into by such owners and servicers in connection
with similar Securitizations provided, however, that if the Corporation retains
any interest in the Securitization, the Servicing and collection procedures used
by the Servicer will be no less rigorous than those standards set forth in
Sections 4.01(a) and (b) hereof. The Corporation and the Owners will encourage
the retention of Servicer to servicer the Mortgage Loans to be included in any
such Securitization.
SECTION 4.02. COLLECTIONS AND REMITTANCES.
(a) Servicer shall segregate on its records the various funds payable
to Owners hereunder.
(b) All moneys collected by Servicer pertaining to the Mortgage Loans,
net of any applicable servicing fees, shall initially be deposited into the
Collection Account. Funds on deposit in the Collection Account may be invested
at Servicer's direction in Permitted Investments. Servicer shall be entitled to
retain all income and gain from investment of funds. The Servicer shall deposit
from its own funds the amount of any losses incurred on any Permitted
Investments in which any such funds are invested into the respective accounts to
which such losses relate, promptly after such losses are incurred.
(c) On each Remittance Date, Servicer shall withdraw from the
Collection Account (1) amounts necessary to pay itself the Servicing Fee and any
applicable related fees for such month attributable to the related Mortgage
Loans out of collections in respect of interest on such Mortgage Loans (to the
extent not otherwise retained by Servicer from such collections) and (2) amounts
necessary to reimburse itself or a predecessor Servicer for Non-Recoverable
Advances made in respect of the related Mortgage Loans in accordance with
Section 4.04(b) below and any Loan Setup Fees and other service fees earned
pursuant to Section 4.14 below, and shall retain such amounts or remit such
amounts to the Person entitled thereto, as the case may be. After making the
withdrawals and remittances described above on any Remittance Date, Servicer
shall withdraw from the Collection Account all amounts collected in respect of
the Monthly Payments due on the related Mortgage Loans during the Due Period
ending in the month in which such Remittance Date occurs, net of the Servicing
Fee and any applicable related fees, with respect to such Mortgage Loans
withdrawn or retained by Servicer as described above (together with any late
Monthly Payments collected by Servicer during such Due Period which were due in
any prior Due Period), and shall remit such amounts at the related Owner's
direction.
(d) Servicer shall remit to the related Owner all Principal Prepayments
in full, Insurance Proceeds received in connection with liquidation of the
related Mortgage Loan (to the extent not
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required by the related Mortgage to be applied to the repair of the related
Mortgaged Property) and Liquidation Proceeds (in the case of any such Principal
Prepayment, Insurance Proceeds and Liquidation Proceeds described above, net of
Expenses incurred by the Servicer, which are to be reimbursed to the Servicer,
and net of previously unreimbursed Advances made by Servicer in respect of such
Mortgage Loan).
(e) The Servicer shall be entitled to retain for its own account all
Supplemental Fees with respect to a Mortgage Loan.
(f) All remittances of funds by Servicer to an Owner pursuant to this
Agreement shall be made by wire transfer of immediately available funds on or
before 2:00 p.m. Charleston, West Virginia time on the applicable Remittance
Date (or other required date of remittance in the case of remittances required
under Section 4.02(d) above); provided, however, that if any remittance is
specified herein to be made on a day which is not a Business Day, such
remittance shall be made on the Business Day immediately preceding such day.
SECTION 4.03. ADVANCES.
(a) Generally. The Servicer shall not be required to make Advances
except as expressly set forth herein or in a written agreement between Servicer
and the Owner.
(b) T&I Advances. In the event that the Escrow Payments, if required,
with respect to a Mortgage Loan or REO Property are insufficient to pay
insurance premiums or taxes or assessments or other charges that give rise to or
may give rise to liens on the related Mortgaged Property when such taxes,
assessments or other charges become due, and such amounts are not otherwise paid
by the Mortgagor, Servicer shall advance such amounts on behalf of the
Mortgagor.
(c) Expense Advances. The Servicer shall advance all Expenses related
to recovery on or liquidation of Mortgage Loans (including the costs of
disposition of any related REO Properties and costs of any collection or
foreclosure proceedings relating to any Mortgage Loans).
(d) Non-Recoverable Advances. Notwithstanding the foregoing, Servicer
shall not be required to make any Advance of less than $1,000 that it determines
in its good faith judgment would be, if made, a Non-Recoverable Advance, unless
otherwise instructed by the Owner in writing. If Servicer determines in its good
faith judgment that that any Advance of $1,000 or more would be a
Non-Recoverable Advance, Servicer shall notify the Owner and shall not be
required to make such Advance except out of funds provided specifically for such
purpose to Servicer (in which case, Servicer shall not be entitled to
reimbursement of such Advance pursuant to Section 4.04).
SECTION 4.04. REIMBURSEMENT OF ADVANCES.
(a) If Servicer shall have made an Advance in respect of a Mortgage
Loan or REO Property, it shall be entitled to recover the amount of such Advance
by retaining such amount from subsequent collections of payments on such
Mortgage Loan, or from subsequent collections
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of income on any related REO Property, and in any event from Liquidation
Proceeds of such Mortgage Loan or REO Property, or from Insurance Proceeds
collected in connection with liquidation of such Mortgage Loan or REO Property.
(b) If an Advance previously made in respect of a Mortgage Loan becomes
a NonRecoverable Advance, and Liquidation Proceeds, Insurance Proceeds and other
amounts collected in respect of such Mortgage Loan are insufficient to reimburse
the Servicer for such Advance after the Mortgage Loan or the related REO
Property has been liquidated, Servicer shall thereafter be entitled to reimburse
itself out of any monies collected with respect to any Mortgage Loans being
serviced by Servicer for the Owner of such Mortgage Loan prior to any remittance
of such monies to such Owner.
SECTION 4.05. COLLECTION OF INSURANCE PREMIUMS, TAXES AND ASSESSMENTS.
(a) If funds are being held in the Collection Account with respect to a
Mortgage Loan, all moneys received as Escrow Payments by Servicer with respect
to such Mortgage Loan shall be held by Servicer for the benefit of the related
Owner and the applicable Mortgagor. Servicer shall maintain a record of the
source of each Escrow Payment and the total of such payments on deposit from
each Mortgagor. Servicer shall obtain bills for taxes, insurance and other items
related to the Mortgage Loan and effect payments thereof with checks drawn on
the Collection Account, prior to each applicable due date.
(b) If any Mortgagor does not make or is not required to make Escrow
Payments for tax and insurance expenses and for payment of any other assessments
or charges which could give rise to a lien on the related Mortgaged Property if
not paid when due, Servicer shall be responsible for causing the related
Mortgagor to pay taxes, insurance premiums and other similar items prior to
their respective due dates in order to protect the interest of the related Owner
in the related Mortgaged Property. If a Mortgagor fails to make such payments in
a timely manner, the Servicer shall make a T&I Advance in the amount of such
delinquent payments pursuant to Section 4.03(a) above.
SECTION 4.06. ASSUMPTIONS.
In connection with an assumption of a Mortgage Loan by a transferee of
a Mortgaged Property, the Servicer shall process such assumption as provided for
in the Mortgage Note or the Mortgage Note assumption rider and shall verify
that:
(a) no material term of the Mortgage Note (including, but not limited
to, the mortgage interest rate, the amount and/or timing of the payment of
principal or interest, the outstanding principal balance, the remaining term to
maturity, the gross margin, the index, the maximum lifetime mortgage interest
rate, the minimum lifetime mortgage interest rate, and any periodic rate cap or
any periodic payment cap) has been changed in connection with such assumption;
(b) the new Mortgagor qualifies for credit similar to that extended to
the original Mortgagor under the Corporation's underwriting guidelines;
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(c) where applicable, the respective primary mortgage insurer and/or
the respective pool insurer has in advance approved in writing such assumption
of such Mortgage Loan by the assumptor and such Mortgage Loan will continue to
be insured by such primary mortgage insurer and/or such pool insurer;
(d) the documents relating to such assumption (i) create a valid and
enforceable promise to pay the unpaid principal balance of the related Mortgage
Loan, together with interest thereon in accordance with the related Mortgage
Note by the new Mortgagor, and (ii) the related Mortgage continues to evidence a
valid and perfected lien on the related Mortgaged Property without any change in
seniority; and
(e) such Mortgage Loan will continue to evidence a valid security
interest upon the related Mortgaged Property without any change in seniority.
In connection with an assumption of a Mortgage Loan and in accordance
with the provisions of the related Mortgage Loan documents, upon verification of
the matters described above, and upon ten days prior written notice to the
related Owner, (i) the Servicer may approve such assumption and (ii) the
Servicer may release the previous Mortgagor from liability (but only with the
prior written approval (where applicable) of the primary mortgage insurer and/or
the pool insurer, unless such approval is precluded by the terms of the Mortgage
Loan documents).
Subject to applicable law or regulation and the provisions of the
related Mortgage Note, the Servicer may charge the Mortgagor and retain a
reasonable and customary assumption fee. Such fee is receivable only from the
Mortgagor directly and may not be withdrawn from any of the custodial accounts
maintained hereunder.
In connection with an assumption of a Mortgage Loan, the Servicer shall
make all disclosures required by applicable law.
In the case of any assumption in connection with which the Owner of the
related Mortgage Loan is required to sign any assumption agreement, substitution
agreement, supplement to the Mortgage Note or Mortgage, or instrument of release
releasing the conveying Mortgagor from liability in connection with the related
Mortgage Loan, in order to effect such assumption, Servicer shall deliver or
cause to be delivered such documents to the applicable Owner for execution. Upon
receipt of such documentation, the Owner shall execute such documents and return
them to Servicer for delivery to the Mortgagor and the assumptor.
Upon the closing of the transactions contemplated by any documents
relating to an assumption of a Mortgage Loan, Servicer shall cause the originals
of the assumption agreement, the release (if any), or the modification or
supplement to the Mortgage Note or Mortgage to be delivered to the custodian of
the Legal Mortgage File relating to such Mortgage Loan, and Servicer shall
retain copies of such documents for retention in the Servicing Mortgage File for
such Mortgage Loan.
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If a Mortgagor transfers a Mortgaged Property without the transferee
entering into an assumption of the Mortgagor's Mortgage Loan as contemplated
above, Servicer shall take all necessary actions to enforce any "due-on-sale"
clause contained in such Mortgage Loan.
SECTION 4.07. REALIZATION UPON DEFAULTED MORTGAGE LOANS.
(a) Foreclosure. Servicer shall be responsible for determining the
necessity of instituting foreclosure or other similar action with respect to
each Mortgage Loan in accordance with prudent residential mortgage loan
servicing standards relating to mortgage loans comparable to such Mortgage Loans
generally accepted within the servicing industry. Servicer shall inspect
Mortgaged Properties relating to delinquent Mortgage Loans as required by its
collection procedures (or shall cause such Mortgaged Properties to be so
inspected). The Servicer shall notify any related primary mortgage insurer or
pool insurer of its decision to pursue foreclosure proceedings regarding a
Mortgage Loan. Each foreclosure or similar proceeding shall be conducted by
Servicer in accordance with general industry standards, this Agreement,
applicable Law and all requirements of any insurer providing insurance on such
Mortgage Loan. Servicer shall make available to the Owner any court pleadings,
requests for trustee's sale or other documents necessary for the foreclosure or
trustee's sale in respect of a Mortgaged Property or for any legal action
brought to obtain judgment against any Mortgagor on a Mortgage Note or Mortgage
or to obtain a deficiency judgment, or to enforce any other remedies or rights
provided by a Mortgage Note or Mortgage or otherwise available to the related
Owner against a Mortgagor at law or in equity. The Owner shall execute and
redeliver, as required, any such documents to Servicer as soon as reasonably
practicable after its receipt thereof.
Servicer shall not commence foreclosure or other similar proceedings
with respect to a Mortgage Loan in cases where it has actual knowledge that the
related Mortgaged Property is contaminated by hazardous wastes or hazardous
substances and where, in the good faith judgment of Servicer, the liabilities
that would be imposed on the related Owner with respect to such contamination as
a result of such action would exceed the Net Liquidation Proceeds that could be
realized from such Mortgage Loan. Servicer shall notify the related Owner at any
time it obtains actual knowledge of such a situation regarding any Mortgaged
Property. Servicer shall have no affirmative duty or obligation to determine
whether a Mortgaged Property is situated on a toxic waste site or is
contaminated by hazardous wastes or hazardous substances and shall not be liable
for any liabilities imposed on such Owner as a result of the existence of
hazardous wastes or hazardous substances on any REO Property.
(b) REO Property.
1. General. Servicer shall manage or oversee the management of
property received through foreclosure and Servicer shall handle or oversee the
sale of any such property, consistently with the terms of this Agreement and
prudent management standards relating to real estate comparable to the REO
generally accepted within the servicing industry. The Servicer shall prepare and
file reports, as necessary, relating to foreclosure and abandonment of REO
Property in accordance with Section 6050J of the Code.
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2. Holding of REO Property. After the foreclosure of a Mortgage
Loan and prior to disposition of any related REO Property, Servicer shall assist
in the marketing, property management and sale or other disposition of the
related Mortgaged Property. Servicer shall not be entitled to receive any
Servicing Fees in respect of any REO Property. However, in consideration for its
assistance in the marketing, property management and disposition of REO
Properties, Servicer shall be paid a REO Property processing fee, upon the final
disposition of the REO Property, of 5% of the price at which the REO Property is
disposed of, which shall be treated as a selling expense for such REO Property
as to which an Expense Advance was made and shall be deducted and retained by
Servicer from the Liquidation Proceeds realized upon the sale or disposition of
such Mortgaged Property. Notwithstanding any Owner's acquisition of title to a
Mortgaged Property and cancellation or satisfaction of the related Mortgage
Loan, such Mortgage Loan shall (except as otherwise expressly provided herein)
be considered to be an outstanding Mortgage Loan until such time as the related
REO Property is sold and the related Liquidation Proceeds have been remitted to
the related Owner, with the same outstanding principal balance and the same
Monthly Payments, Servicing Fees and Advances continuing to be due thereunder as
if it had not been foreclosed. REO Property acquired by an Owner may be leased,
improved or otherwise used for the production of income by or on behalf of the
Owner.
Income received by Servicer in respect of any REO Property in any month
shall be treated as receipt of collections first in respect of Monthly Payments
then due and unpaid on the related Mortgage Loan and second as Principal
Prepayments of the related Mortgage Loan. Any proceeds of an REO Property shall
be accounted for separately from other amounts held in the Collection Account.
3. Disposition. Servicer shall make all reasonable efforts to
dispose of any REO Property as soon as practicable after the related Owner's
acquisition thereof. Servicer shall notify the Owner of all offers received with
respect to such REO Property, and the Owner shall approve or reject such offers
within five (5) business days. If the Owner does not respond within five (5)
business days, Servicer may, at its option, sell the REO Property on the terms
of the notice provided to the Owner or upon such terms as Servicer determines in
good faith to be more favorable.
After the foreclosure of a Mortgage Loan and disposition of any related
REO Property, the related Owner shall be entitled to any net gain from the sale
or disposition of the related Mortgaged Property which shall equal (i) the Net
Liquidation Proceeds therefrom less (ii) (A) the outstanding principal balance
of such Mortgage Loan, plus (B) any accrued and unpaid interest on the amount
specified in clause (ii)(A).
SECTION 4.08. REPORTS.
On or before the 10th day of each month, Servicer shall submit to each
Owner a Monthly Accounting Package for the Mortgage Loans owned by such Owner
and relating to the preceding Due Period (as such report relates to Monthly
Payments) and relating to the preceding Prepayment Period (as such report
relates to Principal Prepayments, Liquidation Proceeds, Insurance Proceeds and
other unscheduled payments, and to losses incurred on Mortgage Loans). In
addition, in connection with any funds remitted on a date other than a
Remittance Date,
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Servicer shall furnish a report in connection with such remittance specifying
the Mortgage Loan or Mortgage Loans to which such funds relate and a description
of such funds on a loan-by-loan basis (i.e., whether such funds constitute
principal, interest, Principal Prepayments, Insurance Proceeds, Liquidation
Proceeds, etc.). As required by applicable Law, Servicer shall report
information related to the Mortgage Loans as necessary to permit the related
Mortgagors and each Owner properly to file all required IRS returns. Servicer
shall also provide to each Owner such other reports or information regarding the
related Mortgage Loans as may be reasonably requested by such Owner.
SECTION 4.09. MAINTENANCE OF HAZARD INSURANCE.
If required by the applicable Mortgage and related documents, Servicer
shall require that each Mortgagor obtain and maintain Hazard Insurance for each
Mortgage Loan. Such Hazard Insurance must provide coverage in an amount equal to
the lesser of (i) the unpaid principal balance of the covered Mortgage Loan and
(ii) the full insurable value of the related Mortgaged Property. Servicer also
shall cause Hazard Insurance to be maintained on any REO Property providing
coverage in an amount at least equal to the amount necessary to avoid the
application of any co-insurance clause contained in the policy providing such
coverage. If the improvements securing a Mortgage Loan are located at the time
of origination of such Mortgage Loan in a federally designated special flood
hazard area and FNMA would require flood insurance thereon, Servicer shall cause
flood insurance (to the extent commercially available) to be maintained in
respect thereof to the extent permitted by the applicable Mortgage and related
documents (and in respect of any REO Property relating to such Mortgage Loan).
Such flood insurance shall provide coverage in an amount equal to the lesser of
(i) the amount required to compensate for any loss or damage to the Mortgaged
Property on a replacement cost basis and (ii) the maximum amount of such
insurance available for the related Mortgaged Property under the national flood
insurance program (assuming that the area in which such Mortgaged Property is
located is participating in such program).
Servicer shall retain custody of such policies and renewals thereof, or
proof of the existence thereof (which proof may consist of an appropriate entry
in Servicer's computer records), and, upon request, shall issue a certificate of
an Officer to the Owner certifying that the requirements of this Section have
been met. Servicer's obligation to require such insurance to be maintained shall
be absolute, regardless of any failure or refusal by any Mortgagor to pay in
timely fashion any premium due thereon, and Servicer agrees, with respect to the
Mortgage Loans, to indemnify and hold the applicable Owner harmless against any
loss suffered by such Owner as a result of the absence of Hazard Insurance or
flood insurance or the insufficiency of coverage provided by such Hazard
Insurance or flood insurance to protect such Owner's interest with respect to
any Mortgaged Property. Servicer shall use due diligence to ascertain the
existence of any loss or damage to each Mortgaged Property and, upon obtaining
knowledge thereof, shall immediately notify the applicable insurer. Each Hazard
Insurance and flood insurance policy maintained with respect to a Mortgage Loan
shall provide for payment to Servicer, on behalf of the applicable Owner and the
related Mortgagor, in the event of loss, and payments for losses under any such
policy shall be collected by Servicer and held in accordance with this Agreement
until disbursed or remitted in accordance herewith.
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Any amounts collected under any such policies (other than amounts to be
applied to the restoration or repair of the related Mortgaged Property or REO
Property or amounts released to the Mortgagor in accordance with Servicer's
normal servicing procedures) shall be deposited in the Collection Account. Any
Insurance Proceeds (other than amounts used for restoration or repair or
required by applicable law to be paid to the related Mortgagor) collected by
Servicer shall be accounted for as though such proceeds constituted a Principal
Prepayment except that, if such Insurance Proceeds are received in connection
with the liquidation of the related Mortgage Loan, they shall be accounted for
as though they were Liquidation Proceeds.
Any cost incurred by Servicer in maintaining any such insurance shall
not be added to the amount owing under the Mortgage Loan, regardless of whether
the terms of the Mortgage Loan so permit. Any such costs shall be recoverable by
Servicer out of payments by the related Mortgagor or out of Insurance Proceeds
or Liquidation Proceeds of the related Mortgage Loan.
If Servicer obtains and maintains a Lloyd's of London Equishield policy
in substantially the form provided to the Corporation prior to the date of this
Agreement or a blanket policy issued or an insurance company rated by Best's
Rating Service in one of its two highest categories, insuring against hazard
losses on all of the Mortgage Loans and REO Properties, it shall conclusively be
deemed to have satisfied its obligation with regard to maintenance of Hazard
Insurance. It is understood and agreed that such a blanket policy may contain a
deductible clause, in which case Servicer shall deposit into the Collection
Account, in no event more than two Business Days after its receipt of the
related Insurance Proceeds, the amount of any loss on a Mortgaged Property or
REO Property not payable under the blanket policy because of such deductible
clause, but that would have been covered by a Hazard Insurance policy had one
been maintained with respect to such property. Servicer agrees to present, on
behalf of itself and the applicable Owner, claims under any such blanket policy.
Servicer shall take all commercially reasonable action necessary to maintain in
force any such blanket policy for such period as it is Servicing or managing any
Mortgage Loans or REO Properties.
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SECTION 4.10. RELEASE OF MORTGAGE LOANS.
(a) Payment in Full. Upon receipt by Servicer of the payment in full of
any Mortgage Loan, Servicer will immediately notify the applicable Owner
(subject to Section 4.10(c) below) of such situation (which notification shall
include a statement to the effect that all amounts received or to be received in
connection with such payment that are required to be deposited in the Collection
Account have been or will be so deposited) and shall request delivery to it of
the related Legal Mortgage File. Upon receipt of such notification and request,
the Owner shall release (or cause to be released) the related Legal Mortgage
File to Servicer as soon as reasonably practicable and execute and deliver to
Servicer any request for reconveyance, deed of conveyance or reconveyance or
release or satisfaction of mortgage, or other instrument in the form provided by
Servicer releasing the lien of the related Mortgage, or any power of attorney
authorizing Servicer to execute any of the foregoing instruments (such
instruments having been prepared by Servicer), together with the related
Mortgage Note with written evidence of cancellation thereof as directed by
Servicer.
(b) Requests for Release of Mortgage Files. From time to time as is
appropriate for the servicing or foreclosure of any Mortgage Loan, Servicer
shall deliver to the related Owner (subject to Section 4.10(c) below) a
certificate of an Officer requesting that all, or any document constituting part
of, the Legal Mortgage File for such Mortgage Loan be released to Servicer and
certifying as to the reason for such requested release. With any such
certificate, Servicer shall deliver to the Owner a request for release signed by
an Officer on behalf of Servicer in substantially the form set forth in Exhibit
C hereto (a "Request for Release"). As soon as reasonably practicable after
receipt of the foregoing, the Owner shall deliver (or cause to be delivered) the
appropriate Legal Mortgage File or portion thereof requested to Servicer
(subject to the provisions of any applicable custodial agreement, if the related
Mortgage Loan is subject thereto). Owner shall reimburse Servicer for all
reasonable out-of-pocket Expenses incurred by Servicer in obtaining substitutes
for any documents requested that are not delivered in sufficient time to
reasonably permit Servicer to comply with applicable laws or contractual
obligations. Servicer shall hold any Legal Mortgage File or portion thereof held
by it in trust for the benefit of the related Owner. Servicer shall cause each
Legal Mortgage File or portion thereof in possession of Servicer to be returned
to the related Owner or its designee when the need therefor by Servicer no
longer exists, unless (i) the related Mortgage Loan has been liquidated and the
Liquidation Proceeds relating to such Mortgage Loan have been deposited into the
Collection Account or (ii) the Legal Mortgage File or portion thereof has been
delivered to an attorney, or to a public trustee or other public official as
required by law, for purposes of initiating or pursuing legal action in
connection with the foreclosure of any Mortgaged Property securing a Mortgage
Loan, either judicially or nonjudicially, and Servicer has delivered to the
Owner a certificate of an Officer certifying as to the name and address of the
Person to which such Legal Mortgage File or portion thereof was delivered and
the purpose or purposes of such delivery. In the event of the liquidation of a
Mortgage Loan and sale of the related Mortgaged Property and if Servicer has
previously delivered a Request for Release of the related Legal Mortgage File or
any document constituting a part thereof, the Owner shall return (or shall cause
to be returned) such Request for Release to Servicer upon deposit of the related
Net Liquidation Proceeds into the Collection Account. If the related Mortgaged
Property becomes REO Property, the Owner shall deliver (or shall cause to be
delivered) the related Request for Release to Servicer upon delivery by Servicer
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to the Owner of the deed or other instrument pursuant to which title to such REO
Property was acquired.
(c) Custodians. All provisions of Sections 4.10(a) and 4.10(b) above,
as they apply to any Mortgage Loan serviced hereunder, shall be subject to the
terms of any custodial agreement between the related Owner and its custodian, to
the extent Servicer has knowledge of such custodial arrangement and its
applicability to such Mortgage Loan and has received a copy of the documentation
of such custodial arrangement. If the Servicer is so aware, it shall deal with
the custodian under such custodial arrangement as the designee of the related
Owner to the extent specified in the related documentation, to the extent that
the terms of such custodial arrangement do not conflict with the terms of this
Agreement as they apply to Servicer.
SECTION 4.11. MAINTENANCE OF FIDELITY BOND AND ERRORS AND OMISSIONS
INSURANCE.
Servicer will obtain and maintain in full force and effect throughout
the term of this Agreement, at its own expense, a fidelity bond and errors and
omissions insurance ("E&O Insurance"), covering Servicer's officers and
employees and other persons acting on behalf of Servicer in its capacity as
Servicer with regard to the Mortgage Loans. Servicer shall furnish to any Owner,
within thirty (30) days of receipt, reasonably satisfactory evidence of the
maintenance of such coverages. The amount of coverage under such fidelity bond
and E&O Insurance policy shall be at least equal to the coverage that would be
required by FNMA if Servicer were servicing the Mortgage Loans for FNMA. Such
fidelity bond and E&O Insurance shall be issued by an insurance company
acceptable to FNMA. In the event that any such bond or policy shall cease to be
in effect, Servicer shall obtain from an insurer acceptable to FNMA a
replacement bond or policy providing equivalent coverage. Servicer shall remit
any amounts collected under such bond or policy relating to Servicer's
activities with respect to the Mortgage Loans to the appropriate Owners to the
extent of losses covered thereby incurred by such Owners. No provision of this
Section shall operate to diminish, restrict or otherwise limit Servicer's
responsibilities and obligations as set forth in this Agreement.
SECTION 4.12. FINANCIAL AND OTHER INFORMATION.
Servicer, at its expense, shall furnish to each Owner, upon Owner's
request, financial statements of City Holding Company for each of its fiscal
years, prepared in accordance with generally accepted accounting principles and
certified by City Holding Company's independent accountants, as soon as
available, and in any event promptly after such information is first filed with
the Securities and Exchange Commission. The Servicer will provide to Owner, upon
Owner's request, City Holding Company's unaudited quarterly financial statements
as soon as available, and in any event promptly after such information is first
filed with the Securities and Exchange Commission.
The Servicer will deliver to the Owner, on or before March 31 of each
year, beginning with March 31, 1999, an Officer's Certificate of the Servicer
substantially in the form set forth in Exhibit D hereto stating that (1) a
review of the activities of the Servicer during the preceding calendar year (or
since the date hereof in the case of the first such statement) and of its
performance under this Agreement has been made under such officer's supervision
and (2) to the
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best of such officer's knowledge, based on such review, the Servicer has
fulfilled all its material obligations under this Agreement throughout such year
(or since the Closing Date in the case of the first such statement), or, if
there has been a default in the fulfillment of any such obligation, specifying
each such default known to such officer and the nature and status thereof.
On or before March 31 of each year, beginning with March 31, 1999, the
Servicer at its expense shall cause a firm of nationally recognized independent
public accountants (who may also render other services to the Servicer) to
furnish a report to the Owner to the effect that such firm has examined certain
documents and records relating to the servicing activities of the Servicer for
the period covered by such report, and that such examination, which has been
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers (to the extent that the procedures in such audit
guide are applicable to the servicing obligations set forth in this Agreement),
has disclosed no exceptions or errors in records relating to the servicing
activities of the Servicer that, in the opinion of such firm, are material,
except for such exceptions as shall be set forth in such report.
SECTION 4.13. LIABILITY OF SERVICER FOR EXPENSES OF OWNERS.
Servicer agrees to pay, without reimbursement therefor, (i) all costs
or expenses, including reasonable attorney's fees, incurred by an Owner
resulting from failure by Servicer to file timely claims for losses relating to
Mortgage Loans (including the failure to file timely claims under the insurance
policies referred to in Section 4.09), (ii) all costs and expenses incurred by
an Owner resulting from failure by Servicer to foreclose Mortgages relating to
delinquent Mortgage Loans in a manner consistent with this Agreement, (iii) all
reasonable costs and expenses incurred by an Owner in investigating Servicer's
activities hereunder, if such investigation proves that Servicer has not
complied in any material respect with this Agreement, (iv) all costs and
expenses incurred by an Owner in connection with replacing Servicer in the event
this Agreement is terminated with cause pursuant to Section 5.02 hereof, and (v)
all penalties associated with the late payment of taxes, insurance premiums and
other assessments, unless some action on the part of a Mortgagor directly
contributed to the imposition of any such penalty, in which case Servicer shall
collect any such penalty from such Mortgagor.
SECTION 4.14. SERVICING COMPENSATION.
(a) Servicing Fee. As compensation for its servicing activities
hereunder, Servicer shall be entitled to retain its Servicing Fee (the
"Servicing Fee"). The annual Servicing Fee for 125 Mortgage Loans shall be not
less than 75 basis points (0.75%). In those cases in which the Servicer is
authorized, pursuant to another agreement, to withhold from payments on a
Mortgage Loan an annual servicing fee in excess of 75 basis points (the "Excess
Fee"), the Corporation and the Servicer shall share the Excess Fee in a manner
that will be negotiated in good faith by the Servicer and the Corporation with
the intention of achieving an appropriate economic outcome for both parties.
The Servicing Fee for all Mortgage Loans other than 125 Mortgage Loans
will be negotiated in good faith by the Corporation and Servicer with the
intention of achieving an appropriate economic outcome for both the Corporation
and Servicer; provided that the Servicing
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Fee shall not be less than the fee customarily paid servicers in the mortgage
banking industry for servicing mortgage loans similar to such Mortgage Loans in
similar circumstances.
The Servicing Fee for any month shall equal one-twelfth of the annual
Servicing Fee, multiplied by the outstanding principal balance of each Mortgage
Loan as of the first day of such month, including any Mortgage Loan which is
delinquent or in foreclosure during such month. After withholding its monthly
Servicing Fee each month, the Servicer shall remit to the Corporation, on the
related Remittance Date, any amount payable to the Corporation pursuant to this
Section 4.14.
(b) Loan Setup Fee. The Servicer will be entitled to a Loan Setup Fee
with respect to each Mortgage Loan to compensate the Servicer for actions it
takes in connection with the acceptance of the obligation to service such
Mortgage Loan. On each Remittance Date, the Servicer may withhold the Loan Setup
Fee for each Mortgage Loan Boarded for which the Transfer Date occurred during
the preceding calendar month, and may withdraw and retain such Loan Setup Fees
for its own account.
(c) Additional Compensation. Additional servicing compensation, in the
form of Supplemental Fees and reinvestment income payable to Servicer pursuant
to Section 4.02(b) above, may be paid to or retained by Servicer in respect of
any Mortgage Loan to the extent not prohibited by the related Mortgage Note and
permitted by Law and to the extent not contrary to the terms of this Agreement,
and in the form of certain other servicing fees as set forth in this Agreement,
may be paid to or retained by Servicer to the extent permitted by Law and not
contrary to the related Mortgage or Mortgage Note.
(d) Compensation For Revenues On Liquidated Mortgage Loans. If the
Servicer obtains any collections on a Liquidated Mortgage Loan that is a 125
Mortgage Loan subsequent to the date on which it became a Liquidated Mortgage
Loan, the Servicer shall be entitled to receive, as additional servicing
compensation, 20% of such recovery amount.
SECTION 4.15. NOTIFICATION OF ADJUSTMENTS.
With respect to each adjustable rate Mortgage Loan, the Servicer shall
adjust the mortgage interest rate on each related interest rate adjustment date
and shall adjust the Monthly Payment on each related mortgage payment adjustment
date, if applicable, in compliance with the requirements of applicable law and
the related Mortgage and Mortgage Note. The Servicer shall execute and deliver
any and all necessary notices required under applicable law and the terms of the
related Mortgage Note and Mortgage regarding the mortgage interest rate and
Monthly Payment adjustments. The Servicer shall promptly deliver to the
applicable Owner such notifications and any additional applicable data regarding
such adjustments and the methods used to calculate and implement such
adjustments as part of its Monthly Accounting Report or upon the reasonable
written request of the applicable Owner. Upon the discovery by the Servicer or
the receipt of notice from the Owner that the Servicer has failed to adjust a
mortgage interest rate or Monthly Payment in accordance with the terms of the
related Mortgage Note, the Servicer shall immediately deposit in the Collection
Account from its own funds the amount of any interest loss or deferral caused
the Owner thereby.
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ARTICLE V
TERMINATION AND LIABILITIES
SECTION 5.01. LIMITATION ON RESIGNATION AND ASSIGNMENT BY THE SERVICER.
The Servicer shall not resign from the obligations and duties hereby
imposed on it as to any Mortgage Loan except by mutual consent of the Servicer
and the Owner thereof or upon the determination that its duties hereunder are no
longer permissible under applicable law and such incapacity cannot be cured by
the Servicer. Any such determination permitting the resignation of the Servicer
shall be evidenced by an Opinion of Counsel to such effect delivered to each
affected Owner, which Opinion of Counsel shall be in form and substance
acceptable to such Owner. No such resignation shall become effective until a
successor shall have assumed the Servicer's responsibilities and obligations
hereunder.
SECTION 5.02. TERMINATION FOR CAUSE.
The Owner of any Mortgage Loan may terminate all of Servicer's rights
pursuant to this Agreement with respect to all Mortgage Loans owned by such
Owner (subject to Section 5.04 below) upon the occurrence of any one or more of
the following events (each, an "Event of Default"):
(1) Failure of Servicer to remit to such Owner as required by
this Agreement any amounts received by Servicer (net of amounts the
Servicer is entitled to retain), failure of Servicer to make any
Advance as required by this Agreement, and the continuance of either
such failure unremedied for three Business Days following the date upon
which written notice of such failure, requiring the same to be
remedied, shall have been received by Servicer.
(2) Failure of Servicer duly to observe or perform in any
material respect any other covenant, condition or agreement contained
in this Agreement that is required to be observed or performed by
Servicer (other than as referred to in subsection (1) above) for a
period of 30 days after Servicer's receipt of written notice from such
Owner specifying such failure and requesting that it be remedied;
provided, however, that if the failure stated in such notice cannot be
corrected within such period and if corrective action is instituted by
Servicer within such period and is diligently pursued until fully
corrected, then this Agreement shall not be terminated as a result of
such failure; and provided further, that if Servicer fails to correct
such failure within 15 days after the end of the initial 30-day period,
such Owner may forthwith terminate Servicer pursuant to this Section;
(3) Issuance or entry of a decree or order of a court, agency
or supervisory authority having jurisdiction in the premises appointing
a trustee, conservator, receiver or liquidator in any bankruptcy,
insolvency, readjustment of debt, marshaling of assets and liabilities
or similar proceeding affecting Servicer or substantially all of its
properties, or
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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 60 days;
(4) Consent by Servicer to the appointment of a trustee,
conservator, receiver or liquidator in any bankruptcy, insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceeding affecting Servicer or substantially all of its properties,
or the commencement of voluntary liquidation or similar proceedings of
or relating to the Servicer or of or relating to all or substantially
all of its properties;
(5) Admission in writing by 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 the
making of an assignment for the benefit of creditors, or the voluntary
suspension of the payment of its obligations;
(6) The Servicer assigns or delegates or attempts to assign or
delegate its duties or rights under this Agreement (except as permitted
in this Agreement);
(7) Falsity, which materially and adversely affects the
Owner's rights hereunder, of any representation of warranty of Servicer
contained in this Agreement and failure of Servicer to cure the
condition or event causing any such representation or warranty to be
false within sixty (60) days after the Servicer's receipt of written
notice from Owner specifying such falsity and requesting that it be
cured or corrected; or
(8) Failure of Servicer to maintain any license that it is
required to have in order to carry out its responsibilities under this
Agreement.
(9) The occurrence of three (3) or more Events of Default in
any 12 month period irrespective of whether such Event of Default may
have been cured pursuant to the cure provisions above.
If any of the events specified in clause (4) or (5) above shall occur,
Servicer shall give written notice of such occurrence to each Owner within three
Business Days of the occurrence of such event. Notwithstanding any provision in
this Agreement to the contrary, no Owner shall be liable in any respect for the
termination of Servicer pursuant to this Section 5.02.
A terminated Servicer shall retain all its rights hereunder to unpaid
Servicing Fees and other servicing compensation due prior to termination of such
Servicer, as well as its rights to receive reimbursement of previously
unreimbursed Advances it made or expenses it incurred (to the extent provided in
this Agreement).
SECTION 5.03. EARLY TERMINATION.
The Owner may terminate without cause the Servicer's right and
obligation to service any Mortgage Loan pursuant to this Agreement as of a date
specified in that notice that is prior to the Initial Period Termination Date
(any such termination being herein referred to as an "Early Termination"). Upon
any Early Termination by the Corporation or upon the sale of any loans serviced
hereunder on a servicing released basis where Servicer will not continue to
service such
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loans, the Owner shall pay to the Servicer a termination fee equal to Fifteen
Dollars ($15.00) per Mortgage Loan for each Mortgage Loan that is then being
serviced by the Servicer and is subject to such termination (the "Termination
Fee"); provided, however, that if the Owner terminating under this Section 5.03
is not the Corporation or Sovereign Bancorp, Inc., the Termination Fee shall be
Thirteen Dollars ($13.00) for each Mortgage Loan that is then being serviced by
the Servicer and is subject to such termination. Upon any termination of the
Servicer and upon receipt by the Servicer of all amounts due to the Servicer
hereunder, the Servicer, as appropriate, shall forward all documents and other
information stored in any format in the possession of the Servicer, as
appropriate (or in the possession of any of the Servicer's subcontractors,
agents or assignees), pertaining to any Mortgage Loan to such location as is
specified by the Owner. As to any Mortgage Loan with respect to which any
payment is thirty (30) or more days delinquent, all such documents and other
information shall be transmitted to the Owner within five (5) days and as to any
other Mortgage Loan, all data concerning the current status of that Mortgage
Loan shall be transmitted as directed by the Owner within ten (10) days and any
actual physical files (if any) with respect to such Mortgage Loans shall be
transmitted as directed by the Owner within thirty (30) days. All out-of-pocket
Expenses incurred in connection with any such transfer shall be borne by the
Owner.
SECTION 5.04. TRANSFER OF TERMINATED SERVICER'S SERVICING.
Upon termination of this Agreement with respect to Servicer pursuant to
either Section 5.01 or Section 5.02 above, the terminated Servicer shall
cooperate fully with each applicable Owner in effecting the termination of
Servicer's responsibilities and rights hereunder and Servicer shall, in
accordance with applicable Law, immediately deliver or cause to be delivered to
a servicer designated by such Owner (hereafter, "Designee Servicer") all monies
held in the Collection Account, together with an assignment of this Agreement
from Servicer to Designee Servicer as to the related Mortgage Loans, and
immediately shall deliver as directed by such Owner all other monies at any time
received by Servicer which will be required to be remitted to such Owner
pursuant to this Agreement and which have not theretofore been remitted in
accordance with this Agreement. In addition, within 30 days after any such
termination, Servicer shall deliver or cause to be delivered to Designee
Servicer all Servicing Mortgage Files and Servicing Records of Servicer relating
to the subject Mortgage Loans. Servicer agrees to indemnify and hold the related
Owner and its Designee Servicer harmless from and against any and all loss,
damage and expenses (including reasonable attorneys' fees) that any of them may
incur in securing the delivery of all files, the transfer of all escrow funds,
and the remittance of all amounts collected by Servicer with respect to any
related Mortgage Loan serviced by Servicer.
SECTION 5.05. ACCESS TO SERVICER'S RECORDS AND AGREEMENT TO PAY
ATTORNEYS' FEES.
Each Owner and its agents may, from time to time, request Servicer to
allow the inspection, at Owner's expense, of any of Servicer's books and records
pertaining to such Owner's Mortgage Loans (including inspections by governmental
agencies having jurisdiction over such Owner which are required by law), and
Servicer shall allow such inspections and access to such books and records at
reasonable times during Servicer's normal business hours and upon reasonable
terms. If it is determined by any Owner that Servicer has breached or failed to
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<PAGE> 34
perform under any provision of this Agreement, and such Owner shall employ
attorneys or incur other expenses for the enforcement, performance, or
observance of the terms of the Agreement on the part of Servicer, then such
Owner, to the extent permitted by Law, shall be reimbursed by Servicer, on
demand, for its reasonable attorneys' fees and other out-of-pocket expenses
incurred in connection with such breach or failure. In the event any such
actions cause Servicer to incur expenses in defense of its performance hereunder
and it is determined that Servicer has not breached or failed to perform under
any provision of this Agreement, then Servicer, to the extent permitted by Law,
shall be reimbursed by such Owner or Owners, on demand, for its reasonable
attorneys' fees and other out-of-pocket Expenses related to such defense. The
Servicer understands that the Corporation desires to be able to monitor the
Mortgage Loans "on-line" through Servicer's servicing systems, at the
Corporation's expense. While the Servicer does not currently offer such
monitoring and has not agreed to provide such on-line monitoring to the
Corporation, it will discuss in good faith the possibility of providing such
on-line access to the Corporation in the future.
SECTION 5.06. NO REMEDY EXCLUSIVE.
No remedy herein conferred upon or reserved to any Owner is intended to
be exclusive of any other available remedy, but each remedy shall be cumulative
and shall be in addition to other remedies of such Owner given under this
Agreement or existing at law or in equity. No delay or omission to exercise any
right or power of any Owner accruing under this Agreement shall impair any such
right or power, or shall be construed to be a waiver thereof, but any such right
and power may be exercised from time to time and as often as may be deemed
expedient.
SECTION 5.07. LIMITATION ON LIABILITY OF THE SERVICER AND OTHERS.
Neither the Servicer nor any subservicer appointed by it, nor any of
their respective partners, directors, officers, employees or agents, shall be
under any liability to any Owner for any action taken or for refraining from the
taking of any action in good faith pursuant to this Agreement, provided the
action is consistent with this Agreement and provided the action is in full
compliance with applicable law, or for errors in judgment; provided, however,
that this provision shall not protect the Servicer or any subservicer against
any liability which would otherwise be imposed by reason of willful misfeasance,
bad faith, negligence or violation of applicable state or federal law in the
performance of his or her or its duties or by reason of reckless disregard of
his or her or its obligations and duties hereunder. The Servicer, any
subservicer, any of their respective partners, directors, officers, employees or
agents, may rely in good faith on any document of any kind prima facie property
executed and submitted by any person or entity respecting any matters arising
hereunder. The Servicer, each subservicer, and each of their respective
partners, directors, officers, employees or agents, shall be indemnified by each
Owner and held harmless against any loss, liability or expense incurred in
connection with any legal action relating to this Agreement, other than any
loss, liability or expense incurred by reason of willful misfeasance, bad faith
or negligence in the performance of his or her or its duties hereunder or by
reason of reckless disregard of his or her or its obligations and duties
hereunder. Neither the Servicer nor any subservicer nor any of their respective
partners, directors, officers, employees or agents shall be under any obligation
to appear in, prosecute or defend any legal action which is not incidental to
its duties under this Agreement and that in its
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opinion may involve it in any expense or liability; provided, however, that the
Servicer or any subservicer may, with the prior written consent of the
applicable Owners, undertake any such action which it may deem necessary or
desirable in respect of this Agreement and the rights and duties of the parties
hereto and the interest of the Owners hereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom shall be
expenses, costs and liabilities of the related Owners, and the Servicer or such
subservicer shall be entitled to be reimbursed therefor out of the Collection
Account.
SECTION 5.08. MERGER OR CONSOLIDATION OF THE SERVICER.
The Servicer will keep in full effect its existence, rights and
franchises as a corporation, and will obtain and preserve its qualification to
do business as a foreign corporation in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and
enforceability of this Agreement or any of the Mortgage Loans and to perform its
duties under this Agreement.
Any entities into which the Servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Servicer shall be a party, or any entities succeeding to the business of the
Servicer, shall be the successor to the Servicer hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything herein to the contrary notwithstanding; provided,
however, that the successor or surviving entity shall be an institution having a
net worth of at least $32,000,000.
ARTICLE VI
GENERAL PROVISIONS
SECTION 6.01. AMENDMENTS, CHANGES AND MODIFICATIONS.
This Agreement may be amended, changed, modified, or altered with
respect to any Mortgage Loan only by an instrument in writing executed by the
applicable Owner and Servicer. Notwithstanding the foregoing, Servicer agrees to
comply with the servicing standards set forth herein, as the same may be
modified from time to time by the Corporation or any Owner pursuant to Section
4.01(c) hereof.
SECTION 6.02. GOVERNING LAW.
This Agreement shall be construed in accordance with the Laws
of the State of West Virginia, and the obligations, rights and remedies of the
parties hereunder shall be determined in accordance with such Laws.
Notwithstanding the preceding sentence, it is understood and agreed that
Servicer will service each Mortgage Loan in accordance with federal Laws and
Laws of the state in which the related Mortgaged Property is located.
SECTION 6.03. NOTICES.
All notices, certificates or other communications hereunder shall be in
writing and be deemed given when delivered (which delivery may be made by
electronic facsimile transmission)
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to the appropriate party at the address or telecopy number identified on the
execution page hereof. Each party may, by notice given hereunder, designate any
further or different address or telecopy number to which subsequent notices,
certificates and other communications to such party shall be sent.
SECTION 6.04. 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 6.01 in order to accomplish the purposes of this Agreement.
SECTION 6.05. FURTHER ASSURANCES AND CORRECTIVE INSTRUMENTS.
To the extent permitted by Law, the Corporation and Servicer agree that
each will, from time to time, execute, acknowledge and deliver, or cause to be
executed, acknowledged and delivered, such supplements hereto and such
instruments of further assurance as may reasonably be required or appropriate
further to express the intention, or to facilitate the performance, of this
Agreement.
SECTION 6.06. TERM OF AGREEMENT.
With respect to each Mortgage Loan, the term of this Agreement shall
end upon the earliest to occur of (i) termination of all of Servicer's rights
pursuant to this Agreement with respect to such Mortgage Loan as provided in
Section 5.01, Section 5.02 or Section 5.03, (ii) remittance of the final payment
of such Mortgage Loan to its Owner, or (iii) the Liquidation Date for such
Mortgage Loan, and the resulting remittance of the proceeds to its Owner.
SECTION 6.07. SURVIVAL OF OBLIGATIONS AND COVENANTS.
After termination of this Agreement and transfer of the servicing
rights to the Mortgage Loans to any Designee Servicer, Servicer shall continue
to be liable for any failure to fulfill its obligations during the time that it
acted as Servicer of the Mortgage Loans hereunder.
SECTION 6.08. FORMS AND REPORTS.
All forms or reports required by this Agreement as prescribed by the
Owners from time to time may be amended, supplemented, or replaced as such
Owners shall deem appropriate.
SECTION 6.09. INDEMNIFICATION.
Servicer agrees to, and does hereby, indemnify and hold harmless the
Corporation and each Owner and its successors and assigns, as well as the
officers, directors, employees, agents, partners and affiliates of any of the
foregoing, against 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 any of such indemnified parties, in any way related to or
arising out of this Agreement or any of the
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transactions contemplated herein, to the extent that any of the same results
from or arises out of any breach of any representation or warranty made by
Servicer in this Agreement in respect of Mortgage Loans owned by the Corporation
or such Owner or from any breach by Servicer (by itself or through any
subservicer) of any covenant or obligation of Servicer to the Corporation or
such Owner under this Agreement or arising from Servicer's (or any such
subservicer's) negligence, failure to comply with applicable law, willful
misconduct or bad faith in the performance of its duties and obligations under
this Agreement. The indemnities contained in this Section shall survive the
termination of this Agreement.
The Servicer may rely on the written instructions and directions of the
applicable Owner pursuant to the terms of this Agreement and shall not be liable
to the Owner 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.
Each Owner 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 such Owner as provided herein.
SECTION 6.10. SERVICER AS INDEPENDENT CONTRACTOR.
All services, duties and responsibilities of Servicer and any
subservicer under this Agreement shall be performed and carried out by Servicer
or such subservicer as an independent contractor, and none of the provisions of
this Agreement shall be construed to make, authorize or appoint Servicer or any
such subservicer as any Owner's employee, agent or representative.
SECTION 6.11. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, and it
shall not be necessary that the signature of both parties hereto appear on any
one counterpart hereof; each counterpart shall be deemed an original, but all
such counterparts together shall constitute but one and the same instrument.
[Signatures Commence on Following Page]
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<PAGE> 38
IN WITNESS WHEREOF, as of June 26, 1998, the Corporation and Servicer
have caused this Servicing Agreement to be executed by their respective officers
thereunto authorized.
MEGO MORTGAGE CORPORATION
By: /s/ Jeff S. Moore
----------------------------------------
Name: Jeff S. Moore
--------------------------------------
Title: President
-------------------------------------
Notice Address: Mego Mortgage Corporation
1000 Parkwood Circle
Atlanta, Georgia 30339
Attention: Jeffrey S. Moore
CITY MORTGAGE SERVICES, a division of
City National Bank of West Virginia
By: /s/ A. Lawrence Crimmins, Jr.
----------------------------------------
Name: A. Lawrence Crimmins, Jr.
--------------------------------------
Title: Executive Vice President/CFO
-------------------------------------
Notice Address: City Mortgage Services
25 Gatewater Road
Cross Lanes, West Virginia 25313
Attention: President
Copy to: Hunton & Williams
951 East Byrd Street
Richmond, Virginia 23219
Attention: Randall S. Parks
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<PAGE> 1
EXHIBIT 10.83
SUBSERVICING AGREEMENT
DATED AS OF JUNE 29, 1998
BETWEEN
MEGO MORTGAGE CORPORATION
AND
CITY MORTGAGE SERVICES, AS SUBSERVICER
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I DEFINITIONS....................................................................1
ARTICLE II ENGAGEMENT OF SUBSERVICER.....................................................8
Section 2.01. Contract for Servicing; Possession of Servicing Files............8
Section 2.02. Representations, Warranties and Covenants of the Corporation....10
Section 2.03. Representations, Warranties and Covenants of Subservicer........11
Section 2.04. Covenants Relating to Mortgage Loans............................13
ARTICLE III ASSIGNMENT OF AGREEMENT.....................................................14
Section 3.01. Assignment of Corporation's Rights..............................14
Section 3.02. Delegation of Corporation's Rights and Duties...................14
Section 3.03. Delegation of Servicing Obligations.............................14
ARTICLE IV SERVICING DUTIES OF SUBSERVICER..............................................15
Section 4.01. Servicing of Mortgage Loans.....................................15
Section 4.02. Collections and Remittances.....................................16
Section 4.03. Advances........................................................17
Section 4.04. Reimbursement of Advances.......................................18
Section 4.05. Collection of Insurance Premiums, Taxes and Assessments.........18
Section 4.06. Assumptions.....................................................18
Section 4.07. Realization upon Defaulted Mortgage Loans.......................20
Section 4.08. Reports.........................................................21
Section 4.09. Maintenance of Hazard Insurance.................................22
Section 4.10. Release of Mortgage Loans.......................................23
Section 4.11. Maintenance of Fidelity Bond and Errors
and Omissions Insurance.......................................24
Section 4.12. Financial and Other Information.................................25
Section 4.13. Liability of Subservicer for Expenses of Corporation............26
Section 4.14. Servicing Compensation..........................................26
Section 4.15. Notification of Adjustments.....................................27
Section 4.16. Y2K Compliance..................................................27
Section 4.17. Document Retrieval..............................................27
ARTICLE V TERMINATION AND LIABILITIES...................................................28
Section 5.01. Limitation on Resignation and Assignment by
the Subservicer...............................................28
Section 5.02. Termination for Cause...........................................28
Section 5.03. Early Termination; Termination Permitted With
Participant's Consent.........................................29
Section 5.04. Transfer of Terminated Subservicer's Servicing..................30
Section 5.05. Access to Subservicer's Records and Agreement to Pay
Attorneys' Fees...............................................30
Section 5.06. No Remedy Exclusive.............................................31
Section 5.07. Limitation on Liability of the Subservicer and Others...........31
Section 5.08. Merger or Consolidation of the Subservicer......................32
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C>
ARTICLE VI GENERAL PROVISIONS...........................................................32
Section 6.01. Amendments, Changes and Modifications...........................32
Section 6.02. Governing Law...................................................32
Section 6.03. Notices.........................................................32
Section 6.04. Severability....................................................33
Section 6.05. Further Assurances and Corrective Instruments...................33
Section 6.06. Term of Agreement...............................................33
Section 6.07. Survival of Obligations and Covenants...........................33
Section 6.08. Forms and Reports...............................................33
Section 6.09. Indemnification.................................................33
Section 6.10. Subservicer as Independent Contractor...........................34
Section 6.11. Participant is Third-Party Beneficiary..........................34
Section 6.12. Participant's Obligation re: Servicing Fees.....................35
Section 6.13. Counterparts....................................................35
</TABLE>
Exhibit A Permitted Investments
Exhibit B Monthly Accounting Package
Exhibit C Form of Request for Release
Exhibit D Form of Annual Statement as to Compliance
Exhibit E Servicing Mortgage Fee
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<PAGE> 4
SUBSERVICING AGREEMENT
This SUBSERVICING AGREEMENT, dated as of June 29, 1998 (the same, as
amended or supplemented from time to time, the "Agreement"), is made and entered
into by and between MEGO MORTGAGE CORPORATION, a Delaware corporation (the
"Corporation"), and CITY MORTGAGE SERVICES, a division of City National Bank of
West Virginia, a national banking association (together with its successors and
permitted assigns, the "Subservicer").
WITNESSETH:
WHEREAS, the Corporation is a party to a Participation Agreement, dated
as of June 29, 1998 (the "Participation Agreement"), between it and Sovereign
Bank, a federally-chartered savings bank ("Participant"), pursuant to which
Participant may purchase 100% participation interests in certain residential
mortgage loans which are to be serviced by the Corporation; and
WHEREAS, Subservicer is engaged in the business of servicing mortgage
loans of the type covered by the Participation Agreement; and
WHEREAS, the Corporation desires to retain Subservicer to subservice
such mortgage loans and Subservicer desires to be so retained; and
WHEREAS, the Corporation and Subservicer desire to execute this
Agreement to define each party's rights, duties and obligations relating to the
servicing of such mortgage loans.
NOW, THEREFORE, in consideration of these premises and of the mutual
agreements herein set forth, and for good and valuable consideration the receipt
of which is hereby acknowledged, the Corporation and Subservicer each agree as
follows:
ARTICLE I
DEFINITIONS
The following terms shall have the respective meanings specified below,
and the definitions of such terms are equally applicable to the singular and
plural forms of such terms and to the masculine, feminine and neuter genders of
such terms. Capitalized terms not otherwise defined herein shall have the
meanings assigned to them in the Participation Agreement.
125 MORTGAGE LOANS: Any Mortgage Loan as to which the original
principal amount plus the amount of any Liens senior in priority to the Mortgage
Loan exceeds the appraised value of the Mortgaged Property.
ADVANCE: With respect to a Mortgage Loan, an advance by Subservicer of
its own funds.
<PAGE> 5
AFFILIATE: As to any Person, each other Person that directly, or
indirectly through one or more intermediaries, controls or is controlled by, or
is under common control with, the Person in question.
AGREEMENT: This Subservicing Agreement, including all amendments or
supplements hereto.
BUSINESS DAY: Any day other than a Saturday, Sunday or other day on
which banking or thrift institutions located in Charleston, West Virginia,
Atlanta, Georgia, or Wyomissing, Pennsylvania, are authorized or obligated by
Law to be closed.
CODE: The Internal Revenue Code of 1986, as amended.
COLLECTION ACCOUNT: An Eligible Account maintained by the Subservicer
into which are deposited all monies received by the Subservicer on account of
the Mortgage Loans and other mortgage loans serviced by the Subservicer.
DEBTOR RELIEF LAWS: Any applicable liquidation, bankruptcy,
conservatorship, insolvency, rearrangement, moratorium, reorganization, or
similar Laws affecting the rights of creditors generally from time to time in
effect.
DESIGNEE SUBSERVICER: As defined in Section 5.04.
DUE DATE: For any Mortgage Loan, a date on which a Monthly Payment is
due thereon, excluding any applicable grace period.
DUE PERIOD: With respect to any Mortgage Loan and any Remittance Date,
the period commencing on the day following the second preceding Due Date and
ending at the close of business on the immediately preceding Due Date therefor.
ELIGIBLE ACCOUNT: One or more accounts (i) that are maintained with a
Qualified Bank, (ii) the deposits in which are fully insured by the FDIC, (iii)
the deposits in which are insured by the FDIC (to the limit established by the
FDIC), and, to the extent deposits in such account exceed amounts covered by
such insurance, such deposits are continuously invested in Permitted Investments
or (iv) that are trust accounts maintained with the trust department of a
federal or state chartered depository institution or trust company acting in its
fiduciary capacity.
ESCROW ACCOUNT: An account or accounts into which shall be deposited
all Escrow Payments received with respect to the Mortgage Loan(s) for which
funds are required to be escrowed.
ESCROW PAYMENTS: With respect to a Mortgage Loan, all moneys collected
to (i) obtain or maintain the related Insurance Policy, and (ii) pay taxes or
assessments or other charges related to the related Mortgaged Property that give
rise or that may give rise to liens on such Mortgaged Property when such taxes,
assessments or other charges become due.
EVENT OF DEFAULT: As defined in Section 5.02.
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<PAGE> 6
EXPENSES: With respect to a Mortgage Loan, any amounts reasonably
incurred in connection with recovery on or release of such Mortgage Loan,
including but not limited to foreclosure fees and expenses, legal fees and
expenses, appraisal and property inspection fees and expenses, maintenance,
repair and rehabilitation of the related Mortgaged Property and the costs of
collection under any Insurance Policy and any other items agreed upon in writing
by the Corporation and the Subservicer.
FHLMC: Federal Home Loan Mortgage Corporation, or any successor
thereto.
FDIC: Federal Deposit Insurance Corporation, or any successor thereto.
FNMA: Federal National Mortgage Association, or any successor thereto.
GINNIE MAE: Government National Mortgage Association.
HAZARD INSURANCE: With respect to a Mortgage Loan, (i) a standard
homeowner's fire insurance policy with extended coverage, which shall provide
coverage against loss sustained by fire and such other hazards as are
customarily covered by extended coverage standard hazard insurance policies in
the area where the related Mortgaged Property is located and (ii) where required
by law or regulation, a standard flood insurance policy, in each case naming the
originator of such Mortgage Loan and its successors and assigns as loss payee
under a standard mortgagee clause or such other insurance policies as are
required by the applicable Mortgage and related documents.
INSURANCE POLICY: A policy or policies of insurance covering a Mortgage
Loan or related Mortgaged Property, providing (without limitation) flood
insurance coverage, Hazard Insurance coverage, special hazard insurance
coverage, Mortgage Insurance or title insurance coverage, in each case issued by
an insurer meeting the requirements of FNMA.
INSURANCE PROCEEDS: Payments received with respect to a Mortgage Loan
under any Insurance Policy or bond maintained in connection with such Mortgage
Loan.
IRS: The Internal Revenue Service of the United States.
LAW: Any applicable statute, law, ordinance, regulation, order, writ,
injunction, or decree of the United States of America or any agency thereof or
any state or political subdivision or agency thereof or any court of competent
jurisdiction.
LEGAL MORTGAGE FILE: For any Mortgage Loan, the file, maintained by the
Participant or the custodian or trustee acting on behalf of the Participant,
containing the original related Mortgage Note, Mortgage and any assignments of
such Mortgage, and such other documents as may be included in a custodial file
held by the Participant, custodian or trustee.
LIEN: Any security interest, pledge, lien, mortgage, assignment,
charge, participation, ownership, interest, or other encumbrance, security
arrangement or any adverse claim of any nature whatsoever.
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<PAGE> 7
LIQUIDATED MORTGAGE LOAN: A Mortgage Loan shall be a Liquidated
Mortgage Loan on the earlier of (i) the date as to which the Subservicer has
determined, in accordance with the servicing procedures specified herein, that
all Liquidation Proceeds that it expects to recover from or on account of such
Mortgage Loan have been recovered and (ii) the date as to which any portion of
amounts due pursuant to such Mortgage Loan are 180 or more days past due, after
the date the last scheduled payment was made.
LIQUIDATION DATE: With respect to a Mortgage Loan that has been
foreclosed, the date of the final receipt of Insurance Proceeds, Liquidation
Proceeds or other payments with respect to such Mortgage Loan.
LIQUIDATION PROCEEDS: Amounts, other than Insurance Proceeds, received
in connection with the liquidation of a defaulted Mortgage Loan, whether through
trustee's sale, foreclosure sale, condemnation, taking under power of eminent
domain, conveyance in lieu of foreclosure or condemnation, or otherwise.
LOAN SETUP FEE: A fee due to the Subservicer from the Corporation for
each Mortgage Loan that it agrees to service hereunder as follows: if the
Corporation delivers to the Subservicer up to 1000 Mortgage Loans in a calendar
month, the Loan Setup Fee shall be $10 per loan, if the Corporation delivers to
the Subservicer between 1000 and 2000 Mortgage Loans in a calendar month, the
Loan Setup Fee shall be $7 per loan, and if the Corporation delivers to the
Subservicer over 2000 Mortgage Loans in a calendar month, the Loan Setup Fee
shall be $0 per loan. The Loan Setup Fee shall be retained by the Subservicer as
described in Section 4.14 hereof. No Loan Setup Fee shall be payable by the
Corporation under this Agreement if the Subservicer is servicing the applicable
Mortgage Loan on the applicable Transfer Date and the Corporation has previously
paid Subservicer a Loan Setup Fee under this or any other agreement.
MONTHLY ACCOUNTING PACKAGE: The accounting and other reports set forth
in Exhibit B hereto.
MONTHLY PAYMENT: With respect to each Mortgage Loan, the scheduled
monthly payment of principal and interest due on each related Due Date under the
terms of the related Mortgage Note.
MOODY'S: Moody's Investors Service, Inc.
MORTGAGE: With respect to a Mortgage Loan, the instrument securing the
related Mortgage Note which creates a lien on the related Mortgaged Property,
subject only to permitted encumbrances.
MORTGAGE INSURANCE: With respect to a Mortgage Loan or group of
Mortgage Loans, any insurance relating to the Mortgagor's payments thereunder,
such as private mortgage insurance or mortgage pool insurance.
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MORTGAGE LOAN SCHEDULE: For any Transfer Date, the Transmittal
Schedule, executed by Participant and the Corporation setting forth the Mortgage
Loans in which Participant will purchase a Participation on such Transfer Date.
MORTGAGE LOANS: All Mortgage Loans in which Participant purchases a
Participation pursuant to the Participation Agreement, as specified in any
Mortgage Loan Schedule.
MORTGAGE NOTE: With respect to a Mortgage Loan, the promissory note or
other evidence of indebtedness of the related Mortgagor.
MORTGAGED PROPERTY: With respect to a Mortgage Loan, a fee simple
interest (or, only if the property underlying the Mortgage Loan is located in an
area where a leasehold interest is customary, a leasehold interest) in
residential real property, together with improvements thereon, subject to the
lien of the related Mortgage, which property includes a single family (one- to
four-unit) residence thereon.
MORTGAGOR: With respect to a Mortgage Loan, the obligor on the related
Mortgage Note.
NET LIQUIDATION PROCEEDS: With respect to any Mortgage Loan,
Liquidation Proceeds thereof (and any Insurance Proceeds collected in connection
with liquidation thereof).
NON-RECOVERABLE ADVANCE: Any Advance made by the Subservicer in respect
of any Mortgage Loan which, in the good faith judgment of Subservicer, will not
ultimately be recoverable by Subservicer from funds received on account of such
Mortgage Loan.
NOTE RATE: The rate of interest payable by any Mortgagor on the
outstanding principal balance of his or her Mortgage Note, as specified in (or
calculated as described in) such Mortgage Note.
OFFICER: Any duly authorized officer of Subservicer involved in, or
responsible for, the servicing of Mortgage Loans.
ONE-TO-FOUR FAMILY MORTGAGE LOANS: Mortgage Loans with respect to which
the related Mortgaged Property consists of a single parcel of real property with
a detached single family residence erected thereon, or a two-to-four family
residential dwelling, or an individual residential condominium unit; provided,
however, that the related Mortgaged Property does not consist of a mobile home
or the land on which the same has been placed.
OPINION OF COUNSEL: A written opinion of counsel, who may be an
employee of or the ordinary or regular outside counsel to the party on behalf of
whom the opinion is being given, reasonably acceptable to each person to which
such opinion is addressed.
PERMITTED INVESTMENTS: Those investments identified on Exhibit A
hereto.
PERSON: An individual, corporation, partnership, association,
joint-stock company, trust, unincorporated organization or joint venture, or a
court or a government or any agency or political subdivision thereof.
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PRIME RATE: The rate of interest published by The Wall Street Journal,
Northeast Edition, in the money rates section, as the "Prime Rate."
PRINCIPAL PREPAYMENT: Any Mortgagor payment of principal or other
recovery of principal on a Mortgage Loan (not including the principal portion of
Insurance Proceeds or Liquidation Proceeds) which is not to be applied to any
past or current Monthly Payment under the Mortgage Loan.
QUALIFIED BANK: City National Bank of West Virginia, provided that it
is "well-capitalized" under applicable regulations of the Office of the
Comptroller of the Currency and any bank whose long-term unsecured debt
obligations, short-term unsecured debt obligations or commercial paper are rated
in one of a Rating Agency's two highest applicable rating categories. A bank
shall be deemed to have the requisite rating if such bank is the principal
subsidiary of a bank holding company and the long-term unsecured debt
obligations, short-term unsecured debt obligations or commercial paper of such
bank holding company are rated in the requisite category. A bank shall be deemed
the principal subsidiary of a bank holding company if the bank's net worth
exceeds 66 2/3% of the consolidated net worth of such bank holding company.
RATING AGENCY: Any of Duff & Phelps Credit Rating Co., Fitch Investors
Service, Inc., Moody's Investors Service, Inc., or Standard & Poor's
Corporation.
REMIC: A "real estate mortgage investment conduit," as defined in the
REMIC Provisions.
REMIC PROVISIONS: Provisions of the federal income tax law relating to
real estate mortgage investment conduits, which provisions appear at Sections
860A through 860G of Subchapter M of Chapter 1 of Subtitle A of the Code, and
related provisions and regulations and administrative pronouncements promulgated
thereunder, as the foregoing may be in effect from time to time, or, if such
provisions are no longer effective, such provisions of the applicable tax
statute as shall have the same operation or effect as the preceding provisions.
REMITTANCE DATE: The 10th day of each month (or the preceding Business
Day if such 10th day is not a Business Day).
REO PROPERTY: A Mortgaged Property that has been acquired by the
Corporation (for the benefit of the Participant) upon foreclosure or similar
termination of the Mortgagor's rights under such Mortgage Loan. For purposes of
the Subservicer's obligation, to make Advances, a Mortgage Loan shall be deemed
to continue to be outstanding even after foreclosure thereon until final
disposition of any related REO Property.
S&P: Standard & Poor's Corporation.
SECURITIZATION: Any sale or other transfer of Mortgage Loans to a trust
or other entity for the purpose of supporting pass-through certificates,
collateralized mortgage obligations or other similar securities issued by such
entity or the creation of a pool of Mortgage Loans otherwise used to support
such securities.
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SEPARATE ACCOUNT: An Eligible Account maintained by Subservicer into
which are deposited all monies received by Subservicer on account of the
Mortgage Loans and only the Mortgage Loans. Such account shall be held by
Subservicer as trustee or custodian for Participant and shall be identified as
trust or custodial accounts for the benefit of the Participant.
SERVICING FEE: Such term as defined in Section 4.14.
SERVICING MORTGAGE FILE: With respect to a Mortgage Loan, the file
containing (i) copies of certain documents executed or delivered in connection
with the closing of such Mortgage Loan, including without limitation the
documents set forth on Exhibit E, and (ii) any servicing documentation which
relates to such Mortgage Loan of the type customarily included by mortgage loan
servicers in their servicing files.
SERVICING PROCEDURES: Such term as defined in Section 2.04(e).
SERVICING RECORDS: With respect to a Mortgage Loan, all of the
Subservicer's servicing records, including without limitation all servicing
files, documents, records, data bases, computer tapes (other than proprietary
computer software of Subservicer), reports of payment histories and other
reports relating to the servicing of such Mortgage Loan, but excluding any
servicing documentation which is included in the Servicing Mortgage File.
SUPPLEMENTAL FEES: With respect to any Mortgage Loan, late charges,
modification fees, subordination fees, release fees, insufficient funds charges
and related amounts received in respect of a Mortgage Loan in connection with
the servicing thereof, which amounts are not attributable to principal or
interest on such Mortgage Loan or to Escrow Payments relating thereto, but not
prepayment penalties.
T&I ADVANCE: With respect to any Mortgage Loan, the advance by the
Subservicer of its own funds to pay Escrow Payments.
TRANSFER DATE: Transfer Date(s) for any Mortgage Loans shall be the
Settlement Date or Settlement Dates upon which Participant purchases a
Participation in such Mortgage Loans.
WHOLE LOAN SALE: Any sale or other transfer of Mortgage Loans from the
Corporation to an investor not involving a Securitization.
Y2K COMPLIANT: With respect to any product or system and its
constituent elements, Y2K Compliant means that such product or system and its
constituent elements correctly, completely, consistently, accurately, reliably,
efficiently, and securely processes, transforms, operates, sorts, calculates,
compares, reports, displays, archives and accepts commands related to data and
associated programs across multiple interfaces and across multiple centuries
without utilizing bridges, gateways and the like while still preserving the
level of functionality, usability, reliability, efficiency, performance and
accessibility of such data and associated programs in each case in all material
respects as existed prior to any modification to such product or system and its
constituent elements to make the same Y2K Compliant.
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ARTICLE II
ENGAGEMENT OF SUBSERVICER
SECTION 2.01. CONTRACT FOR SERVICING; POSSESSION OF SERVICING FILES.
(a) Contract for Servicing. The Corporation hereby contracts with the
Subservicer exclusively to perform the servicing of all Mortgage Loans, in
accordance with this Agreement, which Mortgage Loans shall be identified on
Mortgage Loan Schedules delivered by the Corporation to the Subservicer from
time to time and Subservicer agrees to provide such servicing as provided
herein.
(b) Mechanics of Transfer. On or before the Transfer Date for any
Mortgage Loan, the Corporation shall, with respect to the Mortgage Loans on the
related Mortgage Loan Schedule, deliver, in an electronic format agreed upon by
both parties, a schedule of all such Mortgage Loans and the Subservicer will
confirm its acceptance of such Mortgage Loans for servicing hereunder.
(c) Possession of Servicing Mortgage Files. On or before the related
Transfer Date, the Corporation shall, at the Corporation's expense and upon the
request of the Subservicer, cause each Servicing Mortgage File to be delivered
to the Subservicer, except such Servicing Mortgage Files or parts thereof that
have been deposited with the Participant's custodian or otherwise pursuant to
the Participation Agreement. Each Servicing Mortgage File delivered to the
Subservicer shall be held by the Subservicer in order to service the Mortgage
Loans pursuant to this Agreement and shall be held in trust by the Subservicer
for the benefit of the Participant as the owner thereof. The Subservicer's
possession of any portion of the Mortgage Loan documents shall be at the will of
the Participant for the sole purpose of facilitating servicing of the related
Mortgage Loan pursuant to this Agreement, and such retention and possession by
the Subservicer shall be in a custodial capacity only. The ownership of each
Mortgage Note, Mortgage, and the contents of the Servicing Mortgage File shall
be vested in the Participant and the ownership of all records and documents with
respect to the related Mortgage Loan prepared by or which come into the
possession of the Subservicer shall immediately vest in the Participant and
shall be retained and maintained, in trust, by the Subservicer at the will of
the Participant in such custodial capacity only. The portion of each Servicing
Mortgage File retained by the Subservicer pursuant to this Agreement shall be
segregated from the other books and records of the Subservicer and shall be
appropriately marked to reflect the ownership of the related Mortgage Loan by
the Participant. The Subservicer shall release from its custody the contents of
any Servicing Mortgage File retained by it only in accordance with this
Agreement.
(d) Delivery of Documents. The Subservicer shall forward to the
Participant (or its designated custodian) original documents evidencing any
assumption, modification, consolidation or extension of any Mortgage Loan
entered into in accordance with this Agreement within one week of their
execution; provided, however, that the Subservicer shall provide the Participant
(or its designated custodian) with a certified true copy of any such document
submitted for recordation within one week of its execution, and shall provide
the original of any document submitted for recordation or a copy of such
document certified by the appropriate public recording office to be a true and
complete copy of the original, and applicable recording information, within 120
days of its submission for recordation.
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(e) Servicing Changes. If, following the date of this Agreement, the
Corporation shall propose to (i) sell to Participant Participations in loans
other than those currently originated or otherwise acquired by it in the
ordinary course of business which loans would have servicing requirements
different from those set forth herein; and/or (ii) otherwise alter any aspect of
its origination activities or servicing requirements that, in each case,
Subservicer determines in good faith would have a material effect on its
obligations under this Agreement (any such amendment, supplement,
discontinuation, introduction or other alteration being herein referred to as a
"Servicing Change"), the Corporation shall give the Subservicer written notice
of each such proposed Servicing Change accompanied, as applicable, by a written
description of each proposed loan type or amendment, supplement or other
alteration to the origination or servicing activities, which description shall
in each case be sufficiently clear, comprehensive and detailed to provide a
reasonable basis for the training of individuals who would be required to follow
the procedures described thereby (such written notice is referred to herein as a
"Servicing Change Proposal"). The Corporation shall not propose any Servicing
Change with respect to any Mortgage Loans serviced hereunder without
Participant's written consent.
Within sixty (60) Business Days following the Subservicer's receipt of
a Servicing Change Proposal, the Subservicer shall either (i) accept such
Servicing Change Proposal by delivering to the Corporation a written notice of
acceptance, in which case the Servicing Change shall become effective on the
date specified in the Servicing Change Proposal, or (ii) deliver a written
notice of non-acceptance to the Corporation stating that (a) the performance of
services hereunder by the Subservicer in accordance with such proposed Servicing
Change would result in an increase in the cost to and burden upon the
Subservicer of performing services hereunder and/or (b) such proposed Servicing
Change cannot be practicably implemented. Any such notice shall contain a
description of the increased cost or burden or, as appropriate, the reason or
such impracticability. In the event the Subservicer timely delivers to the
Corporation any such notice of non-acceptance in response to a Servicing Change
Proposal, such proposed Servicing Change shall not become effective unless and
until agreed upon in writing by both the Corporation and Subservicer.
In the event that Subservicer advises the Corporation that it is not
willing to enter into a Servicing Change with the Corporation at the price and
on the terms and conditions set forth in the Servicing Change Proposal, or fails
to advise the Corporation of its intentions within the sixty (60) day period
referred to in the paragraph above, the Corporation shall be free for a period
of sixty (60) days following the expiration of such sixty (60) day period to
enter into a subservicing agreement with a third party at a price and on other
terms and conditions no more favorable to such third party than those set forth
in the Servicing Change Proposal; provided, however, that the Corporation shall
forward to Subservicer a complete copy of the subservicing agreement as
negotiated with such third party at least five (5) Business Days before it is
signed.
Before the Corporation may enter into a subservicing agreement with a
third party at a price or on other terms and conditions more favorable to such
third party than those set forth in the Servicing Change Proposal, the
Corporation must provide a description of the price and the
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<PAGE> 13
material terms and conditions (the "Terms") as proposed to such third party, and
the Subservicer may accept or reject the Terms within five (5) Business Days
thereafter. If the Subservicer accepts the Terms, the Subservicer and the
Corporation shall negotiate and enter into a subservicing agreement based upon
the Terms.
As of the date hereof, the Corporation is not originating or otherwise
acquiring mortgage loans for the purpose of Securitization with Freddie Mac or
Ginnie Mae. A proposal by the Corporation to originate or otherwise acquire
mortgage loans for Securitization with Freddie Mac or Ginnie Mae would be a
Servicing Change.
SECTION 2.02. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
CORPORATION.
The Corporation hereby makes the following representations, warranties
and covenants to Subservicer as of the date hereof and as of each Transfer Date,
and such representations, warranties and covenants shall survive transfer of
servicing of the related Mortgage Loans to Subservicer on such Transfer Date:
(a) The Corporation is duly organized and validly existing under the
Laws governing its formation and existence, has all licenses necessary to carry
on its business as it is now being conducted, and is duly authorized and
qualified to transact in each applicable state any and all business contemplated
by this Agreement; the Corporation has all requisite corporate power and
authority to execute and deliver this Agreement and to perform in accordance
herewith and therewith; the execution, delivery and performance of this
Agreement by the Corporation and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by the
Corporation; this Agreement evidences the valid and binding obligation of the
Corporation, enforceable against the Corporation in accordance with its terms,
except as enforcement hereof or thereof may be limited by applicable Debtor
Relief Laws and general principles of equity, whether considered in a proceeding
at law or in equity;
(b) Any necessary approval of the transactions contemplated by this
Agreement from each federal or state regulatory authority having jurisdiction
over the Corporation has been obtained; there are no actions or proceedings
pending or affecting the Corporation that would adversely affect its ability to
perform hereunder;
(c) The consummation of the transactions contemplated by this Agreement
are in the ordinary course of business of the Corporation and will not result in
the breach of any term or provision of the certificate of incorporation or other
organizational documents of the Corporation 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 agreement, indenture or loan or
credit agreement or other instrument to which the Corporation or its properties
are subject, or result in the violation of any Law to which the Corporation or
its properties are subject; and
(d) To the best knowledge of the Corporation, with respect to each
Mortgage Loan, the related Mortgage Note and Mortgage are genuine and each is
the legal, valid and binding obligation of the maker thereof, enforceable in
accordance with its terms, except as enforceability may be limited by Debtor
Relief Laws and by general principles of equity, whether considered in a
proceeding at law or in equity.
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SECTION 2.03. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SUBSERVICER.
The following representations, warranties and covenants are made by
Subservicer to the Corporation on the date of this Agreement and shall be
ongoing and in effect throughout the term of this Agreement, except that the
representations, warranties and covenants made in Sections 2.03(h) and 2.03(i)
are made only as of the date hereof:
(a) Subservicer is duly organized, validly existing and in good
standing under the Laws governing its formation and existence, has all licenses
necessary to carry on its business as it is now being conducted, and is duly
authorized and qualified to transact in each applicable state any and all
business contemplated by this Agreement and is in compliance with the Laws of
each such state to the extent necessary to ensure the enforceability of the
Mortgage Loans and the terms of this Agreement; Subservicer has all requisite
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 Subservicer and the consummation of the transactions contemplated
hereby have been duly and validly authorized by Subservicer; this Agreement has
been duly executed and delivered and evidences the valid and binding obligation
of Subservicer, enforceable in accordance with its terms, except as enforcement
hereof may be limited by applicable Debtor Relief Laws and general principles of
equity, whether considered in a proceeding at law or in equity;
(b) Any necessary approval of the transactions contemplated by this
Agreement from each federal or state regulatory authority having jurisdiction
over Subservicer has been obtained; there are no actions or proceedings pending
or affecting Subservicer that would adversely affect its ability to perform
hereunder;
(c) The consummation of the transactions contemplated by this Agreement
are in the ordinary course of business of Subservicer and will not result in the
breach of any term or provision of the certificate of incorporation or bylaws of
Subservicer 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 agreement, indenture or loan or credit agreement or other
instrument to which Subservicer or its property is subject, or result in the
violation of any Law to which Subservicer or its property is subject;
(d) From time to time Subservicer will report, as more fully set forth
in this Agreement, information relating to the Mortgage Loans to the Corporation
and the Participant, and will do every act and thing which may be reasonably
necessary or required to perform its duties under this Agreement;
(e) Subservicer agrees that for so long as it shall continue to serve
in the capacity contemplated under the terms of this Agreement, Subservicer (i)
will not dissolve or otherwise dispose of all or substantially all of its assets
and (ii) will not voluntarily consolidate with or merge into any other entity or
permit one or more other entities to consolidate with or merge into
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it; provided, however, Subservicer may dispose of its assets, consolidate with
or merge into any other entity or permit one or more other entities to
consolidate with or merge into it if (A) such transferee, resulting or surviving
entity (if other than the Subservicer) expressly assumes, in a form approved by
the Corporation, all obligations of Subservicer under this Agreement (including
any accrued liabilities thereunder), (B) such transferee, resulting or surviving
entity (if other than the Subservicer) would not then be in default under any
material provision of this Agreement, and (C) such transferee, resulting or
surviving entity would have a net worth of at least $32,000,000. In connection
with any disposition of assets, consolidation or merger which is permitted
pursuant to the preceding sentence, the Corporation shall release Subservicer in
writing from the obligations so assumed. Such release shall be effective upon
the assumption by the transferee, resulting or surviving entity (if other than
the Subservicer) of all obligations of Subservicer under this Agreement, it
being understood that, unless the Corporation otherwise agrees in writing,
Subservicer shall not be released from any liabilities arising from events,
actions or omissions by Subservicer prior to the date of such assumption;
(f) No information, certificate of an Officer, statement furnished in
writing, or report required hereunder, delivered to the Corporation or the
Participant, will, to the best knowledge of Subservicer after due inquiry,
contain any untrue statement of a material fact or omit a material fact
necessary to make the information, certificate, statement or report not
misleading;
(g) The Subservicer can perform each and every covenant contained in
this Agreement;
(h) There is no action, suit, proceeding or investigation pending or
threatened against the Subservicer which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Subservicer, or in
any material impairment of the right or ability of the Subservicer to carry on
its business substantially as now conducted, or in any material liability on the
part of the Subservicer, or which would draw into question the validity of this
Agreement or of any action taken or to be taken in connection with the
obligations of the Subservicer contemplated herein, or which would be likely to
impair materially the ability of the Subservicer to perform under the terms of
this Agreement;
(i) The Subservicer has not dealt with any broker or agent or anyone
else who might be entitled to a fee or commission in connection with this
transaction other than the Corporation;
(j) Subservicer represents and warrants that it, and all of its
information systems, data processing and other hardware, software and other
systems, facilities, programs and procedures, are subject to a plan which has
been initiated and which has the goal of rendering such systems, data
processing, hardware, software and procedures Y2K Compliant by June 30, 1999 and
that such systems, data processing, hardware, software and procedures shall be
Y2K Compliant by June 30, 1999; and
(k) Subservicer maintains a disaster recovery service plan (the
"Disaster Recovery Service Plan") for the services provided by Subservicer, and
shall continue to maintain such Disaster Recovery Service Plan for the services
at all times during the term of this Agreement. A
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"Disaster" shall mean any unplanned interruption of the operations of or
inaccessibility to the Subservicer data center in which Subservicer, using
reasonable judgment, requires relocation of processing to a primary recovery
location. Subservicer shall restore the services in accordance with the time
frames specified in the Disaster Recovery Service Plan. Subservicer shall notify
the Corporation as soon as possible after it deems a service outage to be a
Disaster. Subservicer shall move the processing of services hereunder to a
primary recovery location as expeditiously as possible. During a Disaster,
optional or on-request services shall be provided by Subservicer only to the
extent adequate capacity exists at the primary recovery location and only after
stabilizing the provision of base on-line services.
SECTION 2.04. COVENANTS RELATING TO MORTGAGE LOANS.
With respect to each Mortgage Loan, the following covenants of
Subservicer to the Corporation shall be in effect with respect to each Mortgage
Loan for so long as such Mortgage Loan is being serviced pursuant to this
Agreement:
(a) The terms, covenants and conditions of the Mortgage Loan will not
be waived, altered, impaired or modified by Subservicer in any respect other
than as permitted by Section 4.01(b) hereof;
(b) Subservicer will not do any act or omit to do any act which creates
or would create an offset, defense or counterclaim to the Mortgage Loan,
including the obligation of the Mortgagor to pay the unpaid principal of and
interest on the Mortgage Loan;
(c) Any fees charged and retained by Subservicer with respect to the
Mortgage Loan, will be in compliance with all applicable Laws and industry
standards;
(d) Subservicer will comply with federal disclosure laws, the fair
credit reporting act and other Laws which impose requirements, restrictions or
conditions on Subservicer in connection with the servicing of Mortgage Loans
hereunder; and
(e) The servicing practices to be used by the Subservicer with respect
to each Mortgage Loan will be in all respects in compliance with all federal,
state and local laws, rules, regulations and requirements in connection
therewith and will be consistent with the procedures and standards by which
Subservicer services and collects loans held for Subservicer's own account and
the accounts of its Affiliates (the "Servicing Procedures") and otherwise
customary in the mortgage origination and servicing business for loans of the
same or similar size and type. Subservicer has provided to the Corporation and
Participant a copy of the Servicing Procedures as currently in effect.
Subservicer acknowledges that the Corporation has entered into this Agreement in
reliance upon the Subservicer's independent status, the adequacy of its
servicing facilities, plan, personnel, records and procedures, and its
integrity, reputation and financial standing.
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ARTICLE III
ASSIGNMENT OF AGREEMENT
SECTION 3.01. ASSIGNMENT OF CORPORATION'S RIGHTS.
The Subservicer acknowledges and agrees that, from time to time, the
Corporation may assign, in writing, its right, title and interest in and to one
or more Mortgage Loans and, in connection therewith, its rights under this
Agreement with respect to such Mortgage Loans, and the Subservicer hereby
consents to each such assignment. The Corporation shall provide Subservicer with
prior written notice of any such assignment, together with a schedule
identifying the Mortgage Loans so assigned.
SECTION 3.02. DELEGATION OF CORPORATION'S RIGHTS AND DUTIES.
The Corporation may assign, from time to time to the extent permitted
by Law, all or a portion of the authority, rights and/or duties of the
Corporation under this Agreement to its duly appointed agents, including
consultants, custodians or other Persons retained by the Corporation. Upon
Subservicer's receipt of written notice of the taking of any action pursuant to
this Section 3.02, Subservicer shall treat any such assignee as if it were the
Corporation in accordance with the terms set forth in such assignment, until
notice to Subservicer of any modification or termination of such assignment.
Subservicer acknowledges and consents to such actions, waives any further notice
thereof and agrees to be bound thereby.
SECTION 3.03. DELEGATION OF SERVICING OBLIGATIONS.
Subservicer may engage one or more sub-subservicers to perform
Subservicer's obligations under this Agreement with the prior written consent of
the Corporation. The Corporation's consent to an appointment of a
sub-subservicer as referred to in the preceding sentence shall not be
unreasonably withheld or delayed; provided that the subservicer makes the
representations, warranties and covenants made by the Subservicer in Section
2.03 above, in each case to the extent applicable to it. It is understood that
the Subservicer may not assign its rights hereunder to a successor subservicer
without the prior written consent of the Corporation.
Subservicer shall be entitled to delegate discrete computational, data
processing, collection and foreclosure duties and real estate tax collection and
payment duties to subcontractors selected by Subservicer without giving any
notice or obtaining any consents from the Corporation, provided that Subservicer
may not delegate a material portion of its obligations under this Agreement
without the prior written consent of the Corporation, which shall not be
unreasonably withheld or delayed. The Subservicer shall assure that each entity
retained to provide services as specified in this section is fully licensed and
holds all required federal, state or local government franchises, certificates
and permits necessary to conduct the business in which such entity is engaged
and that such entity is reputable, knowledgeable, skilled and experienced and
has the necessary personnel, facilities and equipment required to provide the
services for which it is retained. Any entity retained in accordance with this
paragraph shall be retained solely for Subservicer's account and at
Subservicer's sole expense and shall not be deemed to be an agent or
representative of the Corporation, its successors or assigns.
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No assignment, delegation, subcontract, authorization or appointment by
Subservicer of a sub-subservicer or any other subcontractor or delegatee shall
relieve Subservicer of the liability and responsibilities with respect to any of
its duties, liabilities or obligations so assigned, delegated, subcontracted,
authorized or appointed, unless the Corporation otherwise consents in its sole
discretion to release Subservicer from the liability and responsibilities with
respect thereto. Subservicer may not pledge or encumber its rights or privileges
hereunder without the prior written consent of the Corporation, which such
consent may be withheld in the Corporation's sole discretion.
ARTICLE IV
SERVICING DUTIES OF SUBSERVICER
SECTION 4.01. SERVICING OF MORTGAGE LOANS.
(a) General Servicing Standards. Subservicer shall manage, service and
administer the Mortgage Loans from and after their respective Transfer Dates in
conformity with the terms of this Agreement in accordance with the best
interests of the Corporation. In fulfilling the foregoing duties and in
administering and enforcing Mortgages, Mortgage Notes and related security
documents, and in fulfilling all of its other obligations under this Agreement,
Subservicer will exercise a degree of skill and care that is consistent with
mortgage loan servicing standards exercised by prudent mortgage lending
institutions which service mortgage loans of the same type as the Mortgage Loans
in the jurisdictions where the respective related Mortgaged Properties are
located and, to the extent consistent with the foregoing, in the same manner in
which it services similar loans for its own portfolio or the portfolios of its
Affiliates and with a view to the maximization of timely recovery of principal
and interest on the Mortgage Loans, but without regard to: (i) any relationship
that the Subservicer or any Affiliate of the Subservicer may have with the
related Mortgagor, (ii) any obligations of the Subservicer to make Advances
relating to a Mortgage Loan, or (iii) the Subservicer's right to receive
compensation for its services hereunder. Subservicer shall have full power and
authority consistent with the aforementioned standards, acting alone and/or
through agents and designees as permitted by Section 3.03 above, to do any and
all things it may deem necessary or desirable in connection with such servicing
and administration; provided, however, that to the extent Subservicer is
prohibited by any applicable rule, regulation, judicial or administrative
determination or other order applicable to it from carrying out any of its
obligations or duties provided for herein or in any document contemplated
herein, such failure shall not constitute a breach of this Agreement.
(b) Collection Procedures. Subservicer shall make reasonable and
prudent efforts to collect all payments called for under the terms and
provisions of the Mortgage Loans, consistently with the standards set forth
above. Consistent with the foregoing, Subservicer in its discretion may (1)
waive any late payment charge or any assumption fees of not more than $1,000 or
other fees that may be collected in the ordinary course of servicing a Mortgage
Loan and (2) arrange with a Mortgagor a schedule for the payment of due and
unpaid principal and interest, if in the Subservicer's reasonable and prudent
determination such waiver, modification, postponement or indulgence is in the
best interest of the Corporation; provided, however, that unless the Subservicer
has obtained the prior written consent of the Corporation, the Subservicer
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shall not permit any modification with respect to any Mortgage Loan that would
change the mortgage interest rate, defer or forgive the payment of principal or
interest, reduce or increase the outstanding principal balance (except as such
balance is reduced by Subservicer's collection of payments of principal) or
change the final maturity date on such Mortgage Loan if such modification would
involve more than $1,000.
(c) Amendment of Servicing Requirements. Subject to Section 2.01(e),
Subservicer agrees that the Corporation may modify or supplement the servicing
requirements set forth herein from time to time as they relate to its Mortgage
Loans, provided that such modifications or supplements (i) are not imposed
retroactively and (ii) are reasonably necessary or appropriate to clarify or
specify certain matters relating to the servicing of the Mortgage Loans.
SECTION 4.02. COLLECTIONS AND REMITTANCES.
(a) Subservicer shall segregate on its records the various funds held
in trust for Participant.
(b) All moneys collected by Subservicer pertaining to the Mortgage
Loans shall be held in trust for the Participant and initially be deposited into
the Collection Account and, within one (1) Business Day following receipt, shall
be deposited in the Separate Account. Funds on deposit in the Separate Account
may be invested at Subservicer's direction in Permitted Investments. Subservicer
shall be entitled to retain all income and gain from investment of funds. The
Subservicer shall deposit from its own funds the amount of any losses incurred
on any investments of funds held in trust for the Participant into the Separate
Account, promptly after such losses are incurred. The foregoing notwithstanding,
upon sixty (60) Business Days written notice from the Corporation or
Participant, the Subservicer will deposit all collections on account of Mortgage
Loans directly to the Separate Account. The Corporation shall reimburse
Subservicer promptly for all reasonable expenses incurred by it in arranging for
such direct deposit.
(c) On each Remittance Date, Subservicer shall withdraw from the
Separate Account and remit from funds collected in respect of Mortgage Loans
during the Due Period to an account designated by Participant (1) all payments
of principal and (2) out of the interest portion, an amount equal to the
interest due Participant on the applicable Outstanding Participation Purchase
Price for such Due Period calculated as set forth in Section 2.1(i)(iv) of the
Participation Agreement. The Subservicer shall then withdraw from the Separate
Account the remaining interest portion of such funds and shall remit to an
account designated by the Corporation, any such interest portion remaining after
retention by the Subservicer for its own account of (1) amounts necessary to pay
itself the Servicing Fee and any applicable related fees for such month
attributable to the related Mortgage Loans and (2) amounts necessary to
reimburse itself or a predecessor Subservicer for NonRecoverable Advances made
in respect of the Mortgage Loans in accordance with Section 4.04(b) below and
any Loan Setup Fees and other service fees earned pursuant to Section 4.14
below, Expenses and Advances not to be reimbursed from Escrow Payments. The
Corporation shall pay to the Subservicer within five (5) Business Days following
its receipt of the Subservicer's invoice, a copy of which shall be sent to the
Participant at the same time as it is sent to the Corporation, the full amount
of any Servicing Fee, any Non-
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Recoverable Advances made in respect of the Mortgage Loans in accordance with
Section 4.04(b) below, any Loan Setup Fees and other service fees earned
pursuant to Section 4.14 below, any other fees earned by Subservicer hereunder
and not satisfied pursuant to the preceding sentence and any previously
unreimbursed Expenses and Advances.
(d) Subservicer shall remit to the Participant all Principal
Prepayments in full, Insurance Proceeds received in connection with liquidation
of the related Mortgage Loan (to the extent not required by the related Mortgage
to be applied to the repair of the related Mortgaged Property) and Liquidation
Proceeds. In the case of any such Principal Prepayment, Insurance Proceeds and
Liquidation Proceeds described above, the Corporation shall pay to the
Subservicer within five (5) Business Days following its receipt of Subservicer's
invoice all previously unreimbursed Advances made by Subservicer in respect of
such Mortgage Loan.
(e) The Subservicer shall be entitled to retain for its own account all
Supplemental Fees with respect to a Mortgage Loan.
(f) All remittances of funds by Subservicer pursuant to this Agreement
shall be made by wire transfer of immediately available funds on or before 2:00
p.m. Charleston, West Virginia time on the applicable Remittance Date (or other
required date of remittance in the case of remittances required under Section
4.02(d) above); provided, however, that if any remittance is specified herein to
be made on a day which is not a Business Day, such remittance shall be made on
the Business Day immediately preceding such day.
SECTION 4.03. ADVANCES.
(a) Generally. The Subservicer shall not be required to make Advances
except as expressly set forth herein or in a written agreement between
Subservicer and the Corporation.
(b) T&I Advances. In the event that the Escrow Payments, if required,
with respect to a Mortgage Loan or REO Property are insufficient to pay
insurance premiums or taxes or assessments or other charges that give rise to or
may give rise to liens on the related Mortgaged Property when such taxes,
assessments or other charges become due, and such amounts are not otherwise paid
by the Mortgagor, Subservicer shall advance such amounts on behalf of the
Mortgagor.
(c) Expense Advances. The Subservicer shall advance all Expenses
related to recovery on or liquidation of Mortgage Loans (including the costs of
disposition of any related REO Properties and costs of any collection or
foreclosure proceedings relating to any Mortgage Loans), provided, that any
individual Expense in excess of $5,000 shall require the prior written consent
of the Corporation.
(d) Non-Recoverable Advances. Notwithstanding the foregoing,
Subservicer shall not be required to make any Advance of less than $1,000 that
it determines in its good faith judgment would be, if made, a Non-Recoverable
Advance, unless otherwise instructed by the Corporation in writing. If
Subservicer determines in its good faith judgment that that any Advance of
$1,000 or more would be a Non-Recoverable Advance, Subservicer shall notify the
Corporation and shall not
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be required to make such Advance except out of funds provided specifically for
such purpose to Subservicer (in which case, Subservicer shall not be entitled to
reimbursement of such Advance pursuant to Section 4.04 or otherwise).
SECTION 4.04. REIMBURSEMENT OF ADVANCES.
If Subservicer shall have made an Advance in respect of a Mortgage Loan
or REO Property, it shall be entitled to recover the amount of such Advance by
retaining such amount from subsequent collections of Escrow Payments on such
Mortgage Loan (to the extent permitted by law and the documents relating to such
Mortgage Loan) or as set forth in Section 4.02(c).
SECTION 4.05. COLLECTION OF INSURANCE PREMIUMS, TAXES AND ASSESSMENTS.
(a) If funds are being held in the Collection Account or the Separate
Account with respect to a Mortgage Loan, all moneys received as Escrow Payments
by Subservicer with respect to such Mortgage Loan shall be held by Subservicer
for the benefit of the Participant and the applicable Mortgagor. Subservicer
shall maintain a record of the source of each Escrow Payment and the total of
such payments on deposit from each Mortgagor. Subservicer shall obtain bills for
taxes, insurance and other items related to the Mortgage Loan and effect
payments thereof with checks drawn on the Separate Account, prior to each
applicable due date.
(b) With respect to any Mortgage Loan with a first mortgage position,
if any Mortgagor does not make or is not required to make Escrow Payments for
tax and insurance expenses and for payment of any other assessments or charges
which could give rise to a lien on the related Mortgaged Property if not paid
when due, Subservicer shall be responsible for causing the related Mortgagor to
pay taxes, insurance premiums and other similar items prior to their respective
due dates in order to protect the interest of the Corporation in the related
Mortgaged Property. If a Mortgagor fails to make such payments in a timely
manner, the Subservicer shall make a T&I Advance in the amount of such
delinquent payments pursuant to Section 4.03(b) above.
SECTION 4.06. ASSUMPTIONS.
In connection with an assumption of a Mortgage Loan by a transferee of
a Mortgaged Property, the Subservicer shall process such assumption as provided
for in the Mortgage Note or the Mortgage Note assumption rider and shall verify
that:
(a) no material term of the Mortgage Note (including, but not limited
to, the mortgage interest rate, the amount and/or timing of the payment of
principal or interest, the outstanding principal balance, the remaining term to
maturity, the gross margin, the index, the maximum lifetime mortgage interest
rate, the minimum lifetime mortgage interest rate, and any periodic rate cap or
any periodic payment cap) has been changed in connection with such assumption;
(b) the new Mortgagor qualifies for credit similar to that extended to
the original Mortgagor under the Corporation's underwriting guidelines;
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(c) where applicable, the respective primary mortgage insurer and/or
the respective pool insurer has in advance approved in writing such assumption
of such Mortgage Loan by the assumptor and such Mortgage Loan will continue to
be insured by such primary mortgage insurer and/or such pool insurer;
(d) the documents relating to such assumption (i) create a valid and
enforceable promise to pay the unpaid principal balance of the related Mortgage
Loan, together with interest thereon in accordance with the related Mortgage
Note by the new Mortgagor, and (ii) the related Mortgage continues to evidence a
valid and perfected lien on the related Mortgaged Property without any change in
seniority; and
(e) such Mortgage Loan will continue to evidence a valid security
interest upon the related Mortgaged Property without any change in seniority.
In connection with an assumption of a Mortgage Loan and in accordance
with the provisions of the related Mortgage Loan documents, upon verification of
the matters described above, and upon ten days prior written notice to the
Corporation, (i) the Subservicer may approve such assumption and (ii) the
Subservicer may release the previous Mortgagor from liability.
Subject to applicable law or regulation and the provisions of the
related Mortgage Note, the Subservicer may charge the Mortgagor and retain a
reasonable and customary assumption fee. Such fee is receivable only from the
Mortgagor directly and may not be withdrawn from any of the custodial accounts
maintained hereunder.
In connection with an assumption of a Mortgage Loan, the Subservicer
shall make all disclosures required by applicable law.
In the case of any assumption in connection with which the Corporation
is required to sign any assumption agreement, substitution agreement, supplement
to the Mortgage Note or Mortgage, or instrument of release releasing the
conveying Mortgagor from liability in connection with the related Mortgage Loan,
in order to effect such assumption, Subservicer shall deliver or cause to be
delivered such documents to the Corporation for execution. Upon receipt of such
documentation, the Corporation shall execute such documents and return them to
Subservicer for delivery to the Mortgagor and the assumptor.
Upon the closing of the transactions contemplated by any documents
relating to an assumption of a Mortgage Loan, Subservicer shall cause the
originals of the assumption agreement, the release (if any), or the modification
or supplement to the Mortgage Note or Mortgage to be delivered to the custodian
of the Legal Mortgage File relating to such Mortgage Loan, and Subservicer shall
retain copies of such documents for retention in the Servicing Mortgage File for
such Mortgage Loan.
If a Mortgagor transfers a Mortgaged Property without the transferee
entering into an assumption of the Mortgagor's Mortgage Loan as contemplated
above, Subservicer shall take all necessary actions to enforce any "due-on-sale"
clause contained in such Mortgage Loan.
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SECTION 4.07. REALIZATION UPON DEFAULTED MORTGAGE LOANS.
(a) Foreclosure. Subservicer shall be responsible for determining
the necessity of instituting foreclosure or other similar action with respect to
each Mortgage Loan in accordance with prudent residential mortgage loan
servicing standards relating to mortgage loans comparable to such Mortgage Loans
generally accepted within the servicing industry, but shall not institute
foreclosure proceedings without the prior written approval of the Corporation.
Subservicer shall inspect Mortgaged Properties relating to delinquent Mortgage
Loans as required by its collection procedures (or shall cause such Mortgaged
Properties to be so inspected). The Subservicer shall notify any related primary
mortgage insurer or pool insurer of its decision to pursue foreclosure
proceedings regarding a Mortgage Loan. Each foreclosure or similar proceeding
shall be conducted by Subservicer in accordance with general industry standards,
this Agreement, applicable Law and all requirements of any insurer providing
insurance on such Mortgage Loan. Subservicer shall make available to the
Corporation any court pleadings, requests for trustee's sale or other documents
necessary for the foreclosure or trustee's sale in respect of a Mortgaged
Property or for any legal action brought to obtain judgment against any
Mortgagor on a Mortgage Note or Mortgage or to obtain a deficiency judgment, or
to enforce any other remedies or rights provided by a Mortgage Note or Mortgage
or otherwise available to the Corporation against a Mortgagor at law or in
equity. The Corporation shall execute and redeliver, as required, any such
documents to Subservicer as soon as reasonably practicable after its receipt
thereof.
Subservicer shall not commence foreclosure or other similar proceedings
with respect to a Mortgage Loan in cases where it has actual knowledge that the
related Mortgaged Property is contaminated by hazardous wastes or hazardous
substances and where, in the good faith judgment of Subservicer, the liabilities
that would be imposed on the Corporation with respect to such contamination as a
result of such action would exceed the Net Liquidation Proceeds that could be
realized from such Mortgage Loan. Subservicer shall notify the Corporation at
any time it obtains actual knowledge of such a situation regarding any Mortgaged
Property. Subservicer shall have no affirmative duty or obligation to determine
whether a Mortgaged Property is situated on a toxic waste site or is
contaminated by hazardous wastes or hazardous substances and shall not be liable
for any liabilities imposed on the Corporation as a result of the existence of
hazardous wastes or hazardous substances on any REO Property.
(b) REO Property.
1. General. Subservicer shall manage or oversee the management of
property received through foreclosure and Subservicer shall handle or oversee
the sale of any such property, consistently with the terms of this Agreement and
prudent management standards relating to real estate comparable to the REO
generally accepted within the servicing industry. The Subservicer shall prepare
and file reports, as necessary, relating to foreclosure and abandonment of REO
Property in accordance with Section 6050J of the Code.
2. Holding of REO Property. After the foreclosure of a Mortgage
Loan and prior to disposition of any related REO Property, Subservicer shall
assist in the marketing, property management and sale or other disposition of
the related Mortgaged Property. Subservicer shall not be entitled to receive any
Servicing Fees in respect of any REO Property.
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However, in consideration for its assistance in the marketing, property
management and disposition of REO Properties, Subservicer shall be paid a REO
Property processing fee, upon the final disposition of the REO Property, of 5%
of the price at which the REO Property is disposed of, which shall be treated as
a selling expense for such REO Property as to which an Expense Advance was made.
Notwithstanding the Corporation's acquisition of title to a Mortgaged Property
and cancellation or satisfaction of the related Mortgage Loan, such Mortgage
Loan shall (except as otherwise expressly provided herein) be considered to be
an outstanding Mortgage Loan until such time as the related REO Property is sold
and the related Liquidation Proceeds have been remitted to the Participant, with
the same outstanding principal balance and the same Monthly Payments, Servicing
Fees and Advances continuing to be due thereunder as if it had not been
foreclosed. REO Property acquired by the Corporation may be leased, improved or
otherwise used for the production of income by or on behalf of the Corporation.
Income received by Subservicer in respect of any REO Property in any
month shall be treated as receipt of collections first in respect of Monthly
Payments then due and unpaid on the related Mortgage Loan and second as
Principal Prepayments of the related Mortgage Loan. Any proceeds of an REO
Property shall be accounted for separately from other amounts held in the
Separate Account.
3. Disposition. Subservicer shall make all reasonable efforts to
dispose of any REO Property as soon as practicable after the Corporation's
acquisition thereof. Subservicer shall notify the Corporation of all offers
received with respect to such REO Property, and the Corporation shall approve or
reject such offers within five (5) Business Days. If the Corporation does not
respond within five (5) Business Days, Subservicer may, at its option, sell the
REO Property on the terms of the notice provided to the Corporation or upon such
terms as Subservicer determines in good faith to be more favorable.
The proceeds from the disposition of any REO Property shall be remitted
by Subservicer pursuant to Section 4.02, with proceeds not representing interest
or Supplemental Fees being remitted as principal payments.
SECTION 4.08. REPORTS.
On or before the 10th day of each month, Subservicer shall submit to
the Corporation a Monthly Accounting Package for the Mortgage Loans and relating
to the preceding Due Period (as such report relates to Monthly Payments) and
relating to the preceding Prepayment Period (as such report relates to Principal
Prepayments, Liquidation Proceeds, Insurance Proceeds and other unscheduled
payments, and to losses incurred on Mortgage Loans). In addition, in connection
with any funds remitted on a date other than a Remittance Date, Subservicer
shall furnish a report in connection with such remittance specifying the
Mortgage Loan or Mortgage Loans to which such funds relate and a description of
such funds on a loan-by-loan basis (i.e., whether such funds constitute
principal, interest, Principal Prepayments, Insurance Proceeds, Liquidation
Proceeds, etc.). As required by applicable Law, Subservicer shall report
information related to the Mortgage Loans as necessary to permit the related
Mortgagors, the Corporation and the Participant properly to file all required
IRS returns. Subservicer shall also provide to the Corporation such other
reports or information regarding the related Mortgage Loans as may be reasonably
requested.
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SECTION 4.09. MAINTENANCE OF HAZARD INSURANCE.
If required by the applicable Mortgage and related documents,
Subservicer shall require that each Mortgagor obtain and maintain Hazard
Insurance for each Mortgage Loan. Such Hazard Insurance must provide coverage in
an amount equal to the lesser of (i) the unpaid principal balance of the covered
Mortgage Loan and (ii) the full insurable value of the related Mortgaged
Property. Subservicer also shall cause Hazard Insurance to be maintained on any
REO Property providing coverage in an amount at least equal to the amount
necessary to avoid the application of any co-insurance clause contained in the
policy providing such coverage. If the improvements securing a Mortgage Loan are
located at the time of origination of such Mortgage Loan in a federally
designated special flood hazard area and FNMA would require flood insurance
thereon, Subservicer shall cause flood insurance (to the extent commercially
available) to be maintained in respect thereof to the extent permitted by the
applicable Mortgage and related documents (and in respect of any REO Property
relating to such Mortgage Loan). Such flood insurance shall provide coverage in
an amount equal to the lesser of (i) the amount required to compensate for any
loss or damage to the Mortgaged Property on a replacement cost basis and (ii)
the maximum amount of such insurance available for the related Mortgaged
Property under the national flood insurance program (assuming that the area in
which such Mortgaged Property is located is participating in such program).
Subservicer shall retain custody of such policies and renewals thereof,
or proof of the existence thereof (which proof may consist of an appropriate
entry in Subservicer's computer records), and, upon request, shall issue a
certificate of an Officer to the Corporation certifying that the requirements of
this Section have been met. Subservicer's obligation to require such insurance
to be maintained shall be absolute, regardless of any failure or refusal by any
Mortgagor to pay in timely fashion any premium due thereon, and Subservicer
agrees, with respect to the Mortgage Loans, to indemnify and hold the
Corporation harmless against any loss suffered by the Corporation as a result of
the absence of Hazard Insurance or flood insurance or the insufficiency of
coverage provided by such Hazard Insurance or flood insurance to protect the
Corporation's interest with respect to any Mortgaged Property. Subservicer shall
use due diligence to ascertain the existence of any loss or damage to each
Mortgaged Property and, upon obtaining knowledge thereof, shall immediately
notify the applicable insurer. Each Hazard Insurance and flood insurance policy
maintained with respect to a Mortgage Loan shall provide for payment to
Subservicer, on behalf of the Participant and the related Mortgagor, in the
event of loss, and payments for losses under any such policy shall be collected
by Subservicer and held in trust for the Participant in accordance with this
Agreement until disbursed or remitted in accordance herewith.
Any amounts collected under any such policies (other than amounts to be
applied to the restoration or repair of the related Mortgaged Property or REO
Property or amounts released to the Mortgagor in accordance with Subservicer's
normal servicing procedures) shall be deposited in the Separate Account. Any
Insurance Proceeds (other than amounts used for restoration or repair or
required by applicable law to be paid to the related Mortgagor) collected by
Subservicer
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shall be accounted for as though such proceeds constituted a Principal
Prepayment except that, if such Insurance Proceeds are received in connection
with the liquidation of the related Mortgage Loan, they shall be accounted for
as though they were Liquidation Proceeds.
Any cost incurred by Subservicer in maintaining any such insurance
shall not be added to the amount owing under the Mortgage Loan, regardless of
whether the terms of the Mortgage Loan so permit. Any such costs shall be
recoverable by Subservicer out of Escrow Payments by the related Mortgagor as
permitted by the applicable Mortgage and related documents or from the
Corporation as provided in Section 4.02.
If Subservicer obtains and maintains a Lloyd's of London Equishield
policy in substantially the form provided to the Corporation and the Participant
prior to the date of this Agreement or a blanket policy issued or an insurance
company rated by Best's Rating Service in one of its two highest categories,
insuring against hazard losses on all of the Mortgage Loans and REO Properties,
it shall conclusively be deemed to have satisfied its obligation with regard to
maintenance of Hazard Insurance. It is understood and agreed that such a blanket
policy may contain a deductible clause, in which case Subservicer shall deposit
into the Separate Account, in no event more than two (2) Business Days after its
receipt of the related Insurance Proceeds, the amount of any loss on a Mortgaged
Property or REO Property not payable under the blanket policy because of such
deductible clause, but that would have been covered by a Hazard Insurance policy
had one been maintained with respect to such property. Subservicer agrees to
present, on behalf of itself and the Corporation, claims under any such blanket
policy. Subservicer shall take all commercially reasonable action necessary to
maintain in force any such blanket policy for such period as it is Servicing or
managing any Mortgage Loans or REO Properties.
SECTION 4.10. RELEASE OF MORTGAGE LOANS.
(a) Payment in Full. Upon receipt by Subservicer of the payment in full
of any Mortgage Loan, Subservicer will immediately notify the Corporation
(subject to Section 4.10(c) below) of such situation (which notification shall
include a statement to the effect that all amounts received or to be received in
connection with such payment that are required to be deposited in the Separate
Account have been or will be so deposited) and shall request delivery to it of
the related Legal Mortgage File. Upon receipt of such notification and request,
the Corporation shall release (or cause to be released) the related Legal
Mortgage File to Subservicer as soon as reasonably practicable and execute and
deliver to Subservicer any request for reconveyance, deed of conveyance or
reconveyance or release or satisfaction of mortgage, or other instrument in the
form provided by Subservicer releasing the lien of the related Mortgage, or any
power of attorney authorizing Subservicer to execute any of the foregoing
instruments (such instruments having been prepared by Subservicer), together
with the related Mortgage Note with written evidence of cancellation thereof as
directed by Subservicer.
(b) Requests for Release of Mortgage Files. From time to time as is
appropriate for the servicing or foreclosure of any Mortgage Loan, Subservicer
shall deliver to the Corporation (subject to Section 4.10(c) below) a
certificate of an Officer requesting that all, or any document constituting part
of, the Legal Mortgage File for such Mortgage Loan be released to Subservicer
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and certifying as to the reason for such requested release. With any such
certificate, Subservicer shall deliver to the Corporation a request for release
signed by an Officer on behalf of Subservicer in substantially the form set
forth in Exhibit C hereto (a "Request for Release"). As soon as reasonably
practicable after receipt of the foregoing, the Corporation shall deliver (or
cause to be delivered) the appropriate Legal Mortgage File or portion thereof
requested to Subservicer (subject to the provisions of any applicable custodial
agreement, if the related Mortgage Loan is subject thereto). The Corporation
shall reimburse Subservicer for all reasonable out-of-pocket Expenses incurred
by Subservicer in obtaining substitutes for any documents requested that are not
delivered in sufficient time to reasonably permit Subservicer to comply with
applicable laws or contractual obligations. Subservicer shall hold any Legal
Mortgage File or portion thereof held by it in trust for the benefit of the
Participant. Subservicer shall cause each Legal Mortgage File or portion thereof
in possession of Subservicer to be returned to the Participant or its designated
custodian when the need therefor by Subservicer no longer exists, unless (i) the
related Mortgage Loan has been liquidated and the Liquidation Proceeds relating
to such Mortgage Loan have been deposited into the Separate Account or (ii) the
Legal Mortgage File or portion thereof has been delivered to an attorney, or to
a public trustee or other public official as required by law, for purposes of
initiating or pursuing legal action in connection with the foreclosure of any
Mortgaged Property securing a Mortgage Loan, either judicially or nonjudicially,
and Subservicer has delivered to the Corporation a certificate of an Officer
certifying as to the name and address of the Person to which such Legal Mortgage
File or portion thereof was delivered and the purpose or purposes of such
delivery. In the event of the liquidation of a Mortgage Loan and sale of the
related Mortgaged Property and if Subservicer has previously delivered a Request
for Release of the related Legal Mortgage File or any document constituting a
part thereof, the Corporation shall return (or shall cause to be returned) such
Request for Release to Subservicer upon deposit of the related Net Liquidation
Proceeds into the Separate Account. If the related Mortgaged Property becomes
REO Property, the Corporation shall deliver (or shall cause to be delivered) the
related Request for Release to Subservicer upon delivery by Subservicer to the
Participant of the deed or other instrument pursuant to which title to such REO
Property was acquired.
(c) Custodians. All provisions of Sections 4.10(a) and 4.10(b) above,
as they apply to any Mortgage Loan serviced hereunder, shall be subject to the
terms of any custodial agreement between the Participant and its custodian, to
the extent Subservicer has knowledge of such custodial arrangement and its
applicability to such Mortgage Loan and has received a copy of the documentation
of such custodial arrangement. If the Subservicer is so aware, it shall deal
with the custodian under such custodial arrangement. Subservicer acknowledges
receipt and the applicability of the Custodian Agreement, dated as of June 29,
1998, by and among the Participant, the Corporation and State Street Bank &
Trust Company.
SECTION 4.11. MAINTENANCE OF FIDELITY BOND AND ERRORS AND OMISSIONS
INSURANCE.
Subservicer will obtain and maintain in full force and effect
throughout the term of this Agreement, at its own expense, a fidelity bond and
errors and omissions insurance ("E&O Insurance"), covering Subservicer's
officers and employees and other persons acting on behalf of Subservicer in its
capacity as Subservicer with regard to the Mortgage Loans. Subservicer shall
furnish to the Corporation, within thirty (30) days of receipt, reasonably
satisfactory evidence of
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the maintenance of such coverages. The amount of coverage under such fidelity
bond and E&O Insurance policy shall be at least equal to the coverage that would
be required by FNMA if Subservicer were servicing the Mortgage Loans for FNMA.
Such fidelity bond and E&O Insurance shall be issued by an insurance company
acceptable to FNMA. In the event that any such bond or policy shall cease to be
in effect, Subservicer shall obtain from an insurer acceptable to FNMA a
replacement bond or policy providing equivalent coverage. Subservicer shall
remit any amounts collected under such bond or policy relating to Subservicer's
activities with respect to the Mortgage Loans to the Participant to the extent
of losses covered thereby incurred by the Participant. No provision of this
Section shall operate to diminish, restrict or otherwise limit Subservicer's
responsibilities and obligations as set forth in this Agreement.
SECTION 4.12. FINANCIAL AND OTHER INFORMATION.
Subservicer, at its expense, shall furnish to the Corporation, upon the
Corporation's request, financial statements of City Holding Company for each of
its fiscal years, prepared in accordance with generally accepted accounting
principles and certified by City Holding Company's independent accountants, as
soon as available, and in any event promptly after such information is first
filed with the Securities and Exchange Commission. The Subservicer will provide
to the Corporation, upon the Corporation's request, City Holding Company's
unaudited quarterly financial statements as soon as available, and in any event
promptly after such information is first filed with the Securities and Exchange
Commission.
The Subservicer will deliver to the Corporation, on or before March 31
of each year, beginning with March 31, 1999, an Officer's Certificate of the
Subservicer substantially in the form set forth in Exhibit D hereto stating that
(1) a review of the activities of the Subservicer during the preceding calendar
year (or since the date hereof in the case of the first such statement) and of
its performance under this Agreement has been made under such officer's
supervision and (2) to the best of such officer's knowledge, based on such
review, the Subservicer has fulfilled all its material obligations under this
Agreement throughout such year (or since the Closing Date in the case of the
first such statement), or, if there has been a default in the fulfillment of any
such obligation, specifying each such default known to such officer and the
nature and status thereof.
On or before March 31 of each year, beginning with March 31, 1999, the
Subservicer at its expense shall cause a firm of nationally recognized
independent public accountants (who may also render other services to the
Subservicer) to furnish a report to the Corporation and the Participant to the
effect that such firm has examined certain documents and records relating to the
servicing activities of the Subservicer for the period covered by such report,
and that such examination, which has been conducted substantially in compliance
with the Uniform Single Attestation Program for Mortgage Bankers (to the extent
that the procedures in such audit guide are applicable to the servicing
obligations set forth in this Agreement), has disclosed no exceptions or errors
in records relating to the servicing activities of the Subservicer that, in the
opinion of such firm, are material.
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SECTION 4.13. LIABILITY OF SUBSERVICER FOR EXPENSES OF CORPORATION.
Subservicer agrees to pay, without reimbursement therefor, (i) all
costs or expenses, including reasonable attorney's fees, incurred by the
Corporation resulting from failure by Subservicer to file timely claims for
losses relating to Mortgage Loans (including the failure to file timely claims
under the insurance policies referred to in Section 4.09), (ii) all costs and
expenses incurred by the Corporation resulting from failure by Subservicer to
foreclose Mortgages relating to delinquent Mortgage Loans in a manner consistent
with this Agreement, (iii) all reasonable costs and expenses incurred by the
Corporation in investigating Subservicer's activities hereunder, if such
investigation proves that Subservicer has not complied in any material respect
with this Agreement, (iv) all costs and expenses incurred by the Corporation in
connection with replacing Subservicer in the event this Agreement is terminated
with cause pursuant to Section 5.02 hereof, and (v) all penalties associated
with the late payment of taxes, insurance premiums and other assessments, unless
some action on the part of a Mortgagor directly contributed to the imposition of
any such penalty, in which case Subservicer shall collect any such penalty from
such Mortgagor.
SECTION 4.14. SERVICING COMPENSATION.
(a) Servicing Fee. As compensation for its servicing activities
hereunder, the Corporation shall pay to Subservicer its Servicing Fee (the
"Servicing Fee"). The annual Servicing Fee for 125 Mortgage Loans shall be 75
basis points (0.75%).
The Servicing Fee for all Mortgage Loans other than 125 Mortgage Loans
will be negotiated in good faith by the Corporation and Subservicer with the
intention of achieving an appropriate economic outcome for both the Corporation
and Subservicer; provided that the Servicing Fee shall not be less than the fee
customarily paid servicers in the mortgage banking industry for servicing
mortgage loans similar to such Mortgage Loans in similar circumstances.
The Servicing Fee for any month shall equal one-twelfth of the annual
Servicing Fee, multiplied by the outstanding principal balance of each Mortgage
Loan as of the first day of such month, including any Mortgage Loan which is
delinquent or in foreclosure during such month.
(b) Loan Setup Fee. The Subservicer will be entitled to a Loan Setup
Fee to be paid by the Corporation with respect to each Mortgage Loan to
compensate the Subservicer for actions it takes in connection with the
acceptance of the obligation to service such Mortgage Loan.
(c) Additional Compensation. Additional servicing compensation, in the
form of Supplemental Fees and reinvestment income payable to Subservicer
pursuant to Section 4.02(b) above, may be paid to or retained by Subservicer in
respect of any Mortgage Loan to the extent not prohibited by the related
Mortgage Note and permitted by Law and to the extent not contrary to the terms
of this Agreement, and in the form of certain other servicing fees as set forth
in this Agreement, may be paid to Subservicer to the extent permitted by Law and
not contrary to the related Mortgage or Mortgage Note.
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(d) Compensation For Revenues On Liquidated Mortgage Loans. If the
Subservicer obtains any collections on a Liquidated Mortgage Loan that is a 125
Mortgage Loan subsequent to the date on which it became a Liquidated Mortgage
Loan, the Subservicer shall be entitled to receive, as additional Servicing Fee,
20% of such recovery amount to be paid pursuant to Section 4.02(c).
SECTION 4.15. NOTIFICATION OF ADJUSTMENTS.
With respect to each adjustable rate Mortgage Loan, the Subservicer
shall adjust the mortgage interest rate on each related interest rate adjustment
date and shall adjust the Monthly Payment on each related mortgage payment
adjustment date, if applicable, in compliance with the requirements of
applicable law and the related Mortgage and Mortgage Note. The Subservicer shall
execute and deliver any and all necessary notices required under applicable law
and the terms of the related Mortgage Note and Mortgage regarding the mortgage
interest rate and Monthly Payment adjustments. The Subservicer shall promptly
deliver to the Corporation such notifications and any additional applicable data
regarding such adjustments and the methods used to calculate and implement such
adjustments as part of its Monthly Accounting Report or upon the reasonable
written request of the Corporation. Upon the discovery by the Subservicer or the
receipt of notice from the Corporation that the Subservicer has failed to adjust
a mortgage interest rate or Monthly Payment in accordance with the terms of the
related Mortgage Note, the Subservicer shall immediately deposit in the
Collection Account from its own funds the amount of any interest loss or
deferral caused the Corporation thereby.
SECTION 4.16. Y2K COMPLIANCE.
Servicer covenants and agrees to make commercially reasonable efforts
to protect its business and operations against any contamination or
recontamination of its products and systems arising, directly or indirectly, by
reason of any third-party's failure to be Y2K Compliant (including, without
limitation, third-parties which conduct business with the Servicer, and any
subservicer allowed hereunder or any of its customers).
SECTION 4.17. DOCUMENT RETRIEVAL.
Upon the reasonable request of the Corporation, Subservicer shall
provide to the Corporation within five (5) Business Days of the Corporation's
request, document research and retrieval with respect to the Servicing Mortgage
Files held by it hereunder. The Corporation shall reimburse Subservicer promptly
following receipt of its invoice for all reasonable out-of-pocket expenses
incurred by it in performing such research and retrieval and for staff costs
associated with requests requiring services outside the ordinary course of
business.
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ARTICLE V
TERMINATION AND LIABILITIES
SECTION 5.01. LIMITATION ON RESIGNATION AND ASSIGNMENT BY THE
SUBSERVICER.
The Subservicer shall not resign from the obligations and duties hereby
imposed on it as to any Mortgage Loan except by mutual consent of the
Subservicer, the Corporation and the Participant or upon the determination that
its duties hereunder are no longer permissible under applicable law and such
incapacity cannot be cured by the Subservicer. Any such determination permitting
the resignation of the Subservicer shall be evidenced by an Opinion of Counsel
to such effect delivered to the Corporation and the Participant, which Opinion
of Counsel shall be in form and substance acceptable to each of them. No such
resignation shall become effective until a successor shall have assumed the
Subservicer's responsibilities and obligations hereunder.
SECTION 5.02. TERMINATION FOR CAUSE.
The Corporation, with the prior written consent of the Participant, may
terminate all of Subservicer's rights pursuant to this Agreement (subject to
Section 5.04 below) upon the occurrence of any one or more of the following
events (each, an "Event of Default"):
(1) Failure of Subservicer to remit as required by this
Agreement any amounts received by Subservicer, failure of Subservicer
to make any Advance as required by this Agreement, and the continuance
of either such failure unremedied for three (3) Business Days following
the date upon which written notice of such failure, requiring the same
to be remedied, shall have been received by Subservicer.
(2) Failure of Subservicer duly to observe or perform in any
material respect any other covenant, condition or agreement contained
in this Agreement that is required to be observed or performed by
Subservicer (other than as referred to in subsection (1) above) for a
period of 30 days after Subservicer's receipt of written notice from
the Corporation specifying such failure and requesting that it be
remedied; provided, however, that if the failure stated in such notice
cannot be corrected within such period and if corrective action is
instituted by Subservicer within such period and is diligently pursued
until fully corrected, then this Agreement shall not be terminated as a
result of such failure; and provided further, that if Subservicer fails
to correct such failure within 15 days after the end of the initial
30-day period, the Corporation may forthwith terminate Subservicer
pursuant to this Section;
(3) Issuance or entry of a decree or order of a court, agency
or supervisory authority having jurisdiction in the premises appointing
a trustee, conservator, receiver or liquidator in any bankruptcy,
insolvency, readjustment of debt, marshaling of assets and liabilities
or similar proceeding affecting Subservicer or substantially all of its
properties, or for the winding-up or liquidation of its affairs;
(4) Consent by Subservicer to the appointment of a trustee,
conservator, receiver or liquidator in any bankruptcy, insolvency,
readjustment of debt, marshaling of
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assets and liabilities or similar proceeding affecting Subservicer or
substantially all of its properties, or the commencement of voluntary
liquidation or similar proceedings of or relating to the Subservicer or
of or relating to all or substantially all of its properties;
(5) Admission in writing by Subservicer of its inability to
pay its debts generally as they mature, or the filing by the
Subservicer of a petition to take advantage of any applicable
bankruptcy or insolvency statute, or the filing against the Subservicer
of any proceeding under any applicable bankruptcy or insolvency statute
which remains undismissed for more than sixty (60) days, or the making
of an assignment for the benefit of creditors, or the voluntary
suspension of the payment of its obligations;
(6) The Subservicer assigns or delegates or attempts to assign
or delegate its duties or rights under this Agreement (except as
permitted in this Agreement);
(7) Falsity, which materially and adversely affects the
Corporation's rights hereunder, of any representation of warranty of
Subservicer contained in this Agreement and failure of Subservicer to
cure the condition or event causing any such representation or warranty
to be false within sixty (60) days after the Subservicer's receipt of
written notice from Corporation specifying such falsity and requesting
that it be cured or corrected;
(8) Failure of Subservicer to maintain any license that it is
required to have in order to carry out its responsibilities under this
Agreement; or
(9) The occurrence of three (3) or more Events of Default in
any 12 month period irrespective of whether such Event of Default may
have been cured pursuant to the cure provisions above.
If any of the events specified in clause (4) or (5) above shall occur,
Subservicer shall give written notice of such occurrence to the Corporation
within three (3) Business Days of the occurrence of such event. Notwithstanding
any provision in this Agreement to the contrary, the Corporation shall not be
liable in any respect for the termination of Subservicer pursuant to this
Section 5.02.
The Subservicer shall retain all its rights hereunder to unpaid
Servicing Fees and other servicing compensation due prior to termination of such
Subservicer, as well as its rights to receive reimbursement of previously
unreimbursed Advances it made or expenses it incurred (to the extent provided in
this Agreement).
SECTION 5.03. EARLY TERMINATION; TERMINATION PERMITTED WITH
PARTICIPANT'S CONSENT.
The Corporation, with the prior written consent of the Participant,
may, and at the direction of Participant shall, terminate without cause the
Subservicer's right and obligation to service any Mortgage Loan pursuant to this
Agreement as of a date specified in that notice that is prior to the Initial
Period Termination Date (any such termination being herein referred to as an
"Early Termination"). Upon any Early Termination, the Corporation shall pay to
the Subservicer
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a termination fee equal to Fifteen Dollars ($15.00) per Mortgage Loan for each
active Mortgage Loan that is then being serviced by the Subservicer and is
subject to such termination (the "Termination Fee"). Upon any such termination
of the Subservicer and upon receipt by the Subservicer of all amounts due to the
Subservicer hereunder, the Subservicer, as appropriate, shall forward all
documents and other information stored in any format in the possession of the
Subservicer, as appropriate (or in the possession of any of the Subservicer's
subcontractors, agents or assignees), pertaining to any Mortgage Loan to such
location as is specified by the Participant. As to any Mortgage Loan with
respect to which any payment is thirty (30) or more days delinquent, all such
documents and other information shall be transmitted to the Participant within
five (5) days and as to any other Mortgage Loan, all data concerning the current
status of that Mortgage Loan shall be transmitted as directed by the Participant
within ten (10) days and any actual physical files (if any) with respect to such
Mortgage Loans shall be transmitted as directed by the Participant within thirty
(30) days. All out-of-pocket Expenses incurred in connection with any such
transfer shall be borne by the Corporation.
SECTION 5.04. TRANSFER OF TERMINATED SUBSERVICER'S SERVICING.
Upon termination of this Agreement with respect to Subservicer pursuant
to either Section 5.01 or Section 5.02 above, the Subservicer shall cooperate
fully with the Corporation and the Participant in effecting the termination of
Subservicer's responsibilities and rights hereunder and Subservicer shall, in
accordance with applicable Law, immediately deliver or cause to be delivered to
a servicer designated by the Participant (hereafter, "Designee Subservicer") all
monies held in the Collection Account or Separate Account, together with an
assignment of this Agreement from Subservicer to Designee Subservicer as to the
related Mortgage Loans, and immediately shall deliver as directed by the
Participant all other monies at any time received by Subservicer which will be
required to be remitted to the Participant pursuant to this Agreement and which
have not theretofore been remitted in accordance with this Agreement. In
addition, within 30 days after any such termination, Subservicer shall deliver
or cause to be delivered to Designee Subservicer all Servicing Mortgage Files
and Servicing Records of Subservicer relating to the subject Mortgage Loans.
Subservicer agrees to indemnify and hold the Corporation and Participant and its
Designee Subservicer harmless from and against any and all loss, damage and
expenses (including reasonable attorneys' fees) that any of them may incur in
securing the delivery of all files, the transfer of all escrow funds, and the
remittance of all amounts collected by Subservicer with respect to any related
Mortgage Loan serviced by Subservicer.
SECTION 5.05. ACCESS TO SUBSERVICER'S RECORDS AND AGREEMENT
TO PAY ATTORNEYS' FEES.
The Corporation and its agents may, from time to time, request
Subservicer to allow the inspection, at its expense, of any of Subservicer's
books and records pertaining to the Mortgage Loans (including inspections by
governmental agencies having jurisdiction over either the Corporation or the
Participant which are required by law), and Subservicer shall allow such
inspections and access to such books and records at reasonable times during
Subservicer's normal business hours and upon reasonable terms. If it is finally
determined that Subservicer has breached or failed to perform under any
provision of this Agreement, and such party shall employ
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attorneys or incur other expenses for the enforcement, performance, or
observance of the terms of the Agreement on the part of Subservicer, then such
party, to the extent permitted by Law, shall be reimbursed by Subservicer, on
demand, for its reasonable attorneys' fees and other out-of-pocket expenses
incurred in connection with such breach or failure. In the event any such
actions cause Subservicer to incur expenses in defense of its performance
hereunder and it is finally determined that Subservicer has not breached or
failed to perform under any provision of this Agreement, then Subservicer, to
the extent permitted by Law, shall be reimbursed by the Corporation, on demand,
for its reasonable attorneys' fees and other out-of-pocket expenses related to
such defense.
SECTION 5.06. NO REMEDY EXCLUSIVE.
No remedy herein conferred upon or reserved to any party is intended to
be exclusive of any other available remedy, but each remedy shall be cumulative
and shall be in addition to other remedies given under this Agreement or
existing at law or in equity. No delay or omission to exercise any right or
power accruing under this Agreement shall impair any such right or power, or
shall be construed to be a waiver thereof, but any such right and power may be
exercised from time to time and as often as may be deemed expedient.
SECTION 5.07. LIMITATION ON LIABILITY OF THE SUBSERVICER AND OTHERS.
Neither the Subservicer nor any subservicer appointed by it, nor any of
their respective partners, directors, officers, employees or agents, shall be
under any liability to the Corporation or Participant for any action taken or
for refraining from the taking of any action in good faith pursuant to this
Agreement, provided the action is consistent with this Agreement and provided
the action is in full compliance with applicable law, or for errors in judgment;
provided, however, that this provision shall not protect the Subservicer or any
subservicer against any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith, negligence or violation of applicable state or
federal law in the performance of his or her or its duties or by reason of
reckless disregard of his or her or its obligations and duties hereunder. The
Subservicer, any sub-subservicer, any of their respective partners, directors,
officers, employees or agents, may rely in good faith on any document of any
kind prima facie property executed and submitted by any person or entity
respecting any matters arising hereunder. The Subservicer, each sub-subservicer,
and each of their respective partners, directors, officers, employees or agents,
shall be indemnified by the Corporation and held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
this Agreement, other than any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or negligence in the performance of his or her or
its duties hereunder or by reason of reckless disregard of his or her or its
obligations and duties hereunder. Neither the Subservicer nor any
sub-subservicer nor any of their respective partners, directors, officers,
employees or agents shall be under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its duties under this
Agreement and that in its opinion may involve it in any expense or liability;
provided, however, that the Subservicer or any sub-subservicer may, with the
prior written consent of the Corporation, undertake any such action which it may
deem necessary or desirable in respect of this Agreement and the rights and
duties of the parties hereto and the interest of the Corporation hereunder. In
such event, the legal expenses and costs of such action and any liability
resulting therefrom shall be expenses, costs and liabilities of the Corporation,
and the Subservicer or such sub-subservicer shall be entitled to be reimbursed
therefor by the Corporation.
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SECTION 5.08. MERGER OR CONSOLIDATION OF THE SUBSERVICER.
The Subservicer will keep in full effect its existence, rights and
franchises as a corporation, and will obtain and preserve its qualification to
do business as a foreign corporation in each jurisdiction in which such
qualification is or shall be necessary to protect the validity and
enforceability of this Agreement or any of the Mortgage Loans and to perform its
duties under this Agreement.
Any entities into which the Subservicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the Subservicer shall be a party, or any entities succeeding to the
business of the Subservicer, shall be the successor to the Subservicer
hereunder, without the execution or filing of any paper or any further act on
the part of any of the parties hereto, anything herein to the contrary
notwithstanding; provided, however, that the successor or surviving entity shall
be an institution having a net worth of at least $32,000,000.
ARTICLE VI
GENERAL PROVISIONS
SECTION 6.01. AMENDMENTS, CHANGES AND MODIFICATIONS.
This Agreement may be amended, changed, modified, or altered with
respect to any Mortgage Loan only by an instrument in writing executed by the
Corporation, the Participant and Subservicer. Notwithstanding the foregoing,
Subservicer agrees to comply with the servicing standards set forth herein, as
the same may be modified from time to time by the Corporation pursuant to
Section 4.01(c) hereof.
SECTION 6.02. GOVERNING LAW.
This Agreement shall be construed in accordance with the Laws of the
State of West Virginia, and the obligations, rights and remedies of the parties
hereunder shall be determined in accordance with such Laws. Notwithstanding the
preceding sentence, it is understood and agreed that Subservicer will service
each Mortgage Loan in accordance with federal Laws and Laws of the state in
which the related Mortgaged Property is located.
SECTION 6.03. NOTICES.
All notices, certificates or other communications hereunder shall be in
writing and be deemed given when delivered (which delivery may be made by
electronic facsimile transmission) to the appropriate party at the address or
telecopy number identified on the execution page hereof. Each party may, by
notice given hereunder, designate any further or different address or telecopy
number to which subsequent notices, certificates and other communications to
such party shall be sent.
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SECTION 6.04. 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 6.01 in order to accomplish the purposes of this Agreement.
SECTION 6.05. FURTHER ASSURANCES AND CORRECTIVE INSTRUMENTS.
To the extent permitted by Law, the Corporation and Subservicer agree
that each will, from time to time, execute, acknowledge and deliver, or cause to
be executed, acknowledged and delivered, such supplements hereto and such
instruments of further assurance as may reasonably be required or appropriate
further to express the intention, or to facilitate the performance, of this
Agreement.
SECTION 6.06. TERM OF AGREEMENT.
With respect to each Mortgage Loan, the term of this Agreement shall
end upon the earliest to occur of (i) termination of all of Subservicer's rights
pursuant to this Agreement with respect to such Mortgage Loan as provided in
Section 5.01, Section 5.02 or Section 5.03, (ii) remittance of the final payment
of such Mortgage Loan as provided hereunder, or (iii) the Liquidation Date for
such Mortgage Loan, and the resulting remittance of the proceeds as provided
hereunder.
SECTION 6.07. SURVIVAL OF OBLIGATIONS AND COVENANTS.
After termination of this Agreement and transfer of the servicing
rights to the Mortgage Loans to any Designee Subservicer, Subservicer shall
continue to be liable for any failure to fulfill its obligations during the time
that it acted as Subservicer of the Mortgage Loans hereunder.
SECTION 6.08. FORMS AND REPORTS.
All forms or reports required by this Agreement as prescribed by the
Corporation from time to time may be amended, supplemented, or replaced as the
Participant shall deem appropriate.
SECTION 6.09. INDEMNIFICATION.
Subservicer agrees to, and does hereby, indemnify and hold harmless the
Corporation and its successors and assigns, as well as the officers, directors,
employees, agents, partners and affiliates of any of the foregoing, against 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 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 any breach of any representation or
warranty made by Subservicer in this Agreement or from any
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breach by Subservicer (by itself or through any subservicer) of any covenant or
obligation of Subservicer under this Agreement or arising from Subservicer's (or
any such subservicer's) negligence, failure to comply with applicable law,
willful misconduct or bad faith in the performance of its duties and obligations
under this Agreement. The indemnities contained in this Section shall survive
the termination of this Agreement.
The Subservicer may rely on the written instructions and directions of
the Corporation pursuant to the terms of this Agreement and shall not be liable
to the Corporation or the Participant 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
Subservicer 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 Corporation agrees to, and does hereby indemnify and hold the
Subservicer harmless against, and shall reimburse the Subservicer 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
Subservicer with respect to any action taken or not taken in good faith pursuant
to the instructions and directions of the Corporation as provided herein.
SECTION 6.10. SUBSERVICER AS INDEPENDENT CONTRACTOR.
All services, duties and responsibilities of Subservicer and any
subservicer under this Agreement shall be performed and carried out by
Subservicer or such subservicer as an independent contractor, and none of the
provisions of this Agreement shall be construed to make, authorize or appoint
Subservicer or any such subservicer as the Corporation's or the Participant's
employee, agent or representative.
SECTION 6.11. PARTICIPANT IS THIRD-PARTY BENEFICIARY.
The Participant is an express third-party beneficiary hereunder.
Without limiting the scope of the foregoing, for purposes of interpreting the
rights of Participant hereunder:
(a) all representations, warranties, covenants and obligations of the
Subservicer to the Corporation shall be deemed to also be to the Participant;
(b) all rights of the Corporation shall also be deemed rights of the
Participant exercisable by Participant with or without the consent or
cooperation of the Corporation and not subject to waiver or modification without
the express written consent of the Participant;
(c) all notices and reports which the Subservicer is required to
provide to the Corporation shall also be provided, contemporaneously, to the
Participant;
(d) all actions by the Subservicer which require the consent of the
Corporation shall also require the express written consent of the Participant;
and
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(e) all indemnities of the Subservicer in favor of the Corporation
shall also be deemed to be in favor of the Participant.
Notwithstanding the existence of the Participant's third-party
beneficiary rights hereunder, the Participant shall not have any obligations or
liabilities to the Corporation, or except as provided in Section 6.12 hereof,
the Subservicer arising out of this Subservicing Agreement.
SECTION 6.12. PARTICIPANT'S OBLIGATION RE: SERVICING FEES.
To the extent the Corporation shall fail to pay any invoice pursuant to
Section 4.02(c) hereof, Participant shall, within ten (10) Business Days of
written demand by the Subservicer to the Participant, pay to the Subservicer any
of such invoiced amount not paid by the Corporation, but only to the extent such
amount is comprised of Servicing Fees and any Expenses or Advances approved by
the Participant prior to being incurred. The foregoing notwithstanding, the
Participant shall not be obligated to pay any portion of an invoiced Servicing
Fee which, when combined with any amounts paid thereon by the Corporation, would
yield a Servicing Fee in excess of seventy-five (75) basis points on an
annualized basis. Subservicer's demand to Participant shall identify all amounts
unpaid by reference to the relevant individual Mortgage Loan. Corporation shall
indemnify Participant for amounts paid by Participant to Subservicer hereunder
and any such indemnity obligation shall be considered an unreimbursed advance as
to the applicable Mortgage Loan for purposes of calculating the Regular
Repurchase Price under the Participation Agreement. Corporation's failure to pay
any invoice pursuant to Section 4.02(c) hereof shall be considered a breach by
the Corporation of this Agreement notwithstanding any subsequent payment by the
Participant.
SECTION 6.13. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, and it
shall not be necessary that the signature of both parties hereto appear on any
one counterpart hereof; each counterpart shall be deemed an original, but all
such counterparts together shall constitute but one and the same instrument.
[Signatures Commence on Following Page]
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IN WITNESS WHEREOF, as of June 29, 1998, the Corporation and
Subservicer have caused this Subservicing Agreement to be executed by their
respective officers thereunto authorized.
MEGO MORTGAGE CORPORATION
By: /s/ Jeff S. Moore
---------------------------------
Name: Jeff S. Moore
-------------------------------
Title: President
------------------------------
Notice Address: Mego Mortgage Corporation
1000 Parkwood Circle
Atlanta, Georgia 30339
Attention: Jeffrey S. Moore
CITY MORTGAGE SERVICES, a division of
City National Bank of West Virginia
By: /s/ A. Lawrence Crimmins, Jr.
---------------------------------
Name: A. Lawrence Crimmins, Jr.
-------------------------------
Title: Executive Vice President/CFO
------------------------------
Notice Address: City Mortgage Services
25 Gatewater Road
Cross Lanes, West Virginia 25313
Attention: President
Copy to: Hunton & Williams
951 East Byrd Street
Richmond, Virginia 23219
Attention: Randall S. Parks
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SOVEREIGN BANK, AS TO SECTION 6.12 ONLY
By: /s/ Robert J. Cunnane
------------------------------------
Name: Robert J. Cunnane
----------------------------------
Title: EVP
---------------------------------
Notice Address: Sovereign Bank
1130 Berkshire Boulevard
Wyomissing, Pennsylvania 19610
Attention: Jerry Cunnane
Copy to: Stevens & Lee
1818 Market Street
Philadelphia, Pennsylvania 19103
Attention: Robert Lapowsky
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EXHIBIT 10.85
RIGHT OF FIRST REFUSAL AGREEMENT
This Right of First Refusal Agreement (the "Agreement") is made as of
June 29, 1998, by and among City National Bank of West Virginia, a national
banking association, with its principal offices at 3601 MacCorkle Avenue,
Charleston, West Virginia ("City"), Sovereign Bancorp, Inc., a Pennsylvania
corporation, with its principal offices at 1130 Berkshire Boulevard, P.O. Box
12646, Reading, Pennsylvania 19612 ("Sovereign"), and Mego Mortgage Corporation
(the "Company"), a Delaware corporation, with its principal offices at 1000
Parkwood Circle, 5th Floor, Atlanta, Georgia.
WHEREAS, the Company has entered into a Preferred Stock Purchase
Agreement dated as of June 9, 1998 with City (the "City Agreement");
WHEREAS, the Company has entered into a Preferred Stock
Purchase Agreement dated as of June 9, 1998 with Sovereign (the "Sovereign
Agreement"); and
WHEREAS, the City Agreement and the Sovereign Agreement both
require as a condition to closing the execution of a right of first refusal
agreement by and among the Company, City and Sovereign;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, the parties agree as follows:
Section 1. Definitions.
A. "Acquisition Agreement" shall mean an agreement which provides
for: (i) a merger, consolidation or similar transaction
involving the Company or any of its subsidiaries (other than
transactions solely between the Company's subsidiaries and
between the Company and one or more subsidiaries and
transactions involving the Company or any subsidiary in which
the voting securities of the Company outstanding immediately
prior thereto continue to represent (by either remaining
outstanding or being converted into securities of the
surviving entity or the parent thereof) at least 75% of the
combined voting power of the voting securities of the
surviving entity or the parent thereof outstanding immediately
after the consummation of the transaction), (ii) the
disposition, by sale, lease, exchange or otherwise, other than
in the ordinary course of business, of assets of the Company
or any of its subsidiaries representing in either case 50% or
more of the
<PAGE> 2
consolidated assets of the Company and its subsidiaries, or
(iii) the issuance, sale or other disposition of (including by
way of merger, consolidation, share exchange or any similar
transaction) securities representing 50% or more of the voting
power of the Company or any of its subsidiaries.
Section 2. Right of First Refusal. Prior to entering into any
Acquisition Agreement, the Company will proceed as follows:
A. The Company will advise City and Sovereign in writing of the
price and all other essential terms and conditions under which
it would be willing to enter into an Acquisition Agreement
with either City or Sovereign (the "Notice").
B. City and Sovereign shall each within ten (10) days following
receipt of the Notice advise the Company in writing whether or
not it is willing to enter into an Acquisition Agreement with
the Company at the price and on the other terms and conditions
set forth in the Notice. In the event that only one of City
and Sovereign advises the Company that it is willing to enter
into such an Acquisition Agreement, the Company and the
interested party shall negotiate in good faith with a view
toward the execution of a legally binding Acquisition
Agreement.
C. In the event that both City and Sovereign advise the Company
that they are willing to enter into such an Acquisition
Agreement with the Company at the price and on the other terms
and conditions set forth in the Notice, the Company shall
negotiate in good faith with each of City and Sovereign with a
view toward the execution of a legally binding Acquisition
Agreement with the party which offers terms most favorable to
the Company. The Company's decision as to which party's terms
are most favorable shall, if made in good faith, be final and
binding upon City and Sovereign.
D. In the event that each of City and Sovereign advises the
Company that it is not willing to enter into an Acquisition
Agreement with the Company at the price and on the terms and
conditions set forth in the Notice, or fails to advise the
Company of its intentions within the ten (10) day period
referred to in Paragraph B above, the Company shall be free
for a period of ninety (90) days following the expiration of
such ten (10) day period to enter into an Acquisition
Agreement with a third party at a price and on other terms and
conditions no more favorable to such third party than those
set forth in the Notice; provided, however that the Company
shall forward to City and to Sovereign a complete copy of the
Acquisition Agreement as negotiated with such third party at
least five (5) business days before it is signed.
-2-
<PAGE> 3
E. In the event that the Company does not enter into an
Acquisition Agreement with a third party within the ninety
(90) day period referred to in Paragraph D above, the Company
must once again follow the procedure set forth herein prior to
entering into an Acquisition Agreement with any third party.
F. The foregoing right of first refusal shall expire
automatically: (i) as to City on the 7% Termination Date as
defined in Section 5.19 of the City Agreement, (ii) as to
Sovereign on the 7% Termination Date as defined in Section
5.19 of the Sovereign Agreement, and (iii) as to both City and
Sovereign when the Company enters into an Acquisition
Agreement with City, Sovereign or a third party after having
duly followed the procedures set forth herein.
Section 3. Notices. All notices, requests, consents and other
communications hereunder shall be in writing, shall be mailed by registered air
mail, postage prepaid, or sent by facsimile transmission with a confirmation
copy sent by registered mail, and shall be deemed given when so mailed:
A. if to the Company, to 1000 Parkwood Circle, Atlanta, Georgia
30339, Attention: Jeffrey S. Moore, or to such other person at
such other place as the Company shall designate to the
Purchaser in writing;
B. if to City, to 25 Gatewater Road, Cross Lanes, West Virginia
25313, Attention: Robert A. Henson, Chief Financial Officer,
or at such other address or addresses as City may have
furnished to the Company, with a copy to Hunton & Williams,
951 East Byrd Street, Richmond, Virginia 23219, Attention:
Randall S. Parks;
C. if to Sovereign, to 1130 Berkshire Boulevard, P.O. Box 12646,
Reading Pensylvania 19612, Attention: Jay S. Sidhu, or at such
other address or addresses as City may have furnished to the
Company, with a copy to Stevens & Lee, 607 Washington Street,
P.O. Box 679, Reading, Pennsylvania 19603-0679, Attention:
Clinton W. Kemp; or
D. if to any transferee or transferees of City or Sovereign, at
such address or addresses as shall have been furnished to the
other parties hereto at the time of the transfer or transfers,
or at such other address or addresses as may have been
furnished by such transferee or transferees to the other
parties hereto in writing.
-3-
<PAGE> 4
Section 4. Amendments. No amendment, interpretation or waiver of any of
the provisions of this Agreement shall be effective unless made in writing and
signed by the parties to this Agreement.
Section 5. Headings. The headings of the sections, subsections and
subparagraphs of this Agreement are used for convenience only and shall not
affect the meaning or interpretation of the contents of this Agreement.
Section 6. Enforcement. The failure to enforce or to require the
performance at any time of any of the provisions of this Agreement shall in no
way be construed to be a waiver of such provisions, and shall not affect either
the validity of this Agreement or any part hereof or the right of any party
thereafter to enforce each and every provision in accordance with the terms of
this Agreement.
Section 7. Governing Law. This Agreement and the relationships of the
parties in connection with the subject matter of this Agreement shall be
governed by and determined in accordance with the laws of the State of Georgia
in the United States of America.
Section 8. Severability. If any severable provision of this Agreement
is held to be invalid or unenforceable by any judgment of a tribunal of
competent jurisdiction, the remainder of this Agreement shall not be affected by
such judgment, and the Agreement shall be carried out as nearly as possible
according to its original terms and intent.
Section 9. Counterparts. This Agreement may be executed in
counterparts, all of which shall constitute one agreement, and each such
counterpart shall be deemed to have been made, executed and delivered on the
date set out at the head of this Agreement without regard to the dates or times
when such counterparts may actually have been made, executed or delivered.
Section 10. Assignment. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of, as the case may be, and be
enforceable by and against the parties hereto and their respective successors
and assigns, but neither this Agreement nor any of the rights, interests or
obligations of the parties hereunder shall be assigned by any of the parties
hereto without the prior written consent of each of the other parties.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives the day and year first above
written.
MEGO MORTGAGE CORPORATION
By: /s/ Jeffrey S. Moore
----------------------------------
Name: Jeffrey S. Moore
Title: President
CITY NATIONAL BANK OF WEST
VIRGINIA
By: /s/ Robert A. Henson
----------------------------------
Name: Robert A. Henson
Title: Chief Financial Officer
SOVEREIGN BANCORP, INC.
By: /s/ Jay S. Sidhu
----------------------------------
Name: Jay S. Sidhu
Title: President and Chief
Executive Officer
-5-
<PAGE> 1
EXHIBIT 10.86
MEGO MORTGAGE CORPORATION
AND
SOVEREIGN BANCORP, INC.
PREFERRED STOCK
PURCHASE AGREEMENT
JUNE 9, 1998
<PAGE> 2
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
Section 1. Definitions................................... 2
Section 2. Agreement to Sell and Purchase the
Securities.................................... 3
Section 3. Option Shares................................. 3
Section 4. Issuance of the Certificates Representing the
Securities.................................... 4
Section 5. Representations, Warranties and Covenants of
the Company................................... 5
5.1. Organization and Qualification......................... 5
5.2. Authorized Capital Stock............................... 6
5.3. Due Execution, Delivery and Performance................ 7
5.4. Offering Memorandum and Additional Information......... 9
5.5. Legal Proceedings...................................... 9
5.6. No Material Adverse Change............................. 10
5.7. Law and Regulation..................................... 11
5.8. Accounting Matters..................................... 11
5.9. Compliance with Securities Laws........................ 13
5.10. Intangibles................................... 13
5.11. Title......................................... 14
5.12. Contracts..................................... 14
5.13. No Violation.................................. 15
5.14. Transactions with Affiliates.................. 15
5.15. No Manipulation............................... 15
5.16. Taxes......................................... 16
5.17. Investment Company Act of 1940................ 16
5.18. Use of Proceeds............................... 16
5.19. Board of Directors............................ 16
5.20. Certificates.................................. 18
5.21. Rolly White................................... 18
5.22. Mortgage-Related Asset Revaluation............ 18
5.23. Other Transactions............................ 19
5.24. Best Efforts.................................. 19
5.25. Due Diligence................................. 19
5.26. Waiver of Certain Claims...................... 19
Section 6. Representations, Warranties and Covenants of
Purchaser..................................... 20
6.1. Compliance with United States Securities Laws.......... 21
6.2. Status of Purchaser.................................... 21
6.3. Restrictions on Re-Sale................................ 22
6.4. Due Execution, Delivery and Performance of
the Purchase Agreement and Other Obligations........... 23
6.5. Representations, Warranties and Covenants at
Closing................................................ 24
</TABLE>
(i)
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
Section 7. Survival of Representations, Warranties,
Covenants and Agreements...................... 24
Section 8. Conditions to Closing......................... 24
8.1. Exchange Offer......................................... 25
8.2. Additional Equity...................................... 25
8.3. Purchaser Board Approval............................... 25
8.4. Waiver of Change of Control Payments................... 25
8.5. Servicing Purchase Agreements.......................... 25
8.6. Registration Rights Agreement.......................... 26
8.7. Opinion of Greenberg Traurig........................... 26
8.8. Comfort Letter......................................... 34
8.9. Offering Memorandum.................................... 34
8.10. Other Transactions............................ 34
8.11. No Material Adverse Effect.................... 34
8.12. Certificates.................................. 34
8.13. Regulatory Matters............................ 35
8.14. Consents...................................... 35
8.15. Related Party Indebtedness.................... 36
8.16. Documents..................................... 36
8.17. Additional Matters Relating to Option Shares.. 36
8.18. Additional Conditions......................... 36
(a) Servicing Purchase Agreements..................... 36
(b) Certificate of Designation........................ 36
(c) Letter from FBR................................... 37
(d) Warehouse Line Agreement.......................... 37
(e) Flow Loan Purchase Agreement...................... 37
(f) Right of First Refusal............................ 37
(g) Amendment of Placement Agreement.................. 38
(h) Agreements with FBR and Emanuel J. Friedman....... 38
(i) Employment and Non-Competition Agreements......... 38
(j) Option Agreement.................................. 38
Section 9. Conditions to Closing......................... 39
Section 10. Compliance with the Securities Act............ 39
10.1. Information Available......................... 39
10.2. Legend Requirement............................ 39
Section 11. Broker's Fee.................................. 40
Section 12. Notices....................................... 41
Section 13. Amendments.................................... 42
Section 14. Headings...................................... 42
Section 15. Enforcement................................... 42
Section 16. Governing Law................................. 43
Section 17. Severability.................................. 43
Section 18. Counterparts.................................. 44
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
Section 19. Assignment.................................... 44
EXHIBITS
EXHIBIT A - TERMS OF REGISTRATION RIGHTS AGREEMENT................... 46
EXHIBIT B - TERMS OF SERIES A PREFERRED STOCK........................ 47
EXHIBIT C - TERMS OF BULK SERVICING PURCHASE AGREEMENT............... 48
EXHIBIT D - TERMS OF FLOW SERVICING PURCHASE AGREEMENT............... 49
EXHIBIT E - JURISDICTIONS OF FOREIGN QUALIFICATION................... 52
EXHIBIT F - OTHER TRANSACTIONS....................................... 53
EXHIBIT G - FBR LETTER RE: VOTING OF SHARES ........................ 54
EXHIBIT H - TERMS OF WAREHOUSE LINE AGREEMENT........................ 55
EXHIBIT I - TERMS OF FLOW LOAN PURCHASE AGREEMENT.................... 61
EXHIBIT J - TERMS OF RIGHT OF FIRST REFUSAL AGREEMENT................ 62
EXHIBIT K - LIST OF EMPLOYEES REQUIRED TO ENTER INTO
EMPLOYMENT AGREEMENTS.................................... 65
</TABLE>
(iii)
<PAGE> 5
MEGO MORTGAGE CORPORATION
PREFERRED STOCK
PURCHASE AGREEMENT
This Preferred Stock Purchase Agreement is made as of June 9, 1998, by and
between Sovereign Bancorp, Inc., a Pennsylvania corporation, with its principal
offices at 1130 Berkshire Boulevard, P.O. Box 12646, Reading, Pennsylvania 19612
(the "Purchaser"), and Mego Mortgage Corporation (the "Company"), a Delaware
corporation, with its principal offices at 1000 Parkwood Circle, 5th Floor,
Atlanta, Georgia.
WHEREAS, the Company is engaging in a plan of recapitalization (the
"Recapitalization") which includes the following: (i) a private offering (the
"Common Stock Offering") of shares of its common stock, par value $.01 per share
(the "Common Stock"); (ii) a private offering (the "Series A Preferred Stock
Offering") by the Company of shares of its Series A Convertible Preferred Stock,
par value $.01 per share (the "Series A Preferred Stock"); and (iii) an exchange
offer to occur concurrent with the Common Stock Offering and the Series A
Preferred Stock Offering (together, the "Offerings") and as a condition thereto
to exchange shares of Series A Preferred Stock and/or new 12.5% Subordinated
Notes Due 2001 ("New Notes") of the Company or a combination thereof, subject to
certain limitations, for any and all of the outstanding 12.5% Senior
Subordinated Notes Due 2001 of the Company, subject to certain conditions (the
"Exchange Offer");
WHEREAS, the Company will enter into a Placement Agreement (the "Placement
Agreement"), with Friedman, Billings,
1
<PAGE> 6
Ramsey & Company, Incorporated ("FBR"), a Virginia corporation, pursuant to
which FBR will act as placement agent in connection with the issue and sale of
the Common Stock and Series A Preferred Stock (together with the New Notes, the
"Securities") to be issued in the Offerings, and;
WHEREAS, the completion of the Offerings (the "Closing") is scheduled to
take place on June 18, 1998, or such other date (the "Closing Date") as is
agreed upon by the Company and FBR;
WHEREAS, the Company wishes to offer and sell to Purchaser, and Purchaser
wishes to buy from the Company, on the terms and conditions set forth herein, up
to 10,000 shares of Series A Preferred Stock having an aggregate liquidation
amount of $10,000,000 for a purchase price of $1,000 per share, or $10,000,000
in aggregate;
WHEREAS, the Company wishes to grant to Purchaser an option to purchase up
to 6,666,667 shares of Common Stock at a purchase price of $1.50 per share on
the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained in this Purchase Agreement, the parties agree as follows:
Section 1. Definitions. Capitalized terms not otherwise defined herein
shall have the meanings assigned to them in the draft of the Company's Offering
Memorandum, dated June 9, 1998 attached hereto as Attachment 1 (the "Offering
Memorandum").
2
<PAGE> 7
Section 2. Agreement to Sell and Purchase the Securities. Subject to the
terms and conditions of this Purchase Agreement, that certain registration
rights agreement (the "Registration Rights Agreement") to be entered into by and
between the Company and Purchaser, as provided in Exhibit A hereto, and the
Placement Agreement, the Company agrees to sell and Purchaser agrees to buy
10,000 shares (the "Initial Shares") of Series A Preferred Stock having an
aggregate liquidation amount of $10,000,000 for a purchase price of $1,000 per
share, or $10,000,000 in the aggregate (the "Purchase Price"). The terms of the
Series A Preferred Stock will be as set forth on Exhibit B hereto. Purchaser
shall pay the Purchase Price on the Closing Date in New York Clearing House
Funds, to the account of the Company.
The Company represents to Purchaser that, prior to the Closing, the Company
will be executing substantially identical purchase agreements with respect to
shares of Common Stock and Series A Preferred Stock (except for the name and
address of the Purchaser and the number of shares of Series A Preferred Stock
and Common Stock purchased) with certain other investors (the "Other
Purchasers") for an aggregate purchase price of at least $20,000,000. Purchaser
and Other Purchasers are hereinafter sometimes referred to as the "Purchasers,"
and this Purchase Agreement and such other Purchase Agreements are hereinafter
sometimes referred to as the "Purchase Agreements."
Section 3. Option Shares. In addition, upon the basis of the warranties and
representations and other terms and
3
<PAGE> 8
conditions herein set forth, the Company will at the Closing grant an option
(the "Option") to the Purchaser to purchase from the Company up to 6,666,667
additional shares of Common Stock at a purchase price of $1.50 per share (the
"Option Shares"), which option will be evidenced by an Option Agreement (the
"Option Agreement") which shall be delivered by the Company to Purchaser at the
Closing and which shall include antidilution provisions in form and substance
satisfactory to Purchaser. The Option will expire 180 days after the second
anniversary of the Closing Date and may be exercised in whole or in part at any
time and from time to time upon written notice by the Purchaser to the Company
setting forth the number of Option Shares as to which the Purchaser is then
exercising the Option and the time and date of payment and delivery for such
Option Shares. Any such time and date of delivery (a "Date of Delivery") shall
be determined by Purchaser, but shall not be later than five full business days
(nor earlier, without the consent of the Company, than three full business days)
after the exercise of said option (and the delivery of such notice, such
delivery date being referred to as the "Notice Date"). Each closing at which the
documents relating to the purchase of Option Shares are exchanged is referred to
as an "Option Closing." The Initial Shares and the Option Shares are referred to
as the "Shares."
Section 4. Issuance of the Certificates Representing the Securities. At the
Closing and at each Option Closing, the Company will cause to be delivered to
the Purchaser, one certificate for the Initial Shares or the Option Shares being
4
<PAGE> 9
purchased, as applicable, registered in the name of Purchaser as set forth on
the signature page hereof (or in such other name as may be designated by
Purchaser to the Company in writing) upon payment of the applicable purchase
price therefore).
Section 5. Representations, Warranties and Covenants of the Company. The
Company hereby represents and warrants to, and covenants with, Purchaser as
follows:
5.1. Organization and Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. The Company has all requisite power and authority, and all necessary
authorizations, approvals, consents, orders, licenses, certificates and permits
of and from all governmental or regulatory bodies or any other person or entity,
to own, lease and license its assets and properties and conduct its business as
now being conducted and as described in the Offering Memorandum, except for such
authorizations, approvals, consents, orders, licenses, certificates and permits
the failure to so obtain would not have a material adverse effect upon the
assets or properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company and its subsidiaries, taken as a whole
(a "Material Adverse Effect"); no such authorization, approval, consent, order,
license, certificate or permit contains a materially burdensome restriction
other than as disclosed in the Offering Memorandum; and the Company has all such
corporate power and authority, and has or will have as of the Closing such
authorizations, approvals, consents, orders,
5
<PAGE> 10
licenses, certificates and permits as shall be necessary to enter into, deliver
and perform this Agreement, the Purchase Agreements and the Other Transaction
Documents (as defined in Section 5.3, below) and to issue and sell the
Securities (except as may be required under state securities laws). The Company
is duly qualified to do business and is in good standing in every jurisdiction
where such qualification is required by controlling law and where the failure to
so qualify is reasonably likely to have a Material Adverse Effect. The Company
has no subsidiaries that would be deemed to be "significant subsidiaries" for
purposes of Rule 1-02 of Regulation S-X promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), substituting in the tests
set forth in such rule the figure "5%" in each case for "10%."
5.2. Authorized Capital Stock. The authorized, issued and outstanding
capital stock of the Company is as set forth in the Offering Memorandum. All
issued and outstanding shares of Company capital stock have been duly and
validly authorized and issued, are fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, and have not
been issued in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right. All of the
outstanding shares of capital stock of the Company's subsidiaries have been duly
and validly authorized and issued and are fully paid and non-assessable and are
owned, directly or indirectly, by the Company, free and clear of any lien,
pledge, charge, security
6
<PAGE> 11
interest or other encumbrance. The Shares have been duly authorized and, in the
case of the Option Shares, reserved for issuance, and, when issued and sold
pursuant to this Purchase Agreement and, in the case of the Option Shares, the
Option Agreement, will be duly and validly issued, fully paid and nonassessable
and none of them will be issued in violation of any preemptive or other similar
right. Except as disclosed in the Offering Memorandum, there is no outstanding
option, warrant or other right calling for the issuance of, and there is no
commitment, plan or arrangement to issue, any share of capital stock of the
Company or any subsidiary or any security convertible into, or exercisable or
exchangeable for, such capital stock. The shares of Common Stock into which the
Initial Shares are convertible (the "Underlying Common Stock") have been duly
authorized and reserved for issuance and, when issued upon such conversion, will
be duly and validly issued, fully paid and nonassessable and none of them will
be issued in violation of any preemptive or other similar right. The Shares and
the Common Stock conform in all material respects to all statements in relation
thereto contained in the Offering Memorandum.
5.3. Due Execution, Delivery and Performance. The execution, delivery
and performance of each of this Agreement and the Placement Agreement, the
Registration Rights Agreement, the Purchase Agreements entered into with the
Other Purchasers, the Option Agreement and the similar Option Agreement entered
into between the Company and City National Bank of West Virginia ("City
National"), the Bulk Servicing Purchase Agreement and the
7
<PAGE> 12
Flow Servicing Purchase Agreement referred to in Section 8.5 below (the
"Servicing Purchase Agreements"), the Warehouse Line Agreement referred to in
Section 8.18(d) below, and the Flow Purchase Agreement referred to in Section
8.18(e) below (collectively, the "Other Transaction Documents") by the Company
(a) have been (or prior to Closing will be) duly authorized by all requisite
corporate action of the Company and (b) will not violate (i) the Certificate of
Incorporation or Bylaws of the Company, or (ii) any provision of any indenture,
mortgage, agreement, contract, or other instrument to which the Company or any
of its subsidiaries is bound or be in conflict with, or result in a breach of or
constitute (upon notice or lapse of time or both) a default under any such
indenture, mortgage, agreement, contract, or other instrument or result in the
creation or imposition of any lien, security interest, mortgage, pledge, charge
or other encumbrance of any nature whatsoever upon any of the properties or
assets of the Company or any of its subsidiaries, except for any such
violations, conflicts, breaches or defaults which have been waived in writing as
of the Closing or would not have a Material Adverse Effect. Upon execution and
delivery, this Agreement and the Other Transaction Documents will constitute
legal, valid and binding obligations of the Company, enforceable in accordance
with their respective terms, except insofar as the enforcement thereof may be
limited by bankruptcy law or other laws relating to or affecting the enforcement
of creditors' rights generally or by general equitable principles (regardless of
whether such enforceability is considered in a
8
<PAGE> 13
proceeding in equity or at law) and except as rights to indemnity or
contribution may be limited under applicable law.
5.4. Offering Memorandum and Additional Information. The Company has
furnished, and Purchasers acknowledge receipt of the Offering Memorandum.
The Offering Memorandum when combined with the documents incorporated by
reference therein does not, and any amendment or supplement thereto will not,
contain any 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 not
misleading. Each document incorporated by reference into the Offering Memorandum
complies in all material respects with the requirements of the Exchange Act, and
the Commission's rules and regulations thereunder ("Exchange Act Regulations")
and, when read together with the other information in the Offering Memorandum,
does 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.
5.5. Legal Proceedings. There are no actions, suits, investigations or
proceedings pending or threatened other than as disclosed in the Offering
Memorandum (including the documents incorporated by reference therein and
provided to the Purchasers) to which the Company or any of its subsidiaries is a
party or to which any of their properties is subject before or by any court or
governmental agency or both which is reasonably
9
<PAGE> 14
likely to have, individually or in the aggregate, a Material Adverse Effect; and
to the knowledge of the Company, no such actions, suits, investigations or
proceedings are threatened by any person, corporation or governmental agency or
body.
5.6. No Material Adverse Change. Subsequent to the respective dates as
of which information is given in the Offering Memorandum, and except as
specifically described therein, there has not been (i) any material adverse
change in the business, properties or assets described or referred to in the
Offering Memorandum, or the results of operations, condition (financial or
otherwise) earnings, operations, business or business prospects, of the Company
and its subsidiaries, taken as a whole, (ii) any transaction entered into
(whether binding or nonbinding) by the Company and/or its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, except
transactions in the ordinary course of business, (iii) any obligation that is
material to the Company and its subsidiaries, direct or indirect, contingent or
noncontingent, matured or unmatured, absolute or otherwise, incurred by the
Company or its subsidiaries, except obligations incurred in the ordinary course
of business, (iv) any change in the capital stock (other than upon the exercise
of stock options described in the Offering Memorandum) or outstanding
indebtedness of the Company or its subsidiaries (other than indebtedness
incurred in the ordinary course of business consistent with past practice), (v)
any dividend or distribution of any kind declared, paid or made on the capital
stock of the Company or any of its subsidiaries, or
10
<PAGE> 15
(vi) any change in senior management or key employees, and no such change or
event is reasonably expected.
5.7. Law and Regulation. The Company and its subsidiaries are in
compliance with, and conduct their respective businesses in conformity with all
applicable laws and governmental regulations governing the businesses conducted
by the Company and its subsidiaries, as the case may be, except for failures to
comply or conform which would not have a Material Adverse Effect.
5.8. Accounting Matters. Deloitte & Touche LLP ("D&T"), which has
audited the financial statements, together with the related notes, of the
Company as of August 31, 1997 and 1996, and for each of the three years ended
August 31, 1997, 1996, and 1995, which are included in the Offering Memorandum,
are independent public accountants as required by the Securities Act of 1933, as
amended (the "Securities Act") and the Securities Act Regulations (as if the
Offering Memorandum was a prospectus filed as part of a registration statement
filed under the Securities Act).
The financial statements included or incorporated by reference in the
Offering Memorandum comply as to form in all material respects with applicable
accounting requirements of the Securities Act, the Securities Act Regulations,
the Exchange Act, and the Exchange Act Regulations, including Regulation S-X
under the Securities Act (as if such financial statements were filed with or
incorporated by reference in a registration statement under the Securities Act),
and said financial statements present
11
<PAGE> 16
fairly the financial position of the Company and its Subsidiaries on a
consolidated basis as of the dates indicated and the results of their operations
for the periods specified; except as otherwise stated in the Offering
Memorandum, such financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis and such
financial statements are consistent in all material respects with financial
statements and other reports filed by the Company and its Subsidiaries with the
Commission; the supporting schedules included are incorporated by reference in
the Offering Memorandum and present fairly the information required to be stated
therein. The selected and summary financial and statistical data included in the
Offering Memorandum present fairly the information shown therein and have been
compiled on a basis consistent with the audited financial statements presented
therein.
The Company and each of its subsidiaries (i) make and keep books and
records which, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of assets; (ii) maintain a system of internal
accounting controls sufficient to provide reasonable assurance that: (a)
transactions are executed in accordance with management's general or specific
authorizations, (b) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets, (c) the recorded
accountability for assets is compared with the existing assets at reasonable
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intervals and appropriate action is taken with respect thereto, and (d) access
to assets is permitted only with management's general or specific authorization;
and (iii) otherwise conform to the requirements of the Exchange Act, Section
13(b) and Regulation 13b-2 thereunder and shall continue to do so for so long as
Purchaser holds any Shares.
5.9. Compliance with Securities Laws. Assuming (i) the accuracy of the
representations and warranties of FBR and the Purchasers as set forth in the
Placement Agreement and the Purchase Agreements, and (ii) that the Purchaser,
the Other Purchasers and the participants in the Exchange Offer are either
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act) or "accredited investors" (as defined in Rule 501(a) under the Securities
Act) (the Company having received representations from such persons to that
effect), the Company has complied with all applicable federal and state
securities or Blue Sky laws in connection with the Offerings and the Offerings
are or will be exempt from registration under such laws.
5.10. Intangibles. The Company owns or possesses adequate and
enforceable rights to use all trademarks, trademark applications, trade names,
service marks, copyrights, copyright applications, licenses, know-how and other
similar rights and proprietary knowledge (collectively, "Intangibles") necessary
for the conduct of its business as described in the Offering Memorandum. The
Company has not received any notice of, nor to its best knowledge is aware of,
any infringement of or conflict
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with asserted rights of others with respect to any Intangibles which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
would have a Material Adverse Effect.
5.11. Title. The Company has good title to each of the items of
personal property which are reflected in the financial statements referred to in
Section 5.8 or are referred to in the Offering Memorandum as being owned by it
and valid and enforceable leasehold interests in each of the items of real and
personal property which are referred to in the Offering Memorandum as being
leased by it, in each case free and clear of all liens, encumbrances, claims,
security interests and defects, other than those described in the Offering
Memorandum and those which do not and will not have a Material Adverse Effect.
5.12. Contracts. Each material contract or agreement to which the
Company is a party is in full force and effect and is valid and enforceable by
and against the Company in accordance with its terms, assuming the due
authorization, execution and delivery thereof by each of the other parties
thereto. Except as disclosed in the Offering Memorandum, neither the Company,
nor to the best knowledge of the Company, any other party is in default in the
observance or performance of any term or obligation to be performed by it under
any such agreement, and no event has occurred which with notice or lapse of time
or both would constitute such a default, in any such case which default or event
would have a Material Adverse Effect. Except as described in the Offering
Memorandum, no default exists, and no
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event has occurred which with notice or lapse of time or both would constitute a
default, in the due performance and observance of any term, covenant or
condition, by the Company of any other agreement or instrument to which the
Company is a party or by which it or its properties or business may be bound or
affected which default or event would have a Material Adverse Effect.
5.13. No Violation. The Company is not in violation of any term or
provision of its Certificate of Incorporation or Bylaws or of any franchise,
license, permit, judgment, decree, order, statute, rule or regulation, where the
consequences of such violation would have a Material Adverse Effect.
5.14. Transactions with Affiliates. No transaction has occurred or is
contemplated between or among the Company and any of its officers or directors
or any affiliate or affiliates of any such officer or director that would have
been required to be described in the Offering Memorandum if it were part of a
Registration Statement under the Securities Act and is not described in the
Offering Memorandum.
5.15. No Manipulation. The Company has not taken, nor will it take,
directly or indirectly, any action designed to or which might reasonably be
expected to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of any of the Shares.
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5.16. Taxes. The Company or its former parent, Mego Financial Corp.,
has filed all Federal, state, local and foreign tax returns which are required
to be filed by the Company through the date hereof, or has received extensions
thereof, and has paid all taxes shown on such returns and all assessments
received by it to the extent that the same are material and have become due.
5.17. Investment Company Act of 1940. The Company is not, and will not
become upon the issuance and sale of the Securities and the application of net
proceeds therefrom as described in the Offering Memorandum under the caption
"Use of Proceeds," an "investment company" or, assuming that FBR is not an
"investment company," an entity "controlled" by an "investment company" as such
terms are defined in the Investment Company Act of 1940, as amended (the "1940
Act").
5.18. Use of Proceeds. The Company will apply the proceeds from the
Offerings as set forth in the Offering Memorandum.
5.19. Board of Directors. As of the Closing, the Board of Directors of
the Company shall have seven members and Purchaser shall be entitled at the
Closing or at any time thereafter to designate one member, who shall be
appointed to the Board of Directors promptly following his designation and who
shall also be elected to any executive or similar committee of the Board of
Directors. After the Closing and until the first date on which Purchaser holds
shares of Series A Preferred Stock (on an as-converted basis) and Common Stock
representing less
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than 7.0% of the outstanding shares of Common Stock (including the number of
shares of Common Stock into which all outstanding shares of Series A Preferred
Stock are convertible) (the "7% Termination Date") (a) the Board of Directors
shall continue to have seven members (as adjusted pursuant to the following
sentence and the similar provision of the Preferred Stock Purchase Agreement of
even date herewith between the Company and City National), and (b) Purchaser
shall be entitled to nominate one member of the Board of Directors at each
meeting of shareholders at which directors are elected, and such member shall
also be elected to any executive or similar committee of the Board of Directors.
Promptly following the first to occur of (i) the purchase by Purchaser pursuant
to the exercise of the Option of all of the Option Shares, or (ii) the
acquisition by Purchaser by exercise of the Option or otherwise of such number
of shares of Common Stock that Purchaser shall immediately following such
acquisition own in the aggregate 15 percent (15%) or more of the then
outstanding shares of Common Stock, the number of members of the Board of
Directors shall be increased by one and Purchaser shall be entitled to designate
one additional member of the Board of Directors, such designee to be promptly
appointed by the Board of Directors to fill the vacancy so created. Thereafter
and until the 7% Termination Date, Purchaser shall be entitled to nominate two
members of the Board of Directors at each meeting of shareholders at which
directors are elected, and one such member designated by Purchaser shall be
elected to any executive or similar committee of the Board of
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<PAGE> 22
Directors. The Company shall use its best efforts to cause the nominees of
Purchaser to be elected to the Board of Directors and appointed to such
committee. In addition, Purchaser shall have the right at all times until the 7%
Termination Date to designate a representative (who shall be reasonably
satisfactory to the Company) who shall be given notice of and who shall have the
right to attend all meetings of the Board of Directors of the Company and all
meetings of any executive or similar committee of the Board of Directors.
5.20. Certificates. Any certificates signed by any officer of the
Company or its subsidiaries, and delivered to the Purchasers or to counsel for
the Purchasers pursuant to the terms of this Agreement shall be deemed a
representation and warranty by the Company to the Purchaser as to the matters
covered thereby.
5.21. Rolly White. Prior to Closing, the Company shall offer Rolly
White a senior position with the Company with responsibilities relating to loan
production and retail acquisitions and shall use commercially reasonable efforts
to employ Mr. White in such position as soon as possible.
5.22. Mortgage-Related Asset Revaluation. Immediately following
Closing, the Company shall cooperate with Purchaser, with the advice of their
respective advisors, to arrive at a mutually satisfactory, and more conservative
set of assumptions to be used to value the mortgage-related assets carried on
the Company's balance sheet.
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5.23. Other Transactions. The material terms of all of the
transactions relating to the Recapitalization are accurately disclosed on
Exhibit F.
5.24. Best Efforts. The Company shall cooperate with Purchaser and
shall use its reasonable best efforts to do or cause to be done all things
necessary or appropriate on its part in order to effect the consummation of the
transactions contemplated under this Agreement.
5.25. Due Diligence. In order to permit Purchaser to perform further
due diligence, the Company shall give to Purchaser and its accountants, counsel
and other authorized representatives reasonable access during normal business
hours throughout the period prior to the Closing Date to all of its properties,
books, records, contracts and other documents relating to its business as
Purchaser may reasonably request, subject to the obligation of Purchaser and its
authorized representatives to maintain the confidentiality of all non-public
information concerning the Company obtained by reason of such access.
5.26. Waiver of Certain Claims. The Company acknowledges that
Purchaser is a unitary thrift holding company which owns all of the outstanding
capital stock of Sovereign Bank, a federally chartered savings bank ("Sovereign
Bank"), which now and which may in the future compete directly or indirectly
with the Company. The Company hereby waives and covenants not to sue Purchaser,
Sovereign Bank and Purchaser's other affiliated entities, and the officers,
directors, employees
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and agents of each of them (including, without limitation, any person who is
appointed to the Board of Directors of the Company pursuant to Section 5.19
above) and the heirs, personal representatives, successors and assigns of each
of them (collectively, the "Released Parties") in connection with any and all
claims, causes of action, counterclaims, set-offs and rights of contribution, at
law or in equity, which the Company (alone or in combination with others) may in
the future have against the Released Parties or any of them for any liability
for any loss, damage, injury or expense of any kind arising from or relating to
any: (i) conflict or alleged conflict of interest, (ii) breach or alleged breach
of any fiduciary duty which may be owed to the Company (including, without
limitation any breach or alleged breach of the duty of loyalty arising under the
corporate opportunity doctrine), or (iii) violation or alleged violation of any
similar duty or obligation which may arise by reason of the fact that Purchaser
and/or Sovereign Bank and Purchaser's other affiliated entities will following
consummation of the transactions contemplated by this Agreement be a stockholder
of the Company, have one or more of its designees serving as directors of the
Company, be a provider of credit to the Company, a purchaser of mortgages from
the Company, a provider of services to the Company, or otherwise.
Section 6. Representations, Warranties and Covenants of Purchaser.
Purchaser hereby represents, warrants and covenants to the Company as follows:
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<PAGE> 25
6.1. Compliance with United States Securities Laws. Purchaser
understands and acknowledges that the Shares and the Underlying Common Stock
have not been registered under the Securities Act, and that the Shares and the
Underlying Common Stock may not be offered or sold in the United States or to,
or for the account or benefit of, any "U.S. person" (as defined in Regulation S
under the Securities Act), unless such Securities are registered under the
Securities Act or such offer or sale is made pursuant to an exemption from the
registration requirements of the Securities Act. The Shares are being offered
and sold in reliance on an exemption from registration pursuant to Section 4(2)
of the Securities Act and Rule 506 promulgated thereunder. Purchaser further
represents that it has read and understands the investor notices and legends set
forth in the Offering Memorandum.
6.2. Status of Purchaser. Purchaser is purchasing the Shares and will
acquire the Underlying Common Stock for its own account or for persons or
accounts as to which it exercises investment discretion. Such Purchaser is an
"accredited investor" (as defined in Rule 501(a) under the Securities Act) and
is knowledgeable, sophisticated and experienced in making, and is qualified to
make, decisions with respect to investments in restricted securities and has
requested, received, reviewed and considered all information it deems relevant
in making a decision to execute this Purchase Agreement and to purchase the
Shares. Purchaser has agreed to purchase the Shares for investment and not with
a view to
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distribution. To the extent that any certificate representing the Shares is
registered in the name of Purchaser's nominee, Purchaser confirms that such
nominee is acting as custodian for Purchaser of the Shares represented thereby.
6.3. Restrictions on Re-Sale. Purchaser understands that the Shares
and the Underlying Common Stock are only transferable on the books and records
of the Company and its Transfer Agent and Registrar and that the Company and the
Transfer Agent and Registrar will not register any transfer of the Shares or the
Underlying Common Stock which the Company in good faith believes violates the
restrictions set forth in this Section 6.3 or violates any state or federal
securities laws. Purchaser will not, directly or indirectly, voluntarily offer,
sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy,
purchase or otherwise acquire or take a pledge of) its rights under this
Purchase Agreement or the Shares or the Underlying Common Stock otherwise than
in compliance with the Securities Act, any applicable state securities or blue
sky laws and any applicable securities laws of jurisdictions outside the United
States, and the rules and regulations promulgated thereunder.
Purchaser understands that the Company intends to register the Option
Shares and the Underlying Common Stock under the Securities Act as contemplated
in the Registration Rights Agreement. After registration of the Option Shares
and the Underlying Common Stock under the Securities Act, Purchaser agrees to
comply with the prospectus delivery and all other
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<PAGE> 27
requirements of the Securities Act in connection with any sale or other
disposition of the Option Shares and the Underlying Common Stock. Purchaser
agrees that Purchaser or its broker will deliver to each transferee a copy of a
current prospectus until the Company gives written notice to the Purchaser that
delivery of a current prospectus is no longer required. Purchaser agrees to
confirm with the Company that the prospectus is in fact current and that the
Option Shares and the Underlying Common Stock may be lawfully sold prior to any
sale or other disposition by Purchaser.
6.4. Due Execution, Delivery and Performance of the Purchase Agreement
and Other Obligations. Upon approval of this Agreement and the transactions
contemplated herein by its Board of Directors: Purchaser will have full right,
power, authority and capacity to enter into this Purchase Agreement and to
consummate the transactions contemplated hereby; the execution, delivery and
performance of this Purchase Agreement by Purchaser will have been duly
authorized by all requisite corporate action of Purchaser; upon the execution
and delivery of this Purchase Agreement by Purchaser, this Purchase Agreement
shall constitute the legal, valid and binding obligations of Purchaser,
enforceable against Purchaser in accordance with its terms except insofar as the
enforcement thereof may be limited by bankruptcy law or other laws relating to
or affecting the enforcement of creditors' rights generally or by general
equitable principles (regardless of whether such enforceability is considered in
a proceeding in equity or at law) and except as
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rights to indemnity and contribution may be limited under applicable law.
6.5. Representations, Warranties and Covenants at Closing. Each of the
representations and warranties contained in this Section 6 is true and correct
as of the date of this Purchase Agreement and will be true and correct as of the
Closing Date or the applicable Date of Delivery with the same effect as though
such representations and warranties had been made on and as of such date. Each
of the covenants contained in this Section 6 will have been performed as of the
Closing Date or the applicable Date of Delivery if performance is required as of
such date by this Section 6.
Section 7. Survival of Representations, Warranties, Covenants and
Agreements. Notwithstanding any investigation made by either party to this
Purchase Agreement, all representations, warranties, covenants and agreements
made by the Company and Purchaser herein shall survive the execution of this
Purchase Agreement, the delivery of certificates representing the Shares and the
receipt of payment for the Shares.
Section 8. Conditions to Closing. The obligations of the Purchaser
hereunder are subject to (i) the accuracy of the representations and warranties
on the part of the Company in all material respects on the date hereof, at the
Closing Date and at each Date of Delivery, (ii) the performance by the Company
of its obligations hereunder in all material respects, and (iii) the following
further conditions:
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8.1. Exchange Offer. The Company shall have consummated the
Exchange Offer with respect to at least $76 million in aggregate principal
amount of Original Notes.
8.2. Additional Equity. The Company shall have consummated the
sale of additional shares of Common Stock and Series A Preferred Stock pursuant
to the Offerings for aggregate gross proceeds to the Company of not less than
$20,000,000.
8.3. Purchaser Board Approval. Purchaser's Board of Directors
shall have approved this Purchase Agreement and the transactions contemplated
hereby. Purchaser warrants and represents that such approval has been obtained
as of the date hereof.
8.4. Waiver of Change of Control Payments. All current and former
directors, officers, employees and consultants of the Company or any subsidiary
who would be entitled as a result of the consummation of the Recapitalization to
receive payments or other benefits pursuant to "change of control" provisions of
any agreement between such person and the Company or any subsidiary shall have
irrevocably waived their rights to receive such payments or benefits and the
Company shall have irrevocably determined not to make such payments.
8.5. Servicing Purchase Agreements. The Company and City National
shall have entered into a Bulk Servicing Purchase Agreement including the terms
set forth on Exhibit C and a Flow Servicing Purchase Agreement including the
terms set forth on Exhibit D and each such Agreement shall have been determined
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by Purchaser in the exercise of its sole and absolute discretion to be
satisfactory in form and substance.
8.6. Registration Rights Agreement. The Company and Purchaser
shall have entered into the Registration Rights Agreement and such
Agreement shall have been determined by Purchaser in the exercise of its sole
and absolute discretion to be satisfactory in form and substance.
8.7. Opinion of Greenberg Traurig. The Company shall have
furnished to the Purchaser on the Closing Date and on each Date of Delivery an
opinion of Greenberg Traurig Hoffman Lipoff Rosen & Quentel, P.A., counsel for
the Company, addressed to the Purchaser and dated the Closing Date and each Date
of Delivery and in form reasonably satisfactory to Stevens & Lee, counsel for
the Purchaser, stating that:
(a) the authorized shares of capital stock of the Company
conform as to legal matters to the description thereof contained in the
Offering Memorandum under the heading "Description of Capital Stock"; the
Company has an authorized capitalization as set forth in the Offering
Memorandum under the caption "Capitalization"; the issued and outstanding
shares of capital stock of the Company have been duly and validly
authorized and issued and are fully paid and non-assessable; to such
counsel's knowledge, except as set forth in the Offering Memorandum, there
are no outstanding (i) securities or obligations of the Company convertible
into or exercisable or exchangeable for any shares of capital stock of the
Company,
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(ii) warrants, rights, or options to subscribe for or purchase from the
Company any shares of capital stock or any such convertible or exchangeable
securities or obligations, or (iii) obligations of the Company to issue any
shares of capital stock, any such convertible or exchangeable securities or
obligation, or any such warrants, rights, or options; the Shares have been
duly authorized and, in the case of the Option Shares, reserved for
issuance, and, when issued and sold pursuant to this Purchase Agreement
and, in the case of the Option Shares, the Option Agreement, will be duly
and validly issued, fully paid and nonassessable; the shares of Common
Stock into which the Shares are convertible have been duly authorized and
reserved for issuance and, when issued upon such conversion in accordance
with the terms thereof, will be duly and validly issued, fully paid and
nonassessable.
(b) the Company has been duly incorporated and is validly
existing and in good standing under the laws of the State of Delaware with
all requisite corporate power and authority to own, lease and license its
assets and properties and conduct its business as now being conducted and
as described in the Offering Memorandum and to enter into, deliver and
perform this Agreement, the Purchase Agreements and the Other Transaction
Documents;
(c) the Company is duly qualified in or registered by and in
good standing as a foreign corporation in each jurisdiction listed on
Exhibit E hereto;
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(d) to such counsel's knowledge, except as described in the
Offering Memorandum, the Company is not in breach of, or in default under
(nor has any event occurred that with notice, lapse of time, or both would
constitute a breach of or default under) its Certificate of Incorporation
or in the performance or observation of any obligation, agreement,
covenant, or condition contained in any license, indenture, mortgage, deed
of trust, loan or credit agreement, or any other agreement or instrument
known to such counsel to which the Company or any of its subsidiaries is a
party or by which any of them or their respective properties may be bound
or affected or under any law, regulation, or rule or any decree, judgment,
or order applicable to the Company or any of its subsidiaries, except such
breaches or defaults that are not reasonably likely to have a Material
Adverse Effect;
(e) the execution, delivery, and performance of this
Agreement and the Other Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated under this
Agreement and the Other Transaction Documents, as the case may be, do not
and will not conflict with, or result in any breach of, or constitute a
default under (nor constitute any event that with notice, lapse of time, or
both would constitute a breach of or default under) (i) any provisions of
the Company's certificate of incorporation or by-laws, (ii) any provision
of any license, indenture, mortgage, deed of
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trust, loan or credit agreement, or other agreement or instrument known to
such counsel and to which the Company or any subsidiary is a party or by
which any of them or their respective properties may be bound or affected,
or (iii) to such counsel's knowledge, assuming (x) the accuracy of the
representations and warranties of the Company, FBR and the Purchasers set
forth in the Placement Agreement, the Purchase Agreements and the Other
Transaction Documents, and (y) that the Purchaser, the Other Purchasers and
the participants in the Exchange Offer are either "qualified institutional
buyers" (as defined in Rule 144A under the Securities Act) or "accredited
investors" (as defined in Rule 501(a) under the Securities Act), any law or
regulation or any decree, judgment, or order applicable to the Company or
any subsidiary, except in the case of clause (ii) for such conflicts,
breaches, or defaults that have been waived or individually or in the
aggregate are not reasonably likely to have a Material Adverse Effect;
(f) the Company has full corporate power, and authority to
enter into and perform this Agreement and the Other Transaction Documents
and to consummate the transactions contemplated herein; this Agreement and
the Other Transaction Documents have been duly authorized, executed, and
delivered by the Company and will constitute valid and binding agreements
of the Company enforceable against the Company in accordance with their
terms, except as may be limited by bankruptcy, insolvency,
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<PAGE> 34
reorganization, moratorium, or similar laws affecting creditors' rights
generally, and by general principles of equity, whether considered at law
or in equity, and except as rights to indemnity or contribution may be
limited under applicable law;
(g) assuming (x) the accuracy of the representations and
warranties of the Company, FBR and the Purchasers set forth in the
Placement Agreement, the Purchase Agreements and the Other Transaction
Documents, and (y) that the Purchaser, the Other Purchasers and the
participants in the Exchange Offer are either "qualified institutional
buyers" (as defined in Rule 144A under the Securities Act) or "accredited
investors" (as defined in Rule 501(a) under the Securities Act), no
approval, authorization, consent, or order of or filing with any federal
or, to such counsel's knowledge, state governmental or regulatory
commission, board, body, authority, or agency is required in connection
with the execution, delivery, and performance by the Company of this
Agreement and the Other Transaction Documents or the consummation of the
transactions contemplated hereby and thereby by the Company, or the sale
and delivery of the Shares by the Company as contemplated hereby, other
than (i) the filing of a certificate of designation of the Series A
Preferred Stock with the Secretary of State of Delaware, (ii) the filing of
a Current Report on Form 8-K, (iii) filings required pursuant to the terms
of the Registration Rights Agreement
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and any other registration rights agreements entered into pursuant to the
Offerings and the Exchange Offer, and (iv) as may be required pursuant to
any state securities laws;
(h) to such counsel's knowledge, each of the Company and its
subsidiaries has all necessary licenses, authorizations, consents, and
approvals and has made all necessary filings required under any federal,
state, or local law, regulation or rule, and has obtained all necessary
authorizations, consents, and approvals from other persons, required to
conduct their respective businesses, as described in the Offering
Memorandum, except to the extent that any failure to have any such
licenses, authorizations, consents, or approvals would not, individually or
in the aggregate, have a Material Adverse Effect; to such counsel's
knowledge, neither the Company nor any of its subsidiaries is in violation
of, in default under, or has received any notice regarding a possible
violation, default, or revocation of any such license, authorization,
consent, or approval or any federal, state, local, or foreign law,
regulation, or decree, order, or judgment applicable to the Company or any
of its subsidiaries, which would result in a Material Adverse Effect; and
no such license, authorization, consent, or approval contains a materially
burdensome restriction that is not adequately disclosed in the Offering
Memorandum;
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(i) the issuance and sale of the Shares by the Company is
not subject to preemptive or other similar rights arising by operation of
law, under the Certificate of Incorporation or Bylaws of the Company or
under any agreement known to such counsel to which the Company or any of
its subsidiaries is a party;
(j) the form of certificate used to evidence the Common
Stock complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the Certificate of
Incorporation and Bylaws of the Company and the requirements of The Nasdaq
National Market;
(k) the statements under the captions "Business --
Government Regulation," "Description of the Original Notes," "Description
of the New Notes," "Description of Capital Stock" and "Certain Federal
Income Tax Consequences" in the Offering Memorandum, insofar as such
statements constitute a summary of the legal matters referred to therein,
constitute accurate summaries thereof in all material respects;
(l) except as described in the Offering Memorandum, to such
counsel's knowledge, there are no actions, suits, investigations or
proceedings pending to which the Company or any of its subsidiaries is a
party or to which any of their properties is subject before or by any court
or governmental agency or both, which is reasonably
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likely to have, individually or in the aggregate, a Material Adverse
Effect,
(m) neither the Company nor any of its subsidiaries is, or
solely as a result of transactions contemplated hereby and the application
of the proceeds from the sale of the Shares or the consummation of the
Recapitalization, will become an "investment company" or, assuming that FBR
is not an "investment company," a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended (the "1940 Act").
In addition, such counsel shall state that they have participated in
conferences with the directors, officers and employees of the Company and its
independent public accountants at which the contents of the Offering Memorandum
were discussed and, although such counsel is not passing upon and does not
assume responsibility for the accuracy, completeness, or fairness of the
statements contained in the Offering Memorandum (except as and to the extent
stated above), they have no reason to believe that the Offering Memorandum, as
of its date and as of the date of such counsel's opinion, contained or contains
any untrue statement of a material fact or omitted or omits to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading (it
being understood that, in each case, such counsel need express no view with
respect to
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the financial statements and other financial and statistical data included in
the Offering Memorandum).
8.8. Comfort Letter. The Purchaser shall have received from
Deloitte & Touche LLP, letters relating to the Offering Memorandum dated as of
the Closing Date and each Date of Delivery, as applicable, addressed to the
Purchaser and in form and substance satisfactory to it.
8.9. Offering Memorandum. The Offering Memorandum, as amended or
supplemented after the date hereof, shall not, in Purchaser's reasonable
judgment, (i)disclose a material change in the assets or properties, business,
results of operations, prospects or condition (financial or otherwise) of the
Company and its subsidiaries taken as a whole, as described in the Offering
Memorandum, or (ii) contain an untrue statement of material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
8.10. Other Transactions. There shall have been, in Purchaser's
reasonable judgment, no material change in the terms of the transactions
described in Exhibit F.
8.11. No Material Adverse Effect. Between the time of execution
of this Agreement and the Closing Date or the relevant Date of Delivery no event
shall have occurred which has had or is reasonably likely to have a Material
Adverse Effect.
8.12. Certificates. The Company will, on the Closing Date and on
each Date of Delivery, deliver to the
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Purchaser a certificate of the Chief Executive Officer and the Chief Financial
Officer of the Company to the effect that, to each of such officer's knowledge,
the representations and warranties of the Company set forth in this Agreement
are true and correct as of such date and the conditions set forth in Sections
8.1, 8.2, 8.4, 8.10, 8.11, 8.14 and 8.15 of this Agreement have been met. The
Company shall have furnished to the Purchaser such other documents and
certificates as to the accuracy and completeness of any statement in the
Offering Memorandum, the representations, warranties and statements of the
Company contained herein, and the performance by the Company of its covenants
contained herein, and the fulfillment of any conditions contained herein as of
the Closing Date or any Date of Delivery as the Purchaser may reasonably
request.
8.13. Regulatory Matters. Purchaser shall have received all
approvals from the Office of Thrift Supervision and any other regulatory agency
having jurisdiction over Purchaser, necessary to consummate the transactions
contemplated by this Agreement.
8.14. Consents. The Company shall have obtained in writing all
consents of third parties necessary to permit the consummation of the
transactions contemplated by this Agreement and the Other Transaction Documents
and no such consent shall contain any term or condition that Purchaser
reasonably deems to be materially disadvantageous to the Company or Purchaser.
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8.15. Related Party Indebtedness. At the Closing, the Company
shall have no outstanding indebtedness to Mego Financial Corp.
8.16. Documents. The Company shall have delivered to Purchaser
executed copies of the Purchase Agreements entered into with the Other
Purchasers and all other agreements between the Company and any Other Purchasers
or any holder of the Original Notes or the New Notes relating to the Offerings
or the Recapitalization.
8.17. Additional Matters Relating to Option Shares. In connection
with the purchase by Purchaser of Option Shares, the Company shall deliver to
the Purchaser on the Date of Delivery such documents as the Purchaser may
reasonably request with respect to the good standing of the Company, the due
authorization and issuance of the Option Shares and other matters related to the
issuance of the Option Shares.
8.18. Additional Conditions. The obligations of Purchaser
hereunder are further subject to the satisfaction of each of the following
conditions:
(a) Servicing Purchase Agreements. The Servicing Purchase
Agreements entered into by the Company and City National shall have been
determined by Purchaser in the exercise of its sole and absolute discretion
to be satisfactory in form and substance.
(b) Certificate of Designation. The certificate of
designation of the Series A Preferred Stock shall have been determined by
Purchaser in the exercise of
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its sole and absolute discretion to be satisfactory in form and substance.
(c) Letter from FBR. FBR shall have delivered to Purchaser a
letter in the form attached hereto as Exhibit G.
(d) Warehouse Line Agreement. The Company and Sovereign Bank
shall have entered into a Warehouse Line Agreement, which Agreement: (i)
shall include, inter alia, the terms set forth in Exhibit H hereto, and
(ii) shall otherwise have been determined by Purchaser in the exercise of
its sole and absolute discretion to be satisfactory in form and substance.
(e) Flow Loan Purchase Agreement. The Company and Sovereign
Bank shall have entered into a Flow Loan Purchase Agreement, which
Agreement: (i) shall include, inter alia, the terms set forth in Exhibit I
hereto, and (ii) shall otherwise have been determined by Purchaser in the
exercise of its sole and absolute discretion to be satisfactory in form and
substance.
(f) Right of First Refusal. The Company and Purchaser shall
have entered into a Right of First Refusal Agreement, which Agreement: (i)
shall include, inter alia, the terms set forth in Exhibit J hereto, and
(ii) shall otherwise have been determined by Purchaser in the exercise of
its sole and absolute discretion to be satisfactory in form and substance.
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(g) Amendment of Placement Agreement. The Company and FBR
shall have entered into an Amendment to the Placement Agreement under the
terms of which the parties thereto agree that the fees to be paid to FBR
shall be paid by the delivery of shares of Common Stock valued at $1.50 per
share.
(h) Agreements with FBR and Emanuel J. Friedman. Purchaser
shall have entered into Agreements with each of FBR and Emanuel J. Friedman
with respect to shares of Common Stock held by FBR in its investment
account and by Emanuel J. Friedman under the terms of which Purchaser is
granted a right of first refusal and a "tag along" right, which Agreements
shall have been determined by Purchaser in the exercise of it sole and
absolute discretion to be satisfactory in form and substance.
(i) Employment and Non-Competition Agreements. The Company
shall have entered into an Employment Agreement or other retention
arrangement (including a 12 month covenant not to compete) with at least
three of the four Company employees identified on Exhibit K hereto, which
Agreements or other retention arrangements shall have been determined by
Purchaser in its sole and absolute discretion to be satisfactory in form
and substance.
(j) Option Agreement. The Option Agreement shall have been
executed by the Company and delivered to Purchaser and shall have been
determined by
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Purchaser in its sole and absolute discretion to be satisfactory in form
and substance.
Section 9. Conditions to Closing. The obligations of the Company
hereunder are subject to (i) the accuracy of the representations and warranties
on the part of the Purchaser in all material respects on the date hereof, at the
Closing Date and at each Date of Delivery, and (ii) the performance by the
Purchaser of its obligations hereunder in all material respects.
Section 10. Compliance with the Securities Act.
10.1. Information Available. So long as Purchaser holds any
shares of the Company's capital stock, the Company will furnish to each
Purchaser:
(a) as soon as practicable after available, one copy of (i)
its Annual Report to Shareholders, and (ii) if not included in substance in
the Annual Report to Shareholders, its Annual Report on Form 10-K, and
(iii) each of its Quarterly Reports to Shareholders and its Quarterly
Reports on Form 10-Q, and
(b) upon the reasonable request of Purchaser, all other
information of a kind that is generally available to the public.
10.2. Legend Requirement. Purchaser hereby agrees that the Shares
and the Underlying Common Stock will be subject to Section 6.3 hereof and to
that effect the following legend will appear on the Shares and any Underlying
Common Stock until such time as the Company may deem such legend to be no longer
required under the federal or state securities laws:
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<PAGE> 44
The Securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, of the
United States of America (the "Act") and may have been issued in
reliance upon the exemption set forth in Section 4(2) of the
Securities Act and Rule 506 promulgated thereunder. The
Securities represented by this certificate may not be offered,
sold, transferred or otherwise disposed of in the United States
or to, of for the account or benefit of, any "U.S. person" (as
defined in Regulation S) unless registered under the Act or an
exemption from the registration requirements of the Act is
available.
Section 11. Broker's Fee. Purchaser acknowledges that the Company
has advised it that the Company intends to pay FBR, (the "Placement Agent"): (i)
a fee (the "Offerings Fee") equal to 6.0% of the gross proceeds received from
the sale of the shares of Common Stock (except for those shares sold to Emanuel
J. Friedman) and Series A Preferred Stock sold in the Offerings and shares of
Common Stock (except for those shares sold to Emanuel J. Friedman or his
affiliates) sold in the Rights Offering; and (ii) a fee (the "Advisory Fee") of
$1,000,000 as financial advisor in connection with the Recapitalization.
Purchaser further acknowledges that the Company has advised it that the Offering
Fee is payable upon consummation of the Offerings in Common Stock valued at the
Offering Price and the
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<PAGE> 45
Advisory Fee is payable upon consummation of the Rights Offering in Common Stock
valued at the Offering Price. Placement Agent shall not receive any fee in
connection with the acquisition of shares of the Underlying Common Stock
pursuant to the exercise by Purchaser of the Option. Purchaser further
acknowledges that the Company has advised it that the Company has also agreed:
(i) to reimburse the Placement Agent on request by the Placement Agent for the
Placement Agent's out-of-pocket expenses, including, among other things, the
fees and expenses of legal counsel; and (ii) to indemnify the Placement Agent
against certain liabilities, including liabilities under the Securities Act, and
other liabilities incurred in connection with the Offerings, and to contribute
to payments the Placement Agent may be required to make in respect thereof. The
parties hereto hereby represent that there are no other brokers or finders
entitled to compensation in connection with the sale of the securities
contemplated hereby.
Section 12. Notices. All notices, requests, consents and other
communications hereunder shall be in writing, shall be mailed by registered air
mail, postage prepaid, or sent by facsimile transmission with a confirmation
copy sent by registered mail, and shall be deemed given when so mailed:
(a) if to the Company, to 1000 Parkwood Circle,
Atlanta, Georgia 30339, Attention: Jeffrey S. Moore, or to such other
person at such other place as the Company shall designate to the
Purchaser in writing;
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(b) if to Purchaser, to 1130 Berkshire Boulevard, P.O.
Box 12646, Reading, Pennsylvania 19612, Attention: Jay S. Sidhu, or at
such other address or addresses as Purchaser may have furnished to the
Company, with a copy to Stevens & Lee, 607 Washington Street, P.O. Box
679, Reading, Pennsylvania 19603-0679, Attention: Joseph M. Harenza
and Clinton W. Kemp; or
(c) if to any transferee or transferees of Purchaser,
at such address or addresses as shall have been furnished to the other
parties hereto at the time of the transfer or transfers, or at such
other address or addresses as may have been furnished by such
transferee or transferees to the other parties hereto in writing.
Section 13. Amendments. No amendment, interpretation or waiver of
any of the provisions of this Purchase Agreement shall be effective unless made
in writing and signed by the parties to this Purchase Agreement.
Section 14. Headings. The headings of the sections, subsections
and subparagraphs of this Purchase Agreement are used for convenience only and
shall not affect the meaning or interpretation of the contents of this Purchase
Agreement.
Section 15. Enforcement. The failure to enforce or to require the
performance at any time of any of the provisions of this Purchase Agreement
shall in no way be construed to be a waiver of such provisions, and shall not
affect either the validity of this Purchase Agreement or any part hereof or the
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<PAGE> 47
right of any party thereafter to enforce each and every provision in accordance
with the terms of this Purchase Agreement.
Section 16. Governing Law. This Purchase Agreement and the
relationships of the parties in connection with the subject matter of this
Purchase Agreement shall be governed by and determined in accordance with the
laws of the State of Georgia in the United States of America.
Section 17. Severability. If any severable provision of this
Purchase Agreement is held to be invalid or unenforceable by any judgment of a
tribunal of competent jurisdiction, the remainder of this Purchase Agreement
shall not be affected by such judgment, and the Purchase Agreement shall be
carried out as nearly as possible according to its original terms and intent.
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<PAGE> 48
Section 18. Counterparts. This Purchase Agreement may be executed
in counterparts, all of which shall constitute one agreement, and each such
counterpart shall be deemed to have been made, executed and delivered on the
date set out at the head of this Purchase Agreement without regard to the dates
or times when such counterparts may actually have been made, executed or
delivered.
Section 19. Assignment. This Purchase Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of, as the case
may be, and be enforceable by and against the parties hereto and their
respective successors and assigns, but neither this Purchase Agreement nor any
of the rights, interests or obligations of the parties hereunder shall be
assigned by any of the parties hereto without the prior written consent of each
of the other parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed by their duly authorized representatives the day and year first
above written.
MEGO MORTGAGE CORPORATION
By: /s/ Jeffrey S. Moore
----------------------------------
Name: Jeffrey S. Moore
Title: President and Chief
Executive Officer
SOVEREIGN BANCORP, INC.
By: /s/ Jay S. Sidhu
----------------------------------
Name: Jay S. Sidhu
Title: President and
Chief Executive Officer
44
<PAGE> 1
EXHIBIT 10.87
STOCK OPTION AGREEMENT
MADE as of this 29th day of June, 1998 by MEGO MORTGAGE CORPORATION, a
Delaware corporation with its principal offices at 1000 Parkwood Circle, 5th
Floor, Atlanta, Georgia 30339 (the "Company"), in favor of SOVEREIGN BANCORP,
INC., a Pennsylvania corporation with its principal offices at 1130 Berkshire
Boulevard, P.O. Box 12646, Reading, Pennsylvania 19612 (the "Holder").
Background:
This Agreement is executed pursuant to the terms of a Preferred Stock
Purchase Agreement dated as of June 9, 1998 entered into by the Company and the
Holder (the "Preferred Stock Purchase Agreement"). Capitalized terms not
otherwise defined herein shall have the meanings given to them in the Preferred
Stock Purchase Agreement.
WITNESSETH:
NOW, THEREFORE, in consideration of the mutual undertakings set forth in
the Preferred Stock Purchase Agreement and other good and valuable
consideration, the Company, intending to be legally bound, hereby agrees as
follows:
1. Definitions. For purposes of this Agreement, the following terms shall
have the meanings indicated below, unless the context otherwise requires:
(a) "Agreement" shall mean this Agreement and any future amendments,
restatements, modifications or supplements hereof or hereto.
(b) "Board" shall mean the Board of Directors of the Company, as
comprised from time to time.
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<PAGE> 2
(c) "Capital Stock" shall mean the Common Stock, and any other stock of
any class, whether now or hereafter authorized, which has the right to
participate in the distribution of earnings and assets of the Company without
limit as to amount or percentage. "Capital Stock" shall not include any shares
at any time directly or indirectly owned by the Company.
(d) "Closing Price" with respect to the Common Stock on any day shall
mean: (i) if the Common Stock is listed or admitted for trading on a national
securities exchange (which shall include for this purpose the Nasdaq National
Market) the reported last sales price regular way or, if no such reported sale
occurs on such day, the average of the closing bid and asked prices regular way
on such day, in each case as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which such class of security is listed or admitted to
trading, or (ii) if the Common Stock is not listed or admitted to trading on any
national securities exchange, the last quoted sales price, or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market
on such day as reported by NASDAQ or any comparable system then in use or, if
not so reported, as reported by any New York Stock Exchange member firm
reasonably selected by the Company for such purpose.
(e) "Fair Market Value" with respect to the Common Stock on any day
shall mean the average of the daily Closing Prices of a share of Common Stock
for the 10 consecutive business days ending on the most recent business day for
which a Closing Price is available; provided, however, that in the event that
Fair Market Value is determined during a period following the announcement by
the Company of: (i) a dividend or distribution on the Common Stock, or (ii) any
subdivision, combination or reclassification of the Common Stock and prior to
the expiration of 10 business days after the ex-dividend date for
2
<PAGE> 3
such dividend or distribution, or the record date for such subdivision,
combination or reclassification, then, and in each such case, the Closing Price
for each day during such period of 10 consecutive business days which falls
prior to such ex-dividend date shall be appropriately adjusted.
(f) "Option" shall mean the option herein provided to purchase the whole
block or any part of the block of shares of Common Stock purchasable hereunder.
(g) "Option Price" shall mean the price per share at which Common Stock
is purchasable hereunder, as such price may be adjusted from time to time
pursuant hereto.
(h) "Option Stock" shall mean, individually or collectively, as
appropriate, any share or shares of Common Stock purchased upon exercise of the
Options.
2. Grant of Option. The Company hereby grants to the Holder the right to
purchase, at any time up to 180 days after the second anniversary of the Closing
Date (the "Expiration Date"), up to 6,666,667 shares of fully paid and
non-assessable Common Stock at an exercise price of $1.50 per share (subject to
adjustment as hereinafter provided).
3. Exercise of Options. This Option may be exercised in whole or in part
(but not as to a fractional share of Common Stock) by the surrender of this
Agreement, properly endorsed, at any office of the Company and upon payment to
it by certified or bank cashier's check of the Option Price for the shares
purchasable thereunder. The persons entitled to the shares of Option Stock so
purchased shall be treated for all purposes as the holders of such shares as of
the close of business on the date of exercise. Certificates for the shares of
Option Stock so purchased, together with a new Agreement or Agreements of like
tenor representing in the aggregate the right to purchase the
3
<PAGE> 4
number of shares of Common Stock with respect to which the Option has not been
exercised (each such Agreement to be for such portion of the total shares of
Option Stock as the holder thereof shall designate), and shall be issued and
delivered to the persons so entitled within a reasonable time, not exceeding ten
(10) days, after such exercise.
4. Exchange. This Agreement is exchangeable, upon the surrender thereof by
the Holder at any office of the Company, for a new Agreement or Agreements of
like tenor representing in the aggregate the right to purchase the number of
shares of Option Stock then purchasable hereunder, each of such new Agreements
to represent the right to subscribe for and purchase such portion of the
aggregate number of shares of Option Stock issuable hereunder as shall be
designated by the Holder at the time of such surrender.
5. Transfer. This Agreement is transferable, in whole or in part, at any
office of the Company by the Holder in person or by duly authorized attorney,
upon presentation of the Agreement, properly endorsed, for transfer.
6. Certain Covenants of the Company. The Company covenants and agrees that
all Option Stock which may be issued upon the exercise of this Option will, upon
issuance, be duly and validly issued, fully paid and non-assessable and free
from all taxes, liens, encumbrances, options, preemptive rights, and other
charges with respect to the issue thereof; and, if any other outstanding shares
of the Company's Common Stock are then listed on a national or regional
securities exchange or on the Nasdaq National Market System, will be so listed.
The Company further covenants and agrees that, during the period within which
this Option may be exercised: (a) the Company shall, at all times, have
authorized and reserved for the purpose of issue upon exercise of the Option
evidenced by this Agreement, a sufficient number of shares of Common Stock, and
(b) the Company will not,
4
<PAGE> 5
by amendment of its Certificate of Incorporation or through any
reclassification, capital reorganization, consolidation, merger, sale or
conveyance of assets, dissolution, liquidation, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Agreement, but will at all times in good faith
assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
Holder hereunder.
7. Adjustment of Purchase Price and Number of Shares. The number and kind
of securities purchasable upon the exercise of the Option and the Option Price
shall be subject to adjustment from time to time upon the occurrence of certain
events as follows:
(a) Mergers and Reclassifications. If after the date hereof there shall
be any reclassification, capital reorganization or change of the Common Stock
(other than as a result of a subdivision, combination or stock dividend provided
for in Section 7(b) hereof), or any consolidation of the Company with, or merger
of the Company into, another corporation or other business organization (other
than a merger in which the Company is the continuing corporation and which does
not result in any reclassification or change of the outstanding Common Stock),
or any sale or conveyance to another corporation or other business organization
of all or substantially all of the assets of the Company, then, as a condition
of such reclassification, reorganization, change, consolidation, merger, sale or
conveyance, lawful provisions shall be made, and duly executed documents
evidencing the same from the Company or its successor shall be delivered to the
Holder, so that the Holder shall thereafter have the right to purchase, at a
total price not to exceed that payable upon the exercise of the Option in full,
the kind and amount of shares of stock and other securities and property which
the Holder would have received upon such
5
<PAGE> 6
reclassification, reorganization, change, consolidation, merger, sale or
conveyance if the Holder had exercised the Option in full immediately prior to
such reclassification, reorganization, change, consolidation, merger, sale or
conveyance, and in any such case appropriate provisions shall be made with
respect to the rights and interest of the Holder to the end that the provisions
hereof (including without limitation, provisions for the adjustment of the
Option Price and the number of shares issuable hereunder) shall thereafter be
applicable in relation to any shares of stock or other securities and property
thereafter deliverable upon exercise hereof.
(b) Dividends; Subdivisions; Combinations. If after the date hereof the
Company shall subdivide the Common Stock, by split-up or otherwise, or combine
the Common Stock, or issue additional shares of Common Stock in payment of a
stock dividend on the Common Stock: (i) the number of shares of Option Stock
issuable upon the exercise of this Option shall forthwith be proportionately
increased in the case of a subdivision or stock dividend, or proportionately
decreased in the case of a combination, and (ii) the Option Price shall
forthwith be proportionately decreased in the case of subdivision or stock
dividend, or proportionately increased in the case of a combination.
(c) Adjustments for Issuances Below Option Price. In case the Company
shall at any time or from time to time after the date hereof issue or sell any
shares of Common Stock (other than shares issued in transactions to which
Sections 7(a) or 7(b) hereof apply), for consideration per share less than the
Option Price in effect immediately prior to the time of such issue or sale, or
pay any dividend or make any other distribution upon the Common Stock payable in
cash, property or securities of the Company other than Common Stock or in
securities of a corporation other than the Company, then forthwith upon such
issue or sale, or upon the payment of such dividend or the making of such other
6
<PAGE> 7
distribution, as the case may be, the Option Price shall (until another such
issue or sale, or dividend or other distribution) be reduced to a price
(calculated to the nearest cent) determined by dividing: (i) an amount equal to
the sum of (x) the number of shares of Common Stock outstanding immediately
prior to such issue or sale or the payment of such dividend or the making of
such other distribution, multiplied by the Option Price in effect immediately
prior to such event, plus (y) the consideration, if any, received by the Company
upon such issue or sale minus (z) the aggregate amount of such dividend or other
distribution in respect of Common Stock, by (ii) the total number of shares of
Common Stock outstanding immediately after such issue or sale or dividend or
other distribution. Further, the number of shares of Option Stock purchasable
hereunder shall be increased to a number determined by dividing: (i) the number
of shares of Option Stock purchasable hereunder immediately prior to such issue
or sale or dividend or other distribution, multiplied by the Option Price
hereunder immediately prior to such event, by (ii) the Option Price in effect
immediately after the foregoing adjustment. Notwithstanding the foregoing, no
adjustment shall be made under this Section 7(c) if the same issuance or sale
would result in a greater adjustment under Section 7(d) below.
(d) Adjustments for Issuance Below Fair Market Value. In case the
Company shall at any time or from time to time after the date hereof issue or
sell any shares of Common Stock (other than shares issued in transactions to
which Sections 7(a) or 7(b) hereof apply), for consideration per share less than
the Fair Market Value per share of outstanding Common Stock on the date of such
issuance or sale, or on the first date of the announcement of such issuance or
sale (whichever is less), then, effective immediately prior to the time of such
issuance, sale or announcement, the number of shares of Common Stock purchasable
upon exercise of this Option shall be adjusted by multiplying the number of
shares of Common Stock subject to purchase upon exercise of this Option by a
fraction, the
7
<PAGE> 8
numerator of which shall be the total number of shares of Common stock
outstanding immediately after such issuance or sale and the denominator of which
shall be an amount equal to the sum of (A) the number of shares of Common Stock
outstanding immediately prior to such issuance or sale, plus (B) the number of
shares of Common Stock which the aggregate consideration, if any, received by
the Company upon such issuance or sale would buy at the Fair Market Value
thereof, as of the date immediately prior to such issuance or sale (whichever is
less). In the event of any such adjustment, the Option Price shall be adjusted
to a number determined by dividing the Option Price in effect immediately prior
to such issuance or sale by the fraction used for purposes of the aforementioned
adjustment. Notwithstanding the foregoing, there shall be no adjustment pursuant
to this Section 7(d) for the issuance of shares of Common Stock upon exercise of
the Option held by City National or upon conversion of shares of Series A
Preferred Stock, and no adjustment shall be made under this Section 7(d) if the
same issuance, sale or announcement would result in a greater adjustment under
Section 7(c) above.
(e) Special Rules. For the purpose of Sections 7(c) and 7(d), the
following provisions shall also be applicable:
(i) If, after the date hereof, the Company shall in any manner
offer any rights to subscribe for or to purchase shares of Common Stock,
at a price less than the Option Price or less than the Fair Market Value
per share of Common Stock in effect immediately prior to the time of the
offering of such rights or the granting of such options, as the case may
be, all shares of Common Stock which the holders of such rights or options
shall be entitled to subscribe for or purchase pursuant to such rights or
options shall be deemed to be issued or sold as of the date of the
offering of such rights or the granting of such options, as the case may
be, and the minimum aggregate consideration
8
<PAGE> 9
named in such rights or options for the Common Stock covered thereby, plus
the consideration received by the Company for such rights or options, shall
be deemed to be the consideration actually received by the Company (as of
the date of the offering of such rights or the granting of such options, as
the case may be) for the issue or sale of such shares.
(ii) If, after the date hereof, the Company shall in any manner
issue or sell any shares of any class or obligations directly or indirectly
convertible into or exchangeable for shares of Common Stock and the price
per share for which Common Stock is deliverable upon such conversion or
exchange (determined by dividing: (i) the total minimum amount received or
receivable by the Company in consideration of the issue or sale of such
convertible or exchangeable shares or obligations, plus the total minimum
amount of premiums, if any, payable to the Company upon conversion or
exchange, by (ii) the total number of shares of Common Stock necessary to
effect the conversion or exchange of all such convertible or exchangeable
shares or obligations) shall be less than Option Price or the Fair Market
Value per share of the Common Stock in effect immediately prior to the time
of such issue or sale, then such issue or sale shall be deemed to be an
issue or sale (as of the date of issue or sale of such convertible or
exchangeable shares or obligations) of the total maximum number of shares
of Common Stock necessary to effect the conversion or exchange of all such
convertible or exchangeable shares or obligations, and the total minimum
amount received or receivable by the Company in consideration of the issue
or sale of such convertible or exchangeable shares or obligations, plus the
total minimum amount of premiums, if any, payable to the Company upon
exchange or conversion, shall be deemed to be the consideration actually
received (as of the date of the issue
9
<PAGE> 10
or sale of such convertible or exchangeable shares or obligations) for the
issue or sale of such Common Stock.
(iii) In the case of any dividend or other distribution on the
Common Stock of the Company payable in property, securities of the Company
other than Common Stock or securities of a corporation other than the
Company, such dividend or other distribution shall be deemed to have been
paid or made at a value equal to the fair market value of the property or
securities so distributed. Any dividend or distribution referred to in this
clause (iii) shall be deemed to have been paid or made on the day following
the date fixed for determination of stockholders entitled to receive such
dividend or distribution.
(iv) In determining the amount of consideration received by the
Company for Common Stock, securities convertible thereinto or exchangeable
therefor, or rights or options for the purchase thereof, no deduction shall
be made for expenses or underwriting discounts or commissions paid by the
Company. The Board shall determine in good faith the fair market value of
the amount of consideration other than the money received by the Company
upon the issue by it of any of its securities. The Board shall also
determine in good faith the fair market value of any dividend or other
distribution made upon Common Stock payable in property, securities of the
Company other than Common Stock or securities of a corporation other than
the Company. The Board shall, in the event that any Common Stock,
securities convertible thereunto or exchangeable therefor, or rights or
options for the purchase thereof are issued with other stock, securities or
assets of the Company, determine in good faith what part of the
consideration received therefor is applicable to the issue of the Common
Stock, securities convertible thereunto or
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<PAGE> 11
exchangeable therefor, or rights or options for the purchase thereof.
(v) If there shall be any change in (A) the minimum aggregate
consideration named in the rights or options referred to in clause (i)
above, (B) the consideration received by the Company for such rights or
options, (C) the price per share for which Common Stock is deliverable upon
the conversion or exchange of the convertible or exchangeable shares or
obligations referred to in clause (ii) above, (D) the number of shares
which may be subscribed for or purchased pursuant to the rights or options
referred to in clause (i) above, or (E) the rate at which the convertible
or exchangeable shares or obligations referred to in clause (ii) above are
convertible into or exchangeable for Common Stock, then the Option Price in
effect at the time of such event shall be readjusted to the Option Price
which would have been in effect at such time had such rights, options, or
convertible or exchangeable shares or obligations still outstanding
provided for such changed consideration, price per share, number of shares,
or rate of conversion or exchange, as the case may be, at the time
initially offered, granted, issued or sold, but only if as a result of such
adjustment the Option Price then in effect hereunder is thereby reduced.
(f) Other Action Affecting Capital Stock. If, after the date hereof,
the Company shall take any action affecting the Capital Stock, other than an
action described in any of the foregoing Sections 7(a) through 7(d) hereof
inclusive, which in the opinion of the Board would have a material adverse
effect upon the rights or economic interests of the Holder, the Option Price and
the number of shares of Option Stock purchasable hereunder shall be adjusted in
such manner and at such time as the Board on the advice of the Company's
independent public
11
<PAGE> 12
accountants may in good faith determine to be equitable in the circumstances.
(g) No Adjustment for Certain Transactions. Notwithstanding the
foregoing, no adjustment shall be made to the Option Price or to the number of
shares of Common Stock issuable upon exercise of this Option in connection with
the following transactions:
(i) the Common Stock Offering, the Series A Preferred Stock
Offering, the Exchange Offer or the Rights Offering (as such terms are
defined in the Offering Memorandum);
(ii) the issuance of up to 6,710,000 shares of Common Stock
pursuant to options granted, expected to be granted or available to be
granted to Company employees as described in Footnote 4 on page 44 of the
Offering Memorandum; or
(iii) the issuance of up to 3,000,000 shares of Common Stock to
the Placement Agent as described in Section 11 of the Preferred Stock
Purchase Agreement.
8. Notice of Adjustments. In the event that the Company shall take any
action which pursuant to Section 7(a) through 7(d) or Section (f) hereof may
result in an adjustment of the Option Price and the number of shares of Option
Stock purchasable upon exercise of the Option, the Company will give to the
Holder at its last address known to the Company written notice of such action
(by first class mail, postage prepaid) ten (10) days in advance of its effective
date in order to afford to the Holder an opportunity to exercise the Option
prior to the effective date. Such notice shall contain the Company's certificate
signed by its President or Vice President and by its Treasurer or Assistant
Treasurer or its Secretary or Assistant
12
<PAGE> 13
Secretary, setting forth, in reasonable detail, the event requiring the
adjustment, the amount of the adjustment, the method by which such adjustment
was calculated (including a description of the basis on which the Board made any
determination hereunder), and the Option Price and number of shares of Option
Stock purchasable after giving effect to such adjustment. In the event that the
actual adjustment required by such event is different from that set forth in
such notice, the Company shall promptly mail to each Holder a revised
certificate and notice in accordance with this Section 8.
9. Fractional Shares. No fractional shares of Common Stock will be
issued in connection with any purchase hereunder but in lieu of such fractional
shares, the Company shall make a cash payment therefor equal in amount to the
product of the applicable fraction multiplied by the Option Price then in
effect.
10. Transfer to Comply with the Securities Act. Notwithstanding any
other provision contained herein, the Option and any Option Shares may not be
sold, transferred, pledged, hypothecated or otherwise disposed of except as
follows: (a) to a person who, in the opinion of counsel to the Company, is a
person to whom the Option or the Option Shares may legally be transferred
without registration and without the delivery of a current prospectus under the
Securities Act with respect thereto and then only against receipt of an
agreement of such person to comply with the provisions of this Section 10 with
respect to any resale or other disposition of such securities; or (b) to any
person upon delivery of a prospectus then meeting the requirements of the
Securities Act relating to such securities and the offering thereof for such
sale or disposition, and thereafter to all successive assignees.
11. Legend. Unless the Option Shares have been registered under the
Securities Act, upon exercise of the Option
13
<PAGE> 14
and the issuance of any of the Optin Shares, all certificates representing such
securities shall bear on the face thereof substantially the following legend:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be sold, offered for sale, assigned, transferred or otherwise disposed
of, unless registered pursuant to the provisions of that Act or unless
an opinion of counsel to the Company is obtained stating that such
disposition is in compliance with an available exemption from such
registration.
12. Expiration Date. To the extent not previously exercised, the
Option provided for in this Agreement shall expire as of the close of business
on the Expiration Date and shall be void thereafter.
13. Notices. All notices and other communications herein shall be
given in the manner required by Section 12 of the Preferred Stock Purchase
Agreement.
14. Loss, Theft, Destruction or Mutilation. Upon receipt by the
Company of reasonable evidence satisfactory to it of the ownership of and the
loss, theft, destruction or mutilation of this Agreement and (in the case of
loss, theft, or destruction) of reasonable indemnity and (in the case of
mutilation) upon surrender and cancellation thereof, the Company will execute
and deliver, in lieu thereof, a new Agreement of like tenor.
14
<PAGE> 15
15. Headings. The descriptive headings of the several sections of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
IN WITNESS WHEREOF, the Company, intending to be legally bound hereby,
has caused this Agreement to be signed by its duly authorized officer.
MEGO MORTGAGE CORPORATION
By: /s/ Jeff S. Moore
--------------------------------
Name:
Title:
State of Georgia
- ------------------------- :
:ss.
COUNTY OF Cobb :
---------------
On this 29th day of June, 1998, before me, a notary public,
the undersigned officer, personally appeared Jeff S. Moore, who acknowledged
himself to be President of MEGO MORTGAGE CORPORATION, a Delaware corporation,
and that he as such officer, being authorized to do so, executed the foregoing
instrument for the purposes therein contained by signing the name of the
corporation by himself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official
seal.
Deborah C. Decker
-----------------------------------
Notary Public
15
<PAGE> 1
EXHIBIT 10.1A
CO-SALE AGREEMENT
THIS CO-SALE AGREEMENT (this "Agreement") is made this 29th day of
June, 1998, by and among MEGO MORTGAGE CORPORATION, a Delaware corporation (the
"Company"), and EMANUEL J. FRIEDMAN, FRIEDMAN, BILLINGS, RAMSEY & COMPANY,
INCORPORATED, a Virginia corporation (individually, a "Transferor" and
collectively, the "Transferors"), CITY NATIONAL BANK OF WEST VIRGINIA, a
national banking association, and SOVEREIGN BANCORP, INC., a Pennsylvania
corporation (individually, an "Investor" and collectively, the "Investors").
RECITALS
A. Each Investor has executed a Preferred Stock Purchase
Agreement with the Company, dated June 9, 1998, which provides for the purchase
of 10,000 shares of Series A Preferred Stock of the Company (the "Preferred
Stock") for a purchase price of $1,000 per share, or $10,000,000 in aggregate,
and also provides for the purchase of up to 6,666,667 shares of Common Stock of
the Company (the "Common Stock") at a purchase price of $1.50 per share;
B. Emanuel J. Friedman has executed a Common Stock Purchase
Agreement with the Company, dated June 9, 1998, which provides for the purchase
of 6,666,667 shares of Common Stock at a purchase price of $1.50 per share; and
C. The Transferors have agreed to grant the Investors the
opportunity to participate, upon the terms and conditions set forth in this
Agreement, in subsequent sales of the Common Stock made by the Transferors to
induce the Investors to make the proposed investment.
AGREEMENT
NOW, THEREFORE, for and in consideration of the premises, covenants and
obligations contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE 1
SALES BY TRANSFERORS
1.1 NOTICE OF PURCHASE OFFERS. Should any of the
Transferors propose to accept one or more bona fide offers (collectively, the
"Purchase Offer") from any persons (the "Purchase Offeror") to purchase shares
of the Company's Common Stock from such Transferor, then the Transferor or
Transferors shall promptly notify the Investors of its or their intent to sell
such shares and the terms and conditions of such Purchase Offer.
<PAGE> 2
1.2 RIGHT TO PARTICIPATE. The Investors shall have the right,
exercisable upon written notice to such selling Transferor or Transferors within
10 business days after receipt of the notice of the Purchase Offer, to
participate in the Transferor's sale of Common Stock on the same terms and
conditions. To the extent any Investor exercises such right of participation,
the number of shares of Common Stock which the Transferor may sell pursuant to
the Purchase Offer shall be correspondingly reduced. The right of participation
of the Investors shall be subject to the following terms and conditions:
(a) Each Investor may sell all or any part of that number
of shares of Common Stock equal to the product obtained by multiplying (i) the
aggregate number of shares of Common Stock covered by the Purchase Offer by (ii)
a fraction, the numerator of which is the number of shares of Common Stock of
the Company at the time owned by such Investor and the denominator of which is
the combined number of shares of Common Stock of the Company at the time owned
by the selling Transferor (including shares transferred to Permitted
Transferees, as defined below, in accordance herewith) and the Investors. For
purposes of such computation, the Investors shall be deemed to own the number of
shares of Common Stock into which all of their Preferred Stock is at the time
convertible.
(b) An Investor participating in the sale pursuant to a
Purchase Offer shall, if requested by the selling Transferor or Transferors, or
the Purchase Offeror, enter into a purchase and sale agreement with the Purchase
Offeror on the same terms and conditions applicable to the selling Transferor or
Transferors or shall deliver to the selling Transferor or Transferors for
transfer to the Purchase Offeror one or more certificates, properly endorsed for
transfer, which represent:
(i) the number of shares of Common Stock which
the Investor elects and is permitted to sell pursuant to this Section 1.2; or
(ii) the number of shares of Preferred Stock
which is at such time convertible into the number of shares of Common Stock
which the Investor elects and is permitted to sell pursuant to this Section 1.2;
provided, however, that if the Purchase Offeror objects to the delivery of
Preferred Stock in lieu of Common Stock, the Investor shall convert and deliver
Common Stock as provided in subparagraph (b)(i) above.
1.3 CONSUMMATION OF SALE. The sale of shares to be sold by any
Investor hereunder shall be consummated as set forth in any applicable Purchase
Agreement. If such shares are instead to be delivered to the selling Transferor
or Transferors as provided in Section 1.2(b), the certificates representing such
shares shall be transferred by the selling Transferor or Transferors to the
Purchase Offeror in consummation of the sale of the Common Stock pursuant to the
terms and conditions specified in the notice to the Investor pursuant to Section
1.1, and the selling Transferor or Transferors shall promptly thereafter remit
to the Investor that portion of the sale proceeds to which the Investor is
entitled by reason of its participation in such sale, without setoff or
deduction.
1.4 ONGOING RIGHTS. The exercise or non-exercise of the rights of
the Investor hereunder to participate in one or more sales of Common Stock made
by a Transferor shall not adversely affect its right to participate in
subsequent Common Stock sales by a Transferor pursuant to Section 1.1 hereof.
-2-
<PAGE> 3
1.5 EXCEPTIONS. The participation rights of the Investors shall
not apply to (a) any pledge of Common Stock made by a Transferor pursuant to a
bona fide loan transaction which creates a mere security interest, (b) any
transfer of Common Stock to the Transferor's descendants or spouse or to a
trustee for their benefit, or (c) any bona fide gift of Common Stock; provided
that (i) the Transferor shall inform the Investor of such pledge, transfer or
gift prior to effecting it and (ii) the pledgee, transferee or donee
(collectively, the "Permitted Transferees") shall furnish the Investors with a
written agreement to be bound by and comply with all provisions of this
Agreement applicable to the Transferors.
ARTICLE 2
PROHIBITED TRANSFERS
2.1 TREATMENT OF PROHIBITED TRANSFERS. If a Transferor sells any
Common Stock in contravention of the participation rights of the Investor under
this Agreement (a "Prohibited Transfer"), the Investors, in addition to such
other remedies as may be available at law, in equity or hereunder, shall have
the put option provided in Section 2.2 below, and such Transferor shall be bound
by the applicable provisions of such put option.
2.2 PUT OPTION. In the event of a Prohibited Transfer, the
Investors shall have the right to sell to the selling Transferor or Transferors
a number of shares of Common Stock (either directly or through delivery of
Preferred Stock) equal to the number of shares the Investors would have been
entitled to transfer to the Purchase Offeror in the Prohibited Transfer pursuant
to the terms hereof. Such sale shall be made on the following terms and
conditions:
(a) The price per share and terms at which the shares are
to be sold to the selling Transferor or Transferors shall be equal to the price
per share paid and terms agreed to by the purchaser to the selling Transferor or
Transferors in the Prohibited Transfer. The selling Transferor or Transferors
shall also reimburse the Investors for any and all fees and expenses, including
legal fees and expenses, incurred pursuant to the exercise or the attempted
exercise of the Investors' rights under this Article 2.
(b) Within 90 days after the later of the dates on which
the Investors (i) received notice from a Transferor of the Prohibited Transfer
or (ii) otherwise became aware of the Prohibited Transfer, the Investors shall,
if exercising the put option created hereby, deliver to the selling Transferor
or Transferors the certificate or certificates representing shares to be sold,
each certificate to be properly endorsed for transfer.
(c) The selling Transferor or Transferors shall, upon
receipt of the certificate or certificates for the shares to be sold by the
Investor, pursuant to Section 2.2(b), pay the aggregate purchase price therefor
and the amount of reimbursable fees and expenses, as specified in Section
2.2(a), by certified check or bank draft made payable to the order of the
Investors.
-3-
<PAGE> 4
(d) Notwithstanding the foregoing, any attempt to
transfer shares of the Company in violation of Article 1 hereof, shall be void
and the Company agrees it will not effect such a transfer nor will it treat any
purported transferee as the holder of such shares without the written consent of
the Investors.
ARTICLE 3
LEGENDED CERTIFICATES
3.1 LEGEND. Each certificate representing shares of the Common
Stock of the Company now or hereafter owned by a Transferor or issued to any
Permitted Transferee pursuant to Section 1.5 shall be endorsed with the
following legend:
"The shares of stock represented by this certificate are subject to a
Co-Sale Agreement, by and among the registered owner of this
certificate, the Company and certain other shareholders of the Company,
copies of which are available for inspection at the offices of the
Company."
3.2 LEGEND REMOVAL. The Section 3.1 legend shall be removed upon
termination of this Agreement in accordance with the provisions of Section 5.1.
ARTICLE 4
RIGHT OF FIRST REFUSAL
4.1 NOTICE OF BONA FIDE OFFER. If a Transferor shall have obtained
a bona fide offer in writing for the purchase, in one or a series of related
transactions, shares of Common Stock representing 5% or more of the aggregate
number of shares of Common Stock owned by the Transferor, and the Transferor
desires to accept such offer, then such Transferor shall give notice to the
Investors of such proposed transaction (the "Option Notice"). The Option Notice
shall describe the proposed transferee, the number of shares of Common Stock
proposed to be transferred (the "Offered Stock"), the price per share, and all
other material terms and conditions of the proposed transaction, and also shall
be accompanied by a copy of the writing comprising the bona fide offer.
(a) 4.2 INVESTORS' OPTION. For a period of 15 consecutive
days following their receipt of such Option Notice (the "Option Period"), the
Investors shall have the irrevocable option, subject to the condition set forth
in Section 4.4 below, to purchase their pro rata share of the Offered Stock for
the consideration and on the terms set forth in the Option Notice. For purposes
of the preceding sentence, an Investor's "pro rata" share shall mean a
percentage determined by dividing the number of shares of Common Stock owned by
such Investor by the total number of shares of outstanding Common Stock owned by
both Investors (assuming that the Investors own the number of shares of Common
Stock into which all of their Preferred Stock is at the time convertible). In
the event that the Option Notice specifies that the Selling Transferor will
receive non-cash consideration in exchange for the Offered Stock, the Investors
shall have the option to purchase the Offered Stock for a cash amount equal to
the fair market value of the non-cash consideration specified in the Option
Notice, as determined by an independent investment banking firm of national
standing selected by the Investors and the selling Transferor.
-4-
<PAGE> 5
4.3 EXERCISE OF THE OPTION. An Investor choosing to exercise said
option shall during the Option Period notify the Selling Transferor in writing
of such election and the number of shares it wishes to purchase, up to its pro
rata share(the "Exercise Notice"). If one but not both of the Investors
exercises the option (or exercises the option in full), the selling Transferor
shall so notify the Investor exercising its option to purchase shares (or
exercising such option in full) and such Investor shall have an additional
option for five consecutive days following its receipt of notice to purchase all
of the Offered Stock (or the portion of the other Investor's pro rata share of
the Offered Stock for which the option was not exercised) for the consideration
and on the terms set forth in the Option Notice and as otherwise provided
herein. If both Investors exercise the option for less than their pro rata
shares, the Investors shall be deemed not to have exercised their option and the
selling Transferor may dispose of the Offered Stock pursuant to Section 4.6.
4.4 RIGHT TO BE EXERCISED IN WHOLE. Notwithstanding the foregoing,
any Selling Transferor shall not be required to sell any of the Offered Stock to
the Investors pursuant to the option described in Section 4.2 above unless
options have been exercised by the Investors to purchase all of the Offered
Stock.
4.5 CLOSING OF EXERCISE. In the event that the Investors exercise
options to purchase, in the aggregate, all of the Offered Stock pursuant to
Section 4.3 above, then a closing shall be held with respect to such purchases
within 20 days after the date upon which the last of such options shall have
been exercised or on such other date as the Selling Transferor and the Investors
exercising such options shall mutually agree. At such closing, the Selling
Transferor shall deliver to the purchasing Investors certificates representing
the shares of Common Stock being acquired by such Investors, together with fully
executed stock powers, endorsed in the name of the transferee, against payment
of the purchase price therefor in accordance with the terms contained in the
Option Notice. Such shares shall be delivered by the Selling Transferor free and
clear of any lien, pledge, security interest or other encumbrance, other than as
described in this Agreement.
4.6 SALE TO THIRD PARTY IF RIGHT NOT EXERCISED. If the Investors
have not exercised their options to purchase, in the aggregate, all of the
Offered Stock pursuant to Section 4.3 above, the Selling Transferor shall have
the right, for a period of 90 days after the expiration of the option period, to
sell all (but not less than all) of the Offered Stock not purchased by the
Investors in accordance with the terms of the bona fide offer, provided that
such transferee agrees in writing to be bound by the terms of this Agreement to
the same extent as the Selling Transferor.
4.7 RIGHT TO PARTICIPATE. In the event that an Investor does not
exercise the option provided for in this Article 4 (or is deemed under the last
sentence of Section 4.3 not to have exercised such option), such Investor shall
nevertheless be entitled to exercise the right of participation provided for in
Article 1 with respect to the proposed sale described in the Option Notice.
ARTICLE 5
MISCELLANEOUS PROVISIONS
5.1 TERMINATION OF CO-SALE RIGHTS. The rights of each Investor
under this Agreement and the obligations of a Transferor with respect to such
Investor shall terminate at such time as the Investor shall no longer be the
owner of any shares of Common Stock or Preferred Stock of the Company.
-5-
<PAGE> 6
5.2 NOTICES. Any notice required or permitted to be given to a
party pursuant to the provisions of this Agreement shall be in writing and shall
be effective upon facsimile delivery, personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified as
set forth below such party's signature or at such other address as such party
may designate by ten (10) days' advance written notice to the other parties
hereto.
5.3 SUCCESSORS AND ASSIGNS. This Agreement and the rights and
obligations of the parties hereunder shall inure to the benefit of, and be
binding upon, their respective successors, assigns and legal representatives.
5.4 SEVERABILITY. In the event one or more of the provisions of
this Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
5.5 AMENDMENTS. Any amendment or modification of this Agreement
shall be effective only if evidenced by a written instrument executed by duly
authorized representatives of the parties hereto. Any waiver by a party of its
rights hereunder shall be effective only if evidenced by a written instrument
executed by a duly authorized representative of such party. In no event shall
such waiver of any rights hereunder constitute the waiver of such rights in any
future instance unless the waiver so specifies in writing.
5.6 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Georgia.
5.7 OTHER OBLIGATIONS OF COMPANY. The Company agrees to use its
best efforts to enforce the terms of this Agreement, to inform the Investors of
any breach hereof and to assist the Investors in the exercise of its rights and
performance of its obligations under Article 2 hereof.
[SIGNATURE PAGE FOLLOWS.]
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year indicated above.
THE COMPANY: MEGO MORTGAGE CORPORATION
By: /s/ Jeff S.Moore
--------------------------------------
Name: Jeff S. Moore
Title: President
THE INVESTORS: CITY NATIONAL BANK OF WEST VIRGINIA
By: /s/ Robert A. Henson
--------------------------------------
Name: Robert A. Henson
Title: Chief Financial Officer
SOVEREIGN BANCORP, INC.
By: /s/ Mark R. McCollom
--------------------------------------
Name: Mark R. McCollom
Title: Chief Accounting Officer
THE TRANSFERORS: EMANUEL J. FRIEDMAN
/s/ Emanuel J.Friedman
-----------------------------------------------
FRIEDMAN, BILLINGS, RAMSEY &
COMPANY, INCORPORATED
By: /s/ James R. Kleeblatt
--------------------------------------
Name: James R. Kleeblatt
Title: Managing Director
-7-
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> MAY-31-1998
<EXCHANGE-RATE> 1
<CASH> 19,475
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<RECEIVABLES> 28,265
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 121,439
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